Ash v. N. Am. Title Co.

• Decision Date: 18 February 2014
• Docket Number: B237404
• Citation: 168 Cal.Rptr.3d 499,223 Cal.App.4th 1258
• Court: California Court of Appeals Court of Appeals
• Parties: David ASH, as Trustee, etc., Plaintiff and Appellant, v. NORTH AMERICAN TITLE COMPANY, Defendant and Appellant; Richard Lerner, as Trustee, etc., Defendant and Respondent.

223 Cal.App.4th 1258

168 Cal.Rptr.3d 499

David ASH, as Trustee, etc., Plaintiff and Appellant,

v. NORTH AMERICAN TITLE COMPANY, Defendant and Appellant;Richard Lerner, as Trustee, etc., Defendant and Respondent.

B237404

Court of Appeal, Second District, Division 5, California.

Filed February 18, 2014

Certified for Partial Publication.^*

See 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 869 et seq.

APPEAL from a judgment of the Superior Court of Los Angeles County, J. Stephen Czuleger and William G. Willett, Judges. Affirmed in part and reversed in part and remanded. (Super. Ct. No. YC059517).

Samuels, Green & Steel, Orlando F. Cabanday and Frederick H. Choi, Irvine, for Plaintiff and Appellant David Ash, as Trustee.

Richard D. Marks Professional Corporation, Richard D. Marks, Calabasas; Garrett & Tully, Ryan C. Squire, Pasadena, and Tammy Chow Weaver, Pasadena, for Defendant and Appellant North American Title Company.

Callahan, Thompson, Sherman & Caudill, Robert W. Thompson and George N. Koumbis, Irvine, for Defendant and Respondent Richard Lerner, as Trustee.

MOSK, Acting P.J.

INTRODUCTION

Defendant, a seller of real property, breached the real estate sales contract with plaintiff, the buyer, by causing the closing of the escrow to be delayed so that it did not close on the agreed-upon Friday set forth in the contract. The sale was part of an Internal Revenue Code (Title 26) section 1031 (section 1031) transaction to defer the buyer's capital gain tax on the buyer's sale of another property. The buyer had the money payable on his sale of the other property deposited in a segregated account with a section 1031 qualified exchange intermediary (section 1031 intermediary). ¹ On the Monday after the sale had been scheduled to close, the section 1031 intermediary closed and then filed for bankruptcy. The bankruptcy court did not release the buyer's money until after it was too late legally to qualify for deferral of taxes under section 1031.

A jury found the seller and the escrow company at fault for the escrow not closing on time—i.e., on Friday—and awarded the buyer damages against the seller for the delay, including the loss of the tax benefits. The jury also found the escrow company liable for breach of fiduciary duty and awarded the buyer damages against the escrow company for losses resulting from the delay in the closing of escrow.

We reverse in part because, as discussed in the published portion of the opinion, (a) there was insufficient evidence the contract damages assessed against the seller based on the bankruptcy were foreseeable and (b), as to the escrow company, the trial court failed to instruct the jury on an intervening and superseding cause—the bankruptcy.

FACTUAL BACKGROUND²

Plaintiff David Ash as trustee of the David Ash Trust (Ash), in connection with his sale of commercial real estate that realized a taxable gain, desired to defer the capital gain tax under section 1031³ by purchasing commercial property from defendant Lerner.⁴ On October 8, 2008, Ash and Lerner entered into an agreement by which Lerner agreed to sell to Ash commercial property. Defendant North American Title Company (NAT) was selected to be the escrow company for the purchase, for which escrow opened shortly thereafter, and was scheduled to close on November 21, 2008—the “expected closing date.”

Ash was in the real estate business, and, after talking to different brokers, selected LandAmerica Exchange Services (LandAmerica) to receive proceeds from the sale of his property in order to comply with section 1031.⁵ When he entered into the agreement with LandAmerica, he had no concerns about its “financial viability.” He chose LandAmerica based on “the opinion of the [p]eople [he] spoke to about it.” When asked if he was “scared to lose [his] money if he got into a 1031 exchange,” he responded “no.” Ash was told LandAmerica had various branches and was part of LandAmerica Commercial Services. Ash had used LandAmerica for another replacement property.

At some point during the escrow period after the purchase and escrow agreements were executed, Ash had concerns, “I was afraid of the whole industry everywhere ... the banking system was, like, collapsing at the time. So—I also needed income. So I wanted to do something as quick as possible to get my income and also to be protected.” He had nevertheless chosen to use LandAmerica, signing the papers on November 13, 2008, over a month after escrow opened, although the paperwork with LandAmerica was dated as of October 9, 2008. He later said that near the closing date he was worried about his money because he wanted the income: “I wanted to get it done.” Ash had told NAT that he needed the income from the property he purchased to have the escrow completed because he wanted to have his funds safely reinvested. Ash never said he was concerned at any time specifically about the financial condition of LandAmerica.

Under section 1031, in order to defer paying the capital gains tax on the sale of his other property, Ash was required to close his transaction with Lerner within 180 days of the sale of Ash's property.⁶ Ash had the proceeds from the sale of his property on which the escrow had closed deposited with LandAmerica, using an account at Citibank. This was a segregated account that paid a lower interest rate than an account that pooled money from other investors. Ash verified that the funds were in the Citibank account.

Neither Lerner nor NAT had any involvement with the selection of LandAmerica. As noted, the escrow was to close on Friday, November 21, 2008, but it was anticipated by both defendants that the escrow would take a few more days to close. When so informed, Ash responded, “no problem do I get a discount [smiley face] (jk) [just kidding]. Thank you!!” Ash's response expressed no concern about the status of LandAmerica. On Monday, November 24, 2008, LandAmerica froze all of its accounts, including segregated accounts, and then filed for bankruptcy.

Ash's real estate broker was aware of LandAmerica and the number of people who used it. He believed it was a “very substantial company” and a “very large company” and knew of its affiliated companies. He said he told Ash it was a reputable company. Ash's broker said he too was “shocked” and “everybody was shocked” when LandAmerica closed its doors. Ash had expressed no concerns to Lerner or to NAT about the financial solvency of LandAmerica. The escrow officer at NAT who had worked with LandAmerica had no concerns about the solvency of LandAmerica prior to the bankruptcy. She said she was “shocked” upon hearing LandAmerica had closed.

Ash's expert, who once worked for LandAmerica, said it was “unusual,” “alarming,” and “unique” that LandAmerica closed its doors. She added that escrow holders would not get information about rumors concerning a section 1031 qualified intermediary, and if they did, they would not necessarily inform the principals to escrow accounts of such rumors. She could not say that any such rumors about LandAmerica were generally known by people in the real estate industry in Southern California. There is no evidence that Ash, and more importantly defendants, were aware of any such rumors about LandAmerica. The real estate agents involved, in addition to the escrow officer for NAT, said they were “shocked” and surprised about LandAmerica's bankruptcy. A LandAmerica employee handling the matter said she had been involved in 5000 or more section 1031 exchanges and apparently had no warning of an impending LandAmerica bankruptcy. That LandAmerica employee said, “There was never any doubt until 9:00 a.m. on the morning of November 24 [the date the business closed] that the money would be available.” She added that the event was so traumatic that it was even worse than the death of her father—“worse than anything”; “absolutely beyond description.” She added, “everybody [at LandAmerica] was very angry and couldn't understand how it could happen.” Another LandAmerica employee said she had no awareness of any financial problems with LandAmerica. Ash's real estate agent, who had been in the industry for more than 35 years and involved with section 1031 exchanges, said this was the first one in which a qualified intermediary failed to fund the escrow.⁷ Despite Ash's hopes and the fact that the money was in a segregated account, the bankruptcy court refused to allow depositors, including Ash, to have access to their deposited monies.

Ash did not cancel the transaction because he was concerned he might lose his deposits and would be unable to complete the tax-deferred exchange. He continued to pay interest on the bank loan he had taken out to purchase the property without the income from the property to use for loan payments. The bank required Ash to repay the loan after five months because there was no deed of trust recorded to secure the loan. Without income from the property, he was required to borrow money from his mother. He also needed to hire an attorney to attempt to convince the bankruptcy court to release his money in order to complete the transaction.

The escrow did not close until March 2010, after the bankruptcy court finally released Ash's funds. The closing of escrow was too late for Ash to obtain the section 1031 tax deferral of his capital gain taxes.⁸

As a result of the delayed escrow and the delay in recovering his funds resulting from the bankruptcy, Ash sued Lerner and NAT for damages, including Ash's legal expenses of $140,000 incurred in the bankruptcy proceeding and tax liability of $465,000 due to the failure of the section 1031 exchange. Additionally, Ash claimed $166,000 in income from the property if the sale had been timely completed, payments to the lender of $42,000, $189,000 paid for a new loan above what he would have paid for the original loan that was terminated by the original lender, and $28,000 of interest on a loan to meet expenses. These direct damages...