IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION SEVEN
May 20, 2009; as modified June 9, 2009
ITTELLA INTERNATIONAL, INC., CROSS-COMPLAINANT AND RESPONDENT,
PACIFIC AMERICAN FISH CO., INC. ET AL., CROSS- DEFENDANTS AND APPELLANTS.
APPEAL from a judgment of the Superior Court of Los Angeles County. olf M. Treu, Judge. Reversed with directions. (Los Angeles County Super. Ct. No. BC315762).
The opinion of the court was delivered by: Zelon, J.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
Pacific American Food Co., Inc. (PafCo) and Peter Huh (Huh) appeal from judgment on Ittella International, Inc.'s (Ittella) cross-complaint for intentional and negligent interference with a lease and punitive damages after a bench trial in which the trial court found for Ittella. Appellants contend that the trial court erred because there is no evidence its conduct caused any harm to Ittella; California law does not recognize the tort of negligent interference with contract; and the punitive damages award was excessive and not supported by any showing of malice. We reverse, and order the trial court to enter judgment in favor of PafCo and Huh.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
1. Summary of Proceedings
M&M Foods, Inc. (M&M) leased commercial real property from Ittella for use as a food processing plant. In early 2004, M&M's principal, Michael Silver (Silver) entered into a plea agreement with the United States concerning federal taxes. At about the same time, PafCo offered to buy substantially all of M&M's assets and agreed to sublet the Ittella premises from M&M for a portion of the remaining lease period. Although Ittella refused to consent to the sublease, PafCo moved into M&M's premises and began conducting business. M&M filed suit against Ittella and PafCo (M&M Action). Ittella commenced a separate unlawful detainer action, which the parties settled by agreeing PafCo could remain at the premises until January 1, 2005. In April 2005, PafCo vacated the premises, and in July 2005, M&M filed for chapter 7 bankruptcy. In July 2006, a bench trial commenced on Ittella's third- amended cross-complaint in the M&M Action, in which Ittella asserted claims against PafCo for intentional and negligent interference with contract and sought punitive damages. PafCo defended by asserting that because M&M was financially incapable of completing the lease term in any event, PafCo's occupation of the premises did not cause M&M's breach of the lease. The trial court found for Ittella, awarding it $230,000 in lost lease payments and $1.15 million in punitive damages.
2. PafCo's Purchase of M&M Assets; The Failed Sublease
On October 3, 1994, Abel C. Galletti, a partner with Galletti Brothers Investments (Galletti Brothers), leased commercial real property located on East 21st Street in Los Angeles to M&M Foods. The property was specifically constructed for a food processing business. After a series of extensions, the lease was extended through November 30, 2006 at a rate of $26,000 per month.*fn1
In February 2004, PafCo entered into negotiations with M&M and Silver for the purchase of a substantial portion of M&M's assets. Silver told Huh, the owner of PafCo, that it was critical to sell M&M because he was having financial problems, and that the business owed the IRS $7 million. Once a plea agreement Silver told Huh that he intended to make became public, Silver's suppliers would cut him off. Huh believed that if the parties could not consummate an asset purchase agreement, M&M would go into bankruptcy.
The parties entered into an asset purchase agreement which provided for the sale of M&M's machinery, equipment, and those portions of the inventory that were saleable. The agreement also provided that M&M would obtain Ittella's consent to PafCo's sublease of the Ittella premises from M&M "for a period of time not to exceed December 31, 2004, or such additional time that the Buyer may need until Buyer's new building is ready for occupancy.... Buyer is not assuming, and not relieving Seller of the lease obligations except as contained herein. Buyer shall pay any and all rents directly to the landlord." M&M's accounts receivable were excluded from the agreement. Further, Silver disclosed in the agreement that he had made a plea agreement with the U.S. Attorney relating to $7 million in taxes, and that PafCo was aware that if the plea agreement became public prior to the closing, such public disclosure could adversely affect M&M's business. Closing was set for March 31, 2004.
Salvatore Sam Galletti, the owner of Stonegate, disputed that M&M Foods was having financial problems. Galletti had known Silver over 20 years, and did not know his business was in trouble; he believed that M&M did $80 million a year in business. From Galletti's observations of the premises, Silver's business was doing well; the freezers were full, there was a lot of activity, and Silver did not have trouble paying the rent. Although Galletti had heard rumors about Silver, he had extended him credit.*fn2
In March 2004, Silver's plea agreement became public, and his suppliers began to cut him off. In early April 2004, M&M informed Ittella of the asset purchase and that it wanted to sublease the premises to PafCo through the end of 2004. Ittella refused to consent to the proposed sublease.*fn3 Because the lease was not secured by any personal property or guarantee, Ittella was concerned that "at the termination of the sublease, M&M would not have the capability of continuing its business within the premises, as most of its equipment, inventory and assets would have been transferred to PafCo by then for PafCo's use in its separate business in a different [location]. Consequently, the ability of M&M to perform its obligations under the lease for the duration of the lease would be compromised." For this reason, Ittella requested that as a condition of its consent to the sublease, PafCo either assume M&M's obligations under the lease or provide it with a guarantee of M&M's obligations.
On May 19, 2004, M&M Foods commenced the M&M Action against Ittella for breach of lease. The First Amended Complaint alleged claims for breach of lease, breach of the covenant of good faith and fair dealing, and intentional interference with contractual relations. M&M Foods claimed that Ittella unreasonably withheld consent to sublet the premises to PafCo.
In spite of Ittella's refusal to consent to the sublease and with the knowledge it could face eviction, PafCo took possession of the premises on June 7, 2004. PafCo paid rent for the time it occupied the premises. Although M&M ceased doing business as of that date, PafCo told M&M's employees they could continue working for PafCo. At the time of the closing, PafCo, which had been advancing funds to M&M during the escrow because its suppliers had cut it off when they learned of Silver's plea agreement, was owed $3 million. Huh believed that it had accounts receivable of $6.8 million (which were not part of the asset sale) and $5 million in creditor claims.*fn4
Huh believed that Ittella was withholding its consent as a negotiating tactic to obtain a longer sublease with PafCo. PafCo considered moving M&M's inventory to another facility where PafCo had sufficient freezer space for the inventory.
3. The Unlawful Detainer Action
Around this time, Salvatore Sam Galletti, the owner of Stonegate, learned that PafCo was on the M&M premises. He believed that M&M was going to stay in business and that PafCo was buying 60 percent of M&M. On June 7, 2004, M&M's attorney Robert Ezra advised PafCo that because of PafCo's failure to obtain a sublease, Ittella would likely be filing an unlawful detainer action against PafCo.
On June 9, 2004, Ittella's counsel wrote to Ezra and informed him that Ittella had learned PafCo had moved into M&M's premises. Ittella requested a response to its offer to settle the matter by having PafCo lease the entire premises directly from Ittella. Ittella did not receive a response to its letter.
On July 19, 2004, Ittella commenced an unlawful detainer action against M&M and PafCo. On September 28, 2004, on the eve of trial, the parties settled, agreeing that judgment would be entered in favor of Ittella; PafCo would pay holdover damages of $132,500 to Ittella; Ittella would not waive any rights in the M&M Action; PafCo would vacate the premises by January 1, 2005; and would leave the premises in "broom swept and in good condition."
On October 14, 2004, Ittella filed a cross-complaint in the M&M Action against M&M, PafCo, Michael Silver and Peter Huh for breach of contract, breach of the covenant of good faith and fair dealing, intentional and negligent interference with contractual relations, and conspiracy.
On December 10, 2004, PafCo informed Ittella that it needed to remain on the premises until January 31, 2005, and offered to pay rent for its continued occupation. Ultimately, PafCo moved out in April 2005. On July 12, 2005, M&M and Silver filed separate petitions for chapter 7 bankruptcies. After unsuccessfully attempting to sublet the property, Ittella sold it in January 2006 for $5.15 million.
4. Ittella's Third Amended Complaint; Trial
On May 17, 2006, Ittella filed its operative third amended cross- complaint against M&M and PafCo, alleging four causes of action against PafCo: intentional interference with contract; negligent interference with contract; conspiracy; and breach of contract (based upon a breach of the unlawful detainer settlement agreement). Ittella sought damages for the unpaid rent for the remaining term of the lease after PafCo moved out, and punitive damages on its claim for intentional interference with contract. Ittella dismissed the action against M&M and Silver prior to trial due to their pending bankruptcies, and trial was confined to Ittella's claims against PafCo.
Prior to trial, Ittella filed motions in limine to exclude any evidence regarding the reasonableness of its refusal to sublease on the theory that even if Ittella had been unreasonable, PafCo took possession of Ittella's property and caused M&M to breach its lease. PafCo contended the issue was pivotal to its defense because under Civil Code section 1995.310, when a landlord unreasonably refuses to consent to a sublease, consent is deemed granted by operation of law, and the subtenant is entitled to be on the premises. The court granted the motion.*fn5
On July 26, 2006, a bench trial commenced on the remaining claims for intentional and negligent interference with contract. In addition to testimony concerning PafCo's purchase of M&M and Ittella's refusal to consent to the sublease, Ittella put on evidence concerning damage to the property and its lost revenues due to PafCo's occupation of the premises.
After PafCo vacated the premises, Ittella spent $40,000 to $50,000 cleaning up chemicals and claimed the property was in a damaged condition. Ittella attempted to lease the premises while PafCo was still on the property, but it was unable to do so because of the condition of the property. As a result of the damage, they were not able to sell it as a food processing plant. Ittella claimed the lost value of the property was $2,068,355, and claimed lost rent of $265,000 ($26,500 per month) for the period April 2005 through January 2006 (when the sale took place).
Huh claimed that the property was already damaged when PafCo moved in, and testified that PafCo did not use or leave any chemicals on the premises. Several of PafCo's employees testified that the floor was damaged, the roof leaked, and they had to spend money to repair some of the refrigerators.
PafCo requested a statement of decision. In its proposed statement of decision, the trial court found for Ittella on its claims, and awarded it $230,000 in lost rents, and $1.15 million in punitive damages. On Ittella's intentional interference with contract claim, the court found that: PafCo knew of the lease between M&M and Ittella; PafCo intentionally moved into the property although it knew it would be subject to an unlawful detainer action; by moving into the property, PafCo knew it would interfere with the lease; and PafCo's interference with the lease proximately caused Ittella's financial losses. The court specifically rejected PafCo's argument that it had not caused damages because M&M would have defaulted on the lease anyway as pure speculation because PafCo never offered any evidence of M&M or Silver's financial condition, and because M&M would continue to collect on accounts receivable that were not part of the sale to PafCo.
On Ittella's negligent interference with contract claim, the court applied J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799 and concluded PafCo and Huh owed Ittella a duty of care to avoid engaging in conduct that could foreseeably interfere with M&M's lease. The court found such conduct "morally blameworthy" in light of PafCo's willfulness, its knowledge that its possession of the leased premises was unlawful, and its ability to relocate to its own premises. The court specifically noted that "While J'Aire, supra, was a case of negligent interference with prospective economic advantage, the court therein made no distinction between that tort and the tort of negligent interference with contractual relations. [Citation] Upon the court's finding herein that the factors enumerated in J'Aire Corp., supra, for the determination of the `duty of care' on the part of PafCo and Huh have been proven by Ittella at trial, the court further concludes that PafCo and Huh breached said duty of care to Ittella by PafCo's wilful usurpation of the leased premises without Ittella's consent, which proximately caused Ittella's financial injury."
The trial court found the punitive damages were supported by the fact PafCo took possession of the premises without Ittella's consent, and that "such conduct would result in Ittella's financial injury with substantial certainty." This fact supported a finding of malice and conscious disregard for Ittella's rights under Civil Code section 3294(c)(1). The court believed $1.15 million bore a reasonable relationship to the compensatory damage award and was warranted based upon the financial condition of Huh and PafCo.
PafCo objected to the proposed statement of decision, contending that it contained factual inaccuracies regarding PafCo's showing of M&M's financial difficulties, and that the court erred in finding its conduct constituted interference with the lease. PafCo also objected that the punitive damages award was excessive and not supported by evidence of PafCo's intent to harm Ittella.
The trial court rejected PafCo's objections to its proposed statement of decision, adopted the statement of decision, and entered judgment.
I. SUBSTANTIAL EVIDENCE DOES NOT SUPPORT THE TRIAL COURT'S FINDING PAFCO'S OCCUPATION OF THE PREMISES CAUSED M&M TO BREACH ITS LEASE WITH ITTELLA
PafCo argues that substantial evidence does not support the trial court's finding that PafCo interfered with the lease between Ittella and M&M because there is no evidence PafCo caused any injury to Ittella. PafCo contends that (1) Ittella presented no evidence that M&M, in spite of its financial problems, would have continued to occupy the space and pay rent; (2) Ittella conceded at trial that M&M could not have continued to fulfill its lease obligation; and (3) Ittella presented no evidence that the lease continued to be enforceable after Ittella unreasonably withheld its consent to M&M's proposed sublease to PafCo. Ittella contends that no legal authority supports the proposition that it was required to prove M&M would have fully performed under the lease but for PafCo's interference; the fact that it went out of business after the consummation of the asset purchase agreement did not establish it was incapable of fulfilling its obligations under the lease; and the reasonableness of its refusal to consent to the proposed sublease does not affect the enforceability of the lease with M&M.
A. Standard of Review
Under the substantial evidence test, we review the entire record in the light most favorable to the judgment to determine whether there are sufficient facts, contradicted or uncontradicted, to support the judgment. (Jonkey v. Carignan Const. Co. (2006) 139 Cal.App.4th 20, 24.) Substantial evidence is evidence which is reasonable, credible, and of solid value. In evaluating the evidence, we do not consider issues of credibility or whether contrary inferences may be made from the evidence. (Kuhn v. Department of General Servs. (1994) 22 Cal.App.4th 1627, 1632-1633.)
A claim for intentional interference with contract requires the plaintiff to show: a valid contract; defendant's knowledge of the contract; defendant's intent to induce a breach; breach; and damages. (Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1148.) Because the tort of interference with contract protects different interests than the tort of interference with prospective economic advantage, the defendant's conduct need not be wrongful aside from the interference with the contract. (Della Penna v. Toyota Motor Sales, Inc. (1995) 11 Cal.4th 376, 392.)
The element at issue here, causation, is shown where defendant's conduct is a substantial factor in bringing about the injury, damage, loss, or harm. (Franklin v. Dynamic Details, Inc. (2004) 116 Cal.App.4th 375, 391.) "`The term `substantial factor' has no precise definition, but `it seems to be something which is more than a slight, trivial, negligible, or theoretical factor in producing a particular result.' [Citation.]" (US Ecology, Inc. v. State of California (2005) 129 Cal.App.4th 887, 909.) The test, which is the same in tort and contract actions, requires that damages be proximately caused by the defendant's actions, and their causal occurrence reasonably certain. (Ibid.) A defendant's conduct is not a substantial factor in bringing about the harm to another if the harm would have occurred even without the defendant's conduct. (Viner v. Sweet (2003) 30 Cal.4th 1232, 1240 (Viner) [applying substantial factor test to tort of legal malpractice].)
Where there is more than one potential cause of harm, the analysis requires more detailed examination. The Restatement Second of Torts provides that if "`two forces are actively operating... and each of itself is sufficient to bring about harm to another, the actor's negligence may be found to be a substantial factor in bringing it about." (Viner, supra, 30 Cal.4th at p. 1240.) While many names are applied to this concept, where there are multiple causes, they must be truly independent: where "these forces operate[ ] in combination, with none being sufficient in the absence of the others to bring about the harm, they are not concurrent, independent causes." (Ibid.)
Such is the case here, as the events were not independent of each other, nor was there a showing of any individual circumstance sufficient to cause the harm alone.
Ittella bore the burden of establishing that PafCo's purchase of M&M's assets and occupation of the premises was a substantial factor in bringing about M&M's breach of the lease. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55.) Although it was not its burden to present evidence of M&M's financial condition, PafCo did provide evidence that due to M&M's poor financial condition and its legal troubles, it was not reasonably certain that M&M would have continued to perform under the lease until the end of the lease term. Its suppliers had cut it off after the plea agreement; PafCo's loans were keeping it afloat; although M&M had accounts receivable of $6.8 million, vendors had made $5 million in claims and Silver owed the IRS $7 million under his plea agreement; and M&M owed PafCo substantial amounts. Ittella contends that nonetheless, M&M's business had been profitable and there was no evidence it would not continue to function as a healthy going concern; however, aside from Ittella's assertion that M&M had made $80 million in the past and its freezers were full, this contention is not supported in the record. Furthermore, the fact that the asset purchase agreement stripped M&M of most of its assets was not a proximate cause of M&M's abandonment of its business and the lease; rather, the sale reflected its financial and legal woes. We conclude Ittella failed to establish that M&M could have continued in possession of the premises as a paying tenant through the end of the lease term of November 2006.
In an attempt to escape the lack of evidence of causation in the record, Ittella disputes that it needed to show that the contract would otherwise have been performed without PafCo's interference, contending that it need only show the existence of a valid contract. We disagree. Ittella's argument fails because it confuses the fact of the contract with the breach of the contract. "It has been repeatedly held that a plaintiff, seeking to hold one liable for unjustifiably inducing another to breach a contract, must allege that the contract would otherwise have been performed, and that it was breached and abandoned by reason of the defendant's wrongful act and that such act was the moving cause thereof [citations]." (Dryden v. Tri-Valley Growers (1977) 65 Cal.App.3d 990, 997; see also Augustine v. Trucco (1954) 124 Cal.App.2d 229, 246 [plaintiff must establish proximate causation by showing the contract otherwise would have been performed].) Thus, "[i]f the [defendant's wrongful] acts are the proximate cause of the breach, then it follows that the contract would otherwise have been performed. If the breach would occur in any event, then the acts cannot be the proximate cause." (Allen v. Powell (1967) 248 Cal.App.2d 502, 508.)
II. NO CLAIM FOR "NEGLIGENT INTERFERENCE WITH CONTRACT"
Ittella also proceeded on a theory of "negligent interference with contract."*fn6 California does not recognize a tort based upon negligent interference with a contract between third parties. (Fifield Manor v. Finston (1960) 54 Cal.2d 632, 636.) As the Supreme Court has explained, there is a "distinction between claims for the tortious disruption of an existing contract and claims that a prospective contractual or economic relationship has been interfered with by the defendant.... [T]he notion that the two torts are analytically unitary and derive from a common principle sacrifices practical wisdom to theoretical insight, promoting the idea that the interests invaded are of nearly equal dignity. They are not." (Della Penna v. Toyota Motor Sales, U.S.A., Inc., supra, 11 Cal.4th at p. 392.) We therefore reverse the compensatory damage award based upon this theory.
III. THE PUNITIVE DAMAGES CLAIM FAILS
Because we reverse the trial court's compensatory damages award on both theories, Ittella's punitive damage claim, which depends upon compensatory damages for its vitality, fails. (McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, 1164.)
The judgment of the superior court is reversed, and the trial court is ordered to enter judgment in favor of PafCo and Huh. Appellants are to recover their costs on appeal.
We concur: PERLUSS, P. J., JACKSON, J.