Formento v. Encanto Business Park

Citations: 744 P.2d 22; 154 Ariz. 495; 1987 Ariz. App. LEXIS 478Docket: 2 CA-CV 87-0022

Court: Court of Appeals of Arizona; August 4, 1987; Arizona; State Appellate Court

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An appeal was filed by Nick C. Formento and Barbara A. Formento against Encanto Business Park and its associated companies regarding a partial summary judgment favoring the defendants on claims of negligent misrepresentation and breach of warranty, as well as a directed verdict on intentional misrepresentation. The case arose from the defendants' sale of Lot 24 in a Phoenix industrial park to the Formentos in November 1983.

Lot 24 was zoned for industrial use, typically allowing a building height of forty feet. However, unbeknownst to the Formentos, it was subject to a more restrictive height limit of 18 feet, plus an additional 2 feet for a parapet wall, and was originally restricted to a one-story office complex. Although the City of Phoenix had removed the office complex restriction in 1979 at the request of Encanto's attorney, it retained the one-story height limitation. This information was not publicly accessible on the city zoning map, and there were no indicators prompting interested parties to inquire further about the property's zoning status.

The court noted that there was no evidence suggesting that an independent inquiry by the Formentos would have revealed the height limitation. Emkay, the project developer, acknowledged this in a letter supporting Formento's variance request after the sale. The height restriction was not recorded in official documents, nor was it mentioned in the Covenants, Conditions, and Restrictions (CC&Rs), or marketing materials, which described Lot 24 as zoned IP. The only indication of the restriction was a mention in an advertisement for a one-story office complex.

Formento testified that he communicated his intention to build a two-story structure to several individuals involved in the negotiations, including representatives from Emkay. The agreement for the sale included a clause stating that the seller would provide title subject only to existing zoning and matters observable through physical inspection at closing. The court ultimately affirmed the partial summary judgment but reversed in part, indicating the complexity of the misrepresentation claims involved.

The 'Miscellaneous' section of the agreement establishes that it overrides any previous agreements, encapsulating the complete understanding between the parties regarding the transaction. It specifies that any unrecorded statements or promises not signed by all parties are ineffective. An addendum clarifies that Buyer Formento has thoroughly examined the Subject Property and is not relying on any representations from the Seller or brokers about the property’s zoning, suitability, or other conditions. Formento discovered a height limitation on Lot 24 only after his building plans were rejected post-transaction. Despite his efforts to obtain a variance with Emkay's support, the city's denial followed, as the height limitation had not been publicly recorded. 

Formento subsequently filed a lawsuit against the defendants for intentional misrepresentation, wanton and negligent misrepresentation, and breach of warranty. The court granted partial summary judgment on the negligent misrepresentation and warranty claims, citing the parol evidence rule. Before trial on the intentional misrepresentation claim, the court restricted Formento to evidence of affirmative representations, excluding claims of fraudulent concealment due to lack of pleading. Formento’s motion to amend pleadings was denied, and a directed verdict favored the defendants, asserting that the agreement’s provisions negated Formento's reliance. On appeal, the court found errors in the summary judgment and directed verdict concerning negligent misrepresentation and reversed those decisions.

The trial court ruled that statements made by David Dixon to Formento were inadmissible hearsay, as Dixon was not considered an agent of Encanto during the transaction. Formento argued that Dixon's role as an agent for Coldwell Banker warranted an exception to the hearsay rule under Rule 801(d)(2). However, the court found that Dixon was acting on behalf of Formento, having previously shown him properties and received commission as the buyer's agent, indicating he was not Encanto's agent. The court's discretion in evidence admission is substantial and will only be overturned on appeal for clear abuse and resulting prejudice, which was not present in this case.

Regarding misrepresentation, Formento contended that the trial court incorrectly applied the parol evidence rule, which excludes pre-contractual statements if the written agreement is deemed a complete integration. He cited Hill v. Jones to argue for the admissibility of evidence related to negligent misrepresentations, asserting that such misrepresentations should be treated similarly to fraudulent ones due to their equivalent harm. However, Arizona case law supports that parol evidence cannot substantiate claims of negligent misrepresentation based on pre-contract statements, although evidence of fraud in inducing a contract is permissible. The Hill case highlighted the seller's duty to disclose material defects, leading to a reversal of a dismissal based on an integration clause, emphasizing that strict enforcement of finality may be unjust in certain circumstances.

Judicial policy favors honesty and fair dealing in business, particularly concerning fraudulent and negligent misrepresentations. Misrepresentations, whether fraudulent or negligent and concerning material facts, allow a party to challenge an integration clause meant to finalize agreements and avoid disclosure of such misrepresentations. Nondisclosure of material facts, known to the seller and not easily discovered by the buyer, can be treated similarly to fraud. The court acknowledges that sellers should not evade liability for misrepresentation using an integration clause.

Formento is entitled to a trial regarding negligent misrepresentation, as the parol evidence rule does not protect Encanto from its own claims. Since negligent misrepresentation falls under tort law, the parol evidence rule is inapplicable, allowing evidence of misrepresentation to be presented. Arizona has adopted Section 552 of the Restatement (Second) of Torts, which could hold Encanto liable if Formento proves misrepresentation occurred. Encanto had pertinent information about height restrictions that was not disclosed to Formento.

The Formentos argue for their right to rely on Encanto's alleged misrepresentations, citing Barnes v. Lopez as precedent. In that case, the court ruled that buyers could rely on sellers' representations despite clauses in the agreement disclaiming reliance on other representations. This case parallels Barnes, as both involve similar disclaimer clauses regarding property use and zoning. Summary judgment for Encanto on this matter was deemed erroneous.

Formento was unable to rely on any representations made by Encanto regarding the property, as the contract explicitly stated that Formento was not relying on any statements from the seller or brokers concerning the property’s zoning or suitability. However, prior case law (Barnes) established that a buyer can rely on a clear and distinct representation about zoning without needing to conduct independent inquiries. Encanto’s assertion that the property had industrial park zoning qualified as such a representation.

Although Formento's claims were based on fraudulent misrepresentation rather than fraudulent concealment, this distinction did not undermine their case. The precedent set in Madisons Chevrolet, Inc. v. Donald demonstrated that failure to disclose critical information can support a claim for fraudulent misrepresentation. Encanto’s marketing materials, while accurate, were misleading due to the omission of information about a restrictive height limitation. The trial court's decision to prevent Formento from presenting evidence of this omission was erroneous.

Regarding warranty claims, the trial court granted summary judgment in favor of the defendants, and Formento sought to extend implied warranties to raw land sales. The court declined this request, noting that while Arizona courts apply implied warranties in residential construction, such an extension to raw land is inappropriate. The court reversed the summary judgment on negligent and intentional misrepresentation but upheld the summary judgment concerning warranties. Formento was awarded attorney's fees for the appeal upon filing a statement of costs. The court also addressed a motion from appellees to reconsider the award of attorney's fees, which was granted.

The contract relevant to this appeal stipulates that if a party initiates legal action related to the agreement, the prevailing party is entitled to recover reasonable attorneys' fees and expenses from the other party, in addition to court costs. The contract, rather than A.R.S. 12-341.01, dictates the terms for awarding attorneys' fees on appeal. For the appellants to recover their attorneys' fees for the appeal, they must first secure a final judgment in their favor, which has not yet occurred; therefore, any award of fees must await the trial court's outcome. 

In a separate note, the City of Phoenix employs a zoning map system that indicates special restrictions on lots with an asterisk, although this system was not in place when the height limitation on Lot 24 was established. 

Additionally, regarding negligent misrepresentation, a party that provides false information in a professional context can be liable for resulting pecuniary losses if they fail to exercise reasonable care. This liability is limited to loss suffered by the recipient or a specific group intended to benefit from the information. However, if the party has a public duty to provide information, their liability extends to any individuals protected by that duty in relevant transactions.