## Facts

- HomeFed Bank was the beneficiary under a deed of trust securing a $100,000 loan on the borrowers’ residential property.
- After the borrowers defaulted, the trustee recorded a notice of default and then a notice of trustee’s sale.
- At the trustee’s sale, the trustee announced a minimum opening bid reflecting the unpaid balance plus fees and costs.
- The purchasers attended and participated in bidding against HomeFed; the purchasers ultimately became high bidders at $155,001 and paid approximately $173,000 through the trustee.
- After the sale, the purchasers discovered severe soil and structural defects requiring repairs alleged to exceed $250,000.
- The purchasers alleged they did not and could not inspect the property before the sale.
- The purchasers alleged the borrowers had previously informed HomeFed of the defects and that HomeFed had obtained reports estimating repair costs above $350,000 and concluding repairs were not economically feasible.
- HomeFed allegedly failed to disclose these defects to prospective bidders despite actual knowledge that the defects materially affected value.

## Issues

1. Whether a deed-of-trust beneficiary with actual knowledge of material facts affecting property value has a duty to disclose those facts to prospective bidders at a trustee’s sale when the facts are not known or readily observable.
2. Whether allegations of such nondisclosure sufficiently state claims for rescission or damages to survive a general demurrer.

## Decision

- The Court of Appeal reversed the judgment sustaining HomeFed’s general demurrer without leave to amend.
- The court held a deed-of-trust beneficiary who has actual knowledge of material facts affecting value must disclose them to prospective bidders at a trustee’s sale when bidders do not know and cannot reasonably discover the facts.
- The court concluded the complaint adequately alleged actual knowledge, materiality, bidders’ inability to discover the defects pre-sale, and nondisclosure, making dismissal at the pleading stage improper.
- The matter was remanded for further proceedings.

## Legal Principles

- “As is” expectations and caveat emptor at trustee’s sales do not bar liability for concealment or nondisclosure where a party has a duty to speak.
- A duty to disclose arises when a party has actual knowledge of material facts, knows the other party is unaware and cannot reasonably discover them, and proceeds in a way that makes silence misleading or unfair.
- In the trustee’s-sale context, a beneficiary may not exploit superior knowledge of latent, value-affecting defects while remaining silent and benefiting from the sale proceeds.
- The duty recognized is limited: it is not a warranty of condition; it applies to material, latent facts actually known to the beneficiary and not readily observable or otherwise known to bidders.
- On demurrer, well-pleaded factual allegations are accepted as true; if those facts could support rescission or damages for concealment, dismissal without leave to amend is improper.

## Conclusion

The court held that a deed-of-trust beneficiary with actual knowledge of material, nonobvious defects affecting value must disclose those defects to trustee’s-sale bidders who cannot reasonably discover them, and it reversed the demurrer-based dismissal because the purchasers pleaded sufficient facts to proceed on rescission or damages theories.


Karoutas v. HomeFed Bank, 232 Cal. App. 3d 767, 283 Cal. Rptr. 809 (Cal. Ct. App. 1991)