A Claim for Rescission Based on Misrepresentation Survives the Economic Loss Rule and Alejandre

Posted on September 24, 2009 by Kevin Steinacker

Division Two of the Court of Appeals recently issued an opinion on yet another suit for negligent misrepresentation and fraud by the purchaser of a home against the seller. Jackowski v. Borchelt, 151 Wn. App. 1, 209 P.3d 514 (2009). With two notable exceptions, the opinion predictably follows the precedent established by the Supreme Court in Alejandre v. Bull, 159 Wn.2d 674, 153 P.3d 864 (2007).

Jackowski confirms that the economic loss rule holds a party to its contract remedies and affirmed dismissal of the purchaser’s negligence claim against the seller. The opinion further affirmed dismissal of the purchaser’s fraud claim for failure to disclose that the property was in a landslide area where a reasonable inspection prior to closing would have disclosed the landslide risk. Each of these results seems obvious based on Alejandre. The decision therefore underscores a purchaser’s need to either perform a thorough inspection prior to purchasing a home or to insist upon contractual terms detailing the seller’s responsibility for representations as to the condition of the home (or both).

Jackowski dealt with two issues that were not addressed in Alejandre, though: the purchaser’s claim for rescission and claims against the real estate agents involved in the transaction. Jackowski successfully argued that the economic loss rule applies to economic damages, not to equitable relief. Division Two ruled that although the economic loss rule bars recovery, rescission is avoidance of a contract, not recovery. Accordingly, the purchaser’s claim for rescission based on negligent misrepresentation was not barred as a matter of law, despite Alejandre and the economic loss rule.

Similarly, the economic loss rule did not apply to bar the purchaser’s statutory and common law claims against the real estate agent. The economic loss rule bars tort claims for losses suffered as a result of a breach of duties assumed only by contract. Alejandre, 159 Wn.2d at 682. However, the real estate agent had duties to the purchaser based on common law and on statute (specifically, RCW 18.86), in addition to any duties assumed by contract. The statutory and common law claims were not barred by the economic loss rule, and those claims were improperly dismissed on summary judgment.

After Alejandre, the legal prospects for home buyers who had been the victims of negligent misrepresentation were bleak. The standard contracts used for the majority of residential sales provided no relief for issues with the condition of a home, and it is never easy to prove fraud or fraudulent concealment, even if there is some indication that it may have occurred. The opinion in Jackowski might give buyers some hope. It is at least possible to ask for rescission of the contract, and there is a chance of recovery against real estate agents involved in the transaction. Of course, the best advice for buyers is still to take diligent steps prior to closing, rather than to rely on the tenuous claims that may be available to them post-closing.

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The information and misinformation about loan modifications

Posted on September 1, 2009 by Wendy Koch

Although loan modifications have only recently become publicly known, in actuality they have always been a lesser known option for some borrowers. Not all loan modifications are equal. When President Obama’s Homeowner Affordability and Stability Plan first became available, the criteria seemed relatively clear: it had to be your primary residence, the payment could not be more than 31% of your gross income, you had to have a Fannie Mae or Freddy Mac loan, etc…However, the plan is not as limiting as once thought.

The most important thing to know about loan modifications is that they vary by lender. Some lenders have their own application packet, some are even available online, and others have no packet at all, leaving the borrower to gather and compile all documents necessary to apply. When the public first became aware of the plan, they sent in their paperwork to apply. Many never heard back from the lender or were told months later to resubmit the paperwork at it had become stale. The demand was overwhelming and the response time was slow. The entire program seemed extremely disorganized and most lenders had not even received official information or funding from the government yet.

However, the process now seems to be streamlining. The documents that are requested are generally the same no matter who the lender is. Typically, lenders require documents such as your 2008 tax return or a signed 4506-T IRS form, a hardship affidavit, and proof of income.

When loan modifications were first approved, borrowers immediately received their modification. However, lenders were finding that many borrowers would default under the modified plan, costing lenders millions in unnecessary administrative costs. To avoid such costs (which are ultimately passed on to the consumers), the vast majority of lenders are now giving borrowers a “trial modification.” In general, a trial modification is over the course of three or four months, and after that time, if the borrower has returned all required documents, signed the agreement, and made all trial modification payments timely, a permanent modification will be made.

There are pitfalls with loan modifications to also be aware of. First, once the documents are submitted to the lender, the borrower should check and then double check that the lender received the documents and that no documents are considered ‘missing.’ Second, some lenders have borrowers sending their trial modification payments to a special modification department as opposed to paying online or by check to the usual payment center. If a loan modification department has been established, sometimes there is no communication between that department and the customer service department, so all inquiries and payments should be directed to the loan modification department. Last, borrowers must understand that with each trial modification payment (which is usually at a much reduced amount than the normal mortgage payment) they are becoming further and further in arrears on their loan. They may receive collection letters, they may be reported delinquent on their credit report, and their online account may not reflect any payments having been made at all. This is normal. After the trial modification period has been successfully completed, the arrearage and late charges are tacked on to the end of the loan and future payments are reported as timely. However, if for some reason the borrower does not complete the trial or no longer qualifies (due to some change, i.e., income) the borrower is responsible for all of the arrearage and late fees, leaving some borrowers in a worse position than they were before the trial. So, it is important to know that there is some risk associated with applying for a loan modification.

I frequently hear from clients that their lender told them that they did not qualify for a modification because they were current. The borrower then purposely failed to pay for a couple of months in an attempt to qualify, only to be told that they are now in foreclosure. Some clients are told that they must be working to qualify. An attorney can help to maneuver through some of these complicated areas. Most importantly, seek help early on. The earlier you seek help, the more options that may be available to you. Seeking to save your home on the eve of a trustee’s sale is a nearly impossible task for even the most experienced attorney.

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