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holding the plaintiff could not state a § 1983 claim against his attorney, a private person who does not act under color of law
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Editorial Note:
This opinion appears in the Federal reporter in a table titled "Table of Decisions Without Reported Opinions". (See FI CTA9 Rule 36-3 regarding use of unpublished opinions)
Argued and Submitted May 8, 1989.
N.D.Cal.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
Before HUG, SCHROEDER and CANBY, Circuit Judges.
ORDER
The petition of appellants for rehearing is granted in part. The memorandum disposition filed February 14, 1990 in this case is withdrawn, and the attached memorandum disposition is ordered filed in its place. In all other respects, the petition for rehearing is denied.
The mandate may issue in due course.
Before HUG, SCHROEDER and CANBY, Circuit Judges.
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Cir.R. 36-3.
Eva and Brainard Harper appeal from the district court's decision finding them liable for violations of federal and California securities laws, the California Business and Professions Code and the common law relating to fraud. The liability arose from six real property transactions involving Lynn and Dean Harman.
We conclude that the transactions do not involve securities and reverse those parts of the judgment based on California and federal securities violations. We also find clear error in the district court's ruling that Brainard Harper made misrepresentations; we reverse the judgments of fraud and negligent misrepresentation against him. We affirm the judgments of fraud and misrepresentation against Eva Harper in transactions 1, 2, and 4. We reverse the judgments of fraud and negligent misrepresentation against Eva Harper in transactions 5 and 6 because of insufficient and clearly erroneous findings. In transaction 3, we conclude that the record does not contain evidence sufficient to support the district court's finding that Eva made misrepresentations with knowledge of their falsity; accordingly, we affirm the decision as to negligent misrepresentation and reverse that of fraud. We reverse the award of attorneys' fees because these claims were not "on a contract." The trial court did not apply the correct legal measure for fraud damages; we therefore remand for reconsideration of the damage awards. We affirm the award of punitive damages to Lynn Harman on transactions 1 and 2, remand for reconsideration of punitive damages to Dean Harman on transaction 4 only.
BACKGROUND
The Harpers owned and operated Harper Realty, Inc. Eva is a licensed real estate broker. Dean Harman, a professional engineer who had been a licensed real estate salesperson from 1975 to 1979, had a business and social relationship with Eva prior to the transactions at issue. Lynn Harman, who married Dean Harman during the relevant time period, had very little experience regarding real estate investments.
Harper Realty, Inc. filed bankruptcy on June 4, 1984. Because of the bankruptcy, Harper Realty, Inc. was dismissed as a party on May 22, 1985. On appeal the Harpers contend that the district court entered judgment against Harper Realty, Inc. and that this judgment was in excess of the court's jurisdiction because there was no relief from the bankruptcy stay provisions of 11 U.S.C. § 362. The district court did not enter, nor could it have entered, judgment against the California corporation because it was no longer a party. The district court simply found that Harper Realty, Inc. was the alter ego of Eva and Brainard and held them liable for the corporation's actions. Findings 163-165.
Eva represented to Dean and Lynn that she was a financial investment counselor. Eva then became involved in investing the $120,000 Lynn had received from her previous marriage and in assisting Dean to invest the proceeds he received from the liquidation of his assets and real estate holdings.
Transaction # 1: The Unsecured Note.
In March of 1981, Lynn gave Eva a check for $60,000 with the understanding that the funds would be placed in an escrow account and used for the acquisition of a secured note and deed of trust to be turned over to Lynn. The funds were never placed in escrow and were used for the Harpers' personal purposes. However, Lynn eventually received an unsecured note from Eva. In April of 1983, Eva repaid $40,000 to Lynn and gave Lynn a note for the remaining $20,000. The $20,000 balance plus interest has never been paid. The district court awarded Lynn $27,823.67 in damages for this transaction.
Transaction # 2: The Joint Venture.
In February of 1981, Lynn signed a joint venture agreement with the Harpers and the Ostermans. Each party contributed $60,000 to the venture, Harper & Associates, which was to be used to purchase two residences, 245 Spreading Oak Drive and 161 Spreading Oak Drive. The surplus investment was to be placed in a money market fund to cover negative cash flow if the leasing of the two residences did not cover debt service and expenses. Eva handled all communications among the joint venturers.
The Harpers engaged in undisclosed self-dealing using the funds invested in the joint venture. When Harper & Associates needed additional cash, Lynn was told by the Harpers that she had to make additional contributions to the money market fund because of a drop in interest rates. Lynn was unable to make any further contributions. Eva offered to buy out Lynn's interest in the joint venture, with either $15,000 cash and a personal unsecured note from the Harpers or $15,000 plus three secured notes (the Burnett/Osterman, Watts/Osterman and Waltersdorf/Overbaugh notes, secured by the Kilo, Watts and Forbes Avenue properties, respectively). Lynn accepted the latter alternative. The Burnett/Osterman note of $5,000 and the Watts/Osterman note for $6,265.20 were paid by the Ostermans in 1984. The Waltersdorf/Overbaugh note for $10,673.54 exceeded the fair market value of the Forbes Avenue property and Lynn apparently never succeeded in collecting on it. The district court determined that Lynn sustained damages of $43,117.33 in this transaction.
Transaction # 3: The Andreini Note.
The Andreinis, in a transaction handled by Eva, purchased property at 973 Forest Way. Eva offered Dean, and he accepted, the Andreinis' $38,400 purchase money second deed of trust at the discounted price of $33,792. In 1982, the Andreinis defaulted and Dean commenced foreclosure proceedings which were stayed when the Andreinis filed personal bankruptcy. The district court concluded that Dean suffered damages of $65,170.16 in this transaction.
Transaction # 4: The Carella Equity Share.
Eva arranged an equity share, memorialized by a "Co-Tenancy Agreement," by bringing together the Carellas and Dean in 1981. Dean invested $25,300, which was used as a down payment on the Arlington Lane Property. In return, he received an 80 percent interest in the equity existing in the property and the right to receive monthly payments from the Carellas for 3 years, culminating in a balloon payment in the amount of his initial investment plus 50 percent of the appreciation in the value of the property. For their part, the Carellas agreed to maintain the property, service the debt to the sellers secured by a first deed of trust, and make monthly payments of $253 to Dean.
In January of 1983, the Carellas defaulted on their monthly payments to Dean. The Co-Tenancy Agreement contained no provisions for eviction or foreclosure. Dean discounted the note and recovered approximately $15,000 of his investment. The district court awarded damages of $13,931.
Transaction # 5: The Garcia Equity Share.
Eva arranged a similar equity share between Dean and the Garcias. In this transaction, Dean provided $26,350 for a down payment on the Santa Rosa Drive property. He received an 85 percent equity interest. When the note became due in late 1984 or early 1985, the Garcias were unable to pay it off. They had purchased the property at approximately $20,000 over market value and were unable to obtain refinancing for the full amount required. Dean eventually received a partial payment of $19,000. The district court set damages at $10,630.13.
Transaction # 6: The Musetta Court Note.
In January of 1982, Eva sold Dean a second deed of trust on property located at 1512 Musetta Court for $20,000. The property was valued at $63,000, but had encumbrances of $55,000 prior to Dean's purchase. In November of 1983, the Harpers defaulted on the note and executed and delivered to Dean a quit claim deed on the Musetta Court property. Damages of $18,595.71 were awarded.
The district court's judgment
The district court based its finding of liability on violations of Section 12(1) and 12(2) of the Securities Act of 1933, 15 U.S.C. § 771, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, 15 U.S.C. § 78j and 17 C.F.R. 240.10b-5, Cal.Corp.Code § 25401, Cal.Bus. & Prof.Code §§ 10131 (fiduciary duty), the California Real Property Securities Dealers Act (Cal.Bus. & Prof.Code §§ 10237 et seq.), common law fraud and negligent misrepresentation. According to the district court, all of the transactions at issue involved "breach of fiduciary duty by [Eva's] lack of due care and diligence, her misrepresentations, her withholding of material facts and her general and specific fraudulent behavior." Finding 172.
In his decision, the district judge states simply "[p]laintiffs are entitled to recover damages under the Securities Act of 1933 and the Securities Exchange Act of 1934." Finding 170. Claims pursuant to Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77g(a), Section 15 of the Securities Exchange Act of 1934, 15 U.S.C. § 78, and the Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. §§ 1961-1968, were raised in the First Amended Complaint, C.R. 3, E.R. (unnumbered), but were eliminated during the course of the trial. See R.T. 1386-1393; C.R. 127. A claim under Section 29(b), 15 U.S.C.§ 78cc, was originally pursued in the First Amended Complaint, but apparently was abandoned. Sections 12(1), 12(2), 10(b) and Rule 10b-5 claims were therefore the only ones remaining when the district court entered judgment against the Harpers.
Finding 171 states that the Harmans were entitled to damages pursuant to Cal.Corp.Code § 25404. This section does not exist. Section 25401 sets forth the substantive violation and Section 25501 provides a private right of action for rescission or damages.
The Harpers argue that no private right of action is created under Cal.Bus. & Prof.Code § 10131. Blue Brief at 29 & n. 38. This argument was apparently not raised before the trial court. In addition, this particular section was not explicitly mentioned in the trial court's Findings of Fact and Conclusions of Law, (although certain findings relate to a breach of fiduciary duty) and a violation of Section 10131 is not necessary to support an award of damages and would not support an award of attorneys' fees. We therefore need not and do not reach this issue. See International Union of Bricklayers & Allied Craftsmen, Local 20 v. Martin Jaska, Inc., 752 F.2d 1401, 1404 (9th Cir.1985) (an issue need not be reviewed for the first time on appeal "unless necessary to prevent manifest injustice").
In addition to the damages awarded in connection with the separate transactions, the district court awarded punitive damages of $100,000 to Lynn and $200,000 to Dean. Attorneys' fees of almost $130,000 and costs were also awarded. Finally, the lower court found that "Eva Harper is not morally suited to hold any license of trust, confidence or fiduciary responsibility in the State of California." Finding 183.
ISSUES
(1) Are the notes and other interests sold to the Harmans "securities" within the meaning of federal and California securities laws? If so, are the various securities law claims nonetheless barred by the applicable statutes of limitations?
(2) Does the California Real Property Securities Dealers Act claim apply to any of the six transactions?
(3) Can the judgment stand on the common law fraud claim?
(a) Was fraud properly pleaded?
(b) Do the findings and record support fraud judgments?
(4) Were the damages excessive?
(5) Did the district court err in awarding both attorneys' fees and punitive damages?
(6) Did the district court's conduct during the trial prevent the Harpers from having a fair and impartial trial?
Appellees have also moved to strike "all non-referenced matters in the Defendants' Statement of the Case as argumentative and irrelevant," Red Brief at 1, claiming a violation of FRAP 28. See also Circuit Rules 28-1 and 28-2. We grant the motion. Appellees also request that the court disregard the "excessive" footnotes on certain specified pages which they claim are used to circumvent the court's 60-page limit on the opening brief. Red Brief at 38-39. We deny the request.
We will address each of these issues in turn.
STANDARD OF REVIEW
Review of the district court's legal conclusions, including the construction of state law, is de novo. Bulgo v. Munoz, 853 F.2d 710, 713 (9th Cir.1988) (state law); SEC v. Goldfield Deep Mines Co. of Nevada, 758 F.2d 459, 463 (9th Cir.1985) (district court's determination that interests in ore purchase program constitute investment contracts); United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824 (1984) (questions of law generally); United States v. Carman, 577 F.2d 556, 562 (9th Cir.1978) (whether an instrument is an investment contract). The district court's findings of fact are reviewed under the clearly erroneous standard. Fed.R.Civ.P. 52(a); Amadeo v. Zant, 108 S.Ct. 1771, 1777 (1988). Standards of review of particular matters will be discussed where appropriate.
DISCUSSION
I. Do the transactions involve "securities" within the meaning of the federal and California securities laws?
A. Federal Law.
Section 2(1) of the Securities Act of 1933 (the Securities Act) defines "security" to include "any note, ..., evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, ..., investment contract, or, in general, any interest or instrument commonly known as a 'security', ..." 15 U.S.C. § 77b(1). The Securities Exchange Act of 1934 (the Exchange Act) has a definition which differs only slightly, expressly excluding "any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months." Exchange Act § 3(a)(10), 15 U.S.C. § 78c(a)(10). " '[T]he definition of 'security' in [the Acts] are virtually identical and will be treated as such in ... decisions dealing with the scope of the term.' " Danner v. Himmelfarb, 858 F.2d 515, 518 (9th Cir.1988) (quoting Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 n. 1 (1985), petition for cert. filed, Mar. 15, 1989.
We apply the statutory definition with an emphasis on the "economic realities" of the transaction, Matek v. Murat, 862 F.2d 720, 724 (9th Cir.1988) (citing Tcherepnin v. Knight, 389 U.S. 332, 336 (1967)), keeping in mind that Congress "did not intend to provide a broad federal remedy for all fraud." Marine Bank v. Weaver, 455 U.S. 552, 556 (1982) (citing Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1253 (9th Cir.1976)).
Because the definition of a security is not construed literally, not all instruments called "notes" are necessarily found to be securities. Great Western Bank, 532 F.2d at 1256. Rather, to determine whether a particular note, or any other instrument, is a security, we have employed the "investment contract" test of SEC v. W.J. Howey, Co., 328 U.S. 293 (1946). Howey requires that there be "(1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits produced by the efforts of others." Hocking v. Dubois, No. 85-1932, slip op. at 11635, 11647-48 (9th Cir. Sept. 21, 1989) (en banc); see also Danner, 858 F.2d at 518 (quoting United California Bank v. THC Financial Corp., 557 F.2d 1351, 1358 (9th Cir.1977)). We find it unnecessary to deal with the first two requirements of the Howey test, because we conclude that the third requirement is not satisfied with regard to any of the transactions in issue here.
The district court found that "[e]ach of the six transactions involved the sale by [the Harpers] of notes represented as adequately secured by deeds of trust or equity share participations," and that all the notes qualified as securities. Findings 167 and 168. The latter is clearly a question of law reviewed de novo. SEC v. Goldfield Deep Mines Co. of Nevada, 758 F.2d 459, 463 (9th Cir.1985). The former, however, may be characterized as a finding of fact subject to the clearly erroneous standard of review. Amadeo v. Zant, 108 S.Ct. 1771, 1777 (1988). Given the structure of the joint venture transaction, Finding 167 is clearly erroneous as to that particular transaction.
Transactions 1, 3 and 6, involving the sales of secured and unsecured notes, do not involve securities because the Harmans did not expect to reap profits based solely on the managerial efforts of others. To satisfy the third prong of the Howey test, it was necessary to show that the Harpers' could "make or break the investment." Matek, 862 F.2d at 725; see Hocking v. Dubois, slip op. at 11656-57. However, after the notes were purchased, the Harpers' efforts could not and did not make any difference. The Harpers made no promises to develop or otherwise manage the properties. In the case of the Andreini Note, Eva could not, nor was she expected to, save the Andreinis from bankruptcy and default. And although the Unsecured and Musetta Court Notes involved the Harpers' failure to pay (a factor which was presumably within their control), an individual borrower's failure to make payments on privately-negotiated notes does not give rise to liability under the securities laws. Cf. Elson v. Geiger, 506 F.Supp. 238, 242 (E.D.Mich.1980) (applying Howey test, "[w]hile the repayment of the mortgage may have depended on the solvency of the borrower, this is not the same as depending on entrepreneurial efforts"), aff'd, 701 F.2d 176 (6th Cir.1982). Therefore, Transactions 1, 3 and 6 do not involve securities.
"Solely" is not to be read literally; "[r]ather we adopt a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821 (1973).
The Equity Share transactions are similar to the note transactions in form and the same analysis applies. In both cases, Dean invested money in return for monthly payments over 36 months from third parties. The success of the investment was in no way dependent upon Eva's entrepreneurial or managerial efforts. The Co-Tenancy Agreements recognize no participation by Eva, Brainard or Harper Realty, Inc. after the sale was completed. E.R. (unnumbered) Exhibits H and K. Dean expected to profit only from appreciation in the value of the Arlington Lane and Santa Rosa Drive properties. Therefore, the Equity Share transactions did not involve securities.
See 1 L. Loss Securities Regulation [491-check] (2d ed. 1961) ("[N]o 'investment contract' is involved when a person invests in real estate, with the hope perhaps of earning a profit as the result of a general increase in values concurrent with the development of the neighborhood, as long as he does not do so as part of an enterprise whereby it is expressly or impliedly understood that the property will be developed or operated by others") (footnote omitted). Cf. Noa v. Key Futures, Inc., 638 F.2d 77, 79 (9th Cir.1980) (silver purchases are not securities when once the purchase is made "the profits to the investor depended upon the fluctuations of the silver market, not the managerial efforts of Key Futures").
Whether Lynn's participation in Transaction 2, the Joint Venture, involved a security is a closer question. The Joint Venture Agreement grants Eva sole discretion to "manage" the affairs of Harper & Associates and to "improve" the Spreading Oak properties. The district court, however, found only that Eva "represented to Lynn that the two properties would appreciate in value and that they would provide excellent tax benefits." Finding 53. Profits were expected from appreciation in the value of the properties to be reaped upon resale, not as a result of the development of the parcels of land or the residences thereon. There is no evidence in the record that the joint venturers discussed, or even contemplated, such improvements. Eva was certainly not obligated by the terms of the Joint Venture Agreement to effectuate such improvements and the record does not disclose that the parties entered into any collateral management contract. Cf. De Luz Ranchos Investment, Ltd. v. Coldwell Banker & Co., 608 F.2d 1297, 1301 (9th Cir.1979) (defendants' only obligation to purchaser was to transfer title; no representation that defendants would develop, manage or improve parcels sold); Woodward v. Terracor, 574 F.2d 1023, 1025 (10th Cir.1978) (same). Because the success of the venture was therefore not dependent upon Eva's managerial efforts, and was not offered as such, the Joint Venture does not give rise to liability under the federal securities laws.
More importantly, however, even if the success of the Joint Venture was dependent upon Eva's managerial efforts, the "economic realities" of Lynn's participation in the Joint Venture Agreement would mandate a conclusion that no security was involved. The Joint Venture was a private agreement, entered into after discussions between Eva, the Harmans and only one other couple. There is no evidence in the record that Eva offered participation in this particular joint venture (or any other) to any other individuals. As we recently stated in Mace Neufeld Productions, Inc. v. Orion Pictures Corp., 860 F.2d 944 (9th Cir.1988):
Eva may have used the same types of schemes (equity participations and joint ventures) with other individuals not parties to this action. Both the Joint Venture Agreement and the Co-Tenancy Agreements were memorialized on pre-printed forms. However, the only Finding of Fact related to the scope of Eva's real estate dealings is Finding 101: "In the spring of 1981, Eva Harper was advertising and presenting free public lectures on real estate investments and the principles of equity sharing as a means of acquiring real property."
[T]he [Supreme] Court stressed [in Marine Bank v. Weaver, 455 U.S. 552 (1982),] that all the uncommon instruments found to constitute securities in prior cases involved offers to a number of potential investors, not just one. Id. at 559 [ ]. The Court emphasized that in [Howey ], 42 persons purchased interests in a citrus grove during a four-month period. Id. Similarly, in SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, [ ] (1943), offers to sell oil leases were sent to over 1,000 prospects. Thus, the Court in Marine Bank concluded that a single unique agreement, 'negotiated one-on-one' between two parties, that is not ordinarily considered to be a security and that was never designed to be publicly traded, is not a security under the [Exchange] Act. Id.
860 F.2d at 946. Cf. Underhill v. Royal, 769 F.2d 1426, 1431 (9th Cir.1985) ("The definition of a security is not likely to include purely private transactions whose terms are negotiated between lender and borrower"); Great Western Bank, 532 F.2d at 1260-62 (unsecured note, negotiated face-to-face, given in return for a loan is not a security). Similarly, simple transactions in real estate, without more, generally do not satisfy the Howey criteria. See United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 859 n. 26 (1975); United Sportsfishers v. Buffo, 597 F.2d 658, 660-61 (9th Cir.1978) (land sale contracts and notes given in exchange for two boats are not investment contracts when "[t]here was no expectation that appellees would contribute managerial skills to enhance the value of the land").
United Sportsfishers quotes the following passage from 1 L. Loss Securities Regulation 491-92 (2d ed. 1961) with approval:
B. California Law.
Cal.Corp.Code § 25019 defines "security" to include "any note; ... evidence of indebtedness; ... or, in general, any interest or instrument commonly known as a 'security'." The definition is patterned after the federal definition, and federal cases interpreting the definition offerpersuasive authority in construing the state law. Moreland v. Department of Corporations, 239 Cal.Rptr. 558, 561 (App.1987). " The crucial question is whether the transaction comes within the regulatory purpose of the Corporate Securities Laws." Hamilton Jewelers v. Department of Corporations, 112 Cal.Rptr. 387, 390 (App.1974) (emphasis in original).
California courts have developed two tests for determining what is a security. The "risk capital" test grew out of a recognition that the corporate securities laws were designed to "protect the public against spurious schemes, however ingeniously devised, to attract risk capital." Silver Hills Country Club v. Sobieski, 13 Cal.Rptr. 186, 187 (1961). Under the risk capital test, California courts consider:
(1) whether funds are being raised for a business venture or enterprise;
(2) whether the transaction is offered indiscriminately to the public at large;
(3) whether the investors are substantially powerless to affect the success of the enterprise; and
(4) whether the investors' money is substantially at risk because it is inadequately insured.
Moreland, 239 Cal.Rptr. at 566 (citation omitted).
The second test is the "federal" or "Howey " test. Under California law, a transaction involves a security if either the federal or the risk capital test is satisfied. Moreland, 239 Cal.Rptr. at 562 n. 3.
We have already concluded that none of the six transactions are securities under the federal tests. Application of California's four-factor risk capital test does not change this conclusion. There is no evidence that any of the loan transactions or the Joint Venture participation were offered to the general public. Although the district court's discussion of the Carella and Garcia Equity Share transactions was preceded by a finding regarding seminars held by Eva, Finding 101, it is not clear that the seminars targeted the non-resident capital investors such as Dean. Finding 111 states that Eva "contacted" Dean personally to persuade him to invest in the Carella Equity Share. The district court also found that Dean was already conducting real estate transactions with the Leytons, sellers of the Santa Rosa Drive property, when he made a down payment on the Santa Rosa Drive property with the Garcias. Findings 128-132. Eva did not involve Dean in transactions "offered indiscriminately to the public at large." Id. at 566.
In addition, the funds invested by Dean in the equity share participations were not raised for a business venture of the sort protected by the California securities laws. Dean was, in essence, purchasing 80 and 85 percent interests in parcels of real property. Although these purchases were unwise, they might be characterized as an "investment of [a] purchased product and not a contribution of risk capital to a business enterprise within the normal scope of securities regulation." Moreland, 239 Cal.Rptr. at 568. To be considered a security, a particular instrument must come within both the letter and the purpose of the California securities laws. People v. Costner, 199 Cal.Rptr. 253, 257 (App.1984).
Because none of the transactions involve "securities" as defined under federal and California law, it is unnecessary to reach the issue of whether the federal and California securities law claims were barred by the applicable statutes of limitations.
II. Do any of the transactions involve "real property securities" within the meaning of California's Real Property Securities Dealers Act, Cal.Bus. & Prof.Code §§ 10237 et seq.?
In their First Amended Complaint, the Harmans claimed that the six transactions involved real property securities and violated "the provisions of the California Business and Professions Code applicable to such sales (§§ 10237, et seq.)" E.R. (unnumbered) First Amended Complaint at 18. The district court made various findings pertinent to liability under the Real Property Securities Dealers Act, and without expressly saying so, apparently found a violation of Cal.Bus. & Prof.Code § 10237.4. Section 10237.4 provides, in pertinent part, that "[e]very person selling a real property security shall personally sign and deliver to the purchaser a statement in writing, containing all the information required by Section 10232.5, before the purchaser shall be obligated to complete the transaction." Cal.Bus. & Prof.Code § 10238.7 provides a private right of action for damages and attorneys fees to individuals injured by to a violation of the Act.
The district court found that Eva was never licensed as a real property securities dealer, but that she had held herself out to be one. Findings 166 and 173. The court further found that each of the six transactions involved real property securities. Findings 174 and 175. Attorneys' fees were awarded pursuant to Cal.Bus. & Prof.Code § 10238.7. And the court held that the Harpers "violated all of the requirements of notice and other provisions required by California Business and Professions Code Section 10232.5," Finding 176, which is an element of a violation of Cal.Bus. & Prof.Code § 10237.4.
Cal.Bus. & Prof.Code § 10232.5 requires reporting of information such as the identity and characteristics of the property, the fair market value and any appraisal relied on, income and credit data for prospective borrowers, the terms of the note and additional encumbrances or expected liens.
We conclude, however, that the transactions at issue do not involve "real property securities" as defined in Cal.Bus. & Prof.Code § 10237.1. "Real property security" is defined, in relevant part, as:
(a) An agreement made in connection with the arranging of a loan evidenced by a promissory note secured directly or collaterally by a lien on real propertyor made in connection with the sale of a promissory note secured directly or collaterally by a lien on real property or a real property sales contractwherein the real property securities dealer or his principal expressly or impliedly agrees to do any of the following:
1. Guarantee the note or contract against loss at any time, or
2. Guarantee that payments of principal or interest will be paid in conformity with the terms of the note or contract, or
3. Assume any payments necessary to protect the security of the note or contract, or
4. Accept, from time to time, partial payments for funding the loan or purchasing the note or contract, or
5. Guarantee a specific yield or return on the note or contract, or
6. Pay with his own funds any interest or premium for a period prior to actual purchase and delivery of the note or contract, or
7. Repurchase the note or contract.
(emphasis added). The Joint Venture and the Unsecured Note do not meet the first portion of the test because they do not involve secured loans or a real property sales contract. However, the Andreini and Musetta Court Notes were clearly connected with "the sale of a promissory note secured directly or collaterally by a lien on real property," and, arguably, the Equity Shares were agreements "made in connection with the arranging of a loan" evidenced by a secured note.
None of the transactions, however, satisfy any of the last-listed alternatives of the definition. The Harpers never guaranteed or assumed payments on the notes or contracts or otherwise acted in accordance with the seven enumerated criteria. Although the Musetta Court Note appears to fall literally within the definition because the Harpers were the borrowers, such a rigid interpretation would not serve the goals of the statutory scheme. The Real Property Securities Dealers Act was enacted "to protect the investing public by regulating the marketing of highly speculative promotional subdivision second trust deeds and sales contracts." Harvey v. Davis, 71 Cal.Rptr. 129, 130 (1968). The purpose of the Act is not to police individual borrowers. In fact, to date, the only California cases dealing with the Act involve the sale of promotional notes which were issued to the public as part of a series. See id. at 130; People v. Mancha, 114 Cal.Rptr. 392, 394-96 (App.1974); Baumrucker v. American Mortgage Exchange, Inc., 58 Cal.Rptr. 677, 681-82 (App.1967). See also In re Thomas, 765 F.2d 926, 931 (9th Cir.1985) (sale of two promissory notes secured by deeds of trust for property in 52-unit condominium development with guaranteed 28 percent rate of return satisfies Section 10237(a)(5)). None of the six transactions fall within the scope of the Act and the district court erred in finding a violation.
Because of our resolution of this issue, it is unecessary to reach the Harpers' contention that some of the statutory claims are barred by limitations.
III. Common Law Fraud Claims.
(A) Was fraud properly pleaded in connection with Transactions 1, 2, 4, 5, and 6?
The Harmans claim that this issue is not properly presented on appeal because it was not timely raised below. R.T. at 2462-64. The issue was, however, raised at closing arguments, and apparently was briefed in both the Harpers' Closing Brief (not part of the Clerk's Record) and their Memorandum of Points and Authorities prepared in connection with the Motion for A New Trial/Additional Findings. C.R. 164. Although unquestionably untimely, the issue was before the district court and apparently resolved against the Harpers. Although we need not address this issue, International Union of Bricklayers & Allied Craftsmen, Local 20 v. Martin Jaska, Inc., 752 F.2d 1401, 1404 (9th Cir.1985), in this case we exercise our discretion to do so. See In re Thomas, 765 F.2d 926, 931 n. 9 (9th Cir.1985) (quoting United States v. Dann, 706 F.2d 919, 925 n. 5 (9th Cir.1983), rev'd on other grounds, 470 U.S. 39 (1985)).
The Harpers contend that common law fraud was only properly pleaded in connection with the Andreini Note transaction and that the district court therefore erred in granting relief based upon a finding of fraud in all six transactions. The First Amended Complaint's ninth claim for relief states simply that the Harpers "knowingly made their statements and failed to disclose to Plaintiffs the true facts with the intent to deceive Plaintiffs and to induce Plaintiffs to enter into the agreement to purchase deeds of trust. " The ninth claim for relief, however, also expressly incorporated Paragraphs 1-30 of the complaint, where fraud or fraudulent activities were mentioned at least four times. See E.R. (unnumbered) First Amended Complaint§ § 14, 20, 29 and 30. The Harpers' Answer denied the allegations of the First Amended Complaint's ninth claim for relief, "specifically denying that defendants acted with oppression, fraud or malice," but not confining their denial to the Andreini Note transaction. C.R. 13. The Harmans' Pretrial Statement, C.R. 67, and both parties' Pretrial Briefs, C.R. 71 and 81, state that the action involved pendent state claims of common law fraud, without restricting those claims to a particular transaction.
The district court's finding of liability for common law fraud is set forth in Finding 160:
On the record before us, we conclude that the Harpers had notice, an opportunity to defend, and did defend against the common law fraud claims. Therefore, the district court properly considered the Harmans' claim of common law fraud in connection with all six of the transactions.
(B) Do the findings support the fraud judgments?
We reverse the judgments of fraud and negligent misrepresentation against Brainard Harper because they are wholly without support in the record. The findings do not assert and the record does not reveal any misrepresentations or material omissions made by Brainard Harper to the Harmans, or any participation by him in these representations. Thus, a crucial element of both fraud and negligent misrepresentation is missing. See 5 Witton, Summary of California Law, (9th edition), §§ 676 and 678; Calif.Civ.Code §§ 1709 and 1710(2). Upon review of the record, we are "left with the definite and firm conviction that a mistake has been committed." Anderson v. Bessemer City, 470 U.S. 564, 573, (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)).
Fraud requires misrepresentation, knowledge of its falsity, intent to induce reliance, justifiable reliance, and resulting damages. For negligent misrepresentation, knowledge of falsity is not required, only that the representation is made without reasonable grounds for believing it to be true. 5 Witton, Summary of California Law (9th edition) §§ 676, 678.
The trial court found that Eva knowingly made false representations to the Harmans, with the intent to defraud, and that they justifiably relied upon those representations. However, these general conclusions of fraudulent behavior do not alone provide us with a clear understanding of the basis for the trial court's judgment; there is no indication what the misrepresentations were. See Nicholson v. Bd. of Education of Torrance Unified School Dist., 682 F.2d 858, 864 (9th Cir.1982) (findings must be sufficiently explicit to give appellate court a clear understanding if basis of decision).
The trial court also found that Eva told Dean that his investments would earn him sufficient profit so that he could attend chiropractic school and still have the principal intact to use to start a practice upon his graduation. This prediction was entirely wrong, as Dean lost much of his principal. The Harpers urge that Eva's statements about property values and future events are mere opinions and "puffery". Eva held herself out as an expert in financial investments and developed a trusting relationship with Lynn and Dean. "What might be innocuous 'puffery' or mere statement of opinion standing alone may be actionable as an integral part of a representation of material fact when used to emphasize and induce reliance ..." Casella v. Webb, # 87-6234, (9th Cir.1989) (representations that investment was a "sure thing", with tax benefits and profits in 3 years). We examine the findings and the record to determine whether Eva's statements constituted fraud and negligent misrepresentation, or whether the findings are clearly erroneous and Eva's statements were mere "puffery".
In transaction 1, the $60,000 unsecured note, the findings clearly reveal Eva's fraud upon Lynn. Eva asked Lynn to invest $60,000 to assist a couple to purchase a home, stating that the money would be placed in an escrow account. The trial court found that Lynn justifiably relied on Eva's misrepresentations, and gave Eva $60,000. Eva used the money for undisclosed purposes, later gave Lynn a note, and repaid $40,000. The misrepresentation concerning escrow was material. The record supports the findings of the district court.
The Harpers contend that the interest rate on the note involved in transaction 1 was usurious. See Calif. Const.Art. XV § 1 (limiting interest to five percent over the Federal Reserve Bank's prevailing rate). We need not reach this issue because damages may be awarded for fraudulent inducement to contract, even if the contract has an illegal provision. See R.D. Reeder Lathing Co. v. Cypress Ins. Co., 3 Cal.App.3d 995, 999, 84 Cal.Rptr. 98, 100 (1970) ("Plaintiff is not seeking to enforce an illegal contract, but rather to recover damages suffered when defendants fraudulently induced it to enter into the illegal contract").
In transaction 2, the joint venture, the findings do not state that Eva knew that her representations regarding the value of the property, its future appreciation, and tax benefits were false. The court found that Eva intentionally overvalued and withheld an appraisal and previous purchase price of her home, which was purchased by the joint venture. The findings state that Eva withheld information about and retained the proceeds of a partnership asset, the Escajeda note. The record supports these findings. Eva's "active concealment" of such material facts combined with the misrepresentations suffice to support the judgment of fraud. See 5 Witkin, Summary of California Law, (9th edition) § 697; See also Sime v. Malouf, 95 C.A.2d 82, 94, 212 P.2d 496 (1949) (fraud liability for active concealment by a joint venturer with a fiduciary duty to disclose).
The Harpers argue that finding 62b is erroneous and that Eva did not conceal her ownership of a home to be purchased by the joint venture because Lynn learned that Eva owned the home the night the joint venture agreement was signed. The record reveals testimony that Lynn did not know of Eva's ownership when Eva assured her that $350,000 was a good price. The finding is not clearly erroneous. See F.R.Civ.Pro. 52(a).
The Harpers contend that Lynn voluntarily chose to sell her share of the joint venture to Eva at a great loss. That contention is without merit in light of testimony that Eva concealed information necessary for Lynn to have made an informed decision. There is no evidence that Lynn did not justifiably rely on Eva's misrepresentations in transaction 1 and 2. Lynn had limited knowledge about investments and real estate and Eva held herself out as an expert. We affirm the judgments of fraud and negligent misrepresentation in transaction 2.
The findings in transaction 3, the Andreini deed of trust, are more troublesome. The trial court found that Eva told Dean that Andreini was a successful businessman who would use the property as a vacation home, but there is no finding or testimony that these statements were false or that Eva knew them to be false.
More than a year after the transaction, Andreini declared bankruptcy and Dean learned that the home had been used as a rental, but there was no evidence that at the time of the sale Andreini was insolvent or that he had not planned to use it for vacations.
The trial court found that Eva told Dean that the property was selling for $172,000 which was $10,000 below market, when in fact it sold for $152,000 and an appraiser later valued it at $132,000. There is no specific finding that Eva knew the falsity of her statements about the property's value and selling price. Our review of the record reveals no evidence of such knowledge.
The Harpers contend that Dean's losses resulted from the Andreini bankruptcy, not Eva's misrepresentations. However, if the property had the higher value Eva claimed, Dean's note would have been more fully secured. We find no error in the finding that Dean's reliance on Eva's representations is justified in light of his experience and knowledge. He had some real estate experience, but was attending chiropractic school while making these investments and Eva held herself out as an expert. See Gray v. Dean Miller & Assoc. 674 P.2d 253, 255 (Cal.1984).
We conclude that the judgment of fraud is erroneous, and reverse, but affirm the judgment of negligent misrepresentation in transaction 3.
In transaction 4, the Corella equity sharing agreement, the findings relate that Eva pressured the Corellas into buying the home, even though "[i]t was clear that the Corellas did not have sufficient money or future income to purchase this home," and "were clearly underqualified." Findings 108 and 118. Eva "misrepresented the financial stability of the Corellas in order to induce Dean" into the investment. Finding 112. The findings do not state that Eva "knew" the Corellas were not financially qualified, but once again there are the general conclusory findings that Eva made misrepresentations knowing them to be false.
There was testimony that Eva knew of falsity and exaggeration in the Corella's financial statement that was shown to Dean, that Eva did not want Dean and the Corellas to meet because the Harmans would find out what was really going on, and that Eva told the Corellas not to worry when they expressed doubts about affording the home. There is further testimony that the Corellas found out about increases in their payments only at the close of escrow, hesitated in closing the deal, and Eva pressured them to sign. Given the above testimony, we conclude that the general finding that Eva "knew" her representations to Dean to be false includes the false representations about the Corella's qualifications. We affirm the judgment of fraud in transaction 4.
In transaction 5, the Garcia agreement, many of the findings about Eva's misrepresentations are not supported by the record. Dean testified that Eva told him the property was "well worth $93,000." An appraiser testified that the property was valued at about $75,000 to $78,000. There was no testimony that Eva knew her valuation of the property was false. Eva may have misvalued the property, but the finding that she told Dean that it was acquired "below market" is not supported by the record and is clearly erroneous.
Dean testified that he relied on Eva's statements regarding the Garcias as equity-sharing buyers. According to Dean, those representations were that four family members would contribute by working and that properties in low-income areas were in high demand. Those statements do not support the finding that Eva misrepresented the Garcia family as financially well qualified. In fact, Dean testified that Eva made no representations about the Garcia family income.
The record supports the finding that Eva took a second deed of trust on this property as a commission from the Leytons on the sale of Dean's home to them, but not that she intentionally withheld this information from Dean. Dean did not fully understand the second deed of trust on the property, but he knew about it. The finding that the trust deed was not revealed to Dean is clearly erroneous.
Dean testified, "I believe that Eva Harper discussed that [commission] at some point in time with me. Exactly what point, I am not certain." AR 831:14-22, "It was discussed briefly when the transaction was being closed, but I didn't really understand it and I was surprised when I had to pay it later." AR 832:2, and "[at the time of the transaction] I must have understood it in some sort of rough terms." AR 837:21.
Eva told Dean that the Garcia venture was a wise investment, that this type of investment was more profitable than others, and that investment in this type of transaction would enable him to use the principal upon graduation from chiropractic school. The record does not reflect that she made these statements knowing them to be false. Without more, these representations seem mere "puffery," rather than concrete misrepresentations. The record reflects other misrepresentations made to the Garcias, but not to Dean.
Dean inspected the property before the sale, expressed reservations about the area, and discussed the investment with his attorney. The property was severely damaged after the sale. These facts lead us to question whether Dean's losses resulted from Eva's misrepresentations. Upon review of the record, we conclude that the trial court clearly erred. We reverse the judgments of fraud and negligent misrepresentation in transaction 5.
In transaction 6, the Musetta Court, the trial court found that Eva misrepresented that the property which secured her note had "substantial equity," and that she knew this to be false since the property had a value of $63,000 with encumbrances of $55,000. The Harmans contend that Eva's "worst representation ... [in the Musetta Court transaction] was the value of the property." Appellee's brief, p. 36. Yet Dean testified that "I don't believe she [Eva] ... talked about how much the property was worth. It was just that it was near Eastridge and it was a 4 bedroom, 2 1/2 bath, which sounded great." AR 863:23-864:2.
Dean testified that Eva told him this was another good investment, but did not tell him that she obtained the property in lieu of foreclosure. The Harmans contend and Dean testified that when Eva defaulted on the note, Dean discovered other encumbrances on the property and had to spend money to repair the property. Yet the trial court made no finding that Eva withheld information from Dean in this transaction. Because the record does not support the finding that Eva misrepresented the note as being supported by substantial equity, we reverse the judgment of fraud and negligent misrepresentation with regard to transaction 6.
Our disposition of the fraud and negligent misrepresentation claims relating to the Musetta Court property makes it unnecessary for us to address the question whether Dean was barred from recovery by his acceptance of a deed in lieu of foreclosure.
V. Were the damages excessive?
The Harpers' failure to complain of excessive damages in the motion for a new trial precludes that issue here, except for the determination "whether the trial court failed to apply the proper legal measure of damages." Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co., 66 Cal.App.3d 101, 122, 135 Cal.Rptr. 802 (1977); See also Roddy v. Christiansen, 186 Cal.App.3d 780, 231 Cal.Rptr. 72 (1986).
The Harpers urge that the court awarded more than the permitted "out-of-pocket" measure of fraud damages. See Gagne v. Bertran 43 Cal.2d 481, 490, 275 P.2d 15 (1954) (fraud damages limited to actual losses suffered because of misrepresentation); Pepper v. Underwood, 122 Cal.Rptr. 343, 48 Cal.App.3rd 698 (1975) (fraud damages limited to out of pocket loss as of the date of fraud, no benefit of the bargain).
Section 3343 of the California Civil Code provides the measure of damages for fraud in the purchase, sale or exchange of property:
(a) ... the difference between the actual value of that with which the defrauded person parted and that which he received ... [and] additional damage ... including ...:
(1) Amounts actually and reasonably expended in reliance upon the fraud ...
(4) Where the defrauded party has been induced by reason of the fraud to purchase or otherwise acquire the property ..., any loss of profits or other gains which were reasonably anticipated and would have been earned by him from the use or sale of the property had it possessed the characteristics fraudulently attributed to it by the party committing the fraud, provided that ...: (i) The defrauded party acquired the property for the purpose of using or reselling it for a profit. (ii) The defrauded party reasonably relied on the fraud in entering into the transaction and in anticipating profits from the subsequent use or sale of the property. (iii) Any loss of profits for which damages are sought under this paragraph have been proximately caused by the fraud and the defrauded party's reliance on it.
(b) Nothing in this section shall ...:
(1) Permit the defrauded person to recover any amount measured by the difference between the value of property as represented and the actual value thereof.
(2) Deny to any person having a cause of action for fraud or deceit any legal or equitable remedies to which such person may be entitled.
Cal.Civ.Code § 3343 (emphasis added).
The trial court awarded damages for unpaid principal and interest at the rates specified on various notes, plus some additional costs. Section 3343 may be applied realistically to give the defrauded party his actual losses, but not anticipated profits. Glendale Savings & Loan Assn v. Marina View Heights Development, 66 Cal.App.3rd 101, 135 Cal.Rptr. 802 (1977); see also Cal.Civ.Code § 1709 ("one who willfully deceives another with the intent to induce his position to his injury or risk is liable for any damage which he thereby suffers").
The Harmans were awarded the expected interest on the notes, not the profits anticipated because of Eva's representations of property appreciation.
Damages for fraudulent breach of fiduciary duty (which the trial court found here), have sometimes given the defrauded party the benefit of his bargain by placing him in the same position as if the contract had been performed. See Pepitone v. Russo, 134 Cal.Rptr. 655 (1976); Walters v. Marler, 83 Cal.App.3d 1, 147 Cal.Rptr. 655 (1978) overruled in part by Gray v. Don Miller & Assoc., Inc. 35 Cal.3d 498, 507, 198 Cal.Rptr. 551, 674 P.2d 253 (1984). Those cases rely on Calif.Civil Code § 3333, which provide damages "for all the detriment proximately caused ... [by the tort], whether it could have been anticipated or not." We conclude that application of those cases here would improperly place the Harmans in a better position than if they had not been defrauded.
In transaction 1, the $60,000, the fraud occurred when Lynn gave Eva the $60,000, in reliance on Eva's misrepresentations. The court awarded damages of the unpaid principal and the 20% interest specified in the defaulted notes. This award improperly placed Lynn in a better position than if the misrepresentations not been made, because there was no finding or evidence that Lynn would have been able to invest at the 20% rate if she had not been defrauded. See Christiansen v. Roddy, 186 Cal.App.3d 780, 89, 231 Cal.Rptr 72, 78 (1986). In Christiansen, an investment counselor negligently misrepresented the value of property used as security on a note. The court found improper the award of interest as specified on the note, and ordered as damages the money paid on the note, minus equity received, plus interest at the legal rate. Id.
The trial court made similar errors with regard to the damages arising from transactions 2, 3 and 4. It awarded recovery according to the terms of the agreement that the Harmans were induced by misrepresentations to enter. On remand, the district court should calculate the damages for transactions 1-4 by determining the value that the Harmans parted with, less the value of what they received, plus interest from the date of the fraud at the legal rate if the district court, in its discretion, determines that to be appropriate. See Calif.Civ.Code § 3288; Nordahl v. Franzalia, 121 Cal.App.3d 657, 121 Cal.Rptr. 794, 800 (1975).
The district court awarded Lynn Harman $100,000 in punitive damages and Dean Harman $200,000, as a general award. The judgment for these damages runs against Eva Harper. The punitive damages in favor of Lynn presumably arose from transactions 1 and 2, with regard to which we have affirmed the fraud findings against Eva. Because we vacate the compensatory damages in favor of Lynn and remand for recalculation, we also vacate the award of punitive damages in favor of Lynn. After recalculating compensatory damages, the district court should reconsider its award of punitive damages to determine whether the need for proportionality to the new compensatory damages award dictates a reduction in the original punitive damages figure. See Neal v. Farmers Ins. Exchange, 21 Cal.3d 910, 582 P.2d 980, 148 Cal.Rptr. 389 (1978) (listing the amount of compensatory damages, the nature of defendant's acts, and the wealth of the defendant as three factors in determining punitive damages); see also Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1163 (9th Cir.1987); Professional Seminar Consultants, Inc. v. Sino American Technology Exchange Council, Inc., 727 F.2d 1470 (9th Cir.1984).
The punitive damages award of $200,000 in favor of Dean Harman is presumably attributable to transactions 3, 4, 5 and 6. We have reversed the judgments as to transactions 5 and 6 completely, and have affirmed only the finding of negligent misrepresentation as to transaction 3. Negligent misrepresentation cannot support a claim for punitive damages. See Delos v. Farmers Ins. Group, Inc., 93 Cal.App.3d 642, 155 Cal.Rptr. 843 (1979). The only transaction that will support an award of punitive damages in favor of Dean is transaction 4, but we have no way of knowing what part of the total punitive damages award was attributable to Eva's conduct in that transaction. We therefore vacate the award of $200,000 punitive damages to Dean and remand for reconsideration.
VI. Did the district court err in awarding both attorneys' fees and punitive damages?
Attorneys' fees were awarded under both Cal.Bus. & Prof.Code § 10238.7 and Cal.Civ.Code § 1717, but we have reversed the judgment under the Real Property Securities Dealers Act. Thus, the award of attorneys' fees must qualify, if at all, under Cal.Civ.Code § 1717, which provides for an award of attorney fees "[i]n any action on a contract." (emphasis added) ; see also Gray v. Dean Miller & Assoc. Inc., 674 P.2d 253, 258 (Cal.1984) (no attorney fees for judgment of fraud against fiduciary real estate agent); Washington v. Baenziger, 673 F.Supp. 1478, 1484 (N.D.Cal.1987) (no attorney fees available for a pure tort action for fraud arising out of a contract.)
Section 1717 provides, in relevant part: (a) In any actionon a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded to either one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorneys' fees in addition to other costs. (Emphasis added)
The trial court also assessed punitive damages which are recoverable only for actions "not arising from contract. " Cal.Civ.Code § 3294(a) (emphasis added). See also Sawyer v. Bank of America, 80 Cal.App.3d 135, 145 Cal.Rptr. 623, 626 (1978) (no punitive damages award for breach of contract). The clear language of the code makes the award of attorney fees and punitive damages for each transaction erroneous, because the actions cannot simultaneously be "on a contract" and "not arising from a contract."
The district court, did not specify which contracts supported the award of attorneys' fees. Finding 180 states: "Plaintiffs are entitled to reasonable attorneys' fees and costs based upon attorneys' fees clauses contained in the various contracts and promissory notes which were signed by Eva Harper individually, on behalf of Harper Realty, Inc. or on behalf of herself and Harper Realty, Inc. or on behalf of herself and her husband ..."
The Harmans did not plead breach of contract against the Harpers, although recission was claimed. This lack of a specific contract pleading or finding does not automatically bar an award of attorney fees to the Harmans. See Bruckman v. Parliament Escrow Corp., 235 Cal.Rptr. 813, 818 (App.1987); Perry v. Robertson, 274 Cal.Rptr. 74, 80 (App.88). We conclude, however, that the Harmans' viable claims were presented and tried as tort claims for fraud and misrepresentation.
In transaction 1, both Lynn and Eva were signatories to the $60,000 unsecured note with an attorneys' fees provision. The judgment is for fraud (and breach of fiduciary duty). The Harpers' counsel had no notice or understanding of this action as a breach of contract claim. The Harmans could have brought this action in contract, but did not. We reverse the award of attorneys' fees on transaction 1.
"If she brought her claim on the note, its common count or contractual claim, she would be entitled to a judgment on the note itself. She didn't bring that claim." AR 2509, Harpers' counsel, Mr. Mathews.
In transaction 2, the Joint Venture Agreement has no attorneys' fee provisions, but the Harmans apparently rely on such provisions in the deposit receipts for the purchase of the properties by Harper & Associates and an installment land sale contract entered by the joint venture. The connection between these contracts and the cause of action is attenuated and falls outside the purpose, if not the letter, of Cal.Civ.Code § 1717. See Reynolds Metal Co. v. Alperson, 158 Cal.Rptr. 1, 3 (1979) (Section 1717 enacted to "establish mutuality of remedy, where contractual provision makes recovery for attorney's fees available for only one party," and "to prevent oppressive use of one-sided attorney's fees provisions") (citations omitted). Transaction 2 cannot support a fee award.
In transactions 3 and 4, Eva was not a signatory on the Andreini note or Corella agreement, which have attorneys' fees provisions. Neither was she a party to a promissory note, nor an alter ego of a party, nor had she assumed the obligations of a party. See Wilson's Heating & Air Conditioning v. Wells Fargo Bank, 249 Cal.Rptr. 553, 559 (App.1988). Nonsignatories have been permitted to recover attorneys fees under limited circumstances, not present here.
Those limited circumstances mostly occur when a defendant is sued on a contract as if he were a party to it. Babcock v. Omansky, 31 Cal.App.3rd 625 (1973), 107 Cal.Rptr. 827. Such a prevailing nonsignatory defendant has received fees from a signatory plaintiff " 'when a plaintiff would clearly be entitled to attorney's fees should he prevail in enforcing the contractual obligation against the defendant.' " Wilson's Heating at 557 (quoting Reynolds Metals Co. v. Alperson, 158 Cal.Rptr. 1, 3 (1979) (defendant is alter ego of a signatory)). And a signatory defendant has recovered fees from a nonsignatory plaintiff in "situations where the defendant can show it actually would have been liable for fees." Leach v. Home Savings & Loan Ass'n, 230 Cal.Rptr. 553, 561 (App.1986). See Jones v. Drain, 196 Cal.Rptr. 827, 831 (App.1983) (holding that signatory defendant can recover fees from a nonsignatory plaintiff without expressly requiring a showing by the defendant that it would have been reciprocally liable for fees). And nonsignatory plaintiffs, acting as third party beneficiaries seeking to enforce contracts, have recovered fees from signatory defendants. Wilson's Heating, 249 Cal.Rptr. at 557 & n. 6.
The purpose of § 1717 is not to create new rights to attorneys fees in tort cases where they are traditionally not awarded. We conclude that it was error to award attorneys fees in transaction 3 and 4. Transactions 5 and 6 cannot support an award of fees, because we have reversed the judgments on those claims. The award of all attorneys' fees is accordingly reversed.
VII. Did the district court's conduct during the trial prevent the Harpers from having a fair and impartial trial?
Finally, the Harpers contend that the district court's conduct prevented them from having a fair and impartial trial, pointing specifically to occasions when the trial judge, inter alia, expressed displeasure with the Harpers' behavior before trial, coached the Harmans' counsel and witnesses, and did not otherwise give equal treatment to the Harpers and their counsel. "Litigants are entitled to a trial before a judge who is detached, fair and impartial." Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 531 (9th Cir.1986) (citing United States v. Crisco, 725 F.2d 1228, 1233 (9th Cir.), cert. denied, 466 U.S. 977 (1984)). Because no objection was made to the district judge's conduct at trial, we consider only whether plain error was committed. Dixon v. International Harvester Co., 754 F.2d 573, 585 (9th Cir.1985).
After reviewing the more than 2500 pages of trial transcript, we are convinced that the Harpers were not denied a fair and impartial trial by the district court's conduct. Although the Harpers' counsel has successfully extracted incidents in which the district court indicated displeasure or impatience with the Harpers and their attorney, we must "consider the record as a whole and not merely isolated remarks." Id. Our review of the transcript does not reveal the "intimidation" of which the Harpers complain. Although the district court did sustain objections to the introduction of various pieces of documentary evidence, he did not adopt a blanket exclusion policy and did permit the Harpers to testify.
Similarly, what the Harpers have called "coaching" of the Harmans' counsel was well within the district court's discretion. "The district court has a right and a duty 'to facilitate, by direct participation, the orderly progress of the trial.' " Matter of Yagman, 796 F.2d 1165, 1179 (9th Cir.1986). Finally, questions by the court indicating skepticism towards the Harpers' testimony and position were not prejudicial or improper in this bench trial because "the witnesses [were] permitted to respond 'to the district court's expressed concerns to the test [sic] of their abilities.' " Shad, 799 F.2d at 525 (quoting Sealy, Inc. v. Easy Living, Inc., 743 F.2d 1378, 1383 (9th Cir.1984)). Many of these questions were clear attempts to "clarify relevant testimony," which are " 'proper so long as the authority is exercised in a nonprejudicial manner.' " Matter of Yagman, 796 F.2d at 1179.
In sum, we are simply not left with the impression that the district court exercised its authority and discretion in a prejudicial manner:
We recognize that we cannot really resurrect the atmosphere at trial, the tone of voice, or the facial and other body language. We are nonetheless convinced by the cold record on this appeal that [the] misconduct allegations must fail. Although, from a broad viewpoint, there was obviously a certain amount of tension at trial, such is not uncommon in emotional and hard-fought cases. Because the nature of our system is adversarial, parties will occasionally be uncooperative, both with each other and with the court, and courts will sometimes be exacting. These elements foster tension. The single most important concern in these situations, as in every case, is ensuring that all parties are afforded a fair and complete opportunity to present their evidence and arguments.
Id. at 1178. We conclude that the Harpers "fairly received their day in court." Id.
The Harpers object to the district court's finding No. 183 that Eva Harper is "not morally suited to hold any license of trust, confidence or fiduciary responsibility in the State of California." We agree that this ruling went beyond the issues properly before the district court, and we vacate the finding.
CONCLUSION
The transactions at issue in this case do not fall within the provisions of the federal or California securities laws, or within the California Real Property Securities Dealers Act, Cal.Bus. & Prof.Code §§ 10237 et seq. The district court's decision basing liability on these provisions is reversed.
The record contains no evidence to support common law claims against Brainard Harper, and all claims against him are dismissed.
The record contains no evidence supporting claims against Eva Harper arising from transactions 5 and 6, and the rulings of the district court finding her liable on those transactions is reversed.
The findings of the district court that Eva Harper is liable for common law fraud in connection with transactions 1, 2 and 4 are affirmed.
The finding that Eva Harper was liable for fraud in connection with transaction number 3 is clearly erroneous and is reversed. The finding that Eva Harper was liable for negligent misrepresentation with regard to transaction 3 is affirmed.
The awards of damages against Eva Harper relating to transactions 1, 2, 3 and 4 are vacated, and remanded for recalculation in accordance with this memorandum.
The award of punitive damages in favor of Lynn is vacated, and remanded for reconsideration in light of the result of the recalculation of her compensatory damages. The punitive damages award in favor of Dean Harman is vacated, and remanded for reconsideration, in accordance with this memorandum. Punitive damages may be awarded to Dean against Eva Harper with regard to her activities in connection with transaction 4 only.
The awards of attorneys' fees are reversed in their entirety.
All parties will bear their own costs on appeal.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
[N]o "investment contract" is involved where a person invests in real estate, with the hope of perhaps earning a profit as the result of a general increase in values concurrent with the development of the neighborhood, so long as he does not do so as part of an enterprise whereby it is expressly or impliedly understood that the property will be developed or operated by others.
597 F.2d 661 n. 2.
In connection with each of the six transactions sued upon, the Court finds that Eva Harper intentionally made material misrepresentations of fact or failed to reveal material facts with the intent to defraud knowing that the misrepresentations were untrue with the intent of having Mr. and Mrs. Harman, or both of them, rely thereon to their detriment. That the Harmans reasonably and justifiably relied thereon to their damage as set forth in these findings.
See also Findings 172 (breach of fiduciary duty and fraudulent behavior) and 179 (negligent misrepresentation).