Carpenter v. Hamilton (1936) 18 Cal.App.2d 69

California Civil Code Section 2079.5 (“Buyers or Prospective Buyers; Duty of Reasonable Care”) provides:

“Nothing in this article relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect himself or herself, including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer.”  

Further, Section B of the California Association of Realtors (CAR) Buyer’s Inspection Advisory (“Buyer Rights and Duties”) explains: 

“You have an affirmative duty to exercise reasonable care to protect yourself, including discovery of the legal, practical and technical implication of disclosed facts, and the investigation and verification of information and facts that you know or that are within your diligent attention and observation.”

One case that perhaps best illustrates a buyer’s duty to exercise reasonable care is Carpenter v. Hamilton (1936) 18 Cal.App.2d 69.  Plaintiff Carpenter (Buyer) sued to recover damages for the alleged fraud inducing him to purchase a house.   Plaintiff claims he bought the property because he believed and relied upon Defendant Hamilton’s (Seller) disclosures that the house and garage were in good condition and not in need of paint and repairs; that the walls were in good condition; that the floors were level; and that the house and garage had new roofs.  However, Carpenter submitted evidence that the floors were not level; that the foundation sunk; that numerous cracks existed in the plaster on the walls; and that the roofs on the house and garage were old. 

Plaintiff (Buyer) had an opportunity to inspect the property before escrow closed and he took title—and he did, in fact, inspect the property.  The court ruled in favor of Defendant (Seller), explaining: “Having inspected the property to be purchased with ample time and opportunity to judge of its condition they (Buyers) must be charged with knowledge of what they learned and what they would have learned in the exercise of ordinary care and diligence.  They may not deny knowledge of facts which would have been known to them but for their negligence…If they neglected to discover what was in plain sight the law will nevertheless charge them with knowledge of what they should have discovered.”

In short—Buyers Beware.  Buyers must exercise reasonable care in conducting due diligence before removing contingencies and closing escrow.  Engaging a professional to conduct a thorough inspection is often effective, but Buyers should not blindly rely on an inspection report before closing escrow.

Pagano v. Krohn (1998) 64 Cal.App.4th 1534

Pagano v. Krohn discusses a Seller’s duties of disclosure in a residential real estate transaction and interprets Civil Code Section 1102, et seq. In general, a seller’s duty is to disclose any and all material facts that affect the value or desirability of the subject property.

In the Pagano case, plaintiff Pagano bought a condominium from defendant Krohn for $315,000. Although there was no evidence of water intrusion in her condominium unit, Krohn disclosed her knowledge of water intrusion problems in other units in the development and of a lawsuit filed by the Home Owners’ Association against the developer concerning water intrusion issues. The defendant seller prepared a real estate transfer disclosure statement representing she was unaware of any flooding, drainage, or grading problems. After moving in and while installing a sound system, Pagano discovered evidence of water intrusion under carpet and baseboards. Pagano (Buyer) sued Krohn (Seller) and real estate brokers involved in the transaction for breach of contract (the real estate purchase agreement), rescission (to unwind the transaction), fraud (intentional misrepresentation and concealment theories), negligent misrepresentation (that the seller should have known of water intrusion issues), and even negligent infliction of emotional distress.

The court affirmed summary judgment entered in Krohn’s favor. The court ruled that the past occurrence of efflorescence and algae on the exterior wall of the garage of Krohn’s unit, which Krohn remedied well over a year before the sale, was not a material fact Krohn was required to disclose. The court explained, “Disclosure of these additional facts would have served only as elaboration on the basic disclosed fact that there was a water intrusion problem in the development . . .” The court ruled that Pagano “was apprised of the essential facts concerning water intrusion. . .” The court also pointed out that Civil Code § 2079.5 provides: “Nothing in this article relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect himself or herself, including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer.”

In short—Sellers Beware. Despite this apparent “victory” for sellers in this case, sellers are wise to disclose all facts within their personal knowledge without making a subjective decision regarding whether such facts are material to a particular buyer.

Shapiro v. Sutherland (1998) 64 Cal.App.4th 1534

Shapiro v. Sutherland is the seminal case in California involving a Relocation Company’s duties in a residential real estate transaction. In general, a Relocation Company administers the benefits an Employer offers to a Transferring Employee. Often, those benefits include relieving the Transferring Employee of the burdens of selling his or her home and finding a new home in his or her new destination, so the Transferring Employee can get started at the new job as soon as possible.

In the Shapiro case, Prudential served as the relocation company for IBM’s transfer of Mr. Sutherland from California to Washington. Plaintiff Shapiro, who purchased the Sutherlands’ California home, sued the Sutherlands and Prudential for fraudulent misrepresentation and material non-disclosure of a nuisance, specifically, a noisy neighbor. Buyer demanded rescission—an equitable remedy requiring the “Seller” to purchase the home back from the “Buyer.” Prudential had purchased the subject property from the Sutherlands for $349,000 and then ultimately sold it to Shapiro for $250,000 approximately six months later.

Normally, a Relocation Company’s purchase and sale of a Transferring Employee Seller’s home to a Buyer are executed in a 2-step transaction involving 2 Grant Deeds (Deed 1: Transferring Employee Seller to Relocation Company; Deed 2: Relocation Company to Buyer). In essence, a Relocation Company acts as the conduit for the transfer of title, even though the Relocation Company technically is the contracting “Seller” to the ultimate “Buyer.”

Concerning Prudential’s duties as the Relocation Company “Seller,” the court ruled: As the Relocation Company who contracted with Buyer (Shapiro) to sell him the Subject Property formerly owned by the Transferring Employee Seller (Sutherland), (a)the Relocation Company (Prudential) had no duty to investigate the disclosures of the Transferring Employee Seller and/or of his real estate agent; and (b) the Relocation Company satisfied whatever burden it had under Civil Code § 1102, et seq. by (i) its expressed disclaimers and disclosures to Buyer (to which Plaintiffs did not object); and (ii) the Relocation Company’s receipt, review, and transmittal of the Transferring Employee Seller’s disclosure statements and the several other disclosures about errant golf balls to Buyer, the accuracy of which the Relocation Company had no reason to doubt. Shapiro v. Sutherland (1998) 64 Cal.App.4th 1534, 1546-1547.

The Shapiro Court, however, also ruled that the Relocation Company Seller is a necessary party to a Buyer’s Rescission claim. Specifically, a Relocation Company may be required to participate in a rescission remedy in some fashion the court deems “equitable,” “in the event Buyer can prove a case for rescission” against the Transferring Employee Seller. Id. at 1552-1553. As with all equitable remedies, the court has broad equitable powers to fashion a rescission remedy that is fair, and the court can adopt means to avoid a harsh result. Id. at 1551-1553.
In short—Relocation Company Sellers Beware.

Finch Law specializes in resolving business and real estate disputes for its diverse clients—empowering them to succeed in their legal endeavors.

Finch Law has substantial experience and success in handling all aspects of general business contract and tort claims, fraud and non-disclosure cases between brokers and agents and buyers and sellers of both commercial and residential real estate, landlord tenant disputes, interstate and intrastate moving, shipping, and storage claims, employment disputes, unfair competition, and trade secret litigation.   Finch Law represents national and local businesses and individuals across several industries—from Point A (pre-litigation mediations and contract negotiations, preparation, and analysis and ex parte applications for temporary restraining orders and preliminary injunctions) through Point Z (jury trials, bench trials, judgment enforcement, and appeals)—in federal and state courts throughout California and the Western United States.  Here is a list of a few examples of this success:

Brent M. Finch, Esq. is looking forward to continuing his service to the San Fernando Valley Bar Association with a high level of enthusiasm and commitment.  Mr. Finch will also continue serving as the co-chair of the Business Law, Real Property & Bankruptcy Section and the Litigation Section of the SFVBA

Finch Law is dedicated to working extensively with its clients to develop effective, innovative, and cost-efficient strategies to favorably resolve their real estate, business, and property disputes.  Finch Law’s mission is to empower its clients to succeed.

- Brent M. Finch, Esq.

“Success is peace of mind which is a direct result of self-satisfaction in knowing you did your best to become the best that you are capable of becoming.”

- John R. Wooden (Legendary UCLA Basketball Coach)