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Ash v. North American Title Co.

California Court of Appeal, Second District, Fifth Division

February 18, 2014

David ASH, as Trustee, etc., Plaintiff and Appellant,
v.
NORTH AMERICAN TITLE COMPANY, Defendant and Appellant; Richard Lerner, as Trustee, etc., Defendant and Respondent.

[CERTIFIED FOR PARTIAL PUBLICATION[*]]

APPEAL from a judgment of the Superior Court of Los Angeles County, J. Stephen Czuleger and William G. Willett, Judges. Affirmed in part and reversed in part and remanded. (Super. Ct. No. YC059517).

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COUNSEL

Samuels, Green & Steel, Orlando F. Cabanday and Frederick H. Choi, Irvine, for Plaintiff and Appellant David Ash, as Trustee.

Richard D. Marks Professional Corporation, Richard D. Marks, Calabasas; Garrett & Tully, Ryan C. Squire, Pasadena, and Tammy Chow Weaver, Pasadena, for Defendant and Appellant North American Title Company.

Callahan, Thompson, Sherman & Caudill, Robert W. Thompson and George N. Koumbis, Irvine, for Defendant and Respondent Richard Lerner, as Trustee.

OPINION

MOSK, Acting P.J.

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INTRODUCTION

Defendant, a seller of real property, breached the real estate sales contract with plaintiff, the buyer, bye causing the closing of the escrow to be delayed so that it did not close on the agreed-upon Friday set forth in the contract. The sale was part of an Internal Revenue Code (Title 26) section 1031 (section 1031) transaction to defer the buyer's capital gain tax on the buyer's sale of another property. The buyer had the money payable on his sale of the other property deposited in a segregated account with a section 1031 qualified exchange intermediary (section 1031 intermediary).[1] On the Monday after the

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sale had been scheduled to close, the section 1031 intermediary closed and then filed for bankruptcy. The bankruptcy court did not release the buyer's money until after it was too late legally to qualify for deferral of taxes under section 1031.

A jury found the seller and the escrow company at fault for the escrow not closing on time— i.e., on Friday— and awarded the buyer damages against the seller for the delay, including the loss of the tax benefits. The jury also found the escrow company liable for breach of fiduciary duty and awarded the buyer damages against the escrow company for losses resulting from the delay in the closing of escrow.

We reverse in part because, as discussed in the published portion of the opinion, (a) there was insufficient evidence the contract damages assessed against the seller based on the bankruptcy were foreseeable and (b), as to the escrow company, the trial court failed to instruct the jury on an intervening and superseding cause— the bankruptcy.

FACTUAL BACKGROUND[2]

Plaintiff David Ash as trustee of the David Ash Trust (Ash), in connection with his sale of commercial real estate that realized a taxable gain, desired to defer the capital gain tax under section 1031[3] by purchasing commercial property from defendant Lerner.[4] On October 8, 2008, Ash and Lerner entered into an agreement by which Lerner agreed to sell to Ash commercial property. Defendant North American Title Company (NAT) was selected to be the escrow company for the purchase, for which escrow opened shortly thereafter, and was scheduled to close on November 21, 2008— the " expected closing date."

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Ash was in the real estate business, and, after talking to different brokers, selected LandAmerica Exchange Services (LandAmerica) to receive proceeds from the sale of his property in order to comply with section 1031.[5] When he entered into the agreement with LandAmerica, he had no concerns about its " financial viability." He chose LandAmerica based on " the opinion of the [p]eople [he] spoke to about it." When asked if he was " scared to lose [his] money if he got into a 1031 exchange," he responded " no." Ash was told LandAmerica had various branches and was part of LandAmerica Commercial Services. Ash had used LandAmerica for another replacement property.

At some point during the escrow period after the purchase and escrow agreements were executed, Ash had concerns, " I was afraid of the whole industry everywhere ... the banking system was, like, collapsing at the time. So— I also needed income. So I wanted to do something as quick as possible to get my income and also to be protected." He had nevertheless chosen to use LandAmerica, signing the papers on November 13, 2008, over a month after escrow opened, although the paperwork with LandAmerica was dated as of October 9, 2008. He later said that near the closing date he was worried about his money because he wanted the income: " I wanted to get it done." Ash had told NAT that he needed the income from the property he purchased to have the escrow completed because he wanted to have his funds safely reinvested. Ash never said he was concerned at any time specifically about the financial condition of LandAmerica.

Under section 1031, in order to defer paying the capital gains tax on the sale of his other property, Ash was required to close his transaction with Lerner within 180 days of the sale of Ash's property.[6] Ash had the proceeds from the sale of his property on which the escrow had closed deposited with LandAmerica, using an account at Citibank. This was a segregated account that paid a lower interest rate than an account that pooled money from other investors. Ash verified that the funds were in the Citibank account.

Neither Lerner nor NAT had any involvement with the selection of LandAmerica. As noted, the escrow was to close on Friday, November 21,

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2008, but it was anticipated by both defendants that the escrow would take a few more days to close. When so informed, Ash responded, " no problem do I get a discount [smiley face] (jk) [just kidding]. Thank you!!" Ash's response expressed no concern about the status of LandAmerica. On Monday, November 24, 2008, LandAmerica froze all of its accounts, including segregated accounts, and then filed for bankruptcy.

Ash's real estate broker was aware of LandAmerica and the number of people who used it. He believed it was a " very substantial company" and a " very large company" and knew of its affiliated companies. He said he told Ash it was a reputable company. Ash's broker said he too was " shocked" and " everybody was shocked" when LandAmerica closed its doors. Ash had expressed no concerns to Lerner or to NAT about the financial solvency of LandAmerica. The escrow officer at NAT who had worked with LandAmerica had no concerns about the solvency of LandAmerica prior to the bankruptcy. She said she was " shocked" upon hearing LandAmerica had closed.

Ash's expert, who once worked for LandAmerica, said it was " unusual," " alarming," and " unique" that LandAmerica closed its doors. She added that escrow holders would not get information about rumors concerning a section 1031 qualified intermediary, and if they did, they would not necessarily inform the principals to escrow accounts of such rumors. She could not say that any such rumors about LandAmerica were generally known by people in the real estate industry in Southern California. There is no evidence that Ash, and more importantly defendants, were aware of any such rumors about LandAmerica. The real estate agents involved, in addition to the escrow officer for NAT, said they were " shocked" and surprised about LandAmerica's bankruptcy. A LandAmerica employee handling the matter said she had been involved in 5000 or more section 1031 exchanges and apparently had no warning of an impending LandAmerica bankruptcy. That LandAmerica employee said, " There was never any doubt until 9:00 a.m. on the morning of November 24 [the date the business closed] that the money would be available." She added that the event was so traumatic that it was even worse than the death of her father— " worse than anything" ; " absolutely beyond description." She added, " everybody [at LandAmerica] was very angry and couldn't understand how it could happen." Another LandAmerica employee said she had no awareness of any financial problems with LandAmerica. Ash's real estate agent, who had been in the industry for more than 35 years and involved with section 1031 exchanges, said this was the first one in which a qualified intermediary failed to fund the escrow.[7] Despite Ash's

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hopes and the fact that the money was in a segregated account, the bankruptcy court refused to allow depositors, including Ash, to have access to their deposited monies.

Ash did not cancel the transaction because he was concerned he might lose his deposits and would be unable to complete the tax-deferred exchange. He continued to pay interest on the bank loan he had taken out to purchase the property without the income from the property to use for loan payments. The bank required Ash to repay the loan after five months because there was no deed of trust recorded to secure the loan. Without income from the property, he was required to borrow money from his mother. He also needed to hire an attorney to attempt to convince the bankruptcy court to release his money in order to complete the transaction.

The escrow did not close until March 2010, after the bankruptcy court finally released Ash's funds. The closing of escrow was too late for Ash to obtain the section 1031 tax deferral of his capital gain taxes.[8]

As a result of the delayed escrow and the delay in recovering his funds resulting from the bankruptcy, Ash sued Lerner and NAT for damages, including Ash's legal expenses of $140,000 incurred in the bankruptcy proceeding and tax liability of $465,000 due to the failure of the section 1031 exchange. Additionally, Ash claimed $166,000 in income from the property if the sale had been timely completed, payments to the lender of $42,000, $189,000 paid for a new loan above what he would have paid for the original loan that was terminated by the original lender, and $28,000 of interest on a loan to meet expenses. These direct damages totaled $1,033,000.[9] Ash also sought indirect damages of $1 million attributed to his loss of cash flow to retain and purchase properties.

Defendants' made motions for nonsuit based on a lack of causation and the defense of intervening and superseding cause. The trial court denied the motions and refused to give defendants' proposed instructions on causation and intervening/ superseding cause.

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The jury returned its verdict finding that Lerner breached its contract by delaying the timely close of escrow, and was liable to Ash for $300,000, and that NAT breached its contract with Ash to provide proper and timely escrow and title services and was liable for $250,000 in contract damages. The jury also found that NAT was liable for negligence in the amount of $500,000 and for $250,000 for breach of fiduciary duty. The jury imposed punitive damages on NAT in the amount of $750,000. The trial court granted NAT's motion for judgment notwithstanding the verdict as to the punitive damage award, but otherwise denied the motions for new trial and judgment notwithstanding the verdict. Lerner and NAT timely appealed. Ash cross-appealed in connection with the punitive damages.

DISCUSSION

A. Standard of Review

The determinations of whether there was a breach of contract and whether the contract damages are foreseeable are questions of fact ( Plut v. Fireman's Fund Ins. Co. (2000) 85 Cal.App.4th 98, 105-106, 102 Cal.Rptr.2d 36; Sun-Maid Raisin Growers v. Victor Packing Co. (1983) 146 Cal.App.3d 787, 790, 194 Cal.Rptr. 612; Porter v. Arthur Murray, Inc. (1967) 249 Cal.App.2d 410, 421, 57 Cal.Rptr. 554; ) and are governed by the substantial evidence test ( Garlock Sealing Technologies, LLC v. NAK Sealing Technologies Corp. (2007) 148 Cal.App.4th 937, 955-956, 56 Cal.Rptr.3d 177; Lenk v. Total-Western, Inc. (2001) 89 Cal.App.4th 959, 968, 108 Cal.Rptr.2d 34)— i.e. whether there is substantial evidence to support the findings of the trier of fact. " ‘ Substantial evidence ... is not synonymous with " any" evidence. Instead, it is " ‘ substantial proof of the essentials which the law requires.’ " ' [Citation.]" ( Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651, 51 Cal.Rptr.2d 907.) We view the evidence in the light most favorable to the prevailing party and draw all reasonable inferences and resolve all conflicts in its favor. ( Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114, 1128-1129, 112 Cal.Rptr.3d 647.) Regarding whether the failure to give an instruction on intervening and superseding cause was error, we use the de novo standard of review. ( Collins v. Navistar, Inc. (2013) 214 Cal.App.4th 1486, 1500, 155 Cal.Rptr.3d 137.)

B. Damages Against Lerner and NAT for Breach of Contract— Forseeability

" Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time; consequential damages beyond the expectations of the parties are not recoverable. [¶] In contrast, tort damages are

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awarded to compensate the victim for injury suffered. [Citation.] ‘ For the breach of an obligation not arising from contract, the measure of damages ... is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.’ (Civ. Code. § 3333.)" ( Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515-516, 28 Cal.Rptr.2d 475, 869 P.2d 454.)

The court in Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960, 969, 22 Cal.Rptr.3d 340, 102 P.3d 257 ( Lewis Jorge ) discussed this principle, pointing out that California follows the common law rule set forth by an English court in Hadley v. Baxendale (1854) 156 Eng. Rep. 145. In that venerable English case, a shaft in Hadley's mill broke rendering the mill inoperable. Hadley contracted with Baxendale to transport the shaft to an engineer to make a duplicate. Hadley told Baxendale the shaft should be sent immediately, and Baxendale promised to have it delivered the next day. Baxendale did not know the mill would be inoperable until the new shaft arrived. Baxendale did not transport the shaft in the promised time, causing the mill to be shut down for an additional five days. Hadley sued, inter alia, for lost profits resulting from the delay. The court held that although a plaintiff is entitled to an amount that will place it in the same position it would have been had the breaching party performed, damages for special circumstances, such as in that case, can be assessed against the breaching party only when they were within the contemplation of both parties as a probable consequence of a breach. Baxendale did not know that the mill would be shut down and would remain shut until the new shaft arrived. Loss of profits could not fairly or reasonably have been contemplated by both parties without Hadley having communicated the special circumstances to Baxendale. Thus, the court, in reversing the judgment, held that lost profits could not be awarded to Hadley. ( Id. at p. 152.)

The court in Lewis Jorge, supra, 34 Cal.4th at pages 969 through 970, 22 Cal.Rptr.3d 340, 102 P.3d 257 added, " Hadley did not expressly distinguish between general and special damages. But such a distinction flows naturally from that case; hence the rule that a party assumes the risk of special damages liability for unusual losses arising from special circumstances only if it was ‘ advised of the facts concerning special harm which might result’ from breach— it is not deemed to have assumed such additional risk, however, simply by entering into the contract. [Citations.] [¶] The Hadley rule has long been applied by California courts, which view it as having been incorporated into California Civil Code section 3300's definition of the damages available for breach of a contract. [Citations.] Contract damages, unlike damages in tort (Civ.Code, § 3333), do not permit recovery for unanticipated injury. [Citation.] Parties may voluntarily assume the risk of liability for unusual losses, but to do so they must be told, at the time the contract is made, of any special harm likely to result from a breach [citations]. Alternatively, the nature of the contract or the

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circumstances in which it is made may compel the inference that the defendant should have contemplated the fact that such a loss would be ‘ the probable result’ of the defendant's breach. [Citation.] Not recoverable as special damages are those ‘ beyond the expectations of the parties.’ [Citation.] Special damages for breach of contract are limited to losses that were either actually foreseen [citation] or were ‘ reasonably foreseeable’ when the contract was formed. [Citation.]" (See Erlich v. Menezes (1999) 21 Cal.4th 543, 550, 87 Cal.Rptr.2d 886, 981 P.2d 978; Greenwich S.F., LLC v. Wong (2010) 190 Cal.App.4th 739, 760, 118 Cal.Rptr.3d 531 [special damages not foreseeable as a matter of law]; see also California Press Mfg. Co. v. Stafford Packing Co. (1923) 192 Cal. 479, 483, 221 P. 345.) In III Farnsworth on Contracts (3d ed. 2004) section 12.14, pages 260 to 262 (Farnsworth), the author sets forth the criteria for foreseeability in part as follows: " foreseeability is to be determined as of the time of the making of the contract" ; " what must be foreseeable is only that the loss would result if the breach occurred" ; " it is foreseeability only by the party in breach that is determinative" ; " foreseeability has an objective character" ; and " the loss need only have been foreseeable as a probable, as opposed to a necessary or certain, result of the breach."

The instant case is governed by the Hadley v. Baxendale, supra, Eng. Rep. 145 principle adopted by our Supreme Court. To the extent any part of the $250,000 of damages for the breaches of contract by Lerner and NAT is attributable to expenses incurred in connection with the bankruptcy and the loss of the deferral of the capital gains tax, such damages are not general damages, i.e., those " ‘ which, in the ordinary course of things, would be likely to result’ " from the breach (Civ.Code, § 3300) and which " flow directly and necessarily from a breach of contract, or that are a natural result of a breach" and are within the contemplation of the parties. ( Lewis Jorge, supra, 34 Cal.4th at p. 968, 22 Cal.Rptr.3d 340, 102 P.3d 257.) Rather, they " are secondary or derivative losses arising from circumstances that are particular to the contract or to the parties." ( Ibid. ) These " [s]pecial damages are recoverable if the special or particular circumstances from which they arise were actually communicated to or known by the breaching party (a subjective test) or were matters of which the breaching party should have been aware at the time of contracting (an objective test)." ( Id. at pp. 968-969, 22 Cal.Rptr.3d 340, 102 P.3d 257.) Moreover, " [s]pecial damages ‘ will not be presumed from the mere breach’ but represent loss that ‘ occurred by reason of injuries following from’ the breach. [Citation.]" ( Id. at p. 969, 22 Cal.Rptr.3d 340, 102 P.3d 257.)

Because counsels' arguments to the jury are not evidence, we look to the testimony of the witnesses and the documents introduced as exhibits to assess the foreseeability of the bankruptcy. There is no evidence in the record that Ash communicated to Lerner or NAT at the time of contracting— the relevant time— or at anytime, that the bankruptcy of LandAmerica and indefinite freezing of segregated accounts could result from a short but untimely delay

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in the escrow closing. There is no evidence in the record, expert or otherwise, that Lerner or NAT knew or should have known of this risk at the time of contracting or anytime. The transaction in issue took place in the fall of 2008, during an economic recession. Evidence of the various events that allegedly took place during 2008 and their timing is not in the record. There is no evidence as to what facts Lerner or NAT knew concerning those events. Whatever Ash's ...


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