California

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT DIVISION THREE

G032152

2004.CA.0005952

June 30, 2004

JUDY RAPHAEL, PLAINTIFF, CROSS-DEFENDANT AND RESPONDENT,
v.
KEVIN HILL ET AL., DEFENDANTS, CROSS-COMPLAINANTS AND APPELLANTS; KEVIN D. HILL & ASSOCIATES, INC., DEFENDANT AND APPELLANT.

Appeal from a judgment of the Superior Court of Orange County, Richard J. Beacom, Judge. (Retired judge of the Orange Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Affirmed. (Super. Ct. No. 01CC13557)

Harbin & McCarron, Bruce A. Harbin, Andrew McCarron and Peter C. Holzer for Defendants, Cross-complainants and Appellants and for Defendant and Appellant.

Fingal, Fahrney & Clark and Christopher R. Clark for Plaintiff, Cross-defendant and Respondent.

The opinion of the court was delivered by: Fybel, J.

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OPINION

INTRODUCTION

Defendant and cross-complainant Kevin Hill entered into a stock purchase agreement and consulting agreement (the agreements) with plaintiff and cross-defendant Judy Raphael, in connection with Hill's acquisition of Raphael's 50 percent ownership interest in JLS Real Estate Inc. (JLS). After Hill defaulted on payments under the agreements, Raphael sued Hill, JLS, and Kevin D. Hill & Associates, Inc. (the defendants), for breach of contract, fraud, declaratory relief, and intentional infliction of emotional distress. She alleged Hill, JLS, and Kevin D. Hill & Associates were the alter egos of each other. Hill and JLS cross-complained against Raphael for breach of contract, fraudulent inducement, intentional misrepresentation, negligent misrepresentation, and recission. Before trial, Raphael dismissed her intentional infliction of emotional distress claim, and Hill and JLS dismissed their recission claim.

With regard to Raphael's complaint, (1) the jury found Hill liable and awarded Raphael the sum of $198,791.63 on her breach of contract claim against Hill; (2) the trial court found Hill, on the one hand, and JLS and Kevin D. Hill & Associates, on the other, are the alter egos of each other; and (3) the trial court found Hill had "gutted" JLS of its assets. With regard to Hill and JLS's cross-complaint, the jury found Raphael liable to Hill and JLS for fraudulent inducement and negligent misrepresentation. The jury awarded Hill and JLS the sum of $82,484.67 on their negligent misrepresentation claim and no damages on their fraudulent inducement claim.

The trial court granted Raphael's motion for judgment notwithstanding the verdict, striking the jury's finding of liability on Hill and JLS's fraudulent inducement and negligent misrepresentation claims on the ground there was no substantial evidence to support those claims. The trial court denied the defendants' motion for judgment notwithstanding the verdict which attacked Raphael's breach of contract award.

On appeal, the defendants contend the trial court erred by (1) granting Raphael's motion for judgment notwithstanding the verdict in light of substantial evidence supporting their claims for fraudulent inducement and negligent misrepresentation; (2) ordering judgment on the jury's award of money damages in favor of Raphael on her breach of contract claim because the jury's finding that Raphael was liable for fraudulent inducement rendered the agreements voidable; and (3) ordering judgment on the jury's verdict awarding Raphael money damages on her breach of contract claim because the agreements provided that Raphael's sole remedy was to take back her ownership interest in JLS.

There was not substantial evidence of reliance by Hill and JLS in support of their claims for fraudulent inducement and negligent misrepresentation. Therefore, the trial court did not err by granting Raphael's motion. Because Raphael was not liable for fraudulent inducement, the agreements were not voidable on that ground. The trial court's finding that Hill depleted JLS's assets, leaving nothing to restore to Raphael, was supported by substantial evidence. Therefore, the trial court did not err by entering judgment on the jury's verdict awarding Raphael money damages on her breach of contract claim. We therefore affirm.

FACTUAL BACKGROUND

I. The Parties

In early 2000, Raphael owned 50 percent of JLS, doing business as Fred Sands Coastal Properties, and Pacific Coast Properties, Inc. (Pacific Coast), doing business as Fred Sands Newport Properties. JLS was located in Dana Point and Pacific Coast was located in Newport Beach. Lois Simmons owned the other 50 percent of both entities. At trial, Raphael testified that JLS had been a profitable business but Pacific Coast had not been profitable since its inception in 1996.

By March 2000, Hill had 10 years' experience working in the real estate field and had managed a real estate office. In April or May 2000, Hill purchased Simmons's 50 percent ownership interests in JLS and Pacific Coast.

From April 2000 through September 2000, Raphael and Hill comanaged JLS and Pacific Coast. Hill's responsibilities as a co-owner included sharing in recruiting, training, and all aspects of management. During his co-ownership with Raphael, Hill was aware that Pacific Coast was losing money and always had since 1996. He was also aware that Simmons and Raphael had personally loaned money, or arranged for JLS to loan money, to Pacific Coast to keep it afloat.

Hill had access to the corporate books and records and accounting records relating to the operations of both businesses. Within a month of Hill's acquisition of Simmons's interests in JLS and Pacific Coast, he brought in a new accountant, Joan Cacali, to do the bookkeeping because he did not like the accountant who had been doing the books. Raphael met with Cacali for the purpose of bringing all of the records to her so that she could "set up the books the way she wanted them."

In the summer of 2000, Hill was aware Fred Sands had sent a letter stating JLS's franchise was not going to be renewed because franchise fees had been paid late. Hill knew Fred Sands agreed to provide only a six-month extension of the franchise through the end of 2000. Hill was uncertain whether the franchise would be renewed past the six-month extension.

II. Raphael and Hill's Negotiations

Raphael testified that she and Hill had "different leadership styles." Hill testified they were not seeing "eye to eye" on a business level. Pacific Coast was not profitable, and Raphael and Hill could not agree on what to do about it. At the end of August 2000, Hill became interested in purchasing Raphael's ownership interest in JLS.

In August 2000, Raphael and Hill began discussing whether they should sell Pacific Coast to a third party or whether Hill should buy Raphael's ownership interest in JLS. Hill told Raphael he was interested in buying Raphael's ownership interest in JLS. Raphael said she wanted the same agreement that Hill had entered into with Simmons a few months earlier. Hill understood his agreement with Simmons to provide that "if [Hill] didn't want the business anymore or they wanted it back or [he] couldn't make payments, just they would send it to [him] in writing and they can have the business back, no harm, no foul. They take it over and run with it again." Hill characterized the agreement as "kind of a zero down, take over the payments, and give it back if it doesn't work." The record on appeal does not contain a copy of the Hill-Simmons agreement.

Hill conducted some due diligence to satisfy himself that he wanted to go forward and buy Raphael's ownership interest in JLS. He testified he had plenty of opportunity to have any books, records, and corporate records reviewed by his attorney or by Cacali. Before signing the agreements, Hill reviewed the financials of the company with Cacali. She did not advise him to go ahead and sign the agreements. Instead, Cacali told Hill "it would be real scary, what's going on." Hill told Cacali, "well, the recourse is they can take the company back if they want to. That's what my agreement had been with - with Lois [Simmons], and that's what I was working off when I was talking to her." Cacali told Hill to proceed at his own risk.

III. The Stock Purchase Agreement and the Consulting Agreement

On September 10, 2000, Hill and Raphael entered into a written stock purchase agreement and a written consulting agreement. The stock purchase agreement provided Raphael would sell her 50 percent ownership interest in JLS to Hill and that Hill would sell his 50 percent ownership interest in Pacific Coast to Raphael. In addition, Hill agreed to: (1) pay Raphael $500 for the shares; (2) repay Raphael $80,000 owed to her by JLS for accrued salary and an outstanding loan; (3) secure the $80,000 debt with a second trust deed against real property owned by Hill; (4) pay Raphael an additional $40,000 for consulting fees pursuant to a consulting agreement; and (5) assume a loan with Sun Country Bank for the sum of $100,000.

The consulting agreement provided that Hill would pay Raphael $39,500 *fn1 for being available to provide consulting services for JLS. The consulting agreement included a paragraph which provided that in the event of Hill's default, Raphael's sole remedy was to purchase Hill's shares of JLS under terms set forth in the consulting agreement. Although the stock purchase agreement referred to the consulting agreement, it did not incorporate the terms of the consulting agreement. The consulting agreement did not incorporate the terms of the stock purchase agreement. Hill testified he read and signed the agreements.

IV. The Parties' Performance Under the Agreements

Pursuant to the terms of the stock purchase agreement, Raphael transferred all the JLS stock she owned to Hill. She also resigned as an officer and a director of JLS.

Raphael was paid $500 under the stock purchase agreement. Hill owed $29,500 under the consulting agreement. After the agreements were signed, Hill did not obtain a deed of trust to secure the $80,000 note and, as of trial, Raphael had received no payment on the $80,000 note. Raphael learned Hill did not qualify to assume the $100,000 bank loan. With regard to the loan, Raphael and Hill renegotiated and Raphael agreed to accept Hill's promissory note for $95,000. *fn2 Only $24,768.85 had been paid on the promissory note. Hill accrued late charges on the $80,000 debt and the consulting agreement payments.

At the time of trial, Hill did not dispute he owed $198,791.63 to Raphael under the terms of the agreements.

V. Events Following the Execution of the Agreements

After the agreements were signed, Raphael decided she could not "carry" Pacific Coast. On September 23, 2000, Raphael sold Pacific Coast to Tom Parisi who was a manager at Pacific Coast.

Two months later, Fred Sands announced he was selling his company to Coldwell Banker. JLS's franchise agreement with Fred Sands expired December 30, 2000, and Fred Sands did not renew the franchise agreement. Hill continued selling real estate out of JLS's office, using Fred Sands's signage until Hill entered into an agreement to become a Century 21 franchise. The new Century 21 franchise was operated by Kevin D. Hill & Associates-an entity solely owned by Hill-out of the same office space previously used by JLS. JLS's assets were transferred to Kevin D. Hill & Associates. A majority of the agents who worked for JLS switched over to work for the Century 21 operation. As a result, JLS was left with no assets and is essentially a shell company that does not operate a business.

PROCEDURAL BACKGROUND

Raphael filed suit. Her first amended complaint alleged (1) breach of contract against the defendants; (2) fraud against Hill and Kevin D. Hill & Associates; (3) a claim for declaratory relief against the defendants; and (4) intentional infliction of emotional distress against Hill and Kevin D. Hill & Associates. The first amended complaint also alleged JLS and Kevin D. Hill & Associates are the "instrumentality, conduit, adjunct and alter-ego" of Hill, and vice versa.

Hill and JLS filed a cross-complaint against Raphael, alleging claims for breach of contract, fraudulent inducement, intentional misrepresentation, negligent misrepresentation, and recission.

Before trial, Raphael dismissed the intentional infliction of emotional distress claim, and Hill and JLS dismissed the claim for recission.

The jury found in favor of Raphael on her breach of contract claim against Hill only and awarded damages against Hill in the amount of $198,791.63. The jury found in favor of the defendants on Raphael's fraud claim.

On Hill and JLS's cross-complaint, the jury found in favor of Raphael on the claims for breach of contract and intentional misrepresentation. The jury found Raphael liable to Hill and JLS on the fraudulent inducement claim, but awarded them zero damages. The jury also found in favor of Hill and JLS on their negligent misrepresentation claim and awarded them $82,484.67.

Following trial, the trial court made findings with regard to Raphael's alter ego allegation and found that Hill, on the one hand, and JLS and Kevin D. Hill & Associates, on the other, were alter egos of each other.

The parties filed several posttrial motions. In Raphael's motion for judgment notwithstanding the verdict, Raphael challenged the jury's finding of liability on the fraudulent inducement and negligent misrepresentation claims. The trial court granted Raphael's motion.

In the defendants' motion for judgment notwithstanding the verdict, they argued the jury's finding that Raphael was liable to Hill and JLS for fraudulent inducement rendered the agreements voidable, and therefore "vitiate[d]" the jury's verdict in favor of Raphael on her breach of contract claim. The trial court denied the defendants' motion.

The defendants appealed.

DISCUSSION

I.

The Trial Court Properly Granted Raphael's Motion For Judgment Notwithstanding the Verdict Because No Substantial Evidence Supported a Finding of Reliance on Any Misrepresentations or False Promises.

The defendants contend the trial court erroneously granted Raphael's motion for judgment notwithstanding the verdict because there was substantial evidence to support their claims for fraudulent inducement and negligent misrepresentation.

"`The trial judge's power to grant a judgment notwithstanding the verdict is identical to his [or her] power to grant a directed verdict [citations]. The trial judge cannot reweigh the evidence [citation], or judge the credibility of witnesses. [Citation.] If the evidence is conflicting or if several reasonable inferences may be drawn, the motion for judgment notwithstanding the verdict should be denied. [Citations.] "A motion for judgment notwithstanding the verdict of a jury may properly be granted only if it appears from the evidence, viewed in the light most favorable to the party securing the verdict, that there is no substantial evidence to support the verdict. If there is any substantial evidence, or reasonable inferences to be drawn therefrom, in support of the verdict, the motion should be denied." [Citation.]'" (Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 877-878.) "In passing upon the propriety of a judgment notwithstanding the verdict, appellate courts view the evidence in the light most favorable to the party who obtained the verdict and against the party to whom the judgment notwithstanding the verdict was awarded. [Citations.] In other words, we apply the substantial evidence test to the jury verdict, ignoring the judgment." (Hasson v. Ford Motor Co. (1977) 19 Cal.3d 530, 546, overruled on other grounds in Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 574, 580.)

In the cross-complaint, Hill and JLS alleged Raphael fraudulently induced them to enter into the stock purchase agreement, "based on [false] representations about the profitability of the business and the productivity of its agents, the business['s] standing in the community, its client base, goodwill[,] the strength of the franchisor and its commitment to the business." Hill and JLS's claim for negligent misrepresentation is based on the same alleged false representations.

The jury was instructed that the elements of a fraud claim based on a false promise include "[t]he moving party must have been unaware of the responding party's intention not to perform the promise; he or she must have acted in reliance upon the promise." The jury was similarly instructed that reliance had to be proved to prevail on a claim for negligent misrepresentation. The jury was further instructed that "[a] party claiming to have been defrauded by a false representation or promise must have relied upon the representation or promise; that is, the representation or promise must have been a cause of that party's conduct in entering into the transaction and without such representation or promise the party would not have entered into the transaction."

In granting Raphael's motion for judgment notwithstanding the verdict, the trial court stated, "The court reiterates the fact that the testimony revealed that Mr. Hill had been a partner in the business that he purchased, that he had complete access to the books, that he had . . . access to the company accountant, that he was advised by the company accountant that she would not recommend the purchase. His own testimony was that he made absolutely no inquiry into the financial condition. He was relying on the possibility that he could simply bail out if he didn't like it." The court further stated, "In a nut shell, he did not rely on any representation, implied or express, made by the seller in this transaction."

Viewing the evidence most favorably to Hill and JLS, we conclude the record on appeal is devoid of any evidence they relied on any alleged misrepresentations by Raphael in entering the stock purchase agreement.

At trial, Hill testified: (1) he had access to JLS's books and records, including profit and loss statements from July 1, 1999 through August 24, 2000; (2) he did not review JLS's prior tax returns to learn the state of the business as presented to the Internal Revenue Service and the Franchise Tax Board because Simmons had told him, "it was not doing real well because it had such a negative cash flow from [Pacific Coast] and it wasn't doing well"; (3) he believed if "it didn't work out, give it back. Zero down, take over the payments. If it doesn't work, give it back. Or if they requested it back, whatever"; (4) after the agreements were signed, he was surprised that JLS immediately owed $90,000 in commissions, but admitted he previously had some information about sales and revenue which he thought was enough to go forward with the agreements because "again, zero down, take over the payments" and "if it doesn't work, they can request it back"; (5) he was aware there were outstanding loans owed to JLS by Pacific Coast before September 10, 2000, but did not know the specifics; (6) Cacali warned him the company's finances were "real scary" and to "proceed at your own risk"; and (6) he did not recall asking Cacali's opinion whether to purchase JLS "because I knew it was a sinking business, going down financially. It needed to be taken up by recruiting new agents and injecting blood in it, cutting off the losses of [Pacific Coast], doing that sort of thing. . . . [] And the end caveat was that if it didn't work, default on the note, they could take it back for any undue balance on whatever I owed them."

In addition to the foregoing, during redirect examination of Hill by Raphael's counsel under Evidence Code section 776, Hill testified as follows:

"Q. Okay. So before concluding the sale and signing the documents, you knew as far as you were - you believed and were concerned that the business was in disarray and going downhill, right?

"A. I knew [Pacific Coast] for sure was and I wasn't clear on the status of JLS in Dana Point.

"Q. All right. And you had reviewed the books and records or had access to books and records to review to satisfy yourself as to whether you wanted to go through with the purchase?

"A. Yes. Still unclear on a lot of things. They were on the books. I said I'll close my eyes because if it doesn't work, give it back to them.

"Q. You were unclear on the Fred Sands franchise, how long that would continue before you closed purchasing Ms. Raphael's interests, correct?

"A. Correct.

"Q. Knowing all this, the uncertainties about the business, the books and records that you either didn't understand or didn't need to go through in detail because you felt if it didn't work out, you'd just give it back?

"A. It was a caveat. If I was on the hook for their mistakes over the last three or four years, if I thought for a minute I would be financially there, then I wouldn't have done it.

"Q. Okay. So knowing all that, you went forward with the transaction. And if it didn't work out, you'd exercise an option to give the business back?

"A. They could request it back if I defaulted on payments."

The appellate record does not show Hill relied on any misrepresentation or promise by Raphael, but he relied on his understanding that if he defaulted on his obligations under the agreements, his exposure was simply to hand JLS back to Raphael. Hill's understanding of the consequences he would face in the event he defaulted is not supported by our record. The stock purchase agreement, under which Hill owed over $150,000, does not include an exclusive remedy provision and does not incorporate the exclusive remedy provision contained in the consulting agreement. (See Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 956 ["`[i]t is the objective intent, as evidenced by the words of the contract, rather than the subjective intent of one of the parties, that controls interpretation'"].)

There was not substantial evidence of reliance on any alleged misrepresentation by Raphael; therefore, Hill and JLS's fraudulent inducement claim as well as their negligent misrepresentation claim failed on that basis. Because Hill and JLS's fraudulent inducement claim was not supported by substantial evidence, we need not reach Hill and JLS's argument that the jury's finding Raphael was liable for fraudulent inducement allowed Hill to void the agreements.

II. Raphael Was Properly Awarded Money Damages on Her Breach of Contract Claim.

The defendants argue the trial court's award of money damages to Raphael is "contrary to the contractual remedy" available to Raphael under the terms of the consulting agreement.

The consulting agreement contains the following provision: "In the event Customer fails to make a monthly payment of the consulting fee on or before the 30th day of any calendar month, a late fee of 5% will be imposed, and due on or before due date of next payment. In the event Customer fails to make more than three (3) consecutive payments of the Consulting Fee, Consultant shall have the right upon written notice to Customer, to purchase his shares of the Company owned by Customer, for a purchase price equal to the remaining unpaid balance of the Consulting Fee unless Customer, within thirty days (30) of receipt of notice, pays to Consultant the delinquent installments of the Consulting Fee which are unpaid as of the date of receipt of Consultant's notice. Consultant's sole remedy in the event of such default shall be to exercise it[s] purchase right as set forth in this paragraph."

The stock purchase agreement twice referenced the consulting agreement: (1) "Kevin to pay Judy an[] additional $40,000 for Consulting. See Consulting Agreement attached"; and (2) "Judy and Kevin shall have executed and delivered a Consulting Agreement upon the terms and conditions set forth in a separate agreement between Kevin and Judy." The stock purchase agreement does not incorporate the exclusive remedy term contained in the consulting agreement. Therefore, Raphael could recover money damages for breach of the stock purchase agreement, but not for breach of the consulting agreement.

Although the agreements were attached to Raphael's original complaint and to her first amended complaint, the appellate record does not show Hill attempted to enforce the exclusive remedy provision contained in the consulting agreement during this litigation. Our record does not show Hill objected to jury instructions or the verdict form providing that Raphael could be awarded money damages upon a finding Hill breached the agreements. None of Hill's posttrial motions raised this issue either.

In ruling on the parties' posttrial motions and making findings on Raphael's alter ego allegations, the trial court stated, "It's noteworthy that with respect to the defendant/cross-complainant's desire to just void the contract, it's impossible. Mr. Hill has totally dissolved that company." The court further stated, "[T]he record should reflect, and it will reflect, that in ruling on the alter ego pleading, that the court made findings that [Hill] essentially gutted the company that he bought [JLS], that he depleted all the assets. He's in no position to try and void the contract after these several years, and there's nothing to restore. [] So that's the ruling."

The finding that Hill had "gutted" JLS of its assets such that there was nothing to restore to Raphael should the consulting agreement's exclusive remedy provision be enforced was supported by substantial evidence.

At trial, Hill testified: (1) after September 10, 2000, he was an officer and a director and the sole shareholder of both JLS and Kevin D. Hill & Associates; (2) he personally operated both companies; (3) in February 2001, he turned JLS's office space into a Century 21 office; (4) the Century 21 office was operated by Kevin D. Hill & Associates, not JLS; (5) the Century 21 office used the same furniture, computer, and phone number previously used by JLS; (6) a majority of the agents who had worked for JLS switched over to work for the Century 21 office; (7) he "changed the name from one day to the next between Fred Sands and Century 21" and "everything else pretty much stayed the same"; ( "the new named office operating with the same people and equipment and phone number and everything else was now being . . . owned by Kevin D. Hill & Associates, not JLS"; and (9) JLS is "dormant."

The following colloquy occurred during Raphael's counsel's direct examination of Hill under Evidence Code section 776:

"Q. Now JLS Real Estate, since that switch-over, doesn't have any assets,[ *fn3 ] does it?

"A. No.

"Q. And it's essentially now a shell company; it doesn't operate a business?

"A. Correct.

"Q. And that's the company that you would like to give back to Ms. Raphael?

"A. If she requests it back, yes.

"Q. The JLS Real Estate, the shell company?

"A. Yes."

Hill's own testimony established that his actions rendered Raphael's sole remedy under the consulting agreement worthless. Substantial evidence supported the trial court's finding there was nothing to return to Raphael. The trial court did not err by entering judgment on the jury's award for money damages on Raphael's breach of contract claim.

DISPOSITION

The judgment is affirmed. Respondent to recover her costs on appeal.

WE CONCUR:

O'LEARY, ACTING P. J.

ARONSON, J.

Opinion Footnotes

*fn1 The $500 Hill paid for the shares was credited toward the amount owed for consulting fees under the stock purchase agreement.

*fn2 A principal reduction payment in the amount of $5,000 had already been paid toward the loan before Hill executed the promissory note, thereby reducing the obligation from $100,000 to $95,000.

*fn3 Later, Hill testified that JLS had outstanding loans it had made to Pacific Coast for which it had not been repaid.

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