Real estate law fraud article co-authored by a Philadelphia attorney

Unauthorized reproduction is expressly prohibited. Copyright ALM 2015

“Proving Fraud in a Residential Real Estate Transaction” by Harper J.  Dimmerman  and  James  M.  Lammendola, ” The  Legal  Intelligencer”, Publication date: January  6,  2015 (Real estate law fraud article co-authored by a Philadelphia attorney. The article discusses Pennsylvania’s disclosure laws in a residential real estate deal).

Litigators  know  that  proving  fraud  against  a  seller  in  the  residential  real  estate  context  can  be  challenging and  being  awarded  damages  for  fraud  even  more  so.  The  recent  decision  in  Floyd  v.  Wigfield,  (Oct.  2014, Lehigh  Co.,  No.  2012-­C-­4131),  handed  down  this  past  October,  provides  a  useful  analysis  of  the  facts and  types  of  claims  that  should  be  considered.  The  case  also  serves  as  a  reminder  that  failure-­to-­disclose cases  continue  to  be  litigated  in  our  state.  This  is  so  despite  the  requirement  in  the  1996  Real  Estate Seller  Disclosure  Law  (68  Pa.C.S.A.  Section  7301)  requiring  material  defects  to  be  disclosed  in  writing before  an  agreement  of  sale  for  residential  real  estate  is  signed  as  well  as  the  1968  Unfair  Trade Practices  and  Consumer  Protection  Law  (73  P .S.  Section  201-­1  et  seq.),  made  applicable  to  residential real  estate  transactions  by  the  Superior  Court  in  1987.

The  facts  are  straightforward  enough:  Shannon  Floyd,  Norman  D’Avanzo  and  Ruth  D’Avanzo  (the buyers),  purchased  property  in  Emmaus,  Pa.,  from  Edward  and  Carol  Wigfield  (the  sellers)  on  Oct.  9, 2010.  During  their  ownership,  the  sellers  made  various  improvements  to  the  property,  including  the conversion  of  a  barn  on  the  site  into  multiple  apartment  units  and  alterations  to  the  wastewater  system. The  sellers  were  the  only  owners  in  the  chain  of  title  prior  to  the  sale  to  the  buyers.  They  listed  the property  and  prepared  various  documents,  including  a  required  seller’s  property  disclosure  statement  that did  not  disclose  any  information  on  any  code  violations.  The  property  was  marketed  as  having  two income-­producing  rental  units,  in  addition  to  the  main  residence  being  ready  for  use.

Post-­settlement,  an  issue  arose  with  the  tenants  (the  rental  units  were  occupied  at  the  time  of  the transfer)  and  an  inspection  by  Upper  Milford  Township  exposed  several  violations.  These  violations included  the  fact  that  the  property  had  never  been  approved  for  multiple  rental  units.  The  buyers  sought zoning  relief,  in  the  form  of  a  variance;;  the  request  was  eventually  granted.  But  the  variance  was conditioned  upon  an  inspection  of  each  of  the  rental  units.  In  the  course  of  this  process,  it  was  discovered that  the  septic  system  servicing  the  dwelling  units  was  non-­compliant,  necessitating  a  new,  compliant system  with  an  approximate  cost  of  $40,000.

As  a  result  of  their  reliance  upon  the  disclosures  either  made  or  omitted  by  the  sellers,  the  buyers commenced  litigation  in  the  Lehigh  County  Court  of  Common  Pleas.  The  multicount  complaint  averred common-­law  misrepresentation  as  well  as  violations  of  both  the  Real  Estate  Seller  Disclosure  Law (RESDL)  and  the  Unfair  Trade  Practices  and  Consumer  Protection  Law  (UTPCPL),  inter  alia.  The  thrust of  the  buyers’  suit  was  that  the  sellers  misrepresented  the  condition  of  the  property,  thereby  entitling  them to  actual  damages  amounting  to  the  cost  of  the  septic  system,  treble  damages  and  attorney  fees.

Notably,  at  the  bench  trial,  the  sellers  stipulated  to  the  fact  that  they  knew  permits  were  required  and intentionally  did  not  obtain  them.  The  court  made  an  additional  finding  of  fact  that  the  sellers  represented on  the  disclosure  statement  that  they  were  unaware  of  any  material  defects  on  the  property.  A  material defect  is  defined  by  case  law,  the  RESDL  and  the  disclosure  statement  as  “a  problem  with  residential  real property  or  any  portion  of  it  that  would  have  a  significant  impact  on  the  value  of  the  property  or  that involves  an  unreasonable  risk  to  people  on  the  property.”  Section  7304-­16  of  the  RESDL  includes  “legal issues  affecting  title  that  would  interfere  with  use  and  enjoyment”  in  its  list  of  what  may  qualify  as  a material  defect.  Section  19-­D  of  the  disclosure  statement  requires  disclosure  of  any  zoning,  housing, building,  safety,  or  fire  code  violations.

In  its  conclusions  of  law,  the  court  relied  heavily  on  the  oft-­cited  Pennsylvania  Supreme  Court  case  Bortz v.  Noon,  729  A.  2d,  555  (Pa.  1999),  in  analyzing  the  sellers’  conduct.  There  is  nothing  in  the  opinion  that mentions  a  defense  for  failing  to  disclose  that  the  apartments  were  in  violation  of  zoning  law  but  the sellers  apparently  tried  to  posit  the  defense  that  the  septic  system  functioned  properly.  The  court  noted that  this  defense  was  only  relevant  to  the  “idea  that  [sellers]  never  thought  their  deceit  would  be uncovered.”

Once  reliance  on  a  misstatement  of  fact,  or  concealment  of  a  material  defect  is  established  as  fact,  then the  intent  to  fraudulently  inflate  the  value  of  the  property  is  established  for  the  purpose  of  finding  a material  defect.  As  a  consequence  of  holding  that  both  the  intentional  misrepresentation  and  a  violation  of the  RESDL  occurred,  the  court  granted  the  plaintiffs  compensatory  damages  in  an  amount  sufficient  to bring  the  septic  system  into  compliance.  The  RESDL  allows  actual  damages  under  Section  7311  but  does not  preclude  punitive  damages  or  “any  other  remedies  applicable  under  other  provisions  of  law.”

The  UTPCPL’s  catch-­all  21st  unfair  trade  practice  definition  is  “any  other  fraudulent  or  deceptive  conduct which  creates  a  likelihood  of  confusion  or  of  misunderstanding,”  which  has  been  interpreted  as  requiring proof  of  common-­law  fraud  by  the  Superior  Court  in  2000  in  Booze  v.  Allstate  Insurance,  750  A.2d  877. Section  201-­9.2  also  provides  that  “the  court  may  in  its  discretion,  award  up  to  three  times  the  actual damages  sustained,”  plus  reasonable  attorney  fees.

As  in  many  cases,  the  court  declined  to  award  treble  damages,  which  is  discretionary  under  UTPCPL Section  201-­9.2(a),  despite  an  explicit  finding  of  intentional  conduct,  coupled  with  the  finding  of  fact  that one  of  the  sellers  was  a  former  township  zoning  officer  who  “was  familiar  with  zoning  hearing  procedures, zoning  laws,  building  laws,  and  septic  system  laws.”  The  court  found  treble  damages  inappropriate  but did  not  explicitly  state  its  reasoning.  Nonetheless,  the  court  did  award  about  $20,126  in  attorney  fees, which  was  the  exact  amount  prayed  for  since  said  sum  met  the  four  factors  under  McCauslin  v.  Reliance Finance,  751  A.2d  683  (Pa.  Super  2000).

Floyd  serves  as  yet  another  reminder  of  the  multiple  causes  of  action  available  in  a  residential  failure-­to-­ disclose  case,  the  specific  remedies  attached  to  the  various  claims,  and  that  treble  damages  are  not awarded  as  a  matter  of  course.  Although  the  threat  of  treble  damages  did  not  serve  as  a  deterrent  to  this litigation,  the  threat  of  treble  damages  and  counsel  fees  makes  the  UTPCPL  a  necessary  supplement  to RESDL  and  common-­law  failure-­to-­disclose  claims.

Harper  J.  Dimmerman  is  an  adjunct  professor  at  Temple  University’s  Fox  School  of  Business.  His  office represents  clients  in  various  litigation  and  real  estate  law  matters  and  he  can  be  reached  at harper@hjdlaw.net  or  215-­545-­0600.

James  M.  Lammendola  is  an  assistant  professor  at  Temple  University’s  Fox  School  of  Business  who was  in  private  practice  for  20  years.  He  can  be  reached  at  james.lammendola@temple.edu  or  215-­204-­ 4124.