Free Appendix - District Court of California - California

Case 5:07-cv-04808-JF

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1989 Cal. App. LEXIS 869, ***
and fraudulent concealment. 2 The intentional misrepre-

sentations consisted of statements by the bank employees, Wictorin and Hadsel, that "Wells Fargo, would

correctness." (Cleary, McCormck on Evidence (3d ed.
1984) § 270, p. 802.) Similarly, throughout the duration

'work with' the plaintiffs in the matter of repayment of
the promissory (*480) notes, (and) would renew the

of the agreement appellants made a number of payments of interest and principal without contesting their obligations. (9) If a part makes a partial payment '''without

promissory notes for up to five (5) years. . . ." Though
the elements of (***25) fraudulent concealment are not
clearly alleged, appellants urge that the record reveals

protest and without otherwise indicating non-recognition

of the validity of the claim, evidence of the payment is

that the bank agents and employees concealed (1) that

unversally received (as proof of the validity of the
claim).''' (6 Cal. Law Revision Com. Rep. (1964) subds.
rule 52, p. 676, quotig The American Law (a) and (b) of Institute's Comment on Model Code rule 309(3).)

Wictorin did not have authority to approve the renewal of the loans, (2) that renewal of the $ 210,000 loan was
conditioned on the payment of

the $ 97,000 and $ 63,000

loans, (3) that Wells Fargo would consider the loans in default if not paid by October 31,1983, and (4) that the
bank officials handling their loans would not be knowledgeable about agricultue.

(*481) (7b) Portions of the deposition testimony of Emest and Maxine Price tended to confirm these tacit admssions; both conceded that they understood that the
matuity date of the three loans was October 31, 1983.

Even more damaging were the admssions in the letters

2 We do not consider the theories of negligent
misrepresentation and constrctive fraud, urged

of appellants' counseL. A letter of Weldon Mattos to
(***28) Pamela Bogle, dated December 12, 1984, states, "(a)s I indicated at our meetig, there is no question that the Prices did not make the payments to Wells Fargo when due." In a letter to W.E. Famam of the same date, Mattos concedes, "(t)he Prices are not denying that they have not been able to make the payments on the schedule

in appellants' opening brief, since these theories
were not pled in the complaint and were raised

for the first time on appeaL.

With two exceptions, the alleged fraud concerns oral

promises relating to the principal term of the loan
agreement. The gravamen of appellant's theory of fraud

that they foolishly agreed to . . . ." (10) (See fn. 3.) A
second letter to Pamela Bogle, dated December 17, 1984,

is that the written loan agreements varied from the term of the agreement they had expected; that bank employees orally promised them (***26) that the written agreement would be administered in a manner consistent with their original expectations; that the bank "never intended" to perform the agreements pursuant to these oral promises; and that they relied to their detriment on the promises.

states, "(w)e are not askig that the Bank termate the
foreclosure, but simply that they hold off for a brief period of time to allow for a less catastrophic solution to

the Prices' obligation to Wells Fargo." 3

These allegations appear to raise the diffcult and disputed question of the relationship between promissory fraud and the parol evidence rule. Wells Fargo has raised the defense of the parol evidence rule, however, only

3 Appellants now argue that the trial cour was barred under Evidence Code section 1152 from

considering this correspondence in the motion for

with respect to the thid cause of action relating to the mobilehome loan. As the issue has been briefed only in

summary judgment. Section 1152 codifies the rule that "(a)n offer to settle or compromise a claim by paying a sum of money or giving other
consideration is not admissible to prove liabilty

this connection, we wil not discuss it here. The summary judgment on (**743) the fraud cause of action
must be affrmed on other grounds.

on the part of the offeror." (1 Witk, CaL. Evidence (3d ed. 1986) § 424, p. 398.) "(T)he obvious policy of the statute is to avoid deterring par-

Wells Fargo argued successfully in the trial cour
that, since appellants' own admssions revealed that they
understood the natue of

ties from making offers of settlement and to facilitae candid discussion which may lead to settlement of disputes." ( Fieldson Associates, Inc.

their obligations to Wells Fargo,

v. Whiteclif Laboratories, Inc. (1969) 276

they cannot assert that they relied to their detriment on
the promises of

Cal.App.2d 770, 773 (81 Cal.Rptr. 332).) But we
find nothig in the record suggesting that there

bank employees that they were subject to

other, less stringent, obligations. We will first examine
the admissions and then consider their significance for
purose of summary judgment.

was any dispute over appellants' obligations under the loan agreements at the time the letters

were written. Indeed, the letters affiratively
disclose that no dispute existed. Under these cir-

The admssions were in part circumtantial. (***27) As recounted earlier in this opinion, appellants conceded that they never disputed Wells Fargo's demands for payment. (8) "A failure to question. . . a bil or statement is uniformy received as evidence of an admission of its

cumstances, Evidence Code section 1152 did not
apply.
Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.d 285 (85 Cal.Rptr. 444, 466

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P.2d 996) is instrctive on this point. During the month of February 1965, plaintiff notified the city that it was unwiling to continue work on a constrction project without a change order. On March 8, 1965, the city sent plaintiff a letter rejecting the need for such a change order. In later correspondence in March, the partes nevertheless
made certain mutual accommodations. The city sought to introduce evidence of the March correspondence "to show the contemporaneous and

by self-serving declarations of a part. ( Advanced Micro Devices, Inc. v. Great American Surplus Lines Ins. Co. (1988) 199 Cal.App.3d 791 (245 Cal.Rptr. 44). But

Leasman v. Beech Aircraft Corp. (1975) 48 Cal.App.3d 376, 382 (121 Cal.Rptr. 768), (***30) phrased the holding in broad language that should be accepted with caution: "Accordingly, when a defendant can establish his defense with the plaintiffs admssions. . . the credibility
of the admissions are valued so higWy that the contro-

practical constrction of the contract." ( /d. at p. 296.) Plaintiff countered that the correspondence was barred by Evidence Code section 1152. The Supreme Cour observed that evidence is admissible that tends to prove "(t)he 'constrction given
the contract by the acts and conduct of the partes

verting affdavits may be disregarded as irelevant, inadmssible or evasive." (See also Niederer v. Ferreira
(1987) 189 Cal.App.3d 1485, 1503 (234 Cal.Rptr. 779);
Shapero v. Fliegel (1987) 191 Cal.App.3d 842, 849 (236
Cal.Rptr. 696).)

with knowledge of its term, before any controversy has arisen as to its meaning. . . ." ( Id. at pp. 296-297.) But it noted, "(b)y March 8, 1965,
the parties had reached a stage of clear disagree-

Apparently accepting the language of Leasman at face value, Weil and Brown comment: "Note that if the case went to trial, the judge or jur might choose to be-

lieve the contradictory testimony. But for summary
judgment puroses, a part is bound by his or her adms-

ment on the crucial question whether plaintiff was entitled to a change order." ( Id. at p. 297.) Accordingly, the cour held that Evidence Code section 1152 precluded the admssion of the cor-

sions made in the course of discovery!" (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (1988)
para. 10:84.) As the commentators' exclamation point

suggests, an uncritical application of the D'Amico deci-

respondence. Applying these principles to the present case, we find that the letters in question
were written before any controversy had arisen as

sion can lead to anomalous results, inconsistent with the general principles of summary judgment law. (***31) (11) We do not interpret the decision, however, assaying
that admssions should be shielded from careful exami-

to the meaning of the loan agreements. Hence, they are not barred by section 1152 but are admissible to show the "practical constrction" of
the loan agreements by the parties.

nation in light of the entire record. A summary judgment
should not be based on tacit admssions or fragmentary and equivocal concessions, which are contradicted by

This analysis also applies to references to the deposition of Weldon J. Mattos in "Event 11" of

the exhbit appendix to the motion for summary judgment. We see no materiality in the remaining

other credible evidence. Weare persuaded that the trial cour properly relied oil the admssions in the case at bar only because we find nothng in the record that is materially inconsistent with the admissions.
On deposition, both Emest and Maxine Price reiter-

document mentioned in this assignent of error,
Mattos's letter to Bogle dated March 5, 1985.

ated again and again that they thought they had a "fiveyear deaL." They acknowledged, however, that the three

(***29) (**744) Arguing that these admissions are decisive, Wells Fargo cites D'Amico v. Board of
Medical Examiners (1974) 11 Cal.3d 1, 22 (112

promissory notes had a matuty of one year. When
pressed for clarification, they expressed two distinct understandings. First, they constred the $ 210,000 loan as being payable over a five-year period with annual princi-

Cal.Rptr. 786, 520 P.2d 10), for the proposition that ad-

missions are entitled to high credibility (*482) in motions for summary judgment: "As the law recognies in other contexts (see Evid. Code, §§ 1220- 1230) admssions against interest have a very high credibility value. .
" Accordingly, when such an admission becomes rele-

pal payments of $ 42,000. As we have seen, the note
was indeed ambiguous on this point, and the Prices' in-

terpretation was entirely plausible. But the issue does
not enter into the present lawsuit because the Prices

vant to the determnation, on motion for summry judgment, of whether or not there exist triable issues of fact
tled to and should receive a kind of deference not normally accorded evidentiary allegations in affdavits." The holding of D'Amico appears entiely sound on its facts;
and this cour has recently applied the decision where

never made the annual principal payments of $ 42,000
that the note (*483) arguably called for. In the (***32)

trial cour, they never contended that Wells Fargo failed
to comply with ths interpretation of

(as opposed to legal issues) between the parties, it is enti-

the note.

would be "redone." This understanding clearly applied to

(7c) Secondly, the Prices insisted that the notes

credible admssions on deposition were contradicted only

the $ 63,000 and $ 97,000 loans but appeared also to extend to the $ 210,000. The diffculty is that the Prices
nowhere specify any understanding as to the term of

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renewaL. The term of a restrctuing agreement obvi-

ously may vary as widely as the term of the original
agreement. Unless an agreement to restrctue a loan

term was payable on demand. The plaintiffs sought to prove that the bank orally promised, without any inten-

embodies definite term, capable of enforcement, it is not
a legally valid contract. "Preliminary negotiations or an

agreement for futue negotiations are not the functional equivalent of a valid, subsisting agreement." ( Kruse v. Bank of (**745) America, supra, 202 Cal.App.3d 38, 59.) The Prices' understanding that the notes would be
"redone" thus raises no triable issue as to a legally enforceable understanding inconsistent with the written

tion of honoring the promise, that "they would not be required 'to make any payments on their indebtedness, either interest or principal, until this money (***35) came in from the 1932 crop oflettce seed. . . .''' ( /d. at p. 263.) Thecour held that the parol evidence rule precluded proof of the alleged promissory fraud: "Our con-

term of the notes.

The thid cause of action alleging fraud in procurement of the $ 15,000 mobilehome loan raises clearly the issue of the relationship between promissory (***33) fraud and the parol evidence rule. Appellants allege that Bank of America offered to make the loan at a 13 percent interest rate, and a Wells Fargo loan offcer countered by promising that Wells Fargo would loan the money "at a better interest rate than Bank of America." In reliance on this promise, they applied for a loan at Wells Fargo; but

ception of the rule which permts parol evidence of fraud to establish the invalidity of the instrment is that it must tend to establish some independent fact or representation, some fraud in the procurement of the instrment or some breach of confdence conceming its use, and not a promise directly at variance with the promise of the writing." (Ibid.)

The holding of the Pendergrass decision received a slightly different verbal formulation in Bank of America
v. Lamb Finance Co. (1960) 179 Cal.App.2d 498 (3

Cal.Rptr. 877). The plaintiff offered to prove that the
bank fraudulently promised her that, contrary to the wrtten term of the instrent, she would not be personally

discovered that the interest rate was 3 percent above
prime, a rate higher than the 13 percent offered by the

"( w )hen the promissory note was ready for signing," they

liable on a guaranty she signed in the capacity of sole
shareholder and offcer of a corporation. Relying on
Pendergrass, the cour barred proof of

Bank of America. At that time, however, "Bank of
America was no longer offering the same rate on mobilehome loans." Consequently, appellants had no alternative but to accept the Wells Fargo loan at the higher
rate of interest.

the alleged prom-

issory fraud: "A distinction has been made by our cours in cases in which the fraud sought to be proved consists

of a false promise. (***36) They have held that if, to
induce one to enter into an agreement, a part makes an

Without considering other diffculties with this
cause of action, we wil discuss only the parol evidence rule. Under Californa law, fraud may consist of "(a) promise made without any intention of performng it." ( Civ. Code, § 1572.) To incur such liability for fraud, BAIl 12.40, subdivision (1) states that "(t)he defendant must have made a promise as to a material matter and, at the time he made it, he must have intended not (***34)
to perform it . . .." Kett v. Graeser (1966) 241

independent promise without intention of performng it, this separate false promise constitutes fraud which may be proven to nullify the main agreement; but if the false promise relates to the matter covered by the main agreement and contradicts or varies the term thereof, any evidence of the false promise directly violates the parol
evidence rule and is inadmissible." ( /d. at p. 502; see

(**746) also Shyvers v. Mitchell (1955) 133 Cal.App.2d

569, 573 (284 P.2d 826); Cobbs v. Cobbs (1942) 53
Cal.App.2d 780 (128 P.2d 373).

Cal.App.2d 571 (50 Cal.Rptr. 727) provides an apt example. The plaintiffs there bought a home in reliance on

the defendant's promise that certain repairs would be performed by a licensed contractor. Reversing a summary judgment in favor of defendant, the cour held that
there was a triable issue of fact as to whether the defen-

The Pendergrass decision has been severely criticized by scholarly commentators. (Parol Evidence: Admissibilty to Show that a Promise was Made Without
Intention to Perform It (1950) 38 Cal.L.Rev. 535-539;

Sweet, Promissory Fraud and the Parol Evidence Rule

dant did not intend to perform the promise at the time it
was made.

(1961) 49 Cal.L.Rev. 877-907.) While applying the decision, the cour in Coast Bank v. Holmes (1971) 19

Cal.App.3d 581, 591 (97 Cal.Rptr. 30), termed the
Pendergrass distinction between different (***37) form of promissory fraud as being "tenuous" and "inconsistent" with tort principles. The cour opined, "(t)he recent decisions liberalizing the parol evidence rule cast
some doubt on the continued vitality of the distinction." (
Id. at p. 592; see also Glendale Fed. Sav. & Loan Assn.
v. (*485) Marina View Heights Dev. Co. (1977) 66

(12) The parol evidence rule in general does not
preclude proof of fraudulent oral misrepresentations (2

Witkin, CaL. Evidence (3d ed. 1986) (*484) §§ 997, 999, pp. 944-945), but the early case of Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258 (48 P.2d
659) perceived a conflict between the rule and promis-

sory fraud relatig to the principal term of an agreement. The case concerned a promissory note that by its

Cal.App.3d 101, 161 (135 Cal.Rptr. 802).)

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(13) We must accept Pendergrass, however, as the governing law. The first (and suffcient) reason is that, since the decision has never been overrled, it may not
be challenged by an appellate cour. (9 Witkn, Cal. Pro-

choice that should be reconsidered only by the Supreme Cour itself.

(***40) (14) Pendergrass may be easily applied to
the present case. The promissory note for the mobilehome loan bears the apparent marks of an integrated
agreement, and appellants (**747) have advanced no

cedure (3d ed. 1985) § 768, p. 735.) The landmark decisions of the 1960's liberalizing the parol evidence rule

have only oblique relevance to Pendergrass and cannot
be read as overrling the decision. ( Masterson v. Sine

(1968) 68 Cal.2d 222 (65 Cal.Rptr. 545,436 P.2d 561); Pacifc Gas & E. Co. v. G. W Thomas Drayage etc. Co. (1968) 69 Cal.2d 33 (69 Cal.Rptr. 561,442 P.2d 641, 40 A.L.R.3d 1373); and Delta Dynamics, Inc. v. Arioto (1968) 69 Cal.2d 525 (72 Cal.Rptr. 785, 446 P.2d 785).) (***38) Moreover, despite scholarly criticisms, the decision is based on an entirely defensible decision favorig the policy considerations underlyig the parol evidence rule over those supporting a fraud cause of action.
The scholarly commentators correctly point out that
there is no conceptual inconsistency between promissory fraud and the parol evidence rule. Promissory fraud re-

contrary argument. The alleged oral promise that Wells Fargo would beat the term of Bank of America constitutes a "contemporaneous oral agreement," contradicting
the term of the written agreement which comes within

the terms of the parol evidence rule. ( Code Civ. Proc., §

1856; 2 Witki, Cal. Evidence, supra, § 960 et seq., p.
908.)

Wells Fargo with intentional and negligent infiction of
emotional distress. The foregoing analysis is, however, fatal to these claims. Our conclusion that Wells Fargo
did not defraud appellants or breach the implied cove-

(15) As fuher tort theories, appellants charge

quires a showing of tortious intent and reliance in addition to proof of an oral promise; the parol evidence rule

is concerned only with proof of an oral promise. The
two legal concepts can logically coexist. The policy

nant of good faith and fair dealing necessarily implies that it did not engage in the sort of "outrageous" conduct necessary to incur liability for intentional infliction of emotional distress. (5 Witk, Summary of Cal. Law (9th
ed. 1988) § 404, p. 484.) Again, our conclusion that there
was no breach of the implied covenant of good (***41)

considerations underlying promissory fraud apply fully when the promise relates to the main term of the agreement. By limiting promissory fraud to promises relating
to ~oll~teral matters, not at variance with the principal

faith and fair dealing appears to preclude liability for
negligent infliction of emotional distress; appellants have not proposed any duty owed to appellants that does not

obhgattons, Pendergrass compromises the objectives of tort law in a manner that is not strictly necessary to give effect to the parol evidence rule.

fall within the implied covenant theory. (6 Witkin, Summary ofCal. Law (9th ed. 1988) § 838, p. 194.)
(16) To support their three posttial motions -- the motion for reconsideration, the motion for new trial and motion for relief under Code of Civil Procedure se~tion 473 -- appellants submitted certain materials that were not included in their opposition to the motion for summary judgment, including excerpts from the depositions of Stephen Schendel and John Richards and declarations of appellants. The trial cour overrled the objections of Wells Fargo to this new material but stil denied the motions. On appeal, appellants urge that the new material

On the other hand, if loosely constred, the concept of promissory fraud may encourage attempts to convert contractual disputes into litigation over alleged fraud. To
be sure, fraud requires proof of the additional elements

(**~39) of intent and reliance. But these can so easily
be inerred from any broken promise that promissory

fraud may in fact open the door to attempts to enforce oral promises though tort causes of action under the guise of a promise made without intention to perform. A ~r?ad doc.trine of promissory fraud may allow parties to

should have compelled a different ruling on the motion
for summary judgment.

httgate disputes over the meanig of contract term
armed with an arsenal of tort remedies inappropriate to the ~esolution of commercial disputes. Thus, the practical impact of alleged promissory fraud may in fact undermne the policies of the parol evidence rule.

For purose of analysis, our discussion of the implied covenant of good faith and fair dealing has in fact
included relevant material from the Richards's deposition

In short, Pendergrass compromises the policies of tort law, but a contrary rule would compromise those of the ~arol ~viden~e rule. How one weighs the conflcting considerattons will depend largely on the importance one attaches to the respective policies. In Pendergrass, the

and the appellants' declarations. This material did not affect our conclusion that (***42) the summary judgment was proper. The deposition of Stephen Schendel
contains certain observations regarding the parties' ex-

Supreme Cour gave (*486) priority to the policies of the parol evidence rule. While the decision was by no means logically inevitable, it represents a rational policy

pectation that the loan agreements would be renewed. ~ut the testimony has no relevance to the actual allegattons of the complaint relating to fraud since it does not
serve to prove any actionable misrepresentation. The

(*487) testimony also has little bearing on the theories

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of liability based on the implied covenant of good faith;
appellants do not argue that the implied covenant re-

cour first announced on August 28, 1987, a tentative
ruling to summarily adjudicate various issues but to deny

quired Wells Fargo to renew the loan agreement. The

other portions of Schendel's testimony cited in the motions -- relating to "mutual trst" residing in the

summary judgment as to Wells Fargo. Later, on Sep-

tember 18, 1987, the cour decided to grant sumary
judgment as to the bank. However, the orders ultimately

bankcustomer relationship and the impropriety of a bank

offcial informng a customer that he wil deny making a
statement -- have little materiality.

signed included the list of summarily adjudicated issues.

We agree that the summry adjudication of issues was unecessary, but appellants were not prejudiced by it. In
ths appeal, they cannot base any grievance on ths superfluous order. 4

As a final assignment of error, appellants point out that the trial cour granted the motion for sumary adjudication of the issues as well as the motion for sumary judgment. Code of Civil Procedure section 437c, subdivision (f), provides: "(a) part may move for sumary
adjudication of issues, either by itself or as an alternative

4 Because of our affirance of the summary

judgment, we do not reach appellant's assignments of error relating to the summary adjudication of issues.

to (***43) summary judgment." (Italics added.) This anomalous result apparently occured because the trial

The judgment is affired.

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LEX

SEE 44 CAL APP 564

C. W. QUACKENBUSH, Respondent, v. JAMES W. DAROUGH et aI., Defendants; RAYMOND W. SMITH et al., Appellants
Civ. No. 3031

COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION TWO
44 Cal. App. 564; 186 P. 1044; 1919 Cal. App. LEXIS 587

December 3,1919, Decided

PRIOR HISTORY: (***1) APPEAL from a judgment of the Superior Cour of San Diego County. W. R. Guy, Judge.

(4) Id. --Erroneous Overruling of Special Demurrer-nonpayment in such an action having been suffcient as against a genNot Prejudicial Error. --The allegation of

DISPOSITION: Affired.
HEADNOTES

eral demurer, the judgment should not be reversed

merely because the trial cour may have erred in overrling a special demurer.

CALIFORNIA NOTES

SYLLABUS

OFFICIAL

REPORTS

HEAD-

The facts are stated in the opinion of the cour.

(1) Pleading--Filng of Demurrer--Appearance. --The
appearance by them.

COUNSEL: Sam Ferr Smith and Eugene Ferry Smith
for Appellants.

filing of a demurer by given defendants constitutes an

F. G. Blood for Respondent.
(2) Id. --Action to Foreclose Mortgage--Right of

Owners to Service of Suffcient Complaint. --In an
action to foreclose a mortgage on real propert, the owners of the land are entitled, if the land is to be sold under
foreclosure decree, to have that done in the manner pro-

JUGES: THOMAS, J. Finayson, P. J., and Sloane, 1., concured.
OPINION BY: THOMAS

vided by law, and, accordingly, are entitled to the service upon them of a complaint which is at least invulnerable to general demurer.

OPINION
(*565) (**1045) THOMAS, J. This is an action to foreclose a mortgage executed by defendants James W. Darrough and Susan E. Darrough, his wife, to plaintiff to secure the payment of a note for the principal sum of one thousand five hundred dollars, dated May 18, 1915, payable on or before five years after date. The defendants

(3) Id. --Nonpayment--Suffciency of Allegation. --In an action to foreclose a mortgage given to secure the
payment of a certain promissory note, an allegation "That

no payments have been made on the principal, and no
payments on the interest since the twentieth day of April, 1916, as provided for in said note and mortgage; and the principal mentioned in said mortgage and note, together with the interest thereon at the rate of seven per cent per

Raymond W. Smith and Mary E. Nelson Smith, his wife,
are subsequent purchasers of the propert from the de-

annum from the sixteenth day of February, 1916, stil
remains due and unpaid from. . . (the makers of

fendants Darrough, and are made partes to the action for that reason.

the note)

to the plaintiff," is suffcient as against a general demurrer. It is not necessary to negative payment by a stranger, or to some person other than plaintiff.

All defendants were duly and legally served with summons and complaint. The defendants Darrough defaulted. The defendants Smith appeared and entered demurer, which was general and special in its term, and which, after presentation and consideration by the cour,

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was overrled. The defendants Smith did not answer, but the judgment-roll does not disclose the filing or entering (***2) of their default for not so doing. Subsequently a decree of foreclosure was entered, (*566) ostensibly against the defendants Darrough, as no mention is made
therein of the defendants Smith, except the erroneous

day of April, 1916, as provided for in said note and

mortgage; and the principal mentioned in said mortgage
and note, together with the interest thereon at the rate of

seven per cent per annum from the sixteenth day of February, 1916, still remains (***4) due and unpaid from
the said James W Darrough and Susan E. Darrough to

recital in the decree that "defendants Raymond W. Smith and Mary E. Nelson Smith not appearing" -- when, as a matter of fact, both had appeared by fiing a demurer as
aforesaid -- and the fuer recital that they had been

the (*567) plaintif" The italicized porton of the foregoing allegation is, we think, the saving clause. It is, in
our opinon, a direct and suffcient allegation that all of

duly and legally served with summons, and that all the interest and estate of said defendants so served in said lands and premises, and all their right and title to the
same, is subject and subordinate, etc.
The appeal is by the defendants Smith only, and

the interest which accrued subsequent to February 16,
1916, remains "unpaid"; and ths notwithstanding the

fact that, according to the complaint, the quarterly payment of interest was not due until February 18, 1916, for

from the judgment on the judgment-roll alone. The suffciency of the complaint and the validity of the judgment are, therefore, before the cour for review.

a reason which must be obvious. Unless it can be successfully maintained that the allegation is insuffcient merely because it alleges that the said principal and interest is unpaid from the defendants Darrough to the
plaintiff, the complaint must be held to be suffcient. Notwthstanding the strict rule in this state, we think the objection to the complaint cannot be successfully main-

tained. It is not necessary to negative payment by a
(1) That the fiing of a demurer by the defendants Smith constituted an appearance by them is, we think, not debatable. ( Hodgkins v. Dunham, 10 Cal. App. 690, (103 P. 351); Dollar v. International Banking Corp., 10 Cal.
App. 83, (101 P. 34); Maclay Co. v. Meads, 14 Cal. App.

stranger, or to some person other than plaintiff. ( Sanford v. Litchenberger, 62 Neb. 501, (87 N.W. 305); Lincoln County v. Fetterman, 170 Cal. 357, (149 P. 811); 8 C. 1. 882 et seq.)

363, (112 P. 195, 113 P. 364); (***3) Altpeter v. Postal etc. Co., 26 CaL. App. 705, (148 P. 241); Clark v.
Forbes, 34 Cal. App. 524, (168 P. 155).)
(4) We th, therefore, the allegation of nonpayment

Notwithstanding this fact, we th these appealing defendants are without standing in this cour. They are
mentioned in the decree only as already above set forth.

sufficient as against (***5) a general (**1046) demurrer, and, the special demurer having been overrled and judgment given for plaintiff, that the judgment should not be reversed merely because the cour possibly may
have erred in so ruling. ( Alexander v. Central Lumber etc. Co., 104 Cal. 532, (38 P. 410); Const., art. VI, sec. 4
1/2.)

(2) Appellants contend that, being the owners of the land subject to the mortgage in question, they are entitled, under the law, if the land is to be sold under foreclosure decree, to have that done in the manner provided

by law; and that, accordingly, they are entitled to the
service upon them of a complaint which is at least invulnerable to general demurer. And with this we agree.
(3) But we thi the complaint served in this action

For these reasons, coupled with the fact that appellants' attorneys have been frank enough to say that "while such is our view of the result -- and we want to be
frank with the cour on the point -- we have taken the

was such a complaint, although not as carefully drawn as

appeal only out of the abundance of precaution" -- the judgment, we thnk, should be sustained.
Judgment affired.

might be desired. The allegation of nonpayment is as
follows: "That no payments have been made on the principal, and no payments on the interest since the twentieth

Finayson, P. J., and Sloane, 1., concured.

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LEXSEE 255 CAL. APP. 2D 781

SHELDON BUILDERS, INC., Plaintiff and Appellant v. TROJAN TOWERS et aI., Defendants and Respondents.
Civ. No. 31198.

COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION ONE
255 Cal. App. 2d 781; 63 Cal. Rptr. 425; 1967 Cal. App. LEXIS 1340

November 8,1967

PRIOR HISTORY: (***1) APPEAL from a judgment of the Superior Cour of Los Angeles County.

visions, be contingent upon the happening of a futue
event, parol evidence may be admtted to show the cau~e of its nonperformnce either in whole or in part, and t?ïs may necessitate the admssion in evidence of a preceding or contemporaneous oral agreement.
(3) Building and Construction Contrac~s--

Jerold E. Weil, Judge. Affired.

Action for money due for services rendered as a
building contractor, for money and received, and upon an
account stated. Judgment for defendant affired.

DISPOSITION: A petition for a rehearig was denied
November 27, 1967, and appellant's petition for a hearing by the Supreme Cour was denied January 3, 1968.

Performance--Condition Precedent. --Where a budd-

ing contract between a contractor and the propert owners demonstrated clearly that it was within the contemplation of both parties that the constrction of an apartment building would be financed by a constrction loan,
as distinguished from funds to be fushed directly by

HEADNOTES

the owners, and substantial evidence disclosed that the

CALIFORNIA NOTES

OFFICIAL

REPORTS

HEAD-

partes at all times understood and agreed that constrction could not proceed without a constrction loan to

cover 100 percent of costs, a condition precedent to per-

(1) Building and Construction Contracts--Parol Evidence: Burden of Proof. --In an action by the contractor on a building constrction contract specifically providing, as a material condition, that the contractor should

formnce was the obtaining of financing by the contractor and when the condition was not fulfilled, neither
pa;; became obligated to perform fuher.

aid and cooperate with the propert owners in successfully obtaining a constrction loan satisfactory to the
owners, the contractor had the burden of proving per-

(4) Id.--Performance--Condition precedent. --Where a
building contract provided that the contractor should

constrct a multistory apartent house for a fixed fee,
but the contractor failed within a reasonable time to ful-

formnce of all conditions precedent, and where the contract was ambiguous as to the financing condition and the owners pleaded that the financing was a condition precedent to the contract's becoming effective, parol evidence was properly admitted to explain what the parties actually intended and to establish that a condition precedent existed which had to be fulfilled before the agreement could become valid, binding and effective.

fill a condition precedent to rendering the constrction
agreement binding, either part was at libert to consider

the agreement termnated, and the contractor was not entitled to payment of the fee.
(5) Id.--Performance--Condition Precedent. --Where

poraneous Agreements-- When Admissible. -change the express written provisions of a contract,
should the taking effect of the contract, or any of its pro-

(2) Evidence--Extrinsic Evidence--Prior or Contem-

it was financially impossible for the propert owners to proceed with a building project without adequate financing, the obtainng of which was a condition precedent ~o performnce of the constrction contract, the owners did
not abandon the contract; all partes were discharged
from all fuer duty to perform in the absence of financ-

Although oral agreements wil not be permtted to

ing.

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propert in partership with a builder who constrcted

by a building contractor upon a constrction contract,

(6a) (6b) Payment--Payment by Check. --In an action

the building on 100 percent financing without fuher
investment by Goodman.

retention by the contractor of a check sent to him by the propert owners upon which was marked "paid in full" without notification by him to the owners that he would
not accept it as payment in full supported a ffnding by
the cour that the bil was satisfied, the owners discharg-

Trojan owned a parcel of real propert on Hoover

Street in Los Angeles. On October 9, 1961, Sheldon
entered into a contract with Trojan providing that Shel-

don (**427) should constrct a multi-story (***3)
apartent house for a fixed fee of $20,000 which was,

ing their obligation under the contract by tendering the
check which was accepted without complaint.

by subsequent written modification, increased to
$22,000. These instrments form the only relevant writ-

(7) Id.--Payment by Check. --Where a check is prepayee to retu it without umeasonable delay if he does

ten agreement (*784) between the parties and it is the
constrction of matter of

sented as payment and not refused, it is the duty of the
not wish to cash it, in order to avoid the presumption that
it constituted satisfaction of the obligation.

this contract which constitutes the subject the instant litigation.

The basic agreement was the result of several
months of negotiation during which both parties were represented by counseL. The agreement provides, inter alia, that "As part of his services hereunder, the contractor will aid and cooperate with the owner in obtainng the

COUNSEL: Pfaelzer, Robertson, Artrong &
Woodard and Thomas J. McDermott, Jr., for Plaintiff
and Appellant.

best suitable ffrst trst deed constrction loan and/or
permnent financing at the best possible rate of interest,
length of years and gross amount." Appeal acknowl-

Arki & Weissman and Alvin H. Weissman for Defendants and Respondents.

edged that he knew Trojan wanted 100 percent financing,
meaning thereby sufficient funds to cover the entie cost
of constrction, that the parters looked to him to secure

OPINION BY: FOURT

OPINION

such financing, and that they could not proceed without
it. By his own admission Appeal encouraged Trojan in

(*783) (**426) FOURT, 1. This is an appeal by Sheldon Builders, Inc., (hereinafter sometimes referred to as Sheldon) from the judgment of the trial cour, sitting without a jury, denying its claims for money due for services rendered as a building contractor, for money had and received, and upon an account stated.

the belief that 100 percent financing could be obtained
by telling the parters that he had obtained such financ-

ing upon previous ventues and occasionally had ob-

tained (***4) financing even in excess of actual constrction cost, thus retung to the principals some of

Sheldon contends that there was insuffcient evidence to support the trial cour's findings (a) that obtaining a loan in the amount equivalent to 100 percent of
constrction cost was a condition precedent to payment

their cost of land acquisition. In reliance upon Appeal's representations that 100 percent financing was within the
realm of reasonable expectation, the parters executed

the agreement of October 9, 1961, and the subsequent

under the constrction contract, and (b) that (***2) Sheldon was paid the sum of $297.70 by respondents. Sheldon fuher contends that parol evidence was improperly considered and that Sheldon was entitled to
damages. These contentions are without merit.

modification thereof, although on neither occasion had the partes determed the precise building design or
specifications.

Pursuant to their agreement, the parties commenced work on the project. Joseph described the basis student
dormtory-tye apartent he envisioned and Sheldon's

Appellant Sheldon is a constrction company whose president, Sheldon Appel, is a licensed general contractor. Appel handled the entie transaction herein related with a partership known as Trojan Towers (hereinafter sometimes called Trojan) which proposed to build an apartent building. Robert Joseph was the principal
agent for the partership in these negotiations; the other

president consulted with an architect, Jack Chernoff, to obtain a design for the building. Over the next year Appel devoted substantial time to meetings with the partners, architect, building departent and subcontractors;
and his fir demolished the existing building on the pro-

posed constrction site.

Although throughout this period both Sheldon and

two parters were Nathan D. Pasacoe and David Good-

respondents sought financing, no commtment suffciently large to cover the entire cost of constrction was
obtained. There is no evidence that the failure to obtain financing was respondents' fault, or that the parters arbitrarily (***5) refused to accept suitable financing.

man. Of the three, Goodman was the parter with the
best financial qualifications and only he had experience
with apartent constrction. On two prior occasions he

had engaged in real estate development by fuishing the

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Goodmn, however, was forced to withdraw from the

project in April 1962 due to personal financial losses which he incured when his business parter absconded
with funds.

parol evidence was improperly admitted to alter the contract term. The trial (*786) cour correctly admitted

parol evidence to determe whether Sheldon had per-

The parties initially envisioned a 57-unit building

formed all conditions precedent to its right to recover; to explain the extrinsic ambiguity in the agreement; and to
show the existence of the collateral agreement, not in-

but the building departent would accept no more than
54 units on the propert and ultimately, when all efforts

to produce adequate (*785) financing for the larger
building failed, Trojan considered a smaller, 19-unit
building. In October 1963 Joseph obtained on behalf of

consistent with the written agreement, that rendered the written agreement ineffective until the happening of the condition precedent.

Trojan a loan commtment on the 19-unit building in the

amount of $165,500 and Sheldon was notified that Trojan found this financing satisfactory. At this point there is a confict in the testimony. Appel testified that he then agreed to proceed with constrction, but he advised J 0seph that Trojan would have to put in money in addition
to the constrction loan in order to complete the build-

The constrction contract specifically provides, as a material condition, that Sheldon should aid and cooperate with respondents in successfully obtainng a constrction loan satisfactory to respondents. Sheldon had the burden of proving performnce of all conditions

precedent and on this issue evidence of all tyes was
properly received. (***8) The contract was clearly am-

ing. Trojan had paid $1,000 as called for upon execution

of the contract, and since no fuher payment was due thereunder until the framework was completed, Trojan declined to make any earlier disbursement. Joseph contends that Appel refused to proceed until he (***6) received payment for some portion of the services previously rendered in connection with the larger building, and that only after his refusal did Trojan sell the propert

biguous, as evidenced by the fact that even the attorneys who drafted it were unable to agree on the interpretation of the financing condition. As a result, the introduction of parol evidence to explain what the partes actually
intended, by reference to surounding circumstances,

conversations and conduct, was clearly admissible. Moreover, respondents pleaded and proved, and the cour found, that the financing was a condition precedent to the contract's becoming effective. Parol evidence was thus

and assign the loan commtment to Chernoff and his

parter.
In any event, Trojan did not build the apartent, but the 19-unt building was built by Chernoff, with a part-

properly admtted, not to vary or contradict the term of
the agreement, but to establish that a condition precedent

existed which had to be fulfilled before the agreement
could become valid, binding and effective.

ner, for his own account. Joseph did not disclose the
transfer to Sheldon or its president, but called in September 1963, to request the (**428) retu of the bids. It

was not until Appel drove by the site in late December
1963, or early January 1964, that he discovered the
building under constrction.

Although the execution of a written agreement supersedes all oral negotiations previous to or contemporaneous with the execution, since these are deemed merged
in the instrent, nonetheless parol evidence may be

admssible for limited puroses. (2) "... The general rule is that oral agreements wil not be penntted to change
the express written provisions of a contract. However, should the taking effect of the contract, or any of its pro-

Sheldon thereupon claimed its right to the payment of its contract fee of $22,000 less the $1,000 paid when the agreement was executed. The tral cour found that a condition precedent to performance under the agreement was the obtaining of financing to build the apartent

visions, (***9) be contingent upon the happenig of a
futue event, parol evidence may be admtted to show the cause of its non-performnce either in whole or in part. This may necessitate the admssion in evidence of a preceding or contemporaneous oral agreement." ( Paratore

building, that such financing had to be suitable to respondents, that respondents needed 100 percent financ-

ing which could not be obtained, and that the condition precedent had not, therefore, been satisfied. In the absence of a suitable constrction loan, all fuher (***7)
performnce under the agreement was excused, and

v. Scharetg, 53 Cal.App.2d 710, 713 (128 P.2d 560);

Gleeson v. Dunn, 113 Cal.App. 347 (298 P. 119);
Fontana v. Upp, 128 Cal.App.2d 205 (275 P.2d 164);

Sheldon was entitled to recover nothing by reason of its
complaint.

Campbell v. Taylor, 189 Ca1.App.2d 236 (11 Cal.Rptr. 271); Clyde Bldg. Assn., Inc. v. Walsh, 248 Cal.App.2d
513,516 (56 Cal.Rptr. 617).
(3) The subject agreement demonstrated clearly
that it (*787) was withi the contemplation of

(1) Appellant contends that the evidence was insufficient to support these findings since the plain language of the contract refutes the finding that 100 percent financing was a condition precedent to continuing per-

both par-

ties that the constrction of the apartent building would
be financed by a constrction loan, as distinguished from
funds to be fushed directly by respondents as owners
of the (**429) propert. Substantial evidence discloses

formnce by either part under the agreement, and that

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that the parties at all times understood and agreed that
constrction could not proceed without a constrction

cause he could not, in effect, finance his full (*788)

loan to cover 100 percent of costs. It is undisputed that Sheldon cooperated, but since no one could obtain the required financing, the condition precedent (***10) was not fulfilled, and neither part became obligated to perform fuher.
(4) Appellant contends that the fee was a sum cer-

contractor's fee. No constrction account was ever
opened, however, and Appel received no assurance that
the contractor's fee could be paid. By that time Goodman's financial position had deteriorated causing him to withdraw and Appel felt the financial condition of the
remaining Trojan parters was uncertain. Respondents

who had invested substantial sums of money in the prop-

tain to which Sheldon was entitled even if the building
was not constrcted. Sheldon would have been entitled

erty (***12) and the project were then forced to sell the
propert to Chernoff, ostensibly because Sheldon with-

to payment of the fee, without performance, had Trojan
termnated the agreement without cause or breached it in any way; neither event occured. Since the only financ-

drew. Substantial evidence supports the trial cour's con-

clusions, and we are not, therefore, at libert to tamper
with the findings. (Stromerson v. Averil, 22 Cal.2d

ing made available within a reasonable time failed to fulfill the condition precedent to rendering the constrction agreement binding, either part was at libert to

808,815 (141 P.2d 732). Appellant, which constred its
obligation to perform as termnated, is entitled neither to damages nor attorney's fees.
(6a) Finally, appellant contends that the tral cour

consider the agreement termated.
(5) Appellant fuher contends that Trojan sought
to avoid the contractual obligation to pay the contractor's

incorrectly determed that it received payment of its
invoice for $297.70. The evidence, however, supports

fee by abandoning the project. The evidence fails to support this contention. As earlier pointed out, it was the
opinon of

the Trojan parters that it would be financially

impossible for them to proceed without adequate financ-

ing. They did not intentionally abandon the project and disenfranchise Sheldon; they simply had no choice. The work of constrction, through no fault of either part, never progressed to the point where any additional payment fell due the contractor. The contractor (***11) received $1,000 from Trojan to cover the prelimiary

the trial cour's finding that this bill was satisfied when Joseph sent to Sheldon a check for the full amount on which appeared the legend "Trojan Towers - paid in full." Appel chose not to deposit that check, but retained it without notifying respondents that he would not accept it as payment in full even though at the time he received it the invoice for $297.70 was the only biling which

Sheldon had sent Trojan. (7) Where a check is presented as payment and not refused, it is the duty of the
payee to retu it without umeasonable delay if he does

work for obtainng financing. It would have been entitled to another payment when the framework was completed,
but the partes were discharged from all fuher duty to

not wish to cash it, in order to avoid the presumption that

it (***13) constituted satisfaction of the obligation. (
Western Pac. Land Co. v. Wilson, 19 Cal.App. 338 (125 P. 1076).) (6b) Respondents discharged their obligation by tendering the check which was accepted by appellant

perform in the absence of financing.

The contract fuher provided that total constrction
costs should be deposited in a bank account established

for that purose, or that in lieu of cash the owner might

provide a constrction loan cornttent for the full
amount. In the event actual constrction costs exceeded

without complaint; appellant cannot (**430) now be heard to complain. (Hohener v. Gauss, 221 Cal.App.2d 797 (34 Cal.Rptr. 656); Duncan v. Standard Acc. Ins.
Co., 1 Cal.2d 385, 390 (35 P.2d 523); Conde v. Dreisam

Gold Min. Co., 3 Cal.App. 583, 589 (86 P. 825); Civ.
Code, § 1501; Code Civ. Proc., § 2076.)
The judgment is affired.

the estimate, Sheldon agreed to accept a note individually guaranteed by the parters. Appeal advised Joseph

that the partership would have to dedicate fuds in excess of the loan cornttent on the 19-unit building be-

Wood P.J., and Lilie 1., concured.

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LEXSEE 100 CAL APP 4TH 44

STOREK & STOREK, INC., et al., Plaintiffs and Appellants, v. CITICORP REAL ESTATE, INC., Defendant and Appellant.
No. A093724

COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT, DIVISION FIVE
100 Cal. App. 4th 44; 122 CaI. Rptr. 2d 267; 2002 CaI. App. LEXIS 4387; 2002 CaI. Daily Op. Service 6284; 2002 Daily Journal DAR 7838

July 15, 2002, Decided
July 15, 2002, Filed

NOTICE: cation. .

(*** 1) Opinon certfied for partal publi-

the project budget was in balance should be evaluated for

both reasonableness and good faith. However, the appellate cour held that the budget determnation, which was

* Pursuant to Californa Rules of Cour, rules

976(b) and 976.1, this opinon is certfied for
publication with the exception of

a condition precedent to defendant's performnce under
the contract, was a matter involving financial calculations, and thus was properly evaluated by an objective test--whether a reasonable person would be satisfied. The cour held that no obligation to act in good faith could be
implied to contradict or limit the express condition
precedent. The only available challenge to defendant's

part II.B.

PRIOR HISTORY: Superior Cour of Alameda
County, No. 7320277, Richard A. Hodge, Judge.

DISPOSITION: The judgment is reversed. Costs on
appeal are awarded to Citicorp.

SUMMARY:

determation was a challenge to its reasonableness, and such a challenge was a claim of nonperformnce of the contract's express term, not a claim of breach of the implied covenant. (Opinion by Stevens, J., with Jones, P. 1., and Simons, J., concuring.)
HEADNOTES

CALIFORNIA OFFICIAL REPORTS SUMMARY

After a real estate development project failed, the
disappointed investors sued a lender that had refused to

CALIFORNIA OFFICIAL REPORTS HEADNOTES Classified to Californa Digest of Offcial Reports
(la) (lb) (Ie) (ld) (Ie) Contracts § 45--Actions--

continue financing the project, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, and fraud by concealment. The ffrst trial resulted in a hung jury. In a second trial, the jur found defendant liable for both fraud and
breach of the implied covenant of good faith and fair dealing, awarding damages on both causes of action, and the trial court entered judgment thereon. (Superior Cour
of Alameda County, No. 7320277, Richard A. Hodge,

Instructions--Breach of Implied Covenant of Good
Faith and Fair Dealing-- Where Duty to Act in Good

Faith Conflcts with Express Contractual Term. --In
an action by investors in a failed real estate development project against a lender that refused to continue financing the project, the trial cour erred in instrcting the jury, as to plaintiffs' cause of action for breach of the implied covenant of good faith and fair dealing, that defendant's

Judge.)

The Cour of Appeal reversed the judgment in its entirety. In the published portion of the opinon, the cour held that the judgment in favor of plaintiffs on the cause of action for breach of the implied covenant of good faith

determation whether the project budget was in balance should be evaluated for both reasonableness and good
faith. The budget determnation, which was a condition

and fair dealing had to be reversed. The trial cour instrcted the jury that defendant's determnation whether

precedent to defendant's performnce under the contract, was a matter involving financial calculations, and thus

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was properly evaluated by an objective test--whether a reasonable person would be satisfied. No obligation to
act in good faith could be implied to contradict or limit the express condition precedent. The only available chal-

the reasonableness of the decision, the cours wil not
examie good faith. The choice of the objective or sub-

lenge to defendant's determation was a challenge to the
reasonableness of that determnation, and such a chal-

jective test depends on the intent of the parties. In the absence of a specific expression, the preference of the
law is for the less arbitrary reasonable person standard. It is especially preferable when factors of commercial value or financial concern are involved.
(6) Contracts § 44--Performance--Breach--Implied

lenge was a claim of nonperformnce of the contract's
express term, not a claim of breach of the implied cove-

nant. Thus, the jury's verdict in favor of plaintiffs had to
be reversed.

Covenant of Good Faith and Fair Dealing--Subjective

(See 1 Witkin, Summary of Cal. Law (9th ed. 1987)
Contracts, § 734.)

and Objective Components. --The question whether a duty to act in good faith should be implied must be distiguished from the question whether a covenant of good

(2) Contracts § 25--Construction and Interpretation-Function of Courts--Questions of Law. --Where there

faith that is implied has been breached. On the latter
question, the concepts of objective reasonableness and

is no extrinsic evidence to indicate conficting interpreta-

subjective good faith merge. The implied covenant of
good faith and fair dealing has both a subjective and ob-

tions of the contract at issue, the appellate cour must
make an independent determnation as to the obligations
of each part.

jective component. A part violates the covenant if it
subjectively lacks belief in the validity of its act or if its conduct is objectively umeasonable.
(7) Contracts § 44--Performance--Breach--Implied

(3) Contracts § 44--Performance--Breach--Implied

Covenant of Good Faith and Fair Dealing. --Every
contract imposes on each part a duty of good faith and

Covenant of Good Faith and Fair Dealing--As Supporting Contract Action. --A breach of the implied

fair dealing in the performnce of the contract such that
neither part may do anything that will have the effect of
destroying or injuring the right of the other part to re-

ceive the frits of the contract. However, the implied

covenant of good faith and fair dealing cannot contradict
the express term of the contract. The scope of conduct
prohibited by the covenant is circumscribed by the pur-

covenant of good faith and fair dealing wil, by itself, support a contract action. Were it otherwise, the covenant would have no practical meaning, for any breach thereof would necessarily involve breach of some other
term of the contract.

poses and express term of the contract.
(4) Contracts § 41--Performance--Conditions Prece-

dent--Waiver--Retraction. --In the absence of consideration or estoppel, a waiver of a condition precedent

COUNSEL: Bien & Summers, Elliot L. Bien; Joseph R. Grodin; Tuttle & Taylor, Douglas W. Beck, E. Robert Wallach and Marshall W. Krause for Plaintiffs and Appellants.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,

may be retracted and the condition may be restored at
any time.
(5) Contracts § 41--Performance--Conditions Prece-

dent--Party's Satisfaction--Subjective and Objective
Tests. --Where a contract provides that the satisfaction
of one of the partes is a condition precedent to that

Jerome B. Falk, Jr., Steven L. Mayer, Kimberly A. Bliss; Shearmn & Sterling, R. Paul Wickes, Amanda J. Gallagher, Adam S. Hakk and Meghan O. Powell for Defendant and Appellant and for Defendant and Respondent.

part's performnce, two different tests are recogned:
(1) the part may make a purely subjective decision but it must be in good faith; or (2) the part must make the decision in accordance with an objective standard of reasonableness. In this context, a decision is uneasonable when it is arbitrary, capricious, or lackig in evidentiary
support. A lack of good faith, on the other hand, suggests a moral quality, such as dishonesty, deceit, or unfaithfulness to duty. When the promisor has the power to make a purely subjective decision, that decision must be made in

JUGES: (Opinon by Stevens, 1., with Jones, P. 1., and Simons, J., concuring.)
OPINION BY: STEVENS

OPINION

good faith, but the cours wil not examie its reasonableness. Conversely, where the validity of the promisor's decision of satisfaction or dissatisfaction rests on

(*47) (**270) STEVENS, J. This lawsuit arises out of a failed real estate development project. The disappointed investors sued the lender, who had refused to contiue financing the project, alleging breach of the implied covenant of good
faith and fair dealing and fraud in the inducement of the

loan agreement. The jury awarded plaintiffs (***2) $

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900,001 on the contract claim and $ 40.92 million for
fraud. We conclude that the judgment must be reversed.

constrction and financing, with the funding to come

from a combination of the Citicorp loan, equity contributions and Old Oakland's operatig income. The equity

i. FACTS
Three limted parterships formed and controlled by

conu'ibutions included $ 3.8 million to be obtained from

Glenn and Richard Storek (the Storeks) and collectively

referred to as "Old Oakland" undertook a redevelopment project in downtown Oakland to restore and convert several 19th-centuy Victorian buildings into offce and re-

tail space. Storek & Storek, Inc., also owned by .the
Storeks, was the project architect, developer, and building manager.

refinancing the Storeks' propert at 530 Bush Street plus an additional $ 1 million to be raised by Old Oakland though a tax credit syndication. In the period pri~r to signing of the loan agreement, Citicorp made two bndge loans to Old Oakland, totaling $ 5.1 million, to enable constrction to continue. When the propert at 530 Bush
Street was eventually refinanced (by an umelated

lender), the bridge loans were repaid and $ 3.8 million in capital was put into Old Oakland.
Citibank (the parent corporation) already held deeds

To fund the project, Old Oakland borrowed $ 30 million in 1984 from the City of Oakland. The city, in
tu raised that money by issuing industrial development

of trst on the Old Oakland project propert and the San

bonds backed by letters of credit from (**271) Citibank. i As security for Old Oakland's agreement to reimburse

Citibank for any draws on the (*48) letters of credit,
Citibank obtained a deed of trst on Old Oakland's prop-

Francisco propertes as security for the bonds. As security for the loan agreement, Citicorp received a second deed of trst on the Old Oakland propert and junor liens on the propertes at (***5) 530 Bush Street and 50
Grant A venue. Moreover, the loan agreement gave Citi-

ert and junor deeds of trst on two pieces of San Fran-

cisco propert owned by other parterships controlled by

corp tight control over disbursements of the loan proceeds to ensure adherence to the project budget. Each

the Storeks--a commercial building at 530 Bush Street
and another at 50 Grant Avenue.

month, Old Oakland was required to submit a request for
disbursement of loan funds together with progress (*49)

1 The city had initially authorized $ 55 millon for a larger project, but ultimately the city issued only $ 30 million in bonds.

schedules and a curent (revised) project budget. (Loan agreement, § 3.01.) 3 Old Oakland represented ~at the

(***3) By 1988 it became clear that the bond fuds would be insuffcient to complete the project, and Old
Oakland approached Citicorp Real Estate, Inc. (Citicorp), a subsidiary of Citibank, to request a loan. In August
1989 the partes entered into a constrction loan agree-

loan fuds, together with additional fuds provided by Old Oakland, would "at all times be suffcient" to complete the project. The loan agreement authoried Citicorp to require Old Oakland to raise additional capital "(i)f at any time the Lender determes (in the Lender's sole judgment) that such fuds to be deposited are not or s~all

not be suffcient to pay all of such costs and to sattsfy
such interest obligations. . . ." (§ 2.02(b ).)

ment (loan agreement) by which Citicorp agreed to lend Old Oakland up to $ 8.9 million. 2

2 At that time the Storeks had various grievances with Citibank, including claims that the bank had demanded excessive collateral for its
letters of credit, that it had refused to back the full

3 Unless otherwise indicated, all fuher section
references refer to the constrction loan agree-

ment, dated August 18, 1989.
Under section 3.02 of the loan agreement, (***6) Citicorp's obligation to make any (**272) disbursements
was subject to a number of conditions precedent, includ-

$ 55 million bond authorization, and that it had endangered the tax-exempt status of the bonds by

forcing Old Oakland to use proceeds from the
sale of limited partership interests before any

more bond proceeds were disbursed. Under the
term of the loan agreement, Old Oakland re-

ing the following conditions significant to this appeal: First and foremost, the project budget was required t