Dec. 28, 2015 – A bank is liable for a misrepresentation that induced a homebuyer to buy a foreclosure home with undisclosed water and mold damage, even though the sale contract said the buyer was purchasing the home “as is,” a state appeals court has ruled.

In 2012, Bank of America foreclosed on a home in Menomonee Falls and hired a real estate agent to resell it. The real estate agent learned that the property had severe water damage. The agent recommended the bank remediate to prevent mold.

The bank agreed and the agent solicited bids. However, the clean-up was not immediately completed, and mold remediation became necessary.

In May 2012, the agent told the bank that the mold remediation appeared complete. However, he subsequently told the bank that mold could still be seen in various rooms.

The bank then approved repair work for new drywall, new flooring and carpeting, and new painting. Upon completion, the agent told the bank the job was unsatisfactory.

But the bank did not take further action. It listed the house for sale at $144,900, and it generated immediate interest from potential buyers.

Catherine Fricano and her fiancé were among a dozen people who attended a house showing. Their real estate agent identified some discoloration in the basement that appeared to be mold, but did not see other signs of mold in other parts of the house.

The fiancée’s brother, who had experience buying and renovating foreclosed homes, came with the couple for a second look. He said he would offer to buy it if they didn’t.

The next day, Fricano offered to purchase the home for about $171,000. She increased the offer to 175,000 through a counteroffer. The bank accepted her offer. Fricano could back out if a home inspection revealed conditions that she deemed unacceptable.

The bank then asked her to sign a purchase addendum. It said that Fricano agreed to purchase the property in “as is” condition, which could include any “hidden defects or environmental conditions affecting the property, whether known or unknown, whether such defects or conditions were discoverable through inspection or not.”

The agreement also allowed the bank to negate and disclaim any representations, warranties, covenants, or guarantees with respect to water damage and mold and specifically said the bank did not guarantee the home was free of mold.

However, the addendum also said the bank had “little or no direct knowledge about the condition of the property.” Fricano’s agent said this language was common with foreclosures. Fricano signed the agreement and then had the home inspected.

The home inspector noted evidence of prior water leakage and substantial mold growth, including mold that was not removed in the basement. She pursued his recommendation to consult with an environmental professional, who surveyed the house and prepared a proposal for proper mold mitigation.

However, Fricano did not pursue the service. She closed on the property believing the mold growth was limited to the basement and not the livable areas of the home. Shortly after closing, Fricano learned that mold was “saturated” throughout the house.

As a result, the whole house was stripped to its studs and reconstructed after proper mold and water damage remediation. Fricano then filed a lawsuit against the bank under Wis. Stat. section 100.18(1), which covers fraudulent representations.

She pointed to the bank’s statement, in the addendum, that it had “little or no direct knowledge regarding the condition of the property.” The bank, she said, had lots of information that the whole house had been flooded and incurred significant damage.

At trial, the trial judge informed the jury that an “as is” clause does not relieve a seller from disclosing material adverse facts about a property, though it was Fricano’s burden to prove the bank had knowledge of the property’s condition and did not disclose it.

The jury awarded Fricano $50,000 in compensatory damages, ruling that the bank violated section 100.18(1). The court denied the bank’s motion for judgment notwithstanding the verdict and entered judgment for Fricano. The bank appealed.

The bank noted the “as is” clause and said a violation of section 100.18(1) requires a misrepresentation to a member of “the public,” but Fricano’s negotiating position with the bank, through offers and counteroffers, created a “particular relationship.”

But in Fricano v. Bank of America, 2015AP20 (Dec. 23, 2015), a three-judge panel for the District II Court of Appeals affirmed, upholding the jury verdict for Fricano.

Jury Verdict Affirmed

The panel noted that motions to change a jury’s verdict must be denied unless there is “no credible evidence to sustain a finding in favor of such party.” And trial courts that preside over trials are given substantial deference to make credibility determinations.

The panel concluded that an “as is” provision in a sales contract between buyer and seller does not relieve the seller from liability for material misrepresentations.

“We see no support for the Bank’s argument that the ‘as is’ provision, disclaimers, and waivers in the parties’ contract relieve it from Wis. Stat. § 100.18(1) liability for its deceptive statement in the contract that it had little to no knowledge of the condition of the property,” wrote Chief Appeals Court Judge Lisa Neubauer.

The panel also ruled that Fricano was a member of the “public” when the bank made its misrepresentation, because the sides had not yet reached a contractual agreement.

“There was no contract between the parties when the Bank misrepresented its knowledge of the condition of the property,” Chief Judge Neubauer wrote.

“[W]e fail to understand how the fact that parties are in negotiations over terms takes the potential purchaser out of the realm of ‘the public.’”

The panel rejected the bank’s claim that Fricano lacked evidence to prove she was induced to purchase the home as a result of any misrepresentation by the bank.

Fricano had testified that she believed the bank could not tell her anything about the property because it was a foreclosure and the bank had not been living there.

“[T]here is more than sufficient credible evidence to believe that had the Bank not misrepresented its knowledge of the condition of the property, Fricano would not have gone forward,” wrote Neubauer, also rejecting the bank’s claim that Fricano had notice of possible defects through a home inspector and should have inquired further.

“The reasonableness of a person’s reliance on a misrepresentation is not a separate element of a Wis. Stat. § 100.18(1) claim, but relevant only to the consideration of the third element: whether the representation materially induced the plaintiff’s loss.”

The panel also noted evidence of what the bank knew and how it acted: it knew there was severe water and mold damage and failed to properly remediate the problem.

“[T]he jury could have concluded that all of these actions were designed to make the property marketable for sale and are evidence that the Bank’s misrepresentation was intended to induce Fricano to purchase the property,” Judge Neubauer wrote.