Coy v. Wachtel

Filed 5/3/07 Coy v. Wachtel CA2/6

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

Appellants Sylvia Wachtel and Leonard Wachtel (the Wachtels) owned a home located at 2511 Seadrift Court in Port Hueneme (the property) which they sold to respondents Samuel Coy and Laura Coy (the Coys). The Coys subsequently discovered that there had been a severe pigeon infestation in the attic during the Wachtels' ownership of the property. The Coys brought a tort action against the Wachtels alleging they had failed to disclose the infestation and its subsequent eradication. The jury found in favor of the Coys and awarded them economic and punitive damages.

The Wachtels filed motions for a new trial and judgment notwithstanding the verdict, which the trial court denied. They appeal, arguing that their disclosure was adequate; the Coys are not entitled to damages; there was no basis for the punitive damages or attorneys fee awards; the verdicts are inconsistent and Mrs. Wachtel was not professionally negligent. We reduce the award of economic damages, but otherwise affirm.

FACTS

Evidence of Pigeon Infestation

Sylvia Wachtel is a real estate broker. She and her husband, Leonard, owned a single family home which they leased as a rental property. In 1997, a tenant told Mrs. Wachtel that he and his wife heard "doves" in the attic. Mrs. Wachtel did not investigate and assured the tenant that he had heard pigeons on the roof.

The Wachtels later rented the property to Tina O'Brien. In November 2001, she notified them that an odor was emanating from an interior wall. They asked her to take care of the problem, and she hired a handyman. He removed the drywall and disposed of nine dead pigeons found in the wall void.

The odor persisted and was traced to the attic. On January 9, 2001, O'Brien obtained an estimate from Ventura Pest Control of $400 to bird-proof the attic; $1,250 to sanitize it; and $6,500 to remove and replace the damaged insulation. The inspector wrote, "In my opinion these pigeons have been nesting in this attic for well over a year. The birds seem to have a problem exiting the attic once they've entered. There is [sic] decomposing bodies feathers [and] droppings . . . that cover the attic floor. The insillation [sic] will have to be replaced during the clean-up process."

Mr. Wachtel took no action, so O'Brien filed a complaint with the City of Port Hueneme. She contacted the code compliance manager to report the condition of the house. The compliance manager contacted Mr. Wachtel, who indicated that the clean-up estimate was too expensive and he would contact another pest control company for a bid. O'Brien subsequently terminated her lease and moved out of the house.

On January 24, 2001, Wachtel obtained an estimate from Cragoe Pest Control for $1,275 and hired them to perform the work. The contract specified that Cragoe would "[r]emove all fowl excrement [and] nesting material including pigeon carcasses from attic. Area will be sprayed with disinfectant once all contaminated material is removed. If found, area will be treated for parasites. . . .  Attic insulation removed due to contamination will not be replaced. Affected areas will be vacuumed using [High Efficiency Particulate Air] HEPA-type equipment."

In February 2001, three Cragoe employees performed the clean-up. Over a three-day period, they removed approximately 20-30 dead pigeons along with their eggs and nesting material. In some areas the droppings were stacked from one to three feet high. The pigeon refuse and contaminated insulation filled approximately 30-40 trash bags. Cragoe vacuumed the attic with HEPA-type filters and sprayed it with "an anti-viral, antibacterial, odor neutralizing and sanitizing agent." Cragoe did not remove debris in areas that were inaccessible, such as wall voids and narrow attic spaces. The Wachtels did not inspect the attic after Cragoe completed the job.

Sale of Property to Coys

The Wachtels listed the property for sale. They were represented by Mrs. Wachtel and a co-listing agent, Lei Eberhardt. The Coys were represented by broker Douglas Moe. On April 2, 2001, the Wachtels entered into a purchase and sale contract with the Coys to sell the property for $325,000. The Coys obtained financing for $320,000 of this amount. Eberhardt and Moe loaned the Coys $5,000 to break a stalemate in the negotiation process.

Although the Wachtels provided a transfer disclosure statement (TDS), they did not disclose that there had been a pigeon infestation in the attic or its present condition. The TDS read "there were birds in the attic, but it was taken care of. Some insulation had to be removed." In the agent disclosure section of the form, Eberhardt wrote "Pidgeons [sic] have gotten in [the] attic and [an] exterminator has come in and removed damaged insulation. Hole has been sealed." A termite inspection report stated that "Any infestation regarding pidgeons [sic] in the attic should be referred to others. There were no pidgeons [sic] noted at the time of inspection. This is a disclaimer only."

Coys Learn of Infestation

In May 2001, a neighbor told Mrs. Coy that Cragoe Pest Control had removed insulation, excrement and dead birds from the attic. Mrs. Coy testified that she went into the attic and saw that the ductwork was "plucked" and shredded in certain areas. Both the ductwork and insulation were covered in feces. The Coys asked Cragoe to re-inspect the attic. Mr. Cragoe testified that his inspection revealed only stains from pigeon excrement that his crew had scraped off the beams, pipes, cables and air ducts.

The Coys also asked Ventura Pest Control to perform an inspection. The employee who had given the estimate in 2001 testified that only a portion of the damaged insulation had been removed. The wood and the ducting had not been touched and were still covered in feces. There were also pigeon feces in a wall void. In October 2001, the Coys moved out of the house and stopped paying their mortgage.

Coys File Tort Action

The Coys filed an action against the Wachtels for intentional and negligent misrepresentation/concealment; intentional infliction of emotional distress and negligence.^[1] They alleged a cause of action against Mrs. Wachtel for professional negligence. Causes of action were also alleged against the Coy's real estate agent and broker; however, they are not parties to this appeal. The Wachtels filed an answer denying the allegations of negligence, claiming that the property was sold in an "as is" condition and that the Coys had failed to adequately investigate the property, despite the strong recommendation in the contract that they do so.

The Wachtels acknowledged that they were aware that pigeons had gotten into the attic, but stated they had hired a pest control company to remedy the problem. They believed "the premises were fully safe for human habitation, and would never have sold the property in this manner without the understanding and good faith belief given to them by pest control professionals that the problem was completely remedied."

The Wachtels further alleged that the Coys had been repeatedly advised in writing to conduct an independent inspection of the property, yet failed to do so. They contended that, had the Coys inspected public records, they would have discovered a complaint lodged with the City of Port Hueneme concerning the condition of the home.

Sale of Property to Andrades

In June 2004, while the litigation was pending, the Coys sold the property to Diana and Frankie Andrade for $505,000. Prospective buyers had been given documents informing them of the former pigeon infestation and lawsuit. The Andrades had the home inspected and acknowledged receipt of the disclosure material but Mrs. Andrade testified they had not read it. After deducting the costs of sale, arrearages and late charges, the Coys realized a net profit of $111,268.20.

Special Verdicts

The jury returned special verdicts, finding that the Wachtels were 80 percent at fault. It found in favor of the Coys on the causes of action for intentional misrepresentation, concealment, negligent misrepresentation and general negligence and found that Mrs. Wachtel was professionally negligent. The jury rejected both emotional distress causes of action, finding that the Coys had not suffered severe emotional distress or suffered emotional distress based on a fear of illness.

The Coys were awarded the sum of $315,200 in damages, consisting of $75,200 in economic damages and $240,000 in punitive damages. The court found the Coys to be the prevailing parties and awarded them $168,086.62 in attorneys fees.

Post-Trial Motions

The Wachtels filed post-trial motions for a new trial on the issue of damages, liability and a motion for judgment notwithstanding the verdict (JNOV). All were denied. The Wachtels appeal (1) the judgment denying their request for a JNOV and motion for a new trial, and (2) the trial court's order awarding the Coys attorneys fees.^[2]

DISCUSSION

The Wachtels argue that (1) their disclosure of the pigeon problem was adequate; (2) the Coys have no damages, thus, there was no basis for the punitive damages or attorneys fee awards; (3) Mrs. Wachtel was not professionally negligent because she had no fiduciary relationship with the Coys; and (4) the special verdicts of intentional misrepresentation are legally inconsistent with the negligence verdicts.

Duty of Disclosure

The seller of a residence has both a common law and statutory duty to disclose material facts concerning a defect in the property. (See 1 Miller & Starr, Cal. Real Estate (3d ed. 2003)  1:140, p. 504.) A breach of the duty of disclosure may exist when (1) a fact is known only to the seller, and (2) the seller knows that the buyer is unaware of the fact and cannot reasonably discover it. (Id.at pp. 506-507.) Failure to fulfill this duty constitutes fraud. (Id.at p. 505.) "'[W]here the seller knows of facts materially affecting the value or desirability of the property . . . and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. [Citations.]'" (Shapiro v. Sutherland (1998) 64 Cal.App.4th 1534, 1544.) A seller is also required by statute to provide a written disclosure to the buyer. (Civ. Code,  1102.3, 1102.6.)^[3] The materiality of the fact and the seller's knowledge are factual questions that we review for substantial evidence. (Shapiro, at p. 1544.)

The Wachtels argue that their statement that "an exterminator had resolved a problem in the attic involving pigeons" represented the full extent of their knowledge and was all they were required to disclose. They also claim they were under no obligation to inspect the attic after the clean-up because the Cragoe contract specified that it would remove pigeon debris from the attic and they had no reason to believe that any problem remained.

We reject these contentions. After being informed of the problem by their tenant, the Wachtels delayed cleaning up the attic until they were contacted by a county official. Two months after the extensive clean-up was completed, the Wachtels sold the property to the Coys. Contrary to their argument, the Coy's disclosure was grossly inadequate. The presence of decaying birds in the attic and its filthy condition was a defect of such magnitude that it required full disclosure to a prospective buyer. Moreover, the defective condition still existed at the time of the sale. There was evidence that, after the attic was reinspected, pigeon excrement was found on the ducting, beams, in a wall void and the insulation was damaged or missing.

The Wachtels rely on Pagano v. Krohn (1997) 60 Cal.App.4th 1 to argue they satisfied their duty of disclosure. In Pagano, buyers of a condominium brought an action against the seller and the seller's and buyer's agents, contending they failed to disclose the existence of water damage in the buyer's unit. Prior to the sale, the seller and agent disclosed that there was a water intrusion in the development that affected some of the units, which resulted in a lawsuit against the developer. There was no evidence that there had ever been water damage in the buyer's unit. However, after the sale of the condominium, the buyers found signs of water damage. The trial court granted summary judgment in favor of all the defendants, because none had knowledge of water intrusion in the buyer's unit when the sale was made. Here, the Wachtels had knowledge of the infestation, which they failed to fully remediate, then chose to minimize its significance on their disclosure statement. The Wachtels breached their duty of disclosure and are liable for damages caused by their breach. The egregiousness of the Wachtel's misconduct is sufficient to merit an award of punitive damages. (See Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1180; Johnson v. Ford Motor Co. (2005) 35 Cal.4th 1191, 1201.)

Damages Available Under Civil Code Section 3343

Fraud in the purchase, sale or exchange of property is limited to those damages specified by Civil Code section 3343.^[4] A defrauded buyer may only recover out of pocket loss, together with consequential damages. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240; Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149, 1162.) By contrast, a buyer defrauded by a fiduciary may recover compensation "for all the detriment proximately caused thereby, whether it could have been anticipated or not." ( 3333;^[5]Brown v. Critchfield (1980) 100 Cal.App.3d 858, 871.)

Under section 3343, out of pocket loss is measured as the difference between the actual value of what the buyer paid and what he received. (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at p. 1240; Fragale v. Faulkner (2003) 110 Cal.App.4th 229, 236 [nondisclosure of construction defects]; Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 564 [misrepresentation of parcel size].) Actual value means market value (Bagdasarian v. Gragnon (1948) 31 Cal.2d 744, 753) and damages are calculated as of the date of the transaction. (Salahutdin, at p. 568.)

The buyer must offer evidence that the price he or she paid was greater than the property's actual value at the time of the sale. (Saunders v. Taylor (1996) 42 Cal.App.4th 1538 [nondisclosure of construction defects].) Thus, a plaintiff may establish the elements of fraud and yet recover nothing if he is unable to prove damages. This result was demonstrated in Saunders, where the seller failed to disclose to the buyer certain structural defects and code violations on the property. The buyers brought an action for fraud, but the trial court granted a nonsuit because the buyers had "offered no evidence of what the market value of the house would have been had the true facts been known regarding the lack of permits and the lack of compliance with the building codes." (Id. at p. 1543.) Although the buyers had testified as to the price they paid for the property, they failed to show they had suffered damages, a necessary element of their cause of action. (Ibid.)

Here, the evidence established that the Coys had purchased the property on April 2, 2001, for $325,000, without knowledge of the pigeon infestation and eradication. They presented no evidence at trial of the value of the house, had the condition of the attic been disclosed. Thus, it is impossible to determine whether the price they paid was greater than its actual value. Because the Coys did not present evidence of value, they are not entitled to out of pocket damages under section 3343. We reject their contention that out of pocket loss should be determined by "the cost of remedying the pigeon problem." Not only is this argument contrary to the provisions of statute, it lacks a factual basis because the Coys made no repairs to the attic.

Consequential Damages

Section 3343 provides that the defrauded buyer is entitled to recover out of pocket loss "together with any additional damage arising from the particular transaction . . . ." (Id., subd. (a), italics added.) The statute identifies as consequential damage (1) expenditures in reliance on the fraud; (2) compensation for the loss of use and enjoyment of the property; and (3) loss of profits. (Id., subd. (a)(1)-(4).)

The Coys acknowledge they made a profit on the sale of the property, but argue they may recover consequential damages without showing out of pocket loss. They are correct. (See Stout v. Turney (1978) 22 Cal.3d 718, 729 [buyers of mobile home park did not suffer out of pocket loss, but could recover consequential damages in the form of lost profits when they were precluded from constructing additional spaces]; see also Alliance Mortgage Co. v. Rothwell, supra,10 Cal.4th at p. 1241, fn. 5.)

The jury was instructed, in part, that the Coys were claiming damages for:

"2. Moving and rental expenses reasonably incurred by the Coys to the extent the Wachtels' false representation and/or failure to disclose important facts about the condition of the [property] was a substantial factor in causing the Coys to incur those moving and rental expenses.

"3. Past psychological expenses of Mrs. Coy. To recover damages for past psychological expenses, Mrs. Coy must prove the reasonable cost of reasonably necessary psychological care."

The Coys claimed at trial and on appeal that they are entitled to three items of damage: (1) rent of $63,000 for two and one-half years; (2) moving expenses of $1,000; and (3) Mrs. Coy's counseling bills in the amount of $550 to $825. The jury awarded the Coys economic damages of $75,200.

The pigeon debris was removed from the attic by Cragoe in February of 2001. The Coys moved into the house in April and, the following month, a neighbor told them of Cragoe's extensive removal efforts. Mrs. Coy contacted Cragoe and Ventura Pest Control to have them re-inspect the attic. There was evidence that a significant problem remained.

Although there were differing accounts at trial of the condition of the attic, there was substantial evidence that the Wachtel's nondisclosure was a substantial factor in causing the Coys to leave the house. The Coys are entitled to recover consequential damages of $64,000, representing $63,000 in rent for two and one-half years and $1,000 in moving expenses. They are not entitled to damages for repairing the attic because they did not expend any funds or have any work performed.

Mrs. Coy is precluded from compensation for her psychological counseling bills because damages for emotional distress are not recoverable under section 3343. (Devin v. Unites Services Auto. Assn., supra, 6 Cal.App.4th at p. 1162.) Although the jury was erroneously instructed that the counseling bills could form a basis for damages, we need not address the error because the jury found against the Coys on their emotional distress claims.

Professional Negligence

The Wachtels next contend that Mrs. Wachtel did not owe the Coys a fiduciary duty because she was selling the property on her own behalf.

"When a licensed real estate broker or salesperson enters into a transaction to sell his or her own property, the other party in the transaction would like to clothe the broker with the responsibilities of an agent. Absent an agency relationship with the buyer, the licensee/seller owes no fiduciary duties to the buyer." (2 Miller & Starr, Cal. Real Estate (3d ed. 2000)  3:17, p. 86; see Horning v. Shilberg (2005) 130 Cal.App.4th 197, 205.) "[A]n individual who is by profession a real estate broker is not, by virtue of this fact, deprived of the right to act as a principal in the sale of his own property." (Robinson v. Murphy (1979) 96 Cal.App.3d 763, 768.)

In returning a special verdict for professional negligence, the jury found that Sylvia Wachtel failed to use such skill and care that a reasonably careful real estate broker would have used in similar circumstances and that her professional negligence was a substantial factor in causing harm to the Coys. Mrs. Wachtel did not, however, have a fiduciary relationship with the Coys, thus there was no evidence to support the jury's finding that she was professionally negligent. For this reason, the Coys are not entitled to tort damages under section 3333.

Inconsistent Verdicts

The Wachtels argue that the intentional misrepresentation verdicts are inconsistent with the negligence verdicts. We reject their contention because negligent misrepresentation is necessarily included in the tort of intentional misrepresentation. Both require a finding that the defendant made a false statement, caused another to rely on the statement, which resulted in harm. Intentional misrepresentation requires an additional finding that the defendant made the statement with knowledge of its falsity.

The jury was instructed that, to establish negligent misrepresentation, it must find that (1) the Wachtels represented to the Coys that an important fact was true; (2) it was not true; and (3) the Wachtels had no reasonable grounds for believing it to be true when it was made. To establish intentional misrepresentation, the court instructed the jury that it must find the Wachtels represented to the Coys that an important fact was true; the representation was false; and the Wachtels knew the representation was false when it was made, or made it recklessly without regard for its truth. The verdicts are consistent. There was no error.

DISPOSITION

The award of compensatory damages is reduced to $64,0000. We affirm the awards of punitive damages and attorneys fees. As modified, the judgments are affirmed. Costs on appeal are awarded to respondents.

NOT TO BE PUBLISHED.

COFFEE, J.

We concur:

GILBERT, P.J.

PERREN, J.

Vincent J. O'Neill, Judge

Superior Court County of Ventura

______________________________

Harry Wachtel, Law Offices of Harry Wachtel, Bruce Adelstein, Law Office of Bruce Adelstein and Edward J. Horowitz for Defendants and Appellants Leonard Wachtel and Sylvia Wachtel.

Douglas G. Benedon, Gerald M. Serlin, Kelly R. Horowitz and Benedon & Serlin for Plaintiffs and Respondents Samuel F. Coy and Laura L. Coy.

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^[1]The Coys had originally alleged a cause of action for negligent infliction of emotional distress. By stipulation of the parties, the Coys "withdrew" this cause of action and replaced it with a cause of action for general negligence.

^[2]The Coys filed a cross-appeal on May 23, 2005, which they subsequently abandoned. We dismissed the cross-appeal on July 13, 2005.

^[3]All statutory references are to this code unless otherwise stated.

^[4]Section 3343 provides in pertinent part:

"(a) 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 any of the following:

"(1) Amounts actually and reasonably expended in reliance on the fraud.

"(2) An amount which would compensate the defrauded party for loss of use and enjoyment of the property to the extent that any such loss was proximately caused by the fraud. . . ."

"(b) Nothing in this section shall . . .  [] (1) [p]ermit the defrauded person to recover any amount measured by the difference between the value of property as represented and the actual value thereof."

^[5]Section 3333 states: "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."