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Passante v. McWilliam
53 Cal. App. 4th 1240, 62 Cal. Rptr. 2d 298 (Cal. Ct. App. 1997)
Sills, P.J.
As someone once said, if you build it they will come. And by the same
token, if you make a baseball card that can't be counterfeited, they will buy it. Which
brings us to the case at hand.
In 1988 the Upper Deck Company was a
rookie baseball card company with an idea for a better baseball card: one that had a
hologram on it. Holograms protect credit cards from counterfeiting, and the promoters of
the company thought they could protect baseball cards as well. By the 1990's the Upper
Deck would become a major corporation whose value was at least a quarter of a billion
dollars. Collecting baseball cards, like baseball itself, is big business.
But the outlook wasn't brilliant for the Upper Deck back in the summer
of 1988. It lacked the funds for a $100,000 deposit it needed to buy some special paper by
August 1, and without that deposit its contract with the major league baseball players
association would have been jeopardized.
The Upper Deck's corporate attorney, Anthony J. Passante, Jr., then
came through in the clutch. Passante found the money from the brother of his law partner,
and, on the morning of July 29, had it wired to a company controlled by one of the
directors. That evening, the directors of the company accepted the loan and, in gratitude,
agreed among themselves that the corporate attorney should have 3 percent of the firm's
stock. The rest is history. Instead of striking out, the Upper Deck struck it rich.
At this point, if we may be forgiven the mixed metaphor, we must change
gears. No good deed goes unpunished. Anthony Passante never sought to collect the inchoate
gift of stock, and later, the company just outright reneged on its promise. Passante sued
for breach of oral contract, and the jury awarded him close to $33 million--the value of 3
percent of the Upper Deck at the time of trial in 1993.
The trial judge, however, granted a judgment notwithstanding the
verdict, largely because he concluded that Passante had violated his ethical duty as a
lawyer to his client. There was no dispute that Passante did not tell the board that it
might want to consult with another lawyer before it made its promise. Nor did Passante
advise the board of the complications which might arise from his being given 3 percent of
the stock.
The board had a clear moral obligation to honor its promise to
Passante. He had, as the baseball cliché goes, stepped up to the plate and homered on the
Upper Deck's behalf. And if this court could enforce such moral obligations, we would
advise the company even yet to pay something in honor of its promise.
But the trial judge was right. If the promise was bargained for, it was
obtained in violation of Passante's ethical obligations as an attorney. If, on the other
hand, it was not bargained for--as the record here clearly shows--it was gratuitous. It
was therefore legally unenforceable, even though it might have moral force. We must
therefore, with perhaps a degree of reluctance, affirm the judgment of the trial court.
FACTS AND PROCEDURAL HISTORY
The Upper Deck Company was formed in March 1988 to produce baseball
cards with holograms. The initial directors were Paul Sumner, William Hemrick, Boris
Korbel, Richard P. McWilliam, Angels' pitcher DeWayne Buice and Anthony Passante.
Passante, who was already the personal attorney for Korbel and McWilliam, was appointed
corporate attorney and secretary. McWilliam, an accountant with contacts to a number of
investors, had the responsibility of obtaining start-up financing for the company.
Passante made no investment in the company and owned no stock.
Upper Deck needed $100,000 to put on deposit with an Italian paper
company by August 1, 1988, so the paper would be available for the inaugural run of
baseball cards planned for December. Without the paper, the company risked losing its
license with major league baseball. However, as of July 26, 1988, the company had
not obtained financing. To make matters worse, McWilliam was demanding more stock in
return for the financing he was supposed to obtain. Board members instructed Passante to
demand the return of McWilliam's 11 percent stock if he would not change his demands.
When Passante found out that McWilliam would not be coming up with the
money, he told his law partner, Andy Prendiville that "there was really no hope for
the company to make it." Prendiville asked Passante if he should talk to his brother,
who was a doctor and might be able to make a loan of $100,000. Passante told Prendiville
to call his brother, who said that he "was in a position to loan the money and would
do so." Both Passante and Prendiville spoke to Korbel concerning the availability of
"those funds." They told Korbel "that the funds were available."
Korbel then requested that Passante come to a special board meeting to
be held on the evening of July 29, 1988, "in order to talk to the other two
shareholders about that loan." Korbel said he wanted the other shareholders to be a
party to the loan. And, because the shareholders would be guaranteeing the repayment of
the funds, Korbel "wanted to make sure that he had the agreement of his
co-shareholders for that type of an arrangement."
Dr. Kevin Prendiville wired $100,000 to an account controlled by Korbel
just a little after 11 a.m. on July 29, 1988, though Passante still understood that if the
board did not approve the loan "it wasn't going to be made."
At the board meeting that evening, Passante told the assembled board
members (assembled without notice to McWilliam) "about the availability of the
funds." He asked them "if they would be interested in obtaining the money from
Dr. Prendiville." The board members agreed.
The board members were "all quite excited about the availability
of those funds." Korbel "brought up" the idea that the board should
consider giving Passante some ownership interest if he got the loan, and Hemrick said,
"Look, if you can get that money for us then I think you're entitled to three percent
of the company." There was "general agreement" among the board members
"that that would be the case." Passante said, "Okay. We'll do the
loan," and then went back to his office.
Passante drafted a note which did not have an interest rate on it.
However, at Korbel's insistence, an extra $10,000 was paid to Dr. Prendiville for the
90-day loan. The Upper Deck made its deposit.
The day after the deadline, the board members were "quite happy
people." At a meeting held that day, the board members discussed how McWilliam's 11
percent would be divided; "it was determined" that Passante would receive 3
percent from McWilliam's 11 percent, and Korbel would receive the 8 percent balance.
Passante's 3 percent, however, was "to be held by Boris
Korbel." The idea was that Korbel would hold Passante's interest in the company until
McWilliam returned his stock certificate, and, when a new investor was brought in and new
certificates were issued, Passante would receive his stock.
But the Upper Deck still needed financing, and, after an unsuccessful
attempt to enlist a New York firm, Korbel told Passante that maybe McWilliam should be
brought back into the company after all. Passante told Korbel that he "should do
whatever he thought necessary to make the company go forward."
What Korbel thought necessary was to contact McWilliam. On August 31,
1988, Korbel told Passante about Korbel's conversation with McWilliam. McWilliam, it
seemed, was "extremely upset" at Passante "because of what had occurred at
the end of July." Accordingly, McWilliam would only "invest in Upper Deck"
on the condition that Passante "not participate as an owner of the company."
Korbel told Passante that "in order to get the company going" Korbel would hold
Passante's 3 percent for him and "we wouldn't tell Mr. McWilliam or any of the other
shareholders about this interest." After McWilliam "cool[ed] off" and
everything was "smooth again," Korbel would discuss Passante's 3 percent
interest and either "get a stock certificate representing that interest from the
corporation," or Korbel would at least make sure Passante "obtained the benefit
of that three percent through him" by way of profit distributions from the company.
In early fall McWilliam came back into the company; McWilliam soon
brought in Richard Kughn, a Chicago investor. As a result, the shares of the company were
redistributed, leaving Korbel, McWilliam and Kughn each with 26 percent. After Kughn made
his investment, Passante was fired as corporate attorney because Kughn wanted the company
represented by a large law firm.
In 1988 and early 1989, Korbel told Passante that he need not be
concerned about the 3 percent--that Korbel "had it" and he "would take care
of it" for Passante. In November 1990, however, at a restaurant in Orange, Korbel
told Passante that he wasn't going to get his 3 percent. In essence, Kughn had been given
Passante's 3 percent in the redistribution of stock occasioned by Kughn's investment.
The next month Passante filed this lawsuit. Andy Prendiville was also
named as a plaintiff because Passante told him, after the August 2 meeting, that
"because of his being so instrumental in obtaining the $100,000 loan" "half
of whatever [Passante] got was his."
As set forth in his second amended complaint, Passante sued McWilliam
for intentional interference with prospective advantage, negligent interference with
economic relationship, bad faith, breach of fiduciary duty, bad faith denial of contract,
conversion, intentional interference with contract, fraud, negligent misrepresentation,
unjust enrichment, intentional fraudulent misrepresentation, and equitable estoppel. He
sued Upper Deck for negligent interference with economic relationship, bad faith, bad
faith denial of contract, conversion, unjust enrichment, intentional fraudulent
misrepresentation, and equitable estoppel. He sued Boris Korbel for negligent interference
with economic relationship, bad faith, breach of fiduciary duty, breach of oral contract,
bad faith denial of contract, conversion, fraud, negligent misrepresentation, constructive
trust, unjust enrichment, intentional fraudulent misrepresentation, and equitable
estoppel.
Passante did not sue the Upper Deck for breach of oral contract.
All breach of fiduciary duty and intentional fraudulent
misrepresentation claims were dismissed pursuant to sustained demurrers. The bad faith,
fraud and negligent misrepresentation were dismissed pursuant to stipulation after the
trial court refused, as a sanction for not having disclosed the identity of the witness
during discovery, to allow Passante to present the testimony of Daniel Lybarger, a former
controller of the Upper Deck, who would have testified that McWilliam actually knew that
Passante had been given 3 percent of the company's stock.
After the close of the plaintiffs' case, the trial judge granted
nonsuit motions which eliminated all remaining claims against McWilliam, the Upper Deck,
and Korbel except the 11th cause of action for breach of fiduciary duty and imposition of
a constructive trust against Korbel only. However, the trial judge also granted Passante's
request to add a claim for breach of oral contract against the Upper Deck.
The claim against the Upper Deck and the claim against Korbel went to
the jury. The jury found for Passante and awarded him some $32 million against Upper Deck
and $1 million against Korbel. The Upper Deck then moved for a judgment notwithstanding
the verdict or, alternatively, a new trial; the trial court granted both. The trial judge
also determined that the sole remaining claim against Korbel was equitable in nature and,
in a tentative decision issued July 2, 1993, gave judgment for Korbel on that claim,
finding that there was no transaction between Korbel and Passante "which could serve
as a basis for imposing a constructive trust."
Two formal judgments were filed August 3, 1993, one in favor of both
the Upper Deck and McWilliam, the other in favor of Korbel on the equitable cause of
action. Passante then filed this appeal from those judgments.
DISCUSSION
In his opening brief Passante asserts that "[a]n enforceable
contract requires only a promise capable of being enforced and consideration to support
the promise." As framed, the assertion is incomplete. Consideration must also be
given in exchange for the promise. Past consideration cannot support a contract. (See
Leonard v. Gallagher (1965) 235 Cal. App. 2d 362, 373 [45 Cal. Rptr. 211] ["It
appears to be the universal rule throughout the United States that past consideration will
not support a promise which is in excess of the promisor's existing debt or duty."].)
Cases relied on by Passante merely demonstrate the rule that the
extinguishment of a preexisting obligation, or the rendering of past services with the
expectation of future payment, constitute sufficient consideration for a contract. In
Parke etc. Co. v. San Francisco Bridge Co. (1904) 145 Cal. 534 [78 P. 1065], the plaintiff
was an agent of the defendant who had been clearly working with the expectation of payment
all along. In Raichart v. Phillips (1953) 120 Cal. App. 2d 645, 651-652 [261 P.2d 777],
the appellate court was able to infer from the record the existence of a preexisting
obligation and a clear expectation of payment. In Blonder v. Gentile (1957) 149 Cal. App.
2d 869, 874-875 [309 P.2d 147], the appellate court stressed that the recital in a written
agreement, "in consideration of the services heretofore rendered," was not
conclusive because the "true consideration" was a promise made at the time, not
the past services ostensibly referred to. Indeed, the Blonder court acknowledged that
"The general rule is that a past consideration is not sufficient to support a
contract." (Id. at p. 874.)
As a matter of law, any claim by Passante for breach of contract
necessarily founders on the rule that consideration must result from a bargain. (E.g.,
Simmons v. Cal. Institute of Technology (1949) 34 Cal. 2d 264, 272 [209 P.2d 581]
["But the consideration for a promise must be an act or a return promise, bargained
for and given in exchange for the promise."]; Enslow v. von Guenthner (1961) 193 Cal.
App. 2d 318 [14 Cal. Rptr. 231] [building contractor's promise to replace defective roof
held unenforceable because not bargained for]; Dow v. River Farms Co. (1952) 110 Cal. App.
2d 403, 410-411 [243 P.2d 95] [corporate resolution to pay executive $50,000 in
consideration of past services rendered held unenforceable given absence of any
expectation of payment when services were rendered].)
[Editorial note]
Thus if the stock promise was truly bargained for, then he had an
obligation to the Upper Deck, as its counsel, to give the firm the opportunity to have
separate counsel represent it in the course of that bargaining. The legal profession has
certain rules regarding business transactions with clients. Rule 3-300 of the California
Rules of Professional Conduct (formerly rule 5-101) forbids members from entering "a
business transaction with a client" without first advising the client "in
writing that the client may seek the advice of an independent lawyer of the client's
choice."
Here it is undisputed that Passante did not advise the Upper Deck of
the need for independent counsel in connection with its promise, either in writing or even
orally. Had he done so before the Upper Deck made its promise, the board of directors
might or might not have been so enthusiastic about his finding the money as to give away
three percent of the stock. In a business transaction with a client, notes our Supreme
Court, a lawyer is obligated to give " 'his client "all that reasonable advice
against himself that he would have given him against a third person." ' " (Beery
v. State Bar (1987) 43 Cal. 3d 802, 813 [239 Cal.Rptr. 121, 739 P.2d 1289], quoting Felton
v. Le Breton (1891) 92 Cal. 457, 469 [28 P. 490].) Bargaining between the parties might
have resulted in Passante settling for just a reasonable finder's fee. Independent counsel
would likely have at least reminded the board members of the obvious--that a grant of
stock to Passante might complicate future capital acquisition.
For better or worse, there is an inherent conflict of interest created
by any situation in which the corporate attorney for a fledging company in need of capital
accepts stock as a reward for past service. As events in this case proved out, had the
gift of 3 percent of the company's stock been completed, it would have made the subsequent
capital acquisition much more difficult.
Passante's rejoinder to the ethics issue is, as we have noted, to point
to the evidence that the stock was virtually thrust at him in return for what he had done.
The terms were totally dictated by the Upper Deck board. And that is it, precisely. There
was no bargaining.
But a close reading of the facts shows that the stock had not been
bargained for in exchange for arranging the loan; Passante had already arranged the loan
(even though the loan had not been formally accepted by the board) before the idea of
giving him stock was ever brought up. There is no evidence that Passante had any
expectation that he be given stock in return for arranging the $100,000 loan. Clearly, all
of Passante's services had already been rendered by the time the idea of giving Passante
some stock was proposed. As the court in Dow plainly stated, ". . . if there was no
expectation of payment by either party when the services were rendered, the promise is a
mere promise to make a gift and not enforceable." (Dow v. River Farms Co., supra, 110
Cal. App. 2d at p. 410.)
CONCLUSION
The promise of 3 percent of the stock was not a reward contract; it was
Passante who first told Korbel that "funds were available." It was simply, to
use a phrase usually associated with life insurance contracts, an inchoate gift--that is,
an unenforceable promise from a grateful corporate board. Like the corporate resolution in
Dow, it represented a moral obligation. And like the corporate resolution in Dow, it was
legally unenforceable. (See Dow v. River Farms Co., supra, 110 Cal. App. 2d 403 [company
executive rendered services without expectation of payment, thus subsequent promise by
board to pay him $50,000 for those services as soon as the company became free of floating
indebtedness was unenforceable].)
Our conclusion about the contract issue necessarily obviates all
other issues in this appeal, including those involving any promise by Korbel to hold
Passante's interest for him, all of which are predicated on the idea that Passante had a
bargain with the Upper Deck. The judgments in favor of McWilliam, the Upper Deck, and
Korbel are affirmed.
Crosby, J., and Rylaarsdam, J., concurred.