Friday, October 08, 2010

Holmes v. Summer (Cal. Ct. App. - Oct. 6, 2010)

Earlier this year, I gave a speech to the Federalist Society at the Ronald Reagan Library in which I argued that the prevailing economic climate does affect -- in part -- some holdings of the judiciary, and that this impact is both understandable and not-entirely-illegitimate.

I should have waited to give the speech.  This case is the perfect example.

A decade ago, I think this case comes out the other way.  But in this era of rampant foreclosures and upside-down properties, I completely understand why the Court of Appeal holds the way it does.

Justice Moore concludes that, if she knows it, a real estate broker has a duty to disclose to a potential buyer the fact that a listed property is massively upside-down and cannot be sold at its ostensible contract price without a "short sale" -- a sale that the lenders have repeatedly refused to enter into.  Hence, when a seller enters into a contract with a buyer to purchase a house for $749,000, then the buyer (in reliance upon the sale) sells his own home to get the money to buy the new one, only to discover to his horror that the loans on the house total over $1.14 million -- and hence that $749,000 totally won't get him the house -- he can sue the broker for damages.

Justice Moore isn't shy about admitting that the Court of Appeal's holding is based in part upon the current economic climate and what we've learned therefrom.  The first paragraph of the opinion begins:

"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."

Perfect example of what I was saying.  Thank you, Justice Moore.