In February, we covered a class action lawsuit alleging the involvement of several real estate agents and two natural hazard disclosure companies, Fidelity’s Disclosure Source and Valley NHD, in an elaborate illegal kickback scheme in our story Agents and Broker Named in NHD Kickback Class Action Lawsuit. At the time, the Defendants were attempting to have the allegations thrown out of court, but just recently the judge denied their demurrer, indicating that the most serious allegations remain and will move forward in the court system.
The background: A class action lawsuit was brought by home Sellers against Defendants Fidelity’s Disclosure Source, Valley NHD, Seller’s Agent, Seller’s Brokerage, and several other Defendants. The Plaintiffs allege, amongst other things, that Disclosure Source and Valley NHD conspired to earn secret profits through an elaborate illegal kickback scheme. Plaintiffs allege that the Brokerage white labeled a Disclosure Source NHD report that it purchased for approximately $40.00, and resold it to the Sellers for $89.00, without making any enhancements to the report that would account for the additional cost to the client. This type of resale is the epitome of a RESPA violation. The fine to the Defendants could be triple the profit made. Additionally, this business arrangement was kept a secret from the Seller, who had a right to know the Broker had a financial interest in the NHD report that was chosen.
The Defendants attempted to have these allegations thrown out of court in a Demurrer, but they were unsuccessful for the most part. The most serious of allegations remain and will move forward in the court system. Here are some excerpts with explanations of the Court’s decision on the Defendants’ failed Demurrer:
The Defendants argued that none of the proposed representative plaintiffs have standing (sufficient involvement in the claims) to prosecute the action.
The Court disagreed with the Defendants and stated: “Specifically with respect to real estate brokers, the law is settled that a real estate broker (like PMZ) owes a fiduciary duty to its clients. Michel v. Moore Assoc., Inc. (2007) 156 Cal.App.4th 756,762. “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. “ Id.at p. 763.”
Further, “an agent is not permitted to make any secret profit out of the subject of his agency….”
In this case, Plaintiffs allege that Valley NHD was formed for the purpose of serving as a “middleman” between Disclosure Source and those involved in real estate transactions, so that NHD reports prepared by Disclosure Source and sold to PMZ and/or its clients for $40 could instead be sold by Disclosure Source to Valley NHD for $40 and then those involved in real estate transactions could be charged $88.95 for those same reports.
It is a RESPA violation to resell an NHD report for more than it was purchased for. In this case, Valley NHD merely profited by being the middleman. Plaintiffs alleged that they paid $48.95 more for a report as a result of the secret agreement between PMZ and Disclosure Source.
- STATUTE OF LIMITATIONS
The Court disagreed and stated: “…Plaintiffs did not discover the business arrangement with Valley NHD until the filing of the lawsuit (2015) and that they could not have discovered that business arrangement because there never was a disclosure of that arrangement and Defendants actively concealed it.”
Because the Plaintiff’s did not know, and could not have reasonably found out, about the business arrangement, the Statute of Limitations ‘tolled’ (did not begin to run).
Defendants claim the Complaint fails to allege various fraud cases with the requisite “particularity”.
The Court: A fraud allegation is taken very seriously and therefore the law requires that each alleged fraud be pled by the Plaintiffs in great detail. The Court found that the Plaintiffs sufficiently pled this cause of action, stating that they met the necessary requirements:
“The elements necessary for Plaintiff to prove Fraudulent Concealment are: 1) Concealment of a material fact; 2) Duty to disclose the fact; 3) intentional concealment or suppression with intent to defraud; 4) Plaintiff was unaware of the fact and would not have acted as he did had he known; 5) Plaintiff sustained damage. Court found each of these was pled sufficiently. With regard to Constructive Fraud, the fiduciary’s earning secret profits can constitute constructive fraud. “
- UNJUST ENRICHMENT
Defendants claim that there is no cause of action for unjust enrichment, it is only a remedy.
Court found that unjust enrichment (getting money for doing very little or nothing) could be a cause of action as well as a remedy.
The Defendants argued that 1) Conspiracy is not a separate cause of action; 2) Real Estate Agents cannot conspire with their employer as a matter of law; 3) Only those Defendants who owed a fiduciary duty could be liable.
The Court stated: Valley NHD and Disclosure Source, although not alleged to have been fiduciaries of the Plaintiffs, acted in furtherance of their own financial gain by participating in the kickback scheme.
The court remarked, “Valley NHD owes its entire existence to the kickback conspiracy. All of its financial gains came about due to the conspiracy.”
The Court did find that at the present time, the agents were not alleged to have been involved in any specific real estate transaction so no basis to conclude conspiracy.
The Defendants seek an accounting from Defendants to identify all secret profits and compensation.
The Court concluded that the Plaintiff’s had not pled their allegation correctly, and stated “while acting as real estate agents” neither Valley NHD nor Disclosure Source belong in that category. Getting something demurred due to an improper pleading is often seen as dodging a bullet’.
What do you think of this class action lawsuit? We’d love to hear from you.