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Reality Principle, Inc. v. George

Court of Appeal of California
Jun 29, 2009
No. B209666 (Cal. Ct. App. Jun. 29, 2009)

Opinion

B209666.

6-29-2009

REALITY PRINCIPLE, INC., Plaintiff and Appellant, v. ROBERT H. GEORGE, et al., Defendants and Respondents.

Bergkvist, Bergkvist & Carter and Paul J. Carter for Plaintiff and Appellant. Fields & Israel, Gary D. Fields and Arlette B. Bolduc for Defendants and Respondents.

Not to be Published in the Official Reports


SUMMARY

The plaintiff filed a complaint against the defendants, alleging causes of action for fraud, breach of contract, negligent misrepresentation and failure to disclose the presence of hazardous substances in connection with a commercial real estate transaction. The defendants demurred, arguing the complaint was barred by an "as is" clause and the applicable statutes of limitations, and the trial court sustained the demurrer without leave to amend. We reverse.

FACTUAL AND PROCEDURAL SYNOPSIS

We accept as true all facts properly pleaded in the third amended complaint to determine whether the demurrer should have been overruled. (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 173, fn. 1, citations omitted.) All properly pleaded allegations are deemed true, regardless of the plaintiffs ability to later prove them. (Ibid., citation omitted.)

According to the allegations of the third amended complaint, Robert H. George and Steven George are co-trustees of the Robert H. George Trust dated June 14, 1991. The Robert H. George Trust owned commercial property located at 1361 Anaheim Street in Long Beach. In 1996, Robert George (George) approached Reality Principle, Inc. (Reality), through its principal Francisco Vilchis, and proposed that Reality purchase the property for a $50,000 down payment with the balance to be paid over ten years. (The purchase agreement and escrow instructions were attached as an exhibit to the complaint.)

Our references to George are also meant to included Steven George (both sued individually and as co-trustees) and the Robert H. George Trust unless otherwise indicated.

George knew Reality (Vilchis) had no experience purchasing commercial real estate. George encouraged Reality to complete the transaction without a broker, and George prepared all of the purchase documents, advising Reality to sign them to complete the transaction. Reality did not understand the nature of the purchase documents other than the fact it was to pay $50,000 down and then make monthly payments. Reality understood Farmers and Merchants Banks only participation in the transaction was to serve as the entity collecting the payments.

George owned the property for about 40 years prior to the sale to Reality. Reality was not aware of the nature of Georges business at the property prior to the sale, but is informed and believes George operated a battery manufacturing plant (A-A Battery Company) and an automobile dismantling facility during that time. George knew of significant hazardous contamination that occurred during his ownership but failed to advise Reality of any defects, particularly hazardous environmental contamination. George represented he was aware of no environmental issues or hazardous contamination.

Reality is informed and believes George used language in the escrow instructions holding Farmers and Merchants Bank harmless at the banks insistence and to protect the bank in the event there was contamination which was unknown to George since the bank was not a part of the sale. George represented the language was superfluous since there was no contamination at the property.

The escrow instructions (attached as an exhibit) include the following language: "The undersigned hereby indemnify and hold Farmers and Merchants Bank of Long Beach harmless from any and all loss, including attorneys fees, which said bank might sustain as a result of the possible presence of hazardous waste substances and materials affecting subject property." (There are no signatures on the attached exhibit, but there is a notation following the quoted sentence that reads: "SEE SEPARATE SHEET FOR CONTINUATION OF ESCROW INSTRUCTIONS.")
Just above the language set out in the preceding paragraph, the following text appears: "THE PARTIES UNDERSTAND AND AGREE THAT SUBJECT PROPERTY IS BEING PURCHASED IN `AS IS CONDITION WITH NO WARRANTIES EXPRESSED OR IMPLIED BY SELLER."

During the sale, George affirmatively represented there was no contamination at the property, and Reality had no reason to doubt Georges affirmative representations. When Reality acquired the property, the subsurface hazardous contamination was not visible or discoverable by visual inspection because George made material modifications and alterations to conceal the contamination—he built a structure and paved the lot. During Realitys ownership, the property was used as a truck yard. Reality never had any reason to know or suspect that just below the surface—below the pavement and concrete George installed to mask the defective condition of the property—laid substantial hazardous contamination George created and concealed. In fact, when the property was leased to others and both Reality and at least one lessee were represented by commercial real estate brokers, no contamination was discovered.

In February 2007, Reality entered into a contract to sell the property and learned of numerous defects it could not have detected by a reasonable inspection prior to consummation of the purchase contract with George. The contamination was discovered during an environmental inspection where borings were drilled approximately 10 feet into the subsurface and core samples were removed and tested. These core samples were found to contain hazardous contamination at a level several feet below the ground and beneath a concrete floor George installed after the contamination occurred, making it impossible for Reality to discover Georges fraudulent concealment until the boring occurred. Until the 2007 sale, Reality had used the property as a truck yard and had no reason to suspect George had knowingly concealed hazardous contamination.

Georges representations about the property were false. Reality is informed and believes on or about August 26, 1992, there was an incident where a significant amount of oil was spilled or released at the property, resulting in heavy crude oil flowing over, into, across and off of the property; and on or about May 28, 1994, at least 50 gallons of heavy crude oil was spilled or released onto the soil at the property. The release of the heavy crude oil resulted in subsurface hazardous contamination. In addition, Reality is informed and believes there were underground storage tanks at the property which were modified or demolished in or about 1985. The property has been contaminated with hazardous environmental waste which seeped into the ground and was underground at the property.

In order to facilitate the remediation of the property, Reality was forced to sell it at a loss of $100,000 to underwrite extensive cleanup and incurred significant costs and expenses while the property was remediated. George knew of the true and actual condition of the property, knew Reality did not know the propertys true condition and knew Reality was relying on George for such information. Despite this knowledge, George failed to disclose the propertys condition and history of contamination. As a result of Georges breach of his duty to disclose the propertys true condition, Reality completed the sale to its damage. Had George provided the propertys true condition and history, Reality would have been able to undertake an investigation to determine whether to complete the sale. George misrepresented and concealed the propertys true condition to deceive Reality and induce its reliance.

Reality alleges entitlement to punitive damages.

In violation of Health and Safety Code section 25359.7, subdivision (a), George failed to give Reality prior written notice of the presence of hazardous substances on or beneath the property. As a result of this failure and because of the extreme danger to human life posed by the presence of toxic and hazardous waste on the property, Reality was forced to sell it at a loss of $100,000. George had actual knowledge of the presence of hazardous substances on or beneath the property and knowingly and willfully failed to give Reality the notice required by law. (Health & Saf. Code, § 25363.)

Health and Safety Code section 25359.7, subdivision (a) provides: "Any owner of nonresidential real property who knows, or has reasonable cause to believe, that any release of hazardous substance has come to be located on or beneath that real property shall, prior to the sale, lease, or rental of the real property by that owner, give written notice of that condition to the buyer, lessee, or renter of the real property. Failure of the owner to provide written notice when required by this subdivision to the buyer, lessee, or renter shall subject the owner to actual damages and any other remedies provided by law. In addition, where the owner has actual knowledge of the presence of any release of a material amount of a hazardous substance and knowingly and willfully fails to provide written notice to the buyer, lessee, or renter, as required by this subdivision, the owner is liable for a civil penalty not to exceed five thousand dollars ($5,000) for each separate violation." This statute became effective May 26, 1999, but its former version, "similar to the present section," first became effective in 1988.

George demurred, arguing Reality could not state any cause of action based on Georges failure to disclose because the property was sold "as is," without any express or implied warranties, and the escrow instructions further disclosed the "possible presence of hazardous waste substances," and the delayed discovery rule did not apply as the contamination Reality complained of was disclaimed in 1996. Over Realitys opposition, the trial court sustained the demurrer without leave to amend and entered a judgment of dismissal.

Reality appeals.

DISCUSSION

"On appeal from an order dismissing a complaint after the sustaining of a demurrer, we independently review the pleading to determine whether the facts alleged state a cause of action under any possible legal theory. [Citations.] We give the complaint a reasonable interpretation, `treat[ing] the demurrer as admitting all material facts properly pleaded but do not `assume the truth of contentions, deductions or conclusions of law. [Citation.] [Citation.] We liberally construe the pleading with a view to substantial justice between the parties. [Citations.] `If the trial court has sustained the demurer, we determine whether the complaint states facts sufficient to state a cause of action. If the court sustained the demurrer without leave to amend, as here, we must decide whether there is a reasonable possibility the plaintiff could cure the defect with an amendment. [Citation.] If we find that an amendment could cure the defect, we conclude that the trial court abused its discretion and we reverse; if not, no abuse of discretion has occurred. [Citation.] The plaintiff has the burden of proving that an amendment would cure the defect. [Citation.]" (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 178-179.)

According to Reality, the "as is" provision does not relieve George from liability because of his fraudulent conduct. According to George, the "as is" clause, "coupled with the waiver of express and implied warranties provision, insulate[s George] from liability to Reality for contamination" because Reality failed to adequately plead fraud in any manner. In Georges view, "Only one conclusion can be drawn by the facts in this case: Reality purchased the property in an `as is condition, with no express or implied warranties, and was informed that there was possible contamination in the soil." Its reliance on Georges representations was "not justified" and it "must now take responsibility for its lack of diligence." For purposes of ruling on the demurrer, we agree with Reality.

Both Reality and George cite Shapiro v. Hu (1986) 188 Cal.App.3d 324 (Shapiro) as supporting authority. In Shapiro, the court stated: "[A]ny sale of property `as is is a sale of the property in its `present or existing condition; the use of the phrase `as is relieves a seller of real property from liability for defects in that condition. The only exception to this principle is when a seller, through fraud or misrepresentation, intentionally conceals material defects not otherwise visible or observable to the buyer." (Shapiro, supra, 188 Cal.App.3d at pp. 333-334, italics added, citing Lingsch v. Savage (1963) 213 Cal.App.2d 729, 740-742; Lingsch, supra, 213 Cal.App.2d at p. 737 [the rule of "caveat emptor" is "inapplicable in a situation involving a sellers fraud"].)

In Shapiro, however, the jury specifically found the defendants had committed no fraud or misrepresentation in that particular case. (Shapiro, supra, 188 Cal.App.3d at p. 334.) This case is before us at the demurrer stage.

As stated in Lingsch, supra, 213 Cal.App.2d at page 735, citations omitted: "It is now settled in California that 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. . . . Failure of the seller to fulfill such duty of disclosure constitutes actual fraud."

"[G]enerally speaking, [an `as is] provision means that the buyer takes the property in the condition visible to or observable by him." (Lingsch, supra, 213 Cal.App.2d at p. 742, citation omitted.) However, "Where the seller actively misrepresents the then condition of the property [citations] or fails to disclose the true facts of its condition not within the buyers reach and affecting the value or desirability of the property, an `as is provision is ineffective to relieve the seller of either his `affirmative or `negative fraud. In either situation the sellers conduct has, as it were, infected the buyers knowledge of the condition of the property. An `as is provision may therefore be effective as to a dilapidated stairway but not as to a missing structural member, a subterranean creek in the backyard or an unexploded bomb buried in the basement, all being known to the seller. . . . To enlarge the meaning of such a provision so as to make it operative against all charges of fraud would be to permit the seller to contract against his own fraud contrary to existing law. (Civ. Code, § 1668.)" (Ibid.; Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 304-305 [same]; and see Katz v. Department of Real Estate (1979) 96 Cal.App.3d 895, 901.)

"All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." (Civ. Code, § 1668.)

For the same reason, the Lingsch court specifically rejected the argument that the following language protected the seller from allegations of fraud: "`No representations, guaranties or warranties of any kind or character have been made by any party hereto, or their representatives which are not herein expressed." (Lingsch, supra, 213 Cal.App.2d at p. 743.) George relies on similar language here; however, under the same well-established principles preventing a party from contracting against his own fraud, (id. at p. 743), Georges reliance on this provision is equally unavailing.

In its complaint, Reality alleged the following facts: George affirmatively represented to Reality he was aware of no environmental issues or hazardous contamination, and Reality had no reason to doubt him. In fact, Georges representations were false as George specifically knew of hazardous contamination on the property. This subsurface hazardous contamination was neither visible nor discoverable by visual inspection because of the very modifications (paving and building a structure) George had made for the purpose of concealing this contamination. Reality had no reason to discover the contamination (and therefore discover its injury as a result of Georges misrepresentations) until it sold the property in 2007, when its buyers environmental inspection revealed contamination in core samples obtaining by drilling 10 feet below the surface. George drafted the documents and told Reality the conditional language in the escrow instructions for the benefit of the bank processing the payments was "superfluous" as there was no contamination.

Moreover, Reality alleged, George had a statutory duty under section 25359.7 of the Health and Safety Code to disclose the contamination to Reality prior to the sale.

Under the applicable authorities, Realitys allegations were sufficient to withstand demurrer. We cannot conclude as a matter of law that the conditional language in the escrow instructions (insulating the bank from any responsibility in the event of any "possible presence" of hazardous substances on the property) is irreconcilable with Realitys allegations, particularly where Reality alleges George assured Reality the language protecting the bank was "superfluous" because there was no contamination. "Effective notice entails more than elliptical obfuscation." (See Katz, supra, 96 Cal.App.3d at pp. 900, 901 [broker seller found guilty of fraudulent conduct under Lingsch, supra, 213 Cal.App.2d 729, "and its progeny," in selling property "as is" when he knew the property to be in violation of and subject to an order directing compliance with specific code sections].) Similarly, Georges argument that Reality bears responsibility for its lack of diligence is "similarly infirm," at least at the demurrer stage, as "facts not visibly apparent are not necessarily within the buyers purview." (Id. at p. 900.) As we noted in Linden Partners v. Wilshire Linden Associates (1998) 62 Cal.App.4th 508, 529, "It has been repeatedly held by the courts of our state that one to whom a representation is made has no duty to employ means of knowledge which are open to that party and which could, if pursued, reveal the falsity of that representation."

Turning to the issue of whether the statutes of limitations barred Realitys causes of action as a matter of law, we preliminarily note: "Resolution of the statute of limitations issue is normally a question of fact." (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 810 ["This procedural posture [on appeal from a judgment of dismissal after sustaining a demurrer without leave to amend] differs from that of our prior cases discussing delayed accrual and the discovery rule"].) Again, as this case is before us on demurrer, we must assume to be true Realitys allegations that it did not discover, nor suspect, nor have reason to suspect Georges wrongdoing until 2007 (at the time of the environmental inspection conducted in connection with the 2007 sale), within the applicable statutes of limitations. (Fox, supra, 35 Cal.4th at p. 811.) Further, "ignorance of a generic element of [a] cause of action" delays its accrual. (Id. at p. 813; and see E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1322 ["Fraud may excuse lack of diligence on the part of plaintiff to pursue an action, and thus, the discovery-of-facts rule allows [its] cause of action to accrue"].)

The original complaint was filed in June 2007.

As we have already explained, Realitys complaint identifies both the time and the circumstances of its discovery of its claims against George, and further explains why it had no reason to discover these claims any earlier. (E-Fab, Inc. v. Accountants, Inc. Services, supra, 153 Cal.App.4th at pp. 1324-1326.) Accordingly, we conclude the pleading requirements for the delayed discovery rule are satisfied here such that it "does not `clearly and affirmatively appear on the face of the complaint that the action is barred by the statute of limitations," (id. at p. 1326), and the demurrer should have been overruled. Any proof problems must await another day.

DISPOSITION

The judgment of dismissal is reversed and the matter is remanded with directions to the trial court to vacate its order sustaining Georges demurrer and to enter a new order overruling the demurrer. Reality is to recover its costs on appeal.

We concur:

ZELON, J.

JACKSON, J.


Summaries of

Reality Principle, Inc. v. George

Court of Appeal of California
Jun 29, 2009
No. B209666 (Cal. Ct. App. Jun. 29, 2009)
Case details for

Reality Principle, Inc. v. George

Case Details

Full title:REALITY PRINCIPLE, INC., Plaintiff and Appellant, v. ROBERT H. GEORGE, et…

Court:Court of Appeal of California

Date published: Jun 29, 2009

Citations

No. B209666 (Cal. Ct. App. Jun. 29, 2009)