When to sue for an undisclosed defect
This post is not legal advice. For legal advice, consult an attorney, not a blog.
You just bought a house! 
Congratulations! You just discovered that foundation is cracked, although the seller said the foundation was fine… 
My condolences…
The next logical question: can you get some recovery from the seller given his failure to disclose and/or concealment of this defect? The absolute first step in answering that question is to determine the amount of money it will cost to fix the problem. There is only one certainty in litigation: it’s expensive. Where the cost to fix the problem is less than the amount you would expect to incur in attorney’s fees and costs, it may very well be in your best interest to bite the bullet and pay for the repair without seeking compensation.
Let’s assume your cracked foundation will cost $50k to repair. That is more than enough to seriously consider threatening and possibly proceeding with a lawsuit. The next step would be to consult an attorney who could analyze your facts and render an informed opinion as to the likelihood of your prevailing. If you’ve got “good facts” (e.g., seller affirmatively represented condition of foundation, crack appeared to have been purposefully concealed, you performed your own inspection that did not identify the crack), then it may be time to take the very serious step of suing the seller (assuming he refuses to compensate you voluntarily).
But what about those attorney fees? They will still eat up most, if not all, of what you seek to recover. (In the case of Stieneke v. Russi, which I discussed in my last post, the cost of repair was $72k, but the attorney fees and costs through appeal were $175k.) Will you be able to recover those from the seller too?
The answer to that question is a very definite “probably” — hardly the assurance you are looking for. Some courts (particularly those in Eastern WA) have determined that this type of claim (fraud) is unrelated to the contract for sale, so that even though the contract contains an attorney’s fees clause (which allows for an award to the prevailing party), no fees are available. Other courts (particularly those in Western WA) have determined that, because the contract is central to the dispute, the attorney’s fees provision would apply. Given this degree of uncertainty in the law, there is a chance that you may win but still end up losing money given your legal costs.
One final note: the attorney’s fees clause in the contract, if it applies, cuts both ways. So, if you sue and lose, you very well may be liable for the seller’s legal fees and costs, in addition to your own. In that case, your total cost for the unsuccessful suit could approach $100k, even if you don’t appeal. Accordingly, it is essential to get good legal advice about the merits of your case and the likelihood of prevailing before filing suit.
Posted: August 1st, 2008 under Buyer Information, Legal Issues, Real Estate Law.
Tags: attorneys, concealment, fraud, lawsuit, legal fees
About the Author: Craig Blackmon
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Comments
2.
Comment
from craig
Time August 1, 2008 at 10:16 am
Great comment, Kary, on the need to consider the ability to collect any award. Even if you win big (total compensation for all repairs, award of all fees and costs incurred), it will not mean anything if the seller does not have other assets that can be seized/sold to satisfy the judgment. For this reason, attorneys are hesitant to take these types of cases on contingency. Unlike a personal injury suit, where there is an insurance company who will pay any judgment, there is some doubt about ever collecting on a judgment against someone without applicable insurance. And yes, that is why agents/brokers are often named — they’ve got money available to satisfy the judgment.
As for discharge of the warranty deed obligations by bankruptcy — are you sure about that? Bankruptcy discharges debts and liabilities — does that extend to every possible liability that has not yet been incurred? It would surprise me if bankruptcy discharged the warranties even where the buyer had yet to assert any claim against them.
3.
Comment
from Kary L. Krismer
Time August 1, 2008 at 10:22 am
The discharge wouldn’t discharge the fraud claim (assuming contested), but I believe it would deal with the warranty claim, because it is merely a contract claim. The only exception might be where the buyer wasn’t named in the bankruptcy (which would be likely if the claim wasn’t known at the time), but assuming the law hasn’t changed, in the 9th Circuit that would still be discharged as long as the court didn’t send out a claims bar date notice.
4.
Comment
from Rhonda Porter
Time August 1, 2008 at 10:33 am
I’m not familiar with either cases but if there was something missed by the home inspector, wouldn’t the buyer consider suing them (potentially deeper pockets)?
5.
Comment
from Kary L. Krismer
Time August 1, 2008 at 10:41 am
In the Bull case the baffle wasn’t inspected for some reason, the inspector told the buyer that, and they didn’t ask for them to go back. In the other case I recall the inspector didn’t want to go up on the roof because it was raining. (Another case where I need a “rolleyes”).
I think the inspector contracts have all sorts of outs for the inspectors. I’m not sure how often they’re sued.
6.
Comment
from craig
Time August 1, 2008 at 10:44 am
Inspectors are usually not sued because they limit their liability in their contract to the price paid for the inspection. Not worth the effort for a probable recovery of $400 or so.
7.
Comment
from Kary L. Krismer
Time August 1, 2008 at 10:57 am
I wonder if that would work for agents? 
8.
Comment
from Thor
Time August 1, 2008 at 12:29 pm
I realize the foundation crack is just an example, but as a geotechnical engineer I need to make the point that a crack in the foundation isn’t necessarily a big deal. Folks in my profession dread that sort of issue. Lots and lots of older foundation have cracked without impacting the house, so it seems extreme to sue over something like that. The value of time spent and the stress involved with a lawsuit should be considered beforehand too. It’s hard to get compensation for that. I don’t want to imply that there’s never a time to sue, if there’s a real problem it needs to be addressed and sometimes litigation is the only way to go.
The costs in the post illustrate why plenty of people don’t care for lawyers - attorney fees and costs were $175k for a problem that cost $72k to fix.
9.
Comment
from Kary L. Krismer
Time August 1, 2008 at 12:43 pm
I’ve mentioned this before, but I was in bankruptcy court once when people were fighting over pianos in inventory of the debtor. There were so many attorneys there the judge joked that the best solution would be to give every attorney a piano if they’d waive their fees.
10.
Comment
from Leanne
Time August 1, 2008 at 5:00 pm
Hi Craig, good post! Definitely the voice of reason.
Thor, good points too. 6 buyers can look at a crack in a foundation and have 6 different levels of concern! Getting professionals to inspect it is the best step, waaaay before the panic step :-).
11.
Comment
from Riley Smith | Coconut Grove Realtor
Time August 7, 2008 at 1:07 pm
I believe that in home buying, as in any decision in life, there are risks. When you buy a home you must do your due diligence and then you have to take a leap of faith. If it turns out that you made a bad investment, then you just have to eat your losses and move on.
12.
Comment
from craig
Time August 7, 2008 at 1:29 pm
Really Riley? Is it that simple? Should someone “eat their losses” where the seller actively concealed a defect in the property? Why should the seller get away with fraud?
I agree that every buyer must investigate the property (an obligation recognized by the law), and I recognize that every transaction has risks. However, the risk of being defauded is not one that must be tolerated. The seller should not profit at the expense of the buyer. In other words, the seller should profit as determined by the market price for the property as it exists, not as determined by the seller’s ability to actively deceive and “get over” on the buyer.
13.
Comment
from DIGITY
Time August 19, 2008 at 8:07 am
WOW! I AM IMPRESSED WITH THIS SITE. I AM A BUYER WHO IS INVOLVED IN A SEEMINGLY RARE CASE OF A PRIOR OWNER (WE JUST CLOSED IN APRIL) CAULKING AND STAINING THE ROTTED LOGS OF A 14 YR OLD CABIN. THEY ADMITTED TO US IT WAS DONE BY THE OWNER AND HER BOYFRIEND. THEY DID A GOOD JOB. MY INSPECTOR NEVER CAUGHT IT EITHER. OFCOURSE, HE FAILED TO PROBE THE LOGS AT ALL. WE ARE SUING HIM AS WELL. MY LAWYER ,WHO HAS FAITH IN OUR SUIT, HAS CAPPED HIS FEES AT $18,000. OR 1/3 OF THE JUDGEMENT. WE ARE SUING THE OWNER FOR VERBAL FRAUD, WRITTEN FRAUD AND 4 OTHER CAUSES I CAN’T THINK OF AT THE MOMENT. THE REPAIRS ARE GOING TO BE ABOUT $60,000.00 TO REPLACE 700 FEET OF ROTTED LOGS AND TO COBB BLAST, TREAT AND RE-CAULK THE REST TO MATCH. WE OWN OTHER PROPERTIES, BUT THEY ARE ALL “STICK” BUILT HOUSES. I HAVE A GOOD FEELING ABOUT THIS SUIT. I HAVE A LOT OF PIC’S OF THE PROPERTY I TOOK ON ONE OF OUR WALK THRU’S BEFORE CLOSING. THESE ARE GOOD PROOF OF HER HIDING THE WATER STAINS ON THE INTERIOR AND OTHER THINGS I WON’T GO INTO. WE ALSO HAVE A WITNESS TO HER GUILT AS WELL. EVEN IF I LOOSE, I STILL WIN AS FAR AS IM CONCERNED . THE STATE OF NY IS VERY STRICT ABOUT “THE BUYER BEWARE” CLAUSE. IT IS UP TO ME TO PROVE SHE WAS AWARE OF THE DEFECTS AND CONCEALED THEM. IF SHE DID NOT KNOW ABOUT IT, I WOULD BE STUCK. THE FACT THAT I DID EXERSISE MY RIGHT TO AN INSPECTION WILL ALSO HELP ME. IT IS PEOPLE WHO DON’T HAVE AN INSPECTION AND THEN TRY TO HOLD THE PRIOR OWNER ACCOUNTABLE THAT KILL ME. MY ADVISE TO PROSPECTIVE BUYERS WOULD BE THAT JUST WHEN YOU THINK YOU KNOW IT ALL, YOU FIND YOU DON’T. STICK TO WHAT YOU KNOW, AND ALWAYS HAVE A HOME INSPECTION DONE. IF YOU CAN FIND A HOME INSPECTION THAT IS A LICENSED ENGINEER, YOUR MUCH BETTER OFF THAN ONE WITH ONLY A CERTIFICATE. THE COST IS ABOUT THE SAME. LOG CABINS ARE SPECIAL. THEY NEED TO BE INSPECTED BY A LOG HOME INSPECTOR AT THE VERY LEAST. I ASKED MY INSPECTOR AND HE TOLD ME HE HAD PERFORMED INSPECTIONS ON LOG HOMES IN THE PAST. WHAT DID I KNOW? I TOOK HIS WORD FOR IT. BIG, HUGE MISTAKE! HE NEVER EVEN TOUCHED THE LOGS. ANYWAY, GOOD LUCK TO ALL!
1. Comment from Kary L. Krismer
Time August 1, 2008 at 9:55 am
Good post. If I recall correctly, the attorney fees in the Bull septic tank case also exceeded the cost of repair, and there the buyer lost.
As to whether Eastern Washington or Western Washington judges are right, I suspect the Supreme Court will ultimately side with Eastern Washington. Also, I’ve found courts are sometimes somewhat reluctant to award attorney fees, even where they can, although that’s probably not often the case on situations also involving valid fraud based claims.
Finally, beyond considering being awarded fees, you also need to consider collecting them. I once had a situation where a seller filed bankruptcy (ch 7) and the trustee was willing to proceed with the sale. The buyer balked at the sale being by quit claim, where from the debtor it would have been a warranty deed. The only problem with that thinking is that had the sale gone through before the bankruptcy, the debtor would have likely discharged the warranty obligation. So the warranty didn’t mean much.
The point is, many sellers really don’t have deep pockets (which is probably why the buyers bring in the agents/brokers too).