Caveat Emptor Roars Back to Life

In part II of Sullivan v. Gagliardi, Peter McGlynn and Bob discuss how the oldest continuous court in the Western Hemisphere rejected the moral principles of St. Thomas Aquinas in the home sale context and what the legislature can do to rectify the decision.

Episode Highlights

DECISION

Sullivan v. Five Acres Realty Trust

Episode Transcript

Bob Stetson: In the 13th century, Saint Thomas Aquinas, an influential philosopher and religious leader, outlined the following four principles in the context of product sales.

Number one, a defect in kind, in quantity or in quality, if known to the vendor, an unrevealed is sin and fraud in the sale is void.

Number two, if the defect be unknown, it is no sin. Yet, the seller must make good to the buyer his loss.

Number three, a seller is bound to reveal secret flaws that may occasion loss through a decrease in the value of the article.

And number four, if the flaw is manifest, he is not bound to reveal it by any duty of justice, though to do so would exhibit the more exuberant virtue. These moral principles were widely accepted throughout Europe and enforced in various civil justice systems for hundreds of years. With the emergence of the Reformation in the 16th and 17^th centuries, however, civil society began to shift away from moral and religious governance to a more laissez faire attitude in commerce and trade. From that attitudinal shift arose the doctrine of caveat emptor: let the buyer beware. Caveat emptor places the onus in a transaction upon the buyer as opposed to the seller absent an express warranty or fraud.

However, caveat emptor fell out of favor almost as quickly as it rose. Tracking the industrial revolution and increased complexity in commercial life, courts began to question the wisdom of caveat emptor and created and imposed implied warranties of merchantability and habitability in certain types of transactions.

Legislatures also followed suit by setting new statutory rules to protect consumers, including home buyers. In 2020, the Massachusetts Supreme Judicial Court took up on appeal the review of a jury verdict in which Ted and Connie Sullivan succeeded on claims for breach of the implied warranty of habitability and Chapter 93 violations against Rosalie and Giuseppe Gagliardi related to substantial home defects sale. This case presented an opportunity to reevaluate caveat emptor in the home sale context and to reestablish acquaintances, moral code and sales. Aquinas versus Caveat Emptor. This is Sullivan versus Gagliardi.

Bob: Welcome to Legal Judg(e)ments, where we tackle litigation and trial strategy by analyzing and talking about real legal cases.

I’m Bob Stetson. The Boston based trial lawyer with Bernkopf Goodman. Today is part two of our episode on what happens when your dream home becomes a nightmare. This part focuses on the appeal in the case of Sullivan versus Gagliardi.

With me again is Peter McGlynn, the director of our litigation department here at Bernkopf and my personal mentor. Peter and I represented The Sullivans in this case. Welcome again, Peter. Thanks for joining.

Peter McGlynn: It’s a pleasure to be here with you again. Thank you for inviting me.

Bob:

Let’s start with the decision on appeal. The SJC’s decision we lost.

Peter:

Indeed, we did.

Bob:

The Sullivans lost the court actually threw out the entire –

Peter:

I don’t want to interrupt you, but I think the public also lost.

Bob:

I agree, and we’ll delve into that. The SJC throughout the entire verdict, basically stating that this was the sale of a private home between private sellers and therefore it did not satisfy the quote “builder vendor requirements” of a claim for breach of the implied warranty of habitability, nor to satisfy the trade or commerce requirements of Chapter 93 A.

Now, there were so many, as you sort of anticipated, there were so many public policy arguments favoring The Sullivans in this case, consumer protection, the safety and habitability of homes, building code enforcement. The policy argument in favor of the Gagliardis really came down to one, the concern that, you know, every so-called weekend warrior down at Home Depot could become the subject of a home sale dispute.

Peter, what role did these various public policy arguments play in the litigation and ultimately the SJC decision?

Peter:

My opinion is that very little, if any, of these are very few, if any of these public policy arguments played a role here, public policy was not argued by the defense. As I recall, the concerns that were expressed during oral argument by Justices Kafker and Gaziano that this this decision, this jury verdict, if upheld, might expose so-called weekend warriors that go down and buy lumber and new kitchen appliances at Home Depot when they get sued for a breach of the implied warranty of habitability. They are certainly expressing their opinions may be grounded on their own personal experiences.

But this case was so far removed from the weekend warrior that perhaps they were concerned about. We had here a professional license builder, an individual who also was expert or claimed to be in home renovations. He had a construction business of some 50 years old.

They were also involved in 40 plus years of renovating properties, developing them, improving them so they could collect greater rents. They lived in them for a while. Then they’d ultimately turn them into their own or part of their own rental property portfolio.

This is not what the typical homeowner does when he’s buying or selling a home. Most of us do not really have any construction background, we’re doing our little renovations with a little help from the people at Home Depot, but were not in it for the business.

The Gagliardi and the jury most certainly agree, were in this for profit for wealth generation. It was part, part and parcel with their so-called business model that we argued about during the trial of the SJC seem to sidestep all of that they ignore, even though they they discussed at length in the decision the 40 plus years of professional real estate development and construction work that the Gagliardi is engaged in. They certainly acknowledged it, but they sidestepped it and simply said not enough to overcome the bar against 93 A actions, as well as breach of the implied worry of habitability actions.

When you have a purely private transaction, which this court found existed here, which seems to be at odds with not only the compelling facts in the case facts that obviously the jury agreed with, but also the standard of review that that all of these facts have to be considered in a light most favorable to the plaintiff.

And what the SJC felt was quote, “the evidence was insufficient to show that the defendants were billed or vendors.”

Well, there was substantial evidence they just seemed to reject it or seemed to sidestep it and come to a decision, which I think is not only sad for The Sullivans, who work so hard to achieve justice, which they did at the trial court level. But I also think now this leaves a big gaping hole in the law in terms of people that would go out and in knowing a violation of the law do work without getting a building code, building permit or, even worse, engaging in substandard construction, which is going to expose the. The public to potential danger like The Sullivans had with respect to their Dover home.

Bob:

I mean, this is, as you mentioned, this is really a bad case for consumers, for home sale buyers and for the public in general. If it had gone the other way in, the SJC had affirmed the trial court – the verdict as I mentioned in the Open, I think it probably would have sounded the death knell, at least in in significant fashion, to the doctrine of caveat emptor. But what we learned, in my opinion from the SJC decision, is that that ancient doctrine remains alive and well here in Massachusetts and that, you know, absent some intentional fraud, most of these types of claims, you know, your Chapter 93a claims your breach of the implied warranty of habitability, most of these types of claims, at least in the home sale context, will be dead on arrival if you try to bring them in court.

So, you know, getting into the public policy sort of impact of this decision and because there is probably going to be mostly lawyers listening to this podcast. Peter, the question is what do residential conveyancers do to protect their home buying clients?

Peter:

And that’s a I wish I had more time to consider that question, because it’s a good one. Obviously, ask a lot of questions when you when you conduct your inspections, ask, does this does the basement leak? Is there any flooding? Have you had any problems with any structural integrity? You know, obviously go down to the building department and look at the jacket and see whether or not there have been permits pulled and what they were for.

Many states, but not Massachusetts, I know New Hampshire, I believe, requires it, as does Connecticut and at least in New England, mandatory disclosures. It’s not all encompassing, but it’s certainly a step in the right direction. Massachusetts does not require mandatory disclosures of various defects or anything else that might exist. I’m sure that there are valid reasons against mandatory disclosures, but I think in this particular instance, that’s another way that you can you can protect yourself. Obviously, with the with the seller, requiring or arguing for exculpatory language. You know, that’s certainly something that’s going to have to be negotiated as I pointed out in our first segment of this particular program. The breach of the implied warranty of habitability does not allow parties to waive by contract that implied warranty.

But obviously, as we found to our extreme disappointment in this case that, what we thought were very compelling facts, which would which would ultimately did lead the jury to conclude that the Gagliardis were builder vendors as well as engaging in trade or commerce.

Obviously, the SJC disagreed and that’s that was a major reversal of this decision of this case for us. Disappointingly so.

Bob:

You mentioned the mandatory disclosures of some states. It was fascinating to me in being involved in this case to learn that Massachusetts is actually one of only three or four states in the entire country that does not have some form of mandatory disclosures in home sales.

And I think your point is a good one that, you know, as Louis Brandeis famously stated, “Sunlight is the best disinfectant.” And if you’ve got mandatory disclosures, if you’re asking a lot of questions, you know, the information will tend to come to light. You’ll have more trust in the transaction. For instance, you’ll have more accurate home inspections, you’ll have a better process and therefore less litigation. I agree with you, and that sort of leads me to the next question here, which is when it comes to the half-truth doctrine, you know, that was an issue that was presented in this case and on appeal in particular and basically under the half-truth doctrine. If you make a representation about something, if you’re asked a question and you respond with some form of a representation, you owe a duty under the law to disclose all material facts about that issue or about that topic. 

In Massachusetts, this doctrine basically comes from the case Kannavos v. Annino, which you and I know very, very well. But in that case, basically, the seller was held liable for fraud under this doctrine because he had marketed his property as being an income generating property, which it was.

It was actually income generating. The problem was that it was doing so in violation of the zoning laws the SJC. This is, of course, 50 or so years ago, the SJC in that decision said, “well, you didn’t really tell the whole truth on that.”

So this is just the same as an intentional fraud claim. Now here in the Sullivan case, we had, in my opinion, the same exact thing you had sellers marketing these renovations that we’ve talked so much about, you know, showing them and really emphasizing them in the marketing materials, in the home inspection, you know, in the showing, in the viewing. But what they failed to disclose was that these renovations completely violated the building code. They were never inspected. They didn’t have permits for them, which in itself is a major building code violation. And yet, the SJC says that’s not enough.

So when I look at the Kannavos case, when I look at the Sullivan case. You can see that there is a line somewhere between what is, you know, an actionable half-truth like what we saw in Kannavos. And I guess which is nonactionable silence, like what the SJC concluded we had here in Sullivan.

I can’t for the life of me figure out where that line is, Peter. At best, it’s a murky one that I think should be given to a jury. But what are your thoughts on it? Where is this line?

Peter:

Well, I’m not sure. You’re right. In this case, there were specific representations, promotional material touting the Tuscan room and the stuff they said, you know, young kitchen, that was rather elaborate. It was obviously a beautiful kitchen.

What they didn’t say as part of their promotion of this, of this work was that it wasn’t promoted and that was downright dangerous. And it strikes me that if you’re touting something as a material element of the sale, which it was, if you look at all of the promotional material that the marketing material, that the Gagliardis had authorized and Mrs. Gagliardi testified at trial that she was front and center with preparing and approving all of this marketing material, that these renovations were a material part of their marketing plan. And, but the court, the SJC said that really this was closer to their nondisclosure, which of course, their nondisclosure means that they said absolutely nothing about that. And that’s what really the Kannavos case talks about in terms of where is the line between their nondisclosure and something that gives rise to a duty to disclose the whole truth. They think that the Kannavos case said, you know, half-truths are as actionable as whole lies. And that’s that was our argument about what they were saying about these renovations. I mean, you can imagine how material it would be to say, “All right, well, we spent all of this money redoing the kitchen and it doesn’t it look beautiful and all that. But we removed a load bearing wall and we didn’t get permits. So there’s a there’s a danger that the ceiling is going to collapse.”

That’s the untold part of this. The court also seemed to be looking into the minds of the defendants, I’ve got the decision here and they say here the defendants did not make and ‘m quoting from the decision here, “The defendants did not make representations that were intended to cause the plaintiffs to believe something that was untrue.”

Well, they certainly were intending to tout these renovations as part of the way to get the get this this house sold and the jury heard about the efforts that the defendants exerted to try and market this case.  Originally, it was on for, I think, $3.2 million and they ultimately sold it for just below 1.9 million.

They actually attended the closing, excuse me, attended the final inspection Mr. Mrs. Gagliardi and escorted the Sullivans around, showing all of these renovations. This was kind of their last chance to convince The Sullivans that this was going to be a great house for them, so it certainly was a material part of their marketing plan and somewhat unusual for a seller to attend the home inspection, especially to tell these renovations.

So keeping in mind the standard of review, as we talked about earlier, Bob, where everything has to be viewed in a light most favorable to, in this case, the plaintiffs, there was certainly evidence that that was material to the Sullivan’s decision about this particular house and the renovations that the Gagliardi made. And again, SJC seemed to sidestep all of that and come up with their own decision that nothing that the Gagliardi had mentioned about these renovations were intended to be and were intended to be conveyed as untruths.

Bob:

Peter, this case sort of epitomizes why I started this podcast. You know, you have… a SJC case that’s going to shape Massachusetts law and residential home transactions for a generation. But you know, the circumstances that led to this decision. The eight years of litigation. The verdict. The SJC, you know, taking the case, which I think it’s like the SJC takes less than what is it, Peter, 3% of civil cases – It’s some astronomically low number.

Peter:

I think, something like five out of 200. Whatever the math is.

Bob:

I think it’s overly simplistic to look at a decision like this. As Oliver Wendell Holmes famously stated, “The life of the of the law has been has not been logic. It’s been experience.”

You know, I think it’s overly simplistic to say, “Well, you know, this is what society deems the law to be.”

That’s not exactly right. It’s also not right to suggest, as you might see, some of the national media talking about the Supreme Court to say that, you know, this is conservative versus liberal decision making. And you know, here in a case like this, you have all of the justices for the first time, I think since John Hancock was the governor of the Commonwealth, all of the justices were appointed by one governor. And here it was Charlie Baker who’s a Republican. And but even still, I think it’s far too simplistic to suggest that because of that, because of the fact that they were appointed by a Republican governor, you get a

narrow conservative decision. I think that when – especially as a participant, when you think about all of the legal judgments that were made along the way between the attorneys, you were I, you know, between the attorneys on the other side, when you think about all the judgments that were made by the parties, you know you have The Sullivans who felt a deep moral wrong. And as you mentioned in the first episode on this topic, had the means to really fight this battle. You have the Gagliardis on the other side who were, you know, had similar means to be able to continue this fight.

And even after taking a pretty thorough drubbing in the in the trial court in front of a jury of their peers. Still continued, the fight in took this all the way to, you know, the highest court in Massachusetts and tested their theory and ultimately won.

You had the jury, you know who played a huge role here, you had multiple trial judges that weighed in, you know, to just sort of say, well, you know, conservative court conservative decision really does not do justice for the way that the law is made for the way that our civil justice system actually works.

So, you know, I could go on forever on how I think, you know, this case ultimately got to where it got and resulted in in the way that it actually resulted. But you know, you’ve had some time to think about this. We both have, you know, I want to get your thoughts. Peter, what were the most important circumstances that ultimately led to this decision? And what did you what did you learn from this experience?

Peter:

Up until this case, I’ve only had one other jury verdict taken away from me, and ultimately that was retried, we won again at the start, but that’s the only time I believe in the sanctity of the jury trial system.

I’ve been a strong advocate of it for 46 years as a lawyer, and my firm belief is juries usually come to the right decisions, if not always for the right reasons. The jury came to the right decision in this case, and I can’t identify who I can attribute to the quote, “Bad facts make bad law,” but I can have my own spin on that and say that we had good facts, indeed compelling facts here in this case, and it made for a bad law.

This is this is not a decision that advances the ball in terms of consumer protection in this state and whatever the motivations were. And obviously, there were some we heard about that during oral argument as far as the concerned about weekend warriors and so on.

So that was one thing that I learned. The other thing is that we are taught that the standard of review of these cases on appeal is so slanted in favor of preserving the jury decision unless there is clear manifest error.

As I indicated earlier, all facts are to be considered in the light most favorable to the opposing party. In this case, The Sullivans. There was strong evidence all over the place in this case about builder vendor status about trade or commerce and certainly about half truths that really constituted whole lies, and unfortunately, we were unsuccessful in convincing the SJC about that. It’s not that these issues weren’t raised, it’s not that these issues weren’t briefed. It’s not that these issues weren’t argue they were. But the SJC took a very narrow approach and as I indicated, I believe and they want to part one of our discussion here, Bob, this does leave a gaping hole in the law when it comes to this type of conduct involving the sale of a home.

Bob:

You know, and then and then there’s the human element of the lawyers, you know, lawyers are they’re not supposed to have feelings regarding these cases. And you know, Peter, you and I have worked together for a lot of years. We’ve had a lot of big, big wins. And you know, some of them, I can’t remember where we were or how we found out. But this loss when it came down, I’ll never forget where I was and how horrible it felt.

This was really a gut wrenching feeling.

Peter:

Last March. Yeah, last March. I agree. This was a tough loss. I mean, obviously, my heart goes out to the Ted Connie and Christine Sullivan. They fought valiantly and they fought hard and they were very courageous, not only in victory, but also in defeat.

They certainly accept the rule of law, and they accepted the SJC decision, even though, like I, didn’t agree with it.

Bob:

Peter, thank you for your time today. That’s our show. Check out our show notes for more information on today’s case.

Peter:

Thank you, Bob.

Bob:

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