Clean-up not disclosed; Seller sued for fraud years later

A recent case highlights the importance of disclosing any environmental contamination and clean-up that took place on your property when you sell it, even if you sell it “as is.”

A New Jersey appeals court decided that a seller’s failure to disclose such information could expose him to liability for fraud many years after the sale.

In the case, the seller had owned the property since 1983 and defaulted on the mortgage in 1987. The seller’s mortgage lender took possession of the property and made plans to sell it. The lender had an environmental consultant take soil samples and learned that the property was contaminated with perchloroethylene (“PCE”).

The consultant engaged to clean up the soil warned that it could not guarantee that all of the contaminated soil had been removed. The state department of environmental protection wasn’t notified about the contamination.

A buyer named Richard Catena entered into a contract to purchase the property “as is” later that year and wasn’t told about the contamination or clean-up. Instead, he was provided with multiple affidavits that mentioned neither the contamination nor the soil removal.

After he closed on the property, a consultant he retained to perform an environmental assessment found that there were extensive past uses of the property that were undisclosed, including production of aircraft parts and other manufacturing activities. The assessment advised Catena to look into the possibility of contamination, but he failed to do so.

Then, almost a decade later, Catena attempted to refinance the property. That’s when his prospective lender hired a consultant to conduct an investigation, which found PCE contamination.

In 1998, Catena began investigating the property, and a few years later groundwater and stream contamination were found.

Catena sued the seller, as well as the prior owners and operators of the property, under New Jersey state law. In discovery, he learned about the earlier soil clean-up, and added claims for fraud against the seller and the lender.

The seller and lender argued that they couldn’t be sued for fraud because more than six years — the length of the statute of limitations for such claims — had passed.

The trial court agreed, saying that Catena should have been aware of the fraud when he started the property investigation in 1998.

Catena appealed the case, claiming that the fraud was not discovered until 2007 during the seller’s deposition in the case.

The appeals court found in favor of Catena, saying that even if he knew about the contamination in the 1980s, he couldn’t have known about the fraud until discovery took place. That means Catena can sue the seller for fraud.

That’s why the discovery rule exists, the court said. It stops the party trying to hide something like contamination from benefiting from that behavior.

Now, that doesn’t mean the buyer can sue in every case. The impact of the discovery rule varies on a case-by-case basis, depending largely on when the buyer might have learned information that would alert a reasonable person that a viable lawsuit might exist.

Still, this case is a wake-up call to real estate sellers that they could be at risk for claims brought by buyers years after a sale if they fail to disclose known environmental contamination and clean-up, even when the property was purchased “as is.”

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