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Man can sue former owners for leaky basement

By: dmc-admin//June 2, 2008//

Man can sue former owners for leaky basement

By: dmc-admin//June 2, 2008//

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A man who bought a house with a flood-prone basement will be able to sue the people who sold him the home. The couple that sold the home to him allegedly tried to cover up the water problems.

Reasonable reliance is not an element of a false advertising claim under sec. 100.18.

However, it might as well be, inasmuch as a May 28 opinion by the Wisconsin Supreme Court effectively holds that reasonable reliance is relevant to the element of causation.

Red Flags

In the case, Chad Novell bought a house from Anthony and Andrea Migliaccio.

He did so, despite numerous red flags that the house may have problems with the foundation and water in the basement.

His home inspector advised him to hire a foundation specialist, but he did not.

For their part, the Migliaccios’ real estate condition report denied any water issues or cracking in the foundation, and they personally denied that they had painted over any cracks in the foundation walls, or had ever had flooding.

Novell and the Migliaccios were also family friends.

Novell bought the house, and after it flooded seven times the next spring, hired a professional engineer and a foundation specialist. The experts determined that cracks had been recently painted over, and that the basement had been experiencing flooding for years.

Novell brought suit against the Migliaccios, alleging a number of claims, including false advertising under sec. 100.18.

The circuit court granted summary judgment on all claims, concluding that Novell was not justified in relying on the Migliaccios’ misrepresentations.

In an unpublished opinion, the court of appeals affirmed on all claims except the sec. 100.18 claim, concluding that reasonable reliance is not an element of the claim.

Reliance

The Wisconsin Supreme Court granted review, and affirmed, in an opinion by Justice Ann Walsh Bradley.

The court agreed with Novell that the plain language of the statute contains no element of reasonable reliance, and that the purpose of the statute — deterring fraud — would not be furthered by including it.

However, it found that reasonable reliance is a proper consideration of causation in light of the statutory language.

Section 100.18(11)(b)2 provides, “Any person suffering pecuniary loss because of a violation of this section by any other person may sue in any court of competent jurisdiction and shall recover such pecuniary loss, together with costs, including reasonable attorney fees… (emphasis added).”

The court found prior interpretations of the statute by the Court of Appeals — holding that the statute requires evidence that false advertising caused damages — consistent with its holding. Tim Torres Enters., Inc., v. Linscott, 142 Wis.2d 56, 416 N.W.2d 670 (Ct.App.1987); Malzewski v. Rapkin, 2006 WI App 183, 296 Wis.2d 98, 723 N.W.2d 156.

The court added that, in some instances, a circuit court may find, as a matter of law, that a buyer’s belief of a representation is unreasonable, and therefore, the representation could not have caused the buyer’s loss.

Application

Applying the standard to the case, the court determined that a trial was necessary to decide whether the misrepresentations caused Novell’s injuries.

The court concluded, “Although the report [of the home inspector] describes several problems with the foundation and basement, it cannot be concluded as a matter of law that the report alerted Novell to the water problems he would experience after moving into his new home.”

Instead, the court determined that a jury could find that Novell reasonably relied on the representations of the Migliaccios, and the prior relationship between them, in deciding not to hire further experts.

The court therefore affirmed that a trial is required on the false advertising claim.

Justice Annette Kingsland Ziegler wrote a concurring opinion, emphasizing that, in some instances, reliance may be so unreasonable that summary judgment or dismissal may be appropriate.

Justice Ziegler added, “This decision today does not address such a situation where the buyer has actual knowledge that representations are untrue or has independent knowledge regarding a defective condition, but proceeds to purchase despite that knowledge.”

Case analysis

The opinion is noteworthy in two respects.

First, the standard jury instruction, while correctly stating the law, is not sufficient.

Wis JI —— Civil 2418 sets forth the third element of a sec. 100.18 claim — causation — as follows: “Third, (plaintiff) sustained a monetary loss as a result of the (assertion) (representation) (statement). In determining whether (plaintiff)’s loss was caused by the (assertion) (representation) (statement), the test is whether (plaintiff) would have acted in its absence. Although the (assertion) (representation) (statement) need not be the sole or only motivation for (plaintiff)’s decision to (buy) (rent) (use) the _______ [product or item], it must have been a material inducement. That is, the (assertion) (representation) (statement) must have been a significant factor contributing to (plaintiff)’s decision.”

Defendants should request, and should be granted, additional language expressly informing the jury that reasonable reliance is relevant to causation.

The Supreme Court recently addressed sec. 100.18 in K&S Tool & Die Corp. v. Perfection Mach. Sales, Inc., 2007 WI 70, 301 Wis.2d 109, 732 N.W.2d 792.

The court wrote, “plaintiff does not have the burden of proving reasonable reliance.” K&S Tool and Die, at par. 36. In the case at bar, the court reaffirmed that statement; instead, lack of reasonable reliance is to be treated as a defense, in considering causation.

Time will tell whether there is any practical difference between treating reasonable reliance as an element, and making the lack of it a defense to the element of causation.

The decision is also noteworthy for the marked contrast between it and a recent Court of Appeals decision discussing securities fraud under sec. 551.41(2). Cuene v. Hilliard, 2008 WL 1945976 (Wis.App., May 6, 2008)(recommended for publication, final publication decision pending).

As in the case at bar, the Court of Appeals held in Cuene that reliance is not an element of misrepresentation in a securities sale.

However, the court held that causation can be presumed: “the causal connection is established when a statutory violation is established.” Id., at par. 21. Reliance is also presumed. Id., at 18.

In order to rebut the presumptions of reliance and causation, the seller must present evidence of actual knowledge of the misrepresentation on the part of the buyer. Id., at par. 17.

In the case at bar, however, the court disavows that its opinion applies to actual knowledge cases.

Justice Ziegler’s concurrence notes, “This decision today does not address such a situation where the buyer has actual knowl
edge that representations are untrue or has independent knowledge regarding a defective condition, but proceeds to purchase despite that knowledge.”

Thus, there is two radically different standards for misrepresentation whether it occurs in the context of a home sale, or a securities sale, even though no difference in the statutory language warrants such a distinction.

If it is a securities sale, causation is presumed, and the seller is automatically liable unless he can prove that the buyer knew the representation was false.

If it is a home sale, on the other hand, the buyer is subject to second-guessing by a jury about why he didn’t consult further inspectors.

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