The strange case of Hot Dog vendor and Bellevue Tower purchaser Danil Kasimov seems to be this week’s closely watched poster child for condo presale-gone-bad. Covered by the Seattle Times, Seattle Bubble Blog and KIRO, causes of action in the case include Fraud in the Inducement, Breach of Contract, Mistake, Conspiracy, Consumer Protection Act (CPA) violation, and violation of the Washington State Constitution.

The brief factual allegation leading off the complaint states that “this [case] involves an alleged conspiracy between a condominium developer and its bank, where below average income immigrants, with limited language skills, are shown extremely expensive “dream home” condominiums, who then make offers contingent on the bank approving them for financing. Then, the bank, in conspiracy with the developer, either mistakenly or fraudulently, allegedly massively inflates the income of the prospective borrowers using “Stated Income” loans, gives them non-binding “Prequalification” letters, and allegedly removes the contingency from the contract. At that point, the developer is allegedly free to grab the victim’s earnest money as liquidated damages under RCW 64.04.005(1), which states:

A provision in a written agreement for the purchase and sale of real estate which provides for liquidated damages or the forfeiture of an earnest money deposit to the seller as the seller’s sole and exclusive remedy if a party fails, without legal excuse, to complete the purchase, is valid and enforceable, regardless of whether the other party incurs any actual damages. However, the amount of liquidated damages or amount of earnest money to be forfeited under this subsection may not exceed five percent of the purchase price. (emphasis added). RCW 64.04.005(1)”

Interestingly enough, Tim Ellis at the Seattle Bubble Blog (http://seattlebubble.com/blog/) conducted a quick search of public records to uncover a number of inconsistencies in the Seattle Times’ interpretation of the complaint and background of the plaintiff. Deft reporter of the tanking local real estate market, no one can mistake Tim as a shill for the condo development industry.

Some of the inconsistencies uncovered by Ellis include the claim that Kasimov is a “a limousine driver, earning little more than minimum wage,” when in actuality, he owns Action Towncar Limousine Service (although that doesn’t mean he is making more than minimum wage); that he was unwittingly duped by a real estate agent and a flashy sales presentation into signing paperwork he had no way of understanding, when public records show three different purchases of real estate in the Redmond/Bellevue area totaling nearly $1.6 million over the last five years; and that …they (the plaintiffs) were never given a copy of the contract – which was written in English, where – based on employment and education – it seems unlikely that any of these plaintiffs are truly ignorant of the English language.

There’s probably enough blame to go around in this case. The majority of buyer’s I’ve interviewed over the past months with presale problems have the same jobs, same income, and same marital status they did two years ago when their project were in presale. Only the rules on lending, availability of funds, and condo valuations have changed locking them out of loans that need to close now to avoid forfeiture of deposits. No small matters these; but clearly issues not within the control of the condo buying community. The thing is many of these projects would have never be built but for strong presales bolstered by marketing and finance teams and an aggressively appreciating market. It will be interesting to see where this case goes. Probably to early settlement to avoid discovery is my guess.

Another take away from the October 2008 Carlile v. Harbour Homes, Inc., decision is Division 1 Washington Court of Appeals’ confirmation that Washington consumer protection act (CPA) claims may be brought for alleged construction defects by subsequent owners of a newly constructed home against the builder-vendors. The homeowners argued that Snohomish County Superior Court erred in dismissing their assigned CPA cause of action on summary judgment.

In order to maintain a private CPA action, a plaintiff must establish five elements: (1) an unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; and (5) a causal link between the unfair or deceptive acts and the injury suffered by the plaintiff.

Harbor challenged the validity of the assigned claims in that the assignments were not made “for the payment of money” as it claims is required under RCW 4.08.080.

RCW 4.08.080 provides:
Any assignee or assignees of any judgment, bond, specialty, book account, or other chose in action, for the payment of money, by assignment in writing, signed by the person authorized to make the same, may, by virtue of such assignment, sue and maintain an action or actions in his or her name, against the obligor or obligors, debtor or debtors, named in such judgment, bond, specialty, book account, or other chose in action, notwithstanding the assignor may have an interest in the thing assigned: PROVIDED, That any debtor may plead in defense as many defenses, counterclaims and offsets, whether they be such as have heretofore been denominated legal or equitable, or both, if held by him against the original owner, against the debt assigned, save that no counterclaim or offset shall be pleaded against negotiable paper assigned before due, and where the holder thereof has purchased the same in good faith and for value, and is the owner of all interest therein.

The Court, in considering similar cases brought before the Washington State Supreme Court, rejected Harbour Homes’ argument that the “for the payment of money” clause requires that parties assign their claims “for the payment of money” in order to be valid by upholding the validity of assigned claims without a showing of consideration. This decision, recognized as consistent with other CPA claims brought by assignees, is clearly consistent with the policy goals of the consumer protection act.

Last October the Washington Court of Appeals Division 1 considered an adverse Snohomish County Superior Court decision brought by the purchasers of newly-constructed homes for breach of implied warranty of habitability, misrepresentation, breach of contract, and violation of Consumer Protect Act, relating to alleged construction defects against the builder-vendor. Carlile v. Harbour Home. The Court’s decision extended the rationale of an earlier case preventing a buyer from recovering economic losses resulting from the seller’s affirmative intentional misrepresentations.

In general, the economic loss rule holds parties to their contract remedies, when a loss potentially implicates both tort and contract relief. The economic loss rule prohibits plaintiffs from recovering, in tort, economic losses to which their entitlement flows only from contract, because tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.

The Court’s limitation on recovery of economic losses for seller’s affirmative intentional misrepresentations spurred the Northwest Multiple Listing Service to revise its form purchase and sale agreements. According to the NWMLS:

It is hard to imagine a situation where the parties would assume that the seller would not be responsible for affirmatively misrepresenting the condition of property to the buyer. Thus, unlike the case of negligent misrepresentations, the standard forms automatically provide the buyer with the right to make a claim for losses resulting from seller’s intentional misrepresentations in Form 17. Please note that the Carlile case did not affect a buyer’s right to make a claim against a seller for fraudulent concealment, where a seller has a duty to disclose a material fact to the buyer but fails to do so.

The new subsection, effective this month, states in part:

If Seller provides Buyer with a disclosure statement pursuant to RCW 64.06 (Form 17), Buyer may bring an action in tort to recover economic losses resulting from intentional misrepresentations in Form 17; and if the parties so agree in Specific Term No. 9, Buyer may bring an action in tort to recover economic losses resulting from negligent errors, inaccuracies and omissions in Form 17.

The subparagraph concludes by advising buyers to continue using due diligence in inspections, and states that common law rights are preserved under the agreement. Specific Term No. 9 is a “check box” item that allows buyers to elect to either preserve or waive their right to seek remedies for Seller’s negligent errors, inaccuracies or omissions in Form 17.

When the election first appeared in the standard NWMLS form a year or so ago it was rare that a Seller would agree to a buyer asking to preserve the right to seek damage remedies for errors and omission in Form 17. Why should they? Wait a bit longer and a needier buyer would appear. In this market it is more likely that buyers will insist that Sellers agree to remain liable for inaccuracies in Form 17 disclosures. It’s all a matter of what the market will bear. However, I think this is a move in the right direction by the NWMLS. We encourage buyers to check Specific Term No. 9 in the affirmative. Even doing so, however, does not guarantee accuracy or solve the problem of enforcement which usually comes at the expense of litigation.