JOANNE PEAKE еt al., Plaintiffs and Appellants, v. MARVIEL UNDERWOOD et al., Defendants and Respondents.
No. D061267
Fourth Dist., Div. One.
June 25, 2014
July 17, 2014
227 Cal.App.4th 428
HALLER, J.
[CERTIFIED FOR PARTIAL PUBLICATION*]
Boudreau Williams and Jon R. Williams for Plaintiffs and Appellants.
Wolfgang F. Hahn + Associates and Wolfgang F. Hahn for Defendant and Respondent Marviel Underwood.
Stavros & Associates and Mark D. Stavros for Defendants and Respondents Dunn Real Estate & Development Co., Inc., and Paul Ferrell.
OPINION
HALLER, J.---Joanne Peake purchased a home from Marviel and Deanna Underwood. About two years later, Peake brought an action against the Underwoods and the Underwoods’ real estate agent, Paul Ferrell.1 Peake sought to recover damages for defendants’ alleged failure to disclose defective subfloors in the home.
After the case had been pending for more than one year, Ferrell moved for terminating and monetary sanctions against Peake and her counsel, Norman Shaw, under
After a hearing, the court found Ferrell met his burden to show Peake‘s claims were “without legal or evidentiary support” and Peake‘s continued maintenance of the lawsuit demonstrated “objective bad faith” warranting
On appeal, Peake and Shаw (collectively appellants) challenge these sanctions. We determine the court acted within its discretion in awarding the
In affirming the sanctions order, we do not intend to suggest sanctions should be routinely awarded. Our adversary system requires that attorneys and litigants be provided substantial breathing room to develop and assert faсtual and legal arguments. However, as we shall explain, the court‘s exercise of discretion was justified for several reasons particular to this case, including that Peake‘s claims were inconsistent with the admitted facts and well-settled law, and the record reflects that Peake‘s trial counsel had no reasonable belief in the validity of the claims.
In the unpublished portion of the opinion, we reject Peake‘s separate appellate argument that the court erred in awarding the Underwoods prevailing party attorney fees after the court granted the Underwoods’ motion to compel arbitration and Peake then dismissed her action against the Underwoods.
FACTUAL AND PROCEDURAL SUMMARY
Complaint
In 2007, the Underwoods purchased a home and were represented by real estate agent Ferrell in the transaction. About one year later, the Underwoods sold this home to Peake. The Underwoods were again represented by Ferrell, and Peake was reprеsented by her own real estate agent (Tiffany Kilcoyne).
Two years later, in February 2010, Peake sued the Underwoods, Ferrell, Kilcoyne, the termite inspector, and the home inspector. Peake alleged “a water intrusion incident whereby standing water was caused to wick into the foundation” had previously occurred, “causing the foundation and attached flooring structures to deteriorate.” She alleged she “only became aware of the extent of the [water intrusion] damage when her son‘s foot recently went through a bathroom floor.”
Peake alleged the Underwoods were aware of the unrepaired water damage and the deteriorated floor structure at the time of the sale but failed to
With regard to Ferrell, Peake alleged he “fail[ed] to conduct a competent and diligent inspection” and “fail[ed] to disclose information about the true condition of the [residence] including water damage” that he knew or should have known. Peake also alleged that Ferrell owed her “a duty to fully and completely disclose all known material defects, failures and deficiencies” concerning the residence. Based on these allegations, Peake asserted causes of action against Ferrell for (1) breach of statutory duties (
A few months after she filed her complaint, Peake stipulated to strike all of her claims against Ferrell except her statutory claim. Ferrell‘s counsel then sent numerous е-mails to Peake‘s counsel (Shaw) explaining the legal and factual deficiencies of Peake‘s statutory claim and encouraging Shaw to consult with a real estate standard-of-care expert. In the e-mails, Ferrell‘s counsel emphasized that Ferrell had provided Peake with all the information in his possession, including documents showing possible problems with the subflooring, and noted an agent‘s statutory duties are limited to a visual inspection. Ferrell‘s counsel reminded Shaw of his ongoing duty to reevaluate the merits of Peake‘s claim, and warned that if Peake did not dismiss her claim, Ferrell would seek sanctions from Peake and Shaw under
Shaw did not take any action in response to these e-mails, and conducted no affirmative discovery after filing the complaint.
Ferrell‘s Sanctions Motion Served on Peake and Her Counsel
About one year after the complaint was filed, in March 2011, Ferrell served Peake and her attorney with a
In support of his sanctions motion, Ferrell submitted several documents.
First, he submitted the three-page statutory transfer disclosure statement provided to Peake during escrow (Transfer Disclosure statement). In the form, the Underwoods checked a box indicating they were not aware of any “[f]looding, drainage or grading problems” on the property, and signed at the bottоm of this page. However, this portion of the document stated: “THE[SE]... ARE REPRESENTATIONS MADE BY THE SELLER(S) AND ARE NOT THE REPRESENTATIONS OF THE AGENT(S), IF ANY.” On the third page of this document, Ferrell signed the section involving a seller‘s agent‘s disclosures. In that section, Ferrell indicated that Peake should see his “Visual Inspection Checklist” and the “reports and disclosures” from the previous owner. (Some capitalization omitted.)
Second, Ferrell submitted a copy of the referenced Visual Inspection Checklist. On this document, next to the printed heading for “LANDSCAPING,” Ferrell wrote “SEE DISCLOSURES ON DRAINAGE UPGRADES BY PREVIOUS OWNER.” And next to the heading for “FOUNDATION/SLAB,” Ferrell wrote that he observed a “SOFT SPOT IN SUBFLOOR IN ONE BEDROOM.” Next to the form‘s “OTHER” heading, Ferrell wrote “SEE PAST INSPECTION REPORTS, DRAINAGE UPGRADE REPORT AND WORK BY CIVIL ENGINEER, KENNETH DISCENZA [phone number] AND BOND CONSTRUCTION. DRAINAGE IMPROVEMENTS WERE PERFORMED IN TWO SEPARATE PROJECTS.”
Third, Ferrell submitted Peake‘s acknowledgment that she had received numerous documents provided to the Underwoods in the previous escrow. These documents included a January 4, 2007 physical inspection report, known as the “2007 Focus report.” It is undisputed that this report disclosed substantial problems and decay in the subflooring of the home. Peake concedes for purposes of this appeal that she received this 2007 Focus report during the escrow period.
Ferrell also proffered excerpts of Peake‘s deposition testimony. In this testimony, Peake acknowledged that during the escrow period she was aware the home had prior drainage problems and that extensive repairs to the drainage system had been performed. She testified that she and her own real estate agent had discussed Ferrell‘s disclosure “that there had been
Although she did not specifically recall reviewing the 2007 Focus report before escrow closed, Peake acknowledged at her deposition that this report “show[s] damage under the floor.” She also said she noticed there was some “sponginess” on one bedroom floor during her walk-through of the property before the sale closed. Peake additionally said she was aware there was a sump pump at the back of the property, and she understood the purpose of a sump pump is to “take water out, if there is any excess water, in a basement.”
In addition to the real estate documents and depositiоn testimony submitted in support of his sanctions motion, Ferrell discussed Peake‘s complete lack of offensive discovery, and her counsel‘s disregard for the numerous cautionary e-mails urging him to reevaluate Peake‘s claim.
Peake‘s Amendments to Complaint in Response to Sanctions Motion
After Ferrell served the sanctions motion, he did not immediately file the motion because of the statutory 21-day safe harbor requirement.3 During this safe harbor period, Peake did not dismiss her statutory claim against Ferrell and instead she moved for leave to amend her complaint to reassert the three common law claims (negligence, breach of fiduciary duty, and constructive fraud) she had previously stricken by stipulation, and to add new causes of action for intentional fraud and negligent concealment against Ferrell.
The trial court denied Peake‘s motion to amend regarding the previously stricken claims because they were based on the same fаcts and legal theories, but allowed the amendments as to the intentional fraud and negligent concealment claims. The facts alleged in these new claims were similar to the
Filed Sanctions Motions and Opposition Arguments
After these amendments were permitted and several months after the safe harbor period expired, Ferrell filed his sanctions motion. The motion was essentially identical to the version initially served on Peake and did not address the new fraud and negligent concealment claims.
As the centerpiece of their opposition papers, Peake and Shaw stated that Peake “is pursuing her cause of action based on [
In support of their assertion that Ferrell knew about undisclosed problems and inadequate repairs before escrow closed, appellants submitted Peake‘s declaration stating: “Several months after purchasing my home, my son‘s foot went through the floor. It became apparent to me for the first time that the floor was suffering from significant rotting. [[] . . . When I told Paul Ferrell [that my son‘s foot went through the floor] and asked him [in a phone convеrsation] about earlier repairs and improvements to the property[,] I asked why the floor was rotted. He responded by saying that when the Underwoods initially purchased the home, they planned on making extensive improvements and repairs. However, shortly after purchasing the home, Mr. Underwood, who was a professional football player with the NFL was injured and lost his income. Mr. Ferrell explained that since Mr. Underwood lost his income, the Underwoods were unable to complete the improvements to the drainage system and repairs to the floor.” In her declaration, Peake also stated that although she was “given various written disclosures” before escrow closed, she “was never told the drainage repairs were not completed prior to purchasing the home, nor was [she] told the floor needed significant
Peake and Shaw further supported their opposition with an expert declaration from Richard Snyder, an experienced Realtor and property manager. Snyder stated he was retained to provide an opinion on whether Ferrell met the standard of care under
In reply, Ferrell raised the factual error in appellants’ opposition brief and Snyder‘s declaration: appellants and Snyder had both claimed Ferrell prepared and endorsed the relevant portion of the Transfer Disclosure statement, but in fact it was the Underwoods who had signed this statement. Appellants thereafter conceded the error and Snyder amended his declaration to correct that discrepancy.
Ferrell also submitted his own declaration in which he denied Peake‘s version of the phone call after her son‘s foot went through the bathroom floor.
Ferrell also lodged nine additional cautionary communications sent to Attorney Shaw after serving the sanctions motion. Attached to one of them was a declaration from Peake‘s own real estate agent, who declared that Peake was given “all [the] disclosures and other transaction paperwork” provided by Ferrell and that Peake reviewed all of it.
Court‘s Ruling
After considering the submissions, the court issued a minute order tentatively granting Ferrell‘s sanctions motion, stating it found “plaintiff and her attorneys’ maintenance of her complaint against [Ferrell was] baseless and utterly lacking in legal merit.” In a lengthy explanation, the court said the evidence established that “at the close of escrow, [Peake] had all the information necessary and that the brokers satisfied all their duty by supplying all reports” and “there is nothing that plaintiff or her counsel can point to establishing that Mr. Ferrell failed in his
During the hearing, Peake‘s counsel focused on the evidence allegedly showing Ferrell had actual notice that the subfloor repairs had not been, performed (or had not been properly performed) and that Ferrell failed to disclose this information and/or that his partial disclosures regarding repairs were misleading. Peake‘s counsel also reminded the court that he had amended the complaint to add two common law claims. The court responded: “I‘ll take this under submission. [][] And I do appreciate your pointing out those two causes of action.”
After the hearing, the court adhered to its prior conclusion that Ferrell met his burden to show Peake‘s claims were “utterly lacking in legal merit” and appellants’ continued maintenance of the claims warranted sanctions under
On a separate issue and as explained below, the court had previously granted the Underwoods’ motion to compel arbitration under an arbitration provision in the purchase agreement. Shortly after, Peake dismissed her case against the Underwoods based on her understanding that the Underwoods were insolvent. After the dismissal, the Underwoods successfully moved for
On appeal, Peake and Shaw challenge the sanctions order and Peake challenges the attorney fees award to the Underwoods.
DISCUSSION
I. Sanctions Award
A. Legal Principles Governing Code of Civil Procedure Section 128.7 Sanctions
Under
The Legislature enacted
A court has broad discretion to impose sanctions if the moving party satisfies the elements of the sanctions statute. (See Kojababian v. Genuine Home Loans, Inc. (2009) 174 Cal.App.4th 408, 421 [94 Cal.Rptr.3d 288].) However, the sanctions statute ” ‘must not be construed so as to conflict with the primary duty of an attorney to represent his or her client zealously. Forceful representation often requires that an attorney attempt to read a case or an agreement in an innovative though sensible way. Our law is constantly evolving, and effective representation sometimes compels attorneys to take the lead in that evolution.” (Guillemin, supra, 104 Cal.App.4th at pp. 167-168.) Moreover, a sanction “shall be limited to what is sufficient to deter repetition of [the improper] conduct or comparable conduct by others similarly situated.” (
We review a
When the court ruled on the sanctions motion, Peake‘s complaint asserted both statutory (
1. Statutory Claim
Peake‘s statutory cause of action is based on
Peake alleged that Ferrell breached these statutory duties by failing to disclose the defective condition of the subfloors. However, it is undisputed that this alleged defеct was not visible and would not have been apparent during a reasonable property inspection. Thus, as a matter of law, Ferrell did not breach his statutory duties under
Peake and Shaw do not challenge this conclusion under existing authority, but suggest it was objectively reasonable to seek an expansion of the statutes to require real estate brokers to “fully disclose facts which the broker knows, whether or not those facts could be revealed by a simple visual inspection” and thus “to affirmatively disclose everything they knew about a specific property which may materially affect the value or desirability of that property.” Appellants characterize this argument as a “functional interpretation” of the statute, rather than a “mechanical” one. They argue
In any event, appellants’ argument is not founded on any reasonable legal principles. In interpreting a statute, a court is bound by the words of the statute and must give those words a plain and commonsense meaning. (Los Angeles County Metropolitan Transportation Authority v. Alameda Produce Market, LLC (2011) 52 Cal.4th 1100, 1106-1107 [133 Cal.Rptr.3d 738, 264 P.3d 579].) ” ‘If the statutory language is unambiguous, ‘we presume the Legislature meant what it said, and the plain meaning of the statute governs.” [Citation.]” (Whaley v. Sony Computer Entertainment America, Inc. (2004) 121 Cal.App.4th 479, 485 [17 Cal.Rptr.3d 88]; accord, Moreno v. Quemuel (2013) 219 Cal.App.4th 914, 918 [162 Cal.Rptr.3d 219].)
Appellants’ discussion of the legislative history underlying
In any event, there is nothing in the legislative history supporting appellants’ proposed statutory interpretation. The Legislature‘s stated intеnt in enacting
Appellants’ argument regarding the proper interpretation of
2. Common Law Fraud Claims
Peake and Shaw alternatively argue that the court erred in concluding that Peake‘s common law intentional and negligent concealment claims were objectively unreasonablе and thus warranted sanctions.
In asserting the common law concealment claims in her amended complaint, Peake alleged Ferrell knew the residence “contained areas of severe water intrusion damage” when the Underwoods purchased the property and knew the Underwoods had not repaired the water-damaged subfloor areas of the home. Peake alleged Ferrell failed to disclose these facts and that Ferrell affirmatively misrepresented that he “knew of no water intrusion and/or other damage to the [property].”
On appeal, appellants do not suggest there are any facts showing Ferrell made affirmative misrepresentations regarding the defective subfloors, but argue there was a reasonable basis to conclude he may be held liable for fraudulent concealment for failing to disclose his knowledge regarding the subfloors’ unrepaired condition.
In enacting
Peake and Shaw contend they presented evidence showing Ferrell knew the defective condition of the subfloors through Ferrell‘s prior representation of the Underwoods. In support, they discuss that Ferrell was the agent when the Underwoods purchased the property and the fact that the prior owner had disclosed the existence of substantial water/drainage problems at the time of that prior sale. They also cite Ferrell‘s statement in the Visual Inspection Checklist in the “OTHER” category, stating: “See past inspection reports, drainage upgrade report and work by civil engineer, Kenneth Discenza and Bond Construction. Drainage improvements were performed in two separate projects.” (Boldface & some capitalization omitted.) Appellants also rely on Peake‘s declaration describing her telephone conversation with Ferrell, in which she stated that Ferrell responded to her inquiry regarding the incident with her son‘s foot falling through the bathroom floor by stating that the Underwoods ran out of money to complete necessary repairs.
Taken together, these facts arguably support an inference that Ferrell was aware there were problems with the subfloors when Peake purchased the property. However, even assuming this awareness, a seller‘s agent has no affirmative duty to disclose latent defects unless the agent ”also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer.” (Holmes v. Summer, supra, 188 Cal.App.4th at p. 1518, italics added; see Assilzadeh, supra, 82 Cal.App.4th at p. 410.)
The undisputed evidence shows Peake had notice of the prior problems with the subfloors caused by a water intrusion incident and was aware that repairs to the drainage systems had been made (including the addition of french drains and sump pumps). The theory of Peake‘s case was that although the drainage system repairs may have fixed the drainage problem, they did not address (or negligently addressed) the damage to the subflooring caused by the water intrusion. However, Peake admits that she was provided the 2007 Focus report during the escrow period and acknowledges that this report disclosed the damaged subfloors. As her counsel noted at the sanctions hearing, the 2007 Focus report contains photographs ” “that show[] the rotted wood.” Additionally, Peake admitted at her deposition that during the escrow period she was aware of some “sponginess” in the floor of one bedroom and acknowledges that Ferrell specifically noted this fact in his Visual Inspection Checklist. Peake further admitted that she reviewed the work by the contractor who performed repairs to the drainage system. These facts would have put any reasonable person on inquiry notice of the need to
This record indisputably establishes that Ferrell provided Peake with disclosures and reports disclosing the existence of prior drainage issues and damage to the subfloors. These were the essential facts regarding the residence‘s conditiоn, and they were not only within Peake‘s “diligent attention,” they were actually known to her prior to the close of escrow. Thus, Peake‘s intentional and negligent concealment claims against the listing agent were without any arguable merit.
In their appellate briefs, appellants suggest that Ferrell could be held liable for intentional fraud by a half-disclosure, i.e., by affirmatively representing that repairs had been made to the drainage system, leading Peake to believe the problems with the subfloors had been fixed. Appellants argue that when Ferrell disclosed in the Visual Inspection Checklist that engineer Discenza and contractor Bond made drainage improvements, Ferrell should also have disclosed that the subfloors remained unrepaired. However, appellants presented no evidence that Peake actually interpreted Ferrell‘s statements in this manner. Moreover, it is not reasonable to infer that because drainage improvements were made, this gave rise to an expectation that the subfloor must also have been repaired. Peake admits that before the transaction closed she was in possession of the 2007 Focus report that disclosed substantial defects in the subfloors and appellants concede in their reply brief that “[n]owhere did the record from the work by Discenza or Bond Construction indicate that the subfloors had been repaired or addressed as a result of any prior flooding or water intrusion,” Moreover, Peake testified that she reviewed contractor Bond‘s plans and saw the work that had been performed. Thus, Peake would have known from the 2007 Focus report that the subfloor was damaged, and would have seen from the Discenza and Bond records the extent to which the subfloor had or had not been repaired. In short, Peake had constructive knowledge of problems with the subflooring and thus was on inquiry notice.
Appellants also rеly on their expert‘s declaration to establish their claims had factual and legal merit. However, as appellants concede, Snyder erroneously assumed that Ferrell had signed the relevant portions of the statutory Transfer Disclosure statement when, in fact, it was the Underwoods who did so. And although Snyder corrected this erroneous information, Snyder never stated or indicated that his conclusions remained unchanged after the correction of this significant fact. Further, Snyder‘s opinions regarding the applicable standard of care are directly at odds with well-settled case law, and
Appellants alternatively contend the sanctions order must be reversed on the common law claims because the court did not consider these claims in awarding sanctions.
This contention is unsupported by the record. In their opposition to the sanctions motion, appellants specifically discussed the case law underlying Peake‘s common law claims and Ferrell referred to these claims at least twice in his reply brief in the proceedings below. Additionally, at the hearing on the sanctions motion, Peake‘s attorney raised the common law claims, and the court responded by expressly acknowledging these claims and indicating it would consider the claims when it took the matter under submission. Consistent with this assurance, the court issued a broad ruling finding the evidence established “that at the close of escrow, plaintiff had all the information necessary and that the brokers satisfied all their duty by supplying all reports.” This ruling is sufficient to show the court addressed Peakе‘s claims under both statutory and common law. Absent an indication to the contrary, we are required to presume a court was aware of, and followed, the applicable law and considered all the relevant facts and arguments. (
On our own motion, we requested the parties to provide supplemental briefing on the issue whether Ferrell was required to file a separate motion and provide a second safe harbor period after Peake added the common law claims in response to Ferrell‘s sanctions motion. Although the statutory language does appear to support the need for an additional safe harbor period after an amended pleading is filed (see
First, appellants never raised the issue below or in their appellate briefs; therefore the issue is waived. Second, it appears that any additional safe harbor period would have been futile because it was clear that appellants would not have dismissed their common law claims. Peake responded to the served sanctions motion by adding these claims that were based on essentially the same facts as the claims that had been previously dismissed.
3. Sanctions Were Appropriate Under the Circumstances of This Case
Our conclusion that the court properly found Peake‘s statutory and common law claims werе without merit, and there was no arguable factual or legal basis for asserting those claims, does not necessarily answer the question whether sanctions were appropriate under the circumstances of the case.
As with
Because our adversary system requires that attorneys and litigants be provided substantial breathing room to develop and assert factual and legal arguments, sanctions should not be routinely or easily awarded even for а claim that is arguably frivolous. Courts must carefully consider the circumstances before awarding sanctions.
With these principles in mind and considering the entire record, we conclude the court did not abuse its discretion in awarding sanctions. The record before us presents an appropriate case for sanctions because (1) under well-settled law Peake‘s substantive claims are clearly without merit; (2) appellants did not present any colorable legal or factual argument to the trial
With respect to the final point, when establishing a claim is factually or legally without merit under
First, shortly after filing the lawsuit, Peake dismissed her common law claims against Ferrell (breach of fiduciary duty, negligence, and constructive fraud). In these claims, Peake alleged liability based on Ferrell‘s failure “to disclose the material defects, failures and deficiencies with the [property] which were known and/or should have been known.” The logical inference from the dismissal of these claims is that Peake (or her attorney) recognized those claims were without merit. However, in response to the sanctions motion, appellants immediately sought to rеassert the identical claims Peake had previously dismissed and to add two legal theories that were essentially the same as the prior fraud allegations. Appellants have never provided an explanation for the earlier dismissal of these same claims. On this record, it is reasonable to infer that Peake added these claims without any reasonable belief that they were legally and factually supported.
Additionally, Peake failed to engage in any affirmative discovery against Ferrell after more than one year of filing the lawsuit. Appellants argue that the lack of discovery had nothing to do with the merits of Peake‘s case, and instead reflected only Peake‘s desire to reduce litigation costs and her tactical decision that discovery was unnecessary because the case could be litigated based on the documents in her possession. However, the trial court had an ample basis to reject thesе assertions and determine the lack of discovery reflected appellants’ recognition that the claims were without merit and the lawsuit was primarily a vehicle to extract a settlement from Ferrell. Although the court did not specifically make a finding of subjective bad faith, Peake‘s failure to seek discovery or otherwise prosecute her claims against Ferrell supports a finding that she and her attorney did not have a good faith belief in their validity and thus that the claims had no actual factual or legal basis.
Further, appellants asserted arguments in their opposition briefs below that incorrectly characterized a significant and critical fact: the identity of the
The trial court did not abuse its discretion in imposing sanctions.5
II. Order Awarding Underwoods’ Prevailing Party Attorney Fees*
*See footnote, ante, page 428.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DISPOSITION
The judgment is affirmed. Appellants to pay respondents’ costs on appeal.
McConnell, P. J., and McIntyre, J., concurred.
A petition for a rehearing was denied July 17, 2014, and the opinion was modified to read as printed above.