Daily Development for Friday, February 7, 2003

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

VENDOR /PURCHASER; MISREPRESENTATION; NONDISCLOSURE: The Illinois Residential Real Property Disclosure Act (the "Act") does not require a purchaser to prove that a vendor actively concealed a material defect, bur rather requires a vendor to disclose fully known defects, and vendor is liable for partial disclosure even though buyer's reasonable investigation based upon such disclosure would have led to buyer's discovery of objectionable conditions.

Hogan v. Adams, 775 N.E.2d 217 (Ill. App. 4 Dist. 2002).

In April of 1998 the defendants, the sellers of the residential property at issue, completed a residential real property disclosure report (disclosure report) as required by the Act. On the disclosure report, the defendants indicated they had experienced flooding in the basement and described one incident of when flooding had occurred in a stair well, when the sump pump power was lost because of a tornado. In fact, there were two incidents, the second occurring when the sump pump was operating, and in both cases the entire basement got water, not just the stair well. Defendants testified that they told their broker about all of the incidents and asked if they should list them all, and the broker approved the approach they took, telling them that only one example was necessary if they disclosed the fact of flooding. (Broker denied this exchange, but a witness supported defendants' version.)

In April of 1998, plaintiffs entered into a contract for the purchase of defendant's home.

Immediately following the sale to plaintiffs, on several occasions in 1998, water entered the home, once when the sump pump failed and another time when it was working. As a result of the flooding, plaintiffs had the basement cleaned and new carpeting installed. Plaintiffs also purchased a new sump pump and new drywall, and changed the grade of the yard with new landscaping. In April of 1999, the plaintiffs sued the defendants for violation of the Act.

The defendants testified it was their understanding they only needed to include an example of the flooding in the explanation section of the disclosure report. In addition, the defendants testified that the plaintiffs never asked for an explanation of the disclosure report or whether the basement got water. In October of 2001, the trial court issued a memorandum opinion in favor of the defendants. Based upon the appeals court analysis, it appears that the trial court found that the defendants filled out the form in good faith and without intent to deceive and that the plaintiffs received sufficient notice to lead them to inquire further, which inquiry would have led them to get the full story of prior flooding.

On appeal: Held: Reversed.

Since both questions involved statutory interpretation, the Court reviewed the questions de novo. Turning to the first issue, the Court reviewed the language of the Act and determined that the Act requires the seller to disclose known defects and imposes liability for failure to do so. The Act also imposes liability on the seller for any material error, inaccuracy, or omission of any information delivered under the Act if the seller had knowledge of the material error, inaccuracy, or omission. The court distinguished cases from other jurisdictions, finding that the statutes in those states did impose a good faith limitation.

Therefore, the defendants' reasonable belief was not at issue and they were at fault for failing to disclose other known instances of flooding (especially since one of them was not a sump pump failure).

Second, in its review of the Act, the Court found no language that requires a purchaser to further investigate disclosure of a defect made on a disclosure report to determine whether the disclosure report is complete.

The Court reasoned that while the disclosure report is not a substitute for inspections or warranties, a purchaser is entitled to rely on the truthfulness, accuracy, and completeness of the statements contained therein. Therefore, it was not the plaintiffs' burden to investigate the defendants' disclosure that there was water in the basement. The Court reversed the trial court's findings in favor of the defendants and found the defendants did violate the Act and therefore, the case was remanded to determine damages.

Comment 1: There's a lot of pushing and shoving going on here between the seller's broker and the sellers. The opinion is worth reading for that reason. Probably both sides are partly accurate in their recollection.

One comment the court makes is of some special interest. It states that the borrowers knew that the broker was not a lawyer, and the form they signed suggested that they consult a lawyer. Maybe in Illinois this is a reasonable expectation. Certainly not in my state, regardless of what appears on the form. It is interesting that we now are having a battle of the ABA and the FTC over whether brokers should be giving legal advice.

(See prior posts) How does that cut here? Is the adequacy of the disclosure a legal question or a factual one?

What if the broker filled out the form while the clients watched? Yes, it happens.

Comment 2: The editor concurs with the court that citing only the one flooding problem, in which the sump pump failed, gives the inference that there was no other flood experience when the pump was working. This was misleading. The seller had to know that. The court could have stopped there. The rest of the opinion, in the editor's view, answers too many questions that ought to be deferred to later cases. It is likely the court will have reason to regret that it concluded, for instance, that good faith or duty of inquiry are never relevant.

Comment 3: Notwithstanding the above comment, the editor always instructs clients that a disclosure is a warranty, and had better be accurate and complete and well thought out. It's only a rare circumstance when the law might be otherwise, and never in Illinois.