Casa Herrera, Inc. v. Beydoun

• Decision Date: 02 February 2004
• Docket Number: No. S111998.,S111998.
• Citation: 83 P.3d 497,32 Cal.4th 336,9 Cal.Rptr.3d 97
• Court: California Supreme Court
• Parties: CASA HERRERA, INC., Plaintiff and Appellant, v. Nasser BEYDOUN et al., Defendants and Respondents.

9 Cal.Rptr.3d 97

32 Cal.4th 336

83 P.3d 497

CASA HERRERA, INC., Plaintiff and Appellant, v. Nasser BEYDOUN et al., Defendants and Respondents.

No. S111998.

Supreme Court of California

February 2, 2004.

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

Gibson, Dunn & Crutcher, Theodore J. Boutrous, Jr., Julian W. Poon, Gregory D. Brown, Los Angeles, Nicola T. Hanna and Michele L. Maryott, Irvine, for Defendants and Respondents Community First National Bank and Tom Ferrara.

Ira S. Carlin, Escondido, for Defendants and Respondents Nasser Beydoun and Am Mex Food Industries, Inc.

BROWN, J.

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

I.

A.

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

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

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

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

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

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

B.

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

The banks and Ferrera, joined by Am Mex and Beydoun, moved for judgment on the pleadings, contending, as a matter of law, Casa Herrera could not establish the favorable termination element of a malicious prosecution claim. Citing Hall v. Harker (1999) 69 Cal.App.4th 836, 845, 82 Cal.Rptr.2d 44 (Hall), the banks claimed that "a resolution ... based on the parol evidence rule cannot be a favorable termination ... so as to support a subsequent action for malicious prosecution." The trial court agreed and dismissed the malicious prosecution claims with prejudice.

The Court of Appeal reversed.³ Declining to follow Hall, the court concluded that "when an action is terminated because the parol evidence rule mandates the defendant's liability be determined by the provision embodied in the written contract rather than by any prior inconsistent oral promises, the action has been terminated for reasons that do reflect on the merits of the plaintiff's underlying claim that the underlying defendant was responsible or liable for allegedly breaching his contractual obligations." In reaching this conclusion, the court observed that "the parol evidence rule is not an evidentiary rule but is instead a rule that fixes duties and establishes rights and responsibilities among persons by declaring that the law will hold parties to their written agreements rather than to prior representations or promises inconsistent with the written agreement."

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

II.

"[I]n order to establish a cause of action for malicious prosecution of either a criminal or civil proceeding, a plaintiff must demonstrate `that the prior action (1) was commenced by or at the direction of the defendant and was pursued to a legal termination in his, plaintiff's, favor [citations]; (2) was brought without probable cause [citations]; and (3) was initiated with malice [citations].'" (Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 871, 254 Cal.Rptr. 336, 765 P.2d 498 (Sheldon Appel), quoting Bertero v. National General Corp. (1974) 13 Cal.3d 43, 50, 118 Cal.Rptr. 184, 529 P.2d 608.)

"The theory underlying the requirement of favorable termination is that it tends to indicate the innocence of the accused, and coupled with the other elements of lack of probable cause and malice, establishes the tort [of malicious prosecution]." (Jaffe v. Stone (1941) 18 Cal.2d 146, 150, 114 P.2d 335.) Thus, "[i]t is hornbook law that the plaintiff in a malicious prosecution action must plead and prove that the prior judicial proceeding of which he complains terminated in his favor." (Babb v. Superior Court (1971) 3 Cal.3d 841, 845, 92 Cal.Rptr. 179, 479 P.2d 379.)

To determine "whether there was a favorable termination," we "look at the judgment as a whole in the prior action...." (Sagonowsky v. More (1998) 64 Cal.App.4th 122, 129, 75 Cal.Rptr.2d 118.) "It is not essential to maintenance of an action for malicious prosecution that the prior proceeding was favorably terminated following trial on the merits." (Lackner v. LaCroix (1979) 25 Cal.3d 747, 750, 159 Cal.Rptr. 693, 602 P.2d 393 (Lackner).) Rather, "[i]n order for the termination of a lawsuit to be considered favorable to the malicious prosecution plaintiff, the termination must reflect the merits of the action and the plaintiff's innocence of the misconduct alleged in the lawsuit." (Pender v. Radin (1994) 23 Cal.App.4th 1807, 1814, 29 Cal.Rptr.2d 36.) For example, a termination is favorable for malicious prosecution purposes where the court in the underlying action: (1) granted summary judgment and issued sanctions because the claim was meritless (Mattel, Inc. v. Luce, Forward, Hamilton & Scripps (2002) 99 Cal.App.4th 1179, 1191, 121 Cal.Rptr.2d 794); (2) granted summary judgment because there was insufficient evidence to establish a triable issue of fact (Sierra Club Foundation v. Graham (1999) 72 Cal.App.4th 1135, 1149-1150, 85 Cal.Rptr.2d 726 (Sierra Club)); or (3) held that the defendant, as a matter of law, violated no duty to the plaintiff (Ray v. First Federal Bank (1998) 61 Cal.App.4th 315, 318, 71 Cal.Rptr.2d 436 (Ray)).

However, a "`favorable' termination does not occur merely because a party complained against has prevailed in an underlying action.... If the termination does not relate to the merits — reflecting on neither innocence of nor responsibility for the alleged misconduct — the termination is not favorable in the sense it would support a subsequent action for malicious prosecution." (Lackner, supra, 25 Cal.3d at p. 751, 159 Cal.Rptr. 693, 602 P.2d 393, fn. omitted.) Thus, a "technical or procedural [termination] as distinguished from a substantive termination" is not favorable for purposes of a malicious prosecution claim. (Ibid.) Examples include dismissals (1) on statute of limitations grounds (id. at pp. 751-752, 159 Cal.Rptr. 693, 602 P.2d 393; Warren v. Wasserman, Comden & Casselman (1990) 220 Cal.App.3d 1297, 1303, 271 Cal.Rptr. 579 (Warren)); (2) pursuant to a settlement (Dalany v....