Opinion
1 CA-CV 12-0664
06-11-2013
ELIZABETH FREEMAN and PAUL FREEMAN, a married couple, Plaintiff/Appellant, v. NEAL KLEIN CONSTRUCTION CORP, an Arizona corporation, Defendant/Appellee.
Mangum, Wall, Stoops & Warden, P.L.L.C. by Clyde P. Halstead Brandon J. Kavanagh Attorneys for Plaintiffs/Appellants Holloway Odegard & Kelly, P.C by Peter C. Kelly, II Leslie Rakestraw and Ellen M. Van Riper, Attorney at Law by Ellen M. Van Riper Attorneys for Defendant/Appellee
NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED
EXCEPT AS AUTHORIZED BY APPLICABLE RULES.
See Ariz. R. Supreme Court 111(c); ARCAP 28(c);
Ariz. R. Crim. P. 31.24
MEMORANDUM DECISION
(Not for Publication -
Rule 28, Arizona Rules of
Civil Appellate Procedure)
Appeal from the Superior Court in Yavapai County
Cause No. V1300CV201080703
The Honorable Patricia A. Trebesch, Judge Pro Tempore
AFFIRMED
Mangum, Wall, Stoops & Warden, P.L.L.C.
by Clyde P. Halstead
Brandon J. Kavanagh
Attorneys for Plaintiffs/Appellants
Flagstaff Holloway Odegard & Kelly, P.C
by Peter C. Kelly, II
Leslie Rakestraw
and
Phoenix Ellen M. Van Riper, Attorney at Law
by Ellen M. Van Riper
Attorneys for Defendant/Appellee
Phoenix PORTLEY, Judge ¶1 Elizabeth and Paul Freeman ("the Freemans") appeal the summary judgment entered in favor of Neal Klein Construction Corp. ("NKC") as well as the attorneys' fees awarded to NKC. For the following reasons, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
¶2 NKC built a house in Cornville in 2007. During construction, NKC experienced problems with the well water system and repeatedly attempted to ameliorate the discolored and cloudy water that flowed from the home's faucets. ¶3 Three years later, NKC sold the house to the Freemans. The purchase contract included two particularly relevant documents. First, the contract included a Seller's Property Disclosure Statement ("SPDS") indicating that the property did not have any known "past or present drinking water problems." The SDPS also stated that the Freemans acknowledged their "obligation to investigate any material (important) facts in regard to the Property." Second, the Freemans signed the Domestic Water Well Addendum ("DWWA"), which imposed a duty on them to inspect the well "[i]f well performance or water quality" was a material matter to them. ¶4 Almost immediately after the Freemans moved into the house, they discovered the water was discolored and cloudy. After the problem did not abate, the Freemans sued NKC for rescission of the purchase contract and compensatory damages for NKC's alleged common law fraudulent concealment of the water issues. Both parties filed motions for summary judgment, and the trial court granted NKC's motion and awarded NKC its attorneys' fees and costs pursuant to Arizona Revised Statutes ("A.R.S.") section 12-341.01 (West 2013). Following entry of judgment, the Freemans filed this appeal.
DISCUSSION
I. Entry of Summary Judgment
¶5 Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Ariz. R. Civ. P. ("Rule") 56(c); see also Orme School v. Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990) (explaining that summary judgment is proper "if the facts produced in support of the claim . . . have so little probative value, given the quantum of evidence required, that reasonable people could not agree with the conclusion advanced by the proponent of the claim"). We review the entry of summary judgment de novo, "viewing the evidence and reasonable inferences in the light most favorable to the party opposing the motion," Andrews v. Blake, 205 Ariz. 236, 240, ¶ 12, 69 P.3d 7, 11 (2003), and determine "whether any genuine issues of material fact exist." Brookover v. Roberts Enters., Inc., 215 Ariz. 52, 55, ¶ 8, 156 P.3d 1157, 1160 (App. 2007).
(A) Failure to Inspect the Well ¶6 The Freemans raise multiple arguments contending that the trial court erred by finding their fraudulent concealment claim failed because they did not inspect the well. The court, however, did not find that the Freemans' claim failed because they did not inspect the well. Instead, the court found that NKC did not prevent the Freemans "from discovering or acquiring the information regarding the well and water quality" because: (1) the DWWA mandated an inspection of the well and water if this was a material matter to the Freemans; and (2) the Freemans' realtor recommended that they inspect the well and conduct a water test. As a result, the court found that NKC did not fraudulently conceal the water and well issues because the Freemans retained the ability to conduct inspections. We, however, will address their arguments.
The Freemans also assert that their failure to inspect the well should not "bar their claims as a matter of law" because the inspection provision was ambiguous, and they were not on notice of potential water issues after seeing the water run clear during a walk-through of the house. The Freemans, however, did not make the argument to the trial court and cannot raise it for the first time on appeal. Harris v. Cochise Health Sys. , 215 Ariz. 344, 349, ¶ 17, 160 P.3d 223, 228 (App. 2007) ("[A]lthough Arizona appellate courts have the discretion to hear arguments first raised on appeal, we rarely exercise that discretion.").
In their opening brief, the Freemans admit that "[t]he trial court ruled in NKC's favor for the simple reason that the Freemans could have inspected the well, thus the water quality was never concealed." (Emphasis added.)
1. Applicability of the Rule Posited in Section 540 of the Restatement (Second) of Torts ¶7 The Freemans first argue that the court improperly decided that the contract provision mandating inspection of the well trumped the rule in Section 540 of the Restatement (Second) of Torts ("Section 540"). Section 540 states that "[t]he recipient of fraudulent misrepresentation of fact is justified in relying upon its truth, although he might have ascertained the falsity of the representation had he made an investigation." Invoking the provision and numerous Arizona cases mirroring the Restatement, see Dawson v. Withycombe, 216 Ariz. 84, 98, ¶ 34, 163 P.3d 1034, 1048 (App. 2007) (explaining that "[a] person may rightfully rely upon a misrepresentation of fact even when he may have discovered the falsity of the statement by a simple investigation") (citing Carrel v. Lux, 101 Ariz. 430, 435, 420 P.2d 564, 569 (1966) and Section 540), the Freemans assert that they reasonably relied on NKC's representations about the well in the SPDS and therefore did not have to inspect the well pursuant to the contract. ¶8 Section 540, however, applies only to fraudulent misrepresentation. See, e.g. , Barnes v. Lopez, 25 Ariz. App. 477, 480, 544 P.2d 694, 697 (1976) (stating when "a positive, distinct and definite representation . . . was made," the plaintiff "was entitled to rely on it and had no duty to make further inquiry") (citation omitted) (emphasis added). And, although "the distinction between concealment and affirmative misrepresentation is tenuous" where "failure to disclose a material fact is calculated to induce a false belief," Madisons Chevrolet, Inc. v. Donald, 109 Ariz. 100, 103, 505 P.2d 1039, 1042 (1973) (quoting Schock v. Jacka, 105 Ariz. 131, 133, 460 P.2d 185, 187 (1969)), "concealment and misrepresentation [are] separate theories which must be independently plead" because "of the differing issues of fact involved." Schock, 105 Ariz. at 133, 460 P.2d at 187; see also Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 496 n.22, ¶ 88, 38 P.3d 12, 34 n.22 (2002) (stating that "[t]he confusion surrounding the requisites for fraudulent concealment results from the fact that there are three distinct classes of fraud: misrepresentation, concealment, and non-disclosure") (emphasis added). Because the Freemans claimed that NKC engaged in fraudulent concealment and not fraudulent mispresentation, we will treat their claim as one for fraudulent concealment rather than an affirmative misrepresentation. See Schock, 105 Ariz. at 133, 460 P.2d at 187 ("[N]either the plaintiff's complaint nor his opposition to the motion for summary judgment articulate any theory of fraudulent concealment and therefore we consider it proper for the trial court to have limited itself to the issue presented."). Consequently, we find that Section 540 does not apply to their fraudulent concealment claim.
2. The Enforceability of the DWWA ¶9 Principally citing Lufty v. R. D. Roper & Sons Motor Co. , 57 Ariz. 495, 115 P.2d 161 (1941), and Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (App. 1986), the Freemans argue that the provision in the DWWA mandating inspection of the well improperly provided NKC with a defense to its fraud. ¶10 In Lufty, the plaintiff sued the defendant-motor company for fraudulent misrepresentation after purchasing a 1936 model-year-car while believing he had purchased a 1937 model. 57 Ariz. at 498, 115 P.2d at 163. The contract for sale stated that the "Purchaser agrees that he has made an independent investigation of the property and has relied solely upon his own investigation . . . and has placed no reliance and acted upon no representations or warranties upon the part of the Seller." Id. at 499, 115 P.2d at 163. The plaintiff argued that this provision "amount[ed] to a waiver of any fraud," making the contract unenforceable "because one may not contract against his own fraud." Id. at 506, 115 P.2d at 166; see also Hill, 151 Ariz. at 83, 725 P.2d at 1117 (holding that a purchase agreement, which provided that "the Purchaser has investigated the said premises, and the . . . Seller [is] hereby released from all responsibility regarding the valuation thereof," "could not shield seller from liability should buyers be able to prove fraud"). The court agreed with the plaintiff and held that the provision made it possible for the defendant "to free himself from the consequences of his own fraud" because, despite the defendant's statement that the car was a 1937 model, the plaintiff, pursuant to the contract, "would have been denied the right to show the falsity of this statement." Lufty, 57 Ariz. at 506, 115 P.2d at 166. ¶11 Here, notwithstanding the fact that the Freemans alleged fraudulent concealment, the well inspection provision in the DWWA did not make it possible for NKC "to free [itself] from the consequences of [its] own fraud." Id. The DWWA merely stated that the Freemans should inspect the well if water quality was a material matter to them. No provision in the purchase contract stated that the Freemans did not rely on representations or warranties made by NKC or otherwise released NKC of liability for its representations.
3. Relevance of Lerner v. DMB Realty, LLC ¶12 The Freemans also assert that Lerner v. DMB Realty, LLC, 231 Ariz. 297, 294 P.3d 135 (App. 2012), governs this case. We, however, find that it does not govern this action for three reasons. ¶13 First, the complaint in Lerner was dismissed pursuant to Rule 12(b)(6). 231 Ariz. at 305-06, ¶ 29, 294 P.2d at 143-44. On appeal, we held that "the complaint states facts that are 'reasonably susceptible of proof' of fraud and that the jury ultimately must decide whether the [defendants] have proved materiality and reasonable reliance." Id. at 303, ¶ 19, 294 P.2d at 141. Here, we are reviewing a grant of summary judgment after the parties presented evidence and had the opportunity to controvert facts to create genuine issues of material fact. Therefore, instead of examining only the allegations in the complaint and accepting them as true, Jeter v. Mayo Clinic Ariz. , 211 Ariz. 386, 389, ¶ 4, 121 P.3d 1256, 1259 (App. 2005), here we are reviewing "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits," to determine whether there are any genuine issues of material facts, which would preclude summary judgment. Ariz. R. Civ. P. 56(c). ¶14 Second, Lerner involved claims for intentional and negligent misrepresentation, not a fraudulent concealment claim. 231 Ariz. at 301, ¶ 7, 294 P.3d at 139. Although similar, concealment and misrepresentation have long been distinguished as separate claims. Schock, 105 Ariz. at 133, 460 P.2d at 187. Therefore, in Lerner, the court did not examine whether the defendants concealed the existence of the truth or prevented the plaintiffs from discovering the truth but instead focused on whether the defendants fraudulently misrepresented the truth, id. at 302, ¶ 13, 294 P.3d at 140, and whether the defendants negligently failed to disclose the truth. Id. at 304, ¶ 21, 294 P.3d at 142. ¶15 Third, while discussing the negligent misrepresentation claim in Lerner, we noted that if would-be buyers alleged the non-disclosure or partial disclosure of a fact that they "reasonably c[ould have] discover[ed] on their own," then they should be denied relief. Id. at ¶ 23. Notwithstanding the fact that the Freemans only asserted a concealment claim, they could have discovered the well issues had they performed an inspection of the well. For example, if they had employed a water treatment specialist to test the water before buying the house instead of a month after they moved in, the specialist could have discovered the issues and recommended several solutions to remedy the cloudiness of the water and to remove sediment in the water, as he did. Then they could have determined whether to buy the house. Therefore, had the Freemans hired the specialist prior to signing the purchase contract, they would have discovered the well issues.
4. Burden Shifting ¶16 The Freemans argue that the court improperly shifted the burden onto them "[b]y focusing entirely on what [they] could have done to discover the information wrongly concealed by NKC." Despite the arguments, the Freemans had to prove that NKC engaged in fraudulent concealment. See, e.g. , Van Buren v. Pima Cmty. Coll. Dist. Bd. , 113 Ariz. 85, 86, 546 P.2d 821, 822 (1976) ("In order to sustain the burden of proof in a claim for relief for fraud, the plaintiff must show a concurrence of all the elements thereof.") (internal quotation marks and citation omitted). They did not raise genuine issues of material fact to defeat NKC's properly-supported motion. Consequently, the court properly concluded that NKC did not fraudulently conceal the well issues because the Freemans could have performed a well inspection.
(B) Evidence Establishing Fraudulent Concealment ¶17 The Freemans next argue that summary judgment was improper because they identified specific evidence showing that NKC prevented them from discovering the well and water issues. Specifically, they allege that the statement in the SPDS that there were no issues with the well or water amounted to concealment because active concealment includes "[a]ny words or acts which create a false impression covering up the truth, or which remove an opportunity that might otherwise have led to the discovery of a material fact . . . or even a false denial of knowledge by one in possession of fact." Wells Fargo Bank, 201 Ariz. at 498, ¶ 96, 38 P.3d at 36. ¶18 The Freemans misinterpret the elements of fraudulent concealment. The Wells Fargo Bank court was not defining the elements of the tort. Instead, it was describing active concealment to show the distinction between concealment and nondisclosure. Id. at 497-98, ¶¶ 95-96, 38 P.3d at 35-36. The court went on to state that "[c]oncealment necessarily involves an element of non-disclosure, but it is the intentional act of preventing another from learning a material fact that is significant." Id. at 496 n.22, ¶ 88, 38 P.3d at 34 n.22. The court then stated that concealment "is characterized by deceptive acts or contrivances intended to hide information, mislead, avoid suspicion, or prevent further inquiry into a material matter." Id. at 497, ¶ 95, 38 P.3d at 35. ¶19 In order to successfully prosecute a concealment claim, a plaintiff must present clear and convincing evidence, Wells Fargo Bank, 201 Ariz. at 498 n.24, ¶ 98, 38 P.3d at 36 n.24, that the defendant (1) knew of the alleged false information and (2) acted to "intentionally prevent[] the plaintiff from finding the truth," or, in other words, that the defendant actively concealed the truth. Id. at 496, ¶ 89, 38 P.3d at 34. ¶20 Here, NKC arguably knew that there were issues with the well and water quality because of its experience some three years before the home was sold, but did not divulge the problems in the SPDS. The Freemans, however, have not identified any evidence that NKC intentionally prevented them from finding the truth about the well and its water. In fact, the contract and DWWA mandated the inspection of the well if it was important, and the Freemans admitted their obligation to inspect the well pursuant to the DWWA. Consequently, the Freemans did not present issues of material fact to preclude summary judgment to NKC.
See, e.g., id. at 498, ¶¶ 97-98, 38 P.3d at 36 (affirming a trial court's finding that the defendant was liable for concealment because it "actively strategize[d] to cover up" the truth); Madisons Chevrolet, 109 Ariz. at 101, 103, 505 P.2d at 1040, 1042 (finding fraudulent concealment where the defendant misrepresented that a car was new and actively concealed the truth by repairing previous damage to the car and changing the amount of miles on the car's odometer); Wagner v. Casteel, 136 Ariz. 29, 31, 663 P.2d 1020, 1022 (App. 1983) (stating that the defendant-home sellers fraudulently concealed the condition of a roof by falsely stating that the roof did not leak and actively concealing the roof's condition by hiring a handyman "to make the roof look as if it were in good condition"); King v. O'Rielly Motor Co., 16 Ariz. App. 518, 519, 521-22, 494 P.2d 718, 719, 721-22 (1972) (holding a defendant liable for concealment because, along with falsely stating the car was new, it repaired damage to the car); Paul v. Kelley, 599 P.2d 1236, 1238-40 (Or. Ct. App. 1979) (holding that the defendant was liable for fraudulent concealment because he actively concealed that he did not install a storm sewer by filling in a ditch, which prevented the home buyers from discovering that the sellers did not install the storm sewer) (discussed in Wells Fargo Bank, 201 Ariz. at 497, ¶¶ 93-94, 38 P.3d at 35).
--------
II. Award of Attorneys' Fees
¶21 The Freemans argue that the court erred by awarding NKC attorneys' fees pursuant to A.R.S. § 12-341.01(A) because their concealment claim did not arise out of a contract. Section 12-341.01(A) permits an award of attorneys' fees "to the successful party in any contested action arising out of a contract." Schwartz v. Farmers Ins. Co. of Ariz., 166 Ariz. 33, 38, 800 P.3d 20, 25 (App. 1990). The applicability of "A.R.S. § 12-341.01(A) is a question of law that we review de novo." Nolan v. Starlight Pines Homeowners Ass'n, 216 Ariz. 482, 490, ¶ 34, 167 P.3d 1277, 1285 (App. 2007) (emphasis deleted). However, we review a court's award of attorneys' fees for an abuse of discretion, Orfaly v. Tucson Symphony Soc'y, 209 Ariz. 260, 265, ¶ 18, 99 P.3d 1030, 1035 (App. 2004), and will not disturb the "court's discretionary award of fees if there is any reasonable basis for it." Hale v. Amphitheater Sch. Dist. No. 10, 192 Ariz. 111, 117, ¶ 20, 961 P.2d 1059, 1065 (App. 1998). ¶22 The requirement in § 12-341.01(A) that a claim must "arise out of a contract" for fees to be awarded has generated extensive analysis. See Barmat v. John & Jane Doe Partners A-D, 155 Ariz. 519, 523-24, 747 P.2d 1218, 1222-23 (1987) (internal quotation marks omitted) (alteration in original) (explaining that the "distinction between tort and contract liability . . . has become an increasingly difficult decision to make," which makes the formulation of a bright line rule impossible to formulate). We, however, need not re-examine the test articulated in Sparks v. Republic National Life Insurance Co., 132 Ariz. 529, 543, 647 P.2d 1127, 1141 (1982) (stating that "attorney's fees may be awarded pursuant to § 12-341.01(A) . . . as long as the cause of action in tort could not exist but for the breach of contract"). Instead, we examine the facts of this case to determine whether the court properly awarded attorneys' fees because the suit arose out of a contract. ¶23 This case arises out of a contract. The Freemans sought to rescind the purchase contract and compensatory damages for NKC's fraudulent concealment of the well and water issues. Moreover, in their complaint, the Freemans alleged their fraudulent concealment claim "arises out of the purchase contract between the parties" and sought fees pursuant to A.R.S. § 12-341.01(A). Their opening brief on appeal states that "[t]he purpose of an action for rescission is to return the Plaintiffs to their pre-contract state." They were, as a result, not just seeking damages for the concealment. Therefore, "[i]t was th[e] contract which prompted this suit and also served as the basis for [the Freemans'] claim." Marcus v. Fox, 150 Ariz. 333, 335-36, 723 P.2d 682, 684-85 (1986). The purchase contract had more than a "causal connection with the claim to justify an award of attorneys' fees." Chaurasia v. Gen. Motors Corp., 212 Ariz. 18, 26, ¶ 25, 126 P.3d 165, 173 (App. 2006). Consequently, the court did not abuse its discretion in awarding fees to NKC.
ATTORNEYS' FEES
¶24 The Freemans seek attorneys' fees pursuant to the language of the purchase contract. NKC requests its fees pursuant to Arizona Rule of Civil Appellate Procedure ("ARCAP") 21(c)(1), A.R.S. § 12-341.01(A), and the language in the purchase contract. Because NKC is the prevailing party on appeal, in the exercise of our discretion we will award it a reasonable amount of its fees and costs upon its compliance with ARCAP 21.
CONCLUSION
¶25 For the foregoing reasons, we affirm the judgment.
______________
MAURICE PORTLEY, Presiding Judge
CONCURRING: ______________
SAMUEL A. THUMMA, Judge
______________
DONN KESSLER, Judge