Over the years, this column has reviewed various court decisions issued by New York courts on the doctrine of “Caveat Emptor” or “Buyer Beware,” which have usually been decided in favor of the seller. Two recent court cases, Striplin v. AC&E Home Inspection Corp. [see https://bit.ly/45kseul] and Wells Fargo Bank, N.A. v. Schepisi [see https://bit.ly/3Kxpf9W], have been decided in favor of the purchaser.
Striplin v. AC&E Home Inspection Corp.
In Striplin, the plaintiffs, who were the purchasers under a certain contract of sale between them and the sellers of residential property in Suffolk County, sued the sellers “to recover damages for fraud after allegedly discovering, subsequent to the closing, that the property had suffered extensive damage due to leaking water.” The purchasers alleged that the sellers had “actively concealed” certain water damage existing at the premises. The defendants moved to dismiss the lawsuit, which the trial court granted, and the plaintiffs appealed the decision.
Caveat Emptor Doctrine Revisited
The Appellate Division in Striplin, citing Simone v Homecheck Real Estate Servs., Inc. [see https://bit.ly/3QqWC24], explained that “‘New York adheres to the doctrine of caveat emptor and imposes no liability on a seller for failing to disclose information regarding the premises when the parties deal at arm’s length, unless there is some conduct on the part of the seller which constitutes active concealment.’” The court in Simone explains that “The mere silence of the seller, without some act or conduct, which deceived the buyer, does not amount to a concealment that is actionable as a fraud.” A seller must actively engage in intentional acts or conduct that purposefully conceal a defect or adverse condition at a property in order to be liable for fraud on the basis of active concealment.
A Seller Cannot ‘Thwart’ a Purchaser’s Ability to Conduct Inspections
The court in Striplin further noted, quoting Jablonski v. Rapalje [see https://nycourts.gov/reporter/3dseries/2005/2005_00129.htm], that in order “‘To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his [or her] responsibilities fixed by the doctrine of caveat emptor.” In essence, if a seller, or seller’s agent, actively “thwarts” a purchaser’s efforts to conduct inspections or the due diligence required by the doctrine of “Caveat Emptor,” then they can be held liable for damages.
In Striplin, the Appellate Division, in reversing the trial court’s dismissal of the purchaser’s lawsuit, relied on the purchasers’ affidavit, which alleged that the sellers “took measures to actively conceal the existence of leaks and water damage to the property, including placing new wood on top of rotten wood to hide the extent of the damage.” The Appellate Court held that “The plaintiffs’ allegations, if true, might have thwarted the plaintiffs’ efforts to fulfill their responsibilities imposed by the doctrine of caveat emptor with respect to the property,” and therefore, the trial court should not have dismissed the lawsuit. The Appellate Court further explained that the defendants were not able to establish “that a material fact alleged in the amended complaint is not a fact at all and that no significant dispute exists regarding it.” Here, the alleged actions by the sellers of installing new wood over the water damaged wood is potential evidence of an effort by sellers to “thwart” purchaser’s ability to discover the defects, and therefore, the court decided that the purchasers are entitled to proceed with their lawsuit.
Can the PCDS be the Basis for a Claim of Misrepresentation?
While not addressed directly in Striplin, a common question that arises in these cases of active concealment and fraudulent misrepresentation, is whether a seller can be held liable for misrepresentations made in the New York State Property Condition Disclosure Statement (PCDS). While it is common, at least in the southern parts of New York State, for sellers not to provide the PCDS and simply credit the purchaser with the $500 credit, sometimes sellers do complete a PCDS. Seller’s agents should make certain that they do not recommend to their seller client to complete the form. Rather, they should simply inform the seller clients that the PCDS law exists and recommend they discuss whether one should be completed or not with their attorneys. The purchasers in the Simone case (cited above) alleged that the sellers engaged in fraudulent misrepresentation and active concealment because they “knowingly” made false statements orally and in the PCDS.
The court in Simone points out that “When a seller makes a false representation in a Disclosure Statement, such a representation may be proof of active concealment.” However, the court goes on to state, “Where the contract specifically disclaims the existence of warranties or representations, a cause of action alleging breach of contract based on such a warranty or representation cannot be maintained.” Therefore, if a contract specifically provides that the “premises had been inspected by the buyer and was being sold “as is” without warranty as to condition, express or implied….[and] a specific merger clause is contained in…the contract and precludes the buyer from claiming that he relied on any of the sellers’ alleged misrepresentations…, [a] cause of action to recover for breach of contract cannot be maintained.” Therefore, as suggested by the court in Simone, completing a PCDS could expose a seller to liability for active concealment and fraudulent misrepresentation, however, a well-drafted contract serves to protect a seller.
Wells Fargo Bank, N.A. v. Schepisi: The Doctrine of ‘Buyer Beware” is Limited in Specific Instances
Wells Fargo Bank, N.A. v. Schepisi [see https://bit.ly/3Kxpf9W] involved a residential real property owned by Wells Fargo Bank, N.A., which was the subject of a foreclosure sale. In 2015, Wells Fargo Bank, N.A. commenced an action to foreclose on its subordinate mortgage. There also existed a first mortgage on the property. In 2018, a judgment of foreclosure and sale was entered by the Supreme Court in favor of Wells Fargo. A foreclosure sale was subsequently held, and Romina Rugova was the successful bidder. Rugova paid a $30,000 down payment to the referee and, prior to the closing,] Rugova (and Mucjon Demiraj) obtained a title report for the subject property. The title report disclosed the existence of the first mortgage. Rugova and Demiraj were not aware of the first mortgage until they obtained the title report.
Upon discovering the existence of the first mortgage, Rugova and Demeraj moved to set aside the foreclosure sale and requested that the $30,000 be returned to them. They also requested they be awarded the costs for certain repairs they made to the property while the property was still owned by Wells Fargo. The Supreme Court denied their motion and Rugova and Demeraj appealed the decision to the Appellate Division.
‘Buyer Beware’ Does Not Apply to a Purchaser at Judicial Sale
Wells Fargo argued that Rugova and Demeraj failed to exercise due diligence and that they should be required to proceed with the purchase. The Appellate Division, however, found this argument “unavailing.” Citing the Court of Appeals case Lane v. Chantilly (1929) [see https://casetext.com/case/lane-v-chantilly-corporation-1], the Appellate Division held that “The rule that a buyer must protect himself [or herself] against undisclosed defects does not apply in all strictness to a purchaser at a judicial sale.” It further noted that “a sale of land in the haste and confusion of an auction room is not governed by the strict rules applicable to formal contracts made with deliberation after ample opportunity to investigate and inquire.’” Since Wells Fargo failed to disclose the existence of the first mortgage, the Appellate Division found that the purchasers were not required to complete the sale and ordered the down payment be returned to them. The court, however, did not award the purchasers the repair expenses they incurred because they were done without the permission of Wells Fargo and at their risk.
Courts Have Discretion to Set Aside Judicial Sale in Equity
In Schepisi, the Appellate Division, citing Paragon Federal Credit Union v. Skarla [see https://nycourts.gov/reporter/3dseries/2020/2020_04751.htm], also held that a court “has the discretion to set aside a judicial sale where fraud, collusion, mistake, or misconduct casts suspicion on the fairness of the sale.” The Appellate Division further held that it “may exercise its inherent equitable power over a sale made pursuant to its judgment or decree to ensure that it is not made the instrument of injustice.” [See Guardian Loan Co. v Early at https://casetext.com/case/guardian-loan-co-v-early]. Courts generally have the power in their “equitable” jurisdiction to decide matters based upon general principles of fairness, equity, and justice.
In Schepisi the court points out that “neither the complaint, the judgment of foreclosure and sale, nor the terms of sale affirmatively disclosed the existence of another mortgage encumbering the subject property or that the mortgage at issue was subordinate to the senior mortgage.” Ultimately, since this information was not provided to the successful bidders at the foreclosure sale, the court deemed it to be “a mistake or misconduct that cast ‘suspicion on the fairness of the sale.’” In essence, the court determined that Wells Fargo failed to disclose a material defect in the property’s title. While the doctrine of Caveat Emptor is the prevailing principle that governs real property sales in New York, the court determined that the failure to disclose this particular defect did not fall within the scope of the “buyer beware” doctrine, and ultimately decided the appeal in favor of the prospective purchasers.
One critical takeaway from these recent “Caveat Emptor” cases is that the doctrine of “Buyer Beware” is still alive and well, and that, except for very limited circumstances, purchasers must continue to be diligent and conduct thorough inspections of any property they wish to purchase. Buyer’s agents and attorneys must advise buyers to conduct extensive due diligence and inspections and inform them that their failure to do so will likely leave them with limited remedies against sellers. On the other hand, sellers, seller’s agents, and seller’s attorneys must ensure that appropriate disclaimers are included in the contracts, that a purchaser is never “thwarted” from conducting any inspections, and that sellers never actively conceal a defect that would make its discovery difficult or impossible in the course of ordinary inspections and due diligence.