From: Modern Business Law, Third Edition, Dunfee et al. (McGraw-Hill)
Desperate Air Corporation (DAC) flies routes along the U.S. East Coast. DAC acquired a number of hotels and undeveloped properties five years ago as part of a short-lived diversification strategy. DAC has recently experienced substantial losses, has a negative cash flow, and bankruptcy looms as a possibility unless high labor costs can be reduced and consumer confidence restored.
Benton Williams has just been brought in as CEO to revitalize DAC. Williams began by cutting back on middle management positions and by placing a one-year moratorium on hiring MBAs. Middle managers terminated by DAC and other airlines have had a tough time finding equivalent jobs.
DAC owns a large underdeveloped ocean front property on the east coast of Florida. Williams directed George Nash, DAC's Vice President of Real Estate, to find a buyer for the property in order to generate badly needed cash. After some effort, Nash identified Fledgling industries, a relatively new developer of retirement villas as a good prospect. Fledgling is interested in finding a property on which it could build a complex of high rise retirement condos featuring elaborate walking trails and outside recreational facilities.
DAC had conducted a full environment audit of the property 6 months previously and had discovered no problems with the property. A copy of the report was given to the Fledgling representative who also walked over the property and discovered no problems. The representative asked "Anything I should know about?" Nash replied, "No problems."
As the negotiations progressed with Fledgling, a long time friend at the firm who told him that there was some highly toxic waste on the property approached Nash. The friend said that she learned about it through the rumor mill at the firm and that she had checked it out by going over the property, and after some difficulty, she discovered several buried metal containers which were marked "Danger! Biohazard. Radioactive medical waste." The containers were cracked and liquid contents had seeped out into the ground. She said she wanted Nash to know because she was concerned that innocent people could be hurt if the sale went through.
Nash contacted Williams, but before he could mention the containers to him, Williams interrupted and told him it was vital that the sale be closed and that it be done as soon as possible. Nash consulted with a DAC lawyer who told him that Florida law does not require the disclosure of hazardous substances on commercial property so long as there hasn't been a fraudulent misstatement about the condition of the property.
Nash was troubled about whether he should mention the hazardous materials to the Fledgling representative before he closed the sale. He knew that Fledgling was considering some other similar properties and Nash thought that if he mentioned the toxic spill problem that Fledgling would probably not go through with the sale. At the least, it could delay the sale for months while the spill was investigated and potential liability problems considered. Nash figured that he would be unlikely ever to deal with Fledgling again regarding future real estate sales, as DAC did not own any other properties that fit Fledgling's business.
The question of whether to close the sale immediately bothered Nash enough that he talked with his wife about it, and then prayed about what to do. After taking those steps, Nash decided that he should go ahead and close the sale.