Opinion
A152431 A152937
12-12-2019
ENA NORTH BEACH, INC., et al., Plaintiffs and Appellants, v. 524 UNION STREET et al., Defendants and Appellants. ENA North Beach, Inc., et al., Plaintiffs and Respondents, v. 524 Union Street et al., Defendants and Appellants.
Wood Robbins, B. Douglas Robbins, San Francisco, Leyla M. Pasic, Kelley A. Harvilla, for Plaintiffs and Appellants. Kerr & Wagstaffe, Wagstaffe, Von Loewenfeldt, Busch & Radwick, James M. Wagstaffe, Michael Von Loewenfeldt, Draper Law Firm, Ann McFarland Draper, San Francisco, for Defendants and Appellants.
Certified for Partial Publication.
Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this opinion is certified for publication with the exception of parts I., A., B., C., D., and III.
Wood Robbins, B. Douglas Robbins, San Francisco, Leyla M. Pasic, Kelley A. Harvilla, for Plaintiffs and Appellants.
Kerr & Wagstaffe, Wagstaffe, Von Loewenfeldt, Busch & Radwick, James M. Wagstaffe, Michael Von Loewenfeldt, Draper Law Firm, Ann McFarland Draper, San Francisco, for Defendants and Appellants.
Kline, P.J. After leasing premises owned by 524 Union Street for purposes of opening a restaurant, respondent ENA North Beach was unable to open because the San Francisco Planning Department determined that an existing conditional use authorization for the property was no longer effective and a new one could not be granted. ENA North Beach filed suit against the lessors, claiming false representations and failure to disclose material facts regarding the problems with the conditional use authorization. A jury found in favor of ENA North Beach and awarded compensatory and punitive damages. This appeal challenges the sufficiency of the evidence to support the jury’s verdict. ENA North Beach’s cross-appeal challenges the trial court’s decision to reduce the amount of the punitive damages award against 524 Union Street. We conclude that the jury’s verdict on liability, including liability for punitive damages, is supported by substantial evidence. Although we conclude the trial court employed an improper procedural mechanism in reducing the amount of the punitive damages award, we affirm the judgment for the reasons explained herein.
BACKGROUND
Natasha Hong, the president of ENA North Beach, sought to open a restaurant with a license to serve beer and wine in a building owned by 524 Union Street (524 Union), a space which had housed restaurants for many years. 524 Union is a general partnership, of which Beverly Smucha is the managing partner and her son, Barak Smucha, a partner. Beverly estimated she had owned the property for 35 or 40 years. Prior tenants had operated under a conditional use authorization for a "full-service restaurant and bar" obtained in 1998. Under the San Francisco Planning Code (Planning Code), a new full-service restaurant could be operated in this space only if there had not been a gap in operations of such a restaurant for more than three years, as the conditional use authorization would lapse if the approved use was discontinued for more than three years. (S.F. Planning Code, § 178, subd. (d).) The continued validity of the existing conditional use authorization was critical to Hong’s ability to open her restaurant because an ordinance adopted in 2012 prohibited approval of a new conditional use authorization for a full-service restaurant in this location. (S.F. Planning Code, § 780.3, subd. (c)(1) [North Beach Special Use District].)
For convenience and clarity, this opinion will refer to Beverly Smucha and Barak Smucha by first name, no disrespect is intended. Unless otherwise indicated, arguments and positions attributed to Smucha are also those of 524 Union.
As the terminology used in the testimony and documentary evidence varies, we note at the outset that this opinion will use the terms "conditional use authorization" and "conditional use permit" interchangeably.
This section provides: "Abandonment. A permitted conditional use that is discontinued for a period of three years, or otherwise abandoned, shall not be restored, except upon approval of a new conditional use application pursuant to the provisions of Article 3 of this Code. For purposes of this Subsection, the period of nonuse for a permitted conditional use to be deemed discontinued in the North Beach [and] Castro Street Neighborhood Commercial Districts, and the Jackson Square Special Use District shall be eighteen (18) months[.]" (S.F. Planning Code, § 178, subd. (d).)
The meaning of the term "full-service restaurant" was a matter of some dispute at trial. According to the San Francisco Planning Department (Department) planner who testified at trial, under the applicable definitions in the Planning Code, a "restaurant" or "full-service restaurant" had to have "a majority of food service" but could also serve alcohol, while a "limited restaurant" would have no alcohol service. She testified, however, that the San Francisco Zoning Administrator interpreted the definitions as requiring that a full-service restaurant have a liquor license, so that a restaurant that did not serve alcohol would be a "limited restaurant." Beverly maintained that a full-service restaurant was allowed to serve alcohol but not required to do so, and differed from a limited restaurant in that full service meant a sit-down restaurant while a limited restaurant was "more like a takeout place."
The San Francisco Planning Code (Planning Code) no longer uses the term full-service restaurant but rather contains definitions for "restaurant" and "restaurant, limited." (S.F. Planning Code, § 102.) A "restaurant" is defined a "[a] Retail Sales and Service use that serves prepared, ready-to-eat cooked foods to customers for consumption on the premises and which has seating," and which "may provide on-site beer, wine, and/or liquor sales for drinking on the premises" if at least 51 percent of its gross receipts are from food prepared and sold on premises. (Ibid .) "Restaurant, limited" is defined as "[a] Retail Sales and Service Use that serves ready-to-eat foods and/or drinks to customers for consumption on or off the premises, that may or may not have seating" and "shall not provide on-site beer and/or wine sales for consumption on the premises, but may sell beer and/or wine for consumption off the premises ...." (Ibid .) Examples of limited restaurants are "sandwich shops, coffee houses, pizzerias, ice cream shops, bakeries, delicatessens, and confectioneries ...." (Ibid .)
As described in the findings supporting the 1998 conditional use authorization, the then-existing provisions of the Planning Code defined "full-service restaurant" without reference to alcohol ("a retail eating or drinking use which serves food to customers primarily for consumption on the premises," "is not specifically designed to attract and accommodate high customer volumes or turnover," "has seating and serves prepared, ready-to-eat cooked foods for consumption on the premises," and where "[g]uests typically order and receive food and beverages while seated at tables on the premises and pay for service after the meal is consumed") and separately defined "bar" ("a retail use which provides on-site alcoholic beverage sales for drinking on the premises").
Prior to ENA North Beach, a restaurant called Le Bordeaux had operated at 524 Union for part of 2011. Although Le Bordeaux had closed less than three years before ENA North Beach’s tenancy, the Department concluded the conditional use authorization had lapsed for two reasons. One was that there had been a long gap between Le Bordeaux and the previous restaurant, The Field, which had a lease running through August 2008, but in fact left the premises in 2004. The second was that although Le Bordeaux had been approved as a full-service restaurant, the Department took the view that it did not operate as such because, while it had applied for a liquor permit from the state Department of Alcohol and Beverage Control (DABC), it had not actually received the permit before it ceased operating. As explained by the attorney Hong later hired to help her negotiate the permit issues, because the Department considered running a bar part of the approved use under the 1998 conditional use authorization, that authorization would lapse if there was a three-year period in which a bar was not run.
As will be explained, Hong initially obtained approval for her restaurant from the Department but that approval was subsequently rescinded after the gap in operations between The Field and Le Bordeaux was brought to the attention of the Department and the Department learned that Le Bordeaux had been operating without a liquor license. Unable to obtain approval to open the restaurant, ENA North Beach sued 524 Union and Beverly, alleging that Beverly falsely told Hong there had been full-service restaurants in the space "continuously," failed to disclose the more than three-year gap, and falsely represented that Le Bordeaux had an alcohol license. Beverly maintained that she made all necessary disclosures regarding the history of the leased premises and that the Department interpreted the Planning Code incorrectly, an error Beverly could not have anticipated.
524 Union filed a cross-complaint against ENA North Beach, Hong, and Arnold Bunyaviroch that is not at issue on this appeal.
Hong testified that when she first visited the property in June 2014, Barak told her Le Bordeaux had a beer and wine license. She testified that Beverly told her there had always been a liquor license at the property, which had always been used as a full-service restaurant; never said Le Bordeaux did not receive a license to serve alcohol but rather said it obtained the license; never said the space had been abandoned or "discontinued" for three years, and never discussed the need for a conditional use permit. Before signing the lease, Hong went to the Department, asked the clerk whether there would be any problem opening a full-service restaurant at 524 Union and was told "no" and "everything is fine." In mid-July 2014, Hong asked Beverly to delay the lease start date from August 1 until September 1, as she was looking for a wine and beer license broker to help her obtain a type 41 alcohol license and was not sure how long processing would take. Beverly agreed to the change in start date but said she could not delay signing the lease. Her email to Hong stated, "You should be able to get a type 41 liq. license (beer and wine) without a broker for a full-service restaurant. You will not be able to move forward with licensing without a fully executed lease." Because she was very busy, Hong hired the broker who had helped her when she opened her existing restaurant.
Hong signed the lease sometime on August 14, 2014. That afternoon, the broker emailed her, "[u]nfortunately, you are not allowed to obtain Liquor license, at all," attaching an email from the Department stating that, according to the zoning administrator, "the site will not be able to accommodate a new liquor license." Hong testified that this was a big deal because a restaurant cannot make a profit without selling alcohol. She contacted Beverly, who replied that evening, saying all of the prior tenants had had type 47 (hard liquor) licenses and the French restaurant was "approved for beer & wine." Beverly sent Hong a list of prior tenants from June 22, 1934, to October 7, 1999, describing all but one (in 1936) as "Bar & Restaurant," as well as some documents related to permits obtained by the tenants. Beverly told Hong she had delayed executing the lease and depositing Hong’s check "because of your phone call," and suggested Hong take a few days to decide whether the space was right for her. Beverly subsequently signed the lease on August 17, 2014.
The lease states that "[t]he premises are to be used for the operation of a Restaurant, to serve food to the public as a Full Service Restaurant and alcoholic beverages of beer and wine. Lessee covenants and agrees with Lessor, as a condition of this lease, that the purpose of or use of the premises will not be changed or altered by Lessee without the prior written consent of Lessor. Lessee shall use said premises continuously and constantly during the term hereof for the purpose of conducting the above mentioned business."
On September 2, Department planner Marcelle Boudreaux signed a "Zoning Affidavit" to be submitted to the DABC for ENA North Beach, indicating the existing conditional use permit could be used and attaching the 1998 conditional use authorization. Hong understood this form to be saying the previous tenant’s conditional use permit remained valid, which was consistent with her understanding from her visit to the Department. Around December 2014, Hong obtained the DABC beer and wine license. Renovations of the premises continued, with the aim of opening the restaurant around March 2015.
On the affidavit form, in a box for "date you filed application for C.U.P.," a handwritten note says, "N/A—can use existing conditional use Motion No. 14759/case 98.84."
On January 20, 2015, planner Carly Grob emailed Hong that the Department "cannot approve the Dept. of Public Health or [DABC] referral for [ENA North Beach]. Planning Code section 780.3 states that a restaurant may be permitted as a conditional use if it does not occupy a vacant space last occupied by a permitted conditional use that has been abandoned or discontinued for 3 years. Because the former tenant, Le Bordeaux, never received a DABC license to serve alcohol, they were operating as a limited restaurant instead of a restaurant. Therefore, the restaurant use was abandoned more than 3 years ago, and cannot be reinstated at this location."
The issues with the conditional use permit were brought to the Department’s attention by Marsha Garland, a permit expediter who had been involved in getting the conditional use approval for The Field in 1998. Garland testified that she told the owner of Le Bordeaux he needed a conditional use permit, told Beverly this, and during the time Le Bordeaux was operating, notified the Department that a conditional use permit was needed. Garland told the Department it had made a mistake with Le Bordeaux because the long prior vacancy meant a new conditional use permit was needed; she felt allowing it to open was unfair to others who were unable to get alcohol licenses.
Hong emailed Beverly about the specified ordinance. Beverly responded, "[t]his came into effect because there were restaurants going into spaces that were previously other uses. [¶] [524 Union] has always been a restaurant bar; it’s a 100 yr old space. This is not a new use but the same use for decades, and one of the oldest if not the oldest restaurant spaces in North Beach. [¶] Also they know Le Bordeaux has not been out of there for 3 years. They are just trying to come up with something else. Makes no sense. It will work out, just need to get to the right person. These planners need to be fired." A few days later Beverly told Hong, "The planner’s opinion that Le Bordeaux became a limited restaurant because of the processing of his beer and wine license was delayed is incorrect."
In this email, Beverly suggested that Hong point out to the Department that "the amendments adding a limited restaurant" would not apply to Le Bordeaux because they did not go into effect until May 2012 and Le Bordeaux was approved as a full-service restaurant in 2011, and in any event the definition of "restaurant" did not require having a liquor license.
Hong hired attorney David Silverman to help her with the conditional use permit issues. On February 8, 2015, when Hong forwarded to Beverly an email from her attorney’s office indicating that in order to fight the abandonment issue they would need "the use/lease/occupancy history of the building laid out, and all the efforts to try to find a tenant over the last several years that hopefully would toll the ticking of the abandonment clock," Beverly replied, "Doesn’t sound like this attorney is up to speed with the laws. We will try to come up with some names." In a March 12, 2015 email, Beverly told Hong that the premises had never been used as a limited restaurant but "always and only" full service, the insurance on the premises was for a full-service restaurant, "which is more expensive and difficult to get," and the previous tenant’s insurance was for a full-service restaurant with a beer and wine license.
Silverman testified that Beverly told him The Field left in 2008 and gave him a copy of its lease, which stated a termination date of August 31, 2008. On this basis, Silverman argued to the zoning administrator that the gap between The Field and Le Bordeaux was less than three years. The zoning administrator found The Field’s lease insufficient to demonstrate that it remained in operation until its termination date because the DABC website indicated The Field’s licenses were cancelled in August 2004. Beverly told Silverman she thought the administrator was mistaken. Based on Beverly’s representations, Silverman prepared a declaration that she executed on March 16, 2015, stating that "the space has been used as a full-service restaurant and bar continuously after we obtained the conditional use authorization in 1998 except for periods of turnover between tenants, when we advertised for full-service restaurant tenants," and that "The Field Restaurant and bar was the Lessee under a Lease Agreement that was in effect from August 26, 1998 until August 31, 2008." The zoning administrator again found this was "not enough to substantiate that the conditional use was not abandoned."
When Silverman’s paralegal investigated, the information was no longer available on the DABC website.
Silverman testified that when he tried to get documentation from Beverly to refute the gap in operations between The Field and Le Bordeaux, she responded with statements about Le Bordeaux’s liquor license application and arguments that the Department’s determination was wrong. At this point, Silverman was "starting to think that [the zoning administrator] might have a point because I’m not getting any evidence to the contrary."
Among his attempts to provide the zoning administrator with facts to support the argument that there was a continuous use of the space, Silverman tried to show that the owner advertised for a tenant for the same purpose during times no restaurant was operating, but Beverly provided only two years of advertisements, which left a five-year gap.
In an April 2015 email correspondence, the zoning administrator informed Silverman that "any approval of Le Bordeaux in 2011 was in error" because the previous restaurant use had been abandoned after The Field discontinued operation in 2004. Silverman’s requests for additional documentation from Beverly met with arguments that the department was acting improperly. The zoning administrator denied Hong’s request for a hearing, and Silverman told Beverly they had reached a dead end. Hong testified that she had believed everything Beverly told her about the use of the premises and realized Beverly "was lying to me from the beginning" only after her attorneys told her there was nothing more to be done and she would not be able to open the restaurant. She gave notice of termination of the lease on April 24, 2015. Asked why he believed, as stated in the termination letter, that Beverly "failed to disclose to [Hong] the existence of the abandonment of the conditional use for the premises," Silverman testified, "[b]ecause she had been telling me the opposite ... [t]hat the restaurant had operated continuously ... [a]s a full-service restaurant and bar." He testified, "the situation was actually worse than I wrote in this letter. I wrote that, ‘You failed to disclose to our client existence of the abandonment.’ [¶] Actually, she lied to our client about it because she told her over and over again that there had been continuous operation. And she told me that, and she told the zoning administrator that."
Planner Carly Grob testified that it initially appeared Hong’s restaurant could be approved with the existing approval for restaurant use, but it was later discovered that Le Bordeaux had been operating as a limited restaurant, without liquor service, and the zoning administrator interpreted the Planning Code as requiring a restaurant to have an alcohol license. When Grob asked Beverly for documentation relating to use of the property, Beverly responded with complaints about the permit expediter who had complained about the conditional use issue (see fn. 7, ante , at p 6.) and assertions that Le Bordeaux had gone through a "very thorough" planning and zoning process to receive approval. Beverly never said there was a vacancy at the property. Grob testified that the Department had not revoked the September 2, 2014 zoning affidavit indicating Hong did not need a new conditional use permit, but had "acknowledged" that position was incorrect and so advised the DABC.
Sylvain Castet, the owner of Le Bordeaux, testified that when he rented the premises intending to open a French restaurant serving beer and wine, Beverly did not tell him about a prior vacancy of more than three years or possible need for a new conditional use approval. After he signed the lease, neighbors told him the property had been vacant for 10 years. When he asked Beverly about this, she responded, "[n]o, it hasn’t been vacant for 10 years" and advised him not to listen to the neighbors; she never told him there was had been a vacancy of more than three years.
Beverly claimed to have clarified that it was vacant for over three years but was not able to identify where she had said this.
Optimist Prime, a company owned by James Bryant Bourque, his mother and his stepfather, signed a lease for the 524 Union premises on October 8, 2015, with the intention of opening a restaurant. For tax reasons, a contingency was being able to open by the end of 2015, and Beverly assured them she would make sure they got timely approvals to be able to meet the deadline. From his conversations with Beverly, Bourque understood they would need to go through the conditional use process but this would not stop them from opening the restaurant; Beverly did not disclose that zoning for this purpose had been lost entirely, did not mention a problem with a prior tenant or with ENA North Beach, and told him the owner of Le Bordeaux had received a liquor license but had to leave the country due to a visa issue before he was able to start using it. Beverly said the space had always been used as a restaurant and both she and the lease itself said it could only be used as a full-service restaurant. His understanding from Beverly was that the premises had been vacant because they were being selective about who to lease to, not because they were having trouble getting tenants.
Beverly provided Bourque with a written disclosure statement that stated the premises had "always" been used as a restaurant and had last been leased by ENA North Beach, which "did not get open"; that Beverly had been told it was "scheduled to open, with all approvals including the issuance of their beer & wine license," until expediter Marsha Garland, who represented competing interests, complained to the Department; and that ENA North Beach, "already in violation of her lease was unable to navigate the permitting process with their attorney and was adverse to the potential of a Conditional Use process, opting instead not to pursue the issue formally." The disclosure described Le Bordeaux as a full-service restaurant "specializing in Bordeaux regional wines," and stated that it "received the required approvals and permits from the city prior to opening" but processing of its beer and wine license was "delayed because of corporate issues" and "they got approved for issuance, however just prior, they had to close due to immigration visa issues." According to the disclosure, Garland and the Department had an issue with Le Bordeaux having been approved to open without going through the conditional use process, and the Department changed its interpretation of the definitions of types of restaurants and acted "as if Le Bordeaux had never opened and withdraw [sic ] ENA’s approval." The disclosure referred to the "discrepancy with the last tenant" and stated that the premises had "never been a dormant space."
Bourque’s understanding from the disclosure was that the liquor license for Le Bordeaux had been issued and ENA North Beach terminated its lease because of disagreements over "tenant improvements, and decorations, paint and that kind of thing" and "for whatever reason, they couldn’t get their permitting ...." He understood the reference to "dormant space" as saying there had been continuous operation of a full-service restaurant with no lapse, and Beverly never discussed a period of dormancy following The Field or a gap of three years or more between The Field and Le Bordeaux.
Bourque first learned there might be a problem from the owner of the restaurant next door. Although the Department initially said it looked like there should not be a problem opening "some kind of food service," an attorney alerted Bourque to the zoning issues, further inquiries at the Department revealed that The Field sold its liquor license to another enterprise in 2004, and Bourque learned they would be able to open only with a special exemption from the supervisor of the district, who was a proponent of the special use district trying to limit restaurants in North Beach.
Bourque testified that Beverly told his mother about the present lawsuit about four days after the lease was signed but said it would not impact Optimist Prime; they came to realize the suit was linked with the zoning issues and gave notice of termination of the lease on October 31, 2015. Bourque denied Beverly’s claims that they terminated the lease because she would not approve unpermitted work they wanted to do on the premises and that they damaged the premises.
Grob testified that it seemed the landlord was continuing to market the space as a restaurant because she continued to get calls from prospective tenants seeking to open a restaurant there; she would tell them that they could not do so, in accordance with the Department’s "practice and opinion" that the space cannot be used as a full-service restaurant and bar.
Beverly testified that when Hong first contacted her about the premises, she did not believe a conditional use permit would be needed because the previous tenant had been approved without a new one, there was still a conditional use permit recorded against the property, and her understanding was that the permit would have to go before the San Francisco Planning Commission to be revoked. The 1998 conditional use authorization included the statement that a "full-service restaurant and bar previously existed at the Project Site, but has been closed for over three years. Per Planning Code Section 178(d), conditional use authorization would not be required had the business been closed for less than three years." Asked about her awareness of this point in 1998, Beverly testified that she did not know whether the new authorization was required because of "the three years or it was a different kind of business or a different kind of liquor license."
Beverly acknowledged there was "at least" a three-year gap between The Field and Le Bordeaux, as The Field vacated before the end of its lease. She testified that "[p]robably all of North Beach" knew about The Field vacancy. Asked why she did not disclose it, Beverly said, "[t]here was nothing to disclose" and "we disclosed everything." She denied having suggested to Grob that the vacancy period was less than three years and testified that she did not correct the misunderstanding reflected in an email suggesting she had done so because she was "trying to figure out what was going on because they had approved Le Bordeaux and they approved Hong," and she was shocked that the city was "going back to a previous tenant" after having approved Le Bordeaux. She denied knowing that a three-year gap in use would jeopardize the conditional use permit or representing to other people that the property did not have a vacancy of at least three years.
Grob’s email to Beverly stated, "From our earlier discussions, I believe that the period of vacancy between Le Bordeaux and the preceding restaurant was less than three years and no CU is required, but I simply do not have documentation to prove it. Any documentation you may have would be very helpful."
In her deposition, asked whether she had any reason to think a 2009 article was incorrect in stating that the space had been vacant "for years," Beverly initially claimed she did not understand the question, then questioned what the author knew about the situation and said she had "no idea," then, after acknowledging she was sure it was vacant in 2009, said, "everybody has their own conception of years.... Some people think six months are years. Some people think ten years are two years ...."
Asked about the statement in her declaration that the space had been used "continuously" as a full-service restaurant and bar since the conditional use authorization in 1998, she testified that her understanding of "continuously" was "repeatedly," the statement was true "except for the time when it was vacant," and the use of the space was never changed. Beverly believed a conditional use authorization would not lapse if the owner did not intend to abandon the use, a view she believed to be supported by a 2004 letter of determination by a previous zoning administrator which she described as concluding there was no abandonment of a conditional use permit where "the owner’s intention is to find a replacement tenant for the same use." She testified that her declaration was meant to prove there was no three-year abandonment, and denied that it was misleading to say The Field was the lessee under an agreement that was "in effect" until August 31, 2008, when The Field had left before the end of the lease term.
The 2004 case involved a restaurant called Basta Pasta that closed in 2001. Based on the facts that the restaurant furnishings and equipment had been kept in place and the business and property had been marketed as a unit, the zoning administrator determined that there had been a "generally consistent effort to operate the subject property as a restaurant" and the use had not been abandoned for purposes of the conditional use authorization. The determination letter noted the "difficult economic conditions following the collapse of the dot com industry, and the ensuing loss of numerous restaurants throughout the city," and stated that "[t]o consider a use abandoned because it was unable to be leased in light of consistent efforts to rent the space, would damage the city’s ability to recover from economically troubled times."
Asked about the email in which she told Hong that Le Bordeaux had been "approved for a type 41 liquor license," Beverly testified that she meant the owner was "approved with the city as a full-service restaurant to operate with a Type 41 liquor license," but acknowledged that the city does not issue liquor licenses and that the owner closed the restaurant "prior to the final issuance and approval" of a liquor license. Beverly denied having a disclosure problem with Optimist Prime; denied that the written disclosure statement failed to disclose that ENA was not able to use the 1998 conditional use authorization or get a new one; denied that saying the premises had "never been a dormant space" was intended to communicate that there were no vacancy issues; and claimed to have discussed the issues about The Field with the lessees when they first looked at the space. Beverly testified that Optimist Prime left because she would not approve plans for unpermitted alterations of the space; asked whether the real reason was that the lessees discovered they would not be able to open a full-service restaurant and bar because of the issues Hong had, Beverly responded, "that’s what they said. However, we were very suspicious that maybe we were set up in them coming in at some point."
Barak testified that when he first showed Hong the space, she knew about Le Bordeaux and asked "how he survived being a French restaurant without the liquor license," and that he discussed with Hong the problem of The Field having left before the end of its lease and told her, as he tells everyone, there had been a three- or four-year vacancy before Le Bordeaux. He testified that Castet knew about the "three- to four-year" vacancy prior to Le Bordeaux and denied that the contrary was indicated by an email in which Castet said he needed to know the departure date of the last tenant because the Department needed to know if it was less than three years so he could be allowed "a ‘continuation of existing use.’ "
Barak testified that when he first showed the space to Bourque, he gave his "usual" disclosure speech, so "they knew going in that there were unresolved zoning issues," but they "weren’t really that interested" and said they had a contact at a lobbyist firm. He told Bourque that the Department was misreading a law and there was more to be done to deal with the issue. He denied having been told Bourque had a definite timeline for opening his restaurant and claimed they would not have leased to him if he had, denied that Bourque was told a beer and wine license had been issued to Le Bordeaux, and stated that Bourque wanted to do extensive unpermitted work on the space. Barak testified he still believed there will be a restaurant with a liquor license in the space, as neighboring properties with long vacancies had gotten licenses in same time period. The jury returned verdicts in favor of ENA North Beach on the claims for intentional misrepresentation, concealment, and breach of the implied covenant of good faith and fair dealing, and found damages of $91,692.50, and clear and convincing evidence that Beverly acted with malice, oppression or fraud. The jury found in favor of Beverly on Ena North Beach’s claim for breach of contract. The jury subsequently awarded punitive damages against 524 Union in the amount of $916,925 and against Beverly personally in the amount of $91,692.50. After the court entered judgment on the jury’s verdict, Beverly filed motions for judgment notwithstanding the verdict (JNOV) and for a new trial. The trial court denied the new trial motion, granted the motion for JNOV in order to reduce the award of punitive damages against 524 Union to $131,500, and denied the motion in all other respects. The court granted ENA North Beach’s motion for attorney fees in the amount of $401,584 ($385,874 for fees accrued up to entry of judgment and $15,710 for fees accrued after entry of judgment), and subsequently granted a supplemental motion for attorney fees in the amount of $75,537. The final judgment was filed on August 28, 2017. This appeal and cross-appeal followed.
Commercial Real Estate Broker Steve Zimmerman, testifying for Beverly, opined that Hong did not satisfy "the standard due diligence usually implemented by a buyer in a project such as this" and that Hong’s signing the lease on the day she had been told there would be no liquor license available "doesn’t seem like a very sound decision." He testified that the Zoning administrator’s statement should have been a red flag that investigation was needed; he would have recommended a client obtain counsel from a permit attorney or DABC attorney; Hong should have hired her land use attorney before she signed the lease rather than afterward; and it was not reasonable for her to rely on the statements of her landlord or broker. Given that there was an existing conditional use permit that had not been removed and a preexisting tenant who was allowed to open without a new conditional use permit, he did not think the landlord had an obligation to disclose more than these facts, because it would be logical for the owner to think the conditional use permit would still be valid. He acknowledged that his analysis assumed there was no fraud or deceit by the landlord toward the tenant, but testified that such fraud or deceit would not change the requirement for the prospective tenant to do due diligence.
DISCUSSION
See footnote *, ante .
II.
Hong’s cross-appeal challenges the trial court’s reduction of the punitive damages award against 524 Union. Hong contends the trial court erred in reducing the award by means of the JNOV process, as the exclusive procedure for such a reduction is the remittitur process set forth in Code of Civil Procedure Code section 662.5. Under this process, where a new trial limited to damages would be proper, the trial court may "issue a conditional order granting the new trial unless the party in whose favor the verdict has been rendered consents to the reduction of so much thereof as the court in its independent judgment determines from the evidence to be fair and reasonable."
Further statutory references will be to the Code of Civil Procedure unless otherwise specified.
A new trial may be granted on grounds of excessive damages only if "after weighing the evidence the court is convinced from the entire record, including reasonable inferences therefrom, that the court or jury clearly should have reached a different verdict or decision." (§ 657.) "When a new trial is granted, on all or part of the issues, the court shall specify the ground or grounds upon which it is granted and the court’s reason or reasons for granting the new trial upon each ground stated." (Ibid. ) An order granting a new trial "must state the ground or grounds relied upon by the court, and may contain the specification of reasons." (Ibid. ) On appeal, an order granting a new trial on the ground of excessive damages shall not be affirmed "unless such ground is stated in the order granting the motion" and "it shall be conclusively presumed that said order as to such ground was made only for the reasons specified in said order or said specification of reasons, and such order shall be reversed as to such ground only if there is no substantial basis in the record for any of such reasons." (Ibid. )
Where the evidence supports a plaintiff’s entitlement to punitive damages but the amount of the award is challenged as unreasonably high, the court cannot reduce the amount of damages on a motion for JNOV. ( Teitel v. First Los Angeles Bank (1991) 231 Cal.App.3d 1593, 1604–1605, 282 Cal.Rptr. 916 ( Teitel ); § 657.) "The trial court’s discretion in granting a motion for judgment notwithstanding the verdict is severely limited. ‘ "The trial judge’s power to grant a [JNOV] is identical to his power to grant a directed verdict [citations]. The trial judge cannot reweigh the evidence [citation], or judge the credibility of witnesses. [Citation.] If the evidence is conflicting or if several reasonable inferences may be drawn, the motion for [JNOV] should be denied. [Citations.] ‘A motion for [JNOV] of a jury may properly be granted only if it appears from the evidence, viewed in the light most favorable to the party securing the verdict, that there is no substantial evidence to support the verdict. If there is any substantial evidence, or reasonable inferences to be drawn therefrom, in support of the verdict, the motion should be denied.’ [Citation.]" ’ ( Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 877–878, 151 Cal.Rptr. 285, 587 P.2d 1098, quoting Hauter v. Zogarts (1975) 14 Cal.3d 104, 110–111, 120 Cal.Rptr. 681, 534 P.2d 377.)" ( Teitel, at p. 1602, 282 Cal.Rptr. 916.)
Here, the trial court found that the evidence supported awards of punitive damages against both Beverly and 524 Union, but that the amount awarded against 524 Union was excessive. As Teitel explained, "[t]he Legislature has provided an exclusive remedy for a trial court to employ where some damages are properly awarded, but the amount is excessive. That is through a remittitur pursuant to Code of Civil Procedure section 662.5. Were we to accept [the] position that the trial judge is empowered to select an appropriate level of punitive damages and compel its determination by a [JNOV], we would find little or no purpose for the remittitur statute. We do not believe the Legislature intended such a result. Rather, the legislative system as enacted makes it plain that damages, except those which may be determined as a matter of law, are to be fixed by the trier of fact and, if erroneous in amount, subject to the reduction or new trial procedure specified in ... section 662.5, subdivision (b)." ( Teitel, supra, 231 Cal.App.3d at pp. 1604–1605, 282 Cal.Rptr. 916, fn. omitted.) Further, a trial court granting (or conditionally granting) a new trial motion is required to specify the grounds upon which it is granted and the reasons supporting the decision (§ 657), a requirement that " ‘serves the dual purposes of "encouraging careful deliberation by the trial court before ruling on a motion for new trial, and of making a record sufficiently precise to permit meaningful appellate review." [Citations.]’ ... [Citation.]" ( Teitel, at p. 1605, 282 Cal.Rptr. 916.) "This purpose would be undermined if the trial court could simply reduce punitive damages from one amount to another through a motion for [JNOV]." ( Ibid. )
The statutory provision discussed in Teitel as subdivision (b) of Code of Civil Procedure section 662.5, subdivision (b), is now subdivision (a)(2) of the statute. (Stats. 2011, ch. 409, § 2.)
Beverly argues that Hong forfeited this challenge to the trial court reducing punitive damages via [JNOV] by failing to raise the point in the trial court, where the problem could easily have been corrected. ( Keener v. Jeld-Wen, Inc. (2009) 46 Cal.4th 247, 264, 92 Cal.Rptr.3d 862, 206 P.3d 403 [failure to object to jury polling procedure; Nickerson v. Stonebridge Life Ins. Co. (2016) 63 Cal.4th 363, 203 Cal.Rptr.3d 23, 371 P.3d 242 ( Nickerson ) [consent to or acquiescence in procedure for presentation to jury of evidence bearing on punitive damages].) This point has some merit. The motion for JNOV asserted that the punitive damages awards should be stricken because they were not supported by the evidence, presenting a legal issue appropriate for disposition on a motion for JNOV; there was no request for a reduction in the amount of punitive damages. At the hearing following the court’s issuance of its tentative decision reducing the amount of the punitive damages award against 524 Union, Hong objected to the court’s reduction, but not by raising any issue as to the court acting in the context of a [JNOV]; Hong simply argued the merits, stating that the jury’s award was within constitutional limits. Clearly, as the court was hearing argument on both the motion for JNOV and the new trial motion, it could easily have rectified the problem if it had been brought to the court’s attention.
In opposition, Hong argued the court was required to deny the motion because substantial evidence supported the jury’s findings, citing Teitel as "holding ‘[t]he trial erred in granting the [JNOV] in light of this evidence [i.e., evidence supporting entitlement to punitive damages]’ and ‘in employing the device of a [JNOV] to reduce the amount of punitive damages[.]’ " Hong thus opposed the motion for JNOV and additionally indicated (albeit by citing Teitel rather than by argument) the court could not reduce the amount of the award, which Smucha and 524 Union had not asked the court to do.
As the appropriate procedure for reducing a punitive damages award is solely a question of law, we have discretion to reach it despite Hong’s failure to object. (See Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 24, 44 Cal.Rptr.2d 370, 900 P.2d 619.) We do so in order to reiterate what Teitel made clear: The procedural mechanism by which a trial court may reduce an award of damages it deems properly awarded but excessive in amount is through a remittitur pursuant to Code of Civil Procedure section 662.5. ( Teitel, supra, 231 Cal.App.3d at pp. 1604–1605, 282 Cal.Rptr. 916.)
One exception to the exclusivity of this remedy may exist where the trial court concludes the evidence supports an award of punitive damages but finds the amount awarded exceeds constitutional bounds ( State Farm Mut. Auto Ins. Co v. Campbell (2003) 538 U.S. 408, 418, 123 S.Ct. 1513, 155 L.Ed.2d 585 ; BMW of North America v. Gore (1996) 517 U.S. 559, 574–575, 116 S.Ct. 1589, 134 L.Ed.2d 809 ; Simon, supra, 35 Cal.4th at pp. 1171–1172, 29 Cal.Rptr.3d 379, 113 P.3d 63 ) and reduces that amount to the constitutional maximum. Gober v. Ralph’s Grocery Co. (2006) 137 Cal.App.4th 204, 211, 214, 40 Cal.Rptr.3d 92 ( Gober ), held that an appellate court can determine the constitutional maximum for a punitive damages award on appeal from the denial of a JNOV because the constitutional maximum is a legal question. The trial court had denied the defendant’s request for a [JNOV] setting punitive damages at the constitutional maximum. ( Id. at p. 210, 40 Cal.Rptr.3d 92.) Rejecting the plaintiffs’ argument that the trial court could not have granted the requested [JNOV], Gober noted that Teitel did not involve a constitutional challenge to the amount of the award and, in holding that punitive damages could not be reduced on a motion for [JNOV], excluded damages "which may be determined as a matter of law." ( Gober, at p. 212, 40 Cal.Rptr.3d 92.) While Gober was concerned with the appellate court’s authority to reduce the award, its reasoning fully supports the trial court having authority to take the same action when it determines a jury’s award is constitutionally excessive.
The defendant in Gober challenged a punitive damages award as excessive in motions for JNOV and new trial; the trial court denied the former motion and issued a conditional order granting the new trial motion unless the plaintiffs agreed to accept punitive damages of 15 times their compensatory damages—a significant reduction from the jury’s verdict but more than what the defendant sought as representing the constitutional maximum. (Gober, supra, 137 Cal.App.4th at pp. 209, 210, 40 Cal.Rptr.3d 92.) The defendant could not appeal from the new trial order because it was not aggrieved, as the trial court granted relief, albeit less than that requested. (Id. at p. 211, 40 Cal.Rptr.3d 92.) The defendant thus sought review of the constitutionality of the award by appealing the denial of the motion for JNOV.
But that does not appear to be what happened here. The trial court did not indicate that the reduced amount of punitive damages it ordered was the constitutional maximum; to the contrary, it stated, "Given the above reduction, the ratios of punitive to compensatory damages are well within ‘due process’ limits. ( State Farm Mut. Auto Ins. Co v. Campbell [, supra, ] 538 U.S. [at p.] 410, 123 S.Ct. 1513.)" Beverly is incorrect in citing Gober as authority for the proposition that "a court can review the legality of a punitive damage award on JNOV" as an alternative to utilizing the remittitur procedure. Gober permits reduction of a punitive damage award to the constitutional maximum on a motion for JNOV; it in no way suggests a trial court can reduce such an award to an amount it deems appropriate short of that constitutional maximum.
One of the trial court’s citations suggests it viewed the reduced award as the constitutional maximum: The court’s first citation after the quoted statement reducing the award was "Nickerson [, supra, ] 63 Cal.4th [at p.] 375, 203 Cal.Rptr.3d 23, 371 P.3d 242 (‘appropriate order is for an absolute reduction,’ not remittitur)." As more fully explained in Simon, supra, 35 Cal.4th at pages 1187–1188, 29 Cal.Rptr.3d 379, 113 P.3d 63, which Nickerson cites, reduction rather than remittitur is the appropriate order when the court finds a punitive damages award constitutionally excessive and reduces it to the constitutional maximum. Had Nickerson been the only citation in the trial court’s order, it would have been clear that the court was following this procedure. But the trial court also cited two cases in which punitive damages awards found excessive for nonconstitutional reasons and the remedy employed was remittitur. (Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1596, 36 Cal.Rptr.2d 343 [award so disproportionate to net worth as to raise presumption it was product of passion or prejudice]; Storage Services v. Oosterbaan (1989) 214 Cal.App.3d 498, 514, 262 Cal.Rptr. 689 [same].)
Here, except for determining and imposing the constitutional maximum, the trial court’s authority to reduce the punitive damages award was through its discretion on the motion for a new trial. But in that context, its choices were to grant a new trial pursuant to section 657, subdivision (5) or to issue a conditional order granting the new trial unless 524 Union consented to the reduced amount the court found "fair and reasonable." ( § 662.5, subd. (a)(2).) Neither section 657 nor section 662.5 give the trial court authority to reduce the amount of a punitive damages award through exercise of its independent judgment without using the remittitur procedure.
Generally, the remedy for the court’s error in granting the motion for JNOV in order to reduce the punitive damages award against 524 Union would be for us to reverse its order and reinstate the original judgment on the jury’s verdict. We cannot do so, however, because—contrary to Hong’s argument—the jury’s award of $916,925 was not supported by substantial evidence. The ratio of punitive damages to compensatory damages in the jury’s verdict was 10:1—at or above the threshold at which an award is "suspect" and "absent special justification ... cannot survive appellate scrutiny under the due process clause." ( Simon, supra, 35 Cal.4th at p. 1182, 29 Cal.Rptr.3d 379, 113 P.3d 63.) Putting aside the question whether the conduct in this case was sufficiently "extreme" or "egregious" ( ibid. ) to justify an award in this amount, the jury’s award could not be sustained on the evidence of 524 Union’s financial condition. The property at 524 Union Street was the only asset of the partnership, and the only evidence on the issue—Beverly’s testimony—put its market value of at $3.5 million, reduced to $2.63 due to an encumbrance of $870,000 in secured loans. As the trial court noted, there may be valid reason to suspect a 9,500 building in North Beach is worth more than $3.5 million—but no evidence was presented on this point. The punitive damages award thus amounted to approximately 35 percent of the property’s net value as shown by the evidence. Although "case law has not established any specific numerical percentage of net worth as constituting the upper permissible limit for the amount of a punitive damages award" ( Vallbona v. Springer (1996) 43 Cal.App.4th 1525, 1539, 51 Cal.Rptr.2d 311 [upholding award amounting to 23 percent of net worth] ), "[p]unitive damages constitute a windfall" and "[s]uch awards generally are not allowed to exceed 10 percent of the net worth of the defendant." ( Michelson v. Hamada, supra, 29 Cal.App.4th at p. 1596, 36 Cal.Rptr.2d 343 [award of 28 percent of net worth too high].) The purpose of punitive damages "is to deter, not to destroy." ( Adams v. Murakami, supra, 54 Cal.3d at p. 112, 284 Cal.Rptr. 318, 813 P.2d 1348.) The evidence suggests the only way 524 Union could satisfy a judgment for $916,925 in punitive damages (which, of course, would be in addition to the compensatory damages of $91,692 and attorney fees of $477,121 ordered by the trial court), would be to sell the building. As the trial court also noted, the evidence demonstrated that the restaurant space would be difficult to rent due to the zoning issues. While there was evidence that there were one or two office tenants and a coffee kiosk in the building, there was no evidence as to the income 524 Union derived from the leases of these spaces. Hong’s assertions that Beverly could rent the restaurant space for another purpose now, and will be able to rent it for $8,000 to $9,000 a month "when it obtains landmark status," are speculation, not evidence; they ignore the impracticalities and costs of renting an outfitted restaurant space for other purposes, and the uncertainty as to whether and when landmark status might be achieved.
Unlike the cases Hong relies upon, which upheld punitive damages awards supported by evidence of ability to pay despite negative net worth or awards at relative high percentages of net worth ( Bankhead v. ArvinMeritor, Inc. (2012) 205 Cal.App.4th 68, 75, 83, 139 Cal.Rptr.3d 849 [despite company’s reported negative net worth of $1.023 billion, evidence of cashflow profit of $211 million for the year, reported net profit of $12 million, CEO paid $7.6 million, $343 in cash, and ability to borrow $245; award of $4.5 million upheld]; Zaxis Wireless Communications, Inc. v. Motor Sound Corp. (2001) 89 Cal.App.4th 577, 107 Cal.Rptr.2d 308, [despite negative net worth, company had average annual revenue of more than $250 million, net profit of about $7.5 million and credit line of $50 million, with $5.3 million unexpended; award of $300,000 upheld] ); Devlin v. Kearny Mesa AMC/Jeep/Renault, Inc. (1984) 155 Cal.App.3d 381, 391, 202 Cal.Rptr. 204 [no evidence award representing 17.5 percent of annualized net worth would "unduly interfere with or hamper [defendant’s] future operations"; $80,000 award upheld] ), the present record contains no evidence to support finding 524 Union had the ability to pay the punitive damages award without being effectively "destroyed."
As we cannot reinstate the original judgment on the jury’s verdict, correction of the trial court’s error would normally require us to remand for the trial court to reconsider the motions for JNOV and for a new trial. But this course of action has been rendered unnecessary. At oral argument, Hong’s counsel effectively stipulated that if this court finds the amount of the jury’s award unsupported and accepts the amount to which the trial court reduced the award, Hong will accept that result. Counsel made clear his client’s paramount desire to avoid further litigation in this matter. In these circumstances, the result of a remand is a foregone conclusion. The trial court has already determined the amount of punitive damages it found fair and reasonable, and Hong has represented she would accept this amount rather than pursuing a new trial. In the interest of efficiency and judicial economy, we will avoid unnecessary further proceedings and simply affirm the judgment.
See footnote *, ante .
DISPOSITION
The judgment is affirmed ENA North Beach, Hong, and Bunyaviroch shall recover costs of appeal, including attorney fees, in amounts to be determined by the trial court.
On the cross-appeal, each party shall bear its own costs and attorney fees.
We concur:
Richman, J.
Miller, J.