When Suing a Seller: Buyer Beware

I often am contacted by purchasers of homes or other real property who want to sue the sellers for Fraud, Misrepresentation, or Failure to Disclose. Invariably, the buyer discovers a problem post-sale that they believe should have been disclosed by the seller. In California, these cases are difficult to win, as demonstrated by the recent case of RSB Vineyards, LLC v. Bernard A. Orsi, et al. (decided by the Court of Appeal of the State of California, First Appellate District, Division Three, September 29, 2017).

The Orsi Misrepresentation Case

In Orsi, sellers of a residence had renovated the building and offered it for sale as a wine tasting facility. Shortly after the purchase, RSB Vineyards discovered structural and other problems with the building that were not disclosed by defendants at the time of the sale. Plaintiff sued defendants for Misrepresentation, Intentional Concealment, Fraud and Deceit, and Negligence (the only claim missing from plaintiff’s complaint was “the kitchen sink”). Defendants moved for summary judgment, offering sworn testimony that they had no knowledge of the various deficiencies in the building. Plaintiff argued that although there was no evidence of actual knowledge, the deficiencies were so severe that defendants’ construction professionals should have been aware of them, and contended that this knowledge was imputed to defendants.

The trial court granted defendants’ summary judgment motion, ruling that although there was little doubt that the defendants were under a duty to disclose the deficiencies identified in the complaint (since the defects “affected the value or desirability of the property”), defendants did not have actual knowledge of the defects, and they could not be imputed with constructive knowledge from their architect or contractor based on a theory of agency. The appellate court upheld the trial court’s ruling and also upheld defendants’ $262,000 attorney’s fee award (Ouch!).

RSB Vineyard argued to the appellate court that the “sheer number and severity of the structural defects could well give rise to an inference that defendants knew that there were multiple defects with the property.” The court rejected plaintiff’s argument, holding that “to create an inference of actual knowledge, circumstantial evidence must suggest that the defendant must have known of the matters to be disclosed.” (Emphasis added).

This case is illustrative of what I have found in over 20 years of prosecuting these types of claims: Misrepresentation and Fraud cases involving real property transactions are very difficult to win because rarely is there direct evidence of actual knowledge by the seller. The exception to this rule is when there is evidence that a seller actively hid latent damage or defects. And even these cases are not bulletproof, as sellers often claim a third party performed the cover up without their knowledge or consent.

The Takeaway

The takeaway from the Orsi case and current Mispreresentation law in California may be distilled to the following:

  • Insist on complete and detailed disclosures in all real property transactions;
  • If the disclosure reveals any potential problem, it is better to explore and investigate pre-closing than to hope for the best;
  • These are very expensive cases to prosecute, as expert
    testimony from forensic experts and construction professionals is required,
    along with intrusive investigation. In
    defendants were also awarded over a quarter-million dollars in attorneys’ fees.

If you have a question regarding disclosures or a related issue involving a real estate transaction, do not hesitate to contact the Law Offices of Daniel Zimberoff by submitting a contact form on this page.

[1] 2017 WL 4325299 (Cal.App. 1 Dist.).