Judge Stephen Morgan, Case 22AVCV00287 2022-10-04 Tentative Ruling

This is a breach of contract action. Plaintiffs Daniel Stephen Tucker (“Daniel”[1]) and Lelonda Tucker (“Lelonda” and collectively “Plaintiffs”), husband and wife, allege that on or around August 10, 2013, they signed a residential purchase agreement to purchase the real property located at 2110 West Ave. O, Palmdale, CA 93551 (the “Property”) that identified Defendant Kenneth Kray Terracciano, an individual also known as Keny Terracciano (“Terracciano”), as the listing agent. The alleged positions of each party are:

The issue alleged is that it was represented that the mother-in-law (“MIL”) quarters was permitted and built to code and the septic tank was permitted. However, upon purchase of the property, Plaintiffs discovered that the MIL quarters were neither permitted nor built to code and the septic tank was not permitted or approved by the County of Los Angeles or any other responsible agency. Plaintiffs allege damages in the amount they paid, the cost needed to rectify the issues with the MIL quarters and the septic tank, and emotional damages.

On April 25, 2022, Plaintiffs filed their Complaint alleging 10 causes of action for: (1) Breach of Express Contract, (2) Breach of Contract Implied-in-Law, (3) Fraudulent Inducement (Intentional Misrepresentation), (4) Negligence, (5) Negligent Misrepresentation, (6) Fraudulent Concealment, (7) Negligent Infliction of Emotional Distress (“NIED”), (8) Intentional Infliction of Emotional Distress (“IIED”), (9) Declaratory Relief, and (10) Breach of Implied Covenant of Good Faith and Fair Dealing.

On July 21, 2022, Plaintiffs filed their First Amended Complaint (“FAC”), alleging the same 10 causes of action.

On August 22, 2022, Hemme, Terraccianao, and Kannella, Inc. doing business as RE/MAX filed their Demurrer to the FAC and Motion to Strike the FAC.

On September 20, 2022, Plaintiffs filed their Oppositions. The Court notes that due to the new holiday, Native American Day, on Friday, September 23, 2022, the Opposition has been filed eight court days prior to the hearing. “All papers opposing a motion so noticed shall be filed with the court and a copy served on each party at least nine court days. . .before the hearing.” (Cal. Code Civ. Proc. § 1005(b).) “No paper may be rejected for filing on the ground that it was untimely submitted for filing. If the court, in its discretion, refuses to consider a late filed paper, the minutes or order must so indicate.” (Cal. Rules of Court Rule 3.1300(d).) The Court, in its discretion, considers the late filed Opposition.

On September 27, 2022, Defendants filed their Replies. The Court notes that two Replies to the Opposition to Motion to Strike Portions of Plaintiff’s Complaint were filed. The Court has looked at both Replies and determined that they are identical.

Standard for Demurrer – A demurrer for sufficiency tests whether the complaint states a cause of action.¿ (Hahn v.¿Mirda¿(2007) 147 Cal. App. 4th 740, 747.) ¿When considering demurrers, courts read the allegations liberally and in context.¿ (Taylor v. City of Los Angeles Dept. of Water and Power¿(2006) 144 Cal. App. 4th 1216, 1228.)¿ In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice.¿ (CCP § 430.30(a).)¿A demurrer tests the pleadings alone and not the evidence or other extrinsic matters.¿ (SKF Farms v. Superior Court¿(1984) 153 Cal. App. 3d 902, 905.)¿ Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.¿¿(Id.)¿¿The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.¿ (Hahn,¿supra,¿147 Cal.App.4th at 747.)¿¿¿

A general demurrer admits the truth of all factual, material allegations properly pled in the challenged pleading, regardless of possible difficulties of proof.¿¿(Blank,¿supra, 39 Cal.3d at p. 318.)¿ Thus, no matter how unlikely or improbable, plaintiff’s allegations must be accepted as true for the purpose of ruling on the demurrer.¿¿(Del E. Webb Corp. v. Structural Materials Co.¿(1981) 123 Cal.App.3d 593, 604.)¿ Nevertheless, this rule does not apply to allegations expressing mere conclusions of law, or allegations contradicted by the exhibits to the complaint or by matters of which judicial notice may be taken.¿¿(Vance v. Villa Park¿Mobilehome¿Estates¿(1995) 36 Cal.App.4th 698, 709.)¿ A general demurrer does not admit contentions, deductions, or conclusions of fact or law alleged in the complaint; facts impossible in law; or allegations contrary to facts of which a court may take judicial notice.¿¿(Blank,¿supra, 39 Cal.3d at p. 318.)¿¿¿¿

Pursuant to¿Code Civ. Proc.¿§430.10(e), the party against whom a complaint has been filed may object by demurrer to the pleading on the grounds that the pleading does not state facts sufficient to constitute a cause of action.¿ It is an abuse of discretion to sustain a demurrer if there is a reasonable probability that the defect can be cured by amendment.¿¿(Schifando¿v. City of Los Angeles¿(2003) 31 Cal.4th 1074, 1082,¿as modified (Dec. 23, 2003).)¿¿¿¿

Standard for Motion to Strike – The court may, upon a motion, or at any time in its discretion, and upon terms it deems proper, strike any irrelevant, false, or improper matter inserted in any pleading. (Code Civ. Proc., § 436(a).) The court may also strike all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (Id., § 436(b).) The grounds for a motion to strike are that the pleading has irrelevant, false or improper matter, or has not been drawn or filed in conformity with laws. (Id. § 436.) The grounds for moving to strike must appear on the face of the pleading or by way of judicial notice. (Id. § 437.)¿¿

Meet and Confer Requirement¿– Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer.¿ (Cal. Code Civ.¿Proc. §430.41 and §435.5.)¿ The Court notes that only the Demurrer contains a declaration. The declaration by Defendants’ counsel, R. Steven Derryberry (“Derryberry”) states that on June 07, 2022, Derryberry sent extensive written communication to Plaintiff’s counsel and was advised that a FAC would be filed and that Plaintiffs did not agree with Defendants’ position. (Decl. Derryberry ¶¶ 2-3). Derryberry also states that they sent further written communication on August 10, 2022 after the FAC was filed. (Id. at ¶ 4.) Generally, counsels include exhibits evidencing such written discussions; however, none are included. Based on what is presented, the Court cannot make a determination that the meet and confer was sufficient.

A determination by the court that the meet and confer process was insufficient shall not be grounds to overrule or sustain a demurrer or grant or deny the motion to strike. (Cal. Code Civ. Proc. §§ 430.41(a)(4), 435.5(a)(4).) The Court considers the motions on their merits.

Defendants demur to nine causes of action in the FAC, excluding the Ninth Cause of Action for Declaratory Relief.

First, as to all causes of action being demurred to, Defendants contend that the FAC is uncertain. CCP § 430.10 defines “uncertain” as ambiguous and unintelligible. This is not the case as there is a clear legal standard and argument in all causes of action presented in the FAC.

Defendants argue that Exhibit 3 to the FAC, the Seller’s Real Estate Transfer Disclosure Statement (“TDS”), to the FAC contradicts the express terms of the contract. They believe that Exhibit 3 shows that Hemme disclosed that there were room additions, structural modifications, or other alterations or repairs that were made without necessary permits or in compliance with building codes and, as such, Plaintiffs cannot establish that a later discovery of the existence of room additions, structural modifications, or other alterations or repairs that were made without the necessary permits or in compliance with building codes constitutes a breach of contract.

Plaintiffs argue that Hemme made express representations to Plaintiffs as Exhibit 3 depicts: 1) in section B, Hemme denied any defects in the septic system; 2) in section C 10, Hemme, denied, "Any zoning violations, nonconforming uses, violation of 'setback' requirements;" and, and 3) in the handwritten portion of section C, Hemme, declared, "Mother in law gas stove not permitted with stove. RV garage, race shop, and mother-in-law quarters permitted and built to code." Because Plaintiff relied upon these representations, Hemme breached the contract by selling property that was not built to code and not permitted.

“To prevail on a cause of action for breach of contract, the plaintiff must prove (1) the contract, (2) the plaintiff’s performance of the contract or excuse for nonperformance, (3) the defendant’s breach, and (4) the resulting damage to the plaintiff.” (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.) “Implicit in the element of damage is that the defendant’s breach caused the plaintiff’s damage.” (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305,1352 [original italics].)

Though there is a third page, the AVID sheet attachment is not presented with the exhibit.

1. Defects in any of the following, (Including past defects that have been repaired) heating, air conditioning, electrical, plumbing (including the presence of polybutelene pipes), water, sewer, waste disposal or septic system, sump pumps, well, roof, gutters, chimney, fireplace, foundation, crawl space, attic, soil, grading, drainage, retaining walls, Interior or exterior doors, windows, walls, ceilings, floors or appliances

2. The leasing of any of the following on or serving the Property: solar system; water softener system, water purifier system, alarm system, or propane tank(s)

The exhibits show that Hemme was aware that the property had room additions, structural modifications, or other alterations or repairs made without necessary permits; and room additions, structural modifications, or other alterations or repairs not in compliance with building codes. However, he presented to Plaintiffs that the mother-in-law quarters were permitted and built to code. As to the septic system, he stated that there were no defects with it. Lack of a permit can constitute a minor defect. (See Fragale v. Faulkner (2003) 110 Cal.App.4th 229, 233.)

It is also alleged that Defendants represented to the Plaintiffs that that they had obtained a permit for the structure as was represented in the Seller Disclosure. (FAC ¶ 79.)

As alleged, the FAC contains the following elements: 1) the contract, (2) Plaintiff’ performance of the contract (i.e., buying the property), (3) Hemme’s breach in the form of false representations, and (4) the resulting damage to the plaintiff stemming from relying on Hemme’s representations.

Accordingly, the FAC contains facts sufficient to constitute a cause of action for Breach of Contract and the Demurrer to the First Cause of Action is OVERRULED.

Breach of Contract Implied-In-Law – Defendant argues that there can be no implied contract where the subject of the relationship is already covered by a written contract and, therefore, there can be no implied contract between Plaintiffs and Hemme. As to Terracciano and RE/MAX, Defendants argue that a real estate agent’s compensation is matter of negotiation between broker and principal; the parties are free to agree to any amount or manner of compensation and may condition the broker's entitlement to compensation on any lawful basis and, therefore, any sums paid to Terracciano and RE/MAX were based on the contractual relationship between Hemme and Terracciano and RE/MAX.

Plaintiffs argue that a real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission. Hemme received payment for the property and Terracciano and RE/MAX received commission related to the sale of the property and it would be inequitable for Hemme to retain the overpayment and Terracciano to retain the sales commission due to the false statements. Plaintiffs present that Terracciano and RE/MAX were compensated, and so were incentivized to ensure that Plaintiffs completed their purchase of the property. Thus, an implied in fact contract as to Terracciano has been properly pled.

Defendants present in their Reply that an agent’s compensation is strictly a matter of negotiation between principal and agent (i.e., seller and agent) and that the seller pays both the listing agent and the buyer’s agent in California. Thus, the argument that an implied contract exists between a buyer and a sellers agent given the agent’s compensation by the Seller is illogical.

“An implied contract is one, the existence and terms of which are manifested by conduct.” (Cal. Civ. Code § 1621.) “An ‘implied-in-law’ contract is actually not a contract at all, but merely an obligation imposed by the law to bring about justice. It has been held that a contract may be formed even though there is no ‘meeting of the minds.’ ” (Arcade County Water Dist. v. Arcade Fire Dist. (1970) 6 Cal.App.3d 232, 236 [superseded on other grounds]; see also Welborne v. Ryman-Carroll Foundation (2018) 22 Cal.App.5th 719, 725; McBride v. Boughton (2004) 123 Cal.App.4th 379, 388.)

“A cause of action for quasi-contract invokes consideration of equitable principles, rather than of contract. ‘“… [It] is an obligation … created by the law without regard to the intention of the parties, and is designed to restore the aggrieved party to [its] former position by return of the thing or its equivalent in money. [Citations.]”’ (Unilab Corp. v. Angeles-IPA (2016) 244 Cal.App.4th 622, 639 [198 Cal. Rptr. 3d 211]; see 1 Witkin, Summary of Cal. Law (11th ed. 2017) Contracts, § 1050, p. 1097; Rest.2d Contracts, § 4, com. b, p. 56.) The doctrine focuses on equitable principles; its key phrase is ‘“unjust enrichment,”’ which is used to identify the “transfer of money or other valuable assets to an individual or a company that is not entitled to them.” (Rest.3d Restitution and Unjust Enrichment, Foreword, vol. 1, p. XIII.)” (Welborne, supra, 22 Cal.App.5th 719 at 725.) It appears that what is requested in this cause of action is a remedy which can be awarded in certain cases. Since there is an actual contract pled here, there is no room for a quasi-contract. Absent some facts denying the existence of a valid contract, there is no basis to allege this claim, even in the alternative. (Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1389-1390.)

Accordingly, the Demurrer to the Second Cause of Action (Breach of Contract Implied in Law) is SUSTAINED without leave to amend.

Fraudulent Inducement (Intentional Misrepresentation) – Defendants present that a seller's agent has no common law fiduciary relationship with a buyer, therefore, courts have strictly limited the scope of an agent's disclosure duties under a fraudulent concealment theory. (Citing Peake v. Underwood, 227 Cal. App. 4th 428, 444–445 (2014), as modified on denial of reh'g (July 17, 2014) (“Peake”).) As such, a seller's agent has no affirmative duty to disclose latent defects unless the agent also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer. Defendants argue that Plaintiffs have only used conclusory statements and do not show how the issues with the septic system and the mother-in-law suite were not within the reach of Plaintiffs’ diligent attention and observation, especially in light of the fact that it was disclosed that there were permitting and compliance issues via Exhibit 3. As to Hemme, Defendants argue that Hemme put Plaintiffs on notice that there were permitting issues.

Plaintiffs argue that Peake is inapposite as the Court rejected the contention that the seller's agent's duty includes an obligation to independently verify or disclaim the accuracy of the seller's representations. However, it was acknowledged at the June 02, 2015 meeting that the handwritten disclosures were that of Terracciano. Thus, Terracciano and RE/MAX bear liability for the false misrepresentation. Plaintiffs argue that Hemme denied any defects in the septic system and signed the TDS with the representations regarding the mother-in-law quarters, despite knowing that these were false representations.

Defendants present that Terracciano intentionally made a representation, not a misrepresentation. It appears Defendants are trying to argue that Terracciano made the statement without knowledge of whether it was true or not. Defendants state that for fraud, there must be an allegation that the representations were made with knowledge of their untruth.

“A complaint for fraud must allege the following elements: (1) a knowingly false representation by the defendant; (2) an intent to deceive or induce reliance; (3) justifiable reliance by the plaintiff; and (4) resulting damages.” (Service by Medallion, Inc. v. Clorox Co. (1996) 44 Cal.App.4th 1807, 1816.)

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. (Herzog v. Capital Co. (1945) 27 Cal.2d 349, 353 [164 P.2d 8]; Clauser v. Taylor (1941) 44 Cal.App.2d 453, 454 [112 P.2d 661]; Rothstein v. Janss Investment Corp. (1941) 45 Cal.App.2d 64, 68-71 [113 P.2d 465]; Dyke v. Zaiser (1947) 80 Cal.App.2d 639, 652-653 [182 P.2d 344]; Barder v. McClung, supra, 93 Cal.App.2d 692, 697; Kuhn v. Gottfried (1951) 103 Cal.App.2d 80, 86 [229 P.2d 137]; Curran v. Heslop (1953) 115 Cal.App.2d 476, 480-481 [252 P.2d 378]; Kallgren v. Steele (1955) 131 Cal.App.2d 43, 46 [279 P.2d 1027]; Burkett v. J. A. Thompson & Son (1957) 150 Cal.App.2d 523, 526 [310 P.2d 56]; Buist v. C. Dudley DeVelbiss Corp. (1960) 182 Cal.App.2d 325, 332 [6 Cal.Rptr. [*736] 259]; Crawford v. Nastos (1960) 182 Cal.App.2d 659, 668 [6 Cal.Rptr. 425]; see 50 Cal.Jur.2d, Vendor and Purchaser, § 404, pp. 518-521; 29 So.Cal.L.Rev. 378; 80 A.L.R.2d 1453.) Failure of the seller to fulfill such duty of disclosure constitutes actual fraud. (Civ. Code, § 1572, subd. 3; Barder v. McClung, supra.)

The real estate agent or broker representing the seller is a party to the business transaction. In most instances he has a personal interest in it and derives a profit from it. Where such agent or broker possesses, along with the seller, the requisite knowledge according to the foregoing decisions, whether he acquires it from, or independently of, his principal, he is under the same duty of disclosure. He is a party connected with the fraud and if no disclosure is made at all to the buyer by the other parties to the transaction, such agent or broker becomes jointly and severally liable with the seller for the full amount of the damages. (Crawford v. Nastos, supra, 182 Cal.App.2d 659, 665.) It is not necessary that there be a contractual relationship between the agent or broker and the buyer. (Gill v. Johnson (1932) 125 Cal.App. 296, 300 [13 P.2d 857, 14 P.2d 1017].) As this court said in Nathanson v. Murphy (1955) 132 Cal.App.2d 363, 368 [282 P.2d 174] "[an] action for deceit does not require privity of contract." No difficulty is encountered in imposing liability on an agent or broker for an affirmative and intentional misrepresentation on his part. (See, e.g., Rothstein v. Janss Investment Corp., supra, 45 Cal.App.2d 64; Crawford v. Nastos, supra, 182 Cal.App.2d 659.) Similarly, no difficulty should be found in imposing liability on him for mere nondisclosure since his conduct in the transaction amounts to a representation of the nonexistence of the facts which he has failed to disclose (cf. Rest., Torts, § 551). His fraud is of a different type; it is "negative" rather than "affirmative" (Barder v. McClung, supra, 93 Cal.App.2d 692); but it is fraud nonetheless.

A further look into what is defined as “within reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer” discloses:

When and where the action by the purchaser is based on conditions that are visible and that a personal inspection at once discloses and, when it is admitted that such personal inspection was in fact made, then manifestly it cannot be successfully contended that the purchaser relied upon any alleged misrepresentations with regard to such visible conditions. But personal inspection is no defense when and where the conditions are not visible and are known only to the seller, and "where material facts are accessible to the vendor only and he knows them not to be within the reach of the diligent attention and observation of the vendee, the vendor is bound to disclose such facts to the vendee". Clauser v. Taylor, 44 Cal. App. 2d 453 [112 P.2d 661] (citing, among other authorities, O'Shea v. Morris, 112 Neb. 102 [198 N.W. 866, 867], and Restatement of the Law of Contracts (1932), vol. 2, p. 897, sec. 472, subd. b).

The Rothstein Court then discusses a case in which real property has been and the value is materially affected and it was held that, even where the vendee makes no inquiry into whether the property has been filled, the vendee may rescind the transaction upon learning the true facts. (Id. at 68-69.)

Here, it is alleged that, while Hemme disclosed that he was aware of room additions, structural modifications, or other alterations or repairs made without necessary permits and not in compliance with building codes, (1) Terracciano and his principal RE/MAX wrote the statement that the “mother in laws quarters permitted & built to code,” (2) Hemme signed off on it (thereby presenting that as true), (3) Hemme checked off that there were no defects with the septic system, and (4) Hemme and Terracciano presented that the septic system was permitted (FAC ¶¶ 78-79). Such statements were affirmative representations and whether the septic system and mother-in-law quarters were permitted and up to code are not visible to Plaintiffs. As pled, both Hemme and Terracciano/RE/MAX had knowledge that the septic system and the mother-in-law quarters were neither permitted nor up to code. Plaintiffs allege that they relied on such statements and were injured by their reliance over-value and the need to expend money to permit the mother-in-law quarters and septic tank and bring the mother-in-law quarters up to code. As pled, an action for intentional misrepresentation exists not only Hemme, but also Terracciano and his principal RE/MAX.

Accordingly, the Demurrer to the Third Cause of Action (Fraudulent Inducement (Intentional Misrepresentation)) is OVERRULED.

Negligence – Defendants argue that Plaintiffs have failed to show that Terracciano and RE/MAX knew of facts materially affecting the value or desirability of the property. Defendants argue, further, that Hemme is not mentioned in the negligence cause of action. Finally, Defendants once again argue that the inclusion of “4. Room additions, structural modifications, or other alterations or repairs made without necessary permits” and “5. Room additions, structural modifications, or other alterations or repairs not in compliance with building codes[]” contradicts the allegations in the FAC.

Plaintiffs rebut by citing Holmes v. Summer (2010) 188 Cal.App.4th 1510, 1528 in which it was held “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.” Plaintiffs also cite that Terracciano himself wrote the handwritten explanation that the mother-in-law quarters were permitted and built to code in the TDS, thus constituting a representation on the behalf of Terracciano and RE/MAX. Hemme signed the TDS and made further representations regarding the septic system. Plaintiffs argue that, at a minimum, these statements were negligently made.

Defendants argue that the undisclosed facts were not demonstrated to have been known by Defendants and that simple stating Defendants knew a fact does not make it true.

The Court notes that the pleading under the Third Cause of Acton (Negligence) states “Plaintiffs reallege and incorporate by reference paragraphs 1 through 87 above as

“ ‘The elements of a cause of action for negligence are well established. They are “(a) a legal duty to use due care; (b) a breach of such legal duty; [and] (c)the breach as the proximate or legal cause of the resulting injury.” ’ ” (Ladd v. County of San Mateo (1996) 12 Cal.4th 913, 917.)

The FAC alleges two duties (1) that the seller has a duty to disclose facts that materially affect the value or desirability of the property which are known or accessible only to him and not within breach of the buyer, and (2) that the real estate agent or broker who is also aware of these facts is under the same duty of disclosure. However, as Defendants state, Hemme is not mentioned in the Negligence cause of action. Instead, the issues of breach and the breach as the cause of resulting injury are focused on Terracciano and RE/MAX.

Accordingly, the Demurrer to the Third Cause of Action (Negligence) is SUSTAINED in part as to Hemme with leave to amend and OVERRULED as to Terracciano and RE/MAX.

Negligent Misrepresentation – Defendants argue that the only difference between the Third Cause of Action (Fraudulent Misrepresentation (Intentional Misrepresentation)) and this one is that a negligent misrepresentation requires only that the representation be made without reasonable ground for believing it to be true. Defendants further argue that Plaintiffs fail to allege facts sufficient to demonstrate that the representations by Terracciano and RE/MAX were made without reasonable grounds for being true and that Hemme disclosed permitting and code compliance issues.

Plaintiffs argue that they have pled that Hemme, Terracciano, and RE/MAX knew the statements in the TDS to be false at the time they made those representations, or, at the very least, Hemme, Terracciano, and RE/MAX made the representations recklessly and without regard for its/their truth. (FAC, ¶ 107). Specifically, Terracciano wrote the explanation and Hemme signed the TDS.

As Defendants and Plaintiffs present the same argument as the Third Cause of Action (Fraudulent Misrepresentation (Intentional Misrepresentation),. the Court defers to the corresponding analysis.

Accordingly, the Demurrer to the Fifth Cause of Action (Negligent Misrepresentation) is OVERRULED.

Fraudulent Concealment – Defendants argue that disclosure occurred in the TDS and that Plaintiffs failed to exercise a reasonable investigation of the disclosure until after the purchase. Defendants also argue that Terracciano and RE/MAX had only a duty to conduct a reasonably competent and diligent visual inspection under Cal. Civ. Code § 2079.

Plaintiffs once again rebut Defendants’ argument by including the part of the TDS which states that the mother-in-law quarters are permitted and built to code and that this statement was (1) wrote byTerracciano as an agent of RE/MAX and (2) signed by Hemme. Plaintiffs argue that Terracciano needs to bear liability for his own misrepresentations.

“[T]he elements of an action for fraud and deceit based on a concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248.)

The pleadings allege that Defendants “had a duty to disclose [the subject real property as related to the mother-in-law quarters and septic tank did not include all permits and was not Code-compliant] to the [Plaintiffs].” (FAC ¶ 115.) Additionally, the FAC includes the fact that Terracciano wrote the explanation in the TDS and Hemme signed it. The FAC also presents that Hemme and his agents, Terracciano and RE/MAX “knew these representations to be false.” (FAC ¶ 72.) As with the other causes of action, Plaintiffs have realleged and incorporated their previous paragraphs.

As plead, (1) Hemme had a duty to disclose the material facts that would affect the value or desirability to the property as they were only accessable to him and not within reach of Plaintiffs, and (2) Terracciano and RE/MAX were under the same duty of disclosure has h had the requisite knowledge. (See Negligence Cause of Action.) This is reiterated in FAC ¶ 144, though not to the same level of detail. Defendants concealed such facts through their affirmative representations in the TDS and other disclosures (see FAC, Exhs. 3 and 4), Defendants intended to defraud Plaintiffs by intentionally concealing these facts (FAC ¶ 115), Plaintiffs would not have purchased the property if they knew of these concealed facts (FAC ¶ 116), and Plaintiffs have sustained damages as a result of the concealed facts in an amount of at least $503,800.00 (FAC 117.) The pleadings state facts sufficient to constitute a cause of action for Fraudulent Concealment.

Accordingly, the Demurrer to the Sixth Cause of Action (Fraudulent Concealment) is OVERRULED.

NIED – Defendants argue that NIED is not itself a tort, but a variant of negligence and, as there is no pre-existing relationship between Defendants and Plaintiff and the FAC fails to establish that Defendants committed an intentional tort, the NIED claim must fail.

Plaintiffs argue that the FAC sufficiently plead an intentional tort (i.e., suppression of material facts related to the value of the property, intent to defraud, etc.) and that the allegations include that such conduct has caused Plaintiffs to suffer intense, enduring, and non-trivial emotional distress, which a reasonable person would not be able to cope with. (FAC ¶ 122).

Defendants present the same argument, ante, for the negligence claims in their Reply.

“ ‘[The] negligent causing of emotional distress is not an independent tort but the tort of negligence . . . ." (6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 838, p. 195.) "The traditional elements of duty, breach of duty, causation, and damages apply. [para.] Whether a defendant owes a duty of care is a question of law. Its existence depends upon the foreseeability of the risk and upon a weighing of policy considerations for and against imposition of liability.’ (Slaughter v. Legal Process & Courier Service (1984) 162 Cal.App.3d 1236, 1249 [209 Cal.Rptr. 189].)” (Marlene F. v. Affiliated Psychiatric Medical Clinic, Inc. (1989) 48Cal.3d 583, 588.)

There are two classifications for negligent infliction of emotional distress claims: (1) bystander and (2) direct victim. (Spates v. Dameron Hospital Association (2003) 114 Cal.App.4th 208, 213.) Plaintiffs' claim here is based on a direct victim theory. To make a claim under a direct victim theory, the emotional distress suffered by the plaintiff must be a foreseeable consequence of the conduct directed at the plaintiff. (See Molien v. Kaiser Foundation Hospital (1980) 27 Cal.3d 916, 930.)

The Court has already determined that an action for Negligence exists based on the facts alleged in the FAC, see ante.

Here, while the facts underlying this cause of action are duplicative of Plaintiffs' separate Negligence cause of action, the damages sought are different. Courts have gone both ways on demurrers for NIED with some sustaining them, and some overruling them. The Court allows the NIED cause action to proceed as it seeks a different form of recovery than the Negligence cause of action.

IIED – Defendants argue that Plaintiffs provide only conclusions and do not support or corroborate their allegations with any facts showing the nature or extent of the alleged “extreme” mental suffering.

Plaintiffs argue that they have pled that Defendants’ conduct caused them to suffer serious and severe emotional distress, including but not limited to, anxiety, worry, shock, humiliation, and that such emotional distress is intense, enduring, and non-trivial emotional distress which a reasonable person would not be able to cope with. (FAC ¶¶130-131.)

Defendants stress that the gravamen of the FAC is the contract and to allow Plaintiffs to carry a cause of action for IIED because Defendants knew how much Plaintiffs wanted the house would bring established contract law into question.

“A cause of action for intentional infliction of emotional distress exists when there is ‘(1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff’s suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant’s outrageous conduct.’ A defendant’s conduct is ‘outrageous’ when it is so ‘extreme as to exceed all bounds of that usually tolerated in a civilized community.’ And the defendant’s conduct must be ‘intended to inflict injury or engaged in with the realization that injury will result.’ ” (Hughes v. Pair (2009) 46 Cal.4th 1035,1050-1051.)

Breach of Implied Covenant of Good Faith and Fair Dealing – This cause of action is only against Hemme.

Defendants argue that the allegations in the FAC do not plead any type of conduct that would constitute a breach of the implied covenant of good faith and fair dealing as there were disclosures in the TDS that showed that certain structures were not permitted and/or not in compliance with codes.

Plaintiffs argue that the misrepresentations, signed by Hemme, in the TDS constitute a breach of good faith and fair dealing as it injured Plaintiffs’ rights to receive the benefit of the agreement. Plaintiffs further argue that Hemme did nothing to correct the misrepresentations in the TDS.

“Although breach of the implied covenant often is pleaded as a separate count, a breach of the implied covenant is necessarily a breach of contract.” (Digerati Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal.App.4th at p. 885.) “The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation. ‘The covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract’s purpose.’ . . . ‘In essence, the covenant is implied as a supplement tothe express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.’ ” (Racine &Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026,1031-1032.)

In Digerati Holdings, LLC, the Court allowed the Breach of Implied Covenant of Good Faith and Fair Dealing to proceed as a separate cause of action:

“[W]e believe that the gravamen of the two counts differs. The gravamen of the breach of contract count is [cross defendants’] alleged failure to comply with their express contractual obligations specified in paragraph 37 of the cross-complaint, while the gravamen of the count for breach of the implied covenant of good faith and fair dealing is their alleged efforts to undermine or prevent the potential sale and distribution of the film, both by informing distributors that the film was unauthorized and could be subject to future litigation and by seeking an injunction.

If a claim for breach of the implied covenant does nothing more than allege a mere contract breach and, relying on the same alleged acts, simply seeks the same damages or other relief already claimed in a contract cause of action, it may be disregarded as superfluous because no additional claim is actually stated. (Careau &Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395.)

Here, the First Cause of Action (Breach of Express Contract) is based on the same facts as the Tenth Cause of Action (Breach of Implied Covenant of Good Faith and Fair Dealing), specifically, that Hemme presented that the mother-in-law quarters were permitted and built to code and that there were no defects in the septic tank, that these representations were incorrect, and that Plaintiffs relied on these representations and were injured in a monetary amount. Thus, based on case law, Tenth Cause of Action (Breach of Implied Covenant of Good Faith and Fair Dealing) is superfluous.

Accordingly, the Demurrer to the Tenth Cause of Action (Breach of Implied Covenant of Good Faith and Fair Dealing) is SUSTAINED.

Defendants argue that damages not contemplated by Cal. Civ. Code §§ 3306 and 3343 should be stricken as they are superfluous, irrelevant, and improper. Defendants further believe that punitive damages should be stricken as Plaintiffs have failed to provide the Court with any facts that Defendants acted maliciously.

Plaintiffs argue that Defendants ignore the entirety of the applicable provisions of Cal. Civ. Code § 3343 and that Plaintiffs are permitted to recover additional damaged arising from the fraudulent purchase of the property including all amounts actually a reasonably expended in the reliance on the fraud, the amount that would compensate Plaintiffs for use and enjoyment of the property to the extent that any such loss was caused by the fraud, and any profits or gains that were reasonably anticipated and would have been earned from the use or sale of the property. Plaintiffs present that Defendants concede that Cal. Civ. Code § 3306 provides that damages allowable include the difference between the price agreed to be paid and the value of the estate agreed to be conveyed, as well as consequential damage. Plaintiffs also highlight Cal. Civ. Code § 3333 which permits compensation "for all the detriment proximately caused" by the breach of an obligation not arising from contract and Cal. Civ. Code §1709 which provides "[o]ne who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers." Regarding punitive damages, Plaintiffs state that their FAC alleges that Terracciano wrote the TDS explanation himself, that the explanation was false, that Terracciano bears liability for his own representation, that Hemme signed the TDS thereby approving and affirming the content despite knowing it was false, that Defendants knew that Plaintiffs would rely on these representations. Thus, the concealment or suppression of these facts was intentional and constitutes oppression, fraud, or malice which justifies punitive damages.

Defendants, in Reply, highlight that Plaintiffs did not intend to turn a profit with the property and that they have offered nothing to support their claim for punitive damages as the gravamen of the FAC is a contractual issue (i.e., there is no malice or fraud).

One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.

The detriment caused by the breach of an agreement to convey an estate in real property, is deemed to be the price paid, and the expenses properly incurred in examining the title and preparing the necessary papers, the difference between the price agreed to be paid and the value of the estate agreed to be conveyed at the time of the breach, the expenses properly incurred in preparing to enter upon the land, consequential damages according to proof, and interest.

For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.

(a) One defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received, together with any additional damage arising from the particular transaction, including any of the following:

(2) An amount which would compensate the defrauded party for loss of use and enjoyment of the property to the extent that any such loss was proximately caused by the fraud.

(3) Where the defrauded party has been induced by reason of the fraud to sell or otherwise part with the property in question, an amount which will compensate him for profits or other gains which might reasonably have been earned by use of the property had he retained it.

(4) Where the defrauded party has been induced by reason of the fraud to purchase or otherwise acquire the property in question, an amount which will compensate him for any loss of profits or other gains which were reasonably anticipated and would have been earned by him from the use or sale of the property had it possessed the characteristics fraudulently attributed to it by the party committing the fraud, provided that lost profits from the use or sale of the property shall be recoverable only if and only to the extent that all of the following apply:

(i) The defrauded party acquired the property for the purpose of using or reselling it for a profit.

(ii) The defrauded party reasonably relied on the fraud in entering into the transaction and in anticipating profits from the subsequent use or sale of the property.

(iii) Any loss of profits for which damages are sought under this paragraph have been proximately caused by the fraud and the defrauded party’s reliance on it.

(1) Permit the defrauded person to recover any amount measured by the difference between the value of property as represented and the actual value thereof.

(2) Deny to any person having a cause of action for fraud or deceit any legal or equitable remedies to which such person may be entitled.

Cal. Civ. Code §3343 determines the measure of damages to be applied where one is defrauded in the purchase of real property. (See Williams v. Graham (1948) 83 Cal. App. 2d 649, 653.) It appears the discussions of the value of the house, the amount paid, the estimates, and the discussion of inflation are allowed under Cal. Civ. Code § 3343.

However, the parties have issue with Cal. Civ. Code §3343(a). Defendants present, and reiterate in their reply, that Plaintiffs did not purchase the property to sell. Plaintiffs concede in the Opposition that they planned to use the property to live in. There is a difference of interpretation between counsels as defense counsel believes that anticipated profits are only allowable when the party that relied on the fraud anticipated profits in subsequent sale or use whereas Plaintiffs’ counsel believes that use only is sufficient. The California Supreme Court has stated that a loss-of-profits standard is not the same as a benefit of the bargain standard in that a loss-of-profits standard only applies where there are reasonably anticipated “profits or other gains.” (See Stout v. Turney (1978) 22 Cal. 3d 718, 727, 727 at fn. 11, 728, and 728 at fn. 12.) Thus, to recover profits, Plaintiffs had to anticipate selling the property, which they concede both in the FAC and their moving papers that they did not.

Cal. Civ. Code § 3294, subsection (a) authorizes punitive damages “where the defendant has been guilty of oppression, fraud, or malice.” (Cal. Civ. Code §3294(a).) “In order to survive a motion to strike an allegation of punitive damages, the ultimate facts showing an entitlement to such relief must be pled by a plaintiff. In passing on the correctness of a ruling on a motion to strike, judges read allegations of a pleading subject to a motion to strike as a whole, all parts in their context, and assume their truth. In ruling on a motion to strike, courts do not read allegations in isolation.” (Clauson v. Superior Ct. (1998) 67 Cal.App.4th 1253, 1255.) Pursuant to Cal. Civ. Code § 3294, subsection (c), “malice” is defined as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others[;]” “oppression” is defined as “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights[;]” and “fraud” is defined as “intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” Punitive damages have long been held to be permissible under Cal. Civ. Code § 3343. (See Bagdasarian v. Gragnon (1948), 31 Cal.2d 744; Eatwell v. Beck (1953), 41 Cal.2d 128; Brockway v. Heilman (1967), 250 Cal. App.2d 807; Sierra Nat. Bank v. Brown (1971), 18 Cal.App.3d 98; Channell v. Anthony (1976) 58 Cal.App.3d 290.)

Here, Plaintiffs have alleged that Defendants made affirmative statements that the mother-in-law quarters were permitted and built to code and that there were no defects in the septic system, despite knowing that the mother-in-law quarters and the septic system were not permitted (Terracciano as agent for RE/MAX wrote the affirmative statement regarding the mother-in-law quarters, Hemme signed off on it and presented it as true and Hemme filled out the section regarding the septic system). Because of these affirmative statements, Plaintiffs purchased the house specifically due to the mother-in-law quarters and the needs of their son. Based on the pleadings, Plaintiffs can now not use the mother-in-law quarters, must obtain the proper permits, must renovate the mother-in-law quarters to comply with code, and suffered damaged both economically and emotionally. The pleadings set out enough facts to constitute fraud on behalf of Defendants and present the basis for all damages alleged except those related to profits.

Accordingly, the Motion to Strike is GRANTED in part, and DENIED in part. All references to profits, including lost opportunity, are stricken.

Defendants John Hemme; Kenneth Kray Terracciano, an individual also known as Keny Terracciano, and Kannella, Inc. doing business as RE/MAX All-Pro’s Demurrer is SUSTAINED in part, and OVERRULED in part:

However, should Plaintiffs seek to amend both the First Cause of Action (Breach of Express Contract) and Tenth Cause of Action (Breach of Implied Covenant of Good Faith and Fair Dealing) so that they are separate, distinct causes of action, the Court allows thirty days leave to amend.

[1] As Plaintiffs share the same surname, the Court address each by their first name for the purpose of clarity. No disrespect is meant.

[2] As Kannella, Inc. does business as RE/MAX, the Court will use “RE/MAX” to address both entities.