MEDIATION BRIEF
1. Introduction: The parties and their contentions
This dispute has good news and bad news for all parties. The good news is that the plaintiffs do not appear to have incurred significant damages. The bad news is that they claim otherwise and are blaming everyone but themselves.
In November 1996, shortly before the County disclosed that contaminants from its former Blackacre landfill might be migrating offsite and entering groundwater, the Whites bought Green's 110-acre ranch for $1,765,000, intending to use it as a residence and vineyard with tasting room. The ranch, with entrances on Blackacre Road at No. 209 (front gate) and No. 195 (rear gate, guest-house) lies directly across the road from the landfill. Local Fealty Realty agents (Victoria Jackson for Green, Karl Carlson for the Whites, both working under Fred Firestone as broker at Fealty Realty Premier Properties in Centerville--collectively, the Brokers) handled the transaction for both sides. The Whites and the Brokers claim they didn't know anything about the landfill. The Whites say Green defrauded them by not disclosing its location and that the agents breached their duty of care by not discovering it and disclosing it.
Green admits not listing the landfill on his real estate transfer disclosure form but firmly denies misleading the Whites. Green filled out the disclosure form believing that his task was to list conditions on the property, not any off-site conditions like the former landfill, and that the brokers would disclose the landfill and any other off-site conditions they might know of. Ralph Freeman, Green's original agent, had done this on Green's form for a previous prospective purchaser (Dr. Purple, discussed in the chronology below), and so had the buyer's agent. Green was not aware that the brokers had omitted this step in their disclosures to the Whites. In any event, however, Green distinctly recalls telling the Whites about the landfill in person. Green's original listing agent, Ralph Freeman, whose listing expired shortly before the Brokers presented the Whites' offer, recalls telling the Whites and their agent, Karl Carlson, about the landfill on two separate occasions. A third witness, Green's daughter Cynthia Green, who lived on the ranch and owned a 25% interest in it, recalls showing Mr. White the property on several occasions and pointing out the landfill each time.
Green also believes that both the Brokers and the Whites knew of the landfill independently through common knowledge of the area, readily accessible public records, and personal observation of white monitoring-well pipes up and down Blackacre road, including one right outside the second ("back") entrance to the property, which presumably led them to inquire and learn about the landfill and the County's monitoring program, if they didn't know already from Taylor, Green, and Cynthia Green.
Green further denies that the Whites have been damaged as a result of his failing to list the landfill or that any damages they might have suffered if they had been unaware of the landfill are attributable to him. The County had been monitoring the landfill since 1988 but did not disclose that contaminants could be affecting neighboring properties until February 1997, four months after escrow opened and a month after it closed. When Green sold the Whites the ranch, he did not know that the landfill threatened to contaminate its water supply. Neighboring properties were bought and sold after the County's monitoring program began just as they had been bought and sold before. The pricing of these properties, like the pricing of the ranch, assumed that the landfill site--which was completely covered over and had been improved with fine homes--was not a major problem. Green sees little reason to believe that, before the County's disclosures, the Whites would have considered the landfill a material detriment or offered less for the ranch than they did.
Even after the County's disclosures, it is still not clear that the Whites have been significantly damaged. The Whites took up residence and planted vines on schedule, irrigating with water from the existing production well. Only trace amounts of contaminants, if any, have ever actually been found at the well-head, and the Whites' consultant has advised them that the water will not harm the vines or the grapes. The County has been supplying the Whites with domestic water, has purchased the properties on the landfill site, and has undertaken, under orders from the Regional Water Quality Control Board, to remediate all aspects of the site. Meanwhile, the County has offered to drill the Whites a new production well up-gradient from the plume, and the Whites' consultant has advised them that the contaminated well is safe for agricultural use. An expert appraiser has opined that the property's price reflected its fair market value at the time of the sale, and that that value has increased substantially. Green has repeatedly offered to buy back the ranch with 10% interest on the purchase price. The Whites have repeatedly rejected these offers.
In sum:
1. Green is morally certain that the Whites knew about the landfill and bought the ranch assuming, not unreasonably, that the landfill would not be a major problem. He thinks their demand on him is a dishonest attempt to make him refund part of the purchase price, now that the landfill has arguably turned out to be a bigger problem than they thought it would.
2. Green strongly believes that the Brokers knew about the landfill too, and that discovery will lead to incontestible proof of such knowledge. Knowing of the landfill, or being at least on inquiry notice, the Brokers had a fiduciary duty to protect Green from liability from failure to disclose. Accordingly, Green thinks the Brokers are obligated to pay the Whites' unmitigated damages, if they have any, and that the Brokers' demand for indemnification from him is unjust.
3. Green thinks the property was worth every penny the Whites paid for it based on what anyone knew about it at the time. He does not think they could prove a claim against him even if they had been misled, which he feels sure they were not.
4. Finally, Green thinks the property is still worth as much or more than the Whites paid for it and would be glad to take it back at the purchase price plus 10% interest.
2. Chronology
A. Background facts
Jack and Hilda Green purchased the ranch in 1985, moving there from San Francisco with their daughter, Cynthia and building the main house. Cynthia lived in a guest house near the back gate. The Greens held frequent social gatherings, including fund-raisers for various charities, which were attended by hundreds of guests at a time.
(1) The Purple transaction
The Greens decided to sell the ranch when Mrs. Green became ill. In early spring 1995 they listed the property with Ralph Freeman, an experienced broker, of West Realty in Centerville. Freeman had lived in Centerville since June 1969, shortly after the landfill was closed, and had been a real estate agent for most of the years since then. Freeman had sold other properties on Blackacre Road, including the Charles Fox residence, which is located directly on top of the landfill site. Fox bought the property in about 1988. Freeman disclosed the existence of the former landfill to Fox at that time, even though no one believed the landfill would be a significant problem.
After several months another broker, Joe Orange, brought in Dr. Purple as a prospective purchaser for the Green ranch, and the parties agreed to a purchase price of $1,750,000.
In Freeman's presence, Green filled out Section II of a disclosure statement, dated August 7, 1995, without noting the landfill, in the same manner as he later did in the White transaction. Freeman noted the landfill in his inspection disclosure (Section III of the form) dated September 20, 1995. Joe Orange, as buyer's agent, noted the landfill in his inspection disclosure (Section IV of the form) dated October 4, 1995.
The Purple transaction failed. Joe Orange and Freeman both stated that the reason for the failure was that Purple was unable to deposit a sufficient down payment timely. At about that time, Hilda Green died, leaving her half interest in the property to her daughters, Cynthia and Beatrice Green.
(2) The White Transaction, Phase I: Freeman shows the Whites the ranch.
A few months later, about April 25, 1996, Steve and Christine White visited the ranch as a prospective location for their vineyard. They were accompanied by their agent, Karl Carlson of Fealty Realty's Centerville office. Freeman met them at the ranch house and drove them around the ranch for about two hours in his SUV, with Mr. White in the front passenger's seat and Mrs. White and Carlson behind them. Freeman drove up to a viewpoint along the northern fence line and specifically pointed out that the property across the road--the same property he had sold to Charles Fox in 1988--had been the Centerville landfill in former days.
The Whites state that they found the asking price of $2,200,000 too high and continued to look for a suitable Center Valley property at a lower price. They found an undeveloped parcel on Big Creek Road that summer but asked to revisit the Green ranch to compare the two properties. Carlson told them that Jack Green had remarried and had reduced his asking price about $200,000.
In September 1996, the Whites returned to the ranch with Carlson and met Freeman there again for a second two-hour visit. Knowing of the Whites' interest in planting a vineyard, Freeman again specifically mentioned the former landfill site across the road.
During this period, Freeman introduced the Whites to Cynthia Green, who lived in the guesthouse. Cynthia and her sister Beatrice had each inherited half of Hilda Green's half-interest in the property. Unlike Jack Green, however, Cynthia Green was attached to the property and was not eager to see it sold. During the next several months, the Whites made repeated visits to the property with Cynthia Green. On each of these occasions, Cynthia Green reminded the Whites that the ranch was directly across the road from the old landfill. More than once, Cynthia Green specifically pointed out and explained the function of the white methane-gas-monitoring pipe, a four-inch tube standing four feet above grade, which was located next to the bright red mailbox a few feet from the gate-post of the back entrance. On one or more of these occasions, Cynthia Green watched Mr. White take photographs of that pipe.
(3) White Transaction, Phase II: Victoria Jackson replaces Freeman as listing agent.
Freeman's listing agreement expired at the end of 1995 but he continued to show the property until he was advised, in September 1996, that Green had decided to give Fealty Realty's Victoria Jackson the listing. The Whites asked Carlson what it meant to them to have the same brokerage represent both sides, but Carlson assured them it was normal.
With Victoria Jackson's assistance, Green signed a new transfer disclosure statement on October 10, 1996. As he had done on the previous statement, Green left off-site conditions for the brokers to disclose. He did not receive a copy of the statement signed by Jackson and Carlson and was not aware that they had failed to disclose the landfill.
Freeman submitted a "procuring cause" list of potential buyers--particularly, of course, the Whites. Fealty Realty asserted that Freeman had submitted the list too late but agreed to give Freeman a 30-day window in which he would be entitled to commission on any accepted offer from a buyer he had procured.
Freeman's 30-day window expired on November 3, 1996. On November 1, the Whites came to Carlson ready to sign an offer. Carlson specifically told them to wait until November 5. The Whites queried this request and expressed concern that someone else might beat them to the punch. Carlson assured them no one would. Carlson was able to give this assurance confidently, of course, since his fellow Fealty Realty-Centerville agent, Jackson, was representing Green. This delay had two results:
(1) Freeman lost his commission. He arbitrated the matter with Fealty Realty and lost. Fealty Realty wrote Freeman a consolation check for $5,000 to cover his advertising expenses.
(2) Fealty Realty's Jackson and Carlson supplanted Freeman in the transfer disclosure process.
In the next few days, the parties negotiated a final price and went to contract on or about November 7. The terms of sale were all cash to seller, and the entire purchase price was self-financed. No institutional lender was involved.
(4) White Transaction, Phase III: in escrow
The Whites made numerous further visits to the property once they were in contract. On one of these visits, Jack Green recalls, as he and Mr. White stood at the back gate together, Green grasped hold of the white methane-monitoring pipe and explained that it was there to monitor landfill emissions from the site across Blackacre road.
(5) Post-sale developments
Escrow closed on January 15, 1997. The Whites visited the ranch to take possession and moved in shortly thereafter.
On February 25, 1997, the Centerville Gazette broke the story that the landfill might be leaching contaminants under the headline: "Old Dump May Be Tainting Water." Mr. White states that this article was the first news he had that the landfill existed. He says that he immediately called Karl Carlson, who told him that no one had known anything about it. Until October 1998, he says, he assumed that Jack Green had not known about the site, changing his mind only when he finally noticed--or a bulldozer driver inquired about--the white methane pipe four feet high at his back gate. He called Green to inquire, he says, and Green told him for the first time, he says, it had been there since the 1980s to detect gas "from the dump." This remark, he says, alerted him to the fact that Green had known about the landfill and the County monitoring all along.
Meanwhile, undeterred by the initial report or by a drumbeat of disquieting news from the County, the Whites proceeded to implement their business plan. Not until May 11, 1999, did they write to Green, requesting mediation as an alternative to rescission.
Green offered rescission but the Whites were not interested.
B. Litigation and discovery
The pleading file contains a complete record of the superior court filings in this case. The facts below are only highlights.
(1) Missing plaintiff: Hortense Smith White Trust, Tenant in Common of the Property
The Whites filed suit on January 13, 2000, with a pleading styled "Petition to Compel Arbitration Under Real Estate Purchase Agreement and Complaint for Damages Against Third Parties."
Curiously, plaintiffs were identified as "Steve and Christine White, Trustees of the White Family Trusts," yet title to the property was shown in escrow as vesting equally in them and in "Archibald C. Etherington and Steve White, Trustees of the H.S. White Trust as to an undivided 50 per cent interest."
Discovery has shown that Archibald C. Etherington is a Minnesota and Ohio attorney. The full name of the "H.S. White Trust" is the Hortense Smith White Trust. Hortense Smith White is Mr. White's mother. The beneficiaries of the H.S. White Trust are Steve White and his brother Fergus White. The H.S. White Trust was the principal source of funds for this all-cash transaction. The H.S. White Trust has leased back to Mr. and Mrs. White its half interest in the property. Yet the H.S. White Trust was not and is still not a party to this lawsuit, even though it funded the purchase and owned and still owns an undivided half interest in the ranch. Indeed, in a manner similar to his long delay in contacting Jack Green, Mr. White admits that he has not notified Etherington of this litigation or any aspect of this dispute.
(2) Motion to compel arbitration denied.
The Whites have sought to arbitrate against Green even though the Brokers are inextricably involved, as is the County, and neither has consented to arbitration. Judge Herman denied the White's motion on September 5, 2000.
(3) Discovery disputes
Ralph Freeman's deposition was taken on June 14. Discovery has accelerated in recent weeks but it remains incomplete. The Whites' depositions were taken last week, as was Green's deposition. The Brokers' depositions are scheduled for September 11.
Green's discovery from the Whites has not gone smoothly. After an egregious incident of abuse in the production of documents, Green was obliged to file a motion to compel discovery; this motion was granted on August 28, 2000. (Green's request for terminating sanctions was, however, denied.) Green's moving papers give the details. Counsel has produced some additional papers in response to this order, but Green has strong reason to believe that counsel, or the Whites, or both, continue to withhold papers that are in their possession, particularly notebooks in which Mr. White recorded the results of his pre-sale and pre-closing research, that would put the Whites' prior knowledge of the landfill beyond dispute.
Motions to compel production by the Brokers are also pending. Among other things, Green seeks to compel discovery of records relating to other transactions on the landfill-affected parts of Blackacre Road in which Fealty Realty-Centerville represented buyers, sellers or both.
3. Analysis
A. The Whites' claim against Green
Reduced to their gist, the disputed elements of fraud in this case are (1) reliance on a false representation (here, an alleged failure to disclose a material fact unknown to the plaintiffs), and (2) resulting damages.
(1) Reliance
The Whites' claim against Green rests on one piece of evidence: Green signed and (unwittingly) allowed his agents to deliver to the Whites a transfer disclosure form that didn't mention the landfill. From this admitted breach, the Whites seek to prove that they didn't know the landfill was there.
Green has explained his omission and rebutted the Whites' inference. In opposition, he offers evidence that the Whites learned of the landfill directly from him, his agent Freeman, and his co-owner and reluctant seller, Cynthia Green.
The Whites deny all of this, but their denials are not credible:
(2) Resulting damages
The second major element of the Whites' proof is that they were damaged by their reliance on the facts as they assumed them to be. For reasons stated above, Green disputes that the Whites have been appreciably damaged at all. Green's evidence will show that the ranch's existing water is still good for agriculture, including viticulture, with no proof that significant levels of contamination exist now or ever will exist in it. The County has promised to drill the Whites a second well, up-gradient from the flow of potentially contaminated water, for domestic use, and it is under State orders to thoroughly remediate the site. Green will further show that the value of the ranch has appreciated since the disclosure of the landfill's toxic potential.
Moreover, even if the Whites were damaged, the measure of Green's liability is based on what he knew or should have known and failed to disclose when he sold the property to the Whites--not on what allegedly developed two to three years later. In other words, the Whites are entitled to the difference, if any, between what they paid for the ranch and what a willing seller would have paid with knowledge of the true facts as they then were known. As the facts were then known, the entire ranch appeared to be up-gradient from the landfill, and concerns about contaminated groundwater or other problems associated with the landfill had never been publicly reported. Nor had most of the closed landfills in the County been proved to constitute environmental hazards. Green's appraisal evidence will show that the Whites' damages attributable to their alleged reliance on misinformation were nil.
B. Green's claim against the Brokers.
If the Brokers, as Green's listing and selling agents, knew or should have known information that Green was required to disclose, they owed Green a contractual and fiduciary duty to disclose it on his behalf in order to avoid exposing him to liability. A breach of this duty exposes them to liability to indemnify Green. See, e.g., West v. Superior Court (1994) 27 Cal.App.4th 1625, 1633 (seller's action for implied contractual indemnity against listing/selling broker, based on breach of duty to disclose to buyer, is not subject to 2-year statute of limitations in Civ. Code § 2079.4, governing selling broker's breach of duty to disclose to purchaser). See also Sweat v. Hollister (1995) 37 Cal.App.4th 603, 608; Marcus & Millichap Real Estate Investment Co. v. Hock Investment Co. (1998) 68 Cal.App.4th 83.
The Brokers claim (1) they did not know about the landfill and (2) had no duty to learn that it existed. Neither claim holds water.
(1) The following evidence strongly suggests that the Brokers did know about the landfill:
Green anticipates that further discovery from the Brokers, including their depositions today and tomorrow, will produce additional probative evidence that they actually knew of the landfill--at the least, that they conveniently "forgot" information they plainly had a duty (to both Green and the Whites) to remember.
(2) Even if the Brokers didn't knowingly fail to disclose the landfill, they had a duty of care to both their clients to make sufficient inquiries to discover its proximity to the ranch. See, e.g., the eloquent statement on a broker's fiduciary duties to a client in Field v. Century21 Klowden-Forness (1998) 63 Cal.App.4th 18, 25-26 (quoting 2 Miller & Starr, Cal. Real Estate 2d (1989) Agency, § 3.17, pp. 94, 9-97, 99). A dual agent, of course, owes the same complete fiduciary duties to both clients. Brown v. FSR Brokerage, Inc., (1998) 62 Cal.App.4th 766, 775. These duties go far beyond the ordinary duty to make a reasonably diligent visual inspection of on-site conditions and embrace a duty of inquiry as soon as the agent is on notice of facts sufficient to trigger that duty. Field, supra, 63 Cal.App.4th 18, 22.
Here, it is enough for Green to show that, before the transaction closed, the Brokers had driven on Blackacre Road and had seen the outcropping of white methane pipes near the ranch or had heard about the landfill and knew its general location, putting them, in either case, on inquiry notice to determine whether the proximity of the landfill was such that it was a material fact that should be disclosed. In a busy, well-established real estate office like the Brokers' Centerville office, it is hard to imagine how the Brokers could have escaped enough knowledge to put them on inquiry notice.
It is ironic that the Brokers' involvement in this case, like Green's involvement, probably stems from the Brokers' unscrupulous treatment of Freeman. Had Victoria Jackson not persuaded Green to fire Freeman just when they knew that the Whites were likely to make an offer, there can be little doubt that Freeman would have disclosed the landfill to the Whites on the disclosure form as he did with Purple. Had Carlson not asked the Whites to withhold their offer until after Freeman's procuring-cause extension expired, Freeman still might have been consulted and might have given Carlson a copy of his pre-sale file. The Whites would likely still have bought the property, and the half commission that the Brokers gave up to Freeman would have been less than they will pay for their greed in lost time and legal fees.
C. Green's claim for indemnification against the County
It seems unnecessary to pursue this claim in detail here. Suffice it to say that to the extent, if any, that Green is liable to the Whites, Green has standing to seek to compel the County to fully perform any unperformed or inadequately performed part of its duties to remediate all hazardous conditions at the site and to mitigate any interim harm to the neighbors.
CONCLUSION
The Whites of course have a legitimate claim for the County to act promptly and adequately to remediate the landfill and provide for their interim water needs. Beyond that, they may perhaps have persuaded themselves--or let their lawyers persuade them--that Green has cheated them. But Green very strongly believes that their lawsuit is a deliberate and transparent attempt to cheat him. He further believes that the Brokers' denial of responsibility is in bad faith. He believes and hopes that the County has discharged and will continue to discharge its responsibilities to the Whites, leaving them for all practical purposes undamaged. Unless and until he sees good reason to change his mind, he will not be inclined to contribute toward a settlement, which in his opinion would amount to improving for the Whites what was already a good bargain.
If the Whites wish to revisit the rescission question, Green's prior offer remains open. He will refund the Whites' money with simple interest at 10% (plus compensation for their improvements at cost), if they will reconvey the property.
1. Introduction: The parties and their contentions 1
2. Chronology 4
A. Background facts 4
(1) The Purple transaction 5
(2) The White Transaction, Phase I: Freeman shows the Whites the ranch. 6
(3) White Transaction, Phase II: Victoria Jackson replaces Freeman as listing agent. 7
(4) White Transaction, Phase III: in escrow 9
(5) Post-sale developments 9
B. Litigation and discovery 10
(1) Missing plaintiff: Hortense Smith White Trust, Tenant in Common of the Property 10
(2) Motion to compel arbitration denied. 11
(3) Discovery disputes 11
3. Analysis 12
A. The Whites' claim against Green 12
(1) Reliance 12
(2) Resulting damages 15
B. Green's claim against the Brokers. 16
C. Green's claim for indemnification against the County 19
CONCLUSION 19