No tort claims in home sales

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The buyer of a residential home cannot recover from the seller for misrepresentation, even if the seller intentionally failed to disclose that the home’s sewer line was broken.

However, the effect will be minimal in most cases, because homebuyers can still pursue contract and statutory remedies.

Writing for the majority, Justice N. Patrick Crooks concluded, “Clearly, purchasers have adequate contractual and statutory remedies, if needed.”

Nevertheless, it will affect some cases.

Writing in dissent, Justice Ann Walsh Bradley noted that the statutory remedies are governed by a three-year statute of repose, and the contract remedies by a six-year statute of limitations.

Tort claims, on the other hand, are subject to the discovery rule, which tolls running of the statute of limitations until the fraud is revealed.

Bradley wrote, “[T]here remain fraud cases where tort is the only remedy. The majority bars those homeowners from recovering for latent defects hidden by sellers’ deceit.”

Broken Sewer

Shannon Below bought a house from Dion R. and Dana Norton.

The Nortons’ property condition report did not disclose that the sewer line that ran between the house and the street was broken.

Below sued, alleging intentional, negligent, and strict liability misrepresentation (tort claims); and misrepresentation in violation of secs. 100.18, 895.446 and 943.20(1)(d) (statutory claims). A contract claim was later added, but the complaint was not properly served.

The Supreme Court held that the tort claims were barred by the economic loss doctrine (ELD), but the sec. 100.18 claim could proceed. The court declined to address whether the 895.446 claim could proceed, because it found the proceedings in the circuit court unclear as to why the claim was dismissed.

Although the Supreme Court has never previously addressed application of the ELD to a residential real estate sale, the majority found that previous cases militate in favor of its application.

In Linden v. Cascade Stone Co., 2005 WI 113, 283 Wis.2d 606, 699 N.W.2d 189, the court applied the ELD to bar a tort suit against a subcontractor who worked on the construction of the plaintiff’s home.

Also, in Wickenhauser v. Lehtinen, 2007 WI 82, 302 Wis.2d 41, 734 N.W.2d 855, the court applied the doctrine to the sale of farmland.

The majority interpreted these cases as extending the ELD to all noncommercial real estate transactions.

In addition to these precedents, the majority emphasized the availability of the other remedies noted above.

Justice Bradley’s dissent, joined by Chief Justice Shirley S. Abrahamson and Justice Louis B. Butler, Jr., took issue with the majority’s characterization of Linden and Wickenhauser.

Bradley argued that Linden was not a real estate case at all, but a suit grounded on a construction contract for a product: “The concept of real estate never entered the equation. The words ‘real estate’ do not even occur in the Linden opinion.”

Addressing Wickenhauser, Bradley wrote “It is unclear why the majority concludes that a case about a transaction involving farmland dictates the outcome of a case involving a contract for the purchase of a home.”

Remedies

As noted above, the dissent also found contractual and statutory remedies inadequate.

Rudolph J. Kuss, of the Law Office of Daniel Stevens, in Brookfield, who represented Below, acknowledged, in most cases, the statutory and contractual remedies will be adequate.

Kuss, who specializes in such cases, said most of his clients discover the problems with their homes within a year, and the statutes of limitation for those remedies do not come into play.

The major exception he noted is when wood paneling hides evidence of undisclosed flood damage.

Kuss noted two other instances when the available remedies may be inadequate: if the home seller files for bankruptcy, or when punitive damages are appropriate.

Debts incurred as a result of intentional misrepresentation are nondischargeable in bankruptcy, but it is uncertain whether that is true for false advertising.

Also, punitive damages are available for fraud, but not for sec 100.18 claims, although the statute does allow for attorney fees.

However, Vicki Zick of Zick & Weber Law Offices in Johnson Creek, who represented the Nortons, said the unavailability of punitive damages does not constitute inadequacy of remedy, but rather, a feature of the court’s opinion.

“If a claim arises in contract, the court should hold the parties to those remedies and not allow the potential for punitive damages,” Zick said. “In my opinion, punitive damages should be reserved for the most egregious conduct.”

Analysis

The law remains uncertain as to what may be the most valuable remedy available for plaintiff homebuyers — sec. 895.446, based on a violation of sec. 943.20(1)(d).

Section 943.20(1)(d) prohibits obtaining title to property by intentionally making a false representation, and sec. 895.446 provides exemplary damages of up to three times the compensatory damages.

The court declined to address whether Below had a remedy under the statutes.

However, it is unfathomable that the court would deny such a remedy, if the issue were squarely presented to it. In Stuart v. Weisflog’s Showroom Gallery, Inc., 2008 WI 22, 746 N.W.2d 762, 772, the Supreme Court clearly held, “We are satisfied that the ELD cannot apply to statutory claims.”

This case is also noteworthy for the dissent’s criticism of the majority’s discussion of the exception to the ELD for fraud in the inducement to a contract.

In Digicorp, Inc., v. Ameritech Corp., 2003 WI 54, 262 Wis.2d 32, 662 N.W.2d 652, the Supreme Court adopted what it called a narrow version of the exception, under which the exception applies only if the misrepresentation is “extraneous to, rather than interwoven with, the contract.”

The court derived this standard from a Michigan Court of Appeals opinion, Huron Tool & Eng’g Co. v. Precision Consulting Servs., Inc., 532 N.W.2d 541 (Mich.Ct.App.1995).

However, the court failed to adopt the very standard it purported to be adopting.

In Huron Tool, the Michigan court did not ask whether the fraud is “extraneous to, rather than interwoven with, the contract.”

Instead, the Huron Tool court asked whether the fraud is “interwoven with THE BREACH OF the contract,” or whether it is “extraneous to THE ALLEGED BREACH OF the contract.” Id., 532 N.W.2d at 545, 546 (emphases added).

The dissent in this case wrote, “It is difficult to discern when, if ever, fraudulent inducement to a contract is ‘extraneous to, rather than interwoven with, the contract.’

Beyond the obvious difficulty in the application of this test, it is simply bad public policy to bar fraudulent inducement claims (cites omitted).”

It is little wonder that the court struggles with applying the standard, when it failed in Digicorp to correctly enunciate the very standar
d it purported to adopt.