Zeliff v. Sabatino

104 A.2d 54, 15 N.J. 70, 1954 N.J. LEXIS 257

• Court: Supreme Court of New Jersey
• Decided: March 29, 1954
• Status: Published

Opinions

The opinion of the court was delivered by

Oliphant, J.

This action was one for damages allegedly resulting from a written representation made by defendants in connection with the sale of real property, later determined to be false. Judgment was entered upon a jury verdict in plaintiff’s favor in the sum of $4,200 against all of the defendants. The defendants appealed and the Appellate Division held that defendants’ liability had been established but “that there was no legal proof of damages” and remanded the action for a new trial as to damages only. The defendants petitioned for certification and the plaintiff cross-petitioned therefor. Both petitions were granted by this court.

Plaintiff paid $71,750 for the property in question which he wanted to acquire as a safe investment and to give him an assured income. He had been furnished an analysis of the annual income and expenses of the property, one of the expense items being the cost of fuel oil for the period from February 1, 1949 to February 1, 1950. Such representation as to this item was contained in the final contract of sale and the affidavit of title recited that “the representations contained in the contract shall remain effective between the parties.”

The plaintiff testified that an examination of the submitted income and expense figures disclosed that he would have a return of 6.9% on his investment of $71,750, but that after taking possession of the property he discovered that his fuel bills were higher than had been represented. Upon investigation he discovered that fuel oil bills for the period from February 1, 1949 to February 1, 1950 were actually $282.74 in excess of that represented. Testimony by an expert was to the effect that a return on the investment of 6.7% or 6.9% was reasonable and that a reduction of net income of $282.74 would result in a loss to the buyer of $4,220 if capitalized at 6.7%.

We agree with the Appellate Division that “A review of the record shows there is ample evidence to support the verdict insofar as defendants’ liability is concerned” but disagree with that court in its holding that this State is definitely committed to the “out-of-pocket” rule as to damages in an action grounded in fraud or deceit and that “there was no legal proof of damages.”

We rather are of the opinion that this State is not so inexorably wedded to the “out-of-pocket” rule as to the measure of damages that “the benefit-of-the-bargain” rule cannot be applied where justice requires. See Crater v. Binninger, 33 N. J. L. 513 (E. & A. 1869); Martin v. Baldwin, 90 N. J. L. 241 (E. & A. 1917). In Schwartz v. Rothman, 1 N. J. 206 (1948), while not deciding the question Justice Wachenfeld, speaking for this court, at least intimated that there was no hard and fast rule in this State in saying:

“* * * we encounter an alleged conflict of decisions as to the correct principle. Recovery for the difference between the price paid and actual value of the property acquired, commonly known as the ‘out-of-pocket’ rule was approved in Cratér v. Binninger, 33 N. J. L. 513 (E. & A. 1869) ; Duffy v. McKenna, 82 N. J. L. 62 (Sup. Ct. 1912) ; Mitchell v. Bassett, 99 N. J. L. 110 (E. & A. 1924) ; CurtissWarner Corp. v. Thirkettle, 101 N. J. Eq. 279 (E. & A. 1927). On the other hand, in Batura v. McBride, 75 N. J. L. 480 (E. & A. 1907), the recovery was for the difference between the price paid and the value of the property had the repi'esentations been true. This is commonly designated as the ‘benefit-of-the-bargain’ rule.”

As to some cases what is called the “out-of-pocket” rule may furnish just and adequate compensation; in others the so-called “benefit-of-the-bargain” rule may be the more just and accurate. The just method of determining damages necessarily varies with the facts of the particular case, and damages in a case such as this, which deals with an overpayment in the purchase price of property as the result of a fraudulent misrepresentation, are to be assessed in the amount of the loss occasioned by that misrepresentation. No rule of damages capable of precise application in all cases can be laid down and followed. If a charge of fraud is sustained, all damages which are the proximate result of the wrong should be awarded. “Regardless of whether the out-of-pocket rule or the benefit-of-the bargain rule is the correct one, the fundamental rule universally employed” * * * is that “The victims of fraud are entitled to compensation for every wrong which was the natural and proximate result of the fraud.” If one or the other rule is inflexibly adhered to, while certainty would be achieved it would in many instances be at the expense of justice. Selman v. Shirley, 161 or 582, 85 P. 2d 384, 91 P. 2d 312, 124 A. L. R. 1, 16 (Or. Sup. Ct. 1939).

The correct principle is, we believe, as stated in 24 Am. Jur., Fraud and Deceit, § 226, p. 54:

“The rule governing the measurement of damages in fraud actions should be flexible, and the principles applied in a flexible manner. A technique should be developed where both the benefit-of-the-bargain rule and the out-of-pocket-loss rule shall be available as formulas, so that one or the other may be used as the circumstances of the case may demand. No difficulty results from the application of the principle of flexibility, and it does not create uncertainty. A formula which combines the fundamental principle of proximity with the principle of flexibility is as follows: (1) If the defrauded party is content with the recovery of only the amount that he actually lost, his damages will be measured under that rule; (2) if the fraudulent representation also amounts to a warranty, recovery may be had for loss of the bargain because a fraiid accompanied by a broken promise should cost the wrongdoer as much as the latter alone; (3) where the circumstances disclosed by the proof are so vague as to cast virtually no light upon the value of the property had it conformed to the representations, the court will award damages equal only to the loss sustained; and (4) where the damages under the benefit-of-the-bargain rule are proved with sufficient certainty, that rule will be employed.”

The essential factor in plaintiffs purchase of this property was net return, which defendants well knew. The resultant loss, therefore, is that sum which, when subtracted from the purchase price paid, produces the sum which would yield the same net return anticipated by the plaintiff when he made his purchase. That sum would be computed by the capitalization of reduction in net income. In other words, the sum required to fairly compensate the plaintiff for the loss suffered, as the natural and proximate result of the fraud would be the amount of capital required to yield the annual differential in income at the anticipated rate of return, provided, of course, that the proofs establish that the rate of return was reasonable. Such proof is in the record.

The trial court charged, and correctly, that “* * * The plaintiff is entitled to be reimbursed for the difference between what he paid for the property and the diminution in its value stemming from the false statement of the cost of fuel oil.”

There was competent legal evidence to sustain the verdict as rendered with respect to damages and we therefore reverse the judgment of the Appellate Division insofar as it directs a new trial as to damages only and remand the cause to the Superior Court, Law Division, Essex County, with direction that the judgment entered therein be reinstated.