Does “Active Concealment” Trump “Caveat Emptor”?

This was originally published on the SGR Blog.

Did Seller Hide Defect in House from Buyer/Inspector?

It is a customary practice for a homebuyer to personally—or through a professional—inspect the residence either before a contract is signed or the transfer of title takes place. And New York is a “real property (caveat emptor) buyer beware” jurisdiction when it comes to such inspections. But what is a Court to do when the buyer discovers defects after the sale closed and claims that the conditions were deliberately concealed by the seller?

In a small claims action, Alexandra Daquila-Imbruglia sought to recover $10,000 from Universal Building Solutions Corp., its principal, Christopher Reno, and Our Island Real Estate, Inc., based on the alleged concealment of a defect in a house that she and her husband purchased.

At a nonjury trial, Imbruglia testified that, shortly after moving into a house which she and her husband had purchased from Universal, they discovered that water came into their house from behind the basement stairs when it rained. Her husband removed the stairs and found that there was no foundation in that part of the house. Imbruglia understood that water penetrated into the house through the dirt. She stated that, even though she and her husband had the house inspected before the purchase, they had been unaware of the problem of rainwater infiltration because at the time of the inspection it had not rained recently. And they had been unaware of the problem with the foundation of the house because it had been hidden by the stairs.

Imbruglia introduced into evidence photographs which depicted the water infiltration, the stairs, and the condition of the premises following the removal of the stairs, in the place where the stairs had previously been located. And two estimates for correction of the problem of water infiltration, at costs of $6,500 and $5,255 respectively, and a single estimate of $1,875, to remove and replace the stairs.

Reno testified that he owned Universal, which had previously purchased the house in foreclosure and, after converting it to a two-family house by extending it laterally and vertically, had sold it to Imbruglia and her spouse.  Our Island had served as the broker. Reno was unable to recall the location of the foundation wall, the location of the basement stairs prior to the renovation, or whether “we” had removed anything from behind the staircase. He confirmed that Universal had installed the stairs that were present when Imbruglia and her husband purchased the house. Reno acknowledged the possibility that water could be entering the house from behind the stairs, but said that Universal had followed the plans that had been provided by the architect and the engineer. He argued that, even if there had been a defect in the house, by accepting a $500 credit against the purchase price, Imbruglia and her husband had waived any defects in the property.

Following the trial, the Court dismissed the action as against Reno and Our Island, and awarded a judgment in the sum of $5,255 as against Universal. The Court found that the photographs that had been introduced into evidence clearly showed the existence of a defect in the foundation; Reno’s assertion that he had been unaware of the defect was incredible; and the staircase had been installed in an attempt to conceal the defect in the foundation from Imbruglia and her home inspector. Universal appealed.

In an appeal from a judgment in a small claims action, the Court’s review was limited to a determination of whether substantial justice had been done between the parties according to the rules and principles of substantive law. The determination of a trier of fact as to issues of credibility is given substantial deference, as a trial court’s opportunity to observe and evaluate the testimony and demeanor of the witnesses afforded a better perspective from which to assess their credibility. That deference applied with greater force to judgments rendered in the Small Claims Part.

Generally, once real property is sold and the deed is delivered, the doctrine of merger extinguishes any claims the buyer may have regarding the contract of sale. But that rule is subject to an exception for conduct which constitutes active concealment. To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor.

There was adequate evidence to support the Civil Court’s factual conclusions as to the defects in the foundation and Universal’s concealment by its construction of a staircase. And Imbruglia made out a prima facie case for damages based on Universal’s active concealment of a defect in the premises. Universal did not rebut that prima facie showing and its claim that the purchasers’ acceptance of a $500 credit in lieu of a Property Condition Disclosure Statement barred recovery lacked merit.

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