## Facts

- Phil and Jenille Holmes agreed to buy a Huntington Beach home listed by Sieglinde Summer, a broker affiliated with Beneficial Services, Inc.
- The property was subject to three deeds of trust totaling $1,141,000, far exceeding the listing and contract price.
- The Holmeses’ offer contemplated taking title free and clear of liens except their new purchase-money loan; they accepted a seller counteroffer to purchase for $749,000 with a 30-day close.
- At the time of contracting, the lenders had not agreed to accept less than the amounts owed to release their liens.
- The Holmeses alleged Summer did not disclose that the transaction could not close at the agreed price unless the lenders approved short-sale payoffs or the seller contributed roughly $392,000 to cover the deficit.
- Relying on the purchase proceeding, the Holmeses sold their existing home, then learned clear title could not be conveyed on the agreed terms.

## Issues

1. Whether a seller’s listing broker who knows the property is so overencumbered that the sale is substantially likely to fail at the contract price owes a duty to disclose that risk to the buyer.
2. Whether the buyers stated claims for negligence, negligent misrepresentation, and deceit based on nondisclosure of extreme overencumbrance and the resulting inability to deliver clear title.

## Decision

- The Court of Appeal reversed the judgment sustaining the brokers’ demurrer without leave to amend.
- The court held the buyers adequately alleged a duty requiring the seller’s brokers to disclose that there was a substantial risk the seller could not convey title free and clear of monetary liens at the contract price.
- The court ruled the alleged nondisclosure concerned a material fact affecting the desirability of the transaction and could support claims for negligence, negligent misrepresentation, and deceit.

## Legal Principles

- A real estate broker may be liable for failing to disclose to a buyer a material fact affecting the value or desirability of the transaction when the fact is not known or readily observable to the buyer.
- When a broker knows encumbrances so exceed the contemplated sale price that clear title is substantially unlikely absent lender concessions (short-sale approvals) or substantial additional seller funds, the broker has a duty to disclose that state of affairs and the risk of nonperformance.
- The duty may be satisfied without disclosing the seller’s broader confidential financial condition; it is enough to disclose the transactional impediment that threatens completion on the agreed terms.
- Foreseeable buyer reliance and consequential decisions triggered by entering the purchase agreement support treating the undisclosed risk of failure as material.

## Conclusion

The court held that, at the pleading stage, a listing broker must disclose to prospective buyers an extreme overencumbrance that makes delivery of clear title at the contract price substantially unlikely, and it allowed the buyers’ tort claims based on nondisclosure to proceed.


Holmes v. Summer, 188 Cal. App. 4th 1510 (Cal. Ct. App. 2010)