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Fragale v. Faulkner: California Court Expands Type of Damages Recoverable from Broker

A California court has considered the proper measurement of damages that a jury could award to a buyer.

Earlene Faulkner ("Seller") retained Vince Messing ("Broker") to sell her home ("Home"). During an open house conducted by the Broker, Tim and Dinora Fragale ("Buyers") expressed an interest in the Home. The Buyers also hired the Broker to serve as their representative in the transaction after he offered to share some of his commission with them, meaning the Broker was representing both parties to the transaction.

The Buyers received a property condition disclosure from the Seller which stated that the Seller was aware of defects in the interior walls, ceilings, floors, driveways, and sidewalks. The Seller also disclosed that she was aware that additions and other work were not in compliance with the applicable building codes, stating "[l]aundry room, bonus room, MBR closet, no permits." The Broker had discussions with the Buyers about the defects, allegedly referring to the disclosures as simply recognizing the fact that no one had bothered to obtain the proper permits for improvements made to the Home. The Buyers also hired an inspector, whose evaluation of the Home discovered no major defects.

The Buyers continued to express concerns about the Seller's disclosures and forwarded a list of additional questions to the Seller. The questions centered on the structure of the home, focusing on the laundry and bonus room addition ("Addition"), where the walls were covered with paneling. One of the Buyers testified that he specifically asked the Broker about the condition of the walls in the Addition, and the Broker allegedly stated that he had contacted the Seller and she had told him the walls were fine and that the paneling was merely cosmetic.

The transaction closed, and the Buyers took possession of the Home. After taking possession, the Buyers discovered numerous structural problems as well as other problems with the Addition that the paneling concealed. The Buyers filed a lawsuit against the Seller and the Broker, alleging intentional misrepresentations as well as negligent misrepresentations. The case went to trial, and a jury found that the Broker and the Seller were liable for intentional and negligent misrepresentations related to the property's condition. The trial court overruled a jury verdict in favor of the Buyers and entered judgment in favor of the Seller and Broker, due to the Buyers' failure to present expert testimony on the property's diminution in value due to the defects. The Buyers appealed.

The California Court of Appeal, Second Division, partially reversed the trial court. The issue before the court was whether the trial court had applied the proper standard in overruling the jury verdict. California has a statute which states that the only damages recoverable in cases making these types of allegations arising from a real estate transaction are the "out-of-pocket" damages, which is the difference between what the buyer paid for the property and what the buyer received. The trial court had ruled that since the Buyers had failed to establish this difference through expert testimony, the Buyers were not entitled to recovery in this case.

The Buyers argued that they could still recover "benefit-of-the-bargain" damages from the Broker, as the Broker was in an agency relationship with the Buyers and so was not affected by the California statute limiting the recovery in real estate transactions. Parties can only recover "benefit-of-the-bargain" damages for intentional misrepresentations, not negligent misrepresentations when there is not a special statute otherwise regulating the conduct. Thus, the Buyers could only recover from the Broker for intentional misrepresentations, not the Seller. The "benefit-of-the-bargain" standard seeks to put the defrauded individual in the position the individual would have been in if the false representations had been true, with the award being the difference between what was paid and what was actually received. There was expert testimony at trial on the cost of repairs to the property, and this testimony is what the jury apparently based its award on.

The court agreed with the Buyers and ruled that the Buyers could recover the benefit-of-the-bargain damages for the intentional misrepresentations that the jury had found the Broker had committed. Reviewing the relevant case law, the court determined that there was a split in authority over whether recovery was limited to out-of-pocket damages in fraud cases involving a real estate transaction. However, the court determined that since the Broker was in a fiduciary relationship with the Buyers, the court ruled that the Buyers were not limited in their recovery to out-of-pocket expenses. Thus, the court reversed the trial court's overruling of the jury verdict, finding the Broker liable for intentional misrepresentations. The court sent the case back to the trial court to reinstate the $19,000 in damages that the jury had awarded to the Buyers.

Fragale v. Faulkner, 1 Cal. Rptr. 3d 616 (Cal. Ct. App. 2003).