A federal court in Michigan has ruled that a seller of real property did not engage in silent fraud by failing to disclose to a buyer what he knew about environmental contamination on the property. In addition, the court held that any relevant obligation of the seller, who had filed for bankruptcy protection, was dischargeable under the Bankruptcy Code.
Background
The dispute arose from the sale of a property in Warren, Michigan owned by Superior Polishing Company (Superior), a chrome plating and polishing firm. At the time of the sale, William Forrester was the sole officer of Superior and owned 98% of its stock. In March 1992, Forrester received a letter from the Michigan Department of Natural Resources (MDNR) stating that the agency considered the Superior site to be contaminated by chromium spills. In response, Forrester removed the contaminated soil from the property and sent a letter to MDNR advising it of his clean-up efforts. In December 1992, Milan Krstich offered to purchase the Superior property. Because Forrester believed that the chromium contamination had been successfully remediated, he did not tell his real estate agent or Krstich about the contamination.
Krstich and Forrester executed several documents, including a land contract that contained a clause stating that the property was being purchased in an "as-is" condition and that Forrester was not responsible for any clean-up or repairs to the building or property. Shortly after the closing, Krstich obtained records from MDNR and the City of Warren detailing the property's past environmental contamination. In September 1993, after Forrester refused to rescind the land contract, Krstich filed a lawsuit against Forrester in Macomb County Circuit Court.
In 1995, Forrester filed for bankruptcy under Chapter 11 of the Bankruptcy Code. Krstich then filed a claim in the United States Bankruptcy Court for the Eastern District of Michigan seeking a declaration that any obligation of Forrester's arising out of the Macomb County action would be non-dischargeable under Section 523 of the Bankruptcy Code because of silent fraud caused by Forrester's failure to disclose the contamination on the property. The bankruptcy court held Forrester had not committed silent fraud, and Krstich appealed to the United District Court for the Eastern District of Michigan.
No Silent Fraud
In affirming the bankruptcy court's decision, the district court held that Forrester had not engaged in silent fraud by failing to disclose to Krstich everything he knew about the environmental contamination on the property because there was no fiduciary or other relationship between Forrester and Krstich that would give Forrester any duty to disclose. In addition, the district court found that Forrester's knowledge of the environmental contamination was within the "fair and reasonable reach" of Krstich, who could have discovered the results of the prior environmental inspections of the property by reviewing public records, as he did after the purchase.
Because the issue of Forrester's lack of any duty to disclose was dispositive, the district court stated that Krstich could not prove his case of silent fraud. The district court, went on however, to address briefly the other issues raised by Krstich. First, the district court noted that under the Restatement of Torts, Krstich would have to show intent to defraud on the part of Forrester to sustain his claim of silent fraud, even though such a showing may not be required under Michigan law. Second, the district court held that the bankruptcy court erred in finding that Krstich was required to demonstrate "reasonable reliance" on Forrester's nondisclosure because only "justifiable reliance," which is a less stringent standard, is required to state a valid claim for fraud. The district court, however, stated that this error was harmless because Forrester did not have a duty to disclose the information regarding the environmental contamination. Therefore, the district court concluded that the bankruptcy court was correct in determining that Forrester's potential obligation to Krstich is dischargeable under the Bankruptcy Code. In re William H. Forrester; Krstich v. Forrester, 96-CV-75636 (E.D. Mich., Dec. 10, 1997).
*article courtesy of Daniella D. Landers of Katten Muchin Rosenman LLP.