Opinion
H036605
12-08-2011
OUITA MARTIN AND THOMAS A. JOHNS GENERAL PARTNERSHIP, Plaintiff and Appellant, v. ETS SERVICES, LLC et al., Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Monterey County Super. Ct. No. M107053)
Plaintiff Ouita Martin and Thomas A. Johns General Partnership purchased a residential property from four defendant entities at a nonjudicial foreclosure sale. Plaintiff brought an action to rescind its purchase, claiming defendants had not disclosed that the property was the subject of a lawsuit filed by defaulting homeowners. Defendants demurred on the ground that a lis pendens recorded on the property by the homeowners before plaintiff's purchase gave plaintiff constructive notice of the pending litigation. The trial court found that the lis pendens provided plaintiff with sufficient notice of the pending litigation and sustained defendants' demurrer without leave to amend.
Plaintiff appeals from the ensuing judgment of dismissal, contending that it was entitled to actual notice, not merely constructive notice. We agree with the trial court and affirm.
Factual and Procedural Background
On June 7, 2010, plaintiff Ouita Martin and Thomas A. Johns General Partnership purchased a residential property at a nonjudicial foreclosure sale. The day after the purchase, plaintiff learned that the property was the subject of a lawsuit brought by the former owners of the residence to challenge the validity of the home loan on which they had defaulted, the enforceability of the deed of trust that secured that loan, and the power of the trustee to conduct a foreclosure sale.
Plaintiff immediately demanded the return of its purchase money by sending a written notice of rescission to defendants ETS Services, LLC (the trustee that conducted the sale), Mortgage Electronic Registration System, Inc. (the deed of trust beneficiary), and GMAC Mortgage, LLC and GMAC Home Services, LLC (the successors in interest to the original lender). Defendants rejected plaintiff's rescission demand and refused to return the money.
Plaintiff filed a complaint for rescission and restoration, alleging that defendants had the duty to disclose the existence of the homeowners' lawsuit prior to the foreclosure sale because the suit amounted to a material defect that adversely affected the value of the property. Plaintiff claimed that it was "entitled to rescind its purchase of the Property by reason of Defendants' failure to disclose the existence of the Lawsuit, the failure of consideration, Plaintiff's material mistake of fact and Defendants' unjust enrichment."
Defendants demurred on the ground that the defaulting homeowners had recorded a lis pendens on the property on May 28, 2010, 10 days before plaintiff purchased it, which gave plaintiff constructive notice of the existence of the lawsuit before its decision to purchase. Had plaintiff diligently conducted a title search before purchasing, defendants asserted, it would have known that the property was the subject of a lawsuit brought by the homeowners.
The trial court found that the constructive notice provided by the lis pendens was sufficient to provide notice of the existence of the homeowners' suit and that, contrary to plaintiff's assertion, defendants were not required to provide plaintiff with actual notice. The court sustained the demurrer without leave to amend and dismissed plaintiff's complaint.
Discussion
1. Scope and Standard of Review
A demurrer is properly sustained when the complaint "does not state facts sufficient to constitute a cause of action." (Code Civ. Proc., § 430.10, subd. (e).) We review the sufficiency of the challenged complaint de novo, accepting as true properly pleaded factual allegations in the complaint and considering matters that may be judicially noticed. (Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 710-711 (State Farm).)
"Generally, it is held to be an abuse of discretion to sustain without leave to amend a demurrer to an original complaint, unless the complaint shows on its face that it is incapable of amendment." (Temescal Water Co. v. Dept. Public Works (1955) 44 Cal.2d 90, 107.) "Sustaining a general demurrer without leave to amend is not an abuse of discretion if it appears from the complaint that under applicable substantive law there is no reasonable possibility or probability that the defect can be cured by amendment." (Buford v. State of California (1980) 104 Cal.App.3d 811, 818 (Buford).)
"[T]he burden is on the plaintiff to demonstrate that the trial court abused its discretion. [Citations.] Plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading." (Cooper v. Leslie Salt Co. (1969) 70 Cal.2d 627, 636; see Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.) Such a showing can be made to the reviewing court even if it was not made to the trial court. (Code Civ. Proc., § 472c, subd. (a); Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1386.)
2. Duty to Disclose
Underlying all of plaintiff's arguments in the trial court and on appeal is the assumption that defendants had a duty to provide actual notice of the ongoing lawsuit brought by the homeowners regarding the subject property. This assumption is incorrect. Defendants had the duty to affirmatively disclose those material defects that plaintiff could not have discovered on its own. Through a simple title search, which would have revealed the lis pendens recorded by the homeowners to give potential buyers notice of the lawsuit, plaintiff could have discovered the existence of the material fact that plaintiff claims defendants failed to disclose.
Plaintiff does not dispute that defendants have no statutory disclosure duties. "[T]ransfers by any foreclosure sale after default" are expressly excluded from the typical Civil Code requirements regarding disclosures upon transfer of residential property. (Civ. Code, § 1102.2, subd. (c).) Thus the focus here is solely on whether defendants breached the common law duty to disclose, which applies in nonjudicial foreclosure sales. (See Karoutas v. HomeFed Bank (1991) 232 Cal.App.3d 767, 773-774 (Karoutas).)
"In the absence of a fiduciary or confidential relationship, a duty to disclose arises at common law if material facts are known only to the defendant and the defendant knows that the plaintiff does not know or cannot reasonably discover the undisclosed facts." (Karoutas, supra, 232 Cal.App.3d at p. 771, italics added.) Latent defects such as problems with soil movement at a residential property must be disclosed. (Ibid.)The existence of an ongoing lawsuit, on the other hand, is reasonably discoverable when a lis pendens is recorded before the foreclosure sale date. Indeed, that is the purpose of a lis pendens: "to give constructive notice of an action affecting real property to persons who subsequently acquire an interest in that property." (Bishop Creek Lodge v. Scira (1996) 46 Cal.App.4th 1721, 1733.)
None of the cases plaintiff cites supports its assertion that defendants had the duty to provide plaintiff with actual notice of the ongoing lawsuit. The only case that appears to come close is our own Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356 (Alfaro), as cited in Holmes v. Summer (2010) 188 Cal.App.4th 1510, 1521 (Holmes). However, when read in context, even Alfaro is inapposite.
In Alfaro, plaintiffs had acquired homes as part of an inclusionary housing development program run by defendant nonprofit corporations; in lieu of a cash down payment, plaintiffs had provided their own time and labor to help build the homes. The homes acquired through this program were subject to a deed restriction requiring them to remain affordable to other low income purchasers if plaintiffs subsequently sold their homes. Though the plaintiff homeowners had constructive notice of this deed restriction because it had been recorded before they entered into contracts to acquire their homes, plaintiffs claimed they had actual notice of the deed restriction only after investing their time and labor to purchase the homes.
We stated outright that "the recording of a deed restriction is ordinarily regarded as imparting constructive notice of its contents to subsequent purchasers," and that " '[c]onstructive notice is "the equivalent of actual knowledge; i.e., knowledge of its contents is conclusively presumed." (4 Witkin, Summary of Cal. Law [(9th ed. 1987) Real Property], § 203, p. 408, italics in original.)' " (Alfaro, supra, 171 Cal.App.4th at p. 1385.) However, under the unusual facts alleged by the plaintiffs in Alfaro, "[b]y working with plaintiffs through these programs, defendants created confidential fiduciary relationships." (Id. at p. 1366.) As we explained, "[a] claim of fraud based on mere nondisclosure may arise when there is a confidential relationship." (Id. at p. 1382.) Reasonable reliance on a defendant's nondisclosure is an element of such fraud, and we found that the issue of whether the plaintiff homeowner's reliance on the defendant fiduciaries' nondisclosure was reasonable under the particular circumstances of Alfaro was a question of fact. (Id. at p. 1383.)
For these reasons, we found that plaintiff had stated a valid cause of action for fraud based on the failure of defendants, as fiduciaries, to affirmatively disclose the existence of a recorded material defect before plaintiff had invested its time and labor, even though plaintiff had constructive notice of it. "[The] mere recording did not relieve defendants from their duty as sellers of realty to disclose its existence. . . . Plaintiffs' constructive notice of the deed restriction by virtue of its recording does not preclude them from seeking damages based on the allegation that they were induced to labor for months by defendants' failure to disclose its existence." (Alfaro, supra, 171 Cal.App.4th at p. 1393.)
Describing this finding, the court in Holmes wrote, "we observe that even when a buyer is on constructive notice of matters of record, that does not necessarily mean a cause of action in tort arising out of failure to disclose will not lie. . . . The fact that the purchasers were on constructive notice of the recorded affordable housing restrictions did not preclude an action for damages against the seller arising out of an alleged breach of the duty to disclose. Judgment in favor of the seller, following the sustaining of a demurrer, was reversed." (Holmes, supra, 188 Cal.App.4th at p. 1521.)
What Holmes did not expressly state--and what was key to our decision in Alfaro--was that the cause of action at issue in this part of Alfaro was for fraud based on fiduciary defendants' failure to provide plaintiffs with actual notice of a material defect at the time plaintiffs agreed to invest their time and physical labor. We were considering only whether plaintiffs' constructive notice of the deed restriction defeated, as a matter of law, their claim for fraudulent inducement of labor by their own fiduciaries. Nothing in Alfaro suggests that a homebuyer who has constructive notice of a nonlatent defect in the property may bring a cause of action against a nonfiduciary seller for restoration and rescission of the purchase contract, especially in the absence of an allegation of fraud.
Plaintiff states that Holmes stands for the proposition that "even when a buyer is placed on constructive notice of matters of record, such notice does not preclude the buyer from pursuing a cause of action against the seller for the seller's failure to have disclosed those matters of record of which the seller knows the buyer is unaware." In truth, the court in Holmes actually confirmed that the duty to disclose exists only when a buyer cannot reasonably ascertain material defects on its own: " '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.' " (Holmes, supra, 188 Cal.App.4th at pp. 1518-1519, quoting Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735-736, italics added.)
In Holmes, the seller's broker failed to disclose before escrow the current high balances of promissory notes secured by deeds of trust recorded against a residential property and represented to the buyers that the property would be transferred free and clear of all liens and encumbrances. Though a title search might have revealed the existence of the deeds of trust, it would not have disclosed the current balances. This material fact was not " 'within the reach of the diligent attention and observation of the buyer.' " (Holmes, supra, 188 Cal.App.4th at p. 1518.) Here, by contrast, a title search would have revealed the material fact with which plaintiff is now concerned: that the property was the subject of a lawsuit by the homeowners. The relevant legal inquiry is not, as plaintiff argues, whether the buyer has actual notice of a material defect, but whether information about that defect is reasonably accessible to the buyer before purchase.
Contrary to plaintiff's assertion, Little v. Community Bank (1991) 234 Cal.App.3d 355 (Little) does not "confirm" that a buyer's cause of action premised on a claim that the seller knew the buyer was unaware of a constructively noticed material defect must survive demurrer because it raises a question of fact. In Little, unlike in the current case, the seller was a judgment creditor that made a motion for sale of a judgment debtor's residence pursuant to the homestead exemption laws (Code Civ. Proc., §§ 704.710-704.850). The homestead exemption laws require that a judgment creditor's application for an order of sale include a statement of liens and encumbrances on the dwelling (id., § 704.760, subd. (c)), but the judgment creditor seller in Little failed to disclose recorded IRS liens on the homestead property in its application. At issue in Little was not whether the seller knew that the buyer was unaware of the recorded liens, but whether the seller could be held liable as a matter of law on a theory of negligence per se for violating the homestead exemption statute. (See Little, supra, at p. 359.) Defendants here did not sell the property subject to homestead exemption laws--the foreclosure sale was nonjudicial-so the statutory duty to provide affirmative notice of liens and encumbrances did not exist. Little is simply inapplicable to the present situation.
Plaintiff's entire complaint was based on defendants' undisputed failure to provide actual notice of the homeowners' lawsuit. However, as defendants pointed out in their demurrer, the recorded lis pendens made the existence of the suit "reasonably discover[able]" (Karoutas, supra, 232 Cal.App.3d at p. 771) by plaintiff. Thus defendants did not have the common law duty to affirmatively disclose it. Plaintiff simply cannot state a valid cause of action for rescission based on defendants' failure to do that which it was not obligated to do.
3. No Other Valid Cause of Action
In its complaint plaintiff stated--but did not actually allege--that its purchase of the property also should be rescinded because there was failure of consideration, unjust enrichment, and mistake of fact. Plaintiff argues on appeal that its own "material mistake of fact . . . will result in substantial inequity and unjust enrichment if the sale is not rescinded" and that "constructive notice does not preclude rescission based upon mistake of fact."
Plaintiff provides no real legal reasoning or explanation in support of these arguments. It cites two cases, but neither is on point. Plaintiff provides a quote from Karoutas, stating that rescission is available when a seller has behaved fraudulently; as plaintiff has never alleged fraud, this issue is not relevant. Donovan v. RRL Corp. (2001) 26 Cal.4th 261 states that rescission is a remedy available to a contracting party whose mistake of fact makes enforcement of a contract unconscionable. However, plaintiff has not provided any discussion of the legal definition of mistake of fact or how the facts of this case meet that definition; we note that mistake of fact is not the equivalent of a simple unilateral mistake, which, based on the facts plaintiff states, is quite clearly what occurred here. (See, e.g., Civ. Code, § 1577.) Plaintiff neither alleges nor argues how defendants' failure to provide actual notice of the homeowners' lawsuit--which again, was constructively noticed in a recorded lis pendens--rendered its purchase agreement unconscionable. Plaintiff provides neither a discussion about what is needed to support a finding of unconscionability nor any legal analysis of it that would explain how the bare allegations in its complaint would support a finding of unconscionability. Plaintiff is likewise silent on the concepts of failure of consideration and unjust enrichment.
Because plaintiff has offered nothing more than conclusory assertions with no legal or factual support other than the existence of the homeowners' lawsuit, we cannot find any valid causes of action concerning these legal issues.
4. Denial of Leave to Amend
We conclude that the trial court did not abuse its discretion in sustaining defendants' demurrer without leave to amend. Plaintiff bears the burden of showing that the complaint can be amended to state a valid cause of action, and "[w]hile such a showing can be made for the first time to the reviewing court [citation], it must be made." (State Farm, supra, 93 Cal.App.4th at p. 711.) Plaintiff has done nothing at all, either here or in the trial court, to show how it might amend its complaint.
Given the uncontested facts as plaintiff has described them, plaintiff has not shown how it could have amended its complaint to state a valid cause of action. Plaintiff's entire case rests on a single legal assumption: that defendants had a common law duty to disclose the existence of a pending lawsuit of which plaintiff already had constructive notice. That assumption is legally incorrect. "[W]here the nature of plaintiff's claim is clear, but under substantive law no liability exists, leave to amend should be denied, for no amendment could change the result." (Berkeley Police Assn. v. City of Berkeley (1977) 76 Cal.App.3d 931, 942; see Buford, supra, 104 Cal.App.3d at p. 818.) Neither the record nor plaintiff's briefs suggest that plaintiff can plead and prove a valid cause of action under the circumstances that exist here.
Disposition
The judgment is affirmed.
Judge of the Santa Clara County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
Bamattre-Manoukian, Acting P.J.
Retired Associate Justice of the Court of Appeal, Sixth Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
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