GREVE v. LEGER LIMITED

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District Court of Appeal, Third District, California.

Myron D. GREVE and Eva Greve, Plaintiffs and Appellants, v. LEGER, LIMITED, a California corporation, and James O. Reimel, as Director of the Department of Alcoholic Beverage Control of the State of California, sued herein as Doe One, Defendants and Respondents.

Civ. 10948.

Decided: February 04, 1965

Orrin K. Airola, San Adreas, for appellants. Brobeck, Phleger & Harrison, San Francisco, Stanley Mosk and Thomas C. Lynch, Attys. Gen., by N. Eugene Hill, Deputy Atty. Gen., Sacramento, for respondents.

Plaintiffs appeal from a judgment entered after a general demurrer to the complaint was sustained without leave to amend.

The complaint alleges that on August 7, 1959, plaintiffs and defendant Leger, Ltd. (whom we shall call ‘Leger’) entered into an agreement for the sale to defendants of the Leger Hotel located at Mokelumne Hill, together with an on-sale general liquor license and an off-sale general liquor license; that in connection with the sale the parties agreed on November 17, 1959, that if Leger defaulted in making its payments on the hotel and if it became necessary for plaintiffs to respossess the property, Leger would retransfer the licenses to plaintiffs for the same price it had paid;1 that Leger did default and plaintiffs foreclosed their deed of trust and repossessed the hotel; that plaintiffs tendered to Leger the sum of $5,000 and requested Leger to retransfer the liquor licenses in accordance with the agreement; that Leger refused to do so and was attempting to transfer the licenses to other parties; that the Leger Hotel as a business establishment depends upon the operation of a bar and the sale of liquor; that unless the licenses were retransferred to plaintiffs, the latter would suffer irreparable injury, being unable to obtain new licenses for those premises or to purchase any licenses except upon the payment of much more than $5,000. The complaint prayed for a decree of specific performance and sought an injunction against any transfer of the licenses to persons other than plaintiffs.

The argument on appeal revolves around the legality of the agreement for license retransfer. At the time of the parties' agreement, the Alcoholic Beverage Control Act, specifically section 24076, Business and Professions Code, provided as follows: ‘No licensee shall enter into any agreement wherein he pledges the transfer of his license as security for a loan or as security for the fulfillment of any agreement. Each application for the transfer of a license shall be accompanied by or contain a statement verified by both the transferor and transferee specifically stating that the transfer application or proposed transfer is not made to satisfy the payment of a loan or to fulfill an agreement entered into more than ninety (90) days preceding the day on which the transfer application is filed with the department or to gain or establish a preference to or for any creditor of the transferor or to defraud or injure any creditor of the transferor. This statement shall become part of the transfer application, and any misrepresentation contained in the statement shall be considered the misrepresentation of a material fact.’ (Stats.1955, ch. 447, p. 916.)2

The trial court apparently concluded that the parties' agreement was illegal; that plaintiffs were entitled neither to mandatory relief (by way of a decree ordering retransfer of the licenses) nor prohibitory relief to prevent sale to third persons. At oral argument counsel for plaintiffs informed this court that defendants had in fact sold the licenses to third persons pending the appeal, a statement which counsel for defendants did not deny. At this point, we note that the contract contains not only a covenant to retransfer to plaintiffs, but a distinct additional commitment that, in the event of repossession, defendants would not attempt to sell the licenses or remove them from the premises. On the occasion of oral argument, counsel for plaintiffs requested reversal at least for the purpose of an amendment to the complaint seeking enforcement of, or money damages for, breach of defendants' covenant against sale to third persons.

Truth of the complaint's allegations is assumed for the purpose of considering its vulnerability to demurrer. It seems evident that Leger utilizes a provision of state law, designed to achieve a public policy objective, as a shield for the evasion of a solemn contractual commitment. Even on the assumption that retransfer to plaintiffs might have been unlawful, Leger might have chosen to surrender the licenses (possibly facilitating plaintiffs' application for new licenses) rather than benefit wrongfully by selling them to third persons. As it is, plaintiffs have now repossessed a liquorless hotel in a Sierra foothill community, perhaps worth considerably less than the property they sold, while there is some likelihood that their liquor licenses are now in the hands of competitors. We are not informed whether transfer of the licenses to third persons received approval of the Department of Alcoholic Beverage Control. As will be apparent, completed transfers to third persons could only have been made with departmental approval.

When the owner-licensee of a retail liquor establishment sells the business on deferred payments, it is understandable that he might wish to reserve the right to repurchase the license if the buyer fails to keep up his payments. Similarly, a lessor-licensee may wish to repurchase the license if his tenant forfeits the lease. There is nothing immoral about such an arrangement. The premises are usually worth a great deal more with the liquor license than without it. The repurchase clause simply expresses the owner's prudent desire to maintain the commercial value of the real estate he repossesses. The agreement is implicitly subject to the statutory demand that retransfer of the license must first be approved by the Department of Alcoholic Beverage Control. (Bus. & Prof. Code, §§ 23958, 24070; Campbell v. Bauer,104 Cal.App.2d 740, 744, 232 P.2d 590; see also Golden v. State, supra, 133 Cal.App.2d at p. 644, 285 P.2d 49.

Section 24076 declares that a licensee shall not enter into an agreement in which he ‘pledges' the transfer of his license as security. As an original matter, it would hardly be supposed that the owner-licensee's repurchase right would constitute a ‘pledge,’ since as the obligee or creditor he has no occasion to give security. The buyer or lessee, on the other hand, does not violate the statute, since he is not yet the licensee and the prohibition is not addressed to him. Once the license has been transferred to him, it is of course burdened with the contingent repurchase obligation. The objective of the agreement, however, is not to hypothecate the license but to tie it to the real estate, at least as between the parties. Also, when the buyer or tenant is entitled to a substantial price for the license retransfer, the element of security is further de-emphasized.

Although the ‘plain meaning of the statute falls quite short of such license repurchase clauses, four judicial precedents broadly construe the term ‘pledge’ to embrace such arrangements. (Citrigno v. Williams, 9 Cir., 255 F.2d 675; Hammond v. Pasquini, 211 Cal.App.2d 540, 27 Cal.Rptr. 208; Belle Isle v. Hempy, 206 Cal.App.2d 14, 23 Cal.Rptr. 599; Elmquist v. Lock, 194 Cal.App.2d 372, 15 Cal.Rptr. 447.) Such decisions extend the statute beyond its literal terms in apparent deference to a statutory purpose described as follows: ‘If such an agreement were permitted, performance of it would vest in the person to whom performance was due, ownership of the license, regardless of his qualifications to be licensed. It is the purpose of section 24076 to prevent a transfer of ownership by any means other than the procedure, compliance with which would limit transfers to those who are qualified to hold licenses.’ (Elmquist v. Lock, supra, 194 Cal.App.2d at p. 377, 15 Cal.Rptr. at p. 450.)

Statutes are interpreted to yield a reasonable result consistent with the legislative purpose. (Kusior v. Silver, 54 Cal.2d 603, 620, 7 Cal.Rptr. 129, 354 P.2d 657.) We question the appraisal of statutory purpose in Elmquist v. Lock, supra. As we have indicated, the Department of Alcoholic Beverage Control has ample power, independent of section 24076, to disapprove retransfer to the original licensee upon appropriate grounds. The department has no need to rely upon section 24076 to prevent license transfer to an unqualified transferee. Rather, the apparent purpose of the pledge prohibition in section 24076 is to prevent a licensee from hypothecating his license to a creditor whose secret control may intervene between the licensee and the direct responsibility he owes to the Department of Alcoholic Beverage Control in the conduct of the business. There was no hypothecation of licenses here. Neither the language nor purpose of the pledge prohibition demands that it be broadened to transactions like the present. Courts are justified in the broad application of statutory words to coincide with the reach of statutory spirit. We disagree with the four cited decisions, suggesting that they stretch both letter and spirit of the law.

Since the contract involved no hypothecation of the licenses, it was not illegal in any sense. Although section 24076 prevents license transfers in fulfillment of an agreement more than 90 days old, the contract at its inception did not violate that phase of the statute. It does seem to have been drawn in ignorance of the legal quicksands confronting the parties should they seek to retransfer the licenses to the original owners more than 90 days from contract date. Had repossession and retransfer occurred within 90 days, the parties could have presented the Department of Alcoholic Beverage Control with an application truthfully stating that the retransfer was not in fulfillment of an agreement more than 90 days old. Once the 90-day period had passed, retransfer of the licenses to plaintiffs became unlawful. Equity has no power to disregard a statutory prohibition. (Town of Mill Valley v. Massachusetts Bonding & Ins. Co., 68 Cal.App. 372, 378, 229 P. 891.) Thus a court of equity could not direct specific performance of the retransfer clause. The trial court correctly decided that the complaint did not state a claim for specific performance.

The parties' inability to achieve retransfer of the licenses after 90 days did not free defendants to flout their commitment by selling the licenses to third persons, pocketing the proceeds of their breach. As to the denial of injunctive relief restraining a threatened sale to third persons, out attention has not been called to any provision of the Alcoholic Beverage Control Act frowning on the covenant against resale. We find none ourselves. The asserted illegality of the retransfer clause did not engulf the resale provision in illegality. Leger had promised that it would not attempt to sell the licenses to third persons if plaintiffs' found it necessary to repossess the hotel. Neither in form nor substance did that negative covenant constitute a ‘pledge’ for security purposes. Its objective was to prevent devaluation of the Leger Hotel and destruction of its economic potential by sale of the licenses to a competitor. That covenant was entirely independent of the promise to retransfer. If, for a valid consideration, one gives an illegal promise and a separate legal promise, he shall be held to do that which is legal. (Poultry Producers etc. v. Barlow, 189 Cal. 278, 286, 208 P. 93.) Plaintiffs had alleged irreparable injury from the threatened sale of the licenses. No reason has been offered and none appears to us to explain why the door to equity should be closed in the face of plaintiffs' plea for prohibitory relief.3 As to this aspect of the complaint, the trial court erred in sustaining the general demurrer.

Denial of leave to amend the complaint could have been predicated only upon the view that the contract was wholly illegal and wholly unenforceable. Even on the assumption that Leger's promise to retransfer violated the anti-pledge provision of section 24076, plaintiffs were not necessarily barred from recourse to the courts. The rule denying judicial relief to parties to an illegal contract is subject to a wide range of exceptions. (Harriman v. Tetik, 56 Cal.2d 805, 811, 17 Cal.Rptr. 134, 366 P.2d 486; Lewis & Queen v. N. M. Ball Sons, 48 Cal.2d 141, 150, 308 P.2d 713; see also Rest., Contracts, sec. 598; Strong, The Enforceability of Illegal Contracts, 12 Hastings L. J. 347, 362–376; Wade, Restitution of Benefits Acquired Through Illegal Transactions, 95 U.Pa.L.Rev. 261.) For example, Harriman v. Tetik, supra, upholds a claim to restitution by one who was not in pari delicto, even though the contract involved an incidental violation of the Alcoholic Beverage Control Act. Ignorance of the law making performance of a contract illegal may also justify a partial remedy against breach, such as restitution. (6A Corbin on Contracts, sec. 1539.) Other cases follow the doctrine that illegality of a portion of the promised performance does not prevent enforcement of a divisible lawful part of the contract. (Poultry Producers etc. v. Barlow, supra, 189 Cal. at pp. 285–286, 208 P. 93; 6A Corbin on Contracts secs. 1520–1522.) Professor Corbin has noted: ‘There is danger of jumping to a conclusion, either refusing all remedy in the belief that the ‘illegal’ is bad and that no ‘bad’ man deserves relief, or granting a remedy without sufficient regard for what the public interest requires.' (6A Corbin on Contracts, sec. 1534, p. 819.) In each case of illegality or partial illegality, extent of the area of enforceability and the kind of remedy the law will allow depend upon a variety of factors including the policy of the trangressed law, the kind of illegality and the particular facts. (Lewis & Queen v. N. M. Ball Sons, supra, 48 Cal.2d at p. 151, 308 P.2d 713.)

Although the judgment of dismissal must now be reversed, our remittitur will confront trial court and counsel with an altered set of facts. To all appearances, following the judgment and pending the appeal, defendant Leger chose to alter the status quo by selling the licenses to a third party. Plaintiffs were unable to prevent this action because no stay pending appeal is available after denial of prohibitory relief. (Seltzer v. Musicians' Union, 12 Cal.2d 718, 87 P.2d 699.) We do not know whether the third party can claim status as a bona fide purchaser.

When a judgment is reversed on appeal, the appellant is entitled to restitution of all rights taken from him under the judgment. (Levy v. Drew, 4 Cal.2d 456, 459, 50 P.2d 435, 101 A.L.R. 1144; City of Oakland v. Buteau, 219 Cal. 745, 758, 29 P.2d 177; Asato v. Emirzian, 177 Cal. 493, 495–496, 171 P. 90.) An appellate court has statutory authority to accomplish that result and a trial court inherent power. (Code Civ.Proc. § 957; Rogers v. Bill & Vince's, Inc., 219 Cal.App.2d 322, 324–325, 33 Cal.Rptr. 129.) Here, where the kind of relief to be afforded may depend on the evidence to be adduced, restoration of the status quo as an incident of ultimate disposition of the controversy is best left to the trial court. Equity, we note, molds its decrees to meet such exigencies as may arise. (18 Cal.Jur.2d, Equity, sec. 7.) Plaintiffs should be permitted to amend their complaint to allege supplemental facts seeking, if so advised, damages instead of or as an alternative to equitable relief. (Code Civ.Proc. § 464; Long Beach Drug Co. v. United Drug Co., supra, 13 Cal.2d at p. 173, 88 P.2d 698; 2 Witkin, Cal. Procedure, Pleading, secs. 605, 609, 611.) Plaintiffs should be permitted at their request to join the third party purchaser as a party defendant. We do not intimate that the courts should or may interfere with the Department of Alcoholic Beverage Control's approval or disapproval of license transfers within the bounds of lawful discretion. The parties, however, are within the control of the courts as potential applicants to the department for a transfer. (See Harriman v. Tetik, supra, 56 Cal.2d at p. 812, 17 Cal.Rptr. 134, 366 P.2d 486.) Nor do we regard the department was anything other than a neutral party. If, however, the department has hitherto approved a wrongful transfer of licenses to third parties in violation of Leger's contract, its continued presence in the litigation may be necessary to permit equity to undo that which should be undone. In the meantime, defendants are the trustees of any money received by them as the result of such a transfer. (City of Oakland v. Buteau, supra, 219 Cal. at pp. 757–758, 29 P.2d 177; Asota v. Emirzian, supra, 177 Cal. at pp. 496–497, 171 P. 90.)

The judgment is reversed and the cause remanded to the trial court for further proceedings not inconsistent with this opinion.

I concur in the result, also with most of what is said in Justice Friedman's opinion and the way it is put. I feel constrained, however, to express divergent views wherein I detour to reach the same destination.

First, as regards that portion of the agreement wherein, in the event of a repossession of the hotel by Greve, Leger agrees to retransfer the license, I construe this as meaning only that it agrees to apply to the department for permission to retransfer the license. The control and plenary powers of the department over the persons to whom, and the conditions upon which, licenses can be transferred are matters of common knowledge and, I think, to those dealing in liquor licenses, matters of universal knowledge. There can be no question, therefore, that the parties intended (1) there would be an application by Leger for the transfer of the license to Greve; (2) thereafter, if the department found Greve to be a qualified person, the transaction would be completed, Greve would pay $5,000 to Leger and that would be the end of the matter; (3) but if, on the other hand, Greve was found to be unqualified, Leger agreed that it would not, in any event, transfer the license to any third party—and Greve would thus be assured that although he might have to operate a liquorless hotel' (as Justice Friedman expresses it), he would not be left with a competitor set up in a liquor business which, effectually, had been financed by Greve.

The agreement as thus construed contravenes no public policy discernible to me. It gives Greve no control over the use of the license, or its privileges, so long as Leger, the licensee, is in business. It interferes in no way with the department's complete control over Leger's operation of the licensed premises. Certainly, no public policy intervenes to prohibit parties from agreeing that upon the happening of a contingency under which a licensee can no longer use a license, he will not have the right to transfer it to a third party. The only effect of such an agreement is a possible cancellation of the license. Obviously, the state, although it IS concerned about oversale of liquor, has no quarrel with an agreement which will result in liquor consumption curtailment.

Nor do I construe the language of Business and Professions Code, § 24076, the part proscribing more-than-ninety-day-old agreements, as relating at all to this sort of an agreement. The statute says that the parties must verify a statement that the proposed transfer is not made to satisfy the payment of a loan and must also state that the transfer is not made to gain or establish creditor preferences or to defraud or injure any creditor. When the Legislature refers to, and prohibits, more-than-ninety-day-old agreements and does not expressly state what type of agreements are meant, obviously some circumscription of agreements is intended. (Otherwise all agreements between the parties, regardless of the subject matter of its relation to liquor regulations, would be outlawed.) Since some limitation of meaning must have been intended, it would seem logical to look at the context of the section to determine the type of agreements affected. And since transfers to satisfy loans, injure creditors, etc., are the only type proscribed, the ‘agreements' prohibited should be deemed limited to those relating to the satisfaction of loans, injury to creditors, etc. Neither of my colleagues agrees with me in this respect, but since Justice Friedman does agree that the portion of the contract under which Leger has agreed not to transfer the license to a third party is valid, and, absent the possible intervening rights of an innocent purchaser for value without notice, specifically enforceable, I can concur because the net result, as I see it, will be the same.

I say ‘net result’ advisedly: If the pleaded allegations are proved and the third-party-purchaser of the license does not have equities to prevent, the new license can be ordered cancelled by a court of equity and the former license revived to give it the same status as it had before the wrongful transfer. I would assume the parties by stipulation would prefer to salvage something from it through a transfer by operation of law (permissible under Bus. & Prof.Code, §§ 24071, 24075, and Cal. Admin. Code, tit. 4, sec. 60.3) in mitigation of Greve's damages. This the trial court can control by its orders so long as the department's control as regards the qualifications of the ultimate licensee is not interfered with.

I concur in the reversal but on different grounds.

Respondents in support of their demurrer contended that the contract concerning the sale and resale of the liquor licenses violated the statutory provision prohibiting a licensee from entering into any agreement whereby he ‘pledges' the transfer of his license as security for the fulfillment of any agreement and was therefore void. In support of this contention respondents cited a number of cases. (See Elmquist v. Lock, 194 Cal.App.2d 372, 15 Cal.Rptr. 447; Belle Isle v. Hempy, 206 Cal.App.2d 14, 23 Cal.Rptr. 599; Citrigno v. Williams (9 Cir.) 255 F.2d 675; Hammond v. Pasquini, 211 Cal.App.2d 540, 27 Cal.Rptr. 208.) The trial court correctly construed the transaction between the parties to be one in which Leger was ‘pledging’ the transfer of the licenses as security for the fulfillment of the agreement to purchase the hotel property. To be sure, as appellants contend, at the time this agreement was made Leger was not the licensee. But this is immaterial. It was intended by the parties that Leger should become the licensee, whereupon the agreement to retransfer the licenses if the purchase price of the hotel property was not paid would bind Leger. As was held in Elmquist v. Lock, supra, 194 Cal.App.2d at page 376, 15 Cal.Rptr. 447, the word ‘pledged’ as used in section 24076 of the Business and Professions Code cannot be given a narrow interpretation nor fitted literally into Civil Code section 2986 as a deposit of personal property by way of security for the performance of another act, but must be construed as intended to relate to a promise or agreement by which one binds himself to do or forbear something; a promise; to bind by or as by a pledge; to plight. That the parties intended a security arrangement is clear from the language they used. The contract reads: ‘It is understood and agreed that the keeping of the liquor licenses on the property aforesaid [the real property being sold] is necessary for the security of first parties [the sellers].’ The arrangement concerning the sale and resale of the licenses on the condition stated violated the provisions of section 24076 as being a ‘pledging’ of his license by a licensee as security for the fulfillment of another agreement.

There is a further reason why equity cannot enforce the agreement, even though it be considered as not constituting a pledge in violation of the code section. If the agreement did not so violate the section, it was valid when made, being merely an agreement for the transfer of liquor licenses which have been held to be legal, although in view of the provisions of the Alcoholic Beverage Control Act transfers can only be consummated through proceedings taken before the board and with the board's consent and approval. (Saso v. Furtado, 104 Cal.App.2d 759, 232 P.2d 583; Golden v. State of California, 133 Cal.App.2d 640, 285 P.2d 49.) Nevertheless, when this contract was made the provisions of section 24076 were such that 90 days from the effective date of the contract a situation would arise rendering the agreement unenforceable through court action. The section provides that an application for transfer of license must be accompanied by or contain a verified statement by both transferor and transferee specifically stating that the transfer application, or proposed transfer, is not made to fulfill an agreement entered into more than 90 days preceding the day on which the transfer application is filed with the department. Once the 90 days had elapsed, which from the pleading appears to have happened, it became possible for either party to comply with the statutory provisions for applying for a transfer since they could not make the statement that the transfer was not being made in fulfillment of an agreement entered into more than 90 days preceding the application. A license can be transferred only in the mode prescribed by the statute, hence the agreement, treated as one simply for the transfer of the licenses, became impossible of performance.

The record does not show that any request was made by appellants, as plaintiffs, to amend, although respondents' demurrer prayed for sustainment without leave which was granted. Nonetheless, on appeal, appellants in their brief ask for an order overruling the order sustaining the demurrer without leave to amend and allowing the plaintiffs to amend their complaint to ask for damages in the event the licenses have been transferred by defendants. It was stated in argument that they have been transferred. The contract sued upon was against public policy. ‘It has long been a rule of law that courts will not compel parties to perform contracts which have for their object the performance of acts against sound public policy either by decreeing specific performance or awarding damages for breach.’ (Haruko Takeuchi v. Schmuck, 206 Cal. 782, 786, 276 P. 345, 346, and cases cited therein.)

‘However, to these settled rules there are certain recognized exceptions in favor of a party who is not in pari delicto with the other party to the contract, and who as the more innocent of the two, seeks recovery.’ (Tiedje v. Aluminum Taper Milling Co., 46 Cal.2d 450, 454, 296 P.2d 554, 556.) It may be the facts are such that plaintiffs can rightfully bring themselves within one of the exceptions to the general rule, and, if so, they should be afforded an opportunity to do so. That leave to amend was not asked in the trial court does not prevent consideration of the plea made here. (Code of Civ.Proc. § 472c; 2 Witkin, Cal. Procedure, Pleading, sec. 505, pp. 1496–1497.) I think the judgment and order sustaining the demurrer without leave to amend should be reversed and the trial court directed to afford plaintiffs an opportunity to amend if so advised.

FOOTNOTES

1.  The November 17, 1959, agreement is incorporated by reference in the complaint. Referring to plaintiffs as ‘first parties' and Leger as ‘second parties,’ the agreement provides in part: ‘. . . second parties do hereby agree that they will not sell or transfer said liquor licenses separate and apart from the real property for so long as they are indebted in any manner to first parties. ‘It is understood and agreed that the keeping of the liquor licenses on the property aforesaid is necessary for the security of first parties. ‘Second parties further agree that in case default be made by them upon the indebtedness owing to first parties and it becomes necessary for first parties to repossess the property, that they will not attempt to sell or remove the licenses from the premises and that in such event the licenses will be transferred to the owner of said property under such repossession upon the payment to second parties of that amount that second parties have paid to first parties for the liquor licenses.’

2.  The section was amended in some respects in 1963. As to this 1959 contract, however, the parties are governed by the statute in force in 1959. (Cavalli v. Macaire, 159 Cal.App.2d 714, 324 P.2d 336; Golden v. State, 133 Cal.App.2d 640, 285 P.2d 49.

3.  Although the briefs fail to discuss the matter, Code of Civil Procedure section 526 and Civil Code section 3423, subdivision Fifth, should be considered. With several exceptions not applicable here, these statutes prohibit issuance of an injunction to prevent breach of a negative covenant in a contract when the affirmative aspect of the covenant cannot be specifically enforced by judicial decree. (Long Beach Drug Co. v. United Drug Co., 13 Cal.2d 158, 170, 88 P.2d 698, 89 P.2d 386; Hunter v. Superior Court, 36 Cal.App.2d 100, 110, 97 P.2d 492). These statutes do not require withholding of injunctive relief here. The negative aspect of the contract (the promise not to resell) is entirely distinct from the affirmative covenant (to retransfer the licenses to plaintiffs). The reasons for the restriction on equitable power are discussed in Poultry Producers etc. v. Barlow, supra, 189 Cal. 278, 288–289, 208 P. 93. Without inflating the matter, we simply note that none of these reasons apply here.

FRIEDMAN, Justice.