Opinion ID: 2632007
Heading Depth: 2
Heading Rank: 2

Heading: Applying Taylor and Garcia

Text: According to the Court of Appeal, two general principles are involved in this case: the  Garcia principle that a personal injury plaintiff cannot avoid a fraudulently induced release without rescinding it and restoring the consideration received, and the more general principle that a party who is fraudulently induced to execute a contract can either rescind the contract and restore the consideration, or can affirm the contract and recover damages for fraud. The Court of Appeal limited application of Garcia and Taylor to personal injury cases, and applied the more general rule for fraud actions that do not involve the rescission of a contract or release agreement. As we explain, the court concluded that Village Northridge may avoid the release in its settlement agreement, keep the settlement proceeds, and sue for fraud by affirming the agreement that it wishes in large part to invalidate. The Court of Appeal relied on two California cases that applied this affirm-and-sue principle. The court initially cites Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1220 [18 Cal.Rptr.3d 276] ( Denevi ) for the proposition that a victim of fraud has the right to `affirm the contract, and simply sue for damages for the fraud.' (Italics omitted.) In Denevi, the plaintiff held a contractual right to purchase a parcel of real property for $8 million. ( Id. at p. 1215.) The plaintiff entered into an agreement with several investors to form a venture to purchase the property. Following a disagreement between the parties over the escrow account, the property owner sold the property to another party. ( Ibid. ) The plaintiff later filed both a derivative action against the seller on the venture group's behalf and a personal claim against his fellow investors in the venture group for, inter alia, fraud in failing to provide adequate funding to purchase the property. ( Id. at p. 1216.) In ruling on the personal fraud claim, the Court of Appeal observed that the plaintiff never elected to rescind the original venture contract and that, in any event, rescission became impossible when the property reverted to the owner, who transferred it to a complete stranger. ( Denevi, supra, 121 Cal.App.4th at p. 1221.) In short, the court recognized that it had no power to order return of the property to the plaintiff and that rescission was therefore impossible. ( Ibid. ) The court stated that the plaintiff, as an alleged fraud victim, may not be required to undo the transaction in its entirety when the fraud occurred at the moment the venture group's management induced the plaintiff to part with his purchase rights, i.e., at the inception or formation of the contract. ( Id. at p. 1219.) The court reasoned: [The plaintiff] has the right to ` retain the benefits of the contract . . ., and make up in damages the loss suffered by the fraud. . . . [ H ] e may affirm the contract, and simply sue for damages for the fraud. ' ( Denevi, supra, at p. 1220, quoting 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 726, p. 825, some italics added by the Denevi court.) Denevi does not apply here because it assumes the existence of a contract fully executed by both sides and affirmed in its entirety, followed by a suit for fraud. ( Denevi, supra, 121 Cal.App.4th at pp. 1220-1221.) That case did not involve a settlement and release of all disputed claims, and a release was not the object of any agreement between the parties. In Denevi, because there was no settlement and release of all claims, there was simply no indication that the plaintiff ever invoked any of the procedures generally reflecting a rescission. ( Id. at p. 1220.) In sum, in contrast to the Denevi facts, the purpose of the settlement and release in this case was to buy[] peace, i.e., freedom from the threat of suit in a case in which the damage amounts were disputed. The Court of Appeal reasoned that State Farm was not simply buying peace, as in the release of a personal injury claim, but was also satisfying an underlying contractual obligation. Whether or not defendant's sole objective in this settlement was to buy peace, that end was part of the consideration defendant expected to receive as a result of the settlement and release between the parties. Indeed, the Court of Appeal acknowledges this is so. Therefore, plaintiff does not seek to affirm the release in its entirety, nor can it assert with any merit that it does so. (5) The Court of Appeal next relied on Sime v. Malouf (1949) 95 Cal.App.2d 82 [213 P.2d 788] ( Sime ), which involved a sophisticated corporate conspiracy and complicated factual and procedural situation. Sime analyzed a release that was included in a sales agreement under which the defendants acquired the plaintiff's interest in a project. ( Id. at pp. 108-109.) In contrast to the release signed by Village Northridge and State Farm, the release at issue in Sime was a general release that did not include unknown claims ( id. at p. 110; see § 1542), and no monetary consideration was paid for the release. ( Sime, supra, 95 Cal.App.2d at pp. 109-110.) Sime stated that restoration was not necessary where the plaintiff had a right, independently of the release itself, to retain the money. ( Id. at p. 111.) Sime clearly articulated the difference between cases involving fraud in a release over a disputed amount and fraud in inducing one to buy something: In such cases [( Garcia and Taylor )] it is clear that the plaintiff must restore what he has received in settlement of the disputed claim before suing upon it. He cannot retain the benefits of the release and sue, for to sue would violate the terms of his bargain. To hold otherwise would frustrate the very purpose of the release and destroy its effectiveness as a favored device for eliminating litigation. Hence rescission is necessary[,] and may be effectively accomplished only by returning the entire consideration received, for if plaintiff should fail to establish his cause of action, he would not be entitled to retain anything. The rule in such circumstances appears to be well settled. ( Id. at pp. 110-111.) The Sime court also recognized that [e]qually well established, however, is the exception to the rule: A restoration is not necessary, in order to avoid the bar of a release, where there is no question as to the right of the plaintiff, arising independently of the release itself, to retain what he received. [Citations.] ( Sime, supra, 95 Cal.App.2d at p. 111; see id. at pp. 111-112, construing Montes v. Peck (1931) 112 Cal.App. 333, 341 [296 P. 624], and cases involving fraud in the sale of property.) Other cases are in agreement. (See, e.g., Stefanac v. Cranbrook Educational Community (1990) 435 Mich. 155 [458 N.W.2d 56, 60] [`A compromise and release is not to be confused with the law of contract, in which equivalents are exchanged, for the very essence of a release is to avoid litigation, even at the expense of strict right.'].) (6) Here, the additional $1.5 million State Farm paid to Village Northridge in exchange for the settlement and release of all claims is not wholly independent[] of the release itself. ( Sime, supra, 95 Cal.App.2d at p. 111.) The release was not included in a contract that had another purpose; it was the sole purpose of the settlement. Indeed, the underlying claim was the subject of dispute. State Farm maintained that not all of the damage was earthquake related and that the amount of the benefits owed was less than the claim. The settlement was intended to resolve that dispute, and the release was intended to apply to it. (7) In a related argument, which the Court of Appeal accepted, Village Northridge relies on Bagdasarian v. Gragnon (1948) 31 Cal.2d 744, 750 [192 P.2d 935], for the rule that a party has the option of affirming the settlement agreement and recovering fraud damages. However, this rule requires the affirming party `on his part [to] comply with the terms of the contract . . . .' ( Ibid., quoting Schmidt v. Mesmer (1897) 116 Cal. 267, 270-271 [48 P. 54].) Here, Village Northridge seeks to affirm those parts of the agreement that benefit it, but to invalidate a major part of the agreement that benefits State Farm. Therefore, the more general principle in Bagdasarian does not apply. (8) As State Farm observes, Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141 [23 Cal.Rptr.3d 335], on which Village Northridge and the Court of Appeal also rely, is easily distinguished. The dispute in Persson was over the price the defendant had to pay to purchase the plaintiff's stock certificates. ( Id. at pp. 1149-1150.) The court relied on its equitable power to set aside the contract, which it believed was procured by fraud. ( Id. at p. 1156.) In Persson, the plaintiff was allowed to affirm a settlement agreement, keep the settlement money, and sue for damages based on fraud. ( Id. at pp. 1152-1156.) Persson, however, was a case, like Sime, supra, 95 Cal.App.2d 82, in which the plaintiff was entitled to a portion of the money he received independent of the settlement. Village Northridge relies on Persson to claim that, because State Farm had an underlying contractual obligation not to misrepresent the terms of its policy, Village Northridge was entitled to payment for insured losses independent of the release it signed. As State Farm observes, however, in contrast to the parties in Persson, the parties here were settling a disputed claim, as the settlement agreement specifically recited. Indeed, even Persson recognized that Garcia controls whenever the release was the sole object of the contract, for which the consideration was paid. ( Persson, at pp. 1154-1155.)