Fraud Affirmed Where Foundation Repair Company Found to Have Sold Useless Services

Where a foundation repair company was sold a set of products and services to a plaintiff that did not actually work to stabilize her home, and where the company made many misrepresentations about the services and the processes used, the Court of Appeals affirmed an award to plaintiff for fraud.

In Maddox v. Olshan Foundation Repair and Waterproofing Co. of Nashville, L.P., No. M2018-00892-COA-R3-CV (Tenn. Ct. App. Sept. 18, 2019), plaintiff had purchased a home in 2003 that was built on a steep lot. When she began noticing water issues, cracking in the bottom level, and felt the house was tilting, she called defendant foundation repair company. Defendant sent Kevin Hayman to plaintiff’s home, who was identified as a “certified structural technician.” Hayman recommended that plaintiff utilize three systems to stabilize her home: a “Cable Lock system to support the front part of the home’s foundation with pillars,” a Wall Lock system that would anchor the back wall to the ground behind it, and a Water Lock system that would allegedly address the home’s water issues. Each of the systems came with a “lifetime warranty.”

Plaintiff believed that “Mr. Hayman was going to consult with an engineer to ensure that these recommendations were appropriate,” and when Mr. Hayman returned, he gave her a computer-generated drawing showing where the systems would go that had a circular stamp or seal on it that said “Kevin Hayman, Certified Structural Technician.” Mr. Hayman “assured [plaintiff] that these systems would fix the home’s structural issues,” and stated that she would receive a letter from an engineer after the work was completed.

Plaintiff paid $23,700 for the three systems to be installed on her home. She was given lifetime warranties for each system, each stating that if adjustments were required they would be covered by defendant. When the work was finished, defendant gave plaintiff a letter from BEC engineering that stated that “the repairs were found to be in general compliance with industry standards” and were “adequate for this type of structure and for the area where the work is being performed.” With this letter there was another computer generated drawing, this time with a stamp from Mr. Hayman and one from “Adrian L. Farr—Registered Engineer—State of Tennessee.”

The work on plaintiff’s home was finished in 2006, and that year defendant did some adjustments that they instigated. Plaintiff contacted defendant in 2007, and more adjustments were made. In May 2010, Nashville experienced a historic flood, after which plaintiff noticed a “significant tilt in her home.” Defendant thereafter sent a representative to tighten and adjust the systems. Later in 2010 and again in March 2011, adjustments were made.

In August 2011, after plaintiff had called defendant, a representative of defendant visited the property and told plaintiff “Cannot fix. Call office.” After this, plaintiff tried to call defendant many times, but no one would return her calls. Plaintiff subsequently became “very concerned” and contacted an engineer, who told her that “the foundation work performed by Olshan actually made the issues at the house worse,” and that the systems were “not working as intended and never would have worked.” The engineer told plaintiff that the house needed $30,000 worth of work to stabilize it, but plaintiff could not afford to move forward with that work. On May 3, 2012, plaintiff filed this suit. While the suit was pending, in 2013 two trees struck the house during a storm. After that date, plaintiff never lived in the house, and the house was eventually deemed “unsafe for habitation” by the city.

At trial, plaintiff offered her own testimony, as well as testimony from a city codes inspector, a real estate expert, and an engineer. The codes inspector testified that “the city requires a permit for [the type of work done here], and Olshan had never pulled any permits or asked for inspections.” The real estate inspector testified as to the value of the house had it been in “perfect condition.” The engineer testified as to the uselessness of the systems sold to plaintiff by defendant, opining that these non-engineered, one size fits all systems were never going to perform as promised. He also offered his opinion about what might have helped stabilize the home. The trial court found plaintiff’s expert’s testimony very credible.

Defendant offered testimony from a corporate representative who was one of the partners in Olshan of Nashville. She testified that the “certified structural technician” status given to Mr. Hayman involved a “three-week training course” and a test, and she “denied that the circular stamp or seal was intended to suggest some legal significance or professional discipline.” She admitted that the engineer who wrote the BEC letter lived in Texas, had never viewed the property, and had not seen photographs of the property, but had instead seen defendant’s work log and drawings. Defendant also offered testimony from an engineer who stated that defendant’s work “had value in stabilizing the home and was an appropriate repair for the conditions at that time.”

After a bench trial, the trial court found defendant liable for “reckless and fraudulent misrepresentations,” and it awarded plaintiff $187,000 in compensatory damages and $15,000 in punitive damages. The Court of Appeals affirmed, but slightly modified the damages award.

Defendant raised several issues on appeal. First, it asserted that the case should be time-barred because it fell within the four-year statute of repose applicable to “any deficiency in the design, planning, supervision, observation of construction, or construction of an improvement to real property.” (Tenn. Code Ann. § 28-3-202). Defendant argued that this statute required plaintiff to bring her claim within four years of the installation of the systems. The Court, though, pointed out that there is a “distinction between improvements to real property and mere repairs or replacements.” (internal citation and quotation omitted). The Court found that the systems sold by defendant were repairs to the property, not improvements. It reasoned that “[a]lthough these actions, like most repairs, might ultimately improve or better the condition of the property, they were nonetheless repairs to the property, not improvements in the ordinary sense of the word. They were not intended to enhance its value, beauty or utility or to adapt it for new or further purposes.” (internal citation and quotation omitted). The claims were thus not barred by the statute of repose.

Next, defendant argued that plaintiff’s claim was time-barred by the three-year statute of limitations applicable to fraud claims. Defendant asserted that plaintiff “was aware in 2006 that the home was not stabilized the way she expected it would be because Olshan made the first adjustment at that time, and she sensed the titling and noticed additional cracks. The Court, however, affirmed the trial court’s ruling that pursuant to the discovery rule, the statute of limitations did not begin running here until August 2011 when plaintiff was first told that defendant could not fix the problems. The Court noted that plaintiff “did not have a reason to believe that Olshan would not continue to help her or would not honor its lifetime warranty until August 2011,” and that the “warranties provided by Olshan conveyed to the purchaser that further adjustments might be necessary in the event of future settlement.” The Court concluded that it could not hold that “the events occurring in 2006 were sufficient to put a reasonable person on notice that she had suffered an injury as a result of Olshan’s wrongful conduct[.]”

The trial court found that defendant had committed fraud in three ways—with its representations “about the permit, the engineer, and the effectiveness of Olshan’s systems,” and defendant challenged each of the findings on appeal. As to the permit, the trial court based its fraud ruling on the facts that the contract between plaintiff and defendant stated “work permitted to meet local government requirements” and that Olshan never even applied for a permit. Further, the city inspector testified that a permit was required for this type of work. Defendant argued that the city codes had an exception that stated that “underpinnings” did not require permits, and that thus no permit was required here, but the Court of Appeals ruled that this argument “misse[d] the point.” The Court reasoned:

Olshan’s contract unequivocally stated, “Work permitted to meet local government requirements.” This conveys the message that Olshan had obtained a permit in order “to meet” local government requirements. Simply put, the contract did not say or suggest that no permit was required or that Olshan would apply for a permit if one was required. Regardless of whether city ordinances required a permit, Olshan represented to [plaintiff] that the work was ‘permitted to meet local government requirements.’ This was not true, and Olshan knew it.

The Court therefore “reject[ed] Olshan’s argument that its statement was not false or that it did not make the statement with the requisite intent.”

Defendant also argued that it should not be held liable for fraud regarding its statements about the involvement of an engineer, as plaintiff “knew from the contract that the engineer would be involved on the back-end of the project” and because the promised letter was provided. The Court found, though, that the letter given to plaintiff was misleading and not truthful. The BEC engineering letter stated that it was based on a limited visual survey, but the engineer never actually visited the property or saw pictures of the property. Based on the facts at play, the Court affirmed the trial court’s ruling that the letter gave plaintiff “confidence” in the systems and that it was “designed to conceal from [plaintiff] that the installation of the systems was not engineered, as was required for the systems to be effective.”

The trial court also found that defendant made “reckless misrepresentations regarding the effectiveness of its systems.” Defendant argued on appeal that it had no “knowledge that its proposed repair plan would be ineffective” for plaintiff’s property, and that in order to succeed on this fraud claim, plaintiff had to prove that defendant “knew that it would not effectively remedy the problems at the Property.” The Court pointed out, though, that a fraud claim may be established where “the defendant made the representation recklessly without knowing whether it was true or false.” (internal citation omitted). Here, the trial court found that defendant “did not know, did not have the expertise, and in fact, did not as a matter of fact know whether the systems would be effective in any way or be completely ineffective. And basically, Olshan, in selling the systems to the plaintiff, simply did not really care.” The trial court ruled that such behavior qualified as recklessness, and thus supported the misrepresentation claim, and the Court of Appeals agreed.

Next, defendant argued that the trial court should not have considered any wrongful conduct by BEC engineering. The Court of Appeals noted that while the trial court correctly did not attribute BEC’s negligence to defendant, it was right to consider the BEC letter as part of the facts of this case. The Court found that “even if Olshan did not initially control what the engineer wrote in the letter, Olshan is the entity that provided the information to [plaintiff], knowing that it contained false statements and knowing that she would rely on it.”

Finally, the Court of Appeals addressed several damages issues. First, it rejected defendant’s argument that “its conduct was not the cause of the complete demise of [plaintiff’s] home,” with defendant pointing instead to the 2010 historic flood and the storm that brought down two trees. The Court ruled, though, that plaintiff’s expert testified that if the correct work had been done in 2005, the flood would not have damaged the home, so the court rejected the argument that the storms actually destroyed the home.

Second, defendant argued that the BEC letter stated that the soil should be graded and that, because plaintiff did not do this, she contributed to the destruction of her home. The Court pointed out that the letter, though, was actually written to Olshan, not to plaintiff, and that plaintiff was under the impression that the issues therein, including the grading, had been addressed by defendant. Further, the engineer who wrote this never visited the property or saw pictures of it, and no one from defendant ever mentioned or discussed soil grading with plaintiff.

Defendant also argued that plaintiff “failed to mitigate her damages” when she failed to do the repairs recommended by the engineer she consulted in 2011. While plaintiffs are required to mitigate their damages, plaintiffs are not “require[d] to mitigate…if such action is unduly burdensome or impossible.” (internal citation omitted). Here, the recommended repairs were going to cost $30,000, which plaintiff testified she could not afford, as she was paying for her ill mother’s health care at the time. The Court ruled that plaintiff “acted with reasonable care by independently investigating the damage to her home, consulting with more than one engineer, repeatedly calling Olshan for assistance, and finally, filing suit,” and that she did not “breach her duty to mitigate damages.”

Finally, the Court addressed the measure of damages awarded. The Court found that “it was appropriate for the trial court to award [plaintiff] her pecuniary loss from the loss of her home, as the Restatement specifically provides that the plaintiff may recover for ‘pecuniary loss to him of which the misrepresentation is a legal cause.’” (internal citation omitted). The Court found, though, that the trial court had miscalculated the current value of the property, and it adjusted the compensatory damages portion of the award up to $214,042.07. It also affirmed the award of punitive damages.

The Court rejected plaintiff’s request for a return of the purchase price, as that request was not made in the complaint or during the trial, and it also denied her request for mortgage payments she had made since 2013, as the Court ruled that such payments were not the result of Olshan’s conduct. The ruling for plaintiff was accordingly affirmed as modified.

This is a lengthy opinion addressing many issues, but it is a good example of a company being held liable for wrongful conduct towards a consumer. Anyone bringing a fraud claim based on the purchase of or warranty for a product or service should read this case.

            NOTE: To aid lawyers in giving clients guidance about how long it takes to receive an opinion after oral argument in the appellate courts, we are going to start sharing that information with readers.   Please understand that the length of time that elapses between oral argument and the date the opinion is released is dependent on a multitude of factors, not the least of which is the complexity of the issues presented.  In this case, the opinion was released over four months after oral argument.