Butler-Rupp v. Lourdeaux

In this litigation arising from a landlord-tenant relationship, the landlords, Roseanna Lourdeaux and Wallace Lourdeaux (hereafter the Lourdeauxs), and their property manager, Evelyn Phelan (hereafter Phelan) appeal a judgment in favor of the tenant, Lili Butler-Rupp (hereafter Butler-Rupp) and Lili Butler Studio, Inc. (hereafter referred to collectively as plaintiff). The plaintiff separately appeals from an order denying a motion for attorney fees. We affirm in part and reverse in part the judgment in favor of plaintiff and reverse the order denying plaintiff’s motion for attorney fees.

PROCEDURAL BACKGROUND

Plaintiff filed a complaint on April 10, 1998, against the Lourdeauxs and Phelan alleging breach of contract and several tort causes of action, and later added additional tort causes of action in a second amended complaint filed on July 7, 2000. At the conclusion of a lengthy trial, the court instructed the jury on seven causes of action: breach of contract, promissory fraud, negligent misrepresentation, defamation, interference with tenant’s quiet enjoyment, intentional infliction of emotional distress, and negligent infliction of emotional distress.

On March 5, 2003, the jury returned a special verdict, responding to 23 questions, which found the Lourdeauxs liable on all causes of action except promissory fraud and intentional infliction of emotional distress. Phelan was found liable on causes of action for defamation, interference with tenant’s quiet enjoyment, and negligent infliction of emotional distress. The jury further found that the Lourdeauxs and Phelan were liable for punitive damages predicated on the defamation verdict and a finding of oppression, malice or fraud.

The special verdict form asked for a single award of damages for the findings of liability for breach of contract, negligent misrepresentation and interference with quiet enjoyment. The jury awarded plaintiff damages of $855,000 on these causes of action. Responding to separate questions in the verdict form, the jury awarded plaintiff damages of $80,000 for defamation and $500,000 for negligent infliction of emotional distress. In a subsequent proceeding, it awarded plaintiff punitive damages against the Lourdeauxs in the amount of $5,000 and against Phelan in the amount of $500.

In postjudgment proceedings, the court denied the motion of the Lourdeauxs and Phelan for a new trial by an order filed June 19, 2003, and

FACTUAL BACKGROUND

Butler-Rupp is a clothes designer and manufacturer based in Sonoma County, California. After early successes as an artist, she began producing monoprints that she sold to local customers at prices appropriate for original works of art. In 1987, she leased a space of 900 square feet in the Lakeville Building in Petaluma, California, which was owned and managed by the Lourdeauxs. The initial lease was for a one-year term and called for a monthly rental of $350; the next year the rental rose to $600. In succeeding years, Butler-Rupp began to achieve a toehold in national markets and developed a line of high-end products for a national market. In 1991, she participated in her first New York fashion show and hired three employees, including an office manager, Anne Sachs.

The business continued to expand rapidly, with sales doubling for several consecutive years. In 1994, Butler-Rupp achieved gross sales of over $1 million, incorporated her business as Lili Butler Studio, Inc., and leased a showroom for the Dallas market. She added a new line of clothes called Tiger Lili and began plans for other lines, called Day Lili and Water Lili, which were targeted at different price ranges and clientele. Her staff continued to increase, reaching a high of 26 employees at one point in the 1990’s.

In 1993 Butler-Rupp leased adjacent warehouse space in the Lakeville Building, designated suite 117, which she converted into a showroom and office. Her rent then rose to $1200. She testified that she agreed to lease suite 117 after receiving the assurance of Wallace Lourdeaux that he would upgrade the heating system. Lourdeaux later provided two vents to the room, but Butler-Rupp complained that the heating system still didn’t work adequately.

The following year, Butler-Rupp explored the option of moving to another location since she calculated that she needed 3000^1-000 square feet of production space to accommodate future business. In an effort to keep her as a tenant, Wallace Lourdeaux offered to convert a small area into a kitchen and to expand the leased area to include a bare, cement-floor warehouse space known as suite G. According to Butler-Rupp, her main concern was the adequacy of the heating system both in suite 117 and in the new suite G,

About the time Butler-Rupp entered the new lease, Roseanna Lourdeaux assumed active management of the building. The next year she hired a tenant, Phelan, to serve as on-site manager. According to Butler-Rupp, her problems with the building and its management, especially with regard to heating, took a turn for the worse in the new lease term, stalling the expansion of her business and leading to the present litigation.

Phelan soon came into conflict with Butler-Rupp by engaging in the practice of walking uninvited into production areas and talking to employees. When Butler-Rupp tried to limit Phelan’s contact with employees, Phelan adopted a contentious attitude toward the business, which was expressed in certain statements that will be examined later in the portion of this opinion dealing with the slander verdict.

Butler-Rupp invested in improvements to both suite 117 and suite G with the expectation that they could be converted into working spaces, but the heating problems allowed only very limited use of suite 117. In response to her complaints, Roseanna Lourdeaux repeatedly assured her that “they were working” on the problem and dispatched a series of workmen to make service calls. In December 1997, Butler-Rupp had an opportunity to talk to a heating system technician who had examined the system. He told her that he had “some bad news.” The system was undersized to heat suite 117 and would never provide adequate heat. In his words, it was “a stage set.”

Being unable to place production employees in unheated space, ButlerRupp could use only a fraction of the leased space to meet the orders generated by rapidly expanding sales. Compounding these difficulties, the first six months of 1998 were marked by a series of conflicts and disputes with the Lourdeauxs and Phelan that signaled a breakdown in cooperation

Shortly after complaining to the Lourdeauxs about Phelan’s management, Butler-Rupp was served with a 30-day notice of termination of her lease. She successfully opposed the notice of termination by relying on the five-year term of the lease, which was not subject to such termination, but the Lourdeauxs pursued other demands: they billed her for common area maintenance charges, though the lease did not provide for them; demanded that she pay monthly parking charges; claimed that she had fallen behind in rental payments based on another disputed interpretation of the lease; and presented her with another notice of rent increase through their attorney.

While she succeeded in meeting her 1998 spring production deadline, Butler-Rupp was forced to send a notice to all customers stating that she was unable to accept new orders. At trial she explained, “We were max’d out in production. We were using all the overtime we could possibly use. We couldn’t employ any more people in that space, and we didn’t have any space left to expand our production.” The rapid sales growth that Butler-Rupp had earlier experienced began to level out in the late 1990’s.

In April 1998 Butler-Rupp filed the original complaint in this action alleging violation of her leasehold rights. The Lourdeauxs countered by claiming that she had breached an oral contract to lease a utility closet and served her with two notices to pay rent or quit and a notice to perform covenants or quit. In July, they filed an unlawful detainer action. Recognizing that an eviction would have a devastating impact on her business, ButlerRupp sought to negotiate a termination of her five-year lease while searching for space elsewhere. Unfortunately, she could not find a suitable space within the time deadline imposed by the Lourdeauxs and a tentative settlement unraveled.

The heating problems of suite 117 were never remedied. Early in 1999, Butler-Rupp retained a mechanical engineer, Daniel Reiter, to study the

As appellants argue, we consider that the present case is governed by Erlich v. Menezes (1999) 21 Cal.4th 543 [ 87 Cal.Rptr.2d 886 , 981 P.2d 978 ], which reversed an award of damages for emotional distress based on breach of a contract to build a house. The decision first analyzed the award of tort damages in contract cases. Citing Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503 , 515 [ 28 Cal.Rptr.2d 475 , 869 P.2d 454 ], the court noted that “conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.” (Erlich v. Menezes, supra, at p. 551; see also Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85 , 102 [ 44 Cal.Rptr.2d 420 , 900 P.2d 669 ].) Thus, “[t]ort damages have been permitted in contract cases where a breach of duty directly causes physical injury [citation]; for breach of the covenant of good faith and fair dealing in insurance contracts [citation]; for wrongful discharge in violation of fundamental public policy [citation]; or where the contract was fraudulently induced. [Citation.] In each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm.” (Erlich v. Menezes, supra, at pp. 551-552.)

In the present case, the jury found that defendants did not intentionally cause emotional distress. The special verdict also precludes any claim that damages for emotional distress can be predicated on negligent misrepresentation. The jury awarded damages for emotional distress solely on the basis of a finding of negligence in response to question No. 19; the finding of negligent misrepresentation supported a distinct award of damages based on the response to question No. 10. In any event, we note that a plaintiff may not recover damages for emotional distress in an action for negligent misrepresentation where the “plaintiff’s direct loss resulting from the negligent conduct of the defendant was [only] economic.” (Branch v. Homefed Bank (1992) 6 Cal.App.4th 793 , 801 [ 8 Cal.Rptr.2d 182 ].)

The question therefore becomes whether the jury’s finding of negligence can support an award of damages for emotional distress on the present record. The Erlich decision also addresses this issue. The Erlich court observed emotional distress damages are not “ ‘available in every case in

The Erlich holding is consistent with the economic loss rule reviewed in Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979 [ 22 Cal.Rptr.3d 352 , 102 P.3d 268 ].) The plaintiff, a manufacturer of helicopters, purchased a clutch mechanism from the defendant. When it discovered that the defendant had misrepresented that the clutch conformed to contract specifications, the plaintiff was required to recall all helicopters that it had sold with the faulty clutches. The jury returned a verdict for both compensatory and punitive damages. On appeal, the court considered whether the economic loss rule precluded recovery of a tort measure of damages, i.e., punitive damages. The court explained that “[t]he economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise.” (Id. at p. 988.) The court held, however, that the defendant was properly found liable for intentional misrepresentation on facts independent of its breach of contract, i.e., its affirmative misrepresentation of contract compliance and affirmed the judgment for punitive damage as being predicated on this finding.

The Erlich decision is also consistent with decisions that have restricted the circumstances under which a plaintiff can recover damages for emotional distress under the law of negligence. (E.g., Christensen v. Superior Court (1991) 54 Cal.3d 868 , 875 [ 2 Cal.Rptr.2d 79 , 820 P.2d 181 ]; Fluharty v.

Our consideration of the Erlich decision and related lines of authority leads to the conclusion that the award of damages for emotional distress should be reversed. The record supports a finding only that defendants negligently performed their contractual duties under the lease, thereby incurring liability for breach of contract. No physical injury to the plaintiff is shown by the record and no basis for predicating tort liability on intentional conduct of the defendants. Moreover, we do not find any breach of duty on the part of the Lourdeauxs that would support liability for infliction of emotional distress under the law of negligence. The Lourdeauxs’ duties were circumscribed by their obligations under the lease and were confined to fulfilling plaintiff’s contractual expectations of economic gain. The damages are therefore predicated on economic injury to plaintiff, which precludes recovery of damages for emotional distress. In our view, the affirmance of the award of damages for emotional distress would blur the distinction between contract and tort, thereby violating the policy underlying the economic loss rule. Since Butler-Rupp’s damages derive solely from appellants’ failure to perform their contract obligations, she can recover only in contract for the economic losses due to her disappointed contractual expectations.

We recognize that “[rjecovery of emotional distress damages has been allowed, absent impact or physical injury, in certain specialized classes of cases. Where the negligence is of a type which will cause highly unusual as well as predictable emotional distress, recovery has been allowed.” (Branch v. Homefed Bank, supra, 6 Cal.App.4th 793 , 800 [collecting cases in point]; see, e.g., Molien v. Kaiser Foundation Hospitals (1980) 27 Cal.3d 916 , 930 [ 167 Cal.Rptr. 831 , 616 P.2d 813 ] [negligent advice that patient had contracted syphilis resulting in distress to husband].) Plaintiff, however, has not cited this authority or identified circumstances that could give rise to such an independent duty of the defendants to avoid infliction of emotional distress.

We reverse the portion of the judgment awarding damages in the sum of $500,000 for negligent infliction of emotional distress but affirm the judgment in all other respects. We reverse the order denying Butler-Rupp’s motion for attorney fees and remand the case for a determination of the amount of attorney fees which plaintiff is entitled to recover from the Lourdeauxs. The parties to the appeal are to bear their own costs on appeal.

Stein, Acting P. J., and Margulies, J., concurred.