Opinion
NOT TO BE PUBLISHED
Alameda County Super. Ct. No. RG07349762.
RUVOLO, P. J.
Appellant Julian Potashnick sold his pharmacy business to respondent Larry Bui. The contract for the sale provided that Bui’s exclusive remedy for any misrepresentation in connection with the sale would be damages. After taking over the business, Bui discovered that Potashnick had misrepresented certain aspects of its financial condition. Bui demanded rescission, but by the time Bui filed suit against Potashnick nearly a year later, the business had failed, in part because of Bui’s poor management.
The case was tried without a jury. The court awarded rescission, damages, and prejudgment interest to Bui. Potashnick moved for a new trial on the ground that the exclusive remedy provision in the purchase agreement precluded the court from granting rescission. The court denied the motion on the ground that Potashnick could not raise the issue for the first time in a motion for new trial.
We conclude that Potashnick did not waive the right to rely on the exclusive remedy provision in the purchase agreement, and that in any event, rescission was not an appropriate remedy under the circumstances of this case. Accordingly, we reverse the judgment, and remand for further proceedings on the issue of damages. For the guidance of the trial court on remand, we also address the appropriate measure of damages and the issue of prejudgment interest.
Facts and Procedural Background
Potashnick owned a corporation (the business) that operated two retail pharmacies. In early 2005, Potashnick—who was then almost 80 years old, and under pressure from his wife to retire—listed the business for sale with a business broker. At the time, Bui and his sister, Lynne Bui, who is a doctor, were looking for a business to purchase. They became interested in buying Potashnick’s pharmacy business.
Our statement of the facts giving rise to the litigation is taken primarily from the trial court’s amended statement of decision, filed September 29, 2009. On this appeal, neither party contests the trial court’s findings as to the historical facts.
We will refer to Larry Bui individually as Bui; to Lynne Bui individually as Dr. Bui; and to the two siblings collectively as the Buis. Dr. Bui, as a physician, was not legally permitted to own a pharmacy business. She provided the funds for Bui’s purchase of the business, and assisted him in running it, but was not a party to the contract between Bui and Potashnick, or to the ensuing litigation.
On May 27, 2005, Potashnick and Bui signed a contract under which Potashnick agreed to sell the business to Bui. Before the transaction closed, however, Potashnick became concerned about Bui’s ability to operate the business successfully, and attempted to cancel the transaction. In response, Bui threatened to sue Potashnick. Ultimately, matters were resolved by the execution of a revised agreement in November 2005.
Under the revised agreement (the purchase agreement), Bui agreed to pay $2 million for the business; to pay the business’s debt to Potashnick, in the amount of $334,819, out of his own funds; and to permit Potashnick to withdraw all funds in the corporation’s bank account over and above a balance of $340,000. The purchase agreement included a clause (the exclusive remedy provision) providing that if “any of [Potashnick’s] representations or warranties are discovered to be untrue in any material respect..., and a claim is timely asserted, all such claims shall be limited to an action for the actual damages to [Bui] proximately caused by the material untruths of such representations....” The exclusive remedy provision also limited Potashnick’s “maximum aggregate amount of liability... for all material breaches or representations or warranties” to the amount of the purchase price for the business.
Escrow closed on the transaction on January 31, 2006. The Buis began to experience financial difficulties almost immediately after they took over the business. As the trial court put it during a posttrial hearing, the Buis “were not good managers”; were “unqualified to run a pharmacy”; and “made bad decisions once they started.” To make matters worse, sometime after the escrow closed, the Buis discovered that Potashnick had been incorrect in representing to them during the negotiations for their purchase of the business that the business’s annual net profits were approximately $660,000. The trial court ultimately found that Potashnick should have known this representation was false. The trial court declined, however, to find that the misrepresentation was intentional; rather, the court concluded that it was due to Potashnick’s negligence.
Similarly, after the escrow closed, the Buis discovered that Potashnick had misrepresented that the business had receivables of approximately $690,000, when in fact, the receivables were approximately $130,000. This misrepresentation also had the effect of inflating the business’s income. The trial court found that the “precise cause of this overstatement was never established at trial, ” but that it probably stemmed at least in part from the business’s practice of recording as income the full list price of prescriptions sold, even though the insurance companies and government agencies who paid for the prescriptions purchased by the pharmacies’ customers generally reimbursed the business at a rate lower than the full list price. Once again, the trial court found that Potashnick should have known that this problem was occurring, but declined to find that Potashnick intentionally misrepresented the business’s receivables to the Buis.
The Buis also discovered soon after the close of escrow that Potashnick had understated the amount of the business’s accounts payable. This dispute was resolved in February 2006, however, by an agreement under which the purchase price for the business was reduced by $190,000.
While concluding that Potashnick negligently misrepresented the business’s income and receivables, the trial court rejected the Buis’ claims that Potashnick defrauded them in numerous other respects in regard to the business.
On October 17, 2006—eight and one-half months after the close of escrow—Bui sent Potashnick a letter alleging that Potashnick had overstated the business’s profits, and demanding rescission of the purchase contract. Potashnick then hired a certified public accountant as a consultant to investigate the business’s financial condition. After some delay, caused at least in part by the Buis’ dilatoriness in releasing financial information, the consultant discovered that the figures Potashnick had given Bui regarding the business’s profits and receivables were incorrect. Potashnick disclosed the consultant’s findings to Bui in a letter dated March 12, 2007. Settlement discussions ensued, but were unsuccessful.
On October 5, 2007—nearly a year after demanding rescission, and over a year and a half after the close of escrow—Bui filed a complaint against Potashnick in the Alameda County Superior Court, alleging that he had been induced to buy the business by Potashnick’s intentional or negligent misrepresentations and nondisclosures. The complaint indicated that Bui would seek either monetary damages or rescission and restitution, plus punitive damages and attorney fees. In late October 2007, Bui closed both of the pharmacies belonging to the business.
Even though the business was no longer operational as of the time of trial, the trial court’s amended statement of decision concluded that rescission was the appropriate remedy. The court awarded Bui over $1.5 million in damages, calculated by starting with the amount Bui paid Potashnick for the business, and subtracting the sums Bui withdrew or received from the business for his personal benefit, and $150,000, attributable to the goodwill value of the business. The court also determined that Potashnick was entitled to retain the funds he withdrew from the business at the close of escrow under the terms of the purchase agreement, and ordered Bui to return any remaining inventory to Potashnick. The court declined to award Bui any consequential damages, but did award him prejudgment interest from the date he first gave notice of his intent to rescind.
Potashnick filed a motion for new trial and to vacate the judgment, arguing that rescission was not the appropriate remedy, and that in any event, Bui was not entitled to prejudgment interest. The trial court denied the motion. This timely appeal ensued.
Discussion
Inappropriateness of Rescission
Exclusive Remedy Provision in Purchase Agreement
As already noted, the purchase agreement included a provision (the exclusive remedy provision) that if “any of [Potashnick’s] representations or warranties are discovered to be untrue in any material respect..., and a claim is timely asserted, all such claims shall be limited to an action for the actual damages to [Bui] proximately caused by the material untruths of such representations....” The exclusive remedy provision also limited Potashnick’s “maximum aggregate amount of liability... for all material breaches or representations or warranties” to the amount of the purchase price for the business. On this appeal, Potashnick argues that the trial court erred in awarding rescission despite the exclusive remedy provision.
Bui does not dispute the existence of the exclusive remedy provision, or its validity as applied to the negligent misrepresentations at issue. Rather, Bui argues that Potashnick waived the right to rely on the exclusive remedy provision by failing to raise the issue at numerous junctures during the course of the litigation. The trial court apparently agreed, because in denying Potashnick’s motion for new trial, the court reasoned that the argument was made for the first time in the motion for new trial, and that Potashnick had waived it by not raising it earlier during the trial.
In support of its ruling on this aspect of the motion for new trial, the court below cited Jacoby v. Feldman (1978) 81 Cal.App.3d 432, 446-447, and Baron v. Sanger Motor Sales (1967) 249 Cal.App.2d 846, 860-861. These cases are inapposite. Jacoby v. Feldman involved a belated objection, in a motion for new trial, to the admissibility of evidence that counsel had stipulated at trial could be admitted. In Baron v. Sanger Motor Sales, the appellate court held that where counsel did not properly or adequately object at trial to the admission of evidence that was at least arguably admissible, the court’s purported error in admitting the evidence did not justify the trial court’s decision to grant a new trial. Thus, neither of these cases holds that trial counsel is precluded from raising a theory of defense in a motion for new trial based on the failure to raise the issue at trial.
Moreover, the record reflects the trial court erred in stating that Potashnick did not explicitly rely on the exclusive remedy provision prior to doing so in his motion for new trial. First, the defense was raised by two affirmative defenses in Potashnick’s answer to the complaint: the eleventh, which averred that Bui’s complaint was “barred by the express conditions, exclusions, and limitations” in the purchase agreement, and the nineteenth, which averred that Bui’s damages were “expressly limited on a contractual basis” by the purchase agreement.
In addition, the issue was explicitly raised in Potashnick’s posttrial brief, which was filed on May 8, 2009—before the court issued its statement of decision, and well before Potashnick filed his new trial motion. That brief began by averring that “[a]s the [c]ourt discussed with both parties at the April 9, 2009 hearing..., rescission is not an appropriate remedy in this case.” The brief later pointed out, albeit in a footnote, that “the purchase agreement... provides that in the case of a claim for misrepresentation, ‘all such claims shall be limited to an action for... damages....’ ” Thus, the record simply does not support the factual basis for the trial court’s statement that Potashnick raised the issue for the first time in his motion for new trial.
The court remarked at the April 9, 2009 hearing that there would be “a lot of problems” with granting rescission, including the fact that “the business doesn’t exist.” Earlier during the same hearing, the court noted that it was a “close-call question” whether “rescission is the right remedy” given that Bui could not “restore the status quo[, and] given that... some of the things that happened were a consequence of their bad management.”
Bui argues on appeal that Potashnick’s failure to bring the exclusive remedy provision to the trial court’s attention sooner and more forcefully amounted to a deliberate tactical choice, which Potashnick should not now be allowed to retract. We disagree. While it might have been preferable for Potashnick to put more emphasis on the issue at an earlier stage, Bui cites no evidence, and our review of the record has revealed none, supporting the contention that Potashnick’s failure to do so was a deliberate tactical decision. It appears far more probable that he did not emphasize it because, as his counsel explained to the court at a posttrial hearing on April 9, 2009, he “never thought that the court would entertain the possibility of rescission, ” particularly since early in the trial, the judge himself had questioned how rescission could be granted when there was “nothing left to give back.”
The record supports the belief of Potashnick’s counsel that no one seriously considered the possibility of a rescission remedy until well into the trial. For example, while Bui’s complaint stated that he would elect between damages and rescission at a later time, and his counsel argued that Bui’s initial rescission demand was justified, no election was made to seek that remedy even as late as the commencement of trial. Indeed, Bui’s opening statement at trial occupies some 20 pages of the reporter’s transcript, of which only half a page relates to the question of remedy. Thus, it was not until late in the proceedings—possibly as late as Bui’s closing argument—that the remedy of rescission really became an issue as a possible remedy.
Potashnick’s opening statement concluded by expressing the “firm conviction that there is no money owed to the Buis whatsoever, ” and did not address the issue of remedy.
In his closing argument, Potashnick’s counsel responded to Bui’s rescission demand by explaining that Potashnick might have been willing to take the business back if Bui had asked earlier, but that by the time Bui demanded rescission, the business was already in trouble. He also opined that “once [the Buis] closed the business, it [was] too late [for rescission]. Absolutely too late, way too late.”
Therefore, Potashnick’s failure to give adequate attention to the question of remedy does not appear from the record to have been a deliberate tactical choice, and thus to have waived the issue as Bui claims. Mesecher v. County of San Diego (1992) 9 Cal.App.4th 1677, 1685-1687 (Mesecher), and Stevens v. Owens-Corning Fiberglas Corp. (1996) 49 Cal.App.4th 1645 (Stevens), on which Bui relies, are distinguishable. In Mesecher, the court held that the defendant had waived its right to seek reversal on the basis of inconsistent jury verdicts, because defense counsel had made an admittedly deliberate tactical choice not to seek a modification of the verdict forms, even after plaintiff’s counsel pointed out the potential for inconsistency. (9 Cal.App.4th at pp. 1685-1687.) Similarly, Stevens concluded that the appellant could not complain of legal error in a jury instruction which the complaining party itself had submitted, based on the invited error doctrine. (49 Cal.App.4th at pp. 1653-1654.) Here, as already noted, Bui has not pointed to anything in the record amounting to invited error. (See Huffman v. Interstate Brands Corp. (2004) 121 Cal.App.4th 679, 706-707 (invited error “requires affirmative conduct demonstrating a deliberate tactical choice on the part of the challenging party”; counsel’s admittedly mistaken acquiescence in incorrect jury instruction did not waive issue on appeal].)
The other cases on which Bui relies in support of his waiver argument are also distinguishable. Telles Transport, Inc. v. Workers’ Comp. Appeals Bd. (2001) 92 Cal.App.4th 1159, 1167 held that an injured worker who intentionally failed to disclose certain medical records at a settlement conference, in violation of a rule requiring disclosure, had thereby waived any subsequent right to rely on the undisclosed records. Zamora v. Lehman (2010) 186 Cal.App.4th 1 and Berman v. Health Net (2000) 80 Cal.App.4th 1359 both involved waiver of the right to compel arbitration by a party that engaged in extensive litigation activity, thereby defeating the very purpose of the arbitration clause that the party belatedly sought to enforce. None of these cases held that a defendant waives the right to rely on a contractual provision expressly limiting the plaintiff’s choice of remedy merely by failing to emphasize it sufficiently, particularly after the trial court has indicated that it is not inclined to award the contractually excluded remedy.
In any event, as Potashnick points out, an issue of this nature—that is, the legal interpretation and effect of an admitted contract provision—can be raised not only for the first time in a motion for new trial or to vacate the judgment, but even for the first time on appeal. (See, e.g., Hoffman-Haag v. Transamerica Ins. Co. (1991) 1 Cal.App.4th 10, 15.)
In Seeley v. Seymour (1987) 190 Cal.App.3d 844, the defendant argued for the first time on appeal that the plaintiff’s cause of action for disparagement of title was without merit, because the document creating the cloud on the plaintiff’s title was void on its face and as a matter of law. Division Two of this court permitted the appellant to raise the argument. The court reasoned that “when ‘the facts with reference to the contention newly made on appeal appear to be undisputed and... no different showing could be made on a new trial[, ] it is deemed appropriate to entertain the contention as a question of law on the undisputed facts and pass on it accordingly.’ [Citations.]” (Id. at p. 856.) The court added that “[a]n appellate court has the duty to make an independent interpretation of a written instrument on its face and is never bound by the determination made at the trial level. [Citations.]” (Ibid.) Thus, because the appellant’s “contention require[d] only the interpretation of a document and the application of such interpretation to an undisputed factual situation, ” the court held that the appellant could raise it for the first time on appeal. (Ibid.)
The court went on to reject the argument on its merits (Seeley v. Seymour, supra, 190 Cal.App.3d at pp. 857-859), but the substantive law governing that aspect of the case is irrelevant here.
Similarly, the court in Raphael v. Bloomfield (2003) 113 Cal.App.4th 617, 621 noted that although “[o]rdinarily, ‘[t]he theory upon which a case was tried in the court below must be followed on appeal[]’ [citation]... [, ] a reviewing court may consider points not raised at trial... when a contention newly made on appeal presents a question of law based upon undisputed facts [citation].” (See also RN Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1518 [legal argument based on change in case law after trial could be raised for first time on appeal]; Redevelopment Agency v. City of Berkeley (1978) 80 Cal.App.3d 158, 167 [appellate court has discretion to address legal question raised for first time on appeal if it is determinable from uncontroverted facts].)
In short, the trial court was not justified in denying Potashnick’s motion for new trial on the ground that his reliance on the exclusive remedy provision had been waived. By the same token, this court can reach Potashnick’s contention despite his failure to raise it earlier or more forcefully in the court below. Given Bui’s inability to restore the business to Potashnick as a going concern, as discussed post, we believe the equities weigh in favor of our deciding that legal issue.
On the merits, Bui does not argue that the exclusive remedy provision is unenforceable or inapplicable. Instead, his only defense to the clause is the argument that, because the trial court alternatively found a mutual mistake resulted from Potashnick’s misrepresentations, rescission can be granted on that basis. But Bui has failed to cite any authority or evidence supporting the contention that the exclusive remedy provision does not apply to negligent misrepresentations that result in mutual mistake. Such an interpretation would defeat the parties’ reasonable expectations based on the contract language they bargained for, and to which they agreed. We therefore decline to adopt it. (See People ex rel. Lockyer v. R.J. Reynolds Tobacco Co. (2003) 107 Cal.App.4th 516, 526 [“courts must give a ‘ “reasonable and commonsense interpretation” ’ of a contract consistent with the parties’ apparent intent. [Citation.]”].) Accordingly, we conclude that the trial court’s award of rescission was contrary to the terms of the exclusive remedy provision, and must be reversed.
Delay in Filing Suit
As an alternative ground for reversal, Potashnick argues that rescission was inappropriate due to Bui’s delay in filing suit. As Potashnick points out, almost a year elapsed between Bui’s rescission demand and the filing of his complaint. During that period, the value of the business continually eroded, to the point where it was shut down and had become essentially worthless. Indeed, at a posttrial hearing, the trial court characterized Bui’s delay in filing suit as “of... serious concern... in connection with [Bui’s] request for rescission....” Nonetheless, the trial court ultimately concluded that the delay did not preclude rescission. In so doing, the court relied on the statement in Farina v. Bevilacqua (1961) 192 Cal.App.2d 681 (Farina) that “inability to restore the precise status quo is not invariably a bar to rescission” and that “in aggravated situations equity is not powerless to effect a fair result even though exact restoration of the prior condition of the parties is impossible.” (Id. at p. 685.)
We do not disagree with the quoted statements in Farina, supra, 192 Cal.App.2d 681, but find it inapplicable to the facts of this case. In Farina, the plaintiffs sold the defendants a 20-foot strip of land along the border between the neighboring parcels of real property owned by the two parties. The defendants defrauded the plaintiffs by telling them that the entire strip would be conveyed to the county for use as a road directly bordering both properties. Instead, the defendants conveyed only an 18-foot strip to the county, and retained a 2-foot strip lying between the road and the plaintiffs’ land. The defendants then accused the plaintiffs of trespassing whenever the plaintiffs crossed the 2-foot strip to get to the road from their property, and demanded more than the price of the entire 20-foot strip in exchange for the return of the 2-foot strip.
The plaintiffs sought partial rescission, seeking return of the 2-foot strip in exchange for a pro rata refund of the price the defendants had paid for it. The defendants argued that partial rescission was not a permissible remedy. It was in that factual context that the court made the statements relied on by the trial court here. Notably, the court also stated that “[w]here a defendant has been guilty of fraud, ‘courts of equity are not so much concerned with decreeing that defendant receive back the identical property with which he parted... as they are in declaring that his nefarious practices shall result in no damage to the plaintiff.’ [Citation.]” (Farina, supra, 192 Cal.App.2d at p. 685.)
Therefore, what the court did in Farina was to grant an intentionally defrauded buyer the right to make a partial return of a parcel of real property, in exchange for a pro rata refund of the purchase price. This is a far cry from ordering rescission based on negligent misrepresentations, in a case in which, for reasons attributable in large part to the buyer’s own conduct, the property that was sold has essentially ceased to exist by the time of trial. Bui has cited no authority applying the reasoning of Farina, supra, 192 Cal.App.2d 681, to a situation like the one in this case.
On the contrary, in Edwards v. Lang (1961) 198 Cal.App.2d 5 (Edwards), a case factually far more similar to this one, the court reached the opposite result. In Edwards, a business owner sold his manufacturing business, and in connection with the transaction, made an innocent misrepresentation concerning the scope of a patent for the business’s product. The buyers of the business were unable to operate it successfully, lost the business’s contract with its sole product distributor as a result, and could not pay the seller what they still owed him on the purchase price. The seller sued to collect the debt, and the buyers cross-complained for rescission of the transaction. The court held that the buyers had no right to rescission, because they “could not place the [seller] in status quo in that they had permitted the business to collapse, [and] depreciated the value of the business” by losing its sole distributor. (Id. at p. 10, italics omitted.) As the court put it, “[a]ny relief which the [buyers] seek under their cross-complaint for rescission is barred by their self-imposed inability to place the [seller] in status quo, i.e., in substantially the same position he would have been if the sale had not taken place. [Citations.]” (Id. at p. 13, italics omitted.)
We acknowledge that Edwards, supra, 198 Cal.App.2d 5 is not on all fours with the present case, for two reasons. First, in Edwards, the trial court found that the seller’s misrepresentation regarding the patent was not causally related to the buyers’ inability to return the business to the seller intact. Here, by contrast, the trial court found that Potashnick’s misrepresentations regarding the business’s profitability and receivables were material, and contributed to Bui’s inability to operate the business successfully. Second, in Edwards, the trial court found that “the innocent misrepresentation made by the [seller] was not made fraudulently or negligently, but in good faith, and upon reasonable grounds for believing it to be true, ” and thus was not actionable. (Id. at p. 13.) In this case, on the other hand, the trial court found that Potashnick’s misrepresentations were negligent rather than entirely innocent. Nonetheless, Edwards is far more pertinent to the situation here than Farina, supra, 192 Cal.App.2d 681.
In general, a party seeking rescission of a contract must offer to “[r]estore to the other party everything of value which he has received from him under the contract....” (Civ. Code, § 1691, subd. (b).) Here, the trial court reasoned that Bui’s inability to restore the business to Potashnick did not bar rescission because, due to the misrepresentations, the failure of the business was “at least as much Potashnick’s fault as Bui’s, ” and thus Potashnick “should not now be heard to complain of it.” (Fn. omitted.) Implicit in this statement is the converse, i.e., that the failure of the business was due in some part to Bui’s mismanagement. This conclusion is supported by the court’s remarks about the Buis’ lack of business competence at the posttrial hearing on April 9, 2009, quoted ante. It is also borne out by the court’s finding that when Bui made his initial demand for rescission in October 2006—some eight or nine months after the close of escrow—“the businesses were still operational and Bui was in a position to restore Potashnick to the status quo ante.” (Italics omitted.) Yet by awarding rescission despite Bui’s inability to return the business as a going concern, the court effectively placed on Potashnick the entire burden of the intervening loss, including whatever portion was Bui’s responsibility.
The trial court also noted that its “conclusion that rescission was appropriate” was “reinforced” by the fact that Potashnick’s “damages proposals incorporated a generous view of the value of [the business] that was not supported by the evidence.” If damages constituted the appropriate remedy, it was incumbent upon the trial court to make a determination, based on the evidence, as to the amount of damages to be awarded. We recognize that under the circumstances of this case, that was (and remains) an extremely difficult task, not rendered any easier if the parties adhered to unrealistic views. But difficulty in quantifying damages does not justify awarding an alternative remedy that is unavailable as a matter of law.
In light of the exclusive remedy provision in the purchase agreement, coupled with the demise of the business as a going concern by the time the case went to trial, we are persuaded that the trial court erred in selecting rescission as the appropriate remedy for Potashnick’s negligent misrepresentations regarding the business’s profitability and amount of accounts receivable. Therefore, the judgment is reversed.
This conclusion renders it unnecessary for us to address Potashnick’s alternative argument that Bui’s right to restitution was barred by laches.
Correct Measure of Damages
Although we reverse the trial court’s judgment awarding rescission, the court’s conclusion that Potashnick is liable for negligent misrepresentation—which Potashnick does not challenge on appeal—remains intact. Thus, on remand, the trial court must once again undertake the task of determining an appropriate damage award.
Fortunately, both parties agree that in the absence of circumstances justifying restitution, the appropriate starting point is the measure of damages specified in Civil Code section 3343, subdivision (a) (section 3343(a)). In addition, under the express terms of the exclusive remedy clause, Bui’s damages award for any misrepresentations by Potashnick cannot exceed “the actual damages to [Bui] proximately caused by” those misrepresentations, with a “maximum aggregate amount of liability” (the damages cap) equal to the amount of the purchase price for the business.
Section 3343(a) reads in pertinent part as follows: “One defrauded in the purchase... of property is entitled to recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received, together with any additional damage arising from the particular transaction, including any of the following: [¶] (1) Amounts actually and reasonably expended in reliance upon the fraud. [¶].... (4) Where the defrauded party has been induced by reason of the fraud to purchase... the property in question, an amount which will compensate him for any loss of profits or other gains which were reasonably anticipated and would have been earned by him from the use... of the property had it possessed the characteristics fraudulently attributed to it by the party committing the fraud, provided that lost profits from the use... of the property shall be recoverable only if and only to the extent that all of the following apply: [¶] (i) The defrauded party acquired the property for the purpose of using... it for a profit. [¶] (ii) The defrauded party reasonably relied on the fraud in entering into the transaction and in anticipating profits from the subsequent use... of the property. [¶] (iii) Any loss of profits for which damages are sought under this paragraph have been proximately caused by the fraud and the defrauded party’s reliance on it.”
It is unclear to us whether Bui claims any damages in this category (reliance damages), other than the purchase price itself. Sums that Bui would have needed to invest in the business, even if Potashnick’s representations about its financial condition had been true, do not qualify as reliance damages.
In calculating the amount of damages, the trial court must first determine (1) what Bui actually paid for the business; (2) what the business was worth at the time Bui purchased it, based on the true facts rather than on Potashnick’s misrepresentations; (3) Bui’s reliance damages, if any; and (4) the lost profits proximately caused by Potashnick’s misrepresentations (the awardable lost profits), rather than by Bui’s mismanagement or any other circumstance. To the extent either party contends he has additional evidence material to the determination of these issues, and shows good cause for his failure to produce that evidence at trial, the trial court may, in the exercise of its sound discretion, reopen the record on such terms as it sees fit. Once each of these elements of damages has been determined, the trial court must also adhere to the damages cap included in the exclusive remedy clause. Thus, the amount of the award will consist of the lesser of the following two figures: (a) the amount of the purchase price, or (b) the amount Bui actually paid, plus any reliance damages and awardable lost profits, minus what the business was worth at the time of the purchase.
There is some dispute about how to calculate what Bui actually paid for the business, as discussed in the parties’ briefs both in the trial court and on appeal. Moreover, this amount may or not be the same as the “Purchase Price, ” as that term is defined in the purchase agreement and used in the exclusive remedy clause. We are confident that the trial court will be able to resolve these issues on remand, to the extent it has not already done so.
As the plaintiff, Bui bears the burden of proof as to each element of his damages. With respect to lost profits, section 3343(a) entitles a defrauded business buyer to “loss of profits... which... would have been earned by him” if the business had been as represented. (See generally Hartman v. Shell Oil Co. (1977) 68 Cal.App.3d 240, 247.) The analysis of this issue in Bui’s brief on appeal assumes that Bui is entitled to recover lost profits measured retrospectively, i.e., by the difference between the business’s historical profits as Potashnick misrepresented them, and the business’s actual historical profits. This position is consistent neither with the case law under section 3343(a), as discussed post, nor with the provision in the exclusive remedy clause limiting Bui’s damages to “the actual damages... proximately caused by the material untruths of [Potashnick’s] representations.” Accordingly, for the benefit of the trial court and the parties, we add the following observations regarding the evaluation of lost profits.
As a general rule, “ ‘where the operation of an established business is prevented or interrupted, as by a tort or breach of contract or warranty, damages for the loss of prospective profits that otherwise might have been made from its operation are generally recoverable for the reason that their occurrence and extent may be ascertained with reasonable certainty from the past volume of business and other provable data relevant to the probable future sales. [Citations.] On the other hand, where the operation of an unestablished business is prevented or interrupted, damages for prospective profits that might otherwise have been made from its operation are not recoverable for the reason that their occurrence is uncertain, contingent and speculative. [Citations.]... But although generally objectionable for the reason that their estimation is conjectural and speculative, anticipated profits dependent upon future events are allowed where their nature and occurrence can be shown by evidence of reasonable reliability. [Citations.] [The relevant] cases recognize and apply the general principle that damages for the loss of prospective profits are recoverable where the evidence makes reasonably certain their occurrence and extent.’ [Citations.]... ‘The award of damages for loss of profits depends upon whether there is a satisfactory basis for estimating what the probable earnings would have been had there been no tort. If no such basis exists, as in cases where the establishment of a business is prevented, it may be necessary to deny such recovery. [Citations.] If, however, there has been operating experience sufficient to permit a reasonable estimate of probable income and expense, damages for loss of prospective profits are awarded. [Citations.]’... Uncertainty as to the amount of profits is not fatal to such a claim. [Citations.] ‘[L]ost prospective net profits may be recovered if the evidence shows, with reasonable certainty, both their occurrence and extent. [Citation.] It is enough to demonstrate a reasonable probability that profits would have been earned except for the defendant’s conduct. [Citations.]’ Moreover, ... a plaintiff is ‘not required to establish the amount of its damages with absolute precision, and [is] only obliged to demonstrate its loss with reasonable certainty. [Citation.]’ [Citations.]” (Kids’ Universe v. In2Labs (2002) 95 Cal.App.4th 870, 883-884, italics omitted.)
The present case involves an established business, but one that had just started operating under entirely new and untried management. It falls somewhere in between the case of the established and the new business. In either case, however, awardable lost profits must be measured prospectively, i.e., by the profit the plaintiff can establish he would have made during the relevant time period if not for the defendant’s wrongful conduct. Thus, Bui can recover only those lost profits he can establish with reasonable certainty the business would have been able to make under the Buis’ management, if not for the difficulties proximately caused by Potashnick’s misrepresentations. If Bui cannot bear his burden of establishing this amount with the requisite degree of certainty, his claim for lost profits as an element of damages will fail.
Availability of Prejudgment Interest
Once the trial court determined that Bui was entitled to rescission, it awarded prejudgment interest from the date of Bui’s rescission demand, correctly citing Babcock v. King (1955) 137 Cal.App.2d 401. However, because we conclude that damages rather than rescission was the appropriate remedy, we must reverse the trial court’s award of prejudgment interest as well. On remand, prejudgment interest may be awarded in the trial court’s discretion, under the normal rules applicable to prejudgment interest in an action for the breach of an obligation not arising from contract, as codified in Civil Code section 3288. (See generally Pepitone v. Russo (1976) 64 Cal.App.3d 685, 690-691.)
Disposition
The judgment is reversed, and the matter is remanded to the trial court for further proceedings on the question of damages and prejudgment interest, consistent with this opinion. Potashnick is awarded his costs on appeal.
We concur: REARDON, J., SEPULVEDA, J.