Buyer Beware – What Not To Do When An Inspection Reveals A Defect

Home buyers are not entitled to relief from sellers who knowingly sell them a mold-infested home, fraudulently concealing the mold with insulation and caulking, where buyers’ pre-purchase inspection shows potential water penetration. Douglas v. Visser, 173 Wn.App. 823 (Feb. 2013). In Douglas, buyers received sellers’ Form 17 Disclosure Statement. Sellers answered nearly every question “I don’t know.” Unsatisfied, buyers pressed back and asked for more thorough answers and a copy of sellers’ inspection report from when sellers purchased the home. Sellers did not provide the inspection report and provided more inadequate follow-up answers. Later but before closing, buyers and their inspector walked through the home. They noticed a small area of rot/decay near the roof line, along with some caulking that suggested a previous roof leak. Buyers did not discuss or disclose their inspector’s report with sellers. The transaction closed. Shortly thereafter buyers noticed a damp smell and potato bugs around the home’s exterior. They hired mold specialists, who determined the home was uninhabitable and that it would cost more to remove the mold than to tear down the house and build a new one. Buyers then sued the sellers for breach of contract, for fraudulently concealing the mold, and for violating Washington’s Consumer Protections Act (CPA). The trial court awarded buyers a judgment for approximately $200,000. Sellers appealed. On appeal, the Court reversed and held sellers were entitled to a judgment for the amount of their attorney’s fees because “[w]here an actual inspection demonstrates some evidence of water penetration, a buyer must make inquiries of the seller” unless doing so would be fruitless. Because buyers didn’t inquire further after their inspection, deciding instead to close the transaction, buyers’ claims were barred. Buyers “cannot succeed when the extent of the defect is greater than anticipated, even when it is magnitudes greater.” Lesson learned: when an inspection reveals defects, even ones appearing to be minor, consider doing a follow-up inspection to determine the true extent of the defect. Otherwise, the general rule is “buyer beware.”

Road Maintenance Obligations Between HOA and Non-HOA Neighbor

In Buck Mountain Owner’s Ass’n v. Prestwich, 174 Wn.App 702 (April 2013), the Court held that when a written road easement does not address who is responsible for road maintenance, courts may, in equity, order a neighboring owner who is not a member of the homeowners’ association (“HOA”) to pay road maintenance assessments levied by the HOA. However, that court order is not a covenant running with the land. Similarly, see Northwest Properties Brokers Network, Inc. v. Early Dawn Estates Homeowner’s Ass’n, 173 Wn.App. 778 (Feb. 2013). There, the Court ordered a non-HOA neighbor with an written road easement that also did not address road maintenance to pay 1/37th of the HOA’s road maintenance expenses, as there were 37th lot owners who used the road to access their lots.

Is A Commercial Loan Guarantor’s Liability Erased By Foreclosing A Deed of Trust That Secures The Promissory Note And The Guaranty?

So far the answer depends on which division of the Washington Court of Appeals you’re in.  In December 2013, Division 2 held a nonjudicial foreclosure of a deed of trust securing a commercial loan wiped out the guarantors’ liability under their guaranty.  First-Citizens Bank & Trust Co. v. Cornerstone Homes & Development, LLC, 2013 WL 6237466 (Wn. App. Div. 2).  There, the Court focused on the definitions of “indebtedness” and “related documents” in the various loan documents to conclude the deed of trust secured/cross-collateralized the borrower’s promissory note and the guarantors’ guaranty.  Citing RCW 61.24.100(10), Division 2 dismissed lender’s deficiency claims against the guarantors, holding lenders can only obtain a deficiency judgment against guarantors if the guaranty was not secured by the deed of trust.  Division 1 disagrees.  In February 2014, Division 1 interpreted RCW 61.24.100(10) differently, concluding it is a permissive statute.  Washington Fed. v. Gentry, 2014 WL 627817 (Wn. App. Div. 1, 2014).  In other words, in Gentry the Court held RCW 61.24.100(10) allows deficiency judgments against guarantors following a nonjudicial foreclosure even when the deed of trust secures the promissory note and guaranty.  RCW 61.24.100(10) reads: “A trustee’s sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligation of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust.”  Stay tuned to see how future courts, potentially the Washington Supreme Court, interprets this statute.

Foreclosure Trustee’s Duty to Continue The Foreclosure Sale

Trustees handling nonjudicial foreclosure sales must handle them fairly and not just follow the dictates of the lender. Klem v. Washington Mut. Bank, 176 Wn.2d 771 (Feb. 2013). The Washington Supreme Court reached this conclusion after a trustee refused to continue the foreclosure sale even though (1) the borrower was under contract to sell the home for more money than what the lender was owed, (2) the lender had an appraisal showing the home was worth four times what lender was owed, (3) borrower had dementia, and (4) postponing the sale would not have harmed the lender. In Klem, the trustee refused to continue the sale because it had a contract with lender that forbid a continuance without lender’s approval. The home sold for $84,000 at the foreclosure sale. Shortly thereafter, the purchaser resold the home for $235,000 ($151,000 profit). The Court held the trustee owed the borrower and the lender a duty of impartiality. By blindly following the lender’s dictates without exercising trustee’s independent discretion, the Court held (1) trustee breached its duty of good faith and duty of impartiality to borrower, and (2) trustee’s conduct was unfair and deceptive under Washington’s Consumer Protection Act (“CPA”). Trustee’s false notarization of a foreclosure notice to expedite the foreclosure sale was held to be unfair and deceptive, satisfying the first three elements of a CPA claim. The Court remanded the case to the trial court to determine the amount of borrower’s monetary damages.