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Faithless Fiduciaries: Broader Relief In Fraud Cases Involving Real Estate Transactions

April 27, 2020 Patrick Hammon

On Friday, the First District attempted to resolve a split of authority among California’s appellate courts regarding the availability of “benefit-of-the-bargain” damages in fraud actions involving the purchase of real property where the fraud is perpetrated by a fiduciary.  In Moore v. Teed, No. A153523, 2020 WL 1968237 (Cal. Ct. App. Apr. 24, 2020), the court endorsed the reasoning of three other appellate courts (while narrowing the analysis from several others) in finding that this substantially broader measure of damages is available in connection with such tort claims.  The Moore decision represents a significant step in tilting the economics in favor of potential plaintiffs—and against, among others, real estate agents—in such fraud cases.

In Moore, the plaintiff, Justin Moore, sued his real estate agent, Richard Burden Teed, for, among other claims, fraud and breach of contract in connection with the purchase and botched remodel of a fixer-upper house in the Pacific Heights neighborhood of San Francisco.  Part of Moore’s claims was premised on Teed’s assurances that he and his team of contractors could deliver a set of high-end improvements for just $900,000—assurances that ultimately proved false.  At trial, the jury returned a verdict in favor of Moore on his tort claims, but not his contract cause of action, and awarded Moore not only his “out-of-pocket expenses” in connection with remedying the botched renovations, but also his “benefit-of-the-bargain” damages for the additional cost he incurred in obtaining the renovations that had been promised him.

On appeal, Teed challenged the award on various grounds, including his contention that “benefit-of-the-bargain damages are not a permissible form of recovery for fraud actions involving the purchase of real property,” even when the fraud is perpetrated by a fiduciary.  Acknowledging the split of authority on the issue, the court sided with the reasoning of three appellate courts—Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, Pepitone v. Russo (1976) 64 Cal.App.3d 685, Fragale v. Faulkner (2003) 110 Cal.App.4th 229—in concluding that such damages are available against “faithless fiduciaries” in intentional fraud claims.  In so finding, the court narrowed the analysis set forth in Hensley v. McSweeney (2001) 90 Cal.App.4th 1081, Overgaard v. Johnson (1977) 68 Cal.App.3d 821, and Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240, cases in which courts seemed to suggest that only “out-of-pocket” damages were available in such cases.  The Moore court explained that those cases only applied to negligent—not intentional—misrepresentation by fiduciaries.  As such, the analysis in such cases did not foreclose the broader form of damages where the fiduciary’s fraud was intentional.

Finding no error in the damages award, the Moore court explained that “[a]pplying this broader measure of damages ensures that a faithless fiduciary is held to account for the full amount of the loss of which his breach of faith is a cause, and that a victim is compensated for any and all detriment proximately caused by their fraudulent behavior.”  To the extent the case is followed by other districts, Moore significantly alters the economic landscape in real estate fraud claims by meaningfully expanding the types of damages available against fiduciaries and allowing plaintiffs in such cases to obtain breach-of-contract damages, without proving the existence or breach of a contract in the first place.