Stout v. Turney

• Decision Date: 30 November 1978
• Citation: 150 Cal.Rptr. 637,586 P.2d 1228,22 Cal.3d 718
• Court: California Supreme Court
• Parties: , 586 P.2d 1228 Edward E. STOUT et al., Plaintiffs and Appellants, v. Thompson TURNEY, Defendant and Appellant. L.A. 30917.

Page 637

150 Cal.Rptr. 637

22 Cal.3d 718, 586 P.2d 1228

Edward E. STOUT et al., Plaintiffs and Appellants, v. Thompson TURNEY, Defendant and Appellant.

L.A. 30917.

Supreme Court of California, In Bank.

Nov. 30, 1978.

Luce, Forward, Hamilton & Scripps, C. Douglas Alford, Lee R. Rydalch and Louis E. Goebel, San Diego, for defendant and appellant.

Jenkins & Perry, James R. Sternberg and Daniel R. Salas, San Diego, for plaintiffs and appellants.

MANUEL, Justice.

Defendant Thompson Turney appeals from a judgment in the net amount of $62,200 plus costs entered following a jury verdict in an action for fraud in the sale of real property. Plaintiffs Edward E. and Claire T. Stout have filed a cross-appeal urging that they should have been awarded attorneys fees. For reasons to be stated below, we affirm the judgment in its entirety.

Plaintiffs brought this action against defendants Turney, William C. Bright, Eugene F. Norwood, Ronald H. Atteberry, and Rainbow Enterprises, a partnership of the four individual defendants. All individual defendants excepting Turney settled the claims against them and the matter proceeded to trial against defendant Turney individually. A jury verdict was entered against Turney in the amount of $92,200 compensatory and $50,000 punitive damages. The judgment entered on the verdict ordered that the amount assessed as compensatory damages be reduced by $30,000 to reflect the settlements of the other defendants. After a new trial was granted on the issue of punitive damages plaintiffs dismissed their claim therefor with prejudice. The appeal and cross-appeal herein are from the ensuing final judgment.

The instant controversy arises out of the purchase of a mobile home park by plaintiffs from defendant Turney and his associates. Although the testimony presented before the jury was in many respects conflicting, it suffices for present purposes to indicate that there was substantial evidence to the effect (1) that defendant prior to the purchase, had made certain representations to plaintiffs relative to the park's sprinkler-type sewage disposal system and its capacity to legally absorb additional effluent to be generated by eight additional mobile home spaces whose construction on the property was contemplated by plaintiffs; (2) that such representations were known by defendant to be untrue; and (3) that subsequent to sale plaintiffs were required to purchase additional acreage for sprinkling purposes in order to continue operation of the existing park in compliance with standards set by the California Regional Water Quality Control Board (WQCB) and moreover were precluded from developing additional mobile home spaces on the property until such time, estimated at five years, as a public sewer system should be extended to it.

Considerable evidence, much of it quite complex, was also presented by plaintiffs on the question of the losses sustained by them as a result of the foregoing. This evidence, the bulk of which was given through the testimony of Mr. Stout himself, fell into three general categories. The first was concerned with demonstrating the loss of income suffered by plaintiffs as a result of being unable to construct the eight additional mobile home spaces as contemplated at the time of purchase; this was shown in two alternative ways by a straight loss-of-income projection based upon the reasonable net income to be expected from the additional spaces over the term of five years, ¹ and by a capitalization of said net income. ² The second category of evidence was concerned with demonstrating the losses to be suffered as a result of having to buy and hold additional property for sprinkling purposes in order to operate the existing park in compliance with WQCB standards pending the installation of a public sewer system; this was also shown in two ways by a straight computation of out-of-pocket costs on this account, ³ and by a capitalization of such costs. ⁴ The third and final category of valuation evidence consisted of a detailed summary of operations and projections comparing the return on investment over a six-year period of a mobile home park with the park's actual sewage disposal capacity (12,000 gallons per day) versus one with the capacity represented by defendant at the time of purchase (20,000 gallons per day). ⁵ No direct evidence was given by either party, however, of the actual fair market value of the park as received at the time of purchase.

Defendant Turney's principal contention and the sole issue of consequence involved in this appeal ⁶ is whether the trial was tainted by prejudicial error as a result of an instruction given by the court on the matter of assessment of damages. The instruction in question provided as follows: "One defrauded in the purchase of property is entitled to recover any damage arising from the particular transaction measured as follows: (1) Amounts actually and reasonably expended in reliance upon the fraud, over and above the purchase price; (2) An amount which would compensate the defrauded party for loss of use of the property to the extent that any such loss was proximately caused by the fraud; (3) Where the defrauded party has been induced by reason of the fraud to purchase or otherwise acquire the property in question, an amount which will compensate him for any loss of profits or other gains which were reasonably anticipated and would have been earned by him from the use or sale of the property had it possessed the characteristics fraudulently attributed to it by the party committing the fraud, provided that lost profits from the use of the property shall be recoverable only if and only to the extent that all of the following apply: 1. The defrauded party acquired the property for the purpose of using or reselling it for a profit; 2. The defrauded party reasonably relied on the fraud in entering into the transaction and in anticipating profits from the subsequent use or sale of the property; 3. Any loss of profits for which damages are sought under this paragraph have been proximately caused by the fraud and the defrauded party's reliance on it."

The foregoing instruction was clearly an adaptation of the provisions of Civil Code section 3343, as amended in 1971 which provisions we set forth in full in the margin. ⁷ As will be seen from a comparison of the statutory language with that of the instruction, the latter significantly omits that portion of the first paragraph of the former which deals with so-called "out of pocket loss" and proceeds directly to the matter of consequential or "additional" damages. ⁸ In so doing, defendant Turney contends, the instruction effectively withdrew from the jury the fundamental consideration applicable under California law in the assessment of damages for fraud in the sale of property and erroneously substituted therefor what amounts to a "benefit of the bargain" standard. The error, he urges, was clearly prejudicial and requires reversal of the judgment in its entirety.

Before addressing ourselves directly to this contention we believe it appropriate to undertake a brief review of the recent history and evolution of California law in this area. For at least the past 43 years since the initial enactment of section 3343 in 1935 ⁹ the cornerstone of the Cali fornia standard for the assessment of damages for fraud in property transactions has been the so-called "out-of-pocket" rule. This rule, against which is traditionally contrasted the so-called "benefit-of-the-bargain" measure, is directed to restoring the plaintiff to the financial position enjoyed by him prior to the fraudulent transaction, and thus awards the difference in actual value at the time of the transaction between what the plaintiff gave and what he received. The "benefit-of-the-bargain" measure, on the other hand, is concerned with satisfying the expectancy interest of the defrauded plaintiff by putting him in the position he would have enjoyed if the false representation relied upon had been true; it awards the difference in value between what the plaintiff actually received and what he was fraudulently led to believe he would receive. Of the two measures the "out-of-pocket" rule has been termed more consistent with the logic and purpose of the tort form of action (i. e., compensation for loss sustained rather than satisfaction of contractual expectations) while the "benefit-of-the-bargain" rule has been observed to be a more effective deterrent (in that it contemplates an award even when the property received has a value equal to what was given for it.) (See e. g., Prosser, Torts (4th ed. 1971) § 110, pp. 733-734, and authorities there cited; Comment, Deceit Damages in California: Old Problem New Departure? (1974) 14 Santa Clara Law. 325, 328-338; Annot. (1967) 13 A.L.R.3d 875, 883-884.)

The Legislature's decision to adopt the "out-of-pocket" rather than the "benefit-of-the-bargain" rule as the foundation of its standard and thus to join what appears to be the minority position (see Prosser, Torts, Supra, § 110, pp. 733-734; see generally, Annot., Supra, 13 A.L.R.3d 875) has not prevented the courts from in many cases fashioning relief appropriate to particular circumstances in which a limitation to strict out-of-pocket recovery would lead to injustice. Thus, although this court early held that the rule of section 3343 set forth the Exclusive standard for damages in fraudulent property transactions (Bagdasarian v. Gragnon (1948) 31 Cal.2d 744, 762, 763, 192 P.2d 935), a clear exception has emerged in cases involving fraudulent Fiduciaries. (See Savage v. Mayer (1949) 33 Cal.2d 548, 551, 203 P.2d 9; Walsh v. Hooker & Fay (1963) 212 Cal.App.2d 450, 458-462, 28 Cal.Rptr. 16.) The courts also gave a liberal construction to the "additional damage" language of the 1935 statute (see fn. 9, Ante ), which was held to comprehend actual expenditures of time and money in reliance on a misrepresentation, including rental...