Monday, June 1, 2009

Court holds that purchasers of reals estate failed to prove elements of their negligent misrepresentation claim

THE HOMESTEAD GROUP, LLC., v. BANK OF TENNESSEE (Tenn. Ct. App. February 26, 2009).

Plaintiff investor Group purchased a hotel from defendant Bank and after defaulting on the loan the Bank foreclosed and repurchased the hotel at the foreclosure sale. Plaintiff investor Group brought this action against the Bank based on intentional fraud and negligent misrepresentation and sought rescission and/or damages. The Trial Judge, after hearing evidence, ruled in favor of the Bank and dismissed plaintiff’s action. Plaintiff appealed and we affirm the Judgment of the Trial Court.

Opinion may be found at the TBA website:

“Liability for negligent misrepresentation will result: if defendant is acting in course of his business, profession, or employment, or in transaction in which he has pecuniary interest and if plaintiff establishes that the defendant supplied information to the plaintiff meant to guide others in their business transactions; the information was false; the defendant did not exercise reasonable care in obtaining or communicating the information; and the plaintiff justifiably relied on the information.”Id.

“Tennessee courts have identified three exceptions to this general rule and have held that a duty to disclose exists: where there is a previous definite fiduciary relationship between the parties; where it appears one or each of the parties to the contract expressly reposes a trust and confidence in the other; or where the contract or transaction is intrinsically fiduciary and calls for perfect good faith such as a contract of insurance which is an example of this last class. Macon at 349. Moreover, the courts have extended the duty of disclosure of material facts to real estate transactions under certain circumstances.”Id.

“Based on the foregoing, the plaintiffs did not meet their burden of establishing the elements of fraudulent misrepresentation. The plaintiff had to establish that the Bank’s representation of fact was false when made and that the fact was material. There is no dispute that the business’ prior income was material to the decision to buy the Hotel. However, assuming that Carroll was acting as the Bank’s agent when he produced the Income Statement to the buyers, the Group put on no evidence that the Income Statement was indeed false. All they could show was exactly what Howell told them before they signed the contract, that there was conflicting information on the Hotel’s prior income from several sources. Plaintiffs offered no evidence to substantiate that the information in the Fletcher appraisal was true or that the data in the Income Statement was false. The fourth element of the tort of fraudulent misrepresentation was also not proven by the plaintiffs. Carroll claimed that he did not know that the Income Statement was false when he produced it to the buyers. The Trial Court believed Carroll’s testimony. Moreover, his alleged misrepresentation was corrected within twenty-four hours and before the sale by Howell. The buyers’ claimed reliance on the Income Statement was unreasonable. Moreover, the actions of Baldridge and Campbell indicate they did not rely on the Income Statement despite their testimony to the contrary. When Ms. Baldridge prepared the business plan for the Hotel, her revenue projections were approximately 20% less that the revenue report in the Income Statement. Also, the business plan itself confirmed that the buyers were not relying on the Income Statement with the statement that “due to the inability to confirm prior financial history of the Open Hearth Hotel . . . “ Id.