Court Opinion

ID: 5550812
Source: CourtListenerOpinion
Date Created: 2022-01-11 00:02:06.369382+00
Date Added: 2024-06-11T08:35:05.628449
License: Public Domain

Filed 1/10/22 Solomon v. Stiles CA4/2
                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
  California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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           IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                   FOURTH APPELLATE DISTRICT

                                                 DIVISION TWO

 NORMAN SOLOMON, et al.,

          Plaintiffs and Appellants,                                      E074899

 v.                                                                       (Super. Ct. No. PSC1905178)

 JOHN STILES,                                                             OPINION

          Defendant and Respondent.

         APPEAL from the Superior Court of Riverside County. David M. Chapman,

Judge. Reversed.

         Rick Edwards and Rick Edwards, for Plaintiffs and Appellants.

         StilesPomeroy and Michael J. Stiles, for Defendant and Respondent.

                                                              1
                                              I.

                                     INTRODUCTION

       Plaintiffs and appellants Palmetto Loft Associates, LLC and Norman Solomon

(collectively, Palmetto) retained defendant and respondent John Stiles (Stiles) to assist in

the sale of their commercial property in Cathedral City (Property). Palmetto mistakenly

stated on the property information sheet (PIS) provided to prospective buyers that the

Property had sewer access. After purchasing the property, the buyer (Buyer) sued

Palmetto for mispresenting that the Property had sewer access. In turn, in the instant

action, Palmetto sued Stiles for knowing but not disclosing that the Property used a septic

tank system, and not correcting the PIS misstatement that there was sewer access.

       Palmetto appeals from the judgment entered after the trial court sustained Stiles’s

demurrer to the first amended complaint (FAC) without leave to amend. Palmetto

contends the trial court erred in ruling Palmetto failed to allege sufficient facts to support

its claims and failed to show it could successfully amend. We agree. We therefore

reverse the order sustaining Stiles’s demurrer without leave to amend and the judgment

of dismissal.

                                              II.

                     FACTS AND PROCEDURAL BACKGROUND

       A. Complaint Allegations

       Palmetto’s FAC alleges causes of action against Stiles for breach of fiduciary

duty, negligence, implied equitable indemnity, and comparative contribution. The FAC

                                              2
alleges the following facts. Stiles was a licensed real estate agent/broker employed by

real estate broker, Sperry Van Ness (SVN). Palmetto resided in Los Angeles. Stiles

represented Palmetto as seller of the Property located in Cathedral City. As a dual agent,

Stiles also represented the Buyer of the Property. Stiles informed Palmetto that he was a

broker highly experienced in selling commercial property located in the subject area.

       The FAC further alleged Stiles knew Palmetto had never occupied the Property,

lived and worked in Los Angeles, and was “unfamiliar with peculiarities of the subject

area and with the lack of sewer lines in the subject area. The subject area’s lack of sewer

lines and dependence on septic tanks was a peculiarity of the area known to STILES but

not to [Palmetto].” Stiles had over six months before escrow closed to disclose and

correct Palmetto’s misstatement in the PIS regarding sewer access but failed to do so.

Stiles reviewed the PIS and suggested changes included in the PIS addendum but did not

correct the statement regarding sewer access.

       Palmetto alleged in the FAC that Stiles was negligent and breached his fiduciary

duty as a dual agent to the Buyer and Palmetto by failing to correct the PIS misstatement

that the Property had sewer access, and by not disclosing to Palmetto that the general area

where the Property was located used septic tanks and not the public sewer system. As a

result, the Buyer purchased the Property and Stiles was paid a $39,000 commission as a

dual agent. Later, after the Property sale, the Buyer discovered the Property was not

hooked up to the public sewer system. The Buyer sued Palmetto for breach of contract,

                                             3
negligent misrepresentation, and suppression of facts. As a result, Palmetto incurred

attorney fees and other costs, and anticipated payment of damages to the Buyer.

       Palmetto alleged in its causes of actions for implied equitable indemnity and

comparative contribution that to the extent Palmetto was found liable to the Buyers,

Palmetto was entitled to equitable indemnity or proportionate contribution from Stiles

because Stiles failed to correct the misstatement in the PIS that the Property had sewer

access.

       Attached to the FAC as exhibits are the form Property sales/purchase agreement,

the Buyer’s counteroffer, the PIS, the PIS addendum, and the Buyer’s complaint. The

PIS states it “[i]s NOT a warranty as to the actual condition of the Property/Premises.

The purpose is, instead, to provide the brokers and potential buyer/lessee with important

information about the Property/Premises which is currently in the actual knowledge of

the Owner and which the Owner is required by law to disclose.” The PIS defines “actual

knowledge” as “the awareness of sufficient information and circumstances so as to cause

one to believe that a certain situation or condition probably exists.” With regard to

utilities, the PIS states that the Property is served by the “public sewer system and the

cost of installation thereof has been fully paid.”

       The PIS addendum states that the “Property was recently acquired by Owner.

Except for storage, the building has been vacant for the duration of Seller’s ownership

and Owner has limited knowledge of any Material Physical Defects. The building may

need repairs and/or renovations.” The addendum provides supplemental information to

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13 of the 14 topic paragraphs included in the PIS. The only topic paragraph in which the

addendum did not provide supplemental information was the paragraph on utilities.

       B. Demurrer

       Stiles filed a demurrer to the FAC, arguing that Palmetto stated in the PIS that it

had actual knowledge that the Property was connected to the public sewer system.

Therefore, Stiles was not liable or negligent for not correcting the misstatement in the

PIS. Stiles further argued Palmetto failed to allege in the FAC that Palmetto told Stiles it

was not sure or did not know if the Property was connected to the public sewer system.

Also, Palmetto did not ask Stiles to investigate or verify whether the Property was

connected to the sewer system. In addition, Stiles argued that “the FAC’s conclusory

allegations that Mr. Stiles knew about a ‘peculiarity of the area’ without alleging specific

facts that would establish Mr. Stiles actually had such knowledge, or that the alleged

peculiarity actually exists,” failed to meet the heightened pleading standards applicable to

a constructive fraud claim.

       Palmetto filed opposition to Stiles’s demurrer, arguing Stiles had a duty to review

the PIS and correct the misstatement that the Property had access to the public sewer

system. Palmetto noted it added FAC allegations from which it could be inferred Stiles

knew the Property was not connected to the sewer system, yet failed to correct the PIS

misstatement. Stiles argued in his reply that he did not owe Palmetto any duty to correct

the misstatement in the PIS.

                                             5
       C. Demurrer Hearing

       Before the hearing on Stiles’s demurrer to the FAC, the trial court provided the

parties with a tentative ruling sustaining the demurrer without leave to amend. The court

explained in the tentative that “Each of [Palmetto’s] 4 causes of action are based on the

premise that [Stiles] owed them a duty to: 1) disclose the peculiarity of the area where

the property was located as concerns septic tanks and non-sewer-line hookup, and 2) to

review and correct the property information sheet furnished by [Palmetto] to Stiles. None

of the cases cited by [Palmetto] stand for that proposition. Ryan v. Real Estate of the

Pacific, Inc. (2019) 32 Cal.App.5th 637 [(Ryan)] does not apply to the facts as alleged in

the FAC. Specifically, in Ryan, which involved the sale of residential not commercial

property, the court found that a real estate broker has a duty to share information with his

client the seller if he knows that information will adversely affect the value of the

property he is selling.”

       During the hearing, the court stated that there were no cited cases that stood for

“the proposition that where an affirmative representation has been made by a plaintiff to

their sales agent, the sales agent has either a fiduciary obligation or any other obligation

to independently confirm whether the misrepresentation made by the plaintiff was, in

fact, accurate.” Palmetto’s attorney stated he was not aware of any such cases but argued

that, even though Ryan, supra, 32 Cal.App.5th 637 is a residential case, it relied on

common law which applies to both commercial and residential real property and is

broader than statutory law.

                                              6
       The court further stated that Palmetto did not allege that Stiles knew that

Palmetto’s misstatement there was sewer access was false. Palmetto also did not allege

that when Stiles reviewed the PIS, it knew the statement was false or that the

modifications in the addendum were in any way related to the statement the Property had

sewer access.

       Palmetto’s attorney acknowledged that there were no allegations in the FAC

specifically stating (1) Stiles knew the Property did not have sewer access, (2) when

Stiles reviewed the PIS, he knew that Palmetto’s statement that there was sewer access

was false, or (3) Stiles’s modifications of the PIS related to Palmetto’s PIS statement the

Property had sewer access. Palmetto’s attorney requested leave to amend to address

these factors. The court asked what additional facts would be alleged. Counsel stated he

would like the opportunity to ask his client but intended to specifically plead Stiles knew

the Property used a septic tank and was not hooked up to the sewer. Palmetto would also

plead Stiles knew the PIS statement regarding sewer access was false. Counsel noted the

FAC already alleged Stiles knew the peculiarity of the general area not having sewer

access.

       The court asked Palmetto’s counsel why those facts were not alleged in the

original complaint or the FAC. Counsel replied that California is a “notice pleading

state” and therefore he believed sufficient facts were alleged to put Stiles on notice of

Palmetto’s claims and more specific facts were not required. Counsel also noted that

California has a liberal amendment policy and therefore the court should allow one more

                                              7
opportunity to amend. The court stated counsel had not demonstrated a good faith belief

that there were sufficient facts that could be pled.

       After the trial court indicated it would sanction Palmetto’s attorney if he amended

the complaint by alleging false facts, counsel retracted his statement Palmetto could

allege Stiles had knowledge the Property had sewer access and Stiles knew the PIS

statement was false. Counsel told the court he believed he could amend the FAC to

allege these facts but needed to confirm them with his client before amending. The court

responded that it therefore intended to sustain the demurrer and deny leave to amend,

concluding counsel did not have any facts that would allow Palmetto to successfully

amend the complaint.

       Palmetto’s attorney responded that he did not state he did not have any facts to

amend. He explained he believed in good faith he could amend by alleging additional

facts but wanted to confirm the facts with his client before doing so. Counsel added that

sustaining the demurrer without leave to amend was a drastic remedy, particularly when

Palmetto had only one opportunity to amend. The court nevertheless sustained Stiles’s

demurrer to the FAC without leave to amend. The court adopted its tentative ruling as
                                                                                       1
the ruling of the court and entered a judgment of dismissal of the FAC as to Stiles.

       1
        The action remained pending against Stiles’s employer, defendant Sperry Van
Ness, who had not yet been served.

                                              8
                                              III.

                                STANDARD OF REVIEW

       “Appellate courts independently review the ruling on a general demurrer and make

a de novo determination of whether the pleading alleges facts sufficient to state a cause of

action. [Citation.] [¶] Generally, appellate courts ‘give the complaint a reasonable

interpretation, reading it as a whole and its parts in their context. [Citation.]’ [Citation.]

Also, the demurrer is treated as admitting all material facts properly pleaded, but does not

admit the truth of contentions, deductions or conclusions of law. [Citation.] [¶]

Ordinarily, the allegations in a pleading ‘must be liberally construed, with a view to

substantial justice between the parties.’ (Code Civ. Proc., § 452.)” (Davis v. Fresno

Unified School Dist. (2015) 237 Cal.App.4th 261, 274-275.)

       “‘It is not the ordinary function of a demurrer to test the truth of the plaintiff’s

allegations or the accuracy with which he describes the defendant’s conduct.

A demurrer tests only the legal sufficiency of the pleading. [Citation.]’ [Citation.] In

reviewing the ruling on a demurrer, ‘the question of plaintiff’s ability to prove these

allegations, or the possible difficulty in making such proof does not concern the

reviewing court [citations] . . . .’ [Citation.] ‘To survive a demurrer, the complaint need

only allege facts sufficient to state a cause of action; each evidentiary fact that might

eventually form part of the plaintiff’s proof need not be alleged. [Citation.]’ [Citation.]

A complaint’s allegations are construed liberally in favor of the pleader. [Citations.]”

(Ferrick v. Santa Clara University (2014) 231 Cal.App.4th 1337, 1341.)

                                               9
                                             IV.

                                       DISCUSSION

       In applying our independent review, we conclude the FAC contains sufficient

allegations to support Palmetto’s causes of action for (1) breach of fiduciary duty, (2)

negligence, (3) implied equitable indemnity, and (4) comparative contribution.

       As a dual agent for the seller and Buyer, Stiles owed Palmetto a fiduciary duty and

duty of care during the sale of the Property. The trial court concluded Palmetto failed to

allege negligence or breach of a fiduciary duty. The trial court reasoned that there was no

case law supporting the proposition that Stiles owed Palmetto a duty to correct the

misstatement in the PIS, and Palmetto did not allege any facts establishing that Stiles

knew there was a misstatement. The court also concluded Ryan was inapposite because it

concerned residential property, not commercial property. We disagree with these

conclusions.

       Under common law, generally any person who performs professional services

owes a duty of care to all persons within the area of foreseeable risk. (Norman I. Krug

Real Estate Investments, Inc. v. Praszker (1990) 220 Cal.App.3d 35, 42-43.) The

standard of care imposed on a real estate broker is higher than that applicable to a

layperson. The broker is subject to a duty of skill, care, and diligence commensurate with

the professional standards that the real estate industry has held out to the public and that

the public reasonably can expect. (Gardner v. Murphy (1975) 54 Cal.App.3d 164, 168.)

                                             10
       A real estate broker’s fiduciary duty to his or her client under the common law

“requires the highest good faith and undivided service and loyalty.” (Field v. Century 21

Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25; Nguyen v. Scott (1988) 206

Cal.App.3d 725, 739; Ford v. Cournale (1973) 36 Cal.App.3d 172, 180.) A real estate

broker owes his or her client a fiduciary duty to act in the client’s best interest, with

honesty and fair dealing. (Nguyen v. Scott, supra, at pp. 733, 740.)

       The FAC alleges that Stiles told Palmetto he was highly experienced in selling

commercial property in the area where the Property was located. Palmetto also alleged

“[t]he subject area’s lack of sewer lines and dependence on septic tanks was a peculiarity

of the area known to STILES but not to [Palmetto].” It could be reasonably inferred from

these allegations that Stiles knew the Property did not have access to the public sewer

system but Palmetto was not aware of this. The FAC alleges Stiles knew Palmetto had

never occupied the Property, Palmetto lived and worked in Los Angeles, and Palmetto

was “unfamiliar with peculiarities of the subject area and with the lack of sewer lines in

the subject area.” In addition, the FAC alleges Stiles reviewed the PIS and suggested

additional facts be included in the PIS addendum, yet did not correct Palmetto’s

misstatement regarding sewer access, even though Stiles had the opportunity to do so

before the sale of the Property became final.

       A reasonable inference could be made from these factual allegations that Stiles

was aware the PIS misstated that the Property had sewer access and Palmetto was

unaware of the misstatement. (See Ortega v. Kmart Corp. (2001) 26 Cal.4th 1200, 1206-

                                              11
1207 [“Knowledge may be shown by circumstantial evidence ‘which is nothing more

than one or more inferences which may be said to arise reasonably from a series of

proven facts.’”].)

       Stiles argues Palmetto stated in the PIS that it had “actual knowledge” of the

information provided in the PIS, which included the statement the Property had sewer

access. Stiles asserts he cannot be held responsible for Palmetto making an erroneous

statement of “actual knowledge.” We disagree. The PIS defines “actual knowledge,” as

the term is used in the PIS, as “the awareness of sufficient information and circumstances

so as to cause one to believe that a certain situation or condition probably exists.” A

reasonable inference could be made from the alleged facts that Palmetto thought it had

sufficient information and circumstances to conclude the Property had sewer access but

was wrong. A reasonable inference could also be made that Stiles, on the other hand,

knew the PIS statement was false and Palmetto was unaware of the error.

       Under such circumstances, Stiles owed Palmetto a fiduciary duty to act in

Palmetto’s best interests by informing it of the error and correcting it in order to avoid

foreseeable harm to Palmetto. The error constituted information adversely affecting the

value of the Property and it was foreseeable that, if the information was not disclosed to

Palmetto and the Buyer, Palmetto would be vulnerable to being sued by the Buyer upon

the Buyer discovering there was no sewer access.

       Stiles argues Palmetto was required to allege facts with greater specificity because

Palmetto’s FAC alleged constructive fraud. (Schauerv. Mandarin Gems of California,

                                             12
Inc. (2005) 125 Cal.App.4th 989, 960-961 [every element of a fraud cause of action must

be alleged with factual specificity, and the policy of liberal construction of pleading will

not be invoked.].) But the FAC does not include any fraud or constructive fraud claims.

Therefore the FAC is not subject to a heightened pleading standard.

       We thus conclude Palmetto’s FAC adequately alleged that Stiles owed Palmetto a

fiduciary duty to disclose that the area where the Property was located used septic tanks,

and to correct the incorrect statement in the PIS that the Property has sewer access.

Additional factual allegations were not necessary to allege negligence, breach of

fiduciary duty, implied equitable indemnity, or comparative contribution.

       Stiles also argues he did not have a duty to investigate whether the Property had

sewer access. But Palmetto’s FAC does not allege Stiles had any such duty or breached

it by not investigating whether there was sewer access. Rather, Palmetto’s claims are

premised on allegations Stiles knew the PIS stated inaccurate information regarding

sewer access and Stiles breached a duty to disclose and correct the misstatement.

       Although, as the trial court noted, Ryan is factually distinguishable because the

case involves residential real property, Ryan is instructive because the Ryan court relied

on common law nondisclosure principles that apply equally to commercial and residential

property. In Ryan, supra, 32 Cal.App.5th 637, the real estate agent for the seller did not

disclose to the seller or buyer that a neighbor told the agent that he intended to remodel

his home, which would result in blocking the seller’s ocean view, and the remodel would

take two years to complete. (Id. at pp. 639-640.) After purchasing the seller’s home, the

                                             13
buyer successfully arbitrated claims against the seller for rescission and damages based

on nondisclosure of the neighbor’s remodel project. The seller then sued his broker for

negligence and breach of fiduciary duty. (Id. at pp. 640-641.) The Ryan court reversed

summary judgment for the broker, holding that there was evidence the seller’s broker

breached his duty to disclose adverse information. (Id. at pp. 639, 646.)

       The Ryan court stated that under such common law, “[i]f a real estate broker has

information that will adversely affect the value of a property he or she is selling, does that

broker have a duty to share that information with his or her client? The clear and

uncontroversial answer to that question is yes.” (Ryan, supra, 32 Cal.App.5th at p. 646.)

The Ryan court explained that under common law “‘a broker’s fiduciary duty to his client

requires the highest good faith and undivided service and loyalty.’ [Citation.] . . . [I]f

Defendants [sellers’ agents] had some knowledge that could impact the sales price

(especially if that information would adversely affect the price), it logically follows that

they, in providing a service to their clients, would have a fiduciary duty to share such

information.” (Id. at p. 646.)

       The court in Ryan concluded that the sellers’ real estate agents “possessed material

information that impacted the value of the Property. They did not need to engage in any

investigation to discover this information. They simply chose to remain silent, collect

their commission, and allow the [sellers] to deal with the consequences. . . . [A]nyone

who hired a real estate broker to sell her home, would expect that broker to share

                                             14
information that would adversely impact the value of the home.” (Ryan, supra, 32

Cal.App.5th at p. 646.)

       Here, the FAC’s allegations were sufficient to support a reasonable inference that

Palmetto and the Buyer would expect Stiles to disclose the Property’s lack of sewer

access if the information was known to Stiles. Such information would adversely impact

the value of the Property. (Ryan, supra, 32 Cal.App.5th at p. 646.) It was also

foreseeable that failure to disclose the information would result in Palmetto sustaining

damages from the nondisclosure, as alleged in the FAC from the Buyer suing Palmetto.

       Giving the FAC’s properly pleaded facts a liberal construction, as we must (Code

Civ. Proc., § 452; Ferrick v. Santa Clara University, supra, 231 Cal.App.4th 1at p. 1341),

we conclude Palmetto pleaded viable claims for breach of fiduciary duty, negligence,

implied equitable indemnity, and comparative contribution. The FAC alleges facts

supporting reasonable inferences that Stiles knew the Property did not have sewer access;

Stiles was aware the PIS misstated there was sewer access; Palmetto was unaware of the

error; Stiles had an opportunity and a duty to disclose the error and correct the PIS but

failed to do so; such failure constituted negligence and a breach of Stiles’s fiduciary duty

owed to Palmetto; and Palmetto sustained damages as a result of Stiles’s failure to correct

the PIS misstatement and disclose information adversely affecting the value of the

Property. The trial court thus erred in sustaining Stiles’s demurrer to the FAC.

                                             15
                                           V.

                                    DISPOSITION

      The order sustaining Stiles’s demurrer to the FAC without leave to amend and

judgment of dismissal are reversed. Palmetto is awarded its costs on appeal.

      NOT TO BE PUBLISHED IN OFFICIAL REPORTS

                                                             CODRINGTON
                                                                                     J.

We concur:

McKINSTER
               Acting P. J.

RAPHAEL
                         J.

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