Wednesday, June 24, 2015

Wong v. Stoler (Cal. Ct. App. - June 23, 2015)

Unlike the Court of Appeal, I sort of liked what the trial court (Judge Buchwald from San Mateo) did here.  Though I understand why the Court of Appeal had to reverse.  Still, on remand, I might continue to lean in the direction of the trial court's sentiment rather than the Court of Appeal's.

It's a "fraud" case.  Though only marginally.  Ira and Toby Stoler have a beautiful home in San Mateo.  They sell it to Wayson and Susanna Wong for $2.35 million.  (Sucks to be poor, eh?)

The sellers fill out the usual paperwork, including a transfer disclosure statement that says that there's no HOA and that the home was connected to a public sewer system.  But these statements were only "sort of" correct.  Whether the Stolers knew it or not, the developer of the property (including the property of a dozen of the Stolers' neighbors) actually built a private sewage line to connect all the properties together and then ran it down a hill to connect it to the public line.  So the home was technically itself connected only to the private line, and while there was no formal HOA, the 1,000-foot private line was legally owned in common by the 13 homeowners that connected to it; e.g., they'd be responsible for any repairs and/or breaks.

So that's a negligent misrepresentation by the Stolers.  Which is admittedly wrong.  Regardless of the fact that the CC&Rs (reviewed by the Wongs) sort of mention this private sewer line.  The Stolers should not have said what they did.

The Wongs originally try to deal with the problem in a neighborly fashion, and try to simply get the City of San Mateo to take over the line.  But no dice.  So then they hire lawyers.  Who sue the Stolers as well as the real estate agent.

What remedy do the Wongs want?

You might initially think damages.  The difference between the value of the home they thought they bought (with a public sewage line) versus the value of the home they actually did buy (with a shared interest in 1000 feet of a private line).

That probably wouldn't be a massive amount of money.  It'd matter a bit to most buyers, perhaps.  It's some exposure.  But in the grand scheme of things, not much.  Bet it didn't matter virtually at all, for example, to the 13 buyers who built it from the developer.

So if that's the measure of damages -- and surely full compensation is a just result -- then we can resolve this lawsuit fairly easily.  Indeed, we can easily resolve it, since the Wongs already got a $200,000 settlement from the real estate agent.  I'm confident that's more than sufficient to cover an actual damages remedy.

But did I mention that the sale of this $2.35 million home transpired in 2008?  That's right.  Immediately prior to the crash.  And consequent plastering of real estate values.

Now can you figure out what remedy the buyers want?

That's right.  Rescission.  They want to give the house back to the Stolers and have their $2.35 million refunded.  Never mind the fact that the Wongs have, in the meantime, remodeled the property and (in the words of the Court of Appeal "much of the home was down to the studs as a result of the demolition work."  The Wongs want the full purchase price back, regardless of the downturn in the market, and are willing to give what's left of the studs back to the Stolers.

All because of some erroneous wording about a 1000-foot private sewage line.

The trial court doesn't like that.  It things that rescission is an equitable remedy.  Which it is.  The trial judge doesn't think the Wongs' demand for relief is equitable.  Which, IMHO, it's not.

So he comes up with a creative solution.  The Wongs get to keep the house.  But the Stolers will be responsible for any repairs, maintenance, or replacement of the private sewage line.  Either for 10 years or until the Wongs sell the house, whichever comes first.  With a cap of $360,000 in liability, offset against the $200,000 the Wongs already received in the prior settlement.  That way the Wongs will essentially get what they thought they were buying:  a particular house, but without the burden of having to potentially repair a private sewage line.

Nice.  Creative.  Fair.  I applaud Judge Buchwald.

Admittedly, I would still reverse.  The Court of Appeal is right that the trial court's remedy doesn't fully put the Wongs in the position they thought they'd be in.  Or one thing, what if repairs cost over $360,000?  For another, what if the repairs were required in the 11th year rather than the 10th?  Finally, what about the fact that the Wongs are now going to have to disclose this private sewer line to the next buyer, with no indemnity by the Stolers -- hence perhaps reducing the selling price of the home?

Those are all problems.  They aren't solved by the trial court's remedy.  So I agree we need to try something else.

Mind you, I think there is a solution in equity.  My thought is that we simply make the Stolers responsible for the property's share of the private line.  Period.

We have a name for that sort of thing.  Insurance.

In my mind, we simply have the court declare that the Stolers are responsible, and the Stolers respond by buying an insurance policy to cover any required repairs.  Maybe the premium's $1,000/year.  Maybe it's $5,000/year.  Whatever.  The Stolers just purchase the policy and pay for it.  That way the Wongs get the property they were promised and we're good to go.  Fair and equitable.

As a bonus, this remedy also gives the Stolers a possible out.  Several, even.  If they don't want to buy insurance, they can make a sum-certain deal with the Wongs to get out of it.  A lump sum payment of $50,000 (or $150,000, or whatever).  Then when the Wongs sell the home to the next person they disclose the private line and everything's hunky dory forever.  Alternately, the Stolers can buy the insurance (or take on the liability themselves) and, sometime down the line, buy the house from the Wongs (or a subsequent purchaser) and then immediately flip it with full disclosure.  My bet is that'd cost the Stolers only a minimal amount of money, since my guess is that buyers won't actually care much about the private line.

Regardless, there's an equitable solution available.  Something that makes the Wongs whole -- maybe even more than whole given the prior $200,000 settlement -- and yet doesn't unjustly hose the Stolers.

So I think a solution like that, potentially on remand, would be a very fair way of resolving the case.

But that's not what the Court of Appeal does.

The Court of Appeal instead just takes the case at total face value.  As if the origins here were not based in equity, nor contain equitable limitations.  It says that victims of fraud are entitled to rescind, and this counts as fraud, so the Wongs get to rescind.  End of story.  Sure, there are some complexities about the value of the Wongs' improvements, and the cut shrubbery, etc.  But that's all detail.  The Wongs get to rescind.

Which is what they want.  Precisely because it gives them a windfall.  They buy the house at the top of the market, and want to give it back once property values plummet.  The latter event having nothing to do with the negligent error made by the Stolers.

I like my remedy better.

In the end, hopefully, as things turned out, maybe the inequitable nature of the Court of Appeal's remedy will have dissipated by now.  Because guess what?  The real estate market has turned.

The Wongs say that they want their $2.35 million back.  Okay.  At least according to Zillow, the value of the property is now over $3.4 million.  So if they want $2.35 million for it, I bet the Stolers may well take that deal.  Heck, the Wongs can even keep the extra $200,000 settlement.  Even though rescission means that they're supposed to turn over pretty much everything they got; e.g., including the $200K.

Lest there be any doubt that it's the general real estate market -- not the actual consequences of the Stolers' misrepresentation -- that's driving the action here, my money's on the Wongs no longer seeking to turn over the property in return for their $2.35 million.

The Court of Appeal's opinion, unlike the trial court's, gives the Wongs a one-way option on the overall real estate market.  That's not attractive to me.  And may work a serious injustice.

At least in the present case, I hope it doesn't matter.  Hopefully the option is valueless.

Since I'm not sure it should have been given in the first place.