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Sharabianlou v. Karp

February 5, 2010; as modified March 3, 2010


(San Mateo County Super. Ct. No. CIV 440755). Trial judge: Hon. Gerald J. Buchwald.

The opinion of the court was delivered by: Needham, J.


These appeals have their origin in a failed real estate transaction. Appellants Farrokh and Scheherezade Sharabianlou offered to purchase a commercial building owned by respondent Berenstein Associates.*fn2 The Sharabianlous engaged real estate agent Ronald Karp and his company California Realty Investment Company (hereafter the Karps) to represent them in the transaction. Soon after the offer was made, however, the parties learned of environmental contamination on the property. Faced with uncertainty about the scope of the contamination and the cost of its cleanup, and unable to agree on who should pay for the remediation, the parties failed to close escrow on the agreed-upon date.

After further efforts to resuscitate the transaction were unsuccessful, the Sharabianlous sued the Berensteins and the Karps, seeking, among other remedies, rescission of their agreement with the former and tort damages from the latter. The trial court ordered the contract rescinded on equitable grounds and, citing its statutory authority to adjust the equities under Civil Code section 1692, awarded substantial damages to the Berensteins. It later awarded attorney fees to the Berensteins as prevailing parties. It rejected the Sharabianlous claims against the Karps in their entirety.

The Sharabianlous now challenge the resulting judgment. They first claim it is void because of the trial judge's bias. They also argue that the damages awarded to the Berensteins exceed those legally available in an action seeking relief based upon rescission, and they raise a number of other claims of error concerning the damage award. As to the Karps, the Sharabianlous contend the trial court erred in rejecting their breach of fiduciary duty and professional negligence claims. In the unpublished portions of our opinion we reject the claim of bias and affirm the judgment in favor of the Karps. In the published portion of our opinion, we address the damage award to the Berensteins and conclude it must be reversed.

Factual and Procedural Background

In the summer of 2002, the Sharabianlous were looking for a new location for their printing business, and they asked Ronald Karp to assist them in finding a suitable building to purchase. In October 2002, they signed a purchase agreement (the Agreement) to buy a building the Berensteins owned on Howard Avenue in Burlingame.*fn3 The purchase price was $2 million, and upon signing the Agreement, the Sharabianlous deposited $65,000 into escrow at Old Republic Title Company (Old Republic). They later deposited an additional $50,000 into escrow, bringing the total deposit to $115,000.

Initially, the Agreement provided that close of escrow was to occur on February 6, 2003. Over the course of the following months, however, the parties executed a number of addenda extending the date on which escrow was to close. The final addendum set a closing date of June 4, 2003.

The Agreement also contained both environmental and financing contingencies and set deadlines by which these contingencies were to be removed. To finance the transaction, the Sharabianlous applied for a $1.7 million loan through US Bank, and on December 9, 2002, the bank conditionally approved their application subject to certain conditions, one of which was the submission of an acceptable Phase I environmental report. On US Bank 's recommendation, the Sharabianlous retained Piers Environmental Services (Piers) to conduct a Phase I site assessment to determine the possible presence of environmental contamination at the Howard Avenue property. In its October 2002 Phase I report, Piers recommended that a Phase II investigation be performed, because research revealed that an underground storage tank had been installed on the property in 1946, and the ground floor of the building had been occupied by a dry cleaning business for several decades.

The Sharabianlous and the Berensteins then agreed to extend the deadline for the Sharabianlous' approval of the environmental inspection to December 13, 2002. On December 17, 2002, the parties executed Addendum 3 to the Agreement,*fn4 extending the deadline for removal of the financing contingency to January 10, 2003. This addendum also addressed the removal of the environmental contingency, stating: "Environmental Contingency shall be removed by the [earlier] of the following events: [¶] i) Seller providing to Purchaser a Notice of Clearance from the San Mateo County Environmental Services, or ii) Seller to deposit in escrow, One Hundred and Fifty Percent (150%) of the remedial costs provided in the summary to be prepared by Piers Environmental Services. [¶] Funds deposited in escrow shall be held until Seller provides a notice of clearance from the San Mateo County Environmental Services Department, at which time escrow holder shall release the remaining funds to Seller without further instructions from the Buyer. At Seller's option, the funds held in escrow may be used to pay the approved invoices of Piers Environmental Services, and the balance of the funds shall be released to Seller when Seller provides notice of clearance from the San Mateo County Environmental Services Department without further instructions from the Buyer."*fn5

In late December 2002, Piers issued its Phase II report, which noted the presence of tetrachloroethene (a dry cleaning solvent), trichloroethene, and other compounds in the subsurface soil at the Howard Avenue property. The report concluded that the subsurface soil had been affected by the property's previous use as a dry cleaning facility, and it recommended further investigation to determine the extent of the contamination.

On January 13, 2003, the parties to the Agreement executed Addendum 4, which released the Sharabianlous' financing contingency but gave them the right to cancel the Agreement if the Howard Avenue property appraised for less than $1.7 million. US Bank retained an appraiser, who inspected the property on January 15, 2003. Ronald Karp accompanied the appraiser to the property and provided information on the value of comparable properties. Karp did not tell the appraiser that environmental reports had been prepared for the property, and the two had no discussion of contamination issues. The appraiser valued the property at $2,050,000. The appraisal report noted, however, that "in light of the [property's] previous use as a cleaners, we make no warranties regarding the presence or absence of toxic substances. If a formal certification of these matters is required, we recommend that a properly licensed professional engineer, familiar with the detailed investigative and reporting requirements of Phase I toxic certifications, be consulted." At trial, the appraiser testified that if he had been provided with copies of the environmental reports, he would not have prepared the appraisal until he had received clarification and estimates for the cost of cleanup. Although he stated that contamination would have affected the appraised value, he offered no opinion on the value of the property in light of the contamination.

On January 31, 2003, the Sharabianlous removed their financing contingencies and signed an addendum to the agreement stating: "There are no remaining contingencies, the . . . Agreement . . . is contingent free."

In March 2003, Piers sent Ronald Karp a cost estimate for the required remediation work. On May 2, 2003, the San Mateo County Health Services Agency approved the scope of work presented in the Piers plan. On May 27, Piers sent Karp a proposal for monitoring and remediating the contamination at the Howard Avenue property at an estimated cost of $187,180.

Meanwhile, in late April 2003, the parties executed the final addendum to the Agreement, extending close of escrow until June 4, 2003. On that date, the Sharabianlous advised Ronald Karp that the matters discovered in the second phase of the environmental investigation were material, but they indicated they were still negotiating to purchase the building. The Sharabianlous informed Karp that their lender would not fund the loan unless it received an indemnity agreement from the sellers and "approval from the geologist."

Escrow did not close on June 4, and on June 10, Karp advised the Sharabianlous that the Berensteins considered them in default of their obligations under the Agreement. On July 11, 2003, US Bank notified the Sharabianlous that it would not approve their request for financing because of the environmental contamination at the property. Nevertheless, the parties conducted further negotiations, and the Berensteins offered to extend seller financing. Because of the Sharabianlous continued concern about the contamination, the negotiations were unsuccessful.

In August 2003, the Berensteins reached an agreement to sell the Howard Avenue property for $1,550,000 to a corporation owned by Stanley Lo. That sale closed on March 8, 2004. The Berensteins had planned to use the Howard Avenue property as part of a like-kind exchange under Internal Revenue Code section 1031 (IRC section 1031).*fn6 They had contracted to purchase a building in Yuba City, California, as a replacement property, but lost the opportunity to buy it because of the failed sale to the Sharabianlous. Instead, the Berensteins bought a building in McKinney, Texas, which generated less rental income than they would have earned from the Yuba City property.

On July 23, 2004, the Sharabianlous filed their original complaint against the Karps and the Berensteins. The Berensteins cross-complained against the Sharabianlous, alleging breach of contract and seeking declaratory relief. On July 27, 2005, the Sharabianlous filed a second amended complaint.

The Sharabianlous sought declaratory relief against the Berensteins and a return of their $115,000 deposit at Old Republic. They included a claim for rescission of the Agreement on the basis of fraud, failure of consideration, mutual mistake of fact, and commercial frustration. In the alternative, the Sharabianlous sought damages for breach of contract. The second amended complaint also included claims against the Karps for breach of fiduciary duty, professional negligence, fraud, and negligent misrepresentation. One of the bases for the breach of fiduciary duty claim was Ronald Karp's failure to disclose the existence of the Piers environmental reports to US Bank 's appraiser. The Sharabianlous also claimed that Karp should have referred them to a lawyer during the sale negotiations, but he failed to do so. The Sharabianlous' cause of action for professional negligence was based in part on their claim that Ronald Karp's drafting of Addendum 3 had left that document ambiguous.

The matter was tried to the court, and at the close of the proceedings, the court issued separate statements of decision as to the Karps and the Berensteins. As relevant here, the trial court found no breach of the Agreement by either the Berensteins or the Sharabianlous, because neither party knew the full extent of the environmental hazard at the Howard Avenue property. It therefore concluded that equitable rescission was the appropriate remedy. The court found "that the purpose of rescission is to restore the parties to the former position as far as possible to bring about substantial justice by adjusting the equities." It noted that in adjusting the equities, it could award compensation to a party. The trial court chose to adjust the equities in favor of the Berensteins because it found they had acted far more reasonably than the Sharabianlous when the parties were attempting to negotiate the sale and because, unlike the Sharabianlous, they had acted to mitigate their losses.

The trial court awarded the Berensteins $332,000 as the "net difference in sales price (i.e. the difference in sales price between the sale price to the Sharabianlous and the lower price paid by Stanley Lo) . . . ." It also awarded the Berensteins $96,660 as "present value loss" due to the difference in rental income expected from the McKinney, Texas property and the Yuba City property the Berensteins had lost the opportunity to buy. The total of these damages was $428,660, to which the trial court added prejudgment interest at 10% from June 3, 2003, the day prior to the scheduled close of escrow. The trial court offset these damages by $42,000, an amount representing the difference between the $78,500 in expenses the Sharabianlous incurred, on the one hand, and the $36,000 in lost rent the Berensteins claimed, on the other, together with 10% prejudgment interest on this difference. The trial court also found that both parties had incurred "out-of-pocket expenses, such as environmental reports, appraisals, and financing fees . . . in the range of $27,000 each," and concluded that, since the expenses were roughly equal, they required no adjustment. The trial court found the Berensteins were the prevailing party and were entitled to recover attorney fees pursuant to the Agreement. (See Civ. Code, § 1717, subd. (a).) The court ordered Old Republic to return the $115,000 deposit to the Sharabianlous, together with interest on that amount.

The trial court found that the Karps had not breached any fiduciary duty to the Sharabianlous. It found that Ronald Karp's failure to disclose the existence of the Piers environmental reports to US Bank 's appraiser did not breach any fiduciary duty, because the Sharabianlous and their lender already knew that the extent of the contamination and the potential costs of remediation were uncertain. The court noted that the Agreement specifically advised the parties to seek expert advice regarding the possible presence of hazardous substances, and it disclaimed any duty by the Karps to provide any advice or information exceeding that needed to obtain a real estate license. The trial court also rejected the professional negligence claim, finding that the Agreement and its addenda were "both objectively straightforward and in fact were subjectively understood by plaintiffs." As a consequence, the court found there was no basis to conclude the Karps breached any duty to draft an unambiguous contract. It further found that the Sharabianlous were well educated, sophisticated individuals with significant experience in commercial real estate transactions who were capable of determining for themselves whether they should seek legal advice. It therefore ordered judgment to be entered in favor of the Karps.

On January 24, 2008, the trial court entered a judgment that specified its damage awards and granted the Berensteins attorney fees in an amount to be determined. The trial court later issued an order awarding the Berensteins fees of $291,269.25. On July 16, 2008, the trial court filed a an amended judgment nunc pro tunc, in which it awarded a total of $890,361.96 to the Berensteins.

The Sharabianlous filed timely appeals from both the original judgment and the order awarding attorney fees.


In the unpublished part I of this opinion, we address the Sharabianlous' contention that the trial judge's bias renders the entire judgment void. In the published part II, we turn to their claims of error regarding the damages and attorney fees awarded to the Berensteins. In the unpublished part III of our opinion, we analyze the Sharabianlous' breach of fiduciary duty and professional negligence claims against the Karps.

I. Judicial Bias

The Sharabianlous contend the judgment must be reversed because the trial judge should have been disqualified for bias. We agree with respondents that the Sharabianlous have forfeited this claim by failing to raise it "at the earliest practicable opportunity after discovery of the facts constituting the ground for disqualification." (Code Civ. Proc., § 170.3, subd. (c)(1).) Moreover, even if the claim were properly before us, it would fail on the merits.

A. Background

The principal basis of the Sharabianlous' claim of judicial bias is an incident that occurred during the latter part of the trial. We therefore set out the relevant facts in some detail.

On December 8, 2005, the Berensteins' trial counsel reported that upon returning to the courtroom after a chambers conference the previous day, he had discovered one of his files missing. According to counsel, the file contained his work product. Counsel told the court the bailiff had informed him the file had been retrieved from Mrs. Sharabianlou. Counsel requested that Mrs. Sharabianlou be admonished on the record and that "she be excluded from the well and [made to] sit behind the wall in the gallery." Counsel noted that defendants had been seated in the gallery during the trial.

Plaintiffs' counsel explained that she had asked Mrs. Sharabianlou to pack her things the previous evening but said, "I was not instructing my client to put a work product of [Berensteins' counsel] in my materials. I had no idea it was there until the bailiff caught up with us in the garage. . . . I am assured that it was inadvertent . . . ." Plaintiffs' counsel asked permission to have her client speak on her own behalf, and the court granted that request. But before Mrs. Sharabianlou addressed the matter, the court stated on the record, "[A]fter you all left yesterday I was working in chambers on something else and [the bailiff] came to me at the very end of his day after retrieving these documents and told me what he had observed and what had transpired and that is right now just hearsay and is not evidence."

Mrs. Sharabianlou apologized for the incident and admitted having taken the documents. She told the court she had done so accidentally and had no use for the file. After listening to Mrs. Sharabianlou's explanation and hearing further from the Berensteins' counsel, the trial judge explained, "I am not going to do anything of a final nature here because if I do take a look at doing something of a final nature - I am actually going to conduct a hearing on this and take evidence and maybe we will need to do that . . . . I am not making this as a finding, Mrs. Sharabianlou, but I am going to tell you that . . . it's my belief that-this was not intentional and I am just going to leave it at that." The trial judge nevertheless required Mrs. Sharabianlou to sit behind the bar for the remainder of the trial. He explained that if the incident were to recur, he would take testimony and handle the matter as a civil contempt. He warned that if he were to find that Mrs. Sharabianlou's actions were not unintentional, he would consider striking plaintiffs' cause of action for fraud. The trial judge concluded, "I am going to try not to let it influence how I look at your testimony and your credibility on the witness stand. I am going to do the best I can to do that, but it's not going to be easy so we will just leave it at that for now."

After the court's noon recess, the Sharabianlous' counsel raised the incident again and said she was "extremely concerned about comments made by the court." She asked the court to consider declaring a mistrial "on the basis that it will be impossible for my client to have a fair hearing because credibility is an important issue." Plaintiffs' counsel explained that she had had very little time to research the matter, but offered to brief the issue and present it the following morning. Counsel for both the Berensteins and the Karps stated they would oppose any motion for mistrial.

The trial judge stated that he did not "see this as a mistrial situation." But he told plaintiffs' counsel, "You have the right to make a motion for mistrial and have it heard, but it would take a lot to persuade me that it ought to be granted. . . . I suppose if you need overnight to research it further and you want to make an actual motion for a mistrial in the morning, then I suppose that is your clients' right and I will hear it and defense will have a chance to respond." The judge also addressed the question of Mrs. Sharabianlou's credibility, stating "if [she] did do this deliberately and it affects her credibility, it seems to me that's a fact of life that she should have contemplated before she did this . . . ." He noted that the incident did not change his view of the merits of the case, a view he had previously articulated to all counsel, which was that "this is probably a case that's more appropriate for a rescission of ...

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