Volume 14,Issue 1
Nondisclosure of Defects in Property
The California Court of Appeal recently dealt with a case in which the buyers sued the sellers for fraud, claiming that the sellers had “constructive knowledge” of various defects rather than actual knowledge. Nondisclosure cases in California typically arise when the plaintiff alleges that the defendant knew of a de- fect in the property but failed to properly disclose it. In this case, the sellers claimed that they did not know of the defects. The issue in this case was whether the construction professionals employed by the sellers knew of certain defects and whether that knowledge can be imputed to the sellers.
Background
RSB Vineyards, LLC purchased a vineyard and building from the Orsi family in 2011. Following the pur- chase, the buyers discovered structural problems in the building that had not been disclosed by the sellers. Buyers sued the sellers for breach of contract, intentional mis- representation, fraud and negligence.
In the lawsuit, the defendants moved for summary judgment offering evidence that they had no knowledge of the various deficiencies in the build- ing. In opposition to the motion for summary judgment, RSB did not provide any evidence to suggest that the sellers had actual knowledge of the problems. Instead, they argued that the deficiencies were so severe that defendant’s construction professionals should have been aware of them and argued that this knowledge was imputed to defendants. The trial court granted summary judgment on the grounds that there was no evidence that the sellers had actual knowledge of the facts to be dis- closed. The Court of Appeals agreed and affirmed.
Fraud: Nondisclosure in Real Estate Sales
A cause of action for fraud based on nondisclosure (concealment) re- quires that a party prove that (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plain- tiff, (3) the defendant must have intentionally concealed or sup- pressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact the plaintiff must have sustained damage.
In real estate transactions, a seller has a duty to disclose where the seller knows of facts materially affect- ing the value or desirability of the property and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer.
Undisclosed facts are material if they would have a significant and measurable effect on market value.
Where a seller fails to disclose a material fact, he may be subject to liability for mere nondisclosure since his conduct in the transaction amounts to a representation of the nonexistence of the facts which he has failed to disclose
Actual Knowledge: What do you know?
In the RSB case, the main defects involved weak floor structures which were insufficient to support the load requirements for its intended use as a tasting room. The building also had inadequate roof support and other structural problems. So there was no dispute that these problems were “material” deficiencies that should have been disclosed. The issue was whether the sellers had actual or constructive knowledge of the deficiencies.
Plaintiff RSB did not provide any direct evidence of defendant’s knowledge, but this is not unusual. Actual knowledge, can, and often is, shown by inference from circumstantial evidence. However, circumstantial evidence does not mean speculation or conjecture. As the Court of Appeal stated, “Only where the circumstances are such that the defendant ‘must have known’ and not ‘should have known’ will an inference of actual knowledge be permitted.
The Court found that the evidence did not suggest that any of the defects would have been apparent to a non-professional. In fact, the seller’s expert did not discover many of the defects until it had undertaken demolition. The plaintiff’s expert concedes that the defects would have only been apparent to a professional who was familiar with structural engineering and commercial building code requirements. Even then, the expert only stated that a professional ‘should’ have known rather than ‘must’ have known.
Plaintiff argued that the “sheer number and severity” of the structural defects “could well give rise to an inference” that the sellers knew about the defects. The Court of Appeals rejected that argument, stat- ing that the standard is whether they ‘must’ have known in order to create an inference of actual knowledge.
Imputed Knowledge: What did your contractors know? The plaintiff argued that it was not required to demonstrate defendants’ actual knowledge of the defects – but instead just needed to show that the defendants’ construction professionals were defend- ants’ agents and therefore, their knowledge is imputed to defendants.
The Court of Appeals disagreed. The Court held that a principal is charged only with knowledge of an agent acquired while the agent was acting in that role and within the scope of his or her authority. The Court found that there was no evidence to suggest the construction professionals would have acquired information about the building while acting as defendants’ agents.
An agent is one who represents another in dealings with a third person, Civil Code Section 2295. Service providers such as construction professionals who simply furnish advice or a service but do not interact with third parties as the representative of the principal are not acting as agents. Even if the professionals had dealings with a third party (such as the architect dealing with local planning officials), the knowledge of any defects would have been acquired while renovating the structure, not while interacting with third persons. They were therefore not agents and any knowledge they may have gleaned while renovating the building is not imputed to the defendants.
The Case: RSB Vineyards, LLC v. Orsi (2017) 15 Cal.App.5th 1089
What Do We Do ? We Handle Real Estate Lawsuits
We all know a lawyer or two (or twenty). But we are not always clear on what type of lawyer they are. There are many lawyers who seem to do a little of this and a little of that. There are also many lawyers who specialize in are- as so arcane that our eyes glaze over when they begin describing their practice.
At Wagenseller Law Firm we specialize in real estate law- suits. Our mission has always been to “be the preeminent boutique real estate litigation law firm in Los Angeles.” In general if you are facing a legal dispute involving property or a partnership, let us know and we can help you.
What Does This Mean?
Real estate lawsuits can involve a number of issues involving property. The most common issues we handle are:
Partnership Lawsuits.
In the real estate context partnership can mean the members of a Limited Liability Company (LLC), partners and limited partners in a partnership or shareholders in a corporation. These lawsuits may involve breach of fiduciary duty, dissolution and accounting.
Co-Owner Lawsuits.
Some properties are held by tenants-in-common or joint tenants rather than some type of entity. Co-owner law- suits often involve partition where one of the owners asks the court to compel the sale or division of the property.
Family Lawsuits.
Over the years we have handled many family lawsuits— among siblings, between par- ents and children—over the ownership of real property. These lawsuits may involve claims of quiet title, fraud, resulting trust and partition.
Breach of Contract.
Most real estate transactions are contract based. We assist clients when there is a breach of the con- tract. Oftentimes this is when a party to a purchase and sale agreement refuses to close the deal or tries to cancel it.
Real Estate Fraud.
Fraud can involve any type of deception or concealment, usually in the purchase and sale of a property. One memorable lawsuit involved a seller of a retail shopping center who actually manufactured fake financials for the center to hide its poor economic performance. Non-disclosure of material defects in a property is also a common fraud case.
Neighbor Disputes.
Neighbor disputes usually involve a boundary dispute or disagreements over trees or fences. These will often involve what is called quiet title claims that ask the court to confirm ownership or prescriptive easement claims that seek access to a neighbor’s property.
Breach of Lease.
We assist commercial landlords and tenants in disputes.
A Message From Laine..
It is interesting – the more our practice expands, the narrower my goals seem to be. Or maybe it is the opposite – the narrower my goals seem to be, the more our practice expands.
Many of my goals haven’t changed much. My vision for Wagenseller Law Firm has always been to create the preeminent boutique real estate litigation law firm in Los Angeles.
I hope to do that by building relationships. One of my goals for the year is to have 100 lunches. That is a SMART goal – specific, measurable, time bound. I am also trying to stop spending so much time on email and start picking up the telephone.
The boys I mentor only use social media and texts. I often give them an assignment call me. Now I have to follow my own advice and pick up the phone to catch up with you. You can do your part by holding me accountable!
Blowing Up Your Life:
Big stands for greatness, extraordinary results. Pursue a big life and you’re pursuing the greatest life you can possibly live. To live great, you have to think big. You must be open to the possibility that your life and what you accomplish can become great. Achievement and abundance show up because they’re natural out- comes of doing the right things with no limits attached.
Don’t fear big. Fear mediocrity. Fear waste. Fear the lack of living to your fullest. When we fear big, we either consciously or subconsciously work against it. We either run toward lesser outcomes and opportunities or we simply run away from the big ones.
If courage isn’t the absence of fear, but moving past it, then thinking big isn’t the absence of doubts, but moving past them. Only living big will let you experience your true life and work potential.
Dr. Martin Seligman believes that there are five factors that contribute to our happiness: positive emotion and pleasure, achievement, relationships, engagement, and meaning. Of these, he believes engagement and meaning are the most important.
Purpose is the straightest path to power and the ultimate source of personal strength, strength of conviction and strength to persevere. – From The One Thing by Gary Keller
News and Happenings..
Laine joined the Lincoln Club on a private tour of the Reagan Library hosted by the Ronald Reagan Presidential Foundation and Institute. The Foundation arranged for a docent-led tour of the private residencies and library.
Have you met Kat?
Kat Kazemi is our new supervising attorney. Kat is an experienced trial attorney who joined Wagenseller Law Firm in February. Kat is a great addition to our team.
Laine also attended the LA5 Rotary Club event with Lew Horne, President of CBRE. Do you want to at- tend a Rotary event? Call Laine and he would be happy to have you as his guest. Rotary also hosted former Independent Counsel Kenneth Starr as a speaker.
Laine is preparing for his annual trip to Bringing Hope to the Family Orphanage in Uganda. This will be Laine’s 9th year working with teenage orphans and “building men.”
Duke University President Vincent Price came out to Los Angeles and Laine was pleased to attend an event in his honor. Laine was also back at Duke University in April.