The case involved Buyers who lost at trial a lawsuit against their Sellers and Realtors@ alleging fraud and negligent misrepresentation.
In the first part of its opinion, the Court ruled that the Buyers failed to prove damages as a matter of law. In the second part of the opinion, the Court ruled that the Sellers and Realtors@ were the "prevailing parties" in the lawsuit and thus were authorized to claim and recover their attorneys fees against the Buyers.
The second part of the opinion was ordered published and can be cited as law. While the first part was ordered not published (and thus cannot be cited as law), it provides attorneys and their clients with clear insight into the views of the Sacramento area Court of Appeal regarding proving damages in real estate litigation.
In the Childers case, Buyers purchased a 1.3 acre parcel in Elverta, a semi-rural area in the northerly part of Sacramento County. Buyers claimed that the Sellers and Realtors@ misrepresented the flooding and drainage problems associated with the property. Their complaint alleged breach of contract, fraud, negligent misrepresentation, suppression of fact, and negligence, but the Buyers proceeded to trial only on their claims for fraud and negligent misrepresentation.
Part One: Damages. The "measure of damages" in an action for damages arising from fraud in a real estate transaction is found at Civil Code section 3343. Buyers defrauded in a purchase, sale or exchange of property are entitled to recover the difference between the actual value of that with which they parted (their purchase price) and the actual value of that which they received (the fair market value of the property). Buyers may also recover additional damages including amounts actually and reasonably expended in reliance on the fraud, loss of use and enjoyment caused by the fraud, and, if the property was acquired for use or resale, lost profits.
The first element of recoverable damages described above is referred to as the "fair market differential." In order to determine whether any recoverable damages exist, the Buyers must introduce evidence of the value of the property at the time of purchase and must establish that the value was significantly less than the purchase price. This requires expert opinion evidence of the true fair market value of defective property as of the date of close of escrow by a competent appraiser acting with knowledge of the nature and extent of the defects.
If the Buyers fail to establish any fair market differential damages, then they are not permitted to recover any such compensation.
The Buyers in the Childers case purchased their property for $179,000 in October 1991. The appraisal evidence in the case included testimony by two experienced appraisers. Archie Morse, one of the appraisers, testified he had appraised the subject property in connection with a Veteran's Administration loan the buyers had sought to purchase the property. Mr. Morse testified he was aware that the property was subject to flooding and had accounted for the property's flood and drainage aspects in making his appraisal, which valued the property at $180,000 in October 1991.
The second appraiser, William McKay, testified that he valued the property in October 1991 at $185,000 using a combined cost approach and comparable sales approach. He then employed the "cost-to-cure" approach by deducting $32,000 which an engineer had calculated would alleviate the flood and drainage problems. McKay also testified that the property was worth between $190,000 to $200,000 under the cost approach, depending on the depreciation factor used.
After the Buyers presented their case at trial, the defendants moved for judgment on the grounds that Buyers had failed to prove damages. The trial court found the defendants had misrepresented the flooding and drainage problems on the property, but determined that the Buyers had failed to prove they had been damaged and, therefore, granted the defendants' motion and entered judgment against the Buyers. The Court of Appeal affirmed, finding there was sufficient evidence to support the trial court's determination that the Buyers had not sustained damages as a matter of law.
Part Two: Attorney's Fees. After the trial court ruled against the Buyers, the Sellers and Realtors@ moved for an award of attorney's fees as prevailing parties under the real estate purchase contract. The attorney fee clause contained in the purchase contract was similar to the language contained in the CAR and SAR Real Estate Purchase Contract and Receipt for Deposit forms.
It is the general rule in this country that the prevailing party in an action brought to enforce the terms of a contract is entitled to recover his costs, which, when authorized by contract, include his attorney's fees. Recovery of fees in this situation is authorized in California by Civil Code section 1717.
On the other hand, it has been the rule in this state for many years that litigants in tort actions involving claims such as alleged fraud and misrepresentation are denied recovery of their attorney's fees.
However, since 1992, the Courts of Appeal in California have recognized a basis for recovery of attorney's fees in tort actions in cases specifically relating to defense by Realtorsx of claims for alleged professional negligence. Recovery is based on the language of California Code of Civil Procedure section 1021 which states that "except as attorney's fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties."
A line of appellate decisions beginning with Xuereb v. Marcus & Millichap has held that a claim for attorney's fees was authorized by Code of Civil Procedure section 1021 in fraud and negligent misrepresentation actions "arising out of" a contract containing the attorney's fees clause referred to above.
The trial court in Childers denied the defendants' motions for attorney's fees, finding that neither party prevailed at trial. The Court of Appeal reversed. Under the authority of Code of Civil Procedure section 1021 and the Xuereb v. Marcus & Millichap decision, the Court held that Sellers and Realtors@ were "prevailing parties," who were entitled to request awards of attorney's fees, and remanded the case to the trial court to determine the amount of reasonable fees.
Since the second part of the Childers decision was ordered published, the decision stands as authority permitting both Sellers and Realtors@ to recover their attorney's fees from Buyers who file suit but lose at trial on claims of fraud and negligent misrepresentation.
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