RSB Vineyards, LLC v Orsi – Case Study

CASE STUDY PREPARED FROM ORIGINAL PUBLISHED OPINION
ERNEST A. LONG
Alternative Dispute Resolution
Resolution Arts Building 
2630 J Street, Sacramento, CA 95816
ph: (916) 442-6739 • fx: (916) 442-4107
elong@ernestalongadr.com • www.ernestalongadr.com
RSB Vineyards, LLC v Orsi 9/29/17
Real Estate; Fraud; Failure to Disclose; Imputing Knowledge of Construction Professional to Principal
This action grows out of Plaintiff RSB Vineyards, LLC (RSB)’s August 2011 purchase from defendants of a vineyard and building located in Healdsburg. Following the purchase, RSB discovered structural and other problems with the building that were not disclosed by defendants at the time of the sale. RSB’s complaint (complaint), filed in September 2013, contains causes of action for breach of contract, intentional misrepresentation, negligent misrepresentation, fraud, and negligence.
Barely seven months after the filing of the complaint, defendants moved for summary judgment, arguing RSB’s claims failed because RSB could not demonstrate defendants had actual knowledge of the building’s flaws or made false representations. The motion was supported by declarations from each of the four defendants and excerpts from the deposition testimony of Robin Black, designated by RSB as its person most knowledgeable.
According to the evidence submitted in support of the motion, the four defendants, members of two families engaged in the business of viticulture and wine-making, purchased the real property in 2009. At the time, the main building on the property was a single family home, and defendants planned to convert it into a commercial wine tasting room. They also considered building a winery. Following the purchase, defendants hired an architect to design a remodel of the home and applied for a commercial use permit, which issued in April 2010 for a winery and tasting room. Once the use permit issued, defendants submitted the architect’s plans to the County of Sonoma (county),
which approved the plans after requiring some changes. Defendants, none of
whom is a construction professional or possesses the skills of such a person,
relied on their architect and county officials to insure the plans conformed to
applicable building codes, and they had no reason to believe the plans were nonconforming.
The construction work was performed by a licensed contractor, in
consultation with a structural engineering firm, and entailed, among other
projects, tearing down an addition to the home, new framing and exterior work,
replacing windows, renovating bathrooms, reinforcing the floor above the
basement, installing new sewage disposal, plumbing, and electrical systems,
repairing dry rot, and creating a parking lot. The work was inspected and
approved by county officials, and a final certificate of occupancy for a
“winery/tasting room” was eventually issued. Defendants began to conduct
business in the tasting room upon issuance of a temporary occupancy permit in
September 2010.
Soon after commencing business, the four defendants “decided that
operating a joint tasting room was not to our liking so we decided to sell the
property.” During the sales process, they continued to conduct business. By
August 2011, they had listed the property with a licensed real estate broker, who
prepared an offering memorandum and placed an ad in a local paper. The
offering memorandum stated that the property had a “vineyard-vested winery
permit” and an “active tasting room” and attached a table describing the various
permits issued for the property. The ad described the parcel as “exceptional 19
acre vineyard parcel with operating tasting room, vested 20,000 case winery
permit and 12 acres planted to vineyard.” RSB submitted a proposed purchase
agreement soon after, which defendants accepted subject to a counter-offer.
Defendants provided to RSB a termite addendum, buyer’s and seller’s advisories,
and other disclosures and documents, and they gave RSB the names of their
architect, general contractor, and structural engineer. RSB waived all
contingencies and inspection rights, and the sale closed the following month.
Each of the declarations submitted by defendants contained essentially the
same affirmation. As two of the declarations stated, “at no time before the sale to
plaintiff did any person connected to the County or any of our own professionals
ever inform me that the finished construction did not comply with any building
codes or standards, that the plans or work were substandard or deficient in any
regard, or not to code, or even just to the level of good construction practices, or
that the building was in any way unsuitable or unsafe for use as a tasting room,
nor did I have any such knowledge from any other source, including my own
observations.” All declarants believed the work “met all applicable codes and
standards.” Each defendant specifically denied any knowledge, at the time of
the sale to RSB, of the defects in the property alleged in the complaint and
claimed no knowledge of any material defects in the property, either from
personal observation or on information by others.
In her deposition, Black stated that RSB had no information to suggest that
any of the defendants had actual knowledge of the deficiencies in the property
cited in the complaint. She also could not recall any false representations made
to her by defendants in connection with the property.
RSB’s opposition to the summary judgment motion was supported by the
declaration of Larry Miyano, a civil engineer familiar with the property, and
excerpts from several depositions. According to Miyano, he was retained by RSB
to evaluate a leaking deck on the renovated residence. Miyano concluded that
the deck was not properly built and did not meet “live load requirements” for its
intended use. This deficiency led him to investigate the building further.
Miyano found the floor structure “insufficient” to support the required load.
When he prepared an analysis of the work necessary properly to engineer the
floor, the expense was found to be more than the cost of demolition and
construction of a new building. Miyano also found the plans prepared by
defendants’ architect to be “unclear and substandard” and decided to inspect the
building during the process of demolition. Based on that inspection, Miyano
found deficiencies in the “shear path,” the building’s resistance to wind and
seismic activity, weakening of a wall due to improper construction of a stairway,
inadequate roof support, “cut down” and improperly spaced floor joists, dry rot
that had been plastered over without repair, insufficient steel reinforcement of
the foundation, and improper construction of a bathroom ceiling. Miyano
expressed the opinion “that each of these deficiencies was substandard for
commercial construction and . . . should have been known by an engineer,
contractor and architect who holds him or herself out as qualified to engage in
commercial construction.”
In a detailed written decision, the trial court granted the motion for
summary judgment. The court reasoned that RSB was required to provide
evidence creating a triable issue of fact regarding defendants’ actual knowledge
of the alleged defects in the property and failed to do so. The court rejected
RSB’s claim that knowledge of the defects could be imputed to defendants from
the presumed knowledge of their construction professionals, concluding that an
agent’s knowledge cannot be imputed when actual knowledge is required. The
court found a number of other arguments unavailing.
Following the grant of summary judgment, the trial court granted
defendants’ motion for contractual attorney’s fees, awarding defendants the full
amount of fees and expenses requested, $262,400 and $4,868, respectively,
without further explanation.
The First District Court of Appeal began by addressing RSB’s primary
theory of recovery, that defendants knew or possessed constructive knowledge
of the various defects uncovered by Miyano and failed to disclose those defects
while under a duty to do so.
“ ‘The elements of a cause of action for fraud based on concealment are:
“ ‘(1) the defendant must have concealed or suppressed a material fact, (2) the
defendant must have been under a duty to disclose the fact to the plaintiff, (3)
the defendant must have intentionally concealed or suppressed the fact with
the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of
the fact and would not have acted as he did if he had known of the concealed
or suppressed fact, and (5) as a result of the concealment or suppression of the
fact, the plaintiff must have sustained damage.’ ” ’ ” (Bank of America Corp. v.
Superior Court (2011) 198 Cal.App.4th 862, 870)
“A real estate seller has both a common law and statutory duty of
disclosure. . . . ‘In the context of a real estate transaction, “it is now settled in
California that where the seller knows of facts materially affecting the value or
desirability of the property . . . 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. ” Undisclosed facts
are material if they would have a significant and measurable effect on market
value’. . . . Where a seller fails to disclose a material fact, he may be subject to
liability ‘for mere nondisclosure since his conduct in the transaction amounts
to a representation of the nonexistence of the facts which he has failed to
disclose.” (Calemine v. Samuelson (2009) 171 Cal.App.4th 153, 160)
The Justices observed there seems little doubt that defendants were under a
duty to disclose the deficiencies mentioned in Miyano’s declaration, since they
affected “the value or desirability of the property” and were not necessarily
apparent to a diligent buyer. The obligation to disclose, however, only arose if
defendants had actual or constructive knowledge of the deficiencies. (Shapiro
v. Sutherland (1998) 64 Cal.App.4th 1534, 1544-1545.)
Defendants carried their initial burden of demonstrating that RSB could
not prevail on a theory of intentional nondisclosure by submitting evidence that
they did not know about any of the defects alleged by RSB. Black’s deposition
testimony confirmed that RSB lacked any evidence to controvert defendants’
claims of ignorance. While this evidence was not conclusive in establishing
defendants’ ignorance of the alleged defects (Yuzon v. Collins (2004) 116
Cal.App.4th 149, 163), it sufficed to shift the burden to RSB to provide sufficient
evidence of knowledge to create a triable issue of fact.
RSB did not provide any direct evidence of defendants’ knowledge, but
this is not unusual. (Blanchard v. DIRECTV, Inc. (2004) 123 Cal.App.4th 903, 922)
Actual knowledge can, and often is, shown by inference from circumstantial
evidence. (Ortega v. Kmart Corp. (2001) 26 Cal.4th 1200, 1206.) In that case,
however, “ ‘actual knowledge can be inferred from the circumstances only if, in
the light of the evidence, such inference is not based on speculation or conjecture.
Only where the circumstances are such that the defendant “must have known”
and not “should have known” will an inference of actual knowledge be
permitted.’ ” (Yuzon, at p. 163; see also Martinez v. Bank of America (2000) 82
Cal.App.4th 883, 890-891.)
RSB’s sole evidence of knowledge was Miyano’s declaration, but the
statements in that declaration are not sufficient to create a triable issue of fact
regarding defendants’ actual knowledge of the deficiencies. With the exception
of the first two defects cited, the deck and floor structure, the deficiencies were
discovered only during the process of demolition. There is no reason to think
defendants would have known of them. Further, Miyano does not suggest that
any of the defects would have been apparent to a non-professional. By Miyano’s
own concession, the defects he cited would have been apparent only to a
professional who was familiar with structural engineering and commercial
building code requirements. Even as to such professionals, he stated only that
they “should” have known of the deficiencies, not that they “must” have known.
Accordingly, Miyano’s declaration does not provide circumstantial evidence
sufficient to create a triable issue of fact that defendants either did or must have
known of the defects in the property.
RSB argues that the “sheer number and severity” of the structural defects
“could well give rise to an inference that Defendants knew that there were
multiple defects with the Property.” The Justices commented, that in order to
create an inference of actual knowledge, circumstantial evidence must suggest
that the defendant must have known of the matter to be disclosed. (Yuzon, at
p. 163.) While Miyano discovered a wide range of problems, all of them are
technical matters that would not be apparent to a person unskilled in
construction or structural engineering, and most of them became visible only
upon demolition. With the exception of a leaky deck, none of the defects cited by
Miyano are claimed to have created perceptible problems—such as, for example,
a sagging or creaking floor. In the absence of some evidence that defendants
had reason to know of the defects, their sheer numerosity does not allow an
inference of knowledge. In short, RSB failed to create a triable issue of fact as to
defendants’ actual knowledge of the deficiencies cited by Miyano.
Next RSB argues that it was not required to demonstrate defendants’ actual
knowledge of the defects because the construction professionals defendants
employed knew of some or all of the defects and, because the professionals were
defendants’ agents, their knowledge is imputed to defendants. As discussed
below, a principal is charged only with the knowledge of an agent acquired
while the agent was acting in that role and within the scope of his or her
authority as an agent. Because there is no evidence to suggest that defendants’
construction professionals would have acquired information about the residence
while acting as defendants’ agents, RSB failed to create a triable issue of fact
regarding the imputation of the professionals’ knowledge.
RSB contends that “knowledge possessed by the professionals hired by a
principal is imputed to the principal,” citing Trane Co. v. Gilbert (1968) 267
Cal.App.2d 720, but the case hardly stands for such a broad proposition of law.
In Trane, the defendant developer retained an architect, who in turn retained a
mechanical engineer to design an air conditioning system. After approximately
three years, a motor in the system malfunctioned, and the developer refused to
pay for the replacement motor. The engineer’s knowledge of the motor warranty
was imputed to the developer under the “well established rule in California that
the principal is chargeable with, and is bound by the knowledge of, or notice to,
his agent, received while the agent is acting within the scope of his authority, and
which is in reference to a matter over which his authority extends.”
However, California case law and statutes place important and significant
limitations concerning the circumstances under which a principal is chargeable
with and bound by the knowledge of his agent. While defendants had a
contractual relationship with their construction professionals for the provision of
services, “not all relationships in which one person provides services to another
satisfy the definition of agency.” (Rest.3d Agency, § 1.01, comment c.) Rather,
Civil Code section 2295 defines an agent as “one who represents another . . . in
dealings with third persons.” (See also, Rest.3d Agency, § 1.01, comment (c);
Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 410-411.) The Restatement
comment captures the essential character of this requirement of representation:
“It has been said that a relationship of agency always ‘contemplates three
parties—the principal, the agent, and the third party with whom the agent is to
deal.’ It is important to define the concept of ‘dealing’ broadly rather than
narrowly. For example, a principal might employ an agent who acquires
information from third parties on the principal’s behalf but does not ‘deal’ in the
sense of entering into transactions on the principal’s account. In contrast, if a
service provider simply furnishes advice and does not interact with third parties
as the representative of the recipient of the advice, the service provider is not
acting as an agent.” (Rest.3d Agency, § 1.01, comment (c), p. 19) Trane
recognized this same element when it noted that “an architect, as far as the
preparation of plans and specifications is concerned, acts as an independent
contractor; but so far as the performance of his supervisory functions with
respect to a building under construction is concerned, he ordinarily acts as an
agent and representative of the person for whom the work is being done.”
(Trane, at p. 726.) RSB contends that a professional acts as an agent if he or she
merely acts “for the benefit” of the purported principal, but that definition is
unacceptably broad. One hopes, after all, that every retained professional acts
for the benefit of the person retaining him or her. Instead, as section 2295 makes
clear, an agent must act for the benefit of another “in dealings with third
persons.”
Any knowledge acquired by defendants’ construction professionals about
the renovated residence is not imputed to defendants because there is no
evidence to suggest those professionals were acting in the role of agent when
they acquired that knowledge. While it might be inferred that defendants’
architect, at least, acted on behalf of defendants in dealing with local planning
officials during the process of renovation, and therefore might have performed as
an agent when acting in that role, there was no actual evidence of such
representation with respect to any particular professional. Thus, the record fails
to support an inference as to which, if any, of the professionals might have
qualified as agents for this purpose. More important, even assuming one or
more construction professionals served in this role, the information that
underlies RSB’s claim of failure to disclose would not have been gained by these
professionals in the course of their work as agents. It would have been gained
while the professionals were planning or carrying out the work of renovating the
residence. And, as Trane noted, when an architect is acting in his or her role as a
designer, the architect is not working as an agent. The same is true for the other
construction professionals employed by defendants, a general contractor and a
structural engineer. Because the professionals’ knowledge of the building’s
structure would have been acquired while acting in this role, rather than while
acting as defendants’ agents, it is not imputed to defendants.
The distinction is illustrated in the Supreme Court’s ruling in Herzog v.
Capital Co. (1945) 27 Cal.2d 349, on which RSB relies. In Herzog, the plaintiff
purchased a defective building from the defendants, which the defendants’ real
estate agent had represented as in “ ‘sound condition’ ” and “ ‘perfectly intact.’ ”
In fact, as it later emerged, the agent had been told by the prior owner of the
house that it leaked in heavy rain and saw the leaks for himself. By the time the
plaintiff toured the house prior to purchase, the agent had caused the water
marks on the plaster to be painted over, and the agent told the plaintiff “that
there had been some leaks but that the house had been repaired and was “ ‘in
perfect condition in all respects.’ ” In holding that the defendants could be held
liable for the agent’s fraud, the court held, “it is clear that the agent knew of the
defective condition of the house and that he was acting within the scope of his
authority when he caused it to be refinished and newly painted, thereby
effectually concealing the structural defects. The knowledge of an agent, which
he is under a duty to disclose to his principal, is to be imputed to the principal,
and, accordingly, defendants are charged with the agent’s knowledge. Under
these circumstances they had a duty to reveal the hidden and material facts
concealed by their agent and of which they had knowledge, and their failure to
disclose them constituted fraud.”
As is clear from the foregoing description, the knowledge gained by the
agent in Herzog was gained while acting as the defendants’ representative and
within the scope of that representation. For that reason, the agent had a
fiduciary duty to reveal his knowledge to the defendants, and the defendants, in
turn, had a duty to reveal it to the buyers of the home. In contrast, on the record
before us, any information gained by defendants’ construction professionals
about the structure of the residence would have been gained while they were
acting in the role of designers and builders, not as agents. Accordingly, any
knowledge of the construction professionals regarding the defects in the
structure was not imputed to defendants.
Because RSB’s fraud and deceit and negligence claims are similarly based
on the duty of disclosure, summary adjudication of these claims was appropriate
under the same rationale.
To the extent RSB contends defendants made affirmative
misrepresentations about the property, they have identified only the statements
made in the offering memorandum that the property had a “vineyard-vested
winery permit” and an “active tasting room.” However, RSB has failed to
adduce competent evidence to support its contention that these representation
are false. To the contrary, defendants’ evidence establishes both that they had
secured a winery permit and were actively operating a wine tasting room at the
time of the sale. RSB’s evidence did not raise a triable issue of fact as to the truth
of this evidence. Accordingly, summary adjudication was appropriate for RSB’s
claims of intentional and negligent misrepresentation.
RSB treats these statements as constituting a representation that the
property was suitable for use as a commercial tasting room. We find no basis for
such a reading. Both are simple statements of fact about (1) an on-going activity
at the property and (2) the issuance of a regulatory permit by the county.
Neither statement constitutes a warranty about the propriety of the activities on
the site. That a property is being used for a particular activity does not
necessarily imply that the property satisfies all regulatory requirements for the
activity. In any event, a cause of action for misrepresentation requires an
affirmative statement, not an implied assertion. (Apollo Capital Fund LLC v. Roth
Capital Partners, LLC (2007) 158 Cal.App.4th 226, 243.)
RSB’s claim for breach of contract is based on the contract of sale for the
property. The primary contractual provisions underlying RSB’s claim for breach
of contract are those concerning disclosure, such as the provision requiring
defendants to disclose “known material facts and defects” and make “other
disclosures required by law.” Because there is no triable issue of law regarding a
failure to disclose by defendants, there is similarly no triable issue regarding a
breach of such provisions.
RSB also claims defendants breached a provision of the contract requiring
them to provide a Seller Property Questionnaire (SPQ), a standard-form
disclosure document. The SPQ requires disclosure of a number of specific
potential problems of which the seller is “aware,” such as chemical
contamination and insurance claims, material repairs to the property, structural
and other defects, mold, boundary disputes, and other matters of concern. The
record contains a blank SPQ form drawn up for the property, which was
apparently never completed and submitted.
This claim fails because RSB cannot demonstrate a causal connection
between the alleged breach and its claimed damages. (Amelco Electric v. City of
Thousand Oaks (2002) 27 Cal.4th 228, 244; Daniels v. Select Portfolio Servicing, Inc.
(2016) 246 Cal.App.4th 1150, 1173) RSB argues “had Defendants completed and
returned the SPQ . . . , they would have disclosed most, if not all, of the
challenged defects.” The SPQ requires disclosure only of “known” problems. If
defendants were unaware of the various deficiencies claimed by RSB, they were
not required to disclose them in the SPQ, and, in any event, would have been
unable to do so. Accordingly, the failure to provide an SPQ would not have
prevented RSB’s loss.
In any event, RSB waived defendants’ provision of a SPQ when it
removed the sale contingencies prior to being provided with the SPQ. The two
contingency removal forms executed by RSB include a number of specific
contingencies to be removed by the seller, including “reports/disclosures.” In
executing a form on August 31, 2011, RSB stated it was removing “ALL Buyer
contingencies,” except “Acceptance of survey north line of property by Adobe
Associates.” A later contingency removal form, executed by RSB on September
7, 2011, “removes any and all buyer contingencies.” Necessarily, once RSB
released a contingency for reports and disclosures, it waived defendants’
obligation to provide the SPQ.
RSB analogizes the contingency removal form to a prohibited “exculpatory
clause,” a contractual provision that purports to exempt a person from “liability
for fraud or deceit based on intentional misrepresentation.” (Manderville v.
PCG&S Group, Inc. (2007) 146 Cal.App.4th 1486, 1499-1500; Civ. Code, § 1668.)
The contingency removal form, however, does not exempt defendants from any
liability for misrepresentation. It simply waives their obligation to provide any
further disclosures that would otherwise be required under the contract. Had
they made any affirmative misrepresentations, they would remain liable for
those.
The remainder of the full opinion, attached, is dedicated to a discussion of
the successful claim for attorney fees.
The appeal from the judgment, filed October 8, 2014, is dismissed. The
amended judgment, filed April 13, 2015, is affirmed. Defendants are awarded
costs on appeal.
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