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Sokol v. Morrissey

Court of Appeals of Iowa

October 25, 2017

DAVID and RACHAEL SOKOL, Plaintiffs-Appellants,
ROBERT and EILEEN MORRISSEY, Defendants-Appellees.

         Appeal from the Iowa District Court for Polk County, Jeffrey D. Farrell, Judge.

         Home buyers appeal from a district court order on their claims related to alleged construction defects and the failure of the sellers to offer them the first right to purchase an adjacent lot. AFFIRMED IN PART AND REMANDED WITH INSTRUCTIONS.

          Billy J. Mallory and Allison M. Steuterman of Brick Gentry, P.C., West Des Moines, for appellants.

          Kenneth R. Munro of Munro Law Office, P.C., Des Moines, for appellees.

          Heard by Danilson, C.J., and Tabor and McDonald, JJ.

          TABOR, JUDGE.

         Home buyers David and Rachael Sokol sued builder-sellers Bob and Eileen Morrissey after encountering various problems with their new home. Following a bench trial, the district court found the Morrisseys had violated the disclosure requirement of Iowa Code section 558A.2 (2009), and awarded the Sokols limited damages. The Sokols appeal, contending the district court should have awarded additional damages under chapter 558A or, alternatively, based upon a breach of the implied warranty of workerlike construction, [1] a breach of the purchase agreement, the Morrisseys' representations about the property, or Bob's negligence in supervising the home's construction. In addition, the Sokols argue the district court should have granted a declaratory judgment obligating the Morrisseys to sell an adjacent lot to the Sokols for its tax-assessed value.

         We affirm the district court's ruling on all grounds but one-breach of implied warranty. Because we find the court erred in its determination Bob Morrissey was not a builder-vendor under the second requirement of the implied-warranty test, we remand for the district court to consider whether the Sokols satisfied the remaining requirements.

         I. Facts and Prior Proceedings

         In 2005, seventy-five-year-old jeweler Bob and his wife, Eileen, decided to build a home for their retirement. Bob, who had never built a home before, acted as the general contractor for the project.[2] Bob began the home-building process by hiring an architect to design the home and purchasing a tract of land, which he subdivided into two lots: Lot 1 and Lot 2, Morrissey Estates. He listed himself as the owner and developer of the land. Bob and Eileen also created an informal entity, "Our Home Builders, " which Bob explained was meant to help keep home-building expenses separate from personal expenses. Bob created business cards for "Our Home Builders" and listed the Morrisseys' home address as the "business address." He described the cards as "kind of a fun thing" to "[p]ass out to the kids and . . . family, " but he also gave the cards to businesses involved with the project. With assistance from a number of subcontractors, Bob began construction on Lot 1.

         Bob came to the construction site almost daily.[3] In a series of notebooks, he logged various difficulties he encountered as the construction of the home progressed. Among other things, Bob described uncertainty about the layout of the roof, problems with the electrical wiring, and issues related to the geothermal heating unit he had installed. Questioning at trial revealed the limits of Bob's understanding of the typical duties of a general contractor. For instance, Bob did not investigate the applicability of any statutes, ordinances, or regulations to his construction project. Bob also confirmed he did not do anything to determine whether the components of his home were constructed or installed pursuant to manufacturer specifications. Instead, he relied on the expertise of the subcontractors.

         By late 2007, Bob had nearly completed construction, but as the Morrisseys prepared to move, Eileen became ill. They soon decided against moving and contacted a realtor-a relative of Bob's-about selling the newly constructed home. Bob finished the home shortly thereafter, and the Morrisseys entered into an agreement with the realtor in November 2008. On the full listing of the property, the realtor identified the builder of the home as "Our Home Builders."

         The Sokols offered to purchase the home on June 11, 2009, and the Morrisseys accepted. In an addendum to the purchase agreement, the Morrisseys also agreed to grant the Sokols the first right of refusal to purchase the adjacent lot, Lot 2, at "current market price" in the event the Morrisseys offered it for sale outside their immediate family. The provision required the Sokols to exercise the right "within [sixty] days' receipt of a written notice" from the Morrisseys of the sale offering.

         The Morrisseys completed a sellers' disclosure form relating to the condition of the property. See Iowa Code § 558A.4(1)(a) (requiring disclosure of "information relating to the condition and important characteristics of the property and structures located on the property, including significant defects in the structural integrity of the structure"). They disclosed no known problems with the home, writing simply: "new construction." Bob testified that although he never lived in the home, he had continued to monitor the property regularly after completing construction and had observed no issues with the home.

         The Sokols had the home inspected on June 22, 2009. The inspector observed relatively insignificant issues with the home. He documented holes and cracks in the EIFS/synthetic stucco siding;[4] Bob agreed to repair the holes. The inspector also noted concerns with the rock retaining wall. Bob responded: "Netting ha[s] already been installed behind the retaining wall to prevent soil erosion-nothing else is needed and nothing else will be added." The Sokols moved forward with the sale after Bob agreed to make limited repairs.[5]

         The Sokols took possession of the home on July 14, 2009. They began experiencing problems within three months. The Sokols first noticed issues with the geothermal unit. Rachael explained: "The weather was getting cold, so it was time to switch the system over from the . . . cooling mode to the heating mode. And after that switch occurred, the breakers started flipping and the system kept turning off, which caused the heat to go off." Next, electrical issues arose-a broken key pad on the garage door, inoperative outlets, a malfunctioning thermostat, and several can lights that persistently burned out. The Sokols were unable to locate the security system's wiring Bob claimed to have installed. And then various faucets, both inside and out of the home, started leaking.

         The Sokols contacted Bob, who initially tried to remedy the issues either himself or through subcontractors who had worked on the home. Bob had also paid for a one-year homeowner's warranty to cover repairs to the home. But despite Bob's repair attempts, some of the problems persisted. The Sokols began to have the issues repaired at their own cost.

         Nearly five years after the sale, on July 9, 2014, the Sokols wrote to Bob requesting he remedy several issues they continued to experience with the home, including: flooding in the basement; leaking from the roof, gutters, and windows; cracking in the siding; rocks falling from the retaining wall; improper installation of the geothermal unit and air conditioner; and faulty wiring. The Sokols also asked for $20, 000 to reimburse them for the expenses they had already incurred making repairs. Bob responded: "I was sorry to hear of the problems you have encountered the last few years. At this time it is difficult for me to get away for any length of time, but I will follow up on what I find out, and I will pass it on to you."

         Then, on August 30, 2014, the Morrisseys listed Lot 2 for sale at a price of $90, 000. They did not give written notice to the Sokols before listing the property.

         The Sokols filed suit against the Morrisseys on September 8, 2014. The petition at law consisted of ten counts: (1) breach of contract, (2) breach of the implied warranty of merchantability, (3) breach of the implied warranty of fitness, (4) breach of the implied warranty of good workership, (5) misrepresentation or concealment, (6) negligent misrepresentation, (7) negligence, (8) violation of Iowa Code chapter 558A, (9) breach of express warranty, and (10) declaratory judgment, requesting the court to "construe and determine the validity and terms of the Addendum to the Purchase Agreement and declare that Defendants are required or obligated to provide Plaintiffs with the First Right of Refusal/Option to Purchase" Lot 2.

         While the case was pending, the Morrisseys, who had taken Lot 2 off the market, again advertised the property. The Morrisseys sent a letter to the Sokols on June 29, 2015, notifying them of their right to purchase the lot for $95, 000, the new listing price. On September 1, the Sokols responded, disputing that $95, 000 was the fair market value for the lot and noting: "At this time the Sokols continue to assert their rights to purchase the lot at the actual fair market value under the terms of the Addendum to Purchase Agreement." The Sokols did not indicate what amount they believed to be the "actual fair market value" of Lot 2.

         The case proceeded to a bench trial on March 30 and 31, 2016. The Sokols, who described continuing problems with the home, asked for reimbursement for the out-of-pocket expenses they had incurred, damages to cover completion of the repairs to the home, and attorney fees. Rachael explained the damages exceeding the $20, 000 she had requested in July 2014 were issues they discovered only after the July 2014 letter.[6] In addition, she testified that at the time she and her husband purchased the home, she did not know Bob was not a professional builder. She quipped: "I mean, I wouldn't let a dentist take out my gallbladder . . . . And so why would you let somebody who has no background or knowledge do something or build something or do something that they have no expertise in?"

         A general contractor hired by the Sokols testified about many deficiencies with the home. He cited problems with the EIFS siding, [7] gutters, electrical and security systems, roof, deck, and retaining wall, [8] as well as the installation of various items inside the house. He also noted evidence of water damage in the basement. The contractor opined that had the home been built in a workerlike manner, these issues would not have arisen.

         A heating, ventilation, and air-conditioning (HVAC) contractor testified about the condition of the geothermal unit. He explained the geothermal system had not been installed pursuant to manufacturer specifications. Specifically, the water in the system was of poor quality and too warm, causing sweating on the surface of the system and corrosion both inside and out.

         Following trial, the district court awarded the Sokols damages of $20, 737.80 based on a violation of the disclosure requirement of chapter 558A. The court found "good grounds to believe" Bob did not know of any defects with the home when he sold it, but because two areas-the geothermal unit and the can lighting-"showed material defects so quickly following sale that a seller in [Bob's] position . . . would have become aware of the defects had he used ordinary care to find them, " the court awarded the Sokols the amount they had expended remedying those issues. The court rejected the Sokols' other claims for damages as either unproven or inapplicable and, on the declaratory-judgment claim, found the Sokols had waived their right of first refusal.

         The Sokols now appeal the district court's order.[9]

         II. Scope and Standard of Review

         The parties disagree about our scope of review. The Sokols contend our review is de novo, but the Morrisseys assert our review is for errors of law. The Sokols emphasize: "While some objections were ruled upon during trial, the Court also too[k] all exhibits into evidence subject to objections of hearsay, cumulative evidence, and weight to be given the exhibits."

         Here, the bulk of the Sokols' claims are actions at law. See, e.g., Van Sloun v. Agans Bros., Inc., 778 N.W.2d 174, 179 (Iowa 2010) ("Where the basic rights of the parties derive from the nonperformance of a contract, where the remedy is monetary, and where the damages are 'full and certain, remedies are usually provided by actions at law, and equity has no jurisdiction.'" (citation omitted)). Although the clerk docketed the case as an equitable action, the Sokols sought equitable relief in only one of their ten counts-the request for a declaratory judgment. We consider the parties' pleadings, the requested relief, the nature of the case, as well as whether the court ruled on evidentiary objections to determine whether a declaratory judgment action is legal or equitable. See Passehl Estate v. Passehl, 712 N.W.2d 408, 414 (Iowa 2006). But if a party demands both legal and equitable relief in one action, as is the case here, "the action is ordinarily classified according to what appears to be its primary purpose or its controlling issue." Van Sloun, 778 N.W.2d at 179. Our "review on appeal is not governed by how the clerk docketed the case, but rather by how the parties tried the case in the district court." Longfellow v. Sayler, 737 N.W.2d 148, 152 (Iowa 2007).

         Regardless of the extent of the district court's rulings on evidentiary objections, [10] because the Sokols' case centered on claims at law for known monetary damages, we find this case was tried at law, which makes our review for errors at law. See Iowa R. App. P. 6.907. As long as the district court's findings of fact are supported by substantial evidence, we are bound by them, but we are not bound by the district court's legal conclusions. See Longfellow, 737 N.W.2d at 153. "Evidence is substantial when a reasonable mind would accept it as adequate to reach the same findings. Evidence is not insubstantial merely because it would have supported contrary inferences." Hendricks v. Great Plains Supply Co., 609 N.W.2d 486, 490 (Iowa 2000) (citation omitted).

         III. Analysis

         A. Disclosure Requirements

         Chapter 558A, Iowa's Real Estate Disclosure Act, requires individuals seeking to transfer real estate to deliver to interested transferees a written disclosure statement detailing "the condition and important characteristics of the property and structures located on the property, including significant defects in the structural integrity of the structure, as provided in rules which shall be adopted by the real estate commission." Iowa Code § 558A.4; see also id. § 558A.2; Iowa Admin. Code r. 193E-14.1(6) (providing sample disclosure statement). The standard for reporting the required information is one of good faith, requiring a "reasonable effort . . . to ascertain the [relevant] information" and any approximation "be based on the best information available at the time." Iowa Code § 558A.3(1). A person who violates the disclosure requirement through "error, inaccuracy, or omission" of required information is liable to the transferee if "that person has actual knowledge of the inaccuracy, or fails to exercise ordinary care in obtaining the information." Id. § 558A.6(1); see also Jensen v. Sattler, 696 N.W.2d 582, 587 (Iowa 2005) (finding showing of failure to exercise ordinary care, whether or not the seller lived on the property, to be sufficient).

         The Sokols assign error to the district court's interpretation of chapter 558A as well as to the district court's factual findings. They contend the court incorrectly found the Morrisseys, as sellers of a newly constructed home, were not required under chapter 558A to disclose issues that arose during construction. The Sokols also argue the evidence presented at trial demonstrated the Morrisseys had actual knowledge of the defects with the home and failed to exercise ordinary care in obtaining information about the defects by neglecting to ensure the subcontractors' work was completed pursuant to industry standard.

         The Morrisseys respond that chapter 558A does not require disclosure of every problem that arose while the home was being built. Citing the report of the initial home inspector, the Morrisseys contend there is no evidence they "knew, or should have known, of any defects with the house (other than for the geo-thermal unit and the can lights)" at the time of sale.

         Regardless of the exact scope of the disclosure requirement, the Sokols have failed to identify with any specificity where the record reveals Bob's actual knowledge of any defects in the home before he completed it. Rather, the Sokols cite generally to 300 pages of notes Bob jotted down during construction-as well as after he had completed the home-and claim: "Defendant knew of issues with water intrusion, the geothermal HVAC, electrical, plumbing, the EIFS, etc." The Sokols do not describe any details related to those issues, nor do they pinpoint when the issues occurred.

         Moreover, the Sokols provide no authority supporting their interpretation of the disclosure requirement. See Iowa R. App. P. 6.903(2)(g)(3) (requiring the argument section to "contain[] the appellant's contentions and the reasons for them with citations to the authorities relied on and references to the pertinent parts of the record" and noting "[f]ailure to cite authority in support of an issue may be deemed waiver of that issue"). Reaching the merits of this issue would require us "to assume a partisan role and undertake a party's research and advocacy." Hanson v. Harveys Casino Hotel, 652 N.W.2d 841, 843 (Iowa Ct. App. 2002). We decline to adopt such a role and, accordingly, limit our analysis to the Sokols' challenge to the district court's fact-findings.[11]

         We find substantial evidence in the record to support the district court's conclusion the Morrisseys did not have actual knowledge of any defects with the home and failed to exercise ordinary care only in regards to the geothermal unit and can lighting. Bob testified at trial he did not know of any defects with the home when he sold it. The district court credited Bob's testimony, and we defer to that determination. See Brokaw v. Winfield-Mt. Union Cmty. Sch. Dist., 788 N.W.2d 386, 394 (Iowa 2010) ("The district court as the fact finder, determines witness credibility and the weight of the ...

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