CRSS COMMERCIAL GROUP INC v. TOOTHMAN

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Court of Appeal, First District, Division 1, California.

CRSS COMMERCIAL GROUP, INC., Plaintiff and Appellant, v. John TOOTHMAN, Defendant and Appellant.

Robert HAY, Plaintiff and Respondent, v. CRSS COMMERCIAL GROUP, INC., Defendant and Appellant.

Nos. A071468, A072956.

Decided: February 26, 1997

James E. Toothman,James L. Pagano, Los Gatos, Grace Mercer Schott, Patrick J. Campbell,Stafford, Toothman & Pagano, Los Gatos, for Appellants. Willard A. Alloway, Jason J. Curliano, Hardin, Cook, Loper, Engel & Bergez, Oakland, for Respondent.

A jury returned a verdict finding that John Toothman owed CRSS Commercial Group $46,409.72 for work performed and $138,000 “benefit of the bargain” damages.   The superior court entered judgment upon the jury's verdict, awarding CRSS $207,641.57 damages plus interest, plus costs in an unspecified amount.   The court later entered an amended judgment adding costs of $87,498.35 pursuant to Code of Civil Procedure section 1141.21, for a total award to CRSS of $295,139.92.   The court denied CRSS's motion for costs and attorney fees pursuant to Code of Civil Procedure section 411.35.   Toothman appeals from the amended judgment.   CRSS cross-appeals from the order denying costs and attorney fees pursuant to Code of Civil Procedure section 411.35.   We will modify the judgment by striking from it the award of benefit of the bargain damages.   We will affirm the order denying costs and attorney fees.

FACTUAL/PROCEDURAL BACKGROUND

Toothman is, and at all times relevant was, the owner of the Wakefield Building, a seven floor commercial building in Oakland.   Oakland Land Company is a management company set up by Toothman to manage Toothman's properties, including the Wakefield Building.   CRSS is a corporation with a construction management division involved in construction consulting, construction management and general contracting.   The construction management division maintained an office in the Wakefield Building.

The Wakefield Building sustained damage in the October 17, 1989 Loma Prieta earthquake.   The day after the earthquake Toothman visited the Wakefield building, running into Tim Buresh, the head of CRSS's Oakland construction management office.   Toothman and Buresh toured the building together.   During the course of the tour they agreed that CRSS would perform services for Toothman.   The same day Toothman sent CRSS a letter outlining the parties' relationship.   It reads:

“Dear Tim:

“You are aware that on October 17th, the 7.0 Richter Loma Prieta Earthquake caused considerable damage to the Wakefield Medical Office Building located at 426 17th Street, Oakland, CA.

“As property manager for the building, and as the representative of the property's ownership, Oakland Land Company has been given the responsibility for:

“1. Determining the extent, and severity of the damage that the building sustained.

“2. Ensuring the safety of both tenants and the general public in and around the building.

“3. Determining if, and to what extent, the the [sic] building's damage is correctable.

“4. Preparing cost schedules and feasibility alternatives for both the repair and demolition of the building and for presenting those alternatives to the ownership and the ownership's banking and real estate lending groups.

“5. Undertaking appropriate repairs or demolition upon approved [sic] of the ownership and the ownership's banking and real estate lending groups.

“CRSS Constructors, Inc., is hereby retained to advise Oakland Land Company on the above responsibilities, and to undertake such repairs or demolition as it is directed to do by Oakland Land Company.

“All out-of-pocket costs, retained professional's fees, material purchases or rentals and labor costs will be paid by Oakland Land Company under your normal billing and statement process when it is presented for payment.”

After receiving Toothman's letter, CRSS surveyed the damage to the Wakefield Building, taking steps to protect the tenants of the building and the public from the dangers it presented.   CRSS proposed and analyzed several options for retrofitting the building, providing rough cost estimates of those options, ranging from $1.8 million to $3 million.   At Toothman's request, CRSS also analyzed the possibility of razing the building and replacing it with a different building.   The record does not reflect that Toothman ever implemented any of CRSS's proposals, or otherwise took steps to retrofit or replace the building.   Toothman used CRSS's analysis, however, in negotiating with his lender, Canada Life, and with Wells Fargo Realty Finance, which serviced Canada Life's loan.   Canada Life held a $3,108, 459 mortgage on the Wakefield Building.   After reviewing Toothman's letters and documentation and after conducting their own investigation into the damage to the Wakefield Building, Canada Life and Wells Fargo sold that loan to Toothman for $100,000.

CRSS billed Toothman $40,766.37 for its work in connection with the Wakefield Building.   Toothman also hired CRSS to perform work on another of his buildings, the California Building.   CRSS billed Toothman $5,642.99 for that work.   When Toothman failed to pay CRSS's bills, CRSS instituted the present action, seeking payment for the work it had done plus accrued interest.   After abandoning several theories of recovery, CRSS tried the case on theories of account stated, quantum meruit and fraud.

Toothman responded to CRSS's complaint, in part, by filing a cross-complaint for intentional misrepresentation, negligent misrepresentation and negligence.   The cross-complaint alleged, in essence, that CRSS was not competent to perform the required retrofitting on the Wakefield Building and that its employees had misrepresented that it was competent to perform that work.1  A few months later a group of the Wakefield Building's tenants, represented by the same attorneys as were representing Toothman, filed a complaint against CRSS.   The tenants' theory was that CRSS was incorrect in its determination that the Wakefield Building was so unsafe that it could not be occupied, and that the tenants were injured by having to move their businesses to other locations.   The tenants later caused their action to be dismissed.

In the meantime, the superior court referred the matter to arbitration pursuant to Code of Civil Procedure section 1141.11, mandating referral to arbitration of actions believed by the court not to exceed $50,000 in value.   The arbitrator found that CRSS had presented a straightforward breach of contract case and that Toothman's case lacked merit.   The arbitrator therefore awarded CRSS $46,309.72, plus accrued interest, for a total award of $62,887.55.   Toothman rejected the arbitration award, requesting a trial de novo.

The matter then went to trial.   CRSS asserted a right to payment for the work performed by it on behalf of Toothman.   CRSS also theorized that Toothman was liable for fraud, presenting evidence that Toothman knew that he could not pay for any retrofitting, and that his purpose in engaging CRSS was to obtain leverage with Canada Life and Wells Fargo so that he could buy out his loan at a heavy discount.   CRSS argued that Toothman lacked the money to pay CRSS for its work, and never intended to pay CRSS, although he continued to ask CRSS to do additional work so that he could convince his lender to sell him the loan.   CRSS argued that as a result of his fraud Toothman owed CRSS not only for the work CRSS actually performed, but for CRSS's loss of the “benefits of the bargain,” meaning the profit CRSS would have made had Toothman hired it to implement one of its retrofitting options.   Toothman stipulated that CRSS was due the amount billed for the services performed in connection with the California Building, but argued that it had so negligently performed the services connected with the Wakefield building that he had no obligation to pay for them.   Toothman further argued that CRSS's negligence injured him by forcing him to close the Wakefield building when in fact it did not have to be closed, and causing him to lose his tenants and the income they generated.   Toothman also complained that CRSS told him it would take at least $1.8 million to fix the building, claiming that in fact it could have been fixed for approximately $400,000.   Toothman's theory was that had he retained his tenants, he would have had income from their rent, which would have been sufficient collateral to enable him to borrow the $400,000 needed to fix the building.   Toothman estimated his damages at $3,556,000.

The jury returned its verdict, rejecting Toothman's claims, and finding in favor of CRSS.   The jury awarded CRSS $5,642.95 plus interest for work performed on the California Building and $40,766.77 plus interest for work performed on the Wakefield Building, thus awarding CRSS essentially the same amount for work done as had been awarded by the arbitrator.   The jury also awarded CRSS $138,000 benefit of the bargain damages.   The court entered judgment on the jury's verdict as indicated, awarding CRSS $207,641.57 plus interest plus costs in an unstated amount, and later amending the judgment to award $87,498.35 in costs, including expert witness fees.   The court denied motions for judgment notwithstanding the verdict and for a new trial filed by Toothman, and it denied CRSS's motion for costs and attorney fees pursuant to Code of Civil Procedure section 411.35.

DISCUSSION

I.The Appeal is Timely***

II.

CRSS was not Entitled to Benefit of the Bargain Damages

 In awarding CRSS $138,000 in benefit of the bargain damages on CRSS's fraud theory, the jury apparently found that CRSS would have earned that amount had Toothman hired CRSS to retrofit the Wakefield building.   This award was error.   First, benefit of the bargain damages are not recoverable for fraud.   Second, even if such damages might be had, they would not be available here where there was no bargain committing Toothman to hire CRSS to retrofit the Wakefield Building.

 Benefit of the bargain damages traditionally are recoverable in contract actions.  “The basic object of damages is compensation, and in the law of contracts the theory is that the party injured by a breach should receive as nearly as possible the equivalent of the benefits of performance.  [Citations.]”  (Brandon & Tibbs v. George Kevorkian Accountancy Corp. (1990) 226 Cal.App.3d 442, 455, 277 Cal.Rptr. 40.)   Thus, had CRSS sued for breach of contract it would have been entitled to damages measured by the benefit of any performance promised by Toothman.   CRSS, however, elected not to sue on the contract, asserting instead the tort theory of fraud.   The measure of damages for obligations other than those arising from contract is “the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”   (Civ.Code, § 3333.)   The proper measure of tort damages, therefore, is the “ ‘out-of-pocket’ ” measure.   Successful tort plaintiffs, including those seeking recovery for fraud, ordinarily are not entitled to have damages computed on a contract or benefit of the bargain theory.  (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240, 44 Cal.Rptr.2d 352, 900 P.2d 601;  Christiansen v. Roddy (1986) 186 Cal.App.3d 780, 790, 231 Cal.Rptr. 72;  and see Overgaard v. Johnson (1977) 68 Cal.App.3d 821, 823-828, 137 Cal.Rptr. 412.)

 CRSS cites BAJI No. 12.57 as supporting the proposition that it is entitled to benefit of the bargain damages on its fraud claim.   BAJI No. 12.57 is neither a statute nor a court opinion and has no precedential value in and of itself.   Moreover, although BAJI 12.57 does indeed instruct that benefit of the bargain damages may be awarded to a plaintiff in a fraud action, the authorities cited in the Use Notes to the instruction do not stand for that proposition.   In Gagne v. Bertran (1954) 43 Cal.2d 481, 490, 275 P.2d 15, the court held only that “damages whether for deceit, or negligence, must be measured by the actual losses suffered because of the misrepresentation.”   The court in Roberts v. Karr (1960) 178 Cal.App.2d 535, 542, 3 Cal.Rptr. 98 merely cited the holding in Gagne as authority for the same conclusion.   Indeed, the Roberts court at pages 543-544, 3 Cal.Rptr. 98 specifically recognized that Gagne does not support an award of benefit of the bargain damages in a fraud action.   There is authority for a finding that in some cases benefit of the bargain damages may be awarded for fraud committed by a fiduciary.  (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at pp. 1240-1241, 44 Cal.Rptr.2d 352, 900 P.2d 601;  Stout v. Turney (1978) 22 Cal.3d 718, 725-726, 150 Cal.Rptr. 637, 586 P.2d 1228;  but see Overgaard v. Johnson, supra, 68 Cal.App.3d at pp. 827-828, 137 Cal.Rptr. 412;  and see discussion in Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 565-566, 29 Cal.Rptr.2d 463.)   Toothman was not, however, CRSS's fiduciary.   It also is true that a plaintiff fraudulently induced to enter into a contract has the power to elect to affirm the contract and sue for damages resulting from the fraud (Lazar v. Superior Court (1996) 12 Cal.4th 631, 645, 49 Cal.Rptr.2d 377, 909 P.2d 981), and that such a plaintiff is entitled to benefit of the bargain damages supplemented by non-duplicative tort damages resulting from the fraud.  (Id. at p. 646, 49 Cal.Rptr.2d 377, 909 P.2d 981;  Walker v. Signal Companies, Inc. (1978) 84 Cal.App.3d 982, 995-996, 149 Cal.Rptr. 119.)   The reason such a plaintiff is entitled to benefit of the bargain damages, however, is because of the contract claim.   Again, CRSS elected not to sue on the contract.   The award of benefit of the bargain damages was error.

 In addition, even those cases permitting an award of benefit of the bargain damages permitted them only when the defendant actually falsely represented that he would perform, and the plaintiff actually relied on the false representation.   As discussed in the cases permitting an award of benefit of the bargain damages for the fraud of a fiduciary, “ ‘[t]he benefit-of-the-bargain measure ․ is concerned with satisfying the expectancy interest of the defrauded plaintiff by putting him in the position he would have enjoyed if the false representation relied upon had been true;  it awards the difference in value between what the plaintiff actually received and what he was fraudulently led to believe he would receive.’  [Citations.]”  (Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at p. 1240, 44 Cal.Rptr.2d 352, 900 P.2d 601.)   The record here is devoid of evidence that Toothman represented that he would hire CRSS to retrofit the Wakefield Building.   The parties' written agreement, embodied in the October 18, 1989 letter quoted above, states only that the Oakland Land Company had been given the responsibility for undertaking appropriate repairs or demolition upon approval of the owner and the owner's lender, and that CRSS had been retained “to advise Oakland Land Company on the above responsibilities, and to undertake such repairs or demolition as it is directed to do by Oakland Land Company.”   Nothing in this letter committed Oakland Land Company or Toothman to repair the building, and nothing committed them to hire CRSS to undertake any repairs.   The record further establishes that CRSS had no understanding that Toothman had committed to hire CRSS for the retrofitting work.   For example, in his opening argument counsel for CRSS discussed the communications that led to the October 18 letter, explaining, “In other words, if [Toothman and Oakland Land Company] ultimately decided to do some repair work, they were going to potentially have CRSS to do that work.”   Richard Hergenrader, the CRSS employee who performed much of the work requested by Toothman, was asked if CRSS had been hired by Toothman “to assist him in evaluating the extent of the damage to his building and to repair his building.”   Hergenrader responded:  “To answer your question, to determine the extent [sic] of the building, yes.   To implement or execute any repairs, that was within the scope of services that may have been provided, but that was not predicated upon what was going to happen after the extent of the damage was identified, whether or not he chose to retain us for that purpose or to retain somebody else, this certainly did not commit him to working solely with us․   It just said these are the scope of services we would like CRSS to assist us with.   If he so chose to go and have somebody else perform the actual construction work, there was nothing in this agreement that would have said that he couldn't go to anybody else.”

It also is significant that CRSS's complaint did not pray for damages measured by the value of any bargain to perform the repairs.   CRSS sought no such damages at arbitration.   At trial, counsel for CRSS did not claim entitlement to such damages in his opening argument.   CRSS did not attempt to establish during the trial either that Toothman in fact represented to CRSS that he would hire CRSS to repair the Wakefield Building, or that CRSS actually believed that Toothman had made such a representation.   CRSS never attempted to establish a measure of benefit of the bargain damages.   The only evidence of such a measure was the testimony of Jax Kneppers, called as a witness to defend against Toothman's cross-complaint.   Kneppers was called as an expert witness on the standard of care of a construction management company such as CRSS, and was asked, among other things, to describe how such a company estimates the cost of construction.   Kneppers stated that an estimate would include architect and engineering fees calculated as a percentage of the cost of construction, and that a 10 percent fee would be appropriate on any contract to repair the Wakefield Building.   This statement, although certainly admissible on the issue of any profits lost by CRSS, was not elicited for that purpose.   It was elicited to show that CRSS did not perform negligently as a construction management company in estimating the cost of the repairs to the building.   It appears that the first time that CRSS contemplated recovery on its benefit of the bargain theory was during closing argument when counsel, referring to Knepper's testimony, asked the jury to award benefit of the bargain damages in the amount of 10 percent of the construction cost.   The record thus not only is devoid of evidence that CRSS had a bargain with Toothman to perform repair and retrofitting services, it affirmatively establishes the lack of any such bargain.   The evidence, accordingly, fails to support the award of benefit of the bargain damages.

The award of benefit of the bargain damages will be stricken from the judgment.

III.

Toothman's Other Arguments of Evidentiary Error Need Not be Addressed†

IV.

CRSS Is Entitled to its Expert Witness Fees Under Code of Civil Procedure Section 1141.21

 CRSS obtained an award of costs, including expert witness fees, pursuant to Code of Civil Procedure section 1141.21.  Section 1141.21 is part of Chapter 2.5 of Title 3 of the Code of Civil Procedure, concerning judicial arbitrations as a means of efficient and cost-effective resolution of small civil claims.   Under Chapter 2.5, the superior court is directed to assess if the amount in controversy in an action will not exceed $50,000.   If so, that action must be submitted to arbitration.  (Code Civ. Proc., § 1141.11, subd. (a).)  A party unhappy with an arbitration award obtained under the chapter is entitled to a trial de novo, but risks becoming liable for certain costs if the judgment upon the trial de novo is not more favorable to that party.   One element of those costs is the reasonable costs of the services of the other party's expert witnesses.  (Code Civ. Proc., § 1141.21, subd. (a)(iii).)  Code of Civil Procedure section 1141.26, however, sets forth an exception to such an award, providing:  “Nothing in this act shall prohibit an arbitration award in excess of the amount in controversy as specified in Section 1141.11.   No party electing a trial de novo after such an award shall be subject to the provisions of Section 1141.21 if the judgment upon the trial de novo is in excess of the amount in controversy as specified in Section 1141.11.”   Under section 1141.26, therefore, the arbitrator has the power to make an award greater than $50,000.   Where, however, it becomes evident that the case was not one appropriate for arbitration under the act because both the arbitration award and the judgment upon a trial de novo exceed $50,000, the special costs provisions of section 1141.21 do not apply.

The superior court in the present case referred the matter to arbitration.   The arbitrator awarded CRSS $62,887.95.   The judgment on the trial de novo was $207,641.57, which amount will be reduced by $138,000 to $69,641.57.   Both the arbitration award and the judgment therefore exceed $50,000.   Toothman accordingly argues that the exception of section 1141.26 applies, rendering the court's award of expert witness fees error.

The arbitration award and judgment, however, exceed $50,000 only because interest was added to Toothman's debt.  Section 1141.11 does not state whether an award of interest should be included in determining if the amount in controversy exceeds $50,000.   Logic, however, dictates that it should not be included.   First, it over complicates the trial court's obligation to assess the value of the case for purposes of determining if it should be submitted to arbitration.   Second, including interest in the amount of damages would enable a defendant to avoid the payment of costs upon a trial de novo,-and indeed to avoid arbitration-simply by delaying litigation until the interest on a debt causes the amount in controversy to exceed $50,000.   Such a course of action would be contrary to the purpose of Chapter 2.5, and we decline to recognize it.

It follows that the exception of section 1141.26 does not apply.   As Toothman did not obtain a more favorable judgment upon the trial de novo, and as the exception of section 1141.26 does not apply, the award of costs, including expert witness fees, was proper.

V.

Under the Trial Court's Rulings, CRSS is not Entitled to Attorneys Fees and Costs For Toothman's Failure to File a Certificate of Merit.††

DISPOSITION

The judgment is modified to strike therefrom the award of benefit of the bargain damages.   As so modified the judgment, including the award of expert witness fees, is affirmed.   Each party will bear the costs incurred by that party in the appeal.

FOOTNOTES

1.   It should be noted that CRSS never in fact performed any retrofitting on the Wakefield Building.

FOOTNOTE.   See footnote *, ante.

FOOTNOTE.   See footnote *, ante.

FOOTNOTE.   See footnote *, ante.

STEIN, Associate Justice.

STRANKMAN, P.J., and DOSSEE, J., concur.

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