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Safaei v. IHOP Corp.

California Court of Appeals, Fourth District, Second Division
Sep 28, 2010
No. E046996 (Cal. Ct. App. Sep. 28, 2010)

Opinion

NOT TO BE PUBLISHED

APPEAL from the Superior Court of San Bernardino County. No. RCV092446 Ben T. Kayashima, Judge. (Retired judge of the San Bernardino Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.)

Laflam Sullivan and Laura M. Sullivan for Plaintiff, Cross-defendant and Appellant.

Lewis Brisbois Bisgaard & Smith, Kenneth C. Feldman, and Barry Zoller for Defendants, Cross-complainants and Respondents.


OPINION

HOLLENHORST J.

I. INTRODUCTION

Plaintiff, cross-defendant and appellant Ali Safaei appeals from judgment following the trial court’s grant of summary judgment in favor of defendants, cross-complainants and respondents IHOP Corp., IHOP Properties, Inc., and International House of Pancakes, Inc. (referred to collectively as IHOP). Safaei contends: (1) IHOP did not establish that the parties’ franchise agreement was automatically terminated as a matter of law, and he was not required to tender franchise fees when IHOP refused to perform; (2) IHOP failed to give him an opportunity to cure; (3) he produced evidence establishing his performance or the excuse of his contractual obligations; (4) material factual issues exist regarding IHOP’s duty of good faith and fair dealing; (5) IHOP was not entitled to judgment as a matter of law on his equitable claims; and (6) IHOP was not entitled to judgment as a matter of law on his claim for unfair business practices.

International House of Pancakes, Inc., is the signatory on the franchise agreement at issue. IHOP Properties, Inc., is the named plaintiff in the underlying unlawful detainer action against Safaei and the sublessor on Safaei’s lease of the restaurant premises.

We conclude that no triable issues of fact exist, and we therefore affirm the judgment.

II. FACTS AND PROCEDURAL BACKGROUND

A. The Franchise Agreement

In December 1991, Safaei entered into a franchise agreement with IHOP for the operation of a restaurant in Ontario, California. Safaei paid IHOP $200,000 for the franchise, which had an initial term of 25 years with an option to renew for an additional 10 years.

The franchise agreement provided that it would “automatically terminate (1) upon the earlier termination of... any lease or sublease, as applicable, for the Franchised Location, or (2) upon the occurrence of any event which prevents or prohibits Franchisee from occupying the Franchised Location....” Safaei agreed to pay IHOP every week a royalty fee of 4.5 percent of his gross sales and an advertising fee of one percent of his gross sales. In addition, Safaei agreed to provide IHOP a weekly written report of his sales activity and to keep and preserve all of his business records for at least 36 months. IHOP had the right to audit Safaei’s business records at any time. The franchise agreement gave Safaei the right to sell the franchise to a third party, subject to IHOP’s right of first refusal.

B. The Underlying Action

Ten times between 1996 and 2003, IHOP sent Safaei notices that he had failed to pay rent or to submit reports for his sales activity, and that he had unpaid balances in varying amounts. In 2000, the restaurant was damaged by a fire, and then it was closed for repairs. Meanwhile, IHOP required Safaei to continue paying franchise fees, and Safaei fell behind in the payments in the amount of approximately $160,000.

In May 2003, IHOP filed a complaint for unlawful detainer against Safaei. The complaint alleged Safaei had breached a sublease and related franchise documents between him and IHOP. It alleged Safaei was in default and he had been given notice of the default and an opportunity to cure, but he had failed to do so. The complaint requested possession of the premises, a declaration that Safaei’s rights under the sublease were forfeited, and damages.

Safaei, who was unrepresented, did not contest the allegations of the complaint, and he entered into a stipulation for entry of judgment (the stipulation). The stipulation provided that IHOP would have judgment immediately entered against Safaei for possession of the premises and for the sum of $160,639.83 for unpaid rent and other charges due under the sublease and related franchise documents. However, execution of the judgment would be stayed, provided Safaei fully and timely performed all his obligations under the sublease and franchise documents, including timely reporting of sales information and payments to IHOP. Safaei was also required to make weekly payments of $1,000 against the unpaid balance of the judgment.

The stipulation stated, “[Safaei] is being given one last chance to perform and thereby cure the past defaults. Time is of the essence, and timely performance by [Safaei] is mandatory. In the event that [Safaei] defaults under this Stipulation, [IHOP] shall give written notice to [Safaei] by overnight delivery.... [Safaei] shall have seven calendar days from the date on which he receives the written notice of default within which to cure the default. If the default is not cured within said seven calendar days, [IHOP] shall thereafter be entitled, without additional notice to [Safaei], to execute forthwith on the Judgment.” Safaei “expressly waive[d] any right to appeal from the Judgment or to attack the Judgment, whether directly or collaterally.”

On May 12, 2003, the stipulation was filed, and the judgment pursuant to stipulation (stipulated judgment) was filed and entered on May 16, 2003.

On July 24, 2003, IHOP sent Safaei notice that he had failed to pay $6,630 for common area maintenance and $80 for equipment rental. Safaei cured the defaults.

In December 2004, IHOP conducted an audit of Safaei’s business records; however Safaei failed to produce most of the requested records. IHOP sent Safaei a notice of default on April 12, 2005, stating he had seven days to produce the required records. By then, Safaei had paid all but approximately $18,000 of the $160,640 stipulated judgment amount.

On May 27, 2005, IHOP filed a declaration of uncured default stating that Safaei had failed to provide the records required for an audit to determine whether Safaei was underreporting sales activity. IHOP’s counsel provided a declaration stating that on April 12, 2005, he had requested Safaei to produce financial statements, sales tax returns, cash register readings and tapes, bank statements, credit card receipts, daily cash and sales reports, paid invoices, and payroll records for the years 2002 through 2004. However, Safaei had “refused to produce any of the required documents and claim[ed] that he ha[d] no such records.” IHOP’s auditor provided a declaration stating that, of the records requested, Safaei had produced only “bank statements for the most recent quarter, credit card receipt copies for eight months, end of day cash register reports for six months, and a handwritten sales journal.” Safaei told the auditor he gave the bank statements each month to his accountant, and after the accountant returned them, Safaei destroyed the statements. The unlawful detainer court issued a writ of possession on May 27, 2005.

On July 1, 2005, Safaei filed an application to vacate the writ of possession on the grounds that the stipulated judgment was invalid, Safaei was not in default under the terms of the stipulated judgment, and IHOP had failed to provide him reasonable notice of and opportunity to cure the default. He provided a declaration stating that IHOP had never before conducted a formal audit. He stated he had provided his available records as requested, but certain sales tax receipts and printouts of daily sales had been discarded after they became moldy from water damage during heavy rains. Safaei testified in his deposition that he routinely destroyed his invoices and statements of credit card activity every month. He had never before been requested to produce those documents to IHOP. The unlawful detainer court vacated the writ of possession on the ground of inadequate notice, but also ruled that the stipulation and stipulated judgment were valid.

“[Counsel for IHOP] Next item is paid invoices. I believe you testified it was your practice that once you paid the invoices, you would throw those away?

“[Counsel for IHOP]: And the documents that you would throw away, describe for me these documents.

On July 6, 2005, IHOP’s counsel, Neil O’Hanlon, delivered a letter to Safaei stating that Safaei was in default for failing to pay rent and other franchise fees. The letter stated that the unpaid amount exceeded $62,000, not including approximately $40,000 in checks that IHOP held but had not yet deposited. The letter stated IHOP would terminate the franchise if Safaei failed to submit the full amount due within seven days. The letter further stated that IHOP was not waiving its claim that Safaei was also in default for failing to produce his business records to IHOP.

In response to that letter, Safaei’s counsel sent O’Hanlon a letter stating that Safaei had placed a stop payment order on the undeposited checks that IHOP held. Safaei’s counsel’s letter stated Safaei would not make any payments to IHOP unless IHOP agreed not to pursue any claim of default against Safaei.

On July 13, 2005, O’Hanlon sent a letter to Safaei’s counsel confirming that Safaei had repudiated his payment obligations to IHOP. O’Hanlon’s letter stated that, because of Safaei’s multiple defaults, IHOP terminated its franchise agreement with Safaei and was entitled to execute on its judgment against Safaei. However, the letter also demanded that Safaei withdraw his repudiation.

On July 26, 2005, IHOP filed another declaration of uncured default and an application for writ of possession. The declaration stated Safaei was in default for, among other things, failing to make payments to IHOP and failing to submit sales information. IHOP stated it had given Safaei notice of his defaults, but he had failed to cure them. IHOP also asserted that Safaei’s rights in the franchise were terminated because of his default under the terms of the stipulated judgment.

Safaei filed an opposition to the application for writ of possession arguing that he was not in default. Following an evidentiary hearing, the unlawful detainer court found Safaei in default based on his failure to pay franchise fees, granted IHOP’s motion, and issued a writ of possession against Safaei. Safaei was evicted, and IHOP then sold the franchise to a third party for $525,000.

In September 2005, Safaei filed a verified application for relief against forfeiture. After conducting a hearing, the unlawful detainer court denied the application, stating that relief was precluded by the parties’ earlier stipulated judgment. Safaei never filed an appeal in the underlying action.

C. The Instant Action

In January 2006, Safaei filed a complaint against IHOP, later followed by his operative first amended complaint. In his first cause of action, he alleged IHOP breached its contract with him by evicting him and terminating the franchise. In his second cause of action, he alleged IHOP breached the covenant of good faith and fair dealing by evicting him and terminating the franchise. In his third cause of action, he alleged that the forfeiture of his rights in the franchise constituted unjust enrichment to IHOP. In his fourth cause of action for money had and received, he sought recovery of the funds IHOP received from its new franchisee under a new franchise agreement. In his fifth cause of action, he alleged IHOP’s actions constituted an unfair business practice.

IHOP filed a general demurrer contending the complaint failed to plead facts sufficient to state a cause of action; each cause of action was barred by res judicata and collateral estoppel; and Safaei was barred from attacking the basis for the unlawful detainer judgment by the terms of the stipulation. The trial court overruled the demurrer.

IHOP filed a motion for summary judgment and/or summary adjudication. IHOP contended Safaei had failed to pay amounts due under the stipulated judgment as well as rent and other franchise fees.

Following a hearing, the trial court granted the motion. The court set forth the undisputed facts that established Safaei’s failure to comply with the terms of the stay on execution of the stipulated judgment. Specifically, the court found Safaei had failed to make the required payments, “thereby triggering the automatic termination of the franchise agreement, ” and he therefore could not establish the performance element of his cause of action for breach of contract or, consequently, a cause of action for breach of the covenant of good faith and fair dealing. The trial court held that Safaei could not establish a cause of unjust enrichment because IHOP had not wrongfully terminated the franchise, and Safaei had benefited from being a franchisee for 14 years. The trial court held Safaei could not establish a cause of action for money had and received because IHOP had properly terminated Safaei’s rights in the franchise agreement. Finally, the trial court held that Safaei had not established his cause of action for unfair business practices because IHOP’s termination of the franchise agreement, based on Safaei’s failure to comply with his monetary obligations, was not unfair, unlawful, or fraudulent. The trial court entered judgment in favor of IHOP, and this appeal ensued.

III. DISCUSSION

A. Standard of Review

This court reviews de novo the trial court’s ruling granting summary judgment, and we apply the same standards applicable to the trial court. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) A defendant is entitled to summary judgment when it shows that one or more of the elements of the plaintiff’s cause of action cannot be established, and the plaintiff fails to show that a material issue of fact exists. (Id. at pp. 843-844.)

B. Breach of Contract

In his first cause of action for breach of contract, Safaei alleged he had fully performed his obligations under the franchise agreement except to the extent his performance was frustrated or excused. He further alleged IHOP had “totally repudiated and otherwise breached the franchise agreement.”

Safaei did not dispute that he placed a stop payment on five checks in June 2005 and thereafter made no further payment to IHOP for the outstanding balance on the stipulated judgment. Specifically, IHOP’s undisputed fact No. 17 stated: “After Safaei placed a stop payment on the five checks in June 2005, he did not make any further payments to IHOP for the outstanding balance on the Stipulated Judgment.” Safaei’s response stated, “Undisputed.” When Safaei stopped making the monthly payments which were due on the stipulated judgment, the stay was extinguished.

Safaei contends, however, that IHOP breached the franchise agreement by pursuing a claim against him for business records default, and he argues he was entitled to withhold rent and franchise payments until the business records dispute was settled. We disagree. In Jay Bharat Developers, Inc. v. Minidis (2008) 167 Cal.App.4th 437 (Jay Bharat), a franchisor claimed a franchise agreement was terminated because of franchisees’ failure to comply with its terms. The franchisees stopped making payments to the franchisor but continued to operate the business. (Id. at pp. 441-442.) The court held the franchisees were not entitled to the benefits of the franchise agreement after they withheld their franchise payments. The court explained, “‘Under basic contract principles, when one party to a contract feels that the other contracting party has breached its agreement, the non-breaching party may either stop performance and assume the contract is avoided, or continue its performance and sue for damages. Under no circumstances may the non-breaching party stop performance and continue to take advantage of the contract’s benefits.’ [Citation.] Yet that is exactly what [the franchisees] tried to do.” (Id. at pp. 443-444, first italics added.)

Here, similarly, Safaei continued to operate the restaurant while simultaneously claiming IHOP was in breach and withholding franchise fees. Safaei was not entitled to stop his own performance while taking advantage of the benefits of the franchise agreement. (Jay Bharat, supra, 167 Cal.App.4th at pp. 443-444 .) Safaei attempts to distinguish Jay Bharat on its facts. We are unpersuaded by his arguments. Despite procedural differences in the cases, the principles stated in Jay Bharat are relevant and applicable to the present case.

Safaei further contends IHOP’s July 2005 notice that his lease was terminated due to his defaults excused his obligation to make further payments to IHOP. He relies on Woods-Drury, Inc. v. Superior Court (1936) 18 Cal.App.2d 340 (Woods-Drury), in which the court stated that a tenant was excused from tendering rent when the landlord had declared a forfeiture of the lease because under the then-applicable statutes, the landlord could not accept the tender of rent while pursuing an unlawful detainer action. (Id. at pp. 348-349.)

Here, it was undisputed that in June 2005, Safaei stopped payment on checks he had previously given to IHOP for payments under the stipulated judgment. He bases his claim that IHOP repudiated the franchise agreement on O’Hanlon’s July 6, 2005, letter in which O’Hanlon stated IHOP demanded payment and stated it was not waiving its claim of business record default. Thus, Safaei stopped his performance of his monetary obligations before IHOP’s claimed repudiation of the franchise agreement.

Finally, Safaei contends disputed issues of material fact exist as to whether he was in default as to his business records. Those arguments are irrelevant-the trial court granted summary judgment based on his monetary defaults, not his business records default, and, as discussed above, we have concluded the trial court did not err in doing so.

C. Breach of the Covenant of Good Faith and Fair Dealing

Safaei contends triable issues of fact exist as to whether IHOP breached the covenant of good faith and fair dealing by (1) terminating the franchise based on a technical breach of recordkeeping requirements; (2) “lur[ing] Safaei to stop paying franchise fees by soliciting buyers... for his franchise and refusing in advance to maintain the franchise even if he paid”; and (3) “sold the franchise to a third party without compensating Safaei, frustrating the provisions in the franchise agreement allowing the franchisee the right to assign the agreement and thereby realize any growth in equity.”

The implied covenant of good faith and fair dealing that inheres in every contract does not expand or limit the parties’ rights and obligations under the contract. (See Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.) As the trial court held, IHOP properly terminated the contract based on Safaei’s failure to pay fees, not on deficiencies in recordkeeping.

D. Unjust Enrichment/Restitution

In his third cause of action, Safaei alleged a claim for unjust enrichment based on the forfeiture of the return on his investment. The franchise agreement did not address the parties’ rights in the event of a “take-back” by IHOP. The stipulated judgment provided only for forfeiture of possession of the leased premises.

IHOP asserts “[t]here is no cause of action in California for ‘unjust enrichment.’” Regardless of the title applied to the claim, however, it is well established that a plaintiff may pursue a claim for restitution when a defendant has received a benefit at the expense of the plaintiff and it would be unjust for the defendant to keep it. (California Federal Bank v. Matreyek (1992) 8 Cal.App.4th 125, 131.)

Safaei argues that this case is governed by Freedman v. The Rector (1951) 37 Cal.2d 16 (Freedman) and its progeny. In Freedman, the Supreme Court held that a defaulting purchaser of real property could recover consideration paid to the extent it exceeded the seller’s damages. The plaintiff purchaser made a $2,000 down payment on real property with a promise to pay the remaining $16,000 into escrow within 30 days. (Id. at p. 18.) The purchaser later repudiated the contract, and the defendant seller cancelled the escrow and sold the property to a third party for $20,000. (Ibid.) In addressing whether the purchaser was entitled to the return of any part of his down payment, the court stated, “Since defendant resold the property for $2,000 more than plaintiff had agreed to pay for it, it is clear that defendant suffered no damage as a result of plaintiff’s breach. If defendant is allowed to retain the amount of the down payment in excess of its expenses in connection with the contract it will be enriched and plaintiff will suffer a penalty in excess of any damages he caused.” (Id. at pp. 19-20.) The court noted, “‘Few questions in the law have given rise to more discussion and difference of opinion than that concerning the right of one who has materially broken his contract without legal excuse to recover for such benefits as he may have conferred on the other party by part performance.... A satisfactory solution is not easy, for two fundamental legal policies seem here to come in conflict. On the one hand, it seems a violation of the terms of a contract to allow a plaintiff in default to recover-to allow a party to stop when he pleases and sell his part performance at a value fixed by the jury to the defendant who has agreed only to pay for full performance. On the other hand, to deny recovery often gives the defendant more than fair compensation for the injury he has sustained and imposes a forfeiture on the plaintiff. The mores of the time and place will often determine which policy will be followed. But the second of these opposing policies has steadily increased in favor in recent years.’ [Citation.]” (Id. at p. 20.)

In Freedman, the Supreme Court decided to adopt the rule of allowing the defaulting purchaser to nonetheless recover to the extent his part performance had conferred a benefit upon the seller. The court explained, “To permit what are in effect punitive damages merely because a party has partially performed his contract before his breach is inconsistent both with section 3294 of the Civil Code limiting the right to exemplary damages and sections 1670 and 1671 dealing with liquidated damages. ‘A penalty need not take the form of a stipulated fixed sum; any provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.’ [Citation.] Such penalties cannot reasonably be justified as punishment for one who willfully breaches his contract. Not only does section 3294 of the Civil Code express the policy of the law against the allowance of exemplary damages for breach of contract regardless of the nature of the breach [citation], but if a penalty were to be imposed it should bear some rational relationship to its purpose. A penalty equal to the net benefits conferred by part performance bears no such relationship. It not only fails to take into consideration the degree of culpability, but its severity increases as the seriousness of the breach decreases. Thus a vendee who breaches his contract before he has benefited the vendor by part performance suffers no penalty, whereas one who has almost completely performed his contract suffers the maximum penalty.” (Freedman, supra, 37 Cal.2d at p. 22; fns. omitted.)

In our view, Safaei’s argument would lead to an unwarranted expansion of the Freedman doctrine. In Freedman itself and in cases applying its principles, the breaching party’s recovery was limited to the amount the purchaser had advanced. In no instance was the breaching party’s recovery based on an increase in the value of the underlying property.

Here, the trial court found Safaei was not entitled to recover under an unjust enrichment theory because IHOP had not wrongfully terminated the franchise, and Safaei had benefitted from being a franchisee for 14 years. We agree with the trial court’s determination of the issue.

E. Money Had and Received

In his fourth cause of action, Safaei alleged a claim for money had and received. He asserts he was entitled to the fee IHOP received from the sale of the franchise to a third party.

An action for money had and received may be brought “‘wherever one person has received money which belongs to another, and which “in equity and good conscience, ” or in other words, in justice and right, should be returned....’” (Mains v. City Title Insurance Co. (1949) 34 Cal.2d 580, 586.) Safaei contends courts have recognized a claim for money had and received in the context of a franchise relationship, citing Landry v. Marshall (1966) 243 Cal.App.2d 170 and Runyan v. Pacific Air Industries, Inc. (1970) 2 Cal.3d 304. Those cases are inapposite; both addressed claims based on the franchisor’s failure to perform under the parties’ agreement. (Landry, supra, at p. 176, Runyan, supra, at p. 307.) As discussed above, Safaei may pursue his claim for unjust enrichment/restitution; however, the trial court properly granted summary judgment on the fourth cause of action.

F. Unfair Business Practices

In his fifth cause of action, Safaei alleged a claim for unfair business practices under Business and Professions Code section 17200 et seq.

To establish a claim for unfair business practices, a plaintiff must plead and prove that the defendant engaged in a business practice that was “either unlawful (i.e., is forbidden by law), unfair (i.e., harm to victim outweighs any benefit) or fraudulent (i.e., is likely to deceive members of the public). [Citations.]” (Albillo v. Intermodal Container Services, Inc. (2003) 114 Cal.App.4th 190, 206.)

Safaei contends a jury could have concluded IHOP committed an unfair business practice when it terminated the franchise based on the failure to preserve business records. As we have already concluded, however, the termination of the franchise was proper based on Safaei’s financial defaults.

Safaei further contends a jury could have found it an unfair business practice to sell the franchise without compensating Safaei or allowing him the right to sell the franchise himself. We conclude IHOP acted within its rights in terminating the franchise, and its conduct did not constitute an unfair business practice as a matter of law.

IV. DISPOSITION

The judgment is affirmed. Each party is to bear its own costs.

We concur: RAMIREZ P.J. MCKINSTER J.

“[Safaei] End of the month, I would pay the invoices and just tear them apart and throw them away.”

“[Safaei]: Just these statements that I would get from American Express or Visa or MasterCard. Every day we would enter the amount of each credit card and what kind of credit card in our ledger. [¶] And at the end of the month, I would receive the statement showing that the credit card company has deposited those amounts to our bank account. And I would match-I would check every figure from their statement to my ledger figure. And I would write down the amount of percentage that they took away and I would just throw it away.”


Summaries of

Safaei v. IHOP Corp.

California Court of Appeals, Fourth District, Second Division
Sep 28, 2010
No. E046996 (Cal. Ct. App. Sep. 28, 2010)
Case details for

Safaei v. IHOP Corp.

Case Details

Full title:ALI SAFAEI, Plaintiff, Cross-defendant and Appellant, v. IHOP CORP. et…

Court:California Court of Appeals, Fourth District, Second Division

Date published: Sep 28, 2010

Citations

No. E046996 (Cal. Ct. App. Sep. 28, 2010)