WARREN v. MERRILL

Filed 9/21/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SEVEN

Story continue from Part I ...

DISCUSSION

Merrill claims the court’s judgment is contrary to law and equity and is unsupported by the evidence. She asserts quieting title in Warren, while leaving Charmaine as the borrower on the loan, was erroneous because (1) Warren had neither legal nor equitable title because he “withdrew” from escrow; (2) because Warren “withdrew” from the escrow she owed him no fiduciary duty and therefore there could be no breach and no fraud; (3) Warren’s illegal scheme to defraud the lender made him guilty of unclean hands which bars relief; (4) Warren failed to prove the existence of a contract, and if he did, it was an illegal oral contract and thus void; (5) the lack of a written land sale contract violated the statute of frauds; and (6) Warren did not prevail on any of his causes of action against Charmaine and thus it is unjust for her to remain on the loan. Merrill also claims the award of punitive damages was erroneous because Warren suffered no actual damages as he defaulted on the mortgage payments, lived rent free and would have lost the property entirely but for her actions in saving the property from foreclosure by paying all arrearages.

I. SUBSTANTIAL EVIDENCE SUPPORTS THE COURT’S FINDING MERRILL BREACHED HER FIDUCIARY DUTY TO WARREN BY PROCURING TITLE TO THE CONDOMINIUM THROUGH FRAUD.

There should be no dispute Merrill owed a fiduciary duty to Warren once she undertook to represent him in the real estate transaction. Merrill herself acknowledged at trial she held a fiduciary position of trust toward Warren. Because she owed Warren a fiduciary duty Merrill further acknowledged she was required to place his interests above her own in the real estate transaction. Nevertheless, she claims there was no evidence of misrepresentation, no evidence of fraud and no evidence of a breach of her fiduciary duties to sustain the court’s judgment. She claims this is true because whatever fiduciary duties she owed Warren terminated when he “withdrew” from the escrow.

When faced with a challenge to the sufficiency of the evidence to support a judgment, an appellate court, “indulge[s] in every reasonable inference to uphold the verdict if possible and defer[s] to the [trier of fact’s] assessment of the credibility of the witnesses. (9 Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 359, p. 408.) ‘[T]he power of the appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, which will support the conclusion reached by the [trier of fact].’ (Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429.)”[1]

We review the court’s factual findings with these standards in mind.

“‘”The law of California impose[s] on . . . the real estate agent the same obligation of undivided service and loyalty that it imposes on a trustee in favor of his [or her] beneficiary. Violation of his [or her] trust is subject to the same punitory consequences that are provided for a disloyal or recreant trustee. (King v. Wise, [(1872)] 43 Cal. 628.)” (Langford v. Thomas, [(1926)] 200 Cal. 192, 196.) Such an agent is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision. [Citations.]’”[2]

A constructive fraud arises on a breach of duty by one in a fiduciary relationship who misleads another to his prejudice.[3] Actual fraud occurs, when, among other circumstances, a person makes a promise without the intention of performing it.[4] To prove a cause of action for actual fraud requires evidence of “‘(1) representation; (2) falsity; (3) knowledge of falsity; (4) intent to deceive; and (5) reliance and resulting damage (causation).”’[5]

The record in the present case contains substantial evidence satisfying each of the elements of both constructive and actual fraud. The evidence showed Merrill breached her fiduciary duties toward Warren and committed fraud by deliberately and falsely promising him she would place his name on title to the condominium if he went along with her plan on how to structure the transaction. From the beginning of the transaction she did not intend to perform her promise of placing his name on title. Merrill instead intended to procure the condominium for herself but did not disclose her role as a principal in the transaction. Merrill in fact kept the condominium and in so doing retained Warren’s $77,000 down payment. She alternatively claimed he had gifted this money to her daughter Charmaine when he signed the amendment removing his name from title or had forfeited it by defaulting on the homeowners’ association dues and mortgage payments.

Specifically, Merrill told Warren he needed a co-borrower in order to finance his purchase of the condominium. Merrill offered her own daughter for this purpose. Merrill promised Warren that Charmaine would quit claim title to him as soon as the loan funded and escrow closed. However, Merrill’s intent not to perform was apparent from the outset as she pursued her plan to use Warren’s funds but keep the condominium for herself. Merrill never had Warren submit a loan application, either as an individual or as a co-borrower with Charmaine. As an experienced real estate agent, real estate broker and loan broker, Merrill knew a lender would not permit Warren to be on title if he was not also responsible for the loan. However, Merrill filed a loan application in Charmaine’s name alone.

Warren paid the initial $10,000 into escrow. Merrill had him make all subsequent payments representing his $77,000 down payment not into escrow, but instead to persons/entities within her control. If this was a legitimate transaction writing checks to third parties would have been wholly unnecessary. However for Merrill’s purposes it made it appear, at least superficially, she, and not Warren, had contributed the $30,000 check into escrow, Charmaine had contributed $10,000 into escrow and she had deferred her earned commissions of $27,000 as a credit into escrow (while holding Warren responsible for repayment).

Merrill led Warren to believe he had to sign the amendment in escrow removing his name from the title and gifting his contributions to Charmaine in order to secure financing. Warren obviously trusted Merrill’s representation because he signed the amendment. However, after escrow closed Merrill did not, and never intended to, place Warren’s name on title as promised. Through these deceptive maneuvers Merrill secured for herself an investment property in her daughter’s name by lying to her principal and misappropriating his funds.

In these circumstances it seems preposterous to argue, as does Merrill, Warren “withdrew” from escrow and for this reason she owed him no fiduciary duty and thus could not be guilty of fraud. Instead, it may be more accurate to say Warren was “coerced” into signing the amendment and into “withdrawing” from escrow based on Merrill’s representations the loan would not fund and the whole deal would fall apart unless he signed the amendment taking his name off title. If Warren truly “withdrew” from the escrow then all of the money he had contributed to the down payment should have been returned. It was not.

In sum, we agree with the trial court the evidence in this case was more than sufficient to show an egregious violation of the duties of loyalty and undivided interest by a fiduciary toward her principal, as well as a deliberate plan to defraud him out of his down payment and the property.

II. THE COURT’S JUDGMENT QUIETING TITLE IN WARREN AND IMPOSING A CONSTRUCTIVE TRUST WERE PROPER REMEDIES IN LIGHT OF MERRILL’S FRAUD AND BREACH OF FIDUCIARY DUTY.

Merrill claims the court’s judgment quieting title in Warren is erroneous for any number of reasons. She argues Warren did not state a cause of action to quiet title because a person holding equitable title cannot prevail as against the person holding legal title;[6] proof of a contract is a prerequisite to an action to quiet title and none was proved;[7] assuming the evidence showed an oral contract, Warren cannot prevail because he was in default under the contract[8] and the oral contract for land violated the statute of frauds;[9] and Warren failed to establish superior title to be entitled to have title quieted in his favor.[10]

Many of Merrill’s arguments could have merit if this case involved a straightforward real estate transaction and not the acquisition of real property by a fiduciary as the result of committing a fraud on her client. For example, if this was a standard contract action then the fact Warren defaulted on his payments may indeed have presented a material impediment to his recovery. But this is not such a case. Indeed, this case did not even allege a contract cause of action. This was instead an action in equity to redress a fiduciary’s actual and constructive fraud. As found in the previous section, substantial evidence supports the trial court’s finding Merrill abused her trust and breached her fiduciary duties to Warren when she procured legal title to the condominium by making a false promise and duping him out of monies he put toward the down payment for the condominium. Thus, because the factual situation is not as Merrill suggests in her arguments, many of her contentions are either inapplicable or do not withstand scrutiny.[11]

What Merrill’s arguments overlook are the following principles of law: Once fraud by a fiduciary is shown by the evidence (1) a written contract for a real property transaction is not required; (2) the absence of a written contract does not violate the statute of frauds; (3) the defrauded person may be found to hold superior title to that held by the defrauder; and (4) a wide variety of equitable remedies are available and appropriate to remedy the fiduciary’s fraud.

Many of these principles were explained by the Supreme Court in Mazzera v. Wolf.[12] “A constructive trust may be imposed when a party has acquired property to which he is not justly entitled, if it was obtained by actual fraud, mistake or the like, or by constructive fraud through the violation of some fiduciary or confidential relationship. [Citations.] Such a trust, imposed upon a partner, agent, or other fiduciary, arises by operation of law, and, accordingly, the statute of frauds is no bar. [Citations.] But the mere failure to perform an oral promise to convey real property is not itself fraud, and the agreement will be held unenforceable under the statute of frauds in the absence of actual or constructive fraud. [Citations.]”[13]

In this case the very fraud perpetrated was Merrill’s oral promise to convey without the intent to perform the promise in order to induce Warren to part with his money. In this situation a constructive trust arose by operation of law and the statute of frauds presented no bar.[14]

Moreover, given the fraud Merrill perpetrated on Warren, equitable estoppel would preclude her from relying on a statute of frauds defense if it was applicable, which it is not. “The doctrine of estoppel to assert the statute of frauds has been consistently applied by the courts of this state to prevent fraud that would result from refusal to enforce oral contracts in certain circumstances. Such fraud may inhere in the unconscionable injury that would result from denying enforcement of the contract after one party has been induced by the other seriously to change his position in reliance on the contract. . . . “[15]

In addition, Warren’s part performance of the oral contract by paying $77,000 for the down payment on the condominium would satisfy the statute of frauds in any event.[16]

On the other hand, Merrill correctly notes that as a general matter an action to quiet title cannot be maintained by the owner of equitable title as against the holder of legal title.[17] However, because of her fraud Merrill through Charmaine acquired only bare legal title which she held as constructive trustee for Warren, who, based on the equities, held superior title.[18]

Finally, when legal title has been acquired through fraud any number of remedies are available and appropriate. These remedies include quieting title in the defrauded equitable title holder’s name and making the legal title holder the constructive trustee of the property for the benefit of the defrauded equitable title holder.[19] “[W]here, as here, the facts upon which plaintiff’s claim is based, are alleged, there is authority to grant any proper relief [within the strictures of the Code of Civil Procedure]. And appropriate remedies, such as cancellation, reconveyance, or decrees quieting title, or establishing or enforcing trusts, or determining the priorities of opposing equities, may be had, as between proper parties under our system, whenever they are required upon equitable considerations and are justified by the pleadings and proof in the case. [Citations.]”[20]

In light of these authorities, and given the evidence of actual and constructive fraud, we conclude the trial court did not err in quieting title in favor of Warren and in making Merrill and Charmaine constructive trustees of the property for Warren’s benefit.

III. THE DOCTRINE OF UNCLEAN HANDS DOES NOT AUTOMATICALLY PRECLUDE EQUITABLE RELIEF.

Merrill argues Warren was not entitled to equitable relief of any sort because he was guilty of unclean hands. She asserts his entire claim for relief was premised on an illegal scheme to conspire to defraud the lender by having Charmaine secure the loan in her name and then fraudulently concealing from the lender Warren’s ownership interest in the property. In addition, Merrill points out because of Warren’s personal and substance abuse problems he would have lost the property altogether but for her efforts stopping the foreclosure and paying the arrearages.[21]

In a somewhat analogous situation, the Supreme Court long ago declared the doctrine of unclean hands does not automatically bar equitable relief where the parties are not equally at fault. As the Supreme Court explained it, “‘one cannot lay a trap for another, secure his confidence, induce him to make a conveyance of his property in expectation that it will be returned, and thereafter retain the fruits of his perfidy on the ground that the donor too readily yielded to temptation to save himself at the possible expense of his creditors. The greater offense of the tempter overshadows and renders innocuous the weakness of the one of whom advantage is taken. Though a deed made for an improper purpose is unfairly procured through the undue influence of the grantee, in violation of a fiduciary relationship, abuse of confidence, oppression or fraud, a court of equity will still grant relief to one in fault. Such relief will not be denied to a party least in fault against one who has led him into the act by a violation of confidence. They are not in equal wrong. [Citation.] Under the circumstances plaintiff should not be denied the relief he seeks.’”[22]

Although Warren’s behavior was far from exemplary, we do not believe under the circumstances he and Merrill were equally at fault. True, Warren agreed to, and acquiesced in, what would have been an improper, if not impossible, plan to use Charmaine as a front in order for him to secure the loan. We note it was Merrill, not Warren, who proposed the “illegal plan.” We also note the “illegal plan” never happened and thus Warren never participated in any “illegal scheme.” Of course, the “illegal scheme” was not carried out because the fiduciary’s own undisclosed plan was to instead take the property for her personal benefit. In the process of carrying out her plan Merrill defrauded her client out of the property and his $77,000 down payment. And she did this to the very person to whom she owed fiduciary duties of loyalty, trust and full disclosure.

In these circumstances the trial court properly weighed the equities and found the doctrine of unclean hands did not automatically bar Warren from receiving relief in this case.[23]

IV. THE AWARD OF PUNITIVE DAMAGES NEED NOT BE REVERSED FOR LACK OF ACTUAL DAMAGES.

Merrill claims Warren did not prove any damages proximately caused by her and thus the award of punitive damages must be reversed.[24] She asserts his credit was too poor to secure a loan, he agreed to participate in an illegal scheme to defraud the lender, he gifted his $77,000 “option” money to Charmaine by signing the amendment in escrow, and because he defaulted on the mortgage and homeowners’ association payments he would have lost the property anyway.

“‘Exemplary or punitive damages are not recoverable as [a] matter of right. Their allowance rests entirely in the discretion of the [trier of fact], and they may be awarded only where there is some evidence of fraud, malice, express or implied, or oppression. Such damages are mere incidents to the cause of action and can never constitute the basis thereof. This being so, it is generally held that exemplary damages are not recoverable in the absence of a showing of actual damages.’ (Clark v. McClurg (1932) 215 Cal. 279, 282; see also, Haydel v. Morton (1935) 8 Cal.App.2d 730, 736.)”[25]

The short answer to Merrill’s argument is actual damages were proved in this case. The evidence showed Merrill misappropriated his $77,000 down payment, later claiming he had forfeited this money by defaulting on mortgage and homeowners’ association payments. In addition, the court awarded Warren $15,000 in noneconomic damages for the pain and suffering he endured from being defrauded out of his money, for being evicted from the home he thought he had purchased, and for nearly losing all his worldly possessions. This alone was a sufficient award of actual damages to support the award of punitive damages in this case.

DISPOSITION

The judgment is affirmed. Warren is awarded his costs on appeal.[26]

CERTIFIED FOR PUBLICATION

JOHNSON, J.

We concur:

PERLUSS, P. J.

ZELON, J.

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Analysis and review provided by Poway Property line Lawyers.

[1] Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 889.

[2] Buckley v. Savage (1960) 184 Cal.App.2d 18, 27 [real estate agent’s failure to disclose he was purchasing the property for himself provided grounds to suspend/revoke his real estate license]; Civil Code section 2322, subdivision (c) [the authority of an agent does not extend to violations of his or her fiduciary duties]; see also, Business and Professions Code section 10176 [listing grounds to suspend or revoke a real estate license, including making substantial misrepresentations and making “false promises of a character likely to influence, persuade or induce.” (Bus. & Prof. Code, § 10176, subds. (a) and (b).)].

[3] Civil Code section 1573; Odorizzi v. Bloomfield School Dist. (1966) 246 Cal.App.2d 123, 129.

[4] Civil Code section 1572, subsection 4.

[5] Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 291, quoting 5 Witkin, California Procedure (4th ed. 1997) Pleading, section 668, page 123.

[6] Citing G. R. Holcomb Estate Co. v. Burke (1935) 4 Cal.2d 289, 297-299 [in a case devoid of any suggestion of fraud, the plaintiff holder of equitable title could not state a cause of action against the holder of legal title where the legal title holder had used her own funds to pay for the properties decades before and neither her title nor possession had ever been challenged for all those years].

[7] Citing Roth v. Malson (1998) 67 Cal.App.4th 552, 557 [holding proof of a contract is a necessary element in any action for specific performance or for damages for breach of contract]. We fail to see how this argument, or any other regarding contract actions, applies because the present case did not have a breach of contract cause of action, did not request specific performance, or request damages for breach of contract.

[8] Citing Civil Code section 1439 [“Before any party to an obligation can require another party to perform any act under it, he must fulfill all conditions precedent thereto imposed upon himself; and must be able and offer to fulfill all conditions concurrent so imposed upon him on the like fulfillment by the other party, except (when performance is excused).”].

[9] Civil Code section 1624, subdivision (a)(3) [an agreement for the sale of real property is invalid unless it is in writing and signed by the person (or the person’s agent) to be charged].

[10] Citing Gerhard v. Stephens (1968) 68 Cal.2d 864, 918 [in a quiet title action a plaintiff can prevail only by proving his or her title is superior to that of the defendant’s].

[11] Before the trial even started the court commented on the parties’ divergent views of the case. After opening arguments the court told counsel, “Now one of you is in the Arctic and the other one is in the Antarctic and God knows where the truth lies, but the two of you are operating in very different universes and one has nothing to do with the other. . . . “

[12] Mazzera v. Wolf (1947) 30 Cal.2d 531.

[13] Mazzera v. Wolf, supra, 30 Cal.2d 531, 535.

[14] Mazzera v. Wolf, supra, 30 Cal.2d 531, 535.

[15] Monarco v. Lo Greco (1950) 35 Cal.2d 621, 623.

[16] Byrne v. Laura (1997) 52 Cal.App.4th 1054, 1072 [“The doctrines of part performance and equitable estoppel are, in any event, separate grounds for avoiding a statute of frauds.”].

[17] See, e.g., G. R. Holcomb Estate Co. v. Burke, supra, 4 Cal.2d 289, 297-299 [in a case devoid of any suggestion of fraud, the holder of equitable title could not state a cause of action against the holder of legal title where the legal title holder had used her own funds to pay for the properties decades before and neither her title nor possession had ever been challenged]; De Leonis v. Hammel (1905) 1 Cal.App. 390, 394 [generally equitable title holder cannot successfully challenge legal title in a quiet title action].

[18] See, e.g., Newport v. Hatton (1924) 195 Cal. 132, 145 [because the defendants acquired title to the property through fraud and coercion the plaintiffs held paramount title unaffected by the defendants’ collusive and fraudulent dealings].

[19] See, e.g., Newport v. Hatton, supra, 195 Cal. 132, 153 [“Any appropriate remedies required upon equitable considerations and justified by the pleadings and proof may be had in such a case.”].

[20] De Leonis v. Hammel, supra, 1 Cal.App. 390, 394.

[21] Merrill argues the court abused its discretion under Evidence Code section 352 by excluding detailed evidence of Warren’s substance abuse and his numerous homeowners’ association violations. Her arguments are not well taken. Before trial the parties stipulated on the record evidence of Warren’s substance abuse would be limited to evidence he went to the Betty Ford Center for treatment. There was also sufficient evidence presented to apprise the court, to the extent relevant, Warren had been the subject of numerous association violations, primarily for not paying association dues on a timely basis. In his testimony, Warren freely admitted to these and other derelictions.

[22] Watson v. Poore (1941) 18 Cal.2d 302, 312-313, quoting Birney v. Birney (1933) 217 Cal. 353, 359.

[23] See also, Johnson v. Johnson (1987) 192 Cal.App.3d 551, 556-557 [although using a straw person to secure a GI loan was improper and against public policy, applying the in pari delicto rule to preclude relief was improper because both parties were not equally at fault]; Norwood v. Judd (1949) 93 Cal.App.2d 276 [although the painting and sandblasting business was conducted without a license a partner in the business could not rely on this illegality to avoid paying a departing partner his rightful share of the partnership profits].

[24] All-West Design, Inc. v. Boozer (1986) 183 Cal.App.3d 1212, 1222 [punitive damages may not be awarded where no actual damages are found].

[25] All-West Design, Inc. v. Boozer, supra, 183 Cal.App.3d 1212, 1222.

[26] Warren has requested an award of attorney fees on appeal. However, the record on appeal is inadequate for this court to even determine the basis for the award of attorney fees in the trial court. We therefore deny Warren’s request for attorney fees without prejudice to renewing his request in the trial court upon issuance of the remitittur from this court.