Daily Development for Wednesday, January 21, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

VENDOR/PURCHASER; FRAUD; NONDISCLOSURE: Developer (and likely any seller) is likely to “foreseeable plaintiffs” in constructive fraud for affirmatively disguising defect in property, even in state where there is no duty to disclose, and consequently subsequent purchaser from the developer’s original purchaser can maintain an action.

Rhee v. Highland Development Corporation, 958 A. 2d 385 (Md. Sp. App. 2008)

This case involves a land developer and contractor who found that they had an abandoned cemetery squarely in the middle of their subdivision.  The cemetery was not recorded in local land records.  Defendants removed the headstones and established the area as a “no build” zone under the recorded plat, But did not disclose the existence of the cemetery to public authorities and did not remove the underground inhabitants of the cemetery, who were, according to the court, about two feet below the ground..  Most of this was in violation of local law, which does permit removal of abandoned cemeteries, but only with public supervision and approval.  The property was left as an undevelopable part of lot 20 in the subdivision, and the defendants sold that lot to a purchaser, apparently with a home on it (not over the cemetery area).

About 10 years later, in 1991, the original purchasers sold to the Rhees. Thirteen years after that, the Rhees discovered from someone who had worked on the original project that their land included a four hundred year old group of buried remains.  The court describes the defect, quite properly as a “desecrated cemetery.”

The trial court dismissed Rhee’s complaint because the developers had not committed any fraud on the Rhees and owed them no duty.  The Intermediate Appeals Court here reversed, finding that modern law of fraud has developed to include as possible plaintiffs those persons foreseeable subject to injury from the initial fraud.  In fact, they cited a case that spent some time on DIRT, Diamond Point Plaza Ltd. Partnership v. Wells Fargo, where the court found that the owners of a shopping center had fraudulently withheld information that a major tenant was planning on vacating the center they were refinancing.  The original lender sold the loan, which was sold again into securitization, and Wells Fargo represented the securitized trust that ultimately held the loan.  The defendants in the current case argued that affirmative financial fraud and simply failure to disclose a latent physical condition are two different cases and should be treated differently as to the range of plaintiffs, but the court elected to expand the doctrine to apply here.

Note that the court conceded that in Maryland, unlike in many states, there is no duty to disclose defective conditions, although of course one cannot commit fraud.  Here, the developers deliberately obscured the presence of the cemetery by removing the headstones and altering documents (later recorded) that showed the presence of the cemetery.  The clear intent was to deceive. 

The court does qualify somewhat the range of possible plaintiffs.  “[I]t is not sufficient that it is foreseeable that this concealment or misrepresentation will be passed on to subsequent purchasers.  The seller must have special reason to expect that the concealment or misrepresentation will be pass on to, and relied upon by, the subsequent purchaser.  [W]ith each intervening resale and with each passing year between the occurrence of the original faud and the lawsuit,” that will be more difficult to prove. [quoting from a California case and the Restatement of Torts Section 531, section d]. 

Here, the defendants had reason to believe that the concealed fact would remain concealed, perhaps for a good long time, and that the property would change hands without the defect being revealed. 

Comment 1: The editor, not a sophisticated tort thinker, admits to some confusion as to the “foreseeability” that controlled this case and “ordinary foreseeablility” that the court appears to differentiate.  But the editor got a 78 in first year torts.  That probably explains everythng. 

Comment 2: What about materiality?  Is the presence of 400 year old human remains on an unbuildable part of one’s property really an actionable defect?  Aren’t there likely to be remains buried virtually everywhere there are populated areas, whether marked as cemeteries or not?  The court confesses that this is probably true, and the simple existence of the possibility of buried remains may not affect a typical buyer’s buying decision.

But the court views the existence of a desecrated cemetery as a culturally distinct element in the minds of the average buyer.  It backs up its decision by noting that the acts of desecration here were in fact in violation of law at the time they occurred (and today.)

In fact, the Rhees argued that their own religious beliefs would have prohibited them from living anywhere that a cemetery had once existed, even if the remains had been removed and all evidence taken away.  The court said that, true or not, this is not a typical market value and if in fact the developer had properly cleared out the cemetery, there would not have been a material defect.  We’ll, see, when the next case comes along, whether this proves to be true.

Comment 3: Note that here there were no easements of other rights associated with this abandoned cemetery.  The injury the Rhees were claiming was that they paid an inflated price for the property because this defect had not been disclosed.  It will be interesting to see how the “battle of appraisers” deals with this one. 

Comment 4: Don’t expect this case to be limited to developer liability.  There is little in the case to suggest that any seller who deliberately disguises conditions on the property and fails to disclose them would not be equally liable, perhaps for a good long time.  Think about that Items reported here and in the ABA publications
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