Yeager v. McLellan

• Decision Date: 23 November 2005
• Docket Number: No. 2003-SC-0180-DG.,2003-SC-0180-DG.
• Citation: 177 S.W.3d 807
• Parties: Michael YEAGER, et al Appellants v. Christine McLELLAN Appellee.
• Court: United States State Supreme Court — District of Kentucky

Page 807

177 S.W.3d 807

Michael YEAGER, et al Appellants v. Christine McLELLAN Appellee.

No. 2003-SC-0180-DG.

Supreme Court of Kentucky.

November 23, 2005.

David A. McCullough, Louisville, Counsel for Appellants.

Bruce A. Brightwell, Louisville, Counsel for Appellee.

Opinion of the Court by Justice GRAVES.

This dispute involves an action for breach of contract/breach of warranty based upon alleged misrepresentations made by the sellers of a home, Appellants Michael and Irene Yeager. Buyer, Appellee Christine McLellan, maintains that a "Seller's Disclosure of Property Condition" form (hereinafter "disclosure form") signed by Appellants misrepresents instances of basement water leaks, and that this form is specifically incorporated by reference as a warranty in the purchase contract. The Jefferson Circuit Court entered summary judgment in favor of the sellers, Appellants. The Court of Appeals reversed and remanded the case to the Jefferson Circuit Court.

After listing their residential property for sale, Appellants completed and signed the disclosure form pursuant to KRS 324.360. 201 KAR 11:350 sets forth administrative regulations relative to the disclosure requirement. 201 KAR 11:350 provides:

This disclosure is based solely on the seller's observation and knowledge of the property's condition and the improvements thereon. This statement shall not be a warranty by the seller or seller's agent and shall not be intended as a substitute for an inspection or warranty the purchaser may wish to obtain.

The disclosure form also includes the above language.

KRS 324.360 mandates that the disclosure form must contain information pertaining to the basement condition and "whether it leaks." KRS 324.360(3). The disclosure form in question contains a checklist of queries regarding the property. In response to the question asking, "Does the basement leak," Appellants checked "Yes." The follow up question asks, "If yes, when?" Appellants wrote, "March 1989 & 1997." The next question asks whether the leak has been repaired or treated. Appellants answered "No" to this question.

Paragraph 11.A of the purchase contract executed between Appellants and Appellee includes the following language:

Buyer acknowledges receipt of a Seller's Disclosure of Property Condition (as required by 201 KAR 11:350) from Seller. Seller represents and warrants to Buyer . . . that the information provided in the Seller's Disclosure of Property Condition is true, accurate and complete to the best of their knowledge. Seller and/or Buyer shall indemnify and hold harmless all the foregoing parties from any liabilities, damages, costs, fees and expenses resulting from any incorrect information provided herein, in the Listing Contract, or in the Seller's Disclosure of Property Condition.

The contract also contains a provision allowing the buyer to inspect the property and report to the seller substantial defects found by the inspection for repair by the seller. Appellee hired Inspection Group, Inc. to inspect the property. The inspection report mentions the existence of cracks in the basement wall and suggests further inquiry. Appellee made no further inquiry or request for repair, and proceeded to close on the property. Appellee alleges that she experienced problems with basement leaks soon after she moved into the house.

Less than three years after moving into the property Appellee brought an action against the sellers alleging breach of contract/breach of warranty and fraud. Appellee charged that Appellants falsely completed the disclosure form because the two incidents listed (March 1989 and 1999) were not the only times that the basement had leaked. The Jefferson Circuit Court entered partial summary judgment in favor of Appellants, reasoning that the disclosure form clearly stated that it was not a warranty. Appellee voluntarily dismissed her fraud claim, and the partial summary judgment on the claim for breach of contract/breach of warranty was certified as final and appealable. The Court of Appeals reversed and remanded, holding that while the disclosure form in and of itself did not constitute a warranty, the parties specifically agreed to incorporate the disclosure form as a warranty in the purchase contract. The Court of Appeals remanded to the trial court to resolve the issue of fact as to whether Appellants lied on the disclosure form and thereby breached the warranty. We granted review.

I.

The first issue that we must decide is whether a warranty exists in either the disclosure form itself, or the purchase contract. As we have noted above, both 201 KAR 11:350 and the disclosure form expressly state that a disclosure form does not constitute a warranty. Clearly, by itself, the disclosure form is not a warranty.

However, the purchase contract does contain a clause stating that Appellants warrant to Appellee that the information in the disclosure form is "true, accurate and complete to the best of their knowledge." In the absence of ambiguity, a written instrument will be strictly enforced according to its terms. O'Bryan v. Massey-Ferguson, Inc., 413 S.W.2d 891, 893 (Ky.1966). However, a court may refuse to enforce a contract on grounds of illegality where the contract has a direct objective or purpose that violates the federal or a state Constitution, a statute, an ordinance, or the common law. Zeitz v. Foley, 264 S.W.2d 267, 268 (Ky.1954). This clause in the contract creates a warranty. The contract incorporates the disclosure form by reference and explicitly warrants the truthfulness and accuracy of the form and must be enforced as such. As the Court of Appeals correctly notes, the contract does not violate KRS 324.360 or 201 KAR 11:350 because the parties are in compliance with these provisions and merely sought to give greater weight to the disclosure form than was statutorily required. See e.g. Munday v. Mayfair Diagnostic Laboratory, 831 S.W.2d 912 (Ky.1992).

II.

Although a warranty exists in the purchase contract, we must consider whether the contract was merged into the deed of conveyance. "The merger doctrine holds that all prior statements and agreements, both written and oral, are merged into the deed and the parties are bound by that instrument." Borden v. Litchford, 619 S.W.2d 715, 717 (Ky.App.1981). If the merger doctrine applies, then Appellee has no grounds for recovery under the warranty of the purchase contract. Id.

One exception to the doctrine of merger states that false and fraudulent misrepresentations do not merge. Dunn v. Tate, 268 S.W.2d 925 (Ky.1954). Appellee must establish the six elements of fraud by clear and convincing evidence in order to demonstrate that the warranty was a fraudulent misrepresentation to be excepted from merger. These elements are: a) a material representation b) which is false c) known to be false or made recklessly d) made with inducement to be acted upon e) acted in reliance thereon and f) causing injury. United Parcel Service Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999). Appellee alleges that Appellants omitted instances of water leakage from the disclosure form, and that Michael Yeager failed to mention his belief that there was an underground spring under the property. Appellee cites to a deposition of Michael Yeager. Appellee makes sufficient allegations to allow the trial court to consider this factual issue. It is to be noted that Appellee dismissed an earlier fraud claim. However, Appellee may prove fraud only insofar as it relates to the fraud exception to the merger doctrine, which is relevant to Appellee's breach of contract/breach of warranty claim.

Appellee argues that the merger doctrine does not bar her claim because a hidden defect exception also applies. Appellee relies on Ferguson v. Cussins, 713 S.W.2d 5 (Ky.App.1986), and Borden v. Litchford, supra. However, Appellee's reliance on these cases is misplaced, as there is no hidden defect exception to the merger doctrine as it applies to express warranties and contracts. Borden involved the purchase of a new home. In discussing caveat emptor, the Borden court states that the merger doctrine does not apply to hidden defective conditions under an implied warranty. Id. at 717. Ferguson also does not involve an express warranty but instead cites to the above Borden proposition in a discussion of caveat emptor. Thus, in both cases, the notion of hidden defect directly relates to caveat emptor and implied warranty. There is no case law stating that hidden defect is a distinct exception to the application of merger to express warranties.

If Appellee can demonstrate that the fraud exception to the merger doctrine applies, then she may proceed on her breach of contract/breach of warranty claim. Accordingly, we affirm the Court of Appeals and remand to the circuit court for further proceedings consistent with this opinion.

LAMBERT, C.J., COOPER, SCOTT, and WINTERSHEIMER, J.J., concur.

JOHNSTONE, J., dissents by separate opinion in which ROACH, J., joins.

Dissenting Opinion by Justice JOHNSTONE.

Respectfully, I must dissent.

The majority concludes that the doctrine of merger applies in this situation, thus barring Ms. McLellan's claim unless she can prove fraud upon remand. Ms. McLellan had moved for summary judgment on the issue of fraud as well, but the motion was denied. I believe that the motion should have been granted in favor of the Yeagers, as Ms. McLellan had failed to present evidence of the requisite elements of fraud.

As noted in the majority opinion, there are six required elements to establish a claim of fraud: (a) a material representation, (b) which is false, (c) and which is known to be false or made recklessly, (d) made with inducement to be acted thereon, (e) which is acted thereon, and (f) causes injury. United Parcel Service Co. v. Rickert, 996 S.W.2d 464, 468 (Ky.1999). "[A] claimant may establish a detrimental reliance in a fraud action when he acts or fails to act due to fraudulent...