Found At: www.statewidetitle.com
Issue 279 Article 433
Cummings v. Carroll (2021-NCSC-147) 12/17/2021
Negligent Representation in Home Sale, Broker Liability Revisited
Chris Burti, Vice President and Senior Legal Counsel
This case comes to the North Carolina Supreme Court from an opinion of a divided Court of Appeals panel. Plaintiff purchasers initially 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." (emphasis added...ed.)
The Court of Appeals opinion, its dissent and the Supreme Court opinion 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 opinions 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 these opinions and the 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:
. . . .
(1) FOUNDATION, SLAB, FIREPLACES/CHIMNEYS, FLOORS, WINDOWS (INCLUDING STORM WINDOWS AND SCREENS), DOORS, CEILINGS, INTERIOR AND EXTERIOR WALLS, ATTACHED GARAGE, PATIO, DESK OR OTHER STRUCTURAL COMPONENTS including any modifications to them? . . .
(2) ROOF (leakage or other problem)? . . .
(3) WATER SEEPAGE, LEAKAGE, DAMPNESS OR STANDING WATER in the basement, crawl space or slab?
. . . .
(4) PRESENT INFESTATION, OR DAMAGE FROM PAST INFESTATION OF WOOD DESTROYING INSECTS OR ORGANISMS which has not been repaired?"
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 Court of Appeals 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 discussion of the respective liability of the other parties for brevity)
Supreme Court affirmed the decision of the Court of Appeals, in part; reverse the decision of the Court of Appeals, in part; and remand this case to Superior Court, Brunswick County, for a trial on the merits with respect to these claims. The economic loss rule was implicated in this case and it bars tort recovery by a plaintiff in a contract breach action for the defendant's simple failure to perform the contract, even though the failure was due to negligence or lack of skill. Berkeley Investors, Mr. Bell, Re/Max and Mr. Carroll contended that some of claims that the plaintiffs asserted against them were barred by the economic loss rule. The Court of Appeals rejected this allegation holding that the economic loss rule did not provide any protection against the claims that plaintiffs had asserted against these defendants because "none of the conduct that allegedly underlay those claims implicated the terms of the purchase contract between plaintiffs and Berkeley Investors." Cummings, 270 N.C. App. at 219. The Court of Appeals also determined Re/Max and Mr. Carroll were not entitled to claim the protection because they lacked privity of contract with the plaintiffs and the Supreme Court held that the Court of Appeals resolved this issue correctly.
The plaintiffs' claims for negligent misrepresentation and fraud against Berkeley Investors and Mr. Bell and for negligence and fraud against Re/Max and Mr. Carroll are rooted in the plaintiffs' allegations that these defendants failed to either disclose or adequately repair any defects in the house and in the alleged misrepresentations by Berkeley Investors' concerning the condition of the house. Specifically, their failure to disclose the long history of water-intrusion problems at the house and their unreasonable reliance on the repairman's assurances that he had fully repaired the problem prior to closing. The Supreme Court deemed that the Court of Appeals correctly concluded that none of these allegations are properly based upon the actual contract provisions. Specifically, "since the substance of the disclosure statement is not incorporated into the purchase contact, it cannot serve as the basis for the application of the economic loss rule in this case."
With respect to the plaintiffs' negligence claims against Re/Max and Mr. Carroll the Supreme Court agreed with the Court of Appeals in its reversal of the trial court's decision to grant summary judgment in defendant's favor with respect to these claims. The Court of Appeals determined that the trial record disclosed the existence of a question of material fact concerning the extent to which Re/Max and Mr. Carroll had a duty to disclose the history of water intrusion into the house considering the nature of Mr. Cribb's statements about the extent of his repairs.
In their amended complaint and on appeal to the Court of Appeals, plaintiffs asserted that Re/Max and Mr. Carroll owed them a number of legal duties, including the duty to:
(1) "take all reasonable steps to ascertain all known and readily available material facts about the condition" of the house; (2) make specific inquiry of the owners, including Berkeley Investors and Mr. Bell, for the purpose of obtaining information relating to facts or circumstances that may materially affect plaintiffs' decision to purchase the house; (3) "take all reasonable steps" to ensure that any prior leaks or water-intrusion problems had been repaired by a licensed professional; and (4) ensure that the disclosure statement was accurate, that the house did not contain any defects and that Re/Max and Mr. Carroll had breached those duties by, among other things, (1) failing to discover and correct any material defects in the house or to disclose the defects to plaintiffs; (2) hiring Mr. Cribb, who was a painter, to fix a suspected leak in the guest level living room; (3) permitting Berkeley Investors to provide a disclosure statement that stated that the house did not have any known defects; and (4) failing to disclose the history of water intrusion problems at the house.
Both opinions make it clear with apt citation that a broker has only the duty disclose that of which the broker has actual knowledge and to not misrepresent that knowledge. There is not, as alleged by the plaintiffs, a duty to discover the fact in question. The Supreme Court affirmed the Court of Appeals' rejection of the plaintiffs' "contention that the failure of Re/Max and Mr. Carroll to discover 'ascertainable' defects in the house rendered those defendants negligent given that 'a seller's agent only has a duty to disclose material facts that are known to him.'" However, brokers do have a duty to disclose any fact of which they were aware that might reasonably affect the buyers' decision to purchase a house.
The Supreme Court's review of the record led them to note the existence of evidence:
"...tending to show that Mr. Carroll knew of previous water-intrusion issues at the house and that he had hired Mr. Cribb to, among other things, attempt to locate and repair the source of a leak in the guest-level living room. After completing the required work, Mr. Cribb sent a text message to Mr. Carroll informing Mr. Carroll that he "may have found that leak" and that he "hope[d] that was it." Re/Max and Mr. Carroll point to this communication in arguing that Mr. Carroll "was told that the condition had been repaired."
While the Court of Appeals determined that at common law this was sufficient to exculpate the defendants, the Supreme Court concluded, on the contrary, that "the record precludes us from holding that the reasonableness of Mr. Carroll's reliance upon Mr. Cribb's statements has been established as a matter of law. (emphasis added - ed.) ... a rational juror could properly conclude that Mr. Carroll acted unreasonably in relying upon the adequacy of Mr. Cribb's performance in rectifying the problems evidenced by the water intrusion into the house."
The Court's approach to the plaintiffs' Fraud and Negligent Misrepresentation claims can fairly be said to also rely on reasonability standards and their principal thrust is the Court's willingness to move past summary judgment and put this case into the hands of the jury. We will omit further discussion of those issue for brevity other than to point out that Justices Berger and Newby dissented in part on these issues and concluded:
Moreover, the majority expands the duty a seller's agent owes a purchaser to the functional equivalent of a fiduciary duty. The obligations seller's agents owe to purchasers are fairly well established. At least they were. The majority opinion seems to suggest a seller's real estate broker is now a guarantor of the condition of the subject property and faces potential liability for failure to disclose any potential deficiency mentioned by the seller. Inevitably, the expansion of this duty will lead to uncertainty as to the responsibilities of seller's agent to the seller vis à vis this new duty to the buyer.
It is supposed that the Court's discussion of the plaintiffs' claims of Breach of Fiduciary Duty against their own agents would be of significant interest, therefore we will go into the Court's analysis. This part of the opinion begins by noting that the relationship between a real estate agent and the client "is by, definition, one of agency, with the agent owing a fiduciary duty to the buyer in all matters relating to the relevant transaction."" the Court observes:
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, 133 N.C. App. at 54-55 (cleaned up). In the same vein, the North Carolina Real Estate Manual, which is published by the North Carolina Real Estate Commission, notes that real estate agents have a duty to disclose any material facts known to the agent and to "discover and disclose to the principal all material facts about which the agent should reasonably have known." N.C. Real Est. Manual 209 (Patrick K. Hetrick, Larry A. Outlaw & Patricia A. Moylan, eds., 2013) (emphasis omitted).
The Court here went into an in-depth analysis of the contentions of the parties as to the obligations of the plaintiff's brokers, what they had done in this respect and what the plaintiffs contended that they had failed to do and particularly whether the plaintiffs' brokers had reasonably relied upon the home inspector in not investigating further. The Supreme Court disagreed with the Court of Appeals in this issue. Holding that the plaintiffs did not successfully impeach the qualifications of the home inspector or demonstrate that the brokers had any reason to conclude that the inspector had failed to act in an appropriate manner, the Court determined that the record contains no basis for concluding that the plaintiffs' brokers failed to exercise "reasonable diligence" in recommending that plaintiffs employ the inspector or in relying upon his expertise.
It may be said that with regard to the obligations of sellers' brokers to buyers, the court did not open a new basis for liability, but perhaps can be said to have lowered the bar to successful litigation. With respect to the buyer's brokers, to court exculpated them in this case, but certainly can't be said to have raised the bar in any measurable respect.