Daily Development for Tuesday, November 9, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

Note there are two reports, and lots of editor ranting, in this one. The original case report came from New Jersey's Ira Meislick, who doesn't rant.

INSPECTIONS; DUTY OF CARE; SEPTIC SYSTEMS: A septic tank inspection service can't limit its certification to the day of inspection because the customer clearly expects to receive an opinion as to how the system will operate in the future.

Mango v. Pierce-Coombs, 370 N.J. Super. 239, 851 A.2d 62 (App. Div. 2004)

An agreement of sale for a previously owned and occupied home called for a septic system certification. At the buyer's request, the real estate agent (a dual agent) arranged for the inspection. A cesspool service company uncovered the septic tank and pumped it down to see if water flowed back from the septic field's bed. No water came back and the cesspool company did not dig up the distribution boxes or the field beds. After successfully flushing a toilet in the house, the company concluded that the system was flowing suitably and its certification was issued. The certification limited its coverage to date of inspection, and stated in bold print: “No warranties or guaranties are made as to the condition nor the continued working order of the field bed, connecting pipes nor the septic tank.”

The “inspector” was in the septic waste hauling business. New Jersey has no licensure provisions or other regulation of septic inspectors.

After closing, the septic system malfunctioned. The cesspool company returned to the property and re-pumped the tank, but this proved to be only a temporary solution. There ensued a series of problems with contractors retained to fix the problem, and a city-ordered redesign of the system. When the project was finally completed, the owner hired an expert to review the original inspecting company's work. The expert engineer criticized the original inspection as inadequate. It further opined that the inspector's certification lacked details as to what was tested or observed, or how the inspector concluded that the system was functional. The report concluded that the system was in a state of failure at the time of its original inspection. In fact, the expert’s report stated, the method of inspection used by the first inspector - pumping down the level of the tank, made effective inspection impossible.
Based on the report, the owner sued the original inspection company for consumer fraud and common law fraud and sued the real estate agent for consumer fraud because it had recommended the original inspector.

The lower court granted summary judgment against the owner, dismissing her complaint. As to the consumer fraud and common law fraud claims against the cesspool inspection company, it focused on the literal wording of the certification, which limited its effect to the day of the inspection. According to the lower court, to prove consumer fraud under the Consumer Fraud Act, the owner needed to show an affirmative misrepresentation by the original inspection company, or show that it had made a statement of fact found to be false, and that either action induced the owner to buy the property. Here, the lower court found no evidence that the company's certification that the system worked on the day of inspection was false.

The Appellate Division disagreed, holding that the contractual provision limiting the certification to the day of inspection was "unconscionable." According to the Court, the limitation “obliterated the underlying purpose for which the company was hired: to provide guidance to the prospective purchaser as to the suitability and condition of the septic system after closing.” What the buyer needed and expected was “a reliable evaluation as to whether the septic system would work in the reasonably foreseeable future.” When the Court "eliminated" the time limitation in the certification as unconscionable and unenforceable, the certification then could be read to say that the septic system would be suitable for the reasonably foreseeable future. Given that the owner had made a prima facie showing that the septic system was not in good working order even a little after the certification was issued, the Court held that the cesspool company's certification was false. For that re!
the Court overturned the lower court's dismissal of the owner's claim against the original cesspool inspection company and remanded the claim.

Comment 1: This case provides a nice comparison to Burnett v. Chimney Sweep, 2004 Westlaw 2445249 (Cal. App. 11/2/09) (the DIRT DD for 11/8/04) where a California court upheld in principle waivers of negligence in commercial lease. The case is discussed under the heading: “Landlord/tenant; Landlord’s Liability for Injury to Tenant; Waiver.”

In Burnett, the court stated that commercial leases do not implicate special public interest concerns, and therefore are addressed simply through private contract analysis. But the factors that the court set forth in Burnett to determine whether the public interest is implicated in evaluating waivers of negligence in a particular contract would also be relevant to evaluating the enforceability of the limitations on liability contained in this case.

The editor is a staunch proponent of freedom of contract when there is a free and open market, so that parties ought to be aware that they need professional guidance in participating in the market. But, as the editor as made plain, he does not view the American residential sales market as such a “free and open marketplace.” All too often, buyers (and sellers as well) are sheep led to slaughter by sophisticated professionals whose primary aim is to get too closing without the parties to the transactions realizing the full extent of the risks and costs of the transaction. The welter of federal and state consumer disclosure laws have made little dent in the true situation of the consumers, as they are presented with mammoth stacks of documents containing purported disclosures under circumstances that preclude careful study and long after they are already committed to proceed with the transaction in terms of their emotional state and personal planning, even if they arguably st!
ill ha
ve a legal “out.”

The only way to protect against overreaching practices in this area is to regulate them on a case by case basis, upholding liability for shoddy work against unreasonable contractual waivers and limitations.

Lest the editor be misunderstood, he stresses that most professionals in the residential marketplace are ethical and have the interests of their clients at heart. They, too, are concerned about the wolves that hide among them that prey on consumers. They are especially concerned about these people precisely because of the hard earned image that the “good” brokers, mortgage brokers, escrow agents, title insurers and inspectors have promulgated that buying a home is indeed a “safe” practice. And of course they are exposed to potential pain and suffering in dealing with claims made by wolves of another kind - aggressive “consumer advocate” attorneys who convince clients that someone ought to be sued every time their expectations aren’t fully met. But in the editor’s view some of this pain and suffering is necessary in order to preserve legal theories and causes of action that protect consumers, who, unlike the professionals, aren’t protected by errors and omissions insura!
nce an
d can’t spread the cost of a catastrophic result through adjustment of pricing.

Comment 2: In the course of reviewing this case, the editor found a cite to a 2002 decision, the DIRT DD for 8/28/2002. In that decision, the court found that an home inspection company engaged in a pattern of unconscionable consumer practices when it curried the favor of brokerage companies by downplaying the defects that it identified and praising the strengths of the home, all in an effort to avoid being characterized as “deal killers.” The language of the court in that decision is worth repeating:
“HouseMaster's marketing and training strategy emphasizes rendering a "balanced" report which stresses the positive aspects of a house, as well as the negative in such a way as to water down negative findings such that a consumer will have as little basis as possible to call the sale off or have solid evidence upon which to renegotiate the price. This marketing and business philosophy is undisclosed to the consumer. The informational brochure reviewed by the Herners deceptively highlights HouseMaster's independence, attention to detail and thoroughness. Yet, inspectors are trained not to reveal they are part time or may be early in their careers as inspectors. It is not disclosed that NIBI is an entity wholly owned by HouseMaster and possesses neither any governmental affiliation nor any accreditation from the construction code or building code enforcement community. The brochure fails to disclose that the 90 day guarantee promised by HouseMaster lapses 90 days from the insp!
rather than from closing, information which in this case, at least, vitiated any value to the Herners in the guarantee.

The record thus establishes an inherent conflict between the essential purposes of a home inspection to a consumer as described above and the duty of a realtor who is engaged to sell a home promptly at the highest price it will bring. It further establishes a pattern of non-disclosure on the part of HouseMaster such as to render its report worthless to consumers.

HouseMaster's reports strum the chord of high hopes on the part of those consumers who, having already committed themselves, yearn for confirmation that they have made a wise decision.”

BROKERS; DUTY OF DISCLOSURE; SELECTION OF INSPECTORS: Broker does not have a duty to disclose to a client that it regularly uses the same inspector, and such regular use does not otherwise render broker liable for malfeasance by the inspector in carrying out the inspection.

Mango v. Pierce-Coombs, 370 N.J. Super. 239, 851 A.2d 62 (App. Div. 2004)

This underlying facts of this case are discussed under the heading: “Property Inspections; Duty of Care; Septic Systems.”

The owner also alleged that the real estate agent (serving in a dual agency capacity) had committed consumer fraud by recommending the cesspool company. Here the theory was that the two had an arrangement in which the cesspool company would conduct inadequate tests of the septic systems and still offer certifications. Under the Consumer Fraud Act, a seller's broker may be liable for non-disclosure of a defective condition if the condition was known to the broker, but not readily observable to the buyer. To prove consumer fraud, one must show that the broker intentionally concealed a material defect with the intention that its client would rely on the concealment.

Following plaintiff’s presentation of evidence, the lower court rejected the owner's contention, finding insufficient evidence to support the claims. The Appellate Division agreed. The lower court also noted that the buyer had the right to choose the septic system inspector. Here, she simply deferred to her realtor. Even though the cesspool inspection company conducted several inspections and certifications each month for the broker, this fact, standing alone, did not prove a fraudulent relationship.

The court noted that in a prior decision, Herner v. Housemaster of America, Inc., 349 N.J. Super. 89, 793 A. 2d 55, certif. denied 174 N.J. 40 (2002), the DIRT DD for 8/22/04, a new Jersey court had held a home inspection company was guilty of unconscionable practices because its home inspectors were trained to provide misleading information and deliberately mislead buyers as the severity of adverse conditions in order to promote a reputation that the inspection company was not a “deal killer” and to attract the custom of brokers in the future. But the case did not involve a liability claim against the brokers involved.

Comment: In his comments to the Herner case, the editor suggested that a case might be made for consumer fraud by the broker on the basis of a pattern of facts similar to those in Herner, if the broker selects inspectors that it knows will underreport defects and use evasive warranty language so that problems are not disclosed and inspectors avoid any responsibility. The court found in the instant case that no pattern of mutual support existed between the broker and inspector that was anything like that described in Herner and that the plaintiff failed to prove any conspiracy. So these facts did not present the right situation, but the case is still out there to be made.

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