Introduction:
Alleging that one was defrauded by another party is a common cause of action in California. Such fraud can be either intentional or negligent and allows the injured party to seek relief in court. It can also be a criminal act in which the state may enforce the law even if the victim does not.
However, a key issue that must be confronted by the victim and his or her counsel is precisely what damages may be awarded if fraud is proven in a real estate transaction. And to the shock of many plaintiffs, it is quite possible to prove fraud, even intentional fraud, yet be entitled to no damages.
That is the topic of this article.
The Basic Law:
“Fraudulent misrepresentation” refers to a statement, which can be verbal, written, or implied through actions, which is either made recklessly and without concern for its truthfulness; or, alternatively, a false promise that is made without any intention of actually carrying out the promised action.
The essential elements of a cause of action are:
the defendant represented to another that a fact was true;
the representation was actually false;
the defendant knew the representation was false (or was reckless about its truth);
the defendant intended the other person to rely on the statement;
the other person did rely on the statement;
the other person was harmed by the reliance; or
the plaintiff’s reliance on the defendant’s representation was a substantial factor in causing the harm suffered.
There are various categories of misrepresentation claims described in California’s Civil Code section 1710. That provision identifies four kinds of fraud:
intentional misrepresentation;
concealment;
false promise; and
negligent misrepresentation.
Note that we are dealing with statements of fact. Usually, an opinion cannot be a statement upon which a lawsuit can be based under this California law. A person’s expression of his or her opinion does not usually constitute a misrepresentation even when it turns out that opinion is incorrect. Thus, in a sales presentation by a realtor, if she says she thinks the house is one of a kind and designed by X and that is not true, that could be a misrepresentation. But if she says she thinks the house is the most beautiful in the neighborhood, that is not actionable.
But also note that concealment of a fact or facts can also constitute fraud. Concealment occurs when a person intentionally fails to disclose or actively hides a known fact to induce reliance on the false representation. For concealment cases, there must be a legal duty to disclose the fact to the plaintiff but instead, the defendant intentionally suppressed the fact (“nondisclosure”) with the intent to defraud. That duty normally arises due to the relationship between the parties. In real estate transactions in California, the Seller is under a duty to disclose various aspects of the property truthfully.
A false promise is sometimes called “promissory fraud” in pleadings. A false promise occurs when:
He or she makes a promise to do something (“intention of performing”) without any actual intent to perform what was promised.
The promise must be made to convince the other person to rely on the promise.
A person “relied” on another person’s statement if:
the false statement, concealment, or false promise substantially influenced him or her to act in a certain way; and
he or she would probably have not done so without the false statement, concealment, or false promise.
Reliance requires that the victim show he or she would not have “gone along with it” except for the defendant’s conduct of lying and false statement of facts.
However, the false statement does not have to be the only reason for the reliance. If multiple true statements were made and an important false one (“half-truth”), it is permissible for a person to rely on both the true statements and the false statements in deciding to rely upon them.
DAMAGES AVAILABLE:
In a trial, the Judge instructs the jury as to the law and has a set of form instructions on all topics including damages available for fraud.
Judicial Council of California Civil Jury Instructions (2025 edition)
1923. Damages - “Out of Pocket” Rule. If you decide that [name of plaintiff] has proved [his/her/nonbinary pronoun/its] claim against [name of defendant], you also must decide how much money will reasonably compensate [name of plaintiff] for the harm. This compensation is called “damages.” The amount of damages must include an award for all harm that [name of defendant] was a substantial factor in causing, even if the particular harm could not have been anticipated. [Name of plaintiff] must prove the amount of [his/her/nonbinary pronoun/its] damages. However, [name of plaintiff] does not have to prove the exact amount of damages that will provide reasonable compensation for the harm. You must not speculate or guess in awarding damages. To decide the amount of damages you must determine the [fair market]value of what [name of plaintiff] gave and subtract from that amount the[fair market] value of what [he/she/nonbinary pronoun/it] received.[“Fair market value” is the highest price that a willing buyer would have paid on the date of the transaction to a willing seller, assuming:1. That there is no pressure on either one to buy or sell; and 2. That the buyer and seller know all the uses and purposes for which the [insert item] is reasonably capable of being used.][Name of plaintiff] may also recover amounts that [he/she/nonbinary pronoun/it] reasonably spent in reliance on [name of defendant]’s [false representation/failure to disclose/false promise] if those amounts would not otherwise have been spent.
In terms of purchase and sale of real estate, this measure of damages could result in virtually no compensation being available if the asset appreciated or has a fair market value greater than the price paid.
Consider: You failed to disclose defects in your property that will cost me fifty thousand dollars to correct and that was intentional on your part. I discovered them two months after the close of escrow. But between the purchase and my seeking relief, the real estate market remained strong, and I actually purchased it for two hundred thousand dollars below fair market value. Even with the extra cost of repair, the value of the property was one hundred and fifty thousand dollars more than I paid. Under this measure of damages, I suffered no loss by your misrepresentation since the fair market value of the property was higher than what I paid.
Some jurisdictions would state you lost the benefit of the bargain, namely fifty thousand dollars in repair costs. Not California if the fair market test is used.
You may be entitled to ancillary costs, such as the cost of the additional inspection to discover the true condition of the property, such as the hiring of an engineer, but not the lost value of the property itself. Given the cost of litigation, such ancillary costs are seldom worth the litigation.
PUNITIVE DAMAGES AVAILABLE
But can you get PUNITIVE DAMAGES against the party who committed the fraud even if the fair market test does not generate damages for the fraud?
The California Civil Code, section 3294, states that punitive damages are available to California plaintiffs who can show that a defendant acted with “oppression, fraud, or malice” toward the plaintiff, in any claim that does not stem from a breach of contract. This leaves a broad array of lawsuits where plaintiffs can seek punitive damages. These can include:
· Certain physical injury claims, such as assault or battery claims
· Sexual harassment or assault lawsuits
· Drunk driving injury claims
· Claims based on ongoing physical abuse
· Certain product liability claims where a dangerous defect was overlooked or ignored
· Suits based on fraud perpetrated on a corporation or business partner
· Wrongful termination lawsuits where the employer committed gender, race, or sexual orientation-based discrimination in terminating the plaintiff.
Note that fraud in the real estate transaction will be argued by the defendant to be based solely on the contractual obligation. California statutes which provide numerous requirements for disclosure may negate that requirement, however. One is suing for breach of those statutes. Further, while punitive damages are not typically recoverable in an action for breach of contract, they may be awarded if the defendant fraudulently induced the plaintiff to enter the contract in the first place.
The California Civil Code requires that plaintiffs prove with “clear and convincing evidence” that a defendant behaved with oppression, fraud, or malice when committing a wrong against the plaintiff. These terms have definitions under California statutory and case law which offer some additional guidance.
· “Oppression” is defined as being despicable conduct that subjects the victim to a cruel and unjust hardship in conscious disregard of their rights.
· “Fraud” is an intentional misrepresentation or deceit.
· “Malice” consists of conduct intended to injure the plaintiff, or which was despicable and showed a willful and conscious disregard for others’ rights and safety.
To award punitive damages, the plaintiff must prove by clear and convincing evidence that the defendant engaged in conduct with malice, oppression, or fraud.
Again, the jury instructions describe best what is needed for punitive damages:
3940. Punitive Damages - Individual Defendant - Trial Not Bifurcated. If you decide that [name of defendant]’s conduct caused [name of plaintiff] harm, you must decide whether that conduct justifies an award of punitive damages. The purposes of punitive damages are to punish a wrongdoer for the conduct that harmed the plaintiff and to discourage similar conduct in the future. You may award punitive damages only if [name of plaintiff] proves by clear and convincing evidence that [name of defendant] engaged in that conduct with malice, oppression, or fraud. “Malice” means that [name of defendant] acted with intent to cause injury or that [name of defendant]’s conduct was despicable and was done with a willful and knowing disregard for the rights or safety of another. A person acts with knowing disregard when the person is aware of the probable dangerous consequences of the person’s conduct and deliberately fails to avoid those consequences. “Oppression” means that [name of defendant]’s conduct was despicable and subjected [name of plaintiff] to cruel and unjust hardship in knowing disregard of [his/her/nonbinary pronoun] rights. “Despicable conduct” is conduct that is so vile, base, or contemptible that it would be looked down on and despised by reasonable people. “Fraud” means that [name of defendant] intentionally misrepresented or concealed a material fact and did so intending to harm [name of plaintiff]. There is no fixed formula for determining the amount of punitive damages, and you are not required to award any punitive damages. If you decide to award punitive damages, you should consider all of the following factors in determining the amount:(a) How reprehensible was [name of defendant]’s conduct? In deciding how reprehensible [name of defendant]’s conduct was, you may consider, among other factors:1. Whether the conduct caused physical harm;2. Whether [name of defendant] disregarded the health or safety of others;3. Whether [name of plaintiff] was financially weak or vulnerable and [name of defendant] knew [name of plaintiff] was financially weak or vulnerable and took advantage of [him/her/nonbinary pronoun/it];924
4. Whether [name of defendant]’s conduct involved a pattern or practice; and 5. Whether [name of defendant] acted with trickery or deceit.(b) Is there a reasonable relationship between the amount of punitive damages and [name of plaintiff]’s harm [or between the amount of punitive damages and potential harm to [name of plaintiff] that[name of defendant] knew was likely to occur because of [his/her/nonbinary pronoun/its] conduct]? (c) In view of [name of defendant]'s financial condition, what amount is necessary to punish [him/her/nonbinary pronoun/it] and discourage future wrongful conduct? You may not increase the punitive award above an amount that is otherwise appropriate merely because [name of defendant] has substantial financial resources. [Any award you impose may not exceed [name of defendant]’s ability to pay.] [Punitive damages may not be used to punish [name of defendant] for the impact of [his/her/nonbinary pronoun/its] alleged misconduct on persons other than [name of plaintiff].
California courts have further refined the criteria through case law, emphasizing the need for a direct link between the reprehensible conduct and the harm suffered by the plaintiff. In cases such as Taylor v. Superior Court, the California Supreme Court underscored the necessity for a nexus between the defendant’s conduct and the punitive damages awarded. This ensures that punitive damages are not awarded arbitrarily but are instead grounded in the specific circumstances of the case. The courts also consider factors such as the reprehensibility of the defendant’s conduct, the ratio of punitive damages to actual harm, and comparisons to civil penalties in similar cases.
The Problem: California Cap on Punitive Damages
In California, while punitive damages serve as a powerful tool for deterring and punishing improper behavior, some significant limitations and caps govern their imposition. These limitations ensure that punitive damages remain fair and proportional, preventing excessive financial burdens on defendants. The United States Supreme Court, in cases like BMW of North America, Inc. v. Gore, has influenced California courts by emphasizing due process considerations, which require punitive damages to be reasonable and proportionate to the actual harm inflicted. This has led to a nuanced balancing act where courts must weigh the severity of the misconduct against the financial impact of the punitive award.
California courts also adhere to the guidelines set forth in State Farm Mutual Automobile Insurance Co. v. Campbell, suggesting that punitive damages should generally not exceed a single-digit ratio to compensatory damages. This means punitive damages should typically not be more than nine times the amount of actual damages awarded, though exceptions may exist in cases involving particularly reprehensible behavior.
In addition to judicial guidelines, California legislation requires that any award be reviewed for reasonableness. This involves an assessment of factors such as the nature of the defendant’s conduct, the relationship between the punitive and compensatory damages, and the potential impact on the defendant’s financial status. By mandating this review, California law seeks to prevent arbitrary or excessive punitive damage awards that could undermine public confidence in the judicial system.
What all this comes down to is that there is a cap of nine times actual damages on possible punitive damages to be awarded and there is a higher burden of proof on being entitled to punitive damages.
Conclusion and Strategy:
Before deciding to commence litigation, it is vital to look beyond emotions such as anger and do a firm cost-benefit analysis. Demonstrating liability is only half the issue: just as important is what damages are possible to be awarded.
One angry client noted that getting the property below market value was, in itself, an asset he owned, and he should not be made to suffer if that value was reduced by someone else's fraud. The key is to determine what other causes of action might lie or are given by statutory law and not just assume that one can ignore the fair market value test of California law.