ROBERT SOROSKY DEFINED BENEFIT PENSION PLAN v. HAMILL

Reset A A Font size: Print

Court of Appeal, Fourth District, Division 3, California.

ROBERT H. SOROSKY, M.D. DEFINED BENEFIT PENSION PLAN, Plaintiff and Appellant, v. John R. HAMILL, Defendant and Respondent.

No. G015399.

Decided: August 28, 1996

Charles S. Doskow, Upland, for Plaintiff and Appellant. Watten, Discoe & Bassett and Michael L. Bassett, Ahrens & Watten, Wayne W. Watten and Marc R. Welton, Santa Ana, for Defendant and Respondent. Callahan, McCune & Willis and Edward L. Schumann, Tustin, Johns & Helmueller and Mark J. Helmueller, San Rafael, as Amicus Curiae on behalf of Defendant and Respondent.

OPINION

The trial court granted a defense motion for nonsuit in a lender's action against a real estate appraiser for negligence, negligent misrepresentation, and breach of a third-party beneficiary contract.   We reverse on the negligent misrepresentation count only.

I

In 1989 Charlottie Wilson asked her physician and friend, Robert Sorosky, to loan her $175,000, secured by a second trust deed on her San Clemente residence.   Sorosky asked for an appraisal, title report, and information on encumbrances.

In August 1989, Wilson retained John Hamill to appraise her property.   Wilson advised Hamill the appraisal would be used to obtain a loan from a friend and the property would serve as security for the loan.   Hamill's appraisal report estimated the fair market value of the property at $600,000 and stated the home contained some 3,419 square feet.   As luck would have it, Hamill's report was not a model of accuracy:  It overestimated the actual area of the home by some 819 square feet and did not mention the absence of permits for various improvements on the property.

Based on Hamill's appraisal, Sorosky borrowed $175,000 from his employee pension fund and gave the money to Wilson in exchange for a second trust deed.   Wilson defaulted on the loan and Sorosky discovered there was no equity in the property above the amount of the existing first trust deed.   To protect his investment, Sorosky accepted a deed from Wilson in lieu of foreclosure, refinanced the property, and made the mortgage payments.   But the senior lender foreclosed on the property, and Sorosky was unable to collect any funds from Wilson.

Sorosky sued Hamill for misrepresentation, negligence, negligent misrepresentation, and breach of contract on a third-party beneficiary theory, alleging Hamill did not use comparable properties in completing his appraisal, miscalculated the square footage of the residence, and overestimated the property's actual fair market value (approximately $360,000).1  The defense moved for summary judgment;  but the trial court ruled, “[t]he issue submitted ․ is one of law only, and is not viewed as a summary judgment motion.   Thus, no judgment will be entered either way pursuant to this motion, and the analysis will not track along summary judgment lines.”

 At a hearing, the parties agreed the plaintiff would submit a written opening statement and the court would rule on defendant's oral motion for nonsuit.   Applying Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745, the court granted the motion, finding an appraiser owes no duty of care to a third party recipient of his report and Sorosky was not a third-party beneficiary of the Wilson/Hamill appraisal contract.   Sorosky complains the Bily opinion, discussing the liability of certified public accountants, “unduly narrows the responsibility of the appraiser” and the facts were sufficient to support all three causes of action.   We treat with his claims seriatim.2

II

 Citing Civil Code section 1714, subdivision (a), Sorosky argues Hamill is liable on a pure negligence theory.   But the “threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion.  [Citations.]   Whether this essential prerequisite to a negligence cause of action has been satisfied in a particular case is a question of law to be resolved by the court.”  (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 397, 11 Cal.Rptr.2d 51, 834 P.2d 745.)

In Bily the California Supreme Court restricted the duty professionals owe to third party recipients of their work product.   Specifically, the Court rejected a rule based on foreseeability of injury to third persons and held an accountant's liability for professional negligence in the preparation of an audit is limited to “clients,” i.e., “the person who contracts for or engages the audit services.   Other persons may not recover on a pure negligence theory.”  (Id. at p. 406, 11 Cal.Rptr.2d 51, 834 P.2d 745, italics added.)

But the court also explained, “[t]here is [ ] a further narrow class of persons who, although not clients, may reasonably come to receive and rely on an audit report and whose existence constitutes a risk of audit reporting that may fairly be imposed on the auditor.   Such persons are specifically intended beneficiaries of the audit report who are known to the auditor and for whose benefit it renders the audit report.   While such persons may not recover on a general negligence theory,[ ] they may ․ recover on a theory of negligent misrepresentation.”  (Id. at pp. 406–407, 11 Cal.Rptr.2d 51, 834 P.2d 745, italics added.)

 Wilson was the only “client” identified in the appraisal contract.   Because Sorosky was not Hamill's “client,” he cannot recover on a general negligence theory.   Accordingly, the motion for nonsuit on this cause of action must be affirmed.

III

We reach a different result on Sorosky's negligent misrepresentation claim, however.3  This tort is “a species of the tort of deceit [ ] ‘[w]here the defendant makes false statements, honestly believing that they are true, but without reasonable ground for such belief․’ ”  (Id. at p. 407, 11 Cal.Rptr.2d 51, 834 P.2d 745;  see Civ.Code, § 1572, subd. 2.)

 In certain circumstances, a professional's statement of his or her opinion may be treated as a positive assertion of fact.  (Gagne v. Bertran (1954) 43 Cal.2d 481, 489, 275 P.2d 15.)   For example, a misrepresentation may be actionable “ ‘where a party holds himself out to be specially qualified and the other party is so situated that he may reasonably rely upon the former's superior knowledge;  [or] where the opinion is by a fiduciary or other trusted person;  [or] where a party states his opinion as an existing fact or as implying facts which justify a belief in the truth of the opinion.’ ”   (Cohen v. S & S Construction Co. (1983) 151 Cal.App.3d 941, 946, 201 Cal.Rptr. 173.)

Acknowledging these principles, Bily held “the person or ‘class of persons' entitled to rely upon the representations is restricted to those to whom or for whom the misrepresentations were made.   Even though the defendant should have anticipated that the misinformation might reach others, he is not liable to them.”  (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 408, 11 Cal.Rptr.2d 51, 834 P.2d 745, italics added.)

Bily adopts the Restatement Second of Torts section 552, subsection (2)(b) approach.   Pursuant to section 552, a business professional who supplies false information to others for guidance in their business transactions is liable for any pecuniary loss suffered as a result of “justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.”   Subsection (2) limits liability to loss suffered “(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it;  and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.” 4

Hamill responds Christiansen v. Roddy (1986) 186 Cal.App.3d 780, 231 Cal.Rptr. 72 is dispositive of this issue.   In Christiansen the Court of Appeal held an appraiser who negligently evaluated commercial property for a mortgage company was not liable to investors in a loan secured by the property.   The appraiser retained by the mortgage company ignored encroachments on adjoining land and grossly underestimated the depreciation on the property.   The appraiser submitted his report to the property owner.   But the mortgage broker obtained a copy and circulated a “loan brochure” to potential investors, stating the owner sought a $100,000 loan and the property was worth $230,000, subject to a $44,922 first trust deed.

Plaintiffs reviewed various loan brochures, agreed to invest $60,000, and were named beneficiaries of a second trust deed.   The borrower defaulted on the note and deeded the property to the plaintiffs in lieu of foreclosure.   Another appraiser concluded the property was worth $51,000.   The trial court found the appraiser negligently misrepresented the value of the property and awarded plaintiffs the loss on their investment plus “lost interest” on that sum.   (Id. at p. 785, 231 Cal.Rptr. 72.)

The Court of Appeal reversed, holding the appraiser could not be liable to the investors because he was retained by and performed his services for the mortgage company and did not know anyone was planning to loan money based on a security interest in the property:  “Here, [the appraiser] performed appraisal services for [the borrower] and for [the mortgage company], not for the [plaintiffs].   There is no evidence that [the appraiser] knew the [plaintiffs].   Likewise, there is no indication that he knew of any of them considering or actually loaning money secured by the subject property until he was served in this action.  [The appraiser] could not have intended that [plaintiffs] rely on his appraisal, and therefore, as a matter of law, he could not have been liable to them.”  (Id. at p. 787, 231 Cal.Rptr. 72, italics added.) 5

 Christiansen is factually distinguishable on this point.   There, the appraiser delivered his report to the client and was unaware any third party was involved or would rely on his report.   Here, the record reveals Wilson told Hamill she needed the appraisal for a third party who would loan her money on the property;  the appraisal contract stated the report was prepared for purposes of securing refinancing;  Hamill's normal procedure was to find out the purpose of the appraisal;  and he assumed any appraisal requested by a borrower would be delivered to a lender.

Accordingly, we find Sorosky was entitled to rely on the appraiser's report because he was within the “ ‘class of persons ․ to whom or for whom the misrepresentations were made.’ ”  (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 408, 11 Cal.Rptr.2d 51, 834 P.2d 745.)   Hamill knew his appraisal was intended to reach and influence a particular person's decision to lend money based on the security value of the property.   In other words, his report was directed to both his client, Wilson, and Sorosky, the third party it was designed to influence.   Accordingly, the judgment granting Hamill nonsuit on this cause of action must be reversed.

IV

 Sorosky next complains the trial court erred in granting nonsuit on his cause of action for breach of a third party beneficiary contract.  Bily is dispositive of this claim as well.   And here we disagree with the Second District's reading of Bily in Soderberg v. McKinney, supra, 44 Cal.App.4th at pp. 1772–1775, 52 Cal.Rptr.2d 635.   In a footnote, the Supreme Court acknowledged the existence, “[i]n theory, [of] an additional class of persons who may be the practical and legal equivalent of ‘clients.’   It is possible the audit engagement contract might expressly identify a particular third party or parties so as to make them express third party beneficiaries of the contract.   Third party beneficiaries may under appropriate circumstances possess the rights of parties to the contract.”   (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 406, fn. 16, 11 Cal.Rptr.2d 51, 834 P.2d 745.)   The reasoning of the Soderberg court that the defendant need only know that the appraisal is for the benefit of another, although unaware of whom, is based on several older Court of Appeal opinions and simply cannot be reconciled with Bily's footnote 16.

No third parties were identified in the Wilson/Hamill appraisal contract and the document did not authorize either side to make any agreements with or for the benefit of any third parties.  (See Outdoor Services, Inc. v. Pabagold, Inc. (1986) 185 Cal.App.3d 676, 682, 230 Cal.Rptr. 73.)   There are no grounds for reversal on this point.

The judgment granting the motion for nonsuit on the cause of action for negligent misrepresentation is reversed.   In all other respects, the judgment is affirmed.   Costs on appeal may be awarded, in the discretion of the superior court, to the party ultimately prevailing at trial.

WALLIN and RYLAARSDAM, JJ., concur.

FOOTNOTES

1.   The complaint originally named Wilson as a defendant, but she was dismissed from the action before trial.

2.   Preliminarily, we note a motion for nonsuit is proper after opening statement if the court finds plaintiff's counsel has stated all the facts he or she expects to prove and these would not be sufficient to state a prima facie case for recovery.  (7 Witkin, Cal. Procedure (3d ed.   1985) Trial, § 416, p. 417.)   Our review is limited:  “Both the trial court in its initial decision and the appellate court on review of that decision must accept all facts asserted in the opening statement as true and must indulge every legitimate inference which may be drawn from those facts.  [Citations.]   It can only be upheld on appeal if, after accepting all the asserted facts as true and indulging every legitimate inference in favor of the plaintiff, it can be said those facts and inferences lead inexorably to the conclusion plaintiff cannot establish an essential element of its cause of action or has inadvertently established uncontrovertible proof of an affirmative defense.  [Citations.]”  (Abeyta v. Superior Court (1993) 17 Cal.App.4th 1037, 1041, 21 Cal.Rptr.2d 680.)

3.   Our colleagues in the Second District have reached the same conclusion on a similar analysis.  (Soderberg v. McKinney (1996) 44 Cal.App.4th 1760, 1765–1772, 52 Cal.Rptr.2d 635.)   Below we will part company with part of that court's opinion, however.

4.   Bily opined this approach was the “most consistent with the elements and policy foundations of the tort of negligent misrepresentation.   The rule expressed there attempts to define a narrow and circumscribed class of persons to whom or for whom representations are made.   In this way, it recognizes commercial realities by avoiding both unlimited and uncertain liability for economic losses in cases of professional mistake and exoneration of the auditor in situations where it clearly intended to undertake the responsibility of influencing particular business transactions involving third persons.   The Restatement rule thus appears to be a sensible and moderate approach to the potential consequences of imposing unlimited negligence liability which we have identified.”  (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 408, 11 Cal.Rptr.2d 51, 834 P.2d 745.)

5.   Various out-of-state authorities support a third party action against an appraiser for professional negligence in the preparation of an appraisal report.   For the most part, these decisions are based on different grounds.  (See e.g., Schaaf v. Highfield (1995) 127 Wash.2d 17, 896 P.2d 665;  1488, Inc. v. Philsec Investment Corp. (5th Cir.1991) 939 F.2d 1281 [appraiser owes a duty of care to all persons he intends to benefit and to all who may foreseeably act in reliance on his report];  Chemical Bank v. National Union Fire Ins. Co. (1980) 74 A.D.2d 786, 425 N.Y.S.2d 818 [appraiser prepared report in a “grossly negligent” manner];  Costa v. Neimon (1985) 123 Wis.2d 410 [366 N.W.2d 896] [appraiser liable to class of persons who would foreseeably suffer harm as a result of his negligence];  Larsen v. United Fed. Savings & Loan Assn. (Iowa 1981) 300 N.W.2d 281 [appraisal prepared by employee of institutional lender and his “employer” could not be considered to be his “client”];  Stotlar v. Hester (1978) 92 N.M. 26 [582 P.2d 403];  Tackling v. Shinerman (1993) 42 Conn.Supp. 517, 630 A.2d 1381 [foreseeability standard applies to negligence action against appraiser].)

CROSBY, Acting Presiding Justice.

Copied to clipboard