August 2, 2016
by Patricia Lonzo and Robert Piette
Gray & Associates, L.L.P. – USFN Member (Wisconsin)
Not only does the phrase “buyer beware” ring true for Wisconsin, “seller beware” does as well. A troublesome judicial decision in Wisconsin may require servicers to think twice about relying on the “as is” language typically included in contracts to purchase in REO. The court held Bank of America liable for a deceptive representation that induced the buyer to agree to an as-is sale. [Fricano v. Bank of America, N.A., 2016 Wis. App. 11, 366 Wis. 2d 748, 875 N.W.2d 143]. The representation at issue in Fricano was that the Bank had “little or no direct knowledge about the condition of the property.”
In the case at hand, Bank of America became the owner of the property via a foreclosure. The local real estate agent charged with selling the property discovered severe water damage in the house. The damage was so grave that ceilings were falling down, water was pooling, and water was seeping through to the basement. The local agent reported the condition of the property to Bank of America. The bank approved a trash-out of the property, and it also approved a bid to have mold remediation work performed. The agent initially told the bank that the remediation was complete but later informed the bank that mold still showed on the living room ceiling, in the kitchen, and in the basement. No further mold remediation work took place. Instead, repair work began so that the house could be placed on the market.
The property was placed on the market at a sales price that generated significant interest from buyers. Fricano viewed the property with her fiancé and real estate agent. During their first time through the property the three observed mold in the basement and stairway to the basement. Fricano and her fiancé went through the property a second time with a family member who was familiar with buying foreclosed houses. Fricano put in an offer to purchase, which was one of thirteen offers.
The bank accepted Fricano’s offer, but also provided the disclosures at issue. She was given a Real Estate Purchase Addendum as well as a Water Damage, Toxic Mold Environmental Disclosure, Release and Indemnification Agreement. The documents contained a clause stating that the buyer accepts the property in an “AS IS condition at the time of closing including without limitation, any hidden defects or environmental conditions affecting the Property, whether known or unknown, whether such defects were discoverable through inspection or not.” The documents went on to make disclaimers regarding the physical condition of the house including from water damage or mold, and specifically said that: “Seller does not in any way warrant the cleaning, repairs or remediation, or that the Property is free of Mold.” Moreover, the documents stated that “Buyer has not in any way relied upon any representations or warranties of Seller or Seller’s employees … concerning the past or present existence of Mold or any environmental hazards in or around the Property.” Numerous additional disclaimers were made. The bank represented that it had “little or no direct knowledge about the condition of the property.” The court found that these additional disclosures, which the bank required Fricano to execute, constituted a counteroffer by the bank. The buyer agreed to accept the conditions and waived all claims against the bank relating to the condition of the property.
After having been given the disclaimers and waivers, Fricano proceeded to have the house inspected. The inspector informed Fricano that there had been water leakage and “substantial mold growth.” Fricano was told that mold remained in the home. The inspector recommended that she consult an environmental professional to determine the remediation actions that were necessary. Fricano obtained a quote from a mold remediator, who recommended remediation in the basement and stairs leading to the basement. None of the professionals voiced concerns about mold on the first or second floors of the property. Fricano did not believe that there was mold in the livable areas of the house. She purchased the property. After closing on the house, she began renovations and learned that in fact mold did saturate the living areas of the house. The house was stripped to the studs, remediation took place, and the house was reconstructed. Fricano then sued the bank for misrepresenting that it had “little or no direct knowledge about the condition of the property” when it had actual knowledge of its condition. The claim was brought under Wis. Stat. § 100.18(1), Wisconsin’s deceptive trade practices statute, which is remedial in nature and provides much broader protection than common law misrepresentation claims. Many jurisdictions have similar statutes.
Based upon the thoroughness of the disclaimers and waivers, it is surprising that this case made its way to trial and even more unexpected that the jury, in a conservative county of Wisconsin, awarded damages to Fricano in the amount of $50,000 plus attorney’s fees for a grand total of $372,213.01. The bank asked the judge to overturn the verdict but the trial court denied the motion to do so. The bank appealed. The Court of Appeals affirmed.
The basis for finding the bank liable was that the statement of the bank having “little or no direct knowledge about the condition of the property” was an affirmative statement regarding the condition of the property that was “indisputably false.” The buyer is allowed to rely upon any affirmative statements of the seller. Here, since the bank did have knowledge of the condition of the property, the court concluded that the buyer was falsely induced into agreeing with the as-is clause as a result of the bank’s misrepresentation. In short, for the jury and the appellate court the affirmative “false” statement under Wis. Stat. § 100.18(1) trumped the “as is” clause, disclaimers, waiver, and the buyer’s own knowledge.
REO servicers need to consider erring on the side of caution and disclosing any “known” conditions of the property even though a property is being sold “as is.” At a minimum, REO sellers should not affirmatively state that they have “little or no” knowledge of the condition of the property when in fact they do. It can be argued that under Wis. Stat. § 100.18(1), remaining silent (i.e., making no statements regarding the seller’s knowledge of the condition of the property) while selling the property “as is” would not subject a seller to liability under the statute because no “affirmative misrepresentation” is being made. However, the more prudent course of action is to affirmatively disclose all known substantially adverse conditions of the property along with the efforts (if any) made by the seller to address those conditions. This is particularly true if it is a known substantial condition not readily observable or discoverable by the buyer. Indeed, given the verdict in Fricano, affirmatively disclosing all known substantially adverse conditions can be viewed as the more conservative course of action.
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