Filed 8/1/12 WRI Golden State v. Liu CA1/1
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opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
ONE
WRI GOLDEN
STATE, LLC,
Plaintiff and Respondent,
v.
MICHAEL LIU
et al.,
Defendants and Appellants.
A132328
(Solano County
Super. Ct. No. FCS031990)
Defendants
Michael Liu, Nancy Ko, John Liu, and Min Hui Liu (jointly referred to as
appellants) executed a 10-year lease with a predecessor in interest of
plaintiff WRI Golden State, LLC (WRI).
After five years, appellants were allowed to assign the lease to another
tenant, but under the terms of the assignment appellants continued to be liable
under the lease. The assignee sold the
business several months later, and the purchasers eventually stopped paying
rent. WRI brought an action against appellants
and the other tenants and was awarded over $100,000 in rent. Appellants contend WRI was barred from
collecting back rent from them because it failed to enter into a
the business. We affirm.
BACKGROUND
WRI
filed an action to collect back rent against appellants, Mun Mantione, Yan
Nian, and Zhang Li Yu on August 26, 2008.
The complaint alleged appellants leased property (premises) in Vacaville
from WRI in 2000, executing a 10-year lease (lease). After an intervening assignment and the
addition of two new tenants, neither of which excused appellants from liability
under the lease, the premises were abandoned in 2008. The action sought unpaid rent and attorney
fees.
According
to the evidence at a bench trial, Michael Liu and his brother John opened the
Mongolian Bistro in the premises in 2000.
They and the other appellants executed a 10-year lease with BPP/Golden
State Acquisitions, apparently a predecessor in interest of WRI.
Mantione. The lease was assigned to
Mantione in a “LEASE ASSIGNMENT & ASSUMPTION AND SIXTH AMENDMENT TO LEASE”
(hereafter Sixth Amendment), executed by WRI, Mantione, and appellants. Although the Sixth Amendment imposed on
Mantione all “the covenants, duties and obligations of ‘Tenant’ ” under
the lease, it did not excuse appellants from further liability. Paragraph 3 of the Sixth Amendment
stated: “[WRI] hereby consents to this
Assignment with the express understanding that . . . this Assignment
shall in no way relieve [appellants] of liability for the performance of the
covenants, duties and obligations of Tenant under said Lease Contract,
including liability for the full amount of rental and any additional charges,
provided to be paid by Tenant to [WRI] pursuant to said Lease Contract; and
[appellants] shall continue to be directly and primarily liable to [WRI] for
the performance of all covenants, duties and obligations of Tenant under such
Lease Contract, including payment of rental, and such liability shall remain
and continue in full force and effect as to any further assignment or transfer
of the Lease Contract . . . .”
Less
than two years later, Mantione told WRI she wanted to sell the restaurant to
Nian and Yu, and sought permission to assign them the lease. Because WRI deemed Nian and Yu “unqualified”
to assume the lease, it proposed adding the pair as cotenants with
Mantione. WRI prepared an amendment to
the lease adding Nian and Yu as tenants, designated “SEVENTH AMENDMENT TO
LEASE” (hereafter Seventh Amendment), and sent it to Mantione on February 1,
2007. WRI soon discovered the draft
contained an error. Although the parties
had agreed to increase the security deposit to $5,000, the draft of the Seventh
Amendment sent to Mantione reflected a security deposit of $500. WRI sent a corrected draft to Mantione on
February 5. Mantione, Nian, and Yu
nonetheless executed and returned a copy of the first version to WRI, dated February
17, 2007. Nian and Yu took over
operation of the restaurant at about the same time. WRI never executed either version of the
and Yu a copy of the original lease.
No
later than mid-March 2007, WRI learned Nian and Yu had purchased the business
and, without authorization, begun altering the premises, including changing the
restaurant’s menu. WRI sent Mantione a
notice of default and engaged outside counsel to negotiate with attorneys for
Nian, Yu, and Mantione over the issues raised by the change in ownership,
including a dispute that had arisen between Mantione and Nian and Yu. A third version of the Seventh Amendment,
dated August 1, 2007, was prepared by WRI’s outside counsel based on these
negotiations. A copy of this third
version of the Seventh Amendment was signed by Nian and Yu, but Mantione and
WRI never executed it. WRI was willing
to sign the document, but it declined to sign until Mantione had done so. Although WRI’s attorney contacted counsel for
Mantione “twice, or possibly three times” about her failure to execute the
document, no explanation was provided for Mantione’s apparent refusal. At trial, WRI took the position Nian and Yu
“were not tenants under the lease” as a result of the failure of all parties to
execute some version of the Seventh Amendment.
In
November, Mantione, Nian, and Yu stopped paying rent; WRI filed an unlawful
detainer action; and Nian and Yu were evicted.
At trial, Nian testified he and Yu stopped paying rent because, “I felt
I was insecure there. If I continued to
invest into it I don’t know what I was going to do. [¶] . . . [¶]
[b]ecause I did not get a lease.”
The
trial court issued an extensive “Revised Tentative Statement of Decision” in
favor of WRI in December 2010, which was incorporated into the court’s final
judgment, entered in April 2011. Among
other findings, the court held (1) through the Sixth Amendment, appellants
became sureties under the lease and waived their surety defenses; (2) Nian and
Yu were deemed to be cotenants under the lease on the basis of a judicial
admission in WRI’s complaint; (3) WRI performed its
the lease; and (4) Mantione would not, in any event, have been entitled to
withhold rent on the basis of any defaults.
Relating specifically to the primary issue raised in this appeal, the
trial court noted, “the actions and/or inactions of [WRI] did not constitute
Bad Faith under Ely v. Liscomb (1914)
24 Cal.App. 224.” The court awarded WRI
$107,192 in rent, as well as costs and attorney fees.
DISCUSSION
Appellants
contend WRI is precluded from recovering under the Sixth Amendment because it
breached the covenant of good faith and fair dealing by failing to accept Nian
and Yu as tenants and because it failed to prove it performed all of its
obligations under the lease when it submitted no evidence regarding the Seventh
Amendment.
A. Breach of the Implied Covenant
“ ‘The
covenant of good faith and fair dealing,
implied by law in every contract, exists merely to prevent one contracting
party from unfairly frustrating the other party’s right to receive the benefits
of the agreement actually made.’ ”
(American Express Bank, FSB v.
Kayatta (2010) 190 Cal.App.4th 563, 570.)
“The implied covenant protects the reasonable expectations of the
contracting parties based on their mutual promises. [Citations.]
The scope of conduct prohibited by the implied covenant depends on the
purposes and express terms of the contract.”
(Digerati Holdings, LLC v. Young
Money Entertainment, LLC (2011) 194 Cal.App.4th 873, 885.) “ ‘The covenant thus cannot “ ‘be
endowed with an existence independent of its contractual
underpinnings.’ ” ’ ” (
Cal.App.4th 1350, 1369.)
“The
implied covenant ‘finds particular application in situations where one party is
invested with a discretionary power affecting the rights of another. Such power must be exercised in good
faith.’ ” (Ladd v. Warner Bros. Entertainment, Inc. (2010)
184 Cal.App.4th 1298, 1306.)
However, “[t]he implied covenant cannot contradict the express terms of
a contract. [Citation.] Similarly, the implied covenant cannot be
used to limit or restrict an express grant of discretion to one of the
contracting parties.” (
Gateway, LLC (2010) 185 Cal.App.4th 1050, 1061–1062, fn. omitted.) Accordingly, the implied covenant of good
faith and fair dealing “cannot impose substantive duties or limits on the
contracting parties beyond those incorporated in the specific terms of their
agreement.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349–350.)
With
respect to “ASSIGNMENT AND SUBLETTING” of the lease, section 19.2 states that
“Tenant shall not enter into or consent to any Transfer or Change of Control
without the prior written consent of Landlord, which Landlord shall not
withhold unreasonably. Although the
following list shall not be deemed exclusive, it shall be reasonable for
Landlord to withhold its consent in any of the following situations: [¶]
(i) Landlord has a reasonable basis for disapproving the use to be made of
the Premises by the Transferee . . . ; [¶] (ii) In Landlord’s
reasonable business judgment, the Transferee lacks sufficient experience to
operate a successful business of the type and quality permitted under the
Lease; [¶] (iii) In Landlord’s reasonable business judgment, the present net
worth of the Transferee is less than the greater of Tenant’s net worth at the
Lease Reference Date or Tenant’s net worth at the date of Tenant’s request for
consent; [¶] (iv) In Landlord’s reasonable business judgment, the Transferee
lacks sufficient creditworthiness to provide assurance that it will discharge
its responsibilities under this Lease; [¶] . . . [¶] (vi) The
proposed Transfer or Change of Control would breach any covenant of Landlord
respecting radius, location, use, prohibited use or exclusivity in any other
lease, financing agreement, or other agreement relating to the Shopping Center.
. . .”
Under
the implied covenant of good faith and fair dealing, WRI had a duty to Mantione
to exercise good faith in considering a transfer to Nian and Yu, consistent
with the terms of section 19.2. As noted
above, however, the covenant of good faith and fair dealing “cannot be used to
limit or restrict an express grant of discretion to one of the contracting
parties.” (Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC, supra,
185 Cal.App.4th at p. 1062, fn. omitted.)
WRI’s duty was therefore no greater than that described in section 19.2.
Appellants
contend WRI acted in bad faith because “[WRI] had paying tenants at the
property (Nian and Yu) but [WRI] refused to sign the amendments to the Lease
(Seventh Amendments) that it prepared that would legally acknowledge Nian and
Yu as tenants.” As demonstrated below,
we find no evidence of bad faith in WRI’s dealings with Nian, Yu, and Mantione
with respect to the Seventh Amendment.
When
first asked to accept Nian and Yu as assignees, WRI examined their finances, as
it was permitted to do under section 19, and found the pair financially
unqualified for an assignment.
Appellants submitted no evidence to suggest this determination was unreasonable
or not made in good faith.
WRI
then suggested a cotenancy, which from appellants’ perspective would have been
similar to an assignment, since it made Nian and Yu jointly liable for
rent. WRI negotiated an agreement with
Mantione, Nian, and Yu to add the cotenants and sent them an erroneous
draft. When it discovered the error, WRI
sent a draft reflecting the actual agreement.
Whether judged under the doctrines of mistake or offer and acceptance,
the sending of the second draft revoked the first draft. Yet Mantione, Nian, and Yu signed and
returned the first draft, although Mantione acknowledged at trial she was aware
it did not reflect the parties’ true agreement.
Appellants provided no evidence suggesting WRI acted unreasonably or in
bad faith when it insisted on the agreed $5,000 deposit and declined to execute
the draft requiring a $500 deposit, which WRI had revoked prior to its
execution by Mantione, Nian, and Yu.
Finally, when WRI learned Nian and Yu had
assumed operation of the business prior to obtaining approval from WRI, as
required by the lease, WRI commenced further negotiations with counsel for them
and Mantione, reached a further agreement, and prepared an appropriate
draft. By sending out the draft, WRI
communicated its willingness to sign.
Again, appellants have provided no evidence suggesting these
negotiations were not undertaken in good faith or that WRI acted unreasonably
or in bad faith during the course of the negotiations. Yet this time, Mantione refused to execute the
resulting agreement. Accordingly, the
only conclusion that can be drawn from the record is that it was Mantione, and
not WRI, who prevented Nian and Yu from entering into a cotenancy agreement
with WRI.
evidence suggesting WRI acted in bad faith or unreasonably in its dealings with
Mantione, Nian, and Yu, and we accordingly affirm the trial court’s decision as
supported by substantial evidence.
name="_ftnref5" title="">[5]
Appellants
rely heavily on Ely v. Liscomb, supra,
24 Cal.App. 224, in which the court held, “it is the duty of a creditor to act
in the utmost good faith toward a surety, and so far as
he can consistently with the security of his own rights, protect the interest
of the former, as well as his own.” (
than the standard created by the implied covenant of good faith and fair
dealing under modern law, we disagree.
On the contrary, the standard of “utmost” good faith, consistent with
the creditor’s protection of its own interests, is not materially different
from existing law of the implied covenant.
Nor do the facts of Ely dictate
a different result here. In
mortgage on certain personal property refused a tender of the property, instead
contending he would prefer to receive the fair value. (Id.
at pp. 225–226.) Because the defendants
were entitled to respond to the foreclosure with a return of the property, the
court found a violation of the duty of good faith. (Id.
at pp. 228–229.) There is no
parallel here. WRI never refused a
tender of rent from its tenants, and, as discussed above, it acted in good
faith in attempting to accommodate Mantione, Nian, and Yu.
B. WRI’s Failure to Prove its Case
Appellants
contend WRI should be denied recovery because it “did not meet its burden that
it complied with the Lease.” According
to appellants, WRI was required to introduce the Seventh Amendment into
evidence because WRI argued the tenants were not allowed to withhold rent. In order to apply this argument to Nian and
Yu, appellants argue, WRI was required to submit proof they were tenants.
For
at least three reasons, the argument makes no sense. First, appellants
persuaded the trial court to rule Nian and Yu were tenants on the basis of a
judicial admission. Once the trial court
ruled Nian and Yu were tenants as a matter of law, it was unnecessary for WRI
to submit proof they were tenants.
Second,
Nian and Yu’s status as tenants was irrelevant to the issue of the right to
withhold rent. Regardless of whether
Nian and Yu were cotenants, Mantione remained a tenant under the lease. When no rent was paid, Mantione was in
default. WRI then had the right under
the Sixth Amendment to proceed against appellants, regardless of whether Nian
and Yu were also tenants who were also in default.
Third,
the trial court found WRI was not in default under the lease. It therefore became unnecessary for WRI to
demonstrate the tenants were not permitted to withhold rent in the event of
WRI’s default, since there was no default by WRI that might otherwise have
justified the tenants’ refusal to pay rent.
We
also find no merit in appellants’ claim the complaint was a sham pleading. There was no inconsistent pleading in
separate actions. (See
Cal.App.4th 857, 877–878.)
Finally,
WRI requests an award of appellate attorney fees. The request must be addressed to the trial
court in the first instance. (Cal. Rules
of Court, rule 3.1702(a) & (c).)
DISPOSITION
The
judgment of the trial court is affirmed.
_________________________
Margulies,
J.
We concur:
_________________________
Marchiano, P.J.
_________________________
Banke, J.
name="_ftn1" title="">[1] We
found no explanation in the record of the relationship between WRI and the
initial landlord, but WRI is the signatory on later amendments to the
lease. It was not disputed at trial that
WRI was entitled to enforce the lease.
name="_ftn2" title="">[2] An
amended judgment including specific amounts for the costs and attorney fees was
later entered and is not separately challenged in this appeal.
