Daily Blast June 25, 2014

The Court of Appeal, Fourth Appellate District, Division One (San Diego), issued an opinion in Peake v. Underwood (June 25, 2014, D061267) ___ Cal.App.4th ___, analyzing Code of Civil Procedure section 128.7, which provides a trial court with discretionary authority to impose sanctions when a party files a pleading that is factually or legally frivolous. (Slip opn., p. 2.) The trial court granted a motion for sanctions and dismissed the case, without a companion demurrer or summary judgment motion being filed. The Court of Appeal held that the trial court properly awarded sanctions because: (1) under well-settled law plaintiff’s substantive claims were clearly without merit, (2) plaintiff did not present any colorable legal or factual argument supporting an extension of existing law to establish liability in the case, (3) before and during the safe harbor period, the defendant set forth the specific factual and legal grounds supporting his position that the plaintiff’s claims were without merit, and (4) plaintiff engaged in conduct supporting the conclusion that he did not reasonably or honestly believe the claims had any merit. (Id. at pp. 27-28.)

The case arose out of plaintiff’s purchase of a home. (Slip opn., p. 1.) About two years later, plaintiff brought an action against the sellers and the sellers’ real estate agent for: (1) breach of statutory duties (Civ. Code, §§ 2079, 1102 et seq.); (2) intentional fraud; and (3) negligent concealment. (Id. at pp. 5, 9.) Plaintiff sought to recover damages for defendants’ alleged failure to disclose defective subfloors in the home. After the case had been pending for more than a year, the sellers’ real estate agent moved for terminating and monetary sanctions against plaintiff and her counsel under Code of Civil Procedure section 128.7. The real estate agent asserted that the plaintiff’s claims were factually and legally frivolous because the evidence showed the agent had fulfilled his statutory and common law disclosure duties. Further, plaintiff had actual notice of facts disclosing prior problems with the subfloors. The trial court dismissed plaintiff’s claims and ordered plaintiff and her attorney to pay the real estate agent $60,000 for his attorney fees incurred in defending the action. (Id. at pp. 1-2.)

The Court of Appeal affirmed. According to the court, “[a claim] is factually frivolous if it is ‘not well grounded in fact’ and it is legally frivolous if it is ‘not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.’ In either case, to obtain sanctions, the moving party must show the party’s conduct in asserting the claim was objectively unreasonable. A claim is objectively unreasonable if ‘any reasonable attorney would agree that [it] is totally and completely without merit.’ [Citation.]” (Slip opn., pp. 14-15.) Here, plaintiff’s claim was frivolous. (Id. at p. 3.) During escrow, the sellers’ agent provided plaintiff with photographs and reports disclosing problems with the residence’s subflooring, satisfying his legal obligations to the buyer. “Having provided this information, the agent—who served only as the sellers’ listing agent—did not owe the buyer any additional statutory or common law duties, and there was nothing in the agent’s communications that would have misled a reasonable buyer.” (Ibid., italics added.)

As to the statutory claims, the court held that “a seller’s real estate agent has a statutory duty to disclose only visible defects, i.e., to disclose only what a ‘reasonably competent and diligent visual inspection of the property’ would reveal. [Citations.]” (Slip opn., p. 17.) This duty does not “include or involve an inspection of areas that are reasonably and normally inaccessible to [such] an inspection.” (Id. at p. 19.) The alleged defective subfloors were not visible and would not have been apparent during a reasonable property inspection. Thus, the agent did not breach his statutory duties under Civil Code sections 2079 and 1102 et seq. (Id. at pp. 17-18.)

Further, as to the common law fraud claims, the court noted that “because a seller’s agent has no fiduciary relationship with a buyer, the courts have strictly limited the scope of an agent’s disclosure duties under a fraudulent concealment theory.” (Sip opn., p. 21.) “In the context of a real estate transaction, ‘it is now settled in California that where the seller knows of facts materially affecting 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, the seller is under a duty to disclose them to the buyer. [Citations.]’” (Ibid., italics in original.) However, “a seller’s agent has no affirmative duty to disclose latent defects unless the agent ‘also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer. [Citations.]” (Id. at p. 22, italics in original.)