Does the Duty of Real Estate Salespersons Terminate when Escrow Closes?
The California appellate decision in Robinson v. Grossman (1997), arose from the sale of a home by John E. Helm and Anne Marie Grossman to Mark S. Robinson and Susan K. Robinson.
The Robinsons appealed a judgment entered after Grossman, Prudential California Realty, the listing broker, and its agent Marti Gellens-Stubbs obtained defense verdicts.
The Robinsons contended the court misunderstood the disclosure duties of a seller's real estate agent to prospective purchasers, and as a result incorrectly excluded expert witness testimony and refused jury instructions on the issue.
They also contended the court abused its discretion in excluding evidence of postescrow events, and in awarding Grossman attorney fees and other costs.
The appellate court disagreed, and affirmed the judgment.
Helm, an architect, designed and built a large home in 1989. Because the hilly terrain would not support a conventional foundation, a pier and grade beam foundation was used. Helm and Grossman moved into the home in 1990, but listed it for sale with Prudential in March 1991.
On the real estate transfer disclosure statement, Helm and Grossman represented they were unaware of any significant defects in the foundation, exterior walls, windows, ceilings or other components of the home.
When Gellens-Stubbs inspected the property, she noted hairline stucco cracks, which Helm assured her were only cosmetic. She did not note them on her portion of the disclosure statement, but wrote "property appears to be in good condition .... I see nothing to contradict what seller has mentioned...."
Later, Gellens-Stubbs noticed interior paint peeling at a dining room window and Helm advised it was caused by water infiltration during construction which had been remedied. Gellens-Stubbs did not add this information to the disclosure statement.
When the Robinsons looked at the home several times in May 1991, they saw the stucco cracks. The Robinsons discussed them with their real estate agent, Gracinda Maier, who recommended they have the home professionally inspected.
Helm also advised the Robinsons "the cracks were caused by the finish of the house, which is called a Santa Barbara finish, and there was a product called elastomeric that ... would alleviate the stucco cracks.
Helm and Grossman accepted the Robinsons' offer of $653,750. The parties signed a real estate purchase contract on May 22, 1991, under which Helm and Grossman were required to provide the Robinsons with copies of the geological report by Ninyo & Moore.
The parties also initialed a preprinted paragraph giving the Robinsons the right to have geological and other inspections and testing done on the home, and if conditions unsatisfactory to the Robinsons were discovered, which Helm and Grossman were unwilling or unable to correct, the Robinsons could cancel the agreement.
On May 24, 1991, Maier added the following remarks to the disclosure statement: "My visual inspection found numerous cracks in the house. Buyer's agent recommends buyer to have property inspected by a professional home inspector and have the land checked by a geologist."
Either then or sometime earlier, Gellens-Stubbs also added the following to the disclosure statement: "Stucco cracks on home are cosmetic in nature according to seller because of finish & type of stucco."
The Robinsons hired Amerispec Home Inspection Service, and Robert Brand conducted an inspection on May 30, 1991; Helm, Grossman, Gellens-Stubbs and Mr. Robinson were present.
Brand noticed paint discoloration around the dining room window, and Helm explained it was caused by leakage during construction. Brand also found a "very old" water stain, which was "almost impossible" to see, on the front entryway ceiling and wall, and "normal settling cracking" of the stucco
As to the latter, Helm told Brand "elastomeric coating ... could be put on the stucco that would stop the cracking."
Brand's written report to the Robinsons stated there were "[n]ormal settling cracks" in the stucco, and water stains at the wall and ceiling juncture in the foyer and in the ceiling of the sitting room.
Brand found no soils-related distress or other significant problem with the home. With regard to a geotechnical inspection, the Robinsons opted to rely upon Ninyo & Moore's report and its assurance "the house was very well built, ... [and] was not going anyplace ...."
In July 1991 during a final inspection, Mrs. Robinson first noticed the water stains on the ceiling and wall in the entryway area. Grossman took her and Gellens-Stubbs to a deck, showing them the water intrusion came from a small hole which had been repaired.
Grossman assured Mrs. Robinson the deck was not leaking. Mrs. Robinson also saw that some of the stucco cracks appeared to have been patched. Grossman told her the cracking was only cosmetic and could be remedied with a coating product.
Gellens-Stubbs wrote in a buyer's property inspection report, "per seller-stucco cracks are cosmetic." She also sent Mr. Robinson a letter advising: "The ceiling and wall in the downstairs sitting area will be repainted where stains are," and "[a]ccording to seller, the stucco cracks are cosmetic in nature and were patched with a stucco and glue mixture."
Escrow closed shortly thereafter.
When the Robinsons attempted to have a swimming pool installed on the property a few weeks later, the excavation collapsed, requiring backfilling and recompaction.
They sued Helm, Grossman, Gellens-Stubbs and others, for professional negligence and negligent and intentional misrepresentation. They alleged the home contained "numerous defects in its roof, exterior walls, windows, [and] insulation, ..." and suffered "geotechnical and soils related distress," which defendants knew but failed to disclose.
The court granted Prudential's and Gellens-Stubbs's motion for nonsuit on the fraud cause of action.
The jury exonerated Grossman, Prudential and Gellens-Stubbs from any liability.
In its special verdict, the jury found Prudential and Gellens-Stubbs did not breach the professional standard of care.
As to the negligent misrepresentation cause of action, the jury found Prudential and Gellens-Stubbs misrepresented a "past or existing material fact," but the misrepresentation was not "made without a reasonable ground for believing it to be true."
The jury found Helm liable for professional negligence and negligent and intentional misrepresentation, but awarded the Robinsons only $16,827 of the $719,130 they sought.
On appeal, the Robinsons contended Prudential and Gellens-Stubbs's disclosure duty included the duty to independently verify or disclaim the accuracy of Helm's and Grossman's representations regarding the exterior stucco cracks, entryway area water stains and dining room paint peeling; because the court erroneously disagreed, it incorrectly excluded expert witness testimony and jury instructions on the issue.
The Robinsons also contended the court abused its discretion in excluding evidence of postescrow communications among Mr. Robinson, Gellens-Stubbs, Helm and Grossman.
In Easton v. Strassburger, the court first pronounced the duty of the seller's broker to potential purchasers to both inspect and disclose. "[T]he duty of a real estate broker, representing the seller, to disclose facts ... includes the affirmative duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal."
In response to Easton, and at the urging of the California Association of Realtors, the Legislature added a new article to the Civil Code (section 2079 et seq.) entitled "Duty to Prospective Purchaser of Residential Property."
The Easton duty is set forth in section 2079 as follows: "(a) It is the duty of a [licensed] real estate broker or salesperson, ... to a prospective purchaser of residential real property ... to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal ...."
The appellate court observed, "[t]he dual nature of this duty does not sound exclusively in negligence. While the first prong of the obligation (inspection) embodies traditional negligence concepts, breach of the second prong (disclosure of material facts) encompasses actionable conduct associated with both negligence and negligent misrepresentation."
The Robinsons conceded section 2079 is applicable to their "broker negligence" and negligent misrepresentation causes of action against Prudential and Gellens-Stubbs, but contended its second prong, the duty of disclosing material facts, includes the duty to either independently verify the accuracy of the seller's information or disclaim knowledge of the accuracy of the information.
The Robinsons relied principally upon Miller and Starr, who write in their treatise: "A broker as a professional is more than a mere 'middleman' or messenger putting the parties together; when information from the seller is transmitted to the buyer by the broker, the broker has a duty to verify the accuracy of that information (or disclaim knowledge of its accuracy)."
However, the appellate court found no support for the Robinsons' argument that section 2079's disclosure duty includes a duty to independently verify or disclaim the accuracy of the seller's representations, and it did not interpret section 2079 in that manner.
To the contrary, in enacting section 2079, the Legislature sought to foster availability of professional negligence insurance by eliminating the implication in Easton that a seller's agent could have liability for relying in good faith upon the seller's representations or failing to discharge a vague obligation to obtain professional inspections or reports to confirm those representations.
In other words, under the post-Easton statutory scheme, once the sellers and their agent make the required disclosures, it is incumbent upon the potential purchasers to investigate and make an informed decision based thereon.
In making the required disclosures, the sellers' agent is required only to act in good faith and not convey the seller's representations without a reasonable basis for believing them to be true.
The obvious purpose of the urged disclaimer duty would be to prevent buyers from being misled to their detriment.
It is undisputed the Robinsons had actual knowledge of each of the three "red flags" of which they now complain well before escrow closed. They saw the stucco cracks during preoffer site visits, during which Helm, not Gellens-Stubbs, explained their cause. Gellens-Stubbs noted on the disclosure statement the stucco cracks were cosmetic "according to seller, ..." and on the buyer's disclosure statement, "per seller-stucco cracks are cosmetic."
Gellens-Stubbs also sent Mr. Robinson a letter again advising "[a]ccording to seller, the stucco cracks are cosmetic in nature and were patched with a stucco and glue mixture."
During Amerispec's inspection, which Mr. Robinson attended, it was Helm, not Gellens-Stubbs, who explained the paint peeling around the dining room window was caused by a leak which had been remedied.
Likewise, it was Grossman, not Gellens-Stubbs, who later assured Mrs. Robinson the water staining in the entryway was caused by a leak which had been fully repaired.
Under the circumstances, the Robinsons could not have reasonably believed the representations came from Gellens-Stubbs, or that she either verified them or vouched for their accuracy.
Moreover, both Gellens-Stubbs and Maier, the Robinsons' agent, encouraged them to obtain independent inspections to verify the causes of the "red flags."
The Robinsons failed to obtain a geotechnical inspection, and their home inspector confirmed Helm's and Grossman's representations.
The Robinsons' geologist, Ralph K. Jeffery, testified the pool excavation failure was caused by an unstable ancient landslide and creeping soils, the latter of which also caused interior wall cracks and uneven floors in the home.
Jeffery admitted, however, that during initial visits to the property he saw no soils-related distress in the home; rather, such manifestations did not appear until 1992.
When asked whether the stucco cracks were nonetheless "signs of possible earth-movement damage to the home," Jeffery responded, "That would be one explanation for them."
However, he had done no destructive testing to determine what caused the cracks, and they could be attributable to "too thin of stucco coat, improper waterproofing, a whole litany of architectural things and probably some things I can't even guess what they are because I don't have expertise ... as an architect."
Robert K. Burkett, the Robinsons' civil and structural engineer, agreed it could not be determined whether the stucco cracks were related to earth movement without performing testing.
Peter Curry, the defense structural engineer, testified that even in 1993, he saw no stucco cracking attributable to foundation movement.
In sum, the Robinsons well knew the representations regarding the "red flags" were exclusively those of Helm and Grossman, and they have shown no detrimental reliance upon anything Gellens-Stubbs disclosed or failed to disclose.
Thus, under any scenario the Robinsons' arguments fail.
Under Cal. Const., art. VI, § 13, no judgment shall be set aside or new trial granted unless evidence exclusion or instructional error has resulted in miscarriage of justice.
Prudential and Gellens-Stubbs brought an in limine motion to exclude Gellens-Stubbs's notes and other evidence of postescrow communications among the parties regarding the stucco cracks.
The court granted the motion, but clarified that "[f]acts memorialized in writing that occurred prior to the close of escrow are not within that motion."
During trial, however, and without reviewing the Robinsons' proffered evidence, the court determined "[n]othing [Gellens-Stubbs] did post escrow is coming in."
The Robinsons contend the court abused its discretion in excluding the evidence because it was relevant to show:
(1) Prudential and Gellens-Stubbs continued to represent Helm and Grossman after the sale, and thus "were under a continuing duty to be honest in all of their dealings with the Robinsons and to disclose all material facts about the condition of the ... [h]ome".
(2) Gellens-Stubbs "knew that independent verification of the representations of Helm and Grossman was required by the standard of care";
(3) Gellens-Stubbs knew Helm wanted to sell the home "as is," and thus "knew the problems with the ... [h]ome were potentially more extensive than she disclosed," and
(4) Gellens-Stubbs's testimony lacked credibility.
The duties of real estate agents, even to their own clients, terminate when the subject matter [i.e., real property] of the agency is sold or otherwise disposed of.
Prudential and Gellens-Stubbs had no postescrow duty to make any disclosures to the Robinsons, and in any event the proffered evidence shows there was nothing to disclose.
Rather, it showed only that Mr. Robinson began complaining to Helm, Grossman, Gellens-Stubbs and others about the stucco cracking a few months after escrow closed, and attempts were made to resolve the problem short of litigation.
Gellens-Stubbs had no duty under section 2079 to independently verify Helm's and Grossman's representations, and her belief to the contrary would be immaterial.
Moreover, the excluded evidence does not show Gellens-Stubbs believed she had such a duty.
In memorializing a postescrow telephone conversation with Grossman regarding Mr. Robinson's complaints, Gellens-Stubbs wrote: "I suggested to [Helm and Grossman] to get their own stucco person to the house to get an opinion re: alastaplast & see if it just needs to be patched like they say it does. They said [Mr. Robinson] wants nothing to do w[ith] that [and] told them he was turning it over to lawyers. I told them they have every right to get someone of their choice to look [at the] house because in court they'll need something in writing from an expert, not just their opinion."
None of the postescrow evidence the Robinsons sought to introduce evidenced any lack of credibility on Gellens-Stubbs's part.
They relied primarily upon a draft letter Helm prepared and suggested Gellens-Stubbs send to the Robinsons.
In it, Helm wrote, "[stucco c]racks by their very nature are dynamic. That is they change with heat, cold, moisture and various other factors. Anyone [sic] of the [Robinsons'] inspectors should have mentioned that some of them might become larger or be an indication of a greater problem."
LESSONS:
1. The duties of real estate agents, even to their own clients, terminate when the subject matter [i.e., real property] of the agency is sold or otherwise disposed of
2. Gellens-Stubbs had no duty under section 2079 to independently verify Helm's and Grossman's representations, and her belief to the contrary would be immaterial.
3. Under the post-Easton statutory scheme, once the sellers and their agent make the required disclosures, it is incumbent upon the potential purchasers to investigate and make an informed decision based thereon.
4. In making the required disclosures, the sellers' agent is required only to act in good faith and not convey the seller's representations without a reasonable basis for believing them to be true.