Legal Case Studies: Buyers allowed to sue for fraud based on the disclosure report

Writen by Lisa Harms Hartzler |

Published: June 25, 2018 |

Reading Time: 13 min

Legal case studies this issue: Fraud and breach of contract, antitrust laws, property management, conditional-use permit, and involuntary annexation.

Lisa Harms HartzlerResearch and analysis by Lisa Harms Hartzler,
Sorling Northrup Attorneys

Buyers allowed to sue for fraud and breach of contract based on Disclosure Report representations

In Blevins v. Marcheschi, 2018 IL App (2d) 170340, the sellers of a house in Glen Ellyn represented on their Residential Real Property Disclosure Report that they were not aware of material defects in the walls or floors. After the closing, the buyers discovered damaged wallboard in the kitchen. An environmental company hired to investigate found significant damage inside the wall, including fungal growth, nail corrosion, wet wood under the exterior façade, and water damage to exterior sheathing. The company concluded that it was inconceivable that the sellers were unaware of the existing damage prior to the sale of the house. Remediation and repairs cost over $45,000. More than one year after the closing, the buyers sued the sellers and a real estate company for breach of contract, consumer fraud, fraudulent misrepresentation, and negligent misrepresentation based on the sellers’ failure to disclose the water damage.

The trial court dismissed the suit based on Section 60 of the Residential Real Property Disclosure Act, which contains a limitations period requiring all claims based on a Disclosure Report to be filed within one year from the earliest of the date of possession, the date of occupancy, or the date of recording. The appellate court reversed that decision, holding that Section 45 of the statute provided that the Disclosure Act was “not intended to limit or modify any obligation to disclose created by any other statute or that may exist in common law in order to avoid fraud, misrepresentation, or deceit in the transaction.” Despite the fact that the sellers’ misrepresentations were “manifested in the false Disclosure Report” the court ruled that the buyers’ complaint was based on common law claims and was not brought under the Disclosure Act. Consequently, the one-year statute of limitations did not apply and the complaint should not have been dismissed on that basis. The case was sent back to the trial court.

Restricting MLS access to REALTOR® members does not violate antitrust laws

In Findling v. Realcomp II, Ltd., Civ. Action No. 17‑CV‑11255 (E.D. Mich. 2018), the plaintiff was an attorney who frequently sold properties as a court-appointed receiver and a bankruptcy trustee. Under Michigan law the attorney did not have to obtain a real estate broker license; however, he could not obtain access to a listing service without paying a listing fee to a licensed broker or agent because the defendant MLS restricted such access to licensed members of its eight controlling REALTOR® associations. The plaintiff applied for membership at one of the associations but was denied because he was not a licensed real estate agent, broker, or appraiser. He then sued the MLS and the associations, claiming that the defendants illegally maintained a monopoly in the southeastern Michigan real estate market and that they illegally tied membership in the associations to access to the MLS.

The federal district court dismissed this case for two reasons. First, the court held that the plaintiff did not have standing to sue because he did not adequately allege an “antitrust injury.” The court defined the product concerned in this case as real estate advertising, but the plaintiff failed to allege any facts about the real estate advertising market or who the major competitors in that market were. In addition, there was no injury to competition because an MLS is an information-aggregating advertising platform that actually promotes competition. Finally, plaintiff failed to allege that he would have joined a different association absent the tie of access to the MLS to membership in one of the defendant associations. Without an allegation of injury, the plaintiff did not have standing to sue.

Second, the court held that even if the plaintiff had standing, the defendants’ membership requirements did not unreasonably restrain trade. Plaintiff failed to present any current market analysis to demonstrate that the MLS had monopoly power that violated the antitrust laws. The tie of MLS access to association membership was not unlawful because a voluntary trade association may reasonably tie its benefits and services to membership.

City’s policy of terminating water service to tenants when landlord fails to pay violates due process and equal protection guarantees

In Winston v. City of Syracuse, 887 F.3d 553 (2d Cir. 2018), a tenant sued a city in New York for terminating water service to her apartment after the landlord, who was responsible for paying for the service, failed to pay the building’s bill, alleging that the city’s policies violated her constitutional rights to due process and equal protection of the law. The federal appeals court first held that without a suspect class or a fundamental right involved, it would apply the rational basis test to the city’s policies. It then found that the city’s policy of only allowing landlords to open water service accounts was rationally related to the goal of collecting delinquent accounts by placing liens on a landlord’s property and was further bolstered by the city’s assertion that it was not possible to separately meter apartments in older buildings.

The court found, however, that there was no rational basis for terminating water service to a tenant who had no legal responsibility to pay for it. The city’s policy of shutting off water to collect debts was divorced entirely from the reality of legal accountability for the debt involved and penalized not the debtor, but an innocent third party with whom the debtor contracted. As long as tenants could not open their own water accounts and assume responsibility for paying for the service, the city’s policy violated the tenant’s equal protection rights by treating tenants whose landlord paid their water bills differently from those whose landlords did not. The court also held that a tenant possessed a property interest in continued service deserving of due process rights. Those rights were violated by the city’s policy of making tenants pay their landlords’ bill for which they were not legally responsible in order to retain that property interest. The court remanded the case back to the district court for further proceedings.

Court upholds city denial of conditional-use permit for drug and alcohol rehabilitation center

In Get Back Up, Inc. v. City of Detroit, Mich., 2018 FED App. 0164 (6th Cir.), the City denied a conditional-use permit for a residential rehabilitation center for recovering drug addicts and alcoholics but agreed to allow the plaintiff to operate the center while pursing a suit to challenge the City’s zoning ordinance as discriminatory. When the plaintiff lost that fight, the City promptly shut down the facility. The plaintiff soon submitted another permit application. Neighbors objected and the Board of Zoning Appeals again denied the permit.

This time the plaintiff filed suit to assert the Board’s decision (rather than the zoning code) discriminated against recovering substance abusers in violation of the American with Disabilities Act, the Fair Housing Act, and the Rehabilitation Act. To succeed, the plaintiff first had to present evidence that the Board members “denied the permit because they harbored animus toward recovering addicts, or that they factored their constituents’ animus into their decision.” If the plaintiff made this prima facie case, then the Board had to offer non-discriminatory reasons for its decision and if it did so, then the plaintiff “must show that a reasonable jury could find that those reasons were pretextual.”

The court found that the plaintiff carried its burden on the first step based on the comments made by neighbors and board members themselves at the zoning hearing, which indicated animus toward recovering addicts. The Board, however, countered with four non-discriminatory reasons for its denial: (1) there were complaints about trash and debris outside the facility when it was operating; (2) residents of the facility had allegedly engaged in disruptive behavior; (3) there were concerns about neighborhood property values; and (4) there were concerns about the number of addicts that could reside in the facility. The court found that these reasons were legitimate and met the Board’s burden. The plaintiff, however, was then unable to show that the reasons were just pretexts to conceal actual discriminatory motives. The federal appeals court affirmed the lower court’s decision in favor of the City.

FTC holds antitrust laws applicable to state appraisal board

In In the Matter of Louisiana Real Estate Appraisers Board (FTC Opinion, April 10, 2018), the Federal Trade Commission held that the Louisiana Real Estate Appraisers Board, which licensed, regulated, and disciplined appraisers in the state, was not exempt from antitrust scrutiny when it issued a regulation governing how appraisers must be compensated. The Governor appointed the ten-member Board, seven of whom had to be certified real estate appraisers, two of whom had to be selected from a list submitted by the Louisiana Bankers Association, and one who had to be a licensed appraiser and a representative of a licensed AMC (AMCs acted as agents for lenders in arranging real estate appraisals, effectively functioning as the purchasers of appraisal services).

The FTC first noted that the Sherman Act “plays a crucial role in our economy, serving as a central safeguard for the Nation’s free market structures by protecting U.S. consumers from anticompetitive conduct.” However, states are “sovereigns” that retain substantial control over commerce within their borders, including the ability to enact statutes that restrain competition. “State action,” therefore, is exempt from the Sherman Act.

Nevertheless, the U.S. Supreme Court held in 1980 that state agencies are not sovereign actors for purposes of state-action immunity simply because of their government character. “Rather, application of the doctrine requires more than a mere façade of state involvement” because the state must “accept political accountability for anticompetitive conduct they permit and control.” In other words, even when a licensing board is created by statute and its members are government-appointed, there must be procedures implemented to make its actions the state’s own actions. Without “state action,” a licensing board may not legally regulate or restrain competition among licensed professionals. Consequently, the main issue in this case was whether the Board could invoke the “state action doctrine” to be exempt from claims that its regulation on appraiser compensation violated federal anti-trust laws.

To invoke state action, the Board had to demonstrate that the regulation challenged in the case was “clearly articulated and affirmatively expressed as state policy” and that “policy must be actively supervised by the state itself.” The challenge in this case was that the Board was not “actively supervised.” Although that concept is a flexible one, at least four requirements are essential: (1) the state supervisor must review the substance of an anti-competitive decision or regulation, not merely the procedures followed to produce it; (2) the state supervisor must have the power to veto or modify particular regulations to ensure they accord with state policy; (3) the mere potential for state supervision is not an adequate substitute for a decision by the state; and (4) the state supervisor may not itself be an active market participant.

The Board contended that it met all of the requirements for being actively supervised, but the FTC concluded there was nothing in how the Board’s regulations and decisions were implemented that indicated active supervision by the state. The Board did not develop an adequate factual record that anyone from the state could review, nor did it present a specific assessment of how its action comported with the substantive standards established by the state legislature for issuing regulations governing appraisers. Further, the procedures established for review by legislative committees, the state attorney general, and the governor only provided for potential review, not actual substantive review, which none of the potential reviewers apparently did. The FTC held that the Board could not use the “state action doctrine” to exempt itself from an antitrust challenge to its rulemaking.

Village engaged in sham to facilitate an involuntary annexation

In Chicago Title Land Trust Company v. County of Will, 2018 IL App (3d) 150713, the Village of Bolingbrook asked ComEd to file a voluntary annexation petition for a parcel located in unincorporated Will County. The Village acknowledged that its purpose was to surround and thereby involuntarily annex the plaintiff’s parcels pursuant to the Municipal Code section authorizing annexation of unincorporated territory containing 60 acres or less that is wholly bounded by one or more municipalities. ComEd executed an annexation agreement and filed a voluntary annexation petition. The Village annexed the ComEd property and involuntarily annexed plaintiff’s property over his objections. The plaintiff then filed a quo warranto action against the Village, claiming that the ComEd annexation was a subterfuge and against public policy and was, therefore, invalid, making the annexation of his property also invalid.

The trial court characterized the Village’s actions as “clever” but valid and entered judgment for the Village. The appellate court disagreed. It first found ample precedent that a court may look beyond the procedural requirements for annexations to consider evidence of subterfuge, particularly in cases alleging that petitioners attempted to manipulate the annexations statute in ways unintended by the legislature or that a municipality engaged in creative manipulations to find contiguity with other property. “Our supreme court has stressed that it is axiomatic that a party cannot circumvent the purpose of the annexation statute by doing indirectly what he cannot do directly.”

The court then determined that the ComEd annexation was a sham transaction created exclusively for the purpose of allowing the Village to reach the plaintiff’s property. It based this conclusion on several factors. First, it was the Village that approached ComEd to ask for annexation and there was no evidence in the record that ComEd had any interest or reason to want its property annexed. In fact, the annexation agreement between the two explicitly stated that it was an accommodation for the Village. Second, the annexation agreement contained a number of unusual provisions, such as the Village’s promise not to tax ComEd or subject it to the enforcement of any Village regulations or zoning requirements. Third, the Village also promised to allow ComEd to disconnect within one year after the annexation date and, even more telling, agreed to allow disconnection in as little as six months if the Village was unsuccessful in force annexing the plaintiff’s property. According to the court, it was abundantly clear that ComEd was not interested in pursuing voluntary annexation unless the Village promised effortless future disconnection after the plaintiff’s property had been incorporated into the Village.

All of these facts led the court to reverse the trial court’s decision and send the case back for further proceedings. One appellate justice filed a dissenting opinion, asserting that the Village had properly followed all required procedures to annex the plaintiff’s property, which was all the court had authority to examine. Whether the Village’s “conduct was good policy” was a matter beyond the scope of the court’s review. It will be interesting to see if the Village tries to appeal the majority’s decision to the Illinois Supreme Court.

About the writer: Lisa Harms Hartzler is Of Counsel at Sorling Northrup Attorneys in Springfield. She graduated from the American University Washington College of Law in 1978 and began her legal career in Chicago. She has provided legal support for the Illinois REALTORS’ local governmental affairs program since she joined Sorling in 2006 and focuses her practice on municipal law, general corporate issues, not-for-profit health care law, and litigation support.

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