Reed v. King

• Decision Date: 21 June 1983
• Citation: 193 Cal.Rptr. 130,145 Cal.App.3d 261
• Parties: Dorris Joni REED, Plaintiff and Appellant, v. Robert J. KING et al., Defendants and Respondents. Civ. 21937.
• Court: California Court of Appeals Court of Appeals

Page 130

193 Cal.Rptr. 130

145 Cal.App.3d 261

Dorris Joni REED, Plaintiff and Appellant, v. Robert J. KING et al., Defendants and Respondents.

Civ. 21937.

Court of Appeal, Third District, California.

June 21, 1983.

Hearing Denied Oct. 6, 1983.

McKernan & Lanam and Stephen E. Benson, Chico, for plaintiff and appellant.

Price, Burnes, Price, Davis & Brown, Philip B. Price, Chico, and Mary Marsh Linde for defendants and respondents.

BLEASE, Associate Justice.

In the sale of a house, must the seller disclose it was the site of a multiple murder? Dorris Reed purchased a house from Robert King. Neither King nor his real estate agents (the other named defendants) told Reed that a woman and her four children were murdered there ten years earlier. However, it seems "truth will come to light; murder cannot be hid long." (Shakespeare, Merchant of Venice, Act II, Scene II.) Reed learned of the gruesome episode from a neighbor after the sale. She sues seeking rescission and damages. King and the real estate agent defendants successfully demurred to her first amended complaint for failure to state a cause of action. Reed appeals the ensuing judgment of dismissal. We will reverse the judgment.

FACTS

We take all issuable facts pled in Reed's complaint as true. (See 3 Witkin, Cal.Procedure (2d ed. 1971) Pleading, § 800.) King and his real estate agent knew about the murders and knew the event materially affected the market value of the house when they listed it for sale. They represented to Reed the premises were in good condition and fit for an "elderly lady" living alone. They did not disclose the fact of the murders. At some point King asked a neighbor not to inform Reed of that event. Nonetheless, after Reed moved in neighbors informed her no one was interested in purchasing the house because of the stigma. Reed paid $76,000, but the house is only worth $65,000 because of its past.

The trial court sustained the demurrers to the complaint on the ground it did not state a cause of action. The court concluded a cause of action could only be stated "if the subject property, by reason of the prior circumstances, were presently the object of community notoriety ...." (Original italics.) Reed declined the offer of leave to amend.

Discussion

Does Reed's pleading state a cause of action? Concealed within this question is the nettlesome problem of the duty of disclosure of blemishes on real property which are not physical defects or legal impairments to use.

Reed seeks to state a cause of action sounding in contract, i.e. rescission, or in tort, i.e. deceit. In either event her allegations must reveal a fraud. (See Civ.Code, §§ 1571-1573, 1689, 1709-1710.) "The elements of actual fraud, whether as the basis of the remedy in contract or tort, may be stated as follows: There must be (1) a false representation or concealment of a material fact (or, in some cases, an opinion) 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." ¹ (Original italics.) (1 Witkin, Summary of California Law (8th ed. 1973) Contracts, § 315.)

The trial court perceived the defect in Reed's complaint to be a failure to allege concealment of a material fact. "Concealment" and "material" are legal conclusions concerning the effect of the issuable facts pled. As appears, the analytic pathways to these conclusions are intertwined.

Concealment is a term of art which includes mere non-disclosure when a party has a duty to disclose. (See e.g. Lingsch v. Savage (1963) 213 Cal.App.2d 729, 738, 29 Cal.Rptr. 201; Rest.2d Contracts, § 161; Rest.2d Torts, § 551; Rest.Restitution, § 8, esp. com. b.) Reed's complaint reveals only non-disclosure despite the allegation King asked a neighbor to hold his peace. There is no allegation the attempt at suppression was a cause in fact of Reed's ignorance. ² (See Rest.2d Contracts, §§ 160, 162-164; Rest.2d Torts, § 550; Rest.Restitution, § 9.) Accordingly, the critical question is: does the seller have duty to disclose here? Resolution of this question depends on the materiality of the fact of the murders.

In general, a seller of real property has a duty to disclose: "where the seller knows of facts 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 seller is under a duty to disclose them to the buyer. ³ [Emphasis added; Citations omitted.]" (Lingsch v. Savage, supra, 213 Cal.App.2d at p. 735, 29 Cal.Rptr. 201.) This broad statement of duty has led one commentator to conclude: "The ancient maxin caveat emptor ('let the buyer beware.') has little or no application to California real estate transactions." (1 Miller and Starr, Current Law of Cal.Real Estate (rev. ed. 1975) § 1:80.)

Whether information "is of sufficient materiality to affect the value or desirability of the property ... depends on the facts of the particular case." (Lingsch, supra, 213 Cal.App.2d at p. 737, 29 Cal.Rptr. 201.) Materiality "is a question of law, and is part of the concept of right to rely or justifiable reliance." (3 Witkin, Cal.Procedure (2d ed. 1971) Pleading, § 578, p. 2217.) Accordingly, the term is essentially a label affixed to a normative conclusion. ⁴ Three considerations bear on this legal conclusion: the gravity of the harm inflicted by non-disclosure; the fairness of imposing a duty of discovery on the buyer as an alternative to compelling disclosure, and its impact on the stability of contracts if rescission is permitted.

Numerous cases have found non-disclosure of physical defects and legal impediments to use of real property are material. (See 1 Miller and Starr, supra, § 181.) ⁵ However, to our knowledge, no prior real estate sale case has faced an issue of non-disclosure of the kind presented here. (Compare Earl v. Saks & Co., supra; Kuhn v. Gottfried (1951) 103 Cal.App.2d 80, 85-86, 229 P.2d 137.) Should this variety of ill-repute be required to be disclosed? Is this a circumstance where "non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing [?]" (Rest.2d Contracts, § 161, subd. (b).)

The paramount argument against an affirmative conclusion is it permits the camel's nose of unrestrained irrationality admission to the tent. If such an "irrational" consideration is permitted as a basis of rescission the stability of all conveyances will be seriously undermined. Any fact that might disquiet the enjoyment of some segment of the buying public may be seized upon by a disgruntled purchaser to void a bargain. ⁶ In our view, keeping this genie in the bottle is not as difficult a task as these arguments assume. We do not view a decision allowing Reed to survive a demurrer in these unusual circumstances as endorsing the materiality of facts predicating peripheral, insubstantial, or fancied harms.

The murder of innocents is highly unusual in its potential for so disturbing buyers they may be unable to reside in a home where it has occurred. This fact may foreseeably deprive a buyer of the intended use of the purchase. Murder is not such a common occurrence that buyers should be charged with anticipating and discovering this disquieting possibility. Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly be imposed upon the buyer.

Reed alleges the fact of the murders has a quantifiable effect on the market value of the premises. ⁷ We cannot say this allegation is inherently wrong and, in the pleading posture of the case, we assume it to be true. If information known or accessible only to the seller has a significant and measureable effect on market value and, as is alleged here, the seller is aware of this effect, we see no principled basis for making the duty to disclose turn upon the character of the information. Physical usefulness is not and never has been the sole criterion of valuation. Stamp collections and gold speculation would be insane activities if utilitarian considerations were the sole measure of value. (See also Civ.Code, § 3355 [deprivation of property of peculiar value to owner]; Annot. (1950) 12 A.L.R.2d 902 [measure of damages for conversion or loss of, or damage to, personal property having no market value].)

Reputation and history can have a significant effect on the value of realty. "George Washington slept here" is worth something, however physically inconsequential that consideration may be. Ill-repute or "bad will" conversely may depress the value of property. Failure to disclose such a negative fact where it will have a forseeably depressing effect on income expected to be generated by a business is tortious. (See Rest.2d Torts, § 551, illus. 11.) Some cases have held that unreasonable fears of the potential buying public that a gas or oil pipeline may rupture may depress the market value of land and entitle the owner to incremental compensation in eminent domain. (See Annot., Eminent Domain: Elements and measure of compensation for oil or gas pipeline through private property (1954) 38 A.L.R.2d 788, 801-804.)

Whether Reed will be able to prove her allegation the decade-old multiple murder has a significant effect on market value we cannot determine. ⁸ If she is able to do so by competent evidence she is entitled to a favorable ruling on the issues of materiality and duty to disclose. ⁹ Her demonstration of objective tangible harm would still the concern that permitting her to go forward will open the floodgates to rescission on subjective and idiosyncratic grounds.

A more troublesome question would arise if a buyer in similar circumstances were unable to plead or...