Opinion
NOT TO BE PUBLISHED
APPEALS from a judgment of the Superior Court of Los Angeles County No. BC21702. Soussan G. Bruguera, Judge. Judgment as to Yair Harpaz, Private Investors Financing, Inc., Itchak Brill and Verdugo Development, Inc.
Law Offices of Gary Brown and Gary Brown; Benedon & Serlin, Gerald M. Serlin and Douglas G. Benedon for Defendants and Appellants Yair Harpaz and Private Investors Financing, Inc.
Law Office of Adam S. Rossman and Adam S. Rossman for Defendant and Appellant Annette McCullough.
Stephen H. Krumm for Defendants and Appellants Itchak Brill and Verdugo Development, Inc.
No appearance for Plaintiffs and Respondents.
MALLANO, P. J.
In this action tried to the court, plaintiffs sued defendants for fraud and related causes of action arising out of defendants’ failure to fully fund a loan for $175,000. Without the funds, plaintiffs were unable to complete construction of their home and lost the home through foreclosure, which loss the court found was caused by defendants’ wrongful conduct.
The primary issue on appeal as to defendants Yair Harpaz, Itchak Brill, Private Investors Financing, Inc., and Verdugo Development, Inc., is whether the trial court properly measured plaintiffs’ compensatory damages by their loss of equity in their home. Inasmuch as “the circumstances constituting fraud being as various as are the devices of ingenious and covinous men” (see Riddle v. Baker (1859) 13 Cal. 295, 299), and because measuring fraud damages based on plaintiffs’ loss of equity appropriately compensates plaintiffs for the harm caused by defendants’ fraud, we uphold the trial court’s award of compensatory damages against the foregoing defendants. But the evidence is insufficient to support the punitive damage awards against those defendants, and those awards will be stricken.
As to defendant Annette McCullough, we conclude that there is insufficient evidence that she engaged in any wrongful conduct in connection with the loans to plaintiffs and reverse the judgment as to her.
BACKGROUND
This case was tried to the court in two parts. The first part of the trial dealt with liability, compensatory damages, and liability for punitive damages; the second part dealt with the amount of punitive damages. The first part of the trial culminated in a 29-page statement of decision. As defendants, except for McCullough, do not challenge the sufficiency of the evidence of their wrongful conduct, we adopt the portions of the statement of decision on this issue as to all defendants except McCullough.
A. Trial: First Part
In order to build a custom home for their family, plaintiffs Isaac Martin, a carpenter, and his wife Lizzette took out a series of loans, secured by trust deeds against the property. Defendants were involved in funding or servicing the third loan and trust deed for $175,000 (the third loan), around which this lawsuit revolves. Brill claimed to have funded the third loan. After defendants failed to fund the third loan fully, plaintiffs were unable to complete the home and obtain refinancing to pay off defendants. Plaintiffs lost the property through foreclosure. The trial court’s compensatory damage award consisted primarily of plaintiffs’ loss of equity in the home.
According to the statement of decision, “defendants set out to hook Mr. Martin into trusting them, having had the intent from the very beginning to take his money and his home with lies, promises and outright fraud,” and “[t]he practice of defendants paying significantly lower dollar amounts than what was reflected on the loan security documents is predatory and despicable.” The court charged that defendants “knowingly came to court and testified to bold, brazen lies, presenting false and altered testimony to boot.”
McCullough did not testify at the first part of the trial.
The court determined that defendants funded only $60,213.59 of the third loan, notwithstanding the $175,000 face amount of the note, that the third loan was a “one-year balloon payment loan with interest prepaid, but defendants foreclosed prior to the one year being up. That foreclosure was wrongful.” Defendants also “defrauded plaintiffs in the calculation of interest on payments actually made.”
The court found that “the property was residential property and that the loans in this case were for construction of property to be occupied by the borrower Isaac Martin and his family. The court also finds that the loan documentation was altered by defendant after being signed by plaintiffs and fails to comply with disclosure requirements for residential loans, and thus the court finds [the third loan] to be void and null.”
In attempting to avoid foreclosure, plaintiffs transferred part interest in the property to individuals in bankruptcy, but the court found that plaintiffs were “misled by persons who claimed to be able to stop the foreclosure,” and that plaintiffs were “unaware that a bankruptcy would be initiated.” The court stated that “the deeds in favor of the foreclosure consultants are void as obtained by fraud and mistake, and are illegal, so as not to represent any setoff to the loss of equity suffered by plaintiffs, and that plaintiffs did not intend to transfer true beneficial ownership to these foreclosure specialists.”
Defendants were successful in lifting the bankruptcy automatic stays and defendant Harpaz acquired title to the property through a foreclosure sale. Four months later, in September 1999, the holder of the first and second trust deeds on the property foreclosed and obtained title. The court found that Harpaz, Private Investors Financing (of which Harpaz was president), and the holders of the first and second notes and trust deeds on the property (Ted Kolchier and Track Mortgage Group, Inc. (Track Mortgage)) “were closely intertwined in their operations and practices. They operated out of the same offices, were engaged in the same business, worked on the same property, for the same borrowers, shared fees on the same loans, transferred money back and forth between themselves in dealing with the same borrower, and generally co-mingled their business affairs.” The court also found that Harpaz, Brill, Private Investors Financing and Verdugo Development “were acting within a joint venture with respect to the funding and foreclosure of the Martin home, and that... Harpaz was held out so as to appear to be an agent of Private Investors Financing and... Brill; that Private Investors Financing was held out so as to appear to be an agent of... Brill.”
At the time of the notice of default and the foreclosure sale, “the Martin home had significant equity that could have funded refinancing of the property. Equity that was attractive to defendants as a further source of money to be obtained through these series of transactions.”
Ed Poulin, a licensed real estate agent, testified that in March 1999 (several months before the first foreclosure sale), the home was close to being completed.
After the foreclosure sale, Martin worked as a union carpenter, capable of earning “$4,500 to $5,500 per month in regular wage. He also built one house in seven or eight months[,] selling it for a profit of $104,000.00.” Thus, plaintiffs “could have been able to keep the house if defendants had not engaged in fraud. The financial resources of [plaintiffs] to keep the house included the monthly earnings of [Isaac Martin], the increasing equity in the house, the opportunity presented by either sale or development of the second lot on the property, and the houses [Martin] would reasonably be expected to build over the following years, each taken separately and/or all together, as well as the lower cost of financing once the construction financing is taken out. [¶] The court also finds that [Isaac Martin] would have completed the property but for defendants’ fraud in lending the money. The misconduct of defendants deprived plaintiff[s] of funds needed to complete the property, and required [them] to spend extra time and money seeking additional funds for completion.... [¶]... Plaintiff[s] had several takeout lenders who were unable to get [the] payoff amount from defendants, which tends to confirm [Isaac Martin’s] statement that defendants were trying to stop him from completing the house. Given the equity margin in the house, these lenders could be expected to have provided the takeout or permanent financing for the house. That lenders were interested in providing financing is seen by their persistent attempt to find out what the defendants as construction lenders wanted to close out their loans.”
Based on defendants’ wrongful refusal to provide the requested payoff demand information, the court decided that “it was exclusively defendants’ misconduct that prevented plaintiff[s] from obtaining refinancing. Nothing to the contrary has been established.”
The court noted that after foreclosure, defendants “took possession of the property and further destroyed it and made it unmarketable,” and that “there has not been adequate showing that any of the expenditures after foreclosure of the property were to protect the property... and are not subject to a setoff of the recovery by [plaintiffs].”
The court concluded that defendants were liable to plaintiffs on theories of (1) fraud and deceit, (2) broker and lender misconduct, (3) violation of the Consumer Legal Remedies Act, Civil Code section 1770, (4) intentional infliction of emotional distress, and (5) interference with prospective economic advantage.
As compensatory damages, the court awarded plaintiffs economic damages — the amount of equity they lost in the home, determined to be $958,000 — and noneconomic damages of $150,000 for the emotional distress suffered by Isaac Martin, for a total of $1,108,000.
As explained by the court, “This $958,000 loss of equity is substantially the same whether calculated in the loss of equity measured at the time of foreclosure with interest added from the date of foreclosure to the date of decision, or calculated on the value of the home today. Plaintiffs should be made whole, and defendants should not by their wrongdoing gain an advantage in calculating damages.” Thus, the court calculated the loss of equity under three separate methods, all of them with the same result:
1. Loss of Equity Based on Value at Time of Trial
Plaintiffs’ appraiser, Rodney Gresko, testified that if the house were completed, the property would be worth $1.4 or $1.5 million at the time of trial. The home was of good quality construction and was situated on 2.5 acres. The court used the midpoint of Gresko’s range of appraised values of the property, $1,450,000, and from that figure the court deducted the liens against the house that it had accepted as valid, namely the $300,000 first trust deed and the $85,000 second trust deed of Track Mortgage, and the $60,213.59 actually loaned by defendants in connection with the third trust deed, for a total of $445,213.59. Without explanation other than as “a cushion of additional monies,” the court also deducted another $46,786.41, to result in a loss of equity of $958,000.
Gresko also testified that in October 1998, he was hired by Private Investors Financing to appraise the property; if the property were completed in October 1998, it would have had an appraised value of $890,000. Ed Poulin, plaintiffs’ real estate agent, testified that in March 1999, he listed the property for sale at $899,950, but received no offers. In 2000, he listed the property for sale on behalf of Track Mortgage at $749,900, but also received no offers.
2. Loss of Equity Based on Value in October 1998
The trial court used an alternative means of valuation in which it began with the value of the house in October 1998 at $950,000, and then increased it by 10 percent until foreclosure in September 1999, for a value of $1.045 million. The court deducted the liens and loans in the amount of $445,213.59, leaving a value in September 1999 of $599,786.41. The court increased that value by 10 percent per year until September 2004, resulting in $965,962.01. The court then deducted another amount, which it characterized as a “cushion,” to arrive at the total equity loss of $958,000.
3. Entire Range of Testimony
As the third method of calculating the economic damages, the court stated that it “considers the entire range of testimony regarding the value of the property, the existence of various liens and other setoffs against that value, and then weighs and balances their uncertainties, risks and approximation, to conclude that the best estimate of the value of the loss of equity in the Martin house as of February 2, 2004, was $958,000.”
With respect to punitive damages, the court found that defendants “deliberately and repeatedly lied about making $85,000 in cash payments [under the third loan] knowing that it would cause plaintiffs to lose their family home, was done with malice and was intended by defendants and each of them to cause injury and harm to plaintiffs.”
B. Trial: Second Part (Amount of Punitive Damages)
In the second part of the trial in January 2005, McCullough testified that in December 1996, she became broker of record for Private Investors Financing, but her agreement was to supervise only loans by institutional lenders, not private loans such as in this case. In 1997 and 1998, McCullough was not aware that Private Investors Financing was making private loans; she disaffiliated herself with Private Investors Financing in 2004.
Brill testified that he earned approximately $13,000 per year in his nut distribution business; he was then in poor health, with a leaking heart valve. Brill owned Verdugo Development, but the business was run by Harpaz. Verdugo Development had gross receipts of $297,000 in 2002 and $90,000 in 2003; Verdugo’s tax returns listed mortgages on its property totaling about $1.3 million.
Harpaz and his family lived with Brill, Harpaz’s brother-in-law, in a large home whose ownership was the subject of litigation. Harpaz filed a chapter 7 bankruptcy in 1995 and a chapter 13 bankruptcy in 1996. Harpaz was then employed and earning about $3,900 per month. Private Investors Financing, owned by Harpaz and his wife, was then in chapter 7 bankruptcy.
The court issued an order assessing punitive damages, providing in pertinent part that because defendants in the first part of the trial “submit[ed] false documents and alleg[ed] large unreported amounts of cash payments, no testimony by the defendants regarding their wealth is credible or worthy of belief.” Without any finding as to each defendant’s financial condition, the court assessed punitive damages of $2.5 million against Harpaz, $1.5 million against Brill, $100,000 against McCullough, and $2.5 million against both Private Investors Financing and Verdugo Development.
After their motions for a new trial were denied, defendants appealed from the judgment. McCullough challenges the liability finding against her and joins in the contentions made by the other defendants. Harpaz, Brill, Private Investors Financing, and Verdugo Development challenge the awards of compensatory and punitive damages and the calculation of prejudgment interest.
DISCUSSION
A. McCullough
There is merit to McCullough’s contention that there is insufficient evidence of her liability in this action because she was not involved in the Martin transaction in any capacity and her agreement with Private Investors Financing obligated her to act as broker of record only on institutional loans and not on privately placed loans such as the third loan. Accordingly, the judgment as to McCullough is reversed.
B. Harpaz, Brill, Private Investors Financing, and Verdugo Development
1. Compensatory Damages
Defendants contend that the trial court incorrectly used the “benefit-of-the bargain” measure of damages and that plaintiffs were limited to their “out-of pocket-damages,” which were “zero,” because they did not repay the third loan. Although defendants correctly point out that the general rule in California is that a defrauded party is ordinarily limited to recovering his out-of-pocket loss (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240), they fail to acknowledge, as explained in Strebel v. Brenlar Investments, Inc. (2006) 135 Cal.App.4th 740, 748 (Strebel), that there is no fixed rule for the measure of tort damages for fraud under Civil Code section 3333 (section 3333) and that there is a split of authority regarding the proper measure of damages under section 3333 and Civil Code section 1709 (section 1709).
Section 3333 provides: “For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”
“‘Tort damages are awarded to fully compensate the victim for all the injury suffered. [Citation.] There is no fixed rule for the measure of tort damages under Civil Code section 3333. The measure that most appropriately compensates the injured party for the loss sustained should be adopted.’ [Citation.]” (Strebel, supra, 135 Cal.App.4th at p. 749.) Some appellate courts have held that the measure of damages under sections 1709 and 3333 is “‘substantially the same as that for breach of contract prescribed by section 3300, i.e., it tends to give the injured party the benefit of his bargain and insofar as possible to place him in the same position he would have been [in] had the promisor performed the contract.’ [Citations.] Others, however, have concluded that the out-of-pocket rule should apply. [Citations.]” (Strebel, at p. 748.)
“Sometimes, however, neither the out-of-pocket nor benefit-of-the-bargain measure is particularly helpful or appropriate. ‘We often look upon the out of pocket rule and the benefit of the bargain rule as being the sole antagonists on the battlefield of damages when at times neither is truly applicable.’ [Citation.] Such is the case here.” (Strebel, supra, 135 Cal.App.4th at p. 748.)
Strebel, a homeowner, sought fraud damages from a real estate broker who induced him to sell his existing home and to enter into a contract to buy a new home in Sonoma County without disclosing that the new home was unsalable due to tax liens. “Strebel asserted that he was injured because defendants’ fraud caused him to sell his San Bruno house sooner than he would otherwise have done, rendering him unable to purchase a replacement home before housing values substantially increased.... The resultant harm was a decrease in the buying power of the proceeds of his San Bruno house in a rapidly appreciating housing market. In the words of Strebel’s attorney in closing argument, ‘All we’re asking for here is for him in effect to get enough money to now buy something comparable to the [Sonoma] property in today’s market. That would be the net effect of what we’re asking for, which would in a sense put him back to where he was back in 1999.’ In permitting the jury to consider lost appreciation, the trial court properly determined that the jury could reasonably find this element necessary to compensate Strebel for the injury caused by defendants’ concealment. Under the circumstances shown by the evidence, the jury was entitled to find the recovery of the lost appreciation was reasonable compensation for Strebel’s inability to purchase an acceptable home in Sonoma concurrently with the sale of his San Bruno house.” (Strebel, supra, 135 Cal.App.4th at pp. 749–750.)
As explained by the Strebel court, “Strebel’s damages cannot be measured in terms of out-of-pocket loss or contractual benefits and expectations. Unlike the more common situation in which the actionable fraud relates to the value of the property being sold or exchanged [citations], the facts that were fraudulently concealed here had nothing to do with the value of the... properties.... The question is not whether Strebel is entitled to his out-of-pocket losses or to the benefit of his bargain, but whether the amount by which the value of his San Bruno home appreciated after he sold it is a reasonable measure of the harm he suffered as a consequence of defendant’s fraud.” (Strebel, supra, 135 Cal.App.4th at pp. 748–749.) The court thus upheld the award of appreciation damages based on the value of the San Bruno home at the time of trial rather than at the time of the sale of the property which he had been fraudulently induced to sell because “measuring Strebel’s damages at the time of the sale would provide no compensation for the most significant portion of the loss he suffered as a result of defendants’ fraud.” (Id. at p. 750.) The court in Strebel also affirmed loss of use damages measured by the “loss of the use of his San Bruno home between the sale and the time of trial,” which was measured by subtracting Strebel’s costs of living in his San Bruno home from the market rent for a similar home. (Id. at p. 754.)
Strebel is instructive here because both Strebel and plaintiffs lost homes through fraud, and measuring damages based on loss of appreciation is similar to measuring damages based on loss of equity. We conclude that the trial court properly permitted plaintiffs to recover damages for the loss of equity in their home based on the value at the time of trial because it is a reasonable measure of the harm they suffered as a consequence of defendants’ fraud. The trial court expressly found that plaintiffs “could have been able to keep the house if defendants had not engaged in fraud,” and that they “would have completed [construction on] the property but for defendants’ fraud in lending the money.” Accordingly, the trial court properly permitted plaintiffs to recover damages for loss of equity.
We also conclude that substantial evidence supports the finding, based on Gresko’s opinion, that the property had a value at time of trial of $1,450,000, and that the economic damage award was properly calculated by the trial court based on the method set out above in part A.1. of the Background section. Defendants maintain that because Gresko was not a “designated expert witness,” he was not qualified to express an opinion on value. But defendants do not point to any evidence showing a demand to exchange lists of experts, and, if so, that Gresko was not designated. Defendants also do not claim that Gresko was not qualified to express an opinion on value. Thus, their arguments as to Gresko are without merit.
Because we have concluded that economic damages were properly awarded for the loss of equity based on the value of the property at the time of trial (see part A.1. of the Background section), we need not address defendants’ arguments pertaining to the two other methods of valuation set out in the statement of decision.
Defendants maintain that plaintiffs sustained no damages because they had no equity in the property due to the outstanding liens. But this point is without merit as it is based on defendants’ own assessment of the validity and amount of the liens, which is contrary to the trial court’s assessment of validity and amount. In any event, the trial court did afford defendants a setoff for the $60,213.59 funded under the third loan as well as for two loans by Track Mortgage.
Without merit is defendants’ assertion that the damage award must be offset because plaintiffs owned only an 88 percent interest in the property, having conveyed away a 12 percent interest to others in order to stave off foreclosure. In a related argument, defendants contend that the trial court lacked jurisdiction to determine the deeds of third parties were void because these third parties were not before the court and the complaint did not seek to have these third party deeds voided.
The arguments are without merit. The interests of the third parties in the property, as well as plaintiffs’ interests, were presumably lost in the foreclosure sale, which is not at issue in this case. The discussion in the statement of decision relating to the third party deeds was not for the purpose of settling or quieting title to the property, which is not at issue here; rather, the discussion was directed to the issues of damages and setoff. As explained in the statement of decision, plaintiffs’ dealings with the foreclosure consultants “were caused and precipitated by defendants’ misconduct in handling the loans and foreclosure against [plaintiffs’] home, and thus defendants are responsible for any costs or harm incurred thereby. The court further finds that the deeds in favor of the foreclosure consultants are void as obtained by fraud and mistake, and are illegal, so as not to represent any setoff to the loss of equity suffered by plaintiffs....”
With respect to the award for emotional distress damages, defendants’ only argument is that “because the Martins suffered no financial injury, no emotional distress damages are permissible.” But we have upheld the economic damage award, so this point is not well taken.
For all of the above reasons, the compensatory damage awards against Harpaz, Brill, Private Investors Financing, and Verdugo Development are affirmed.
2. Punitive Damages
Defendants correctly argue that the punitive damage awards must be stricken. The record lacks evidence of defendants’ net worth, and it is thus insufficient to determine their financial conditions or abilities to pay punitive damages. (Kelly v. Haag (2006) 145 Cal.App.4th 910, 916–917.)
3. Prejudgment Interest
The trial court used a 10 percent interest rate to calculate prejudgment interest on both the compensatory and punitive damage awards. Because the punitive damages will be stricken, the prejudgment interest awards based thereon also must fall.
Defendants correctly maintain that because plaintiffs recovered compensatory damages on tort theories and not for breach of contract, their prejudgment interest is limited to 7 percent from February 4, 2004, the date the trial court assessed the damages, to September 21, 2007, when the judgment was entered.
“[T]he California Constitution provides for prejudgment interest at 7 percent per annum. (Cal. Const., art. XV, § 1.) However, Civil Code section 3289 provides that the legal rate of interest chargeable after the breach of a contract which does not stipulate an interest rate is 10 percent per annum.” (Pro Value Properties, Inc. v. Quality Loan Service Corp. (2009) 170 Cal.App.4th 579, 582–583.)
On remand, the trial court is to recalculate the prejudgment interest on compensatory damages using the 7 percent rate. Inasmuch as this recalculation appears to be a ministerial act, the parties are invited to stipulate to the proper amount of interest. (Los Angeles National Bank v. Bank of Canton (1995) 31 Cal.App.4th 726, 746.)
DISPOSITION
The judgment against defendant Annette McCullough is reversed, and on remand the trial court is directed to enter a judgment in favor of Annette McCullough and against plaintiffs Isaac and Lizzette Martin.
That portion of the judgment against defendants Yair Harpaz, Itchak Brill, Private Investors Financing, Inc., and Verdugo Development, Inc., awarding punitive damages and prejudgment interest is reversed, and on remand the trial court is directed to (1) strike the punitive damage awards and the prejudgment interest thereon and (2) recalculate the amount of prejudgment interest on the compensatory damage awards. In all other respects the judgment as to Yair Harpaz, Itchak Brill, Private Investors Financing, Inc., and Verdugo Development, Inc., is affirmed.
The defendants are to bear their own costs on appeal.
We concur: ROTHSCHILD, J., MILLER, J.
Judge of the Los Angeles Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
Section 1709 provides: “One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damages which he thereby suffers.”