Rescission Switcharoo . . . .

Guan v. Hu, No. B276546 (D2d1, on rehearing Feb. 7, 2018)

Told you this one was weird. 

Last year, the Court of Appeal decided this case and reversed a judgment for plaintiff, who failed to prove a recession claim. The Court wouldn’t permit an award of damages under Civil Code § 1692 in lieu of recession, based on a breach of contract theory that, although seemingly supported by the evidence at trial, had been dismissed after a demurrer was granted without leave early in the litigation. 

But the court of appeal granted rehearing. And now it comes out the other way.

This time around, the court views the recession claim in a much different light. Based on what was plead and tried, it was basically a breach of contract claim, demanding return of the value of performance based on a breach that constituted a failure of consideration. Since recession isn’t really a claim—it’s a remedy—the court reasons that the claim that was tried “was actually a claim for breach of contract.” And since relief isn’t limited to a complaint’s demand, the court was in its power to award contract damages in lieu of recession when that’s what was proven at trial. Indeed, affording an alternative remedy when rescission is sought is expressly permitted under § 1692.

So far as the earlier demurrer on the contract claim goes, the court finds that that ruling was superseded, even if not explicitly, by its later rulings that found the “rescission claim”—which basically just alleged a breach of contract—stated an adequate claim. Courts always have the power to correct interim rulings, a rationale that “applies forcefully here.” If Defendant thought Plaintiff was just re-pleading a dismissed claim under a different name, she should have demurred again and potentially sought sanctions. But by letting a claim that was, in essence, a breach of contract claim stand unchallenged, Defendant essentially conceded that it was appropriate for the court to let the case proceed to trial on that theory, notwithstanding the earlier demurrer.

Justice Johnson dissents in part. He pretty strongly accuses the majority of being disingenuous and of distorting the record and the law with respect to its suggestion that the trial court was acknowledging a prior error when it permitted a previously dismissed breach of contract claim to be retried as a breach of contract claim even though it was ostensibly plead as rescission.

Justice Johnson would avoid that whole quandary by partially affirming the judgment because, in his view, rescission based on failure of consideration had been proven. Justice Johnson notes that the failure of consideration theory got lost in the shuffle because Plaintiff alleged two theories of rescission—both fraud and failure of consideration, see Civil Code § 1689(b)(1), (2)—but his trial presentation was largely focused on fraud. The trial court’s ruling for defendant on the rescission claim was also entirely devoted to the lack evidence that Defendant had no intention of performing from the beginning. Plaintiff, however, never abandoned the failure of consideration theory. And according to Justice Johnson at least, the trial evidence, as well as the Court’s findings, supported Plaintiff prevailing on that theory. (The majority opinion disagrees, noting that “the trial court made no such finding.”)

What’s not clear to me from the dissent, however, is the difference between “failure of consideration” and a regular old material breach of a contract. Indeed, the dissent basically equates the two; it straight out says, “it is also manifest from the entire record that the trial court found that there was in fact a failure of consideration (i.e., [defendant] failed to honor the promises that she made to [plaintiff].)” But if a failure of consideration and a material breach of contract are, in fact, the same thing, than what’s all the fuss about? Wouldn’t that mean that you can get a rescissory remedy for any material breach? I’m not really sure what the answer is here, and some poking around in the case law has proven less than enlightening.

Anyway, if Justice Johnson’s right, there’s a problem because the trial court awarded ordinary contractual damages, not rescissory ones. The difference is largely an issue of timing. 

Contract damages look to the benefit of the bargain at the time it was struck. Rescissory damages, on the other hand, aim to put a plaintiff in the same place as before the contract was entered. They largely come into play when, for instance, a seller departs with an asset under a contract that gets rescinded. If the asset can’t be practically returned to the seller, the seller’s rescissory damages are based the value of the asset at the time of trial, which compensates changes in the value of the asset premised on the idea that it would not have been sold. 

Here, that likely means a windfall to plaintiff, because it would permit him to recover based on the appreciation of the value of the real estate at the heart of this case over the past several years. So Justice Johnson would remand for a calculation under the correct measure.

Affirmed.