Yvonne R. Kovach appeals the summary final judgment of foreclosure in favor of appellees, William and Nancy McLellan, and the dismissal with prejudice of her amended counterclaim. We vacate the summary final judgment and reverse the dismissal with prejudice of the counterclaim.
The McLellans alleged non-payment of installments and failure to insure the security as grounds for their action to foreclose a mortgage granted by Kovach. Kovach generally denied the allegations and affirmatively alleged waiver, estoppel, fraud, and failure of consideration. In her counterclaim, Kovach sought damages for fraud and to set aside the mortgage on the grounds of fraud, misrepresentation, and want or failure of consideration. Kovach alleged that she purchased a single-family residence from the McLellans' daughter and son-in-law, the Aldermans; that at the time of purchase she delivered a note and mortgage on the property in favor of the McLellans; that the McLellans had participated in improper construction of improvements on the property; that two years and three months prior to this purchase the McLellans sold the residence to the Aldermans and accepted a purchase money mortgage that was replaced by Kovach's mortgage; and that, sometime after the purchase, Kovach discovered latent defects that rendered the property uninhabitable.
The McLellans' motion to dismiss Kovach's first counterclaim was heard on November 3, 1988. The trial court dismissed the counterclaim, allowing Kovach until November 14, 1988, to file an amendment. The order was filed on November 22, 1988, and dated by handwritten entry that is difficult to decipher but appears to be "the 18th day of March, 1988," although, logically, it was probably dated November 18, 1988. Kovach then served an amended counterclaim and third party claim on November 30, 1988. The McLellans countered with a motion to dismiss, alleging that the amended counterclaim was tardy, failed to state a cause of action, and merely repeated the allegations contained in the first counterclaim. A hearing on this motion on December 14, 1988, resulted in an order dismissing the amended counterclaim with prejudice. This time, the order was signed and filed on December 14. The order does not state any grounds for the dismissal with prejudice.
While the motion for summary judgment of foreclosure is not affected by the confusion of dates and while all procedural rules were followed, the counterclaim included a count to set aside the mortgage, and that counterclaim was improperly dismissed with prejudice. Therefore, the judgment must be vacated until resolution of the counterclaim. Because of the unique nature of the position of the McLellans as lender and former owner, we feel obliged to guide the trial court in its subsequent proceedings.
Kovach opposed the motion for summary judgment through her affirmative defenses, alleging without detail waiver, estoppel, fraud, and failure of consideration. She attempted to support those defenses through factual contentions set forth in an affidavit in opposition to the McLellans' motion for summary judgment. The affidavit indicated that the McLellans took an active role in the sale of the property; that they agreed to allow Kovach to assume a mortgage held by them on the property;
The McLellans' liability for nondisclosure of defects as individual lender and former owner of the property presents an issue that we have been unable to locate in previous appellate decisions. Kovach and the McLellans are in privity as lender and borrower, but they are not in privity in their respective capacities as buyer and remote seller. Because of the absence of privity between them as buyer and seller, the rule of law pronounced in Johnson v. Davis, 480 So.2d 625 (Fla. 1985), does not apply. In Johnson, our supreme court held that, when the seller of a used home knows of defects materially affecting the value of property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer. Johnson may have application to Kovach and the Aldermans as current buyer and seller who are in privity with each other, but not to Kovach and the McLellans as current purchaser/former seller. Johnson did not involve lender liability for failure to disclose, and we are unwilling to expand the rule established in that case in the absence of any affirmative representations of any fiduciary, special, or longstanding relationship between Kovach and the McLellans as lenders.
Also absent from Kovach's answer and affidavit is any allegation that she relied upon an affirmative representation or expertise of the McLellans to her detriment. S.H. Investment & Development v. Kincaid, 495 So.2d 768 (Fla. 5th DCA 1986), rev. denied, 504 So.2d 767 (Fla. 1987), is cited by Kovach to establish the essential elements for an action based upon fraud. The first element, which requires a false statement concerning a material fact, is absent in the instant case. Ramel v. Chasebrook Construction, 135 So.2d 876 (Fla. 2d DCA 1961), is cited for the rule that nondisclosure of a material fact may be deemed fraudulent where the other party does not have equal opportunity to become apprised of the fact. However, that case involved a construction company's failure to advise its buyer that the home built by the company for its customer was erected without pilings on muck when affirmative representations were made that the house was well constructed.
Kovach's affidavit opposing the motion for summary judgment shows at most that the McLellans' participation in the Aldermans' sale to Kovach was that the McLellans "agreed to allow [Kovach] to assume [the] mortgage." This allegation and the other sketchy recitations in the affidavit are not enough to support her affirmative defenses. To hold a lender responsible for damages such as these, there must be allegations of ultimate facts that would indicate active participation in the sale of the residence or the existence of a special relationship between the lender and the borrower. We are cognizant of the special relationship that exists here between the seller and the lender, but Kovach knew of this relationship at the time she purchased the house and granted the mortgage. No allegation was made that the McLellans conspired with the Aldermans to defraud her.
Judgment VACATED; REVERSED and REMANDED.
DANIEL, C.J., concurs.
W. SHARP, J., concurs with result, dissents in rationale with opinion.
W. SHARP, Judge, concurring in result and dissenting, as to rationale.
I respectfully disagree with the majority opinion, not only because I find the facts in this case so extreme as to "shock my judicial conscience" (we appellate judges do have them), but also because I think it construes the thrust of Johnson v. Davis, 480 So.2d 625 (Fla. 1985) much too narrowly. Further, I think Kovach raised a valid affirmative defense in her counterclaim of negligent construction (although not specifically so labelled), which was probably a compulsory counterclaim
The McLellans filed a mortgage foreclosure action against Kovach. Kovach pled fraud and failure of consideration due to a botched construction job performed on the house by the McLellans and their daughter and son-in-law (the Aldermans). Kovach also filed an amended counterclaim against the McLellans seeking to set aside the mortgage and claiming damages for fraud. The trial court ruled the defenses and counterclaim were legally insufficient because Kovach could neither allege she purchased the house from the McLellans, nor could she allege any affirmative misrepresentation they made to her concerning the house prior to her purchasing it from the Aldermans and executing the mortgage the McLellans. Apparently the majority opinion echos this limited view, and the result after remand will probably not alter the result in the trial court.
In my view, lack of a buyer-seller relationship with the McLellans and absence of an affirmative misrepresentation on their part are not fatal defects in this case. Kovach alleged that the McLellans sold the subject property to the Aldermans in 1984; the Aldermans and the McLellans participated in building the residence; and all four knew it had been built in violation of applicable building codes. The violations were so extreme that the residence is now uninhabitable, and it has been condemned by local authorities.
Kovach also alleged that the defects in the house were not discoverable by a reasonable inspection. For example, the kitchen sink, toilets, and bathroom sink drain into an improperly installed septic system. The bathtub drains directly into the ground. Other substantial defects were alleged to exist with regard to electrical wiring, roof installation, and the heating system. A letter from a building inspector attached to the amended counterclaim opines that $35,000 to $40,000 will be required to put the residence in acceptable condition.
The pleadings also established that in 1986 Kovach signed a contract to buy the residence from the Aldermans. She is a single parent with children and intended to use the structure as her residence. The purchase price was $69,000, but $35,000 was to be financed by the McLellans. The McLellans originally held a $38,000 purchase money mortgage from the Aldermans. In order to finance Kovach's purchase, the McLellans agreed to satisfy the Alderman mortgage and replace it with a mortgage from Kovach.
Neither the Aldermans nor the McLellans told Kovach about the serious, latent construction defects of the house before she closed the purchase and executed the mortgage in favor of the McLellans. Shortly after Kovach moved into the house, she experienced a series of problems requiring repairs.
Although Kovach did not specifically label as one of her causes of action negligent construction, the facts pled and her request for damages disclose a viable cause of action, which make entry of final summary judgment against her erroneous. She alleged the McLellans participated in the construction of this disastrous home. Although she could be categorized as a "remote purchaser," the lack of privity is no defense in such cases. See Simmons v. Owens, 363 So.2d 142 (Fla. 1st DCA 1978) (remote purchaser held able to sue contractor who built home for a prior owner, for negligent construction contrary to building code); Drexel Properties, Inc. v. Bay Colony Club Condominium, Inc., 406 So.2d 515 (Fla. 4th DCA 1981) (remote purchasers of condominium units allowed to sue builder for negligent construction and recover their economic losses).
As was observed by our sister court in Parliament Towers Condominium v. Parliament House Realty, Inc., 377 So.2d 976 (Fla. 4th DCA 1979), the issue is not privity, but foreseeability. If a person negligently constructs a residence the fact that the identity of the person or family who eventually resides there is unknown, is no defense. It is clearly foreseeable someone will live there and will be damaged.
However, a stronger and more clearly articulated defense and cause of action in this case is fraud and deceit. Without question fraud and deceit can be valid defenses in a mortgage foreclosure suit, where as here, the McLellans are not holders in due course.
The trial judge, as well as the majority opinion, find Kovach's allegations legally insufficient because Kovach purchased the residence from the Aldermans rather than the McLellans. The majority holding is that under such circumstances the McLellans owed Kovach no duty to disclose the latent material defects in the house she was buying and which they were undertaking to finance. I disagree. Privity has never been required by the tort or equitable defense of fraud and deceit. Prosser, Law of Torts (4th ed.), p. 686. Focus on that relationship misconceives the essence of the tort as applied to failure to disclose.
Failure to disclose, like nonfeasance as opposed to misfeasance, was traditionally restricted by the courts to special situations or relationships. However, the exceptions appear to be rapidly consuming the rule.
But even if the McLellans are viewed as not having privity with Kovach because they were not the sellers of the property, the lack of privity is not fatal. Kovach alleged the McLellans knew of the defects and participated in their creation, and they
In Johnson, our supreme court adopted the rule that nondisclosure of a latent material defect is an actionable fraud in a suit brought by a buyer against the seller of real estate. It said:
Id. at 628. Although Johnson involved a seller and a buyer of a residence, I do not think the court intended to limit the rule of law to those facts.
Other Florida courts have extended the rule in Johnson to real estate brokers. See Young v. Johnson, 538 So.2d 1387 (Fla. 2d DCA 1989); Rayner v. Wise Realty Company of Tallahassee, 504 So.2d 1361 (Fla. 1st DCA 1987). The Third District, which originally wrote the Johnson opinion, later affirmed by the supreme court, specifically noted that the duty to disclose might well be applicable to real estate brokers, builders, and developers beyond the immediate seller. Johnson v. Davis, 449 So.2d 344, 350, n. 1 (Fla. 3d DCA 1984). The same result has been reached in cases decided in other jurisdictions.
In Daniel v. Coastal Bonded Title Co., 539 So.2d 567 (Fla. 5th DCA 1989), we held that a cause of action in fraud had been pled against a title agent and his company for failure to disclose to a buyer easements not of record, but known to the insurer prior to the closing, when the title insurance company stood to benefit from the closing going forward. Similarly, in Ramel v. Chasebrook Construction Co., 135 So.2d 876 (Fla. 2d DCA 1961), contra other grounds, Johnson, the court held that a prima facie cause of action in fraud for nondisclosure had been established by a remote purchaser against a builder under facts similar to this case. The defect in Ramel was the soil condition (muck) which caused the residence to settle and crack.
In Ramel, the defective lot was sold directly to a builder (Chasebrook Construction Company, Inc.), who built a house on it "for speculation." Chasebrook (the developer and seller of the builder) held a purchase money mortgage. When the builder sold the house to the plaintiff, the developer's mortgage was paid off out of the proceeds of the sale. The presidents of both corporations told the plaintiff the house was "well built," but neither disclosed to the plaintiff that the patio, pool and house had been built on a muck foundation, nor did they make any affirmative representations concerning the foundation.
The Ramel court held that under these circumstances both the developer and builder committed "affirmative," actionable fraud, despite lack of privity between the developer and home-buyer. However, the court went on to say that these facts also constituted "actionable nondisclosure":
135 So.2d at 882.
Banks or financiers in positions like the McClellans have also been held liable and
Section 551 of the Restatement of Torts provides:
The comments to (e) indicate that in order to create the duty to disclose, the information must be "basic," "going to the essence" of the transaction, and more than material.
In my view, the horrendously poor, jerryrigged construction of the home Kovach purchased meets the test of being "basic," since it went to the essence of the purpose of the transaction: obtaining a place fit for human habitation. The defects certainly were "material." The McLellans knew of the latent defects; they participated in creating the defects; they stood to benefit from the sale and acceptance of Kovach as mortgagor; their participation as mortgagees was essential to finance Kovach's purchase; and they had the opportunity to disclose the defects to Kovach prior to the closing, but did not do so. Under these alleged circumstances, I think the McLellans owed Kovach a duty to disclose and their failure to do so constituted actionable fraud and deceit. Dismissal of Kovach's defenses and counterclaim based on the pleadings was erroneous.