POIZNER v. FREMONT GENERAL CORPORATION

Filed 2/28/07

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

STORY CONTINUED FROM PART I..

A court sustaining a demurrer without leave to amend is required to state the specific ground or grounds upon which the decision or order is based which may be by reference to appropriate pages and paragraphs of the demurrer. (Code Civ. Proc.,  472d.) The grounds for a demurrer are those listed in Code of Civil Procedure section 430.10, including among others the failure to state facts sufficient to constitute a cause of action (id., subd. (e)). The grounds for a demurrer differ from the reasons for sustaining a demurrer on a particular ground. A court sustaining a demurrer is required to state the specific grounds for its decision, but is not required to state its reasons for sustaining the demurrer on the specified grounds. (Stevenson v. San Francisco Housing Authority (1994) 24 Cal.App.4th 269, 275; Berkeley Police Assn. v. City of Berkeley (1977) 76 Cal.App.3d 931, 943.) Regardless of whether the superior court complies with this requirement, a reviewing court reviews the judgment rather than the reasons for the judgment and must affirm the judgment if any of the grounds stated in the demurrer is well taken. (E. L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497, 504, fn. 2; Maheu v. CBS, Inc. (1988) 201 Cal.App.3d 662, 670; Weinstock v. Eissler (1964) 224 Cal.App.2d 212, 224-225.)

The California Supreme Court has held that if a demurrer made on general and special grounds is sustained without leave to amend without specifying the grounds for the decision, the reviewing court must assume that the court sustained only the general demurrer and did not rule on the special demurrer. (Briscoe v. Readers Digest Association, Inc. (1971) 4 Cal.3d 529, 544, overruled on another point in Gates v. Discovery Communications, Inc. (2004) 34 Cal.4th 679, 685, 697, fn. 9; see E. L. White, Inc. v. City of Huntington Beach, supra, at p. 504, fn. 1.) Although the court here did not expressly specify the grounds for its decision, the reasons stated in the minute order indicate that the court sustained a general demurrer on the ground of failure to state facts sufficient to constitute a cause of action (Code Civ. Proc.,  430.10, subd. (e)). The court concluded that the letter agreement provided a defense to the counts to the extent they were based on the alleged misappropriation of net operating losses. The court apparently also concluded that some of the counts to some extent were based on injuries to Re for which Indemnity had no standing to sue, and that some of the allegations were directed against Re and did not support a cause of action against Fremont General or Insurance Group. The existence of a defense to the allegations alleged in the complaint, lack of standing to sue, and the failure to state facts sufficient to constitute a cause of action against a particular defendant are general grounds for demurrer in that all are considered a failure to state facts sufficient to constitute a cause of action. (Casterson v. Superior Court (2002) 101 Cal.App.4th 177, 183; Saks v. Damon Raike & Co. (1992) 7 Cal.App.4th 419, 427.) Accordingly, we assume that the court sustained only the general demurrer and will consider all the reasons for general demurrer asserted in the demurrer. But we assume that the court did not rule on the special demurrer to counts four through seven based on the absence of an indispensable defendant or the special demurrer to count three based on uncertainty.

2. The Court Erred by Taking Judicial Notice of the Proper Interpretation

and Enforceability of the Letter Agreement and by Deciding those

Questions in Ruling on the Demurrer

Indemnity alleges in the complaint that Fremont General, Insurance Group, and Indemnity purported to enter into a second agreement, allegedly memorialized by a letter dated July 2, 2002 (July 2, 2002 Letter), to replace the November 27, 2000 Letter, but continuing the requirement from the November 27, 2000 Letter that Fremont Indemnity would submit to the Commissioners ongoing supervision and regulatory oversight. Indemnity alleges that Fremont General and Insurance Group breached the November 27, 2000 Letter and the July 2, 2002 Letter . . . by concealing material transactions from the Commissioner as regulator of Fremont Indemnity and Comstock. Indemnity alleges further that the transactions between Comstock and Re were not subject to the commissioners oversight under the July 2, 2002, letter agreement and that the alleged transfer of liabilities from Re to Comstock and then merging of Comstock into Indemnity was a violation of the terms of the July 2, 2002 Letter. Thus, the complaint alleges the existence of a letter dated July 2, 2002, alleges that the letter purports to memorialize an agreement, and alleges that Fremont General and Insurance Group violated the terms of the purported agreement. Those are the only references to the July 2, 2002, letter in the complaint. The complaint does not attach a copy of the letter.

Fremont General and Insurance Group requested judicial notice of a letter dated July 2, 2002. They cited no statutory authority for the request, but argued that the court had taken judicial notice of the same letter in the NOL action and that consideration of the letter was essential to a proper understanding of the allegations of the complaint. They cited Ingram v. Flippo (1999) 74 Cal.App.4th 1280 and Marina Tenants Assn. v. Deauville Marina Development Co. (1986) 181 Cal.App.3d 122 for the latter proposition. Fremont General and Insurance Group argue on appeal that the trial court properly took judicial notice of the letter under Evidence Code section 452, subdivision (d), which authorizes judicial notice of court records. They argue that the letter was judicially noticeable because it was part of the superior court record in the NOL action. They argue further that under the terms of the letter agreement, the commissioner clearly and unambiguously released them from any liability to Indemnity for their use of Comstocks net operating losses.

Judicial notice may not be taken of any matter unless authorized or required by law. (Evid. Code,  450.) Matters that are subject to judicial notice are listed in Evidence Code sections 451 and 452. A matter ordinarily is subject to judicial notice only if the matter is reasonably beyond dispute. (Post v. Prati (1979) 90 Cal.App.3d 626, 633.) Although the existence of a document may be judicially noticeable, the truth of statements contained in the document and its proper interpretation are not subject to judicial notice if those matters are reasonably disputable. (StorMedia, Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9.) StorMedia stated: In ruling on a demurrer, a court may consider facts of which it has taken judicial notice. (Code Civ. Proc.,  430.30, subd. (a).) This includes the existence of a document. When judicial notice is taken of a document, however, the truthfulness and proper interpretation of the document are disputable. (Joslin v. H.A.S. Ins. Brokerage (1986) 184 Cal.App.3d 369, 374 [228 Cal.Rptr. 878].) (Ibid.)

Joslin v. H.A.S. Ins. Brokerage, supra, 184 Cal.App.3d at page 374 stated: Taking judicial notice of a document is not the same as accepting the truth of its contents or accepting a particular interpretation of its meaning. (See Middlebrook‑Anderson Co. v. Southwest Sav. & Loan Assn. (1971) 18 Cal.App.3d 1023, 1038 [96 Cal.Rptr. 338].) On a demurrer a courts function is limited to testing the legal sufficiency of the complaint. (Marina Tenants Assn. v. Deauville Marina Development Co. (1986) 181 Cal.App.3d 122, 127 [226 Cal.Rptr. 321].) A demurrer is simply not the appropriate procedure for determining the truth of disputed facts. (Ramsden v. Western Union (1977) 71 Cal.App.3d 873, 879 [138 Cal.Rptr. 426].) The hearing on demurrer may not be turned into a contested evidentiary hearing through the guise of having the court take judicial notice of documents whose truthfulness or proper interpretation are disputable. (See Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 605 [176 Cal.Rptr. 824].) Joslin, supra, at page 375 stated further,  judicial notice of matters upon demurrer will be dispositive only in those instances where there is not or cannot be a factual dispute concerning that which is sought to be judicially noticed. (Cruz v. County of Los Angeles (1985) 173 Cal.App.3d 1131, 1134 [219 Cal.Rptr. 661].)

The proper interpretation of a contract is disputable if the contract is susceptible of more than one reasonable interpretation, that is, if the contract is ambiguous. An ambiguity may appear on the face of a contract, or extrinsic evidence may reveal a latent ambiguity. (Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37-39.) A court determining whether a contract is ambiguous must first consider extrinsic evidence offered to prove the parties mutual intention. If the court determines that the contract is reasonably susceptible of an interpretation supported by extrinsic evidence, the court must admit that evidence for purposes of interpreting the contract. (Id. at pp. 39‑40.) A court cannot determine based on only the four corners of a document, without provisionally considering any extrinsic evidence offered by the parties, that the meaning of the document is clear and unambiguous. (Id. at p. 37.)[1] Instead, a court must provisionally consider extrinsic evidence offered by the parties in the manner we have stated.

For a court to take judicial notice of the meaning of a document submitted by a demurring party based on the document alone, without allowing the parties an opportunity to present extrinsic evidence of the meaning of the document, would be improper. A court ruling on a demurrer therefore cannot take judicial notice of the proper interpretation of a document submitted in support of the demurrer. (StorMedia, Inc. v. Superior Court, supra, 20 Cal.4th at p. 457, fn. 9; Joslin v. H.A.S. Ins. Brokerage, supra, 184 Cal.App.3d at p. 374.) In short, a court cannot by means of judicial notice convert a demurrer into an incomplete evidentiary hearing in which the demurring party can present documentary evidence and the opposing party is bound by what that evidence appears to show.

Southern Pacific Land Co. v. Westlake Farms, Inc. (1987) 188 Cal.App.3d 807 illustrates the same principle but with respect to a document attached to the complaint. Southern Pacific Land Co. involved an action for declaratory relief and breach of contract relating to an oil and gas lease that was attached to the complaint, rather than judicially noticed. The plaintiff alleged that the lease did not terminate under its own terms, while the defendant maintained that the lease had terminated. (Id. at pp. 811‑812, 815.) The trial court interpreted the lease and sustained a demurrer to the complaint. The plaintiff argued on appeal that it was entitled to an opportunity to present extrinsic evidence in support of its interpretation of the lease. The Court of Appeal agreed and held that the trial court in ruling on the demurrer without the benefit of extrinsic evidence could not construe the ambiguous lease in a manner contrary to the plaintiffs interpretation as alleged in the complaint. (Id.at p. 816‑817.)

Thus, a court ruling on a demurrer cannot decide a question that may depend on disputed facts by means of judicial notice. This rule applies not only with respect to the interpretation of a contract, but also with respect to its enforceability. A court ruling on a demurrer cannot take judicial notice that a contract submitted in support of the demurrer is binding and enforceable if the plaintiff claims the contract is unenforceable due to fraud or duress (see Civ. Code,  1567). (Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145-1146.) Gould held that it was error for the trial court to take judicial notice of the enforceability of a written contract for purposes of ruling on a demurrer when the plaintiff claimed that he had signed the document under duress. (Ibid.)

Indemnity does not allege in the complaint either that the July 2, 2002, letter agreement released the defendants from liability to Indemnity for their use of Comstocks net operating losses or that the letter agreement is an enforceable contract. Because the parties disputed and continue to dispute the proper interpretation of the letter agreement, we conclude that the trial court erred by interpreting the document in ruling on the demurrer. Moreover, the parties also dispute the enforceability of the letter agreement. Indemnity argued in the trial court and continues to argue on appeal in this action, and alleges in the NOL action, that the defendants obtained the commissioners consent to the terms stated in the letter by fraudulently concealing from the commissioner material information concerning Indemnitys financial condition. The trial court erred by determining in ruling on the demurrer that the letter agreement is binding and enforceable. The court could not properly foreclose the introduction of extrinsic evidence bearing on the proper interpretation of the letter agreement and its enforceability by deciding those questions based on only the pleadings and matters judicially noticeable. In accordance with the authorities cited above, we conclude that the sustaining of the demurrer based on the terms of the letter agreement was error.

The cases cited by Fremont General and Insurance Group in the trial court are distinguishable. The plaintiff in Ingram v. Flippo, supra, 74 Cal.App.4th 1280 alleged that the district attorney published a letter and a media release stating inaccurately that school district board members had violated the Ralph M. Brown Act (Brown Act) (Gov. Code,  54950 et seq.). The plaintiff sought declaratory and injunctive relief under the Brown Act. The complaint quoted from and summarized parts of the letter, the defendant filed a copy of the letter and media release in support of the demurrer, and both sides referred to the letter and quoted from it at the hearing on the demurrer. The defendants requested judicial notice of the letter and media release on appeal under Evidence Code section 452, subdivision (h), and the plaintiff did not oppose the request. Noting all of those circumstances, the Court of Appeal granted the request for judicial notice of the letter and media release. (Ingram, supra, at p. 1285, fn. 3.) The Court of Appeal did not resolve conflicting interpretations of those documents or decide any question of enforceability, as the superior court did here. Rather, Ingram held that the plaintiff failed to state a cause of action for declaratory relief under the Brown Act because she did not allege that the district attorney had violated the Brown Act, and that the plaintiff was not entitled to an injunction because the district attorney was specifically authorized to file an action under the Brown Act if he determined that a violation had occurred. (Ingram, supra, at pp. 1290‑1291.)

The plaintiffs in Marina Tenants Assn. v. Deauville Marina Development Co., supra, 181 Cal.App.3d 122 alleged that they were third party beneficiaries of a master lease between the defendants and the County of Los Angeles. They alleged that they had paid excessive rents that were not  fair and reasonable as required under the lease and sought to recover the alleged excess amounts as damages. The complaint alleged some of the lease terms, and the trial court took judicial notice of the entire master lease. (Id. at pp. 126‑127 & 128, fn. 1.) On appeal, no party challenged the taking of judicial notice. The Court of Appeal stated that the plaintiffs had pled only selected portions of the lease and that it was proper for the trial court to consider the entire lease. (Id. at p. 130.) Marina Tenants stated that the lease was ambiguous as to whether the plaintiffs were intended beneficiaries and that the court could not resolve that ambiguity in ruling on the demurrer. (Id. at p. 132.) Marina Tenants concluded, however, that even if the plaintiffs were intended beneficiaries, they were not entitled to the requested relief. Marina Tenants stated that the lease provided for the county to determine whether rents were fair and reasonable and that absent an allegation that the county had determined that rents were not fair and reasonable, neither the county nor the plaintiffs had a right under the lease to obtain a retroactive rent reduction. (Id. at pp. 132‑133.) Thus, Marina Tenants expressly declined to resolve the parties conflicting interpretations of a judicially noticed document and did not decide any question of enforceability.

The cases cited by Fremont General and Insurance Group on appeal also are distinguishable. The plaintiff in Ascherman v. General Reinsurance Corp. (1986) 183 Cal.App.3d 307 sued a reinsurer alleging that the plaintiff as the insured was a third party beneficiary of a reinsurance contract. He sought to recover the cost of defending an action from the reinsurer after his liability insurers liquidation, alleging counts for declaratory relief and unjust enrichment. The Court of Appeal stated that the trial court properly took judicial notice of both the reinsurance contract and a release in favor of the reinsurer from the Illinois Director of Insurance. (Id. at pp. 310‑311.) Ascherman concluded that, consistent with reinsurance contracts generally, the terms of the reinsurance contract indicated that the plaintiff was not an intended beneficiary, and therefore concluded that the complaint failed to state a cause of action for declaratory relief. (Id. at pp. 310‑312.) Ascherman also concluded that the complaint failed to state a cause of action for unjust enrichment because the reinsurer had discharged its responsibilities under the reinsurance contract and obtained a release from the Director of Insurance, and because the plaintiff had failed to timely file a claim in liquidation. (Id. at pp. 310, 312 & fn. 6.) The parties in Ascherman did not dispute the enforceability of the reinsurance contract or release. Moreover, it appears from the opinion that there was no significant dispute as to the interpretation of those documents and no contention that extrinsic evidence was relevant.

The plaintiff in Laughner v. Bryne (1993) 18 Cal.App.4th 904 sought to recover damages on her own behalf for future medical and support expenses that she would incur to care for her injured child. The Court of Appeal concluded that the plaintiff was precluded from recovering those damages because she had settled and released claims for the same damages on behalf of her minor child. (Id. at pp. 910‑912.) The trial court had approved the settlement and release and took judicial notice of the document in ruling on the demurrer. (Id. at pp. 907‑908.) The parties did not dispute the enforceability of the release, and there was no contention that extrinsic evidence was relevant to its interpretation.

Jones v. Aetna Casualty & Surety Co. (1994) 26 Cal.App.4th 1717, also cited by Fremont General and Insurance Group, held that the plaintiff lessee was not a third party beneficiary of the lessors insurance policy. The plaintiff apparently alleged the relevant policy terms in the complaint or attached a copy of the policy to the complaint (id. at p. 1721), and there was no mention of judicial notice in the opinion. Jones concluded that the terms of the policy indicated that the plaintiff was not an intended beneficiary. The parties did not dispute the enforceability of the policy, and there was no contention that extrinsic evidence was relevant to its interpretation. Similarly, Vaillette v. Firemans Fund Ins. Co. (1993) 18 Cal.App.4th 680 held that a settlement agreement between the plaintiff, a defendant in another action, and that defendants insurer could not reasonably be interpreted to allow the plaintiff to recover from the insurer attorney fees, costs, and interest. The settlement agreement apparently was attached to the complaint. The parties did not dispute the enforceability of the settlement agreement, and there was no contention that extrinsic evidence was relevant to its interpretation.

Finally, in Beck v. American Health Group Internat., Inc. (1989) 211 Cal.App.3d 1555, the plaintiff sued for breach of contract and other counts based on an alleged written contract to employ the plaintiff as a hospital medical director and attached a copy of the alleged contract to the complaint. The alleged contract was a letter from the hospital to the plaintiff, countersigned by the plaintiff, expressly stating that the letter was preliminary to a proposed future agreement and written contract. (Id. at pp. 1558‑1559 & fn. 1.) The plaintiff did not allege that the letter was ambiguous or that it was susceptible of the interpretation that it was a present agreement. (Id. at pp. 1561‑1562.) Beck cited the rule that if the plaintiff fails to allege that a document attached to the complaint has a special meaning, a court ruling on a demurrer will interpret the document on its face to determine as a matter of law whether it is reasonably susceptible of an interpretation that would support a cause of action. (Id. at p. 1561, citing Hillsman v. Sutter Community Hospitals (1984) 153 Cal.App.3d 743, 749-750 and California Assn. of Highway Patrolmen v. Department of Personnel Admin. (1986) 185 Cal.App.3d 352, 361.) Interpreting the letter on its face, Beck concluded that the letter was not a binding contract. (Beck, supra, at pp. 1562‑1563.) Thus, the court interpreted the letter on its face without regard to the possibility of extrinsic evidence because the plaintiff relied on the letter as the basis for his cause of action but failed to allege any special meaning. Here, in contrast, Indemnity does not rely on the letter dated July 2, 2002, to support a cause of action and did not attach a copy of the letter to its complaint, and therefore is not precluded from presenting extrinsic evidence concerning the enforceability and proper interpretation of the letter.

3. The Sustaining of the Demurrer Cannot Be Affirmed Based on the Other

Reasons Cited by the Trial Court

A demurrer must dispose of an entire cause of action to be sustained. (PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682.) Counts one, two, and three are based exclusively on the alleged misappropriation of Comstocks net operating losses, while counts four through twelve are based on that and also on the alleged misappropriation of other assets involving Re. The trial courts conclusion that Indemnity lacks standing to sue for injuries to Re and that some of the allegations are directed against Re concerns only the alleged misappropriation of assets involving Re and does not dispose of an entire count or cause of action. We therefore conclude that the demurrer cannot be sustained to any count based on the reasons cited by the trial court and express no opinion as to the validity of those reasons. We will now address the other reasons for general demurrer asserted in the demurrer but not relied on by the trial court.

4. The Complaint Adequately Alleges a Cause of Action for Conversion

Fremont General and Insurance Group demurred to count seven for conversion arguing that the unauthorized taking of an intangible property interest that is not merged with or reflected in tangible property is not actionable as conversion. Conversion is generally described as the wrongful exercise of dominion over the personal property of another. (Gruber v. Pacific States Sav. & Loan Co. (1939) 13 Cal.2d 144, 148.) The basic elements of the tort are (1) the plaintiffs ownership or right to possession of personal property; (2) the defendants disposition of the property in a manner that is inconsistent with the plaintiffs property rights; and (3) resulting damages. (Burlesci v. Petersen (1998) 68 Cal.App.4th 1062, 1066.)

Thrifty-Tel, Inc. v. Bezenek (1996) 46 Cal.App.4th 1559, 1565 stated, Courts have traditionally refused to recognize as conversion the unauthorized taking of intangible interests that are not merged with, or reflected in, something tangible. (Adkins v. Model Laundry Co. (1928) 92 Cal.App. 575, 583 [268 P. 939] [business goodwill]; Olschewski v. Hudson (1927) 87 Cal.App. 282, 286-288 [262 P. 43] [competitors customer route]; Faircloth v. A.L. Williams & Associates (1992) 206 Ga.App. 764 [426 S.E.2d 601, 604-605] [unpaid commissions not evidenced by a receipt or certificate]; Matzan v. Eastman Kodak Co. (1987) 134 A.D.2d 863 [521 N.Y.S.2d 917, 918] [no protected interest in an idea].) And Dean Prosser has cautioned against scuttling conversions tangibility requirement altogether, recommending instead the use of other remedies to protect intangible interests. (Prosser & Keeton on Torts [(5th ed. 1984)]  15, p. 92.) [Fn. omitted.][2]Thrifty-Tel involved unauthorized use of the plaintiffs access and authorization codes to make long distance telephone calls. The jury found the defendants liable for conversion. The Court of Appeal concluded that the evidence supported the verdict based on a theory of trespass to personal property and declined to decide whether the evidence established liability for conversion. (Id. at pp. 1565‑1566.) The quoted language from the opinion was dictum.

The California Supreme Court in Payne v. Elliot (1880) 54 Cal. 339 held that the defendant was liable for trover for the conversion of shares of stock despite the absence of any allegation that the plaintiff had owned or that the defendant had converted share certificates. (Id. at p. 340.) Payne stated: At common law, trover was the proper remedy for a conversion of personal property; but it lay only for tangible property, capable of being identified and taken into actual possession. The conversion of the property was the gist of the action; and the action did not lie, unless the defendant had become actually possessed of the property by some means, whether of finding or otherwise. Shares of stock, and such things, did not belong to that class of property known as chattels; they were considered incorporeal, intangible things, which existed in idea, and were incapable of being subjected to actual possession. . . .  The certificates themselves were not considered property, but were considered evidence of property. Wherever common-law ideas of personal property prevail, courts hold that trover is not the proper remedy for the conversion of things which were considered at common law as mere personal rights, not reducible into possession, but recoverable by law. . . .

TO BE CONTINUED AS PART III.

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[1] [T]he meaning of language is to be found in its applications. An indeterminacy in the application of language signals its vagueness or ambiguity. An ambiguity arises when language is reasonably susceptible of more than one application to material facts. There cannot be an ambiguity per se, i.e., an ambiguity unrelated to an application. [Citations.] [] Accordingly, [e]ven if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible. [Citation.] (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 391.) The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. [Citations.] [] A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained. (Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., supra, 69 Cal.2d at p. 37.)

[2] Section 242 of the Restatement Second of Torts, published in 1965, states: (1) Where there is conversion of a document in which intangible rights are merged, the damages include the value of such rights. [] (2) One who effectively prevents the exercise of intangible rights of the kind customarily merged in a document is subject to a liability similar to that for conversion, even though the document itself is not converted. The comments to section 242 recognized that the law of conversion was undergoing a process of extension at that time and stated, nothing that is said in this Section is intended to indicate that in a proper case liability for intentional interference with some other kind of intangible rights may not be found. (Id., com. f, p. 475; see id., com. b., pp. 473-474.)