O'LEARY, ACTING P. J.
Kumar Yamani appeals from a judgment finding him liable for intentional and negligent misrepresentation after closing a stock offering which had not, in fact, satisfied the requirements to close. The jury determined Yamani's actions defrauded the six plaintiffs out of more than $500,000. On appeal, Yamani argues there was insufficient evidence to conclude he intentionally or negligently misrepresented the stock offering had closed. Yamani also asserts the trial court abused its discretion in limiting the testimony of one of his key witnesses and in denying his motion for nonsuit. His contentions are without merit, and we affirm the judgment.
Yamani spun SiteLite out from his other business, OSI Consulting (OSI), in 1999.
The Lenders were each given a promissory note (Bridge Notes) with identical terms aside from the name of the lender and the value of the note. Under the Bridge Notes, which were designed to last one year, the Lenders were entitled to recoup their principal investment plus 8 percent interest if SiteLite was unable to secure $2.5 million in net proceeds by October 5, 2001. If, however, SiteLite was able to obtain $2.5 million in investments before October 5th, the Lenders' principal and all interest accrued would be automatically converted into shares of SiteLite preferred stock.
Each of the Bridge Notes provided as follows: "Subject to the provisions of [s]ection 4 hereof, all outstanding principal and accrued and unpaid interest shall be due and payable in full on the earlier of (i) the first business day following consummation by [SiteLite] of any offering, whether public or private, of shares of its capital stock wherein [SiteLite] receives net proceeds of at least $2,500,000 in connection therewith (an `Offering [of Series B Preferred Stock]') or (ii) October 5, 2001 (the `[m]aturity [d]ate')." (Italics added.)
Section 4 of the Bridge Notes provided as follows: "
According to Yamani, the Bridge Notes became due if the offering did not close prior to the maturity date. It was the Lenders' "understanding that [SiteLite] would have to actually receive the money before the maturity date" and the "net proceeds" requirement from the Bridge Notes meant "[SiteLite got] $2.5 million deposited in [its] bank account," giving it "new money to use towards the operations of the company."
Yamani retained David Andersen, an experienced corporate and securities attorney to assist SiteLite in raising capital through the Bridge Loans and the offering. As part of his duties, Andersen drafted the "Series B Convertible Preferred Stock Purchase Agreement" (hereinafter Purchase Agreement). According to Andersen, the Purchase Agreement contained a number of additional conditions to be fulfilled prior to closing the offering.
Relevant to this appeal, one condition required the investors actually invest their own money, not money that could have been attributed to another (borrowed money), to purchase the stock. Andersen explained, "[I]f it wasn't a valid debt . . . it would not be appropriate" to convert that debt into purchase money to fund the offering. A valid debt, per the terms of the Purchase Agreement, should arise out of an "[i]nvestor's own funds" and such funds could not be attributable to anyone else other than the investor.
Another condition of the Purchase Agreement required anyone investing in SiteLite to fully pay the purchase price for their shares of stock before the October 5th maturity date. The Purchase Agreement provided, in pertinent part, as follows: "Each Investor specifically warrants and represents that the funds utilized for making this investment are such [i]nvestor's own funds. . . . [¶] Each Investor shall have delivered the purchase price for the [s]hares to be purchased by it."
Former SiteLite officers testified that when the offering's "looming maturity date" was drawing near, "SiteLite was in no position at that time to pay back $4.4 million in notes" because "[t]hey were not in a cash flow position . . . to pay back that loan." Indeed, Yamani also stated SiteLite "wanted to get the deal done by the maturity date so [it was] not in default." Time was of the essence for SiteLite, and there was a sense of urgency at the office.
On October 9, 2001, Yamani sent letters to the Lenders notifying them the offering closed on October 4, 2001—the day before the maturity date. The letter stated SiteLite had received all $2.5 million required under the terms of the Bridge Notes. The letters further informed the Lenders "the entire principal sum and all accrued and unpaid interest under [their Bridge Notes] were converted automatically . . . into shares of . . . Preferred Stock." Each of these letters was signed by Yamani as President and CEO of SiteLite. In short, the letters informed Lenders they were now SiteLite preferred shareholders.
What the Lenders did not know was the $2.5 million offering had been jointly funded by Krishna Yarlagadda, who contributed $1.5 million, and Yamani himself, who contributed $1 million because he "couldn't find any other investors." Although their investments seemed, at first blush, to meet all of the requirements provided in the Bridge Notes and Purchase Agreement, Yarlagadda and Yamani violated a number of terms contained in both documents.
First, nearly $1.5 million of the offering was not "net proceeds" as required by the Bridge Notes. Instead, $438,000 originated from SiteLite's own account before it was funneled through OSI as part of Yamani's $1 million investment. Yamani thus "didn't invest [his] own money, it didn't come out of [his] personal bank account for [his] investment[,] . . . it came from OSI Consulting" after originating from SiteLite—the company it was getting deposited back into.
Further, $1 million of Yarlagadda's investment was loan forgiveness credit from existing SiteLite debt arising out of a number of his past loans to Yamani's company. Only $400,000 of Yarlagadda's investment actually came from Yarlagadda directly. At the time, Yarlagadda loaned SiteLite this $400,000, he intended his investment to be considered Bridge Loans similar to those made by the Lenders—not part of the offering. The remaining $600,000 was comprised of loans from others and was not actually money SiteLite owed Yarlagadda.
Finally, the majority of the funds deposited by Yamani and Yarlagadda were not paid until several weeks after the maturity date due to insufficient funds. At the time the checks were sent to SiteLite, mere hours before the October 4 closing date, Yamani was fully aware the OSI account and Yarlagadda's account were insufficiently capitalized. Because Yamani was intimately involved with OSI's business and was its sole shareholder, he was fully aware OSI's account did not have enough funds to cover a more than $500,000 transfer to SiteLite. Yarlagadda had also informed Yamani not to cash his checks right away because his funds would not be available until November 2001. Yamani also "knew the money wasn't in at the time [he] wrote the October [9, 2001] letter that told [Lenders the] transaction had closed."
The Lenders did not discover they had been defrauded until late 2003—nearly two years after Yamani sent out the letters and the Bridge Notes were converted to stocks. Immediately after learning Yamani may have defrauded them, the Lenders sued Yamani and SiteLite for intentional and negligent misrepresentation, alleging the offering did not close on October 4 as stated but instead matured on October 5 and their loans should have been repaid. The Lenders alleged they relied on Yamani's letter representing the offering closed on October 4, which induced them to accept SiteLite stock in lieu of repayment of their loans. In their second amended complaint, the Lenders prayed for damages totalling at least the amount of their loans plus interest.
At trial, it was determined SiteLite had a value of $120 million in April 2001. As of October 2001, SiteLite was valued, based on price per share, at $38 million even though the company was becoming profitable and bringing in revenues exceeding $1 million a month. SiteLite continued to pay its creditors as revenues poured in. There were also numerous offers at this time to purchase large portions of SiteLite stock, ranging from $11 million to nearly $150 million. All of the offers fell through and SiteLite declared bankruptcy in April 2005—at which point Yamani funneled $3 million from SiteLite into OSI.
Yamani filed a motion in limine before trial, and a motion for nonsuit during trial, asserting three of the Lenders had signed a release agreement in an unrelated matter, which precluded recovery in the current action. The court denied Yamani's motions concluding the scope of the release was limited to claims arising from the unrelated matters that had been settled.
The jury reached a verdict in favor of the Lenders, finding Yamani knowingly made a false representation of an important fact to the Lenders and they each reasonably relied on Yamani's representation and were thereby harmed. The trial court denied Yamani's motion for judgment notwithstanding the verdict, finding "there was substantial evidence that supports the verdict." The court entered judgment accordingly. It awarded damages to each of the Lenders in an amount equal to their initial loan plus 8 percent interest compounded annually from the maturity date until April 2008, totaling $706,783.34.
Yamani argues there was insufficient evidence to support a finding of intentional or negligent misrepresentation against him. Yamani also argues the trial court abused its discretion in refusing to permit Andersen to testify about conversations prior to the allegedly fraudulent statements, and that the trial court erred in denying his motion for nonsuit. The Lenders correctly contend we must defer to the trial court's factual findings if they are supported by substantial evidence. As we will discuss in more detail below, substantial evidence supports the jury's finding Yamani made a fraudulent statement in his letters to the Lenders, the court properly exercised its discretion in limiting Andersen's testimony, and the court correctly denied Yamani's motion for nonsuit.
"The well-established common law elements of fraud which give rise to the tort action for deceit are: (1) misrepresentation of a material fact (consisting of false representation, concealment or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to deceive and induce reliance; (4) justifiable reliance on the misrepresentation; [and] (5) resulting damage. [Citations.]" (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith Inc. (1998) 68 Cal.App.4th 445, 481 (City of Atascadero).)
The elements for negligent misrepresentation, while highly similar, differ with regard to the knowledge requirement. "Negligent misrepresentation is a form of deceit, the elements of which consist of (1) a misrepresentation of a past or existing material fact, (2) without reasonable grounds for believing it to be true, (3) with intent to induce another's reliance on the fact misrepresented, (4) ignorance of the truth and justifiable reliance thereon by the party to whom the misrepresentation was directed, and (5) damages. [Citation.]" (Fox v. Pollack (1986) 181 Cal.App.3d 954, 962.) Intentional misrepresentation requires a statement to have been made with knowledge it was false or with reckless disregard for the statement's truthfulness. Alternatively, negligent misrepresentation requires the statement to have been made without reasonably believing in its truthfulness.
"When a party contends insufficient evidence supports a jury verdict, we apply the substantial evidence standard of review. [Citations.] `"[T]he power of [the] appellate court begins and ends with the determination as to whether there is any substantial evidence contradicted or uncontradicted which will support the [verdict]." [Citations.]' [Citation.] We must `view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor. . . .' [Citation.] Needless to say, a party `raising a claim of insufficiency of the evidence faces a "daunting burden."' [Citation.]" (Wilson v. County of Orange (2009) 169 Cal.App.4th 1185, 1188.) "`The ultimate determination is whether a reasonable trier of fact could have found for the respondent based on the whole record. [Citation.]'" (Frei v. Davey (2004) 124 Cal.App.4th 1506, 1512.)
The thrust of Yamani's argument is that the Lenders did not offer sufficient evidence to show Yamani had any reason to believe the statements made in his letters were patently false. We disagree. The Lenders presented a wealth of documentary and testimonial evidence supporting their proposition Yamani knew the conditions for the offering to close had not been met.
It was uncontroverted the offering had to close by the maturity date or SiteLite would be forced to pay back each of the Bridge Loans with interest. As a requirement for the closing, the Bridge Notes espoused SiteLite had to raise $2.5 million in "net proceeds" by the maturity date. Each of the Lenders testified as to the common definition of the term "net proceeds" as phrased in the Bridge Notes. They stated "net proceeds" required SiteLite to raise "new money" it could use to further its operations. The Lenders, through their testimony, established what an average businessperson such as Yamani would have felt was the proper definition for "net proceeds."
Pursuant to the terms of the Purchase Agreement, as drafted by Andersen, closing the offering required that investors "shall have delivered" the full purchase price for their shares of stock, and investors invest their own funds in purchasing stock—not the funds of others. Andersen, who claimed to be "`caught off guard and surprised'" at trial when he reviewed the Purchase Agreement's language, ultimately testified both of those requirements must have been fulfilled prior to the purchase of stock and the closing of the offering. The Lenders produced numerous documents showing the bulk of the $2.5 million raised during the offering was not actually delivered until long after the maturity date. The funds given to SiteLite by both Yamani and Yarlagadda were insufficient at the time their checks were drafted, and were required to be held by SiteLite for the better part of a month before they could be cashed. Further, Yamani and Yarlagadda provided the full investment amount in the form of multiple checks, evidencing they knew money would trickle into their accounts such that the checks could be cashed one by one. Yamani and Yarlagadda did not deliver the full purchase price until long after the maturity date elapsed.
The Lenders further elicited testimony from SiteLite's officers that the majority of Yarlagadda's investment included converting Bridge Loans into shares of SiteLite stock. Although this practice was technically permissible, SiteLite's controller revealed most of Yarlagadda's loans were not actually in Yarlagadda's name, and were thereby "not valid debt" under the Purchase Agreement because they were not the investor's "own funds." Under the terms of the Bridge Notes and the Purchase Agreement, the evidence shows a reasonable person would have felt the offering never closed because the requirements and conditions were not met.
In light of the above evidence, we can now turn to the substance of the letters Yamani sent to the Lenders. Yamani argues he should not be held liable for his statements in the letters because he did not personally draft the letters and the letters were given to him by Andersen. Yamani asserts he should be protected by the business judgment rule. Not so.
The business judgment rule, codified in Corporations Code section 309, subdivision (b)(2), provides that: "In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: . . . [¶] (2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person's professional or expert competence." In interpreting the actions of a director of a business, we are generally required to defer to the director's judgment in the propriety of his actions. The exception is where, as here, there is an issue of fraud, the business judgment rule does not apply. (Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 432.) "`"The assessment of fraud or bad faith is a function courts are accustomed to perform, and in performing it the courts do not intrude upon the process of business decisionmaking beyond assuring that those decisions are not improperly motivated."' [Citations.]" (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 188.)
As discussed above, the evidence could reasonably be interpreted to show the offering did not close because the requirements and conditions were not fulfilled. Therefore, the statements in the October 9 letters were a misrepresentation of what actually occurred. A finding of intentional misrepresentation, however, requires "knowledge of falsity" and an "intent to deceive." (City of Atascadero, supra, 68 Cal.App.4th 445, 481.) Yamani claims no evidence was presented to show he knew the letters were false. This is simply not the case. Yarlgadda testified he had a conversation with Yamani where he told Yamani the funds to cover his checks would not be forthcoming until the end of the month—and SiteLite should delay in depositing the checks until then. Bank records from SiteLite and OSI showed Yamani needed to move money from SiteLite to OSI in order to cover his payments—both of which were made past the maturity date. Yamani, as OSI's President, CEO, and sole shareholder, was also in a position where he was required to know exactly how much money OSI had in its account, lest he would not have needed to divert money from SiteLite to OSI to cover his checks. The evidence thus showed Yamani knew the funds were not available before the maturity date, he knew full payment was required for the offering to close, and thus knew the statements in the October 9th letters were false. This was sufficient evidence supporting the jury's verdict.
Yamani also raises a sufficiency of the evidence argument with respect to the damages levied against him. "To recover for fraud, a plaintiff must prove loss proximately caused by the defendant's tortious conduct. [Citations.] `Deception without resulting loss is not actionable fraud.' [Citation.]" (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 65.) Damages must also be pled with "sufficient specificity" rather than in general or speculative terms. (Roberts v. Ball, Hunt, Hart, Brown & Baerwitz (1976) 57 Cal.App.3d 104, 111.) "`Interest may be awarded as an element of damages sustained by reason of fraud where the amount of the plaintiff's loss and the date from which interest, if awarded, should be computed are capable of definite ascertainment." (Smith v. Rickards (1957) 149 Cal.App.2d 648, 654.)
Yamani insists the amount of damages must be apportioned to "a legal certainty," but the Lenders did not meet this standard because they presented no evidence they had been harmed. He asserts the Lenders could not have recovered anything had they brought their lawsuit soon after the maturity date. This is incorrect. The Lenders alleged they had been harmed to the tune of at least $500,000 plus 8 percent interest, pursuant to the terms of their initial loans under the Bridge Notes. They further alleged they first discovered the fraud in mid-to-late 2003, roughly two years after receiving the letters. It was at this time the Lenders filed suit, claiming they would have brought suit immediately after the maturity date had they not been defrauded into believing the offering had closed. The Lenders brought forth numerous examples showing SiteLite could have paid off the Bridge Notes at any time after the maturity date. SiteLite was a viable company making revenues of $1 million per month, was generating profits, and was viewed as a highly profitable investment by a number of other companies in SiteLite's field. During and after the offering, SiteLite had more than enough capital in its coffers to pay off millions of dollars worth of debt to its other creditors, which it did.
Moreover, the Lenders offered documentary evidence which showed Yamani himself funneled $3 million from SiteLite to his other company, OSI, just months before SiteLite declared bankruptcy. Yamani, through SiteLite, had free use of the Lenders' money from the time of the maturity date to SiteLite's bankruptcy, thereby directly harming the Lenders. Because the terms of the Bridge Notes required interest to be paid at 8 percent compounded annually, the trial court properly awarded damages according to these same terms. The verdict and the resulting damages were supported by substantial evidence.
Yamani contends the trial court abused its discretion in refusing to permit Andersen from testifying about conversations he had with Yamani regarding the propriety of the letters.
In ruling on the trial court's determination to exclude Andersen's testimony, we are bound by the deferential abuse of discretion standard. "The trial court's `discretion is only abused where there is a clear showing [it] exceeded the bounds of reason, all of the circumstances being considered.' [Citation.]" (People ex rel. Lockyer v. Sun Pacific Farming Co. (2000) 77 Cal.App.4th 619, 640.) "`Under this standard, a trial court's ruling will not be disturbed, and reversal of the judgment is not required, unless the trial court exercised its discretion in an arbitrary, capricious, or patently absurd manner that resulted in a manifest miscarriage of justice.' [Citation.]" (Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 919.) A trial court abuses its discretion if it "transgresses the confines of the applicable principles of law." (City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297.)
To understand the trial court's rationale in limiting Andersen's testimony, we turn to the timeline of events prior to the trial. The trial date was originally set for April 18, 2005. On February 24, 2005 (53 days before trial), Andersen was scheduled to appear for a properly noticed deposition. He failed to appear. On March 11, 2005 (38 days before trial), Yamani was scheduled to appear for a properly noticed deposition. He appeared and was deposed, but he was instructed to not answer any questions relating to conversations he had with Andersen. According to both parties, Yamani refused because he had not yet determined whether he would raise the advice of counsel affirmative defense. On March 14, 2005 (35 days before trial), Yamani informed the Lenders he intended to call Andersen as a witness in the case to support the advice of counsel affirmative defense. Yamani, however, persisted in his refusal to produce any documents regarding communications between Andersen and Yamani prior to Andersen's deposition. Additionally, Andersen was twice scheduled for deposition after March 14 but was forced to reschedule when Yamani consistently failed to produce the necessary documents. On March 19, 2005 (30 days before trial), the discovery cut-off date passed. The parties agreed, however, to extend the cut-off date only for depositions that had been previously noticed—effectively barring Andersen's deposition or further questioning of Yamani.
On April 4, 2005 (14 days before trial), Yamani moved to file an amended answer containing the newly considered advice of counsel affirmative defense. The court denied the motion. On April 8, 2005 (10 days before trial), Yamani agreed to produce Andersen but again failed to produce the necessary documents. The Lenders were forced to remove Andersen from their deposition calendar.
Finally, on April 12, 2005 (six days before trial), Yamani moved for a second time to file an amended answer to include the advice of counsel affirmative defense. Again, the motion was denied.
In the motion in limine to exclude Andersen's testimony, the Lenders argued Andersen's refusal to appear at his deposition, Yamani's refusal to answer questions involving conversations with Andersen, and Yamani's refusal to produce documents that directly related to one of his affirmative defenses severely prejudiced the Lenders and would reward Yamani for abusing the discovery process. Yamani responded by stating the Lenders had ample time to compel Andersen to appear, but they never attempted to do so. Yamani further asserted the business judgment rule, and its corollary advice of counsel defense, were presupposed as a matter of law and the Lenders should have known it would be a defense even if Yamani never directly pleaded as such.
The trial court granted the Lenders' motion in limine in part and precluded Andersen from testifying about communications between he and Yamani. Andersen was not permitted to testify he directly informed Yamani the offering had properly closed or he directly instructed Yamani to send the letter to the Lenders. Andersen was also not permitted to testify about the propriety of the letters. According to the trial court, the Lenders "chose not to depose [Andersen] . . . and so I'm not going to preclude the testimony of . . . Andersen generally. However, I am precluding any testimony relating to any communications between . . . Andersen and [Yamani]. It wasn't [Yamani's] job to explain exactly how they might use the testimony of . . . Andersen, and if they didn't provide that information, then the [Lenders are] relieved of the burden of seeking to move to compel his deposition. [¶] I don't think that any—either side is ever obligated to lay out their case to explain why a particular person's deposition may be relevant. However, in this case, very clearly the [Lenders were] focused on communications between [Yamani] and counsel, and they were essentially precluded . . . from obtaining the discovery in that regard. [¶] As to the party deponent [Yamani], there was a specific instruction not to answer those questions. There was not the production of documents prior to the discovery cutoff. [¶] And so, again, as to any communications between [Yamani] . . . and . . . Andersen, that testimony is precluded. However, I'm not precluding . . . Andersen from testifying as a witness generally." During the trial, Anderson testified about his role in promulgating the Bridge Notes, Purchase Agreement, and the letters.
Trial courts have a duty to ensure all parties to an action receive a fair trial. To protect the right to a fair trial, the Legislature drafted Code of Civil Procedure section 2023.030, which allows trial courts wide latitude to impose sanctions on parties who misuse the discovery process. "The court may impose an evidence sanction by an order prohibiting any party engaging in the misuse of the discovery process from introducing designated matters into evidence." (Code Civ. Proc., § 2023.030, subd. (c).) Accordingly, a misuse of the discovery process includes: "Failing to respond or to submit to an authorized method of discovery." (Code Civ. Proc., § 2023.010, subd. (d).) Specified types of sanctions, such as the evidence sanction at issue here, may be imposed "[t]o the extent authorized by the chapter governing any particular discovery method or any other provision of this title." (Code Civ. Proc., § 2023.030.) "This means that the statutes governing the particular discovery methods limit the permissible sanctions to those sanctions provided under the applicable governing statutes." (New Albertsons, Inc. v. Superior Court (2008) 168 Cal.App.4th 1403, 1422 (New Albertsons).)
According to Yamani, the Lenders' motion in limine sought a discovery sanction specifically under Code of Civil Procedure section 2025.480, which provides in relevant part that "[i]f a deponent fails to answer any question [during a deposition] . . . the party seeking discovery may move the court for an order compelling that answer." within a specified time period. (Italics added.) Yamani contends the court should have denied the motion because the Lenders never moved to compel deposition responses or the production of related documents before moving for sanctions. He has misconstrued the record.
The Lenders did not seek sanctions for a specific statutory violation but rather argued Yamani abused the litigation process by revealing a new defense after avoiding all reasonable discovery relating to that defense. Instead of relying on statutory authority, the Lenders asked the court to exercise its inherent power to ensure a fair trial. Further, the trial court did not purport to rely on statutory requirements in determining the sanctions it imposed on Yamani. Although Yamani is correct in stating the Lenders never moved for an order to compel Andersen's deposition or for the production of documents, recent case law suggests such a choice not to pursue such an order is not necessary prior to moving for sanctions. In any event, even if the trial court did not properly follow the statutory guidance provided by the Code of Civil Procedure, there are other ways in which a trial court may exercise its discretion and rightly issue an evidence sanction. Such an alternative situation was present in the case before us.
Case law has defined two alternative ways in which a trial court may issue an evidence sanction against a party. First, "[s]ome courts . . . have held that nonmonetary sanctions for misuse of the discovery process may be imposed in certain circumstances not involving the sanctioned party's failure to obey an order compelling discovery. [Citations.]" (New Albertsons, supra, 168 Cal.App.4th at pp. 1424-1426.) "The general rule that we glean from these opinions is that if it is sufficiently egregious, misconduct committed in connection with the failure to produce evidence in discovery may justify the imposition of nonmonetary sanctions even absent a prior order compelling discovery, or its equivalent. Furthermore, a prior order may not be necessary where it is reasonably clear that obtaining such an order would be futile." (Id. at p. 1426.) Second, evidence may be excluded where "`justice demands it' [citations] [and] the inherent power of courts to control and prevent abuses in the use of their process `does not depend upon constitutional or legislative grant.' [Citation.]" (Peat Marwick, Mitchell & Co. v. Superior Court (1988) 200 Cal.App.3d 272, 287.) Therefore, "statutory restrictions on the exercise of the court's inherent sanctioning power are binding unless they materially impair the court's ability to ensure the orderly administration of justice." (New Albertsons, supra, 168 Cal.App.4th at p. 1431.) The trial court in the case before us considered the egregious nature of Yamani's discovery abuses and utilized its inherent power to restrict the evidence in a limited fashion, making sure it did not impose any substantial hardships on Yamani despite his persistent failure to provide necessary evidence to the Lenders.
Given the extremely time sensitive nature of the attempted depositions and the lack of production of necessary documents, we find the trial court acted properly in limiting Andersen's testimony under its inherent discretion to exclude evidence in certain circumstances. Andersen became a key witness the instant Yamani determined he was going to assert the advice of counsel affirmative defense at trial. Not permitting the Lenders access to the necessary documents on which Andersen's testimony hinged, despite the repeated requests to do so and the repeated claims of compliance, was an egregious abuse of the discovery process and forced the Lenders to reschedule Andersen's deposition time and time again such that Andersen completely eluded his deposition. "[V]iolation of a discovery order is not a prerequisite to issue and evidentiary sanctions when the offending party has engaged in a pattern of willful discovery abuse that causes the unavailability of evidence. [Citation.]" (Karlsson v. Ford Motor Co. (2006) 140 Cal.App.4th 1202, 1215 (Karlsson).)
Even though it was always the Lenders' responsibility to properly call Andersen for a deposition because he was not a party to the action, Yamani effectively prevented the Lenders from taking full advantage of the benefits the Lenders would gain from deposing Andersen. Though Yamani never attempted to truly conceal the presence of the necessary evidence, he never attempted to furnish the documents to the Lenders either. Such actions were conducted with flagrant disregard for the requirements of the discovery process. "Because the persistent refusal to comply with discovery requests is equated with an admission that the disobedient party has no meritorious claim in regard to that issue, the appropriate sanction for such conduct is preclusion of that evidence from trial." (Karlsson, supra, 140 Cal.App.4th at p. 1219.)
Yamani was the party in exclusive control of the evidence, and he used that dominance to intentionally suppress what he was obligated to produce during discovery, as agreed upon between his counsel and the Lenders' counsel. (Pate v. Channel Lumber Co. (1997) 51 Cal.App.4th 1447 [holding evidence sanction appropriate without prior court order when party informed opposing party all relevant documents had been produced, then attempted to produce previously withheld documents at trial]; Vallbona v. Springer (1996) 43 Cal.App.4th 1525, 1526 [holding evidence sanction appropriate without prior court order when party failed to comply with discovery requests on numerous occasions, told opposing party documents were stolen, then attempted to admit documents at trial]; Do It Urself Moving & Storage, Inc. v. Brown, Leifer, Slatkin & Berns (1992) 7 Cal.App.4th 27 [holding sanctions were appropriate without court order when a party persistently withheld items of discovery] (Do It Urself) superseded by statute on another ground in Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 582-583.) Considering Yamani's consistently hollow reassurances he would produce the necessary documents, it was likely he intended to surprise the Lenders during trial with evidence supporting his advice of counsel affirmative defense without the Lenders having a chance to view the evidence beforehand.
It is well settled "[d]iscovery sanctions must be tailored in order to remedy the offending party's discovery abuse [and] should not give the aggrieved party more than what it is entitled to." (Karlsson, supra, 140 Cal.App.4th at p. 1217.) Given that Lenders' motion to exclude Andersen's testimony hinged only on the argument Yamani made a last minute decision to raise the advice of counsel affirmative defense after taking great measures to avoid any discovery on the issue, their motion in limine was the proper way to remedy the problem. The record shows the trial court exercised its discretion by not excluding all of Andersen's testimony. Taking into account the amount and consistency of Yamani's disobedience during the discovery process, the court concluded Andersen's testimony should be limited in only two regards. Contrary to Yamani's contention, the trial court was not forced to strictly flow with the statutory tide to determine the type of sanction to use. Rather, the trial court was authorized to, and did, exercise its discretion to impose the sanction it deemed appropriate in order to exclude evidence in an attempt to further the interests of justice and provide a forum for all parties to receive a fair trial. Had the trial court imposed a lesser sanction, it would have permitted Yamani to game the discovery system and force the Lenders "to proceed to trial without the benefit of the bargained-for evidence." (Do It Urself, supra, 7 Cal.App.4th at p. 37.)
Even if Andersen's testimony was improperly limited by the trial court's exercise of its discretion, "the error does not require reversal of the judgment unless the error resulted in a miscarriage of justice." (Saxena v. Goffney (2008) 159 Cal.App.4th 316, 332.) It must be "reasonably probable a more favorable result would have been reached absent the error." (Ibid.) We find no miscarriage of justice present, and determine any error was harmless.
Despite the trial court's imposed limitation, Yamani was still able to take full advantage of Andersen's testimony. Over the Lenders' objections, the trial court allowed other witnesses to testify regarding conversations between Andersen, Yamani, and the SiteLite board. Andersen and Yamani both testified as to their business relationship and Andersen stated he was fully involved in the offering, including drafting, interpreting, defining, and clarifying terms for Yamani and the SiteLite board. Andersen further testified as to the propriety of allowing loans to be converted into "net proceeds" for the purposes of closing the offering. Andersen stated he felt the offering properly closed, and he discussed the offering with Yarlagadda. Andersen testified he drafted the Lenders' letters and felt all representations in them were accurate and true, and he instructed SiteLite to send the letters to the Lenders. Given the wealth of evidence surrounding Andersen's involvement with the offering, it would not have been a stretch for the jury to imply Andersen had communicated with Yamani about whether Andersen felt the offering had properly closed. Had Andersen directly testified to any communications he had with Yamani, the outcome of this case would have been the same. Thus, any error in limiting Andersen's testimony was harmless.
During trial, Yamani sought to introduce evidence of a settlement agreement signed by Varon, Sickler, and Sherman in an unrelated matter. The document contained a release of all "known and unknown claims" against SiteLite and Yamani. The court determined the release did not apply to the claims currently being litigated but permitted admission of the evidence so Yamani could later file a motion for nonsuit. Thereafter, the court considered and denied Yamani's motion for nonsuit and directed verdict.
On appeal, Yamani asserts the court should have granted his motion for nonsuit or directed verdict against Varon, Sickler, and Sherman. He asserted the three Lenders were pursuing a claim that had been released by the 2002 settlement agreement and Yamani was entitled to judgment in his favor. He is wrong.
The underlying facts relating to this issue are as follows: In October 2001, the Lenders' Bridge Notes were converted into company stock. The following year, in March 2002, three of the Lenders (Varon, Sickler, and Sherman) entered into a settlement agreement with SiteLite in an unrelated matter. Specifically, Varon, Sickler, and Sherman were plaintiffs in "Stockholder Actions" against SiteLite. Varon was a plaintiff in an employment action against SiteLite arising from his termination in 2001 as the company's manager.
In the settlement agreement Varon, Sickler and Sherman were referred to individually or collectively as the "Plaintiffs" or the "Parties." SiteLite/Yamani was referred to as the "Company." The agreement began by listing five "Recitals" regarding the nature of the disputes being settled: (1) the Stockholder Actions; and (2) the employment action. The last Recital provided, "The Parties have agreed to a settlement of all claims and disputes of any nature whatsoever arising out of or in any manner related to the [d]issenting [s]hares [the subject of the Stockholder Actions] and to Varon's employment with the Company, including without limitation the causes of action described in the Stockholder Actions and the Employment Action and any other cause of action which could have been alleged therein, and to certain other terms and conditions as set forth herein." In short, the parties intended to settle their current disputes.
The motion for nonsuit is based on paragraph 8a of the settlement agreement, which consists of a single sentence that fills almost the entire page. From this enormous mumbo jumbo of legalese, Yamani plucked the following phrase to support his motion: "[Plaintiffs agree to release the Company] from . . . "any and all known and unknown claims . . . including but not limited to any and all claims which have been or could be brought against the Plaintiffs arising out of or in any way relating to the issuance of any securities of the Company . . . ." He asserts the underlying action would certainly qualify as a claim involving "issuance of any securities of the Company." Yamani explains the agreement was executed after the three Lenders' Bridge Notes had been automatically converted into company stock, and clearly any claim regarding issuance of the stock was released by this subsequent agreement.
We begin our analysis by reciting our standard of review. "Contract interpretation presents a question of law which this court determines independently. [Citations.] A contract must be interpreted to give effect to the mutual, expressed intention of the parties. Where the parties have reduced their agreement to writing, their mutual intention is to be determined, whenever possible, from the language of the writing alone. (Civ. Code, §§ 1636, 1639; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 821-822.) We may not "`create for the parties a contract which they did not make, and... cannot insert in the contract language which one of the parties now wishes were there.' [Citation.]" (Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 472-473 (Ben-Zvi).) Since the parties agree with the trial court's conclusion the settlement terms were unambiguous, extrinsic evidence was unnecessary, and our de novo review is limited to reviewing the text within the four corners of the document.
Yamani asserts the court erred in its interpretation of the scope and meaning of one fragment of a lengthy sentence found in paragraph 8a. When interpreting a settlement agreement, as with any other contract, our key task is to ascertain the intent of the parties. In so doing, we must interpret the language of any portion of the agreement in the context of the document as a whole, rather than using a disjointed approach. (Ticor Title Ins. Co. v. Rancho Santa Fe Assn. (1986) 177 Cal.App.3d 726, 730.) When paragraph 8a is viewed in context of the document as a whole, we conclude the court's interpretation was correct.
The first section of the settlement agreement incorporates by reference the five Recitals (described in more detail above) listing the nature of the disputes/lawsuits being settled. Paragraphs 2 through 7 of the agreement delineate how and when the settlement money will be paid and when the lawsuits will be dismissed. Paragraph 8a describes the claims the Lenders are willing to release, and paragraph 8b contains the Company's release provision. Paragraph 8c states "all claims covered by" paragraphs 8a and 8b will be referred to in the agreement as "Released Claims". Paragraphs 9 and 10 contain a Civil Code section 1542 waiver "with respect to the Released Claims." The remaining paragraphs contain the ordinary boilerplate contract terms, such as integration clauses and attorney fee provisions that are not relevant to this appeal.
We agree with the trial court's interpretation of the settlement agreement that the parties intended the release of future unknown claims to be limited to those connected to, resulting from, or arising from, the lawsuits being settled, i.e., the Stockholder Actions and the employment action. It is undisputed this intent is clearly reflected in the Recitals. We conclude paragraph 8a considered in its entirety also supports this interpretation.
As noted above paragraph 8a consists of one monstrous sentence, badly punctuated, and grammatically challenged. For the sake of clarity, we will break the sentence into four parts. The first part simply identified the collection of Plaintiffs and the big group of released parties affiliated with the Company. In the second part, the Plaintiffs agreed to "completely release and forever discharge" the Company affiliates "of and from any and all past, present or future [causes of action] . . . which the Plaintiffs now have, or which may hereafter accrue or otherwise be acquired by the Plaintiffs . . . ."
The third part of the sentence spelled out the scope of the release/discharge as follows: The Plaintiffs released the Company from causes of action "arising from, on account of, or in any way related to, or which are or could have been, the subject of the" (1) the "Stockholder Actions or" (2) "the Employment Action, and" (3) "any and all known or unknown claims which have resulted or may result from the alleged acts or omissions of the Released Parties . . . ." The last subject (No. 3) listed above is further elaborated upon in the fourth and final part of the sentence contained in paragraph 8a.
However, the crux of the argument raised on appeal centers on part three and specifically the text of the last subject (No. 3) listed above. The trial court interpreted this language as expressly limiting the release of unknown future claims to those arising from the Stockholder Actions or the employment action. We agree with this analysis. The plain meaning of the text clearly reflects the parties' intent to release any claims arising from either of the settled lawsuits "and" any other unknown claims resulting from those "alleged acts or omissions" of the Company folks. The use of "and" rather than "or" as the coordinating conjunction joining No. 3 to the sentence, as well as the use of a past tense qualifier (the result of alleged acts), together served to limit the scope of the release.
If the parties had intended No. 3 to not relate the released parties' acts or omissions to the actions being settled, use of the coordinating conjunction "or" would have signified a new category of claims unrelated to the Stokcholder Actions or employment action listed immediately prior. Moreover, the parties did not have to condition the release of known and unknown claims in No. 3 to those that "resulted or may result" from the "alleged acts or omissions of the Released Parties." As aptly noted by the trial court, "the term, `alleged actions or omissions of the released parties' does provide a limitation to the release agreement, that there were alternative ways of framing [the release] that would have constituted a general release of all known or unknown claims, whether or not they arose from the alleged actions or omissions of the released parties, and that that alternative language wasn't used." Indeed, if the parties had intended for the release to cover any future unknown claims, of any kind, they would not have specified the claims must arise from the prior "alleged acts" of the Released Parties. We find no language in the agreement suggests the parties intended to release unknown claims related to any acts or omissions of the Company. We are mindful of the fact the court cannot "`create for the parties a contract which they did not make, and . . . cannot insert in the contract language which one of the parties now wishes were there.' [Citation.]" (Ben-Zvi, supra, 40 Cal.App.4th at p. 473.)
Contrary to Yamani's assertion this interpretation does not create an absurdity. Having the limited release stated in No. 3 served a valid purpose. In making its ruling the trial court explained the parties "specifically relat[ed the release] to known or unknown claims that arose out of the context of the agreement which was the Stockholder Actions and the employment action so that even if, for example, there were claims that were not asserted but were based on something arising out of the employment of the individuals or arising out of issues relating to the value of the stockholder's dissenting shares, then those would have been covered and were covered by the agreement." We similarly interpret this to the purpose and scope of this portion of the release agreement.
Moreover, we disagree with Yamani's argument paragraphs 9 and 10, containing a Civil Code section 1542 waiver, should somehow trump the specific release language detailed in paragraph 8a. Civil Code section 1542 provides that a "general release" does not extend to unknown or unsuspected claims. The parties to a release may be bound by a waiver of the section's protection if they understand and consciously agree to the waiver. (Winet v. Price (1992) 4 Cal.App.4th 1159, 1170.) Varon, Sickler, and Sherman waived the section's protection but qualified the waiver as follows: "In connection [with settlement of and bar to the Released Claims (listed in 8a and 8b)], the Plaintiffs acknowledge that they may hereafter discover facts different from or in addition to the facts which they may know or believe to be true with respect to the Released Claims but that they intend to hereby fully and forever settle all disputes between and/or among them. In furtherance of such intention, the release given herein shall be and remain in effect as a full and complete release by each [p]arty in favor of each other[p]arty as to the Released Claims, notwithstanding discover of any such different or additional facts. Therefore, each Party acknowledges that it has been informed of and is familiar with the provisions of Civil Code section 1542, which provides as follows: [¶] [text contains full citation of Civil Code section 1542] . . . [¶] (10) All [p]arties understand . . . the significance of this waiver of [Civil Code] section 1542 . . . and nonetheless waive any and all rights, and benefits that they might invoke under this [Civil Code s]ection 1542." (Italics added.) We conclude this provision plainly provides the waiver of unknown claims was limited to those "connected" with the "Released Claims" listed in paragraphs 8a and 8b. The motion for nonsuit/directed verdict based on the release agreement was properly granted.
The judgment is affirmed. Respondents shall recover their costs on appeal.
WE CONCUR:
ARONSON, J.
FYBEL, J.
