Ford v. Cournale

• Citation: 111 Cal.Rptr. 334,36 Cal.App.3d 172
• Court: California Court of Appeals
• Decision Date: 14 December 1973
• Parties: , 81 A.L.R.3d 704 Lewis A. FORD, as Executor of the Estate of Clara Ford, Deceased, Plaintiff and Appellant, v. Clyde COURNALE and Michael R. Webb, Defendants and Respondents. Civ. 30773.

Page 334

111 Cal.Rptr. 334

36 Cal.App.3d 172, 81 A.L.R.3d 704

Lewis A. FORD, as Executor of the Estate of Clara Ford, Deceased, Plaintiff and Appellant, v. Clyde COURNALE and Michael R. Webb, Defendants and Respondents.

Civ. 30773.

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

Dec. 14, 1973.

Hearing Denied Feb. 7, 1974.

John F. Harper, San Francisco, for plaintiff and appellant.

Clifford J. Krueger, San Francisco, for defendants and respondents.

TAYLOR, Presiding Justice.

This is an appeal by the executor of the estate of Clara Ford ¹ from an adverse judgment entered on a jury verdict ² in her action for fraud and misrepresentation against defendants, Clyde Cournale, a real estate broker, and his salesman, Michael R. Webb. We have concluded that the judgment must be reversed as the trial court erred in failing to properly instruct the jury on the fiduciary duties of a real estate broker, the elements of negligent misrepresentation, the applicable measure of damages, and in excluding certain evidence.

Viewing the record most strongly in favor of the judgment, the following chronology of pertinent facts appears: Mrs. Ford, a widow in her 70's, first met defendants in 1963 when they negotiated for her the sale of her former home in San Francisco. At all times here pertinent, defendant Webb was a licensed real estate salesman employed and supervised by defendant Cournale. As Mrs. Ford then lived in Marin County and the home sold by defendants was in San Francisco, most of the preliminary discussions and signing of papers was conducted by her adult son Lewis. Lewis and his wife lived with Mrs. Ford in a home in Larkspur that the three had purchased together.

As a result of the first transaction, defendants knew that Mrs. Ford had previously owned a small apartment house in San Francisco and also owned a service station in Novato, and that she was interested in acquiring other income property. Defendants submitted a variety of proposed properties to her, including a lease property in Redwood City. After making an independent personal investigation, Lewis believed that the Rodwood City property would be a good investment. Lewis also executed a personal financial statement to aid his mother in the transaction. Subsequently, defendants strongly advised against it and asked Mrs. Ford and Lewis to sign a hold harmless agreement if they went through with the Redwood City transaction. Finally, Mrs. Ford decided against the Redwood City transaction.

Defendants, however, continued to look for additional income property for Mrs. Ford. They knew that she had acquired the gas station in Novato in 1958 for $62,500 and that it brought a net monthly income of $400. The lease, however, was subject to a renewal option at the discretion of the owner, Mobil Oil Company. Mrs. Ford was unable to ascertain whether Mobil was going to renew the option on the forthcoming renewal date. She asked defendants to obtain information about the renewal from Mobil but Webb could not obtain any more definite information as to Mobil's intent to renew than Mrs. Ford.

Over a six-month period in 1964, defendants submitted between 20 and 30 broker's statements of assorted income properties to Mrs. Ford. Finally after they had submitted the broker's statement on Harbor Towers in San Rafael in December 1964, Lewis indicated that his mother might be interested in acquiring the property. The one-page broker's statement described Harbor Towers as a 42-unit apartment house with a swimming pool and laundry facilities. The broker's statement indicated that: 1) the sale price of the property was $550,000; 2) the property was encumbered by a first and second mortgage, totaling $475,156, with respective monthly payments of $1,980 and $1,100, totaling $3,080; and 3) the gross monthly rental income was about $5,366.50 (amounting to a gross annual of $64,398, less $14,410 of maintenance and management expenses) amounting to an annual income of $49,928; subtracting the $36,960 annual mortgage payments would leave a net of $12,968.

Shortly after indicating his mother's interest in the property, Lewis, along with Webb, went to inspect the Harbor Towers that was located about 5 miles (or a 10-minute drive) from the family home in Larkspur. Lewis and Webb spent about 45 minutes to an hour at the property and saw 10 of the apartments. At this time, Webb told Lewis that there were 3 or 4 vacancies but that the building should easily run at 100 percent occupancy as it was the only one in the area that took both children and pets. Subsequently, on December 15, 1964, Webb, Lewis, Mrs. Ford and an unidentified person who worked for the previous owners (a partnership of real estate brokers Mapes, et al.) spent about one-half hour at the Harbor Towers. They visited the 3 or 4 empty units and had some discussion of maintenance expenses but did not speak to the resident manager at the request of the owners. Immediately after this visit to Harbor Towers, Webb proceeded to Mrs. Ford's home to write up an offer to exchange the Novato service station, with its mortgage of $4,250, for Harbor Towers.

The exchange agreement indicated that it was subject to confirmation of rent schedules and rent deposits, and that defendants were to receive a commission of $4,250. The exchange was accepted on December 16, 1964, with a supplementary agreement indicating that the monthly payment on the first mortgage was $2,804 (instead of $1,980, because of a trust fund for taxes), and on the second, $1,240, or a monthly total of $4,044 (an annual total of $48,528).

Both Webb and Cournale knew that Mrs. Ford was concerned that the Mobil Company would not renew her lease on the service station and was interested in additional income and growth. Her net income from the service station was $400 per month. Webb assured her that her net income from Harbor Towers would be between $700 and $900 a month. He also told her that the Harbor Towers building had been excellently maintained and that if the property did not suit her, it could easily be resold.

At the time Webb made these statements to Mrs. Ford, he had not made any check of maintenance or other expense and income records of Harbor Towers. Cournale was aware of the representations made by Webb to Mrs. Ford concerning the income and condition of the property. He did not feel, however, that it was necessary to make any further investigation of the books and records of the owners as they were dealing directly with the owners and could, therefore, rely on the monthly income in excess of $5,000, as stated. Cournale admitted, however, that the broker's statement was based on 100 percent occupancy and he knew the vacancy figures were not and could not be totally accurate.

After Mrs. Ford indicated that she was interested in a rental history and some vacancy figures on the property, Webb promised to obtain these for her. He, however, did not expect her to conduct any independent investigations or seek any other information, as he was aware that she was depending on him. Mrs. Ford, who was in good health and capable of making up her own mind, relied only on the advice of Webb and Cournale.

Mrs. Ford received from Webb a letter dated December 29, signed by one of the owners indicating vacancies, as set forth below, ³ and further stating that the figures were 'an average--at times we run 100%--but these figures are average or as close as I can figure.' Webb computed for her that the $700--$900 monthly income figure was based on no vacancies and that taking into account the average rental loss for the last 6 months, she could expect a monthly net income of $600. Thereafter, the escrow instructions were prepared. Cournale made his first inspection of the property after the escrow instructions had been prepared and spent 45 minutes at Harbor Towers and saw the 3 or 4 vacant apartments. On December 29, both Webb and Cournale again met with Mrs. Ford for a signing of the final papers. Cournale explained the terms and the purpose of the trust fund. Webb and Cournale reiterated the former representations that the property would provide a net income of $700 to $900 a month and that it was well worth the $550,000 price. They also indicated to her that the $75,000 allowed for the service station was a very good figure. She believed this as she had previously listed the station at this price with other brokers and had received no offers. As experienced brokers, Webb and Cournale knew that the facts set forth in a broker's statement had to be adjusted and interpreted to laymen; vacancy factors were not customarily listed in broker's statements as the vacancy rate depended on management of the property.

At this time, Mrs. Ford went over the expenses as shown on the broker's statement and they seemed normal to her on the basis of her prior experience as an apartment owner. However, previously she had owned only a few units and no other areas requiring maintenance, like a pool. She also had no prior experience with a trust fund for taxes and insurance.

Although Lewis lived at the same home with his mother, there was no extensive discussion of the entire Harbor Towers transaction with him or his wife. After relating his impression after his initial visit with Webb, Lewis was not directly involved in the transaction. ⁴

Escrow closed on January 6, 1965, and Mrs. Ford took possession of Harbor Towers. Then, for the first time, she talked to the resident manager and saw a number of apartments. Mrs. Ford discovered that a large number of apartments were leaking, that there were maintenance problems with the drapes and carpets and difficulties with some of the tenants who had not yet been evicted for nonpayment of rent. Although at the time of her first visit to the property in the middle of December 1964 there were only three vacancies, by the time she took possession a few weeks later in January 1965, there were eight vacancies. In addition,...