Opposition Brief — Shell Oil Co. v. Nelson

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| Supreme Court, U.S.

riLe D

AUG 13 1993

No. 93-64 OFFICE OF THE GLLRK

In The

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1993

SHELL OIL COMPANY,

Petitioner,

Vv.

EDWARD L. NELSON, et a/.,

Respondents.

On Petition for a Writ of Certiorari to the

Court of Appeal for the State of California

Second Appellate District, Division One

OPPOSITION TO PETITION

**G. Dana Hobart

Hobart & Heeringa

Donald Caffray

4676 Admiralty Way, Suite 801

Marina del Rey, California 90292

(310) 306-0063

Attorneys for Respondents

Charlotte Nelson, et. al.

**Counsel of Record

August 15, 1993

er —— alent wee

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QUESTIONS PRESENTED

Respondents respectfully submit that

there are no questions presented for

review in Shell Oil Company’s Petition

for Writ of Certiorari which have not

been fully decided and settled by this

Court’s rulings in Pacific Mutual Life

nsura Co. Vv. slip, 499 U.S. 1, 111

S.Ct. 1032, 113 L.ed.2d 1 (1991) and TxXO

oduction Corp. ‘ ce Resources,

61 U.S.L.W. 4766 (U.S. June 22, 1993).*

* The decision concerning which

petitioner herein seeks the intervention

of this Court is an unpublished opinion

which, under California law, denotes an

opinion that does not incorporate any

new, significant or conflicting legal

principles. (See California Rules of

Court, Rule 976(b)). It is therefore

deemed to have no precedential value and

cannot be cited as precedent for any

issue or subject discussed in the

decision. (California Rules of Court,

Rule 977 (a) )

PARTIES TO THE PROCEEDING

The Petitioner, Shell Oil Company,

is a Delaware corporation with its

principal place of business in Houston,

Texas.

The Respondents are Charlotte Louise

Nelson, Sharlee Lou (Nelson) Welsh, and

Mary Jo (Nelson) Settles, as trustees of

the Nelson Trust.

TABLE OF CONTENTS

QUESTIONS PRESENTED. .. + s«+s+-e se sei

PARTIES TO THE PROCEEDING ...... ii

INTRODUCTORY STATEMENT ..... . 1

A. THE FACTS ..-.+ ++ «© « e 5

B. THE HISTORY OF THIS

ei ys Re ne a ee ee 413

C. REASONS WHY THE PETITION

SHOULD BE DENIED ee a ae ee 23

I SHELL’S FIRST CONSTITUTIONAL

CLAIM HAS NO MERIT, SINCE

THE TRIAL COURT UTILIZED THE

PRECISE CRITERIA APPROVED IN

HASLIP AND CONFIRMED IN TXO

AND THE STANDARD OF APPELLATE

REVIEW WAS WELL WITHIN THIS

COURT’S GUIDELINES ...... . 23

1. The trial court’s detailed

statement of decision demon-

strates that the court

applied the precise criteria

approved by this Court in

Haslip and ratified in TXO. 24

iii

IIl

TABLE OF CONTENTS - Continued

a) Shell’s petition does

not show that the court’s

findings deviated in any

way from the principles of

Haslip and TXO ..... 29

Shell’s claims concerning

the California standard of

review are without merit . 31

SHELL’S SECOND CONSTITUTIONAL

QUESTION IS WITHOUT MERIT AND

IS BASED ON SELF-SERVING

CHARACTERIZATIONS WHICH IN

TURN RELY ON FACTUAL

ALTERATION .. -. © « «© « «© « 39

SHELL’S THIRD POINT IS WITHOUT

MERIT: THIS COURT HAS TWICE HELD

THAT ATTORNEYS’ FEES ARE

CONSTITUTIONALLY PROPER TO

CONSIDER IN ASSESSING PUNITIVE

DAMAGES . . « «© « «© « «© « « « 48

THIS COURT’S RETRANSFER ORDER

IN THE AMERICAN NATIONAL BANK

CASE DOES NOT SUPPORT A

RETRANSFER OF NELSON ... .- 50

CONCLUS I ON ad * * * ad * dl ad ad 5 6

TABLE OF AUTHORITIES

CASES

54 Cal. 3d 105

284 Cal. Rptr. 318

S23 Po. 26 32346 «+ se eee vvwe eo eo BH

(Sth Cir. 1991) 934 Fed.2d 1377... 27

Gourley v. State Farm Mut.

Auto. Ins. Co.,

$014133 (Court of Appeal

Opinion unpublished) .. .. 21, 36, 37

’ : | on

Bank and Trust Co.,

844 S.W. 2d 408 (Ky. 1992) ... 4, 50

51, 52, 53, 54, 55

Hasson v. Ford Motor Co.,

32 Cal.3d 388

185 Cal.Rptr. 654

we ete ay ee |

12 Adv. Cal. App. 4th 330

10 Cal. Rptr. 2d 76 Pe 0 eo wee SOs oF

12 Ady. Cal. App. 4th 244

6 Cal. Rote. 26 333 . « « « « 23, 36, 37

TABLE OF AUTHORITIES - Continued

CASES

Pacific Mutual Life

499 U.S. 1

111 S.Ct. 1032

543 6.08.38 1 1004). sw ss SS 3

1. 21, 23, 24, 2%. 2

a) oe or a a)

44, 45, 47, 48, 52, 53

TXO Production Corp. v.

Alliance Resources Corp.

P , No. 92-479

61 U.S.L.W. 4766

(U.S. June 22, 1993) .. i, 2-5, 20-24

28-31, 36-38, 47-49, 52, 53

‘

Willis v don,

20 Cal. 3d 629

143 Cal. Rptr. 723

ore wee Fee baere) « « s 2 6 6 eo 0 te OO

Wollersheim v.

Church of Scientology,

10 Adv. Cal. App. 4th 370

TABLE OF AUTHORITIES - Continued

Cal. Civil Code §§ 1695.7é8,

1812.217-218 and 2924h (9g) ....

Cal. Civil Code § 3294 ..... 4&4,

Cal. Penal Code §§ 532 and 182(4)

California Rules of Court

ee ee eers 6 ee et ee eh te hl

mee Beetle Gee eee ee +e ew

eee erro. «se © «6 ee 6 ee

vii

Deena

No. 93-84

In The

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1993

SHELL OIL COMPANY,

Petitioner,

Vv.

EDWARD L. NELSON, ef a/.,

Respondents.

On Petition for a Writ of Certiorari to the

Court of Appeal for the State of California

Second Appellate District, Division One

OPPOSITION TO PETITION

INTRODUCTORY STATEMENT

It is clear that the three so-called

federal constitutional questions Shell

Oil Company ("Shell") purports to raise

were completely resolved by this Court in

its two recent decisions on the

subject.['] TXO Production Corp. vv.

Alliance Resources Corp., _U.S.___, no.

92-479, established the constitutionality

of substantial punitive damages under the

Federal Constitution where (as in TxXO,

and much more so here) the defendant

e To support its claims in light

of these decisions, Shell has resorted to

patent distortions and omissions of

relevant facts supporting the trial

court’s conclusions, including:

"The court cannot overstate its

assessment of Shell’s cold, ruthless plan

to profit off the life savings of an

elderly couple." (Appendix C to Shell’s

petition, p. 33a)

The trial court also found that

"Shell’s conduct is at the outer limits

of intolerable business practice." (Id.,

p. 31a)

pursued a "malicious and fraudulent"

course of conduct, "part of a larger

pattern of fraud, trickery and deceit."

(TXO plurality opinion, p. 17. See also

id., pp. 14-16.)

Pacific Mutual Life Ins. Co. v

Haslip, 499 U.S. 1, 111 S.Ct. 1032, 113

L.Ed.2d 1 (1991) confirmed that the due

process clause of the United States

Constitution permits substantial punitive

damages when utilized to “advance the

State’s interest in minimizing fraud"

(111 S.Ct. at 1041) and that a sub-

stantial punitive damage award is

constitutional when it is based on a

defendant’s failure to prevent its agent

from committing fraud. (Id., pp. 1040-

1041) Shell’s conduct at bar is far more

egregious as it not only knew of and

authorized the Nelson fraud, its

instruction manual tutored such fraud as

a standard procedure for doing business.

(See also TXO, concurring opinion of

JUSTICE KENNEDY, pp. 3-4, noting that TXO

was "not a case of negligence, strict

liability or respondeat superior," but a

case of intentional "’fraud, trickery and

deceit’" and "’unsavory and malicious

practices.’")

Shell’s petition brings to mind Yogi

Berra’s celebrated apothegm, "It’s deja

vu all over again." TXO’s corpus has

scarcely cooled, but its message has not

deterred Shell from raising punitive

damage challenges plainly laid to rest by

TXO and Haslip.

Shell’s apparent objective in filing

its petition while the TXO opinion is

still warm is not to secure consideration

by this Court. Rather, Shell urges yet

another round of review by the California

courts. [7] Shell asks for an order

remanding this case "for reconsideration

in light of TXO." (Shell’s petition at

pp. 16, 20, 26) Shell relies on this

Court’s order remanding H.C. Hanson v.

American National Bank and Trust Co., 844

S.W. 2d 408 (Ky. 1992). (Petition, pp.

7, 8, 14, 15, 16) Shell does not mention

. The current unpublished aw

of the Court of Appeal (Nelson III) is

annexed to Shell’s petition at pp. 2a-

24a. In addition, the California Courts

of Appeal have issued two other opinions,

filed May 24, 1989 and October 21, 1991,

referred to in the current opinion as

Nelson _I and Nelson II respectively.

(Nelson III, Shell’s petition, pp. 3a,

7a)

For this Court to have a more

complete picture of the proceedings in

this case, respondents annex the two

earlier opinions hereto as appendices,

pp. 1A-91A of the annexed appendices.

Citations to "Pet. App." refer to

the pertinent pages of Shell’s appendix.

Citations to "Rspts.’ App." refer to the

appendices we have annexed and include

Nelson I and Nelson II.

the other cases pending at the time TXO

was decided where this Court denied

certiorari.

As shown below, no justification

whatever exists for further proceedings

in Nelson v. Shell which has’7 been

critically analyzed three times by the

California Courts of Appeal and twice

presented by Shell to the California

Supreme Court. This litigation should

now be laid to rest.

A. THE FACTS

The facts are detailed in the most

recent opinion of the Court of Appeal,

annexed to Shell’s petition. (Pet. App.,

pp. 2a-24a) [*] Briefly stated, these

. Contrary to Shell’s statement

(Petition, p. ii), Edward L. Nelson is

not a party to this proceeding, having

died 14 years ago, in mid-1979. (Opinion

of the Court of Appeal, Pet. App., p.7a.)

The respondents are Charlotte Nelson, the

widow of Edward Nelson, and the Nelsons’

lara am

facts establish that a corner lot which

had been owned by members of the Nelson

family since 1942 was scheduled for

condemnation by Caltrans, an agency of

the State of California. (Opinion, Pet.

App., pp. 3a, 5a) Shell had leased the

property for use as a service station

Since 1950. (Id., p. 3a) Shell and

Lewis, its real estate representative,

learned in 1975 of the prospective

condemnation, but the Nelsons (who lived

in Leisure World, in another county) did

not. (Id., pp. 3a-5a) [*)}

Lewis knew that under California law

a lessee with a favorable lease could

two daughters, Sharlee Lou Welsh and Mary

Jo Settles, trustees of the Nelson Trust.

(Nelson I, Rspts.’ App. p. 3A, NM. 2-)

* Shell implies the Nelsons knew of

the prospective condemnation. (Pet., p.3)

This is contrary to the findings (Pet.

App., p.32a) and illustrates Shell’s

revisionist presentation.

Claim a share of the condemnation

proceeds which would otherwise go to the

property owner. (Pet. App., pp. 5a-6a)

Although Shell had 10 years remaining on

its lease, Lewis tried and failed in 1976

to extend the lease by 15 additional

years. (Id., p. 4a) Then, in 1978, when

Mr. Nelson was in failing health, Shell

"pressured" Mr. Nelson to give it the

options it wanted. (Respts.’ App., p.

82A) Taking advantage of the circumstance

that the Nelsons owed Shell $5,625, Lewis

told Mr. Nelson he had two choices:

either repay,the debt or agree to three

five-year options to extend Shell’s

current lease to the year 2001, on terms

advantageous to Shell. (Id., pp. 4a, 5a)

At the time, Mr. Nelson, almost 80 years

of age, had been having serious health

problems and in fact died within a year.

(Id., pp. 4a, 7a) [*)

To further motivate Mr. Nelson to

grant Shell the desired options, Lewis

falsely told him that Shell looked

forward to many years of business there,

and had long-range plans for the station.

He also solicitously affirmed to Mr.

Nelson that the monthly rental check

would be comforting to Mrs. Nelson and

offered her financial security should

anything happen to Mr. Nelson. (Opinion,

Pet. App., p. 5a) These representations

were made even though Lewis knew the

subject property was scheduled for

condemnation and Shell had no long-term

plans. (Id., pp. 5a-6a)

* With no support in the record,

Shell represents that this ill, 80-year

old man could be perceived as "relatively

sophisticated." (Pet., p. 10.)

Thus, Shell’s factual revision which

asserts that the finding of fraud was

based only on Shell’s concealment of the

impending condemnation (Petition, p. 3)

is materially misleading. The findings

of fraud are based on the express

misrepresentations to Mr. Nelson that

Shell had long term plans for the

property and that he was providing his

wife with long term financial security.

Shell’s real objective was to obtain the

options to drastically reduce the assets

of this elderly couple by placing itself

in position to claim $620,000 of the

$975,000 condemnation proceeds which

otherwise would go to the Nelsons alone.

(Opinion, Pet. App., pp. 7a, 8a)

In making these false represen-

tations, Shell’s real estate represen-

tative (Lewis) acted upon "’the

offensively manipulative advice printed

in Shell’s base lease manual’” (Pet.

App-, p- 7a, quoting from Nelson II.)

"Base Lease Manual” is the title of a

raini nd Banual which Shell’s

real estate representatives were

instructed to follow in their real estate

dealings. (Id., p. 6a) The manual

instructed Shell’s real estate

representatives, including Lewis, in the

use of manipulative tips and techniques

to defraud and mislead property owners in

California and elsewhere. Some instruc-

tions were directed Squarely at cheating

the elderly. For example:

"(W)hen Shell wants to secure a

long term lease from ‘an owner

who is middle-aged or slightly

beyond,’ the representative

should tell the owner that ‘a

long lease gives...security of

income for...old age, -.-f.}*

4 2 {the manual } suggests

reminding an owner that, ‘After

a man dies, his family is

always better off if it has a

steady income....It is very

difficult to plan an estate on

a short-term lease. Widows and

children need the protection

afforded by the experience and

ability of 2 successful

business man. That protection

can be extended by an owner

through the use of [aj] long-

term lease.’" (Opinion at p

6a, quoting from Nelson I.)

Lewis’ misrepresentations that the

lease options would afford Mrs. Nelson

financial security were a direct

application of the foregoing technique.

Other examples of the manual’s

teaching of fraudulent techniques

included "suggestions on how to minimize

a lease feature by hurrying along,

joking, or grouping together and

dismissing as unimportant the desired

feature" sought by the property owner.

(Pet. App., p. 6a) Another technique

taught by the manual is that of "placing

the owner in a ‘defensive position’ and

in a ‘frustrated position’" when nego-

tiating leases. (Ibid.) Lewis employed

this ploy by his oppressive use of the

Nelsons’ debt to Shell. (Pet. App., p.4a;

Respts.’ App., p- 10A)

In March 1983, five years after

Shell fraudulently obtained the options,

Charlotte Nelson (by then a Widow) was

first advised by Caltrans that the

property was to be condemned for con-

struction of the Century Freeway. In

November 1984 she learned Shell was

Claiming two-thirds of the condemnation

award. According to Shell’s expert, the

value of the three five-year options was

$620,000, based on his opinion that the

fair rental value of the property was

$7,900 per month, almost $7,000 per month

more than the rental provided by the

options. (Opinion, Pet. App., p. 7a)

B. THE HISTORY OF THIS LITIGATION

This litigation commenced on June

18, 1985, when Caltrans filed a complaint

in eminent domain against the Nelsons and

Shell. (Pet. App., pp. 3a, 8a) Caltrans

included Shell in the litigation because

Shell continued to assert its claim to

two-thirds of the condemnation award,

based on the _ fraudulently procured

options. (Pet. App., pp. 7a, 8a) The

Nelsons filed a cross-complaint against

Shell seeking rescission of the options

and damages for fraud. (Id., p. 8a)

The case was first tried in 1987.

(Pet. App., p. 8a) The fraud cause of

action was tried to a jury, which

returned special verdicts, finding Shell

had committed fraud. (Pet. App., p. 8a)

The rescission cause of action was tried

to the court which also made a finding of

fraud, granted the Nelsons rescission and

assessed $1,900,000 in punitive damages,

less certain minor deductions. (Id.)

The trial court also granted Nelson’s

post-trial motion for a new jury trial on

the issue of damages on their fraud cause

of action. (Id., pp. 8a-9a) Shell

appealed the judgment of rescission and

the judgment on the jury verdict. (Pet.,

p. 4; Pet. App., p. 9a) [°]

6 Shell now relies on the jury’s

verdict as demonstrating that there were

fact-finders who would view its sordid

transaction as less loathsome. (E.g.,

petition at p. 10.) However, the trial

court’s grant of a new trial established

that the jury award was flawed. Although

Shell now embraces that award, Shell

appealed the judgment on the jury

verdict. (Petition, p. 4) The Court of

Appeal in Nelson I determined that the

Nelsons had elected the remedy of

rescission (Rspts.’ App., p. 24A); hence,

the jury’s determination has long ceased

to be of any relevance.

Upon retrial, after the first round

of appeals, Shell waived its right to a

second jury trial. (Rspts.’ App., p. 83A)

Shell attacked the punitive damage

awards on several grounds following the

first trial, but it did not claim that

the awards violated the United States or

California Constitutions. (See Opinion

ih Nelson I, Rspts.’ App., pp. 1A-42A,

discussing the issues raised by Shell.)

On May 24, 1989 the California Court

of Appeal filed its first opinion; it

reversed the award of punitive damages on

the rescission cause of action on the

ground that "no evidence of actual

damages had been’ presented in the

rescission trial." (Rspts.’ App., p. 834A)

However, the Court of Appeal affirmed

that part of the trial court’s decision

which found that Shell had committed

fraud and that the Nelsons were entitled

to rescission. (Pet. App., p. 9a)

The case returned to the trial

court, which granted respondents’ motion

for a new trial on the issue of damages

on the rescission cause of action. (Id. )

At the second trial the Nelsons

established that they had. sustained

various items of compensatory damages.

(Id.) Additional evidence also estab-

lished that Shell _ had taken no _ steps

whatever to discontinue the use of its

Base Lease Manual during the three years

between trials. (Pet. App., pp. 11la-12a)

The trial court found from this evidence

that during the three year interim "Shell

was continuing to utilize the *‘manipu-

lative techniques advanced in the

manual.’" (Pet. App., p. 12a) The trial

court assessed punitive damages of

$6,295,000, based on its conclusion that

Shell’s continued use of the manual after

the first trial and appeal established

the need for a far greater deterrent than

the original $1,900,000 punitive damage

award, which demonstrably had had no

deterrent effect on Shell. (Id.)

Shell again appealed. The Court of

Appeal again reversed portions of the

judgment. The Court held that certain

items of compensatory damages were

improperly awarded and reduced the award

of compensatory damages accordingly.

(Pet. App., pp. 9a-lla, 19a)

The Court also reexamined the

factual basis for the trial court’s award

of punitive damages. The Court held that

the evidence supported the trial court’s

original award of $1,900,000 punitive

damages on the rescission cause of

action, but the facts did not support the

full amount of the trial court’s increase

in punitive damages. (Rspts’ App., pp.

80A-87A) The Court reasoned that the

evidence in the second trial was

insufficient to establish that Shell was

continuing to utilize the fraudulent

techniques advanced in the base lease

manual. (Id., pp. 86A-87A)

The Court therefore held that the

trial court abused its discretion in

increasing the punitive damage award to

$6,295,000. (Id.) The Court held that

no further retrials would be required,

directing the trial court to redetermine

the issue of punitive damages consistent

with the views expressed in its opinion.

(Id., ». 90A)

The Court also addressed Shell’s

challenge to the constitutionality of

punitive damages and Shell’s assertion

that "the absence of objective standards

deprives it of due process." (Nelson II,

Rspts.’ App., p. 89A) The Court of

Appeal held that this argument had been

considered and rejected by the United

States Supreme Court in Haslip, supra,

and by the California Supreme Court in

Hasson v. Ford Motor Co., 32 Cal.3d 388,

402, note 2, 185 Cal.Rptr. 654, 650 P.2d

1171 (1982) (Rspts.’ App., p. 89A)

Shell petitioned the California

Supreme Court for review in November

1991. The California Supreme Court denied.

review without dissent. (Id., p. 92A)

Shell did not petition the United

States Supreme Court after denial of

review by the California Supreme Court.

After remand, the trial court

reconsidered the evidence as directed by

the Court of Appeal, and then reduced the

compensatory damages to $268,891 and

+ Ate elon

reduced the punitive damages to

$4,600,000. (Pet. App., p. 10a) The

trial court issued a detailed Statement

of Decision explaining its rationale for

the punitive damage award. (See Point

CI1, infra; Pet. App., pp. 28a-33a)

Shell appealed to the California

Court of Appeal again, contending, among

other things, that the punitive damage

award violated rights protected by the

United States and California Consti-

tutions. The Court of Appeal rejected

Shell’s contentions and affirmed the

judgment. (See Point CI2, infra.)

Shell petitioned tthe California

Supreme Court in April 1993. (Pet. App.,

Pp. 37a-62a) The petition relied on the

happenstance that the TXO case was

pending before this Court and that the

California Supreme Court had granted

review in four cases to address punitive

damages issues raised by Haslip, (supra),

and by this Court’s decision in the then-

impending TXO case. (Pet. App., pp. 42a-

43a) The pending cases relied on by

Shell were Gourley v. State Farm Mut.

Auto. Ins. Co., S014133 (Court of Appeal

Opinion unpublished); MGW, Inc. vv.

Fredericks Dev. Corp., 12 Adv. Cal. App.

4th 244, 6 Cal. Rptr. 2d 333; Wollersheim

v. Church of Scientology, 10 Adv. Cal.

App. 4th 370, 6 Cal. Rptr. 2d 532; and

Hilgedick v. Koehring Fin. Corp., 12 Adv.

Cal. App. 4th 330, 10 Cal. Rptr. 2d

76) (Pet. App., p. 42a)

In its most recent petition to the

California Supreme Court Shell requested

that the Court "hold this case so that it

can be remanded for reconsideration after

decision" in these four cases which Shell

incorrectly assumed would "be heard on

the merits." (Pet. App., p. 43a) The

California Supreme Court rejected Shell’s

requests and denied review of Shell’s

petition without dissent on May 26, 1993.

TXO was then decided, (Pet. App., p. 1a)

and soon thereafter the California court

dismissed the four petitions for review

as having been "“improvidently granted."

[7] (California Rules of Court, Rule

29.4(c))

g The Court’s order was issued on

July 15, 1993. (California Supreme Court

minutes, July 15, 1993.)

C. REASONS WHY THE PETITION

SHOULD BE DENIED

SHELL’S FIRST CONSTITUTIONAL

CLAIM HAS NO MERIT, SINCE THE

TRIAL COURT UTILIZED THE

PRECISE CRITERIA APPROVED IN

HASLIP AND CONFIRMED IN TXO AND

THE STANDARD OF APPELLATE

REVIEW WAS WELL WITHIN THIS

COURT’S GUIDELINES

The basis for Shell’s’' shifting

constitutional claims has been its

expectation that this Court’s’ then-

impending decision in TXO, supra, would

somehow support further protraction of

this litigation. As it developed, how-

ever, there is nothing in TxXO that

supports Shell’s position. Nor does TXO

change, in any manner benefiting Shell,

the law set forth in Haslip; and the

California appellate courts have already

twice rejected Shell’s claims that the

principles of Haslip affect the judgment

rendered herein. (Section B, supra.)

1. The trial court’s detailed

statement of decision

demonstrates that the court

applied the precise criteria

approved by this Court in

Haslip and ratified in Txo

Shell’s first claim in its Poixt I

is that California’s punitive damage

system violated procedural due process

"by virtue of its subjective, vague

criteria for assessing punitive damages."

(Shell’s Point I, pet., p. 9)

The vacant nature of this claim is

demonstrated by the fact that the trial

court issued a detailed statement of

decision that set forth and applied

criteria indistinguishable from those

approved by this Court in Haslip.

For example, the first group of

criteria discussed in Haslip is "whether

there is a_- reasonable relationship

| — rae

between the punitive damages award and

the harm likely to result from the

defendant’s conduct as well as the harm

that actually has occurred." (111 S.Ct.

at p. 1045, item a)

The trial court found that the "harm

likely to result from the defendant’s

conduct" included: (1) the exposure of

numerous persons to Shell’s fraudulent

"leasing and condemnation practices"

pursuant to "the program outlined" 1.

Shell’s Base Lease Manual (Pet. App., pp.

31la-32a) and, (2) cheating an elderly

couple out of the bulk of the value of

property they had owned since 1942.

(Id., pp. 32a, 33a)

Other criteria discussed in Haslip

refer to "the degree of reprehensibility

of the defendant’s conduct, the duration

of that conduct, the defendant’s aware-

we deen) ‘

Metin a

ness, any concealment, ana tre existence

and frequency of similar past conduct."

(Item b at p. 1045)

The trial court’s Statement of

Decision demonstrates that the court

found Shell’s conduct reprehensible in

the extreme, since the court said that it

"cannot overstate" its "assessment of

Shell’s cold, ruthless plan" (Pet. App.,

p. 33a) and that Shell’s conduct "is at

the outer limits of intolerable business

practice." (Id., p. 31a) The Statement

also refers to "the vulnerability of the

victims coupled with their advanced age."

(Id., p. 33a) The court noted that when

Shell obtained the lease options Mr.

Nelson was ill and 80 years of age and

Shell was "fully aware of the Nelson’s

need for retirement security and that the

deal Nelson was induced to accept woulda

undermine that security. The conduct

should not be condoned in society."

(Id., p. 33a) (Emphasis added.)

Other Haslip criteria refer to "the

profitability to the defendant of the

wrongful conduct and the desirability of

removing that profit and of having the

defendant also sustain a loss." (111

S.Ct. at p. 1045, item c) The court’s

Statement explicitly discusses’ these

elements. (See Pet. App., p. 33a)

These, and other findings it seems

unnecessary to detail, clearly establish

that the award in this case satisfies the

factors set forth in Haslip. (See also

Section II, infra.)

In Eichenseer v. Reserve Life Ins.

Co. (5th Cir. 1991) 934 Fed.2d 1377,

1385, where the Court of Appeals found

that the Haslip requirements were

satisfied, the Court pointed out that the

case was tried by a judge who "must

explain the conditions that require a

particular award of punitive damages...

and must justify the amount of punitive

damages imposed against the defendant."

The TXO decision did not alter these

principles. Rather, this Court reaffirmed

that a substantial award of punitive

damages is warranted where, as the trial

court herein found, the defendant pursued

a "malicious and fraudulent" course of

action, "part of a larger pattern of

fraud, trickery and deceit." (TXO,

plurality opinion, p. 17. See also Id.,

pp. 14-16)

a) Shell’s petition does not

show that the court’s

findings deviated in any

way from the principles

of Haslip and TxoO

In contrast to the foregoing which

demonstrates the trial court’s exacting

adherence to the Haslip and Txo

principles, Shell’s petition does not

raise any issue from TXO that would merit

this Court’s intervention. In Point I of

its petition, Shell relies on the argu-

ment that the jury herein arrived at a

different result than the trial court.

(Pet., p. 10) As discussed above, the

trial court found that the jury’s verdict

was tainted and set it aside. Neither

party sought its reinstatement on the

first appeal and on retrial Shell waived

its right to a jury. (Note 6, supra)

Thus, the jury verdict has been detached

from this case since the first opinion of

Sac eS Ee Bh ley ip es an ie OP ELI tet Ait Det ahah Sa ie ALO INP CA h P aH

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the Court of Appeal, filed in May 1989.

(Section B, supra, note 6)

Moreover, Shell has not cited any

case to support its implied contention

that in a civil action the United States

Constitution requires that one trier of

fact arrive at the same result as

another. (Petition, pp. 16-20)

Employing linguistic legerdemain to

claim the ratio here is 750-1, Shell

argues that the ratio of punitive to

compensatory damages is disproportionate.

(POt., BP. 11) Independently, however,

TXO makes it clear that the ratio is not

controlling where the conduct is

malicious, fraudulent, and part of the

defendant’s business methods. (TXO,

plurality opinion, pp. 14-17) Of course,

the actual ratio here is 17-1. (Pet.

App., p. 19a)

The desultory nature of Shell’s

constitutional challenges is demonstrated

by its assertion that financial condition

ought not be considered (Pet., pp. 11,

20), despite TXO’s reaffirmance of the

Haslip holding that "the financial

position" of the defendant is properly

considered in assessing punitive damages.

(Plurality opinion, p. 19)

2. Shell’s claims concerning the

California standard of review are

without merit

The other claim in Shell’s Point I

is that it was denied due process because

of California’s "deferential" standard of

appellate review of punitive damage

awards. (See Petition, Point I, p. 9)

This claim is ironic. The history of

this case (Section B, supra) demonstrates

that Shell received meticulous appellate

review in three appellate proceedings.

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On Shell’s first appeal, in Nelson

i, the California Court of Appeal

reversed the trial court’s punitive

damage award on the rescission cause of

action. (Nelson I, Rspts’ App., p. 39A)

The Court of Appeal’s rationale was that

Nelson had presented no evidence of

actual damages which, under California

law, are required to support an award of

punitive damages. (Id., pp. 36A-39A)

Thus, in Nelson I the Court shielded

Shell from the punitive damage award on

the rescission cause of action.

On remand, the trial court took

evidence of damages on the rescission

cause of action and awarded compensatory

damages, as well as punitive damages.

(Section B, supra) When Shell appealed,

the California Court of Appeal in Nelson

iI not only struck various items of

compensatory damages from the judgment,

but also reversit the punitive damage

award as excessive, based on a factual

redetermination favorable to hell,

stating that the evidence was insuf-

ficient to conclude that Shell was in

fact continuing to utilize the manipu-

lative techniques advanced in the Base

Lease Manual. (Pet. App., 12a)

The Court could have reasonably

concluded that Shell’s continued use of

the techniques set forth in the Base

Lease Manual was inferable from its

complete failure to take any official

action following the first trial to halt

such use. The general use of inferences

and circumstantial evidence is very broad

under California law. (See, e.g., Willis

v. Gordon, 20 Cal. 3d 629, 143 Cal. Rptr.

723, 574 P.2d 794 (1978), evincing

inci ia ate ae

California’s liberal use of inferences in

an action for compensatory damages. )

Nelson II illustrates that the Court of

Appeal will take a more restrictive

approach to the use of inferences in

punitive damage cases.

In the present opinion, the Cali-

fornia Court of Appeal defined the

standard of review as follows:

"An award of punitive

damages may be upheld on appeal

only where supported by the

evidence and must be reversed

where it is unsupported and

appears to have been the result

of passion and prejudice."

(Nelson III Opinion, Pet., p.

17a) (Emphasis added.)

Utilizing this standard, the Court

of Appeal scrutinized the trial court’s

findings and held that they supported the

punitive damage award, based upon Cali-

fornia criteria (which are, as detailed

above, substantially the same as those

approved by this Court in Haslip).

Shell relies on statements by the

California Supreme Court in Adams _v.

Murakami, 54 Cal. 3d 105, 284 Cal. Rptr.

318, 813 P. 2d 1348, questioning whether

California’s system of appellate review

was consistent with Haslip. (Pet., p.

13) The Court of Appeal addressed that

claim in part III of its opinion (Pet.

App., pp. 22a-24a) and concluded that

"California’s review of punitive damage

awards is not violative of the

constitutional guarantees of due

process." (Id, p. 24a)

The subsequent unanimous denial of

Shell’s petition for review by the

California Supreme Court demonstrates

that Court saw no error in the Court of

Appeal’s conclusions regarding compliance

with Haslip. Had the California Supreme

nila REN CTR A He ale AR te puma IEG Oa Dede:

Court not agreed, it would have granted

review in the light of Haslip and the

pending TXO, as it did in the four

punitive damage cases cited above

(Section B, supra), Gourley, MGW, inc. ,

W sheim, and Hilgedick.

The California Supreme Court’s

denial of review also confirms that it

saw no potential transgression of the

federal constitution, notwithstanding

that TXO was pending before this Court.

Since this Court did not accept the

defense position in !Txo, it is even

clearer that the California Supreme Court

would not find any potential federal

constitutional issue in Nelson v. Shell.

In its petition to the California

Supreme Court, Shell asserted that "The

first issue raised here is identical to

that which will be decided in these four

cases. . . [i.e., Gourley, MGW, Inc.,

Wollersheim, and Hilgedick.]" (Emphasis

added. ) (Pet. App., p. 43a) That

"identical" issue is a virtual mirror

image of Shell’s first "Question

Presented" before this Court. Since the

California Supreme Court has now

dismissed reviews of those four cases

following the TXO decision, there is no

reason at all to remand Nelson for a

review of the "identical" issue already

decided by that Court in conformity with

TXO and Haslip.

Nothing in TXO alters the Haslip

criteria already twice reviewed by the

California courts regarding Nelson v

Shell. TXO rejected the defendant’s plea

for a "heightened scrutiny" review

(plurality opinion at p. 11) and con-

Cluded that a jury award which was upheld

at ta eal eee ot

‘

“a

by the trial judge and unanimously

affirmed on appeal "is entitled to a

strong presumption of validity [and] ...

there are persuasive reasons for

suggesting that the presumption should be

irrebuttable che or virtually = so"

assuming that fair procedures were

followed. (Plurality opinion, p. 12)

In TXO this Court also noted that

the West Virginia appellate opinion "was

unanimous and gave careful attention to

the relevant precedents, including our >

decision in Haslip..." (Plurality

opinion, p. 20) Nelson ciearly meets

that test since Haslip was twice

considered by two different California

Courts of Appeal which, independently,

unanimously found no Haslip violation,

and the California Supreme Court twice

denied review of Shell’s_ petitions

without dissent. (Pet. App., p. 1a;

Rspts.’ App., p. 92A)

It is respectfully submitted that

Shell’s First Question is captious and

does not merit further attention or delay

by a retransfer to California Courts

which have already resolved all of the

issues arguably involved.

SHELL’S SECOND CONSTITUTIONAL

QUESTION IS WITHOUT MERIT AND

Is BASED ON SELF-SERVING

CHARACTERIZATIONS WHICH IN TURN

RELY ON FACTUAL ALTERATION

Shell’s second constitutional propo-

sition is that it was denied "substantive

due process" because the punitive damage

award was "fundamentally unfair."-(Pet.,

Point II, p. 16) Shell asserts that the

increase at the retrial was based on

"essentially the same factual record."

PT rare ee Pee gree

(Shell’s Question Presented, No. 20)

While this and every retrial of

necessity involves "essentially" the same

facts as the first trial, Shell slides

past the significant additional evidence

adduced at the retrial: Nelson proved

that the initial award of punitive

damages had not motivated Shell to

rescind or withdraw use of its infamous

Base Lease Manual. Over three years

later, at the September 1990 retrial

(Rspts.’ App., p. 47A), Nelson subpoenaed

each and all documents Shell had created

in the three year interval between trial

number one and trial number two which

evidenced any modification or withdrawal

of the manual, or any part thereof.

(Pet. App., p. 8a) No documents were

produced and Shell’s counsel eventually

stipulated that no such documents

existed. (Ibid.)

On appeal Shell argued that the

increased award could not be justified

based on “use of the base lease manual

subsequent to 1987..." (Rspts.’ App., p.

84A) The Court of Appeal found that the

"contention is without merit cee

{because, in California] evidence of the

defendant’s continuing bad acts is

relevant to the issue of malice."

(Rspts.’ App., pp. 84A-85A)

The fact that during the three-year

interim between trials Shell had done

nothing to rescind or modify the vicious,

fraud-inducing Base Lease Manual was

Significant to the trial court: "Some

effort following the first trial to

withdraw or recall the base lease manuals

would be reasonably expected if the first

punitive damage award was seen as

anything beyond a mere nuisance." (Pet.

App., p. 30a) After describing a few of

the fraudulent techniques Shell taught

its personnel to employ (Id.), the trial

court continued: "By not rescinding such

methods promptly and clearly Shell has at

a minimum left the continued use of these

manuals up to the individual choice of

field personnel, many of whom were

trained to follow these techniques. It

is obvious that the first assessment of

punitive damages has been insignificant

considering that one [objective] ... is

to deter future conduct of a similar

nature...The sum of $4,600,000...is the

minimal amount that will deter future

conduct and fairly and justly punish

outrageous and fraudulent conduct."

(Id., p. 31a)

The essence of Shell’s Point II is

that the United States Constitution

prohibits California from punishing it

for failing to take steps to halt the

fraudulent practices advocated in the

Base Lease Manual. (Pet., pp. 16-20)

Shell’s argument is’ particularly

hollow considering this Court’s holding

in Haslip, supra, that there was no

constitutional impediment to a

substantial award of punitive damages

(see 111 S.Ct. at p. 1037, note 2) based

on defendant’s failure to prevent its

agent from committing a fraud. (See 111

S.Ct. at pp. 1040-1041)

This Court said:

"Alabama’s common-law rule

is that a corporation is liable

for both compensatory and

punitive damages for fraud of

its employee effected within

the scope of his employment.

We cannot say that this does

not rationally advance the

State’s interest in minimizing

fraud. Alabama long has

applied this rule in the

insurance context, for it has

determined that an insurer is

more likely to prevent an

agent’s fraud if given

sufficient financial incentive

to do so. [Citation]

"Imposing exemplary

damages on the corporation when

its agent commits intentional

fraud creates a strong incen-

tive for vigilance by those in

. ition t uard substan-

tially against the evil to be

prevented.’ [Citation}]" (111

S.Ct. at p. 1041) (Emphasis

added. )

California law is less expansive

than the Alabama law construed in Haslip

Since it does not permit holding a

corporation responsible in punitive

damages for acts of its agent, absent

proof of authorization, ratification and

the like. (See California Civ. c. Section

3294 (b) ) However, the two States are

equally interested in "minimizing fraud,"

precisely the point the trial court made

when it stated, "It is obvious that the

first assessment of punitive damages has

been insignificant considering that one

of the purposes of punitive damages is to

deter future conduct of a= similar

nature." (Pet. App., p. 31a) In Nelson,

unlike Haslip, we are not dealing with

renegade agents overstepping their

authority. Here, Shell created the

fraudulent techniques and urged that they

be followed.

Yet, despite the punitive damage

assessment, despite having its’ foul

instruction manual exposed for all to

see, and despite knowing the distressful

effect its use wrought on an elderly

family, Shell acted with callous indif-

ference to the property owners with whom

it deals, the public, its employees and

the judicial system. It did absolutely

nothing to rescind or modify the manual

or otherwise officially act to prevent

the continuance of those business

practices (Pet. App., p. 17a) which were

found by the trial court to be "at the

outer limits of intolerable business

practice." (Pet. App., p. 31a)

The need to send Shell a meaningful

message in light of this action, and its

Subsequent inaction, was apparent to the

trial court:

"Shell gave virtually nothing for

the lease extensions, bore no risk,

and stood to take $600,000 from the

Nelsons. If merely one effort

creates such a gain the enticement

of profitability would be too

tempting to resist. The potential

for enormous profit must be dampened

by meaningful penalty if caught."

(Pet. App., p. 33a)

The California Court of Appeal

agreed that the increase was appropriate

and even necessary to _ finally "get

{[Shell’s}) attention" to the need to put

an end to its fraudulent techniques of

doing business in California. (Pet. App.,

pp. 18a-19a) Shell had been using the

techniques of the Base Lease Manual since

1960. (Respts. App., p.30A)

In TXO, this Court reaffirmed that

in calculating punitive damages the trier

of fact could consider the "magnitude of

the potential harm that defendant’s

conduct would have caused to its intended

victim if the wrongful plan had suc-

ceeded, as well as the possible harm to

other victims that might have resulted if

similar future behavior were not

deterred." (Plurality Opinion, pp. 15-16)

(Emphasis in original.)

It is respectfully submitted that

both TXO and Haslip demonstrate that the

California Supreme Court and Appellate

Court were correct in finding that

nothing in Shell’s second "Question

Presented" merits further delay in

implementation of the California

judgment.

Iit

SHELL’S THIRD POINT IS WITHOUT

MERIT: THIS COURT HAS TWICE

HELD THAT ATTORNEYS’ FEES ARE

CONSTITUTIONALLY PROPER TO

CONSIDER IN ASSESSING FUNITIVE

DAMAGES

Shell’s effort to create a federal

due process issue out of a "ratio"

argument that assails consideration of

attorney fees (Pet., p. 25) has been

rejected in Haslip and TxXO. In Haslip,

supra, this Court held that one of the

factors that the trier of fact could

properly consider in determining the

amount of punitive damages to award was

"all the costs of litigation." (111 S.Ct.

at p. 1045) Similarly, in TXO, supra,

the compensatory damages consisted of the

costs of defending against defendant’s

declaratory judgment action, which is no

different than the situation at bar.

While Shell’s ratio argument depre-

cates the significance of Nelson’s

attorneys’ fee expenditure of $268,000 to

prevent a theft of $650,000 (Pet., p.

22), this Court realistically recognized

that the expense of litigation is as real

a financial loss to a victim of fraud as

any other type of monetary damage.

Shell also fails to mention that the

trial court reviewed the attorney fees

incurred by Nelson and made an express

finding that they were necessary and

reasonably incurred. (See Rspts.’ App.,

p. 69A, note 10 and text) In various

types of cases, such as Nelson,

attorneys’ fees are appropriately

considered "as compensatory damages."

(Rspts.’ App., p. 69A) Thus, the Court

of Appeal appropriately depicted the

ratio here to be 17-1. (Pet. App., p.

19a) Shell does not assert that a 17-1

ratio violates due process of law.

THIS COURT’S RETRANSFER ORDER

IN THE AMERICAN NATIONAL BANK

CASE DOES NOT SUPPORT A

RETRANSFER OF NELSON

In a last-ditch effort to create the

appearance of a justiciable issue, Shell

attaches to H.C. Hanson vv, American

National Bank and Trust Co., supra, 844

S.W.2d 408, with limpet-like tenacity.

(See Shell’s petition at pp. 7, 8, 14,

15, 16, and 26) Because this Court

vacated and remanded American National

Bank (61 U.S.L.W. 3669), Shell purports

to discern much in common with it.

However, American National Bank provides

no justification to further extend this

litigation marathon. [(*}

Shell asserts that American National

Bank is germane here because, Shell

Claims, this Court’s retransfer order is

addressed to the standard of review.

(Petition, pp. 7-8, 14-15) We have

demonstrated above that the California

standard of review, as applied in Nelson

* Respondent Charlotte Nelson was

born December 3, 1907, and is 85 years of

age. (Declaration of Charlotte Nelson,

dated October 15, 1992, in support of her

Motion for Preference in the California

Court of Appeal.)

Even though Mrs. Nelson’s Motion for

Preference was granted, 16 months have

elapsed since the judgment was entered on

March 31, 1992.

The order which Shelli seeks would

result in yet another round of appellate

litigation. This case would be retrans-

ferred to the California Court of Appeal.

After the decision of that Court, Shell

could again petition the California

Supreme Court and then this Court.

by the California appellate courts, fully

complies with Haslip and TxO. (Point CE?

supra) Furthermore, Kentucky has a

"first blush rule" to determine if a

punitive assessment was the product of

passion and prejudice. (American National

Bank, supra, 844 S.W.2d at 416) Cali-

fornia’s standard of review is more

stringent. (Nelson III Opinion, Pet.,

p.17a)

Shell next claims that California’s

criteria for awarding punitive damages

are less specific than the criteria

"which this Court apparently viewed as

potentially insufficient in merican

a ank." (Petition, p. 15) We

have demonstrated above that the trial

court painstakingly applied the criteria

approved by Haslip. (Point CI 1, supra)

Shell then states that Kentucky does

not consider a defendant’s wealth.

(Petition, - pp. 15) This Court has,

however, made it clear that considering a

defendant’s wealth does not present a

constitutional issue. (TXO, supra,

plurality opinion at p. 17, note 28;

Haslip, supra, 111 S.Ct. at p. 1045) (%]

Additionally, Shell fails to mention

that American National Bank differs from

the case at bar in several other

significant respects:

The petitioner in American

National Bank claimed that the punitive

damages award was equal to one-half of

' Indeed, consider the financial

havoc which could be wreaked if a defend-

ant’s net worth were not an jndicium of

consideration thus increasing the likeli-

hood that triers of fact would assess

punitive damages grossly disproportionate

to a defendant’s worth (as apparently

happened in American National Bank).

its net worth and hence would destroy it.

(American National Bank petition at pp.

21, 25-27.) (See footnote 9, supra.) No

such claim has been made by Shell. (See

Nelson III, Pet. App., p. 18a, note 2.)

Ze American National Bank involves

a judgment following a jury trial where

the bank claimed that the jury was not

instructed properly, thus prejudicing the

bank. Nelson involves a court decision.

Be In the case at bar, there was

no disagreement in the appellate courts.

In American National Bank, on the other

hand, the Kentucky appellate courts did

disagree on the issue of whether the

punitive damage award was excessive, the

Court of Appeals reversing the trial

court and the Supreme Court in turn

reversing the Court of Appeals.

4. American National Bank has not

involved the repeated reviews accorded

defendant in the case at bar.

5. American National Bank involves

a national bank, which uniquely presents

federal issues of peeteatinn the

depositors and the like. The case at bar

involves only California’s repeatedly

expressed interest in minimizing

fraudulent business' practices. (See,

e.g., Cal. Penal Code Sections 532 and

182(4), providing for imprisonment for

fraud; Cal. Civil Code sections 1695.7,

1695.8, 1812.217, 1812.218 and 2924h (9g),

providing for imprisonment or punitive

damages for fraud; Cal. Civil Code

Section 3294, providing for punitive

damages for fraud.)

CONCLUSION

If Shell had shown similar interest

in protecting the Nelsons’ legal rights

in 1978, it would not now be seeking

relief from this Court.

Shell advocated fraud in its Base

Lease Manual for some 27 years before it

was publicly exposed by Nelson. It is

time that the last chapter of this

malevolent manual is finally written.

Shell’s petition should be denied.

Respectfully submitted,

G. Dana Hobart

Hobart & Heeringa

Donald Caffray

Attorneys for Respondents

Charlotte Nelson, et. al.

APPENDICES

IN THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

B030269

(Super. Ct. No. C 552457)

SHELL OIL COMPANY,

Cross-Defendant and Appellant,

Vv.

EDWARD L. NELSON, CHARLOTTE LOUISE

NELSON, SHARLEE LOU (NELSON) WELSH

and MARY JO (NELSON) SETTLES,

Cross Complainants and Respondents.

(Filed May 24, 1989}

APPEAL from a judgment of the

Superior Court of Los Angeles County.

Arthur Baldonado, Judge. Affirmed in

part and Reversed in part.

Keltner & Schreiber, Inc., Gregory

C. Horn, and Edwin cC. Schreiber for

Cross-Defendant and Appellant.

Hobart & Herringa, and G. Dana

Hobart, Donald B. Caffray, and Leonard

Sacks for Cross-Complainants and

Respondents.

Cross-defendant/appellant Shell Oil

Company (Shell) appeals from the judg-

ments “ entered upon (1) special jury

1 The record on appeal reveals that

the court erroneously entered two

separate judgments, neither of which

makes reference to or incorporates the

other. As there can only be one

judgment, we have joined these judgments,

creating one which offers two alternative

remedies. As discussed, infra, Nelson

has now abandoned one of these remedies.

verdicts, finding Shell liable for

concealment or suppression of a material

fact and intentional misrepresentation of

a material fact, awarding $154,150

compensatory damages and $235,600

punitive damages and valuing Shell’s

leasehold estate at $235,600; and (2) a

court verdict, rescinding three five-year

options to renew Shell’s lease with

cross-complainants/respondents Edward L.

Nelson, et al. (Nelson)?/ and awarding

$1.9 million punitive damages, less $5625

(rental overpayment by Shell to Nelson)

and $7000 (value of Shell’s leasehold for

the time prior to that in which the

? Cross-complainants and respondents

are Charlotte Louise Nelson, widow of

Edward L. Nelson, who died in June, 1979;

and Sharlee Lou Welsh and Mary Jo

Settles, children of Edward and Charlotte

Nelson. All are trustees of the Nelson

Trust, which owned the property in

question.

option took effect).

UNDERLYING FACTS?/

Since 1942, a member of the Nelson

family has owned the real _ property

located at 5548 West Imperial Highway,

the leasing of which has given rise to

this appeal. Shell first leased this

property from the parents of cross-

complainant Edward Nelson in 1950 for

operation as a Shell service station.

Upon the property passing to Edward

Nelson, Shell entered into a lease with

Edward and Charlotte Nelson on March 16,

1960. The terms of this lease terminated

upon completion of the reconstruction and

modernization of the service station.

3 Consistent with long-established

rules on appeal, these facts are related

in the light most favorable to the

judgment. (Walling v. Kimball (1941) 17

Cal.2d 364, 373.)

SAAN ie TA lactic, ks Dike

A second 15-year lease followed. It

began on May 1, 1961 and ended May 31,

1976, and included a ten year option,

commencing in 1976. Shell paid $1135 in

rent, $328.40 of which was repayment of

the reconstruction loan by Nelson to

Shell and $806.66 of which was actual

rent to Nelson. Were Shell to exercise

the ten-year option, the monthly rent, as

of 1976, would be $910. The lease

included no provision allowing for a rent

adjustment to respond to inflation and,

among other things, included a 90-day

termination clause in Shell’s favor; a

requirement that Nelson pay the property

taxes up to $2400 per year; a requirement

that Nelson pay for fire insurance; and

the aforementioned 10-year option to be

exercised 45 days before expiration of

the lease.

In March, 1975, Dale A. Lewis

(Lewis), a Shell real estate

representative, was contacted by the

California Department of Transportation

‘Caltrans) about construction of highway

-05, now known as the Century Freeway.‘/

Because of its plans to widen Sepulveda

Boulevard and to construct the Century

freeway, Caltrans purchased a parcel of

real property located on Imperial Highway

end Sepulveda, upon which Shell had a

service station. Shell received $11,500

for the fixtures which remained on that

property.

The Century Freeway became an

active Caltrans project in 1958 or 1959.

Construction of the freeway was enjoined

in 1972 by the Federal Court, in the case

of Keith v. Volpe (C.D.Cal. 1972) 352 F.

Supp. 1324, which ordered California to

reconsider the project. This injunction

remained in effect until October, 1979,

wnen it was lifted by a consent decree.

BRS OE RD et lh A eS Heda: De

From December, 1975, through March,

1976, Lewis engaged in an unsuccessful

attempt to negotiate three five-year

options to the Nelson lease, due to

expire on May 31, 1976. At this time,

Lewis offered Nelson a $6000 bonus for

these lease extensions. Nelson rejected

this offer and countered with a proposal

that Shell pay all property taxes and

that the rent for any additional option

years be based on the appraised value of

the property at the time the options were

exercised. Upon Lewis’ recommendation,

Shell abandoned these negotiations for

the time being.

In April, 1976, Shell exercised the

ten-year option to renew the Nelson

lease, and, as provided in the lease, the

monthly rental payments were to be

decreased to $910. The remainder of the

lease terms remained the same.

In June, 1976, Shell failed to

reduce the monthly rent and continued

paying $1135 to Nelson. Shell continued

to overpay Nelson $225 every month for

over two years, resulting in overpayments

totalling $5,625. Lewis was informed

about Shell’s overpayment by telephone on

May 30, 1978 and by follow-up interoffice

memorandum, dated May 31, 1978.

Lewis immediately telephoned Nelson

to explain there had been an error in the

rental payments and advise him of the

overpayment. Nelson stated that it would

be a hardship for him to repay the

$5,625. Lewis met with Nelson at the

Nelson apartment in Leisure World during

the first week of June, 1978. Mr.

Nelson, Mrs. Nelson, and Lewis were the

only parties present during this

Seen BE

Nhat 9 oe tka Codae lite eter te,

Ce Den hind Ch Sea WA Rte

meeting.°/

After Mrs. Nelson greeted Lewis at

the door, they chatted about Mr. Nelson’s

failing health. Mr. Nelson had been to

the emergency room once that week and to

his doctor’s office. Hospital records

revealed that on June 2, 1978, Mr. Nelson

had suffered "dizziness and chest pain."

Mr. Nelson’s physician’s records

indicated that between May 24 and June

22, Mr. Nelson had lost approximately 11

pounds. The week Lewis met with the

Nelsons, Mr. Nelson had _ been having

trouble with his heart and losing weight

rapidly. On June 8, 1978, Mr. Nelson

. According to Lewis, a fourth

person, identified as the Nelson

attorney, was also present; however, this

assertion was not reflected in Lewis’

notes about the meeting.

argument, Nelson informs us that he now

elects the remedy of rescission and,

consequently, will not pursue a new trial

on the issue of damages as to the remedy

which was tried to the jury. That being

the case, Shell’s contentions of error as

to the jury verdicts have become moot.

We focus this opinion on_ Shell’s

assertions of error as to the court’s

action granting recision of the three

five-year options.

Shell contends that the judgment

granting rescission was erroneous because

(1) substantial evidence is lacking to

support the finding of fraud or undue

influence because (a) the Statute of

Limitations bars this remedy, and (b) the

Summary Order found that Mrs. Nelson had

sufficient capacity to execute’ the

agreement; (2) the court allowed

24A

admission of the Base Lease Manual

without the proper foundation having been

laid; (3) the court abused its discretion

when it denied Shell’s motion for

mistrial, based upon Nelson’s reference

to settlement negotiations in

contravention of the court’s order; and

(4) the court’s punitive damages award

was improper because (a) the options were

totally executory at the time of the

taking, consequently, there were no

actual damages suffered by the Nelsons,

(b) even if the court had jurisdiction to

award punitive damages, it cannot award

an amount different from that designated

by the jury, and (c) there was. no

evidence of ratification of the alleged

fraudulent act by an officer, director or

managing agent of Shell.

25A

i. Substantial Evidence.

(a) Statute of Limitations. Shell

argues that the court based ite decision

to rescind on fraud and undue influence.

Citing Code of Civil Procedure section

337, subdivision 3, Shell asserts that a

cause of action for rescission based upon

undue influence is barred by the Statute

of Limitations which it pleaded as an

affirmative defense.'°/ Contending that

the last act of undue influence could

have occurred no later than the signing

of the option agreement (June 8, 1978),

10 Code of Civil Procedure section

337, subdivision 3 sets forth a four-year

limitation period. In pertinent part, it

provides: "(Where an action is brought

to rescind a contract in writing,]} [t]he

time begins to run from the date upon

which the facts that entitle the

aggrieved party to rescind occurred.

Where the ground for rescission is fraud

or mistake, the time does not begin to

run until the discovery by the aggrieved

party of the facts constituting the fraud

or mistake."

26A

Shell avers that Nelson was required to

file his action for rescission by June 8,

1982. Shell continues that even if it

were to accept the fact that Mr. Nelson

was incompetent at the time of the

Signing, he died on June 10, 1979, and

Mrs. Nelson or the remaining family

members were required to file an action

for rescission by June 10, 1983.

This argument fails because Shell

completely ignores the fact that the

court’s decision was not based on undue

influence alone but on fraud as well.

The evidence presented at trial and

summarized above and in the court’s order

(Appendix i BB) Clearly provides’ the

requisite substantial evidence to support

a finding that Shell engaged in fraud

when it pressured the Nelsons to sign the

option agreement. (Crawford v. Southern

27A

Pacific Co. (1935) 3 Cal.2d 427, 429.)

(b) Mrs. Nelson’s competency.

Shell contends that since the Summary

order! found that Mrs. Nelson had

sufficient capacity to execute’ the

option, her signature alone is sufficient

to validate the option even if Mr. Nelson

lacked capacity. This assertion is

meritless because it is irrelevant. As

noted above, the rescission was grounded

on Shell’s fraudulent actions. The

extent of Mrs. Nelson’s capacity is of

little, if any, consequence to the

finding of fraud on the part of Shell.

2. The Base Lease Manual. Shell

asserts that the court allowed admission

of the Base Lease Manual without the

proper foundation having been laid, i.e.

evidence that this manual set forth the

habit or custom of Shell. Shell contends

28A

that without such a showing, this manual

was irrelevant. In addition, Shell

argues that its witnesses denied using

them.

Shell disregards the testimony of

Ted J. Moriarity and Robert S. Drager.

Mr. Moriarity was a Shell employee for 25

years, approximately 14 of which as a

real estate representative. He testified

that he was instructed to follow the

guidelines set forth in the Base Lease

Manual when negotiating service station

leases and that this was one of the

manuals used by real estate

representatives.

Mr. Drager, at the time of trial,

was Shell’s district Real Estate

Representative. His deposition testi-

mony, which was read at trial to impeach

his trial testimony, revealed that he was

29A

provided a copy of the Base Lease Manual

at his training seminar; was told that it

was to be used as a guideline for his

work as a real estate representative;

and, in fact, did use the Base Lease

Manual as a guideline when he _ was

involved in the negotiation of service

station leases.

The Base Lease Manual is relevant to

a number of issues. Since it had been

used in substantially the same form since

1960, it established that many years ago

Shell instituted the methods outlined

therein to secure leases advantageous to

it. The Base Lease Manual instructions

establish Shell’s authorization = and

ratification of the practices promoted in

the Manual.

3. Motion for Mistrial. Shell’s

motion for mistrial was prompted by a

30A

question posed by Nelson’s counsel to Mr.

Drager, Shell’s District Real Repre-

sentative. It followed a series of

questions about $5446 the State had paid

to Shell for Shell’s personal property,

remaining on the Nelson property. The

question was: "Mr. Drager, Shell had

been pressing a claim to the Nelsons by

communication that they [sic] thought

that their [sic] improvements were worth

$44,000. They [sic] ended up settling

for or taking from the State $5400.

(Par.] Did you, at all times know that,

when you were pressing the $44,000

figure, that it wasn’t what you

considered to be the true value of the

property?" Before Mr. Drager could

respond, Shell objected, citing Evidence

31A

Code section 1152.!!/

The court declared a recess and, out

of the presence of the jury, heard argu-

ment about whether Shell’s acceptance of

the $5446 was the result of a negotiated

settlement. Unable to determine whether

the pertinent stipulation was a settle-

ment, the court precluded the testimony

on the ground that it was irrelevant

because the stipulation to accept $5446

occurred in June, 1986, which was eight

years subsequent to the alleged mis-

conduct which was the subject of this

1! In pertinent part, Evidence Code

section 1152 provides: "(a) Evidence that

a person has, in compromise or from

humanitarian motives, furnished or

offered or promised to furnish money or

any other thing, act, or service to

another who has sustained or will sustain

or claims that he or she has sustained or

will sustain loss or damage, as well as

any conduct or statements made _ in

negotiation thereof, is inadmissible to

prove his or her liability for the loss

or damage or any part of it."

32A

trial. When the jury returned, the court

instructed it as_ follows: "You are

instructed to disregard [the following}.

{[Par.] ... there was some mention in Mr.

Drager’s testimony about some $5000 of

various personal property items and an

agreement that was entered into in front

of another judge much earlier in this

case, and to the extent that any of that

sounded like a settlement of any issue in

this case, you’re to disregard it.

(Par.] And we’re not going to go into

that agreement or issue again because

it’s not before us and it is not to

affect your deliberations in this case on

any issue."

Whether or not to grant a motion for

mistrial is within the discretion of the

trial court, and its determination will

not be disturbed on appeal unless the

33A

court has manifestly abused its

discretion. (Richardson v. Employers

Liab. Assur. Corp. (1972) 25 Cal.App.3d

232, 244, disapproved on other grounds in

Gruenberg v. Aetna Ins. Co. (1973) 9

Cal.App.3d 566.)

The gist of Shell’s objection is

that this one question, standing alone,

painted Shell in the image of a greedy

bully. We cannot agree. Without

repeating all the evidence previously

summarized, we find that the jury heard

other substantial evidence which painted

that picture much more effectively. This

other evidence coupled with the court’s

admonition to the jury to disregard

counsel’s query about the stipulation

lead us to conclude that the court did

not abuse its discretion when it denied

Shell’s motion for mistrial.

34A

4. The Punitive Damages. As noted

above, the court awarded Nelson

$1,900,000 (less approximately $12,060)

in punitive damages. Shell asserts that

this award must be reversed because Civil

Code section 3294 precludes an award of

exemplary or punitive damages in a suit

based upon a contract cause of action.!?/

In any event, citing Esparza v. Specht

(1976) 55 Cal.App.3d 1, Shell argues that

since there were no actual damages

awarded or suffered, the punitive damages

award must fall.

Shell’s first theory is unpersuasive

2 In pertinent part, Civil Code

Section 3294 provides: "(a) In an action

for breach of an obligation not arising

from contract, where it is proven by

clear and convincing evidence that the

defendant has been guilty of oppression,

fraud, or malice, the plaintiff, in

addition to the actual damages, may

recover damages for the sake of example

and by way of punishing the defendant."

35A

because it has long been recognized that

an action for rescission based upon a

fraudulent inducement to enter into an

agreement does not arise from oiabrect.

and allowance of exemplary damages is,

therefore, proper. (Mahon v. Berg (1968)

267 Cal.App.2d 588, 589-90.)

Shell’s second theory requires a

more complete discussion. Shell asserts

that Nelson suffered no actual damages

because the options were completely

executory in nature; the time had not

arrived, nor would it ever given the

State condemnation, for Shell to exercise

these options. Nelson counters that for

all practical purposes, Shell exercised

these options when it grounded its claim

for the lion’s share of the condemnation

award upon its right, pursuant to these

fraudulently obtained options, to lease

36A

the Nelson property until 2001. However,

Nelson’s counter argument Sidesteps

Shell’s assertion that Nelson suffered no

actual damages.

We recognize that under certain

circumstances punitive damages may be

awarded without a_e verdict expressly

providing recovery of compensatory

damages. These cases, however, have

involved situations where (1) actual

damages are presumed as a matter of law,

e.g., defamation per se (Clark v. McClurg

(1932) 215 Cal. 279); or (2) the evidence

establishes an actionable wrong committed

by defendant and resulting damages. (See

e.g., Wayte v. Rollins ternationa nc.

(1985) 169 Cal.App.3d 1; Commercial

Cotton Co. v. United j nia ank

(1985) 163 Cal.App.3d 511; Werschkull v.

United California Bank (1978) 85

37A

Cal.App.3d 981; Weiss v. Blumencranc

(1976) 61 Cal.App.3d 536.)¥/ The facts

of the case at the bench do not place it

in either category. Despite the

dissenting opinion’s discussion as to how

the Nelsons would have suffered actual

damages had certain contingencies

occurred, in fact these contingencies did

not materialize, and no actual damages

were suffered.

The options have been rescinded, and

Nelson is now entitled to the full amount

paid by the State for the property in

question. "It is well settled in

California that punitive damages cannot

be awarded unless actual damages are

3 We further note that the latter

category of cases involves a_ special

relationship. In the instant case, a

fact found not to be in substantial

controversy was that Shell did not stand

in any fiduciary relationship to the

Nelsons. (Footnote 9, supra.)

38A

suffered (Mother Cobb’s Chicken T., Inc.

Vv. Fox [1937] 10 Cal.2d 203, 206)."

(Esparza v. Specht, supra, 55 Cal.App.3d

at p. 6.)

Having so determined, we need not

discuss Shell’s remaining arguments

challenging the validity of the punitive

damages award.

DISPOSITION

The judgment of rescission is

affirmed to the extent that rescission

was granted but reversed to the extent

that punitive damages were awarded.

Each party to bear its own costs.

NOT FOR PUBLICATION IN THE OFFICIAL

EPO

GOERTZEN, J.

I concur:

GEORGE, J.

39A

| i alo

McCLOSKY, J., Concurring and Dissenting.

I concur in that part of the opinion

affirming the judgment of rescission but

I dissent from that part of it reversing

the award of punitive damages.

The majority bases its reversal of

the punitive damages award on the

supposed lack of actual damages. It does

correctly point out that "[ijt is well

settled in California that punitive

damages cannot be awarded unless actual

damages are suffered (Mother Cobb’s

Chicken T., Inc. v. Fox [1937] 10 Cal.2d

203, 206)." (Esparza v. Specht, supra,

55 Cal.App.id at p. 6.)

"If actual damages are alleged and

proved, [however,] a separate award of

compensatory damages is not a necessary

foundation for an award of punitive

damages." (6 Witkin, Summary of Cal. Law

40A

(9th ed. 1988) Torts, Sect. 1371, Pp.

837.) In this case at bench, it is true

that no award was made for the actual

damages on which the punitive damages

were based, but it is clear beyond doubt,

as was proven at trial, that the Nelsons

suffered actual damages by Shell’s

Claiming in the condemnation its supposed

right to $620,000 of the condemnation

award because the 1978 extension exacted

from the Nelsons entitled it to two-

thirds of the condemnation award. Had

Shell been successful in that claim this

would have had the effect of lowering the

part of trial award to which the Nelsons

were entitled. In fact, at trial,

Shell’s expert witness testified that the

value of Shell’s leasehold interest was

$620,000, based upon his professional

opinion that the fair rental value of the

41A

Nelsons’ property was $7,900 per month, a

sum almost $7,000 per month higher than

the rent called for by the options. This

low rent 15-year extension, it should be

remembered, was exacted from the Nelsons

on penalty of their having to immediately

repay Shell the $5,625 overpayment if the

Nelsons did not agree to the low rent

extension. This $5,625 was an amount of

money the Nelsons did not have and would

have had to borrow, thus reducing their

net income had they not agreed. This was

yet another actual damage suffered by the

Nelsons at a time ten and one-half years

before the expiration date of the lease

and continuing for some time thereafter.

McCLOSKY, Acting P. J.

42A

IN THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

B055153

(Super. Ct. No. C 552457)

EDWARD L. NELSON,

Cross-Complainant and Respondent,

Vv.

SHELL OIL COMPANY,

Cross-Defendant and Appellant.

[Filed October 21, 1991]

43A

APPEAL from a judgment of the

Superior Court of Los Angeles County,

Arthur Baldonado, Judge. Modified and

Affirmed in part. Reversed in part,

Affirmed in part, and Remanded.

Schreiber & Horn, Gregory C. Horn,

Edwin C. Schreiber and Mark Schreiber for

Cross-Defendant and Appellant.

Hobart & Herringa, Kent Heeringa,

Donald B. Caffray and G. Dana Hobart for

Cross-Complainant and Respondent.

44A

Cross-defendants/appellants Shell

Oil Company, etc., et al., (collectively

as Shell) appeal from the judgment

awarding cross-complainants/respondents

Edward L. Nelson, Ote.,; et Gis,

(collectively as the Nelson Trust)

$352,242 in actual damages and $6.295

million in punitive damages.

For the reasons discussed below, we

reverse and remand the judgment in part

and modify and affirm in part.

FACTS AND PROCEDURAL BACKGROUND

On May 24, 1989, we affirmed a

judgment against Shell, which judgment

granted rescission, based upon fraud, of

three five-year options to lease property

Owned by the Nelson Trust. In that

earlier appeal, however, we also reversed

the approximately $1.9 million punitive

damages award, finding that it was not

45A

sustainable as no actual damages, as to

the rescission, had been proven or

awarded.”

The parties returned to superior

court, where, upon motion by the Nelson

Trust, the court granted a new trial on

"the Rescission Cause of Action as to

compensatory damages and punitive

damages." Shell petitioned this court

for a writ of mandate/prohibition, asking

Fr In brief, the evidence supported

the court’s finding that Shell, via its

real estate representatives who acted

upon the offensively manipulative advice

printed in Shell’s base lease manual, had

fraudulently acquired the three five-year

options on the Nelson Trust property,

knowing that Caltrans’ Century Freeway

project would require eminent domain

acquisition of this’. property. This

occurred when the late Edward Nelson was

80 years old and in severe ill health.

When Caltrans filed its eminent domain

action, Shell claimed the lion’s share of

the award, and the Nelson Trust cross-

complained seeking, among other things,

the rescission of the three five-year

options.

46A

us to reverse the new trial order. We

denied the petition "for absence of facts

showing entitlement to extraordinary

relief." Shell then filed a notice of

appeal, challenging the court’s order

granting a new trial. We dismissed the

appeal as being from a nonappealable

order.

The trial commenced on September 25,

1990. The case was tried to Judge

Baldonado, sitting without a jury, both

sides having agreed that the retrial

applied only to the equitable "side of

the case." Before the taking of evidence,

the parties argued several motions.

Shell moved to dismiss, asserting that

our earlier opinion was dispositive of

all the issues. The court denied Shell’s

motion. The Nelson Trust moved to amend

its cross-complaint to add a cause of

47A

action for slander of title/quiet title.

The Nelson Trust also movea the court to

take judicial notice of the transcript of

the original trial. Shell objected to

both motions. The court reserved ruling

on the Nelson Trust’s motions, in part,

to allow Shell time to file written

opposition to the motion to amend.

On this appeal, Shell contends that

the trial court erred in awarding general

and punitive damages to the Nelson Trust

at the conclusion of the new trial.

The Nelson Trust Case.’/

Robert Drager, current Shell real

estate manager and Shell real estate

representative during the previous trial,

was called as an adverse witness. (Evid.

2 We set forth the facts with more

particularity than usual to facilitate

discussion of Shell’s assertion that

there is no admissible evidence to

support the damage awards at issue.

48A

Code, Sect. 776.) He testified that he

had not prepared nor did he know of any

document prepared by Shell which modified

or discussed the base lease manual since

1987.°/ On cross-examination, Mr. Drager

stated that he had not seen a base lease

manual since 1987; his duties included

training younger people in the real

estate department and that he had not

directed any trainee to the base lease

manual; as far as he knew, no copies of

the base lease manual were available in

the Shell real estate office.

Keith Settles, spouse of Nelson

Trust trustee Mary Jo Nelson Settles,

testified that he acted as an "unpaid

informal advisor" to the Nelson Trust and

. Shell objected to this line of

questioning, arguing that it was irrele-

vant because conduct subsequent to the

previous trial had nothing to do with the

rescission of the lease extensions.

49A

had participated in the Nelson Trust

income tax return preparation since 1987.

He keeps the records on the Nelson Trust

real estate transactions, prepares

mortgage payments and the homeowners’

association checks for his’ wife’s

signature and makes rent deposits. In

December 1986, when $345,000 of the

eminent domain funds were released to the

Nelson Trust, he was involved _§ in

investment strategy decisions made by the

Nelson Trust. At that time, the Nelson

Trust purchased three condominium units

and invested about $242,000 in a

California tax-free municipal bond

account (the Nuveen account). In May

1990, when the Nelson Trust received an

additional $169,688 from the _ state,

$165,000 was invested in the Nuveen

account and about $4,000 was deposited in

50A

the checking account for the condominium

properties. He opined that had the

$624,553 (hereinafter referred to as

$624,000), released by the state in

November of 1986 and placed in a blocked

account, ‘/ been received by the Nelson

Trust, it would have been used to

purchase more real property and to invest

in tax-free municipal bonds or money

market funds in order to preclude greater

income tax liability. He stated that the

condominium properties were purchased

because income generated by these

properties was less than their expenses

plus depreciation, resulting in no tax

liability.

“ By stipulation of the parties,

the state released $624,553.78, repre-

senting the condemnation proceeds in

dispute, to the Nelson Trust and Shell

jointly to be deposited in an interest-

bearing account to be selected by the

Nelson Trust and Shell.

51A

On cross-examination, Mr. Settles

testified that he had never been a

trustee of the Nelson Trust; the Nelson

Trust did not pay federal or state taxes

on income generated by the Nuveen

account; without considering property

taxes, maintenance’ costs, and other

expenses, the condominium units’ negative

cash flow totalled about $500 per month;

and although his memory was "hazy," he

believed the Nelson Trust trustees had

consented to the $624,000 being placed in

the blocked account.

Mary Jo Settles testified that she

was a trustee of the Nelson Trust; Keith

Settles’ testimony about his advisory

role to the Nelson Trust was correct; and

the investments Keith Settles described

were accurate.

52A

Darlene Huber has been ae tax

preparer since 1971 and prepared the tax

returns for the Nelson Trust. She is

very familiar with the Nelson Trust’s

investments in real estate and tax-free

bonds; the Nelson Trust paid no taxes in

1987, 1988, and 1989 because the income

was offset either by depreciation or

negative cash flow. She opined that had

the Nelson Trust received $624,000 in

1986 for investment in 1987, the same

investment strategy would have been

followed, and the Nelson Trust would have

incurred no tax liability for 1987, 1988,

1989, and the first quarter of 1990.°/

On cross-examination, Ms. Huber testified

that her zero-tax-liability projection

depended upon the type of real property

* Shell’s objection to this opinion

as speculation was overruled.

53A

acquired, how much was paid for it, and

the amount of rents it generated. She

admitted she did not know what the Nelson

Trust would have bought or what rents it

would have received because it was "all

speculation." Ms. Huber further testified

that if the Nelson Trust condominium

units were sold at a profit, capital

gains taxes would be owed; the money

placed in the Nelson Nuveen account could

be deposited and withdrawn at will; she

knew of no reason why the $624,000 placed

in the blocked account was not invested

in the Nuveen account. On redirect, Ms.

Huber reiterated her opinion that had the

Nelson Trust received $624,000 at the end

of 1986 and invested it 50/50 in

condominiums (with the same negative cash

flow as the other Nelson Trust

condominiums) and in the Nuveen account,

54A

it would have had no tax liability for

1987, 1988, 1989, and the first quarter

of 1990.°/

Lastly, G. Dana Hobart, counsel for

the Nelson Trust, testified that the

Nelson Trust had paid a combined total of

$281,208 in attorney fees to his firm for

defense in the condemnation action and

for prosecution of the fraud/rescission

suit. He also testified that the Nelson

Trust had paid $61,341 #1=“iin costs,

excluding costs of the previous appeal.’/

Mr. Hobart further testified that $4,050

ai Shell’s objection to this

question as calling for speculation was

overruled.

"4 Shell objected to introduction

of this evidence, asserting that attorney

fees were not recoverable in an action

based on contract and that costs were a

matter subject to a post-trial

proceeding, not part of damages. This

objection was overruled without prejudice

to renewing.

55A

in attorney fees was paid to an attorney

specializing in condemnation.

As to the interest earned by the

blocked account, Mr. Hobart testified

that $400,000 had been invested in

treasury bills and $224,000 in a short-

term certificate of deposit, and $20,869

interest had been earned. He asserted

that the Nelson Trust suffered a $6,210

loss in earned interest, which

represented the difference between the

interest actually earned and the "state

mandated 7 percent rate of interest under

the California Constitution. "*/

Asserting that had the $624,000 in

the blocked account been available to the

Nelson Trust and invested so as to

preclude tax liability, Mr. Hobart

* Upon objection by Shell, the court

labeled this testimony argument.

56A

testified that for 1990, 1989, and 1988,

the Nelson Trust suffered a loss totaling

$9,132.42 in federal income taxes, $1,054

in state income taxes, and $175 in tax

preparation fees.

Mr. Hobart offered into evidence

Shell’s 1989 annual statement; the

October 10, 1986, court minute order

ordering release of approximately

$624,000 by the state; and a copy of the

lease between Shell and the Nelson Trust

recorded on June 22, 1978. He stated

that his firm had expended in excess of

2,500 hours on this case and had received

partial payment pursuant to their

contingent fee agreement.

As to the investment of the blocked

account funds, Mr. Hobart testified that

$400,000 was invested in a treasury bill

account with Merrill Lynch, and $224,000

57A

was placed in a certificate of deposit

account with Los Angeles’ Bank; the

account was under the joint control of

the two firms representing Shell and the

Nelson Trust. He testified that the

agreement allowing dispersal of the

$624,000 was “coerced and was tantamount

to an imposed stipulation" because

without it, the state would have held the

money until resolution of the litigation

between the Nelson Trust and Shell. He

opined that if the Nelson Trust had been

able to place these funds in a long-term

municipal bond account or a long-term

investment, the interest would have been

higher than that earned.

On cross-examination, Mr. Hobart

testified that he selected the

institutions in which the money was

deposited; he never asked anyone at

58A

Shell’s attorney’s office if the funds

could be placed in a tax-free municipal

fund; the motivation for agreeing to the

release stipulation was to have the funds

accessible; in early 1986, the Nelson

Trust had applied to withdraw the balance

of the condemnation proceeds, and Shell

and the state objected; consequently, the

only way to get any part of the $624,000

was to accept the stipulation.

se.

Gregory Horn, counsel for Shell,

testified that around November 1986, he

entered into an agreement with Mr. Hobart

regarding the use of the _ soon-to-be-

released $624,000 condemnation proceeds;

he told Mr. Hobart the funds could be

placed in accounts which Mr. Hobart

"deemed fit" and that he only wanted to

be kept informed and have the right to

59A

Sign on the accounts; he had 0no

recollection of discussing investment of

the funds with Mr. Hobart prior to the

funds’ placement in the two accounts; he

received copies of letters indicating

where the money had been deposited after

the fact of the deposit and never

objected to any investment decision.

On cross-examination, Mr. Horn

testified that when he learned that

$400,000 had been placed in a three-month

treasury bill account, he did not

consider telephoning Mr. Hobart’ to

request that the funds be placed in a

higher interest-bearing account’ upon

termination of the three months; he had

"ultimate faith" in Mr. Hobart’s ability

to choose the financial institution.

The Court’s Rulings.

On October 5, 1990, the parties

60A

returned to court to argue their

respective positions on the reserved

motions. The reserved motions included

Shell’s motion to exclude evidence of

acts subsequent to the securing of the

lease extensions; the Nelson Trust’s

request for judicial notice of certain

testimony in the prior trial, the trial

court’s earlier opinion, and the court of

appeal opinion; the Nelson Trust’s motion

to amend the cross-complaint; Shell’s

motion to strike all exhibits; and

Shell’s motion for a directed verdict.

The last motion was summarily denied.

After extensive argument, the court took

the remaining matters under submission.

On October 11, 1990, the court filed

its statement of decision, a copy of

which is attached to this opinion as an

appendix.

61A

Shell’s subsequent motion for new

trial was denied.

On October 26, 1990, judgment was

entered. This timely appeal followed.

DISCUSSION

Shell asserts that the court erred

when it granted a new trial on the issue

of damages; when it awarded actual

damages; when it granted the Nelson

Trust’s motion to take judicial notice;

and when it granted the Nelson Trust’s

motion to amend its cross-complaint.

Shell also challenges the punitive damage

award. We shall address each contention

of error in the order raised.

(1) The New Trial. As noted above,

when we affirmed the earlier judgment of

rescission we "reversed to the extent

that punitive damages were awarded."

Each party seized upon this language to

62A

argue its respective position.

Generally, an unqualified reversal

without directions remands the case for

further trial. (Stromer v. Browning

(1968) 268 Cal.App.2d 513, 518-519.)

"The fact that the rule ... is a general

rule implies that is has limitations.

One limitation is that a case is to be

set at large for retrial only when that

is the intent of the appellate court.

Judgment reversed at the end of an

opinion is, of course, strong indication

of such intent." (McCoy v. Hearst Corp.

(1991) 227 Cal.App.3d 1657, 1662, quoting

Stromer, supra, internal quotation marks

omitted. ) In our earlier opinion, we

ordered that the judgment was "reversed

to the extent that punitive damages were

awarded." Of course, only we are in a

position to state unequivocally what we

63A

intended by that language. We do so now.

We intended to authorize a new trial on

the issue of damages. Given the history

of this case and the fact that the jury

hearing the legal cause of action found

and awarded actual damages, we concluded

that equitable considerations mandated

that the Nelson Trust be given the

opportunity to present evidence of

compensatory damages related to the

rescission cause of action. The general

rule calling for a retrial applies.

(Erlin v. iona ire Ins. Co.

(1936) 7 Cal.2d 547.)

In Erlin, supra, the Supreme Court

noted that in its first opinion (Erlin v.

National Union Fire Ins. Co. (1933) 217

Cal. 374), it had held that "there [was]

no evidence in the record sufficient to

support" plaintiff’s allegations, and

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that therefore, "on the merits, the

plaintiff [was] not entitled to recover."

(Erlin v. National Union Fire Ins. Co.,

supra, ai7.60 Gall. at p. 377.) In

authorizing a retrial, the Supreme Court

explained, in Erlin II: "The statement

by this court in its opinion upon the

former appeal that ’on the merits the

plaintiff is not entitled to recover’

could only refer to evidence then before

the court. The reversal of the judgment

was unqualified, that is to say, without

direction to the trial court. Such a

reversal remands the case for a new trial

and places the parties in the same

position as if the case had never been

tried. (Citations.]" (Erlin v. National

Union Fire Ins. Co., supra, 7 Cal.2d at

pp. 548-549.)

65A

This case is indistinguishable from

the situation presented in Erlin II. We

intended to authorize a new trial on the

issue of damages. Therefore, the trial

court did not err when it granted the new

trial as to compensatory and punitive

damages.

(2) a mages. Shell

challenges either the legal or

evidentiary sufficiency of each of the

items of compensatory damages awarded.

There is merit in some, but not all, of

Shell’s assertions.

Preliminarily, we note that when a

contract (hare, a lease extension) is

rescinded because of fraud, the defrauded

party is entitled not only to the

consideration with which he or she has

parted, but also may be reimbursed for

"any other special damage to which he [or

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she) has been subjected" by the other’s

fraud. (Runyan v. Pacific Air Industries,

inc. (1970) 2 Cal.3d 304, 315, emphasis

in original.) The fundamental principle

underlying full compensatory awards in

rescission suits is that "’in such

actions the court should do complete

equity between the parties’ and to that

end ‘may grant any monetary relief

necessary’ to do so. [(Citation.}] It is

the purpose of rescission ‘to restore

both parties to their former position as

far as possible.’ (Citations.])" (Id.,

at p. 316.)

a. d ees. In an action

for rescission based upon fraud, a

plaintiff is entitled, among. other

things, to compensation for consequential

damages, including attorney’s_ fees,

(Kass v. Weber (1968) 261 Cal.App.2d 417,

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423.) Clearly, were it not for Shell’s

fraudulent acquisition of the lease

extensions and its’~ related action

claiming a large percentage of the

eminent domain proceeds, the Nelson Trust

would not have been required to defend

against the Shell claim and would not

have incurred the related attorney’s

fees.

In addition, as found by the court,

some of the attorney’s fees paid by the

Nelson Trust were incurred because it was

required to litigate with the State to

ensure that the State would not release

funds to Shell. The court heard evidence

and took judicial notice of court

documents which indicated that Shell had

petitioned the State to release $479,000

of the $624,000 eminent domain funds

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remaining to be disbursed.’/ The court

rightly concluded that but for Shell’s

fraud, the Nelson Trust’s litigation with

the State would have ended on October 10,

1986. (Appendix, p. 6.) Under the "tort

of another" theory, the Nelson Trust was

entitled to recover these attorney’s fees

as compensatory damages.!°/ (Glass v.

Gulf Oi] Corp. (1970) 12 Cal.App.3d 412,

437-438.)

b. Costs. The court awarded

$60,000 in costs of litigation as item of

damages, finding this expenditure was

necessary and reasonable. (Appendix, p.

7.) Shell correctly contends inclusion

, This occurred prior to the

stipulation between the parties which

allowed for the dispersal of $624,000 to

both the Nelson Trust and Shell.

™ The court ruled that this

assessment of reasonable attorney fees

did not allow any additional contingent

fee factor. (Appendix, p. 7.)

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of these costs in a compensatory damages

award is erroneous.

The cases cited by respondent, to

wit, Prentice v. Nort er. Tit uar.

Corp. (1963) 59 Cal.2d 618, 620, Kass v.

Weber, supra, 261 Cal.App. 2d at page 423

and Appel v. Burman (1984) 159 Cal.App.3d

1209, 1216, speak to the recoverability

of attorney’s fees as an item of damages;

they do not provide that costs are

Similarly recoverable.

As there was no fiduciary relation-

ship between the Nelson Trust’ and

Shell,'/ Civil Code section 3343 sets

forth the damages recoverable in this

action. (Brown v. Critchfield (1980) 100

Cal.App.3d 858, 871.) This section does

not include costs of iitigation as part

1! This fact was found to be without

substantial controversy prior to the

initial trial in this matter.

7O0OA

of recoverable damages.

c. Loss of Use. The court awarded

the Nelson Trust the difference between

the interest paid on the funds in the

blocked account and interest at seven

percent, citing California Constitution,

article 20, section 22. (Appendix, p.

18.) This article and section of our

Constitution, however, deal with liquor

control. The cases cited to the court

below and to us quote language in the

California Constitution, since 1976,

found at article 15, section 1.'/ These

cases continue their viability and relate

now to article 15, section 1.

- In pertinent part, article 15,

section 1 of the California Constitution

provides: "The rate of interest upon the

loan or forbearance of any money, goods,

or things in action, or on accounts after

demand, shall be 7 percent per annum...."

71A

The court properly awarded the

Nelson Trust the difference between the

interest paid on the $624,000 in the

blocked account and seven percent.

(McConnell v. acifi u j Ss.

Co. (1962) 205 Cal.App.2d 469, 481; Civ.

Code, Sect. 3343, subd. (a) (2).)

Shell objects, arguing that the

Nelson Trust should be estopped from

asserting it suffered damages when the

funds were placed in the blocked account

because it voluntarily agreed to the

stipulation releasing these funds. In

its Statement of Decision, the court

specifically found that the Nelson

Trust’s claim for these damages was not

inconsistent with its entering into the

stipulation. Whether the Nelson Trust

voluntarily entered into the stipulation

is a question of fact within the purview

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of the trier of fact. The evidence

presented, summarized supra, supports the

court’s conclusion that the Nelson Trust

was required to enter into the

stipulation to acquire access to the

funds and to remove the State as a party

to the litigation, as well as the

inferred finding that the Nelson Trust

did not voluntarily enter into the

Stipulation. (Appendix, p. 6-7.)

da. income Taxes and Penalties.

The court awarded a total of $10,060 in

income taxes paid by the blocked account,

a $126 tax penalty, and a $175 tax

preparation § fee. (Appendix, p. 9-10.)

Shell asserts that the amount

representing the income taxes paid and

the penalty assessment was awarded in

error. We agree.

73A

The pertinent evidence adduced at

trial was offered by Ms. Huber, the

income tax preparer for the Nelson Trust,

and Mr. Settles, the unofficial adviser

to the Nelson Trust. Ms. Huber testified

that in her opinion the Nelson Trust

would not have paid any taxes during

1987, 1988, 1989, and the first quarter

of 1990 if the $624,000 had been released

to it and not placed in ae blocked

account. This opinion was based on

speculation. Evidence that is purely

speculative in nature is insufficient to

support an award of damages.

Mr. Settles’ opinion regarding the

type of investments that would have been

made by the Nelson Trust was equally

speculative in nature.

As the evidence presented by Ms.

Huber and Mr. Settles was based on

74A

speculation, it is insufficient to

Support the award of $10,186 for income

taxes paid and the tax penalty.

(Frustuck v. City of Fairfax (1963) 212

Cal.App.2d 345, 367-368.)

(3) udicial tice. The Nelson

Trust requested that the court take

judicial notice of certain documents and

testimony admitted in the prior fraud and

rescission trial. Shell objects to the

granting of the Nelson Trust’s request to

take judicial notice because the items

judicially noticed are hearsay.

Certainly, no hearsay exception was

available to allow the introduction of

transcripts of prior testimony. Nor

could the trial court take "judicial

notice" of such testimony. Without the

consent of both parties, the trial court

cannot, on a retrial base its

75A

determinations on testimony introduced at

an earlier proceeding. (Hall v. Superior

Court (1955) 45 Cal.2d 377, 381; Tulare

Dist. v. Lindsay-Strathmore Dist. (1935)

3 Cal.2d 489, 579.)

However, any error in taking

"judicial notice" of prior testimony was

harmless. Both the jury and the trial

court had expressly found that Shell was

guilty of fraudulent conduct, and both

had awarded punitive damages to the

Nelson Trust. Although punitive damages

were reversed on appeal, that reversal

was based solely on the lack of evidence

of general damages to support the award.

The underlying finding of - Shell’s

despicability was manifest in the record.

The fact of fraud is res judicata, and

there was no need to introduce evidence

of it at the second trial.

76A

As to the five documents relating to

the parties’ respective applications for

withdrawal of the disputed eminent domain

funds, judicial notice of these documents

to support the fact that these

applications had been made was proper.

(Evid. Code, §§ 452, subd. (d) and 454.)

Those findings of fact, the res

judicata effect of the first appellate

decision and the evidence properly

admitted at the second trial, Support the

award of general damages.

(4) Quiet Title Amendment. At the

beginning of the trial, the Nelson Trust

moved to amend its second amended cross-

complaint to conform to proof to include

an action to quiet title. After taking

the matter under submission, the court

ultimately granted the motion, finding

that Shell had had ample notice and that

77A

all the issues related to rescission,

cloud on title and quiet title were fully

litigated in the first trial. (Appendix,

p. 3.) Shell avers that the court abused

its discretion, because the Nelson Trust

presented no excuse for making a motion

to amend after five years and an entire

trial had taken place. -:

We need not decide whether the court

abused its discretion when it permitted

this amendment, because any prejudice

suffered by Shell was harmless. The

primary reason Shell objects to the

amendment is that it believes the only

ground upon which to sustain inclusion of

attorney fees in compensatory damages is

through a quiet title action. As we have

determined that the attorney’s fees award

was proper absent the quiet title action,

any error committed was harmless.

78A

(5) Punitive Damages. Lastly, ona

variety of grounds Shell challenges the

propriety of the court’s award of

punitive damages. Given our earlier

conclusions, we need only address the

following assertions by Shell: that the

court was bound by the amount of the

jury’s award of punitive damages

($235,000) and that the increase to $1.95

million was erroneous; that in later

increasing its award from $1.9 million to

$6.295 million, the court was punishing

Shell for taking a successful appeal;

that the second increase in punitive

damages was based on improperly admitted

evidence; that Shell did not ratify the

fraudulent conduct upon which’ the

rescission was based; and that the award

of punitive damages is unconstitutional

without application of objective

79A

standards.

a. The court was not bound by the

jury’s award of punitive damages, because

the jury’s actions became moot when the

Nelson Trust elected the remedy of

rescission. At the hearing on the issue

of punitive damages after the first

trial, the Nelsons cited numerous cases

to the trial court for the proposition

that punitive damages could properly be

awarded in a rescission action, and both

sides argued at length concerning whether

the evidence of fraud did or did not

support a punitive damage award. Shell’s

only objection on the issue of punitive

damages was that no general damages

existed in the rescission action to

support then.

Thereafter, the trial court awarded

punitive damages in the sum of $1.9

80A

million, less $5,625 in rental

Overpayment and less $7,000 representing

the value of Shell’s leasehold estate,

for a net award of $1,887,375.

Appellant’s contention that this

award was erroneous, first raised in the

prior appeal, is asserted again in this

appeal. We did not address this issue in

the prior appeal; we concluded that

punitive damages could not be sustained,

since no general damages had been proven

in the first trial, and the matter was

remanded. We now address this argument

for the first time.

Punitive damages may properly be

awarded in an equity action where the

right to rescind a contract is based on

fraud. "The law is clear that punitive

damages are authorized in a case of fraud

inducing entry into a contract, as this

81A

is." (Campbell v. McClure (i986) 182

Cal.App.3d 806, 808, fn. 1; see also Horn

v. Guaranty Chevrolet Motors (1969) 270

Cal.App.2d 477, 484.)

Both the trial judge and the jury

found that Shell had perpetrated a fraud

on the Nelsons. At the conclusion of the

court trial with respect to the right to

rescind, the trial court made substantial

factual findings on this issue, including

the fact that Shell pressured Mr. Nelson

to extend the lease agreements; that

Nelson resisted until he became ill; that

when Nelson was suffering from advanced

heart disease and_ senility, Shell

threatened to collect some $5,600 in

overpaid rent if the contract were not

signed; and that Shell kept from the

Nelsons the status of the Century Freeway

condemnation action.

82A

In our prior decision, we affirmed

the finding of fraud and the Nelson’s

right to rescind the contract. The

matter was remanded solely because no

evidence of actual damages had been

presented in the rescission trial. At

the retrial, evidence was introduced, as

set out supra, establishing that general

damages were in fact suffered by the

Nelson Trust.

The Nelson Trust presented evidence

of the most recent annual financial

statement of Shell, offered as proof of

its financial condition. (Adams v.

Murakami (1991) 54 Cal.3d 105, 111.)

Once general damages were

established at the conclusion of the

second trial, both sides having waived

jury on the punitive damages issue, the

trial court could have, but did not re-

83A

ale

impose the $1,887,375 punitive damage

award. This figure was not excessive as

a matter of law. It was supported by the

evidence and bears a reasonable

relationship to general damages.

b. The same is not true, however,

with respect to the increase in punitive

damages which the trial court imposed at

the conclusion of the retrial. With

respect to this issue, Shell raises two

contentions.

Shell contends that the court erred

when it ‘based its increased award of

punitive damages on evidence admitted,

over objection, regarding use of the base

lease manual subsequent to 1987, the year

of the earlier trial. This contention is

without merit. As in any civil trial

based on tortious conduct, evidence of

the defendant’s continuing bad acts is

~ 84A

relevant to the issue of malice.

(Hilliard v. A.H.Robins Co. (1983) 148

Cal.App.3d 374, 400-401.)

Shell further argues that even if

properly admitted, this evidence is

insufficient to support the increased

award. The following evidence on the

continuing use of the base lease manual

by Shell was presented:

Prior to the retrial, the Nelson

Trust had subpoenaed from Shell “any and

all writings or documents wherein Shell

either modified, withdrew, repudiated or

otherwise prevented or discouraged the

continued use of its base lease manual or

any part thereof (since July 1987)." No

documents were produced in response to

that subpoena, and counsel for Shell

stipulated that no such documents exist.

85A

Mr. Drager, Shell’s real estate

manager testified that, since 1987, he

had not prepared any communication

discussing or modifying the use of the

manual, nor had he seen such a document.

He also testified that since 1987 he had

not directed anyone to use the manual and

was not aware if one was available in his

office.

With the exception of the foregoing,

the only occurrence between the first and

second trials was the passage of time.

There is no justification for the

increase in the punitive award from the

approximately $1.9 million, which was

reasonably justified by the state of the

record, to the much greater $6.295

million award, which was not.

The trial court interpreted the

evidence in the second trial as estab-

86A

lishing that Shell was continuing to

utilize the "manipulative techniques

advanced in the manual." However, this

conclusion is simply not supported by the

evidence. It is equally reasonable to

conclude on the basis of what was

testified to that Shell no longer uses

the manual or the procedures it espouses.

The Nelson Trust did not meet its burden

on this issue. We conclude that the

court abused its discretion in assessing

punitive damages of $6.295 million.

c. Shell asserts that there was no

evidence that it ratified the fraudulent

conduct which induced the Nelsons to

agree to the three five-year extensions.

We rejected this argument when it was

raised in Shell’s earlier appeal, where

we affirmed the judgment of rescission

based upon fraud. After summarizing the

87A

evidence presented regarding the base

lease manual, we concluded that the

instructions contained therein "establish

Shell’s authorization and ratification of

the practices promoted in the Manual."

Moreover, we note that when a master

or principal asserts that punitive

damages cannot be imposed upon it for the

acts of its agents, "the critical inquiry

is the degree of discretion the employees

possess in making decisions that will

ultimately determine corporate policy."

(Egan v. Mutual of Omaha Ins. Co. (1979)

24 Cal.3d 809, 822-823.) In the instant

situation, no one disputes that Mr. Lewis

was authorized to enter into the contract

for the three five-year extensions with

the Nelsons, thereby binding Shell to its

terms. We conclude, therefore, that he

did possess sufficient discretion for the

88A

law to impute his actions to Shell.

(Ibid. )

d. Constitutionality. Shell

challenges the constitutionality of the

punitive damages award, asserting that

the absence of objective standards

deprives it of due _ process. This

argument has been considered and rejected

by both the United States and our Supreme

Court. (See ific u ife

insurance Co. v. Haslip (1991) __—saU«S.«

[113 L.Ed.2d 1]; Hasson v. Ford

Motor Co. (1982) 32 Cal.3d 388, 402, fn.

2.)

DISPOSITION

The judgment awarding damages is

modified to strike the following items of

general damages: $60,000 costs of

litigation, $10,060 income taxes, and

$126 Internal Revenue Tax penalty; as

89A

modified, the award of general damages is

affirmed.

We also strike as excessive the

judgment awarding $6.295 million in

punitive damages. It appearing that all

of the evidence necessary to a

determination of the issue of punitive

damages is before the court, we see no

necessity for a further trial. It only

remains for the trial court to arrive at

an amount of punitive damages supported

by the evidence. The matter is remanded

for the trial court to assess and award

punitive damages consistent with the

views expressed in this opinion. Each

side is to bear its own costs. on

appeal.

90A

NOT TO BE PUBLISHED

Cooper, J. **kxxx

We concur:

WOODS (Arleigh), P. J.

EPSTEIN, J.

*kkkkkASSigned by the Chairperson of the

Judicial Council.

91A

turned 80 years old.°/

Mr. Nelson and Lewis met at the

dinette table, and Mrs. Nelson was never

more than six feet away, in the kitchen

or living room. Mr. Nelson had discussed

Shell’s overpayment with Mrs. Nelson

after Lewis’ call, and Mrs. Nelson was

very interested in their discussion.

Mrs. Nelson heard Lewis explain to Mr.

Nelson that he had two choices--either

pay back the $5,625 overpayment or agree

to an additional 15 year lease on the lot

in exchange for Shell forgiving the

indebtedness. Mr. Nelson proposed that a

"cost of living" rental increase be

included in the lease. Lewis unequiv-

ocally rejected this idea. Lewis stated

that Shell was very happy with the

6 Mr. Nelson died approximately one

year later.

10A

station location, looked forward to many

years of business there, and had long-

range plans for it. He also reminded Mr.

Nelson that the monthly rental check

would be comforting to Mrs. Nelson and

offer financial security for her should

anything happen to hin.

The meeting lasted between thirty

minutes to an hour. Mrs. Nelson felt

Lewis created an atmosphere of urgency

during this meeting. No mention was made

of the Century Freeway or possible

condemnation of the property by

Caltrans.’/ Mrs. Nelson had. no

. Lewis testified that he was

ignorant concerning the progress of the

Century Freeway, and his knowledge of the

freeway was no greater than that of the

average person reading the newspapers and

watching television. He also testified,

however, that he knew that the freeway

was not being abandoned, that Caltrans

was preparing an environmental impact

report at great expense to comply with

the Court order, that three cities which

11A

information at that time about any

possible effect the Century Freeway might

have on the property. By the time Lewis

left, Mr. Nelson had agreed to the three

five-year options to extend the lease to

2001. All other lease terms remained the

same.

On June 8, 1978, approximately 10.5

years before the lease expiration date,

both the Nelsons signed the "Agreement

Amending Lease." The agreement was a

one-page document which provided that the

monthly rent in 2001 would be $1200 and

incorporated by reference the terms of

originally had objected to the freeway

route had withdrawn their objections, and

that the freeway was still a possibility

as of June 1978. Moreover, during the

period while the injunction was in

effect, Lewis had handled a transaction

for Shell which conveyed to him knowledge

that the State was still interested in

proceeding with the freeway, and was

buying property in the corridor from

owners who would voluntarily sell.

12A

the 1960 lease. It was executed by Shell

on June 20, 1978. Mrs. Nelson signed the

agreement because she trusted her

husband’s judgment and realized that in

order to repay the $5625 they would have

had to borrow or sell stock, thereby

reducing their income. From the time the

Nelsons received the first call from

Lewis to the time they signed the

agreement, three days had elapsed.

In 1978, Lewis knew that the State

compensated the owners of property it

condemned and that a lessee who had a

right into the future beyond the period

of condemnation was entitled to make a

Claim for a certain percentage of the

Overall state payment for the property.

He was also aware that options counted in

determining the length of the lease, and

that the lower the rent the more Shell’s

13A

claim in condemnation was worth.

Several training and policy manuals

were available to Shell real estate

representatives. One such manual was the

Shell Base Lease Manual. During their

training seminar, real estate

representatives were instructed to follow

the procedures outlined in the Base Lease

Manual.*/ It offered tips on how to

approach certain issues and to persuade

owners to accept various lease provisions

' During his trial testimony,

Robert S. Drager, Shell’s District Real

Estate Representative at the time of

trial, testified that he had not been

given the Base Lease Manual during his

training seminar nor did he recall being

instructed to use it. His deposition

testimony, however was to the contrary.

He further testified he had never been

trained to extend a lease in order to

obtain a greater portion of a

condemnation award; and he, personally,

would disclose the possibility of state

condemnation during negotiations with a

property owner if he were aware that it

might occur.

14A

favorable to Shell, including purchase

options, lease amendments, and extension

options. Shell also printed a

Condemnation Manual, which instructed the

real estate representatives to keep

abreast of developments upon discovering

that a condemnation might occur.

Among the tips described in the Base

Lease Manual, were suggestions on how to

minimize a lease feature by hurrying

along, joking, or grouping together and

dismissing as unimportant the desired

feature; on how to convince an owner to

pay his or her own property taxes; on how

to effectuate inclusion of the "use the

premises for any lawful purpose" phrase.

The Manual emphasizes the importance of

timing in renewal negotiations; the

advantages of placing the owner in a

"defensive position" and ina "frustrated

15A

position"; and directs the real estate

representatives to “be familiar with all

instructions relating to condemnations."

It further suggests that when Shell wants

to secure a long term lease from "an

owner who is middle-aged or slightly

beyond," the representative should tell

the owner that "a long lease gives ...

security of income for ... old age, ..."

It suggests reminding an owner that,

"After a man dies, his family is always

better off if it has a steady income....

It is very difficult to plan an estate on

a short-term lease. Widows and children

need the protection afforded by the

experience and ability of a successful

business man. That protection can be

extended by an owner through the use of

long-term lease."

As of June, 1978, the date when

16A

Lewis obtained the lease extension from

the Nelsons, all governmental bodies and

officials responsible for implementing

the freeway had indicated their approval

of the project. As of that time, Cal-

trans was publicly expressing optimism

that the freeway would proceed and was so

advising any member of the public that

inquired. The United States Department

of Transportation was taking the same

position in response to inquiries from

the public.

In October, 1979, the federal court

dissolved its injunction stopping con-

struction of the Century Freeway. Lewis

did not inform Mrs. Nelson that his

representation that Shell looked forward

to pumping gas for many years into the

future was mistaken; nor did he inform

her that his representations that the

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extensions would give her financial

security was mistaken.

Mrs. Nelson first learned of the

condemnation when she received a letter,

dated March 14, 1983, from Caltrans. She

learned that Shell was making a claim on

the condemnation proceeds on November 19,

1984.

On February 1, 1985, Shell claimed

that the 1978 extensions entitled it to

two-thirds of the condemnation award. At

trial, Shell’s expert witness testified

that the value of Shell’s leasehold

interest was $620,000, based upon his

professed opinion that the fair rental

value of the Nelson property was $7900

per month, almost $7000 per month more

than the rent called for by the options.

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PROCEDURAL HISTORY

On June 18, 1985, Caltrans filed a

complaint in eminent domain against the

Nelsons and Shell, alleging that the

subject property was necessary for

highway construction. On September 4,

1985, Nelson filed a _ cross-complaint

against Shell. The remedies sought were

(1) rescission of the three five-year

options negotiated in 1978; and (2)

damages for fraud, constructive fraud,

and intentional infliction of emotional

distress.

On October aes 1986, an

Interlocutory Judgment of Condemnation

was filed. Under its terms, the State

agreed to pay the sum of $975,000 to

Shell and Nelson, jointly, representing

the total value of their combined

interests in the property. The

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apportionment of that sum between the

parties was left to be resolved at trial.

Shell presented a claim for $620,000.

Prior to trial various matters were

determined by the Court to be without

substantial controversy. (Code Civ.

Proc., Sect. 437c.)°/

Prior to commencement of trial,

Shell filed a Motion in Limine, seeking

to exclude mention of various matters

during trial. Among the motions which

were granted was an order that Nelson not

make, “Any reference to any settiement

9 Pertinent to this appeal is the

following fact found to be without

substantial controversy: "9. That at

all times material to this litigation,

the only relationship that ' existed

between Shell-Lewis on the one hand, and

the Nelsons on the other, was that of

lessor and lessee of a piece of real

property and improvements thereon. That

at no time did Shell-Lewis, or either of

them, stand in any fiduciary relationship

to the Nelsons."

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negotiations between any of the parties

in this’ action, including without

limitation, any reference to any offer of

settlement and response thereto.... ”

Also granted was an order that Nelson not

make “Any reference to any fact which

either directly or indirectly contradicts

those facts which have been found by the

Court to be without substantial

controversy.... "

Trial commenced on June 5, 1987.

The causes of action for fraud,

constructive fraud and intentional

infliction of emotional distress were

tried to the jury. On July 21, 1987, the

jury returned its special verdicts. In

summary, the jury found that Shell had

Suppressed a material fact but without

intent to defraud Nelson; that Shell

intentionally made a false representation

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as to past or existing material fact;

that Shell made the representation with

an intent to defraud Nelson, and Nelson,

unaware of the _ falsity, acted in

justifiable reliance upon the truth of

the representation; and that Nelson was

damaged as a result of this reliance upon

the truth of the representation in the

amount of $154,150. The jury awarded

Nelson $235,600 in punitive damages and

valued Shell’s leasehold interest at

$235,600.

On September 18, 1987, the trial

court granted Nelson a new trial on the

issues of compensatory and punitive

damages on the fraud cause of action.

On the rescission cause of action,

the trial court granted Nelson rescission

and awarded punitive damages of

$1,900,000, deducting $5625 (rent

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overpayments) and $7000 (value of Shell’s

leasehold interest in the remainder of

the original lease). The court’s order

granting the partial new trial and

rescinding the options and its Nunc pro

Tunc order correcting it are attached to

this opinion as Appendix A.

On July 27, 1987, judgment on the

jury’s special verdicts was filed as was

the judgment on the court’s verdict. In

the latter, the court reserved juris-

diction to award damages and further

apportion the condemnation proceeds. At

the trial court level, Nelson did not

elect a remedy.

ISSUES ON APPEAL

Shell has raised numerous issues on

appeal, attacking the validity of the

jury verdicts and the court verdict. In

the Nelson’s responding brief and at oral

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.