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Seller Liability for Disclosures (or Non-Disclosures), Part 2

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May 12, 2014

By:  Kevin J. Parker

In our blog post dated April 29, 2013, Matthew Fischer discussed the case Lerner v. DMB Realty, LLC (Arizona Court of Appeals, November 27, 2012).  In that case, the Arizona Court of Appeals addressed, among other things, the viability of a claim wherein a buyer of residential real estate alleged that the seller had an obligation – under the facts of that case – to disclose that they were selling because of the presence of a registered sex offender next door.

The complicating factor was that Arizona, by statute, expressly states that sellers are not obligated to disclose the existence of registered sex offenders in the vicinity.  A.R.S. § 32-2156.  One question addressed by the Lerner court was whether the statute also required dismissal of a fraud claim based on the allegation that the seller lied about the sellers’ true reason for moving.  The buyers alleged that they specifically asked the sellers why they were selling, and the sellers said their reason for selling was to move closer to friends.  The buyers alleged this was a lie because, according to the buyers, the sellers’ true reason was to move away from the nearby sex offender.  In its 2012 opinion, the Arizona Court of Appeals held that the buyer’s allegations, if proven to be true, would state a valid fraud claim under Arizona law despite the Arizona statute.

After that 2012 opinion was published, the sellers asked for reconsideration by the Court of Appeals.  The Court of Appeals asked for supplemental briefing, and issued a new opinion in 2014.  680 Ariz.Adv.Rep. 4 (February 13, 2014).

In the new opinion, the Court of Appeals arrived at the same ultimate conclusion, but expanded on the discussion of a sellers’ disclosure obligations.  In its expanded discussion in the 2014 opinion, the Court of Appeals explained its reasoning in a way that has much broader application than simply to the facts of this case.  In particular, the court explained its reasoning as follows:  “When one is asked a question that fairly calls for disclosure of a material fact, he or she commits fraud by concealing the truth or otherwise answering in a manner deliberately calculated to mislead.  ‘Unlike simple nondisclosure,  a party may be liable for acts taken to conceal, mislead or otherwise deceive, even in the absence of a fiduciary, statutory, or other legal duty to disclose.’” The court also cited the Restatement for the following proposition;  “‘A representation stating the truth so far as it goes but which the maker knows or believes to be materially misleading because of his failure to state additional or qualifying matter is a fraudulent misrepresentation.’”

 The new Lerner opinion reinforces one of the lesson points identified by Matthew Fischer in his April 29, 2013 blog post:  Sellers should consider avoiding verbal representations to potential buyers, and leave the selling to their broker.