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

VENDOR/PURCHASER; MISREPRESENTATION; STATUTORY DISCLOSURE REQUIREMENTS: A home seller violates the South Dakota Statutory Disclosure Law by failing to release all information available concerning foundation defects, even though seller mentions defects in disclosure statement.

Engelhart v. Kramer, 570 N.W.2d 550 (S. D. 1997).

A home buyer sued her seller for damages, alleging that the seller had violated South Dakota's Statutory Disclosure Law (S.D.C.L. ch 43-4), after discovering that the foundation of the buyer's home was badly cracked and disintegrating.

The seller had completed the statutory disclosure form indicating that the basement walls contained "some spots" involving cracks and "some crumbling," and that there was some water penetration in the northwestern corner. When the buyer inquired further regarding the condition of the basement walls, the seller offered to allow the buyer to remove paneling which had been installed over the basement walls shortly before the seller placed the home on the market.

Shortly prior to sale, the buyer had cleaned out the basement and had discovered evidence of cracks. She had removed the existing damaged drywall, viewed the cracked conditions, and replaced the drywall with the new paneling. She recorded the work with "before, during and after" photographs. But seller but did not tell the buyer of these photographs at the time of buyer's inquiry concerning the walls. The buyer declined the seller's officer to remove the paneling.

The South Dakota statute, one of the "new breed" of disclosure statutes promoted by the National Association of Realtors, requires that the seller fill out a disclosure statement and that the seller "perform each act and make each disclosure in good faith." Elsewhere, the statute provides that there is no liability for defects if the seller "truthfully completes" the disclosure statement.

Seller argued that the disclosure statement truthfully answered the questions and indicated that there were cracks in the basement. The court, however, concluded that the statutory language "truthfully completes," suggests more than "mere" truthful statements are necessary. In short, although the court's statement of its conclusion is somewhat vague, the court appears to read the statute as absolving the seller of liability only when the disclosures are both "truthful" and "complete."

With respect to the "good faith" requirement, the court borrowed from the UCC definition, holding that the term "good faith" means:

"an honest intention to abstain from taking any unconscientious advantage of another; even through the forms or technicalities of law, together with an absence of all information or belief of facts which would render the transaction unconscientious."

Again, the court does not "fill in the blanks," but appears to conclude that the seller's failure to offer the pictures she had taken of the bare walls was an action that lacked "good faith" in light of the fact that she had covered those walls with paneling only four days prior to putting the property on the market. The trial court had concluded that one purpose of the paneling installation was to hide the cracked walls, and that seller's offer to permit borrower to remove the paneling to inspect was a subterfuge, as the seller did not really expect the buyer to be willing to remove paneling from the walls of a home that buyer did not own.

As to the seller's characterization of her the description of the condition of the basement as being, at worst, an "innocent misrepresentation" that was, in fact, truthful, the court characterized this assertion as "colorful" but "inaccurate."

Reporter's Comment: Many states have adopted statutes similar to the South Dakota Statute. The South Dakota Act, like other similar state's acts contained the following exculpatory language:

THIS STATEMENT IS A DISCLOSURE OF THE CONDITION OF THE ABOVE-DESCRIBED PROPERTY....IT IS NOT A WARRANTY OF ANY KIND BY THE SELLER OR ANY AGENT REPRESENTING ANY PARTY IN THIS TRANSACTION AND IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR WARRANTIES THE PARTIES MAY WISH TO OBTAIN.

Sellers who hope to rely on such language to provide less than full disclosure of known defects do so at their peril, for, as the Engelhart court expressly noted "the doctrine of caveat emptor has been abandoned [in the State of South Dakota under the new Disclosure Statute]."

Editor's Comment 1: As the editor has set forth in the caption above, the editor views this case as compelling the seller to release any and all information it has concerning the condition of the house; a court easily could construe any withholding of information as a demonstration of "bad faith," since the most likely motive for withholding any information would be to deny the seller information that the seller might find useful in evaluating the property's condition. It is clear that "mere truth" is no defense.

Editor's Comment 2: Just how far would the court have gone in reviewing the seller's conduct? If, for instance, there had been no pictures, would the court have held that the seller had the duty to volunteer to the buyer the fact that seller had put up the paneling just prior to sale? That the purpose of the paneling was to disguise the condition of the walls? Did the seller in fact have a duty to take photographs under these circumstances in order to memorialize the condition of the walls? All of this strikes the editor as going much too far, but also the editor views such actions as quite consistent with the apparent expectation of the court that the seller's actions be "complete and honest" in order to avoid an "unconscientious" sale (whatever that means).

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