Carey v. Cusack

• Decision Date: 21 September 1966
• Court: California Court of Appeals Court of Appeals
• Parties: G. E. CAREY and C. J. Keenan, Individually and as copartners doing business as Cornish & Carey, Plaintiffs and Respondents, v. William B. CUSACK and Eileen M. Cusack, Defendants and Appellants. Civ. 22687.

Page 244

54 Cal.Rptr. 244

245 Cal.App.2d 57

G. E. CAREY and C. J. Keenan, Individually and as copartners doing business as Cornish & Carey, Plaintiffs and Respondents, v. William B. CUSACK and Eileen M. Cusack, Defendants and Appellants.

Civ. 22687.

District Court of Appeal, First District Division 2, California.

Sept. 21, 1966.

Hearing Denied Nov. 16, 1966.

T. C. Carlstrom, McCloskey, Wilson, Mosher & Martin, Palo Alto, for appellants.

Crist, Peters, Donegan & Brenner, Palo Alto, for respondents.

TAYLOR, Justice.

Plaintiffs, G. E. Carey and C. J. Keenan, real estate brokers (hereafter brokers) recovered in quantum meruit for services rendered in subdividing certain property owned by defendants, William B. and Eileen M. Cusack (hereafter Cusacks). On this appeal, the Cusacks contend that the trial court erred by: 1) denying their motion to dismiss the complaint as the action was barred by the compulsory counterclaim statute (Code Civ.Proc. § 439) as well as the doctrines of collateral estoppel and res judicata; and 2) allowing the brokers to recover in quantum meruit as the relief was barred by the statute of frauds and inconsistent with the written agreement of the parties.

Although the facts are not disputed and the sufficiency of the evidence not challenged, a detailed chronological exposition is necessary for an understanding of the issues presented. In July 1956, the Cusacks and the Smiths purchased a 62.71 acre parcel of land in Los Altos Hills for $245,000. In November 1956, the Cusacks first met with the brokers who were in partnership under the fictitious name of Cornish & Carey, and subsequently discussed how the Cusack-Smith property could be subdivided and sold to the public. After several months of negotiation, the brokers and the Cusacks, on May 27, 1957, entered into a written agreement for the development of the property. This agreement provided for a dummy corporation, Archway, Incorporated (hereafter Archway), in which the brokers were to be the sole stockholders, as the instrumentality to provide certain tax benefits for the Cusacks and through which the brokers would perform their services. The agreement provided that Archway would purchase the Cusack-Smith property for $420,000. Although the agreement on its face was a sale of undeveloped acreage, it provided for subdivision of the land into lots. The Cusacks knew that Archway had no assets and the purpose of its use in the transaction was to acquire capital gains treatment, ¹ even though the price paid to the Cusacks was based on the sale of improved subdivided lots.

The brokers agreed to use their best efforts to carry out all of the terms and conditions of the agreement including all acts necessary for the subdivision of the acreage and the subsequent sale of lots. A separate agreement contemporaneously executed provided that the brokers should have no personal liability in connection with carrying out the agreement and that their sole responsibility as stockholders was to use reasonable efforts to cause Archway and its officers to perform its obligations under the subdivision agreement. The price to Archway was computed by determining the expected proceeds of the sales of the lots and deducting all of the costs of subdivision and off-side improvements together with an amount estimated at $64,000, the commission to be retained by Archway. This latter amount was understood to be compensation to Archway and thereby to the brokers for all of their services under the agreement. The brokers intended to have the actual sale of individual lots handled by their partnership. The purchase price was to be paid by delivery of Archway's promissory notes to the Smiths and Cusacks, both notes secured by deeds of trust on the property. The agreement further provided that the first payment by Archway of 25 percent of the purchase price was to be made on December 31, 1957, and that time was of the essence. The agreement was silent as to what compensation, if any, would be due to the brokers if the transaction did not proceed to the sale of improved subdivided lots.

After the execution of the May 27, 1957 agreement, the brokers, through Archway, hired an engineer, George S. Nolte (hereafter Nolte), to survey the property and prepare subdivision plans. The brokers then devoted a substantial part of their time for approximately 12 months to the subdivision of the Cusack-Smith property. All necessary steps for the subdivision of the property were completed except the recording of the final subdivision map as the Cusacks and Smiths never deeded the total acreage to Archway as called for in the written agreement.

When it became apparent that they would be unable to effect the subdivision of the property in time to make the first payment on December 31, 1957, as required by the agreement, the brokers wrote to the Cusacks and requested an extension. Although the parties could not agree on the terms of the extension, the brokers continued to work on the subdivision of the property. During the period of these negotiations, the Cusacks urged the brokers to complete the subdivision and start selling lots.

Around March 1958, the county adopted a tentative freeway route that cut through one or two lots on the corner of the subdivision and otherwise affected the marketability of some of the lots but did not make the subdivision project unfeasible. After learning of the freeway route, the brokers continued to work on the subdivision and by May of 1958 had obtained the necessary financing. Archway had the necessary subdivision bond and the subdivision map ready to record on obtaining the signatures of the Smiths. On May 25, 1958, the brokers wrote the Cusacks asking that the revised agreement be executed, the deed deposited, and stating that they were ready to start selling lots. The Cusacks knew that the brokers were working to subdivide the land, did not want them to stop, and did not tell them to stop. The revised agreement drafted by the Cusacks' attorney in final form was never signed; no deeds ever deposited by the Cusacks or Smiths; and no subdivision map signed. After the Cusacks indicated they were not going through with the deal, the brokers stopped working on the subdivision in the latter part of June.

Subsequently, the Cusacks, through another broker, submitted the land as a potential site for the Foothill Junior College and were advised in September 1958 that the college would buy the property for a negotiated condemnation price of $580,000, which was $160,000 more than the $420,000 purchase price provided in the May 1957 agreement.

In July 1958, Nolte filed suit against Archway, the Cusacks, and the Smiths ² for his engineering services rendered in connection with the subdivision. Nolte's action sought to establish an indebtedness from all defendants as a lien against the property. The Cusacks filed an answer and amended cross-complaints against Archway and the brokers in which the first cause of action sought declaratory relief under the agreement of May 27, 1957, alleging that the brokers were liable for Nolte's engineering services, and the second cause of action sought subrogation against the brokers in the event the Cusacks were required to pay Nolte. A third cause of action was directed against the brokers' partnership on the same grounds. The brokers answered, the matter was tried in January 1959, and the judgment entered in favor of Nolte against the Cusacks and Archway. The court found that the brokers were not individually liable to Nolte as his employment by Archway and the performance of his engineering services were with the knowledge of the Cusacks. This aspect of the judgment was not challenged by the Cusacks in their appeal of the Nolte action and the judgment was affirmed in 1961 by this court (Division One) on appeal on grounds not pertinent here (Nolte v. Smith, 189 Cal.App.2d 140, 11 Cal.Rptr. 261, 87 A.L.R.2d 996). ³

In April 1959, about two months after the entry of judgment in the Nolte action, the brokers filed the instant complaint against the Cusacks alleging two causes of action: the first, based on the written agreement of May 27, 1957, for $64,449 (representing $63,000 for their services and $1,449 for costs expended) pursuant to the contract; the second, on an implied contract for payment of the same services and costs expended in the identical amount. At the trial of this action in 1964, the brokers testified that they had performed services, the total value of $22,600, of which about half had been performed under the written agreement prior to December 31, 1957, and the remainder performed thereafter.

The court found that the pending highway condemnation made the development and sale of the property as originally contemplated virtually impossible; that circumstances beyond the control of the parties had delayed the subdivision of the property and the intended sale of the lots, and that as a result of the actual or threatened condemnation proceedings by the Foothill Junior College District, the completion of the May 27, 1957 agreement became impossible. The court further found that after it became apparent that Archway could not make the first payment by December 1957, the parties discussed revising the written agreement and the brokers continued their efforts toward completing the subdivision; and that in the Nolte action, the court did not decide any of the material issues raised in the instant case and that the brokers did not and were not required to file a cross-complaint or counterclaim against the Cusacks.

The court concluded that the brokers were not entitled to recover under the written agreement of May 27, 1957, as full performance of that agreement was impossible, and the agreement did not cover the circumstances that actually occurred; that the present action was not barred by the compulsory counterclaim statute (Code Civ.Proc. § 439); that the statute of frauds was not applicable to...