Fraudulent property disclosure case survives

Homeowners who claimed materially false disclosures induced them to purchase a home riddled with structural, water and termite damage have survived demurrers filed by the sellers, realtor and inspector in the Richmond Circuit Court.

The defendants argued that caveat emptor and the source of duty rule barred the plaintiffs’ fraud claims. They also challenged the underlying basis for claims of negligence per se, and contended that the allegations were insufficient for any of the claims.

Judge Jacqueline S. McClenney disagreed, finding the plaintiffs’ allegations of fraudulent concealment trumped the defendants’ demurrer arguments.

“[C]ourts have found the diversion exception to the doctrine of caveat emptor ‘where sellers engaged in affirmative concealment by lying in responses to direct questions or by direct acts to conceal the appearance, condition or even smell which would have alerted the buyer to the problem,’” she said.

McClenney also found the plaintiffs adequately pled negligence and consumer protection claims in O’Neill v. Parker (VLW 024-8-035).

Troubled property

Christopher and Wendy McCaig bought foreclosed property in Richmond but found the home was in considerable disrepair. They made no effort to repair the property when they tried to resell; prospective buyers were concerned about termites, water intrusion and structural damage.

The McCaigs relisted the property with Shannon Parker as realtor — her husband, Clifton Parker, performed an inspection. He reported no structural failures and implied there was no active termite infestation.

The McCaigs provided that report to prospective buyers, Colin and Christina O’Neill. After purchasing the property, the O’Neills discovered structural problems, as well as water and termite damage.

In a multicount suit against the McCaigs, the Parkers and Virginia Engineering Services, or VES, the O’Neills said they wouldn’t have purchased the property with knowledge of its defects that will require extensive repairs.

The defendants demurred on several grounds.

VRDPA

Citing § 55.1-712 of the Virginia Residential Property Disclosure Act, or VRDPA, Shannon Parker argued that she couldn’t be held liable for failure to disclose and had no further duty to the O’Neills because they received a disclosure statement.

The O’Neills, however, responded that Parker knew the disclosure was false; § 55.1-712 couldn’t shield her from liability.

McClenney pointed out that other Virginia circuit courts have suggested that § 55.1-712 may provide a cause of action against realtors.

“In Nathan v. Long & Foster Real Estate, Inc., the Circuit Court of the City of Roanoke held that a realtor’s failure to accurately inform purchasers regarding the presence of radon prevented the realtor from obtaining the protection of Virginia Code § 55.1-712,” she said.

Also, not only did the O’Neills allege the disclosure falsely stated that old termite activity had been repaired, they pointed to other instances of fraudulent concealment by the defendants.

Based on those allegations, McClenney said Parker couldn’t avail herself of § 55.1-712’s protection.

Diversion exception

According to the Parkers and VES, the O’Neills’ fraud claims were barred by the doctrine of caveat emptor and Virginia’s source of duty rule.

The O’Neills responded that caveat emptor bowed to the diversion exception described by the Supreme Court of Virginia in Armentrout v. French. As for the source of duty rule, the O’Neills noted their claims weren’t governed by a contract.

While the purchaser of real property bears the burden to discover defects, the Armentrout court found “a very 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.’”

The high court later held in Van Deusen v. Snead that concealment of a material fact may constitute misrepresentation sufficient to apply the diversion exception.

“[A]n allegation of concealment by conduct is equivalent to an allegation of verbal misrepresentation of a material fact, made intentionally to mislead prospective purchasers and to divert them from “making the inquiries and examination which a prudent man ought to make,’” the Van Deusen court said.

But the purchaser’s reliance on the misrepresentation must be reasonable, McClenney noted by citing Sweely Holdings LLC v. SunTrust Bank.

Here, the allegations describing “misrepresentations and concealment, conceivably amounting to diversion by all of the named defendants,” were sufficient to survive demurrer of the fraud claim.

McClenney said Virginia “courts have found the diversion exception to the doctrine of caveat emptor ‘where sellers engaged in affirmative concealment by lying in responses to direct questions or by direct acts to conceal the appearance, condition or even smell which would have alerted the buyer to the problem.’”

She added that the source-of-duty didn’t apply to claims for fraud in the inducement to contract, looking to Abi-Najm v. Concord Condo. LLC.

“As the Supreme Court of Virginia explained, where the alleged fraud was perpetrated before a contract between the parties came into existence, it cannot logically follow that the duty allegedly breached was one that finds its source in the contract,” McClenney wrote.

Further, the judge rejected the McCaigs’ assertion that the fraudulent inducement allegations lacked sufficient details of active concealment.

Negligence per se

The Parkers contended that the real estate statutes cited in the complaint weren’t adopted for public safety. Clifton Parker further asserted that the O’Neills weren’t within the class of people protected by the statutes and no brokerage relationship existed between them.

McClenney was persuaded by cases cited by the O’Neills.

“Virginia circuit courts have recognized a cause of action for breach of the statutory duty to disclose material adverse facts pursuant to Virginia Code § 54.1-2131,” she wrote. “The purpose of subsection (B), in particular, is to ensure that real estate licensees exercise certain duties with respect to the sellers they represent and ‘treat all ‘prospective buyers honestly’ and with full disclosure.’” (Emphasis added)

Citing Walton v. Aguilar, McClenney said § 54.l-2131(B) “was enacted to protect the public from fraud by licensees; as such, it is a remedial statute and should be liberally construed to prohibit harms that, while not specifically addressed, are within the spirit and purpose of the legislation.”

As prospective buyers, the O’Neill’s were protected by § 54.1-2131, but they failed to sufficiently allege their brokerage relationship with Clifton Parker. Thus, the court sustained his demurrer to negligence per se.

The case is scheduled for a three-day trial jury beginning May 27, 2025.