“Caveat emptor” (i.e. let the buyer beware) is a long-standing doctrine in New York which states that a seller is not liable for failing to disclose information regarding the item being sold unless the seller actively conceals the information from the buyer. As demonstrated in a case recently decided by the New York Appellate Division, Second Department, the question of whether the seller actively concealed information is a fact-sensitive determination. As a result, courts will not easily dismiss a lawsuit by a purchaser which means sellers could be forced to mount a costly defense in court.
In Striplin v. AC&E Home Inspection Corp., the purchasers of a residence in Suffolk County sued the sellers for fraud based upon the sellers’ alleged concealment of certain conditions which would have revealed extensive water damage to the premises of which buyers had not become aware until after the closing. The plaintiffs also sued the company they had engaged to inspect the premises prior to purchasing the property.
The sellers’ made a motion to dismiss the amended complaint against them on the grounds that the plaintiffs’ complaint failed to state a cause of action against the sellers and that the documentary evidence produced by the sellers had refuted plaintiffs’ allegations and established a legal defense to plaintiffs’ claims. The lower court agreed with the sellers and dismissed the action and the plaintiffs appealed. The Appellate Division reversed, reinstated the claims against the sellers and sent it back to the lower court for further proceedings.
When reviewing a motion to dismiss, the court must look at the allegations in the complaint in the light most favorable to the plaintiffs and accept all of the plaintiffs’ allegations are true. Using this standard, the appellate court found that the amended complaint sufficiently stated a cause of action to recover damages for fraud in that it alleged that the defendants actively concealed extensive water damage to the property, by, inter alia, placing new wood on top of rotted wood to hide the extent of the damage. Assuming the plaintiffs’ allegations can be proven true, the defendants’ conduct could result in them being liable for damages, meaning the claim should not have been dismissed. The Court further stated (without indicating what documentary evidence had been submitted by the defendants) that the documents submitted by the sellers failed to “utterly refute the plaintiffs’ factual allegations and conclusively establish a defense as a matter of law.” Therefore, the claims against the sellers should be reinstated and remanded to the lower court where the defendants will now be required to submit an answer to the amended complaint.
The lesson to be learned from this case is that even though New York generally applies the doctrine of caveat emptor, a seller cannot actively conceal conditions from a prospective purchaser and may have to defend itself in court to clearly refute the plaintiffs’ allegations. Indeed, in hindsight, it seems that the better course of action would have been to make such conditions known to the purchasers and to thereafter negotiate an adjustment to the purchase price if the same was warranted. This would have avoided the expense of litigation, which may be more costly than lowering the purchase price.
If you have any questions regarding a real estate transaction in which you are involved, please contact one of our attorneys.