Opinion
H029470
5-30-2007
AGUSTIN ZARATE, Plaintiff and Appellant, v. CENTURY 21 SU CASA et al., Defendants and Respondents.
NOT TO BE PUBLISHED
Plaintiff Agustin Zarate sued defendants, Century 21 Su Casa, Bic Pho, and Phuong Bui on claims related to plaintiffs purchase of real property in 2002. The trial court found defendants liable for negligence and breach of fiduciary duty and awarded plaintiff damages of $5,506.45. Plaintiff appeals. He argues that the trial court used the wrong rule to measure his damages. We shall affirm.
Additional named defendants are not parties to this appeal.
I. FACTUAL AND PROCEDURAL BACKGROUND
We take a large part of our recitation of the facts from the trial courts statement of decision, which plaintiff accepts as an accurate description of the facts of the case.
Plaintiff purchased a four-unit apartment building for $575,000 in June 2002. The property was one of 92 units in a high-crime area of San Jose. All 92 units were subject to a permanent court injunction requiring the property owners to comply with local building ordinances and to pay for an onsite property management company. Plaintiff operated the property for about two years. During those two years he made repairs to bring the property into compliance with the building codes, performed general maintenance of the property, paid the taxes, and purchased insurance. He also paid the property management fees required by the injunction. During the period of plaintiffs ownership the property generated a negative cash flow of approximately $ 1,000 per month. Plaintiff sold the property in May 2004.
Plaintiff claimed that the existence of the permanent injunction was not disclosed to him prior to the close of escrow. He sued Bui, his agent in the transaction, Pho, Buis broker, and the Century 21 office with which they were both affiliated. Plaintiff alleged that Bui should have discovered the existence of the injunction and informed him of its requirements. He claimed that he would not have purchased the property had he known about the injunction.
The matter was tried to the court. On the issue of damages plaintiff showed that he had paid $575,000 for the property in 2002, that he sold it for $600,000 in 2004, and that, in his opinion, its actual value at the time he bought it was only $400,000. He also produced evidence of the sums he spent in acquiring, repairing and maintaining the property, the rents he received from the four tenants, and the amount he realized upon the sale of the property in 2004. These figures showed that plaintiff had lost roughly $130,000 over the two years of his investment.
The trial court found defendants liable for negligence and breach of fiduciary duty and the applicable measure of damages to be the out-of-pocket measure, defined by the difference in value between that which plaintiff gave and that which he received. The court did not award the out-of-pocket loss, however, because the court concluded that plaintiff had not proven that the property was worth less than the $575,000 he had paid for it. Plaintiffs estimate that the property was worth only $400,000 in 2002 was not based upon comparable sales or market analyses. The trial court rejected this evidence as lacking foundation. Plaintiff produced no other evidence pertaining to the actual value of the property in 2002. Thus, the trial court was unable to determine whether there was an out-of-pocket loss.
The trial court rejected plaintiffs argument that he was entitled to consequential damages in the full amount of the net loss he suffered during the two years he owned the property. The court held that plaintiff was not entitled to the expenses he incurred incident to ownership as these would exist regardless of whether or not there was an injunction. The trial court did award plaintiff $5,506.45 for the property management fees required by the injunction.
II. DISCUSSION
A. Contention
Plaintiff does not challenge the trial courts conclusion that he did not prove the actual value of the property in 2002. He claims that if he had known about the injunction he would not have purchased the property and, therefore, he is entitled to the full amount of the loss he incurred as a result of the purchase. As plaintiff explains it, he "paid A amount of dollars for the Property, paid B amount for taxes, repairs, mortgage, etc. , . . . received C amount as rent while he owned the Property, and received D amount when he sold the Property." Thus, he claims, he is entitled to the sum of A and B minus the sum of C and D—$123,269.76.
B. Legal Framework
The trial court applied the out-of-pocket measure of damages to this case involving negligence and breach of fiduciary duty in connection with the sale of property. The question is whether the trial courts selection and application of this measure of damages was correct given the now-undisputed facts set forth above. This is a pure question of law to which we apply our independent review. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 801.)
The out-of-pocket measure of damages "is directed to restoring the plaintiff to the financial position enjoyed by him prior to the fraudulent transaction." (Stout v. Turney (1978) 22 Cal.3d 718, 725.) It achieves that purpose by awarding the plaintiff "the difference in actual value at the time of the transaction between what the plaintiff gave and what he received." (Ibid.) In contrast, the benefit-of-the-bargain measure is concerned with satisfying the expectancy interest of the injured plaintiff by putting the plaintiff in the position he or she would have enjoyed if the false representation relied upon had been true. It awards the difference in value between what the plaintiff actually received and what the plaintiff was fraudulently led to believe he or she would receive. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240 (Alliance Mortgage).)
Civil Code section 3343 provides that the out-of-pocket measure of damages applies in the case of fraud in the "purchase, sale or exchange of property." (§ 3343, subd. (a).) That said, where the victim is defrauded by a fiduciary, damages are authorized by sections 1709 and 3333. (Alliance Mortgage, supra, 10 Cal.4th at p. 1241.) Section 3333 does not specify any particular measure of damages. As Overgaard v. Johnson (1977) 68 Cal.App.3d 821, 823-824 clarified, "section 3333 does not set forth any benefit of the bargain rule. That section simply sets out the measure of damages long recognized in torts, namely, to compensate a plaintiff for a loss sustained rather than give him the benefit of any contract." It is unclear whether the measure of damages under section 3333 would provide a benefit-of-the-bargain measure of damages in the case of a fiduciarys intentional misrepresentation. (Alliance Mortgage, supra, 10 Cal.4th at p. 1250.) It is settled, however, that victims of fiduciary negligence are entitled to only the out-of-pocket measure of damages: "We have previously held that a plaintiff is only entitled to its actual or `out-of-pocket losses suffered because of fiduciarys negligent misrepresentation under section 3333. (Gray v. Don Miller & Associates, Inc., supra, [(1984)] 35 Cal.3d [498] at pp. 502, 504, citing Gagne v. Bertran (1954) 43 Cal.2d 481, 490.)" (Id. at pp. 1249-1250.) Thus, with the possible exception of claims against a fiduciary for intentional misrepresentation, courts do not have broad flexibility to fashion a damage award in cases such as this. The out-of-pocket measure applies. (Ibid.) The trial court, therefore, did not err in choosing the out-of-pocket measure here.
Further unspecified code references are to the Civil Code.
Subdivision (a) of section 3343 provides: "One defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received, together with any additional damage arising from the particular transaction, including . . . . [¶] [out of pocket costs and lost profits under specified circumstances]."
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."
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."
C. Strebel v. Brenlar
On appeal, plaintiff relies upon a single case—Strebel v. Brenlar Investments, Inc. (2006) 135 Cal.App.4th 740—to argue that the court should have calculated damages in a manner that would allow him to recover all his loses. In Strebel, the agent representing a buyer in the purchase of a home in Sonoma induced the buyer to close escrow on the sale of his own home by intentionally misrepresenting that the sellers tax lien problem would be resolved and the purchase of the Sonoma property would go forward. (Id. at pp. 743, 751.) As a result, the buyer sold his San Bruno home sooner than he would otherwise have done, and, after the Sonoma sale did not go through, the buyer was unable to purchase a replacement home since housing values had substantially increased. (Id. at p. 749.) The appellate court determined that the plaintiff was entitled to recover the lost appreciation of his San Bruno home between its premature sale and the time of trial as well as his loss of use of that property during that same period. (Id. at pp. 744-754.) The court noted that sometimes "neither the out-of-pocket nor benefit-of-the-bargain measure is particularly helpful or appropriate. . . . 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 Sonoma or San Bruno properties. Strebels damages arose neither because the value of either property was more or less than the agreed price nor because the value of either was other than as promised. 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 the consequence of defendants fraud." (Id. at pp. 748-749, fn. omitted.)
Strebel is distinguishable on two bases. First, Strebel concerned an agents intentional misrepresentations. This case involves only negligence. Indeed, in his closing trial brief, plaintiff expressly waived his fraud claim, electing to go forward solely upon theories of negligence and breach of fiduciary duty. Contrary to plaintiffs assumption, Strebel does not hold that courts have broad judicial latitude in awarding damages pursuant to section 3333 in cases not involving intentional fraud by a fiduciary. (See Alliance Mortgage, supra, 10 Cal.4th at pp. 1249-1250.) Second, this is the common situation in which the actionable tort relates to the value of the property being sold. Even though plaintiff might not have purchased the property had he known of the existence of the injunction, the fact remains that he did purchase the property and, therefore, he had something of value on the day he purchased it, although he was unable to prove what that value actually was.
D. Application of the Measure of Damages
If plaintiff had been able to prove that the propertys actual value in 2002 was $400,000, he would have been entitled to the difference between that amount and the amount he paid. But plaintiffs failure of proof means that the court had no evidence to show whether the property was worth $400,000, $ 575,000, or some other amount, so there was no evidence upon which the court could make an award for the difference in value. Accordingly, the trial court did not err in refusing to award any amount for this element of damages.
Even without evidence of a difference in value, plaintiff is entitled to recoup expenses he can show were directly related to defendants failure to disclose the injunction. (Stout v. Turney, supra, 22 Cal.3d 718, 729-730 [effect of failure to show traditional out-of-pocket loss is that nothing is added to amount of consequential damages].) Plaintiff insists that he is entitled to all his losses incurred in operating the property because, but for defendants negligence and breach of fiduciary duty, plaintiff would not have purchased the property and would never have suffered those losses. But under the applicable legal principles, he is not entitled to expenses incurred as a result of his ownership.
Under the out-of-pocket rule, "when, as a result of the fraud, the person defrauded has made expenditures which were reasonable under the circumstances, these may ordinarily be recovered, insofar as they have been lost or rendered fruitless because of the deceit." (Garrett v. Perry (1959) 53 Cal.2d 178, 186.) For example, consequential damages would be proper where "a buyer was obliged to move from the property that he had been fraudulently induced to purchase on account of the dangerous character of the premises." (Jacobs v. Levin (1943) 58 Cal.App.2d Supp. 913, 917.) "In such a case he could not only recover the difference between the amount that he had paid for the property and its actual value but also recover the expense of moving." (Ibid.)
Expenditures that were not incurred in reliance on the misrepresentation or fraud should not be included in a damages award. In Gagne v. Bertran, supra, 43 Cal.2d 481, the plaintiffs purchased property based upon the defendants report that there was no fill below 16 inches. When the plaintiffs commenced construction of a foundation for an apartment building they discovered that the fill actually went as deep as six feet in some places. (Id. at p. 485.) The plaintiffs sued the defendant to recover the increased cost of installing the foundation. (Ibid.) The Supreme Court stressed that the proper measure of damages was the difference between the true value of the property and the amount plaintiffs had paid for the lots. (Id. at pp. 490-491.) "[I]f the lots were worth what plaintiffs paid for them, plaintiffs were not damaged by their purchase, for even though they would not have bought the lots had they known the truth, they nevertheless received property as valuable as that with which they parted." (Id. at p. 491.) The court further determined that the additional cost incurred to install the foundation was not recoverable as additional damages because the expenditure resulted from the physical condition of the land and not from the misinformation regarding the depth of the fill. (Id. at pp. 491-492.) The court distinguished the circumstances of the case from the situation "in which plaintiffs wholly or partially completed their building before they discovered the truth and thereafter had to abandon it or make costly alterations that would not have been required had they known the true condition of their land at the outset of construction." (Id. at p. 491.) "Such damages, had they been suffered, would have resulted directly from defendants failure to report the truth and would clearly be recoverable." (Ibid.)
In Walters v. Marler (1978) 83 Cal.App.3d 1, 26-27 (disapproved on other grounds in Gray v. Don Miller & Associates, Inc., supra, 35 Cal.3d 498, 507), the plaintiff purchased property based on representations regarding its boundaries. He subsequently discovered that only a small portion of a house was actually located on the parcel purchased. (Walters v. Marler, supra, 83 Cal.App.3d at pp. 13-15.) The appellate court rejected the plaintiffs claim of damages for the cost of landscaping, property taxes, title insurance, property insurance, interest on the loan, and maintenance and repair of the property because those expenditures "would have been made even if the property had been as it was represented to be." (Id. at p. 26.) Repairs are not recoverable where they "constitute improvements of the property" and their cost is not " `lost or rendered fruitless " as a result of the deceit. (McNeill v. Bredberg (1961) 192 Cal.App.2d 458, 469.)
These cases are directly applicable here. Plaintiff learned of the injunction promptly after the close of escrow. The expenses he incurred for upgrades and maintenance were related to the condition of the property, not to defendants failure to disclose the injunction. The mortgage interest, taxes, and insurance are costs plaintiff would have incurred in owning any property. Further, all these expenditures served to maintain or increase the value of the property and were not rendered fruitless as a result of defendants negligence. These expenses are, therefore, not recoverable and the trial court did not err in refusing to award them.
In his opening brief on appeal, plaintiff stresses that this case is not solely about the failure to disclose the existence of the injunction. He contends that defendants failed to inform him about "the nature, desirability, and condition of the property." This argument was not raised below. The matter was tried solely based upon the allegation that defendants should have learned about and informed plaintiff of the existence of the permanent injunction.
III. DISPOSITION
The judgment is affirmed.
We concur:
Rushing, P.J.
Elia, J.