No Fraud Claim Where Inspection Revealed Possible Water Issues

Where a homebuyer’s inspection of a property put them on notice that there were potential water issues in the garage before closing, the buyer could not later sustain a claim for fraud.

In Fulmer v. Follis, No. W2017-02469-COA-R3-CV (Tenn. Ct. App. Dec. 20, 2018), plaintiffs had previously purchased a home from defendants. On their disclosure forms, defendants had stated that they knew of no drainage issues, and that heavy rain had caused water to come into the garage one time, but that the issue had been repaired. While under contract but before closing, plaintiffs had a home inspection done, which noted “possible rainwater intrusion at the east wall in the garage,” grading issues that might cause drainage problems outside the garage, and a 1×8 board that had been installed for “some unknown reason” on the base of the east garage wall. After the inspection, plaintiffs and defendants continued to communicate through their realtors, with defendants sending pictures after a rain to show that no water had come into the garage, and plaintiffs asking about seeing behind the board. Defendants told plaintiffs that the board was intended to cover an area where they “did not like how the drywall and the garage floor came together” and was “purely cosmetic.” Plaintiffs ultimately did not do any further inspection and closed on the property, but did negotiate for defendants to pay $1,500 more in closing costs “due to the possible rainwater intrusion and grading issue.”

Two days after plaintiffs bought and took possession of the property, water leaked into the garage through the east wall. Subsequent inspection and removal of the board revealed that “the wall had been exposed to moisture over an extensive period of time,” and plaintiffs spent over $13,000 repairing the wall. Plaintiffs filed this suit against defendant sellers for intentional misrepresentation, fraudulent inducement and fraudulent concealment. The trial court ruled in plaintiffs’ favor, but the Court of Appeals reversed, holding that plaintiffs could not have reasonably relied upon the representations made by defendants regarding the condition of the wall.

One of the elements in an intentional misrepresentation, or fraud, claim is that plaintiffs must have “reasonably relied on the misrepresented material fact.” Since the Court of Appeals accepted the trial court’s determination that the sellers did misrepresent the condition of the wall and the reason for the board, the issue was whether plaintiffs’ reliance on these representations was reasonable, with the Court finding that it was not.

The Court pointed out that plaintiff purchasers were put on notice by the inspection report that there was a “possible water intrusion on the east wall,” that there were grading issues in the same area, and that there was a board on the wall “for an unknown reason.” The inspection “warned in all capital letters that ‘all items noted should be further investigated by the appropriate professionals in their field of expertise and repairs made as needed.’” Plaintiffs, however, did not perform any additional inspections or hire additional experts before closing. The Court ruled:

Therefore, Purchasers did not reasonably rely on Sellers’ misrepresentations and concealment, as they could have discovered the fraud through ordinary diligence… Moreover, Purchasers were on notice of a problem with the house, as evidenced by the inspection report and their counter-offer for an additional $1,500 towards closing costs, further showing their reliance on Sellers’ misrepresentations was unreasonable.

Because the Court held that plaintiffs could not prove reasonable reliance, the verdict for plaintiffs was reversed.

This case illustrates the pitfall of many fraud cases—the inability to prove reasonable reliance on the alleged misrepresentation. Lawyers pursuing misrepresentation cases should keep this element in mind while drafting complaints, preparing cases, and selecting which cases to take on.