Ramifications of Failure to Disclose Contamination

A recent Michigan Court of Appeals decision illustrates the ramifications of failure to fully disclose the presence of hazardous substances prior to the sale of real estate. The case of Alfieri v Bertorelli, — N.W.2d —-, 2011 WL 4949671 (Mich.App.) involved a condominium project built on a site previously used to manufacture pipe organs and picture frames. It also housed a cyanide based metal plating operation. The site was abandoned after the plating operation went bankrupt. A developer purchased the site and began to remodel the shell of the former factory into condominiums. During the development process, the past practice of using the onsite septic tank to dispose of liquid wastes came to light.

The Plaintiff ultimately purchased one of the condos built on the site without conducting any independent environmental investigation of its own. While the Plaintiff had notice of potential environmental issues before it acquired the condominium, it claimed an article in a local newspaper and the project’s sales brochure both indicated the site had been completely remediated. Subsequent environmental studies revealed that was not the case however. Not only was the site not completely remediated; it still contained significant concentrations of hazardous substances. These studies documented the presence of various chlorinated hydrocarbons, petroleum hydrocarbons, polycyclic aromatic hydrocarbons and metals in the soils and groundwater at the site. One monitor well installed at the site was found to contain ten (10) feet of a free product mixture of Trichloroethylene and Xylene.

Plaintiff filed a suit setting forth claims of silent fraud and negligent misrepresentation. Silent fraud involves suppression of a material fact that a party is legally obligated to disclose. Negligent misrepresentation occurs when one justifiably relies to its detriment upon information negligently prepared by one who owed the relying party a duty of care. Silent fraud and negligent representation both require that the defendant owe the plaintiff a legal duty to speak up or accurately represent the facts. The jury found the Defendants liable to Plaintiff on both theories. Defendants claimed they could not be liable for silent fraud or negligent misrepresentation because they were only acting as agents of the seller. They argued that agents were not subject to the same duties that the law imposes upon sellers under these circumstances. The Alfieri Court stated that a seller’s agent has a duty to disclose newly acquired information that renders a prior affirmative statement untrue or misleading. That is especially true when the agent knows the buyer has expressed a particular concern or made a specific inquiry about the concern. Here, Plaintiff had asked Defendants about the environmental condition of the property after reviewing the sales brochure. The Department of Environmental Quality had advised the Defendants that this brochure was inaccurate and misleading. Thus, the Court stated there was a genuine question of fact and upheld the trial court’s submittal of these claims to the jury.

Defendants also claimed they could not be liable because the Plaintiff had the means to discover the existence of contamination on its own accord. The Court responded by stating that where a defrauded party has made an effort to examine extrinsic evidence that supports the false statement, that party is not required to exercise diligence to seek out additional evidence to disapprove the defrauder’s representations. The court believed that Plaintiffs’ reliance on numerous sources that indicated the property had been cleaned up was reasonable and that it was not required to seek out additional information.

After disposing of the Defendants’ claims on appeal, the Alfieri Court addressed the Plaintiffs’ appeal of the trial court’s decision to give a jury instruction on comparative negligence. In general terms, comparative negligence is a policy of apportioning damages according to the fault of each party. Because the Plaintiff did not obtain its own environmental inspection and the purchase agreement disclaimed any knowledge of the property’s environmental condition, the Court upheld the jury’s determination that the Plaintiff was 35% at fault.