Buyer Sanctioned for Frivolous Lawsuit

Read the full decision: Peake v. Underwood

A California appellate court has affirmed the award of $60,000 in sanctions against a homebuyer for pursuing a meritless disclosure lawsuit against the seller and seller’s real estate representative. 

In 2009, Joanne Peake (“Buyer”) purchased a home from Marviel and Deanna Underwood (“Sellers”).  Two years later, Buyer sued Sellers and Sellers’ broker, Paul Ferrell (“Listing Broker”) for allegedly failing to disclose defective subflooring in the home caused by water drainage problems.  Buyer stated in her suit that she only became aware of the defective flooring after her son’s foot broke through a bathroom floor.  She alleged that Sellers and Listing Broker had been aware of the damage at the time of her purchase, but had failed to alert her to it.  While Buyer eventually dropped her suit against Sellers based on her understanding that they were insolvent, she persisted in her suit against Listing Broker.  Buyer claimed that Listing Broker owed her “a duty to fully and completely disclose all material defects, failures and deficiencies” about the home. Her counts against Listing Broker included breach of statutory duties, breach of fiduciary duties, and constructive fraud. 

After Buyer filed suit, Listing Broker’s attorney sent Buyer’s attorney numerous emails explaining that prior to the sale Listing Broker had provided Buyer with all of the information in his possession, including a number of documents that indicated possible problems with the subflooring.  Listing Broker’s attorney recommended that Buyer’s attorney consult with a real estate standard-of-care expert, as Buyer’s lawsuit failed to recognize that a listing broker’s statutory duties to a Buyer are limited to disclosing defects that are detectable upon a visual inspection of the property.  Listing Broker’s attorney warned Buyer’s attorney that if he did not drop the suit, Listing Broker would seek sanctions for frivolous claims.  Buyer’s attorney ignored the emails, and, as promised, Listing Broker’s attorney filed a motion for sanctions. 

The motion for sanctions set forth the facts that Listing Broker had provided Buyer with no less than three separate documents suggesting the possibility of flooring defects, and containing recommendations made by Listing Broker that Buyer also “see ‘reports and disclosures’ of previous owners.”  The documents provided by Listing Broker to Buyer prior to sale also listed numerous past repairs made to the home to upgrade its water drainage system.  They also contained photographs that showed rotting to the subfloors.  In addition, Listing Broker disclosed in his Visual Inspection Checklist that he had observed a soft spot in the subfloor of a bedroom. 

In her deposition, Buyer admitted that both Sellers and Listing Broker had provided her with documents revealing that the home had had extensive repairs made to the drainage system.  In addition, she conceded that she and her own real estate representative had discussed Listing Broker’s disclosures about the drainage repairs.  She also admitted that she herself had noticed some “sponginess” in a bedroom floor during a walk-through of the home.   Nonetheless, Buyer claimed that because her own inspector had given the home the all-clear, Buyer had “assumed” that the disclosed drainage systems repairs had taken care of any problems with the home. 

Buyer opposed the motion for sanctions in part by offering an “expert declaration” from a real estate agent and property manager.  Buyer’s expert stated that it was his opinion that Listing Broker failed to meet his standard of care to Buyer because he had failed to “red flag the drainage issue” by disclosing in writing that the repairs had not been properly performed, thus allowing further damage to the subflooring.  Both the trial and appellate court roundly disagreed with the expert’s assessment.  In its opinion, the appellate court stated that the expert’s conclusions were “directly at odds” with well-settled case law and the applicable statutory standard of care.     

The trial court determined that Buyer’s claims against Listing Broker were “utterly lacking in merit” and that Buyer’s refusal to drop the suit warranted sanctions in the amount of $60,000, representing Listing Broker’s attorney’s fees for defending the action.  In affirming the trial court’s award, the appellate court reiterated that a seller’s real estate representative has a duty under California law to “conduct a reasonably competent and diligent visual inspection of the property….and to disclose to the prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal. The inspection…does not include or involve an inspection of areas that are reasonably and normally inaccessible.”  Because, stated the court, subflooring is “reasonably and normally inaccessible,” as a matter of law Listing Broker did not breach his duties to Buyer.  Furthermore, Listing Broker had provided Buyer with numerous documents indicating the possibility of problems with the subflooring, and Buyer had had constructive knowledge of the damage prior to purchasing the home.  Finally, the court held that Buyer and her attorney “engaged in conduct supporting the conclusion that they did not reasonably or honestly believe the claims had any merit.”  While the appellate court made clear in its opinion that “sanctions should not be routinely awarded,” it held that, given the acts of Buyer and her attorney, in this case they were justified. 

Peake v. Underwood, 173 Cal. Rptr. 3d (Cal. Ct. App. 2014).  

Editor’s Note:  NAR Legal Affairs would like to thank Mark D. Stavros of Stavros & Associates for alerting NAR to this decision.  Mr. Stavros represented the listing broker, Paul Ferrell, at all phases of the Peake v. Underwood case.