Brief Fact Summary. Geoffrey and Charlene Jue, (Appellants) brought suit against Kenn and Victoria Smiser, (Respondents), seeking damages in connection with the sale of Respondent’s home to Appellants on the theories of fraud, concealment, and negligent misrepresentation among others. Respondents successfully moved for summary judgment asserting that it was undisputed that appellants had actual knowledge of all material facts before the close of escrow and nevertheless voluntarily elected to proceed with the purchase of the property in the face of such knowledge.
Synopsis of Rule of Law. When a party learns that he has been defrauded, he may, instead of rescinding, elect to stand on the contract and sue for damages, and, in doing so, his continued performance of the agreement does not constitute a waiver of his action for damages.
Respondents listed their home for sale. Shortly thereafter, an article appeared in the San Francisco Chronicle indicating that Julia Morgan, a famous architect, had designed the home. Appellants saw the article and made arrangements to view the house. At the viewing they were given a brochure that indicated the house was an “Authenticated, Julia Morgan Design, built in 1917.”Appellants and Respondents executed a contract for the sale of the home.
At closing Appellants were asked to sign a contract with two provisions and a disclaimer acknowledging that the house could not be verified as a Julia Morgan design. Appellants signed the other two provisions but did not sign the disclaimer. Appellants then spoke with two conflicting authorities who expressed opposite opinions as to whether Julia Morgan had actually designed the house. Appellants then filed a complaint seeking damages on a number of different theories including fraud, concealment, and negligent misrepresentation.
Issue. Whether a purchaser of real property who learns of potential material misrepresentations about the property after execution of a purchase agreement but before consummation of the sale may close escrow and sue for damages?
Held. Yes. Public policy dictates that a purchaser may close the sale and sue for damages.
Discussion. Points of Law - for Law School Success
When a party learns that he has been defrauded, he may, instead of rescinding, elect to stand on the contract and sue for damages, and in such case his continued performance of the agreement does not constitute a waiver of his action for damages. View Full Point of Law
The trial court granted summary judgment predicated on Appellants’ supposed lack of “justifiable reliance” on Respondents’ fraud when appellants closed escrow. Any party who learns of a fraud before a contract has been completed will not complete it in “reliance” on the fraud. The issue is whether or not at the time the purchase agreement was struck Appellants relied on Respondents’ alleged misrepresentations. No evidence was presented to negate Appellants’ claim that they did rely on those alleged misrepresentations at that time.
Public policy supports this decision. The legislature has enacted statutes designed to foster honesty and disclosure in real estate transactions. If this rule were not adopted then a buyer who learned of a misrepresentation after the purchase contract were struck but before escrow closed would be faced with either consummating the purchase and waiving any claim for damages or rescinding and dealing with the consequences of that choice. Those consequences would include securing a return of money deposited with the escrow holder, the loss of moneys spent to secure a loan and meeting other costs, and the risk of being sued by the seller. One who may be the victim of another’s fraud should not be forced to make such a cho.