Opinion
E072908
05-06-2021
JAMES JAIMES, Plaintiff, Cross-defendant and Appellant, v. ALEX DOURBETAS et al., Defendants and Respondents.
Law Offices of Lawrence R. Bynum and Lawrence R. Bynum, for Plaintiff, Cross-defendant and Appellant. Law Offices of Michael J. Hemming and Michael J. Hemming, for Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. RIC1704394) OPINION APPEAL from the Superior Court of Riverside County. Sunshine S. Sykes, Judge. Reversed. Law Offices of Lawrence R. Bynum and Lawrence R. Bynum, for Plaintiff, Cross-defendant and Appellant. Law Offices of Michael J. Hemming and Michael J. Hemming, for Defendants and Respondents.
I.
INTRODUCTION
Plaintiff, cross-defendant and appellant, James Jaimes, appeals from a judgment of dismissal of his case. During a bench trial, the trial court concluded plaintiff's complaint was founded on an illegal contract to purchase real property, in furtherance of an illegal short sale scheme. The court therefore dismissed the action midtrial. Plaintiff objected to the dismissal and requested the trial court to resume the trial to allow him to prove he was entitled to equitable relief for substantial improvements made to the property. The trial court rejected plaintiff's request to resume the trial and entered a judgment of dismissal.
Plaintiff contends the contract he was seeking to enforce (the 2016 agreement) was not illegal. Plaintiff alternatively argues that, even if the agreement was illegal, the trial court erred in terminating the trial without allowing him to prove he was entitled to equitable relief for making substantial improvements to the property. We conclude the trial court did not err in finding the 2016 agreement illegal but abused its discretion in prematurely terminating the trial without determining whether plaintiff was entitled to equitable relief. The judgment is therefore reversed.
II.
FACTS
Defendant's motion to augment, deemed a request for judicial notice, filed on April 27, 2020, is denied with the exception of the documents designated in plaintiff's motion to augment as exhibits 10 (Purchaser Eligibility Certification) and 11 (Beechwood Services final settlement statement). (Evid. Code, § 452, subd. (d)); People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 422, fn. 2.) Exhibits 10 and 11 were identified as trial exhibits 140 and 33, respectively, during plaintiff's trial testimony, and therefore are relevant to this appeal. The trial court admitted into evidence only trial exhibit 140 (Purchaser Eligibility Certification). Judicial notice is denied as to the remaining documents because they are not materially relevant to the issues in this appeal, since they were not identified as exhibits or admitted into evidence during the trial. (See Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3.)
A. Complaint and Cross-Complaint Allegations
Plaintiff filed a verified complaint against defendants and respondents Alex and Christina Dourbetas (defendants) alleging (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) quiet title, and (4) declaratory relief.
Plaintiff alleged in his complaint the following facts. Plaintiff resides at 2858 Lyon Avenue, in Riverside (the Property), a single family residence. On December 1, 2016, defendants, who owned the Property, entered into a written agreement with plaintiff, wherein defendants agreed to sell the Property to plaintiff (2016 agreement). The written agreement stated that plaintiff agreed to pay defendants $190,000 for the Property, by securing a Wells Fargo loan. Close of escrow would be 45 days after acceptance of escrow or sooner. Defendants and plaintiff opened escrow and signed escrow instructions. Copies of the 2016 agreement and escrow instructions were attached to plaintiff's complaint as exhibits.
Plaintiff further alleged in his complaint that he performed all conditions required for purchase of the Property, including offering to pay through escrow the full considerations specified in the 2016 agreement. On February 13, 2017, plaintiff requested defendant to convey the Property to plaintiff. Defendants refused, in breach of the 2016 agreement. Plaintiff alleged that he "has no adequate remedy at law because pecuniary damages would not afford adequate relief because the Property is unique and Plaintiff's primary residence." Plaintiff further alleged defendants did not have any right to the Property, and therefore plaintiff requested a judicial declaration quieting title upon the recording of the trustee's deed upon sale, restoring title to plaintiff. Plaintiff also requested declaratory relief determination of the parties' rights and interests in the Property, and the effect of the 2016 agreement and escrow agreement.
In the complaint prayer, plaintiff requested compensatory damages according to proof; special damages of at least $250,000; special performance of the 2016 agreement, requiring defendants to sell the Property to plaintiff for the agreed upon price, less credits for payments made by plaintiff; quiet title of the Property in plaintiff's name and declaration that defendants have no interest in the Property; an order restoring possession of the Property to plaintiff; a declaration of all of the parties' rights and liabilities; and an order for such other and further relief as the court might deem just and proper.
Defendants filed an answer and first amended answer to plaintiff's complaint and cross-complaint. Defendants cross-complaint included a cause of action for breach of contract and declaratory relief. Defendants alleged they owned the Property. They took title on May 4, 2010. Plaintiff sold the property to them. Plaintiff requested defendants to purchase the property and defendants rent it back to him. Plaintiff agreed to pay $2,070 in monthly rent, beginning on June 1, 2010. Because plaintiff was unable to pay that amount, payment of the full amount was deferred, with repayment to be made when plaintiff repurchased the property. The deferred amount totaled $102,670, plus 10 percent annual interest. Plaintiff also agreed to pay all taxes and insurance on the property, from May 4, 2010, to the date of repurchase, amounting to $34,061. Plaintiff also owed defendants $22,000 plus 10 percent annual interest, for a loan plaintiff received from defendants.
In the cross-claim for breach of contract, defendants alleged plaintiff's monthly rent was deficient by $835 per month. Plaintiff breached the rental agreement and therefore owed defendants $102,670, plus 10 percent annual interest. He also breached the agreement to pay all taxes and insurance on the property, and failed to repay defendants for the $20,000 loan, plus interest. Defendants further alleged that "an illegal contract to repurchase the subject property from [defendants] was entered into between the parties and that the contract claimed by [plaintiff] should not be enforced, and that [plaintiff] has no right or claim to title to the subject property by [plaintiff]." Plaintiff filed an answer and amended answer to defendants' cross-complaint, denying the cross- complaint allegations and alleging various affirmative defenses, including offset and setoff, and mistake of fact and law.
The parties stipulated that plaintiff initiated the instant case, in which he alleged he was the equitable title holder of the Property by virtue of the 2016 agreement. The parties further stipulated that defendants denied there was a binding agreement and claimed plaintiff was merely a tenant. It was also stipulated that plaintiff would be permitted to continue residing at the Property while the case was pending, with plaintiff paying defendants $1,500 in monthly rent, which would be credited toward either the purchase price or rent, depending on the outcome of the case.
A. Court Trial
The matter was set for a long cause, court trial, and the parties filed trial briefs. The trial began on December 11, 2018, with the trial court noting that plaintiff's complaint only dealt with the 2016 agreement.
1. Stipulated Facts
In a joint pretrial statement the parties stipulated to the following facts, which are stated in the trial court's statement of decision filed on December 17, 2018. In 2002, plaintiff purchased property located on Lyon Avenue, in Riverside. In November 2009, plaintiff sought permission from his lender, One West Bank, to sell the Property to defendants in a short sale. The lender approved the short sale in April 2010. On May 10, 2010, defendants, for whom plaintiff had previously provided construction services, purchased the Property from plaintiff for $183,718.61. Before the purchase, plaintiff and defendants entered into an oral agreement in which the parties agreed that plaintiff could buy back the property by paying defendants the current sale price and satisfy certain additional terms. The oral agreement was not disclosed to the lender. Both parties admittedly submitted false affidavits to the lender indicating that the short sale was an arm's length transaction and that the parties had no prior business dealings or affiliation. In May 2010, the parties' oral agreement was reduced to a writing (2010 agreement). Defendants claimed they had no recollection of signing the written agreement. On December 1, 2016, the parties executed a second written contract in which the parties agreed that plaintiff could purchase the Property for $190,000. Defendants ultimately refused to close escrow on the transaction.
The joint pretrial statement of the stipulated facts is not included in the record on appeal.
2. Plaintiff's Trial Testimony
After opening statements, plaintiff testified to the following facts. Plaintiff has worked as a construction worker since 1996. He can build a house from the ground up, including doing the plumbing, framing, electrical, and drywall. Plaintiff works as a construction worker for friends, family, homeowners, and contractors. He charges about $300 a day. Plaintiff met Mr. Dourbetas through a family friend. Thereafter, plaintiff and Mr. Dourbetas had a business relationship. Mr. Dourbetas asked plaintiff to do some remodeling work. Plaintiff worked for Mr. Dourbetas three or four times a week on his apartments, houses, and commercial property. Defendants' properties were located in Corona, Mira Loma, Buena Park, Seal Beach, Cerritos, La Palma, Lakewood, Anaheim, and Crestwood. The last time plaintiff worked for Mr. Dourbetas was in 2017. Plaintiff spent 100 percent of his time working full time for Mr. Dourbetas on his properties. Mr. Dourbetas would have a list of things for plaintiff to do, which might include getting the property ready for a new tenant, cleaning the property when a tenant moved out, making repairs such as plumbing repairs, checking the electrical, repairing walls, and patching. Plaintiff charged Mr. Dourbetas $180 to $200, by the day.
After plaintiff filed for divorce in 2006, and under the divorce settlement, plaintiff was required to pay his ex-wife $100,000. He therefore refinanced his house and borrowed $100,000 to pay his ex-wife and an additional $50,000. When plaintiff told Mr. Dourbetas this, Mr. Dourbetas suggested plaintiff work on building a house on vacant property Mr. Dourbetas owned in Oak Hills, Hesperia. Mr. Dourbetas and plaintiff agreed he would pay his $50,000 toward the project and Mr. Dourbetas would pay the rest. Mr. Dourbetas would sell plaintiff the land for $190,000, plaintiff would build the house, and plaintiff would get the balance from the sale of the Oak Hills home. The oral agreement was later stated in a written agreement, entitled "Purchase Agreement," dated July 23, 2007, and signed by both parties. Mr. Bynum, plaintiff's attorney, explained to the court that the agreement was relevant to showing the history of the parties' conduct in prior contractual arrangements, and showed why plaintiff insisted future agreements with Mr. Dourbetas be in writing.
Plaintiff started developing the Oak Hills property in 2007 and spent his $50,000 on the project. Plaintiff spent eight to 10 months on the project, while also doing work for Mr. Dourbetas's rental properties. Plaintiff did not finish the Oak Hills project. He stopped working on it and did not know if Mr. Dourbetas still owns the property. Plaintiff never got his $50,000 back and did not get paid for his work on the Oak Hills project.
In 2009, plaintiff's ex-wife moved out of the Property with the children. Plaintiff decided to also leave and work with his nephew in Texas. Mr. Dourbetas continued calling plaintiff three to four times a week, asking when plaintiff was coming back, because he needed plaintiff. Plaintiff did not want to return but decided to return because Mr. Dourbetas offered him full-time work taking care of his rental properties and told plaintiff he could be manager of his properties. Plaintiff also came back to fight for his children.
The day after plaintiff returned, he met with Mr. Dourbetas. Mr. Dourbetas asked plaintiff how much plaintiff owed on the Property. Plaintiff told him he owed around $300,000 in principal. Mr. Dourbetas suggested a short sale on the property and said he checked Zillow, which showed the property was worth about $180,000. Mr. Dourbetas said he would buy the property from plaintiff in a short sale. Plaintiff did not know what a short sale was. Mr. Dourbetas explained what it was and told him he had to be in default on his loan. That concerned plaintiff because he had just made two payments on the property and he was concerned about his credit.
Mr. Dourbetas told plaintiff to cancel the two payments because plaintiff needed to be in default. Mr. Dourbetas said he would buy the Property for $180,000, and plaintiff could continue living there while paying Mr. Dourbetas $1,200 a month. Plaintiff was excited and trusted Mr. Dourbetas that there would be no problems. Plaintiff defaulted on his mortgage loan on the Property, and on May 4, 2010, sold the property to Mr. Dourbetas in a short sale for $183,718.61. Because of what had happened with the Oak Hills project, in which plaintiff invested his money in the project and did not get anything back, plaintiff asked Mr. Dourbetas to put their agreement in writing. Plaintiff was very concerned about the property because he had lived there since 2002, and it was his home. Plaintiff prepared the written agreement dated May 10, 2010 (2010 agreement) about a week after escrow closed on the short sale on May 4, 2010.
The 2010 agreement stated (1) the purchase price would be $183,718.61, the amount Mr. Dourbetas told plaintiff he had paid for the short sale purchase, (2) plaintiff could continue living at the Property until he could qualify for a loan to repurchase the home from defendants, (3) plaintiff would pay defendants $1,335 a month, and (4) with 30 percent of the monthly payment going toward the property taxes and insurance, and 70 percent credited toward plaintiff's purchase price of the Property. Plaintiff and defendants agreed to these terms.
In 2010, plaintiff remodeled the entire interior of the house, including its two bathrooms. He installed can lights throughout the house, scraped off the popcorn ceiling, textured the walls of the entire house, installed ceiling fans, blinds, new doors, trim, and baseboards, and remodeled the kitchen, including installing granite countertops and laying a tile floor. Plaintiff spent $40,000 on remodeling the interior.
Plaintiff began making the monthly payments in June 2010. His monthly payments initially were made by being credited for work he provided Mr. Dourbetas. Plaintiff worked Monday through Friday for him, and did not receive much monetary compensation from him. Plaintiff kept a daily log of his work in 2010 and 2011, and provided Mr. Dourbetas with statement invoices reflecting his work. Plaintiff prepared an invoice showing that from June 2010, through December 2010, plaintiff owed defendants $12,920.40 for property taxes, and plaintiff claimed a $14,200 offset credit for his work.
In 2011, plaintiff paid his monthly mortgage payment by giving Mr. Dourbetas a check each month because it had been a problem getting Mr. Dourbetas to pay plaintiff for his work. Plaintiff was getting paid hardly anything for his work. When plaintiff had asked Mr. Dourbetas to pay him, he would only pay plaintiff a portion of what was owed and then claim he had paid the full amount owed. Plaintiff gave Mr. Dourbetas monthly checks for the mortgage payments so he could prove he had made the payments. Plaintiff made all of the $1,335 monthly payments for the mortgage, taxes, and interest owed through 2016.
Because plaintiff got frustrated dealing with Mr. Dourbetas every month regarding the payments, plaintiff demanded repurchasing the Property. In October 2016, defendants and plaintiff and his new wife met to discuss plaintiff purchasing the Property.
3. Court Dismissal of Case Based on Illegal Contract
Before plaintiff had finished testifying, the trial court announced it was going to take a noon recess. Plaintiff's counsel, Mr. Bynum, stated plaintiff had less than an hour left of testimony, and then the escrow officer on the 2016 agreement would testify. The court noted there would also be cross-examination of plaintiff by defense counsel.
After the noon recess, the court informed the parties that, upon reflecting on the parties' trial briefs and plaintiff's testimony, the court believed that the parties may have entered into illegal agreements in 2010 and 2016, which the parties concealed from the lender, in a scheme to defraud the lender, in violation of Title 18 U.S.C. 1014. The court asked counsel if it was undisputed that the parties entered into the 2010 agreement and 2016 agreement. Defense counsel, Mr. Hemming, responded that defendants asserted that the written agreement dated May 10, 2010, was fabricated and defendants never signed it. Mr. Hemming confirmed that defendants acknowledged they signed the 2016 agreement. Mr. Hemming further stated that the parties agreed to additional terms not stated in the 2016 agreement, because plaintiff qualified for an FHA loan but could not also receive seller financing for additional money plaintiff owed defendants. Therefore, the parties had an undisclosed "side deal," which the escrow officer would explain.
The trial court responded that it believed the case turned on whether the 2010 agreement and 2016 agreement were legal contracts, and whether the parties were relying on side agreements directly in conflict with the parties' representations to the banks, thus committing a fraud on the banks. The trial court stated it therefore was going to suspend the trial and have the parties brief the issue of whether the trial court could enforce the 2016 agreement or "do equity with contracts that were entered into illegally or fraudulently," by concealing from the bank the 2016 agreement, in violation of Title 18 U.S.C. section 1014. The court wanted to know what was the effect of such a contract on court enforcement of the agreement, when both parties knew they entered into the agreement unlawfully and had unclean hands.
The court stated that the case turned on, "if these contracts entered into by both plaintiff and defendant were illegal, is it proper for the Court to then step in and decide a dispute when both parties are conducting illegal transactions." The court told the parties it would like them to brief the issue. In addition, the court wanted the parties to address what was the effect of the short sale 2010 agreement and the parties knowingly making false statements to the lender when entering into the short sale transaction with the bank. The court further told the parties it wanted them to address the following questions: "[W]hat is the statute relying upon that makes the contracts illegal; what is the effect if, in fact, it is illegal; and then also what is the effect if both sides equally entered into the contract knowing that they were misleading or doing some sort of concealment to a third party, that being the bank." Defense counsel stated that he had already addressed the issues in his trial brief.
The trial court said that, after it reviewed the parties' briefs, the court would hold a hearing during which the court would decide the legal issue, which might be dispositive of the case. In effect, the court was sua sponte conducting a bifurcated bench trial, in which the trial court would decide whether the 2016 agreement was illegal and unenforceable as a matter of law. Upon deciding that issue, which the court viewed as potentially dispositive of the case, the trial court would then decide whether to dismiss the case. Plaintiff filed a supplemental brief on the illegal contract issue, as requested by the court. Plaintiff argued the only illegal agreement was the 2010 agreement, which defendants deny they entered into, and which plaintiff is not seeking to enforce. Plaintiff asserted there was no authority supporting finding the 2016 agreement was illegal. That agreement was merely an agreement that defendants would sell the Property to plaintiff.
Plaintiff further argued that even if the 2016 agreement was illegal, an exception to the general rule of unenforceability applied when nonenforcement would result in unjust enrichment or a disproportionate penalty to the plaintiff. Plaintiff argued that defendants would be unjustly enriched by allowing defendants to reap the full benefits of the short sale, plus all of plaintiff's improvements to the property. Plaintiff asserted that, even if the trial court denied plaintiff specific performance of the 2016 agreement and allowed defendants to retain title of the Property, plaintiff was entitled to a lien on the property allowing plaintiff to recover the cost of the improvements and plaintiff's payments made toward the Property loan principal, less the reasonable rental value.
On December 17, 2018, the trial court conducted a hearing, during which the parties provided additional argument before the court decided the issues regarding whether the 2016 agreement was illegal and the effect of such illegality on the case. The court noted defendants conceded there was an oral agreement in 2010 but claimed they did not sign the written agreement which plaintiff claimed reflected the terms of the oral 2010 agreement. Plaintiff's attorney, Mr. Bynum, argued the 2016 agreement was a legal, enforceable agreement. He alternatively argued that, if the 2016 agreement was illegal, defendants would be unjustly enriched if permitted to retain title to the Property, because plaintiff fully performed the terms of the agreement and paid $140,000 for substantial improvements to the Property.
The trial court stated that, even if the 2010 agreement and 2016 agreement were illegal, this would not preclude plaintiff from seeking reimbursement for the improvements from defendants. In response to the court noting that plaintiff had not pled unjust enrichment in his complaint, Mr. Bynum stated that the pleadings could be amended to conform to proof on the claim, and plaintiff should be allowed to amend to include claims for recovery of the cost of the improvements. Defense counsel, Mr. Hemming, argued the 2016 agreement was illegal and unenforceable, as an extension of the illegal 2010 agreement. He further argued plaintiff's monthly payments were rental payments, not payments on the mortgage. Plaintiff stated in his 2016 loan application he made rent payments. Mr. Hemming concluded the equities were in defendants' favor.
Mr. Bynum responded that the purchaser eligibility certification (trial exh. 140) was signed by both parties and was the basis for the alleged fraud on the lender in the short sale. Mr. Bynum argued that the short sale was Mr. Dourbetas's idea. In addition, Mr. Bynum noted that, after the short sale, defendants received almost $123,000 in payments from plaintiff and improvements to the Property costing plaintiff $180,000, which did not include the cost of plaintiff's labor or the actual value of the improvements. Defendants also benefitted from the increased equity in the Property of $210,000.
The trial court took the matter under submission and later that day issued a minute order and detailed written statement of decision, in which the court found that the 2016 agreement was illegal. The trial court stated in its statement of decision: "Both Plaintiff and Defendants admit that they provided false statements to the Plaintiff's lender in potential violation of 18 U.S.C. [section] 1014 in order to secure the approval of a proposed short sale. The parties' agreement to reconvey the property to the Plaintiff following the short sale is contrary to public policy and may not serve as the foundation of any action in law or equity. The object of the parties' oral agreement (subsequently reduced to writing ) was to defraud the lender. Because the illegality of the contract renders the bargain unenforceable, the court will leave the parties where they were when the action began."
In the discussion section of the trial court's statement of decision, the court stated that "Plaintiff actively participated in a scheme to defraud the lender, received more than $200,000 in debt forgiveness and has remained at the Property for over eight years." The court further found that plaintiff admitted that "the transaction was entered into for the express purpose of avoiding debt and not because he was unable to make his mortgage payments." The trial court noted that both parties admitted to providing material misrepresentations to the lender. The court concluded in its written statement of decision that "Plaintiff was an equal participant in the fraudulent short sale agreement and cannot now seek the court's tacit approval of his unlawful actions by asking it to enforce his agreement with Defendants." As to plaintiff's equitable relief request for reimbursement for the improvements, the court stated that, "[w]hile Defendants may be unjustly enriched by the added improvements which Plaintiff alleges he made to the Property, the court's refusal to enforce the parties agreement does not necessarily extend to any claim independent of the agreement."
The court concluded that any interest in enforcing the parties' agreement was outweighed by public policy prohibiting parties from making false statements to lenders. The court stated that it therefore would not enforce the parties' agreement and would leave the parties as it found them. The court set an order to show cause (OSC) hearing re: dismissal. Plaintiff filed a request to resume the trial on the ground that, if the trial court believed the 2016 agreement was illegal, the parties were still entitled to a determination of the remaining equitable issues, including whether plaintiff was entitled to equitable relief for substantial improvements. Plaintiff's attorney stated in his attached supporting declaration that defendant purchased the Property from plaintiff in a short sale for $183,718.61; plaintiff made payments or provided services to defendants of at least $1,335 a month; plaintiff made $180,000 in improvements to the property; and the current value of the Property was $400,000.
Defendants filed opposition to plaintiff's request to resume the trial, asserting that no equitable accounting was needed. Defendants argued that they never agreed that plaintiff could make the improvements. Also, plaintiff was the party being unjustly enriched because he avoided a foreclosure sale, received debt relief, and lived in the property, with discounted monthly rental payments, for an additional eight years. Defendants asserted they were merely trying to help plaintiff, and should not have to pay for property improvements plaintiff voluntarily made as a result of the short sale scheme.
During the hearing on the OSC regarding dismissal, on January 24, 2019, the trial court denied plaintiff's request to resume trial, finding there was no reason to reopen the trial because the court found the illegal agreement unenforceable and plaintiff did not plead in his complaint a cause of action for unjust enrichment. The trial court ordered dismissal of the complaint and cross-complaint with prejudice, and entered judgment dismissing the case. Plaintiff filed a timely notice of appeal of the judgment of dismissal.
III.
STANDARD OF REVIEW
The standard of appellate review of the judgment of dismissal is mixed. "In reviewing any order or judgment we start with the presumption that the judgment or order is correct, and if the record is silent we indulge all reasonable inferences in support of the judgment or order. [Citation.] Nonetheless, '"all exercises of legal discretion must be grounded in reasoned judgment and guided by legal principles and policies appropriate to the particular matter at issue." [Citations.] Therefore, a discretionary decision may be reversed if improper criteria were applied or incorrect legal assumptions were made. [Citation.] Alternatively stated, if a trial court's decision is influenced by an erroneous understanding of applicable law or reflects an unawareness of the full scope of its discretion, it cannot be said the court has properly exercised its discretion under the law. . . .'" (Chalmers v. Hirschkop (2013) 213 Cal.App.4th 289, 299.) "'The appellant bears the burden of showing a trial court abused its discretion.'" (Ibid., quoting F.T. v. L.J. (2011) 194 Cal.App.4th 1, 15-16.)
The standard of review of a pure question of law is de novo. (Chalmers v. Hirschkop, supra, 213 Cal.App.4th at p. 300.) As to the trial court's factual findings, we apply the substantial evidence standard of review. (Ibid.) "We resolve conflicts in evidence in favor of the prevailing party and draw all reasonable inferences to uphold the trial court's decision." (Id. at p. 300.) We review the trial court's application of the law to the facts based on the abuse of discretion standard of review. (Id. at pp. 299-300.)
IV.
ILLEGAL CONTRACT PRINCIPLES
We begin with the issue of whether the 2016 agreement was illegal. The trial court terminated the trial and dismissed the action based upon finding the agreement was illegal. "'Whether a contract is illegal . . . is a question of law to be determined from the circumstances of each particular case. [Citation.]'" (Timney v. Lin (2003) 106 Cal.App.4th 1121, 1126; see also Kashini v. Tsann Kuen China Enterprise Co., Ltd (2004) 118 Cal.App.4th 531, 540 (Kashini).) We therefore review this determination de novo. (Chalmers v. Hirschkop, supra, 213 Cal.App.4th at p. 300.) Generally, "'contracts, though properly entered into in all other respects, will not be enforced, or at least will not be enforced fully, if found to be contrary to public policy.' [Citations.] Such agreements are 'traditionally referred to as "illegal contracts,"' even though they 'are functionally described as contracts unenforceable on grounds of public policy.' [Citation.]" (Kashini, supra, at pp. 540-541.)
"California statutes require that a contract have 'a lawful object.' (Civ. Code, § 1550, subd. (3); see Civ. Code, § 1596.) Otherwise the contract is void. (Civ. Code, § 1598.) Civil Code section 1668 provides that a contract that has as its object a violation of law is 'against the policy of the law.' Civil Code section 1667 states that 'unlawful' is '1. Contrary to an express provision of law; [¶] 2. Contrary to the policy of express law, though not expressly prohibited; or [¶] 3. Otherwise contrary to good morals.' (See also Civ. Code, §§ 1441 ['A condition in a contract, the fulfillment of which is . . . unlawful . . . is void'], 1608 ['If any part of a single consideration for one or more objects, or of several considerations for a single object, is unlawful, the entire contract is void'].) California courts have stated that an illegal contract 'may not serve as the foundation of any action, either in law or in equity' [citation], and that when the illegality of the contract renders the bargain unenforceable, '"[t]he court will leave them [the parties] where they were when the action was begun."' [Citations.]" (Kashini, supra, 118 Cal.App.4th at p. 541, italics added.)
"'A bargain may be illegal because the performance that is bargained for is illegal; and the performance may be illegal because governmental authority has declared it to be a "crime," in any one of the multiplicity of degrees. . . . This is true whether the performance bargained for is one that is merely promised, to be rendered in the future, or is one that is rendered as the executed consideration for a return promise. On the other hand, a bargain may be illegal even though no illegal performance is either promised or executed as the consideration for a promise; it may be illegal because the making of such a bargain is itself forbidden and subjected to penalty.'" (Kashini, supra, 118 Cal.App.4th at p. 542, citing 6A Corbin on Contracts (1962) § 1373, p. 2.)
For purposes of illegality, the "law" is broadly construed as encompassing "legislation," which includes "'any fixed text enacted by a body with authority to promulgate rules, including not only statutes, but constitutions and local ordinances, as well as administrative regulations issued pursuant to them.'" (Kashini, supra, 118 Cal.App.4th at p. 542, citing Rest.2d Contracts, § 178, com. a, p. 7.) "[A] violation of federal law is a violation of law for purposes of determining whether or not a contract is unenforceable as contrary to the public policy of California." (Kashini, supra, at p. 543.)
V.
ILLEGALITY OF 2016 AGREEMENT
The contract plaintiff seeks to enforce in this case is the 2016 agreement, which consisted of a written agreement executed by the parties on December 1, 2016. The parties agreed that defendants would sell the Property to plaintiff, and plaintiff would purchase it for $190,000, with escrow to close within 45 days. On its face, the written agreement appears to be an enforceable contract but the parties' opening statements at trial, stipulated facts, plaintiff's trial testimony, and trial exhibit 140 (purchaser eligibility certification) established that the agreement was illegal because it was entered into in furtherance of an unlawful short sale scheme devised in 2010.
In May 2010, the value of the Property was substantially less than what plaintiff owed the lender on the mortgage. Defendants offered to purchase the Property from plaintiff in a short sale and then later resell it back to plaintiff, while allowing plaintiff to continue living at the Property. The objective of the 2010 agreement was to eliminate plaintiff's debt to the lender and then, when plaintiff was able to do so, allow plaintiff to repurchase the property from defendants at about the same amount defendants purchased the Property from plaintiff. This was an illegal scheme to defraud the lender out of hundreds of thousands of dollars in mortgage debt by means of plaintiff selling the property to defendants in a short sale and, unbeknownst to the lender, defendant agreeing to plaintiff later buying it back from defendants. In seeking lender approval of the short sale, the parties made misrepresentations under oath in a purchaser eligibility certification affidavit (trial exh. 140), concealing their intent that plaintiff would continue living at the Property and in the future buy back the property from defendants. The purchaser eligibility certification affidavit, signed by both parties, states that the parties understood that "it is a Federal crime punishable by fine or imprisonment, or both, to knowingly and willfully make any false statements" in the affidavit under Title 18, United States Code, Section 1001, et seq.
The evidence introduced during the trial indicated that the parties' short sale scheme was illegal under Title 18 U.S.C. sections 1001 and 1014. Section 1001 prohibits anyone in any manner within the jurisdiction of any department or agency of the United States, from willfully or knowingly falsifying, concealing or covering up a material fact. The statute states that, "(a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully— [¶] (1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact; [¶] (2) makes any materially false, fictitious, or fraudulent statement or representation; or [¶] (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry; [¶] shall be fined under this title, imprisoned not more than 5 years . . . or both."
Title 18 U.S.C. section 1014 imposes liability on anyone who commits fraud or makes false statements to influence the action of any federally insured bank. (Title 18 U.S.C. § 1014.) Anyone committing such a violation "shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both." (Title 18 U.S.C. § 1014.) One of the primary purposes of Title 18 U.S.C. § 1014, and the policy behind the section is to protect lending institutions from fraudulent loan applications and misrepresentations which attempt to influence action by financial institutions. (U.S. v. Lentz (5th Cir., 1975) 524 F.2d 69, 71 ["one policy behind [Title 18 U.S.C. § 1014 is to protect specific financial institutions from fraudulent loan applications"]; U.S. v. Pavlick (M.D.Pa.,1980) 507 F.Supp. 359, 362 [the statute "criminalizes misrepresentations which attempt 'to influence action by the financial institution concerning a loan or other transaction listed in the statute.'"].)
As admitted by the parties in their joint pretrial statement of stipulated facts, "both parties admittedly submitted false affidavits to the lender indicating that the short sale was the result of an arm's length transaction and that the parties had no prior business dealing or affiliation." Also as defense counsel acknowledged during his opening statement, the lender approved the 2010 short sale of the Property to defendants based on the following conditions: (1) there was no business relationship between the parties; (2) plaintiff would vacate the Property at the close of escrow; and (3) plaintiff would not buy back the Property. Both parties signed an affidavit under oath certifying the truth of these conditions (purchaser eligibility certification, trial exhibit 140), knowing the affidavit statements were false. Plaintiff and defendants thus agreed to a short sale scheme founded on lying to the lender and deceiving the lender into excusing a substantial portion of the debt plaintiff owed the bank.
We therefore conclude the trial court correctly found that the 2016 agreement, which plaintiff was attempting to enforce, was illegal as an extension or continuation of the 2010 agreement, in which the parties agreed to carry out an illegal short sale scheme. Contrary to the parties' false representations to the lender in the purchaser eligibility certification, the 2010 short sale was not an arm's length transaction; plaintiff did not move out of the property or intend to do so; and the parties intended that title to the Property be transferred back to plaintiff.
VI.
EXCEPTIONS TO THE AFFIRMATIVE DEFENSE
OF CONTRACT ILLEGALITY
Plaintiff contends the 2016 agreement is enforceable under the unjust enrichment exception to the general rule that an illegal contract is unenforceable.
In Norwood v. Judd (1949) 93 Cal.App.2d 276, 288 (Norwood), the court concluded that courts should not blindly extend the general rule of unenforceability to every illegal contract. The Norwood court explained: "The rule that the courts will not lend their aid to the enforcement of an illegal agreement or one against public policy is fundamentally sound. The rule was conceived for the purposes of protecting the public and the courts from imposition. It is a rule predicated upon sound public policy. But the courts should not be so enamored with the Latin phrase 'in pari delicto' that they blindly extend the rule to every case where illegality appears somewhere in the transaction. The fundamental purpose of the rule must always be kept in mind, and the realities of the situation must be considered." (Id. at pp. 288-289.)
The Norwood court concluded that the general rule of unenforceability of an illegal contract should not apply when, by applying the rule, "[1] the public cannot be protected because the transaction has been completed, [2] where no serious moral turpitude is involved, [3] where the defendant is the one guilty of the greatest moral fault, and [4] where to apply the rule will be to permit the defendant to be unjustly enriched at the expense of the plaintiff . . . ." (Norwood, supra, 93 Cal.A.pp.2d at p. 289.)
Subsequent to Norwood, the courts recognized "'a lengthy and intricate list of exceptions'" to the general rule that an illegal contract is unenforceable. (Kashini, supra, 118 Cal.App.4th at pp. 541-542; see also Asdourian v. Araj (1985) 38 Cal.3d 276, 292-294 (Asdourian) [illegal contract enforceable if otherwise defendant unjustly enriched or plaintiff subject to harsh penalty]; M. Arthur Gensler, Jr., & Associates, Inc. v. Larry Barrett, Inc. (1972) 7 Cal.3d 695, 702 [illegal contract can be enforced if statutory penalties interpreted to exclude as a sanction nonenforcement of contract]; Tri-Q, Inc. v. Sta-Hi Corp. (1965) 63 Cal.2d 199, 218-220 [illegal contract enforceable based on considerations such as public cannot be protected because contract terminated, no serious moral turpitude involved, defendant more at fault, and defendant otherwise would be unjustly enriched]; Lewis & Queen v. N.M. Ball Sons, supra, 48 Cal.2d at p. 151 [illegal contract enforceable if policy better served by enforcement against violating defendant]; R.M. Sherman Co. v. W.R. Thomason, Inc. (1987) 191 Cal.App.3d 559, 564 [the courts have fashioned exceptions to the general rule of unenforceability of illegal contracts].)
As summed up in R.M. Sherman Co. v. W. R. Thomason, Inc., supra, 191 Cal.App.3d at page 564, "'The illegality of contracts constitutes a vast, confusing and rather mysterious area of the law.' [Citation.] 'One of the reasons for the apparent confusion is the fact that illegality may appear in many forms and in varying degrees. . . . Another source of confusion seems to be the tendency of some courts to speak in terms of absolute rules, and others in terms of numerous exceptions. Unfortunately, there appear to be several conflicting and competing "absolute" rules. On the other hand, a monotonous and patterned recital of exceptions is apt to obscure the actual rule of decision.' [Citation.] [¶] Civil Code sections 1598 and 1608 are not always applied literally; in many cases they have simply been overlooked or ignored. (E.g. Asdourian[, supra,] 38 Cal.3d [at p.] 293 [suggesting contract might be merely 'voidable'; allowing recovery despite violation punishable as misdemeanor].) In any event the courts have fashioned exceptions and qualifications to the seemingly unequivocal statutory mandate of unenforceability. (E.g., Asdourian[, supra,] 38 Cal.3d [at pp.] 292-294 [defendant unjustly enriched, plaintiff unduly penalized]; Lewis & Queen v. N.M. Ball Sons[, supra,] 48 Cal.2d [at p.] 151 [policy of violated statute better served by granting relief]; Severance v. Knight-Counihan Co. (1947) 29 Cal.2d 561, 569 [restitution to party only slightly at fault, or party equally at fault who repudiates before illegal part of bargain executed]; [citation].)" (Id. at p. 564.)
Here, assuming that the 2010 short sale transaction and subsequent 2016 agreement were illegal, "the effect of the illegality depends on the facts and equities of the particular case." (Johnson v. Johnson (1987) 192 Cal.App.3d 551, 558 (Johnson).) The trial court terminated the trial midtrial, finding the 2016 agreement was illegal and dismissed the action, concluding plaintiff was not entitled to equitable relief because his complaint did not include an unjust enrichment claim. We conclude termination of the trial was premature because, although the 2016 agreement was illegal, there was evidence and argument presented that supported applying the unjust enrichment exception, at least to the extent of possibly awarding plaintiff equitable relief for the substantial improvements. (Kashini, supra, 118 Cal.App.4th at p. 541; Asdourian, supra, 38 Cal.3d at pp. 292-294 [illegal contract enforceable if otherwise defendant unjustly enriched or plaintiff subject to harsh penalty].)
In Asdourian, supra, 38 Cal.3d 276, the court held the unjust enrichment exception applied to an oral home improvement contract for over $500, which was void and unenforceable because it was not reduced to a written agreement. (Id. at p. 279.) In Asdourian, the plaintiff and defendants entered into a written agreement for the conversion of the defendant's garage into a restaurant. After the plaintiff completed most of the work, the defendant refused to make any further payments and the plaintiff stopped working. The plaintiff also remodeled two flats for the defendant. After the plaintiff completed the work, the defendant refused to pay the plaintiff. In addition, the defendant requested the plaintiff to perform repairs on a single family residence and then requested the plaintiff to remodel the kitchen and bathroom. There was no written contract and the parties disagreed over whether they agreed orally on a price. The defendant refused to pay for the work. The plaintiff obtained a mechanic's lien on one of the properties and brought two consolidated actions to enforce the lien and payment for his work.
The Asdourian court held that, because the remodeling contracts were not in writing, in violation of Business and Professions Code section 7159, the contracts were illegal and unenforceable as violative of public policy. (Asdourian, supra, 38 Cal.3d at p. 290.) The Asdourian court noted the general rule that a contract made in violation of a regulatory statute is void, and the courts will not aid in enforcing an illegal contract or one against public policy. (Id. at p. 291.) The court also recognized that the rule is not inflexible and there are a wide range of exceptions. One such exception is that "[i]n compelling cases, illegal contracts will be enforced in order to 'avoid unjust enrichment to a defendant and a disproportionately harsh penalty upon the plaintiff.' [Citation.] '"In each case, the extent of enforceability and the kind of remedy granted depend upon a variety of factors, including the policy of the transgressed law, the kind of illegality and the particular facts."' [Citation.]." (Id. at p. 292.) The Asdourian court concluded that application of these factors to the contracts at issue supported enforcement of the remodeling contracts. (Id. at p. 292; see also Arya Group, Inc. v. Cher (2000) 77 Cal.App.4th 610, 610 (Arya).)
Arya, supra, 77 Cal.App.4th 610, is similar to Asdourian in that the parties orally agreed the plaintiff would receive property remodeling services but, after the plaintiff provided the services, the defendant refused to pay the plaintiff based on there being no signed written contract. The plaintiff sued for breach of contract. Citing Asdourian, supra, 38 Cal.3d 276, the Arya court reversed the trial court judgment dismissing the action, concluding the plaintiff was entitled to seek enforcement of the contract because otherwise the defendant would be unjustly enriched by receiving construction services from the plaintiff, which the defendant did not pay for. (Id. at pp. 615, 618.)
As in Asdourian, the trial evidence supported a finding defendants would be unjustly enriched. Also, defendants were not members of the group primarily in need of the applicable statute's protections. Title 18 U.S.C. section 1001 and particularly section 1014 are intended to protect the lender, not plaintiff or defendants. The 2016 agreement was illegal because it was executed in furtherance of a secret illegal short sale scheme intended to deprive the lender of recovering debt plaintiff owed on his mortgage in violation of Title 18 U.S.C. section 1001.
Although, unlike in Asdourian and Arya, the 2016 agreement was in furtherance of consummating an illegal short sale, the trial court could reasonably find, that the 2016 agreement should be enforced based on the factors found in Asdourian that "Plaintiff fully performed according to the oral agreements. Defendants accepted the benefits of the oral agreements. If defendants are allowed to retain the value of the benefits bestowed by plaintiff without compensating him, they will be unjustly enriched." (Asdourian, supra, 38 Cal.3d at p. 293.)
We recognize the instant case differs from Asdourian in that the illegality of the 2016 agreement was more than a mere technicality, but rather was an immoral, dishonest act. Nevertheless, we conclude the trial court could have reasonably found that the circumstances leading to defendants receiving substantial improvements to the Property at plaintiff's expense supported equitably compensating plaintiff for the improvements, while denying plaintiff's request to enforcement the 2016 agreement.
Although the parties' violations of Title 18 U.S.C. sections 1001 and 1014 constituted serious moral turpitude, the victim was the lender, not defendants who willingly and actively participated in the illegal short sale scheme; the policy of protecting the public from the future consequences of the contract would not be furthered by denying equitable relief because the transaction has been completed; defendants would likely be unjustly enriched by receiving substantial home improvements at plaintiff's expense; and the penalty resulting from denial of equitably compensating plaintiff for the improvements would be disproportionately harsh under the circumstances of this case. (Asdourian, supra, 38 Cal.3d at p. 294.) Denying plaintiff enforcement of the 2016 agreement by not requiring defendants to transfer title to plaintiff as agreed, but allowing plaintiff to receive compensation for his substantial improvements to the Property, would not defeat the policy of the Title 18 U.S.C. sections 1001 and 1014.
We recognize that, unlike in Asdourian, in the instant case there was no evidence defendants requested, consented, or agreed to pay for the improvements, but this was because the parties agreed defendants would return title to the Property to plaintiff as soon as plaintiff was financially able to repurchase it from defendants. Therefore, plaintiff was led to believe that he would regain ownership and become the beneficiary of his substantial improvements. Plaintiff's testimony supported a reasonable finding that depriving plaintiff of any compensation for the property improvements would unjustly enrich defendants. We therefore conclude the trial court prematurely terminated the trial before allowing the parties to present evidence and argue the issue of whether plaintiff was entitled to equitable relief for the substantial improvements.
Other case law, including Hainey v. Narigon (1966) 247 Cal.App.2d 528 (Hainey), Griffis v. Squire (1968) 267 Cal.App.2d 461 (Griffis), and Johnson, supra, 192 Cal.App.3d 551, also supports the proposition that the trial court prematurely terminated the trial without trying the issue of whether plaintiff was entitled to equitable relief for the substantial improvements made to the property. In Johnson, the defendant, who was a veteran, persuaded his parents to purchase a home in the defendant's name so that the home could be financed with a Veterans Affairs (VA) loan under the Servicemen's Readjustment Act of 1944 (58 Stat. 268, § 500 et seq.) (VA Act). It was understood by the son and parents that the parents would remain the actual owners of the home. Shortly after the home purchase, the parents began entreating the defendant to transfer title to the home to them, to no avail. The parents paid for the home, the loan payments, and most all of the home maintenance.
Two years after the Johnson parents moved into the home, the defendant's father died. About two years after that, the defendant separated from his wife and moved into his mother's home. He paid no rent but did not indicate he considered himself owner of the home. Three years later, the defendant told his mother he was going to sell the home and attempted to force his mother out of the home. The mother refused to move out and insisted the defendant transfer title of the home to her. After the defendant refused, she filed suit seeking a resulting trust and ancillary relief. (Johnson, supra, 192 Cal.App.3d at p. 555.)
The trial court in Johnson ordered the home be placed in a resulting trust in favor of the mother. On appeal, the defendant asserted that the trial court was barred from decreeing a resulting trust because the underlying VA loan contravened public policy under the VA Act and was illegal. The Johnson court disagreed. (Johnson, supra, 192 Cal.App.3d at p. 557.) The Johnson court concluded that, although the agreement between the defendant and his mother was illegal because it violated the VA Act, each of the Norwood criteria was satisfied and therefore the agreement was enforceable. (Johnson, supra, at p. 557.) The Johnson court found: (1) The public could not be protected because the home purchase transaction was completed; (2) there was no serious moral turpitude on the part of the plaintiff involved; (3) the defendant was the one guilty of the greatest moral fault, because he instigated the transaction and took advantage of it, and (4) applying the general rule of unenforceability of an illegal contract would have permitted the defendant to be unjustly enriched at the expense of the plaintiff. (Id. at p. 557.)
We recognize Johnson, supra, 192 Cal.App.3d 551 is distinguishable. Here, unlike Johnson, both parties were equally at fault for knowingly entering into an illegal transaction. Both played a part in carrying out an illegal short sale scheme, cheating the bank out of recovering the full amount of plaintiff's mortgage debt, which constituted an act of serious moral turpitude. But unlike Johnson, the trial court denied enforcement of the 2016 agreement, thus depriving plaintiff of title to the Property, and terminated the trial prematurely without trying the remaining issue of whether plaintiff was entitled to any equitable relief. As a consequence, defendants retained title and also received the benefit of the substantial improvements without paying for them. Johnson supports not enforcing performance of the 2016 agreement, because it was an illegal agreement. Johnson, however, suggests that plaintiff nevertheless might be entitled to equitable relief for the substantial improvements because, otherwise, defendants would be permitted to be unjustly enriched at the expense of plaintiff.
In Griffis, supra, 267 Cal.App.2d 461, the court denied the plaintiff enforcement of an illegal contract but granted the plaintiff equitable relief for improvements to the property provided by the plaintiff. The plaintiff in Griffis brought an action to quiet title to desert land and for recovery of rent owed. The defendants cross-complained, seeking a portion of the land. The Griffis court reversed the trial court judgment awarding the defendants a portion of the land and awarding the plaintiffs damages. The plaintiff argued on appeal that the agreement upon which the judgment was based was illegal and unenforceable because it was contrary to public policy. The Griffis court agreed the plaintiff and defendants' land title assignment agreement was illegal because it violated the Desert Land Act. (Griffis, supra, 267 Cal.App.2d at pp. 469-470.) The Griffis court noted that "as a general rule courts will not enforce an illegal contract or lend their assistance to a party who seeks compensation for an illegal act. [Citation.] The reason behind this rule is that equitable consideration of possible injustice between the parties, or unjust enrichment, are outweighed by the importance of discouraging prohibited transactions." (Id. at p. 470.)
The Desert Land Act prohibited holding by assignment more than 320 acres of desert land prior to issuance of a patent for a homestead claim to title to the government land under the Desert Land Act.
The Griffis court concluded that neither party was guilty of greater moral fault. The parties were in pari delicto. The Griffis court therefore reversed the trial court judgment granting specific performance of the agreement that the plaintiff would convey part of the desert land to the defendant in return for the defendants' completion of improvements on the land needed for the plaintiff to obtain title. But the Griffis court further granted the defendants a lien on the property for recovery of money defendant expended in making the improvements on the land and paying the property taxes and insurance premiums. (Griffis, supra, 267 Cal.App.2d at p. 471.) Citing Hainey, supra, 247 Cal.App.2d 528, the Griffis court noted that, upon retrial, the defendant would have the opportunity to establish under "the Hainey formula" the amount of the lien to be attached to the plaintiff's property. (Griffis, supra, at pp. 471-473.)
In Hainey, supra, 247 Cal.App.2d 528, the court held that a plaintiff who took title to real property in the name of another for the purpose of defrauding the government, in violation of the VA loan program under the VA Act, could not enforce a resulting trust in his favor, because the home purchase agreement was illegal and contrary to public policy. (Id. at p. 532.) The plaintiff and defendant in Hainey had agreed that the defendant would purchase for the plaintiff property the plaintiff had selected, using a VA loan; the defendant would have no interest in the real property; and the defendant would deliver the title instruments to the plaintiff. After the defendant purchased the property with a VA loan, title remained in the defendant's name, and the plaintiff made all of the payments but one on the loan, taxes, and insurance for over 12 years, and lived in the home. The plaintiff brought an action against the defendant to impose a resulting trust, for declaratory relief, and to quiet title.
The Hainey court concluded that, because the agreement violated federal statutes and regulations, and was contrary to public policy, the plaintiff was not entitled to enforce it. (Hainey, supra, 247 Cal.App.2d at p. 531.) This, however, did not end the discussion. The Hainey court noted that, "[a]lthough plaintiff is not entitled to enforce the contract, this is not to say, in the factual context of this case, that he is not entitled to some consideration. In Tri-Q, Inc. v. Sta-Hi Corp., supra, 63 Cal.2d 199, the court (at p. 220) noted the importance of effective deterrence of contracts that were violative of public policy and at the same time indicated that the forfeiture resulting from unenforceability of such a contract should not be disproportionately harsh considering the nature of the illegality, and concluded with the statement from Lewis & Queen v. N. M. Ball Sons, supra, 48 Cal.2d at page 151, that: 'In each such case, how the aims of policy can best be achieved depends on the kind of illegality and the particular facts involved.'" (Hainey, supra, at p. 531.)
In applying these principles, the Hainey court noted that the appeal could not affect the loan, its collectability, or the underlying security because the VA loan was made many years before the trial, and neither the Veterans Administration nor the lending institution were involved in the litigation. Rather, the lawsuit was solely between private citizens. (Hainey, supra, 247 Cal.App.2d at p. 532.) The Hainey court therefore reached the following equitable, Solomonic resolution, balancing the parties' interests, policy concerns, and equities: "Looking at 'the particular facts involved,' it appears that a fair and equitable solution is to give plaintiff a lien on the property for the net amount of his financial investment in it, that is to say, the amount of the payment that he made in the initial acquisition of the property, the monthly payments that he has made, including interest, taxes, and insurance and any out-of-pocket expense in making permanent improvements, less the reasonable rental value of the property from the date plaintiff moved into it until the date of any new judgment that is entered herein in the trial court. Thus, plaintiff would be deprived of the benefit of his bargain, that is to say, the appreciation in value of the property over the years. Such a loss would no doubt serve as a deterrent to others who might conceive the idea of going into a similar deal. The forfeiture by plaintiff of the appreciation of the property would not appear to be disproportionately harsh considering the nature of his violation of public policy. Furthermore, to allow plaintiff to have the benefit of the appreciation in value of the property would be to give him an unearned profit on an invalid transaction." (Hainey, supra, at p. 532.)
The Hainey court further stated that, "[v]iewing the matter from the position of the defendants, the result is to prevent them from being unjustly enriched from the out-of-pocket money plaintiff has put into the property. However, this gives defendants the benefit of any appreciation in the value of the property. But as between Mr. Narigon [defendant] who has veteran status for a Veterans Administration guaranteed loan for the purchase of a home for his own use and plaintiff who was not a veteran, it would appear more reasonable to give the former the benefit of any appreciation in the value of the property. He had actually earned the right to the veteran's benefit here had he sought to use it to acquire a home for himself, whereas plaintiff had not earned any such right at all." (Hainey, supra, 247 Cal.App.2d at p. 532.)
Of all of the cases cited by the parties, Hainey is the most analogous to the instant case. We therefore conclude a similar resolution may be appropriate in the instant case. Although the 2016 agreement to sell the Property back to plaintiff is unenforceable as illegal, thus leaving defendants with title to the property, plaintiff may be entitled to equitable compensation for the substantial improvements he made to the Property. Because the trial court terminated the trial without allowing the parties to fully try the equitable relief issue, this matter must be remanded for trial of the issue.
Defendants cite Kashini, supra, 118 Cal.App.4th 531, for the proposition plaintiff is not entitled to reimbursement for the improvements. In Kashini, the plaintiffs, who were United States citizens, contracted with the defendants, which were Chinese, Taiwanese, and American corporations. The plaintiffs agreed to build a manufacturing plant in Iran for production of the defendants' computer products to be sold in Iran and other places. After the plaintiffs invested in setting up the manufacturing plant in Iran, the defendant corporations ceased doing business in the computer industry and decided not to proceed with the agreement. The plaintiffs brought a complaint against defendant, asserting a sole cause of action for breach of contract. (Id. at p. 538.)
The Kashini trial court granted the defendants' motion for summary judgment on the ground the contract was unenforceable as illegal and against public policy, because it violated United States presidential executive orders and regulations prohibiting without a license any United States person from engaging in or financing any transaction dealing in or relating to the exportation, sale or supply of goods, technology or services to Iran. The court in Kashini, supra, 118 Cal.App.4th 531, 537, affirmed the summary judgment, holding that, "[i]n affirming the summary judgment, we hold that plaintiffs legally cannot establish their claim because the agreement upon which plaintiffs' claim is based is illegal and against public policy." The Kashini court concluded that, "[b]y entering into the contract, plaintiffs 'approve[d]' and 'facilitate[d]' a prohibited transaction." (Id. at p. 547.) In addition, the Kashini court concluded that the "[p]laintiffs' actual and anticipated performance under the agreement were likewise prohibited." (Id. at p. 548.)
In Kashini, the court recognized there are exceptions to the general rule of the courts not enforcing illegal contracts. (Kashini, supra, at p. 557.) Such exceptions include a contract violating a statute making the conduct illegal and providing a fine or administrative discipline. Such statute excludes by implication the additional penalty of holding the illegal contract unenforceable. (Ibid.) Another exception the Kashini court noted was when contract unenforceability would be disproportionately harsh considering the nature of the illegality. "'"In each such case, how the aims of policy can best be achieved depends on the kinds of illegality and the particular facts involved." [Citation.]' [Citation.]" (Id. at p. 557, quoting M. Arthur Gensler, Jr., & Associates, Inc. v. Larry Barrett, Inc., supra, 7 Cal.3d at pp. 702-703.)
In Kashini, the court concluded the facts did not warrant applying any exception to the general rule of unenforceability of an illegal contract. (Kashini, supra, 118 Cal.App.4th at p. 559.) The court reasoned that the plaintiffs were aware they were dealing with Iran and of the possibility the agreement was invalid and unenforceable because it was in violation of trade restrictions promulgated for national security reasons. The Kashini court therefore concluded that "the penalty is not disproportionate to the severity of the offense, and any 'forfeiture' is not unfair." (Id. at p. 557.)
The Kashini court further noted that the court's refusal to enforce the illegal agreement had a deterrent effect of such serious violations of the regulations. "'Knowing that they will receive no help from the courts and must trust completely to each other's good faith, the parties are less likely to enter an illegal arrangement in the first place.'" (Kashini, supra, 118 Cal.App.4th at p. 558, quoting Lewis & Queen v. N.M. Ball Sons, supra, 48 Cal.2d at p. 150.) The Kashini court added that, even though the Kashini defendants breached the agreement before full performance, they were no more at fault than the plaintiffs in entering into the illegal transaction, and the violations did not consist of minor technical violations. The violated regulations were intended to protect United States security interests. (Kashini, supra, at p. 558.)
As in Kashini, in the instant case, plaintiff and defendant were equally at fault for knowingly entering into an agreement to commit an illegal scheme. Because the short sale scheme was illegal, the trial court reasonably refused to enforce the illegal 2016 agreement, but also dismissed the case before trying the issue of whether plaintiff was entitled to any recovery for his Property-related payments and improvements.
Kashini is distinguishable in that in Kashini, the plaintiff did not seek restitution of monies or consideration paid to the defendants. The Kashini plaintiff only sought recovery of lost profits. There were no allegations that any benefit was conferred on or retained by the defendants, that the defendants had been unjustly enriched, or that the defendants had retained monies from a joint venture that could have been distributed to the participants in the joint venture. (Kashini, supra, 118 Cal.App.4th at p. 557.) In the instant case, unlike in Kashini, plaintiff requested equitable relief for substantial home improvements, which constituted benefits retained by defendants as a result of the court not enforcing the 2016 agreement. The limited evidence at trial supported findings of unjust enrichment and equitable relief.
Also, unlike in Kashini, here there was little, if any, deterrent effect in depriving plaintiff or others of such relief. It is unlikely that disallowing equitable reimbursement for the cost of substantial improvements would add much, if any, additional deterrence. The court's nonenforcement of the 2016 agreement resulted in substantial deterrence by precluding plaintiff from buying back the Property. Furthermore, not awarding equitable relief for the improvements would merely serve as deterrence to making improvements until after acquiring title to the property. Therefore, depriving plaintiff of equitable relief for the home improvements would not likely serve as an effective deterrent to entering into an illegal short sale transaction.
On the other hand, not requiring defendants to reimburse plaintiff for the improvements could provide defendants or others with incentive to repeat the short sale scheme. In the absence of requiring defendants to reimburse plaintiff for the cost of remodeling the Property, defendants not only would retain title to the property, the monthly payments received from plaintiff for over six years, and substantial increased equity in the property, defendants would also benefit from having the entire interior and exterior of the Property remodeled for free.
We conclude that under the particular circumstances of the instant case, the trial court prematurely dismissed the trial on the grounds the 2016 agreement was illegal, without allowing the parties to try the remaining issues of whether defendant was unjustly enriched, whether plaintiff was subject to an unduly harsh penalty in depriving him of reimbursement for the cost of the home improvements, and whether plaintiff was entitled to equitable relief for the cost of the substantial improvements.
The trial court stated in its statement of decision that, "[w]hile Defendants may be unjustly enriched by the added improvements which Plaintiff alleges he made to the Property, the court's refusal to enforce the parties['] agreement does not necessarily extend to any claim independent of the agreement." The court further stated during the hearing on plaintiff's motion to resume the trial, that plaintiff was not entitled to trial on the issue of whether plaintiff was entitled to compensation for the property improvements, because plaintiff's complaint did not include a cause of action for unjust enrichment.
But unjust enrichment is not recognized by California courts as a cause of action. "[T]here is no cause of action in California for unjust enrichment. 'The phrase "Unjust Enrichment" does not describe a theory of recovery, but an effect: the result of a failure to make restitution under circumstances where it is equitable to do so.' (Lauriedale Associates, Ltd. v. Wilson (1992) 7 Cal.App.4th 1439, 1448.) Unjust enrichment is '"a general principle, underlying various legal doctrines and remedies,"' rather than a remedy itself. (Dinosaur Development, Inc. v. White (1989) 216 Cal.App.3d 1310, 1315.) It is synonymous with restitution. (Id. at p. 1314.)" (Melchior v. New Line Productions, Inc. (2003) 106 Cal.App.4th 779, 793.)
Unjust enrichment is thus a form of relief equivalent to restitution derived from plaintiff's contract-related claims and request for declaratory relief. Therefore, plaintiff was not required to allege a separate cause of action for equitable relief or unjust enrichment.
Furthermore, plaintiff's complaint included a declaratory relief cause of action which requested a determination of the parties' rights, which would have encompassed a determination of whether plaintiff was entitled to an offset or equitable relief for the property improvements in the event the contract was determined to be illegal and unenforceable. In addition, plaintiff alleged in his answer and amended answer to defendant's cross-complaint the affirmative offense of offset or setoff to defendant's cross-claims; argued in his trial brief he was entitled to damages of $140,000 for the property improvements; testified to facts supporting equitable relief for the cost of the home improvements; and asserted in his supplemental brief addressing defendants' contract illegality defense, that he was entitled to recover the amount of all of his payments made and improvements to the Property, less the reasonable rental value, in the event the 2016 agreement was found to be an illegal unenforceable contract. After the court terminated the trial, plaintiff also filed a request to resume trial for the purpose of trying the remaining issue of whether he was entitled to equitable recovery for the property improvements.
This is not a case in which defendant did not have notice of plaintiff's request to recover over $140,000 in improvements plaintiff made to the property. Even if the pleadings were deficient in not adequately pleading plaintiff's claim for recovery for the improvements as equitable relief, the trial court could have amended the pleadings to conform to the evidence and argument presented at trial, to allow plaintiff's equitable relief request to be addressed on the merits. Because a triable issue of fact remained when the trial court terminated the trial and dismissed the case, as to whether plaintiff was entitled to equitable relief for the home improvements, we conclude the trial court abused its discretion in prematurely dismissing the case.
VII.
DISPOSITION
The judgment is reversed. Plaintiff is awarded his costs on appeal.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
CODRINGTON
Acting P. J. We concur: SLOUGH
J. FIELDS
J.