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Published: July 22, 2008
Author: Timothy Barber
Overview
In a recent decision (Below v. Norton), the Wisconsin Supreme Court ruled that a person who was fraudulently induced into purchasing a home could not sue the previous owners in tort for intentional misrepresentation. This decision limits victims of real estate fraud to contractual and statutory remedies and has the potential to deny fraud victims any remedy in the case of latent defects.
In 2004, Shannon Below purchased a house on the south side of Milwaukee. The previous owners stated in their property condition report that they were not aware of any plumbing defects in the house. After Below moved into the house, she discovered her sewer lateral was broken. Below sued the previous owners alleging intentional misrepresentation and a violation Wis. Stat. § 100.18 (false advertising), among other claims. The circuit court dismissed all of Below's claims.
The Law: Victims of Real Estate Fraud Cannot Sue in Tort For Intentional Misrepresentation
On review, the Wisconsin Supreme Court determined that Below's claim for intentional misrepresentation was barred by "the economic loss doctrine"-a judge-made rule that says parties to a contract cannot sue in tort. Previously, the court applied this rule to bar tort claims related to commercial real estate, the construction of a house, and an option to sell farmland. In this case, the court expanded the economic loss doctrine and ruled that it bars claims for intentional misrepresentation in all real estate transactions, regardless of whether they are characterized as "residential" or "noncommercial" transactions. However, the court stated that rule does not bar statutory claims, such as claims for false advertising under § 100.18.
Impact: Victims of Fraud May not Have a Remedy For Latent Defects
In her dissent, Justice Bradley warned that the decision will "affect every single person who purchases a home in this state." The dissent explains that although a victim of fraud may theoretically sue for breach of contract or false advertising, in practice, some victims may be without a remedy because of the shorter deadlines to bring these types of actions. Unlike the deadline for tort claims for property damage (6 yrs), the deadlines for breach of contract (6 years) and false advertising (3 years) cannot be extended if the defect in the property is hidden from the consumer.
What this means is that home purchasers may lose any right to sue sellers that misrepresent the condition of their property, if the defect remains hidden for a long enough period of time. Therefore, it is more important than ever to discover latent defects as soon as possible. Because "a professional inspector's technical knowledge may be required to detect certain defects or code violations," all home purchasers are well-advised to hire their own professional inspector before closing to preserve their rights.
Future Litigation: Look For More Claims for False Advertising
The majority opinion was quite clear that "a purchaser of residential or noncommercial real estate... Is protected by § 100.18 from false representations of a home seller." This statute allows a person to recover pecuniary loss, court costs, and attorney fees caused by untrue or deceptive statements made to the public. Last year, the Wisconsin Supreme Court reiterated that this statute can apply to situations where a misrepresentation is made to a single individual and it ruled that a plaintiff does not need to prove she "reasonably relied" on the untrue statement in order to recover. In light of that case and the court's most recent ruling, expect to see an increase in claims for false advertising under § 100.18 related to real estate transactions.
Timothy M. Barber is an attorney with Axley Brynelson, LLP. He can be reached at 608.283-6740 or tbarber@axley.com.
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