Reed v. King: California Appellate Court Compares Duty to Dislose Facts About Stigmatized Property and Elements of Fraud

In Reed v. King, the California Court of Appeal addressed whether a seller has a duty to disclose a multiple murder in a house that occurred ten years prior to sale. The court found a duty to disclose facts that materially affect the value or desirability of property which facts are known to the seller and are not readily apparent to the buyer. The court remanded for trial on the issue of value.

Reed bought a home from King for $76,000. Ten years earlier, a mother and four children were murdered in the home. King and his agent knew of the murders. They told Reed that the house was in good condition and fit for an "elderly woman" living alone, but did not disclose the murders. At some point, King asked a neighbor not to inform Reed of the event. Nevertheless, after Reed moved in, neighbors told her no one was interested in purchasing the house because of the stigma. They estimated the value at $65,000. Reed sued King for rescission on the basis of fraud. The trial court dismissed for failure to state a cause of action. Reed appealed.

The California Court of Appeal stated that fraud requires: "(1) a false representation or concealment of a material fact . . . susceptible of knowledge, (2) made with knowledge of its falsity or without sufficient knowledge on the subject to warrant a representation, (3) with the intent to induce the person to whom it is made to act upon it, and such person must (4) act in reliance upon the representation (5) to his damage." It also stated that "concealment is a term of art which includes mere non-disclosure when a party has a duty to disclose." Further, a "seller of real property has a duty to disclose: 'where the seller knows of facts that materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer . . . .'"

The California Court of Appeal noted that whether information is of sufficient materiality to affect the value or desirability depends on the facts of the particular case, and encompasses justifiable reliance. The court also noted three considerations: (1) the gravity of the harm inflicted by non-disclosure; (2) the fairness of imposing a duty of discovery on the buyer as an alternative to compelling disclosure; and (3) its impact on the stability of contracts if rescission is permitted. The court found that the murder of innocents was so disturbing that buyers may be unable to reside in a home where it has occurred. It also found that murder is not such a common occurrence that a duty of inquiry and discovery can sensibly be imposed upon a buyer. The court also found that "if information known or accessible only to the seller has a significant and measurable effect on market value and the seller is aware of this effect, the duty to disclose does not turn on the character of the information" (physical, stigmatic, or otherwise). Further, the court cited the Restatement 2d Torts §551 for the proposition that "failure to disclose such a negative fact where it will have a for[e]seeably depressing effect to be generated by a business is tortious."

The California Court of Appeal found that there were triable issues of fact and remanded the case on the issue of whether a decade-old multiple murder had a significant effect on the market value and the seller's awareness of the effect. It concluded that if Reed was able to prove this, she was entitled to a favorable ruling on the issues of materiality and the duty to disclose.

Reed v. King, 145 Cal. App. 3d 261, 193 Cal. Rptr. 130 (Cal. Ct. App. 1983).