In the case Johnson v. Baum, Eric Johnson bought a home from David and Norma Baum in Des Moines, Iowa. The terms of the purchase contract provided that Baum had the duty to disclose any material defects in the property about which they knew or should have known, to Johnson.
The contract went on to say that if Baum breached this duty to disclose and Johnson prevailed in a lawsuit, Baum would be liable for Johnson’s "reasonable attorney fees."
As part of the transaction, Baum provided Johnson with a form "Seller Disclosure of Property Condition and Lead-Based Paint Disclosure" that expressly stated it was intended to satisfy Baum’s duty to disclose defects to Johnson under Iowa law.
After the transaction closed, Johnson had problems with water in the basement of the home, and filed suit against Baum, alleging that Baum had breached both Iowa law requiring disclosure of material defects, and the contractual provision mandating disclosure.
After a trial, the jury found that Baum had not breached the contract, but had breached the Iowa seller disclosure statute, and awarded Johnson $12,000 in damages.
Johnson filed a motion for nearly $40,000 in attorney fees. The sellers argued against an attorney fee award, on grounds that the statute the jury had found the sellers to violate did not authorize an award of attorney fees.
The contract, which did have an attorney fee provision, was found not to have been violated, argued the sellers. Johnson claimed that the contract incorporated the disclosure statement, which the sellers refuted.
The trial court ruled in Johnson’s favor, finding that the disclosure statement and, thus, the statute’s attorney fee clause, was incorporated into the purchase agreement, entitling Johnson to an attorney fee award — though the trial court approved an award of only half the requested fees.
Baum, the seller, appealed the attorney fee award. The Iowa Court of Appeals upheld the trial court’s decision.
The court explained that the purchase agreement expressly stated that "Sellers and buyers acknowledge that sellers of real property have a legal duty to disclose material defects of which sellers have actual knowledge and which a reasonable inspection by buyers would not reveal."
Johnson argued — and both the trial and appellate courts agreed — that the "legal duty" referred to in the contract was the same statutory duty to disclose material defects that the jury ultimately found Baum had breached — the same statute that was expressly referenced in the faulty form disclosure Baum had provided to Johnson during the transaction.
When that the contract expressly incorporated the breached statute, Baum in effect agreed to pay Johnson’s attorney fees in the event Baum breached not only the contract, but also the statute. Because the jury found Baum to have breached the statute, Baum was liable to Johnson for the attorney fees that the trial court had awarded. The Iowa Court of Appeals affirmed the lower court’s ruling.
