Legislature(1993 - 1994)

03/16/1994 01:15 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  HB 517 - REAL PROPERTY TRANSFERS                                             
  JUDY MATHIS, Legislative Assistant to Representative Ron                     
  Larson, Prime Sponsor of HB 517, testified that HB 517 would                 
  remove real estate professionals from liability for innocent                 
  misrepresentation in real estate property transactions.                      
  This bill was introduced as a result of a 1989 Supreme Court                 
  decision, in Bivins vs. Ballard, that brokers who make an                    
  innocent misrepresentation to a purchaser of real property                   
  are liable for the misrepresentation.  This ruling puts an                   
  unjustified liability on real estate professionals.  She                     
  further stated that allowing innocent misrepresentation                      
  action against a broker in such circumstances is like posing                 
  strict liability and there was no reason for making the                      
  broker liable for the seller's misrepresentation.  She                       
  concluded by saving that HB 517 would overturn the Supreme                   
  Court's decision by removing real estate brokers' liability                  
  for innocent misrepresentations.                                             
  GORDON SCHADT, Attorney representing the Alaska Association                  
  of Realtors, testified that innocent misrepresentation is a                  
  situation where an individual does not have a reason to                      
  know, or does not know, there is a problem in their house,                   
  and they are a conduit.  So, if the seller fills out a form                  
  which says there are no problems in the basement and you, as                 
  a real estate agent, pass that on to the buyer, you have                     
  liability even though you had no reason, you were not                        
  negligent, you didn't intentionally do anything wrong, by                    
  being that conduit.  The Bivins case was a narrow decision                   
  and the court basically said that they think the broker                      
  should have the liability.                                                   
  TAPE 94-43, SIDE B                                                           
  Number 000                                                                   
  MR. SCHADT continued his testimony by further stating that                   
  there is a required form that needs to be filled out from                    
  the seller to the buyer so that the buyer can then evaluate                  
  the situation relating to the property to make an informed                   
  decision.  The real estate broker, as a conduit, just passes                 
  on the information, and as a result, is liable.  Mr. Schadt                  
  concluded that HB 517 would simply take away the innocent                    
  misrepresentation aspect of the real estate transaction.                     
  Also, part of the spin-off that he sees as detrimental is                    
  that the problem typically is between the seller and the                     
  buyer and that is where the problem essentially lies.                        
  DAVE FEEKEN testified via teleconference in support of HB
  517.  He sighted an example of an innocent misrepresentation                 
  a buyer, who after closing on a home, sent a letter to him                   
  revealing a leak in the shower and that he wanted it                         
  repaired.  Upon investigation it was discovered that the                     
  buyer began a remodeling of the shower and broke a seal,                     
  which caused the leak.                                                       
  REP. NORDLUND inquired into how this bill would solve the                    
  problem of an unreasonable buyer.                                            
  MR. FEEKEN responded that if there wasn't a chance of using                  
  innocent misrepresentation as a claim, problems of                           
  unreasonable buyers wouldn't exist.                                          
  CRAIG JOHNSON, Member of the Kodiak Board of Realtors,                       
  testified via teleconference in support of HB 517 and                        
  remarked that there are limited opportunities for obtaining                  
  errors and omissions insurance coverage to protect real                      
  estate agents against innocent misrepresentations.                           
  FRANK MICHEL, past chair of the Alaska Board of Realtors                     
  Legislative Committee, testified via teleconference that                     
  this legislation was meant to be part of a comprehensive                     
  packet which included agency and property disclosure, both                   
  of which became law.  He further testified on the difficulty                 
  of obtaining insurance if you are not part of a national                     
  chain.  He said AS 34.55.030 contains innocent                               
  misrepresentation protection and the passage of HB 517 would                 
  extend that testimony to realtors.                                           
  GREG ERIKINS testified via teleconference in support of HB
  517.  He felt it was not too much to ask the state of Alaska                 
  to protect a licensed real estate practitioner from innocent                 
  GLEN RYERSON, President of Southeast Board of Realtors,                      
  testified in support of HB 517.  He further testified that                   
  he sold a home which, as it turned out, during the                           
  transaction the seller disclosed that there were no                          
  easements affecting the property and that the septic system                  
  was in good working order.  The records office substantiated                 
  that there were no easements and the septic system was                       
  checked out by an engineer and it was passed and received                    
  approval by the Department of Environmental Conservation.  A                 
  year later, the new owner decided to refinance the house and                 
  during this process had to have the septic system                            
  re-certified.  During the inspection, problems were noted                    
  and it was revealed that there was no drainage field, as                     
  well as other problems.                                                      
  REP. NORDLUND inquired as to what sort of obligations agents                 
  have to make sure that the representations they make about a                 
  property are correct.                                                        
  MR. SCHADT responded that that fits into the area of                         
  negligence and negligence is decided in a standard that has                  
  not always been satisfactory and it is what a reasonable                     
  agent in this case would have done in that situation.  Thus                  
  it is not as specific as it should be and that is a problem                  
  with that area of the law; i.e., tort liabilities.  An                       
  example would be if a reasonable agent would have seen                       
  something that would put them on notice then they would need                 
  to proceed to investigate further.                                           
  REP. NORDLUND then inquired about a situation in which a                     
  seller says the furnace works fine and when winter comes and                 
  the buyer turns on the furnace and discovers it is                           
  inoperable. He asked, what about a situation like that.                      
  MR. SCHADT responded that if there is an inquiry such as a                   
  buyer asking "what is the furnace like or does the furnace                   
  work?", one of the ways you can have liability is if you are                 
  asked a question and you do not undertake initiative to find                 
  out the accuracy of your answer.  He further remarked that                   
  the agent should undertake the responsibility, to avoid                      
  negligence, to follow-up on any indication that there might                  
  be a problem.                                                                
  CHAIRMAN PORTER inquired if an agent sees that there are                     
  water marks on the ceiling and he asked the seller, who                      
  responds that yes there was, and I had it fixed, here is a                   
  receipt and as far as he was concerned the leak was fixed.                   
  Under the current situation, as Chairman Porter understood                   
  the law, he asked if that agent was liable.                                  
  MR. SCHADT responded, yes, that is correct.                                  
  CHAIRMAN PORTER then asked if HB 517 would rectify that                      
  MR. SCHADT responded yes.                                                    
  REP. GREEN inquired how many times, in the number of                         
  transactions that are conducted, how many of those would                     
  result in a situation where the realtor would be brought in                  
  rather than the buyer and seller dealing directly with each                  
  MR. SCHADT responded that over half innocent                                 
  misrepresentation litigation involves the realtor.                           
  REP. GREEN then restated the question to be of one hundred                   
  transactions, how many of those would end up with the seller                 
  going after the realtor because of a bad negotiation?                        
  MR. SCHADT responded that he didn't know the percentage.  He                 
  then remarked that this type of litigation is one of the                     
  most common forms of real estate litigation that may well                    
  account for half or more of the lawsuits that relate to real                 
  REP. GREEN then asked for clarification whether he meant                     
  seller and broker or buyer and broker because the buyer has                  
  been stuck with the property.                                                
  MR. SCHADT responded that it is typically the buyer coming                   
  after the seller and bringing in the agents, often after                     
  consulting an attorney.                                                      
  REP. GREEN inquired if the property disclosure statement has                 
  less than the number of these things because the seller has                  
  to disclose things that might not have otherwise done,                       
  because of fraudulent misrepresentation.                                     
  MR. SCHADT responded that it probably is, but it only                        
  officially went into effect last July, so there isn't a                      
  great deal of history to go with it.  He further remarked                    
  that the disclosure statement should reduce the amount of                    
  litigation overall.                                                          
  REP. GREEN stated that without HB 517, the real estate sales                 
  persons are at more risk than they would be with this bill.                  
  He inquired if there are some situations that really do                      
  involve negligence or something on the realtor's behalf.                     
  Mr. SCHADT responded that there are and if you get into a                    
  leaky roof you are looking at ten or twenty thousand                         
  dollars.  He further responded that there are several other                  
  factors which exacerbate the situation and that there are a                  
  lot of situations that result in costly litigation.                          
  REP. GREEN inquired if there is a perceived conflict because                 
  the sales commission comes from the seller to the broker and                 
  is there any potential, that by now giving the broker a                      
  waiver, what is my recourse, innocent fraud, by going                        
  through the broker?                                                          
  MR. SCHADT responded that fraud is one extreme that would be                 
  there.  Negligence is still there and that's the one that is                 
  going to be.  There has been for a long time, fraud on the                   
  agent's part, in his experience, is fairly well.  Negligence                 
  does come up in situations, such as, you should have seen                    
  those water marks, etc., and that will remain there.  He                     
  didn't think the passage of the money influences things that                 
  REP. GREEN stated that perhaps there is an innocent                          
  representation because he has less (inaudible) as a broker                   
  now than he did yesterday before this thing became law.  He                  
  has a duty, but there are shades of gray.  He asked if this                  
  bill would cause the broker to fall into a little darker                     
  shade of gray on their duty to look into the water spots, or                 
  something maybe a little more subtle than that?                              
  MR. SCHADT responded that he didn't think so because we are                  
  not doing away with the negligence part of it.                               
  REP. GREEN remarked that he was not talking about                            
  negligence, he was talking about the innocent part, where he                 
  thought was the gray area, and he wanted to know if HB 517                   
  would cause him as a real estate agent to relax my duty.                     
  MR. SCHADT responded that the thing that keeps the agents                    
  from relaxing their duty is the fact that they have to be                    
  diligent in what they do because if they don't they are back                 
  into negligence.                                                             
  CHAIRMAN PORTER inquired if he knew of any situation in                      
  which the court has caused someone by definition who is                      
  innocent to be guilty.                                                       
  MR. SCHADT responded that he was not aware of any.  He                       
  further added that HB 517 does not change the fact that                      
  under state case law a seller is liable for an innocent                      
  TAPE 94-44, SIDE A                                                           
  Number 000                                                                   
  REP. NORDLUND remarked that a buyer could make an innocent                   
  misrepresentation, I have had personal experience, and I                     
  find it difficult to believe that a real estate agent could                  
  not have some knowledge as to the workmanship of a                           
  MR. SCHADT commented that as the real estate profession is                   
  evolving they are becoming clearer with their buyers as to                   
  what their role is.  He thought that helps to a certain                      
  extent.  He agreed that the public comes to a real estate                    
  agent with a higher expectation and they should.                             
  REP. JAMES commented that she feels that if a person has a                   
  problem that somebody is at fault and that is not                            
  necessarily true.  Even in criminal cases, intent is very                    
  important and she agreed that real estate people are                         
  expected to know more, but they are not engineers or                         
  surveys, they are sales people and they are there to pass on                 
  the information from the seller.  Therefore, she felt that                   
  the law needed to be changed.                                                
  CHAIRMAN PORTER commented that he was going to support this                  
  bill because we have created the requirement to fill out a                   
  property disclosure form that is passed on to the buyer.                     
  This then increases the vulnerability of the broker because                  
  he has to pass the form on.                                                  
  REP. JAMES moved that HB 517 be moved from committee with                    
  individual recommendations.                                                  
  REP. NORDLUND objected and stated that he would like to be                   
  able to offer a couple of amendments.  One along the lines                   
  of there should be some protection afforded the potential                    
  buyers that real estate agents are not necessarily experts                   
  in terms of the structural, mechanical, wood aspects of the                  
  house but they are primarily agents for the financial                        
  aspects of the transactions.  The other amendment would be                   
  defining innocent misrepresentation.                                         
  CHAIRMAN PORTER asked Mr. Schadt whether the court would                     
  have difficulty with the term innocent misrepresentation.                    
  MR. SCHADT responded no because they specifically adopted                    
  that term in the Bivins case and the statute attempts to                     
  give some definition where it talks about not having                         
  personal knowledge of the error, inaccuracy or omissions.                    
  The court would find that their case clearly defined that.                   
  REP. GREEN remarked that he was opposed to HB 517, but he                    
  would pass it on because he doesn't see any duty in here                     
  that says that it's a duty that might be a negligent case.                   
  It just says if the agent doesn't know, it's okay.                           
  CHAIRMAN PORTER asked the committee for a motion to adopt                    
  the CS; and hearing no objection, the CS was adopted.                        
  CHAIRMAN PORTER then declared the CS for HB 517 moved from                   
  committee with individual recommendations.                                   
  The House Judiciary Committee was adjourned at 3:07 p.m.                     

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