The owner of a historic landmark restaurant property leased the premises to a corporation operated by two local restaurateurs. The restaurant closed after six months of operation and the parties filed lawsuits against each other. A jury ruled in favor of plaintiffs Julius Castle Restaurant, Inc. (JCRI), Charles Stinson, and John Bonjean on their claim of fraud. It also ruled in favor of defendants James Frederick Payne and Top of the Rock Castle, LLC (TOTRC), on their cross-complaint for breach of contract. Defendants have filed three consolidated appeals claiming that (1) the trial court committed prejudicial error in allowing plaintiffs to introduce parol evidence in support of their fraud claim, (2) the amount of damages awarded to them on their cross-complaint is insufficient, (3) the court erred in awarding damages to plaintiffs upon the termination of a preliminary injunction, and (4) the court erred in awarding attorney fees to plaintiffs. In light of the recent Supreme Court decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169 [151 Cal.Rptr.3d 93, 291 P.3d 316] (Riverisland), we conclude the judgment for fraud must be affirmed. We also conclude the court erred in awarding damages with respect to the preliminary injunction. As to the claim of inadequate damages for breach of contract, defendants have failed to demonstrate error and, accordingly, we affirm the judgment on the cross-complaint. Finally, we affirm the award of attorney fees to plaintiffs.
This lawsuit concerns a restaurant property known as "Julius' Castle," an official historical landmark in the City and County of San Francisco (the City). Payne is the managing member of TOTRC. He purchased the property in June 2006. The restaurant that had been operating on the site closed shortly thereafter. Plaintiffs Stinson and Bonjean desired to reestablish the restaurant, planning to realize a profit at a later date by selling the business for
On April 20, 2007, Stinson and Bonjean (through JCRI), entered into a long-term lease (the Lease) with defendants. Section 10 of the Lease concerns the condition of the premises and provides: "Tenant acknowledges that as of the date of this Lease, Tenant has inspected the Premises and all improvements on the Premises and that the Premises and improvements are in good order, repair, and condition." Section 34 contains the agreement's integration clause and provides: "This instrument constitutes the sole agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, and the specified lease term, and correctly sets forth the obligations of Landlord and Tenant. Any agreement or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are void. This agreement, however, is to be read and interpreted in a manner consistent with the contract of Tenants with [TOTRC], entered into contemporaneously herewith, and through which Tenants are acquiring the fixtures, goodwill, website, liquor license, and trade name of Julius' Castle."
On May 3, 2007, JCRI entered into a bulk sales agreement (the BSA) with TOTRC for the purchase of all the restaurant's business assets, including its fixtures, equipment, trade name, leasehold improvements, and liquor license.
On August 16, 2007, escrow closed on the BSA.
On November 21, 2007, Payne sent JCRI a notice of default. The notice alleged plaintiffs had failed to timely make installment payments on the BSA and had made unauthorized and improper deductions from one or more of the payments that had been made. Payne demanded immediate payment of the entire principal owing on the BSA.
On November 26, 2007, Payne sent Stinson and Bonjean a demand for guarantor's performance based on their personal guaranty of the Lease.
On March 18, 2008, plaintiffs filed their first amended complaint (FAC) against defendants. The FAC alleges causes of action for (1) breach of contract, (2) breach of warranty, (3) fraudulent misrepresentation, (4) negligent misrepresentation, (5) fraudulent concealment, (6) rescission,
On April 3, 2008, defendants filed a cross-complaint against plaintiffs, alleging causes of action for breach of contract, declaratory relief, and breach of the covenant of good faith and fair dealing.
On July 3, 2008, the trial court issued a preliminary injunction, restraining plaintiffs from selling, transferring, or disposing of the restaurant's liquor license.
On September 30, 2009, defendants filed seven pretrial motions in limine. Motion in limine No. 2 sought to exclude the introduction of parol evidence. Defendants noted plaintiffs' claims for fraudulent and negligent misrepresentation were based on the assertion that Payne had told them the property was in good condition. The FAC also alleges Payne assured them an inspection was not necessary, "`and guaranteed that he would fix anything that was not working or in proper running order.'" Defendants claimed these alleged statements should be excluded because they contradict the terms of the parties' written agreements.
On March 12, 2010, defendants filed a supplement to their motion in limine No. 2. In it, they argued the fraud exception to the parol evidence rule (Code Civ. Proc., § 1856, subd. (g))
On March 30, 2010, the trial court denied in part and granted in part defendants' motion in limine No. 2. At the hearing, the court stated: "Well, I think the jury can consider whether [plaintiffs] were, in fact, fraudulently
At the time of trial, Stinson had been in the restaurant business for over 35 years as the owner and operator of Sinbad's Pier Two restaurant in the City. He had also recently opened a restaurant and yogurt shop in Hayward. Bonjean had worked at Sinbad's for many years. Payne was a casual customer of Sinbad's for at least 10 years.
One evening, Payne came to Sinbad's and told Stinson and Bonjean that he had purchased the Julius' Castle restaurant and had made extensive renovations to the property.
Subsequently, the parties did a walk-through tour of Julius' Castle. They went through each floor of the building, and Payne explained some of the improvements he had made. In the kitchen area, all of the equipment had been cleaned and appeared to be in good condition, though nothing was
Because the restaurant had been closed for almost a year, Stinson was concerned as to whether the equipment and the plumbing were in working order. He testified Payne assured him that everything worked. Payne also said if anything was not working, he would fix it. He told Stinson and Bonjean that he had spent about $600,000 on building renovations. They did not test the equipment because they "took Mr. Payne for his word that if anything is not working he would fix it." Additionally, it appeared all the utilities were turned off, making it impossible to test the equipment under realistic working conditions. They depended on and accepted Payne's verbal commitment that he would make everything workable. They did not ask for an opportunity to test the equipment, nor did they hire a third party to do so.
Payne denied telling Stinson and Bonjean that he would repair the equipment or fix anything else on the premises. He did not guarantee the equipment's condition. He did say the equipment was in full operation when he bought the property. They did not ask to test anything in the kitchen. The utilities were turned on at that time, and he would have been willing to provide them access to any part of the premises for inspections or testing. They also never said they intended to sell the restaurant at any point. Had he known this, he would not have gone forward with the Lease. Prior to signing the Lease, Payne did not know he could be cited by the City's Planning Department (the Department) for his renovation work.
The parties entered into extensive negotiations for the Lease and for the purchase of the restaurant's assets. Bonjean testified, "Nobody wants to go into business without a lease. It's very important." Stinson and Bonjean worked with Gordon Wong, who was Payne's broker and executor.
The final version of the Lease was signed on April 20, 2007, after Stinson and Bonjean's Nevada corporation (JCRI) was finalized. They had approximately five to seven meetings with Wong before they signed the Lease. Wong would report their negotiations to Payne who would talk to his attorney, a process that resulted in numerous drafts. The drafts "never came back the way that we had agreed to in our conversation" so the process was "a back-and-forth type thing." With a few exceptions, the final Lease was in accordance with what they had discussed. Bonjean testified that the final version did not include a personal guaranty. The parties went through every page of the Lease together to ensure they were all satisfied with the document. They also made edits reflecting that Stinson and Bonjean were acting through their Nevada corporation.
The BSA allowed JCRI to purchase the restaurant's assets from TOTRC, including the equipment, the liquor license, and the restaurant's Web site. The total payment for BSA was $240,000, which Bonjean thought was a fair price.
On cross-examination, Bonjean stated the drafting of the Lease took several weeks. He and Stinson asked many questions so that they would feel confident and satisfied with the final version. They did not feel rushed. He acknowledged the Lease does not reflect Payne's alleged promise to fix anything that did not work. Bonjean never asked that such a provision be included. He also never asked for any changes to section 10 of the Lease, which states that he and Stinson had inspected the premises and improvements and found them to be in good order, repair, and condition. He agreed the provisions of the Lease pertaining to repairs and maintenance do not call for Payne to fix the equipment and improvements. He conceded having
At trial, Stinson said he did not agree with the integration clause because there were "implied provisions" that everything was in working order. When asked why he did not modify the Lease to reflect that Payne was going to maintain the equipment and the premises despite the contradictory language in the agreement, Stinson said it was not necessary because the obligation was already implied and Payne had already promised to make any needed repairs. Payne did fix some things prior to the close of escrow but stopped thereafter.
After the Lease was executed, plaintiffs took steps to get the restaurant running, such as putting in new carpet, planning for promotion, creating a menu and a wine list, hiring kitchen help, and purchasing inventory. About three months later, Bonjean received an inventory list of equipment and fixtures purchased through the BSA. They did not actually receive all of the items listed. For example, an espresso machine was missing, and a refrigerator had been misrepresented as a freezer, causing them to have to buy their own freezer.
In May 2007, Stinson received a fax from the Department that included a notice of violation. The violation related to alterations allegedly done without building permits or a certificate of appropriateness (Certificate), which was required because of the property's status as a historic landmark. On the day the restaurant opened it was granted a temporary health permit. The permit was conditioned on filing for a Certificate. Previously, Bonjean and Stinson had not known there were any permitting issues. They never received a regular health permit. Because Payne had made major changes to the building
Reza Khoshnevisan, Payne's architectural consultant, testified that Payne received a conditional Certificate in December 2008. During the approval process, no one threatened to shut down the restaurant. A competent contractor could have completed the required alterations in two weeks to a month. He acknowledged that, considering the politics of doing construction in the City, it was both surprising and unwise for Payne to have made renovations to the premises without first obtaining permits.
After the restaurant was open for a few months, business "shot up big" and it performed almost twice as well as Stinson had anticipated.
According to Stinson, they were unable to market the restaurant because they misplaced their copy of the Lease. A flood downstairs at Julius' Castle had forced them to move their business records and they lost track of the document. When they received a copy of the Lease from Payne's attorney, Stinson was distressed because the document was a draft, and not the correct final version. The document also included a personal guaranty that Stinson and Bonjean had never signed.
A real estate agent specializing in retail leasing who testified on behalf of defendants stated that for a restaurant like Julius' Castle, she would expect the tenants to have set aside six months' worth of operating expenses. She would also expect prospective tenants to have an operating budget. Potential buyers of a restaurant would want to see a good long-term lease in addition to longevity and stability. They would also want to view profit-loss statements covering no less than two to three years. She had never seen a restaurant in
The parties soon had conflicts over repairs. In general, Payne was slow at making repairs, causing plaintiffs to spend their own money to keep the restaurant operational. For example, Bonjean had to hire someone to install temporary phone lines. They sent the bill for the installation to Payne because they felt it was his duty to fix the problem. Payne often refused to reimburse them for repairs. He also billed them for a plumbing problem involving a large pipe that had to be removed. At one point, Payne also locked Stinson and Bonjean out of an apartment on the property that they had planned to use as an office.
According to Payne, Bonjean approached him several times to fix the equipment when Payne was working on unrelated projects in the building. It never appeared that Stinson and Bonjean had hired a maintenance person of their own. He did not believe he had an obligation to fix these problems, but he had workers with him at the time and it was not hard for him to provide assistance. He also wanted the restaurant to be successful. On July 10, 2007, he sent a letter to them stating that he would no longer undertake such repairs. They did not immediately object or assert that he had promised to do so.
On October 24, 2007, Stinson sent a letter to Payne and his attorney complaining that Payne was neglecting his obligations to keep the building and the equipment in working order. Payne sent a letter in reply. He did not respond to Stinson's complaints. Instead, he told them they were in violation of a valet zoning permit. Around this time, he also sent a three-day notice to pay rent or quit when they were one day late on the rent. They paid the rent that month, including a $1,500 late charge.
Plaintiffs made the $10,000 monthly BSA payment in July, August and September of 2007. After September, they did not pay the full amount due. Instead, they reduced the amount by taking deductions for repair costs, paying just $3,418 in October, $800 in November, and $375 in December.
After Stinson and Bonjean started deducting money from their monthly payments, Payne asked his attorney to notify them that they were in default on the Lease and the BSA. He filed notices against them to pay or quit. They did not leave within the noticed periods, nor did they pay. He never filed an actual eviction lawsuit.
In November 2007, Payne sent plaintiffs a 10-day notice to pay or quit. The notice said they had defaulted on the payments owed under the BSA. At that point, Stinson told the BTI Group that they could not sell the restaurant. He also contacted an attorney to handle the notice. He and Bonjean left Julius' Castle in January 2008 after closing their affairs. In Stinson's view, they had been evicted. They did not make any payments in January 2008 because they had been evicted. Stinson informed their vendors that JCRI would be unable to make payments on its accounts due to an unlawful eviction and explained he would be filing a lawsuit to recoup the monies owed.
On cross-examination, Stinson admitted he did not have a written business plan or a written budget when he started the restaurant. Initially, he and Bonjean each invested $25,000 in the restaurant, along with a $20,000 line of credit. They obtained a $100,000 loan shortly after the restaurant opened. They paid about half of that off before they closed the restaurant, at which point they stopped making payments. They also stopped paying sales taxes that were owed. He believed the restaurant made a profit just about every month it was in business. A document prepared by his bookkeeper showed gross sales increased from $25,757 in June 2007 to $190,445 in December 2007.
Bonjean testified that he had anticipated a profit of at least $500,000 upon the sale of the restaurant. When asked on cross-examination why he and Stinson didn't pay Payne the arrearages on the BSA payments so that they could realize the future profit from selling the business, Bonjean stated they did not have a concrete purchase offer at that time. Though the restaurant did very well in December 2007, they did not consider making good on the BSA
The trial court granted defendants' motion for nonsuit on the claim for breach of warranty. The court denied their motion for nonsuit on the fraud claim, stating "the parol evidence that's been adduced is admissible for the jury to consider on the issue of whether there was fraud in the inducement." Defendants proposed the following special jury instruction: "You may consider the alleged representations that James Payne would fix anything at the restaurant that did not work right only with respect to plaintiffs' claim that they were fraudulently induced into entering into the Lease and not for any other purpose or for any other claims made by the plaintiffs in this case."
During closing arguments, plaintiffs' counsel asserted her clients were not able to test the equipment before they entered into the Lease. Instead, Payne offered to repair anything that was not working. She argued he intentionally lulled them into complacency by fixing equipment until the BSA went through escrow, covering just enough time for the transaction to close. She claimed he knew the Department was investigating him when he first approached her clients and that he tricked them into opening the restaurant. Plaintiffs sought damages for the lost business opportunity of selling the restaurant.
Defense counsel noted Payne's alleged promise to make repairs is not set forth in the agreements. Instead, the agreements place the burden on plaintiffs to maintain the premises and equipment. Additionally, he pointed out the Lease's integration clause states any promises not contained in the Lease are void. He argued the restaurant had failed because the business was undercapitalized. He further asserted that the deductions from the BSA were made because plaintiffs were running out of money, not because they were incurring repair expenses. He also claimed the Certificate was a nonissue, as the Department had not threatened to shut down the restaurant and had given Payne three years to return the building to its prior condition.
The jury found against plaintiffs on their breach of contract claim, finding they had failed to substantially perform. It found in favor of them on the intentional misrepresentation claim, specifically finding that Payne had made a false representation of material fact, intending their reliance.
As to the cross-complaint, the jury found JCRI had breached the Lease by improperly deducting amounts from its BSA payments. The jury assigned contract damages at $75,000. It also found that Stinson and Bonjean had not personally guaranteed the contract.
Judgment was filed on September 29, 2010. The trial court set damages for plaintiffs at $205,800 after the reduction for comparative negligence. The court affirmed the $75,000 award on the cross-complaint.
On September 29, 2010, the trial court terminated the preliminary injunction entered on July 3, 2008, which had enjoined plaintiffs from transferring the liquor license. The court awarded plaintiffs $15,000 in damages from defendants' bond.
On October 14, 2010, Payne filed a motion for judgment notwithstanding the verdict.
On October 25, 2010, Payne filed a motion for a new trial. Within his motion, he asserted the trial court had improperly denied his motion in limine to exclude parol evidence.
On October 27, 2010, Payne filed a motion for attorney fees, asserting that he was the prevailing party in the breach of contract claim.
On November 29, 2010, plaintiffs filed a motion for attorney fees and costs.
On December 15, 2010, the trial court denied Payne's motion for judgment notwithstanding the verdict.
On December 16, 2010, the trial court denied Payne's motion for attorney fees and declared plaintiffs the prevailing party under Code of Civil Procedure section 1032.
On December 28, 2010, Payne filed a notice of appeal from the judgment entered on September 29, 2010.
On January 7, 2011, Payne filed a notice of appeal from the order denying his motion for judgment notwithstanding the verdict and the trial court's ruling on the preliminary injunction.
On January 31, 2011, plaintiffs filed a motion for attorney fees and costs.
On April 14, 2011, the trial court granted plaintiffs' motion for attorney fees and costs, awarding $158,180.75. Defendants filed an appeal of this order on April 21, 2011.
On September 20, 2011, we granted Stinson's motion to consolidate the three appeals.
We conclude the evidence of Payne's alleged guarantee as to the quality of the restaurant's equipment is inconsistent with the express representation in the Lease that plaintiffs had relied upon their own inspection in finding the premises and improvements to be in "good order, repair, and condition." Payne's alleged promise to repair any faulty equipment is also inconsistent in that it does not appear in the Lease or the BSA. Indeed, the Lease provides that the tenant agrees "at Tenant's own expense, to keep the Premises ... in good condition and repair ...." Under the Lease, Payne's repair obligation is limited to being responsible for "maintaining the roof and the structural integrity of the building premises." Further, the Lease provides that JCRI agreed to waive all statutory provisions or any other laws requiring Payne to maintain or repair the property or permitting JCRI to make needed repairs and deduct the repair costs from the rent. Payne's alleged oral statements are thus directly at variance with the terms of the Lease and the BSA. Accordingly, we agree with defendants that the contested oral statements constitute parol evidence. However, the recent Supreme Court decision in Riverisland
As noted above, at trial defendants relied on Pendergrass, supra, 4 Cal.2d 258, 263-264, in which the Supreme Court held that parol evidence is inadmissible to prove a fraudulent promise directly at variance with the terms of a written agreement. In that case, the court announced: "Our conception of the rule which permits parol evidence of fraud to establish the invalidity of the instrument is that it must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing." (Id. at p. 263, italics added.) One noted impact of the Pendergrass holding was that the parol evidence rule effectively immunized against liability for both prior and contemporaneous statements at variance with the written contract, and it implied that the alleged wrongdoer is innocent of fraud. (Casa Herrera, supra, 32 Cal.4th 336, 347.)
Defendants also argue that Riverisland, and the authorities it cites, "require that the circumstances of each case and the bargaining power of [each party] be considered." Defendants also claim that "inquiry into the relative sophistication of the parties is simple." Perhaps. In our view, however, our high court sought the opposite result, namely, to create certainty and consistency by eliminating altogether the judicially created exception to section 1856, subdivision (g). We also note that the plaintiffs in Riverisland appear to have been relatively sophisticated business people. While the defendant in that case was an established lender, the plaintiffs operated a corporation and thus had experience with business contracts. In light of these facts, distinguishing sophisticated business parties who should be barred from introducing parol evidence of fraud from those who should be permitted to introduce such evidence is not as simple as defendants suggest.
In the post-Riverisland world, parties would be better served in addressing the heightened burden of proving fraud in a civil action. Fraud demands specialized pleading. (Small v. Fritz Companies, Inc.) (2003) 30 Cal.4th 167, 182 [132 Cal.Rptr.2d 490, 65 P.3d 1255]; Lazar v. Superior Court (1996) 12 Cal.4th 631,
Finally, defendants note one of the justifications for the Riverisland decision was to avoid shielding fraudulent practices. They argue, however, that "Although this is a valid concern, Riverisland is strong medicine and must be applied only when the circumstances call for it: with contracts of adhesion where there is a disparity in bargaining power." Again, the court did not limit its holding to contracts of adhesion and we decline to read such a limitation into the decision. Accordingly, in light of the Supreme Court's overruling Pendergrass, supra, 4 Cal.2d 258 in Riverisland, we conclude the parol evidence was properly admitted at trial under the statutory exception for fraud.
The judgments on the complaint and the cross-complaint are affirmed. The award of $15,000 on termination of the preliminary injunction is reversed. The attorney fee award to plaintiffs is affirmed. The parties are to bear their own costs on appeal.
Margulies, Acting P. J., and Banke, J., concurred.
