Nissan Motor Acceptance v. Superior Automotive Group CA4/3 ( 2014 )

Filed 1/16/14 Nissan Motor Acceptance v. Superior Automotive Group CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
NISSAN MOTOR ACCEPTANCE
CORPORATION,
G046914
Plaintiff, Cross-defendant and
Respondent, (Super. Ct. No. JCCP 4613)
v. OPINION
SUPERIOR AUTOMOTIVE GROUP et
al.,
Defendants, Cross-complainants and
Appellants.
Appeal from a judgment of the Superior Court of Orange County, Ronald
L. Bauer, Judge. Reversed in part and remanded with instructions.
Miller Barondess, Louis R. Miller, Amnon Z. Siegel and Mira Hashmall for
Defendants, Cross-complainants and Apellants.
Severson & Werson, Jan T. Chilton and Mark Joseph Kennedy for Plaintiff,
Cross-defendant and Respondent.
Michael Kahn, the owner of seven car dealerships that composed Superior
Automotive Group (SAG), accuses the lending company that financed his automobile
empire of causing its collapse. This appeal concerns certain trial court rulings that
stopped the jury from reaching Kahn’s and SAG’s tort claims in their cross-complaint
against the lender.
The lender, Nissan Motor Acceptance Corporation (NMAC), sued Kahn
and SAG for breach of various loan agreements and obtained a $40 million contractual
damages award. Kahn and SAG do not appeal from the jury verdict on the contract
claims and instead appeal only from the judgment against them as to certain claims in
their cross-complaint. Essentially, they contend the trial court erred in excluding under
the parol evidence rule all evidence of fraudulent oral promises by NMAC, which led to
pretrial dismissal of their fraud claims and nonsuit as to their claims for fraudulent
concealment and violation of the Automobile Dealers Day in Court Act (15 U.S.C.
§ 1221 et seq; ADDCA).
We agree the trial court erred in its parol evidence ruling as well as in
granting the partial nonsuit. We further find these errors prejudicial. Consequently, we
reverse the judgment in part and remand for a retrial of appellants’ claims against NMAC
for negligent and intentional misrepresentation, promissory fraud, fraudulent concealment
and violation of the ADDCA.
FACTS AND PROCEDURAL HISTORY
A. Background
In 2008, before this litigation commenced, Kahn owned and operated seven
automobile dealerships across California. SAG was comprised of four Nissan stores, two
Toyota stores, and one Chevrolet store. NMAC financed six of the seven dealerships (the
Dealerships), all but the Chevrolet store. NMAC provided a full complement of
financing for the Dealerships, including construction financing, loans for furniture,
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fixture and equipment purchases (FF&E financing), and most particularly, “inventory”
financing.
Through inventory financing, NMAC provided lines of credit to authorized
Nissan dealers to purchase vehicles from its parent company, Nissan North America, for
resale to the public. NMAC’s standard Wholesale Financing Agreement (WFA) set the
terms for inventory financing, including the requirement that a dealer must remit payment
to NMAC for every sold vehicle within the earlier of: (a) two days after the purchaser
has paid the dealer for the vehicle, or (b) 10 days from the date of sale, regardless of
whether the dealer has received payment (the 2-day/10-day rule).
In industry parlance, if a dealer fails to pay NMAC timely under the 2-
day/10-day rule, the dealer is “out of trust” or has an “SOT” for the inventory balance
owing –– technically, an event of default under the WFA. Testimony established that,
notwithstanding the 2-day/10-day rule, it was common for Kahn and other dealers to pay
more slowly than the letter of the rule allowed. In fact, it was NMAC policy to tolerate
an SOT of up to 25 percent of inventory sold but not yet paid for at a store; it was also
policy for NMAC, upon discovering any SOT in its periodic audits of dealerships, to
demand immediate payment of the SOT within 24 hours.
As the 2008 economic downturn hit the automotive industry, many Nissan
dealerships, including Kahn’s, were increasingly late on inventory payments. A June 2,
2008 audit by NMAC revealed the Dealerships had an SOT of approximately $1.36
million. Though Kahn eventually paid the SOT, he continued to struggle with making
timely inventory payments as well as meeting other loan obligations, and so sought
assistance from NMAC.
On June 23, 2008, Kahn and NMAC entered into a “forbearance
agreement” (the June FA) that gave Kahn some breathing room by extending certain of
the Dealerships’ payment obligations for six months, subject to certain conditions. The
June FA also provided that, in regard to the Dealerships’ various defaults under the WFA
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(including untimely inventory payments), NMAC would forbear until December 31,
2008, from exercising its rights and remedies under the WFA. The June FA stated that in
the event of a “further default” under the WFA during the forbearance period, including
any failure to comply with the 2-day/10-day rule, NMAC “has the right” to exercise its
rights under the WFA against the Dealerships, borrowers and guarantors of the various
loans.
Soon after executing the June FA, the Dealerships were again SOT. On
July 1, 2008, the parties amended the June FA with a new document (the July
Amendment) that acknowledged the Dealerships’ new SOT of approximately $752,000,
and Kahn’s promise to pay it within two days, as well as NMAC’s continued agreement
to forbear from exercising its rights and remedies under the WFA despite this new “event
of default,” in exchange for $15 million worth of additional collateral to be put up by
Kahn, the Dealerships (each a separate LLC), and guarantors (Kahn, his wife, and a
family trust). Like the June FA, the July Amendment stated that in the event of any
further default under the WFA, NMAC “has the right” to exercise any of its remedies
under the WFA against the Dealerships, borrowers and guarantors.
By September 2008, the recession’s effect on the Dealerships had
deepened, causing a 40 percent drop in sales from pre-recession levels. The September
audit revealed an SOT of $800,000, which grew to $1.4 million before SAG paid it on
October 1. The October 10, 2008 audit revealed the Dealerships had an extremely large
SOT of $4.5 million. Kahn was also struggling to make other payments due to NMAC
for mortgages, construction loans, and FF&E financing for various dealerships.
In October 2008, Kahn approached Steve Lambert, president of NMAC,
and Kevin Cullum, NMAC director of commercial lending, to ask for NMAC’s help in
enabling the Dealerships to survive the recession. Kahn, Lambert and Cullum began
negotiating a new forbearance agreement that would involve rolling the SOT into a
capital loan or “cap” loan, payable over five years, as well as making additional loans to
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provide working capital and a $2 million FF&E loan for completion of the new Oakland
dealership Kahn was building.
B. The Purported Oral Promises
Because the trial court’s in limine parol evidence ruling barred Kahn from
presenting at trial his evidence of purportedly fraudulent oral promises by NMAC, the
following facts are taken from Kahn’s testimony and other evidence presented at the
pretrial hearing.
Kahn testified that in several conversations occurring in mid-October
through November 3, 2008, Lambert made specific oral promises to him that NMAC
would continue to finance the operations of the Dealerships in 2009 to help them ride out
the recession.1 Kahn testified that he told Lambert that he would likely “get out of trust
again,” and in response Lambert assured Kahn that NMAC would not treat Kahn’s
inability to comply with the 2-day/10-day rule as an event of default under the WFA.
Kahn testified Lambert told him: “‘Don’t worry about it. Do the best you can and just
keep’ –– he got into cutting expenses, make sure you’re doing this.”
Kahn further testified that, in exchange for this promise of continued
financing through 2009, Lambert demanded that Kahn sell a newly acquired Toyota
dealership located in San Juan Capistrano (the SJC dealership). Kahn had purchased the
SJC dealership in 2007 with financing from Bank of America. When the recession hit in
2008, Bank of America gave Kahn a 30-day notice of intent to terminate financing and, at
Kahn’s request, NMAC stepped in with replacement financing to keep the SJC dealership
afloat. By the fall of 2008, NMAC’s loans to Kahn for the SJC dealership totaled
approximately $30,000,000 (“the key biggest loan I had”). According to Kahn, Lambert
1 In his testimony, Kahn explained that the promised “continued financing
through 2009” meant, essentially, two “cap” loans: one, right away, for $7.7 million,
representing the Dealerships’ then-SOT (see next section on November Forbearance
Agreement), and a second loan in 2009 for as much as $12 million, as needed to cover
any newly accrued SOT and other operating expenses.
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demanded that Kahn sell the SJC dealership by December 31, 2008, and remit the
proceeds to NMAC as a condition of obtaining the financing needed to carry the
Dealerships through 2009.
Kahn testified that he complained to Lambert he would “take a bath” on a
year-end sale at the bottom of the market. Still, he agreed to NMAC’s demand that he
sell the SJC dealership, telling Lambert: “‘[I]f that’s what’s gonna save my entire
company, then we’ll do what we gotta do.’” Kahn summarized “the generalities” of
Lambert’s promise as follows: “I sell San Juan, he would get me through ’09.”
Kahn also testified that on January 5, 2009, Lambert reiterated his earlier
promises to get the Dealerships the financing they needed in 2009. In a conference call
among key personnel of both NMAC and SAG, Lambert told Kahn, “You get me a pro
forma, show us how you’re going to use the funds, and we’ll get you the money.”
C. The November Forbearance Agreement
By late October 2008, the Dealerships’ SOT had ballooned to $7.7 million.
On November 4, 2008, SAG and NMAC entered into a new Forbearance Agreement (the
November FA) which expressly superseded the June FA and the July Amendment. In the
November FA, NMAC agreed to provide a five-year cap loan of $7.7 million that would
be applied to satisfy the SOT. Kahn gave NMAC deeds of trust on four pieces of his own
real estate, including his personal residence, as security for the $7.7 million cap loan,
collectively amounting to over $30 million in new collateral. This was a significant
benefit for NMAC because the SOT had been unsecured: The only collateral for
inventory financing is the vehicle sitting on the lot; once the vehicle is sold, NMAC loses
its security interest in the car.
Other provisions in the November FA included a six-month deferral of all
payments of interest and principal SAG owed, and an agreement by NMAC to give SAG
a $2 million FF&E loan for Oakland.
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The new agreement acknowledged, as had the superseded documents, that
the Dealerships had defaulted under the WFA by failing to make timely inventory
payments and that NMAC would forbear until December 31, 2008, from exercising its
rights and remedies under the WFA for that default.
There was one significant difference between the superseded documents
and the November FA. Where the June FA and July Amendment stated that NMAC “has
the right to exercise its remedies” under the WFA in the event of a further default, the
November FA stated that any further failure to comply with the 2-day/10-day rule would
result in termination of all existing and future financing for the Dealerships. The relevant
contract provision is as follows: “If any Dealership causes an additional hard SOT
(defined as any units reported sold and funded or unfunded outside of NMAC guidelines:
i.e., 2 days after funding or 10 days after reported sale), then all debt outstanding of all
Borrowers and Guarantors will become due and payable and all credit lines will be
cancelled.” (Italics added.)
D. “Pulling the Plug”
Much of the following evidence was excluded at trial under the parol
evidence rule, and thus comes from the transcript of the pretrial hearing.
On December 17, 2008, Kahn sold the SJC dealership for $28 million and
paid the proceeds to NMAC. The sale price was $2 million shy of the debt owed on that
dealership. Kahn testified that he personally lost $8 million on the sale of the SJC
dealership.
The next day, Kahn and his team called Lambert and Cullum to discuss
“the going forward plan for ’09.” Having complied with Lambert’s demand that he sell
the SJC dealership, Kahn was eager to arrange the additional financing Lambert had
promised he would extend to get the Dealerships through 2009.
The Dealerships were still struggling financially. The inventory balance
was again fluctuating, with the Dealerships intermittently SOT, though NMAC did not
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declare a “hard SOT” and impose the severe penalty stated in paragraph 4 of the
November FA. On December 18, 2008, Cullum responded to Kahn’s attempt to start
discussing 2009 financing plans by telling him “not to worry about it right now,” and that
they could talk after New Year’s.
It is Kahn’s contention in this litigation that despite Cullum’s pre-Christmas
assurances, NMAC and Lambert had no intention of honoring Lambert’s promise of
continued financing for the Dealerships through 2009. Instead, according to Kahn,
Lambert and NMAC had a secret plan to squeeze from Kahn as much money and
additional collateral as they could until the time was ripe to freeze financing and shut
down the Dealerships, ultimately seizing the Dealerships and Kahn’s other assets.
Kahn viewed two incidents as proof of this “secret plan” scenario. The first
occurred on January 5, 2009, when Kahn and his team called Lambert and Cullum to
discuss an additional cap loan and other financing to get the Dealerships through 2009.
In the conference call, Lambert asked Kahn how much money the Dealerships would
need over the next six months. Lambert stated that he wanted to see a six-month
projection of the Dealerships’ financial performance, showing how the Dealerships
would use the funds from NMAC and when they would need the funds. Lambert told
Kahn, “[You] get me a pro forma, show us how you’re going to use the funds, and we’ll
get you the money.”
Unbeknownst to Kahn, however, earlier that same day Cullum had told
NMAC executives that he and Lambert agreed that Kahn would get no new funding.
Cullum also stated that he expected the Dealerships to become SOT “anytime now,”
providing a technical justification for declaring a hard SOT and terminating all financing
for the Dealerships.
The second key incident took place a few days later. On January 7, 2009,
Kahn’s team submitted to NMAC the requested projections of the Dealerships’ cash flow
through April 2009. The projections forecasted the Dealerships would lose
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approximately $4 million through April 2009. Lambert e-mailed Cullum about the
projections the next day, stating: “If it will cost them another $4M to stay afloat through
April plus we are kicking in $1.2 M per month [the deferred interest and principal on all
loans per the November FA], or a total of $11M through June all in, it is time to pull the
plug.” (Italics added.)
Kahn contends that within hours of receiving Lambert’s e-mail, Cullum got
his staff working to ensure NMAC was fully secured with as much collateral as possible
before freezing Kahn’s financing. Cullum told his staff to obtain Kahn’s home as
collateral and to “grab the valuable ones” when it came to Kahn’s other personal assets.
Despite NMAC’s clear intention to “pull the plug” on SAG, it did not
disclose this fact to Kahn. Nor did it immediately act on the intention. NMAC continued
its previous pattern of tolerating SOT’s. It did not impose the extreme penalty for a “hard
SOT” provided in paragraph 4 of the November FA, despite the fact SAG often paid late
for inventory. In fact, the Dealerships had an SOT of $1.5 million on January 16, 2009
— the same day the parties executed an extension of the November FA (the January
Extension). The January Extension referenced the November FA and extended the
forbearance period through March 31, 2009 (it had expired on December 31, 2008). The
January Extension provided for a new loan to SAG of approximately $4.4 million to
cover the deficiency from the SJC sale and to provide “working capital” for the
Dealerships. As part of the January Extension agreement, Kahn gave NMAC another
deed of trust on his family home for $1.9 million.
Kahn, believing Lambert would honor his oral agreement to continue
providing the financing SAG needed to get through 2009, took the following actions: He
sold his personal interest in a private jet, raising $800,000 that he gave to NMAC to pay
down the debts owed. Kahn poured millions of his own funds into the Dealerships to
support operations. He signed the January Extension and gave NMAC the additional
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$1.9 trust deed on his home, and he also obtained another loan for the new Oakland
dealership, which was nearing completion.
Then, without warning, NMAC pulled the plug. On February 10, 2009,
Cullum called SAG’s chief financial officer Jay Larsen and told him the Dealerships
were $1.6 million SOT and demanded immediate payment of the entire sum. Larsen
responded that for months the Dealerships had been SOT off and on, but had always
caught up, and would again. Larsen was scheduled for heart surgery the next day, so he
told Cullum to speak with Kahn about resolving the SOT.
On February 11, 2009, NMAC sent a written demand to SAG for payment
within 24 hours of the $1.65 million SOT, warning that if the entire SOT was not paid by
the deadline, NMAC would default the Dealerships, declare all outstanding loans due,
and terminate the inventory credit lines.
The next day, on February 12, 2009, Kahn attempted to call Lambert to
discuss the next steps for paying the inventory balance, but Lambert refused to take the
call. Kahn had previously told Lambert that he was expecting soon a cash infusion of $4
million.
SAG was unable to raise the $1.65 million demanded by the February 12
deadline. NMAC declared the Dealerships in default for a “hard SOT” under paragraph 4
of the November FA, declared all loans due and payable, canceled the Dealerships’ lines
of credit and terminated the franchise agreements.
On February 24, 2009, NMAC filed in several different counties a total of
five actions against SAG and each of the Dealerships for breach of various loan and lease
agreements. Several months later, NMAC filed an action in Orange County Superior
Court against Kahn, his wife, and others, on the guarantees for the loans. By order of
Chair of the Judicial Council, all these cases were eventually coordinated in Orange
County Superior Court.
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On August 25, 2010, Kahn and SAG (collectively SAG) filed a coordinated
cross-complaint against NMAC and Lambert (collectively NMAC). The cross-complaint
asserted causes of action against NMAC for promissory fraud (intentional and negligent
misrepresentation, false promises), based on Lambert’s oral promise to Kahn that NMAC
would continue funding the Dealerships through 2009 regardless of SOT’s.
The cross-complaint also stated causes of action for constructive fraud,
fraudulent concealment and violation of the ADDCA, based on cross-defendants’
implementation of their secret plan to grab as much cash and collateral from Kahn as
possible before using a pretext to declare a “hard SOT,” freeze financing, and seize the
Dealerships’ and Kahn’s other assets. The cross-complaint also contained claims for
breach of contract and related contract claims.
E. The Parol Evidence Fight in the Trial Court
On July 14, 2011, NMAC moved for summary adjudication of all the
claims in the cross-complaint. NMAC contended SAG could not prevail on its fraud
claims because the parol evidence rule barred evidence of Lambert’s purported oral
promise to continue financing through 2009 despite violation of the 2-day/10-day rule,
and SAG could not prove reasonable reliance on that oral promise. On October 18, 2011,
the trial court denied summary adjudication on all issues, finding triable issues of fact.
Ten days later, on the eve of trial, NMAC moved in limine for an
evidentiary hearing to determine if the parol evidence rule applied to bar evidence of
Lambert’s purported oral promise to ignore SOT’s and provide continued financing
through 2009. Codified at Civil Code section 16252 and Code of Civil Procedure section
1856,3 the parol evidence rule bars the use of extrinsic evidence, including evidence of
2 Civil Code section 1625 provides: “The execution of a contract in writing,
whether the law requires it to be written or not, supersedes all the negotiations or
stipulations concerning its matter which preceded or accompanied the execution of the
instrument.”
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any prior or contemporaneous oral agreement, to alter or add to the terms of a writing
intended as a final expression of the parties’ agreement. (Riverisland Cold Storage, Inc.
v. Fresno-Madera Production Credit Assn. (2013) 55 Cal. 4th 1169, 1174 (Riverisland).)
A longstanding exception to the parol evidence rule allows a party to
present extrinsic evidence to show the agreement was tainted by fraud. (Riverisland,
supra, 55 Cal.4th at p. 1172; see Code Civ. Proc., § 1856, subd. (g) [“This section does
not exclude other evidence . . . to establish . . . fraud”].) Case law plainly applicable at
the time of the hearing, however, narrowly limited the fraud exception. In Bank of
America Etc. Assn. v. Pendergrass (1935) 4 Cal. 2d 258 (Pendergrass), the California
Supreme Court held that parol evidence may only be offered to prove fraud if the
evidence establishes an independent fact or representation that does not directly
contradict the terms of the written contract. (Id. at p. 263.)
Upon NMAC’s motion, the trial court conducted an Evidence Code section
402 hearing to determine the preliminary facts relevant for application of the parol
evidence rule here: whether the November FA and January Extension (collectively
Forbearance Agreements) constituted an integrated contract and, if so, whether Lambert’s
purported fraudulent promises directly contradicted that contract, making them
inadmissible under Pendergrass.
After a two-day hearing consisting of live testimony from Cullum and
Kahn, recorded deposition testimony, and extensive argument, the trial court ruled that
the Forbearance Agreements constituted an integrated agreement and that Lambert’s
alleged fraudulent promises directly contradicted the terms of that agreement.
Consequently, the trial court concluded, under Pendergrass, that the fraud exception to
3 Code of Civil Procedure section 1856 provides, in pertinent part, as follows:
“(a) Terms set forth in a writing intended by the parties as a final expression of their
agreement with respect to the terms included therein may not be contradicted by evidence
of a prior agreement or of a contemporaneous oral agreement.”
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the parol evidence rule did not apply and evidence of Lambert’s fraudulent promises was
inadmissible at trial.
In response to that ruling, SAG amended the cross-complaint, effectively
dismissing the promissory fraud claims, and dismissed Lambert as a cross-defendant.
The new amended cross-complaint contained only claims against SAG for breach of
contract, constructive fraud, fraudulent concealment and violation of the ADDCA. The
amended cross-complaint deleted all references to Lambert’s oral promises to Kahn of
continued funding regardless of untimely inventory payments.
F. Trial, Partial Nonsuit and Judgment
The parties conducted an eight-day trial on NMAC’s breach of contract
claims and on SAG’s cross-complaint for breach of contract, constructive fraud,
fraudulent concealment and violation of the ADDCA. SAG based its proof of the
constructive fraud, fraudulent concealment and ADDCA claims on evidence that NMAC
failed to disclose its intent as of January 5, 2009, to “pull the plug” and terminate the
Dealerships’ financing by a sudden insistence on strict compliance with the 2-day/10-day
rule and immediate payment of a $1.6 million SOT. SAG contended this conduct was
fraudulent and wrongful because NMAC had tolerated SOT’s for months, even after the
November FA which supposedly imposed a doomsday penalty for any “hard SOT.” SAG
contended NMAC’s course of conduct in tolerating SOT’s lulled Kahn into believing he
did not have to sell any of his substantial personal assets (approximately $135 million as
of May 2008) to generate sufficient cash to prevent any SOT’s, action he would have
taken had he known an SOT would effectively destroy the Dealerships.
At the close of evidence, NMAC made an oral motion for nonsuit as to
each of SAG’s claims. The trial court denied nonsuit as to SAG’s contract claims, but
granted nonsuit as to the other claims.
The jury returned a verdict of approximately $40 million for NMAC on its
contract claims and awarded SAG nothing on its contract claims. SAG filed the instant
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appeal from the judgment only as to certain claims in its cross-complaint. SAG appeals
from the trial court’s in limine ruling that the parol evidence rule barred all evidence of
Lambert’s oral promises not to enforce the 2-day/10-day rule, and SAG also appealed
from the order granting nonsuit on the fraudulent concealment and ADDCA claims.
SAG does not appeal the nonsuit as to constructive fraud.
G. The Appellate Briefing, and the Riverisland Decision
SAG filed its appellant’s opening brief on November 13, 2012. The parol
evidence arguments in the brief contested the trial court’s finding that the Forbearance
Agreements were integrated, and that Lambert’s purported oral promises directly
conflicted with the written agreement. The brief also challenged the grant of nonsuit by
arguing the evidence presented at trial was sufficient to bring the fraudulent concealment
and ADDCA claims to the jury.
On January 14, 2013, shortly before NMAC filed its respondent’s brief, the
California Supreme Court issued its decision in Riverisland, supra, 55 Cal. 4th 1169. In
Riverisland, the high court overturned the 78-year-old Pendergrass rule that oral
promises directly contradicting a written contract are inadmissible to prove fraud.
Riverisland characterized the Pendergrass decision as “an aberration” and declared “its
restriction on the fraud exception was inconsistent with the terms of the statute, and with
settled case law as well.” (Riverisland, at p. 1182.)
NMAC’s respondent’s brief acknowledged the Riverisland holding, but
argued it should apply only prospectively, and should not affect this case on appeal. We
granted SAG’s request for leave to address Riverisland in its reply brief. Unsurprisingly,
SAG argued Riverisland is applicable and warrants the requested partial reversal of the
judgment. With our leave, NMAC filed a supplemental respondent’s brief, and SAG
filed a supplemental reply.
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DISCUSSION
The central issue on appeal is whether the Riverisland decision overturning
the Pendergrass rule applies to this case. SAG argues, based on Riverisland, that the trial
court erred in excluding the evidence of Lambert’s fraudulent oral promise to continue
financing the Dealerships through 2009 regardless of untimely inventory payments. SAG
contends the trial court’s erroneous application of the parol evidence rule severely
prejudiced its case, leading to the dismissal of the promissory fraud claims and the
erroneous grant of nonsuit on the fraudulent concealment and ADDCA claims.
NMAC argues in response that Riverisland applies only prospectively and
cannot be a basis for finding the trial court erred in barring the parol evidence at issue.
Moreover, NMAC argues that if Riverisland does apply, the exclusion of SAG’s parol
evidence was at most harmless error because “no reasonable juror could conclude that
[SAG] justifiably relied on the supposed oral promise, so those claims would have been
non-suited just as [SAG’s] other fraud claims were . . . .” NMAC further asserts the trial
court properly granted nonsuit as to the fraudulent concealment and the ADDCA claims
because SAG failed to produce evidence as to essential elements of each claim.
We conclude SAG is correct in asserting the Riverisland decision applies to
this case. Consequently, the trial court erred in excluding the evidence of Lambert’s oral
promises to Kahn. Moreover, we find that error was prejudicial, dooming not only
SAG’s promissory fraud claims but its fraudulent concealment and ADDCA claims as
well.
1. The Exclusion of SAG’s Parol Evidence Was Error Under Riverisland
NMAC faces a steep uphill battle in contesting the retroactive application
of the Riverisland decision. “‘It is the general rule that a decision of a court of supreme
jurisdiction overruling a former decision is retrospective in its operation.’ [Citation.]”
(Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal. 3d 176, 193.) Courts
“have recognized exceptions, however, when considerations of fairness and public policy
15
preclude full retroactivity. [Citations.]” (Ibid.) Such considerations weigh heavily in
favor of a retrospective, not prospective, application of Riverisland. 4
In Riverisland, supra, 55 Cal. 4th 1169, the Supreme Court was very clear
about the multiple policy considerations underlying its decision to overrule Pendergrass
and abrogate the significant limitation it imposed on the fraud exception. The high court
explained that the Pendergrass rule was “an aberration” (Riverisland, at p. 1182) that “is
difficult to apply[,] . . . conflicts with the doctrine of the Restatements, most treatises, and
the majority of our sister-state jurisdictions . . . [and] departed from established California
law at the time it was decided, and neither acknowledged nor justified the abrogation.”
(Id. at p. 1172.) Riverisland further stated that the Pendergrass rule’s “limitation on the
fraud exception is inconsistent with the governing statute” (Riverisland, at p. 1179),
defying “the unqualified language of [Code of Civil Procedure] section 1856, which
broadly permits evidence relevant to the validity of an agreement and specifically allows
evidence of fraud . . . .” (Id. at p. 1175.) Perhaps most importantly, Riverisland found
that “the rule established in Pendergrass may actually provide a shield for fraudulent
conduct.” (Id. at p. 1172.) The Supreme Court’s decisive and emphatic rejection of the
Pendergrass rule leaves little doubt that it should apply immediately to all pending cases.
NMAC argues that “Riverisland wrought an abrupt, unforeseeable change
in a basic, well-settled rule of California law” and, thus, its retroactive application would
be unfair because the parties relied on the Pendergrass rule in drafting the contract. At
oral argument, NMAC asserted that, going forward, contracting parties can “contract
around” Riverisland. We need not decide whether clever drafters of future contracts will
find a way to avoid the fraud exception. We decide simply that in overruling
Pendergrass, the Supreme Court intended to remove an unwarranted judicially-created
4 Two published cases have applied Riverisland retroactively. (See Thrifty
Payless, Inc. v. The Americana At Brand, LLC, (2013) 218 Cal. App. 4th 1230, 1240;
Julius Castle Restaurant, Inc. v. Payne (2013) 216 Cal. App. 4th 1423, 1426.)
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limitation on the fraud exception, and that considerations of fairness and public policy are
served by giving that decision immediate, retroactive effect. As the high court itself
noted, its decision to overrule Pendergrass “reaffirm[ed] the venerable maxim stated in
Ferguson v. Koch [(1928),] 204 Cal. [342] at page 347: ‘[I]t was never intended that the
parol evidence rule should be used as a shield to prevent the proof of fraud.’”
(Riverisland, supra, 55 Cal.4th at p. 1182.)
2. The Erroneous Parol Evidence Ruling Was Prejudicial
NMAC argues that even if the trial court erred in excluding SAG’s parol
evidence, the error was harmless because, based on “[t]he evidence adduced at the 402
hearing and at trial . . . no reasonable juror could conclude that [SAG] justifiably relied
on the supposed oral promise.” In other words, NMAC contends it was virtually
guaranteed a judgment of nonsuit on the promissory fraud claims. NMAC points to the
evidence of Kahn’s dogged negotiations with NMAC over the language of the penalty
provision in paragraph 4 of the November FA as irrefutable proof Kahn understood
NMAC would impose that harsh contractual penalty if SAG violated the 2-day/10-day
rule. Additionally, NMAC contends that Kahn, a sophisticated businessman, knew
Lambert’s oral promise of continued funding regardless of SOT’s in exchange for Kahn’s
sale of the SJC dealership was unenforceable because the men had not agreed on specific
terms such as the amount of the new loan, the identity of the borrower, or the security for
the loan.
NMAC’s argument fails for two reasons. The first reason is that reasonable
reliance is an inherently factual inquiry rarely amenable to resolution as a matter of law.
As the California Supreme Court explained in Alliance Mortgage Co. v. Rothwell (1995)
10 Cal. 4th 1226: “‘Except in the rare case where the undisputed facts leave no room for
a reasonable difference of opinion, the question of whether a plaintiff's reliance is
reasonable is a question of fact.’ [Citations.]” (Id. at p. 1239.)
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The second reason we decline to decide the issue of reasonable reliance as a
matter of law is that it would be patently unfair to do so when SAG had no opportunity to
present its full evidence on the reliance issue. At the Evidence Code section 402 hearing,
the trial court strictly limited the testimony to two questions: whether the Forbearance
Agreements constituted integrated written agreements and whether Lambert’s purported
oral promises directly conflicted with those agreements. At several points during the
hearing, both NMAC’s counsel and the trial court reminded SAG’s attorney, Louis
Miller, that he had to confine his questioning of Kahn to “the integration phase
questioning.” Miller’s attempt to explore directly the basis of Kahn’s reliance on
Lambert’s promises drew an immediate relevancy objection, which the trial court
sustained.5 At trial, of course, the in limine ruling barred SAG from presenting any
evidence of Lambert’s oral promises and, by necessity, also precluded any evidence of
Kahn’s reliance on such promises. Because SAG had no opportunity to establish the
factor of reasonable reliance, basic concepts of fairness preclude a finding against SAG
on that issue. (See Gordon v. Nissan Motor Co., Ltd. (2009) 170 Cal. App. 4th 1103,
1114-1115 [“when a trial court erroneously denies all evidence relating to a claim . . . the
error is reversible per se because it deprives the party offering the evidence of a fair
hearing and of the opportunity to show actual prejudice”].)
Finally, we note that notwithstanding the evidentiary constraints put on
SAG in the pretrial and trial proceedings, SAG did manage to present substantial
5 The hearing transcript reveals the following colloquy between Kahn and his
attorney, Miller, and its interruption by an objection from NMAC’s attorney, Kenney:
Miller: “Did you rely on Steve Lambert’s statements to you about if you sold San Juan
Capistrano, NMAC would support you financially through ’09?”
Kahn: “100 percent, yes.”
Miller: “Why?”
Kenney: “Objection. It’s irrelevant.”
Court: “Sustained.”
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evidence that Kahn reasonably relied on Lambert’s oral promises of continued funding
regardless of SOT’s. That evidence consisted of NMAC’s course of conduct in tolerating
SOT’s even after the November FA, as well as the personal trust Kahn placed in Lambert
as a result of their longstanding working relationship, “CEO to CEO.”6
We conclude there is no basis for finding as a matter of law that SAG could
not establish reasonable reliance on Lambert’s oral promises. Consequently, the trial
court’s error in excluding SAG’s parol evidence, resulting in the dismissal of SAG’s
promissory fraud claims, was prejudicial.
2. The Riverisland Error Also Requires Reversal of the Partial Judgment of Nonsuit
A nonsuit is properly granted only when, disregarding conflicting evidence,
giving plaintiff’s evidence all the value to which it is legally entitled, and indulging in
every legitimate inference that may be drawn from the evidence, there is insufficient
evidence to support a verdict in the plaintiff’s favor. (Carson v. Facilities Development
Co. (1984) 36 Cal. 3d 830, 838-839.) The de novo standard of review applies to an order
granting nonsuit. (CC-California Plaza Associates v. Paller & Goldstein (1996) 51
Cal. App. 4th 1042, 1050-1051.)
SAG contends the trial court erred in granting nonsuit as to its claims for
fraudulent concealment and violation of the ADDCA. SAG argues the trial court’s
erroneous parol evidence ruling curtailed its proof as to both claims, necessitating
reversal of the nonsuit and retrial of the claims. SAG further contends that even its
6 Kahn testified at the Evidence Code section 402 hearing: “[Lambert and I] had
worked together through some other problems that we got through. We had been doing
business together for years. I had no reason, in my wildest dreams, not to believe that
Mr. Lambert was going to do what he said. I wasn’t worried about where we were going
to put it [i.e., the lien on the collateral that would be required for the additional financing
needed to get through 2009] at that point. I had his wo2rd and I was very comfortable
with that.”
Counsel: “That somehow he’d get you through ’09?”
Kahn: “Not somehow. He said he would.”
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truncated presentation of evidence was sufficient to defeat nonsuit. SAG’s arguments
have merit.
a. Nonsuit As To Fraudulent Concealment
NMAC contends the trial court properly granted nonsuit as to the
concealment claim because SAG failed to prove three elements of the claim:
concealment of a material fact, duty to disclose that fact, and detrimental reliance.
(Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal. App. 4th 858,
868.) NMAC’s arguments, however, mischaracterize SAG’s contentions in the lawsuit
and ignore the impact of the trial court’s erroneous parol evidence ruling on SAG’s proof
of this claim. The resulting prejudice requires reversal of the nonsuit.
As for the first “unproved” element of concealment, NMAC asserts it fully
disclosed both its intention “not to make additional loans to [SAG]” and its intention “not
to tolerate additional hard SOTs.” NMAC points to paragraph 4 of the November FA and
specific warnings in Cullum’s January 16, 2009 letter transmitting the January Extension,
as proof that NMAC did not hide these intentions from SAG. But the intentions
expressed in these documents are entirely beside the point. SAG’s claim is that Lambert
fraudulently concealed the material fact that he decided not to honor his oral promises to
Kahn. Significantly, the trial court’s erroneous parol evidence ruling forced SAG to
prove its claim of concealment without proving Lambert made the oral promises in
question. If SAG failed to prove concealment under those circumstances, the fault is not
SAG’s. Given that the trial court’s Riverisland error prevented SAG from presenting all
the evidence relevant to its concealment claim, the nonsuit cannot stand.
As for the supposed unproved element of duty, NMAC again
mischaracterizes SAG’s contention. NMAC argues it had no duty to “to disclose how it
intended to respond to [SAG’s] possible future requests for additional funding or its
potential future breaches of contract.” But SAG asserted NMAC had a duty to disclose
Lambert’s decision not to honor his promise of continued funding. Again, the existence
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of that duty depended on proof of Lambert’s oral promises to Kahn. If SAG failed to
establish the element of duty, the Riverisland error is to blame.
Finally, NMAC argues SAG failed to offer evidence it detrimentally relied
on Lambert’s purported oral promise. NMAC argues that SAG’s only claim of detriment
is that Kahn had insufficient time to sell his assets to cure the “hard SOT” that NMAC
declared on February 11, 2009. NMAC contends Kahn had been trying to sell his assets
unsuccessfully for six months, so there was no substantial evidence he could have sold
the assets needed to prevent the hard SOT had he known as of January 5 that NMAC
intended to no longer tolerate SOT’s. But this argument, again, ignores SAG’s actual
contention and its evidence.
In addition to suffering harm as a result of NMAC’s sudden imposition of
an impossible 24-hour deadline to cure the SOT, SAG contended that Lambert’s promise
of continued funding induced Kahn to give NMAC substantial additional collateral,
personal guaranties, and money, as well as to take on more debt to complete the new
Oakland Toyota store –– a dealership he would lose to NMAC six days after its opening
–– all to SAG’s detriment. This evidence easily established the element of detrimental
reliance.
b. Nonsuit as to The ADDCA Claim
SAG sued NMAC for violating the statutory protections afforded to car
dealers under the ADDCA. The ADDCA permits a dealer to sue for damages it suffers
“by reason of the failure of [an] automobile manufacturer . . . to act in good faith in . . .
terminating, canceling, or not renewing the franchise with said dealer.” (15 U.S.C.
§ 1222.) At trial, SAG made the case that NMAC acted in bad faith by implementing a
secret plan to squeeze Kahn for additional cash and collateral before surprising him with
a declaration of default, an impossible demand for payment, and the termination of
financing, all based on the sort of temporarily large SOT that NMAC had tolerated for
months.
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NMAC contends the trial court properly nonsuited SAG on this claim
because the evidence it offered of NMAC’s purportedly unfair conduct did not meet the
“specialized” standard for “lack of good faith” under the ADDCA. NMAC argues that an
automobile dealer “‘cannot establish lack of good faith merely by demonstrating that the
manufacturer acted arbitrarily, unreasonably, or in a generally unfair manner; rather, the
dealer must establish that the manufacturer’s conduct constituted “coercion, intimidation,
or threats of coercion or intimidation” directed at the dealer.’”
NMAC argues, essentially, evidence it acted “arbitrarily or unreasonably or
in a generally unfair manner” is insufficient to establish lack of good faith under the
ADDCA. Instead, SAG was required to prove NMAC had “an ulterior motive” or an
improper purpose when it abruptly enforced the 2-day/10-day rule and declared a hard
SOT, leading to the freeze of financing for the Dealerships. NMAC contends SAG
proved no such improper purpose in NMAC’s conduct.
SAG contends, to the contrary, that it did offer proof NMAC acted with an
improper purpose in concealing its intent to abruptly enforce the 2-day/10-day rule. That
improper purpose was to obtain from Kahn all the cash and collateral it could, using
trickery (Lambert’s false promise of continued funding and no enforcement of the
payment rule) to do so.
A jury certainly could have found lack of good faith, within the meaning of
the ADDCA, from the evidence proffered by SAG. Moreover, as in regard to the
concealment claim, the exclusion of SAG’s parol evidence curtailed its ability to present
all its evidence of violation of the ADDCA. Consequently, the nonsuit was erroneous
and must be reversed.
DISPOSITION
The judgment is reversed in part as to the claims against NMAC in the
cross-complaint for negligent misrepresentation, intentional misrepresentation,
promissory fraud, fraudulent concealment, and violation of the ADDCA, and the case is
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remanded for retrial of those claims only. In all other respects, the judgment is affirmed.
SAG is entitled to costs on appeal.
THOMPSON, J.
WE CONCUR:
MOORE, ACTING P. J.
ARONSON, J.
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