Menzel v. Morse

• Citation: 362 N.W.2d 465
• Decision Date: 13 February 1985
• Docket Number: No. 83-869,83-869
• Parties: Robert K. MENZEL and Janet R. Menzel, Appellants, v. Michael J. MORSE and Dave Jones, d/b/a Dave Jones Realty, Appellees.
• Court: United States State Supreme Court of Iowa

Page 465

362 N.W.2d 465

Robert K. MENZEL and Janet R. Menzel, Appellants, v. Michael J. MORSE and Dave Jones, d/b/a Dave Jones Realty, Appellees.

No. 83-869.

Supreme Court of Iowa.

Feb. 13, 1985.

Jerry C. Estes of Estes Law Offices, Fort Dodge, for appellants.

Dan T. McGrevey, Fort Dodge, for appellees.

Considered en banc.

REYNOLDSON, Chief Justice.

Plaintiffs Robert K. Menzel and Janet R. Menzel appeal from a district court judgment denying them damages in a malpractice action against the salesman, Michael J. Morse, and the broker, Dave Jones, who were involved in their purchase of a home. We reverse and remand.

The evidence that is relevant to the issues raised in this appeal is as follows: In 1978 plaintiff Robert K. Menzel purchased a one-half interest in Crocker Claims Service in Fort Dodge. In August 1978 the Menzels traveled from their Mason City home to the Crocker Claims office in Fort Dodge. Defendant real estate salesman Michael Morse, an agent for defendant broker Dave Jones, had an office in the same building. Learning the Menzels were moving to Fort Dodge, he sought them out. He later testified, "I hoped to make [Robert Menzel] my customer," and that he told them "we were one of the leading realtors in the community." Robert testified without contradiction that Morse stated "he would like to be our realtor and find a house for us." Both Robert and Janet testified that from that time forward they considered Morse their agent, to be compensated by the seller out of the money they paid for a home if they purchased as a result of Morse's services. Morse testified he never at any time told the Menzels that they "were not [his] clients," nor could he remember ever telling them he was working for or in behalf of any seller.

Robert and Janet again returned to Fort Dodge on August 15 and 26, 1978, and looked at some houses with Morse. On the morning of the 26th they spent about fifteen minutes examining a house under construction by Baker & Schorrer Construction Company. This home was about 80 percent completed, and was multiple-listed with Joe Brown Realty. Following lunch, Robert and Janet looked at the structure again for fifteen minutes, and decided to make an offer on it.

Morse prepared the offer form and counseled Menzels to offer the list price, which he said was the customary practice with new housing. Robert and Janet offered the asking price, $78,500, but on the condition that substantial improvements be added. Baker & Schorrer rejected this offer, countering with an offer to sell for $76,500 with the utility and laundry room to be finished. In the absence of Robert and Janet, Morse drafted another "Offer to Purchase and Acceptance" containing these terms, and signed it "By agent Michael Morse for Robert & Jan Menzel." The sellers signed this instrument, which provided that all necessary work ("to be of good professional caliber and subject to pre-closing inspection") was to be completed by the closing date, November 1, 1978.

Robert and Janet planned to inspect the house on November 1 and then go to the bank to close the deal. When they arrived at Morse's office, they were informed the closing time had been moved up. This left only about fifteen minutes to inspect the house. Robert and Janet, who had no experience with construction or new homes, found so many obvious construction defects they refused to close. Although Morse did not point out construction errors, he agreed there were problems, and later did not dispute the testimony of Robert and Janet that he assured them that "everything [would] be taken care of."

At trial Robert and Janet also testified Morse told them if they failed to close they would lose their $2000 down payment and in all likelihood would have a suit filed against them for breach of contract.

A meeting at the house was arranged for November 2, to be attended by Robert, Morse, a banker, a listing agent from Joe Brown Realty, and the contractors. Before that meeting, Robert and Morse discussed the situation in the latter's office. Robert testified he then stated he should have an attorney to protect his interest, but Morse advised him he did not need an attorney, that if "we had an attorney, and we didn't get that house [deal] closed, we would lose our $2000 and in all likelihood be subjected to a suit for nonperformance or breach of contract."

Morse's trial recollection of this discussion was as follows:

Q. Well, was this something that you told him? A. I did not tell him he would lose his earnest money. I told him that ... was one of the possibilities.

Q. And also it was possible he would be sued? A. Yes. I was merely re-paraphrasing in regards to the suit, paragraph 15 of this exhibit.

Q. Well, Mr. Morse, did you advise him to get a lawyer after you saw all these bad things at the house? A. No. It was not my position to advise him to get an attorney. I was representing the seller.

At a later point in his testimony Morse again referred to this meeting:

And [Robert] said he thought he should call an attorney. And I suggested he wait a minute on that. And I told him what his alternatives were, set forth in the offer, paragraph 15, sections a, b and c, and also informed him of the possibility that there may be a forfeiture of the earnest money if that was to be the case. At that point in time our appointment was arranged to look at the house. And the whole gist of it was that this was not the time to call the attorney. We had to go back out and see what could be done.

Although Morse's reference was to a provision on the back of the contract, essentially providing the buyer could rescind on the seller's default, Morse thereafter testified:

Q. Mr. Morse, you never told these two people that they could rescind or get out of this transaction, did you? A. I don't believe I did. I didn't know that they could. We had a signed agreement.

Robert testified that after the discussion in Morse's office, he felt he had no choice but to go through with the closing. He and Morse proceeded to the meeting at the house. After waiting outside for the contractors, who never appeared, those present inspected the house for a short time. Robert pointed out the defects he could discern and Morse took notes. Later in the day Morse telephoned Robert that an agreement had been reached and that there would be another meeting at the bank the next day.

November 3, Robert, Janet, a banker and Morse met at the financing Fort Dodge bank. Morse, according to the Menzels, told them the contractors had agreed to a $1500 escrow with the bank to assure the house defects would be fixed, that this was the largest escrow ever held out in a new home in Fort Dodge that he had heard of. Further, "we could go ahead with the closing and he would make sure everything would be taken care of." Morse testified that Robert asked at this meeting if the $1500 was adequate and he answered "it would be adequate to keep anybody from walking away from it"; that he felt it was adequate. He also testified at trial it was his "first sale of a new construction," he had no knowledge of building construction, made no effort to obtain the services of an expert or his broker to evaluate the problems in the house, had no knowledge of the building code, and made no effort to determine the adequacy of the escrow. Menzels closed the deal, with the bank providing $43,000 of the purchase money.

After Menzels moved into the house they found more serious defects. Among other problems, stringers under the ground floor had been cut to accommodate plumbing, resulting in a failure of support. Walls were out of plumb. Snow drifted in around doors and windows. The basement steps and other obvious features violated the building code. Pipes froze from lack of insulation. The most serious of these defects could not have been discovered by an inexperienced person. The contractors made one early visit to the house to fix the fireplace. The effort was unsuccessful.

Menzels first sued the contractors, who then instituted bankruptcy proceedings. The most Menzels were able to salvage from that source was the return of the $1500 escrow fund, and that by execution and delivery of a covenant not to sue, which specifically reserved their right to proceed against others.

After repairing some of the shabby work and obtaining an estimate of about $14,000 to repair other defects, the Menzels filed this action seeking $20,000 in damages. Division I of the petition alleged defendants breached their contractual and fiduciary relations with plaintiffs in nine particulars. These included failing to protect plaintiffs' interests and insist on strict performance by the contractor before closing; failing to insist on adequate escrow for defects prior to closing; discouraging plaintiffs from seeking legal advice when their interest so required; giving improper legal advice as to the effect of failure to close the transaction; failing to advise plaintiffs of building code requirements with respect to the house; and failing to advise plaintiffs the house had not passed official building inspection and to insist that this be done before closing. Division II alleged defendants were negligent in six specifications, including failure to conduct a reasonably competent and diligent investigation for defects in material and workmanship in the house and disclose the same to plaintiffs; in giving improper and erroneous legal advice as to the effect of plaintiffs' failure to close; in failing to develop a comprehensive list of defects and to insist on an adequate escrow fund to protect plaintiffs; and in failing to ascertain whether the house had passed final building code inspection. Defendants denied all of these allegations, but did not plead contributory negligence.

The trial evidence included the testimony referred to above. All the witnesses, including the defendants, were called by the plaintiffs. Morse testified the National Association of Realtors'...