Rothstein v. Janss Investment Corp.

Rule of Law:

A vendor of real property has a legal duty to disclose material facts accessible only to the vendor and not visible to the diligent vendee, and a contractual exculpatory clause cannot shield the vendor from liability for their own fraud or active concealment of such facts.

Facts:

• Plaintiffs (husband and wife) inspected a residential lot in Westwood Village offered for sale by the defendant corporations.
• Plaintiffs signed an option agreement to purchase the property which contained a clause stating they had personally inspected the property and that the seller was not bound by any representations not contained in the written option.
• Defendant Spradling, an agent for the corporations, orally represented to the Plaintiffs that the lot was solid and did not contain a fill.
• Plaintiffs exercised the option and purchased the property, relying on the belief that the ground was solid.
• Plaintiffs hired an architect and began excavating the lot to construct a dwelling.
• Upon excavation, Plaintiffs discovered the lot contained a fill of approximately 19 feet deep.
• The filled condition required the construction of a significantly more expensive foundation than initially anticipated.
• The defendant corporations knew the lot was filled ground but did not disclose this fact to the Plaintiffs.

Procedural Posture:

• Plaintiffs sued the Defendant corporations and their agent in the trial court for damages for fraud.
• Plaintiffs amended their complaint to allege the corporate defendants knew of the fill and concealed it.
• At trial, Plaintiffs offered to prove the cost of the foundation and the existence of the oral representations regarding the fill.
• Defendants objected to this evidence based on the exculpatory clause in the option agreement.
• The trial court sustained the objection, refusing to admit the evidence.
• The trial court entered judgment in favor of the Defendants.
• Plaintiffs appealed to the California District Court of Appeal.