Lerner v. DMB Realty (CA1 11/27/12)

                                             THIS OPINION HAS BEEN MODIFIED

This at first seems to be an anti-abrogation case but the principal analysis is of negligent misrepresentation (and is arguably dicta).

“After [Plaintiffs] unwittingly bought a home next door to a registered sex offender, they sued the couple who sold them the home and the real estate broker that represented both couples in the transaction. The defendants moved to dismiss, arguing the . . .  claims of fraud, misrepresentation and breach of fiduciary duty were barred by the sales documents and by . . . A.R.S. §32-2156(A)(3) . . . which prohibits a civil action against a seller or real estate broker for failing to disclose that a home is located ‘in the vicinity of a sex offender.’”

That’s how the court begins – pleasantly concise. Unfortunately, it turns out that that’s just an introduction; the opinion soon reverts to standard Division One style.

The fraud claim was that defendants were moving because of the sex offender but told plaintiffs that they wanted to be nearer their family. On appeal the defendants apparently agreed that the statute wouldn’t cover fraud. They argued instead that what they said couldn’t be material or relied on because the documents specifically said that the sellers weren’t required to disclose sex offenders and that the buyers had to investigate that for themselves. The court says that contract language can’t excuse fraud and that materiality, etc., was for the jury; it reverses the trial court’s dismissal on fraud. The dissent (which agrees with the majority except for this issue) argues that a party’s reason for entering into a contract is generally not material. The opinion adds a footnote to counter this, suggesting that it isn’t always true as a matter of law. But the dissent points out that motivation’s only alleged relevance here is that it omitted something that needn’t be disclosed anyway.

The court next rules that the allegation of negligent misrepresentation stated a claim – subject to being barred by the statute – because “we draw from the Restatement [§551] . . . the principle that a seller may be required to disclose information when the buyer reasonably cannot discover the information for himself.” This lesson is drawn from a Restatement comment discussing the “continuing development of modern business ethics,” which the ALI professors are all too happy to conflate with law. The facts indicated that the location of a level one sex offender is not public record.

As for A.R.S. §32-2156(A)(3), plaintiffs argued that it was unconstitutional as an abrogation of common-law rights. The court holds it valid. A right to sue because of an undisclosed sex offender did not “evolve out of common-law antecedents” since at common law the seller had no duty to disclose “latent defects” absent a special relationship. Since the court’s negligent-misrepresentation conclusion is based on “modern business ethics” its not based on common law. So dismissal of the claims other than fraud – including the misrepresentation claim that the court had just spent several pages upholding – was okay after all.

(link to opinion)