Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County, Peter D. Lichtman, Judge. Super. Ct. No. BC279691
Robins, Kaplan, Miller & Ciresi, Bernice Conn, and Roman M. Silberfeld for Plaintiffs and Appellants.
Munger, Tolles & Olson LLP, Marc T.G. Dworsky, Mark H. Epstein, and Randall G. Sommer for Defendants and Respondents Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch & Co., Inc., Merrill Lynch Life Agency Inc., and Merrill Lynch Insurance Group Services, Inc.
Tatro Tekosky Sadwick LLP, René P. Tatro and Juliet A. Markowitz for Respondent Jonathan H. Pardee.
TURNER, P. J.
I. INTRODUCTION
Plaintiffs, Takako Hawkins, Clive Hawkins, and Stan Mandell, the conservator of the Estate of Thelma Jean Fenter, appeal from a final judgment resulting from the entry of two orders in favor defendants: Merrill Lynch, Pierce, Fenner & Smith, Inc.; Merrill Lynch Co. Inc.; Merrill Lynch Life Agency, Inc.; Merrill Lynch Insurance Group Services, Inc. (sometimes referred to collectively as “the Merrill Lynch defendants”); and John H. Pardee. Plaintiffs challenge an order sustaining the demurrer to certain causes of action in the first amended complaint. Plaintiffs also challenge a later order granting defendants’ summary judgment motion. This litigation involves Treasury Investment Growth Receipts. The Third Circuit described Treasury Investment Growth Receipts as follows: “Zero-coupon bonds are debt securities on which no interest is paid prior to maturity. At maturity, a one-time payment incorporating the principal repayment and accrued interest is made. These securities are therefore sold at a discount from face value. [¶] [Treasury Investment Growth Receipts] . . . are a proprietary product of Merrill Lynch. [Treasury Investment Growth Receipts] consist of United States Treasury bonds that have been repackaged by Merrill Lynch into zero-coupon securities. Specifically, a [Treasury Investment Growth Receipt] is a receipt that evidences ownership of a future payment of interest or principal on Treasury bonds which are purchased by Merrill Lynch and are held by a custodian for the benefit of the [Treasury Investment Growth Receipt] holder.” (Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (3rd Cir. 1987) 835 F.2d 1031, 1032, fn. 1.) We conclude: the demurrers to the first amended complaint should not have been sustained as to the sixth, seventh, eighth, and eleventh causes of action; the order granting summary judgment as to the Merrill Lynch defendants should not have been entered; and the order granting summary judgment as to Mr. Pardee must be deemed to be an order entering summary adjudication of the fifth cause of action in the second amended complaint.
II. THE DEMURRER DISMISSAL OF CERTAIN CAUSES OF ACTION IN THE FIRST AMENDED COMPLAINT
A. The First Amended Complaint.
1. The Merrill Lynch defendants purchase the settlement company
In 1969, Robert and Ray Schultz founded IBAR which engaged in the business of arranging structured settlements funded by annuities or United States Treasury Bonds held in trust. The structured settlements were designed to comply with Internal Revenue Code section 130 in order to provide tax benefits to settling plaintiffs. So as to assure the safety of settlements funded by United States Treasury Bonds, IBAR placed them in trust. On March 31, 1982, Merrill Lynch Life Agency, Inc. acquired the stock of IBAR from the Schultzes. The company was renamed Merrill Lynch IBAR Inc. In February, 1984, the Schultzes left Merrill Lynch IBAR, Inc. Thereafter, the company was renamed Merrill Lynch Settlement Services, Inc.
2. The Fenter settlement
On February 10, 1981, Thelma Fenter filed suit against the County of Los Angeles. A guardian ad litem was appointed for Ms. Fenter. A settlement was entered into between Ms. Fenter’s guardian ad litem and the County of Los Angeles (the county). The first amended complaint alleges: “Pursuant to the settlement, Ms. Fenter’s claims against the county were assigned to Merrill Lynch IBAR, Inc., and pursuant to a separate written Assignment Agreement to which Ms. Fenter and Merrill Lynch IBAR, Inc. were parties, Merrill Lynch IBAR, Inc. assumed the obligation to make settlement payments over time to Ms. Fenter, or, in the event of her death, to her estate. Some of the structured settlement payments owed to Ms. Fenter were funded with United States Treasury Bonds purchased at the time of settlement and placed into trust for the sole purpose of providing principal and income sufficient to make these payments to Ms. Fenter; the settlement payments that were backed by a Treasury Bond Trust were the subject of separate litigation before this Court.”
Additionally, part of the structured settlement called for a deferred payment stream of $3,750, payable twice a year concluding on November 15, 2010. On that date, an additional $60,000 was to be paid to Ms. Fenter. This deferred payment stream was not to be funded by either annuities of United States Treasury Bonds. Rather, this payment stream was to be funded by the purchase of Treasury Investment Growth Receipts. Treasury Investment Growth Receipts were a proprietary investment product of Merrill Lynch & Company, Inc. or Merrill Lynch, Pierce, Fenner & Smith, Inc., which were trademarked and offered for public sale. Treasury Investment Growth Receipts were “a zero-coupon or stripped treasury bond derivative,” which were “sold at a discount and redeemed for face value at maturity.” According to the settlement agreement, the Treasury Investment Growth Receipts were to assure the deferred payments due to Ms. Fenter were paid. Unlike the treasury bonds, the Treasury Investment Growth Receipts were not placed in trust. Rather, they were held in a “brokerage and/or cash management” account managed by the Merrill Lynch defendants or their agents.
3. The Hawkins settlement.
On August 21, 1979, Ms. Hawkins and her minor son, Clive, filed a wrongful death suit against American Airlines (the airline), McDonnell Douglas and (the manufacturer), and other defendants arising from an airplane crash in Chicago. Thereafter, a settlement was reached. A separate written assignment agreement was entered into in which “plaintiffs and Merrill Lynch IBAR Inc.” were parties. Pursuant to the settlement, Ms. Hawkins and her son Clive were to receive monthly payments between November 1, 1982, and October 1, 2002. The settling defendants in the Hawkins litigation, the airline and the manufacturer, paid Merrill Lynch IBAR, Inc. $1.014 million to fund certain payments. Those payments are not the subject of the present litigation. In addition, on November 15, 2002, Ms. Hawkins and her son Clive were to receive $2,466,232.50 and $1,231,267.50 respectively. In order to fund these final lump sum payments, the settling defendants and their insurers transferred to Merrill Lynch IBAR, Inc., additional funds. The first amended complaint alleges, “According to the terms of the settlement agreement, the [Treasury Investment Growth Receipts] were to ‘serve as a medium for payment of’ the structured settlement payments ‘and to assure the payment of such funds’ to Takako and Clive Hawkins.” As in the case of the Fenter settlement, the Treasury Investment Growth Receipts were not placed in trust. Rather, the Treasury Investment Growth Receipts were placed in brokerage accounts maintained by the Merrill Lynch defendants or their agents.
4. In concert allegations
The first amended complaint alleged that the various defendants acted in concert with one another. According to the first amended complaint: “In committing the wrongful acts alleged herein, the defendants have at various times pursued or joined in the pursuit of, a common course of conduct and acted in concert with and conspired with one another, in furtherance of their common plan, scheme or design. In addition to the wrongful conduct herein alleged as giving rise to primary liability, the defendants further aided and abetted and knowingly assisted each other in breach of their respective duties as herein alleged. . . .” The first amended complaint also alleged: all defendants “conspired to commit, aided and abetted and rendered substantial assistance in the wrongs complained of herein”; defendants conspired to “commit, and substantially assist in the commission” of the alleged wrongdoing; defendants acted with knowledge of the wrongdoing of each other; and each of the acts engaged in were in furtherance of the conspiracy and a common course of conduct.
Moreover, the first amended complaint contained allegations concerning joint marketing conduct: “In marketing to the plaintiffs and to the general public the settlement services offered by Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc. . . ., Defendant Merrill Lynch authorized, consented to and/or ratified the use of its name, its logo, and its trademarks by the [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc]. In addition to the name of [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.], the correspondence, checks and brokerage trade receipts and used and issued by [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] in providing its structured settlement services to plaintiffs displayed the name ‘Merrill Lynch’ next to depictions of the globally recognized Merrill Lynch bull logo. [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] also expressly represented [themselves] to the public as a wholly-owned subsidiary of Merrill Lynch & Co. Inc. and the checks used by [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] in connection with structured settlements were issued from a Merrill Lynch Cash Management Account(s). [¶] One or more of the Merrill Lynch Defendants also authorized, consented to and/or ratified advertisements regarding [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] and its structured settlement services to be published and circulated in California and promotional materials to be distributed to plaintiffs and to plaintiffs’ counsel.”
There were allegations concerning advertising by the various Merrill Lynch defendants: “The promotional brochures authorized, consented to and/or ratified by one or more of the Merrill Lynch Defendants for distribution to tort victims such as plaintiffs, and to their counsel, were designed to induce them to enter into structured settlements with [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] based on the reputation and financial strength of Merrill Lynch. The Merrill Lynch [D]efendants also expressly authorized, consented to and/or ratified the use of the Merrill Lynch name, strength and reputation by [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] in marketing, advertising and sales activities. For example, one such brochure stated that the ‘respected name of Merrill Lynch inspires the confidence of plaintiffs and their counsel.’ The brochures also touted that plaintiffs and their counsel were more likely to agree to utilize [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] for structured settlements because it was ‘an affiliate of Merrill Lynch, a name they know and trust.’ [¶] In marketing its structured settlement services, [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] represented that Merrill Lynch & Co., Inc. maintained appropriate control over the operating activities of all of its subsidiaries and that it was subject to regular management review to assure its compliance with Merrill Lynch’s high ethical and operating standards.”
The purpose of the promotional materials was alleged to be: “The foregoing advertising and promotional materials authorized and distributed by the Merrill Lynch Defendants were designed to assure settling plaintiffs and their counsel that if they entered into structured settlements which called for plaintiffs to agree to have their settlement funds delivered to [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] and to agree to the assignment of the settling defendant’s settlement payment obligations to [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.], the safety of the financial instruments used to fund their long-term structured settlements, and the future payment of such settlements would be backed by the strength and reputation of the Merrill Lynch Defendants and the Merrill Lynch Defendants would be responsible for making the structured settlement payments throughout the term of the settlement. [¶] By engaging in the aforesaid advertising, marketing and business activities, and by making the aforesaid representations which were authorized, consented to and/or ratified by the Merrill Lynch Defendants, the [Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.] held [themselves] out to be and [were], the actual and ostensible agent[s] of the Merrill Lynch Defendants at all times.”
5. Allegations of joint action and account mismanagement
According to the first amended complaint, the settling defendants in the underlying lawsuits paid in settlement monies to Merrill Lynch IBAR, Inc. or Merrill Lynch Settlement Services, Inc. This was done in accordance with the settlement agreements. The first amended complaint alleged: “[The Treasury Investment Growth Receipts] purchased for the benefit of the plaintiffs were not placed into trust, as were the U.S. Treasury Bonds, based on the express and/or implied representations of the Settlement Company and/or the Merrill Lynch Defendants that because the [Treasury Investment Growth Receipts] were a proprietary investment product of one or more of the Merrill Lynch Defendants, they would be held inviolate by one or all of the Merrill Lynch Defendants and/or their appointed agents in accounts held and/or managed by one or more of the Merrill Lynch Defendants and/or their appointed agents, that the product was backed by the financial strength and reputation of the Merrill Lynch Defendants and that therefore, the integrity and safety of the [Treasury Investment Growth Receipts] and plaintiffs’ future structured settlement payments was guaranteed.”
On or about April 28, 1988, Merrill Lynch & Company, Inc., transferred 80 percent of its stock in Merrill Lynch Settlement Services, Inc. to Laugharn Associates, Inc. The principals in Laugharn Associates, Inc. were C. John Laugharn (Mr. Laugharn), and Hubert F. Laugharn. In about June, 1988, Merrill Lynch Settlement Services, Inc. changed its name to ML Settlement Services, Inc. On or about October 18, 1991, Merrill Lynch & Company, Inc. sold its remaining interests in ML Settlement Services, Inc. to Mr. Laugharn and Mr. Pardee. In early 1992, Mr. Laughren transferred his remaining interest in ML Settlement Services, Inc. to Mr. Pardee. Mr. Pardee change the name of ML Settlement Services, Inc. to Settlement Services Treasury Assignments, Inc. Mr. Pardee’s company, Settlement Services Treasury Assignments, Inc., owed all of the duties and obligations to plaintiffs that existed under the original settlement agreements and related documents. Mr. Pardee reviewed the pertinent settlement documents and knew, or should have known, the Treasury Investment Growth Receipts were being held for the sole purpose of ensuring payments due under the settlement documents. Mr. Pardee also knew, or should have known: a critical component of the settlement agreements was to enter into structured settlements; this would provide deferred in lieu of a lump-sum payments; and in order to preserve the right to receive deferred payments, it was necessary to preserve the Treasury Investment Growth Receipts. Finally, Mr. Pardee knew that plaintiffs were the sole to intended beneficiaries of the Treasury Investment Growth Receipts. Even after the sale of ML Settlement Services, Inc., the Merrill Lynch defendants or their agents retained custody of the Treasury Investment Growth Receipts.
At some point in time, Mr. Pardee sold the Treasury Investment Growth Receipts. The Treasury Investment Growth Receipts were being held by one of the Merrill Lynch defendants or their agents. Despite the fact the Treasury Investment Growth Receipts were to be held for purposes of paying the moneys due under the settlements, the Merrill Lynch defendants sold them. One or more of the Merrill Lynch defendants received a brokerage or commission fee for executing Mr. Pardee’s sell order. Plaintiffs were never advised that the Treasury Investment Growth Receipts had been sold. Nor was any court approval sought to permit liquidation of the Treasury Investment Growth Receipts even though Clive was still a minor. On November 15, 2000, Mr. Pardee’s firm, Settlement Services Treasury Assignments, Inc., defaulted on payments due to Ms. Fenter. In December, 2000, plaintiffs were advised that the United States Treasury Bonds held in trust for the benefit of the structured settlement payees had been lost. The letter did not disclose that the Treasury Investment Growth Receipts had been liquidated in 1993 for the benefit of Mr. Pardee and his company. Settlement Services Treasury Assignments, Inc. secured the protection of the bankruptcy courts on June 25, 2001.
6. Individual causes of action
a. first cause of action for intentional contract interference
Plaintiffs alleged in the first cause of action claims for intentional contract interference against: Merrill Lynch, Pierce, Fenner & Smith Incorporated; Merrill Lynch & Co., Inc.; Merrill Lynch Light Agency, Inc.; and Mr. Pardee. The first cause of action alleged the Merrill Lynch defendants interfered with the settlement agreement by failing to protect the Treasury Investment Growth Receipts. Also, it was alleged Mr. Pardee interfered with the settlement and assignment agreements by selling the Treasury Investment Growth Receipts which were intended to be for the benefit of plaintiffs.
b. second cause of action for negligent contract interference
The second cause of action named: Merrill Lynch, Pierce Fenner & Smith Inc.; Merrill Lynch & Co. Inc.; and Merrill Lynch Life Agency, Inc. The second cause of action alleged that the Merrill Lynch defendants negligently interfered with plaintiffs’ contract rights by allowing the Treasury Investment Growth Receipts to be liquidated.
c. third cause of action for contract breach
The third cause of action for contract breach was brought against: Merrill Lynch, Pierce, Fenner & Smith, Incorporated; Merrill Lynch & Co., Inc.; Merrill Lynch Life Agency, Inc.; and Mr. Pardee. Plaintiffs alleged that the Merrill Lynch defendants breached the assignment contracts by permitting the sale of the Treasury Investment Growth Receipts prior to maturity. Further, plaintiffs alleged they were third party beneficiaries of the Treasury Investment Growth Receipts and were damaged in the amount that remain unpaid. As the successor in interest to Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc., Mr. Pardee breached the assignment contracts by: selling the Treasury Investment Growth Receipts prior to maturity; using the sale proceeds for his own benefit; and by failing to make the settlement payments owed to the Hawkinses.
d. fourth and fifth causes of action for implied covenant breach
The fourth and fifth causes of action realleged all of the contract breach and negligent interference claims. In addition, the fourth and fifth causes of action alleged that the Merrill Lynch defendants had breached the implied covenant of good faith and fair dealing by allowing the Treasury Investment Growth Receipts to be liquidated. As a result, plaintiffs sought tort and punitive damages.
e. sixth and seventh causes of action for fiduciary duty breach.
The sixth cause of action was brought against all the Merrill Lynch defendants. The sixth cause of action alleged that: a confidential relationship existed between plaintiffs and the Merrill Lynch defendants; plaintiffs had reposed trust and confidence in the honesty, financial strength, reputation, integrity, and fidelity of the Merrill Lynch defendants; and the Merrill Lynch defendants took receipt of the settlement funds and agreed to make all the payments due thereunder. Eventually, the Merrill Lynch defendants breached their fiduciary duties by allowing Mr. Pardee access to the proceeds from the sales of the Treasury Investment Growth Receipts. The seventh cause of action for fiduciary duty breach was alleged against Mr. Pardee. According to the seventh cause of action, Mr. Pardee breached his fiduciary duties owed to plaintiffs by: selling the Treasury Investment Growth Receipts and retaining the proceeds for himself; concealing the sale from plaintiffs; failing to pay the Hawkinses of their settlement funds; and depriving Ms. Fenter of her future settlement payments.
f. eighth cause of action for constructive fraud
The eighth cause of action asserted all defendants had the fiduciary obligation to advise plaintiffs that: the Treasury Investment Growth Receipts were possibly not qualified funding assets under governing tax law; the Treasury Investment Growth Receipts had been purchased and were being held in the name of Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.; and the Treasury Investment Growth Receipts had been transferred to Mr. Pardee and later liquidated. According to the eighth cause of action, defendants concealed the foregoing events from plaintiffs. Further, it was alleged the Merrill Lynch defendants engaged in the foregoing misconduct in order to earn fees and commissions.
g. ninth cause of action for fraud
Plaintiffs realleged the foregoing facts in their fraud cause of action which was asserted against all defendants. The true facts were: the Merrill Lynch defendants knew that the only assets from which tax-free interest income could be generated under then governing tax laws were United States Treasury Bonds and other annuities; the Merrill Lynch defendants did not intend to hold the Treasury Investment Growth Receipts for plaintiffs’ benefit; the Treasury Investment Growth Receipts were held in the name of Merrill Lynch IBAR, Inc. and Merrill Lynch Settlement Services, Inc.; because the Treasury Investment Growth Receipts were negotiable instruments, they should have been placed in trust; and the Merrill Lynch defendants did not intend to comply with the payment obligations of Merrill Lynch IBAR, Inc., and Merrill Lynch Settlement Services, Inc. to plaintiffs. According to the first amended complaint: the foregoing misrepresentations were knowingly made by the Merrill Lynch defendants; plaintiffs detrimentally relied on these misrepresentations; had plaintiffs known the true facts, they would not have relied on the misrepresentations; and plaintiffs were damaged as a result. Finally, Mr. Pardee concealed the fact he had acquired control of the Treasury Investment Growth Receipts and he ordered they be sold for his own benefit.
h. tenth cause of action for conversion
The tenth cause of action asserted a conversion claim against all defendants. According to the tenth cause of action, “[The Merrill Lynch defendants] wrongfully caused the [Treasury Investment Growth Receipts] purchased with plaintiffs’ settlement funds to be purchased and held in the name of [Merrill Lynch IBAR, Inc., and Merrill Lynch Settlement Services, Inc.], wrongfully transferred control of the [Treasury Investment Growth Receipts] to [Mr.] Pardee and . . . permitted [Mr.] Pardee to obtain and use for his own benefit the proceeds from the [Treasury Investment Growth Receipts].” Mr. Pardee was alleged to have wrongfully converted the Treasury Investment Growth Receipts for his own benefit by selling them in 1993.
i. eleventh cause of action for negligence.
The eleventh cause of action for negligence was asserted against all defendants. The eleventh cause of action alleged “The Merrill Lynch Defendants and [Mr.] Pardee owed plaintiffs duties of reasonable care in performance of their duties and obligations related to the structured settlements, including but not limited to, properly structuring the settlements to conform with existing tax-law in order to ensure that plaintiffs would receive all tax advantages of such structured settlements and preserving and protecting the [Treasury Investment Growth Receipts] purchased with plaintiffs’ settlement funds. This duty of reasonable care exists because the [Treasury Investment Growth Receipts] were purchased with plaintiffs’ settlement funds and were intended solely to be used to fund future settlement payments owed to plaintiffs, who were persons who would be [foreseeably] endangered by the breach of the duty of reasonable care if such future payments were not made.” The eleventh cause of action further alleged: “[D]efendants breached their duty of due care owed to plaintiffs by using [Treasury Investment Growth Receipts], which were possibly not qualified funding assets, to fund future settlement payments, by failing to place the [Treasury Investment Growth Receipts] in trust, by selling the [Treasury Investment Growth Receipts] and by permitting the sales proceeds to be used for purposes other than to pay plaintiffs their structured settlement payments and by failing to disclose such facts to plaintiffs.”
j. twelfth cause of action for unjust enrichment.
The twelfth cause of action alleged that the Merrill Lynch defendants were unjustly enriched because they acquired the settlement funds used to purchase the Treasury Investment Growth Receipts and received sales commissions and brokerage fees in connection with the transactions. Also, Mr. Pardee acquired the full value of Treasury Investment Growth Receipts at the time of their sale in 1993. Plaintiffs allege that defendants would be unjustly enriched. As result, plaintiffs requested that a constructive trust be imposed on the monies and benefits wrongly secured by defendants.
k. judicially noticed materials
The trial court granted defendants’ judicial notice motion. The trial court judicially noticed the Hawkins settlement agreement with the airline and the manufacturer. Pursuant to that agreement, the airline and the manufacturer were released from all liability for the accident. After the payment of various sums, $1.39 million were to be used to purchase Treasury Investment Growth Receipts. The Treasury Investment Growth Receipts were to be used in part to fund monthly payments to Ms. Hawkins. On November 15, 2002, Ms. Hawkins was to receive a lump-sum payment of $2,466,232.50, which was to be funded exclusively from the Treasury Investment Growth Receipts. Further, Clive was to receive a lump sum payment of $1,231,267.50 on November 15, 2002. The Treasury Investment Growth Receipts were to be assigned to Merrill Lynch IBAR, Inc. and were to serve “as a medium for payment” and “assure the payment of” the monies due under the settlement agreement including the November 15, 2002 lump sums. Once the assignment to Merrill Lynch IBAR, Inc. was executed, the settling defendants, the airline in the manufacturer, were released from all liability. Plaintiffs, Ms. Hawkins and Clive, were to have no ownership interest in the Treasury Investment Growth Receipts; rather, their rights were merely those of creditors.
Further, the settlement agreement contained an express statement of liability on the part of Merrill Lynch IBAR, Inc. until all payments were made: “Notwithstanding any other provision of this Settlement Agreement, Merrill Lynch IBAR, Inc. following an assignment pursuant to Paragraph 2 hereof, shall at all times remain directly responsible for the payment of all sums and obligations contained in the Settlement Agreement until such time as the terms of the Settlement Agreement are fully satisfied.”
Accompanying the settlement agreement was a separate Assignment and Assumption Agreement. The assignment agreement was between the airline and the manufacturer, on one hand, and Merrill Lynch, IBAR, Inc., and Ms. Hawkins on the other. Under the terms of the assignment agreement, Merrill Lynch IBAR, Inc., assumed all obligations to make the November 15, 2002 lump sum payments to Ms. Hawkins and Clive. As noted, these payments were funded by the Treasury Investment Growth Receipts. Additionally, the assignment agreement provided that Merrill Lynch IBAR, Inc. would fund the payments in part with Treasury Investment Growth Receipts. Ms. Hawkins, on behalf of herself and her son Clive, approved of the assignment. Finally, the assignment stated in part, “This Agreement . . . shall be binding upon and inure to the benefit of the parties hereto, jointly and severally, the . . . successors . . . and assigns of each.”
Additionally, the trial court judicially noticed the settlement agreement involving Ms. Fenter. That settlement agreement likewise required part of the settlement be paid with funds derived from the purchase of Treasury Investment Growth Receipts by Merrill Lynch IBAR, Inc. As in the case of the Hawkins’s settlement, Merrill Lynch IBAR, Inc. was responsible for the payments of monies due under the agreement: “Notwithstanding any other provision of this Settlement Agreement, Merrill Lynch IBAR, Inc., following an assignment, pursuant to Paragraph 2 hereof, shall at all times remain directly responsible for the payment of all sums and obligations contained in the Settlement Agreement until such time as the terms of the Settlement Agreement are fully satisfied.”
Also, the trial court judicially noticed the assignment agreement entered into between the county, Merrill Lynch IBAR, Inc., and Ms. Fenter’s guardian ad litem. Under the terms of the assignment agreement: all of the county’s obligations were assigned to Merrill Lynch IBAR, Inc.; the assignment contemplated the purchase by Merrill Lynch IBAR, Inc. of Treasury Investment Growth Receipts; and Ms. Fenter’s guardian ad litem approved of the assignment. As in the case of the agreement with the Hawkinses, the agreement was binding on the successors of the parties: “This Agreement contains the entire Agreement between the parties with regard to the matter set forth in it and shall be binding upon and inure to the benefit of the parties hereto, jointly and severally, and the . . . successors . . . and assigns of each.”
B. The Demurrer Rulings
The Merrill Lynch defendants demurred to and moved to strike certain portions of the first amended complaint. The Merrill Lynch defendants demurred to the first amended complaint on the ground they had not engaged in any wrongful conduct. The Merrill Lynch defendants argued they were not parties to any contract relating to any obligation to make payments to plaintiffs. The Merrill Lynch defendants further argued that they did not “play any role in the actions” that led to the breach of the payment obligations over a decade after they sold their “stock in the structured settlement company.” Mr. Pardee also demurred and moved to strike certain portions of the to the first amended complaint. Mr. Pardee also joined in parts of the Merrill Lynch defendants’ demurrer.
The trial court sustained without leave to amend the demurrers to the claims for: negligent interference with a contract; breach of the good faith and fair dealing implied covenant; fiduciary duty breach; constructive fraud; conversion; negligence; and unjust enrichment. The trial court sustained with leave to amend the demurrer to the fraud claim. The trial court overruled the demurrers to the claims for intentional interference with contract and breach of contract. The trial court granted defendants’ motions to strike plaintiffs’ conspiracy allegations and an attorney fees prayer.
C. Standard Of Review
In reviewing an order after a demurrer is sustained without leave to amend, all well-pleaded factual allegations must be assumed as true. (Naegele v. R. J. Reynolds Tobacco Co. (2002) 28 Cal.4th 856, 864-865; Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 946.) The Supreme Court has defined our task as follows, “‘Our only task in reviewing a ruling on a demurrer is to determine whether the complaint states a cause of action.’” (People ex rel. Lungren v. Superior Court (1996) 14 Cal.4th 294, 300; Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125.) We assume the truth of allegations in the first amended complaint which have been properly pleaded and give them a reasonable interpretation by reading it as a whole and with all its parts in their context. (Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 558; People ex rel. Lungren v. Superior Court, supra, 14 Cal.4th at p. 300.) The Supreme Court has held: “On appeal from a judgment of dismissal entered after a demurrer has been sustained without leave to amend, unless failure to grant leave to amend was an abuse of discretion, the appellate court must affirm the judgment if it is correct on any theory. [Citations.] If there is a reasonable possibility that the defect in a complaint can be cured by amendment, it is an abuse of discretion to sustain a demurrer without leave to amend. [Citation.] The burden is on the plaintiff, however, to demonstrate the manner in which the complaint might be amended. [Citation.]” (Hendy v. Losse (1991) 54 Cal.3d 723, 742; Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.)
D. Negligent Interference With Contract
In the second cause of action in the first amended complaint, plaintiffs asserted a claim for negligent interference with contract. We agree with defendants that the trial court properly sustained the demurrer to this cause of action without leave to amend. In Fifield Manor v. Finston (1960) 54 Cal.2d 632, 636, the California Supreme Court refused to recognize the existence of a cause of action for negligent interference with a contract. No doubt, our Supreme Court subsequently recognized a cause of action for negligent interference with prospective economic advantage. (J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 804-805; see Integrated Healthcare Holdings, Inc. v. Fitzgibbons (2006) 140 Cal.App.4th 515, 531.) But Fifield Manor has not been overruled. (See LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 349; compare Woods v. Fox Broadcasting Sub., Inc. (2005) 129 Cal.App.4th 344, 350 [stating negligent interference with contract claim exists without citing or discussing Fifield Manor]; SCEcorp. v. Superior Court (1992) 3 Cal.App.4th 673, 677 [concluding negligent interference with contract claim exists without reference to Fifield Manor].) Fifield Manor controls the disposition of this issue and, as such, the trial court properly sustained the demurrer to this cause of action without leave to amend.
E. Breach Of The Good Faith And Fair Dealing Implied Covenant
The first amended complaint alleged that plaintiffs were intended beneficiaries of a contract between Merrill Lynch IBAR, Inc. and one or more named Merrill Lynch entities. According to plaintiffs, they were obligated to purchase and hold the Treasury Investment Growth Receipts for 20 years. In the fourth cause of action, both the Merrill Lynch defendants and Mr. Pardee were alleged to have had an implied contractual obligation not to deprive plaintiffs of benefits of their settlement agreements or to render performance impossible. It was alleged that defendants breached the implied covenant of good faith and fair dealing by: failing to place Treasury Investment Growth Receipts in trust; prematurely liquidating the Treasury Investment Growth Receipts; allowing Mr. Pardee access to the proceeds from the sale; concealing the sale from plaintiffs; and failing to pay plaintiffs sums owed or depriving them of future payments. In the fifth cause of action, which is against the Merrill Lynch defendants, plaintiffs alleged they were injured by inadequate advice about and the consequences of using the Treasury Investment Growth Receipts as tax free funding vehicles. Plaintiffs further alleged that the Merrill Lynch defendants are liable for marketing the Treasury Investment Growth Receipts in order to fund the structured settlement agreements and then depriving plaintiffs of the funds and the tax advantages. Although plaintiffs did not label the fourth and fifth causes of action as claims for tortious breach of the implied covenant, they sought tort remedies. On appeal, plaintiffs assert it was error to sustain the demurrer to the “tortious of breach of contract” claim. Plaintiffs do not assert a contract breach claim was stated in the fourth and fifth causes of action. Defendants counter that California law does not recognize a tort for breach of the implied covenant.
The Supreme Court has explained: “‘Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.’ [Citation.] . . . . Because the covenant is a contract term, however, compensation for its breach has almost always been limited to contract rather than tort remedies. As to the scope of the covenant, ‘[the] precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes.’ [Citation.] Initially, the concept of a duty of good faith developed in contract law as ‘a kind of “safety valve” to which judges may turn to fill gaps and qualify or limit rights and duties otherwise arising under rules of law and specific contract language.’ [Citation.] As a contract concept, breach of the duty led to imposition of contract damages determined by the nature of the breach and standard contract principles.” (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683-684; accord Jonathan Neil & Associates Inc. v. Jones (2004) 33 Cal.4th 917, 937.) In Freeman v. Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 102, the California Supreme Court in overruling Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 767-774 held that as a general rule tort recovery is not allowed for contract breach outside the insurance context. (Accord Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515.) In Erlich v. Menezes (1999) 21 Cal.4th 543, 551-552, our Supreme Court explained that tort damages have only been permitted in contract cases where: a breach of duty directly causes physical injury; there is a breach of the implied good faith and fair dealing covenant in insurance contracts; an employee sues for wrongful discharge in violation of fundamental public policy; or where the contract was fraudulently induced. Erlich further explained, “[T]he duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.” (Id. at p. 552.) Erlich explained: “Generally, outside the insurance context, ‘a tortious breach of contract . . . may be found when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion or; (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.’ [Citation.]” (Id. at pp. 553-554.)
Here, plaintiffs did not label the claims as one for tortious breach of the implied covenant. However, they sought tort remedies for breach of the implied covenant which is not available outside of the insurance context. The label of a cause of action does not control; rather the substance of the claim and the rights at issue determine what a plaintiff is seeking. (Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 845; Paularena v. Superior Court (1965) 231 Cal.App.2d 906, 911-912.) Plaintiffs do not assert in their briefs that cause of actions exist because of the incorporation by reference of other facts which establish the existence of third party beneficiary rights. Further, any contention that valid causes of action exist because of the incorporation by reference of other contract based claims has been waived. (Tiernan v. Trustees of Cal. State University & Colleges (1982) 33 Cal.3d 211, 216, fn. 4; Johnston v. Board of Supervisors (1947) 31 Cal.2d 66, 70, disapproved on another point in Bailey v. County of Los Angeles (1956) 46 Cal.2d 132, 139.) As noted, plaintiffs have not alleged sufficient facts to permit recovery on a tortious contract breach theory. The order sustaining the demurrers to the fourth and fifth causes of action may therefore not be reversed.
F. Fiduciary Duties Breach
The trial court sustained demurrers to alleged fiduciary breach claims against the Merrill Lynch defendants (sixth) and Mr. Pardee (seventh). A fiduciary breach cause of action contains the following elements: the existence of a fiduciary duty; the breach of that duty; and damages legally caused by that breach. (Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086; accord Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1405.)
As we previously noted plaintiffs’ claims against the Merrill Lynch defendants are predicated in part on the conduct of Merrill Lynch IBAR, Inc. under agency theories. However, plaintiffs also sought recovery against one or more of the Merrill Lynch defendants for the marketing and sale of its own proprietary investment product, the Treasury Investment Growth Receipts, with the settlement funds provided by the county, airline, and manufacturer in the underlying litigation. The sixth cause of action against the Merrill Lynch defendants sought relief on a fiduciary breach theory based on the following: plaintiffs placed trust and confidence in the Merrill Lynch defendants; this confidence was based in part on the name and reputation of the Merrill Lynch defendants; the Merrill Lynch defendants received settlement funds paid pursuant to the settlement agreements in the underlying litigation; the Merrill Lynch defendants had knowledge of the settlement and assignment agreements and agreed to make payments as required by them; the Merrill Lynch defendants had control of and held the Treasury Investment Growth Receipts which were purchased with plaintiffs’ settlement funds and intended to fund in part the structured settlements; the Merrill Lynch defendants marketed and sold their proprietary product which was to be held by them in lieu of placing it in a trust; and the Merrill Lynch defendants represented the Treasury Investment Growth Receipts were qualified funding assets under governing tax law which would be safe and held exclusively for plaintiffs’ benefit. The sixth cause of action further alleged: the Merrill Lynch defendants sold the Treasury Investment Growth Receipts prior to maturity; the Merrill Lynch defendants gave Mr. Pardee access to the proceeds of the sale; plaintiffs were not notified of the sale or transfer of the Treasury Investment Growth Receipts to Mr. Pardee even though they had been purchased with their settlement funds; the Merrill Lynch defendants failed to disclose the sale or transfer of their proprietary investment product or to place the Treasury Investment Growth Receipts in trust; and they were damaged by the loss of the assets as well as the liquidation of the Treasury Investment Growth Receipts prior to maturity. Plaintiffs asserted that the Merrill Lynch defendants were guilty of oppression, fraud, and malice and engaged in conduct intended to cause injury to plaintiffs. These allegations were sufficient to state a claim as to one or more the Merrill Lynch defendants.
In the seventh cause of action against Mr. Pardee, plaintiffs alleged a confidential relationship existed because: Mr. Pardee assumed the payment obligations owed to them; he took control of the Treasury Investment Growth Receipts which had been purchased with their settlement funds; the Treasury Investment Growth Receipts were intended to benefit the structured settlements; and they had no control over and were not provided any information about the sale and transfer of possession of the funds to Mr. Pardee for his own benefit. Plaintiffs further alleged: Mr. Pardee failed to disclose and concealed the facts of the transfer and sale of the Treasury Investment Growth Receipts to him; and Mr. Pardee allowed the Treasury Investment Growth Receipts which were purchased with their funds and earmarked for their structured settlements to be sold, transferred, and lost to plaintiffs’ detriment. The allegations were sufficient to withstand a demurrer which should have been overruled. (Richelle L. v. Roman Catholic Archbishop (2003) 106 Cal.App.4th 257, 271; Lynch v. Cruttenden & Co. (1993) 18 Cal.App.4th 802, 809.)
G. Constructive Fraud
The eighth cause of action alleged that defendants were liable for constructive fraud. In Estate of Gump (1991) 1 Cal.App.4th 582, 601, constructive fraud was explained as follows: “Civil Code section 1573 defines constructive fraud. ‘Constructive fraud consists: [¶] 1. In any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; or [¶] 2. In any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud.’ ‘Constructive fraud arises on a breach of duty by one in a confidential or fiduciary relationship to another which induces justifiable reliance by the latter to his prejudice. [Citation.]’ [Citations.] ‘“In its generic sense, constructive fraud comprises all acts, omissions and concealments involving a breach of legal or equitable duty, trust, or confidence, and resulting in damages to another. [Citations.] Constructive fraud exists in cases in which conduct, although not actually fraudulent, ought to be so treated-that is, in which such conduct is a constructive or quasi fraud, having all the actual consequences and all the legal effects of actual fraud.” [Citation.] Constructive fraud usually arises from a breach of duty where a relation of trust and confidence exists. [Citation.]’ [Citation.]” (Original italics; see Jones v. Wagner (2001) 90 Cal.App.4th 466, 471.)
The first amended complaint alleged: plaintiffs were intended beneficiaries of a contract between Merrill Lynch IBAR, Inc. and one or more named Merrill Lynch defendants; the contract required Merrill Lynch IBAR, Inc. to purchase and hold the Treasury Investment Growth Receipts for 20 years; Merrill Lynch IBAR, Inc. used funds received from the settling plaintiffs to purchase Treasury Investment Growth Receipts which had been marketed by one or more of the Merrill Lynch defendants as an investment to fund future payment obligations owed under the structured settlement agreements; the Merrill Lynch defendants sold the rights to the liquidated Treasury Investment Growth Receipts to Mr. Pardee; and Mr. Pardee took control of the assets obtained from the liquidation and used them for his own benefit. Plaintiffs sufficiently alleged: a fiduciary relationship premised on an agency or trust relationship; breach of the duty by failing to disclose material facts within defendants’ knowledge; and prejudice to plaintiffs from the premature liquidation and loss of the assets from the Treasury Investment Growth Receipts which were purchased with the settlement proceeds for the express purpose of funding the structured settlements including the lump sum payments. The demurrer to this cause of action should have been overruled.
H. Conversion
The following analysis concerning the tenth cause of action does not constitute the judgment of this court. Associate Justice Sandy R. Kriegler has filed a concurring and dissenting opinion. In the dissenting portion of his opinion, Justice Kriegler has concluded that the demurrer to the tenth cause of action in the first amended complaint for conversion was correctly sustained without leave to amend. Coupled with the dissenting opinion which would affirm the judgment in its entirety, there are two justices who would enter judgment on plaintiffs’ conversion claims. Thus, the following views in the lead opinion do not constitute the judgment of the court. The disposition portion of this lead opinion reflects that the order sustaining the demurrer to the tenth cause of action in the first amended complaint for conversion is affirmed.
The applicable principles when an agent is alleged to have converted funds after the principal has relinquished possession for an express purpose was described in National Bank of New Zealand, Ltd. v. Finn (1927) 81 Cal.App. 317, 345 as follows, “‘An agent may be guilty of the conversion of chattels intrusted to him by his principal so as to render him liable in trover to the principal, or the action may be maintained by the principal against third persons who wrongfully acquire the property from the agent.’” The National Bank of New Zealand, Ltd. decision further explained that a conversion right of action may be maintained even where the owner of a chattel has parted with its possession for a definite period of time if the bailee puts the property to a use different from that for which it was bailed. (Ibid.) The Court of Appeal held, “‘[W]here a bailee, during the term of the bailment, has put the chattel to a different use from that for which it was bailed, the owner thereupon becomes entitled to immediate possession . . . and may maintain trover for its conversion.’” (Ibid.)
The settlement agreements do not permit any other entity or person to sell, transfer, reinvest, or otherwise dispose of the Treasury Investment Growth Receipts at any time after their acquisition, much less in a manner inconsistent with the purpose for which they were purchased. The settlement agreements only give the county, the airline, or the manufacturer the right to determine to whom the payment obligation is to be assigned. The purpose of the Treasury Investment Growth Receipts was to provide a fund to make the lump sum payments to plaintiffs. The funds were to be held in such manner for 20 years so as to allow plaintiffs to avoid certain tax consequences.
This scenario is a bailment relationship. (See Software Design & Application, Ltd. v. Hoefer & Arnett, Inc. (1996) 49 Cal.App.4th 472, 485 [funds which are held in a brokerage account are in the nature of a bailment]; Band v. Wilson (1931) 118 Cal.App. 101, 103 [unauthorized delivery or use of bonds and stocks raised bailment issue]; Nichols v. Leach (1931) 114 Cal.App. 545, 550 [same].) Retired Presiding Associate Justice Vaino Spencer, has explained: “A bailment ‘is made by one giving to another with his consent, the possession of personal property to keep for the benefit of the former, or of a third party.’ (Civ. Code, §1814.)” (McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1490.) Another Court of Appeal has held: “‘In a broad sense a bailment is the delivery of a thing to another for some special object or purpose, on a contract, express or implied, to conform to the objects or purposes of the delivery which may be as various as the transactions of men. [Citation.] Ordinarily the identical thing bailed or the product of, or substitute for, that thing, together with all increments and gains, is to be returned or accounted for by the bailee when the use to which it is to be devoted is completed or performed or the bailment has otherwise expired. . . . [Citations.]” (Niiya v. Goto (1960) 181 Cal.App.2d 682, 687; see also People v. Cohen (1857) 8 Cal. 42, 43; Gebert v. Yank (1985) 172 Cal.App.3d 544, 550-551; Windeler v. Scheers Jewelers (1970) 8 Cal.App.3d 844, 851; H.S. Crocker Co. v. McFaddin (1957) 148 Cal.App.2d 639, 643.) Pursuant to Civil Code section 1822, “A depository must deliver the thing to the person for whose benefit it was deposited, on demand, whether the deposit was made for a specific time or not, unless he has a lien upon the thing deposited, or has been forbidden or prevented from doing so by the real owner thereof, or by the act of law, and has given the notice required by section 1825.” (See 14 pt. 2 Cal.Jur.3d (1999) Conversion, § 23, pp. 219-221.) Civil Code section 1825 states, “A depository must give prompt notice to the person for whose benefit the deposit was made, of any proceedings taken adversely to his interest in the thing deposited, which may tend to excuse [the bailee] from delivering the thing to him.” Civil Code section 1822 et seq. has been held applicable in bailment situations. (See Witkin, 13 Summary of Cal. Law (10th ed. 2005) “Personal Property,” § 166, pp. 178-180; Todd v. Dow (1993) 19 Cal.App.4th 253, 261; Branch v. Bekins Van & Storage Co. (1930) 106 Cal.App. 623, 632.) The failure to give plaintiffs the benefit of the personalty entrusted to Merrill Lynch, IBAR, Inc., subjects the contracting defendants to liability for damages for conversion, contract breach, and negligence. (See Byer v. Canadian Bank of Commerce (1937) 8 Cal.2d 297, 300-301 [conversion]; Edwards v. Jenkins (1932) 214 Cal. 713, 716 [contract breach and conversion]; Messerall v. Fulwider (1988) 199 Cal.App.3d 1324, 1329 [conversion]; Greenberg Bros., Inc. v. Ernest W. Hahn, Inc. (1966) 246 Cal.App.2d 529, 533-534 [contract breach and negligence].)
Here, it was alleged that defendants liquidated the Treasury Investment Growth Receipts prior to the 20-year period. In so doing, they were acting in manner inconsistent with plaintiffs’ right to have the payment obligations satisfied by the Treasury Investment Growth Receipts. The allegations of the first amended complaint established that defendants’ conduct in liquidating the Treasury Investment Growth Receipts and giving the funds to parties other than Merrill Lynch IBAR, Inc. gave rise to a conversion cause of action.
Furthermore, the first amended complaint sufficiently raised an issue as to whether Mr. Pardee’s conduct amounted to a conversion. Plaintiffs alleged that Mr. Pardee ordered the sale of the Treasury Investment Growth Receipts without the right to do so. The Court of Appeal has explained, “One who buys property in good faith from a party lacking title and the right to sell may be liable for conversion.” (State Farm Mut. Auto. Ins. Co. v. Department of Motor Vehicles (1997) 53 Cal.App.4th 1076, 1081; Messerall v. Fulwider, supra, 199 Cal.App.3d at p. 1329; Culp v. Signal Van & Storage (1956) 142 Cal.App.2d Supp. 859, 861-862.) Mr. Pardee is alleged to have assumed control over the Treasury Investment Growth Receipts and directed a sale and reinvestment without plaintiffs’ consent or knowledge. Moreover, it is further alleged that Mr. Pardee then wrongfully transferred to different parties the funds which were to be held for plaintiffs’ benefit until maturity.
In response to our request for additional briefing on issues related to the conversion claim, defendants argue that, as brokers, they are statutorily immune from liability for conversion under former Commercial Code section 8318 which was in effect when the Treasury Investment Growth Receipts were sold. Defendants argue that former Commercial Code section 8318 supplants the common law conversion claim as a matter of law. Former Commercial Code section 8318 provides that defendants are potentially subject to liability for conversion if they lacked good faith in transferring and selling the Treasury Investment Growth Receipts. Prior to January 1, 1997, Commercial Code section 8318 provided: “An agent of bailee who in good faith (including observance of reasonable commercial standards if he or she is in the business of buying, selling, or otherwise dealing with securities) has received certificated securities and sold, pledged, or delivered them or has sold or caused the transfer or pledge of uncertificated securities over which he or she had control according to the instructions of his or her principal, is not liable for conversion or for participation in the breach of fiduciary duty although the principal had no right so to deal with the securities.” (Stats. 1984, ch. 927, § 6, p. 3117; repealed by Stats.1996, ch. 497, § 8, p. 2904.)
Despite defendants’ contentions to the contrary, former Commercial Code section 8318 does not preclude liability as a matter of law for conversion. Rather, former Commercial Code section 8318 provided a qualified immunity from liability for conversion when the broker has acted in “good faith.” The determination of whether or not a broker acted in good faith under former Commercial Code section 8318 is factual. (Martinez v. Dempsey-Tegeler & Co., Inc. (1974) 37 Cal.App.3d 509, 515; see also Sun’n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 690 [defense of “good faith” is not properly raised as a demurrer ground]; Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 432 [defense of good faith is factual in nature and not properly resolved as a matter of law].) In this case, the issue of defendants’ liability for conversion was raised in the context of a demurrer to the first amended complaint. The first amended complaint alleged facts that, if true, established that defendants did not act good faith. In any event, the existence or lack of defendants’ good faith is a matter of an affirmative defense which is not properly resolved at the demurrer stage. Plaintiffs were not required to allege facts or anticipate defendants’ “good faith” defense in seeking to recover for the wrongful transfer of the financial asset. (See Stowe v. Fritzie Hotels, Inc. (1955) 44 Cal.2d 416, 422; Jaffe v. Stone (1941) 18 Cal.2d 146, 158-159; Bradley v. Hartford Acc. & Indemn. Co. (1973) 30 Cal.App.3d 818, 825, overruled on another point in Silberg v. Anderson (1990) 50 Cal.3d 205, 212.)
Transfer of a financial asset is no longer evaluated under a “good faith” standard. Rather, Commercial Code section 8115 provides: “A securities intermediary that has transferred a financial asset pursuant to an effective entitlement order, or a broker or other agent or bailee that has dealt with a financial asset at the direction of its customer or principal, is not liable to a person having an adverse claim to the financial asset, unless the securities intermediary, or broker or other agent or bailee did one or more of the following: [¶] (1) Took the action after it had been served with an injunction, restraining order, or other legal process enjoining it from doing so, issued by a court of competent jurisdiction, and had a reasonable opportunity to act on the injunction, restraining order, or other legal process. [¶] (2) Acted in collusion with the wrongdoer in violating the rights of the adverse claimant. [¶] (3) In the case of a security certificate that has been stolen, acted with notice of the adverse claim.” Even under the current statute, defendants are not absolutely immune from liability as a matter of law when a financial asset is wrongfully transferred. Liability may be established when one or more of the following circumstances exist: there is proof of an adverse claim subject to a court order; the defendants act in collusion with the wrongdoer; or a certificate is stolen and defendants acted with notice of the adverse claim. (Ibid.)
I. Negligence
Plaintiffs alleged that defendants’ negligently failed to hold the Treasury Investment Growth Receipts until maturity, liquidated them, which led to the loss of the assets. The allegations are sufficient to support a negligence claim without reference to any bailment theory. But as to the lead opinion, plaintiffs’ sufficiently alleged facts that would support a bailment relationship rendering the defendants liable for their tortious conduct. The rule was stated in Windeler v. Scheers Jewelers, supra, 8 Cal.App.3d at pages 850-851 as follows: “‘Where a bailment is for mutual benefit the bailee in the absence of a special contract is held to the exercise of ordinary care in relation to the subject-matter of the bailment and is responsible for loss or injury resulting from his failure to use ordinary care.’” (Accord Greenberg Bros., Inc. v. Ernest W. Hahn, Inc., supra, 246 Cal.App.2d at pp. 533-534.) The demurrer to the negligence cause of action should have been overruled.
J. Proceedings Upon Issuance Of The Remittitur
Upon issuance of the remittitur, the orders sustaining the demurrers to the causes of action of fiduciary duty breach (sixth and seventh), constructive fraud (eighth), conversion (tenth), and negligence (eleventh) are to be set aside. A new order is to be entered overruling the demurrers to those causes of action. The orders sustaining the demurrers to the causes of action for negligent contract interference (second), implied covenant breach (fourth and fifth), and unjust enrichment (twelfth) are to remain in full force and effect.
III. THE SUMMARY JUDGMENT MOTIONS
A. Second Amended Complaint
On January 18, 2005, plaintiffs filed a second amended complaint which contained claims for: intentional interference with contract (first); contract breach (second); and fraud (third). The second amended complaint contains similar allegations to the first amended complaint concerning: the history of the settlements of the underlying lawsuits against the county, the airline, and the manufacturer; the transactions involving the Merrill Lynch defendants which resulted in the Treasury Investment Growth Receipts ending up in Mr. Pardee’s possession; the liquidation of the Treasury Investment Growth Receipts; and agency and third party beneficiary theories.
In the first cause of action (intentional interference with contract), it is alleged that the Merrill Lynch defendants interfered with the settlement agreement by complying with Mr. Pardee’s orders to liquidate the Treasury Investment Growth Receipts. Further, plaintiffs alleged that the Merrill Lynch defendants interfered with the settlement agreements by failing to take steps to adequately safeguard the Treasury Investment Growth Receipts from liquidation such as placing them in trust or in specially numbered accounts. Mr. Pardee was alleged to have interfered with plaintiffs’ settlement agreements by selling the Treasury Investment Growth Receipts and using the proceeds for his own benefit.
In the second cause of action (contract breach), plaintiffs alleged that the Merrill Lynch defendants breached the assignment contracts by: permitting the sale of the Treasury Investment Growth Receipts prior to maturity; permitting the proceeds of the sale to be paid to persons other than plaintiffs; and failing to make the settlement payments to plaintiffs. Also, plaintiffs alleged they were the intended beneficiaries of the purchase of Treasury Investment Growth Receipts even though they were purchased by Merrill Lynch IBAR, Inc. or Merrill Lynch Settlement Services, Inc.
With respect the third cause of action (fraud), plaintiffs alleged: specified representatives of Merrill Lynch IBAR, Inc. represented that they were acting as the agents of the Merrill Lynch defendants in undertaking to structure, sign, fund, finalize, and administer the structured settlements; it was falsely represented to plaintiffs that the Treasury Investment Growth Receipts would assure the payment of the lump sums; it was also falsely represented that the income from the Treasury Investment Growth Receipts was tax-free; it was necessary that plaintiffs relinquish title to the Treasury Investment Growth Receipts to Merrill Lynch IBAR, Inc.; these representations were false; and the Merrill Lynch defendants ratified or consented to the alleged misrepresentations by the specified employees of Merrill Lynch IBAR, Inc.
The third cause of action also alleged that Merrill Lynch Insurance Group Services, Inc. assumed ownership and administration of the Hawkins structured settlement and the annuity purchased with the settlement funds in 1993. Until November 2002, Merrill Lynch Insurance Group Services, Inc. remitted payments to the Hawkins plaintiffs. In 1993, the Merrill Lynch defendants delivered, transferred, negotiated, traded, or sold the Treasury Investment Growth Receipts to Mr. Pardee without plaintiffs’ consent or knowledge. Plaintiffs alleged that the Merrill Lynch defendants deliberately concealed the transfer of the Treasury Investment Growth Receipts to Mr. Pardee. Further, plaintiffs alleged that in the Treasury Investment Growth Receipts were no longer being held for their benefit. The fraud cause of action alleged that, in November 2002, Merrill Lynch Life Agency Inc. (this is the entity which acquired IBAR, Inc. in 1982) caused the full amount of the settlement payments to be placed in the Hawkins’ Japanese bank accounts. Merrill Lynch Life Agency Inc. then filed suit against the Hawkinses in Japan for return of the funds. The parties settled the Japanese action by placing a portion of the funds in escrow in New York pending the outcome of this case.
The fourth cause of action for fraud was alleged only against Mr. Pardee and is based on allegations he directed the Merrill Lynch defendants in 1993 to deliver, transfer, or liquidate the Treasury Investment Growth Receipts for his own benefit and use. Mr. Pardee was alleged to have failed to advise plaintiffs of his intention to sell the Treasury Investment Growth Receipts. As will be noted, this is essentially a restatement of the constructive fraud claim in the first amended complaint.
B. Defendants Summary Judgment Motions
The Merrill Lynch defendants moved for summary judgment on the grounds that: they were not signatories to any of the settlement agreements and assignments; plaintiffs could not establish justifiable reliance; plaintiffs were not third party beneficiaries of the Treasury Investment Growth Receipts; the Merrill Lynch defendants had no knowledge of the contracts and therefore could not interfere with them; plaintiffs could not demonstrate causation; plaintiffs could not have relied on any misrepresentations in entering into the settlement and assignment contracts; and there was no basis for a claim for punitive damages. Mr. Pardee moved for summary judgment on the grounds that: he had no relationship with the company with whom the contract were entered into and could not interfere with them; he had no intent to interfere with plaintiffs’ rights; he was not a fiduciary of plaintiffs and owed them no duty of disclosure; and he caused no harm to plaintiffs.
C. Standard Of Review
In Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850-851, the Supreme Court described a party’s burdens on a summary judgment or adjudication motion as follows: “[F]rom commencement to conclusion, the party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law. That is because of the general principle that a party who seeks a court’s action in his favor bears the burden of persuasion thereon. [Citation.] There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof. . . . [¶] . . . [T]he party moving for summary judgment bears an initial burden of production to make a prima facie showing of the nonexistence of any triable issue of material fact; if he carries his burden of production, he causes a shift, and the opposing party is then subjected to a burden of production of his own to make a prima facie showing of the existence of a triable issue of material fact. . . . A prima facie showing is one that is sufficient to support the position of the party in question. [Citation.]” (Fns. omitted; see Kids’ Universe v. In2Labs (2002) 95 Cal.App.4th 870, 878.) We review the trial court’s decision to enter summary judgment de novo. (Johnson v. City of Loma Linda (2000) 24 Cal.4th 61, 65, 67-68; Sharon P. v. Arman, Ltd. (1999) 21 Cal.4th 1181, 1188, disapproved on another point in Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at p. 854, fn. 19.) The trial court’s stated reasons for granting summary judgment are not binding on us because we review its ruling, not its rationale. (Continental Ins. Co. v. Columbus Line, Inc. (2003) 107 Cal.App.4th 1190, 1196; Dictor v. David & Simon, Inc. (2003) 106 Cal.App.4th 238, 245.)
D. There Are Triable Issues Concerning All Of The Contract-Based Claims Alleged In The Second Amended Complaint Against The Merrill Lynch Defendants.
1. Controlling facts
The following are the controlling facts. The Schultzes founded IBAR, Inc. IBAR, Inc. engaged in the business of arranging and administering structured settlements funded by annuities or United States Treasury Bonds held in trust. The company’s purpose was to structure litigation settlements so as to avoid tax consequences and make future payments to the settling plaintiffs. One of the Schultzes testified that their company did not handle the money because they were not trustees nor did they want to invest the funds. His understanding of the structured settlement agreements were that there was a schedule of payouts which would mirror the coupons on the federal bonds. He testified that the purchase of the Treasury Investment Growth Receipts was a part of the structured settlement agreements. However, he never recommended to a litigant entering into a structured settlement plaintiff that money be held in a cash account because the funds can be taken. He testified there was never any intent under the structured settlement agreements to allow the proceeds to be invested other than in buying annuities or treasury bonds. The Schultzes promised all of their clients that the settlement funds could not be used to guarantee loans nor could they be liquidated.
Stanley Schultz testified that he was a vice-president of Merrill Lynch, IBAR, Inc. The son of one of the founders of IBAR, Inc., he testified that the primary purposes for entering into structured settlements were to avoid taxes and have the security of an income stream for the intended beneficiary. He did not know of any structured settlement agreement which provide that funding assets would be held in a cash account.
William B. Stannard, a Merrill Lynch Life Agency officer, testified that he did not believe that treasury bonds and notes deposited into settlement trusts could be used for any purpose other than to pay tort plaintiffs. Retired Judge Paul Egly testified at his deposition that he joined IBAR, Inc. in 1981. The purpose of the structured settlements was to prevent a taxable transaction from occurring. The money was being held for one purpose and that was for plaintiffs’ benefit.
In 1979, the Ms. Hawkins filed suit against the airline and the manufacturer for wrongful death. On March 31, 1982, Merrill Lynch Life Agency Inc. acquired the stock of IBAR, Inc. and renamed the company Merrill Lynch IBAR, Inc.; the Schultzes remained as employees.
On July 30, 1982, a marketing letter was sent by Merrill Lynch IBAR, Inc. to a Minneapolis attorney. The letter described the relationship between Merrill Lynch IBAR, Inc. and Merrill Lynch Pierce, Fenner & Smith as follows: “Merrill Lynch IBAR, Inc. became a Merrill Lynch subsidiary on April 1, 1982 when all of its stock was purchased by Merrill Lynch Life Agency, Inc. Merrill Lynch Life Agency is a wholly owned subsidiary of Merrill Lynch Pierce, Fenner and Smith which in turn is a wholly owned subsidiary of Merrill Lynch & Co., Inc. [¶] Merrill Lynch & Co., Inc. operates with a management leadership, control and reporting system. This system maintains appropriate control over the operating activities of all of its subsidiaries. Merrill Lynch IBAR, Inc. is part of this system and subject to regular management review to assure its compliance to Merrill Lynch’s high ethical and operating standards.” (Italics added.) On August 20, 1982, Merrill Lynch, Pierce, Fenner & Smith, Inc. offered Treasury Investment Growth Receipts for sale to investors. The Treasury Investment Growth Receipts were a Merrill Lynch created product which on their face stated they evidenced ownership of future interest and principal payments on United States Treasury Bonds. The August 20, 1982 preliminary offering circular of Merrill Lynch Pierce Fenner & Smith, Inc. stated that the Treasury Investment Growth Receipts were not redeemable prior to maturity.
On August 6, 1982, Merrill Lynch & Co. Inc. issued a press release which stated: “Merrill Lynch & Co., Inc. announced today that it has acquired the stock of IBAR, Inc. . . . The acquisition, was made through a Merrill Lynch subsidiary, Merrill Lynch Life Agency Inc. [¶] . . . [¶] Daniel P. Tully, president of the Merrill Lynch Individual Services Group, said, ‘We have been acquainted with IBAR and the services it offers for a number of years and have helped provide securities services –primarily annuities and government securities—in connection with some of the settlements IBAR has arranged. We therefore look forward to the expansion of their services to a wider market as more potential customers become aware of the advantages it can offer.’”
In 1982, prior to the settlement of the lawsuit against the airline and the manufacturer, Ms. Hawkins was visited by two men, who used the name “Merrill Lynch” in discussing the structured settlement. Ms. Hawkins was told that the United States government obligation would be held for 20 years by Merrill Lynch. Ms. Hawkins understood that the settlement company was a part of Merrill Lynch because her attorney and the two representatives that worked for the settlement company told her so. Ms. Hawkins believed that Merrill Lynch would hold the Treasury Investment Growth Receipts. In September 1982, Ms. Hawkins entered into a written structured settlement of wrongful death claims that had been brought against American Airlines and McDonnell Douglas Corporation. The structured settlement company was known as Merrill Lynch IBAR, Inc. To qualify for structured settlement, the airline and the manufacturer delivered the settlement funds to a third party—Merrill Lynch IBAR, Inc.—to avoid tax liability for plaintiffs. Merrill Lynch IBAR, Inc. obtained an assignment from the airline and the manufacturer. The assignment specifically called for purchase of the Treasury Investment Growth Receipts which was the new proprietary product of Merrill Lynch Pierce Fenner & Smith, Inc.
Paragraph 2 of the Hawkins’ settlement agreement stated the airline and the manufacturer would “assign their duties and obligations” to make payments to the Hawkinses to Merrill Lynch IBAR, Inc. Paragraph 2 continues: “[T]hat such assignment, if made, shall be accepted by Takako Hawkins, individually and as mother and next friend of Clive Hawkins, an infant, without right of rejection and in full discharge and release of the duties and obligations of American Airlines, Inc. and McDonnell Douglas Corporation. In the event American Airlines, Inc. and McDonnell Douglas Corporation assign the duties and obligations as provided herein, it is understood and agreed by and between the parties that American Airlines, Inc. and McDonnell Douglas Corporation may direct Merrill Lynch IBAR, Inc. or some other person or entity to mail said payments directly to plaintiffs . . . .” (Italics added.) As can be noted, paragraph 2 only gives the airline and the manufacturer the authority to designate a payor other than the Merrill Lynch IBAR, Inc. Paragraph 3 of the Hawkins’ structured settlement provided that the airline and the manufacturer agreed to make payments totaling $1.75 million to them. $1.39 million was to be used for the purchase of annuities and Treasury Investment Growth Receipts which were to provide payments of $3,523.98 monthly from November 1, 1982, until October 1, 2002 with 10 per cent increases per annum to Ms. Hawkins. The balance of $2,466.232.50 was to be paid to on November 15, 2002 to Ms. Hawkins. Clive was to receive monthly payments of $1,759.35 from November 1, 1982, until October 1, 2002. The sum of $1,231,267.50 was to be paid to Clive Hawkins on November 15, 2002.
Paragraph 4 states: “To assure the ready availability to Merrill Lynch IBAR, Inc., should an assignment be made, of funds payable under Paragraph 3 (b), (c) and (d) of this Agreement, to serve as a medium for payment of said funds, and to assure the payment of such funds, Merrill Lynch IBAR, Inc., following an assignment pursuant to Paragraph 2 hereof, will, upon and concurrent with the execution of this Settlement Agreement purchase annuities and to aid in the promise to pay the sums described in Paragraph 3(c)(i) and (ii) and 3(d)(i) and (ii), purchase Treasury Investment Growth Receipts maturing on November 15, 2002 in the total amount of $3,697,500.00. Said receipts shall evidence ownership of future interests and principal payments of United States Treasury Bonds. The entire income of the annuities and of the Treasury Investment Growth Receipts will be included in the income of Merrill Lynch IBAR, Inc., following an assignment pursuant to Paragraph 2 hereof. The plaintiffs shall have no legal or equitable interest, vested or contingent, in the annuities or the Treasury Investment Growth Receipts and their rights against Merrill Lynch IBAR, Inc., following an assignment pursuant to Paragraph 2 hereof shall be solely those of a creditor. [¶] Each payment made by the issuer of the annuities or by Merrill Lynch IBAR, Inc. to Takako Hawkins, individually or to Clive Hawkins, individually should no guardian be required, shall discharge Merrill Lynch IBAR, Inc. following an assignment pursuant to Paragraph 2 hereof, from liability under this Settlement Agreement to the extent of such payment. Notwithstanding any other provision of this Settlement Agreement, Merrill Lynch IBAR, Inc. following an assignment pursuant to Paragraph 2 hereof, shall at all times remain directly responsible for the payment of all sums and obligations contained in the Settlement Agreement until such time as the terms of the Settlement Agreement are fully satisfied. If an assignment is made pursuant to Paragraph 2 hereof, American Airlines, Inc. and McDonnell Douglas Corporation shall be released from all such future obligations and the assignee shall at all times remain directly and solely responsible for the payment of all such sums and obligations. Notwithstanding any other provision of this Settlement Agreement, the defendants’ liability to plaintiffs for any and all sums will be extinguished by defendants’ assignment to an assignee, in any form, of their obligation to pay, or by defendants’ purchase of an annuity. The assignment to such assignee or purchase of any annuity shall release defendants from any and all further liability, including any default in any form by the assignee or by the entity from whom any annuity is purchased.” (Italics added.)
The parties to the Assignment and Assumption Agreement were the Hawkinses, Merrill Lynch IBAR, Inc., the airline, and the manufacturer. Paragraph C of the recitals stated: “Pursuant to the Settlement Agreement, American Airlines, Inc. and McDonnell Douglas Corporation may assign all of their duties and obligations with respect to said payments to Merrill Lynch IBAR, Inc. Further, to assure the ready availability to Merrill Lynch IBAR, Inc. of funds payable under the Settlement Agreement, to serve as a medium for payment of said funds, and to assure the payment of such funds, Merrill Lynch, IBAR, Inc., in the event an assignment is made pursuant to Paragraph 2 of the Settlement Agreement, may purchase annuities and Treasury Investment Growth Receipts (said receipts evidence ownership of future interests and principal payments of United States Treasury Bonds).”
Paragraph 1 of the Assignment and Assumption Agreement stated: “Assignment and Assumption of Obligations. Subject to the terms and conditions of this Agreement and pursuant to the terms of the Settlement Agreement, American Airlines, Inc. and McDonnell Douglas Corporation hereby assign to Merrill Lynch IBAR, Inc., and Merrill Lynch IBAR, Inc. hereby assumes, the obligations of American Airlines, Inc. and McDonnell Douglas Corporation to make the payments to the Plaintiffs commencing forthwith and more particularly described in Paragraph 3(b), (c) and (d) of the Settlement Agreement. Merrill Lynch IBAR, Inc. shall not assume and shall have no liability whatsoever with respect to any obligation that is not set forth in Paragraph 3(b), (c) and (d) of the Settlement Agreement.” (Original underscore.)
Paragraphs 2 and 3 of the Assignment and Assumption Agreement provided that the airline and the manufacturer were to pay Merrill Lynch IBAR, Inc. $1.4 million to purchase annuities and Treasury Investment Growth Receipts. Paragraph 3 of the Assignment and Assumption Agreement states, “[I]t is understood and agreed that a fee will be paid to IBAR, Inc. from the funds paid to Merrill Lynch IBAR, Inc. Both Merrill Lynch IBAR, Inc. and Plaintiffs shall be bound by the provision of Paragraph 4 of the Settlement Agreement as if that Paragraph refers to Merrill Lynch IBAR, Inc. rather than to [the airline and the manufacturer].” As noted, while discussing the partial demurrer dismissal, the assignment agreement was binding on the successors of Merrill Lynch IBAR, Inc.
Kyle Hording testified that she worked as an assistant to Judge Egly while he was employed at IBAR, Inc. and Merrill Lynch IBAR, Inc. On September 10, 1982 she wrote a letter to David Zoffer of U.S. Aviation Underwriters confirming that $370,040 of the Hawkins’ settlement funds would be used to purchase Treasury Investment Growth Receipts. According to Ms. Hording, “[T]hat purchase will in fact yield to Ms. Hawkins the sum of $2,466,232.50 and to Clive Hawkins the sum of $1,231,267.50 on November 15. 2002.” Ms. Hording further explained: “Merrill Lynch IBAR, Inc. will be holder of the Treasury Investment Growth Receipts and the payor of the sums generated by those receipts.”
In September 1982, Ms. Fenter’s lawsuit with the county settled. It has similar provisions to those in the Hawkins agreement but also includes a trust and the successor liability provision. Ms. Fenter’s settlement funds were used in part to purchase Treasury Investment Growth Receipts. The assignment states the Treasury Investment Growth Receipts “evidence ownership of future interests” and were to generate funds for payments beginning potentially on November 15, 2005.
In February 1983, after the settlements, Merrill Lynch IBAR, Inc., publicly distributed a marketing brochure which stated: “We also function as a valuable addition to the broad spectrum of products and services offered by Merrill Lynch & Co., Inc., one of the largest, strongest and most diversified financial services firms in the world.” The brochure contained the following bold-faced statement: “However, Merrill Lynch IBAR offers a unique and valuable structured claims settlement service that eliminates these long-term obligations for defendants. Under this service, we assume all of the settlement liabilities and administrative responsibilities, allowing the defendant to close out the claim completely.” The brochure continued in regular text: “The plaintiff must sign a release before this transfer of liabilities can be accomplished. Obviously, plaintiffs are far more likely to agree to the transfer if they know the promise of future payments is made by an affiliate of Merrill Lynch, a name they know and trust. [¶] At the end of 1982, Merrill Lynch’s assets [totaled] more than $17 billion and its net worth calculated on a consolidated basis) was more than $1 billion.” The brochure provides on the last page: “Our clients enjoy the confidence of receiving a full range of services from a firm whose experience, expertise and resources are unequaled. In addition, they obtain the security of dealing with Merrill Lynch, one of the most prominent financial services firms in the world.”
In February 1984, the Schultzes left Merrill Lynch IBAR, Inc. which was then renamed Merrill Lynch Settlement Services, Inc. On April 1, 1984, Merrill Lynch Settlement Services, Inc. issued an interoffice memorandum explaining the name-change from Merrill Lynch IBAR, Inc. to Merrill Lynch Settlement Services, Inc. The memorandum explained: “Why the change? Simply stated, the new name describes our principle business clearly. It establishes that Merrill Lynch is in the settlement business, and our advertising will emphasize that.”
On July 19, 1984, at the Annual Meeting of the Board of Directors of Merrill Lynch Settlement Services, Inc., an issue arose concerning the consolidated balance sheet of Merrill Lynch & Company. Merrill Lynch & Company guaranteed the promises of Merrill Lynch Settlement Services, Inc. The assets and liabilities of Merrill Lynch Settlement Services, Inc. were maintained on the consolidated balance sheet of Merrill Lynch & Company. The Merrill Lynch Settlement Services, Inc. minutes provide: “It was agreed that Merrill Lynch & Co. would have no chance of avoiding creditor claims of Merrill Lynch Settlement Services should the latter ever develop financial problems due to the close integration of fiscal operations within the system, use of the name of Merrill Lynch in Merrill Lynch Settlement Services, advertising, utilization of account executives as a sales force, etc.” The issue of selling Merrill Lynch Settlement Services, Inc. to an independent corporation or a different entity is raised. The minutes while recording this discussion stated: “Merrill Lynch & Co. transfers Merrill Lynch Settlement Services to a separate [independent] corporation. All plaintiffs would have to approve this which is unlikely, and it effectively would end Merrill Lynch Settlement Services future operations unless the separate corporation was very large, well known, etc.” (Italics added.)
In 1988, Merrill Lynch Settlement Services became ML Settlement Services. Inc. Merrill Lynch Life Agency Inc. sold 80 percent of its stock in ML Settlement Services, Inc. to Laugharn Associates, Inc. for $1. No notice of sale of the stock was not given to plaintiffs. According to Mr. Stannard, a Merrill Lynch Life Agency officer, when asked why no notice was given, responded, “Never thought of it.” (As previously noted, the Merrill Lynch Settlement Services board discussed the ramifications of selling the stock to a separate entity because it required the unlikely consent of all plaintiffs who had the right to receive the future payments.)
In 1989, Mr. Pardee joined Laugharn Associates and acquired 40 percent ownership interest in ML Settlement Services. In 1991, Merrill Lynch Life Agency sold its remaining 20 percent interest in Merrill Lynch Settlement Services to C. John Laugharn Associates and Mr. Pardee for $1. No Merrill Lynch employee discussed the Treasury Investment Growth Receipts with Mr. Pardee before the sale. Merrill Lynch Life Agency acquired ownership of the annuities used to fund the structured settlement agreements. Merrill Lynch Life Agency serviced the annuities. In 1992, Merrill Lynch Life Agency terminated the service agreement and transferred the servicing of the annuities including the Hawkins annuities to Merrill Lynch Insurance Group Services, Inc. Merrill Lynch Insurance Group Services, Inc. along with Merrill Lynch Settlement continued servicing the Hawkins annuity payments between 1992 through 2002. Also in 1992, ML Settlement Services, Inc. became Settlement Services Treasury Assignment, Inc. The Treasury Investment Growth Receipts were held in a Merrill Lynch, Pierce, Fenner & Smith brokerage account in the name of ML Settlement Services, Inc. In August 1993, Mr. Pardee directed Merrill Lynch, Pierce, Fenner & Smith to sell the Treasury Investment Growth Receipts. Mr. Pardee received $2,148,492.70 for the Hawkins and $26,301 for the Fenter Treasury Investment Growth Receipts. Plaintiffs were given no notice of the sale or the transfer to Mr. Pardee of Treasury Investment Growth Receipts which were purchased with their settlement funds. Mr. Pardee invested the proceeds of the sale.
On May 20, 1997, Mr. Pardee sold Settlement Services Treasury Assignments, Inc. to Charles E. Bradley, Sr., Charles E. Bradley, Jr., and other entities for $16.8 million. Settlement Services Treasury Assignments, Inc. became Stanwich Financial Services, Inc. $4 million in cash remained to pay creditors but no cash was set aside to pay plaintiffs’ claims. Mr. Pardee did not disclose that the cash came from the sale of the Treasury Investment Growth Receipts to the Bradleys. Between 1998 and 2000, the Bradleys pledged Treasury Bonds which are being held to fund payments as collateral for low interest loans from Morgan Stanley. The loan proceeds were in turn invested in privately held companies controlled by the Bradleys and their family members. The companies defaulted on the loans which caused Morgan Stanley to foreclose on the Treasury Bonds and sell them. In November 2000, Stanwich Financial Services, Inc. defaulted on its payment obligations to plaintiffs. In December 2000, the Bradleys disclosed to plaintiffs that the Treasury Bonds have been lost. On August 14, 2002, Stanwich Financial Services, Inc. filed a Chapter 11 bankruptcy petition. It bears emphasis that only Stanwich Financial Services, Inc. has sought the protection of the bankruptcy courts.
On June 25, 2001, plaintiffs filed this action, which was stayed pending resolution of a class action involving the theft of United States Treasury Bonds. The Hawkins plaintiffs were not members of the class but the Ms. Fenter was a class member.
2. Contract interference cause of action
The first cause of action in the second amend complaint was for contract interference. Plaintiffs’ theory of liability was: the Treasury Investment Growth Receipts were purchased on their behalf with settlement agreement funds; the Treasury Investment Growth Receipts were to be held until maturity to satisfy payment obligations; the Treasury Investment Growth Receipts were prematurely redeemed; the liquidated funds were given to parties not authorized to receive them; and the funds were ultimately lost so that when the payments were due, plaintiffs were injured. Plaintiffs argue that as third party beneficiaries of the purchase agreement for the Treasury Investment Growth Receipts they may predicate contract claims for the failure to hold the funds under third party beneficiary principles. In Harper v. Wausau Ins. Corp. (1997) 56 Cal.App.4th 1079, 1086-1087, we explained: “Under California law third party beneficiaries of contracts have the right to enforce the terms of the contract under Civil Code section 1559 which provides: ‘A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.’ Traditional third party beneficiary principles do not require that the person to be benefited be named in the contract. [Citations.] A third party may qualify as a beneficiary under a contract where the contracting parties must have intended to benefit that individual and such intent appears on the terms of the agreement. [Citations.] It is well settled, however, that Civil Code section 1559 excludes enforcement of a contract by persons who are only incidentally or remotely benefited by the agreement. [Citations.]” (See also Mercury Cas. Co. v. Maloney (2003) 113 Cal.App.4th 799, 802-803; Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 79.)
The settlement and assignment agreements and the purchase of the Treasury Investment Growth Receipts were intended to benefit plaintiffs. Moreover, in August 1982, the Treasury Investment Growth Receipts were offered to and sold to the public including Merrill Lynch IBAR, Inc. with the representation that they “evidence ownership of the future interest and principal payments on the Treasury Bonds” and they “are not redeemable prior to” maturity. Plaintiffs alleged that they were beneficiaries of the Treasury Investment Growth Receipts, which were sold by Merrill Lynch, Pierce, Fenner & Smith with the promise that the financial instruments would produce the amount of the payment obligation due to plaintiffs upon maturity. As intended beneficiaries, plaintiffs were entitled to the benefits of the instruments and damages for the breach of the obligation to hold the Treasury Investment Growth Receipts until maturity. Defendants did not establish as a matter of law that the premature liquidation of the Treasury Investment Growth Receipts was not a breach of settlement and assignment agreements.
Moreover, the second amended complaint raised the issue of whether defendants delivered the funds, which were to be held by defendants on plaintiffs’ behalf, to unauthorized persons. The settlement agreements did not provide that the funds could be sold, transferred, or reinvested at any time. Rather than establishing an unfettered right to dispose of the Treasury Investment Growth Receipts, the settlement agreements required that the funds be used for a specific purpose—to pay settlement moneys to plaintiffs. The failure to pay plaintiffs when the settlement funds were due and the disposal of the Treasury Investment Growth Receipts without notice raised issues of liability under contract and tort theories. (See Civ. Code, §§ 1814, 1822, 1825; Byer v. Canadian Bank of Commerce, supra, 8 Cal.2d at pp. 300-301; Edwards v. Jenkins, supra, 214 Cal. at p. 716; Messerall v. Fulwider, supra, 199 Cal.App.3d at p. 1329; Greenberg Bros., Inc. v. Ernest W. Hahn, Inc., supra, 246 Cal.App.2d at pp. 533-534.) In any event, defendants have not established that the law permits such unfettered discretion in connection with personal property entrusted to one party for the benefit of another.
One point bears emphasis. If this were a case where the parties entered into a settlement agreement whereby the Merrill Lynch defendants agreed to purchase a speculative security which became worthless due to the vagaries of the marketplace, the result could be different. But that is not what happened. There is evidence the Merrill Lynch defendants permitted the Treasury Investment Growth Receipts to be transferred to another company and Mr. Pardee who sold them. When the Merrill Lynch defendants sold the Treasury Investment Growth Receipts at Mr. Pardee’s direction, the instruments had substantial value. Thus, the act of transferring control of the Treasury Investment Growth Receipts which had demonstrable value is materially different from the situation where a settlement contemplates the purchase of a speculative investment which becomes worthless.
3. Contract breach
The second cause of action is for contract breach. The assignment agreements were between plaintiffs, on one hand, and the settling defendants (the county, the airline, and the manufacturer) and Merrill Lynch IBAR, Inc. on the other hand. The evidence indicates: the Merrill Lynch parties allowed the Treasury Investment Growth Receipts to be transferred to Mr. Pardee; the Merrill Lynch defendants permitted Mr. Pardee to sell the Treasury Investment Growth Receipts; and plaintiffs never received the funds due to them. There is a triable issue as to the second cause of action for contract breach. (Edwards v. Jenkins¸ supra, 214 Cal. at 716; Greenberg Bros., Inc. v. Ernest W. Hahn, Inc., supra, 246 Cal.App.2d at pp. 533-534.)
E. Fraud As To The Merrill Lynch Defendants
The fraud claim is premised on misrepresentations made by specified employees of Merrill Lynch defendants. The Merrill Lynch defendants’ separate statement makes no reference to the allegedly misleading statements made by Merrill Lynch representatives. Moreover, the Schultz, Egly, and Hawkins testimony created a triable issue as to whether any misrepresentations were made. Further, Ms. Hawkins’s testimony was sufficient to demonstrate detrimental reliance. The Merrill Lynch defendants’ contentions to the contrary have no merit in the summary judgment context.
F. The Conflicting Evidence Concerning The Merrill Lynch Defendants On The Agency Issue
The second amended complaint alleged that: one or more of the named defendants allowed Merrill Lynch IBAR, Inc. to market Treasury Investment Growth Receipts as a product; the marketing of the Treasury Investment Growth Receipts as a product would result in their purchase for the benefit of settling plaintiffs; and this marketing was based in material part on the Merrill Lynch name and reputation. As to the Merrill Lynch defendants who were not signatories to the settlement and agreements, plaintiffs alleged they were liable due to their own conduct in marketing the Treasury Investment Growth Receipts and ratifying the conduct of Merrill Lynch IBAR, Inc.
Plaintiffs also sought to hold the Merrill Lynch defendants liable under agency principles for the conduct of Merrill Lynch IBAR, Inc. Civil Code section 2316 states, “Actual authority is such as a principal intentionally confers upon the agent, or intentionally, or by want of ordinary care, allows the agent to believe himself to possess.” Civil Code section 2317 provides, “Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess.” The Court of Appeal has held: “To establish ostensible authority in an agent, it must be shown the principal, intentionally or by want of ordinary care has caused or allowed a third person to believe the agent possesses such authority. [Citations.] . . . [¶] . . . [¶] Ostensible authority must be established through the acts or declarations of the principal and not the acts or declarations of the agent. [Citation.] However, the doctrine of ostensible authority extends to subagents; hence the principal is similarly liable to third persons for representations made by subagents. [Citation.] Also, where the principal knows that the agent holds himself out as clothed with certain authority, and remains silent, such conduct on the part of the principal may give rise to liability. [Citation.]” (Preis v. American Indemnity Co. (1990) 220 Cal.App.3d 752, 761-762; see Leavens v. Pinkham & McKevitt (1912) 164 Cal. 242, 247-248; Gulf Ins. Co. v. TIG Ins. Co. (2001) 86 Cal.App.4th 422, 439.) Whether the Merrill Lynch defendants are liable for the acts of one another under an agency theory is typically a question of fact. (Boquilon v. Beckwith (1996) 49 Cal.App.4th 1697, 1719; Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1248.) Further, the various press releases and other documents were admissible as to all of the Merrill Lynch defendants pursuant to Evidence Code sections 1222 and 1224. (O’Mary v. Mitsubishi Electronics America, Inc. (1997) 59 Cal.App.4th 563, 570 [Evid. Code, § 1222]; Atlas Assurance Co. v. McCombs Corp. (1983) 146 Cal.App.3d 135,146 [Evid. Code, § 1224]; Labis v. Stopper (1970) 11 Cal.App.3d 1003, 1005 [Evid. Code, § 1224].)
The conflicting evidence on agency issue was as follows. There was evidence that no named Merrill Lynch defendant signed the settlement agreements or assumption and assignments. Further, there was evidence the agreements state that Merrill Lynch IBAR, Inc. should remain at all times directly and solely responsible for the payments of all sums and obligations. By contrast, plaintiffs presented evidence that Merrill Lynch, IBAR, Inc. made a number of marketing representations about the name, reputation, and financial strength of Merrill Lynch in promoting the structured settlements. Ms. Hawkins declared that these representations were made to her by her attorney and two employees or representatives of “Merrill Lynch” prior to the September 1982 settlement. Ms. Hawkins’ attorney, William Morgan, testified at his deposition that it was his understanding that Merrill Lynch IBAR, Inc. was a part of Merrill Lynch. Mr. Morgan recommended the September 1982 settlement to Mrs. Hawkins based on his belief about the company.
Moreover, on or around March 31, 1982, Merrill Lynch Life Agency purchased the stock of IBAR, Inc. and changed the name of the company to Merrill Lynch IBAR, Inc. In a press release on August 6, 1982, representatives from one or more of the named Merrill Lynch defendants announced the acquisition of the settlement company touting the advantages the new company could offer to customers who settled their claims. On August 20, 1982, Merrill Lynch, Pierce, Fenner & Smith began offering the Treasury Investment Growth Receipts to the public. The settlement agreements executed by the parties called for the purchase of Treasury Investment Growth Receipts by Merrill Lynch IBAR, Inc. with settlement funds.
In February 1983, Merrill Lynch, IBAR, Inc. issued a marketing brochure describing its relationship to one or more of the named Merrill Lynch defendants. The marketing brochure states: “The plaintiff must sign a release before this transfer of liabilities can be accomplished. Obviously, plaintiffs are far more likely to agree to the transfer if they know the promise of future payments is made by an affiliate of Merrill Lynch, a name they know and trust. [¶] At the end of 1982, Merrill Lynch’s assets [totaled] more than $17 billion and its net worth (calculated on a consolidated basis) was more than $1 billion.” The brochure provides on the last page: “Our clients enjoy the confidence of receiving a full range of services from a firm whose experience, expertise and resources are unequaled. In addition, they obtain the security of dealing with Merrill Lynch, one of the most prominent financial services firms in the world.”
Furthermore, Merrill Lynch Life Agency retained ownership of the stock in Merrill Lynch IBAR, Inc. The issue of liability on the part of Merrill Lynch Life Agency in the event of a default was discussed at a director’s meeting. Specifically, the issue of whether selling the Merrill Lynch IBAR, Inc. to a third party was discussed. The directors discussed and concluded that any such sale would require the consent of the settling plaintiffs which was unlikely. In addition, even after Merrill Lynch Life Agency sold its stock, one or more Merrill Lynch agencies continued to administer the periodic payments from 1993 through 2002. The issues of whether Merrill Lynch IBAR, Inc. was acting as the agent of one or more of the other named Merrill Lynch defendants in assuming the payment obligations and purchasing the Treasury Growth Investment Receipts were factual in nature. Thus, the agency issues were not properly resolved at the summary judgment stage.
G. Conflicting Causation Evidence
Plaintiffs assert there was conflicting evidence on the causation issue. Cause-in-fact determinations are made under the substantial factor test. (Rutherford v. Owens-Illinois, Inc. (1997) 16 Cal.4th 953, 968-969; Mitchell v. Gonzales (1991) 54 Cal.3d 1041, 1048-1054.) Our Supreme Court has held, “A tort is a legal cause of injury only when it’s a substantial factor in producing the injury.” (Soule v. General Motors, Corp. (1994) 8 Cal.4th 548, 572; Mitchell v. Gonzales, supra, 54 Cal.3d at pp. 1048-1054.) The same substantial factor test applies for contractual claims. (U.S. Ecology, Inc. v. State (2005) 129 Cal.App.4th 887, 909; Bruckman v. Parliament Escrow Corp. (1987) 190 Cal.App.3d 1051, 1063-1064.) Our Supreme Court has not set forth a precise definition of the term “substantial factor.” However, courts have concluded that a substantial factor is something more than slight, trivial, negligible, or theoretical. (Rutherford v. Owens-Illinois, Inc., supra, 16 Cal.4th at p. 969; Espinosa v. Little Co. of Mary Hospital (1995) 31 Cal.App.4th 1304, 1314.) In Osborn v. Irwin Memorial Blood Bank (1992) 5 Cal.App.4th 234, 253, the Court of Appeal explained: “[C]ausation in fact is ultimately a matter of probability and common sense: ‘[A plaintiff] is not required to eliminate entirely all possibility that the defendant’s conduct was not a cause. It is enough that he introduces evidence from which reasonable men may conclude that it is more probable that the event was caused by the defendant than that it was not. The fact of causation is incapable of mathematical proof, since no man can say with absolute certainty what would have occurred if the defendant had acted otherwise. If, as a matter of ordinary experience, a particular act or omission might be expected to produce a particular result, and if that result has in fact followed, the conclusion may be justified that the causal relation exists. In drawing that conclusion, the triers of fact are permitted to draw upon ordinary human experience as to the probabilities of the case.’ (Rest.2d Torts, § 433B, com. b.) [¶] . . . Conduct can be considered a substantial factor in bringing about harm if it ‘has created a force or series of forces which are in continuous and active operation up to the time of the harm’ (Rest.2d Torts, § 433, subd. (b)), or stated another way, ‘the effects of the actor’s negligent conduct actively and continuously operate to bring about harm to another’s (Rest.2d Torts, §§ 439, 433, com. e.).” (Osborn v. Irwin Memorial Blood Bank, supra, 5 Cal.App.4th at p. 253; accord Espinosa v. Little Co. of Mary Hospital, supra, 31 Cal.App.4th at p. 1314; see also U.S. Ecology, Inc. v. State, supra, 129 Cal.App.4th at p. 909 [causation test the same for contract claims].)
We have previously rejected the contention that the Merrill Lynch defendants proved as a matter of law that the September 1982 settlement agreements gave Merrill Lynch IBAR, Inc. and any of its successors the unfettered right to dispose of the Treasury Investment Growth Receipts. A jury could reasonably infer that the actions of both the Merrill Lynch defendants and Mr. Pardee were substantial factors in causing plaintiff’s damages. It is undisputed that the Treasury Investment Growth Receipts were liquidated after Mr. Pardee obtained control of the company. There is no evidence any Merrill Lynch defendant did anything to protect the Treasury Investment Growth Receipts, a Merrill Lynch proprietary product. A jury could reasonably conclude that the liquidation, sale, and transfer of the assets caused plaintiffs’ injury.
Moreover, we disagree with the Merrill Lynch defendants’ claim that the liquidation did not cause plaintiffs damage. Defendants’ theory is, at the time Stanwich Financial Services petitioned for bankruptcy protection, Merrill Lynch IBAR, Inc. no longer existed and Merrill Lynch Life Agency had sold its stock in the settlement company. Defendants argue that when the Treasury Investment Growth Receipts were liquidated by Mr. Pardee and the Bradleys purchased what had once been Merrill Lynch IBAR, Inc., there were sufficient assets to make the payments. We are unpersuaded by defendants’ claim that there was no causation as a matter of law because when the Treasury Investment Growth Receipts were liquidated in 1993 and the settlement company was sold to the Bradleys in 1997, there were sufficient assets to meet the obligations owed to plaintiffs. In fact, there was evidence that Merrill Lynch IBAR, Inc. agreed to purchase the Treasury Investment Growth Receipts with plaintiffs’ settlement funds. Merrill Lynch IBAR, Inc. promised to pay plaintiffs the value of principal and interest in the future. None of the Merrill Lynch defendants disclosed to plaintiffs that the settlement company was being sold and the Treasury Investment Growth Receipts were later liquidated. Further, Mr. Pardee sold the Treasury Investment Growth Receipts without disclosing they had been sold. Moreover, plaintiffs were never advised that the company what had been Merrill Lynch IBAR, Inc. had been sold.
It should be noted that the very fact that the payment obligations were transferred to a different entity provides a basis for relief. The settlement agreements specifically provide that only the settling defendants, the airline, the manufacturer, and the county, had the right to re-designate who was saddled with the payment obligations. In addition, the act of liquidating the Treasury Investment Growth Receipts that the parties agreed would fund the payments was arguably a breach of the express or implied covenants of the settlement agreements. The settlement agreements specifically required that the Merrill Lynch IBAR, Inc. purchase the Treasury Investment Growth Receipts to provide a fund for the payment obligations. The settlement agreements did not contemplate or provide that any entity or person, other than Merrill Lynch IBAR, Inc., could obtain ownership and title to the Treasury Investment Growth Receipts. In any event, even if there were abundant assets when the company what had once been known as Merrill Lynch IBAR, Inc. was sold, that does not affect any of defendants’ obligations. This is particularly so because there is no evidence that the Bradleys assumed an obligation to make the payments to plaintiffs. There is also nothing in the settlement agreements or the assumption and assignment agreements which allowed the payment obligations to be transferred or reassigned at Merrill Lynch IBAR, Inc.’s option.
There were also triable issues concerning the knowledge of employees of the Merrill Lynch defendants of the settlement agreements. Indeed, a large part of defendants’ arguments are based on the denial of knowledge of conduct by Merrill Lynch IBAR, Inc. employees in representing the company itself as an agent of other Merrill Lynch entities. The Merrill Lynch defendants also deny any knowledge of their employees that the Treasury Investment Growth Receipts were purchased to fund the settlement agreements. Nevertheless, sufficient evidence was produced which would lead a trier of fact to conclude otherwise. This is not a case of one company engaging in an arm’s length transaction with a different entity on behalf of third parties.
Rather, the evidence shows that on or around March 31, 1982, Merrill Lynch Life Agency purchased the stock of IBAR, Inc. and changed the name of the company to Merrill Lynch IBAR, Inc. In a press release on August 6, 1982, representatives from one or more of the named Merrill Lynch defendants announced the acquisition of IBAR, Inc. touting the advantages the new entity could offer to customers who settled their claims. On August 20, 1982, Merrill Lynch, Pierce, Fenner & Smith began offering the Treasury Investment Growth Receipts to the public. The settlement agreements executed by the parties called for the purchase of Treasury Investment Growth Receipts by Merrill Lynch IBAR, Inc. with settlement funds. Moreover, Merrill Lynch Life Agency retained ownership of the stock in Merrill Lynch IBAR, Inc. The issue of potential liability on the part of Merrill Lynch Life Agency in the event of a default was discussed at a director’s meeting. Specifically, the issue of a potential sale to a third party was raised at the directors’ meeting. The directors discussed and concluded that any such sale would require the consent of the settling plaintiffs which was unlikely. Furthermore, even after Merrill Lynch Life Agency sold its stock, one or more Merrill Lynch agencies continued to administer the periodic payments from 1993 through 2002. Thus, triable issues of fact existed about the knowledge of employees of various Merrill Lynch entities.
Further, the settlement agreements and the purchase of the Treasury Investment Growth Receipts were intended to benefit the plaintiffs. Moreover, in August 1982, the Treasury Investment Growth Receipts were offered and sold to the public including to Merrill Lynch IBAR, Inc. with the representation that they “evidence ownership of the future interest and principal payments” to purchasers. The August 20, 1982 preliminary offering circular Merrill Lynch Pierce Fenner & Smith, Inc. states that the Treasury Investment Growth Receipts were “not redeemable prior to” maturity. Mr. Pardee does not dispute that he directed the sale of the Treasury Investment Growth Receipts. In short, the evidence established triable issues of material fact as to whether the liquidation of the Treasury Investment Growth Receipts was a legal cause of plaintiffs’ injuries. The issues could not have been resolved as a matter of law at the summary judgment stage.
At oral argument, counsel for the Merrill Lynch defendants argued that all of plaintiffs’ contentions concerning the demurrer rulings on the first amended complaint are moot. Defendants reason that since they have demonstrated their conduct was a not legal cause of any damage, all of plaintiffs’ demurrer dismissal contentions have any merit. A summary judgment motion addresses the allegations in a complaint. (Government Employees Ins. Co. v. Superior Court (2000) 79 Cal.App.4th 95, 98, fn. 4; FPI Development, Inc. v. Nakashima (1991) 231 Cal.App.3d 367, 381-383.) Defendants’ summary judgment motions did not address any of the causes of action in the first amended complaint which were the subject of an erroneous order sustaining the demurrers without leave to amend. Nonetheless, given our analysis on the causation issue, there is no merit to defendants’ argument that plaintiffs’ demurrer contentions are now moot.
H. Evidentiary Objections
a. Overview
The trial court sustained all defense objections to plaintiffs’ evidence. With the exception of certain inapplicable statutory exceptions, all relevant evidence is admissible. (Evid. Code, §§ 350, 351.) The trial court has the duty to determine the relevance and thus the admissibility of evidence before it can be admitted. (Id., §§ 400, 402.) The trial court is vested with broad discretion in performing its duty to determine the relevance and admissibility of evidence. (People v. Harris (2005) 37 Cal.4th 310, 337; see also Evid. Code, §§ 400, 402.) Except as noted, we review the trial court’s evidentiary rulings for an abuse of discretion. (Carnes v. Superior Court (2005) 126 Cal.App.4th 688, 694; Walker v. Countrywide Home Loans, Inc. (2002) 98 Cal.App.4th 1158, 1169; Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 192, fn. 15.) In the following respects, we conclude the trial court acted beyond the scope of allowable discretion in excluding relevant evidence as to the disputed issues. Moreover, we have examined the entire case and are persuaded that, if the trial court had not erroneously excluded the evidence which was relevant to the disputed issues, it is reasonably probable that a more favorable result would have been reached. (Evid. Code, § 354; People v. Earp. (1999) 20 Cal.4th 826, 880; Karlsson v. Ford Motor Co. (2006) 140 Cal.App.4th 1202, 1223.)
b. Extrinsic evidence to explain the meaning of the agreements
Defendants argue the trial court properly refused to consider extrinsic evidence to explain the parties’ intent as to whether the settlement agreements gave Merrill Lynch, IBAR, Inc. or a successor entity or individual, the unfettered right to liquidate and reinvest the Treasury Investment Growth Receipts. Plaintiffs contend that the trial court erroneously excluded Ms. Hawkins’ declaration and deposition testimony and evidence of conduct by former officers and employees of Merrill Lynch IBAR, Inc.; the Schultzes, Mr. Hording and retired Judge Egly. The proffered evidence was offered to show that the parties intended for Merrill Lynch IBAR, Inc. to hold with the Treasury Investment Growth Receipts until maturity for the benefit of plaintiffs.
Before proceeding to an analysis of the merits of the extrinsic evidence issue, we note the issue is irrelevant as to all of the of the contract based issues. Even if the Merrill Lynch defendants had the unfettered authority to sell the Treasury Investment Growth Receipts, they still had a duty to see that plaintiff received the moneys due under the settlement and assignment agreements. Paragraph 2 of the Hawkins settlement agreement and paragraph 1 of the Fenter assignment explicitly states Merrill Lynch IBAR, Inc. is responsible to pay all sums due to plaintiffs. Further, the challenged evidence was admissible on the agency issues. Finally, extrinsic evidence was admissible on the fraud claim. (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 301; see 2 Witkin, Cal. Evidence (4th Ed. 2000) “Documentary Evidence,” § 95, pp. 217-218.)
Extrinsic evidence is excluded based on the premise that the written instrument is the agreement of the parties. (Banco Do Brasil v. Latian, Inc. (1991) 234 Cal.App.3d 973, 1001; Gerdlund v. Electronic Dispensers International (1987) 190 Cal.App.3d 263, 270.) The issue of whether the rule applies so as to exclude any collateral oral agreement is one of law to be determined by the court. (Code Civ. Proc., § 1856, subd. (d); Banco Do Brasil v. Latian, Inc., supra, 234 Cal.App.3d at p. 1001.) The issue is reviewed de novo on appeal. (Banco Do Brasil v. Latian, Inc., supra, 234 Cal.App.3d at p. 1001; Wagner v. Glendale Adventist Medical Center (1989) 216 Cal.App.3d 1379, 1386.) We must decide two issues. First, we must determine whether the writings were intended to be an integration, the complete and final expression of the parties’ agreement, which precludes any evidence of collateral understandings. Second, we must evaluate whether the agreement susceptible of the meaning asserted by the party offering the evidence. (Banco Do Brasil v. Latian, Inc., supra, 234 Cal.App.3d at p. 1001; Gerdlund v. Electronic Dispensers International, supra, 190 Cal.App.3d at p. 270.)
The crucial issue of determining there has been an integration is whether the parties intended their writing to serve as the embodiment of their agreement. (Masterson v. Sine (1968) 68 Cal.2d 222, 225; Salyer Grain & Milling Co. v. Henson (1970) 13 Cal.App.3d 493, 498.) In determining the threshold issue of whether the parties intended the written instrument to serve as the exclusive embodiment of their agreement, the appellate court in Banco Do Brasil v. Latian, Inc., supra, 234 Cal.App.3d at pages 1002-1003, approved the following analysis: “(1) does the written agreement appear on its face to be a complete agreement; obviously the presence of an ‘integration’ clause will be very persuasive, if not controlling, on this issue; (2) does the alleged oral agreement directly contradict the written instrument; (3) can it be said that the oral agreement might naturally have been made as a separate agreement or, to put it another way, if the oral agreement had been actually agreed to, would it certainly have been included in the written instrument; and (4) would evidence of the oral agreement be likely to mislead the trier of fact.”
Plaintiffs argue the trial court erroneously refused to consider extrinsic evidence to explain the parties’ intentions concerning a duty to hold the Treasury Investment Growth Receipts to satisfy the future payment obligation. According to plaintiffs, the issue of how or where the Treasury Investment Growth Receipts were to be kept was not addressed because they were a new investment product introduced by Merrill Lynch, Pierce, Fenner & Smith immediately prior to the September 1982 settlement agreements. Defendants counter the trial court properly refused to consider extrinsic evidence to vary the terms of the clear and unequivocal written agreements giving Merrill Lynch IBAR, Inc. and any successor entity or individual the unfettered right to dispose of the Treasury Investment Growth Receipts. Defendants argue that plaintiffs should not have been permitted to introduce evidence of any oral agreement that the Treasury Investment Growth Receipts could not be liquidated without plaintiffs’ consent because this is inconsistent with the terms of the written settlement agreements. We disagree with defendants. We further conclude that the settlement agreements cannot be interpreted to allow the settlement company and its successors the unfettered right to do as they pleased with the Treasury Investment Growth Receipts.
The settlement agreements do not specify how and where the Treasury Investment Growth Receipts are to be held for 20 years. The agreements are silent on this issue. Because the settlement agreements are silent on this question, evidence was admissible to explain the missing intent of the parties to the extent it is consistent with the written agreements. The Supreme Court has held: “It has long been the rule that when the parties have not incorporated into an instrument all of the terms of their contract, evidence is admissible to prove the existence of a separate oral agreement as to any matter on which the document is silent and which is not inconsistent with its terms.” (American Indust. Sales Corp. v. Airscope, Inc. (1955) 44 Cal.2d 393, 397, accord Masterson v. Sine, supra, 68 Cal.2d at p. 229; Cione v. Foresters Equity Services, Inc. (1997) 58 Cal.App.4th 625, 638-639; Mangini v. Wolfschmidt (1958) 165 Cal.App.2d 192, 199.)
Here, the parties agreed that Merrill Lynch, IBAR, Inc. could purchase the Treasury Investment Growth Receipts with settlement funds belonging to plaintiffs. The purpose of purchasing the Treasury Investment Growth Receipts was to provide a source for future payment obligations. The evidence also established that Treasury Investment Growth Receipts were marketed as a vehicle for providing the source of the fund. The purchase of the funds in the name of Merrill Lynch, IBAR, Inc. was to avoid tax consequences. However, the Treasury Investment Growth Receipts on their face and in the public offering provide that they “evidence ownership of the future interest and principal payments” on United States Treasury Bonds. The August 20, 1982 Merrill Lynch, Pierce, Fenner & Smith preliminary offering circular stated that the Treasury Investment Growth Receipts “are not redeemable prior to” maturity. Plaintiffs assert that extrinsic evidence was admissible to prove that the parties did not intend to give Merrill Lynch, IBAR, Inc. or any party the unfettered discretion to liquidate the Treasury Investment Growth Receipts at any time. Plaintiff’s interpretation of the agreements’ silent terms is consistent with the terms of the written settlement agreements providing for the purchase of the Treasury Investment Growth Receipts as a funding source for the future payment obligation.
c. Evidence related to intent and agency
One of the issues in the case was whether Merrill Lynch IBAR, Inc. was acting as an agent of the other Merrill Lynch defendants at the time the settlements agreements were signed. Plaintiffs argue that the trial court erred in excluding a number of statements made by agents of Merrill Lynch IBAR, Inc. or one or more Merrill Lynch defendants which would have supported plaintiffs’ agency theories. We agree.
The trial court excluded evidence such as: the July 30, 1982 letter; the August 6, 1982 press release; statements which had been made to Ms. Hawkins in 1982 by Merrill Lynch IBAR, Inc. employees prior to the September 1982 settlement agreements. The trial court excluded these statements as well as deposition testimony and documentary evidence generated by former officers and key employees of Merrill Lynch IBAR, Inc., the Schultzes, Mr. Harding and retired Judge Egly which would have established what the parties intended to do with the Treasury Investment Growth Receipts. As we previously concluded, several of the statements were admissible to prove the parties’ intent with respect to the Treasury Investment Growth Receipts.
The controlling rule was identified by our Supreme Court as follows “The rule is that ‘“‘whatever is said by an agent, either in the making of a contract for his principal, or at the time, and accompanying the performance of any act, within the scope of his authority, . . . of the particular contract or transaction in which he is then engaged, is, in legal effect, said by his principal, and admissible as evidence . . . . But declarations or admissions by an agent, of his own authority, and not accompanying the making of a contract, or the doing of an act, in behalf of his principal, . . . are not binding upon his principal . . . and are not admissible. . . .’” [Citation.]’ [Citation.]” (Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, 1077, original italics.)
In this case, Merrill Lynch, IBAR, Inc. asserted it was not acting as an agent of one or more of the other Merrill Lynch defendants. This contention has no merit at the summary judgment stage. The July 30, 1982 marketing letter sent by Merrill Lynch IBAR, Inc. to a Minneapolis attorney was admissible to prove plaintiffs’ theories of agency, ratification, and fraud. The letter describes the relationship between Merrill Lynch IBAR, Inc. to Merrill Lynch Pierce, Fenner & Smith as follows: “Merrill Lynch IBAR, Inc. became a Merrill Lynch subsidiary on April 1, 1982 when all of its stock was purchased by Merrill Lynch Life Agency, Inc. Merrill Lynch Life Agency is a wholly owned subsidiary of Merrill Lynch Pierce, Fenner and Smith which in turn is a wholly owned subsidiary of Merrill Lynch & Co., Inc. [¶] Merrill Lynch & Co., Inc. operates with a management leadership, control and reporting system. This system maintains appropriate control over the operating activities of all of its subsidiaries. Merrill Lynch IBAR, Inc. is part of this system and subject to regular management review to assure its compliance to Merrill Lynch’s high ethical and operating standards.” (Italics added.) We agree with plaintiffs that the evidence was admissible because its shows the nature of the relationship between Merrill Lynch IBAR, Inc. to one or more of the Merrill Lynch defendants.
The trial court also sustained evidentiary objections to the August 6, 1982 press release by Merrill Lynch & Co., Inc. announcing its acquisition of IBAR, Inc. on the ground it was inadmissible to prove the meaning of the settlement agreements. The press release states: “Merrill Lynch & Co., Inc. announced today that it has acquired the stock of IBAR, Inc. . . . The acquisition, was made through a Merrill Lynch subsidiary, Merrill Lynch Life Agency Inc. [¶] . . . [¶] Daniel P. Tully, president of the Merrill Lynch Individual Services Group, said, ‘We have been acquainted with IBAR and the services it offers for a number of years and have helped provide securities services –primarily annuities and government securities—in connection with some of the settlements IBAR has arranged. We therefore look forward to the expansion of their services to a wider market as more potential customers become aware of the advantages it can offer.’” A trier of fact could infer that this is an admission of the agency relationship between Merrill Lynch IBAR, Inc. and one or more of the named Merrill Lynch defendants. Thus, the press release was relevant to whether the marketing materials established that Merrill Lynch, IBAR, Inc. was the agent of one or more of the Merrill Lynch defendants.
d. Evidence of statements and conduct after September 1982
The trial court excluded evidence of acts or statements made by Merrill Lynch IBAR, Inc. or its successor entities including: a February 1983 brochure, the April 1, 1984 interoffice memorandum explaining the name change from Merrill Lynch IBAR, Inc. to Merrill Lynch Settlement Services, Inc., and the July 19, 1984 minutes from the Board of Directors’ Meeting of Merrill Lynch Settlement Services. At issue was whether the Merrill Lynch defendants subsequently ratified the alleged actions of Merrill Lynch IBAR, Inc. and successor entities. The trial court had no discretion to exclude this relevant evidence which had been offered to dispute defendants’ contention that they did not ratify Merrill Lynch IBAR, Inc.’s actions.
I. Ms. Hawkins Declaration
The trial court sustained an objection to Ms. Hawkins’s declaration concerning representations that were made to her prior to signing the settlement agreement. The objection was made on the ground the declaration was hearsay because Mrs. Hawkins speaks Japanese and the declaration, which is in English, stated that it had been translated by her Japanese attorney, Masako Sakaguchi. The Court of Appeal has held: “Authentication of a writing is required before it may be received into evidence and before secondary evidence of its content may be received into evidence. (Evid. Code, § 1401.) ‘Authentication of a writing means (a) the introduction of evidence sufficient to sustain a finding that it is the writing that the proponent of the evidence claims it is or (b) the establishment of such facts by any other means provided by law.’ (Evid. Code, § 1400.)” (People v. Miller (2000) 81 Cal.App.4th 1427, 1445.)
In response to defendants’ objection, Ms. Sakaguchi filed a declaration. That declaration indicates Ms. Sakaguchi represented Ms. Hawkins in Japan. Ms. Sakaguchi is also a member of the New York State Bar. Ms. Sakaguchi had assisted Mrs. Hawkins with this lawsuit since 2002. Ms. Sakaguchi certified that she translated the declaration at issue on November 21, 2005 from English into Japanese. According to the certification, Ms. Sakaguchi read the declaration to Ms. Hawkins in Japanese. Upon completion of the translation, Mrs. Hawkins confirmed she understood the declaration and then signed it. Bernice Conn, plaintiffs’ attorney of record, declared that Ms. Hawkins spoke very limited English. Ms. Sakaguchi acted as a translator for Mrs. Hawkins’ September 13, 2005 deposition. Ms. Sakaguchi subsequently signed a certificate confirming that she had translated the written deposition transcript from English to Japanese. Ms. Hawkins confirmed that she understood the translation. In the event the trial court found Mrs. Hawkins’ declaration to lack authenticity, Ms. Conn requested a delay to file a similar certification for the Hawkins declaration. This was sufficient evidence to conclude that Ms. Sakaguchi understood English and Japanese and was capable of providing an accurate translation. (Correa v. Superior Court (2002) 27 Cal.44th 444, 466-467; People v. Aranda (1986) 186 Cal.App.3d 230, 237.) Under the circumstances, the trial court did not have the discretion to exclude the entire declaration, which was properly authenticated. (People v. Alvarez (1996) 14 Cal.4th 155, 203; Firestone v. Hoffman (2006) 140 Cal.App.4th 1408, 1418.)
J. Mr. Pardee
In terms of the summary judgment motions, the discussion in plaintiffs’ brief focuses on the Merrill Lynch defendants. In the second amended complaint, the sole cause of action alleged against Mr. Pardee is for fraud. The key allegations in the fourth cause of action are that he directed the Merrill Lynch defendants to sell the Treasury Investment Growth Receipts and later failed to advise plaintiffs of the transaction. There is no allegation in the second amended complaint that Mr. Pardee committed constructive fraud or that he had any special relationship with plaintiffs. In fact, no such allegation could be made because the constructive fraud claim in the first amended complaint had been dismissed after the demurrer had been sustained without leave to amend. Thus, the trial court correctly resolved the fraud claim in the fourth cause of action of the second amended complaint as pled. We have reversed the demurrer dismissal ruling as to portions of the first amended complaint. Upon issuance of the remittitur, the parties may litigate those matters as to Mr. Pardee including the constructive fraud claim.
IV. DISPOSITION
The order granting summary judgment is reversed as to defendants, Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Co. Inc., Merrill Lynch Life Agency, Inc., and Merrill Lynch Insurance Group Services, Inc. The order granting summary judgment in favor of defendant, Jonathan H. Pardee, is deemed to be an order granting summary adjudication and is affirmed. The orders sustaining the demurrers to the causes of action of fiduciary duty breach (sixth and seventh), constructive fraud (eighth), and negligence (eleventh) in the first amended complaint are reversed. The orders sustaining the demurrers to the remaining causes of action in the first amended complaint are affirmed. Plaintiffs, Takako Hawkins, Clive Hawkins, and Stan Mandell, as conservator of the Estate of Thelma Jean Fenter, are to recover their costs incurred on appeal jointly and severally from defendants.
Kriegler, J., Concurring.
I concur in the lead opinion, with the exception of part H, dealing with the order sustaining the demurrer to the conversion cause of action. Plaintiffs did not allege the right to immediate possession of the proceeds of the settlement, as required, in order to maintain a cause of action for conversion. (AmerUS Life Ins. Co. v. Bank of America, N.A. (2006) 143 Cal.App.4th 631, 641-642; Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th 445, 452.) To establish a claim for conversion, a “‘plaintiff must establish an actual interference with his ownership or right of possession. . . . Where plaintiff neither has title to the property alleged to have been converted, nor possession thereof, he cannot maintain an action for conversion.’ [Citations.]” (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 136, fn. omitted.)
Moreover, plaintiffs’ conversion cause of action cannot be upheld on a bailment theory. Plaintiffs did not allege the existence of a bailment, and in my view, we should not add that theory to the complaint.
MOSK, J., Dissenting
I dissent.
INTRODUCTION
This case involves a widely used device known as a structured settlement. Apparently, how it operates and the application of legal principles to it require some demystification.
Plaintiffs and appellants Takao Hawkins, Clive Hawkins (the Hawkinses) and the estate of Thelma Jean Fenter (Fenter) (collectively “plaintiffs”) appeal judgments entered after the trial court granted summary judgment in favor of defendants and respondents Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPFS); Merrill Lynch & Co., Inc. (MLC); Merrill Lynch Life Agency Inc. (MLLA); Merrill Lynch Insurance Group Services, Inc. (MLIGS); and Jonathan H. Pardee (Pardee). For the reasons stated below, I would affirm the judgment.
Following the parties’ usage, I sometimes refer to the Merrill Lynch parties collectively and in the singular as Merrill Lynch. I refer to all defendants collectively as defendants.
Plaintiffs entered into structured settlements of their personal injury and wrongful death claims in prior lawsuits. Structured settlements offer plaintiffs certain advantages. They assist plaintiffs who are unaccustomed to handling large sums of money avoid the risk of squandering large, lump-sum settlement payments. Structured settlements also offer significant tax advantages to a plaintiff, effectively permitting the plaintiff to receive tax-free investment income from a lump-sum settlement that would be taxable if the plaintiff invested the settlement proceeds him- or herself.
Structured settlements are not risk free, however. Tax law in effect at the time of the structured settlements in this case held that a plaintiff could enjoy the tax benefits of a structured settlement only if the plaintiff settled his or her claim in exchange for a promise of future periodic payments. While the payor (that is, the settling defendant or its assignee) could invest a lump-sum to fund those periodic payments, the payee plaintiff could have no ownership or other possessory interest in the investments held by the payor. If the payee plaintiff was in actual or constructive receipt of the settlement funds or the investment vehicles used by the payor to fund the future periodic payments, then the investment income was taxable to the plaintiff.
This principle — known as the doctrine of constructive receipt — engendered certain unavoidable risks to a plaintiff accepting a structured settlement. As one authority has noted, “The benefits of a structured settlement offer must be weighed against some substantial costs. . . . [T]he constructive receipt doctrine requires that the award not be in the control of the recipient. The beneficiary must be made aware that he or she will not be the owner of or have any control over the award. The principal amount will not be available for emergency use, and the payout stream cannot be altered to satisfy any changing needs of the beneficiary. Any attempts to define the award to the contrary will likely conflict with the constructive receipt provision, and the tax advantages may be lost. [¶] A second drawback of a structured settlement is the possibility of default or bankruptcy of the annuity company. Failures of top-rated insurance companies have led to concerns about the safety of settlement funds held on behalf of a claimant [citation]. Although a lack of control and the potential for default are disadvantages that must be considered, the key problem with structured settlements is the inflation risk imposed on the recipient.” (Yandell, Advantages and Disadvantages of Structured Settlements (1995) Fall 1995 J. Legal Econ. 71, 73.) Other risks include misconduct — including embezzlement of the settlement proceeds — by the payor or its agents, or the payor’s unwise or unsafe investment of the settlement funds. It is the obligation of lawyers representing plaintiffs to advise their clients of these risks of structured settlements. (Simpson, Settlement: Safe or Sorry? (April/May 2003) GP Solo 42, 45.)
In this case, the 1982 structured-settlement agreements entered into by plaintiffs, and signed by their attorneys, specified — as they were required to do if plaintiffs were to obtain the tax benefits they sought — that plaintiffs had no interest, legal or equitable, in the investments used by the payor to fund the structured-settlement payments, and that, in the event of the payor’s insolvency, plaintiffs would be unsecured creditors. This term of the agreements was fundamental and indispensable if the structured settlements were to serve their intended purposes.
It was not until the Technical and Miscellaneous Reform Act of 1988 (P.C. 100-647, 102 Stat. 3710, Title VI, U.S.C. § 6079(b)(1)(A)-(B)) that section 130 of the Internal Revenue Code permitted a payee of a structured settlement involving an assignment under that section to be a secured creditor of the assignee.
Here, in 1982, the settling defendants’ obligation to pay the plaintiffs was delegated to a structured settlement company, to whom plaintiffs assigned the right to receive lump-sum payments from the settling defendants. As here, the structured settlement company typically invests the lump-sum payment in secure investments to fund its future payment obligations to the settling plaintiff. The lump-sum payment to the settlement company by the settling defendant does not belong to the settling plaintiff. Rather, it belongs to the settlement company assuming the settling defendant’s payment obligations. In fact, unless the settlement company immediately reinvests the payment in U.S. Treasury Bonds or annuities, those payments must be included as gross income of the settlement company. (26 U.S.C. § 130, subd. (a).)
Furthermore, the corporate entity that owed the obligation to pay plaintiffs under their structured-settlement agreements — which I refer to as MLIBAR — is not a party to this action. That corporate entity was founded in 1969, and went into the structured settlement business in 1978. The stock of that corporation was purchased by MLLA, a subsidiary Merrill Lynch entity, in 1982, shortly before plaintiffs entered into their structured settlements. MLLA sold its shares of stock in that corporation in 1988. Pardee became a shareholder in that corporation in 1989. Although in 1993 MLIBAR replaced certain zero coupon treasury instruments — originally acquired with plaintiffs’ settlement proceeds — with other conservative investments, these other investments were adequate to cover MLIBAR’s obligations to plaintiffs. Pardee sold his shares in that corporation in 1997 to certain third parties, the Bradleys, who also are not parties to this action. The Bradleys thereafter committed acts that caused that corporation, MLIBAR, to become insolvent and to declare bankruptcy in 2001 — years after the defendants sold the corporation’s shares, and before any of the relevant payments were due to plaintiffs.
It was MLIBAR’s bankruptcy in 2001 that caused plaintiffs’ damage — nothing else. The payment obligation to plaintiffs was never transferred to any entity other than MLIBAR. The corporate entity remained the same; only the shareholders changed. This is an obvious case of lack of causation. The cause of plaintiffs’ harm was the corporation’s bankruptcy, which occurred while the Bradleys owned the corporation’s shares and as the result of the Bradleys’ conduct. Nothing that any of the defendants did caused plaintiffs any damage.
Finally, the plaintiffs in this case did not allege that any of the Merrill Lynch defendants was the alter ego MLIBAR. As plaintiffs have not alleged alter ego, this court must respect the corporate form of both MLIBAR and the four corporate Merrill Lynch defendants. Those parties cannot be held liable for damage they did not cause.
I am at a loss to understand how defendants could be liable to plaintiffs in this action. A clear comprehension of the facts can lead to only one conclusion in this case — the trial court’s judgment should be affirmed.
If Merrill Lynch could be held liable for executing an order by MLIBAR in 1993 to sell the securities in which plaintiffs had no interest, that could result in significant implications. (See former Com. Code, § 8319; Com. Code, § 8115.)
I discuss certain evidentiary and discovery issues in sections C and D of Discussion, post, because they were raised on appeal, and therefore I deal with those issues in order to conclude that the trial court’s judgment should be affirmed.
BACKGROUND
I set forth a brief overview of the facts. To the extent necessary, I explain the facts in further detail as I address each of plaintiffs’ claims of error.
I state the facts consistent with the rules that “we view the evidence in the light most favorable to plaintiffs” and “liberally construe plaintiffs’ evidentiary submissions and strictly scrutinize defendants’ own evidence, in order to resolve any evidentiary doubts or ambiguities in plaintiffs’ favor.” (Wiener v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142; Baptist v. Robinson (2006) 143 Cal.App.4th 151, 159-160.) Any evidentiary objections not made are deemed waived. (Code Civ. Proc., § 437c, subds. (b)(5), (d).)
A. MLIBAR
In 1969, Robert and Ray Schultz formed a company called IBAR, Inc. (IBAR) that was in the business of brokering structured settlements. “Structured settlements are a type of settlement designed to provide certain tax advantages. In a typical personal injury settlement, a plaintiff who receives a lump-sum payment may exclude this payment from taxable income under I.R.C. § 104(a)(2) (providing that the amount of any damages received on account of personal injuries or sickness are excludable from income). However, any return from the plaintiff’s investment of the lump-sum payment is taxable investment income. In contrast, in a structured settlement the claimant receives periodic payments rather than a lump sum, and all of these payments are considered damages received on account of personal injuries or sickness and are thus excludable from income. Accordingly, a structured settlement effectively shelters from taxation the returns from the investment of the lump-sum payment.” (Western United Life Assur. Co. v. Hayden (3d Cir. 1995) 64 F.3d 833, 839; see also 26 U.S.C. §§ 104, subd. (a)(2); 130, subds. (c), (d); 5891, subd. (c)(1); Ins. Code, § 10134; see generally Lesti, Structured Settlements (2d ed. 2006) § 1:1.)
I recognize that the structured settlements at issue here were entered prior to the effective date of the Periodic Payment Settlement Act of 1982, Public Law 97-473, Title K, § 101(b)(1), 96 Stat. 2605 (1982). This is not material to my analysis. In any event, “[t]he Act codified the tax-free status already generally set forth in previous revenue rulings.” (Lesti, supra, § 16:4.)
In a typical structured settlement, the plaintiff in a personal injury or wrongful death action enters into a settlement agreement with one or more defendants providing for periodic payments. The plaintiff enters into an assignment and assumption agreement (an “assignment agreement”), assigning a third-party settlement company, like IBAR, the right to receive settlement funds from the settling defendant. The settling defendant will also delegate its obligation to pay the plaintiff to the settlement company. The settling defendant will then make a lump-sum payment to the settlement company, which uses that money to purchase an annuity or U.S. Treasury Bonds to fund future periodic payments to the plaintiff. There may also be a provision for a final lump-sum payment when the periodic payments cease. “A key characteristic of a structured settlement is that the beneficiary of the settlement must not have actual or constructive receipt of the economic benefit of the payments. Rev.Rul. 79-220. In a structured settlement, the settling defendant’s ‘purchase of a[n] . . . annuity contract from the other insurance company [is] merely an investment by [the settling defendant] to provide a source of funds for [him] to satisfy [his] obligation to [the plaintiff].’ Id. The arrangement is ‘merely a matter of convenience to the [defendant] and d[oes] not give the recipient any right in the annuity itself.’ Id. (emphasis added). Because the recipient never had actual or constructive receipt of the lump-sum amount, the recipient need not include the investment yield on that amount as taxable income. Id. Thus, the exclusion applies to the full amount of the annuity payments because the full amount is received as damages on account of personal injuries. Id.” (Western United Life Assur. Co. v. Hayden, supra, 64 F.3d at pp. 839-840 [alterations and emphasis in original]; see generally, Lesti, supra, § 4:3.)
The settlement and assignment agreements are typically interrelated and intended to be read together as documenting a single, integrated transaction. (Lesti, supra, § 11:1.) I sometimes refer to related settlement and assignment agreements collectively as “structured-settlement agreements.”
Theoretically, the settlement company could purchase funding assets other than annuities or U.S. Treasury Bonds, but doing so would have adverse tax consequences for the settlement company. The settlement company may exclude from its income the funds it receives from settling defendants only if, inter alia, it uses the proceeds to purchase a “qualified funding asset” within 60 days. Internal Revenue Code section 130, subdivision (d) defines “qualified funding asset” to mean “any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States . . . .” (26 U.S.C. § 130, subd. (d); see generally Lesti, supra, § 4:4.)
I sometimes refer to future periodic and lump-sum payments due to a settling plaintiff pursuant to structured-settlement agreements as “future payments.”
On March 31, 1982, defendant MLLA acquired all of IBAR’s stock and renamed the company Merrill Lynch IBAR, Inc. (MLIBAR). For more than two years thereafter, the Schultzes continued to operate the company. MLIBAR remained a wholly-owned subsidiary of MLLA until 1988, when MLLA sold 80% of its MLIBAR shares to Laugharn Associates, Inc. In 1991, MLLA sold its remaining 20% interest in MLIBAR to John Laugharn and Pardee. In March 1993, Pardee acquired 90% to 100% of MLIBAR’s stock and became the company’s controlling shareholder. In May 1997, Pardee sold the stock of MLIBAR to Charles E. Bradley, Sr. and related persons and entities (collectively the Bradleys). At the time Pardee sold his MLIBAR stock to the Bradleys, MLIBAR had sufficient assets to satisfy its obligations to its structured-settlement payees as those obligations became due.
During the relevant time frame, MLIBAR’s corporate name changed at least five times. The company eventually became Stanwich Financial Services Corporation, the name under which it entered bankruptcy proceedings in 2001. (See Official Comm. of Unsecured Creditors v. Pardee (In re Stanwich Fin. Servs. Corp.) (Bankr. D. Conn. 2003) 291 B.R. 25, 26.) To avoid confusion, I refer to this corporate entity as MLIBAR. MLIBAR is not a party to this action.
B. Plaintiffs’ Structured Settlements
1. Fenter’s Structured Settlement
In September 1982, Fenter, a minor acting through her guardian ad litem, settled a personal injury claim against the County of Los Angeles (the County). Fenter entered into a settlement agreement with the County providing that the County could, in its sole discretion, delegate to MLIBAR its obligation to pay Fenter. Fenter concurrently entered into an assignment agreement with the County and MLIBAR. One of the members of the Schultz family (Stanley Schultz, Robert’s son), which had been operating MLIBAR since the company was founded (before and after the stock was sold to Merrill Lynch), signed the agreement on behalf of MLIBAR. Fenter’s attorney also signed the agreement. Fenter’s structured-settlement agreements provided that the bulk of Fenter’s settlement payments would be funded by the purchase of U.S. Treasury Bonds, to be held in trust by Bank of America. A portion of Fenter’s settlement, however, would be funded through the purchase of a long-term investment product called Treasury Investment Growth Receipts (“TIGRs”). A proprietary investment product of Merrill Lynch, TIGRs are certificates evidencing “ownership of future interest and principal payments on United States Treasury Bonds.” TIGRs can be traded on the secondary market. The TIGRs were to fund biannual payments to Fenter of $3,750 from 2006 to 2010, plus a $60,000 lump-sum payment in 2010.
Fenter subsequently died. This action is being prosecuted by her estate.
The Third Circuit described TIGRs thus: “Zero-coupon bonds are debt securities on which no interest is paid prior to maturity. At maturity, a one-time payment incorporating the principal repayment and accrued interest is made. These securities are therefore sold at a discount from face value. [¶] TIGR’s . . . are a proprietary product of Merrill Lynch. TIGR’s consist of United States Treasury bonds that have been repackaged by Merrill Lynch into zero-coupon securities. Specifically, a TIGR is a receipt that evidences ownership of a future payment of interest or principal on Treasury bonds which are purchased by Merrill Lynch and are held by a custodian for the benefit of the TIGR holder.” (Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (3d Cir. 1987) 835 F.2d 1031, 1032, fn. 1.)
Fenter’s structured-settlement agreements provided that MLIBAR would “use the funds transferred to it” by the County in part to “purchase [TIGRs].” The TIGRs were purchased “to assure the ready availability to [MLIBAR] of funds payable under the Settlement Agreement, to serve as a medium for payment of said funds, and to assure the payment of such funds . . . .” The structured-settlement agreements, however, did not provide that the TIGRs were to be placed in trust, nor did they expressly prohibit MLIBAR from liquidating the TIGRs prior to maturity. Fenter’s settlement agreement provided that MLIBAR “will be the owner of the [TIGRs] and the entire income of the Trust and the [TIGRs] will be included in the income of [MLIBAR]. The Plaintiff [Fenter] shall have no legal or equitable interest, vested or contingent, in the Trust or the [TIGRs] and her rights against [MLIBAR] . . . shall be solely those of a creditor.”
The structured-settlement agreements do not specify that the TIGRs were to be held in brokerage or cash management accounts and to be “managed” or “maintained” by Merrill Lynch.
2. The Hawkinses’ Structured Settlement
In September 1982, the Hawkinses settled a wrongful death action against American Airlines (AA) and McDonnell Douglas (MD). The Hawkinses entered into structured-settlement agreements with AA, MD and MLIBAR. This agreement was signed by Stanley Schultz on behalf of MLIBAR. The Hawkinses’ attorney also signed the agreement, in addition to the Hawkinses. The structured-settlement agreements provided that the Hawkinses were to receive monthly payments from November 1982 through October 2002. These payments were to be funded by the purchase of annuities. The Hawkinses were also to receive two lump-sum payments on November 15, 2002 totaling just under $3.7 million. The lump-sum payments were to be funded through the purchase TIGRs.
MLIBAR expressly agreed to “use the funds transferred to it” by AA and MD in part to “purchase . . . [TIGRs].” As in Fenter’s agreements, the TIGRs were to be purchased “to assure the ready availability to [MLIBAR] of funds payable under [the Settlement Agreement], to serve as a medium for payment of said funds, and to assure the payment of such funds . . . .” The Hawkinses’ structured-settlement agreements did not expressly provide that the TIGRs were to be placed in trust, nor did they expressly prohibit MLIBAR from liquidating the TIGRs prior to maturity. The Hawkinses’ settlement agreement provided that “the entire income of the annuities and of the [TIGRs] will be included in the income of [MLIBAR] . . . . The [Hawkinses] shall have no legal or equitable interest, vested or contingent, in the annuities or the [TIGRs] and their rights against [MLIBAR] . . . shall be solely those of a creditor.”
C. Premature Liquidation of the TIGRs and MLIBAR’s Default
In 1982, pursuant to plaintiffs’ structured-settlement agreements, MLIBAR used a portion of plaintiffs’ settlement proceeds to purchase TIGRs. In 1993, those TIGRs were held in MLIBAR’s brokerage account with defendant MLPFS. Pardee was then the controlling shareholder of MLIBAR. In August 1993, Pardee directed MLPFS to liquidate the TIGRs. Plaintiffs were not informed of, and did not consent to, the sales. MLPFS executed Pardee’s sale order and released the sales proceeds to MLIBAR. MLIBAR reinvested the sales proceeds in “a conservative, professionally-managed [sic] securities portfolio.”
Other than mere corporate affiliation, there is no evidence that defendants MLC or MLIGS had any involvement with the TIGRs, knew that the TIGRs were sold in 1993, or had any direct ownership interest in MLIBAR at any time. MLC’s only involvement was its issuance of a press release in August 1982 announcing that MLLA had acquired the stock of MLIBAR. Defendant MLIGS did not exist at the time the structured-settlement agreements were executed — it was incorporated in 1990, eight years later, and did not exist in any other form prior to that time. MLIGS administered the Hawkinses’ annuity contracts from 1993 to 2002. It had nothing to do with the TIGRs.
In May 1997, as noted above, Pardee sold the stock of MLIBAR to the Bradleys. At the time of the sale, MLIBAR had sufficient assets to meet its payment obligations to its structured-settlement payees.
More than three years later, in November 2000, MLIBAR defaulted on its obligations to more than 250 of its structured-settlement payees, including Fenter. In January 2001, the structured-settlement payees filed a class action against MLIBAR, Pardee, the Bradleys and others in the Los Angeles Superior Court (the class action). The plaintiffs in the class action alleged that MLIBAR had purchased U.S. Treasury Bonds to fund structured-settlement payments to class members, but had pledged those U.S. Treasury Bonds as collateral for loans from Morgan Stanley. MLIBAR defaulted on those loans, and Morgan Stanley foreclosed on the U.S. Treasury Bonds. MLIBAR was thus left with insufficient assets to fund its structured-settlement payments. In June 2001, MLIBAR filed for bankruptcy protection in Connecticut.
In re Structured Settlement Litigation, LASC Case No. BC244111.
D. Procedural History
Fenter was a member of the class in the class action. During the course of that litigation, Fenter discovered that MLIBAR had liquidated the TIGRs. Plaintiffs filed this action in August 2002. The trial court stayed this action pending resolution of the class action.
This action was thus filed approximately nine years after the TIGRs were liquidated, but before any of the TIGR-funded payments were due. There is no issue on this appeal, however, regarding whether this action was filed prematurely or was barred by the statute of limitations.
In November 2002, Merrill Lynch Life Insurance Company (MLLI) — which is not a party to this action — wired approximately $3.7 million to bank accounts controlled by the Hawkinses’ in Japan. The payment was made at the time and in the amount of the TIGR-funded lump-sum payments due to the Hawkinses under their structured settlement agreements. Claiming that the payment was an administrative error, however, MLLI sued the Hawkinses in Japan to recover the money. The Hawkinses and MLLI settled the Japanese litigation, with the proviso that the settlement would have “no influence” on this action. (See post Discussion Part C.)
The trial court lifted the stay in this action in March 2004. After defendants demurred to plaintiffs’ original complaint, plaintiffs filed their first amended complaint (FAC) asserting twelve causes of action: (1) intentional interference with contract; (2) negligent interference with contract; (3) breach of contract; (4) tortious breach of implied covenant of good faith and fair dealing against all defendants; (5) tortious breach of implied covenant of good faith and fair dealing against Merrill Lynch; (6) breach of fiduciary duty against Merrill Lynch; (7) breach of fiduciary duty against Pardee; (8) fraud; (9) constructive fraud; (10) conversion; (11) negligence; and (12) unjust enrichment.
Although the FAC does not specifically label the fourth and fifth causes of action as tort causes of action, plaintiffs prayed for punitive damages in both and, in their opening brief on appeal, characterize the claims as seeking recovery for “tortious breach of contract.”
Defendants demurred and moved to strike portions of the FAC. The trial court sustained without leave to amend the demurrers to plaintiffs’ claims for (2) negligent interference with contract; (4)-(5) tortious breach of the implied covenant of good faith; (6)-(7) breach of fiduciary duty; (9) constructive fraud; (10) conversion; (11) negligence; and (12) unjust enrichment. The trial court sustained with leave to amend the demurrer to plaintiffs’ (8) fraud claim. The trial court struck plaintiffs’ conspiracy allegations and their prayer for attorneys fees. The trial court overruled the demurrers to plaintiffs’ intentional interference with contract and breach of contract claims.
Plaintiffs subsequently filed a second amended complaint (SAC) alleging causes of action for (1) intentional interference with contract, (2) breach of contract, and (3) fraud. Defendants moved for summary judgment on the SAC, and the trial court granted defendants’ motions. On Merrill Lynch’s motion, the trial court concluded that (1) Merrill Lynch was not party to the contracts that plaintiffs alleged were breached, and that MLIBAR was not acting, actually or ostensibly, as Merrill Lynch’s agent in entering those contracts; (2) with respect to the intentional interference claim, plaintiffs failed to introduce evidence that Merrill Lynch knew of plaintiffs’ structured settlement contracts, or took any action designed to induce or that caused a breach of those contracts; and (3) with respect to the fraud claim, plaintiffs failed to introduce evidence that Merrill Lynch made any representations to plaintiffs, that plaintiffs relied on any such representations, or that plaintiffs’ alleged reliance was reasonable. The trial court also concluded that Merill Lynch’s alleged misconduct was neither the cause in fact nor the proximate cause of plaintiffs’ damage.
On Pardee’s motion, the trial court concluded that (1) Pardee was a not a party, the successor-in-interest to a party, or the alter ego of a party to the contracts allegedly breached; (2) with respect to the intentional interference claim, Pardee was protected by the so-called “manager’s privilege” or “agent’s immunity rule” protecting a corporate principal or employee from tort liability for interfering with a corporate contractual obligation, and that Pardee did not interfere or intend to interfere with plaintiffs’ contracts; and (3) with respect to the fraud claim, Pardee had no duty to disclose the sale of the TIGRs to plaintiffs and, because plaintiffs had no right to prevent the sale, Pardee’s non-disclosure was not the cause of plaintiffs’ damage. The trial court also concluded, as it had with respect to Merrill Lynch, that Pardee’s alleged misconduct was neither the cause in fact nor the proximate cause of plaintiffs’ damage.
The trial court entered judgment in favor of defendants. Plaintiffs timely appealed.
DISCUSSION
A. The Demurrers to Plaintiffs’ FAC
1. Standard of Review
When reviewing the trial court’s order sustaining demurrers without leave to amend, this court must examine the complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.) The court is to give the complaint a reasonable interpretation, and treat the demurrer as admitting all material facts properly pleaded. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) It does not, however, assume the truth of contentions, deductions or conclusions of law. (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125.) It is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. (Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 103; see also Franklin v. The Monadnock Co. (2007) 151 Cal.App.4th 252, 257.) Further, it is an abuse of discretion to sustain a demurrer without leave to amend if there is a reasonable possibility that the defect can be cured by amendment. (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 810; see also Rotolo v. San Jose Sports and Entertainment, LLC (2007) 151 Cal.App.4th 307, 321.)
In support of its demurrers, Merrill Lynch requested that the trial court take judicial notice of a number of documents outside the pleadings, including the structured-settlement agreements and pleadings filed in this action and the class action. In the trial court, plaintiffs objected only to the extent that the documents contained hearsay statements offered for the truth of the matters asserted. The trial court did not expressly rule on Merrill Lynch’s request for judicial notice, either from the bench or in its written order sustaining the demurrers, and its remarks from the bench regarding whether it considered the extrinsic evidence are ambiguous. Plaintiffs, in their opening brief, voice the bare complaint that defendants’ arguments on demurrer “raised factual issues outside the pleading.” Plaintiffs offer no argument or authorities, however, that the trial court improperly considered the extrinsic evidence. I have reviewed the extrinsic evidence submitted by defendants in connection with their demurrers, and conclude that, to the extent it is relevant to the issues on appeal, it does not conflict with the allegations in the FAC. I therefore need not determine whether the trial court improperly considered the extrinsic evidence in sustaining the demurrers or whether plaintiffs forfeited any such contention.
2. Negligent Interference with Contract
Plaintiffs alleged that Merrill Lynch negligently interfered with plaintiffs’ settlement agreements by fulfilling Pardee’s order to liquidate plaintiffs’ TIGRs and by failing to inform plaintiffs that their rights under the structured-settlement agreements “were in jeopardy.” Defendants argue that California does not recognize a tort cause of action for negligent interference with a contract. I agree.
The California Supreme Court expressly refused to recognize a cause of action for negligent interference with contract in Fifield Manor v. Finston (1960) 54 Cal.2d 632 (Fifield Manor). In that case, a nursing home entered into a life-care contract with a man who was subsequently struck by a negligent driver. The man was seriously injured, and died from his injuries six weeks later. (Id. at p. 634.) The Supreme Court held the nursing home could not recover against the driver, even though the driver’s negligence increased the nursing home’s cost to perform its contract to provide care for the man. (Id. at pp. 634-637.) The Court reasoned, “[W]ith the exception of an action by the master for tortious injuries to his servant, thus depriving the master of his servant’s services, . . . the courts have quite consistently refused to recognize a cause of action based on negligent, as opposed to intentional, conduct which interferes with the performance of a contract between third parties or renders its performance more expensive or burdensome.” (Id. at pp. 636.) The Court concluded that recognizing such a claim “would constitute an unwarranted extension of liability for negligence.” (Id. at p. 637.) The holding in Fifield Manor is consistent with the majority rule in the United States. (Rest.2d Torts, § 766C.)
The exception alluded to in Fifield Manor, supra, 54 Cal.2d at p. 636 for an action by a master for tortious injuries to a servant is no longer recognized under California law. (I.J. Weinrot & Son, Inc. v. Jackson (1985) 40 Cal.3d 327, 332-336, 339 fn. 8.)
Although the California Supreme Court subsequently recognized a cause of action for negligent interference with prospective economic advantage (J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799), the specific holding in Fifield Manor, 54 Cal.2d 632 has not been overruled. (LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 349.) Accordingly, this court is bound by the decision in Fifield Manor. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455.) The trial court properly sustained the demurrer to plaintiffs’ claim for negligent interference with contract.
3. Tortious Breach of the Implied Covenant of Good Faith
Plaintiffs alleged that Merrill Lynch tortiously breached the implied covenant of good faith in plaintiffs’ assignment agreements by failing to place the TIGRs in a trust for plaintffs’ benefit, by permitting Pardee to sell the TIGRs prior to maturity, by permitting the sale proceeds to be paid to Pardee, and by failing to make the future payments owed to plaintiffs. Plaintiffs also alleged that Merrill Lynch tortiously breached the implied covenant by marketing TIGRs as a component of structured settlements even though the TIGRs allegedly did not qualify for the same tax treatment as annuities or U.S. Treasury Bonds. Plaintiffs alleged that Pardee tortiously breached the implied covenant by selling the TIGRs, appropriating the proceeds of the sale, and by failing to pay plaintiffs their future payments. Defendants argue that California law does not permit claims for tortious breach of contract outside of the insurance context. Again, I agree.
In Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 102, the California Supreme Court overruled Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, and stated that the “general rule preclude[es] tort recovery for noninsurance contract breach, at least in the absence of a violation of ‘an independent duty arising from principles of tort law’ [citation] other than the bad faith denial of the existence of, or liability under, the breached contract.” Accordingly, “conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.” (Erlich v. Menezes (1999) 21 Cal.4th 543, 551, italics added.) Tort liability “‘may be found when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion; or (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.’ [Citation.]” (Id. at pp. 553-554; accord, Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 989-990; see also Benavides v. State Farm General Ins. Co. (2006) 136 Cal.App.4th 1241, 1251-1252.)
In this case, plaintiffs asserted tort claims for fraud, constructive fraud and breach of fiduciary duty. Each of those claims is based on defendants’ alleged breaches of tort duties arising from their alleged contractual relationship with plaintiffs, consistent with the rule of Erlich v. Menezes, supra, 21 Cal.4th at p. 551. In contrast, plaintiffs, in their fourth and fifth causes of action for breach of the implied covenant, do not plead the breach of any independent tort duty, nor any of the requirements for a tort cause of action set forth by the Supreme Court in Erlich v. Menezes, supra, 21 Cal.4th at p. 553-554. Rather, plaintiffs allege in their fourth and fifth causes of action only that defendants breached the implied contractual duties of good faith and fair dealing. Such claims are simple breach of contract claims for which there is no remedy in tort. (See Hunter v. Up-Right, Inc. (1994) 6 Cal.4th 1174, 1184-1185.) The trial court therefore properly sustained the demurrers to plaintiffs’ claims for tortious breach of the implied covenant of good faith.
4. Breach of Fiduciary Duty and Constructive Fraud
The elements of a claim for breach of fiduciary duty are (1) the existence of a relationship giving rise to fiduciary duties, (2) a breach of the duties, and (3) damage proximately caused by that breach. (Mendoza v. Rast Produce Co. (2006) 140 Cal.App.4th 1395, 1405.) In the FAC, plaintiffs alleged that Merrill Lynch owed them fiduciary duties because plaintiffs entrusted their settlement proceeds to Merrill Lynch; Merrill Lynch used the proceeds to purchase the TIGRs; and Merrill Lynch promised plaintiffs that the TIGRs “would be safe and held exclusively” for plaintiffs’ benefit. Pardee owed fiduciary duties, plaintiffs alleged, because he assumed the payment obligations owed to plaintiffs and took control of the TIGRs. Plaintiffs alleged that defendants breached their fiduciary duties when they sold or permitted the sale of the TIGRs and released the sales proceeds to Pardee, which Pardee misused. Defendants committed constructive fraud, plaintiffs alleged, by failing to inform plaintiffs that they had done so.
I assume without deciding that the FAC adequately alleged breaches of fiduciary duty and constructive fraud by Merrill Lynch and Pardee. I conclude, however, that any error by the trial court in sustaining the demurrers to these claims was harmless. Had these claims survived demurrer, they necessarily would have failed on summary judgment. (See Cal. Const., Art. VI, § 13; Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 800 [“‘[A] “miscarriage of justice” should be declared only when the court, “after an examination of the entire cause, including the evidence,” is of the “opinion” that it is reasonably probable that a result more favorable to the appealing party would have been reached in the absence of the error”’”]; see also Grell v. Laci Le Beau Corp. (1999) 73 Cal.App.4th 1300, 1307 [error harmless when subsequent summary judgment on statute-of-limitations grounds would have disposed of claims erroneously dismissed on demurrer]; Curtis v. 20th Century-Fox Film Corp. (1956) 140 Cal.App.2d 461, 464-465 [when two claims were based on the same factual allegations, the plaintiff was not prejudiced by erroneous ruling sustaining a demurrer to one claim when the second claim was resolved against plaintiff after trial].)
An essential element of both breach of fiduciary duty and constructive fraud claims is causation in fact — that is, defendants’ alleged misconduct must be the cause in fact of plaintiffs’ damage. (Mendoza v. Rast Produce Co., supra, 140 Cal.App.4th at p. 1405 [breach of fiduciary duty]; Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 415 [constructive fraud].) As explained in Part B.2 post, however, plaintiffs failed to submit evidence that the sale of the TIGRs and MLIBAR’s reinvestment of the sale proceeds, which occurred in 1993, was a substantial factor in causing MLIBAR to default — years later — on its obligations to pay plaintiffs. To the contrary, the evidence adduced on summary judgment indicates that plaintiffs’ damage was caused by the mismanagement of MLIBAR’s assets by the Bradleys, after Merrill Lynch and Pardee had divested their ownership interests in MLIBAR. Accordingly, any error by the trial court in sustaining defendant’s demurrers was harmless.
5. Conversion
Plaintiffs alleged that Merrill Lynch converted plaintiffs’ settlement proceeds by “wrongfully” causing the TIGRs to be purchased by MLIBAR knowing that TIGRs were “possibly not approved structured settlement funding assets under then governing tax law,” by transferring control of the TIGRs to Pardee, selling the TIGRs at Pardee’s instruction, and releasing the sales proceeds to Pardee. Plaintiffs alleged that Pardee converted the TIGRs by ordering them sold.
“A cause of action for conversion requires allegations of plaintiff’s ownership or right to possession of property; defendant’s wrongful act toward or disposition of the property, interfering with plaintiff’s possession; and damage to plaintiff. [Citation.]” (McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1491; accord, PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395.) To state a claim for conversion, therefore, plaintiffs were required to allege that, at the time of the alleged conversion, plaintiffs had possession or the right to immediate possession of the property. (Pope v. National Aero Finance Co. (1965) 236 Cal.App.2d 722, 731.) Plaintiffs failed to do so. Plaintiffs alleged that Merrill Lynch converted the settlement proceeds by “wrongfully” causing the TIGRs to be purchased by MLIBAR. At the time of the alleged conversion, therefore, the settlement proceeds were in the possession of MLIBAR, not plaintiffs. Plaintiffs did not allege that they had a right to demand immediate payment of those proceeds under the structured-settlement agreements, nor did plaintiffs allege that they had a right to demand possession of the TIGRs. Any allegations that plaintiffs had an immediate right to possess either the settlement proceeds or the TIGRs would be inconsistent with the allegations in the FAC concerning the terms of the structured-settlement agreements and the manner in which the settlement proceeds were to be paid to plaintiffs.
National Bank of New Zealand, Ltd. v. Finn (1927) 81 Cal.App. 317, 345 (Finn) has no application here. The court in that case stated at page 345, “‘[W]here a bailee, during the term of bailment, has put the chattel to a different use from that for which it was bailed, the owner thereupon becomes entitled to immediate possession . . . and may maintain trover for its conversion.’” The cited language, however, expressly refers to the “owner” of the property. The plaintiff in Finn was, the court concluded, the “real beneficial owner” of the property at issue, which was a check representing payment on a liquidated claim. (Id. at p. 344.) As the court in Finn also noted, “‘Manifestly . . . one cannot maintain the action [in trover for conversion] where [the plaintiff] had neither possession, right of possession, nor any title in the property claimed at the time of the conversion.’” (Id. at p. 345.) In this case, as noted above, plaintiffs disclaimed (and were required to disclaim) any ownership interest, legal or equitable, in both the payments by the settling defendants and the TIGRs.
Furthermore, the plaintiffs in this case did not plead a bailment, and even if they had such an allegation would have been inconsistent with the terms of the structured-settlement agreements. As noted above, the structured-settlement agreements expressly define plaintiffs’ relationships with MLIBAR not as bailors, but as creditors entitled to future cash payments. “The duties and obligations of a bailee ordinarily cannot be thrust on one against his consent — they must be voluntarily assumed as in every obligation founded on contract. [Citations.] [¶] No bailment can be implied where it appears it was the intention of the parties, as derived from their relationship to each other and from the circumstances of the case, that the property was to be held by the party in possession in some capacity other than as bailee.” (H.S. Crocker v. McFaddin (1957) 148 Cal.App.2d 639, 644 (italics added); see also Masterson, Baron & LaMothe, California Civil Practice: Business Litigation (2007) § 37:2, pp. 5-6.) A bailment relationship cannot be implied contrary to the express terms of the structured-settlement agreements. The trial court therefore properly sustained defendants’ demurrers to plaintiffs’ claim for conversion.
6. Negligence
Plaintiffs alleged that Merrill Lynch and Pardee were negligent by (1) failing to ensure that the TIGRs conformed with tax law as it related to structured settlements, and (2) failing to preserve and protect the TIGRs. Plaintiffs’ argument on appeal, however, consists of nothing more than a reiteration of the factual allegations in the FAC. Plaintiffs cite no legal authority and make no legal argument to support the proposition that Merrill Lynch or Pardee owed plaintiffs a duty of care under negligence law distinct from any contractual or fiduciary duties they might have owed. Plaintiffs therefore forfeit the issue. (People ex rel. 20th Century Ins. Co. v. Building Permit Consultants, Inc. (2000) 86 Cal.App.4th 280, 284.) In any event, plaintiffs alleged no damage from defendants’ failure to ensure that the TIGRs conformed with tax law. Plaintiffs do not allege that they incurred any unanticipated tax liability on the TIGR-funded future payments — which, of course, plaintiffs never received. Furthermore, because there was no bailment, no duty of care arose by virtue of defendants’ purported role as bailees of the TIGRs.
Plaintiffs do not argue on appeal that the trial court erred in sustaining without leave to amend the demurrer to their cause of action for unjust enrichment.
B. The Trial Court Properly Granted Summary Judgment on Plaintiffs’ SAC
1. Standard of Review
On an appeal from a grant of summary judgment, this court examines the record de novo to determine whether triable issues of material fact exist. (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 767.) The court views the evidence in a light favorable to the non-moving parties, and resolves any evidentiary doubts or ambiguities in their favor. (Id. at pp. 768-769.) The moving parties bear the burden to demonstrate “that there is no triable issue of material fact and that [they are] entitled to judgment as a matter of law.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850, fn. omitted.) The moving parties initially must “make a prima facie showing of the nonexistence of any triable issue of material fact.” (Id. at p. 850.) If the moving parties make a prima facie showing, the burden shifts to the parties opposing summary judgment “to make [their own] prima facie showing of the existence of a triable issue of material fact.” (Ibid.) “There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the part[ies] opposing the motion in accordance with the applicable standard of proof.” (Ibid., fn. omitted.)
2. Causation
In the SAC, plaintiffs alleged claims for intentional interference with contract, breach of contract, and fraud. An essential element of each of these claims is that defendants’ alleged misconduct was the cause in fact of plaintiffs’ damage. (See Civ. Code, §§ 1709, 3300, 3333; Rest.2d Contracts § 347; Rest.2d Torts, §§ 546, 766; Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55 [intentional interference with contract]; Franklin v. Dynamic Details, Inc. (2004) 116 Cal.App.4th 375, 391 [same]; St. Paul Fire and Marine Ins. Co. v. American Dynasty Surplus Lines Ins. Co. (2002) 101 Cal.App.4th 1038, 1060 [breach of contract]; Vu v. California Commerce Club, Inc. (1997) 58 Cal.App.4th 229, 233 [same]; Goehring v. Chapman University (2004) 121 Cal.App.4th 353, 364 [fraud].)
Generally, a plaintiff who proves a “breach of duty” (including breach of contract) but fails to show any “appreciable detriment” — i.e., damages — nevertheless “may recover” nominal damages and, when appropriate, costs of suit. (Civ. Code, § 3360; see Sweet v. Johnson (1959) 169 Cal.App.2d 630, 632-633.) Plaintiffs have made no argument that summary judgment was improper because they might have been entitled to nominal damages and costs. Plaintiffs therefore forfeit any such contention.
The causation analysis in a contract or tort action involves two elements. “‘One is cause in fact. An act is a cause in fact if it is a necessary antecedent of an event.’ [Citation.]” (Ferguson v. Leiff, Cabraser, Heimann & Bernstein LLP (2003) 30 Cal.4th 1037, 1045, italics in original.) The second element is proximate cause. “‘[P]roximate cause “is ordinarily concerned, not with the fact of causation, but with the various considerations of policy that limit an actor’s responsibility for the consequences of his conduct.”’ [Citation.]” (Ibid.) For purposes of this case, I address only the first element, cause in fact. (See Viner v. Sweet (2003) 30 Cal.4th 1232, 1235, fn. 1.)
Courts sometimes refer to cause in fact as “but for” causation. (Viner v. Sweet, supra, 30 Cal.4th at p. 1239-1240.)
Determining whether a defendant’s misconduct was the cause in fact of a plaintiff’s injury involves essentially the same inquiry in both contract and tort cases. (US Ecology, Inc. v. State (2005) 129 Cal.App.4th 887, 909 (US Ecology); Vu v. California Commerce Club, Inc., supra, 58 Cal.App.4th at p. 233.) “The test for causation in a breach of contract . . . action is whether the breach was a substantial factor in causing the damages.” (US Ecology, supra, 129 Cal.App.4th at p. 909.) Similarly, in tort cases, “California has definitely adopted the substantial factor test . . . for cause-in-fact determinations. [Citation.] Under that standard, a cause in fact is something that is a substantial factor in bringing about the injury. [Citations.]” (Rutherford v. Owens-Illinois, Inc. (1997) 16 Cal.4th 953, 968-969; see also Franklin v. Dynamic Details, Inc., supra, 116 Cal.App.4th at p. 391 [applying substantial-factor test in intentional interference with contract action]; Strebel v. Brenlar Investments, Inc. (2006) 135 Cal.App.4th 740, 752 [approving substantial-factor jury instruction in fraud action]; Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1095 [applying substantial-factor test in breach of fiduciary duty action].) “‘The term “substantial factor” has no precise definition, but “it seems to be something which is more than a slight, trivial, negligible, or theoretical factor in producing a particular result.’ [Citation.]” (US Ecology, supra, 129 Cal.App.4th at p. 909.) The substantial-factor test, however, “subsumes the traditional ‘but for’ test of causation.” (Viner v. Sweet, supra, 30 Cal.4th at p. 1240.) Thus, a defendant’s misconduct “‘is not a substantial factor in bringing about harm to another if the harm would have been sustained even if the actor had not’” engaged in misconduct. (Ibid., italics in original, quoting Rest.2d Torts § 432(1); see also Goehring v. Chapman University, supra, 121 Cal.App.4th at pp. 364-365.) “The crucial causation question is what would have happened if the defendant” had not engaged in the alleged misconduct. (Viner v. Sweet, supra, 30 Cal.4th at p. 1242.)
In this case, defendants met their initial burden to make a prima facie showing that plaintiffs’ losses were not caused by MLIBAR’s sale of the TIGRs and reinvestment of the sale proceeds. The undisputed evidence on summary judgment establishes that plaintiffs entered into their structured-settlement agreements in September 1982. Those agreements provide that MLIBAR “will be the owner of the [TIGRs] and the entire income of the . . . [TIGRs] will be included in the income of [MLIBAR]. [Plaintiffs] shall have no legal or equitable interest, vested or contingent, in the . . . [TIGRs] and [their] rights against [MLIBAR] . . . shall be solely those of a creditor.” Thus, plaintiffs disclaimed any ownership interest in the TIGRs and confirmed that, in the event of MLIBAR’s insolvency, they were unsecured creditors for purposes of obtaining payment on their claims. These disclaimers were necessary, in plaintiffs’ words, “to guard against claims of constructive and actual receipt by the plaintiffs of settlement money thus triggering tax liability.”
I assume for purposes of my analysis that MLIBAR’s sale of the TIGRs constituted a breach of the structured-settlement agreements. The structured-settlement agreements provide that the payments to plaintiffs were to be funded, in part, by using a portion of plaintiffs’ settlement proceeds to purchase the TIGRs. The purchase of the TIGRs was intended “to assure the ready availability to [MLIBAR] of funds payable under the Settlement Agreement, to serve as a medium for payment of said funds, and to assure the payment of such funds . . . .” Although the structured-settlement agreements do not expressly prohibit MLIBAR from liquidating the TIGRs, those agreements also do not expressly permit MLIBAR to do so. MLIBAR’s duty to maintain the TIGRs for plaintiffs’ benefit could be inferred from the obligation of good faith and fair dealing inherent in every contract. The purpose of the structured settlements was to provide for and secure future payments to the plaintiffs. It appears antithetical to that purpose to conclude that MLIBAR could, in its own unfettered discretion, liquidate the specific assets that the parties contemplated would fund those payments.
In March 1993, Pardee became the controlling shareholder in MLIBAR, holding between 90% and 100% of MLIBAR’s common stock. In August 1993, Pardee directed MLPFS to sell the TIGRs. The proceeds from the sales were reinvested by MLIBAR in “a conservative, professionally-managed [sic] securities portfolio.” In May 1997, Pardee sold the stock of MLIBAR to the Bradleys. At the time of the sale, MLIBAR had in excess of $4 million in cash, and had no debt or other obligations other than future payments to structured-settlement payees. Both at the time of the sale in May 1997 and at the time of MLIBAR’s year-end audit in December 1997, MLIBAR had sufficient assets to satisfy its present and future liabilities, including its future obligations to its structured-settlement payees.
Between 1998 and 2000, the Bradleys mismanaged MLIBAR’s assets. As noted above, the plaintiffs in the class action alleged that MLIBAR, while controlled by the Bradleys, pledged the U.S. Treasury Bonds intended to fund future structured-settlement payments to secure loans from Morgan Stanley. MLIBAR subsequently defaulted on those loans, and Morgan Stanley foreclosed on the U.S. Treasury Bonds. MLIBAR thereafter had insufficient liquid assets to satisfy its obligations to its structured-settlement payees.
In November 2000, MLIBAR failed for the first time to make payments to structured-settlement payees. MLIBAR instituted voluntary bankruptcy proceedings in June 2001. The TIGR-funded payments became due to the Hawkinses in November 2002, and to Fenter beginning in 2006, after the bankruptcy proceedings were instituted.
The summary judgment evidence thus establishes that MLIBAR was solvent at the time it was sold to the Bradleys in 1997, four years after the TIGRs were sold. MLIBAR continued to service its structured-settlement obligations until November 2000, more than seven years after the TIGRs were sold. The evidence further establishes that, even if the TIGRs not been sold in 1993, plaintiffs would have been unsecured creditors with a contractual claim to future payments in the event of MLIBAR’s insolvency. As a result, even if defendants had not engaged in their alleged misconduct, plaintiffs would have been in the same position when MLIBAR initiated bankruptcy proceedings in 2001. Defendants presented a prima facie case that the sale of the TIGRs in 1993 was not a substantial factor in causing MLIBAR’s failure to pay plaintiffs in 2002 and 2006, respectively.
The burden thus shifted to plaintiffs to produce evidence sufficient to raise a triable issue with respect to causation. To satisfy that burden, plaintiffs had to produce some evidence that their harm would not have occurred had MLIBAR not sold the TIGRs. (Viner v. Sweet, supra, 30 Cal.4th at p. 1242; US Ecology, supra, 129 Cal.App.4th at p. 909.) Plaintiffs failed to do so. Plaintiffs produced no evidence that MLIBAR would have avoided its default in 2000 and subsequent bankruptcy in 2001 if MLIBAR had not sold the TIGRs in 1993. Furthermore, plaintiffs produced no evidence that, had MLIBAR not sold the TIGRs, the TIGRs would have been exempt from the claims of MLIBAR’s other creditors and available to satisfy plaintiffs’ unsecured claims to future payments when MLIBAR went into bankruptcy in 2001. The evidence is to the contrary: the TIGRs were assets held in MLIBAR’s name, and to which plaintiffs had disclaimed any ownership interest.
Plaintiffs argue that, had they been informed in 1993 of MLIBAR’s sale of the TIGRs, they could and would have taken legal action to enjoin the sale or to impose a constructive trust against the TIGRs or the proceeds generated by their sale, and thus secured their future payments. Such a theory of causation, however, is both speculative and unsupported by the summary judgment record. (See Barnard v. Langer (2003) 109 Cal.App.4th 1453, 1462 [mere probability of future harm insufficient to sustain claim for damages]; Sukoff v. Lemkin (1988) 202 Cal.App.3d 740, 746-747 [same].) In any event, even if plaintiffs had succeeded in enjoining the sale, as noted above, there is no evidence that the portfolio of TIGRs would have prevented MLIBAR’s insolvency or that the TIGRs would have been exempted from the claims of other creditors.
Plaintiffs also argue that the sale of the TIGRs caused them harm because “the tax free status of their future payments and settlement was jeopardized.” Even if this is true, it is irrelevant. Plaintiffs produced no evidence that they incurred any unanticipated tax liability as a result of MLIBAR’s sale of the TIGRs. That defendants “jeopardized” plaintiffs’ expectation that future payments would have been tax free had they been made is not a compensable injury.
It bears emphasizing the following facts in connection with the lack of causation. The mere fact that the TIGRs were sold (which is undisputed) is insufficient to establish causation because MLIBAR had sufficient assets to pay its obligations more than four years later — that is, until after the Bradleys purchased MLIBAR’s stock. There is no allegation and no proof that any of the defendants were involved in the Bradleys’ gross mismanagement of MLIBAR’s assets between 1998 and 2001. The company that was run by the Bradleys and that petitioned for bankruptcy in 2001, called Stanwich Financial Services, is the same corporate entity that I refer to as MLIBAR. The evidence is undisputed that the obligation to pay plaintiffs always remained with the same corporate entity, MLIBAR. Plaintiffs do not contend and did not prove that the payment obligations were transferred or reassigned at MLIBAR’s option. Further, the Bradleys purchased MLIBAR’s common stock. They did not purchase the company’s assets or assume its liabilities. MLLA and Pardee had both sold their stock in MLIBAR. They did not own stock in MLIBAR or otherwise control MLIBAR’s assets when the harm to plaintiffs occurred. The failure to recognize these facts reflects a misunderstanding of the transactions and entities involved.
I acknowledge that plaintiffs have suffered harm. They were not paid sums they were due under their structured-settlement agreements beginning in 2002 and 2006, respectively. But the wrongdoing that plaintiffs allege by these defendants — the sale of the TIGRs in 1993 — did not cause that harm.
3. Plaintiffs’ Claims Otherwise Lack Merit
Plaintiffs’ failure to raise a triable issue with respect to causation is sufficient to affirm the summary judgment. I will nevertheless discuss the other issues raised by plaintiffs.
(a) Breach of Contract
In granting summary judgment, the trial court concluded that plaintiffs failed to raise triable issues of fact regarding whether (a) Merrill Lynch or Pardee were parties to the structured-settlement agreements; (b) MLIBAR had acted as Merrill Lynch’s actual or ostensible agent in entering into the assignment agreements; and (c) Pardee was liable on the assignment agreement as the successor-in-interest to or alter ego of MLIBAR.
Appellants appear to have abandoned the theory that Pardee is liable on the contracts as the successor-in-interest to MLIBAR, as they make no such argument on appeal. I therefore do not address the issue.
I agree with the trial court. The structured settlement agreements were entered by MLIBAR in its own name. They were signed by a member of the Schultz family on behalf of MLIBAR. The Schultzes founded the company and continued to operate it after they sold their stock in it to MLLA. The agreements do not mention any other Merrill Lynch entity; to the contrary, the agreements refer only (and repeatedly) to MLIBAR. Further, defendants introduced testimony from officers and employees of MLIBAR involved in plaintiffs’ structured settlements that they acted, and were authorized to act, only for MLIBAR and no other Merrill Lynch entity. There is no evidence to support the conclusion that any Merrill Lynch entity other than MLIBAR was a direct party to the structured-settlement agreements.
Plaintiffs argue that MLIBAR entered the structured-settlement agreements as the agent of Merrill Lynch. Although the existence of an agency relationship is usually a question of fact, it “becomes a question of law when the facts can be viewed in only one way.” (Metropolitan Life Ins. Co. v. State Bd. of Equalization (1982) 32 Cal.3d 649, 658.) There no indication in the structured-settlement agreements that MLIBAR entered into those agreements in any capacity other than as a principal. A disclosed principal can be held liable on a written contract made in the name of the agent only “if such intent is plainly inferable from the instrument itself.” (Civ. Code § 2337; Sunset Mill. & Grain Co. v. Anderson (1952) 39 Cal.2d 773, 778; Fundin v. Chicago Pneumatic Tool Co. (1984) 152 Cal.App.3d 951, 956-957 [claim that distributor entered sales contract as manufacturer’s agent was precluded by written agreement when “there is nothing in the contract itself from which one could infer that [distributor’ purported to act as [manufacturer’s agent or that [manufacturer] was [distributor’s] principal”].) If no such intent is inferable from the written agreement itself, extrinsic evidence is inadmissible to bind a principal to a contract made in the agent’s name. (Ibid.) Plaintiffs’ agency argument thus fails.
Although extrinsic evidence is admissible to identify an undisclosed principal (see 3 Witkin, Summary of Calif. Law (10th ed. 2005) Agency & Employment § 158 at p. 203), plaintiffs do not contend that Merrill Lynch was “undisclosed.”
Plaintiffs’ agency argument is also barred by the equal dignities rule. In defining the authority of agents, Civil Code section 2309 provides, “An oral authorization is sufficient for any purpose, except that an authority to enter into a contract required by law to be in writing can only be given by an instrument in writing.” (Italics added.) Because the structured-settlement agreements could not by their terms be performed within one year, they were subject to the statute of frauds. (Civ. Code § 1624, subd. (a)(1).) It therefore appears that MLIBAR could only be authorized to execute the structured settlement agreements as an agent of Merrill Lynch if it was authorized in writing to do so. (See McGirr v. Gulf Oil Corp. (1974) 41 Cal.App.3d 246, 254-255.) No evidence of such authorization appears in the record.
Plaintiffs argue that, even if MLIBAR was not Merrill Lynch’s actual agent, they relied on MLIBAR’s ostensible authority to bind Merrill Lynch. To establish an ostensible agency, plaintiffs must demonstrate that Merrill Lynch “intentionally or by want of ordinary care, cause[d] or allow[ed] [plaintiffs] to believe” that MLIBAR was acting as Merrill Lynch’s agent. (Civ. Code, § 2317.) Plaintiffs must therefore show “(1) conduct by [Merrill Lynch] that would cause a reasonable person to believe there was an agency relationship and (2) reliance on that apparent agency relationship by [plaintiffs].” (Mejia v. Community Hospital of San Bernardino (2002) 99 Cal.App.4th 1448, 1457.) “The act or declaration of the agent alone can never establish ostensible authority; there must be some conduct on the part of the alleged principal.” (3 Witkin, Summary of Cal. Law (10th ed. 2005) Agency & Employment, § 144, p. 189.)
Plaintiffs argue that the trial court erred in failing to consider extrinsic evidence in rejecting their ostensible agency theory. Generally, extrinsic evidence is admissible on a claim of ostensible agency “to show the reasonable appearances upon which [the plaintiff] acted.” (Crabbe v. Mires (1952) 112 Cal.App.2d 456, 460.) Even considering plaintiffs’ extrinsic evidence, however, plaintiffs failed to raise a triable issue of ostensible authority.
The summary judgment record contains no evidence of an act or omission by Merrill Lynch to raise a triable issue regarding an ostensible agency. Plaintiffs rely primarily on a letter from William Morgan, the Hawkinses’ attorney, to Takako Hawkins dated November 17, 1982 — after the structured settlement agreements had been executed — in which Morgan characterizes MLIBAR as “the correspondent of Merrill Lynch, or more correctly, is a part of Merrill Lynch.” On its face, this refers to nothing more than the corporate affiliation between Merrill Lynch and MLIBAR. Morgan confirmed this understanding in his deposition: “I meant,” he testified, “that Merrill Lynch had purchased IBAR and what IBAR did was, in fact, done [as] a part of Merrill Lynch.” Morgan refers to no act by Merrill Lynch that led him to rely on Merrill Lynch as the principal of MLIBAR. To the contrary, Morgan testified that he had no communications with anyone from Merrill Lynch. Morgan also testified that he had represented clients in more than ten structured settlements with IBAR before it was acquired by MLLA and changed its name to MLIBAR, and was not even aware that IBAR had been acquired by a Merrill Lynch entity when he originally approached IBAR regarding the Hawkinses’ settlement. It must be remembered that MLIBAR was originally owned by the Schultzes, and had been engaged in the structured settlement business for four years before it was acquired by MLLA. MLLA’s acquisition of the MLIBAR’s stock did not change the company’s business — the company continued in the structured settlement business, under the Schultzes’ management, for years thereafter. MLIBAR was not, by the acquisition of its stock by MLLA, suddenly transformed from a going-concern doing business for its own account to being the agent for Merrill Lynch. None of the Merrill Lynch entities — including MLLA, MLIBAR’s direct parent — was in the structured settlement business.
With respect to Fenter’s claim, plaintiffs introduced no evidence that she or her representatives actually relied upon MLIBAR’s affiliation with Merrill Lynch or any conduct of Merrill Lynch in entering into her structured settlement. The trial court therefore properly granted summary judgment on Fenter’s claim.
The only evidence cited by plaintiffs of an act by Merrill Lynch that predated the structured-settlement agreements was an August 1982 press release by MLC announcing that MLLA had acquired the stock of MLIBAR. There is no evidence, however, that plaintiffs received or relied upon the press release. All of the other evidence cited by plaintiffs post-dates the structured settlement agreements and therefore could not have been relied upon by plaintiffs.
The mere fact that MLIBAR’s name included the words “Merrill Lynch” does not raise a triable issue of ostensible agency. Plaintiffs rely on Kaplan v. Coldwell Banker Residential Affiliates, Inc. (1997) 59 Cal.App.4th 741, 747-748. In that case, the plaintiff testified that he relied on “the venerable name, Coldwell Banker, the advertising campaign, the logo, and the use of the word ‘member’” to believe that a franchisee was the ostensible agent of Coldwell Banker. (Ibid.) The court of appeal held that this was sufficient to create a triable issue of fact with respect to ostensible agency. (Ibid.) In this case, however, Merrill Lynch did not promote MLIBAR’s settlement services prior to the time plaintiffs entered into their structured settlement agreements in September 1982 — the only promotion evidenced in the record was done by MLIBAR, and there is no evidence that plaintiffs saw or relied upon it. (See Emery v. Visa International Service Ass’n (2002) 95 Cal.App.4th 952, 961 [promotion by merchants using Visa trademarks cannot give rise to ostensible agency; ostensible agency “must be based on the acts or declarations of the principal and not solely upon the agent’s conduct”].) Kaplan is therefore distinguishable.
Plaintiffs also argue that Merrill Lynch “ratified” the structured-settlement agreements because various Merrill Lynch entities sold the annuities and TIGRs to MLIBAR and subsequently administered those assets. “A principal cannot ratify the act of the alleged agent, unless the ‘agent’ purported to act on behalf of the principal.” (Emery v. Visa International Service Ass’n, supra, 95 Cal.App.4th at p. 961.) There is no evidence that MLIBAR purported to act on behalf of Merrill Lynch. MLIBAR entered the structured-settlement agreements in its own name, and those agreements do not mention Merrill Lynch. The purchase by MLIBAR of the both the annuities and the TIGRs was specifically contemplated in the structured-settlement agreements. Merrill Lynch presented evidence that the annuities were administered by MLIGS pursuant to a separate agreement between MLIGS and MLIBAR.
Plaintiffs also failed to establish that they were “third-party beneficiaries of the TIGRs” because they failed to establish the terms of any contract relating to the TIGRs, other than the structured-settlement agreements to which plaintiffs were direct parties. I can discern, and plaintiffs’ pleaded, no other agreement that was breached.
It appears that plaintiffs’ third-party beneficiary theory might relate to the purchase-sale agreement between MLIBAR and MLPFS with respect to the TIGRs. Plaintiffs, however, did not plead the breach of any such agreement, and there is no such agreement in the record. The only document that might constitute such an agreement is the MLPFS offering circular for the TIGRs. The offering circular does not state or imply that TIGRs were being offered (to the general public) for plaintiffs’ benefit, or for the benefit of structured-settlement plaintiffs generally. Nor do the offering circulars contain a pledge by MLPFS to hold the TIGRs for plaintiffs’ benefit, or for any period of time. To the contrary, the offering circulars state that MLPFS contemplated that TIGRs would be transferable on the secondary market. It should be noted that the TIGRs were never “transferred” to Pardee; they were held in MLIBAR’s brokerage account at MLPFS until sold, when the proceeds were remitted to and reinvested by MLIBAR.
With respect to Pardee, plaintiffs conceded below that Pardee is not a direct party to the structured settlement agreements. On appeal, plaintiffs rely solely on the contention that, because Pardee was the sole shareholder of MLIBAR when it sold the TIGRs in 1993, he should be held liable on the contracts on an alter-ego theory. Plaintiffs, however, did not plead an alter-ego theory. “A defendant moving for summary judgment need address only the issues raised by the complaint; the plaintiff cannot bring up new, unpleaded issues in his or her opposing papers.” (Government Employees Ins. Co. v. Superior Court (2000) 79 Cal.App.4th 95, 98 fn. 4.) The trial court therefore properly granted summary judgment on plaintiffs’ breach of contract claim.
(b) Intentional Interference with Contract
The elements of a claim for intentional interference with contract are (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. (Quelimane Co. v. Stewart Title Guaranty Co., supra, 19 Cal.4th at p. 55.) It is undisputed that, at the time the TIGRs were sold, they were held in a brokerage account at MLPFS, and that the brokerage account was in the name of MLIBAR. The MLPFS broker who executed MLIBAR’s order to sell the TIGRs declared that he personally had no knowledge of plaintiffs’ structured settlement agreements. Plaintiffs did not dispute that evidence. Nor do plaintiffs cite to any evidence to raise a triable issue that MLPFS, MLC or MLLA had constructive knowledge of the structured settlement agreements.
Merrill Lynch, in effect, concedes that the summary judgment evidence raised an issue whether MLIGS had knowledge of the Hawkinses’ structured settlement because MLIGS administered the Hawkinses’ annuities. Plaintiffs, however, did not allege and have introduced no evidence that MLIGS interfered with the agreements. The trial court therefore properly granted summary judgment in favor of Merrill Lynch.
Plaintiffs argue that the evidence of the 2002 wire transfer was admissible to rebut Merrill Lynch’s claim that they lacked knowledge of the structured settlement agreements. As discussed post, the trial court did not abuse its discretion in excluding evidence of the wire transfer. In any event, evidence of the wire transfer relates only to MLLI, which is not a defendant in this action. Plaintiffs introduced no evidence that the knowledge of MLLI should be imputed to Merrill Lynch.
Pardee, as an officer of MLIBAR, cannot be held liable for interfering with MLIBAR’s contract because of the agent’s immunity rule: “‘[O]rdinarily corporate agents and employees acting for and on behalf of the corporation cannot be held liable for inducing a breach of the corporation’s contract since being in a confidential relationship to the corporation their action in this respect is privileged.’” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 512 fn. 4, quoting Wise v. Southern Pacific Co. (1963) 223 Cal.App.2d 50, 72; see also Shoemaker v. Myers (1990) 52 Cal.3d 1, 24.) Thus, Pardee cannot be held liable for inducing MLIBAR’s alleged breach of contract absent evidence that he was acting for his own benefit, and not in the best interests of MLIBAR.
The sole case relied upon by plaintiffs, Price v. Hibbs (1964) 225 Cal.App.2d 209, is inapposite. In that case, the defendants were corporate officers alleged to have “wrongfully convert[ed] the assets of said corporation to their own personal use and benefit, thereby destroying the value of said corporation and the value of the capital stock of said corporation.” (Id. at p. 219.) Misappropriating corporate property to the extent that the corporation is rendered insolvent is not “acting for and on behalf of” the corporation. That is not what happened in this case.
In this case, Pardee declared that selling the TIGRs and reinvesting the proceeds in MLIBAR’s “conservative, professionally managed, securities portfolio” permitted MLIBAR to make its investment portfolio “uniform and conservative,” to realize “a substantial capital gain” and “an increased yield” and put MLIBAR “in a stronger position to perform its contractual obligations to its settlement payees and other general creditors.” Pardee further declared that, when he sold MLIBAR in 1997, MLIBAR had sufficient assets to meet its obligations to plaintiffs. The TIGRs were sold in 1993, approximately four years before Pardee sold MLIBAR, and approximately eight years before MLIBAR filed for bankruptcy.
Plaintiffs argue that, to the extent that the sale of the TIGRs and reinvestment of the proceeds might enhance the value of MLIBAR, it also enhanced the value of Pardee’s shareholdings. Most actions that benefit a corporation, however, will incidentally benefit its shareholders. Plaintiffs cite no authority that this alone is sufficient to strip a shareholder-officer of the agent’s immunity rule. The trial court properly granted summary judgment on plaintiffs’ claim for intentional interference with contract.
(c) Fraud
Plaintiffs alleged in the SAC that MLIBAR represented that MLIBAR was acting as the agent of Merrill Lynch, and that Merrill Lynch, “by their actions and/or inactions, authorized, consented to and/or ratified such representations.” Through its agent MLIBAR, plaintiffs alleged, Merrill Lynch made the fraudulent representations that (a) payments under plaintiffs’ settlement would be funded by TIGRs; (b) the payments funded by the TIGRs would be tax free, requiring plaintiffs to disclaim any legal or equitable interest in the TIGRs, and (c) the TIGRs “would be held inviolate” and “backed by the financial strength and reputation of [Merrill Lynch]” such that payment was guaranteed. Plaintiffs also alleged that Merrill Lynch fraudulently concealed the 1993 sale of the TIGRs. On summary judgment, plaintiffs did not attempt to establish liability for fraud on a conspiracy or aiding and abetting theory. They offered no evidence or argument to support those allegations in the SAC. Furthermore, plaintiffs did not argue on appeal either conspiracy or aiding-and-abetting liability for fraud. Those allegations have therefore been abandoned.
The summary judgment evidence establishes that Pardee made no representations to plaintiffs. The only evidence of a representation by Merrill Lynch that predated the structured-settlement agreements was MLC’s press release stating that MLLA had acquired MLIBAR. That press release, however, contained none of the alleged misrepresentations, and there was no evidence that plaintiffs saw or relied upon the press release. Plaintiffs did not plead fraud by omission in the SAC, and in any event failed to establish that Merrill Lynch (as distinct from MLIBAR) had a duty to disclose the sale of the TIGRs.
Defendants adequately presented the evidence and issues relating to plaintiffs’ fraud claim in their separate statements. The misrepresentations alleged by plaintiffs were pleaded in generalities (e.g., that the “TIGRs would be held inviolate” and “backed by the financial strength of Merrill Lynch”), not by reference to specific documents or oral communications. If defendants’ separate statements failed to anticipate the precise documents plaintiffs were to rely upon, the fault lies with plaintiffs’ failure to allege the fraud with the requisite particularity. Defendants’ separate statements nevertheless refer to the marketing materials relied upon by plaintiffs; the fact that Merrill Lynch never communicated with the Hawkinses’ attorney, upon whom the Hawkinses admittedly relied (Ms. Hawkins does not speak English, and in 1982 Clive Hawkins was an infant); and that the Hawkinses’ attorney did not rely on any Merrill Lynch marketing materials. Defendants also submitted extensive responses to plaintiffs’ separate statements.
Plaintiffs did not make any contention to the contrary, nor were defendants given the opportunity to brief any such contention.
I could find no document, piece of testimony or misrepresentation as raising a triable issue as to a fraud claim. The Schultzes and Egly were representatives of MLIBAR, not Merrill Lynch, and none of them testified as to any statements by Merrill Lynch. Assuming Takako Hawkins’ declaration was admissible, it is insufficient to raise a triable issue of a misrepresentation by Merrill Lynch. Ms. Hawkins declared that, prior to entering into the structured-settlement agreements, she was visited in her home by two men. She did not know the name of the company the men worked for, but knew they “were from the company which was going to set up our settlement.” (Italics added.) She had been alerted that the men would come by her attorney, Morgan. Morgan testified that he had no communications with Merrill Lynch. Further, Ms. Hawkins does not specify any misrepresentation made by the men who visited her — rather, she declared that she was told about Merrill Lynch by her attorney. The trial court properly granted summary judgment on the fraud claim.
The Hawkins declaration was excluded by the trial court because Ms. Hawkins does not speak English, but submitted an uncertified, English-language declaration drafted by a Japanese attorney.
C. The Trial Court Properly Struck the Allegations Concerning the Wire Transfer
1. Factual and Procedural Background
Paragraph 76 of the SAC (hereafter “Paragraph 76”) alleged, “On November 15, 2002, [MLLA] transferred to the Hawkins’ Japanese bank accounts, the full amount [$3,697,500] of the settlement payments owed to Clive and Takako Hawkins . . . . Thereafter, MLLA filed a civil suit in Tokyo, Japan against the Hawkins [sic] seeking the return of the funds. Pursuant to a settlement agreement reached in the Japanese lawsuit, some part of the funds remain in an escrow account in New York pending the outcome of this action.”
Merrill Lynch moved pursuant to Code of Civil Procedure section 436, subdivision (b) to strike Paragraph 76 and for an order preventing plaintiffs “from presenting evidence or argument in this action regarding the November 15, 2002 wire of funds to [the Hawkinses] and the Japanese litigation and settlement with respect to that wire transfer.” Merrill Lynch claimed that MLLI — a Merrill Lynch subsidiary that is not involved this action — and not defendant MLLA had made the wire transfer; that MLLI had done so as the result of an administrative error; and that MLLI thereafter instituted litigation in Japan to recover those funds.
The litigation in Japan was settled pursuant to an agreement providing that the disputed funds would be placed into escrow until this action was finally adjudicated or December 31, 2005, whichever occurred first (the “Escrow Agreement”). If this action was not finally adjudicated prior to December 31, 2005, the funds were to be paid to MLLI. Article 8 of the Escrow Agreement provided:
“Article 8. No Influence on California Action.
“Unless otherwise specifically set forth herein, the execution of this Agreement, communications relating to this Agreement or the Dispute, or performance under this Agreement, shall not be considered as admissions by either party with respect to any matters of the California Action, and no party shall assert that the facts relating to this agreement [sic] have any effect whatsoever on the claims and defenses in the California Action.”
The “part[ies]” referenced in Article 8 are MLLI and the Hawkinses. The “California Action” is defined in Article 6 as this action; Article 6 specifically identifies the Merrill Lynch entities as defendants in this action. The term “Dispute” used in Article 8 is defined in Article 1 as the Hawkinses’ disputed claim to the money wired by MLLI into the Hawkinses’ accounts.
The trial court granted Merrill Lynch’s motion, striking Paragraph 76 and ordering that “[p]laintiffs shall not present evidence or argument in this action regarding the November 15, 2002 wire of funds to Takako and Clive Hawkins and the Japanese litigation and settlement with respect to that wire transfer.” The trial court observed, “It sounds pretty clear to me [from Article 8] that what [the parties] did is they said let’s put on hold — get the money out of the [Hawkinses’] account, put on hold the dispute that may be arising or may have brewed in Japan, and await the resolution of the California Action, and that the events that gave rise to this particular dispute in Japan are not to have any effect on what goes on in California. In other words, it’s just a nullity.”
2. The trial court did not abuse its discretion in granting the motion to strike
This court reviews the trial court’s order ruling the motion to strike for abuse of discretion. It is plaintiffs’ burden to establish such abuse. (Pacific Gas & Electric Co. v. Superior Court (2006) 144 Cal.App.4th 19, 23; Leader v. Health Indus. of America, Inc. (2001) 89 Cal.App.4th 603, 612.)
The trial court properly interpreted the Escrow Agreement. Although MLLI (rather than Merrill Lynch) was the party to the Escrow Agreement, MLLI has never been a party to this action. Article 8 therefore could not have been intended to protect MLLI’s interests in this litigation. Article 6, on the other hand, expressly identifies the Merrill Lynch entities as defendants in the instant action. Article 8 of the Escrow Agreement thus expresses the parties’ intent to benefit Merrill Lynch by ensuring that “facts relating to” the disputed wire transfer and the parties’ settlement of that dispute would have, as the title of Article 8 indicates, “no influence” on this action. Article 8 thus precluded both the allegations stated by plaintiffs in Paragraph 76 and the admission of evidence relating to the wire transfer and Escrow Agreement. Merrill Lynch had standing to enforce Article 8 as an express third-party beneficiary. (Civ. Code, § 1559; Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 524; Prouty v. Gores Technology Group (2004) 121 Cal.App.4th 1225, 1232 [“‘It is not necessary that the beneficiary be named and identified as an individual; a third party may enforce a contract if he can show he is a member of a class for whose benefit it was made’”].)
Furthermore, plaintiffs have, in effect, conceded that the trial court’s interpretation of the Escrow Agreement as barring reference to or evidence concerning the Escrow Agreement is correct. In their FAC, plaintiffs stated with regard to the Escrow Agreement, “Pursuant to a settlement agreement reached in the Japanese lawsuit . . . the Hawkins [sic] are not permitted to argue that such payment or any of MLLA’s or Merrill Lynch’s actions in this regard support any of the claims in this action.” (Italics added.) Further, in their opposition to defendants’ demurrers to the FAC, plaintiffs cited this statement from the FAC and added, “The Escrow Agreement precludes the Hawkins [sic] from arguing that the [$3.7 million] settlement payment is an admission of Merrill Lynch’s liability and also evidence that for the last 20 years, the Merrill Lynch defendants knew of, and acknowledged, their obligation to pay the Hawkins’ [sic] settlement.” (Italics added.)
The evidence submitted by defendants in support of the motion to strike consisted of a properly authenticated copy of the Escrow Agreement, executed in counterparts, in the original Japanese, and an English translation of the Escrow Agreement by a Japanese attorney who declared that the translation was “accurate,” but who did not state his qualifications as a translator. (See Cal. Rules of Court, rule 3.1110(g) [former rule 311(e)] [“Exhibits written in a foreign language shall be accompanied by an English translation, certified under oath by a qualified interpreter”].) Plaintiffs objected that the translation was “uncertified.” The English translation of the Escrow Agreement submitted by defendants was thus inadmissible. Any error in admitting the exhibit was, however, harmless. As noted in the text, plaintiffs had already admitted the substance of Article 8 in their FAC and opposition to defendants’ demurrers. Further, plaintiffs subsequently submitted an English translation of the Escrow Agreement as an exhibit to the declaration of Takako Hawkins in opposition to defendants’ motions for summary judgment. In all material respects, the translation offered by plaintiffs is essentially identical to the translation offered by defendants.
Plaintiffs argue that Article 8 is unenforceable in California courts because it violates Evidence Code, section 911 and is contrary to California public policy. The cases relied upon by plaintiffs, however, are inapposite. Those cases concern agreements purporting to prevent third-party witnesses from giving evidence in cases between other litigants. (Williamson v. Superior Court (1978) 21 Cal.3d 829, 836-837 [holding unenforceable an agreement to suppress the harmful testimony of co-defendant’s expert witness in personal injury action by third party]; McPhearson v. Michaels Co. (2002) 96 Cal.App.4th 843, 848 [employee who entered confidential settlement agreement with employer was not barred thereby from testifying as percipient witness to events related to a second employee in lawsuit brought by the second employee]; Smith v. Superior Court (1996) 41 Cal.App.4th 1014, 1025 [former employee of auto manufacturer subject to an agreement not to testify could not be enjoined from testifying against former employer in product liability actions brought by third-party plaintiffs].) This is not a case, however, in which a third party seeks to present evidence relating to the wire transfer. Here, the Hawkinses themselves agreed not to present evidence of the wire transfer in their own case as partial consideration for the Escrow Agreement. Litigants may voluntarily agree not to present specific evidence in their own case. (Tower Acton Holdings v. Los Angeles County Waterworks District No. 37 (2002) 105 Cal.App.4th 590, 601-602.)
Evidence Code, section 911, subdivision (c) provides, “No person has a privilege that another shall not be a witness or shall not disclose any matter or shall not produce any writing, object, or other thing.”
Plaintiffs also argue that the Escrow Agreement “expired” by its own terms on December 31, 2005, so that it should not have been enforced by the trial court to preclude evidence of the wire transfer in this case. We note, however, that the trial court’s order is dated April 12, 2005, eight months before the Escrow Agreement purportedly “expired.” In any event, although Article 6 indicates that the escrow of the disputed funds would terminate no later than December 31, 2005, no termination date is specified with respect to the Hawkinses’ obligations under Article 8. As noted above, the text of Article 8 indicates that the parties intended to preclude evidence relating to the wire transfer in this action. Absent a clear indication of the parties’ contrary intent, it would be unreasonable to construe Article 8 to terminate prior to the final adjudication of this action.
Finally, plaintiffs argue that Fenter was not a party to the Escrow Agreement, and that the trial court therefore erred to the extent that it barred her from introducing evidence relating to the wire transfer. I disagree. Although Fenter might not be barred from introducing such evidence by the Escrow Agreement, plaintiffs have never articulated — either in the trial court or on appeal — how a wire transfer of funds by a Merrill Lynch entity that is not a party to this action, into the Hawkinses’ accounts, is probative of Fenter’s claims. In fact, in their motion to compel Merrill Lynch to produce documents relating to the wire transfer (discussed below), plaintiffs did not assert that such documents were relevant to Fenter’s claim. I therefore perceive no abuse of discretion in excluding evidence of the wire transfers.
D. Plaintiffs’ Motion to Compel Production of Documents
1. Factual and Procedural Background
On August 4, 2004, while the demurrers to plaintiffs’ FAC were pending, plaintiffs served identical requests for the production of documents on three Merrill Lynch entities pursuant to Code of Civil Procedure, section 2031 (the document requests). The document requests sought ten categories of documents relating to the creation and marketing of TIGRs generally, plaintiffs’ structured settlements and the payments made thereunder, and the liquidation of the TIGRs. The document requests also sought documents relating to the November 2002 wire transfer and the related Japanese litigation, and documents relating to the annuity policies issued in connection with the Hawkinses’ structured settlement. The document requests required responses on or before September 3, 2004. (Code Civ. Proc., § 2031.260.)
The Civil Discovery Act of 2004 (the “2004 Act”) became effective July 1, 2005 (Code Civ. Proc., § 2016.010), after the discovery at issue here was served. The 2004 Act reorganized and renumbered the provisions of the Civil Discovery Act of 1986, but the 2004 Act was not intended to effect any substantive changes in the law. (Stats. 2004, ch. 182, § 61 [“Nothing in this act is intended to substantively change the law of civil discovery”]; see Sinaiko Helathcare Consulting, Inc. v. Pacific Healthcare Consultants (2007) 148 Cal.App.4th 390, 395 fn. 2.) For ease of reference, I refer to the relevant statutory provisions as renumbered and reorganized by the 2004 Act.
On the day Merrill Lynch’s responses were due, however, the trial court sustained the demurrers to the FAC. From the bench, the trial court indicated its intent to “move [the parties] directly into settlement” and stated, “I don’t want you to do a thing on this thing until I’ve declared an impasse. That’s my intent.” Accordingly, the court set a status conference for October 18, 2004, stating, “I will stay everything on this case until such time as I see you again.” The trial court ordered plaintiffs not to file an amended complaint, because it did not want to trigger defendants’ time to respond prior to a settlement conference. The trial court concluded, “Right now I am staying everything on this case until I see you back on that October 18 date. So your [plaintiffs’] time in which to amend . . . is stayed. Even if you were to do something they’re [defendants] not going to have to respond or do anything. . . . Everything is stayed on this case until I get a chance to talk to you guys.” In its written order sustaining the demurrers, the trial court ordered that “[a]ll proceedings other than settlement discussions are stayed until the status conference set for Monday, October 18, 2004.”
It does not appear from the record, however, that a status conference occurred in this case on October 18, 2004. The register of actions notes the entry on October 7, 2004 of a stipulation and order regarding a settlement conference, but no such order is included in the record. According to declarations filed by the parties on plaintiffs’ motion to compel, it appears that an unsuccessful mediation occurred before the trial court on November 23, 2004. No record of such proceedings has been included in the record on appeal. Counsel for Merrill Lynch declared, “On November 23, 2004, after a failed mediation effort, the Court ordered plaintiffs to file their amended complaint by January 15, 2005, granted defendants until February 6, 2005 to respond, and set a status conference for February 17, 2005 (which was later resecheduled to March 2).” No such order appears in the record. Counsel for plaintiffs declared that “[t]he stay was lifted at the conclusion of the mediation.” Again, no such order appears in the record.
The record does reflect that plaintiffs filed their SAC on January 15, 2005, and that Merrill Lynch filed its motion to strike with respect to the wire transfers (discussed above) on February 4, 2005. On February 8, 2005, Merrill Lynch filed its answer to the SAC.
Merrill Lynch responded to the document requests on February 25, 2005. Based on Article 8 of the Escrow Agreement, Merrill Lynch refused to produce documents relating to the November 2002 wire transfer and the ensuing Japanese litigation (Request Nos. 5 and 6), and refused to produce documents relating to the Hawkinses’ annuity policies on the ground that this action concerned only the TIGRs, not the annuities (Request No. 10). Merrill Lynch agreed to produce documents in response to the other requests (as construed and limited by Merrill Lynch), to the extent it had not already done so. Merrill Lynch’s responses, however, were not verified, as required by Code of Civil Procedure, section 2031.250. Merrill Lynch did not deliver verifications to plaintiffs until May 18, 2005, nearly three months after the responses were served.
The trial court held a status conference on March 2, 2005, the first proceeding on the record since the trial court imposed the stay on September 3, 2004. The parties reported that plaintiffs had propounded written discovery and that Merrill Lynch had responded. Plaintiffs did not challenge the timeliness of, or otherwise indicate any dissatisfaction with, the responses. The following colloquy occurred at the status conference:
“THE COURT: Refresh my memory with respect to the stay. . . . Is the stay still in force?
“[PLAINTIFFS’ COUNSEL]: The stay is no in force any longer.
“THE COURT: I didn’t think so.
“[MERRILL LYNCH’S COUNSEL]: After the — after the — mediation effort failed, I think Your Honor said, go ahead —
“THE COURT: Go ahead.
“[MERRILL LYNCH’S COUNSEL]: — and respond, get it going. Yeah.
“THE COURT: So I’m going to leave you to your own devices with respect to discovery, I guess; is that right?”
The trial court set a further status conference for June 8, 2005 “concerning the progress with respect to discovery and also a timing on the hearing of the dispositive motion.”
On April 11, 2005, plaintiffs moved pursuant to section 2031.300 (former section 2031, subd. (l)) to compel Merrill Lynch to produce documents pursuant to the document requests. Plaintiffs argued that Merrill Lynch’s responses were untimely because served more than 30 days after the stay ended at the unsuccessful mediation on November 23, 2004, and that Merrill Lynch thus waived all objections to the discovery. Plaintiffs also moved in the alternative to compel further responses pursuant to section 2031.310 (former section 2031, subd. (m)), arguing that Merrill Lynch’s specific objections lacked merit. On April 12, 2005, the trial court entered its order striking Paragraph 76 and precluding plaintiffs from presenting evidence or argument relating to the wire transfer.
Merrill Lynch opposed plaintiffs’ motion to compel and, in the alternative, moved for relief from any waiver of objections pursuant to Code of Civil Procedure, section 2031.300, subdivision (a). Merrill Lynch asserted that the discovery stay was in place until the March 2, 2005 status conference, contrary to plaintiffs’ contention that the discovery stay had expired on November 23, 2004. Merrill Lynch argued that its responses were therefore timely. Merrill Lynch further argued that plaintiffs had failed to meet and confer, as required by Code of Civil Procedure, sections 2016.040 and 2031.310, subdivision (b)(2).
The trial court agreed with Merrill Lynch that the discovery stay had not expired in November 2004. The trial court stated, “And it was never the court’s intent that somehow when the . . . stay on the action . . . was lifted that somehow everybody was going to jump right back into the seat where they were. And the reason for that is I didn’t have an operative pleading on file as of the November 23 [settlement conference]. I had no idea what allegations were going to be before the court. . . . So to try and [sic] argue that there has been some type of waiver and this time period, whatever it was, was missed I think is not appropriate. . . . There has been no waiver. . . . It is clearly not what this court had in mind. . . . And so, having said that, I don’t find any issue concerning timeliness. And I don’t find any waiver.” The trial court therefore denied plaintiffs’ motion under section 2031.300.
The trial court and counsel for Merrill Lynch offered to permit plaintiffs the opportunity to meet and confer regarding the substance of Merrill Lynch’s objections, as required by section 2031.310, but plaintiffs declined to do so. The trial court therefore treated plaintiffs’ motion to compel responses as a motion to compel further responses under section 2031.310 and denied the motion because, among other things, plaintiffs had failed to meet and confer.
2. The Trial Court Did Not Abuse Its Discretion In Denying Plaintiffs’ Motion to Compel
This court reviews the trial court’s discovery order for abuse of discretion. (John B. v. Superior Court (2006) 38 Cal.4th 1177, 1186.) It will reverse only “only when it has been demonstrated that there was no legal justification for the order denying the discovery requested.” (Ochoa v. Fordel, Inc. (2007) 146 Cal.App.4th 898, 912.)
Plaintiffs brought their motion to compel on two alternative bases: (a) under section 2031.300 to compel responses without objection, based on Merill Lynch’s alleged failure to serve timely responses; and (b) under section 2031.310, arguing that the objections in the responses belatedly served by Merrill Lynch lacked merit.
The trial court properly denied plaintiffs’ motion under section 2031.300. Under that provision, a party who “fails to serve a timely response” to a discovery request waives “any objection” to the request. (§2031.300, subd. (a); see generally, Sinaiko Healthcare Consulting, Inc. v. Pacific Healthcare Consultants (2007) 148 Cal.App.4th 390, 403-404 (Sinaiko).) A party moving to compel pursuant to section 2031.300 does not have to meet and confer prior to bringing the motion. (Id. at p. 404; see generally Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2006) ¶ ¶ 8:1137 to 8:1144, pp. 8F-59 to 8F-60, ¶ ¶ 8:1483 to 8:1489, pp. 8H-29 to 8H-30 (Weil & Brown); see also Cal. Rules of Court, rule 3.1020 (b) [“A separate statement is not required when no response has been provided to the request for discovery”].)
For purposes of plaintiffs’ motion under section 2031.300, the trial court did not abuse its discretion in concluding that plaintiffs failed to demonstrate that Merill Lynch’s responses were untimely. Plaintiffs’ argument was based entirely on the notion the trial court’s discovery stay expired after the unsuccessful mediation on November 23, 2004. The trial court, however, stated that did not lift the stay and had not intended the parties to engage in discovery because no operative complaint was on file, and because it had scheduled a further status conference to discuss, inter alia, the parties’ discovery plan. Merrill Lynch thus served its discovery responses prior to the stay being lifted, in anticipation that the trial court would lift the stay at the March 2005 status conference. Merrill Lynch’s discovery responses were therefore timely. Although the trial court might have expressed its intentions to the parties more clearly — as the trial court itself acknowledged — the trial court’s interpretation of its own order was not an abuse of discretion.
Plaintiffs argue, in effect, that Merrill Lynch’s discovery responses were untimely even if the stay was not lifted until March 2005 because the responses were not verified until May 2005, more than 30 days later. There is authority that unverified discovery responses are legally invalid, and are therefore deemed untimely for purposes of a motion to compel responses under section 2031.300. (See Laguna Auto Body v. Farmers Ins. Exchange (1991) 231 Cal.App.3d 481, 487 [responding party violated order to compel answers by providing responses that were “legally invalid, because they were unverified”], disapproved on other grounds in Garcia v. McCutchen (1997) 16 Cal.4th 469, 478, fn. 4; see also Sinaiko, supra, 148 Cal.App.4th at p. 406.) Nevertheless, even if Merrill Lynch’s failure to provide the verifications until May rendered the discovery responses untimely, it does not necessarily follow that the trial court abused its discretion in denying plaintiffs relief under section 2031.300. Merrill Lynch provided the verifications prior to the hearing on plaintiffs’ motion to compel. When a responding party provides legally valid discovery responses after a propounding party has moved to compel responses pursuant to section 2031.300, the trial court may, in its discretion, grant the motion under section 2031.300, deny the motion as unnecessary, or treat the motion as one brought pursuant to section 2031.310. (Sinaiko, supra, 148 Cal.App.4th at p. 409.) In this case, plaintiffs expressly invoked section 2031.310 as an alternative ground for its motion. The trial court therefore did not abuse its discretion in denying plaintiffs’ motion under section 2031.300.
Plaintiffs asserted both below and on appeal that Merrill Lynch’s failure to provide verifications meant that the discovery responses were not in substantial compliance with Merrill Lynch’s discovery obligations. (§ 2031.300, subd. (a)(1).)
The trial court also did not abuse its discretion in denying plaintiffs relief under section 2031.310. A party moving to compel under section 2031.310 must demonstrate that it complied with its obligation to “meet and confer.” (§ 2031.310, subd. (b)(2).) Plaintiffs failed to do so. The record on the motion to compel contains no correspondence, and no evidence of any other communication between counsel relating to the document requests, that occurred after the service of Merrill Lynch’s discovery responses on February 25, 2005 and before plaintiffs filed their motion to compel on April 11, 2005.
Although plaintiffs correctly assert that the meet-and-confer requirement does not apply to motions under section 2030.300 (Sinaiko, supra, 148 Cal.App.4th at p. 403), plaintiffs expressly asserted section 2031.310 as an alternative ground for their motion. Furthermore, prior to denying the motion, the trial court gave plaintiffs the opportunity “meet and confer and figure out a discovery plan. . . . And if you want the court’s assistance I will be more than happy to . . . have you come back and let’s work out a discovery plan the timing of it, the types of discovery devices you want and everything you want to do. . . . I think this is the wrong way to go, but you’ve got the discovery motion before me and I’m more than happy to rule on it.” Counsel for Merrill Lynch also stated his willingness to meet and confer on the discovery. Counsel for plaintiffs declined those invitations and asked for a ruling. Because plaintiffs failed to establish that they satisfied their obligation to meet and confer, only one ruling was possible. The trial court therefore properly denied plaintiffs’ motion to compel under section 2031.310.
For all of the foregoing reasons, I would affirm the judgment.