by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

VENDOR/PURCHASER; MISREPRESENTATION; CAVEAT EMPTOR: Seller has no duty to disclose to buyer existence of litigation in local federal court that will affect buyer's ability to effectuate financing of acquisition, even where buyer posts substantial non-refundable payments to extend the period of the financing condition. Gewin v. TCF Asset Management Corp., 668 So.2d 523 (Ala. 1995)

The buyer paid $16,000 in extension payments while it was trying to arrange an assumption of the existing mortgage loan on the property and a release of the seller from that loan. Ultimately, the lender informed the buyer that it would not release the seller (although it would permit the buyer to assume the loan and acquire the property) and the deal fell through. The buyer had acted promptly in contacting and negotiating with the lender, and the seller was fully aware of all of these activities during the negotiations over the extensions.

Later, the buyer discovered that during all of the negotations with the lender the seller was engaged in litigation with the lender in federal district court in the city in which the parties negotiating and the property was located. That litigation did not involve the subject property; it had to do with priorities of mortgages held by the two parties on other property. The court seems to assume that this information would have been relevant information to the buyer in assessing its chances of getting the consent of the lender to release the seller in the instant transaction. Had the buyer known about this litigation, it might not have invested $16,000 in a gamble that it would be able to secure the release.

The court commented that buyers were "sophisticated businessmen dealing at arm's length . . . not in a position of unequal pargaining power." The fact of the litigation in federal court was a matter of public record and, in the view of the court, the buyers could have discovered it through "due diligence."

Comment 1: The case is typical of the "hardball" decisions implementing the caveat emptor rule in Alabama and other Southeastern states. One would expect a different decision in a number of other jurisdictions. Although the litigation between the lender and the seller was a matter of public record, it did not involve the subject property and might not even have been picked up by a "no-litigation" certificate cleverly drafted by a knowing attorney for seller.

Comment 2: Both parties were represented by brokers throughout. Assuming that the broker for the buyer was a "buyer's broker," is the finding that the discovery of the litigation was part of buyer's "due diligence" a "lay down hand" on broker malpractice? In some states, the seller's broker would also have a duty to disclose, if it knew of the information and its significance to the deal. If the buyer had an attorney conducting the negotiations, would this have made the "due diligence" issue any more (or less) clear? The editor believes the duty is clear in either instance [based only upon the hypothetical facts posited here - more details in the actual case could change things]. These are particularly difficult facts, where the buyer specifically put up additional non-refundable money in the hope that it could negotiate a release of the seller from the mortgage.

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