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“As-Is” Clause in Purchase Contract Ineffective: Bank Still Liable to Buyer of Foreclosed Property

Norman D. Farnam

Jennifer M. Luther

January 8, 2016

The Wisconsin Court of Appeals recently held that an “as-is” clause in the contract between a bank selling a foreclosed property and a buyer did not, as a matter of law, relieve the bank from liability under Wis. Stat. § 100.18(1) for its deceptive representation in the contract.  This case is significant because the bank was found liable even though the property was sold “as-is” and the bank’s purchase contract documents had robust disclaimer, waiver, and exculpatory clauses.

In Fricano v. Bank of America, 2015AP20 (Dec. 23, 2015) (recommended for publication), Bank of America acquired a property in a foreclosure and hired a real estate agent to list the property for sale.  The bank and the agent had a series of communications regarding water damage to the property and subsequent mold issues. The bank approved a bid for mold remediation. The agent initially advised that the work was complete, but later reported that the work “was not a complete job” and that additional mold was showing in the living room, kitchen, and basement. In response, the bank approved further repair work.  The agent subsequently informed the bank that the additional repair work was found to be unsatisfactory.

The bank made no further repairs and instead listed the property which immediately generated significant interest.  Catherine Fricano contacted her agent and requested a showing. Fricano acknowledged observing mold in the basement and noticing a musty smell in the basement. After a second walk-through with her fiancé and his brother, who was experienced in purchasing foreclosed properties, Fricano submitted an offer to purchase. The bank notified Fricano via e-mail on October 4, 2012 that her “offer had been accepted,” but attached a Bank of America Real Estate Purchase Addendum (“Addendum”) and Water Damage, Toxic Mold Environmental Disclosure, Release and Indemnification Agreement (“Agreement”).

The Addendum contained an “as-is” clause, along with a significant number of disclaimers, waivers and exculpatory clauses purporting to place all risk and the burden of investigation on the buyer and releasing the bank of all liability.  In addition, the bank represented that it acquired the property by foreclosure, and, therefore, had “little or no direct knowledge about the condition of the [p]roperty.”  Fricano was told by her agent that this type of language was “very common with foreclosures.”  Fricano signed the Addendum and Agreement and returned them to the bank and the bank executed the purchase agreement document.

Fricano had the home inspected.  The inspector noted evidence of water damage and mold growth in the basement. Fricano consulted with an environmental professional who prepared a mold mitigation proposal.  She did not pursue the mitigation, believing that the mold was limited to the basement and not the livable areas of the home.  After closing, Fricano discovered mold “saturated” the house.  The entire house was stripped to studs and reconstructed after mold and water damage remediation was completed.

Fricano filed a lawsuit against the bank under § 100.18(1), the fraudulent misrepresentations statute.  Fricano alleged that the bank misrepresented to her that it had “little or no direct knowledge regarding the condition of the property,” and further alleged that the bank had actual knowledge of the damage.  At trial, the circuit court instructed the jury that “[a]n ‘as-is’ clause does not relieve the bank from a duty to disclose a material adverse fact about the property.” The trial court also instructed as follows on the elements of a § 100.18(1) claim:  “the Bank must have published or placed before one or more members of the public an untrue, deceptive, or misleading statement or representation concerning the sale of the property with the intention of inducing the sale of the property, and Fricano must have suffered a loss as a result of that statement or representation.”

The jury found in favor of Fricano on the § 100.18(1) claim and awarded her $50,000 in damages. The bank moved for judgment notwithstanding the verdict on multiple grounds, which the trial court denied.  On appeal, the bank argued:  (1) the “as-is” and exculpatory clauses barred Fricano’s § 100.18(1) claim, and (2) by the time the bank had mispresented its knowledge of the condition of the property, that Fricano was not a member of “the public” as required in a § 100.18(1) claim.

The Court of Appeals disagreed with the bank’s assertion that the “as-is” clause and similar disclaimers and waivers in the parties’ contract relieved it from § 100.18(1) liability for its deceptive statement concerning its lack of knowledge of the condition of the property.  Rather, the Court stated that an “as-is” clause is not a complete bar to a misrepresentation claim when the seller makes affirmative misrepresentations.  A falsely induced “as-is” clause will not preclude liability for a § 100.18(1) claim.

The Court also disagreed with the bank’s assertion that the misrepresentation was not made to “the public.”  The bank argued that it accepted Fricano’s Counter-Offer via its October 4, 2012 e-mail which thereby created a “particular relationship” before the misrepresentation was made.  Of course, the bank had not “accepted” Fricano’s offer.  It required Fricano to execute the Addendum and Agreement containing the misrepresentation, which was a counteroffer.  Therefore, Fricano was still a member of the public when the misrepresentation was made to her by the bank.

The bank also argued there was insufficient evidence to show Fricano was materially induced into buying the property by the bank’s statement as to the lack of knowledge and that there was insufficient evidence to show the misrepresentation was intended to induce Fricano.  Both arguments were quickly dismissed by the Court.

The lesson from the Fricano case is that banks cannot protect themselves from misrepresentations (at least those contained in the purchase contract itself) with “as-is” statements, disclaimers, waiver or releases.  The Court held open the possibility that statements and representations made outside the purchase contract likewise may not be disclaimed in the contract under §100.18(1). The Fricano case appears to expose banks selling REO property to more risk that unsatisfied buyers will claim they were tricked into buying the property because of something the bank or its agents did or said, notwithstanding contractual language designed to protect the bank from such claims.  In fact, in the Fricano case, the very contract language, found in many contracts for sale of REO property and intended to protect the bank, was used against the bank.

In light of the Fricano case, banks – and all sellers – are encouraged to re-examine the exculpatory language in their purchase contracts.  Banks also might reconsider their REO sales practices as a whole to determine whether they are exposed to risks notwithstanding exculpatory language in the purchase contracts.  The bottom line is that “as-is” clauses, disclaimers, and waivers may be ineffective if the buyer relied on something the selling bank did or said with respect to the property and claims to have been damaged as a result.


If you have any questions about how the information in this article may affect you or your business, please contact Norman Farnam at nfarnam@stroudlaw.com or Jennifer Luther at jluther@stroudlaw.com or (608) 257‑2281 or your Stroud attorney. 

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.