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Smith v. First Principle Church

California Court of Appeals, Sixth District
Jan 27, 2011
No. H033637 (Cal. Ct. App. Jan. 27, 2011)

Opinion


RUSSELL SMITH, et al., Plaintiffs and Appellants, v. FIRST PRINCIPLE CHURCH, Defendant and Appellant. H033637 California Court of Appeal, Sixth District January 27, 2011

NOT TO BE PUBLISHED

Santa Cruz County Super. Ct. No. CV149102

McADAMS, J.

Plaintiffs and appellants Russell Smith and Helga Smith appeal from a judgment after a court trial in an action for breach of contract and promissory estoppel against defendant and respondent First Principle Church (Church or the Church). (For ease of reference and not out of disrespect, we shall hereafter refer to Russell Smith as “Smith”; his wife, Helga Smith, as “Helga”; and Russell and Helga jointly as “the Smiths.”) Smith was one of the founders of Church and worked for Church for several years as a minister. In 1996, Church and Smith signed a written agreement in which Church, “[i]n gratitude for... Smith’s past performance, and for no other reason” agreed to pay the Smiths a pension consisting of a housing allowance, medical insurance, dental insurance, and pastoral liability insurance for the rest of their lives. In 2003, the Smiths left Church. Months later, after seeking legal counsel, Church’s board of directors determined that the pension agreement was unenforceable and stopped making payments under the agreement.

The Smiths sued Church for breach of contract and promissory estoppel. Church filed a cross-complaint against Smith for “recovery of distribution, ” “money had and received, ” and breach of fiduciary duty. (The operative pleadings are the Smiths’ second amended complaint and Church’s first amended cross-complaint. For ease of reference, we shall refer to them simply as the “complaint” and the “cross-complaint.”) Smith demurred to the cross-complaint, arguing among other things that all three causes of action were barred by the statute of limitations. The court agreed that the cross-complaint was time-barred and sustained the demurrer without leave to amend.

At trial, the court found that the pension agreement was not enforceable because it lacked consideration. The court also found that although Church’s head minister, Reverend Nome (Nome), had made multiple promises to Smith regarding the pension, Nome did not have actual or ostensible authority from Church to make those promises. In addition, the evidence established that Smith could not have reasonably relied on Nome’s promises. The court held that Church did not have to make equitable restitution of donations Smith’s parents had made to Church in reliance on Nome’s promises of a pension for Smith because Church was not unjustly enriched by those donations and Smith breached his fiduciary duty to Church by withholding material information from Church, which constituted unclean hands.

On appeal, the Smiths contend that the court erred in finding no consideration for the contract, that Nome’s promises should be imputed to Church, that the facts support a finding of promissory estoppel, and that the court erred in denying restitution and in finding unclean hands. In its cross-appeal, Church argues that the court abused its discretion when it sustained the demurrer to its third cause of action for breach of fiduciary duty without leave to amend, since that claim is subject to a delayed discovery rule, and that Church can state facts supporting a delayed discovery. We reject the arguments in the Smiths’ appeal, but find that the cross-appeal has merit. In a separate opinion filed concurrently herewith, we reject the Smiths’ challenge to the court’s post-judgment order awarding Church contractual attorney fees.

Facts and Procedural History

First Principle Church, also known as the Society of Abidance in Truth, is a Hindu-based religious organization grounded in the Advaita Vedanta tradition (the teaching of non-duality). Smith and his brother, Jeffrey Smith, founded the Church in the 1970’s in San Bruno, California. About that time, Jeffrey Smith changed his name to I. M. Nome.

Nome was the Church’s head minister. Smith was also a minister of the Church. It does not appear that there have been any other ministers in the over 30 years that the Church has been in existence. Church members referred to Nome as “Reverend Nome, ” “Master Nome” (which indicated that he had achieved spiritual perfection), “Bhagavan” (which means “one who is God”), and “Guru” (which means supreme authority; a spiritual light or leader). They referred to both ministers as “sages.”

The Church moved to Santa Cruz and built a temple on Ocean Street. In 1985, the Church incorporated as a non-profit religious organization. Prior to that, it existed as an association, with about 20 members. Smith served on the committee that formed the corporation and he helped draft Church’s bylaws.

Nome and Smith lived together for over 30 years, from 1970 or 1971 until 2003. The brothers had a joint bank account and Nome handled their finances. Nome did the banking, paid the bills, prepared their taxes, and made the investment decisions.

In 1985, Smith and Nome moved to a three-bedroom, three-bath house on 9.5 acres on North Rodeo Gulch Road in Soquel (hereafter Rodeo Gulch property). In addition to the house, the property had a 990-square-foot storage barn. Initially, Church rented the property. Church used the property as both a “parsonage” and a “retreat center.”

From 1985 until 1991, Church member Stephanie Harr was Nome’s personal attendant. In 1985, she spent almost every day at the parsonage, remodeling the property and doing domestic work. Generally, she was not compensated for her work. Harr was Nome’s girlfriend in 1987 and lived at the parsonage for most of that year. She did earthquake repairs after the 1989 earthquake and received some compensation for that work.

In 1986, Smith married Lane Langston, a Church member and president of its board of directors (Board). In January 1987, Langston passed away. Shortly thereafter, Smith joined the Board and became its president, assuming the position that Langston had previously held. Smith remained on the Board and served as its president until December 1991. He testified that during that time, he took direction from Nome on Board matters.

Salary Forgiveness in July 1987

After Langston passed away, Smith received $100,000 in life insurance proceeds. Initially, he planned to invest the money with his father’s assistance, since he had no experience investing. But Church needed money for the construction of a temple. Nome suggested that instead of investing the money, they divide it equally, with $50,000 for Nome and $50,000 for Smith, in lieu of their salaries from the Church for one year. Smith testified that Nome had told him that this would provide a way for Church to grow and that when Church was successful, Smith’s future would be taken care of in the form of a housing allowance. Smith said he would not have given up his salary if there was not a promise of a pension.

Smith and Nome discussed this matter with their parents, Leon and Gloria Smith (Parents). Leon Smith passed away in 2001, but Gloria Smith testified at trial. She recalled discussing this with her sons and testified that Nome had said that he could not guarantee Smith’s future unless Smith gave up the insurance money to stabilize Church and that if Church was financially secure, it could give Smith a pension. Nome testified that he did not promise Smith he would get a pension in exchange for giving up his salary for one year.

In May 1987, Smith informed the Board that he and Nome had decided to give up their salaries for up to one year “to help the Church through a needy time financially.” Although Smith was the president of the Board, he did not tell the Board about the alleged promise of a pension in exchange for the salary forgiveness because Nome told him it was not the right time.

In June 1987, Smith and Nome signed a memorandum confirming their agreement to forego their salaries effective July 1, 1987. The memorandum did not mention the promise of a pension. About that time, two other Church employees gave up their salaries and the Board hired Helga, who was Smith’s girlfriend, as a housekeeper for the parsonage.

Loan From Smith’s Parents in October 1987

Church bought the Rodeo Gulch property in September 1987 as a “retreat center” and the ministers continued to live there. Over the years, Church made several improvements to the property, including adding a 1, 500 square foot gym, “revamping... the plumbing, ” reconfiguring walls, and replacing the windows.

In October 1987, Parents lent the Church $55,000 in exchange for a second mortgage on the Rodeo Gulch property. The terms of the loan included 10 percent interest for a period of 10 years. Smith testified that this was a favorable interest rate for Church, that it was lower than Church could obtain elsewhere. Richard Morey, who was Church’s business manager in 1987, testified that the interest rate was “quite competitive.”

As a further condition of the loan, Church gave Smith an option to purchase the property during the 10-year term of the loan. Smith testified that Nome had promised that if Parents made the loan, Smith would receive a housing allowance so that he would be able to make the payments on the property in the event he exercised the option. Nome denied making such a promise.

Changes in Church Salary Obligation and Religious Practice

In February 1988, Helga and Harr sent a letter to Church, setting forth a new proposal for the ministers’ compensation. Helga, Harr, and 18 other Church members felt it was their obligation to support the ministers financially and decided to use a portion of their monthly offerings to the Church to pay the ministers directly. The direct donations were designed to eliminate the ministers’ salaries from Church’s budget, but also resulted in a decrease in pledge revenue for Church. According to Harr, this was Nome’s idea. Church’s former bookkeeper testified that the direct payments to the ministers “more than replaced” the salaries they had given up.

In 1989, Smith suggested a change of emphasis for the Church. He suggested Church (1) become more universal and less Hindu, (2) de-emphasize the role of guru, (3) not require that members wear eastern clothing or sit on the floor, and (4) have sermons that draw on multiple traditions. According to Smith, Church implemented his suggestions and membership increased dramatically from 55 or 60 members to 165.

Until 1990, Smith believed Nome was a guru, a perfect guide or teacher, because Nome said he was a perfect being who had achieved states Smith had read about in texts. Based on his own spiritual growth, Smith’s opinion changed in 1990 and he did not accept Nome’s claims anymore. According to Smith, Nome shifted Church’s practices back to a Hindu-based guru system at the end of 1991. In 1992, Nome replaced Smith on the Board and in 1994, Nome became the director/office manager of the corporation.

Dakshina

In 1992, Nome formed a company called “Dakshina.” It was a sole proprietorship that provided religious services to Church and others. Church members made pledges and donations to Church. They also made regular, direct offerings to the ministers through Dakshina, “consistent with a very old practice within the Vedantic tradition of temple members providing direct support to sages.” Between 1995 and 2002, Smith earned between $34,500 and $88,000 per year in offerings through Dakshina. The amounts fluctuated, depending on the size of the offerings. In addition, Church provided Smith with a housing allowance, a car, and insurance benefits.

Smith Purchases Rodeo Gulch Property in October 1992

In October 1992, the Board approved the sale of the Rodeo Gulch property to Smith in exchange for his assumption of the three existing loans on the property, which totaled $370,985. At that time, Smith was no longer on the Board, but was still an active minister. According to Smith, Church was worried that it would not be able to repair the parsonage, which had been damaged in the earthquake in 1989. Morey testified that Church kept getting large requests for money for construction, most of which were upgrades. He felt it would be easier for Church if it got away from the expenses associated with the parsonage. Morey told the Board that it was becoming a financial strain for Church to pay the loans and other costs associated with the property, which were $5,763 per month. The Board estimated that it could save $3,163 per month if it sold the parsonage and gave the ministers a housing allowance of $2,600 per month.

The agreement for the sale of the property, which was dated October 12, 1992, provided that Church would take the funds it had received for earthquake repairs ($51,168) and place them in an interest-bearing account that would continue to be used for earthquake repairs during escrow and that would transfer to Smith upon close of escrow. The sale also included all personal property, including building materials, tools, and equipment on the property. At the time of sale, the house was between 3, 350 and 3, 570 square feet in size.

The option agreement provided that the purchase price would be the average of two appraisals of the fair market value of the property. It also set forth a procedure whereby each party would appoint an appraiser. At the time of the sale, the parties obtained three appraisals for a “quick sale” of the property, which averaged $300,333. Smith testified that the purchase price was not based on the average of two appraisals as provided in the option agreement because that was not good for Church financially. Instead, he agreed to buy the property for $370,985, the amount of the outstanding loans. Smith testified that Nome had told him that if he “overpaid for the house the money would stabilize [Church] financially” and ensure that Church would be in a position to give him a pension. Smith said his parents were involved in the conversation in which Nome promised him a pension in exchange for purchasing the property. However, neither Smith nor Nome told the Board that he had paid more than the property’s appraised value in consideration for the promise of a pension.

Escrow closed on November 13, 1992. There was $37,043.75 in the repair fund at that time. While the transaction was in escrow, Parents forgave the balance due on their loan ($33,767). These credits brought Smith’s actual cost of purchasing the property close to the average of the three appraisals for a “quick sale.”

March 1993 Letter

In March 1993, Smith received a letter from the Board, inviting a proposal from him that would enable Church “to continue receiving the great spiritual privilege of having [Smith] as a minister.” The letter stated that there had been “mixed reactions” to Smith’s activities and urged Smith to contact the Board if he did not feel it was supporting his activities. The Board stated that it wished to support Smith, “as an Enlightened Disciple, at one with [its] Guru” and that it considered “all Enlightened Disciples to be lifetime affiliates, with no question of membership fees.” The Board assured Smith that his housing allowance would never be reduced and that it would continue his health insurance. The Board stated that it had reluctantly accepted Nome’s suggestion that it lay off one of his housekeepers, but that it would “make sure that these needs are properly met” when the financial situation improves. The Board extended “the very warmest welcome and overture of appreciation... [to Smith and Helga] as Enlightened Disciples of [its] Guru, to consider [Church their] home in which to freely participate or not in ministerial and other inspirational functions.”

Smith interpreted this letter as an assurance that his pension would be forthcoming. Smith explained that he and Parents had started to feel uneasy about relying on Nome’s oral promises of a pension and that one month before he received the March 1993 letter, he asked Nome to get confirmation from the Board that this was “a real agreement.”

Smith married Helga in October 1995. He retired from his ministerial duties at Church on December 31, 1995, at age 44.

Written Pension Agreement in 1996

In January 1996, Smith gave Nome a written contract setting forth Smith’s proposed pension agreement and asked Nome, who was president of the Board, to present the agreement to the Board for its approval. The Board discussed Smith’s proposals for several hours, over the course of two Board meetings, and ultimately approved Smith’s request for a pension. Since Nome was Smith’s brother, Nome believed he had a conflict of interest and did not participate in the discussions or the vote.

Smith drafted the pension agreement. Nome testified that Smith had obtained legal advice drafting the agreement. According to Smith, he did not consult an attorney.

The minutes from the Board meetings in January 1996 indicate that the Board had some concerns about condition “number 4” in the agreement. Originally, the Board voted to accept all of the conditions in Smith’s agreement except condition number 4. By the time of the trial 12 years later, it was not clear what “condition... number 4” in the Board minutes referred to; none of the witnesses could recall anything about the nature of condition number 4, its wording, or the topic it addressed. The contract that Nome presented to the Board was not the same as the one they voted on in February 1996. Smith testified that he noticed that a provision had been added to the agreement after it was first presented to the Board, that he asked Nome if he should consult an attorney about it, and that Nome said it was not necessary.

The pension agreement, which was signed by Smith and representatives of Church, stated that Smith had been a minister of Church since its inception and that he had “received fair compensation” for his work at Church. The agreement provided: “In gratitude for Russell Smith’s past performance, and for no other reason, [Church] desires to give and Russell Smith desires to receive retirement compensation as a pension.” (This is the provision that Smith alleges was added.) The agreement provided that Smith’s retirement compensation “shall be in the form of a continuation of his current ministerial housing allowance.”

The contract provided that the “compensation” for 1996 shall be at the rate of $1,576.58 per month and shall increase at the rate of 10 percent per year each year, compounded yearly, until 2000; eight percent per year each year between 2001 and 2005; six percent per year each year between 2006 and 2010, and four percent per year each year thereafter or the cost of living increase as declared by the federal government, whichever is higher. The benefits were to continue for the rest of Smith’s life and for the life of his spouse, should he predecease her. The contract also provided that Church would provide Smith and his wife the same medical and dental benefits that are in effect for full-time employees, plus pastoral liability insurance for Smith. The contract described Smith as a “retired minister, ” but provided that he could return to active ministry at any time with the agreement of the head minister (Nome) in accordance with Church’s bylaws. If Smith returned to active ministry, the agreement was to remain in full force and effect. The agreement also contained an acceleration clause, which provided that in the event any payment was late or other form of breach, the Smiths would be entitled to the full value of the contract based on “Standard actuality [sic] tables.”

Nome believed the agreement was unconscionable when he presented it to the Board because of “the entire greediness of it.” Nome thought Smith was getting numerous benefits without doing anything for them and complained that Smith’s work efforts had “slacked off” after Langston died. However, Nome did not share these views with the Board in 1996. He reasoned that the Board members were intelligent and would figure it out for themselves.

Board member Jim Nieters and others were concerned about the financial implications of the agreement. They questioned whether Church could afford the pension, both in 1996 and in the future, and were concerned about the acceleration clause. But the board members felt a great deal of gratitude to Smith for helping them spiritually for many years. While the agreement was under consideration, Board member Tim Frank wrote an impassioned letter to the Board about the importance of supporting the ministers. Board members testified: (1) that they voted for the pension in gratitude for past performance and no other reason; (2) that the Board never authorized Nome to enter into a contract for a pension for Smith or anyone else or to promise Smith a housing allowance for life; and (3) that Nome did not have the authority to enter into contracts without the Board’s approval.

Smith Returns to the Ministry in Late 1996

Smith returned to ministerial duties at Church in late 1996. By the fall of 1996, Church attendance had dropped from between 90 and 100 members at Sunday services to between 10 and 12 members. Smith testified that Nome had told him that attendance had fallen dramatically, that the organization was doing poorly financially, and that Nome had concerns for its future and its ability to pay Smith’s pension. When Smith returned, Nome demanded that he stop teaching Buddhism outside the Church, something he had done for years.

According to Smith, he was planning to return to school and get a degree in psychology; Parents were going to pay for his schooling. Smith did not feel he could go to school and work at Church “to preserve [his] pension.” He returned to the Church and worked there until May 2003. He continued to receive his pension, as well as payments from Dakshina, until the fall of 2003. Both Smith and Helga taught classes in Buddhism at Church. Nome denied telling Smith he needed to return to Church to save his pension or promising Smith that he would receive a pension if he returned to Church and gave up going back to school and teaching Buddhism outside of Church.

Other Donations By Smith’s Parents

Smith alleged that Parents made multiple donations to the Church in exchange for his pension. In December 1991, Parents created a charitable trust naming Church as the beneficiary. The proceeds of the trust were to be used for the parsonage. Nome told Parents this would stabilize Church financially and provide housing for Smith. At trial, the parties stipulated that the value of future donations from the trust was $76,000. The court found that Church did not know about the trust before it was disclosed in this litigation.

Between 1993 and 2001, Parents made several donations to the Church, usually in $10,000 increments, totaling $85,000. Nome told his mother that if they continued to make these payments, it would stabilize Church and help her sons. Gloria Smith testified that Parents would not have made these donations if they had not thought that their sons would benefit from them. She did not expect a direct benefit of a pension in exchange for her donations but that her sons would benefit eventually with housing, a salary, and a pension. She received a letter from Church after each donation that stated that she had not received any material items or services in exchange for the donation.

Church Stops Paying Pension

In 2002, Jim Clark joined the Board. Church was having financial troubles and Clark wondered why Church was paying a pension to someone who was fully employed and fairly young. He questioned whether Church could continue to pay the pension, since it was such a big part of the budget, and whether the pension agreement was enforceable. The Board consulted with an attorney who informed them that the agreement was not enforceable because it lacked consideration. The Board stopped paying the pension in the latter part of 2003.

The parties stipulated that between February 1996 and October 2003, Church paid the Smiths $203,915 as a housing allowance, $48,462 for medical insurance, and $11,410 in dental benefits, for a total of $263,787. The parties stipulated that Smith’s loss valuation expert would testify that the future value of Smith’s lost pension was $2,828,250 and that the present value of those benefits was $1,557,298.

Trial Court Decision

At trial, Smith argued that, aside from the written pension agreement in 1996, various acts by Smith and Parents provided consideration for Church’s promise to pay Smith a pension, including Smith’s salary forgiveness in 1987, the loan from Parents in 1987, the establishment of the trust in 1991, Smith’s purchase of the parsonage in 1992, his return to ministerial duties in 1996, and Parents’ other donations.

With regard to the Smiths’ breach of contract action, the court found that the pension agreement was not enforceable because it lacked consideration. The court concluded that the agreement was a gift of a pension that was revocable at the will of the Church. The court also found that although Nome had made multiple promises to Smith regarding a pension, Nome did not have actual or ostensible authority from Church to make those promises.

With regard to the cause of action for promissory estoppel, the court relied on its finding that Nome did not have actual or ostensible authority from Church to promise Smith a pension. In addition, the evidence established that Smith could not have reasonably relied on Nome’s promises.

Finally, the court held that Church did not have to make equitable restitution of the donations Parents had made to Church in reliance on Nome’s promises of a pension for Smith because Church was not unjustly enriched by those donations and Smith breached his fiduciary duty to Church by withholding material information from Church, which constituted unclean hands. The court also held that Church had not been unjustly enriched by the creation of the charitable trust, since Church did not know about the trust prior to this litigation, the trust benefits had not yet been paid to Church, and Church agreed to disclaim any future interest in the trust. Moreover, Church was not unjustly enriched by Parents’ decision to forgive the balance due on their loan since it benefited Smith, not Church.

Discussion

Standard of Review

“When a trial court’s construction of a written agreement is challenged on appeal, the scope and standard of review depend on whether the trial judge admitted conflicting extrinsic evidence to resolve any ambiguity or uncertainty in the contract. If extrinsic evidence was admitted, and if that evidence was in conflict, then we apply the substantial evidence rule to the factual findings made by the trial court. But if no extrinsic evidence was admitted, or if, ... the evidence was not in conflict, we independently construe the writing.” (De Anza Enterprises v. Johnson (2002) 104 Cal.App.4th 1307, 1315 (De Anza).) Where extrinsic evidence has been admitted as an aid to the interpretation of a contract, and that evidence is in conflict, the appellate court will uphold a reasonable construction of the agreement by the trial court that is supported by substantial evidence. (In re Marriage of Fonstein (1976) 17 Cal.3d 738, 746-747.)

In this case, Smith alleged that he and Parents engaged in several acts (forgoing salary, buying the parsonage, returning to work at Church, making donations and loans) in exchange for Nome’s promise of a pension for Smith and that those acts supplied consideration for the pension contract. It has been held that the question whether there is sufficient consideration to support a contract is a question of fact for the trier of fact. (Sharman v. Longo (1967) 249 Cal.App.2d 948, 952.)

The trial court also found that Nome did not have authority from the Church, either actual or ostensible, to promise Smith a pension. The question whether one acts as the agent of another is also a question of fact. (Gulf Ins. Co. v. TIG Ins. Co. (2001) 86 Cal.App.4th 422, 439.) We review disputed factual questions under the substantial evidence standard of review.

“The trial court’s factual findings... are subject to limited appellate review and will not be disturbed if supported by substantial evidence.” (Williams v. Saunders (1997) 55 Cal.App.4th 1158, 1162.) An appellate court is “not in a position to weigh any conflicts or disputes in the evidence. Even if different inferences can reasonably be drawn from the evidence, [the appellate court] may not substitute [its] own inferences or deductions for those of the trial court. [Its] authority begins and ends with a determination of whether, on the entire record, there is any substantial evidence, contradicted or uncontradicted, which will support the judgment. [Citations.] Therefore, we must consider all of the evidence in the light most favorable to the prevailing party, giving that party the benefit of every reasonable inference from the evidence tending to establish the correctness of the trial court’s decision, and resolving conflicts in support of the trial court’s decision.” (Estate of Beard (1999) 71 Cal.App.4th 753, 778-779.)

The Smiths’ Appeal

The trial court concluded that over the years, Nome made oral promises of a pension to Smith but that Nome did not have actual or ostensible authority to make such promises on behalf of Church or to enter into an agreement to pay Smith a pension. The court found, further, that Smith, who helped draft Church’s bylaws and served on the Board for five years, knew that Nome did not have authority to enter into contracts on behalf of Church or to fix compensation and that only the Board had such authority.

The Smiths attack the court’s finding that the pension agreement was not enforceable because it was not supported by consideration on several grounds. They also assert that Smith’s return to work in late 1996 supported a finding of promissory estoppel and that the court erred in not awarding them restitution. We begin with their arguments regarding consideration to support the pension agreement.

Smith’s Resumption of Ministerial Duties in 1996

The Smiths contend that “Nome’s express promise of a pension and Smith’s acceptance [of that promise] by returning to work” at Church in late 1996, after he retired the first time, provided adequate consideration for the promise to pay a pension.

Church responds (1) that Nome had neither actual nor ostensible authority from Church to promise Smith a pension if he returned to work in 1996, (2) that Nome’s statements to Smith in 1996 suggesting Smith return to ministerial duties at Church because attendance had dropped, Church was doing poorly financially, and Nome was concerned about its ability to continue paying Smith’s pension cannot be construed as a promise of a pension, and (3) that the Smiths cannot rely on an implied contract theory, since they did not assert a cause of action for breach of an implied contract in their complaint.

The Smiths rely on four cases that address an employer’s obligation to pay pension, stock option, or profit sharing benefits, which inform our analysis.

Kern v. City of Long Beach (1947) 29 Cal.2d 848 (Kern) involved a government employer’s obligation to pay pension benefits to its employees. Kern worked for the City of Long Beach as a firefighter. When he was first employed in 1925, the city charter provided that he would be entitled to a monthly pension equal to a portion of his salary after 20 years of service. (Id. at p. 850.) Thirty-two days before Kern completed the required 20 years of service, the city repealed the pension provisions in its charter and eliminated the pension benefits. (Ibid.) The issue on appeal was whether Kern had acquired “a vested right to a pension which the city could not abrogate by repealing the charter provisions without impairing its obligation of contract.” (Ibid.) The court observed that while in some states pensions for government employees are treated as gratuities, the California Constitution forbids gifts of public money to individuals, which has prompted our state courts to hold that pension rights are something more than a gratuity. (Ibid.) In reviewing the case law regarding the nature of pension benefits, the court noted that “ ‘[a] pension is a gratuity only where it is granted for services previously rendered which at the time they were rendered gave rise to no legal obligation.’ ” (Id. at p. 851.) But where a public employee renders services under a pension statute, the pension benefits become part of the employment agreement. (Ibid.) They are a form of deferred compensation. “ ‘They are in effect pay withheld to induce long-continued and faithful services.’ ” (Id. at p. 852; see also Hunter v. Sparling (1948) 87 Cal.App.2d 711, 722.) One of the primary objectives in providing pensions for government employees is to induce competent persons to enter and remain in public employment. (Kern, at p. 856.)

The right to a pension vests upon acceptance of employment, which establishes certain contractual rights for the employee. (Kern, supra, 29 Cal.2d at p. 853.) But the “fact that a pension right is vested will not, of course, prevent its loss upon the occurrence of a condition subsequent such as lawful termination of employment before completion of the period of service designated in the pension plan.” (Ibid.) The court concluded that while the city had a right to modify its pension plan, “it does not follow that an employee may be deprived of all pension benefits by a repeal of the statute without the enactment of a substitute.” (Ibid.) The court held that Kern had a vested pension right; that the city, by repealing all pension provisions, had attempted to impair its contractual obligations; and that the repeal was ineffective as to Kern. (Id. at p. 856.)

The plaintiff in Hunter v. Sparling, supra, 87 Cal.App.2d at page 712 worked for a Japanese bank in San Francisco for 49 years. The bank had a retirement plan that provided a lump sum payment upon retirement to all employees who worked for the bank for over 10 years. (Id. at p. 724.) The plaintiff knew about the plan and had turned down offers of employment from other banks in reliance on the retirement plan. (Id. at pp. 718, 724.) Upon the plaintiff’s retirement in 1941, the bank determined that $40,835.50 was payable as a retirement benefit, paid the plaintiff $20,000, and agreed to defer payment of the balance until the following year at the plaintiff’s request for tax purposes. (Id. at pp. 712, 717.) In the meantime, the “war intervened” and the state superintendant of banks took over the Japanese bank as liquidator and refused to pay the balance of the retirement benefit. (Id. at p. 712.) The liquidator argued that there was no consideration for the promise to pay the pension. The court concluded that there was consideration and explained that “in connection with pension provisions made by private employers... continued service after knowledge of a pension plan, constitutes ample consideration for the employer’s promise to pay.” (Id. at p. 723.) The court relied on the following: “ ‘A benefit plan offered by an employer to all its employees and impliedly accepted by them through remaining in the employment constitutes a contract between the employer and employee, the service rendered by the employee being a sufficient consideration to support the employer’s promise to pay benefits. In such case the plan is not a mere gratuity or charity conferring on the employees and their dependents no legal rights and payments of benefits under the plan are not mere gratuities to be awarded in the discretion of the corporate employer’s officials.’ ” (Id. at p. 723.)

In Newberger v. Rifkind (1972) 28 Cal.App.3d 1070, a corporate employer granted stock options to five of its employees. Pursuant to a written option agreement, the options vested completely after five years of employment. The employees worked beyond the five years. The principal shareholder died three years before the options matured and the executor of his estate refused to honor the options. (Id. at p. 1072.) The trial court concluded that the options were not supported by consideration and had therefore been revoked upon the death of the grantor. The appellate court disagreed, and held that the employees’ continued employment, with knowledge of the options, was consideration for the option agreement. (Id. at pp. 1073-1075.) The court rejected the defendant’s contention that the employee’s continued work efforts did not supply consideration because they had not been bargained for and held that the bargain was implied from the circumstances and that there was an implied request by the optionors that the optionees continue working in exchange for granting the options. (Id. at p. 1074-1075.)

In Novack v. Bilnor Corp. (1966) 26 A.D.2d 572, a decision of the appellate division of a New York trial court, an employer sent its employee a letter offering him two percent of the company’s net profits for the year if he remained on the job until October 31, 1961. The court construed the letter as a unilateral offer, which the employee accepted by staying on the job for the specified period. It also held that the employee’s continued employment was sufficient consideration to impose liability on the employer. (Id. at p. 573.)

With this authority in mind, we return to the Smiths’ contention that Nome promised Smith a pension if he returned to work in 1996 and that Smith’s acceptance of that promise by returning to work at Church provided adequate consideration for the pension. We are not persuaded.

First, unlike Kern and Hunter, where the employers had pension plans in place that offered benefits to all employees who worked for a specified period of time, there was no evidence that Church had a pension plan that was available to all employees or that it ever offered pension benefits to any employees other than Smith. Nome testified that the Board had not offered him any pension benefits. Board members testified that they had never approved a pension for anyone other than Smith. There was no statute, practice, or Church bylaw that provided a pension for Church employees. The only evidence of any pension offered by Church was the 1996 written pension agreement between Church and Smith.

Second, the situation here is distinguishable from the pension plans in Kern and Hunter and the option and profit sharing agreements in Newberger and Novack in another respect. In those cases, the employers offered pensions, stock options, or profit sharing benefits to the employees in exchange for the employees’ work efforts for a specified period of time in the future. Neither Nome’s alleged oral promise in 1996 nor the written pension agreement required that Smith work for a specified period of time in the future in exchange for a pension. The written pension agreement was given in gratitude for past services.

Third, after Smith returned to the Church in late 1996, he continued to receive his pension benefits in addition to the compensation he received from Church through Dakshina. Thus, his pension was not a form of deferred compensation like those in Kern and Hunter.

In our view, the written pension agreement here was a gratuitous pension of the kind described in Kern where the court stated: “ ‘A pension is a gratuity only where it is granted for services previously rendered which at the time they were rendered gave rise to no legal obligation.’ ” (Kern, supra, 29 Cal.2d at p. 851.) The pension agreement provided that Smith had been a minister of Church since its inception and that he had “received fair compensation” for his work at Church. The agreement provided that a pension benefit in the form of a housing allowance and continued insurance coverage would be paid “[i]n gratitude for Russell Smith’s past performance, and for no other reason.” The contract described Smith as a “retired minister, ” but provided that he could return to “active ministerial duty” at any time with the agreement of the head minister (Nome) in accordance with Church’s bylaws. Moreover, the agreement provided that if Smith returned to active ministerial duty, the agreement was to remain in full force and effect. We interpret this phrase to mean that if Smith returned to active ministerial duties at Church, such action would not change the terms or the basic nature of the pension agreement. Thus, the written pension agreement was given in gratitude for services previously rendered at a time when Church had no pension plan in place that might otherwise give rise to a legal obligation to pay pension benefits.

For these reasons, we reject Smith’s contention that his return to work in 1996 provided consideration for the payment of a pension. In light of our conclusion, we shall not, at this juncture, address Church’s other arguments.

Smith’s Employment Efforts Between 1993 and 1996

The Smiths contend that Smith’s continued employment after receiving the Board’s letter of March 18, 1993 (hereafter 1993 Letter), in which the Board stated that “the housing allowance for [the parsonage] would never be reduced” and that the Board “want[ed] to continue [Smith’s] health insurance, ” provided adequate consideration for the payment of a pension. Smith argues that the trial court erred in failing to address the 1993 Letter as either a separate offer of a pension or confirmation of the Board’s knowledge of Nome’s promises and that Smith’s continued employment after receipt of that letter provided the necessary consideration for the pension.

Church responds that the Smiths’ claims based on the 1993 Letter fail for a variety of reasons. Church argues that the Smiths’ breach of contract action is based entirely on a breach of the 1996 written pension agreement and does not assert a separate claim based on the 1993 Letter. Church asserts that the 1993 Letter (1) was not an official action of the Board, (2) was merely an invitation to make a proposal, (3) is too uncertain to create an enforceable contract, and (4) was superseded by the written pension agreement in 1996. Moreover, Church argues that the 1993 Letter is not evidence that the Board knew about Nome’s promises to give Smith a pension, nor does it ratify Nome’s alleged promise of a pension.

The interpretation of a writing is a question of law, which this court reviews de novo. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866.) Where extrinsic evidence has been admitted as an aid to the interpretation of a contract, and that evidence is in conflict, the appellate court will uphold a reasonable construction of the agreement by the trial court that is supported by substantial evidence. (In re Marriage of Fonstein, supra, 17 Cal.3d at pp. 746-747.)

We agree with Church that the Smiths cannot state a claim for breach of contract based on the 1993 Letter because they failed to plead a breach of contract action based on the 1993 Letter in their complaint. The breach of contract action in the complaint is based entirely on the 1996 written pension agreement. And while the complaint alleges that various acts by Smith supplied consideration for Church’s written promise to pay a pension (including leaving active ministry in 1995, seeking Church’s permission before returning to active ministry, foregoing his salary in 1987, returning to the ministry in 1996, leaving Church in 2003 without seeking to take control of Church or taking parishioners with him), it does not mention the 1993 Letter. Moreover, the Smiths did not make a motion to amend their complaint to state a cause of action for breach of contract based on the 1993 Letter. However, they did argue in their opening argument that the 1993 Letter provided consideration for a promise to pay a pension or could be used to impute knowledge of Nome’s promises to the Board. To the extent that the Smiths now contend that there was a breach of contract based on the 1993 Letter, we conclude that they have forfeited that claim by failing to properly raise it below. (Gavaldon v. DaimlerChrysler Corp. (2004) 32 Cal.4th 1246, 1264.)

In addition, we reject the Smiths’ assertion that Smith’s work between 1993 and 1995, after receipt of the 1993 Letter, provided consideration for the 1996 pension agreement or any other implied offer of a pension.

The 1993 Letter was drafted after a committee meeting in which the committee “disclaimed any authority to make Board resolutions, ” in part because it did not have a quorum. At the meeting, the committee members agreed to prepare a letter to Smith, inviting Smith to propose ministerial services that he would like to offer and offer his own contract. In the early 1990’s, Smith and Nome had disagreed about the spiritual direction of the Church.

The 1993 Letter stated that there have been “mixed reactions” to Smith’s activities and that the Board was seeking “unity among all of us.” The committee “invite[d] a proposal” from Smith that would enable the Church to continue to receive his services as a minister. They invited Smith to contact them if he had “uncertainties about the Board’s supporting [his] activities and expressions” and reassured him that they wanted to support him as an “Enlightened Disciple, at one with our Guru.” They let him know that they considered “all Enlightened Disciples” lifetime affiliates of the Church and assured him that his housing allowance, which was part of his compensation as an active minister, would not be reduced and that they wanted to continue his health insurance. They reassured Smith of their “commitment to keeping the Temple, to making [Church] a home for the Enlightened, to spreading the Teaching.”

The 1993 Letter does not contain the word “pension.” Unlike the pension plans and other benefit agreements in the cases cited by Smith, it does not offer any benefits in exchange for a specified period of employment. On its face and as stated in the committee meeting minutes, it was intended as a request for a proposal from Smith. Moreover, there was no evidence that the 1993 Letter included a promise to pay a pension. Two of the people who signed the letter testified at trial. One testified that he never heard that Smith had been promised a pension before 1996 and the other testified that the 1993 letter was not sent to reassure the Smiths that they would receive a housing allowance and health insurance for life.

For these reasons, we conclude that Smith’s continued employment after receipt of the 1993 Letter cannot be construed as consideration for a promise of a pension.

Whether the Court Erred When it Declined to Impute Nome’s Promises to Church

The trial court found that “Nome did in fact make oral promises of a pension to Russell Smith, but that he did not have actual or ostensible authority to make such promises on behalf of [Church] or to enter into an agreement on [Church’s] behalf to pay [the Smiths] a pension.” The Smiths contend that since the court found that Nome promised Smith a pension on multiple occasions, the court erred in not imputing those promises to Church. The Smiths rely on three promises in particular: Nome’s promises when Smith gave up his salary in 1987, when Smith purchased the Rodeo Gulch property in 1992, and when he returned to work in late 1996. They argue that all of these promises must be imputed to Church because Nome was the president of the Board when the pension was approved in early 1996 and when Smith returned to the ministry in late 1996.

Where an agency relationship exists, notice is imputed to the principal (Church) of any facts relating to the subject matter of the agency of which the agent (Nome) acquires knowledge while acting as such within the scope of the agent’s authority. (South Bay Chevrolet v. General Motors Acceptance Corp. (1999) 72 Cal.App.4th 861, 879-880 & fn. 13.) However, a corporation is not charged with the knowledge of an officer or agent who has no authority to bind the corporation with regard to the matter at issue or who conspires or collaborates with another to defraud it. (Meyer v. Glenmoor Homes, Inc. (1966) 246 Cal.App.2d 242, 264 (Meyer).)

This contention completely ignores the trial court’s finding that when Nome made the various promises, he did not have actual or ostensible authority to bind Church. The trial court’s finding is supported by substantial evidence and will therefore not be disturbed on appeal. Smith helped draft the Church’s bylaws, which at all times provided that it “shall be the duty of the Directors to: [¶]... [¶] Appoint and remove, employ and discharge, and except as otherwise provided in these Bylaws, prescribe the duties and fix the compensation, if any, of all Officers, agents and employees of the Corporation.” The bylaws provided that the Board, by resolution, could authorize any officer or agent to enter into contracts in the name of Church, but “[u]nless so authorized, no officer, agent, or employee shall have any power or authority to bind the Corporation by any contract....” The minutes of the Board’s meetings were replete with examples of instances in which the Board made hiring and other personnel decisions, including: (1) hiring office personnel and housekeepers; (2) approving the general manager’s employment contract, increases in the ministers’ housing allowance, and employee bonuses; (3) evaluating staff performance; and (4) contracting with Nome to serve as office manager. In 1991, when Smith was on the Board, he wrote a letter to Church members explaining that he does not govern the Board, that he serves on the Board with 10 other people, and that the Board makes all the decisions. At all times relevant to the appeal, Smith knew that the Board was responsible for setting his compensation and had to vote on it. He understood that the Board had to vote on such things as contracts and employee pay, including his pension. He also knew that Nome did not have the final say with regard to the pension and that any pension had to be approved by the Board. Smith testified that on at least two occasions Nome told him it was not the right time to take his pension request to the Board. Although Nome promised him a pension, Smith at all times knew that those promises had no force until they were approved by the Board. He testified that in 1993, he felt uneasy about not having a written pension contract and finally, in 1996, he asked Nome to take the contract that he (Smith) had drafted to the Board.

In light of this evidence supporting the court’s finding that Nome did not have actual or ostensible authority to bind the Board, we conclude that the Smiths’ contention that Nome’s promises must be imputed to the Board based on Nome’s position of authority within Church is without merit.

The Smiths contend that as head minister, president of the Board, director, and manager of the corporation, Nome had the authority to promise to retain Smith’s pension when Smith returned to work in 1996. In addressing this, we note that Smith’s gratuitous pension agreement provided that the gratuity was not dependant on whether or not Smith returned to work for Church. Smith testified that Nome told him in 1996 that attendance had fallen dramatically, Church was doing poorly financially, and that Nome had concerns for its future and its ability to pay Smith’s pension, and that Smith was going to lose his pension. These words cannot be construed as a promise to modify the existing contract or as a promise of pension benefits separate and apart from those set forth in the written pension agreement.

The Smith’s reliance on Vertex Investment Co. v. Schwabacher (1943) 57 Cal.App.2d 406 is misplaced. In Vertex, a family-owned corporation sued the widow of its deceased president, treasurer and general manager to recover funds that he had allegedly misappropriated over a 24-year period. The trial court entered judgment in favor of the widow after sustaining her demurrer on statute of limitation grounds. The appellate court concluded that the allegations of the complaint established that the corporation knew that its former president was commingling funds and that such knowledge was sufficient to establish a duty of inquiry on the part of the other shareholders and commence the running of the statute of limitations. There is no statute of limitations issue here. Moreover there was no evidence that anyone on the Board ever knew of Nome’s promises to Smith regarding a pension.

Other Forms of Consideration

As a separate ground for reversal, the Smiths argue that the following “promises” were sufficient consideration for the pension: Smith’s abatement of salary in 1987, Parents’ loan to Church in 1987, which included an option agreement in favor of Smith, Smith’s purchase of the Rodeo Gulch property in 1992, and Parents’ donations to Church between 1993 and 2001.

Consideration may be either a benefit conferred or agreed to be conferred on the promisor or some other person or a detriment suffered or agreed to be suffered by the promisee or some other person. (Civ. Code, § 1605; Flojo Internat., Inc. v. Lassleben (1992) 4 Cal.App.4th 713, 719; 1 Witkin, Summary of Cal. law, Contracts, § 203, p. 237.) “[C]onsideration for a promise must be an act or a return promise, bargained for and given in exchange for the promise.” (Meyer, supra, 246 Cal.App.2d at p. 259.)

As noted previously, substantial evidence supports the trial court’s finding that Nome did not have actual or ostensible authority to make promises on behalf of Church to pay Smith a pension. In addition, it was uncontroverted that the Board was never informed of Nome’s oral promises of a pension for Smith with regard to any of these transactions. In our view, the alleged consideration was not bargained for in any of the circumstances that the Smiths now rely on. Smith served on the Board between 1987 and 1991. He admitted that during that time, he never told the Board about Nome’s promises to him of a pension for life. Furthermore, Smith understood that he had a material financial interest in the pension agreement and that if the Board voted on a transaction that involved such an interest, full disclosure was required. When the Board accepted his offer of salary forgiveness and approved the loan from his parents in 1987, Smith did not tell the Board that there was a promise of a lifetime pension in connection with either transaction. Neither he nor Nome told the Board that there was a promise of a pension in connection with the purchase of the Rodeo Gulch property. Since the Board never knew about the promise of a pension in connection with these transactions, it cannot be said that the promise was bargained for.

Moreover, there was sufficient evidence that supports an implied finding that neither Smith nor Parents suffered any detriment in any of the transactions that the Smiths now rely on as consideration for the promise to pay a pension. First, there was evidence that the new system whereby Church members’ paid the ministers directly “more than replaced” the salaries that they gave up. Second, in exchange for the loan, Parents received 10 percent interest and an option in favor of their son to purchase the property. There was evidence that the 10 percent interest rate was “quite competitive.” Third, there was evidence that during the sales transaction on the Rodeo Gulch property, Smith instructed Church’s general manager to find an attorney who would get the property into Smith’s name at the lowest possible price and that the attorney suggested the parties pursue a “short sale” to accomplish that goal. There was evidence that, although there were some financial pressure to get out from under the burden of owning the parsonage, the property was not under the type of financial duress that required a short sale. In addition, with the credits for the repair fund and the loan forgiveness by Parents, the final price Smith paid for the property was very close to the average of the three appraisals for a short sale of the property. Thus, the evidence supported a conclusion that Smith did not suffer any detriment in the purchase of Rodeo Gulch, as he alleged. Fourth, Parents made periodic charitable donations for which they obtained a tax write-off. After each donation, they received written confirmation that they did not receive any material items, goods, or services in return for the donation. Nome told Parents that the donations would stabilize Church, which in turn would benefit their sons. Gloria Smith testified that she would not have made the donation if they would not have helped her sons and Church’s former bookkeeper testified that the donations that Parents made passed through Church quickly, and that Smith and Nome, rather than Church, benefitted from them.

In summary, there was substantial evidence that supported the trial court’s conclusion that Smith’s salary forgiveness, Parents’ loan, Smith’s purchase of the Rodeo Gulch property, and Parents’ donations did not supply consideration for the promise of a pension.

Whether Pension Agreement Itself Provides Consideration

The Smiths contend that the pension agreement itself provided sufficient consideration. But they also argue that the court had a duty to look outside the contract if adequate consideration was not evident from the document itself.

There is no question that during the course of this five-day court trial, which included live testimony, video testimony, or offers of proof from 15 witnesses and the admission of 57 exhibits, plus extensive argument and briefing by both sides, that the court explored all of the evidence presented on the question of consideration to support a promise to pay a pension. Clearly, the court considered both the pension agreement and extrinsic evidence.

With regard to the question whether the pension agreement, on its face, provided consideration for the promise of a pension, it recites that the pension is given “[i]n gratitude for... Smith’s past performance, and for no other reason.” The agreement states that Smith has already “received fair compensation... for his work.” Smith made no promises in exchange for the pension. He did not promise to return to work or to remain retired. The agreement provided that if he returned to work, it must be with the agreement of the head minister and in accordance with the bylaws. This was consistent with Church’s practice and the requirements of the bylaws and was not a detriment to Smith. We conclude that the pension agreement was a gratuity, of the kind discussed in Kern and thus unenforceable. (Passante v. McWilliam (1997) 53 Cal.App.4th 1240, 1249.) The trial court did not err in making that finding.

Promissory Estoppel Based on Statements Made in 1996

The Smiths contend that Smith’s return to work in late 1996 supports a finding of promissory estoppel. “The elements of a promissory estoppel claim are ‘(1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.’ [Citation.] [¶] ‘Promissory estoppel is a “doctrine which employs equitable principles to satisfy the requirement that consideration must be given in exchange for the promise sought to be enforced.” ’ ” (US Ecology, Inc. v. State of California (2005) 129 Cal.App.4th 887, 901-902.)

With regard to the Smiths’ promissory estoppel claim, the court concluded that while Nome had made multiple promises to Smith, “Smith could not have reasonably relied on Rev. Nome’s promises as promises by or on behalf of [Church].” The Court reasoned that as a drafter of the bylaws and a member of the Board, “Smith knew that, despite his role as [Church’s] spiritual leader, Rev. Nome did not have authority to contractually bind the Church or to set the compensation of its ministers, including Smith. In addition, Smith knew that [the Board] had to approve his pension. Further, from Rev. Nome’s statements that it was not the right time to go to the Board for approval of the pension, Smith knew or should have know that Rev. Nome did not have control over the Board with respect to the pension issue. Thus, the uncontroverted evidence establishes that Smith could not have reasonably relied on Rev. Nome’s promise of a lifetime pension. Plaintiffs presented zero evidence that Helga Smith relied on any promises of a pension.”

The Smiths argue that Smith returned to work at Church in late 1996, rather than pursue other educational or employment opportunities, based on Nome’s representations about saving his pension. At that point in time, the pension was a gratuity. As noted previously, Smith testified that Nome told him that attendance had fallen dramatically, that Church was doing poorly financially, that Nome had concerns for its future and its ability to pay Smith’s pension, and that Smith was going to lose his pension. We do not construe these statements as a promise to pay a new pension, different from the gratuitous pension set forth in the pension agreement. We view these words as an expression of a financial reality and the concern that unless Church grew and attracted more members, there would not be enough money to continue to pay the gratuitous pension. These representations can hardly be construed as a clear and unambiguous promise to pay a pension separate and apart from the written pension agreement. In addition, although Smith alleged that he had planned to return to school, there was no evidence that he had applied to any institutions or had taken any steps toward going back to school. Smith did not testify that he was considering any specific programs or colleges. Parents had said they would pay for his education since he had graduated from high school. Gloria Smith testified that Smith periodically discussed going back to school in the 1980’s and 1990’s. And although he had stopped teaching Buddhism outside of Church, Smith started teaching Buddhism at Church, for which he was presumably compensated through Dakshina. The record reflects that he received payments from Dakshina every year from 1995 until 2003. Presumably, he would not have received this income if he had remained retired.

Moreover, it was not forseeable to Church that Smith would rely on a further “promise” of a pension from Nome. Under the written agreement, Smith received the gratuitous pension whether or not he worked for Church. Thus, it was not forseeable to Church that Nome would make some other promise of a pension to Smith or that Smith would rely on that promise as a promise from Church.

For these reasons, we reject the Smith’s promissory estoppel claim.

Restitution

The trial court considered whether the Smiths or Parents were entitled to restitution based on funds Parents contributed to Church through the loan, the trust, and donations. Equitable rulings, such as the question whether to award restitution, are matters within in the trial court’s sound discretion, which we will not overturn absent a showing of abuse. (De Anza, supra, 104 Cal.App.4th at p. 1315.)

In its tentative decision, the court awarded restitution to the Smiths. However, after further briefing by the parties, the court changed its mind. In its final decision, the court found that although Smith did not reasonably rely on Nome’s promises, Parents did.

The court correctly observed that for Church to be liable for restitution, there had to be evidence that Church was unjustly enriched. (Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51 [“Under the law of restitution, an individual may be required to make restitution if he is unjustly enriched at the expense of another”].) The court found no unjust enrichment. Specifically, the court found that Church was not unjustly enriched by the creation of the charitable trust, since Church did not know about the trust prior to the lawsuit, trust benefits had not yet been paid, and Church agreed to disclaim any future interest in the trust. It found that Church was not unjustly enriched by Parents’ decision to forgive the loan balance, since that decision benefitted Smith, who assumed the loan but never made any payments on the loan, and not Church. Finally, the court held that Church was not unjustly enriched by the donations, since there was evidence that the donations passed quickly through Church and benefited Smith and Nome. Moreover, the amount of the donations ($85,000) was less than the amounts the Smiths had received in pension benefits ($263,787).

On appeal, the Smiths contend that the money that Church received was intended for the Smiths and should be awarded to them. They do not specify any particular error by the trial court with regard to its analysis of the restitution claim and we find none. The court’s analysis of the restitution claim was supported by substantial evidence and we agree with its conclusions that Church was not unjustly enriched by Parents’ loan, the creation of the trust, or the donations. We note also, that Parents were able to use the donations and perhaps even the loan forgiveness as a tax write-off. Parents received a letter from Church acknowledging the loan forgiveness as a donation to the Church. In addition, they intended that their donations benefit both Smith and Nome, not just Smith. We therefore conclude the court did not abuse its discretion when it decided not to award restitution.

We also reject Smith’s assertion that denial of the restitution claim means he worked for free from 1996 until 2003. Church paid for religious services through Dakshina. Smith received income from Dakshina for his work efforts every year from 1996 through 2003, just as he had prior to retirement. There was no evidence that Smith was paid outside of Dakshina or that Church did not pay him for ministerial services rendered after 1996. Moreover, even if restitution was owed for Parents’ payments, the restitution would have been payable to Parents and not the Smiths. However, Parents were not parties to the lawsuit.

Unclean Hands

The Smiths contend that the court erred as a matter of law in finding unclean hands. The court held that “uncontroverted evidence” established that between 1987 and 1991, while Smith was a member of the Board and its president, he “participated in withholding material information from [the] Board” by failing to disclose Nome’s promises of a pension. The court held that Smith’s failure to disclose this information was a breach of fiduciary duty and constituted unclean hands, which provides additional grounds for denying the restitution claim. Since we conclude that the court did not err when it found the Smiths are not entitled to restitution for the reasons set forth above, we shall not reach the unclean hands issue.

Church’s Cross-Appeal

Church contends that the trial court’s order sustaining the Smiths’ demurrer to its cross-complaint without leave to amend should be reversed because the defects in the cross-complaint can be cured by amendment. Church’s argument is limited to its third cause of action for breach of fiduciary duty.

Background

The Smiths filed their original complaint in May 2004. Church filed its original cross-complaint against Smith on December 6, 2006, seeking to recover the $263,787 it had paid the Smiths between 1996 and 2003 based on causes of action for recovery of distributions and money had and received.

In October 2007, Church filed a motion for leave to file a first amended cross-complaint to add a cause of action for breach of fiduciary duty with a request for punitive damages. The third cause of action alleged that Smith breached his fiduciary duty to Church between 1987 and 1991, when he served on the Board and failed to disclose that Nome had promised him a pension in exchange for forgoing his salary in 1987, as a condition of Parents’ loan in 1987, and in exchange for Parents’ creation of the charitable trust in 1991.

After the court granted leave to amend, Smith filed a demurrer to the first amended cross-complaint on a variety of grounds. With regard to the third cause of action for breach of fiduciary duty, Smith argued that the claim was barred by the statute of limitations and that it failed to state a cause of action because Smith was not on the Board when the pension agreement was approved in 1996 and therefore “was under no duty to disclose his financial interest in the pension agreement” to the Board.

A cause of action for breach of fiduciary duty is subject to a four-year statute of limitations (Code Civ. Proc., § 343), which began to run when Church “discovered, or in the exercise of reasonable diligence could have discovered, that facts had been concealed.” (Stalberg v. Western Title Ins. Co (1991) 230 Cal.App.3d 1223, 1230.)

In his demurrer, Smith argued that Church had knowledge of Smith’s financial interest in the pension agreement when the Board approved the agreement in 1996, that the cause of action for breach of fiduciary duty accrued at that time, and that the cross-complaint filed in 2008 was therefore time-barred. Church argued that the breach of fiduciary claim was based on Smith’s failure to disclose facts that were material to transactions that the Board voted on in 1987 and 1991, not the written agreement in 1996; that the failure to disclose was first revealed by Smith through discovery after this litigation was filed in May 2004; and that the breach of fiduciary claim, which was filed in January 2008, was therefore timely. Church argued that it knew it was giving Smith a pension in 1996, but it did not know and had no reason to know that he had been promised a pension years before. Church acknowledged that it had not pleaded a delayed discovery in the cross-complaint, but argued that the complaint could be amended to include that information and that the delayed discovery occurred after this litigation was filed. The trial court sustained the demurrer without leave to amend on statute of limitations grounds.

Standard of Review

When reviewing a judgment dismissing a cross-complaint after a demurrer has been sustained without leave to amend, we assume the truth of the cross-complaint’s properly pleaded or implied factual allegations and consider matters that are properly judicially noticed. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) In addition, we give the cross-complaint a reasonable interpretation and read it in context. (Ibid.) Since the trial court sustained the demurer, we determine whether the cross-complaint states facts sufficient to state a cause of action. Since the court sustained the demurrer without leave to amend we must decide whether there is a reasonable possibility that Church could cure the defect with an amendment. (Ibid.) If we find that an amendment could cure the defect, we conclude that the trial court abused its discretion and we reverse; if not, no abuse of discretion has occurred. (Ibid.) Church has the burden of proving that an amendment would cure the defect. (Ibid.) If the trial court’s ruling was in error, it is reversible per se because it amounts to the denial of a fair hearing. (Deeter v. Angus (1986) 179 Cal.App.3d 241, 251.)

Contentions and Analysis

Church contends that its breach of fiduciary duty claim was timely because it did not discover that Smith had concealed Nome’s promises from the Board in 1987 and 1991 until that information was revealed in discovery in this case, after the litigation was filed in May 2004, and that the cause of action for breach of fiduciary duty filed in January 2008 is therefore timely. Church argues, further, that the court abused its discretion when it denied leave to amend to allege this delayed discovery.

Smith argues that the actions that took place in 1987 and 1991 did not become an alleged breach of fiduciary duty until the creation of the written pension agreement in 1996, which is the agreement he sued on. He argues that the promises were made by Nome, who was president of the Board in 1996 and presented the pension agreement to the Board for its approval. He also asserts that Church is unable to establish that it was injured as a result of his concealment in 1987 and 1991. He argues that Church had an interest in doing so to support its affirmative defenses of breach of fiduciary duty and unclean hands and that it failed to prove damages, which is an essential element of a breach of fiduciary duty claim.

In its reply brief on the cross-appeal, Church responds that it should not be charged with knowledge of Nome’s promises based on Nome’s role as president of the Board, since Nome had no authority to bind the corporation. Citing Meyer, supra, 246 Cal.App.2d at page 264, Church argues that a corporation cannot be charged with the knowledge of an officer who conspires or collaborates with another to defraud it. With regard to the damages question, it argues that it has incurred substantial attorney fees defending the Smith’s claims.

The trial court found that Smith “participated in withholding material information” from the Board from 1987 through 1991 and that he failed to disclose Nome’s promises that Church would pay him a pension. The court found that Smith’s failure to provide information to the Board was a breach of his fiduciary responsibility to the Board and affected every decision the Board made with respect to the pension.

We agree with Church that Smith’s breaches of his duty of disclosure in 1987 and 1991 are separate and apart from the transaction involving the written pension agreement in 1996. Although the Smiths argue that these earlier promises supplied consideration for the promises in the written pension agreement (an argument that we reject on appeal), Smith’s failures to disclose these promises, which he agreed were material to decisions that were facing the Board, were separate breaches of Smith’s fiduciary obligation to Church. Although the cross-complaint failed to allege the delayed discovery of these breaches, based on the briefs and oral argument on the demurrer, there is a reasonable possibility that Church could cure the defect with an amendment. We therefore conclude that the trial court abused its discretion when it denied leave to amend the cross-complaint and that Church should be granted leave to amend its cross-complaint to allege a cause of action for breach of fiduciary duty between 1987 and 1991.

Church’s cross-complaint adequately alleges that it was damaged by the breach of fiduciary duty. Since Church only asserted a breach of fiduciary duty as an affirmative defense, and not an affirmative claim at trial, it did not have occasion to present evidence or argument regarding any damages that may flow from the alleged breach of fiduciary duty. Given the evidence at trial, we have some concern about Church’s ability to prove damages as a result of the alleged breach of fiduciary duty. But since the trial court has not ruled on the merits of a cause of action for breach of fiduciary duty, any discussion of the viability of that claim by this court would constitute an advisory opinion. Accordingly, we do not express an opinion on the question whether Church will be successful on an amended cross-complaint for breach of fiduciary duty.

Disposition

The judgment on the Smith’s complaint for breach of contract and promissory estoppel is affirmed. The order on the Smith’s demurrer to Church’s first amended cross-complaint is reversed and the court is directed to grant Church leave to amend its cross-complaint. Church is awarded its costs on appeal.

WE CONCUR: BAMATTRE-MANOUKIAN, ACTING P.J., MIHARA, J.


Summaries of

Smith v. First Principle Church

California Court of Appeals, Sixth District
Jan 27, 2011
No. H033637 (Cal. Ct. App. Jan. 27, 2011)
Case details for

Smith v. First Principle Church

Case Details

Full title:RUSSELL SMITH, et al., Plaintiffs and Appellants, v. FIRST PRINCIPLE…

Court:California Court of Appeals, Sixth District

Date published: Jan 27, 2011

Citations

No. H033637 (Cal. Ct. App. Jan. 27, 2011)