MICHAELS v. MORRIS (1985)

Plaintiffs Marlene Michaels and Buttons Swerloff filed this complaint for breach of an interior decorating contract, alleging the breach of certain warranties and fraud.   Named as defendants were interior decorator Phyllis Morris, doing business as Phyllis Morris Originals and various Does.¹  Plaintiffs sought both compensatory and punitive damages, and rescission.   Defendant cross-complained for recovery on a promissory note, alleged breach of contract and common counts.   The matter was consolidated for purpose of trial, a trial conducted before the court sitting without a jury.   Trial proceeded on plaintiffs' subsequent amended complaint which set forth ten causes of action, including additional causes of action for conspiracy and breach of fiduciary duty.   Plaintiffs also sought attorney fees.

The trial court awarded plaintiffs a judgment rescinding the contract entered into by the parties on the grounds of failure of consideration and fraud.   Defendants were ordered to return to plaintiffs the sum of $59,490 paid to defendants plus interest from August 28, 1980, “upon the condition that plaintiffs restore to defendants all furniture and furnishings delivered to and in the possession of plaintiffs.”   The trial court further ordered cancellation of a promissory note executed by plaintiffs in the amount of $185,700, as well as an assignment by plaintiffs of a certain land contract used as collateral for repayment of the note.   Punitive damages of $25,000 were awarded as well as attorney fees of $25,000.   Defendants took nothing on the cross-complaint.   Defendants' motion for new trial was denied;  notice of appeal from the judgment was timely filed.

We affirm the judgment of the trial court.

STANDARD OF REVIEW

“A judgment or order of the lower court is presumed correct.   All intendments and presumptions are indulged to support it on matters as to which the record is silent, and error must be affirmatively shown.   This is not only a general principle of appellate practice but an ingredient of the constitutional doctrine of reversible error.”  (6 Witkin, Cal.Procedure (2d ed. 1971) § 235, p. 4225;  emphasis in original.)

Since the presumption favors the judgment as rendered below, an appellate court considers the judgment in the light most favorable to the prevailing party, giving that party the benefit of every reasonable inference and resolving evidentiary conflicts in favor of the judgment.  (Id., at p. 4236.)   The rationale for this posture is, of course, that the trial court has heard the evidence and seen the witnesses, and the resulting judgment, particularly one which resolves credibility issues, is given deference by a reviewing court.

 In the case at bench, the dispute involved writings, i.e., the contract for interior decorating services and the note and assignment executed by the plaintiffs.   Where the meaning of writings is in issue, and there is no extrinsic evidence offered concerning the meaning in the trial court, the appellate court is not bound by the trial court's interpretation of the writings but undertakes independent inquiry;  interpretation is a question of law.   When extrinsic evidence is offered below, as it was here, however, “[t]he long-established rule ․ is that ․ any reasonable construction by the lower court will be upheld under the general rule of conflicting evidence.”   (Id., at pp. 4248–4249.)   With these principles in mind, we summarize the events which gave rise to this litigation.

STATEMENT OF FACTS

Defendant Phyllis Morris Goller is an interior decorator widely known in the interior design industry where she uses the name Phyllis Morris.   Educated at UCLA, she has been a decorator for some 25 years and had, at time of trial, a net worth in excess of $2 million.   She is married to Nathan Goller, an attorney and member of the State Bar of California, who served as her trial counsel in this litigation.   Phyllis Morris and Nathan Goller are the principals in two California corporations:  Phyllis Morris Originals, which provides interior design items to interior decorators through a showroom and also employs so-called “in-house decorators” (in addition to Phyllis Morris) to provide interior design services to customers;  and Phyllis Morris Manufacturing, a totally owned subsidiary of Originals, which manufactures furniture and furnishings, many of which are sold to Phyllis Morris Originals for resale to decorators.   The trial court, pursuant to the parties' stipulation, awarded judgment “jointly and severally” against Morris as an individual and Phyllis Morris Originals.

Plaintiffs Marlene Michaels and Buttons Swerloff spend much time in Las Vegas, Nevada, but have substantial real estate interests in California.   In February 1979, plaintiffs jointly owned a newly constructed English Tudor style residence at 19820 Northridge Road, Chatsworth, California, referred to as “Northshire Manor.”   The residence, located in an area where a number of Hollywood celebrities live, contained 10,000 square feet and consisted of at least 10 rooms;  it was surrounded by such amenities as a swimming pool, stables and a park situated on land owned in connection with the residence.   The residence was valued by plaintiffs at approximately $1 million.   It was plaintiffs' intention, as real estate investors, to decorate the house and sell it as soon as possible for a quick profit.   Until the house was sold, plaintiffs also intended to use it as a showplace to impress prospective affluent real estate investors with whom they wished to do business.

Plaintiffs, however, were not knowledgeable about interior decorating or decorators.   They talked to several decorators and saw examples of their work but chose defendant decorator Phyllis Morris after seeing her work in some design magazines and visiting the showroom of Phyllis Morris Originals located in an area of Los Angeles inhabited by members of the design industry.   During preliminary discussion between plaintiffs and Morris, plaintiffs apprised Morris of their plans regarding the residence and Morris advised plaintiffs that generally the interior decorating cost for a million dollar residence would be about 25 percent of the value of the real estate, in this case, $250,000.

During these preliminary conversations, Phyllis Morris represented to plaintiffs that she would personally provide the design services for the residence (which she had not yet seen) and that the charge for each item of furniture and furnishings would be “decorator's costs” plus an additional 35 percent as the designer fee;  that the project would be a “turnkey operation” ² which would be completed within 90 days.³  Plaintiffs agreed to retain Morris and Phyllis Morris Originals.

On April 19, 1979, plaintiffs paid Morris a retainer of $5,000.   This sum purportedly entitled plaintiffs to “renderings” of the proposed interior design of the residence, but all plaintiffs ever received were some less formal sketches of various design plans for particular rooms in the residence.

On July 10, 1979, attorney Nathan Goller prepared a written letter agreement whereby plaintiffs agreed to pay to Phyllis Morris Originals the sum of $233,500, of which $75,700 was the designer fee and $157,800 was the estimated cost of furniture and furnishings.   A down payment in cash of $47,800 was to be paid by July 23, 1979, and the balance of $185,700 was the subject of a promissory note to be executed by plaintiffs, payable at a rate of $1,690 per month;  payment of the note was to be secured by collateral, the assignment of a land contract owned by plaintiffs in the amount of $685,000 on real property at 6333 Lexington Avenue, Hollywood, California.   Plaintiffs signed the agreement, and executed the note and assignment on July 12, 1979.   The cash down payment (which apparently included the $5,000 already paid to Morris) was paid by August 14, 1979.   Commencing in September 1979 and through March 1980, plaintiffs also paid the $1,690 per month as provided in the promissory note.

During the period from July 1979 to November 16, 1979, however, the only item of furniture and furnishings delivered to plaintiffs was a box spring and mattress.   Morris continued to make representations of speedy performance.   Knowing that plaintiffs were planning some holiday social events, Morris sent a shipment of furniture and furnishings to plaintiffs on November 16, 1979.   There were numerous items included that did not fit where they were supposed to;  were of shoddy quality or in a state of disrepair;  much of the house remained unfurnished.   Plaintiffs made specific complaints to Morris about the November shipment;  they received assurances that the defects would be corrected, but they never were.   The same situation occurred after the second shipment was received on December 21, 1979;  while some of the items were on loan from Morris, a substantial amount was, again, not appropriate, or shoddy, or damaged.   Plaintiffs again complained;  nothing was done.

Morris had sent several interior decorators employed by her to the house from time to time, and occasionally came out herself but it appears that each of the employees sent had different ideas about what should be done at “Northshire Manor,” and total confusion was the result.   Some of the problems were simply those resulting from mismeasurements, such as drapes in the kitchen which interfered with the use of the sinks.   Some of the innovations presented to plaintiffs actually created hazards, i.e., mirrors on the ceiling of the master bedroom which were not glued properly and appeared ready to fall down at any time.   Numerous items, from lamps to chairs to tables, were defective, in need of obvious repair at the time of delivery.   The last employee-decorator, Steve Reiman, suggested design treatment (including the mirrors and various wall treatments) that caused plaintiffs to expend $25,000 in addition to the contract price;  these amounts were paid directly by plaintiffs to various workers, painters, installers and paperhangers.

Plaintiffs finally came to the conclusion that, despite continuous assurances from Morris, the project of decorating the house was not going to be finished nor were the defects complained of going to be repaired.   Instead of making the April 1980 payment on the promissory note, they sent a letter to Morris requesting performance;  Morris did not respond in any meaningful way.   Plaintiffs consequently withheld the May 1980 and June 1980 payments as well.

During the original negotiations with plaintiffs, Morris had represented to plaintiffs that they would be charged “decorator's costs,” plus 35 percent—Morris' decorating fee.   Plaintiffs understood that term to mean Morris' actual cost of acquisition as a decorator, and by implication the trial court found that to be a reasonable understanding of the term.   As will be seen, the rather massive fraud practiced on plaintiffs evolved from the false representation made as to pricing, in contrast to how pricing was actually effectuated in this transaction.

The trial court found that defendant Morris knowingly failed to reveal to plaintiffs that as far as she was concerned, the term “decorator's cost” had no fixed meaning, no relation to actual cost of manufacture or acquisition of the item in question.   The reality was that Morris herself determined what she wished to charge regardless of these factors, on any item she provided to her customers.   At trial, Morris professed to have no idea how costs or prices were determined in her business operation.   It was, as she explained, “a mystery.”

In fact, there was overwhelming evidence in this record that the price which defendant Morris had termed “decorator's cost” while inducing plaintiffs to sign this quarter-million dollar contract was almost always in excess of actual cost of manufacture by Morris or acquisition by Morris as a decorator.   With respect to custom-made furniture produced by defendant Morris' manufacturing corporation, the price paid by Originals, defendant's showroom—through which all the transactions flowed—was cost of production plus 15 percent.   However, plaintiffs would receive invoices from Originals for such goods at some arbitrarily arrived at figure which was much higher on occasion than even the markup for other interior decorator customers of the design house.   Despite defendant Morris' proferred ignorance, there was substantial evidence that she was the principal individual responsible for the price selection:  the pattern of selection appeared to be based upon her experienced appraisal of what the market would bear, what the customer would pay.

With respect to items acquired from other sources, the results were the same:  Morris Originals would acquire an item elsewhere using the discount they were allowed by others in the industry and instead of passing it on to plaintiffs, in most instances they would sell it to plaintiffs at the cost the showroom would have charged any decorator or raise the price to whatever level seemed fitting.   Besides taking the cream off the top, so to speak, Morris would then also charge the 35 percent she was entitled to pursuant to the contract designed by her attorney husband.   The profits obtained by defendants in this manner were very high.   One simple example will demonstrate.   Ten dining room chairs for plaintiffs were assembled by the manufacturing company at a recorded cost of $300 per unit, a total of $3,000.   The recorded cost plus 15 percent would net the manufacturer $450.   Originals, however, charged plaintiffs $5,000 for the chairs, and defendant Morris took 35 percent on top of that.   Everyone showed a profit:  the manufacturer, the showroom, and defendant Phyllis Morris.   Plaintiffs' brief aptly described this process as “triple-dipping.”

On August 28, 1980, plaintiffs notified defendants that they were rescinding the contract.   As indicated previously, the trial court granted rescission on the grounds of fraud and failure of consideration.   The trial court specifically found that plaintiffs had been fraudulently induced to make the contract with the defendants based on misrepresentations concerning price, quality and time of completion known by defendants to be false.   The record is replete with evidentiary grounds for the trial court's conclusions.

CONTENTIONS ON APPEAL

Defendants contend:

I. That there was insufficient evidence to support the finding of fraud and failure of consideration;

II. that restitution was not the proper remedy;

III. that neither punitive damages nor attorney fees nor interest should have been awarded plaintiffs by the trial court;

IV. that certain post-judgment events and trial court proceedings should be considered by this court on appeal.

Plaintiffs ask this court to award additional attorney fees to cover the litigation expenses incurred by plaintiffs post-judgment and to defend the trial court judgment on appeal.

DISCUSSION

I.

 Defendants contend that there was no evidence of fraud in the record made below.   It is well understood that fraud must be pleaded and proved in civil litigation with some specificity.  “The elements of actual fraud, whether as the basis of the remedy in contract or tort, may be stated as follows:  There must be (1) a false representation or concealment of a material fact (or, in some cases, an opinion) susceptible of knowledge, (2) made with knowledge of its falsity or without sufficient knowledge on the subject to warrant a representation, (3) with the intent to induce the person to whom it is made to act upon it;  and such person must (4) act in reliance upon the representation (5) to his damage.”  (1 Witkin, Summary of Cal.Law (8th ed. 1973) § 315, p. 265;  emphasis in original;  see also, Civ.Code, §§ 1572 and 1574.)

As was explained in Wells v. Zenz (1927) 83 Cal.App. 137, 140, 256 P. 484, “Fraud is a generic term which embraces all the multifarious means which human ingenuity can devise and are resorted to by one individual to get an advantage over another.   No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling, and unfair way by which another is deceived․”

In the case at bench, a major material misrepresentation made to plaintiffs by defendants concerned pricing.   Defendants claim that the term “decorator's cost,” as used in the interior decorating contract, was a state of the art term generally understood in the design industry to mean retail or list price less 40 percent charged to interior decorators by the showrooms where they select merchandise for their clients.   The interior decorator who pays this price may either charge the client retail list or what was paid the showroom plus 35 percent, the standard decorating percentage.   The defendants contend that plaintiff Marlene Michaels could not have been misled by defendant Morris' use of this term because she testified to her understanding that “decorator's cost” meant the cost of the item to Morris, as a decorator working under the same conditions as any other decorator plaintiffs might have employed.

There is no doubt that this was plaintiffs' understanding, after discussion with Morris, and that this understanding was reasonable.   The problem with the understanding was that it was not the reality, as defendant Morris well knew.   Defendant Morris was not similarly situated to other interior decorators plaintiffs might have selected, because through her corporate structures, the manufacturing arm and the showroom—and the discount available to her showroom in the industry—Morris was in a unique position to control and manipulate the cost and price of any item furnished by her to her customers;  there was ample evidence presented that she did just that, in a arbitrary fashion.   Plaintiffs had no reason to understand, or any knowledge of, these crucial facts, and a reasonable inference is that they would not have dealt with defendant Morris had they understood the actual situation.

 Defendant Morris' trial testimony on the subject of costs and prices was illuminating.   While she professed complete ignorance of the precise procedures employed by her corporate structures to arrive at determinations in this area, she also demonstrated by her responses to many questions that she felt entitled to set any price she wanted to, and often did.   The essence of her testimony was that the term “decorator's cost” had no fixed meaning.   She admitted that she often marked up items sold by the showroom to customers.   No clearly stated reasons were given.   The combination of evasion, arrogance and candid indifference provided solid support for the trial court's conclusion that plaintiffs had been fraudulently induced to enter into the near-quarter-million decorating contract by defendants' untruthful assurance that they would be charged “decorator's costs” plus 35 percent.

While the record is replete with examples of overreaching, a few will suffice:  “An overdrop table which cost Morris $590.40 was provided to plaintiffs for $1,000;  a Mayfair extension table which cost $1,100 was provided to plaintiffs for $3,250;  a custom sectional which cost $2,300 was provided to plaintiffs for $5,600.   To these prices, Morris added her 35 percent.

Thus, there was ample evidence of fraud in the inducement of this contractual relationship and fraud throughout plaintiffs' dealings with defendant Morris.

 Defendants also claim there was insufficient evidence of failure of consideration.   This claim is made in the face of a record showing dismal recital in the trial court, hour after hour, of the defects in the goods provided to plaintiffs.   Whether it was tables, chairs, lamps, shades, beds, or sectionals, a substantial number of the items either did not fit, did not work properly, or were in need of obvious repairs upon delivery.   The taste of the items was not the issue;  the goods were simply not in acceptable condition upon arrival at the residence, and that was the fact in at least 35 instances.   No good faith attempt was ever made to repair these items.   Failure of consideration means basically that the complaining party has not gotten the benefits of the bargain.   There was ample evidence of failure of consideration with respect to this interior decorating contract.

II.

 Defendants contend that the evidence adduced below does not support the trial court's selection of rescission of the contract as the appropriate remedy.   We find no error.   As the court had found fraud in the inducement of the contract, rescission provided the logical and reasonable manner for restoring the plaintiffs to the status quo, by extinguishing the contract.  (Civ.Code, § 1688.)  Civil Code section 1689 sets forth the grounds for rescission;  included are both fraud (subd. (b)(1)), and failure of consideration (subd. (b)(2)).   Defendants' argument that monetary damages would have been sufficient suggests that fraudulently inclined sellers need only charge a fair price if detected;  the remedy of rescission has its roots, however, in equity, and was appropriately granted in the case at bench.   While the court did not do so, it could have awarded compensatory damages as well.   (Civ. Code, § 1692.)

III.

 Defendant contends that the trial court also erred in awarding punitive damages and attorney fees in this matter, as well as interest from the date of notice of rescission.   Defendants argue that if the action by plaintiffs below sounded in contract, no punitive damages could be awarded, and on the other hand, if the action was based on tort principles, the attorney fee award was improper.   Plaintiffs pleaded ten causes of action, encompassing various theories based on both contract and tort for recovery from defendants.   An action for fraud in the inducement of a contract is one of those actions which is properly termed a hybrid action as it is based, or can be based, on both the breach of contractual obligations and upon obligations imposed by the law with respect to torts.  (Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 135 Cal.Rptr. 802.)   Under these circumstances, both the award of punitive damages and attorney fees were proper.

 With respect to the punitive damages awarded, Civil Code section 3294, subdivision (a), provides that such an award may be made when “the defendant has been guilty of oppression, fraud, or malice, ․”  Such damages are imposed “for the sake of example and by way of punishing the defendant.”   Fraud in the inducement of a contract is included within this section.  (See Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co., supra, 66 Cal.App.3d 101, 135 Cal.Rptr. 802.)   Defendants do not question the amount of the award, and, of course, our review of the award is limited on appeal to a determination as to whether “the award is so grosslydisproportionate to the harm suffered as to raise the presumption that it resulted from passion or prejudice.”  (Hasson v. Ford Motor Co. (1982) 32 Cal.3d 388, 419, 185 Cal.Rptr. 654, 650 P.2d 1171.)   We do not find it grossly disproportionate in the case at bench.   The entire tenor of defendant Phyllis Morris' conduct toward the plaintiffs suggests that she was grossly disinterested in the contractual concept long established in California law of good faith and fair dealing.

We also uphold the award for attorney fees.   Defendants do not claim that they would have not been entitled to an award of such fees had they prevailed on their cross-complaint seeking enforcement of the note executed by plaintiffs, which did include an attorney fees provision.  Civil Code section 1717, which provides statutory authority for such an award, has been broadly interpreted in recent case law to do justice to the interests of prevailing parties in civil litigation.  (See Star Pacific Investments, Inc. v. Oro Hills Ranch, Inc. (1981) 121 Cal.App.3d 447, 176 Cal.Rptr. 546.)

 Nor does the award of interest constitute error.   As provided in Civil Code section 1691, subdivision (b), the plaintiffs gave notice of rescission when this action was initiated, and the trial court could determine, as it did, that interest was due and owed by defendants from this date forward.

IV.

 Both parties make various contentions concerning events which have taken place both outside of court and in court proceedings since these appeals were consolidated for review in this court.   Neither side appears to be aware that the general rule is that “[m]atters occurring after entry of judgment are ordinarily not reviewable.   The appeal reviews the correctness of the judgment or order as of the time of its rendition, leaving later developments to be handled in subsequent litigation.”  (6 Witkin, Cal.Procedure (2d ed. 1971) § 220, p. 4210;  see also In re Marriage of Folb (1975) 53 Cal.App.3d 862, 877, 126 Cal.Rptr. 306 (overruled on other grounds in In re Marriage of Fonstein (1976) 17 Cal.3d 738, 749, fn. 5, 131 Cal.Rptr. 873, 552 P.2d 1169).)   None of the exceptions to the general rule appear to apply here.   There are also substantial limitations on the right to appellate review from post-judgment orders, in any event.

 Plaintiffs have requested this court to award attorney fees on appeal.   We decline to do so, on the ground that the trial court is in a better position to assess the extent of an award to which plaintiffs may be entitled as a result of both post-judgment litigation and the defense of this appeal.

DISPOSITION

The judgment is affirmed.   The matter is remanded to the trial court for consideration of an appropriate application by plaintiffs for additional attorney fees for their post-judgment representation, including appellate representation.   Plaintiffs are hereby awarded costs on this appeal.

FOOTNOTES

1.   The individually named defendant is actually Phyllis Morris Goller, an interior decorator.   Phyllis Morris Originals is a California corporation owned by Mrs. Goller, as is Phyllis Morris Manufacturing.   It was stipulated at trial that the corporations were alter egos of the individual defendant and that judgment could be rendered accordingly.   In our discussion, “Originals” will sometimes be called the showroom or the design house;  the manufacturing arm of the Morris-Goller business establishment will sometimes be referred to as the manufacturer.

2.   An operation where a house is completely furnished down to the last cup and saucer;  all one needs to do to live there is turn the key to the front door, presumably.

3.   It is unclear from testimony when this 90-day period was intended by the parties to commence running;  the trial court found that a reasonable starting point was when the contract was executed;  in any event, there was not even an effort to complete within 90 days of any reasonable starting point.

L. THAXTON HANSON, Associate Justice.

SPENCER, P.J., and LUCAS, J., concur.