P.A.C. Auto Mall v. Finance and Thrift

Filed 10/17/07 P.A.C. Auto Mall v. Finance and Thrift CA5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

APPEAL from a judgment of the Superior Court of Fresno County. Alan J. Simpson, Judge.

Henry D. Nunez for Plaintiffs and Appellants.

Law Offices of Robert Krase, Robert Krase and Lee Guthrie for Defendant and Respondent.

-ooOoo-

Plaintiffs P.A.C. Auto Mall, Inc. and Bobby Perales (collectively PAC) appeal from a judgment entered in favor of defendant Finance and Thrift Company (Finance) after Finances demurrer to the first amended complaint was sustained without leave to amend and the trial court denied PACs motions for reconsideration and to set aside the order on the demurrer. PAC claims the trial court erred when it concluded PAC could not state a valid cause of action for breach of contract. PAC also claims the trial court erred in failing to allow it to amend its pleading because it has presented facts which, if alleged, would be sufficient to state a cause of action. While we disagree that the trial court erred in sustaining the demurrer to the first amended complaint, we agree PAC should have been given leave to amend as to its breach of contract claim. Accordingly, we will reverse the judgment only as to the breach of contract claim.

FACTUAL AND PROCEDURAL BACKGROUND

The Dealer Agreements

On August 1, 2000, PAC signed a dealer agreement with Finance. The agreement states that Finance shall purchase installment contracts from [PAC] on a recourse basis, with PAC unconditionally guaranteeing Finance payment in full. The agreement states in paragraph six that PAC shall establish and maintain a Reserve Account with Finance, which is funded and maintained by Finances withholding of 15 percent of the amount financed on each contract purchased. The agreement further provides that the reserve balance in excess of 15 percent of contingent liability will be available for release upon PACs request and [t]he amount available for release will be reduced further by the total of balances of all accounts reported as being 60 or more days delinquent. (Two payments due and unpaid) as of the prior month-end. Paragraph 9 of the agreement provides that the parties agree to the following concerning delinquents and repossessions:

(a) [PAC] will pay-off on demand of [Finance] any contract which becomes 90 days delinquent.

(b) [PAC] will be responsible for all repossessions and contract is to be paid off within 15 days of repossession.

(c) Contracts paid off by [PAC] on demand of [Finance] will be immediately returned to [PAC] except that if it becomes necessary that [Finance] deduct the pay-off from the Reserve Account, [Finance] may retain said contract and undertake whatever steps are necessary to recover payment to replenish Reserve Account and protect [Finance]s security interest.

On November 19, 2003, PAC signed a second dealer agreement with Finance, in which they again agreed that Finance would purchase installment contracts from PAC on a recourse basis. This agreement contains the same requirement in paragraph six that PAC shall establish and maintain a Reserve Account with Finance, which is funded and maintained by Finances withholding of 15 percent of the amount financed on each contract purchased. The agreement further provides that the reserve account shall build and be maintained with a minimum balance of no less than 20% of total outstanding contract liability of [PAC]. Withdrawals from Reserve Account by [PAC] will be considered only when the Reserve balance exceeds 20% of contingent liability. The amount available for release will be reduced further by the total of balances of all accounts reported as being 60 or more days delinquent on the most recent Monthly Delinquency Report. Paragraph 9 of the agreement provides that concerning delinquents and repossessions, the parties agree:

(a) [PAC] will payoff on demand of [Finance] any contract which becomes 60 days delinquent.

(b) [PAC] will be responsible for all repossessions and contract is to be paid off within 15 days of repossession.

(c) Contracts paid off by [PAC] on demand of [Finance] will be immediately returned to [PAC] except that if it becomes necessary that [Finance] deduct the payoff from the Reserve Account, [Finance] may retain said contract and undertake whatever steps are necessary to recover payment to replenish Reserve Account and protect [Finance]s security interest.

The Original Complaint

In June 2005, PAC filed a complaint against Finance, which alleged the following nine causes of action: (1) fraud and deceit; (2) breach of fiduciary duty; (3) intentional interference with prospective business advantage; (4) negligent interference with prospective business advantage; (5) intentional infliction of emotional distress; (6) unfair business practices; (7) breach of contract; (8) breach of the covenant of good faith and fair dealing; and (9) imposition of constructive trust.

With respect to the breach of contract claim, the complaint alleged that PAC signed the August 1, 2000 and November 19, 2003 dealer agreements with Finance, which were incorporated into the complaint by reference. The complaint further alleged that PAC had requested a full and complete accounting of the transactions between the parties and the contracts financed by Finance, which Finance refused to provide, and in addition to this failure, Finance materially and willfully breached these contracts as follows:

a. By failing to provide timely notice and records of late payments by customers, in order to allow [PAC] the opportunity to follow up with the customers on said delinquencies;

b. By failing to provide timely notice and detail regarding repossession of vehicles from customers and failing to conduct commercially reasonable sales of the repossessed automobiles and by failing to conduct commercially reasonable sales of repossessed automobiles;

c. By failing to timely assign the accounts which were required to be assigned back to [PAC];

d. By failing to provide adequate collection efforts on the accounts considered delinquent and held by [Finance];

e. By failing to follow adequate and proper repossession procedures with the customer accounts and by filing false insurance claims;

f. By failing to timely and properly release funds to [PAC] from the trust account; and

g. By failing to act in good faith and fair dealing with [PAC], as set out in the Second Cause of Action [Breach of Fiduciary Duty].^[1]

PAC alleged that [a]s a direct and proximate result of the breach of the agreement, [PAC] suffered damages in an amount in excess of $500,000.00.

The Demurrer

Finance demurred to the complaint. With respect to the breach of contract cause of action, Finance asserted the allegations were uncertain and ambiguous (Code Civ. Proc., 430.10, subd. (f)^[2]) and it could not be determined whether the contract was written, oral or implied by conduct ( 430.10, subd. (g)). Specifically, Finance argued the demurrer to the breach of contract cause of action should be sustained because the alleged breaches were not addressed by the written agreements attached to the complaint, and therefore it could not be determined whether the duties allegedly breached were found in a contract that was oral, written, or implied by conduct. PAC filed a written opposition to the demurrer, but made no argument with respect to the breach of contract claim.

The court sustained the demurrer as to the breach of contract cause of action with leave to amend. The court explained: the gravamen of the instant Complaint seems to be breach of the parties written contracts, copies of which are attached to the pleading. [PAC has] alleged up to 19 wrongful acts, but none of them appears to be included as a term of the written agreements. Consequently, it cannot be determined whether the terms allegedly breached are found in a contract that is written, oral, or implied by conduct. (CCP 430.10(g)) [] Thus, the demurrer to the Seventh Cause of Action is sustained, with leave to amend, because [PAC] should be able to allege the source of the alleged terms that were breached.

The First Amended Complaint

On December 16, 2005, PAC filed a first amended complaint (FAC) alleging the following seven causes of action: (1) fraud and deceit; (2) intentional interference with prospective business advantage; (3) negligent interference with prospective business advantage; (4) unfair business practices; (5) breach of contract; (6) breach of the covenant of good faith and fair dealing; and (7) imposition of constructive trust.^[3] The allegations of the breach of contract cause of action are identical to those in the original complaint with the exception of (1) the addition of the phrase or their agents, or representatives when referencing defendants and (2) the alleged failure to act in good faith and fair dealing references the acts set out in the second cause of action, which in the FAC is for intentional interference with prospective business advantage, although that cause of action lists the same 19 alleged breaches of the contracts as contained in the second cause of action for breach of fiduciary duty alleged in the original complaint.

On December 22, 2005, PAC filed a Notice of Non-Availability which stated notice was given that from December 20, 2005, through and including March 1, 2006, Henry D. Nunez will be unavailable for the purposes of, including but not limited to, receiving notice of any kind, appearing in Court, responding to ex parte applications, or attending depositions, in the within matter. Reference is made to Tenderloin Housing Clinic v. Sparks [(]1992) 8 Cal.App.4[t]h 299, regarding the consequences of purposefully scheduling a conflicting proceeding without Good Cause. The proof of service attached to the notice states that the notice was served on Finances attorney by mail on December 15, 2005.

The Demurrer to the First Amended Complaint

On January 20, 2006, Finance filed a demurrer to the FAC, asserting the demurrer should be sustained without leave to amend. Finance demurred to the breach of contract cause of action on the following grounds: (1) there is another action pending between the same parties on the same cause of action ( 430.10, subd. (c)); (2) the allegations fail to state facts sufficient to constitute a cause of action ( 430.10, subd. (e)); (3) the allegations are uncertain and ambiguous ( 430.10, subd. (f)); and (4) it cannot be ascertained from the pleadings whether the contract alleged is written, oral or implied by conduct ( 430.10, subd. (g)). Finance argued that the laundry list of wrongful acts alleged to have constituted a breach of contract do not appear to be included in the terms of the written agreements attached to the pleading, and therefore it could not be determined whether the terms allegedly breached are found in an oral or written contract, or a contract implied by conduct.

On March 2, 2006, PAC filed an opposition to the demurrer. With respect to the breach of contract cause of action, PAC asserted Finances argument that it could not be determined whether the terms allegedly breached were found in a contract that was written, oral, or implied by conduct was frivolous because it was immaterial whether or in what form the breach had occurred and PAC had alleged facts which addressed all the elements of a breach of contract cause of action. PACs attorney also submitted his declaration, to which he attached a proposed Second Amended Complaint (SAC), in which he stated that PAC believed the bolded portions of the SAC should address the issues presented in the demurrer, but if the court believed the SAC to be deficient, PAC requested leave to amend. The SAC did not change the allegations in the breach of contract cause of action contained in the FAC.

At oral argument, PACs attorney conceded the demurrer should be sustained as to the second, third and seventh causes of action, but argued the court should grant PAC leave to amend the remaining causes of action. PACs attorney explained to the court that because of health reasons, he hired an attorney and law clerk to assist him, who authored the complaint, and asserted he could personally amend the complaint to address the courts rulings. Finances attorney argued PAC had three attempts to allege valid causes of action, which included the proposed SAC, none of which alleged a cause of action. Following oral argument, the court adopted its tentative ruling and sustained the demurrer without leave to amend.

In its written ruling, the court stated that PAC had failed to allege any facts showing how Finance breached the agreements. The court explained it previously had sustained the demurrer to the breach of contract claim with leave to amend and noted the alleged wrongful acts did not appear to be terms of the written agreements, and while the court instructed PAC to allege the source of the alleged terms that were breached, the FAC did not include new allegations regarding the source of the terms Finance allegedly breached. The court found the proposed SAC did not attempt to explain where the allegedly breached terms came from, as it did not add any new allegations to the breach of contract cause of action, and therefore the cause of action still was defectively pled. The court concluded that PAC was apparently unable to plead any additional facts to cure the defect, since even [PACs] SAC does not clarify how the breached terms were part of any agreement between the parties, and therefore it sustained the demurrer without leave to amend. The court further recognized Finance had demurred to the entire complaint on the ground there is another action pending between the parties. The court, however, found no need to address that ground since it sustained the demurrer to the entire complaint without leave to amend on other grounds. The court clerk served the parties with the written ruling by mail on March 16, 2006. On March 28, 2006, PAC served Finances attorney by mail with a notice of entry of the order sustaining the demurrer to the FAC without leave to amend.

The Motions for Reconsideration and to Set Aside the Courts Order

On April 3, 2006, PAC filed a motion for reconsideration pursuant to section 1008, which sought reconsideration of the order sustaining Finances demurrer to the FAC as to the causes of action for fraud and breach of contract. In support of the motion, PAC submitted a new proposed Second Amended Complaint (SAC2), which it claimed addressed the courts concerns about the inadequacy of the FACs allegations, and argued reconsideration was proper because the SAC2 showed the existence of new and different facts. PAC also submitted the declaration of its attorney, who explained the FAC was deficient because the staff attorney assigned to draft it had been diagnosed with a serious and life-threatening disease requiring major surgery, which necessitated a medical leave of absence, and therefore the FAC was completed by a law clerk. PACs attorney further explained he could not devote his full attention to the case because he was going through his own medical issues. PACs attorney claimed that since March 2006, he had performed additional investigation and learned new facts which give rise to distinct causes of action alleged in the SAC2.

The SAC2 alleges that a written agreement was made between PAC and Finance on November 19, 2003, a copy of which is attached to the complaint and which is the same agreement alleged to have been breached in the original complaint and the FAC. The SAC2 further alleges that on April 30, 2004, Finance breached paragraphs six and nine of the agreement by the following acts: Monthly delinquency reports were not provided; proper collections on accounts were not performed; Unauthorized repossessions were performed and improper procedures followed in repossessions; and sales were conducted. A separate Trust account for the dealer reserve was not maintained and excess funds were not released as required by the Agreement.

On April 14, 2006, pursuant to section 473, subdivisions (a) and (b), PAC filed a motion for an order setting aside and vacating the order sustaining the demurrer to the FAC without leave to amend. PAC asserted that order should be set aside pursuant to section 473, subdivision (b), due to surprise, mistake, inadvertence or excusable neglect because Finance filed its demurrer within a month after PACs attorney filed the notice of non-availability which indicated he would not be available from December 20, 2005, to March 1, 2006, thereby causing PAC to respond to the demurrer on an expedited basis. PAC asserted that had Finance complied with the notice of unavailability, more care could have been taken in preparing an acceptable amended pleading. In a declaration submitted with the motion, PACs attorney explained that he filed the notice of non-availability because of health problems he and his staff attorney were experiencing, and therefore he was surprised when Finance filed the demurrer.

Finance filed oppositions to both motions. In response to the motion for reconsideration, Finance argued the motion was untimely and the trial court properly refused leave to amend, as PAC was given ample opportunity to amend. In response to the motion to set aside and vacate the order sustaining the demurrer, Finance asserted that section 473, subdivision (a)(1) is inapplicable because it does not provide for setting aside a courts order, and discretionary relief under section 473, subdivision (b), is not available because PACs counsels conduct was not excusable.

In support of its opposition to the motion to set aside the courts order, Finance submitted the declaration of its attorney, who explained that on December 7, 2005, after the demurrer to the original complaint was sustained, PACs attorney wrote Finances counsel requesting additional time to file the FAC; the parties thereafter entered into a stipulation allowing PAC to file the FAC no later than December 16, 2005; on December 15, 2005, PACs attorney served the notice of non-availability on Finances attorney; the next day, PAC served the FAC on Finance; on January 11, 2006, Finances attorney served PACs attorney with the demurrer and motion to strike the FAC; the following day, Finances attorney sent a letter to PACs attorneys office stating that although she was aware of the notice of non-availability, since PACs attorneys associate had been making appearances in the case, she assumed one of them could cover the March 16 hearing date but if the date was a problem, he should contact her and they could discuss it; no one from PACs attorneys office responded to this letter; on February 21, 2006, during his alleged period of non-availability, PACs attorney appeared at the case management conference and set the case for trial; and although PACs attorney filed responsive pleadings to the demurrer and personally appeared at the hearing, he never requested a continuance of the hearing or additional time to file pleadings.

Following oral argument on the motions, the court denied both the motions. A judgment of dismissal with prejudice subsequently was entered and this appeal followed.

DISCUSSION

Standard of Review

On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. We give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law. [Citations.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse. (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865.)

When conducting our independent review, in addition to assuming the truth of properly pleaded factual allegations, we assume the truth of facts that reasonably can be inferred from those expressly pleaded and matters of which judicial notice has been taken. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081 (Schifando).) We construe the pleading in a reasonable manner and read the allegations in context. (Ibid.) However, we will not assume the truth of contentions, deductions, or conclusions of law or fact. (People ex rel. Lungren v. Superior Court (1996) 14 Cal.4th 294, 300-301; Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125.) Facts appearing in exhibits attached to the complaint are also accepted as true and given precedence over inconsistent allegations in the complaint. (Barnett v. Firemans Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505; Holland v. Morse Diesel Internat., Inc. (2001) 86 Cal.App.4th 1443, 1447.)

We affirm the judgment if it is correct on any ground stated in the demurrer, regardless of the trial courts stated reasons. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.) It is PACs burden, however, to demonstrate the trial court sustained the demurrer erroneously. (Smith v. County of Kern (1993) 20 Cal.App.4th 1826, 1829-1830.) It is also PACs burden to show that further amendment could cure the complaints defects. (Schifando, supra, 31 Cal.4th at p. 1081.)

The Demurrer to the First Amended Complaint

On appeal, PAC only challenges the trial courts ruling as to its breach of contract claim. Finance demurred to the breach of contract claim asserted in the FAC on four grounds: (1) another action was pending between the parties; (2) the claim failed to state facts sufficient to constitute a cause of action; (3) the claim is uncertain; and (4) it cannot be ascertained from the allegations of the pleading whether the contract alleged to have been breached is written, oral or implied by conduct. The trial court sustained the demurrer on the ground the claim failed to state facts sufficient to constitute a cause of action, as PAC failed to allege any facts showing how Finance breached the written agreements or the source of the alleged terms that were breached. PAC contends the trial court erred. We disagree.

To state a cause of action for breach of contract, a plaintiff must plead the contract, his performance of the contract or excuse for nonperformance, defendants breach and the resulting damage. (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452, 458.) The plaintiff must indicate in the complaint whether the contract is written, oral, or implied by conduct. (Id. at pp. 458-459.) If the action is for alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written instrument must be attached and incorporated by reference. (Id. at p. 459.)

The FAC adequately alleges the contracts at issue, as it alleges the parties entered into two written agreements, one dated August 1, 2000 and the other November 19, 2003, both of which were attached to the complaint and incorporated by reference. The FAC also alleges PACs performance, as it alleges PAC has performed all the covenants, promises and agreements called for under these agreements, except for those conditions, covenants, promises or agreements which have been excused or waived.

The issue here is whether the complaint adequately alleges Finances breach of the written agreements. In its opening appellate brief, PAC contends six of the seven alleged breaches constitute violations of paragraph nine of the written agreements. Specifically, PAC contends paragraph 9(b) was breached when Finance (1) fail[ed] to provide timely notice and records of late payments by customers, in order to allow [PAC] the opportunity to follow up with the customers on said delinquencies; (2) fail[ed] to provide timely notice and detail regarding repossession of vehicles from customers and failing to conduct commercially reasonable sales of the repossessed automobiles and by failing to conduct commercially reasonable sales of repossessed automobiles; and (3) fail[ed] to follow adequate and proper repossession procedures with the customer accounts and by filing false insurance claims.

The duties allegedly breached, however, are not contained within paragraph 9(b), which lists two items: (1) PAC will be responsible for all repossessions; and (2) contracts will be paid off within 15 days of repossession. Nothing is mentioned in paragraph 9(b) about the provision of notices of either late payment or repossessions, the conduct of sales of repossessed vehicles, the repossession procedures that must be followed, or the filing of insurance claims. The duties specified in paragraph 9(b) do not even appear to be Finances duties; instead, they are PACs duties, namely to conduct repossessions and to pay off the contract after repossession. While PAC urges us to construe the provisions of paragraph 9(b) liberally, there simply is no way to construe that paragraph so as to impose on Finance the duties allegedly breached.

PAC next contends paragraph 9(c) was breached when Finance: (1) fail[ed] to timely assign the accounts which were required to be assigned back to [PAC]; (2) fail[ed] to provide adequate collection efforts on the accounts considered delinquent and held by [Finance], or their agents, or representatives; and (3) fail[ed] to timely and properly release funds to [PAC] from the trust account. Paragraph 9(c) provides that contracts paid off by PAC on Finances demand will be immediately returned to [PAC] except that if it becomes necessary that [Finance] deduct the pay-off from the Reserve Account, [Finance] may retain said contract and undertake whatever steps are necessary to recover payment to replenish Reserve Account and protect [Finance]s security interest.

Thus, under paragraph 9(c), if PAC pays off a contract, Finance is obligated to return the contract to PAC, but if PAC does not pay off the contract and Finance deducts the payoff from the reserve account instead, Finance may retain the contract and do whatever is necessary to recover payment. The subparagraph mentions nothing about two of the duties that allegedly were breached, namely collection efforts on delinquent accounts or the release of funds from a trust account. While the subparagraph does require Finance to return[] [c]ontracts that PAC has paid off, it does not mention assignment of accounts, as alleged in the FAC. Even assuming PACs allegation that Finance failed to timely assign accounts which were required to be assigned to PAC refers to the return of contracts PAC had paid off, Finance is not obligated to return such contracts if Finance needs to deduct the payoff from the reserve account. No allegation was made in the FAC, however, that such deductions were unnecessary.

For the first time in its reply brief, PAC claims it alleged a cause of action for breach of contract in the FAC because it alleged that Finance fail[ed] to act in good faith and fair dealing with PAC, as set out in the second cause of action for intentional interference with prospective business advantage. As PAC asserts, a covenant of good faith and fair dealing is implied by law in every contract. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349.) This covenant, however, is closely pinned to the underlying contract from which it arises, and cannot be endowed with an existence independent of its contractual underpinnings. (Ibid.) In other words, the covenant cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement. (Id. at pp. 349-350, italics added.)

While the FAC alleges 19 acts that PAC claims constitute a breach of the covenant of good faith and fair dealing, the FAC fails to allege the contract terms on which the covenant is based. PAC does not make any reasoned argument on appeal that explains the contractual basis for the covenant, asserting only that through the implied covenant, the trial court could have inferred some relief in [PAC]s cause of action for breach of contract but did not. It is PACs burden to show the trial court sustained the demurrer erroneously. (Smith v. County of Kern, supra, 20 Cal.App.4th at pp. 1829-1830.) Without an explanation as to how the covenant relates to the agreements, PAC has failed to meet this burden. PAC contends it is an abuse of discretion to sustain a demurrer to a breach of contract cause of action where a covenant implied in the contract is operative, citing Wilson v. Houston Funeral Home (1996) 42 Cal.App.4th 1124 (Wilson). In that case, the court held every funeral services contract contains an implied covenant that the services will be conducted with dignity and respect toward the family members for whose benefit the services are performed, and the complaint alleged facts sufficient to constitute a breach of that covenant when it alleged false imprisonment of the bereaved family, holding of the deceaseds body until the familys debt for the services was paid, and unprofessional conduct of the limousine driver. (Wilson, supra, 42 Cal.App.4th at pp. 1133-1137.) Thus, in that case, the plaintiffs alleged specific breaches of a specific duty implied in the contract. Here, while PAC has alleged specific breaches, it has not identified how those breaches relate to duties that arise from the agreements.

In sum, PAC has not alleged breaches of any of the express terms of the dealer agreements, and has not explained how any implied covenant allegedly breached relates to those agreements. As the trial court found, Finances alleged breaches do not pertain to the terms contained in the dealer agreements, and if there was another agreement that contained such terms, PAC did not plead such allegations. We agree with the trial court that PAC failed to state a cause of action against Finance.

Leave to Amend

PAC contends the trial court abused its discretion in sustaining the demurrer to the FAC without leave to amend. As noted above, PAC has the burden of showing how the complaint can be amended to state a cause of action. This showing, however, need not be made to the trial court; PAC may make this showing for the first time on appeal. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1386 (Careau); 472c, subd. (a).)^[4] To meet this burden, PAC must show in what manner the pleadings can be amended and how such amendments will change the legal effect of their pleadings. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349; Careau, supra, 222 Cal.App.3d at p. 1388.) The assertion of an abstract right to amend does not satisfy this burden. (McKelvey v. Boeing North American, Inc. (1999) 74 Cal.App.4th 151, 161, superseded by statute on a different point in Grisham v. Philip Morris U.S.A., Inc. (2007) 40 Cal.4th 623, 637, fn. 8.).) PAC must set forth factual allegations that sufficiently state all required elements of a cause of action. (McMartin v. Childrens Institute International (1989) 212 Cal.App.3d 1393, 1408.) Allegations must be factual and specific, not vague or conclusory. (Cooper v. Equity Gen. Insurance (1990) 219 Cal.App.3d 1252, 1263-1264.) Where a plaintiff offers no allegations to support the possibility of amendment, there is no basis for finding the trial court abused its discretion when it sustained the demurrer without leave to amend. (New Plumbing Contractors, Inc. v. Nationwide Mutual Ins. Co. (1992) 7 Cal.App.4th 1088, 1098; see HFH, Ltd. v. Superior Court (1975) 15 Cal.3d 508, 513, fn. 3.)

PAC contends the SAC2, which was attached to its motion for reconsideration, alleges facts sufficient to state a cause of action for breach of contract and explains the gist of these additional facts was summarized in its attorneys declaration in support of that motion. In the SAC2, PAC alleges Finance breached paragraphs six and nine of the November 2003 dealer agreement by: (1) failing to provide monthly delinquency reports; (2) failing to perform proper collections on accounts; (3) performing unauthorized repossessions and following improper repossession procedures; (4) conducting sales; (5) not maintaining a separate trust account; and (6) failing to release excess funds as required by the Agreement.

We address first whether PAC can allege a breach of paragraph 9. Subdivision (a) of paragraph 9 states that PAC will payoff on Finances demand any contract that becomes 60 days delinquent, subdivision (b) states that PAC will be responsible for all repossessions and the contract will be paid off within 15 days of repossession, and subdivision (c) states that if PAC pays off a contract pursuant to Finances demand, the contract will be immediately returned to PAC except that if it becomes necessary that [Finance] deduct the payoff from the Reserve Account, [Finance] may retain said contract and undertake whatever steps are necessary to recover payment to replenish Reserve Account and protect [Finance]s security interest.

PAC asserts it can allege that Finance breached paragraph 9(c) because PAC requested the return of contracts it paid off pursuant to that paragraph, but the contracts through March 2006 had not been returned and no collection efforts have been pursued by Finance and Thrift, thereby causing a loss of the contract. It appears PAC is asserting that Finance breached paragraph 9(c) when (1) it failed to return contracts PAC had paid off and (2) failed to undertake collection efforts on the contracts it retained. Certainly paragraph 9(c) requires Finance to immediately return[] contracts that PAC has paid off; therefore, Finances failure to return such contracts would amount to a breach of that provision. Paragraph 9(c) also provides that if Finance retains a contract, Finance may undertake whatever steps are necessary to recover payment. While this provision does not explicitly require Finance to undertake collection efforts on contracts it retains, Finances alleged failure to make such efforts could give rise to a breach of the implied covenant of good faith and fair dealing.

In general, the implied covenant is read into a contract in order to protect the express covenants or promises of the contract. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373.) As such, the implied covenant finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith. (Id. at p. 372.) The provision allowing Finance to undertake whatever steps are necessary to recover payment on contracts it retains gives Finance discretionary power which affects PACs rights, i.e. if Finance deducts the contract from the reserve account and retains it, but does not undertake to collect on the contract, PAC will be required to put even more money into the reserve account to maintain the required minimum balance. Thus, this appears to be a typical contract in which one party is invested with a discretionary power affecting the rights of another, and therefore a contract particular[ly] appropriate for implication of the covenant of good faith and fair dealing. (Ibid.) As the dealer agreement vests in Finance the discretion to collect on delinquent contracts, under the implied covenant of good faith and fair dealing, Finance has a duty to exercise that discretion reasonably and in good faith. Any failure to do so arguably would be a breach of the implied covenant.
It also is reasonably possible that PAC can allege other breaches of the agreement. PAC asserts that it can allege Finance breached paragraph 9(b) when Finance (1) conducted its own repossessions without PACs authorization and consent, (2) failed to follow proper procedures in the repossession and sales of those vehicles, and (3) failed to conduct sales in the same fair and equal manner as other repossessed vehicles. To the extent PAC is asserting paragraph 9(b) authorizes only PAC to conduct repossessions, this provision arguably would be breached if Finance conducted repossessions without PACs authorization. To allege such a claim, PAC would have to proceed on the theory that paragraph 9(b), which states that PAC will be responsible for all repossessions, means that only PAC can conduct repossessions. On its face, this provision is susceptible to such an interpretation. If PAC proceeds on the theory that the term is ambiguous, however, it must allege in [the] complaint the meaning which the party ascribes to that contract. (Southern Pacific Land Co. v. Westlake Farms, Inc. (1987) 188 Cal.App.3d 807, 817; see also Hayter Trucking, Inc. v. Shell Western E & P, Inc. (1993) 18 Cal.App.4th 1, 18 [if the instrument is ambiguous, the pleader must allege the meaning he or she ascribes to it].) Thus, it is reasonably possible that PAC will be able to amend the complaint to state a claim for breach of contract based on its interpretation of paragraph 9(b).

PAC also asserts it can allege that Finance breached paragraph 6(b) by failing to provide it with monthly delinquency reports and failing to release excess funds from the reserve account. PAC explains that from March 2005 through March 2006, it requested the monthly delinquency reports set out in paragraph 6(b), but Finance failed to provide them. Paragraph 6(b) requires the maintenance of a reserve account with a minimum balance of 20 percent of PACs total outstanding contract liability. The paragraph further states that Finance will consider withdrawals from the reserve account only when the accounts balance exceeds the minimum balance, and the amount available for withdrawal will be reduced further by the total balances of all accounts reported as being 60 or more days delinquent on the most recent Monthly Delinquency Report. Under this provision, the release of funds from the reserve account that exceed the minimum balance appears to be a discretionary decision on Finances part, which arguably must be exercised reasonably and in good faith, and therefore Finances refusal to release such funds could constitute a breach of the implied covenant of good faith and fair dealing. Moreover, while there is no express requirement that Finance provide PAC with the monthly delinquency reports, it could be possible to imply such a contract term. (See, e.g., Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 473 [Under limited circumstances, the court may find that a contract includes an implied term or covenant. implied covenants will be found if after examining the contract as a whole it is so obvious that the parties had no reason to state the covenant, the implication arises from the language of the agreement, and there is a legal necessity.].)

We conclude that PAC has shown that there is a reasonable possibility it will be able to amend the breach of contract claim in the FAC to plead specific facts that, if true, would show Finance breached the November 2003 dealer agreement. While PAC has been given other opportunities to either amend the complaint or show the trial court how the complaint could be amended, we think it appropriate PAC be given one final opportunity to amend in light of the direct guidance provided by this opinion.^[5]

DISPOSITION

The judgment is affirmed as to all causes of action except PACs breach of contract claim. The judgment is reversed on the sixth cause of action in the first amended complaint for breach of contract and the matter is remanded to the trial court with instructions to vacate its order sustaining the demurrer as to the sixth cause of action in the first amended complaint for breach of contract without leave to amend and to enter a new order sustaining the demurrer with leave to amend as to that cause of action only. PAC is awarded its costs on appeal.

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Gomes, J.

WE CONCUR:

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Vartabedian, Acting P.J.

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Dawson, J.

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^[1]The Second Cause of Action for breach of fiduciary duty lists 19 actions Finance allegedly committed in breach of its fiduciary duty to PAC, some of which are identical to those actions alleged to have constituted a breach of contract.

^[2]All subsequent statutory references are to the Code of Civil Procedure.

^[3]The FAC designates the claim for breach of contract as the sixth cause of action, the claim for breach of the covenant of good faith and fair dealing as the seventh cause of action, and the imposition of constructive trust claim as the eighth cause of action. The FAC does not designate any claim as the fifth cause of action.

^[4]Finance asserts this rule is limited to cases where a demurrer to the original complaint is sustained without leave to amend, and urges us not to apply it where, as here, the plaintiff has been given multiple opportunities to amend the complaint yet still has failed to state a cause of action. Section 472c, subdivision (a), however, specifically provides that the question of whether the trial court abused its discretion in sustaining a demurrer without leave to amend is open on appeal even though no request to amend such pleading was made to the trial court. If the issue of whether a party can amend a complaint to state a cause of action is open on appeal even if leave to amend was not requested in the trial court, certainly we are required to review the issue on appeal even if multiple opportunities to amend have been given. (See also Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 704-705, 711 [court recognized that although the plaintiffs had been given four opportunities to allege viable causes of action, a showing of how a complaint could be amended could be made for the first time to the reviewing court, and concluded that, at least as to some of the defendants, the plaintiffs should have been given leave to amend].)

^[5]Since we conclude PAC should be given leave to amend, it is unnecessary to address PACs claims of error with respect to the motion for reconsideration or the motion to set aside the trial courts order.