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reversing the district court's grant of summary judgment finding a reasonable juror could conclude that the defendant's representations regarding the sale of property were false when made
Summary of this case from Estate of Butler v. Maharishi Univ. of ManagmentOpinion
No. 5-653 / 04-0670
Filed October 26, 2005
Appeal from the Iowa District Court for Polk County, Douglas F. Staskal, Judge.
Xay Fong appeals from adverse rulings of the district court. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
Ta-Yu Yang, Des Moines, for appellant.
Michael D. Ensley of Hanson, Bjork Russell, L.L.P., Des Moines, for appellees.
Heard by Hecht, P.J., and Vaitheswaran, J., and Nelson, S.J.
Senior Judge assigned by order pursuant to Iowa Code section 602.9206 (2005).
Xay Fong appeals from adverse rulings of the district court. We affirm in part, reverse in part, and remand for further proceedings.
I. Background Facts and Proceedings.
In June of 1999, Dennis Blume obtained a tax certificate for real estate located at 1800 7th Street in Des Moines (property). In March of 2002, the property was inspected by the City of Des Moines pursuant to a citizen complaint. The housing inspector found a residence in dilapidated condition, and the City subsequently issued a notice declaring the property a public nuisance and requiring its current owner to (1) remedy within thirty days the forty-seven individual Class I violations itemized on a list attached to the public nuisance notice, (2) vacate the property immediately, and (3) placard the dwelling as "unfit for human habitation." The public nuisance notice declared that "[f]ailure to correct these violations will result in legal action."
The record is silent as to whether any written notice indicating the property was a public nuisance was attached to the dwelling at the time Fong made his cursory inspection of the property.
The property was subsequently conveyed to Blume by tax deed in August of 2002. Blume thereafter quitclaimed all interest in the property to All Lots, L.L.C. (All Lots), a limited liability company formed by John Davis and Christine Frank. All Lots placed on the property a sign requesting inquiries from prospective purchasers.
Xay Fong, a thirty-six year old Laotian immigrant, noticed the sign in front of the property and telephoned All Lots. Fong's inquiry was forwarded to Davis, and the two met briefly in November of 2002 in order to discuss the property. During the initial meeting, Davis informed Fong that he could inspect the property, but Davis declined when requested to accompany Fong during his walk-through. Fong entered the boarded property, which was in a deplorable state of disrepair, but he did not engage the services of a qualified inspector. Instead, believing he could perform the necessary renovations, Fong returned to All Lots to negotiate a purchase price. Fong, who possesses limited command of the English language, brought his pastor along to serve as an interpreter during this second meeting with Davis.
Davis agreed to a sale price of $10,000. When Fong disclosed he could pay only $6,000 by cashier's check, Davis agreed that All Lots would lend Fong the balance of $4,000 at an interest rate of 14.373%. Fong left to obtain the cashier's check while Davis prepared the necessary documents, including a mortgage on the property to secure the $4,000 financing. Upon his return, Davis told Fong "there was no problem with the agreement." Fong signed the documents but did not read the documents or have his pastor read them for him.
The documents signed by Fong included various disclosures. Paragraph 6(b) of the sale agreement stated "[b]uyers acknowledge that they have made a satisfactory inspection of the property and are purchasing the property in its existing condition." Paragraph 18 of the sale agreement stated "PROPERTY IS SOLD `AS IS AS SHOWN,' BUYERS UNDERSTAND BUILDING IS A PUBLIC NUISANCE AND THEY MUST COMPLY WITH CITY REQUIREMENTS BEFORE THIS BUILDING CAN BE OCCUPIED." All Lots also inserted the following disclaimer near the end of the agreement: "THIS IS A LEGALLY BINDING CONTRACT. IF NOT UNDERSTOOD SEEK COMPETENT LEGAL ADVICE."
All Lots also provided Fong with a Disclosure Statement. The statement included twenty questions requesting information from All Lots pertaining to both known problems with the dwelling's structure and system components and any known repairs to the areas specified. Each of All Lots's answers to these questions was listed as "unknown." All Lots justified its answers in the document by noting that the "[o]wner has never lived in house and has no knowledge of repairs and/or replacements done in house, garage, and/or land." All Lots concluded the Disclosure Statement with the cautionary note that "[o]wner warrants NOTHING, house is sold `as is as shown,' house is public nuisance." The notice of public nuisance and the itemized list of code violations were conspicuously omitted from the packet of documents provided by All Lots to Fong.
The record on appeal suggests that prior to the completion of the transaction, Fong was never orally informed by Davis that these written disclosures had been inserted into the sale documents, nor made aware of the legal significance of any of these disclosures, including the fact the property had been considered a public nuisance by Des Moines for over seven months prior to the sale. Fong's deposition testimony suggests he did not understand the phrases "public nuisance," "as is," or "quitclaim" at the time he signed the sales documents. Fong thereafter took some affirmative steps to improve the condition of the property, and in February of 2003, Fong attempted to obtain financing from a local lender to make additional repairs. The lender informed Fong, through an interpreter, that it would not extend credit secured by a mortgage against property designated as a public nuisance. Fong halted his renovation efforts and subsequently stopped making payments on the mortgage. In March of 2003, Fong attempted to serve by certified mail a notice of rescission of the sales agreement, but All Lots refused to accept delivery.
On April 30, 2003, Des Moines filed a petition against Fong for abatement of the public nuisance. Fong answered the petition and filed a cross-claim against All Lots, Davis, and Blume alleging (1) fraudulent misrepresentation in knowingly failing to disclose the fact the property was a public nuisance with numerous Class I housing code violations and doing so with the intent to induce Fong to purchase the property, and (2) violating Iowa Code chapter 558A (2003)'s good faith disclosure requirement by denying knowledge of substantial defects in the property. The cross-claim also sought rescission of the sales contract and mortgage, alleging the failure to disclose the code violations constituted a material breach of the contract.
When timely responses to his interrogatories and requests for production were not forthcoming, Fong filed a motion to compel in December of 2003. The district court sustained Fong's motion and ordered All Lots and Davis to provide discovery as to any legal actions taken against either Davis or All Lots involving real estate transactions occurring within the last five years. On February 10, 2004, All Lots and Davis, provided the following interrogatory answer:
As it pertains to John Davis, he has been sued several times in the last five (5) years, and he does not keep a record of the lawsuits. He cannot recall the specifics of the lawsuits [and] the [attached list] does not necessarily pertain to John Davis in this lawsuit.
The document attached to the discovery response consisted of a list of all lawsuits against "John Davis" and "All Lots" within the last five years without making any representations as to which lawsuit(s) in fact included a party to the present cross-claim. The inability of All-Lots and Davis to provide a more complete response was claimed despite the fact that (1) Davis's attorney had represented Davis in several of the previous real estate actions, and (2) Davis had settled a cross-claim in a separate city abatement action several weeks prior to serving the subject discovery response. On February 13, 2004, Fong filed a motion for imposition of sanctions, alleging the incomplete discovery response by All Lots and Davis violated the district court's discovery ruling.
Meanwhile, on February 3, 2003, Blume filed a motion for summary judgment on all counts alleged in Fong's cross-petition, contending Blume was in no way liable in failing to disclose any relevant information because he had quitclaimed his interest before Fong bought the property. On February 24, 2004, Fong filed a motion for leave to amend his cross-petition to allege a separate breach of contract claim against All Lots and Davis. This proposed amendment alleged All Lots breached the sales contract when Davis misrepresented his knowledge of the defects in the property's electrical, mechanical, and plumbing systems and the dwelling's lack of structural integrity by representing in the disclosure statement that these matters were "unknown." On February 27, 2004, All Lots and Davis filed their combined motion for summary judgment. They asserted they were excused from any duty of disclosure under chapter 558A because they quitclaimed their interest to Fong. See Iowa Code § 558A.1(4)(h). The motion filed by All Lots and Davis also claimed entitlement to judgment as a matter of law because the sales agreement clearly contemplated an "as is" sale and clearly disclosed the public nuisance designation of the subject real estate. Davis and All Lots also filed a counterclaim against Fong seeking judgment for the unpaid balance owed by Fong to All Lots on the promissory note.
Fong did not resist Blume's motion for summary judgment and does not appeal the ruling in Blume's favor on that motion.
All Lots subsequently dismissed without prejudice its counterclaim against Fong.
Fong's resistance to the summary judgment motion noted Davis had been previously involved with sixteen public nuisance properties and therefore had not only superior knowledge of the property's condition, but also a clearly superior command of the legal implications of a public nuisance designation by virtue of his receipt of the notice of public nuisance. Fong's resistance included a request for a continuance of the hearing on the ground that Davis had been unavailable for deposition.
Davis was apparently out of the country from February to April of 2004 and was therefore unavailable for deposition for several weeks prior to the hearing.
In a combined ruling, the district court granted both motions for summary judgment and denied Fong's motions to amend, for sanctions, and for continuance. In granting Davis's and All Lots' motion, the district court ruled as a matter of law that the disclosure in the sales agreement "that the property is a public nuisance [was] a disclosure that it violate[d] city code and of the possibility of an abatement action." The court concluded that the written disclosure, coupled with Fong's observation of the dilapidated condition of the property before signing the documents, settled all issues of fact against Fong in his fraudulent misrepresentation claim. The district court also dismissed Fong's claim based upon the seller's failure to make disclosures of the property's defects under chapter 558A, noting All Lots was exempt from the disclosure requirements because it quitclaimed its interest to Fong. For all these reasons, the district court concluded no legitimate purpose would be served by either (1) continuing the proceedings to allow Fong the opportunity to depose Davis, or (2) permitting Fong to amend his claim to allege an alternative breach of contract claim. In denying Fong's motion for sanctions, the district court merely referred to "reasons stated on the record at the time of the ruling."
It appears no transcript was made of the hearing on the several pending motions.
Fong now appeals, alleging genuine issues of material fact exist on both the fraudulent misrepresentation claim and the claim under chapter 558A. Fong further alleges the district court abused its discretion in refusing to (1) continue the summary judgment proceedings to allow Fong to depose Davis, (2) grant Fong's request for leave to amend the cross-petition to assert a breach of contract claim against All Lots and Davis, and (3) impose sanctions against All Lots and Davis for inadequate responses to Fong's discovery requests.
II. Scope and Standards of Review.
We review the district court's grant of summary judgment for correction of errors at law. Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d 637, 641 (Iowa 2001). "Summary judgment is appropriate only when the moving party shows there are no genuine issues of material fact, and in deciding that issue, we review the record in the light most favorable to the party opposing the motion." Campbell v. Delbridge, 670 N.W.2d 108, 109 (Iowa 2003).
We review the district court's ruling on the motion to amend, the motion for continuance, and on the request for sanctions for abuse of discretion. See Kellar v. Peoples Natural Gas Co., 352 N.W.2d 688, 692 (Iowa Ct. App. 1984); see also State v. Artzer, 609 N.W.2d 526, 529 (Iowa 2000); Sullivan v. Chicago and Northwestern Transp. Co., 326 N.W.2d 320, 325 (Iowa 1982). "An abuse of discretion occurs when the court's decision is based on a ground or reason that is clearly untenable or when the court's discretion is exercised to a clearly unreasonable degree." Pexa v. Auto Owners Ins. Co., 686 N.W.2d 150, 160 (Iowa 2004).
III. Discussion.
A. Summary Judgment: Fraudulent Misrepresentation
The elements that Fong must show to prove a claim for fraudulent misrepresentation are: (1) representation, (2) falsity, (3) scienter, (4) intent to deceive, (5) materiality, and (6) justifiable reliance resulting in injury. Smidt v. Porter, 695 N.W.2d 9, 22 (Iowa 2005). However, in order to survive the motion for summary judgment, Fong need only establish a genuine issue of material fact exists with regard to every element of the claim. Campbell, 670 N.W.2d at 109.
The district court found, as a matter of law, that "a disclosure that the property [was] a public nuisance [was] a disclosure that it violates the city code and of the possibility of an abatement action." According to the district court, All Lots's disclosure in the sales documents that the property was a public nuisance requiring repairs prior to occupancy satisfied as a matter of law any duty of disclosure the law or equity would impose. We disagree. The city's notice to All Lots of the existence of the public nuisance listed each code violation and the grace period within which it must be abated to avoid legal action by the city. A reasonable fact-finder viewing the evidence in the light most favorable to Fong could find that All Lots's concealment of the specific contents of the notice deprived Fong of essential information, namely that the time allowed by the city for abatement of the nuisance had long since passed and the risk of the owner's exposure to both legal action and the cost of demolition was great and steadily increasing with each passing day. We therefore reject the district court's conclusion that All Lots's written disclosures preclude a finding that All Lots made a false representation in this case.
Viewed in the light most favorable to Fong, the list of more than forty class one violations includes electrical and plumbing problems that might not have been readily discernible upon lay inspection. Property owners with class one violations of the city of Des Moines housing code are allowed thirty days in which to remedy the violation or risk abatement by the city. See DES MOINES, IA., CODE § 26-78 (2000).
Fong relies not on an affirmative "representation" from Davis, but rather on the concealment of facts bearing directly on the condition of the property and the imminence of an enforcement action by the city. The district court correctly observed that where the false representation upon which the claim rests is the concealment of a material fact, "[t]o be actionable, the concealment must be by a party under a duty to communicate the concealed fact." Cornell v. Wunschel, 408 N.W.2d 369, 374 (Iowa 1987).
A reasonable fact-finder could find from the summary judgment record that Davis was involved with at least sixteen public nuisance properties prior to the transaction that is the subject of this case, and that Fong had no prior experience in such matters. Such evidence could support a finding of a great disparity between the parties with respect to experience and expertise in such matters. See id. at 376 (noting that where one party possesses clearly superior knowledge in a transaction, "we have required the party to make a full and truthful disclosure of all material facts within that party's knowledge"); see also Kunkle Water Elec., Inc., v. City of Prescott, 347 N.W.2d 648, 653-54 (Iowa 1984) (noting misrepresentation may occur when one with superior knowledge, dealing with inexperienced persons who rely on him, purposefully suppresses the truth respecting a material fact in the transaction). In particular, a reasonable fact-finder could find from the summary judgment record that Davis was in a far better position than Fong to know when the City of Des Moines would commence litigation to force repair or demolition of the property. Given the evidence of Davis's superior knowledge of the specific housing code violations and, when viewed in the light most favorable to Fong, the imminent threat of legal proceedings by the city against the owner, we conclude a genuine issue of material fact exists on the issues of representation and falsity. Cornell, 408 N.W.2d at 376.
A reasonable fact-finder could also find from this record when viewed in the light most favorable to Fong, that the failure of All Lots and Davis to disclose this information was motivated by an intent to induce Fong to not merely acquire a "handyman's special," but also to assume the costs of the impending lawsuit and the potential forced demolition of the property. We conclude a genuine issue of material fact is engendered in the record on the elements of scienter and intent to deceive. See Cornell, 408 N.W.2d at 376 (stating that the failure to disclose material facts in light of party's superior knowledge is evidence of scienter).
We now address the question of whether a genuine issue of fact exists on the element of justifiable reliance. Fong's visit to the premises clearly made him aware of the property's general state of disrepair. However, a reasonable fact finder viewing the evidence in the light most favorable to Fong could infer that Fong reasonably believed he could make the property habitable over time; and that All Lots's concealment of the imminence of the City's enforcement action deprived Fong of knowledge that he would not be allowed adequate time to do so. We conclude a genuine issue of material fact has been generated on the question of whether Fong, in signing the documents, justifiably relied on the incomplete disclosure of material facts within Davis's and All Lots's knowledge.
Finally, we address the question of whether Fong generated a fact question on the element of damage. A reasonable fact-finder could find All Lots's and Davis's concealment of material facts (1) induced Fong to purchase a property which he is unable to use as collateral for credit to make essential repairs, and (2) allowed the sellers to shift to Fong the cost of the impending enforcement litigation and potential demolition of the property. We conclude these facts amply engender a fact question on the element of Fong's damage. Because the record on summary judgment engenders a genuine issue of material fact with regard to each element of Fong's claim for fraudulent misrepresentation, we conclude the district court erred in granting summary judgment.
B. Summary Judgment: Chapter 558A
In dismissing Fong's claim under chapter 558A, the district court correctly noted transfers by quitclaim deed are not covered by the disclosure requirements of chapter 558A. Iowa Code § 558A (4)(h). On appeal Fong claims that despite this clear statutory exemption, Davis nonetheless ostensibly undertook to make disclosures under the chapter and therefore should be held to the statute's requirements. The disclosure document tendered by All Lots to Fong represented that the condition of the property and any repairs performed thereon were unknown to the seller. While Davis and All Lots contend on appeal that they had no knowledge of such matters, a reasonable fact-finder could disagree. Their prior receipt of the notice of public nuisance identifying and classifying specific defects could clearly support a finding that the seller was aware of the property's condition and made material misrepresentations in the written disclosure form provided to Fong at the time of sale.
We believe Fong has engendered a fact question on the question of whether Davis and All Lots had a common law duty to provide an honest disclosure once disclosure was voluntarily undertaken. See, e.g. First Bank of Whiting v. Schuyler, 692 N.E.2d 1370, 1373 (Ind.Ct.App. 1998) (stating that a seller is not permitted to "partially disclose the facts as he knows them to be, so as to deliberately create a false impression in the mind of the buyer"); Ralston Purina Co. v. McKendrick, 850 S.W.2d 629, 636 (Tex.Ct.App. 1993) (noting that when one makes a partial disclosure and conveys a false impression, he has a duty to speak); State Nat'l Bank v. Farah Mfg. Co., 678 S.W.2d 661, 681 (Tex.Ct.App. 1984) (noting that when one voluntarily discloses information, he has a duty to disclose the truth). However, any liability for the seller's misrepresentations in the disclosure cannot be based on a violation of a statutory duty created by chapter 558A. The plain and unambiguous language of this statute clearly indicates that transfers by quitclaim deed are not covered. Iowa Code section 558A.1(4)(h). Because we must read the statute as it is written, Gannon v. Bd. of Regents, 692 N.W.2d 31, 43 (Iowa 2005), we conclude the legislature did not intend to mandate disclosure when conveyance is accomplished by quitclaim deed. S ee Iowa R.App. P. 6.14(6)( m) (noting that courts discover legislative intent in what the legislature said, rather than what it should or might have said). We therefore affirm the district court's grant of summary judgment on Fong's statutory claim. B. Discretionary Rulings.
We of course do not condone misrepresentation in disclosures voluntarily undertaken but not statutorily required. As noted above, we conclude the liability of All Lots and Davis for any misrepresentations made in the voluntary disclosure derives from the common law and not directly from chapter 558A. Any breach of that common law duty should therefore be considered by the district court in connection with its analysis of Fong's fraudulent misrepresentation claim.
Fong has also alleged the district court abused its discretion in ruling against his motion to amend, his motion to continue the summary judgment hearing, and his motion for sanctions. The district court enjoys considerable discretion in determining whether to allow amendment of pleadings, and we will interfere with that decision only upon a clear showing that the court abused its discretion. Moser v. Brown, 249 N.W.2d 612, 615 (Iowa 1977). Leave to amend shall be freely given when justice so requires. Iowa R. Civ. P. 1.402(4). The proposed amendment to the cross-petition sought to allege a breach of contract theory based on Davis's fraudulent concealment of the condition of the property's plumbing and electrical systems. As we have rejected the district court's conclusion that Fong's misrepresentation claim must fail as a matter of law, we also reject the district court's related conclusion that any contract claim must fail for the same reasons. We therefore direct the district court on remand to grant Fong's motion for leave to amend the cross-petition.
We next address Fong's contention that the district court erred in failing to impose sanctions against All Lots and Davis for their failure to provide a timely and complete answer to a discovery request. Fong concedes, however, that no record of the district court's exercise of discretion in ruling on the motion for sanctions has been provided for our review. It is the burden of the appellant to make a record of all errors claimed on appeal. State v. Ruiz, 496 N.W.2d 789, 791 (Iowa Ct.App. 1992). Fong failed to preserve error on this issue. State v. Christianson, 337 N.W.2d 502, 504 (Iowa 1983).
IV. Conclusion.
Finding genuine issues of material fact with respect to Fong's claim for fraudulent misrepresentation, we reverse the district court's summary judgment ruling. We also reverse the district court's ruling denying Fong leave to amend his cross-petition. We affirm the district court's ruling on Fong's motion requesting discovery sanctions against All Lots and Davis. Because a trial on the merits will be required on remand, we need not address the denial of Fong's motion for continuance of the hearing on the motion for summary judgment as he shall be allowed a reasonable opportunity to depose Davis in advance of trial.