Chesapeake Industries, Inc. v. Togova Enterprises, Inc.

• Decision Date: 14 December 1983
• Citation: 197 Cal.Rptr. 348,149 Cal.App.3d 901
• Parties: CHESAPEAKE INDUSTRIES, INC., Plaintiff, Cross-Defendants and Appellants, v. TOGOVA ENTERPRISES, INC., Defendants, Cross-Complainants and Respondent. Civ. 68458.
• Court: California Court of Appeals Court of Appeals

Page 348

197 Cal.Rptr. 348

149 Cal.App.3d 901

CHESAPEAKE INDUSTRIES, INC., Plaintiff, Cross-Defendants and Appellants, v. TOGOVA ENTERPRISES, INC., Defendants, Cross-Complainants and Respondent.

Civ. 68458.

Court of Appeal, Second District, Division 7, California.

Dec. 14, 1983.

James R. Tweedy and Richard G. Howard, Sherman Oaks, for plaintiff, cross-defendants and appellants.

Grayson, Gross, Friedman & Phillips and Marvin Gross, Los Angeles, for defendants, cross-complainants and respondent.

JOHNSON, Associate Justice.

INTRODUCTION

This appeal arises from an action for an accounting under a lease agreement in which the lessor was awarded prejudgment interest under Civil Code section 3287. ¹ We conclude the amount of damages owed was not sufficiently certain or calculable and thus prejudgment interest was not appropriate.

I. STATEMENT OF FACT AND PROCEEDINGS BELOW.

Appellant Chesapeake Industries, Inc. (Chesapeake) leased real property from respondent Togova Enterprises, Inc. (Togova) by written lease agreement dated September 28, 1967. The term of the lease was ten years beginning November 1, 1967. The total rent under the lease was $474,000 with $3,950 due on the first of each calendar month.

In the event of a breach of covenant or agreement, section 14 of the lease provided Togova the option either to terminate the lease or to relet the premises and hold Chesapeake liable for any deficiency incurred from the following: (1) the rent monies collected from reletting the premises, (2) costs of reletting, (3) costs of alterations and repairs to premises and (4) any other indebtedness due the lessor from the lessee.

Chesapeake vacated the premises on or about February 26, 1974. Over three-and-half years still remained on the ten-year lease. In a subsequent legal action, Togova recovered possession and obtained a judgment for partial damages against Chesapeake. Further, in accord with section 14 of the agreement, the lease remained in effect until October 31, 1977, with Chesapeake liable for any deficiency incurred during that period. Togova subsequently relet the premises.

On July 13, 1978, Chesapeake brought an action for an accounting for all rents received by Togova from the reletting of the premises for the remainder of the lease. ² Chesapeake sought to recover any excess sums received by Togova from reletting the premises over what Togova would have received under the lease agreement with Chesapeake. Togova responded by filing a cross-complaint on September 18, 1978, alleging that it had received "substantially less revenue and rents" through reletting than it would have received under the lease with Chesapeake. Togova recited in its cross-complaint that it did not know the exact amount Chesapeake owed under the lease but that an accounting would be prepared and provided to Chesapeake informing it of the deficiency. Togova averred that the deficit would exceed $115,000.

After a three-day non-jury trial, the court found both the complaint and cross-complaint were actions for an accounting for the period of February 26, 1974, through October 31, 1977. Furthermore, after deciding it was not unreasonable for Togova to have relet the premises, the trial court entered judgment for Togova.

The trial court concluded Chesapeake owed Togova the sum of $50,323.84. It reached this net deficit figure by adding the gross rent monies Chesapeake owed for

                the rest of the lease period, repair and improvement costs, brokers' costs, and taxes and then subtracting credits for Chesapeake, principally the rent monies Togova collected from the substitute tenant. 3  In addition, the court awarded Togova $25,245.81 in prejudgment interest for the period of January 1, 1975, to March 1, 1982, plus costs.  Subsequently the judgment was modified to reflect a revised deficit of $34,830.04 and a prejudgment interest award of $15,493.80.  The parties stipulated to the revised judgment and to a second revision of the prejudgment interest award from $15,493.80 to $16,367.13 for the period of January 1, 1975, to July 26, 1982.  Chesapeake appeals only from the portion of the judgment awarding prejudgment interest
                

II. LEGAL PRINCIPLES AND POLICIES GOVERNING AWARD OF PREJUDGMENT INTEREST.

Civil Code section 3287(a) provides for the payment of prejudgment interest to every person entitled to receive damages which are (1) certain or (2) "capable of being made certain by calculation" if (3) the right to receive such damages vested on a particular day. ⁴ The dispute in the instant case centers upon whether the amount due under the lease, if any, was certain.

There are two lines of authority which instruct us in the proper award of prejudgment interest under section 3287(a). First, interest traditionally has been denied on unliquidated claims because of the general equitable principle that a person who does not know what sum is owed cannot be in default for failure to pay. (Cox v. McLaughlin (1888) 76 Cal. 60, 67, 18 P. 100.) Thus no prejudgment penalty is assessed against a litigant for failing to pay a sum which is unascertainable prior to judgment. ⁵ (See Comment, Interest as Damages in California, (1958) 5 UCLA L.Rev. 262, 263, fn. 6 [interest disallowed on unliquidated damages on principle that defendant not at fault for nonpayment of unascertainable sum].)

The second line of authority advances the countervailing policy that injured parties should be compensated for the loss of the use of their money during the period between the assertion of a claim and the rendition of judgment. (See McConnell v. Pacific Mutual Life Ins. Co., 205 Cal.App.2d 469, 478, 24 Cal.Rptr. 5; Note, Developments in the Law: Damages 1935-1947 (1947) 61 Harv.L.Rev. 113, 136 [interest on amount of claim is standard measure for loss of use of money during the period between the accrual of claim and judgment]; Comment, Interest As Damages in California, supra, 5 UCLA L.Rev. 262 [person deprived use of money is denied opportunity of investing it and receiving The injured party's right to prejudgment interest is further protected by the rule that the legal interest allowable under section 3287 cannot be defeated by setting up an unliquidated counterclaim as an offset. (Hansen v. Covell, supra, 218 Cal. 622, 629, 24 P.2d 772; McCowen v. Pew (1912) 18 Cal.App. 482, 488, 123 P. 354; Cal. Lettuce Growers, Inc. v. Union Sugar Co. (1955) 45 Cal.2d 474, 487, 289 P.2d 785 [reaffirming Hansen and holding that unliquidated counterclaims do not affect the character of the debt]; Muller v. Barnes (1956) 139 Cal.App.2d 847, 850, 294 P.2d 505.) One effect of this rule is to encourage mitigation of damages. (Coleman Engineering Co. v. North American Aviation, Inc. (1966) 65 Cal.2d 396, 409, 55 Cal.Rptr. 1, 420 P.2d 713.) ("If the rule were otherwise, a plaintiff might be encouraged to forego opportunities to mitigate damages so as not to jeopardize his right to prejudgment interest.")

interest on the [149 Cal.App.3d 907] sum].) This policy has been implemented through a generally liberal construction of "certainty" under section 3287. (See Cox v. McLaughlin, supra, 76 Cal. 60, 68-69, 18 P. 100 [tracing modification of early rule from ascertainment of sum due from face of contract to reference to standards providing debtor with "proximate knowledge" of amount due]; see also Damages 14 Cal.Jur.2d § 77.)

These competing policy considerations have led the courts to focus on the defendant's knowledge about the amount of the plaintiff's claim. The fact the plaintiff or some omniscient third party knew or could calculate the amount is not sufficient. The test we glean from prior decisions is: did the defendant actually know the amount owed or from reasonably available information could the defendant have computed that amount. Only if one of those two conditions is met should the court award prejudgment interest. (Conderback, Inc. v. Standard Oil Co. (1966) 239 Cal.App.2d 664, 690, 48 Cal.Rptr. 901; Cox v. McLaughlin, supra, 76 Cal. 60, 70, 18 P. 100; McConnell v. Pacific Mutual Life Ins. Co. (1962) 205 Cal.App.2d 469, 479, 24 Cal.Rptr. 5; Gray v. Bekins (1921) 186 Cal. 389, 399, 199 P. 767.)

III. PREJUDGMENT INTEREST NOT ALLOWABLE BECAUSE CHESAPEAKE DID NOT KNOW AND COULD NOT CALCULATE AMOUNT DUE UNDER THIS COMPLEX LEASE PROVISION.

In this case the lessee, Chesapeake, is only liable for prejudgment interest on the net sum due under this lease if it knew or could have calculated the amount of that deficit. We hold that the trial court erred in granting an award of $16,376.13 in prejudgment interest because Chesapeake's liability under section 14 of the lease agreement was not ascertainable on the information reasonably available to this defendant at the time the claim was filed.

A. Creditor's Cross-Claim for Accounting Is Prima Facie Indication That Claim Not Capable of Calculation.

In bringing cross-claims for an accounting both Chesapeake and Togova asserted that they did not know and could not calculate the amount of Chesapeake's liability under section 14 of the lease agreement. This strongly suggests any deficiency under section 14 was not certain. (See Damages 14 Cal.Jur.2d, § 78 at p. 704.) Consistent with this view, courts have reasoned that "where an accounting is required in order to arrive at a sum justly due, interest is not allowed." (Stockton Theatres, Inc. v. Palermo, 121 Cal.App.2d 616, 632 [no abuse of discretion in refusing prejudgment interest after long and complicated accounting]; Schmidt v. Waterford Winery, Ltd., 177 Cal.App.2d 28, 34-35 [no prejudgment interest allowed where ascertainment of amount due under contract required an accounting]; Williams v. Flinn & Treacy (1923) 61 Cal.App. 352, 357, 214 P. 1024 [no prejudgment interest allowed in accounting case where amount asked for by plaintiff varied greatly from what court found to be due because not certain under 3287]; 11 Williston on Contracts (3d ed. Disallowing prejudgment...