Opinion
8-19-1958
William R. WARD and Bert W. Martin, Plaintiffs and Respondents, v. Marshall W. TAGGART and H. M. Jordan, Defendants and Appellants. * Civ. 22884.
James C. Blackstock and Felix H. McGinnis, Los Angeles, for appellants. Chandler P. Ward, Los Angeles, for respondents.
William R. WARD and Bert W. Martin, Plaintiffs and Respondents,
v.
Marshall W. TAGGART and H. M. Jordan, Defendants and Appellants. *
Aug. 19, 1958.
Hearing Granted Oct. 15, 1958.
James C. Blackstock and Felix H. McGinnis, Los Angeles, for appellants.
Chandler P. Ward, Los Angeles, for respondents.
ASHBURN, Justice.
The facts of this case, now before us on rehearing, are set forth in the former prevailing opinion (325 P.2d 502, 504) as follows: 'This is an appeal by the defendants from a money judgment in favor of the plaintiffs growing out of a real estate transaction. Plaintiffs, William R. Ward and Bert W. Martin, are purchasers of certain real property; defendants are a real estate broker and his employee, both of whom were instrumental in effecting a sale of the property to plaintiffs. 'The essential facts alleged in the complaint and proved at the trial are as follows: 'Prior to the transaction in question plaintiff Ward had asked Leroy Thomsen, a real estate broker, to look for properties which Ward might be interested in purchasing. In February, 1955, Thomsen visited defendant Taggart concerning unrelated matters and during conversation Taggart informed Thomsen that as exclusive agent for the owner, Sunset Oil Company, he had for sale several acres of real property in Los Angeles County. A general discussion concerning the location and nature of the property ensued, Thomsen stating that he had a client who might be interested in acquiring the property. Thomsen mentioned to Taggart that a broker named Dawson had a 'for sale' sign on the property; Taggart replied that Sunset had taken the listing away from Dawson. 'Thereafter, Thomsen submitted an offer on behalf of Ward to Taggart relating to seven acres in the tract. Taggart promised to submit the offer to Sunset. Taggart later reported that such offer was rejected by Sunset because of a large blanket mortgage. Ward then directed Thomsen to make an offer of $4,000 per acre for the entire property. Thomsen submitted this offer to Taggart, who promised to take it up with Sunset and report back. Taggart later told Thomsen that Sunset had refused the offer and that the least it would take for the property was $5,000 per acre, one-half in cash. Thomsen conveyed the information to Ward and Ward told Thomsen to make an offer on the that basis. Thomsen submitted this offer in writing, accompanied by Ward's check for $2,000, to Taggart on March 18, 1955. At Taggart's direction, Thomsen inserted in the written offer provision for payment by Sunset of a ten per cent commission which Taggart and Thomsen agreed to divide equally. On the following day Thomsen advised Ward of the commission arrangement and he was agreeable. 'Thomsen contacted Taggart respecting the $5,000 per acre offer three or four times during the following two weeks. On March 31 Taggart informed Thomsen that Sunset had accepted Ward's offer. Thomsen met with Taggart and the latter presented proposed escrow instructions in which defendant Jordan was named as seller acting for Taggart, who was designated as the real principal in the transaction. Taggart then informed Thomsen that he was to be the principal to enable him to 'clear up the Dawson exclusive listing' as well as certain blanket mortgages on the property. Thomsen told Ward of this when he submitted the escrow instructions to him. Ward asked why Jordan was to be the payee of the notes and beneficiary of the trust deeds. Thomsen related that Taggart had said that such was necessary because of certain tax and other problems of Sunset, and that the trust deeds would be turned back to Sunset after the escrow. The property conveyed to plaintiffs consisted of 72.0492 acres. The full purchase price which plaintiffs paid for the property was $360,246. 'It was not until after they had purchased the property that plaintiffs learned the following facts: Taggart had never been given a listing by Sunset on the property in question. Taggart never presented to Sunset, and never intended to present plaintiffs' offers of $4,000 per acre and $5,000 per acre. Instead Taggart presented to Sunset his own offer of $4,000 per acre, half in cash, and it was accepted. Taggart misrepresented to plaintiffs that the least Sunset would take for the property was $5,000 per acre; he intended to purchase the property from Sunset himself and resell it to plaintiffs at a profit of $1,000 per acre. All of Taggart's statements to Thomsen concerning Sunset's reason for handling the sale in so unusual a manner were fabrications. Taggart never disclosed to Sunset that he had an offer from Ward until after the escrow papers had been signed. All of the moneys used by Taggart to pay Sunset the purchase price were derived wholly from the Ward escrow. 'Plaintiffs commenced this action on August 25, 1955. The case was tried without a jury, and the court rendered judgment against both defendants for $72,049.20 compensatory damages, and awarded exemplary damages of $36,000 against defendant Taggart individually. The judgment also enjoined defendants from transferring certain notes and trust deeds which plaintiffs had given them, and ordered defendants to discharge said notes and trust deeds, thereby reducing the amount of the judgment. Defendants have appealed.'
We ruled that plaintiffs' complaint alleges and the proof supports a finding of fraud in the form of deceit practiced by defendant Taggart upon plaintiffs; but there is no allegation or proof that the land purchased by plaintiffs was worth less than the amount paid and hence no showing of damage such as required by § 3343, Civil Code; the allegation of fiduciary relationship between plaintiffs and defendants was not sustained by the evidence and plaintiffs' theory of recovery of damages (not measured by § 3343) for violation of such a relationship could not prevail. But we further ruled that, as Taggart was not the agent of Sunset or of plaintiffs and so far as appears did not defraud Sunset, the secret profit he made belonged in equity and good conscience to plaintiffs who had been defrauded, and that they could recover to the extent of defendants' unjust enrichment, in quasi contract but not in tort. Accordingly the majority of the court struck out the award of exemplary damages and affirmed the judgment in a reduced amount. We differed as to the allowance of certain credits to defendant, the majority holding that he was entitled to no deductions whatever except the amount he actually paid for the land, $4,000 an acre. We agreed that defendant Jordan had not been unjustly enriched and accordingly reversed the judgment as to her.
We granted a rehearing primarily because of the insistence of counsel for both sides that in modifying and affirming the judgment we had adopted and applied a legal theory which was not merely different from that pursued by plaintiffs in the trial court, but was one which plaintiffs had expressly disavowed both in the trial court and in their briefs on appeal. Upon further consideration, we have concluded that there is merit in the contention that this is not a proper case for directing the entry of judgment in a different amount and upon a legal theory which was never canvassed in the court below.
Counsel call our attention to the fact that cases such as Panopulos v. Maderis, 47 Cal.2d 373, 303 P.2d 738, and American Automobile Ins. Co. v. Seaboard Surety Co., 155 Cal.App.2d 192, 318 P.2d 84, do not sanction a departure by the reviewing court from the theory pursued below in cases where the evidence is in substantial conflict.
In Panopulos it is said, 47 Cal.2d at page 340, 303 P.2d at page 740: 'It is the general rule that a party to an action may not, for the first time on appeal, change the theory of the cause of action. [Citations.] There are exceptions but the general rule is especially true when the theory newly presented involves controverted questions of fact or mixed questions of law and fact. If a question of law only is presented on the facts appearing in the record the change in theory may be permitted. [Citation.] But if the new theory contemplates a factual situation the consequences of which are open to controversy and were not put in issue or presented at the trial the opposing party should not be required to defend against it on appeal.' In American Automobile Ins. Co. at page 200 of 155 Cal.App.2d, at page 89 of 318 P.2d: 'If it be said that the views herein expressed depart from the theory upon which the case was tried the answer is that the rule confining the parties upon appeal to the theory pursued below does not apply to a question which is one of law only [citations], and that an appellate court is never bound by concessions of counsel as to the applicable law [citation] or by the interpretation of documents made by the trial court upon the basis of the terms of the written instrument without the aid of other evidence [citations]. There was no evidence at bar except the written indemnity agreement; other matters were covered by admission of the pleadings or the briefs.' Barrera v. De La Torre, 48 Cal.2d 166, 172, 308 P.2d 724, 728: 'However, the new legal theory in the Panopulos case presented only a question of law on undisputed facts, and it was deemed appropriate to pass upon its merits as a further basis for affirmance of the judgment. Here plaintiffs not only dispute defendant's version of the facts but, in addition, they advance this new theory of trespass as ground for reversal of the judgment for defendant. Such change of theory by an appellant cannot be permitted.' See, also, Townsend v. Wingler, 114 Cal.App.2d 64, 68, 249 P.2d 613.
This is not a case of uncontradicted evidence. While appellant Taggart's counsel concedes the sufficiency of the evidence to support upon appeal the finding of fraud, he does not concede the fact of fraud. The transcript exceeds 500 pages and the change of theory conceived by this court does not present a question of law only; on the contrary it 'contemplates a factual situation the consequences of which are open to controversy and were not put in issue or presented at the trial,' and we cannot say in the instant case 'that probably no different showing could be made on a new trial.' Quoting Panopulos, supra.
As we have concluded that this is not a proper case for direction of a new judgment or, what is its equivalent, reduction of amount and affirmance upon a legal theory which was never canvassed below, the cause should be reversed generally, thus affording both parties full opportunity to present all the facts applicable to the theory upon which we find it possible for plaintiffs to recover, assuming the evidence to be the same as shown by the instant record. Though their counsel upon oral argument disclaimed any intention to embrace the theory adopted by this court, plaintiffs should have leave to amend their complaint to rely upon the same if so advised.
We adhere to the view that the judgment at bar is not sustainable as a recovery of damages for a tortious violation of duties arising from a fiduciary relationship. Upon the pleadings as now framed and upon the evidence as presented in the record before us the only sustainable recovery would have to be premised upon the theory of unjust enrichment and its amount would have to be measured in terms of unjust enrichment.
Taggart was not the agent of Sunset Oil Company, the owner of the land. So far as appears, he did not defraud that company. Any secret profit obtained by him did not belong to Sunset. It was plaintiffs who were defrauded and entitled to any appropriate remedy therefor. They elected not to sue for damages on the theory of recovery under § 3343, Civil Code, i. e., the difference between the price paid and the value of the land received for it. They have not advanced the claim at any stage of the case that the land was worth less than they paid for it. Their complaint and their briefs on appeal rest upon the theory that Taggart's working a fraud upon plaintiffs created a confidential relationship between them and entitled plaintiffs to damages for violation of the obligation of a difuciary. Of course, the making of successful false representations to a buyer does not create a fiduciary relationship; but its result may be, at the election of the defrauded party, the imposition upon the wrongdoer of the obligations of a constructive trustee (Civ.Code, § 2224). This is the result of the fraud; it does not antedate its accomplishment. The Restatement of the Law of Restitution, § 160, comment a, page 641, says: 'The term 'constructive trust' is not altogether a felicitous one. It might be thought to suggest the idea that it is a fiduciary relation similar to an express trust, whereas it is in fact something quite different from an express trust. An express trust and a constructive trust are not divisions of the same fundamental concept. They are not species of the same genus. They are distinct concepts. A constructive trust does not, like an express trust, arise because of a manifestation of an intention to create it, but it is imposed as a remedy to prevent unjust enrichment. A constructive trust, unlike an express trust, is not a fiduciary relation, although the circumstances which give rise to a constructive trust may or may or not involve a fiduciary relation.'
Through fraud defendant received money belonging to plaintiffs (not Sunset Oil Company) and plaintiffs have elected to recover in an action which we hold properly to be based upon a contract or trust implied in law, not in fact,--one which rests ultimately upon the doctrine of unjust enrichment. The tort is thereby waived; the action proceeds on contract. Crogan v. Metz, 47 Cal.2d 398, 404, 303 P.2d 1029.
McCall v. Superior Court, 1 Cal.2d 527, 532, 36 P.2d 642, 645, 95 A.L.R. 1019: 'But in assumpsit, where the tort is waived, the sum sued for is the benefit unjustly retained by the defendant; not the damage to the plaintiff, usually more uncertain in amount.'
French v. Robbins, 172 Cal. 670, 679, 158 P. 188, 191: 'The foundation of the action of assumpsit, where property of plaintiff has been wrongfully taken and sold by the defendant, is the unjust enrichment of the wrongdoer. Keener on Quasi Contracts, p. 160. It is well settled that in order to recover in such an action the plaintiff must show that a definite sum, to which he is justly entitled, has been received by the defendants. 'As the amount of the plaintiff's recovery is limited to the proceeds received by the defendant, it will be fatal to this form of action that the amount is not ascertainable.'
These principles rule out the recovery of exemplary damages. That is the holding of Crogan v. Metz, supra, 47 Cal.2d 398, 405, 303 P.2d 1029. See, also, Steiner v. Rowley, 35 Cal.2d 713, 720, 221 P.2d 9; Squire's Dept. Store, Inc., v. Dudum, 115 Cal.App.2d 320, 325, 252 P.2d 418; Fordson Coal Co. v. Kentucky River Coal Corporation, 6 Cir., 68 F.2d 131; Hilderbrand v. Anderson, Mo.App., 270 S.W.2d 406, 410.
In our opinion it would be unjust and erroneous to allow defendant Taggart only the sum of $4,000 an acre (a total of $288,196.72) as the basis for measuring his liability for restitution of unjust enrichment. Restatement of the Law of Restitution, § 160, comment d, page 643: 'Unjust enrichment and unjust deprivation. In most cases where a constructive trust is imposed the result is to restore to the plaintiff property of which he has been unjustly deprived and to take from the defendant property the retention of which by him would result in a corresponding unjust enrichment of the defendant; in other words the effect is to prevent a loss to the plaintiff and a corresponding gain to the defendant, and to put each of them in the position in which he was before the defendant acquired the property.'
As indicated by the quotations from French v. Robbins, supra, and McCall v. Superior Court, supra, the plaintiff who sues in assumpsit growing out of fraud or other tort recovers only such sum or property as belongs to him in equity and good conscience; at this point the fraud has spent its force and the idea of punishment is out. The rule is thus stated in 58 C.J.S. Money Received § 33, page 947: 'In an action for money had and received the plaintiff is entitled to recover such sum, and only such sum, as in equity belongs to him, in no event exceeding the sum actually received for his use by the defendant or the amount sued for, which interest.'
The cases do not sustain the disallowance of all expenditures made by Taggart regardless of whether they would have been incurred in consummating a legitimate transaction. All of us agree that he should have credit for the $4,000 per acre paid for the land. In the opinion of the majority the line of demarcation is this: That defendant is entitled to a deduction of the entire cost to him of the transaction except those items which were incurred as a means of accomplishing his fraud.
That the foregoing reasoning is sound is supported by the authorities. Schwarting v. Artel, 40 Cal.App.2d 433, 105 P.2d 380, was decided by this court and hearing denied. It was an action to recover a secret profit made by plaintiff's agent. Artel, the agent, had included in an exchange of properties between his principal, Schwarting, and one Hartman, an Inglewood bungalow belonging to himself and thereby had reaped a secret profit. At page 441 of 40 Cal.App.2d, at page 384 of 105 P.2d the court said: 'In those cases where an agent has secretly profited, as a matter of course, to the end that equity be done to all parties, he is entitled to be reimbursed for any portion of the purchase money advanced by him and for all expense necessarily incurred by him in protecting and conserving the property of his principal. 3 C.J.S. Agency § 140, p. 14. Under this hypothesis, Artel is entitled to be reimbursed in the amount of $2,000, the value of his said Inglewood bungalow, which he utilized in effectuating said exchange for Schwarting.'
In Kinert v. Wright, 81 Cal.App.2d 919, 185 P.2d 364, also decided by this division, it was said concerning the measure of recovery in a secret profit case: 'Respondent received $1,200 from appellants, asserting that the small tract selected by them could be purchased for that sum and falsely representing that it was free and clear of encumbrances. He paid $500 for the large parcel of land. The finding is that in his accounting he claimed to have paid $120 as commission. There is no finding that the commission was not paid, the evidence is not before us, and appellants do not dispute the claim. Allowing respondent his full due he is entitled to credit for $620 and appellants should recover the difference between that sum and the amount entrusted to him amounting to $580.' 81 Cal.App.2d at pages 927-928, 185 P.2d at page 369. In the same case the agent was disallowed an item of $160 which had been incurred for costs and attorney fees in an action concerning delinquent taxes upon property purchased by him for his principal because 'the expenditures made by him were in pursuance of his 'scheme to obtain a secret profit' at appellants' expense.' 81 Cal.App.2d at page 923, 185 P.2d at page 367. At page 926, of 81 Cal.App.2d, at page 368 of 185 P.2d: 'Though respondent was appellants' agent when their relationship began he became their trustee when he took title to the property in his own name, using their money with which to make the purchase.' At page 927, of 81 Cal.App.2d, at page 369 of 185 P.2d: 'The fraud and deception of respondent deprive him of the right to repayment of his expenditures for attorney's fees in the tax suit and for other purposes in connection with the property. Section 2273 of the Civil Code provides that a trustee is entitled to reimbursement out of the trust property of all expenses actually and properly incurred by him in the performance of his trust. This rule is applicable only when the trustee has conducted the affairs of the trust honestly, has dealt fairly with his beneficiary, and has not attempted to make a secret profit for himself out of the trust property or otherwise to deceive and defraud those who entrusted him with their business. An involuntary trustee who becomes such through his own fault is not entitled to reimbursement. Civ.Code, sec. 2275; Title Insurance & Trust Co. v. California Dev. Co., 171 Cal. 173, 220, 152 P. 542; Marsh v. Smith, 46 Cal.App. 692, 699, 189 P. 1037. The beneficiary 'is under absolutely no obligation to repay these outlays.' McArthur v. Goodwin, 173 Cal. 499, 505, 160 P. 679, 682.' This case seems to recognize an important distinction here applicable, namely, that legitimate expenses incurred in acquiring the property for the principal are credited to the agent, but those concerned with its maintenance or protection which are incurred after the constructive trust has arisen are not allowed. The cases of McArthur v. Goodwin, 173 Cal. 499, 504, 160 P. 679, and Title Insurance & Trust Co. v. California Dev. Co., 171 Cal. 173, 220, 152 P. 542 (cited by respondents), fall within the purview of § 2275, Civil Code: 'An involuntary trustee, who becomes such through his own fault, has none of the rights mentioned in this Article.' In other words, they have to do with expenses of management or protection of property which has already become the subject of a constructive trust in the hands of defendant. Both cases apply Civil Code, § 2275, and are not controlling here.
Such evidence upon the subject of legitimate expenses of acquiring the property for plaintiffs as is now before us was received incidentally in the canvassing of other issues. We should not attempt now to evaluate it but should leave the subject open for full exploration upon a new trial.
Concerning the question of defendant Jordan's liability, we repeat what was said in the previous opinion [325 P.2d 508]: 'Even though Jordan willingly allowed her name to be used in the dual escrows, she did not share in the illicit profit which Taggart obtained. In each escrow transaction it was indicated that Jordan was merely acting for Taggart, who was designated as the real principal. The evidence establishes that Jordan turned over all that she received to Taggart, her employer. Under these circumstances it is clear that defendant Jordan cannot be held liable as an involuntary trustee. One cannot be deemed an involuntary trustee of something which he has not acquired. Civil Code section 2224 applies only to those who have made the wrongful acquisition. Since it was Taggart alone who obtained the illicit profit, he alone can be required to hold that profit as an involuntary trustee for the benefit of plaintiffs. Therefore, the judgment must be reversed as to defendant Jordan.'
The judgment is reversed as to both defendants with instructions to the lower court to permit plaintiffs to amend their complaint if so advised.
HERNDON, J., concurs.
FOX, Presiding Justice (concurring and dissenting).
While I concur in the majority opinion with respect to the applicable theory of liability, the ruling concerning punitive damages and the reversal of the judgment against the defendant Jordan, I must dissent from the majority's decision that a retrial is necessary. I also disagree with the majority's view that Taggart is entitled to be credited with more than the $4,000 per acre that he paid Sunset for the property.
In my opinion the judgment against Taggart should be modified by striking the award of punitive damages therefrom, and as so modified the judgment should be affirmed.
In their complaint the plaintiffs set forth in detail the facts on which they based their right to recover. Their evidence established all these facts except that a fiduciary relationship existed between Taggart and plaintiffs. Although founded upon a tort, the instant case is not truly a tort action even though both counsel may have treated it as such. The facts which plaintiffs pleaded and proved sustain the judgment on the theory of involuntary trust, but not on the theory of tort. The only difference between the theory which this court holds to be applicable and the theory proceeded upon below is the nature of the duty breached and the type of relief flowing therefrom. The trial court found that Taggart assumed and breached a fiduciary duty. We find that Taggart breached a duty different from that of a fiduciary. These duties, however, are similar in many respects. Even excluding the finding of a breach of fiduciary duty, the facts found by the trial court sustain plaintiffs' right to recover the profits which Taggart acquired as a result of his fraudulent conduct. Thus, there is no question as to plaintiffs' right to recover under the facts pleaded and proved; the only question has to do with the precise legal theory upon which such recovery should be founded. Under such circumstances the rule confining a case on appeal to the theory pursued below does not apply. Panopulos v. Maderis, 47 Cal.2d 337, 341, 303 P.2d 738; American Automobile Ins. Co. v. Seaboard Surety Co., 155 Cal.App.2d 192, 200, 318 P.2d 84; 3 Cal.Jur.2d, Appeal and Error, § 142, p. 609. In my opinion, the legal theory which this court has applied does not contemplate any factual situation different from that established by the evidence in the trial court. Taggart had a full opportunity, in a trial that lasted several days, to present, and apparently did present, his version of the transaction here involved. He does not suggest any new evidence that he could present upon a new trial. The evidence which Taggart presented below was not sufficient to dissuade the court from concluding that plaintiffs had established facts sufficient to entitle them to recover. Those same facts support plaintiffs' recovery on the theory here applied. Taggart has had his day in court on these factual issues; hence I feel a retrial is unwarranted. It would simply entail unnecessary delay and additional expense.
I do not believe Taggart is entitled to credit for any expenses he incurred in consummating his fraud. Because of his acts the law deems him an involuntary trustee of the funds wrongfully acquired. 'An involuntary trustee who becomes such through his own fault is not entitled to reimbursement.' Kinert v. Wright, 81 Cal.App.2d 919, 927, 185 P.2d 364, 369; see, also, McArthur v. Goodwin, 173 Cal. 499, 504-505, 160 P. 679; Title Ins. & Trust Co. v. California Dev. Co., 171 Cal. 173, 220, 152 P. 542. This is in accord with the principle enbodied in Civil Code, section 2275. The expenses which Taggart incurred were a direct result of his fraudulent acts; if he had acted properly, they would not have accrued to him. 'No equity is acquired through fraud.' Marsh v. Smith, 46 Cal.App. 692, 700, 189 P. 1037, 1040. Moreover, assuming that Taggart had committed no fraud and that plaintiffs had purchased the property from Sunset, it is uncertain whether plaintiffs or Sunset would have paid Thomsen's commission. It may well be that Sunset would have been willing to pay this commission even though plaintiffs were purchasing the property for $4,000 per acre. It is not unreasonable to assume that Taggart would be quick to make concessions in his dealings with Sunset in light of the large profit which he expected to acquire. Since the court could but speculate as to whether plaintiffs would have had to bear this expense in the absence of Taggart's fraud, justice requires that Taggart bear it rather than plaintiffs. The same may be said of the other expenses for which Taggart seeks credit; plaintiffs may well have not incurred these expenses even in the absence of Taggart's misconduct. Because of the uncertainty as to whether plaintiffs would have been required to bear any of these expenses in the absence of any fraud, and because this uncertainty was caused by Taggart's own fraud, it would be unreasonable for the court to allow Taggart to deduct any of these expenses from plaintiffs' recovery.
Thus the judgment against Taggart should be modified simply by eliminating the award of exemplary damages therefrom and affirmed as so modified. --------------- * Opinion vacated 336 P.2d 534.