Utah's highest court has ruled on whether broker and real estate licensee selling homes in a development had a duty to disclose to a purchaser that the soil in the development was unstable.
Stanley McDougal ("Developer") is a part owner of the McDougal Shaw Development, LLC. The Developer hired real estate broker George Tasulis d/b/a Interchange Real Estate ("Listing Broker") as the listing broker for the Developer's current project. Terena McDougal ("McDougal"), wife of the Developer, was a real estate licensee who worked for the Listing Broker.
C. Dean and Carol N. Hermansen ("Buyers") purchased a home in the Developer's current project. Following their home purchase, their home suffered substantial structural problems due to the home settling. The Buyers filed a lawsuit alleging that the Developer, the Listing Broker, and McDougal all knew of the unstable soil on which their house was built, and they failed to disclose this condition to the Buyers. The Buyers claimed that the Listing Broker knew the soil was unstable because there were many problems during the building process, including a backhoe getting stuck in chocolate pudding-like mud, and the Listing Broker had been onsite during the building process. The Buyers also argued that the Listing Broker was imputed whatever knowledge McDougal had received from her husband (the Developer) about the condition of the soil, based on the employer-employee relationship between McDougal and the Listing Broker. There was evidence that the Developer had knowledge that the property had been boggy historically. The Developer and McDougal settled with the Buyers, and so only the Buyers' claims against the Listing Broker remained. The trial court ruled in favor of the Listing Broker, and the Buyers appealed.
The Supreme Court of Utah reversed the trial court and sent the case back to the trial court for further proceedings. The court first considered the rationale used by the trial court. The trial court had ruled that the "economic loss rule" had barred the Buyers from seeking recovery from the Listing Broker. This is a judicially-created doctrine which bars parties from recovery in certain situations for tort-like claims when the parties do not have a contractual relationship. The court ruled that the economic loss doctrine was not applicable to this case, as real estate licensees like the Listing Broker have a duty to disclose facts to purchasers that "materially affect the value or the desirability of the property" when these facts are known to the licensee. The court also stated that the Listing Broker could be liable for McDougal's failure to disclose material facts.
The court next considered whether the Listing Broker was liable for fraudulent nondisclosure. In order to succeed with fraudulent nondisclosure allegations, a party must show that there was nondisclosed information which was material; the nondisclosed information was known by the party failing to make the disclosure; and the party failing to make the disclosure had a legal duty to inform the other party of the defect. First, the court determined that unstable soil qualified as material fact that needed to be disclosed if known by the licensee. The court also stated that, as set forth above, the Listing Broker and McDougal had a legal duty to inform the Buyers of all known material defects on the property.
The remaining question was whether McDougal or the Listing Broker knew of these defects. For a determination of whether the Listing Broker and/or McDougal knew of the unstable soil condition, the court send the case back to the trial court in order to conduct a trial on this issue. Thus, the trial court was reversed and the court sent the case back to the trial court for further proceedings.
Hermansen v. Tasulis, 48 P.3d 235 (Utah 2002).