Filed 7/5/17 C&N Holdings v. Cremolose CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA



C&N HOLDINGS, LLC et al.,

Plaintiffs and Respondents,

v.

CREMOLOSE, LLC,

Defendant and Appellant.
D070564



(Super. Ct. No.
37-2015-00005394-CU-BC-CTL)


APPEAL from a judgment of the Superior Court of San Diego County, Kevin A. Enright, Judge. Affirmed.
Stephen Thomas Erb, APC, and Stephen T. Erb for Defendant and Appellant.
Dentons US and Charles A. Bird for Plaintiffs and Respondents.
As one part of a complex business transaction, defendant Cremolose, LLC (Cremolose) agreed to sell its assets to plaintiff C&N Holdings, LLC (C&N) and its principal, Michael Kelly (Kelly). The assets consisted of a liquor license and restaurant equipment already in place in a building owned by an entity controlled by the principals of Cremolose, John and Frank Russo. In conjunction with the purchase, C&N also leased the commercial space with the belief they were purchasing a complete, "turnkey" restaurant. As the jury found, however, the Russos misrepresented and concealed serious problems with the air conditioning for the space, which was incapable of handling the crowds of a busy saloon.
When C&N's new saloon failed to attract patrons due to the stifling heat, it stopped paying rent and also stopped payments on the note. C&N was evicted, leaving the assets in the leased premises. This litigation followed. Following trial, the jury found the Russos breached the lease for the space and also found that C&N was excused from paying for the Cremolose assets because the purchase was conditioned on the delivery of a functional premises by the Russos, which did not occur.
On appeal, Cremolose argues the court erred in allowing the jury to determine there was an implied condition on C&N's performance. It contends that, as a matter of law, the condition does not exist. It also maintains that even if the condition exists, its nonperformance should be excused because it constitutes an unenforceable penalty. Cremolose, however, is estopped to deny the existence of the condition based on its actions at trial. It also does not establish any unreasonable forfeiture arising from C&N's excused performance. Accordingly, we affirm the judgment and order denying the motion for judgment notwithstanding the verdict.
FACTUAL AND PROCEDURAL BACKGROUND
Before the agreements giving rise to this lawsuit, John and Frank Russo operated a restaurant on the ground floor of a building they owned in the Gaslamp District of downtown San Diego. The Russos operated the restaurant, also called Cremolose (the restaurant), under an eponymous corporate entity, Cremolose. The building was held by a different corporate entity, 840 5th Avenue LLC, also owned by the Russos.
Before the restaurant opened, the space was used as a clothing store. The Russos expended considerable time and money to convert the space into a restaurant. By late 2012, however, the restaurant was failing and the Russos were anxious to leave the restaurant business.
Through a mutual friend, the Russos met Michael Kelly, who was interested in opening a downtown bar with his wife, Nicole (Michael and Nicole Kelly are hereafter referred to as the Kellys). After a series of meetings and negotiations, the Russos and Kelly signed a letter of intent to lease the space from 840 5th Avenue and to purchase the assets of Cremolose, LLC. Kelly agreed to pay $700,000 for all the assets, including, among other things, the kitchen fixtures, barware, furniture, and the liquor license. He was to pay pursuant to a promissory note, requiring monthly payments for a term of five years.
Kelly agreed to obtain permission from the Russos before selling any of the existing assets, which served as collateral for the note under a separate security agreement. He also agreed to personally guarantee both the lease and purchase agreement, with the amount of the guaranty to decrease as payments were made. The lease specified a term of five years with a monthly rent of $25,000 plus a share of common area maintenance, referred to as "CAM." As part of both the letter of intent and subsequent lease, 840 5th Avenue LLC warranted that the air conditioning system was in proper working order.
The five agreements between the parties—the lease, purchase and sale of assets, promissory note, security agreement, and continuing guaranty—were separate contracts between different corporate entities, but were negotiated between Kelly and the Russos as a cohesive package. The asset purchase agreement was conditioned on Kelly signing the lease. Kelly also testified that the actual assets purchased were not worth $700,000, but rather that the purchase price for the assets included "key money" for the lease. As he explained, key money is an upfront premium paid for an in-demand property in addition to any monthly rent. Although key money would typically be paid as part of a lease, Kelly testified that the Russos wanted to include the key money in the purchase agreement so they could direct the money to a minority owner of Cremolose for his lost investment.
Following the signing of the letter of intent and additional negotiations, the lease and purchase agreement were signed in March 2013. The Kellys moved in and began converting the space into their concept saloon. Kelly testified that in preparing for opening, he sold some of the assets with verbal approval from the Russos, but invested the proceeds back into the space.
When the Kellys opened the Lucky Bastard Saloon in the summer of 2013, they immediately experienced problems with the air conditioning. Kelly characterized the grand opening as taking place in a sauna, where it was so hot the icing on the celebratory cake melted. He testified that the unpleasant atmosphere precluded the Saloon from developing the clientele it needed to succeed as a business.
Over the next year and a half, the parties attempted to fix the air conditioning while the Kellys operated the saloon, but were unable to remedy the shortcomings of the system. Due to the issues with the air conditioning and the resulting loss of business, the Kellys delayed payments on the note and began to withhold rent. In April 2015, the Russos filed an unlawful detainer action to have the Kellys evicted based on their failure to pay rent. Pursuant to a court order in the unlawful detainer action, the Kellys did not remove most of the business assets. John Russo testified that after the Kellys moved out, the kitchen equipment was mostly the same as when Cremolose was in the space and changes in the décor were "like for like." According to a series of appraisals ordered by the Russos, the value of the property left behind fell somewhere in the range of $58,470.00 (value if the Russos were forced to quickly liquidate the assets) to $202,610.00 (fair market value if no compulsion to sell).
Concurrently with the unlawful detainer action, Kelly and C&N filed this lawsuit against the Russos, 840 5th Avenue LLC, and Cremolose. The operative complaint alleged causes of action for breach of contract and fraud by intentional and negligent misrepresentation. Kelly also sought rescission of the lease, note, and guaranty. In response, the Russos filed a cross-complaint, alleging breach of all five agreements, conversion, and fraud.
Before trial, the parties prepared a joint trial readiness report. The report identified a number of disputed legal issues, but did not identify any dispute regarding interpretation of the purchase agreement.
At trial, both parties focused on the issue of air conditioning and its effect on the lease. The Kellys argued that the lease required the landlord to provide an operable and adequate air-conditioning system. They also contended that the Russos knew before the lease was signed that the air conditioning was entirely inadequate, but intentionally misrepresented the condition of the air-conditioning system to the Kellys to induce them to sign the agreements. The Kellys maintained that if they had known the true condition of the air-conditioning system, they never would have entered into any of the agreements. In regard to the purchase agreement and the note, Kelly testified that he stopped payments on the note due to the problems with the air conditioning.
In response, the Russos argued that the lease did not make any special warranties regarding the air-conditioning system, they believed the system was adequate during lease negotiations, and they made reasonable efforts to fix the system after the Kellys moved into the space. They further contended that any problems were the result of physical alterations made by the Kellys and that the failure of the saloon was caused by the Kellys' mismanagement or other external factors, not an inadequate air-conditioning system. Thus, they argued that the Kellys breached all of the agreements by failing to make payments.
Both parties submitted jury instructions with no significant disagreements. In an introductory instruction regarding Cremolose's breach of contract claims arising from the purchase agreement, the jury was informed that "C&N Holdings . . . claims that its non-performance was excused." "To recover damages for breach of contract," the jurors were told, "the Plaintiff and/or Cross-complainants must prove," inter alia, "[t]hat all [of] the conditions required for the Defendants/Cross-defendants['] performance had occurred or were excused."
Neither party cites any evidence or argument in the record demonstrating that the Russos denied the existence of an implied condition. Instead, during closing argument, counsel for the Russos conceded the existence of a condition. Discussing Cremolose's causes of action for breach of the purchase agreement and promissory note, the Russos' counsel walked the jury through the special verdict form. Addressing the questions posed to the jury in the special verdict form, counsel stated: "Was C&N Holdings excused from performing? Again, we get back to [the Kellys' claim that the Russos] lied to us about the air-conditioning; so we shouldn't have to pay for the $700,000 of improvements that we actually received, that's [the Kellys'] argument. . . . If you believe it, you are going to check yes." (Italics added.)
The jury did believe the Russos lied about the air conditioning. On Cremolose's cross-complaint, the jurors followed counsel's instructions in closing argument and found that C&N's performance was excused because all of the conditions required did not occur and, therefore, C&N did not breach any of the agreements. Similarly, in the special verdict on C&N's complaint, the jury determined that the Russos and 840 5th Avenue LLC made intentional and negligent misrepresentations, and intentionally concealed information, to deceive the Kellys and induce them to enter into the agreements. The Kellys reasonably relied on these misrepresentations, with resulting harm. At the same time, however, the jury concluded that Cremolose itself did not make any misrepresentations. Finally, the jury found that the Russos breached the lease by failing to provide a functioning air-conditioning system.
Rather than rescind the agreements, C&N elected to affirm the contracts, resulting in a judgment in favor of C&N and Kelly, awarding a total of $1,532,129.58 in damages. Cremolose—the Russos' corporate seller of restaurant assets—challenged the result in a motion for judgment notwithstanding the verdict. It argued there was no evidence of any unfulfilled condition, hence it should have prevailed on its breach of contract claim. According to Cremolose, no express condition existed and no condition could be implied because it would result in a forfeiture. Cremolose thus claimed it was entitled to judgment in its favor on the causes of action related to breach of the purchase agreement, note, and guaranty.
The trial court disagreed. In its order denying the motion for judgment notwithstanding the verdict, the court explained that "[t]he jury could reasonably have found a condition for C&N Holdings, LLC's performance under the Agreement for Purchase and Sale of Assets ("PSA"), Security Agreement, and Secured Promissory Note ("Note") was to provide functional premises, including a functioning HVAC system, in which to conduct the Lucky Bastard Saloon business. The jury reasonably found that such premises were not provided."
DISCUSSION
Cremolose appeals from both the judgment and the order denying its motion for judgment notwithstanding the verdict only as to the causes of action in its cross-complaint for breach of the purchase agreement, promissory note, and guaranty. In all other respects, it does not challenge the jury's verdict. Likewise, 840 5th Avenue LLC and the Russos individually have not appealed from the judgment on C&N's complaint. Thus, what began as a complex civil action involving a complaint and cross-complaint with multiple parties is now narrowed to a dispute over a single issue regarding the existence and enforceability of a contractual condition to performance.
Whether we are reviewing the jury's verdict or the order denying the motion for judgment notwithstanding the verdict, the scope of appellate review is the same: we must determine whether substantial evidence supports the jury's verdict. (Zagami, Inc. v. James A. Crone, Inc. (2008) 160 Cal.App.4th 1083, 1096 [review of jury's findings]; Dell'Oca v. Bank of New York Trust Co., N.A. (2008) 159 Cal.App.4th 531, 554-555 [review of order denying motion for judgment notwithstanding the verdict].)
Regardless of the precise argument advanced on appeal, Cremolose challenges a single finding by the jury in its special verdict that all of the conditions required for C&N's performance did not occur. To be even more precise, Cremolose challenges the existence of the implied condition to C&N's performance that it be provided with a functional premises in which to conduct the Lucky Bastard Saloon business. Assuming such a condition does exist and is legally enforceable, Cremolose does not contend that the condition was in fact satisfied.
Thus, to prevail on appeal, Cremolose must show the jury's finding that the implied condition exists is not supported by substantial evidence or that the nonoccurrence of the condition should be excused. To meet this burden, Cremolose advances two general arguments. Although presented in the opposite order in its brief, Cremolose argues that (1) there is no evidence of an implied condition and (2) such an implied condition creates an unenforceable forfeiture.
1. The Existence of an Implied Condition
Cremolose contends the jury's finding of the existence of an implied condition cannot be supported by substantial evidence because the existence of the implied condition is a question of law, requiring an interpretation of the unambiguous contracts. Thus, Cremolose believes the court erred in submitting this legal question to the jury and allowing the jury to "insert" an implied condition that did not exist. C&N disagrees, asserting that the existence of conflicting extrinsic evidence regarding the existence of the condition creates a question of fact properly submitted to the jury.
We need not decide, however, the proper characterization of the question regarding the existence of the implied condition or even whether the condition exists based on the evidence in the record. As suggested by C&N, Cremolose cannot challenge the existence of an implied condition on appeal given its actions at trial, where it tried the case on the theory that the condition did exist, but that the condition was fulfilled.
" 'The rule is well settled that the theory upon which a case is tried must be adhered to on appeal. A party is not permitted to change his position and adopt a new and different theory on appeal. To permit him to do so would not only be unfair to the trial court, but manifestly unjust to the opposing litigant.' " (Coy v. E.F. Hutton & Co. (1941) 44 Cal.App.2d 386, 391-392; see also Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1350, fn. 12.) Thus, "where a deliberate trial strategy results in an outcome disappointing to the advocate, the lawyer may not use that tactical decision as the basis to claim prejudicial error." (Mesecher v. County of San Diego (1992) 9 Cal.App.4th 1677, 1686.)
Similarly, "under the doctrine of invited error, a party is estopped from asserting prejudicial error where his own conduct caused or induced the commission of the wrong." (Telles Transport, Inc. v. Workers' Comp. Appeals Bd. (2001) 92 Cal.App.4th 1159, 1167.) The doctrine will be applied only upon a showing of "affirmative conduct demonstrating a deliberate tactical choice on the part of the challenging party." (Huffman v. Interstate Brands Corp. (2004) 121 Cal.App.4th 679, 706.)
The invited error doctrine applies to bar an appellant from attacking a verdict that resulted from a jury instruction given at the appellant's request. (Stevens v. Owens-Corning Fiberglas Corp. (1996) 49 Cal.App.4th 1645, 1653.) In most circumstances, a trial court is under no sua sponte obligation to propose jury instructions. (Mesecher v. County of San Diego, supra, 9 Cal.App.4th at p. 1686.) "A civil litigant must propose complete instructions in accordance with his or her theory of the litigation and a trial court is not 'obligated to seek out theories [a party] might have advanced, or to articulate for him that which he has left unspoken.' " (Ibid.) If a party fails to request additional or qualifying instructions on a general jury instruction, the party forfeits the right to argue on appeal that the court misinstructed the jury. (Metcalf v. County of San Joaquin (2008) 42 Cal.4th 1121, 1130-1131.) A party cannot ask the court to submit a legal issue to the jury and then complain on appeal that the court erred in doing so. (Mozzetti v. City of Brisbane (1977) 67 Cal.App.3d 565, 572-573.)
On appeal, Cremolose argues that the trial court erred in submitting a legal question to the jury. The trial court, however, did not do so: Cremolose did. Cremolose submitted, or at the very least acquiesced, to an instruction informing the jury that "C&N Holdings . . . claims that its non-performance was excused." Cremolose also prepared an instruction admitting that it bore the burden of proving "[t]hat all [of] the conditions required for the Defendants/Cross-defendants['] performance had occurred or were excused." In the special verdict form prepared by Cremolose, the jury was asked: "Did all the conditions that were required for C&N Holdings, LLC's performance occur?"
Most conspicuously, Cremolose directly and affirmatively invited the alleged error. In closing argument, counsel for Cremolose explicitly told the jury to find that C&N's performance was excused if it believed the Russos "lied . . . about the air conditioning."
In light of these actions at trial, Cremolose has forfeited the right to argue on appeal that the court erred in submitting the question to the jury or claiming that the implied condition does not exist as a matter of law.
Our ruling that Cremolose forfeited the claim of error is not the result of an overly formalistic application of appellate maxims. Rather, Cremolose's decision not to contest the existence of the condition at trial shaped the proceedings and their outcome. The record shows that the existence of an implied condition was raised by Kelly and Cremolose was aware that C&N believed the nonoccurrence of this condition excused its performance. Cremolose, however, neither presented evidence to the contrary nor denied the existence of the condition. To properly contest the existence of the implied condition, Cremolose could have sought a legal determination from the trial court that such a condition did not exist to support a jury instruction regarding the condition. (See, e.g., Holguin v. DISH Network LLC (2014) 229 Cal.App.4th 1310, 1323 [jury instructed regarding existence of implied condition at request of party].) It could have also requested a jury instruction informing the jury of a dispute over the existence of the condition. (CACI No. 321 [jury instruction regarding "Existence of Condition Precedent Disputed"].) Instead, Cremolose prepared jury instructions and a special verdict form premised on the existence of this condition and simply asked the jury to decide if the condition occurred.
If Cremolose had raised the issue below, it is impossible to determine what additional evidence would have been admitted regarding the existence of the implied condition, which could have affected the decision whether to submit the question to the jury as a factual dispute or to determine the issue as a matter of law. If the Kellys were aware the issue was in dispute, they may have presented additional conflicting evidence that created an issue of fact for the jury to determine. (See, e.g., Karpinksi v. Smitty's Bar, Inc. (2016) 246 Cal.App.4th 456, 464, fn. 6 [parol evidence rule does not apply to implied conditions].) Likewise, the Kellys may have made different arguments in closing or requested additional jury instructions. To address the merits of Cremolose's claim on appeal, we would have to speculate about a succession of events that did not happen. To do so would be unfair to both plaintiffs and the trial court. By litigating the case on the accepted presumption that the implied condition exists, Cremolose cannot now contend on appeal that the court erred by failing to properly instruct the jury or by submitting this alleged legal question to the jury. The jury found such a condition to exist and Cremolose is estopped to deny its existence on appeal.
2. Nonoccurrence of Condition as Unenforceable Forfeiture
Alternatively, Cremolose asserts that even if the implied condition exists, the nonoccurrence of that condition must be excused because to do otherwise would result in an unenforceable forfeiture. It argues that if C&N's performance is excused, Cremolose will be penalized despite its full performance.
Having established the existence of the implied condition and its nonoccurrence, the jury correctly found that C&N did not breach the purchase agreement or promissory note and Kelly did not breach the guaranty. The inquiry, however, does not end there. Even if a contractual condition exists, a court may excuse the nonoccurrence of a condition when it would cause a disproportionate forfeiture or penalty. (Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc. (2015) 232 Cal.App.4th 1332, 1355-1356 (Grand Prospect); see also 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 827, pp. 915-916.) "Whether a contractual provision is an unenforceable penalty is determined by the trial court, not the jury." (Grand Prospect, at p. 1354.)
A classic example of an unenforceable forfeiture is a seller's retention of a deposit in a real estate transaction following a breach by the buyer. (See, e.g., Freedman v. The Rector (1951) 37 Cal.2d 16, 21-23.) If the amount of the deposit does not approximate the actual damages sustained by the seller, allowing the seller to retain the deposit would result in an inequitable, and therefore unenforceable, forfeiture. (Kuish v. Smith (2010) 181 Cal.App.4th 1419, 1429.)
An unenforceable penalty can also arise based on the failure of a condition to occur where there is no breach of contract. For example, in Grand Prospect, supra, 232 Cal.App.4th 1332, a commercial tenant entered into a lease with a "cotenancy provision," which conditioned the tenant's payment of rent on the continued operation of another store in the same shopping center. (Id. at p. 1337.) After that other store closed, the tenant stopped paying rent and, after eventually terminating the lease, the landlord sued to recover rent for the term of the lease. (Ibid.)
The Grand Prospect court recognized that the cotenancy provision was a condition in the lease agreement to the tenant's performance, but concluded it constituted an unenforceable penalty. As defined by the court, an unenforceable penalty exists where the forfeiture compelled by the contract " 'bears no reasonable relationship to the range of actual damages the parties could have anticipated would flow' from a breach of a covenant or a failure of a condition." (Grand Prospect, supra, 232 Cal.App.4th at p. 1358.) "Therefore, the general rule for whether a contractual condition is an unenforceable penalty requires the comparison of (1) the value of the money or property forfeited or transferred to the party protected by the condition to (2) the range of harm or damages anticipated to be caused that party by the failure of the condition. If the forfeiture or transfer bears no reasonable relationship to the range of anticipated harm, the condition will be deemed an unenforceable penalty." (Ibid.)
As applied in Grand Prospect, the court determined that the landlord had forfeited over $30,000 a month in rent based on the failure of the condition, whereas the tenant did not prove any actual damage caused by the closing of the other store. (Grand Prospect, supra, 232 Cal.App.4th at pp. 1361-1363.) Given the complete absence of any relationship between the value forfeited by the landlord and any harm to the tenant, the court held the cotenancy provision was invalid and unenforceable. (Id. at pp. 1364-1365.)
Here, Cremolose contends that allowing the nonoccurrence of the implied condition to excuse C&N's performance creates an unenforceable penalty because it allows C&N to stop payments on the note despite Cremolose's full performance, i.e., delivery of the assets purchased under the agreement. As stated in its opening brief, it frames the issue as "Cremolose's forfeiture of an otherwise uncontested right to recover more than $650,000 for commercial property sold, delivered, never rejected and never timely or fully returned."
The record on appeal does not support the claim that as a result of the nonoccurrence of the implied condition, Cremolose forfeited almost $650,000. As a first step, Cremolose must show the value of the property forfeited. The record it provides, however, fails to substantiate a forfeiture.
As Cremolose admits, all of the purchased assets remained in the restaurant space and were recovered by Cremolose after C&N stopped payments. Although C&N made some changes to the space, like replacing the seating booths, Cremolose admitted that the changes were "like for like." The liquor license purchased under the agreement was also returned to Cremolose.
C&N stopped making payments on the assets, but they were returned to Cremolose and remained in its possession at the time of trial. Although Cremolose raises a claim that some assets were removed, there is no indication that the value of those assets exceeded C&N's payments of almost $50,000 on the note. At trial, Cremolose valued the removed assets at $27,440.
Cremolose relies heavily on an appraisal of the assets left by C&N, which were valued in the range of $58,470.00 to $202,610.00. Cremolose posits that because the assets were purchased for $700,000, but were only worth, at most, $202,610 when returned, it necessarily must have "lost" almost $500,000. This equation, however, is premised on multiple omissions.
First, the appraisal did not include the value of the liquor license. Although the value of the license was not precisely determined, Kelly testified at trial that it was worth about $100,000.
Second, Kelly testified at trial that the purchase price also included "key money" for the lease. Although Cremolose did not admit the price included key money, it also did not deny it. Interestingly, assuming the assets left in the space were worth approximately $200,000, Cremolose admitted to seeking approximately $300,000 in key money in its advertisements for a new tenant after the closing of the Lucky Bastard Saloon. Again, without any testimony regarding the amount of key money included in the purchase price, Cremolose cannot demonstrate that it suffered any forfeiture.
Moreover, even assuming there was some forfeiture by Cremolose, the applicable test requires the court to compare the value of that forfeiture to the range of harm or damages anticipated to be caused to C&N resulting from the failure of the condition. On this point, Cremolose provides no evidence.
In summary, the record and findings by the jury establish that (1) Cremolose and C&N entered into a purchase agreement by which Cremolose would sell certain assets, transfer a liquor license, and receive "key money" for a total purchase price of $700,000, paid over a period of five years, (2) C&N partially performed before halting payments based on the nonoccurrence of a condition to its continued performance, and (3) the purchased assets, or their equivalent, and the liquor license were returned to Cremolose. This situation does not describe an unenforceable penalty. If, in the end, Cremolose was not returned to the exactly same position it was in before the purchase agreement, it was incumbent on Cremolose to place a value on that variance and seek equitable relief. We see no reason to reverse the judgment or order denying Cremolose's motion for judgment notwithstanding the verdict.
DISPOSITION
The judgment and order denying the motion for judgment notwithstanding the verdict are affirmed. C&N is entitled to costs on appeal.


DATO, J.

WE CONCUR:



McCONNELL, P. J.




NARES, J.