(Super. Ct. No. 30-2007-00100307) Appeals from a judgment and two orders of the Superior Court of Orange County, Nancy Wieben Stock, Judge.
The opinion of the court was delivered by: Rylaarsdam, Acting P. J.
CERTIFIED FOR PUBLICATION
Judgment affirmed; one order affirmed; one order affirmed as modified.
We affirm the trial court's judgment holding defendant Bruce Elieff liable for misstating his authority to bind a group of real estate businesses known as the "Joint Entities" in the course of agreeing to buy out his former partner, plaintiff Todd Kurtin. We affirm the trial court's posttrial order denying Elieff's motion for judgment notwithstanding the verdict. And we affirm the trial court's grant of a new trial as to the issue of the precise amount of damages which Kurtin may recover.
However, as to one of Kurtin's causes of action - for liability under Civil Code section 2343 for lack-of-good-faith breach of an agent's warranty of authority - the new trial order must extend to liability as well. (All further statutory references to sections 2343, 2342, or 3318 will be to the Civil Code.) The jury returned inconsistent verdicts. Liability under section 2343 requires either (1) the lack of a good faith belief on an agent's part that "he has authority" to bind "his principal," or (2) an act by the agent that is "wrongful" in its nature. Case law has equated "wrongful" with tortious. Here, the jury found that Elieff did have a good faith belief in his authority to bind what the parties refer to as the Joint Entities when he signed the agreement. Furthermore, the jury specifically exonerated Elieff of all tort claims presented against him to the jury, including even the claim for negligent misrepresentation.
The proper remedy for inconsistent verdicts is a new trial. (See Shaw v. Hughes Aircraft Co. (2000) 83 Cal.App.4th 1336, 1344 (Shaw) ["Inconsistent verdicts are '"'against the law,'"' and the proper remedy is a new trial."].) Accordingly, we will modify the new trial order on appeal to provide for the trial of liability under section 2343, as well as damages. (Code Civ. Proc., § 906.) As modified, we affirm that new trial order.
1. The 2005 Settlement Agreement
Kurtin and Elieff had been equal partners in a series of real estate ventures in the 1990's, doing business under the rubric of SunCal Companies. In 2003, growing disagreements between the two led Kurtin to sue Elieff to "separate" themselves. By that time SunCal Companies had already been "transformed" into "basically" Elieff's company.
The litigation led to a mediation, which in turn led to a settlement agreement. The agreement, signed in August 2005, provided that Elieff was to buy out Kurtin for $48.8 million in four installment payments.
As Kurtin and Elieff structured their partnership, each real estate project was its "own little company." The settlement agreement provided that of the $48.8 million, both Elieff and the Joint Entities were jointly and severally responsible for the first installment of $21 million. However, only the Joint Entities were responsible for making the last three installments.
2. Default on the Payments
Elieff made the $21 million first and only installment payment for which he could be held personally responsible. The Joint Entities made the $1.8 million second installment payment for which they alone were responsible. But the Joint Entities paid only about $3.5 million of the $13.1 million third installment payment, and nothing on the final installment of $12.9 million.
Elieff had signed the settlement agreement both "individually and on behalf of the Elieff Separate Entities and the Joint Entities." The agreement had provided that if there was a default in any of the last three payments, Kurtin would be "entitled to have judgment entered pursuant to C.C.P. Section 664.6 against the Joint Entities" in an amount equal to the unpaid balance.
But when Kurtin sought to enforce the agreement against the Joint Entities under section 664.6 of the Code of Civil Procedure in the context of the 2003 litigation, the trial judge denied his request. The judge determined that the Joint Entities were not "parties" to Kurtin's 2003 litigation.
Elieff opposed the attempt to enforce the agreement. He argued that the trial judge had correctly determined the Joint Entities had to be added as parties to the lawsuit before any judgment could be entered against them.
The trial judge did not address the question of whether Elieff had the authority to bind the Joint Entities. However, in opposition to a writ petition filed in this court by Kurtin contesting the trial court's order, Elieff pointed out that "some of the Joint Entities are majority owned by independent third-parties," and further asserted "that only his interest in the Joint Entities, if anything, is subject to legal action." (Italics in original.) Pursuant to Evidence Code section 452, subdivision (d), on our own motion we have taken judicial notice of the records in writ proceeding in this court's docket number G037647.
Two of the Joint Entities, Moorpark 150 LLC (Moorpark), and SJD Partners (SJD), appeared through their own counsel, and argued that Elieff did not have any authority to bind their assets "to resolve his personal dispute with Kurtin." As they asserted in opposing the writ relief sought by Kurtin, Elieff "might as well have pledged the Brooklyn Bridge to Kurtin."
Elieff further argued that Kurtin had an adequate remedy at law. Besides Kurtin's bringing the Joint Entities into the case, Elieff took the position that Kurtin could either (1) demand arbitration under the arbitration clause of the settlement agreement, or (2) sue for breach of the settlement agreement.
Kurtin never tried to bring the Joint Entities into the case. Instead he sought arbitration. We will recount the relevant facts involving the arbitration when we discuss whether the arbitration decision precludes any judgment against Elieff in more detail. For the moment, we need only note two things about the result of the arbitration. First, the arbitrator determined that the amount owing to Kurtin was $24,411,433.86. Second, the arbitrator announced a decision that only gave Kurtin the right, along the lines previously advocated by Elieff's attorneys in the writ proceeding, to foreclose on Elieff's own interests in the Joint Entities to the extent of that amount.
After the arbitration, Kurtin filed this action against Elieff and the Joint Entities, including Moorpark and SJD. A "distribution" clause in the settlement agreement prompted the trial judge to propose a bifurcated trial. The clause provided
that "Elieff shall not take any distribution from any of the Joint Entities if such distribution prevents satisfaction of payment of the Settlement Payments." With reference to that clause, trial judge noted that Kurtin was "alleging certain causes of action concerning how the defendant handled certain funds or assets of" the Joint Entities. There was thus a "sub-issue" as to whether "distributions are measured in every entity at the very moment they emerge or whether the alleged pre-existing practice treating the joint entities as a single unified economic force allows somebody to exercise the business judgment to consider it more as a whole and utilize what might be considered net profit from one entity to help preserve the viability of another entity for the purpose allegedly of making more money for everybody as to all the entities." That is, the judge was concerned whether, if Elieff moved money around from one entity to another for the purpose of maximizing total aggregate profit, such movement might constitute a violation of the agreement.
Phase 1 of the bifurcated proceedings consisted of a five-day trial "concerning the accounting issues arising out" of Kurtin's claim that Elieff had breached the settlement agreement by, among other things, taking distributions from entities that prevented repayment of remaining payments. Kurtin had charged that some $22.4 million of "distributions" had been diverted to Elieff himself or Elieff-controlled entities.
After hearing evidence, the court made certain, limited, findings. The "evidence received by the Court," said the judge, "has, in fact, accounted for every penny of the funds that could be classified in any way as a distribution from a joint entity in the period following the August 2005 settlement agreement."
But the "every penny" comment did not mean the trial judge was ruling that Elieff had taken no "distributions" in contravention of the agreement. In fact, the trial judge did not actually define the word with the exception of ruling, as a matter of law, that the word "distribution" could not "be interpreted as precluding any and all distributions from being utilized for the good of the whole"
The result of phase 1 was an elaborate jury instruction (Jury Instruction No. 10 in the record). The jury instruction encapsulates what happened at phase 1. In summary, the court ruled - and only ruled - that the $22.4 million in "distributions" fell into one of five categories, and left to the jury the task of deciding whether money falling into any given one of those categories was a "distribution" in contravention of the settlement agreement. We quote the relevant parts:
"At an earlier trial, the Court found that after the Settlement Agreement between Mr. Elieff and Mr. Kurtin was signed, Mr. Elieff used distributions of money from various of the Joint Entities in the total amount of $22,384,632.22. . . . The Court found that all of this money was used by Mr. Elieff in the following five categories: (1) management services; (2) management expenses; (3) management costs; (4) loan repayment or return of capital; and (5) payments to Mr. Kurtin. . . . [¶] The Court did not decide whether the taking of these distributions of money did or did not violate Paragraph 14 of the Settlement Agreement. The Court found that Paragraph 14 does not preclude Mr. Elieff from taking distributions from the Joint Entities, so long as the distributions were used to enhance, and not prevent or jeopardize, the possibility of Mr. Kurtin being paid the Settlement Payments required under the Settlement Agreement."
Attached to the instruction was a chart giving the jury a list of 19 specific money outflows totaling $22,384,632.22 from various of the Joint Entities, and a recapitulation of the five categories (management services, management expenses, and so on) which the judge had identified. Fourteen of the 19 outflows listed told the jury only that the court had made "no specific findings other than to conclude that the amount distributed was used for one or more" of those categories. For example: Item number 4 showed that on November 6, 2006, $1.5 million from one entity, Serrano Heights East, went into "one or more" of those five categories.
The remaining five outflows were more specific. About $4 million was used (by Rancho Etiwanda 685 and Serrano Heights East) to reimburse "Elieff/SunCal" for "costs incurred on joint projects." Another outflow from Moorpark Equity Partners consisted of $1 million to repay a deposit from a third party, another $250,000 going to pay a third-party owner, with the balance (roughly half a million dollars) going either to Moorpark Equity Partners itself ($263,000) or to reimburse "Elieff/SunCal for advances made by Elieff" ($241,500). Only one item, a $1.8 million outflow from Rancho Etiwanda, was unambiguously shown to have been used to repay Kurtin. (Presumably this was the same $1.8 million referenced above as the second installment payment.)
Even though the settlement agreement had not personally obligated Elieff to pay more than $21 million of the $48.8 buyout price, Kurtin sought recovery from Elieff on the theory that Elieff had misrepresented his authority to obligate the Joint Entities to pay the balance. Concomitantly, Kurtin also claimed that Elieff had breached a provision in the settlement agreement to execute the customary documents "necessary to perfect this security interest" in Elieff's interests in the Joint Entities. And, as just discussed, Kurtin asserted that Elieff had taken distributions from the Joint Entities that should have gone to pay off the buyout price.
From these basic claims the following six causes of action against Elieff were submitted to the jury: number 2, for breach of warranty of an agent's authority under section 2342; number 3, for breach of warranty of an agent's authority under section 2343; number 4, for fraud or intentional misrepresentation in representing to Kurtin that he had the authority to sign for the Joint Entities; number 5, for negligently misrepresenting that he had the authority to sign for the Joint Entities; number 6, for breaching the provision of the settlement agreement that he would execute the documents necessary to perfect Kurtin's security interests in Elieff's share of the Joint Entities; and number 7, for breaching the provision of the settlement agreement not to take distributions which prevented the Joint Entities from paying the balance of the buyout amount.
The jury, however, came back with an anomalous result. On the one hand, it found Elieff liable for breaching the warranty of authority under both sections 2342 and 2343, and in each case determined the amount of damage to be $24,411,433.86, which was the exact amount the arbitrator had determined was owing on the unpaid balance. The jury further determined that Elieff had breached the provision requiring him to provide Kurtin with perfected security interests in Elieff's interests in the Joint Entities. And it likewise determined that Elieff had breached the provision precluding him from taking distributions that prevented the Joint Entities from paying off the balance of the $48.8 million. And, again, in each case the jury assessed Kurtin's damages at exactly $24,411,433.86.
But on the other hand the jury exonerated Elieff on both the intentional and negligent misrepresentation causes of action. It specifically found, in answering the special verdict form, that Elieff did not know his representation that he had authority to obligate the Joint Entities was false when he made it. And it specifically found that Elieff did not make the representation recklessly and without regard for its truth. Further, the jury concluded that Elieff did not lack reasonable grounds to believe his representation was true when he made it. Likewise, the jury found, in answering the special verdict form in regard to liability under section 2343, that Elieff did not "lack a good faith belief" in his authority to sign on behalf of the Joint Entities.
But then again, the jury found liability under section 2343 because Elieff had committed an act "wrongful in its nature" when he signed on behalf of the Joint Entities. As we discuss in more detail below, Kurtin's counsel had argued to the jury that the precise acts committed by Elieff that were "wrongful in their nature" were the alleged intentional and negligent misrepresentations, and yet the jury absolved Elieff of both intentional and negligent misrepresentation.
c. Judgment, posttrial motions and appeal
Judgment was filed May 17, 2010, decreeing that Kurtin recover $24,411,433.86 from Elieff. Within 12 days Elieff gave notice of his intent to move for new trial. The notice was supported by four juror declarations all stating that the jury "solely" looked at the $24,411,433.86 from the arbitration decision, and (as stated in each of the four declarations) did not discuss or "look at any other evidence to determine damages." The new trial motion focused on the anomaly of liability under section 2343 in light of the jury's exoneration of Elieff on the intentional and negligent misrepresentation claims. The motion further pointed out that even Kurtin's own counsel had not asked the jury for damages in excess of $8 million on the violation of the no-distribution clause. Elieff also filed a motion for judgment notwithstanding the verdict (JNOV).
The trial judge denied the motion for JNOV, but granted the new trial motion as to damages only. The judge reasoned that the evidence would not support a $24,411,433.86 verdict on any of the four causes of action on which Kurtin had prevailed. The court noted that the $24,411,433.86 figure "exceeded the total amount of all" distributions from the Joint Entities, and even exceeded "Kurtin's argued-for damages of $7,852,222.22." The judge in particular rejected Kurtin's argument that the $24,411,433.86 might be justified under section 2343 on the theory that Elieff's "'wrongful acts'" subjected him to the "full liability of his principal." She ruled that damages under section 2343 were governed by section 3318, and under section 3318, Elieff could only be liable for what Kurtin could have "recovered and collected" from the Joint Entities.
Elieff filed a timely notice of appeal, challenging the judgment, the order denying the JNOV motion, and the order granting in part and denying in part his motion for new trial. Kurtin countered with a notice of cross-appeal, also challenging the order granting in part and denying in part the new trial motion.
1. The Effect of the Arbitration
Elieff contends that the arbitration decision precludes the subsequent civil court judgment (either by way of res judicata or collateral estoppel, or both). Because the arbitration issue most clearly brings the various textual provisions of the settlement agreement into sharp relief, we now set them forth:
a. Relevant terms of the settlement agreement
A number of particular features of the settlement agreement are relevant. First, the recitations at the beginning purport to treat Elieff and the Joint Entities as one collective entity. ("This ...