McCLAIN v. OCTAGONPLAZA

Filed 1/31/08; reposted to provide correct title

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

Story continues from Part I ..

The FAC also alleges that Octagon breached the implied covenant by negotiating the [common expenses] charges with her on a per-square foot basis, which Octagon held out as a reflection of the ratio which the Premises held to [the] size of the Shopping Center as a whole. Octagon falsely represented the ratio to be 23 [percent]. Octagon induced McClain to enter into the Lease which provided that her proportional share of the annual [common] expenses were [sic] 23 [percent], when it knew or had reason to know that the true ratio was substantially less. Finally, the FAC alleges that Octagon breached the implied covenant because the Charanians repeatedly assured McClain that their representations were trustworthy.

Insofar as these allegations assert that Octagon violated the implied covenant during the negotiations of the lease, they fail to state a claim. As the court explained in Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031-1035, the implied covenant is a supplement to an existing contract, and thus it does not require parties to negotiate in good faith prior to any agreement.

In an apparent effort to avoid the operation of this principle, McClain contends that the FAC alleges -- or can be amended to allege -- that before the parties executed the lease, they entered into another agreement with materially different terms regarding McClains rent. She argues that Octagon breached the implied covenant by inserting erroneous figures for the base rent and the [common expense] charges into the [l]ease which did not reflect the contract terms upon which the parties had mutually agreed and which McClain had intended.

No such allegation can cure the deficiency explained above. It contradicts the allegations in the FAC and McClains original complaint that McClain accepted the Charanians representations about the size of her unit and her share of the common expenses, which were incorporated into the lease. Generally, [a] plaintiff may not avoid a demurrer by pleading facts or positions in an amended complaint that contradict the facts pleaded in the original complaint or by suppressing facts which prove the pleaded facts false. [Citation.] Likewise, the plaintiff may not plead facts that contradict the facts or positions that the plaintiff pleaded in earlier actions or suppress facts that prove the pleaded facts false. [Citation.] (Cantu v. Resolution Trust Corp., supra, 4 Cal.App.4th at p. 877, italics omitted.) That is the case here.

4. Declaratory Relief

Because the FAC adequately alleges a fraud claim based on misrepresentations about her proper base rent and share of the common expenses under the lease (see pt. A.2., ante), the trial court erred in sustaining the demurrer to McClains claim for declaratory relief. As the court explained in Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 605: The existence of an actual controversy relating to the legal rights and duties of the respective parties, suffices to maintain an action for declaratory relief. [Citation.] Code of Civil Procedure section 1060 is clear: Any person interested under a written instrument, . . . or under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property, . . . may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court . . . for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or contract. Here, the FAC adequately alleges an actual controversy regarding McClains obligations to pay rent and other expenses under the lease, and thus pleads a claim for declaratory relief.

B. CCRAA Claim

McClain contends that the trial court erred in determining that she failed to establish her claim under the CCRAA. For the reasons explained below, we disagree.

Generally, the CCRAA limits the dissemination of consumer credit information. (Olson v. Six Rivers National Bank (2003) 111 Cal.App.4th 1, 8.) Under Civil Code section 1785.3, subdivision (c), a [c]onsumer credit report is defined as any written, oral, or other communication of any information by a consumer credit reporting agency bearing on a consumers credit worthiness, credit standing, or credit capacity, which is used or is expected to be used, or collected in whole or in part, for the purpose of serving as a factor in establishing the consumers eligibility for: (1) credit to be used primarily for personal, family, or household purposes, or (2) employment purposes, or (3) hiring of a dwelling unit . . . , or (4) other purposes authorized in Section 1785.11.[1] The definition expressly exempts certain categories of credit reports, including reports furnished for use in connection with a transaction which consists of an extension of credit to be used solely for a commercial purpose. ( 1785.3, subd. (c).)

Section 1785.11 authorizes consumer credit reporting agencies to provide a consumer credit report without the consumers prior written consent only in enumerated circumstances. Pertinent here is subdivision (a)(3)(F), which permits an agency to provide a consumer credit report to a person it has reason to believe

has a legitimate business need for the information in connection with a business transaction involving the consumer. Also of importance here are subdivisions (a)(1) and (a)(2) of section 1785.19, which authorize the imposition of a civil penalty not exceeding $2,500 on any person who knowingly and willfully obtains access to or data from a consumers credit file other than as provided in Section 1785.11.
Only [c]onsumer credit reporting is subject to the CCRAA. ( 1785.41.) Section 1785.41 provides: Commercial credit reports, which differ significantly, are not subject to [the CCRAA]. The circumstances, business practices, and reports themselves differ sufficiently to make it impractical to include commercial credit reports under the [CCRAA]. With exceptions not relevant here, section 1785.42 defines a commercial credit report as any report provided to a commercial enterprise for a legitimate business purpose, relating to the financial status or payment habits of a commercial enterprise which is the subject of the report.
At trial, McClain contended that the Charanians violated the CCRAA by improperly obtaining her credit report without her consent. The evidence at trial established that in February 2005, Ted Charanian opened an online credit information account with Citi Credit Bureau (Citi), and that in March 2005, he obtained a credit report on McClain from Citi. McClain testified that she never authorized the Charanians to gain access to her personal credit information. In addition, she submitted testimony from Jimmy Yu, a Citi employee, and records from Citi, indicating that Ted Charanian had stated that his purpose in opening the Citi account was Tenant screening, management for self.

Ted Charanian testified as follows: When McClain sought to lease her unit, she submitted a personal financial statement that identified her annual income from A+ Teaching Supplies as $25,000 per year, and also stated that her husbands annual income was $170,000. Reassured by McClains substantial financial resources, the Charanians permitted her to lease the second largest unit in the shopping center. Subsequently, at a deposition in September 2004, Ted Charanian learned that McClains husband had opened a small business and no longer earned $170,000 per year. In December 2004, McClain paid her rent in an unusual manner: she submitted two checks, only one of which was drawn on her business account.

In February 2005, Ted Charanian decided to open the Citi account to get a better handle on, if possible, the economic viability of both current and prospective . . . [c]ommercial tenants. He explained his purposes to Citis representative during phone conversations and filled out the Citi application in accordance with the representatives advice. In view of McClains unusual rent payment and an apparent reduction in the number of her customers, the Charanians became concerned she would not be able to pay her rent. Ted Charanian obtained the credit report, determined that McClains credit was in good order, placed the report in his files, and forgot about it.

In denying McClains CCRAA claim, the trial court found that the Charanians had a legitimate business need for the report, and that McClain failed to show that Ted Charanian breached his agreement with Citi in obtaining the report. On appeal, McClain argues that the trial court erred as a matter of law in applying the CCRAA. She contends that the record establishes that Octagon obtained access to McClains credit data in a manner other than as provided in Section 1785.11 ( 1785.19, subds. (a)(1), (a)(2)), and that Octagon is subject to a civil penalty under the CCRAA. The crux of this contention is that because the credit report was indisputably obtained in connection with a commercial transaction, it is not a consumer credit report, as defined in section 1785.3, subdivision (c), and thus falls outside the scope of section 1785.11.
This contention fails in the face of sections 1785.41 and 1785.42. Although the parties did not raise or discuss these provisions before the trial court, we will affirm the judgment on any ground properly supported by the record.[2] On appeal, [w]e do not review the trial courts reasoning, but rather its ruling. (J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 15.) Thus, we may affirm the trial courts ruling on any basis presented by the record whether or not relied upon by the trial court. (Day v. AltaBatesMedicalCenter(2002) 98 Cal.App.4th 243, 252, fn. 1.)

In view of the trial courts findings and the undisputed facts, the credit report that Ted Charanian obtained falls within the definition of a [c]ommercial credit report in section 1785.42. The record establishes that the tenant on the lease was a commercial enterprise, namely, Kelly McClain dba A+ Teaching Supplies, and that Ted Charanian obtained the credit report to determine whether McClain could meet her financial obligations under the lease.[3] The report was thus provided to a commercial enterprise for a legitimate business purpose, relating to the financial status or payment habits of a commercial enterprise which is the subject of the report. ( 1785.42.) Because the report is exempt from the provisions of the CCRAA under section 1785.41, the trial court did not err in rejecting McClains claim.[4]

Pointing to Bakker v. McKinnon (8th Cir. 1998) 152 F.3d 1007 (Bakker), McClain argues that the report obtained by Ted Charanian is not a commercial credit report because Citi does not characterize or identify itself as a commercial credit reporting agency. We disagree. In construing a statute, we look first to the words of the statute, giving effect to their plain meaning. If those words are clear, we may not alter them to accomplish a purpose that does not appear on the face of the statute or from its legislative history. [Citation.] (In re Jerry R. (1994) 29 Cal.App.4th 1432, 1437.) The definition of a [c]ommercial credit report in section 1785.42 encompasses any report that has the specified features, but does not require such reports to originate from a self-designated commercial credit reporting agency. Moreover, subdivision (b) of section 1785.42 defines a commercial credit reporting agency as any person who, for monetary fees, dues, or on a cooperative nonprofit basis, provides commercial credit reports to third parties. This definition identifies providers of commercial credit reports as commercial credit reporting agencies regardless of how they characterize themselves. In view of the plain language of section 1785.42, McClains contention fails.

Additionally, Bakker is materially distinguishable. There, an attorney representing the plaintiffs in a dental malpractice action obtained credit reports on the defendant and his daughters in order to obtain information that would force the defendant to enter into a settlement. (Bakker, supra, 152 F.3d at pp. 1009-1011.) When the defendant and his daughters sued the attorney under the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) (FCRA), the trial court found that the reports were consumer credit reports protected by the FCRA, and that the attorney had not obtained them for a legitimate business purpose. On appeal, the Eighth Circuit affirmed these determinations, and rejected the attorneys contention that the reports were not consumer credit reports because they had been obtained for what she characterized as a commercial purpose. (Bakker, at pp. 1011-1013.) Unlike Bakker, however, where the trial court found the attorneys repeated attempts to dig up as much dirt as possible on the defendant constituted a blatant attempt to extract a settlement, that grossly crossed the line of proper litigation conduct (id. at pp. 1009-1011), here the trial court found that Ted Charanian had a legitimate business purpose in obtaining the reports to determine the continued financial viability of his commercial tenant. Moreover, unlike Bakker, where the attorney sought to use the information for purposes other than those agreed to (id. at p. 1012), here the trial court found McClain had not shown that Ted Charanian had violated his agreement with Citi. Finally, we note that Bakker involved the FCRA which, unlike the CCRAA, lacks provisions akin to sections 1785.41 and 1785.42, which define commercial credit reports and expressly exempt them from the CCRAA.

McClain also attacks the trial courts finding that she failed to show that Ted Charanian violated the Citi agreement. On this matter, she argues that Jimmy Yu testified that the Citi agreement obliged Ted Charanian to obtain McClains written consent prior to obtaining her credit report, and that Ted Charanian conceded that he never acquired this consent.

The record does not support this contention.[5] Yu, Citis custodian of records, testified that Citi had purged all its personal documents regarding Ted Charanians account, that none of the documents from Citis records admitted into evidence defined the terms of tenant screening that Ted Charanian had accepted, and that he did not know whether Ted Charanian had filled out the standard Citi agreement. He nonetheless testified that the standard Citi agreement required landlords to get a consent or some kind of rental application before Citi would run a report. In addition, Yu stated that after Ted Charanian obtained McClains report, Citi repeatedly asked him to provide a consent form from McClain, and it terminated his account when he failed to provide it.

Ted Charanian testified that the Citi agreement admitted into evidence was not the one to which he had agreed. He also testified that he informed Citi of his purposes in opening the account, that he supplied all the documents they required to open the account, that Citi never asked him for a consent form from McClain and that he had learned that Citi closed his account only because McClain and her husband had been harassing Citi.

The trial court found that McClain had failed to show that Ted Charanian breached any of the terms of his agreement with Citi. In view of the testimony from Yu and Ted Charanian -- including the latters testimony that he did not execute the standard Citi agreement -- the trial court could reasonably infer that McClain never established the terms of the agreement. In sum, the trial court properly concluded that Octagon had not violated the CCRAA.[6]

C. Accounting

McClain contends that the trial court erred in denying her request for a declaration that under the lease she is entitled to an accounting of her share of the common expenses. She argues that the express provisions of the lease, together with the implied covenant, oblige Octagon to permit her to examine its records to verify her share of the common expenses.

Regarding this claim, the record establishes that in February 2005, Octagon sent McClain a letter stating her share of the actual common expenses for the 2004 calendar year and her share of these expenses for the 2005 calendar year. When she requested a reasonably detailed statement regarding these expenses pursuant to the lease, Octagon provided a more elaborate description of the common expenses for the 2004 calendar year. McClains husband responded to the statement in a letter dated April 7, 2005. Asserting that a landlord owed a fiduciary duty to a tenant, the letter questioned certain expenditures, disputed the need for others, and sought documentation beyond that verifying the actual expenses incurred. In addition, the letter requested permission for an auditor to examine Octagons records and obtain answers to the questions raised in the letter. Octagon did not agree to the request. The trial court determined that neither the express language of the lease nor the implied covenant of good faith and fair dealing accorded McClain the right to such an audit.

For the reasons explained below, we conclude that McClain is not entitled to dispute the need for expenses or to audit Octagons records. Rather, she is entitled only to disclosure of the documents supporting the Charanians reasonably detailed statement of her share of the common expenses, for the limited purpose of verifying that the listed expenses were incurred and that the listed amounts are accurate. Octagon may fulfill this obligation in any reasonable manner it elects, as by providing copies of the relevant documents or permitting McClain to examine the originals.

On appeal, McClain argues only that the implied covenant supports her request for an accounting, and does not suggest that the lease imposes fiduciary duties upon Octagon regarding the common expenses. Generally, the implied covenant operates to protect the express covenants or promises of the contract. (Racine & Laramie, Ltd. v. Department of Parks & Recreation, supra, 11 Cal.App.4th at pp. 1031-1032.) In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other partys rights to the benefits of the contract. (Ibid., quoting Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1153.) Accordingly, it imposes not only . . . upon each contracting party the duty to refrain from doing anything which would render performance of the contract impossible by any act of his own, but also the duty to do everything that the contract presupposes that he will do to accomplish its purpose. (Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1093, quoting Harm v. Frasher (1960) 181 Cal.App.2d 405, 417.) Nonetheless, because it protects only the express terms of the agreement, [i]t cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.) The precise nature and extent of the duties imposed under the implied covenant thus depend upon the purposes of the contract. (Foothill Properties v. Lyon/Copley Corona Associates (1996) 46 Cal.App.4th 1542, 1551-1552.)

California courts have long recognized that when two parties enter into an agreement for the sharing of profits that accords one party exclusive access and control over financial records bearing on the profits, the implied covenant accords the other party the right to an accounting of the profits. In Nelson v. Abraham (1947) 29 Cal.2d 745, 747 (Nelson), the defendant, who manufactured ice, entered into a profit-sharing agreement with the plaintiff. Under the terms of the agreement, the plaintiff was to sell ice for the defendant in San Francisco in exchange for one third of the net profits from his sales operation; the plaintiff otherwise acquired no interest in the defendants business. (Ibid.) When the defendant sold his business, including the San Francisco operation, to a third party, the plaintiff filed an action for an accounting and division of profits. (Id. at p. 749.) The trial court determined that the parties had not formed a partnership or joint venture and rejected the plaintiffs claim for an accounting. (Id. at p. 747.)

In reversing, our Supreme Court concluded that under the circumstances, the implied covenant obliged the defendant to provide an accounting, even if the agreement did not create a partnership or other form of fiduciary relationship. (Nelson, supra, 29 Cal.2d at p. 750.) It reasoned: [U]nder an agreement calling for a division of profits, whether the contract is one of copartnership, joint venture, or employment, good faith and fair dealing require that neither party may be permitted to take an unfair advantage or enjoy greater rights than called for by the terms of the agreement. One may not obtain a secret profit or undue benefit. The one who is entrusted with the rights of another is charged with the duty of guarding those rights with the utmost good faith. [Citations.] (Id. at p. 751.)

In a later case, Waverly Productions, Inc. v. RKO General, Inc. (1963) 217 Cal.App.2d 721, 724-725 (Waverly), two corporations entered into a motion picture distribution agreement that obliged them to share profits, but granted one of the corporations exclusive rights to sell the rental rights to the motion picture in other countries. Without mentioning Nelson, the court in Waverly concluded that although the agreement did not create a fiduciary relationship, the trial court had properly required the corporation in exclusive control of the rental rights to provide an accounting. (Waverly, at p. 731.)

In Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 31-33 (Wolf), the court endorsed and explained the holding in Nelson. There, the author of a novel entered into agreements with an entertainment corporation to share the profits from a movie and related merchandise based on the novel. (Wolf, at pp. 27-28.) The agreements expressly accorded the author the right to an accounting. (Ibid.) After a dispute arose, the author initiated an action against the entertainment corporation, asserting, inter alia, a claim for breach of fiduciary duty. (Ibid.) When the trial court sustained a demurrer to this claim without leave to amend, the author sought relief by petition for writ of mandate. (Id. at p. 29.)

In rejecting the authors contention that the parties agreements created a fiduciary relationship, the court in Wolf acknowledged the continuing vitality of Nelson: The duty to provide an accounting of profits under the profit-sharing agreement in Waverly is appropriately premised on the principle, also expressed in Nelson, that a party to a profit-sharing agreement may have a right to an accounting, even absent a fiduciary relationship, when such a right is inherent in the nature of the contract itself. As the court in Nelson observed, the right to obtain equitable relief in the form of an accounting is not confined to partnerships but can exist in contractual relationships requiring payment by one party to another of profits received. That right can be derived not from a fiduciary duty, but simply from the implied covenant of good faith and fair dealing inherent in every contract, because without an accounting, there may be no way by which such [a] party [entitled to a share in profits] could determine whether there were any profits . . . . (Wolf, supra, 107 Cal.App.4th at p. 34, quoting Nelson, supra, 29 Cal.2d at p. 751.)

In our view, the principle asserted in Nelson also encompasses the cost-sharing provisions of the lease. Like the courts in Nelson, Waverly and Wolf, we see no basis in these provisions for concluding that the lease imposes fiduciary duties upon Octagon regarding the common expenses. (See also Korens v. R. W. Zukin Corp. (1989) 212 Cal.App.3d 1054, 1058-1059 [lease term requiring tenant to make security deposit does not impose fiduciary duty on landlord].) The lease obliges the parties to share the common expenses of the shopping mall, as enumerated in the lease, but accords Octagon exclusive management and control over those expenses while requiring it to provide McClain with a reasonably detailed statement of the expenses. Because McClains share of the common expenses under the lease is determined by the actual expenses incurred by Octagon, she is entitled to verify that such expenses were, in fact, incurred and that the listed amounts are accurate. Accordingly, if requested, Octagon must provide McClain with the documents it used in preparing the reasonably detailed statement; to hold otherwise would necessarily frustrate[] [McClains] rights to the benefits of the contract. (Racine & Laramie, Ltd. v. Department of Parks & Recreation, supra, 11 Cal.App.4th at pp. 1031-1032, quoting Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d at p. 1153.) Octagon may discharge this obligation in any reasonable manner it selects, including providing McClain with

copies of the pertinent documents or giving her an opportunity to view the original documents.
In so concluding, we do not suggest that McClains limited right to the documents underlying the reasonably detailed statement accords her greater control over the shopping center and its management than authorized by the express terms of the lease.[7] As our Supreme Court explained in Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., supra, 2 Cal.4th at page 374, [a]s to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct. (Quoting VTR, Incorporated v. Goodyear Tire & Rubber Company (S.D.N.Y. 1969) 303 F.Supp. 773, 777-778.) We hold only that Octagon may not prevent her from examining the records supporting its statements regarding actual common expenses incurred.

DISPOSITION

The judgment is reversed solely with respect to McClains claims for misrepresentation, an accounting, and declaratory relief, and the matter is remanded for further proceedings in accordance with this opinion. The judgment is otherwise affirmed in all other respects. The parties are to bear their own costs on appeal.

CERTIFIED FOR PUBLICATION

MANELLA, J.

We concur:

WILLHITE, Acting P. J.

SUZUKAWA, J.

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Analysis and review provided by Poway Property line Lawyers.

[1] All further statutory citations are to the Civil Code.

[2] We accorded the parties an opportunity to present supplemental briefs on the provisions in question.

[3] Although section 1785.42 does not provide a definition of commercial enterprise, courts have generally concluded that the designation d.b.a. in connection with an individual indicates that the individual operates a business and is liable for its obligations. (See Providence Washington Ins. Co. v. Valley Forge Ins. Co. (1996) 42 Cal.App.4th 1194, 1200); Pinkertons, Inc. v. Superior Court (1996) 49 Cal.App.4th 1342, 1348-1349 and the cases cited therein.) Accordingly, the term commercial enterprise, as commonly understood, encompasses such individuals.

[4] In view of the trial courts findings, we note that the CCRAA claim also fails even if the report constitutes a consumer credit report.

[5] We review the trial courts findings for the existence of substantial evidence. (Nordquist v. McGraw-Hill Broadcasting Co. (1995) 32 Cal.App.4th 555, 561.) On review for substantial evidence, all of the evidence must be examined, but it is not weighed. All of the evidence most favorable to the respondent must be accepted as true, and that unfavorable discarded as not having sufficient verity[] to be accepted by the trier of fact. If the evidence so viewed is sufficient as a matter of law, the judgment must be affirmed. (Estate of Teel (1944) 25 Cal.2d 520, 527.)

[6] For the first time on appeal, McClain argued during oral argument that the credit report at issue constituted a consumer credit report under the CCRAA, and that the trial court erroneously determined that Ted Charanian had a legitimate business purpose (within the meaning of the CCRAA) in obtaining it. McClain has forfeited this contention. (See Reyes v. Kosha (1998) 65 Cal.App.4th 451, 466, fn. 6.)

[7] McClains requested audit, as described in the letter dated April 7, 2007, far exceeds the access to Octagons documents authorized by the principles we have articulated. Under our holding, McClain is entitled to have Octagon produce the records to confirm the figures in the statement it provided her regarding her share of the common expenses; she is not entitled to demand explanations of Octagons decisions to incur common expenses or to challenge these decisions. The record discloses that Ted Charanian was prepared to give McClain cancelled checks verifying the expenditures set forth in the detailed statement. It thus appears that McClains claim for declaratory relief on this matter would have been unnecessary had she asked only for an opportunity to see the documents underlying the statement provided to her.