Stone v. Mitchell CA1/4 ( 2013 )

Filed 12/10/13 Stone v. Mitchell CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
ROLAND STONE, et al.,
Plaintiffs and Respondents,
A131442
v.
JOHN C. MITCHELL, (San Francisco County
Super. Ct. No. CGC-08-479284)
Defendant and Appellant.
Plaintiffs Roland and Jane Stone1 bought an apartment building (the building or
the property) from defendant John Mitchell, believing its 10 apartments could all be
legally rented out. They later learned that a larger unit had been divided into two without
a building permit, and therefore only nine of the units were legally permitted. They
brought this action against Mitchell for breach of contract, negligence, and negligent
misrepresentation. On the negligence claim, the jury found in plaintiffs’ favor, but also
determined the Stones were 60 percent responsible for their injuries. The jury found in
Mitchell’s favor on the other two claims. Both plaintiffs and Mitchell have appealed.
We shall affirm the judgment.
I. BACKGROUND
A. Mitchell’s Purchase and Ownership of the Property
The apartment building was constructed in the late 1960’s or early 1970’s, with a
total of nine legally permitted units. At some point after that, probably in the mid- to
1
We shall refer to Roland Stone as “Stone,” and Roland and Jane Stone
collectively as “the Stones” or “plaintiffs.”
1
late-1970’s, a two-bedroom unit was divided into two one-bedroom units (units 3015A
and 3015B), without a permit.2 In 1978 or 1979, the zoning of the property was changed
to single-family residential, and as a result new units could not legally be added to
existing multi-unit apartment buildings.
Mitchell bought the property in 2001 from Antonio Castellucci, who had owned it
only briefly. Castellucci did not know, and did not tell Mitchell, that one unit had been
divided into two without a building permit. The contract required Castellucci to provide
a “3R” or a similar report that would show the legality of the units in a multi-unit
building, but Castellucci did not know whether his agent provided Mitchell with such a
report.3
The property had 10 apartments, each with a separate address and mailbox.
However, it appears that the property had only nine Pacific Gas and Electric Company
(PG&E) meters, which were next to the mailboxes. Units 3015A and 3015B and the
common areas shared a meter.
The property was inspected and appraised in 2002 when Mitchell applied for a
loan. The appraisal report noted that the “[p]resent [i]mprovements . . . do not conform
to zoning regulations.” Mitchell testified that he did not review the appraisal report.
During the time Mitchell owned the property, he knew there were only nine PG&E
meters, and he paid a single bill for the two units in question and the common areas. He
did not investigate the reason the units and the common areas shared a meter or try to
have them put on separate meters. Mitchell testified that both when he bought the
2
By the early 1980’s, the county assessor’s office assessed the property as
containing 10 units.
3
The agent testified that Napa County did not have such a report, and he did not
recall complying with this requirement. He was not aware of any information indicating
that work had been done on the property without a building permit. He did not recall
noticing that there were only nine meters for the 10 apartments, and testified that if he
noticed such a thing, he would normally ask the seller the reason, and go to the city to
find out if the seller did not know.
2
property and when he sold it to the Stones, he believed it contained 10 legal income-
producing apartments.
B. Marketing of the Property and Sale to the Stones
In 2006, Mitchell hired Philip Moreno, a real estate broker, to market and sell the
property.4 Mitchell told Moreno it consisted of 10 apartments, and gave Moreno copies
of the 10 leases. The leases all provided that the tenants were responsible for payment of
all utilities except water and garbage.
Moreno visited the property, and believed there were 10 separate meters. Based
on the information Mitchell had given him, he prepared a sales flyer. The flyer described
the property as a 10-unit apartment building, and listed the monthly rent for the units. A
disclaimer at the bottom of the flyer stated: “This information has been secured from
sources we believe to be reliable, but make no representations or warranties, expressed or
implied, as to the accuracy of the information. Buyers are advised to investigate and
verify the above information and make their own market evaluation.” He also prepared
an income and expense statement, which listed among the operating expenses the
aggregate amount of the costs of the utilities, without breaking them down further. The
statement indicated that the apartment building would yield a 6.17 percent annual return
on the investment based on the income and expenses and an asking price of $1,225,000.
Moreno also prepared a multiple listing service (MLS) listing that stated the tenants paid
for their own electricity. Although Mitchell had told Moreno he was paying the PG&E
bills for units 3015A and 3015B, Moreno did not include this information in any sales
materials or multiple listing service entries. At trial, Moreno agreed that illegal “in-law”
units sometimes lacked a separate meter.
Stone contacted Moreno about another property, and Moreno told him about the
apartment building and sent him the flyer and income statement.5 Moreno also gave
4
Moreno was originally a defendant in this action, but reached a settlement with
plaintiffs before trial.
5
Mitchell never met Stone and never spoke with him, instead conducting the
transaction entirely through Moreno.
3
Stone a rent roll listing the rental income from each of the apartments. It did not indicate
that the owner was responsible for paying the utilities for units 3015A and 3015B, and
Moreno never told Stone that that was the case. He gave Stone copies of the leases—
including the lease for unit 3015B—which provided that the tenants would pay for the
utilities except water and garbage, and Stone believed the tenants did so. Based on the
documents he received, Stone believed the property had 10 legal income-producing units
and would provide a good return on his investment. However, Moreno never told him
the property contained 10 legally permitted units.
Stone testified that when he visited the property with Moreno, he noticed there
were only nine electric meters, and asked Moreno about it. Moreno told him there were
two additional meters in the garage. The door to the garage did not open properly, and
according to Stone, they could not enter it. Before the close of escrow, Stone never
entered the garage to verify the presence of the meters. 6
Moreno gave Stone a report prepared by Hypersafe Property Inspection (the
Hypersafe report) for another person who had been interested in the property. Moreno
suggested the Stones read the report, and he put a “Read & Approved” stamp on it.
Moreno also told the Stones they could have another report prepared if they preferred not
to use the Hypersafe report. The report contained the disclaimer that it was “not intended
for use by anyone other than the buyer/client named herein. No other person should rely
on the information in this report.” The “Electrical” section of the Hypersafe report noted:
“Main Service panel (unlabeled) at the right exterior wall of the building appears to serve
Unit 3015A and Unit 3015B (single meter for both units) as well as garage, laundry area
and exterior lighting.” Under a section entitled “General Notes—Specific Units,” the
report noted in its discussions of Units 3015A and 3015B that they were “not provided
with separated metered electric service,” and that they shared a common meter.
6
Moreno, on the other hand, testified that although the garage was full and the
door did not open completely, he and Stone were able to go into it and look around, and
that Stone wanted to look for meters but that they did not see any in the garage and
concluded they were all in the front of the building.
4
The Stones returned the Hypersafe report to Moreno with the stamp “Read &
Approved” initialed and dated. However, Stone did not read the report past the point
where it stated that it was not intended for use by anyone other than the person for whom
it had been prepared—the previous prospective buyer. He told his wife, for whom he
acted as agent, not to read the report, and she initialed it without reading it.
Stone testified at trial that he had a general contractor inspect the property, but he
did not receive a formal inspection report. The contractor did not inspect the electrical
system. In his pretrial deposition, however, Stone testified that he never had any kind of
inspection made before the close of escrow. He did not check on the building permits
because it was not customary to do so with a building that old.
Stone was a realtor, held a real estate broker’s license, had been involved in selling
multi-unit residential properties in the past, and had owned approximately three such
buildings other than the one at issue in this case. All of them had had separate meters for
each apartment.
Don Jose Barrelier, a real estate broker for whom Stone once worked, testified that
when a buyer removed an inspection contingency, it indicated that the inspection had
been made and the property was acceptable to the buyer based on the inspection.
Barrelier testified that in his work representing sellers, he had had occasion to
obtain copies of reports previously obtained by potential buyers, and he would always
pass them on to a new potential buyer, as part of his duty to disclose problems with the
property. He would ask the buyer to acknowledge in writing having received and read
the reports. He would never advise a client not to read such a disclosure report, or to sign
one as read and approved if the client had not read it.
Barrelier testified that the notations in the Hypersafe report that units 3015A and
3015B shared a common meter with each other and with the common areas could be a
“red flag,” calling for further investigation, although it did not necessarily mean the units
were not permitted.
5
C. The Contract
The Stones agreed to buy the property for $1,200,000, with $75,000 to be credited
to them for repairs. The sales contract included an inspection contingency. In his
accepted counter-offer, Mitchell included this provision: “Buyers and contractor to
inspect property with in [sic] 10 days from acceptance and to release this contingenie
[sic] 3 days there after [sic].”
The contract included among its terms and conditions a “Buyer Inspection
Advisory (C.A.R. Form BIA),” which advised the buyer to inspect the land and
improvements, both personally and with professionals, and to read the professionals’
written reports. Under the heading “Buyer Rights and Duties,” the Buyer Inspection
Advisory stated: “You have an affirmative duty to exercise reasonable care to protect
yourself, including discovery of the legal, practical and technical implications of
disclosed facts, and the investigation and verification of information and facts that you
know or that are within your diligent attention and observation. The purchase agreement
gives you the right to investigate the Property. If you exercise this right, and you should,
you must do so in accordance with the terms of that agreement. This is the best way for
you to protect yourself. It is extremely important for you to read all written reports
provided by professionals and to discuss the results of inspections with the professional
who conducted the inspection.” It also advised the buyer to investigate, inter alia,
“BUILDING PERMITS, ZONING AND GOVERNMENT REQUIREMENTS: Permits,
inspections, certificates, zoning, other governmental limitations, restrictions, and
requirements affecting the current or future use of the Property, its development or size.
(Such information is available from appropriate governmental agencies and private
information providers. Brokers are not qualified to review or interpret such
information.)” The buyer also agreed that the broker would “not be responsible for
inspecting public records or permits concerning the title or use of Property.”
The contract also provided, in bold print: “NOTE TO BUYER: You are strongly
advised to conduct investigations of the entire Property in order to determine its present
condition since Seller may not be aware of all defects affecting the Property or other
6
factors that you consider important. Property improvements may not be built according
to code, in compliance with current Law, or have had permits issued.”
Under the terms of the contract, “If Buyer removes, in writing, any contingency or
cancellation rights, unless otherwise specified in a separate written agreement between
Buyer and Seller, Buyer shall conclusively be deemed to have: (i) completed all Buyer
investigations, and review of reports and other applicable information and disclosures
pertaining to that contingency or cancellation right; (ii) elected to proceed with the
transaction; and (iii) assumed all liability, responsibility, and expense for Repairs or
corrections pertaining to that contingency or cancellation right, or for inability to obtain
financing.” Before the close of escrow, the Stones removed all contingencies.
D. Events After the Sale
Escrow on the sale closed on November 30, 2006. In January 2007, the PG&E bill
for units 3015A and 3015B and the common areas was $1,109.53. Stone was surprised
by the bill, asked his property manager to look into the matter, and learned that the two
units and the common area shared a meter. He tried to have separate meters installed for
the two units, but was unable to obtain the necessary permit because the property only
had nine legal units. Until the county told him that, Stone believed he owned 10 legal
units. He made unsuccessful efforts to legalize the 10th unit, but the county ultimately
told him he would have to reduce the number of units on the property to nine. Stone
then converted the two units into a larger single unit.
E. Trial
During trial, Mitchell moved for nonsuit, and the trial court denied his motion.
The jury found in plaintiffs’ favor on their cause of action for negligence, found the total
damages were $111,400, and assessed 40 percent responsibility to Mitchell and 60
percent responsibility to the Stones based on their own negligence. The jury found in
defendant’s favor on the causes of action for negligent misrepresentation and breach of
contract. Both Mitchell and the Stones made motions for judgment notwithstanding the
verdict (JNOV), which the trial court denied.
7
II. DISCUSSION
A. Mitchell’s Appeal
1. Denial of Mitchell’s Motions for Nonsuit and JNOV
Mitchell contends the trial court erred in denying his motions for nonsuit and
JNOV. We review the court’s rulings on these motions for substantial evidence. (OCM
Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157
Cal.App.4th 835, 845.) We “read the record in the light most advantageous to the
plaintiff[s], resolve all conflicts in [their] favor, and give [them] the benefit of all
reasonable inferences in support of the original verdict.” (Stubblefield Construction Co.
v. City of San Bernardino (1995) 32 Cal.App.4th 687, 703.)
Mitchell argues he had no legal duty to plaintiffs except to disclose information
affecting the value and desirability of the property that he or his agent actually knew, and
that he had no duty to make an affirmative inspection of public records or permits. (See
Holmes v. Summer (2010) 188 Cal.App.4th 1510, 1518–1519 [where seller knows of
facts materially affecting value or desirability of property and knows facts are not within
buyer’s diligent attention and observation, seller must disclose them to buyer]; Watt v.
Patterson (1954) 125 Cal.App.2d 788, 793–794 [where all pertinent facts known to buyer
and seller of house operated as rooming house, defendant had no duty to know about
zoning regulations restricting its use and inform plaintiffs of them]; Alfaro v. Community
Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1382
[fraud claim based on nondisclosure arises where there is confidential relationship, where
defendant has made representation likely to mislead absent disclosure, when there is
active concealment, or where one party has sole knowledge or access to material facts
and knows facts are not known to or reasonably discoverable by other party]; Shapiro v.
Sutherland (1998) 64 Cal.App.4th 1534, 1544; Civ. Code, § 2079.3.)
Here, the only theory upon which Mitchell was found liable was that of
negligence. There was evidence that Mitchell knew he paid the PG&E bills for units
3015A and 3015B; that neither he nor his agent, Moreno, told the Stones that fact; that
the bill for the first full month Stone owned the apartment was over $1,100, significantly
8
offsetting his income on those units; that the fact that the units shared a meter with each
other and with the common areas could be a “red flag” calling for further investigation;
and that Mitchell gave Moreno copies of the leases requiring the tenants to pay their own
utility bills.7 Because these facts affected the value and desirability of the property,
Mitchell had a duty to provide full and accurate information about them. Additionally,
from these facts, the jury could reasonably conclude Mitchell acted negligently—that is,
as it was instructed, that he “fail[ed] to use reasonable care to prevent harm to . . . others”
and that he “[did] something that a reasonably careful person would not do in the same
situation or fail[ed] to do something that a reasonably careful person would do in the
same situation.”
We recognize that the Stones received, and indicated they had read, the Hypersafe
report, which noted that units shared a common meter with each other and with the
common areas, and that they did not investigate the matter further despite the explicit
advisements in their contract that they should investigate the entire property and that
improvements might not have been built according to code or in compliance with current
law or have had permits issued. The jury, however, appears to have considered these
facts and adjusted for them when it found the Stones were also negligent and assigned to
them 60 percent of the responsibility for their own harm. On the facts of this case, the
trial court did not err in denying Mitchell’s motions for nonsuit and JNOV.
2. Motion in Limine
Mitchell next complains that the trial court erred when, in response to plaintiffs’
motion in limine, it precluded him from testifying that he never represented to plaintiffs
that he was selling them 10 legal units. We review the trial court’s ruling on the
admissibility of evidence for abuse of discretion. (People ex rel. Lockyer v. Sun Pacific
Farming Co. (2000) 77 Cal.App.4th 619, 639–640.) Even where the trial court
improperly excludes evidence, we will not reverse unless the appealing party shows it is
7
In addition, Moreno, Mitchell’s agent, prepared an MLS listing stating the
tenants paid for their own electricity. It is not entirely clear from our review of the record
whether the Stones saw that MLS listing before they bought the property.
9
reasonably probable a more favorable result would have been reached absent the error.
(Poniktera v. Seiler (2010) 181 Cal.App.4th 121, 142.)
We see no possibility that Mitchell was adversely affected by the trial court’s
ruling. Plaintiffs made no claim that Mitchell or Moreno told them explicitly that the
units were “legal.” In fact, the evidence was clear that Mitchell had no direct dealings
with the Stones, and that Moreno never told Stone the units were “legal.” Rather,
plaintiffs took the position that because Mitchell represented that the apartment building
included 10 units, the Stones were entitled to infer that all 10 of the units could legally be
offered for rent. There is thus no basis to conclude that the absence of Mitchell’s
testimony led the jury to believe that Mitchell told Stone explicitly that all 10 units could
legally be rented or that the additional testimony would have affected the result of the
trial.
3. Instructional Error
The trial court read the following instruction to the jury: “Special Jury Instruction
No. 1, Breach of Contract. [¶] When a seller accurately describes the current use or
income from the property, as the defendant Mr. Mitchell did in this case, that is, he was
selling ten income-producing units, there is an implied representation that the property
may be used by the plaintiffs for the same purposes and produce the same future income.
Sean Mitchell’s representation that he has ten income-producing apartment units was a
positive assertion.” Mitchell contends this instruction constituted error. He relies on
cases holding that a cause of action for negligent misrepresentation requires a positive
assertion, rather than a mere omission or implied representation. (See Diediker v. Peelle
Financial Corp. (1997) 60 Cal.App.4th 288, 297–298; Wilson v. Century 21 Great
Western Realty (1993) 15 Cal.App.4th 298, 306–307.)
We reject Mitchell’s claim of prejudicial error. The instruction applied only to
plaintiffs’ cause of action for breach of contract—a claim the jury decided in Mitchell’s
10
favor. We see no reason to conclude the jury applied the rule to the cause of action for
negligence.8
B. Plaintiffs’ Cross-Appeal
In their cross-appeal, the Stones argue the verdicts are fatally inconsistent: that is,
that having found Mitchell liable for negligence, the jury could not logically have found
him not liable for the claims for breach of contract and negligent misrepresentation that
were based on the same set of facts.
As to the cause of action for breach of contract, the Stones contend the
information Mitchell and his agent gave them indicated that the property contained 10
rentable units, that this information became a positive assertion that the 10 units could
legally be rented to tenants, that this assertion became a term of the contract, and that
Mitchell breached the contract by failing to deliver title to 10 legally rentable units. In
finding in Mitchell’s favor on the breach of contract cause of action, however, the jury
reached only the first question on the verdict form, which asked, “Did Roland Stone and
Jane C. Stone do all, or substantially all, of the significant things the contract required
them to do?” The jury answered, “No.” Evidence to support this verdict can be found in
the contract, which not only strongly advised the Stones to inspect the property and stated
the Stones had “an affirmative duty to exercise reasonable care to protect yourself,
including discovery of the legal, practical and technical implications of disclosed facts,
and the investigation and verification of information and facts that you know or that are
within your diligent attention and observation,” but also provided: “Buyers and
contractor to inspect property with in [sic] 10 days from acceptance and to release this
contingenie [sic] 3 days there after [sic].” It appears the jury based its verdict on the
conclusion that the contract gave the Stones the affirmative obligation to inspect the
property before removing the inspection contingency.
8
We also note that the trial court immediately went on to instruct the jury that in
order to find Mitchell liable for negligent misrepresentation, “an applied [sic] assertion or
implied representation is not enough. A positive assertion on his part is required”—
precisely the legal principle Mitchell relies on.
11
Plaintiffs contend this conclusion is contrary to law, and that they were entitled to
rely on Mitchell’s representations without further investigation. They rely on
Manderville v. PCG&S Group, Inc. (2007) 146 Cal.App.4th 1486, 1503, which concludes
that a form contract giving a buyer the right to inspect property and strongly advising
such an inspection did not impose a duty to inspect the property. Here, however, in
addition to the form language giving the Stones such rights and advisements, the contract
included the additional language providing that the Stones were “to inspect property”
within 10 days of acceptance and to release the inspection contingency three days
thereafter. This language may reasonably be understood to impose on the Stones the
obligation to carry out such an inspection—and Stone testified at his deposition that he
did not inspect the property before releasing the contingency. This conclusion is not
inconsistent with the jury’s verdict on the negligence cause of action—that is, the jury
could logically conclude both that the Stones did not do all the significant things the
contract required them to do, and that Mitchell acted negligently toward them to their
detriment.
Nor is the jury’s verdict on the cause of action for negligent misrepresentation
necessarily inconsistent with the verdict on the negligence claim. The jury was instructed
that Mitchell’s representation that he had 10 income-producing apartment units was a
positive assertion, and that when he represented that he was selling 10 income-producing
units, “there [was] an implied representation that the property may be used by the
plaintiffs for the same purposes and produce the same future income.” (Italics added.)
The court went on to instruct the jury, “In order to find Mr. Mitchell liable for negligent
misrepresentation, an applied [sic] assertion or implied representation is not enough. A
positive assertion on his part is required.” (Italics added.) (See Wilson v. Century 21
Great Western Realty, supra, 15 Cal.App.4th 298, 306.) In the special verdict form for
the negligent misrepresentation cause of action, the jury answered only the first question,
which asked, “Did [Mitchell] make a false representation of an important fact to Roland
Stone and Jane C. Stone?” The jury answered, “No.” Based on the instructions, the jury
could reasonably have concluded Mitchell made a positive representation about the
12
current use of the property, but that the representation that plaintiffs could continue to use
the property in the same way was only an implied representation, which was insufficient
to support a cause of action for negligent misrepresentation. This verdict is not
inconsistent with a conclusion that—whether or not he made a positive assertion about
plaintiffs’ legal ability to rent out all 10 units—Mitchell failed to use reasonable care to
prevent harm to plaintiffs.
III. DISPOSITION
The judgment is affirmed.
_________________________
Rivera, J.
We concur:
_________________________
Ruvolo, P.J.
_________________________
Humes, J.
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