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A California court has considered the appropriate level of damages that a buyer could recover after he was misled by broker.
In July 2001, John Warren (“Buyer”) became interested in purchasing a property listed for sale by real estate broker Hildegard Merrill (“Broker”). However, the Buyer had a lot of personal problems at the time, such as the collapse of his business and neurological problems that impaired his cognitive abilities. In addition, no lender would extend him a loan because of an outstanding judgment against his company, even though his personal credit was in order.
In order to help him acquire the property, the Broker offered to have her daughter (“Daughter”) serve as co-borrower in order to help the Buyer a loan. In exchange for this service, the Buyer would pay the Daughter $10,000. As part of the arrangement, the Buyer would put down a portion of the downpayment, the Broker would defer her commission to cover the remainder of the downpayment, and the Daughter would transfer her interest in the property to the Buyer following the close of escrow.
The Broker served as the mortgage broker for the Daughter’s loan application. Even though her daughter lived in Colorado and worked as a waitress there, the Broker listed her as having an annual income of $90,000 and also as owning her own home in California. The Broker also listed on the application that her daughter planned on using the condominium as her primary residence, even though the daughter had no plans to leave Colorado. Based on the false information contained in the loan application, the Daughter was approved for the loan.
The Buyer claimed to have paid the downpayment through a series of payments to the Broker and her family, such as writing a check to the Broker’s boyfriend and paying off the Daughter’s credit card bills. While the Broker disagreed that the Buyer had made the downpayment through a series of payments, she had difficulty explaining why the Buyer would otherwise be making such payments.
Although originally the title for the property was going to list the Buyer and the Daughter as title holders, the Broker had the Buyer execute an amendment to the escrow agreement removing his name from the title, as the Broker knew the loan would not close with two names on the title. The sale closed in October 2001, and the Buyer moved onto the property and began making payments on the mortgage. However, shortly thereafter the Buyer checked into the Berry Ford Center for substance abuse problems and he did not make arrangements for anyone to take care of his finances while he was in rehab.
The Broker learned the Buyer was in rehab and also that he had stopped making mortgage payments as well as not paying monthly condo assessments. The Broker paid the past due assessments and started making the mortgage payments. She also filed a wrongful detainer action against the Buyer, seeking possession of the property. The Broker successfully obtained a judgment against the Buyer and removed his possessions from the property. She then began leasing the property.
In September 2002, the Buyer left rehab and discovered that he was locked out of the property. The Broker refused to return the condominium to the Buyer, and so the Buyer eventually filed a lawsuit against the Broker, seeking to obtain possession of the property and also seeking other damages from the Broker. The trial court found that the Broker had acted “recklessly” in committing fraud against the Buyer, and so awarded the Buyer the title to the property as well as punitive damages. The Broker appealed.
The California Court of Appeal, Second District, affirmed the trial court’s rulings. On appeal, the Broker raised a number of challenges to the lower court’s rulings. First, the Broker challenged the evidence underlying the lower court’s finding that she breached her fiduciary duty to the Buyer. Constructive fraud can concur when someone in a fiduciary relationship misleads another to act in a way which is to his/her detriment. Actual fraud occurs when another party makes a false representation of material fact with knowledge of the statement's falsity or reckless disregard for the truth, with the purpose of inducing the other to act in reliance on the statement, and where the other justifiably relies upon the misrepresentation and acts upon it, thereby suffering damage.
In this case, the court found evidence of both actual and constructive fraud. The Broker mislead the Buyer into believing that he would eventually hold title to the property, but the court stated that it appeared her real plan was to retain the Buyer’s downpayment while holding title to the property. The court cataloged the various deceitful actions taken by the Broker in this case, and it found her argument that her fiduciary duty to the Buyer ended when he “withdrew” from the escrow as “preposterous”. The court affirmed the trial court’s determination that the evidence supported a finding of an “egregious” breach of fiduciary duty by the Broker.
Next, the court considered whether imposing a constructive trust on the property was the proper remedy. The Broker raised a number of arguments on why the Buyer could not hold title in the property. The court acknowledged that many of the Broker’s arguments would be correct if this was an action to quiet title in a straightforward real estate transaction. But those arguments were inapplicable to this case, as this was an action to compensate the Buyer for the Broker’s fraudulent actions. Courts have a wide array of remedies available to them to remedy such fraud, including the ability to impose a constructive trust on real property for the benefit of the individual harmed by the fraud. Thus, the court affirmed the trial court’s imposition of a constructive trust.
The Broker also argued that the doctrine of unclean hands barred the Buyer from receiving equitable relief. Under this doctrine, if a party is also guilty of engaging in the wrongful act, then the party is not entitled to equitable relief. The court rejected this argument because here the fault of the parties was not at all equal. While it is true that the Buyer participated in the Broker’s scheme to acquire a mortgage under false pretenses, his level of culpability was much lower and the whole fraud scheme was created by the Broker. The doctrine of unclean hand does not bar the award of equitable relief in such a situation, and so the court dismissed this argument.
Finally, the court considered whether the award of punitive damages was appropriate in this case. Punitive damages are only recoverable where there is evidence of fraud or malice, and they also must be accompanied by actual damages. The court found there was ample evidence of the Broker’s fraud to support the award of punitive damages and that the Buyer had suffered actual damages, since the Broker had tried to misappropriate the downpayment funds. Therefore, the court affirmed the trial court’s rulings in favor of the Buyer.
Warren v. Merrill, 49 Cal. Rptr. 3d 122 (Cal. Ct. App. 2006).