Unpublished Disposition, 930 F.2d 28 (9th Cir. 1988)

MEMORANDUM^* 

Jeffrey A. Menish appeals from the grant of a judgment notwithstanding the verdict (JNOV), and a conditional grant of a new trial, entered by the district court following a jury verdict in his favor. Menish sued Jackie Fine Arts, Inc. (JFA) for breach of contract. Menish agreed to pay $540,000 for the right to sell prints and posters of an original Picasso painting made from a transparency, or other means of reproduction, to be furnished by JFA. He made payments totaling $84,922.

The jury awarded Menish $84,922 after Menish's attorney argued that his client was entitled to restitution. The district court granted a JNOV, and a conditional motion for a new trial, on the ground that, under California law, restitution is not available in an action for breach of contract.

Menish also seeks reversal of the JNOV and the conditional motion for a new trial ordered by the court following the jury's verdict in favor of Menish on JFA's counterclaim. The counterclaim was for damages for breach of contract based on Menish's failure to pay the balance owing on the contract. Menish further appeals from the ruling excluding evidence of tax-related damages, the dismissal of his fraud claim, the denial of his motions to amend his complaint, and the denial of his request for prejudgment interest at the rate of 10% from the date of the breach.¹ 

The pertinent facts are well known to the parties. We discuss the validity of each of the court's rulings and the facts necessary to resolve the issues raised by Menish under separate headings.

DISCUSSION

A. Validity of the Judgment Notwithstanding the Jury's Verdict in Favor of Menish on the Complaint

Menish contends that the district court erred in holding that a JNOV was required because it had erroneously permitted the jury to consider extrinsic evidence regarding the time for performance of JFA's promises under the written agreement. We conclude that the admission of extrinsic evidence was proper.

Menish also argues that the district court erred in granting a JNOV because he is entitled to "rescissionary damages" in his action for breach of contract. This contention lacks merit under California law. Because evidence of other damages resulting from the breach was presented to the jury, however, it was improper to grant a JNOV.

In reviewing the grant of JNOV, we apply the same standard used by the district court. The Jeanery, Inc. v. James Jeans, Inc., 849 F.2d 1148, 1151 (9th Cir. 1988). A district court's interpretation of state law is reviewed de novo. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984) (en banc). "We view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in favor of that party. A JNOV is improper if reasonable minds could differ over the verdict." Peterson v. Kennedy, 771 F.2d 1244, 1252 (9th Cir. 1985) (citations omitted), cert. denied, 475 U.S. 1122 (1986).

In its post-trial rulings, the district court held that it had erred in permitting the jury to consider extrinsic evidence regarding the time of performance. The court concluded that the agreement of the parties was integrated.

Section 1856(a) of the California Code of Civil Procedure provides: "Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous agreement."

The California courts have stated that " [t]he crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement." Masterson v. Sine, 68 Cal. 2d 222, 225, 65 Cal. Rptr. 545 (1968). The existence of language in the written contract expressing that there are no other understandings or agreements is not dispositive on this issue. Id. at 225-26. A collateral agreement must also be examined "to determine whether the parties intended the subjects of negotiation it deals with to be included in, excluded from, or otherwise affected by the writing." Id. "Evidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled." Id. at 227.

The agreement between JFA and Menish does not contain a provision setting forth a specific time of performance. Section 1856(b) of the California Code of Civil Procedure provides: "The terms set forth in a writing described in subdivision (a) may be explained or supplemented by evidence of consistent additional terms unless the writing is intended also as a complete and exclusive statement of the terms of the agreement." Extrinsic evidence of an oral agreement that the limited edition prints and posters would be available for delivery within six to eight months does not contradict the language of the written contract, nor is it likely to mislead a fact finder. Rather, it explains or supplements the "best efforts" term by applying an outside limit on the time for performance. The district court properly admitted evidence of the collateral oral agreement concerning the time of performance. Because the district court granted JNOV based upon its erroneous conclusion that extrinsic evidence was not admissible, we must reverse the order granting JNOV.

Menish's contention that restitution can be awarded in an action for damages resulting from a breach of contract is contrary to California law. Under California law, "damages and restitution constitute alternative remedies and an election to pursue one is a bar to invoking the other." Jozovich v. Central California Berry Growers Assn., 183 Cal. App. 2d 216, 229, 6 Cal. Rptr. 617 (1960). See also 1 B. Witkin, Summary of California Law Sec. 798 (9th ed. 1987).

Menish relies on CBS, Inc. v. Merrick, 716 F.2d 1292 (9th Cir. 1983), in support of his argument that an award of restitution damages is proper in an action for a breach of contract. Menish's reliance on Merrick is misplaced. In Merrick, we were required to apply New York law. We held that under New York case law, " [a] party injured by a breach of a contract may recover both restitution and reliance damages." Id. at 1296. Under California law the remedies for an action for rescission and breach of contract are mutually exclusive and call for an election by the parties. Jozovich, 183 Cal. App. 2d at 229.

Menish also claims that JFA waived its right to complain that the law does not support the jury's award of damages for restitution because JFA stipulated to the jury instructions on damages for a breach of contract. This argument finds no support in the record.

On February 8, 1988, JFA requested an instruction that would inform the jury on the law of rescission. JFA proposed the following instruction:

Rescission of a contract is a type of remedy sometimes sought by a plaintiff in a case claiming a breach of contract. In rescission, a plaintiff who has bought goods pursuant to a contract gets his money back and has to return any property received pursuant to the contract. Mr. Menish is not seeking rescission of his contract with Jackie Fine Arts.

In denying the proposed instruction, the district court commented as follows: "Anybody who talks to the jury about rescission and uses that word ought to be chastised in any event."

While it is true that JFA stipulated to the instructions on damages for breach of contract, it is equally clear that JFA did not in any way acquiesce in Menish's theory that restitution was available in this matter.

The fact that Menish was not entitled to restitution in this action for breach of contract does not support the grant of a JNOV. Menish produced other evidence of damages he suffered as the result of JFA's failure to perform within six to eight months. For example, the record shows that Menish paid $3,000 for printing costs. A new trial under proper instructions is necessary to permit Menish to recover the damages he is able to prove that resulted from the breach of contract. As discussed below, the court also erred in excluding evidence of tax-related damages that may have been contemplated by the parties at the time they entered into the agreement. Because the judgment in favor of JFA notwithstanding the verdict in favor of Menish would bar recovery of damages that are available under breach of contract, we conclude that the JNOV on the complaint must be reversed.

Prior to trial, the district court granted JFA's motion to exclude evidence of tax-related damages. Menish contends that this ruling is erroneous under applicable California law. Menish argues that JFA's breach of the agreement directly caused the IRS' disallowance of deductions taken by Menish on his tax returns. He asserts that he is entitled to recover for liabilities incurred due to the disallowed deductions, including higher rates of interest and penalties assessed by the IRS.

Generally, " [a] district court's decision to admit or exclude evidence will be upheld on appeal unless the court abused its discretion." United States v. Merrill, 746 F.2d 458, 465 (9th Cir. 1984) (citing United States v. Long, 706 F.2d 1044, 1053 (9th Cir. 1983)), cert. denied, 469 U.S. 1165 (1985). If the decision to exclude evidence is based on a misinterpretation of the applicable law, however, it is reviewed de novo. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984) (en banc).

California Civil Code Sec. 3300 provides:

For the breach of an obligation arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.

The California courts have restricted the recovery of damages in breach of contract cases to "such damages as were actually contemplated by or within the reasonable contemplation of the parties at the time they entered into the contract." California Shoppers, Inc. v. Royal Globe Ins. Co., 175 Cal. App. 3d 1, 59, 221 Cal. Rptr. 171 (1985).

The district court erred in concluding that tax-related damages are not compensable in an action for breach of contract under California law if they are within the reasonable contemplation of the parties. Walker v. Signal Companies, Inc., 84 Cal. App. 3d 982, 993, 149 Cal. Rptr. 119 (1978). In Walker, the California Court of Appeal upheld an award of damages for adverse tax consequences as special damages where the evidence showed that the parties knew or should have known that a delay in performance would increase the plaintiff's tax liability. Id.

Menish maintains that the tax consequences of the Picasso Art Master purchase were within the reasonable contemplation of the parties at the time they entered the contract. Mr. Finesod, President of JFA, referred to the Art Master program as a tax shelter. Mr. Rothchild, one of the appraisers selected by JFA, indicated that the Art Masters were part of a tax scheme. JFA's promotional brochure devoted 56 of its 68 pages to the tax consequences of purchasing an Art Master. The record indicates that the whole transaction was structured as a tax-shelter scheme. Whether the tax related damages claimed by Menish were within the contemplation of the parties at the time of contract is a question of fact to be resolved by a jury if there are material facts in dispute. The district court erred in concluding that, as a matter of law, evidence of tax-related damages was inadmissible.

We review the district court's decision on the motion for new trial for an abuse of discretion. Hard v. Burlington Northern R.R., 812 F.2d 482, 483 (9th Cir. 1987). A motion for new trial may be granted for insufficiency of the evidence "only if the verdict is against the 'great weight' of the evidence, or 'it is quite clear that the jury has reached a seriously erroneous result.' " Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1347 (9th Cir. 1984) (citations omitted), cert. denied, 473 U.S. 908 (1985). Instead of awarding damages which may have been caused by the two and one-half years' delay of delivery, the jury awarded Menish restitution. The award of $84,922 was against the great weight of the evidence in the record on an action for damages for breach of contract. The district court did not abuse its discretion in conditionally granting a motion for a new trial.

D. Dismissal of Fraud Claim and Denial of Motions to Amend

Menish contends that the court erred in dismissing the claim for negligent misrepresentation contained in his initial complaint and in denying subsequent motions for leave to amend the complaint to include a claim for fraud. The court ruled that the applicable California statute of limitations barred recovery of damages for fraud. The district court's application of the appropriate statute of limitations under state law is reviewed de novo. In re Hawaii Federal Asbestos Cases, 871 F.2d 891, 893 (9th Cir. 1989). The denial of leave to amend a pleading is reviewed for abuse of discretion. Gabrielson v. Montgomery Ward & Co., 785 F.2d 762, 765 (9th Cir. 1986). "While the district court's action on a motion for leave to amend should be reversed only if the action is an abuse of discretion, there is a 'strong policy to permit the amending of pleadings,' and denial of a motion to amend must be reviewed 'strictly.' " Id. (citations omitted).

Section 338(d) of the California Code of Civil Procedure requires that an "action for relief on the ground of fraud or mistake" be commenced within three years. The statute further provides that " [t]he cause of action in that case is not to be deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake."

The cases construing this code section [Sec. 338(d) ] have held that the provision tolling the operation of the statute until discovery is an exception, and, accordingly, plaintiff must affirmatively excuse his failure to discover the fraud within three years by showing that he was not negligent in failing to make the discovery sooner and that he had no actual or presumptive knowledge of facts sufficient to put him on inquiry.

Bedolla v. Logan & Frazer, 52 Cal. App. 3d 118, 129, 125 Cal. Rptr. 59 (1975).

Menish also maintains that since JFA became Menish's agent under the agreement for the purchase of the Picasso Art Master, JFA may not assert the statute of limitations as a defense against Menish's claim of fraud. This contention lacks merit.

The only distinction between the rules of discovery in the ordinary fraud case and those in the confidential relationship category is that in the latter situation the duty to investigate may arise later by reason of the fact that the plaintiff is entitled to rely upon the assumption that his fiduciary is acting in his behalf. But, once the plaintiff becomes aware of facts which would make a reasonably prudent person suspicious, the duty to investigate arises and the plaintiff may then be charged with the knowledge of facts which would have been discovered by such an investigation.

Id. at 131.

The court concluded that Menish knew as of August 7, 1981, that JFA's representation that the prints and posters would be delivered within six to eight months was false. Menish did not file his action in this matter until December 7, 1984. Thus, the record shows that Menish filed his complaint more than three years after discovering that the representation was false. The district court did not err in dismissing Menish's claim for fraud.

In his proposed Third Amended Complaint, Menish alleged that on June 1, 1981, he was told that "it would realistically take a total of one year to complete the agreement." This statement indicates that Menish discovered the falsity of JFA's representation regarding delivery more than three years before filing this action. The district court did not err in denying Menish's motions to amend the pleadings.

E. Judgment Notwithstanding the Verdict on the Counterclaim

JFA filed a counterclaim for breach of contract for nonpayment of the promissory notes which Menish had signed as partial payment for the right to the "Master." The jury found in favor of Menish on this counterclaim. In its order granting JNOV on the counterclaim, the court stated:

Since the defendant did not breach the agreement, plaintiff's performance could not have been excused. Furthermore, even if defendant did breach a time for performance term, said breach did not excuse plaintiff from performing independent aspects of the agreement.

The district court's ruling on the counterclaim is premised on its erroneous conclusion that extrinsic evidence was not admissible to show the agreement of the parties concerning the time for performance. The evidence that JFA failed to perform pursuant to the collateral oral agreement was uncontradicted.

In granting a JNOV on the counterclaim the district court also appears to have overlooked the fact that Menish introduced evidence to support his defense to the counterclaim based on fraud. JNOV was improper because sufficient evidence was presented to cause reasonable minds to differ regarding whether the defense of fraud was proved. Peterson v. Kennedy, 771 F.2d 1244, 1252 (9th Cir. 1985), cert. denied, 475 U.S. 1122 (1986).

F. Conditional New Trial on the Counterclaim

In granting a conditional motion for a new trial on the counterclaim, the district court stated:

The Court conditionally grants new trial on the counterclaim. Fed. R. Civ. P. [50(c) (1) ]. The jury's verdict on the counterclaim is against the clear weight of the evidence.

The evidence manifestly supports a finding that plaintiff's obligations under the sued upon promissory notes were due and payable and that plaintiff defaulted on those obligations.

The district court's order is based upon its determination that extrinsic evidence of JFA's breach of contract was not admissible to excuse Menish's failure to perform. We have concluded, as discussed above, that the district court erred in its post-trial ruling that extrinsic evidence was inadmissible to prove that JFA breached its contract. JFA's breach of contract was an excuse for Menish's nonperformance. See 1 B. Witkin, Summary of California Law Sec. 804 (9th ed. 1987) (material breach of an "entire" contract by one party justifies termination by the nonbreaching party). As noted above, the district court also made no reference to the defense of fraud presented by Menish. The jury's implied finding that JFA was not entitled to recover because of its nonperformance and fraud was not against the great weight of the evidence. Therefore, the district court abused its discretion in granting the motion for a new trial. See Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1347 (9th Cir. 1984) (a motion for new trial may be granted for insufficiency of evidence "only if the verdict is against the 'great weight' of the evidence...."), cert. denied, 473 U.S. 908 (1985).

CONCLUSION

The JNOV on the complaint is REVERSED.

The conditional grant of a motion for a new trial on the complaint is AFFIRMED.

The order excluding evidence of tax benefits as proof of damages for breach of contract is REVERSED.

The order dismissing Menish's fraud claim is AFFIRMED.

The order denying the motions to amend the complaint is AFFIRMED.

The JNOV on the counterclaim is REVERSED.

The conditional motion for a new trial on the counterclaim is REVERSED. The district court is directed to enter judgment in favor of Menish on the counterclaim.