Sharabianlou v. Karp

• Decision Date: 05 February 2010
• Docket Number: No. A122548.,No. A122167.,No. A120940.,A120940.,A122167.,A122548.
• Citation: 181 Cal.App.4th 1133
• Court: California Court of Appeals Court of Appeals
• Parties: SCHEHEREZADE SHARABIANLOU et al., Plaintiffs and Appellants, v. RONALD M. KARP et al., Defendants and Respondents.

181 Cal.App.4th 1133

SCHEHEREZADE SHARABIANLOU et al., Plaintiffs and Appellants, v. RONALD M. KARP et al., Defendants and Respondents.

No. A120940.

No. A122167.

No. A122548.

Court of Appeals of California, First District, Division Five.

February 5, 2010.

CERTIFIED FOR PARTIAL PUBLICATION^*

Law Offices Mallette & Libonati, Linda L. Mallette; Berliner Cohen, Thomas P. Murphy and Heather H. Munoz for Plaintiffs and Appellants.

Peterson Martin & Reynolds, P. Kurt Peterson, Ryan L. Werner; Law Offices of Bernard N. Wolf, Bernard N. Wolf and Brian W. Newcomb, for Defendants and Respondents.

OPINION

NEEDHAM, J.

These appeals have their origin in a failed real estate transaction. Appellants Farrokh and Scheherezade Sharabianlou offered to purchase a commercial building owned by respondent Berenstein Associates.¹ The Sharabianlous engaged real estate agent Ronald Karp and his company California Realty Investment Company (hereafter the Karps) to represent them in the transaction. Soon after the offer was made, however, the parties learned of environmental contamination on the property. Faced with uncertainty about the scope of the contamination and the cost of its cleanup, and unable to agree on who should pay for the remediation, the parties failed to close escrow on the agreed-upon date.

After further efforts to resuscitate the transaction were unsuccessful, the Sharabianlous sued the Berensteins and the Karps, seeking, among other remedies, rescission of their agreement with the former and tort damages from the latter. The trial court ordered the contract rescinded on equitable grounds and, citing its statutory authority to adjust the equities under Civil Code section 1692, awarded substantial damages to the Berensteins. It later awarded attorney fees to the Berensteins as prevailing parties. It rejected the Sharabianlous claims against the Karps in their entirety.

The Sharabianlous now challenge the resulting judgment. They first claim it is void because of the trial judge's bias. They also argue that the damages awarded to the Berensteins exceed those legally available in an action seeking relief based upon rescission, and they raise a number of other claims of error concerning the damage award. As to the Karps, the Sharabianlous contend the trial court erred in rejecting their breach of fiduciary duty and professional negligence claims. In the unpublished portions of our opinion we reject the claim of bias and affirm the judgment in favor of the Karps. In the published portion of our opinion, we address the damage award to the Berensteins and conclude it must be reversed.

FACTUAL AND PROCEDURAL BACKGROUND

In the summer of 2002, the Sharabianlous were looking for a new location for their printing business, and they asked Ronald Karp to assist them in finding a suitable building to purchase. In October 2002, they signed a purchase agreement (the Agreement) to buy a building the Berensteins owned on Howard Avenue in Burlingame.² The purchase price was $2 million, and upon signing the Agreement, the Sharabianlous deposited $65,000 into escrow at Old Republic Title Company (Old Republic). They later deposited an additional $50,000 into escrow, bringing the total deposit to $115,000.

Initially, the Agreement provided that close of escrow was to occur on February 6, 2003. Over the course of the following months, however, the parties executed a number of addenda extending the date on which escrow was to close. The final addendum set a closing date of June 4, 2003.

The Agreement also contained both environmental and financing contingencies and set deadlines by which these contingencies were to be removed. To finance the transaction, the Sharabianlous applied for a $1.7 million loan through US Bank, and on December 9, 2002, the bank conditionally approved their application subject to certain conditions, one of which was the submission of an acceptable phase I environmental report. On US Bank's recommendation, the Sharabianlous retained Piers Environmental Services (Piers) to conduct a phase I site assessment to determine the possible presence of environmental contamination at the Howard Avenue property. In its October 2002 phase I report, Piers recommended that a phase II investigation be performed, because research revealed that an underground storage tank had been installed on the property in 1946, and the ground floor of the building had been occupied by a dry cleaning business for several decades.

The Sharabianlous and the Berensteins then agreed to extend the deadline for the Sharabianlous' approval of the environmental inspection to December 13, 2002. On December 17, 2002, the parties executed addendum 3 to the Agreement,³ extending the deadline for removal of the financing contingency to January 10, 2003. This addendum also addressed the removal of the environmental contingency, stating: "Environmental Contingency shall be removed by the [earlier] of the following events: [¶] i) Seller providing to Purchaser a Notice of Clearance from the San Mateo County Environmental Services, or ii) Seller to deposit in escrow, One Hundred and Fifty Percent (150%) of the remedial costs provided in the summary to be prepared by Piers Environmental Services. [¶] Funds deposited in escrow shall be held until Seller provides a notice of clearance from the San Mateo County Environmental Services Department, at which time escrow holder shall release the remaining funds to Seller without further instructions from the Buyer. At Seller's option, the funds held in escrow may be used to pay the approved invoices of Piers Environmental Services, and the balance of the funds shall be released to Seller when Seller provides notice of clearance from the San Mateo County Environmental Services Department without further instructions from the Buyer."⁴

In late December 2002, Piers issued its phase II report, which noted the presence of tetrachloroethene (a dry cleaning solvent), trichloroethene, and other compounds in the subsurface soil at the Howard Avenue property. The report concluded that the subsurface soil had been affected by the property's previous use as a dry cleaning facility, and it recommended further investigation to determine the extent of the contamination.

On January 13, 2003, the parties to the Agreement executed addendum 4, which released the Sharabianlous' financing contingency but gave them the right to cancel the Agreement if the Howard Avenue property appraised for less than $1.7 million. US Bank retained an appraiser, who inspected the property on January 15, 2003. Ronald Karp accompanied the appraiser to the property and provided information on the value of comparable properties. Karp did not tell the appraiser that environmental reports had been prepared for the property, and the two had no discussion of contamination issues. The appraiser valued the property at $2.05 million. The appraisal report noted, however, that "in light of the [property's] previous use as a cleaners, we make no warranties regarding the presence or absence of toxic substances. If a formal certification of these matters is required, we recommend that a properly licensed professional engineer, familiar with the detailed investigative and reporting requirements of Phase I toxic certifications, be consulted." At trial, the appraiser testified that if he had been provided with copies of the environmental reports, he would not have prepared the appraisal until he had received clarification and estimates for the cost of cleanup. Although he stated that contamination would have affected the appraised value, he offered no opinion on the value of the property in light of the contamination.

On January 31, 2003, the Sharabianlous removed their financing contingencies and signed an addendum to the agreement stating: "There are no remaining contingencies, the ... Agreement ... is contingent free."

In March 2003, Piers sent Ronald Karp a cost estimate for the required remediation work. On May 2, 2003, the San Mateo County Health Services Agency approved the scope of work presented in the Piers plan. On May 27, Piers sent Karp a proposal for monitoring and remediating the contamination at the Howard Avenue property at an estimated cost of $187,180.

Meanwhile, in late April 2003, the parties executed the final addendum to the Agreement, extending close of escrow until June 4, 2003. On that date, the Sharabianlous advised Ronald Karp that the matters discovered in the second phase of the environmental investigation were material, but they indicated they were still negotiating to purchase the building. The Sharabianlous informed Karp that their lender would not fund the loan unless it received an indemnity agreement from the sellers and "approval from the geologist."

Escrow did not close on June 4, and on June 10, Karp advised the Sharabianlous that the Berensteins considered them in default of their obligations under the Agreement. On July 11, 2003, US Bank notified the Sharabianlous that it would not approve their request for financing because of the environmental contamination at the property. Nevertheless, the parties conducted further negotiations, and the Berensteins offered to extend seller financing. Because of the Sharabianlous continued concern about the contamination, the negotiations were unsuccessful.

In August 2003, the Berensteins reached an agreement to sell the Howard Avenue property for $1,550,000 to a corporation owned by Stanley Lo. That sale closed on March 8, 2004. The Berensteins had planned to use the Howard Avenue property as part of a like-kind exchange under Internal Revenue Code section 1031 (section 1031).⁵ They had contracted to purchase a building in Yuba City, California, as a replacement property, but lost the opportunity to buy it because of the failed sale to the Sharabianlous. Instead, the Berensteins bought a building in McKinney, Texas, which generated less rental income than they would have earned from...