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The Falsity of a Statement is No Defense

January 13, 2022

California

,

United States of America

Issue

Is a real property purchaser's failure to discover a concealed fact a valid defense to a fraudulent concealment claim?

Conclusion

Negligence on the part of a plaintiff in failing to discover the falsity of a statement is no defense when the defendant's misrepresentation was intentional. (Smith v. Williams)

However, if the conduct of the plaintiff in light of their own intelligence and information was manifestly unreasonable, they will be denied recovery. (Furla v. Jon Douglas Co., Seeger v. Odell)

The fact that an investigation would have revealed the falsity of the misrepresentation will not alone bar the plaintiff's recovery. (Furla v. Jon Douglas Co., Seeger v. Odell)

The purchaser can rely on the seller's representations even where they hire an expert to inspect the property and the expert does not discover the defects. (Franklin Reinforcing Steel Co. v. Kruss)

Law

Per the California Supreme Court in Smith v. Williams, 12 Cal.Rptr. 665, 55 Cal.2d 617, 361 P.2d 241 (Cal. 1961), negligence on the part of a plaintiff in failing to discover the falsity of a statement is no defense when the defendant's misrepresentation was intentional (at 620):

Defendant's first contention that the statement of this cause of action is defective for failure to allege facts establishing that plaintiff was justified in relying

Page 667

[361 P.2d 243] on defendant's misrepresentation is without merit. Even negligence on the part of plaintiff in failing to discover the falsity of a statement is no defense when the misrepresentation was intentional, as alleged here, rather than negligent. (Seeger v. Odell (1941), 18 Cal.2d 409, 414(7a, 8), 115 P.2d 977, 136 A.L.R. 1291; Sullivan v. Dunnigan (1959), 171 Cal.App.2d 662, 668(7), 341 P.2d 404; see also Rogers v. Warden (1942), 20 Cal.2d 286, 288-289(1), 125 P.2d 7.)

In Seeger v. Odell, 18 Cal. 2d 409, 115 P.2d 977, 1941 Cal. LEXIS 377, 136 A.L.R. 1291 (Cal. August 12, 1941), the California Supreme Court further elaborated that the fact that an investigation would have revealed the falsity of the misrepresentation will not alone bar the plaintiff's recovery. However, if the conduct of the plaintiff in light of their own intelligence and information was manifestly unreasonable, they will be denied recovery (at 414-415):

(3) It is well established in California and other jurisdictions that a person who has been induced by fraudulent misrepresentations to enter into a contract or to make a conveyance may have the contract or conveyance set aside and secure a restitution of those benefits lost to him by the transaction. (Cal. Civ. Code, sec. 1689 (1); see cases cited in 12 Cal. Jur. 781, 782; 6 Cal. Jur. Supp. 54; Cal. Annotations to Rest. Restitution, sec. 28. See Rest. Restitution, sec. 28.) (4) A fraudulent misrepresentation is one made with the knowledge that it is or may be untrue, and with the intention that the person to whom it is made act in reliance thereon. (Rest. Torts, secs. 526, 531; Cal. Civ. Code, secs. 1572, 1710; see cases cited in 12 Cal. Jur. 706-709. (5) It must appear, however, not only that the plaintiff acted in reliance on the misrepresentation but that he was justified in his reliance. [***6] (Rest. Torts, sec. 537; see cases cited in 12 Cal. Jur. 750 et seq.) (6) He may not justifiably rely upon mere statements of opinion, including legal conclusions drawn from a true state of facts (Rest. Torts, sec. 545; see cases cited in 12 Cal. Jur. 730-733, unless the person expressing the opinion purports to have expert knowledge concerning the matter or occupies a position of confidence and trust. (Rest. Torts, sec. 542; see cases cited in 12 Cal. Jur. 725 et seq.) If, however, the opinion or legal conclusion misrepresents the facts upon which it is based or implies the existence of facts which are nonexistent, it constitutes an actionable misrepresentation. (Rest. Torts, sec. 539; see cases cited in 12 Cal. Jur. 727, 728.) (7a) Negligence on the part of the plaintiff in failing to discover the falsity of a statement is no defense when the misrepresentation was intentional rather than negligent. (See cases cited in 12 Cal. Jur. 758, 759; Prosser, Torts, 748.) (8) As a general rule negligence of the plaintiff is no defense to an intentional tort. (See Prosser, Torts, 402.) (7b) (9) The fact that an investigation would have revealed the falsity of the misrepresentation will [*415] not alone [***7] bar his recovery (Rest. Torts, sec. 540; see cases cited in 12 Cal. Jur. 758, 759), and it is well established that he is not held to constructive notice of a public record which would reveal the true facts. (Rest. Torts, sec. 540 (b); see cases cited in 12 Cal. Jur. 759, 764; Prosser, Torts, 750, 751.) The purpose of the recording acts is to afford protection not to those who make fraudulent misrepresentations but to bona fide purchasers for value. CA(10) (10) Nor is a plaintiff held to the standard of precaution or of minimum knowledge of a hypothetical, [**981] reasonable man. Exceptionally gullible or ignorant people have been permitted to recover from defendants who took advantage of them in circumstances where persons of normal intelligence would not have been misled. (See cases cited in 6 Cal. Jur. Supp. 45 (note 13); Prosser, Torts, 749.) "No rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool." (Chamberlin v. Fuller, 59 Vt. 247 [9 Atl. 832, 835].) If the conduct of the plaintiff in the light of his own intelligence and information was manifestly unreasonable, however, he will be denied a recovery. (Rest. Torts, sec. [***8] 541; see cases cited in 12 Cal. Jur. 757; Prosser, Torts, 747, 748.) "He may not put faith in representations which are preposterous, or which are shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth. . . ." (Prosser, Torts, 749.)

In Furla v. Jon Douglas Co., 76 Cal.Rptr.2d 911, 65 Cal.App.4th 1069 (Cal. App. 1998), the California Court of Appeal for the Second District repeated that while purchasers of real property are not relieved of the duty to act with reasonable care to protect themselves, they are entitled to rely upon a seller's representations and are not required to hire an expert to discover the falsity of the seller's representations. The plaintiff is not required to hire an expert even if the truth could have been discovered by an expert (at 1079):

[65 Cal.App.4th 1079] Ordinarily a buyer is entitled to rely upon a seller's representations concerning the area of the property being sold, and is not required to hire an expert to discover the falsity of the seller's representations. (Richard v. Baker (1956) 141 Cal.App.2d 857, 861-862, 297 P.2d 674; Piazzini v. Jessup (1957) 153 Cal.App.2d 58, 61; , 314 P.2d 196 1 Miller & Starr, supra, § 1:118, p. 400.) On the other hand, a buyer is not relieved of "the duty to exercise reasonable care to protect himself or herself, including those facts [sic] which are known to or within the diligent attention and observation of the buyer" (Civ.Code, § 2079.5); and a buyer is held to be aware of obvious and patent conditions. (Tarrant v. Butler (1960) 180 Cal.App.2d 235, 240, 241-242, 4 Cal.Rptr. 230 [buyer was not required to hire an expert to determine if the builder "used a 2" X 4" (when he) should have used a 2" X 6"," but was on notice from

Page 917

glaring oddities that the building could not be in compliance with code]; 1 Miller & Starr, supra, § 1:118, p. 388.)

Whether the buyer unreasonably failed to protect himself and unjustifiably failed to discover true conditions depends upon all the circumstances. (1 Miller & Starr, supra, § 1:118, p. 389.) This presents an issue of fact for the trier of fact. A jury might reasonably conclude that plaintiff was justified in relying on defendant's representation of the square footage, that the truth was not obvious and patent to plaintiff and could be determined only by an expert measurement which plaintiff was not required to hire in order to discover defendants' misrepresentations.

In the recent unpublished decision of Goodfield v. Frahm, G059551 (Cal. App. 2021), the plaintiffs were the purchasers of a residential property who alleged that the defendant sellers had failed to disclose material defects in the pool on the property. The buyer's agent visually inspected the property in accordance with state law and noted that there were cracks in the pool. The seller's agent also performed a visual inspection of the property. The only mention of the pool in the report of the seller's agent was a recommendation for the buyer to satisfy themselves as to all plumbing and repairs and to have the grounds inspected by a geotechnical engineer. In the Seller Property Questionnaire, the sellers also indicated that the cracks in the pool had been repaired five years prior. The buyers followed up with some questions to the sellers about the pool cracks and the sellers provided the name of the contractor who filled the cracks along with some invoices. The buyers asked the company who performed the repairs for copies of relevant documents but the company advised it did not have any information. The buyers did not ask the sellers for the documents. After escrow closed, the buyers learned that the pool had been repaired many more times than previously disclosed and that the pool was unfixable and had to be replaced. There were several structural issues with the pool other than the cracks that were not visible. The buyers sued the sellers, alleging intentional misrepresentation, concealment, negligent misrepresentation, and other contract-based claims. The sellers moved for summary judgment, arguing that they did not fail to disclose any material fact. The buyers opposed the motion and argued that there were multiple triable issues of material fact concerning whether the sellers had satisfied their disclosure obligations. The trial court granted summary judgment, concluding that any additional information about past pool repairs would have been a mere elaboration of details concerning the disclosures made by the sellers. The buyers appealed. In response, the sellers argued that the undisclosed conditions of the pool were within the buyers' diligent attention because they could have discovered the conditions by retaining experts to inspect the property, which had been recommended multiple times during escrow. The California Court of Appeal for the Fourth District disagreed and granted the appeal, finding that there were triable issues of material fact concerning whether the sellers satisfied their disclosure obligations. The Court noted that buyers are entitled to rely upon a seller's representations and are not required to hire an expert to discover the falsity of a seller's representations:

Sellers go one step further, arguing the true condition of the pool was within buyers' diligent attention because sellers would have provided the undisclosed documents had buyers asked. Such an argument turns a seller's obligation on its head. A seller could always prevail in a nondisclosure suit simply by declaring they would have disclosed the information if the buyer had asked. That is not the law. A seller's duty to disclose exists, in large part, because of a seller's superior knowledge. (See Garrett v. Perry (1959), 53 Cal.2d 178, 181.) It is not dependent upon a buyer's prescience in asking the right questions. (See Linden Partners v. Wilshire Linden Associates (1998) 62 Cal.App.4th 508, 529 [“It has been repeatedly held by the courts of our state that one to whom a representation is made has no duty to employ means of knowledge which are open to that party and which could, if pursued, reveal the falsity of that representation”]; Alexander, supra, 7 Cal.App.4th at p. 977 [“[T]he concept of ‘let the buyer beware' is an anachronism in California having little or no application in real estate law”].)

In a similar vein, we reject sellers' assertion that the undisclosed conditions were within buyers' diligent attention as a matter of law because they could have discovered the conditions by retaining experts to inspect the property, something sellers claim was recommended multiple times during escrow. “[A] buyer is entitled to rely upon a seller's representations concerning the area of the property being sold, and is not required to hire an expert to discover the falsity of the seller's representations.” (Furla v. Jon Douglas Co. (1998) 65 Cal.App.4th 1069, 1079 (Furla); see also Hartong v. Partake, Inc. (1968) 266 Cal.App.2d 942, 966 (Hartong) [“Where a plaintiff commences an investigation, his failure to discover the truth may be excused by the defendant's superior knowledge of the facts, the difficulty in ascertaining all of the facts or plaintiff's incompetence to judge the facts without expert assistance”].)

The Court also noted that the fact that an investigation would have revealed the falsity of the misrepresentation does not bar recovery, and that the buyer's agent's statutory inspection obligation extended only to a visual inspection of the property:

Lastly, regarding buyers' reliance, we recognize the seller's duty to disclose does not relieve a buyer of the duty to exercise reasonable care to protect himself or herself. ““If the conduct of the [buyer] in the light of his own intelligence and information was manifestly unreasonable, ... he will be denied a recovery” on a fraudulent misrepresentation theory. (Seeger v. Odell (1941) 18 Cal.2d 409, 415 (Seeger).) However, whether a buyer unreasonably failed to protect him or herself and/or unjustifiably failed to discover true conditions is a case specific factual issue for the trier of fact. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1383; Furla, supra, 65 Cal.App.4th at p. 1079.) Falling within the ambit of the trier of fact's charge is a determination of the level of care to which buyers should be held considering their own intelligence, knowledge and experience. (See Seeger, at p. 415; Hartong, supra, 266 Cal.App.2d at p. 965.) Notably, mere negligence in failing to investigate or discover the omitted facts is not a defense to intentional misrepresentation. (Smith v. Williams (1961) 55 Cal.2d 617, 620.)

Sellers urge us to decide whether buyers' reliance was reasonable and justified as a matter of law. They argue buyers' reliance was unreasonable because buyers' agent did not fulfill her statutory duty to inspect the property. But generally, “[t]he fact than an investigation would have revealed the falsity of the misrepresentation will not alone bar... recovery.” (Seeger, supra, 18 Cal.2d at pp. 414-415.) And, buyer's agent's inspection obligation extended, at most, to “a reasonably competent and diligent visual inspection of the property[.]” (Civ. Code, § 2079.) As previously discussed, there is a triable issue of material fact whether the undisclosed facts were observable via a visual inspection.

In the unpublished decision of Franklin Reinforcing Steel Co. v. Kruss, 2005 Cal. App. Unpub. LEXIS 4126, 2005 WL 1090185 (Cal. App. 2d Dist. May 10, 2005), the California Court of Appeal for the Second District found that even though the plaintiff purchaser had hired an expert to inspect the property, the purchaser could still rely on the seller's representations. The expert had not identified the environmental concerns at issue in the action (at 47-49):

Moreover, the fact that investigations were conducted prior to the close of escrow or Mr. Franklin hired environmental engineers did not preclude a finding of justifiable reliance. (Bagdasarian v. Gragnon (1948) 31 Cal.2d 744, 748; Linden Partners v. Wilshire Linden Associates (1998) 62 Cal.App.4th 508, 529.) Mr. Kruss had superior knowledge about the condition of the property. Hence, plaintiff was not required to hire environmental professionals to confirm the truth of Mr. Kruss's alleged representations. (See Furla v. Jon Douglas Co. (1998) 65 Cal.App.4th 1069, 1079 [buyer not required to hire a professional to discover falsity of seller's representations concerning area of property]; Hartong v. Partake, Inc. (1968) 266 Cal. App. 2d 942, 966, 72 Cal. Rptr. 722 [*48] ["Where a plaintiff commences an investigation, his failure to discover the truth may be excused by the defendant's superior knowledge of the facts . . . or plaintiff's incompetence to judge the facts without expert assistance"]; Curran v. Heslop (1953) 115 Cal. App. 2d 476, 481-482 [an independent investigation or examination does not preclude reliance on representations of seller where falsity of statement is not apparent from an inspection or seller has superior knowledge].)

In any event, the evidence shows that the environmental issues, including the subsurface asbestos, were not discovered by the environmental professionals hired to address these issues. It should be noted that, although the Waterstone firm was hired to evaluate the property because of plaintiff's lender, defendants paid for the investigation and determined its scope. Eric Smith, the chief hyrogeologist of the Waterstone firm, testified that he prepared the scope of work and the environmental report on the property. Mr. Smith only dealt with Mr. Kruss and Mr. Foley. Under the circumstances, notwithstanding the investigation, where the falsity of Mr. Kruss's statements were not apparent from [*49] the inspection, plaintiff was not precluded, as a matter of law, from relying on his representations. (Bagdasarian v. Gragnon, supra, 31 Cal.2d at p. 748; Linden Partners v. Wilshire Linden Associates, supra, 62 Cal.App.4th at p. 529.) Viewing the evidence in a light most favorable to plaintiff, we cannot conclude the trial court erred in denying the judgment notwithstanding the verdict motion on the fraud claims.

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