A06-1711

Tony Lyle Flatten, et al.,

Respondents,

vs.

Brett Mattson, et al.,

defendants and third party plaintiffs,

Appellants,

vs.

Darrin K. Merrill, et al.,

Third Party Defendants.

Filed July 31, 2007

Reversed

Hudson, Judge

Freeborn County District Court

File No. 24-C6-05-000024

Douglas A. Boese, John C. Beatty, Dunlap & Seeger, P.A., 206 South Broadway, Suite 505, P.O. Box 549, Rochester, Minnesota 55903 (for respondents)

Sarah L. Nelsen, Adams, Rizzi & Sween, P.A., 300 First Street Northwest, Austin, Minnesota 55912 (for appellants)

Considered and decided by Hudson, Presiding Judge; Lansing, Judge; and Halbrooks, Judge.

U N P U B L I S H E D O P I N I O N

HUDSON, Judge

On appeal from a judgment for plaintiffs in this leaky-roof case, appellants-defendants argue that (a) the district court incorrectly used the cost-of-repair measure of damages rather than the out-of-pocket measure when calculating plaintiff’s damages; (b) the record lacks the evidence required for application of the correct damage calculation; and (c) plaintiffs failed to provide sufficient evidence of the damages they claimed. Because the district court used the wrong measure of damages, we reverse.

FACTS

In March 2000, appellant Brett Mattson bought a house in Clarks Grove, Minnesota. Appellant Stacey Mattson resided in the house with Brett Mattson until November 2003.

In August 2004, appellants sold the house to respondents. Appellants filled out a “Seller’s Property Disclosure Statement,” which reported that the only place the roof leaked was above the dining room and that they had fixed the leak a year earlier. Respondents made an offer to buy the house for $95,900; appellants accepted. In September 2004, approximately three weeks after respondents moved in, there was a large storm with heavy rains, and the roof leaked. When respondents examined the attic, they found several large plastic tubs filled with water, apparently placed there to collect rainwater that leaked through the roof. Respondents testified that, before they purchased the house, no one had disclosed to them the existence of the plastic tubs in the attic. They also noticed that water leaking in from the roof had matted down the insulation in the attic. Respondents also discovered that water was trickling down the sides of the chimney and collecting in the basement. Since then, respondents have noticed leaking whenever there is rainfall of more than one or two inches.

Respondents commenced an action against appellants in conciliation court on December 14, 2004. Judgment in the amount of $7,555 was entered in favor of respondents. On December 30, 2004, appellants challenged this decision in district court. Respondents filed a formal complaint on April 6, 2005, alleging that appellants induced the purchase by withholding material facts in violation of Minn. Stat. § 513.55 (2004), and making false representations regarding the roof.

A court trial was held on June 21, 2005. Travis Olson, a contractor who examined respondents’ home shortly after they discovered the water damage, testified that he had noticed black mold in the attic. Mr. Olson estimated that the cost of repair would be approximately $17,000, excluding the cost of dealing with the mold. Contractor Robert Rice, who also examined respondent’s house, testified that the mold was “bad, it was very bad. It was in the rafters, all on the bottom sheathing.” Mr. Rice estimated the cost of all needed repairs would be $30,000. Mr. Rice’s estimate included “[e]verything, including the roof, tearing off that and removing the insulation, putting in insulation in there and the drywall.” Mr. Rice admitted that the figure was an estimate; he would not know the true cost of repair until he started the work and was able to get a better idea of the true extent of the damage.

Respondents attempted to correct the leak by having a contractor apply sealing tar to the roof. Respondent Tony Flatten testified that application of the sealant helped a great deal, but the roof still needed to be replaced. Respondents testified that despite the leak, they have continued to use the rooms in their house in the same manner as before they discovered the leaky roof. Respondent Tony Flatten testified that they had been unable to repair the roof because their insurance did not cover the repair, and they could not otherwise afford it. He also testified that the difference between the amount claimed in conciliation court, $7,500, and the amount claimed in the district court action, $30,000, stemmed from additional damages that have occurred after the filing of the conciliation-court claim.

Following the close of respondents’ case, appellants moved for dismissal under Minn. R. Civ. P. 41.02(b). Appellants argued that the measure of damages should be the diminution in value and not the cost of repairs. The district court took the matter under advisement, and both parties submitted written briefs. Respondents’ brief included a request to “re-open their case . . . for the limited purpose of recalling Tony Flatten for the purpose of providing . . . testimony to the court about the diminution in value.” On September 26, 2005, the district court issued an order declining to render judgment on appellants’ motion to dismiss until the close of all evidence and denying respondents’ motion to re-open the case.

The court trial resumed on November 22, 2005. Appellants testified that they never entered or looked into the attic during their four years of residency at the house. Appellant Brett Mattson testified that he never noticed any evidence of water leaking from the roof or anything that would indicate that there was water damage in the attic. Appellants claimed that they did not place the plastic tubs in the attic or know how they got there.

At the close of appellants’ case, respondents’ attorney attempted to recall Tony Flatten to the witness stand to testify about the effect water damage had on the home’s value. Appellants objected, arguing that respondents’ request was “inappropriate and untimely.” Appellants stated that “there is no evidence as to fair market value diminution.” The district court denied appellants’ motion to dismiss and disallowed additional testimony by Tony Flatten.

The district court issued an order granting judgment in favor of respondents. The district court concluded that respondents’ house required repairs in the amount of $30,000 to make it habitable and to mitigate the condition. This appeal follows.

D E C I S I O N

Appellants argue that the district court erred by employing a “cost of repair” measure of damages instead of a “diminution in value” or “out-of-pocket loss” measure of damages.

Respondents argue that this court may not consider this issue because appellants failed to make any post-trial motions following the district court’s January 6, 2006 order. Respondents argue that this court may consider only whether the evidence is sufficient to support the district court’s findings and whether those findings support the court’s conclusions of law. To support their argument, respondents cite Sauter v. Wasemiller, 389 N.W.2d 200, 201 (Minn. 1986).

Generally, a new-trial motion is required for appellate review of objections made during trial, but we may review “substantive questions of law when a genuine issue of law is properly raised and considered at the district court level.” Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 311 (Minn. 2003). Substantive law is “[t]he part of the law that creates, defines, and regulates the rights, duties, and powers of the parties.” Black’s Law Dictionary 1443 (7th ed. 1999). The measure of damages is a question of substantive law. Lowrey v. Dingmann, 251 Minn. 124, 129, 86 N.W.2d 499, 503 (1957). And respondents raised the issue of the proper measure of damages before the district court both at trial and in written arguments presented to the district court. The district court itself addressed the issue during trial. Therefore, we consider whether the district court used the proper measure of damages.

To prevail on a claim of false representation in the sale of real property, a claimant must show false representation and resulting damages. Marion v. Miller, 237 Minn. 306, 309, 55 N.W.2d 52, 55 (1952). “Minnesota recognizes the ‘out-of-pocket-loss’ rule as the proper measure of damages for misrepresentation.” Lobe Enters. v. Dotsen, 360 N.W.2d 371, 373 (Minn. App. 1985) (citing Marion, 237 Minn. at 309, 55 N.W.2d at 55). The out-of-pocket-loss rule provides that “[d]amages in an action for false representations and deceit are the natural and proximate loss sustained by the party because of reliance thereon. . . . In cases where fraud induced a purchase, the measure of damages is the difference in value between what was given and what was received.” Id. at 372 (quotation omitted). The appropriate measure of damages for false representation in the sale of real property is the amount paid less the fair market value. Peterson v. Johnston, 254 N.W.2d 360, 362 (Minn. 1977). In jurisdictions like Minnesota that follow the “out-of-pocket” rule, “if the property is worth what plaintiff gave for it he has suffered no damage and therefore cannot recover.” Berg v. Xerxes-Southdale Office Bldg. Co., 290 N.W.2d 612, 615 (Minn. 1980) (quotation omitted). Whether the district court used the correct measure of damages is a question of law, Snyder v. City of Minneapolis, 441 N.W.2d 781, 789 (Minn. 1989); we review legal questions de novo. Modrow v. JP Foodservice, Inc., 656 N.W.2d 389, 393 (Minn. 2003).

Here, the district court concluded that $30,000 in damages was appropriate because it is “[t]he reasonable and necessary sum needed to make the [house] habitable, restore it to the value paid, and to mitigate the damage to the house.” The district court also stated that “[respondents] paid $95,900.00 for the [appellants’] home. The actual value of the home was that amount minus the cost to make it habitable.”

The only evidence presented regarding the value of the house as represented by appellants was the amount respondents paid for it. This is sufficient evidence of the value of the house as represented because the sale was recent and “[t]he price agreed upon . . . is strong evidence of the value as represented and is sufficient to support a verdict when there is no evidence of the market value of what plaintiffs would have received if defendants’ representation had been true.” Marion, 237 Minn. at 310, 55 N.W.2d at 55; see also LaValle v. Aqualand Pool Co., 257 N.W.2d 324, 328 (Minn. 1977) (holding that an owner of real estate is competent to testify concerning its value).

But as appellants noted, and as respondents admitted during oral arguments before the district court, no evidence was presented regarding the valuation of the house taking into account the leaky roof. Respondents presented evidence regarding an estimated cost of repair of the roof, but repair costs are not sufficient to show damages for fraudulent misrepresentation in a real-estate transaction. See Lobe Enters., 360 N.W.2d at 373 (rejecting a party’s attempt to calculate out-of-pocket loss by subtracting the cost of replacing a roof from the purchase price of a house and holding that when plaintiffs fail to offer evidence to show value of property in condition received, repair costs do not accurately reflect loss arising from misrepresentation).

The burden is on respondents, as plaintiffs, to prove damages by a fair preponderance of the evidence. Pagett v. N. Elec. Supply Co., 283 Minn. 228, 236, 167 N.W.2d 58, 64 (1969). Because the appropriate measure of damages in this case depends on “the difference in value of what was given and of what was received,” Lobe Enters., 360 N.W.2d at 373, and because respondents did not produce any evidence of the value of the house as received, they did not meet their burden of showing damages by a fair preponderance of the evidence. And because there was no evidence of the fair market value of the house as received, the district court should not have calculated the “out-of-pocket-loss” attributable to appellant’s misrepresentation. We conclude that the district court erred by applying the incorrect measure of damages. Because we reverse on other grounds, we do not consider appellants’ remaining arguments.

Reversed.