Green v. Johnson
Filed 4/25/13 Green v. Johnson CA2/6
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF
APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE
DISTRICT
DIVISION SIX
KEVIN GREEN et al.,
Plaintiffs and
Respondents,
v.
PAUL D. JOHNSON,
Defendant and
Appellant.
2d Civil No.
B239546
(Super. Ct. No.
56-2008-
00330015-CU-BT-SIM)
(Ventura
County)
Investors in trust deeds
sued the broker who arranged the loans when the loans went into default. The trial court found the broker liable for
fiduciary duty, and awarded damages measured by the benefit of the
bargain. The trial court also found the
broker violated numerous provisions of the Business and Professions Code, and
awarded restitution of commissions and fees.
On appeal, the broker
contends the judgment for negligent misrepresentation and breach of fiduciary
duty is not supported by substantial evidence.
The investors have declined to submit a respondents' brief. We remand for a redetermination of
In all other respects we affirm.
FACTS
Paul D. Johnson is a
licensed real estate broker. He is
married to Sheila Newman, an attorney.
Johnson's business
included selling fractionalized interests in notes and deeds of trust. The loans were for the construction and
rehabilitation of single family residences.
Kevin and Susan Green
met Johnson in 2002. They were referred
to Johnson by Kevin's father. Kevin's
father had invested with Johnson and had been satisfied with the investments. Although susan Green was a licensed real
estate agent, she had limited experience. Neither of the Greens had any experience with
fractionalized interests in trust deeds.
The Greens invested in a
number of loans brokered by Johnson.
Three of the loans developed problems.
Sand
Quill Loan
Johnson arranged for a
construction loan for a project on San Quill Street
in Salton City, California. Johnson invited the Greens to participate in
funding the loan. The Greens agreed to
fund $50,000 of the $140,000 loan. The
loan was to bear interest at a rate of 14 percent and be due within a year. They deposited $47,666.67 into escrow. The difference was prepaid interest.
Johnson prepared a
disclosure statement on his own form.
The form was not prepared or approved by the California Department
of Real Estate. According to the
disclosure statement, the lenders included the Greens and Johnson's wife,
Newman. Johnson estimated the value of
the property upon completion would be $200,000.
Johnson did not provide an independent appraisal.
Johnson received a
commission of four percent plus $1,200 in fees.
Part of the fees was for Johnson to monitor construction and authorize
distributions to the borrower. Johnson
was not qualified to authorize the distribution of funds. (Bus. & Prof. Code, § 10238, subd.
(h)(4)(D).)
Johnson recorded the
Newman's portion of the loan. Recording
the trust deed without the loan being fully funded violated Business and
Professions Code section 10238, subdivision (h)(4)(B).
Johnson distributed the
funds from escrow, but the project was never completed. The manufactured home placed on the property
was heavily vandalized. The property was
worth less than $50,000.
Hopland
Loan
Johnson arranged for a
construction loan for a single family residence on Hopland
Street in Victorville. Johnson wanted the Greens to invest in the
loan. The disclosure statement showed
that Johnson and his wife would participate in funding the $285,000 loan. The term of the loan was one year and bore
interest at four percent. Johnson
recorded the trust deed, but neither he nor his wife funded their portion of
the loan.
After the trust deed was
recorded, the Greens paid $85,000 for a 29 percent interest in the loan. The Greens received their interest by an
assignment of a part of the Johnsons' interest in the loan. The Johnsons assigned the balance of their
interest in the loan to a third party.
Johnson paid out almost
all of the loan proceeds to the developer in progress payments, including a
draw for cabinets. In fact, the only
construction that took place on the premises were wooden frames for concrete
foundation footings. The developer never
even obtained a building permit. Only $4,250
remained in the escrow account. Johnson
took that money for himself without the consent of the Greens or other lenders.
Johnson arranged a
construction loan for a single family residence on Grove
Avenue in California
city. The loan was for $185,000. It accrued interest at 14 percent and had a
term of one year.
The disclosure statement
identified the Johnsons as among the lenders.
When Johnson recorded the trust deed, the Johnsons' portion of the loan
was not funded. Thereafter, Johnson
assigned a portion of their interest to the Greens for $63,000. Johnson assigned another portion of their
interest to a third party. Newman
invested $12,000.
Johnson distributed the
funds to the developer, but the project was only 85 percent complete when the
work stopped. The current value of the
property in its uncompleted condition is $50,000.
Susan Green testified
that she managed all the investments with Johnson on behalf of herself and her
husband. She said when she saw Johnson's
or Newman's name on the disclosure statements it made her "feel comfortable"
about investing. It indicated that
Johnson "thought it was a good project and that he was going to be
involved with it." Johnson did not
explain to her that "he took an unfunded position in any of these
loans."
The trial court
found: "The evidence establishes
that, after assuring Ms. Green that he 'tries to invest' in the loan packages
he brokers, Johnson negotiated, executed and delivered to the Greens
assignments of deeds of trust which implied that Johnson and/or Newman had
invested $85,000 of their own money in Hopland . . ., and $105,000 of their own
money in Grove . . . . In addition, the
lender disclosure statements prepared by Johnson for each of the three loans
reflected some level of investment by Johnson and/or Newman. This created the appearance that Johnson,
with his superior knowledge and experience in these investments, found these
loans to be attractive investments. The
Greens trusted in and relied upon Johnson's guidance. The true facts were that neither Johnson nor
Newman had any money invested in San Quill or Hopland and never had more that [
of security it created, entered into these three transactions."
The trial court also
found, however, that Johnson's misrepresentations were negligent and not
intentional. The trial court based its
judgment on negligent misrepresentation and constructive fraud arising from
The court determined
that the measure of damages for breach of fiduciary duty is benefit of the
bargain. The trial court calculated
damages as the Greens' principal investment totaling $198,000; plus 14 percent
interest for a period of a year totaling $27,720, for a sum of $225,720. From that sum, the court deducted $1,166.66
for interest payments received from the Sand Quill developer, and $17,025
representing the Greens' portion of the residual value of the Grove property,
for a total judgment of $207,528.34, plus prejudgment interest on the amounts
invested from the dates of the investments.
The court also found
that Johnson committed numerous violations of the Business and Professions
Code. The court ordered restitution of
commissions and fees paid in the amount of $10,262.31.
DISCUSSION
I.
Johnson contends there
is no substantial evidence to support the trial court's finding that the Greens
formed the mistaken belief that the Johnsons funded a substantial portion of
the Grove and Hopland loans.
In viewing the evidence,
we look only to the evidence supporting the prevailing party. (GHK
Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 872.) We discard evidence unfavorable to the
prevailing party as not having sufficient verity to be accepted by the trier of
fact. (Ibid.) Where the trial court
has drawn reasonable inferences from the evidence, we have no power to draw
different inferences, even though different inferences may also be
reasonable. (9 Witkin, Cal. Procedure
(5th ed. 2008) Appeal, § 376, p. 434.)
Cal.App.3d 1012, 1028.)
Here Johnson assured
Susan Green that he "tries to invest" in the loans he brokers. Disclosure statements for the loans list the
Johnsons as among the lenders. Susan
Green testified that Johnson did not explain to her that he took an unfunded
position in any of the loans. That is
more than sufficient evidence to support the trial court's conclusion that the
Greens were misled into believing that the Johnsons funded a substantial
portion of the loans.
Johnson points to his
testimony that he informed "all of his lenders" that the loan was
"phase funded" and explained the mechanism for phase funding. But we presume the trial court did not find Johnson's
testimony credible. (
informed him, does not mean Susan Green was informed, or that the court must
find the testimony credible.
Johnson argues the trial
court found he did not intentionally misled the Greens. But the argument misses the point. The trial court found that the Greens were in
fact misled.
Johnson points out that
the Greens received a disclosure statement for the Grove loan prior to making
an investment. The disclosure statement
points out that at that point in time it had a funded six percent ($12,000)
position in the Grove loan. But the
trial court found that the Johnsons did not place the $12,000 or any money into
escrow until after the Greens invested.
In any event, Johnson points to nothing in the disclosure statement that
would have informed the Greens the Johnsons' position would not be fully funded
by the time the trust deed was recorded.
II.
Johnson contends there
is no substantial evidence that he is liable based on negligent
misrepresentation, professional negligence or breach of fiduciary duty.
Johnson relies on
(1993) 15 Cal.App.4th 298. There, buyers
of a home sued seller's real estate broker for failing to disclose that the
home had foundation problems. The court
upheld a nonsuit on the buyers' cause of action for negligent
misrepresentation. The court stated that
negligent representation requires a "'positive assertion'" or
"'assertion' of fact." (
representation is not enough. (
Johnson points out the trial court found that he never expressly
represented to the Greens his positions in the trust deeds were fully funded.
But in
at all about the foundation. Here
Johnson provided the Greens with disclosure statements naming specific persons,
including Johnson and his wife, who would be lenders on the loans. That qualifies as a positive assertion that
the loans would be fully funded and the Johnsons would participate. It is the only reasonable conclusion that the
Greens could deduce from the disclosure statements.
Negligent
misrepresentation also requires that the defendant intend the plaintiff rely on
the representation. (5 Witkin, Summary
of Cal. Law (10th ed. 2005) Torts, § 818, p. 1181.) Here, the trial court found that Johnson did
not intend for the Greens to infer the positions stated in the documents were
funded.
It may well be that
Johnson did not subjectively intend the Greens to rely on his
representations. But Johnson provided
the Greens with disclosure statements that would lead any reasonable person to
believe the loans would be fully funded.
Johnson will not be heard to say he did not intend the Greens to rely on
the disclosure statements.
In any event, the trial
court did not base its judgment on negligent misrepresentation alone. It also based its judgment on
"constructive fraud" arising from a breach of fiduciary duty.
"'[A]s a general
principle constructive fraud
comprises any act, omission or concealment involving a breach of legal or
equitable duty, trust or confidence which results in damage to another even
though the conduct is not otherwise fraudulent. Most acts by an agent in breach of his
fiduciary duties constitute constructive fraud.
The failure of the fiduciary to disclose a material fact to his
principal which might affect the fiduciary's motives or the principal's
decision, which is known (or should be known) to the fiduciary, may constitute
constructive fraud. Also, a careless
misstatement may constitute constructive fraud even though there is no
fraudulent intent.'" (Salahutdin v. Valley of California, Inc, (1994) 24 Cal.App.4th 555, 565-568, quoting 2
Miller & Starr (2d ed. 1989) Agency, § 3:20 at pp. 120-121.)
Here the trial court
could reasonably conclude that Johnson breached his fiduciary duty by not fully
disclosing the extent of Newman's and Johnson's participation in the loans and
that the loans would not be fully funded.
Johnson argues, however,
that the Greens must prove causation under the "'but for'" test. (Citing Viner
v. Sweet (2003) 30 Cal.4th 1232, 1240.)
Here Susan Green testified that when she saw
Johnson's or Newman's name on the loans she felt "very comfortable"
and that it meant "[Johnson] thought it was a good project . . .
." But Johnson points out neither
of the Greens testified that but for seeing Johnson's or Newman's name they
would not have invested. Thus, Johnson
argues, there was insufficient evidence of causation.
But
Johnson points to no authority that would require the Greens to expressly
testify that "but for" seeing Johnson's or Newman's name they would
not have invested. Instead, the trial
court as the trier of fact can draw reasonable inferences from the
evidence. We are bound by such
inferences on appeal even if other inferences are also reasonable. (9 Witkin, Cal. Procedure,
conclude from Susan Green's testimony that but for seeing Newman's or Johnson's
name as lenders the Greens would not have invested.
III.
Johnson
contends the trial court erred in awarding damages based on the
"benefit-of-the-bargain"; that is, what the Greens would have
received had their investments been successful.
Johnson
argues, without citation to authority, that the proper measure of damages is
the Greens' "out-of-pocket" loss.
In
determining that the benefit-of-the-bargain is the proper measure of damages
for a breach of fiduciary duty, the trial court relied on
v. Valley of California, Inc,
565-568. Our Supreme Court, however,
in Alliance Mortgage Co. v. Rothwell
(1995) 10 Cal.4th 1226, 1249, recognized the holding in
is only entitled to its actual or 'out-of-pocket' losses suffered because of
fiduciary's negligent misrepresentation . . . .
[Citations.]" We take that to
mean the proper measure of damages is out-of-pocket loss, at least where the
misrepresentation is not intentional.
Moreover,
out-of-pocket loss is the most reasonable measure. Presumably, had the Greens known the truth,
they would not have invested. Thus, they
are not entitled to the benefit the investment was supposed to have
provided. We must remand for a
determination of damages based on the Greens' out-of-pocket loss.
The
matter is reversed and remanded for a determination of damages based on the
Greens' out-of-pocket loss. In all other
respects the judgment is affirmed.
Appellant shall bear his own costs.
NOT
TO BE PUBLISHED.
GILBERT,
P. J.
We concur:
YEGAN,
J.
PERREN,
J.
Mark
S. Borrell, Judge
Superior
Court County of Ventura
______________________________
Terran T. Steinhart for
Defendant and Appellant.
No appearance for
Plaintiffs and Respondents.
