Hedging Concepts, Inc. v. First Alliance Mortgage Co., B084508

CourtCalifornia Court of Appeals
Citation49 Cal.Rptr.2d 191,41 Cal.App.4th 1410
Decision Date23 January 1996
Docket NumberNo. B084508,B084508
Parties, 96 Cal. Daily Op. Serv. 499, 96 Daily Journal D.A.R. 763 HEDGING CONCEPTS, INC., Plaintiff and Appellant, v. FIRST ALLIANCE MORTGAGE COMPANY, Defendant and Appellant.

[41 Cal.App.4th 1413] Jennifer L. Kurzon and Jim Goff, Orange, for Defendant and Appellant.

Kulik, Gottesman & Mouton, Glen L. Kulik, Claudia Ribet, for Plaintiff and Appellant.

ZEBROWSKI, Associate Justice.

This appeal concerns a contract dispute tried to the court. The court found that defendant's understanding of the contract was correct, that plaintiff had not performed a condition precedent to plaintiff's right to be paid, and that defendant had therefore not breached the contract by not paying. The court then declared the contract rescinded and awarded a quantum meruit recovery to plaintiff, notwithstanding that the court had found that plaintiff had not performed and

that defendant had not breached. Attorney's fees requested by the prevailing party defendant on plaintiff's breach of contract claim were denied. Prejudgment interest and costs were awarded to plaintiff

[41 Cal.App.4th 1414] The trial court's construction of the contract, the finding that plaintiff had not performed, and the finding that defendant had not breached are affirmed. The award of quantum meruit damages, prejudgment interest and costs to plaintiff is reversed. The case is remanded for a determination of attorney's fees to the prevailing party defendant, plus costs.


Defendant First Alliance Mortgage Company is a corporation engaged in arranging, purchasing and selling second trust deed loans. First Alliance has many employees, but Brian Chisick is the sole owner. Plaintiff Hedging Concepts, Inc. is the one-person financial consulting corporation of Dennis Rosenfeld.

In early 1989, Rosenfeld (on behalf of Hedging) proposed to Chisick (on behalf of First Alliance) that Rosenfeld/Hedging assist First Alliance in arranging financial transactions called "securitizations." A "securitization" is a bundling of secured real property loans for sale as a group to institutional investors. Although the securitization technique had previously been used with first trust deeds, securitization was not commonly used with second trust deeds as of 1989. A securitization transaction consists of several components, involves an investment banker, rating agency and trustee, and can take a year or more to complete. A party (such as First Alliance) which originates loans which are securitized can earn higher profits than from selling loans individually. Neither Rosenfeld nor Chisick had previously been involved in a securitization.

After some discussion between Rosenfeld (for Hedging) and Chisick (for First Alliance), Rosenfeld sent Chisick a letter in February of 1989 which Chisick signed and returned. The question at trial was exactly what the parties agreed to by their discussions and this letter.

Chisick testified that he and Rosenfeld discussed that First Alliance would pay a commission to Rosenfeld/Hedging only if a securitization was successfully completed through Rosenfeld's efforts. When he received Rosenfeld's letter, Chisick interpreted it to condition Rosenfeld's right to payment upon his procuring a completed securitization.

The letter states that it contains "an agreement which will govern the amount of compensation paid to Hedging Concepts, Inc. in the event that a successful securitization ... is initiated through firms introduced by Hedging Concepts, Inc. to First Alliance Mortgage Company." The letter goes on to provide that First Alliance agrees to pay Hedging a fixed percentage [41 Cal.App.4th 1415] commission on "the principal balance of all mortgages sold, securitized or delivered to or through firms located or introduced by" Hedging for a period of ten years. The balance of the letter covers matters not necessary to detail here.

Although Rosenfeld's letter specifies the details of rate, timing and duration of Rosenfeld/Hedging's right to payments, the letter does not expressly describe the duties Rosenfeld/Hedging will perform in order to be entitled to such payments. The uncertainty in Rosenfeld's letter regarding what duties Rosenfeld/Hedging was to perform resulted in this dispute.

After the letter was signed in March of 1989, Rosenfeld began to "register" names of various financial institutions with First Alliance by sending frequent letters to First Alliance listing the names of various financial institutions. About five months later, on July 31 of 1989, Rosenfeld informed First Alliance by letter that "the bulk" of his "explorations" had been completed, although he might later add "additional names." The letter stated that in Rosenfeld's opinion, he had "introduced" First Alliance "to nearly every competitive buyer of second trust deeds in the United States." Included on Rosenfeld's list were many of the better-known financial institutions operating in the United States. 1

Upon receiving the July 31 letter from Rosenfeld, Chisick wrote back in early August that it was not his understanding that Rosenfeld merely had to "register" names in order to lock himself into a commission for ten years. Subsequent efforts to clarify the terms of the agreement were not fruitful. In September, Rosenfeld's lawyer wrote to First Alliance that Rosenfeld had fulfilled his obligations under the agreement by "introducing" First Alliance to the listed parties. Dealings between Hedging and First Alliance terminated at about this time.

Approximately a year and a half later, in early 1991, First Alliance contracted with a different financial adviser for the arrangement of securitizations. Compensation to the adviser was contingent upon his being the procuring cause of a completed securitization. In 1992 and 1993, the new adviser completed three securitizations for First Alliance. Although these [41 Cal.App.4th 1416] securitizations involved companies whose names had previously appeared on Rosenfeld's "registration" list, the new adviser never heard Rosenfeld's or Hedging's name mentioned, nor did he use any documents or information generated by Rosenfeld or Hedging. 2


Hedging sued First Alliance for fraud and breach of contract, and Chisick for fraud. First Alliance cross-claimed for fraud and negligent misrepresentation against both Rosenfeld and Hedging, and sought rescission and declaratory relief against Hedging only.

The issue was the meaning of the contract. Rosenfeld/Hedging contended that Rosenfeld/Hedging's duties were limited to "registering" names and that Hedging was entitled to payment if any securitization were completed by First Alliance within ten years with any of the entities on Rosenfeld's "registration" list. First Alliance contended that Rosenfeld/Hedging actually had to procure a completed securitization agreement before being entitled to payment.

The February 1989 letter written by Rosenfeld was not necessarily an integrated agreement and was reasonably susceptible to either interpretation. The trial court therefore properly accepted parol evidence to explain the meaning of the contract. See, generally, California Practice Guide, Civil Trials and Evidence (The Rutter Group), section 8:3102 et seq. (admissibility of parol evidence to aid interpretation of written agreement) and cases cited there; 2 Witkin, California Evidence (3d ed. 1986), section 975 et seq., page 920 (when extrinsic evidence admissible) and section 984, pages 930-931 (discussing Pacific Gas & Electric rule). 3

At the close of plaintiff's case, the trial judge sua sponte raised the prospect of a quantum meruit award to Rosenfeld/Hedging if "a contract didn't come into effect." Although First Alliance and Chisick protested that quantum meruit had not been pleaded or prepared for, the court stated that [41 Cal.App.4th 1417] "[i]f there is a ruling that the contract is for one reason or another invalid, then quantum meruit would have an application, and I will permit the amendment to conform to proof." 4

Motions eliminated all of Rosenfeld/Hedging's claims other than breach of contract. Other motions eliminated all of First Alliance and Chisick's claims except those for declaratory relief and rescission on grounds of failure of consideration and mutual mistake.


The trial court issued a statement of decision finding: "Rosenfeld thought commissions were payable for an introduction to prospects with whom First Alliance might do any business during the following ten years. First Alliance thought commissions were payable for procuring a deal...."

"On this point, the differences between the parties is obvious and blatant: Plaintiff, fee entitlement for an introduction; defendant, fee entitlement for effecting a deal. There never was or had been any meeting of the minds on these points."

Instead of declaring a lack of contract formation at this point, however, the statement of decision goes on to evaluate "the factual arrangement of the parties in the light of common understanding and customary business practices in order to arrive at an understanding of the true arrangement of the parties." In evaluating the arrangement of the parties, the court found "no rational basis to support an agreement which would provide for payment of large fees to a finder for introduction to 92 entities, fees payable if the principal did business with any of these entities during the following ten years." After further analogies and analysis, the statement of decision continues: "The issue and the essential point of the contract visualized a consummation of a deal within a reasonable period of time. It did not visualize general solicitation of and compilation of a list of the principal entities active in the business of buying and...

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