CONTINUING LEGAL EDUCATION: RESIDENTIAL ENVIRONMENTAL LITIGATION

Presented to: Kansas Association for Justice Crown Center Seminar December 4, 2009 Kansas City, Missouri

Presented by: Edward L. Robinson Joseph & Hollander, P.A. 500 N. Market Wichita, KS 67214 316.262.9393 Phone 316.262.9006 Fax erobinson@josephhollander.com

TABLE OF CONTENTS

Introduction Types of Property Damage to Residence Damage to Other Real Property Typical Litigation Scenarios Purchaser of Contaminated Property Liability of Seller Liability of Real Estate Agent Liability of Home Inspector Owner of Property that Becomes Contaminated By Contractor By Adjacent Landowner Renter of Contaminated Property Insurance Issues Categories of Damages Remediation and Restoration of Contaminated Property

2.1 2.2
3

3.1 3.1.1
3.1.2

3.1.3 3.2 3.2.1 3.2.2

3.3
4

5 6

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Copyright 2009 by Edward L. Robinson. All rights reserved.

INTRODUCTION

Residential environmental litigation can be complex, involving federal, state and local environmental laws as they apply to residences, surrounding surface property and subsurface resources. It should be contrasted with commercial environmental litigation, which involves a host of other issues and federal laws. In order to properly represent a client whose property has been contaminated by the intentional or negligent act of another, one must tread carefully, knowing the traditional statutes and common law have in many cases been modified and/or abrogated for residential environmental disputes. Failure to understand these intricacies may result in the investment of substantial resources for legally meritless claims. Understanding the legal and factual issues arising in residential environmental litigation depends on the proper categorization of property, client and adversary. These materials should not be considered an all-encompassing resource for those wishing to practice in the area of residential environmental litigation. Rather, they are an introduction to the most common situations and applicable laws and statutes. Should you have questions about anything contained herein, please do not hesitate to contact me. 8 TYPES OF PROPERTY

The term "residential" as used herein includes dwellings and the real property surrounding them. Although residential contamination often affects the client's dwelling as well as the surrounding real property, there are times when the damage does not affect both.

8.1

DAMAGE TO RESIDENCE The types of contamination to one's residence commonly involves mold, asbestos or other construction materials. Claims for contamination to one's residence are generally governed by state law.

8.2

DAMAGE TO OTHER REAL PROPERTY

The types of contamination to real property typically involves an adjacent landowner allowing pollutants to enter the property of your client, causing damage. These claims can be governed by federal environmental laws, as well as state common law.

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Copyright 2009 by Edward L. Robinson. All rights reserved.

TYPICAL LITIGATION SCENARIOS

Residential environmental disputes typically fall into one of three categories: a new homeowner purchases contaminated property; an existing homeowner suffers contamination by an adjacent landowner or contractor; or a renter inhabits contaminated property.
9.1

PURCHASER OF CONTAMINATED PROPERTY

The most common litigation scenario involves a purchaser who discovers the property is contaminated or otherwise defective after the purchase. Due to the increasing prevalence of mold (and most recently, Chinese drywall) in homes, sellers have a significant financial incentive to either fail to disclose these issues or affirmatively conceal them to make the property marketable.
9.1.1

LIABILITY OF PROPERTY SELLERS

The liability of sellers for failing to accurately state the condition of the property has been hotly litigated in the last ten years I , and the cumulative effect has been a wholesale abrogation of a buyer's right to rely on a seller's statements. Claims for intentional misrepresentation (fraud), negligent misrepresentation, breach of contract and violation of the Kansas Consumer Protection Act are most common in these situations.
9.1.1.1

INTENTIONAL MISREPRESENTATION

Prior to the 1990s, the common laws of fraud by silence and fraudulent misrepresentation applied in the same way it applied to other situations? Therefore, if a seller misrepresented the condition of a home, the seller could be held liable for hislher fraud? With the advent of standard-form purchase agreements, typically drafted and encouraged by local Realtor associations, the law of fraud has become less available to home buyers against dishonest sellers. Even though Seller's Property Disclosure Statements are used as a matter of course in residential real estate transactions, form purchase contracts require buyers to take the extra step of expressing in the contract the statements of the seller on which they were relying or

ISee, e.g., Katzenmeier v. Oppenlander, 39 Kan. App. 2d 259,178 P.3d 66 (2008) (holding that buyers waived their right to rely on seller's representations and relied on their own inspections, therefore summary judgment was appropriate); Brennan v. Kunzle, 37 Kan. App. 2d 365, 154 P.3d 1094, rev. denied 284 Kan. 945 (2007); Phillips v. Tyler, 35 Kan. App. 2d 256,264, 129 P.3d 656, rev. denied 281 Kan. 1378 (2006); McLellan v. Raines, 36 Kan. App. 2d 1, 140 P.3d 1034 (2006); Alires v. McGehee, 277 Kan. 398,403,412,85 P.3d 1191 (2004); Hamtil v. J.c. Nichols Real Estate, 22 Kan. App. 2d 809, 811, 923 P.2d 513 (1996); see also Westerbeke, Survey of Kansas Tort Law: Part II, 50 Kan. L. Rev. 225, 280 (2002).
2

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See, e.g., Fox v. wilson, 507 F.2d 252, 266 (Kan. 1973). 3Id.

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Copyright 2009 by Edward L. Robinson. All rights reserved.

waive their right to rely on any statements, including anything contained Disclosure.

III

the Property

The ability of a seller prevent a buyer from relying on the seller's statements regarding the condition of the property has been repeatedly challenged, and the Kansas Court of Appeals recently held that such terms were unenforceable as a matter of public policy.4 Unfortunately, the Kansas Supreme Court recently granted review of this decision,5 and will (hopefully) soon settle this issue once and for all. Until then, buyers should not presume that they may rely on a seller's statements unless they take affirmative steps to protect themselves.6 9.1.1.2 NEGLIGENT MISREPRESENTATION

The issues and concepts discussed supra regarding intentional misrepresentation apply equally to claims for negligent misrepresentation. 9.1.1.3 BREACH OF CONTRACT

Claims for breach of contract are also common when sellers fail to be entirely forthright regarding the condition of the property. In a residential transaction, the purchase contract and seller's property disclosure statement are considered one document. In the cases prior to Osterhaus v. Toth, Kansas appellate courts reasoned that since the buyers released the sellers from any obligation to disclose adverse information, any false statements made by the sellers did not breach their duty to disclose as expressly stated in the two documents. Therefore, under the current state of the law, claims for breach of contract likely are barred (again, this is dependent on the Kansas Supreme Court's much-anticipated decision in reviewing Osterhaus). 9.1.1.4 KANSAS CONSUMER PROTECTION ACT

Although the Kansas Consumer Protection Ace (KCP A) generally applies to home purchase transactions, the typical home seller would not be considered a supplier, so the Kep A would not apply to a dispute between a buyer and seller.

9.1.2
4

LIABILITY OF REAL ESTATE AGENTS

Osterhaus v. Toth, 39 Kan. App. 2d 999 (2008); see also Hanson v. The Hackman Corp, 2008 Kan.App.Lexis 795 (Oct. 3, 2008) 5http://judicial.kscourts.org:7780iplsicoaiCLERKS_ OFFICE.list_case_ detail?i_case_number=9784 7&i_ca se name=. 6The author has developed a system called RealAssist to help home purchasers protect themselves during
the Course of a residential transaction.
7

K.S.A. 50-623 et seq. Page 5 of II

Copyright 2009 by Edward L. Robinson. All rights reserved.

The relationship between home buyers and the real estate agents representing the parties is governed by the Brokerage Relationships in Real Estate Transactions Act (BRRETA), KS.A. 58-30,101 et seq. BRRETA states that a seller's agent "shall not disclose any confidential infonnation about the client unless disclosure is required by statute or rule and regulation or failure to disclose the infonnation would constitute fraudulent misrepresentation." K.S.A. 5830,106(c). This obligation is also on appeal in Osterhaus v. Toth, and hopefully the Kansas Supreme Court will soon lay this issue to rest. 9.1.3 LIABILITY OF HOME INSPECTORS

In 2008, the K.ansas legislature passed the Kansas Home Inspeetors Professional Competence and Financial Responsibility Act, K.S.A. 58-4502 et seq. Since then, the Kansas Home Inspector Registration Board has worked on preparing rules and regulations, which will soon be published. 8 Prior to this legislation being enacted, home inspectors were allowed to limit their liability to the purchase price of the home inspection; regardless of how negligent the inspector was or how big a problem he/she missed. Now, home inspectors not only must be registered (which requires either substantial previous experience or meeting minimum education and testing requirements), but also may not limit their liability to less than $2,000.00, and must carry insurance of not less than $10,000.00. 10 Under this legislation, inspectors may contract for greater liability. Importantly, actions against home inspectors must be brought within one year of the inspection (thus altering the traditional statute of limitations for negligence and fraud).ll The transaction between a home purchaser and a home inspector clearly falls within the Kansas Consumer Protection Act, which has a three-year statute of limitations. It is not clear which would govern if a home buyer brought suit against a home inspector, but it is likely that beeause the home inspector legislation is specific in nature, courts may rule that even KCP A claims must be brought within one year.

8In the interest of full disclosure, the anthor has heen a member of the Kansas Home Inspector Registration Board since it was formed in 2008. 9 See, e.g., Molerv. Melzer, 24 Kan. App. 2d 76, 942 P.2d 643 (1997). 10 K.S.A. 58-4509 (2008); H.B. 2315 (2009). IIK.S.A. 58-4512( d) (2008). Page 6 of 11
Copyright 2009 by Edward L. Robinson. All rights reserved.

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9.1.4

PRODUCT LIABILITY ISSUES

Although newer homes are considered by some to be constructed of higher quality materials, relatively new homes may be built with materials that are the subject of class action lawsuits. Examples include, but are not necessarily limited to: The installation of drywall supplied from China12 Weyerhauser brand exterior hardboard siding 13 ABTCO/ABITIBI hardboard sidingl4

If a client discovers hislher home was installed with such materials, there may be a question whether the seller was aware of this problem at the time of the sale. In sueh cases, the failure to disclose such known defects would be subject to the limitations discussed above regarding seller liability. If the seller was not aware of such problems, the proper course would be to submit a claim to proper entity and determine whether a claim should also be submitted to the client's own insurance company (see below).

9.2

OWNER OF PROPERTY THAT BECOMES CONTAMINATED

Residential property is not always contaminated at the time of purchase. In some cases, the property becomes contaminated through a contractor or an adjacent landowner. These cases present their own challenges.

9.2.1

CONTAMINATION BY CONTRACTOR

A common example of contamination is when a contractor, either during a remodel or remediation/restoration of property following casualty, makes matters worse by contaminating the property with construction materials or materials existing in the house (such as asbestos) that were stable prior to the contractor's involvement. If the contractor was involved due to remediation/restoration following casualty, It IS important to determine whether the client's first-party insurer chose the contractor. If so, the insurance company may be involved for negligently recommending that contractor. If the client chose the contractor themselves, the common claim is for negligence, and less commonly for violations of the KCPA (for example, if the contractor has a history of such problems). The primary problem in such cases is the contractor's insurance coverage. Many insurance policies contain exclusions for environmental damage, so one must proceed with caution in these cases.

121illJ:1:llwww.cpsc.gov/info/drywalVindex.html. 13http://www.weyerclaims.com!
14 www.abteoel' a@.l:h9Qm

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9.2.2

CONTAMINATION BY ADJACENT LANDOWNER

Cases involving contamination by an adjacent landowner are each unique, but have some common threads. The typical claim in these cases is for trespass and negligence. However, some of these cases involve complex issues of federal environmental law. For example, if the client's property contains "waters of the United States" and that property is contaminated by a "pollutant", as those terms are used in Federal Water Pollution Control Act/Clean Water Act, the client may bring an original action as a private attorney general in the United States District Court. In some such cases, attorney's fees may be recovered along with actual damages. Another example is if the adjacent landowner releases "solid waste" or "hazardous waste" as those terms are used in the Solid Waste Disposal Act/Resource Conservation Recowry Act. As above, in these cases the client may bring an original action in United States District Court, and in some cases may recover attorneys' fees. Cases involving pollution by adjacent landowners such as feedlot or industrial facilities will almost invariably implicate federal environmental laws, so such cases should be evaluated and prosecuted accordingly. 9.3 RENTER OF CONTAMINATED PROPERTY
It appears to be increasingly common for rental property to become contaminated with

mold. In such cases, the relationship between the landlord and tenant will be governed exclusively by the Kansas Residential Landlord and Tenant Act (''RLLTA,,)15 The RLLTA is generally concerned with the disposition of rents and deposits, but does provide for the recovery of damages in certain, limited situations. They are: -Noncompliance by the landlord with the rental agreement; -Noncompliance with K.S.A. 58-2553; or -Noncompliance with tenant's rights listed in K.S.A. 58-2559(a).16 Unless the tenant can show that the property contamination falls into one of these three categories, their claim likely will be limited to a possible refund of rent.

15 K.S.A. 58-2540 et seq. 16 See K.S.A. 58-2559(b).

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Copyright 2009 by Edward L. Robinson, All rights reserved.

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10 INSURANCE ISSUES Perhaps due to the increased prevalence of residential environmental claims, many insurance companies are waiving coverage for damage due to mold or other environmental contaminants. Because of these waivers, it is important to be mindful of how a claim is submitted to avoid such waivers. 10.1 FIRST PARTY ISSUES

When mold or other environmental contaminants are discovered, it is certainly worth considering the preliminary step of submitting the claim to the homeowner's first-party insurance carner. Failure to make this first step may cause a waiver of coverage for an otherwise-covered event. Unfortunately, many homeowner's insurance policies contain exclusions for mold or other environmental contaminants. Therefore, it is critical that if the only reasonable avenue for recovery is the first-party insurance, that claims be made in such a way that avoids thesc exclusions. For example, if a client suffers a burst plumbing pipe in the house, and then hires a contractor who causes environmental damage during the repair, it is important that any first party claim be for the water damage only, and not for the mold that may have grown due to the presence of the moisture. In many cases the proper remediation steps will be substantially similar, so if the claim is submitted only for water damage and leaves out the issue of mold, there is a greater likelihood of the claim being accepted. The author is unaware of any instances of a homeowner successfully challenging the mold and environmental contaminant exclusion in an insurance policy, so care should be taken to avoid this pitfall. 10.2 THIRD PARTY ISSUES

Just as dangerous as first-party exclusions for mold and environmental contaminants, many insurance policies for contractors have exclusions for environmental damage. In these cases, the case may be approached in similar way as the first-party claim method outlined supra. However, using this strategy in a third-party situation is much riskier because the insurance company may provide a defense without a duty to pay any damages, and the defendant may be without the means to pay a judgment. It is the:efore critical that any residential environmental claim involve a careful analysis of the responsible parties' insurance policies and/or other financial means. Sometimes it is impossible to obtain the defendant's insurance policies prior to beginning litigation, which can present its own difficulties. However, there are some methods of learning more information before beginning litigation. For example, environmental
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Copyright 2009 by Edward L. Robinson. All rights reserved.

remediation/restoration contractors typically have independent insurance policies for environmental damage. Another acceptable method is having a private investigator uncover what information is available. In any event, anyone practicing in this area should be acutely aware of the increasingly common mold and environmental insurance exclusions and govern themselves accordingly. 11 CATEGORIES OF DAMAGES

The damages recoverable in residential environmental litigation are of course dependent upon the causes of action asserted in any given case. Nevertheless, the following are common examples of damages categories sought in such cases: -Damage to Real Property -Damage to Personal Property -Medical Expenses -Pain and Suffering Damages -Out of Pocket Expenses -Lost Income -Attorneys' Fees (for KCPA claims and federal environmental claims) -Punitive Damages (for fraud claims) This list should not be considered exhaustive. A separate seminar could be taught regarding damages in residential environmental litigation, especially for valuation of property, so if you have any questions please do not hesitate to contact me.

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REMEDIATION PROPERTY

AND

RESTORATION

OF

CONTAMINATED

Hardly anyone contemplates owning their current house until they die. Therefore, when dealing with contaminated properties, buyers must consider how they will minimize the consequences of the contamination when marketing the property to a future buyer, and therefore maximize the market value of the property. In Kansas, a Seller's Property Disclosure Statement will require a seller to disclose virtually any contamination problem to future buyers. 17 If a seller fails to have the property remediated properly, the result may be a substantial reduction in the market value of the property or an outright inability to sell the property.

17Although seUers may be effectively immunized from liability for any misrepresentations during the course of a transaction under the current state of the law, an honest seUer will fuUy disclose any contamination or other defects. In addition, if the Kansas Supreme Court affmns the Kansas Court of Appeals' decision in Osterhaus v. Toth [citation], buyers will be allowed to rely on a seller's statements (or silence) during the transaction.

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,.

A three-step framework is accepted for restoring the market value of contaminated property. The first step is to obtain inspections as needed from qualified environmental inspectors.18 Each inspector will compile a report of the contamination and detail a protocol for remediating and/or restoring the property. The protocol is then given to qualified contractors, who will provide bids for the protocol. Once the contractor has completed the inspector's protocol, the inspector will conduct a follow-up inspection to ensure the work has been completed to the inspector's protocol, and if it has, the inspector will issue a follow-up report showing the contamination has been remediated and/or restored according to accepted techniques. If a homeowner follows this three--step framework, he/she will be able to provide this information to future buyers as part of the property disclosures. Historical property appraisals have shown either a complete recovery of the lost market value or a net increase in the market value of the property due to a recent passing environmental inspection.

18 There are relatively few such inspectors in the State of Kansas. The author will provide contact
information for such inspectors upon request.

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Copyright 2009 by Edward L. Robinson. All rights reserved.