Court Opinion

ID: 3154320
Source: CourtListenerOpinion
Date Created: 2015-11-12 21:02:22.199277+00
Date Added: 2024-06-11T11:57:03.318747
License: Public Domain

Filed 11/12/15 717 Nogales v. Zheng CA2/7
                  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     SECOND APPELLATE DISTRICT

                                                DIVISION SEVEN

717 NOGALES, LLC,                                                    B258916

         Plaintiff and Respondent,                                   (Los Angeles County
                                                                     Super. Ct. No. BC464912)
         v.

CHI ZHENG,

         Defendant and Appellant.

         APPEAL from a judgment of the Superior Court of Los Angeles County, Edward
Simpson, Judge. Affirmed.
         Law Offices of Stephen R. Wade, Stephen R. Wade and W. Derek May for
Defendant and Appellant.
         The Byrne Law Office and John P. Byrne for Plaintiff and Respondent.
                                                   _____________
       Chi Zheng appeals from the judgment entered after a bench trial on 717 Nogales,
LLC’s claims for breach of lease, fraud and negligent misrepresentation. The trial court
found Zheng had acted in bad faith in agreeing to and signing a lease purportedly on
behalf of his corporate principal, MotorScience Enterprise, Inc. (MEI), knowing MEI had
dissolved nearly a year earlier and could not authorize the transaction or meet its
obligations under the lease. Without challenging any of the court’s factual findings,
Zheng contends the court erred as a matter of law in holding him personally liable for
breaching the lease. We affirm.
                 FACTUAL AND PROCEDURAL BACKGROUND
       In July 2007 MEI entered into a lease with 717 Nogales for a term of three years.
Unbeknownst to 717 Nogales, in November 2009 Zheng filed a certificate of dissolution
with the Secretary of State in which he declared under penalty of perjury that MEI had
been dissolved and all of its known debts paid and assets distributed. Despite MEI’s
dissolution, on September 1, 2010 Zheng signed a second amendment to the lease
purportedly on MEI’s behalf, extending the lease term for another three years, through
November 30, 2013. After MEI failed to meet its rental obligations under the second
amendment to the lease, 717 Nogales obtained an unlawful detainer judgment for
possession and past due rent against MEI and Zheng and later filed the instant action
against both of them for breach of lease, fraud and negligent misrepresentation.
                                                                         1
717 Nogales voluntarily dismissed MEI from this action prior to trial.
       At trial 717 Nogales claimed Zheng was personally liable under the lease. Zheng
disputed he had executed the lease and insisted a subordinate had signed his name
without his authorization. In supplemental briefs submitted at the trial court’s request on
the issue of Zheng’s personal liability, 717 Nogales argued Zheng was personally liable

1      The very limited record Zheng provided on appeal does not include the lease
agreement, the complaint or a transcript of the trial; and no statement of decision was
requested or issued. Our factual recitation borrows liberally from the court’s July 8, 2014
“ruling on submitted matter.”

                                             2
                                                                 2
either as an alter ego of MEI or under Civil Code section 2343, which makes an agent
responsible to third parties as a principal when the agent entered into a written contract in
the name of the principal without a good faith belief he or she had the authority to do so.
Zheng argued he could not be held personally liable for MEI’s breach of lease either
under section 2343 or under various provisions of the Corporations Code. The court
rejected Zheng’s arguments and found he had acted in bad faith by signing the lease as an
agent for MEI knowing MEI did not, and could not, authorize the transaction. The court
concluded Zheng could be held personally liable under the lease agreement pursuant to
section 2343 as if he were a party to the lease. The court entered judgment for
717 Nogales and against Zheng for $178,073.61, exclusive of costs and attorney fees.
                                      DISCUSSION
       1. Standard of Review
       Without challenging any of the court’s factual findings, Zheng contends the court
erred in finding him personally liable under section 2343. He insists other provisions of
the Civil Code and the Corporations Code either prohibit holding him personally liable
for an agreement he signed on behalf of his principal or limit the amount of damages for
which he may be held accountable. To the extent these arguments are directed to the
interpretation and application of statutes to undisputed facts, they present questions of
law subject to de novo review. (Smith v. Superior Court (2006) 39 Cal.4th 77, 83;
People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 432.) To the
extent Zheng’s legal arguments rest on factual assumptions in this case, however, Zheng
did not request, and the trial court did not issue, a statement of decision. Accordingly,
under the doctrine of implied findings, we infer all findings in favor of the judgment.
(See In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133-1134 [judgment is
presumed to be correct; absent a statement of decision making specific findings,
reviewing court will infer the trial court made implied factual findings on all issues

2      Statutory references are to this code unless otherwise indicated.

                                              3
necessary to support the judgment]; Fladeboe v. American Isuzu Motors, Inc. (2007)
150 Cal.App.4th 42, 59-60.)
       2. The Court Did Not Err in Holding Zheng Personally Liable as a Principal
          Under the Lease Pursuant to Section 2343
       Ordinarily a personal judgment for damages for breach of contract may not be
obtained against an agent who entered into a contract on behalf of a disclosed principal.
(Filippo Industries, Inc. v. Sun Ins. Co. (1999) 74 Cal.App.4th 1429, 1433; see Lippert v.
Bailey (1966) 241 Cal.App.2d 376, 382 [“[w]here the signature as agent and not as a
principal appears on the face of the contract, the principal is liable and not the agent”].)
                        3
However, section 2343 makes an agent who enters into a contract in the name of his or
her principal “without believing in good faith that he [or she] has the authority to do so”
personally liable as if he or she were the principal. (Jeppi v. Brockman Holding Co.
(1949) 34 Cal.2d 11, 18-19 [“[a]lthough one is not liable personally on a contract
executed by him as the officer of a corporation, he may, if he acted without authority, be
held to account on a theory of breach of the implied warranty of authority[,] Civ[il] Code,
                4
[section] 2342,[ ] or, if bad faith is found, as a principal [under] Civ[il] Code sec[tion]
2343”]; Ferroni v. Pacific Finance Corp. (1943) 21 Cal.2d 773, 778 [same]; see Kurtin v.
Elieff (2013) 215 Cal.App.4th 455, 458 (Kurtin) [“Liability under section 2343 requires
either (1) the lack of a good faith belief on the agent’s part that ‘he has authority’ to bind
‘his principal,’ or (2) an act by the agent that is ‘wrongful’ in its nature. Case law has
equated ‘wrongful’ with tortious.”].)
       Zheng contends Civil Code section 2343 does not apply to him because, as MEI’s
corporate director, he was permitted to “wind up” the affairs of MEI, both before and

3       Section 2343 provides, “One who assumes to act as an agent is responsible to third
persons as a principal for his acts in the course of his agency, in any of the following
cases, and in no others: [¶] . . . [¶] 2. When he enters into a written contract in the name
of his principal, without believing, in good faith, that he has the authority to do so; or [¶]
3. When his acts are wrongful in their nature.”
4      Section 2342 provides, “One who assumes to act as an agent thereby warrants to
all who deal with him in that capacity that he had the authority which he assumes.”

                                               4
after the filing of the certificate of dissolution. (See Corp. Code, § 1903, subd. (b)
[“[w]hen a voluntary proceeding for winding up has commenced, the board shall
continue to act as a board and shall have full powers to wind up and settle its affairs, both
before and after the filing of the certificate of dissolution”].) Zheng’s reliance on
section 1903 of the Corporations Code is misplaced. We may infer, consistent with the
court’s minute order, the trial court made a factual finding that Zheng did not sign the
lease as part of winding up and settling the defunct corporation’s affairs but rather to
shield himself from personal liability following MEI’s inevitable default. (See
Acquire II, Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959, 970
[articulating doctrine of implied findings].) Under those factual circumstances, which
Zheng expressly does not, and cannot, challenge, Corporations Code section 1903 is not a
barrier to holding Zheng personally liable for his bad faith conduct under section 2343.
       3. Zheng Has Forfeited the Argument His Personal Liability Is Circumscribed by
          Section 3318
       Section 3318 provides, “The detriment caused by the breach of a warranty of an
agent’s authority, is deemed to be the amount which could have been recovered and
collected from his principal if the warranty had been complied with, and the reasonable
expenses of legal proceedings taken, in good faith, to enforce the act of the agent against
his principal.” Relying on section 3318, Zheng argues, even if he can be held personally
liable on the lease, any damages for the breach of his agency warranty under section 2343
must be limited to what could actually be “recovered and collected” from MEI. Since
MEI dissolved in 2009 and has no assets, Zheng asserts, nothing can be “collected and
recovered” from MEI under the contract. In other words, because MEI is judgment
proof, he is as well.
       There is some question whether section 3318 applies only to innocent or good
faith breaches of an agent’s warranty of authority (for example, because of a
misunderstanding or miscommunication between principal and agent) or applies equally
to bad faith acts by the agent within the meaning of section 2343, subdivision 2. In
Kurtin, supra, 215 Cal.App.4th at page 482, Division Three of the Fourth District labeled

                                              5
this question one of first impression in California and concluded, albeit in dicta, that
section 3318 applied to bad faith breaches of warranty as well as innocent breaches.
(Kurtin, at pp. 483-485 [explaining the “as principal” language in section 2343 addressed
the personal liability of the agent, not the measure of damages to which he or she is
accountable].) Otherwise, the court explained, the third party who believed in the agent’s
warranty would be able to recover more than the benefit of his or her bargain. (See
Kurtin, at p. 485 [“[s]ection 3318 sets forth a measure of damages that indeed reflects the
benefit of the bargain, together with the commercial risks inherent in that bargain, which
Kurtin actually made,” italics omitted].)
       Although we have difficulty reconciling the Kurtin court’s analysis of
section 2343 with the Supreme Court’s language in Jeppi v. Brockman Holding Co.,
supra, 34 Cal.2d at pages 18 to 19, quoted above, we need not determine whether
section 3318 applies here or whether, contrary to the analysis in Kurtin, section 2343,
subdivision 2, makes the agent fully liable on the entire underlying contract “as a
principal” (here, for example, for breach of the agreement to pay rent), and not simply for
breach of the warranty of authority. Zheng did not raise the issue of section 3318’s
applicability below, and it is properly deemed forfeited. (See In re Sheena K. (2007)
40 Cal.4th 875, 880 [“‘“[n]o procedural principle is more familiar to this Court than that
a constitutional right,” or a right of any other sort, “may be forfeited in criminal as well
as civil cases by the failure to make timely assertion of the right before a tribunal having
jurisdiction to determine it”’”]; Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d
180, 184-185, fn. 1 [it is fundamental that a reviewing court will ordinarily not consider
claims made for the first time on appeal which could have been but were not presented to
the trial court]; Perez v. Grajales (2008) 169 Cal.App.4th 580, 591-592 [“‘[a]ppellate
courts are loath to reverse a judgment on grounds that the opposing party did not have an
opportunity to argue and the trial court did not have an opportunity to consider’”].)
       Zheng contends the issue is one of law and urges that we exercise our discretion to
consider it for the first time on appeal. (See In re Abram L. (2013) 219 Cal.App.4th 452,
462 [reviewing court has discretion to consider pure questions of law raised for the first

                                              6
time on appeal]; Rayii v. Gatica (2013) 218 Cal.App.4th 1402, 1409 [same].) We decline
to do so because Zheng’s so-called “purely legal” argument rests on a questionable
factual assumption. Even under the analysis in Kurtin, section 3318 would not apply if
Zheng had committed a fraud. (See Kurtin, supra, 215 Cal.App.4th at p. 486
[section 3318 does not limit damages “in cases where the purported agent’s breach of his
or her implied warranty of authority comes under one of the two other subdivisions of
section 2343, namely receiving credit personally, or is combined with his or her own
independent tort”]; see also Bock v. Hansen (2014) 225 Cal.App.4th 215, 230 [“[a]n
agent or employee is always liable for his or her own torts, whether the principal is liable
or not, and in spite of the fact that the agent acts in accordance with the principal’s
directions”]; Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003)
107 Cal.App.4th 54, 68-69 [same].) Recognizing this limitation, Zheng insists
717 Nogales abandoned its fraud claim at trial and, as a result, the court made no findings
of fraud. Other than Zheng’s own assertions, however, nothing in the record
affirmatively supports this characterization. Moreover, even if 717 Nogales did elect to
abandon its fraud claim at some point, had Zheng raised the section 3318 issue in a
timely fashion in the trial court, 717 Nogales may well have advanced its fraud claim to
counter that argument, as it vigorously does on appeal. Under these circumstances we
decline to exercise our discretion to consider the issue for the first time on appeal. (See
Rayii, at p. 1409 [although reviewing court has “the discretion to consider for the first
time on appeal an issue of law based on undisputed facts,” “we will not consider a new
issue where the failure to raise the issue in the trial court deprived an opposing party of
the opportunity to present relevant evidence”].)
       4. Corporations Code Section 2011 Does Not Foreclose This Action or Provide
          the Sole Remedy for MEI’s Default in These Circumstances
       Zheng alternatively contends Corporations Code section 2011, subdivision (b),
which permits a creditor of a dissolved corporation to hold shareholders personally liable
for their respective shares of the dissolved corporation’s distributed assets, provides the

                                              7
                                                                     5
exclusive remedy for holding Zheng personally liable in this case. He misapprehends
the nature of the statute and 717 Nogales’s claim. Although 717 Nogales could have
proceeded against MEI and recovered against Zheng personally as MEI’s shareholder if
Zheng had received assets from MEI following its dissolution (see Corp. Code, § 2011,
subd. (b)), that course of action was not its only remedy. As the trial court recognized,
the gravamen of 717 Nogales’s action was against Zheng for his own fraud and bad faith,
making him personally liable for his own wrongful conduct independent of MEI’s
liability or Zheng’s status as MEI’s former shareholder.
                                      DISPOSITION
       The judgment is affirmed. 717 Nogales is to recover its costs on appeal.

                                                   PERLUSS, P. J.

       We concur:

              ZELON, J.

              SEGAL, J.

5       Corporations Code section 2011 provides, “(a)(1) Causes of action against a
dissolved corporation, whether arising before or after the dissolution of the corporation,
may be enforced against any of the following: [¶] (A) Against the dissolved
corporation, to the extent of its undistributed assets . . . . [¶] (B) If any of the assets of
the dissolved corporation have been distributed to shareholders, against shareholders of
the dissolved corporation to the extent of their pro rata share of the claim or to the extent
of the corporate assets distributed to them upon dissolution of the corporation, whichever
is less.”

                                              8