Elworthy v. Spiva
Filed 11/6/13 Elworthy v.
Spiva CA6
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TO BE PUBLISHED IN OFFICIAL REPORTS
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Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
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purposes of rule 8.1115.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH
APPELLATE DISTRICT
BRUCE R. ELWORTHY, et al.,
Plaintiffs and
Appellants,
v.
STEPHAN SPIVA, et al.,
Defendants and
Respondents.
H037747
(Monterey
County
Super. Ct.
No. M87603)
This
litigation arises out of a real estate transaction in which Bruce Elworthy and
Anne Marshall (husband and wife, jointly Buyers) purchased a home for $3
million from Stephan (Steve) and Barbara Spiva (Spivas or Sellers). After they discovered several defects with
the home, many of which had to do with windows and doors that leaked, Buyers sued
Sellers, Sellers’ real estate agents, and certain parties responsible for the
construction of the home. After settling
with some defendants and dismissing others, the case was tried to the court on
Buyers’ claims for intentional
misrepresentation, negligent misrepresentation, and rescission against
Sellers. The court found for Buyers on their
claim for negligent misrepresentation about the doors that leaked; it awarded
Buyers $60,000 in damages.
In this appeal,
Buyers challenge the trial court’s ruling that rescission of the house purchase––as
opposed to a $60,000 damages award––was not available to them as a remedy. Buyers contend the court erred when it
refused to grant their request for rescission, abused its discretion when it
found that Buyers were guilty of laches, and erred when it failed to consider
that Sellers engaged in “more than mere ‘negligent misrepresentation.’ †We conclude that the court properly found that
rescission was not available to Buyers because they had lost the property to
foreclosure. Accordingly, we will affirm
the judgment.
Facts
& Procedural History
Respondents
Steve and Barbara Spiva were planning to retire and decided to build a home at
the Pasadera Golf Club on Highway 68 in Monterey.
In March 2000, they purchased a lot (approximately
eight tenths of an acre) at 612 Belavida Road,
adjacent to the fifth green, for $665,000.
They also hired Jerry Whitney, a draftsman who had designed other homes
in the area, to draw up the plans for their new home. The Spivas liked their house in Hollister,
and asked Whitney to use the same basic layout for their new home, but to
design it on a grander scale. They told
Whitney they wanted to look “right down the chute of the fairway.â€
In March
2001, the Spivas hired General Contractor Richard Avila to build the house. The contract price was $1,974,270. A building permit was issued in May 2001. Construction proceeded without significant
problems; the project was completed on time and on budget.
The
5,460-square-foot, two-story house had four bedrooms, seven bathrooms, an
exercise room, and an office. The house
had “eight windowed French doors†and made “extensive use of windows,†which
provided “an openness with natural light.†Whitney specified the use of ADA-compliant,
low-threshold patio doors on the south side of the house, which overlooked the
golf course. The windows and the
exterior doors were manufactured by Weather Shield Manufacturing, Inc. (Weather
Shield). The Spivas did not have any
input into the decision to use low-threshold doors or the choice of window and
door manufacturer.
While the
house was under construction, the seals failed in some of the double-paned windows
in the master bedroom, which made the windows fog. Weather Shield repaired seal failures three
times between March 19 and June 14,
2002. The repairs involved
replacing the window panes where seal failures had occurred.
During
construction, Avila observed
evidence of water intrusion through the threshold of the patio doors in the
master bathroom and the upstairs office.
After a rainstorm, Avila saw
half a cup of water on the tile floor in the bathroom and noted dampness on the
subflooring in the office (the carpeting had not yet been installed). He reported the problem to Weather Shield. Weather Shield gave him a new threshold, which
his crew installed on the patio door in the office. Weather Shield also made adjustments to the
other doors.
Avila
testified that toward the end of the construction, right before the final
inspection, he told the Spivas that (1) there had been a problem with water
intrusion in the master bathroom and the office; (2) he had had the doors
adjusted; (3) he had installed a new threshold on the office door; and (4) everything
should be alright.
title="">[1] Avila
also testified that he told the Spivas about the window failures that occurred
during construction. But Steve Spiva
testified that Avila never informed
the Spivas that there were any problems with the doors or windows during
construction.
The Spivas
moved into the home in June 2002. After
they moved in, Weather Shield repaired windows on three occasions: (1) in October 2002, it replaced a scratched
window; (2) in November 2002, it repaired seal failures in two panes of one
window; and (3) in December 2002, it replaced a window pane that had a stress
crack. Steve Spiva testified that he did
not think the number of window failures was unusual; he experienced more
problems with double-paned windows in other homes he had owned.
After the
Spivas moved in, they experienced one incident of water intrusion under the
patio doors. In November 2002, during a
rainstorm with “very heavy sideways rain,†the patio doors in the master
bedroom, master bathroom, kitchen, and office, which were all on the south side
of the house, leaked. Steve Spiva was
away on a trip, but Barbara Spiva was home and noticed water coming in under
the doors. She put rolled up towels at
the thresholds and called Avila. Avila
and a representative of Weather Shield inspected the doors. Avila
adjusted the doors and the Spivas did not experience any other incidents of water
intrusion under the patio doors during the two winters they lived in the house. They attributed the single incident of water
intrusion to “post-construction fine tuning.â€
Steve Spiva
played golf once or twice a day and was very happy at Pasadera. But Barbara Spiva felt isolated there. Barbara had family in San
Diego and in the summer of 2003, the Spivas started
splitting their time between San Diego
and Monterey. In June 2003, they decided to sell the Monterey
house and move to San Diego. They hired Realtor Jeff Davi and initially
offered the property for sale at $4.8 or $4.9 million. In July 2003, they leased an apartment in San
Diego. After
that, they spent more time in Monterey
than in San Diego. They did not experience any water intrusion
during the winter of 2003-2004.
After
Christmas 2003, the Spivas started spending more time in San
Diego than in Monterey. On March
31, 2004, they lowered the price on their Monterey
home to $4,595,000. In June 2004, they
bought a house in Solana Beach
in San Diego County,
and in July 2004, they moved their furniture from Monterey
to Solana Beach.
In November 2004, the Spivas lowered the
price on their Monterey home to
$3.5 million. While the Monterey
house was on the market, the Spivas asked their realtor to check the house for
water intrusion whenever it rained. The
realtor’s assistant checked and never saw any problems, so the Spivas assumed
there were no further problems with leaky doors.
The house
did not sell. In June 2005, after their
listing agreement with Davi expired, the Spivas retained a new realtor, Joy
Jacobs of Keller Williams Realty. Jacobs’s
MLS listing described the Spivas’ house as “Custom built estate on the fifth
green. Awe-inspiring and in pristine
condition. . . . True luxury including granite and stone
throughout, expansive patios [with] 360 degree views, smart system, office with
terrace, exercise room.â€
In June
2005, the Spivas completed real estate property disclosure forms. In response to the question “Are you (Seller)
aware of any significant defects/malfunctions in any of the following? . . . Windows . . . Doors
. . . ,†they responded “No.†In answer to the questions “ARE YOU (SELLER)
AWARE OF . . . 1. Any . . . replacements or material
repairs on the Property, [¶] [¶] 4. Defects in the following, (including
past defects that have been repaired) . . . doors, windows
. . . [¶] [¶] 6. Water intrusion into any part of any
physical structure on the Property; leaks from or in any appliance, pipe, slab
or roof; standing water, drainage, . . . , moisture,
. . . on or affecting the Property,†they responded “No.†The Spivas testified that they did not disclose
the water intrusion in November 2002 because they did not think it was a
serious problem and they believed the doors had been fixed.
In Response
to the questions “ARE YOU (SELLER) AWARE OF . . . 2. Ongoing or
recurring maintenance on the Property (for example, drain or sewer cleanout,
tree or pest control service) [¶] [¶] 9. Pets on or in the Property
. . . . [¶] 10. Problems with . . . wildlife, insects
or pests . . . . [¶] [¶] 12.
Past or present treatment or eradication of pests . . . ,†the
Spivas answered “No.†In fact, the
Spivas owned a small dog when they lived in the house. Steve Spiva explained that by the time they
completed the disclosure forms in 2005, they had forgotten about the dog
because it had passed way more than two years earlier. The Spivas had seen a couple of mice in the
“cart barn†where they stored the golf carts.
They had also seen ants on the property.
As they had done with previous homes, the Spivas hired Terminix, a pest
control service, to perform monthly maintenance during the entire time they
owned the Monterey house. At trial, the
Spivas testified that they did not disclose any pests on the property because
Terminix kept the pests under control.
In October
2005, the Spivas sold their Monterey home to Buyers Elworthy and Marshall for
$3 million.
title="">[2] The sale included the home entertainment
system and the Crestron smart home touch screen control system that Sellers had
purchased for $95,053.56. Buyers also
purchased a membership at the Pasadera Country Club.
Buyers were
attorneys who handled tax, probate, trust and estate planning, and fiduciary
malpractice cases. Elworthy was also a
litigator who had experience handling construction defect litigation. Although they had previously resided in California,
Buyers moved to Sheridan, Wyoming in 1997 to be closer to clients in Texas,
Minnesota, and Colorado. In 2005, they
decided to move back to California and looked at homes in San Francisco and
Monterey County. They were looking for a
luxury, “turnkey†property that did not require any work. In May 2005, five months before buying the
Monterey house, Buyers placed their house in Wyoming on the market. Although Buyers expected their Wyoming
property to sell within one year, by the time of trial in April 2011, the
property still had not sold. Elworthy
testified it was a “very unusual and large property†for Wyoming.
When they
walked through the Monterey house in October 2005, Buyers noticed water damage
to the paint and sheetrock around several doors. According to Buyers, they asked real estate
agent Joy Jacobs about it and she attributed it to a “sloppy maid.†(Jacobs could not recall making that
statement.) On October 21, 2005, the day
they made their offer, Buyers observed a Weather Shield repairman making window
repairs. Elworthy spoke to the repairman
“for a couple minutes.†Buyers testified
that Jacobs told them the window had been hit by a golf ball. (Jacobs did not recall making that statement
either.) According to the repairman, he
replaced two small panes of glass in the master bedroom and a window sash in
the master bathroom, all of which had seal failures.
During the
escrow period, Buyers had the property inspected by Robert Ferguson of Pacific
Coast Inspections. Buyers and their agent
were present during the inspection. Ferguson
told Buyers several times he thought the house was well built; he noted some
minor deficiencies, including minor cracks in the driveway, and recommended
minor repairs. He did not notice any
problems with the windows or doors or any damage to the sheetrock near the doors. Buyers obtained a termite report from
Terminix; Buyers knew Terminix had been servicing the property and reasoned
that it would be familiar with the property. Buyers had the radiant heating system
inspected by Garza Plumbing (Garza), the subcontractor that installed the
heating system in the house. The Garza technician
reported that the heating system was working properly. Buyers wanted to have the entertainment system
inspected by Monterey Stereo, the company that had installed it. But Monterey Stereo was not available during
the escrow period. Buyers were satisfied
with the inspection reports and escrow closed on November 23, 2005.
To fund
their purchase, Buyers refinanced their Wyoming house and pulled out $1.15
million in equity, which they used to pay for the Monterey house. Buyers also obtained a first mortgage for $1.5
million and a HELOC (home equity line of credit) for $282,000 on the Monterey
house. The first mortgage on the
Monterey house required payments of interest-only for the first five years,
with payments of $8,750 per month. The
total debt service on both houses was more than $16,000 per month.
Buyers
moved into the Monterey house in December 2005. Within the first few days, they testified that
they discovered ants in the master bathroom and kitchen, and nests of ants
under the Jacuzzi bathtub and the foundation. They hired a pest control service to spray for
ants. The following week, they discovered
dead and dying mice in the kitchen, laundry room, attic, and some walls. Elworthy removed several dead mice himself and
then hired a pest control service to handle the problem. Afterwards, Buyers were able to keep the mice
under control with regular service. At trial,
Buyers testified about a number of other defects, including windows and doors
that leaked.
title="">[3]
Initially,
Buyers complained about the defects to Sellers, Avila, Monterey Stereo, Garza,
and Sellers’ realtors, and the parties attempted to resolve the problems
informally. The Sellers paid for repairs
to the alarm system and for pest control, and offered to pay to have the
Crestron smart home control system reprogrammed. Monterey Stereo paid for repairs to one of
the TV’s and Avila made several proposals for fixing the patio doors.
In May
2006, Buyers retained Whitney, the same draftsman used by Sellers, to design a
second garage for the property; they planned to build a two-story, detached,
3-car garage, with a “shop/craft room†on the second floor. Buyers believed the project would help remedy
some of the problems they were having with the phone, Internet, heating, and
electrical systems in the house by bringing additional wiring to the east side
of the property. Buyers also planned to
remove the patio door from the master bathroom. Whitney worked on the plans until at least
December 2006. Buyers testified that as
of early 2007, their law practice was going very well; at that time, they
planned to keep the Monterey house, both as their residence and their office,
and to repair it.
But on
August 1, 2007, Elworthy sent a letter to Sellers’ counsel suggesting Sellers
“budget funds well in the six figures in the event they want to settle and that
their broker should consider budgeting even more.†He also suggested Sellers “consider the
immediate repurchase of the home and [golf] membership†to “avoid the
litigation and certain result that will follow.†Elworthy testified that this letter was a
formal demand for rescission.
In 2007, Buyers
hired Structural Engineer Brett Ferrari to inspect the Monterey house. Ferrari did a “brief inspection†on October
19, 2007, which did not include any destructive testing. Ferrari opined that the “patio doors need to
be removed and replaced with new thresholds and pan flashing installed and
properly integrated with the building envelope.†He stated that the “unacceptable rate of
window failure and the inefficiency of performing piecemeal repairs suggests
that the windows should be replaced entirely with [windows from] a different
manufacturer.†Ferrari recommended
repairing the retaining walls and cracks on the interior walls, replacing the
driveway, and installing a “trunk line of CAT-5 cables†to address problems
with the thermostats, controllers, Internet, and telephones; he said further
investigation was required to address other issues. Later, Buyers retained Larry Daniels, a general
contractor and construction estimator, who opined that it would cost $1,060,434
to fix the defects identified in Ferrari’s report. Daniels’s estimate assumed that all exterior
doors needed to be replaced, even those that did not leak.
On November
14, 2007, Buyers filed their complaint for “damages for negligence, breach of
contract, negligent misrepresentation, intentional misrepresentation/fraud and
rescission.†Named defendants included
Keller Williams, Jacobs and other employees of Keller Williams (jointly real
estate defendants), Sellers, Whitney, Avila, Garza, and Weather Shield. The complaint alleged causes of action for
negligent misrepresentation, intentional misrepresentation, and rescission
against Sellers. The defendants filed
cross-complaints against one another and other subcontractors involved in the
construction of the home.
Buyers also
stopped paying the first mortgage on the Monterey home in November 2007. Later, they entered into a
pursuant to which the lender agreed that Buyers could stop making payments on the
first mortgage and the HELOC. In
exchange for the lender’s forbearance, Buyers agreed to pay the insurance
premiums and property taxes, maintain the property, list it for sale, prosecute
the instant lawsuit, and bring the loan current from the proceeds of any sale or
the lawsuit. Buyers relied on an oral
agreement with the lender’s attorney in Texas and did not obtain the agreement
in writing. Subsequently, there was a
change in loan servicer, and the property went into foreclosure. In June 2009, the lender issued a Notice of Default
and Election to Sell. At that time,
Buyers owed $174,742.50 in past due payments, costs and expenses.
In December
2007, Elworthy was diagnosed with a brain tumor. He had surgery to remove the tumor in the
summer of 2008; after the surgery his ability to work as an attorney was
impaired.
longer afford both houses and moved back to Wyoming permanently. In November 2008, Buyers listed the Monterey
home for sale for $3.2 million. Thereafter,
Buyers stayed in the house whenever they were in California.
In the fall
of 2009, Buyers dismissed their construction defect claims against Avila,
Whitney, and Weather Shield; Buyers did not settle with those defendants and
took the position that it was up to Sellers to pursue the construction defects
claims. In September 2009, Buyers
settled with the real estate defendants and Garza Plumbing. The court granted the settling parties’
motions for good faith settlement and Buyers received the settlement proceeds in
October and December 2009.
The
trustee’s sale was initially set for January 12, 2010, and was then continued
to a date in April 2010. Although Buyers
had more than enough money from the settlements to pay the past due amounts and
to stop the foreclosure, they allowed the foreclosure sale to occur.
finances and his failing health, Buyers decided it was in their best interest
to retain the settlement funds rather than use them to bring the loan current
and avoid foreclosure. The lender bought
the property at the trustee’s sale and sold it to a third party in June 2010
for $1.67 million.
The cross-complaints
were bifurcated for trial. Between March
and May 2011, the court held a 14-day bench trial on Buyers’ claims against
Sellers. In their trial brief, Buyers
stated, “This matter is proceeding as an action for fraud in the
inducement. [Buyers] will make their
election between a claim for damages or rescission in a timely manner prior to
entry of judgment.†On the ninth day of
trial, Buyers’ counsel advised the court that Buyers had not yet elected
between rescission and a damages remedy.
Buyers’
expert witnesses included Stephen Brown, an appraiser. Brown testified that the unimpaired value of
the Monterey house in 2005 was $3 million and that the diminution in the value
of the home, assuming it had all the defects alleged by Buyers, was $800,000.
Sellers’ construction
expert, General Contractor Robert Fransen, testified that the cost to replace
the six patio doors that leaked was $30,000. He testified that the maximum cost of
repairing all of the items Buyers claimed were defective was $75,000, and that
he told counsel that he was willing to do the repairs at that price when he
inspected the property in May 2008. The
defense appraiser, Todd Johnson, agreed that the unimpaired value of the
Monterey house in November 2005 was $3 million and testified that the market value
of the home at that time, assuming the defects were limited to those described
by Fransen, was between $2.92 and $2.95 million.
Buyers
requested rescission damages totaling $4,912,000 based on all of the costs they
incurred to own the home, including: (1) $1,059,756
for their down payment; (2) $1,782,000 they borrowed on the Monterey
house; (3) $1,499,533 interest on their loans at the rate of 10 percent; (4)
$353,000 in taxes, fees, improvements, and repairs; and (5) $118,000 for their
golf membership. They argued that
Sellers were entitled to a credit of $1,670,000 from the sale of the house, for
a net claim of $3,252,000.
The court
issued a 46-page statement of decision. The court concluded that rescission was not
available as a remedy because (1) it was barred by laches, and (2) Buyers could
not restore the consideration they had received under the contract because the
home had been lost to foreclosure. The
court found that there were no intentional misrepresentations, but that Sellers
had negligently misrepresented the condition of the patio doors in their real property
disclosures by failing to disclose the water intrusion incident in November
2002. The court also found that Sellers’
disclosures were inaccurate because they failed to disclose that they had owned
a dog and had a monthly pest control service. The court concluded, however, that there was
“no reliance on or damage flowing from†the misrepresentations regarding pets
and pests. The court found that the
number of window failures was not excessive for new construction of this size
and was not something Sellers had to disclose. As for the other defects alleged, the court
found that Buyers failed to prove that (1) the condition was defective, (2) the
claimed defect was material, (3) the defect existed when Sellers made their
disclosures, (4) there were any misrepresentations regarding the issue, or (5)
a combination of these factors. The
court found that some defects were visible upon inspection and that Buyers did
not avail themselves of the opportunity to inspect. The court was persuaded by Fransen’s methodology
for repair or replacement of the doors, but concluded that his cost of repair
was too conservative. Accordingly, the
court doubled the amount estimated by Fransen for replacing six patio doors and
awarded Buyers $60,000 in damages. The
court found that the entire $60,000 awarded to Buyers against Sellers was
offset by the amount of the good faith settlements with Garza and the real
estate defendants. The court entered
judgment in favor of Sellers and found that Sellers were prevailing parties for
the purpose of awarding costs. The court
subsequently denied Buyers’ motions for new trial and to vacate the judgment. Buyers filed a timely
Discussion
Buyers
contend the court erred when it refused to grant their request for rescission,
abused its discretion when it found Buyers were guilty of laches, and erred
when it failed to consider that Sellers engaged in “more than mere ‘negligent
misrepresentation.’ â€
I.
Rescission
A.
General Principles
When a
party to a contract has been injured by a breach of contract or fraud and lacks
the ability or the desire to keep the contract alive, the injured party may
choose between two different remedies. (
London (2006) 140 Cal.App.4th 291, 296 (Akin)
[breach of contract]; Campbell v. Birch
(1942) 19 Cal.2d 778, 791 [fraud]; Lenard
v. Edmonds (1957) 151 Cal.App.2d 764, 768 [fraud].) The injured party may: (1) disaffirm the contract, treat it as
rescinded, and recover damages resulting from the rescission; or (2) affirm the
contract and recover damages for breach of contract or fraud. (Akin,
at p. 296; Campbell, at p. 791,
101 (Bancroft).) An action for rescission is based on the
disaffirmance of the contract and an action for damages is based on its
affirmance. (Akin, at p. 296, citing
Cal.2d 675, 678-679; Bancroft,
at p. 101.)
Rescission
and damages are alternative remedies. (
breach of contract or fraud “in the event rescission cannot be obtained†in the
same action. (Williams v. Marshall (1951) 37 Cal.2d 445, 457 [defrauded
vendee], citing Bancroft,
on another ground in Gray v. Don Miller
& Associates, Inc. (1984) 35 Cal.3d 498, 505-507.) “But the election of one remedy
bars recovery under the other.†(
383.)
B.
Statutory Grounds for Rescission
The grounds
for rescinding a contract are set forth in Civil Code section 1689.
“party to a contract may rescind the contract†if “the consent of the party
rescinding, . . . , was given by mistake, or obtained through
. . . , fraud, or undue influence, exercised by
. . . the party as to whom he rescinds
. . . .†(§ 1689,
subd. (b)(1).)
Section
1691 sets forth the procedural requirements for rescission. It provides:
“Subject to section 1693, to effect a rescission a party to the contract
must, promptly upon discovering the facts which entitle him to rescind
. . . : [¶] (a) Give notice of rescission to the
party as to whom he rescinds; and
[¶] (b) Restore to the other
party everything of value which he has received from him under the contract or
offer to restore the same upon condition that the other party do likewise,
unless the latter is unable or positively refuses to do so. [¶] When
notice of rescission has not otherwise been given or an offer to restore the
benefits received under the contract has not otherwise been made, the service
of a pleading in an action or proceeding that seeks relief based on rescission
shall be deemed to be such notice or offer or both.†(§ 1691.)
Section
1693 sets forth the effect of delay in notice of rescission or in restoration
of benefits. It provides: “When relief based upon rescission is claimed
in an action or proceeding, such relief shall not be denied because of delay in
giving notice of rescission unless such delay has been substantially prejudicial
to the other party. [¶] A party who has
received benefits by reason of a contract that is subject to rescission and who
in an action or proceeding seeks relief based upon rescission shall not be
denied relief because of a delay in restoring or in tendering restoration of
such benefits before judgment unless such delay has been substantially prejudicial
to the other party; but the court may make a tender of restoration a condition
of its judgment.†Section 1693 contains
an “express grant of authority to courts to exercise their discretion in
delaying restoration until judgment.†(
Farm Fire & Casualty Co. (2010) 50 Cal.4th 913, 929, fn. 6 (
1693, it sought “to promote a flexible approach to the restoration requirementâ€
and “to address any unfairness that the rescinding parties might face if they
were insolvent or without funds to restore consideration prior to filing
suit.†(Village Northridge, at p. 928.)
Although
“damages†are recoverable in an action for rescission, the nature of the damages
available in such cases differs from the damages that may be recovered for
breach of contract or fraud. Section
1692, which sets forth the relief available in an action for rescission,
provides in relevant part: “A claim for
damages is not inconsistent with a claim for relief based upon rescission. The aggrieved party shall be awarded complete
relief, including restitution of benefits, if any, conferred by him as a result
of the transaction and any consequential damages to which he is entitled; but such
relief shall not include duplicate or inconsistent items of recovery. [¶] If
. . . a party seeks relief based upon rescission, the court may
require the party to whom such relief is granted to make any compensation to
the other which justice may require and may otherwise in its judgment adjust
the equities between the parties.â€
Section
1692 “essentially ‘restates the equity jurisprudence applicable in the
rescission context.’ [Citation.] The fundamental principle underlying that
jurisprudence ‘is that “in such actions the court should do complete equity
between the parties†and to that end “may grant any monetary relief necessaryâ€
to do so. [Citation.]’ (Runyan
v. Pacific Air Industries, Inc. (1970) 2 Cal.3d 304, 316 . . . (
as nearly as possible to their former positions and ‘ “to bring about
substantial justice by adjusting the equities between the parties†despite the
fact that “the status quo cannot be exactly reproduced.†’ [Citations.]
To achieve this objective, section 1692 provides that ‘[a] claim for
damages is not inconsistent with a claim for relief based upon rescission.’ It further provides that the aggrieved party
shall be awarded ‘complete relief,’ including restitution and ‘consequential damages.’ â€
(Sharabianlou
v. Karp (2010) 181 Cal.App.4th 1133, 1144-1145 (Sharabianlou).)
“The
distinction between disaffirmance and affirmance of the contract has important
consequences when it comes to damages. . . . Rescission extinguishes the contract
(. . . § 1688), terminates further liability, and restores
the parties to their former positions by requiring them to return whatever
consideration they have received. [Citation.] Thus, the ‘[r]elief given in rescission
cases—restitution and in some cases consequential damages—puts the rescinding
party in the status quo ante, returning him to his economic position before he
entered the contract.’ †(
“In cases
involving the rescission of agreements to purchase real property, California
courts have held that the seller must refund all payments received in
connection with the sale. [Citation.] If the
buyer has taken possession of the property, the buyer must restore possession
to the seller. [Citation.] Such recovery of the consideration exchanged
is part of restitution.
[Citations.] As consequential
damages, rescinding buyers or sellers may recover such items as real estate commissions
paid in connection with the sale [citation], escrow expenses [citation],
interest on specific sums of money paid to the other party [citation], and
attorney fees in appropriate cases [citation].â€
(Sharabianlou,
citing Kent v. Clark (1942) 20 Cal.2d
779, 784, italics added.)
C.
Standard of Review
To the
extent Buyers’ contentions on appeal involve questions of law, we review the
issues presented de novo. (
Cal.4th 791, 799.) We review
Buyer’s challenges to the court’s factual findings for sufficiency of the
evidence. (Winograd v. American Broadcasting Co. (1998) 68
Cal.App.4th 624, 632.)
D.
Buyers Were Not Entitled to Rescission Simply Upon
Request
Buyers
argue that once the trial court determined that they were victims of a misrepresentation,
it should have respected their choice to rescind the contract.
to adopt the remedy they preferred and imposed a damages remedy instead. They argue that the court was required to
respect their preference for rescission as a matter of law. And they assert that the questions of when and
how a plaintiff may elect remedies and the court’s role in that process is
“surprisingly unsettled.â€
As for the
questions of when and how, Buyers cite one case that says that the plaintiff
must elect between alternative inconsistent remedies before judgment (
plaintiff may make such an election until satisfaction of judgment, or
application of res judicata or estoppel, vindicates one of the inconsistent
rights (Southern Christian Leadership
Conference v. Al Malaikah Auditorium Co. (1991) 230 Cal.App.3d 207,
223 (SCLC); Fassberg Construction Co. v. Housing Authority of City of Los Angeles
(2007) 152 Cal.App.4th 720, 759 (Fassberg).)
We need not
determine the question of when the injured party must elect between
inconsistent remedies. The court did not
hold that Buyers could not obtain rescission because their election of that
remedy was untimely or barred by res judicata or satisfaction of judgment. Instead, it held that rescission was not
available because Buyers did not meet the procedural requirements for
rescission since they could not restore the consideration they had received,
namely the house. The court also held
that their rescission claim was barred by laches, a different concern from the
timing of their election between rescission and damages.
As for the
court’s role, Buyers cite cases that suggest that the choice of remedies
belongs to the plaintiff (Lenard,
p. 16 [“the choice of remedies lies with the wronged party, and not with the
courtâ€]) and cases that state that the choice of remedy ultimately belongs to
the court (Akin, supra, 140 Cal.App.4th at p. 297 [“even if the party seeks
inconsistent remedies, it is the court ultimately who determines to which she
is entitledâ€]; Tanforan v. Tanforan
(1916) 173 Cal. 270, 273-274 (Tanforan);
Crogan v. Metz (1956) 47 Cal.2d 398,
403 (Crogan).) In Tanforan,
which was decided in 1916, the Supreme Court held that the trial court erred
when it forced the plaintiff to elect between inconsistent theories at trial, before
the defendant put on his case. The court
stated that the plaintiff may introduce evidence on each of his or her causes
of action and “the election or . . . decision as to which of them is
sustained†is a matter for the trier of fact.
(Tanforan, at pp.
273-274.) And 40 years later, in
is not otherwise estopped, the election as to which cause of action is
sustained belongs to the trier of fact.
(Crogan, at p. 403.)
Buyers rely on the statement in
that “the choice of remedies lies with the wronged party, and not with the
court,†and argue that once they “made it clear that they preferred
rescission,†the court could not refuse to grant rescission and impose a
damages remedy instead. As we shall
explain, Buyer’s reliance on this language from Walters is misplaced.
The defendant sellers in
of which included a house. They sold one
of the parcels, which they thought included the house, to the plaintiff
buyer. After the sale, the buyer learned
that only a small portion of the house was on the parcel he had purchased. (Walters,
supra, 83 Cal.App.3d
lenders, and the title insurer for rescission, breach of contract, fraud,
negligence, and other claims; several defendants filed cross-complaints. (Id.
at p. 11.) At trial, the jury
awarded the buyer damages for negligent misrepresentation against all of the
defendants. (Id. at p. 12.) On
appeal, the defendants challenged the trial court’s order denying their motion
to restrict the trial to damages based on rescission, which was based on the
contention that the buyer had made a binding election of rescission when the
sellers accepted his notice of rescission, as well as their argument that the
buyer should be compelled to make an early election of remedies at trial. (Id.
at p. 15.) The appellate court
concluded that substantial evidence supported the trial court’s finding that
the buyer had not made a binding election of remedies because the sellers had
not accepted the buyer’s notice of rescission.
(Id. at pp. 15-16.) The court explained, “A party who attempts to
rescind a contract, but does so ineffectively, does not lose his right to
maintain an action for damages based upon its affirmance. [Citation.]
Such a party may, in the same action, seek rescission or, alternatively,
damages based upon contract in the event rescission cannot be obtained. ‘There is no good reason why the plaintiff in
such an action should be compelled to make an election between those remedies
during the course of the trial, and such a rule would be contrary to
fundamental principles of law.’
[Citation.] As [the buyer’s]
attempt to rescind the contract was ineffectual, the trial court properly
refused to restrict the trial to consequential [(rescission)] damages, or to
compel an election of remedies early in trial.â€
(Walters, at p. 16, citing
p. 457.) The court also rejected the
defendants’ contention that the trial court should have restricted the buyer to
rescission “because an award of damages does not resolve the problems of the
parties.†The court stated, “Upon
discovery of the problem with his property, [the buyer] had an election of two
inconsistent remedies: one to disaffirm
the contract and rescind, and the other, to affirm the contract and sue for
damages. [Citation.] The
choice of remedies lies with the wronged party, and not with the court. [Citation.]â€
(Walters, at p. 16; italics
added.)
Buyers rely on the italicized
language from Walters quoted above to
support their contention that the court was bound by their election of
rescission as their remedy. But this
language must be read in light of Supreme Court authority, which provides that
although the plaintiff may allege inconsistent theories (rescission and
damages) and present evidence on each theory at trial, “the election or
. . . decision as to which of them is sustained†is a matter for the
trier of fact. (Tanforan, 173 Cal. at pp. 273-274.)
To the extent that it is inconsistent with Tanforan, we disagree with the court’s conclusion in
lies with the wronged party, and not with the court.â€
This case
is also factually distinguishable from Walters. In Walters,
the court found that since the buyer’s pretrial attempt to rescind was
ineffective, he had not made a binding election before trial and could not be
compelled to elect until the case was submitted to the jury. (Walters,
supra, 83 Cal.App.3d at pp.
15-16.) Thus, at the conclusion of the
trial in Walters, both remedies were
still available to the buyer. The
italicized language from Walters that
Buyers rely on may have been an acknowledgement of that fact. In contrast, in this case, the court found
that the remedy of rescission was not available to Buyers because of defenses
asserted by Sellers, but that Buyers could still recover damages for Sellers’
negligent misrepresentations. Since
rescission was not available, there was only one remedy available to Buyers
(damages for negligent misrepresentation) and no election to be made.
Buyers
assert that the cases that say the trier of fact may choose the remedy involved
“situations where the choice of remedy depends upon a choice between
inconsistent facts.†But the trial court
concluded that rescission was not available to them, based on its factual
findings that they could not restore the property after the house went into
foreclosure and that the claim was barred by laches. Thus, the court found that Buyers could not
state a cause of action for rescission.
Buyers also
argue that the trial court erred when it imposed the damages remedy on them,
notwithstanding their testimony that if they had known about the defects, they
would have investigated and would not have bought the house in the first place. But at trial, it was up to the court to
determine the credibility of the witness and the court said it did not believe
Buyers’ testimony on this point.
For these
reasons, we reject Buyers’ contention that the court was required to honor
their request for rescission.
E.
Application of Exception to Restoration Requirement
Buyers
argue that the court abused its discretion when it concluded that rescission
was not available because it misunderstood the legal rules governing
application of the “special circumstances†exception to the restoration
requirement.
The trial court
held that “[r]escission is not an available remedy because [Buyers] cannot
restore the consideration received under the contract and because it is barred
by laches. [¶] [Buyers] cannot restore the property to
[Sellers] because through their voluntary actions in defaulting on the first
trust deed loan, the property was sold to a third party in foreclosure.†The court added that “the foreclosure was
caused by [Buyers] defaulting on their loan and had nothing to do with Sellers’
alleged misrepresentations.†The court
stated, “Additionally, it does not appear that defendants could be made whole
by a credit for the selling price with appropriate adjustments because the
market decreased significantly between the sale to [Buyers] and the
foreclosure.â€
As we have
noted, one of the procedural requirements for rescission is that the rescinding
party “restore to the other party everything of value which he has received
from him under the contract or offer to restore the same upon condition that
the other party do likewise, . . . .†(§ 1691.) “ ‘There are exceptional cases where restoration,
or an offer to restore before suit is brought, is not necessary,’ â€
including “ ‘where, without any fault of the plaintiff, there have been
peculiar complications which make it impossible for plaintiff to offer full
restoration, although the circumstances are such that [the court] may by final
decree fully adjust the equities between the parties.’ †(Carruth
v. Fritch (1950) 36 Cal.2d 426, 430 (Carruth),
quoting California Farm & Fruit Co.
v. Schiappa-Pietra (1907) 151 Cal. 732, 739 (California Farm) and citing cases applying this principle;
(Kelley).)
Buyers
seize upon the phrase “before suit is brought†in the cases that repeat this
rule and argue that the court should evaluate the rescinding party’s ability to
restore as of the date that he or she offers to rescind and not as of the time
of trial or any subsequent election to rescind.
They assert that since they still owned the house and were able to
restore “as early as August 1, 2007†(when their counsel sent a letter
suggesting Sellers “consider the immediate repurchase of the home and [golf]
membershipâ€) and “in any event no later than November 2007†(when they filed
their complaint), the court erred when it held that this case did not fall
within the special circumstances exception to the restoration requirement and denied
their claim for rescission. They argue
that “ ‘[s]pecial circumstances’ are necessary to justify a recessionary
remedy when the plaintiff cannot return the consideration received only if the
plaintiff’s voluntary act prior to making
an offer to rescind has made return of the consideration impossible.†Buyers assert the court was mistaken when it
concluded that events that occurred after they offered to rescind were relevant
to their right to rescission. They argue
that if Sellers had accepted their demand in 2007, “neither party would have
been exposed to the risks of a foreclosure sale. In other words, the court put the risk of the
decline in value of the [house] after the demand for rescission on the party
that was injured by the deception, to wit, Buyers.â€
Buyers
devote almost eight pages of their opening brief to a discussion of cases that
neither address this issue nor support their contention that the ability to
restore must be evaluated as of the date the rescinding party first requests
rescission. Some of the cases they cite contain
broad, general statements regarding the extent of the court’s equity
jurisdiction or the power of the court upon granting rescission to adjust the
equities between the parties if they cannot be returned to precisely the same
positions they were in before entering into the contract. (See e.g.,
Swan v. Talbot (1907) 152 Cal. 142, 147 [no error where trial court found
rescission impractical and awarded damages for an account stated];
(1970) 5 Cal.App.3d 243, 258; Connell
v. Crawford (1928) 92 Cal.App. 715, 719.)
Other cases cited fail to support their contention altogether. (Stock
v. Meek (1950) 35 Cal.2d 809, 814 [in determining whether appeal on
cause of action for rescission was moot, court considered sale of property
after entry of judgment]; Dreiske v. Los
Angeles Investment Securities Corp. (1936) 13 Cal.App.2d 59, 63-64
[plaintiff could not state a cause of action for rescission because of loss of
consideration due to voluntary act by plaintiff]; Chamberlain v. Wakefield (1949) 95 Cal.App.2d 280 [applies a
different exception to the restoration requirement].) None of these cases aid Buyers.
Buyers read
too much into the phrase “before suit is brought†in the case law. As we have noted, the Supreme Court has
repeatedly stated that “[t]here are exceptional cases where restoration, or an
offer to restore before suit is brought,
is not necessary.†(Carruth, supra, 36 Cal.2d
at p. 430; California Farm, 151 Cal.
at p. 739; Kelley, supra, 120 Cal. at
p. 511.) This merely means that
restoration or an offer to restore is a condition precedent to filing an action
for rescission and to obtaining rescission.
As the Supreme Court recently explained in Village Northridge, “section 1691 requires the party seeking
rescission to give notice to the other party ‘as to whom he rescinds,’ and to
restore all consideration or ‘everything of value which he has received’ under
the contract. The statute’s language is
clear. With certain exceptions
. . . , it generally requires that the rescinding party return
any consideration received as a condition of rescission before judgment in the
rescission action. As originally
enacted, section 1691 did not make prelawsuit restoration an absolute condition
of rescission, but instead required ‘the use of . . . reasonable
diligence’ to restore or offer to restore any consideration received.†(Village
Northridge, supra, 50 Cal.4th at
pp. 921-922.) The court noted, however,
that “the rule requiring ‘tender or return of consideration
. . . is not inflexible.’ â€
(Id. at p. 928, quoting
The court explained that in 1961, the Legislature enacted section 1693
“to address any unfairness that the rescinding parties might face if they were
insolvent or without funds to restore consideration prior to filing suit.†(Ibid.) Thus, section 1693 permits plaintiffs who are
unable to restore the consideration received “to delay restoration until final
judgment consistent with equitable principles, including that defendants not be
substantially prejudiced by the delay.â€
(Id. at p. 929.)
Since a
party may delay the election of rescission until at least a final judgment is
entered and restoration may be delayed until final judgment, it makes no sense
to evaluate the ability to restore as of the date rescission is first
requested. In addition, the flexible
nature of the restoration requirement militates against adopting the rigid rule
that Buyers advance. Nothing in section
1691 or the cases Buyers cite supports their argument that the court could only
consider their acts up until the time they requested rescission in 2007 and
that the court erred when it considered matters that occurred after that date
in determining whether they were entitled to rescind.
Buyers did
not make an irrevocable election of rescission any time before trial. In fact, even on the ninth day of trial, they
were still undecided on the question whether to pursue rescission or damages. To obtain rescission, Buyers were required to
restore the consideration they had received (the house) to Sellers. (§ 1691.) But they had lost the house to foreclosure in
2010. Buyers were therefore required to
show that one of the exceptions to the restoration requirement applied. The only exception at issue provides that
restoration, or an offer to restore, is not necessary, “ ‘where,
there have been peculiar complications which make it impossible for plaintiff
to offer full restoration, although the circumstances are such that [the court]
may by final decree fully adjust the equities between the parties.’ †(Carruth,
supra, 36 Cal.2d at p. 430; italics
added.) The trial court found this
exception did not apply because Buyers were not without fault in the loss of
the property because they stopped paying their mortgages in November 2007 and allowed
the property to be lost to foreclosure. Substantial evidence supports that finding.
In
addition, Buyers had an opportunity to cure the default in the fall and winter
of 2009, when they received the proceeds of their settlement with the real
estate defendants and Garza. At that
time, there were more than sufficient funds to cure the default and avoid
foreclosure on their mortgages and to pay for the repairs recommended by
Fransen, the defense expert. In addition,
Fransen testified that he was willing and able to make all of the repairs for
$75,000. Instead, Buyers decided to use
funds for other purposes. They did not
repair the property and moved back to Wyoming.
It is also
true that Buyers lived in the house for three years. They used the house as both their home and
office, thereby saving the expense associated with maintaining a separate
office. They reaped the tax benefits
attendant to owning the home and enjoyed the prestige of living in a large
luxury home on a golf course. The last
year they occupied the house, they lived there without paying a mortgage or
rent. Their mortgage obligation was
interest-only and they could therefore use the money that they would otherwise
have paid toward principal for other purposes.
Even if the court had concluded that Buyers were without fault in the
loss of the house, Buyers do not point to any evidence of the value of the
benefits they received from owning the home that would have allowed the court
to balance the equities as part of an award of rescission. (McCoy
v. West (1977) 70 Cal.App.3d 295, 301-302 [where there has been a
rescission and restoration, guilty party is entitled to a credit for the value
of the innocent party’s use of the property].)
For these
reasons, we conclude the trial court did not err when it found: (1) rescission was not available to
Buyers because they were unable to restore the property; and (2) Buyers were
not entitled to rely on the exception that applies when, without any fault of the plaintiff, there have been peculiar
complications which make it impossible for plaintiff to offer full restoration
and the court may in its final decree fully adjust the equities between the
parties since Buyers were not without fault in the loss of the property to
foreclosure.
II.
Laches
Buyers
challenge the court’s judgment on a second ground, arguing the court erred when
it found that their rescission claim was barred by laches. The trial court found that Sellers “were
prejudiced by the delay in [Buyers’] attempt to rescind because there had been
a serious depression in the value of real property throughout the country,
which depreciated the market value of the property involved in this case. The bankruptcy of the Pasadera Country Club
and change in membership rules and equity value affected the value of homes in
the subdivision.â€
Since we
conclude the court did not err when it found that rescission was not available
to Buyers because of their inability to restore the consideration received, we
need not address Buyers alternative claim that the court erred when it held
that “[l]aches also bars rescission.â€
III. Negligent
Misrepresentation Finding
Buyers
contend the judgment must be reversed because the “trial court failed to take
into account that Sellers engaged in more than mere ‘negligent
misrepresentation.’ †They assert
that “[s]ince rescission is an equitable remedy, and since adjusting the
equities requires a full consideration of the facts, the trial court’s faulty
conclusions with respect to the Sellers’ negligence are relevant to the
propriety of its choice of remedies as well.
The trial court simply ignored a serious issue concerning the actions of
the Sellers’ agent, Jacobs.†Buyers then
proceed to reargue the evidence regarding the statements made by Jacobs. Buyers assert that they were the victims “of
what can only be described as
misrepresentations†and that Sellers were liable for the actions of their
agent. They argue that the court’s
conclusion “that Sellers were liable only for negligent misrepresentationâ€
cannot be affirmed and that the court “should be required to reconsider the
remedy in light of Sellers’ agent’s intentional misconduct.â€
Sellers
respond that any representations Jacobs may have made regarding the reason for
the window repairs or regarding the home’s wiring and Internet access are
immaterial since the court found that the windows and electrical system were
not defective. We agree.
As for
Jacobs’s representation that water stains on the walls were caused by a sloppy
maid, the court’s statement of decision carefully reviews the legal rules
governing both intentional and negligent misrepresentations. It also contains a detailed analysis of the
question whether Jacobs’s statement regarding the maid was an intentional or a
negligent misrepresentation. In its analysis,
the court describes the evidence presented and observes that while it is
possible that Jacobs’s statement was an intentional misrepresentation, “there
are other inferences that are equally or more possible†that support the
conclusion that there was no intentional misrepresentation. Accordingly, the court found Buyers did not meet
their burden of proof on that claim. Given the court’s detailed analysis of this
question, we cannot agree that the court ignored Jacobs’s statements. We therefore decline Buyers’ request to remand
this case to the trial court to reconsider the remedy in light of Jacobs’s
actions.
Disposition
The judgment is affirmed.
Márquez,
J.
WE CONCUR:
Rushing, P. J.
Grover, J.
name="_ftn1" title=""> [1] At trial, Avila testified that he was worried
about the low thresholds on the patio doors; he said he feared they would leak,
and wished he had sent the thresholds back to Weather Shield. Avila expressed his concerns to Whitney, the
draftsman, who told him that the low-threshold doors were used all the time
“back east.†Avila did not discuss his
concerns with the Spivas.
name="_ftn2" title=""> [2] The purchase price listed on the purchase
agreement was $2,820,000. The parties
entered into a separate agreement whereby Buyers agreed to pay broker
commissions of $180,000, making the total value of the sale $3 million.
