Appeal by plaintiffs from judgment entered 11 March 2002 and
an order entered 14 November 2002 by Judges Robert P. Johnston and
J. Gentry Caudill, respectively, in Mecklenburg County Superior
Court. Heard in the Court of Appeals 13 October 2003.
Andresen & Associates, by Christopher M. Vann and John W.
Gresham, for plaintiff-appellants.
Helms Mulliss & Wicker, P.L.L.C., by Robert A. Muckenfuss,
Thomas D. Myrick, and Jill C. Griset, for defendant-appellee.
HUNTER, Judge.
Mary Ellison Little (“Little”) and Robert J. Ellison
(“Ellison”) (collectively “plaintiffs”) appeal from a Directed
Verdict and Judgment entered against them filed 11 March 2002 and
an order denying plaintiffs' motion for relief from judgment filed
14 November 2002. Plaintiffs also petition this Court for
certiorari to review a consent judgment dated 11 June 2002 and an
order awarding bond and denying plaintiffs' motion to restore the
injunction filed 6 August 2002. We grant plaintiffs' petition for
certiorari in order to fully review this appeal. Because the trial
court erred in granting a directed verdict against plaintiffs on
their fraud claim and in dismissing plaintiffs' breach of implied
warranty claim, we reverse in part and vacate the award of costs to
defendant. We also vacate the order lifting the preliminary
injunction and awarding the injunction bond to defendant. However,
we affirm the trial court's dismissal of plaintiffs' claim under
the Residential Property Disclosure Act and the exclusion of
evidence on the valuation of the property at the time of trial.
The evidence presented at trial tends to show Jack Douglas
Stogner (“defendant”) sold two lots located on Lake Wylie in
Mecklenburg County, North Carolina, to plaintiffs. Defendant on
various occasions represented to plaintiffs and others that he had
soil tests performed on the property and those tests revealed that
the soil “perked,” meaning the soil was suitable to support a
septic tank system because it could filtrate water at an acceptable
rate. In early May 1998, after Little had initially shown interest
in buying the property from defendant, defendant called Little andmade an appointment for her to view the lots. Defendant walked the
property showing Little where the boundaries of the lots
corresponded to copies of recorded plats. He informed Little that
a lot of soil work had been performed on the property and that the
property would “perk.” Defendant also told Little that there were
two septic tanks and that Mecklenburg County had “grandfathered”
both of the tanks. Defendant also represented that Little could
connect houses she planned to build to the septic tanks without the
expense of any additional septic system. Defendant reminded Little
that her property next to the lots perked, that the next door
neighbor's property perked, and that another property down the road
also perked, and that his land was the same, he had all the soil
work done and there would be no problem with the property. There
was also evidence that defendant made similar representations to
other potential buyers.
Little and defendant initially entered into a standard form
offer to purchase and contract for the property on 1 June 1998. In
that standard form contract, however, provisions related to
property disclosure and inspections were crossed out. Further, the
contract stated Little waived her right to receive a Residential
Property Disclosure Statement and that the property was being sold
“as is.” Little was told by defendant and Malickson, the attorney
advising defendant and who performed the closing, that the
Residential Property Disclosure Statement only applied to a cabin
located on the property, which was going to be removed, and dealt
only with termites, chimney inspections, electrical wiring, and
lead paint disclosures. Following the signing of the offer to purchase and contract,
Ellison, Little's brother, decided he would join Little in
purchasing the lots, and plaintiffs and defendant once again viewed
the property. Defendant again pointed out the location of the
septic tanks, and reassured plaintiffs that he had performed soil
work and the land would perk. Defendant further asserted that he
and his wife had once planned to construct a three bedroom house on
one of the lots and offered to show plaintiffs the plans assuring
them they would have no problem constructing such a house.
At closing, plaintiffs received a general warranty deed for
the property and signed a deed of trust to defendant for a portion
of the sales price. Subsequently, plaintiffs, while in the process
of trying to obtain building permits, were made aware of records in
the Mecklenburg County Department of Health that showed soil
testing of the property had been performed at the request of
defendant and his wife and revealed that the property was not
suitable to support septic tank systems and further that the septic
tanks in place on the property had not been “grandfathered” in by
Mecklenburg County. These records showed that in 1982, prior to
defendant acquiring the lot, a site investigation report revealed
the soil on one of the lots was unsuitable to support a septic tank
system. A letter to defendant's wife dated 12 February 1993 stated
a soil investigation had been conducted at her request on the other
lot and showed the property was unsuitable for use with “any
conventional, modified or alternative system of which [the
investigator] was aware.” The records also contained two
applications filed by defendant on behalf of his wife dated 23February 1993, requesting water and wastewater services for the
property in order to build a three bedroom home. A subsequent
“Soil And Site Report For A Ground Absorption Wastewater System”
dated 23 March 1993 listed defendant and his wife as
“Owner/Applicant” and stated that defendant was present at the
evaluation. This report concluded that the property was unsuitable
for a conventional ground absorption wastewater system (a septic
tank), and was further unsuitable for either a modified septic tank
system or an alternative sewage system.
When confronted by Little, defendant stated that he would only
provide the documents from the soil testing after plaintiffs paid
off the deed of trust. Plaintiffs purchased the property from
defendant for $370,000.00 with the intent of constructing three
bedroom homes. An appraisal conducted on behalf of the plaintiffs
valued the two lots at $100,000.00 and $140,000.00, respectively.
Plaintiffs brought suit against defendant alleging fraud,
breach of implied warranty, and violation of the Residential
Property Disclosure Act. Defendant reciprocated by beginning
foreclosure proceedings based on non-payment under the deed of
trust. The trial court, however, entered a preliminary injunction
preventing defendant from proceeding on the foreclosure action
during the pendency of this action. See Little v. Stogner, 140
N.C. App. 380, 536 S.E.2d 334 (2000) (dismissing defendant's appeal
of the preliminary injunction as interlocutory).
Prior to trial, the trial court dismissed plaintiffs' breach
of implied warranty and Residential Property Disclosure Act claims.
The case proceeded to trial on plaintiffs' fraud claim, upon whichthe jury ultimately deadlocked seven to five. The trial court
declared a mistrial and entered a directed verdict in favor of
defendant on 11 March 2002, which lifted the preliminary
injunction. Subsequently, the trial court entered a consent order
awarding costs to defendant and later entered its separate order
denying plaintiffs' motion to reinstate the preliminary injunction
and awarded the injunction bond to defendant.
The issues on appeal are whether: (I) there was evidence
sufficient to reach a jury that plaintiffs' reliance on defendant's
representations was reasonable; (II) the Residential Property
Disclosure Act provides a cause of action for damages; and (III)
the trial court erred in dismissing the breach of implied warranty
claim. Defendant raises a single cross-assignment of error: (IV)
that the exclusion of testimony on the current value of the
property at trial was error.
I.
[1] Plaintiffs first contend the trial court erred in
directing a verdict in favor of defendant on the fraud claim. We
agree.
“A motion for directed verdict tests the sufficiency of the
evidence to take the case to the jury.”
Abels v. Renfro Corp., 335
N.C. 209, 214, 436 S.E.2d 822, 825 (1993). In ruling on a directed
verdict motion, a trial court “must examine all of the evidence in
a light most favorable to the nonmoving party, and the nonmoving
party must be given the benefit of all reasonable inferences that
may be drawn from that evidence.”
Id. at 214-15, 436 S.E.2d at
825. “'If there is more than a scintilla of evidence supportingeach element of the plaintiff's case, the directed verdict motion
should be denied.'”
Stamm v. Salomon, 144 N.C. App. 672, 679, 551
S.E.2d 152, 157 (2001) (quoting
Little v. Matthewson, 114 N.C. App.
562, 565, 442 S.E.2d 567, 569 (1994)).
The elements of fraud are:
“(a) that defendant made a representation
relating to some material past or existing
fact; (b) that the representation was false;
(c) that when he made it defendant knew it was
false or made it recklessly without any
knowledge of its truth and as a positive
assertion; (d) that the defendant made the
false representation with the intention that
it should be acted on by the plaintiff; (e)
that the plaintiff reasonably relied upon the
representation and acted upon it; and (f) that
the plaintiff suffered injury.”
Bolick v. Townsend Co., 94 N.C. App. 650, 652, 381 S.E.2d 175, 176
(1989) (citations omitted) (emphasis omitted). In this case, there
is clearly sufficient evidence, viewed in the light most favorable
to plaintiffs, to reach a jury that defendant knowingly made false
representations that the property “perked” and was suitable to
support a septic system and the septic tanks in place on the
property had already been “grandfathered” in by Mecklenburg County.
It is plainly apparent that defendant was aware of the fact that
soil work had been performed on the property and that this soil
work indicated that the property was not suitable to support septic
tank systems. Further, these statements were made with the
intention of inducing plaintiffs to purchase the property and that
plaintiffs relied on those statements and in fact purchased the
property and suffered damages as a result.
The only close question is whether there is sufficient
evidence that plaintiffs' reliance on defendant's fraudulentstatements was reasonable.
See State Properties, LLC v. Ray, 155
N.C. App. 65, 72, 574 S.E.2d 180, 186 (2002) (reliance on false
statement must be reasonable). “The reasonableness of a party's
reliance is a question for the jury, unless the facts are so clear
that they support only one conclusion.”
Id. at 73, 574 S.E.2d at
186. It is the policy of our Courts “on the one hand, to suppress
fraud and, on the other, not to encourage negligence and
inattention to one's own interest.”
Calloway v. Wyatt,
246 N.C.
129, 135, 97 S.E.2d 881, 886 (1957). Thus, generally, where a
plaintiff fails to make any independent investigation, reliance on
an assertion is deemed unreasonable.
See State Properties, LLC,
155 N.C. App. at 73, 574 S.E.2d at 186.
Where, however, a defendant has resorted to an “artifice which
was reasonably calculated to induce [plaintiffs] to forego
investigation,” plaintiffs' failure to conduct an independent
investigation is not fatal to a claim for fraud.
Calloway, 246
N.C. at 134, 97 S.E.2d at 885-86. Our Courts have recognized the
well established rule in such cases “'that one to whom a positive
and definite representation has been made is entitled to rely on
such representation if the representation is of a character to
induce action by a person of ordinary prudence, and is reasonably
relied upon.'”
Kleinfelter v. Developers, Inc., 44 N.C. App. 561,
565, 261 S.E.2d 498, 500 (1980) (quoting
Keith v. Wilder, 241 N.C.
672, 675, 86 S.E.2d 444, 447 (1955)). Thus in these scenarios, the
buyer of property does not “necessarily have to examine the public
records to ascertain the truth where the buyer reasonably relies
upon representations made by the seller.”
Id. at 565, 261 S.E.2dat 500 (citing
Fox v. Southern Appliances, Inc., 264 N.C. 267, 141
S.E.2d 522 (1965)).
In this case, plaintiffs concede that they conducted no
independent investigation of the property's suitability to support
a septic tank system or whether the existing septic tanks had been
“grandfathered” in by Mecklenburg County. Defendant contends that
reasonable diligence and inquiry on the part of plaintiffs would
have led them to discover the results of the soil testing performed
for defendant in the records kept by the Mecklenburg County Health
Department, and that plaintiffs had ample opportunity to conduct
their own inspection of the property.
The evidence in this case, however, shows that defendant's
representations were not merely vague indications that the property
would support a septic system, they were instead definite
representations that soil work had been performed and the property
“perked,” and further that the septic tanks already on the property
had, in fact, actually been “grandfathered” into compliance.
Further, defendant assured plaintiffs that the property would perk
and reminded them that Little's property perked as did that
belonging to her next door neighbor and other property down the
road. Defendant, moreover, indicated that he had planned to build
a three bedroom residence on the property similar to those planned
by plaintiffs and they would have no problem constructing such
residences. This is sufficient evidence for a jury to find that
these statements constituted positive and definite representations
such that a reasonable person would be justified in relying upon
them without inspecting the Health Department records. Furthermore, when Little met with defendant and Malickson,
defendant's attorney, to sign the standard form offer and contract
to purchase, portions of the form regarding property disclosures
were already crossed out. One of these provisions included the
buyer's right to inspect the property including water and sewer
systems. This is evidence tending to show defendant was taking
steps to prevent an inspection by plaintiffs into the condition of
the property, calculated to induce plaintiffs into foregoing their
own investigation.
The contract also provided that the buyer was purchasing the
property “as is” and was waiving any right to receive a Residential
Property Disclosure Statement. Plaintiff was induced into
accepting these terms by defendant's and Malickson's assertions
that the property disclosure portion of the standard form contract
would only apply to a cabin already on the property that was to be
removed, and further that the Residential Property Disclosure
Statement applied only to lead paint, termites, the condition of
the roof and chimney, the foundation, and electrical systems.
The Residential Property Disclosure Act requires that owners
of residential real property “shall furnish to a purchaser a
residential property disclosure statement.” N.C. Gen. Stat. § 47E-
4(a) (2001). The owner of property has the option of either (1)
disclosing items relative to conditions and characteristics of the
property of which the owner has actual knowledge, including,
inter
alia, the water supply and sanitary sewage system, or (2) stating
that the owner makes no representations as to the conditions or
characteristics of the property. N.C. Gen. Stat. § 47E-4. In thecase
sub judice, had defendant and his attorney not induced
plaintiffs to waive their right to a residential property
disclosure statement, defendant would have either been required to
(1) truthfully disclose his knowledge that Mecklenburg County had
found the property unsuitable to support a septic tank system and
had not grandfathered the septic tanks into compliance, or (2)
state that he made no representation about the condition of the
property relating to sanitary sewer systems. If defendant had
chosen the latter, after making the fraudulent representations to
plaintiffs and others, it is reasonable to assume that this would
have alerted plaintiffs to the potential for fraud causing them to
perform an investigation. Thus, it is also reasonable to infer, in
light of defendant's actual knowledge of the condition of the
property, that defendant's desire not to provide a residential
disclosure statement was reasonably calculated to prevent
plaintiffs from conducting further investigation and discovering
his false representations.
Under the standard for a directed verdict, we conclude that
viewed in the light most favorable to plaintiffs and giving them
the benefit of every reasonable inference drawn therefrom, this
constitutes more than a scintilla of evidence to support the
element that plaintiffs reasonably relied on defendant's assertions
as, even though plaintiffs conducted no investigation, a jury could
reasonably conclude defendant took steps calculated to prevent
further investigation and that the representations made were
definite and positive statements of such a character that a
reasonable person would have foregone any further investigation. Thus, there was sufficient evidence to create a jury question on
the issue of reasonable reliance, and the trial court erred in
directing a verdict for defendant on the fraud claim.
II.
[2] Plaintiffs next contend that the trial court erred in
dismissing the claim for damages under the Residential Property
Disclosure Act. We disagree.
The Residential Property Disclosure Act contained in Chapter
47E of the North Carolina General Statutes, with certain
exceptions, applies to sales or exchanges, installment land sales
contracts, options, and leases with options to purchase involving
transfers of residential real property consisting of between one
and four dwelling units. N.C. Gen. Stat. § 47E-1 (2001). Under
the Residential Property Disclosure Act, the owner of residential
real estate is required to furnish a disclosure statement to a
purchaser of the real estate that either discloses characteristics
and conditions of the property, of which the owner has actual
knowledge, or states that the owner makes no representations as to
the characteristics and condition of the property, except as
provided in the real estate contract. N.C. Gen. Stat. § 47E-4.
The disclosure statement is to be delivered to the purchaser no
later than the time at which the purchaser makes an offer to
purchase, exchange, option, or exercises an option to purchase
leased property. N.C. Gen. Stat. § 47E-5(a) (2001).
The remedy for an owner's failure to comply with the
Residential Property Disclosure Act is provided in Section 47E-
5(b), which provides the sole remedy for a violation of theResidential Property Disclosure Act. Under this section, if a
disclosure statement is not provided to the purchaser prior to or
contemporaneously with the making of an offer, the purchaser has
the right to cancel any resulting contract. N.C. Gen. Stat. § 47E-
5(b). This right to cancel, however, expires (1) three calendar
days from the delivery of a disclosure statement to the purchaser,
(2) three calendar days following the date the contract was made,
(3) at settlement or occupancy of the property by the purchaser, or
(4) at settlement in the case of a lease with option to purchase.
Id. Accordingly, plaintiffs' sole remedy under the Residential
Property Disclosure Act was cancellation of the contract pursuant
to Section 47E-5(b), and no separate action for damages under the
Residential Property Disclosure Act will lie. Thus, the trial
court did not err in dismissing plaintiff's claim for damages under
the Residential Property Disclosure Act.
III.
[3] Plaintiffs also argue that the trial court erred in
dismissing their claim for a breach of the implied warranty arising
out of the restrictive covenants. We agree.
Our Court's have recognized an implied warranty arising out of
restrictive covenants:
“[W]here a grantor conveys land subject
to restrictive covenants that limit its use to
the construction of a single-family dwelling,
and, due to subsequent disclosures, both
unknown to and not reasonably discoverable by
the grantee before or at the time of
conveyance, the property cannot be used by the
grantee, or by any subsequent grantee through
mesne conveyance, for the specific purpose to
which its use is limited by the restrictive
covenants, the [grantor] breaches an impliedwarranty arising out of said restrictive
covenants.”
Balmer v. Nash, 65 N.C. App. 401, 403, 309 S.E.2d 518, 519-20
(1983) (quoting
Hinson v. Jefferson, 287 N.C. 422, 435, 215 S.E.2d
102, 111 (1975)). Thus, in order to establish a breach of the
implied warranty arising out of the restrictive covenants, a
plaintiff must not only show that the property cannot be used for
the purpose its use is limited to by the covenant, but also that
the fact the property could not be used for that purpose was
unknown to the plaintiff and not reasonably discoverable.
Id.
In this case, restrictive covenants limited the use of the
property to single family recreation and/or single family residence
purposes and required the grantee to construct and maintain an
outside toilet or inside sewage system in compliance with
governmental regulations. Plaintiffs produced evidence tending to
show that the property was unsuitable for any conventional,
modified, or alternative sewage systems to support residential
construction. Moreover, although the restrictive covenants
permitted the construction of an outside toilet, a separate
covenant prohibited “any refuse, garbage, rubbish or waste of any
kind [from being] placed upon or allowed to remain” on the lot.
Thus, plaintiffs have made a sufficient showing of evidence to
support their claim that the property could not be used for the
purpose of constructing a residential home in compliance with the
restrictive covenants.
Defendant contends that even if the property cannot be used
for the purpose of residential construction, the condition of the
property was reasonably discoverable and cites
Balmer ascontrolling authority. In this case, however, although Little
lived next door to defendant's property, the evidence shows that
Little's property perked, as did other property with which she was
familiar. Furthermore, although the public records showed the
property was unsuitable for a septic tank system and that the
existing septic tanks had not been “grandfathered” into compliance,
we have already concluded that the evidence, taken in the light
most favorable to plaintiffs, tends to show that defendant took
steps to prevent any investigation through his misrepresentations
and assurances. Thus, plaintiffs produced evidence sufficient to
show that, because of their reliance on defendant's
misrepresentations, it was not reasonable to discover that the
property would not support a septic system sufficient for
residential purposes. Therefore, the trial court erred in
dismissing plaintiffs' breach of implied warranty claim.
Because we reverse the trial court on both plaintiffs' fraud
and breach of implied warranty claims, we vacate the award of costs
to defendant. In so doing, we also reverse the lifting of the
preliminary injunction and vacate the order denying plaintiffs'
motion to reinstate the preliminary injunction and awarding the
bond to defendants.
IV.
[4] Defendant cross-assigns error under Rule 10(d) of the
North Carolina Appellate Rules to the trial court's exclusion of
expert testimony regarding the current fair market value of the
property at the time of trial. Although defendant contends this
evidence was generally admissible, he cites no authority to supporthis position and thus we reject this assignment of error pursuant
to N.C.R. App. P. 28(b)(6). Furthermore, we note the calculation
of damages in a fraud case is based upon the difference between the
actual value of the property at the time of the making of the
contract and the value it would have possessed had the fraudulent
representation been true, and is not based upon the value of the
property at trial.
See Horne v. Cloninger, 256 N.C. 102, 104, 123
S.E.2d 112, 113 (1961).
Accordingly, we reverse the directed verdict on the
plaintiffs' fraud claim and the dismissal of plaintiffs' implied
warranty claim; we affirm the trial court's dismissal of
plaintiffs' claims under the Residential Property Disclosure Act;
and vacate the consent judgment awarding costs to defendant and the
orders lifting the preliminary injunction and awarding bond.
Reversed in part, affirmed in part, vacated in part.
Chief Judge EAGLES and Judge GEER concur.
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