Neptune Society Corp. v. Longanecker

• Decision Date: 17 September 1987
• Citation: 240 Cal.Rptr. 117,194 Cal.App.3d 1233
• Court: California Court of Appeals Court of Appeals
• Parties: The NEPTUNE SOCIETY CORPORATION et al., Plaintiffs, Cross-Defendants and Appellants, v. L. Calvin LONGANECKER et al., Defendants, Cross-Complainants and Respondents. D003646.

Page 117

240 Cal.Rptr. 117

194 Cal.App.3d 1233

The NEPTUNE SOCIETY CORPORATION et al., Plaintiffs, Cross-Defendants and Appellants, v. L. Calvin LONGANECKER et al., Defendants, Cross-Complainants and Respondents.

D003646.

Court of Appeal, Fourth District, Division 1, California.

Sept. 17, 1987.

James McKiernan, San Lius Obispo, for plaintiffs, cross-defendants and appellants

Richard E. Gattis and Steven J. Cote, San Diego, for defendants, cross-complainants and respondents.

TODD, Associate Justice.

In this contract action and cross-complaint for recission stemming from a partnership agreement that went sour, the trial court, after an 18-day court trial, made a series of rulings against the plaintiff. Judgment was entered for the defendant and cross-complainant for recission, restitution, dissolution of the partnership and attorney's fees. Plaintiff and cross-defendants appeal.

THE PARTIES

The plaintiff is Neptune Society Corporation, a California corporation, which sued

L. Calvin Longanecker, his wife and Leneta Corporation, a California corporation formed by Longanecker in 1977. Longanecker and Leneta filed a cross-complaint against Neptune Society Corporation; Proteus, Inc., a Delaware corporation; Charles H. Denning, Jr., and Barbara H. Denning. Proteus was added as a party plaintiff at the conclusion of the trial.

FACTS AND PROCEDURAL BACKGROUND

On August 3, 1974, Longanecker and his former wife Neta entered into an "Agreement of Limited Partnership" with Proteus Corporation, doing business as Neptune Society. Charles H. Denning, Jr. was the purported president of Proteus and was the promoter and negotiator for the partnership agreement on behalf of Proteus. The purpose of the agreement was to start Neptune Society of San Diego, a business to provide low cost crematory services, as well as dissemination of the remains of San Diego County residents. The first Neptune office had been opened in San Pedro in June 1973 to service the Los Angeles area. At the time Longanecker entered into the agreement, there were also Neptune offices in San Francisco, Orange County and Santa Barbara.

Under the agreement, Longanecker agreed to pay to Proteus the sum of $45,000. Longanecker executed three promissory notes, each dated August 3, 1974, payable in the sum of $1,000, $4,000 and $40,000 respectively to the order of the Neptune Society, due and payable, first, within seven days for the $1,000, second, within 35 days for the $4,000, and, third, within three years for the $40,000. Longanecker also agreed to pay to Proteus 10 percent of the gross income of the new business. (Later, Longanecker and Proteus, through its agent Denning, modified the agreement to entitle Proteus to a flat rate royalty schedule of $1.50 per individual memberships, $2.50 for family memberships, $25 per member death cases and $30 for non-member death cases.)

In return for the promissory notes and the payment of royalties, Proteus agreed to perform various services in furtherance of the new business, including training Longanecker's employees, providing promotional services and market research assistance, and providing facilities and services to disseminate ashes at sea. Longanecker, in turn, received the exclusive right to operate a Neptune Society business in San Diego County.

Neptune Society of San Diego opened for business in September 1974. On August 7, 1975, the Neptune Society Corporation was formed by Denning. On June 23, 1976, Denning wrote Longanecker that the agreement had been transferred from "... Proteus Corp which I own 100% ... to the Neptune Corp which I own."

In August 1977, Longanecker stopped making his royalty payments because of purported longstanding and continuing breaches by Proteus/Neptune Society Corporation of its obligations under the agreement. In February 1978, the Neptune Society Corporation sued Longanecker to collect the sums due under the $40,000 note and to collect unpaid royalties due. On March 29, 1978, Longanecker filed a cross-complaint for recission, restitution, dissolution of partnership and declaratory relief.

Trial commenced on December 3, 1984, on Neptune Society Corporation's third amended complaint and Longanecker's cross-complaint and concluded on January 23, 1985 when the trial court ruled (1) the agreement was a "franchise" as that term is used in the state Franchise Investment Law (Corp.Code, § 31000 et seq.)--a finding that is not questioned on appeal--(2) Neptune Society Corporation had willfully violated the law by not registering the franchise and Longanecker was entitled to recission, (3) Neptune Society Corporation was not entitled to recover for breach of contract because of its prior material breach of the agreement (failure to provide ongoing market research, among other things), (4) Longanecker is entitled to restitution of $19,000 he paid in royalties and $5,000 he paid in notes to Neptune Society Corporation, (5) Neptune Society Corporation is entitled to be reimbursed for the In its July 17, 1985 statement of decision, the trial court also found Neptune Society Corporation did not have standing to bring its lawsuit against Longanecker. The trial court rejected Neptune Society Corporation's claim that it was the lawful assignee of Proteus.

value of its contributions, including the use [194 Cal.App.3d 1240] of the name Neptune Society, in the sum of $25,000, (6) Longanecker and his successors-in-interest will have the right to use the Neptune Society name in San Diego County and (7) each side is to pay its own attorney's fees. At a hearing on March 27, 1985, the trial court reversed itself on the last issue, ruling Longanecker is entitled to attorney's fees.

DISCUSSION

As best we can ascertain, Neptune Society Corporation makes the following contentions: (1) the trial court's admission of evidence concerning a $90,000 loan made by the Small Business Administration to Proteus in 1973 deprived Neptune Society Corporation of a fair and unbiased trial; (2) the evidence did not support the trial court's finding that Neptune Society Corporation was not the lawful assignee of Proteus; (3) the one-year statute of limitations provided in Corporations Code section 31303 precludes Longanecker from rescinding the agreement for willful failure to register a franchise; (4) the evidence did not support the trial court's finding that Neptune Society Corporation willfully violated the Franchise Investment Law; (5) trial court's finding of rescission based on fraud are defective; (6) the trial court did not properly order restitution and restoration between the parties after rescission of the agreement; (7) the evidence did not support the trial court's finding that Charles H. Denning, Jr. and Barbara H. Denning violated the Franchise Investment Law; (8) the trial court committed prejudicial error by excluding evidence during Neptune Society Corporation's case-in-chief; and (9) the trial court erred in awarding attorney's fees to Longanecker.

I

Neptune Society Corporation complains throughout its brief that it was highly prejudiced and denied a fair trial because the trial court insisted on exploring Proteus' questionable Small Business Administration loan. Neptune Society Corporation had a continuing relevancy objection to the evidence concerning the loan.

At the outset, the loan evidence should be put in perspective in relationship to the entire trial. The trial was originally estimated to take five days. In fact, there were 18 days of trial over a two-month period, which was broken up by holidays and other commitments by counsel on both sides, as well as the court. It is true that at the court's direction a number of witnesses were brought in to testify about the loan, but the testimony of these unexpected witnesses took up only two days of court time. Also, it is important to recognize the trial court was prompted to look into the loan by Denning's testimony, which throughout the trial was simply incredible. Denning at various points claimed he had documentary evidence of purported transactions, but the documents were destroyed by either a flood at one property or a fire at another. Later, he was able to find some documents helpful to his case that were contemporaneous to those destroyed by the fire or flood.

A trial court has wide discretion in deciding relevancy. (People v. Warner, (1969) 270 Cal.App.2d 900, 908, 76 Cal.Rptr. 160.) Evidence is relevant not only when it tends to prove or disprove the precise fact in issue but when it tends to establish a fact from which the existence or non-existence of a fact in issue can be directly inferred. (Ibid.)

Longanecker presented evidence that Proteus had been transferred to Denning's stepdaughter so the firm could qualify for a loan from the Small Business Administration. Denning testified his stepdaughter's purchase of Proteus was a sham concocted by his associate Volney Stefflere to defraud the Small Business Administration into making a Minority Enterprise Small Business Investment Corporation (MESBIC) In its statement of decision, the trial court concluded, among other things, that Neptune Society Corporation was not the lawful assignee of Proteus based on the following evidence:

loan to Proteus. The stepdaughter is one-half Indonesian. Denning also claimed the stepdaughter's purchase of Proteus was never consummated because the MESBIC loan was never made to Proteus. Longanecker's counsel, however, uncovered evidence that a $90,000 MESBIC loan was made to a d.b.a. of Proteus in July 1973. A Small Business Administration auditor testified that Denning told him how the loan money was spent, and Denning did not dispute the auditor's testimony. Instead, Denning testified that Stefflere, the supposed mastermind of the scam, had told him to lie to the auditor about the use of the loan proceeds and he, Denning, had merely followed Stefflere's instructions.

"... PROTEUS became indebted to the Small Business Administration (SBA...