DIRT DEVELOPMENT for April 14, 2009
Daniel B. Bogart
Donley and Marjorie Bollinger Chair in Real Estate Law
Chapman University School of Law, Orange, California
Redevelopment; Developer Misrepresentation; Rights of neighboring homeowners: Homeowners did not rely to their detriment on Developer’s alleged misrepresentation of financial facts and identity of anchor tenant in Developer’s successful application to redevelop nearby property as a shopping center.
Stein v. Novus Equities Co., 2009 WL 214342 (Missouri Ct. App. 2009)
Stein owned a home in an area of Sunset Hills, Missouri (as suburb of St. Louis) known locally as “the Manor.” Officials of Sunset Hills decided that the Manor could do with a bit of redevelopment, and approved Novus as the exclusive developer of the project. Novus proposed to develop a shopping center, and identified Bass Pro Shops as its anchor tenant. Novus also submitted financial information demonstrating the viability of their proposal. As part of Novus’ plan, Novus agreed to pay 15 million dollars to Bass Pro for construction costs. A consulting firm hired by the City evaluated the developer’s proposal and submitted its analysis to the City for approval.
The plan hinged on the successful condemnation of homes and a number of small businesses in the Manor. In July of 2005, the City delegated the right to condemn property in the Manor to Novus. Novus made clear its intention to use this power at a meeting held on August 8, 2005. Presumably, this was a meeting open to the owners of homes in the Manor, because, according to the opinion, immediately after the meeting “many of the other property owners began stripping and salvaging materials from their homes.” What this meant, basically, is that the homeowners resisting the condemnations and the redevelopment were now surrounded by a bunch of gutted homes.
Not long afterwards, at a second meeting, Novus announced that it would not be exercising its options to purchase homes and develop the property because it had lost its financing. The opinion also disclosed that Novus in fact agreed to pay Bass Pro 30 million dollars for construction of the facility as opposed to 15 million dollars. Further, in February of 2005, Novus lost Bass Pro as an anchor tenant, and instead solicited May department stores to act as tenant in the anchor space. The problem is that May’s lease would cover less space. In short, the financial projections of the original decision of the City were based on facts that changed considerably. In the end, Novus was unable to develop the property.
Legal mayhem ensued.
Among other things, the plaintiffs, (homeowners who did not agree to option their properties) brought suit alleging loss of property value as a result of the now ragged nature of the neighborhood. The plaintiffs alleged that the developer committed fraudulent misrepresentation, negligent misrepresentation, injurious falsehoods and negligence. The trial court granted the developer’s petition to toss out all counts for failure to state a claim for which relief could be granted and the Missouri Court of Appeals here affirmed.
The case presented the court an opportunity to review basic law of fraud and negligent misrepresentation. According to the court, to prove negligent misrepresentation, the plaintiffs must show the following:
“(1) the speaker supplied information in the course of his business; (2) because of the speaker's failure to exercise reasonable care, the information was false; (3) the information was intentionally provided by the speaker for the guidance of limited persons in a particular business transaction; (4) the hearer justifiably relied on the information; and (5) due to the hearer's reliance on the information, the hearer suffered a pecuniary loss.” Novus, 2009 WL at 3.
It is clear that the homeowners in this case suffered a loss, possibly a really costly loss. It is not clear from the facts, but it is entirely possible that the neighborhood will never look the same again. Many of the homes were deliberately gutted as the owners departed, making resale difficult. The shopping center was not built. Property values likely dropped. But to prove negligent (or fraudulent) misrepresentation, the homeowners who did not sign options were required to show that they relied to their detriment on statements of the developer. In this case, according to the court, the homeowners who did not option their properties did not engage in any different course of conduct because of statements made by Novus. In fact, these homeowners resisted sale of their properties notwithstanding statements of Novus.
The individuals in a position to plausibly say they relied on statements of the developer are the homeowners who optioned their homes, and then gutted them believing that they were going to actually close the sales. Some of these people actually purchased replacement homes. However, these property owners are not plaintiffs in this suit. (And in any event, the reader might doubt whether this reliance is reasonable. Who buys a new home before the owner of the option exercises that right?)
The claim of injurious falsehood essentially is a tort relating to false published statements -- in this case, the pro forma statements. Under this tort theory, “one who publishes a false statement harmful to the interests of another is subject to liability for pecuniary loss resulting to the other if (a) he intends for publication of the statement to result in harm to interests of the other having a pecuniary value… or should know that it is likely to do so, and (b) he knows that the statement is false or acts in reckless disregard of its truth or falsity.” Novus Equities, 2009 WL 214342 at 5. According to the court, this tort addresses a false statement made about the plaintiff. In this case, the false statement concerned the feasibility of developer’s plan for redevelopment.
As to the basic negligence claim, the court says simply that Novus did not owe any duty to the plaintiff homeowners. According to homeowners, the developer had a duty to provide truthful information to them because “defendants had superior knowledge not within the fair and reasonable reach of Plaintiffs.” Id. at 6. The court rejects this contention. The court states that superior knowledge creates a duty in the context of fraudulent misrepresentation and not pure negligence. As to the former, the court had already dismissed the action because of the failure of the homeowners to rely on the statements of the developer.
The case does not address Kelo or the issue of whether there was a sufficient public purpose to support the redevelopment of the Manor. But see comment 1 below; the Kelo decision may well have played a role in the decision making of the parties.
Reporter’s Comment 1: Kelo was handed down on June 23, 2005, and the facts that form the backdrop of Novus occurred very soon afterward. To the extent that homeowners in the subdivision may have thought that a taking for redevelopment would be forbidden by the U.S. Constitution, the timing must have seemed horrible. Many of the homeowners agreed to sell, perhaps because the purchase price was simply too good to pass up. But it is reasonable to suppose that there may have been others who were persuaded to take the deal because the law now seemed to turn against them. The case opinion does not give enough detail to determine when all of the option contracts were finalized. Similarly, the handing down of Kelo placed the City and the developer in a stronger position and perhaps enabled the developer to insist on a lower sales price. Again, the opinion does not present enough information for this reporter to draw a conclusion, and he has no first hand knowledge of the dispute. P
resumably, this was a matter of significant public debate and media attention in St. Louis. Perhaps a reader can fill in some details.
Reporter’s Comment 2: In many ways, this is just a case of a developer losing its financing. Anyone agreeing to sell property to a developer via an option must understand the possibility that the developer may not go through with the deal. The inability of developer to obtain a loan is an inherent possibility of all such deals. What distinguishes this case is the hammer of eminent domain. The developer could “encourage” the voluntary acceptance of a sale of units because it had the power to condemn property. Thus, attention shifted to the parties who did not sign options but who were ruined by the developer’s inability to make good on its development plans. The court was right that the homeowners who did not option their property did not rely (change their position) on basis of the developer’s statements. But the City approved and homeowners sold to some degree because of the false information about the anchor tenant and the financial statement generated by the developer. Th
is chain of events hurt the plaintiffs. To be blunt, this is a wrong in search of a cause of action. As law students sometimes learn, not all wrong behavior is actionable.
Editor’s Comment: There is no question that an offer to purchase backed up by a power to condemn is an iron fist in a velvet glove. In obtaining condemnation power, the developers enormously increased the credibility of their project and the ability to negotiate for property acquisition in the area. This led directly (but predictably?) to the situation that now bedevils the plaintiffs.
Of course, the City is the party with the power to sanction the developer for its misrepresentation, and if it was misled by the developer, creating a situation in which City property values significantly declined, shouldn’t it have a legal claim as well as a political one?
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