It is well established that brokers may be held liable under theAct for misleading sales material. Home improvement contractorswill be penalized for mere technical violations, and even financiallenders are now deemed subject to the Act's requirements. A recenttrial court opinion, Matera v. M.G.C.C. Group, Inc., hasfurther expanded the scope of the Act and should be a cautionarytale for anyone who participates, however indirectly, in sellingreal estate.

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In Matera, a lender acquired Phase III of a residentialdevelopment by deed in lieu of foreclosure after the originaldeveloper defaulted. The lender appeared before the planning boardin 1996 to obtain a compliance letter to allow Phase III to beconstructed. Allegedly, the lender failed to disclose drainageproblems affecting homes already constructed in Phase II by theoriginal developer, and also misrepresented drainage information inthe plans presented to the board. After the board granted thecompliance letter in 2002, the lender sold Phase III to a builder.During construction of Phase III, water flooded the homes in PhaseII.

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Homeowners in Phase II sued the lender, the builder and others.The lender moved to dismiss the consumer fraud claims, arguing thatit did nothing unlawful in selling Phase III and that it was notresponsible for the water damage to the homes in Phase II.

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The court held that the lender's alleged misrepresentationsbefore the planning board, if proved at trial, would be the type ofunconscionable conduct prohibited by the Act. The critical issue,however, was whether the lender made these misrepresentations aspart of the sale of Phase III, since the Act only applies tounlawful conduct occurring in connection with the sale of realestate.

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The court ruled that the lender made the allegedmisrepresentations to the board in connection with the sale ofPhase III. The court reasoned that because the lender could notsell Phase III without the compliance letter, its appearance beforethe board was part of the sale process. And since the lender madethe alleged misrepresentations with the objective of selling PhaseIII, the court considered the lender's appearance before the boardinextricably linked to the sale of the real estate.

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A consumer fraud claim requires three elements under theAct:

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• Existence of an unlawful act under the Consumer Fraud Act;

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• An ascertainable loss by the plaintiff; and

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• A causal nexus between the unlawful conduct and the loss.

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Because it is remedial legislation intended to deterunconscionable practices, the Act has always been construedliberally in favor of consumers. In allowing the homeowners'consumer fraud claims to proceed to trial, the court in Materainterpreted the Act as being intended to protect any consumer whosuffers an ascertainable loss from any unlawful conduct.

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Significantly, the court concluded that a claim under the Actdoes not require direct contact between the violator and thevictim. There need only be a nexus between the unlawful conduct andthe loss. Consequently, the court did not evaluate the relationshipbetween the lender and homeowners because it focused instead on theconnection between the lender's unlawful conduct and the damagessuffered by the homeowners.

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The court reasoned that the flooding would not have occurred ifthe lender had disclosed the drainage issues to the board.According to the homeowners, if the board had been made aware ofthe drainage issues, it would not have issued the compliance letteror it would have required corrective measures prior toconstruction.

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The court's opinion continues an alarming trend of expanding thescope of the Act. Under the court's holding, a lender that acquiredan asset by foreclosure is now exposed to treble damages and legalfees from complete strangers. The lender did not have any contractor dealings with the homeowners. It did not even construct PhaseIII, which caused the water damage to Phase II. Nevertheless, thelender must now defend itself at trial because ofmisrepresentations allegedly made to the planning board in seekingan administrative approval to allow the property to beconstructed.

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The court's opinion is alarming for two reasons. First, itexposes all participants in a real estate transaction to potentialliability under the Act. Under the court's rationale, any activityintended to satisfy a contractual contingency could be consideredpart of the sale process. In Matera, the qualifying conductwas appearing before the planning board to secure a developmentapproval.

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Presumably, any conduct by a seller to satisfy a contractualcontingency could be considered part of the sale process. And anyassistance provided by a broker, attorney or engineer to satisfythe contingency could be subject to the Act and later expose thatprofessional to consumer fraud claims.

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Second, the court's opinion allows liability to be imposedwithout any contractual relationship or direct dealings between theplaintiff and defendant. Under the court's holding, a consumerfraud claim only requires a connection between the unlawful conductand the damages. There is precedent for this holding, sinceindirect suppliers of merchandise may be sued under the Act eventhough they have no direct contact with the consumer. However, thecourt's holding now extends this interpretation of the Act to thereal estate setting.

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The lesson to be learned from Matera is that allparticipants in a real estate transaction should considerthemselves potentially exposed to consumer fraud claims fromperipheral parties. Based upon the court's interpretation of theAct, they will be permitted to pursue a claim so long as they candemonstrate that they suffered damages from unlawful conduct underthe Act. Waivers and disclaimers in contracts and loan documentswill not protect against these types of claims. Consequently, theonly sure-fire way to avoid exposure under the Act is to acthonestly and openly at all stages of the transaction.

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Because Matera is a trial court opinion, it is notbinding precedent and it may even be appealed. However, the court'sreasoning undoubtedly will be adopted by other courts and theexpansion of liability under the Act will certainly continue.

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The views expressed here are those of the author and not ofGlobeSt.com.

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Craig W. Alexander is a partner in the law firmMandelbaum Salsburg Gold Lazris & Discenza, West Orange, NJ. Hecan be reached at [email protected].

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