Bank Not Liable for Failing To Disclose Environmental Issues At Foreclosure Sale

In Rhima v JPMorgan Chase Bank, 2012 U.S. Dist.LEXIS 70492 (N.D.Tx. 5/18/02), plaintiff was the successful bidder at a foreclosure auction for a warehouse property. The advertised terms and conditions of the foreclosure sale offer indicated that bidders would be provided with environmental reports and access to the property for inspection but the sale was on an “as is” basis.

The environmental reports were not provided to plaintiff prior to the auction. In addition, plaintiff was unable to inspect the property because the lender’s representatives said it did not have the key to the premises. Despite not receiving the environmental reports or having the opportunity to inspect the property, plaintiff submitted the winning bid of $60K.

The day after the closing, the substitute trustee provided the plaintiff with a phase 1 and phase 2 prepared in 2006 for Washington Mutual, a predecessor of JP Morgan. A month later, lender’s counsel provided a phase 2 prepared in 2008 for Washington Mutual which apparently disclosed contamination. As it turned out, the property had significant quantities of abandoned hazardous wastes and was contaminated. Plaintiff also learned that the Texas Commission of Environmental Quality (TCEQ) had been working with Washington Mutual to resolve the environmental issues at the site. The plaintiff estimated it would incur up to $400K to address the environmental violations and complete the cleanup.

The plaintiff then filed a lawsuit asserting that the defendant had committed statutory and common law frauds misrepresentation and deceptive trade practices when it represented that it would provide environmental reviews and access to property prior to the foreclosure sale but failed to do so. Plaintiff said it would have not purchased the property had it been provided the environmental reports or provided access to the property. The defendant filed a motion to dismiss, arguing a lender had no statutory or common law disclosure obligation for foreclosure sales. In addition, JPMorgan said it had no disclosure obligation since the substitute trustee was the seller, not the bank. In response, the plaintiff claimed the trustee was the agent of the bank who had made inaccurate representations about the condition of the property by selecting providing environmental reports that changed  the terms of the sale.

However, the court held that the plaintiff did not establish justifiable reliance on defendant’s alleged misrepresentations. Indeed, the court said, the plaintiff’s allegations pled the opposite of reliance because the plaintiff knew the defendant had failed to provide the environmental reports and inspection it had promised. As a result, the judge granted judgment in favor of the bank.

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