Fraud: Failure to Disclose (Part II)

In our prior post we outlined the new holding in Hoffman v. 162 North Wolfe LLC by the California Court of Appeal.  The court granted a motion for summary adjudication on a cross-complaint, holding that a property owner had no relationship with the purchaser of the neighboring property owner and that the purchaser had no justifiable reliance.  Here is an examination of the court’s findings on the lack of a relationship between the parties.

Under Civil Code section 1710, subd. (3), fraud may consist of a suppression of a material fact in circumstances in which the defendant has a legal duty of disclosure.  In other words, the person charged with the concealment or nondisclosure must be under a legal duty to disclose them.  “There are four circumstances in which nondisclosure or concealment may constitute actionable fraud:  (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.”  Elements 2, 3 and 4, however, presuppose the existence of some other relationship between the plaintiff and the defendant in which a duty to disclose can arise.

In the Hoffman case the Hoffmans argued that there was a relationship between the Hoffmans, as potential purchasers of the property, and the defendant, owner of the neighboring property, “arising out of their mutual interest in the property that the Hoffmans were interested in purchasing.  The Hoffmans claim they were tenants of the property and interested in purchasing it.  The defendant claimed easement rights over the property.  The court noted that “there is no evidence in the record that 162 LLC or its members had any relationship with the Hoffmans.  162 LLC. Owens and Haverstock were not parties in any way to the transaction involving the Hoffmanns and the sellers of the 170 Wolfe property.”  The fact that the neighboring owner claimed prescriptive easement rights over the property, “these are not circumstances that constitute a transactional relationship between the parties giving rise to a duty of disclosure….”

The court noted an exception to this general rule:  concealment when one has no duty but speaks nonetheless and makes misleading statements.  “Active concealment may exist where a party ‘while under no duty to speak, nevertheless does so, but does not speak honestly or makes misleading statements or suppresses facts which materially qualify those stated.’  Providing a disclosure schedule which deliberately omitted material facts seems clearly to fit this category.”  However, in the Hoffman case, the defendant was not asked whether it claimed an interest in the neighboring property.

The court concluded that “[i]n considering a fraudulent concealment claim, ‘we begin with the threshhold question of duty.’  Based upon the absence of a relationship between the Hoffmans and 162 LLC, we conclude that there was no triable issue of material fact as to the second cause of action of the Cross-Complaint for fraudulent concealment/suppression of facts.  Summary adjudication of that claim was properly granted.”

This cross-complaint was asserted against the neighboring landowner after it sued to quiet title on its prescriptive easement, perhaps on the theory that the best defense is a good offense.  While failure to disclose lawsuits are usually very difficult to establish, this case seems particularly weak.  However, the decision does not explain whether the Hoffmans and their attorneys pursued the seller of their property, who may have known of the potential claim.  Even then, if the Hoffmans could prove that the sellers knew of such a claim and failed to disclose it, the case would still be difficult in that the Hoffmans themselves have already attested that they were aware that the neighbors were entering and exiting through the property at issue.  The question then arises whether this put them on notice of the potential claim and whether they had a duty to investigate it.