Sugarline Assoc. v. Alpen Assoc.
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No. 87-432
Sugarline Associates Supreme Court
v. On Appeal from
Washington Superior Court
Alpen Associates June Term, 1989
Alan W. Cheever, J.
David Putter of Saxer, Anderson, Wolinsky & Sunshine, Montpelier, for
plaintiff-appellant
James M. Vitt of Paterson & Walke, P.C., Montpelier, for defendant-appellee
PRESENT: Allen, C.J., Peck, Gibson, Dooley and Morse, JJ.
PECK, J. This case involves the 1985 purchase by plaintiff Sugarline
Associates, a limited partnership, of a hotel and land in Waitsfield,
Vermont, owned by defendant Alpen Associates, also a limited partnership.
Sugarline sued for damages, claiming that Alpen fraudulently failed to
disclose information about the site's septic system, and Alpen
counterclaimed to collect on a promissory note given to Alpen at the
closing. The superior court awarded damages on the constructive fraud
claim and set off that sum against the amount owed on the note, with a net
award to Alpen. Both parties appealed, raising numerous issues. We find as
a matter of law that Alpen's conduct in this transaction did not amount to
fraud (constructive or otherwise) and accordingly vacate the damages award.
We remand for a determination of what amount, if any, Sugarline owes on the
promissory note.
I.
As found by the trial court, the facts essential to the issues on
appeal are as follows. Alpen Associates owned and operated a 33-room hotel
and restaurant in Waitsfield known as the Alpen Inn. Prior to Alpen's
purchase of the property in 1982, the leach field had failed, and the
previous owner had applied to the state for a land use permit to install a
new leach field. A permit was issued in 1978 approving the construction of
a replacement field and containing the following condition:
Only utilization of the replacement field is authorized.
Any substantial change to the project involving
increased wastewater flows or further repair or
reconstruction of the subsurface wastewater disposal
system will require prior review and approval by the
Agency of Environmental Conservation.
A new leach field was installed and used thereafter. The permit was among
the records transferred to Alpen when it assumed ownership of the Inn.
After purchasing the property, Alpen initiated a project to construct
condominiums alongside the hotel, and to this end began the necessary Act
250 permit process. In November 1982, a hydrogeologist with the Agency of
Environmental Conservation, Stephen Goldberg, visited the site and
performed soil tests. In a letter to Michael Wurth, a geologist hired by
Alpen, Goldberg related details of his findings and recommended further
analysis. The letter referred to the 1978 land use permit authorizing use
of the replacement field only, and stated that "[t]he new disposal field has
a design capacity of 4,500 gallons per day and the old field had a design
capacity of 7,500 gallons per day." Goldberg then concluded his letter:
Since the proposed condominium development is an
expansion of the overall Alpen Inn property operation, a
replacement disposal area for the Inn facility must be
identified and provided before consideration can be
given to the condominium project. The Food and Lodging
Section of the Vermont Department of Health has indi-
cated that the Inn is licensed for 130 bed spaces and
150 restaurant seats. This means that a replacement
area with a capacity to accommodate 11,000 gallons per
day of sewage must be provided. It should be pointed
out that the new disposal field for the Inn facility and
the old disposal field (if utilized) have a combined
design capacity of just over 11,000 gallons per day.
Alpen received a copy of this letter. Alpen's failure to disclose the
letter and the 1978 permit (or the information contained therein) in the
subsequent negotiations with Sugarline is the basis for the fraud claim.
A week after the letter was sent, Goldberg and Wurth met to discuss
plans for increased sewage capacity for the condominium project. A second
letter from Goldberg to Wurth, also with a copy to Alpen, dated the day
after the meeting, summarizes their agreements on what further tests should
be performed. This letter contains the following paragraph: "It is our
understanding that the land encompassing the Alpen Inn will be subdivided
into a 10 acre parcel. Therefore, the subject of the replacement leach
field as raised in our letter of November 22, 1982 is no longer under our
jurisdiction."
The land apparently could accommodate a septic field for the
condominium development. In May of 1983, Wurth wrote to a geologist at the
Department of Water Resources, confirming a meeting at which it was decided
that "the project will have 92 bedrooms generating 13,800 gallons of waste
water per day. A 10% flow reduction will be generated for the installation
of low flow mixture. The septic tank will be sized for 13,800 gallons per
day, while the disposal field sizes and flow nets will be based upon the
reduced flows of 12,420 gallons per day."
Alpen subsequently abandoned the condominium project, and placed the
Inn on the market. In the fall of 1984, Andrew Neisner, a general partner
of Sugarline Associates, began negotiations with Alpen's general partners,
Robert Forenza and Geoffrey Dickes, to purchase the property. The trial
court found that Neisner informed Forenza and Dickes "of his intention, upon
purchase of the property, to enlarge the hotel." Finding No. 34 states in
part:
The plans were described in general terms, and the
defendants were told that Mr. Neisner planned to build a
luxury "Sheraton Spec" hotel that would have approxi-
mately 100 rooms which would sleep 4 persons each. It
would also have a restaurant, lounge, health center and
conference facilities which could service 250 people.
The credible evidence is that the defendants did not
tell Mr. Wolf [Neisner's associate] or Mr. Neisner
during 1984 that there was 11,000 gallons per day
available sewage capacity from the existing systems or
that the old leach field and the new leach field could
be used together. However, Mr. Neisner was told by Mr.
Dickes that defendant had verbal concurrences from the
State of Vermont for 13,800 gallons in back of the Inn
with a flow reduction of 12,420 gallons per day.
In short, no affirmative misrepresentations were made.
Discussions continued for several months and in May of 1985, Neisner
delivered a draft purchase and sales agreement to Alpen's attorney. Section
12 of the draft agreement included the following representations by the
seller:
(a) That the present septic system is in good working
order and approved for a capacity of ______ gallons.
There are no known defects therein.
(b) That Seller has obtained approval for construction
of an additional 13,500 gallon capacity septic system
pending completion of final design drawings suspended
prior to submission. The obtaining of said final
approval shall be a contingency upon this agreement.
Alpen expressly refused to enter a figure into the blank in section 12(a).
After further discussion, Neisner prepared a second draft agreement with a
new section 12(a) as follows:
That the existing septic system is in good working order
and is currently approved for the capacity required by
the Alpen Inn. There are no known defects therein.
Seller warrants that there have been no recent problems
with capacity or flow which would jeopardize continued
use of the system at its present capacity.
(Emphasis added.) Alpen stated that it could not agree to this provision
either.
Negotiations continued. Finding No. 50 relates a discussion at a June
1, 1985 meeting:
Mr. Lorenz (Neisner's attorney) told the defendants that
the plaintiff needed between 22,000 and 24,000 gallons
per day from a septic system. Mr. Lorenz stated that he
asked the defendants whether he could place 9,000 gal-
lons per day, 10,000 gallons per day or 11,000 gallons
per day as an amount of the existing septic system.
Attorney Lorenz stated that he understood from the
discussion that the existing system would have no less
than 9,000 gallons per day. The credible evidence is
that the defendants told Mr. Lorenz and Mr. Neisner
that they did not know what the legal capacity of the
existing system was.
The trial court found, however, that Dickes and Forenza did not
disclose all that they did know. Finding No. 54 states:
The court finds that during negotiations with
Neisner, Forenza and Dickes knew, but did not disclose
to Neisner or any other representative of the plaintiff:
(a) That the Alpen Inn had and was only authorized to
use one leach field.
(b) That leach field had a design capacity of only
4,500 gallons per day.
(c) That there was no back-up leach field with which
that 4,500 gallons per day leach field could be
alternated.
(d) That the second "old" leach field had failed in
1978.
The record also tends to show (although the trial court did not make
findings on the matter) that, during these negotiations, Dickes and Forenza
offered to convey additional information but that Neisner declined the
offer. Neisner acknowledged in testimony that it is his general practice to
hire engineers to handle the technical aspects of his projects. Forenza
testified that during a discussion on an early draft of the purchase and
sales agreement, when Sugarline "was trying to have us get this gallonage
put in the contract . . . I mentioned that there was some representation,
that there was something in the files that may determine it. . . . Mr.
Neisner came in and he indicated that his engineers would be checking it
out, and to leave it at that, and that was the understanding we had." This
exchange was confirmed in testimony by Alpen's real estate broker, Brian
Lewis, who was present at the meeting. Dickes also testified generally that
"whenever I endeavored to volunteer something, I always felt that it was
received somewhat negatively as though . . . I couldn't hope to know as much
about the development process as what Mr. Neisner knew."
Neisner did not request access to Alpen's files on the Inn until June
18, 1985, the date the sales contract ultimately was signed. On the
following day, Dickes accordingly provided the records to Neisner's
contractor, Robert Blair, including the 1978 land use permit and the letters
from Stephen Goldberg. Blair acknowledged that Dickes was "always willing
to provide" him with information. There is no evidence that files were ever
withheld from Neisner or his agents. The record also reveals that the 1978
permit and the Goldberg letters were on file at the District 5 Environmental
Commission office and were thus available to Neisner even had Forenza and
Dickes refused to provide them.
The signed purchase and sales agreement provides in section 12(a):
That the existing septic system is in good working order
with no known defects. Seller warrants that there have
been no recent problems with capacity or flow thereof
which would jeopardize continued use of the system at
its present capacity.
Section 12(b) in the agreement appears substantially as it did in Neisner's
first draft. Section 12(c) states that "excepting certain fire code
violations, there are no known violations of any state, local or federal
laws or regulations and Seller has no knowledge of any condition now
existing which would cause such a violation." No reference is made to the
amount of present capacity or whether the existing system had been approved
for the capacity required by the Inn, items from the earlier drafts that
Alpen had expressly refused to warrant.
The contract also specifies that the buyer shall be responsible for
obtaining all permits "for the construction of a not less than 90 unit
condominium hotel." Appended to the agreement is a list of the required
permits including a "certificate of compliance" from the Department of Water
Resources, with the proviso:
It is understood that the Seller makes no representation
that any permit or authorization it has obtained will be
valid, or subject to amendment so as to be suitable, for
Buyer's intended development project.
Hoping to complete construction by the end of the year, Neisner
immediately began preparations for obtaining the requisite permits. New
soil tests were done, and an engineering firm was engaged to design a new
septic system. The Department of Water Resources finally issued a
"certificate of compliance" on November 22, 1985, approving wastewater
disposal of 4,500 gallons per day in the field previously approved in 1978
and 15,421 gallons per day in the newly designed field. A land use permit
was issued on December 6, 1985 by the District 5 Environmental Commission,
authorizing extensive renovation of the Inn.
The sale was closed on December 13 and 16, 1985. Among the terms of
payment, Sugarline executed a promissory note, secured by the property, in
the amount of $309,500. Interest at 15 per cent was to be paid monthly
over the course of a year, and the principal was to be paid in full on
December 16, 1986. Sugarline fell behind on the interest payments and never
paid the principal.
The trial court concluded that Alpen was liable for "constructive
fraud" because it failed to disclose material facts, thereby inducing
Sugarline to purchase the property. The court accordingly awarded Sugarline
damages, calculated at $36,528. This amount was set off from the larger
amount of $333,508 due Alpen on the promissory note.
II.
Liability for fraud may be premised on the failure to disclose material
facts as well as on affirmative misrepresentations.
Under Vermont law, fraud must "consist of some
affirmative act, or of concealment of facts by one with
knowledge and a duty to disclose." Standard Packaging
Corp. v. Julian Goodrich Architects, Inc., 136 Vt. 376,
381, 392 A.2d 402, 404 (1978). . . .
Where such duty is present, the failure to disclose a
material fact coupled with an intention to mislead or
defraud rises to the level of material misrepresen-
tation.
White v. Pepin, 151 Vt. 413, 416, 561 A.2d 94, 96 (1989); accord Sutfin v.
Southworth, 149 Vt. 67, 70, 539 A.2d 986, 988 (1987) ("Vermont has long
recognized the doctrine of negative deceit" where there is a duty to speak);
Cushman v. Kirby, 148 Vt. 571, 575-76, 536 A.2d 550, 552-53 (1987); Cheever
v. Albro, 138 Vt. 566, 571, 421 A.2d 1287, 1290 (1980). Where there is no
intent to mislead or defraud, but the other elements of fraud are met, we
have held that a seller may be liable for constructive fraud. "'Actual
fraud' is deceitful misrepresentation or concealment with evil intent, while
'constructive fraud' is wrongdoing without bad faith." Proctor Trust Co.
v. Upper Valley Press, Inc., 137 Vt. 346, 354, 405 A.2d 1221, 1226 (1979).
Here, the trial court made no findings that Alpen intended to defraud or
mislead Neisner -- only that, by withholding critical information, it did in
fact mislead him. The findings therefore do not support liability for
actual fraud, and the trial court properly rejected that claim. We hold
that the court erred, however, in concluding that Alpen was liable for
constructive fraud.
We may assume that Alpen had a duty to disclose once Neisner inquired
as to the capacity of the septic system. Cf. White v. Pepin, 151 Vt. at
416, 561 A.2d at 96 ("no general duty to disclose facts absent inquiry
...."). We also assume, as the trial court found, that Alpen knew the
facts and that they were "material" to the transaction, although there is
some evidence in the record to the contrary. Materiality, knowledge, a duty
to disclose, and a failure to do so, however, do not exhaust the elements of
constructive fraud. As with any action in fraud, recovery also requires
that the party claiming fraud justifiably relied on the statements or
conduct of the other. Liability in fraud extends only to harm caused by the
buyer's "'justifiable reliance upon the misrepresentation.'" Proctor Trust
Co. v. Upper Valley Press, Inc., 137 Vt. at 351, 405 A.2d at 1224-25
(quoting Restatement of Torts { { 525 (1938)); accord Restatement (Second)
of Torts {{ 525, 537 (1977). (FN1) It is the element of justifiable reliance
that is missing in this case.
Neisner relied only on inferences he himself drew from the information
conveyed to him -- none of it false -- coupled with Alpen's express dis-
claimers of knowledge as to the septic capacity then existing and its
express refusal to warrant that the system was approved for the capacity
required by the state for an Inn of that size. These were signals that
would lead a reasonable buyer not to rely on an assumption that all relevant
documents or information had been disclosed, but, to the contrary, to
investigate further. As we stated recently: "The 'duty' to investigate,
such as it is, is not necessarily determined by the experience of the
parties to a deal, but by their conduct and the circumstances under which
they make their decisions." White v. Pepin, 151 Vt. at 420, 561 A.2d at
98. The conduct and circumstances here -- strikingly different from those
where we have allowed recovery -- indicate that Neisner was not justified in
relying on his inferences and assumptions about the property's septic
system.
In White v. Pepin, the defendant had purchased a business and failed to
pay certain consulting fees due the plaintiff under the sale agreement.
When the plaintiff sued for the fees, the defendant counterclaimed that he
was induced to buy the business through fraud. The trial court dismissed
the counterclaim and ruled that the defendant had a burden to investigate
the truthfulness of the plaintiff's representations, "stating that most of
the facts of which defendant complained were readily discoverable through
review of the Chapter 11 bankruptcy pleadings or other investigative
techniques prior to the purchase." Id. at 419-20, 561 A.2d at 98. We
reversed, holding that
what constitutes due diligence must be weighed against
the facts of each case. Here, plaintiff placed
defendant in a position where it was impossible, if he
wanted to make a deal, to do any investigation other
than what he did . . . .
. . . Where, as here, plaintiff placed defendant in a
position calculated to discourage independent investi-
gation, and where defendant actively sought out infor-
mation from plaintiff himself as well as from corporate
books and records, it would be inequitable now to
require that defendant should have inquired further.
Id. at 420, 561 A.2d at 98. In the present case, by contrast, Alpen never
discouraged independent investigation and certainly did not make further
investigation by Sugarline "impossible"; the evidence shows, to the
contrary, that Alpen invited further investigation, at least by
implication. Sugarline was under time constraints of its own making, unlike
in Pepin, where the buyer "was told, in effect, that if he did not make a
purchase offer almost immediately, [the seller] would be compelled to accept
[another] offer." Id. at 415, 561 A.2d at 95. The equities, in short, are
entirely dissimilar in the two cases.
Our decision in Cushman v. Kirby is similarly instructive. In that
case, a couple selling their house failed to disclose to the buyer that the
well water was sulfuric and only "tolerable" to drink after treatment,
responding to the buyers' inquiry about the water's quality only that the
water was "a little hard." 148 Vt. at 573-74, 536 A.2d at 551. We held
that the question of fraud was properly submitted to the jury under the
following standard:
"Where one has full information and represents that he
has, if he discloses a part of his information only,
and by words or conduct leads the one with whom he
contracts to believe that he has made a full disclosure
and does this with intent to deceive and overreach and
to prevent investigation, he is guilty of fraud against
which equity will relieve, if his words and conduct in
consequence of reliance upon them bring about the result
which he desires."
Id. at 574, 536 A.2d at 552 (quoting Crompton v. Beedle, 83 Vt. 287, 298, 75 A. 331, 334-35 (1910)). Again, in marked contrast, Alpen never represented
or implied that it had "full information" and never indicated by its words
or conduct that it had "made a full disclosure." Alpen's words and conduct
conveyed exactly the opposite impression.
In Sutfin v. Southworth, we reversed a judgment for the seller of a
home after the buyer sued in fraud, where the seller failed to disclose
facts pertaining to the septic system. There, we held that "when the nature
of the misrepresentation or fraudulent concealment itself led the plaintiff
to forbear a full inquiry, such reliance will not bar recovery." 149 Vt. at
70, 539 A.2d at 988. Here, as we have emphasized, the nature of the
"concealment" found by the trial court, far from having led Sugarline "to
forbear a full inquiry," actually invited further inquiry.
Whether or not a buyer has a general duty to investigate facts material
to its purchase of real estate, see W. Keeton, D. Dobbs, R. Keeton & D.
Owen, Prosser and Keeton on The law of Torts { 108, at 752 (5th ed. 1984),
we conclude that a duty to investigate is triggered when, as here, the buyer
is put on notice by the seller's declaration of ignorance of the material
facts. Dickes' and Forenza's statements disclaiming knowledge and their
express refusal to identify an existing septic capacity -- even if they had
deliberately withheld information -- would put a reasonable buyer, planning
a multimillion dollar development, on notice that it should investigate
further, until satisfied it has the information it needs, or proceed at its
own risk. Sugarline relied not on false information obtained from Alpen,
nor even on Alpen's silence as to material facts, but on inferences it drew
from discussions with Alpen regarding the property's septic capacity that
Alpen expressly refused to warrant. In these circumstances, the buyer's
reliance was not justified and cannot be the predicate of liability for
fraud, constructive or actual.
III.
Sugarline argues that Alpen's counterclaim upon the note is moot
because Alpen subsequently "obtained satisfaction of a judgment in fore-
closure against the realty secured by that note" and should not be
permitted a double recovery. Alpen responds by denying that it is in
possession of the property. We remand to the superior court for a deter-
mination of the facts necessary to decide whether Alpen has indeed obtained
full satisfaction.
The parties also raise claims pertaining to the proper remedy for
constructive fraud (Alpen contends that rescission is the only available
remedy); the amount of damages (Sugarline contends it should be awarded
additional damages representing the "benefit of the bargain" plus con-
sequential damages caused by delay); the court's failure to award pre-
judgment interest on the damages award; and the timeliness of Neisner's
assignment of his cause of action to Sugarline. None of these claims need
be addressed in light of our holding that the elements of fraud were not
proved.
Judgment reversed; cause remanded for proceedings as directed herein.
FOR THE COURT:
__________________________________
Associate Justice
FN1. Section 525 states the basic rule of liability for fraudulent
misrepresentation, in part: "One who fraudulently makes a misrepresentation
. . . is subject to liability to the other in deceit for pecuniary loss
caused to him by his justifiable reliance upon the misrepresentation."
Section 537 provides: "The recipient of a fraudulent misrepresentation can
recover against its maker for pecuniary loss resulting from it if, but only
if, (a) he relies on the misrepresentation in acting or refraining from
action, and (b) his reliance is justifiable." Identical rules apply where
one party conceals or intentionally prevents the other from acquiring
material information, Section 550, or where a party under a duty to disclose
"fails to disclose to another a fact that he knows may justifiably induce
the other to act or refrain from acting . . . ." Section 551(1).
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