A new legal claim, like a piece of real estate, can at first blush have great “curb appeal.” But sometimes it doesn’t hold up on close inspection.
In just such a case — RSB Vineyards, LLC v. Orsi, 15 Cal.App.5th1089 (2017) — the purchaser of a vineyard was forced to demolish a structurally unsound wine tasting building on the property, one that had been extensively renovated before the closing by the sellers’ team of construction and design professionals. The sellers – who, under California law, were under a duty to disclose to the purchaser, prior to the closing, all facts known to them that materially affected the value or desirability of the property – made no mention of any problems with the wine tasting building. The disappointed purchaser wound up filing suit against the sellers for fraudulent non-disclosure.
But, however promising the case may have appeared to the purchaser/plaintiff, it never even made it to trial. The sellers obtained a summary judgment – which means that the court found that there was no triable issue of fact – as well as an order requiring that the purchaser/plaintiff pay the sellers’ attorney’s fees, which were in six-figures.
So how did this case end up as a cautionary tale? Because, even though it was beyond dispute that the wine tasting building was seriously defective, the purchaser/plaintiff was unable to present any evidence that, prior to the closing, the sellers knew or had constructive knowledge that the property was defective. Proving that a seller has knowledge of that sort is a crucial element in all California real estate fraud cases because, without it, intent to defraud cannot be established.
But wouldn’t the “sheer number and severity” of the structural defects give rise to an inference that the sellers in RSB Vineyards knew that “there were multiple defects with the Property?” (these quotes come from the text of the decision). The court answered this question in the negative, finding that the defects were technical matters that would not have been apparent to the sellers, who “were unskilled in construction or engineering.”
Even so, the purchaser presented evidence in opposition to the summary judgment motion demonstrating that the deficiencies in the wine tasting building were so severe that the sellers’ architect, engineer and contractor should have been aware of them. Shouldn’t the knowledge of those professionals be chargeable to the sellers on the ground that the former were agents of the latter? The court again answered in the negative, finding that, while the sellers’ architect, engineer and contractor had at times acted as the sellers’ agents, they weren’t serving in that capacity – i.e., they weren’t representing the sellers in dealings with third parties — while they were actually carrying out the planning and construction work on the wine tasting building, which is when they would have become aware of the defects; hence, according to the appellate court, their knowledge couldn’t be imputed to the sellers on a principal-agent basis.
So what’s the moral of the story? In any real estate fraud case, the focus on the plaintiff’s side must be on whether or not it can be demonstrated that a seller had actual or constructive, pre-closing knowledge of defects in the conveyed property, and on becoming thoroughly versed in case law that defines the circumstances under which the knowledge of third parties – like architects, engineers and contractors — can be imputed to sellers. If evidence that a seller has such actual or constructive pre-closing knowledge is not at hand at the outset of a case, then a decision must be made as to whether or not proceed with the case in hope of obtaining it through discovery by way of interrogatories, depositions and document requests. While a single communication to or from the sellers – or a bit of deposition testimony, such as – under the scenario presented by the RSB Vineyards case — a concession by the architect that the sellers had requested cost-cutting measures despite being told that they would create structural deficiencies in the wine tasting building — could establish the critical element of prior knowledge/intent to defraud, RSB Vineyards illustrates that launching a non-disclosure case can carry big risks.
The observations made in this comment also apply to the defense side in real estate fraud litigation. Defense counsel must always be thinking in terms of how to maneuver the case toward a summary judgment – when it looks like a plaintiff cannot prove a particular element of a claim — with a strong focus on whether the plaintiff can develop the evidence needed to tar the seller with pre-sale knowledge of an undisclosed property defect.