Courts May Not Consider Prejudice to Liable Party in Granting Rescission of Purchase Contract

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After the Wongs bought a $2.35 million home, they discovered that they and 12 of their neighbors were connected to a private sewer system rather than the city of San Carlos’s public system.  The Wongs had remodeled the home, expending about $300,000.  They sued the sellers (Wong v. Stoler) for non-disclosure, seeking, among other things, rescission.  They also sued the real estate agents involved, and settled with them for $200,000.  The trial court found the sellers recklessly misrepresented that the house was connected to a public sewer system, but it declined to effectuate the rescission, which would have returned the home to sellers and refunded the purchase amount to the Wongs.  The court reasoned that doing so would place an undue burden on the sellers, who had already used the sales proceeds to purchase a new home and finance improvements, and that it would be too complicated to unwind the deal.  Instead, the court ordered the sellers to pay the Wongs for sewer maintenance and repair costs beyond the $200,000 settlement until 10 years had passed or the Wongs sold the house, whichever came first.

 

Rescission extinguishes the contract and restores the parties to their former positions, or as near as possible to their positions before entering into the contract.  If the court agrees there are grounds for rescission, the rescinding party is entitled to recover “complete relief,” including damages and the return of benefits provided.  In real estate cases, this means the seller must refund the purchase price to the buyer in exchange for return of the property.  If the court finds the contract has not been rescinded, it may grant other relief appropriate under the circumstances.

 

Here, the Court of Appeal, First Appellate District, reversed the San Mateo County Superior Court, finding that the contract was rescinded and the court improperly considered prejudice to the sellers. In refusing to effectuate rescission, the remedy fashioned by the trial court was not “complete.”  The trial court also improperly relied upon the hardship rescission would cause to the sellers, who had just been found liable for negligent misrepresentation, a species of fraud.  The need for rescission was effectively the fault of sellers, who as a result of their failure to disclose “must sustain the necessary inconveniences thereby entailed.”  Moreover, although untangling the sale might not be easy, there were not insurmountable obstacles to doing so.  Thus, the case was remanded to effectuate the rescission and award any other consequential damages (such as real estate commissions, escrow payments, interest on sums paid to the other party, and costs of improvements) needed to return the Wongs to the status quo. The court was also directed to determine whether the Wongs were entitled to attorney’s fees as part of their complete relief.

 

Wong v. Stoler (2015) 14 C.D.O.S. 6633

(12/15)

Court Liens Away From Coverage in Title Insurance Case

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Most real estate investors, and real property attorneys for that matter, think they know a lien when they see one. In a late December decision which was recently certified for publication (so it can now be cited as precedent in California), the California Court of Appeal for the Third Appellate District reminded one and all that the determination of whether a recorded document constitutes a defect, lien or encumbrance against title may require deeper analysis.

 

In Stockton Mortgage v. Tope, the Court reviewed the San Joaquin County trial court’s granting of First American Title Insurance Company’s summary judgment motion. First American had been sued by Stockton Mortgage under various theories for refusal to defend and indemnify Stockton Mortgage in a lawsuit brought by real estate investors. Stockton Mortgage contended that a “Notice of Abatement Action” recorded against the property by the County Environmental Health Department in 2004 pursuant to Health & Safety Code §17985 was covered by First American’s 2005 title insurance policy. The Notice at issue addressed the property’s substandard physical conditions, including 26 separate structural, mechanical, electrical and plumbing violations.

 

Alliance Title, acting as escrow for the transaction, attempted to resolve the issue, paying the County’s then current enforcement costs of $2,005. The County refused to issue a release because the underlying violations had yet to be cleared but escrow closed anyway.

 

In one of the principal issues decided by the case, the Court of Appeal upheld the trial court’s granting of First American’s summary judgment on the basis that the Notice related to physical condition of the property, which related to the value of the property rather than the marketability of its title. In other words, the Notice was not a lien or encumbrance because the property could be transferred without doubt as to who owns or has an interest in it. The Court reminded that “one can hold perfect title to land that is valueless; one can have marketable title to land while the land itself is unmarketable.” The Court relied heavily on a 2002 case involving similar issues. (Elysian Inv. Group v. Stewart Title.)

 

Importantly, the Court also followed longstanding authority which holds that no liability exists for statements issued in a Preliminary Report as it is neither an insurance contract nor a representation of the title. (Ins. Code §12340.11.)

 

While this case did not change existing law, it is notable that the Court was able to distinguish the obligations, and perhaps the mistakes, of the escrow holder versus the title insurer.

 

Stockton Mortgage, Inc. v. Tope (2015) 233 Cal.App.4th 437

(06/15)

Damages for Wrongful Foreclosure Not Necessarily Limited to Lost Equity

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The recent case of Miles v. Deutsche Bank involves the measure of damages for wrongful foreclosure. In 2005, plaintiff refinanced the loan on his home in Riverside with an adjustable rate mortgage serviced by HomeEq. Plaintiff made regular payments until the rate increased in 2007 and then sought a loan modification. In early 2008, HomeEq agreed to modify the loan terms in exchange for a lump sum payment. Both parties signed the modification agreement and plaintiff made the first payment, but HomeEq then refused to honor the agreement.

 

Plaintiff continued for a time to make monthly payments but HomeEq kept revising the agreement terms and demanding more lump sum payments to modify the loan. When plaintiff insisted on the terms of the original agreement, HomeEq recorded a notice of default and then a notice of trustee’s sale. Plaintiff obtained a court order temporarily preventing the sale of the home in 2009, but defendants proceeded with the sale and evicted plaintiff.

 

Plaintiff sued HomeEq and Deutsche Bank, which owned the loan. The trial court in Riverside County without explanation sustained defendants’ demurrer to causes of action for breach of contract, fraud and negligent misrepresentation. The court also granted defendants’ motion for summary judgment on the remaining cause of action for wrongful foreclosure, finding that plaintiff had no equity in the property and thus could not prove damages. The Court of Appeal, Fourth Appellate District, reversed both rulings.

 

The court first rejected the argument that plaintiff’s failure to attach a copy of the contract or plead its terms verbatim was fatal to the breach of contract claim. The correct rule is that a plaintiff may plead the legal effect of the contract rather than its precise language.

 

On the fraud and negligent misrepresentation claims, defendants argued they could not lie where, as here, the representations pertained to future events and thus there could be no prior knowledge that assertions were untrue. The court rejected the argument, finding that such claims could be based on making promises, here to modify the loan, but having no intent to actually perform. The court also rejected the argument that the claims lacked specificity for failing to identify the specific misrepresentations and the persons who made them, finding that such information was more likely in the possession of defendants.

 

With regard to the wrongful foreclosure claim, which requires “an illegal, fraudulent or willfully oppressive sale”, the court disagreed with the trial court’s conclusion that a plaintiff with no equity in the home cannot prove damages. Because wrongful foreclosure is a tort, the measure of damages includes “all the detriment proximately caused thereby” (see Civil Code § 3333), which in addition to lost equity the court noted might also include moving expenses, damage to credit, loss of rental income, personal injury including emotional distress, property damage and, upon a proper showing, punitive damages. The court made clear, however, that it was not suggesting any of these damages would be actually recoverable in the case, and noted that plaintiff’s damages, if any, might be entirely offset by the benefit of being free of an underwater loan.

 

After the events giving rise to this lawsuit, the legislature enacted a statutory cause of action to recover damages for wrongful foreclosure, codified at Civil Code sections 2924.12(b) and 2923.6(c)(3), but the court took no position on whether this impacts the common law tort action.

 

Plaintiffs’ Bar may attempt to rely on this case to seek broad damages in all real estate tort actions, but given other applicable case law, the scope of this particular ruling is arguably limited to instances where a party illegally, fraudulently or with willful oppression exercises a right to foreclose on property, evict an occupant, or both.

 

Miles v. Deutsche Bank Nat’l Trust Co. (2015) 236 Cal.App.4th 394

(06/15)

Whether an Issue Is Arbitrable Is Determined Solely by Language in Arbitration Agreement

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The Bunker Hill v. U.S. Bank case involved a rather dry, but nonetheless important issue which may have an impact on real-world situations: when arbitration may be compelled pursuant to an arbitration agreement between two parties, and more specifically, what kinds of issues may be arbitrated.

 

Landlord Bunker Hill owned land in Los Angeles County.  It leased the land to U.S. Bank, who owns five low-rise buildings on the parcel.  The parties are governed by a 99-year ground lease, which expires in 2077.  When the lease is terminated (either in 2077 or at some point before then), the buildings and other improvements on the property become the property of Bunker Hill.  The lease also allows U.S. Bank to sublet the property, which it did.

 

A dispute arose between the parties over the amount of rent, which was adjusted in April of 2013.  They went to arbitration pursuant to an arbitration provision in the lease.  During the arbitration, a related issue arose: whether, upon termination of the lease, the subleases would terminate or whether Bunker Hill would take title to them.  That issue was not resolved during the arbitration, but the parties continued to correspond about it.  After a while, U.S. Bank invoked the arbitration provision again and demanded arbitration to resolve the issue.

 

After a few months of conferring, U.S. Bank made several acknowledgements which, in its view, made arbitration on the sublease issue unnecessary.  Bunker Hill pressed its position that arbitration was necessary to eliminate uncertainty which may arise when the lease ends.  U.S. Bank responded that the issue was “purely hypothetical.”

 

Bunker Hill filed a petition to compel arbitration with the court, stating that there was presently a dispute between the parties regarding their respective rights and obligations under the ground lease.  U.S. Bank opposed on the grounds that there was no justiciable controversy, and therefore, in essence, there was nothing to arbitrate.  The trial court agreed with U.S. Bank and denied the motion.  Bunker Hill appealed.

 

The appellate court held that the usual requirements of justifiability and ripeness, which are required before a court can hear a case, do not necessarily apply in arbitration.  The language in the arbitration agreement or provision is what governs what can and cannot be arbitrated.  Contracting parties are free to negotiate and restrict the powers of an arbitrator and the “universe of issues that he or she may resolve,” as the powers of the arbitrator are derived from and limited by the arbitration agreement.  In this case, the provision broadly obligated the parties to arbitrate “any and all disputes, controversies or claims arising under or relating to the Ground Lease.”  As the lease did not define these terms, the court interpreted them in their “ordinary and popular sense,” and concluded that the sublease issue was plainly included, as it was an “unresolved dispute which both arises under and relates to the ground lease.”

 

Bunker Hill Park Ltd. v. U.S. Bank, N.A. (2014) 231 Cal.App.4th 1315

(06/15)

No Duty to Disclose Claim of Easement to Prospective Purchaser of Adjacent Property

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The Hoffman v. 162 North Wolfe case involved claimed prescriptive easements over commercial property in Sunnyvale. In March 2010, Hoffmans purchased property at 170 North Wolfe (“170”). At the time of the purchase, Hoffmans were tenants of 170 and were thus familiar with that property and the adjacent property at 162 North Wolfe (“162”). After close of escrow, the owner of the adjacent property, 162 LLC, notified Hoffmans that they claimed a landscape easement and prescriptive easement rights of ingress and egress over 170. Thereafter, 162 LLC sued Hoffmans to quiet title to the landscape easement and prescriptive easement rights.

 

In an interesting twist, Hoffmans cross-complained against 162 LLC for fraud, alleging (among other things) that 162 LLC should have disclosed their claims or interest with respect to the disputed area and that its members had falsely told them that they had no claims. Hoffmans claimed that eight months before close of escrow they complained to Jonathon Owens, one of 162 LLC’s members, that vehicles servicing 162 were crossing over onto 170, and that Owens said he “would take care of it.” Notwithstanding this alleged conversation, the vehicles continued to cross onto 170 but the Hoffmans failed to raise the issue again.

 

The Santa Clara County trial court granted summary adjudication of Hoffmans’ on grounds that, without a preexisting relationship, 162 LLC had no duty to affirmatively disclose anything to Hoffmans. On both causes of action, the trial court found that the Hoffmans hadn’t justifiably relied on 162 LLC’s actions or inactions. The Court of Appeal for the 6th District upheld the trial court’s ruling.

 

On the concealment (fraudulent non-disclosure) cause of action, the Court of Appeal rejected Hoffmans’ claim that the parties’ mutual interest in purchasing 170 constituted a “preexisting relationship” sufficient to warrant a duty of disclosure. The Court found “no evidence in the record that 162 LLC or its members had any relationship with the Hoffmans.”

 

The Court went on to find that even if 162 LLC had owed Hoffmans a duty to disclose their easement claims prior to close of escrow, the Hoffmans’ fraud claims failed because they could not establish reliance. In order to satisfy the reliance element of actionable fraud, the purported reliance must be reasonable or justified. The Court first found that Steven Hoffman’s status, sophistication and experience was relevant to the determination of reasonable reliance. Hoffman was an “experienced real estate agent who had owned several businesses and owned several pieces of real property.” The Court explained that it was unreasonable as a matter of law for someone of Hoffman’s sophistication and experience to take no action, and fail to even make any further inquiry, while observing the tenants of 162 drive over the disputed area for eight months which was a “common occurrence” as the Hoffmans admitted at deposition.

 

On the fraud claim, while the Court appeared quite dubious of the Hoffmans’ argument that Owens’ statement that he “would take care of it” constituted an actionable promise, since it might be too vague to be enforceable even if it constituted a promise, the Hoffmans could not in any event establish reasonable reliance as a matter of law based on the analysis above.

 

This case is perhaps most interesting for what it did not do – the Court resisted the attempt to extend disclosure rules to third parties without any preexisting relationship. Requiring the owners of neighboring properties to essentially become part of their neighbor’s real estate transaction would have had a long-reaching, and potentially devastating, impact on almost every real estate transaction in California.

 

Hoffman v. 162 North Wolfe (2014) 228 Cal.App.4th 1178.

(06/15)

First District Court of Appeal Takes A Bit of the Bite Out of the Merger Doctrine

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In Ram’s Gate Winery, LLC v. Roche, Ram’s Gate bought a Sonoma County property intending to build a new winery. The sellers (Roches) had agreed in the purchase agreement to disclose facts having a “material effect on the value of the ownership or use of the Property,” including geological hazards.

 

After escrow closed, Ram’s Gate discovered an active fault trace on the property that substantially increased the cost of development, and sued the Roches for, among other things, breach of contract. The trial court granted summary adjudication in favor of the Roches on the breach of contract action finding that the warranties in the purchase agreement had “merged” with the recording of the deed and thus did not survive the close of escrow – the “merger doctrine.” The Roches were awarded their attorneys’ fees and costs, and Ram’s Gate appealed.

 

The general rule, long recognized in California, is that “where a deed is executed in pursuance of a contract for the sale of land, all prior proposals and stipulations are merged, the deed is deemed to express the final and entire contract between the parties.” (Bryan v Swain (1880) 56 Cal. 616, 618.) Thus, any and all previous duties of disclosure, unless specifically stated in the deed, are extinguished and deemed to have “merged” into the deed.

 

Historically, the merger doctrine has been criticized for its inherent unfairness. For example, in Ram’s Gate, the trial court ruled that “When the contract [i.e., deed] does not provide that the representations and warranties survive the closing of the transaction, [they] are treated as extinguished as of the closing date, and cannot thereafter give rise to liability.” As such, even though the Roches allegedly knew about the fault trace prior to closing, their duty to disclose this alleged material defect was extinguished because the duty was not specifically stated in the deed that was recorded at the close of escrow – if applied, a harsh result.

 

The First District Court of Appeal reversed, finding the merger doctrine “not as broad and absolute as some abbreviated statements of the doctrine might indicate.” “The crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement.”

 

The Court agreed “with those courts which have limited application of the merger doctrine to circumstances where the contractual terms are inconsistent with the deed, or where the parties clearly intend to have all contractual obligations subsumed by the recitals of the recorded deed.” This formulation mitigates the potential unfairness resulting from strict application of the merger doctrine.

 

Thus, whether the merger doctrine applies should be decided now based on (1) an analysis of the deed in comparison with, and in the context of, the prior contract to discern whether the contractual terms are inconsistent with the deed, and (2) examination of the parties’ intent as to whether the provisions of the prior agreement continue in force after the transfer of title.

 

Applying the above formulation to the case before it, the Court found that from the face of the deed there was no “obvious conflict” between the purchase agreement and the terms of the deed which would show that the disclosure warranty was merged into the deed. As such, the merger doctrine would not be applied.

 

Turning to the second prong – the parties’ intent – the Court found that the manager’s declaration established that Ram’s Gate believed the warranties and disclosure duties would continue after close of escrow. The declaration should therefore have been considered in determining the parties’ mutual intent on the integration and survival issue, which raised a factual issue to be determined at trial. Because there was a triable issue of fact as to the parties’ intent, the merger doctrine would not be applied in this case.

 

In the end, the Court took some of the sting out of a draconian and sometimes harsh law – the merger doctrine. As a result, courts are now permitted to examine both the purchase agreement and the deed side-by-side to determine if the contract terms are inconsistent with the deed. Courts are also permitted to accept extrinsic evidence to determine whether the parties’ intended all prior representations and warranties to be extinguished and “merged” into the deed at the time of closing.

 

Ram’s Gate Winery, LLC v. Roche (2015) 235 Cal.App.4th 1071

(06/15)

Represented limited partner in multi-million dollar claims against general partners and former lawyers

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