Unpublished Disposition, 930 F.2d 26 (9th Cir. 1981)

No. 88-6647.

United States Court of Appeals, Ninth Circuit.

Before: REINHARDT and LEAVY, Circuit Judges, and KING^* , Senior District Judge.

MEMORANDUM^** 

This appeal and its companion have their roots in a series of disputes involving a Joint Venture Agreement entered into between the Club Development & Management Corporation ("CDMC") and Mark IV Properties, Inc. ("Mark IV") in January 1980. Matthew J. Leonard, Sr. ("Leonard") is the president of CDMC. The Joint Venture Agreement concerned the ownership and operation of the Pala Mesa Resort ("Resort"). A time share program called the Gold Key Vacation Club ("GKVC"), run by Leonard, sold time share memberships in the Resort. CDMC appeals from a judgment against it and in favor of Mark IV on its claims for breach of contract and breach of fiduciary duty.

DISCUSSION

California law governs the substantive provisions of the Joint Venture Agreement.

II. BREACH OF PARAGRAPH 3.08 OF THE JOINT VENTURE AGREEMENT

On November 24, 1980, CDMC invoked Paragraph 3.08, the buy/sell provision of the Joint Venture Agreement. CDMC offered to buy the Resort "according to the strict terms of the joint venture agreement" and, in an accompanying letter, on more beneficial terms to Mark IV, namely, a downpayment of $1,500,000, well in excess of the 30% maximum as prescribed by the Joint Venture Agreement. Mark IV elected to buy the resort, however, and designated a $25,000 downpayment figure. CDMC responded by seeking a $750,000 downpayment and Mark IV's assumption of the Union Bank loan. CDMC also noted it would seek Chapter 11 protection if an agreement was not reached.

In the absence of an agreement or the opening of escrow, CDMC filed for bankruptcy on January 20, 1981 and Mark IV filed an adversary complaint six days later. CDMC then applied for and was granted permission by the bankruptcy court to sell the Resort to another entity pursuant to 11 U.S.C. § 365(a), subject to Mark IV's right of first refusal. Mark IV decided to buy CDMC's share of the Resort at a price of $3,462,500, the same price as that provided for in the Joint Venture Agreement. The bankruptcy court approved the sale.

Mark IV contended in the bankruptcy court that CDMC had breached Paragraph 3.08 of the Joint Venture Agreement, and that it had consequently suffered damages by having to make a larger downpayment than it would have had to make under the terms it had set out in its notice of election. The bankruptcy court rejected this argument, determining that no breach of Paragraph 3.08 had occurred because it had never been properly invoked. On appeal, the district court, Judge Rudi M. Brewster presiding, reversed, holding that CDMC had effectively invoked Paragraph 3.08 and that since it had not set a proper downpayment figure, Mark IV's designated downpayment was valid and enforceable. On remand in the bankruptcy court, damages were assessed against CDMC as a result of its breach of contract in the amount of $425,270 plus prejudgment interest.

CDMC contends that the district court erred in holding that CDMC breached Paragraph 3.08 of the Joint Venture Agreement. CDMC sets forth two arguments in support of this contention. First, CDMC argues that Mark IV's refusal to assume the Union Bank loan excused CDMC from any duty to perform under the contract. Second, CDMC argues that the district court erred in determining that Mark IV was entitled to set the amount of the downpayment under Paragraph 3.08.

In response, Mark IV contends that it acted within its rights in refusing to assume and demanding payment of CDMC's share of the Union Bank loan pursuant to an Amendment to the Joint Venture Agreement. Moreover, Mark IV argues that when CDMC did not set forth a downpayment figure consistent with the terms of Paragraph 3.08 in its notice of election, it had the right to set the downpayment figure.¹ 

In cases involving contracts, the standard of review is not always clear because contractual interpretation and the determination of breach are mixed questions of fact and law. L.K. Comstock & Co. v. United Engineers & Contractors, Inc., 880 F.2d 219, 221 (9th Cir. 1989). In general, a district court's decision based upon an analysis of the contractual language and an application of the principles of contract interpretation is a matter of law and is reviewed de novo. Kern Oil & Refining Co. v. Tenneco Oil Co., 840 F.2d 730, 736 (9th Cir.), cert. denied, 109 S. Ct. 378 (1988).

Paragraphs 3.08(B)-(C) of the Joint Venture Agreement state in pertinent part:

B. Sale and Purchase Price.

The total sale and purchase price for the [Resort] (which must be paid and purchased as a unit) shall be $3,462,500.00, subject to 50% of the then existing total of the balance of any existing notes secured by deed of trust against the [Resort] . . . .

Unless the Joint Ventures agree otherwise, the above referred to purchase price of the Interests shall be paid upon an installment sale basis, with not more than 30% of the purchase price to be paid in the year of sale . . . .

Paragraph 3.08 thus is silent as to which party shall determine the amount of the downpayment. In California, if a contractual provision is ambiguous, its interpretation depends on the intent of the parties at the time of execution. Cal. Civ. Code Sec. 1636; Kemmis v. McGoldrick, 767 F.2d 594, 597 (9th Cir. 1985). In such a case, the court should make factual findings in order to determine the parties' actual intent. Kemmis, 767 F.2d at 597.

The district court held that because CDMC's written notice to elect did not contain a downpayment figure which complied with the terms of Paragraph 3.08, Mark IV was free to specify the downpayment figure. The district court reached this conclusion without making factual findings to determine the parties' actual intent.

We conclude that the district court erred in determining that CDMC breached Paragraph 3.08 of the Joint Venture Agreement. Under California law, contractual interpretation should be reasonable, Rodriguez v. Barnett, 52 Cal. 2d 154, 338 P.2d 907, 910 (1959), and unfair or harsh results should be avoided. Northridge Hospital Foundation v. Pic 'N' Save No. 9, Inc., 187 Cal. App. 3d 1088, 1095, 232 Cal. Rptr. 329, 333 (1986); Strong v. Theis, 187 Cal. App. 3d 913, 920, 232 Cal. Rptr. 272, 276 (1986). We find that district court's interpretation of Paragraph 3.08 to be inconsistent with both of these principles.

Although silent as to which party shall set the amount of the downpayment, Paragraph 3.08(C) sets forth the maximum downpayment figure at 30% of the purchase price unless otherwise agreed to by the parties. this provision serves as an important protection for the potential buyer of the Resort; unless mutually agreed by the parties, the potential buyer is always certain as to the maximum amount that it would be required to put down as the downpayment on the Resort. No such protection is provided for the potential seller. Here, under the district court's interpretation of Paragraph 3.08, Mark IV as the non-compelling party had the authority to choose to buy the Resort and set the downpayment figure -- in this case, a proposed downpayment of $25,000, less than 1% of the total purchase price of $3,462,500. Consistent with this rationale, Mark IV could have set an acceptable downpayment figure of only one dollar or one penny. We find such an interpretation of Paragraph 3.08 to be both unreasonable and allowing for unfair and harsh results. In light of the district court's failure to make any factual findings in support of its interpretation that would indicate the parties' actual intent, we hold that Mark IV did not have the authority to set the binding downpayment figure once CDMC had invoked the buy-sell provision but failed to specify a downpayment figure that complied with the provisions of Paragraph 3.08.

Accordingly, we conclude that CDMC did not braach Paragraph 3.08 of the Joint Venture Agreement. Accordingly, we REVERSE the district court's judgment that CDMC breached Paragraph 3.08 of the Joint Venture Agreement and VACATE the damage award.

The GKVC sold memberships entitling members to stay in the Resort for certain periods over a time span of up to twenty-five years. At some point while CDMC and Mark IV were negotiating the Joint Venture Agreement, CDMC, the manager of the Resort, and Leonard entered into a rental agreement between the GKVC and the Resort which provided rooms to time share buyers at discounted rates. Mark IV asserts that this arrangement was not disclosed during the joint venture negotiations. Mark IV had demanded during the negotiations that time share programs not be sold without its assent.

CDMC and Leonard also entered into an arrangement with the Vincent Marketing Group ("Vincent") to boost sales of the GKVC. The parties dispute as to how much Mark IV was told during the negotiations about the arrangement with Vincent.

Between February 1980 and September 1980, time share sales had exceeded $5,000,000. During this period, Mark IV demanded that sales be stopped and ultimately brought this action against CDMC claiming breach of contract and breach of fiduciary duty.

Mark IV's claims concerning the GKVC were tried in September 1987. The jury returned a verdict in favor of Mark IV, finding that CDMC was guilty of breach of contract and breach of fiduciary duty. The jury awarded damages in favor of Mark IV in the amount of $56,611 in compensatory damages and $25,000 in punitive damages.

CDMC challenges the sufficiency of the evidence to support the jury verdicts and several rulings on jury instructions.

A jury verdict is reviewed to determine if it is supported by substantial evidence. Landes Constr. Co. v. Royal Bank of Canada, 833 F.2d 1365, 1370-71 (9th Cir. 1987). Substantial evidence "means 'more than a mere scintilla' but 'less than a preponderance.' " McAllister v. Sullivan, 880 F.2d 1086, 1089 (9th Cir. 1989) (citations omitted). It means "such reasonable evidence as a reasonable mind might accept as adequate to support a conclusion." Richardson v. Perales, 402 U.S. 389, 401 (1971).

Jury instructions are reviewed for an abuse of discretion and "are considered as a whole to determine if they are misleading or inaccurate." United States v. Armstrong, 898 F.2d 734, 739 (9th Cir. 1990) (quoting United States v. Spillone, 879 F.2d 514, 525 (9th Cir. 1989)). A reviewing court will reverse a lower court for abuse of discretion only if it has a "definite and firm conviction" that the trial court committed clear error. Abatti v. CIR, 859 F.2d 115, 117 (9th Cir. 1988).

1. Challenges to the Award of Compensatory Damages

CDMC challenges the sufficiency of the evidence to support the award of compensatory damages. CDMC argues that the fact of damages has not been proven, that the amount of damages was not established by competent evidence, and that the record does not support the jury's finding concerning reasonable room rates. Mark IV responds by arguing that it was entitled to the benefit of its bargain with CDMC, and that the damages suffered was the difference between the reasonable rental value of the hotel rooms at the Resort from 1980 through 1983 and the amounts actually paid under the time share program.

In California, recovery for damages is not permitted unless there is proof by competent evidence of actual damages suffered. California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 42, 221 Cal. Rptr. 171, 192 (1982). Once the cause and fact of damages is established, however, the amount of damages sustained need not be proven with the same degree of certainty but can be left to reasonable approximation. Johnson v. Cayman Dev. Co., 108 Cal. App. 3d 977, 983, 167 Cal. Rptr. 29, 32 (1980).

Upon an examination of the record, we find that Mark IV did not establish that it had suffered actual damages. Mark IV presented testimony from Robert Leonard of the number of nights between 1980 and 1983 that GKVC members stayed in the hotel at the discount rates, and evidence that the rates charged to time share members were significantly lower than the standard rental rate. However, for actual damage to be demonstrated, Mark IV would have had to prove that, in place of the GKVC members, either the GKVC members themselves or other persons would have stayed at the hotel at the higher rates. Mark IV presented no such evidence. In fact, significant evidence to the contrary was presented. When Mark IV increased rates in 1983, the evidence demonstrated that the occupancy level of the Resort declined dramatically. Moreover, Mark IV conceded at trial that the Resort had not made less of a net profit as a result of the time share program nor that it had suffered more of a net loss.

Instead, Mark IV contends that it was entitled to the benefit of its bargain with CDMC. Mark IV's brief states that "Appellee's [Mark IV's] damages were not that it made less profits or incurred bigger losses because of the time share program than it would have if it never existed, but rather that it was entitled to the benefit of its bargain under the Joint Venture Agreement, i.e., operation of the Resort to produce a reasonable rental rate for use of Resort rooms." Appellee's Brief, at 37. We reject this contention. The Joint Venture Agreement contained no provision or bargain providing that the Resort produce a reasonable rental rate for the use of its rooms.

Turning to the alleged damages for breach of fiduciary duty, we note that in cases involving tort, the injured party is not to be placed in a better position than they would have been in had the wrong not occurred. Valdez v. Taylor Automobile Co., 129 Cal. App. 2d 810, 278 P.2d 91, 98 (1954). The award of damages to Mark IV does just that. Mark IV has not established that it suffered a loss as a result of the time share program, yet it seeks to recover damages for the difference in the room rates. As such, Mark IV would be receiving payment in excess of what it would have received had CDMC not breached the Joint Venture Agreement contract or its fiduciary duty to Mark IV.

Thus, we conclude that Mark IV did not present sufficient evidence to establish the amount of actual damages that it suffered. Accordingly, the award of compensatory damages and prejudgment interest to Mark IV is VACATED.

2. Challenges to the Award of Punitive Damages

CDMC next contends that the award of punitive damages to Mark IV is not sustainable. CDMC argues that Mark IV has not established that CDMC breached its fiduciary duty to Mark IV. In the alternative, after arguing that the award of compensatory damages cannot be sustained, CEMC maintains that punitive damages are not recoverable when actual or compensatory damages have not been established.

Before reaching these issues, we note that punitive damages cannot be recovered in an action arising from contract. Cal.Civ.Code Sec. 3294. Here, in answers to interrogatories, the jury found that CDMC had breached both the Joint Venture Agreement contract and its fiduciary duty to Mark IV. Therefore, because the jury made a specific finding that CDMC had breached its fiduciary duty to Mark IV, we have no reason to question the award of punitive damages on the ground that it was based on Mark IV's contract theory.

a. Breach of Fiduciary Duty

CDMC asserts that the award of punitive damages cannot stand because CDMC was not in a fiduciary relationship with Mark IV before the signing of the Joint Venture Agreement, and therefore that no breach of fiduciary duty could be found. As such, CDMC contends that the jury instruction allowing the finding of such a fiduciary relationship was in error. CDMC also claims that Mark IV should have been collaterally estopped from raising this issue in the district court.

In California, a fiduciary relationship can arise during negotiations for a joint venture or partnership. Solomont v. Polk Dev. Co., 245 Cal. App. 2d 488, 495, 54 Cal. Rptr. 22, 27 (1966). We conclude that the instruction permitting the jury to find that a breach of fiduciary duty occurred before the Joint Venture Agreement was entered into was not erroneous or an abuse of discretion.

CDMC contends, however, that the jury instruction was improperly given because the bankruptcy court had earlier made a finding that " [t]he parties did not conduct their affairs, nor did they intend to create a joint venture, fiduciary relationship between them, until after January 17, 1980." Therefore, CDMC asserts that Mark IV was collaterally estopped from raising this contention in the district court.

Collateral estoppel makes a determination of an issue conclusive in a subsequent action when the issues are identical between parties who are in privity and where the first determination is on the merits. Montana v. United States, 440 U.S. 147, 153 (1979); St. Paul Fire & Marine Ins. Co. v. Weiner, 606 F.2d 864, 868 (9th Cir. 1979). In addition, the parties must have had a "full and fair opportunity" to litigate the issue. Montana, 440 U.S. at 153.

CDMC cites to no place in the record to show that they raised this issue in the district court. Upon our review of the record, we note that CDMC did take an exception to the district court's proposed jury instruction. RT 4094-4105.

The bankruptcy court made the finding at issue here in the context of CDMC's rescission counterclaim against Mark IV. The bankruptcy court determined that CDMC failed to establish that Mark IV had breached its fiduciary duty to CDMC, and failed to establish that the parties intended to create a "joint venture, fiduciary relationship" until January 17, 1980. CDMC now asserts that its failure to prevail on this claim collaterally estops Mark IV from making the separate argument before the district court that CDMC itself violated its fiduciary duty to Mark IV by failing to disclose during the joint venture negotiations the existence of the right-to-use program obligating the Resort to provide lodging and services at discounted rates to GKVC members or its intention to enter into a time share marketing arrangement with Vincent.

We hold that the earlier bankruptcy court finding does not foreclose Mark IV from raising this issue before the district court. The issue raised by Mark IV involves a different claim from that presented to the bankruptcy court. Therefore, the issue is not identical to that presented to the bankruptcy court. Montana, 440 U.S. at 153.

Accordingly, we hold that the damage awards against CDMC are sustainable under a tort theory.

b. Award of Punitive Damages

In light of our conclusion that Mark IV did not suffer actual damages, CDMC's relevant contention becomes whether punitive damages are recoverable when actual or compensatory damages have not been established. CDMC maintains that punitive damages are not recoverable in such circumstances.

It is settled law in California that punitive damages cannot be awarded unless actual damages are suffered. Werschkull v. United California Bank, 85 Cal. App. 3d 981, 1002, 149 Cal. Rptr. 829, 842 (1978). However, California courts have recognized that "the more usual application of punitive damages is somewhat didactic in nature." Id. at 1002, 149 Cal. Rptr. at 842; see also Carr v. Progressive Casualty Ins. Co., 152 Cal. App. 3d 889, 892, 199 Cal. Rptr. 835, 842 (1984) (same). As such,

the requirement of "actual damages" imposed by [California] Civil Code section 3294 is simply the requirement that a tortious act be proven if punitive damages are to be assessed. Consequently, ... punitive damages may be awarded in appropriate cases even if the injured party is not awarded compensatory damages or is only awarded nominal damages.

Carr, 152 Cal. App. 3d at 892, 199 Cal. Rptr. at 841 (emphasis added). Thus, in Ward v. Taggart, 51 Cal. 2d 736, 743, 336 P.2d 534, 538-39 (1957), the California Supreme Court upheld an award of punitive damages even though the evidence established that the defrauded plaintiff had received real property worth at least what he had paid for it.

Here, the district court instructed the jury that punitive damages could not be awarded without a finding of conscious disregard by CDMC of the rights and interests of Mark IV. These instructions were sufficient to acquaint the jury with the underlying substantive law, that a breach of fiduciary duty is not sufficient to warrant punitive damages; malice, fraud, or oppression must be shown. See Flyers Body Shop Profit Sharing Plan v. Ticor Title Ins. Co., 185 Cal. App. 3d 1149, 1154, 230 Cal. Rptr. 276, 278 (1986). The jury awarded punitive damages. Hence, under these governing principles, we hold that the jury's determination that CDMC had tortiously breached its fiduciary duty to Mark IV and its award of punitive damages against CDMC is sustainable under California law.

Accordingly, the award of punitive damages to Mark IV is AFFIRMED.

In light of our preceeding conclusions, we VACATE the awards of attorney's fees and REMAND to the district court for the determination of attorney's fees.

CONCLUSION

We REVERSE the district court's judgment holding that CDMC violated Paragraph 3.08 of the Joint Venture Agreement and VACATE the award of damages. We VACATE the compensatory damages awarded to Mark IV and against CDMC on the contract claim as well as on the breach of fiduciary duty claim. We AFFIRM the punitive damages awarded to Mark IV and against CDMC in connection with the breach of fiduciary duty claim. We VACATE the awards of attorneys' fees and REMAND the claims to the district court.

Each party is to bear its own costs.