Equity Does Not Sanction an Award on a Dismissed Claim

Guan v. Hu, No. B276546 (D2d1 June 2, 2017)

This is kind of weird one. The case is a dispute over a house that was, to some degree, co-owned by an unmarried couple who later broke up. Plaintiff sued Defendant for breach of contract and various fraud theories allegedly meriting rescission. But the trial court granted several demurrers on the contract claims, ultimately without leave to amend. 

The case then got tried on the rescission theory. The trial court found that rescission wasn’t proven. But puzzlingly, it went on to find that the dismissed breach of contract claim was. Purportedly acting under the authority of Civil Code § 1692, which permits an adjustment of the equities in a rescission case, the trial court awarded contract damages to plaintiff. It later denied Plaintiff’s request to amend the complaint to conform with proof, in order to re-allege the contract claim.

Defendant appeals the damage award and Plaintiff appeals the denial of the amendment. Curiously, Plaintiff does not appeal the demurrers that nixed the contract claims. Which is fatal to the appeal.

Section 1692 permits a trial court to adjust the relief in a rescission case under two circumstances. First, when rescission is awarded, the court can can require the prevailing party “to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties.” Second, when rescission is not awarded “the court may grant any party to the action any other relief to which he may be entitled under the circumstances.” This second ground permits an award of what in other jurisdictions is called “rescissory damages.” I.e., when grounds for rescission are present but a contract can’t be practically rescinded because of changed circumstances, the party demanding rescission can sometimes obtain an equitable damages award based on the actual value of the consideration she tendered at the time the contract was entered.

The first circumstance—the one that specifically references adjusting the equites—doesn’t apply because the court did not order the contract rescinded. As to the second, the Court of Appeal holds that § 1692 permits only an award of damages to which the party is “entitled.” According to the court, a plaintiff isn’t “entitled” to any relief if she didn’t prove any of the claims in her complaint. Because, by the time of the trial, no contract claim had been pled, the fact that Plaintiff might have proved facts showing a breach of contract entitled her to no relief. So the court holds that § 1692 didn’t give the trial court the authority to restore the previously dismissed with prejudice contract claim.

So without a legit contract claim in her complaint, Plaintiff can’t recover. And the court isn’t going to sanction adding the claim back after the fact under the guise of conforming to proof. Amendment according to proof is highly discretionary. But to permit a plaintiff to amend after a trial to re-allege claims on which a demurrer was sustained without leave to amend would prejudice the defendant and upset what was effectively a judgment on the dismissed claims. Under the circumstances, the trial court didn’t abuse its discretion in denying leave.

Reversed.