Schwartz v. Morgan

#25205, #25212-a-JKK

2009 SD 110

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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GREGG W. AND SHARON K.
SCHWARTZ, Plaintiffs and Appellants,

v.

SALLY R. MORGAN, Defendant and Appellee.

* * * *

APPEAL FROM THE CIRCUIT COURT
OF THE FIRST JUDICIAL CIRCUIT
UNION COUNTY, SOUTH DAKOTA

* * * *

HONORABLE STEVEN R. JENSEN
Judge

* * * *

SABRINA L. SAYLER of
Crary, Huff, Inkster, Sheehan,
Ringgenberg, Hartnett & Storm, PC Attorneys for plaintiffs
Dakota Dunes, South Dakota and appellants.

ROBERT B. DECK of
Deck Law Attorneys for defendant
Sioux City, Iowa and appellee.

* * * *

ARGUED ON NOVEMBER 19, 2009

OPINION FILED 12/22/09
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KONENKAMP, Justice

[¶1.] A purchaser of residential real estate brought suit against a seller for

fraudulent concealment of the fact that the driveway encroached on a neighbor’s

property. The jury returned a verdict in favor of the purchaser. Holding that there

was insufficient evidence that the seller was aware of the encroachment, the circuit

court granted a judgment notwithstanding the verdict. Because we find that the

seller owed no duty to the purchaser by the time the suit was commenced, we

affirm.

Background

[¶2.] In 1997, Gregg and Sharon Schwartz purchased a residence at 53

Sunset Drive from Sally Morgan. The home sits on one of several lots in Riv-R-

Land Estates in Union County, South Dakota. The Schwartzes did not personally

have the property surveyed, but instead relied on the survey obtained by their

mortgage company. In 2002, the Schwartzes decided to sell the house. A potential

purchaser had the property surveyed in contemplation of the sale. The survey

revealed that three quarters of the driveway encroached on the neighbor’s lot. The

Schwartzes attempted to rectify the problem, but the sale could not be saved in

time. They were eventually able to resolve the boundary and encroachment issues

and sell the house to another buyer, but not without much time and expense.

[¶3.] Sally Morgan originally purchased the lot in the early 1970s. The legal

boundaries for Morgan’s lot, as well as her neighbors’ lots, ran, as the circuit court

phrased it, “square with a waterway canal directly behind each lot.” But the road

and the canal were not parallel. Consequently, the homes and driveways were

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constructed to run square with the road so that they sat at an angle to the boundary

lines of each property. Each homeowner treated the property lines as though they

ran square to the road. In treating the lines in this way, Morgan and her neighbors

mowed and cared for portions of property not their own.

[¶4.] In 1990, a homeowner near Morgan wanted to construct a detached

garage on his property. The desired location of the garage would not satisfy the

required setbacks between neighboring properties. That property owner, Morgan,

and other neighbors executed an agreement to change the property lines to conform

to the way the owners treated their properties. This re-platting agreement was

filed with the register of deeds. But after failing to obtain the consent of all the

neighbors, the re-plat was vacated. The vacation was also filed with the register of

deeds, and the property owners continued to treat their property lines as if they ran

square to the road.

[¶5.] In 2005, after resolving the encroachment and boundary issues at 53

Sunset Drive, the Schwartzes brought suit against Sally Morgan. They alleged that

she (1) failed to provide a disclosure statement as required by SDCL 43-4-38, which

should have revealed the lot lines and consequent boundary problems, as well as

the encroachment caused by the driveway, (2) negligently failed to provide the

disclosure statement, and (3) fraudulently concealed the true facts regarding the

boundary problems. Morgan moved for summary judgment alleging that the

Schwartzes’ claims were barred by the expiration of the applicable statute of

limitations, as well as by waiver and equitable estoppel. After a hearing on the

motion, the court granted summary judgment in part. It held that the statute of

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limitations expired on the Schwartzes’ claim against Morgan under SDCL 43-4-38 et

seq. The court also granted summary judgment against the Schwartzes on their

negligence claim. As to the fraudulent concealment claim, the court ruled that the

statute of limitations had not expired. The court also concluded that there was an

issue of fact on whether the Schwartzes had constructive notice of the title defects.

[¶6.] At the close of trial, Morgan moved for a directed verdict. The court

held the motion in abeyance, and the case was submitted to the jury. The jury

returned a verdict in favor of the Schwartzes, awarding them $30,144.88 in

damages. Morgan moved for a judgment notwithstanding the verdict, or in the

alternative, a new trial. She asserted that the applicable statute of limitations had

run on the Schwartzes’ claim, the claim for fraudulent concealment was not a

recognized cause of action in South Dakota, there was insufficient evidence to

present the claim for fraudulent concealment to the jury, and the merger doctrine

precluded any claim by the Schwartzes. The court granted Morgan a judgment

notwithstanding the verdict. Although it recognized a valid fraudulent concealment

claim and held that the statute of limitations had not expired, it declared that there

was no evidence to support the jury’s verdict because (1) there was no proof “that

any ‘title problems’ existed at the time [Morgan] purchased the subject property,”

(2) the re-plat alone did not establish that Morgan was aware of “any problems

relating to establishing lot lines/boundaries,” and (3) there was no evidence that

Morgan knew of any encroachment at the time of the sale in 1997.

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[¶7.] On appeal, both the Schwartzes and Morgan advance several

assignments of error, but we find one question dispositive: did the circuit court err

when it held that Morgan owed a duty to the Schwartzes under SDCL 20-10-2? 1

Analysis and Decision

[¶8.] Morgan challenges the circuit court’s ruling that she owed a duty to

the Schwartzes under SDCL 20-10-2. 2 “One who willfully deceives another, with

intent to induce him to alter his position to his injury or risk, is liable for any

damage which he thereby suffers.” SDCL 20-10-1. The Schwartzes’ fraudulent

concealment claim is premised on the following definition of deceit: “[t]he

1. Our standard of review on motions for a directed verdict and judgment
notwithstanding the verdict is well established:
We must examine the evidence in the light most favorable to the
non-moving party and give him the benefit of all reasonable
inferences. The moving party is entitled to evidentiary
consideration only where its evidence is uncontradicted or tends
to amplify, clarify or explain the evidence in support of the
verdict of the jury for the prevailing party. In such a context, it
becomes our task to review the record and determine whether
there is any substantial evidence to allow reasonable minds to
differ. This court does not weigh the evidence and substitute its
judgment for that of the jury. The decision of the jury is likely to
be upheld as questions of negligence . . . are for the
determination of the jury in all except the rarest of instances.
Kuper v. Lincoln-Union Elec. Co., 1996 SD 145, ¶36, 557 NW2d 748, 759
(quoting Bridge v. Karl’s, Inc., 538 NW2d 521, 523 (SD 1995) (internal
citations omitted)).
2. The Schwartzes’ complaint alleged that Morgan “deliberately concealed the
true facts regarding the title, lot lines, and encroachments associated with
the real property.” They did not specifically allege deceit under SDCL ch. 20-
10. At trial, however, the court instructed the jury under the theory of
fraudulent concealment as part of SDCL ch. 20-10 because the Schwartzes
argued that their claim should be submitted under the deceit theory and
Morgan did not challenge the sufficiency of the Schwartzes’ pleading.

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suppression of a fact by one who is bound to disclose it, or who gives information of

other facts which are likely to mislead for want of communication of that fact[.]”

See SDCL 20-10-2(3) (emphasis added). Here, the court concluded that Morgan was

“one who is bound to disclose” based on the fact that she was required to provide a

disclosure statement under SDCL 43-4-38. 3 The court then held that the disclosure

requirements of SDCL 43-4-44 delineated the scope of Morgan’s duty. 4

3. SDCL 43-4-38 provides:

The seller of residential real property shall furnish to a buyer a
completed copy of the disclosure statement before the buyer makes a
written offer. If after delivering the disclosure statement to the buyer
or the buyer’s agent and prior to the date of closing for the property or
the date of possession of the property, whichever comes first, the seller
becomes aware of any change of material fact which would affect the
disclosure statement, the seller shall furnish a written amendment
disclosing the change of material fact.

4. In defining the scope of Morgan’s duty, the court instructed the jury that

A seller of residential real estate in South Dakota has a duty to
complete a real estate disclosure form that requires the seller to
disclose to the purchaser the following:

1. Any title problems known to the seller at the time the seller
purchased the property;

2. Disclosure of any problems relating to lot lines/boundaries, and;

3. Whether the seller is aware of any encroachments from or on
adjoining property.

The court also instructed the jury that to establish fraudulent concealment
the Schwartzes must prove “[t]he defendant deceived the plaintiffs;” “[t]he
defendant intended or had reason to expect that the plaintiffs would act upon
the concealment; and;” “[t]he plaintiffs justifiably relied upon the
concealment to the plaintiffs’ detriment.”

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[¶9.] Morgan argues that the court erred when it used the disclosure

requirement of SDCL 43-4-38 to conclude that she was “one who is bound to

disclose” under SDCL 20-10-2(3). The court previously granted Morgan summary

judgment on the Schwartzes’ claim under SDCL 43-4-38. With the dismissal of this

claim, Morgan contends that SDCL 43-4-38 cannot perpetuate a duty under SDCL

20-10-2(3). The Schwartzes, on the other hand, maintain that although their claim

under SDCL 20-10-2(3) is separate and distinct from any claim under SDCL 43-4-38

et seq., SDCL ch. 43-4 supports their argument that Morgan had a duty to disclose.

They assert that despite the expiration of the statute of limitations on the SDCL 43-

4-38 claim, their suit for deceit under SDCL 20-10-2(3) should not be barred.

[¶10.] Whether a duty exists is a question of law reviewed de novo. McGuire

v. Curry, 2009 SD 40, ¶9, 766 NW2d 501, 505 (citations omitted). Before the

adoption of SDCL 43-4-38 et seq., sellers generally did not have a duty to disclose

known defects in a home. Engelhart v. Kramer, 1997 SD 124, ¶20, 570 NW2d 550,

554. As we explained in Engelhart, “South Dakota’s detailed disclosure statutes”

abandoned “the doctrine of caveat emptor . . . in favor of full and complete disclosure

of defects of which the seller is aware.” Id; see also Bradley v. Kryvicky, 574

FSupp2d 210, 219-20 (DMe 2008); Mitchell v. Christensen, 31 P3d 572, 574-75

(Utah 2001). Now sellers of residential property in South Dakota can be liable for

their failure to provide a disclosure statement in compliance with SDCL 43-4-37 to

SDCL 43-4-44. A claim under SDCL ch. 43-4 must be brought within the applicable

limitations period: six years. See SDCL 15-2-13. Because the Schwartzes failed to

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bring their cause of action under SDCL ch. 43-4 within six years, it was properly

dismissed.

[¶11.] Despite the fact that the Schwartzes’ claim under SDCL 43-4-38 was

dismissed, the circuit court attached the duties imposed by SDCL ch. 43-4 to the

Schwartzes’ fraudulent concealment claim under SDCL 20-10-2(3) in order to find

that Morgan was “one who is bound to disclose[.]” This was error. The Schwartzes’

right to recover for any violation of SDCL ch. 43-4 expired when they failed to bring

their claim within the applicable limitations period. They cannot now affix the

duties of disclosure from their expired claim to effectively revive their untimely

action. To proceed on their fraudulent concealment claim under SDCL 20-10-2(3),

the Schwartzes had to identify some duty owed by Morgan separate from SDCL ch.

43-4. To conclude otherwise would contravene the legislative intent that violations

of the disclosure requirements of SDCL ch. 43-4 must be brought within six years.

See SDCL 15-2-13.

[¶12.] Was there any other duty to disclose in the circumstances of this case

distinct from SDCL ch. 43-4? SDCL 20-10-2(3) only imposes liability for fraudulent

concealment on a person “who is bound to disclose.” In Taggart v. Ford Motor

Credit Co., we recognized that “[t]his [C]ourt has never imposed a duty to disclose

information on parties to an arm’s-length business transaction, absent an

employment or fiduciary relationship.” 462 NW2d 493, 499 (SD 1990) (emphasis

added). Clearly there was no employment or fiduciary relationship here.

Nonetheless, in Ducheneaux v. Miller, we relied on Restatement (Second) Torts

section 551 to conclude that anyone, including those in arms-length transactions,

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could have a duty to disclose under SDCL 20-10-2(3) “facts basic to the transaction,

if he knows that the other is about to enter into it under a mistake as to them, and

that the other, because of the relationship between them, the customs of the trade

or other objective circumstances, would reasonably expect a disclosure of those

facts.” 488 NW2d 902, 913 (SD 1992) (quoting Restatement (Second) Torts

§551(2)(e)) (emphasis omitted).

[¶13.] The requirement in the Restatement that one disclose facts basic to the

transaction also demands that before imposing a duty there must be evidence that

the information not disclosed was something not discoverable by reasonable care.

Restatement (Second) Torts §551; see also Mitchell, 31 P3d at 575. “The defendant

may reasonably expect the plaintiff to make his own investigation, draw his own

conclusions and protect himself.” Restatement (Second) Torts §551(2)(e)(cmt k); see

also Bradley, 574 FSupp2d at 220. Moreover, the Restatement suggests limiting

the “facts basic to the transaction” analysis to circumstances “in which the

advantage taken of the plaintiff’s ignorance is so shocking to the ethical sense of the

community, and is so extreme and unfair, as to amount to a form of swindling, in

which the plaintiff is led by appearances into a bargain that is a trap, of whose

essence and substance he is unaware.” Restatement (Second) Torts §551(2)(e)(cmt

l).

[¶14.] Here, there was no advantage taken of the Schwartzes’ ignorance.

They testified that they did not procure their own survey, but chose to rely on the

survey required as part of their mortgage acquisition. The Schwartzes learned later

that the survey conducted by the mortgage company did not assess whether there

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were any encroachment issues. Regardless of what the survey failed to reveal, it

was not Morgan’s duty, beyond the requirements of SDCL ch. 43-4, to ensure the

comprehensiveness of the mortgage company’s survey. It was the Schwartzes

responsibility to conduct a reasonable investigation to protect themselves. They

could have examined the public records, which would have revealed the attempted

re-plat. See SDCL 43-28-15 (constructive notice of instrument on subsequent

purchasers). They also could have hired their own surveyor to determine if there

were any encroachment issues. Essentially, the absence of a special relationship

between the parties and the fact that the driveway encroachment was reasonably

discoverable by the Schwartzes prevents a finding of a duty under Restatement

(Second) Torts section 551. Cf. Deptula v. Simpson, 164 P3d 640, 645-46 (AK 2007).

[¶15.] Affirmed.

[¶16.] GILBERTSON, Chief Justice, and ZINTER, MEIERHENRY, and

SEVERSON, Justices, concur.

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