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Meritless Lawsuit Against Agent Draws Sanctions

lawsuitThis article in is welcome news for agents who did  nothing wrong, but are nevertheless sued by a buyer based on “the more the merrier” attitude of many lawyers. Even though it is a California ruling, you can bet that this decision will make all buyers think twice before suing the agent. 

We’ve all heard of situations where a real estate agent and/or firm is named in a lawsuit even though, by any objective measure, the agent did nothing wrong. Moreover, it is not unusual, in such a situation, for the agent — or the agent’s insurer — simply to settle on the grounds that doing so is less expensive and less cumbersome than seeking vindication through a full-blown trial. And life goes on.

But what if, so to speak, the tables were turned? What if the agent responded with an action against the plaintiff for bringing a case that is frivolous — without factual or legal merit? Any chance of the agent winning that one? Yes, if it looks anything like Peake v. Underwood, recently decided by California’s Fourth Appellate District Court of Appeal. (Peake v. Underwood,Fourth Appellate District, June 25, 2014).

Joanne Peake purchased a home from the Underwoods in 2008. The Underwoods were represented by Paul Ferrell of Prudential Dunn REALTORS®. (Mr. Ferrell had represented the Underwoods when they acquired the home a year earlier.) Two years later, in early 2010, after discovering that water intrusion had caused damage to the “…foundation and attached flooring structures”, Peake filed suit against the sellers, the termite inspector, the home inspector, and the agent, Paul Ferrell. Initial causes of action asserted against Ferrell were (1) breach of statutory duties (Civil Code sections 2079 and 1102), (2) negligence, (3) breach of fiduciary duty, and (4) constructive fraud.

After the case had been pending more than a year, Ferrell moved for terminating and monetary sanctions against Peake and her lawyer. His grounds were California Code of Civil Procedure 128.7 which allows for sanctions if the trial court finds that a pleading is factually or legally frivolous. Ferrell argued that the undisputed evidence showed that he had fulfilled his statutory and common law disclosure duties.

The trial court agreed with Ferrell and ordered Peake and her attorney to pay $60,000 for Ferrell’s attorney fees. Naturally, they appealed. We pick up at the Appellate Court’s ruling.

“Ferrell’s counsel … sent numerous emails to Peake’s counsel (Shaw), explaining the legal and factual deficiencies of Peake’s statutory claim and encouraging Shaw to consult with a real estate standard-of-care expert. In the emails, Ferrell’s counsel emphasized that Ferrell had provided Peake with all the information in his possession, including documents showing possible problems with the subflooring, and noted an agent’s statutory duties are limited to a visual inspection. Ferrell’s counsel reminded Shaw of his ongoing duty to reevaluate the merits of Peake’s claim, and warned that if Peake did not dismiss her claim, Ferrell would seek sanctions from Peake and Shaw under section 128.7.”

California Code of Civil Procedure §128.7 is based on Rule 11 of the Federal Rules of Civil Procedure (28 U.S.C.), as amended in 1993. The Appellate Court explained it this way: “Under Rule 11, even though an action may not be frivolous when it is filed, it may become so if later-acquired evidence refutes the findings of a prefiling investigation and the attorney continues to file papers supporting the client’s claims.” “Thus, a plaintiff’s attorney cannot ‘just cling tenaciously to the investigation he had done at the outset of the litigation and bury his head in the sand.’”

In this particular case, the statutory claims against Ferrell involved Civil Code §2079 and §1102. The Appellate Court wrote:

“Section 2079 imposes on a seller’s agent the duty ‘to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to [the] prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal…’ (§2079, subd.(a).)” The Court pointed out that the inspection “does not include or involve an inspection of areas that are reasonably and normally inaccessible.” The Court then wrote that §1102 imposes these same limited duties [on an agent].

Peake alleged that Ferrell breached his duties by failing to disclose the condition of the subfloors. “However,” the Court said, “it is undisputed that this alleged defect was not visible and would not have been apparent during a reasonable property inspection. Thus, as a matter of law, Ferrell did not breach his statutory duties under sections 2079 and 1102 et seq.”

As to the common-law fraud claims, the Appellate Court observed, “…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. If the seller knows of material facts “…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.”This duty applies to the seller’s agent as well as to the seller.

But, in this case, the Appellate Court pointed out, Ferrell had provided the buyer with a variety of reports — some of which addressed the drainage and subfloor issues — from the Underwoods’ purchase escrow. Also, Ferrell’s inspection report to Peake noted that there was a soft spot in the subfloor in one of the bedrooms. The buyer had been put on notice. Ferrell had done his seller’s agent duty.

While noting that “Courts must carefully consider the circumstances for awarding sanctions,” it nonetheless concluded that “The record before us presents an appropriate case for sanctions. The trial court’s award was upheld. $60,000

TheCarr McClellan Law Blog (June 30, 2014) nicely summarizes the potential importance of this case:

“It is common practice for parties to “blame the agents” when a transaction sours, just to have another source of settlement funds. Defending these claims is expensive and the agents rarely recover their cost of defense. The Peake case teaches that the agent’s attorney should weigh in early and often with emails and letters showing why the claims are baseless. These communications should demand that the claims be withdrawn or sanctions will be requested. That used to be an idle threat, but after the Peake decision, complaining parties (and their attorneys) will have to weigh whether they will be the ones making the payment at the end of the day.”

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