Daily Development for
Thursday, April 22, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

Thanks to Professor Jerry Organ at Missouri-Columbia for this one:

VENDOR/PURCHASER; MISREPRESENTATION; FRAUD: Broker is liable for fraudulent misrepresentation when broker discusses property condition without disclosing hazardous conditions, even when the broker has no specific knowledge of the property's dangerous condition and even when the representations are general. Haberstick v. Gundaker Real Estate Company, Inc, .921 S.W.2d 104 (Mo. App. 1996).

The idyllic little rural subdivision in this case abutted a site that the state environmental quality department had determined represented "imminent danger of causing irreversible or irreparable damage to the public health or environment with immediate action required." The site had unknown quantities of dioxin, oils, and other pesticides. A creek passing through the site proceeded to bisect the subdivision itself, and the state agency had concluded that there was danger that poisons would runoff into the creek water from the site.

There had been some concern in the general area about dioxin problems, and the agency had instructed its brokers carefully as to how to deal with this issue concerning this subdivision. Here follows the language of the court:

"Agents . . . had been receiving inquiries from potential purchasers about the possible presence of dioxin. [Broker's] management, along with [subdivision] developers and home builders, held a meeting to develop a common strategy to confront these inquiries. They chose not to disclose the presence of the hazardous waste sites; rather, the sales agents were to respond to inquiries about dioxin by showing the potential purchaser three "Sitex" reports. The Sitex reports contained the results of chemical hazard testing of Turnberry Place. Although the scientifically worded Sitex reports were difficult for the lay person to comprehend, broker interpreted the reports as giving [the subdivision] "a clean bill of health.". . . [S]ales agents were to simply produce the Sitex reports even to questions explicitly about the hazardous waste sites and only if asked about potential chemical hazards. A [Broker's] manager explained [Broker} did not want to "wave a flag" to potential buyers about the nature of "the property next door." An attorney consulted by [broker] advised it was not obligated to disclose the sites. In subsequent meetings, [Broker's] sales agents were instructed on this policy."

In fact, Broker's agents never told any of the buyers about the hazardous waste problems. Apparently few of the actual buyers inquired specifically about dioxin problems. They did inquire about the property adjacent to the common ground. The responses received varied, but no Buyer was told the land included a hazardous waste site. The agents told them variously that the property was ". . . a farm; rural property; could not be developed; was inaccessible and could not be developed; farmland without access; and that it was owned by an old lady and would remain farmland. The agents did not provide Buyers with a copy of the Sitex report."

The court quotes a vivid account of how one happy homeowner discovered that there might be problems with her new home:

"The very first time I had an incling [sic] that there was something wrong or something different about the area was I heard voices out my windows. When I looked out the window, I saw three or four people in space suits, moon suits, completely covered with big huge helmets all the way down to boots and gloves. They were carrying air breathing equipment and other types of equipment, I suppose, measuring equipment.... They were walking around our common ground area, the Turnberry common ground area. At that point, I walked away to find my kids because I didn't know where they were."

The jury found fraudulent misrepresentation and awarded actual and punitive damages. The court granted a judgment notwithstanding the verdict as to one plaintiff couple. Both that couple and the broker appealed.

Held: Broker liable, judgment for plaintiffs upheld, jnov reversed. Punitive damages upheld.

There were two points of law discussed. First, the Broker argued that there was no evidence that its agents actually knew of the specific location of the dangerous sites. They had a general awareness that there was some contamination problem in the area, including on the adjacent site, but did not know how close the contamination was to the subdivision. In fact, they had been provided with scientific reports indicating that the area was safe. The court dealt with this argument summarily. It held that the very fact that the agent had no knowledge of the specifics of the contamination demonstrated that their statements, which suggested that the brokers were in a position to provide such information, were fraudulent.

"the agents, ignorant of the precise location of the waste sites, made representation of the sites without regard to the known potential the land being described was a waste site. In these circumstances, ignorance of the location of the sites is not consistent with mere negligence. Rather, the ignorance coupled with the disregard of the known hazard of the surrounding area demonstrates an act of fraudulent malfeasance."

The Broker then argued that the statements of the agents did not in fact represent that the premises were safe, and that in fact they were too vague to be actionable. The court also dealt with this easily. It said that the representations had the effect, under the circumstances, to convey the notion that there was no danger.

"The meaning of representations, their truth or falsity, are to be made in the light of the meaning which the plaintiffs would reasonably attach to them in existing circumstances and the words employed must be considered against the background and in the context in which they were used. A misrepresentation may be made by conduct calculated to mislead and to fraudulently obtain an undue advantage." (Citations omitted)

In reversing the nonsuit for one of the couples, the court concluded that the agent's statements were sufficiently actionable when the agent diverted the buyer's inquiry. The buyers asked about the dioxin problems in a nearby subdivision, the agent responded that the instant subdivision "was a better buy," without disclosing dioxin problems there.

Comment 1: Note that the court might easily have concluded that the Broker had a higher duty of disclosure - that the defects were latent defects or at least unknown to the buyers and that the agents had an affirmative duty to come forward with the information. The court elected not to take this tack, perhaps because the trial court had submitted only the fraudulent misrepresentation claim to the jury and the plaintiffs had not appealed. Note also that the opinion does not focus on the fact that the representations were made by brokers. The principles would apply as easily to sellers themselves, inspectors, appraisers or even (shudder) lawyers.

Comment 2: The court doesn't tell us what the buyers had actually said to the agents that elicited a response about the property condition. It appears that the questions were quite broad, and the court was willing to conclude that the inquiries nevertheless "were intended to discover such material facts [as evidence of dioxin contamination.]"

Comment 3: This decision goes a long way toward imposing a complete duty of disclosure of material facts on all selling parties. Any typical generalized inquiry made by an interested buyer could be regarded as in inquiry about general overall condition, demanding the disclosure of all relevant information. The case itself seems to have somewhat egregious facts in the background, but the actual "contact points" were not all that tight a fit. But the court dealt with them summarily, creating difficult precedent for future fraud defendants in Missouri and elsewhere.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.