Renovating Azam: a proposal for rebuilding the reliance test in real estate torts.

• Author: Cavendish, Michael

Here is a syllogism. Industries are aggregated transactions. Lawsuits destabilize transactions. Lawsuits destabilize industries. Florida is the fourth most populous U.S. state with an enormous residential real estate market. (1) When we evaluate how law affects real estate sales, Florida is a natural choice of laboratory. Here, then, is another syllogism.

Lawsuits turning on poorly comprehended law are particularly destabilizing. The test for intentional misrepresentation claims arising from residential real estate sales set out by the Supreme Court of Florida in M/ I Schottenstein Homes, Inc. v. Azam, 813 So.2d 91 (Fla. 2002), is poorly comprehended. Lawsuits founded upon the Azam test are particularly destabilizing. If we accept this second syllogism, the stability of Florida's residential real estate industry is threatened by the poorly comprehended "totality of the circumstances" test set forth in Azam. This article is a modest proposal for renovating Azam and rebuilding and improving Florida's test for the actionability of intentional misrepresentation claims attendant to residential real estate transactions.

Revisiting Azam

In Azam, eight homebuyer plaintiffs sued the corporate developer of their subdivision. (2) The plaintiffs alleged that some years before they purchased homesites from the defendant, the local county had prepared a site plan locating a public school 500 feet away from the plaintiffs' lots. (3) The plaintiffs alleged that the defendant had actual knowledge of the planned school but represented to them presale that the school site was actually a permanent nature preserve. (4) Claiming they had decided to purchase nearby lots in reliance on the misrepresentation that the site was a nature preserve, the Azam plaintiffs sued the defendant for fraud-in-the-inducement. (5)

The defendant moved to dismiss the fraud claim because the school site plan was on file in the local public records. (6) Although this argument succeeded in the trial court, Florida's Fourth District Court of Appeal reversed the dismissal. (7) The intermediate court disagreed with the trial court's adoption of a broad bar against fraud claims based on information in the public record, an outlook borrowed from another DCA decision in Pressman v. Wolf, 732 So.2d 356 (Fla. 3d DCA 1999), rev. denied, 744 So.2d 459, overruled, M / I Schottenstein Homes, Inc. v. Azam, 813 So.2d 91 (Fla. 2002). (8) In the initial appeal in Azam, the Fourth DCA flatly "disagree[d] with the broad prohibition in Pressman," and instead "held that whether a fraud claim is properly asserted as to matters of public record is a factual question that must be resolved on a case-by-case basis." (9)

The Fourth DCA's holding created a split of authority between two district courts of appeal, so in Azam, the Supreme Court of Florida undertook to review and restate the foundations of intentional misrepresentation claims in the context of residential (10) real estate transactions involving a misrepresented fact found in the public record. (11) Specifically, the court observed (paraphrased here):

In 1980, Florida adopted [subsection]540 and 541 of the Restatement (Second) of Torts. These sections provide for claims sounding in fraudulent misrepresentation but bar such claims if the recipient of the misrepresentation either knows it is false, or could have, by way of a cursory inquiry, determined that it was obviously false.

These reliance-dependent claims of fraudulent misrepresentation impose a duty on the seller to disclose facts materially affecting the value of the property that are unknown to and not readily ascertainable by the buyer. This duty can extend to situations where the misrepresented fact is contained in public records.

Whether this duty does extend to cover facts in public records is a question of fact that must be resolved by the court (12) on a case-by-case basis through a "totality of the circumstances" test. (13)

Totality of the Circumstances

One shortcoming of legal tests described as a "totality of the circumstances" is that they attempt to marry two mathematically and rhetorically (14) inconsistent concepts. The idea of totality is finite. It is also descriptive of something that can be verified, counted, and measured empirically. The concept of circumstances, on the other hand, is rather infinite. It is also more subject to viewpoint, so that what may be a legitimate material circumstance to some might seem irrational, invalid, or offensive to others.

Thus, an instruction to engage in a "totality of the circumstances" analysis invites the trial judge to capture, count, and weigh an ill-defined, infinite set of facts. It is a method of analysis not ideally suited to extemporizing torts. (15) This weakness in method has not gone unnoticed. (16) Nevertheless, other jurisdictions have used the test; in prescribing a "totality of the circumstances" analysis, the Azam court was not alone. (17)

The Azam Test

To its credit, the Azam opinion does not specify more than three discrete categories of fact that will populate the trial judge's universe of circumstances. (18) These three categories are: 1) "the type of information [misrepresented]," 2) "the nature of the communication between the parties," and 3) "the relative positions of the parties." (19) Unfortunately, however, each of these three categories will elude consistent, predictable application for two reasons. First, they are poorly defined. (20) Second, they were not actually applied in the opinion, so they are not exampled.

Difficulties in Applying the Test

Consider how the Azam test confronts the trial judge with analytical or methodological ambiguity in the following hypothetical: Buyer, a real estate agent, contracts with Seller, a teacher, to purchase Seller's home situated on a parcel of acreage. Prior to execution of the contract and closing, Seller represents to Buyer in an e-mail that the parcel measures nine acres, and the parcel can be subdivided. Information contradicting Seller's statements can be found in the county land records.

Applying the Azam test to this hypothetical, we encounter ambiguity of method as we consider the type of information misrepresented. What significance does the trial judge assign to 1) the parcel size and 2) the status of the parcel as say, already platted and not capable of further subdivision, or not yet platted and capable of subdivision? Is one fact more subject to misrepresentation than the other, or than other facts such as drainage rights or public school system jurisdiction? What significance does the trial judge assign to the public source of the correct information, for example, the local tax collector's office? Are computerized public records treated differently from paper archives? Should the trial judge consider the objective ease of access to particular computer or paper records, evaluating the records access protocols maintained by the archivist?

The second factor is the nature of the communication between our hypothetical Seller and Buyer. which, between the paired binary conclusions the Azam test is supposed to select between--actionable or nonactionable--is favored because Seller's misrepresentation transpired by e-mail?

The third factor, the relative positions of the parties, is fraught with ambiguity. At the outset, what is meant by "positions"? Is the legal status of "buyer" or "seller" a position? Is a party's occupation her position? His age, intelligence, or wealth? An investigator cannot tell from the text of the opinion. For that matter, is the significance assigned to the undefined positions of the parties contingent upon the type of information considered in the first factor? In...