WONG v. TENNECO INC

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Court of Appeal, Fourth District, Division 1, California.

Leo WONG, etc., et al., Plaintiffs and Appellants, v. TENNECO, INC., et al., Defendants and Cross-Appellants.

Civ. 26358.

Decided: January 27, 1984

Irwin & Thuesen and Donald C. Thuesen, Fresno, for plaintiffs and appellants. Hufstedler, Miller, Carlson & Beardsley and Shirley M. Hufstedler, Robert S. Thompson, Burton J. Gindler, Los Angeles, and Hillyer & Irwin, San Diego, for defendants and cross-appellants.

This commercial dispute concerns the enforceability of a marketing contract between Lee K. Wong and Heggblade-Marguleas-Tenneco, Inc. (H–M–T).   After a two month trial a jury found H–M–T and its codefendants (collectively, the Tenneco group) breached the contract and intentionally interfered with Wong's business relations with certain Mexican farming associates.   The jury awarded Wong $1,691,422 on his complaint and the Tenneco group $595,510 on its cross-complaint.   The court ruled the parties' performance under the contract violated Mexican law, however, rendering the contract illegal and unenforceable.   Accordingly, the court vacated the jury's verdicts and entered judgment denying relief to both Wong and the Tenneco group.

We decide the court erroneously relied on Mexican law to invalidate the contract and vacate the jury's verdicts.   The court's application of Mexican law was contrary to applicable comity and conflict of law rules.   We therefore reverse the judgment and remand for further proceedings consistent with this opinion.

Factual and Procedural Background

A complicated set of business transactions began in the early 1970s.   Dozens of individuals and entities were involved, eight of them becoming parties to litigation.   The principal parties are Lee K. Wong, a farmer and California resident (now deceased), and H–M–T, a produce broker incorporated in California.

Wong was a talented farmer with a long-standing reputation for growing premium quality green onions.   In 1969 he expanded his operations to Mexico.   Unfortunately, Wong's business skills did not match his farming talents.   By 1970 he was deeply in debt and in need of additional capital.   H–M–T learned of Wong's difficulties and arranged to market a portion of his green onion crop.   In August 1971 Wong and H–M–T entered into the first of a series of contracts giving H–M–T the exclusive right to market Wong's crops in exchange for business management and financing assistance.   The contracts were executed and to be performed primarily in California.   Wong retained financial control of his business through his receipt from H–M–T of all crop revenues (less commissions, costs and payments on advances).

After some initial improvement Wong's financial condition took a turn for the worse.   By 1974 Wong was substantially indebted to creditors in Mexico and to H–M–T.   To tighten up his Mexican farming operation Wong funded an “Imprest Account” from crop revenues for payment of bills submitted by Mexican creditors and jointly approved by H–M–T and himself.   Wong also executed a $300,000 promissory note in favor of H–M–T to cover part of its advances to him, and secured the note with a deed of trust on real property he owned in Laguna Niguel, California.   H–M–T allegedly promised Wong it would retire the note through crop revenues rather than by foreclosing on his property.

Despite these measures Wong's fortunes continued to decline.   In January 1975 several of Wong's Mexican farming associates demanded H–M–T remit crop revenues directly to them, bypassing the “Imprest Account.”   Over Wong's objections, H–M–T agreed to do so.   In August 1975 Tenneco West, Inc. (H–M–T's successor in interest) filed notice of Wong's default on H–M–T's promissory note in apparent contemplation of forcing the sale of Wong's Laguna Niguel property under the deed of trust.  (See Civ.Code, § 2924.)

In August 1976 Wong filed suit against the Tenneco group on several theories, including breach of contract and intentional interference with business relations.   Wong died soon after and his estate was substituted in his place.   The Tenneco group answered and cross-complained to recover on H–M–T's promissory note, to foreclose on Wong's Laguna Niguel property and to recover past and future expenses incurred to protect its security interest in that property.   Before trial Wong and the Tenneco group agreed to sell the property.   In November 1979 Tenneco West, Inc. received sales proceeds of $682,500 to hold until conclusion of the Wong/Tenneco litigation.   In a stipulation Wong and the Tenneco group agreed to have the court rather than the jury decide the disposition of the sales proceeds as part of the final judgment in the action.

As noted above, the jury returned verdicts for Wong in the amount of $1,691,422 and for the Tenneco group in the amount of $595,510.   The jury also answered special interrogatories identifying the several contract and tort theories supporting its verdict for Wong and decided Wong was entitled to prejudgment interest on his contract damages.   The 1973 marketing contract underlying Wong's complaint provided the prevailing party in any litigation based on the contract would be entitled to attorney's fees fixed by the court.

During trial the Tenneco group moved for a judgment of nonsuit (Code Civ.Proc., § 581c, subd. (a)) based on the defense of illegality of the 1973 marketing contract under Mexican law.   The court denied the motion for administrative reasons, preferring to decide the issue after receiving the verdicts.   Based on extensive documentary evidence and expert testimony, the court eventually upheld the Tenneco group's illegality defense and decided California public policy required it to leave the parties where it found them upon commencement of the litigation.   The court vacated the jury's verdicts and answers to special interrogatories and entered judgment denying recovery to all parties and ordering Tenneco West, Inc. to return the sales proceeds from the Laguna Niguel property to Wong.   Wong and the Tenneco group both appeal the judgment.

Defense of Illegality

The court's intended decision explained its reasons for upholding the Tenneco group's illegality defense:  “The evidence supports [Lee Wong's] contention that [he] was the de facto owner and grower of a farming and packing operation in the Republic of Mexico.[1 ]  Under Mexican law, Wong, an American citizen, had no right to own or control the land or the business in Mexico.   To circumvent Mexican law, [certain] Mexican Nationals were engaged as ‘front men’.   They took legal title to the real and personal property in Mexico with the understanding that Wong remained the ‘true owner’.   Thus the operation was a clear violation of the constitution and laws of the Republic of Mexico.[2 ]  Under the circumstances of this case, comity requires the Court to apply Mexican law as if it were a law of one of the United States.   In so doing, the Court, under California public policy, will leave the parties where it finds them.   Neither party may have judgment against the other and the proceeds from the sale of the Wong home in Laguna Niguel must be returned to [Wong].”

The court also explained its comity rationale:  “Where the law of a friendly nation is not inimical to domestic public policy, the principle of comity requires its enforcement in California courts.   Neither this state nor this nation has laws prohibiting ownership of land or commercial enterprises by foreigners.   However, the concept of preserving national resources and excluding foreign ownership and exploitation is not inconsistent with our public policy.   It is conceivable that if the center of wealth shifts from the United States to other powers such defensive measures may be undertaken.   Members of Congress have expressed alarm at the number of American enterprises that are now controlled by foreigners and suggestions to limit such holdings have been made.   In its simplest form, the principle of comity is the golden rule.   If some day we should pass legislation similar to the Mexican law under consideration here, we would expect the friendly nations on our borders to recognize, respect and enforce it.”  (Italics added.)

Introduction

 Comity is based on the concept of interstate courtesy, by which a forum state will permit application of a foreign law in the interest of promoting justice or out of respect for the laws and institutions of a foreign state.   (Estate of Lund (1945) 26 Cal.2d 472, 489, 159 P.2d 643.)   However, a well established exception to the rule of comity precludes application of foreign laws which are contrary to the public policy of the forum state.   Modern conflict of law rules, on the other hand, may dictate application of foreign law in a particular case, resulting in the public policy of the forum state being “subordinated” to that of the foreign state.  (See post.)   As a theoretical matter, could the exception to the rule of comity be applied to preclude such a result?   Even if applicable, should that exception be so applied?   Stated another way, what is the hierarchy of law as between rules of comity and conflict of law?

 As interesting as these questions are, we need not attempt to answer them 3 in light of our conclusion the court's reliance on Mexican law to uphold the Tenneco group's defense of illegality was contrary both to applicable comity and conflict of law rules.

Comity

We disagree with the court's conclusion comity requires application of Mexican law in this case.

California's public policy, as expressed in its constitution and statutes, is to allow ownership of property without regard to citizenship.   (Cal. Const., art. I, § 20:  “Noncitizens have the same property rights as citizens.”;  Civ.Code, § 671:  “Any person, whether citizen or alien, may take, hold, and dispose of property, real or personal, within this State.”)   The citizenship-based Mexican law applied below is directly contrary to that policy.   Whether a different policy may someday be adopted is not for us to speculate.   The “rule of comity is subject to the principle that foreign laws will not be given effect when contrary to the settled public policy of the forum.  [Citations.]”  (Biewend v. Biewend (1941) 17 Cal.2d 108, 113, 109 P.2d 701, overruled on another ground in Worthley v. Worthley (1955) 44 Cal.2d 465, 470, 283 P.2d 19;  accord, Severn v. Adidas Sportschuhfabriken (1973) 33 Cal.App.3d 754, 763, 109 Cal.Rptr. 328;  Victor v. Sperry (1958) 163 Cal.App.2d 518, 525, 329 P.2d 728;  Thome v. Macken (1943) 58 Cal.App.2d 76, 78–81, 136 P.2d 116;  see also 15 Williston on Contracts (3d ed. 1972) §§ 1748, p. 126, 1792, pp. 371–373.)   The court recognized this exception to the rule (see ante ) but incorrectly concluded it did not apply.

Conflict of Law

The judgment also cannot be affirmed under California's governmental interest approach to conflict of law issues.4

As shown above, the 1973 marketing contract was legal and enforceable under California law but not under Mexican law.   In light of these differing laws, we must first examine the policies underlying those laws to determine whether both California and Mexico have an interest in application of their respective laws.  (Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d at p. 163, 148 Cal.Rptr. 867, 583 P.2d 721;  Bernhard v. Harrah's Club, supra, 16 Cal.3d at pp. 317–318, 128 Cal.Rptr. 215, 546 P.2d 719.)   California's policy of allowing ownership of property without regard to citizenship is involved here more as a matter of principle than as a practical matter, given the foreign location of Wong's farming operation.   However, California's general policies of affording relief to breach of contract and tort victims (see Civ.Code, §§ 3300, 3333) and of punishing and deterring wrongful conduct (see Civ.Code, § 3294, subd. (a)) 5 give it a strong interest in application of its law.   Similarly, Mexico's policies of preserving domestic ownership and control of its natural resources give it a strong interest in application of its law.

“Once [a] preliminary analysis has identified a true conflict of the governmental interests involved as applied to the parties under the particular circumstances of the case, the ‘comparative impairment’ approach to the resolution of such conflict seeks to determine which state's interest would be more impaired if its policy were subordinated to the policy of the other state.   This analysis proceeds on the principle that true conflicts should be resolved by applying the law of the state whose interest would be the more impaired if its law were not applied.”  (Bernhard v. Harrah's Club, supra, 16 Cal.3d at p. 320, 128 Cal.Rptr. 215, 546 P.2d 719.)   Application of Mexican law in this case would completely impair California's interests in compensation, punishment and deterrence.   Application of California law, however, would only partially impair Mexico's interests.   Violations of the Mexican law applied below carry civil and criminal penalties in addition to the sanction of unenforceability.6  Mexico can advance its interests by imposing those additional penalties even without our upholding the sanction of unenforceability in this case.   Thus California law, whose underlying interests would be the most impaired, should be applied.7

Disposition

The judgment is reversed, and the court is directed to enter a new judgment on the verdicts returned by the jury (see Raedeke v. Gibraltar Sav. & Loan Ass'n (1974) 10 Cal.3d 665, 675, 111 Cal.Rptr. 693, 517 P.2d 1157) and to reinstate the jury's answers to special interrogatories.   The court also is directed to award appropriate prejudgment interest and attorney's fees to Wong and to decide the disposition of the sales proceeds from the Laguna Niguel property.8

FOOTNOTES

1.   The Tenneco group concedes substantial evidence supports the court's finding that Wong was the actual owner and grower of his Mexican farming operation.   In legal terms, Wong was acting as a producer of farm products (Agr.Code, §§ 56109, 56110) rather than as an unlicensed produce dealer or commission merchant.  (Id., §§ 56105, 56107.)   Consequently, the general rule precluding enforcement of contracts by persons required to be so licensed (id., § 56181;  Southfield v. Barrett (1970) 13 Cal.App.3d 290, 292–293, 91 Cal.Rptr. 514 (applying statutory predecessor of Agr.Code, § 56181)) does not apply here.

2.   In reaching this conclusion the court relied on the Constitution of Mexico (1917) article 27, sections I and IV, and the Law for the Promotion of Mexican Investment and Regulation of Foreign Investment (Mar. 9, 1973) articles 5(d), 7–8, 28–31.

3.   We note, however, the leading California cases developing and applying modern conflict of law rules do not even once mention the concept of comity.  (See Offshore Rental Co. v. Continental Oil Co. (1978) 22 Cal.3d 157, 148 Cal.Rptr. 867, 583 P.2d 721;  Bernhard v. Harrah's Club (1976) 16 Cal.3d 313, 128 Cal.Rptr. 215, 546 P.2d 719, superseded by Civ.Code, § 1714, subd. (b) on another point;  Hurtado v. Superior Court (1974) 11 Cal.3d 574, 114 Cal.Rptr. 106, 522 P.2d 666;  Reich v. Purcell (1967) 67 Cal.2d 551, 63 Cal.Rptr. 31, 432 P.2d 727.)

4.   “The governmental interests approach is applicable not only to situations involving multistate contacts but also to those involving a state of the United States vis-a-vis a political entity of a foreign country.  [Citation.]”  (Hurtado v. Superior Court, supra, 11 Cal.3d at p. 580, fn. 2, 114 Cal.Rptr. 106, 522 P.2d 666.)

5.   The court refused to submit Wong's punitive damages claims to the jury, resulting in the absence of any such award in the jury's verdict for Wong.   California nonetheless has an interest in potential punishment and deterrence in this case because punitive damages may yet be awarded in further proceedings following remand.  (See post.)

6.   The additional penalties include fines against participants in illegal transactions in amounts up to the value of the transactions, fines against regulatory officials of up to $8,000 for noncompliance with Mexican law, loss of license for notaries and brokers for improper authentication of documents, loss of office for public registrars for improper recordation of documents, and imprisonment of up to nine years plus fines of up to $4,000 for anyone guilty of complicity (through misrepresentation) in violations of Mexican law.  (Law for the Promotion of Mexican Investment and Regulation of Foreign Investment (Mar. 9, 1973) arts. 28–31.)

7.   Stockton v. Ortiz (1975) 47 Cal.App.3d 183, 120 Cal.Rptr. 456 does not compel a contrary conclusion.   The Stockton holding, denying recovery on a contract to acquire real property in Mexico, rests entirely on California law.  (Id., at pp. 194–195, 199–200, 120 Cal.Rptr. 456.)   The court itself suggests its conflict of law discussion is dictum.   (Id., at pp. 194, 200, 120 Cal.Rptr. 456.)   Even if not dictum that discussion would be inapposite because it stands for the proposition, inapplicable here, that transactions affecting title to real property are governed by the law of the forum in which the property is located.  (See id., at pp. 195, 200, 120 Cal.Rptr. 456;  see also Estate of Patterson (1980) 108 Cal.App.3d 197, 207–208, 166 Cal.Rptr. 435;  Losson v. Blodgett (1934) 1 Cal.App.2d 13, 17–18, 36 P.2d 147.)

8.   Wong's remaining contentions regarding the court's refusal to submit certain causes of action and punitive damages claims to the jury are premature for decision at this time.  (See id., at p. 675, fn. 6, 111 Cal.Rptr. 693, 517 P.2d 1157;  see also Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 458–460, 20 Cal.Rptr. 321, 369 P.2d 937.)   Although we would like to promote judicial economy and minimize litigation costs by considering them, those contentions must first be decided by the lower court after entry of judgment on the jury's verdicts.

WIENER, Associate Justice.

BROWN, P.J., and WORK, J., concur.