Ninth Circuit Confirms Old Adage in Home Buyer’s Rescission Action: “He Who Hesitates Is Lost”

First Tennessee National Bank Association (“FTB”) initiated a nonjudicial foreclosure on residential real property and sold the property at a foreclosure sale to DM Residential Fund II, LLC (“DM”).  The property lacked a utilities easement needed to provide electrical service to the new home on the property.  DM discovered the easement issue shortly after buying the property but waited two years to file suit against FTB seeking to rescind the transaction based on FTB’s failure to disclose this defect.


The district court granted FTB’s motion for summary judgment on the grounds that DM was not entitled to the equitable remedy of rescission.  Even though a jury could have reasonably concluded that DM could not have discovered the utility easement issue prior to the foreclosure sale, and therefore a genuine issue of material fact existed, a party seeking the equitable remedy of rescission must do so “promptly upon discovering the facts which entitle him [or her] to rescind.”  (Civ. Code § 1691.)


It was undisputed that shortly after the sale DM discovered it did not have electricity and could not obtain any absent the purchase of an additional easement.  Nevertheless, the Ninth Circuit, relying on a 1920 California Supreme Court case, ruled that “a reasonable person would be put on inquiry notice as to whether there had been some wrongdoing in the sale of the residence, at which point a duty to investigate the wrongdoing arises.”


DM presented no evidence that would allow a trier of fact to conclude it would not have been able to discover the facts supporting its right to rescind at the time it discovered the defect.  The Court further noted that DM took actions inconsistent with “unwinding the contract” including encumbering the property, building improvements and attempting to sell it.  By taking those actions and waiting two years to sue FTB, DM affirmed the transaction and its right to rescind was gone.  As such, the Ninth Circuit concluded that there was no genuine question of material fact on this issue and affirmed the trial court’s granting FTB’s motion for summary judgment.


The moral of the story is he who sits on his rights, with knowledge that his rights may have been violated, is lost and may be stuck with a defective property with no path for recourse.  Therefore, a party who may be entitled to rescind a contract must act “promptly upon discovering the facts which entitle him to rescind” or else he may find himself stuck with the object of the contract.  And this is true even if any applicable statute of limitations has yet to expire such as the three-year statute of limitations for fraud; an argument made in the dissenting opinion.

DM Residential Fund II, LLC v. First Tennessee Bank Nat’l Assoc. (December 30, 2015) 2015 U.S. App. LEXIS 22816.


Homeowners Were Not Liable, This Time, for Injury Sustained by Employee of Their Unlicensed, Uninsured Contractor

Vebr v. Culp serves as a cautionary tale for any homeowner considering hiring a contractor to perform work on their home.


The Culps contracted with OC Wide Painting to paint the interior of their home. The contract specified that OC Wide had workers’ compensation insurance, or would acquire it. Culp confirmed online that OC Wide had a valid license and also checked OC Wide Painting’s references. Before signing the contract, Culp reviewed the California Contractors State License Board’s detail for OC Wide which stated: “This License is exempt from workers compensation insurance; they certified that they have no employees at this time.”


An hour into working in the Culps’ home, OC Wide’s employee, Plaintiff Tomas Vebr, fell from an extension ladder provided by OC Wide resulting in serious injury. The ladder was supported by two helpers employed by OC Wide. OC Wide never did acquire workers’ compensation insurance as promised in the contract and the Culps did not halt the project despite the fact that other individuals were working in their home.


California Business and Professions Code § 7125.2(a)(2) provides that a contractor’s license is automatically suspended by operation of law as of the date the contractor is required to obtain workers’ compensation insurance but fails to do so. Labor Code § 2750.5 provides that a worker who performs services for which a license is required but lacks such a license is rebuttably presumed to be an employee, not an independent contractor.


Vebr sought to hold the Culps liable in tort under the theory of respondeat superior as Vebr’s statutory employer in light of OC Wide’s unlicensed and uninsured status. The Culps moved for summary judgment on the grounds there were no facts to show that they were liable for Vebr’s injuries, that they breached any duty owed to Vebr, that the premises were dangerous or defective, or that the Culps’ actions were the legal or proximate cause of Vebr’s injuries. The trial court agreed and granted the motion for summary judgment. Vebr appealed, and the Court of Appeal, Fourth Appellate District, affirmed the decision of the Orange County Superior Court.


Ordinarily, when an employee sustains a worksite injury, the exclusive remedy is provided by the workers’ compensation law, and the employer is immune from a lawsuit. (Lab. C. §§ 3600, 3601, 3602.) But if the employer has not secured workers’ compensation coverage, an injured employee may bring a civil suit against his employer. (Lab. C. § 3706.) If the employee establishes that he was injured in the course and scope of his employment, a rebuttable presumption is created that an uninsured employer was negligent and the employer is precluded from claiming comparative fault or assumption of risk as a defense. (Lab. C. § 3708; Huang v. L.A. Haute (2003) 106 Cal.App.4th 284, 289–291.)


When an employee of a contractor is injured, and the contractor is unlicensed and uninsured at the time of injury, the injured employee’s recourse may be against not only the contractor, but also against the landowner who hired the contractor, as an additional employer. (Heiman v. Workers’ Comp. Appeals Bd. (2007) 149 Cal.App.4th 724, 734.) The injured employee may have the landowner deemed a “statutory” employer and seek workers’ compensation benefits through the landowner’s general liability or homeowners’ insurance policy. In this case, the Culps were insured under a homeowners’ policy but Vebr did not qualify as a “residence employee” under that coverage. This meant that if the Culps were found liable, they would have to pay out of pocket for Vebr’s injuries.


The potential scope of a homeowner’s tort liability to an injured employee of an unlicensed contractor whom the homeowner hired has not yet been resolved by the California Supreme Court. (See Cortez v. Abich (2011) 51 Cal.4th 285, 291 [“Whether unlicensed contractors or their workers may or must be deemed the homeowners’ employees under section 2750.5 … are difficult and unsettled questions.]; Ramirez v. Nelson (2008) 44 Cal.4th 908, 916 [same].


The Court ruled that it did not need to decide whether the Culps were the statutory employer of Vebr because no triable issue of material fact existed regarding such liability. The court concluded: “Here, the undisputed facts show the cause of Vebr’s fall is a mystery. There is no evidence showing what had occurred or that Vebr was free from negligence himself. There is no evidence, for example, that at the time of the fall, he was holding on the ladder with two hands and did not cause the fall himself by losing his balance. On this record, there is no reasonable and logical inference that…anyone…present in the residence at the time of the accident, was negligent. Someone might have been negligent, but we do not and likely never will know whether that was the case.”


Don’t count on being as lucky as the Culps. If you are considering hiring a contractor to perform work in your home, review their license and insurance status. If the license deems the contractor exempt from carrying workers’ compensation insurance because there are no employees, make sure no one other than the contractor himself performs work at the property. Otherwise, immediately halt the work and demand written proof of workers’ compensation insurance. Doing so will reduce the possibility of being deemed a statutory employer and possibly held liable for injuries sustained by workers on your property.


Vebr v. Culp (2015) 14 C.D.O.S. 11845


First District Court of Appeal Takes A Bit of the Bite Out of the Merger Doctrine

In Ram’s Gate Winery, LLC v. Roche, Ram’s Gate bought a Sonoma County property intending to build a new winery. The sellers (Roches) had agreed in the purchase agreement to disclose facts having a “material effect on the value of the ownership or use of the Property,” including geological hazards.


After escrow closed, Ram’s Gate discovered an active fault trace on the property that substantially increased the cost of development, and sued the Roches for, among other things, breach of contract. The trial court granted summary adjudication in favor of the Roches on the breach of contract action finding that the warranties in the purchase agreement had “merged” with the recording of the deed and thus did not survive the close of escrow – the “merger doctrine.” The Roches were awarded their attorneys’ fees and costs, and Ram’s Gate appealed.


The general rule, long recognized in California, is that “where a deed is executed in pursuance of a contract for the sale of land, all prior proposals and stipulations are merged, the deed is deemed to express the final and entire contract between the parties.” (Bryan v Swain (1880) 56 Cal. 616, 618.) Thus, any and all previous duties of disclosure, unless specifically stated in the deed, are extinguished and deemed to have “merged” into the deed.


Historically, the merger doctrine has been criticized for its inherent unfairness. For example, in Ram’s Gate, the trial court ruled that “When the contract [i.e., deed] does not provide that the representations and warranties survive the closing of the transaction, [they] are treated as extinguished as of the closing date, and cannot thereafter give rise to liability.” As such, even though the Roches allegedly knew about the fault trace prior to closing, their duty to disclose this alleged material defect was extinguished because the duty was not specifically stated in the deed that was recorded at the close of escrow – if applied, a harsh result.


The First District Court of Appeal reversed, finding the merger doctrine “not as broad and absolute as some abbreviated statements of the doctrine might indicate.” “The crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement.”


The Court agreed “with those courts which have limited application of the merger doctrine to circumstances where the contractual terms are inconsistent with the deed, or where the parties clearly intend to have all contractual obligations subsumed by the recitals of the recorded deed.” This formulation mitigates the potential unfairness resulting from strict application of the merger doctrine.


Thus, whether the merger doctrine applies should be decided now based on (1) an analysis of the deed in comparison with, and in the context of, the prior contract to discern whether the contractual terms are inconsistent with the deed, and (2) examination of the parties’ intent as to whether the provisions of the prior agreement continue in force after the transfer of title.


Applying the above formulation to the case before it, the Court found that from the face of the deed there was no “obvious conflict” between the purchase agreement and the terms of the deed which would show that the disclosure warranty was merged into the deed. As such, the merger doctrine would not be applied.


Turning to the second prong – the parties’ intent – the Court found that the manager’s declaration established that Ram’s Gate believed the warranties and disclosure duties would continue after close of escrow. The declaration should therefore have been considered in determining the parties’ mutual intent on the integration and survival issue, which raised a factual issue to be determined at trial. Because there was a triable issue of fact as to the parties’ intent, the merger doctrine would not be applied in this case.


In the end, the Court took some of the sting out of a draconian and sometimes harsh law – the merger doctrine. As a result, courts are now permitted to examine both the purchase agreement and the deed side-by-side to determine if the contract terms are inconsistent with the deed. Courts are also permitted to accept extrinsic evidence to determine whether the parties’ intended all prior representations and warranties to be extinguished and “merged” into the deed at the time of closing.


Ram’s Gate Winery, LLC v. Roche (2015) 235 Cal.App.4th 1071