HERZOG v. CAPITAL CO ET AL (1944)

This is an appeal from a judgment awarding plaintiff damages for fraud and deceit in the sale of a dwelling to him.

The residence in question is located in the city of San Diego and it is admitted that it was owned by defendants, with the record title standing in the name of the Capital Company. At the time of the sale a Mr. Yakel was local manager of the Capital Company in San Diego.

In June, 1938, plaintiff was in search of a residence in San Diego. He went to the office of Hotchkiss and Anewalt, realtors, and was shown the house in question by Mr. Yakel who took him through it. The house had been newly painted inside and out and the floors had been sanded and refinished. In the inspection plaintiff noticed that lines in the plaster in one of the upstairs bedrooms indicated that the plaster had been repaired and then painted. He called Yakel's attention to those patches and was assured that the house was in perfect condition in all respects. In the words of plaintiff, Yakel said, “there had been some leaks in the house at some time, but they had been patched and repaired, but at that time the house was perfectly intact.”

Both plaintiff and Roscoe Porter testified that Yakel told plaintiff, in effect, that $1000 had been spent on the house; that it had been completely repaired; that it was in perfect condition. Plaintiff testified that he believed those representations and relied on them; that he would not have purchased the house had he known its true condition; that he did not learn of the falsity of those representations until December, 1939, or early in January, 1940; that between the time he purchased the house in June, 1938, and December, 1939, or January, 1940, there had been no hard rains; that in December, 1939, or early in January, 1940, there were very hard rains; that the house then leaked very badly; that the water poured in through three of the walls, ran down the walls, and dropped from the ceilings; that this recurred in succeeding hard rains; that the interior plaster became loose and hung from the ceilings; that furniture had to be stacked and covered to protect it from water. The condition described in the record was very bad and shows that the house was unfit for habitation in such condition.

Plaintiff had repairs made in 1940, but the leaking was not stopped. He finally employed an architect to investigate and advise him. This architect finally removed sections of the interior plaster in order to determine the cause of the leaks. He found structural defects in the original construction of the building; that there was no cross–bracing in the walls which permitted them to sway from wind pressure or during earth tremors. This would tend to crack the exterior and interior plaster. There was no sheeting on the outside of the studding under the exterior stucco. The studding was covered with a paper that was not waterproof. A wire mesh was applied over this paper and covered with exterior stucco which was not waterproof resulting in the rotting of the paper and the rusting of the wire. Water came in around the windows and other places besides through the plaster.

The leaks were finally stopped at a cost to plaintiff of something more than $2339.39. Two of the exterior walls and part of a third were covered with water proof paper, metal lath and water proof stucco. All of the windows were removed and others installed. The interiors of several rooms were replastered and redecorated. There were other necessary repairs which we need not specify.

From 1926 to 1937, the house had been owned and occupied by Irvin M. Schulman. It had leaked during heavy rains during the entire time of his occupancy. He had expended about $4000 in unsuccessful attempts to stop those leaks.

In 1937 he sold the house, through Mr. Yakel, to defendants. He told Mr. Yakel about the house leaking and sold it “as is”. Thus Mr. Yakel had actual knowledge of the leaky condition of the house prior to its sale to plaintiff.

Plaintiff paid $9500 for the house. There is evidence to the effect that its reasonable market value in the condition it was in at the time of the sale to plaintiff was not more than $4500. The trial court gave plaintiff judgment for $3500 damages.

Defendants argue that reasonable market value is not the equivalent of “actual value” which is now made the basis of assessing damages in fraud cases such as this. Sec. 3343, Civil Code. As the case must be retried we need not decide this question.

Defendants attack the judgment on many grounds. It is argued that the complaint fails to state a cause of action; that the action was barred by the statute of limitations; that the representations made by Yakel were puffing and sales talk and mere expressions of opinion; that there was no evidence that defendants knew the representations were false.

We need devote little space to the consideration of these questions. The plaintiff did inspect the house but the structural defects were concealed and were only discovered during hard rains and after large holes were cut in the plaster. Signs of leaking had been covered by the repairs made. Yakel knew the history of the leaks in the house over a long period of time. He made positive statements to plaintiff that the house was in perfect condition even after his attention had been directed to repairs in the interior plaster undoubtedly made necessary by former leaks. The trial court was fully justified in concluding that the knowledge possessed by Yakel of the prior leaky condition of the house did not justify his positive representations to plaintiff that it was in perfect condition. While Yakel may not have actually known that the prior leaks had not been stopped, in view of his knowledge of the history of the house he should have informed himself on that subject before making the positive representations that the house was in perfect condition which carried the clear implication that it would not leak. The trial court was justified in concluding that “under the law it is a matter about which he should have informed himself before making the representations. * * * that the defendant's positive assertions in a manner not warranted by the information he possessed, of that which was not true even though he believed it to be true, constituted actual fraud within the meaning of subdivision 2 of section 1572 of the Civil Code.” Shearer v. Cooper, 21 Cal.2d 695, 134 P.2d 764, 768; Graham v. Los Angeles First N. T. & S. Bank, 3 Cal.2d 37, 43 P.2d 543.

The facts before us present as clear a case of actual fraud and deceit on the part of Yakel with consequent damage to plaintiff as any called to our attention in a considerable time. Yakel was a regular employee of the Capital Company and was described by its assistant secretary as “local manager” in San Diego. He had negotiated the sale of another house to plaintiff by defendants in June, 1936. He negotiated the sale of the house involved here by Schulman to defendants. He negotiated the sale of the house by defendants to plaintiff. He was their agent and the knowledge of the agent, within the scope of his employment, is usually considered to be the knowledge of the principal.

Plaintiff purchased the house in June, 1938. The action was filed October 21, 1942, more than three years thereafter. It is alleged in the complaint, and plaintiff testified, that the fraud was not discovered until December, 1939, or early in January, 1940, less than three years before the action was filed. Plaintiff further testified that there were no hard rains between June, 1938, and December 1939, so there had been no leaks and the fraud had not been discovered. The trial court was justified in regarding the allegations of the complaint, as well as the proof, sufficient, and in holding that the statute of limitations had not run. Rutherford v. Rideout Bank, 11 Cal.2d 479, 80 P.2d 978, 117 A.L.R. 383.

The next argument of defendants is much more serious to the cause of plaintiff. The agreement to purchase signed by plaintiff contained the following:

“The undersigned has examined said property and each and every part thereof, and agrees to purchase same in its existing condition and the undersigned agrees that there are no promises, representations, verbal understandings or agreements, excepting those contained herein.

“I understand that the sale of subject property is subject to acceptance by Capital Company, San Francisco, and in the event said offer is rejected, deposit set forth shall be returned.”

Commencing with Speck v. Wylie, 1 Cal.2d 625, 36 P.2d 618, 619, 95 A.L.R. 760, it has been consistently held in California that similar provisions would not prohibit rescission of a contract obtained by the fraud of a selling agent committed without the knowledge of the principal. The reason for the rule is thus stated in a concurring opinion by Mr. Associate Justice Shenk:

“As I understand this rule, it is that an innocent principal so contracting with another may relieve himself from liability for the fraud of his agent, but he is nevertheless subject to rescission on the part of the defrauded party. The rule proceeds upon the theory that an innocent principal so contracting may not be permitted to enrich himself by reason of his agent's fraud, and that any property received by such principal is held by him as a constructive trustee for the person defrauded.” See, also, Lozier v. Janss Inv. Co., 1 Cal.2d 666, 36 P.2d 620; Greenberg v. Du Bain Realty Corp., 2 Cal.2d 628, 42 P.2d 628; Graham v. Los Angeles, etc., Bank, supra; Weiner v. Roof, 10 Cal.2d 450, 74 P.2d 736; Rutherford v. Rideout Bank, supra; Longway v. Newberry, 13 Cal.2d 603, 91 P.2d 110; Curtis v. Title Guarantee, etc., Co., 3 Cal.App.2d 612, 40 P.2d 562, 42 P.2d 323; Rothstein v. Janss Inv. Corp., 45 Cal.App.2d 64, 113 P.2d 465.

It is also stated in many of those cases that an action for damages could not be maintained by the defrauded buyer against the innocent principal under the circumstances disclosed. Each of the actions was for rescission so such statement was not necessary for the decision.

Plaintiff seeks to distinguish those cases from the instant case. In practically all of them the agent committing the fraud was a broker whose compensation depended on his success in completing the sale. Here the agent committing the fraud was a regular employee who occupied the position of local manager of the Capital Company. The authority he possessed is not made at all clear in the record.

It is argued that the knowledge of this agent should be imputed to his principal and that the principal is responsible for his fraud; that, therefore, defendants were not innocent principals and should not have the protection of the rules announced in the foregoing cases.

It is recognized in California that “the rule generally is that one who accepts the fruits of a fraud, with knowledge of the misrepresentations or concealments by which the fraud was perpetrated, thereby inferentially ratifies the fraud complained of and will be liable therefor, even though he did not personally participate in the fraud, and this is so apart from any consideration of the theory of agency.” McClung v. Watt, 190 Cal. 155, 211 P. 17, 20.

In Kalkruth v. Resort Properties, Ltd., 57 Cal.App.2d 146, 134 P.2d 513, 516, relied on by plaintiff, the sale was negotiated by an agent and the contract contained a clause somewhat similar to the one involved in the instant case. The fraudulent representations were made by a selling agent but were later repeated, ratified and affirmed by the president and general manager of the corporation selling the property. A judgment for damages was affirmed, this court saying: “If the principal participates in the fraud, then the fraud becomes its own and it cannot escape liability.”

It seems to us that it might be possible to draw a logical distinction between fraud committed by a broker authorized by the owner to act in a sale where compensation depends on concluding the sale, and fraud on the part of a regular employee of the owner who was its local manager. Here rescission does not afford plaintiff an adequate remedy as he had spent a little less than $3500 in repairs and in betterments in addition to the sums paid on the purchase price. However, we have reluctantly reached the conclusion that the judgment for damages must be reversed. This is compelled by the cases of Harnischfeger Sales Corp. v. Coats, 4 Cal.2d 319, 48 P.2d 662, and Schroeder v. Dickinson & Gillespie Corp., 6 Cal.App.2d 175, 44 P.2d 425. Any further relaxation of the rule of Gridley v. Tilson, 202 Cal. 748, 262 P. 322, must be made by the Supreme Court and not by us.

Harnischfeger Sales Corp. v. Coats, supra, involved a judgment for damages for fraud against the seller committed by its agent. The contract of sale contained a clause very similar to the one involved in the instant case. The judgment for damages was reversed by the Supreme Court because of that clause in the contract. The briefs, filings on the petition for hearing, and the opinion of the District Court of Appeal (40 P.2d 875) give a much more extended statement of facts than those set forth by the Supreme Court. Those facts cannot be distinguished in principle from the facts of the instant case. The same conclusion was reached in the case of Schroeder v. Dickinson & Gillespie Corp., supra, in which a hearing was denied by the Supreme Court.

We consider those cases controlling here and therefore the judgment for damages cannot be sustained.

The judgment is reversed.

MARKS, Justice.

BARNARD, P. J., and GRIFFIN, J., concur.