Kellogg v. Woods, No. A05-1837.

• Decision Date: 12 September 2006
• Docket Number: No. A05-1837.
• Parties: James J. KELLOGG, et al., Respondents, v. William B. WOODS, defendant and third party plaintiff, Appellant, v. Wayne Anderson, d/b/a Mariway Land Consultants, third party defendant, Respondent.
• Court: Minnesota Court of Appeals

720 N.W.2d 845

James J. KELLOGG, et al., Respondents, v. William B. WOODS, defendant and third party plaintiff, Appellant, v. Wayne Anderson, d/b/a Mariway Land Consultants, third party defendant, Respondent.

No. A05-1837.

Court of Appeals of Minnesota.

September 12, 2006.

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Todd M. Johnson, Johnson Law Group, L.L.P., Minnetonka, MN, for respondents James J. Kellogg, et al.

Glenn P. Bruder, Mitchell, Bruder & Johnson, Edina, MN, for appellant.

Erik J. Askegaard, Askegaard & Robinson, P.A., Brainerd, MN, for respondent Wayne Anderson, d/b/a Mariway Land Consultants.

Considered and decided by LANSING, Presiding Judge; KLAPHAKE, Judge; and PARKER, Judge.^*

OPINION

LANSING, Judge.

The district court entered judgment against William Woods for violating the mandatory-disclosure requirements for individual sewage-treatment systems set forth in Minn.Stat. § 115.55, subd. 6 (2004). Woods appeals, arguing that the district court misinterpreted the statute, that the record does not support the district court's findings that the system was noncompliant when he sold the property and that he had reason to know of the noncompliance, and that the district court improperly limited damages for the septic-system inspector's breach of contract. Because the district court correctly applied section 115.55, subdivision 6, and the findings supporting the judgment are not clearly erroneous, we affirm Woods's liability to the buyers under section 115.55. But because the district court erred in its legal determination of the scope of damages for a negligent septic-system inspection, we reverse and remand for further proceedings on damages.

FACTS

William Woods purchased a lake cabin in the fall of 1996 for seasonal use. Because his family rarely used the cabin, he decided to sell it in 2000. James and Tari Kellogg signed a purchase agreement for the property in March 2001 and closed on the sale in April 2001. An addendum to the purchase agreement stated that the "[s]eller agrees to provide buyers with a current septic inspection and warrants its compliance."

Jim Christensen, Woods's real estate agent, contracted with Wayne Anderson to inspect the septic tank, and on March 28, 2001, Anderson deemed it compliant. Anderson testified that he removed the cover from the septic tank and visually examined the tank with a flashlight. He then used a piece of rebar to comb across the bottom of the tank two or three times. He testified that gray-colored water prevented him from seeing the bottom of the tank, but, because the rebar did not catch on the bottom of the tank, he determined that it was not cracked.

The inspection was consistent with a previous disclosure statement, signed by Woods and issued in September 2000. The disclosure statement represented that the tank was in compliance with applicable laws and rules, had a 500-gallon capacity, was pumped three times a year, and had last been emptied in September 1999.

Shortly after signing the purchase agreement, the Kelloggs arranged to have the tank emptied because they had noticed, when first viewing the property, that the tank level-indicator showed that the tank was full. According to James Kellogg, the company he hired went to the site on March 28, and Anderson, who was inspecting the tank, said that it did not need emptying. Anderson disputes this claim. Between March 28 and June 4, 2001, the Kelloggs used the cabin twice. They first emptied the tank on June 4, removing 750 gallons. Although the cabin was not used between June 4 and June 22, the indicator again showed that the tank was full on June 22. On July 19 the Kelloggs had 700 gallons removed from the septic tank at 10:00 a.m. At 10:00 p.m., with no intervening activity at the cabin, the tank had ten inches of water in it.

The Kelloggs hired Arlen Sergent to inspect the septic tank in August 2001. Sergent found that the bottom of the tank was cracked and that the septic system was failing. The Kelloggs later sold the property and, for purposes of the sale, removed the septic tank in May 2002 and installed two 750-gallon tanks. When removing the old tank, Sergent noted in his report that, when the tank was emptied for the August 2001 inspection, it had "numerous cracks in the floor." The report also noted that, "It appeared to have been that way for a long time."

The Kelloggs sued Woods and Anderson in conciliation court in September 2002 to recover the costs of replacing the cracked septic tank. The conciliation court found Woods liable to the Kelloggs for the cost of replacing the tank because he had warranted the septic system's compliance. The conciliation court dismissed the claim against Anderson because the Kelloggs had no contractual relationship with Anderson.

In response to Woods's demand, the case was removed to the district court. The district court granted the parties leave to amend the complaint and answer and also granted Woods's motion to join Anderson as a third-party defendant. The Kelloggs amended their complaint to state claims only against Woods. They alleged that Woods violated Minn.Stat. § 115.55, subd. 6(b) (2004), and breached the warranty in the purchase-agreement addendum. In a cross-claim, Woods alleged that Anderson was obligated to indemnify him for any amount for which the court found Woods liable to the Kelloggs.

Following a trial, the district court determined that Woods violated Minn.Stat. § 115.55, subd. 6(b). The court ordered Woods to pay the Kelloggs the costs incurred to replace the septic tank and the statutorily permitted attorneys' fees. On Woods's cross-claim against Anderson, the district court determined that Anderson was negligent in conducting his inspection but limited Woods's recovery to $150, the cost of the second compliance inspection. In this appeal from judgment, Woods contends that the district court misinterpreted section 115.55, subdivision 6. Alternatively, he contends that, if he is liable to the Kelloggs, he is entitled to full indemnification from Anderson.

ISSUES

I. Did the district court err by applying Minn.Stat. § 115.55, subd. 6(b) (2004), to find that a seller is liable to a buyer

for representing a septic system's compliance with sewage-treatment-system rules on the ground that the seller had reason to know the representations were false?

II. Is the evidence sufficient to support the district court's finding that, at the time of the sale, the seller had reason to know that the septic system was not in compliance?

III. Did the district court err by limiting a septic-system inspector's liability for a negligent inspection to the costs of a second inspection?

ANALYSIS

I

Minnesota law requires that, before entering an agreement for the sale of real property, the seller must disclose to the buyer, in writing, the method for managing sewage generated on the property. Minn.Stat. § 115.55, subd. 6 (2004). If the sewage is not routed to a permitted facility, the seller must make a series of specific disclosures, including whether the system is, "to the seller's . . . knowledge, in compliance with applicable sewage treatment laws and rules." Id., subd. 6(a)(2). Subdivision 6(b) also provides for the disclosure of the known status of an individual sewage-treatment system at the time of sale and provides specific penalties relating to a failure to disclose or a false disclosure of the status of the system. Id., subd. 6(b). A seller who "knew or had reason to know of the . . . known status of the system" is liable for costs related to bringing the system into compliance and for reasonable attorneys' fees associated with the collection of those costs. Id.

Woods argues that the district court erred in its interpretation of Minn.Stat. § 115.55, subd. 6(b), because the court used a constructive-knowledge standard instead of an actual-knowledge standard. This interpretation, he argues, effectively makes sellers guarantors of septic systems when selling real property.

Statutory interpretation is a question of law, which we review de novo. ILHC of Eagan, LLC v. County of Dakota, 693 N.W.2d 412, 419 (Minn.2005). The goal of statutory interpretation is "to ascertain and effectuate the intention of the legislature." Minn.Stat. § 645.16 (2004). Our starting point is the specific language of the statute to determine whether it has a plain meaning. Id. If on its face a statute's meaning is plain, judicial construction is neither necessary nor proper. Am. Tower, L.P. v. City of Grant, 636 N.W.2d 309, 312 (Minn.2001). Minnesota appellate courts have not yet addressed the meaning of subdivision 6(b), but the language of the subdivision supports the district court's interpretation. This interpretation is not as broad as Woods suggests.

Subdivision 6(a)(2) first requires a seller to disclose, "to the seller's . . . knowledge," whether the system is in compliance with state regulations. Minn.Stat. § 115.55, subd. 6(a)(2). Subdivision 6(b) provides for liability of a seller who fails to disclose a known status when the seller "knew or had reason to know of the . . . known status." Id. subd. 6(b). Woods interprets the statute to impose liability only for intentional misrepresentations. But the express language "had reason to know" must be given its plain meaning; it expands the relevant state of mind beyond actual knowledge to include what the seller should reasonably know. See ILHC, 693 N.W.2d at 419 (noting that "[w]henever possible, no word, phrase, or sentence should be deemed superfluous, void, or insignificant" (quotation omitted)).

The specific context of subdivision 6 and the general context of the statute as a whole make it clear that the provisions are aimed at ensuring that buyers are informed. The statute would lose its force if a seller could make statements that the seller either has reason to know are false or does not actually know to be true or false. See Yost v. Millhouse, 373 N.W.2d 826, 830 (Minn.App...