Flakus v. Schug

Nebraska Supreme Court · Contracts

ContractsFraudReal estate salesDamagesfraudfraudulent concealmentmisrepresentation by conductreal estate

Facts

Before purchasing the house, the purchasers saw a sump pump and a sand point well in the basement, but two sump holes in basement closets had been concealed before their inspections. The purchasers alleged the sellers fraudulently represented that the lot and house were free from underground water problems and that the sellers had not experienced basement water problems. After the sellers accepted the offer to purchase and the purchasers moved in, the basement took on damaging water in April 1980 and again in June 1980, and the purchasers discovered the concealed sump holes after those events. The contract also contained a clause stating the offer was based on the purchasers' personal inspection or investigation and not on seller representations or warranties of condition.

Issue

Whether the evidence was sufficient to let the jury find fraud based on concealment of latent water-related defects despite the contract's inspection/disclaimer clause, and whether the trial court's erroneous damages instruction required reversal. The case also presented whether the pleadings were broad enough to permit proof and instruction on fraudulent concealment rather than only oral misrepresentation.

Rule

To recover damages for fraud, the plaintiff must show a representation of fact that was untrue and known to be untrue by the maker or made recklessly, made with intent to deceive and induce action, and actual reliance causing injury. In the sale of real property, a seller is not liable for failing to disclose latent defects unknown to him, but if the seller was aware of circumstances from which a reasonable inference could be drawn that he knew or should have been aware of latent defective conditions, he is liable; a misrepresentation may be made by conduct as well as words. A contractual inspection or disclaimer clause is relevant to reliance but does not preclude the trier of fact from considering whether fraud induced the bargain. The proper measure of damages for misrepresentation in the sale of real estate is the cost of placing the property in the condition represented, not exceeding the difference between the property's actual value and its value if as represented.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Omaha, Nora Bennett sold her house to Luis Ortega. Before listing it, Nora had paneled over a narrow access hatch in a finished basement wall that led to a hidden drainage pit she had used during prior seepage events, and the purchase contract stated Luis was relying on his own inspection rather than any seller representations.

If Luis later discovers repeated basement seepage and sues for fraud, which is the best argument for denying Nora's motion for directed verdict?

Explanation. A seller's conduct can amount to a misrepresentation. Under the majority rule, concealment of a latent defect known to the seller may support fraud, and a contractual inspection/disclaimer clause is relevant to reliance but does not preclude the trier of fact from considering whether fraud induced the bargain. Thus the case should go to the jury rather than be resolved by directed verdict. (Derived from Flakus v. Schug (n.d.).)