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Holmes v. Summer

October 6, 2010


Appeal from a judgment of the Superior Court of Orange County, David R. Chaffee, Judge. Reversed. (Super. Ct. No. 30-2008-00110902).

The opinion of the court was delivered by: Moore, J.



Particularly in these days of rampant foreclosures and short sales, "[t]he manner in which California's licensed real estate brokers and salesmen conduct business is a matter of public interest and concern. [Citations.]" (Wilson v. Lewis (1980) 106 Cal.App.3d 802, 805-806.) When the real estate professionals involved in the purchase and sale of a residential property do not disclose to the buyer that the property is so greatly overencumbered that it is almost certain clear title cannot be conveyed for the agreed upon price, the transaction is doomed to fail. Not only is the buyer stung, but the marketplace is disrupted and the stream of commerce is impeded. When properties made unsellable by their debt load are listed for sale without appropriate disclosures and sales fall through, purchasers become leery of the marketplace and lenders preparing to extend credit to those purchasers waste valuable time in processing useless loans. In the presently downtrodden economy, it behooves us all for business transactions to come to fruition and for the members of the public to have confidence in real estate agents and brokers.

The case before us presents the interesting question of whether the real estate brokers representing a seller of residential real property are under an obligation to the buyers of that property to disclose that it is overencumbered and cannot in fact be sold to them at the agreed upon purchase price unless either the lenders agree to short sales or the seller deposits a whopping $392,000 in cash into escrow to cover the shortfall. Here, the buyers and the seller agreed to the purchase and sale of a residential real property for the price of $749,000. Unbeknownst to the buyers, the property was subject to a first deed of trust in the amount of $695,000, a second deed of trust in the amount of $196,000 and a third deed of trust in the amount of $250,000, for a total debt of $1,141,000, and the lenders had not agreed to accept less than the amounts due under the loans in order to release their deeds of trust. According to the buyers, after they signed the deal with the seller, they sold their existing home in order to enable them to complete the purchase of the seller's property. Only then did they learn that the seller could not convey clear title because the property was overencumbered.

In a lawsuit against the seller's brokers, the trial court sustained a demurrer without leave to amend, holding that the brokers owed no duty of disclosure to the buyers. The buyers appeal. We reverse, holding that, under the facts of this case, the brokers were obligated to disclose to the buyers that there was a substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.


Phil and Jenille Holmes (buyers) made the following allegations in their first amended complaint against Sieglinde Summer and Beneficial Services, Inc. (collectively brokers). Summer is a licensed real estate broker who represented the seller of certain residential real property located in Huntington Beach, California. Summer was employed by Beneficial Services, Inc., which operated a Re/Max office in Huntington Beach.

The brokers listed the property for sale on a multiple listing service, advertising a price of $749,000 to $799,000. The listing noted that the seller was motivated and that Summer would receive a 3 percent commission for the sale. The buyers saw the listing on the multiple listing service Web site and became interested in the property. Summer showed them the property, and made no mention of any encumbrances on the property that might affect the ability of the seller to sell at the advertised price.

The buyers offered to purchase the property for $700,000, free and clear of all monetary liens and encumbrances other than a new loan in the amount of $460,000, escrow to close in 60 days. The brokers prepared a counter offer on the seller's behalf, with a sales price of $749,000 and a 30-day escrow. The buyers accepted the counter offer. The counter offer did not disclose that the property was subject to three deeds of trust totaling $1,141,000. Unbeknownst to the buyers at the time they signed the purchase documents, the property could not be transferred to them free and clear of all monetary liens and encumbrances, other than their own purchase money deed of trust, because the existing debt on the property far exceeded the purchase price. The buyers suffered damage in an amount to be proven at trial.

The first amended complaint asserted causes of action for negligence, for negligent misrepresentation, and for deceit--based on both misrepresentation and the failure to disclose. The brokers filed a demurrer. They argued that the lawsuit was a disguised effort to require the brokers to guarantee the seller's performance. They also asserted that if the seller decided to sell the property at a loss, such that it would have to come up with cash to close the transaction, but then changed its mind, that was a business decision for which the brokers could not be held liable.

In their opposition to the demurrer, the buyers stated that Summer had admitted both that she knew about the excess debt when she listed the property on the multiple listing service and that she did not disclose the excess debt to the buyers. The buyers also alleged that Summer was actually attempting to arrange a "short sale," which would have required the lenders to accept less money than was owing to them in order to retire the debt against the property. In addition, the buyers asserted that, during escrow, the lenders refused to discount the loans and demanded full payment before they would release their liens against the property.

The court sustained the demurrer without leave to amend and ordered the dismissal of the first amended complaint. Judgment was entered accordingly.


A. Standard of Review

"We independently review the ruling on a demurrer and determine de novo whether the complaint alleges facts sufficient to state a cause of action. [Citation.] We assume the truth of the properly pleaded factual allegations, facts that reasonably can be inferred from those expressly pleaded, and matters of which judicial notice has been taken. [Citation.] We construe the pleading in a reasonable manner and read the allegations in context. [Citation.] We affirm the judgment if it is correct on any ground stated in the demurrer, regardless of the trial court's stated reasons. [Citation.]" (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 111.)

B. Seller as Indispensable Party

The buyers' first argument is that the court erred in finding that the seller was an indispensable party to the litigation and in sustaining the demurrer because of the failure to name the seller as a defendant. However, the court made no such finding or ruling, as we shall show.

At the hearing on the brokers' demurrer to the buyers' original complaint, the court asked why the seller had not been named as a defendant in the case. The buyers expressed doubt that the seller could pay a judgment. The court stated that the complaint lacked any allegation of personal knowledge on the part of the brokers, and suggested that the buyers' real claim was against the seller. It sustained the demurrer to the original complaint, with leave to amend.

At the hearing on the demurrer to the first amended complaint, the court concluded: "Well, I said this last time, and I repeat it this time. I think you've got a great lawsuit against the seller of the property, but the seller of the property is not a named defendant in this case. I'm guessing that the seller, because the seller is upside down in this, is basically judgment proof. And so you're searching around for a deep pocket. The deep pocket is the brokerage. But the brokerage appears . . . under the circumstances to have done nothing that breached any duty to your client, certainly did not engage in fraud that you allege. ...

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