What is the statute of limitations for fraudulent breach of contract to purchase real property?

In the recent case of Vera v. REL-BC, LLC, the trial court entered summary judgment on Adriana Vera’s complaint against REL-BC, LLC (REL-BC) relating to Vera’s purchase of a home in Oakland.

The court ruled the action was barred by the three-year statute of limitations for actions based on fraud in Code of Civil Procedure section 338(d).

Vera appealed from the judgment contending that the trial court erred in applying the three-year statute of limitations to her breach of contract claim, and that the court ignored disputes of material fact concerning when the limitations period began to run.

The appellate court ruled the trial court correctly concluded that Vera’s breach of contract claim was based on fraud, and therefore subject to the three-year statute in section 338(d).

The trial court also correctly concluded that the undisputed facts demonstrated Vera’s claims based on fraud accrued more than three years before she filed suit, and were therefore time-barred.

In 2011, REL-BC bought a property in Oakland to remodel and resell.

After the property was renovated for REL-BC, it signed an agreement to sell it to Vera.

The purchase agreement obligated REL-BC to disclose known material facts and defects affecting the property.

Pursuant to that provision, and as independently required by statute (Civ. Code,
§ 1102.6), REL-BC provided disclosures in which they identified material conditions of the property.

In those documents, REL-BC said it was not aware of any significant defects or malfunctions (including past defects that had been repaired) with respect to various components of the property, including the sewers and drainage.

The disclosures also stated that REL-BC was not aware of any water intrusion, leaks from the sewer system or any pipes, work or repairs that had been done without permits or not in compliance with building codes, or any material facts or defects that had not otherwise been disclosed to Vera.

Vera hired her own inspector, Eric Burtt, to examine the property and she accompanied Burtt during the inspection. Burtt’s report stated that the basement was well below the exterior grade and several areas showed a history of water intrusion, including areas that had been recently tiled and painted. The report stated, “Expect moisture and water intrusion during periods of wet weather!!” Burtt also noted that there was a sump pump in the basement that was not operating correctly.

Burtt observed through a vent that there had been some prior work or repair to the front stairs leading up to the house, but he did not inspect it because the area was inaccessible. He recommended further inspection.

In light of the considerable remodeling, some of which appeared to be peculiarly or imperfectly done, Burtt also advised Vera to obtain the property’s complete permit history to verify that the work was permitted and inspected.

Vera acquired the permit history for the property and sent it to Burtt, but Vera was unable to recall later whether she discussed the permit history with him.

Vera also had a sewer inspection done by Rhino Rooter. That inspection revealed that there was a major disconnect at the house cleanout that was leaking a large amount of water into the crawl space. REL agreed to repair several items noted in the Burtt report, including the sump pump and the sewer disconnect.

Escrow closed in 2011, but the sewer line still had not been corrected. In January 2012, a large amount of water flooded into the basement, apparently because the repairs to the sewer line were not done correctly.

Vera contacted Laura Blair, who at the time lived across the street. Blair came over and told Vera that it was not necessary to obtain another inspection of the sewer line because the water coming into the basement was rainwater. Blair told Vera that rain had previously flowed down the foundation wall when there was a sewer problem.

Sellers later admitted to Vera that the earlier sewer work had been completed without a permit, and that Vega was unlicensed, though they told Vera that Vega’s work had been done under the supervision of a licensed contractor.

In 2014, the exterior stairs leading up to the house began collapsing. Vera asked Burtt to investigate. Burtt concluded that there was no support for the stairs. Burtt also said that the unsupported joists holding up the stairs were the same repairs he had observed through the vent when he inspected the property in 2011.

On December 5, 2014, three years and three days after the close of escrow, Vera filed her initial complaint against Sellers. Vera’s second amended complaint alleged six causes of action: negligence (first and sixth causes of action), breach of warranty (second cause of action), breach of contract (third cause of action), fraud (fourth cause of action), and negligent misrepresentation (fifth cause of action).

Sellers moved for summary judgment based on, among other grounds, the three-year statute of limitations in section 338(d) for actions based on fraud or mistake. The trial court granted the motion and entered judgment for Sellers. Vera appealed.

Vera first contended the trial court erred in applying the three-year statute of limitations in section 338(d) for actions based on fraud to her breach of contract cause of action, and Vera contended the four-year statute under Code of Civil Procedure section 337(a) was controlling.

To determine the statute of limitations which applies to a cause of action, it is necessary to identify the nature of the cause of action, i.e., the ‘gravamen’ of the cause of action.

The nature of the right sued upon and not the form of action nor the relief demanded determines the applicability of the statute of limitations under our code.

In determining whether an action is on the contract or in tort, it is the nature of the grievance rather than the form of the pleadings that determines the character of the action. If the complaint states a cause of action in tort, and it appears that this is the gravamen of the complaint, the nature of the action is not changed by allegations in regard to the existence of or breach of a contract.

In other words, it is the object of the action, rather than the theory upon which recovery is sought that is controlling.

Vera alleged that Sellers promised in the purchase agreement to provide her a disclosure statement listing all material facts known to the Sellers. She alleged the Sellers failed to disclose and misrepresented defects with the property, including prior water intrusion, structural defects, and the fact that the renovations and remodeling work were not permitted or performed by a licensed contractor.

She further asserted that Sellers performed labor and installed materials in the project in a negligent manner, which deprived her of the full use and enjoyment of the property after purchase.

After alleging causes of action for negligence and breach of warranty based on these facts, Vera incorporated all prior allegations by reference into her cause of action for breach of contract.

She claimed that Sellers agreed in the purchase agreement to provide a disclosure statement, and the agreement’s implied covenant of good faith and fair dealing required Sellers to disclose defects.

She finally alleged: In breach of the express provisions of the contract and the implied covenant of good faith and fair dealing, Seller concealed defects, failed to make repairs of items they knew were deficient, and otherwise misrepresented the condition, desirability, and value of the property.

These allegations state in essence that Sellers harmed Vera by failing to disclose material facts to her.

Section 338(d) establishes a three-year period of limitations for an action for relief on the ground of fraud of mistake, so this provision applies to Vera’s breach of contract claim.

It makes no difference that the breach of contract claim rests on a contractual duty to disclose material facts, while her fraud claim rests on the same duty under tort law. It is black letter law that section 338(d) applies regardless of the form of the action a plaintiff chooses or legal theory she advances.

Section 338(d)’s language is comprehensive, and the statute, with its favorable accrual rule, is accordingly applied to any form of action, for any kind of relief.

In other words, if fraud or mistake is the basis of the legal injury (the "ground" of the action), the section applies regardless of whether the complaint seeks legal or equitable relief or pleads a cause of action in tort or contract.

Vera argued that the trial court and Sellers failed to cite any case in which a court applied the three-year statute of limitations for fraud to a claim for breach of written contract.

However, courts routinely bar causes of action, including for breach of written contract, where the gravamen rule dictates a shorter statute of limitations.

Vera did not cite (and the appellate court was not aware of) any authority holding that claims for breach of written contract are exempt from the rule that the gravamen of a claim governs the applicable statute of limitations, nor did she point to any authority that the rule operates only to extend a limitations period.

Vera argued the summary judgment had to be reversed because the trial court ignored disputes of material fact concerning when her claims accrued for the purposes of the limitations period in section 338(d).

In general, a cause of action accrues when it is complete with all of its elements.

But section 338(d) provides that a cause of action based on fraud or mistake is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.

Vera argued that this provision established that a cause of action for fraud accrues only based on actual knowledge of the facts constituting the fraud, unlike other causes of action that accrue based upon mere suspicion of wrongdoing.

She maintained that the decisions applying this discovery rule to start the running of a limitations period do so only when the plaintiff has admitted actual suspicion of wrongdoing, while here there is a factual dispute about the date of her knowledge.

The language of section 338(d) on its face might support Vera’s interpretation that only actual knowledge and discovery will start the running of the statute, but it has long been settled that actual knowledge is not necessary.

The courts interpret discovery in this context to mean not when the plaintiff became aware of the specific wrong alleged, but when the plaintiff suspected or should have suspected that an injury was caused by wrongdoing.

The statute of limitations begins to run when the plaintiff has information which would put a reasonable person on inquiry.

A plaintiff need not be aware of the specific facts necessary to establish a claim since they can be developed in pretrial discovery.

The cases construing section 338(d) have held that a plaintiff must affirmatively excuse his failure to discover the fraud within three years after it took place, by establishing facts showing that he was not negligent in failing to make the discovery sooner and that he had no actual or presumptive knowledge of facts sufficient to put him on inquiry.

As these cases’ statements of the law demonstrate, Vera’s contention that the discovery rule is triggered only by actual knowledge is incorrect. A fraud claim will accrue even without actual knowledge if a plaintiff knows facts that should raise suspicion and trigger a further investigation.

While resolution of the statute of limitations issue is normally a question of fact, where the uncontradicted facts established through discovery are susceptible of only one legitimate inference, summary judgment is proper.

Vera should have been suspicious that she was injured by Sellers’ wrongdoing and investigated more than three years before she filed suit.

Vera alleged Sellers misrepresented or concealed four aspects of the property: (1) a history of water intrusion, which Sellers concealed by tiling over affected areas or covering them with drywall; (2) repairs that were unpermitted and completed by unlicensed contractors; (3) failure of the terra cotta sewer line; and (4) lack of structural framing supporting the front stairs.

Sellers contended that the Burtt and Rhino Rooter reports contradicting these assertions gave Vera reason to investigate Sellers’ alleged fraud, so the tolling of the statute under the discovery rule ended when Vera received the reports before the close of escrow.

The difference between Sellers’ statements and her inspection reports proves as a matter of law that Vera’s claims accrued because she had, at minimum, reason to be suspicious and should have investigated Sellers’ fraud.

Vera also argued Sellers’ misrepresentations tolled the running of the limitations period by actively concealing their wrongdoing. However, Vera could and did hire inspectors who revealed or at least called into serious question the truth of Sellers’ misrepresentations, so those misrepresentations did not postpone accrual of her claims.

Regarding Sellers’ misrepresentation of the permit history and licensing status, the Burtt report advised Vera to review the permit history and permit documentation for completeness and scope given the considerable remodeling work and the fact that some of the remodeling, such as the electrical panel, was “extremely peculiar” in certain respects.

Vera did, in fact, obtain the permit history, and she passed it to Burtt to review. Although this permit history would not have revealed that Sellers’ contractor was unlicensed, in conjunction with her and her inspectors’ observations of the work performed at the property, it should have shown if Sellers’ representations about permits were true or false.

LESSONS:

1.         The three-year statute of limitations in Code of Civil Procedure section 338(d) applies to actions based on fraud, even if they arise out of a contract for the purchase of real property.

2.         The statute of limitations for fraud begins to run when the plaintiff has information which would put a reasonable person on inquiry.

3.         The permit history of the real property should always be obtained by a buyer, especially if the property had been improved or remodeled.

4.         All issues raised in inspection reports should be investigated and considered in proceeding with a purchase.