LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Los Angeles Appellate Attorney
LIABILITY UPDATE
March 14, 2008
In Michel v. Moore & Associates, Inc. 2007 Daily Journal D.A.R 16495, the Second Appellate District of the California Court of Appeal held that a real estate broker may be liable to a buyer on a theory of negligent nondisclosure.
Mike Kirkpatrick was a real estate agent working for defendant Larry Moore & Associates Realtors, Inc. (Moore), a licensed real estate broker. Sometime around the beginning of 2000, he inspected a home in Rolling Hills Estates owned by a friend’s parents. Hoping to become the listing agent if the parents decided to sell their house, he took notes of the property’s defects, including possible water leaks, cracked interior walls, and damage to the pool. If he won the listing, he planned to use his notes to identify needed repairs and possible disclosure to potential buyers.
About six months later in June 2000, the house was on the market. Kirkpatrick, who had not received the sellers’ listing, showed the house to plaintiffs Carl and Sydne Michel, who were represented by agent Nicola Lagudis (Lagudis), a colleague of Kirkpatrick also working for Moore. During the home tour, Kirkpatrick did not point out any of the defects from his notes. Plaintiffs submitted an offer to buy the house. Plaintiffs and the sellers shortly thereafter agreed on the terms of sale and entered escrow. At the end of July, plaintiffs’ agent Lagudis visually inspected the property and gave plaintiffs her obligatory transfer disclosure statement (“TDS”). The TDS noted that cracks had been patched and painted. The TDS did not, however, disclose some of the defects listed in Kirkpatrick’s notes. Although mindful of his notes as he reviewed the TDS, he did not tell Lagudis about them, nor did he augment her TDS with anything from those notes. The Michels thus never knew the contents of Kirkpatrick’s notes before escrow closed.
Plaintiffs started remodeling their backyard and pool. To do so, they needed a permit, which required a soil engineer to inspect their property. The engineer discovered poor top soil and fill had caused significant instability and ground movement on the property. Upset by the engineer’s report, the Michels met with Kirkpatrick in January 2001. They told him about the soil instability and cracks in the walls, which would likely cost about half a million dollars to fix. Kirkpatrick replied he had seen during his inspection before the house was put on the market cracks big enough to slip a coin into. Hearing about his notes for the first time, the Michels asked for a copy, which Kirkpatrick gave them.
In September 2002, the Michels sued Moore. They alleged causes of action for violation of Civil Code section 2079 for Moore’s failure to competently inspect the property. They also alleged a cause of action for fraudulent concealment for the failure of Lagudis’s TDS to disclose defects known by Moore. And, finally, they alleged a cause of action for negligent nondisclosure in Moore’s not telling the Michels about problems Moore knew about the property.
The case went to trial. Before the Michels’ opening statement, Moore moved for a judgment of nonsuit on the Michels’ cause of action for negligent nondisclosure. Moore argued California law required that Moore’s negligence involve an affirmative assertion, but negligence in failing to disclose a fact was not actionable. The court granted Moore’s motion. Trial proceeded only on the Michels’ causes of action for violation of Civil Code section 2079 (section 2079) and fraudulent concealment. The jury returned a verdict for Moore on both causes of action. Rejecting the claim under section 2079, the jury found Moore did not fail to conduct a reasonably competent and diligent visual inspection of the property, and did not fail to disclose to the Michels any material fact about the property that an investigation would reveal. Similarly rejecting the claim for fraudulent concealment, the jury found Moore did not conceal or suppress any material fact from the Michels. The court entered judgment for Moore. This appeal from the grant of nonsuit followed, and the Court of Appeal reversed.
The court found that the court’s dismissal of the Michels’ cause of action for negligent nondisclosure was error because that cause of action involved elements different from the Michels’ section 2079 and fraudulent concealment causes of action. (Karoutas v. HomeFed Bank (1991) 232 Cal.App.3d 767, 771 [recognizing negligent nondisclosure where bank did not disclose soil instability to buyer purchasing property after bank foreclosed on the property].) “For those latter two causes of action submitted to the jury, Lagudis may very well have been competent in her visual inspection of the property in preparing her TDS for the Michels AND Kirkpatrick may very well have had no fraudulent intent in not telling the Michels about his inspection and notes before escrow closed—circumstances justifying the jury’s verdict for Moore on the section 2079 and fraud causes of action—but that does not mean Moore did not injure the Michels by not telling them before they bought their house about Kirkpatrick’s notes.”
The court observed that a broker has a fiduciary duty to its client. (Civ. Code, § 2079.24; Field v. Century 21 Klowden-Forness Realty, supra, 63 Cal.App.4th at p. 25 [“a broker’s fiduciary duty to his client requires the highest good faith and undivided service and loyalty”].) The fiduciary duty is greater than the negligence standard of due care under section 2079. (Section 2079.2 [standard of care is of a “reasonably prudent real estate licensee”].) “Thus a broker can be professionally competent under section 2079 without satisfying the greater duty of a trusted fiduciary. As Field, supra, explained, ‘the fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in section 2079.’ ”
A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests. (L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corp. (1991) 1 Cal.App.4th 300, 304; 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 794, p. 1149; 2 Miller & Starr, Cal. Real Estate (3d ed.2000), §§ 3.25, p. 120, 3:27, p. 149, 4:17, p. 41.) A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent. (Civ. Code, § 1573.)
[Plaintiffs’] negligent nondisclosure/constructive fraud theory relieved them of the burden of needing to prove [defendant] intended to defraud them, a much easier row to hoe than proving actual intent to defraud for fraudulent concealment.
Defendant Moore argued that no difference existed between the Michels’ causes of action for negligent nondisclosure and violation of section 2079 because the statute codifies a claim for common law negligence. “Hence, [defendant] concludes, the jury’s rejection of the Michels’ cause of action for violation of section 2079 necessarily decided in [defendant’s] favor the question of [defendant’s] common law negligence. . . . [However, defendant’s] conclusion does not follow because it rests on a flawed premise. Section 2079 codifies a negligence standard of care for one particular task that the law imposes on brokers—the obligation (by a seller’s agent) to visually inspect the property and disclose the results of that inspection to the buyer. [Plaintiffs’] cause of action for negligent nondisclosure rests, in contrast, on Moore’s fiduciary duty to disclose material information within its possession. It was immaterial how the fiduciary obtained the information; it has a duty to disclose the information to its principal. [Plaintiffs’] two causes of action were not the same: As Field, supra, 63 Cal.App.4th 18, observed, ‘the fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in section 2079.’ ”
----Andrea Lynn Rice
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Los Angeles Appellate Attorney
LIABILITY UPDATE
March 14, 2008
In Michel v. Moore & Associates, Inc. 2007 Daily Journal D.A.R 16495, the Second Appellate District of the California Court of Appeal held that a real estate broker may be liable to a buyer on a theory of negligent nondisclosure.
Mike Kirkpatrick was a real estate agent working for defendant Larry Moore & Associates Realtors, Inc. (Moore), a licensed real estate broker. Sometime around the beginning of 2000, he inspected a home in Rolling Hills Estates owned by a friend’s parents. Hoping to become the listing agent if the parents decided to sell their house, he took notes of the property’s defects, including possible water leaks, cracked interior walls, and damage to the pool. If he won the listing, he planned to use his notes to identify needed repairs and possible disclosure to potential buyers.
About six months later in June 2000, the house was on the market. Kirkpatrick, who had not received the sellers’ listing, showed the house to plaintiffs Carl and Sydne Michel, who were represented by agent Nicola Lagudis (Lagudis), a colleague of Kirkpatrick also working for Moore. During the home tour, Kirkpatrick did not point out any of the defects from his notes. Plaintiffs submitted an offer to buy the house. Plaintiffs and the sellers shortly thereafter agreed on the terms of sale and entered escrow. At the end of July, plaintiffs’ agent Lagudis visually inspected the property and gave plaintiffs her obligatory transfer disclosure statement (“TDS”). The TDS noted that cracks had been patched and painted. The TDS did not, however, disclose some of the defects listed in Kirkpatrick’s notes. Although mindful of his notes as he reviewed the TDS, he did not tell Lagudis about them, nor did he augment her TDS with anything from those notes. The Michels thus never knew the contents of Kirkpatrick’s notes before escrow closed.
Plaintiffs started remodeling their backyard and pool. To do so, they needed a permit, which required a soil engineer to inspect their property. The engineer discovered poor top soil and fill had caused significant instability and ground movement on the property. Upset by the engineer’s report, the Michels met with Kirkpatrick in January 2001. They told him about the soil instability and cracks in the walls, which would likely cost about half a million dollars to fix. Kirkpatrick replied he had seen during his inspection before the house was put on the market cracks big enough to slip a coin into. Hearing about his notes for the first time, the Michels asked for a copy, which Kirkpatrick gave them.
In September 2002, the Michels sued Moore. They alleged causes of action for violation of Civil Code section 2079 for Moore’s failure to competently inspect the property. They also alleged a cause of action for fraudulent concealment for the failure of Lagudis’s TDS to disclose defects known by Moore. And, finally, they alleged a cause of action for negligent nondisclosure in Moore’s not telling the Michels about problems Moore knew about the property.
The case went to trial. Before the Michels’ opening statement, Moore moved for a judgment of nonsuit on the Michels’ cause of action for negligent nondisclosure. Moore argued California law required that Moore’s negligence involve an affirmative assertion, but negligence in failing to disclose a fact was not actionable. The court granted Moore’s motion. Trial proceeded only on the Michels’ causes of action for violation of Civil Code section 2079 (section 2079) and fraudulent concealment. The jury returned a verdict for Moore on both causes of action. Rejecting the claim under section 2079, the jury found Moore did not fail to conduct a reasonably competent and diligent visual inspection of the property, and did not fail to disclose to the Michels any material fact about the property that an investigation would reveal. Similarly rejecting the claim for fraudulent concealment, the jury found Moore did not conceal or suppress any material fact from the Michels. The court entered judgment for Moore. This appeal from the grant of nonsuit followed, and the Court of Appeal reversed.
The court found that the court’s dismissal of the Michels’ cause of action for negligent nondisclosure was error because that cause of action involved elements different from the Michels’ section 2079 and fraudulent concealment causes of action. (Karoutas v. HomeFed Bank (1991) 232 Cal.App.3d 767, 771 [recognizing negligent nondisclosure where bank did not disclose soil instability to buyer purchasing property after bank foreclosed on the property].) “For those latter two causes of action submitted to the jury, Lagudis may very well have been competent in her visual inspection of the property in preparing her TDS for the Michels AND Kirkpatrick may very well have had no fraudulent intent in not telling the Michels about his inspection and notes before escrow closed—circumstances justifying the jury’s verdict for Moore on the section 2079 and fraud causes of action—but that does not mean Moore did not injure the Michels by not telling them before they bought their house about Kirkpatrick’s notes.”
The court observed that a broker has a fiduciary duty to its client. (Civ. Code, § 2079.24; Field v. Century 21 Klowden-Forness Realty, supra, 63 Cal.App.4th at p. 25 [“a broker’s fiduciary duty to his client requires the highest good faith and undivided service and loyalty”].) The fiduciary duty is greater than the negligence standard of due care under section 2079. (Section 2079.2 [standard of care is of a “reasonably prudent real estate licensee”].) “Thus a broker can be professionally competent under section 2079 without satisfying the greater duty of a trusted fiduciary. As Field, supra, explained, ‘the fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in section 2079.’ ”
A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests. (L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corp. (1991) 1 Cal.App.4th 300, 304; 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 794, p. 1149; 2 Miller & Starr, Cal. Real Estate (3d ed.2000), §§ 3.25, p. 120, 3:27, p. 149, 4:17, p. 41.) A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent. (Civ. Code, § 1573.)
[Plaintiffs’] negligent nondisclosure/constructive fraud theory relieved them of the burden of needing to prove [defendant] intended to defraud them, a much easier row to hoe than proving actual intent to defraud for fraudulent concealment.
Defendant Moore argued that no difference existed between the Michels’ causes of action for negligent nondisclosure and violation of section 2079 because the statute codifies a claim for common law negligence. “Hence, [defendant] concludes, the jury’s rejection of the Michels’ cause of action for violation of section 2079 necessarily decided in [defendant’s] favor the question of [defendant’s] common law negligence. . . . [However, defendant’s] conclusion does not follow because it rests on a flawed premise. Section 2079 codifies a negligence standard of care for one particular task that the law imposes on brokers—the obligation (by a seller’s agent) to visually inspect the property and disclose the results of that inspection to the buyer. [Plaintiffs’] cause of action for negligent nondisclosure rests, in contrast, on Moore’s fiduciary duty to disclose material information within its possession. It was immaterial how the fiduciary obtained the information; it has a duty to disclose the information to its principal. [Plaintiffs’] two causes of action were not the same: As Field, supra, 63 Cal.App.4th 18, observed, ‘the fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in section 2079.’ ”
----Andrea Lynn Rice
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