JVMCM, Inc. v. Internet Automotive Group

Filed 7/31/07 JVMCM, Inc. v. Internet Automotive Group CA3

NOT TO BE PUBLISHED

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

THIRD APPELLATE DISTRICT

(Sacramento)

This case tenders the question whether there is substantial evidence to support an unpled claim of fraud to which no demurrer or objection was raised below.

The case arises from a series of three agreements between plaintiff JVMCM, Inc., which owned Dollar Rent-a-Car (Dollar), and defendants Internet Automotive Group, doing business as Autosquare USA, Inc. and Westlake Financial Services, which are owned by the same individual.

All three agreements provided that defendants would sell and finance the sale of fleet cars to plaintiff. Under the first agreement, Autosquare agreed to repurchase the cars after 12 months but when the time came, it failed to repurchase 44 of 89 cars and wrongly informed Dollar the cars had been rejected for high mileage. Under the third agreement, Autosquare agreed to sell plaintiff 90 new cars and repurchase 126 cars previously sold to Dollar under the first two agreements, but again failed to repurchase most of the cars as it had promised.

Plaintiff brought suit against defendants for promissory fraud and breach of contract on the third agreement only. Both claims were based on allegations that defendants, operating as one company, falsely promised to repurchase the 126 cars and failed to make the repurchase. At trial, plaintiff also tendered an unpled claim of fraudulent misrepresentation, to which no objections were raised, based upon the trial testimony of John McMichael, owner of JVMCM, that the only reason Dollar entered into the third agreement was because Westlake had falsely represented to him that Dollar still owed Westlake $384,709.42 for the 44 cars Autosquare had refused to repurchase under the first agreement.^[1]

By special verdicts, the jury found in favor of plaintiff on its contract claim and against plaintiff on its claim of promissory fraud. However, it found in favor of plaintiff on the unpled claim of fraudulent misrepresentation tendered by plaintiff based upon McMichaels testimony.

The court awarded plaintiff contract damages for $100,746.50 against Westlake on the first agreement, $301,200.19 against Westlake and Autosquare jointly and severally on the second and third agreements, and imposed $2,700,000 in punitive damages against Westlake.^[2]

No objection was raised below to plaintiffs failure to plead the claim of fraudulent misrepresentation or to plaintiffs evidence in support of that claim. Accordingly, the dispositive issue is whether there is substantial evidence to support the unpled claim of fraudulent misrepresentation. Finding none, we agree with defendants that the evidence is insufficient to support the verdict for fraud.

We shall reverse the verdict on the unpled claim of fraud and the resulting punitive damage award. We affirm the judgment in all other respects.^[3]

FACTUAL AND PROCEDURAL BACKGROUND

To provide a background for the case we set out the facts in some detail.

A. The Parties

John McMichael and his wife owned JVMCM, Inc., a corporation that owned Dollar, a car rental franchise for the Sacramento and Placer County areas.

Donald Hankey owned Hankey Investment Company, a limited partnership. Hankey incorporated Midway Motors, which operated Autosquare USA. In May 2000, Hankey formed Internet Automotive, which began doing business as Autosquare USA. Hankey also incorporated Westlake, a finance company that financed purchases by car rental companies, and Westlake had a dealership agreement with Autosquare to finance its fleet sales.

Hankey was the major shareholder of both Autosquare and Westlake and the two companies operated as one company, sharing the same address and the same manager, John Pham.

B. The Agreements

In 1999, McMichael heard a presentation about a new type of car designed for the car rental business, the Daewoo. After making inquiries, he was contacted by Jim McCluskey, a salesman for Autosquare, who explained that Autosquare could provide the Daewoos as well as a funding source.

1. Batch Deal No. 1

On April 15, 1999, McMichael signed a commercial purchase order on behalf of Dollar, agreeing to buy 90 Daewoos from Autosquare for $1,009,340 (Batch 1). The agreement provided that Autosquare, with Daewoo Motor America, Inc. as guarantor, would repurchase all of the Daewoos after 12 months at a specified price totaling $793,341 for the 90 cars.

Westlake agreed to finance the purchase by loaning Dollar $986,000. John Pham is listed as the manager of and contact person for Westlake Financial Services. Dollar sent Westlake two checks totaling $44,645 for the down payment, the Department of Motor Vehicle license fee, and the document fee, and made timely monthly payments on the loan.

In the early part of 2000, McCluskey notified Dollar it was time to return the Batch 1 cars under the repurchase agreement. In accordance with McCluskeys instructions, Dollar returned 20 of the cars to Autosquare in Los Angeles and sent the remaining 69^[4]cars to an auto auction. The auto auction paid defendants for 25 of the 69 cars and Westlake credited Dollar for those 25 cars. A few months later, however, Autosquare advised Dollar the auction had rejected 44 of the cars under the repurchase program because of high mileage. McMichael testified that according to Westlake, at the end of June 2000, Dollar continued to owe $384,709.42 for the 44 cars, an amount that was equal to the buy-back value of those cars. Although McMichael thought the auto auction had rejected an unusually high number of vehicles, he accepted Westlakes representation about the amount of the outstanding balance because he thought the people at Westlake were honorable and Dollar had a trust relationship with them.

2. Batch Deal No. 2

In March 2000, Dollar agreed to buy 80 Daewoos and 30 Toyota Camrys (Batch 2) to replace the Batch 1 cars. The total contract price was approximately $1,385,000. The amount to be financed was approximately $1,365,520. This agreement did not include a buyback provision.

3. Batch Deal No. 3

A few months later after the Batch 2 cars had been delivered, an Autosquare employee contacted Dollar and made the following offer: Autosquare would buy back 21 of the Batch 1 cars, all of the Batch 2 Daewoos (80), and 25 of the 30 Batch 2 Toyota Camrys, and would help Dollar dispose of the remaining Batch 1 cars. In exchange, Dollar would agree to buy 90 new Daewoos (Batch 3). On July 21, 2000, Pham prepared the Autosquare purchase order and Westlakes finance agreement.

McMichael was reluctant to accept the proposal. The Toyotas generated the most revenue but in order to unload the Batch 1 Daewoos, which were difficult to sell, he would have to return the Toyotas. In addition, because Westlake had just told him that he still owed $384,709.42 for the 44 Batch 1 cars, he agreed to the proposal in order to pay off that loan.

After further negotiation over other matters not here pertinent, Pham signed the agreement and sent it to Dollar. The total contract price was $892,266, the amount financed was $871,100.

Dollar did not receive any more invoices on the Batch 1 and 2 loans after July 2000, which seemed appropriate to McMichael because it was his understanding the July 21, 2000, agreement left him with little or nothing owing on the first two loans.

Meanwhile, defendants instructed Dollar to return the Batch 2 cars on the trucks that delivered the Batch 3 cars. However, the Batch 3 cars arrived much earlier than expected, so the Batch 2 cars were not ready for return. As a result and pursuant to defendants directions, Dollar accepted delivery of the Batch 3 cars, placed the Batch 2 Daewoos in storage awaiting pickup by defendants, and returned the 25 Toyotas to Autosquare. Defendants did not retrieve the Batch 2 Daewoos as promised. Instead, in February 2001, they instructed Dollar to send the vehicles to an auto auction and Dollar complied.

Dollar rented out the Batch 3 Daewoos from the time of their delivery to late 2002. However, McMichael did not know how much revenue Dollar derived from those cars because they were not a particularly popular vehicle.

C. Westlakes Accounting Practices

In defense of Westlakes cross-complaint for breach of contract, Dollar presented evidence that Westlake engaged in fraudulent accounting practices by failing to credit Dollar with over $400,000 in payments made on the Batch 1 and Batch 2 loans^[5]and overcharging Dollar approximately $120,000 in interest charges and $49,000 in unjustified late fees. Craig Connerty, Dollars forensic accounting expert, concluded Dollar overpaid Westlake a total of $406,275 on all three loans.^[6]

D. The Lawsuit

Plaintiff filed a complaint against all defendants for breach of contract and fraud relating to the third agreement only, seeking compensatory and punitive damages. On the fraud claim, plaintiff alleged that defendants falsely and fraudulently represented to Plaintiff that they would buy from Plaintiff . . . (126) vehicles . . . in exchange for and in tandem with Plaintiff agreeing to buy . . . (125) vehicles

. . . .

Defendants answered the complaint, Westlake filed a cross-complaint against plaintiff seeking $752,714.56 in damages for breach of contract on all three loans, and Dollar filed an answer to the cross-complaint.

The matter was tried before a jury which returned special verdicts in favor of Dollar on all but the fraud claim against Autosquare. As to the Batch 1 agreement, the jury found inter alia, that Autosquare breached the buyback provision of that agreement, Dollar did not breach the agreement, the award of damages against Autosquare should be credited on the Batch 1 loan from Westlake, and Westlake owes Dollar $100,746.50 for overpayments on that loan.

As to the third agreement, the jury found Dollar and Internet entered into the third agreement to repurchase cars, Internet breached that agreement, an award of damages against Internet should be credited towards the Batch 2 loan, and Westlake and Autosquare each owe Dollar $301,200.19 for the Batch 2 loan.

In connection with the claim of promissory fraud the jury found in favor of Internet. However, the jury found Westlake guilty of fraudulent misrepresentation on the unpled claim but made no monetary award.

Last, on the question of punitive damages the jury found Westlake and Internet both guilty of fraud, malice, or oppression for false promise and/or false representation but awarded punitive damages against Westlake only.

The trial court entered judgment for plaintiff and awarded plaintiff $100,746.50 against Westlake, $301,200.19 against Internet and Westlake jointly and severally, as contract damages, and, on the punitive damages claim, awarded $2,700,000 against Westlake.^[7]

Defendants appeal from the judgment but assert no error regarding the contract claims.

DISCUSSION

I.

The Evidence Fails to Establish

the Unpled Claim of Fraud

As noted, the dispositive issue on appeal concerns the judgment concerning the claim of fraudulent misrepresentation.

Here the factual basis for plaintiffs claim of fraudulent misrepresentation was never pled. As a result, it was not subject to demurrer (Tarmann v. State Farm Mutual Auto. Ins. Company (1991) 2 Cal.App.4th 153, 158) and defendants waived any other pleading error in connection with the claim.^[8] Having escaped dismissal of its unpled claim of fraudulent misrepresentation, (see fn. 9, infra), plaintiff still had to clear the hurdle of proof, and on appeal, we review the sufficiency of the evidence to determine whether there is substantial evidence to support each and every element of that claim. (Warren v. Merrill (2006) 143 Cal.App.4th 96, 110.)

Although the verdict for fraud is based upon an unpled claim, defendants have not preserved a challenge to the verdict on that ground.^[9] Rather, they contend the verdict for fraud is not supported by substantial evidence because there is insufficient evidence to establish the elements of scienter and reasonable reliance. With respect to the element of scienter, defendants argue that McMichael failed to identify who made the false representation that Dollar owed Westlake $384,704.92 in June 2000. Without such evidence, they argue, it is impossible to find scienter. Plaintiff contends there is substantial evidence to prove both elements.

Although we differ in our analysis, we agree with defendants that the evidence fails to support the jurys finding of fraud and shall reverse the verdicts for the unpled fraud and punitive damages because we find there is no evidence to establish that an authorized agent of Westlake made a false misrepresentation. Because we do so, we do not address defendants argument relating to scienter and reasonable reliance.

When reviewing the sufficiency of the evidence to support the verdict, the power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the determination, and when two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the trial court. (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874, italics omitted.)

The elements of fraud are (1) a false misrepresentation or concealment of a material fact; (2) scienter or knowledge of the falsity; (3) intent to induce reliance; (4) justifiable reliance; and (5) resulting damage. (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1108, superseded by statute on other grounds as stated in Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 854; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, 393, p. 356.)

To establish the element of misrepresentation, there must be facts which show how, when, where, to whom, and by what means the representations were tendered. (Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73; Lazar v. Superior Court (1996) 12 Cal.4th 631, 645.) Additionally, when made against a corporate entity, the plaintiff must also establish the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written. (Lazar, supra, at p. 645; Tarmann v. State Farm Mut. Auto. Ins. Co., supra, 2 Cal.App.4th at p. 157.) Unattributed statements are insufficient to impose liability upon a corporation. (Tarmann, supra, at pp. 157-158 [general allegation that persons who made statements on behalf of corporation were authorized agents and specific allegation that plaintiff did not know their names were insufficient to state fraud cause of action].)

The jurys verdict for fraud rests solely on McMichaels testimony that [a]ccording to Westlake, we were told that [at the end of June 2000] we owed $384,000 on the 44 Batch 1 cars. There is no testimony by McMichael or any other witness that identifies the person who made this statement, nor any other evidence to prove the declarant had authority to speak for Westlake, or establish when, where, how, or to whom the alleged statement was made. Dollars failure to present such evidence is fatal to its claim. (Warren v. Merrill, supra, 143 Cal.App.4th at p. 110; Lazar, supra, 12 Cal.4th at p. 645.) Plaintiff fails to address this evidentiary gap in the record.

Given the insufficiency of McMichaels testimony to establish that a misrepresentation was made, we reviewed the documentary evidence to determine whether Westlake sent any invoice or other statement of account that informed McMichael of the alleged debt. We were unable to find any such document prepared by Westlake between the months of March and July of 2000, which states that Dollar owed Westlake $384,704.92 for the 44 rejected cars.^[10] Although plaintiff presented a good deal of evidence establishing Westlakes fraudulent accounting practices for late fees, interest charges, and uncredited payments (see fn. 2), these practices were offered in defense of Westlakes cross-complaint and not to prove the $384,704.92 debt.

During oral argument, counsel for Dollar argued that the jurys verdict for fraud is supported by McMichaels testimony, Exhibit 62, and the testimony of Westlakes accounting manager Oscar Rodriguez, that he prepared the spreadsheets in Exhibit 62. We disagree.

Exhibit 62 is a series of spread sheets. The first page bears Westlakes logo and is entitled Dollar Rent-A-Car Account Statement 910-030979. That page and the second page show a running account statement reflecting various types of financial activity, including receipt of payment checks, payoffs, charges, and balances. The statement shows that in May 2000 the balance owed was as much as $543,764.16 and as little as $431,272.91 and while those sums are enough to include the $384,704.92, there is no specific entry identifying that sum on the Batch 1 loan. Theother nine pages include spread sheets listing individual cars by make and model, amount financed, funding date, and monthly balances. Three of the pages pertain to Batch 1 cars, but show an ending balance of $55,761.09.

Most notably however, the spread sheets in this exhibit appear to have been prepared well after Dollar entered into the Batch 3 agreement. The first two pages, Dollars account statement, run from April 1999 through January 2003, showing it was prepared after June 2000. The third and fifth pages bear columns labeled Conceded Amt Financed and Conceded 5/5/1999 DOWN Payment. The use of the word conceded shows that these documents were prepared in contemplation of litigation andtherefore were also prepared well after Dollar entered into the Batch 3 Agreement. The remaining spread sheets show running totals through July 2001, while the last two pages actually bear the time and date July 24, 2003 2:16 PM.

In sum, contrary to counsels assertions, Exhibit 62 does not constitute substantial evidence that prior to or in June 2000, Westlake Financial sent Dollar an account statement, which represented that in June 2000, Dollar still owed Westlake $384,704.92 for the 44 rejected Batch 1 cars.

Accordingly, we conclude the evidence fails to establish Westlake made a misrepresentation of fact that in June 2000 Dollar owed it $384,704.92 for the 44 rejected cars and shall reverse the verdict for fraud.

II

Punitive Damages May Not be Awarded

Punitive damages may only be awarded [i]n an action for the breach of an obligation not arising from contract . . . . (Civ. Code, 3294, subd. (a).) In the absence of an independent tort, punitive damages may not be awarded for breach of contract even where the defendant's conduct in breaching the contract was wilful, fraudulent, or malicious. (Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 61, quoting Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 516.) Because we shall reverse the judgment for fraud, the foregoing rule compels a reversal of the award of punitive damages in its entirety. (Cates, supra, 21 Cal.4th at p. 61.)

III.

The Compensatory Damage Award

is Not Excessive

Defendants challenge the compensatory damage award as excessive on the theory the jury failed to follow the instruction to offset the damage award by the rental value of the Batch 3 cars. Plaintiff counters that this contention is without merit because there is no evidence upon which the jury could make that determination without speculating. We agree with plaintiff that this argument should be rejected but again differ in our analysis.

The jury was instructed that in determining the amount of damages for fraud, it must subtract the fair-market value of any benefits Dollar received. No such instruction was given for assessing the amount of contract damages and defendants do not argue the failure to do so was error.

Because the jury did not award Dollar damages for the unpled fraud, there can be no claim the damages on that claim are excessive. Since defendants do not argue that the jury was improperly instructed on the measure of contract damages, they have forfeited any claim of error relating to an offset against the amount of contract damages. (Christoff v. Union Pacific Railroad Co. (2005) 134 Cal.App.4th 118, 125 [appellants failure to discuss an issue in its opening brief forfeits the issue on appeal]; Dieckmeyer v. Redevelopment Agency of Huntington Beach (2005) 127 Cal.App.4th 248, 260.) We therefore reject defendants claim of error.

DISPOSITION

The judgment for fraudulent misrepresentation and punitive damages is reversed. The judgment is affirmed in all other respects. The parties shall pay their own costs on appeal. (Cal. Rules of Court, rule 8.276(a)(3).)

BLEASE , Acting P. J.

We concur:

NICHOLSON , J.

BUTZ , J.

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^[1] In addition Westlake filed a cross-complaint against JVMCM seeking damages for unpaid balances on the loans made pursuant to all three agreements. The jury found against Westlake on these claims.

^[2] Plaintiff pled one contract claim based upon the third agreement while Westlake pled contract claims on all three agreements. Because the pleadings tendered breach of contract claims on all three agreements, the jury returned verdicts on all three agreements, finding in favor of plaintiff as to allthree contract claims. Although Dollar is only entitled to damages on its one contract claim, the contract damages on the third agreement were credited to the first two agreements andawarded as contract damages on those two agreements. No objection was raised below nor is any error raised by defendants on appeal as to the fact or the amount of the contract damage award on the Batch 1 and Batch 2 agreements.

^[3] Because we reverse the finding of fraud on the unpled claim of misrepresentation and the punitive damage award and the jury did not award Dollar any compensatory damages on that claim, we need not resolve defendants further contentions, which all relate to the unpled claim for fraud, that the compensatory damage award is excessive because it fails to credit them with an offset for the rental value of the Batch 3 cars, and the punitive damages award must be reversed because it is based upon an unpled factual allegation, no compensatory damages were awarded for the underlying fraud, and it is excessive under the due process clause.

^[4] One car was damaged in an accident.

^[5] Westlake failed to credit Dollar on the Batch 1 loan with $23,010, paid by check dated May 5, 1999, $21,635 for license and document fees, paid by check dated April 28, 1999, $6,839 paid by check dated June 19, 2000, $11,661 paid by check dated November 9, 2000, 10 checks dated August 31, 2000, totaling over $70,000 from Internet to Westlake on behalf of Dollar, $34,581 by check dated September 20, 2000, from Internet to Westlake on behalf of Dollar, $72,860 by check dated August 18, 2000, and $190,584,69 by check dated September 20, 2000, from Internet to Westlake on behalf of Dollar.

^[6] In determining Dollars damages for Batch 2 and Batch 3, Connerty assumed a jury finding of fraud and credited all Batch 3 payments to the Batch 2 loan.

^[7] The court also awarded plaintiffs $11,149.24 in costs and disbursements and $185,000 for attorney fees.

^[8] As stated, plaintiff pled one count of promissory fraud based solely on the allegation that Autosquare promised to repurchase the Batch 1 and Batch 2 cars.

The complaint includes no allegation that in May or June 2000, Westlake falsely represented to Dollar that it still owed Westlake $384,704.92 on the Batch 1 loan. Nevertheless McMichael was allowed to testify to that effect and defendants did not object to the admission of that evidence nor did they object on the grounds there was a material variance between the complaint and the evidence. To the contrary, when defense counsel moved for a directed verdict on the fraud claim and plaintiffs counsel argued in part that the evidence showed Westlake had falsely represented the amount Dollar owed it on the Batch 1 loan, defense counsel argued only that McMichael did not justifiably rely on those representations.

^[9] Defendants assert that at the beginning of trial, they preserved this claim by objecting to the admission of evidence of accounting errors. However, that evidence is distinct from and was not offered to prove the unpled fraudulent misrepresentation that Dollar still owed Westlake $384,704.92 for the 44 rejected cars. As Dollars counsel advised the court in response to defendants objection, the evidence of accounting errors was being introduced to defend against the cross-complaint. We therefore conclude no objection was raised to the admission of McMichaels testimony to prove the unpled fraud claim.

Where issues are not specifically alleged in a complaint or other pleading, but they become properly involved in and are a part of the case, the objection may not properly be made for the first time on appeal. (Harvey v. Harvey (1954) 124 Cal.App.2d 444, 449-450.) Indeed, defendants do not raise any claims on appeal relating to pleading errors or variance. We shall therefore assume the complaint was impliedly amended to conform to proof (Godfrey v. Steinpress (1982) 128 Cal.App.3d 154, 174 [trial court has discretion to grant motion to amend complaint to conform to proof]) and shall address the merits of defendants argument.

^[10] The only document prepared by Westlake which shows Dollar carried a balance of $384,709.42 in July 2000 is a spreadsheet introduced as Exhibit 66. However, that document was faxed to McMichael on May 3, 2002, two years after the alleged misrepresentation was made. The other documents make no such statement. The invoices for the Batch 1 loan are limited to those sent for the period between June 1999 and March 2000. They show 89 cars as outstanding units and state that at the end of March 2000, Dollar owed a principal balance of $750,649, an amount that does not reflect the credits Westlake gave Dollar for the 25 cars it did repurchase. The monthly invoices relating to the Batch 2 loan for the months of March, April, June, and July 2000, on the other hand, make no reference to the Batch 1 cars or the Batch 1 loan.