MORTON v. LARSON

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Court of Appeal, Second District, Division 4, California.

Donald L. MORTON et al., Plaintiffs and Respondents, v. George R. LARSON, et al., Defendants and Appellants.

No. B087676.

Decided: July 19, 1996

Montelone & McCrory, Donald J. Shields and G. Robert Hale, Los Angeles, for Defendants and Appellants. Berger & Norton, Ann Kelly and George M. Soneff, Santa Monica, for Plaintiffs and Respondents.

This is an appeal from a judgment granting rescission of a land sale contract.   The principal issue presented is whether there is a right to jury trial on a cause of action for rescission.   We conclude that there is, and that the trial court erred in entering judgment for respondent after the jury was unable to reach a verdict.   We also conclude there was sufficient evidence to go to the jury on the factual issues presented in the suit for rescission.

FACTUAL AND PROCEDURAL SUMMARY

This case arises from the sale of a parcel of land in Malibu, California.   The property is a 12–acre lot in the DeButts Terrace area of Malibu.   In 1987, the owner, Julian Bay, listed the property with real estate broker Jack Corrodi.   The sale price was $475,000.   Mr. Corrodi located a buyer, Michael Flood, who agreed to pay $450,000, contingent on geological studies.   Mr. Flood hired Baseline Consultants, geotechnical engineers, to investigate the geology on the property.

In a letter dated April 9, 1987, Baseline informed Mr. Flood that there were two landslides and an earthquake fault on the property.   It warned that one of the slides would impact proposed development in three ways.   First, extensive grading would be required to remove and replace slide debris and to create a building pad.   Second, deep pile foundations would be required.   Finally, seepage pits for sewage would have to be as deep as 100 feet, with the upper 50 feet sealed off to prevent the sewage effluent from affecting the stability of the slopes.

As a result of these negative findings, Mr. Flood directed Mr. Corrodi to cancel the escrow.   He gave Mr. Corrodi a copy of the report by Baseline and asked him to discuss it with Mr. Bay, so Mr. Bay would agree to the cancellation.   The escrow was cancelled.

Eight days later, Mr. Corrodi brought George Larson to Mr. Bay as a prospective buyer.   Mr. Larson is a geologist, and a principal and owner of GeoSoils, Inc., a geology company.   He opened escrow to purchase the property for $375,000.   He requested all geological data on the property and engaged GeoSoils to conduct further geological investigation of the site.   Before the close of escrow, Carroll Dean Rasmussen, an acquaintance of Mr. Larson's, became interested in the property.   Mr. Larson formed a partnership with Rasmussen's company, C.A. Rasmussen Company, to purchase the property.   They planned to divide the tract into four lots, of which two would be sold, and the others used for homesites for Mr. Larson and Mr. Rasmussen.   Mr. Larson received the Baseline report before the close of escrow.

The day after escrow closed, the property was re-listed for sale with Mr. Corrodi for $2,000,000.   GeoSoils prepared a geological report dated July 28, 1988.   The original report was submitted to Los Angeles County for review.   In response to requests from the County's engineering geology group, GeoSoils prepared two addenda to the report.   The GeoSoils reports did not refer to either the Baseline report or an earlier report referenced in the Baseline study.   The GeoSoils reports minimized the negative findings reported in the Baseline study.   Los Angeles County gave final approval to the geological aspects of the seller's proposed four-lot subdivision and preliminary approval to the subdivision tract map.  (From this point on, we refer to Mr. Rasmussen and Mr. Larson as “sellers.”)   By April 1989, an all-weather road to access the property had been built and water services had been extended to the site.

In early 1989, Dr. Donald L. Morton became interested in the property.1  He opened escrow to purchase the property on April 30, 1989, agreeing to pay $1,200,000, in cash, and to give the sellers a note for the remaining $800,000 of the purchase price.   The Purchase Agreement contained a requirement that sellers provide all “Survey, topo, geology reports.”   Dr. Morton was given the GeoSoils reports, but was not given or told about the Baseline report.

Dr. Morton retained Don Kowalewsky, a geologist, to review the geological reports he had received.   Mr. Kowalewsky reviewed the GeoSoils reports and concluded that although there may have been an earthquake fault and landslides, the property was sufficiently stable to support four proposed building pads.   At that point, Dr. Morton decided to proceed with the transaction.

After escrow closed, Dr. Morton sought permission from the California Coastal Commission to develop the property.   An anonymous person sent a copy of the Baseline report to the Commission.   Dr. Morton testified that he learned of it for the first time at a Coastal Commission hearing on January 13, 1992, where it was discussed.   He contends the Commission imposed restrictions which limited him to dividing the property into two lots as a result of the disclosure of the negative Baseline report at the hearing.   Appellants argue that the Commission's limitations were the result of changes Dr. Morton made which made the proposed houses more visible from a nearby public trail.

Dr. Morton ceased making payments on his purchase money note.   The sellers threatened foreclosure.   On March 27, 1992, attorneys for Dr. Morton wrote to Mr. Larson, rescinding the land sale contract on the ground of fraud because of the concealment of the Baseline report and of Mr. Larson's affiliation with GeoSoils.   On July 29, 1992, Dr. Morton filed a complaint against Mr. Larson, GeoSoils, Mr. Corrodi and his firm, Corrodi & Corrodi, and C.A. Rasmussen Company, C.A. Rasmussen, Inc., Carroll Dean Rasmussen, Carl Andrew Rasmussen, and Larry Gene Rasmussen.   An amended complaint alleged causes of action for fraud, rescission, breach of contract, negligence and for injunctive relief to enjoin foreclosure by the sellers.

The case was tried to a jury, which was given special verdict forms asking it to make findings on fraud or mistake of fact, fraud, breach of contract, negligence, and punitive damages.   On each question, the jury either found for one or more of the defendants, or was unable to reach a verdict.   The first question asked:  “Was plaintiff's consent to purchase the DeButts Terrace property obtained through ‘fraud’ of any of the defendants or given by a ‘mistake of fact’?”   The jury was unable to reach a verdict on that question.   On the cause of action for fraud, it reached defense verdicts as to each defendant except Mr. Larson, Carroll Dean Rasmussen, and Mr. Corrodi;  it was unable to reach a verdict as to those defendants.   The jury also was unable to decide whether there was a breach of contract by the sellers.   On the negligence cause of action, the jury was unable to reach verdicts as to Mr. Larson, Carroll Dean Rasmussen, Mr. Corrodi, and Corrodi & Corrodi.   It found for the remaining defendants on negligence.   Although it had failed to reach a verdict on the fraud theory as to three defendants, and found for the remaining defendants on that theory, the jury found that none of the defendants had committed oppression “in the conduct upon which [it based its] finding of liability for fraud.”   On the other two bases for punitive damages related to the fraud cause of action (malice and fraud), the jury was unable to reach verdicts as to Mr. Larson, Carroll Dean Rasmussen, and Mr. Corrodi.   It rendered defense verdicts as to the remaining defendants on those issues.2

The trial court declared a mistrial as to the questions on which a verdict was not reached, and discharged the jury.   Two days later, Dr. Morton filed a memorandum arguing that the parties had tried the case with the understanding that the court would decide the equitable question of rescission after the jury made the findings on the Special Verdict forms.   He argued that the trial court was not bound by the jury's failure to reach a verdict on whether he had entered into the contract because of either fraud or mistake of fact.   The Rasmussen defendants and Mr. Larson asserted a right to jury trial on the rescission issues.

Following argument and briefing, the trial court denied the defendants' request for jury trial on rescission.   It concluded that it was not bound by the jury's failure to reach a verdict on either fraud or mistake as a basis for rescission, and proceeded to determine the rescission issues on the basis of evidence presented in the jury trial and the briefing and argument of counsel.   The court ruled that rescission was justified by the failure of the defendants to disclose the Baseline report to Dr. Morton.   The trial court ordered rescission of the sale, enjoined foreclosure until title of the property is transferred back to the sellers, and cancelled the note given by Dr. Morton.

Defense counsel argued they were entitled to a jury trial on the issue of consequential damages.   The court ruled that it, rather than a jury, would determine consequential damages to which Dr. Morton is entitled.   There was a hearing on damages.   In its statement of decision, the trial court found that defendants Larson, C.A. Rasmussen Company, and Mr. Corrodi intentionally concealed the existence of the Baseline report from Dr. Morton;  that Dr. Morton's consent to purchase the property was obtained through fraud by these defendants;  and that the consent was a result of a mistake of fact about the geology and soil data regarding the property.   The court rescinded the contract under Civil Code section 1689, subdivision (b).   Judgment for Dr. Morton was entered, rescinding sale of the property, canceling the note for $800,000, canceling the deed of trust and an assignment of the deed of trust, and permanently enjoining defendants from foreclosing on the property, or selling or conveying the note or deed of trust given by Dr. Morton.   Dr. Morton was awarded damages of $1,733,774 plus prejudgment interest of $749,487 from May 14, 1994 through the date of judgment.   Upon payment of the damages award, Dr. Morton was ordered to quitclaim the property to sellers.   Dr. Morton took nothing on his claims against defendants GeoSoils, Inc. and C.A. Rasmussen, Inc.

The trial court denied motions for new trial brought by Mr. Larson and the Rasmussen defendants.   It awarded attorney's fees and costs to Dr. Morton in the amount of $795,421.29.   Mr. Larson and the Rasmussen defendants filed a timely notice of appeal from the judgment and the order awarding fees and costs.

DISCUSSION

 We are asked to decide whether the court deprived the defendants of the right to jury trial on the rescission issue by entering judgment on that cause after the jury deadlocked.   The answer is derived from 1961 legislative changes to the former procedure for rescission, which had codified the common law distinctions between actions at law and actions in equity to obtain rescission.   As we shall explain, we conclude that where, the gist of relief sought in an action to rescind is monetary damages, the parties are entitled to jury trial.

“The right to a jury trial is guaranteed by our Constitution.  (Cal. Const., art. I, § 16.)   We have long acknowledged that the right so guaranteed, however, is the right as it existed at common law in 1850, when the Constitution was first adopted, ‘and what that right is, is a purely historical question, a fact which is to be ascertained like any other social, political or legal fact.’  [Citations.]  As a general proposition, ‘[T]he jury trial is a matter of right in a civil action at law, but not in equity.’   [Citations.] [¶] ․  ‘ “If the action has to deal with ordinary common-law rights cognizable in courts of law, it is to that extent an action at law.   In determining whether the action was one triable by a jury at common law, the court is not bound by the form of the action but rather by the nature of the rights involved and the facts of the particular case—the gist of the action.   A jury trial must be granted where the gist of the action is legal, where the action is in reality cognizable at law.” ’  [Citation.]  On the other hand, if the action is essentially one in equity and the relief sought ‘depends upon the application of equitable doctrines,’ the parties are not entitled to a jury trial.  [Citations.]  Although ․ ‘the legal or equitable nature of a cause of action ordinarily is determined by the mode of relief to be afforded’ [citation], the prayer for relief in a particular case is not conclusive [citations].   Thus, ‘The fact that damages is one of a full range of possible remedies does not guarantee ․ the right to a jury․’  [Citation.]”  (C & K Engineering Contractors v. Amber Steel Co. (1978) 23 Cal.3d 1, 8–9, 151 Cal.Rptr. 323, 587 P.2d 1136, original italics;  see also Walton v. Walton (1995) 31 Cal.App.4th 277, 36 Cal.Rptr.2d 901.)

Prior to 1961, the Civil Code provided two procedures for rescission.  (All further statutory references are to the Civil Code unless otherwise indicated.)   Under the first (former §§ 1688–1691), a party could give notice of rescission, offer to restore all consideration received, and bring an action to enforce the out-of-court rescission.  (See Runyan v. Pacific Air Industries, Inc. (1970) 2 Cal.3d 304, 311–312, 85 Cal.Rptr. 138, 466 P.2d 682.)   This was considered an action at law, entitling the parties to a jury trial.  (See Radinsky v. T.W. Thomas, Inc. (1968) 264 Cal.App.2d 75, 78, 70 Cal.Rptr. 150.)   The second procedure allowed a party to bring an action for judicial rescission under former sections 3406–3408.   This was treated as an equitable proceeding for specific judicial relief, and it did not include the right to jury trial.  (See Runyan, supra, 2 Cal.3d at p. 312, 85 Cal.Rptr. 138, 466 P.2d 682;  Radinsky, supra, 264 Cal.App.2d at p. 78, 70 Cal.Rptr. 150.)

In 1960 the California Law Revision Commission recommended abolition of the action for judicial rescission, and its replacement by a single procedure for rescission.  (Recommendation Relating to Rescission of Contracts (Oct.1960) 3 Cal. Law. Revision Com. Rep. (1961) pp.   D–1, D–6–7.) As the Radinsky court observed, inequities in the availability of jury trial to defendants were a factor which led to the recommendation:  “The California Law Revision Commission recommended that the Legislature establish ‘a single rescission procedure in lieu of the existing dual procedures' upon the ground it ‘would facilitate a resolution of existing confusion as to the availability of jury trial,’ and that it would also terminate ‘the advantage—unfair on the face of it—which a rescinding party seems presently to possess in being able to elect at his pleasure whether to proceed by way of an action to enforce a rescission in which a jury may be had or by way of an action to obtain a rescission which must be tried to the court.’  (1961 Cal. Law Revision Com. Rep., Rescission of Contracts, p. D–23.)” (264 Cal.App.2d at pp. 78–79, 70 Cal.Rptr. 150.)

The Commission suggested:  “The rescission statutes should make plain that, after rescinding a contract, a party may seek any form of relief warranted under the circumstances, whether legal or equitable.   As all such actions will be to enforce a rescission, the right of the parties to a jury ․ will be determined by the nature of the substantive relief requested and not by the form of the complaint.”  (3 Cal. Law Revision Com. Rep., p. D–7, italics in original.)   The Legislature followed these recommendations in its 1961 repeal of former sections 3406–3408.   By doing so, it eliminated the equitable proceeding to declare a rescission.  Sections 1689 and 1691 were amended and section 1692 was added, all to provide a single action to enforce an out-of-court rescission in which the court could award “complete relief” including consequential damages.  (See Runyan v. Pacific Air Industries, Inc., supra, 2 Cal.3d at pp. 316–319, 85 Cal.Rptr. 138, 466 P.2d 682;  Radinsky v. T.W. Thomas, Inc., supra, 264 Cal.App.2d at p. 79, 70 Cal.Rptr. 150.)

Appellants rely upon Paularena v. Superior Court (1965) 231 Cal.App.2d 906, 42 Cal.Rptr. 366, in which the court was asked to determine the impact of the 1961 legislation on the right to jury trial in an action for rescission.   In that case, 39 plaintiffs sought rescission of land sale contracts by which they had purchased homes from the defendants.   They sued for rescission and other relief.   In response, the defendants wrote to the plaintiffs and accepted the offer of rescission and agreed to mutual restoration of benefits received under the contract.   Despite that response, restoration of the benefits was not effected, and the defendants filed an answer, again accepting the offer of rescission set forth in the complaint.   The trial court ruled that the parties had agreed to rescission, that trial would be limited to determining the value of benefits conferred, offsets, and consequential damages, and that the action was one in equity to be tried without a jury.

The plaintiffs sought an extraordinary writ to require trial by jury.   The Paularena court rejected their argument, applying the rule we have cited that requires determination of the right to jury trial based on the nature of the relief sought, which in turn is based upon the gist of the action as framed by the pleadings and the facts.  (231 Cal.App.2d at p. 911, 42 Cal.Rptr. 366.)   The court concluded that the gist of the action before it was the recovery of damages because the plaintiffs sought recovery of the consideration they had conferred upon the defendants.   The Paularena court noted that since the defendants had accepted the offer of rescission, the only issues to be determined concerned damages.  (Id. at p. 913, 42 Cal.Rptr. 366.)   It held that any relief of an equitable nature afforded the parties was ancillary to the recovery of a money judgment and therefore plaintiffs were entitled to a jury trial as of right.  (Id. at p. 914, 42 Cal.Rptr. 366.)

Dr. Morton attempts to distinguish Paularena on the ground that, in our case, there was no agreement to rescind.   The argument is misplaced.   In light of the legislative history of the 1961 amendments to the rescission statutes, it is apparent that the Legislature intended that the right to jury trial be based on the gist of the relief sought.   Here Dr. Morton sought recovery of the $1,200,000 down payment he made, interest payments of $200,000, and consequential damages of $339,774 for a total of $1,739,774.   The orders of the court canceling the $800,000 note, and the deed of trust, and issuing injunctive relief were ancillary to the damage award.   Because the nature of the action was primarily for the return of money paid and damages, we are satisfied that the defendants had a right to jury trial on the rescission cause of action.   The trial court erred in denying that right after the jury failed to reach a verdict.

Dr. Morton argues that the trial court had the power to award damages and any other relief under section 1692 sitting without a jury.   We agree that the court had the authority to award damages under section 1692.   But the scope of remedies available following the 1961 amendments does not resolve the jury trial issue.   At oral argument, counsel for Dr. Morton relied on footnote 16 in the Runyan opinion for the proposition that the right to jury trial in a rescission action depends on whether the non-rescinding party contests the rescission.  (See 2 Cal.3d at pp. 317–318, fn. 16, 85 Cal.Rptr. 138, 466 P.2d 682.)   In that footnote, the Supreme Court quotes a passage from the historical review section of the Law Revision Commission report.   The passage discusses the remedies available in rescission before the 1961 legislative amendments.   It does not discuss the issue of right to jury trial.

Dr. Morton also contends that appellants waived their right to jury trial.   He relies on various comments made by counsel after the mistrial was declared regarding their understanding of the intent of the parties in submitting the special finding on rescission to the jury.   The parties stipulated to jury trial.   Our review of the reporter's transcript reveals that when the issue was argued following the mistrial, the trial court recognized that there had been no express waiver of the right to jury:  “I think there was a feeling on the part of all of us that somehow, without having thought it through sufficiently carefully, that the jury would ultimately resolve those issues for us, and that was the forum wherein the decisions were made.  [¶] In terms of the court, I can assure you I was not aware of the fact that the court had the power to countermand a verdict by the jury on the equitable issues.”   We conclude that the right to jury trial was preserved.

Dr. Morton also relies on Snelson v. Ondulando Highlands Corp. (1970) 5 Cal.App.3d 243, 85 Cal.Rptr. 806.   We find nothing in that opinion which affects the result we reach.   In Snelson, an action for rescission of the purchase of residential property, the right to jury trial was first asserted in a petition for rehearing after an opinion of the Court of Appeal had issued.   The appellate court ruled that a party may not allow an issue to be tried as an equity matter in the trial court without objection and then claim, on appeal, that it should have been tried as a legal action with right to jury trial.   (Id. at p. 259, 85 Cal.Rptr. 806.)   The Snelson court also concluded that the right to jury trial had not been preserved because the parties had stipulated that the rescission cause of action was to be bifurcated and tried to a court sitting without a jury.  (Ibid.) In a dictum, the court observed that the gravamen of the cause of action for rescission was equitable because the defendants denied the existence of the basis for rescission.  (Ibid.) We agree with the court's conclusion that the parties had given up their right to jury trial.   We question the dictum as inconsistent with the intent of the Legislature in enacting the Law Revision Commission's recommendation to end the distinction between actions for rescission in law and in equity.

 The denial of right to jury trial is reversible error per se.   (Golden West Baseball Co. v. City of Anaheim (1994) 25 Cal.App.4th 11, 50, 31 Cal.Rptr.2d 378;  Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819, 863, 251 Cal.Rptr. 530.)   We therefore must reverse the judgment entered on the trial court's statement of decision regarding the rescission cause of action.

In light of our conclusions, we need not reach the issues raised by appellant regarding misconduct by the trial court.

 Appellants argue the evidence presented below was insufficient to establish fraud or mistake as a basis for rescission.   Were that so, they would be entitled to reversal with directions to enter judgment in their favor and would avoid the expense of a new trial.  (See Mid–Century Ins. Co. v. Gardner (1992) 1205, 1220.)   As our factual summary at the beginning of this opinion makes clear, the evidence is anything but insufficient.   Testimony established that Mr. Larson had the Baseline report and that it was not disclosed or given to Dr. Morton.   Mr. Larson's relationship to GeoSoils, which prepared the more optimistic reports which were given to Dr. Morton, was also concealed.   This evidence is sufficient to support a jury verdict or court decision adverse to appellants.   Therefore, we reverse for a new trial on the rescission cause of action.

DISPOSITION

The judgment is reversed and remanded to the trial court for a new trial Appellants are to have their costs on appeal.

FOOTNOTES

1.   Dr. Morton acted on behalf of the Donald L. Morton Family trust.   This litigation was brought by Dr. Morton individually and in his status as trustee of the Family trust.   We refer to them collectively as “Dr. Morton.”   They are respondents in this appeal.

2.   The briefs of the parties do not discuss the causes of action for breach of contract and for negligence.   As a result, we do not address these theories in our opinion.

EPSTEIN, Acting Presiding Judge.

HASTINGS and ARANDA,* JJ., concur.