Ollerman v. O’Rourke Co., Inc.

Brief Fact Summary.

Ollerman bought a vacant lot to build a house. While excavating, a well was uncapped and water was released. Ollerman sued O’Rourke, alleging he would not have bought the property had he known about the defective well (or at least he would have paid less for the property).

Synopsis of Rule of Law.

A subdivider-vendor of a residential lot has a duty to a “non-commercial” purchaser to disclose facts which are known to the vendor, which are material to the transaction, and which are not readily discernible to the purchaser. A fact is known to the vendor if the vendor has actual knowledge or acted with reckless disregard as to the existence of the fact. A fact is material if a reasonable purchaser would attach importance to the existence or non-existence in determining how to proceed in the transaction or if the vendor knows or has reason to know that the purchaser subjectively regards or is likely to regard the matter as important.

Facts.

Ollerman bought a vacant lot to build a house. While excavating, a well was uncapped and water was released. Ollerman alleged that O’Rourke was an experienced real estate developer that knew of the well’s existence and had a duty to disclose the well’s existence that it failed to do. As a layperson inexperienced in real estate, Ollerman alleged that he either would have not bought the property if he had known of the well or would have at least paid less for the property.

Issue.

Does Ollerman’s complaint state a claim for intentional misrepresentation upon which relief may be granted?

Held.

Affirmed.

Yes, Ollerman’s complaint states a claim for intentional misrepresentation upon which relief may be granted.

Discussion.

In Wisconsin, an action for intentional misrepresentation traditionally placed no duty on a seller of real estate, dealing at arm’s length with a buyer, to disclose information to the buyer and therefore has no liability for failure to disclose. This rule is based on the common law doctrine of caveat emptor, which posited the law as a facilitator to a free market where individuals could exercise ordinary business sense without having the law stand in loco parentis for their business decisions.

As society and business evolved, courts have reigned in the doctrine of caveat emptor when application would promote injustice and have carved out four main exceptions to caveat emptor:

Actively conceal a defect or prevent an investigation;
Tell a half-truth or make an ambiguous statement to create a false impression;
A fiduciary relationship exists between the parties; or
One party to the transaction exclusively has all information and the other party cannot discover the facts for himself.

A new exception has evolved that would also hold liable a party who conceals or suppresses a material fact which he is in good faith bound to disclose if justice, equity, and fair dealing demand it.

The Restatement of Torts (Second) § 551 tapped into this trend, finding a seller who has a duty to use reasonable care to disclose information and fails to disclose information that may induce reliance liable for an intentional misrepresentation. Such a duty arises for disclosure of facts basic to the transaction that the seller knows the buyer is mistaken about that a reasonable buyer would want to know and would expect to be told by the seller given the relationship between them. Facts basic to the transaction are ones assumed by the parties that go to the essence of the transaction.

If an intentional misrepresentation is found, a plaintiff will be entitled to compensatory damages. In practice, this rule applies to cases where the plaintiff’s ignorance has been taken advantage of to a degree that shocks the community’s ethical sense as extreme and unfair.

In the world of real estate, to prove that justice, equity, and fair dealing should hold a seller of real estate liable for an intentional misrepresentation, courts look to the following elements:

The condition is “latent” and not readily observable to the purchaser;
The purchaser acts upon the reasonable assumption that the condition does (or does not) exist;
The seller has special knowledge or means of knowledge not available to the purchaser; and
The existence of the condition is material to the transaction, such that it influences whether the transaction is concluded at all or at the same price.

Here, Ollerman reasonably relied on O’Rourke to disclose material facts that it knew and were not readily discernible. The buyer must prove at trial that the well’s existence was a material fact and that his reliance was justifiable.