Zillow ‘Zestimates’ Not Actionable Value Statements; Homeowner Plaintiffs’ Not Consumers Under IL Consumer Fraud Act – IL ND 2018

Decrying the defendants’ use of “suspect marketing gimmicks” that generate “confusion in the marketplace,” the class action plaintiffs’ allegations in Patel v. Zillow, Inc. didn’t go far enough to survive a Rule 12(b)(6) motion.

The Northern District of Illinois recently dismissed the real estate owning plaintiffs’ claims against the defendants, whose Zillow.com website is a popular online destination for property buyers, sellers, lenders and brokers.

The plaintiffs alleged Zillow violated Illinois’s deceptive trade practices and consumer fraud statutes by luring prospects to the site based on fabricated property valuation data, employing “bait and switch” sales tactics and false advertising and giving preferential treatment to brokers and lenders who pay advertising dollars to Zillow.

Plaintiffs took special aim at Zillow’s “Seller Boost” program – through which Zillow provides choice broker leads in exchange for ad dollars – and “Zestimate,” Zillow’s property valuation tool that is based on computer algorithms.

The Court first dismissed Plaintiffs’ Illinois Deceptive Trade Practices Act (IDTPA) claim (815 ILCS 510/1 et seq.). Plaintiffs alleged Zestimate was a “suspect marketing gimmick” designed to lure visitors to Zillow in an effort to increase ad revenue from real estate brokers and lenders, and perpetuated marketplace confusion and disparaged properties by refusing to take down Zestimates that were proven inaccurate. Plaintiffs also alleged Defendants advertise properties for sale they have no intention of actually selling.

The Court found that Zestimates are not false or misleading representations of fact likely to confuse consumers. They are simply estimates of a property’s market value. As Zillow’s disclaimer-laden site says, Zestimates are but “starting points” of a property’s value and no proxy for a professional appraisal. As a result, the Court found Zestimates were nonactionable opinions of value.
Plaintiffs’ allegation that Zestimate creates consumer confusion also fell short. An actionable IDTPA claim premised on likelihood of confusion means a defendant’s use of a given trade name, trademark or other distinctive symbol is likely to mislead consumers as to the source of an advertised product or service. Here, the plaintiffs’ allegations that Zestimate was falsely vaunted as a legitimate valuation tool did not assert confusion between Zillow’s and another’s products or services.

Plaintiffs’ “bait and switch” and commercial disparagement claims fared no better. A bait and switch claim asserts that at a seller advertised one product or service only to “switch” a customer to another, costlier one. A commercial disparagement claim, based on IDPTA Section 510/2(a)(8) prevents a defendant from denigrating the quality of a business’s goods and services through false or misleading statements of fact.

Since plaintiffs did not allege Zillow was enticing consumers with one product or service while later trying to hawk a more expensive item, the bait and switch IDTPA claim failed. The court dismissed the commercial disparagement claim since Zestimates are only opinions of value and not factual statements.

The Court next nixed Plaintiffs’ self-dealing claim: that Zillow secretly tried to enrich itself by funneling For Sale By Owner (FSBO) sellers to premier brokers. While Illinois does recognize that a real estate broker owes a duty of good faith when dealing with buyers, the Court noted that Zillow is not a real estate broker. As a result, Defendants owed plaintiffs no legal duty to abstain from self-dealing.

The glaring absence of likely future harm also doomed the plaintiffs’ IDTPA claim. (The likelihood of future consumer harm is an element of liability under the IDTPA.) The Court found that even if Plaintiffs were confused or misled by Zillow in the past, there was no risk of future confusion. In IDTPA consumer cases, once a plaintiff is aware of potentially deceptive marketing, he can simply refrain from purchasing the offending product or service.

Next, the court jettisoned plaintiffs’ consumer fraud claims which alleged Zestimates impeded homeowners efforts to sell their properties. A business (or another non-consumer) can still sue under ICFA where alleges a nexus between a defendant’s conduct and consumer harm. To meet this consumer nexus test, a corporate plaintiff must plead conduct involving trade practices addressed to the market generally or that otherwise implicates consumer protection concerns. If a non-consumer plaintiff cannot allege how defendant’s actions impact consumers other than the plaintiff, the ICFA claim fails.

The plaintiffs’ consumer fraud allegations missed the mark because plaintiffs were real estate sellers, not buyers. Moreover, the Court found that plaintiffs’ requested relief would not serve the interests of consumers since the claimed actual damages were unique to plaintiffs. The plaintiffs attempt to recover costs incidental to their inability to sell their homes, including mortgage payments, taxes, home owner association costs, utilities, and the like were not shared by the wider consumer marketplace. (For example, the Court noted that plaintiffs did not allege prospective consumer buyers will have to pay incidental out-of-pocket expenses related to Zillow’s Zestimate published values.)

Lastly, the Court dismissed plaintiffs’ deceptive practices portion of their ICFA claim. To state such a claim, the plaintiff must allege he suffered actual damages proximately caused by a defendant’s deception. But where a plaintiff isn’t actually deceived, it can’t allege a deceptive practice.

Here, in addition to falling short on the consumer nexus test, plaintiffs could not allege Zillow’s site content deceived them. This is because under Illinois fraud principles, a plaintiff who “knows the truth” can’t make out a valid ICFA deceptive practice claim. In their complaint, the plaintiffs’ plainly alleged they were aware of Zillow’s challenged tactics. Because of this, plaintiffs were unable to establish Zillow as the proximate cause of plaintiffs’ injury.

Afterwords:

Zillow provides a good primer on Federal court pleading standards in the post-Twombly era and gives a nice gloss on the requisite pleading elements required to state a viable cause of action for injunctive and monetary relief under Illinois’s deceptive practices and consumer fraud statutes.

Massive Wind Turbine Tower A Trade Fixture, Not Lienable Property Improvement – IL Second Dist.

AUI Construction Group, LLC v. Vaessen, 2016 IL App (2d) 160009 wrestles with whether a massive wind turbine tower that can be removed only by detonating several bombs at a cost of over half a million dollars qualifies as a lienable property improvement or is a non-lienable trade fixture under Illinois law.

The property owner and turbine seller signed an easement agreement for the seller to install a turbine on defendant’s land for an annual fee.  The easement provided the turbine would remain the seller’s property and that the seller must remove the structure on 90 days’ notice.  The seller also had to remove the turbine when the easement ended.  The turbine seller then contracted with a general contractor to install the turbine who, in turn, subcontracted out various aspects of the installation.

The owner-general contractor agreement and the downstream subcontracts referenced the easement and stated the turbine system remained the seller’s property.

When the plaintiff sub-subcontractor didn’t get paid, he sued its subcontractor, ultimately getting an arbitration award of over $3M.  When that proved uncollectable after the subcontractor’s bankruptcy, the plaintiff sued the property owner to foreclose a mechanics lien it previously recorded to recover the unpaid judgment.  The trial court dismissed the suit on the basis that the turbine was a removable trade fixture that was non-lienable as a matter of law.

Affirming, the Second District first noted that Illinois’ Mechanics Lien Act (770 ILCS 60/0.01 et seq.)(MLA) protects those who furnish material or labor for the improvement of real property.  The MLA allows a claimant to record a lien where its labor, materials or services improves the property’s value. In Illinois, real estate improvements are lienable; trade fixtures are not.

The factors considered in determining whether equipment is lienable includes (1) the nature of attachment to the realty, (2) the equipment’s adaptation to and necessity for the purpose to which the premises are devoted, and (3) whether it was intended that the item in question should be considered part of the realty.  Crane Erectors & Riggers, Inc. v. LaSalle National Bank, 125 Ill.App.3d 658 (1984).

Intent (factor (3)) is paramount.  Even where an item can be removed from land without injuring it, doesn’t mean the item isn’t lienable. So long as the parties manifest an intent to improve the realty, a removable item can still be lienable.  Moreover, parties are free to specify in their contract that title to equipment furnished to property will not pass to the land owner until its fully paid for.

Applying the three-factored fixture test, the court found the  nature of attachment, and necessity of the item for production of wind energy weighed in favor of finding the turbine lienable.   However, the all-important intent factor (factor number 3 above) suggested the opposite.

The easement agreement specified the turbine seller retained its ownership interest in the turbine and could (and had to) remove it at the easement’s end.  The court wrote: “the easement agreement establishes that the tower was a trade fixture.”  (¶ 20)

The Court also found that plaintiff’s “third party” rights were not impacted since plaintiff’s sub-subcontract specifically referenced the easement and prime contract – both of which stated the turbine would remain seller’s property. (¶ 23)

The Court examined additional factors to decide whether the turbine was lienable.  From a patchwork of Illinois cases through the decades, the Court looked at (1) whether the turbine provided a benefit or enhancement to the property, (2) whether the turbine was removable without material damage to the property, (3) whether it was impractical to remove the item, (4) whether the item (turbine) was used to convert the premises from one use to another, and (5) the agreement and relationship between the parties.

The sole factor tilting (no pun intended) in favor of lienability was factor 4 – that the turbine was essential to converting the defendant’s land from farmland to harnessing of wind energy.  All other factors pointed to the turbine being a nonlienable trade fixture.

The Court noted the property owner didn’t derive a benefit from the turbine other than an annual rent payment it received and rent is typically not lienable under the law.  The Court also pointed out that the tower could be removed albeit it through a laborious and expensive process.  Lastly, and most importantly, the parties’ intent was that the turbine was to remain seller’s personal property and for it not to be a permanent property improvement. (¶¶ 38-39)

The Court also rejected the subcontractor’s remaining arguments that (1) the Illinois Property Tax Code evinced a legislative intent to view wind turbines as lienable improvements and (2) it is unfair to disallow the plaintiff’s lien claim since it could not have a security interest in the turbine under Article 9 of the Uniform Commercial Code (UCC).

On the tax issue, the Court held that Illinois taxes turbines to ensure that wind turbines do not escape taxation and is purely a revenue-generating device.  Taxation of a structure is not a proxy for lienability. (¶¶ 43-44)

The Court agreed with that the subcontractor plaintiff did not have a security interest in the turbine under UCC Section 9-334 since, under that section, security interests do not attach to “ordinary building materials incorporated into an improvement on land.”  Since the turbine was replete with building materials (e.g. concrete, rebar, electrical conduit), the UCC didn’t give the plaintiff a remedy.  The Court allowed that this was a harsh result but the parties’ clear intent that the turbine remain the seller’s personal property trumped the policy arguments.

Afterwords:

This case strikes a blow to contractors who install large structures on real estate. Even something as immense as a multi-piece turbine system, which seemingly has a “death grip”- level attachment to land, can be nonlienable if that’s what the parties intended.

Another case lesson is for contractors to be extra diligent and insist on copies of all agreements referenced in their contracts to ensure their rights are protected in other agreements to which they’re not a party.

The case also portrays some creative lawyering.  The court’s discussion of the taxability of wind turbines, UCC Article 9 and the difference between a lease (which can be lienable) and an easement (which cannot) and how it impacts the lienability question makes for interesting reading.

 

Florida Series II: RE Broker Can Assert Ownership Interest in Retained Deposits in Priority Dispute with Condo Developer’s Lenders

Plaza Tower v. 300 South Duval Associates, LLC considers whether a real estate broker or a lender has “first dibs” on earnest money deposits held by a property developer.  After nearly 80% of planned condominium units failed to close (no doubt a casualty of the 2008 crash), the developer was left holding $2.4M of nonrefundable earnest money deposits.  The exclusive listing agreement (“Listing Agreement”) between the developer and the broker plaintiff provided the broker was entitled to 1/3 of retained deposits in the event the units failed to close.

After the developer transferred the deposits to the lender, the broker sued the lender (but not the developer for some reason) asserting claims for conversion and unjust enrichment.

The trial court granted the lenders’ summary judgment motion.  It found that the lenders had a prior security interest in the retained deposits and the broker was at most, a general unsecured creditor of the developer.  The broker appealed.

The issue on appeal was whether the broker could assert an ownership interest in the retained deposits such that it could state a conversion claim against the lenders.

The Court’s key holding was that the developer’s retained deposits comprised an identifiable fund that could underlie a conversion claim.  Two contract sections combined to inform the Court’s ruling.

One contract section provided that the broker’s commission would be “equal to one-third of the amount of the retained deposits.”  The Court viewed this as too non-specific since it didn’t earmark a particular fund.

But another contract section did identify a particular fund; it stated that commission advances to the broker would be offset against commissions paid from the retained deposits.  As a result, the retained deposits were particular enough to sustain a conversion action.  Summary judgment for the developer reversed.

Afterwords: Where a contract provides that a nonbreaching party has rights in a specific, identifiable fund, that party can assert ownership rights to the fund.  Absent a particular fund and resulting ownership rights in them, a plaintiff’s conversion claim for theft or dissipation of the fund will fail.