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Hakakha v. Quality of Life Health Corp.

California Court of Appeals, Second District, Eighth Division
Sep 18, 2008
No. B192716 (Cal. Ct. App. Sep. 18, 2008)

Opinion

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. BC327362 Haley J. Fromholtz, Judge.

Benedon & Serlin, Gerald M. Serlin and Douglas D. Benedon for Plaintiff and Appellant.

Fredman | Lieberman, Howard S Fredman and Marc A. Lieberman for Defendants and Respondents.


COOPER, P. J.

Plaintiff, Benjamin Hakakha, appeals from a judgment on directed verdict in his action against defendants Quality of Life Health Corporation (QLHC) and its employees David Todt, George Todt, Rowan Farber, and Josh Moorvitch, for breach of contract, fraud, and negligent misrepresentation. The action arose out of plaintiff’s investment of $250,000 in QLHC. The trial court directed a verdict primarily on grounds there was no proof that plaintiff had suffered damages. A related ground sustained was that plaintiff had rendered his final scheduled payment late, with contractual consequences. We conclude that the court correctly assessed these questions, and that plaintiff cannot revitalize his damages action as one for rescission. We therefore affirm the judgment.

QLHC is now known as Lifehouse Retirement Properties, Inc. As do the parties, we use the former name, under which the underlying transactions occurred.

The judgment does not address defendants’ cross-complaint against plaintiff, for declaratory and injunctive relief. Plaintiff urges that this omission should not deprive the judgment of appealability, because defendants have abandoned the cross-complaint. Defendants do not deny having done so, and we so perceive the record. The judgment is therefore appealable. (Stubblefield Construction Co. v. City of San Bernardino (1995) 32 Cal.App.4th 687, 702, fn. 1.)

FACTS

In mid-2004, plaintiff became interested in investing in QLHC, in part through contact with defendant Moorvitch, the company’s recent hire, whom plaintiff had previously known. QLHC was engaged in acquisition and ownership of 12 assisted living facilities in Michigan, through a subsidiary, Leisure Living Holdings (LL), which in turn owned the companies that held the facilities. QLHC had contracted to acquire LL in 2003, for stock, from one Thomas Nobel (who later refused to close the deal). The LL facilities were encumbered by $26 million of obligations owing to Key Bank, which QLHC was seeking to refinance to an agreed discounted amount of $15,375,000.

Negotiations between plaintiff and QLHC culminated in an agreement referred to by the parties and herein as the Note. It contained the following material provisions. (1) Plaintiff would advance $250,000 in three installments, the last of which, for $90,000, would be due by 5:00 p.m. on Friday, September 24, 2004. (2) QLHC would repay these advances by the maturity date of January 11, 2005. If QLHC achieved its refinancing of the facilities for $15,375,000, repayment would be in QLHC stock, at the rate of one share per $0.25 of principal (or 1 million shares). Otherwise, implicitly, plaintiff would be repaid cash. (3) If plaintiff had not made his $90,000 payment by September 24, 2004, he would simply purchase QLHC stock, and would receive no repayment or collateral for his advances. (4) If the refinancing were not accomplished by the maturity date, plaintiff could extend the Note for 48 months. (5) QLHC would have appraised the so-called Grant facility, as to which plaintiff was to be provided a second mortgage as collateral. If the appraisal showed less than $2.5 million, plaintiff would be entitled to a refund. This provision would be null if plaintiff took any stock. An accompanying Security Agreement provided for the Grant facility collateral.

Several mishaps of performance led to the present litigation. First, although there was a conflict over whether plaintiff delivered his $90,000 check timely, he admitted that when he did so, there were insufficient funds in the account on which it was drawn. Plaintiff made the delivery to Moorvitch, who took the check to New York, then forwarded it to QLHC after plaintiff made a deposit to the account, five days after the payment due date.

Second, the facilities’ seller Nobel refused to complete the transaction. This put the Grant facility out of QLHC’s and plaintiff’s reach. Litigation with Nobel ensued, and was settled before the maturity date by a division of the LL facilities (and a reduction in the consideration allowed Nobel), by which Nobel retained ownership of the Grant facility and several others. QLHC did not provide plaintiff an appraisal of the Grant property.

Third, QLHC did refinance its $26 million in borrowings, in December 2004, but the overall loan it received was for approximately $19 million, not the roughly $15 million stated in the Note. The difference, however, was not used to refinance the Key Bank loans, but to provide for other corporate expenses.

In December 2004 and again in January 2005, QLHC offered plaintiff its stock, under the Note. Plaintiff declined the tender. On January 18, 2005, he commenced the present action, alleging that defendants had falsely represented to him that QLHC owned the Grant property, and that plaintiff would receive a mortgage on it, to secure his advances pending QLHC’s debt refinancing. In exchange and reliance, plaintiff alleged, he entered into the Note. Plaintiff asserted causes of action for fraud, negligent misrepresentation, and breach of contract (the Note), as well as others that he dismissed before trial commenced.

The case proceeded to jury trial. After both sides rested, defendants moved for a directed verdict, on grounds that (1) plaintiff had suffered no damages, because he was offered the stock to which he was solely entitled, and he was not damaged by failure to receive a mortgage; (2) plaintiff had not shown either a misrepresentation or scienter, as he did receive the mortgage, through the Security Agreement; and (3) a future promise could not constitute negligent misrepresentation. In connection with the first ground, defendants also asserted plaintiff had not been entitled to a mortgage under the Note, both because (4) the refinancing had been completed and (5) plaintiff had not made his last payment when required. The court granted the motion, on grounds (1), (3), and (5), ruling also that QLHC had not waived plaintiff’s lateness in paying. The ensuing judgment awarded defendants $237,815 in costs, principally contractual attorney fees.

Additional facts material to resolution of the issues will be stated below.

DISCUSSION

We review the grant of a directed verdict de novo. (Brassinga v. City of Mountain View (1998) 66 Cal.App.4th 195, 210.) Our review follows the same standards that govern a trial court’s consideration of a directed verdict motion. “‘[T]he function of the trial court on a motion for a directed verdict is analogous to . . . that of a reviewing court in determining, on appeal, whether there is evidence in the record of sufficient substance to support a verdict.’” (Dailey v. Los Angeles Unified Sch. Dist. (1970) 2 Cal.3d 741, 745.) A trial court therefore may direct a verdict – and a reviewing court may affirm that ruling – “‘only when, disregarding all questions of credibility, and all unfavorable evidence, and indulging all rational inferences to help the resisting party, there is still a total lack of substantial evidence to support a verdict in his favor.’” (Vinson v. Ham Bros. Constr., Inc. (1970) 7 Cal.App.3d 990, 993; see also Howard v. Owens Corning (1999) 72 Cal.App.4th 621, 629-630.)

Plaintiff’s breach of contract cause of action centered upon his alleged contractual right to security for his advances. In paragraph 4(c) of the Note, however, plaintiff agreed that if by September 24, 2004 he had funded only $160,000, not $250,000, he would not receive collateral for his investment. Defendants contended that plaintiff became disentitled to collateral, by failing to pay the $90,000 installment by 5:00 p.m. on September 24, 2004. The trial court agreed, and so do we.

Plaintiff contends there was a factual dispute about the time of his payment, in that he testified he delivered a $90,000 check to Moorvitch before the 5:00 p.m. Friday deadline, whereas Moorvitch stated it was delivered late Saturday night, September 25. There was no dispute, however, that the check so delivered was drawn on an account that at the time contained greatly insufficient funds to cover it. Only after plaintiff deposited $100,000 in the account, on September 29, and notified Moorvitch, did the latter transmit the check to QLHC for collection. The evidence thus established that plaintiff did not make his agreed payment of $90,000 until several days after the contractual time.

Plaintiff contends that the foregoing showing was inadequate, for several reasons. The first is that under section 3310, subdivision (b) of the California Uniform Commercial Code, “if a note or an uncertified check is taken for an obligation, the obligation is suspended” until the check is paid or dishonored. But the purpose of this statutory suspension “is to allow the creditor the option, on dishonor of the instrument, to sue either on the instrument or the underlying obligation. [Citation.]” (Long v. Cuttle Construction Co. (1998) 60 Cal.App.4th 834, 838.) The statute does not address or override the parties’ intentions and expectations about what constitutes timely payment. “Payment” by an insufficient funds check could not have been contemplated by the Note’s detailed provisions regarding time of payment and the consequences of its failure.

As a procedural matter, plaintiff asserts that defendants did not argue below that his payment was untimely because drawn on insufficient funds. Not so. Defendants’ counsel argued this point at length on the motion for directed verdict, and the written motion also asserted, “Plaintiff’s final payment of $90,000 was not made timely (approximately 5 days late) . . . .”

Plaintiff’s further and more prominent argument – which the trial court expressly rejected – is that QLHC waived the lateness of the payment, by knowing that it came late and yet acting in a way that disregarded that defect. The crucial issue here is whether QLHC had knowledge of the payment’s lateness. (See Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31.) Plaintiff’s initial assertion, that Nobel, as an officer and director of QLHC, knew of the late payment, lacks basis: the cited testimony by defendant David Todt, QLHC’s vice-president, that “I think Mr. Nobel was kind of upset because the payments didn’t come on time,” is too vague and indefinite, especially in context, to be direct or inferential proof.

The remainder of plaintiff’s contention of knowledge is based on Civil Code section 2332, under which plaintiff would attribute to QLHC the knowledge of its employee Moorvitch, who alone among those connected with the company admitted knowing that the check plaintiff delivered was drawn on insufficient funds. The statutory rule does not operate here, however, because of an established exception: “Where an agent acts in a capacity adverse to the principal in the transaction, there is no reason to believe that the agent will keep the principal properly informed, and ordinarily the notice will not be imputed.” (3 Witkin, Summary of Cal. Law (10th ed. 2005) Agency and Employment § 156, p. 200; see, e.g., People v. Park (1978) 87 Cal.App.3d 550, 566.)

Civil Code section 2332 provides: “As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.”

Moorvitch testified that plaintiff told him there were not enough funds to cover the check, and asked him to hold it until the money could be deposited. Moorvitch said he would take the check with him to New York on Monday, and tell QLHC’s president Farber he had done so accidentally. Then he would mail the check to the company. Moorvitch performed as stated. He testified he acted to protect plaintiff’s interests, as well as his own, in not providing his new employer a check that would “bounce.”

This situation clearly falls within the exception to Civil Code section 2332, as well as one of its rationales. Under the circumstances, the expectation was that Moorvitch would not keep QLHC advised of the insufficiency of plaintiff’s check, although the statute and Moorvitch’s fiduciary duties contemplated that he would. As the United States Supreme Court has observed, “[T]h[e] general rule does not apply when the third party knows there is no foundation for the ordinary presumption,-- when he is acquainted with circumstances plainly indicating that the agent will not advise his principal.” (Mutual Life Ins. Co. v. Hilton-Green (1916) 241 U.S. 613, 622-623.) Plaintiff’s waiver claim, based on Moorvitch’s knowledge, is therefore unfounded.

In rejoinder, plaintiff asserts there was an evidentiary conflict about Moorvitch’s “collusion,” because plaintiff testified he did not tell Moorvitch there were insufficient funds to cover the check, but only asked when it would be deposited. But if this testimony is credited, Moorvitch had no knowledge to attribute to QLHC, and therefore plaintiff’s waiver argument fails at threshhold. Plaintiff did not make his third payment on time, and under paragraph 4(c) of the Note he was not entitled to collateral. The breach of contract claim therefore failed for lack of damages.

The same facts and reasons also sustain the court’s rejection of plaintiff’s fraud and negligent misrepresentation causes of action. The alleged misrepresentations were that QLHC owned the Grant facility, and would give plaintiff a mortgage on it as security for his advances. Under paragraph 4(c), because of his untimely payment plaintiff was entitled only to QLHC stock, not collateral. And plaintiff rejected QLHC’s tender of that stock. Plaintiff thus obtained all that he was entitled to. The trial court properly disapproved the misrepresentation claims on grounds of failure to prove damages.

Plaintiff contends that even if he failed to show damages, he was entitled to seek rescission of the Note, and restitution of his investment, as a remedy for the fraud. Although this may have been true at the outset, that is not the choice plaintiff made. Instead of invoking rescission and suing for restitution, plaintiff affirmed the Note, sought damages for its alleged breach, and further pursued a damages – including punitive damages – remedy, against all defendants, for the alleged fraud. Under modern doctrine, plaintiff was required to elect between enforcing the contract and undoing it. (1 Witkin, supra, Contracts, §§ 175-176, pp. 245-246.) He chose the former. Even when he argued on the motion for directed verdict for a return of his investment, plaintiff termed that relief a form of damages, and he never requested leave to amend to claim rescission. He cannot do so now.

Contrary to plaintiff’s assertion, he did not originally undertake rescission, by observing the statutory condition of prompt notice of it. (Civ. Code, § 1691.) Plaintiff’s refusal of the QLHC stock did not constitute such notice, and he did not avail himself of the alternative of pleading a rescission claim. (Ibid.; see also Civ. Code § 1693 [when sued for, rescission will be denied if delay in notice has been substantially prejudicial]; Citicorp Real Estate, Inc. v. Smith (9th Cir. 1998) 155 F.3d 1097, 1103-1104.)

Accordingly, plaintiff’s claims for fraud and negligent misrepresentation, like his breach of contract claim, were properly disallowed based on failure to prove damages.

DISPOSITION

The judgment is affirmed.

We concur: RUBIN, J. FLIER, J.


Summaries of

Hakakha v. Quality of Life Health Corp.

California Court of Appeals, Second District, Eighth Division
Sep 18, 2008
No. B192716 (Cal. Ct. App. Sep. 18, 2008)
Case details for

Hakakha v. Quality of Life Health Corp.

Case Details

Full title:FARAMARZ BENJAMIN HAKAKHA, Plaintiff and Appellant, v. QUALITY OF LIFE…

Court:California Court of Appeals, Second District, Eighth Division

Date published: Sep 18, 2008

Citations

No. B192716 (Cal. Ct. App. Sep. 18, 2008)