Hagen v. La Jolla Bank

Filed 7/17/06 Hagen v. La Jolla Bank CA4/1

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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

CONSOLIDATED APPEALS from a judgment and an order of the Superior Court of San Diego County, Patricia A.Y. Cowett, Judge. Judgment affirmed, order reversed.

Larry and Lynda Hagen, Mary Crume and their closely-held corporation, Greville-Lacey, Ltd. (Limited; and collectively with the Hagens and Crume, the plaintiffs) sued La Jolla Bank (the Bank) arising out of its alleged failure to timely fund a business loan and a line of credit to Limited. The Hagens appeal a judgment dismissing their action after the trial court granted the Bank's motion for judgment on the pleadings as to all their causes of action, essentially contending that the allegations of their first amended complaint were sufficient to plead causes of action for breach of contract, breach of promise, negligence and negligent misrepresentation (Case No. DO45270). The Bank has filed a motion to dismiss this appeal contending that the Hagens' opening brief fails to comply with California Rules of Court, rule 14 (Rule 14) and that they lack standing to pursue this appeal. Lynda Hagen separately appeals from the trial court's order awarding the Bank $127,919.50 in attorney fees pursuant to the loan documents on the ground that the award is erroneous as a matter of law (Case No. DO46132). Prior to oral argument, we issued an order consolidating the cases for purposes of oral argument and disposition. We deny the motion to dismiss and affirm the ruling on the Bank's motion for judgment on the pleadings on the merits. We reverse the award of attorney fees against Lynda Hagen.

FACTUAL AND PROCEDURAL BACKGROUND

In accordance with the legal principles governing our review of the trial court's grant of a motion for judgment on the pleadings, the following factual recitation is based on the allegations of the plaintiffs' first amended complaint (see Gerawin Farming, Inc. v. Lyons (2002) 24 Cal.4th 468, 515-516).

Larry Hagen owned a 94 percent interest and Crume a 6 percent interest in Limited, a clothing manufacturer, designer and retailer. In about February 2002, Limited applied for a $596,000 small business loan from the Bank to fund its purchase of a business known as Trio Knitting Mills (Trio). (All further dates are in 2002 except as otherwise noted.) The Bank made a commitment to Limited that it would fund the loan on or before June 14, in part so that Limited's purchase of Trio would include accounts receivable of more than $1 million. The Hagens and Crume took out personal loans against their homes to provide funds to Limited, which thereafter spent money and entered into contracts based on the expectation that the Bank loan would close on June 14.

Notwithstanding its commitment, the Bank thereafter delayed funding the loan on numerous occasions and in July Limited opened a business bank account at another bank (U.S. Bank) and applied for a line of credit from U.S. Bank to cover certain costs to keep its purchase of Trio from being terminated. As a result of certain demands made by the Bank, however, U.S. Bank terminated its relationship with Limited.

The Bank apparently finally funded the loan in August and thereafter agreed to provide Limited with a line of credit for Limited's use in purchasing fabric, paying its employees and other business expenses. Based on the Bank's assurances that it would provide the line of credit by a specific date, Limited committed in writing to pay off certain outstanding debts to creditors by late February 2003; however, the Bank failed to provide Limited with the credit line. As a result of the Bank's delays and failure to provide the line of credit, Limited was unable to meet its contractual obligations and suffered substantial economic damages, which in turn caused economic and emotional injuries to the plaintiffs.

The plaintiffs filed this action against the Bank and, in their first amended complaint, asserted claims for breach of contract, breach of promise, negligence and negligent misrepresentation. The Bank moved for judgment on the pleadings as to the Hagens' claims, arguing in part that they lacked standing to sue for Limited's injuries and that it owed no duty to them. Over the Hagens' strenuous opposition, the court granted the motion without leave to amend on the grounds that: (1) the allegations of the first amended complaint failed to establish that the Bank owed the Hagens a duty of care as necessary to support their claims for negligence and negligent misrepresentation; (2) Lynda Hagen's assertion of a claim for negligent misrepresentation also failed because there were no allegations that the Bank made any representations to her at all; (3) the Hagens' breach of contract and breach of promise causes of action (a) were not supported by any allegations of the existence of a contract between the Bank and them; and (b) failed because the allegations showed that the alleged agreements violated the statute of frauds; and (4) Larry Hagen and Crume lacked standing to sue because the gravamen of their claims was for injury to Limited.

After Limited declined to pursue its claims, the court entered judgment in the Bank's favor. The Bank thereafter moved to recover its attorney fees, which the court granted in the amount of $127,919.50. The Hagens appeal.

DISCUSSION

1. Motion to Dismiss Appeal No. D045270

The Bank moves to dismiss the Hagens' appeal from the granting of judgment on the pleadings without leave to amend (No. D045270), on the grounds that (A) the Hagens' opening brief (their third) still fails to comply with Rule 14, notwithstanding that they were given two prior opportunities to correct the noncompliance and (B) the Hagens lack standing to assert claims that were rightfully Limited's. We discuss these issues in turn below:

A. Failure to Comply with Rule 14

The Bank correctly points out that the Hagens' opening brief fails to comply with Rule 14, particularly in failing to provide citations to the record in support of their assertion of facts and failing to articulate direct arguments as to how the court erred in granting the motion for judgment on the pleadings. (Rule (14)(a)(1)(B), (a)(1)(C).) Although parties who proceed in propria persona, like the Hagens, are not exempt from this rule (see Nwosu v. Uba (2004) 122 Cal.App.4th 1229, 1246-1247), we nonetheless decline the Bank's request to strike the Hagens' opening brief and effectively dismiss their appeal. Here, the relevant facts are those specified in the first amended complaint, which is included in the record before us, and the gist of the Hagens' challenges to the trial court's ruling is readily discernable from their brief; in fact, the matter has in fact been fully briefed on appeal by both sides. Under these circumstances, we exercise our discretion to consider the merits of the appeal. (Rule 14(e)(2)(C); see also Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 237.)

B. Standing

In its motion to dismiss, the Bank makes a cursory argument that the Hagens lack standing to assert arguments on behalf of Limited, which is no longer a party to this appeal. Although this argument is of course true (see generally Code Civ. Proc., § 902), it does not establish that the allegations of the first amended complaint are insufficient to support claims by the Hagens on their own behalf, a determination that can only be made by examining the sufficiency of the allegations and the court's ruling on the motion for judgment on the pleadings. Accordingly, we deny the Bank's motion and proceed to address the Hagens' appellate arguments on the merits. (See generally Bratcher v. Buckner (2001) 90 Cal.App.4th 1177, 1184; Ajida Technologies, Inc. v. Roos Instruments, Inc. (2001) 87 Cal.App.4th 534, 540 [recognizing that Code Civ. Proc., § 902 is a remedial statute that must be liberally construed in favor of the right to appeal].)

2. Judgment on the Pleadings

As noted above, the Hagens essentially contend that the court erred in granting the Bank's motion for judgment on the pleadings because the allegations of the first amended complaint were sufficient to support claims by them against the Bank. The Hagens have the burden on appeal to demonstrate that the court erred in granting the motion without leave to amend. (Rakestraw v. California Physicians' Service (2000) 81 Cal.App.4th 39, 42-43; Cloud v. Northrop Grumman Corp. (1998) 67 Cal.App.4th 995, 999.) We review the first amended complaint de novo to determine whether it alleges facts stating a cause of action under any legal theory. (Rakestraw v. California Physicians' Service, supra, 81 Cal.App.4th at pp. 42-43.)

A. Breach of Contract

A cause of action for damages for breach of contract must be supported by allegations establishing the following elements: (1) a contract between the parties, (2) the plaintiffs' performance or excuse for nonperformance of their obligations under the contract, (3) the defendant's breach of its contractual obligations, and (4) resulting damages to the plaintiffs. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1388.) Here, although the first amended complaint alleges the existence of a contract between the Bank and Limited, it does not set forth allegations of any contract between the Bank and the Hagens. In the absence of such allegations, the court correctly granted the Bank's motion for judgment on the pleadings as to the Hagens' claims for breach of contract. (See ibid.)

The Hagens nonetheless cite to the allegations of the first amended complaint that they detrimentally relied on the Bank's promises and contractual obligations to Limited by contributing their own personal funds, or funds obtained by virtue of collateral provided by them, to Limited, that the Bank knew this and that they suffered individual injuries, consisting of the loss of the invested funds and provided collateral, as a result of the Bank's alleged malfeasance. However, these allegations of reliance and injury as a result of the Bank's alleged breaches of its agreement with Limited is not sufficient to establish that the Hagens were entitled to assert a breach of contract cause of action against the Bank. (Saks v. Charity Mission Baptist Church (2001) 90 Cal.App.4th 1116, 1135 [recognizing that the mere fact that a person relied on another's promise to his injury, standing alone, will not give rise to a claim for breach of contract].) Accordingly, the Hagens' argument that the trial court erred in granting the Bank's motion for judgment on the pleadings as to their breach of contract claim fails.

B. Breach of Promise (Promissory Estoppel)

The equitable doctrine of promissory estoppel may be used to enforce a defendant's promise when the plaintiff has reasonably and foreseeably relied upon it. (Evid. Code, § 623; see Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, 1261.) Under the doctrine, a promise that the maker should reasonably expect to induce action or forbearance on the part of the promisee or a third person and that does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. (Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305, 310.) The elements of a claim for promissory estoppel are: (1) a promise that is clear and unambiguous in its terms; (2) reasonable and foreseeable reliance by the party to whom the promise is made; and (3) injury to the relying party. (Laks v. Coast Fed. Sav. & Loan Assn. (1976) 60 Cal.App.3d 885, 890.) The purpose of the promissory estoppel doctrine is "to make a promise binding, under certain circumstances, without consideration in the usual sense of something bargained for and given in exchange." (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 249.)

Here, the alleged promise by the Bank was to fund the loan to Limited by June 14. These circumstances essentially establish a promise by the Bank to Limited, enforceable by Limited, not the Hagens and in fact, Limited pursued this claim in the proceedings below. Since Limited had a remedy, enforcement of the promise the Bank is alleged to have made in favor of the Hagens is not required to avoid injustice. Therefore, the court also properly granted the motion for judgment on the pleadings as to the Hagens' claim for breach of promise.

C. Negligence and Negligent Misrepresentation

The Hagens' first and fourth causes of action, although labeled "negligence" and "negligent misrepresentation," respectively, are essentially substantive restatements of their claims for breach of contract and breach of promise as torts. The negligence cause of action alleges that, despite the Bank's promises to fund the loan and to provide a line of credit by specified dates, the Bank failed to process the necessary documentation in a timely fashion to meet the promised deadlines. The negligent misrepresentation cause of action alleges that at the time the Bank made the promises to fund the loan, it had no reasonable belief that the loan would be timely funded. "The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion." (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 57 (Quelimane), quoting Rest.2d Torts, § 281, subd. (a) & 6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 732, p. 60.) The trial court concluded that the Hagens' allegations were insufficient to establish that the Bank owed them a duty of care, as necessary to support a claim for negligence. For the reasons that follow, we agree with the trial court's conclusion.

There are limited circumstances when the breach of a contract will give rise to a tort claim:

"'The traditional goal of contract remedies is compensation of the promisee for the loss resulting from the breach, not compulsion of the promisor to perform his promises. Therefore, "willful" breaches have not been distinguished from other breaches. . . .The restrictions on contract remedies serve purposes not found in tort law. They protect the parties' freedom to bargain over special risks and they promote contract formation by limiting liability to the value of the promise. This encourages efficient breaches, resulting in increased production of goods and services at lower cost to society. [Citation.] Because of these overriding policy considerations, the California Supreme Court has proceeded with caution in carving out exceptions to the traditional contract remedy restrictions. [Citation.]'" (Harris v. Atlantic Richfield Co. (1993) 14 Cal.App.4th 70, 77.)

"'Generally, outside the insurance context, "a tortious breach of contract . . . may be found when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion; or, (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages. [Citation.] . . . ."'" (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 990, quoting Erlich v. Menezes (1999) 21 Cal.4th 543, 553-554.) Thus, as explained by the California Supreme Court, a breach of contract will give rise to tort liability only if there is a duty that arises completely independent of the contract or where the conduct is both intentional and intended to harm. (Robinson Helicopter Co., Inc. v. Dana Corp., supra, 34 Cal.4th at pp. 989-990.) The law does not allow an award of tort damages for merely negligent breaches of a contract because doing so would render the limitation on contract damages and the statutory distinction between tort and contract remedies "meaningless." (Erlich v. Menezes, supra, 21 Cal.4th at pp. 553-554.)

As described above, the Bank's alleged duty to process Limited's loan and line of credit did not arise independently of its contract with Limited, but was, in accordance with the allegations of the first amended complaint, part and parcel of that contract. Further, the first amended complaint does not allege that the Bank's failure to fund the loan and provide the line of credit was both intentional and intended to harm Limited. As such, it is questionable that the existing allegations would have supported a negligence claim by Limited arising out of the Bank's alleged failure to follow through on its promises to provide funds by specific dates.

Even if the foregoing principles allowed Limited, as the contracting party, to pursue a negligence claim against the Bank, however, this does not mean that the Hagens are similarly entitled to pursue such a claim. Recognition of a duty to manage one's business affairs so as to prevent purely economic loss to third parties in their financial transactions is the exception, not the rule, in negligence law. (Quelimane, supra, 19 Cal.4th at p. 57.) Although privity of contract is no longer a prerequisite to the recognition of a duty in the business context, such a duty will exist only where public policy so dictates. (Id. at p. 58, citing Connor v. Great Western Sav. & Loan Assn. (1968) 69 Cal.2d 850, 865 [construction lender that was actively involved in the construction enterprise was liable to third party purchasers of defective homes].) Whether the defendant in a specific case will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, including (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to him, (3) the degree of certainty that he suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct, and (6) the policy of preventing future harm. (Biakanja v. Irving (1958) 49 Cal.2d 647, 650.)

Applying these principles here, we conclude that any duty owed by the Bank was to Limited rather than to the Hagens. The loan and line of credit transactions were intended for the primary benefit of Limited. Although this would have had an indirect effect (whether benefit or harm) on Limited's shareholders (including the Hagens), the Hagens do not cite us to any authority, nor have we found any, recognizing a duty on the part of a lender to avoid business decisions even though those decisions might affect the financial interests of its borrower's principals. Further, the law is clear that the mere foreseeability of financial injury to third persons alone does not provide a basis for imposing liability for negligent conduct. (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 399.) The facts alleged in the first amended complaint simply do not present the exceptional circumstance in which a duty of care to third parties is recognized. The trial court correctly granted the Bank's motion for judgment on the pleadings as to this cause of action.

D. Conclusion

For the foregoing reasons, we conclude that the law supported the trial court's decision to grant the Bank's motion for judgment on the pleadings.

3. Attorney Fee Award

Lynda Hagen also appeals the trial court's award of attorney fees against her, contending the court erred as a matter of law in awarding fees because she was not a signatory to the contract containing the attorney fee provision. The Bank responds with two arguments: (A) Lynda Hagen was a party to a deed of trust in its favor that included an attorney fee provision; and (B) it would be entitled to recover fees even if she had not been a signatory to the loan documentation, based on her mere allegations that she was entitled to recover fees pursuant to such a contract.

As to the Bank's first contention, the Bank submitted evidence in support of its motion for attorney fees that Lynda Hagen had signed a deed of trust authorizing the recovery of attorney fees in its favor in "any suit or action [by it] to enforce any of the terms of this Deed of Trust . . . ." The difficulty with this argument, however, is that this action did not refer to, nor did the Hagens seek to recover attorney fees based on, the Deed of Trust and accordingly, the attorney fee provision contained in it is, in accordance with its own terms, inapplicable here. (Compare Torrey Pines Bank v. Hoffman (1991) 231 Cal.App.3d 308, 325 [where bank brought an action to enforce individual loan guaranties, the guarantors were entitled to recover attorney fees against it despite the fact that the trial court found the guaranties unenforceable under California's antideficiency laws].)

The Bank's second contention is essentially based on the notion that a party who seeks to recover fees pursuant to a contract is thereafter judicially estopped to deny that he or she was a party to the contract if the opposing party prevails and requests an award of attorney fees. This theory has found acceptance in a few appellate decisions (see International Billing Services, Inc. v. Emigh (2000) 84 Cal.App.4th 1175, 1186-1192; Manier v. Anaheim Business Center Co. (1984) 161 Cal.App.3d 503, 508; Pas v. Hill (1978) 87 Cal.App.3d 521, 535-536), but has been criticized and rejected in others, including decisions of this court. (Super 7 Motel Associates v. Wang (1993) 16 Cal.App.4th 541, 548-549; see also Sessions Payroll Management, Inc. v. Noble Construction Co. (2000) 84 Cal.App.4th 671, 681-682; Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949, 962, fn. 12; Leach v. Home Savings & Loan Assn. (1986) 185 Cal.App.3d 1295, 1307; Saucedo v. Mercury Sav. & Loan Assn. (1980) 111 Cal.App.3d 309, 312-313.) We conclude that the analysis of these latter cases provides the more sound reasoning and thus we adhere to the rule that the mere allegation of an entitlement to recover attorney fees under a contract is not sufficient to trigger a reciprocal right to recover attorney fees pursuant to Civil Code section 1717 in favor of the opposing party. (Alhambra Redevelopment Agency v. Transamerica Financial Services (1989) 212 Cal.App.3d 1370, 1381 [holding that a reciprocal right to recover attorney fees "is only created where the party alleging he or she is entitled to attorney's fees 'actually would have been entitled to receive them if he or she had been the prevailing party'"].) Accordingly, we reverse the order awarding the Bank its attorney fees against Lynda Hagen. The Bank's motion to strike the exhibits attached to Lynda Hagen's reply brief is moot.

DISPOSITION

The judgment is affirmed, but the order awarding the Bank its attorney fees against Lynda Hagen is reversed. Each party is to bear its own costs on appeal.

McINTYRE, J.

WE CONCUR:

HUFFMAN, Acting P.J.

NARES, J.

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