McLeroy v. Western Pacific Housing

Filed 9/26/06 McLeroy v. Western Pacific Housing CA6

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

Plaintiffs Linda and Jeff McLeroy signed a contract to purchase a new condominium from defendants Western Pacific Housing, Inc. and Western Pacific Housing-Communications Hill, LLC. Plaintiffs thought they were buying a unit with a three-foot yard along one side but after the unit was constructed, escrow closed, and plaintiffs moved in, they discovered there was no side yard; the living room window looked directly into the neighbors’ backyard. Plaintiffs sued and the matter was resolved through a judicial reference proceeding. The referee concluded that under the measure of damages described in Civil Code section 3343[1] plaintiffs had not suffered any compensable damages. Plaintiffs appeal from the resulting judgment.

I. Background[2]

Plaintiffs wanted to purchase a soon-to-be built condominium in defendants’ Lancaster Gate complex. In or about April 2002, plaintiffs selected unit 1301 and were given a set of documents and disclosures concerning the property. The documents plaintiffs received contained plans that showed the location, layout, and boundaries of unit 1301. The plans demonstrated that unit 1301 did not have a separate side yard. The boundary line between the unit’s rear yard and the yard next door stopped at the corner of the structure. Defendants’ agent highlighted this feature on the document showing the property lines when he went over the sales documents with plaintiffs. Although the documents accurately represented that there was no side yard, plaintiffs claimed that they failed to comprehend this fact. Plaintiffs signed the purchase agreement and paid a deposit of $10,000.

Two months after entering into the purchase agreement but before escrow closed plaintiffs took a tour of the completed premises with defendants’ agent, Sal Garcia. At the time of the tour there was a six-foot fence running between unit 1301 and the unit next door. The placement of the fence made it appear that unit 1301 had a three-foot side yard. Plaintiffs were not surprised by the location of the fence. Linda McLeroy commented during the walk-through that she could hang flowerpots on the fence after they moved in. The fence, however, had been erected in the wrong place and was scheduled to be removed.

Escrow closed on June 21, 2002, four days after plaintiffs’ tour of the property. Some time shortly after plaintiffs took possession of the premises, workers arrived to remove the fence. Although plaintiffs objected, the fence was eventually removed. Now plaintiffs’ living room window faced the neighbors’ yard. The neighbors’ yard was at first an eyesore. After the yard was improved the neighbors used it frequently, were very noisy, and often looked into plaintiffs’ window. Plaintiffs claimed to have lost a significant amount of privacy and to have suffered severe emotional distress.

Plaintiffs were unable to reach a compromise with the neighbors and filed this action, asserting causes of action for fraud and deceit, negligence, breach of contract, and rescission. Plaintiffs claimed that they would not have gone forward with the purchase of unit 1301 if they had realized the unit had no side yard. They alleged as damages the “diminution of property value“ and special and general damages according to proof.

The superior court ordered the matter resolved by judicial reference as required by the purchase contract. Plaintiffs eventually abandoned their cause of action for rescission and the reference proceeded on the causes of action for intentional and negligent misrepresentation and fraud based on failure to disclose. Plaintiffs’ contentions at the proceeding were that as a result of defendants’ misrepresentation at the time of the walk-through they had suffered damages of $20,000, which, they claimed, was the difference between the actual value of the property and the amount they paid for it. They also claimed to have suffered emotional distress damages in the combined amount of $50,000. Defendants conceded that Garcia should have disclosed the improper location of the fence. They argued, however, that plaintiffs had not suffered any compensable injury.

The referee found that there were no misrepresentations or concealments inducing plaintiffs to sign the purchase contract. Defendants’ agent had highlighted the correct property line but plaintiffs did not understand its significance at the time. The referee did not accept plaintiffs’ claim that they were also unaware that there would be a window or a door on the subject wall. The referee concluded that Garcia should have disclosed that the fence was improperly located and that, if he had done so, plaintiffs would have forfeited their deposit to the extent required and would not have gone through with the purchase. Although the property would have been worth more with a side yard than without, the referee found that plaintiffs could not recover damages for the difference in value since they had not contracted to purchase a condominium with a side yard. Plaintiffs’ assertion that they would have terminated the contract had they been informed that the fence was in the wrong place did not support an award of damages related to the value of the property or other consequential damages.

The referee did find that plaintiffs had suffered emotional distress related to Garcia’s fraudulent concealment. The plaintiffs did not actually become aware that there would be no side yard and that their large window would directly face the neighbor’s backyard until after the workers arrived to remove the fence. As a result, plaintiffs “were shocked and dismayed and forced to endure a significant lack of privacy resulting in a substantial and enduring emotional distress.” The referee valued Linda McLeroy’s emotional distress at $15,000 and Jeff McLeroy’s emotional distress at $10,000. Upon further consideration, however, the referee declined to award damages for emotional distress because section 3343, which is the exclusive measure of damages in this case, does not permit recovery for emotional distress. The referee refused to award punitive damages because under the terms of the purchase agreement plaintiffs had waived their right to seek punitive damages.

The superior court adopted the decision of the referee (Code Civ. Proc., § 644, subd. (a)) and entered judgment in favor of defendants. Plaintiffs have timely appealed.

II. Issues

Plaintiffs argue that section 3343, which sets forth the measure of damages for fraud in the “purchase, sale or exchange of property,” does not preclude an award of damages for emotional distress. In the alternative, plaintiffs maintain that section 3343 does not apply and that the applicable measure of damages is contained in section 3333, which is the measure of damages for breach of a duty not arising in contract. Plaintiffs also argue that their contractual waiver of punitive damages is void as against public policy.

III. Discussion

A. Section 3343 Precludes Recovery of Damages for Emotional Distress

There are two measures of damages for fraud, the “out-of-pocket“ measure and the “benefit-of-the-bargain“ measure. The out-of-pocket measure of damages restores the plaintiff to the financial position he or she enjoyed prior to the fraudulent transaction. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240.) The benefit-of-the-bargain measure is concerned with satisfying the expectancy interest of the defrauded 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. (Ibid.) In California, the Legislature has expressly provided that the out-of-pocket measure of damages applies in cases involving the “ ‘purchase, sale or exchange of property.’ “ (Ibid.; § 3343, subds. (a), (b)(1).)

Section 3343 is the exclusive measure of damages in cases in which it applies. (Bagdasarian v. Gragnon (1948) 31 Cal.2d 744; see also Cory v. Villa Properties (1986) 180 Cal.App.3d 592, 598-599.) 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].” Subdivision (b)(1) precludes recovery of “any amount measured by the difference between the value of property as represented and the actual value thereof.” Subdivision (b)(2) states, however, that nothing in section 3343 shall deny “any person having a cause of action for fraud or deceit any legal or equitable remedies to which such person may be entitled.” (Italics added.)

Plaintiffs argue that since section 3343, subdivision (b)(2) states that a person is not to be denied “any legal or equitable remedies” to which he or she may be entitled, the section permits recovery of damages for emotional distress. The argument is unavailing for the simple reason that emotional distress damages are not other remedies. Plaintiffs’ remedy under section 3343 is damages. In Bagdasarian v. Gragnon, supra, 31 Cal.2d at page 763, the Supreme Court explained: “The provision relating to other legal or equitable remedies . . . does not pertain to the measure of damages, but, rather, it preserves such other remedies as the right to rescind or the right to recover on a warranty, if any.”

The long-settled rule is that one defrauded in the purchase, sale or exchange of property may not recover damages for emotional distress. (Newman v. Smith (1888) 77 Cal. 22, 27.) Every case that has expressly considered the question has concluded that emotional distress is not an element of the out-of-pocket measure of damages as defined by section 3343. (Sierra Nat. Bank v. Brown (1971) 18 Cal.App.3d 98, 103; O‘Neil v. Spillane (1975) 45 Cal.App.3d 147, 159; Channell v. Anthony (1976) 58 Cal.App.3d 290, 315; In re Marriage of McNeill (1984) 160 Cal.App.3d 548, 559; Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149, 1162.) Plaintiffs offer no convincing reason to depart from this line of authority.

Plaintiffs’ only argument in support of their position is that in Eatwell v. Beck (1953) 41 Cal.2d 128, 134-135, the Supreme Court held that section 3343 “was not intended to, and that it does not, preclude the recovery of exemplary damages.” Plaintiffs argue that by analogy to Eatwell, section 3343 does not preclude recovery of emotional distress damages either. It is true that Eatwell construed the language now contained in section 3343, subdivision (b)(2) as permitting recovery of punitive damages. But the holding does not support the conclusion that emotional distress damages may be had as well.

“Compensatory damages and punitive damages are two different things with two different purposes. Compensatory damages are awarded to compensate an injured party for his injury; punitive damages are awarded to punish a wrongdoer and make an example of him [or her].” (Merlo v. Standard Life & Acc. Ins. Co. (1976) 59 Cal.App.3d 5, 20.) Emotional or mental distress is a form of injury for which a plaintiff may recover compensatory damages in a proper case. (Id. at p. 16.) Thus, emotional distress damages, if available, would be an element of a plaintiff’s measure of damages. And, as we have explained, the exclusive measure of damages under section 3343 is the plaintiff’s out-of-pocket, pecuniary loss, which does not include emotional distress. Since punitive damages are not compensatory damages, they are not part of the measure of damages. The availability of punitive damages, therefore, is not affected by any limit upon the measure of damages. It follows that there is nothing in section 3343 to preclude an award of punitive damages. Accordingly, plaintiffs’ proposed analogy is inapt.

B. Section 3333 Does Not Apply

Plaintiffs’ alternative argument is that their claim is governed by section 3333. 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.” This section permits recovery of emotional distress damages in a proper case. (Cf. Schroeder v. Auto Driveaway Co. (1974) 11 Cal.3d 908, 921.) Plaintiffs argue that, since there was no fraud in the inducement of the purchase contract, their injury does not arise from the contract so that section 3333 is the applicable measure of damages. Plaintiffs rely upon Sprague v. Frank J. Sanders Lincoln Mercury, Inc. (1981) 120 Cal.App.3d 412 (Sprague), in which the appellate court held that fraud occurring after performance of a purchase contract was governed by section 3333. The case is distinguishable.

In Sprague, the plaintiff returned her new automobile to the dealer numerous times for repair of various defects during the warranty period. On each occasion the dealer falsely represented to her that repairs would be properly made. Plaintiff alleged that the false representations were made in order to induce her to leave her car with the defendant so that the defendant could represent to the manufacturer that the repairs were made and collect for the work from the manufacturer. The plaintiff relied upon the representations by leaving her car with the defendant and foregoing her right to rescind the purchase contract, believing the car would be repaired correctly. (Sprague, supra, 120 Cal.App.3d at p. 415.) At trial the court refused to allow any evidence of emotional distress damages. The appellate court concluded that this was error, explaining: “The complaint and the proof in this case rather clearly demonstrate that plaintiff’s suit is not on the contract, though the contract is the foundational backdrop giving rise to the action. Plaintiff does not seek to rescind the contract because of defects in the car nor to sue for damages for the breach of the contract. The complaint is not that the automobile was a ‘lemon’ nor that there was a breach of warranty; rather, the complaint is that despite repeated representations by defendant that certain defects and difficulties with the car had been repaired and corrected, in reality they were not.” (Id. at p. 419.) That is, the misrepresentations did not relate to the purchase, sale, or exchange of the property.

Plaintiffs argue that their suit is likewise not “on the contract” because the misrepresentation occurred after they signed the contract. We disagree. Plaintiffs’ complaint arises directly from their contract to purchase the property. Plaintiffs alleged that, at the time they signed the purchase contract, defendants represented that there would be a walkthrough process to allow for review and inspection of the premises prior to closing. Plaintiffs signed the contract in reliance upon that representation. Defendants then placed a fence in a location that made it appear that the property had a three-foot side yard. By so doing defendants “impliedly represented to [plaintiffs] that the Fence was placed in its intended location, and[/]or that the placement of the Fence was permanent.” Defendants’ agent perpetuated the misrepresentation by failing to disclose that the fence was in the wrong place and if plaintiffs had known the truth “they would have never purchased the Home in the first instance or closed escrow on the transaction.” That is, the contract was still executory when the misrepresentation was made. These allegations along with the proof plaintiffs produced unquestionably relate to a claim of fraud in the purchase, sale or exchange of property. The gravamen of the entire action is that the misrepresentation caused plaintiffs to complete the purchase of a property they otherwise would not have purchased. This type of claim falls squarely within the scope of section 3343.

C. The Fraud Was Not Independent of the Property Transaction

Plaintiffs claim that defendants’ “fraud” was an independent tort, separate and apart from the “breach” of the purchase contract. Plaintiffs rely upon Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 990, in which the Supreme Court held that the defendant’s fraudulent conduct in the performance of a contract for the sale of helicopter parts established an independent tort separate from the breach of contract. Accordingly, the plaintiff’s recovery was not limited by the “economic loss” rule. Plaintiffs argue by analogy that defendants’ fraud in this case was an independent tort and, therefore, plaintiffs’ recovery should not have been limited by the usual measure of damages. We reject the argument because the misrepresentation of which plaintiffs complain simply does not amount to an independent tort.

Fraudulent representations which work no damage cannot give rise to an action at law. (Abbot v. Stevens (1955) 133 Cal.App.2d 242, 247.) Although it is conceded that defendants misrepresented the location of the property line at the time of the walkthrough, the misrepresentation is not compensable as fraud absent proof of damage. By the time the misrepresentation was made plaintiffs had already agreed to purchase the unit without a side yard. The misrepresentation merely deprived them of the opportunity to cancel the contract, which they acknowledge would have cost them some or all of their $10,000 deposit. The law does not provide a remedy for this type of “loss.” It does not lie within the power of any judicial system to remedy all human wrongs. (Nagy v. Nagy (1989) 210 Cal.App.3d 1262, 1269.)

By completing their performance of the contract plaintiffs now own a condominium. Although it is not what they may have thought they were getting, it is what they paid for. Even if, as plaintiffs allege, they suffered emotional distress they would not have suffered if they had had the opportunity to cancel the contract, the emotional distress is not a recoverable item of damages even in general fraud or deceit actions except as an aggravation of other damage. (Williams v. Wraxall (1995) 33 Cal.App.4th 120, 134.) Thus, there was simply no independent tort for which they may be compensated.

D. Plaintiffs Are Not Entitled to Punitive Damages

The referee concluded that plaintiffs were not entitled to an award of punitive damages because the purchase agreement contained a punitive damages waiver. Plaintiffs claim that the waiver is void as a violation of public policy. We need not reach this contention because we have concluded that plaintiffs have not suffered any actual damages. In California, as common law, actual damages are an absolute predicate for an award of exemplary or punitive damages. (See § 3294; Mother Cobb‘s Chicken T., Inc. v. Fox (1937) 10 Cal.2d 203, 205; Hilliard v. A.H. Robins Co. (1983) 148 Cal.App.3d 374, 391; Jackson v. Johnson (1992) 5 Cal.App.4th 1350, 1355.) Since plaintiffs suffered no actual damages there is no predicate for an award of punitive damages.

IV. Disposition

The judgment is affirmed.

Premo, J.

WE CONCUR:

Rushing, P.J.

Elia, J.

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[1] Hereafter all unspecified statutory references are to the Civil Code.

[2] Since this matter was resolved by judicial reference and there is no reporter’s transcript, our recitation of the facts is based upon the referee’s factual findings, which, for purposes of this appeal, are undisputed.