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Levaton v. Levaton

Levaton v. Levaton

Levaton v. Levaton

Filed 6/10/10 Levaton v. Levaton CA2/1


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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.





Plaintiff, Cross-defendant and




Defendants, Cross-complainants

and Respondents;


Cross-defendant and Appellant.


(Los Angeles County

Super. Ct. No. PC034432)

APPEAL from a judgment of the Superior Court of Los Angeles County, Barbara M. Scheper, Judge. Affirmed in part and reversed in part.

Law Offices of Rosario Perry, Rosario Perry and Jacqueline M. Fabe for Plaintiff, Cross-defendant and Appellant.

Law Offices of Jeffrey E. Lieber and Jeffrey E. Lieber for Defendants, Cross-complainants and Respondents.

Law Offices of Rosario Perry, Rosario Perry and Jacqueline M. Fabe for Cross-defendant and Appellant.

Egal and Tamar Levaton appeal from a judgment in favor of Joe and Shoshana Levaton, granting rescission and restitution in a rancorous family dispute over an agreement to purchase real property and a Midas Muffler franchise. We affirm in part and reverse in part.


I. The purchase agreement.

On November 1, 1999, Egal Levaton, his brother Joe Levaton, and Joes[1]then-wife Shoshana Levaton signed a Purchase Agreement (agreement) to Purchase real estate and business located at 17060 Devonshire St. Northridge. Egal was to manage the business. The agreement provided that Egal purchased the property and business, a Midas Muffler (Midas) franchise (Joe was the franchisee), in return for $400,000 and a promise to repay three loans. The agreement also provided that Egal would pay all taxes, as well as all legal fees [i]n the event of any legal problems. Egal had already paid Joe and Shoshana $100,000,[2]and Egal paid off the loans, which totaled $215,910.85. In all, Egal paid $715,910.85 for the property and the business.

II. The resulting litigation.

Egal filed a lawsuit in Los Angeles Superior Court against Joe and Shoshana on February 10, 2004, alleging that although he had performed all his obligations under the agreement, Joe and Shoshana had refused to tender a deed transferring the property to him, and had also failed to sign the paperwork required to transfer the business. The complaint alleged breach of contract, requested specific performance, and alleged fraud in that Joe and Shoshana had induced Egal to enter into the agreement with no intention of complying, despite Egals payment of full consideration.

Joe and Shoshana filed a cross-complaint against Egal on April 7, 2004, alleging that the full purchase price was $800,000, and that Egal had failed to pay the approximately $80,000 outstanding. The cross-complaint requested an accounting regarding Egals obligation to pay taxes on the business, and requested either the remaining $80,000 plus interest, or the rescission of the agreement.

On August 24, 2004, Joe and Shoshana filed a motion for judgment on the pleadings or to dismiss the complaint, alleging that Egal had filed for Chapter 7 bankruptcy on June 27, 2002 without disclosing the Northridge property or the Midas franchise, and attaching a copy of the bankruptcy petition. The motion alleged that as a result of Egals failure to list the property and business as assets on his bankruptcy petition, Egal was estopped from asserting the claims in his complaint. The court granted the motion to dismiss Egal from the action.

In March 2005, Tamar Levaton, Egals daughter, filed a second amended complaint for breach of contract and specific performance.[3] She alleged that in November 1999, Egal had orally assigned the agreement to Tamar with the oral permission of Joe and Shoshana, and that Joe and Shoshana had failed to sign a deed or paperwork to transfer the business to her although Tamar had performed fully under the agreement. Tamar asserted in a declaration dated September 10, 2004 that Egal assigned the contract to her when he signed it on November 1, 1999; that she had paid the inducement money and the purchase price of $400,000; and that in late December 2003 she met with Joe and Shoshana, who were ready to transfer the property to her and instructed that a grant deed to Tamar be prepared. Tamar stated that to remove myself from the family arguments which have ensued, and for the purpose of pursuing a legal conclusion to this matter (presumably, to allow Egal to file his complaint in February 2004), in January 2004 she assigned all her rights under the agreement back to Egal.Joe and Shoshana filed a first amended cross-complaint on April 25, 2005, naming Tamar and Egal as cross-defendants and alleging that although they disputed whether Egal assigned his rights to Tamar, if he did, Tamar was responsible for all of Egals obligations under the contract.

III. The court trial and related proceedings.

The trial court heard two days of testimony in a court trial on December 18 and 19, 2006. Egal testified that Tamar, not he, made the $100,000 inducement payment before the November 1, 1999 agreement and the $400,000 payment[4]provided for in the agreement. Egal testified that he assigned the purchase agreement to Tamar shortly after he signed it with the intention that she own and operate the business, with Egal as the assistant manager to help her out, keeping the books and paying the bills. Egal also testified that the loans had been paid off and that he and Shoshana and Joe had discussed preparing a grant deed and documentation to transfer the business in December 2003, and that up to that date, Joe and Shoshana, had not requested more money.

On cross-examination Egal stated that Tamar had saved $500,000 from working, with which she paid for the business and the real estate, although at the time she was in her early 20s. Egal had been a Midas franchisee at another location until around 2000. He believed that Tamar had contacted Midas to inform them that she had been assigned the franchise. Egal admitted having seen an October 17, 2003 letter from Midas to Joe, stating that Midas would not allow Joe to assign the franchise agreement to Egal because based on his operational history with Midas, Mr. Egal Levaton has not been approved to become a Midas franchisee. He also had seen an unsigned addendum to a Midas franchise agreement assignment, which required that if the Midas franchise agreement were assigned to Tamar, at no time shall Egal Levaton be employed at or hired on a consultant basis or be in any way involved, directly or indirectly, at any time or in any manner whatsoever, in the operation of the Midas Shop. The addendum continued: Assignee and Midas hereby agree that if Midas determines, in its sole discretion, that Egal Levaton has been or is involved, directly or indirectly, at any time and in any manner in the operation of the Midas Shop, Midas may, in its sole discretion terminate the Franchise Agreement immediately . . . .

Egal also admitted that in a letter Joe wrote to Midas in October 2003, proposing the sale of the business to Tamar, Egal crossed out the purchase price of $375,000 and changed it to $80,000. He explained that he changed the amount at Shoshanas request to reduce the taxes on the purchase. He denied that Shoshana had ever asked him for more money for the property and business, although his deposition testimony had been that she had requested $100,000 in additional payment in 2004; he explained that Shoshanas request was not related to the purchase price but was made for no reason, and that he had refused. Egal admitted he had not paid any federal or state taxes on the transfer of the business.

Tamar testified that she had paid the $100,000 inducement fee at the time that she typed up the November 1, 1999 agreement, and that she had discussed with Egal, Joe and Shoshana that she would be the final purchaser. (The inducement fee was not in the agreement.) There was no agreement to pay any additional money, outside of the sums and the loans specified in the agreement. She had made the $400,000 payment out of her own savings and by borrowing money, and Egal had verbally assigned the agreement to her shortly thereafter. The loans in the agreement were paid off. Tamar stated that she reassigned the agreement to Egal in December 2003 to avoid family legal problems, and that Egal transferred the agreement back to her so she could be the plaintiff in the lawsuit. She had completed the Midas training course.

On cross-examination, Tamar testified that she paid the $100,000 in cash from a safe deposit box at home, and that it was part of her savings, but admitted that at her deposition she testified that part of the payment was from Egal. Egal supervised her work at the shop, where he had worked on and off since 1999. She had also typed the letter that Joe wrote to Midas in October 2003 and on which Egal had changed the purchase price. When she verbally reassigned the agreement to Egal in January 2004, she couldnt remember whether she knew that Egal could not be a franchisee. She denied ever having learned from Midas that Egal was barred from any involvement in the business. When she learned that Egal could not be the plaintiff in the lawsuit (after his dismissal from the case), she met with counsel, and then Egal reassigned the agreement back to her.[5]

Tamar testified that she knew Egal was going through a divorce at the time of the agreement, but denied that the purchase money actually came from Egal or that he wanted to hide that fact because of the divorce proceedings.

Shoshana testified that Joe was now her ex-husband, although she still lived with him. She had worked at the Midas franchise for many years with Joe when he owned the franchise. Shoshana and Joe owned the property, but were required to enter into a lease-back arrangement with Midas regarding the business. Midas had a contractual right of first refusal if Shoshana and Joe decided to sell the property. Any assignment of the franchise agreement required Midass consent.

In 1999, Egal called Shoshana and asked if she and Joe wanted to sell, and she said yes. Another buyer had agreed to pay $850,000 but his loan fell through, and because Egal agreed to pay all the taxes, Shoshana was asking $800,000. Egal brought the $100,000 inducement fee to the shop in cash, in a paper bag.

Egal, Joe and Shoshana met and decided to draft the agreement without a lawyer. Shoshana was especially concerned that the agreement provide for the repayment of the loans, which had been taken out to repair the shop after the Northridge earthquake. The payment was to be in cash to save money on taxes.

Shoshana testified that in March 2000 Egal arranged with Shoshana and Joe to meet him at an escrow company office, where Egal asked them to sign an escrow transferring the assets to Tamar. They refused. In October 2003, Egal called to inform them that based on his past performance, Midas would not let him own the franchise. She and Joe never received the outstanding amount due.

Shoshana also testified that in December 2003, in a meeting in Egals counsels office, Egal and Tamar tried to persuade Joe and Shoshana to transfer the business to Tamar, presenting them with a deed to sign. They refused because they were still owed the money to complete the sale. Shoshana never made a written demand for the outstanding amount.

In rebuttal, Egal testified that the $100,000 in cash was kept in a safe and was paid to Joe and Shoshana at his house. He was trying to reduce his child support obligations to his ex-wife in 2002 and 2003. Joe and Shoshana were aware that he could not use the Midas name, although he claimed it was not true that Midas had terminated his franchise.

After testimony concluded, the court heard arguments on the equitable issues presented. Egals counsel argued that Joe and Shoshana had the power to transfer the franchise agreement to Tamar, and that Midas had approved the transfer to Tamar. The court pointed out that no evidence supported an approval by Midas of Tamar. Counsel responded that no evidence or testimony had not been submitted to the court because the question whether Tamar had been approved was never brought up and nobody considered that. Tamars name was not on the agreement because nobody thought to correct the name even though they all knew that Tamar Levaton was going to have the business and have the land and make the payments. Egal simply assigned the contract to Tamar, which he had a right to do. The court commented I think that this is a straw purchase designed by Mr. Egal Levaton to avoid showing an asset in his name so money was gotten out of his hands through his daughter and through these laundered checks in the names of other people into the hands of the defendants. They at the same time retained all ownership in both the property and the business so that no creditor, no bankruptcy court, no one could come after him for that asset at a time when he didnt want them to know it. He set up his daughter as a shill to run the business. When Midas finds out about it, the letter appears indicating that he, Mr. Egal Levaton cannot be a franchisee, and then and only then do we start seeing written names [sic] with Tamar Levatons name on it. That is to keep him out of the circle of the problem with the franchisee. The court was incredibly suspicious of the claim that [Tamar] had this money on her own.

Joe and Shoshanas counsel pointed out that Egal had filed the initial complaint. The agreement was poorly drafted, but even more importantly Midas would never have approved of Egals involvement in the business. Counsel admitted that, in drafting the agreement, his clients had responsibility to consider this. Even so, specific performance was not possible, and the best outcome would be to undo[] this whole mess . . . .  [] . . . [] It seems to me that the way to go is the rescission route. In rebuttal, Egal and Tamars counsel argued for specific performance.

IV. The courts ruling and the accounting.

The court made its ruling on January 19, 2007, finding in favor of Joe and Shoshana on Tamars claims, and concluding that the assignment to Tamar is a sham. The court finds that the series of alleged assignments and reassignments and so forth is designed as a fraud on this court, a fraud on Mr. Egal Levatons creditors probably, and a fraud on Mr. Egal Levatons wife. The court ordered rescission of the contract, and asked the parties whether an accounting would be necessary. Egal and Tamars counsel requested an accounting. The court suggested the parties meet and confer on the issue and report back.

Counsel for Egal and Tamar requested reopening to introduce documents regarding Tamars Midas training, and to put Tamar on the stand to testify that she had been approved as a Midas franchisee. The court denied the motion to reopen.

On March 19, 2007, Joe and Shoshanas counsel stated that an accounting was not necessary. The court pointed out that Egal and Tamar had not requested an accounting in the complaint. Egal and Tamars counsel argued that an accounting as a matter of law is required any time a contract is rescinded, and that $100,000 to $120,000 was still in issue, a substantial sum of money. The court ordered further briefing at Egal and Tamars counsels request.

On April 25, 2007, the court concluded that given the parties arguments about offsets and increases, an accounting was necessary. The court asked counsel to meet and confer to select a referee, with Tamar and Egal to pay for the accounting. Egal and Tamars counsel suggested a retired judge, but the trial court stated it intended to reserve any legal issues for itself, and that forensic accounting was necessary. At a further hearing on May 18, 2007, Joe and Shoshanas counsel submitted the name of a forensic accountant, and Egal and Tamars counsel submitted the name of a retired judge. The court selected the accountant.

The accountant submitted the accounting on March 13, 2008. The next day, March 14, the parties appeared at a hearing with the accountant, who explained that he had received comments on earlier drafts of his report from both parties. Egal and Tamars counsel requested an evidentiary hearing, and the court deferred its ruling.

On May 2, 2008, the court stated that it had reviewed the referees report, and the dealings of the plaintiff in this matter have not been legitimate or perhaps even legal . . . which is further supported by [the referees] declaration that there is a lot of undeclared cash transactions going through this business. The court adopted the referees findings and denied the request for an evidentiary hearing, because there had already been much back and forth between the parties and the referee . . . .  [] [Y]ou had an opportunity to provide [the referee] with the necessary information. I am certainly not going to delay this any longer, and I am certainly not going to substitute myself as the fact-finder on these issues in this case. Egal and Tamars counsel protested that the referee had been unfair in charging rent against Egal and Tamar, and asked the court to consider a rent amount proposed by their expert. The court rejoined: This is an equitable matter. I am forced to say it again. You started this. It is perfectly appropriate for the court to fashion a remedy which does not allow or pin fault on either party. It was within the courts discretion to award rent to try to put the parties back in the position they were in before the agreement. Egal and Tamars counsel requested a statement of decision. The court reiterated that it would award rent to Joe and Shoshana. The court approved and adopted the accounting report.

V. The statement of decision and judgment.

The court issued its statement of decision on August 15, 2008. The decision stated: The court found the testimony of defendant credible and the testimony of Egal and Tamar Levaton utterly lacking in credibility. [] Based on the evidence and the courts credibility determination, the court has concluded that Egal Levaton was the intended owner and operator of the Midas franchise from the beginning. Egal had created the fiction of the assignment to Tamar to conceal his assets and defraud creditors, the bankruptcy court, Midas, and likely his ex-wife. Because Egal was the true buyer under the agreement, the contract failed for lack of consideration, because Egal could not take ownership without Midass consent, and Midas had indicated that it would never accept Egal as a franchisee. Alternatively, there was a failure of consideration because Joe and Shoshana never contracted with plaintiff Tamar, and the full purchase price was never paid. The court rescinded the contract.

The court had ordered an accounting, a lengthy and expensive process made more so by plaintiffs poor record keeping and in some instances lack of timely cooperation with the referee. To adjust the equities between the parties under Civil Code section 1692,[6]the court ordered Joe and Shoshana to refund the $715,910.85 purchase price to Egal, and ordered Egal to return the property and business to Joe and Shoshana. To avoid a windfall to either side, the court credited Egal with interest from the date Joe and Shoshana demanded rescission, and awarded an offset to Joe and Shoshana for inventory. Joe and Shoshana were entitled to fair rental value of the property from November 1, 1999 to the date of the propertys return. Adopting the referees determination of fair rental value, Joe and Shoshana received an offset of $920,956. Egal and Tamar were responsible for $35,430 that Joe had paid in taxes and any other tax liabilities, and Joe and Shoshana were entitled to an offset for the cash balance of $17,067 and the inventory of $24,351 on November 1, 1999.

As a result, Joe and Shoshana were ordered to pay Egal and Tamar a total of $37,026.43; Egal and Tamar were ordered to turn over to Joe and Shoshana the premises and the business, and its equipment and furnishings, as well as books and records; and Egal and Tamar were to pay in full all taxes related to the business and real property from November 1, 1999, as well as any outstanding bills.

VI. Motion for new trial.

Egal and Tamar filed a motion for new trial on August 27, 2008, arguing that the court should have ruled specifically on each of their objections to the statement of decision, should have set an evidentiary hearing, and should not have charged rent. The court denied the motion after a hearing on October 10, 2008.[7]

An amended judgment filed October 10, 2008 adjusted the amount due to Egal and Tamara to $27,948.45. The amended judgment awarded Joe and Shoshana $5,973.52 in costs and $45,081.00 in attorneys fees from Egal and Tamar.

Egal and Tamar filed a timely notice of appeal.


Egal and Tamara argue on appeal that rescission of the agreement was not justified, because the outstanding amount due was not a substantial failure to comply with the agreement, and because Shoshana and Joe were also in material default. They also challenge the denial of the motion to reopen to introduce new evidence of Tamars approval by Midas, the failure to set an evidentiary hearing regarding the restitution amount and cash expenditures, and the failure to rule on each of their objections to the statement of decision.

I. Rescission of the agreement was justified.

Egal and Tamar first argue that the approximately $84,000 outstanding of the $800,000 purchase price was not a substantial amount, and so the trial court erred in ordering rescission of the agreement.

Section 1689, subdivision (b)(2) provides that a party may rescind a contract [i]f the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds. Subdivision (b)(4) allows rescission [i]f the consideration for the obligation of the rescinding party, before it is rendered to him, fails in a material respect from any cause. The rescission of a contract is to restore the parties to their former position. [Citations.] . . . a retroactive termination of a contract, as compared to cancellation, which is a prospective termination. (Nmsbpcsldhb v. County of Fresno (2007) 152 Cal.App.4th 954, 959.) A rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration has been received. (Id. at pp. 959960; Habitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga (2009) 175 Cal.App.4th 1306, 1344 [rescission terminates further liability and demands restoration of parties to former positions as though contract never existed].)

A party may rescind only if the failure of consideration by the other party is material, or goes to the essence of the contract. (Wyler v. Feuer (1978) 85 Cal.App.3d 392, 404.) Whether a failure of consideration is sufficiently material to warrant rescission is a question of fact, to be decided by the trial court. (See Calab rese v. Rexall Drug & Chemical Co. (1963) 218 Cal.App.2d 774, 782.) We review the trial courts determination of this question of fact for substantial evidence. (Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 953.)

Tamar and Egal argue that the failure of consideration in issue here was Egal and Tamars failure to pay the outstanding $84,089.85 of the purchase price for the property and the Midas franchise. The unpaid amount was approximately 10.5 percent of the entire price of $800,000. Tamar and Egal do not explain why this significant amount is necessarily immaterial. Further, another failure of consideration was Egals failure to pay taxes on the property, as provided by the agreement. Substantial evidence supports the conclusion that this was a material failure of consideration.

More importantly, however, the failure to pay the $84,089.85 was only one of several grounds on which the trial court granted rescission. The overarching reason the trial court gave in its statement of decision was that the consideration failed entirely, because Egal was the true buyer, and he had never assigned the property to Tamar. Midas had a contractual right of first refusal if Shoshana and Joe decided to sell the property, and any assignment of the franchise agreement required Midass consent. Midas had made it clear it would not accept Egal as a franchisee or even as an employee. Therefore, [r]egardless of the true purchase price, defendants could never have conveyed the business and the property to Egal Levaton without Midas consent, and because Midas had already indicated it would not consent, the agreement of the parties could never have been completed. Egal could not perform under the contract, because he was incapable of assuming the ownership of the franchise, managing the business, or even working at the shop, as contemplated in the agreement underlying the sale of the property and the business to him. This failure went to the root of the consideration (Karz v. Department of P. and V. Standards (1936) 11 Cal.App.2d 554, 557), entitling Shoshana and Joe to rescind the contract.

Further, as to Tamar, there was a lack of mutual consent between the parties because Shoshana and Joe never contracted with her. Shoshana testified at trial that when the agreement was signed on November 1, 1999, she had no idea that Tamar was going to be the buyer, and that she did not consent when asked to transfer the assets to Tamar. The court credited Shoshanas testimony and did not believe a word of Tamars testimony to the contrary. There was no contract between Tamar and Joe and Shoshana, and so there was nothing to rescind.

The trial court did not err in ordering rescission of the agreement.

II. The denial of the motion to reopen was within the courts discretion.

After the court ruled in Joe and Shoshanas favor on January 19, 2007, it clarified that it was ordering rescission of the contract because there was a failure of consideration because the party they contracted with, Mr. Egal Levaton, was not an acceptable franchisee to Midas. The court continued, the business of the assignment between Mr. Egal Levaton and Tamar, that is a fraud. Counsel for Egal then represented that Midas had approved Tamar as a franchisee, and requested reopening of the case for that sole purpose, we can show she went through her training, she received the certificate with a nice frame from Midas approving her. She got the right to assign the franchise to her from Midas, subject of course to the current franchisee, the brother [Joe], releasing the franchise to her. The court denied the motion to reopen.

Trial courts have broad discretion in deciding whether to reopen the evidence. [Citation.] We review a courts denial of a motion to reopen evidence for an abuse of discretion. [Citation.] (Horning v. Shilberg (2005) 130 Cal.App.4th 197, 208.) A trial court does not abuse its discretion when it refuses to reopen a case for new evidence that will not produce a different result. (Broden v. Marin Humane Society (1999) 70 Cal.App.4th 1212, 1222.) A Midas certificate would not have changed the courts conclusion that the purchase agreement had not been assigned to Tamar and that Egal was not an acceptable franchisee, which were the basis for ordering rescission.

Further, A motion to reopen is also subject to a diligence requirement. (Broden v. Marin Humane Society, supra, 70 Cal.App.4th at p. 1222.) The lack of documentation supporting Tamars claim that she had been approved by Midas first surfaced after her testimony, and the motion to reopen was made after the court announced its decision. The purported evidence was not newly discovered and, if it existed, would have been available before the second amended complaint was filed and certainly before trial. As the court pointed out during Tamars testimony, the documents would have been relevant to support Tamars claim that she had been running the business, and should have been submitted initially because credibility is always an issue. The court repeated when denying the motion, I think the issue was obvious . . . . The court thus impliedly found that the evidence should have been introduced earlier. (See Id. at pp. 12221223 [if court does not specify reasons for denying motion to reopen, appellate court may presume that denial was for either or both of these grounds, new evidence that will not produce a different result and the lack of diligence of a moving party].)

The appropriate test for abuse of discretion is whether the trial courts decision exceeded the bounds of reason. When two or more inferences can reasonably be deduced from the facts, we have no authority to substitute our decision for that of the trial court. [Citation.] (Horning v. Shilberg, supra, 130 Cal.App.4th at p. 208209.) The trial courts denial of the motion to reopen was within the bounds of reason, and therefore was not an abuse of discretion.

III. The court erred when it failed to conduct a trial regarding fair rental value.

Egal and Tamar argue that an evidentiary hearing was necessary to address their claim that the restitution amount was based on an erroneous calculation of the fair rental value of the property. They dispute the fair rental value provided by the referees real estate expert and used by the referee, claiming that the appropriate amount was that recommended by their real estate expert.

Egal and Tamar requested an evidentiary hearing on March 14, 2008, the day after the referee submitted his report. At the March 14 hearing, the court clarified that both parties had submitted comments on drafts of the report to the referee. Egal and Tamars counsel indicated that she might make a request for sort of an evidentiary hearing . . . as to certain of the issues, and the court stated that it would decide whether an evidentiary hearing was necessary after reading submissions from the parties.

At the further hearing on May 2, 2008 the court declined to hold an evidentiary hearing because there was much back and forth between the parties and the referee, and the referee had prepared preliminary, draft, and tentative reports, giving the parties opportunities to object. The court concluded The whole point of . . . establishing the referee, which I again point out, [Egal and Tamars counsel], you asked for . . .  was to allow someone with the necessary expertise to assess the information regarding this business. . . .  [] . . . [] I am certainly not going to delay this any longer, and I am certainly not going to substitute myself as the fact-finder on these issues . . . . Egal and Tamars counsel rejoined that they objected to the estimate of fair rental value: On the rent, [the referee] . . . picked one person and got an estimate. The estimate was not for a Midas-type of business, it was just for offices. We also got an estimate which was actually in writing. [] [The referee] did not get an estimate in writing from his alleged expert. We have an expert in writing. He has comparables and the rental value is much less. Counsel also claimed that this issue of unreported income . . . I think [the referee] made it up.

Joe and Shoshanas counsel pointed out that the referees preliminary report in November 2007 indicated how the rent issue would be addressed and announced the expert to be consulted, and that Egal and Tamar had not put forward their rival expert until the day of the hearing. The court sustained an objection to the report of Egal and Tamars expert for lack of foundation. The court asked Joe and Shoshanas counsel to prepare a statement of decision, invited objections from Egal and Tamar, and stated: if I think, based on the objections, that a hearing is necessary, I will inform counsel.

The court issued its statement of decision on August 15, 2008, without an evidentiary hearing. In its August 15, 2008 minute order ruling on objections to the statement of decision, the court stated that Egal and Tamar had agreed to an accounting tasking the referee with determining fair rental value, had been presented as early as November 2007 with the opportunity to object to the referees calculation of fair rental value, and did not present new evidence to the referee on the issue. Instead, Egal and Tamar sought to present entirely new information regarding their alleged expert . . . directly to the court at the hearing on May 2, 2008. However, pursuant to the agreement of the parties and the order of the court, it was the referees responsibility to determine fair rental value. The fact that [Egal and Tamar] disagree with the referees determination in this regard is no reason to have an evidentiary hearing.

When the parties agree (by contract or in court at the time of the dispute) to have a referee try any or all of the issues or ascertain one or more facts, the appointment of the referee is made pursuant to [Code of Civil Procedure] section 638. (Marathon Nat. Bank v. Superior Court (1993) 19 Cal.App.4th 1256, 1259 (Marathon).) When the parties do not consent, the court may, upon the written motion of any party, or of its own motion, appoint a referee . . . [] . . . [] [w]hen the taking of an account is necessary for the information of the court before judgment, or for carrying a judgment or order into effect. (Code Civ. Pro., 639, subd. (a)(2); see Marathon, supra, 19 Cal.App.4th at p. 1259.) [T]he statutory scheme does not expressly require that a hearing be held before the trial court accepts or rejects a referees report. . . .  [] . . . [] [A] . . . referees report is advisory, not determinative, and . . . the trial court must independently consider the referees findings before acting upon the referees recommendations. One way to do this is to hold a hearing but a hearing is not required as a matter of law. In an exercise of its discretion, the trial court may consider the matter as the circumstances dictate. (Id. at pp. 12601261.)

This was not an appointment by agreement under Code of Civil Procedure section 638. Joe and Shoshana opposed the accounting. Although Egal and Tamar requested the accounting, they protested the selection of an accountant as a referee, and agreed to the appointment only after the court denied their request to appoint a retired judge. The appointment of the referee in this case falls instead under Code of Civil Procedure section 639, which in subdivision (a)(1) authorizes the court to appoint a referee [w]hen the trial of an issue of fact requires the examination of a long account on either side; in which case the referees may be directed to hear and decide the whole issue, or report upon any specific question of fact involved therein.

The referee, a trained accountant, was entitled to examine the records provided by the parties and make the factual determinations necessary for a traditional accounting. The reference [under Code of Civil Procedure section 639, subdivision (a)(1)] is allowed because a trained accountant is generally better able to efficiently and inexpensively examine a long account than a trial court judge is able to do through adversarial court proceedings. The tension in this area is over how much latitude the accountant referee may exercise in making factual determinations. (De Guere v. Universal City Studios, Inc. (1997) 56 Cal.App.4th 482, 499.) Under Code of Civil Procedure section 639, subdivision (a)(1), the referee may apply accepted accounting methodology to the accounting records at issue, and examine the accounting records at issue. (Ibid.) The factual question of fair market rental value, however, is not an accounting question determinable by applying accounting methods to the business records. Instead, it is a factual determination outside the accountants expertise, which the referee acknowledged by consulting a real estate expert to provide a fair rental value for the property. Because that factual dispute is not susceptible of determination by a reference under Code of Civil Procedure section 639, the appropriate mechanism for resolving it is a trial on the merits. (Code Civ. Proc., 592.)[8]

IV. The court did not err in addressing the objections to the statement of decision.

Egal and Tamar argue that the court erred in finding that their response to the statement of decision was not timely. The record shows, however, that the court then construed the pleading as objections to the proposed statement of decision, so that the pleading was nevertheless considered by the court.

Egal and Tamar also present a hodgepodge of objections to the statement of decision, mostly again regarding fair rental value, and argue that the amount of rent was unfair because Egal was working at the business and contributing sweat equity. This ignores that the trial court concluded that Egal was the buyer/owner rather than an employee. Egal admitted at trial that he had seen Midass letter stating that he could not be a Midas franchisee, and the proposed addendum indicating that if Egal was involved as an employee, Midas would terminate the franchise agreement.

Egal and Tamar argue that fair rental value may not be included in the rescission judgment because the contract did not provide that Egal was a tenant or Joe a landlord. This ignores that the remedy upon rescission of the agreement is equitable, not legal, and does not depend upon the language of the rescinded agreement. Unlike breach of contract, rescission is a remedy that disaffirms the contract, extinguishing it and restoring the parties to their former positions. (Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133, 1145.)

To the extent that Egal and Tamar argue that fair rental value may not be considered in restoring the parties to their original positions after the rescission of the contract, we disagree. The court had the equitable power to include fair rental value in its award. Section 1692 provides that in a rescission action the court may require the party to whom such relief is granted to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties. (Italics added.) In the rescission context, the court should do complete equity between the parties and to that end may grant any monetary relief necessary to do so. (Sharabianlou v. Karp, supra, 181 Cal.App.4th at p. 1144, quoting Runyan v. Pacific Air Industries, Inc. (1970) 2 Cal.3d 304, 316.) [C]ase law recognizes the trial courts broad power to fashion an appropriate remedy in cases of rescission . . . in accordance with established principles of law and equity. (Id. at p. 1147.)

The statement of decision provided that Joe and Shoshana recovered the property and the business. Egal recovered the purchase price. To ensure that neither side obtained a windfall, the court awarded Egal interest from the date that Joe and Shoshana demanded rescission, and reimbursement for capital improvements. Joe and Shoshana received an offset for the inventory that they left for Egal. Joe and Shoshana also received the fair rental value of the property from November 1, 1999 to the date of the propertys return, to restore the parties to their positions prior to the initiation of the contract yet take account of what has actually occurred during the last eight years. The court refused to award Joe and Shoshana the adjusted net income during the period, because this would have gone beyond what justice required. The court also made Egal liable for the taxes that Joe paid and any outstanding taxes on the property, and awarded Joe and Shoshana another offset to reflect the cash balance in the business on November 1, 1999. This equitable award assured that neither party received contract damages, the benefit of the bargain or the expectational interest which full performance would have brought (Sharabianlou v. Karp, supra, 181 Cal.App.4th at pp. 11441145). Instead, the court restored each party to its former position, requiring each to return whatever consideration was received.

Egal had to return the property, and Joe and Shoshana were debited for the purchase price; and because Egal had had use of the property and the profits from the business over the eight years, Joe and Shoshana received the offset for reasonable rental value. [A] rescinding vendor . . . is entitled to recover the propertys use value during the entire period of the vendees possession. (Kudokas v. Balkus (1972) 26 Cal.App.3d 744, 753.) The trial courts award in this contentious case was reasonable and equitable.

V. On remand, the trial court must determine the issue of attorneys fees at trial and on appeal.

The agreement provided: In the event of any legal problems, all legal fees shall be paid by Egal Levaton regarding this transaction or any other problems. The trial court held a hearing on attorneys fees on December 17, 2008, and the amended judgment awarded Joe and Shoshana $45,081 in attorneys fees. Joe and Shoshana request that we remand the matter to the trial court to award attorneys fees on appeal to Respondents.

In an action to enforce the rescission of a written land sale agreement, containing a clause for attorneys fees which does not limit recovery of such fees to any particular form of action involving the contract, the prevailing party is entitled to an award of such fees. (Hastings v. Matlock (1985)171 Cal.App.3d 826, 841.) [T]he prevailing party is the party who recovered a greater relief in the action on the contract. (Zagami, Inc. v. James A. Crone, Inc. (2008) 160 Cal.App.4th 1083, 1097, fn. omitted). The trial court found that Joe and Shoshana were the prevailing parties, and consequently awarded them attorneys fees. In light of our limited reversal of the judgment on the issue of fair rental value and cash expenditures, however, we conclude the trial court must consider anew, at the conclusion of the [further proceedings on remand], the prevailing party issue. (Ibid.)

The trial court must also determine whether Joe and Shoshana are entitled to attorneys fees on appeal. [B]ecause further proceedings are necessary on remand, the determination of whether attorney fees should be awarded in connection with this appeal should be made by the trial court at the conclusion of those proceedings. (Zagami, Inc. v. James A. Crone, Inc., supra, 160 Cal.App.4th at p. 1097.) At the conclusion of the proceedings on remand, the trial court is to determine whether Joe and Shoshana are the prevailing parties on appeal and thus entitled to attorneys fees, and if so, to determine the amount of fees and costs due. (See ibid. [The prevailing party determination is to be made only upon final resolution of the contract claims and only by a comparison of the extent to which each party ha[s] succeeded and failed to succeed in its contentions. [Citation.]].)


The judgment is affirmed in part and reversed in part, and we remand to the trial court for trial on the issue of fair rental value, and a determination whether to award attorneys fees at trial and on appeal. The parties are to bear their own costs.



We concur:



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[1]For ease of reference, we will refer to the parties by their first names.

[2]The $100,000 payment was not in the agreement, which did not contain an integration clause. Tamar testified that Shoshana dictated the agreement, Tamar typed it, and at the time the parties signed the agreement the $100,000 had already been paid.

[3]Tamar dismissed a fraud cause of action before trial.

[4]The agreement provided The buyer Egal Levaton paid $400,000 Nov. 1, 1999 in good faith.

[5]Tamar testified that could not remember many details, and the trial court asked Is there some reason why your memory is so poor, Ms. Levaton? When Tamar explained There were a lot of things going on for me at that time, the court asked Do you know that is perjury if you are claiming a lack of memory when you do have memory? and Tamar answered I dont have memory of that. The court then stated Then I am questioning your competence to testify in these proceedings given how poor your memory is. The court suggested that Tamars counsel meet with her and explain her rights with respect to perjury. Cross-examination resumed after a recess. The court later stated In case it is not clear, I find both Ms. Levaton and her father completely lacking in credibility.

[6]All further statutory references are to the Civil Code unless otherwise indicated.

[7]The court stated at the hearing: [T]hese papers [in support of the new trial motion] . . . are dangerously close to being sanctionable. In my view some of the representations made in there, they are just so disingenuous that the court seriously considered striking the entire pleadings.

[8]Egal and Tamar also argue that the trial court should have conducted an evidentiary hearing to allow their accountant to explain certain undeclared cash transactions identified by the referee. We reject the argument because Egal and Tamar do not explain how they were prejudiced by the absence of such a hearing, and our own review of the record confirms that they were not prejudiced. The referee considered the undeclared cash transactions only in calculating the income of the business, but those calculations ultimately had no effect on the judgment. Joe and Shoshana had asked the court to award them the businesss net income, but the court expressly refused that request and did not otherwise rely on the referees determination of the income of the business.

Description Egal and Tamar Levaton appeal from a judgment in favor of Joe and Shoshana Levaton, granting rescission and restitution in a rancorous family dispute over an agreement to purchase real property and a Midas Muffler franchise. Court affirm in part and reverse in part.

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