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Court Throws Cold Water on Residential Real Estate Exemption

Ellis Winters

Ellis & Winters

Many years ago, I brought in my first case.  The matter grew out of a residential real estate sale.  I was a recent graduate.  The lawyer for the other side had many years in practice.  He fired off a letter threatening a host of claims, including a section 75-1.1 claim.

As a baby lawyer, I was a fish out of water.  After I got over being intimidated, I found a long body of caselaw holding that section 75-1.1 claims won’t hold water in a residential real estate context.

I responded to the letter quoting my authority, and the opposing lawyer stopped threatening a section 75-1.1 claim.

But a recent federal decision shows that I might not have been entirely correct.  (Lucky for my clients and me, the statute of limitations has run, so we won’t end up in hot water.)

In Fraim v. Chilly DIL Consulting, Inc., Magistrate Judge Joi Peake denied the defendants’ motion of summary judgment and allowed a section 75-1.1 claim in a residential real estate matter to proceed to trial.  Judge Catherine Eagles adopted Magistrate Peake’s recommendations.

Today’s post examines Judge Peake’s opinion.

Not a Drop in the Bucket:  The Money Pit

Fraim involves a historic house in the heart of Pinehurst.  And some water.  Or maybe a lot of water.

The Carlins, who would ultimately become defendants in the lawsuit, purchased the home as a fixer-upper (albeit a $2 million fixer-upper.)  Rather than buying the home as individuals, the Carlins used a corporate entity that they had formed.

The home was not in good shape, so the Carlins began renovations while living in another house.  They had the home inspected, and the inspection report identified “evidence of previous moisture intrusion in the basement.”

The Carlins needed to sink or swim, so they tried to address the water issues through renovations.  Even during the renovations, though, the home continued to flood.  The Carlins’ contractor didn’t water down his advice:  he told them that he did not believe it was possible to ever stop the basement from flooding during a large rainfall.

The Carlins completed the renovations and moved into the home in 2017.  But just a few months later, they decided the well had run dry, moved out, and listed the house for sale (through their corporate entity). 

When it rains, it pours.  Even while the home was listed for sale, it continued to experience flooding.  The Carlins’ corporate entity even filed an insurance claim for tens of thousands of dollars of water damage. 

Mr. and Ms. Fraim—who became the plaintiffs in this lawsuit—were looking for a home in Pinehurst and decided to test the waters with the Carlins’ house. 

The Fraims made an offer and had nine different inspections performed (and apparently the water issue did not surface). 

The Carlins gave the Fraims a residential real estate disclosure statement that denied any problem with the foundation or with water issues.  Apparently, they were determined to sell come hell or high water.

After the initial contract was signed, the Fraims decided to change mid-stream and substitute their trust as the purchaser.  So the sale of a house from one couple to another became a sale between a corporate entity and a trust (that fact becomes important later).

Two months after closing, Ms. Fraim walked into the basement of her new $2 million home to find . . . you guessed it, water. 

The Fraims found themselves up a creek, so to keep their head above water they (and their trust) filed a lawsuit.  They brought a boatload of claims, including fraud and negligent misrepresentation, and a section 75-1.1 claim against all defendants (the Carlins and the Carlins’ corporate entity).

When Keeping it Corporate Goes Wrong

After discovery, the Carlins moved for summary judgment seeking dismissal of all claims, including the section 75-1.1 claim.  The Carlins relied on the residential real estate exemption to section 75-1.1 claims.  Courts applying that exemption have generally found that an individual selling her private residence is not engaged in commerce.

But Judge Peake poured cold water on the Carlins’ arguments, finding that the exemption would not apply here.

Judge Peake began by reviewing the history of the exemption.  It is a “limited” exemption for private homeowners selling their private residence.  Judge Peake also noted that the North Carolina Supreme Court has not yet adopted that exemption.

The Carlins argued that they should be able to take advantage of the exemption, limited or not, because the property was a residential dwelling. 

Judge Peake disagreed, noting that the exemption is narrower and applies only to the sale by a private party of his or her own private residence.  Judge Peake identified three primary arguments by the Fraims in declining to apply the exemption.

First, the Carlins—as individuals—were not the sellers.  The Carlins’ for-profit Florida corporation sold the home.

Second, the property had been marketed for “commercial purposes.”  The marketing materials targeted someone who might be looking for an AirBnB opportunity, noting that the home would “make a profitable rental for the 2024 US Open golf tournament.”

Finally, the Carlins actually left town before the sale.  Having tested the waters of living in North Carolina, they decided to relocate to Utah.  So the Carlins were no longer selling their primary residence.

For these reasons, Judge Peake declined to apply the exemption.

Judge Eagles adopted Judge Peake’s recommendation.  Judge Eagles noted that the Fraims had not provided any particular basis for their objection to the section 75-1.1 claim, but even a de novo review would have resulted in the same holding.

Judge Peake’s decision is not in unchartered waters.  We previously examined a decision of the North Carolina Court of Appeals that also muddied the waters by allowing a Section 75-1.1 claim in the residential real estate context. 

Is the Exemption Dead in the Water?

It remains to be seen whether this opinion will make a big splash. 

To be sure, Judge Peake didn’t throw the baby out with the bathwater; the exemption remains intact.  But Judge Peake’s analysis does provide some potential options for litigants to try and tack on a section 75-1.1 claim to a residential real estate claim.  With the crazy real estate market of 2022, adding a treble damages claim could create some high-value lawsuits in the residential real estate world.

The opinion might also give realtors some things to consider.  Maybe including the AirBnB pitch isn’t the best idea.  And maybe clients with the means to conduct their purchases through a corporate entity need to consider section 75-1.1 liability as they evaluate the pros and cons of acting through a corporate form.

As for me, I’m just glad this opinion wasn’t around when I was litigating that first case.  But it’s all just water under the bridge at this point.

August 30, 2022
Posted in  75-1.1 Exemptions