Elworthy v. Spiva CA6

Filed 11/6/13 Elworthy v. Spiva CA6
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
BRUCE R. ELWORTHY, et al., H037747
(Monterey County
Plaintiffs and Appellants, Super. Ct. No. M87603)
v.
STEPHAN SPIVA, et al.,
Defendants and Respondents.
This litigation arises out of a real estate transaction in which Bruce Elworthy and
Anne Marshall (husband and wife, jointly Buyers) purchased a home for $3 million from
Stephan (Steve) and Barbara Spiva (Spivas or Sellers). After they discovered several
defects with the home, many of which had to do with windows and doors that leaked,
Buyers sued Sellers, Sellers’ real estate agents, and certain parties responsible for the
construction of the home. After settling with some defendants and dismissing others, the
case was tried to the court on Buyers’ claims for intentional misrepresentation, negligent
misrepresentation, and rescission against Sellers. The court found for Buyers on their
claim for negligent misrepresentation about the doors that leaked; it awarded Buyers
$60,000 in damages.
In this appeal, Buyers challenge the trial court’s ruling that rescission of the house
purchase––as opposed to a $60,000 damages award––was not available to them as a
remedy. Buyers contend the court erred when it refused to grant their request for
rescission, abused its discretion when it found that Buyers were guilty of laches, and
erred when it failed to consider that Sellers engaged in “more than mere ‘negligent
misrepresentation.’ ” We conclude that the court properly found that rescission was not
available to Buyers because they had lost the property to foreclosure. Accordingly, we
will affirm the judgment.
FACTS & PROCEDURAL HISTORY
Respondents Steve and Barbara Spiva were planning to retire and decided to build
a home at the Pasadera Golf Club on Highway 68 in Monterey. In March 2000, they
purchased a lot (approximately eight tenths of an acre) at 612 Belavida Road, adjacent to
the fifth green, for $665,000. They also hired Jerry Whitney, a draftsman who had
designed other homes in the area, to draw up the plans for their new home. The Spivas
liked their house in Hollister, and asked Whitney to use the same basic layout for their
new home, but to design it on a grander scale. They told Whitney they wanted to look
“right down the chute of the fairway.”
In March 2001, the Spivas hired General Contractor Richard Avila to build the
house. The contract price was $1,974,270. A building permit was issued in May 2001.
Construction proceeded without significant problems; the project was completed on time
and on budget.
The 5,460-square-foot, two-story house had four bedrooms, seven bathrooms, an
exercise room, and an office. The house had “eight windowed French doors” and made
“extensive use of windows,” which provided “an openness with natural light.” Whitney
specified the use of ADA-compliant, low-threshold patio doors on the south side of the
house, which overlooked the golf course. The windows and the exterior doors were
manufactured by Weather Shield Manufacturing, Inc. (Weather Shield). The Spivas did
2
not have any input into the decision to use low-threshold doors or the choice of window
and door manufacturer.
While the house was under construction, the seals failed in some of the double-
paned windows in the master bedroom, which made the windows fog. Weather Shield
repaired seal failures three times between March 19 and June 14, 2002. The repairs
involved replacing the window panes where seal failures had occurred.
During construction, Avila observed evidence of water intrusion through the
threshold of the patio doors in the master bathroom and the upstairs office. After a
rainstorm, Avila saw half a cup of water on the tile floor in the bathroom and noted
dampness on the subflooring in the office (the carpeting had not yet been installed). He
reported the problem to Weather Shield. Weather Shield gave him a new threshold,
which his crew installed on the patio door in the office. Weather Shield also made
adjustments to the other doors.
Avila testified that toward the end of the construction, right before the final
inspection, he told the Spivas that (1) there had been a problem with water intrusion in
the master bathroom and the office; (2) he had had the doors adjusted; (3) he had installed
a new threshold on the office door; and (4) everything should be alright.1 Avila also
testified that he told the Spivas about the window failures that occurred during
construction. But Steve Spiva testified that Avila never informed the Spivas that there
were any problems with the doors or windows during construction.
The Spivas moved into the home in June 2002. After they moved in, Weather
Shield repaired windows on three occasions: (1) in October 2002, it replaced a scratched
window; (2) in November 2002, it repaired seal failures in two panes of one window; and
1
At trial, Avila testified that he was worried about the low thresholds on the patio
doors; he said he feared they would leak, and wished he had sent the thresholds back to
Weather Shield. Avila expressed his concerns to Whitney, the draftsman, who told him
that the low-threshold doors were used all the time “back east.” Avila did not discuss his
concerns with the Spivas.
3
(3) in December 2002, it replaced a window pane that had a stress crack. Steve Spiva
testified that he did not think the number of window failures was unusual; he experienced
more problems with double-paned windows in other homes he had owned.
After the Spivas moved in, they experienced one incident of water intrusion under
the patio doors. In November 2002, during a rainstorm with “very heavy sideways rain,”
the patio doors in the master bedroom, master bathroom, kitchen, and office, which were
all on the south side of the house, leaked. Steve Spiva was away on a trip, but Barbara
Spiva was home and noticed water coming in under the doors. She put rolled up towels
at the thresholds and called Avila. Avila and a representative of Weather Shield
inspected the doors. Avila adjusted the doors and the Spivas did not experience any other
incidents of water intrusion under the patio doors during the two winters they lived in the
house. They attributed the single incident of water intrusion to “post-construction fine
tuning.”
Steve Spiva played golf once or twice a day and was very happy at Pasadera. But
Barbara Spiva felt isolated there. Barbara had family in San Diego and in the summer of
2003, the Spivas started splitting their time between San Diego and Monterey. In June
2003, they decided to sell the Monterey house and move to San Diego. They hired
Realtor Jeff Davi and initially offered the property for sale at $4.8 or $4.9 million. In
July 2003, they leased an apartment in San Diego. After that, they spent more time in
Monterey than in San Diego. They did not experience any water intrusion during the
winter of 2003-2004.
After Christmas 2003, the Spivas started spending more time in San Diego than in
Monterey. On March 31, 2004, they lowered the price on their Monterey home to
$4,595,000. In June 2004, they bought a house in Solana Beach in San Diego County,
and in July 2004, they moved their furniture from Monterey to Solana Beach. In
November 2004, the Spivas lowered the price on their Monterey home to $3.5 million.
While the Monterey house was on the market, the Spivas asked their realtor to check the
4
house for water intrusion whenever it rained. The realtor’s assistant checked and never
saw any problems, so the Spivas assumed there were no further problems with leaky
doors.
The house did not sell. In June 2005, after their listing agreement with Davi
expired, the Spivas retained a new realtor, Joy Jacobs of Keller Williams Realty.
Jacobs’s MLS listing described the Spivas’ house as “Custom built estate on the fifth
green. Awe-inspiring and in pristine condition. . . . True luxury including granite and
stone throughout, expansive patios [with] 360 degree views, smart system, office with
terrace, exercise room.”
In June 2005, the Spivas completed real estate property disclosure forms. In
response to the question “Are you (Seller) aware of any significant defects/malfunctions
in any of the following? . . . Windows . . . Doors . . . ,” they responded “No.” In answer
to the questions “ARE YOU (SELLER) AWARE OF . . . 1. Any . . . replacements or
material repairs on the Property, [¶] [¶] 4. Defects in the following, (including past
defects that have been repaired) . . . doors, windows . . . [¶] [¶] 6. Water intrusion into
any part of any physical structure on the Property; leaks from or in any appliance, pipe,
slab or roof; standing water, drainage, . . . , moisture, . . . on or affecting the Property,”
they responded “No.” The Spivas testified that they did not disclose the water intrusion
in November 2002 because they did not think it was a serious problem and they believed
the doors had been fixed.
In Response to the questions “ARE YOU (SELLER) AWARE OF . . . 2. Ongoing
or recurring maintenance on the Property (for example, drain or sewer cleanout, tree or
pest control service) [¶] [¶] 9. Pets on or in the Property . . . . [¶] 10. Problems with . . .
wildlife, insects or pests . . . . [¶] [¶] 12. Past or present treatment or eradication of pests
. . . ,” the Spivas answered “No.” In fact, the Spivas owned a small dog when they lived
in the house. Steve Spiva explained that by the time they completed the disclosure forms
in 2005, they had forgotten about the dog because it had passed way more than two years
5
earlier. The Spivas had seen a couple of mice in the “cart barn” where they stored the
golf carts. They had also seen ants on the property. As they had done with previous
homes, the Spivas hired Terminix, a pest control service, to perform monthly
maintenance during the entire time they owned the Monterey house. At trial, the Spivas
testified that they did not disclose any pests on the property because Terminix kept the
pests under control.
In October 2005, the Spivas sold their Monterey home to Buyers Elworthy and
Marshall for $3 million.2 The sale included the home entertainment system and the
Crestron smart home touch screen control system that Sellers had purchased for
$95,053.56. Buyers also purchased a membership at the Pasadera Country Club.
Buyers were attorneys who handled tax, probate, trust and estate planning, and
fiduciary malpractice cases. Elworthy was also a litigator who had experience handling
construction defect litigation. Although they had previously resided in California, Buyers
moved to Sheridan, Wyoming in 1997 to be closer to clients in Texas, Minnesota, and
Colorado. In 2005, they decided to move back to California and looked at homes in San
Francisco and Monterey County. They were looking for a luxury, “turnkey” property
that did not require any work. In May 2005, five months before buying the Monterey
house, Buyers placed their house in Wyoming on the market. Although Buyers expected
their Wyoming property to sell within one year, by the time of trial in April 2011, the
property still had not sold. Elworthy testified it was a “very unusual and large property”
for Wyoming.
When they walked through the Monterey house in October 2005, Buyers noticed
water damage to the paint and sheetrock around several doors. According to Buyers, they
asked real estate agent Joy Jacobs about it and she attributed it to a “sloppy maid.”
2
The purchase price listed on the purchase agreement was $2,820,000. The
parties entered into a separate agreement whereby Buyers agreed to pay broker
commissions of $180,000, making the total value of the sale $3 million.
6
(Jacobs could not recall making that statement.) On October 21, 2005, the day they made
their offer, Buyers observed a Weather Shield repairman making window repairs.
Elworthy spoke to the repairman “for a couple minutes.” Buyers testified that Jacobs told
them the window had been hit by a golf ball. (Jacobs did not recall making that statement
either.) According to the repairman, he replaced two small panes of glass in the master
bedroom and a window sash in the master bathroom, all of which had seal failures.
During the escrow period, Buyers had the property inspected by Robert Ferguson
of Pacific Coast Inspections. Buyers and their agent were present during the inspection.
Ferguson told Buyers several times he thought the house was well built; he noted some
minor deficiencies, including minor cracks in the driveway, and recommended minor
repairs. He did not notice any problems with the windows or doors or any damage to the
sheetrock near the doors. Buyers obtained a termite report from Terminix; Buyers knew
Terminix had been servicing the property and reasoned that it would be familiar with the
property. Buyers had the radiant heating system inspected by Garza Plumbing (Garza),
the subcontractor that installed the heating system in the house. The Garza technician
reported that the heating system was working properly. Buyers wanted to have the
entertainment system inspected by Monterey Stereo, the company that had installed it.
But Monterey Stereo was not available during the escrow period. Buyers were satisfied
with the inspection reports and escrow closed on November 23, 2005.
To fund their purchase, Buyers refinanced their Wyoming house and pulled out
$1.15 million in equity, which they used to pay for the Monterey house. Buyers also
obtained a first mortgage for $1.5 million and a HELOC (home equity line of credit) for
$282,000 on the Monterey house. The first mortgage on the Monterey house required
payments of interest-only for the first five years, with payments of $8,750 per month.
The total debt service on both houses was more than $16,000 per month.
Buyers moved into the Monterey house in December 2005. Within the first few
days, they testified that they discovered ants in the master bathroom and kitchen, and
7
nests of ants under the Jacuzzi bathtub and the foundation. They hired a pest control
service to spray for ants. The following week, they discovered dead and dying mice in
the kitchen, laundry room, attic, and some walls. Elworthy removed several dead mice
himself and then hired a pest control service to handle the problem. Afterwards, Buyers
were able to keep the mice under control with regular service. At trial, Buyers testified
about a number of other defects, including windows and doors that leaked.3
Initially, Buyers complained about the defects to Sellers, Avila, Monterey Stereo,
Garza, and Sellers’ realtors, and the parties attempted to resolve the problems informally.
The Sellers paid for repairs to the alarm system and for pest control, and offered to pay to
have the Crestron smart home control system reprogrammed. Monterey Stereo paid for
repairs to one of the TV’s and Avila made several proposals for fixing the patio doors.
In May 2006, Buyers retained Whitney, the same draftsman used by Sellers, to
design a second garage for the property; they planned to build a two-story, detached, 3-
car garage, with a “shop/craft room” on the second floor. Buyers believed the project
would help remedy some of the problems they were having with the phone, Internet,
heating, and electrical systems in the house by bringing additional wiring to the east side
of the property. Buyers also planned to remove the patio door from the master bathroom.
3
Buyers complained that: (1) twelve windows had failed, including fogging
(moisture between the panes) and flaking of the ultraviolet coating; (2) water intruded
under the patio doors whenever there was a serious rain storm; (3) the hot water mixer in
the master bathroom shower was broken; (4) the Crestron control system had been
unplugged and needed to be reprogrammed; (5) components of the entertainment system
did not work; (6) although the house had been advertised as having Internet access in
every room, there was no Internet access where Buyers set up their office; (7) the wiring
of telephone jacks and the 240-volt outlet in the laundry room was faulty; (8) the
bedroom Marshall used as an office was too cold; (9) the driveway was cracking
significantly and the retaining walls along the driveway were defective and encroached
on the property next door; (10) parts of the yard did not drain properly; (11) the security
camera at the front door did not work; (12) the alarm system and electrical lighting were
defective; (13) the slate on the exterior patios and decks was disintegrating; (14) exterior
water spigots were ineffective; and (15) the shades in the kitchen were decorative only
and did not cover the windows.
8
Whitney worked on the plans until at least December 2006. Buyers testified that as of
early 2007, their law practice was going very well; at that time, they planned to keep the
Monterey house, both as their residence and their office, and to repair it.
But on August 1, 2007, Elworthy sent a letter to Sellers’ counsel suggesting
Sellers “budget funds well in the six figures in the event they want to settle and that their
broker should consider budgeting even more.” He also suggested Sellers “consider the
immediate repurchase of the home and [golf] membership” to “avoid the litigation and
certain result that will follow.” Elworthy testified that this letter was a formal demand for
rescission.
In 2007, Buyers hired Structural Engineer Brett Ferrari to inspect the Monterey
house. Ferrari did a “brief inspection” on October 19, 2007, which did not include any
destructive testing. Ferrari opined that the “patio doors need to be removed and replaced
with new thresholds and pan flashing installed and properly integrated with the building
envelope.” He stated that the “unacceptable rate of window failure and the inefficiency
of performing piecemeal repairs suggests that the windows should be replaced entirely
with [windows from] a different manufacturer.” Ferrari recommended repairing the
retaining walls and cracks on the interior walls, replacing the driveway, and installing a
“trunk line of CAT-5 cables” to address problems with the thermostats, controllers,
Internet, and telephones; he said further investigation was required to address other
issues. Later, Buyers retained Larry Daniels, a general contractor and construction
estimator, who opined that it would cost $1,060,434 to fix the defects identified in
Ferrari’s report. Daniels’s estimate assumed that all exterior doors needed to be replaced,
even those that did not leak.
On November 14, 2007, Buyers filed their complaint for “damages for negligence,
breach of contract, negligent misrepresentation, intentional misrepresentation/fraud and
rescission.” Named defendants included Keller Williams, Jacobs and other employees of
Keller Williams (jointly real estate defendants), Sellers, Whitney, Avila, Garza, and
9
Weather Shield. The complaint alleged causes of action for negligent misrepresentation,
intentional misrepresentation, and rescission against Sellers. The defendants filed cross-
complaints against one another and other subcontractors involved in the construction of
the home.
Buyers also stopped paying the first mortgage on the Monterey home in November
2007. Later, they entered into a forbearance agreement with their lender pursuant to
which the lender agreed that Buyers could stop making payments on the first mortgage
and the HELOC. In exchange for the lender’s forbearance, Buyers agreed to pay the
insurance premiums and property taxes, maintain the property, list it for sale, prosecute
the instant lawsuit, and bring the loan current from the proceeds of any sale or the
lawsuit. Buyers relied on an oral agreement with the lender’s attorney in Texas and did
not obtain the agreement in writing. Subsequently, there was a change in loan servicer,
and the property went into foreclosure. In June 2009, the lender issued a Notice of
Default and Election to Sell. At that time, Buyers owed $174,742.50 in past due
payments, costs and expenses.
In December 2007, Elworthy was diagnosed with a brain tumor. He had surgery
to remove the tumor in the summer of 2008; after the surgery his ability to work as an
attorney was impaired.4 In October 2008, Buyers decided they could no longer afford
both houses and moved back to Wyoming permanently. In November 2008, Buyers
listed the Monterey home for sale for $3.2 million. Thereafter, Buyers stayed in the
house whenever they were in California.
In the fall of 2009, Buyers dismissed their construction defect claims against
Avila, Whitney, and Weather Shield; Buyers did not settle with those defendants and
4
Buyers testified that Elworthy was unable to work as an attorney after the
surgery and did not represent third parties. He did, however, act as cocounsel in this
case; he handled the discovery, including numerous depositions. He also represented
Buyers in litigation with the Pasadera Country Club.
10
took the position that it was up to Sellers to pursue the construction defects claims. In
September 2009, Buyers settled with the real estate defendants and Garza Plumbing. The
court granted the settling parties’ motions for good faith settlement and Buyers received
the settlement proceeds in October and December 2009.
The trustee’s sale was initially set for January 12, 2010, and was then continued to
a date in April 2010. Although Buyers had more than enough money from the
settlements to pay the past due amounts and to stop the foreclosure, they allowed the
foreclosure sale to occur.5 Elworthy testified that given their overall finances and his
failing health, Buyers decided it was in their best interest to retain the settlement funds
rather than use them to bring the loan current and avoid foreclosure. The lender bought
the property at the trustee’s sale and sold it to a third party in June 2010 for $1.67 million.
The cross-complaints were bifurcated for trial. Between March and May 2011, the
court held a 14-day bench trial on Buyers’ claims against Sellers. In their trial brief,
Buyers stated, “This matter is proceeding as an action for fraud in the inducement.
[Buyers] will make their election between a claim for damages or rescission in a timely
manner prior to entry of judgment.” On the ninth day of trial, Buyers’ counsel advised
the court that Buyers had not yet elected between rescission and a damages remedy.
Buyers’ expert witnesses included Stephen Brown, an appraiser. Brown testified
that the unimpaired value of the Monterey house in 2005 was $3 million and that the
diminution in the value of the home, assuming it had all the defects alleged by Buyers,
was $800,000.
Sellers’ construction expert, General Contractor Robert Fransen, testified that the
cost to replace the six patio doors that leaked was $30,000. He testified that the
5
Elworthy testified that he contacted the loan servicer and was told that he had to
pay the mortgage in full to avoid foreclosure. He did not determine whether Buyers had
the right to reinstate the loan and avoid foreclosure by bringing past due amounts current.
The Notice of Default indicates that Buyers could have reinstated the loan by paying past
due amounts.
11
maximum cost of repairing all of the items Buyers claimed were defective was $75,000,
and that he told counsel that he was willing to do the repairs at that price when he
inspected the property in May 2008. The defense appraiser, Todd Johnson, agreed that
the unimpaired value of the Monterey house in November 2005 was $3 million and
testified that the market value of the home at that time, assuming the defects were limited
to those described by Fransen, was between $2.92 and $2.95 million.
Buyers requested rescission damages totaling $4,912,000 based on all of the costs
they incurred to own the home, including: (1) $1,059,756 for their down payment;
(2) $1,782,000 they borrowed on the Monterey house; (3) $1,499,533 interest on their
loans at the rate of 10 percent; (4) $353,000 in taxes, fees, improvements, and repairs;
and (5) $118,000 for their golf membership. They argued that Sellers were entitled to a
credit of $1,670,000 from the sale of the house, for a net claim of $3,252,000.
The court issued a 46-page statement of decision. The court concluded that
rescission was not available as a remedy because (1) it was barred by laches, and (2)
Buyers could not restore the consideration they had received under the contract because
the home had been lost to foreclosure. The court found that there were no intentional
misrepresentations, but that Sellers had negligently misrepresented the condition of the
patio doors in their real property disclosures by failing to disclose the water intrusion
incident in November 2002. The court also found that Sellers’ disclosures were
inaccurate because they failed to disclose that they had owned a dog and had a monthly
pest control service. The court concluded, however, that there was “no reliance on or
damage flowing from” the misrepresentations regarding pets and pests. The court found
that the number of window failures was not excessive for new construction of this size
and was not something Sellers had to disclose. As for the other defects alleged, the court
found that Buyers failed to prove that (1) the condition was defective, (2) the claimed
defect was material, (3) the defect existed when Sellers made their disclosures, (4) there
were any misrepresentations regarding the issue, or (5) a combination of these factors.
12
The court found that some defects were visible upon inspection and that Buyers did not
avail themselves of the opportunity to inspect. The court was persuaded by Fransen’s
methodology for repair or replacement of the doors, but concluded that his cost of repair
was too conservative. Accordingly, the court doubled the amount estimated by Fransen
for replacing six patio doors and awarded Buyers $60,000 in damages. The court found
that the entire $60,000 awarded to Buyers against Sellers was offset by the amount of the
good faith settlements with Garza and the real estate defendants. The court entered
judgment in favor of Sellers and found that Sellers were prevailing parties for the purpose
of awarding costs. The court subsequently denied Buyers’ motions for new trial and to
vacate the judgment. Buyers filed a timely notice of appeal.
DISCUSSION
Buyers contend the court erred when it refused to grant their request for rescission,
abused its discretion when it found Buyers were guilty of laches, and erred when it failed
to consider that Sellers engaged in “more than mere ‘negligent misrepresentation.’ ”
I. Rescission
A. General Principles
When a party to a contract has been injured by a breach of contract or fraud and
lacks the ability or the desire to keep the contract alive, the injured party may choose
between two different remedies. (Akin v. Certain Underwriters at Lloyd’s London (2006)
140 Cal.App.4th 291, 296 (Akin) [breach of contract]; Campbell v. Birch (1942) 19
Cal.2d 778, 791 [fraud]; Lenard v. Edmonds (1957) 151 Cal.App.2d 764, 768 [fraud].)
The injured party may: (1) disaffirm the contract, treat it as rescinded, and recover
damages resulting from the rescission; or (2) affirm the contract and recover damages for
breach of contract or fraud. (Akin, at p. 296; Campbell, at p. 791, Bancroft v. Woodward
13
(1920) 183 Cal. 99, 101 (Bancroft).) An action for rescission is based on the
disaffirmance of the contract and an action for damages is based on its affirmance. (Akin,
at p. 296, citing Davis v. Rite-Lite Sales Co. (1937) 8 Cal.2d 675, 678-679; Bancroft, at p.
101.)
Rescission and damages are alternative remedies. (Akin, supra, 140
Cal.App.4th at p. 296.) A party may seek rescission or damages for breach of contract or
fraud “in the event rescission cannot be obtained” in the same action. (Williams v.
Marshall (1951) 37 Cal.2d 445, 457 [defrauded vendee], citing Bancroft, supra, 183 Cal.
99; Walters v. Marler (1978) 83 Cal.App.3d 1, 16 (Walters) [breach of contract],
overruled on another ground in Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d
498, 505-507.) “But the election of one remedy bars recovery under the other.” (Akin, at
p. 296, citing Alder v. Drudis (1947) 30 Cal.2d 372, 383.)
B. Statutory Grounds for Rescission
The grounds for rescinding a contract are set forth in Civil Code section 1689.6
That statute provides in relevant part that a “party to a contract may rescind the contract”
if “the consent of the party rescinding, . . . , was given by mistake, or obtained through
. . . , fraud, or undue influence, exercised by . . . the party as to whom he rescinds . . . .”
(§ 1689, subd. (b)(1).)
Section 1691 sets forth the procedural requirements for rescission. It provides:
“Subject to section 1693, to effect a rescission a party to the contract must, promptly
upon discovering the facts which entitle him to rescind . . . : [¶] (a) Give notice of
rescission to the party as to whom he rescinds; and [¶] (b) Restore to the other party
everything of value which he has received from him under the contract or offer to restore
the same upon condition that the other party do likewise, unless the latter is unable or
6
All further statutory references are to the Civil Code, unless otherwise stated.
14
positively refuses to do so. [¶] When notice of rescission has not otherwise been given
or an offer to restore the benefits received under the contract has not otherwise been
made, the service of a pleading in an action or proceeding that seeks relief based on
rescission shall be deemed to be such notice or offer or both.” (§ 1691.)
Section 1693 sets forth the effect of delay in notice of rescission or in restoration
of benefits. It provides: “When relief based upon rescission is claimed in an action or
proceeding, such relief shall not be denied because of delay in giving notice of rescission
unless such delay has been substantially prejudicial to the other party. [¶] A party who
has received benefits by reason of a contract that is subject to rescission and who in an
action or proceeding seeks relief based upon rescission shall not be denied relief because
of a delay in restoring or in tendering restoration of such benefits before judgment unless
such delay has been substantially prejudicial to the other party; but the court may make a
tender of restoration a condition of its judgment.” Section 1693 contains an “express
grant of authority to courts to exercise their discretion in delaying restoration until
judgment.” (Village Northridge Homeowners Assn. v. State Farm Fire & Casualty Co.
(2010) 50 Cal.4th 913, 929, fn. 6 (Village Northridge).) In 1961, when the Legislature
enacted section 1693, it sought “to promote a flexible approach to the restoration
requirement” and “to address any unfairness that the rescinding parties might face if they
were insolvent or without funds to restore consideration prior to filing suit.” (Village
Northridge, at p. 928.)
Although “damages” are recoverable in an action for rescission, the nature of the
damages available in such cases differs from the damages that may be recovered for
breach of contract or fraud. Section 1692, which sets forth the relief available in an
action for rescission, provides in relevant part: “A claim for damages is not inconsistent
with a claim for relief based upon rescission. The aggrieved party shall be awarded
complete relief, including restitution of benefits, if any, conferred by him as a result of
the transaction and any consequential damages to which he is entitled; but such relief
15
shall not include duplicate or inconsistent items of recovery. [¶] If . . . a party seeks
relief based upon rescission, the court may require the party to whom such relief is
granted to make any compensation to the other which justice may require and may
otherwise in its judgment adjust the equities between the parties.”
Section 1692 “essentially ‘restates the equity jurisprudence applicable in the
rescission context.’ [Citation.] The fundamental principle underlying that jurisprudence
‘is that “in such actions the court should do complete equity between the parties” and to
that end “may grant any monetary relief necessary” to do so. [Citation.]’ (Runyan v.
Pacific Air Industries, Inc. (1970) 2 Cal.3d 304, 316 . . . (Runyan).) Rescission is
intended to restore the parties as nearly as possible to their former positions and ‘ “to
bring about substantial justice by adjusting the equities between the parties” despite the
fact that “the status quo cannot be exactly reproduced.” ’ [Citations.] To achieve this
objective, section 1692 provides that ‘[a] claim for damages is not inconsistent with a
claim for relief based upon rescission.’ It further provides that the aggrieved party shall
be awarded ‘complete relief,’ including restitution and ‘consequential damages.’ ”
(Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133, 1144-1145 (Sharabianlou).)
“The distinction between disaffirmance and affirmance of the contract has
important consequences when it comes to damages. . . . Rescission extinguishes the
contract (. . . § 1688), terminates further liability, and restores the parties to their former
positions by requiring them to return whatever consideration they have received.
[Citation.] Thus, the ‘[r]elief given in rescission cases—restitution and in some cases
consequential damages—puts the rescinding party in the status quo ante, returning him to
his economic position before he entered the contract.’ ” (Sharabianlou, supra,
181 Cal.App.4th at pp. 1144-1145.)
“In cases involving the rescission of agreements to purchase real property,
California courts have held that the seller must refund all payments received in
connection with the sale. [Citation.] If the buyer has taken possession of the property,
16
the buyer must restore possession to the seller. [Citation.] Such recovery of the
consideration exchanged is part of restitution. [Citations.] As consequential damages,
rescinding buyers or sellers may recover such items as real estate commissions paid in
connection with the sale [citation], escrow expenses [citation], interest on specific sums
of money paid to the other party [citation], and attorney fees in appropriate cases
[citation].” (Sharabianlou, supra, 181 Cal.App.4th at pp. 1145-1146, citing Kent v. Clark
(1942) 20 Cal.2d 779, 784, italics added.)
C. Standard of Review
To the extent Buyers’ contentions on appeal involve questions of law, we review
the issues presented de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799.) We
review Buyer’s challenges to the court’s factual findings for sufficiency of the evidence.
(Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 632.)
D. Buyers Were Not Entitled to Rescission Simply Upon Request
Buyers argue that once the trial court determined that they were victims of a
misrepresentation, it should have respected their choice to rescind the contract.7 They
contend the court erred when it refused to adopt the remedy they preferred and imposed a
damages remedy instead. They argue that the court was required to respect their
preference for rescission as a matter of law. And they assert that the questions of when
7
Buyers argue that, while they did not foreclose their right to request damages,
they made their preference for rescission clear throughout the case. Buyers cite: (1) their
counsel’s argument on the first day of trial that Buyers never abandoned their request for
rescission and that it has always been one of the theories of their case; (2) their counsel’s
statement on the ninth day of trial that they had not yet made an election between
rescission and damages; (3) their request for rescission after the court issued its statement
of decision; and (4) their counsel’s argument at the hearing on their post-trial motions.
Contrary to Buyers’ assertion, the record does not support the conclusion that Buyers
stated a preference for rescission throughout the case. At the most, it suggests Buyers
wanted to keep the option of rescission available as the trial unfolded.
17
and how a plaintiff may elect remedies and the court’s role in that process is “surprisingly
unsettled.”
As for the questions of when and how, Buyers cite one case that says that the
plaintiff must elect between alternative inconsistent remedies before judgment (Lenard,
supra, 151 Cal.App.2d at p. 768) and two cases that say the plaintiff may make such an
election until satisfaction of judgment, or application of res judicata or estoppel,
vindicates one of the inconsistent rights (Southern Christian Leadership Conference v. Al
Malaikah Auditorium Co. (1991) 230 Cal.App.3d 207, 223 (SCLC); Fassberg
Construction Co. v. Housing Authority of City of Los Angeles (2007) 152
Cal.App.4th 720, 759 (Fassberg).)
We need not determine the question of when the injured party must elect between
inconsistent remedies. The court did not hold that Buyers could not obtain rescission
because their election of that remedy was untimely or barred by res judicata or
satisfaction of judgment. Instead, it held that rescission was not available because Buyers
did not meet the procedural requirements for rescission since they could not restore the
consideration they had received, namely the house. The court also held that their
rescission claim was barred by laches, a different concern from the timing of their
election between rescission and damages.
As for the court’s role, Buyers cite cases that suggest that the choice of remedies
belongs to the plaintiff (Lenard, supra, 151 Cal.App.2d at p. 768; SCLC, supra, 230
Cal.App.3d at p. 223; & Walters, supra, 83 Cal.App.3d at p. 16 [“the choice of remedies
lies with the wronged party, and not with the court”]) and cases that state that the choice
of remedy ultimately belongs to the court (Akin, supra, 140 Cal.App.4th at p. 297 [“even
if the party seeks inconsistent remedies, it is the court ultimately who determines to
which she is entitled”]; Tanforan v. Tanforan (1916) 173 Cal. 270, 273-274 (Tanforan);
Crogan v. Metz (1956) 47 Cal.2d 398, 403 (Crogan).) In Tanforan, which was decided in
1916, the Supreme Court held that the trial court erred when it forced the plaintiff to elect
18
between inconsistent theories at trial, before the defendant put on his case. The court
stated that the plaintiff may introduce evidence on each of his or her causes of action and
“the election or . . . decision as to which of them is sustained” is a matter for the trier of
fact. (Tanforan, at pp. 273-274.) And 40 years later, in Crogan, the Supreme Court
stated that if the plaintiff makes no election and is not otherwise estopped, the election as
to which cause of action is sustained belongs to the trier of fact. (Crogan, at p. 403.)
Buyers rely on the statement in Walters, supra, 83 Cal.App.3d 1, 16 that “the
choice of remedies lies with the wronged party, and not with the court,” and argue that
once they “made it clear that they preferred rescission,” the court could not refuse to
grant rescission and impose a damages remedy instead. As we shall explain, Buyer’s
reliance on this language from Walters is misplaced.
The defendant sellers in Walters owned six parcels of land, one of which included
a house. They sold one of the parcels, which they thought included the house, to the
plaintiff buyer. After the sale, the buyer learned that only a small portion of the house
was on the parcel he had purchased. (Walters, supra, 83 Cal.App.3d. at pp. 13-15.) The
buyer sued the sellers, the realtors, the lenders, and the title insurer for rescission, breach
of contract, fraud, negligence, and other claims; several defendants filed cross-
complaints. (Id. at p. 11.) At trial, the jury awarded the buyer damages for negligent
misrepresentation against all of the defendants. (Id. at p. 12.) On appeal, the defendants
challenged the trial court’s order denying their motion to restrict the trial to damages
based on rescission, which was based on the contention that the buyer had made a
binding election of rescission when the sellers accepted his notice of rescission, as well as
their argument that the buyer should be compelled to make an early election of remedies
at trial. (Id. at p. 15.) The appellate court concluded that substantial evidence supported
the trial court’s finding that the buyer had not made a binding election of remedies
because the sellers had not accepted the buyer’s notice of rescission. (Id. at pp. 15-16.)
The court explained, “A party who attempts to rescind a contract, but does so
19
ineffectively, does not lose his right to maintain an action for damages based upon its
affirmance. [Citation.] Such a party may, in the same action, seek rescission or,
alternatively, damages based upon contract in the event rescission cannot be obtained.
‘There is no good reason why the plaintiff in such an action should be compelled to make
an election between those remedies during the course of the trial, and such a rule would
be contrary to fundamental principles of law.’ [Citation.] As [the buyer’s] attempt to
rescind the contract was ineffectual, the trial court properly refused to restrict the trial to
consequential [(rescission)] damages, or to compel an election of remedies early in trial.”
(Walters, at p. 16, citing Williams v. Marshall, supra, 37 Cal.2d at p. 457.) The court
also rejected the defendants’ contention that the trial court should have restricted the
buyer to rescission “because an award of damages does not resolve the problems of the
parties.” The court stated, “Upon discovery of the problem with his property, [the buyer]
had an election of two inconsistent remedies: one to disaffirm the contract and rescind,
and the other, to affirm the contract and sue for damages. [Citation.] The choice of
remedies lies with the wronged party, and not with the court. [Citation.]” (Walters, at p.
16; italics added.)
Buyers rely on the italicized language from Walters quoted above to support their
contention that the court was bound by their election of rescission as their remedy. But
this language must be read in light of Supreme Court authority, which provides that
although the plaintiff may allege inconsistent theories (rescission and damages) and
present evidence on each theory at trial, “the election or . . . decision as to which of them
is sustained” is a matter for the trier of fact. (Tanforan, 173 Cal. at pp. 273-274.) To the
extent that it is inconsistent with Tanforan, we disagree with the court’s conclusion in
Walters that “the choice of remedies lies with the wronged party, and not with the court.”
This case is also factually distinguishable from Walters. In Walters, the court
found that since the buyer’s pretrial attempt to rescind was ineffective, he had not made a
binding election before trial and could not be compelled to elect until the case was
20
submitted to the jury. (Walters, supra, 83 Cal.App.3d at pp. 15-16.) Thus, at the
conclusion of the trial in Walters, both remedies were still available to the buyer. The
italicized language from Walters that Buyers rely on may have been an acknowledgement
of that fact. In contrast, in this case, the court found that the remedy of rescission was not
available to Buyers because of defenses asserted by Sellers, but that Buyers could still
recover damages for Sellers’ negligent misrepresentations. Since rescission was not
available, there was only one remedy available to Buyers (damages for negligent
misrepresentation) and no election to be made.
Buyers assert that the cases that say the trier of fact may choose the remedy
involved “situations where the choice of remedy depends upon a choice between
inconsistent facts.” But the trial court concluded that rescission was not available to
them, based on its factual findings that they could not restore the property after the house
went into foreclosure and that the claim was barred by laches. Thus, the court found that
Buyers could not state a cause of action for rescission.
Buyers also argue that the trial court erred when it imposed the damages remedy
on them, notwithstanding their testimony that if they had known about the defects, they
would have investigated and would not have bought the house in the first place. But at
trial, it was up to the court to determine the credibility of the witness and the court said it
did not believe Buyers’ testimony on this point.
For these reasons, we reject Buyers’ contention that the court was required to
honor their request for rescission.
E. Application of Exception to Restoration Requirement
Buyers argue that the court abused its discretion when it concluded that rescission
was not available because it misunderstood the legal rules governing application of the
“special circumstances” exception to the restoration requirement.
21
The trial court held that “[r]escission is not an available remedy because [Buyers]
cannot restore the consideration received under the contract and because it is barred by
laches. [¶] [Buyers] cannot restore the property to [Sellers] because through their
voluntary actions in defaulting on the first trust deed loan, the property was sold to a third
party in foreclosure.” The court added that “the foreclosure was caused by [Buyers]
defaulting on their loan and had nothing to do with Sellers’ alleged misrepresentations.”
The court stated, “Additionally, it does not appear that defendants could be made whole
by a credit for the selling price with appropriate adjustments because the market
decreased significantly between the sale to [Buyers] and the foreclosure.”
As we have noted, one of the procedural requirements for rescission is that the
rescinding party “restore to the other party everything of value which he has received
from him under the contract or offer to restore the same upon condition that the other
party do likewise, . . . .” (§ 1691.) “ ‘There are exceptional cases where restoration, or
an offer to restore before suit is brought, is not necessary,’ ” including “ ‘where, without
any fault of the plaintiff, there have been peculiar complications which make it
impossible for plaintiff to offer full restoration, although the circumstances are such that
[the court] may by final decree fully adjust the equities between the parties.’ ” (Carruth
v. Fritch (1950) 36 Cal.2d 426, 430 (Carruth), quoting California Farm & Fruit Co. v.
Schiappa-Pietra (1907) 151 Cal. 732, 739 (California Farm) and citing cases applying
this principle; Kelley v. Owens (1898) 120 Cal. 502, 511 (Kelley).)
Buyers seize upon the phrase “before suit is brought” in the cases that repeat this
rule and argue that the court should evaluate the rescinding party’s ability to restore as of
the date that he or she offers to rescind and not as of the time of trial or any subsequent
election to rescind. They assert that since they still owned the house and were able to
restore “as early as August 1, 2007” (when their counsel sent a letter suggesting Sellers
“consider the immediate repurchase of the home and [golf] membership”) and “in any
event no later than November 2007” (when they filed their complaint), the court erred
22
when it held that this case did not fall within the special circumstances exception to the
restoration requirement and denied their claim for rescission. They argue that “ ‘[s]pecial
circumstances’ are necessary to justify a recessionary remedy when the plaintiff cannot
return the consideration received only if the plaintiff’s voluntary act prior to making an
offer to rescind has made return of the consideration impossible.” Buyers assert the court
was mistaken when it concluded that events that occurred after they offered to rescind
were relevant to their right to rescission. They argue that if Sellers had accepted their
demand in 2007, “neither party would have been exposed to the risks of a foreclosure
sale. In other words, the court put the risk of the decline in value of the [house] after the
demand for rescission on the party that was injured by the deception, to wit, Buyers.”
Buyers devote almost eight pages of their opening brief to a discussion of cases
that neither address this issue nor support their contention that the ability to restore must
be evaluated as of the date the rescinding party first requests rescission. Some of the
cases they cite contain broad, general statements regarding the extent of the court’s equity
jurisdiction or the power of the court upon granting rescission to adjust the equities
between the parties if they cannot be returned to precisely the same positions they were in
before entering into the contract. (See e.g., Swan v. Talbot (1907) 152 Cal. 142, 147 [no
error where trial court found rescission impractical and awarded damages for an account
stated]; Snelson v. Ondulando Highlands Corp. (1970) 5 Cal.App.3d 243, 258; Connell v.
Crawford (1928) 92 Cal.App. 715, 719.) Other cases cited fail to support their contention
altogether. (Stock v. Meek (1950) 35 Cal.2d 809, 814 [in determining whether appeal on
cause of action for rescission was moot, court considered sale of property after entry of
judgment]; Dreiske v. Los Angeles Investment Securities Corp. (1936) 13 Cal.App.2d 59,
63-64 [plaintiff could not state a cause of action for rescission because of loss of
consideration due to voluntary act by plaintiff]; Chamberlain v. Wakefield (1949) 95
Cal.App.2d 280 [applies a different exception to the restoration requirement].) None of
these cases aid Buyers.
23
Buyers read too much into the phrase “before suit is brought” in the case law. As
we have noted, the Supreme Court has repeatedly stated that “[t]here are exceptional
cases where restoration, or an offer to restore before suit is brought, is not necessary.”
(Carruth, supra, 36 Cal.2d at p. 430; California Farm, 151 Cal. at p. 739; Kelley, supra,
120 Cal. at p. 511.) This merely means that restoration or an offer to restore is a
condition precedent to filing an action for rescission and to obtaining rescission. As the
Supreme Court recently explained in Village Northridge, “section 1691 requires the party
seeking rescission to give notice to the other party ‘as to whom he rescinds,’ and to
restore all consideration or ‘everything of value which he has received’ under the
contract. The statute’s language is clear. With certain exceptions . . . , it generally
requires that the rescinding party return any consideration received as a condition of
rescission before judgment in the rescission action. As originally enacted, section 1691
did not make prelawsuit restoration an absolute condition of rescission, but instead
required ‘the use of . . . reasonable diligence’ to restore or offer to restore any
consideration received.” (Village Northridge, supra, 50 Cal.4th at pp. 921-922.) The
court noted, however, that “the rule requiring ‘tender or return of consideration . . . is not
inflexible.’ ” (Id. at p. 928, quoting Carruth, supra, 36 Cal.2d at p. 430.) The court
explained that in 1961, the Legislature enacted section 1693 “to address any unfairness
that the rescinding parties might face if they were insolvent or without funds to restore
consideration prior to filing suit.” (Ibid.) Thus, section 1693 permits plaintiffs who are
unable to restore the consideration received “to delay restoration until final judgment
consistent with equitable principles, including that defendants not be substantially
prejudiced by the delay.” (Id. at p. 929.)
Since a party may delay the election of rescission until at least a final judgment is
entered and restoration may be delayed until final judgment, it makes no sense to
evaluate the ability to restore as of the date rescission is first requested. In addition, the
flexible nature of the restoration requirement militates against adopting the rigid rule that
24
Buyers advance. Nothing in section 1691 or the cases Buyers cite supports their
argument that the court could only consider their acts up until the time they requested
rescission in 2007 and that the court erred when it considered matters that occurred after
that date in determining whether they were entitled to rescind.
Buyers did not make an irrevocable election of rescission any time before trial. In
fact, even on the ninth day of trial, they were still undecided on the question whether to
pursue rescission or damages. To obtain rescission, Buyers were required to restore the
consideration they had received (the house) to Sellers. (§ 1691.) But they had lost the
house to foreclosure in 2010. Buyers were therefore required to show that one of the
exceptions to the restoration requirement applied. The only exception at issue provides
that restoration, or an offer to restore, is not necessary, “ ‘where, without any fault of the
plaintiff, there have been peculiar complications which make it impossible for plaintiff to
offer full restoration, although the circumstances are such that [the court] may by final
decree fully adjust the equities between the parties.’ ” (Carruth, supra, 36 Cal.2d at p.
430; italics added.) The trial court found this exception did not apply because Buyers
were not without fault in the loss of the property because they stopped paying their
mortgages in November 2007 and allowed the property to be lost to foreclosure.
Substantial evidence supports that finding.
In addition, Buyers had an opportunity to cure the default in the fall and winter of
2009, when they received the proceeds of their settlement with the real estate defendants
and Garza. At that time, there were more than sufficient funds to cure the default and
avoid foreclosure on their mortgages and to pay for the repairs recommended by Fransen,
the defense expert. In addition, Fransen testified that he was willing and able to make all
of the repairs for $75,000. Instead, Buyers decided to use funds for other purposes. They
did not repair the property and moved back to Wyoming.
It is also true that Buyers lived in the house for three years. They used the house
as both their home and office, thereby saving the expense associated with maintaining a
25
separate office. They reaped the tax benefits attendant to owning the home and enjoyed
the prestige of living in a large luxury home on a golf course. The last year they
occupied the house, they lived there without paying a mortgage or rent. Their mortgage
obligation was interest-only and they could therefore use the money that they would
otherwise have paid toward principal for other purposes. Even if the court had concluded
that Buyers were without fault in the loss of the house, Buyers do not point to any
evidence of the value of the benefits they received from owning the home that would
have allowed the court to balance the equities as part of an award of rescission. (McCoy
v. West (1977) 70 Cal.App.3d 295, 301-302 [where there has been a rescission and
restoration, guilty party is entitled to a credit for the value of the innocent party’s use of
the property].)
For these reasons, we conclude the trial court did not err when it found:
(1) rescission was not available to Buyers because they were unable to restore the
property; and (2) Buyers were not entitled to rely on the exception that applies when,
without any fault of the plaintiff, there have been peculiar complications which make it
impossible for plaintiff to offer full restoration and the court may in its final decree fully
adjust the equities between the parties since Buyers were not without fault in the loss of
the property to foreclosure.
II. Laches
Buyers challenge the court’s judgment on a second ground, arguing the court erred
when it found that their rescission claim was barred by laches. The trial court found that
Sellers “were prejudiced by the delay in [Buyers’] attempt to rescind because there had
been a serious depression in the value of real property throughout the country, which
depreciated the market value of the property involved in this case. The bankruptcy of the
Pasadera Country Club and change in membership rules and equity value affected the
value of homes in the subdivision.”
26
Since we conclude the court did not err when it found that rescission was not
available to Buyers because of their inability to restore the consideration received, we
need not address Buyers alternative claim that the court erred when it held that “[l]aches
also bars rescission.”
III. Negligent Misrepresentation Finding
Buyers contend the judgment must be reversed because the “trial court failed to
take into account that Sellers engaged in more than mere ‘negligent misrepresentation.’ ”
They assert that “[s]ince rescission is an equitable remedy, and since adjusting the
equities requires a full consideration of the facts, the trial court’s faulty conclusions with
respect to the Sellers’ negligence are relevant to the propriety of its choice of remedies as
well. The trial court simply ignored a serious issue concerning the actions of the Sellers’
agent, Jacobs.” Buyers then proceed to reargue the evidence regarding the statements
made by Jacobs. Buyers assert that they were the victims “of what can only be described
as intentional (even if innocently intended) misrepresentations” and that Sellers were
liable for the actions of their agent. They argue that the court’s conclusion “that Sellers
were liable only for negligent misrepresentation” cannot be affirmed and that the court
“should be required to reconsider the remedy in light of Sellers’ agent’s intentional
misconduct.”
Sellers respond that any representations Jacobs may have made regarding the
reason for the window repairs or regarding the home’s wiring and Internet access are
immaterial since the court found that the windows and electrical system were not
defective. We agree.
As for Jacobs’s representation that water stains on the walls were caused by a
sloppy maid, the court’s statement of decision carefully reviews the legal rules governing
both intentional and negligent misrepresentations. It also contains a detailed analysis of
the question whether Jacobs’s statement regarding the maid was an intentional or a
27
negligent misrepresentation. In its analysis, the court describes the evidence presented
and observes that while it is possible that Jacobs’s statement was an intentional
misrepresentation, “there are other inferences that are equally or more possible” that
support the conclusion that there was no intentional misrepresentation. Accordingly, the
court found Buyers did not meet their burden of proof on that claim. Given the court’s
detailed analysis of this question, we cannot agree that the court ignored Jacobs’s
statements. We therefore decline Buyers’ request to remand this case to the trial court to
reconsider the remedy in light of Jacobs’s actions.
DISPOSITION
The judgment is affirmed.
Márquez, J.
WE CONCUR:
Rushing, P. J.
Grover, J.
28