Kurtin v. Elieff

Filed 4/16/13 (opn. on rehearing)
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
TODD KURTIN,
Plaintiff and Appellant, G043999
v. (Super. Ct. No. 30-2007-00100307)
BRUCE ELIEFF, OPINION
Defendant and Appellant.
Appeals from a judgment and two orders of the Superior Court of Orange
County, Nancy Wieben Stock, Judge. Judgment affirmed; one order affirmed; one order
affirmed as modified.
Miller Barondness, Louis R. Miller, Daniel S. Miller; Snell & Wilmer,
Richard A. Derevan, Todd E. Lundell and Andreea V. Micklis for Plaintiff and
Appellant.
Andersen Hilbert & Parker, M. Steven Andersen, Jeffrey N. Garland, Jason
L. Satterly; Luce, Forward, Hamilton & Scripps; McKenna Long and Aldridge and
Charles A. Bird for Defendant and Appellant.
* * *
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.
BACKGROUND
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
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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.
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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.
3. Arbitration
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.
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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.
4. The Litigation
a. Phase 1 accounting
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.
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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”
b. Phase 2 jury trial
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
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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.
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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
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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
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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.
DISCUSSION
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 Settlement Agreement is entered into . . . between Todd
Kurtin . . . and Bruce Elieff, the Elieff Separate Entities identified in Exhibit ‘A’ and the
Joint Projects identified in Exhibit ‘B’ on the other hand (collectively ‘Elieff’).”)
Second, the text of the agreement is clear that Elieff personally was only
responsible for the initial $21 million installment payment, and not for the balance
contemplated to come from the Joint Entities. The point is made in three separate
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instances. Paragraph 2 directly says it: “Elieff and each of the Joint Entities are jointly
and severally liable for making the first Settlement Payment in the amount of
$21,000,000. The Joint Entities are liable for making the remainder of the Settlement
Payments.” Paragraph 3 strongly implies it, both by (a) defining default in terms of the
particular “Elieff Party obligated to pay” (thus excluding Elieff parties, like Elieff
himself, not obligated to pay) and also by (b) specifically separating Kurtin’s remedy for
failure to pay the first installment from failure to pay the other installments.
Third, the text of the settlement agreement contemplates that the assets of
the Joint Entities would secure the obligations of the Joint Entities under the agreement.
It does so in paragraph 14 by both requiring Elieff personally to “execute customary
documents necessary to perfect” a security interest to be held by Kurtin and by
preventing Elieff from taking distributions which impair that security. Rather than
attempting to paraphrase the remainder of that paragraph, we now quote it in full:
“Payment to Kurtin of the Settlement Payments shall be secured by the interest of Elieff
and the Joint Entities in the projects owned by the Joint Entities. Elieff and the Joint
Entities shall execute customary documents necessary to perfect this security interest,
including UCC-1 filings, provided however that Kurtin shall, within ten (10) business
days of written notice execute those consents and/or subordination agreements necessary
for Elieff to refinance the Pacific Point project. Elieff shall not take any distribution from
any of the Joint Entities if such distribution prevents satisfaction of payment of the
Settlement Payments.”
Fourth, paragraph 15 of the settlement agreement contains an arbitration
clause. The arbitration clause reads: “The Parties believe that all of the material terms of
their agreement are set forth herein. It is the intent of the parties that this Settlement
Agreement shall be final and binding and that this Settlement Agreement shall be
enforceable under C.C.P. Section 664.6. In the event that any Party claims that one or
more material terms have been omitted from this Settlement Agreement, or that the
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Parties failed to reach an agreement as to one or more material terms, or that any other
defect exists with respect to this Settlement Agreement that would make it unenforceable,
the Parties agree to final and binding arbitration before Tony Piazza or, if Mr. Piazza is
unable, before a mutually agreeable arbitrator. At such arbitration, the arbitrator shall
imply a reasonable term that the arbitrator finds consistent with the purpose and intent of
this Settlement Agreement or otherwise cure any defect in the Settlement Agreement by
amending its terms. The sole act of the arbitrator shall be to issue an amendment to this
Settlement Agreement implying such additional terms, curing any ambiguity or otherwise
curing any defect in this Settlement Agreement that would make this Settlement
Agreement unenforceable. The Settlement Agreement, together with any amendment
issued by the arbitrator, shall be enforceable under C.C.P. Section 664.6.”
Finally, in paragraph 17, the agreement contains an integration clause:
“This agreement contains the entire and only understanding between the Parties
pertaining to the subject matter contained in it and supersedes any and all prior and/or
contemporaneous oral or written negotiations, agreements, representations and
understandings. This agreement shall be governed by California law.”
b. The arbitration award
Despite the “sole act” language in the settlement agreement, at the
arbitration Kurtin sought a direct award for the balance due. His arbitration brief
asserted: “Therefore, the arbitration award here should include an award against Elieff
personally for the principal balance owing under the Settlement Agreement which, as
explained below, is now $22,934,809.16 plus interest, attorney’s fees and costs in an
amount according to proof at the hearing.”
What Kurtin received, however, was in substance simply an amendment to
the terms of the settlement agreement. The arbitrator decreed that any recovery against
Elieff would be restricted to Elieff’s own interests in the Joint Entities, as distinct from
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the total assets of the Joint Entities themselves: “If payment of $24,411,433.86 is not
made to Todd Kurtin by June 30, 2007, then Kurtin shall have the right to require Bruce
Elieff to transfer to Kurtin or his designee by July 10, 2007, any and all of Elieff’s right,
title and interest - held directly or indirectly - in and to any or all of the Joint Entities
listed on ‘Exhibit B’ to the Settlement Agreement of August 5, 2005 and Elieff shall
promptly execute all documents necessary to effectuate such transfer.”
The narrowness of the arbitrator’s decision (it would be a misnomer to call
it an “award,” though the arbitrator himself referred to it as that) was emphasized by a
statement which soon followed the sentence quoted above, the essence of which was that
Kurtin could still assert further rights under the settlement agreement: “Exercise of this
right [to require Elieff to give security in his own interests in the Joint Entities] shall not,
of itself, extinguish Kurtin’s rights to payment under the Settlement Agreement, but shall
only reduce the amount due under the Settlement Agreement by the fair market value of
any Elief [sic] right, title or interest transferred to Kurtin.”
The second paragraph of the award then bolstered the right of Kurtin to
recover from Elieff’s own interests in the Joint Entities by prohibiting Elieff from
encumbering those interests until Kurtin was “paid in full.” It also provided that Elieff
would hold “in constructive trust for Kurtin anything he received from said Joint Entities
from this date [June 11, 2007] forward.”
The next two, one-sentence paragraphs, suggested that there was no winner
in the arbitration: Paragraph one read: “No attorney fees or costs are awarded.”
Paragraph two read: “This award is not intended to preclude any other remedy that
Kurtin may have at law, or in equity.”
The final paragraph of the award referred back to the arbitration paragraph
of the original agreement. It self-consciously recognized that arbitration decision was, in
fact, amending the terms of the original settlement agreement: “This award shall also
constitute an amendment to the Settlement Agreement of August 15, 2005, pursuant to
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Paragraph 15 of that Agreement, and shall be enforceable under C.C.P. Section 664.6, as
well as enforceable as an arbitration award.”
c. Discussion
Elieff argues the arbitration decision, as the result of a prior proceeding,
necessarily precluded further litigation of his liability on the unpaid balance under the
settlement agreement in this civil action as a matter of res judicata. As summarized by
our Supreme Court in Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797, the
doctrine of res judicata requires that the cause of action in the prior proceeding be the
same as in the present cause of action, the prior proceeding result in a final judgment on
the merits, and the parties be the same as in the prior proceeding. (Or in privity with
parties in the prior proceeding). If applicable, the doctrine “not only precludes the
relitigation of issues that were actually litigated, but also precludes the litigation of issues
that could have been litigated in the prior proceeding.” (Bullock v. Philip Morris USA,
Inc. (2011) 198 Cal.App.4th 543, 557.)
Elieff emphasizes the “could have been” aspect of the res judicata doctrine.
He argues that Kurtin asserted his “primary right” to be made whole in the arbitration
proceeding, which is the same primary right he subsequently asserted in this civil case,
and therefore must be satisfied with the decision the arbitrator handed down.
The flaw in Elieff’s logic is that he confuses what Kurtin asked for in the
arbitration with the arbitrator’s power to give it in light of the scope of the arbitrator’s
powers to which the parties had agreed. It is well established that the scope of an
arbitrator’s powers are fixed by the agreement to arbitrate. (E.g., Moncharsh v. Heily &
Blase (1992) 3 Cal.4th 1, 8 [the “‘“‘powers of an arbitrator are limited and circumscribed
by the agreement or stipulation of submission’”’”]; Kelly Sutherlin McLeod Architecture,
Inc. v. Schneickert (2011) 194 Cal.App.4th 519, 528 [“An arbitrator’s powers ‘derive
from, and are limited by, the agreement to arbitrate.’”].)
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Here, the settlement agreement conferred only limited powers on the
arbitrator. There is no provision giving the arbitrator power to make an award against
any party for money. The arbitrator’s powers are limited to interpreting the settlement
agreement and, at the most, amending it to insert intended but inadvertently omitted
material terms.
And the arbitrator did just that. He interpreted and amended the agreement
to insert terms which had been understood by the parties, but did not find their way into
the final text. Thus, to the degree that the agreement was initially ambiguous as to
Kurtin’s right to security involving all the assets of each Joint Entity, the arbitrator
cleared up that ambiguity by limiting Kurtin’s right to security to just Elieff’s interests in
each Joint Entity.
The “primary right,” then, that was adjudicated in the arbitration was not
Kurtin’s “right to be made whole,” but Kurtin’s right, under the agreement, to have the
mediator who midwifed the settlement agreement interpret, and if necessary amend, the
agreement. This case thus presents the opposite of the usual could-have-been-decided
situation in res judicata analysis, where a litigant seeks to litigate in a second proceeding
what could have been litigated in the first place. Here, a litigant sought to litigate more in
the first proceeding than he could have possibly obtained from it.
Elieff’s argument that O’Malley v. Petroleum Maintenance Co. (1957) 48
Cal.2d 107 (O’Malley), University of San Francisco Faculty Assn. v. University of San
Francisco (1983) 142 Cal.App.3d 942, 954 (University of San Francisco), Felner v.
Meritplan Ins. Co. (1970) 6 Cal.App.3d 540, 544 (Felner), and Crofoot v. Blair Holdings
Corp. (1953) 119 Cal.App.2d 156, 186-187 (Crofoot) compel a contrary result is
unpersuasive. All these cases are distinguishable.
O’Malley and University of San Francisco both involved second
agreements to specifically submit disputes to arbitrators which clearly encompassed the
scope of what was later challenged in court. (See O’Malley, supra, 48 Cal.2d at p. 108
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[submission agreement made after initial collective bargaining agreement specifically
included question of arbitrability by arbitrators] & p. 110 [holding employer bound by
terms of its submission agreement]; University of San Francisco, supra, 142
Cal.App.3d at pp. 945, 953-954 [noting that “additional agreement” plus “discussion at
the hearing” showed that supplemental pension provisions “were properly a subject of
arbitration,” plus “the parties stipulated” that the arbitrator had the power to decide issue
of his own “jurisdiction’”].)
Crofoot involved an agreement to arbitrate after a “plethora” of litigation
which, by its terms, included issues of law as well as fact. The court rejected, as a matter
of textual interpretation of the agreement to arbitrate, one party’s argument that the terms
of the agreement “necessarily” excluded issues of law. (Crofoot, supra, 119
Cal.App.2d at pp. 164, 186.) Likewise, in Felner, the text of the agreement to arbitrate –
there an uninsured motorist provision in an insurance policy – was held “broad enough”
and “sufficiently comprehensive” to include a dispute over whether an uninsured motorist
actually came into “physical contact” with the insured. (Felner, supra, 6 Cal.App.3d at
pp. 543-544.)
In the case before us, unlike O’Malley and University of San Francisco,
there was no second agreement specifically to arbitrate which encompassed the
arbitrability of some issue which might have been outside some initial agreement. And
unlike Crofoot and Felner, the actual text of this arbitration agreement – here, the
settlement agreement itself – will not support the resolution by the arbitrator of the
question of damages. We need only note additionally that while Kurtin may have sought
more from the arbitrator than the arbitrator had the power to give, Elieff vigorously
opposed Kurtin’s attempt, and Elieff was successful in that opposition.
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2. The Mediation Privilege
What we have just said about the nature of the settlement agreement bears
on Elieff’s main argument against the judgment, namely that Kurtin’s invocation of the
mediation privilege denied Elieff a fair trial. Elieff’s argument goes like this: Various
terms of the settlement agreement were ambiguous, particularly the clauses requiring
Elieff to execute “customary” security documents. Typically, in contract litigation,
extrinsic evidence is allowed so that the trier of fact may resolve the issue of what the
parties intended when they used ambiguous terms in a contract. (E.g., Duncan v. The
McCaffrey Group, Inc. (2011) 200 Cal.App.4th 346, 381, overruled on another point in
Riverisland Cold Storage v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th
1169, 1176, 1182 [“extrinsic evidence can be admitted to explain the ambiguity in the
contract”].) But here, by asserting the “mediation privilege” (see Evid. Code, § 1119),
Kurtin effectively prevented the trier of fact from hearing evidence from the mediation
bearing on any ambiguities in the settlement agreement. Therefore, just as an attorney
sued by a former client for malpractice must be allowed to use otherwise confidential
information received from that client (cf. McDermott, Will & Emery v. Superior Court
(2000) 83 Cal.App.4th 378, 385), Kurtin’s decision to hold firm to the mediation
privilege means Elieff did not get a fair trial. Elieff should either have been allowed to
present evidence otherwise precluded by the mediation privilege to defend himself or
Kurtin should have been required to drop his claims. (See Solin v. O’Melveny & Myers
(2001) 89 Cal.App.4th 451 [client’s invocation of attorney-client privilege vis-à-vis
attorneys sued for malpractice required dismissal of malpractice action against them].)
There are two flaws in the argument: One, Elieff already had a chance to
clear up ambiguities in the settlement agreement before trial in arbitration. In fact, he
actually used the arbitration process to clear up, in his favor, at least one ambiguity.
(Here the parties acknowledge that the initial out-of-court proceeding was a mediation.
The later proceeding which resulted in clarification of the settlement agreement is
17
referred to by the parties as an arbitration. Mediation and arbitration are two different
things, as Evidence Code section 1119, subdivision (a) makes clear. What went on at the
mediation was the subject of the mediation privilege. Further proceedings in arbitration
would not be so privileged.)
Two, even if, arguendo, Elieff did not have a chance to clear up ambiguities
by way of arbitration prior to going to civil trial, Kurtin still did not forfeit his right to sue
Elieff by asserting the mediation privilege. The California Supreme Court has clearly
signaled the policy behind the mediation privilege is so strong that California law is
willing to countenance the “high price” of the loss of relevant evidence to protect the
privilege. (Cassel v. Superior Court (2011) 51 Cal.4th 113, 138 (conc. opn. of Chin, J.).)
a. Elieff’s chance to clear up ambiguities before trial
The first flaw in Elieff’s mediation privilege argument is that he ignores the
opportunity he had to resolve ambiguities in the settlement agreement by returning to the
original mediator in arbitration. Accordingly, Elieff cannot now be heard to complain
that he was denied the chance to resolve ambiguities at trial. The arbitration paragraph
gave each party the right to go to arbitration in front of the one person most familiar with
what the parties achieved at their mediation – the mediator himself – where any
ambiguity in its terms might be resolved.
As against such an opportunity, Elieff counters with the argument that the
arbitration paragraph (giving the parties the right to return to the arbitrator) really is
restricted to situations absolutely necessary to make the settlement agreement
enforceable. Outside of those situations, he now argues, the arbitrator did not have the
power to interpret ambiguous terms in the settlement agreement.
We cannot agree. The text of the arbitration clause is, on balance, most
naturally read to set forth three sets of arbitral powers, with only the last of those three
tethered to the idea of some need to avoid making the agreement unenforceable.
18
We begin by observing the arbitration clause (quoted in full on page 12,
infra) consists of six sentences: The first two make the points that the settlement
agreement consists of all material terms, and the parties want the agreement to be
enforceable, while the sixth sentence specifies the intent that the agreement indeed be
enforceable as the settlement of pending litigation under Code of Civil Procedure section
664.6.
It is sentences three and five on which Elieff relies to confine the
arbitrator’s power to interpret or cure ambiguities only to situations where the cure was
absolutely needed to preserve enforceability. For reader convenience, we quote those
two sentences again here, and include the intervening sentence four:
“[Sentence 3:] In the event that any Party claims that one or more material
terms have been omitted from this Settlement Agreement, or that the Parties failed to
reach an agreement as to one or more material terms, or that any other defect exists with
respect to this Settlement Agreement that would make it unenforceable, the Parties agree
to final and binding arbitration before Tony Piazza or, if Mr. Piazza is unable, before a
mutually agreeable arbitrator. [Sentence 4:] At such arbitration, the arbitrator shall
imply a reasonable term that the arbitrator finds consistent with the purpose and intent of
this Settlement Agreement or otherwise cure any defect in the Settlement Agreement by
amending its terms. [Sentence 5:] The sole act of the arbitrator shall be to issue an
amendment to this Settlement Agreement implying such additional terms, curing any
ambiguity or otherwise curing any defect in this Settlement Agreement that would make
this Settlement Agreement unenforceable.”
Readers will see that sentences three and five are constructed in two
parallel series of three clauses, each clause dealing with, in order: (1) omission of
material terms; (2) curing ambiguity or disagreement as to those material terms; and (3)
unspecified defects. In each sentence, only the last clause, concerning unspecified
defects, is unambiguously connected to the idea of remedying unenforceability. Thus, to
19
make the unenforceability language apply to either of the first two clauses, one must
relate back to the first and second clauses the unenforceability language one finds in the
third clause. And that of course is how Elieff reads sentences three and five in this
appeal.
To be sure, Elieff’s argument is consistent with the references to “other
defect” in sentence three, and the reference to “otherwise” in sentence five. Those two
references can indeed be stretched to suggest a connection between what happens in the
third clause and what has gone before in clauses one and two.
All else being equal, however, courts prefer a more natural reading of text
to a less natural one, whether that text be found in a statute (e.g., Runyon v. Board of
Trustees of California State University (2010) 48 Cal.4th 760, 768; Munson v. Del Taco,
Inc. (2009) 46 Cal.4th 661, 672) or a contract (Lapp-Gifford Co. v. Muscoy Water Co.
(1913) 166 Cal. 25, 27-28 [more natural interpretation of letter to creditor containing
check for “final payment” was that it did not refer to payment in full of the disputed
debt]; Dover Village Assn. v. Jennison (2010) 191 Cal.App.4th 123, 128-129 [more
natural reading of CC&R’s was that sewer pipes were not “‘exclusive use’” items for
purposes of repair responsibility].) And of course courts are directed by statute to read
contracts as a whole, so, if reasonably practical, no part is deprived of effect. (Civ. Code,
§ 1641.)
In this case, we conclude Elieff’s interpretation of the arbitration provision
is not the more natural reading and does not give effect to the whole of the arbitration
provision.
First, Elieff’s reading is by no means compelled. Sentence three’s phrase
“other defect,” and sentence five’s use of the word “otherwise” do not necessarily require
a connection to the first two clauses. Logically, each of the three clauses can be seen as
independent of the others, i.e., the arbitrator has three sets of powers: (1) omission of
material terms; (2) curing ambiguity or disagreement as to material terms; and (3) curing
20
any unspecified defects which might make the agreement not enforceable. The
independence of the three clauses is confirmed when one realizes that, grammatically, in
sentence three the third clause is not even necessary to make an intelligible English
sentence. Sentence three is written so the first two clauses easily survive even if the third
were completely omitted. (Thus: “In the event that any Party claims that one or more
material terms have been omitted from this Settlement Agreement, or that the Parties
failed to reach an agreement as to one or more material terms, the Parties agree to final
and binding arbitration . . . .”)
By the same token, sentence five, like sentence three, also can be read
logically to set forth three independent clauses, though the gerund-based parallel
construction (“implying . . . curing . . . or otherwise curing”) makes it impossible to
simply omit the third clause. Even so, the “or” separating the third clause from the other
two emphasizes the independence of each clause: Either (1), (2) “or otherwise” (3). In
that sequence, whatever is attached to (3) is not necessarily attached to (1) or (2).
Second, Elieff’s reading of the arbitration clause tends to reduce sentence
four to a meaningless afterthought. Sentence four begins by pegging off sentence three
(“[a]t such arbitration”) but articulates two powers of the arbitrator without any
qualification as to enforceability. To be sure (as shown by sentences one, two and six),
the parties clearly wanted their mediated agreement to be enforceable. But if they wanted
to confine the arbitrator’s powers solely to what was necessary to “save” that
enforceability, there was no need to write sentence four. By stating powers in sentence
four without any reference to enforceability, an intention is evidenced to give the
arbitrator powers to construe the contract without a need to justify their use on a “saving”
theory – an intention particularly demonstrated by the structure of the preceeding
sentence three, where the reference to enforceability (as shown above) is not even
grammatically necessary.
21
Third, and most importantly, the last antecedent rule strongly indicates the
arbitrator’s powers are necessarily pinned down by a requirement to only be exercised to
“save” the agreement. (See ACS Systems, Inc. v. St. Paul Fire & Marine Ins. Co. (2007)
147 Cal.App.4th 137, 150 [applying last antecedent rule, which usually applies to
statutes, to contracts as well].)
The last antecedent rule is the common sense presumption that the tail
should not wag the dog in sentence construction, i.e., qualifiers apply to words and
phrases immediately preceding them, as distinct from words and phrases more remote.
(See Renee J. v. Superior Court (2001) 26 Cal.4th 735, 743.) In this regard, we note that
if the parties really meant to confine the arbitrator’s power to interpret terms or cure
ambiguities to only situations where it was absolutely necessary to make the agreement
enforceable, they could easily been much clearer than appending that limitation to the last
of three successive clauses. (Here’s one possibility: “In order to make sure this
agreement is absolutely enforceable, the arbitrator shall have the power to (1) insert
omitted terms, (2) cure ambiguities, or (3) remedy defects, but the arbitrator’s power to
so shall be limited only to those situations where it is necessary to make sure the
agreement is enforceable; otherwise the arbitrator shall have no power at all.”)
Four, a reading of the arbitrator’s powers not dependent on a need to “save”
the agreement was one Elieff himself used with ease at both the trial and appellate level
in other contexts when describing the arbitration clause. At the trial level, in the context
of opposing Kurtin’s attempt to obtain judgment under section 664.6 of the Code of Civil
Procedure, Elieff’s trial counsel observed: “The Settlement Agreement provided for final
and binding arbitration in front of the person who mediated the settlement, Tony Piazza,
if a party claimed that a material term had been omitted or that another defect with the
agreement existed.” The sentence lacks any qualifier about “only if necessary to save the
agreement.”
22
Likewise, at the appellate level, after Kurtin sought writ relief in this court
because the trial court refused to grant the Code of Civil Procedure section 664.6 motion,
Elieff’s counsel quoted with approval Kurtin’s counsel’s characterization of the
arbitration provision that “‘if there’s anything in this agreement that prevents the express
intent of the parties from being carried out, the arbitrator can fix it basically.’” The
context of that quotation, ironically, was Elieff’s point that Kurtin already had a remedy
to enforce the agreement in arbitration. And again, nothing was said about enforceability
qua enforceability being a prerequisite for resort to the arbitrator.
And finally, in this regard, we also further note that at the arbitration that
was actually held, Elieff won an important interpretational victory independent of any
need to save the contract – a victory he certainly has not repudiated as beyond the
arbitrator’s powers. Namely, he established that Kurtin’s claims under the agreement
only extended to Elieff’s own interests in the Joint Entities, as distinct from being directly
against the Joint Entities themselves.
In sum, on balance, we conclude the better reading of the text of the
arbitration clause is that Elieff could have cleared up any ambiguities he thought
necessary to his defense by going back to the mediator prior to trial. Doing so, we note,
would also have been consonant with the zealous regard the law affords the mediation
privilege, which we now address.
b. California’s Zealously Guarded Mediation Privilege
But even if the arbitration clause is limited to just clearing up what is
minimally necessary to have an enforceable agreement, Elieff’s more basic argument –
that Kurtin forfeited his claims against Elieff by invoking the mediation privilege
(see Evid. Code, §§ 1115-1128 and particularly § 1119) – cannot prevail. The mediation
privilege carries with it different dynamics than simple attorney malpractice cases where
a party can indeed be required to give up an evidentiary privilege as the price of asserting
23
its claim. (E.g., Solin, supra, 89 Cal.App.4th at p. 467; McDermott, Will & Emery v.
Superior Court, supra, 83 Cal.App.4th at p. 385 [corporate outside counsel entitled to
judgment in shareholder derivative action where counsel could not make use of attorney-
client communications].) Elieff’s theory concerning mediation simply cannot be squared
with what our Supreme Court unanimously both did and said in Cassel v. Superior Court,
supra, 51 Cal.4th 113.
In Cassel, a plaintiff in a legal malpractice action claimed his attorneys had,
in a pretrial mediation, pressured, harassed and otherwise coerced him into accepting a
lower price than he wanted for certain licensing rights. The Supreme Court upheld a trial
court order precluding the admission of evidence related to the mediation, including the
discussions the plaintiff had with his attorneys. (Cassel, supra, 51 Cal.4th at pp. 121,
138.) The high court acknowledged that the exclusions “may indeed hinder the client’s
ability to prove a legal malpractice claim against the lawyers.” (Id. at p. 122) But, as
Justice Chin separately wrote to explain why he was “reluctantly” concurring in the
judgment, the high court was willing to pay such “a high price . . . to preserve total
confidentiality in the mediation process.” (Id. at p. 138 (conc. opn. of Chin, J.).)
The application of the mediation privilege in Cassel meant, under the
particular circumstances of that case, the plaintiff’s ability to present a claim was
hindered. Here, Elieff argues that application of the mediation privilege supposedly
hindered his ability as defendant to defend against a claim. And on that difference – the
difference between one’s status as a plaintiff or as a defendant – Elieff hangs all attempt
to distinguish Cassel.
But we cannot see any meaningful difference between plaintiffs and
defendants in the mediation privilege situation. In fact, differentiating between them
makes no sense. One need only think of the consequence of Elieff’s position to
understand it was never intended by the Legislature. Under Elieff’s theory, parties to a
mediation would know that if they were successful in achieving a mediated settlement in
24
which they were the obligee, they could not enforce the settlement without running the
risk of their adversaries claiming terms of the settlement were ambiguous, and forcing
either (1) the disclosure of communications made in the course of the mediation or (2) the
loss of the very benefit of that mediation, which was the mediated agreement itself. By
contrast, obligors would have a natural advantage over obligees. They could put obligees
to the Hobson’s choice of giving up the benefit of the settlement or allowing the airing of
privileged communications. The Legislature obviously never intended such asymmetry.
Due process is an underlying theme of Elieff’s argument. Somehow, he
says, it was fundamentally unfair that he was sued under a mediated agreement but was
not allowed to bring evidence bearing on what the parties discussed concerning the actual
terms of that agreement. But the Cassel decision itself confronted and rejected the idea
that enforcing the mediation privilege statutes “in strict accordance with their plain
terms” deprives a civil litigant of due process. (Id. at p. 124.) Said the court: “We
further emphasize that application of the mediation confidentiality statutes to legal
malpractice actions does not implicate due process concerns so fundamental that they
might warrant an exception on constitutional grounds. Implicit in our decisions . . . is the
premise that the mere loss of evidence pertinent to the prosecution of a lawsuit for civil
damages does not implicate such a fundamental interest.” (Cassel, supra, 51 Cal.4th at
p. 135, italics added.)
Moreover, and significantly, a page after the “mere loss of evidence”
statement, the Cassel opinion again rejected the notion that somehow due process was
implicated by protection of the privilege, but phrased its idea in such a way as to apply to
both sides of a dispute: “The Legislature decided that the encouragement of mediation to
resolve disputes requires broad protection for the confidentiality of communications
exchanged in relation to that process, even where this protection may sometimes result in
the unavailability of valuable civil evidence.” (Cassel, supra, 51 Cal.4th at p. 136, italics
added.)
25
This court followed Cassel in its recent decision in Provost v. Regents of
University of California (2011) 201 Cal.App.4th 1289 (Provost), where we rejected the
claim of a party seeking to disavow a stipulated settlement arrived at through mediation,
even though the party claimed coercion from threats of criminal prosecution by the other
party if he did not enter into the agreement. (See id. at pp. 1302-1304.) If evidence of
coercion in the achievement of a mediated agreement itself was properly excluded by the
mediation privilege in Provost, how much less compelling is Elieff’s contention that
Kurtin should forfeit his claim to repayment where the assertion of the privilege entails
only an incidental loss of evidence from a mediation bearing on allegedly ambiguous
contract terms.
Elieff places great reliance on In re Marriage of Kieturakis (2006) 138
Cal.App.4th 56 (Kieturakis) for his forfeiture theory, but the case doesn’t help him.
Kieturakis is a somewhat complicated case that arose from a mediated
divorce settlement which lopsidedly favored the husband, so we must explore it in some
detail to show why does not stand for what Elieff claims. In fact, Kieturakis is a case
which strongly upholds the mediation privilege.
After the mediated divorce settlement in Kieturakis the wife attempted to
set it aside. Under substantive family law, the question then arose as to whether the
husband had exerted undue influence in obtaining the settlement agreement, and, again as
a matter of substantive family law, on that issue the husband bore the burden of showing
he did not exert undue influence. To ascertain whether the husband had indeed exerted
undue influence, the trial court allowed in evidence from the mediation in the interests of
“‘justice’” (Kieturakis, supra, 138 Cal.App.4th at p. 75) – something which, we now
note, would clearly not be correct under Cassel or Provost. But, having made that
mistake, the trial court concluded the husband had carried his burden of showing an
absence of undue influence, so the trial court did not set aside the agreement. In effect,
26
the trial court’s finding the husband had indeed carried his burden rendered harmless the
earlier error of admitting evidence from the mediation.
Accordingly, the appellate court affirmed the order refusing to set aside the
agreement. However, in affirming, it took the opportunity to explain that because the
settlement was the product of mediation, the trial court had still erred in determining the
husband bore the burden of proof. (Kieturakis, supra, 138 Cal.App.4th at p. 85.) To
apply a presumption of undue influence from a lopsided agreement arising out of
mediation would undermine the Legislature’s preference for mediation. (Id. at pp. 85-
87.)
It was in the process of recognizing that there was indeed a cost to be paid
for the Legislature’s value judgment placing a higher value on mediation than on the
substantive family statutes involving possible undue influence, that the Kieturakis court
made a comment which Elieff now asserts requires dismissal of Kurtin’s claims.
“However, if there is a price to be paid in fairness to preserve mediation confidentiality,
the cases have required that it be paid by parties challenging, not defending, what
transpired in the mediation.” (Kieturakis, supra, 138 Cal.App.4th at p. 87.)
We are not persuaded by Elieff’s argument connecting (a) the observation
made by the Kieturakis court and (b) the idea Kurtin was put to a forced choice of giving
up the mediation privilege or dropping his claims. Elieff’s argument is a non sequitur. It
does not follow from (a) Kieturakis’ proposition that a party to a mediated agreement
who later wants to get out from under the terms of that agreement cannot use evidence
from the mediation to achieve her purpose if the other party asserts the mediation
privilege to Elieff’s proposition that (b) a party seeking to enforce a mediated agreement
cannot do so without simultaneously losing the right to assert the mediation privilege.
Kieturakis’ observation was, in context, a simple recognition that a party,
such as the wife in the case before it, who seeks to set aside an agreement resulting from
a mediation, will have a “price” to pay in being unable to use what happened at the
27
mediation to challenge the agreement. And under Cassel, that recognition is fairly
unremarkable. Indeed, as applied to the case before us, the observation only strengthens
our conclusion that the mediation privilege statutes mean that it was Elieff, not Kurtin,
who was required to pay the “price” of the Legislature’s policy in favor of mediation
confidentiality. The whole point of the passage in Kieturakis was that the mediation
statutes reflect such a strong legislative policy that it even allows “unfair agreements to
stand.” (Kieturakis, supra, 138 Cal.App.4th at p. 87.) As with Provost, if the Legislature
is willing to allow even unfair mediated agreements to stand as a result of mediation
confidentiality, it certainly is willing to stomach whatever incidental unfairness might
result from a party’s inability to use mediation evidence to explain allegedly ambiguous
terms within a mediated agreement.
In sum, Kurtin did not lose this case by asserting a mediation privilege
which the Legislature has chosen to zealously protect.
3. The “Accounting” and Damages
Elieff argues that cause of action number 7 (for violation of the
“distribution” clause in paragraph 14) is precluded from any retrial because the
“accounting” which Kurtin received established that Elieff took no “profits” and spent
funds only for authorized purposes. As Elieff’s trial attorney said after the trial judge
delivered her decision in the phase 1 trial from the bench, “I want to address the issue of
whether there’s anything left to submit to a jury on the seventh cause of action.”
The argument overstates what happened in the trial court. There was
indeed much left after the phase 1 trial. The trial judge did not rule that Elieff took no
“distributions.” She ruled, rather, that money which was used by Elieff to maximize the
“good of the whole” would not be covered by the distribution clause.
Only one of the five destinations of the outflows identified by the trial
court, payments to Kurtin, is unequivocally not a “distribution” taken by Elieff to
28
“prevent” repayment of the unpaid balance. (That distribution was the $1.8 million that
was itself a payment to Kurtin.) A reasonable jury might readily conclude that outflows
within the other four categories (management services, management expenses,
management costs, return of capital) both (a) did not benefit the Joint Entities as a whole
and (b) prevented repayment of the unpaid balance. And the ultimate categorization of
the various outflows was left to the jury. The trial judge granted a new trial on damages
because the numbers of available outflows did not add up to the $24.4 million which the
jury awarded on the seventh cause of action.
Put another way, the “gist” or “essence” of Kurtin’s seventh cause of action
was not one in equity. (Cf. De Guere v. Universal City Studios (1997) 56
Cal.App.4th 482, 507-508 [explaining when parties are, or are not, entitled to jury trial in
context of contract actions involving accountings].) Tracing the various outflows from
discrete Joint Entities was only ancillary to the true gravamen of that cause of action,
focused as it was on whether various outflows came within the category of distributions
that prevented repayment. A reasonable jury might very well find that much mischief
might be done under the cover of management services, expenses, and costs. Even
capital that was “returned” to Elieff might, if not otherwise linked to the “good of the
whole,” and if that return had the effect of preventing repayment, constitute an improper
“distribution” under the distribution clause. With the exception of the “good of the
whole” qualifier appended to the definition of distribution by the trial judge, the whole
tenor of the settlement agreement was that Kurtin would be paid off the top from any
money available for outflows from any of the Joint Entities, even if it meant that Elieff
might go out of pocket.
By the same token, we must reject Elieff’s argument that Kurtin did not
prove any damages. While a requirement of actual collectability from the Joint Entities
puts a limit on Elieff’s liability under section 2342 and under section 2343 per section
3318 (see discussion below in part 5 of this opinion), Kurtin had no need to establish
29
collectability under his cause of action for violation of either the “distribution,” or
security-document clauses of paragraph 14. And phase 1 showed that of $22.4 million in
outflows from Joint Entities identified in the phase 1 trial, only $1.8 million was shown
to have been paid to Kurtin. That leaves about $20 million in distributions for which
Elieff might (at least in theory) be personally liable under the distribution and security
clauses of the settlement agreement alone.
4. Inconsistent Verdicts Regarding Section 2343
Kurtin’s cause of action number 3 for violation of section 2343 presents the
problem of inconsistent jury verdicts. The text of section 2343 plainly requires either the
absence of a good faith belief on the part of the agent that he or she “has authority” to
enter into the contract on behalf of a principal, or acts “wrongful in their nature.” Here is
the text of section 2343: “One who assumes to act as an agent is responsible to third
persons as a principal for his acts in the course of his agency, in any of the following
cases, and in no others: [¶] 1. When, with his consent, credit is given to him personally
in a transaction; [¶] 2. When he enters into a written contract in the name of his principal,
without believing, in good faith, that he has authority to do so; or, [¶] 3. When his acts
are wrongful in their nature.”
The problem is the jury found that that Elieff did have a good faith belief he
could obligate the Joint Entities, and the only “wrongful” acts which the jury were asked
to impute to Elieff were negligent or intentional misrepresentation, and the jury refused to
find he engaged in either of those wrongful acts. Compounding the problem was
Kurtin’s own argument to the jury at the end of trial. That argument specifically linked
Kurtin’s claim of wrongful acts to the intentional misrepresentation claim. Kurtin’s
counsel rhetorically asked the jury, “Did Bruce Elieff commit an act that was wrongful in
its nature when he signed the settlement agreement on behalf of any of” the Joint Entities,
then answered his own question by referring to his intentional misrepresentation cause of
30
action, emphasizing that Elieff had committed fraud: “Now, I’m going to defer on this
question because in a minute we’re going to come to a verdict form on what’s called
intentional misrepresentation.”
Kurtin posits that any “wrongful” act that might be derived from the facts
generally before the jury will satisfy section 2343, regardless of whether the jury
specifically found that Elieff actually committed it. In particular, Kurtin suggests that a
“wrongful” act can be extracted from facts showing breach of a partnership duty. The
argument, however, rests on an incorrect interpretation of section 2343.
Case law explicating section 2343 shows that the “acts are wrongful in their
nature” clause arises in juxtaposition to the normal rule that agents are not liable for the
torts or breaches of contract of their principals. (See Sanchez v. Lindsey Morden Claims
Services, Inc. (1999) 72 Cal.App.4th 249, 255 [independent insurance adjuster retained
by insurer to adjust loss not directly liable in tort for negligent claims handling].) The
“wrongful in their nature” clause codifies a corollary rule that agents are responsible for
their own independent torts and breaches of contract in connection with “acts in the
course of their agency.” (See Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon &
Gladstone (2003) 107 Cal.App.4th 54, 68-85 (Shafer) [attorney of insurance company
providing coverage for defendant liable for own fraud in misrepresenting defendant’s
coverage to third party claimants]; Bayuk v. Edson (1965) 236 Cal.App.2d 309, 319-320
(Bayuk) [rejecting agent’s argument he could not be liable on theory “he was acting for a
disclosed principal,” because he “personally agreed” to supervise construction of house
and was negligent in doing so].)
Here, however, the jury never determined that Elieff committed any
wrongful act in the course of signing on behalf of the Joint Entities. To be sure, he
breached his own personal obligations not to take distributions which prevented
repayment and to provide documents to secure his own interests in the Joint Entities, but
those were not “acts in the course” of an assumed agency. The jury specifically found, in
31
regard to his signing, that he had a good faith belief in his authority, and made no
misrepresentation, intentional or negligent. Because of these inconsistent verdicts, we
cannot say that the jury impliedly found a tort or a breach of contract “in the course” of
an agency where they had not been asked to find one.
The trial court itself rejected Elieff’s motion for a new trial as to liability
under section 2343 by concluding that the evidence showed wrongful conduct in the lack
of an intention to ever “expose” the Joint Entities to liability and by “act[ing] to impair”
their ability to perform. The problem with the former rationale is that the jury rejected all
findings of fraud or misrepresentation on Elieff’s part. The problem with the latter
rationale is that Elieff’s obligation under the distribution clause not to impair the Joint
Entities’ ability to perform was a personal obligation (liability for which remains
undisturbed by our decision today), not an act “in the course” of his assumed agency.
The law is clear that the proper remedy for inconsistent verdicts is “not to
grant judgment as a matter of law in favor of one of the parties, but rather, to order a new
trial.” (Stillwell v. The Salvation Army (2008) 167 Cal.App.4th 360, 376; Shaw, supra,
83 Cal.App.4th at p. 1344; e.g., Oxford v. Foster Wheeler LLC (2009) 177 Cal.App.4th
700, 704 [“Because the jury rendered inconsistent verdicts, we will reverse and remand
for a new trial.”].) We have power to modify the new trial order on appeal to have it
include a new trial on the issue of liability under section 2343 as well as damages (Code
Civ. Proc., § 906), and do so now.
5. Kurtin’s Cross-Appeal
a. The Relationship Between Section 2343 and Section 3318
i. no effect on new trial order
The trial court’s formal order on motion for new trial agreed with Elieff’s
contention that the measure of damages for the violation of section 2343 is found in
section 3318. In particular, the trial judge cited the language from section 3318 that the
32
measure of damages is what “could have been recovered and collected from [the agent’s]
principal if the warranty had been complied with” as governing in the new trial to come.
Accordingly, the judge ruled that “even as” to the cause of action for violation of section
2343, “Kurtin [would be] required to prove actual damages.” The judge “left for another
day” the question of how “‘recovered and collected’” should be interpreted and “what
degree of certainty” would meet “that standard.”
In his cross-appeal, Kurtin now argues that the trial judge’s ruling that
section 3318 governs his section 2343 claim was incorrect. His main concern is the
“recovered and collected” clause of the statute. Given that the total value of the Joint
Entities is apparently not enough to pay off the unpaid balance of the $48.4 million
buyout price (much less Elieff’s personal interests in those entities), Kurtin argues that
section 3318 does not establish the relevant measure of damages. Kurtin argues for an
interpretation of section 2343 that would make Elieff personally liable for the unpaid
balance exceeding more than $20 million without regard to section 3318’s “recovered
and collected” language.
Preliminarily, we reject Kurtin’s argument that any error by the trial court
on the issue of the applicability of section 3318 to section 2343 requires reversal of the
order granting a new trial. As we have just shown in the preceding part of this opinion,
given the inconsistent jury verdicts in this case, even the question of Elieff’s liability
under section 2343 must be considered anew by the trier of fact. Moreover, the trial
judge identified several other reasons to order a new trial besides the inconsistent
verdicts. These included: the failure of the amount of damages assessed to add up to the
distributions at issue, the fact that the jury’s award “exceeded even Kurtin’s argued for”
damages of about $7.8 million, and the lack of more detailed evidence in phase 2 of the
trial by which the jury might be able to evaluate the “two dozen cash transactions” which
the trial court itself had considered in phase 1. Even if, for sake of argument, the trial
judge’s announced opinion on the applicability of section 3318 to section 2343 were
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incorrect, under an abuse of discretion standard we can hardly say that the trial judge was
unreasonable in determining to re-try the whole issue of damages.
However, because the question of the proper measure of damages under
section 2343 has been fully briefed on appeal and the new trial order is being affirmed,
we address the question of the applicability of section 3318 to section 2343 for the
benefit of the trial court on remand. (Code Civ. Proc., § 43.) The question is a matter of
first impression in California.
As we now show, the trial judge was correct. Section 3318 does indeed
limit the damages recoverable under section 2343.
ii. text of sections 2342, 2343 and 3318
For reader convenience we now set out the complete verbatim text of the
three statutes at issue, including repeating the text of section 3318 recited in the previous
part of this opinion.
Section 2342 provides: “One who assumes to act as an agent thereby
warrants, to all who deal with him in that capacity, that he has the authority which he
assumes.”
Section 2343 provides: “One who assumes to act as an agent is responsible
to third persons as a principal for his acts in the course of his agency, in any of the
following cases, and in no others: [¶] 1. When, with his consent, credit is given to him
personally in a transaction; [¶] 2. When he enters into a written contract in the name of
his principal, without believing, in good faith, that he has authority to do so; or, [¶] 3.
When his acts are wrongful in their nature.”
Section 3318 provides: “The detriment caused by the breach of a warranty
of an agent’s authority, is deemed to be the amount which could have been recovered and
collected from his principal if the warranty had been complied with, and the reasonable
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expenses of legal proceedings taken, in good faith, to enforce the act of the agent against
his principal.”
iii. analysis of text
The opening line of section 3318 sets forth a clear measure of damages for
breach of an agent’s warranty of authority, and makes no differentiation as to whether
that breach is in good faith (section 2342) or lacks good faith (section 2343, subdivision
(2)). Damages against the agent are limited by what could be “recovered and collected”
from the agent’s purported principal.
Any argument that section 3318 does not apply to section 2343 necessarily
rests on two premises: (1) section 2343 contains its own, competing, measure of
damages in the form of section 2343’s “responsible . . . as a principal clause” and (2) the
competing measure of damages clause set forth in section 2343 must prevail over the
alternative in section 3318. That is, for section 3318 to not apply to section 2343, the
“responsible . . . as a principal” clause of section 2343 must necessarily trump the
“detriment . . . is deemed to be” clause of section 3318.
Courts, of course, must prefer statutory interpretations which harmonize
and reconcile potentially conflicting statutory meanings. (E.g., Voices of the Wetlands v.
State Water Resources (2011) 52 Cal.4th 499, 519; DeVita v. County of Napa (1995) 9
Cal.4th 763, 778-779.) In the present case, the two potentially competing clauses
(“responsible . . . as a principal” and “detriment . . . is deemed to be”) may be harmonized
by reading section 2343’s “responsible . . . as a principal” language to set forth the fact of
liability (i.e., if a purported agent does X, Y, or Z, he or she shall be liable as a principal)
while section 3318 sets forth the precise amount of liability (i.e., if there is liability for
doing Y, then here is the way the detriment is calculated). Three reasons impel our
conclusion.
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First, the very structure of the Civil Code suggests that very harmonization.
Chapter and section headings may be considered in ascertaining legislative intent and are
entitled to “considerable weight.” (People v. Hull (1991) 1 Cal.4th 266, 272; Howard
Jarvis Taxpayers Association v. County of Orange (2003) 110 Cal.App.4th 1375, 1385.)
Sections 2342 and 2343 are contained within article 4 (obligations between principals and
third persons) which is a subdivision of title 9 (dealing generally with agency) which is
within part 4 (obligations arising from particular transactions) of division 3 (generally
dealing with obligations) of the Civil Code. On the other hand, the general subject of
relief, including damages, is within part 1 of division 4 (general provisions). Section
3318 is found in article 1 (damages for breach of contract), which is within chapter 2
(measure of damages) which is within title 2 (compensatory relief), which is within
division 4 (dealing with general provisions). One can, from this pattern, divine the
general structure of the Civil Code on the subject of breaches of an agent’s warranty of
authority: Spell out the obligation in division 3. Set forth the remedy in division 4.
Second, textually, we are required to give effect to section 2343’s “in the
course of his agency” clause” as well as its “responsible . . . as a principal” clause. When
the statutory clauses are read together (“responsible . . . as a principal in the course of his
agency”) it is evident that the statute was intended to refer to the particular transaction in
which the agent “assumed” to act for another. The statute was not intended to assign a
liability to the purported agent beyond what was inherent in that particular transaction,
i.e., beyond the course of his agency. We note that Kurtin’s proposed interpretation of
section 2343 not only ignores the plain language of section 3318, but confers on Kurtin a
windfall beyond the course of Elieff’s purported agency, i.e., beyond the original
expectations of the parties.
The point may be illustrated by examining the original intentions of the
parties as the transaction was supposed to occur. Assume, for sake of argument, that
Elieff really did have authority to bind the Joint Entities, that Elieff delivered all the
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security documents he was required to deliver, and that he took no distributions of any
kind (e.g., forewent management fees otherwise legitimately owed to his companies)
from any of the Joint Entities. But further assume (as appears indeed to have occurred in
this case) that despite Elieff’s foregoing any distributions from the Joint Entities, the real
estate recession put them all into insolvency. In such a case, there would be no question
that Kurtin would be limited to what he could “recover and collect” from any of the Joint
Entities, even if he had to go to bankruptcy court for that recovery. Section 3318 sets
forth a measure of damages that indeed reflects the benefit of the bargain, together with
the commercial risks inherent in that bargain, which Kurtin actually made.
The third reason is that to the degree that section 2343’s “responsible . . . as
a principal” clause does indeed conflict with section 3318’s “detriment is deemed to be”
clause, section 3318 must prevail as the more specific. (See Code Civ. Proc. § 1859 [“a
particular intent will control over a general one that is inconsistent with it”]; e.g., San
Francisco Taxpayers Assn. v. Board of Supervisors (1992) 2 Cal.4th 571, 577 [“‘It is well
settled . . . that a general provision is controlled by one that is special, the latter being
treated as an exception to the former.’”].) The precise “responsibility” or liability of a
principal in any given context may vary, depending on the circumstances. For example,
in criminal law, aiders and abettors are “liable as a principal” for the crime, but the exact
extent of their liability is fixed by more specific penalty statutes. Here, section 3318
fixes a clear measure of damages for breaches of an agent’s warranty of authority. By
contrast one can puzzle all day over the degree to which “responsible . . . as a principal”
implies a measure of damages, if it does at all.
To the degree that case law has addressed the question of whether section
3318 applies to section 2343, the answer is yes. (See Borton v. Barnes (1920) 48
Cal.App. 589 (Borton).) Borton, in fact, contains a plain statement that section 3318
provides the measure of damages in a section 2343 situation where the agent lacks a good
faith belief in his authority. (Borton, supra, 48 Cal.App. at pp. 591-592; cf. Nichols
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Grain & Milling Co. v. Jersey Farm Dairy Co. (1933) 134 Cal.App. 126, 130 [following
Borton but not mentioning section 3318].) The brief reference to section 2343 in Jeppi v.
Brockman Holding Co. (1949) 34 Cal.2d 11, 18-19 [observing that difference between
section 2342 and section 2343 is that under section 2342 the agent is simply “held to
account on a theory of breach of the implied warranty of authority” while under section
2343 the agent is held liable “as a principal”] merely notes the general difference between
section 2342 and section 2343.
The question of section 2342 remains. There is a clear overlap between
section 2342 [all breaches of an agent’s warranty of authority] and section 2343,
subdivision (2) [lack-of-good-faith breaches of an agent’s warranty of authority]. We
may observe that all liability for lack-of-good-faith breach of a purported agent’s
warranty of authority under section 2343 necessarily includes a breach of the purported
agent’s warranty of authority under section 2342 as well. (See Borton, supra, 48
Cal.App. at p. 591 [treating section 2342 and section 2343 together].)
From this overlap, the question arises as to what the practical difference
between section 2342 and section 2343, subdivision (2) might be. One might postulate,
simply to avoid a construction that avoids surplusage, that section 2342 and section 2343,
subdivision (2) must have two different measures of damages, not just one as the
language of section 3318 would lead one to believe, and, further, that the “as a principal”
clause in section 2343 provides that different measure.
It does not, however, follow that section 2342 and section 2343 must have
different measures of damages. Much of the time, in fact, the result under either statute
will be exactly the same, as shown in the two cases that remain the leading case
authorities on the interaction between the two statutes and section 3318, namely, Borton,
supra, 48 Cal.App. 589, and Kohlberg v. Havens (1919) 41 Cal.App. 222 (Kohlberg).
Kohlberg was the first case to find liability under section 2342. Borton was the first case
to find liability under section 2343. In each case, the plaintiff received from the
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purported agent the commission he would have received from the purported principal if
the purported principal had been liable on the contract. (In Kolhberg, the amount owing
under the contract was not called a commission, but that’s what it plainly was – the price
of obtaining a third party’s signature to a real estate agreement, see Kohlberg, supra, 41
Cal.App. at pp. 223-224.)
At the very least, the “as a principal” clause in section 2343 makes a
potential difference as to when the applicable statute of limitations may begin to run.
(E.g., Kennedy v. Stonehouse (1904) 13 N.D. 232 [where purported agent sued for lack-
of-good faith breach of warranty of authority, statute of limitations began running when
principal repudiated contract made in her name and not when agent initially
misrepresented authority, which was ten years earlier].) Moreover, we may observe that
the two statutes will yield different measures of damages in cases where the purported
agent’s breach of his or her implied warranty of authority comes under one of the two
other subdivisions of section 2343, namely receiving credit personally, or is combined
with his or her own independent tort.
B. The Accounting
Kurtin presents another point in his cross-appeal that centers on the phase 1
trial. Like Elieff in the main appeal, Kurtin claims that phase 1 decided more than it did.
Specifically, he identifies three issues he now says “should have been tried to the jury”:
(1) the meaning of “distribution” in paragraph 14; (2) the standard by which Elieff’s
decisions to move any funds from one Joint Entity to another should be judged; and (3)
the question of whether there were payments from Joint Entities to Elieff distributions
preventing repayment.
We perceive that Kurtin’s cross-appeal as it relates to these questions is
essentially protective, because he has not been aggrieved by the new trial order on any of
these issues. Those issues were tried to the jury by way of Kurtin’s seventh cause of
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action 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. And
he prevailed on them. We need only mention here that we do not disturb the new trial
order as to Elieff’s liability on Kurtin’s seventh cause of action on the distribution issue.
DISPOSITION
The new trial order is modified to include a new trial on Elieff’s liability
under section 2343, as well as a new trial on the topic of damages. As modified, the new
trial order is affirmed. In all respects the judgment and order denying JNOV are
affirmed, but let us now spell out what exactly that means:
(1) We affirm the trial court’s determination that Elieff is liable to Kurtin
in an as-yet-to-be-determined amount, if any, on Kurtin’s causes of action for (a) breach
of warranty of an agent’s authority under section 2342; (b) breach of the provision of the
settlement agreement that Elieff would execute the documents necessary to perfect
Kurtin’s security interests in Elieff’s share of the Joint Entities; and (c) for breach of the
provision of the settlement agreement not to take distributions which prevented the Joint
Entities from paying the balance of the buyout amount.
(2) As we modify the trial court’s new trial order, the issue of both
Kurtin’s liability under section 2343 and, if he is found to be liable, the amount of
damages for which he will be liable, will be the subject of the new trial.
(3) Moreover, in the new trial on section 2343, if Elieff is found liable, the
amount of damages for which he will be liable will be governed by section 3318’s
“collected and recovered” language.
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Because each side has prevailed on at least one point, each side will bear its
own costs in this appeal.
RYLAARSDAM, ACTING P. J.
WE CONCUR:
ARONSON, J.
FYBEL, J.
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