Proving Fraud in a Residential Real Estate Transaction

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Proving Fraud in a Residential Real Estate Transaction | The Legal Intelligencer

Litigators know that proving fraud against a seller in the residential real estate context can be challenging and being awarded damages for fraud even more so. The recent decision in Floyd v. Wigfield, (Oct. 2014, Lehigh Co., No. 2012-C-4131), handed down this past October, provides a useful analysis of the facts and types of claims that should be considered. The case also serves as a reminder that failure-to-disclose cases continue to be litigated in our state. This is so despite the requirement in the 1996 Real Estate Seller Disclosure Law (68 Pa.C.S.A. Section 7301) requiring material defects to be disclosed in writing before an agreement of sale for residential real estate is signed as well as the 1968 Unfair Trade Practices and Consumer Protection Law (73 P.S. Section 201-1 et seq.), made applicable to residential real estate transactions by the Superior Court in 1987.

The facts are straightforward enough: Shannon Floyd, Norman D’Avanzo and Ruth D’Avanzo (the buyers), purchased property in Emmaus, Pa., from Edward and Carol Wigfield (the sellers) on Oct. 9, 2010. During their ownership, the sellers made various improvements to the property, including the conversion of a barn on the site into multiple apartment units and alterations to the wastewater system. The sellers were the only owners in the chain of title prior to the sale to the buyers. They listed the property and prepared various documents, including a required seller’s property disclosure statement that did not disclose any information on any code violations. The property was marketed as having two income-producing rental units, in addition to the main residence being ready for use.

Post-settlement, an issue arose with the tenants (the rental units were occupied at the time of the transfer) and an inspection by Upper Milford Township exposed several violations. These violations included the fact that the property had never been approved for multiple rental units. The buyers sought zoning relief, in the form of a variance; the request was eventually granted. But the variance was conditioned upon an inspection of each of the rental units. In the course of this process, it was discovered that the septic system servicing the dwelling units was non-compliant, necessitating a new, compliant system with an approximate cost of $40,000.

As a result of their reliance upon the disclosures either made or omitted by the sellers, the buyers commenced litigation in the Lehigh County Court of Common Pleas. The multicount complaint averred common-law misrepresentation as well as violations of both the Real Estate Seller Disclosure Law (RESDL) and the Unfair Trade Practices and Consumer Protection Law (UTPCPL), inter alia. The thrust of the buyers’ suit was that the sellers misrepresented the condition of the property, thereby entitling them to actual damages amounting to the cost of the septic system, treble damages and attorney fees.

Notably, at the bench trial, the sellers stipulated to the fact that they knew permits were required and intentionally did not obtain them. The court made an additional finding of fact that the sellers represented on the disclosure statement that they were unaware of any material defects on the property. A material defect is defined by case law, the RESDL and the disclosure statement as “a problem with residential real property or any portion of it that would have a significant impact on the value of the property or that involves an unreasonable risk to people on the property.” Section 7304-16 of the RESDL includes “legal issues affecting title that would interfere with use and enjoyment” in its list of what may qualify as a material defect. Section 19-D of the disclosure statement requires disclosure of any zoning, housing, building, safety, or fire code violations.

In its conclusions of law, the court relied heavily on the oft-cited Pennsylvania Supreme Court case Bortz v. Noon, 729 A. 2d, 555 (Pa. 1999), in analyzing the sellers’ conduct. There is nothing in the opinion that mentions a defense for failing to disclose that the apartments were in violation of zoning law but the sellers apparently tried to posit the defense that the septic system functioned properly. The court noted that this defense was only relevant to the “idea that [sellers] never thought their deceit would be uncovered.”

Once reliance on a misstatement of fact, or concealment of a material defect is established as fact, then the intent to fraudulently inflate the value of the property is established for the purpose of finding a material defect. As a consequence of holding that both the intentional misrepresentation and a violation of the RESDL occurred, the court granted the plaintiffs compensatory damages in an amount sufficient to bring the septic system into compliance. The RESDL allows actual damages under Section 7311 but does not preclude punitive damages or “any other remedies applicable under other provisions of law.”

The UTPCPL’s catch-all 21st unfair trade practice definition is “any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding,” which has been interpreted as requiring proof of common-law fraud by the Superior Court in 2000 in Booze v. Allstate Insurance, 750 A.2d 877. Section 201-9.2 also provides that “the court may in its discretion, award up to three times the actual damages sustained,” plus reasonable attorney fees.

As in many cases, the court declined to award treble damages, which is discretionary under UTPCPL Section 201-9.2(a), despite an explicit finding of intentional conduct, coupled with the finding of fact that one of the sellers was a former township zoning officer who “was familiar with zoning hearing procedures, zoning laws, building laws, and septic system laws.” The court found treble damages inappropriate but did not explicitly state its reasoning. Nonetheless, the court did award about $20,126 in attorney fees, which was the exact amount prayed for since said sum met the four factors under McCauslin v. Reliance Finance, 751 A.2d 683 (Pa. Super 2000).

Floyd serves as yet another reminder of the multiple causes of action available in a residential failure-to-disclose case, the specific remedies attached to the various claims, and that treble damages are not awarded as a matter of course. Although the threat of treble damages did not serve as a deterrent to this litigation, the threat of treble damages and counsel fees makes the UTPCPL a necessary supplement to RESDL and common-law failure-to-disclose claims.

Harper J. Dimmerman is an adjunct professor at Temple University’s Fox School of Business. His office represents clients in various litigation and real estate law matters and he can be reached at harper@hjdlaw.net or 215-545-0600. 

James M. Lammendola is an assistant professor at Temple University’s Fox School of Business who was in private practice for 20 years. He can be reached at james.lammendola@temple.edu or 215-204-4124.  •

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