Opinion
B174420 B177716
12-6-2006
KOHAP, LTD., Plaintiff and Respondent, v. WON KYUNG OH, Defendant and Appellant.
Law Offices of Nate G. Kraut and Nate G. Kraut for Defendant and Appellant. Law Office of Kent M. Bridwell and Kent M. Bridwell for Plaintiff and Respondent.
Appellant Won Kyung Oh (Oh) appeals from a trial court judgment finding him the alter ego of Grand Bell, Inc. (Grand Bell), and thus personally liable for a judgment against Grand Bell and in favor of respondent Kohap, Ltd. (Kohap). He raises four arguments on appeal: (1) Insufficient evidence supports the trial courts judgment finding him the alter ego of Grand Bell; (2) Kohap should have been barred from pursuing an alter ego claim because of its unclean hands; (3) the trial courts special reference order exceeded its jurisdiction and violated Ohs right to due process and right to a jury trial; and (4) the trial court erred in excluding certain evidence at trial.
In his opening brief, Oh argued that the trial court erred by precluding Hong Hoon Park from testifying. In his reply brief, Oh withdrew his challenge to this alleged error.
We are partially persuaded by Ohs arguments on appeal. We conclude that sufficient evidence supports the trial courts finding that Oh is the alter ego of Grand Bell. We also conclude that Kohap did not have unclean hands such that it should have been precluded from pursuing an alter ego claim against Grand Bell and Oh. Thus, the judgment attributing liability to Oh as Grand Bells alter ego is affirmed. However, we conclude that the trial courts special reference order violated Ohs right to a jury trial on the breach of contract cause of action. This error was compounded by the trial courts instruction to the jury regarding the referees findings. Accordingly, we reverse the trial court judgment on the breach of contract cause of action, and remand the matter for a new trial. In so doing, we express no opinion as to whether the trial court erred in excluding evidence pertaining to Grand Bells novation theory; upon retrial, the trial court must determine whether the proposed evidence is relevant and admissible.
FACTUAL AND PROCEDURAL BACKGROUND
The Parties
Kohap, a Korean corporation, is in the business of selling petroleum resin (pet resin), a substance used in the manufacturing of plastic bottles.
Grand Bell grew out of another corporation, Space Enterprises, Inc. (Space). Oh was the sole shareholder of Space. In 1996, Oh sold his shares in Space to his brother-in-law, Dong Moon Yoo (Yoo), although Oh continued to work for Space. At some point, Space changed its name to Grand Bell.
One of Kohaps theories below was that Ohs transfer of ownership of the corporation to Yoo was a sham and that Oh remained the sole shareholder of Space and later Grand Bell.
Factual Background
The underlying facts prompting this lawsuit are largely undisputed. To set the factual backdrop, we summarize the facts as set forth in the trial courts statement of decision.
This case arises out of the sales from Kohap to Grand Bell of substantial quantities of pet resin. Pet resin was manufactured in Korea and shipped to the United States. The transactions were financed through the D/A (document acceptance) method of financing, which allowed the extension of credit to the buyer for 180 days, the maximum allowed by the Korean internal banking regulations without approval by the Korean National Bank.
As it turns out, Grand Bells payments for pet resin were not made within the 180-day period as required by Korean law and Kohap did not receive the requisite authorization from the Korean National Bank for the delayed payment. Consequently, Kohap was prosecuted by Korean authorities and was fined; certain Kohap employees were incarcerated.
Kohap Initiates This Lawsuit Against Grand Bell and Oh
As a result of Grand Bells failure to pay Kohap for pet resin shipped and delivered on Grand Bells behalf, Kohap initiated this lawsuit against Grand Bell and Oh; the operative pleading is the first amended complaint. Specifically, it alleges breach of contract against Grand Bell, along with an alter ego claim against Oh.
Grand Bell and Oh answered the first amended complaint on July 14, 2000. Their sixth affirmative defense alleges that Kohap cannot recover any damages on the grounds of unclean hands.
Appointment of a Referee
According to the trial courts December 21, 2001, interim order, because the transactions at issue "are reflected in extensive documentation, principally, if not exclusively, of an accounting nature," the parties agreed to hire a forensic accountant to resolve the accounting issues raised in this action. The parties subsequently hired John H. Reith (Reith) to serve as the forensic accountant in this matter. Reith then performed certain accounting analyses for the parties, including reconciling schedules of particular sales and purchases.
On November 9, 2001, Grand Bell, represented by new counsel, filed a motion to withdraw from the stipulation. In response, Kohap filed a motion to enforce the parties agreement for independent accounting. Both motions were heard on December 3, 2001.
After reviewing the parties competing papers and listening to oral argument, the trial court appointed Reith, pursuant to Code of Civil Procedure section 639, to serve as referee and "determine what amount, if any, remains to be paid to [Kohap] by [Grand Bell and/or Oh] for" the subject pet resin. Kohap was ordered to prepare an order in compliance with section 639 and California Rules of Court, rule 244.2, with Grand Bell being given the opportunity to object to Kohaps proposed order.
All further statutory references are to the Code of Civil Procedure unless otherwise indicated.
Consistent with the trial courts ruling, Kohap submitted a proposed order and, on February 1, 2002, Grand Bell lodged objections thereto. Simultaneously, Grand Bell filed a motion to disqualify Reith as referee. Kohap responded to Grand Bells objections and opposed the motion to disqualify Reith as referee.
Ultimately, on April 5, 2002, pursuant to section 639, the trial court appointed William Wallace Holder (Holder) as the special accounting referee in this dispute. Holder was directed to "determine the amount of money paid by or on behalf of Grand Bell to or for the benefit of Kohap for resin sold by Kohap to Grand Bell for the period 1996 thru 1999, inclusive." The trial court further instructed: "To the extent that an interpretation of a contract provision is necessary for the referee to perform his/her duties hereunder, the referee or the parties may seek a determination by this court of the issue raised." The parties were ordered to provide Holder with all relevant documents. Finally, Holder was directed to file his findings with the trial court by June 30, 2002.
Holder submitted a preliminary report on September 16, 2002. Following a dispute by the parties regarding this report and a subsequent court order to the referee, Holder submitted his second and final report, determining that Grand Bell owed Kohap $13,656,128. Over Grand Bells objection, the trial court adopted the second report, and the findings contained therein, on April 16, 2003.
The case was then ready to proceed to trial.
Grand Bell Amends Its Answer
Grand Bell later amended its answer to Kohaps first amended complaint. On September 24, 2003, it added the supplemental affirmative defense of novation, asserting that Kohaps claims were barred "as the result of an oral agreement and conduct by the parties following therefrom which as of on or about October 22-27, 1997, extinguished [Grand Bell and Ohs] obligations to pay the monetary sums claimed under the [first amended complaint] by way of novation of the July 22, 1996 Distribution Agreement attached as Exhibit `A to the [first amended complaint]."
Jury Trial and Verdict for Kohap
On October 23, 2003, a jury trial commenced on Kohaps claim against Grand Bell. Following the conclusion of all testimony, the jury was instructed on the law regarding contracts and novation. Importantly, over Grand Bells objection, the jury also was instructed: "This matter concerns purchases and sales . . . during the period encompassing 1996 through 1999. Kohaps complaint seeks damages for a series of allegedly unpaid PET resin transactions at issue. Because of the number, size and complexity of the transactions, the Court has appointed an accounting referee to determine the amount of money paid by or on behalf of Grand Bell to or for the benefit of Kohap concerning these PET resin transactions at issue under Kohaps complaint. . . . On the basis of the report of the accounting referee, the Court has found that the sum which was unpaid for PET resin transactions under the original contract amounts to $ 13,656,128. Therefore, you need not make any determination regarding the occurrence of purchases and sales of PET resin from Kohap to Grand Bell, or the unpaid amount thereof under the original contract."
On November 5, 2003, the jury returned its special verdict, finding that Grand Bell and Kohap did not agree to forgive the outstanding amount owed to Kohap by Grand Bell for the transactions under which the pet resin had been sold and received. The jury further determined that Grand Bell owed Kohap $13,656,128.
Grand Bell Files a Supplemental Affirmative Defense
On November 13, 2003, Grand Bell filed another supplemental affirmative defense, this time for unclean hands. Specifically, Grand Bell averred that because Kohap had been convicted of a felony in violation of Koreas Foreign Exchange Control Codes concerning the subject matter transactions as set forth in its first amended complaint, it could not assert a claim for alter ego liability against Oh.
Court Trial on Alter Ego and Unclean Hands
The parties then submitted competing briefs regarding Kohaps alter ego claim and Grand Bell and Ohs assertion of the unclean hands defense.
Ultimately, the trial court concluded that Oh did act as the alter ego of Grand Bell. In particular, the trial court found "that, in its review of the evidence as a whole, a unity of interests existed between Grand Bell and O[h]. Clearly, Grand Bell maintained virtually no credible financial records, was inadequately capitalized and its corporate records were devoid of any meaningful observation of the formalities of corporate governance. In addition, the court [found] the alleged transfer of ownership . . . of Grand Bell devoid of substance."
In so ruling, the trial court rejected Grand Bell and Ohs unclean hands defense as "disingenuous." "Kohap manufactured the pet resin and shipped it to Grand Bell (now a non-operating corporation). Kohap did not receive payment for the pet resin. If the court were not to apply the alter ego doctrine, Kohap would not be able to pursue the collection of the amounts that the jury found it is owed from Grand Bell. This is clearly an inequitable result, which flies in the face of the Associated standard. Kohaps allowing the credit period to extend beyond the 180 days allowed under Korean law clearly financially benefited Grand Bell and O[h], although the court recognizes that there may have been some accounting benefit to Kohap given the conditions of the Asian monetary crisis that existed at the time these transactions occurred. Grand Bell seems to be arguing that if one violates a law and, in so doing, confers a benefit on another, that the party violating the law should be precluded from recovering the benefit. This position is fraught with public policy concerns. To hold otherwise would give rise to a vast variety of conspiratorial circumstances that the law cannot condone."
Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825 (Associated).
Judgment was entered, and Ohs timely appeal followed.
DISCUSSION
I. Alter Ego Liability
A. Standard of Review
A trial courts finding of alter ego liability will be upheld on appeal if it is supported by substantial evidence. (Arnold v. Browne (1972) 27 Cal.App.3d 386, 397, overruled on other grounds in Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 129.) Under that standard, we review the record in the light most favorable to respondent, resolving all evidentiary conflicts and indulging all reasonable inferences in support of the judgment, to determine whether there is sufficient substantial evidence to warrant a reasonable trier of fact in finding for respondent based upon the whole record. (In re Marriage of Mix (1975) 14 Cal.3d 604, 614.)
B. Substantial Evidence Supports the Trial Court Judgment of Alter Ego Liability
"It is well settled that when a corporation `is used by an individual or individuals, or by another corporation, to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the acts as if they were done by the individuals themselves or by the controlling corporation . . . the court will disregard the "fiction" of the corporate entity[.] [Citation.]" (McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746, 752-753.)
To invoke alter ego liability, two conditions must be met: (1) there must be such a unity of interest and ownership between the corporation and the shareholder that the separate personalities of the corporation and the shareholder do not in reality exist; and (2) there must be an inequitable result if the acts in question are treated as those of the corporation alone. (F. Hoffman-La Roche, Ltd. v. Superior Court (2005) 130 Cal.App.4th 782, 796-797.) "`Among the factors to be considered in applying the doctrine are commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other. [Citations.] Other factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. [Citations.] No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied. [Citation.]" (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538-539; see also Associated, supra, 210 Cal.App.2d at pp. 838-840 [listing numerous factors that courts consider when deciding whether alter ego liability exists].)
Here, substantial evidence supports the trial courts judgment. Kohap presented convincing evidence that Oh was the sole owner of Grand Bell, including testimony from persons who conducted business with Grand Bell, from Kohap employees, and even from a Grand Bell employee. Likewise, numerous documents named Oh as the sole owner of Grand Bell, long after the purported transfer of the corporation by Oh to Yoo, including income tax returns and Grand Bells application to the Federal Maritime Commission for an operating common carrier bond.
And, Oh immersed himself in high-level corporate activities, even after he purportedly divested himself of all interest in the corporation. Subordinate employees identified him as "the boss," reported to him, and sought his approval on various corporate decisions.
Moreover, Grand Bell was inadequately capitalized. Professor Lynn Stout (Stout) offered expert testimony that when the corporation was first formed, it was inadequately capitalized in light of its intended purpose in business. And, as the business progressed, Stout found it "curious" that the business "expenses somehow always managed to keep up with the revenues"; Grand Bell saw virtually no profits and incurred no significant losses. According to Stout, this type of business pattern "suggests that the people that control the corporation were steadily insuring to drain out any money to make sure the firm not only was undercapitalized at inception, but remained undercapitalized throughout."
Finally, Kohap demonstrated that Grand Bell failed to maintain corporate formalities. No board meetings were scheduled on a regular basis. There were no bylaws. No corporate minutes were maintained. While 200,000 shares of Grand Bell corporate stock apparently were issued, no corresponding corporate share certificates exist. Oh challenges this evidence on appeal by arguing that Corporations Code section 300, subdivision (e) precludes the trial court from relying upon this fact in support of its judgment. The problem with Ohs contention is the absence of any evidence of a shareholders agreement of the type referenced in Corporations Code section 300, subdivision (e). Thus, according to the plain language of the statute, Grand Bells failure to maintain corporate formalities cannot be excused.
Taken together, this evidence supports the trial courts finding that a unity of interests between Grand Bell and Oh existed.
The next question is whether an inequitable result would follow if the acts of Grand Bell were treated as its alone. Substantial evidence supports the trial courts finding that Ohs disregard of the corporate form created an inequitable result. (Communist Party v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980, 993 [alter ego applies when shareholder uses corporate form to accomplish an inequitable purpose]; see also Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892 [same].) Grand Bell and Oh acted dishonestly. While Grand Bell maintained in written discovery responses that no financial statement had been prepared for the calendar year 1999, it was later revealed in a deposition that one in fact had been prepared. Also, approximately $9.5 million in Grand Bell assets could not be accounted for at the end of 1999. Grand Bell owed Kohap more than $13 million. Instead of Grand Bell using its assets to pay its debts, Oh drained Grand Bells assets by paying himself a large compensation, monies that were not properly recorded in financial statements. This conduct is sufficient to pierce the corporate veil. (See 2 Ballantine & Sterling, Cal. Corporation Laws (4th ed.) § 297.03, pp. 14-58.1-14-58.2 (rel. 94-9/06) [one kind of inequitable result that may make imposition of alter ego liability appropriate is an abuse of the corporate form, such as inadequate capitalization].)
II. Unclean Hands
A. Standard of Review
We review the trial courts rejection of Grand Bell and Ohs unclean hands defense for abuse of discretion. (Lovett v. Carrasco (1998) 63 Cal.App.4th 48, 55.)
B. The Trial Court Did Not Abuse Its Discretion in Rejecting the Unclean Hands Defense
"The defense of unclean hands arises from the maxim, `"`He who comes into Equity must come with clean hands." (Blain v. Doctors Co. (1990) 222 Cal.App.3d 1048, 1059 (Blain).) The doctrine demands that a plaintiff act fairly in the matter for which he seeks a remedy. He must come into court with clean hands, and keep them clean, or he will be denied relief, regardless of the merits of his claim. [Citations.] The defense is available in legal as well as equitable actions. [Citations.] . . .
"The unclean hands doctrine protects judicial integrity and promotes justice. It protects judicial integrity because allowing a plaintiff with unclean hands to recover in an action creates doubts as to the justice provided by the judicial system. Thus, precluding recovery to the unclean plaintiff protects the courts, rather than the opposing partys, interests. [Citations.] The doctrine promotes justice by making a plaintiff answer for his own misconduct in the action. It prevents `a wrongdoer from enjoying the fruits of his transgression. [Citations.]
"Not every wrongful act constitutes unclean hands. But, the misconduct need not be a crime or an actionable tort. Any conduct that violates conscience, or good faith, or other equitable standards of conduct is sufficient cause to invoke the doctrine. [Citations.]
"The misconduct that brings the unclean hands doctrine into play must relate directly to the cause at issue. Past improper conduct or prior misconduct that only indirectly affects the problem before the court does not suffice. The determination of the unclean hands defense cannot be distorted into a proceeding to try the general morals of the parties. [Citation.] Courts have expressed this relationship requirement in various ways. The misconduct `must relate directly to the transaction concerning which the complaint is made, i.e., it must pertain to the very subject matter involved and affect the equitable relations between the litigants. [Citation.] `[T]here must be a direct relationship between the misconduct and the claimed injuries . . . "`so that it would be inequitable to grant [the requested] relief." [Citation.] `The issue is not that the plaintiffs hands are dirty, but rather "`"that the manner of dirtying renders inequitable the assertion of such rights against the defendant."" [Citation.] The misconduct must `"`prejudicially affect . . . the rights of the person against whom the relief is sought so that it would be inequitable to grant such relief." [Citation.]
"From these general principles, the Blain court gleaned a three-pronged test to determine the effect to be given to the plaintiffs unclean hands conduct. Whether the particular misconduct is a bar to the alleged claim for relief depends on (1) analogous case law, (2) the nature of the misconduct, and (3) the relationship of the misconduct to the claimed injuries. [Citations.]" (Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 978-979.) Consistent with the case law, we will analyze the parties contentions under the three prongs.
1. Analogous case law
The only case identified by the parties as analogous to the instant situation is Wong v. Tenneco, Inc. (1985) 39 Cal.3d 126 (Wong). In that case, two parties "entered into [a] produce marketing/financing arrangement with full knowledge that the farming operations upon which the agreement depended were being carried out in violation of Mexican law. When one party abandoned the floundering scheme, the other sought redress in the California courts, to recover that which was unrecoverable under Mexican law." (Id. at pp. 133-134, fn. omitted.) Our Supreme Court found that the "trial court properly declined to involve our courts in this flagrant effort to circumvent Mexican law." (Id. at p. 134.) In so doing, the high court applied principles of comity and concluded that the plaintiffs "failure to comply with the requirements of Mexican law casts a pall of illegality over all of his business transactions tied to the Mexican farming operation, including the marketing/financing arrangement" at issue in that case. (Id. at pp. 137-138.)
That fact pattern is readily distinguishable from the instant case. Admittedly, Kohap was convicted of violating Korean law, namely for failing to timely collect sales proceeds from its overseas customers (including Grand Bell) and/or for neglecting to obtain government permission to collect those proceeds after the mandated 180-day period lapsed. However, there is no evidence that Kohap was participating in an illegal scheme in an attempt to avail itself of Korean and/or United States laws. And, unlike Wong, there is no evidence that principles of comity will be violated by allowing Kohap to prevail on its breach of contract claim against Grand Bell and Oh. In fact, given that Kohap was charged and convicted of failing to timely collect the very monies upon which this lawsuit is based, it appears that principles of comity would be compromised if Kohap were not to pursue judgment to collection. Finally, Californias public policy does not dictate a different result. In fact, as set forth above, public policy and equity compel application of the alter ego doctrine here.
2. Nature of the misconduct
As set forth in documents presented in the Seoul District Court, Criminal Division Section 22, Kohap violated Korean law for failing to collect accounts receivable from nonresidents by the statutory due date without obtaining prior approval from the appropriate Korean official, including the sum of $13,568,968 from Grand Bell, the debt upon which this lawsuit is based.
3. Relationship of the misconduct to the injuries
Finally, we must examine the relationship between Kohaps misconduct and its claimed injuries. "The misconduct that brings the unclean hands doctrine into play must relate directly to the transaction concerning which the complaint is made. It must infect the cause of action involved and affect the equitable relations between the litigants." (Kendall-Jackson Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th at p. 984.) "Moreover, the unclean hands doctrine is not a legal or technical defense to be used as a shield against a particular element of a cause of action. Rather, it is an equitable rationale for refusing a plaintiff relief where principles of fairness dictate that the plaintiff should not recover, regardless of the merits of his claim. It is available to protect the court from having its powers used to bring about an inequitable result in the litigation before it." (Id. at p. 985.)
While Kohaps criminal conviction was based, in part, on its conduct relating to the contract upon which it sued Grand Bell, equity weighs in favor of Kohap. Grand Bells refusal to pay significant monies it owed to Kohap gave rise to both Kohaps failure to timely collect accounts receivable and this lawsuit. In other words, Grand Bells misconduct "affect[ed] the equitable relations between the litigants" in this action. (Kendall-Jackson Winery, Ltd. v. Superior Court, supra, 76 Cal.App.4th at p. 985.) It follows that allowing Oh to avoid personal liability for Grand Bells debt would bring about an undeserved windfall for him.
III. Special Reference Order
A. Standard of Review
Traditionally we review a trial courts order for abuse of discretion. (Walsh v. Jack Rubin & Sons, Inc. (1960) 182 Cal.App.2d 652, 655.) However, because a "trial court has no authority to assign matters to a referee or special master for decision without explicit statutory authorization," a special reference order not supported by a specific statutory basis constitutes an act in excess of the trial courts jurisdiction, and is void. (Ruisi v. Thieriot (1997) 53 Cal.App.4th 1197, 1208.)
B. Section 639
Section 639 provides that upon motion of a party, or its own motion, the trial court may appoint a special referee in certain specified circumstances: "(1) When the trial of an issue of fact requires the examination of a long account on either side; in which case the referees may be directed to hear and decide the whole issue, or report upon any specific question of fact involved therein. [¶] (2) When the taking of an account is necessary for the information of the court before judgment, or for carrying a judgment or order into effect. [¶] (3) When a question of fact, other than upon the pleadings, arises upon motion or otherwise, in any stage of the action. [¶] (4) When it is necessary for the information of the court in a special proceeding." (§ 639, subds. (a)(1)-(4).)
In its respondents brief, Kohap cites section 906 and urges us to affirm the trial courts order pursuant to section 638, on the grounds that the parties had actually agreed to a reference. Kohaps reliance upon section 906 is misplaced. That statute provides, in relevant part: "The respondent . . . may, without appealing from [the] judgment, request the reviewing court to and it may review any of the foregoing matters [verdict, decision, any intermediate ruling, proceeding, order, or decision which involves the merits or necessarily affects the judgment or order appealed from] for the purpose of determining whether or not the appellant was prejudiced by the error or errors upon which he relies for reversal or modification of the judgment from which the appeal is taken." As discussed herein, Grand Bell was prejudiced by the reference. And, the appellate record does not support Kohaps position. By ordering a reference pursuant to section 639 and not section 638, we can infer that the trial court did not find sufficient evidence of an agreement for a referee. In light of the parties intense dispute regarding the scope and propriety of the reference, we conclude that ample evidence supports this trial court finding.
A reference pursuant to section 639, subdivision (a), "is allowed because a trained accountant is generally better able to efficiently and inexpensively examine a `long account than a trial court judge is able to do through adversarial court proceedings. The tension in this area is over how much latitude the accountant referee may exercise in making factual determinations. It does not matter that a particular referee has legal training. The scope of the reference is set by the constitutional limitations on delegation of judicial power to a referee." (De Guere v. Universal City Studios, Inc. (1997) 56 Cal.App.4th 482, 499 (De Guere).)
"To do a proper examination of a long account, a referee needs to know two things — each of which is within the proper ambit of his or her authority. First, the referee must know the proper accounting methodology to be applied. Second, the referee must have the accounting records at issue. The parties must obtain the necessary records through discovery to enable the referee to perform the examination." (De Guere, supra, 56 Cal.App.4th at p. 499.) "The language of section 639, subdivision (a) cannot constitutionally be interpreted to allow a referee to make broader determinations, such as the intent of the parties, or whether their agreement is a contract of adhesion." (De Guere, supra, at p. 499.)
"Problems also arise when there are ambiguities in the contract that are not amenable to resolution by application of generally accepted accounting principles." (De Guere, supra, 56 Cal.App.4th at p. 499.) "Broadly speaking, there are three ways to deal with that problem. The trier of fact may resolve the factual and legal issues before making the reference; the referee may petition for instructions when such issues of contract interpretation and enforceability arise; or the referee may make findings based on each of the limited possible interpretations of the contract advanced by the parties, leaving it for the trier of fact to determine which interpretation should be adopted." (Ibid.)
"We endorse the procedure employed by the trial court in Huntoon v. Hurley (1955) 137 Cal.App.2d 33. In that case, an employee sued his employer to enforce a written contract which provided that the plaintiff was to receive a share of net profits, calculated by a firm of independent certified public accountants on the basis of generally accepted accounting principles. Plaintiffs actions on the employers note securing his net profit share and for an accounting were consolidated for trial. Pursuant to stipulation, the trial court first addressed the employers contention that the written agreement had been modified, and concluded that it had not. The court then appointed a referee to take an accounting pursuant to the terms of the original agreement. [Citation.]
"We think this is an appropriate procedure to employ where an accounting is necessary, but there is a dispute about the terms, or enforceability of the written agreement at issue. Following this approach, issues of contract interpretation are resolved first, and that resolution guides the referee who examines the account. We recognize, however, that this may not be the preferable approach in all cases, and that the particular approach selected is a matter of trial court discretion so long as it conforms to the constitutional principle of nondelegability of judicial functions." (De Guere, supra, 56 Cal.App.4th at pp. 499-500.)
C. The Trial Courts Special Reference Order is Erroneous
Applying the foregoing legal principles, we conclude that the trial court erred in the manner in which the special reference proceeded. A special reference may have been appropriate. After all, it appears that this case consisted of far more than an ordinary breach of contract action. Over 7,000 documents, such as bills of lading, commercial invoices, certificates of export reports, and export sales contracts, were present. These documents needed to be organized and examined so that it could be determined how much Grand Bell owed Kohap. Given the volume of documents and the complexity of the issues, it was within the trial courts discretion to conclude that a long account existed and to appoint a special referee.
For this reason, Dunner v. Hoover (1941) 43 Cal.App.2d 753, cited by Oh, is distinguishable. That case did not involve a long account. (Id. at pp. 758-759.)
That being said, Ohs objection to the reference order on the grounds that it improperly delegated resolution of factual and legal issues to the referee is well-taken. As Oh argues, the referee exceeded his authority by determining the accuracy, sufficiency, and veracity of the conflicting documents. In its special reference order, the trial court instructed the parties to provide Holder with all relevant documents. In other words, the documents reviewed by the referee were not produced "through discovery." (De Guere, supra, 56 Cal.App.4th at p. 499.) As a result, no one authenticated the documents and no one was given the opportunity to challenge the accuracy of the documents. Instead, the referee was left alone to sort through unauthenticated, unverified documents and determine, as best as he could, what was owed by Grand Bell to Kohap.
In fact, the referee even acknowledged problems he faced while trying to sort through the incomplete documents provided to him by the parties. In his September 16, 2002, "Tentative, Preliminary and Incomplete" report, the referee noted certain limitations upon his ability to determine how much monies Grand Bell owed to Kohap. For example, many of the documents provided were written in Korean. "Although I understand that I have access to English translations of those documents, I do not provide any assurance as to the completeness or accuracy of such translations." Also, the parties did not provide Holder with "complete original documents from financial institutions that memorialized the payment of cash by Grand Bell and the receipt of cash by Kohap." Other documents "purported to identify the amount of cash received by Kohap and the amounts which remain unpaid," but the referee could not be certain. Finally, the referee indicated that "[a]dditional materials such as copies of bank records and canceled checks, evidence of wire transfers or accessed lines of credit could provide additional information that would be useful in resolving the issues in this matter."
Following a dispute between the parties regarding this report from Holder, the trial court instructed Holder to prepare a new report. However, the problems with the previously-submitted documents that Holder had outlined for the parties were not remedied. In fact, in his second report dated February 13, 2003, Holder identified many of the same limitations that existed when he prepared the September 16, 2002, report, such as the absence of any verification of the accuracy of the English translations of the Korean documents and the lack of complete original documents from financial institutions. He also pointed out new concerns, such as the fact that the supporting documents provided by the parties were not identical for each of the purported cash transactions. Also, the referee received separate schedules from each party that purported to identify the amount of cash transferred between the parties. Despite the referees request for additional information, such as copies of bank records and canceled checks, evidence of wire transfers, letters of credit or lines of credit, no additional documents were provided.
Moreover, the referees determinations were conditional as a result of the foregoing problems. In the first sentence of the conclusions section of his report, Holder expressly stated that the conclusions were subject to "the limitations expressed." With respect to cash settlements, the referee noted that his conclusion is based upon the "limited evidence that related to" that issue.
This procedure violated a host of evidentiary rules as well as Kohaps constitutional right to have a jury resolve all disputed factual issues. Holder was allowed to decide for himself which documents to consider and which ones were accurate. He determined which documents were properly translated. And, the referee was permitted to evaluate the competing schedules and documents supplied by the parties and determine how much monies had been paid by Grand Bell to Kohap. He even made findings regarding the sufficiency of certain documents. Such a process violates the constitutional prohibition against delegation of judicial power. (De Guere, supra, 56 Cal.App.4th at p. 496.)
Kohap responds to this objection by asserting that many of the incomplete documents supplied to the referee were those provided by Grand Bell. This argument, which goes to the credibility of Grand Bell and its defense, should have been made to the jury.
In urging us to affirm the trial courts judgment, Kohap directs us to arguments made by Grand Bell in its opposition to Kohaps ex parte application regarding the referees report. In that opposition, Grand Bell stated the following: "GRAND BELL concludes that the procedure required under DE GUERE was followed and that the REPORT complies with the ORDER and the tenets of DE GUERE." Grand Bell also argued that the referees order "strictly complied with the strictures of DE GUERE." Based upon these arguments, Kohap essentially argues that Grand Bell is judicially estopped from challenging the special reference order on appeal. We cannot agree.
Judicial estoppel applies when a party successfully asserts a position in a judicial proceeding and later attempts to assert an inconsistent position. (See, e.g., Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 183 [judicial estoppel "should apply when: (1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake"].)
Quite simply, Kohap has not demonstrated how the elements of judicial estoppel are satisfied here. For example, Kohap has not shown how Grand Bell has taken two completely inconsistent positions. In fact, as Grand Bell explains in its reply brief, the arguments it made below in connection with its opposition to Kohaps ex parte application cannot be taken out of that context. And, Kohap has not established that Grand Bell was successful in asserting the first position.
While we will not instruct the trial court on how to handle this upon retrial, we can suggest that it follow one of the procedures proposed in De Guere. For example, the jury can resolve issues of contract interpretation first and then, if the jury returns a finding that Grand Bell owes Kohap monies, a referee can be appointed to determine the amount of monies due, based upon his or her review of documents produced through discovery. (De Guere, supra, 56 Cal.App.4th at p. 500.)
Compounding this error was the trial courts instruction to the jury that the amount of damages had been predetermined by the referee, thereby improperly removing the issue of damages from the jury. While the jury may have been instructed regarding the elements of a breach of contract cause of action and what Kohap needed to establish in order to prevail, those instructions were virtually nullified by this special instruction. The jury was instructed that an accounting referee had already reviewed the documents and determined that Grand Bell owed Kohap approximately $13 million. In other words, the jury was effectively told that the issues had already been determined against Grand Bell, and all that the trial court needed was the jurys stamp of approval. Such an instruction was highly prejudicial, warranting reversal of the judgment. (Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 580-581.)
Oh also complains that the trial courts reference order is void for failure to comply with certain requirements of section 639 and California Rules of Court, rule 244.2, namely (1) the failure to set forth the reasons that justify the appointment of a special referee (§ 639, subd. (d)(1)), (2) a finding that no party has established an economic inability to pay a pro rata share of the referees fees (§ 639, subd. (d)(6)(A)), and (3) the trial courts failure to obtain a signed certification by the referee that he was aware of and was willing to comply with the requirements of canon 6 of the Code of Judicial Ethics. In light of our conclusions above, we need not resolve the question of whether these technical omissions compel reversal of the trial courts special reference order. That being said, we suggest that, upon remand, should the trial court elect to appoint a referee to determine the amount of monies owed by Grand Bell to Kohap, it adhere to the statutory requirements in connection with such an order to avoid these challenges in the future.
IV. Exclusion of Evidence
Oh contends that the trial court committed reversible error by excluding evidence of Kohaps refusal to put an alleged novation in writing. Ordinarily, we would review the alleged evidentiary error for abuse of discretion. (City of Ripon v. Sweetin (2002) 100 Cal.App.4th 887, 900; see also People ex rel. Lockyer v. Sun Pacific Farming Co. (2000) 77 Cal.App.4th 619, 639.) Given that we are reversing the trial court judgment for errors in connection with the special reference procedure, this issue is now moot. Upon retrial, the trial court must determine what evidence is relevant and admissible. (Gdowski v. Louie (2000) 84 Cal.App.4th 1395, 1398 [the Court of Appeals conclusion that the trial courts improper jury instructions caused prejudicial error and required a new trial rendered moot consideration of particular claims of evidentiary error].)
DISPOSITION
The judgment is affirmed in part, reversed in part, and remanded for a new trial on the breach of contract cause of action. The parties to bear their own costs on appeal.
We concur:
BOREN, P.J.
DOI TODD, J.