Free and Clear Title Nerd

Real Estate Condition Report – the Wisconsin Supreme Court just made it a little easier to lie

cah@knightbarry.com (Cheri Hipenbecker) — Sat, 19 Jul 2008 00:00:00 GMT

The title of this blog is not entirely tongue in cheek as in an opinion filed on July 1, 2008, the Wisconsin Supreme Court eased the consequences of lying on a Real Estate Condition Report in a residential real estate transaction. In Below v. Norton, 2008 WI 77 (http://www.wisbar.org/res/sup/2008/2005ap002855.htm), the court held that the economic loss doctrine bars common-law claims for intentional misrepresentation in all real estate transactions (residential and commercial). The facts of the case were as follows:

In 2004 Below purchased a home in Milwaukee from Norton;
In their property condition report Norton represented that they were not aware of any defects with the house’s plumbing system, except for a problem with their bathtub’s drain handle;
Following closing Below learned that the sewer line that ran between the house and the street was broken;
Below filed a lawsuit in Milwaukee County Circuit Court alleging various misrepresentation claims against Norton, including intentional misrepresentation and misrepresentation in violation of Wis. Stat. §100.18. The circuit court dismissed Below’s action on various grounds; Below appealed the decision to the Wisconsin Court of Appeals (who affirmed the dismissal) and then appealed to the Wisconsin Supreme Court;
The Wisconsin Supreme Court held that Below could not pursue the intentional misrepresentation claim, but could ask the lower court for leave to file a breach of contract claim; and
To date, the case has not been put before either a judge or jury to determine whether Norton in fact lied on the property condition report.

So what does this mean? Will the case ever be presented before a judge or jury to hear the facts and determine if Norton lied? If yes, will Below have a remedy? The answers – (i) unless the case is settled, yes it will go to a judge or jury to decide the facts, and (ii) yes, if Below prevails, she will have some remedies, however her remedies are now limited.

There are three basic claims that Below and similarly situated parties make; in Below v. Norton the court decided that Below, and like situated plaintiffs, could pursue 2 of these 3 basic claims. The 3 basic claims are: (i) intentional misrepresentation, (ii) breach of contract, and (iii) misrepresentation in violation of state statutes (specifically §100.18, §895.446 and §943.20(1)(d).6). The court in Below v. Norton decided that Below could pursue the claims of breach of contract and misrepresentation in violation of state statutes claim, but because of the economic loss doctrine, Below could not pursue the intentional misrepresentation claims.

Why is this important? If Below and other buyers of real property can sue for breach of contract and misrepresentation in violation of state statutes, why is the barring of an intentional misrepresentation claim relevant or important? It’s important because the remedies available to a plaintiff under a breach of contract claim are generally perceived as being less than the remedies available in an intentional misrepresentation claim. But probably more important is the fact that the statute of limitations on an intentional misrepresentation claim can be much longer than the statute of limitations for a breach of contract claim or claims for misrepresentation in violation of state statutes.

The statute of limitations for an intentional misrepresentation claim is 6 years. The statute of limitations for a breach of contract claim is also 6 years; however the difference is when the clock starts running on the 6 years. In a breach of contract claim, the clock starts running at the time of the breach (in this case, when Norton allegedly lied on the property condition report). In an intentional misrepresentation claim, the clock starts running when the injured party discovers the alleged misrepresentation (in this case, when Below learned that the sewer line was broken). The statute of limitations (repose) for a claim under §100.18 is even shorter – 3 years from the time of the violation.

What does Below v. Norton mean for homebuyers? It means that buyers should not solely rely upon the seller’s representations and warranties, but should perform thorough inspections of the property both before and after purchasing the property. Further, if the buyer discovers a defect and has any concern that the seller lied or misrepresented something in the sale transaction, the buyer should run (not walk) to his/her attorney because the clock is ticking. If the buyer files a lawsuit 6 years + 1 day after the alleged misrepresentation, then the seller wins.

Example:

· Jack bought his home in May of 2002 from Mark;

· On the property condition report Mark stated “No” to the following statement “I am aware of defects in the septic system or other sanitary disposal system”;

· In June of 2008 the septic system failed;

· In July of 2008 a contractor employed by Jack, after looking at the septic system, told Jack that he had been to the property in the past, that the septic system had failed in the past and that he had advised Mark that a new septic system should be installed; and

· In August of 2008, Jack filed a lawsuit against Mark for intentional misrepresentation, breach of contract and misrepresentation in violation of §100.18, Wis. Stats.

Will Jack be successful? No. Mark will be able to kick out the breach of contract claim because the 6 year statute of limitations on that claim ran out in May of 2008, likewise the 3 year statute of limitations (repose) on the §100.18 claim ran out in May of 2005. The intentional misrepresentation claim will be barred under the court’s holding in Below v. Norton. But for Below v. Norton, Jack’s intentional misrepresentation claim would have survived the statute of limitations attack because the 6 year clock would not have started until July of 2008 – the time when Jack discovered the alleged misrepresentation. Because of Below v. Norton, Jack has no recourse against Mark.

If this blog has tickled your interest – I encourage you to read the epitome of dissenting opinion penned by Justice Ann Walsh Bradley. She eloquently and effectively slashes the majority’s opinion in Below v. Norton. My question: Is there a consumer protection group in Wisconsin that will take up this issue to change the statutes to provide that the statute of limitations for these types of contract claims accrue upon discovery of the breach?

Transfer on Death Deeds (#2)

cah@knightbarry.com (Cheri Hipenbecker) — Thu, 10 Jul 2008 00:00:00 GMT

THIS BLOG IS IN RESPONSE TO QUESTIONS POSTED BY MARVEL LEMKE ON JULY 4, 2008:

(1) Is there a specific TOD deed form the drafter should use or can a warranty or quit claim deed form or any other creative form be used? THERE IS NO OFFICIAL "TRANSFER ON DEATH DEED" FORM - THE GRANTOR CAN USE A STANDARD WARRANTY OR QUIT CLAIM DEED, OR OTHERWISE BE CREATIVE.

(2) Is a Wisconsin real estate transfer return required with the TOD deed upon recording in the register of deeds office where the property is located? NO - SEE http://www.revenue.wi.gov/ust/news/0610.pdf - PER THE WISCONSIN DEPARTMENT OF REVENUE, A DOCUMENT DESIGNATING A TRANSFER ON DEATH BENEFICIARY DOES NOT REQUIRE A TRANSFER RETURN; HOWEVER, LANGUAGE MUST BE PLACED ON THE DOCUMENT TO EXEMPT IT FROM THE RETURN AND FEE, SUCH AS: “This document is only designating a transfer on death beneficiary and is exempt per s. 77.21(1), Stats and s. 77.25(10m), Stats.”. THE TRANSFER RETURN IS REQUIRED WHEN RECORDING A DOCUMENT EVIDENCING THE TERMINATION OF THE DECEDENT'S INTEREST IN THE PROPERTY.

(3) As the designation of a TOD beneficiary on a deed does not affect ownership of the property until the ower’s death, will the beneficiary name(s) appear on the tract index in the register of deeds office as grantee, as a future interest is intended to be conveyed? TO ANSWER THIS QUESTION, THE REGISTER'S OF DEEDS MAY WANT TO SEEK AN OPINION FROM CORPORATE COUNSEL OR OTHER APPROPRIATE LEGAL OPINION FROM THE STATE. MY THOUGHT - TO PROVIDE PUBLIC NOTICE, THE REGISTER SHOULD INDEX THE TOD DEED IN BOTH THE TRACT AND GRANTOR/GRANTEE INDEXES. THE INDEXING OF THE TOD DEED DOES NOT CHANGE THE LEGAL EFFECT OF THE TOD DEED.

(4) Is it required to list the specific names of the TOD beneficiaries or is the following statement sufficient “to all of Cheri’s children as tenants in common as TOD beneficiaries’? AGAIN, REGISTER'S MAY WANT TO SEEK AN OPINION FROM CORPORATE COUNSEL OR OTHER APPROPRIATE LEGAL OPINION FROM THE STATE. MY OPINION - BY USING THE SUGGESTED LANGUAGE THE GRANTOR IS PROBABLY DEFEATING THE PURPOSE OF USING A TOD DEED (NAMELY TO AVOID PROBATE) BECAUSE USING THE SUGGESTED LANGUAGE MAY REQUIRE A PROBATE PROCEEDING TO DETERMINE WHO ARE "CHERI'S CHILDREN".

(5) In your example, let’s say Cheri executes and records a TOD deed January 1, 2006; January 1, 2007 Cheri went to a nursing home; June, 2007 the State of Wisconsin executed and recorded a Medical Assistance Lien on the home in Cheri’s name; March, 2008 Cheri passes – are the TOD beneficiaries subject to the medical assistance lien placed on the real estate by the State of Wisconsin? YES, PER 705.15(4), TOD BENEFICIARIES TAKE THE PROPERTY "...subject to any lien or other encumbrance..." AS THE MEDICAL ASSISTANCE LIEN ATTACHED ON JUNE 2007 AGAINST CHERI, THIS WAS A LIEN AGAINST THE REAL ESTATE BEFORE THE INTEREST IN THE REAL ESTATE PASSED TO GAVIN ON CHERI'S DEATH

(6) You cite an example where a Warranty Deed and then a TOD Deed is put of record; what if it happens the other way around - a TOD deed is recorded, the land owner forgets it is of record and a Warranty Deed is recorded after – does the TOD deed cease to exist? YES, IN THIS EXAMPLE THE TOD DEED IS REVOKED UNDER 705.15(3), STATING IN PERTINENT PART "...The designation may be canceled or changed at any time by the sole owner or all then surviving owners, without the consent of the beneficiary, by executing and recording another deed that designates a different beneficiary or no beneficiary. The recording of a deed that designates a TOD beneficiary or no beneficiary revokes any designation made in a previously recorded deed relating to the same property interest."

(7) By operation of law, the TOD beneficiary owns the property on death of the sole owner or last to die of multiple owners, how is the notice of death put on record in the real estate tract index? THE WISCONSIN REGISTER OF DEEDS ASSOCIATION HAS PREPARED A FORM FOR THIS PURPOSE CALLED AN "TOD-110", AVAILABLE AT http://www.wrdaonline.org/Forms/index.htm.

Thanks for your detailed questions Marvel!

Transfer on Death (TOD) Deeds

cah@knightbarry.com (Cheri Hipenbecker) — Tue, 1 Jul 2008 00:00:00 GMT

Frequently we are asked whether we can insure a Transfer on Death (TOD) Deed? Whether a grantee under a TOD Deed must join the execution of a new mortgage being executed by the Grantor? Or whether, after the execution and recording of a TOD Deed, may the Grantor execute and record a TOD Deed to a new Grantee? The brief answers – depends, no and yes.

In 2005, Wisconsin enacted Section 705.15, Wis. Stats., providing an additional means to effect non-probate transfers of real property on death. Emphasis on “additional” – as prior to 2005 people had multiple avenues to effectuate non-probate transfers of real estate on death, including creating life estates in real property, taking title to real property as “joint tenants with rights of survivorship,” or creating living Trusts and placing title to the real estate in the Trust.

Contrary to recording deeds creating life estates or taking title as joint tenants with rights of survivorship, the benefit of preparing a TOD Deed is that the Grantor on the TOD Deed can change his/her mind and change the Grantee/beneficiary without requiring that the former Grantee/beneficiary join the new conveyance. Why? Because the TOD Deed does not affect ownership of the property until the owner’s death – until the death of the owner, the TOD beneficiary only has an expectancy of a future fee simple estate and not a vested interest in the property. For example:

January 1, 2008: Grantor Cheri executes and records a TOD Deed to Bob
February 1, 2008: Bob and Cheri have a falling out and Cheri executes and records a TOD Deed to Gavin
February 15, 2008: Cheri dies

Who owns the property on February 16, 2008? Answer - Gavin.

But what if instead of a TOD Deed on January 1, 2008, Cheri signed a Warranty Deed to Bob, retaining a life estate? And then on February 1, 2008 Cheri executes and records a TOD Deed to Gavin? In this scenario Bob (not Gavin) is the owner on February 16, 2008 because the transfer to Bob as remainderman, subject to the life estate, vested on January 1, 2008. In order for Gavin to have owned the property in this hypo, Bob would have had to join in on the February 1, 2008 TOD Deed to Gavin, agreeing to release his remainder interest in the real property.

Key elements of Section 705.15 include:

705.15(1) - Who can convey via a TOD Deed? In order to convey under a TOD Deed, the real property must be solely owned, owned by spouses as survivorship marital property, or owned by 2 or more persons as joint tenants.
705.15(3) – Can the Grantor of a TOD Deed change his/her mind? YES. As in the hypo above, because the designation of a TOD beneficiary on a deed does not affect ownership of the property until the owner’s death, the TOD beneficiary designation may be canceled or changed at any time by the sole owner or all then surviving owners, without the consent of the beneficiary. The recording of a deed that designates a TOD beneficiary or no beneficiary revokes any designation made in a previously recorded deed relating to the same property interest.
705.15(4) – When does the TOD beneficiary own the real property? The TOD beneficiary owns the real property on the death of the sole owner or the last to die of multiple owners. The TOD beneficiary takes the property subject to liens and encumbrances against the property.
705.15(4) – What if the TOD beneficiary is dead? Then the TOD beneficiary’s issue (children) under §854.06(3) take the property; if the TOD beneficiary does not have children that take under §854.06(3), then the interest in the real property passes to the estate of the deceased sole owner or the estate of the last to die of the multiple owners.

Note – the effective date of §705.15 was April 10, 2006, meaning that TOD Deeds recorded on or after April 10, 2006, are governed by §705.15. What remains unclear is what effect the courts will give to TOD Deeds recorded before April 10, 2006? At this time, as there is limited case law, we don’t know.

So going back to the first paragraph of this blog, the answers to the questions posed are:

Can we insure a TOD Deed? DEPENDS – we can insure the owner(s) under an owner’s policy, which policy will include an exception on Schedule B regarding the TOD Deed. We cannot insure the Grantee under the TOD Deed, as the Grantee does not have a vested interest in the real estate until the owner(s) death. (The Grantee under the TOD only has an expectancy of a future fee simple estate.)
Does a grantee under a TOD Deed need to join the execution of a new mortgage being executed by the Grantor? NO – only the owner(s) need to execute the mortgage as the Grantee under the TOD Deed only has an expectancy of a future fee simple estate. Under §705.15(4), on the death of the owner(s), the Grantee under the TOD will take the property subject to the mortgage and other liens and encumbrances.
After the execution and recording of a TOD Deed, may the Grantor execute and record a TOD Deed to a new Grantee? YES – Under §705.15(3), the TOD beneficiary designation may be canceled or changed at any time by the sole owner or all then surviving owners, without the consent of the beneficiary.

Proviso: Planning for death is complicated and involves not just probate avoidance issues but other factors come into play, including estate tax implications and Title XIX – Medicare and Medicaid concerns. Thus it’s important to consult with an estate planner before completing a TOD Deed or any other deed or conveyance intended to transfer property on death.