Homeowner’s Claims Defeated Because “Gravamen” of Complaint was Fraud, not Breach of Contract

Be careful what you wish for or, as in the next case, what you plead. In Vera v. REL-BC, LLC, Case Nos. A155807, A156823, and A159141 (June 30, 2021) 1st District Court of Appeal, a the buyer of a remodeled home who asserted breach of contract and fraud claims against a developer discovered that her claims, including her breach of written contract claim, was subject to a shorter 3 year statute of limitations because the “gravamen” of her complaint was fraud.

The REL-BC Case

Homeowner Adriana Vera purchased a remodeled home in Oakland, California from developers REL-BC, LLC and SNL Real Estate Solutions, LLC. The developers had purchased the home in July 2011, remodeled it, and sold it to Vera in November 2011.

As is typical in such transactions, the purchase agreement for the house required that the sellers disclose known material facts and defects affecting the property. In their disclosure, the sellers stated that they were not aware of any significant defects or malfunctions with respect to the property. The disclosure also stated that the sellers were not aware of any water intrusion issues with respect to the property.

Vera hired a property inspector prior to purchasing the property. The property inspector noted that the basement was well below the exterior grade and that several areas showed a history of water intrusion. The property inspector’s report stated, “[e]xpect moisture and water intrusion during periods of wet weather!!” 

The property inspector also noted that there appeared to be repair work to the front stairs leading to the house but that because it was inaccessible that further inspection should be conducted. The property inspector recommended that the permit history of the house be obtained because there were various areas that appeared peculiar or imperfectly done.

Vera also hired a sewer inspection company who noted a major disconnect at the house cleanout that was leaking a large amount of water into the crawlspace and a sump pump that was not operating correctly. REL-BC and SNL agreed to repair the sewer disconnect and the sump pump.

Escrow closed on December 2, 2011. In January 2012, a large amount of water flooded the basement because the repair to the sewer line had been done incorrectly. REL-BC and SNL later admitted that the sewer line work had been done without a permit and that the person who corrected the sewer line was unlicensed. Later, in May 2014, the front stairs leading to the house began to collapse. Upon investigation, it was determined that the stairs had no support. 

On December 5, 2014, three years and three days following the close of escrow, Vera filed a complaint against REL-BC and SNL alleging causes of action for negligence, breach of contract, fraud, breach of warranty and negligent misrepresentations.

REL-BC and SNL later filed a motion for summary judgment claiming that Vera’s complaint was time-barred because the complaint was not brought within the three-year statute of limitations for fraud. The trial court granted the motion and awarded SNL attorneys’ fees based on the purchase and sale agreement, but not REL-BC, because REL-BC had been dissolved at the time of the judgment.

Vera and REL-BC appealed.

The Appeal

On appeal, Vera argued that trial court erred in applying the three-year statute of limitations applicable to fraud to all of her causes of action, including her cause of action for breach of written contract, which has a four-year statute of limitations. 

The 1st District Court of Appeals disagreed explaining:

To determine the statute of limitations which applies to a cause of action it is necessary to identify the nature of the cause of action, i.e., the `gravamen’ of the cause of action. “[T]he nature of the right sued upon and not the form of action nor the relief demanded determines the applicability of the statute of limitations under our code.” In determining whether an action is on the contract or in tort, . . . it is the nature of the grievance rather than the form of the pleadings that determines the character of the action. If the complaint states a cause of action in tort, and it appears that this is the gravamen of the complaint, the nature of the action is not changed by allegations in regard to the existence of or breach of a contract. In other words, it is the object of the action, rather than the theory upon which recovery is sought that is controlling.

And, here, explained the Court of Appeals:

Vera alleged that Sellers promised in the purchase agreement to provide her a disclosure statement listing all material facts known to the Sellers. She alleged the Sellers failed to disclose and misrepresented defects with the property including prior water intrusion, structural defects, and the fact that the renovations and remodeling work were not permitted or performed by a licensed contractor. She further asserted that Sellers performed labor and installed materials in the project in a negligent manner, which deprived her of the full use and enjoyment of the property after purchase. After alleging causes of action for negligence and breach of warranty based on these facts, Vera incorporated all prior allegations by reference into her cause of action for breach of contract. She claimed that Sellers agreed in the purchase agreement to provide a disclosure statement, and the agreement’s implied covenant of good faith and fair dealing required Sellers to disclose defects. She finally alleged, “In breach of the express provisions of the contract and the implied covenant of good faith and fair dealing, [Sellers] concealed defects, failed to make repairs of items they knew were deficient, and otherwise misrepresented the condition, desirability, and value of the . . . property.”

“These allegations,” concluded the Court of Appeal, “state in essence that Sellers harmed Vera by failing to disclose material facts to her . . . fraud is the gravamen of this claim.” And because Civil Code section 338(d) provides a three-year statute of limitations for fraud claims, explained the Court of Appeal, it also applied to Vera’s breach of contract claim: 

It makes no difference that the breach of contract claim rests on a contractual duty to disclose material facts, while her fraud claim rests on the same duty under tort law. It is black letter law that section 338(d) applies regardless of the form of the action a plaintiff chooses or legal theory she advances. Section 338(d)’s “language is comprehensive and the statute, with its favorable accrual rule, is accordingly applied to any form of action, for any kind of relief. In other words, if fraud or mistake is the basis of the legal injury (the `ground’ of the action), the section applies regardless of whether the complaint seeks legal or equitable relief or pleads a cause of action in tort or contract.”  

Ouch.

The Court of Appeals also rejected Vera’s argument that she did not become aware of the defective construction until 2012 and 2014, stating that “[a] fraud claim will accrue even without actual knowledge if a plaintiff knows facts that should revise suspicion and trigger a further investigation,” and that Vera knew or should have known that there were construction defects when she purchased the property.

Finally, the Court of Appeals rejected Vera’s argument that did not suffer damages until 2012 2014, stating that “[I]f the last element to occur in a tort action is damages, ‘the statute of limitations begins to run on the occurrence of “appreciable and actual harm, however uncertain in amount,” that consists of more than nominal damages,'” and that Vera could have sued REL-BC and SNL immediately upon close of escrow because at that point she paid more for the property than she now alleges it is worth.

Double, triple, ouch.

But that’s not the end of it. The Court of Appeals also held that REL-BC, despite having been dissolved, was entitled to recover its attorneys’ fees, because under Corporations Code section 17707.06 a limited liability company can continue to prosecute and defend actions in order to collect and discharge its obligations even after it has been dissolved.

Conclusion 

REL-BC is one of those head snapping cases for attorneys, where, on the face of things, it would appear that Vera, while she might lose on her fraud claim, would be able to continue to pursue her breach of contract claim. It’s also head snapping (I’m not even sure if that’s a phrase, but it appears appropriate) because the Court of Appeal affirmed an award of attorneys’ fees based on a contractual attorney’s fees provision although, as stated by the Court of Appeals, the “gravamen” of the complaint was fraud not breach of contract. It’s the equivalent of the unexpected upper cut.

And yup, that photo is from the Rumble in the Jungle between Mohamad Ali and George Foreman: