Daily Development for Friday, July 27, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; MISREPRESENTATION; FRAUD; ENVIRONMENTAL ISSUES: Fact that EPA is conducting investigation of contamination on property is a material fact of independent significance, even when evidence of such contamination is evident from an inspection of the property, and seller?s failure to disclose investigation is fraudulent, even where sale agreement contains ?as is? clause.

Hess v. Chase Manhattan Bank, U.S.A., N.A., 220 S.W. 3d 758 (Mo. 2007)

A prior owner, owner of a paint company, had instructed his employees to bury some drums of old paint on his small farm property, and also to dump many old paint cans out behind the barn.  When the employees later became ?former employees,? they ratted out the boss to the federal EPA.  Soon thereafter, the boss declared bankruptcy and defaulted on the mortgage on the farm.

The EPA searched the property, found lots of evidence of environmental crimes, and ultimately the boss became a criminal defendant who pleaded guilty and served a year in prison. 

The mortgagee, Chase, apparently obtained leave to foreclose from the bankruptcy court to foreclose and purchased the property at the foreclosure sale.   Chase was aware of the contamination problems all along and a Chase employee that specialized in contaminated properties arranged for an appraisal of the property, which appraisal stated that the property was being evaluated by the EPA.

Chase offered the property for sale.  There was a lot of interest, and three people, including Hess, submitted offers.  The other two offerors did observe the paint cans on the property, but Hess did not make such a thorough inspection.  The sale agreement did require Chase to deliver a written disclosure of material adverse information concerning the property, but it never did so.  There was no disclosure to any of the offerors of the EPA interest in the property.  All of them, along with Hess, testified at trial that they would not have purchased it had they known of the EPA?s continuing interest.  The sale papers also contained an as is clause and a disclosure the seller had never been in active possession of the property.

After closing, Hess discovered the paint cans and, still unaware of their significance, ordered his employees to bury them.  A year later, the EPA ordered the exhumation of the cans, and Hess knew he had environmental problems.  He brought suit against Chase for common law fraud and under the Missouri Merchandising Practices Act, which applied because Hess bought the property as a home.  The trial court denied Chase?s motions for a directed verdict and the jury found for Hess and awarded damages in the amount of the purchase price, $52,000.  The court denied punitive damages under the MPA, as it had not been amended to provide for individual actions until after the sale in this case. 

The appeals court found that failure to disclose a fact that a seller has a duty to disclose amounts to fraud.  Here both the common law and the MPA required disclosure of latent defects known to seller.  The court found that the information about the EPA investigation was distinct information from the discoverable information about the discarded paint cans.  Chase knew of this information, and Hess would have had difficulty, at least, in discovering it.  Expert witnesses - experienced real estate brokers in the area, testified that this was the sort of information that would be deemed relevant to a buyer. 

As to the ?as is? clause, the court found that Missouri will not honor such a clause in fraud cases where the fraud amounts to fraud in the inducement - where it led the victim to accept the contract and the as is clause when he would not have done so had he known of the fraud.   The fact that Hess and all other potential buyers testified that they would not have bought the property with knowledge of EPA?s interest was effective evidence here. 

Chase marketed the property through its own employees, and the court did not believe that the employee who supervised the sale had no knowledge of the environmental problem, as she had received information in several ways of the EPA investigation. 

The jury did not award punitive damages under the fraud claim, and the court held (by a split decision) that punitive damages were not available under the MPA, although actual damages and attorney?s fees were available, where private rights of action did not exist under the MPA at the time of the events here. 

Comment 1:  Undoubtedly the case was so carefully prepared and presented because the plaintiff?s attorneys saw a deep pocket here for punitive damages.  Chase dodged the bullet here, but look for the next shoe to drop on another corporate seller in the near future.  The wave of foreclosures on junk properties resulting from the current subprime mortgage debacle is going to create lots of opportunities here, so probably the investment in this case will pay off to the plaintiffs? bar in the long run. 

Comment 2: The nondisclosure of the environmental problem was just corporate carelessness, and there likely was no deliberate intent to deceive, so the jury?s finding of no punitive damages likely was just.  But where the statute authorizes punitive damages, will the standards for awarding the be less stringent?  This seems a ripe area for exploitation, and a scary one for foreclosing mortgagees.  Regular homeowners selling their properties likely will not get caught up in this issue because the MPA may not apply to them and in any event typical broker supervised home sale in Missouri likely would have resulted in disclosure here 

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