When is fraud not fraud? According to the most recent Washington Court of Appeals decision, even overt intentional fraud is not fraud if the buyer discovered any evidence of a defect and fails to prove that “further inquiry would have been fruitless.” When courts announce a harsh rule, they often use some Latin term because it sounds somehow more official. Early in Washington history, for example, we had caveat emptor, which simply means “buyer beware” in Latin.
But we have reached the point where courts no longer even bother to hide behind clever Latin phrases. This is the first sentence of a recent seller misrepresentation case named Douglas v. Visser: “When prospective homebuyers discover evidence of a defect, the buyers must beware.” It has long been the law that a buyer who discovers a defect cannot sue for concealment later. What has changed is the amount of information necessary to put a buyer on notice and the amount of diligence that is required of the buyer.
In this new case of Douglas v. Visser, the sellers had purchased the property as a fixer and decided that it was too much work. The sellers filled out a Seller Disclosure Statement with lots of “Don’t Know” and missing answers. The buyers sought clarification and a copy of the inspection report that the sellers had obtained when they purchased, but obtained little information and no report. Then the buyers had an inspection. The inspection revealed a few small areas of rot and decay, but said they were not a structural threat. The buyers took no action with regard to their inspection report. After moving in, the buyers found massive, extensive structural damage that was known to the sellers. But rather than repair that extensive damage prior to the sale the sellers instead told their workers to cover it up. The case went to a trial. Predictably, the judge hammered the sellers, awarding the buyers the cost to replace the house and other damages.
The Court of Appeals reversed the trial judge’s decision and dismissed the case because it found that the buyers were “on notice of the defect and ha[d] a duty to make further inquiries.” The court held that the buyers “cannot now obtain relief by asserting that the defect was worse than anticipated.” You would have to be a lawyer to appreciate how rarely the Court of Appeals will take a trial decision for one party and completely reverse it.
In 2007, the Washington Supreme Court decided a case over a bad septic system, Alenjandre v. Bull. The seller there was told by a septic contractor that the system had failed and that she needed to spend $30,000 to hook up to sewer. Instead, she put the house on the market and said in her Disclosure Statement that the septic system had no defects. Shortly after moving in, the buyer discovered the full truth. The case went to a jury trial. At the close of the buyer’s case, the seller brought a motion to take the case from the jury and dismiss it because the buyer, before closing on the purchase, had received a bill for the pumping of the septic system which stated that the septic system’s back baffle could not be inspected but there was “[n]o obvious malfunction of the system at time of work done.” The trial judge granted the seller’s motion because the buyer had failed to investigate further after receiving the bill.
The Washington Supreme Court in Alejandre affirmed the trial court decision because the buyers “failed to meet their burden of showing that the defect in the septic system would not have been discovered through a reasonably diligent inspection.” As the Supreme Court saw it, the buyers “were on notice that the septic system had not been completely inspected but failed to conduct any further investigation and indeed, accepted the findings of an incomplete inspection report.” That was sufficient to take the case from the jury and dismiss it.
Both buyers and sellers should take important lessons from these cases. First, buyers should assume that they are purchasing property as-is without any reliable remedy even if the seller misrepresented or concealed defects. Brokers should emphasize to buyers that they have a very real duty of diligence when purchasing a house, and that any indication of a problem, or any missing information could preclude relief even for outright fraud. Buyers tend to assume that the Disclosure Statement is accurate, and that they will have a remedy if it is not. The best practice for brokers is to make sure that buyers understand their duty of diligence and act accordingly.
Second, sellers could easily take these cases as a recipe for strategic concealment. It would be all too easy to assume that a small amount of disclosure will provide a great deal of protection. But that would be foolish thinking. The vast majority of cases are decided by settlement or in trial. Both of these cases made it to trial. In one, the trial judge dismissed the case, while in the other he found for the buyer. Judges are people too, and when the facts of a case are outrageous, trial judges can still find for the buyer and thwart any appeal by making the necessary findings of fact. It is one thing for the law to permit fraud, and another altogether for a judge to reward a fraudulent seller.
Smart sellers will still make full disclosure of the condition of their property. Smart buyers will take that disclosure as a starting point and quadruple their diligence. If either fails to do so, only the lawyers will win.
This legal bulletin is provided for informational purposes only, and to assist you in identifying potential legal problems. It should not be used as a substitute for obtaining the advice of an attorney when problems arise, and is not intended to constitute legal advice. A lawyer cannot give legal advice without a detailed factual background of the client’s particular situation, as the same legal question may have different answers under different circumstances. Do not base any important decisions on these materials without first consulting an attorney.