Decision defeats real estate buyers' claim for seller's false representations

By Philip B. Grennen

Real estate buyers will have difficulty winning misrepresentation claims against sellers as a result of a new Washington Supreme Court decision. The Court held that the “economic-loss rule” curtails most damages in such claims, and that if the buyers’ pre-closing inspection was incomplete, they may not recover at all.

In Alejandre v. Bull, No. 76274-1 (Mar. 1, 2007), the Alejandres bought a house from Mary Bull that was served by a septic system. A year before Bull put the house on the market, the septic system had been pumped, and a broken pipe between the septic tank and the drain field had been repaired. The evidence conflicted as to whether Bull knew that the repairs were unsuccessful. When marketing the property, Bull completed a seller’s disclosure statement that said that the septic system had no defects.

The purchase and sale agreement between the Alejandres and Bull contained an inspection contingency. The contingency entitled the Alejandres to inspect the property, including the septic system, and to rescind the purchase if the property’s condition was unsatisfactory to them. The Alejandres hired a septic inspector, who found “no obvious malfunction of the system.” The Alejandres waived their inspection contingency and closed on their purchase of the property.

Almost immediately after the Alejandres moved in, they began experiencing septic problems. They incurred $30,000 fixing the defects. They sued Bull for fraud and misrepresentation. At trial, Bull moved to dismiss at the close of the Alejandres’ case. She argued that the economic-loss rule precluded the Alejandres’ damages. The trial court agreed and dismissed the action. The Court of Appeals reversed, and Bull successfully petitioned the Washington Supreme Court for review.

Generally, the economic-loss rule holds parties to their contract remedy when a loss could involve both tort- and contract-based relief. The Supreme Court noted that “tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.” Tort law protects society’s interest in protecting against harm, with the goal of restoring plaintiffs to their prior position, whereas contract law seeks to place plaintiffs where they would be had the contract been performed.

Here, the Alejandres sued for a failed septic system and “purely economic damages” that resulted. The Court held that because the parties’ relationship was governed by contract, plaintiffs “are limited to their contract remedies.” This contract did not provide for the damages the Alejandres claimed.

The Court held that the economic-loss rule did not defeat the Alejandres’ claim for fraud, but that claim lacked adequate proof. Fraud requires proof that the plaintiff justifiably relied on the misrepresentation, and the plaintiff must exercise due diligence as to the representations. The Alejandres had bought contingent on an inspection of the septic system, but they failed to inspect the system fully. Because the Alejandres had a full opportunity to inspect, and a reasonable inspection would have found the defects, the Alejandres failed to exercise reasonable diligence, and their reliance was not justified.

Court reaffirms legal-malpractice plaintiff's burden of proof of causation

By William R. Kiendl

A legal-malpractice plaintiff must prove that a lawyer's advice caused him harm, the Washington Court of Appeals reaffirmed in a recent decision.

In Smith v. Preston Gates & Ellis LLP, 135 Wn. App. 859 (2006), Terry Smith had agreements with a contractor for improvements to realty. Smith later signed a contract with a company to provide a log home for the property. Smith approached his employer, the Preston Gates law firm, for advice as to agreement with the contractor to erect the log home. One of the firm's attorneys spent six hours reviewing the agreement and advising Smith.

The project proved vastly more expensive than Smith could afford. Smith discovered that the contractor had engaged in fraud and overbilling. By the time the home was completed, it had consumed most of Smith's assets. Smith could not afford to live in the home, so he sold it and sued the contractor. Smith sued Preston Gates, alleging that had the firm advised him as to the risks of entering into the agreement with the contractor, he never would have proceeded. Smith alleged damages of more than $1.7 million. Preston Gates moved to dismiss, arguing that Smith had failed to show a causal connection between the advice he had received and the damages he alleged. The trial court agreed and dismissed the action. Smith appealed.

The Court of Appeals reiterated that a legal-malpractice plaintiff must show that but for the attorney's conduct, he would have obtained a better result. Smith provided no evidence that had the lawyer advised him differently, he would have achieved a better outcome, and the court affirmed.

Around The Firm

Peter E. Sutherland won a defense judgment and an award of attorney fees after a bench trial in Casmey v. Donchez, et al. Plaintiff had retained an attorney to pursue a personal-injury action arising from an auto accident. The attorney hired a local legal-messenger service to serve suit papers on the tortfeasor in Florida. The messenger service retained a process server in Florida that later returned an affidavit of service that showed service on the tortfeasor and his wife. The attorney obtained a default judgment against the tortfeasor. However, the affidavit turned out to be false; the tortfeasor was never served, rendering the default judgment void. The statute of limitations had run in the meantime. Plaintiff sued the attorney and the messenger service. At the end of the trial, the court agreed with Peter that the attorney was not negligent in relying on the facially valid affidavit of service. The court awarded plaintiff damages against the messenger service for legal expenses incurred in defending the default judgment in the underlying action. The court awarded Peter’s client attorney fees and costs against the messenger service for the defense of the legal-malpractice claim, because the attorney was sued only because of the fault of the messenger service.

Peter Sutherland also won an appeal in another legal-malpractice case, Estate of Black v. Robben, Blauert, et al. Plaintiff estate alleged that the decedent's attorney had lost the decedent’s will, which caused the estate to incur more than $70,000 in attorney fees to establish a facsimile of that lost will with the probate court. When the decedent had died in 2000, advocates of an earlier will filed in probate, creating the estate. The decedent’s daughter successfully moved to become personal representative of the plaintiff estate in accordance with the lost will, but only after extensive litigation. The probate court awarded attorney fees in September 2001 to the losing party, the prior personal representative, in large part, for efforts taken in litigating the “lost will” issue. The daughter then sued the attorney for malpractice on October 14, 2004, more than three years from the date that she and the opposing personal representative were on notice of the facts explaining the loss of the will. The court granted Peter’s motion for summary judgment, and Court of Appeals affirmed, based on the three-year statute of limitations.

Philip B. Grennan, Michelle A. Corsi, and Keith J. Kuhn won dismissals in seven asbestos cases in which plaintiffs alleged personal injuries from exposure to asbestos at pulp and paper mills. The plaintiffs claimed that the defendant sales representative for a manufacturer of an asbestos-containing product was in the chain of distribution. After motions for summary judgment were filed in each case, based on plaintiffs’ failure to prove product identification, and after motions for costs and terms for various plaintiffs’ failure to appear at their scheduled independent medical examinations, plaintiffs’ counsel dismissed each case with prejudice, only six weeks prior to trial. ... Michelle Corsi won an appeal and an award of $71,000 in attorney fees in Gerard v. Shattuck, a legal-malpractice action. The Court of Appeals affirmed summary judgment in favor of Michelle’s client and assessed fees against plaintiff because the appeal was frivolous. … Michelle Corsi also won summary judgment in Alexander & Associates v. Keller Williams Realty, a real-estate-malpractice case. Plaintiffs, sellers of a hotel, alleged that the real estate agent violated a confidentiality agreement when showing the property. The court dismissed the action, as the agent caused no harm. … Michelle Corsi and William R. Kiendl won partial summary judgment that limited plaintiffs’ damages in a negligent-misrepresentation case against an appraiser in Borish v. Russell. Plaintiffs bought waterfront property in Pierce County and later sued various parties involved in the transaction because they learned only after closing that the home was a manufactured home and not a house of conventional construction. The court agreed with Michelle and Bill that any recovery for negligent misrepresentation is limited to the value of the property received and its purchase price, not the cost of replacing the house, and not benefit of the bargain, which typically are awardable only in contract. The court also dismissed plaintiffs’ claim of “negligence,” which they claimed existed independent of the claim of negligent misrepresentation.

Michael A. Patterson and Daniel G. Lloyd won summary judgment in Payne v. Peninsula Sch. Dist., a federal civil-rights action arising out of a school district’s special education program. The plaintiff was an autistic boy’s mother, who claimed the teacher had subjected the student to improper therapy and violated state law. Mike and Dan persuaded the court to dismiss all claims because plaintiffs failed to exhaust administrative remedies through the state education program. … Tammy L. Williams won a defense jury verdict in Stockdale v. ADESA Corp. Plaintiff attended an auto auction and walked in front of a vehicle being sold. The vehicle moved forward slowly, and the plaintiff claimed the bumper hit his knee. The incident was recorded on videotape. While the jury found the auction driver to be negligent for moving forward when plaintiff was near the bumper, they agreed with Tammy that the event was not the cause of plaintiff’s knee problems. The video showed no major impact, and plaintiff had had knee problems for 21 years.

Jeffrey P. Downer and Jenny M. Downey won dismissal in Buchanan v. Tobacco, a professional-liability claim against an appraiser. Plaintiff claimed to be a victim of a “foreclosure rescue” scam, in which plaintiff was facing foreclosure by her mortgage lender, and other defendants offered financial relief but allegedly tricked plaintiff into quitclaiming her house to them. Those defendants later took out their own mortgage. Plaintiff alleged that the appraiser inflated his appraisal so that the co-defendants could maximize their ill-gotten gains. The court agreed that plaintiff failed to state a claim against the appraiser and dismissed the complaint against him. … In Gayte v. Burkebile, Jeff Downer, Jenny Downey, and Melisa K. Thompson won summary judgment of dismissal of a real estate broker who listed a house for sale that was on 50 feet of waterfront property. Plaintiff, a developer, bought the property subject to a feasibility contingency. Plaintiff saw that 14 more feet of waterfront belonging to a neighbor was fenced in. After consulting his own real estate agent, a lawyer, and a surveyor, he concluded that he would own the extra 14 feet through adverse possession. He waived his feasibility contingency, and the transaction closed. He later learned of a prior agreement between the seller by which the neighbor retained ownership of the 14 feet. Plaintiff sued the listing broker for failing to disclose the agreement. Jeff, Jenny, and Melisa moved for summary judgment because the listing broker did not know of the agreement and never said that an adverse-possession claim existed, and since plaintiff was going to determine the value of the property for himself, he had no legal right to rely on the nondisclosure. The court agreed and dismissed all claims against the listing broker. … Michael A. Guadagno won a jury trial in Gelman v. Costco, a premises-liability case. The plaintiff walked into a sign in defendant’s parking lot and suffered facial scarring. He alleged that the sign’s placement was too low and was a dangerous condition. Mike argued to the jury that the defendant was not negligent, because the sign was not dangerous and was in plain sight to the plaintiff. The jury returned a defense verdict after deliberating for only 15 minutes. ... Duncan K. Fobes and Marc Rosenberg won summary judgment in Yi v. Kim. Plaintiffs’ three-year-old son died when struck by a vehicle in a church parking lot. The court held that alleged design flaws in the parking lot were not the cause of the accident and dismissed the case.