Galvan v. Yam Foo Poon
| Docket Number | SC 163741 |
| Decision Date | 12 July 2023 |
| Parties | REYES GALVAN, Plaintiff-Appellee, v. YAM FOO POON, HWAI-TZU HONG POON, and DANIEL Y. POON, Defendants-Appellants. and MINHWA KIM, Plaintiff, |
| Court | Michigan Supreme Court |
Argued on application for leave to appeal April 5, 2023.
Chief Justice: Elizabeth T. Clement Justices: Brian K. Zahra David F. Viviano Richard H. Bernstein Megan K. Cavanagh Elizabeth M. Welch Kyra H. Bolden
This syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader.
Reyes Galvan and Minhwa Kim filed an action against Yam Foo Poon Hwai-Tzu Hong Poon, and Daniel Y. Poon in the Washtenaw Circuit Court, alleging fraud, misrepresentation, fraudulent concealment, silent fraud, innocent misrepresentation, loss of consortium, and breach of a warranty deed. In 2017 plaintiffs bought a condominium in the city of Ann Arbor from defendants, and defendants transferred title to plaintiffs via a warranty deed. The deed warranted, among other things that pursuant to MCL 565.151, the property was "free from all incumbrances." While renovating the condominium, plaintiffs learned of several issues with the property, including that there was no proper firewall between their condo and the neighboring units, and that one of the defendants had signed a unit-modification form indicating that a wall had been moved and that a neighboring unit encroached on the upstairs bathroom of plaintiffs' unit. Because the absence of a firewall violated the city's building code, the city sued plaintiffs and their adjoining neighbors to enforce the code and require installation of firewalls. Plaintiffs were ordered to pay $18,000, in part to bring the walls of their unit into compliance with the building code, and they also spent additional funds to remediate other problems with the property. During a jury trial, defendants moved for a directed verdict on plaintiffs' breach-of-warranty claim, arguing that the building code violations were not an encumbrance. The trial court, Timothy P. Connors, J., agreed and directed verdict in favor of defendants on this claim. The jury subsequently found in favor of plaintiffs regarding their claims of silent fraud and loss of consortium. Galvan appealed the directed verdict in the Court of Appeals (BORRELLO, P.J., and SERVITTO and STEPHENS, JJ.), which reversed in an unpublished per curiam opinion, determining that the building code violations constituted an encumbrance in violation of the warranty deed. Defendants applied for leave to appeal in the Supreme Court which ordered and heard oral argument on the application. 509 Mich. 938 (2022).
In a unanimous opinion by Justice VIVIANO, the Supreme Court, in lieu of granting leave to appeal, held:
A building code violation that is in existence at the time a warranty deed is executed and that is not yet subject to any official enforcement action does not constitute an encumbrance under MCL 565.151.
1. Does a building code violation that is not yet subject to any enforcement action constitute an encumbrance under MCL 565.151 and therefore breach a warranty deed? Deeds transfer ownership interests in real property. MCL 565.151 governs the effect of and covenants included in a warranty deed and provides in relevant part that the land is "free from all incumbrances ...." This case turns upon the scope of the term "encumbrance." This Court has described encumbrances as affecting the ownership rights to or interests in a property, not the property's material condition. Additionally, it is a well-established rule that a governmental regulation alone does not constitute an encumbrance. This rule reflects that there is a difference between economic lack of marketability, which concerns conditions that affect the use of the land, and title marketability, which relates to defects affecting legally recognized rights and incidents of ownership. Clear title to a property can be held despite the fact that the land is subject to laws restricting its use. Because such laws are not a burden on the title affecting rights or interests in the property, they are not encumbrances.
2. At issue in this case is not simply a governmental regulation but also the violation of that regulation. While courts are split regarding whether such violations generally may constitute encumbrances, almost no courts hold that a violation of a building code that is not the subject of an enforcement action is an encumbrance. Some caselaw treats zoning code violations as encumbrances because, in part, they are known and not hidden. Building code violations, by contrast, almost always involve obscure or technical details that would not be apparent to the parties. Because a building code violation that has not yet been the subject of enforcement action does not affect the rights to or interests in the property and is generally hidden or at least not readily known, it lacks the defining characteristic of an encumbrance. The fact that future enforcement actions might lead to a lien is not enough to transform a bare violation into an encumbrance because, to be actionable, the breach of the covenant against encumbrances must have occurred when the covenant was made. A contrary holding would not only disregard the longstanding meaning of "encumbrance" but would invite title disputes based on violations of building codes that would not be discovered during a normal title search or inspection of the property.
Court of Appeals judgment reversed, and case remanded to the trial court for reinstatement of the order granting defendants' motion for a directed verdict on the breach-of-warranty claim.
BEFORE THE ENTIRE BENCH
In 2017, plaintiffs, Reyes Galvan and Minhwa Kim, purchased a condominium from defendants, Yam Foo Poon, Hwai-Tzu Hong Poon, and Daniel Poon. As part of the sale, defendants transferred title to plaintiffs under a warranty deed. Pursuant to MCL 565.151, the deed warranted that the property was "free from all incumbrances," among other things.[1] It turned out that, at the time of sale, the property was in violation of a building code requiring a firewall between condominium units. The question in this case is whether that violation constituted an encumbrance violating the warranty deed. We hold that a violation of a building code at the time of sale, not yet subject to any official enforcement action, is not an encumbrance.
The property at issue was originally part of a three-unit townhouse. It was subsequently converted into a single residence for a time, and the demising walls (i.e., those separating the units) were removed. Later, when the property was again partitioned into three separate residences, the demising walls were reconstructed but placed in different locations. As a result, they did not form a single wall from the foundation to the roof as required by the building code of the city of Ann Arbor (the City). In addition, the contractors failed to install proper fire barriers behind the drywall of the units, which the City's building code also required.
Plaintiffs purchased one of the units, a condominium, in 2017. They received a warranty deed that covenanted against encumbrances. The sellers' disclosure form indicated that there were no known problems regarding the unit. Plaintiffs learned of the code violations after they began renovations on the condominium. At that time, they discovered staining on the drywall and learned of numerous past maintenance visits to fix leaks. In addition, plaintiffs learned that one of the defendants had signed a unitmodification form indicating that a wall had been moved and that the neighboring unit encroached on the upstairs bathroom. After hiring contractors to remediate the problems, plaintiffs discovered that there was no proper firewall between the units.
The City sued plaintiffs and their two adjoining neighbors in 2018 to enforce the code and require installation of firewalls. Plaintiffs were ordered to pay $18,000, half of which was to bring the walls into compliance with the code and half to compensate a neighbor for the loss of a portion of her unit that was being transferred to plaintiffs to create a proper firewall. Plaintiffs also paid $27,160 for an architect to assist in the compliance repairs. Because plaintiffs initially lacked funds to pay the judgment, the City placed a lien on the property. Plaintiffs, who eventually paid the judgment and for the remediation, were forced to live elsewhere while the repairs were made.
Plaintiffs then brought the present lawsuit against defendants, alleging fraud, misrepresentation, fraudulent concealment, silent fraud, innocent misrepresentation, loss of consortium, and breach of the warranty deed. At trial, a real estate appraiser testified that the total cost of the building code violation was $30,000 and that a family could not reside in the unit until the violations were remedied. After the close of trial, but before the jury's verdict, defendants moved for a directed verdict on the breach-of-warranty claim. They argued that the building code violations were not an encumbrance. The trial court agreed, granting defendants' motion. The jury subsequently found that defendants withheld material facts about the condition of the property and were therefore liable for silent fraud. Plaintiffs were awarded $20,802 for Galvan's economic damages and $8,100 for Kim's noneconomic losses.
Plaintiff Galvan appealed the directed verdict on the breach-of-warranty claim, and the Court of Appeals reversed.[2] It observed that the code violations subjected plaintiffs to the threat of litigation and made the home unmarketable and uninhabitable. The Court of Appeals...
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