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John B. BERTERO, Plaintiff and Respondent, v. NATIONAL GENERAL CORP. et al., Defendants and Appellants.
Defendants, National General Corporation, Eugene V. Klein and NGC Theatre Corporation,1 appeal from a judgment entered on a jury verdict against them totaling in principal amount $1,178,952.77. Of this total $553,952.77 was awarded in compensatory damages against all three defendants. Punitive damages were allocated as follows: $350,000 against National; $250,000 against Klein; and $25,000 against NGC. The judgment was entered in the action of plaintiff, John B. Bertero, for damages for malicious prosecution.
Broadly speaking, defendants ask primarily that we reverse the judgment and direct that judgment be entered instead for them on the ground that no actionable malicious prosecution occurred, and secondarily in the alternative, that we reverse the judgment for retrial because the evidence is insufficient, both as to the liability of NGC and to the amounts of damages awarded against defendants in both categories of damages and because the trial court's charge to the jury was both prejudicially erroneous and unfair. We reach and determine only the first of these major contentions.
On June 9, 1961 Bertero, who had been president of both National and NGC's predecessor, Fox, resigned his directorship in National, much to the displeasure of Klein, who had succeeded Bertero as president of National. Bertero, however, continued working for National as a part-time executive consultant under a written contract of employment executed by National and guaranteed by Fox on November 12, 1959 just prior to Bertero's resigning as the chief executive officer of both corporations. Until Bertero's resignation as director occurred, Bertero received regularly the top management reports of General. Following the resignation, however, Klein ordered that these reports no longer be sent to Bertero and despite Bertero's subsequent written protest to Klein, Bertero received no more of them.
In February of the following year, 1962, the Board of Directors of National was reduced in size and a majority of the directors then elected were management personnel such as Klein. By this time Klein was by far the largest shareholder in National and he now had complete control of the Board of Directors as well.
Some three weeks later, on March 13, 1962, Klein asked Bertero to meet with him. Bertero did so. Klein informed Bertero that he needed some of Bertero's stock options for key employees of National. Bertero reiterated his prior offer to surrender to National his option for 15,606 shares that had been issued to him in 1955. Klein accepted the offer and Bertero immediately thereafter surrendered the option. At this meeting Klein told Bertero that he wanted to revise Bertero's employment contract or otherwise he wanted to but it up. Bertero refused to discuss either proposal with Klein.
On March 29, 1962 Bertero again met with Klein at Klein's request. At this meeting Klein told Bertero that he wanted to shorten the duration of Bertero's contract of employment, to reduce the salary that Bertero received thereunder and that he also wanted Bertero to surrender to National his two remaining stock options that had been issued to him in 1957 and 1958. These latter options were recognized in his 1959 contract of employment. Bertero refused both of these proposals. Klein became quite angry. He announced that he ‘was going all the way.’
Immediately following this conference and on the same day Klein wrote Bertero and advised him that his contract of employment was ‘invalid and unenforceable’ by reason of the circumstances under which it had been made,2 that in view of the fact that Bertero had rendered no services under the contract National had no further need of his services, that no further compensation would be paid Bertero under the contract and that National was then terminating and cancelling the contract.
In taking this drastic action Klein consulted no one and did not attempt to secure either authorization or ratification of his conduct from the board of directors of either corporation. Moreover, neither he nor National made any inquiry as to the circumstances under which the contract of employment had been made or as to whether Bertero had performed any services under the contract. Actually Klein himself knew of some such services of substance. Nevertheless, immediately after writing the letter, Klein ordered that no further salary be paid Bertero and cancelled out Bertero's 1957 and 1958 stock options and his benefits under National's life and health insurance plans.
On June 8, 1962 Bertero filed in the superior court an action against National and Fox (No. 797769) for a declaration of his rights under his 1959 contract of employment and his stock options of 1957 and 1958. He asked the court to declare these instruments valid and enforceable and for judgment for unpaid salary from the date of Klein's letter of repudiation of the contract to the date of the judgment. Thereupon National and Fox filed a formal demand for arbitration of their dispute with Bertero. This demand included a demand for the return of $104,789.12 in salary that had been paid Bertero under the contract. Arbitration was thereupon ordered by the superior court, but this court directed that the arbitration order be set aside since it had been made pursuant to the arbitration provision in Bertero's contract of employment, which contract the two corporations had previously repudiated in the manner already described. (See Bertero v. Superior Court, 216 Cal.App.2d 213, 219, 30 Cal.Rptr. 719.)
National and Fox thereupon filed their answer in Bertero's action for declaratory relief. In this answer they alleged that they had received no consideration for Bertero's contract of employment, that it had been obtained by him through duress and undue influence and that his performance thereunder had been defective and inadequate. On October 1, 1963 National and Fox filed an amendment to this answer and a verified cross-complaint seeking by way of a common count for money had and received to recover from Bertero the just-mentioned $104,789.12 that had been paid him under the 1959 contract. In the amendment to their answer National and Fox asserted that Bertero had demanded the contract of employment as his price for resigning as National's president, that he had breached his fiduciary duty to National and its shareholders and that he had been disloyal to National by revealing confidential information to third persons.
Following trial of the action, the superior court found and concluded that the 1958 employment contract and the 1957 and 1958 stock options were each valid and enforceable agreements and dismissed with prejudice National's and Fox's cross-complaint. The court further found that on March 29, 1962 National and Fox had wrongfully, deliberately and in bad faith repudiated and totally breached these agreements and that one of their purposes in so acting was to force Bertero to accept a revision of his contract of employment satisfactory to them on pain of otherwise suffering through the recovery of a lump sum of damages for such breach, a substantial loss in the total compensation payable to him under the agreements due to the unfavorable income tax treatment of such recovery. The court also specifically found that each of the various contentions of National and Fox, which we have already mentioned, in support of their claim of invalidity of these agreements, was without merit. The court nevertheless gave to the two defendants the option of either extending the duration of the stock options or paying Bertero $302,724.71 for them.
National and Fox appealed the judgment to this court. This court, however, affirmed the judgment in its entirety. (See Bertero v. National General Corp., 254 Cal.App.2d 126, 62 Cal.Rptr. 714.) In December of 1967 National and Fox paid Bertero $607,069.38 in full satisfaction of the judgment.
On March 8, 1968 Bertero filed his complaint for damages for malicious prosecution against National, NGC (Fox's successor) and Klein and the litigation under review on this appeal ensued.
The threshold question posed by this appeal is whether Bertero's for malicious prosecution lies in view of the fact that, as tried,3 the action was based solely upon the filing by National and Fox of their cross-complaint in the prior action (Bertero's action for declaratory relief against them) for the salary paid Bertero under his contract of employment prior to March 29, 1962 ($104,789.12).
Although denominated a cross-complaint, the cross-pleading at issue appears from its allegations to have been actually a transactional counterclaim that National and Fox were compelled to plead in the action on pain of otherwise waiving it. (See Code Civ.Proc., former §§ 438, 439, 442; § 666 prior to its amendment effective July 1, 1972; Case v. Kadota Fig Assn., 35 Cal.2d 596, 603–604, 220 P.2d 912; Tomales Bay, etc., Corp. v. Superior Court, 35 Cal.2d 389, 393, 217 P.2d 968.) The subject matter of this counterclaim had already been asserted by National and Fox in their prior demand for arbitration of the dispute.
Bertero contends that under Slee v. Simpson (1932) 91 Colo. 461, 15 P.2d 1084, 85 A.L.R. 412, an action for malicious prosecution may rest upon a cross-pleading or cross-action. There, the defendants, in a suit for damages for personal injuries sustained in a collision between two automobiles, filed a cross-complaint against the plaintiff for the damages they had sustained in the accident. This filing of this cross-complaint continued the litigation. In addition, they could have asserted this claim for damages in an independent action. The court held that such a cross-action was the equivalent of an independent action since it accomplished precisely the same thing that an independent action would have.
This is the only case, to our knowledge, holding that an action for malicious prosecution may be predicated upon a cross-action rather than upon an initial action.4 At least two other courts have indicated in dictum that in all fairness a malicious defense should bear the same consequences in tort as a malicious prosecution (see Potts v. Imlay (1816) 4 N.J.Law 377, 382, 385; Kolka v. Jones (1897) 6 N.D. 461, 71 N.W. 558, 561, contra, McHale v. Heman (1887) 28 Mo.App. 193, 197; Baxter v. Brown (1910) 83 Kan. 302, 111 P. 430, 430–431; Ivey v. Daus (So.Dist.N.Y.1955) 17 F.R.D. 319, 322–323) since each constitutes an abuse of our system of justice to another's injury and, unlike the situation in England, the party prevailing in the prior action normally recovers but a small fraction of the expenses incurred in that litigation because of its malicious defense.5
The Restatement of Torts, however, does not recognize the tort of malicious defense but only the tort of ‘Wrongful Initiation of Civil Proceedings.’ (See 3 Rest. Torts (1938) ch. 30, § 674, et seq.) We have been unable to find any authority for a fort of malicious defense.
The counterclaim before us was part of the overall defense of National and Fox to Bertero's suit. This defense, including the counterclaim, rested on the claimed total invalidity of Bertero's contract of employment. National and Fox filed the counterclaim at the same time they filed their amendment to their answer alleging three further grounds for such invalidity. The filing of these pleadings did not continue the litigation as the litigation was unconcluded at the time.6 The counterclaims did bring into litigation one additional item in the dispute between Bertero on the one hand and National and Fox on the other, namely, the salary that had already been paid him under his contract of employment. This had, however, already been included in National and Fox's demand for arbitration.
Unlike Slee v. Simpson, supra, the subject matter of the compulsory counterclaim was not something that could have been made the basis for an independent suit. It was not, therefore, the equivalent of, or a substitute for, an independent action. It is true that it alone among the answering documents sought affirmative monetary relief from Bertero, but that, on pain of waiver otherwise, was both permitted and required. (See Code Civ.Proc., § 666, prior to its amendment on July 1, 1972; former § 439.) The filing of this compulsory counterclaim in itself did not change the essentially defensive posture of National and Fox in the litigation initiated by Bertero.7 To hold otherwise would be a case of the tail wagging the dog.
We cannot say that the time has come when a new tort—that of malicious defense—should be recognized in California. Malicious prosecution itself is a disfavored tort in this state. (See Babb v. Superior Court, 3 Cal.3d 841, 847, 92 Cal.Rptr. 179, 479 P.2d 379.) In any event recognition of a new tort is more appropriately the function of our high court. As the lower appellate court in California we must declare the law as it is and not as what others may think it should be. (See Note, ‘Controlling the Malicious Defendant,’ 2 Stan.L.Rev. 184, 191–192.)
The judgment for plaintiff is reversed and the trial court is directed to enter judgment for defendants.
1. National's circuit of motion picture theatres, located in sixteen of the western and midwestern states, is the second largest in the United States. Fox West Coast Theatres Corporation was for several years the most important subsidiary of National. It operated a circuit of motion picture theatres located principally in California, Arizona and Nevada. It was wholly owned and controlled by National. In 1967 Fox was merged into NGC and NGC assumed all of Fox's liabilities.
2. Klein had been a member of the Board of Directors of National when that board unanimously authorized and approved Bertero's contract of employment and Klein knew that in the negotiations leading up to the contract National and Fox had both been represented by National's counsel, a leading local law firm.
3. Bertero, in paragraph 18 of his complaint in this action alleges that he was forced into filing the prior action by National and Fox terminating his salary under his contract of employment and asserting the invalidity of that contract. At trial, however, Bertero's action for malicious prosecution went to the jury solely on the basis of National and Fox having filed their cross-complaint against Bertero in Bertero's action for declaratory relief.Bertero has not brought to our attention any authority for holding that an action for malicious prosecution may rest upon such a theory an that advanced in paragraph 18 of Bertero's complaint and we have found none. In any event, as we have just stated, it appears to have been abandoned before the case was presented to the jury for verdict.
4. See Ann., ‘Malicious Prosecution—Defense—Cross-Action,’ 85 A.L.R. 415, and cases supplemental thereto.
5. In the 1884 case of Eastin v. Bank of Stockton, 66 Cal. 123, 127, 4 P. 1106, our Supreme Court in dictum indicated that the malicious plaintiff was more culpable than the malicious defendant since the former ‘set the law in motion.’
6. In 54 C.J.S. Malicious Prosecution § 14, p. 966, it is said that an action for malicious prosecution may lie not only for the commencement of an original civil proceeding but also for its continuation.
7. While we do not reach the question of the propriety of the damages awarded Bertero, we do note the difficulty of determining what part of the damages that he sustained was caused by the filing of the cross-complaint as opposed to that caused by the prior repudiation of his contract of employment and that caused by the filing of the answer and the amendment thereto.In this connection we note further that the cross-complaint itself does not contain any allegations in support of the claimed invalidity of Bertero's contract of employment. These are found only in the answer and the amendment thereto.
COBEY, Associate Justice.
ALLPORT, Acting P. J., and SCHAUER,* J., concur.
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Docket No: Civ. 40017.
Decided: April 06, 1973
Court: Court of Appeal, Second District, Division 3, California.
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