Opinion
B310735
04-12-2024
RAHEF TAIAN et al., Plaintiffs and Appellants, v. MAMDOUH WANNES et al., Defendants and Appellants
Law Offices of E. Patrick Morris and E. Patrick Morris for Plaintiffs and Appellants. Davis Law Group and D. Jason Davis for Defendants and Appellant.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC610162, Anthony Mohr, Judge.
Law Offices of E. Patrick Morris and E. Patrick Morris for Plaintiffs and Appellants.
Davis Law Group and D. Jason Davis for Defendants and Appellant.
STRATTON, P. J.
BACKGROUND
On July 9, 2014, by oral agreement, plaintiff Rahef Taian agreed to buy a gas station and convenience store, Hungry's Market, from defendant Mamdouh Wannes. (Both men acted with their companies who were also parties to the litigation, but for clarity we describe the transaction by using the names of the individuals only.) The transaction included the name, equipment, and transfer of a liquor license from Wannes to Taian. The agreed-upon purchase price was $350,000 plus inventory left in the store worth approximately $74,000 and the gas in the underground storage tanks. (The amount agreed for the inventory and the gas was $102,000 which plaintiff Taian never paid.) Taian and Wannes agreed that Taian would buy Hungry's Market, escrow was opened and Taian delivered $150,000 to escrow. Taian subsequently delivered another $200,000 in bags of cash to Wannes outside of escrow rather than depositing the amount in escrow.
Cimarron Escrow, Inc. prepared the escrow instructions which both buyer and seller signed. The escrow instructions state the consideration paid for the purchase of Hungry's Market was $150,000 excluding inventory, allocated as $10,000 for equipment and fixtures; $70,000 for the liquor license; and $70,000 for goodwill.
The escrow instructions required a bill of sale, which defendant Wannes, as the seller, signed. The bill of sale was to list furniture, fixtures and equipment sold as part of the transaction. The buyer Taian was to reimburse the seller Wannes for payment of the sale tax due on the furniture, fixtures and equipment listed in the bill of sale.
Because the transaction involved the transfer of a liquor license, the California Department of Alcoholic Beverage Control (Department) had to approve the transfer. Generally, the escrow officer must obtain releases from several government entities and ensure the government is paid before the seller receives any money from the transaction. One of the forms that must be returned to the Department, ABC Form 227, requires the buyer applying for the liquor license (here plaintiff Taian) to declare under penalty of perjury that the purchase price or consideration set forth in the escrow agreement is deposited with the escrow holder. Plaintiff Taian signed ABC Form 227 under penalty of perjury. He testified at trial that he did not deposit all consideration with the escrow holder, contrary to the form he signed. Taian also gave Wannes $50,000 in payment for the store's equipment rather than depositing the purchase money with the escrow officer.
While escrow was pending, plaintiff Taian operated the business for six months from July 9, 2014 until December 31, 2014. After six months of operating the business, Taian returned the business to defendant Wannes before escrow closed and backed out of the transaction. During the same period, Wannes repaired malfunctioning equipment and cleared up citations for air pollution violations that had cropped up. Because Taian backed out of the transaction, escrow never closed.
On April 3, 2017, plaintiff Taian filed a second amended complaint against Wannes alleging fraud, conversion, and breach of written and oral contracts in connection with the transaction. The second amended complaint alleges that Wannes fraudulently misrepresented the profitability of the business and operating condition of the fuel dispensing tanks and equipment in order to induce Taian to buy the business. Because Taian restored Hungry's Market to Wannes before escrow closed, Taian sought only the return of all sums he had paid to purchase the business. The second amended complaint alleges Taian paid Wannes "$150,000 in cash as a good faith deposit, to be held in trust by Wannes until the sale closed." The cash was delivered in bags to Wannes directly and not through escrow. Wannes said he would hold the money toward payment of the purchase price when escrow closed. The total consideration for the business was $350,000.
On April 21, 2017, defendant Wannes's business entity, Amigos Liquor and Junior Market, Inc. (Wannes) filed a crosscomplaint against plaintiff Taian for breach of contract, breach of the implied covenant of good faith and fair dealing, interpleader, and fraud. After a lengthy bench trial, the trial court issued a final statement of decision on July 7, 2020. On plaintiff Taian's complaint, judgment was entered in favor of defendant Wannes. On defendant Wannes's cross-complaint, judgment was entered in favor of plaintiff Taian. The court also determined that all funds still held in escrow would be delivered in full to plaintiff Taian.
The trial court issued a 22-page statement of decision. The trial court began its analysis: "The agreement between the parties constitutes an illegal bargain." The court found the contract became illegal when one of the parties insisted on cash payments outside of escrow. "Even if we ignore the origins of the bag full of cash wrapped in ten thousand-dollar bundles, it is clear that what the parties did flies in the face of California's alcoholic beverage regulations." The court found the contract illegal for a second reason: Taian paid $50,000 to Wannes outside escrow for equipment and the escrow instructions required the buyer to pay sales tax on the value of the equipment being sold, which had to be, and was not, disclosed. The court noted that generally a contract made in violation of a regulatory statute is void, citing Asdourian v. Araj (1985) 38 Cal.3d 276 (Asdourian), and found the contract unenforceable because of the violations of Business &Professions Code section 24074. "Applying a balancing test, the court remains loathe to reward conduct pursuant to which a serious misrepresentation was made to the relevant public authority.... Deterring illegal conduct is important public policy. The court is not basing its decision on the fact that cash was placed in a bag and handed over. The court bases its ruling on the failure, which it concludes was deliberate, to disclose to the proper agency roughly half the consideration that was paid." "The illegality attached when this significant amount of cash changed hands from plaintiffs to Wannes without passing through escrow or being disclosed in the escrow documents."
In fashioning a remedy, the court noted that the particular circumstances of each case must be considered. Citing Southfield v. Barrett (1970) 13 Cal.App.3d 290, the court ruled: "In the case at bar, the Business [and] Professions Code violations did not involve serious moral turpitude, although the court views them as more serious than those in Southfield. Neither side can be said to have been guilty of the greater moral fault. Finally, and most important, Wannes would be unjustly enriched if he or his business received the funds in escrow. As stated in Southfield, 'In such circumstances, equitable solutions have been fashioned to avoid unjust enrichment to a defendant and a disproportionately harsh penalty upon the plaintiff.'" The court ordered escrow to return the $150,000 to plaintiff. In rebuffing the parties' respective claims that each deserved more of the money that was actually exchanged, the court explained: "There are equities on both sides, but as mentioned earlier, the most significant point is that the agreement constitutes an illegal bargain. If the contract were legal, the court might well structure an equitable distribution in this regard. But the court has concluded that the bargain was not legal (Civil Code sections 3513, 3524), and the court is not convinced that either side breached it. It makes the most sense to return the funds in escrow to the plaintiffs. With that, each side will retain roughly half of the payment sum." Judgment was entered on October 2, 2020.
DISCUSSION
I. The Contract Is Illegal.
Tain argues the trial court erred in finding the contract illegal as a matter of law. We find no error.
A. The State of California Completely Controls the Transfer of Liquor Licenses.
It is well established that the state has complete control over matters dealing with the sale and licensing of alcoholic products. The same control would naturally and reasonably extend to the transfer of liquor licenses, for without control over license transfers, the power over original applications would be meaningless. (Pacific Firestone Escrow Co. v. Food Giant Markets, Inc. (1962) 202 Cal.App.2d 155, 158.) The Legislature has seen fit, in enacting a comprehensive scheme of alcoholic beverage control for this state, to require the parties to a sale of a liquor license to establish an escrow for the orderly transfer of such licenses. Business and Professions Code section 24074 prescribes certain procedures and requirements in connection with the transfer of liquor licenses. It requires an escrow when any transfer of a liquor license involves a purchase price or consideration, and deposit of the purchase price therein. (§ 24074; Webster v. Southern Cal. First Nat. Bank (1977) 68 Cal.App.3d 407, 414; Business Title Corp v. Division of Labor Law Enforcement (1976) 17 Cal.3d 878, 883.)
All undesignated citations are to the Business and Professions Code.
Business and Professions Code section 24074 provides, in pertinent part: "Before the filing of such a transfer application with the department, if the intended transfer of the business or license involves a purchase price or consideration, the licensee and the intended transferee shall establish an escrow with some person, corporation, or association not a party to the transfer acting as escrow holder, and the intended transferee shall deposit with the escrow holder the full amount of the purchase price or consideration. The transfer application shall be accompanied by a description of the entire consideration. The description shall include a designation of cash, checks, promissory notes, and tangible and intangible property, and the amount of each thereof." (§ 24074.)
The language in the section requires the intended transferee (usually a buyer) to deposit with the escrow company the full amount of the purchase price or consideration, accompanied by a description of the entire consideration, including cash, checks, promissory notes, and tangible and intangible property. (Cohn v. Gramercy Escrow Co. (1977) 65 Cal.App.3d 884, 893.) All deposited assets, not just cash, are to be distributed in a manner that will benefit creditors covered by the statute. (Ibid.) Section 24074 was intended to protect not only buyers and sellers of liquor licenses, but also the creditors of sellers, by creating a payment plan dependent upon submission of claims, and not upon the usual commercial self-help procedures of attachments and executions. (Grover Escrow Corp v. Gole (1969) 71 Cal.2d 61.) Section 24074 supersedes all other remedies against the sale proceeds that creditors of liquor license transferors may have, and the statutory provisions are exclusive and mandatory, not directory. (Id. at p. 63.)
The transfer of the liquor license must be approved by the Department of Alcoholic Beverage Control before any money can be paid out of escrow. Thus, section 24074 also protects the buyer from loss of consideration if the Department does not transfer the license to the buyer. (Harriman v. Tetik (1961) 56 Cal.2d 805, 811-812 (Harriman).)
B. The Trial Court Is Empowered to Decline to Enforce an Illegal Contract.
The general rule, subject to a wide range of exceptions, is that parties to an illegal agreement cannot seek the aid of the courts upon a breach of contract. (Harriman, supra, 56 Cal.2d at p. 811.) When the evidence shows that the plaintiff in substance seeks to enforce an illegal contract or recover compensation for an illegal act, the court has both the power and duty to ascertain the true facts in order that it may not unwittingly lend its assistance to the consummation or encouragement of what public policy forbids. It is immaterial that the parties, whether by inadvertence or consent, do not raise the issue. The court may do so on its own motion when the testimony produces evidence of illegality. (Fellom v. Adams (1969) 274 Cal.App.2d 855, 863.)
The policy in favor of narrowing the disputed issues, which normally confines the court to issues raised by the pleadings, and the policy of the parol evidence rule favoring the conclusiveness of integrated written agreements both give way before the importance of discouraging illegal conduct. "To this end, the trial court must be free to search out illegality lying behind the forms in which the parties have cast the transaction to conceal such illegality." (Lewis &Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 148 (Lewis &Queen).)
The rule is settled that courts will not enforce a contract to perform an act prohibited by statute or by ordinance. (Vick v. Patterson (1958) 158 Cal.App.2d 414, 417.) A judge may not properly act to "approve" an illegal contract and thereby shield it from invalidation. (California State Auto. Assn. Inter-Ins. Bureau v. Superior Court (1990) 50 Cal.3d 658, 664 [The court may reject a stipulation that is contrary to public policy or one that incorporates an erroneous rule of law. The" 'court cannot surrender its duty to see that the judgment to be entered is a just one, nor is the court to act as a mere puppet in the matter.' "].)
Civil Code section 1608 codifies the unenforceability of an unlawful contract. "If any part of a single consideration for one or more objects, or of several considerations for a single object, is unlawful, the entire contract is void." (Civil Code, § 1608.) An unlawful contract is one that is contrary to an express provision of law; contrary to the policy of express law, though not expressly prohibited; or otherwise contrary to good morals. (Civil Code, § 1667.)
That an injustice to one or more parties may result when a contract is found illegal is outweighed by the importance of deterring illegal conduct. (Lewis &Queen, supra, 48 Cal.2d at p. 150.)
C. The Independent Standard of Review Applies.
Whether a contract is illegal is a question of law to be determined from the circumstances of each particular case. (Jackson v. Rogers &Wells (1989) 210 Cal.App.3d 336, 349-350.) Where the extrinsic evidence is not in conflict, construction of the agreement is a question of law for independent review. (Appleton v. Waessil (1994) 27 Cal.App.4th 551, 556.) We give statutory words their plain meaning. (Cvejic v. Skyview Capital, LLC (2023) 92 Cal.App.5th 1073, 1077.) Our goal is to effectuate the statute's purpose. (Ibid.)
D. The Trial Court Properly Found the Contract Illegal.
Relying on Harriman, Taian argues that the purpose of section 24074- to protect creditors-was not violated and therefore the contract should have been enforced. We disagree.
First, the record is devoid of any facts about the totality of Wannes's creditors and whether the money that was placed into escrow was sufficient to satisfy any debts Wannes owed to them. The escrow was missing $200,000-$150,000 for the purchase price and $50,000 for purchase of the equipment. Although the escrow included a provision to pay creditors from the funds placed into escrow, we cannot assume that all creditors were indeed fully protected by the deposit of less than half of the true purchase price. Based on this incomplete record, we cannot conclude that the purpose of the statute was effectuated by the terms of the escrow.
Second, as the trial court pointed out, citing Asdourian, supra, 38 Cal.3d at p. 291, a contract made in violation of a regulatory statute is void. The public importance of discouraging prohibited transactions outweighs equitable considerations of possible injustice to the parties. (Ibid.) Courts will not lend their aid to the enforcement of an illegal agreement or one against public policy. (Ibid.) Thus, whether or not any of Wannes's creditors or the parties themselves were injured by the illegalities in the contract is immaterial to the question of whether the contract is illegal. (Civil Code, § 3513 ["Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement."].)
We also find Harriman inapt. In that case, the escrow agreement stated that the escrow agent would not be held liable for distribution of escrow funds prior to the close of escrow. The agent distributed the money before the close of escrow and before transfer of the liquor license had actually been approved. (Harriman, supra, 56 Cal.2d at pp. 808-809.) This early distribution of the funds in escrow violated section 24073 which states that payout of consideration should occur only after the department has approved the transfer of the license. (§ 24073.)
The Court of Appeal found that the contract between the parties was not illegal because the contract did not mandate distribution of the consideration in violation of section 24073. The contract was silent on the issue of when the funds could be distributed. The court also found that no public policy considerations required treating the contract as illegal under the circumstances of the case because section 24073 statute did not impose a duty on the contracting parties to express time constraints in their escrow instructions. (Harriman, supra, 56 Cal.2d at pp. 811-812.)
Here the relevant statute, section 24074, did place express obligations on the parties, to wit, to disclose in escrow the full consideration for the transaction and to pay sales taxes through escrow on the purchase price of the furniture, equipment, and inventory. The parties expressly violated their statutory duties by deliberately misstating the full amount of consideration and failing to disclose the purchase price of the equipment. Harriman does not compel a different result.
The parties' agreement to pay part of the consideration outside escrow violated their obligations under section 24074, that is, the full amount of consideration, in whatever form, must be disclosed and paid through escrow. The agreement to pay the additional $50,000 outside of escrow for the sale of the equipment also violated their obligation to account for and pay sales tax on the transaction through escrow. The trial court properly found the agreement between the parties illegal.
II. The Trial Court Did Not Abuse Its Discretion in Fashioning a Remedy for the Illegal Agreement.
The trial court found the transaction illegal and did not enforce the contract. It then had to determine a remedy for the illegal transaction. The trial court left the parties in the position they were in at the end of the trial, with one exception: it ordered escrow to return to Taian the $150,000 he had deposited into the still-open escrow. Apart from that order, everything else remained in equipoise.
Taian's second argument on appeal is that the trial court also should have ordered Wannes to return the $200,000 in cash Taian paid directly to Wannes as part of the consideration for the purchase of Hungry's Market. In his cross-appeal, Wannes is also unhappy with the trial court's remedy. Wannes argues that the trial court should have ordered Taian to disgorge the profits he made during the six months he operated the business while escrow was pending. Wannes also seeks an order that Taian reimburse him for missing or unusable inventory on hand at the end of the six-month period.
We find no error in the trial court's remedy.
A. The Appropriate Remedy Depends on the Facts of the Case.
Ordinarily, the parties to a contract, void because contrary to public policy, will be left where they are, when they come to the court for relief. (Stanley v. Robert S. Odell &Co. (1950) 97 Cal.App.2d 521, 531.) But a "wide range of exceptions" has been recognized. (Asdourian, supra, 38 Cal.3d at p. 291.)"' "In each case, the extent of enforceability and the kind of remedy granted depend upon a variety of factors, including the policy of the transgressed law, the kind of illegality and the particular facts." '" (Id. at p. 292; see also 6A Corbin, Contracts (1962) § 1534, p. 816, cited in Homestead Supplies, Inc. v. Executive Life Ins. Co. (1978) 81 Cal.App.3d 978, 990 (Homestead) [" 'Before granting or refusing a remedy, the courts have always considered the degree by the offense, the extent of public harm that may be involved, and the moral quality of the conduct of the parties in the light of the prevailing mores and standards of the community.' "].)
To elaborate, among the specific factors frequently considered by courts are whether the violation of law involved serious moral turpitude, whether the parties are not entirely in pari delicto, whether the adverse party would be unjustly enriched if enforcement were denied, whether the forfeiture resulting from denial of enforcement would be disproportionately harsh in proportion to the illegality and whether the purpose of the statute violated would best be served by enforcement or denial of enforcement. (Homestead, supra, 81 Cal.App.3d at pp. 990-991.)
B. The Standard of Review is Abuse of Discretion.
The trial court fashioned an equitable remedy for the illegal contract at issue here. Because the trial court exercised its equitable powers when it determined the remedy, we review the judgment under the abuse of discretion standard. (City of Barstow v. Mojave Water Agency (2000) 23 Cal.4th 1224, 1256.) Under that standard we resolve all evidentiary conflicts in favor of the judgment and determine whether the court's decision falls within the permissible range of options set by the legal criteria. (Dorman v. DWLC Corp. (1995) 35 Cal.App.4th 1808, 1815.) Discretion is abused whenever, in its exercise, the court exceeds the bounds of reason, all circumstances before it being considered. The burden is on the complaining party to establish an abuse of discretion and unless a clear case of abuse is shown and unless there has been a miscarriage of justice, a reviewing court will not substitute its opinion and thereby divest the trial court of its discretionary power. (Denham v. Superior Court (1970) 2 Cal.3d 557, 566.) The abuse of discretion standard measures whether, given the established evidence, the act of the lower court falls within the permissible ranges of options set by the legal criteria. (Department of Parks &Recreation v. State Personnel Bd. (1991) 233 Cal.App.3d 813, 831.)
C. The Trial Court Did Not Abuse Its Discretion.
Here each party complains that the trial court did not appreciate the injury each suffered when the transaction did not culminate. Each party asserts he suffered more than the other and therefore should have been made whole -Taian by getting the $200,000 back without having to disgorge the profits he earned while he operated the business; Wannes by getting reimbursed for the profit Taian made (alleged to be $140,000.) during the six months he operated the business and for missing or unsellable inventory on hand when the market was restored to Wannes at the end of the six months.
The trial court discussed at length the various factors particular to the circumstances of the case and then determined to return to Taian only the escrow funds he had deposited, otherwise leaving the status quo as it was. In doing so, the trial court evaluated the seriousness of the statutory violations, the relative culpability of the parties, the harshness of a forfeiture, and the possibility of a windfall to one of the parties. It found the parties equally responsible for the violations and the violations somewhat serious. It also found that without returning the funds still in escrow to Taian, Wannes would receive a windfall which would not be just. It concluded that as to the total money exchanged, each party ended up with roughly half.
Our review of the evidence convinces us that the trial court considered the appropriate factors and its ruling did not effectuate a miscarriage of justice. The court found that each party failed to prove the other had breached the contract, committed fraud, misrepresented facts, or otherwise acted in bad faith. The trial court concluded that no party was guilty of greater moral fault. Both signed off on the deceitful escrow instructions and effectuated the payment of consideration payments outside of escrow. The court found that given the fact that the parties were in pari delicto, the most significant issue was to avoid a windfall to Wannes by allowing him to receive the remaining escrow funds. We cannot say the court abused its discretion in fashioning this equitable remedy.
DISPOSITION
The judgment is affirmed. The parties are to bear their own costs.
I concur: GRIMES, J., VIRAMONTES, J.