Squire's Dept. Store v. Dudum

• Decision Date: 14 January 1953
• Docket Number: 15161,Nos. 15160,s. 15160
• Citation: 252 P.2d 418,115 Cal.App.2d 320
• Court: California Court of Appeals Court of Appeals
• Parties: SQUIRE'S DEPARTMENT STORE, Inc. v. DUDUM et al. DUDUM et al. v. SQUIRE'S DEPARTMENT STORE, Inc.

Page 418

252 P.2d 418

115 Cal.App.2d 320

SQUIRE'S DEPARTMENT STORE, Inc. v. DUDUM et al.

DUDUM et al. v. SQUIRE'S DEPARTMENT STORE, Inc.

Nos. 15160, 15161.

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

Jan. 14, 1953.

Hone & Lobree, San Francisco, Hubert D. Forsyth, San Francisco, of counsel, for appellants.

Conrad T. Hubner and Abraham Setzer, San Francisco, for respondent.

FRED B. WOOD, Justice.

Squire's Department Store, Inc., leased a basement store to Ramallah Wholesale Import Company, a copartnership, for the period March 16 to December 31, 1949, at a rental in the amount of 50% of the lessee's net profits at these premises. At the end of the term the lessee vacated and paid no rent, claiming there were no net profits.

A controversy has arisen between the parties. The main question is whether or not this controversy includes a 'dispute' relative to 'determination of the rental due' under the lease, and as such subject to arbitration. The lease provided: 'In the event of any dispute between the Lessor and the Lessee relative to the determination of the rental due hereunder, they shall each select an arbitrator, the two arbitrators so selected shall select a third arbitrator, and the three arbitrators so selected shall hear and determine the controversy and their decision thereon shall be final and binding upon both the Lessor and the Lessee, who shall bear the cost of such arbitration equally between them.'

A subsidiary question is whether or not Ramallah, the lessee, who is insisting upon arbitration, has waived the right thereto.

Within three months of the expiration of the lease, Squire's, the lessor, filed a complaint against Ramallah in the superior court (Action No. 395,802 in the trial court; No. 15160 in this court; hereinafter called the 'first action'). Of the three counts alleged, two had nothing to do with rent. Count II was for goods sold. Count III was for damages for asserted fraudulent diversion of patronage from the plaintiff.

Nor did count I present an arbitrable dispute. It was not an action upon the contract for 'rental due.' It was an action to recover 'damages' for actual fraud. The fraud consisted of promises 'made without any intention of performing' them. Civ.Code, § 1710, subd. 4 and § 1572, subd. 4; Union F. M. v. Southern Cal. F. M., 10 Cal.2d 671, 676, 76 P.2d 503. 'One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.' Civ.Code, § 1709. 'In an action for the breach of an obligation not arising from contract, where the defendant has been guilty of oppression, fraud, or malice, express or implied, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.' Civ.Code, § 3294.

If the defrauded party is induced by such false promises to execute a contract, he need not disaffirm the contract. He has the option of rescinding or of affirming the contract, and recovering damages for the fraud. Hines v. Brode, 168 Cal. 507, 511-512, 143 P. 729; Thompson v. Modern School, etc., 183 Cal. 112, 190 P. 451; Morey v. Bovee, 218 Cal. 780, 25 P.2d 2; Bagdasarian v. Gragnon, 31 Cal.2d 744, 192 P.2d 935; Hickman v. Johnson, 36 Cal.App. 342, 178 P. 145; Security Commercial etc. Bank v. Seitz, 43 Cal.App. 353, 185 P. 188; Hullinger v. Big Sespe Oil Co., 50 Cal.App. 6, 194 P. 742; Howland v. Meximerican Co., S. A., 55 Cal.App. 581, 583-584, 203 P. 1019; Mahony v. Haines, 66 Cal.App. 456, 226 P. 620; Connelly v. J. D. Millar Realty Co., 131 Cal.App. 67, 69, 20 P.2d 781; Hjorth v. Bernstein, 44 Cal.App.2d 561, 564, 112 P.2d 643; Williamson v. Clapper, 88 Cal.App.2d 645, 653, 199 P.2d 337; Le Clercq v. Michael, 88 Cal.App.2d 700, 703, 199 P.2d 343; 12 Cal.Jur. 781, Fraud and Deceit § 49; 24 Am.Jur. 21-24, Fraud and Deceit § 200.

In count I, Squire's without disaffirming the contract alleged that, in order to induce Squire's to lease this basement store, Ramallah promised to pay Squire's as rental a sum equal to 50% of the net profit to be derived by Ramallah; that Squire's, relying upon such promise, executed a lease of the store; that Squire's has fully performed the lease; that Ramallah had possession and conducted business throughout the term and has paid no rental therefor; that Ramallah has made statements indicating a net loss and a lack of net profit earned during the term but that these statements were and are false and untrue and were made pursuant to a secret predetermined fraudulent plan of Ramallah to cheat and defraud Squire's; that there never was any intention by Ramallah to ever pay Squire's for the possession, use and occupancy of the premises; that prior to executing the lease Squire's did not know of said fraudulent plan; that Squire's believed the promises of Ramallah as set forth in the lease, particularly that Ramallah would abide by its agreement to keep separate and accurate sales records of all business done in, upon or from the demised premises and would enter all receipts and expenses arising from said business in regular books of account kept by Ramallah for said purpose, whereas by various fraudulent devices, such as diverting all substantial purchases originating upon the premises to the wholesale business of Ramallah at a different location, by failing to record sales made at the premises or diverted to other locations, by charging unreasonable salaries and padding the payroll, and by the assertion of false cost of merchandise and by asserting false operating costs and charges against the operation of the business, Ramallah fraudulently concealed from Squire's, from the inception of the lease, the true revenues and net profits of the business conducted thereat; that had Squire's known of the fraudulent and corrupt plan and the corrupt design and intent of Ramallah, it would not have entered into the lease; that not until the end of the term and the denial by Ramallah of any indebtedness to plaintiff did said fraudulent plan of Ramallah stand revealed to Squire's; that through said possession, use and occupancy of the demised premises Ramallah earned and received a net income in excess of $35,000; that it would be an unjust enrichment of Ramallah to permit Ramallah to retain such ill-gotten gain and that in equity and good conscience the sum of $35,000 is justly due Squire's and that Squire's has been damaged by Ramallah's fraud and deceit in the sum of $35,000; that Ramallah has thus been guilty of oppression, fraud and malice, and Squire's, in addition to the actual damages alleged, is entitled to $15,000 further damages from Ramallah for the sake of example and by way of punishing Ramallah.

Quite clearly, in count I, Squire's is suing for the breach of an obligation imposed by law, not for the breach of a contractual obligation to pay rent. That characterizes it as an action in tort, not an action sounding in contract. Nathan v. Locke, 108 Cal.App. 158, 161-162, 287 P. 550, 291 P. 286, and De Mirjian v. Ideal Heating Corp., 91 Cal.App.2d 905, 908-909, 206 P.2d 20. That is so even though the alleged fraudulent acts might also operate as a breach of an obligation created by contract. Chelini v. Nieri, 32 Cal.2d 480, 486, 196 P.2d 915; Haigler v. Donnelly, 18 Cal.2d 674, 680, 117 P.2d 331.

We are not here concerned with the question whether Squire's used a correct theory for the measure of damages in pleading this action in tort. It asked for all of the net profits which Ramallah earned at the demised premises during the period of the lease, not for the difference between what Squire's bargained for and what Squire's received, nor for the value of Ramallah's use and occupation of the demised premises. See Bagdasarian v. Gragnon, supra, 31 Cal.2d 744, 759-763, 192 P.2d 935, for a discussion of the proper measure of damages in fraud cases. The measure he did use finds no basis whatsoever in contract, and the demand for exemplary damage is consistent only with a tort action, not an action upon the contract.

After the filing of the action and on May 5, 1950, Ramallah filed a notice of motion for an order staying further proceedings in the action, pending arbitration of the issues pursuant to the contract pleaded by the plaintiff. By an order filed October 10, 1950, the court granted this motion, but limited the stay to the first count, did not apply it to the second or third counts of the complaint.

Meanwhile, May 24, 1950, Ramallah filed a petition for an order for arbitration, in a separately numbered action (No. 397,395 in the trial court; No. 15161 in this court; hereinafter called the 'second action'). The petition alleged the execution of the lease, setting forth a copy, and stated that a controversy had arisen relative to the determination of the rental due, Squire's having commenced an action claiming that Ramallah made a net profit of $35,000; and that Ramallah has demanded but Squire's refuses arbitration. June 28 Ramallah gave notice of a motion to appoint an arbitrator. By an order filed October 10, 1950, the court found the allegations of the petition true and that neither the making of the agreement for arbitration nor the failure of the petitioners to comply therewith was in issue, and directed Squire's to proceed to the arbitration of the controversy in accordance with the terms of the agreement therefor. December 6 the court made an order designating the arbitrators.

Next, in sequence, it appears that plaintiff Squire's amended the third count of its complaint in the first action. Then on February 2, 1951, Ramallah filed notice of motion to stay that count pending arbitration. This motion was denied March 7, 1951.

Meanwhile, March 2, 1951, Ramallah filed an answer and cross-complaint to the amended third count of the complaint in the first action. By so doing Ramallah did not waive its right to arbitrate any arbitrable controversy which...