Freeman & Mills, Inc. v. Belcher Oil Co., S042831

CourtUnited States State Supreme Court (California)
Citation11 Cal.4th 85,44 Cal.Rptr.2d 420,900 P.2d 669
Decision Date31 August 1995
Docket NumberNo. S042831,S042831
Parties, 900 P.2d 669, 64 USLW 2160, 95 Cal. Daily Op. Serv. 6935, 95 Daily Journal D.A.R. 11,851 FREEMAN & MILLS, INCORPORATED, Plaintiff and Appellant, v. BELCHER OIL COMPANY, Defendant and Appellant.

McClintock, Weston, Benshoof, Rochefort, Rubalcava & MacCuish, John M. Rochefort, Martha S. Doty, Saman Zia-Zarifi and Andrew M. Gilford, Los Angeles, for Plaintiff and Appellant.

Ian Herzog, Los Angeles, Douglas DeVries, Sacramento, Leonard Sacks, Encino, Bruce Broillet, Los Angeles, Thomas Stolpman, Long Beach, Robert B. Steinberg, Los Angeles, Roland Wrinkle, Woodland Hills, Gary Paul, Santa Monica, Steven Kleifeld, Harvey Levine, San Jose, Wayne McClean, Woodland Hills, William Turley, San Diego, Rose, Klein & Marias, David A. Rosen, Los Angeles, Miller, Starr & Regalia, Edmund L. Regalia, San Francisco, Bernard & Wood, David P. Bonaccorsi, Newark, Crowe & Day, J. Michael Crowe and Douglas L. Day, Santa Monica, as Amici Curiae on behalf of Plaintiff and Appellant.

Stanley E. Crawford, Jr., David A. Engels, Sands, Narwitz, Forgie, Leonard & Lerner and Arthur A. Leonard, Houston, TX, for Defendant and Appellant.

Horvitz & Levy, Ellis J. Horvitz, Lisa Perrochet, John A. Taylor, Jr., Encino, Tanke & Willemsen, Tony J. Tanke, Michael A. Willemsen, Belmont, McCutchen, Doyle, Brown & Enersen, John R. Reese, Robert A. Lewis and William Carpenter, San Francisco, as Amici Curiae on behalf of Defendant and Appellant.

LUCAS, Chief Justice.

We granted review in this case to resolve some of the widespread confusion that has arisen regarding the application of our opinion in Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158 (Seaman's ). We held in that case that a tort cause of action might lie "when, in addition to breaching the contract, [defendant] seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists." (Id. at p. 769, 206 Cal.Rptr. 354, 686 P.2d 1158.)

In the present case, the Court of Appeal reversed judgment for plaintiff and remanded the case for a limited retrial, but also suggested that "it is time for the Supreme Court to reexamine the tort of 'bad faith denial of contract.' " We agree, and proceed to do so here. As our order granting review stated, "the issue to be argued before this court is limited to whether, and under what circumstances, a party to a contract may recover in tort for another party's bad faith denial of the contract's existence."

In light of certain developments occurring subsequent to Seaman's that call into question its continued validity, we find it appropriate to reexamine that decision. (See generally Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58 (Moradi-Shalal ).) As will appear, we have concluded that the Seaman's court incorrectly recognized a tort cause of action based on the defendant's bad faith denial of the existence of a contract between the parties. That holding has been widely criticized by legal scholars, has caused considerable confusion among lower courts, and has been rejected by the courts of several other jurisdictions. These critics convincingly argue that the Seaman's decision is confusing and ambiguous, analytically flawed, and promotes questionable policy. After careful review of all the foregoing considerations, we conclude that our Seaman's holding should be overruled.

I. Facts

We first review the underlying facts, taken largely from the Court of Appeal opinion herein. In June 1987, defendant Belcher Oil Company retained the law firm of Morgan, Lewis & Bockius (Morgan) to defend it in a Florida lawsuit. Pursuant to a letter of understanding signed by Belcher Oil's general counsel (William Dunker) and a Morgan partner (Donald Smaltz), Belcher Oil was to pay for costs incurred on its behalf, including fees for accountants. In February 1988, after first obtaining Dunker's express authorization, Smaltz hired plaintiff, the accounting firm of Freeman & Mills, Incorporated, to provide a financial analysis and litigation support for Belcher Oil in the Florida lawsuit.

In March, an engagement letter was signed by both Morgan and Freeman & Mills. At about this time, William Dunker left Belcher Oil and was replaced by Neil Bowman. In April 1988, Bowman became dissatisfied with Morgan's efforts and the lawyers were discharged. Bowman asked Morgan for a summary of the work performed by Freeman & Mills and, at the same time, directed Smaltz to have Freeman & Mills stop their work for Belcher Oil. Smaltz did as he was asked. Freeman & Mills's final statement was for $70,042.50 in fees, plus $7,495.63 for costs, a total of $77,538.13.

Freeman & Mills billed Morgan, but no payment was forthcoming. Freeman & Mills then billed Belcher Oil directly and, for about a year, sent monthly statements and regularly called Bowman about the bill, but no payment was forthcoming. In August 1989, Smaltz finally told Freeman & Mills that Belcher Oil refused to pay their bill. Freeman & Mills then wrote to Bowman asking that the matter be resolved. In September 1989, Bowman responded, complaining that Belcher Oil had not been consulted about the extent of Freeman & Mills's services and suggesting Freeman & Mills should look to Morgan for payment of whatever amounts were claimed due.

Ultimately, Freeman & Mills filed this action against Belcher Oil, alleging (in its second amended complaint) causes of action for breach of contract, "bad faith denial of contract," and quantum meruit. Belcher Oil answered and the case was presented to a jury in a bifurcated trial, with punitive damages reserved for the second phase. According to the evidence presented during the first phase, the amount owed to Freeman & Mills (as indicated on their statements) was $77,538.13.

The jury returned its first phase verdict. On Freeman & Mills's breach of contract claim, the jury found that Belcher Oil had authorized Morgan to retain Freeman & Mills on Belcher Oil's behalf, that Freeman & Mills had performed its obligations under the contract, that Belcher Oil had breached the contract, and that the amount of damages suffered by Freeman & Mills was $25,000. The jury also answered affirmatively the questions about whether Belcher Oil had denied the existence of the contract and had acted with oppression, fraud, or malice. Thereafter, the jury returned its verdict awarding $477,538.13 in punitive damages and judgment was entered consistent with the jury's verdicts.

In three post-trial motions, Freeman & Mills asked for orders (1) "correcting" the jury's verdicts and the court's judgment to reflect compensatory damages of $77,538.13 and punitive damages of $425,000 (on the ground that the jury's questions showed this was its true intent); (2) awarding attorney fees as sanctions for the litigation tactics of Belcher Oil's attorneys; and (3) awarding prejudgment interest on the compensatory damage award. Over Belcher Oil's opposition, all three motions were granted--but with some changes in the course of correcting the judgment--by giving Freeman & Mills $131,614.93 in compensatory damages (the $25,000 actually awarded by the jury, plus the $77,538.13 included in the punitive damage award, plus $29,076.80 for prejudgment interest), and $400,000 (not $425,000 as requested) in punitive damages.

Belcher Oil appealed from the "corrected" judgment. Freeman & Mills cross-appealed from a mid-trial order denying its request to amend its complaint to add a cause of action for fraud, an issue not presently before us. The Court of Appeal majority, finding no "special relationship" between the parties to justify a tort theory of recovery under Seaman's, reversed the judgment and remanded the case to the trial court for a retrial limited to the issue of damages under plaintiff's breach of contract cause of action. (The Court of Appeal dissenting justice would have sustained the tort cause of action and remanded for retrial of the damage issue as to both causes of action.) As will appear, we affirm the judgment of the Court of Appeal, concluding that a tort recovery is unavailable in this case.

II. The Seaman's Decision

The tort of bad faith "denial of contract" was established in a per curiam opinion in Seaman's, supra, 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158. These were the facts before the court in that case: In 1971, Seaman's Direct Buying Service, a small marine fueling station in Eureka, wanted to expand its operation by developing a marine fuel dealership in conjunction with a new marina under development by the City of Eureka. When Seaman's approached the city about a long-term lease of a large parcel of land in the marina, the city required Seaman's to obtain a binding commitment from an oil supplier. To that end, Seaman's negotiated with several companies and, by 1972, reached a tentative agreement with Standard Oil Company of California.

Both Seaman's and Standard Oil signed a letter of intent setting forth the basic terms of their arrangement, but that letter was subject to government approval of the contract, continued approval of Seaman's credit status, and future agreement on specific arrangements. Seaman's showed the letter to the city and, shortly thereafter, signed a 40-year lease with the city. (Seaman's, supra, 36 Cal.3d at pp. 759-760, 206 Cal.Rptr. 354, 686 P.2d 1158.)

Shortly thereafter, an oil shortage dramatically reduced the available supplies of oil and, in November 1973, Standard Oil told Seaman's that new federal regulations requiring allocation of petroleum products to those that had been customers since 1972 precluded its execution of a new dealership agreement. In response, Seaman's obtained an exemption from the appropriate federal agency. Standard Oil appealed and persuaded the agency to reverse the...

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