LEMOS v. Roy Fencl, Defendant and Respondent.

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Court of Appeal, First District, Division 5, California.

Eugene LEMOS, Plaintiff, Appellant, Cross–Respondent, v. METROPOLITAN LIFE INSURANCE COMPANY, Defendant, Respondent, Cross–Appellant, Roy Fencl, Defendant and Respondent.

No. A039748.

Decided: November 29, 1989

Law Offices of Michael James Moriarty, Michael James Moriarty, John Daniel, San Francisco, for plaintiff, appellant and cross-respondent Eugene Lemos. Richard Kilmartin, Knight, Boland & Riordan, San Francisco, William J. Toppeta, Alvin Pasternak, New York City, for defendant, respondent and cross-appellant Metropolitan Life Ins. Co. Clyde L. MacGowan, Haims, Johnson, MacGowan & McInerney, Oakland, for defendant and respondent Roy Fencl.

Eugene Lemos sued Metropolitan Life Insurance Company and its sales agent, Roy Fencl (collectively, “defendants”) and recovered a judgment including punitive damages against both defendants for fraud.   He appeals from nonsuits on other causes of action, as well as from the damage award.   His primary contention on appeal is that the trial court erroneously precluded him from recovering damages for emotional distress.


In 1974 Fencl contacted Lemos concerning a $5,000 life insurance policy Lemos had purchased from Metropolitan in 1950 (the 1950 policy).   Fencl informed Lemos that Lemos had overpaid on the 1950 policy and had thereby accumulated sufficient funds to purchase a new policy worth $25,000.   Lemos agreed to purchase a new policy (the 1974 policy).   As part of the transaction Lemos signed numerous documents and had a physical examination.   The 1974 policy stated on its face that the annual premium was $1,060.50 for the first 22 years, and $1,040.50 for 21 additional years.   However, Fencl deliberately misled Lemos into believing the accumulated overpayments on the 1950 policy would pay for the 1974 policy, and that he would have no further expenses toward its maintenance other than the annual premiums on the 1950 policy.

In fact, due to Fencl's deception, Lemos unknowingly financed the 1974 policy by a method known in the insurance trade as minimum deposit option, or “piggybacking.”   Among the documents Lemos signed was an authorization changing his 1950 policy from endowment to whole life.   The effect of the change was to reduce the annual premiums on the 1950 policy and refund to Lemos the difference between the premiums paid and dividends earned between 1950 and 1974, a sum of approximately $2,600.   This “change allowance” was applied to the first two years' premiums on the 1974 policy, which equalled $2,120, and the balance of $480 was refunded to Lemos.

The third and fourth years were paid by borrowing against the cash value and dividends of the retroactively converted 1950 policy.   Among the documents Lemos signed when he purchased the 1974 policy were two blank loan forms requesting Metropolitan to extend loans on the 1950 policy.   In 1976 and 1977 when the third and fourth year premiums were due on the 1974 policy, Fencl pulled a signed loan form from his file and filled it out to request a loan from the 1950 policy at 5 percent interest, to be used for payment of the 1974 policy premiums.   He submitted the loan requests to Metropolitan, which complied and lent the funds.

When Fencl first prepared the financing for the 1974 policy he told Lemos it would become self-sustaining after the first four years of premium payments.   However, Lemos' medical examination revealed high blood pressure, which resulted in a higher rating.   Therefore, the policy would not become self-sustaining until after six years of premiums, and Lemos would have to pay the fifth and sixth year premiums himself.   Fencl concealed from Lemos that he (Lemos) would be borrowing against the 1950 policy to pay for the 1974 policy or that, as a result of the medical examination, he would be obligated to pay the fifth and sixth year premiums.

Fencl contacted Lemos again in 1976 to discuss insurance.   To supplement his retirement plan, Lemos agreed to purchase a $20,000 policy (the 1976 policy) after Fencl again misled him by informing him there were still sufficient overpayments on the 1950 policy such that the 1976 policy would “take care of itself” after Lemos paid an annual premium of $923.20 for four years.   Lemos agreed to purchase the 1976 policy, understanding he would still have to continue making payments on the 1950 policy.   The 1976 policy stated on its face that the premiums were $923.20 per year for 41 years.

Fencl prepared a document entitled “MY INSURANCE PROGRAM, EUGENE E. LEMOS,” dated April 1976, which he gave to Lemos at the time of the 1976 transaction.   It bears the letterhead of Fencl and Metropolitan, and states:  “My Insurance Program is a $5,000 Whole Life with Disability Waiver of Premium and Double Indemnity;  and a $25,000 Whole Life (Minimum Deposit) with Disability Waiver of Premium and Double Indemnity.   The above $25,000 (Minimum Deposit) will be maintained in the 3rd and 4th years by transfer of Equity at 5% Simple Interest on Premium;  and a $20,000 Whole Life with Disability Waiver of Premium and Double Indemnity and the Minimum Deposit Option which may be exercised at the end of the 4th year.”   The document states that in 15 years, when Lemos is 65, he will have a cash value of $19,582, which “will provide you a Life Income (Annuity) of $172.00 per month.   You would have to invest at a net 4% after taxes $51,600 to receive $172.00 per month.   If premiums are paid on the $25,000 Minimum Deposit in the 5th and subsequent years, cash at Age 65 will be $35,762.   This capital will provide a Life Income of $316.00 per [month].”   The document does not indicate the amount of annual premiums, or that Lemos would have to pay the premiums of the fifth and sixth years of the 1974 policy.   Nor does it define “Minimum Deposit” or indicate that loans from one policy will be deducted from the face value of that policy.

Lemos was misled into believing that if he did not pay premiums on his 1974 policy after the fourth year his cash value at age 65 would be $19,582, and that he had the option of paying the premium in the fifth and subsequent years of the policy, in which case the cash value at age 65 would be $35,762.

When Lemos received a bill in 1978 for $1,060 he telephoned Fencl about it.   Fencl said the bill was “automatically paid and not to worry about it.”   In January 1979 he received a cancellation notice of the 1974 policy due to nonpayment of premiums.   He telephoned Fencl, who told him the cancellation was a mistake and there was “no problem.”   Lemos requested a letter of correction that the policy was not cancelled, but he received no response.   He also took the policy to the local Metropolitan office and called the San Francisco office to have the matter corrected.

In May 1979 Robert Hernandez replaced Fencl as Lemos' insurance agent.   Lemos met with him to discuss the problems he was having with his policies.   From Hernandez, Lemos learned for the first time of the loans on his policies and that he did not have the insurance outlined in his “Insurance Program.”   Hernandez and his sales manager, Louis Aguirre, met with Lemos again a month later, and discussed the terms of the three policies.   Hernandez explained that if Lemos continued to borrow from the policies to pay premiums, the death benefit of both the 1974 and 1976 policies would continue to reduce until they got to a point where there was no more cash value available in the policies to pay the premiums, at which point the policies would cancel.   Lemos was very upset to learn the true nature of the transactions.   He showed Hernandez the “My Insurance Program” document, using it to support his belief that he was only to pay the premium on the 1950 policy and had not taken out any loans.   He also contacted the state Department of Insurance.

In February 1980 Lemos met with Keith Ferris, a district sales manager for Metropolitan.   Ferris offered to refund the premiums Lemos paid on the policies, plus interest—approximately $8,000.   Lemos declined, saying he wanted the policies to remain in effect based on the misrepresentations made to him, which meant remaining in force without further payments.

Lemos filed the instant action July 3, 1980.   He voluntarily stopped paying premiums on his 1950 policy in June 1986.   His complaint alleged nine causes of action.   The first sought a declaration that the 1974 and 1976 policies be maintained as whole life policies without further payment, that the cash value of the three policies would be at least $19,528 should he live to age 65, that should he live to age 65 he would have the option of obtaining a life income annuity of at least $170 per month rather than cash value, that should he die while the policies were in effect, the total insurance payable would be $50,000, and that he had performed all conditions precedent to the contract.   By stipulation this cause of action was tried to the court.   After Lemos rested, defendants' motion for judgment (Code Civ.Proc., § 631.8) on the first cause of action was granted.   At the same time, defendants' motions for nonsuit were granted on the causes of action for deceit, breach of the covenant of good faith and fair dealing, intentional interference with protected property interests, breach of fiduciary duty, and breach of warranty.   A directed verdict in defendants' favor was granted on the cause of action for breach of Insurance Code section 790.03, subdivisions (a) and (b).

By special verdict submitted on the causes of action for fraud and negligent misrepresentation, the jury found they were not barred by the statute of limitations.   It found true all the elements of fraud and negligent misrepresentation, including damages.   It then awarded no compensatory damages, but awarded punitive damages of $500 against Fencl and $50,000 against Metropolitan.1



 For ease of analysis we first dispose of Lemos' challenge to the nonsuits.   Except for the causes of action for deceit and breach of the covenant of good faith and fair dealing, we affirm the nonsuits because of appellant's failure to demonstrate error.   The California Rules of Court require that “[t]he statement of any matter in the record shall be supported by appropriate reference to the record.”  (Cal.Rules of Court, rule 15(a).)   “Appellate courts will not act as counsel for either party to an appeal and will not assume the task of initiating and prosecuting a search of the record for the purpose of discovering errors [or facts] not pointed out in the briefs.   It is the duty of counsel to refer the reviewing court to the portion of the record [in contention] and to show [how] the appellant was prejudiced thereby.  [Citations.]”  (Fox v. Erickson (1950) 99 Cal.App.2d 740, 742, 222 P.2d 452;  9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, § 475.)

Lemos' opening brief contains approximately two pages devoted to the nonsuit issue.   His reply brief contains approximately 24 lines on the subject.   However, although brevity is a desirable quality in appellate briefing, so is substance.   Lemos has provided nothing more than a statement of abstract legal principles, with no attempt at application to any facts, or any reference to the record.   As we noted, this Court has no obligation to undertake a search of the record to support a vague assertion of prejudicial error.  (See 9 Witkin, Cal.Procedure, op. cit. supra, Appeal, §§ 475, 479.)   If Lemos were serious in his quest for appellate review of these issues he should at least have (1) set forth the elements of each cause of action he contends was improperly nonsuited;  (2) set forth the evidence, with appropriate citation to the record, which he contends would support his dismissed causes of action;  (3) set forth and demonstrate, by citation of appropriate authority, any evidentiary or other rulings by the trial court which he contends were erroneous and why any such error was prejudicial.   He has made no attempt to do so, and we are not inclined to undertake the task on his behalf.

 As to his fourth (Deceit;  Promise Made Without Intention to Perform Alleged Against Defendant METROPOLITAN LIFE), fifth (Tortious Breach of the Covenant of Good Faith and Fair Dealing Alleged Against Defendant METROPOLITAN LIFE), sixth (Breach of Statutory Duties Alleged Against all Defendants), and eighth (Breach of Fiduciary Duties Alleged Against Defendant METROPOLITAN LIFE) causes of action, Lemos contends the nonsuits were erroneous because the actions were established by collateral estoppel.   For this proposition he relies on the results of a hearing before the Department of Insurance which resulted in a 30–day suspension of Fencl's license.   The Department of Insurance proceedings occurred after the events involving Lemos.

Collateral estoppel focuses on issues, as opposed to causes of action.   (Lockwood v. Superior Court (1984) 160 Cal.App.3d 667, 671–672, 206 Cal.Rptr. 785.)   In order to prevail on a collateral estoppel theory the proponent must, inter alia, establish that a relevant issue necessarily decided at a previous proceeding is identical to the one sought to be relitigated in the current proceeding.  (People v. Sims (1982) 32 Cal.3d 468, 484, 186 Cal.Rptr. 77, 651 P.2d 321;  People v. Taylor (1974) 12 Cal.3d 686, 691, 117 Cal.Rptr. 70, 527 P.2d 622;  Lockwood v. Superior Court, supra, 160 Cal.App.3d at p. 671, 206 Cal.Rptr. 785.)

Again, Lemos provides no specifics.   He did not below, and he does not on appeal identify the specific issues he contends were decided in the proceedings before the Department of Insurance, and why or how those unidentified issues sustain the dismissed causes of action.   We therefore are compelled to affirm the nonsuits, except those for deceit and for tortious breach of the covenant of good faith and fair dealing, which we discuss next in sub-part B.


 “A nonsuit may be granted only when, disregarding conflicting evidence and giving to plaintiff's evidence all the value to which it is legally entitled, indulging in every legitimate inference which may be drawn from that evidence, the result is a determination that there is no evidence of sufficient substantiality to support a verdict in favor of the plaintiff.  [Citation.]”  (Cervantez v. J.C. Penney Co. (1979) 24 Cal.3d 579, 593, 156 Cal.Rptr. 198, 595 P.2d 975;  see also Nally v. Grace Community Church (1988) 47 Cal.3d 278, 291, 253 Cal.Rptr. 97, 763 P.2d 948;  Carson v. Facilities Development Co. (1984) 36 Cal.3d 830, 838–839, 206 Cal.Rptr. 136, 686 P.2d 656.)

Lemos' fourth cause of action was for deceit.   Deceit is:  “1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;  [¶ ] 2. The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true;  [¶ ] 3. The suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact;  or, [¶ ] 4. A promise, made without any intention of performing it.”  (Civ.Code, § 1710.)

Although Lemos labelled his cause of action for deceit as a “promise made without intention to perform,” his actual allegations are sufficiently broad to encompass the entire statutory definition.   As we set forth in the statement of facts, and as is obvious from the verdict, Lemos proved a cause of action for deceit, and should not have been nonsuited thereon.

 Lemos' fifth cause of action was for tortious breach of the covenant of good faith and fair dealing.   It is well established that every insurance contract has an implied covenant of good faith and fair dealing imposed by law, and that the breach thereof provides a basis for a tort action by the insured.  (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818, 169 Cal.Rptr. 691, 620 P.2d 141;  Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 575, 108 Cal.Rptr. 480, 510 P.2d 1032;  Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429, 58 Cal.Rptr. 13, 426 P.2d 173;  Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658, 328 P.2d 198;  Richardson v. Employers Liab. Assur. Corp. (1972) 25 Cal.App.3d 232, 239, 102 Cal.Rptr. 547;  see also Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 684–685, 254 Cal.Rptr. 211, 765 P.2d 373.)   It is also axiomatic that fraudulent conduct by an insurer which is designed to deceive the policy holder about his benefits, as the jury herein specifically found, is a breach of the covenant of good faith and fair dealing.  (See, e.g., Delos v. Farmers Insurance Group (1979) 93 Cal.App.3d 642, 155 Cal.Rptr. 843.)

 The erroneous dismissal of both these causes of action deprived Lemos of his ability to establish and recover tort damages for emotional distress, and is clearly prejudicial.2

II ***


 Finally, Lemos contends the court erroneously ruled he was not allowed to present evidence of emotional distress resulting from defendants' fraud and negligent misrepresentation.

Civil Code section 3343 provides, in pertinent part, that 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․”  Mental distress is not deemed a permissible element of damage under Civil Code section 3343 (see, e.g., Kruse v. Bank of America (1988) 201 Cal.App.3d 354, 383, 248 Cal.Rptr. 217;  Channell v. Anthony (1976) 58 Cal.App.3d 290, 315, 129 Cal.Rptr. 704;  O'Neil v. Spillane (1975) 45 Cal.App.3d 147, 159, 119 Cal.Rptr. 245;  Sierra Nat. Bank v. Brown (1971) 18 Cal.App.3d 98, 103, 95 Cal.Rptr. 742), and the jury was so instructed.

However, when the action is determined not to be on a contract, even though a contract may be “the foundational backdrop giving rise to the action” (Sprague v. Frank J. Sanders Lincoln Mercury, Inc. (1981) 120 Cal.App.3d 412, 419, 174 Cal.Rptr. 608), but a tort action for deceit, the measure of damages is Civil Code sections 1709 and 3333.  Civil Code section 1709 provides that “[o]ne who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.”  Civil Code section 3333 provides that “[f]or the breach of an obligation not arising from contract, the measure of damages ․ is the amount which will compensate for all the detriment proximately caused thereby․”  (Sprague v. Frank J. Sanders Lincoln Mercury, Inc., supra, at p. 417, fn. 4, 174 Cal.Rptr. 608.)   Damages for mental distress are recoverable in such an action.  (Id., at p. 417, 174 Cal.Rptr. 608.)

In Sprague, plaintiff executed a contract to purchase a new car.   Within the year after paying the full purchase price, she had to return the car several times under the warranty for defects.   The gravaman of her complaint and the evidence presented established that each time she returned it, the defendant fraudulently represented that if she left the car it would be properly repaired;  the false representations were made in order to induce her to leave the car so that defendant could represent to the manufacturer that the repairs were made, and so collect the cost thereof from the manufacturer.   The defendant represented the defects had been corrected when they had not, and in reliance upon the misrepresentations plaintiff was persuaded to forego her right to rescind the sales contract, believing the car would be repaired correctly.   The trial court concluded her action was on the contract, so that Civil Code section 3343 provided the proper measure of damages, and evidence of emotional distress was precluded.

The Court of Appeal reversed.   It held that plaintiff had correctly taken the position throughout litigation that her action sounded in deceit, in which case “ ‘the contract as pleaded [has] nothing whatever to do with the liability other than to create a duty on the part of respondent herein, and the action is grounded not upon the contract, but upon the duty springing from the relation created by it.’  [Citations.]”  (Sprague v. Frank J. Sanders Lincoln Mercury, Inc., supra, 120 Cal.App.3d at p. 418, 174 Cal.Rptr. 608.)   Plaintiff was not seeking to rescind the contract due to defects, or sue for damages for breach of the contract or breach of warranty.   Rather, she was deceived by the repeated misrepresentations that the car had been repaired.

Sprague relied on Murphy v. Allstate Ins. Co. (1978) 83 Cal.App.3d 38, 147 Cal.Rptr. 565, in which plaintiffs brought an action for fraud, bad faith, and intentional infliction of emotional distress against their homeowner insurance company.   They alleged that following a fire loss their insurer wrongfully failed to make payments, and had procured unqualified workers to repair the damage.   The trial court granted summary judgment on unrelated grounds.   The Court of Appeal reversed.   It observed that plaintiffs' causes of action were not “on the policy” of insurance;  that is, they were not for losses covered by the policy.   Rather, they were for damages to their house and personal property resulting from the “untimely and unworkmanlike efforts of the persons and firms [defendant] either employed or caused plaintiffs to employ,” defending legal actions against them caused by defendant's failure to make prompt payments, and emotional distress resulting therefrom.  (Id., at p. 46, 147 Cal.Rptr. 565.)

Sprague also relied on Schroeder v. Auto Driveaway Co. (1974) 11 Cal.3d 908, 114 Cal.Rptr. 622, 523 P.2d 662, in which the plaintiff brought an action for breach of contract and fraud after defendant, whom plaintiff had hired to transport a vanload of goods from Arizona to California, destroyed the van and damaged most of the contents.   The evidence established that defendant fraudulently misrepresented that it was authorized to transport goods of a value and weight equal to those owned by plaintiff, when in fact it was not, and that plaintiff was deceived into believing that her goods were being shipped pursuant to a contract whereby defendant was obligated to carry and deliver them safely and pay full value for any loss en route.   Although the amount, rather than the proper measure of damages was the issue on appeal, Schroeder noted that Civil Code section 1709 provided the proper measure (id., at pp. 916–976, 114 Cal.Rptr. 622, 523 P.2d 662), and that plaintiff was entitled to damages for emotional distress, since she had “very clearly pleaded and ․ proved a cause of action in tort for fraud and deceit․”  (Id., at p. 922, 114 Cal.Rptr. 622, 523 P.2d 662.)

The gist of the actions in which damages are measured under Civil Code section 3343 are those in which the plaintiff, because of defendant's fraud, received property of a lesser value than the value represented by the defendant.   The section 1709 cases, on the other hand, are not so much concerned with the value of the property that changes hands as with the behavior of the defendant.   Lemos' action is akin to the latter.   He alleged and established that defendants fraudulently deceived him into believing he would have a specific amount of insurance merely by continuing the premiums on his existing policy, plus making four payments on the $20,000 policy when, in fact, the value of his insurance was significantly less.   This conduct is tortious, and supports damages for emotional distress.


IV–VI ****


The judgment is reversed and remanded for new trial on the issue of damages for emotional distress and punitive damages.   In all other respects, the judgment is affirmed.


In the Superior Court of the Statein and for the County of AlamedaNo. H–69362–2Filed June 18, 1989Eugene Lemos, Plaintiff,vs.Roy Fencl, Metropolitan Life Insurance Company, Defendants.SPECIAL VERDICT FORMSPECIAL VERDICT

We, the jury in the above entitled action, find the following special verdict on the following questions submitted to us:


Question no. 1:  Is this action barred by the statute of limitations?

Answer “yes” or “no”.


If you answer question no. 1 “yes”, sign and return this verdict.   If you answer question no. 1 “no”, go on to question no. 2.


Question no. 2:  Did the defendant make a representation as to a past or existing material fact?

Answer “yes” or “no”.


If you answer question no. 2 “no”, go on to question no. 12.   If you answer question no. 2 “yes”, then answer the next question.

Question no. 3:  Was the representation false?

Answer “yes” or “no”.


If you answer question no. 3 “no”, go on to question no. 12.   If you answer question no. 3 “yes”, then answer questions 4a and 4b.

Question no. 4a:  Did the defendant know that the representation was false when he made it?  (or see question 4b).

Answer “yes” or “no”.


Question no. 4b:  Did the defendant make the representation recklessly without knowing whether it was true or false?

Answer “yes” or “no”.


If you answer questions 4a and 4b “no”, go on to question no. 12.   If you answer either question 4a or question 4b “yes”, then answer the next question.

Question no. 5:  Did the defendant make the representation with an intent to defraud the plaintiff?

Answer “yes” or “no”.


If you answer question no. 5 “no”, go on to question no. 12.   If you answer question no. 5 “yes”, then answer the next question.

Question no. 6:  Was the plaintiff aware of the falsity of the representation?

Answer “yes” or “no”.


If you answer question no. 6 “yes”, go on to question no. 12.   If you answer question no. 6 “no”, then answer the next question.

Question no. 7:  Did the plaintiff act in reliance upon the truth of the representation?

Answer “yes” or “no”.


If you answer question no. 7 “no”, go on to question no. 12.   If you answer question no. 7 “yes”, then answer the next question.

Question no. 8:  Was the plaintiff justified in relying upon the representation?

Answer “yes” or “no”.


If you answer question no. 8 “no”, go on to question no. 12.   If you answer question no. 8 “yes”, then answer the next question.

Question no. 9:  Was the plaintiff damaged as a result of his reliance upon the truth of the representation?

Answer “yes” or “no”.


If you answer question no. 9 “no”, go on to question no. 12.   If you answer question no. 9 “yes”, go on to questions nos. 10 and 11, regarding damages.



Question no. 10:  What is the amount of damage suffered by the plaintiff as a proximate result of his reliance upon the truth of the representation?

ANSWER:  $0.00.


Question no. 11:  Do you award punitive damages against either defendant?   If so, specify the amounts below:

ANSWER:  As to defendant ROY FENCL,


As to defendant METROPOLITAN,


Please go on to the next question.


1.   A copy of the verdict is attached as Appendix A.

2.   As discussed in part III, infra, Lemos was not permitted to seek damages for emotional distress in his actions submitted to the jury.

FOOTNOTE.   See footnote *, ante.

FOOTNOTE.   See footnote *, ante.

HANING, Associate Justice.

LOW, P.J., and KING, J., concur.

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