Consumer Fraud in Real Estate Transactions

Real estate professionals should be aware that their clients and customers have a powerful tool for obtaining damages resulting from fraud or deception.  That tool is the Arizona Consumer Fraud Act, A.R.S. § 44-1521 et seq.  This Act was initially passed so that the Arizona Attorney General could go after fraudulent activity that otherwise escaped the reach of the law.  However, Arizona appellate courts have read into the Arizona Consumer Fraud Act an implied private right of action.  That means that private individuals, not just the Attorney General, may bring a civil action against a defendant based upon violation of the Act.  This is significant, because it is much easier for a plaintiff to prove consumer fraud, than to prove common law fraud.

In Arizona, common law fraud requires proof of nine separate elements, and the proof must be by clear and convincing evidence.  Therefore, many commercial schemes involving some form of deception are able to evade civil liability for common law fraud.  On the other hand, consumer fraud can be proven by a mere preponderance of the evidence, which is a lower standard of proof than clear and convincing evidence.  Dunlap v. Jimmy GMC of Tucson, Inc., 136 Ariz. 338, 666 P.2d 83 (App. 1983).  In addition, the elements of consumer fraud are simpler.  In order to establish a claim for consumer fraud, a plaintiff must prove:

i. Defendant used deception, a deceptive act or practice, fraud, false pretense, a false promise, a misrepresentation, or concealed, suppressed, or omitted a material fact, in connection with the sale or advertisement of merchandise;

ii. Defendant intended that others rely upon such deception, deceptive act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression, and/or omission of a material fact;

iii. Plaintiff suffered damages as a result of reliance on defendant’s deception, deceptive act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression, or omission of a material fact; and

iv. Plaintiff’s damages.

The first element of an action for consumer fraud requires proof that the defendant used deception or any of several similar devices in connection with the sale or advertisement of merchandise.  The term “merchandise” means “any objects, wares, goods, commodities, intangibles, real estate, or services.”  A.R.S. § 44-1521.  Therefore, the sale of real estate is clearly covered by this statute.  In fact, case law suggests that any potential interest in real estate is covered by the Consumer Fraud Act.  For example, the court in State ex rel. Corbin v. Marshall, 161 Ariz. 429, 430, 778 P.2d 1325 (App. 1989) found that oil and gas lease assignments are covered by the Act, since they evidence an interest in real estate.  In other words, the assignment of a leasehold interest in oil and gas that may be found on the property is sufficient to create an interest in real estate under the Act.  As a result, the sale or advertisement of virtually any interest in real estate is covered by the Consumer Fraud Act.  Consequently, real estate professionals need to be cautious about comments or representations they make during a real estate transaction, whether those comments are made verbally, in writing, or through an advertisement.

The second element of an action for consumer fraud requires proof that the defendant intended that others rely on the deception or other similar device.  This does not require proof of an intent to deceive.  In a consumer fraud action, it is not necessary to show that the defendant intended to deceive the plaintiff.  Flagstaff Medical Center, Inc. v. Sullivan, 773 F.Supp. 1325 (D. Ariz. 1991); and Alaface v. National Inv. Co., 181 Ariz. 586, 590, 892 P.2d 1375 (App. 1994).  Rather, this element is satisfied if the defendant communicated the deceptive information in a manner such that it is reasonable to assume that others would rely on it.  For example, if a real estate salesperson publishes an advertisement about a listing, it is reasonable to assume that persons reading the advertisement would rely on it.  Similarly, if a salesperson communicates information about a property to a seller or buyer, it is reasonable to assume that the seller or buyer would rely on the information.

The third element of an action for consumer fraud requires proof that the plaintiff suffered damages as a result of reliance on defendant’s deception.  The courts have held that if plaintiff was harmed as a result of reliance on any false statement or misrepresentation made by the defendant, the reasonableness of plaintiff’s reliance is not an element of the claimParks v. Macro-Dynamics, Inc., 121 Ariz. 517, 520, 591 P.2d 1005, 1008 (App. 1979).  Therefore, the plaintiff does not have to prove that he or she reasonably relied on the deception.

Moreover, in evaluating representations made under the Consumer Fraud Act, the test is whether the least sophisticated consumer would be misled; technical correctness of the representation is irrelevant if the capacity to mislead is found.  Madsen v. Western Am. Mortgage Co., 143 Ariz. 614, 694 P.2d 1228 (App. 1985).  This means that in a consumer fraud action, the issue is not whether the plaintiff was actually deceived, but rather whether the least sophisticated consumer would have been deceived.  Therefore, in communicating information in a real estate transaction, real estate professionals must keep in mind this concept of the “least sophisticated consumer.”  Information must be communicated in such a way as not to mislead someone who falls into this category.  That would probably be someone who has virtually no knowledge of real estate transactions.  Even if a communication is technically correct, it may be deceptive if it has the capacity to mislead.  For example, if a salesperson represents that a house has no termites, that may be technically correct if a termite infestation has recently been treated.  However, this statement has the capacity to mislead one into believing that the house has never had termites.  This type of language, which is intended to parse hairs, can create potential liability for consumer fraud.  Therefore, real estate professionals need to be careful about the way they communicate information.  In the above example, the existence of the prior termite infestation, as well as the recent treatment, should be disclosed.

The final element in an action for consumer fraud is proof of the plaintiff’s damages.  In this regard, it is important to note that punitive damages are recoverable in an action under the Consumer Fraud Act.  Sellinger v. Freeway Mobile Home Sales, Inc., 110 Ariz. 573, 521 P.2d 1119 (1974), and Dunlap v. Jimmy GMC of Tucson, Inc., 136 Ariz. 338, 666 P.2d 83 (App. 1983).  This means that in egregious cases involving deception, a plaintiff may be entitled to recover both compensatory and punitive damages.  See, e.g., Howell v. Midway Holdings, Inc., 362 F.Supp.2d 1158, 1165 (D. Ariz., 2005), where the court denied summary judgment on punitive damages in part because the evidence was sufficient for a jury to find “a recurring artifice to defraud customers.”

Hopefully, this article will help real estate professionals understand why it is so important to be careful about the way information is communicated to clients and customers.  This includes information communicated verbally, in writing, or in an advertisement.

Craig Stephan
Attorney at Law
480-621-8281
website: www.craigstephanlaw.com
email: info@craigstephanlaw.com

Consumer Fraud in Real Estate Transactions
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