M & L Financial v. Sotheby's ( 2022 )

Filed 7/14/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
M & L FINANCIAL, INC., B312816
Plaintiff and Appellant, Los Angeles County
Super. Ct. No. 20STCV12144
v.
SOTHEBY’S, INC.,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Mark V. Mooney, Judge. Affirmed in part,
reversed in part, and remanded with directions.
Bienert Katzman Littrell Williams, Michael R. Williams
and Nancy J. Sandoval for Plaintiff and Appellant.
Sheppard, Mullin, Richter & Hampton, Todd E. Lundell,
Adam F. Streisand, Bryan M. Wittlin and Meghan K. McCormick
for Defendant and Respondent.
____________________
M & L Financial, Inc. (M&L) took 45 vivid yellow diamonds
worth $4 million to Sotheby’s for auction on consignment. M&L
told Sotheby’s it was the exclusive owner of the diamonds, but
Sotheby’s later released them to a stranger without telling M&L.
The diamonds vanished. M&L sued Sotheby’s, which escaped on
demurrer. We reverse a breach of contract ruling, affirm a tort
ruling, and remand. Statutory citations are to the Civil Code.
We independently review demurrer rulings, taking the
complaint’s allegations as true.
Leon Landver is the principal of M&L. We call the two
M&L.
A man named Jona Rechnitz owed M&L “substantial”
sums. As security for his debt, Rechnitz transferred ownership of
45 vivid yellow diamonds to M&L on the understanding Rechnitz
could repurchase them at a fixed price.
Then Rechnitz had another idea: he proposed M&L list the
diamonds with Sotheby’s, an auction house. M&L had never
dealt with Sotheby’s, but Rechnitz said he had a long-standing
relationship with an executive there named Quig Bruning. M&L
did not know, but later learned, Bruning and Rechnitz were
friends. Rechnitz had flown Bruning to Las Vegas in a private jet
and had given Bruning valuable tickets to a sporting event.
Rechnitz proposed to introduce M&L to Bruning.
M&L, Bruning, and Rechnitz met in April 2019 at
Sotheby’s Los Angeles office. M&L brought the diamonds to the
meeting, and that was the last it saw of them.
Bruning explained the first step in the auction process was
for him to send the diamonds to Sotheby’s New York office for
appraisal. Depending on the results, Sotheby’s would decide
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whether to propose terms for the sale. M&L agreed to proceed as
Bruning suggested.
Bruning began to fill out a printed form with many blank
lines. The form was entitled “Sotheby’s Consignment Listing.”
The front of the one-page form had empty spaces for a name,
contact information, items, estimated value, and so forth.
On the back of the form was Sotheby’s New York address
and paragraphs of fine print titled “Conditions of Receipt.” The
fine print did not include an integration clause. It did include,
however, a paragraph 7, which momentarily will assume
importance because it states and indeed insists that the form is
not the sum of the agreement: “If any of the terms of the
consignment agreement between you and Sotheby’s conflict with
any of the terms herein, the terms of the consignment agreement
shall prevail. No property will be offered for sale absent receipt
by Sotheby’s of a signed consignment agreement.”
On the front of the “Sotheby’s Consignment Listing” form is
a space labeled “Consignor Name.” The word “Name” is in the
singular. No space exists for a second consignor name. The fine
print on the back of the form does not address the possibility of
more than one “consignor.”
In the space for “Consignor Name,” Bruning wrote “Jadelle
Jewelry + M&L Financial Inc.” Jadelle was the name of
Rechnitz’s company.
When Bruning included “Jadelle Jewelry” in the space
labeled “Consignor Name,” M&L immediately told Bruning this
was not accurate because M&L was the sole owner of the
diamonds and was the sole party providing them to Sotheby’s.
Bruning “indicated he understood.” Rechnitz did not disagree.
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Bruning wrote the estimated value of the diamonds was $4
million.
M&L signed the form as Bruning had written it, without
altering the handwriting about “Jadelle Jewelry.”
Bruning took the diamonds and gave the original of the
form to M&L.
After the April 2019 meeting, M&L did not hear from
Sotheby’s. In late 2019, M&L phoned Bruning, who announced
surprising news: Sotheby’s had given the diamonds to someone
named Levin Prado. Prado told Sotheby’s he was picking up the
diamonds on behalf of Rechnitz. Sotheby’s had no written
records about its release of the diamonds. Sotheby’s had not
mentioned its release of the diamonds to M&L.
M&L never recovered the diamonds and does not know
where they went.
M&L sued Sotheby’s and appended to its complaint a news
article about how Rechnitz had been sentenced to 10 months in a
New York “corruption scandal.”
M&L amended its complaint. The trial court sustained
Sotheby’s demurrer with leave to amend. Our record does not
explain the court’s reasoning. M&L’s second amended complaint
alleged claims for breach of contract, negligence, and conversion.
The court sustained Sotheby’s demurrer to the contract and
conversion claims without leave to amend, but it granted leave to
amend as to the negligence count. Again, the record does not
recount the court’s logic. M&L’s third amended complaint
alleged one count of negligence. The trial court sustained
Sotheby’s demurrer without leave to amend. The court’s order
explained a person may not ordinarily recover in tort for the
breach of duties that merely restate contractual obligations.
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M&L appealed.
M&L had stated a proper claim for breach of contract, so it
was wrong to sustain the demurrer to this count.
The essence of this consignment contract was simple. M&L
gave diamonds to Bruning, told him they belonged to M&L, and
left them for Sotheby’s to appraise in anticipation of a
consignment sale. There was no agreement yet that Sotheby’s
definitely would auction the diamonds for M&L, but a potential
auction was the point of Sotheby’s involvement. Sotheby’s
breached this agreement by giving the diamonds to stranger
Prado without M&L’s permission. This breach cost M&L the
value of the lost diamonds. (See, e.g., CACI No. 303 [breach of
contract elements].)
Sotheby’s sole defense rests on Civil Code section 1828,
which fails because that law does not apply to this case.
Section 1828 is an old and little-used provision that has
received scant attention in the past century. This section,
unamended since its original enactment in 1907, provides as
follows, with our emphasis: “When a deposit is made in the name
of two or more persons, deliverable or payable to either or to their
survivor or survivors, such deposit or any part thereof, or increase
thereof, may be delivered or paid to either of said persons or to
the survivor or survivors in due course of business.”
The deal between M&L and Sotheby’s was not a deposit
“made in the name of two . . . persons.” (We assume without
deciding this was a “deposit.”) On his form, Bruning wrote in his
friend’s company “Jadelle” along with M&L’s name, but M&L
immediately clarified, it is alleged, that M&L was the sole owner
of the diamonds and was the sole party providing them to
Sotheby’s. Bruning assented and the deal went forward on this
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basis. Sotheby’s then breached the contract by, without notice to
M&L, giving M&L’s diamonds to a stranger claiming to be
Rechnitz’s representative.
Sotheby’s protests Bruning wrote “Jadelle” on the form, and
so Jadelle and its principal Rechnitz had made the “deposit” in
the name of two parties: Jadelle and M&L. At the demurrer
stage, this protest is unavailing. M&L alleged it explained the
situation to Sotheby’s, which manifested assent. This allegation
controls at this stage.
Sotheby’s argues M&L errs by including oral terms about
how M&L was the exclusive owner of the diamonds. Sotheby’s
view is the written contract governs, pure and simple, and cannot
be informed by what M&L told Sotheby’s.
To the contrary is Justice Traynor’s famous decision in
Pacific Gas & Electric Co. v. G. W. Thomas Drayage etc. Co.
(1968) 69 Cal.2d 33 (Thomas Drayage), which pronounced
California’s rule for deciding when to allow recourse to extrinsic
evidence in a contract case. The test “to explain the meaning of a
written instrument is not whether it appears to the court to be
plain and unambiguous on its face, but whether the offered
evidence is relevant to prove a meaning to which the language of
the instrument is reasonably susceptible.” (Id. at p. 37; see also
Ri-Joyce, Inc. v. New Motor Vehicle Board (1992) 2 Cal.App.4th
445, 452, fn.1 [applying Thomas Drayage].)
M&L’s oral statement about exclusive ownership satisfies
this test. The conversation between M&L and Bruning is
relevant to prove a meaning. The language of Sotheby’s form is
reasonably susceptible of the meaning that the diamonds
belonged only to M&L and, if released, were to be returned only
to M&L.
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Nothing in this spare form contravened M&L’s assertion of
ownership. Bruning extemporized by putting two names—
Jadelle Jewelry and M&L Financial, Inc.—in the space for a
single “Consignor Name.” This handwritten improvisation
created ambiguity. What were the respective rights and duties of
Jadelle versus M&L? The form did not illuminate that question.
M&L’s oral statement did. Under Thomas Drayage, this
allegation of an oral statement was relevant and proper.
Moreover, paragraph 7 of the form’s “Conditions of
Receipt”—which we quoted above with emphasis—shows even
Sotheby’s did not expect and would not allow this form to be the
complete statement of all contractual terms between it and M&L.
And, we repeat, there was no integration clause. In sum,
Sotheby’s form did not state the whole deal.
Sotheby’s cites Kim v. Westmoore Partners, Inc. (2011) 201
Cal.App.4th 267, 283 for the proposition that a plaintiff cannot
allege that a defendant has breached a contract where the basis
of the breach is contradicted by the terms of the contract attached
to the complaint. This decision sparkles but does not apply here,
for it involved a contract with an integration clause. (Ibid.)
M&L’s illuminating allegation does not contradict Sotheby’s
opaque form, which distinguishes Fundin v. Chicago Pneumatic
Tool Co. (1984) 152 Cal.App.3d 951, 956 (“The written sales
contract attached to the complaint clearly shows that it is a
contract between plaintiff and Shepherd, and not between
plaintiff and Chicago”). Sotheby’s other citation is far afield.
(See Holly Sugar Corp. v. Johnson (1941) 18 Cal.2d 218, 226–227
[plaintiff may elaborate its complaint by appending a verified tax
protest].)
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In sum, it was error to sustain the demurrer to M&L’s
proper breach of contract claim.
As for M&L’s negligence claim, however, the trial court’s
ruling was right.
The economic loss rule governs. “In general, there is no
recovery in tort for negligently inflicted ‘purely economic losses,’
meaning financial harm unaccompanied by physical or property
damage.” (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th
905, 922 (Sheen).) By deferring to the contract between parties,
the economic loss rule prevents the law of contract and the law of
tort from dissolving one into the other. (Ibid.)
M&L and Sotheby’s had a contract. That controls. M&L
offers no good reason for departing from the fundamental
economic loss rule, which bars its tort claim.
M&L cites section 1852, which specifies a depository for
hire must use at least ordinary care for the preservation of the
thing deposited. M&L claims this section creates an exception to
the economic loss rule and thus permits recovery in tort. This is
incorrect.
“Using contract law to govern commercial transactions lets
parties and their lawyers know where they stand and what they
can expect to follow legally from the words they have written.
But if a disappointed buyer has the option of abandoning the
contract and suing in tort, the significance of the contract is
diminished and the doctrines that protect the integrity of the
contractual process are reduced in importance.” (Farnsworth,
The Economic Loss Rule (2016) 50 Val.U. L.Rev. 545, 553.) The
Restatement states this form of the economic loss rule thusly:
“there is no liability in tort for economic loss caused by negligence
in the performance or negotiation of a contract between the
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parties.” (Rest.3d Torts, Liability for Economic Harm (June
2020) § 3; see also Sheen, supra, 12 Cal.5th at p. 923.)
Regarding conversion, M&L forfeited this argument by
omitting legal authorities from its opening papers showing the
trial court erred. (See United Grand Corp. v. Malibu Hillbillies,
LLC (2019) 36 Cal.App.5th 142, 146, 153.)
DISPOSITION
We reverse the judgment and remand for further
proceedings regarding M&L’s breach of contract claim. We
award costs to M&L.
WILEY, J.
We concur:
STRATTON, P. J.
HARUTUNIAN, J.*
* Judge of the San Diego Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
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