Posting for

Tuesday, August 18, 1998

by: Bert Rush

brush@firstam.com

ESCROW NEGLIGENCE/CONSTRUCTIVE FRAUD/ESCROW AND CLOSING

In Pennsylvania (and elsewhere) a case now pending before the PA Supreme Court has the attention of many involved in real estate closings. The cite for the decision of the court of appeal in this case is Bortz v. Noon, 698 A.2d 1311 (1997).

At issue is the liability of realtors and escrow and closing companies who rely on faulty information in closing. Here's what happened.

Albert and Cindy Bortz contracted to buy a home in Pittsburgh from Patrick and Virginia Noon. Selling agent was Renee Valent with Coldwell Banker Real Estate. The settlement company was Suburban Settlement Services, whose Christopher Abernathy did the closing.

In order to get a commitment from the mortgage lender, the property was required to pass a "dye test" of its septic system. In this test, dye is flushed down the toilets to see if comes to the surface of the leech field. If it does, the system fails the test.

The dye test failed and Valent notified the Bortzes, telling them that settlement would be delayed until the system could be repaired and was working properly.

The Noons hired J.J. Nolte, a contractor, to make repairs and re-test the system. Ten days before scheduled closing, the lender notified closer Abernathy that the property had passed the second dye test. Abernathy conveyed this information to realtor Valent--and closing went forward.

On the appointed day, closing was delayed 20 minutes for receipt of the dye test. It was received, Abernathy handled it as a passing test, and the transaction closed. Nolte was paid $2,000 for the repairs and re-test.

After closing there was another dye test (by A.J. Kramer) in which the system failed. As a result, the property would have to be connected to the public sewer system at a cost of $15,000. It turned out the system failed its second test--as could have been figured out by a careful reading of the dye test report delivered at closing--but through sloppiness the report (the "Nolte report") apparently contained a typo, reading that after the test "dye did not show"--but also saying "one of the trenches was surfacing on the ground." These statements were conflicting and, according to at least one witness, didn't make sense.

The Bortzes sued the Noons and Coldwell Banker. Coldwell Banker cross-complained for indemnity against Nolte and Suburban Settlement.

After a court trial, the judge dismissed the cross-complaint against Nolte and Suburban Settlement because they were not in contractual privity with the Bortzes, and gave judgment in favor of the Noons against Coldwell Banker for $15,300. Coldwell Banker appealed, raising three issues: (1) Whether the trial court erred in holding Coldwell Banker liable for fraudulent misrepresentation; (2) whether the court erred in holding Coldwell Banker liable for fraud for concealing results of the first dye test; and (3) whether the court erred in dismissing the cross-complaint against Nolte and Suburban Settlement.

The court of appeal made quick work of the first two issues. The Court explained that to be actionable a misrepresentation need not be intentional but, instead, may have been in the nature of deceit (ie., suppression of a material fact, half truth, providing assurance without reasonable basis to believe it true, etc.). The Court found Valent resposible for this type of misrepresentation (on behalf of the broker, Coldwell Banker), in that she gave assurances the system would be repaired before closing--and allowed the closing to take place--without reviewing the Nolte report and without making an independent inquiry to determine whether the system passed. She was also faulted for relying on the settlement agent's interpretation of the Nolte report, and for not having copies of all reports available for the Bortzes' review prior to closing.

But on the third issue, the Court of Appeal reversed. The Court held that a contractor may be sued for fraud in the absence of direct privity, when the complaining party was "specifically intended" to rely on the "fraudulent conduct" or where "reasonable reliance" of the complaining party was "specially foreseeable."

With specific reference to Suburban Settlement's liability, the Court faulted closer Abernathy for closing in reliance on someone else's interpretation of the Nolte report, without reading it carefully enough to note its internal inconsistency. Said the Court:

In closing the Court said,

There was one dissenting opinion, by a justice arguing Coldwell Banker should not be liable under the facts of this case.

Comment: What surprises me most about this case is labelling the cause of action "fraudulent misrepresentation." My understanding is that the evidence was that Abernathy relied on advice from the lender--given over the telephone--and that's all he ever represented to anyone. Presumably the Bortzes were there when Abernathy was handed the Nolte report--and they should have seen he didn't read it or vouch for its contents.

Remember, this was a lender requirement. If the lender had the report and they were satisfied with it, should Suburban Settlement be required to scan the report for inconsistencies--in terminology a closer might not be familiar with--and question the lender's OK? If Bortz cared about the report he should have undertaken to look at it.

My point is that "fraud" is pretty strong language--it doesn't fairly characterize what happened here. You might find an expert witness to testify that the closing officer violated a standard of care by closing without asking for buyer approval of the report--or by failing to explain that he wasn't vouching for the report--but that would be negligence, not fraud.

Not even "constructive" fraud, a/k/a deceit. Constructive fraud is where you represent something to be true without sufficient knowledge to make the representation, or make a representation while concealing other knowledge you have which should cause you to wonder whether your representation is true (concealment). If Abernathy said, "The lender says the property passed the test," and if that is what the lender said, how is that deceitful?

On the other hand, here are the Bortzes--first-time buyers maybe. They don't know to ask for a dye test, and when someone else does they don't know to look at it. Maybe they should have had their own agent or attorney present--but they should not be looking to a settlement company to give them this kind of advice and counsel.

This case is our latest brush with the duty to advise--or duty to warn-in escrow and closing. It'll be interesting to see what the Pennsylvania Supreme Court does with it. I understand the Pennsylvania Land Title Assn. has filed an amicus brief.

Questions, comment, argument? Just press the "reply" button....