REMEDIES FEBRUARY 2017 CALIFORNIA BAR EXAM QUESTION #2

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1 REMEDIES FEBRUARY 2017 CALIFORNIA BAR EXAM QUESTION #2 Steve agreed to convey his condominium to Betty for $200,000 in a written contract signed by both parties. During negotiations, Steve told Betty that, although there was no deeded parking along with the unit, he was allowed to park his car on an adjacent lot for $50 a month. Steve stated that he had no reason to believe that Betty would not be able to continue that arrangement. Parking was important to Betty because the condominium was located in a congested urban area. On June 1, the conveyance took place: Betty paid Steve $200,000, Steve deeded the condominium to Betty, and Betty moved. She immediately had the entire unit painted, replaced some windows, and added a deck. The improvements cost $20,000 in all. She also spent $2,000 to remove the only bathtub in the condominium and to replace it with a shower, leaving the condominium with two showers and no bathtub. On August 1, Betty discovered that the owner of the adjacent parking lot was about to construct an office building on it and was going to discontinue renting parking spaces. She also learned that Steve had known about these plans before the sale. She quickly investigated other options and discovered that she could rent parking a block away for $100 a month. At the same time, she also found that, immediately before Steve had bought the condominium, the previous owner had been murdered on the premises. Steve had failed to tell Betty about the incident. Betty has tried to sell the condominium but has been unable to obtain offers of more than $160,000, partly due to the disclosure of the murder and the lack of a parking space. Betty has sued Steve for fraud. What is the likely outcome of Betty s lawsuit and what remedies can she reasonably seek? Discuss. Fleming s Fundamentals Of Law ( 2017) Remedies Page 1

2 REMEDIES FEBRUARY 2017 CALIFORNIA BAR EXAMINATION QUESTION #2 What Is The Likely Outcome Of Betty s Lawsuit And What Remedies Can She Reasonably Seek? Applicable Law The common law applies to contracts for the sale of real estate. Steve and Betty executed a contract for the sale of Steve s condominium at a price of $200,000. Therefore, the common law governs the contract. Formation - Validity of Contract A valid contract requires mutual assent and consideration. Here, the facts state that Steve agreed to convey his condominium to Betty for $200,000 in a written contract signed by both parties. Thus, mutual assent is present. On June 1, the conveyance took place: Betty paid Steve $200,000, Steve deeded the condominium to Betty, and Betty moved in. The required bargained-for exchange and legal detriment is present as well. The agreed consideration was $200,000. Therefore, a valid contract exists for the sale of Steve s condominium. Statute of Frauds Contracts involving an interest in real property must be in writing in order to satisfy the statute of frauds. The facts stipulate the condominium contract was written and signed by both parties. Therefore, the statute of frauds is satisfied. Parol Evidence Any written/oral statements made prior or oral statements made contemporaneous with the contract cannot vary, add to, or contradict terms of original writing. The rule applies only to writings, which parties intend to be the final expression of their bargain. Here, during pre-contract negotiations, Steve told (oral) Betty that, although there was no deeded parking along with the unit, he was allowed to park his car on an adjacent lot for $50 a month. Steve stated that he had no reason to believe that Betty would not be able to continue that arrangement. Steve was aware that parking was important to Betty because the condominium was located in a congested urban area. Fleming s Fundamentals Of Law ( 2017) Remedies Page 2

3 On August 1, Betty discovered that the owner of the adjacent parking lot was about to construct an office building on it and was going to discontinue renting parking spaces. She also learned that Steve had known about these plans before the sale. She quickly investigated other options and discovered that she could rent parking a block away for $100 a month. Steve will contend that the written contract with Betty was intended to be the final expression of their agreement. As a fully integrated contract, the parol evidence rule would bar the introduction of his oral statement made during pre-contract negotiations, that, he had no reason to believe that Betty would not be able to continue that arrangement (added term). Therefore, the parol evidence rule is applicable. Thus, Betty will be prevented from introducing Steve s statement that she was allowed to park her car on an adjacent lot for $50 a month. Exception to the Parol Evidence Rule Fraud - Intentional Misrepresentation Parking Adjacent Lot Intentional misrepresentation is a misrepresentation of an existing material fact made knowingly, with the intent to induce plaintiff's reliance, causing the plaintiff to justifiably rely to her damage. Here, Steve knew it was important to Betty that she has a parking place in the event she purchased the condominium. Steve told Betty that she could rent a space in an adjacent lot for $50 per month. This was an existing material fact, as parking was important to Betty because the condominium was located in a congested urban area. Further, at the time Steve made the statement, he knew it was false because he was aware that the owner of the parking lot intended to construct an office building on the site. Steve made the false statement with the intent to induce Betty to buy the condominium, and she justifiably relied on his statement when she purchased the property. Betty has tried to sell the condominium but has been unable to obtain offers of more than $160,000, partly due to the disclosure of the murder (discussed below) and the lack of a parking space. Therefore, she suffered damages as a direct result of her reliance. Therefore, Steve is liable for intentional misrepresentation. Fraud - Intentional Nondisclosure Murder On The Premises Betty also has a claim against Steve for intentional nondisclosure. Active concealment is a form of misrepresentation. According to the facts, Steve failed to disclose (omission) that the previous owner of the premises had been murdered on the premises. This was a material fact, as it affected the condominium s market value. Moreover, Steve knew of the incident, but intentionally concealed the murder and failed to tell Betty about it. Thus, the nondisclosure likely was a factor that induced Betty to buy the condominium, as she would not have otherwise purchased it. Fleming s Fundamentals Of Law ( 2017) Remedies Page 3

4 Further, as discussed above, Betty has tried to sell the condominium but has been unable to obtain offers of more than $160,000, partly due to the disclosure of the murder. Therefore, she suffered damages. Steve is liable for fraud based on intentional nondisclosure. Breach A breach is an unjustified failure to perform, which goes to the essence of the bargain. Steve knew that parking was important to Betty since the condominium was located in a congested urban area. He told her that he had no reason to believe that she would not be able to continue the parking arrangement since he was allowed to park his car on an adjacent lot for $50 a month. Thus, parking was a material term of the contract discussed during negotiations. On August 1, Betty discovered that the owner of the adjacent parking lot was about to construct an office building on it and was going to discontinue renting parking spaces. It was at that time, that she learned for the first time that Steve had known about these plans before the sale. It was only when she quickly investigated other options that she discovered that her only option was to rent parking a block away for $100 a month (essence of the bargain). As such, Steve intentionally lied to Betty about the parking. He induced Betty to purchase his condominium. Therefore, Steve committed a major breach. Contract Remedies: General Damages General damages are an award of money to compensate for plaintiff s lost benefit of the bargain. In contact cases, damages are a monetary award given to protect the non-breaching party s expectancy under the contract. Here, Betty is the non-breaching party. She purchased the condominium for the agreed contract price of $200,000. Betty has tried to sell the condominium but has been unable to obtain offers of more than $160,000, partly due to the disclosure of the murder and the lack of a parking space. Therefore, Betty s expectation interest is the difference between the contract price of $200,000 and the current market price of $160,000 or $40,000. Consequential Damages Consequential damages are those damages that are unique to the plaintiff, which must be pled and proven specially. In contracts cases, the foreseeability of special damages is limited by the rule of Hadley v. Baxendale. To recover these damages, the plaintiff must prove that they were within the contemplation of the parties (foreseeable) when the contract was made, reasonably certain and unavoidable. Fleming s Fundamentals Of Law ( 2017) Remedies Page 4

5 Betty may try to recover the $20,000 she spent in improvements to the condominium and the $2,000 she spent to replace the bathtub with a shower as special damages. Betty will be unsuccessful for two reasons. First, the facts show it was not within the contemplation of the parties at the time of contracting that Betty would incur these costs, as Steve did not know of her plans. Therefore, Betty cannot meet the Hadley foreseeability requirement. Second, if the court were to award special damages for the improvements and bathroom remodel, Betty would have a windfall. If Betty elects to sue for breach of contract damages, the award of $40,000 in general damages will fully compensate for her lost expectancy. The remodeling costs are ones Betty voluntarily incurred that were not caused by Steve s fraud. The costs of changes to the condominium are Betty s responsibility as new owner. It would be unfair to make Steve pay $40,000 as general damages and also give Betty a free remodel at his expense. The purpose of damages is to compensate for loss, not to give the plaintiff a windfall. Therefore, Betty will not recover the $22,000 in consequential damages for Steve s breach of contract. Rescission for Fraud Rescission is a remedy available in both the common law and the equity courts to cancel a contract and restore the parties to the pre-contract status quo. If the court grants rescission, the parties are required to return any consideration they received under the agreement. Rescission is available as a remedy when one party induces the other to enter into a contract by misrepresenting a fact material to the agreement. As discussed above, Steve committed an intentional misrepresentation regarding the parking space and intentionally failed to disclose the murder at the condominium. For these reason, Betty qualifies for rescission. If she sued for rescission in a common law court, Betty would have to notify Steve of her intent to rescind and offer to tender back the consideration she received before suing. In equity, there is no pre-suit tender back requirement. Restitution Unjust Enrichment Restitution places the parties in the position they would have occupied if the contract had never been formed. Thus, restitution compels the wrongdoer to return to the aggrieved party (usually by payment of money) the value of any benefit the aggrieved party has conferred upon the wrongdoer. Betty would request the return of the $200,000 purchase price, the $20,000 for improvements to the condominium (painting, replacements windows, and a deck), and $2,000 for removing the bathtub and replacing it with a shower. She would also want interests on these amounts. In turn, Betty would be required to transfer title back to Steve. The court might require Betty to pay rent for the time she lived in the condominium. This would restore the parties to the pre-contract status quo. Fleming s Fundamentals Of Law ( 2017) Remedies Page 5

6 Steve may argue that removing the bathtub and replacing it with a shower did not benefit him, but may actually make it more difficult to sell the condominium to another buyer. However Betty made this change and the other improvements before she discovered Steve s fraud. It is equitable that she should recover for all the improvements because Steve s dishonesty was the cause of the problem. For these reasons, Betty is entitled to rescission of the contract and restitution of the purchase price ($200,000) and $22,000 for all improvements, plus interest. Reliance Damages If Betty incurred out-of-pocket losses, such as moving expenses, she would also be entitled to these as reliance damages, but there are no facts showing these kinds of losses. Tort Remedies Damages Betty can sue Steve for damages she suffered as a result of Steve s fraud. The purpose of tort damages is to compensate plaintiff with a monetary award for injuries caused by the defendant. General Damages General damages are those the law presumes flow naturally from the tort. The out-of-pocket measure of general damages for fraud is the difference between the contract price and the actual fair market value of the land. Here, the facts show Betty paid $200,000 for the condominium. She has tried to sell it, but she has been unable to obtain offers greater than $160,000 partly due to the murder and lack of parking space. Her general damages under this measure are $40,000. There is a second measure of general damages for intentional fraud known as the benefit-of-thebargain measure, but no facts are given to compute this amount. Special Damages Special damages compensate for other injuries caused by defendant that do not naturally flow from the tort. A plaintiff must plead and prove these damages. In tort cases, they are limited by the rule of proximate cause. Betty will argue that she should receive the additional $50 per month that she must pay for parking. She will ask the court to award this amount for the years she will likely own the condominium, discounted to present value. Steve will argue that the increased cost of parking is already reflected in the condominium s lower fair market and therefore is already included in the general damages award. As such, an additional award for the increased parking costs would result in a double recovery. Fleming s Fundamentals Of Law ( 2017) Remedies Page 6

7 Steve is likely to prevail on this issue. Punitive Damages If a defendant acts willfully, wantonly, and maliciously when committing an intentional tort, the plaintiff may recover punitive damages. Punitive damages are awarded to punish and deter such conduct. The facts establish that Steve intentionally deceived Betty about the parking problem and also concealed material information about the murder. A court is likely to find his conduct was willful, wanton, and malicious. Steve acted in bad faith and should be punished for his egregious conduct. Therefore, Betty will be able to recover punitive damages against Steve. Fleming s Fundamentals Of Law ( 2017) Remedies Page 7