On December 23, 2015, the Wisconsin Court of Appeals affirmed a jury verdict and $50,000 in damages for a buyer in an “as-is” transaction. An “as-is” clause will not protect a seller from liability in all cases. Parties include “as-is” clauses in contracts for a variety of reasons, but the most common goal is to limit liability arising from condition issues, title problems, unpaid taxes or assessments, or other post-closing surprises. REO sellers almost uniformly include “as-is” clauses in their sales contracts.
In this case, Bank of America (the Bank) acquired a Menomonee Falls property in foreclosure for $235,000. The Bank hired a Wisconsin broker to list the property. The listing agent visited the property on February 3, 2012, and reported to the Bank that the property had severe water damage. The Menomonee Falls Fire Department prepared a report the day before the agent visited the property. The report contained the following description:
“Through front window, you could see ceilings that had fallen in family room … Found ceilings down throughout first floor with pooling throughout. Plumbing fitting in the ceiling appeared to have given way. Second floor had similar wet floors, especially in master bath … Basement had moderate amount of water leaking down and soaked floors.”
On February 6, 2012, the listing agent emailed the Bank’s asset manager and advised the asset manager that cleaning up the property sooner rather than later may limit or even prevent issues related to mold. The agent included photographs of the damage with the email. The agent solicited bids to clean up the water damage, and the Bank approved one of the bids on March 7, 2012. The clean-up was not yet completed as of April 4, 2012, leading the listing agent to contact the Bank seeking an update. The agent again conveyed to the Bank that lingering moisture in the property would soon turn into a mold problem.
The initial planned clean-up could not take place because the moisture problem had become a mold problem. In early May, the Bank approved a bid for mold remediation. Upon initial inspection, the agent informed the Bank that the mold remediation appeared to be complete — but upon further inspection, the agent determined that it was not complete. The agent noted additional mold showing on the living room ceiling as well as in the kitchen and basement. The Bank approved more repair work that included installing cabinets, countertops, sinks and plumbing; replacing drywall in the living room, master bedroom and kitchen; installing a vinyl floor in the kitchen; installing carpeting in the living room, master bedroom and on the stairs; and painting the living room, master bedroom and kitchen.
On September 19, 2012, the Bank approved a listing contract with the broker to list the property for $144,900. The buyer, Catherine Fricano, visited the property the next day with her agent and her fiancé, Leo Pagoudis. When Fricano arrived, at least 12 other individuals were also viewing the property. Fricano’s agent noted some discoloration that appeared to be mold in the basement and pointed it out to Fricano. Pagoudis noticed a musty smell in the basement and saw mold along the basement stairwell, in the sump crock and on drywall. Fricano acknowledged that she too saw mold in the basement.
On September 23, 2012, Fricano, using a WB-11 Residential Offer to Purchase, offered $171,111 for the property. Thirteen other offers on the property were also submitted to the Bank. As is typical with REO properties, the Bank encouraged interested buyers to submit highest and best offers. Fricano increased her purchase price by $4,000 and offered $175,111, and the Bank “accepted” Fricano’s offer by email notification on October 4, 2012. With this “acceptance” came the Bank of America Real Estate Purchase Addendum (Addendum) and the Water Damage, Toxic Mold Environmental Disclosure, Release and Indemnification Agreement (Agreement). Both documents contained “as-is” clauses along with a number of disclaimers or exculpatory clauses. The clauses and disclaimers were standard issue for the average REO transaction. In addition to all the boiler plate language, the Bank also represented that it had “little or no direct knowledge about the condition of the [p]roperty.”
Fricano’s home inspector noted that it was “obvious the ceilings and walls have been subject to a water leakage event resulting in substantial mold growth” and that some walls and ceilings had been replaced due to the damage. Her follow-up inspector noted mold in the basement and came up with a remediation plan. The follow-up inspector did not indicate the presence of mold on the first or second floors. Fricano closed on the property, believing that the mold was limited to the basement and not in any livable areas of the house.
Shortly after closing, Fricano, apparently unsatisfied with the existing Bank-installed cabinetry, met with a contractor about replacing the kitchen cabinets. The full scope of the mold problem quickly became clear; mold saturated the property.
To remediate the mold, Fricano had the house stripped down to the studs, and the interior of the house was reconstructed. She sued the Bank. The Bank’s defense rested in the many “as-is” clauses, disclaimers and exculpatory clauses. In a different case, that defense may have worked. The problem for the Bank in this case was its statement that it had “little or no direct knowledge about the condition of the [p]roperty.” During trial, the court instructed the jury that an “as-is” clause does not relieve a seller from disclosing defects that are difficult to discover or making false affirmative representations to the buyer.
Based on the multiple discussions with the listing agent regarding the water and eventual mold problems, the jury found that the Bank’s claim of no knowledge of the property was not true and was a deceptive representation that induced Fricano to purchase the home. The jury awarded Fricano $50,000 in damages. The Bank appealed, and the Wisconsin Court of Appeals affirmed the verdict and award for the buyer. To read the Court of Appeals opinion, see Fricano v. Bank of America, 2015AP20 (Dec. 23, 2015) online at www.wicourts.gov/ca/opinion/DisplayDocument.pdf?content=pdf&seqNo=158224.
Jennifer Lindsley is Staff Attorney and Director of Training for the WRA.