RUI PEREIRA v. JOAO RODRIGUES CABRAL PEREIRA

Reset A A Font size: Print

Court of Appeal, Fifth District, California.

RUI PEREIRA et al., Plaintiffs and Respondents v. JOAO RODRIGUES CABRAL PEREIRA, Defendant and Appellant.

F060784

Decided: October 21, 2011

Law Offices of John S. Perkins and John S. Perkins for Defendant and Appellant. Morse, Morse & Morse and Brian D. Morse for Plaintiffs and Respondents.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

OPINION

Appellant, Joao Rodrigues Cabral (“John”) Pereira, and respondents, Rui Pereira and Lucia Pereira, entered into an oral contract relating to the purchase of a residence.   John, Rui's older brother, agreed to apply for a real estate loan to purchase the property because Rui and Lucia could not qualify for a loan.   The parties agreed that John would take legal title to the property but that Rui and Lucia would be the equitable owners and have the exclusive right of possession.   Rui and Lucia were to provide the down payment, make all the mortgage payments and pay all other expenses.   John was to execute and deliver a deed adding Rui and Lucia to the title after escrow closed “and when it was reasonably legal to do so.”

John purchased the property and Rui and Lucia moved in.   Rui and Lucia made the payments as agreed until John secretly refinanced the property and withdrew over $98,000 in equity approximately three and one-half years later.   John then filed eviction proceedings and Rui and Lucia vacated the house.

Rui and Lucia filed the underlying complaint for breach of contract, fraud, intentional infliction of emotional distress, and declaratory relief.   The trial court, sitting without a jury, ruled in favor of Rui and Lucia on the breach of contract and intentional infliction of emotional distress claims.   The court ordered that Rui and Lucia immediately be restored to possession of the property and that John execute a grant deed adding Rui and Lucia to the title.   John was further ordered to restore the mortgage balance to what it would have been if the refinancing had not occurred or to pay the difference each month.   The court also awarded damages to Rui and Lucia for intentional infliction of emotional distress.

John contends he did not breach the contract because it was a land security contract and therefore he was permitted to refinance the property.   John further argues that Rui and Lucia should be prevented from recovering under the unclean hands doctrine.   John also asserts that substantial evidence does not support the intentional infliction of emotional distress finding.   Finally, John argues the court should have let him recover on his cross-complaint for improvements he made under a good faith improver theory.

As discussed below, the trial court's findings are supported by law and the record.   Accordingly, the judgment will be affirmed.

BACKGROUND

John is a naturalized United States citizen.   John's younger brother, Rui, and Rui's wife, Lucia, came to the United States from the Azores in 1998 and have remained here illegally.

In 2002, Rui and Lucia contacted a real estate agent about purchasing a house on Earl Street in Hilmar.   According to Lucia, John had told them several years earlier that they should invest in a house and that he would help.   However, although Rui and Lucia had saved $24,000 for a down payment, they could not qualify for a loan because they were not citizens.

The parties agreed that John would apply for a purchase money loan in his name and place title to the Earl Street property in his name solely for the purpose of obtaining the loan.   All equity and rights to possession were to belong exclusively to Rui and Lucia.   Rui and Lucia agreed to pay the down payment and all of the buyer's fees.   Rui and Lucia further agreed to pay all mortgage payments on the purchase money loan, to be solely responsible for all maintenance expenses, to pay all property taxes, and to insure the property.

John entered into an agreement to purchase the Earl Street house for $185,000 in September 2002.   Rui and Lucia paid the $500 deposit and the $24,150 down payment.   However, the down payment could not appear to be borrowed money.   Therefore, Rui and Lucia signed a “gift letter” stating that the $24,150 was a gift to John solely to enable John to qualify for the purchase money loan.

The evidence was conflicting regarding when Rui and Lucia were to be placed on the title.   Rui and Lucia testified that John agreed to add them to the title after escrow closed and when it was legal to do so.   In contrast, John testified that title was to be transferred to Rui only after the loan was paid off.   Later, John testified that title would be transferred when Rui and Lucia could get their own loan.   Thereafter, John testified that he did not know when he was supposed to transfer title under the agreement.   The trial court concluded that John was not credible and found that John was to execute and deliver a deed adding Rui and Lucia to the title “after escrow closed and when it was reasonably legal to do so.”

Escrow closed in November 2002 and Rui and Lucia moved into the house.   The mortgage payments were $971.65, principal and interest.   After five years, the payments were to increase to $1,166.   Rui and Lucia made all payments directly on the purchase money loan until April 2006.   At about that time, unbeknownst to Rui and Lucia, John refinanced the house.   John replaced the purchase money loan with a non-purchase money loan in the amount of $262,500 and took $98,781 in equity from the property.

Rui and Lucia first learned about John's refinancing when the new loan documents were sent to their house.   The new full principal and interest payment was $1,824.89.   However, they also had the option to make either an interest only payment of $1,647.28 or a minimum payment of $874.79.   Lucia testified that when she contacted John and objected, he responded “ ‘Why do you care?   Your payment is lower now.’ ”

Rui and Lucia made the minimum payments on the refinanced loan through December 2006 but then stopped because they felt that John broke the agreement when he refinanced their house and withdrew the equity.   In February 2007, John filed an unlawful detainer action against Rui and Lucia to have them evicted.   A writ of possession was issued and served in March 2007 and Rui and Lucia vacated the premises.

In April 2007, Rui and Lucia filed the underlying complaint alleging breach of contract and intentional infliction of emotional distress.   Rui and Lucia also sought declaratory relief.   John cross-complained seeking compensation for alleged damage to his credit and for repairs he allegedly made to the house.

The case was tried by the court.   The trial court ruled in Rui and Lucia's favor on both the complaint and the cross-complaint.   The court found that Rui and Lucia substantially performed their obligations under the contract and that John breached the contract when he refinanced the house and took over $98,000 in equity from the property.   The court further concluded that Rui and Lucia were excused from making any further payments on the mortgage, taxes or insurance because of John's material breach.   On the intentional infliction of emotional distress cause of action, the court found that John's conduct was outrageous and that Rui and Lucia suffered emotional distress.   The court awarded $10,000 to Rui and $40,000 to Lucia.

The court ordered John to deliver immediate possession of the house to Rui and Lucia and to execute a grant deed adding Rui and Lucia as tenants in common.   The court further ordered John to either reduce the current loan to a principal balance of approximately $148,000 or pay the monthly payments on the mortgage in excess of $1,166.

John moved for a new trial.   This motion was heard and denied.

DISCUSSION

1. John's claim that the transaction was a security contract is not viable.

John argues that he did not breach the contract by refinancing the house because the transaction with Rui and Lucia was a security contract, also known as an installment land contract or a real property sales contract.   Such a “real property sales contract is an agreement in which one party agrees to convey title to real property to another party upon the satisfaction of specified conditions set forth in the contract and that does not require conveyance of title within one year from the date of formation of the contract.”  (Civ.Code, § 2985, subd. (a).)

John notes that under a security contract, the seller retains the right to encumber the property during the term of the security contract, unless the contract expressly provides to the contrary, as long as the seller can convey clear title by the time the seller is obligated to convey.   Therefore, John argues, when he refinanced the house, he did not breach his agreement with Rui and Lucia.

The seller under a security contract may encumber the property without breaching the contract.  (Beck v. Swank (1921) 55 Cal.App. 552, 554.)   Nevertheless, such encumbrances must be within certain limits and are subject to some statutory prohibitions, e.g., the encumbrances cannot exceed the amount due under the contract.  (Civ.Code, § 2985.2.) Here, however, there is no evidence that the transaction between John and Rui and Lucia was a sale and purchase.   Rather, John testified that he was helping his brother to purchase a home.   John never claimed that he was selling the house to Rui and Lucia.   Accordingly, John's claim that he entered into a security contract with Rui and Lucia has no merit.

Moreover, John did not raise his security contract argument until after the judgment was entered.   Generally, a litigant cannot change his or her position on appeal and assert a new theory.  (Brown v. Boren (1999) 74 Cal.App.4th 1303, 1316.)   To permit this practice would be unfair to the trial court and the opposing party.  (Ibid.) However, exceptions exist in cases where a new point of law is decided after the trial court proceedings or where applying the new theory is purely a matter of applying the law to undisputed facts.  (RN Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1518.)   Whether to consider a new theory lies within the appellate court's discretion.  (Ibid.)

Here, contrary to John's position, the facts surrounding the terms of his agreement with Rui and Lucia are not undisputed.   Accordingly, John's security contract theory is not cognizable on appeal.

2. The unclean hands doctrine does not bar Rui and Lucia's recovery.

John argues that Rui and Lucia should be barred from recovery under the unclean hands doctrine because they entered into an agreement with the intent to defraud the lender.   According to John, the entire purchase and loan transactions were essentially a ruse to trick the lender into giving a loan to benefit nonparties who did not qualify.

The defense of unclean hands demands that a plaintiff act fairly in the matter for which he or she seeks a remedy.  (Kendall–Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 978.)   The plaintiff must come into court with clean hands, and keep them clean, or be denied relief, regardless of the merits of the claim.  (Ibid.) This doctrine applies to both suits in equity and suits at law.  (Pond v. Insurance Co. of North America (1984) 151 Cal.App.3d 280, 290.)

The unclean hands doctrine does not require the party seeking relief to be guilty of fraud or other illegal conduct.  (Pond v. Insurance Co. of North America, supra, 151 Cal.App.3d at p. 291.)   Conduct that violates conscience, or good faith, or other equitable standards is sufficient to invoke the defense.  (Kendall–Jackson Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th at p. 979.)

Whether the unclean hands doctrine applies is a question of fact.   (Kendall–Jackson Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th at p. 978.)   Moreover, the defense must be raised in the trial court to be available.  (Stone v. Lobsien (1952) 112 Cal.App.2d 750, 758.)   The trial court must pass on the defense and the person against whom it is sought to be applied must be permitted the opportunity to present such evidence as might bear on that issue.  (Marshall v. Marshall (1965) 232 Cal.App.2d 232, 253.)

While John did assert unclean hands as an affirmative defense in his answer to the complaint, it was not made an issue at trial.   Consequently, at trial, Rui and Lucia were denied the opportunity to present their own evidence on the issue and the court made no findings on the applicability of this doctrine.

The trial court did consider the issue in denying John's motion for a new trial and refused to apply unclean hands to Rui and Lucia.   Rather, the court concluded that it was John who declared he was going to own and occupy the property and who concealed the true facts from the lender.

John contends the trial court erred and that unclean hands should be applied as a matter of law.   However, the facts are not undisputed.   Moreover, unclean hands is an equitable defense and courts do not hesitate to reject it whenever the doctrine's application would accomplish an inequitable result.  (Womack v. Womack (1966) 242 Cal.App.2d 572, 579.)   Accordingly, the trial court's ruling will not be disturbed.

3. The contract was not illusory.

An agreement is illusory, and thus invalid, when one of the parties assumes no obligation.  (Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal.App.4th 86, 95.)   For example, when one of the parties to the agreement reserves an unqualified right to escape its obligations under the agreement, the promise is illusory.  (Moreland Development Co. v. Gladstone Homes, Inc. (1982) 135 Cal.App.3d 973, 977.)

John argues the contract as found by the trial court was illusory because Rui and Lucia possess all the rights to the property but have no duties to the lender.   According to John, Rui and Lucia could essentially terminate the contract at any time without risk to themselves, simply by defaulting on the monthly payments and walking away from the property.

However, as found by the trial court, Rui and Lucia were at substantial risk.   If they were to default on the loan, they would lose their home and the investment they had made in it.   Accordingly, the contract was not illusory.

4. The record supports the intentional infliction of emotional distress findings.

John argues the trial court erred in finding him liable for intentional infliction of emotional distress.   John contends his conduct was either not outrageous as a matter of law or could not have caused the emotional distress.   Further, John asserts the evidence was insufficient to support the trial court's finding that Rui and Lucia actually suffered extreme emotional distress.

“The elements of a cause of action for intentional infliction of emotional distress are (1) outrageous conduct by the defendant, (2) intention to cause or reckless disregard of the probability of causing emotional distress, (3) severe emotional suffering, and (4) actual and proximate causation of the emotional distress.”  (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1120.)

To be outrageous, conduct must be so extreme that it exceeds all bounds of that usually tolerated in a civilized community.  (Davidson v. City of Westminster (1982) 32 Cal.3d 197, 209.)   However, conduct that might not otherwise be considered extreme and outrageous may be found to be so if a defendant abuses a relation or position that gives him power to damage the plaintiff's interest.  (Molko v. Holy Spirit Assn., supra, 46 Cal.3d at p. 1122.)

In deciding in the first instance whether the defendant's conduct may be reasonably regarded as so extreme and outrageous as to permit recovery, the court applies an objective standard to determine how reasonable people might view the conduct.  (Fowler v. Varian Associates, Inc. (1987) 196 Cal.App.3d 34, 44–45;  Fuentes v. Perez (1977) 66 Cal.App.3d 163, 172.)   Where reasonable people may differ, it is for the trier of fact, be it the court or a jury, to determine whether, in the particular case, the conduct has been sufficiently extreme and outrageous to result in liability.  (Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 499.)

Here, the trial court concluded that John abused a position of trust and damaged Rui and Lucia's interest by adding debt to the property and converting over $98,000 in equity to himself.   The court further found that John threatened to have Rui and Lucia deported when they objected to the refinance.   Finally, John commenced an unlawful detainer action against Rui and Lucia when they were the equitable owners and entitled to possession of the property.   In light of John's relationship with Rui and Lucia, both familial and fiduciary, his abuse of that relationship, and the resulting damage to Rui and Lucia, i.e., the added debt and considerably higher principal and interest payments, the court's determination that John's conduct was sufficiently extreme and outrageous to result in liability was reasonable.

John further argues that the evidence does not support finding that his conduct caused emotional distress or that Rui and Lucia in fact suffered severe emotional distress.   John focuses on his threats to have Rui and Lucia deported and claims that there is no evidence that any emotional distress stemmed from those threats.

A plaintiff may recover damages for emotional distress alone, without consequent physical injuries.  (Alcorn v. Anbro Engineering, Inc., supra, 2 Cal.3d at p. 498.)   Such emotional distress need not be traumatic emotional distress of the character of shock, horror or nausea.  (Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376, 397.)   The “requisite emotional distress may consist of any highly unpleasant mental reaction such as fright, grief, shame, humiliation, embarrassment, anger, chagrin, disappointment or worry.”  (Ibid.) Nevertheless, such distress must be severe, i.e., of such substantial quantity or enduring quality that no reasonable person in a civilized society should be expected to endure it.   (Potter v. Firestone Tire & Rubber Co. (1993) 6 Cal.4th 965, 1004.)   Whether the defendant suffered severe emotional distress is a question of fact that will be upheld if supported by substantial evidence.  (Fletcher v. Western National Life Ins. Co., supra, 10 Cal.App.3d at p. 397.)

In challenging the trial court's conclusion that his conduct caused emotional distress, John erroneously focuses on his deportation threats.   However, the court looked at the whole of John's conduct in reaching its decision.   The court considered John's secret and unauthorized refinance, “conversion” of Rui and Lucia's equity and filing of an unlawful detainer action in addition to the deportation threats.   Moreover, there was evidence of emotional distress linked to these threats.   Lucia testified that she was scared that if she insisted that John put them on the title to the house, he would cause them to be deported.

On the issue of whether Rui and Lucia in fact suffered severe emotional distress, the trial court was presented with the following evidence.   Rui and Lucia testified that when they learned of the refinancing, they felt bad, threatened and violated.   Both the eviction proceedings and the need to move to a small apartment caused Rui and Lucia significant emotional upset.   It affected their marriage and caused their children to be scared and insecure.   The effect on the children particularly affected Lucia.   The court found that Rui was so upset that he threatened to kill his brother, John, and that Lucia was so upset that she sought medical attention and received medication for depression.   Moreover, this emotional distress was of long duration.   At the time of trial in February and April 2010, three years after they were evicted by John, Lucia was still being treated for depression.   Considering the record as a whole in the light most favorable to Rui and Lucia, giving them the benefit of every reasonable inference, and resolving all conflicts in their favor, it must be concluded that substantial evidence supports the trial court's finding that Rui and Lucia in fact suffered severe emotional distress.  (Cf. SFPP v. Burlington Northern & Santa Fe Ry. Co. (2004) 121 Cal.App.4th 452, 462.)

5. The trial court did not err in ruling on John's good faith improver claim.

In his cross-complaint, John requested reimbursement for costs he incurred to repair the residence after Rui and Lucia moved out.   During the trial, John presented evidence of damage allegedly caused by Rui and Lucia.   John testified that the property had been “destroyed” and that he was required to spend as much as $60,000 for repairs before he could lease the house to tenants.   At the conclusion of the trial, the court denied this claim finding that Rui and Lucia did not cause any damage.

John argues the trial court erred as a matter of law in basing its decision on finding that Rui and Lucia did not cause any damage to the property because whether they caused any damage is not an element of recovery as a good faith improver.   John contends that it is clear from the findings of fact and evidence that John should have been entitled to a setoff against any eventual accounting with Rui and Lucia as a good faith improver.

A good faith improver is “[a] person who makes an improvement to land in good faith and under the erroneous belief, because of a mistake of law or fact, that he is the owner of the land.”  (Code Civ. Proc., § 871.1, subd. (a).)  Such an improver may seek judicial relief but has the burden of establishing his or her entitlement to relief.  (Raab v. Casper (1975) 51 Cal.App.3d 866, 871.)   While taking into account the degree of the improver's negligence, the court is to determine both whether the improver acted in good faith and the relief, if any, that is consistent with substantial justice to the parties under the circumstances of the particular case.  (Code Civ. Proc., § 871.3, subd. (b).)

John's argument that the court erred in denying his claim based on a finding that Rui and Lucia caused no damage is not well taken.   During trial, John's claim for reimbursement was based solely on his allegation that Rui and Lucia damaged the property.   Thus, the court's finding appropriately responded to the issue raised.

John did not raise the good faith improver argument until his motion for a new trial.   In denying that motion, the trial court found that John was not acting in good faith in that he was taking advantage of his brother and sister-in-law and essentially converted their equity to his own interest.   The court further concluded that John had not met his burden of establishing entitlement to relief.   The court found that John was not credible.   The court noted that John's claims regarding the amounts he spent varied widely and that the receipts and checks offered as evidence did not relate to the amounts he was asserting as improvements.   Accordingly, the court correctly analyzed John's good faith improver claim and made the required factual findings.

DISPOSITION

The judgment is affirmed.   Costs on appeal are awarded to respondents.

LEVY, J.

WE CONCUR:

WISEMAN, Acting P. J.

KANE, J.