Duane Harmon v. Gary Fisher

FILED
Jun 23 2016, 9:12 am

CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court

ATTORNEY FOR APPELLANT ATTORNEY FOR APPELLEE
David W. Stone IV Thomas L. Hulse
Stone Law Office & Legal Research Hulse Lacey Hardacre & Austin, PC
Anderson, Indiana Anderson, Indiana

IN THE
COURT OF APPEALS OF INDIANA

Duane Harmon, June 23, 2016

Appellant-Defendant, Court of Appeals Case No.
48A02-1511-SC-1957
v. Appeal from the Madison Circuit
Court.
The Honorable Thomas L. Clem,
Gary Fisher, Judge.
Appellee-Plaintiff. Cause No. 48C05-1506-SC-2332

Garrard, Senior Judge

[1] Duane Harmon appeals from the trial court’s judgment in a small claims action

brought by him alleging false representation made on a real estate sales

disclosure form about the condition of certain real estate sold to him by Gary

Fisher. Finding that the judgment is not clearly erroneous, we affirm.

[2] Gary Fisher’s mother and step-father purchased real estate in Anderson,

Indiana in 1976. Fisher never lived in the home, but in games played with

children while visiting the house, Fisher and others used a metal lid, which was
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 located in the yard and marked as a water meter, as home plate. After Fisher’s

mother and step-father relocated to a nursing home sometime in 2013 or 2014,

Fisher paid their bills pursuant to a power of attorney. Among the bills was the

Anderson City Utility bill showing charges for city water and sewage services.

Believing that the real estate was connected to the city water and sewer system,

and, thus that the charge was valid, Fisher paid that bill.

[3] Fisher inherited the real estate upon his mother’s death in 2014. Fisher sought

to sell the home at auction and had the property appraised. The appraisal

showed that the house was connected to public water and sewer services. Ex.

Vol. p. 33. The public auction flyer pertaining to the house stated that “[t]he

mechanics of the house include city water/sewer.” Id. p. 46.

[4] The home did not sell at auction, so Fisher listed it with Janice Stinson Real

Estate. The real estate listing for the home stated that the primary water source

and primary sewage disposal were both connected to the municipality. Id. p. 3.

Harmon, who was not present at the auction, made a first offer on the house for

$25,000. After negotiating, Harmon and Fisher agreed upon a purchase price

of $27,000. The seller’s residential real estate disclosure form contained a line

for disclosure of whether the structures were connected to a public sewer

system. The columns allowed responses of yes, no, and do not know. Fisher

selected the yes column. In the section answering “Septic Field/Bed” and

“Septic & Holding Tank/Septic Mound”, the answers that could be chosen

were “None/Not Included/Rented”, “Defective”, “Not Defective”, and “Do

Not Know”. Id. p. 12. Fisher answered both questions by selecting

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 “None/Not Included/Rented”. Id. When Fisher completed the disclosure

form, he believed the property was connected to city sewer services.

[5] After taking possession of the property in April 2015, Harmon attempted to

shut off the water to replace some washing machine valves. Harmon removed

the water meter cover in the yard and discovered a septic tank. He called a

plumber to come to the property and verify that it was not connected to the city

sewer system, and after that, paid the expenses associated with having the

property connected to the system, including knocking a hole in the basement

wall, and excavating, grading, and seeding the yard. By the time of trial,

Harmon had sold the property on contract for $46,900.

[6] Harmon filed a notice of small claim on June 23, 2015, and filed his amended

complaint on September 22, 2015. The trial was held on October 7, 2015. At

the trial, Harmon testified that as an experienced purchaser of homes for resale,

having purchased close to seventy-five homes over the years, he would not have

considered purchasing the property had he known in advance that it was

connected to a septic system. He admitted that he conducted his own thorough

inspection of the home. He produced evidence that it cost $3,200 to have the

house connected to the city sewer, $225 for landscaping the lawn, $250 for

verification of the septic system by the plumber, and a loss of the use of the

property valued at $250. Harmon also sought $500 in attorney fees due to the

allegation of fraud and misrepresentation in the disclosure form.

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[7] Fisher testified that he had never lived in the home and believed that it was

connected to both city water and city sewer systems. He stated that he did not

provide the information contained in the auction flyer and did not provide

information about the water or sewer system to the person who prepared the

appraisal. He testified that he had no idea that a home located in the middle of

a community where there was sewer service could have a septic tank. The first

time Fisher spoke with Harmon was at the closing, at which time they did not

discuss the water or sewer systems.

[8] In its order, the trial court concluded that while the real estate was only

connected to city water and not city sewer services, Fisher had no actual

knowledge that the real estate was connected to a septic system when he made

the disclosure on the form.

[9] Harmon now appeals arguing that the trial court’s decision is clearly erroneous

because the amended complaint alleged fraud and misrepresentation and the

evidence establishes Fisher committed constructive fraud. Fisher contends that

the argument is being raised for the first time on appeal and is waived.

[10] Under the rules for small claims actions, judgments are “subject to review as

prescribed by relevant Indiana rules and statutes.” Ind. Small Claims Rule

11(A). The Trial Rule 52(A) clearly erroneous standard applies to appellate

review of facts determined in a bench trial with due regard given to the

opportunity of the trial court to assess witness credibility. Trinity Homes, LLC v.

Fang, 848 N.E.2d 1065, 1067 (Ind. 2006). In small claims actions, this

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 deferential standard of review is important because of the informal nature of the

proceedings, whose objective is to dispense speedy justice between the parties

according to the rules of substantive law. Id. at 1067-68; S.C.R. 8(A). With

respect to substantive rules of law, however, our review is de novo just as it is in

appeals from courts of general jurisdiction. Trinity Homes, LLC, 848 N.E.2d at

1068.

[11] Harmon’s notice of small claim indicated that the claim was for “money owed”

in the amount of $3,925.00. Appellant’s App. p. 5. His amended complaint

alleged that attorney fees were sought, in addition to the claim for actual

damages, under the statutory remedy for fraud and misrepresentation. Id. at 6.

The amended complaint further alleged the claim was based on Fisher’s

certification of actual knowledge that the property did not include a septic tank

and septic field in the seller’s residential real estate disclosure form. Id.

[12] Harmon bore the burden of proof at trial, but did not prevail. As such, he

appeals from a negative judgment. Smith v. Dermatology Assocs. of Fort Wayne,

P.C., 977 N.E.2d 1, 4 (Ind. Ct. App. 2012). We will not reverse a negative

judgment unless it is contrary to law. Id. To make that determination, we

consider the evidence in the light most favorable to the appellee, together with

all the reasonable inferences to be drawn therefrom. Id. The appellant must

show that the evidence points unerringly to a conclusion different than that

reached by the trial court. Id.

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[13] The sale of the house was governed by the provisions of Indiana’s real estate

sales disclosure statutes. Ind. Code chapter 32-21-5 (2002). As pertains to the

issue here, the disclosure form must contain the known condition of the water

and sewer systems. Ind. Code § 32-21-5-7(1)(E) (2014). In this case, the form

states that the information in the disclosure is correct to the best of the seller’s

“CURRENT ACTUAL KNOWLEDGE”. Exhibit Vol. pp. 12-13. The form

is not a warranty by the owner, and the disclosure form is not to be used as a

substitute for any inspections or warranties the buyer or owner may later

obtain. Ind. Code § 32-21-5-9 (2002). As applicable to this appeal, in the event

the buyer discovers a defect after the sale has been completed, the seller’s

liability is limited such that the seller “is not liable for any error, inaccuracy, or

omission of any information required to be delivered to the prospective buyer

under this chapter if the error, inaccuracy, or omission was not within the actual

knowledge of the owner.” Ind. Code § 32-21-5-11 (2002) (emphasis added).

[14] Therefore, Fisher’s disclosure verified his “CURRENT ACTUAL

KNOWLEDGE” of the water and sewer systems and septic fields and tanks,

and the statute limited his liability for inaccuracies, errors, or omissions in the

disclosure that were not within his actual knowledge. Exhibit Vol. pp. 12-13.

In Johnson v. Wysocki, 990 N.E.2d 456, 466 (Ind. 2013), our Supreme Court held

that the seller may be liable for fraudulent misrepresentations made on the

disclosure form if he or she had actual knowledge that the representation was

false at the time he or she completed the form. (emphasis added).

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[15] The trial court’s findings regarding this disclosure form are supported by the

record. Fisher was aware of the water meter cover in the yard, and paid the

utility bills which contained charges for both city water and sewer. The

location of the house within the community in an area where sewer services

were available, further supported Fisher’s belief that the house was connected to

the sewer system and not a septic tank. Under section 11, Fisher would be

liable if he knew the house was connected to a septic system, but stated that it

was not. However, the statute’s unambiguous language does not hold a seller

liable for an erroneous disclosure on the form made without actual knowledge

of the error. Thus, the trial court correctly concluded that Fisher was not liable

under Indiana’s Disclosure Statutes because he had no actual knowledge that

the house was connected to a septic system when he disclosed that it was not.

[16] Now, for the first time on appeal, Harmon argues that the trial court’s decision

is contrary to law because he established at trial that Fisher committed

constructive fraud in his disclosure form responses, the real estate listing, and

brochure. Although small claims actions are more informal, as a general rule, a

party may not present an argument or issue to an appellate court unless the

party raised that argument or issue before the trial court. Tamko Roofing

Products, Inc. v. Dilloway, 865 N.E.2d 1074, 1080 (Ind. Ct. App. 2007).

Arguments not presented first to the trial court are waived for appellate review.

Id.

[17] Nevertheless, the record reveals that the trial court’s decision is not contrary to

law as suggested by Harmon for reasons we explain below.

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[18] “In constructive fraud, the law infers fraud from the relationship of the parties

and the circumstances which surround them.” American Heritage Banco, Inc. v.

Cranston, 928 N.E.2d 239, 246 (Ind. Ct. App. 2010). The five elements of

constructive fraud are: “(1) a duty owing by the party to be charged to the

complaining party due to their relationship; (2) violation of that duty by the

making of deceptive material misrepresentations of past or existing facts or

remaining silent when a duty to speak exists; (3) reliance thereon by the

complaining party; (4) injury to the complaining party as a proximate result

thereof; and (5) the gaining of an advantage by the party to be charged at the

expense of the complaining party.” Id.

[19] For purposes of constructive fraud, the existence of a duty may arise in two

ways: (1) the existence of a fiduciary relationship; and, (2) the case of a buyer

and seller. Id. at 247. Pertinent to this appeal is the buyer and seller

relationship. Where there is a buyer and a seller, one party may possess some

knowledge not possessed by the other. However, that fact alone does not

establish that the party with some knowledge enjoys a position of superiority

over the other such that a special duty and a right of reliance are created. Id.

When allegations of constructive fraud are based on misrepresentations made

between a buyer and a seller, no presumption of fraud arises and the plaintiff

bears the burden of proving all five elements. Id.

[20] In this case to the extent that Harmon seeks recovery based upon the

representations in the residential real estate disclosure form, the statute, itself,

precludes relief. Indiana Code section 32-21-5-11 is explicit that the owner is

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 not liable for any error, inaccuracy, or omission required to be delivered under

this chapter unless the error, inaccuracy or omission was within the actual

knowledge of the owner.

[21] To the extent Harmon argues matters beyond the contents of the disclosure

form, we conclude that he has failed to carry his burden of proof.

[22] Harmon seeks recovery founded in equity. “Constructive fraud arises by

operation of law from a course of conduct, which, if sanctioned by law would

secure an unconscionable advantage, irrespective of the actual intent to defraud.”

American Heritage Banco, at 246 (emphasis added). The protection is provided to

the unwary and unsuspecting against those who are scheming and calculating,

but it does not protect those who stand on equal mental footing and in no

fiduciary relationship who fail to exercise common sense and judgment. Id. at

248.

[23] Here, the record reflects that Fisher had never lived in the house and held the

reasonable belief that the house was on the city sewer system. He was not in

possession of knowledge, which Harmon did not possess, such that he enjoyed

a position of superiority over him. Indeed, the record reflects that both Harmon

and Fisher were surprised to learn that the property located in the middle of the

community was connected to a septic system. Thus, the record fails to disclose

the necessary element of duty owed to Harmon. Consequently, Harmon’s

claim, even if adequately preserved, fails.

[24] Affirmed.

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Bradford, J., and Brown, J., concur.

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