Friday, May 29, 2015

Wis. Stat. s. 100.18 - For Members Only

On multiple occasions (here and here), I have emphasized the importance of buyers receiving the statutorily-mandated Real Estate Condition Report prior to making an offer. Usually, this isn't a problem. Real estate agents make sellers' Real Estate Condition Reports readily available on MLS, at open houses, or provide them to the buyers prior to the initial showing. Then again, some homeowners attempt to sell their home without a real estate agent's assistance and some buyers rush in to make offers before a home is really "on the market."

Why should I wait for a Real Estate Condition Report before making an offer, you might ask. The common sense answer is that you want to know the property's condition in deciding what price to offer. You would pay less for a home with a leaky basement or a leaky roof than a home with a dry basement and a new roof, all else being equal. The legal answer is that you risk losing your best claim in the event that the sellers misrepresent the property's condition in the Real Estate Condition Report.

If you discover defects in your new home that were not identified in the sellers' Real Estate Condition Report, a claim for violation of Wis. Stat. s. 100.18 is your best claim and it's not even close. You don't have to prove that the sellers intended to deceive you; only that they intended to sell their home when they completed a Real Estate Condition Report (why else they would complete a Real Estate Condition Report is beyond me). You don't have to prove that the sellers' representations were false; only that they were deceptive or misleading. You don't have to prove that your reliance on the sellers' Real Estate Condition Report was reasonable; only that these representations materially induced (caused) you to purchase the property. See K&S Tool & Die Corp. v. Perfection Machinery Sales, Inc. You are entitled to recover your damages plus reasonable attorneys' fees if you prevail.

Trouble is, Wis. Stat. s. 100.18 contains this pesky little "member of the public" requirement. After all, it is commonly referred to as the false advertising statute. While Wisconsin courts recognize that "the public" does not necessarily mean a large audience and could mean an individual member of the public, a buyer loses his status as a "member of the public" once he or she forms a "particular relationship" with the seller. In the context of real estate sales (as opposed to repeat purchases of goods and services in a commercial setting), a buyer ceases to be a member of the public once he or she enters into a contract with the seller. See Kailin v. Armstrong.

This requirement bit one of my clients in Novell v. Migliaccio. While the tortured history of that case deserves its own post, the Cliffs Notes version is that Mr. Novell's case was originally dismissed at summary judgment on the grounds that it was unreasonable as a matter of law for him to rely on the Migliaccios' Real Estate Condition Report. Like the other case that was dismissed by Judge Guolee on October 17, 2005, I argued that case to the Wisconsin Supreme Court during the last week of February 2008. Relying on K & S Tool & Die, the Wisconsin Supreme Court held in Novell that a buyer need not prove that his reliance on the sellers' Real Estate Condition Report was reasonable for the purposes of his s. 100.18 claim.

Trouble is, there was another problem with Mr. Novell's s. 100.18 claim - a problem that the Migliaccios' attorney somehow only figured out after losing at the Wisconsin Supreme Court. The Migliaccios and the Novells were family friends, and they handled this transaction without the assistance of any real estate professionals. The Migliaccios did not even complete their Real Estate Condition Report until nearly two months after they accepted Mr. Novell's offer. The trial court held that no reasonable jury could find that the representations in the Real Estate Condition Report were made to Mr. Novell while he was still a member of the public. In order to save Mr. Novell's case, I had to convince the Wisconsin Court of Appeals that the Migliaccios' concealment of their leaky basement with paint could qualify as a misrepresentation under s. 100.18. As they say, necessity is the mother of invention.

Now I'm dealing litigating another case with "member of the public" issues. Once again, the buyers made their offer without first receiving a Real Estate Condition Report. The sellers withheld their Real Estate Condition Report from the buyers until after they accepted the buyers' counteroffer. As in Novell, I will argue that the sellers concealed their leaky basement while the buyers were still members of the public. Unlike Novell, I have an argument that the buyers received the Real Estate Condition Report before there was an enforceable contract because the buyers still had the unilateral right to rescind the contract depending on the contents of the Real Estate Condition Report.  In other words, the buyers could have backed out of the deal without consequence (and recovered their earnest money) had the sellers represented in their Real Estate Condition Report that they were aware of basement defects. See Wis. Stat. s. 709.05

While my legal sorcery might save the day again, buyers should not rely on attorneys to protect them from trickery and deception after their purchase. Instead, prospective buyers must find a real estate professional (either an attorney or a buyers' agent) before they offer to purchase a home. Working with a real estate professional should protect most buyers in the event that they encounter a seller who misrepresents a property's condition.

Friday, May 15, 2015

Marchese v. Miller and Total Realty LLC - An Example Of What Real Estate Agents Should Not Do

As I said in an earlier post, most buyer claims against real estate agents contracted by the seller involve allegations of misrepresentation or nondisclosure. In Marchese v. Miller and Total Realty LLC, the Wisconsin Court of Appeals has provided real estate agents with a helpful example of what not to do.

In Marchese, the real estate agent advertised a vacant lot as buildable. He also drafted a WB-40 Amendment To Offer To Purchase that provided that the buyers would not make any payments towards their purchase of this lot until the sellers relocated the retention pond on the lot. He even reassured the buyers prior to closing that that the sellers would relocate the pond. The buyers closed on their purchase even though the pond had not been relocated because they assumed that the title company would not disburse any money to the sellers until the pond was relocated. Unfortunately, money was disbursed to the sellers and the pond was never relocated. The buyers had to purchase another lot because this one was unbuildable with the pond in its present location.

The buyers sued the sellers and the real estate agent. The subject of the Court of Appeals' decision was the trial court's order dismissing all claims against the real estate agent notwithstanding the jury's verdict finding that the real estate agent engaged in intentional misrepresentation and violated Wis. Stat. s. 100.18.

The Court of Appeals held that the evidence presented at trial was sufficient to prove a s. 100.18 claim. The real estate agent admitted at trial that he advertised that a home could be built on the lot even though he knew that no home could be built until the pond was relocated. Even more damning, the seller testified at trial that he told the real estate agent that he would not move the pond until he got paid - after the closing.

The Court of Appeals further held that the evidence presented at trial was sufficient to prove an intentional misrepresentation claim. Though the real estate agent told the buyers that it "shouldn't be a problem" for the sellers to relocate the pond before they got paid, the real estate agent knew that the seller would not move the pond until he got paid.

While there are important lessons in this decision about whether or not real estate agents should should advertise in a manner which is false, deceptive or misleading (no!), whether or not expert testimony is required to prove a negligence claim against a real estate agent (no!), and whether or not judges should disregard jury verdicts (again, no!), the real lesson is that real estate agents must do whatever they can to distance themselves from sellers hellbent on committing fraud. Wis. Admin. Code s. REEB 24.03(2)(b) says as much under the label of "COMPETENCE REQUIRED": "Licensees shall act to protect the public against fraud, misrepresentation and unethical practices." Furthermore, Wis. Admin. Code s. REEB 24.07(2) provides as follows:

Disclosure of material adverse facts. A licensee may not exaggerate or misrepresent facts in the practice of real estate. A licensee, when engaging in real estate practice, shall disclose to each party, in writing and in a timely fashion, all material adverse facts that the licensee knows and that the party does not know or cannot discover through a reasonably vigilant observation, unless the disclosure of the material adverse fact is prohibited by law. This provision is not limited to the condition of the property, but includes other material adverse facts in the transaction. 

This duty to disclose material adverse facts is NOT limited to situations in which the seller tells his real estate agent that his basement and roof leak like a sieve whenever it rains. Under Wis. Admin. Code s. REEB 24.02(1)(b), "adverse fact" is defined to include "[i]nformation that indicates that a party to a transaction is not able to or does not intend to meet his or her obligations under a contract or agreement made concerning the transaction." Here, the seller threw his real estate agent under the bus and testified that he told the seller that he had no intention of complying with his obligations under the WB-40 Amendment. Real estate agents - this is what could happen to you if you allow yourself to get involved with sellers with the wrong intentions!

UPDATE (10/24/2015): This case has been summarized on realtor.org. I have no idea why the author of that "legal case summary" repeatedly refers to Total Realty LLC as "the Buyer's Representative" when the Court of Appeals' decision refers to Total Realty LLC's agent as "the listing and selling broker" and focuses on how that agent advertised the property and what he was told by the seller that he failed to disclose to the buyer. This was not a WB-36 buyers' agent obligated to negotiate on the buyer's behalf.