Buyer Claims Seller ‘Diverted’ from Fraud

Plaintiff LLC has stated claims that defendants fraudulently induced it to perform a real estate purchase agreement by false representations regarding the nature and amount of real estate taxes and special assessments, and acted to divert plaintiff’s attention from the false representations; the Hanover County Circuit Court overrules defendants’ demurrer and plea in bar.

The elements of a cause of action for actual fraud are a false representation, of a material fact, made intentionally and knowingly, with intent to mislead; and reliance by the party misled and resulting damage to the party misled. The elements of a cause of action for constructive fraud are a showing by clear and convincing evidence that a false representation of a material fact was made innocently or negligently, and the injured party was damaged as a result of reliance upon the misrepresentation.

In the context of a contract for the purchase of real estate, the law requires the purchaser to “discover for himself” the true condition of the premises if he has information which would excite the suspicions of a reasonably prudent person. However, an important exception to that rule is that the seller must not say or do anything to throw the purchaser off his guard or to divert him from making the inquiries and examination which a prudent man ought to make, which is commonly referred to as the “diversion exception.”

The court finds plaintiff has pleaded sufficient facts to state a proper cause of action for both counts of the complaint. Relying on the diversion theory of proof, the court finds plaintiff’s complaint contains sufficient factual allegations of both actual and constructive fraud in the inducement of the performance of the contract.

Specifically, the court finds the complaint adequately states that defendants fraudulently induced plaintiff to perform the real estate purchase agreement by false representations regarding the nature and amount of real estate taxes and special assessments. As alleged in the complaint, those false representations were material to plaintiff’s decision to perform the real estate purchase contract. Finally, the complaint alleges plaintiff reasonably and justifiably relied upon such representations and omissions and suffered damages and losses as a direct and proximate result. These allegations, if true, are sufficient to state a cause of action under either count 1 or 2 of the complaint.

Defendants argue plaintiff has sued the wrong parties. However, the court finds that all three named defendants made false representations to plaintiff, both in their individual capacities and acting as agents of defendant Holladay Property Services.

Defendants also contend plaintiff cannot claim it relied on defendants’ representations because the real estate contract and deed disclose all facts about which plaintiff now complains, and plaintiff undertook its own due diligence and inquiry into such facts. The court disagrees, and finds instead that the facts alleged fall within the diversion exception doctrine. Plaintiff alleges defendants “diverted Thomlyn’s attention,” tried to divert and trivialize a matter and acted “in order to completely allay Thomlyn’s concerns and divert Thomlyn’s attention from the special assessment.”

Defendants also contend the “as is” language and the contract’s integration clause absolve them of any alleged wrongdoing. The court finds this position to be contrary to Virginia law. Defendants cannot use the contract language as a shield from liability.

The court rejects defendants’ additional arguments: that the complaint’s allegations refer to statements of opinion or to future events, and that plaintiff’s remedies are limited to contract remedies due to the economic loss rule. Under Virginia law, performance of an executory contract may be fraudulently induced. Here, plaintiff has not alleged breach of contract but has alleged defendants fraudulently induced plaintiff to perform the real estate purchase agreement by false representations regarding the nature and amount of real estate taxes and special assessments.

Thomlyn LLC v. Holladay Property Services Midwest Inc. (Harris) No. CL 15000067-00, May 22, 2015; Hanover County Cir.Ct.; Steven S. Biss for plaintiff; R. Webb Moore for defendants. VLW 015-8-055, 4 pp.