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No reasonable reliance on warranty deed where lien was publicly recorded.

Where plaintiffs claimed intentional misrepresentation based on a warranty deed stating that property being conveyed was free from encumbrances, but a bank held a lien on the property and had recorded a deed of trust eight years before the transaction, plaintiffs’ reliance on the warranty deed was not reasonable.

In Erwin v. Great River Road Supercross, LLC, No. W2019-01005-COA-R3-CV (Tenn. Ct. App. Dec. 1, 2020), plaintiffs purchased real property from defendants in 2008. The warranty deed conveying the property “contained a covenant that the real estate was unencumbered.” The parties eventually got into a dispute regarding personal property that was supposed to be included in the sale, which resulted in plaintiffs paying less than the agreed price and defendants declaring a default and instituting foreclosure proceedings. During the foreclosure, plaintiffs learned that a bank had a pre-existing lien on the property, meaning that the representation in the warranty deed that the property was unencumbered was false.

Plaintiffs filed this case for intentional misrepresentation and breach of contract. The trial court initially found that plaintiffs had not actually relied on the representation in the warranty deed, but in a first appeal, the Court of Appeals ruled that the evidence preponderated against that finding. On remand, the trial court found for the plaintiffs on the misrepresentation claim, and defendants filed this second appeal, arguing that any reliance on the warranty deed was not reasonable. The Court of Appeals agreed and reversed the trial court’s ruling.

A plaintiff claiming intentional misrepresentation must prove six elements, one of which is reasonable reliance. When considering whether a plaintiff’s reliance was reasonable, courts should consider factors including the “plaintiff’s sophistication and expertise,” the relationship between the parties, “the availability of relevant information about the representation,” whether the defendant had attempted to conceal information, and “any opportunity to discover the misrepresentation.” (internal citation omitted). Based on the facts of this case, the Court of Appeals agreed that plaintiffs had relied on the representation but found that the reliance could not be deemed reasonable, explaining:

The Bank’s deed of trust was recorded in 2000, placing all the world on constructive notice of an encumbrance on the real property. This was an arm’s length transaction. There was no proof that [plaintiff] was inexperienced in real estate matters or that [defendant] took steps to prevent him from discovering the recorded deed of trust. The true facts were readily available through a simple search of the public record. Generally, a party dealing on equal terms with another is not justified in relying upon representations where the means of knowledge are readily within his reach.

(internal citations and quotations omitted).

Because the reliance was not reasonable, the finding for plaintiffs on the intentional misrepresentation claim was reversed.

When evaluating an intentional misrepresentation claim, it’s important to remember that merely alleging or even showing reliance is not sufficient—the reliance must be reasonable. When information that contradicts the facts allegedly relied upon is publicly available, proving an intentional misrepresentation claim will be difficult.

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