GREENWICH v.WONG







Filed 12/2/10






CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

GREENWICH S.F., LLC, Plaintiff and Respondent, v. DONNA WONG, Defendant and Appellant.

A123670 & A124882 (San Francisco County Super. Ct. No. CGC-06-454625)

INTRODUCTION
The primary questions presented in this case are whether lost profits may be awarded as consequential damages under Civil Code section 3306 for breach of a real property sale agreement where the buyer intended to renovate and sell the property at a profit and, if so, whether lost profits were properly awarded here.[1] We shall conclude that although lost profits may be available in an appropriate case, lost profits were not properly awarded here, where the evidence showed the prospect of profits was uncertain, hypothetical and entirely speculative.
Defendant Donna Wong appeals from a judgment of the San Francisco Superior Court on a jury verdict awarding plaintiff and respondent Greenwich S.F., LLC (Greenwich S.F.) $600,000 in lost profits, among other damages, on appellant’s breach of a real property sales agreement between appellant and plaintiff Yui Hei Chan, Greenwich S.F.’s predecessor in interest.[2] Appellant contends the trial court applied an erroneous measure of damages by allowing recovery of lost profits as consequential damages under section 3306. She also contends the court erred (1) in admitting expert testimony as to the hypothetical value of the property if it had been renovated according to plaintiffs’ plans; (2) in allowing the expert to testify as to new opinions regarding valuation dates to which the expert did not testify during her deposition; and (3) in instructing the jury that it could award lost profits. If lost profits may be recovered in an appropriate case, appellant contends the evidence was insufficient to support the award in this case as (4) lost profits were not proved with reasonable certainty and the prospect of profits after renovation was hypothetical and speculative, and (5) there was insufficient evidence to support a finding that appellant knew plaintiffs intended to sell the property for a profit. Appellant also challenges (6) the award of $60,000 damages for sums plaintiffs had deposited into escrow, and (7) the award of $90,000 damages for funds plaintiffs expended toward the planned property renovation. Finally, should she prevail on appeal, appellant seeks reversal of the attorney fee award.
FACTS AND PROCEDURAL BACKGROUND
Appellant and her late husband Dennis Wong (Wong) were married for 44 years. The couple owned many investment properties together. Wong made decisions regarding the purchase of the properties; however, appellant did the bookkeeping, collected rents and paid the expenses. Yui Hei Chan was a licensed general contractor and had been involved in both remodeling and building houses. Chan and Wong had known each other for a long time. Chan called Wong his “uncle.” In 2001, Wong and Chan began doing business together, Wong buying houses and Chan remodeling them. Specifically, in 2001, Wong and a friend purchased a house on 28th Avenue. Chan remodeled the house, working on it for four or five months. Wong and Chan signed a contract wherein Chan was responsible for remodel plans, remodeling the house, and selling it. He made “commissions” from the remodeling, but could not remember how much. He stated it was “several tens of thousands of dollars.” Chan worked with Wong remodeling an apartment building owned by Wong, repairing the roofs on three structures. He was not paid for that work, but deducted $18,000 from a $50,000 debt on money he had borrowed from Wong in 2002. He repaid the balance of the debt, plus interest to appellant in 2003, after Wong’s death.
In 2002, Chan became aware of the subject property, located on Greenwich Street in San Francisco. It was a very old, damaged, and unoccupied residence. Chan contacted Wong and the two orally agreed that Wong would buy the property and Chan would remodel or rebuild it. Upon resale, Chan would receive 20 percent of the profit. Wong purchased the property for $711,000, taking title with appellant as “joint tenants.” Chan did not tell appellant about his 20 percent profit on resale of the property. He did not discuss the property with appellant before Wong’s death. However, Chan testified that appellant was present on one occasion when Wong told Chan that “we would be making money for sure and you would be making money, so she knew.” Appellant told Chan, “He is so old now. He is still concerning making money for you.”
Wong died suddenly on December 27, 2002, three months after purchasing the Greenwich Street property. During the three-month period, Chan had been working with an architect, James Li, on a design for the property. However the plans had not been drawn up before Wong’s death. Chan anticipated that after the plans were drawn, it would take approximately one year after plan approval by the City of San Francisco to complete the building. He had originally expected under his oral agreement with Wong that it would take more than two years from the date the property was purchased to complete the project.
About a month after Wong’s death, Chan heard from a realtor that appellant wanted to sell the Greenwich Street property. Of the properties that appellant was left owning, the Greenwich Street property was the only one (with the exception of her home) not producing income. The property needed major redevelopment, but appellant had no experience of the sort that would be required and, so far as her son Dexter Wong knew, she had no plan to develop it herself. Appellant called Chan a week later asking him to find a buyer. Chan tried, but was unable to find a buyer, because they thought the price was too high.
According to appellant, around this time Chan proposed to her that he would fix up the property for her, then sell it, and they would split the profit half and half. Chan denied this conversation. However, he told appellant that he had already spent $10,000 to $20,000 in his time and money on the project based on his oral agreement with Wong.
Chan testified that, pursuant to his oral agreement with Wong, he was to be paid for his work on the property as a contractor, plus 20 percent of the profits realized on resale. Asked how much he expected to make “as a contractor” on the project, he testified that the calculation would be based on the square footage of the construction and that “[u]sually is $160 to $180 per square foot.” That square footage would be “[w]hatever the City Hall approves in the plans.” He reiterated that he could not give a “best estimate” as to his expected earnings on the agreement with Wong because “[i]t all depends on what size the City approves. If the City approves 300 square foot, then it would be that, or 3,000 square foot, it would be that, or 4,000 square foot. Whatever.” He also stated, “the bigger the better, but it all depends on the approval from the City.” His agreement with Wong anticipated construction of a new two-unit building on the site. Li eventually drew up plans for a two-unit structure to replace the existing house. Although Chan did not remember the total square footage for those plans, he stated he “would approximate it to be 4,000 square foot.” Questioned again as to his “best estimate” of what he expected his 20 percent profit to amount to after renovation and resale of the property, Chan again said, “It is useless to approximate because it all depends when you sell the structure.” Asked to assume that the construction was completed and sold in the fall of 2004, Chan stated that one year did not include the time needed for the City to approve plans to get the permit and that he had expected the project to be completed and ready for resale “more than two years” after purchasing the property—“more or less” sometime in 2005. Asked to assume the property was ready for resale in the summer of 2005, Chan again could not estimate what 20 percent of the profits he expected to earn would total. He responded, “[y]ou [would] have to ask Uncle Wong because he paid for all the expenses, so I would not know.” Asked again, he stated, “I don’t know.” Asked whether he expected to earn more than $200,000, he answered that he “did not think of that question at all.”
Chan decided to try to find others to purchase the property with him. He contacted John Lee, a CPA, and someone with whom he had bought and sold houses previously. Lee testified that he “did business with Chan for many, many properties.” Chan’s role was to perform multiple functions as a finder of the property, as a contractor, and developer. Chan testified that as of 2003, he had worked on three renovation projects with John Lee for a percentage of the profits on the renovated properties.
Chan testified that on the first renovation project he undertook with Lee, he received 10 percent of the profit. Asked “[h]ow much was that [10] percent‌ How much did it amount to‌” Lee answered, “$160,000. Sorry. No. $1,600,000.”[3] Chan testified that he and Lee sold the second project, but did not make any profit. His percentage of the third project with Lee was also 10 percent, but once again he made nothing. Chan testified that before offering to purchase the Greenwich Street property he and Lee had a conversation about the possibility of potential renovations, but they did not discuss much. Chan stated that “[g]enerally we buy a property and then we discuss what to do about it.”
Lee proposed to buy the Greenwich Street property for $760,000. That was the price appellant was hoping to get. Lee contacted two other investors, Elizabeth Tsai and Eddy Shum, with whom Li and Chan formed a limited liability company, respondent Greenwich S.F., for the purpose of acquiring, developing, and reselling the property. Chan held about 10 percent and the other three each held about 30 percent of the company.[4] In May or June of 2003, Chan told appellant that he had a buyer for the property for the $760,000 price. A realtor prepared the purchase agreement and Chan signed it on July 25, 2003. The buyer in the contract was named as “Yui Hei Chan And Assignees.” Chan later executed a complete assignment of all of his rights and obligations under the contract to Greenwich S.F.[5]
Appellant signed and dated the contract in her home on July 30, 2003, in the presence of her son Dexter, himself a real estate broker. The parties had widely varying versions of the events leading to and following appellant’s signing of the purchase and sales agreement. However, on this appeal, we recite the facts in the light most favorable to the prevailing party, giving that party the benefit of every reasonable inference, and resolving conflicts in support of the judgment. (Whiteley v. Philip Morris, Inc. (2004) 117 Cal.App.4th 635, 642 & fn. 3; Eisenberg et al., Cal. Practice Guide: Civil Appeals and Writs (The Rutter Group 2010) ¶ 8:74, p. 8-35.)
Chan took the contract to Lee, who wrote a check for $60,000 so that escrow could be opened. Lee testified he expected escrow to close within a matter of days. Chan expected escrow to close within about 30 days.
Chan worked on obtaining the various approvals and permits for the work on redeveloping the property. Lee was not happy with the two-unit duplex concept that had been worked on thus far. Therefore, the project changed from a two-unit building to a single family residence and architect Li was engaged to begin redrawing the plans anew. These plans were revised several times: on March 30, 2004, July 9, 2004, and April 15, 2005. The eventual design was for a single family residence of approximately 4,000 square feet.
In September of 2003, appellant told Chan that tax issues had arisen with her husband’s estate and would delay closing of escrow on the property. Chan received a letter dated March 30, 2004, from an attorney representing appellant, implying that Chan was cheating appellant and demanding that the escrow be cancelled. The letter stated that the Greenwich Street property was in probate and that the escrow had to be cancelled. The letter was headed: “Notice of Rescission of Contract.” (The probate had been opened in September 2003, after appellant and Chan signed the contract. Appellant and Dennis Wong had held title in joint tenancy, so the property should never have been in the probate estate.) Chan spoke with Lee, who urged him to speak with appellant. Appellant asked Chan to cancel the escrow to allow the probate to proceed and assured him that after the probate was concluded, she would still sell the property to him. Chan told her that he and his partners were spending a lot of time and money getting permits and told her of the preparations being made for the redevelopment of the property. Lee also met with appellant in April 2004, and she agreed to reopen the escrow or open a new escrow once issues in probate were resolved. Therefore, appellant and Chan signed escrow cancellation instructions on April 28, 2004. Chan and Lee testified they never agreed to rescind the contract itself and appellant never suggested they do so.
Thereafter, appellant assisted Chan in posting notices required by the City to inform neighbors who might have objections to the project. A number of neighbors raised objections to the project. However, after meeting with Chan and architect Li about the proposed renovations, the neighbors’ objections were withdrawn. A permit was obtained sometime in 2005, but the permit fee was never paid.
At some point after the permit was approved in 2005, Chan asked appellant when she would transfer title so that plaintiffs could proceed. Appellant said the price had gone up, that the property was worth more than $1 million. She wanted $1.1 million for the property. She also maintained, including at trial, that she lacked the ability to transfer the property because it was in probate.
Plaintiffs Greenwich S.F. and Chan filed their action for breach of contract on July 28, 2006. The third amended complaint alleged a cause of action for breach of contract, together with other causes of action. Appellant raised various affirmative defenses and cross-complained against plaintiffs.
The case was tried to a jury in August and September 2008. At trial, plaintiffs presented evidence of their damages due to appellant’s breach of contract.
Lee testified on direct examination about $71,877.16 in out-of- pocket expenditures that Greenwich S.F. made from 2003 to 2005 as a result of the contract to purchase and develop the property: In 2003, Greenwich S.F. paid Li $10,000 for design work; paid $2,000 in attorney fees to form the limited liability company; paid an $800 minimum annual tax payment to the state; and paid $2,547.74 to the City and County of San Francisco for planning and related costs. In 2004, Greenwich S.F. paid Li $26,000 more for his architectural design services on the project; paid $412.42 to the San Francisco Planning Department; paid $117 for compilation of a list of people in the neighborhood required to be noticed of the planned construction; and paid $2,500 for a soils report as part of the permit requirements. In 2005, Greenwich S.F. paid $2,366.72 to the San Francisco Unified School District as part of the permit process, and $30,000 to a permit facilitator. (Lee testified it was almost impossible to get a permit approved in San Francisco without a facilitator.) In addition, the court admitted into evidence a handwritten itemization prepared by Lee. This itemization contained 12 entries, totaling $90,165.30. Most were referenced by Lee in his testimony. The itemization included a notation of “minimum tax LLC” of $4,800 (rather than the $800 to which Lee had testified); $2,547.74 to the City of San Francisco and $112.42 to the City Planning Department (rather than the single payment of $412.42 to which Lee had testified); $170 to the person compiling the list of neighbors (rather than $117); an additional $112.42 to Li for his revised plan; and $9,556 to Chan for travel costs.
Greenwich S.F. presented evidence of lost profits through the testimony of real estate appraiser Janette Miller. She had inspected the property in April of 2008, and had seen the plans and specifications prepared by Li for the project. Based on her review of a “drive by” or “desktop” appraisal done for appellant before the sale by John Tom in 2002, that valued the property at $850,000, Miller opined that the value of the property in December 2002 was $878,000. Miller also testified she had appraised the property in April 2008, some months before trial, at $1,009,000 in its undeveloped state (the “as is” appraisal). Miller acknowledged that her April 4, 2008 “as is” appraisal misstated the neighborhood boundaries and that it erred in listing the zoning compliance as “legal.” In fact, the lot was substandard and the property would be a legal nonconforming use. She maintained it was likely the developer would be able to build a house on the property, but that “there might be a few more hoops for them to jump through.” Miller also opined that if the property could be built according to the plans and specifications that had been generated by Li and with no changes (the “plans and specs” appraisal), the value of the property would have been $3,252,000 as of April 4, 2008. Appellant’s expert real estate appraiser Stanley Joel Tish criticized Miller’s appraisals (and particularly the “plans and specs” appraisal) on numerous grounds and concluded that the “plans and specs” appraisal was not in conformity with minimal appraisal standards of the Uniform Standards of Professional Appraisal Practice and did not constitute a market value appraisal. Tish also opined that the reports indicated nothing about the financial viability of the proposed project. He did not opine on the market value of the property.
At the close of trial, both parties moved for directed verdicts. The trial court ruled Chan had no causes of action remaining following the assignment of his interest to Greenwich S.F.
The jury returned its verdict, finding there had been a contract between the parties and that appellant had breached it. [6] It made the following findings as to damages: The difference between the fair market value of the property on the date of the breach and the contract price was $0. The amount of payments made by plaintiffs toward the purchase was $60,000. The amount of any reasonable expenses for examining title and preparing documents for sale was $0. The amount of reasonable expenses in preparing to occupy the property was $0. The amount of reasonable consequential damages for lost profits was $600,000, and the amount of reasonable consequential damages for expenditures incurred by plaintiffs in planning to develop the property was $90,000.[7] Judgment was entered on October 6, 2008.[8] Appellant filed a timely appeal from the judgment (case No. A123670).
On January 27, 2009, the court awarded $391,000 in attorney fees to plaintiffs. Appellant timely appealed the attorney fee award (case No. A124882). We consolidated the two appeals.
DISCUSSION
I. Lost Profits Under Section 3306
The parties agree that the proper measure of damages in this case is that set forth in section 3306, which provides: “The detriment caused by the breach of an agreement to convey an estate in real property, is deemed to be the price paid, and the expenses properly incurred in examining the title and preparing the necessary papers, the difference between the price agreed to be paid and the value of the estate agreed to be conveyed at the time of the breach, the expenses properly incurred in preparing to enter upon the land, consequential damages according to proof, and interest.” (Italics added.)
The parties disagree as to whether consequential damages under section 3306 may include lost profits. The issue is one of law, subject to our de novo review on appeal. (Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305, 315 [measure of damages for promissory estoppel is a question of law]; Glendale Redevelopment Agency v. County of Los Angeles (2010) 184 Cal.App.4th 1388, 1396 [de novo review of questions of statutory interpretation].) “The rules of damages for a breach of a contract to sell or buy real property are special and unique. To the extent that the measure of compensatory damages available to a buyer or seller of real property for a breach of a contract are different from the general measure of compensatory damages for a breach of contract, the special provisions for damages for a breach of a real property sales contract prevail.” (12 Miller & Starr, Cal. Real Estate (3d ed. 2001) § 34:42, p. 34-158, citing Code Civ. Proc. § 1859; Crag Lumber Co. v. Crofoot (1956) 144 Cal.App.2d 755, 777-780.)
No California case cited by the parties or found by us directly holds that lost profits are encompassed within the “consequential damages” recoverable by the parties under section 3306. Various treatises appear to differ on the question whether lost profits ever may be recovered as consequential damages. (Compare 12 Miller & Starr, Cal. Real Estate, supra, § 34:45, pp. 34-160 to 34-161 (rel. 9/2008) [indicating lost profits may be available where the “buyer purchased the property for purposes of resale and the seller was aware of the buyer’s purpose”] with Cal. Real Property Remedies and Damages (Cont. Ed. Bar 2d ed. Aug. 2010 update) § 4.46, p. 321 [lost resale profits not available] and 54 Cal. Jur.3d (2008) Purchaser’s Remedies, § 563, p. 744 [lost profits are “generally not an allowable measure of recovery”]; see also Greenwald & Asimow, Cal. Practice Guide: Real Property Transactions (The Rutter Group 2009) ¶ 11:192, p. 11-47 [stating both that lost profits are not recoverable consequential damages under section 3306, and that “[u]nless the buyer purchased the property for resale and the seller was aware of the buyer’s intention to resell the property, lost profits are not deemed a reasonably foreseeable, natural consequence of the seller’s breach of its obligation to convey”].)[9]
Historically, the measure of damages under section 3306 for a seller’s breach of a contract to sell real property has been held not to include lost profits. (E.g., Coger v. Wiltsey (1931) 117 Cal.App. 652, 657-658.) The appellate court in Coger v. Wiltsey reversed a judgment awarding lost profits for breach of an agreement to convey real property where the jury was instructed in terms of section 3300, rather than 3306. The appellate court reasoned that to allow the recovery of lost profits in this context “would open the door to fraud and collusion. One would merely have to plead and prove a contract with a third party, and he thereupon would be entitled to judgment for the difference between the original contract price and the contract price with the third party. This would be done, as attempted here under the guise of special damages. This would open up a realm of speculation for the jury. It was probably for this reason that the legislature confined the damages to the difference between the price agreed upon in the contract and the value of the land at the time of the breach. . . . [W]here a vendor has breached his contract to convey real property, the vendee cannot recover damages predicated . . . solely upon profits which he might have made on a resale of said property to a third party.” (Id. at pp. 657-658.)[10]
Section 3306 was amended in 1983 to eliminate a requirement of bad faith and to add consequential damages and interest to the damages recoverable for a breach of the agreement to convey an estate in real estate. (Stats. 1983, ch. 262, § 1, p. 806.) Stevens Group Fund IV v. Sobrato Development Co. (1991) 1 Cal.App.4th 886, 892 (Stevens Group Fund IV) described the relevant legislative history of that amendment: “The summary of Assembly Bill No. 1086 explained the amendment as follows: ‘Under existing law, the detriment caused by a breach of an agreement to convey real property is the price paid, expenses incurred, interest, and, in the case of bad faith, the difference between the agreed price and the value of the property plus expenses incurred in preparing to enter upon the land. [¶] This bill would delete the requirement of bad faith for recovery of the difference between the agreed price and the value of the property plus expenses in preparing to enter upon the land, and would also permit the recovery of other consequential damages and interest, as specified.’
“The Assembly Committee on Judiciary explained the inclusion of consequential damages in the proposed statute. ‘This bill would permit the recovery of “consequential damages” for breach of a real property conveyance agreement. Generally, such damages are those which, in view of all facts known by the parties at the time of the making of the contract, may reasonably be supposed to have been considered as a likely consequence of a breach in the ordinary course of events. This provision would conform the measure of damages in real property conveyance breaches to the general contract measure of damages which is specified in Civil Code 3300: “ . . . all the detriment proximately caused (by the breach), or which, in the ordinary course of things, would be likely to result therefrom.” ’ [¶] Thus, section 3306 provides that the measure of damages for plaintiff is the difference between the contract price and the fair market value of the property at the time of the breach plus consequential damages.” (Stevens Group Fund IV, supra, 1 Cal.App.4th at p. 892, italics added.)
As explained by the Supreme Court in Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960, 968 (Lewis Jorge), a case involving breach of a construction contract and damages under the general contract measure of damages of section 3300: “Contractual damages are of two types—general damages (sometimes called direct damages) and special damages (sometimes called consequential damages). (24 Williston on Contracts (4th ed. 2002) § 64.1, pp. 11-12; 3 Dobbs, Law of Remedies (2d ed.1993) § 12.2(3), pp. 39-42; see, e.g., Erlich v. Menezes (1999) 21 Cal.4th 543, 558.)” “Unlike general damages, special damages are those losses that do not arise directly and inevitably from any similar breach of any similar agreement. Instead, they are secondary or derivative losses arising from circumstances that are particular to the contract or to the parties. Special damages are recoverable if the special or particular circumstances from which they arise were actually communicated to or known by the breaching party (a subjective test) or were matters of which the breaching party should have been aware at the time of contracting (an objective test). [Citations.] Special damages ‘will not be presumed from the mere breach’ but represent loss that ‘occurred by reason of injuries following from’ the breach. [Citation.] Special damages are among the losses that are foreseeable and proximately caused by the breach of a contract. (Civ. Code, § 3300.)” (Lewis Jorge, at pp. 968-969.) “Lost profits, if recoverable, are more commonly special rather than general damages [citation], and subject to various limitations. Not only must such damages be pled with particularity [citation], but they must also be proven to be certain both as to their occurrence and their extent, albeit not with ‘mathematical precision.’ [Citations.]” (Id. at p. 975.)
Where “consequential damages” or special damages are recoverable for breach of contract not involving breach of a real property purchase agreement, they may include lost profits, where such profits are the natural and direct consequence of the breach, where the amount of the lost profits can be established with reasonable certainty, and where the seller knew of the buyer’s intent to use the property for profit. (See § 3301.)
Appellant relies upon three cases decided after the 1983 amendment of the statute to support her contention that lost profits are never recoverable under section 3306: Stevens Group Fund IV, supra, 1 Cal.App.4th 886; Reese v. Wong (2001) 93 Cal.App.4th 51; and Horning v. Shilberg, supra, 130 Cal.App.4th 197.

TO BE CONTINUED AS PART II….


Publication Courtesy of California attorney directory.
Analysis and review provided by Oceanside Property line attorney.
San Diego Case Information provided by www.fearnotlaw.com

---