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Peake v. Underwood

California Court of Appeal
227 Cal.App.4th 428, 173 Cal. Rptr. 3d 624, 2014 WL 2872065 (2014)
ELI5:

Rule of Law:

A real estate agent fulfills their statutory disclosure duty by conducting a competent visual inspection and providing the buyer with reports revealing material defects; pursuing a lawsuit against an agent who has made such disclosures constitutes objective bad faith warranting sanctions.


Facts:

  • The Underwoods purchased a home in 2007, represented by real estate agent Ferrell, and sold it to Peake approximately one year later with Ferrell acting as their listing agent again.
  • During the escrow for the sale to Peake, Ferrell provided Peake with a Visual Inspection Checklist where he noted a 'soft spot' in a subfloor and referenced past inspection reports and drainage upgrades.
  • Ferrell also provided Peake with a 2007 'Focus report' from the previous owner which explicitly documented decay and damage to the subflooring.
  • The Underwoods signed a Transfer Disclosure Statement claiming there were no drainage problems, but Ferrell did not sign that specific portion of the document.
  • Peake admitted she saw the disclosures regarding the 'sponginess' of the floor and received the reports but assumed prior drainage repairs had fixed the underlying issues.
  • Two years after the purchase, Peake's son's foot fell through the bathroom floor due to the rotting subfloor.
  • Peake claimed she would not have bought the property had she known the repairs were incomplete.

Procedural Posture:

  • Peake filed a complaint in the Superior Court of San Diego County against the Underwoods and Ferrell alleging breach of contract, fraud, and negligence.
  • Ferrell served Peake and her counsel with a motion for sanctions under CCP section 128.7, initiating the 21-day safe harbor period.
  • Peake did not dismiss the claims during the safe harbor period but instead moved to amend the complaint to add common law fraud claims.
  • The trial court granted the motion to amend but then heard Ferrell's motion for sanctions.
  • The trial court granted Ferrell's motion, dismissed the claims against him, and ordered Peake and her attorney to pay $60,000 in sanctions.
  • Separately, the Underwoods moved to compel arbitration.
  • The trial court granted the motion to compel arbitration.
  • Peake voluntarily dismissed her claims against the Underwoods.
  • The Underwoods moved for prevailing party attorney fees, which the trial court granted.
  • Peake and her attorney appealed the sanctions order and the attorney fee award to the Court of Appeal.

Locked

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Issue:

Does a trial court abuse its discretion by imposing monetary sanctions and dismissing a homebuyer's claims against a seller's real estate agent for failure to disclose defects, where the agent provided inspection reports revealing the defects and the plaintiff continued the litigation without evidentiary support?


Opinions:

Majority - Justice Haller

No, the trial court acted within its discretion because the agent fulfilled his legal duties and the plaintiff's claims were objectively unreasonable. The court reasoned that under Civil Code section 2079, a seller's agent has a duty to conduct a 'reasonably competent and diligent visual inspection' and disclose material facts. This duty does not extend to inaccessible areas like subfloors. The evidence established that Ferrell disclosed the 'soft spot' and provided the 2007 report showing the subfloor damage, thereby placing Peake on inquiry notice. Because Peake possessed the reports revealing the defects before escrow closed, she could not prove the agent concealed facts. Furthermore, the plaintiff's attorney failed to withdraw the claims during the safe harbor period and instead filed an amended complaint with baseless fraud allegations. Consequently, maintaining the lawsuit despite knowing the agent had disclosed the defects demonstrated objective bad faith.



Analysis:

This decision reinforces the protections for real estate agents who comply with their statutory disclosure obligations. It clarifies that an agent's duty is limited to visual inspections and known facts, and they are not required to verify the seller's representations or inspect inaccessible areas. Significantly, the case serves as a stern warning to litigants and attorneys regarding California Code of Civil Procedure section 128.7. It establishes that sanctions are appropriate not just for filing a frivolous complaint, but for continuing to advocate for claims after contrary evidence (here, the disclosure reports) makes it clear the claims lack merit. It emphasizes that attorneys cannot 'bury their heads in the sand' regarding the results of their own client's pre-escrow disclosures.

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