DENISE BESHADA V MILLARD REALTY
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STATE OF MICHIGAN
COURT OF APPEALS
DENISE BESHADA,
UNPUBLISHED
January 13, 2004
Plaintiff-Appellant,
v
MILLARD REALTY, RAILSIDE APPRAISAL
SERVICES, RICHARD J. HANSEN, MARILYN
J. HANSEN, and RICK A. HANSEN,
No. 244635
Montcalm Circuit Court
LC No. 00-000729-CZ
Defendants-Appellees.
Before: Markey, P.J., and Murphy and Talbot, JJ.
PER CURIAM.
This is a civil action for damages arising out of plaintiff’s purchase of a residence in
Montcalm County. Plaintiff alleged in her complaint that defendants were liable for failing to
disclose material defects in the home. The trial court granted defendant Railside summary
disposition pursuant to MCR 2.116(C)(8) and (10) by order entered December 28, 2001, and
entered final judgment on October 4, 2002, granting defendant Millard and defendants Hansens’
summary disposition pursuant to MCR 2.116(C)(10). We conclude that the trial court did not err
by granting defendants Hansens and defendant Millard summary disposition because plaintiff
failed to produce evidence that a material issue of fact remained for trial that if proved would
entitle her to relief. Smith v Globe Life Ins Co, 460 Mich 446, 455; 597 NW2d 28 (1999). The
trial court also properly granted Railside summary disposition pursuant to MCR 2.116(8) and
(10) because, based on the undisputed facts, Railside did not owe plaintiff a duty of care.
Accordingly, we affirm.
I. Summary of Material Facts.
Plaintiff, a twenty-one-year-old, first-time homebuyer, agreed to purchase a home from
defendant Hansens contingent on her obtaining a Federal Housing Administration (FHA) insured
mortgage loan. The Hansens had purchased the older residence about a year before the sale to
plaintiff specifically for the purpose of remodeling and reselling it. The buy-sell agreement
(BSA) between plaintiff and the Hansens contained in ¶ 10 an “as is” clause also giving plaintiff
the right of inspection and cancellation, and plaintiff also inserted “must pass for mortgage” into
that paragraph. It is undisputed that the FHA appraisal by Railside failed to disclose certain
problems with the residence, which if disclosed, would have precluded the residence from
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meeting minimum FHA standards. But it is also undisputed that plaintiff received her loan on
FHA terms. Further, after closing and discovery of the deficiencies, Railside’s appraiser and the
mortgagee, the Independent Mortgage Company, paid contractors $9,600 to correct the problems
so that the house met minimum FHA standards. Plaintiff acknowledged in discovery that two
appraisals of the home after the post-closing repairs showed the home was worth more than she
had paid for it.
Plaintiff alleged several theories of liability against the Hansens, their real estate agent,
defendant Millard, and the FHA appraiser, Railside. Count I of plaintiff’s amended complaint
alleged the Hansens and Millard were negligent in failing to disclose known deficiencies and that
Railside was negligent in failing to detect and report the deficiencies. In Count II, plaintiff
alleged a violation of Michigan’s Consumer Protection Act (MCPA), MCL 445.901 et seq.,
based on defendants’ alleged misrepresentations, failure to reveal material facts, and misleading
statements and actions. Plaintiff alleged in Count III a theory of innocent misrepresentation.
Plaintiff alleged common law fraud in Count IV. Finally, in Count V, plaintiff claimed that the
Hansens breached their contract. Plaintiff sought money damages, not rescission.
II. Standard of Review
We review de novo a trial court's grant or denial of summary disposition. Spiek v Dep’t
of Transportation, 456 Mich 331, 337; 572 NW2d 201 (1998). A motion under MCR
2.116(C)(8) tests the legal sufficiency of the pleadings standing alone. Maiden v Rozwood, 461
Mich 109, 119; 597 NW2d 817 (1999). The motion must be granted if no factual development
could justify plaintiff's claim for relief. Id.; Spiek, supra. Also, whether a duty exists, the
violation of which may result in tort liability, is a question of law for a court to decide. Harts v
Farmers Ins Exchange, 461 Mich 1, 6; 597 NW2d 47 (1999). We review de novo the trial
court’s answer to that question. Benejam v Detroit Tigers, Inc, 246 Mich App 645, 648; 635
NW2d 219 (2001).
A party’s motion under MCR 2.116(C)(10) tests the factual sufficiency of a claim and
must be supported by affidavits, depositions, admissions, or other documentary evidence. MCR
2.116(G)(3)(b); Spiek, supra. The moving party must identify the undisputed factual issues,
MCR 2.116(G)(4), and the trial court must consider the submitted documentary evidence in the
light most favorable to the nonmoving party. Maiden, supra at 120; MCR 2.116(G)(5). If the
moving party fulfills its initial burden, the party opposing the motion then must demonstrate with
evidentiary materials that a genuine and material issue of disputed fact exists. MCR
2.116(G)(4); Crown Technology Park v D & N Bank, FSB, 242 Mich App 538, 547; 619 NW2d
66 (2000); State Farm v Johnson, 187 Mich App 264, 267; 466 NW2d 287 (1990). If no dispute
exists regarding a fact material to a dispositive legal claim, the moving party is entitled to
judgment as a matter of law and summary disposition is properly granted. Id.; Maiden, supra at
120-121.
III. Plaintiff’s claims against the Hansens and Millard
The trial court did not err by granting defendants summary disposition pursuant to MCR
2.116(C)(10) because plaintiff failed to produce evidence that a material issue of fact remained
for trial that if proved would entitle her to relief. Smith v Globe Life Ins Co, 460 Mich 446, 455;
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597 NW2d 28 (1999). Moreover, plaintiff cannot establish that she sustained any damages after
her lender and the FHA appraiser paid for repairs to the home. Reviewing the facts in the light
most favorable to plaintiff, she bargained for, and received, a home meeting FHA standards,
financed with an FHA-insured mortgage. The benefit of an FHA-insured mortgage loan to the
borrower is obtaining financing to purchase a home at terms more favorable than those available
on the private market. See Clark v Grover, 132 Mich App 476, 481; 347 NW2d 748 (1984), and
Cason v United States, 381 F Supp 1362, 1364-1365 (WD Mo, 1974), aff’d sub nom Summers v
United States, 510 F2d 123 (CA 8, 1975), cert den 423 US 851; 96 S Ct 95; 46 L Ed 2d 75
(1975). After the mortgage company and appraiser paid for the repairs, plaintiff’s home had an
appraised value higher than the purchase price she paid. In short, even if the legal theories
plaintiff advances had merit, because plaintiff sought money damages instead of rescission, she
has no damages that entitle her to relief.
A. Breach of Contract: The trial court properly dismissed plaintiff’s claim for breach
of contract as a matter of law because the Hansens did not promise to deliver a house that met
FHA standards. Plaintiff cannot convert her subjective expectations into a legal promise by the
Hansens.
The interpretation of a contract is a question of law reviewed de novo on appeal.
Archambo v Lawyers Title Insurance Corp, 466 Mich 402, 408; 646 NW2d 170 (2002). Further,
whether contract language is ambiguous, and requires resolution by the trier of fact is also a
question of law reviewed de novo on appeal. Klapp v United Ins Group Agency, Inc, 468 Mich
459, 463, 480; 663 NW2d 447 (2003). The main goal of interpreting a contract is to honor the
intent of the parties. Mahnick v Bell Co, 256 Mich App 154, 159-160; 662 NW2d 830 (2003).
But courts must discern the parties’ intent from the words used in the contract and must enforce
an unambiguous contract according to its plain terms. Id. at 160; Wilkie v Auto-Owners Ins Co,
469 Mich 41, 51-52; 664 NW2d 776 (2003).
In this case, the plaintiff’s offer to buy and the Hansens’ offer to sell the subject property
was contingent on plaintiff’s ability to obtain an FHA-insured mortgage. Paragraph ten of the
BSA provided that plaintiff agreed to accept the property “as is,” subject to her right to inspect
the building and its various components. Paragraph ten also provided a remedy should
plaintiff’s inspections disclose unacceptable conditions: the right to terminate the agreement.
Into the sentence of ¶ 10 describing the various inspections plaintiff could have, she handwrote:
“must pass for mortgage.” It is settled that contracts must be interpreted and their legal effects
determined as a whole. Perry v Sied, 461 Mich 680, 689 n 10; 611 NW2d 516 (2000). It
addition to reading a contract as a whole, its various words and phrases must be read in harmony,
if possible. Wilkie, supra at 50 n 11.
Here, the language “must pass for mortgage” inserted into ¶ 10, when read in context
with the entire BSA, clearly provided plaintiff the right to cancel the contract if the home did not
pass the inspection required for an FHA-insured mortgage. It was a condition precedent to
plaintiff’s obligation to perform, not an independent promise by the Hansens that the home met
certain standards. “A ‘condition precedent’ is a fact or event that the parties intend must take
place before there is a right to performance. A condition precedent is distinguished from a
promise in that it creates no right or duty in itself, but is merely a limiting or modifying factor.”
Mikonczyk v Detroit Newspapers, Inc, 238 Mich App 347, 350; 605 NW2d 360 (1999), citing
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Reed v Citizens Ins Co of America, 198 Mich App 443, 447; 499 NW2d 22 (1993). Thus, if the
home failed to pass FHA inspection, plaintiff had the option to terminate her obligation to
complete her purchase. Archambo, supra at 409. But the contractual condition that the home
must pass an FHA inspection was not an independent promise by the Hansens that may form a
basis for breach of contract. Mikonczyk, supra.
This result is not changed by plaintiff’s subjective expectation that the condition would
assure her of a certain quality home. “‘It is beyond doubt that the actual mental processes of the
contracting parties are wholly irrelevant to the construction of contractual terms. Rather, the law
presumes that the parties understand the import of a written contract and had the intention
manifested by its terms.’” Zurcher v Herveat, 238 Mich App 267, 299; 605 NW2d 329 (1999),
quoting Zurich Ins Co v CCR & Co (On Rehearing), 226 Mich App 599, 604; 576 NW2d 392
(1997). So, plaintiff’s subjective reliance on the FHA inspection process to verify the condition
of the home is irrelevant to the construction of the contract. The Hansens simply made no
promise that the home would meet FHA standards. Rather, plaintiff bore the burden under ¶ 10
of the BSA to ascertain the condition of the property, and plaintiff bore the risk of defects as
well. Accordingly, plaintiff has no claim for breach of contract. Lenawee Co Bd of Health v
Messerly, 417 Mich 17, 32 n 15; 331 NW2d 203 (1982); Niecko v Emro, 769 F Supp 973, 979
(ED Mich, 1991).
B. Negligence, Silent Fraud and Innocent Misrepresentation: Plaintiff conceded she
had no evidence that either the Hansens or Millard committed common-law fraud in concealing
the complained-of defects in the home. Common-law fraud requires proof that (1) defendant
made a material representation; (2) it was false; (3) when it was made defendant knew that it was
false, or made it recklessly, without knowledge of its truth and as a positive assertion; (4)
defendant made it with the intent that it should be acted upon by plaintiff; (5) plaintiff did act in
reliance upon it; and (6) plaintiff thereby suffered injury. Hord v Environmental Research Inst
(After Remand), 463 Mich 399, 404; 617 NW2d 543 (2000); Webb v Malmquist, 195 Mich App
470, 473; 491 NW2d 851 (1992). Rather, plaintiff asserts theories of negligence and innocent
misrepresentation.
To establish a claim of negligence, “a plaintiff must prove four elements: (1) a duty
owed by the defendant to the plaintiff, (2) a breach of that duty, (3) causation, and (4) damages.”
Case v Consumers Power Co, 463 Mich 1, 6; 615 NW2d 17 (2000), footnote omitted. “‘Duty is
essentially a question of whether the relationship between the actor and the injured person gives
rise to any legal obligation on the actor's part for the benefit of the injured person.’” Christy v
Prestige Builders, Inc, 415 Mich 684, 693, 329 NW2d 748 (1982), quoting Moning v Alfono, 400
Mich 425, 438-439; 254 NW2d 759 (1977). Here, plaintiff claims a duty to disclose defects in
the home arose from the relationship of vendor and vendee between the Hansens and plaintiff,
and the relationship of Millard as the Hansens’ real estate agent. Plaintiff claims the Hansens
and Millard breached this duty by failing to disclose defects about which defendants knew about
or should have known. In short, plaintiff claims defendants are liable for silent fraud or
fraudulent concealment. See M & D, Inc v McConkey, 231 Mich App 22, 28-36; 585 NW2d 33
(1998).
The common-law rule in land sales is caveat emptor, which provides “a land vendor who
surrenders title, possession, and control of property shifts all responsibility for the land's
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condition to the purchaser.” Christy, supra at 694. But a special conflict panel of this Court in
McConkey, supra, explained that although neither a land vendor nor a vendor’s agent has a
general duty to disclose material defects to a prospective vendee, silence may constitute
actionable fraud where a legal or equitable duty of disclosure exists. After reviewing Supreme
Court decisions in this area, the McConkey panel concluded that a plaintiff must establish more
than that the vendor was aware of a hidden defect. Id. at 32. Rather, “in order to prove a claim
of silent fraud, a plaintiff must show that some type of representation that was false or
misleading was made, and that there was a legal or equitable duty of disclosure.” Id. The
McConkey Court summarized,
a claim of silent fraud is established when there is a suppression of material facts
and there is a legal or equitable duty of disclosure. We emphasize that there must
be some type of misrepresentation, whether by words or action, in order to
establish a claim of silent fraud. [Id. at 36.]
In general, as real estate agent for the seller, Millard owed no duty of disclosure to
plaintiff, the buyer McMullen v Joldersma, 174 Mich App 207, 212; 435 NW2d 428 (1988). “In
order for the suppression of information to constitute silent fraud there must be a legal or
equitable duty of disclosure.” United States Fidelity & Guaranty Co v Black, 412 Mich 99, 125;
313 NW2d 77(1981), citing 37 Am Jur 2d, Fraud and Deceit, § 146. Here, the course of dealing
between the parties did not establish that Millard had either a legal or equitable duty to disclose
to plaintiff.
Plaintiff argues that Millard misrepresented that the home passed FHA inspection with
“flying colors,” and that it withheld a “red-flag” water report. But Millard did no more than
convey information it had received from others to plaintiff, or in the case of the water report, to
the parties responsible for approving plaintiff’s FHA loan-her lender and the FHA appraiser.
Further, the statement that the home passed inspection was obviously inaccurate. Plaintiff was
notified that both the appraisal report and the water report uncovered certain deficiencies in the
home that needed to be corrected, including adding handrails and drilling a new well. In
essence, plaintiff was placed on notice of potential problems but took no action. She could have
obtained her own inspections or requested a copy of the water report from its author, Millard,
the appraiser, or her lender. No fraud occurs where plaintiff has the means of discovering the
truth and is not precluded from employing those means. Webb, supra at 474. In sum, Millard
did no more than act as a conduit of information. Millard owed no independent duty of
disclosure to plaintiff and did not actively conceal any material information.
The Hansens, however, had a legal duty to disclose certain conditions of the home to
plaintiff under the Seller Disclosure Act, MCL 565.951, et seq. Moreover, an “as is” clause will
not preclude liability based on fraud. Lenawee Co, supra at 32 n 16. See also, Clemens v
Lesnek, 200 Mich App 456 460; 505 NW2d 283 (1993), and McConkey, supra at 32. The Seller
Disclosure Act required the Hansens to provide plaintiff with a seller’s disclosure statement
(SDS) on a form prescribed by the act. MCL 565.594, 597. Plaintiff claims the Hansens’ SDS
contained misrepresentations because check-marks “yes” indicated that the home’s electrical,
heating and plumbing systems were in working order. But plaintiff produced no evidence the
Hansens’ statements were false, or that Hansens knew of defects that were not disclosed. Nor
did plaintiff present any evidence the Hansens knew of either asbestos in the basement or of a
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nonconforming gray water discharge. The Hansens’ SDS disclosed that the condition of the
well, septic tank, pump, drain field and environmental problems were all “unknown.” Plaintiff
only argues that because repairs were later necessary to meet FHA specifications, the statements
were false or misleading. A statement that a system is in working order is simply not a statement
that the system meets FHA standards. Plaintiff’s unwarranted inference from something the
SDS says does not support a claim that there was misrepresentation. See, e.g., Hord, supra at 10
(financial information about one fiscal year was not a representation of financial condition in
subsequent years). Plaintiff simply cannot establish a claim of silent fraud without some type of
misrepresentation that was false or misleading. McConkey, supra at 36.
Similarly, plaintiff’s claim of innocent misrepresentation must fail. “A claim of innocent
misrepresentation is shown if a party detrimentally relies upon a false representation in such a
manner that the injury suffered by that party inures to the benefit of the party who made the
representation.” McConkey, supra at 27, citing United States Fidelity, supra at 118. But a
plaintiff may only assert a claim of innocent misrepresentation against a defendant where privity
of contract exists. McConkey, supra at 28. Applying these principles to the case at bar, plaintiff
may not assert an innocent misrepresentation claim against Millard because there is no privity of
contract. As to the Hansens, because their only representations were set forth in the SDS and
because there was no evidence those representations were false, plaintiff’s innocent
misrepresentation claim fails.
C. The Michigan Consumer Protection Act: The Consumer Protection Act prohibits
“unfair, unconscionable, or deceptive methods, acts, or practices in the conduct of trade or
commerce.” MCL 445.903(1). The act defines “trade or commerce” as “the conduct of a
business providing goods, property, or service primarily for personal, family, or household
purposes and includes the advertising, solicitation, offering for sale or rent, sale, lease, or
distribution of a service or property, tangible or intangible, real, personal, or mixed, or any other
article, or a business opportunity.” MCL 445.902(d). The Legislature clearly intended the
MCPA to protect consumers in their purchase of goods and services. Forton v Laszar, 239 Mich
App 711, 715; 609 NW2d 850 (2000). But the MCPA does not apply to purchases primarily for
business purposes. Slobin v Henry Ford Health Care, 469 Mich 211, 216 NW2d 632 (2003);
Zine v Chrysler Corp, 236 Mich App 261, 273; 600 NW2d 384 (1999). Further, the MCPA
exempts from its purview a “transaction or conduct specifically authorized under laws
administered by a regulatory board or officer acting under statutory authority of this state or the
United States.” MCL 445.904(1)(a). This exemption focuses on “whether the transaction at
issue, not the alleged misconduct, is ‘specifically authorized.’” Smith, supra at 464; see also
Attorney General v Diamond Mortgage Co, 414 Mich 603, 617; 327 NW2d 805 (1982).
In the instant case, plaintiff alleges violation of subsections (s), (bb), and (cc) from the
list of “unfair, unconscionable, or deceptive methods, acts, or practices” found in MCL
445.903(1), which subsections provide:
(s) Failing to reveal a material fact, the omission of which tends to mislead or
deceive the consumer, and which fact could not reasonably be known by the
consumer.
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(bb) Making a representation of fact or statement of fact material to the
transaction such that a person reasonably believes the represented or suggested
state of affairs to be other than it actually is.
(cc) Failing to reveal facts that are material to the transaction in light of
representations of fact made in a positive manner.
Michigan courts have held the MCPA applicable to business activity related to residential
home sales. See, e.g., Diamond Mortgage, supra (application of the MCPA to a real estate
broker’s charging usurious interest rates); Forton, supra (application of the MCPA to a licensed
residential builder’s deviation from construction plans); and Price v Long Realty, Inc, 199 Mich
App 461; 502 NW2d 337 (1993) (application of the MCPA to a real estate agents sale of
property for the purpose of building a family residence). Thus, the MCPA applies in general to a
real estate agent’s business endeavors to sell residential property to the ultimate consumer.
Although the Hansens’ activity of buying a single older home to remodel and then resell presents
a closer question, the Hansens’ for-profit activity appears to fit within the act’s broad definition
of “trade or commerce.” MCL 445.902(d). Accordingly, the Hansen’s and Millard’s business
activity falls with the purview of the MCPA.
Although the MCPA applies to the Hansens and Millard, plaintiff’s theory of liability
stems from the same factual claims of misrepresentation and fraudulent concealment. For the
reasons already discussed, plaintiff failed to produce evidence that the Hansens misrepresented
or withheld material information concerning the home. Accordingly, plaintiff’s MCPA claim
against the Hansens fails.
Similarly, the facts of this case create no liability for Millard. First, even though Millard
did not provide plaintiff with the water test report, plaintiff had easy access to it. Second, the
water report’s reference to a nonconforming gray water discharge was not so inherently obvious
as to alert either plaintiff or Millard to be concerned about FHA compliance. Third, plaintiff
failed to produce any evidence that a nonconforming gray water discharge was contrary to FHA
standards. Fourth, Millard did not conceal the water report. Millard simply distributed it to the
entities that could interpret and apply the results to determine if FHA standards were satisfied,
the mortgage company and the FHA appraiser. Last, as already discussed, Millard owed no duty
to disclose material facts to plaintiff.
Plaintiff also bases her claims against Millard under the MCPA because Millard was a
conduit of the FHA appraisal which later proved defective. This claim must also fail. An FHA
appraisal is a “transaction or conduct specifically authorized under laws administered by a
regulatory board or officer acting under statutory authority of . . . the United States.” MCL
445.904(1)(a). The Secretary of Housing and Urban Development is authorized, upon
application by the mortgagee, to insure mortgages eligible under 12 USC 1709 on such terms as
the Secretary prescribes. Further, 12 USC 1708(e) provides that the “Secretary shall prescribe
standards for the appraisal of all property to be insured by the Federal Housing Administration.”
Federal regulations require an application for insurance to be accompanied by a property
appraisal upon a form meeting the requirements of the Secretary. 24 CFR 203.255(b)(1). Thus,
the transaction at issue in this case, the FHA appraisal, was (1) specifically authorized by the
laws of the United States and (2) administered by an officer acting under statutory authority of
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the United States. Accordingly, the appraisal was exempted from the MCPA. MCL
445.904(1)(a); Smith, supra at 464; Diamond Mortgage, supra at 617. Millard cannot be liable
under the MCPA for merely relaying truthful information concerning a transaction exempted
from the act.
In sum, plaintiff failed produce evidence of disputed material fact that could establish the
liability of either the Hansens or Millard. Accordingly, the trial court properly granted summary
disposition to defendants. MCR 2.116(C)(10), (G)(4).
IV. Plaintiff’s claims against Railside
The trial court properly granted Railside summary disposition pursuant to MCR 2.116(8)
and (10). First, plaintiff’s claim of innocent misrepresentation against Railside fails because no
privity of contract exists between plaintiff and Railside. McConkey, supra at 28. Second, the
FHA appraisal is a transaction “specifically authorized under laws administered by a[n] . . .
officer acting under statutory authority of . . . the United States.” MCL 445.904(1)(a).
Accordingly, Railside is not subject to liability under the MCPA. Smith, supra at 464. Last,
plaintiff’s claim of negligent misrepresentation against Railside fails because as an FHA
appraiser, Railside owed no duty of due care to plaintiff. Clark v Grover, 132 Mich App 476;
347 NW2d 748 (1984).
In Clark, supra at 479, the plaintiff’s sought damages for personal injuries suffered as a
consequence of carbon monoxide poisoning from a defective furnace which had been subject to
an FHA loan inspection. The plaintiffs claimed the negligent performance of the inspection was
a proximate cause of their injuries. The trial court granted summary disposition in favor of the
lender that had hired the negligent furnace inspector. The question on appeal in Clark was
whether the lender owed the homeowners, and through them the injured plaintiffs, a duty of care.
Id. at 480. This Court concluded that federal laws and regulations regarding inspections and
insurance of mortgages address “(1) the availability of mortgages on terms more favorable to the
mortgagor than the market would otherwise provide, and (2) the security of the government's
insurance funds.” Id at 481. Further, “[s]afety conditions in buildings on the mortgaged
property are relevant only because they affect the value and marketability of the property and
thus affect the risk assumed by the government as insurer of the mortgage.” Id. The Court
therefore concluded “that the federal statute and rules, including the inspection requirements,
were not intended to impose upon the mortgagee any duty of care concerning safety.” Id.
The Clark Court cited federal decisions, quoting United States v Neustadt, 366 US 696,
709; 81 S Ct 1294; 6 L Ed 2d 614 (1961):
[It] was repeatedly emphasized that the primary and predominant objective of the
appraisal system was the 'protection of the Government and its insurance funds’;
that the mortgage insurance program was not designed to insure anything other
than the repayment of loans made by lender-mortgagees, and that there is no legal
relationship between the FHA and the individual mortgagor. Never once was it
even intimated that, by an FHA appraisal, the Government would, in any sense,
represent or guarantee to the purchaser that he was receiving a certain value for
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his money. [Clark, supra at 481-482, quoting Neustadt, supra at 709 (Footnotes
and internal punctuation omitted).]
The Clark Court also quoted Cason, supra:
It is now settled, however, that the primary and predominant objective of the FHA
appraisal system is the protection of the Government and its insurance funds; that
the mortgage insurance programs do not insure anything other than the repayment
of loans made by lender-mortgagees; and that there is no legal relationship
between the FHA and the individual mortgagor. * * * Although Neustadt was
based on a different theory of liability, the Court believes that the Supreme Court
completely rejected the notion that Congress intended to establish a duty of due
care for the benefit of mortgagors such as plaintiffs. [Clark, supra at 482, quoting
Cason, supra at 1367 (Internal punctuation omitted).]
Moreover, the Clark Court relied upon the Michigan Supreme Court precedent of Smith v
Allendale Mutual Ins Co, 410 Mich 685; 303 NW2d 702 (1981). In Smith the issue was the
liability of a fire insurer for injuries resulting from a fire caused by hazards not detected by the
fire insurer’s inspection of the insured’s premises. The Smith Court held:
[The] threshold requirement of an undertaking to render services to another is
lacking in these cases. An insurer's inspection of an insured's premises for fire
hazards does not in itself demonstrate an undertaking to render fire inspection and
prevention services to the insured. Absent evidence that the insurer agreed or
intended to provide services for the benefit of the insured, there is no basis for a
conclusion that such inspections are conducted other than to serve the insurer's
interests in underwriting, rating and loss prevention and hence there is no
undertaking. An insurer who does not undertake to inspect for the insured's
benefit owes no duty to the insured or the insured's employees to inspect with
reasonable care; such an insurer is, however, subject to liability if it engages in
affirmative conduct creating or enlarging a fire hazard. [Clark, supra at 483,
quoting Smith, supra, 410 Mich at 705-706 (Emphasis in original).]
Based on Neustadt, Cason, and Smith, the Clark Court concluded:
[T]here is no basis here for a conclusion that the inspection was conducted for any
reason other than to serve the mortgagee’s interest in obtaining insurance
pursuant to 12 USC 1709. No well-pled facts in plaintiffs’ complaints suggest
that defendant agreed or intended to have the inspection performed for plaintiffs’
benefit or that defendant engaged in affirmative conduct creating or enlarging a
safety hazard. We therefore conclude that [the lender] owed no duty to the
plaintiffs. [Clark, supra at 483-484.]
Likewise, in the instant case there is no evidence that Railside performed its appraisal of
the subject property for any purpose other than to allow the mortgage company to determine if
the property possessed sufficient value to underwrite a loan to plaintiff and to qualify the
property for an FHA certificate of insurance. Plaintiff’s edition of paragraph ten of the BSA
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with the words “must pass for mortgage” plainly placed the burden on her to obtain any
structural or mechanical inspections she desired. Otherwise, she was accepting the property “as
is.” The appraisal report itself clearly warns: “This report has been prepared for mortgage
lending purposes only. Any other use is strictly prohibited without the express written consent
of the appraiser.” Most telling, plaintiff signed a warning letter more than three weeks before
closing advising her of the purpose for the FHA appraisal and also warning her that FHA
appraisals are not the same as home inspections. That warning provided:
As part of our job insuring the mortgage for the lender, the FHA requires the
lender to conduct an appraisal to:
•
estimate the value of your potential new home
•
make sure it meets minimal FHA standards
•
ensure that it will be marketable
Appraisals are different from home inspections. Home inspections give more
detailed information about your potential new home.
This Court’s decision in Clark controls the outcome of plaintiff’s claim against Railside.
Railside performed its appraisal for the mortgage company only for FHA lending purposes.
There is simply no evidence that Railside undertook an inspection of the property for plaintiff’s
benefit. Accordingly, Railside owed no duty of care to plaintiff. Because Railside owed no duty
of care, plaintiff’s claim of negligent misrepresentation fails. Clark, supra at 484.
We affirm.
/s/ Jane E. Markey
/s/ William B. Murphy
/s/ Michael J. Talbot
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