O'Toole v. Oceanview Cottages CA4/1 ( 2024 )

Filed 10/28/24 O’Toole v. Oceanview Cottages CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
ROSEMARY O’TOOLE, et. al, D080948
Plaintiffs and Appellants,
v. (Super. Ct. No. 37-2020-
00016583-CU-CD-CTL)
OCEANVIEW COTTAGES, LLC, et.
al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of San Diego County,
Keri Katz, Judge. Affirmed as modified.
Wood, Smith, Henning & Berman, Steven R. Disharoon and Robin L.
Krutzsch for Defendants and Appellants.
Quade & Associates, Michael W. Quade and Cheryl L. Gustafson for
Plaintiffs and Appellants.
INTRODUCTION
This is an appeal and cross-appeal from judgment rendered by a
judicial referee on construction defect claims. All issues presented involve
damages. We affirm with one modification.
BACKGROUND
The plaintiffs in the underlying action are Rosemary O’Toole (O’Toole)
and 611 Stratford Court, LLC (Zable) (collectively, plaintiffs). They each own
one of the two condominium units in a residential building at 611 and 613
Stratford Court, Del Mar.1 The building was originally owned, built, and
developed by Oceanview Cottages, LLC; Pacific Stratford Three, LLC;
Pacifica Construction CA, Inc.; and Stratford Del Mar, Inc. (collectively,
defendants).
In May 2020, plaintiffs filed suit against defendants asserting the
condominium units were “not properly constructed to prevent water from
entering though walls, roofs, decks, windows, and foundations, allowing
water to enter the buildings[.]” In October 2020, the parties submitted the
controversy to judicial reference by stipulation. Relevant here, the statement
of claims submitted for adjudication included claims for (1) negligence,
(2) violation of the building standards set forth in Civil Code section 896,2
(3) negligent misrepresentation, (4) intentional misrepresentation, and
(5) concealment.
On April 5, 2022, the referee rendered a final decision and award. The
referee found defective construction in both units, specifically: “[T]he
waterproofing system for the east wall was improperly assembled and
constructed by [defendants]. In addition, [defendants] did not adequately
provide for the substantial flow of groundwater from the adjacent uphill
property, resulting in the unmanaged flow of water onto the [condominium
1 Unit 611 was formerly owned by Walter Zable as trustee for the Ana
Bianca Zable trust.
2 Undesignated statutory references are to the Civil Code.
2
units]. The drainage system as built seems to be incapable of directing water
away from the [units], allowing that water instead to challenge and breach
the improperly constructed waterproofing system and associate building
components. Further, the drainage systems intended for landscaping,
surface drainage, rainfall, and prevalent coastal moisture were inadequately
constructed to effectively assist in the dewatering of the [units]. Additionally,
the construction of the balcony deck improperly allowed water to enter the
garage, and the windows in the below-ground elevations leak.”
Based on these findings, the referee ruled in favor of plaintiffs on two
causes of action: violation of section 896 statutory building standards, and
negligence. The referee denied all of plaintiffs’ remaining claims, including
the claims for negligent misrepresentation, intentional misrepresentation,
and concealment. Defendants appealed and plaintiffs cross-appealed. As
noted, all issues raised involve the referee’s award of damages.
DISCUSSION
I.
The Referee Did Not Improperly Exclude Defendants’ Revised Cost of Repair
Report
Defendants ask us to remand for reconsideration of the referee’s cost of
repair award. They contend the referee violated their right to due process by
reversing an evidentiary ruling after the close of evidence without notice and
an opportunity to be heard. We reject this contention. Defendants’ claim
does not take into account the distinction between a trial court’s gatekeeping
role with respect to evidentiary rulings and its final assessment of the
evidence when it decides the case in a bench trial. It is also based on a
misreading of the referee’s final decision.
3
During trial, the parties presented competing expert opinions about the
scope of repairs needed to rectify the construction defects in the two
condominium units. In addition, each party presented expert opinion and
reports about the cost to implement the repairs recommended by their
experts.
Defendants presented two cost of repair reports. The original cost of
repair report (for $127,616.87) was based on the scope of repair advocated by
their experts. The revised cost of repair report (for $459,691.23) included
additional repairs the parties had discussed during a pretrial mediation.
Plaintiffs sought to exclude from evidence the revised cost of repair
report on the ground that it was based on confidential mediation discussions.
The referee overruled plaintiffs’ objection and allowed the defendants’ revised
cost of repair report into evidence along with supporting testimony.
The referee agreed with defendants that the mediation privilege
“certainly protects any admissions, concessions, agreements” that occur
during mediation, but “people who are participating are not then expected to
scrub their brains and scrub their memories of any ideas that may germinate
there [at a mediation].” She agreed that to rule otherwise would “shut down
any opportunity for the defense to do anything with their strategy that was in
any way touched upon by any participant in any mediation previously held in
the case.”
After trial and the close of evidence, the referee awarded damages to
plaintiffs based on the full amount of their cost of repair, finding their
proposed scope of repair “provide[d] a greater likelihood of success in
reconstructing the improvements.” The referee’s written decision explained
she selected the scope of repair recommended by plaintiffs over the scope of
repair recommended by defendants, because she found plaintiffs’ experts
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correctly identified a major cause of water intrusion to be a construction
defect in a subterranean wall:
“Construction and geotechnical professionals opine for the
[plaintiffs], and the undersigned finds it to be most likely,
that the waterproofing on the east-facing subterranean
exterior wall was improperly installed, causing water to
enter the building continuously since the first rains
occurred during construction. The most significant portion
of [plaintiffs’] proposed repair includes exposing, cleaning,
and waterproofing the east wall across the back of both
units, a job, done properly and thoroughly, requiring
extensive earthwork and precautionary measures due to
the limited space between that wall and the retaining wall
on the uphill property behind it. [Defendants] present a
less expansive, less expensive repair scope, generally
approaching the work from the interior.”
Defendants claim they were denied due process because the referee
purportedly refused to consider their revised cost of repair report “after
initially ruling that [it] was admissible” without providing “meaningful
notice” that she was “contemplating changing her order.” Defendants claim
they “introduced two cost of repair estimates, one of which was a compromise
between the two parties’ positions. . . . Each was allowed as evidence by the
[r]eferee. However, the [r]eferee reversed that ruling in her [d]ecision,
remarking that she could not consider the [r]evised [c]ost of [r]epair due to
mediation privileges and lack of foundation.”
We do not agree with defendants’ interpretation of the referee’s written
decision. The referee did not exclude the defendants’ revised cost of repair
estimate from evidence because of the mediation privilege or lack of
foundation. Nowhere does her decision say this. According to the decision,
the referee appropriately assessed the revised cost of repair report as part of
the decision-making process, but she ultimately found the record lacked
sufficient evidence to consider the associated scope of repairs to be the best
5
choice to make plaintiffs whole. The referee’s decision explains the scope of
repair associated with the revised cost of repair estimate was devised as a
potential compromise between the parties’ positions at mediation, and
defendants failed to present expert testimony at trial to explain why it would
be the best plan to fix the construction defects as opposed to simply a legal
compromise:
“It should be noted here that [defendants] introduced a
compromise cost of repair, the scope for which was not
presented through qualified expert testimony. (Ex[hibit]
386.) It is left to the trier of fact to infer what scope is
intended and which defect(s) it is intended to address.
Admittedly, this third cost of repair is written such that the
informed reader might discern the intended scope and the
defects to be addressed by it. However, this third alternate
scope had its inception in mediation and was not otherwise
developed outside of that process. Absent the testimony of a
qualified witness to support the scope, and, critically, to
allow that witness to be challenged on cross-examination,
there is insufficient evidence to consider this alternative as
the basis for an award.” (Italics added.)
The referee’s ruling was consistent with standard procedure for
admitting and assessing expert opinion testimony. (Evid. Code, §§ 402, 801–
802.) During trial, “under Evidence Code sections 801, subdivision (b), and
802, the trial court acts as a gatekeeper to exclude expert opinion testimony
that is (1) based on matter of a type on which an expert may not reasonably
rely, (2) based on reasons unsupported by the material on which the expert
relies, or (3) speculative.” (Sargon Enterprises, Inc. v. University of Southern
California (2012) 55 Cal.4th 747, 771–772 (Sargon).) In exercising its
gatekeeper function, the court conducts a limited inquiry. At this juncture,
the court does not weigh an opinion’s probative value or substitute its own
opinion for the expert’s opinion. The court simply determines whether the
opinion is worthy of consideration by the trier of fact. (Id. at pp. 769, 772.)
6
After the close of evidence, the trier of fact—most often a jury but here
the referee—is not bound by the earlier assessment. The preliminary
determination that an expert opinion is admissible is not binding in the sense
that it is “not a decision on its persuasiveness.” (Sargon, supra, 55 Cal.4th at
p. 772.) How much weight to give an opinion after the close of evidence is up
to the trier of fact who may reject it entirely “if in [its] judgment the reasons
given for it were unsound.” (Kastner v. Los Angeles Metropolitan Transit
Authority (1965) 63 Cal.2d 52, 58.) Explained another way, the referee’s
preliminary ruling there was sufficient foundation for admissibility was not
binding on her subsequent assessment of its weight after all the evidence was
in. Ultimately, “expert opinions . . . are worth no more than the reasons and
factual data upon which they are based.” (Griffith v. County of Los Angeles
(1968) 267 Cal.App.2d 837, 847.)
We see no basis in the referee’s written decision to conclude she
reversed her earlier evidentiary ruling. To the contrary, the decision explains
how she weighed the evidence. “When the record clearly demonstrates what
the trial court did, we will not presume it did something different.” (Lafayette
Morehouse, Inc. v. Chronicle Publishing Co. (1995) 39 Cal.App.4th 1379,
1384.) The referee was entitled to reject defendants’ revised cost of repair
estimate on the ground that it lacked foundation to the extent defendants
failed to link the revised estimate to expert testimony explaining why the
underlying scope of repair was the best choice to repair the condominium
units. We affirm this aspect of the referee’s ruling.
II.
Plaintiffs Are Not Entitled to Remand for a Punitive Damages Phase
Plaintiffs sought punitive damages based on their fraud-based causes of
action for negligent misrepresentation, intentional misrepresentation, and
7
concealment. To obtain punitive damages, plaintiffs were required to prove
the elements of their fraud-based claims by clear and convincing evidence.
(§ 3294.) In her written decision, the referee discussed whether plaintiffs
sustained their burden to prove potential entitlement to punitive damages
and found they did not. Plaintiffs contend “[s]ubstantial evidence of fraud by
clear and convincing evidence requires a remand to the trier of fact . . . for a
hearing on punitive damages.”
We begin with the standard of review. It is not for substantial
evidence. “In a case where the trier of fact has determined that the party
with the burden of proof did not carry its burden and that party appeals, it is
misleading to characterize the failure-of-proof issue as whether substantial
evidence supports the judgment. Instead, where the issue on appeal turns on
a failure of proof at trial, the question for a reviewing court becomes whether
the evidence compels a finding in favor of the appellant as a matter of law.
Specifically, we ask whether the appellant’s evidence was (1) uncontradicted
and unimpeached and (2) of such a character and weight as to leave no room
for a judicial determination that it was insufficient to support a finding.”
(Ajaxo, Inc. v. E*Trade Financial Corp. (2020) 48 Cal.App.5th 129, 163−164
(Ajaxo), italics added [cleaned up].) This is “an onerous standard.” (Id. at
p. 164.) It is one that is “almost impossible” for a losing plaintiff to meet,
because unless the trier of fact made “specific findings of fact in favor of the
losing plaintiff,” we presume the trier of fact concluded that “plaintiff’s
evidence lacks sufficient weight and credibility to carry the burden of proof.”
(Bookout v. State of California ex rel. Dept. of Transportation (2010) 186
Cal.App.4th 1478, 1486 (Bookout).)
We turn next to the underlying burden of proof that was required to
obtain punitive damages. To sustain an award of punitive damages, the
8
plaintiff must prove “by clear and convincing evidence that the defendant has
been guilty of oppression, fraud, or malice.” (§ 3294; American Airlines, Inc.
v. Sheppard, Mullin, Richter & Hampton (2002) 96 Cal.App.4th 1017, 1049.)
The clear and convincing standard “ ‘requires a finding of high probability.’ ”
(Conservatorship of O.B. (2020) 9 Cal.5th 989, 998.) To prevail, “the evidence
must be so clear as to leave no substantial doubt and sufficiently strong to
command the unhesitating assent of every reasonable mind.” (Butte Fire
Cases (2018) 24 Cal.App.5th 1150, 1158 [cleaned up].)
Putting these standards together, plaintiffs face “an extremely high
burden on appeal.” (Estes v. Eaton Corporation (2020) 51 Cal.App.5th 636,
651.) Unsurprisingly, they have failed to demonstrate the evidence
compelled a ruling in their favor as a matter of law by clear and convincing
evidence on all elements of a fraud-based cause of action—a very tall order
indeed.
“California law generally recognizes four forms of deceit: intentional
misrepresentation, negligent misrepresentation, concealment, and failure to
perform a promise.” (Finch Aerospace Corp. v. City of San Diego (2017) 8
Cal.App.5th 1248, 1252.) “The well-established common law elements of
[intentional] fraud which give rise to the tort action for deceit are:
(1) misrepresentation of a material fact (consisting of false representation,
concealment or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to
deceive and induce reliance; (4) justifiable reliance on the misrepresentation;
and (5) resulting damage.” (City of Atascadero v. Merrill Lynch, Pierce,
Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 481.) “Negligent
misrepresentation is a separate and distinct tort, a species of the tort of
deceit.” (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 407.) “The tort of
negligent misrepresentation . . . does not require intent to defraud but only
9
the assertion, as a fact, of that which is not true, by one who has no
reasonable ground for believing it to be true.” (Conroy v. Regents of
University of California (2009) 45 Cal.4th 1244, 1255, citation omitted.)
Plaintiffs contend defendants committed fraud in five ways. They
claim defendants (1) failed to disclose the expiration of the contractor’s
general contractor’s license and consequent decision to obtain building
permits as an “Owner/Builder,” (2) failed to disclose they did not conduct an
inspection recommended by a geotechnical engineer, (3) misrepresented the
“R value” of the fiberglass insulation in the units, (4) failed to disclose
modifications to the planned drainage design for the property, and (5) failed
to disclose water intrusion events that took place during construction.3
Starting with the first four contentions, the referee found plaintiffs
failed to demonstrate materiality for each of them. These first four
contentions include allegations that defendants failed to disclose information
as well as allegations they made affirmative misrepresentations. In the
context of a real estate transaction, “undisclosed facts are material if they
would have a significant and measurable effect on market value.” (RSB
Vineyards, LLC v. Orsi (2017) 15 Cal.App.5th 1089, 1097 [cleaned up].) To
find fraud based on affirmative misrepresentations, a statement of fact is
material if a reasonable person “would attach importance to its existence or
nonexistence in determining his choice of action in the transaction in
question.” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951,
977.)
3 Plaintiffs also assert defendants showed a “[g]eneral [l]ack of [c]are” on
the job site, but they do not assert this as a separate ground for fraud.
(Boldface omitted.)
10
To persuade us the evidence of materiality was so exceptionally strong
the referee erred as a matter of law on this element, plaintiffs point to
statements about the four contentions in declarations by O’Toole (owner of
the 613 unit), Gregory Kunz (original owner of the 613 unit), Walter Zable
(trustee for the original purchaser of the 611 unit), and Walter’s wife,
Stefanie Zable.
The witnesses state in their declarations that (1) defendants did not
“apprise[ ]” them “of the expiration of the general contractor’s license by the
entity that pulled the permits” nor that “the developer of [611 and 613]
Stratford Court proceeded as an ‘Owner/Builder’ ” at some point during
construction; (2) the insulation in the basement area was different than as
represented in the purchase and sale documents; and (3) the drainage system
on the eastern side of the property was modified from the original building
plans. The declarations then state in conclusory fashion: “The above-stated
facts significantly affected and currently affect the value or desirability of the
property. I would not have proceeded forward with the purchase transaction
had I known the facts stated in the preceding paragraph or I would have
asked for a significant discount from the purchase price.” That’s it. Plaintiffs
point to nothing more in the record on the element of materiality to support
the first four contentions.
This is insufficient to require reversal and remand for a punitive
damages hearing. The referee was not compelled to find that defendants’
alleged misstatements and concealment of facts were material just because
plaintiffs said they were material. The referee heard testimony by O’Toole
and the Zables that repeated the statements in their respective declarations.
She was entitled to disbelieve the witnesses based on their demeanor. She
was entitled to disbelieve them based on inferences drawn from other
11
testimony in the record. She was entitled to find the evidence lacked weight
and persuasive value based on the witnesses’ failure to elaborate as to the
particular reasons why they would not have purchased the properties or
asked for a discount had they known about the information that was
misrepresented or not disclosed to them. She was entitled to reject the
testimony for a myriad of other reasons not apparent to us on a cold record.
A reviewing court starts with the presumption the record contains evidence
to sustain every finding of fact that is needed to support the judgment.
(Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66
Cal.App.3d 101, 152.) Plaintiffs have not demonstrated the evidence of
materiality was “of such a character and weight as to leave no room for a
judicial determination that it was insufficient to support a finding.” (Ajaxo,
supra, 48 Cal.App.5th at pp. 163–164 [cleaned up].)
Turning to plaintiffs’ remaining contention––that defendants failed to
disclose water intrusion events that took place during construction—the
referee did find this information to be a “relevant material fact.” However, to
be liable for fraud based on a failure to disclose, a defendant must have
knowledge of the facts he or she is required to disclose. (Curran v. Heslop
(1953) 115 Cal.App.2d 476.) The referee found defendants lacked the scienter
that is required to prove fraud with respect to this remaining theory:
“[T]he only relevant material fact here is that a
construction defect caused the water intrusion events
during construction. A misrepresentation, if any there be,
would be a failure to disclose that fact. That
misrepresentation requires that the speaker knew of the
construction defect at the time. The evidence falls short of
the clear and convincing standard on this point. While
hindsight has afforded clarity about what problems have
caused the conditions plaguing the Subject Property, it is
not at all clear that the [defendants] knew about the
12
construction deficiencies and intentionally—or even
negligently—withheld that information.”
On this record, we cannot find the referee erred as a matter of law
when she found insufficient evidence of scienter. At trial, to support their
contention that defendants must have known the water intrusion was caused
by a construction defect, plaintiffs pointed to pictures showing standing water
in the basement after the roof was complete and the building was “dried in,”
as well as eyewitness testimony about the flooding by a civil engineer. The
civil engineer testified the amount of water was “memorable” and he had not
ever seen so much water in a basement “with the framing up like this.”
In direct contrast, however, defendants’ senior project manager
testified he believed the water intrusion was caused by rain and that it is not
“unusual for rainwater to enter a property during construction.” Defendants
further presented testimony by a geotechnics engineer that supported the
manager’s belief as a reasonable one. The engineer opined the water
intrusion during construction was “just simple storm water that . . . could
easily infiltrate the construction of the building. The openings were there for
that to happen.”
The evidence was thus in direct conflict at trial as to whether
defendants knew the rain intrusion events during construction were caused
by a construction defect, as opposed to water entering the property because
construction had not yet been completed. Plaintiffs, accordingly, have failed
to demonstrate the evidence of scienter was “uncontradicted and
unimpeached.” (Ajaxo, supra, 48 Cal.App.5th at p. 163 [cleaned up].)
Finally, plaintiffs assert there is an inconsistency between the referee’s
finding of liability for violation of section 896 building standards and her
failure to find defendants were aware of the construction defects during
construction when the basement flooded. We see no conflict, much less one
13
that requires judgment in favor of plaintiffs on a fraud cause of action as a
matter of law.
In the portion of the decision that discusses liability, the referee relied
on contemporaneous photographs to find water had intruded into the
structure during construction through an “improperly applied waterproofing
system” located at the east wall. She found the photographs to be in direct
conflict with the project manager’s recollection that water could have entered
because the building, and the roof in particular, was incomplete:
“The photographs reveal the stage of construction with at
least two of [the water intrusion] events to be much further
along than [the project manager’s] recollection. . . . The
photographs also reveal standing water along the back wall
of the ground floor, but less so (or none at all) in the center
of unit 613, where the ‘low spot’ was later discovered to be.
Where contemporaneous photographs and human
observations and recollections are so disparate, the
photographs must prevail. While there was some
legitimate dispute about whether the building was entirely
‘dried in,’ at least regarding the back wall, the undersigned
finds that the waterproofing system had in fact been
completed. The roof as depicted in the photographs
appears to have been sufficient to protect the interior from
rain. It could not do so during these (at least) three rain
events because the water appears to have entered the
structure through the east wall. In short, breaches in the
improperly applied waterproofing system had already
begun to occur.”
This is not the kind of “specific findings of fact in favor of the losing
plaintiff” that compels reversal as a matter of law. (Bookout, supra, 186
Cal.App.4th at p. 1486.) The conflict between the photographs and the
project manager’s memory does not prove he lied nor that he necessarily
knew the building was defective. The project manager could simply have
been wrong about the cause of the water intrusion events during
construction.
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We affirm the judgment denying liability on plaintiffs’ fraud-based
causes of action.
III.
The Referee Erred by Awarding Lost Rental Income to Plaintiffs
A. Additional Background
The referee awarded damages for lost rental income to O’Toole in the
amount of $204,750 and to Zable in the amount of $200,000. She based this
component of the damages award on “the common law claim of negligence.”
Defendants contend this was error, because the Right to Repair Act of 2003
(the Act) (§ 895 et seq.) was the exclusive avenue for recovering economic
losses due to construction defects in residential buildings under the
circumstances presented here. We agree. We further hold the Act prohibits
awards for lost income where a home business was not in compliance with
local licensing laws. Our review is de novo. (Bermudez v. Ciolek (2015) 237
Cal.App.4th 1311, 1324.)
B. Legislative History and Governing Law
In Aas v. Superior Court (2000) 24 Cal.4th 627, the California Supreme
Court “held that the economic loss rule [barred] homeowners suing in
negligence for construction defects from recovering damages where there is
no showing of actual property damage or personal injury.” (McMillin Albany
LLC v. Superior Court (2018) 4 Cal.5th 241, 246 (McMillin).) In response to
this ruling, homeowner and construction interest groups lobbied the
Legislature for reform, and “[t]he major stakeholders on all sides of
construction defect litigation participated in developing the Act.” (Id. at
pp. 246, 251.) “Informed by the various stakeholders’ concerns, the
Legislature enacted provisions that reflect a conscious effort to address how
15
and when various categories of damages would be recoverable going forward.”
(Id. at p. 251.)
The resulting statutory scheme “comprehensively revises the law
applicable to construction defect litigation for individual residential units . . .
first sold after January 1, 2003.” (Lantzy v. Centex Homes (2003) 31 Cal.4th
363, 382, fn. 16.) It “sets forth detailed statewide standards” that govern
residential construction defect litigation. (McMillin, supra, 4 Cal.5th at
pp. 246–247.) Within this field, the Act supplants common law actions for
recovery of economic loss as well as property damage including claims
sounding in negligence. As a result, the Act is “the virtually exclusive
remedy not just for economic loss but also for property damage arising from
construction defects.” (Id. at p. 247.) The Act specifically provides: “In any
action seeking recovery of damages arising out of, or related to deficiencies in,
the residential construction, design, specifications, surveying, planning,
supervision, testing, or observation of construction, a builder . . . shall, except
as specifically set forth in this title, be liable for, and the claimant’s claims or
causes of action shall be limited to violation of, the following standards,
except as specifically set forth in this title.” (§ 896.)
Section 944 lists the types of economic loss that may be recovered in an
action under the Act. The list includes “the reasonable value of repairing any
violation of the standards set forth in this title, the reasonable cost of
repairing any damages caused by the repair efforts, . . . the reasonable cost of
removing and replacing any improper repair by the builder, reasonable
relocation and storage expenses, lost business income if the home was used as
a principal place of a business licensed to be operated from the home, [and]
reasonable investigative costs for each established violation.” (§ 944, italics
added.) With respect to these listed damages, the Act provides it is the
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exclusive means of recovery absent an express statutory exception: “Except
as provided in this title, no other cause of action for a claim covered by this
title or for damages recoverable under Section 944 is allowed.” (§ 943,
subd. (a).) As explained by our high court, “section 944 identifies what
damages may be recovered in an action under the Act, and section 943
establishes that such damages may only be recovered in an action under the
Act, absent an express exception.” (McMillin, supra, 4 Cal.5th at p. 251.)
Plaintiffs and the referee misread McMillin on this point. According to
plaintiffs, “There is no express denial of [a] right to claim damages under
negligence in McMillin.” They further contend that, to the extent “lost rent is
not recoverable under the [Act], then such damages are outside its scope and
recovery is permitted under negligence. . . . According to the referee,
McMillin’s interpretation of the Act allows the recovery of damages for
economic loss “under common law theories of negligence where actual
damages are incurred.”
McMillin’s holding is precisely to the contrary: “[T]he text and
legislative history [of the Act] reflect a clear and unequivocal intent to
supplant common law negligence and strict product liability actions with a
statutory claim under the Act.” (McMillin, supra, 4 Cal.5th at p. 249.) “The
Act, in effect, provides that construction defect claims not involving personal
injury will be treated the same procedurally going forward whether or not the
underlying defects gave rise to any property damage.” (Id. at p. 253.) As
explained by Justice Liu, the language in the Act “suggests an intent to
create not merely a remedy for construction defects but the remedy.” (Id. at
p. 250.)
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C. Plaintiffs Are Not Entitled to Lost Rental Income
As noted, the referee awarded lost rental income to plaintiffs as a
remedy for their common law claim of negligence. This was error. Plaintiffs’
claims for lost rental income were based on construction defects in residential
properties that were sold after 2003. These types of claims are covered by the
Act. (§ 938.) As a consequence, absent an express exception in the statutory
scheme, economic loss and property damage could only be recovered in an
action under the Act; common law claims in negligence for these types of
damages have been supplanted. (McMillin, supra, 4 Cal.5th at p. 251.)
Plaintiffs contend in the alternative they were entitled to recover lost
rental income on their breach of contract and fraud-based causes of action.
“Although the Right to Repair Act is the exclusive vehicle for asserting
certain claims, it is not the exclusive vehicle for asserting all claims.” (River’s
Side at Washington Square Homeowners Association v. Superior Court (2023)
88 Cal.App.5th 1209, 1237.) It is true the Act excludes from its provisions
“any action by a claimant to enforce a contract or express contractual
provision, or any action for fraud, personal injury, or violation of a statute.”
(§ 943.) The McMillin decision specifically acknowledges this carve-out:
“[T]he statute here leaves the common law undisturbed in some areas,
expressly preserving actions for breach of contract, fraud, and personal
injury.” (McMillin, supra, 4 Cal.5th at p. 249.)
But plaintiffs here did not prevail on any of their other causes of action.
The referee expressly ruled: “All other theories of recovery are denied.”
Obviously, plaintiffs are not entitled to damages on causes of action where
they were the losing parties.
We also reject plaintiffs’ contention that we should overturn the
referee’s denial of their fraud claims on the ground that “the totality of the
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evidence warrants a finding by a preponderance as to fraud.” Again, we will
not overturn a lower court ruling that there was a failure of proof at trial
unless “the evidence compels a finding in favor of the appellant as a matter of
law.” (Ajaxo, supra, 48 Cal.App.5th at pp. 163–164.) As explained, plaintiffs’
evidence of fraud was neither “uncontradicted and unimpeached” nor “of such
a character and weight as to leave no room for a judicial determination that it
was insufficient to support a finding.” (Ibid. [cleaned up].) Consequently, it
does not matter whether the evidence is assessed under the preponderance of
the evidence or clear and convincing evidence standard. The evidence was
insufficient either way to require reversal as a matter of law.
Plaintiffs next contend the award should be upheld on the alternate
ground that recovery of lost rental income is permitted under the Act. When
a trial court judge gives an incorrect legal reason for a decision, we look for
any other correct legal basis on which to sustain the ruling. (Kemp Bros.
Construction v. Titan Electric Corp. (2007) 146 Cal.App.4th 1474, 1477.)
As noted, the Act allows homeowners to recover damages for “lost
business income if the home was used as a principal place of a business
licensed to be operated from the home.” (§ 944.) Plaintiffs contend the
language of section 944 must be read to include lost rental income because
“the legislature would not have intended to leave a gaping hole with regard to
damages for homeowners who rent out their valuable property and garner
income from same.” They assert, in effect, that rental income is a type of
business income, and that the rental of residential property is one way to use
a home as a principal place of business.
We question whether the Legislature intended to use the phrase
“principal place of business” in such a roundabout way to authorize the
recovery of lost rental income. It is especially questionable whether lost
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business income, within the meaning of the Act, includes lost rental income
when an entire home is rented out and there are no business operations by
the owner on the premises at all (as was the case for the condominium unit
belonging to Zable).
In any event, we leave this question for another day. The Act
unequivocally prohibits the recovery of business income for businesses that
are not in compliance with local licensing laws: “If a claim for damages is
made under this title, the homeowner is only entitled to damages for . . . lost
business income if the home was used as a principal place of a business
licensed to be operated from the home.” (§ 944, italics added.) The City of
Del Mar requires a “business license” to rent out residential property. (Del
Mar Mun. Code, §§ 5.04.010, 5.04.020, 5.08.010, 5.20.010.) Plaintiffs concede
they did not have a Del Mar business license to rent out their respective
condominium units.
Despite admitting they failed to obtain a required business license,
plaintiffs contend they were nevertheless entitled to recover lost rental
income because the particular business license required by Del Mar was
enacted to raise tax revenue and is not a regulatory license. The Del Mar
Municipal Code provides: “This Title is enacted solely to raise revenue for
municipal purposes and is not intended for regulation.” (Del Mar Mun. Code,
§ 5.04.010.) According to plaintiffs, the award of lost rental income was
proper because the Del Mar licensing provision “has no function to regulate
the conduct or activity it governs; its purpose is to raise funds.”
We see this to be a distinction without a difference. We are not
persuaded the Legislature intended, with the language used in section 944, to
prohibit lost business income awards to businesses that illegally fail to obtain
a required regulatory business license, but to allow such awards to
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businesses that illegally fail to obtain a required business tax license and pay
required taxes.
Nor do we agree with plaintiffs that the Del Mar Municipal Code “does
not regulate whether a business can legally be operated.” The code clearly
makes it illegal to operate a business without a license under circumstances
where one is required. Section 5.32.010, entitled “License Required,
Penalty, provides, “Any person who transacts or carries on any commercial
activity within the City without first having procured a license from the City
in accordance with this Title to include paying the license tax thereon . . .
shall be deemed guilty of an infraction.” (Del Mar Mun. Code, § 5.32.010; see
also id., § 5.32.060 [“It is unlawful for any person to conduct a commercial
activity under any license which has been suspended or revoked.”].) The Del
Mar business licensing provisions are thus not “regulatory” in the sense that
they do not regulate businesses by telling them how they must operate. But
the Del Mar Municipal Code makes it clear that it is illegal to operate a
business without a license under circumstances, such as the rental of
residential property here, where one is required. (Del Mar Mun. Code,
§§ 5.04.010, 5.04.020, 5.08.010, 5.20.010.)
Plaintiffs had the burden of proof to demonstrate their homes were
“used as a principal place of a business licensed to be operated from the
home.” (Civ. Code, § 944, italics added; Evid. Code, §§ 115, 500.) We hold
they were not entitled to lost rental income under the Act.
Finally, in addition to damages for lost business income, the Act allows
recovery of “relocation and storage expenses.” (§ 944.) Plaintiffs contend
they are entitled to lost rental income under this category of damages
because there is purportedly “no material difference or legally significant
difference between the legislature allowing relocation damages and the lost
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rental amounts sought here.” Plaintiffs cite no legal authority for this
assertion, and we find it to be meritless.
“When the trial court makes a clear, uncontroverted and prejudicial
error of law in the calculation of damages, the appellate court has the power
to modify the judgment to correct that error.” (Maughan v. Correia (2012)
210 Cal.App.4th 507, 523, citing Code Civ. Proc., § 43.) We modify the
judgment by reducing the damages awarded to Zable by $200,000 and the
damages awarded to O’Toole by $204,750.4
DISPOSITION
The judgment of May 24, 2022, is modified to reduce the monetary
award to O’Toole from $1,483,007.21 to $1,278,257.21, and the damages
awarded to Zable from $1,245,299.20 to $1,045,299.20. As modified, the
judgment is affirmed. Defendants are awarded costs on appeal.
DO, J.
WE CONCUR:
O’ROURKE, Acting P. J.
RUBIN, J.
4 Because we have determined the referee erred when she awarded lost
rental income damages, we do not reach O’Toole’s contention that the award
was too low.
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