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Julius Castle Restaurant Inc. v. Payne

California Court of Appeals, First District, First Division

June 10, 2013

JULIUS CASTLE RESTAURANT INC., et al., Plaintiffs and Respondents,
JAMES FREDERICK PAYNE et al., Defendants and Appellants.


San Francisco County Super. Ct. No. CGC-07-469795, Hon. Tomar Mason, Judge.

Attorney for Defendants and Appellants: HAIGHT BROWN & BONESTEEL LLP Jules Solomon Zeman.

Attorneys for Plaintiffs and Respondents: SEYFARTH SHAW LLP Christian J. Rowley Cody D. Knight.

Dondero, J.

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 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 re-establish the restaurant, planning to realize a profit at a later date by selling the business for approximately $1 million. According to their complaint, the two men are “very well qualified restaurateurs with well over 38 years of successful operations.”

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, [1] (7) fraud and deceit, (8) unfair business practices, (9) breach of covenant of good faith and fair dealing, (10) injunctive relief, (11) intentional infliction of emotional distress, and (12) negligent infliction of emotional distress.[2] The FAC alleges that both the Lease and the BSA omitted certain material facts, including that defendant had made substantial improvements to the property without having obtained the proper permits. It also alleges Payne had orally misrepresented that the facility was in good condition, and falsely assured them that he would make it good if it was not.

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))[3] “does not apply where parol evidence is offered to show a fraudulent promise directly at variance with the terms of the written agreement.” They relied on Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263 [48 P.2d 659] (Pendergrass).

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 induced to sign the Lease and the contract based on statements that are not part of the contract. And if they believe that the statements were made and if they believe that that’s what fraudulently induced [plaintiffs] to sign the Lease and/or to sign the [BSA], then they may consider that, and for that limited purpose only.” The court later clarified: “Statements made which could be construed as fraud in the inducement to get them to sign the Lease and the [BSA] will be permitted for that limited purpose only, but not after the signing of either of those agreements, in which case it would clearly be an attempt to utilize parol evidence to modify the terms of the written contract.” Thereafter, defendants asked the court to give a limiting instruction stating that this evidence could be considered only as to plaintiffs’ claim that they were fraudulently induced into executing the contracts, and not for any other purpose.

I. The Trial

A. The Decision to Lease Julius’ Castle

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.[4] The restaurant is located on Telegraph Hill and has been in existence since the early 1920’s. It is a destination location, often used for special occasions. Stinson and Bonjean expressed interest, and Payne asked them to look at the property and decide if they wanted to take part in reopening the restaurant, which had been closed for about nine months.

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 operating at the time. Payne testified he assumed everything worked because the former owner, who had operated the restaurant, did not say that anything was wrong.[5]

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.

B. The Parties Negotiate the Lease and the BSA

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.[6] They expressed their concerns about the equipment to Wong: “We mentioned that to him many times, because you can’t operate any type of a specialty restaurant business unless you have equipment that’s workable. Whenever there’s downtime and something breaks, something has to be fixed, it’s not only expensive, but you cannot fulfill your obligation to your customer.” Wong reassured them that Payne would fix any major problems with the building and the equipment.

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 website. The total payment for BSA was $240, 000, which Bonjean thought was a fair price.[7] The Lease payment was set at $15, 000 per month for 10 years, and the payments on the BSA were set at $10, 000 a month. After signing the Lease, plaintiffs gave Payne a $25, 000 check as a deposit.

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 everything in working order is very important to operating a restaurant. He also acknowledged the Lease’s integration clause states that any agreements or representations made outside of the written contract are void.

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 ...

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