Stone v. Farnell

• Decision Date: 23 January 1957
• Docket Number: No. 15024.,15024.
• Citation: 239 F.2d 750
• Parties: George Wesley STONE and Hildegarde Stone, Appellants, v. Jack W. S. FARNELL, and Elisabeth Patee Farnell, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

239 F.2d 750 (1956)

George Wesley STONE and Hildegarde Stone, Appellants, v. Jack W. S. FARNELL, and Elisabeth Patee Farnell, Appellees.

No. 15024.

United States Court of Appeals Ninth Circuit.

December 7, 1956.

Rehearing Denied January 23, 1957.

COPYRIGHT MATERIAL OMITTED

Leo Shapiro, Beverly Hills, Cal., for appellants.

Albert Lee Stephens, Jr., Los Angeles, Cal., for appellees.

Before BARNES and HAMLEY, Circuit Judges, and ROSS, District Judge.

BARNES, Circuit Judge.

This is an appeal from a judgment entered for plaintiffs in an action based on fraud in the sale of residential real property. The District Court, sitting without a jury, awarded plaintiffs $15,000 in damages, ordered the cancellation of a second deed of trust on the property, and denied the defendants recovery on their counterclaim for "foreclosure, as a mortgage, of said deed of trust." Jurisdiction is grounded on diversity of citizenship, 28 U.S.C.A. § 1332(a).

This litigation arose out of the sale by appellants, Mr. and Mrs. Stone (herein sometimes called vendors), to appellees, Mr. and Mrs. Farnell (herein sometimes called vendees), of improved real property located on Mulholland Drive in Beverly Hills, California, in December, 1953. The agreed consideration was $38,000, $6,500 of which was paid in cash, with the Farnells assigning a third party's note in the face amount of $5,250, and executing their own promissory notes in the sum of $15,083.64 and $11,166.36 (secured by first and second trust deeds, respectively), for the remainder. This property consisted of a main residence, guest house, carport, cesspool and septic tank, swimming pool, walks, driveway, landscaping and other appurtenances. About eight months after the purchase, following a survey, the Farnells learned that approximately one-third of the main residence, the carport, the guest house, the cesspool and septic tank, and portions of the walks, driveways and landscaping and other improvements were not on the property purchased from the Stones, but were situated on property owned by the City of Los Angeles, being a part of Mulholland Drive.

The District Court found that the vendors had represented that the improvements were located on the property sold to the vendees and that the total value of such property was $38,000; that such representations were false; that the vendees relied on them in buying the property, and would not have purchased it had they known the true facts; and that the damages incurred by the vendees were a direct and proximate result of the representations made by the appellants. From the foregoing facts, the court concluded that in making the sale of the property, the appellants had committed both actual and constructive fraud under California law. Cal.Civ.Code, §§ 1572, subd. 2, 1573, subd. 1.

Section 1572, subd. 2, defines actual fraud as including:

"The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true."

Section 1573, subd. 1, provides in substance that constructive fraud is committed by

"* * * any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault * * * by misleading another to his prejudice."

Appellants challenge the sufficiency of the findings and the evidence on both the issues of fraud and damages. They also assert that the denial of their counterclaim was error and that this Court should enter judgment for them thereon.

The Supreme Court of California has stated that to establish a cause of action for fraud or deceit the plaintiff must prove that a material misrepresentation was made; that it was false; that defendants knew it to be untrue or did not have sufficient knowledge to warrant a belief that it was true; that it was made with an intent to induce plaintiff to act in reliance thereon; that the plaintiff reasonably believed it to be true; that it was relied on by the plaintiff; and that the plaintiff suffered damage thereby. Hobart v. Hobart Estate Co., 1945, 26 Cal.2d 412, 159 P.2d 958; see also, Nathanson v. Murphy, 1955, 132 Cal. App.2d 363, 282 P.2d 174.

The alleged representations in the instant case concern the area and boundaries of the property conveyed. It is well settled in California that such representations are deemed material representations of fact. De Bairos v. Barlin, 1920, 46 Cal.App. 665, 190 P. 188; Nathanson v. Murphy, supra; Richard v. Baker, Cal.App., 1956, 297 P.2d 674. The only written representation, if any was made, was by means of a map, which we will later discuss. There is a conflict in the evidence as to what oral representations, if any, were made by the Stones. Viewing the testimony in the light most favorable to appellees, as we must, Worchester Felt Pad Corp. v. Tucson Airport Authority, 9 Cir., 233 F.2d 44, the evidence shows that Mrs. Stone, one of the vendors, made the specific statement to the Farnells that all the improvements were located on the property. She pointed out to them the purported location of the south boundary, stating erroneously, "it runs right along here, south of the guest house and south of the carport." Tr. p. 115 As Richard v. Baker, supra, indicates, a single material misrepresentation suffices to establish this element of the cause of action. However, the District judge also found that appellants had falsely represented the value of the property, an almost necessary concomitant of their expressions as to the boundaries, if such boundaries were substantially incorrect. The California courts have long wrestled with the troublesome question of whether a misrepresentation of value is actionable. A ruling on this point is not necessary to our decision, but it appears that the trend of the California law is toward liability, especially where the misstatement of value is accompanied by other misrepresentations. Yeoman v. Sherry, 1935, 10 Cal.App.2d 567, 52 P. 2d 555; Hobart v. Hobart Estate Co., supra.

In regard to the intent element, the California Supreme Court, in Gagne v. Bertran, 1954, 43 Cal.2d 481, 488, 275 P.2d 15, 20, stated that "* * * the intent required to prove a cause of action for deceit is an intent to induce action. An `intent to deceive' is not an essential element of the cause of action * * *." The intent to induce action here is not in dispute. The evidence clearly demonstrated that the representations were designed to persuade the Farnells to buy the property.

Thus, the two major elements of fraud in controversy relate to the appellants' knowledge, or lack thereof, of the falsity of the misrepresentations, and to the reasonableness of appellees' reliance thereon. As to the first element, appellants vigorously contend that despite the statutory language a finding of scienter is essential in this action, and that in the absence of such a finding by the trial judge, this Court is compelled to reverse the judgment. They place much reliance on Wishnick v. Frye, 1952, 111 Cal.App.2d 926, 245 P.2d 532, which involved an action for fraud and deceit. That decision supports appellants' position. However, the Wishnick decision is not the law of California. That case was decided by a division of the District Court of Appeal in 1952. As a direct consequence of Wishnick v. Frye, supra, and other like decisions which cast doubt on the literal construction of the statute, the Supreme Court, in 1954, in Gagne v. Bertran, supra, determined to resolve this uncertainty. Mr. Justice Traynor, writing for the Court, stated at page 20 of 275 P.2d (note 4),

"Since the Legislature in this section of the Civil Code has made the cause of action for negligent misrepresentation a form of deceit, statements in a number of cases, contrary to this section and the cases cited in the text, that scienter is an essential element of every cause of action for deceit are erroneous and are therefore disapproved."

Wishnick v. Frye, supra, was one of the cases cited in the text. Moreover, it appears probable that this has been the law in California, according to Supreme Court dicta, for a quarter of a century. Washington Lumber and Millwork Co. v. McGuire, 1931, 213 Cal. 13, 1 P.2d 437.¹

One problem remains. In the Gagne case, Mr. Justice Traynor referred only to California Civil Code, § 1710, defining deceit.² Subsequent decisions have cited it in relation to that section. Nathanson v. Murphy, supra; Richard v. Baker, supra. The question thus presented is whether the language in Gagne, supra, has equal applicability to sections 1572, subd. 2, and 1573, subd. 1, of the California Civil Code, defining fraud, in view of the similar wording of all three provisions. It appears that the California courts have not attempted to differentiate between fraud and deceit in this respect. In Walker v. Department of Public Works, 1930, 108 Cal. App. 508, 291 P. 907, wherein no fraud was found to exist, the court cited sections 1572, subd. 2, and 1710 together and made no endeavor to distinguish between the two. Hayter v. Fulmor, 1949, 92 Cal.App.2d 392, 206 P.2d 1101, 1105, states that constructive fraud under section 1573, subd. 1, can be grounded on negligent or careless misrepresentations. Wishnick v. Frye, supra, itself provides a vivid illustration of how the courts use the words fraud and deceit interchangeably, thereby strongly indicating that they have been equated. We therefore conclude that the language of the Gagne case, supra, applies with the same force and effect to California Civil Code Sections 1572, subd. 2, and 1573, subd. 1, as it does to § 1710. There being no necessity for a finding of scienter, the want of such finding is not error.

Altho scienter is not required, it is plain that a finding, and evidence, of negligence is essential. In Williams v. Spazier, 1933, 134 Cal.App. 340, 25 P.2d 851, the Supreme Court reversed a judgment because of the absence of a finding on the reasonableness of the defendant's belief. Rule 52 of...