Metropolitan News-Enterprise


Wednesday, January 3, 2007


Page 3


Realtor’s Failure to Disclose Held Constructive Fraud, Not Negligence


By a MetNews Staff Writer


The four-year statute of limitations for constructive fraud—and not the two-year statute for professional negligence—applies where a realtor failed to disclose that the house her client was buying was built on landfill, this district’s Court of Appeal ruled yesterday.

In an unpublished opinion, Div. Seven reversed summary judgment granted to realtor Teresa Akerblom and Pickford Realty, Ltd. dba Prudential California Realty John Aaroe Division. Los Angeles Superior Court Judge James A. Bascue had granted summary judgment based on the two-year statute.

Akerblom and Prudential represented Michael and Patricia Gallagher in their purchase of a residential property in Pacific Palisades in late 2000. The Gallaghers alleged that they informed Akerblom that they intended to make major renovations to the property.

Prior owners had procured geological reports indicating that the property was “constructed on fill material over an ancient landslide,” the record showed. One report related to a geological and soil investigation after a landslide at the property in 1980.

A 1987 report confirmed geological defects and indicated the property was constructed on “8 feet of artificial fill, which was underlain by 4 feet of topsoil, which in turn was underlain by 18 feet of landslide debris.”

Akerblom knew or should have known that the property was on unstable soil, including an ancient landslide, and the Gallaghers could not make their intended improvements without substantial and drastic remediation costs, the Gallaghers alleged. Yet, Akerblom failed to “suggest, instruct, recommend and/or require” the Gallaghers to commission a complete geological study of the property prior to the close of escrow.

After escrow closed, the Gallaghers hired an architect to draft plans for a new residence, sought a permit and commissioned a geological report for the project. In February 2001, the Gallaghers learned of the geological defects in the property and were advised that in order to obtain building permits and safely construct their new residence, they would have to stabilize the soil at a cost of more than $600,000, they alleged.

They claimed that Akerblom “admitted . . . she should have had the Gallaghers commission a complete geological study prior to closing the escrow period.”

In October 2003 the Gallaghers sued Akerblom and Prudential for breach of fiduciary duty. Akerblom and Prudential disputed the Gallaghers’ claims and moved for summary judgment, asserting that the action was barred by the two-year statute of limitations for professional negligence.

After Bascue granted the motion, the Gallaghers appealed.

Justice Fred Woods, writing for the Court of Appeal, noted that the statute of limitations for breach of fiduciary duty can be as long as four years, depending on the gravamen of the action.

“Most acts by an agent in breach of his fiduciary duties constitute constructive fraud. The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Also, a careless misstatement may constitute constructive fraud +even though there is no fraudulent intent+,” Woods wrote, quoting from prior case law.

The justice continued:

“[I]in this case, the record contains evidence that Akerblom knew of the

Gallaghers plans to improve the property, made affirmative representations regarding its condition without disclosing she had not confirmed the accuracy of this information and, in fact, did not disclose that she had negative information about the property from the geologist or that he had recommended further testing and investigation—evidence sufficient to support a finding of constructive fraud, rather than mere professional negligence.

Woods concluded:

“[T]he gravamen of the Gallaghers’ action is Akerblom’s breach of her fiduciary duty as their real estate agent upon facts susceptible to a finding of constructive fraud, and, as a result, the two-year statute of limitations does not bar the action as a matter of law.”

Presiding Justice Dennis M. Perluss and Justice Earl Johnson concurred in the opinion.

The case is Gallagher v. Prudential California Realty, B183899


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