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Misrepresentation "Negotiation Skill"
by Michael Blahy

The “negotiation skill” of a salary plus commission employee landed a California leasing agency in court.

Paul Orozco (Orozco), who developed a successful chain of Mexican restaurants had a new concept, “Pauly’s Famous Franks N Fries” (Pauly’s), which he wanted to debut. The concept featured gourmet hot dogs, sausages, and specialty fries.

Orozco searched for an ideal location for his first location, settling on The Plant Shopping Center (the Plant), in San Jose. He liked the mix of restaurants at the center. Even though some, sold hot dogs, hot dogs were not a major item on their menu.

WPV San Jose, LLC, a subsidiary of Vornado Realty Trust (Vornado) was the leasing agency for the Plant. Amber Weltner (Weltner), their salaried employee, was responsible to quickly negotiate leases for the empty units for which she received thousands of dollars in commission.

In May 2011, Weltner was contacted by Orozco to open discussions on a lease. In the succeeding five months, about ten conversations, of which at least six were in‑person, took place between the Orozco and Weltner.

At their first face‑to‑face, Weltner was told about the focus of the new restaurant being “gourmet hot dogs—including a ‘Chicago style’ hot dog—as well as sausages and specialty fries”. He explained that he was drawn to the Plant by the mix of tenants, and that his concept would be unique. Orozco was told that there were three open spaces available. Orozco asked about possible tenants for the other unoccupied units, and was told that Vornado had a policy of not divulging information on prospective tenants. No such policy existed; this was one of Weltner’s “negotiation skill”.

Orozco emphasized to Weltner that it was important for him to evaluate operations that were selling hot dogs. He told Weltner that the tenant, Five Guys was investigated and was satisfied that hotdogs are a very small portion of its offerings and it would not be competition.

During subsequent meetings, Orozco asked about incoming tenants and Weltner cited the non‑existent policy. Orozco told her he did not care about the names but instead was more interested to know whether Vornado was considering tenants for the Plant that would offer either concepts or products that would compete with his own business. Weltner responded there were not.

Simultaneously, during the discussions with Orozco, negotiations were being held by Weltner and “Al’s Beef”, a company whose menu includes sausages and hot dogs. On July 7, 2011, the president of Al’s Beef asked to have language like “the Plant would not allow another tenant to sell ‘Italian Beef sandwiches, Italian Sausage sandwiches and/or Hot Dog sandwiches’ as its primary business and that Al’s Beef ‘shall have the unrestricted and exclusive right to sell said products and services’. ” A more limited exclusive paragraph was included in the agreement with Al’s Beef. The Al’s Beef agreement was completed prior to the agreement between Orozco and Weltner.

Orozco formed Solid Restaurant Ventures, LLC (SRV) to operate Pauly’s. At the end of September, [o]n the day Orozco signed the lease, he again asked Weltner if there were any other restaurants being considered for the Plant that would offer competing concepts or competing products. She said no. Orozco told Weltner that this information was “critical” for him.

Believing Weltner to be “a professional who worked for ‘a reputable large company’” and after reading the “major deal points” at the front part of the lease, he signed the 80 page ten‑year lease on behalf of SRV. The lease contained the one‑sided terms:

    In the event that, at any time after the date of this Lease, Landlord shall (i) consult with and/or retain an attorney as a result of Tenant’s breach of this Lease, (ii) prepare and/or serve a valid notice of default under this Lease and seek the cure of such default, or (iii) institute any action or proceeding against Tenant relating to or arising from the provisions of this Lease or any default hereunder, Tenant shall reimburse Landlord for its expenses, actual attorneys’ fees, and all fees, costs and expenses incurred in connection with such consultation, pursuit of rights, action or proceeding . . . ”.

He also signed a personal “Guaranty of Lease” which:

    provided that Orozco “absolutely and unconditionally guarantee[d] and promise[d] to Landlord the due, punctual and full performance by Tenant” of the lease’s obligations, including the payment of rent. The guaranty included a provision entitling a prevailing party “in an action against the other arising out of or in connection with this Guaranty” to “recover from the other attorneys’ fees and costs, including collection costs incurred.
Five months into preparations and 30 percent of the construction of Pauly’s, a “coming soon” sign went up for Al’s Beef, two stores away. Upset, Orozco called Nancy Wooten, the Plant’s property manager, saying that Al’s Beef was a “big problem” and described it as a “HUGE conflict here” in an email. Orozco was “told not to worry” by the landlord, that Al’s Beef was experiencing financial issues, and would not be a problem. With that assurance Orozco continued with the construction.

Pauly’s opened for business in late October 2012 with lines out the door, and from November 2012 to April 2013, sales were up 15 percent. Then Al’s Beef opened for business. Within a week, Pauly’s sales were down 24 percent, and over three weeks were down 35 percent.

In August 2013, Orozco and SRV filed a lawsuit against Vornado alleging:

  • three fraud causes of action-negligent misrepresentation, intentional fraud, and fraudulent concealment– . . . based on the theory that the defendants had committed fraud in the negotiation of the lease (that is, fraud in the inducement of the contract)

  • a fourth cause of action for “rescission, restitution and damages”

  • a fifth cause of action for unfair business practices in violation of Business and Professions Code section 17200

  • a sixth cause of action for declaratory relief, which they later amended to include a claim for reformation “based on fraud and/or mistake”

There was no allegation made of breach of contract, or any violation of the terms of the lease.

In November 2013, following advice from Brian Skarbek (Skarbek), the bookkeeper and financial advisor for Pauly’s, Orozco closed Pauly’s due to dramatically declining sales.

A jury trial was held in two phases. A ten‑day liability phase heard evidence related to the first three fraud claims, negligence and whether punitive damages were warranted. The jury unanimously found Vornado liable to SRV for the tort of intentional misrepresentation, but not on the other claims.

The jury then heard another two days of testimony regarding damages. SRV presented testimony from Skarbek and another expert, Jeff Back (Back) who showed, estimated losses of $1.2 million to $1.6 million. They used sales data from after the first month “honey moon” period to just before the opening of Al’s Beef and trend lines and discounts, that they could reasonably predict future sales would increase over the ten‑year lease.

Vornado’s sole expert, Robert Patterson, said that Pauly’s sales were “good” prior to the opening of Al’s Beef. He, using the same data as Skarbek and Back calculated Pauly’s lost profits as $498,192.

[T]he jury awarded $872,141 in total damages to SRV, which was comprised of: (i) $676,967 for lost profits; (ii) $129,462 for operational losses incurred by Pauly’s at the Plant; and (iii) $65,712 for startup costs for another Pauly’s, located in downtown San Jose.

Following the jury portion of the trial, heard arguments by Orozco and SRV on their motion to rescind the lease and the guaranty. The trial court issued a tentative decision stating that lost profits damages were not available to SRV if it elected to rescind the lease. SRV declined to rescind the lease and accepted the jury verdict for fraud and the $872,141 in damages.

Orozco sought rescission of the guaranty and presented a motion for attorney’s fees and costs (totaling over $700,000), which the trial court denied.

Vornado filed an appeal that:

  1. the jury’s finding that SRV justifiably relied on any misrepresentation was not supported by sufficient evidence

  2. there was insufficient evidence to support the jury’s award of lost profits damages
Orozco and SRV filed a cross‑appeal saying:

  1. the judgment should be reversed because he was entitled to rescind the guaranty

  2. the trial court erred in refusing to do so

  3. the trial court erred in denying them attorney’s fees under Civil Code section 1717. Alternatively . . . he is entitled to attorney’s fees as the prevailing party under the attorney’s fee provision in the guaranty
The appeals court reviewed the trial record and said:
     . . . we have little difficulty finding that it contains ample evidence to support the jury’s unanimous factual finding that Orozco reasonably relied on Vornado’s misrepresentations.

As for damages, during the trial, Vornado did not object to testimony by Skarbek even though they describe him as “incompetent” and his testimony as “flawed methodology and flawed assumptions”. The court of appeal looked at the estimates presented by the plaintiff and the defence. It noted that the jury made its own estimates, much lower than what was suggested by the plaintiff but slightly higher than what was calculated by the defence expert. The court of appeal ruled:

    We find no error either in the trial court’s decision to admit Skarbek’s testimony or in the jury’s determination of Pauly’s lost profits, including its determination of a discount rate.

    For these reasons, we reject all of Vornado’s claims against the judgment.

Regarding the rescission of the personal guaranty, the trial court made a judgement that the lease and guaranty should be treated as one. Since SRV accepted the jury damages award, thereby declining the rescission of the contract and that Orozco didn’t suffer any individual damages, therefore he is not entitled to having the personal guaranty annulled.

The court of appeals said “there is ample evidence in the record that Orozco was injured by virtue of entering into a guaranty, under which he assumed individual responsibility to answer for the obligations of the tenant under the lease, that he would not have freely entered into if he had known about Al’s Beef”. It emphasized that there is plenty of precedent “that a party does not have to suffer any pecuniary loss to rescind a contract that it was induced to enter into through fraud”. As far as the joining of the lease and guaranty, the appeals court said, “The relevant question was not whether the lease and guaranty were separate but instead whether Orozco and SRV were legally separate entities . . .  As they were legally distinct entities, they may pursue—and receive—separate remedies for Vornado’s fraud”.

The appeals court decided that:

    Because the trial court’s order was premised on these factual and legal errors, we conclude that the trial court abused its discretion in denying Orozco the remedy of rescission. We therefore reverse the judgment and remand to the trial court to effectuate Orozco’s rescission of the guaranty as to Vornado.

Normally, attorney fees are the responsibility of the individual parties, unless terms are specified in a contract. The appeals court ruled that since SRV was arguing fraud and not a breach of contract, the attorney fee clause in the lease does not apply.

The guaranty had its own attorney’s fee clause entitling the prevailing party to attorney fees in “an action against the other arising out of or in connection with this Guaranty”. The appeals court ruled:

    This expansive language, which applies to any prevailing party . . . is sufficient to encompass Orozco’s fraud action and rescission remedy. . . . As discussed above, Orozco is entitled to rescind the guaranty as to Vornado. He has therefore prevailed in an action arising from the guaranty and is entitled to attorney’s fees incurred in connection with his action related to the guaranty.

    Therefore, the order denying Orozco’s motion for attorney’s fees is reversed and the matter is remanded to the trial court for a determination of the amount of reasonable attorney’s fees to be awarded to Orozco in connection with his action related to the guaranty.

(Paul Orozco et al v WPV San Jose, LLC et al (California Courts of Appeal, Docket: H044014(Sixth Appellate District)))

Decided: June, 2019
Published: June, 2019

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