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Tuesday, July 8, 2008

Wisconsin Supreme Court Applies Economic Loss Doctrine to Bar Fraud Claims Related to Residential Home Sales

Wisconsin_flag In a recent decision, the Supreme Court of Wisconsin held that the economic loss doctrine barred a buyer's claims for intentional misrepresentation in connection with a residential real estate purchase. 

Plaintiff buyer, Shannon Below, purchased a house in Milwaukee from defendant sellers, the Nortons.  The Nortons completed a statutorily required "property condition report" when they put their house on the market.  The report indicated that the Nortons were not aware of any defects with the house's plumbing system, except for a problem with the bathtub's drain handle.  After Below closed on the home and moved in, she learned that the sewer line that ran between the house and the street was broken.  Below alleged that the Nortons knew of the defect in the sewer line when they put the house on the market and, therefore, intentionally misrepresented its condition.  Below sued for, among other things, intentional misrepresentation.  The question before the Supreme Court of Wisconsin was whether the economic loss doctrine barred Below's intentional misrepresentation claim.

Below argued that the economic loss doctrine was not applicable and, on a policy level, argued that residential home purchasers "should not have the burden of allocating risk that they will be defrauded."  The Nortons countered that the rationale for the economic loss doctrine supported its application in this case -- that is, that "the buyers are adequately protected by the contractual remedies that they negotiate" and this rationale was not affected by the fact that the real estate transaction was residential rather than commercial.  The Court sided with the Nortons, and noted that Below was not without a remedy - she could still assert contractual claims and even false advertising claims.

Bradleylg Judge Ann Walsh Bradley proffered a spirited dissent:

This is a case that can affect every single person who purchases a home in Wisconsin.  For many citizens of this state, buying a home will be one of the most important purchases that they will make in their lifetime.

According to the majority, a person selling a home can look the buyer in the eye, lie about the condition of the home, and escape legal consequences in tort for the lie because of the economic loss doctrine.

Wisconsin has the dubious distinction of being the only state in the entire country to have expanded this judicially created doctrine in such a fashion.  The majority has taken a doctrine that originally applied in a very narrow context -- commercial transactions for products under warranty -- and has now used it to prevent homebuyers from recovering damages in tort caused by misrepresentations of fraudulent sellers.

Contrary to its protestation, the majority is not compelled to reach this unfortunate result.

Below v. Norton, No. 2005AP2855 (Wis., July 1, 2008).

[Meredith R. Miller]

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