Appeal from the United States District Court for the Central District of California. D.C. No. CV-85-3330-JSL. Spencer Letts, District Judge, Presiding
Before: Canby, Norris, and Boochever, Circuit Judges
Cary Agajanian, a founding director of Solid Waste Transporters, Inc. ("SWT"), challenges a $3 million jury verdict against him in a case brought by the company's trustee in bankruptcy and the civil authority whose bonds financed its major project, a transfer station for handling trash.*fn1 We reverse the verdicts for breach of contract, breach of the implied covenant of good faith and fair dealing, and conspiracy, but affirm the verdict for breach of fiduciary duty.
Appellant challenges the sufficiency of the evidence of breach of contract. The cause of action went to the jury on two alternative theories: that a bilateral contract between Agajanian and each of his co-directors at SWT obligated him to support the station with trash or funds, or that the same obligation arose from a unilateral contract, formed when Agajanian subsequently promised to support the station, and the co-directors or the company reasonably relied on that promise. We must decide whether either theory is supported by such relevant evidence as reasonable minds might accept as adequate. Sanders v. Parker Drilling Co., 911 F.2d 191, 193-94 (9th Cir.), cert. denied, 111 S. Ct. 2014 (1991).
We find insufficient evidence of a bilateral contract. Although the jury heard testimony that Agajanian's co-directors at SWT thought they were all equal partners in the venture and that by mid-1982 Agajanian considered himself obligated to support the station's revenues, there were no objective manifestations of a bilateral contract. If, as appellees contend, a bilateral contract had been formed at the inception of the organization as part of the inducement for the California Pollution Control Authority ("CPCFA") to guarantee SWT's bonds, surely a signed copy of that contract would have been included in the bond documentation. Yet the parties agree Agajanian did not sign a contract at that time. Nor was there substantial objective evidence that Agajanian orally agreed to be bound by a supply contract.
The unilateral contract theory is likewise not supported by substantial evidence. Appellees acknowledge that consideration for Agajanian's guarantee of the station's revenues is lacking if his contract was not formed at the time of the original bond transaction in 1980. Instead, they argue that the co-directors or SWT detrimentally relied on Agajanian's promise, so that Agajanian was estopped from subsequently withdrawing his offer. See Aronowicz v. Nalley's, Inc., 30 Cal. App. 3d 27, 43-44 (1973); 1 B. Witkin, Summary of California Law, Contracts § 184 at 196-97 (9th ed. 1992). Appellees cite considerable evidence that Agajanian's co-directors relied on his promise, in the sense that they treated Agajanian as a co-obligor and assessed him or his family's trash hauling business for delivery shortfalls and for other financial obligations of the station. But none of this evidence demonstrates detrimental reliance, a prejudicial change in another party's position because of Agajanian's promise. The other parties merely received a windfall in the form of Agajanian's financial assistance, to which they were not entitled unless Agajanian had undertaken his obligations at the same time his co-directors did. In sum, there is insufficient evidence of a unilateral contract formed by SWT's detrimental reliance on an offer Agajanian extended some time after the 1980 bond transaction.
Because the evidence is insufficient to establish breach of contract, it is necessarily insufficient to prove breach of the covenant of good faith and fair dealing. Because the covenant is implied in the contract, there is no covenant when there is no contract. See Smith v. City and County of San Francisco, 225 Cal. App. 3d 38, 49 (1990). Moreover, California courts have rarely recognized a tortious breach of the implied covenant except in the context of insurance adhesion contracts. Wallis v. Superior Court, 160 Cal. App. 3d 1109, 1118 (1984), limits the cause of action to contracts that meet five criteria, including that they are entered into out of "a nonprofit motivation [such as] to secure peace of mind, security, [or] future protection." The contract alleged here, in contrast, was a commercial contract obligating entrepreneurs to guarantee the revenues of their own company. The facts do not support a verdict for breach of the covenant of good faith and fair dealing.
Appellant's third challenge is to the jury's verdict that he breached his fiduciary duty as a director of SWT. As a director, Agajanian's fiduciary duty ran to the corporation and, after insolvency, its creditors. See Pepper v. Litton, 308 U.S. 295, 307 (1939). That duty required him to exercise "such care, including reasonable inquiry, as an ordinarily prudent person would use under similar circumstances." Cal. Corp. Code § 309. He could not fulfill his responsibilities by relying on others if he had knowledge of facts making this reliance unwarranted. Id.
The evidence showed that Agajanian had reason to believe that several of his co-directors were unable from the start to use the station, and that most of them did not understand their obligations to use it or guarantee its revenues. Yet Agajanian never inquired into their ability to perform their obligations under the supply agreements. Instead he "relied" on the Questor report. And he relies now on an argument that a director has no fiduciary duty to explain things to his fellow directors. True enough. But a director who fails to investigate, when he has reason to believe that the contracts he is negotiating for the company are with parties who do not understand them at all and may well not be able to perform under them, fails to exercise reasonable care, or at least the jury was entitled to so decide.
Agajanian attempts to explain away some of the evidence as demonstrating only his shortcomings in the role of corporate counsel, which he argues is not relevant because no cause of action for legal malpractice is alleged. The argument is a non sequitur. Evidence of Agajanian's incompetence as corporate counsel goes to his faithfulness as a director because it demonstrates that, had he been a reasonably careful director, he would have hired more competent counsel to represent the corporation.
Agajanian also challenges three evidentiary rulings, which we must consider in order to determine whether they hampered his ability to defend against the breach of fiduciary duty claim. The first of these was the trial court's ill-advised decision to admit into evidence a letter on Los Angeles Superior Court letterhead from retired Judge Harry Shafer. The letter was highly prejudicial on the question whether Agajanian was bound by a supply agreement, but probably had no effect on the ...