Unpublished Disposition, 930 F.2d 26 (9th Cir. 1991)

No. 88-6649.

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. Leonard appeals from a judgment against him and in favor of Mark IV on its claim for breach of fiduciary duty.

DISCUSSION

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

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 exceeded $5,000,000. During this period, Mark IV demanded that sales be stopped and ultimately brought this action against Leonard claiming breach of fiduciary duty.

Mark IV's claim concerning the GKVC was tried in September 1987. The jury returned a verdict in favor of Mark IV, finding that Leonard was guilty of breach of fiduciary duty. The jury awarded damages in favor of Mark IV in the amount of $344,120 in compensatory damages and $75,000 in punitive damages.

Leonard challenges the sufficiency of the evidence to support the jury verdict as well as 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).

Leonard contends that the district court abused its discretion by not instructing the jury that the issue of fiduciary duty between Leonard and Mark IV depended entirely upon whether Leonard usurped a joint venture business opportunity by operating the GKVC. See Defendant's Requested Instruction No. 18, A 271. Leonard argues that in viewing the evidence on the basis of this instruction, the jury would have concluded that Leonard had not usurped a business opportunity.

We hold that the district court did not abuse its discretion by failing to give the requested instruction. Mark IV was not claiming the usurpation of a business opportunity, it was claiming the breach of a fiduciary duty. The rule against the usurpation of business opportunities comes into play when a business opportunity in the line of the enterprise's business and which the enterprise is able and willing to undertake is presented to an officer or director of the enterprise and the director or officer undertakes the opportunity for themself. Thompson v. Price, 251 Cal. App. 2d 182, 189-91, 59 Cal. Rptr. 174, 178 (1967); Guth v. Loft, Inc., 5 A.2d 503, 511 (Del.Ch.1939). As a result, the self-interest of the director or officer is brought into conflict with that of the enterprise. Manifestly, the condition for such a case to arise is that both the director or officer and the enterprise desire the business opportunity.

Such a situation is not involved in the case before us. Mark IV's contention before the district court was that Leonard failed to disclose during the joint venture negotiations the existence of the GKVC right-to-use memberships, which obligated the Resort to provide lodging and services to GKVC members at discounted rates, or his intention to enter into a time share marketing relationship with Leonard which would sell such memberships. All of the evidence is to the effect that Mark IV desired no relationship whatsoever with the GKVC. This is not a case in which Leonard took for himself an opportunity that both joint venturers desired. The district court did not abuse its discretion by refusing the requested instruction.

Leonard next claims the district court abused its discretion by failing to give adequate instructions concerning breach of fiduciary duty. We disagree. The district court's instructions on breach of fiduciary duty were complete and proper, and therefore were not an abuse of discretion. RT 4264-67.

Leonard maintains, however, that Mark IV is collaterally estopped from contending that he breached a fiduciary duty as a result of his failure to disclose during the joint venture negotiations the existence of the right-to-use program obligating the Resort to provide lodging and services to GKVC members at discounted rates or his intention to enter into a time share marketing relationship with Vincent. He claims the issue is foreclosed by the bankruptcy court's 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." A 246, p. 6.

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, 505 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.

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 had failed to establish that Mark IV had breached its fiduciary duty to CDMC, and that it failed to establish that the parties intended to create a "joint venture, fiduciary relationship" until January 17, 1980. Leonard now asserts that CDMC's failure to prevail on this claim collaterally estops Mark IV from making the separate contention before the district court that Leonard violated his fiduciary duty to Mark IV by failing to disclose during the joint venture negotiations the existence of the right-to-use program or his intention to enter into a time share marketing relationship with Vincent.

We hold that the earlier bankruptcy court finding did 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 Mark IV was not foreclosed from presenting this issue before the district court.

Finally, Leonard argues that there is no substantial evidence to support a finding of breach of fiduciary duty. We disagree. As Mark IV notes in its brief, it presented evidence at trial that CDMC and Leonard had failed to disclose during the joint venture negotiations both the existence of the right-to-use program and their intention to enter into the marketing relationship with Vincent. Moreover, in California, a fiduciary relationship can arise during the negotiations for a joint venture of partnership. Solomont v. Polk Dev. Co., 245 Cal. App. 2d 488, 495, 54 Cal. Rptr. 22, 27 (1966). We conclude that there is substantial evidence to support the jury's determination that Leonard breached his fiduciary duty to Mark IV.

a. Compensatory Damages

Leonard next argues that even if there was substantial evidence to support the finding of a breach of fiduciary duty, Mark IV cannot establish actual damages. The jury awarded compensatory damages to Mark IV in the amount of $334,120, or half the sum Mark IV alleged had been withdrawn from GKVC by Leonard for his personal benefit; as such, the jury implicitly found that the GKVC was a joint venture asset. Leonard maintains that there is no substantial evidence to support the conclusion that the GKVC was a joint venture asset.

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).

We agree with Leonard's contention. We conclude, upon examination of the record, that substantial evidence does not exist to support the jury's implicit determination that the GKVC was a joint venture asset. Leonard testified at trial that the GKVC was begun by him in 1976 or 1977, and that his family purchased the Resort in 1978. Hence, the GKVC was begun at least two full years before the Joint Venture Agreement was entered into with Mark IV, and at least one year before the Leonard family first purchased the Resort. There was no evidence presented at trial indicating that the Joint Venture Agreement included as one of its terms the assumption of ownership by the joint venture of the GKVC. In fact, the Joint Venture Agreement is entirely silent as to the status of the GKVC.

Moreover, the evidence cited by Mark IV in support of the jury's implicit finding that the GKVC was a joint venture asset is inconsistent with Mark IV's own actions at the time the joint venture was in existence. Mark IV notes on appeal that the GKVC Membership Agreement, which in discussing the Resort, "warrant [ed] that ... [GKVC] has fee simple title to the units in which the Member is acquiring a right to use," and that the "timeshared units shall be managed and maintained by [GKVC]." However, in a letter to Leonard, John H. Slavik, Vice President of Mark IV, stated that such language was "misleading" and that Mark IV "expect [ed] this to be corrected immediately with proof thereof to Mark IV." James Slavik also testified that Mark IV took the position that this language was incorrect because the GKVC was a separate entity from the Resort.

Finally, upon review of Paragraph 48 of the Pretrial Order as well as the jury instruction on the measure of damages, see C 126, p. 17; RT 4269-71, we note that Mark IV's only claim for damages against Leonard were in relation to the room rates charged by the Resort to GKVC members under the terms of the right-to-use program. Although Mark IV claimed that it was a breach of fiduciary duty for Leonard to have withdrawn GKVC funds, it did not assert this as a measure of its damages.

Accordingly, we hold that substantial evidence does not exist to support the jury's implicit finding that the GKVC was a joint venture asset. Because the award of compensatory damages was based upon this implicit conclusion, we VACATE the compensatory damages awarded to Mark IV and against Leonard.

b. Punitive Damages

Leonard also challenges the jury's award of punitive damages to Mark IV and against him in the amount of $75,000. Leonard contends that the evidence was insufficient to support an award of punitive damages under California law.

We disagree. The district court instructed the jury that punitive damages could not be awarded without a finding of conscious disregard by Leonard 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 conclude that the jury's determination that Leonard had tortiously breached its fiduciary duty to Mark IV justifies the imposition of punitive damages.

In the alternative, Leonard contends that the award of punitive damages violates his right to due process of law. Leonard asserts that the punitive damage award violates due process by stigmatizing him on the basis of findings only supported by a preponderance of the evidence.

This claim is meritless. In Pacific Mutual Life Ins. Co. v. Haslip, 59 U.S.L.W. 4157 (March 4, 1991), the Supreme Court recently turned back a challenge to an award of punitive damages on due process grounds. The Court held that the common-law method for assessing punitive damages was not so inherently unfair as to deny due process. Id. at 4161. In addition, the Court held that the Due Process Clause does not require a heightened standard of "clear and convincing evidence" in the imposition of punitive damage awards. Id. at 4162 n. 11. Accordingly, we reject Leonard's due process challenge to the imposition of punitive damages against him.

Finally, of necessity, we consider whether, in the absence of compensatory damages, the punitive damage award is sustainable. 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, 548-39 (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.

As has been noted above, the district court satisfactorily instructed the jury that punitive damages could not be awarded without a finding of conscious disregard by Leonard of the rights and interest of Mark IV. Hence, we hold that the imposition of punitive damages against Leonard in the absence of compensatory damages is sustainable under California law.

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

CONCLUSION

We VACATE the compensatory damages awarded to Mark IV. We AFFIRM the punitive damages awarded to Mark IV.

Each party is to bear its own costs.