Free Appendix - District Court of California - California

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222 CaL. App. 3d 1371, *; 272 CaL. Rptr. 387, **; 1990 CaL. App. LEXIS 879, ***

Contracts, '(t)he phrase "good faith" is used in a variety of contexts, and its meanig varies somewhat in the context. Good faith performnce or
enforcement of a contract emphasizes faithflness

enhancing the beneficiary's security. This result

was simply an application of the rule that
"'(w)here a contract confers on one part a discre-

tionary power affecting the rights of the other, a

to an agreed common purose and consistency
with the justified expectations of the other part;
it excludes (from consideration) a variety of

duty is imposed to exercise that discretion in
good faith and in accordance with fair dealing.'

of conduct characterized (in other contexts) as involving "bad faith" because they violate community standards of decency, fairess or reasonable-

tyes

(Citations.)" ( Kendall v. Ernest Pestana, Inc.
(1985) 40 Cal.3d 488, 500 (220 Cal.Rptr. 818, 709 P.2d 837), quoting Cat. Lettuce Growers v.
Union Sugar Co. (1955) 45 Cal.2d 474, 484 (289
P.2d 785, 49 A.L.R.2d 496).) In such circum-

ness.' (Rest.2d Contracts (Tent. Draft Nos. 1-7) § 231, com. a.)"

(***35) Foley emphasized that an alleged breach
of the implied covenant is a claim founded upon contract

and that a careful distinction must be maintained between "ex-delicto" and "ex-contractu" obligations. "When a cour enforces the implied covenant it is in essence acting to protect 'the interest in having promises pedormed (citation)' . . . ." ( Foley, supra, 47 CaL.3d at
pp. 689-690.) This is the traditional function of a contract

stance, a breach of the implied covenant can result from conduct permtted by the express (or implied-in-fact) term of the contract. (See also, Milstein v. Security Pac. Nat. Bank (1972) 27
Cal.App.3d 482,487 (103 Cal.Rptr. 16).

In Wilkerson, plaintiff sued on an alleged contract of employment that he would not be
termnated except for cause. The cour held that even though the employer may have had a good

action. A tort action, on the other hand, redresses the breach of the general duty to society which the law imposes without regard to the substance of the contractual

faith belief that such "good cause" existed, such
belief would be a defense only to an action for

breach of the covenant, but would not provide a
defense to breach of contract.

obligation. (16) "The covenant of good (**399) faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's puroses." ( Id., at p. 690.) In short, it is an implied-in-law term of the contract. Therefore, its breach

In Sheppard, the plaintiff had left his stock
analyst position in Californa to accept a similar

job in Tennessee but was termated before he
could begin work. The cour held that while there was no agreement not to termnate except
for cause, and thus no breach of a consensual

wil always result in a breach of the contract, (*1394)

although a breach of a consensual (i.e., an express or
implied-in-fact) contract term wil not necessarily constitute (***36) a breach of

the covenant. 16

contract term the implied covenant of good faith required that the employer at least give the new

16 The same conduct does not necessarily result
in a breach of both a consensual contract term

employee an opportty to demonstrate his ability to satisfy the requirements of the job. (See also, Murray v. State Farm Fire & Casualty Co.

and the implied covenant of good faith. (See,
e.g., Schoolcraft v. Ross, supra, 81 CaL.App.3d at pp. 80-81; Wilkerson v. Wells Fargo Bank (1989) 212 Cal.App.3d 1217, 1230-1231 (261 Cal Rptr.

33).

(1990) 219 Cal.App.3d 58, 65 (268 Cal.Rptr.

(***37)

185); Sheppard v. Morgan Keegan & Co. (1990)
218 CaL.App.3d 61,66-67 (266 Cal.Rptr. 784).)
In Schoolcraft, the cour awarded contract

A "'breach of the implied covenant of good faith and

fair dealing involves something beyond breach of the
contractual duty itself and it has been held that '(b )ad
faith implies unair dealing rather than mistaken judgment . . .. (Citation.)' (Citation.)" ( Congleton v. Na-

damages to the trstor under a deed of trst upon
the theory that the beneficiary's conduct, in ap-

tional Union Fire Ins. Co. (1987) 189 Cal.App.3d 51,59
the (234 Cal.Rptr. 218). 17 For example, in the context of insurance contract, it has been held that the insurer's re-

plying fire insurance proceeds to the secured debt
rather than to the reconstrction of the insured

residence, was a breach of the covenant of good

faith implied in the trst deed. While such choice
was permtted by the express term of the trst deed, and thus there was no breach of those
term, the cour found that the choice had been
made in bad faith and had deprived the trstor of

sponsibility to act fairly and in good faith with respect to the handling of the insured's claim "'is not the require-

ment mandated by the term of the policy itself -- to defend, settle, or pay. It is the obligation. . . under which (*1395) the insurer must act fairly and in good faith in
discharging its contractual responsibilities.' (Citation. J"

the benefit of the agreement without necessarily

(Italics in originaL.) ( California Shoppers, Inc. v. Royal

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Globe Ins. Co. (1985) 175 Cal.App.3d 1, 54 (221

CaL.Rptr. 171), quoting Gruenberg v. Aetna Ins. Co.,
supra, 9 Ca1.d at pp. 573-574.)

v. Farmers Ins. Exchange, supra, 21 Ca1.d at p. 920; Gruenberg v. Aetna Ins. Co., supra, 9 Cal. 3d at p. 574; (***40) Suarez v. Life Ins. Co. of North America (1988) 206 Cal.App.3d 1396, 1407 (254 Cal.Rptr. 377); California Shoppers, Inc. v. Royal Globe Ins. Co., supra, 175

17 Several California cases have defined the of-

fensive conduct as "bad faith action, extraneous
to the contract, with the motive intentionally to
frstrate the (other part)'s enjoyment of contract

Cal.App.3d at pp. 54-55.)
However, whether such a concept has any application in noninsurance cases appears to be increasingly

rights." ( Sairer v. Bank of America (1978) 83
Cal.App.3d 135, 139(145 Cal.Rptr. 623); Khanna
v. Microdata Corp. (1985) 170 Cal.App.3d 250,

262 (215 Cal.Rptr. 860). Such definition has been recently criticized by the Supreme Cour,
but only in the context that it was uncritically applied to justify a tort remedy rather than contract
damages. (Foley, supra, 47 Ca1.d at p. 689.)

problematic. Indeed, the proposition that (*1396) tort damages might be allowed for a breach of the implied covenant in noninsurance cases is barely 10 years old
and is based entirely on dicta from 2 earlier opinons which the Supreme Cour has recently questioned. To appreciate just how diffcult it is to assert such a claim, a short historical review is appropriate.

(***38) Thus, allegations which assert such a claim must show that the conduct of the defendant, whether or not it also constitutes a breach of a consensual contract term demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad (**400) judgment or negligence but rather by a conscious and deliberate act, which unfairly frstrates
the agreed common puroses and disappoints the reasonable expectations of the other part thereby depriving

In 1980, the Supreme Cour took the occasion, in a ~ongful discharge case where a tort recovery was periltted ( Tameny v. Atlantic Richfield Co. (1980) 27

Ca1.3d 167 (164 Cal.Rptr. 839, 610 P.2d 1330, 9
A.L.R.4th 314) (Tameny)), to hit that such a recovery

might also be justified under the theory of a breach of the implied covenant. The authority for ths possible transition, however, was insurance (***41) cases. 18 Indeed,

that part of the benefits of the agreement. Just what
conduct wil meet these criteria must be determned on a
case by case basis and wil depend on the contractual puroses and reasonably justified expectations of the parties.

any (**401) serious suggestion of such an extension of tort liability would have been a signficant change in the law. Up until that time the cours had repeatedly rejected claims for tort relief for breach of the implied covenant
in noninsurance cases. (See, e.g., Wagner v. Benson (1980) 101 Cal.App.3d 27,33 (161 Cal.Rptr. 516); Saw-

yer v. Bank of America (1978) 83 Cal.App.3d 135, 139
(145 Cal.Rptr. 623); Glendale Federal Savings & Loan Assn. v. Marina View Heights (1977) 66 Cal.App.3d 101,
135, fr. 8 (135 Cal.Rptr. 802).) However, following

(17) If the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfuous as no additional claim is actually stated. Thus, absent those
limited cases where a breach of a consensual contract

Tameny, at least two cases (involving employment ter-

term is not claimed or alleged, the only justification for
assertng a separate cause of action for breach of the

mination) simply assumed the existence of a tort remedy, but again relied entiely on insurance cases. (Cleary v. American Airlines, Inc. (1980) 111 Cal.App.3d 443, 456
(168 Cal.Rptr. 722); Cancellier v. Federated Dept.
Stores (9thCir. 1982) 672F.2d

1312, 1318.)

(***39) implied covenant is to obtain a tort recovery.
. (18) In insurance cases there is a well-developed

18 In Tameny, the cour sanctioned a tort remedy for the termnation of a long-term employee

history recogniing a tort remedy for a breach of the impli~d covenant. ( Foley, supra, 47 Ca1.3d at p. 684.) A review of those cases demonstrates that the existence of
this remedy has been justified by the "special relation-

who refused the employer's direction to engage in

activities which were criminal violations of the
antitrst law. The cour concluded its opinion
with a foottote reference to the breach of the

ship" existing between insurer and insured, which is characterized by elements of public interest, adhesion and fiduciary responsibility. (Seaman's, supra, 36
Ca1.3d at pp. 768-769; Egan v. Mutual of

Omaha, supra,

covenant implied in the employment agreement: "In light of our conclusion that plaintiffs complaint states a cause of action in tort under Cali-

24 Ca1.d at p. 820.) In addition, it is essential to a recovery in tort that the insurer, in breachig the implied

forna's common law wrongful discharge doctrine, we believe it is unnecessary to determine
whether a tort recovery would additionally be available under these circumstances on the theory that Arco 's discharge constituted a breach of

covenant, have acted unreasonably ( Egan v. Mutual of
Omaha, supra, at p. 818; Gruenberg v. Aetna Ins. Co., supra, 9 Ca1.d at p. 575) or without proper cause ( Neal

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the implied-in-law covenant of good faith and fair
dealing inherent in every contract. We do note in ths regard, however, that authorities in other jurisdictions have on occasion found an employer's discharge of an at-wil employee violative of the

20 The Seaman's cour explained its reluctance by stating that, "When we move from such special relationships (as are recognized as the basis for tort liability in insurance cases) to consideration of the tort remedy in the context of the ordinary commercial contract, we move into largely

employer's 'good faith and fair dealing' obliga-

tions, (citations), and past Californa cases have
held that a breach of

uncharted and potentially dangerous waters.
Here, parties of roughly equal bargainng power

this implied-at-law covenant

sounds in tort as well as in contract. (See, e.g.,
Comunale v. Traders General Ins. Co. (1958) 50
CaL.2d 654, 663 (328 P.2d 198, 68 A.L.R.2d

are free to shape the contours of their agreement
and to include provisions for attorney fees and

liquidated damages in the event of breach. They
may not be permtted to disclaim the covenant of
good faith but they are free, within reasonable

883); Crisci v. Security Ins. Co. (1967) 66 CaL.2d 425, 432-433 (58 Ca1.Rptr. 13, 426 P.2d 173);
Gruenberg v. Aetna Ins. Co. (1973) 9 CaL.3d 566,

limits at least, to agree upon the standards by
which application of the covenant is to be measured. In such contracts, it may be diffcult to distiguish between breach of the covenant and

574 . . . ." (Italics added.) ( Tameny, supra, 27
Ca1.d at p. 179, fn. 12.)

(***42) The Supreme Cour next had occasion to
address the issue in its 1984 Seaman's decision. 19 In that

breach of contract, and there is the risk that interjectig tort remedies wil intrde upon the expec-

case, the plaintiff sought to enforce a (* 1397) "contract" for a long-term marine fuel supply dealership on which it had relied to its severe detriment. When the oil market
dynamics changed following execution of

tations of the partes. This is not to say that tort
remedies have no place in such a commercial

the "contract,"

context, but that it is wise to proceed with caution

the defendant, Standard Oil, did everyng in its power to cause the concerned governent agencies to deny to
Seaman's the permts required by the contract and, when that failed, took the position that the "contract" was an unenforceable letter of intent and denied that any contract was ever formed. The evidence produced at tral essentially demonstrated that ths position was taken
without any factual basis to support it and without a good
faith belief

in determning their scope and application." (36
Ca1.d at p. 769, fn. omitted.) (***44)

21 As we noted in footnote 13, ante, plaintiffs also seek to sustain a cause of action on this the-

ory and we discuss those efforts below. However, the Supreme Cour has twce emphasized
that such theory is not, as a matter of law, based
upon a breach of the implied covenant of good

that such assertion had any legal merit.

faith. (Seaman's, supra, 36 Ca1.d at p. 769;
Foley, supra, 47 Ca1.d at pp. 688-689.)
22 It is arguable that the Seaman's dicta also
suggested that a tortious breach of the implied

19 The precise issue before the cour was defined at the outset of the opinion by the question,

"Maya plaintiff recover in tort for breach of an
implied covenant of good faith and fair dealing in

a noninsurance, commercial contract?" ( Seaman's, supra, 36 CaL.3d at p. 758.)

covenant could result from a defendant's assertion of a stonewall ("see you in cour") defensive postue (see fn. 26, post). However, apart from a

brief reference to this possibility in one opinon
(see Multiplex Ins. Agency, Inc. v. California Life
Ins. Co. (1987) 189 CaL.App.3d 925, 939 (235

(***43) Although the issue was directly raised and asserted, the cour avoided giving a direct answer as to whether such conduct might constitute a tortious breach
of the implied covenant 20 and stated that it was not nec-

Ca1.Rptr. 12)), no cour has recognied such a

essary to predicate liability on such a breach but was
simply sufficient "to recognize that a part to a contract

constrction of the Seaman's opinon. Whle it certainy has contributed to some of the confsion
and uncertainty which has trailed in Seaman's

may incur tort remedies when, in addition to breaching the contract, it seeks to shield itself from liability by denying, in bad faith and without probable cause, that the
contract exists." (Seaman's, supra, 36 CaL.3d at p. 769.)
21 However, in refusing to recogne a tortious breach of

wake (see, e.g., fn. 27, post), it seems more likely
that the discussion of a "stonewall defense" (

Seaman's, supra, 36 CaL.3d at pp. 769-770) was
merely a part of the cour's rationale supporting

its recogntion of the new tort of bad faith denial
of contract existence.
(***45) (*1398) (**402) The Seaman's cour

the covenant, the cour, in dictum, seemed to suggest that
when the contracting partes shared a "special relationship," then a breach of the implied covenant might justify
a tort remedy. (36 CaL.3d at pp. 768-769.) 22

suggested, with both a reference to and reliance upon
inurance cases (and the "special relationship" between

insurer and insured), that "(n)o doubt there are other rela-

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tionships with similar characteristics and deserving of
similar legal treatment." ( /d., at p. 769, fn. omitted.)

24 "If the covenant is implied in every contract,
but its breach does not in every contract give rise

Although not a part of its holding, and certainly uneces-

sary to it, the cour expressed a tentative wilingness to
entertain an expansion of the tort remedy to contractually

to tort damages, attempts to define when tort
damages are appropriate simply by interjecting a requirement of 'bad faith' do nothing to limit the
potential reach of tort remedies or to differentiate between those cases properly and traditionally

based disputes between certain parties who had a relationship other than that of insurer and insured. A judicial
test for defining that relationship was not long in coming.
In Wallis v. Superior Court (1984) 160 CaL.App.3d

compensable by contract damages and those in
which tort damages should flow. Virally...

1109 (207 CaL.Rptr. 123) (Walls), the cour announced a
five-part description of the characteristics of the "special

any breach of a contract term. . . could provide
the basis for a pleading alleging the discharge

relationship" which must be present in a nonisurance contractual dispute in order to justify tort recovery for a
breach of the implied covenant. 23 However, in its most

was in bad faith under the cited standards." (
Foley, supra, 47 Ca1.3d at p. 699.)

25 A number of cases, including Foley, have
concluded that certain relationships are not suffciently "special" to warrant imposition of a tort

recent discussion of this issue, the Supreme Cour refused to apply this approach to employment cases.

remedy for breach of the implied covenant: (1)
employer-employee ( Foley, supra, 47 CaL.3d at
p. 693 and at p. 700, fn. 42, disapproved of

23 The Wallis cour set forth the following five characteristics which must be satisfied: "(1) the

contract must be such that the partes are in inherently unequal bargainng positions; (2) the motivation for entering the contract must be a nonprofit motivation, i.e., to secure peace of
mind, security, futue protection; (3) ordinary

Cleary v. American Airlines, Inc., supra, 111
Ca1.App.3d 443 "and its progeny"), (2) commercial grower-grain hauler ( Quigley v. Pet, Inc.
(1984) 162 Ca1.App.3d 877, 893 (208 CaL.Rptr.
394)), (3) inurance company-general agent (

contract damages are not adequate, because (a) they do not require the part in the superior position to account for its actions, and (b) they do not make the inferior part 'whole'; (4) one part is especially vulnerable because of the tye of harm
it may suffer and of necessity places trst in the

Multiplex Ins. Agency, Inc. v. California Life Ins. Co., supra, 189 Cal.App.3d at p. 938), (4) dis-

tributor-vendor ( Premier Wine v. E. & J Gallo Winery (9th Cir. 1988) 846 F.2d 537, 540), (5) franchisor-franchisee ( Martin v. U-Haul Co. of
Fresno (1988) 204 Ca1.App.3d 396, 412 (251

other part to perform; and (5) the other part is

Ca1.Rptr. 17); Eichman v. Fotomat Corp. (9th
Cir. 1989) 871 F.2d 784, 802-803; Little Oil Co. Inc. v. Atlantic Richfield Co. (9th Cir. 1988) 852
F.2d 441, 447), (6) limousine rental company-

aware of this vulnerability." (160 CaL.App.3d at
p. 1118.)

(***46) In Foley, the cour held that it was "not
convinced that a 'special relationship' analogous to that between insurer and insured" existed in the usual em-

customer ( Rogoff v. Grabowski (1988) 200

ployment relationship so as to justify recognition of a tort remedy for a breach of the implied covenant. (47 CaI.d at p. 692.) Indeed, the cour even suggested that any extension of tort remedies to noninsurance cases is not justified given (1) the limited purose and scope of contract
damages, (2) the strong need in our commercial system
for predictability of the cost of contractual relationships

Ca1.App.3d 624, 632) (246 Ca1.Rptr. 185) (7) bank-commercial borrowers and guarantors ( Price v. Wells Fargo (1989) 213 Ca1.App.3d 465, 476-478 (261 Ca1.Rptr. 735); Mitsui Manufacturers Bank v. Superior Court (1989) 212

and (3) the diffculty of formulating a workable test for distinguishing between a simple breach of contract and a

Ca1.App.3d 726, 730-731 (260 Cal.Rptr. 793); but see Barrett v. Bank of America (1986) 183 Ca1.App.3d 1362, 1369 (229 Ca1.Rptr. 16), and Commercial Cotton Co. v. United California
Bank (1985) 163 Ca1.App.3d 511, 516 (209

"tortious" breach of the implied covenant. ( Id., at pp.
683, 699-700.) 24 Nonetheless, the Foley cour did limit

Ca1.Rptr. 551, 55 A.L.RAth 1017)) and (8)
stockbroker-investor ( Trustees of the Capital

Wholesale Electric etc. Fund v. Shearson, Lehman Brothers, Inc. (1990) 221 Ca1.App.3d 617,

its holding to the employer-employee relationship and

did not expressly reject the Wallis definitional efforts;

however, it did (*1399) suggest that it is stil an open
question as to whether "the special relationship model is

624-625 (270 Ca1.Rptr. 566)). One cour ( Okun

v. Morton (1988) 203 Ca1.App.3d 805, 826 (250
Ca1.Rptr. 220)) has taken a more general view and suggested that no contractual relationship
other than insurer-insured would warrant "special

an appropriate one to follow in determng whether to
expand tort recovery." (Id., at p. 692.) (***47) 2S

relationship" treatment. Only the relationship of

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bank and depositor has received any endorsement
as meeting the criteria for a "special relationship"

the August 25 letter, was the product of meaningful ne-

gotiations between the parties. Moreover, it does not
appear that plaintiffs were either in a partcularly vulnerable position nor in need of any special protection. Finally, ordinary contract damages are obviously adequate to make plaintiffs whole for any compensable misconduct on the part of

( Commercial Cotton Co. v. United California Bank, supra, 163 Cal.App.3d at p. 516) and even

that has been strongly criticized. (See Price v.
Wells Fargo, supra, 213 Cal.App.3d at p. 476.)

(***48) (**403) From this history, it seems clear to us that the recognition of a tort remedy for a breach of
the implied covenant in a noninsurance contract has little authoritative support. In fact, with but one arguable exception (see fr. 25) and apart from decisions disapproved by Foley, every case which has considered the issue has rejected the recogntion of a special relationship between
specific contracting partes. However, as the Foley cour

the defendants.

(**404) Under no reasonable perspective of the
facts in ths case would the Walls/Mitsui standards be

satisfied. Given the allegations set out in plaintiffs' sec-

ond amended pleadings, the "transaction involved here is the quintessentially ordinary arm-length commercial
transaction between two partes of equal bargaining

strength, breaches of which are adequately remedied by
ordinary contract damages." ( Mitsui Manufacturers Bank v. Superior Court, supra, 212 CaL.App.3d at p.

did not see fit to specifically reject the Seaman's consideration of the noninsurance special relationship, or the

Wallis criteria for determng its existence, we decline
to do so. Indeed, the Foley cour's discussion of why the

731.) (***51) Whatever may be the viability of the
proposition that a bank can have a special relationship

employment relationship was dissimilar to that of insurer and insured essentially relied upon a Wallis analysis. (
Foley, supra, 47 Cal.3d at p. 692.)

with a depositor so as to justify a tort recovery for breach

of the implied covenant (see, e.g., Commercial Cotton Co. v. United California Bank, supra, 163 Cal.App.3d at
p. 516; cf. Price v. Wells Fargo Bank, supra, 213

More recently, in Mitsui Manufacturers Bank v. Superior Court, supra, 212 Cal.App.3d 726, 733, the cour discussed similar criteria in concluding that a lender and commercial borrower did not share a special relationship

Cal.App.3d at p. 476; see also, Lee v. Bank of America (1990) 218 Cal.App.3d 914 (267 Cal.Rptr. 387), includ-

suffcient to justify a tort claim. The cour restated
(***49) the standard to be applied in term very similar to those used by Wallis. "It is the natue of the contract that is critical, whether it reflects unequal bargaining strength (*1400) between the partes, an inadequacy of ordinary contract damages or other remedies, adhesiveness of contract provisions adversely impacting the damaged part which are either neutral toward or benefit the other, public concerns that partes to certain tyes of contracts conduct themselves in a particular manner, the

ing conc. and dis. opn. of Johnson, 1., at pp. 922-929), there is neither authority nor reason for according such characterization to the relationship between a bank and a
commercial borrower.

Therefore, since it is patently clear that no "special

relationship" exists suffcient to support a tort recovery for an alleged breach of the implied (*1401) covenant of good faith, plaintiffs can state no basis for recovery in tort. Moreover, as they have alleged nothing more than a duplicative claim for contract damages, the trial cour
was correct in sustainng a demurer to this count without

reasonable expectations of the parties or a fiduciary relationship in which the financial dependence or personal
security by the damaged part has been entrsted to the other. There are undoubtedly other significant factors

leave to amend.
(2) Bad Faith Denial of

Contract

and it may be that not all must be present in every case which might give rise to tort damages." ( Id. at p. 731.) Whatever the present effcacy of this analytical restatement, we find that plaintiffs here have failed to allege suffcient facts to demonstrate that they satisfy the requirements set forth in either Walls or Mitsui.
(13c) This case presents a rather common commercial bankng transaction. The plaintiffs, seeking to (***50) make a profit motivated investment in the form of a leveraged buyout of a going business entered into arm length negotiations with a unit of a major lending institution. There were no indicia of unequal bargainng here, no adhesive agreements, no indication that one
part had any partcular advantage over the other. In-

As we (***52) have already discussed, the Seaman's cour chose to avoid the diffcult question of the
natue and extent of a tort remedy for a breach of the implied covenant in non insurance cases by recognizing a

new tort which would not be predicated on a breach of the covenant. (19) It provided such a remedy in those
limited cases in which a part "seeks to shield itself from

liability by denying, in bad faith and without probable cause, that the contract exists." ( Seaman's, supra, 36
Cal.3d at p. 769). 26 The elements of such a tort are (1) an

underlying contract, (2) which is breached by the defendant, (3) who then denies liability by asserting that the contract does not exist, (4) in bad faith and (5) without
probable cause for such deniaL. 27

deed, it appears that the terms of the central document,

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26 The Seaman's cour explained its rationale

for the recognition of tort liability in these circumstances with this comment. "It has been held
that a part to a contract may be subject to tort li-

term of the contract. The test -- if one can call it such -- seems to be whether the conduct 'offends
accepted notions of business ethics.''' ( Oki Amer-

ability, including punitive damages, if he coerces
the other part to pay more than is due under the

ica, Inc. v. Microtech Intern., Inc. (9th Cir. 1989) 872 F.2d 312, 315 (conc. opn. of Kozinski, 1.,
quoting Seaman's, supra, 36 Ca1.3d at p. 770).) Such test would seem to be equally applicable to

contract term though the threat of a lawsuit, made "'without probable cause and with no belief
in the existence of the cause of action. '" ( Adams

v. Crater Well Driling, Inc. (1976) 276 Ore. 789 (556 P.2d 679, 681).) There is little difference, in principle, between a contracting part obtainng
excess payment in such manner, and a contracting part seeking to avoid all

the assertion of any defense in bad faith, as the Seaman's cour may have recognized in its dictum concerng the assertion of the "stonewall
defense." (Seaman's, supra, 36 Ca1.d at pp. 769-

770; see also, fn. 26, ante.)

liability on a meritorious contract claim by adopting a 'stonewall'

these five (***54) elements, (*1402) (**405) Of the last two are the most critical and diffcult to demonstrate. The requirement that the defense be asserted in
bad faith is a subjective issue relatig to the defendant's

position ('see you in cour') without probable

cause and with no belief in the existence of a defense. Such conduct goes beyond the mere

breach of contract. It offends accepted notions of business ethics. (See Jones v. Abriani (1976) 169

state of mind. Stated in its simplest form it means that the defendant does not have a good faith belief that the facts relied upon constitute or support a legally tenable

Ind. 556 (350 N.E.2d 635). Acceptance of tort remedies in such a situation is not likely to intrde upon the bargainng relationship or upset

defense. The fifth element, the absence of probable
cause, means that, on the basis of the facts known to the
defendant, the asserton of the defense was not legally tenable; that is, it was neither reasonable nor justified
under applicable law. This is an objective requirement
and requires a consideration of all of the circumstances.

reasonable expectations of the contracting parties." (36 Ca1.3d at pp. 769-770.)

While the Supreme Cour in Foley did not directly address ths comment in Seaman's, it is fair

to say that it did express considerable skepticism about the viability of a tort recovery which was based upon a defendant's bad faith conduct in assertg a stonewall ("see you in cour") defense to

the absence of probable cause and that such failure is fatal to their claim, we limit our discussion to that element.
In our view, the question of probable cause pre-

(20a) As we conclude that plaintiffs have failed to plead

an ordinary commercial contract. The cour acknowledged that while a test of

bad faith could be formulated by requiring both objective (no factual

basis for an asserted defense) and subjective (no

sented here is conceptually no different than it is in the tort of malicious prosecution where the cour is called upon "to make an objective determnation of the 'reasonableness' of the defendant's conduct, i.e., to determne
whether, on the basis on the facts known to the defen-

good faith belief that asserted defense was reasonable or justified) elements, it would "not serve

dant, (***55) the institution of the prior action was lethat question of law calls for the application of an objective standard to the facts on gally tenable. The resolution of

to limit intiation and prosecution of litigation
based on almost any (breach of contract)" (Foley, supra, 47 Ca1.d at p. 697, fn. 35.) The cour made it clear that, at least in the employment con-

which the defendant acted. (Citation.) Because the mali-

text, it did not favor actions which would be
based upon the subjective intentions and state of

cious prosecution tort is intended to protect an individual's interest 'in freedom from unjustifiable and umeasonable litigation' (citation), if the trial cour determes
that the prior action was objectively reasonable, the

mind of the breaching part. Such actions, it
said, "could rarely be disposed of at the demurer

or summary judgment stage." (/d., at p. 697.)
(***53)
27 It is unfortnate that the Seaman's cour nei-

plaintiff has failed to meet the threshold requirement of demonstrating an absence of probable cause and the defendant is entitled to prevail." ( Sheldon Appel Co. v.
Albert & Oliker (1989) 47 Ca1.3d 863, 878 (254

ther explained or justified why tort liability could be imposed for a bad faith denial of contract exis-

Ca1.Rptr. 336, 765 P.2d 498); see also, Leonardini v.

tence but not for the bad faith asserton of any other defense. As Judge Kozinski put it, "It is
impossible to draw a principled distinction between a tortious denial of a contract's existence

Shell Oil Co. (1989) 216 Ca1.App.3d 547,569-570 (264 Ca1.Rptr. 883); Klein v. Oakland Raiders, Ltd. (1989) 211 Ca1.App.3d 67, 74-75 (259 Ca1.Rptr. 149).

As the Supreme Cour put it, the existence or absence of probable cause in a malicious prosecution case

and a permssible denial of liability under the

is a '''question. . . of law to be determned by the cour

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222 Cal. App. 3d 1371, *; 272 Cal. Rptr. 387, **;

1990 Cal. App. LEXIS 879, ***

from the facts established in the case.''' ((***56) Sheldon Appel Co. v. Albert & Oliker, supra, 47 Cal.3d at p.
875, quoting Ball v. Rawles (1892) 93 Cal. 222,227 (28

guage and draw its own conclusion as to the legal effect
of the instrment. (Beck v. American Health Group

P. 937). "'(I)f there is no dispute concernng the existence of the facts relied upon to show probable cause, the

Internat., Inc. (1989) 211 Cal.App.3d 1555, 1561 (260
Cal.Rptr. 237).)

trial cour must then determne as a matter of law
whether such undisputed facts do or do not warrant an inference of probable cause.' (Citation.)" (Italics in the originaL.) (*1403) (Sheldon Appel Co. v. Albert & Oliker, supra, 47 Cal.3d at p. 880.) Only if there is a
dispute concernng (1) the existence of the facts relied

(20b) Here, plaintiffs incorporated the August 25 letter, which can only be constred as a conditional
agreement. It is clearly subject to several specific condi-

upon to show probable cause or (2) the state of the defendant's belief in, or knowledge of, such facts, would
there be any issue as to probable cause which would
have to be tried to a jur. (/d., at pp. 879-880.)

tions precedent which were required to be satisfied before the defendants would be contractually commtted to provide the proposed financing. While plaintiffs allege the making (***59) of a number of oral statements by
one or more representatives of the defendants to the ef-

fect that the (*1404) conditions were satisfied, nowhere
is there any direct allegation that any of such conditions,

We have no trouble in extending the priciples applicable to the element of probable cause in malicious
prosecution actions to the tort now before us. 28 The

much less all, were ever satisfied. It is also apparent
from the pleadings that the defendants dispute the plaintiffs' allegations. In the context of this case, where detailed wrtten documentation and a complicated and sophisticated transaction were clearly contemplated by the parties, defendants should not be compelled to assert
their side of such dispute only at their periL.

(**406) essential interest which a malicious prosecution action addresses is also present in (***57) the context of the tort of bad faith denial of contract. In each case

the law seeks to protect a part from the asserton by
another of an umeasonable and unjustifiable litigation
position. It is immaterial that the offending activity re-

lates in one case to the intiation and prosecution of a

From plaintiffs' own pleadings, including our constrction of the critical August 25 letter, it is clear that there is not only a dispute with the defendants with respect to the satisfaction of signficant conditions prece-

legal action and in the other to the asserton of a partcular defense. We therefore conclude that the element of

dent to liability, but there is a reasonable factual basis for
that dispute. Whatever the merits of the competing posi-

probable cause which the plaintiffs here must establish in order to recover is likewise a legal issue, not a factual
one.

tions of the partes with respect to just what oral statements were made, there can be no question as to the exis-

tence of the factual fabric upon which the dispute is
28 The standard in Sheldon Appel Co. for prob-

based. In other words, the complaint itself provides a
basis for the cour to conclude that probable (***60)

able cause has also been applied in determning
the existence of "reasonable cause" to bring an

action under the Tort Claim Act for the purose
of making an award of attorney's fees under Code

of Civil Procedure section 1038. (Ramsey v.
City of Lake Elsinore (1990) 220 Cal.App.3d

1530, 1540 (270 Cal.Rptr. 198); Carroll v. State of California (1990) 217 Cal.App.3d 134, 141142 (265 Cal.Rptr. 753); see also, BAJI No. 7.87
(1990 new) and related Use Note.)

cause exists for the defendants' denial of contractual obligation. Given that plaintiffs' own allegations provided this foundation, they were then required to affirmtively allege additional facts suffcient to demonstrate that (1) defendants' reliance on the failure of such conditions as a basis for their defensive postue was neither reasonable nor justified and thus was not legally tenable or (2) defendants did not have any belief in, or knowledge of,
facts which would make their defensive asserton legally

tenable. (22) (See fr. 29.) Plaintiffs' failure to provide

(***58) Depending on the allegations of a complaint containng a claim for bad faith denial of contract existence, there is no reason why ths legal issue cannot be determed by the cour on demurer. This would be most likely to occur in those cases where there are detailed allegations concernng the negotiations for, or formtion of, the contract in dispute or where documents are attached and incorporated into the pleadings. (21) For example, where a plaintiff attaches and incorporates a written instrment into a pleading, without alleging that it was ambiguous or subject to some special interpretation, the cour is free on demurer to constre the lan-

such additional facts is fatal to their cause of action as
the absence of probable cause has not been alleged. 29

29 In our view, this situation is analogous to the complaint which includes allegations indicating the existence of a defense to the claim (e.g., that

the statute of limitations has ru). In such circumstance, specific facts negating that defense
must be alleged. General or conclusionary allegations wil not suffce. (Saliter v. Pierce Broth-

ers Mortuary (1978) 81 Cal.App.3d 292, 297

(146 Cal.Rptr. 271).)

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(***61) (20c) Our insistence upon such specific
pleading seems amply justified. Without such a re-

quirement, the cours wil be faced with general allegations charging this tort in every contract dispute in which

liability is denied, and defendants in such cases wil be faced with the dilemma of raising a (**407) defense to contract liability only at the risk and expense of litigating a tort action. The recogntion we give to the rule that the issue of probable cause is a legal one to be determned by the cour and that it can be resolved on demurer where,
as here, a complaint demonstrates the factual basis for

pable of amendment, it would be an abuse of discretion to deny plaintiffs an opportty to amend the allegations of this cause of action. ( Postley v. Harvey, supra, 153 Cal.App.3d 280, 287.) Therefore, we conclude that it was error to sustain defendants' demurer without leave to
amend.

* See footrote, ante, page 1371.

the defensive position asserted, will serve to limit these cases to only those where a plaintiff can trthfully allege
specific facts demonstrating the absence of probable cause.

The orders of dismissal are reversed as follows:

1. In the Carrott action, counts 1, 2, 3, 8 (except as to Torres), 9, 10 and 14 as to Careau only and count 12
as to both Carrott and Careau. Upon remand, the trial

cour shall permt Careau to amend the allegations in
counts 1, 2, 3, 8 (except as to Torres), 10 and 14 of the

(*1405) Plaintiffs first asserted this claim in their second amended complaints. Thus, they have not been given any opportty to provide the additional allegations which we here hold, for the first time, are required. As a result, there has been no fair opportty for plain-

second amended complaint; and

2. In the Careau Group action, counts 1,2,3,8 (except as to Torres), (***63) 9, 10 and 12. Upon remand,

tiffs to make the necessary allegations. (LarwinSouthern California, Inc. v. JGB Investment Co., supra, 101 Cal.App.3d at p. 635; (***62) Greenberg v. Equitable Life Assur. Society (1973) 34 Cal.App.3d 994, 998 (110 Cal.Rptr. 470).) Moreover, as we are unable to conclude from the face of the pleading that it is legally inca-

the tral cour shall permt the Careau Group to amend
counts 1, 2, 3, 8 (except as to Torres), 10 and 12 of the

second amended complaint.

In all other respects, the orders of the trial cour are affirmed. Each part shall bear their own costs on appeaL.

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EXHIBIT 9

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LEXSEE 32 CAL 4TH 336

CASA HERRRA, INC., Plaintiff and Appellant, v. NASSER BEYDOUN et aI., Defendants and Respondents.
Sl11998

SUPREME COURT OF CALIFORNIA
32 CaI. 4th 336; 83 P.3d 497; 9 CaI. Rptr. 3d 97; 2004 CaI. LEXIS 735; 2004 Daily Journal DAR 1207
February 2, 2004, Filed

SUBSEQUENT HISTORY: Reported at Casa Herrera
v. Beydoun, 2004 Cal. LEXIS 1224 (Cal., Feb. 2, 2004)

PRIOR HISTORY: Superior Cour of San Diego
County, No. GIC760l27, Ronald S. Prager, Judge. Cour of Appeal, Fourh Dist., Div. One, No. D038326. Casa Herrera, Inc. v. Beydoun, 103 Cal. App. 4th 83, 126 Cal. Rptr. 2d 431,2002 Cal. App. LEXIS 4866 (Cal. App. 4th Dist., 2002)

manufactuer alleged that the Cour of Appeal opinon in the underlying suit constituted a termnation on the merits in its favor. The trial cour granted the tortlla bakers' motion for judgment on the pleadings, and dismissed the malicious prosecution claims with prejudice, finding that resolution of the underlying suit based on the parol evidence rule could not be a favorable termnation so as to
support a subsequent action for malicious prosecution.

DISPOSITION: affrmed.
SUMMARY:

(Superior Cour of San Diego County, No. GIC760l27, Ronald S. Prager, Judge.) The Cour of Appeal, Four
Dist., Div. One, No. D038326, reversed, concluding that

Judgment of the Cour of Appeal

termnation of the underlying suit based on the parol
evidence rule mandated that the manufactuer's liability
be determned by the written contract rather than by any

prior inconsistent oral promises and that the action had thus been termnated in favor of the manufactuer.

CALIFORNIA OFFICIAL REPORTS SUMMARY

A manufactuer that built and sold tortila production equipment fied a malicious prosecution action

The Supreme Cour affrmed the judgment of the
Cour of AppeaL. The cour held that termation of a breach of contract and fraud action based on the parol evidence rule satisfies the favorable termnation element
of a malicious prosecution claim. Although the parol

against a tortila baking company and its owner, who had

purchased a tortlla oven from the manufactuer, and
against the banks and banker who had enforced a security interest in that oven (collectively tortlla bakers),

evidence rule results in the (*337) exclusion of evidence, as it is applied to contracts, it establishes that as a
matter of substantive law the execution of a written contract supersedes agreements which precede or accompany the execution of the contract, and that the written

following termation in the Cour of Appeal of an un-

derlying suit that had been brought by the tortlla bakers against the manufactuer. The underlying suit had alleged causes of action for breach of contract and mali-

cious prosecution based on alleged promises by the
manufactuer as to the production capacity of the oven.
The trial cour in the underlying suit had directed a ver-

contract becomes the sole agreement. By applying the parol evidence rule, the Cour of Appeal in the underlying action held that the written contract was the only
agreement between the parties. As a consequence of this
substantive holding, the court refused to consider evi-

dict for the manufactuer, finding that the tortila bakers lacked standing. The Cour of Appeal had affrmed, but instead of relying on lack of standing, had found that the parol evidence rule barred the tortilla bakers from attempting to show that the manufactuer had breached a
promise to provide an oven with a higher production

dence offered by the tortila bakers which suggested that

the parties' agreement had included a promise by the
manufactuer of a production capacity higher than that stated in the written contract. Having defined the term

capacity than that enumerated in the written sales contract. As part of its malicious prosecution claims, the

of the parties' agreement to be the term of the written agreement, the Cour of Appeal necessarily resolved the
breach of contract and fraud claims on the merits in favor

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32 Cal. 4th 336, *; 83 P.3d 497, **; 9 Cal. Rptr. 3d 97, ***; 2004 Cal. LEXIS 735
of the manufactuer. The Supreme Cour noted a distincpersedes any prior or contemporaneous promise at vari-

tion, for puroses of finding a favorable termnation to
support a subsequent action for malicious prosecution,

ance with the term of that agreement. Thus, in a breach
of contract suit and fraudulent misrepresentation suit

between an underlying action which has relied on a technical or procedural defense, and one which has relied on a substantive rule of contract law, like the parol evidence rule, and resolved the action on its merits. (Opinion by Brown, 1., expressing the unanimous view of the cour.)

brought by a tortila baker against the manufactuer who
had sold the baker a tortlla oven, any alleged prior oral
agreement regarding the capacity of a tortila oven no

longer existed because the written sales contract, as a matter of law, had replaced it. For puroses of establishing a favorable termation in a subsequent malicious

HEADNOTES
CALIFORNIA OFFICIAL REPORTS HEADNOTES Classified to Californa Digest of Offcial Reports

prosecution action brought by the manufactuer, the
cour's decision in the underlying breach of contract action based on the parol evidence rule termated the ac-

tion in favor of the manufacturer by establishing that the manufactuer could not have breached any enforceable or
unenforceable extant agreement as to the oven's capacity.

(1) Malicious Prosecution § 7--Essentials to Maintenance of Action--Favorable TerDDnation-Termination Based on Parole Evidence Rule.--A ter-

(Disapproving to the extent inconsistent: Hall v. Harker
(1999) 69 Cal.AppAth 836,845 (82 Cal. Rptr. 2d 44).

mination based on the parol evidence rule is a substantive termation in the malicious prosecution context.

(5 Witk, Summary of Cal. Law (9th ed. 1988)
Torts, § 439; 2 Witkin, CaL. Evidence (4th ed. 2000)

(2) Evidence § 61--Documentary Evidence--Parol

Documentary Evidence, § 63.)

Evidence Rule--Generally--Substantive Rule.-- The
parol evidence rule establishes that the term contained

COUNSEL: Meisenheimer, Herron & Steele, Matthew

in an integrated wrtten agreement may not be contradicted by prior or contemporaneous agreements. In doing so, the rule necessarily bars consideration of extrinsic
evidence of prior or contemporaneous negotiations or

V. Herron, Robert M. Steele; Post Kirby Noonan & Sweat, Michael 1. Kirby and Matthew P. Nugent for
Plaintiff and Appellant.

agreements at variance with the written agreement. As a matter of substantive law such evidence cannot serve to
create or alter the obligations under the instrent. In

Gibson, Dun & Crutcher, Theodore 1. Boutrous, Jr.,
Julian W. Poon, Gregory D. Brown, Nicola T. Hanna and
Michele L. Maryott for Defendants and Respondents

other words, the evidentiary consequences of the rule
follow from its substantive component--which estab-

Community First National Bank and Tom Ferrara.

lishes, as a matter of law, the enforceable and incontrovertble term of an integrated wrtten agreement. (*338)

Ira S. Carlin for Defendants and Respondents Nasser
Beydoun and Am Mex Food Industries, Inc.
JUGES: Brown, 1., expressing the unanimous view of

(3) Malicious Prosecution § 7--Essentials to Maintenance of Action--Favorable TerDDnation--

the cour.
OPINION BY: BROWN (*339)

Termination Based on Parol Evidence Rule Constitutes Resolution on the Merits.-- The Cour of Appeal
necessarily resolved an underlying action on the merits

when, after defining the terms of the partes' agreement by applying the parol evidence rule, it found that a manu-

OPINION

factuer that sold a tortilla oven to a tortila bakig company did not breach the written contract or commt fraud
by orally promising a production capacity higher than

an action for breach of contract and fraud in favor of a defendant by applyig the parol evidence rule. That defendant subsequently fies a malicious prosecution action

(***98) (**499) BROWN, J.--A cour resolves

that enumerated in the written contract. Its decision reflected on the manufactuer's inocence of the alleged misconduct and therefore constituted a favorable termnation for malicious prosecution puroses.

against the plaintiffs in the breach of contract action and others. We now consider whether the termnation of the breach of contract and fraud action based on the parol evidence rule satisfies the favorable termnation element of a malicious (***99) prosecution claim. We conclude
it does.

(4) Malicious Prosecution § 7--Essentials to Maintenance of Action--Favorable TerDDnation-TerDDnation Based on Parol Evidence Rule Constitutes Resolution on the Merits.-- The parol evidence

I.
A.

rule establishes that an integrated written agreement su-

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In 1994, respondent Am Mex Food Industries, Inc.
Beydoun--purchased an oven and related equipment

(Am Mex)--which was owned by respondent Nasser

from appellant Casa Herrera, Inc. (Casa Herrera or appellant) for manufactuing tortilas for sale to its distributors. As stated in the written sales contract, Cas a Herrera promised that the oven would produce 1,500 dozen 10ounce tortllas per hour, 1,800 dozen 8-ounce tortilas per hour, and 2,000 dozen 6-ounce tortilas per hour. i The contract also gave Am Mex 10 days to operate the oven after its installation and to return it if dissatisfied.
1 The weights refer to the weight of one dozen

Herrera was "integrated on the rates of guaranteed production, and the language specifying a guaranteed rate of 1500 dozen per hour for lO-ounce tortilas is not reasonably susceptible to the interpretation that the partes agreed to a guaranteed rate of 1500 dozen per hour for

l6-ounce tortllas." The cour then concluded that the
"parol evidence rule barred Am Mex from attempting to
show Casa Herrera breached a promise (or fraudulently

promised) to provide an oven producing l6-ounce tortllas at the rate of 1500 dozen per hour."

(***100) B.
Following the Cour of Appeal's decision, Cas

tortilas.
Cas a Herrera delivered the oven to Am Mex, but Am Mex did not sign the written acceptance within 10 days after its installation because of diffculties in operating the oven. Casa Herrera then made some repairs and

a

Herrera filed the instant action against Beydoun, Am
Mex, the banks, and Tom Ferrara, a director and officer

of Valle (collectively respondents), asserting, among
other thngs, causes of action for malicious prosecution. 2

provided Am Mex with additional instrctions on how to

operate the oven. Over a month after the installation of the oven, Am Mex and Beydoun signed the acceptance, "acknowledging they had observed the oven in operation and were satisfied with the quantity and quality of production. "

As part of its malicious prosecution claims, Casa Herrera alleged that the Cour of Appeal opinon in Beydoun v. Casa Herrera, Inc. (Jan. 10, 2000, D03006l) (nonpub.
opn.) constituted a termation on the merits in its favor.
2 Although the banks

and Ferrera were not par-

ties to the underlying action, Casa Herrera al-

Am Mex began experiencing financial diffculties
and was unable to service its debt to respondent Valle De Oro Bank (Valle), the predecessor to respondent Com-

leged that they "encouraged and advocated the
contiuation of

the" action.

munity First National Bank (collectively, the banks).
Valle filed an action to enforce its security interest in Am Mex's assets and obtained the appointment of a receiver. The receiver eventually sold Am Mex's assets, including the oven, to Circle Foods.
Shortly after the appointment of the receiver, Am
Mex and Beydoun sued Casa Herrera, assertg causes of

The banks and Ferrera, joined by Am Mex and Beydoun, moved for judgment on the pleadings, contending, as a matter of law, Casa Herrera could not establish the
favorable termation element of a malicious prosecution

claim. Citing Hall v. Harker (1999) 69 Cal.AppAth 836,
845 (82 CaL. Rptr. 2d 44) (Hall), the banks claimed that

action for breach of contract and fraudulent misrepresen-

"a resolution ... based on the parol evidence rule cannot be a favorable termnation ... so as to support a subsequent action for malicious prosecution." The trial cour
agreed and dismissed the malicious prosecution claims
with prejudice.

tation. As the basis for both causes of action, they alleged that Casa Herrera had promised the oven would

produce 1,500 dozen 16-ounce tortilas per hour even
though Casa Herrera knew the oven did not and could not do so.

(*340) At trial, the cour, after hearing opening
a Herrera's motion for a nonsuit against Beydoun on the ground that Beydoun lacked
statements, granted Cas

The Cour of Appeal reversed. 3 Decling to follow Hall, the cour concluded that "when an action is termnated because the parol evidence rule (*341) mandates the defendant's liability be determned by the provision embodied in the written contract rather than by any prior
inconsistent oral promises, the action has been term-

standing to sue. After Am Mex presented its case, the trial cour directed a verdict for Casa Herrera" on the ground(J that Am Mex had no standing to pursue said
claims as they had been sold and assigned to Circle Foods pursuant to a written contract."
The Cour of Appeal affrmed. But instead of

nated for reasons that do reflect on the merits of the
plaintiffs underlying claim that the underlying defendant was responsible or liable for allegedly breaching his con-

tractual obligations." In reachig this conclusion, the cour observed that "the parol evidence rule is not an
evidentiary rule but is instead a rule that fixes duties and establishes rights and responsibilities among persons by

on lack of standing, the court held that "there was no substantial evidence to support the claims for breach of contract (**500) or fraud." In support, the cour found
that the written sales contract between Am Mex and Casa

relying

declaring that the law wil hold partes to their written
agreements rather than to prior representations or promises inconsistent with the written agreement."

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32 CaL. 4th 336, *; 83 P.3d 497, **;

9 CaL. Rptr. 3d 97, ***; 2004 CaL. LEXIS 735
3 Cas

a Herrera also asserted a cause of action

under Code of Civil Procedure section 1908
against the banks. The trial cour dismissed this

Luce, Forward, Hamilton & Scripps (2002) 99
Cal.AppAth 1179, 1191 (121 Cal. Rptr. 2d 794)); (2)

cause of action with prejudice, and the Cour of Appeal affrmed. The parties do not challenge
ths aspect of the Cour of Appeal's ruling.

granted summary judgment because there was insuffcient evidence to establish a triable issue of fact ( Sierra
Club Foundation v. Graham (1999) 72 Cal.AppAth

We granted review to determe whether a termation based on the parol evidence rule constitutes a favorable termation for malicious prosecution puroses, and

1135, 1149-1150 (85 Cal. Rptr. 2d 726) (Sierra Club)); or (3) held that the defendant, as a matter of law, violated

no duty to the plaintiff ( Ray v. First Federal Bank
(1998) 61 Cal.AppAth 315, 318 (71 CaL. Rptr. 2d 436)
(Ray)).

conclude that it does.

However, a " 'favorable' termation does not occur

II.

merely because a part complained against has prevailed

"(I)n order to establish a cause of action for malicious prosecution of either a criminal or civil proceeding, a plaintiff must demonstrate 'that the prior action (1) was

in an underlying action. ... If the termnation does not
relate to the merits--reflecting on neither inocence of nor responsibility for the alleged misconduct--the term-

commenced by or at the direction of the defendant and was pursued to a legal termnation in his, plaintiffs, favor (citations); (2) was brought without probable cause
(citations); and (3) was initiated with malice (citations).'
" ( Sheldon Appel Co. v. Albert & Dliker (1989) 47 CaL.3d 863, 871 (254 CaL. Rptr. 336, 765 P.2d 498)
(Sheldon Appel), quoting Bertero v. National General

nation is not favorable in the sense it would support a
subsequent action for malicious prosecution." ( Lackner, supra, 25 Cal.3d at p. 751, fu. omitted.) Thus, a "techncalor procedural ( termnation) as distinguished from a

substantive termation" is not favorable for puroses of
a malicious prosecution claim. (Ibid.) Examples include dismissals (1) on statute of limitations grounds ( id. at
pp.75l-752; Warren v. Wasserman, Comden & Cassel-

Corp. (1974) 13 Ca1.d 43, 50 (118 Cal. Rptr. 184, 529 P.2d 608).
"The theory underlying the requirement of favorable

man (1990) 220 Cal. App. 3d 1297, 1303 (271 Cal. Rptr. 579) (Warren) ); (2) pursuant to a settlement ( Dalany v.
American Pacifc Holding Corp. (1996) 42 Cal.AppAth

termnation is that it tends to indicate the innocence of
the accused, and coupled with the other elements of lack

822, 828-829 (50 Cal. Rptr. 2d 13)); or (3) on the
grounds of laches ( Asia Investment Co. v. Borowski

of probable cause and malice, establishes the tort (of
malicious prosecution)." (Jaffe v. Stone (1941) (**501)

18 Cal.2d 146, 150 (***101) (114 P.2d 335).) Thus, "(i)t is hornbook law that the plaintiff in a malicious
prosecution action must plead and prove that the prior judicial proceeding of which he complains termated in
his favor." (Babb v. Superior Court (1971) 3 CaL.3d 841,

(1982) 133 CaL. App. 3d 832, 838-839 (184 CaL. Rptr. 317)).

(1) With these standards in mind, we now tu to the
Cour of Appeal's decision termating the underlying

breach of contract and fraud action. (See Ray, supra, 61

845 (92 CaL. Rptr. 179,479 P.2d 379).

To determne "whether there was a favorable term-

Cal.AppAth at pp. 318-319 (holding "that the appellate decision ... both marked and constituted favorable termnation of that case").) In affrming the judgment in favor of appellant, the Cour of Appeal found that "there was
no substantial evidence to support the (underlying)

nation," we "look at the judgment as a whole in the prior action ... ." (Sagonowsky v. More (1998) 64 Cal.AppAth

claims for breach of contract or fraud." Ostensibly, this
finding reflects on the merits and appellant's inocence of the wrongful conduct alleged in the underlying action.
(See Sierra Club, supra, 72 Cal.AppAth at pp. 1149-

122, 129 (75 Cal. Rptr. 2d 118). "It is not essential to maintenance of an action for malicious prosecution that
the prior proceeding was favorably termnated following

trial on the merits." ( Lackner v. LaCroix (1979) 25
Cal.3d 747, 750 (159 Cal. Rptr. 693, 602 P.2d 393)

(Lackner).) Rather, "(i)n order for the termation of a lawsuit to be considered favorable (*342) to the malicious prosecution plaintiff, the termnation must reflect the merits of the action and the plaintiffs innocence of
the misconduct alleged in the lawsuit." ( Pender v. Radin

1150.) Nonetheless, respondents contend the termnation was procedural or techncal because the Cour of Appeal refused to (***102) consider evidence of prior negotiations in light of the parol evidence rule. According to respondents, under Lackner the parol evidence rule is a procedural defense like the statute of frauds, and a termnation based on that rule does not reflect on appellant's inocence. (See Lackner, supra, 25 CaL.3d at p. 751.) As

(1994) 23 CaL.AppAth 1807, 1814 (29 Cal. Rptr. 2d 36).) For example, a termnation is favorable for malicious prosecution puroses where the cour in the underlying action: (1) granted summary judgment and issued sanc-

explained below, we (*343) disagree and find that a
termnation based on the parol evidence rule is a substantive termation in the malicious prosecution context.

tions because the claim was meritless ( MatteI, Inc. v.

96

Case 5:07-cv-04808-JF

Document 50-5

Filed 07/03/2008

Page 14 of 30
Page 5

32 Cal. 4th 336, *; 83 P.3d 497, **; 9 Cal. Rptr. 3d 97, ***; 2004 Cal. LEXIS 735

The parol evidence rule is codified in Civil Code section 1625 4 (**502) and Code of Civil Procedure
section 1856.5 (See Marani v. Jackson (1986) 183 Cal.

in this section, the term agreement includes deeds and wils, as well as contracts between parties."
Although the rule results in the exclusion of evidence, it "is not a rule of evidence but is one of substantive law." ( Estate of Gaines (1940) 15 Cal.2d 255, 264 (100 P.2d 1055), italics added.) Of course, our prior
characterization of the parol evidence rule as a substan-

App. 3d 695, 701 (228 Cal. Rptr. 518) (Marani).) It "generally prohibits the introduction of any extrinsic evidence, whether oral or written, to vary, alter or add to the term of an integrated written instrment." ( Allng v.
Universal Manufacturing Corp. (1992) 5 CaL.AppAth

1412, 1433 (7 Cal. Rptr. 2d 718) (Allng).) The rule does not, however, prohibit the introduction of extrinsic evidence "to explain the meaning of a wrtten contract ... (if) the meaning urged is one to which the written contract

tive rule of law is not necessarily dispositive in the mali-

cious prosecution context. (See Grant v. McAulife
(1953) 41 Cal.2d 859, 865 (264 P.2d 944) (" , "Substance" and "procedure" ... are not legal concepts of in-

term are reasonably susceptible." ( BMW of North America, Inc. v. New Motor Vehicle Bd. (1984) 162 Cal.
App. 3d 980, 990, fu. 4 (209 Cal. Rptr. 50) (BMW).)
4 Civil Code section 1625 provides that: "The
execution of a contract in writing, whether the

variable content' ... and a statute or other rule oflaw wil
be characterized as substantive or procedural according
to the (*344) natue of the problem for which a charac-

terization must be made").) But a careful examination of

the underlying natue of the rule demonstrates that it
should be so.

law requires it to be written or not, supersedes all the negotiations or stipulations concernng its matter which preceded or accompanied the execution of the instrment."

(***103) Unlike traditional rules of evidence, the
parol evidence rule "does not exclude evidence for any of

5 Code of Civil Procedure section 1856 states
that: "(a) Term set forth in a writing intended by
the partes as a final expression of their agree-

the reasons ordinarily requirg exclusion, based on the probative value of such evidence or the policy of its admission. The rule as applied to contracts is simply that as
a matter of substantive law, a certain act, the act of em-

ment with respect to such term as are included
therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement. (i!) (b) The terms set forth in a writing

bodyig the complete term of an agreement in a writing (the' integration'), becomes the contract of the parties. The point then is, not how the agreement is to be proved, because as a matter of law the writing is the agreement."
( Estate of Gaines, supra, 15 CaL.2d at pp. 264-265.)

described in subdivision (a) may be explained or supplemented by evidence of consistent additional term unless the writing is intended also as

Thus, "( u )nder (the) ruleL) the act of executing a wrtten

contract ... supersedes all the negotiations or stipulations
concernng its matter which preceded or accompanied

a complete and exclusive statement of the term of the agreement. (i!) (c) The terms set forth in a writing descr