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A Kentucky court has considered whether a brokerage had a duty to disclose a known material fact about the property’s flooding history.
In 2005, Bryan and Sonja Waldridge (“Buyers”) hired Lori Lawson of Rector-Hayden REALTORS® (“Brokerage”) to help them locate a home. The home was originally built in 1988 and had a history of flooding. The original owners had experienced three floods that damaged the property. They listed the home for sale with the Brokerage in 1995 and disclosed the flooding. The property was sold again in 1999 and 2001, with both of those transactions involving salespeople from the Brokerage and flooding disclosures. Two different owners purchased the property in 2003 and 2004, and they both experienced flooding on the property.
In 2004, the current owners, Doug and Corinne Golubics (“Sellers”) listed the property for sale with a salesperson associated with the Brokerage. The Sellers completed a property condition disclosure form that stated the property had water damage from a failed sump pump but failed to mention the prior flooding on the property. After the first listing agreement expired, the Sellers retained another salesperson associated with the Brokerage, Alma Hopkins (“Hopkins”), who had not represented any of the previous sellers. Again, the Sellers did not disclose the prior flooding on the property but attributed the water damage to a faulty sump pump.
The Buyers purchased the property, moved onto the property, and soon learned that the property had an extensive flooding history which they alleged was not disclosed to them. They brought a lawsuit against Hopkins, the Brokerage, and the Sellers. The Sellers settled their lawsuit with the Buyers, and the trial court dismissed the allegations against the Brokerage and Hopkins. The Buyers also filed a complaint with the state’s real estate commission against the Brokerage’s principal broker and Hopkins, but the commission dismissed the complaint.
The Kentucky Court of Appeals reversed the trial court and sent the case back to the lower court for further proceedings. The court first considered whether the Buyers’ claims were barred by the doctrine of res judicata, since the state’s real estate commission had already considered and dismissed the Buyers’ allegations against the Brokerage. Res judicata is a judicial doctrine that bars litigation over already litigated matters. While the doctrine of res judicata can apply to decisions by administrative agencies, the administrative proceeding must have given the parties an opportunity to present their case in the same way they could in court.
The court ruled that res judicata did not bar these claims because the administrative process had not allowed discovery, the agency had not conducted an investigation, and the Buyers did not receive a chance to argue their claims before the real estate commission. Instead, the commission simply dismissed the complaint without a hearing. Since this process did not quality as litigation between the parties, the doctrine of res judicata did not bar the Buyers’ lawsuit.
Next, the court considered the two fraud allegations, fraudulent misrepresentation and fraudulent omission. The key issue for both causes of action was whether the flooding on the property was a material fact known by Hopkins and/or the Brokerage that they had a duty to disclose. Kentucky courts have generally applied the doctrine of caveat emptor in real estate transactions, where there is no liability if there is no direct misrepresentation by the seller and the buyer has a chance to inspect the property prior to purchase, but there is an exception to that doctrine for fraud.
The court ruled that Kentucky licensees have a duty to disclose known material facts to buyers which are not disclosed by the sellers and so sent the case back to the lower court. The Brokerage argued that there was no duty to make disclosures to someone who was not a brokerage client, but the court found that the state’s license law contained no such limitation. The court also stated that licensees are not liable for a seller’s fraud, but have a duty to disclose material facts if they know the seller is not accurately disclosing all material facts. Thus, the court sent the case back to the trial court for further proceedings to determine whether the Brokerage or Hopkins had actual knowledge of the property’s history of flooding.
One judge dissented, arguing that there was no support for the majority’s opinion within Kentucky law.
Waldridge v. Homeservices of Kentucky, Inc., 384 S.W.3d 165 (Ky. Ct. App. 2011)