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Issue  262  Article  414
Published:  5/1/2020

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Cummings v. Carroll (19-283) 3/3/2020, Negligent Representation in Sale of Home, Broker Liability
Chris Burti, Vice President and Senior Legal Counsel

Plaintiff purchasers appealed from a trial court order granting summary judgment in favor of the defendant sellers and their real estate brokers concerning numerous claims including: (1) negligence, (2) negligent misrepresentation, (3) breach of fiduciary duty, (4) fraud and fraud in the inducement, and (5) fraud by concealment. In a lengthy and divided opinion, the majority found sufficient evidence of a factual dispute with regard to these issues to reverse the trial courts summary judgment order and remand for trial on the issues. The divided dissenting opinion:

"...concurred fully with that portion of the opinion in so far as it affirms the grant of summary judgement to the defendants on any claims." and "with that portion of the opinion which reverses summary judgment with respect to negligent misrepresentation, and the fraud claims in whatever form pled against [sellers]. However ... I dissent from that portion of the majority's opinion that reverses summary judgement with respect to any claim against either plaintiffs' or [defendant sellers'] real estate agents."

This opinion and dissent are far too long to review in an article of this length, therefore we are only going to discuss a limited presentation of the facts and an analysis of certain issues discussed in the opinion relative to real estate agent liability that we believe will give a fair representation of the thrust of this case. If advising on any of the issues under appeal, a careful reading of this opinion and its cited cases is warranted and highly recommended.

There was evidence of a long history of repairs to what had been rental property, including "damage to the roof, windows which would not close, various internal leaks, mold and other 'foreign substances' growing within, and pests." The seller executed a State of North Carolina Residential Property and Owners' Association Disclosure Statement (the "Disclosure Statement"). In the Disclosure Statement, the seller marked "No" in response to the following questions:

Regarding the [House] . . . to your knowledge is there any problem (malfunction or defect) with any of the following:
. . . .
(2) ROOF (leakage or other problem)? . . .
(3) WATER SEEPAGE, LEAKAGE, DAMPNESS OR STANDING WATER in the basement, crawl space or slab?
. . . .

First, the plaintiffs contended that the sellers' agents were negligent because they failed to discover defects and disclose "ascertainable" material facts. The opinion held that this contention was misguided,

"...because a seller's agent only has a duty to disclose material facts that are known to him. ... Second, [seller's] agents could not have become liable in negligence to Plaintiffs by failing to ensure that proper repair work at the House took place, because [seller's] agents owed Plaintiffs no duty to ensure that the House was in any particular condition at the time of closing. And third, [seller's] agents were not negligent by merely passing along [seller's] Disclosure Statement to Plaintiffs, where the Disclosure Statement (1) was not signed by [seller's] agents, (2) expressly set forth that "the representations are made by the owner and not the owner's agent(s) or subagent(s)[,]" and (3) only set forth representations regarding Berkeley's (and its representatives') actual knowledge."

The opinion held that even though the sellers agents owed the plaintiffs no such duty to discover defects or repair the House, nor to correct the Disclosure Statement, it did not mean that they owed no duty to Plaintiffs to speak regarding the water intrusion issues at the House, the circumstances surrounding the purported repair work to those issues, or the substance of the sellers' Disclosure Statement, of which they reportedly had knowledge.

"'a broker has a duty not to conceal from the purchasers any material facts and to make full and open disclosure of all such information." Clouse, 115 N.C. App. At 508, 445 S.E.2d at 432-33. Berkeley's agents do not dispute that they did not tell Plaintiffs about the previous water-intrusion issues or the circumstances surrounding [the] purported repairs, and so the question is whether those facts were material such that Berkeley's agents were required to disclose them, and were negligent by failing to do so."

The plaintiffs claimed losses arising from an alleged breach of fiduciary duty by their own real estate agents, arguing that their agents;

"... breached their fiduciary duties '"by failing to take all necessary steps to ascertain the history and status of the [House] and by referring a home inspector whom [sic] [Plaintiffs' agents] knew did not undertake the usual and customary testing and investigations which would have or could have independently disclosed and discovered the substantial water intrusion issues and damages' to the House."

The opinion notes that the Court of Appeals has previously said:

A real estate agent has the fiduciary duty to exercise reasonable care, skill, and diligence in the transaction of business entrusted to him, and he will be responsible to his principal for any loss resulting from his negligence in failing to do so. The care and skill required is that generally possessed and exercised by persons engaged in the same business. This duty requires the agent to make a full and truthful disclosure to the principal of all facts known to him, or discoverable with reasonable diligence and likely to affect the principal. The principal has the right to rely on his agent's statements, and is not required to make his own investigation. Brown v. Roth, 133 N.C. App. 52, 54-55, 514 S.E.2d 294, 296 (1999) (internal quotation marks, brackets, and citations omitted).

The plaintiffs' agents argued that their duties to discover and disclose of any defects to the House were defined by their contract. While the Exclusive Buyer Agency Agreement used contemplates those duties, the opinion held that "'a real-estate agent's fiduciary duty is not prescribed or limited by the contract, but rather is imposed by operation of law; citing "Lockerman v. S. River Elec. Membership. Corp. , 250 N.C. App. 631, 635-36, 794 S.E.2d 346, 351 (2016) (noting that de jure fiduciary duties, which 'arise by operation of law' between 'legal relations[,]' include those between 'principal and agent' (citation omitted))."

On the issue of whether the plaintiff's agents exercised reasonable diligence in attempting to investigate and discover defects to the House and to disclose the results, the plaintiffs rely on  two acts that allegedly breached the fiduciary duty owed to them: (1) the agents' failure to request and obtain the rental agency's maintenance records for the House, which allegedly demonstrate a history of moisture intrusion and other defects to the House; and (2) the agents' hiring of the inspector who did not perform a moisture test, which the plaintiffs allege was "usual and customary."

The agents argued that there is no:

"North Carolina Real Estate Commission ruling or advisory opinion that establishes a duty to request maintenance records for the sale of a house"; (2) Plaintiffs did not request that Plaintiffs' agents ask for the [rental agency] maintenance records; and (3) [seller's] agents were in possession of those records and that, if they showed material defects to the House, [those] agents were obligated to produce them to Plaintiffs.

The opinion asserts that the agents provided no authority setting forth that a real-estate agent's duty to investigate and disclose is limited, as a matter of law or by any of these contentions and that the plaintiffs had the right to rely upon their agents' investigation and were not required to conduct their own again citing Brown, 133 N.C. App. At 54-55, 514 S.E.2d at 296. The Court of Appeals, therefore, found that there existed genuine issues of material fact as to whether the plaintiffs' agents breached their fiduciary duties and that the trial court erred by granting the agents summary judgment on the fiduciary-breach cause of action.

With regard to the plaintiff's claim for negligence and negligent misrepresentation against the various agents, the opinion discussed the limitations of the economic-loss rule which can bar such causes of action, the Court of Appeals analyzed the rule and concluded that the plaintiffs' negligence and negligent misrepresentation causes of action barred against the plaintiff's agents, but does not apply to the negligent misrepresentation claims brought against the sellers or their agents.

In summary, the Court of Appeals affirmed the trial court's grant of summary judgment as to the causes of action alleging negligence against buyers' agents and negligent misrepresentation, against buyers' and sellers' agents;  and the Court of Appeals reversed the grant of summary judgment as to the causes of action alleging: negligence, against seller's agents; breach of fiduciary duty, against buyers' agents; fraud and fraud in the inducement, against sellers' agents; and fraud by concealment, against  sellers' agents, all of which were remanded for further proceedings. (We have intentionally omitted any discussion of the respective liability of the other parties for brevity)

It may be speculated that the opinion of the dissenting judge reflects what many real estate agents believed the law to be. However, at the time of this writing the period for which to file an appeal has not expired, so we do not know whether it will remain controlling or be changed.

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