DR Legal News: Legal Case Studies March 2017

Legal Case Studies

Research and analysis by Lisa Harms Hartzler, Sorling Northrup Attorneys

Real estate agent owed purchaser no duty to disclose convict living next door

In Troja v. Pleatman, 2016-Ohio-7683, the plaintiffs discovered after signing a contract to purchase a house that a criminal convicted of stabbing and severely injuring a 13-year-old girl lived next door. The seller sued for specific performance and the buyers filed a third-party complaint against their real estate agent, Sibcy Cline, alleging that it had breached a fiduciary duty to inform them of the neighbor’s crime and that it had misrepresented information when the plaintiffs asked about criminal activity in the neighborhood. 

An Ohio court of appeals held that a real estate agent owes a fiduciary duty to a client, including the duty to disclose all nonconfidential information material to the transaction. Ohio statutes also imposed on real estate licensees duties to disclose material facts of which the licensee is aware or should be aware. However, the court determined that “psychological stigmas,” such as a suicide or the commission of rape and murder at a house, were not material to the transaction. In this case, the non-material fact (a convict living next door) did not even involve the property that was the subject of the transaction. Further, the seller had disclaimed any representations as to conditions outside the boundaries of the property. The court affirmed summary judgment in favor of the defendant real estate agents (the seller settled his case during the trial). 

Plaintiff injured while viewing property for sale was a trespasser

In Rucker v. Federal National Mortgage Association, 2016 COA 114, a father made an offer on an unoccupied foreclosure house intending to rent it to his daughter. Without notifying the listing real estate broker, the daughter took her divorced mother, the plaintiff, to see the house. They parked in the driveway and walked up to the windows to peer inside. The plaintiff was injured on the sidewalk while returning to the car. She sued the seller and listing broker under Colorado’s Premises Liability Act (PLA). The defendant’s liability depended on whether the plaintiff was an “invitee” as defined in the PLA. That definition included a person who entered on land “in response to the landowner’s express or implied representation that the public is required, expected, or intended to enter or remain.” 

The plaintiff argued that the “For Sale” sign posted on the property created an implied representation to strangers to enter the property. The Colorado Court of Appeals held that the sign only provided notice that the property was for sale and provided information about whom to contact to schedule a viewing. The court found that it was unreasonable to conclude that such a sign gave permission for anyone to enter the property at any time of the day or night. The plaintiff was not an invitee but was a trespasser and not entitled to claim any damages under Colorado law. 

Copyright infringement suit defeated by photographer’s inability to demonstrate damages

In Bell v. Taylor, 827 F.3d 699 (7th Cir. 2016), a photographer sued three businesses for posting on their websites his copyrighted photograph of downtown Indianapolis. One of the defendants was a real estate agent who advertised her services on her website. She immediately removed the photo when the plaintiff contacted her. The federal court of appeals affirmed the lower court’s summary judgment in favor of all the defendants because, even though the plaintiff established the copyright infringements, he was unable to demonstrate that he suffered any damages from them. 

The Copyright Act provides that a copyright owner may recover actual damages suffered as a result of the infringing activity. Actual damages consist of the “loss in the fair market value of the copyright, measured by the profits lost due to the infringement or by the value of the use of the copyrighted work to the infringer.” However, the loss of value cannot be hypothetical or based on undue speculation. In this case, the plaintiff asserted that he listed the price of his photograph as $200, but he produced no evidence that he had ever sold the photo for that amount. Consequently, his claim as to the fair market value of the photo was speculative. Further, there was no evidence that any of the defendants attracted more clients as a result of using the photo on their websites. Even if the defendant businesses experienced an increase in profits during the time they used the plaintiff’s photo, there was nothing to establish a nexus between the increased profits and the use of the photo. The plaintiff’s bare allegations of wrongful profits were insufficient to prove cause and effect. 

Neither buyer nor seller entitled to attorney’s fees under contract or RESPA

In Cantrall v. Bergner, 2016 IL App (4th) 150984, an Illinois appellate court interpreted a fee-shifting provision in a real estate contract. The contract provided: 

All costs, expenses and reasonable attorney’s fees incurred by one party in enforcing said party’s rights under this Contract may be recovered from the other party. 

During a pre-closing inspection at which the plaintiff buyer was present, the inspector noticed a wet, visible watermark on a wall, damaged fascia and rotted wood. He recommended further examination by a roofer. Based on the inspection report, the parties executed a repair addendum requiring repair and replacement of all wood rot and missing fascia. The buyer did not seek further evaluation from a roofer. The seller repaired the fascia himself but apparently did not repair the wood rot. Two weeks after closing the roof leaked when it rained. The buyer sued the seller, alleging a violation of (1) the Residential Real Property Disclosure Act; (2) fraudulent concealment, and (3) breach of contract. The trial court granted judgment in favor of the plaintiff only on the third count for breach of the repair addendum, but denied the buyer’s request for attorney’s fees under the contract. The court held in favor of the defendant seller on the first and second counts and also denied the seller’s request for attorney’s fees under RESPA. 

The appellate court noted that Illinois follows the “American Rule,” which provides that each party bears his or her own attorney’s fees and costs unless a statute provides otherwise or the parties privately agree by contract. A reviewing court must strictly construe such a contract provision to mean nothing more or less than what its plain language suggests. In this case, whether the court had to shift attorney fees around depended on the word “may” in the contract provision. The court held that the plain and ordinary meaning of the term “may” as used in the provision indicated that the decision as to whether a prevailing party can receive fees was up to the discretion of the trial court. Because both sides won and lost on different counts, the court found that the lower court did not abuse its discretion in not awarding the plaintiff attorney’s fees. 

The appellate court also denied attorney’s fees to the defendant seller under the RESPA count. RESPA does make a person who knowingly violates the Act liable for reasonable attorney’s fees. However, regardless of whether the buyer was put on actual notice about the leaky roof during the inspection and took no additional action, “the only issue for Count I was whether defendants were aware of the leak when they completed the disclosure form.”  By suing the seller to determine whether he had actual knowledge of a material defect in the roof and failed to disclose it, the buyer did not engage in any knowing misconduct. 

Transfer tax not applicable to assignment of mortgage

In City of Chicago v. Elm State Property LLC, 2016 IL App (1st) 152552, an Illinois appellate court vacated a local real estate transfer tax assessment.  The case involved two defendants who purchased bank loans in default and who took assignment of the mortgages securing those loans. The mortgagors later executed deeds in lieu of foreclosure to the defendants.  The City assessed a tax on the assignments of the mortgages, claiming that they were assignments of beneficial interests in real property and subject to the transfer tax. The appellate court exhaustively reviewed Illinois law and held that a mortgage, including an assignment of rents, creates a lien and is simply a form of security to assure repayment of a loan.  It does not convey any ownership interest with the requisite degree of ownership control that would constitute an assignment of a beneficial interest. Under the City’s ordinance, assignment of a mortgage was not an assignment of beneficial interest subject to the transfer tax. 

Seller’s statements on property’s zoning did not constitute fraudulent or negligent misrepresentations

In Kupper v. Powers, 2017 IL App (3d) 160141, a buyer of an apartment building under an installment contract failed to pay several installments, the final payment, and real estate taxes when due. When the sellers declared buyer in default and sued for possession, the buyer counterclaimed that the sellers had fraudulently and/or negligently represented that the property was properly zoned for the 13 dwelling units it contained, but it was actually zoned for only 9 units. 

To state a claim for fraudulent misrepresentation, there must be an allegation of a false statement of material fact rather than law.  “As a general rule, one is not entitled to rely upon a representation of law because both parties are presumed to be equally capable of knowing and interpreting the law.” Whether a false statement or omission is one of fact or law turns on whether it was discoverable through the exercise of ordinary prudence by the plaintiff (law) or whether the knowledge of its truth or falsity was almost exclusively in the possession of the defendant and not readily ascertainable by the plaintiff (fact).  In this case, the court held that the buyer could have determined that the property was not in compliance with the zoning code by merely looking up the applicable ordinance. Consequently, the seller’s statement as to the building’s compliance was one of law and not actionable. The court rejected the buyer’s argument that, given its advanced age, the building could have been a legal non-conforming use, noting that reviewing the ordinance would have alerted the buyer to inquire further. 

To state a claim for negligent misrepresentation, a complaint must allege facts establishing that the defendant owed the plaintiff a duty to communicate accurate information. Such a duty has been recognized when negligently conveying false information results in physical injury to a person or harm to property, but “negligent misrepresentation actions are almost universally limited to situations involving a defendant who, in the course of his business or profession, supplies information for the guidance of others in their business relations with third parties.” However, the court noted that such actions have also been recognized against a party under a public duty to provide information, such as when a statute requires a plat of subdivision to be reviewed for a flood hazard determination by the Department of Transportation before it may be filed. In this case, the buyer argued that the City of Peoria’s zoning ordinance prohibiting recording of a deed without first obtaining a “zoning certificate” created a public duty to provide information on zoning to the buyer. The court disagreed, holding that the ordinance did not require the seller to file any information regarding zoning for the benefit of the public or to accurately represent the zoning status to prospective buyers. Consequently, the ordinance did not create a public duty on which the buyer could base a negligent misrepresentation claim.  

Village lacked standing to obtain injunction against re-zoning by neighboring village

In Village of Willow Springs v. Village of Lemont, 2016 IL App (1st) 152670, Willow Springs sought to enjoin its neighboring village, Lemont, from enforcing a zoning reclassification and approving a proposed development for a concrete crushing and recycling industry. An Illinois appellate court held that to the extent that Willow Springs sought to enjoin the zoning reclassification of the property in question from R‑1 to M‑3, it failed to demonstrate that it was “substantially, directly and adversely affected in its corporate capacity” by the rezoning. It therefore lacked standing to assert its claim. In addition, to the extent that Willow Springs sought to prevent Lemont from approving the proposed industrial development, the challenge was improper, as “Illinois courts have long refused to preemptively enjoin legislative action.” Challenges to a law must await enactment.