Wong v. Tenneco, Inc.

• Decision Date: 29 July 1985
• Citation: 39 Cal.3d 126,216 Cal.Rptr. 412,702 P.2d 570
• Court: California Supreme Court
• Parties: , 702 P.2d 570 Leo WONG, as Executor, etc., et al., Plaintiffs, Cross-defendants and Appellants, v. TENNECO, INC., et al., Defendants, Cross-Complainants and Appellants. L.A. 31900.

Page 412

216 Cal.Rptr. 412

39 Cal.3d 126, 702 P.2d 570

Leo WONG, as Executor, etc., et al., Plaintiffs, Cross-defendants and Appellants, v. TENNECO, INC., et al., Defendants, Cross-Complainants and Appellants.

L.A. 31900.

Supreme Court of California,

In Bank.

July 29, 1985.

Rehearing Denied September 26, 1985.

Donald C. Thuesen, Fresno, for plaintiffs, cross-defendants and appellants.

Hufstedler, Miller, Carlson & Beardsley, Shirley M. Hufstedler, Robert S. Thompson, Burton J. Gindler, Los Angeles, and Hillyer & Irwin, San Diego, for defendants, cross-complainants and appellants.

REYNOSO, Justice.

May a produce grower enlist the aid of the California courts to recover damages allegedly suffered as a result of losing his illegal farming operations in Mexico? We conclude that under principles of comity he may not.

I

This case traces the exploits of Lee Wong (Wong), ¹ an accomplished produce grower best known for his green onions. In 1969, Wong, a United States citizen and a California resident, moved his farming operations to Mexico.

Wong was aware that Mexican law and policy prohibited foreign ownership and control of farming operations except in limited circumstances. ² Accordingly, he recruited Mario Cota, a Mexican citizen, to act as his "front man" in running the operation. Legal title to the Mexican operation and its assets was placed in Cota's name and the names of other Mexican citizens hired to assist Cota. The land was leased in the names of these individuals. The Mexican citizens grew, packed and shipped the produce under Wong's name and label using machinery, equipment and money provided by Wong. In 1973, Wong and Cota formed "Legumbres de Baja," a Mexican corporation with stock held by Mexican citizens for Wong, to run the farming operation. ³

Wong's financial picture, gloomy prior to the move to Mexico, continued to deteriorate after operations got underway. To secure needed financing and to insure future crop sales, Wong entered into a series of agreements with Heggeblade-Marguleas-Tenneco, Inc. (H-M-T), a California corporation and wholly owned subsidiary of Tenneco, Inc. H-M-T, a produce broker, marketed produce throughout the United States and Canada. From the beginning of their relationship, H-M-T had full knowledge of the illicit nature of Wong's interest in the Mexican operation.

The first marketing contract, entered into in August 1971, gave H-M-T the exclusive right to market Wong's produce in exchange for business management and financial assistance. After deducting its commission and expenses, H-M-T was to remit the balance of the sales proceeds to Wong. Wong admittedly requested this financial set up as "a necessary part of doing business in Mexico ... the only practical means by which an investor can exercise some degree of control over the enterprise and protect his interest in Mexico."

The parties renewed their marketing agreement an undetermined number of times, each time incorporating essentially the same terms. The last such contract, the basis for Wong's ultimate claim of breach of contract, was dated March 3, 1973.

Despite the success of the marketing arrangement, Wong's financial fortunes continued to dim, while his debt to H-M-T grew steadily. A self-confessed poor businessman, Wong apparently exacerbated his already weakened financial condition by diverting funds away from the Mexican operation for his own personal use. As a result, on July 24, 1974, at H-M-T's request, Wong executed a $300,000 promissory note to H-M-T, secured by a deed of trust on residential property in Laguna Niguel, California. ⁴ Wong's financial situation reached a crisis point in 1974 when the Mexican Government and other creditors began threatening the Mexican "front men" with foreclosure on personal assets for nonpayment of taxes and other debts related to the farming operations. Additional pressure from Tenneco, Inc., H-M-T's parent corporation, to lower the outstanding debt convinced the parties to set up an "imprest account" through which sales proceeds were funnelled to creditors. This system was maintained for the last three months of 1974.

It appears that this stopgap measure failed to remedy the situation. On January 10, 1975, H-M-T yielded to the Mexican growers' demands to sever its relationship with Wong and remit the sales proceeds directly to the growers. This move deprived Wong of control of the Mexican farming operation, effectively installing the Mexican growers as the "true owners." Operations ceased some time in 1976. The record is unclear whether the machinery was retained by the growers or impounded by the Mexican Government for nonpayment of taxes.

Wong then brought suit in San Diego County Superior Court against the Tenneco group, ⁵ alleging misrepresentation, breach of the marketing contract, breach of an oral contract to credit the produce sales proceeds against the note on the Laguna Niguel property, intentional interference with advantageous business relations, negligence, conversion and conspiracy. On each cause of action Wong sought $10,350,000 in compensatory damages representing $1.6 million in produce sales, which Wong claims H-M-T wrongfully diverted to the Mexican growers after January 10, 1975, and the fair market value of the Mexican operation, including machinery, equipment, facilities, brand names and labels. He also prayed for $1 million in punitive damages. The Tenneco group cross-complained for recovery of the $500,000 debt and foreclosure on the deed of trust.

While the case was pending, the Laguna Niguel property sold for $682,500. Pursuant to a stipulated agreement filed with the court on October 31, 1979, Tenneco West, successor in interest to H-M-T, retained the proceeds pending the outcome of the litigation. The parties further stipulated that the court, not the jury, would determine the ultimate disposition of the funds.

Trial was bifurcated, with the court reserving judgment on the Tenneco group's motion for nonsuit based on the defense of illegality under Mexican law, until after the jury rendered its verdicts. ⁶ After a six-week trial, the jury returned a verdict for Wong in the amount of $1,691,422 for breach of a written and oral contract, interference with an advantageous business relationship and negligence. ⁷ The jury also returned a verdict for the Tenneco group on the cross-complaint in the amount of $595,510.

Following the verdicts, the trial court ruled that Wong was barred from recovery under the "unclean hands" doctrine because the entire transaction was illegal under the laws of the Republic of Mexico. The court concluded, as a matter of law, that "all of plaintiffs' claims and alleged damages are based upon their past and the assumed continuing violations of the laws and public policy of Mexico and, under the principle of comity, the public policy of the State of California .... The Court leaves the parties where it finds them. No party is entitled to judgment on its claims." To preserve the status quo ante litem motam, the court ordered Tenneco West to return the proceeds for the sale of the real property to Wong together with interest at the rate of 7 percent per annum.

II

Instead of a standard contract claim we deal with a question of the respect due the constitution and statutory laws of a sovereign nation. The parties entered into this produce marketing/financing arrangement with full knowledge that the farming operations upon which the agreement depended were being carried out in violation of Mexican law. ⁸ When one party abandoned the floundering scheme, the other sought redress in the California courts, to recover that which was unrecoverable under Mexican law. The trial court properly declined to involve our courts in this flagrant effort to circumvent Mexican law.

The doctrine of comity is fully applicable in the present case. Under that longstanding principle of the law of nations, the forum state will generally apply the substantive law of a foreign sovereign to causes of action which arise there. (Loranger v. Nadeau (1932) 215 Cal. 362, 366, 10 P.2d 63; Blythe v. Ayres (1892) 96 Cal. 532, 561, 31 P. 915. See Stockton v. Ortiz (1975) 47 Cal.App.3d 183, 200, 120 Cal.Rptr. 456. The philosophy behind the comity doctrine is easily identified: respect for the sovereignty of other states or countries, " 'considerations of mutual utility and advantage' " (Blythe, supra, 96 Cal. at p. 561, 31 P. 915), and "business and social necessity" (Hutchinson v. Hutchinson (1941) 48 Cal.App.2d 12, 22, 119 P.2d 214). It is the first of these factors that is central to our inquiry today and compels the application of Mexican law.

Since 1917, Mexico's Constitution has expressly prohibited alien ownership or control of Mexico's land or waters. This restriction represents that country's abiding commitment to the preservation and management of scarce resources for the benefit of the Mexican people, a commitment fostered by a sobering history of exploitation of the land, and its people, by foreign interests.

Mexico's statutory law governing foreign investment contains ownership limitations similar to those expressed in its Constitution. However, neither the Constitution nor the statute wholly preclude foreign investment in Mexico's resources. Foreigners who agree to respect the autonomy and ultimate authority of the Mexican government may acquire ownership interests in many of the country's natural resources. ⁹ Thus, Mexico has sought to strike a balance between the needs of its people, the country's developmental requirements and the desires of foreign investors for economic advantage.

Consistent with our duty to respect Mexico's right to determine her own internal policies, we should defer to her laws implementing those policies when they are directly implicated in the case at hand. To do otherwise would unnecessarily upset the relationship of friendship and mutual respect we enjoy with our southern neighbor. ...