N. REID NEUREITER, Magistrate Judge.
This case is before the Court pursuant to an Order (Dkt. #80) issued by Judge Christine M. Arguello referring Defendants Mervin J. Flood and Susan S. Flood's Motion to Dismiss Plaintiffs' Second Amended Complaint. (Dkt. #78.) The Court has carefully considered the motion, Plaintiffs Steven Hardy and Jody Whitson-Hardy's Response (Dkt. #87), and the Floods' Reply. (Dkt. #89.) The Court heard argument on the subject motion on October 3, 2018. (Dkt. #103.) The Court has taken judicial notice of the Court's file and has considered the applicable Federal Rules of Civil Procedure and case law. The Court, now being fully informed, makes the following recommendation.
The following allegations are taken from the Second Amended Complaint (Dkt. #66) and are described in the light most favorable to the Hardys.
The Floods were the original owners of real property in Franktown, Colorado, that includes a house, a horse barn, and a road arch (the "Property"). (Id. ¶ 8.) In June 2013, the Hardys purchased the Property from the Floods pursuant to a written Contract to Buy and Sell Real Estate (the "Purchase Contract"). (Id. ¶ 5.) Prior to the sale, the Floods provided the Hardys with a "Seller's Property Disclosure (Residential)," (the "SPD"). (Id. ¶ 8; #66-3.) In the SPD, the Floods represented that there were no "additions or alterations" made to the Property, and no "moisture and/or water problems." (Dkt. #66 ¶ 10; #66-3 at 1.) During a property inspection on May 8, 2013, no latent or hidden defects were discovered. (Dkt. #66 ¶ 11.)
Unbeknownst to the Hardys, the basement of the home was an addition that had been completed no more than four years before the sale. (Id. ¶ 13.) Moreover, the Floods had not obtained building permits for the basement construction, the additional upstairs improvements, the barn, or the road arch. (Id.) The Floods knew that the work was done without a permit, but the Hardys did not learn this until 2015. (Id.) According to the Hardys' expert witness, attorney and licensed real estate broker Alan L. Stein, "improvements to real property which are built without required building permits and governmental inspections are `latent or hidden defects,' which have been defined in Colorado as `those manifesting themselves after purchase and which are not discoverable through reasonable inspection.'" (Id. ¶ 16; #66-4 at 4.)
After the sale, the Hardys experienced significant water leaks in the home and, while making repairs, discovered black mold, suggesting a history of leaks and moisture problems. (Dkt. #66 ¶ 20.) At least one of the leaks was caused by shower tiles that had been adhered directly onto plywood, which is not an acceptable construction practice. (Id.) Finally, the road arch collapsed after the Hardys purchased the Property. (Id. at 21.)
In sum, the Hardys identify the following conditions that they contend were latent defects that the Floods were obligated to disclose:
(Id. ¶ 21.)
The Hardys assert claims for breach of contract, fraud, and negligent misrepresentation. (Id. ¶¶ 26-46.) They request an award of punitive and exemplary damages, in addition to the actual damages incurred because of the Floods' conduct. (Id. at 11-12.)
The Hardys filed their initial Complaint in Douglas County District Court on December 28, 2016. (Dkt. #3.) The Floods timely filed their Notice of Removal on March 17, 2017. (Dkt. #1.) When the Floods' Motion for a More Definite Statement (Dkt. #7) was denied (Dkt. 23), they moved to dismiss Plaintiffs' Complaint on May 17, 2017. (Dkt. #26.) In response, pursuant to Fed. R. Civ. P. 15(a)(1)(B), the Hardys filed an Amended Complaint and Jury Demand on June 9, 2017. (Dkt. # 32.) On June 12, 2017, the Floods moved to dismiss the Amended Complaint. (Dkt. # 35.) Judge Arguello granted the Floods' motion because she found that the Amended Complaint did not satisfy the particularity requirements of Fed. R. Civ. P. 9(b), but gave the Hardys leave to file a Second Amended Complaint (see Dkt. #65), which they did on March 22, 2018. (Dkt. #66.) The Floods filed the subject motion to dismiss on April 12, 2018. (Dkt. #78.)
Under Rule 12(b)(6), "[d]ismissal is appropriate only if the complaint, viewed in the light most favorable to plaintiff, lacks enough facts to state a claim to relief that is plausible on its face." United States ex rel. Conner v. Salina Regional Health Center, 543 F.3d 1211, 1217 (10th Cir. 2008) (quotation omitted). A claim is plausible on its face "when the plaintiff pleads factual content that enables the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007)). "The plausibility standard is not akin to a `probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.
While plaintiffs need not provide "detailed factual allegations" to survive a motion to dismiss, they must provide more than "labels and conclusions" or "a formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555; see also Ashcroft, 556 U.S. at 678 (explaining that a complaint will not suffice if it offers "naked assertions devoid of further factual enhancement" (quotations and alterations omitted)). Furthermore, conclusory allegations are "not entitled to be assumed true." Ashcroft, 556 U.S. at 679.
A court may not dismiss a complaint merely because it appears unlikely or improbable that a plaintiff can prove the facts alleged or ultimately prevail on the merits. Twombly, 550 U.S. at 556. Instead, a court must ask whether the facts alleged raise a reasonable expectation that discovery will reveal evidence of the necessary elements. Id. If, in view of the facts alleged, it can be reasonably conceived that the plaintiff could establish a case that would entitle him to relief, the motion to dismiss should not be granted. Id. at 563 n.8.
Granting a motion to dismiss is a "harsh remedy" that should be "cautiously studied" to "effectuate the liberal rules of pleading" and "protect the interests of justice." Dias v. City & Cty. of Denver, 567 F.3d 1169, 1178 (10th Cir. 2009) (quotations omitted).
The Floods move to dismiss the Hardys' Second Amended Complaint on five grounds. First, they argue that the Hardys' claims are barred by the statute of limitations. Second, they assert that the Hardys' fraud and negligent misrepresentation claims fail because there is no proof of reasonable or justifiable reliance. Third, the Floods contend that their representation that no alterations or additions had been made to any structural condition on the property was accurate. Fourth, the Floods state that they accurately represented that there was no known water damage or moisture problem at the Property. Finally, the Floods argue a non-permitted basement is, by law, not a latent defect, and therefore they had no duty to disclose this information to the Hardys.
Under Colorado law, the statute of limitations for breach of contract and fraud, misrepresentation, concealment, or deceit actions is three years from the date of accrual. Colo. Rev. Stat. § 13-80-101(1)(a) and (c). A breach of contract claim "accrue[s] on the date the breach is discovered or should have been discovered by the exercise of reasonable diligence." Id. § 13-80-108(6). A fraud, misrepresentation, concealment, or deceit cause of action is "considered to accrue on the date such fraud, misrepresentation, concealment, or deceit is discovered or should have been discovered by the exercise of reasonable diligence." Id. § 13-80-108(3).
The Floods argue that the Hardys' claims are barred by the statute of limitations because the Purchase Contract was entered into on June 2013, but the Hardys' did not file suit until December 28, 2016, more than three years later. The Floods claim that the Hardys should have known about the water damage upon in the inspection of the home. The further argue that Hardys would have known that the additions and alterations to the Property were performed without a permit had they first searched the Douglas County public records.
The Hardys argue that the defects in the real property were latent and were therefore, by definition, not discoverable through inspection. They also contend the defects were not, in fact, discovered until 2015, which puts them safely within the statute of limitations period.
Although statute of limitations questions may be appropriately resolved on a Fed. R. Civ. P. 12(b) motion to dismiss, that is only appropriate when "when the dates given in the complaint make clear that the right sued upon has been extinguished." Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1041 n. 4 (10th Cir. 1980). Undermost circumstances, "`[w]hether the statute of limitations bars a particular claim is a question of fact.'" Lilly v. Bank of Am., N.A., No. 17-cv-02359-RBJ, 2018 WL 4185204, at *3 (D. Colo. Aug. 31, 2018) (quoting Trigg v. State Farm Mut. Auto. Ins., 129 P.3d 1099, 1101 (Colo. App. 2005)). See also Morris v. Geer, 720 P.2d 994, 997 (Colo. App. 1986) (recognizing that when a plaintiff discovered, or through the use of reasonable diligence should have discovered, the alleged negligent conduct is normally a question of fact which must be resolved by the trier of fact.).
As the Court discussed in its previous Report on Recommendation on Defendants' Motion to Dismiss (Dkt. #62), the date of a contract is not synonymous with the date of accrual of a claim.
For these reasons, the Court declines to recommend Rule 12(b)(6) dismissal on statute of limitations grounds.
Reasonable and justifiable reliance is required for the Hardys' state law claims for fraud and negligent misrepresentation. See Ivar v. Elk River Partners, LLC, 705 F.Supp.2d 1220, 1238 (D. Colo. 2010). "`A party cannot say they were deceived by the other's misrepresentations where the means of knowledge are equally available to both parties and the subject matter is equally open to their inspection.'" Id. (quoting Sheffield Services Co. v. Trowbridge, 211 P.3d 714, 726 (Colo. App. 2009)).
The Floods argue that the Hardys had equal access to the information giving rise to their fraud and negligent misrepresentation claims and therefore they cannot show any reasonable reliance on the Floods' oral and written statements. The Floods claim that the property inspection precludes any reliance on statements made as to the structural conditions of the Property, including any improvements or additions to the Property and the history of water damage. They also argue that the Hardys were not justified in relying on any misrepresentations concerning additions or alterations to the Property because that information was available through the Douglas County records office.
In response, the Hardys argue that under Colorado law, the Floods, as sellers of real property, owed the Hardys a duty to disclose any latent defects. In the SPD, the Floods represented that there were no additions or alterations made to the Property, and no moisture and/or water problems. Despite these representations, the Hardys allege that the Floods knew about the existence of water damage and that unpermitted work had been performed on the Property. The Court finds that these allegations are plausible for the purposes of deciding a Fed. R. Civ. P. 12(b) motion to dismiss.
First, the Floods cannot avoid liability for misrepresentation by relying on the Hardys' decision to obtain a property inspection. "`An inspection by a purchaser which does not disclose [a defect] does not render inapplicable the rule requiring disclosure of a latent defect.'" Haney v. Castle Meadows, Inc., 839 F.Supp. 753, 757 (D. Colo. 1993) (quoting Cohen v. Vivian, 141 Colo. 443, 349 P.2d 366 (1960)). This is "only logical" because "[a] latent defect by its very nature cannot be discovered by inspection." Id. Rationally, a seller "who has actual knowledge of a latent defect" is in a "a better position to know the structural condition of a home." In re Estate of Gattis, 2013 COA 145, ¶ 16. Whether there was "zero" water damage at the time of sale, as the Floods' contend the inspection proves, or whether any water damage, such as the existence of black mold, was latent in nature, cannot be decided on a motion to dismiss. If there was water damage, there are questions of fact as to whether, and to what extent, the Floods had actual knowledge of the problems. The same goes for whether the Hardys' reliance on the SPD and the Floods' representations was reasonable. Thus, viewing the allegations of the Second Amended Complaint in the light most favorable to the Hardys requires denying the motion to dismiss.
Second, whether the Hardys could have discovered that the additions and improvements to the property were done without permits raises factual questions to be determined on the evidence, rather than on the pleadings. In their Second Amended Complaint, the Hardys allege that the Floods did not obtain building permits for the basement construction, the upstairs improvements, the barn, or the road arch. The Hardys allege these are latent defects, and the Court cannot say, at this early stage, that they are not, as a matter of law, latent defects. The Hardys also adequately allege that the Floods knew these additions and alterations had been made, and thus their representation to the contrary on the SPD was knowingly false. Such allegations are sufficient to survive a motion to dismiss.
The Floods argue that, as a matter of law, they accurately denied of the existence of water damage or moisture problems at the Property, and accurately denied making "additions and alterations" to the structural conditions of Property. Thus, they claim that their representations cannot form the basis for any allegations of fraud. The Court is unpersuaded.
The Floods contend that their denial of having made "additions and alterations" was accurate because it was in relation to the Property's "structural conditions," and that "[a]s a matter of law, finishing a basement that was originally built with the original construction of the home has no impact on the `structural condition' of the home." (Dkt. #78 at 10.) The Floods provide no authority for this assertion. This is understandable; whether finishing a basement has an impact on the structural condition of a home is not a question to be decided on a motion to dismiss.
The Floods next claim that their representation as to the absence of water damage or moisture problems was confirmed by the Hardys' inspection of the Property, and this forecloses fraud liability. As discussed above, the quality and nature of the property inspection cannot be decided on Rule 12(b)(6) motion. For example, the existence of black mold may or may not have been discoverable based on the scope of the inspection and the way it was performed. If the black mold or other water damage constitutes a latent defect, as the Hardys sufficiently allege, then it necessarily could not have been discovered in the inspection.
Moreover, while the Floods correctly point out that to prevail on their fraud claim, the Hardys will ultimately have to
Finally, the Floods argue that a non-permitted basement, by law, cannot be a considered a latent defect, which absolves them from failing to disclose to the Hardys the fact that they did not obtain building permits for the additions and improvements to the Property. The Floods posit that a basement built without a permit is not a latent defect because such information is readily available through basic inspection of the public records. The Floods also argue that none of the alleged "latent defects" caused any damages that can be attributed to their actions. These arguments miss the mark.
First, the Court has already rejected the Floods' claim that, as a matter of law, the Hardys had equal access to accurate information as to the representations made regarding the alterations and additions to the Property. The Court will also decline the Floods' suggestion that it should disregard the retained expert report of Mr. Stein, which states that improvements to real property built without the required building permits and governmental inspections constitutes a latent defect.
Next, the Floods argue that the Hardys could have "easily discovered the existence or non-existence of any building permit by doing a basic record permit search through Douglas County." (Dkt. #78 at 14.) However, the Court must stress that the Hardys allege that the Floods did not merely fail to disclose the fact that additions and alterations were made to the Property, they affirmatively represented that no such alterations and additions had been made. The Hardys also plausibly allege that the Floods knew that they were supposed to obtain a permit but did not do so. (Dkt. #66-4 at 8-10.) Accepting these allegations as true, the Hardys had little reason to perform a records search for permits given these knowingly deceptive statements, and the Floods' argument that the burden of discovering this type of defect necessarily falls on the buyers of real property is unconvincing.
The cases cited by the Floods do not change the Court's conclusion. In Sterbcow v. Peres, 64 So.2d 195 (La. 1953), the Louisiana Supreme Court stated that the failure to obtain a building permit is not a latent defect because with "a simple examination of the files in the proper city office the question of whether or not a permit had issued could be determined." Id. at 201. However, the court went on to explain that the failure to obtain the building permit was not fraudulent because the defendant reasonably believed that a permit had, in fact, been issued. Id. In the instant case, on the other hand, the Floods allegedly knew that no building permits were obtained and failed to disclose this fact to the Hardys. Moreover, the plaintiff in Sterbcow was buying a new building, and thus must have known that building permits were or should have been issued. In contrast, the Hardys had no reason to suspect that building permits for additions or alterations would or should be on file because they were told that no new additions or alterations to the Property had been made.
In Findlay Ford Lincoln-Mercury v. Huffman, 2004 WL 231511 (Ohio App. Feb. 9, 2004) (unpublished), the Ohio Court of Appeals held that a buyer who discovered an underground oil well and related soil contamination could not recover damages from the seller because the presence the well could have been discovered through a reasonable inspection, and the buyer failed to establish existence of a misrepresentation by vendors amounting to actual fraud. Id. at *3. Significantly, the Findlay decision arose in the summary judgment context, after discovery had been conducted. In contrast, the instant motion seeks dismissal under Rule 12(b), and, despite the Floods' repeated attempt to apply a Rule 56 standard, the Court will not make factual findings at this stage. Moreover, the seller in Findlay never stated affirmatively that there were "no wells" on the property. Id. at *5. Here, as discussed above, the Hardys have sufficiently alleged that the Floods affirmatively stated that there had been no additions or alterations to the Property.
Finally, the Floods argue that any damages suffered by the Hardys were caused by those who performed the allegedly faulty construction work, and damages are only recoverable from those entities. The Court is not convinced. The Floods cite no legal authority for this proposition. Furthermore, the Hardys' alleged damages do not stem from the shoddy construction per se, but rather from the Floods' misrepresentations regarding known, latent defects. In other words, the Floods could have avoided liability had they disclosed the nature and extent of the water damage and the un-permitted construction. They did not do so, and cannot now deflect blame onto unidentified third parties.
WHEREFORE, for the foregoing reasons, it is hereby
