An Iowa court has considered whether an intermediate purchaser of a residence who never lived on the premises could be liable because of prior sellers’ failure to disclose flooding problems on the property.
Joel and Mary Ellen Bowers (“Bowers”) purchased a residence in 1998 and added an addition to the home in 1999. The construction of the addition caused the property to begin experiencing flooding problems. In 2000, Mary Ellen Bowers was transferred to an out-of-state location by her employer. Initially, the Bowers listed their home for sale with a real estate broker, with whom they completed a property condition disclosure form. On the disclosure form, the Bowers denied experiencing any flooding problems.
When the broker failed to sell the home, the Bowers decided to take advantage of a relocation service offered by one of their employers through Associates Relocation Management Company, Inc. (“Relocation Service”). Under this program, the Relocation Service would buy the Bowers’ home and resell it to a third party. As part of the transaction with the Relocation Service, the Bowers completed two additional disclosure forms, again denying they had ever experienced flooding while living in their residence. The Bowers also gave the Relocation Service their permission to provide copies of all disclosure statements to interested buyers.
The Relocation Service sold the property in November 2000 to Ricky and Janet Sedgwick (“Buyers”). The Buyers received copies of the Bowers’ disclosure statements. The Buyers began experiencing flooding problems shortly after their purchase of the property. After learning that the Bowers had experienced similar problems, the Buyers filed a lawsuit against the Bowers and the Relocation Service, alleging that they had falsely represented the condition of the property. The trial court dismissed the lawsuit and the Buyers appealed.
The Supreme Court of Iowa affirmed the dismissal of the Relocation Service from the lawsuit but reinstated the allegations against the Bowers. The trial court had determined that the Bowers were not liable to the Buyers because the buyer of their property was the Relocation Service, not the Buyers. The Bowers also argued that while they provided false statements about flooding on the property, they had never experienced the type of flooding that the Buyers had experienced and so the Bowers failure to disclose did not harm the Buyers. The trial court had ruled that the Relocation Service was not liable because it had no reason to know that the disclosures provided by the Bowers were false.
In order to allege fraud, a party must allege a false statement which the party knows to be untrue, is material to the transaction, is justifiably relied upon by the other party, and causes the other party damage. Considering the allegations against the Bowers, the court found that the Bowers had agreed to allow the Relocation Service to share its disclosure statements with interested buyers. Further, the Bowers had agreed to indemnify the Relocation Service for any false statements made by the Bowers in their disclosure statements. Thus, the Bowers knew that their disclosure statements would be shared with interested buyers and so their false statements on the disclosure statement could amount to fraud. The court also rejected the Bowers argument that they had experienced a different variety of flooding, determining that the flooding was a result of the same drainage problems related to the addition. Thus, the court ruled that the Buyers had sufficiently alleged fraud against the Bowers and so the court reinstated these allegations and sent the matter back to the trial court.
Next, the court considered the allegations against the Relocation Service. An Iowa statute protects a “transferor…[from liability] for the error, inaccuracy, or omission in information required in a disclosure statement, unless that person has actual knowledge of the inaccuracy, or fails to exercise ordinary care in obtaining the information.” There was no evidence that the Relocation Service had any knowledge of the falsity of the Bowers’ disclosure statements or that the Relocation Service had failed to exercise care in obtaining the information. Thus, the court affirmed the trial court’s ruling in favor of the Relocation Service.
Sedgwick v. Bowers, 681 N.W.2d 607 (Iowa 2004).