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ENA North Beach, Inc., v. 524 Union Street

California Court of Appeals, First District, Second Division

December 12, 2019

ENA NORTH BEACH, INC., et al., Plaintiffs and Appellants,
v.
524 UNION STREET et al., Defendants and Appellants. ENA NORTH BEACH, INC., et al., Plaintiffs and Respondents,
v.
524 UNION STREET et al., Defendants and Appellants.

         CERTIFIED FOR PARTIAL PUBLICATION [*]

          San Francisco County Superior Court No. CGC-15-547922, Hon. Richard B. Ulmer, Jr. Trial Judge

          Attorneys for Plaintiffs and Appellants: Wood Robbins, B. Douglas Robbins, Leyla M. Pasic, Kelley A. Harvilla

          Attorneys for Defendants and Appellants, Kerr & Wagstaffe, Wagstaffe, Von Loewenfeldt, Busch & Radwick James M. Wagstaffe Michael Von Loewenfeldt, Draper Law Firm Ann McFarland Draper

          KLINE, P.J.

         After leasing premises owned by 524 Union Street for purposes of opening a restaurant, respondent ENA North Beach was unable to open because the San Francisco Planning Department determined that an existing conditional use authorization for the property was no longer effective and a new one could not be granted. ENA North Beach filed suit against the lessors, claiming false representations and failure to disclose material facts regarding the problems with the conditional use authorization. A jury found in favor of ENA North Beach and awarded compensatory and punitive damages. This appeal challenges the sufficiency of the evidence to support the jury's verdict. ENA North Beach's cross-appeal challenges the trial court's decision to reduce the amount of the punitive damages award against 524 Union Street. We conclude that the jury's verdict on liability, including liability for punitive damages, is supported by substantial evidence. Although we conclude the trial court employed an improper procedural mechanism in reducing the amount of the punitive damages award, we affirm the judgment for the reasons explained herein.

         BACKGROUND

         Natasha Hong, the president of ENA North Beach, sought to open a restaurant with a license to serve beer and wine in a building owned by 524 Union Street (524 Union), a space which had housed restaurants for many years. 524 Union is a general partnership, of which Beverly Smucha is the managing partner and her son, Barak Smucha, a partner.[1] Beverly estimated she had owned the property for 35 or 40 years. Prior tenants had operated under a conditional use authorization[2] for a “full-service restaurant and bar” obtained in 1998. Under the San Francisco Planning Code (Planning Code), a new full-service restaurant could be operated in this space only if there had not been a gap in operations of such a restaurant for more than three years, as the conditional use authorization would lapse if the approved use was discontinued for more than three years. (S.F. Planning Code, § 178, subd. (d).)[3] The continued validity of the existing conditional use authorization was critical to Hong's ability to open her restaurant because an ordinance adopted in 2012 prohibited approval of a new conditional use authorization for a full-service restaurant in this location. (S.F. Planning Code, § 780.3, subd. (c)(1) [North Beach Special Use District].)

         The meaning of the term “full-service restaurant” was a matter of some dispute at trial. According to the San Francisco Planning Department (Department) planner who testified at trial, under the applicable definitions in the Planning Code, a “restaurant” or “full-service restaurant” had to have “a majority of food service” but could also serve alcohol, while a “limited restaurant” would have no alcohol service.[4] She testified, however, that the San Francisco Zoning Administrator interpreted the definitions as requiring that a full-service restaurant have a liquor license, so that a restaurant that did not serve alcohol would be a “limited restaurant.” Beverly maintained that a full-service restaurant was allowed to serve alcohol but not required to do so, and differed from a limited restaurant in that full service meant a sit-down restaurant while a limited restaurant was “more like a takeout place.”

         Prior to ENA North Beach, a restaurant called Le Bordeaux had operated at 524 Union for part of 2011. Although Le Bordeaux had closed less than three years before ENA North Beach's tenancy, the Department concluded the conditional use authorization had lapsed for two reasons. One was that there had been a long gap between Le Bordeaux and the previous restaurant, The Field, which had a lease running through August 2008, but in fact left the premises in 2004. The second was that although Le Bordeaux had been approved as a full-service restaurant, the Department took the view that it did not operate as such because, while it had applied for a liquor permit from the state Department of Alcohol and Beverage Control (DABC), it had not actually received the permit before it ceased operating. As explained by the attorney Hong later hired to help her negotiate the permit issues, because the Department considered running a bar part of the approved use under the 1998 conditional use authorization, that authorization would lapse if there was a three-year period in which a bar was not run.

         As will be explained, Hong initially obtained approval for her restaurant from the Department but that approval was subsequently rescinded after the gap in operations between The Field and Le Bordeaux was brought to the attention of the Department and the Department learned that Le Bordeaux had been operating without a liquor license. Unable to obtain approval to open the restaurant, ENA North Beach sued 524 Union and Beverly, alleging that Beverly falsely told Hong there had been full-service restaurants in the space “continuously, ” failed to disclose the more than three-year gap, and falsely represented that Le Bordeaux had an alcohol license.[5] Beverly maintained that she made all necessary disclosures regarding the history of the leased premises and that the Department interpreted the Planning Code incorrectly, an error Beverly could not have anticipated.

         Hong testified that when she first visited the property in June 2014, Barak told her Le Bordeaux had a beer and wine license. She testified that Beverly told her there had always been a liquor license at the property, which had always been used as a full-service restaurant; never said Le Bordeaux did not receive a license to serve alcohol but rather said it obtained the license; never said the space had been abandoned or “discontinued” for three years, and never discussed the need for a conditional use permit. Before signing the lease, Hong went to the Department, asked the clerk whether there would be any problem opening a full-service restaurant at 524 Union and was told “no” and “everything is fine.”

         In mid-July 2014, Hong asked Beverly to delay the lease start date from August 1 until September 1, as she was looking for a wine and beer license broker to help her obtain a type 41 alcohol license and was not sure how long processing would take. Beverly agreed to the change in start date but said she could not delay signing the lease. Her email to Hong stated, “You should be able to get a type 41 liq. license (beer and wine) without a broker for a full-service restaurant. You will not be able to move forward with licensing without a fully executed lease.” Because she was very busy, Hong hired the broker who had helped her when she opened her existing restaurant.

         Hong signed the lease sometime on August 14, 2014. That afternoon, the broker emailed her, “[u]nfortunately, you are not allowed to obtain Liquor license, at all, ” attaching an email from the Department stating that, according to the zoning administrator, “the site will not be able to accommodate a new liquor license.” Hong testified that this was a big deal because a restaurant cannot make a profit without selling alcohol. She contacted Beverly, who replied that evening, saying all of the prior tenants had had type 47 (hard liquor) licenses and the French restaurant was “approved for beer & wine.” Beverly sent Hong a list of prior tenants from June 22, 1934, to October 7, 1999, describing all but one (in 1936) as “Bar & Restaurant, ” as well as some documents related to permits obtained by the tenants. Beverly told Hong she had delayed executing the lease and depositing Hong's check “because of your phone call, ” and suggested Hong take a few days to decide whether the space was right for her. Beverly subsequently signed the lease on August 17, 2014.

         The lease states that “[t]he premises are to be used for the operation of a Restaurant, to serve food to the public as a Full Service Restaurant and alcoholic beverages of beer and wine. Lessee covenants and agrees with Lessor, as a condition of this lease, that the purpose of or use of the premises will not be changed or altered by Lessee without the prior written consent of Lessor. Lessee shall use said premises continuously and constantly during the term hereof for the purpose of conducting the above mentioned business.”

         On September 2, Department planner Marcelle Boudreaux signed a “Zoning Affidavit” to be submitted to the DABC for ENA North Beach, indicating the existing conditional use permit could be used and attaching the 1998 conditional use authorization.[6] Hong understood this form to be saying the previous tenant's conditional use permit remained valid, which was consistent with her understanding from her visit to the Department.

         Around December 2014, Hong obtained the DABC beer and wine license. Renovations of the premises continued, with the aim of opening the restaurant around March 2015.

         On January 20, 2015, planner Carly Grob emailed Hong that the Department “cannot approve the Dept. of Public Health or [DABC] referral for [ENA North Beach]. Planning Code section 780.3 states that a restaurant may be permitted as a conditional use if it does not occupy a vacant space last occupied by a permitted conditional use that has been abandoned or discontinued for 3 years. Because the former tenant, Le Bordeaux, never received a DABC license to serve alcohol, they were operating as a limited restaurant instead of a restaurant. Therefore, the restaurant use was abandoned more than 3 years ago, and cannot be reinstated at this location.”[7]

         Hong emailed Beverly about the specified ordinance. Beverly responded, “[t]his came into effect because there were restaurants going into spaces that were previously other uses. [¶] [524 Union] has always been a restaurant bar; it's a 100 yr old space. This is not a new use but the same use for decades, and one of the oldest if not the oldest restaurant spaces in North Beach. [¶] Also they know Le Bordeaux has not been out of there for 3 years. They are just trying to come up with something else. Makes no sense. It will work out, just need to get to the right person. These planners need to be fired.” A few days later Beverly told Hong, “The planner's opinion that Le Bordeaux became a limited restaurant because of the processing of his beer and wine license was delayed is incorrect.”[8]

         Hong hired attorney David Silverman to help her with the conditional use permit issues. On February 8, 2015, when Hong forwarded to Beverly an email from her attorney's office indicating that in order to fight the abandonment issue they would need “the use/lease/occupancy history of the building laid out, and all the efforts to try to find a tenant over the last several years that hopefully would toll the ticking of the abandonment clock, ” Beverly replied, “Doesn't sound like this attorney is up to speed with the laws. We will try to come up with some names.”

         In a March 12, 2015 email, Beverly told Hong that the premises had never been used as a limited restaurant but “always and only” full service, the insurance on the premises was for a full-service restaurant, “which is more expensive and difficult to get, ” and the previous tenant's insurance was for a full-service restaurant with a beer and wine license.

         Silverman testified that Beverly told him The Field left in 2008 and gave him a copy of its lease, which stated a termination date of August 31, 2008. On this basis, Silverman argued to the zoning administrator that the gap between The Field and Le Bordeaux was less than three years. The zoning administrator found The Field's lease insufficient to demonstrate that it remained in operation until its termination date because the DABC website indicated The Field's licenses were cancelled in August 2004. Beverly told Silverman she thought the administrator was mistaken.[9] Based on Beverly's representations, Silverman prepared a declaration that she executed on March 16, 2015, stating that “the space has been used as a full-service restaurant and bar continuously after we obtained the conditional use authorization in 1998 except for periods of turnover between tenants, when we advertised for full-service restaurant tenants, ” and that “The Field Restaurant and bar was the Lessee under a Lease Agreement that was in effect from August 26, 1998 until August 31, 2008.” The zoning administrator again found this was “not enough to substantiate that the conditional use was not abandoned.”

         Silverman testified that when he tried to get documentation from Beverly to refute the gap in operations between The Field and Le Bordeaux, she responded with statements about Le Bordeaux's liquor license application and arguments that the Department's determination was wrong.[10] At this point, Silverman was “starting to think that [the zoning administrator] might have a point because I'm not getting any evidence to the contrary.”

         In an April 2015 email correspondence, the zoning administrator informed Silverman that “any approval of Le Bordeaux in 2011 was in error” because the previous restaurant use had been abandoned after The Field discontinued operation in 2004. Silverman's requests for additional documentation from Beverly met with arguments that the department was acting improperly. The zoning administrator denied Hong's request for a hearing, and Silverman told Beverly they had reached a dead end.

         Hong testified that she had believed everything Beverly told her about the use of the premises and realized Beverly “was lying to me from the beginning” only after her attorneys told her there was nothing more to be done and she would not be able to open the restaurant. She gave notice of termination of the lease on April 24, 2015. Asked why he believed, as stated in the termination letter, that Beverly “failed to disclose to [Hong] the existence of the abandonment of the conditional use for the premises, ” Silverman testified, “[b]ecause she had been telling me the opposite... [t]hat the restaurant had operated continuously... [a]s a full-service restaurant and bar.” He testified, “the situation was actually worse than I wrote in this letter. I wrote that, ‘You failed to disclose to our client existence of the abandonment.' [¶] Actually, she lied to our client about it because she told her over and over again that there had been continuous operation. And she told me that, and she told the zoning administrator that.”

         Planner Carly Grob testified that it initially appeared Hong's restaurant could be approved with the existing approval for restaurant use, but it was later discovered that Le Bordeaux had been operating as a limited restaurant, without liquor service, and the zoning administrator interpreted the Planning Code as requiring a restaurant to have an alcohol license. When Grob asked Beverly for documentation relating to use of the property, Beverly responded with complaints about the permit expediter who had complained about the conditional use issue (see fn. 7, ante, at p 6.) and assertions that Le Bordeaux had gone through a “very thorough” planning and zoning process to receive approval. Beverly never said there was a vacancy at the property. Grob testified that the Department had not revoked the September 2, 2014 zoning affidavit indicating Hong did not need a new conditional use permit, but had “acknowledged” that position was incorrect and so advised the DABC.

         Sylvain Castet, the owner of Le Bordeaux, testified that when he rented the premises intending to open a French restaurant serving beer and wine, Beverly did not tell him about a prior vacancy of more than three years or possible need for a new conditional use approval. After he signed the lease, neighbors told him the property had been vacant for 10 years. When he asked Beverly about this, she responded, “[n]o, it hasn't been vacant for 10 years” and advised him not to listen to the neighbors; she never told him there was had been a vacancy of more than three years.[11]

         Optimist Prime, a company owned by James Bryant Bourque, his mother and his stepfather, signed a lease for the 524 Union premises on October 8, 2015, with the intention of opening a restaurant. For tax reasons, a contingency was being able to open by the end of 2015, and Beverly assured them she would make sure they got timely approvals to be able to meet the deadline. From his conversations with Beverly, Bourque understood they would need to go through the conditional use process but this would not stop them from opening the restaurant; Beverly did not disclose that zoning for this purpose had been lost entirely, did not mention a problem with a prior tenant or with ENA North Beach, and told him the owner of Le Bordeaux had received a liquor license but had to leave the country due to a visa issue before he was able to start using it. Beverly said the space had always been used as a restaurant and both she and the lease itself said it could only be used as a full-service restaurant. His understanding from Beverly was that the premises had been vacant because they were being selective about who to lease to, not because they were having trouble getting tenants.

         Beverly provided Bourque with a written disclosure statement that stated the premises had “always” been used as a restaurant and had last been leased by ENA North Beach, which “did not get open”; that Beverly had been told it was “scheduled to open, with all approvals including the issuance of their beer & wine license, ” until expediter Marsha Garland, who represented competing interests, complained to the Department; and that ENA North Beach, “already in violation of her lease was unable to navigate the permitting process with their attorney and was adverse to the potential of a Conditional Use process, opting instead not to pursue the issue formally.” The disclosure described Le Bordeaux as a full-service restaurant “specializing in Bordeaux regional wines, ” and stated that it “received the required approvals and permits from the city prior to opening” but processing of its beer and wine license was “delayed because of corporate issues” and “they got approved for issuance, however just prior, they had to close due to immigration visa issues.” According to the disclosure, Garland and the Department had an issue with Le Bordeaux having been approved to open without going through the conditional use process, and the Department changed its interpretation of the definitions of types of restaurants and acted “as if Le Bordeaux had never opened and withdraw [sic] ENA's approval.” The disclosure referred to the “discrepancy with the last tenant” and stated that the premises had “never been a dormant space.”[12]

         Bourque first learned there might be a problem from the owner of the restaurant next door. Although the Department initially said it looked like there should not be a problem opening “some kind of food service, ” an attorney alerted Bourque to the zoning issues, further inquiries at the Department revealed that The Field sold its liquor license to another enterprise in 2004, and Bourque learned they would be able to open only with a special exemption from the supervisor of the district, who was a proponent of the special use district trying to limit restaurants in North Beach.

         Bourque testified that Beverly told his mother about the present lawsuit about four days after the lease was signed but said it would not impact Optimist Prime; they came to realize the suit was linked with the zoning issues and gave notice of termination of the lease on October 31, 2015. Bourque denied Beverly's claims that they terminated the lease because she would not approve unpermitted work they wanted to do on the premises and that they damaged the premises.

         Grob testified that it seemed the landlord was continuing to market the space as a restaurant because she continued to get calls from prospective tenants seeking to open a restaurant there; she would tell them that they could not do so, in accordance with the Department's “practice and opinion” that the space cannot be used as a full-service restaurant and bar.

         Beverly testified that when Hong first contacted her about the premises, she did not believe a conditional use permit would be needed because the previous tenant had been approved without a new one, there was still a conditional use permit recorded against the property, and her understanding was that the permit would have to go before the San Francisco Planning Commission to be revoked. The 1998 conditional use authorization included the statement that a “full-service restaurant and bar previously existed at the Project Site, but has been closed for over three years. Per Planning Code Section 178(d), conditional use authorization would not be required had the business been closed for less than three years.” Asked about her awareness of this point in 1998, Beverly testified that she did not know whether the new authorization was required because of “the three years or it was a different kind of business or a different kind of liquor license.”

         Beverly acknowledged there was “at least” a three-year gap between The Field and Le Bordeaux, as The Field vacated before the end of its lease. She testified that “[p]robably all of North Beach” knew about The Field vacancy. Asked why she did not disclose it, Beverly said, “[t]here was nothing to disclose” and “we disclosed everything.” She denied having suggested to Grob that the vacancy period was less than three years and testified that she did not correct the misunderstanding reflected in an email suggesting she had done so[13] because she was “trying to figure out what was going on because they had approved Le Bordeaux and they approved Hong, ” and she was shocked that the city was “going back to a previous tenant” after having approved Le Bordeaux. She denied knowing that a three-year gap in use would jeopardize the conditional use permit or representing to other people that the property did not have a vacancy of at least three years.[14]

         Asked about the statement in her declaration that the space had been used “continuously” as a full-service restaurant and bar since the conditional use authorization in 1998, she testified that her understanding of “continuously” was “repeatedly, ” the statement was true “except for the time when it was vacant, ” and the use of the space was never changed. Beverly believed a conditional use authorization would not lapse if the owner did not intend to abandon the use, a view she believed to be supported by a 2004 letter of determination by a previous zoning administrator which she described as concluding there was no abandonment of a conditional use permit where “the owner's intention is to find a replacement tenant for the same use.”[15] She testified that her declaration was meant to prove there was no three-year abandonment, and denied that it was misleading to say The Field was the lessee under an agreement that was “in effect” until August 31, 2008, when The Field had left before the end of the lease term.

         Asked about the email in which she told Hong that Le Bordeaux had been “approved for a type 41 liquor license, ” Beverly testified that she meant the owner was “approved with the city as a full-service restaurant to operate with a Type 41 liquor license, ” but acknowledged that the city does not issue liquor licenses and that the owner closed the restaurant “prior to the final issuance and approval” of a liquor license.

         Beverly denied having a disclosure problem with Optimist Prime; denied that the written disclosure statement failed to disclose that ENA was not able to use the 1998 conditional use authorization or get a new one; denied that saying the premises had “never been a dormant space” was intended to communicate that there were no vacancy issues; and claimed to have discussed the issues about The Field with the lessees when they first looked at the space. Beverly testified that Optimist Prime left because she would not approve plans for unpermitted alterations of the space; asked whether the real reason was that the lessees discovered they would not be able to open a full-service restaurant and bar because of the issues Hong had, Beverly responded, “that's what they said. However, we were very suspicious that maybe we were set up in them coming in at some point.”

         Barak testified that when he first showed Hong the space, she knew about Le Bordeaux and asked “how he survived being a French restaurant without the liquor license, ” and that he discussed with Hong the problem of The Field having left before the end of its lease and told her, as he tells everyone, there had been a three- or four-year vacancy before Le Bordeaux. He testified that Castet knew about the “three- to four-year” vacancy prior to Le Bordeaux and denied that the contrary was indicated by an email in which Castet said he needed to know the departure date of the last tenant because the Department needed to know if it was less than three years so he could be allowed “a ‘continuation of existing use.' ”

         Barak testified that when he first showed the space to Bourque, he gave his “usual” disclosure speech, so “they knew going in that there were unresolved zoning issues, ” but they “weren't really that interested” and said they had a contact at a lobbyist firm. He told Bourque that the Department was misreading a law and there was more to be done to deal with the issue. He denied having been told Bourque had a definite timeline for opening his restaurant and claimed they would not have leased to him if he had, denied that Bourque was told a beer and wine license had been issued to Le Bordeaux, and stated that Bourque wanted to do extensive unpermitted work on the space. Barak testified he still believed there will be a restaurant with a liquor license in the space, as neighboring properties with long vacancies had gotten licenses in same time period.[16]

         The jury returned verdicts in favor of ENA North Beach on the claims for intentional misrepresentation, concealment, and breach of the implied covenant of good faith and fair dealing, and found damages of $91, 692.50, and clear and convincing evidence that Beverly acted with malice, oppression or fraud. The jury found in favor of Beverly on Ena North Beach's claim for breach of contract. The jury subsequently awarded punitive damages against 524 Union in the amount of $916, 925 and against Beverly personally in the amount of $91, 692.50. After the court entered judgment on the jury's verdict, Beverly filed motions for judgment notwithstanding the verdict (JNOV) and for a new trial. The trial court denied the new trial motion, granted the motion for JNOV in order to reduce the award of punitive damages against 524 Union to $131, 500, and denied the motion in all other respects. The court granted ENA North Beach's motion for attorney fees in the amount of $401, 584 ($385, 874 for fees accrued up to entry of judgment and $15, 710 for fees accrued after entry of judgment), and subsequently granted a supplemental motion for attorney fees in the amount of $75, 537. The final judgment was filed on August 28, 2017. This appeal and cross-appeal followed.

         DISCUSSION

         I.

         Beverly challenges the sufficiency of the evidence to support the jury's verdict. In resolving this issue, “[a]ll conflicts in the evidence are resolved in favor of the prevailing party, and all reasonable inferences are drawn in a manner that upholds the verdict. (Greathouse v. Amcord, Inc. (1995) 35 Cal.App.4th 831, 836-837, citing Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429.)” (Holmes v. Lerner (1999) 74 Cal.App.4th 442, 445.) “All issues of credibility are likewise within the province of the trier of fact.” (Nestle v. City of Santa Monica (1972) 6 Cal.3d 920, 925.)

         A.

         The theory of Hong's case was that she was fraudulently induced to enter the lease agreement. “ ‘The necessary elements of fraud are: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage.' ” (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1108; see Seeger v. Odell (1941) 18 Cal.2d 409, 414; § 1709.)” (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239 (Alliance Mortgage).)

         Beverly contends there was no substantial evidence to support the jury's verdict for intentional misrepresentation in that there was no evidence of any misrepresentation made before the lease was signed. According to Beverly, Hong's attorney argued in closing that evidence of statements made after the lease was signed allowed an inference that similar statements were made and relied upon prior to signing, an argument Beverly maintains improperly called for speculation absent evidence of any such statements having been made. (California Shopper, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 45 [finding of fact must be based on evidence, not speculation].)

         Beverly's characterization of this portion of the argument is not accurate. Counsel argued that Hong testified to statements she relied upon in signing the lease, and that evidence of statements made after the lease was signed was relevant in addition to Hong's testimony because it showed “how [Beverly] is talking. It's consistent that, if you make misrepresentations before the lease is signed, you continue to make those same misrepresentations after the lease is signed.”[17] Counsel did not argue that because there was evidence of false statements made after the lease was signed the jury could conclude such statements were also made before the signing.

         Hong testified that when she first visited the property, Barak told her that Le Bordeaux was a “bar, ” “they must have had a lot of beer piping going upstairs” and “they had a beer and wine license.”[18] She testified that Beverly told her the property had always been a full-service restaurant and there had always been a liquor license at the property; never said Le Bordeaux did not receive a license to serve alcohol but ...


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