Cardinal v. Lupo

• Court: District Court, N.D. California
• Decided: April 7, 2020
• Docket: 3:18-cv-00272
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 CHRISTOPHER CARDINAL, et al., Case No. 18-cv-00272-JCS

8 Plaintiffs, ORDER DENYING MOTIONS FOR 9 v. ATTORNEYS’ FEES AND COSTS AND MOTION FOR NEW TRIAL 10 JOHN LUPO, et al., Re: Dkt. Nos. 209, 211, 212 Defendants. 11

12 13 I. INTRODUCTION 14 This case arises from the sale of a kitchen remodeling business. Plaintiffs Christopher 15 Cardinal and Kitchen Experts of California, Inc. asserted claims for intentional misrepresentation, 16 negligent misrepresentation, and breach of contract against Defendants John Lupo and Kitchen 17 Fantastic, Inc., among other claims that were not presented to the jury at trial.1 Lupo asserted a 18 counterclaim for breach of contract. After the Court largely denied Defendants’ motions for 19 summary judgment, see Order Re Mot. for Sanctions & Mots. for Summ. J. (dkt. 134),2 a jury 20 found Lupo liable for damages of $250,000 for intentional misrepresentation, did not reach the 21 alternative claim for negligent misrepresentation, and found in Cardinal’s favor on Cardinal’s 22 claim for breach of contract but assessed no damages for that claim. See Jury Verdict (dkt. 197). 23 The jury found Cardinal not liable on Lupo’s counterclaim. Id. 24 1 The parties agreed for simplicity to present their claims at trial as between Cardinal and Lupo 25 individually, with any judgment to be entered jointly and severally either against Cardinal and Kitchen Experts or against Lupo and Kitchen Experts. See Dec. 6, 2019 Civ. Trial Minutes (dkt. 26 182). This order follows that convention and at times uses “Cardinal” to refer collectively to Christopher Cardinal and Kitchen Experts, and “Lupo” to refer to collectively to John Lupo and 27 Kitchen Fantastic. The distinctions between the two plaintiffs and between the two remaining 1 Cardinal now moves for a new trial on the issue of damages for his intentional 2 misrepresentation claim, and Cardinal and Lupo each move for attorneys’ fees and costs, with 3 each arguing that he “prevailed” for the purpose of the fee-shifting provision of the Stock 4 Purchase Agreement that governed the sale. The Court finds the motions suitable for resolution 5 without oral argument and VACATES the hearing set for April 10, 2020. For the reasons 6 discussed below, all three motions are DENIED, the jury’s verdict stands, and each party shall 7 bear his own attorneys’ fees and costs.3 8 II. MOTION FOR NEW TRIAL 9 A. Legal Standard 10 Under Rule 59(a)(1) of the Federal Rules of Civil Procedure, a court “may, on motion, 11 grant a new trial on all or some of the issues.” Fed. R. Civ. P. 59(a)(1). A court may grant a new 12 trial “if the verdict is contrary to the clear weight of the evidence, is based upon false or perjurious 13 evidence, or to prevent a miscarriage of justice.” Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 14 (9th Cir. 2007). A new trial is appropriate where, “‘having given full respect to the jury’s 15 findings, the judge on the entire evidence is left with the definite and firm conviction that a 16 mistake has been committed.’” Landes Constr. Co. v. Royal Bank of Canada, 833 F.2d 1365, 17 1371–72 (9th Cir. 1987) (quoting a treatise). The court is not required to view the trial evidence in 18 the light most favorable to the verdict when it considers a Rule 59(a) motion. Experience Hendrix 19 L.L.C. v. Hendrixlicensing.com Ltd., 762 F.3d 829, 842 (9th Cir. 2014). Instead, “the district court 20 can weigh the evidence and assess the credibility of the witnesses.” Id. “Ultimately, the district 21 court can grant a new trial under Rule 59 on any ground necessary to prevent a miscarriage of 22 justice,” id. (citing Murphy v. City of Long Beach, 914 F.2d 183, 187 (9th Cir. 1990)), but mere 23 “[d]oubts about the correctness of the verdict are not sufficient grounds for a new trial,” Landes 24 Constr., 833 F.2d at 1372, and “a district court may not grant or deny a new trial merely because it 25 would have arrived at a different verdict,” United States v. 4.0 Acres of Land, 175 F.3d 1133, 1139 26 (9th Cir. 1999). 27 1 B. Cardinal Is Not Entitled to a New Trial on Damages 2 The jury awarded Cardinal $250,000 on his claim for intentional misrepresentation. The 3 Court instructed the jury to calculate damages for that claim by “determin[ing] the fair market 4 value of what Christopher Cardinal gave [i.e., the $2,000,000 purchase price that Cardinal paid for 5 Kitchen Experts] and subtract[ing] from that amount the fair market value of what he received 6 [i.e., Kitchen Experts],” and that Cardinal could “also recover amounts that he reasonably spent in 7 reliance on John Lupo’s false representation if those amounts would not otherwise have been 8 spent.” See Jury Instr. (dkt. 189) No. 31. Cardinal contends that the jury failed to follow the 9 Court’s instructions and the law in assessing damages for Lupo’s intentional misrepresentation 10 because “[t]here was no evidence that the damages caused by Lupo’s fraud was other than 11 $1,580,297.53.” Mot. for New Trial (dkt. 212) at 1. 12 Cardinal reaches that figure based on his expert witness Steven Boyles’s testimony that the 13 fair market value of the company was as most $590,000 (or $1,400,000 less than the $2,000,000 14 purchase price) and Lupo’s expert witness’s acknowledgment that Lupo failed disclose trade debt 15 totaling $170,297.35.4 Id. at 3–4. Cardinal suggests that the jury might have reached its $250,000 16 damages award by treating Cardinal’s testimony that he had at one point offered to purchase 17 Kitchen Experts for $1,750,000 as representing the fair value of the company. Id. at 6. According 18 to Cardinal, such a conclusion is not supported by that testimony because Cardinal was prepared 19 to pay $1,750,000 only if he received certain documents to conduct due diligence. Id. at 4–5. 20 While a jury’s award of damages must generally fall within the range supported by the 21 evidence, the jury need not accept a particular figure offered by an expert witness, or even reach a 22 total that “fall[s] between the extremes of expert appraisals without regard to other testimony that 23 may bear on the [disputed] valuation.” 4.0 Acres of Land, 175 F.3d at 1141. Lupo argues that the 24 because the jury was free to believe any amount—or none—of Boyles’s testimony, it could 25 reasonably have determined that the true value of Kitchen Experts was $1,750,000 and Cardinal’s 26

27 4 Cardinal’s claim that the correct measure of damages should have included 53 cents appears to 1 damages were only $250,000. Opp’n to New Trial (dkt. 219) at 5–7. Lupo also argues that tax 2 returns entered in evidence showing higher net income for the years before the sale, as well as his 3 own expert’s testimony discussing the significance of those tax returns, could support a lower 4 damages award, or even a conclusion that Cardinal paid less than the fair value of the company 5 and thus suffered no damages. Id. at 7–8.5 Cardinal objects to that approach, arguing that the 6 methodology of estimating value from the net income stated in the tax returns was not presented to 7 the jury, none of Lupo’s proposed calculations produce the same damages figure as the jury, and 8 the tax returns were “utterly discredited” by the “undisputed fact that Lupo falsely reported his 9 payroll practices to the IRS in each of those years.” Reply re New Trial (dkt. 222) at 10–11. 10 Lupo is correct that both parties’ expert witnesses testified that a twenty percent risk-based 11 rate of return was reasonable to apply here, which results in a valuation equivalent to five times 12 the annual net income, and that Cardinal himself testified to applying effectively the same formula 13 to determine the most he was willing to pay for the company. See Opp’n to New Trial at 7; Trial 14 Tr. at 348:4–9 (Cardinal), 849:14–850:1 (Boyles), 1083:22–1084:7 (Lupo’s expert witness Robert 15 Anderson). Lupo’s expert witness Robert Anderson also testified that the tax returns from before 16 the sale, which state larger net income values and at least two of which were admitted as 17 evidence,6 would be a more reliable source than the figures that Cardinal’s expert witness used 18 from after the sale. Trial Tr. at 1086:8–1087:2.7 Even if the jury determined that Lupo was 19

20 5 Aside from his substantive arguments supporting the jury’s damages figure, Lupo also contends that Cardinal’s motion is untimely under Rule 59(e) (despite the parties’ stipulation and the 21 Court’s order allowing Cardinal to file the motion when he did) and that a new trial could not feasibly be limited to only the issue of damages. While the Court does not reach those arguments, 22 Cardinal is likely correct that Rule 6(b)’s stricture that a “court must not extend the time to act under Rules . . . 59(b), (d), and (e)” is subject to waiver, and that Lupo’s stipulation to the later 23 filing date constitutes waiver. See Reply re New Trial (dkt. 222) at 2–6 (citing, e.g., Legg v. Ulster County, 820 F.3d 67, 78–79 (2d Cir. 2016)). 24 6 Lupo’s present arguments rely on the tax returns from 2014 (Exhibit 71), 2015 (Exhibit 73), and 2016 (Exhibit 78). Although Exhibits 71 and 73 were admitted, Exhibit 78 does not appear to 25 have been admitted. See Master Index (dkt. 183-1) at 5. Neither party addresses this issue, but the Court concludes that the 2014 and 2015 tax returns are sufficient to support the jury’s award of 26 damages. 7 Cardinal moved to strike, and the Court instructed the jury to disregard, Anderson’s subsequent 27 opinion as to the value of the business that he would derive from those tax returns. Trial Tr. at 1 unscrupulous, it might have credited Anderson’s testimony that business owners usually seek to 2 minimize the net income reported to the IRS in order to minimize their tax liability, and thus 3 might reasonably have determined that the income stated in the tax returns represented a 4 conservative valuation of the business. See id. at 1086:19–23. Using the net income from the 5 2014 tax return alone would result in a valuation of $1,112,605 and damages of $887,395; while 6 using the net income from the 2015 tax return alone would result in a valuation of $2,088,505, 7 indicating that Cardinal paid less than the company was worth and suffered no damages. 8 Neither Lupo’s failure to argue in closing that the jury could multiply net income from a 9 tax return by five to reach a valuation, nor the fact that the jury’s figure does not perfectly align 10 with any particular calculation offered by either party, supports setting aside the jury’s award and 11 granting a new trial. The multiply-by-five method endorsed by both experts is straightforward and 12 well within the jury’s competence. As for the particular value that the jury reached, “it is well- 13 established under California law that while the fact of damages must be clearly shown, the amount 14 need not be proved with the same degree of certainty, so long as the [finder of fact] makes a 15 reasonable approximation.” Robi v. Five Platters, Inc., 918 F.2d 1439, 1443 (9th Cir. 1990). 16 Accordingly, although Cardinal is correct that the jury could not permissibly set damages based on 17 mere speculation, the fact that the damages award does not precisely correspond to any method of 18 calculation proposed by either party is not a significant cause for concern. Assuming that the jury 19 credited the repeated testimony that quintupling a company’s net income provides a reasonable 20 estimate of value, it might reasonably have approximated $350,000 as Kitchen Expert’s expected 21 net income (one-fifth of the $1,750,000 valuation that corresponds to the $250,000 damages 22 award) based on whatever weighting the jury considered appropriate for the $222,521 net income 23 reported for 2014, the $417,701 net income reported for 2015, and the $117,000 net income that 24 Boyles assessed based on 2018 data, as well as any other evidence that the jury might have 25 deemed relevant to this inquiry. 26 The Court declines to set aside the jury’s damages award and DENIES Cardinal’s motion 27 for a new trial. 1 III. MOTIONS FOR ATTORNEYS’ FEES 2 A. Legal Standard for Contractual Attorneys’ Fees 3 Although parties to litigation generally bear their own attorneys’ fees, contractual clauses 4 awarding fees to the prevailing party in actions on the contract are enforceable under California 5 law. See Cal. Civ. Code § 1717(a); Cal. Civ. Proc. Code § 1021. Courts applying California law 6 will also respect broader agreements between parties to award fees to the prevailing party in tort 7 claims as well as contract claims, and apply ordinary principles of contract interpretation to 8 determine whether a particular attorneys’ fees clause encompasses claims beyond those to enforce 9 the contract. See, e.g., Gil v. Mansano, 121 Cal. App. 4th 739, 742–44 (2004). While the 10 prevailing party is generally “the party who recovered a greater relief in the action on the 11 contract,” a “court may also determine that there is no party prevailing on the contract.” Cal. Civ. 12 Code § 1717(b)(1).8 13 B. Neither Party Is Entitled to Attorneys’ Fees 14 The attorneys’ fees provision of the Stock Purchase Agreement governing the sale of 15 Kitchen Experts states:

16 If any action or proceeding shall be commenced to interpret or enforce this Agreement or any right arising in connection with this 17 Agreement, the prevailing party in such action or proceeding shall be entitled to recover from the others the reasonable attorneys’ fees, 18 costs and expenses incurred by such prevailing party in connection with such action or proceeding or negotiation to avoid such action or 19 proceeding. 20 Stock Purchase Agreement § 10.6.9 Each party argues that he is the “prevailing party” under that 21 provision. Lupo contends that the provision does not encompass any of Cardinal’s claims except 22 8 Although section 1717 is limited by its terms to contract claims and does not govern fees for tort 23 claims even where such fees arise from a provision of a contract, see Gil, 121 Cal. App. 4th at 723, this Court is aware of no authority depriving it of discretion to determine similarly that no party 24 prevailed on tort claims for which a contractual agreement would award fees to the prevailing party. The history of California courts finding no prevailing party in appropriate cases under 25 section 1717 before it was amended to provide explicitly for such discretion tends to support a court’s discretion to so find even in the absence of specific statutory authority. See Hsu, 9 Cal. 4th 26 at 874 (“This provision, allowing the court to find that there was no party prevailing on the contract for purposes of contractual attorney fees, was declaratory of existing law.”) 27 9 The Stock Purchase Agreement appears in multiple placed in the record, including as Exhibit 1 1 his claim for breach of contract, on which the jury awarded Cardinal no damages. See Lupo’s 2 Fees Mot. (dkt. 209) at 1–4. Lupo does not address his own contract claim, on which the jury 3 found Cardinal not liable. Cardinal argues that he is the prevailing party because he recovered 4 under his claim for intentional misrepresentation, which he contends was based on express 5 warranties of the Stock Purchase Agreement, citing decisions by California courts construing such 6 claims as falling within arguably similar contractual fees provisions. See generally Cardinal’s 7 Fees Mot. (dkt. 211). Lupo argues that Cardinal’s misrepresentation claim does not fall within the 8 fees provision because his complaint alleged only misrepresentations predating the contract, and 9 because any ambiguity in the contract should be construed against Cardinal as the drafter of the 10 provision at issue. See, e.g., Opp’n to Cardinal’s Fees Mot. (dkt. 220) at 3–6. Each party also 11 disputes the reasonableness of the amount of fees claimed by his opponent. Id. at 8–9; Opp’n to 12 Lupo’s Fees Mot. (dkt. 216) at 7–8. 13 The parties’ briefs do not address in detail the Court’s discretion to award fees to neither 14 party—Lupo does not address it at all, while Cardinal includes only a brief argument that such an 15 outcome could be appropriate in his opposition to Lupo’s motion. The California Supreme Court 16 has described that discretion as follows:

17 As one Court of Appeal has explained, “[t]ypically, a determination of no prevailing party results when both parties seek relief, but neither 18 prevails, or when the ostensibly prevailing party receives only a part of the relief sought.” (Deane Gardenhome Assn. v. Denktas (1993) 13 19 Cal.App.4th 1394, 1398, 16 Cal.Rptr.2d 816.) By contrast, when the results of the litigation on the contract claims are not mixed—that is, 20 when the decision on the litigated contract claims is purely good news for one party and bad news for the other—the Courts of Appeal have 21 recognized that a trial court has no discretion to deny attorney fees to the successful litigant. Thus, when a defendant defeats recovery by 22 the plaintiff on the only contract claim in the action, the defendant is the party prevailing on the contract under section 1717 as a matter of 23 law. (See, e.g., Melamed v. City of Long Beach (1993) 15 Cal.App.4th 70, 84, 18 Cal.Rptr.2d 729; Deane Gardenhome Assn. v. Denktas, 24 supra, 13 Cal.App.4th 1394, 1398, 16 Cal.Rptr.2d 816; Elms v. Builders Disbursements, Inc., supra, 232 Cal.App.3d 671, 674–675, 25 283 Cal.Rptr. 515; Manier v. Anaheim Business Center Co. (1984) 161 Cal.App.3d 503, 505–509, 207 Cal.Rptr. 508.) Similarly, a 26 plaintiff who obtains all relief requested on the only contract claim in the action must be regarded as the party prevailing on the contract for 27 purposes of attorney fees under section 1717. (E.g., Texas Commerce 198 Cal.Rptr. 174.) 1 [. . .] 2 Accordingly, we hold that in deciding whether there is a “party 3 prevailing on the contract,” the trial court is to compare the relief awarded on the contract claim or claims with the parties’ demands on 4 those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources. The 5 prevailing party determination is to be made only upon final resolution of the contract claims and only by “a comparison of the 6 extent to which each party ha[s] succeeded and failed to succeed in its contentions.” (Bank of Idaho v. Pine Avenue Associates (1982) 137 7 Cal.App.3d 5, 15, 186 Cal.Rptr. 695.) 8 Hsu v. Abbara, 9 Cal. 4th 863, 875–76 (1995). 9 “If neither party achieves a complete victory on all the contract claims, it is within the 10 discretion of the trial court to determine which party prevailed on the contract or whether, on 11 balance, neither party prevailed sufficiently to justify an award of attorney fees.” Scott Co. of Cal. 12 v. Blount, Inc., 20 Cal. 4th 1103, 1109 (1999). Even so, a court may abuse that discretion if it 13 finds no prevailing party where the results are “so lopsided that, even under an abuse of discretion 14 standard, it [is] unreasonable to say the [party with a greater degree of success] was not the 15 prevailing party.” See De la Cuesta v. Benham, 193 Cal. App. 4th 1287, 1290 (2011). 16 Regardless of whether Cardinals’ misrepresentation claim is treated as falling within the 17 scope of the contractual attorneys’ fees provision, this is not a lopsided case. If the Court looks 18 only to the claims for breach of contract, each party brought such a claim, and each party 19 recovered nothing on those claims. While the jury found that Lupo breached the contract, it 20 awarded Cardinal no damages for such breach. And while neither party’s briefs meaningfully 21 address Lupo’s claim for breach of contract, the jury found Cardinal not liable on that claim. 22 California courts have acknowledged that cases where “both parties seek relief, but neither 23 prevails” are a “typical” example of when a court may find that neither party is entitled to recover 24 its attorneys’ fees. See Hsu, 9 Cal. 4th at 875 (quoting Deane Gardenhome, 13 Cal. App. 4th at 25 1398)). Accordingly, the Court concludes that no party is entitled to attorneys’ fees under Civil 26 Code section 1717 based solely on the contract claims. 27 Cardinal has at least a colorable argument that his misrepresentation claim falls within the 1 his claim on representations specifically included in the contract as compared to earlier 2 representations by Lupo,10 reliance was a necessary element of Cardinal’s claim, and his reliance 3 took the form of purchasing Kitchen Experts pursuant to the Stock Purchase Agreement. 4 Accordingly, there is some appeal to Cardinal’s position that the “right” at issue for that claim 5 “ar[ose] in connection with [the] Agreement.” See Stock Purchase Agreement § 10.6. 6 The Court need not decide that issue, however, because even if the Court considers the 7 misrepresentation claim—either in conjunction with the contract claims, or on its own because it is 8 not governed by section 1717, see Gil, 121 Cal. App. 4th at 723—the result is too equivocal to 9 award fees to either party. The Court has discretion to find no prevailing party where “the 10 ostensibly prevailing party receives only a part of the relief sought.” Hsu, 9 Cal. 4th at 875 11 (quoting Deane Gardenhome, 13 Cal. App. 4th at 1398). Although a substantial sum, Cardinal’s 12 award of $250,000 represents less than one-sixth of the $1,580,297.53 total that Cardinal now 13 claims he should recover. See Mot. for New Trial at 1. Cardinal’s motion for a new trial on 14 damages—proposing to throw out his award and try again—strongly suggests that he has not 15 achieved his litigation objectives. See Hsu, 9 Cal. 4th at 876 (stating that courts should compare a 16 party’s award to “the parties’ demands on those same claims and their litigation objectives as 17 disclosed by the pleadings, trial briefs, opening statements, and similar sources”). The Court also 18 notes that the award is significantly lower than the attorneys’ fees and costs that each party claims 19 to have reasonably accrued in trying the case. See Cardinal’s Fees Mot. at 25 (seeking a total of 20 $1,062,327.09); Lupo’s Fees Mot. at 10 (seeking a total of $448,533). Cardinal’s marginal 21 success on his claim for intentional misrepresentation therefore would not warrant an award of 22 attorneys’ fees to either party, and the Court declines to resolve whether the attorneys’ fees 23 provision of the Stock Purchase Agreement encompasses that claim. 24 C. Costs Under Rule 54 25 Having concluded that neither party prevailed for the purpose of attorneys’ fees and costs 26

27 10 The Court notes that while Lupo is correct that the allegations of Cardinal’s complaint focus on 1 under California law, the Court turns to Rule 54 of the Federal Rules of Civil Procedure, which 2 provides that “[u]nless a federal statute, these rules, or a court order provides otherwise, costs-- 3 other than attorney’s fees--should be allowed to the prevailing party,” Fed. R. Civ. P. 54(d)(1), and 4 |} U.S.C. § 1920, which lists categories of expenses that a court “may tax as costs.” 5 “Although Federal Rule of Civil Procedure 54(d)(1) and 28 U.S.C. § 1920 presume costs 6 || will be awarded to the prevailing party, the district court may decline to award costs.” Anderson v. 7 || State Farm Mut. Auto. Ins. Co., 766 F. App’x 432, 434 (9th Cir. 2019) (citing Draper v. Rosario, 8 836 F.3d 1072, 1087 (9th Cir. 2016)). Whether to award costs is left to the discretion of the 9 || district court, and a court may decline to do so based on factors including, but not limited to: “‘(1) 10 || the substantial public importance of the case, (2) the closeness and difficulty of the issues in the 11 case, (3) the chilling effect on future similar actions, (4) the plaintiff's limited financial resources, 12 || and (5) the economic disparity between the parties.’” Draper, 836 F.3d at 1087 (quoting Escriba 13 yv. Foster Poultry Farms, Inc., 743 F.3d 1236, 1247-48 (9th Cir. 2014)). 14 For the same reasons addressed above in the context of California law, the Court concludes 3 || that the minimal recovery and “closeness . . . of the issues in the case” warrant declining to award 16 || costs under Rule 54, regardless of which party could be said to have “prevailed” for the purpose of 17 || that rule. 18 IV. CONCLUSION 19 For the reasons discussed above, all three pending motions are DENIED. The jury’s 20 || verdict stands, and each party shall bear his own attorneys’ fees and costs. 21 IT ISSO ORDERED. 22 || Dated: April 7, 2020 23 5 CZ J PH C. SPERO 24 ief Magistrate Judge 25 26 27 28