Strebel v. Brenlar Investments, Inc.

On June 27, 2000, Strebel filed a complaint against Brenlar and Smith alleging unfair business practices, fraud, negligence, and breach of fiduciary duty. At the liability phase of the trial, which began in July 2003, the jury found that Smith and Brenlar had intentionally concealed material facts with the intent to defraud Strebel and on a separate verdict form that they were also liable for negligence.^[1] Strebel was awarded $300,000 in economic damages on both claims. The negligence verdict form alone contained a space for noneconomic damages, which the jury found to be an additional $50,000. The jury found that Brenlar and Smith acted with oppression and fraud, but not malice.

After the jury returned its verdict on Friday, September 5, 2003, the court ordered the jury to return the following Monday to begin the punitive damages phase of the trial. At the same time, Strebel dismissed his punitive damages claim against Smith. On August 29, in anticipation of the punitive damages phase, Strebel had attempted to subpoena Brenlar’s financial documents. At a hearing on the afternoon of September 5, Brenlar argued that the subpoenas had not been properly served and that an additional document request made only that afternoon was unreasonable. The court continued the hearing to Monday morning and ultimately determined that Strebel had not subpoenaed Brenlar’s financial documents in a timely manner. Because Strebel was unable to present any evidence in support of his claim for punitive damages, the court excused the jury and entered judgment. Defendants filed a timely notice of appeal and Strebel filed a timely notice of cross-appeal.

Discussion

Strebel’s claimed economic damages consisted of several components: the lost appreciation of his San Bruno house between its sale in 1999 and trial in 2003, the lost use of the property during that period, and other components that are not disputed on appeal.^[2] Strebel’s expert witness John D’Andrea testified to Strebel’s economic damages, including the value of the loss of

appreciation and use of the San Bruno property. D’Andrea calculated the gross lost appreciation by subtracting the 1999 sale price from his opinion of the then current fair market value of the house based on a study of comparable sales. This produced an increase in value of 46 percent, which he considered to be conservative when compared to a 62 percent rate of appreciation between 1999 and 2003 reflected in a general market indicator survey to which he referred. He then reduced the gross amount by the estimated closing costs on such a sale to reach net lost appreciation, which he calculated to be $183,427.

D’Andrea calculated Strebel’s loss of use damages by subtracting the costs associated with living in his house, mortgage interest, taxes and insurance, from the cost of renting a similar house in San Bruno. This difference was $66,046. Adding this amount to $183,427 of lost appreciation and including the other undisputed damage elements produced a total of $247,273, which was D’Andrea’s opinion of economic damages and the amount that Strebel’s attorney asked the jury to award.

Strebel’s noneconomic damages were based on claimed emotional distress arising from “him not having a house and running around looking for a place to live” and from “financial injury . . . including] the withholding of Mr. Strebel’s ten thousand dollar security deposit at the exact time when he was looking for another house to buy and would have needed that to pay towards another purchase offer.”

As indicated ante, the jury returned verdicts awarding Strebel $300,000 in economic damages on his concealment and negligence claims and an additional $50,000 in noneconomic damages on his negligence claim. Judgment was entered in his favor against Brenlar and Smith for $305,000. It appears that the court deducted from $350,000 5 percent comparative fault that the jury attributed to Strebel^[3] and an additional amount received by Strebel in settlement of related claims against another party. Thereafter, the court denied motions for judgment notwithstanding the verdict and a new trial that were grounded primarily on the claimed excessiveness of the damages.

1. Appreciation Damages

By an in limine motion, defendants moved to exclude evidence of appreciation in the value of the San Bruno property. After extended argument and supplemental briefing, the court denied the motion, accepting Strebel’s contention that lost appreciation is a proper element of recovery under Civil

Code^[4] section 3343, which defines the measure of damages generally for fraud in the purchase, sale or exchange of property.^[5] On appeal, Strebel implicitly acknowledges the inapplicability of section 3343, and defends the admissibility of the appreciation evidence under the broader measure of damages for torts under sections 1709 and 3333.^[6] Without objection, the court instructed the jury under all of these sections. Referring to the claim of constructive fraud by a fiduciary, the court drew from section 3333 and instructed that damages “must be in an amount that would compensate plaintiff for all harm or loss caused by [defendants’] wrongful conduct, whether the harm or loss caused by [defendants’] wrongful conduct could have been anticipated or not.” Referring to the claim of fraudulent concealment, the court drew from section 3343 and BAJI No. 12.56 and instructed on the out-of-pocket measure of damages (“amount of the award should include, one, the difference, if any, between the actual value of that with which the plaintiff parted and the actual value of that which was received”) and on the additional items of recovery authorized by section 3343, subdivision (a), paragraphs (1)., (2) and (3) (“amounts actually and reasonably expended in reliance upon the fraud; . . . any amount which would compensate the plaintiff for loss of use and enjoyment of the property to the extent that any such loss was caused by the fraud; and . . . any amount which would compensate the plaintiff for any profits or other gains which might reasonably have been earned by use of the property had the plaintiff retained it.”) The court used BAJI No. 3.76 to instruct on causation^[7] and BAJI No. 14.68 to instruct on the duty to mitigate damages.^[8]

Although of little consequence,^[9] there are two reasons for which section 3343 does not apply in this case. For one, the fraud was perpetrated by a fiduciary. “California law is committed to the view that the fraudulent breach of fiduciary duty is a tort, and the faithless fiduciary is obligated to make good the full amount of the loss of which his breach of faith is a cause. [Citations.] In accordance with this general principle, the cases hold that while the fraudulent property transactions between a vendor and vendee are governed by the special ‘out-of-pocket-loss’ rule espoused in section 3343 [citations], where, as here, the defrauding party stands in a fiduciary relationship to the victim of fraud, the damages must be measured pursuant to the broad provisions of sections 3333 and 1709[,] regulating compensation for torts in general.” (Pepitone v. Russo (1976) 64 Cal.App.3d 685 , 688-689 [ 134 Cal.Rptr. 709 ], fn. & italics omitted.) More recently the California Supreme Court reiterated, “ ‘In California, a defrauded party is ordinarily limited to recovering his “out-of-pocket” loss . . . .’ [Citation.] [f] In fraud cases involving the ‘purchase, sale or exchange of property,’ the Legislature has expressly provided that the ‘out-of-pocket’ rather than the ‘benefit-of-the-bargain’ measure of damages should apply. (§ 3343, subds. (a), (b)(1).) This section does not apply, however, when a victim is defrauded by its fiduciaries. In this situation, the ‘broader’ measure of damages provided by sections 1709 and 3333 applies.” (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226 , 1240-1241 [ 44 Cal.Rptr.2d 352 , 900 P.2d 601 ], fns. omitted (Alliance).)

Secondly, in Channell v. Anthony, supra, 58 Cal.App.3d at page 315, the court held that the consequential damages provided under section 3343, subdivision (a)(2) and (3) are available only in conjunction with a claim for rescission. (Channell v. Anthony, supra, at p. 315 [“[b]y electing to drop their rescission cause of action respondents gave up any right to claim loss of profits, except as such right was created by the final agreement”]; see also Miller & Starr, Cal. R.eal Estate (3d ed. 2005) § 34:89 [“A seller who loses the use and enjoyment of the premises as a proximate result of the buyer’s misrepresentations can recover the value of the loss-of-use of the premises by bringing an action for rescission, but the loss of use usually cannot be recovered when the seller affirms the contract and seeks the recovery of damages because the right of possession was transferred to the buyer when title was conveyed” (fns. omitted)].)

San Bruno properties. Strebel’s damages arose neither because the value of either property was more or less than the agreed price nor because the value of either was other than as promised.^[10] The question is not whether Strebel is entitled to his out-of-pocket losses or to the benefit of his bargain, but whether the amount by which the value of his San Bruno home appreciated after he sold it is a reasonable measure of the harm he suffered as the consequence of defendant’s fraud.

“Tort damages are awarded to fully compensate the victim for all the injury suffered. [Citation.] There is no fixed rule for the measure of tort damages under Civil Code section 3333. The measure that most appropriately compensates the injured party for the loss sustained should be adopted.” (Santa Barbara Pistachio Ranch v. Chowchilla Water Dist. (2001) 88 Cal.App.4th 439 , 446-447 [ 105 Cal.Rptr.2d 856 ].) The jury here was correctly advised that “the damages awarded must be in an amount that would compensate plaintiff for all harm or loss caused by [defendants’] wrongful conduct” and that defendants’ fraud must be a substantial factor in causing Strebel’s loss.

Strebel asserted that he was injured because defendants’ fraud caused him to sell his San Bruno house sooner than he would otherwise have done, rendering him unable to purchase a replacement home before housing values substantially increased. Strebel testified that he intended to sell his home and purchase the new house in Sonoma at the same time, thereby limiting the impact of market fluctuations on the exchange. However, because of defendants’ fraud, Strebel was unable to make the second transaction before market values rose. The resultant harm was a decrease in the buying power of the proceeds of his San Bruno house in a rapidly appreciating housing market. In the words of Strebel’s attorney in closing argument, “All we’re asking for here is for him in effect to get enough money to now buy something comparable to the [Sonoma] property in today’s market. That would be the net effect of what we’re asking for, which would in a sense put him back to where he was back in 1999.” In permitting the jury to consider lost appreciation, the trial court properly determined that the jury could reasonably find this element necessary to compensate Strebel for the injury caused

by defendants’ concealment. Under the circumstances shown by the evidence, the jury was entitled to find that recovery of the lost appreciation was reasonable compensation for Strebel’s inability to purchase an acceptable home in Sonoma concurrently with the sale of his San Bruno house.^[11]

Defendants contend that “sections 1709 and 3333 do not authorize Strebel’s appreciation damages because damages proximately caused by fraud are determined as of the date when the fraud took effect—not by a later increase or decline in value.” In Estate of Anderson (1983) 149 Cal.App.3d 336 , 354 [ 196 Cal.Rptr. 782 ], the court rejected the argument that “there is no basis in California law for an award of so-called ‘appreciation damages.’ ” The court upheld an award of damages based on the value at the time of trial rather than the time of the sale of property which the seller had been fraudulently induced to sell. The court concluded that “California law is not as restrictive as the bank urges, and [found] that the award in this case does not offend against reasonableness or any other policy of recovery.” (Ibid. ) The court relied in part on Estate of Talbot (1956) 141 Cal.App.2d 309 , 323 [ 296 P.2d 848 ], in which another court recognized that in cases involving a breach of loyalty, “ ‘the trier of the fact should have some discretion to fix the damages in accordance with the nature and degree of the breach .... Thus, what constitutes making “good” the loss may vary according to the circumstances.’ ” (Estate of Anderson, supra, at p. 355.) Likewise, in Garrett v. Perry (1959) 53 Cal.2d 178 [ 346 P.2d 758 ], the court held that “[t]he statement. . . that damages are to be assessed as of the date of the fraudulent transaction is too broad insofar as it means that the court can not consider subsequent factors which affect the amount of the actual loss.” (Id. at p. 185.) “The fact that values must ordinarily be considered as of the time of the fraudulent transaction does not mean that the court cannot consider circumstances other than value which operate to increase or reduce the injury.” (Id. at p. 186.) Here, measuring Strebel’s damages at the time of the sale would provide no compensation for the most significant portion of the loss he suffered as a result of defendants’ fraud.

Russo, supra, 64 Cal.App.3d at p. 688; Prince v. Harting (1960) 177 Cal.App.2d 720 , 731 [ 2 Cal.Rptr. 545 ] [“It has long been the law in this state that a faithless fiduciary must repay to the beneficiary of his fiduciary duties the entire profit that he caused the beneficiary to lose”].) More importantly, Strebel’s diminished buying power in the rising real estate market was substantially related to defendants’ fraud. The jury was instructed on the proper standard of causation (“substantial factor”) and the record supports its finding that defendants’ fraud was a substantial factor in bringing about Strebel’s damages.^[12] The rising value of the property he intended to purchase with the proceeds from the San Bruno home was not unforeseeable and, indeed, was the very reason Strebel testified he told defendants he wanted to be sure the Sonoma purchase would close before he sold the San Bruno property. Finally, in Safeco, the court concluded that “there is no compelling public policy reason to allow plaintiff[ ] to recover when the time needed to repair . . . coincides with a general decline in the market for such properties. Such a recovery would surely not deter negligence in any meaningful way.” (Safeco, supra, 17 Cal.App.4th at pp. 1205-1206.) Allowing recovery for lost appreciation under the facts of this case, however, will provide a significant deterrent to a real estate agent fraudulently misleading prospective buyers under similar circumstances in the future.^[13]

Defendants’ next argument, that “Strebel’s appreciation damages are barred by the doctrine of ‘avoidable consequences’ ” is no more persuasive. Defendants contend that “uncontradicted evidence shows that Strebel had the financial ability to buy another San Bruno area house. This simple action would have avoided his claimed damages for lost appreciation. [1] Under the doctrine of avoidable consequences, Strebel’s failure to take reasonable steps

to avoid lost appreciation conclusively bars his recovery for lost appreciation.” In State Dept. of Health Services v. Superior Court (2003) 31 Cal.4th 1026 , 1043-1044 [ 6 Cal.Rptr.3d 441 , 79 P.3d 556 ], the court explained, “Although courts explaining the avoidable consequences doctrine have sometimes written that a party has a ‘duty’ to mitigate damages, commentators have criticized the use of the term ‘duty’ in this context, arguing that it is more accurate to state simply that a plaintiff may not recover damages that the plaintiff could easily have avoided. [Citations.] A federal appellate court explained the guiding principle this way: ‘[T]he community’s notions of fair compensation to an injured plaintiff do not include wounds which in a practical sense are self-inflicted.’ [Citations.] [][] Under the avoidable consequences doctrine as recognized in California, a person injured by another’s wrongful conduct will not be compensated for damages that the injured person could have avoided by reasonable effort or expenditure. [Citations.] The reasonableness of the injured party’s efforts must be judged in light of the situation existing at the time and not with the benefit of hindsight.” (Italics added.) Strebel does not dispute that “recovery will not be allowed for damages that a party should have foreseen and could have avoided by reasonable effort without undue risks, expense, or humiliation.” As indicated ante, the jury was instructed that Strebel “may not recover for losses which could have been prevented by reasonable efforts or by expenditures that might reasonably have been made.” Despite defendants’ argument to the contrary, the jury apparently concluded that Strebel did not act unreasonably by investing the proceeds from the sale of the San Bruno property in an interest-bearing money market account, the interest from which was deducted from the calculation of damages. The jury was entitled to reject defendants’ contention that it was unreasonable for Strebel not to purchase a replacement house in a city in which he no longer wished to live.

Contrary to defendants’ assertion, there is nothing inequitable about the recovery of appreciation damages in this case. The fact that Strebel received what was the fair market value for his house at the time he sold it did not eliminate financial loss from the premature sale of the property. Nor did Strebel attempt to profit from an unreasonable delay in filing suit. Upholding the jury’s verdict in this case does not imply that a defrauded plaintiff may recover appreciation damages over an unlimited period of time.^[14] Strebel

filed Ms complaint witMn a year of the fraud and for over a year after the complaint was filed continued to look for a suitable replacement property. The jury was entitled to conclude that Strebel made reasonable efforts to avoid the adverse consequences of having sold his former home without being able to purchase a new one as the defendants had led him to believe he could. The amount by which the value of Strebel’s former home appreciated after the fraudulently induced sale was a reasonable measure of his damage in tMs case.

2. Lost use damages

D’Andrea calculated Strebel’s damage for the loss of the use of his San Bruno home between the sale and the time of trial by subtracting Strebel’s costs of living in the house (interest on mortgage, taxes and insurance) from the market rent for a similar home. Defendants argue that “[f]or the same reasons that appreciation damages should not be allowed, this Court should also strike from the judgment the $66,046 in lost ‘use’ damages.” However, as with the loss of appreciation, the jury was entitled to find that Strebel suffered this loss when he sold his house in reliance on defendants’ fraud. He is equally entitled under section 3333 to recover for his loss of use of the San Bruno home.

3. The economic damages must be reduced by $52,727^[15]

4. Emotional distress damages^[16]

II. Strebel’s Cross-appeal Regarding Punitive Damages^[17]