Summary
In Miles, a real estate broker was found liable for failing to disclose to its contract buyer that a termite inspection had revealed the presence of termites in the home.
Summary of this case from General Acquisition, Inc. v. GencorpOpinion
No. 78-796
Decided May 9, 1979.
Vendor and vendee — Sale of real estate — Failure of broker to disclose knowledge — Liability in damages.
Parties who directly benefit from and knowingly participate in a transaction tainted with fraud or deceit, who are under a duty to disclose their knowledge and fail to do so, are liable for damages directly and proximately resulting from their silence.
APPEAL from the Court of Appeals for Columbiana County.
On December 23, 1975, appellees, Mr. and Mrs. Cletus T. Miles, commenced an action for damages against appellant, real estate broker Merl M. McSwegin, the Perpetual Savings Loan Company (Perpetual), and Ethel A. Maylone. The substance of appellees' claim was that the defendants concealed the presence of termites in Maylone's premises, said premises being the subject of a sale by Maylone, through the efforts of appellant, to appellees. Perpetual supplied mortgage funds to appellees, caused the property to be inspected for termite infestation, and furnished closing statements and other documents to those involved in the transaction.
The facts giving rise to the action demonstrate that on July 10, 1975, appellant accompanied appellees to the Maylone property, which had previously been listed for sale with appellant by Maylone on June 23, 1975, for an inspection of the premises. During the course of discussions with appellees relative to the possible purchase of the property, appellant represented to appellees that the property was a good solid home, and that it appeared to be a good buy at the price offered. Thereafter, on July 12, 1975, appellees executed, in appellant's presence, a contract to purchase the property for the price of $25,000, which was accepted by appellant's client, Maylone.
On July 16, 1975, appellees applied to Perpetual for a mortgage loan to finance acquisition of the property. Subsequent thereto, Perpetual initiated a termite inspection and discovered that the property was burdened with a termite infestation. On September 5, 1975, Maylone notified appellant of the termite condition and expressed concern that the sale would be jeopardized. Appellant advised Maylone that treatment of the property was mandatory, and that Perpetual would pay for the treatment ($460) and deduct that expense from Maylone's share of the sale price.
Appellees met with Perpetual on September 5, 1975, and executed the requisite documents to secure the mortgage loan. Included among the papers was a statement that a termite inspection had been performed at a cost of $15, but appellees were not informed of, and did not know about, the termite infestation discovery and treatment.
On October 7, 1975, appellees took possession of the property and, within a few days of their occupancy, discovered evidence of the termite infestation. The cost of repairing the termite damage to the property was estimated at $5,962.50.
At the close of the trial, jury verdicts were rendered in favor of appellees against appellant in the amount of $2,500 for compensatory damages, and against Perpetual for $2,500 in compensatory damages and $25,000 in punitive damages. The action against Maylone was dismissed, and judgment was entered on the verdicts.
Upon appeal, the Court of Appeals, in a split decision dated April 4, 1978, affirmed the judgment of the trial court.
Separate appeals by appellant and Perpetual were taken to this court, and appellant's cause is now before us pursuant to allowance of a motion to certify the record.
Aronson, Fineman Davis Co., L.P.A., and Mr. Bernard Fineman, for appellees.
Mr. Lawrence W. Smith, for appellant.
The essence of appellant's first proposition of law is that where a real estate vendee's lending institution requires an inspection, which informs the institution of a termite infestation, and the institution exclusively controls the closing documents and proceedings, a duty to disclose the fact of the infestation rests solely with the lending institution and not with the vendor's real estate agent.
Whether the vendee's lending institution was under a duty to disclose is addressed separately in our decision in the companion cause decided today. See Miles v. Perpetual S. L. Co. (1979), 58 Ohio St.2d 93, ___ N.E.2d ___. The disposition of that cause has no bearing upon the issue of appellant's liability for non-disclosure.
One of the interests protected by the law of deceit is "the interest in formulating business judgments without being misled by others * * *" into making unwise decisions which result in financial loss. Fleming Gray, Misrepresentation — Part I, 37 Maryland L. Rev. 286-287 (1977). It is well established that an action for fraud and deceit is maintainable not only as a result of affirmative misrepresentations, but also for negative ones, such as the failure of a party to a transaction to fully disclose facts of a material nature where there exists a duty to speak. Prosser on Torts (4 Ed. 1971) 695-696, Representation and Nondisclosure, Section 106; 37 American Jurisprudence 2d 197-201, Fraud and Deceit, Sections 144 and 145; Barder v. McClung (1949), 93 Cal.App.2d 692, 697, 209 P.2d 808. Moreover, it should be axiomatic that parties who directly benefit from and knowingly participate in a transaction tainted with fraud or deceit, who are under a duty to disclose their knowledge and fail to do so, are liable for damages directly and proximately resulting from their silence. See 37 American Jurisprudence 2d 571, Section 421; Saporta v. Barbagelata (1963), 220 Cal.App.2d 463, 33 Cal.Rptr. 661.
3 Restatement of Torts 2d 119, Section 551, subsections (1) and (2), states, in essence, that a party is under a duty to speak, and therefore liable for non-disclosure, if the party fails to exercise reasonable care to disclose a material fact which may justifiably induce another pary to act or refrain from acting, and the non-disclosing party knows that the failure to disclose such information to the other party will render a prior statement or representation untrue or misleading. See Id., at Comment h to subsection 2(c) and Illustrations 1 and 2 thereto, at page 122; cf. Equitable Life Ins. Co. of Iowa v. Halsey, Stuart Co. (1941), 312 U.S. 410; Fruit Dispatch Co. v. Wolman (1925), 124 Me. 355, 128 A. 740.
Vendees of real estate in the case of Bursey v. Clement (N.H. 1978), 387 A.2d 346, were granted rescission of their transaction when it was demonstrated that the vendor of the land represented to them that they would be able to secure building permits for a number of lots, but, due to a subsequent change in a local ordinance which occurred before the sale was consummated, the vendor's representation became untrue. The court, at page 348, stated: "One who makes a representation that is true when made is under a duty to correct that statement if it becomes erroneous or is discovered to have been false before the transaction is consummated."
In Maser v. Lind (1967), 181 Neb. 365, 148 N.W.2d 831, the vendees of real estate sued the vendor to recover damages for fraud, claiming reliance on the latter's representation that the buildings were in "good sound condition," when in fact they had been seriously damaged by termites. The court, in affirming a judgment for vendees, reasoned that the vendor's statements were actionable because they were made as positibe assertions of existing fact, and the purchasers, through the exercise of ordinary prudence, were unable to discover the true condition of the property.
We conclude that, under the facts at bar, appellant was under a duty to disclose to appellees that the subject property had suffered an infestation of termites. See, also, Cooper v. Jevne (1976), 56 Cal.App.3d 860, 128 Cal.Rptr. 724; Obde v. Schlemeyer (1960), 56 Wn.2d 449, 353 P.2d 672; Piazzini v. Jessup (1957), 153 Cal.App.2d 58, 314 P.2d 196; Annotation, 8 A.L.R. 3d 550; cf. Pumphrey v. Quillen (1956), 165 Ohio St. 343, 135 N.E.2d 328.
A reasonable interpretation of the testimony below establishes that appellant represented to appellees that this property was "a good solid home" — "a good sound house." Additionally, it was uncontroverted that when subsequently informed of the termite infestation, appellant failed to notify appellees that this representation had become subject to material qualification. This non-disclosure, coupled with the hidden nature of the impairment, entitled appellees to rely upon appellant's prior representation with regard to the overall soundness of the property, and imposed a duty upon appellant to disclose to appellees the existence of the termite infestation.
Appellant argues alternatively that the doctrine of caveat emptor precludes recovery by appellees.
In our opinion, the cause sub judice is inappropriate for the application of the maxim caveat emptor because the presence of the termite infestation was not detectable by appellees upon reasonable inspection. Actions involving latent defects constitute an exception to the application of the rule. See Hadley v. Clinton County Importing Co. (1862), 13 Ohio St. 502; Traverse v. Long (1956), 165 Ohio St. 249, 135 N.E.2d 256; Obde v. Schlemeyer, supra; Keeton, Rights of Disappointed Purchasers, 32 Tex. L. Rev. 1, 2-7 (1953).
Appellant maintains further that a defect unknown to both vendor and vendee at the time of the execution of an agreement to purchase real property is not a latent defect.
We agree with the Court of Appeals' resolution of this contention by noting that appellant became aware of the termite condition on September 5, 1975, the day of the closing and a number of days prior to the date Perpetual recorded the mortgage and distributed the settlement monies. Under these facts, a duty to disclose the information arose at the time it was discovered. Furthermore, it is generally not the time that parties become aware of a defect which determines its latent quality; such determinations are usually based upon the nature of the defect and the ability of the parties to determine through reasonable inspection that it exists. See Hadley v. Clinton County Importing Co., supra; Roberts v. Rogers (1935), 129 Neb. 298, 261 N.W. 354; Cole v. Lord (1964), 160 Me. 223, 202 A.2d 560. Cf. W.R. Grassle Co. v. Alaska Workmen's Comp. Bd. (Alaska 1974), 517 P.2d 999, 1002.
Appellant contends finally that a duty on the part of a real estate agent to disclose knowledge of a termite infestation cannot exist in the absence of a special relationship between the vendor's agent and the vendee.
Appellant's duty to disclose was determined, supra, in response to his first proposition of law. The existence of a special relationship between vendor's agent and vendee is not requisite to our conclusion that appellant, under the facts of this cause, was under a duty to disclose the existence of the termite infestation. See 37 American Jurisprudence 2d 201, Section 146; 3 Restatement of Torts 2d, supra, at page 119.
Accordingly, the judgment of the Court of Appeals with respect to appellant, Merl McSwegin, is affirmed.
Judgment affirmed.
CELEBREZZE, C.J., W. BROWN, SWEENEY, LOCHER and HOLMES, JJ., concur.
P. BROWN, J., concurs in the judgment.