Date: 02-02-2004

Case Style: Casa Herrera, Inc. v. Nasser Beydoun, et al.

Case Number: S111998

Judge: Brown

Court: Supreme Court of California

Plaintiff's Attorney:

Meisenheimer, Herron & Steele, Matthew V. Herron, Robert M. Steele; Post Kirby Noonan & Sweat, Michael J. Kirby and Matthew P. Nugent for Plaintiff and Appellant.

Defendant's Attorney:

Gibson, Dunn & Crutcher, Theodore J. Boutrous, Jr., Julian W. Poon, Gregory D. Brown, Nicola T. Hanna and Michele L. Maryott for Defendants and Respondents Community First National Bank and Tom Ferrara. Ira S. Carlin for Defendants and Respondents Nasser Beydoun and Am Mex Food Industries, Inc.

Description:

A court resolves an action for breach of contract and fraud in favor of a defendant by applying the parol evidence rule. That defendant subsequently files a malicious prosecution action against the plaintiffs in the breach of contract action and others. We now consider whether the termination of the breach of contract and fraud action based on the parol evidence rule satisfies the favorable termination element of a malicious prosecution claim. We conclude it does.

I.

A.

In 1994, respondent Am Mex Food Industries, Inc. (Am Mex) - which was owned by respondent Nasser Beydoun - purchased an oven and related equipment from appellant Casa Herrera, Inc. (Casa Herrera or appellant) for manufacturing tortillas for sale to its distributors. As stated in the written sales contract, Casa Herrera promised that the oven would produce 1,500 dozen 10-ounce tortillas per hour, 1,800 dozen 8-ounce tortillas per hour, and 2,000 dozen 6-ounce tortillas per hour.1 The contract also gave Am Mex 10 days to operate the oven after its installation and to return it if dissatisfied.

Casa Herrera delivered the oven to Am Mex, but Am Mex did not sign the written acceptance within 10 days after its installation because of difficulties in operating the oven. Casa Herrera then made some repairs and provided Am Mex with additional instructions on how to operate the oven. Over a month after the installation of the oven, Am Mex and Beydoun signed the acceptance "acknowledging they had observed the oven in operation and were satisfied with the quantity and quality of production."

Am Mex began experiencing financial difficulties and was unable to service its debt to respondent Valle De Oro Bank (Valle), the predecessor to respondent Community First National Bank (collectively, the banks). Valle filed an action to enforce its security interest in Am Mex's assets and obtained the appointment of a receiver. The receiver eventually sold Am Mex's assets, including the oven, to Circle Foods.

Shortly after the appointment of the receiver, Am Mex and Beydoun sued Casa Herrera, asserting causes of action for breach of contract and fraudulent misrepresentation. As the basis for both causes of action, they alleged that Casa Herrera had promised the oven would produce 1,500 dozen 16-ounce tortillas per hour even though Casa Herrera knew the oven did not and could not do so.

At trial, the court, after hearing opening statements, granted Casa Herrera's motion for a nonsuit against Beydoun on the ground that Beydoun lacked standing to sue. After Am Mex presented its case, the trial court directed a verdict for Casa Herrera "on the ground[] that Am Mex had no standing to pursue said claims as they had been sold and assigned to Circle Foods pursuant to a written contract."

The Court of Appeal affirmed. But instead of relying on lack of standing, the court held that "there was no substantial evidence to support the claims for breach of contract or fraud." In support, the court found that the written sales contract between Am Mex and Casa Herrera was "integrated on the rates of guaranteed production, and the language specifying a guaranteed rate of 1500 dozen per hour for 10-ounce tortillas is not reasonably susceptible to the interpretation that the parties agreed to a guaranteed rate of 1500 dozen per hour for 16-ounce tortillas." The court then concluded that the "parol evidence rule barred Am Mex from attempting to show Casa Herrera breached a promise (or fraudulently promised) to provide an oven producing 16-ounce tortillas at the rate of 1500 dozen per hour."

B.

Following the Court of Appeal's decision, Casa Herrera filed the instant action against Beydoun, Am Mex, the banks, and Tom Ferrara, a director and officer of Valle (collectively respondents), asserting, among other things, causes of action for malicious prosecution.2 As part of its malicious prosecution claims, Case Herrera alleged that the Court of Appeal opinion in Beydoun v. Casa Herrera, Inc. (Jan. 10, 2000, D030061) [nonpub. opn.] constituted a termination on the merits in its favor.

The banks and Ferrera, joined by Am Mex and Beydoun, moved for judgment on the pleadings, contending, as a matter of law, Casa Herrera could not establish the favorable termination element of a malicious prosecution claim. Citing Hall v. Harker (1999) 69 Cal.App.4th 836, 845 (Hall), the banks claimed that "a resolution . . . based on the parol evidence rule cannot be a favorable termination . . . so as to support a subsequent action for malicious prosecution." The trial court agreed and dismissed the malicious prosecution claims with prejudice.>{?The Court of Appeal reversed.3 Declining to follow Hall, the court concluded that "when an action is terminated because the parol evidence rule mandates the defendant's liability be determined by the provision embodied in the written contract rather than by any prior inconsistent oral promises, the action has been terminated for reasons that do reflect on the merits of the plaintiff's underlying claim that the underlying defendant was responsible or liable for allegedly breaching his contractual obligations." In reaching this conclusion, the court observed that "the parol evidence rule is not an evidentiary rule but is instead a rule that fixes duties and establishes rights and responsibilities among persons by declaring that the law will hold parties to their written agreements rather than to prior representations or promises inconsistent with the written agreement."

We granted review to determine whether a termination based on the parol evidence rule constitutes a favorable termination for malicious prosecution purposes, and conclude that it does.

II.

"[I]n order to establish a cause of action for malicious prosecution of either a criminal or civil proceeding, a plaintiff must demonstrate ‘that the prior action (1) was commenced by or at the direction of the defendant and was pursued to a legal termination in his, plaintiff's, favor [citations]; (2) was brought without probable cause [citations]; and (3) was initiated with malice [citations].' " (Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 871 (Sheldon Appel), quoting Bertero v. National General Corp. (1974) 13 Cal.3d 43, 50.)

"The theory underlying the requirement of favorable termination is that it tends to indicate the innocence of the accused, and coupled with the other elements of lack of probable cause and malice, establishes the tort [of malicious prosecution]." (Jaffe v. Stone (1941) 18 Cal.2d 146, 150.) Thus, "[i]t is hornbook law that the plaintiff in a malicious prosecution action must plead and prove that the prior judicial proceeding of which he complains terminated in his favor." (Babb v. Superior Court (1971) 3 Cal.3d 841, 845.)

To determine "whether there was a favorable termination," we "look at the judgment as a whole in the prior action . . . ." (Sagonowsky v. More (1998) 64 Cal.App.4th 122, 129.) "It is not essential to maintenance of an action for malicious prosecution that the prior proceeding was favorably terminated following trial on the merits." (Lackner v. LaCroix (1979) 25 Cal.3d 747, 750 (Lackner).) Rather, "[i]n order for the termination of a lawsuit to be considered favorable to the malicious prosecution plaintiff, the termination must reflect the merits of the action and the plaintiff's innocence of the misconduct alleged in the lawsuit." (Pender v. Radin (1994) 23 Cal.App.4th 1807, 1814.) For example, a termination is favorable for malicious prosecution purposes where the court in the underlying action: (1) granted summary judgment and issued sanctions because the claim was meritless (Mattel, Inc. v. Luce, Forward, Hamilton & Scripps (2002) 99 Cal.App.4th 1179, 1191); (2) granted summary judgment because there was insufficient evidence to establish a triable issue of fact (Sierra Club Foundation v. Graham (1999) 72 Cal.App.4th 1135, 1149-1150 (Sierra Club)); or (3) held that the defendant, as a matter of law, violated no duty to the plaintiff (Ray v. First Federal Bank (1998) 61 Cal.App.4th 315, 318 (Ray)).

However, a " ‘favorable' termination does not occur merely because a party complained against has prevailed in an underlying action. . . . If the termination does not relate to the merits - reflecting on neither innocence of nor responsibility for the alleged misconduct - the termination is not favorable in the sense it would support a subsequent action for malicious prosecution." (Lackner, supra, 25 Cal.3d at p. 751, fn. omitted.) Thus, a "technical or procedural [termination] as distinguished from a substantive termination" is not favorable for purposes of a malicious prosecution claim. (Ibid.) Examples include dismissals (1) on statute of limitations grounds (id. at pp. 751-752; Warren v. Wasserman, Comden & Casselman (1990) 220 Cal.App.3d 1297, 1303 (Warren)); (2) pursuant to a settlement (Dalany v. American Pacific Holding Corp. (1996) 42 Cal.App.4th 822, 828-829); or (3) on the grounds of laches (Asia Investment Co. v. Borowski (1982) 133 Cal.App.3d 832, 838-839).

With these standards in mind, we now turn to the Court of Appeal's decision terminating the underlying breach of contract and fraud action. (See Ray, supra, 61 Cal.App.4th at pp. 318-319 [holding "that the appellate decision . . . both marked and constituted favorable termination of that case"].) In affirming the judgment in favor of appellant, the Court of Appeal found that "there was no substantial evidence to support the [underlying] claims for breach of contract or fraud." Ostensibly, this finding reflects on the merits and appellant's innocence of the wrongful conduct alleged in the underlying action. (See Sierra Club, supra, 72 Cal.App.4th at pp. 1149-1150.) Nonetheless, respondents contend the termination was procedural or technical because the Court of Appeal refused to consider evidence of prior negotiations in light of the parol evidence rule. According to respondents, under Lackner the parol evidence rule is a procedural defense like the statute of frauds, and a termination based on that rule does not reflect on appellant's innocence. (See Lackner, supra, 25 Cal.3d at p. 751.) As explained below, we disagree and find that a termination based on the parol evidence rule is a substantive termination in the malicious prosecution context.

The parol evidence rule is codified in Civil Code section 16254 and Code of Civil Procedure section 1856.5 (See Marani v. Jackson (1986) 183 Cal.App.3d 695, 701 (Marani).) It "generally prohibits the introduction of any extrinsic evidence, whether oral or written, to vary, alter or add to the terms of an integrated written instrument." (Alling v. Universal Manufacturing Corp. (1992) 5 Cal.App.4th 1412, 1433 (Alling).) The rule does not, however, prohibit the introduction of extrinsic evidence "to explain the meaning of a written contract . . . [if] the meaning urged is one to which the written contract terms are reasonably susceptible." (BMW of North America, Inc. v. New Motor Vehicle Bd. (1984) 162 Cal.App.3d 980, 990, fn. 4 (BMW).)

Although the rule results in the exclusion of evidence, it "is not a rule of evidence but is one of substantive law." (Estate of Gaines (1940) 15 Cal.2d 255, 264, italics added.) Of course, our prior characterization of the parol evidence rule as a substantive rule of law is not necessarily dispositive in the malicious prosecution context. (See Grant v. McAuliffe (1953) 41 Cal.2d 859, 865 [" ‘ "Substance" and "procedure" . . . are not legal concepts of invariable content' . . . and a statute or other rule of law will be characterized as substantive or procedural according to the nature of the problem for which a characterization must be made"].) But a careful examination of the underlying nature of the rule demonstrates that it should be so.

Unlike traditional rules of evidence, the parol evidence rule "does not exclude evidence for any of the reasons ordinarily requiring exclusion, based on the probative value of such evidence or the policy of its admission. The rule as applied to contracts is simply that as a matter of substantive law, a certain act, the act of embodying the complete terms of an agreement in a writing (the ‘integration'), becomes the contract of the parties. The point then is, not how the agreement is to be proved, because as a matter of law the writing is the agreement." (Estate of Gaines, supra, 15 Cal.2d at pp. 264-265.) Thus, "[u]nder [the] rule[,] the act of executing a written contract . . . supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument." (BMW, supra, 162 Cal.App.3d at p. 990, italics added.) And "[e]xtrinsic evidence cannot be admitted to prove what the agreement was, not for any of the usual reasons for exclusion of evidence, but because as a matter of law the agreement is the writing itself. [Citation.]" (Ibid.) "Such evidence is legally irrelevant and cannot support a judgment." (Marani, supra, 183 Cal.App.3d at p. 701.)

The parol evidence rule therefore establishes that the terms contained in an integrated written agreement may not be contradicted by prior or contemporaneous agreements. In doing so, the rule necessarily bars consideration of extrinsic evidence of prior or contemporaneous negotiations or agreements at variance with the written agreement. "[A]s a matter of substantive law such evidence cannot serve to create or alter the obligations under the instrument." (Tahoe National Bank v. Phillips (1971) 4 Cal.3d 11, 23 (Tahoe National Bank).) In other words, the evidentiary consequences of the rule follow from its substantive component - which establishes, as a matter of law, the enforceable and incontrovertible terms of an integrated written agreement.

Thus, by applying the parol evidence rule, the Court of Appeal, in effect, held that the written sales agreement was the only existing agreement of the parties. (See Estate of Gaines, supra, 15 Cal.2d at pp. 264-265.) As a consequence of this substantive holding, the court refused to consider extrinsic evidence suggesting that the parties' agreement had included a term promising that the oven would produce 1,500 dozen 16-ounce tortillas per hour. Such evidence was irrelevant as a matter of law. (See Marani, supra, 183 Cal.App.3d at p. 701.) After defining the terms of the parties' agreement by applying the parol evidence rule, the court then found that appellant did not breach the contract or commit fraud. As such, the Court of Appeal necessarily resolved the underlying action on the merits, and its decision reflects on appellant's innocence of the alleged misconduct. The decision therefore constitutes a favorable termination for malicious prosecution purposes.

* * *

Outcome: Although malicious prosecution suits are disfavored, we will not bar such suits for that reason alone. As we stated long ago, “we should not be led so astray by the notion of a ‘disfavored’ action as to defeat the established rights of the plaintiff by indirection; for example, by inventing new limitations on the substantive right, which are without support in principle or authority, or by adopting stricter requirements of pleading that are warranted by the general rules of pleading. In brief, the public policy involved has properly served, over many years, to crystallize the limitations on the tort, and the defenses available to the defendant. Having served that purpose, it should not be pressed further to the extreme of practical nullification of the tort and consequent defeat of the other important policy which underlies it of protecting the individual from the damage caused by unjustifiable criminal [and civil] prosecution[s].” (Jaffe v. Stone, supra, 18 Cal.2d at pp. 159-160.) Accordingly, we hold that terminations based on the parol evidence rule are favorable for malicious prosecution purposes. In doing so, we disapprove of Hall v. Harker, supra, 69 Cal.App.4th 836, to the extent it is inconsistent with our opinion here.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: None