12/20/2018
IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
November 13, 2018 Session
KENNETH FULMER ET AL. v. JEFFREY FOLLIS ET AL.
Appeal from the Circuit Court for Shelby County
No. CT-000785-14 Felicia Corbin Johnson, Judge
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No. W2017-02469-COA-R3-CV
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Purchasers of real property brought this action against the sellers alleging fraud,
fraudulent misrepresentation, fraudulent inducement, and fraudulent concealment. The
alleged misrepresentations and concealment related to severe water damage to one wall
of the purchased house. The trial court found in favor of the purchasers with respect to
each claim. After our thorough review of the record, we conclude that because the
purchasers were on notice of potential defects and failed to exercise ordinary diligence,
the evidence preponderates against the trial court’s finding that the purchasers reasonably
relied on the sellers’ misrepresentations and concealment. We reverse and remand for
further proceedings.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Reversed and
Remanded.
BRANDON O. GIBSON, J., delivered the opinion of the court, in which RICHARD H.
DINKINS, J., and J. STEVEN STAFFORD, P.J., W.S., joined.
Webb Alexander Brewer, Memphis, Tennessee, for the appellants, Jeffrey Follis, and
Debra Follis.
Sam Blaiss, Memphis, Tennessee, for the appellees, Kenneth Fulmer, and Debra Fulmer.
OPINION
I. FACTS AND PROCEDURAL HISTORY
Kenneth and Debra Fulmer (“Purchasers”) purchased a home from Jeffrey and
Debra Follis (“Sellers”), which, unknown to Purchasers, had significant water damage to
the east wall of the garage, requiring the wall to be replaced. Sellers initially placed the
house on the market on March 13, 2013. In preparation for selling the house, Sellers
made some aesthetic improvements to the interior. One such improvement, according to
Sellers testimony at trial, was the installation of a 1x8 board across the bottom of the east
wall of the garage. According to Sellers, there was a small hole near the bottom of the
wall that needed to be covered, but instead of filling the hole, they elected to cover the
hole with the board, reasoning that installing the board would be easier.
Moreover, in conjunction with listing their house, Sellers filled out a Tennessee
Residential Property Disclosure Form, pursuant to the Tennessee Residential Property
Disclosure Act (“TRPDA”).1 On the disclosure form, Sellers marked “no” to whether
any “[f]looding, drainage, or grading problems” existed and marked “yes” to whether
they were aware of “any past or present water intrusions,” explaining that the water
intrusion was a “[o]ne time event” and that “heavy rain caused water to come into back
laundry area—repairs made and drainage repaired—never had any other problems.”2
However, they did not disclose any other water intrusions, despite having other issues
with water entering the house in the past. Specifically, water leaked into the garage
multiple times until a French drain was installed in 2010 to alleviate the problem.
Three days after listing the house, on March 16, 2013, Purchasers made an initial
offer of $230,000 plus requiring Sellers to pay up to $6,900 of the closing costs. Sellers
countered with $232,500 and up to $5,000 of the closing costs, which Purchasers
accepted.
Afterwards, as allowed by the Purchase and Sale Agreement, Purchasers hired a
licensed home inspector, Jason Lovelace, to inspect the house. In his report, Mr.
Lovelace noted several potential issues with the house. First, Mr. Lovelace indicated in
his report that there was a “possible rainwater intrusion at the east wall in the garage[,]”
as well as raising concerns that “a 1x8 board [was] installed along the base of the east
wall in the garage for some unknown reason.” In addition, Mr. Lovelace also noted that
“[t]he grade along the east side of the garage/ utility room slopes towards the structure
[but] should slope away from the structure for proper drainage. The grade may possibly
be above the height of the slab.”
1
Section 66-5-202 of the Tennessee Code states that “the owner of the residential property shall
furnish to a purchaser . . . [a] residential property disclosure statement in the form provided in this part
regarding the condition of the property, including any material defects known to the owner.” Tenn. Code
Ann. § 66-5-202(1).
2
The one-time event occurred during a rainstorm when water entered through a hole in a room at
the back of the east wall. After finding water in the floor, the Follises discovered debris in one of their
drains outside and removed it, stopping the water from overflowing into the house. Mr. Follis later
caulked the hole, fixing the issue.
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As a result of the inspection report, Purchasers became concerned about rainwater
entering the garage, as well as the reason for the placement of the board along the bottom
of the wall. To alleviate their concerns, Sellers’ real estate agent sent an email with
attached photographs taken by Sellers of the garage after it rained, stating: “Attached are
photos just taken by the owners during the rain. . . . You can see there is no water issue in
the garage. The [Sellers] have no reason to believe there is a problem or issue with the
wood trim being in the garage. . . . As a result . . ., the seller has no reason or desire to
remove the wood trim in the garage.” Sellers’ agent also relayed that Sellers were
attempting to locate all invoices for “work done regarding the drainage.”3 Purchasers’
real estate agent responded by stating the following:
I’m attaching the entire inspection report. The buyers don’t plan to
ask for every item to be addressed, so we were trying not to upset the
sellers by showing them the entire report, but the buyer has asked me to
show it to you to possibly clarify things.
....
No one is trying to be an alarmist, we all know that wood can’t be
touching the ground, and it is touching the ground at the southeast corner of
the garage. We don’t necessarily think that water is gushing into the
garage, we’re afraid that water is seeping under the wall and possibly
deteriorating the plate and maybe causing some deterioration to the interior
wall in the garage. We thought that possibly seeing behind that 1x8 would
help us see inside the wall. Thank you for the pictures you forwarded.
In response, Sellers’ agent offered the following explanation for the 1x8 on the east wall
of the garage:
As to the wood trim. When the seller had the drainage issues fixed
they did not like how the drywall and the garage floor came together. The
repair guy told the sellers a piece of trim would make it look “prettier.”
That is why the piece of wood is in the garage along the floor. It’s purely
cosmetic in nature. Having said that, they don’t want to take out the board
and then have to deal with the drywall and replacing the board.
As a result of the email exchange, Purchasers decided not to inspect the walls
further, but due to the possible rainwater intrusion and grading issue, Sellers agreed to
pay an additional $1,500 of the closing costs, amounting to a total of $6,500. Purchasers
3
The invoices were never sent to Purchasers. Instead, a proposal for work to the house was
attached to the email. The proposal related to the “one time event” in the room at the back of the east
wall.
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executed this agreement in lieu of three separate remedies available to them under the
Purchase and Sale Agreement. Under section 8(D) of the Purchase and Sale Agreement,
Purchasers were permitted to exercise the following remedies: (1) “furnish Seller with a
list of specified objections and immediately terminate” the contract; (2) “accept the
[house] in its present ‘AS IS’ condition[;]” or (3) “furnish Seller a written list of items
which Buyer requires to be repaired and/or replaced with like quality or value in a
professional and workmanlike manner.” Moreover, under the third remedy, Purchasers
had the “right to request any supporting documentation that substantiates any item
listed.” The closing took place on April 16, 2013. Purchasers did not conduct a final
inspection before closing, as allowed by the Purchase and Sale Agreement.4
Two days after the closing, on April 18, 2013, Purchasers took possession of the
house. Later that same day, they noticed water leaking into the house through the east
wall of the garage. Concerned, they hired an inspector, Gauge Moorefield, to assess any
possible repairs that needed to be made. After removing the 1x8 boards from the wall,
Mr. Moorefield discovered severe water damage, finding that the wall had been exposed
to moisture over an extensive period of time.5 Moreover, the inspector testified that the
water damage to the sheetrock was obvious, stating that during his inspection “it became
evident that they used [the 1x8 board] because they were covering up a large exposed gap
which showed [] a rotten wall” and “whoever put that board up, they had to have seen
what they were covering up.” After Mr. Moorefield’s assessment, Purchasers spent
$13,100 repairing the wall.
Purchasers filed suit in the General Sessions Court for Shelby County, Tennessee,
on June 3, 2013. The judgment of the general sessions court was subsequently appealed
4
Regarding a final inspection, the agreement provided:
Buyer and/or his inspectors/representatives shall have the right to conduct a final
inspection of Property no later than 1 day[ ] prior to the Closing Date only to confirm
Property is in the same or better condition as it was on the Binding Agreement Date,
normal wear and tear excepted, and to determine that all repairs/replacements agreed to
during the Resolution Period, if any, have been completed. Property shall remain in such
condition until the Closing at Seller’s expense. Closing of this sale constitutes
acceptance of Property in its condition as of the time of Closing, unless otherwise noted
in writing.
Here, this inspection would have been limited to “confirm [the house was] in the same or better
condition as it was” when the Purchase and Sale Agreement was executed because Purchasers
decided to contract for $1,500 towards closing costs instead of electing the third remedy provided
for in the contract.
5
The water damage was a result, according to Mr. Moorefield, of the garage originally being a
carport. Normally, in the construction of a garage, a concrete curb is erected at the bottom of a wall in
order to ensure water does not touch wood. However, in this garage, there was no concrete curb, and the
grading of the ground sloped towards the house, causing the wood to routinely come into contact with
water and rot.
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to the circuit court where Purchasers filed an amended complaint, alleging, among other
things, fraud, fraudulent concealment, and fraudulent inducement, as well as violations of
the TRPDA. Purchasers also sought punitive damages. Sellers denied each of these
claims in their answer. Moreover, Sellers asserted as an affirmative defense that
Purchasers were on notice of the water intrusion and damage when executing the
contract.
A bench trial was eventually held on February 22, 2017, and February 23, 2017.
After trial, the court found that Purchasers met their burden of proof regarding their
claims of fraud, fraudulent misrepresentation, fraudulent concealment, and fraudulent
inducement. Specifically, the court found that there were two instances where the water
damage was concealed: (1) the disclosure form; and (2) the failure to disclose the water
damage after Mr. Lovelace’s inspection report. The court also found that the boards were
placed along the wall to cover the water damage, not to cover the hole or for aesthetic
purposes, as Sellers testified. The trial court awarded $13,100 in compensatory damages,
representing the cost to repair the wall. At a separate punitive damages hearing, the court
found that Sellers’ conduct was egregious and set another trial to determine the amount of
punitive damages that should be awarded. After the punitive damages trial, on November
17, 2017, the court determined that Purchasers were entitled to $39,300 in punitive
damages. Sellers filed a timely notice of appeal.
II. ISSUES PRESENTED
Although not exactly worded as such, Sellers present the following issues on appeal:
1. Whether the trial court erred in ruling in favor of Sellers “on their claims of
fraudulent inducement, fraudulent misrepresentation, fraudulent concealment and
damages under the [TRPDA] because they were on notice of a potential defect and
elected to proceed with the transaction.”6
2. Whether the trial court erred in awarding punitive damages.
III. STANDARD OF REVIEW
Because this case was tried without a jury, we will review findings of fact de
novo, with a presumption of correctness. Holland v. Forrester, No. E2016-02147-COA-
R3-CV, 2017 WL 6405111, at *3 (Tenn. Ct. App. Dec. 15, 2017). However, “[o]ur de
novo review is tempered by the well-established rule that the trial court is in the best
position to assess the credibility of the witnesses; accordingly, such credibility
6
Sellers raised a third issue—“Whether [Purchasers] are bound by the removal of the inspection
contingency in a residential Purchase and Sale Agreement through a negotiated agreement for a reduction
in price and consummating the sale after they were on notice that there was potential water intrusion . . .
.” We address this issue in conjunction with the first issue, as both issues address whether Buyers had
notice of the defective condition of the wall.
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determinations are entitled to great weight on appeal.” Pitz v Woodruff, No. M2003-
01849-COA-R3-CV, 2004 WL 2951979, at *7 (Tenn. Ct. App. Dec. 17, 2004) (quoting
Murvin v. Cofer, 968 S.W.2d 304, 306 (Tenn. Ct. App. 1997)) (internal quotation marks
omitted). We review the trial court’s findings of law de novo, with no presumption of
correctness. Id.
IV. DISCUSSION
A.
On appeal, Sellers argue that the trial court erred in finding they were liable for
fraud, fraudulent misrepresentation, fraudulent concealment, and fraudulent inducement.
At the onset, we note that fraud and fraudulent misrepresentation are the same cause of
action. Concrete Spaces, Inc. v. Sender, 2 S.W.3d 901, 904 n.1 (Tenn. 1999) (stating that
intentional misrepresentation, fraudulent misrepresentation, and fraud are synonymous);
Huddleston v. Harper, No. E2014-01174-COA-R3-CV, 2015 WL 3964791, at *4 (Tenn.
Ct. App. June 30, 2015) (‘“[I]ntentional misrepresentation,’ ‘fraudulent
misrepresentation,’ and ‘fraud’ are different names for the same cause of action.”). The
court in Huddleston suggested that the term “intentional misrepresentation” be used
exclusively to denote fraud, fraudulent misrepresentation, and intentional
misrepresentation; therefore, we will refer to both the fraud and fraudulent
misrepresentation claims as intentional misrepresentation. Huddleston, 2015 WL
3964791, at *4 (“[W]e will refer to the cause of action as a claim for intentional
misrepresentation, and, in order to avoid confusion, we suggest that this term should be
used exclusively henceforth.”).
In order to prove intentional misrepresentation, a plaintiff must show the
following:
1) the defendant made a representation of an existing or past fact; 2) the
representation was false when made; 3) the representation was in regard to
a material fact; 4) the false representation was made either knowingly or
without belief in its truth or recklessly; 5) plaintiff reasonably relied on the
misrepresented material fact; 6) plaintiff suffered damage as a result of the
misrepresentation.
Goodall v. Akers, No. M2008-01608-COA-R3-CV, 2009 WL 528784, at *5-6 (Tenn. Ct.
App. Mar. 3, 2009) (quoting Walker v. Sunrise Pontiac-GMC Truck, Inc., 249 S.W.3d
301, 311 (Tenn. 2008)).
Purchasers also brought a fraudulent inducement claim. A claim for fraudulent
inducement is closely associated with an intentional misrepresentation claim, as “[i]t
arises when a person’s willingness to enter into a contract is caused by another person’s
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[intentional] misrepresentations with regard to a matter material to the contract.” Loew v.
Gulf Coast Dev., Inc., 01-A-019010CH00374, 1991 WL 220576, at *7 (Tenn. Ct. App.
Nov. 1, 1991). In order to bring a successful fraudulent inducement claim, a plaintiff
must prove that the defendant “(1) made a false statement concerning a fact material to
the transaction (2) with knowledge of the statement’s falsity or utter disregard for its truth
(3) with the intent of inducing reliance on the statement, (4) the statement was reasonably
relied upon, and (5) an injury resulted from this reliance.” Baugh v. Novak, 340 S.W.3d
372, 388 (Tenn. 2011).
Moreover, a party is liable to the same extent for concealing a material fact as a
party is liable for intentional misrepresentation. Patel v. Bayliff, 121 S.W.3d 347, 352-53
(Tenn. Ct. App. 2003) (quoting Macon Cty. Livestock Mkt. Inc. v. Ky. State Bank, Inc.,
724 S.W.2d 343, 349 (Tenn. Ct. App. 1986)). “A party commits fraudulent concealment
for failing to disclose a known fact or condition where he had a duty to disclose and
another party reasonably relies upon the resulting misrepresentation, thereby suffering
injury.” Dixon v. Chrisco, No. M2018-00132-COA-R3-CV, 2018 WL 4275535, at *4
(Tenn. Ct. App. Sept. 7, 2018) (quoting Odom v. Oliver, 310 S.W.3d 344, 349 (Tenn. Ct.
App. 2009) (internal quotation marks omitted). In order to establish a fraudulent
concealment claim, a party must show “(1) the defendant had knowledge of a material
existing fact or condition, and that (2) the defendant had a duty to disclose the fact or
condition.” Id. (quoting Pitz, 2004 WL 2951979, at *8). A fact is material where it is
‘“of controlling importance in determining the desirability and value of the residence’
that would not be apparent to the buyer through the exercise of ordinary diligence.”
Patel, 121 S.W.3d at 353 (quoting Simmons v. Evans, 206 S.W.2d 295, 296 (Tenn.
1947)). “[T]here is no duty to disclose a material fact or condition if it was apparent
through ‘common observation’ or if it would have been discoverable through the exercise
of ordinary diligence.” Pitz, 2004 WL 2951979, at *8 (citing Simmons, 206 S.W.2d at
297).
First, we note the trial court determined that the testimony of Sellers was not
credible, finding that Sellers knew of the condition of the east wall and used the 1x8
board to conceal the water damage. “When the resolution of the issues in a case depends
upon the truthfulness of witnesses, the trial judge, who has the opportunity to observe the
witnesses in their manner and demeanor while testifying, is in a far better position than
this Court to decide those issues.” Mach. Sales Co., Inc. v. Diamondcut Forestry Prod.,
LLC, 102 S.W.3d 638, 643 (Tenn. Ct. App. 2002). “Accordingly, appellate courts will
not re-evaluate a trial judge’s assessment of witness credibility absent clear and
convincing evidence to the contrary.” Hanger Prosthetics & Orthotics E., Inc. v.
Kitchens, 280 S.W.3d 192, 199 (Tenn. Ct. App. 2008). There is not clear and convincing
evidence to contradict the trial court’s finding that Sellers were not credible.
Because the trial court found that Sellers’ testimony concerning their unawareness
of the water damage was not credible, this case turns on whether Purchasers reasonably
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relied on Sellers’ misrepresentations and concealment of the water damage. The trial
court found that Purchasers relied on the misrepresentations in the disclosure form and
were prohibited from discovering any defects or making further inspections by Sellers.
The trial court further stated this reliance was reasonable, as Purchasers “wanted to
further investigate” but were denied their requests to see underneath the board and were
sent pictures taken by Sellers to show there was no water entering the house through the
east wall.
Reasonable reliance is a question of fact. Pitz, 2004 WL 2951979, at *10. To
determine whether there was reasonable reliance, we consider the following factors:
(1) the plaintiff's business expertise and sophistication; (2) the existence of
a longstanding business or personal relationship between the parties; (3) the
availability of the relevant information; (4) the existence of a fiduciary
relationship; (5) the concealment of the fraud; (6) the opportunity to
discover the fraud; (7) which party initiated the transaction; and (8) the
specificity of the misrepresentation.
Id. Here, while we agree that there was concealment, there was also an opportunity to
discover the fraud through the exercise of ordinary diligence and through available
relevant information.
“It is well settled that if a purchaser of real property has notice or with ordinary
diligence should have had notice of a problem with the real estate, the purchaser cannot
attack the validity of the contract for fraud, misrepresentation, or concealment of that
problem.” Daniels v. Basch, No. M2004-01844-COA-R3-CV, 2005 WL 2860177, at *5
(Tenn. Ct. App. Oct. 27, 2005) (citing Winstead v. First Tennessee Bank N.A., Memphis,
709 S.W.2d 627, 631 (Tenn. Ct. App. 1986)). Purchasers were put on notice of potential
defects by Mr. Lovelace’s inspection report. The report detailed (1) a possible water
intrusion on the east wall; (2) grading issues outside the east wall; and (3) the presence of
a 1x8 board across the wall for an unknown reason. Moreover, the report also warned in
all capital letters that “all items [noted] should be further investigated by the appropriate
professionals in their field of expertise and repairs made as needed.” Despite the listed
potential issues and warning, Purchasers failed to conduct any further inspections.
Not only did the inspection report put Purchasers on notice of issues relating to the
east wall, but they also had the ability to remedy the issues under the Purchase and Sale
Agreement. The contract provided that after the inspection, Purchasers “could furnish
Seller a written list of items which Buyer requires to be repaired and/or replaced with like
quality or value in a professional and workmanlike manner.” If a list of items to be
repaired or replaced had been furnished, Purchasers would then have “the right to request
any supporting documentation that substantiates any item listed.” Purchasers also had the
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option to conduct a final inspection of the property under the contract7 but elected not to
exercise this right. “Generally, a party dealing on equal terms with another is not
justified in relying upon representations where the means of knowledge are readily within
its reach.” Solomon v. First Am. Nat’l Bank of Nashville, 774 S.W.2d 935, 943 (Tenn.
Ct. App. 1989). The means of knowledge were easily accessible to Purchasers had they
exercised their contractual remedy to fix any issues related to water intrusion in the east
wall. In addition, Purchasers decided to negotiate for an additional $1,500 to be paid
towards closing costs by the Seller. This counter-offer was made due to concerns over
the grading outside the east wall, evidencing Purchasers were on “notice of a problem
with the real estate[,]” yet proceeded to purchase the property irrespective of their
concerns.
Therefore, Purchasers did not reasonably rely on Sellers’ misrepresentations and
concealment, as they could have discovered the fraud through ordinary diligence by
pursuing the remedy under the Purchase and Sale Agreement, which also would have
provided them access to relevant information regarding the condition of the wall.
Moreover, Purchasers were on notice of a problem with the house, as evidenced by the
inspection report and their counter-offer for an additional $1,500 towards closing costs,
further showing their reliance on Sellers’ misrepresentations was unreasonable.
Reasonable reliance is an essential element for intentional misrepresentation,
fraudulent inducement, and fraudulent concealment. See Baugh, 340 S.W.3d at 388
(listing that “the statement was reasonably relied upon” as the fourth element of
fraudulent inducement); Goodall, 2009 WL 528784, at *6 (“[Reasonable] reliance is an
essential element of a claim for fraudulent misrepresentation or fraudulent
concealment.”); Williams v. Berube & Assocs., 26 S.W.3d 640, 645 (Tenn. Ct. App.
2000) (“An essential requirement of any action for fraud, deceit, failure to disclose or
negligent or innocent misrepresentations is detrimental reliance on a false premise”). Due
to the Purchasers’ notice of potential defects and failure to exercise ordinary diligence,
the evidence preponderates against the trial court’s finding of reasonable reliance.
B.
Sellers also argue on appeal that the trial court erred in awarding punitive damages
to Purchasers. Because we have already concluded that Purchasers unreasonably relied
on Sellers’ misrepresentations, this issue is pretermitted.
7
See supra note 4.
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V. CONCLUSION
For the aforementioned reasons, the decision of the circuit court is hereby reversed
and remanded for dismissal of the case. Costs of this appeal are taxed to the appellees,
Kenneth Fulmer and Debra Fulmer, for which execution may issue if necessary.
_________________________________
BRANDON O. GIBSON, JUDGE
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