Stambovsky v.

Ackley
casebriefsco.com/casebrief/stambovsky-v-ackle

169 A.D.2d 254, 572 N.Y.S.2d 672 (1991)

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Nature of the Case

Stambovsky (P) appealed the dismissal of his complaint that was seeking rescission of
contract for sale of a house that P later discovered had a reputation as being haunted.

Facts
Stambovsky (P) bought a house from Ackley (D). D knew the house was haunted, but did not
give this information to P. P then discovered that the house had a reputation for being
haunted. D had in fact perpetrated the rumor by having reported such occurrences to Reader’s
Digest and the local press in 1977 and 1982. The home was also included in a local walking
tour through Nyack. P wanted to have the contract rescinded, but the New York Supreme Court
dismissed his complaint; P had no remedy at law. P appealed.

Issues
Can a buyer rescind a contract for the sale of a house because the seller failed to tell him that
it was possessed by poltergeists? Will the doctrine of caveat emptor yield to equity when there
is no practical manner in which a buyer could discover material special information known only
by the seller?

Rule of Law
If a condition is created by the seller, known by the seller, is unlikely to be discovered by a
careful and prudent buyer, and impairs the value of the contract, the nondisclosure of this
condition represents a basis for rescission under equity. The doctrine of caveat emptor will
yield to equity when there is no practical manner in which a buyer could discover material
special information known only by the seller.

Holding and Decision

(Rubin, J.) Can a buyer rescind a contract for the sale of a house because the seller failed to
tell him that it was possessed by poltergeists? Yes. Will the doctrine of caveat emptor yield to
equity when there is no practical manner in which a buyer could discover material special
information known only by the seller? Yes. With respect to transactions in real estate, New
York adheres to the doctrine of caveat emptor and imposes no duty upon the vendor to
disclose any information concerning the premises unless there is a confidential or fiduciary
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relationship between the parties or some conduct on the part of the seller which constitutes
'active concealment.' Even so, caveat emptor is not so all-encompassing a doctrine of
common law as to render every act of nondisclosure immune from redress, whether legal or
equitable. The doctrine of caveat emptor requires that a buyer act prudently to assess the
fitness and value of his purchase and operates to bar the purchaser who fails to exercise due
care from seeking the equitable remedy of rescission. For a purchase of land, the obligation is
to conduct an inspection of the premises and a search of available public records with respect
to title. There is no sound policy reason to deny plaintiff relief for failing to discover a state of
affairs which the most prudent purchaser would not be expected to even contemplate. If a
condition is created by the seller, known by the seller, is unlikely to be discovered by a careful
and prudent buyer, and impairs the value of the contract, the nondisclosure of this condition
represents a basis for rescission under equity. D deliberately reported that his home was
haunted. Having undertaken to inform the public-at-large, to whom she has no legal
relationship, about the supernatural occurrences on her property, she may be said to owe no
less a duty to her contract vendee. D is estopped from denying their existence and as a matter
of law, the house is haunted. New York State follows the caveat emptor rule, that the buyer is
required to inspect the house for any defects. However, the buyer, who is a resident of New
York City, cannot be expected to have any familiarity with the folklore of Nyack. If the buyer
had inspected the house, he probably would not have discovered that it was haunted. Since D
knew about the problem, and P was not able to detect it, P will be allowed rescission of the
contract for sale. While the real estate broker, as agent for the seller, is under no duty to
disclose to a potential buyer the phantasmal reputation of the premises and that in his pursuit
of a legal remedy for fraudulent misrepresentation against the seller, P hasn’t a ghost of a
chance, we are moved by the spirit of equity to allow the buyer to seek rescission. We have no
remedy for damages incurred as a result of the seller’s mere silence, applying instead the
caveat emptor rule. Even under extraordinary facts as in this case, the basis for granting relief
if elusive if not ephemeral. However, caveat emptor is not so all encompassing a doctrine of
common law as to render every act of nondisclosure immune from redress. Where fairness
and common sense dictate that an exception should be created, the evolution of the law
should not be stifled by rigid application of the legal maxim. The doctrine only acts against
those who do not exercise their rights and who fail to take due care. Here there was no clue or
objective standard to apply to P on just how the ghosts were to be discovered. There is no
other remedy available for the buyer. Rescission must be allowed.

Dissent: (Smith, J.) If the doctrine of caveat emptor is to be discarded let it be for a reason
more substantive than a poltergeist. The parties herein were represented by counsel and dealt
at arm's length. There is no allegation that Ds, by some specific act, other than the failure to
speak, deceived P. Nevertheless, a cause of action may be sufficiently stated where there is a
confidential or fiduciary relationship creating a duty to disclose and there was a failure to
disclose a material fact, calculated to induce a false belief. P has not alleged and there is no

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basis for concluding that a confidential or fiduciary relationship existed between these parties
to an arm's length transaction such as to give rise to a duty to disclose. There is no allegation
that Ds thwarted P's efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor.

Legal Analysis
Full disclosure is the better law. Many of the more progressive states require full disclosure
when dealing with real property and they put a duty on the real estate broker to disclose if the
seller doesn’t. The judge in this case has a terrible and wicked sense of humor.

From Dean’s Law Dictionary: In an action for intentional misrepresentation the seller of real
estate, dealing at arm's length with the buyer, has no duty to disclose information to the buyer
and therefore has no liability in an action for intentional misrepresentation for failure to
disclose. Kamuchey v. Trzesniewski, 8 Wis.2d 94, 99, 98 N.W.2d 403 (1959); Southard v.
Occidental Life Ins. Co., 31 Wis.2d 351, 142 N.W.2d 844 (1966); Guyer v. Cities Service Oil Co.,
440 F. Supp. 630, 632 (E.D. Wis. 1977).

The traditional legal rule that there is no duty to disclose in an arms-length transaction is part
of the common law doctrine of caveat emptor which is traced to the attitude of rugged
individualism reflected in the business economy and the law of the 19th century. Friedman,
Contract Law in America 103 (1956); 12 Williston on Contracts, sec. 1497, p. 377 (Jaeger 3d
ed. 1970); Keeton, Fraud -- Concealments & Non-Disclosure, 15 Tex. L. Rev 1, 5, n. 13 (1936);
Hamilton, The Ancient Maxim Caveat Emptor, 40 Yale L.J. 1133 (1931); Kesseler & Fine, Culpa
in Contrahendo, Bargaining in Good Faith, & Freedom of Contract: A Comparative Study, 77
Harv. L. Rev. 401, 440 (1964); Sorrell v. Young, 6 Wash. App. 220, 491 P.2d 1312 (1971).

Under the doctrine of caveat emptor, no person was required to tell all that he or she knew in a
business transaction, for in a free market the diligent should not be deprived of the fruits of
superior skill and knowledge lawfully acquired. The business world, and the law reflecting
business mores and morals, required the parties to a transaction to use their faculties and
exercise ordinary business sense, and not to call on the law to stand in loco parentis to protect
them in their ordinary dealings with other business people.

'The picture in sales and in land deals is, in the beginning, that of a community whose trade is
simple and face to face and whose traders are neighbors. The goods and the land were there
to be seen during the negotiation and particularly in the case of land, everybody knew
everybody's land; if not, trade was an arm's length proposition with wits matched against skill.
Of course, caveat emptor would be the rule in such a society. But caveat emptor was more
than a rule of no liability; it was a philosophy that left each individual to his own devices with a
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minimum of public imposition of standards of fair practice. In the beginning the common law
did grant relief from fraud and did recognize that if the seller made an express promise as to
his product at the time of the sale he remained liable after the sale on this 'collateral' promise.
Indeed, covenants for title in the deed were such collateral promises which survived the sale.'
Dunham, Vendor's Obligation as to Fitness of Land for a Particular Purpose, 37 Minn. L.R. 108,
110 (1953).

But, modernly courts are moving away from the doctrine of caveat emptor in real estate
transactions. In Pines v. Perssion, 14 Wis.2d 590, 594, 595, 111 N.W.2d 409 (1961), the court,
while recognizing that a tenant is a purchaser of an estate in land and is subject to the doctrine
of caveat emptor, concluded that 'the frame of reference in which the old common-law rule
operated has changed.' The court held that the lease contained an implied warranty of
habitability. For a discussion that the doctrine of strict liability is applicable to
misrepresentation or that courts should extend it to the purchase of raw land from a vendor in
the real estate business the protection of implied warranty (here a warranty of fitness for a
particular purpose) that the law affords a purchaser of personal property, see Haskell, The
Case for an Implied Warranty of Quality in Sales of Real Property, 53 Georgetown L. J. 633
(1965); Note, The Doctrine of Caveat Emptor as Applied to Both the Leasing and Sale of Real
Property: The Need for Reappraisal and Reform, 2 Rutgers Camden L. J. 120 (1970); Dunham,
Vendor's Obligation as to Fitness of Land for a Particular Purpose, 37 Minn. L. Rev. 108, 118
(1953).

An analysis of the cases indicates that the presence of the following elements is significant to
persuade a court of the fairness and equity of imposing a duty on a vendor of real estate to
disclose known facts: the condition is 'latent' and not readily observable by the purchaser; the
purchaser acts upon the reasonable assumption that the condition does (or does not) exist;
the vendor has special knowledge or means of knowledge not available to the purchaser; and
the existence of the condition is material to the transaction, that is, it influences whether the
transaction is concluded at all or at the same price. Prosser, Law of Torts, 697 (1971); Berger &
Hirsch, Pennsylvania Tort Liability for Concealment & Nondisclosure in Business Transactions,
21 Temple L.Q. 368 (1948); Keeton, Fraud -- Concealment & Nondisclosure, 15 Tex. L. Rev. 1,
31-40 (1936); Keeton, Rights of Disappointed Purchasers, 32 Tex. L. Rev. 1, 2-7 (1953); 12
Williston Contracts, sec. 1498 (Jaeger 3d ed. 1970); Obde v. Schlemeyer, 56 Wash.2d 449, 353
P.2d 672 (1960); Sorrell v. Young, 6 Wash. App. 220, 491 P.2d 1312 (1971); Loghry v. Capel, 257
Iowa 285, 132 N.W.2d 417 (1965); Weintraub v. Krobatsch, 64 N.J. 445, 317 A.2d 68 (1974).

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