Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, Richard Neidorf, Judge. Affirmed., Los Angeles County Super. Ct. No. SC084455.
Salehi & Associates and Amir S. Salehi for Defendant and Appellant.
Jerry A. Weissburg and Diane B. Weissburg for Plaintiffs and Respondents.
MANELLA, J.
In the underlying action, which arises out of contracts to sell a restaurant, the trial court entered judgment against appellant Anthony G. Katsaras on respondents’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Katsaras contends that the judgment is infirm because the parties cancelled the sales contracts by mutual agreement. We affirm.
RELEVANT FACTUAL AND PROCEDURAL BACKGROUND
On February 15, 2005, respondents Patricia Rose, Richard Rose, and Yola Sanchez filed their complaint for breach of contract, breach of the implied covenant, fraud, interference with contract, and conspiracy against Katsaras, real estate broker Mario Carron, and Carron’s firm. The complaint alleges the following facts: Respondents operated a business named the “Continental Coffee Shop” in El Segundo. After they hired Carron to sell the business, Katsaras offered to buy it for $35,000. On or before July 6, 2004, respondents accepted the offer, and escrow was opened. They later agreed to reduce the sales price to $22,500, which was set forth in the escrow instructions. When Katsaras refused to comply with the sales agreement, escrow was cancelled in October 2004, resulting in damages to respondents. Respondents subsequently learned that Carron had improperly acted as a “secret dual agent” for Katsaras and respondents during the transaction.
Carron and his firm are not parties to this appeal.
A bench trial on respondents’ claims occurred in June 2006. Patricia and Richard Rose testified as follows: They are married, and Yola Sanchez is Patricia’s mother. Respondents jointly owned the restaurant, which is located on leased premises. They bought the restaurant for $38,000, and decided to sell it a year later due to Sanchez’s health problems. On March 10, 2004, they hired Carron as an agent to assist them with the sale, and initially listed the price of the business as $55,000. In early July 2004, Katsaras sent Carron a written offer to buy the business for $35,000. On July 6, 2004, respondents accepted the offer because they wished to attend to Sanchez’s health problems.
Katsaras told respondents he wanted to take possession of the restaurant when escrow closed on September 1, 2004, to make extensive renovations. He subsequently asked respondents to reduce the sales price from $35,000 because the renovations would be very expensive. According to Patricia Rose, Katsaras knew respondents needed to sell the business due to Sanchez’s ill health.
On July 21, 2004, the parties executed escrow instructions reflecting a sales price of $22,500, including Katsaras’s escrow deposit of $2,500. Respondents complied with their obligations under the escrow instructions. To facilitate the closing of escrow, respondents provided Katsaras with their accountant’s business card so that he could obtain their financial records; in addition, at Katsaras’s request, they shut down their business in early September 2004 to permit him to begin renovations.
Escrow did not close on September 1, 2004. In early October 2004, Carron notified Patricia Rose that Katsaras no longer wanted to buy the business. Relying upon Carron’s advice, respondents executed a document entitled “Cancellation Escrow Instructions” dated October 22, 2004 (October agreement). Respondents were subsequently unable to sell the business. In January 2005, they signed a lease termination agreement that required them to pay $30,000 of the $80,000 in lease payments then outstanding, and they incurred other expenses in closing the business.
Katsaras indicated in his testimony that the closing of escrow was subject to certain contingencies, namely, his obtaining respondents’ financial records, building permits for the renovations, and a lease. According to Katsaras, respondents did not disclose their financial records, despite his repeated requests. He denied that he received the business card of respondents’ accountant. In addition, he testified that his applications for the permits were disapproved, and that he was dissatisfied with the lease offered by the landlord. On October 6, 2004, he told Carron that he wanted “to pull out of escrow.” When Carron did not respond, he informed the escrow company and respondents that he was cancelling escrow.
The trial court also heard testimony from Carron, as well as from witnesses who indicated that Katsaras had ample opportunity to meet the escrow contingencies. Following the presentation of evidence, the trial court remarked that Katsaras was the “least credible” of the parties, and that he made inadequate efforts to satisfy the contingencies. It concluded that respondents had established their claims against Katsaras for breach of contract and breach of the implied covenant. On July 20, 2006, judgment was entered against Katsaras awarding respondents damages totaling $71,000, together with prejudgment interest. The judgment contains findings that Katsaras had breached the July 6, 2004 sales agreement and July 21, 2004, escrow instructions, as well as the covenant of good faith and fair dealing implied in these contracts, and that his breaches were intentional injuries to respondents.
DISCUSSION
Katsaras contends that the October agreement bars respondents’ recovery on their claims for breach of contract and breach of the implied covenant. We disagree.
A. Standards of Review
When, as here, no statement of decision was requested, “we must assume that the trial court made whatever findings are necessary to sustain the judgment and we indulge all presumptions in favor of the order. [Citations.]” (Tusher v. Gabrielsen (1998) 68 Cal.App.4th 131, 140.) To the extent Katsaras challenges the trial court’s factual findings, whether express or implied, we examine the record for substantial evidence to support these findings. (Nordquist v. McGraw-Hill Broadcasting Co. (1995) 32 Cal.App.4th 555, 561; Green v. Smith (1968) 261 Cal.App.2d 392, 397.) We thus “consider the evidence in the light most favorable to the prevailing party, giving that party the benefit of every reasonable inference and resolving conflicts in support of the judgment. [Citation.]” (Nordquist v. McGraw-Hill Broadcasting Co., supra, 32 Cal.App.4th at p. 561.) In contrast, we independently review the trial court’s resolution of questions of law. (Home Depot, U.S.A., Inc. v. Contractors’ State License Bd. (1996) 41 Cal.App.4th 1592, 1599.)
B. Forfeiture
At the threshold, we address whether Katsaras forfeited his contention by failing to plead the October agreement as an affirmative defense in his answer. Generally, defenses that rely on facts not implicated by denials of the complaint’s allegations constitute “‘new matter,’” and must be pleaded as affirmative defenses in the answer. (FPI Development, Inc. v. Nakashima (1991) 231 Cal.App.3d 367, 383-384 & fn. 4; 5 Witkin, Cal. Procedure (4th ed. 1997) Pleading, §§ 1008-1009, pp. 461-463.) Respondents argue that the October agreement is an affirmative defense not properly pleaded in Katsaras’s answer, and thus assert that Katsaras has forfeited the defense.
The record does not support respondents’ conclusion, regardless of whether the October agreement is an unpleaded affirmative defense. As the court explained in Jones v. Dutra Construction Co. (1997) 57 Cal.App.4th 871, 877 (Jones), when a party fails to challenge the sufficiency of the pleading of an affirmative defense upon which the adversary relies at trial, the party may not claim on appeal that the adversary’s answer is defective. That is the case here.
During opening statements, Katsaras’s counsel argued that the October agreement rendered the sales agreement “null and void.” He stated: “[W]e really don’t see how they have a case. That’s our position.” Subsequently, Katsaras’s counsel cross-examined the Roses about their understanding of the consequences of the October agreement. Following the presentation of evidence, Katsaras’ counsel pointed to the October agreement, and argued that once it was signed, Katsaras’ obligations under the sales contracts were “null and void.” Throughout the trial, respondents never objected that the October agreement was not pleaded as an affirmative defense in Katsaras’s answer. Accordingly, Katsaras may raise his contentions regarding this defense on appeal. (Kane v. Sklar (1954) 122 Cal.App.2d 480, 483 [contention that defense was improperly pleaded is not cognizable on appeal when defense was litigated without objection at trial].)
Pointing to Trafton v. Youngblood (1968) 69 Cal.2d 17 (Trafton), Jessup v. King et al. (1854) 4 Cal. 331 (Jessup), and McComb v. Reed (1865) 28 Cal. 281 (McComb), respondents contend that Katsaras may not assert a defense predicated on the October agreement. We disagree. In Trafton and Jessup, objections to an unpled defense were raised before the trial court. (Trafton, supra, 69 Cal.2d at pp. 30-33 [party may not assert unpled defense on appeal when trial court denied party leave to amend answer to allege facts underlying such defense]; Jessup, supra, 4 Cal. at pp. 331-332 [trial court properly barred evidence regarding unpled defense after denying leave to amend answer to assert defense].) As noted, respondents raised no such objection.
In our view, McComb relies on obsolete pleading rules superseded by modern practices. There, our Supreme Court held that a judgment was infirm insofar as it rested on allegations that were improperly pleaded, even though apparently no pertinent objection had been raised at trial. (McComb, supra, 28 Cal. at p. 284.) Since McComb, courts have adopted a liberal policy concerning the amendment of pleadings. (5 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 1126, pp. 581-582.) As the court indicated in Jones, this liberal policy underwrites the rule that parties must challenge the litigation of unpled defenses at trial to preserve the objection on appeal: “If [the] plaintiffs had openly challenged the adequacy of defendants’ pleading in the trial court, and defendants tendered a potentially meritorious unpled defense, it is likely that they would have been allowed to amend their answer. [Citation.]” (Quoting FPI Development, Inc. v. Nakashima, supra, 231 Cal.App.3d at p. 385.)
C. Cancellation or Rescission
We therefore examine the merits of Katsaras’s contention that the October agreement bars respondents’ recovery on their claims. Generally, “‘[a]n executory contract may be rescinded, abandoned or terminated, either wholly or in part, by the mutual consent of the respective parties at any stage of their performance.’ [Citation.]” (Kane v. Sklar, supra, 122 Cal.App.2d at p. 482, quoting Sanborn v. Ballanfonte (1929) 98 Cal.App. 482, 487 (Sanborn).) Because the record unequivocally establishes that the parties executed the October agreement to terminate the sales transaction, the key issues concern the legal consequences of the October agreement. These consequences hinge on whether it rescinded or merely cancelled the prior sales agreements.
“There is a difference between a cancellation of a prior agreement and a ‘rescission’ of an agreement. The former refers to a prospective termination of the existing contract. The latter refers to a retroactive termination. [¶] By a ‘cancellation,’ each party agrees to terminate a contract and relinquish its rights under the contract for future performance by the other party. However, each party reserves any rights for recovery for prior completed performance and for damages for any prior breach. [¶] On the other hand, a ‘rescission’ means that a prior contract is void ab initio. A rescission not only terminates the contract as to future performance of its terms but also requires a restoration of the parties to their former position prior to rescission . . . .” (1 Miller & Starr, Cal. Real Estate (3d. ed. 2003) Contracts, § 1:103, pp. 352-353, fns. omitted.) When an agreement constitutes a rescission, the consideration for the agreement is the parties’ mutual abandonment of the right to recover damages for breaches of the underlying contract. (Honda v. Reed (1958) 156 Cal.App.2d 536, 539.)
Generally, an agreement terminating a contract is presumed to be a rescission unless the agreement indicates that the parties intended it to be a cancellation. (Evans v. Rancho Royale Hotel Co. (1952) 114 Cal.App.2d 503, 508-509 (Evans); Early v. Forbes (1935) 5 Cal.App.2d 726, 727-728 (Early); 1 Miller & Starr, supra, Contracts, § 1:103, at p. 354.) As the court explained in Early, “‘parties to a contract may agree to cancel it, and if there be nothing to indicate a different intention, each party will be fully discharged from all liability under such contract.’” (Quoting Alabama Oil & Pipe Co. v. Sun Co. (1906) 99 Tex. 606, 611 [92 S.W. 253, 254].) Instructive applications of this principle are found in Sanborn and Evans.
In Sanborn, the plaintiff entered into two contracts that permitted the defendant to extract oil from the plaintiff’s property in exchange for the payment of royalties. (Sanborn, supra, 98 Cal.App. at pp. 483-485.) When the defendants stopped making the payments, the plaintiff served notices on them asserting that the contracts were terminated; in addition, the notices stated that the plaintiff waived his rights to further royalty payments, with the exception of those due at the time of the notices. (Id. at pp. 486-487.) The court in Sanborn concluded that the defendants had accepted the terms of the notices, and that the notices cancelled, but did not rescind, the underlying contracts. (Id. at pp. 488-489.)
In contrast, in Evans the plaintiff agreed to buy two parcels of real property in Palm Springs. (Evans, supra, 114 Cal.App.2d at pp. 504-505.) After the defendants accepted her offer, the parties opened escrow, and the plaintiff made an escrow deposit. (Id. at p. 505.) When the plaintiff discovered undisclosed restrictions on the property, she decided to end the transaction and informed the defendants, who arranged for the return of her deposit. (Id. at p. 505.) The parties then executed escrow cancellation instructions that obliged the defendants to pay the cancellation costs, but lacked an express reservation of rights. (Id. at pp. 505-506.) The plaintiff sued the defendants for fraudulent representations regarding the property, and obtained a judgment in her favor. (Id. at p. 505.)
The court of appeal reversed, concluding that the cancellation instructions constituted a rescission. (Evans, supra, 114 Cal.App.2d at pp. 507-509.) It rejected the plaintiff’s contention that the instructions’ silence regarding her right to recover damages indicated that she had not waived this right: “The record shows that this matter was not discussed by the parties and it is to be presumed that the written agreement contained all the terms upon which the parties had agreed for rescission . . . . The inference is that there was a mutual waiver of all claims for damages and that it was a complete settlement of their controversy.” (Id. at p. 508.)
Here, the record discloses that both parties -- Katsaras and respondents through their counsel -- reviewed the October agreement before executing it. Although the agreement contains a provision releasing respondents’ and Katsaras’s claims against the escrow company arising out of the escrow, it lacks a similar term waiving respondents’ rights to recover damages from Katsaras. The record does not suggest that the parties discussed whether the agreement should include such a term. The trial court rejected Katsaras’s contention that the October agreement waived the Roses’ rights to recover damages from Katsaras, and in denying Katsaras’s motion for a new trial explained that the agreement was not a rescission because “the hold harmless agreement applied only against the escrow [company].”
The October agreement states: “In connection with the above referenced escrow, and the sum of $2,500.00 held on deposit by the escrow holder, the parties herein have mutually agreed to the following cancellation instructions: [¶] 1. The parties agree that the above-numbered and referenced escrow, including all amended and modified escrow instructions, are hereby cancelled. Escrow Holder shall deduct and pay the following fees from the Buyer[’]s deposit in escrow: [¶] . . . [¶] 2. Upon receipt of fully executed cancellation instructions, Escrow Holder shall pay the above sums listed in paragraph 1, and disburse the remaining balance, $939.72 to the Buyer herein. This Cancellation Instruction may be executed in counterparts, and all of the original signature pages of which shall constitute the original of this document. [¶] 3. The Buyer and Seller(s) release and hold harmless, and indemnify, Escrow Holder and its attorney from any and all claims of any kind and nature whatsoever, known or unknown, concerning the above-referenced Escrow and Funds held on deposit, and the parties hereto specifically and expressly waive the provisions of California Civil Code Section 1542 with respect to Escrow Holder and its attorney.”
In our view, the trial court did not err. Our inquiry into the status of the October agreement follows established principles. When, as here, the extrinsic evidence bearing on the interpretation of a contract is uncontradicted, we interpret the contract de novo, and are not bound by the trial court’s determinations. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866; Intershop Communications AG v. Superior Court (2002) 104 Cal.App.4th 191, 196.) Because the extrinsic evidence present here does not indicate the parties’ intentions, we examine the language of the agreement itself, viewed as a whole. (Eltinge & Graziadio Dev. Co. v. Childs (1975) 49 Cal.App.3d 294, 297.)
Katsaras suggests that Patricia Rose’s testimony that she believed the October agreement “finish[ed]” the sales transaction establishes that the agreement operated as a rescission. We disagree. Patricia Rose’s use of the term “finish” does not indicate whether she regarded the October agreement as a rescission or cancellation. Moreover, because nothing suggests that she communicated her understanding of the October agreement to anyone, it is immaterial to the interpretation of the agreement. (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, §§ 744, 748, pp. 832-833, 836-838.)
Although the parties did not include a term addressing their rights to recover damages from one another, they elected to include a term waiving their rights to recover damages from the escrow company. Because the October agreement, viewed as a whole, manifests the parties’ intent to waive recovery rights solely by an express term, the absence of any term waiving their rights against each other is itself an objective expression of their intent to cancel -- but not rescind -- the sales transaction. The October agreement is thus unlike the cancellation instructions in Evans, which lacked any objective sign of an intent to reserve the right to recover damages. Because the terms of the October agreement affirmatively “indicate a different intention” than one to waive recovery of damages (see Early, supra, 5 Cal.App. at p. 728), we conclude the trial court did not err in determining that the October agreement was not a rescission of the sales transaction.
On a different matter, Katsaras contends that the Roses’ claim for breach of the implied covenant was not independent of their claim for breach of contract. Because he does not argue in any manner that the damage award is infirm or that the error (if any) is otherwise prejudicial to him, he has forfeited any such contention.
DISPOSITION
The judgment is affirmed.
We concur: EPSTEIN, P. J., SUZUKAWA, J.