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Recent Appellate Decisions: June 9 – 14, 2012

Summaries prepared by Commissioner James Verellen (ret.)

Washington Supreme Court

June 14, 2012

Jackowski v. Borchelt No. 83660-4

real estate – independent duty doctrine (economic loss rule) – fraud – fraudulent concealment – negligent misrepresentation – fiduciary duties – seller – agents and brokers – duty to advise purchaser to retain expert- rescission

Historically, the “economic loss rule” was used to draw the line between tort and contract, focusing upon the existence of a contract and whether the losses were economic in nature.  In Eastwood v. Horse Harbor Found., Inc., 170 Wn.2d 380, 387-89, 241 P.3d 1256 (2010) (Chambers, J., concurring)., the Washington Supreme Court concluded that the term “economic loss rule” was a misnomer.  The Court adopted the term “independent duty doctrine” because it more accurately captured the principle behind the rule: “An injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract.”

Here, pre-Eastwood, the trial court and Division II applied the economic loss rule to a purchaser’s claims against a seller, brokers and agents.  The Washington Supreme Court applied the independent duty doctrine and affirmed the Court of Appeals.

The seller of a waterfront residence represented on the Form 17 disclosure statement that there was no settling, no fill material, no material damage from landslides, and no other existing material defects affecting the property that the purchaser should know about.  The seller later amended the Form 17 disclosure to refer to a letter the prior year from the county that the property was located within a landslide hazard area, and a geotechnological report two years earlier that the slope on the property was unstable within the first 25 feet of the shoreline, and that a proposed addition to the house could be safely placed only to the west of the existing house.  (The seller later built the new addition on the north side of the house.)  The amended Form 17, the county letter, and the geotechnological report were delivered to the purchaser through the purchaser’s agent.  The purchaser exercised an inspection clause to obtain a standard home inspection, but did not conduct an inspection of soil stability.  The sale closed in 2004.  In 2006, a landslide occurred causing damage to the home.

The purchaser sued the seller for fraud, fraudulent concealment, negligent misrepresentation and breach of contract alleging that the addition to the home had been built on uncompacted fill and that the seller concealed cracks in the basement floor by covering the floor with carpet.  The purchaser sought rescission or alternatively, damages.  The purchaser sued the seller’s agents and brokers alleging fraud, fraudulent concealment, negligent misrepresentation and breach of common law fiduciary duty.  The purchaser also sued the purchaser’s broker and agent for similar theories together with a claim of breach of statutory fiduciary duties for failing to advise the purchaser to hire a geotechnical expert.

The superior court dismissed all of the purchaser’s claims except the fraudulent concealment claims regarding the cracks in the basement floor.  Division II affirmed the dismissal of the purchaser’s claims of negligent misrepresentation by the seller, and claims of fraud and fraudulent concealment based upon the risk of landslide as to all parties.  The Court of Appeals reinstated the purchaser’s claims of: statutory and common law breach of fiduciary duty against the purchaser’s broker and agent; all claims of fraud regarding fill material; and breach of contract by the seller.  The Court of Appeals also held that the purchaser was not barred from seeking rescission of the purchase.

The Washington Supreme Court unanimously affirmed Division II holding that:

  1. The independent duty doctrine was adopted in Eastwood while review was pending in this appeal.  Eastwood did not limit the doctrine to prospective application only.  The independent duty doctrine applies to this appeal.
  2. Ch. 18.86 RCW changed some but not all common law duties of real estate brokers and agents.  Common law fiduciary duties continue to the extent they have not been limited by or are not otherwise inconsistent with the statute.
  3. The statutory duty “to advise the buyer to seek expert advice on matters related to the transaction that are beyond the agent’s expertise” allows the purchaser to pursue the theory that the broker and agent should have advised the purchaser to hire a geotechnical expert to inspect the property.  This is not a new statutory cause of action:  “common law tort causes of action remain the vehicle through which a party may recover for a breach of statutory duties set forth in chapter 18.86. RCW.”
  4. RCW 64.06.030 allows a purchaser to rescind an offer within three days of receiving the Form 17 disclosure statement, but the statute is not inconsistent with a common law right to rescind.  A purchaser may seek common law rescission based on misrepresentations in the Form 17 disclosures outside of the three-day statutory right of rescission.  To the extent that the purchaser bases the “request for rescission on negligent misrepresentation under RCW 64.06.050(1), they must show actual knowledge, as the statute indicates.”
  5. The independent duty doctrine allows the purchaser’s claims for fraud and negligent misrepresentation regarding the fill on the property:  “Because the duty to not commit fraud is independent of the contract, the independent duty doctrine permits a party to pursue a fraud claim regardless of whether a contract exists…The same is true for a claim of negligent misrepresentation, but only to the extent the duty to not commit negligent misrepresentation is independent of the contract.”
  6. Genuine issues of fact exist regarding the claims based on the presence of the fill: the purchaser was entitled to rely on the seller’s representation in the initial Form 17 disclosure that there was no fill; it is not clear when the purchaser received the amended Form 17; and it is not clear whether the presence of fill was “obvious” or “apparent” prior to the 2006 landslide.

Div. III Washington State Court of Appeals

June 14, 2012

Yakima County v. E. Wash. Growth Mgmt. Hearings Bd. No. 29763-2-III

land use – Growth Management Act – critical areas – stream buffers – wetland buffers – ephemeral streams

The Growth Management Act (GMA) requires local governments to enact regulations protecting critical areas including fish and wildlife habitat conservation areas, wetlands, frequently flooded areas, critical aquifer recharge areas, and geologically hazardous areas.  Local governments must consider the “best available science” in this process, but they may depart from the “best available science” if they have a reasoned justification.

Yakima County adopted various buffers for different categories of streams and wetlands.  The buffers were consistent with the best available science recommendations for some but not all functions.  The Growth Management Hearings Board concluded that the County’s stream and wetland buffers were not supported by the best available science and failed to comply with the GMA.  The superior court reversed the Board.  Division III agreed with the Board: “substantial evidence supports the GMHB’s conclusion that the standard stream buffers and the administrative minimum adjustments of the stream and wetland buffers violate the GMA because they are not supported by the best available science and the County failed to present a reasoned justification for departure from the best available science.”

As defined in the best available science review conducted for the County: perennial streams generally flow year round; intermittent streams flow on a limited basis, but usually more than 30 days a year fed by groundwater and precipitation; and ephemeral streams flow fewer than 30 days a year solely in response to precipitation.  The County “apparently concluded” that ephemeral streams do not serve as significant fish and wildlife habitat and have a limited effect on the functions and values of other streams.  The County chose not to regulate ephemeral streams in its critical areas ordinance, but recognized that other development regulations, such clearing and grading limitations extend to those streams.  The Board held that the County breached the GMA by failing to include ephemeral streams in its critical areas ordinance.  The superior court reversed the Board.  Division III held that the County critical areas ordinance does not violate the GMA because the County had a reasoned justification to “chose not to regulate ephemeral streams under the critical areas ordinance but under other land use ordinances.”

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