A North Carolina appellate court has ruled on whether a jury should consider the fraud allegations made in a buyer's lawsuit against the seller and builder for structural problems arising in a house clad with a Exterior Insulation and Finish System ("EIFS"), or synthetic stucco.
In 1993, Ramon and Regine Everts ("Buyers") purchased a home with an EIFS exterior from John and Vicki Parkinson ("Sellers"). The home was built by A.T.D. Construction Company ("Builder"). EIFS is an exterior siding system which is used in both residential and commercial buildings. While the outer layer of the EIFS is water-resistant, there is no way for water to drain that gets behind the outer layer. Water usually gets behind the EIFS from points where the EIFS meets non-EIFS portions of the building, like around the windows. To learn more about EIFS, click here to read a helpful article from the National Association of Home Builders.
Following the Buyers' purchase of the home, the Buyers claimed that they were forced to undertake extensive repairs of the property due to wood rot and other problems caused by moisture penetration of the EIFS. In 1997, the Buyers sued the Sellers, the Builder, and Prime South Construction ("PSC"), who the Sellers had employed to perform improvements to the property. The lawsuit made numerous allegations, including allegations of fraud, negligent misrepresentation, breach of contract, and negligence. The trial court entered judgment in favor of the Sellers, the Builder, and PSC. The Buyers appealed.
The North Carolina Court of Appeals partially reversed the trial court and allowed some of the Buyers' lawsuit to proceed to the jury. The court first considered whether the trial court had properly ruled that the Buyers' lawsuit against the Sellers was barred by North Carolina's three-year statute of limitations. The statute of limitations did not start running until the Buyers became aware of, or should have been aware of, the damage to their property, and so the Buyers had to show that their awareness of the structural problems was less than three years before filing their lawsuit. Looking at the evidence produced before the trial court, the court found that there were three possible times when the Buyers could have become aware of the structural damage to their property. The first was when the Buyers discovered water in the garage and living room shortly after their purchase of the property. The second time was in 1994, when a painter told the Buyers that he had shown the Sellers rot around the windows while the painter was performing another job for the Sellers. The painter had also told the Buyers that he had observed the Sellers doing work around other windows. The Sellers argued that either of those instances should have put the Buyers on notice of potential defects in their home, and so their lawsuit was barred by the statute of limitations. The Buyers argued that they did not become aware of the problems that surround EIFS homes until attending a class about EIFS in 1995, following which they hired an engineer to conduct a moisture test of their home. The court ruled that a jury could conclude that the Buyers were not aware nor should have been aware of the defects to their home until some time within the three year statute of limitations, and thus the court ruled that the trial court should not have ruled that the Buyers' lawsuit was barred by the statute of limitations. Thus, the court reversed the trial court.
The court next considered whether a jury should consider the individual claims made against the Sellers. The court first examined the fraud allegations made against the Sellers. Fraud requires a party to show a false representation or concealment of a material fact which was reasonably calculated to deceive another; the party making the representation intends to deceive another and does deceive another, causing damage to the other party. As the seller of property, the Sellers had an affirmative duty to disclose any material defects in the home that were not known by the Buyers and could not be discovered by observation.
The court found that there were numerous problems with the house which may have required disclosure to the Buyers. The Sellers did not inform the Buyers about any of the repair work which was performed on the property during their ownership. The Sellers had attempted to personally repair leakage around the window lights and rotting brick mold around the windows and doors, conceding that they weren't sure at the time whether they were using the proper type of sealant or that they were actually fixing the problem. Another problem was the rot around one of the windows. The Sellers had asked the president of the Builder to examine it, and he told the Sellers that the leaking was coming from where the EIFS met the brick. The Sellers attempted to fix this leak, and then added a "decorative" band of stucco running over the top of all of the windows, in order to prevent any further leaking. The Sellers were told that this was not the recommended way to step leaks and the band would likely not solve the leak problem. The court also found that the property was placed on the market for a second time immediately after the "decorative" band was installed. All of this lead the court to conclude that the jury should consider whether the Sellers committed fraud.
The court next considered the fraudulent misrepresentation allegations made against the Sellers. A fraudulent misrepresentation claim must contain allegations that a party supplied false information intended to guide another during the course of a transaction. The Buyers alleged that the false representation made by the Sellers was a provision in the purchase contract which allowed the Buyers to cancel the contract if an inspection revealed any problems to certain areas of the property which the Sellers declined to fix. The court ruled that this statement did not give the Buyers grounds to bring a lawsuit for negligent misrepresentation because the statement was simply a condition precedent to the Buyers' purchase of the property, not a representation giving the Buyers the ability to sue the Sellers. Since this was not a representation, the Buyers could not support their negligent misrepresentation allegations and therefore the trial court had properly entered judgment in favor of the Sellers. For similar reasons, the court also dismissed the breach of contract allegations against the Seller because these allegations were also based on a condition precedent and so did not give rise to an independent cause of action against the Sellers. The court also dismissed all of the other allegations against the Sellers.
The court dismissed the negligence allegations against the Builder, since the Buyers had only alleged that the Builder was negligent in its subsequent inspection of the property and not in its building of the home. The court ruled that since the Builder did not owe any duties to the Buyers when it inspected the property, the Builder could not be liable for negligence. Similarly, the court rejected the negligence arguments against PSC, since they also owed no duties to the Buyers. Therefore, the court reversed the trial court's ruling on the fraud counts and ruled that a jury should consider those allegations, but affirmed the trial court's rulings on all of the other allegations made by the Buyers.
Everts v. Parkinson, 555 S.E.2d 667 (N.C. Ct. App. 2001).
Editor's Note: NAR Legal Affairs would like to thank the legal staff at the North Carolina Association of REALTORS® for alerting us to this decision.