VICTORY IN LITIGATION INVOLVING ALLEGED NEGLIGENT NON-DISCLOSURE OF CONSTRUCTION DEFECTS

Often one of the most challenging tasks for any real estate broker or agent in selling property is to determine what conditions should be disclosed as part of the realtor's statutory obligations to conduct a reasonable inspection of the premises.

In a recent case, a California Appellate Court ruled that, while a realtor is obligated to conduct a reasonably diligent inspection, pursuant to California state law, it can, in the event of a lawsuit arising from an alleged negligent failure to disclose construction defects, pursue a home inspection contractor for indemnity. In the case of Leko v. Cornerstone Home Inspection, the purchasers of a home in the San Fernando Valley brought suit against the home sellers and realtors alleging that they had failed to disclose defects and structural damage which occurred during the Northridge earthquake in 1994. After being sued, the realtors filed an indemnity action against the companies responsible for performing home inspections. One of the inspection contractors, Cornerstone Home Inspection, filed a motion for judgment on the pleadings. Two other inspection contractors, Crystal Home Inspection and D-Way Inspection, filed motions for summary judgment. All of the motions were granted by Trial Court.

On appeal, the Appellate Court reversed ruling that while realtors owe potential purchasers of a property a duty to conduct a reasonable inspection, and to disclose any defects to buyers, the home inspection company may be jointly and severally liable with the realtor for failing to disclose or discover construction defects during the course of the inspection conducted by the contractor.

The decision in the Leko case sends a common sense message to home inspection contractors that they may be responsible, in indemnity, to a realtor if they fail to perform a reasonable inspection.


APPELLATE COURT BARS CLAIM AGAINST TITLE COMPANY BY MORTGAGE HOLDER

In a case with interesting facts and potential implications for property owners, an Appellate Court has held that an escrow holder's primary duty is to strictly perform the instructions given by the parties to an escrow and that an escrow holder does not owe any duty of care to individuals who are not a party to the escrow, even if such "nonparty" is directly impacted by the escrow transaction.

In Summit Financial Holdings, Ltd. v. Continental Lawyers Title Company, a property owner, a Dr. Furnish, had borrowed $425,000.00 in 1994 from Talbert Financial ("Talbert"). Without informing Dr. Furnish, the property owner, Talbert immediately assigned its rights under the promissory note to Summit Financial Holdings, Ltd. ("Summit"). Summit, just as with Talbert, did not inform Dr. Furnish that it was the holder of the promissory note.

A year later, Furnish obtained a new loan on his property and used a portion of the proceeds to pay off the original loan. Continental Lawyers Title Company ("Continental") acted as the escrow holder for the refinancing transaction. Summit was not a party to the escrow.
After receiving instructions to pay Talbert to satisfy the original note, Continental did so. Summit then sued Continental for negligence, alleging that it was entitled to the funds rather than Talbert.

At the Trial Court level, the Court ruled that Continental had acted negligently because it breached its duty of care to Summit. Continental then appealed, on the basis that, according to its counsel, it could only be liable to the parties to the escrow. On appeal, the Appellate Court agreed with Continental and reversed. The Court specifically held that the escrow holder owes no duty, whatsoever, to individuals who are not a party to the escrow.

The Court found that Summit's damages were caused by its own failure to inform Furnish that it had assigned its rights under the promissory note and further noted that Talbert had breached its contract with Summit by demanding payment on a loan that it no longer owned.

While the Appellate Court's ruling in the Summit Financial Holding Ltd. case is certainly understandable, the case could potentially have an impact on property owners and note holders who are not parties to an escrow. For this reason, the Summit Financial Holdings Ltd. case could have broader implications for property owners.