DEMETRIA BARNES LAKEISHA BUTLER v. OSCAR MORALES

Reset A A Font size: Print

Court of Appeal, Second District, California.

DEMETRIA BARNES and LAKEISHA BUTLER, Plaintiffs and Respondents, v. OSCAR MORALES, Defendant and Appellant.

B214360

Decided: February 19, 2010

Bazan Huerta & Associates, John F. Bazan and Manuel Huerta for Defendant and Appellant. Douglas S. Draper for Plaintiffs and Respondents.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

Defendant and appellant Oscar Morales (Morales or seller) appeals a judgment in favor of plaintiffs and respondents Demetria Barnes and Lakeisha Butler (plaintiffs or the buyers) following a court trial.

The buyers prevailed in an action against Morales for breach of contract and fraud, based on his misrepresentation of the property's rental income and his failure to disclose he made improvements to the property without the required permits.

We perceive no error in the trial court's rulings and affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

1. Facts.

On August 2, 2006, plaintiffs purchased a mixed residential and commercial property from Morales for $725,000, with $72,500 in cash and a $652,500 30-year note to the seller, at an interest rate of 8.5 percent per year.   The property, located at 7500 South Broadway in Los Angeles, includes two residential rental units which Morales represented were each rented for $800 per month.   Morales also indicated he received a monthly income from a catering truck which used a portion of the property.

In the transaction, both sides were represented by real estate licensees.   However, Morales did not provide estoppel certificates from the residential tenants or any documentation concerning the rental agreement with the catering truck.   Nor did Morales disclose that he had installed a 26-foot by 32-foot metal shade canopy on the property without a building permit.

After the close of escrow, when the buyers attempted to collect rent from the residential tenants, the buyers discovered the tenants had been paying substantially less than $800 per month.   One of the tenants, Juan Martinez, filed a claim with the Los Angeles Housing Department (LAHD).   The buyers were ordered to refund a portion of the August rent paid by Martinez and were told the maximum allowable rent for each unit was $583.50, pursuant to the Rent Stabilization Ordinance.   Previously, the buyers were unaware the property was subject to rent control.

In December 2007, the plaintiffs received an order to comply from the City of Los Angeles requiring that they cease using the land as an outdoor restaurant (which referred to the catering truck), and that they demolish and remove unapproved canopies or bring the structure up to code, and remove extension cords which supplied electricity to the canopy.   The plaintiffs complied.   They had the metal canopy removed at a cost of $1,000 and obtained an estimate for its replacement at a cost of $28,466.

2.  Proceedings

On December 11, 2007, the buyers filed suit against Morales, as well as against the agents and brokers for the buyers and the seller.1

As against Morales, plaintiffs pled causes of action for breach of contract, negligent and intentional misrepresentation.

Plaintiffs subsequently filed a supplemental complaint, seeking additional damages relating to removal and replacement of the metal canopy.

On December 1, 2008, the matter came on for a three-day court trial.   The witnesses included plaintiff's expert witness Rodd Hitch, who prepared an appraisal and opined the market value of the property was $430,000 as of the close of escrow on August 2, 2006.

On December 19, 2008, the trial court signed and filed its statement of decision.   The trial court awarded the buyers $26,466.20 on their breach of contract claim, representing the cost of removing and replacing the metal canopy.   The trial court further found the buyers were entitled to compensatory damages on their fraud cause of action in the amount of $295,000, representing the difference between the $725,000 purchase price and the actual value of the property at the time of purchase.   The trial court also awarded the buyers $56,418.75 in punitive damages.   The amount of punitive damages was based on the amount of interest the plaintiffs paid Morales on $295,000 over a 27-month period.   The trial court credited Morales $30,000 for the two good faith settlements between plaintiffs and the other codefendants, resulting in a net judgment for plaintiffs in the sum of $347,884.95.

Morales filed a timely notice of appeal from the judgment.

CONTENTIONS

Morales contends:  the real estate agents had a duty to discover and disclose rent control and the lack of building permits;  Morales did not have a duty to disclose the existence of rent control or the lack of building permits;  Morales's representation of rents and determined failure by the trial court to disclose rent control and canopy permits was not a proximate cause of the buyers' damage, if any;  the extraordinary negligence of the buyers' real estate agent is a proximate and superseding cause of the buyers' damage, if any;  a purchaser who conducts an independent and unhindered investigation of real property is not misled;  the record lacks substantial evidence to support the essential elements of fraud;  the contract must be preserved;  the award of punitive damages was improper because claimed damages were purely economic;  and the trial court erred in excluding the testimony of Morales's expert.

DISCUSSION

1. Overview.

The trial court found Morales “is a very intelligent, sophisticated individual who had been engaged in real estate transactions before this transaction,” and that he knew the buyers would rely on his misrepresentation and would believe each of the tenants was paying $800 per month.

As the trial court found, Morales, as the seller of the property, was required by the contract to make a number of written disclosures to the buyers which he either failed to do, or which he did inaccurately, and in some instances, intentionally did so.   Paragraph 6B of the contract required Morales to provide the buyers with, inter alia:  all current leases;  a rental statement indicating the rental rates, dates of last rent increase and other related information;  a statement of income and expenses for the past 12 months;  tenant estoppel certificates;  and any known structural additions or alterations to the property;  any improvements made by seller “without required governmental permits, final inspections and approvals.”   The contract, at paragraph 11B, also required disclosure of “known material facts and defects affecting the property.”

Morales failed to provide any of the required disclosures except for a rent statement dated July 7, 2006, wherein Morales represented he was collecting $800 per month from each of two residential tenants.   The rent schedule was admittedly false;  at trial Morales testified he had never received more than $700 per month from either of the residential tenants.   Further, at the time escrow closed, the maximum allowable rent on each unit, pursuant to the rent control ordinance, was $583.50 per month.   Although Morales claimed to be ignorant of the rent control law, the trial court found that as a landlord, Morales was charged with knowledge thereof.

With respect to improvements and permits, Morales testified he had made renovations to the property, converting the commercial structure from a restaurant to an auto stereo and alarm store, and that he had installed a 26-foot by 32-foot metal canopy as a shade structure.   He also testified he had done all the work without permits.   As the trial court found, the failure to disclose these structural modifications, and the failure to disclose the work, including electrical work, was done without permits, constituted a breach of paragraph 6B(6) and (7) of the contract.

Notwithstanding all the above, Morales seeks to exculpate himself by shifting responsibility to the real estate agents and to the buyers.   As discussed below, his arguments lack merit.   We conclude the judgment is fully supported by the evidence and must be affirmed.

2. Morales committed fraud by intentionally misrepresenting the rental income and failing to make required disclosures.

Morales contends the record lacks substantial evidence to support the essential elements of fraud.   The argument fails.

The elements of fraud are (a) misrepresentation (false representation, concealment, or nondisclosure);  (b) knowledge of falsity (scienter);  (c) intent to defraud, i.e., to induce reliance;  (d) justifiable reliance;  and (e) resulting damage.  (Buckland v. Threshold Enterprises, Ltd. (2007) 155 Cal.App.4th 798, 807.)

Morales represented the rental income on each unit was $800, when in fact the actual rents were only $700 per month, and the maximum allowed rents were only $583.50.   Morales knew the $800 figure was false.   Although Morales denied knowledge of the Rent Stabilization Ordinance, as a landlord Morales was charged with knowledge thereof, including knowledge of the legally allowed rent for each unit.

Morales knew the buyers would rely on the rent schedule that he provided.   Further, his representations were material.   Barnes testified the property's rental income was a “major factor” in her decision to purchase the property because it would help with the mortgage payment.

Finally, the buyers were entitled to rely on Morales's contractually required disclosures.

Accordingly, the trial court's determination that Morales had defrauded the buyers is supported by substantial evidence.

3. The trial court properly determined compensatory damages on the fraud cause of action.

Civil Code section 3343 provides in relevant part at subdivision (a):  “One defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received․”

The trial court found the property, for which the buyers paid $725,000, was worth $430,000 at the time of purchase.   The $430,000 valuation was pursuant to the testimony of the buyers' expert witness, whom the trial court found to be well qualified, credible and truthful.

Therefore, the award of $295,000 in compensatory damages was consistent with Civil Code section 3343 and is supported by the evidence at trial.

4. Award of punitive damages was proper.

The trial court also awarded the buyers $56,418.75 in punitive damages.   The amount of punitive damages was based on the amount of interest the plaintiffs paid Morales on $295,000 over a 27-month period.

Morales contends the award of punitive damages was improper because the claimed damages were purely economic.   The argument is meritless.  “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.”  (Civ.Code, § 3294, subd. (a), italics added.)   Therefore, the buyers herein, who were fraudulently induced by Morales to purchase the property, were entitled to recover punitive damages.  (Kuchta v. Allied Builders Corp. (1971) 21 Cal.App.3d 541, 549.)

5. Exclusion of plaintiff's expert.

Morales contends the trial court erred in precluding his expert witness, Eric Forster, from testifying as to the reasons he believed the purchase price of $725,000 represented fair market value.

We review the trial court's ruling on the admissibility of expert testimony for an abuse of discretion.  (Easterby v. Clark (2009) 171 Cal.App.4th 772, 778.)

The record reflects Forster opined the $725,000 purchase price in this case represented fair market value.   Forster explained “[t]his was not a cash transaction.   This was a credit transaction where the seller was asked to, in essence, wait for 30 years to receive the sales price for a credit transaction.   This was a fair price.”

The buyers' counsel then objected on the ground that Forster did not disclose this theory in his deposition.   Counsel explained:  “I asked him if he had any more opinions to give in this case.   The only opinion that he had in this case as to the value of the property was that there was a willing buyer and a willing seller ․  [¶] We didn't hear anything in his deposition about the net present value of the promissory note or any computation that the note was worth anything less than its face value.  [¶] This comes as an unfair surprise, given the nature of the designation and of my questions and answers at his deposition.”  (Italics added.)

The trial court sustained the objection, ruling that the buyers were entitled to rely on Forster's deposition testimony and that the opinions expressed during the deposition were the only ones that need be met at trial.

We perceive no abuse of discretion in the trial court's disallowing this portion of Forster's testimony.  “When an expert deponent testifies as to specific opinions and affirmatively states those are the only opinions he intends to offer at trial, it would be grossly unfair and prejudicial to permit the expert to offer additional opinions at trial.”  (Jones v. Moore (2000) 80 Cal.App.4th 557, 565, italics added;  accord Bonds v. Roy (1999) 20 Cal.4th 140, 147.)   Here, Forster, when asked at his deposition whether he had any additional opinions regarding valuation, responded “[t]he only opinion that he had in this case as to the value of the property was that there was a willing buyer and a willing seller․”  (Italics added.)   Because Forster did not opine at deposition that the $725,000 purchase price was justified by the seller's financing of the purchase, resulting in unfair surprise at trial, the trial court acted within its discretion in precluding Forster from testifying that seller financing of this transaction justified the $725,000 purchase price.

6. No merit to Morales's attempts to shift responsibility to others.

Morales contends that as the seller, he did not have a duty to disclose either the existence of rent control, which is a matter of common knowledge, or the lack of building permits.   The argument is meritless.   Irrespective of whether Morales had a duty to advise the buyers of the existence of the Rent Stabilization Ordinance, Morales was obligated to disclose the legally allowed rental income, rather than the inflated figures he gave sellers.   Morales also was obligated, pursuant to paragraph 6B(7) of the contract, to disclose any improvements made without required governmental permits.

Morales further contends the real estate agents had a duty to discover and disclose rent control and the lack of building permits.   The argument is unavailing.   Irrespective of the duties imposed on real estate agents, Morales, as the seller, was under a duty to disclose truthfully the rental income, as well as any unpermitted modifications to the property.

Morales also argues the extraordinary negligence of the buyers' agent, in failing to ascertain the existence of rent control or whether the metal canopy was permitted, was a proximate and superseding cause of the buyers' damage, if any.   Again, irrespective of any omission by the buyers' agent, Morales had his own disclosure obligations, which obligations he breached.

Morales further asserts a purchaser who conducts an independent and unhindered investigation is not misled.   However, the buyers' investigation did not relieve Morales of his disclosure obligations under the contract.   Once again, we reject Morales's attempt to exculpate himself by shifting responsibility to the buyers.

DISPOSITION

The judgment is affirmed.   The buyers shall recover their costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

We concur:

FOOTNOTES

FN1. Shortly before trial, the buyers entered into good faith settlements (Code Civ. Proc., § 877.6) with their agent and broker for $12,500, and with the seller's agent and broker for $17,500..  FN1. Shortly before trial, the buyers entered into good faith settlements (Code Civ. Proc., § 877.6) with their agent and broker for $12,500, and with the seller's agent and broker for $17,500.

KITCHING, J. ALDRICH, J.

Copied to clipboard