Purchasers of real estate frequently claim they were misled about the condition of a property. With the sizzling real estate market, sales are rushed and due diligence is often an afterthought. Purchasers are often surprised to learn that fraud requires something more than a misleading or false statement. The recent case of Plets v Triple L Land Development, LLC shines a light on the elements of an actionable fraud case.
The Plets Plaintiffs owned property that was formerly used for auto repair. Automotive service shops have historically used a variety of hazardous substances that could potentially contaminate the soil and groundwater. Plaintiffs agreed to sell the property to Defendant. The sales contract stated:
“This offer is contingent on … (2) receiving satisfactory evidence the land and soil …is free of contaminants and pollution and proof is provided.
Defendant ultimately purchased the property on a land contract.
Plaintiffs’ environmental consultant had collected soil and groundwater samples. It prepared a Phase II Report indicating the property was contaminated. There was a factual dispute as to whether the Phase II report had been provided to the Defendant. Plaintiffs’ real estate agent claimed she sent a copy of it to the Defendant’s agent. Defendant’s agent denied ever receiving that copy.
After the sale, Defendant sought to transfer the property to another party. The new purchaser performed its own Phase II Environmental Assessment of the property. It also confirmed the presence of contaminants in the soil and groundwater. Based on the new information, the Defendant stop paying the land contract. Plaintiffs sued the Defendant for breach of contract. Defendant counterclaimed and sought to void the land contract on the basis of fraudulent inducement.
The Trial Court granted summary disposition to the Defendant. The Court of Appeals was not convinced that Defendant had established a claim for fraud. It reversed and remanded the case for further proceedings.
To prove fraud, a party must establish six elements: (1) that the opposing party made a material representation; (2) that the representation was false; (3) that when the opposing party made the representation, the opposing party knew that it was false, or made it recklessly, without knowledge of its truth and as a positive assertion; (4) that the opposing party made the representation with the intention that the party would act upon it; (5) that the party acted in reliance upon it; and (6) that party suffered damage.
The COA agreed that the Defendant had established the first three elements of fraud. However, the Defendant was required to prove more than just a false representation. It also had to prove that (1) Plaintiffs made the false representation with the purpose of inducing Defendant to enter into the purchase; and (2) it purchased the property in reliance on Plaintiffs’ false representation.
The COA held that Defendant had failed to provide evidence unequivocally establishing reliance. If Defendant had received a copy of the Phase II Report from the Plaintiffs’ real estate agent, it would be difficult to claim reliance on any contrary representations of the Plaintiffs about the property’s condition. Conversely, if Defendant never received the Phase II Report, it could claim reliance on Plaintiffs’ representation that the property was clean because it had no other way of knowing the property was contaminated. The issue of whether Defendant was justified in relying on Plaintiffs’ representation would have to remain unresolved until it was determined whether the Defendant actually received a copy of the Phase II Report.
Answering the question of whether Defendant received a copy of the Phase II Report was also necessary to determine whether the Plaintiffs’ intended to defraud the Defendant. If the Phase II Report was sent to Defendant’s agent as Plaintiffs’ agent claimed, reasonable minds could conclude that Plaintiffs had no intent to defraud Defendant. On the other hand, because Plaintiffs did not correct Defendant’s misunderstanding about the true condition of the property, reasonable minds could also conclude the opposite.
As illustrated by Plets, it’s not enough to say the seller told me everything was fine but it wasn’t. That’s the beginning of the analysis, not the end. Each and every element of a fraud claim has to be proved. Sometimes, that is easier said than done.