Case Law Summaries

Citicorp Mortgage, Inc. v. Musa

• Opinion Date: July 26, 2000
• Real Property Law
• E-Mail

DAMAGES; FRAUD; CONCEALMENT—Where a seller fraudulently conceals hidden fire damage, a buyer is entitled to recover damages under the “benefit of the bargain” rule, comparing the value of the damaged property to its value without the damage.

An individual and his wife sold a commercial building to a buyer for $160,000. The buyer received $40,000 in financing from the seller and the balance from a bank. Several years after operating the building as a four unit apartment complex, the building suffered an interior structural failure due to previous fire damage that the seller had concealed. After investigation, it was determined that burned structural beams and wall cracks had been covered up. The seller contended that he was unaware of the fire damage. After vacating the tenants, the buyer was unable to maintain his mortgage payments and the bank foreclosed on both the property and the buyers’ personal residence. The bank subsequently purchased the property at a sheriffs sale. The property was then sold for $57,000. It was estimated that the buyer owed the bank $244,000 as a result of both foreclosures and a jury determined that the seller perpetuated a fraud. It awarded damages of $280,000 against the Seller. The seller appealed, putting forth eight separate arguments.

First, the seller argued that the lower court erred by not allowing his expert to testify that the cost to repair the charred beams would have been only $1,750. The lower court held the testimony to be inadmissible because he gave “no basis for explaining how the estimate was come by, and continuing with the fact that the witness has minimal experience working on burned buildings.” The Appellate Division held that “when an expert’s opinion is merely a bare conclusion unsupported by factual evidence, i.e., a net opinion, it is inadmissible” and accordingly, it determined that the lower court did not abuse its discretion because the witness did not qualify as an expert.

The seller’s arguments revolved around the issue of damages. The Appellate Division recognized two theories on which to award damages in fraud or concealment cases: the “out of pocket rule” and the “benefit of the bargain rule.” Under the out of pocket rule, recovery is permitted for the “difference between the price paid and the actual value of the property.” Under the benefit of the bargain rule, recovery is permitted for the “difference between the price paid and the value of the property had the representation been true.” Here, the Appellate Division was persuaded that the debt incurred by the buyer to buy the building was not an appropriate measure of damages. Rather, the Appellate Division concluded that “the proper measure of damages should have been the building’s value in the absence of structural defects, based on stream of income, comparable sales or other elements utilized to establish value, less the value of the property after it collapsed.” Here, the buyer had procured a subsequent buyer before the collapsehad occurred and was to sell the building for $175,000. Based on the sheriff’s sale of the building for $57,000, the difference represented the gross damages sustained by the buyer. Because the buyer still owed the seller $35,000, this amount had to be deducted. The Appellate Division held however that damages stemming from the foreclosure of his personal residence were “too remote a consequence” to recover.

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