Filed 5/7/15 Ehrlich v. Zlot CA1/5
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FIVE
MICHAEL EHRLICH,
Plaintiff and Appellant,
A139567, A139829
v.
HAROLD ZLOT et al., (San Francisco City and County
Super. Ct. No. CGC-11-516168)
Defendants and Respondents.
Harold Zlot was the sole owner of Access Fund Management Company (Access
Management), which managed a group of investment hedge funds (The Access Fund,
L.P.; hereafter Access Fund or Fund). In 2004, Zlot asked appellant Michael Ehrlich to
assist in management of the Fund, offering him half of the management fees it generated
and promising him half of the proceeds from a then-anticipated sale of the company. In
late 2010 Zlot removed Ehrlich and in 2011 Access Management merged with a different
entity. Ehrlich sued Zlot and Access Management (Defendants) for a premerger share of
management fees and for a share of the merger proceeds. Ehrlich argued that he and Zlot
had entered into a partnership or, in the alternative, an employment contract that entitled
him to posttermination compensation in the event of a sale of Access Management. He
brought claims for breach of a partnership agreement, breach of contract and the implied
covenant of good faith and fair dealing, fraud, negligent misrepresentation, promissory
1
estoppel, as well as equitable causes of action.1 After the close of evidence, the trial
court granted a directed verdict in Defendants’ favor. (Code Civ. Proc., § 630.)
We reverse in part. Ehrlich produced substantial evidence that would support jury
findings in his favor on several causes of action, and the trial court erred in excluding
expert testimony Ehrlich sought to present at trial. Because we vacate the judgment and
remand for a new trial, we dismiss as moot Ehrlich’s appeal from the denial of his motion
to tax costs.2
I. BACKGROUND
“A motion for directed verdict, like a motion for nonsuit, is in the nature of a
demurrer to the evidence. [Citations.]” (7 Witkin, Cal. Procedure (5th ed. 2008) Trial,
§ 420, p. 494.) “ ‘ “[A] directed verdict may be granted ‘only when, disregarding
conflicting evidence and giving to plaintiff’s evidence all the value to which it is legally
entitled, herein indulging in every legitimate inference which may be drawn from that
evidence, the result is a determination that there is no evidence of sufficient substantiality
to support a verdict in favor of the plaintiff if such a verdict were given.’ ” [Citations.]’
[Citations.]” (North Counties Engineering, Inc. v. State Farm General Ins. Co. (2014)
224 Cal.App.4th 902, 919.) The power of a court in passing upon such motions is
“ ‘strictly limited.’ ” (Estate of Lances (1932) 216 Cal. 397, 401.) “In determining such
a motion, the trial court has no power to weigh the evidence, and may not consider the
credibility of witnesses. . . . A directed verdict may be granted only when, disregarding
conflicting evidence, giving the evidence of the party against whom the motion is
1
Ehrlich originally asserted 14 causes of action in his first amended complaint.
During trial he dismissed claims for defamation, tortious interference with business
relations, and intentional interference with prospective economic advantage.
2
By order of December 26, 2013, we granted Ehrlich’s motion to consolidate his
appeal of the judgment (No. 139567) with his appeal of the postjudgment order
(No. 139829). On September 30, 2014, Defendants moved to strike portions of Ehrlich’s
reply brief, arguing that Ehrlich misrepresented the record and raised new arguments.
The motion is denied. In our view, Ehrlich’s representations are supported by reasonable
inferences drawn from the evidence and he did not materially alter the arguments he
made in his opening brief.
2
directed all the value to which it is legally entitled, and indulging every legitimate
inference from such evidence in favor of that party, the court nonetheless determines
there is no evidence of sufficient substantiality to support the claim or defense of the
party opposing the motion, or a verdict in favor of that party. [Citations.]” (Howard v.
Owens Corning (1999) 72 Cal.App.4th 621, 629–630.) On appeal, we decide de novo
“whether sufficient evidence was presented to withstand a directed verdict. [Citation.]”
(Gelfo v. Lockheed Martin Corp. (2006) 140 Cal.App.4th 34, 46–47.)
We summarize the trial evidence from this required perspective.3
A. Access Fund Origin and First Republic Deal
In about 1987, Zlot established the Access Fund—a “fund of funds” that pooled
investments into a diversified set of hedge funds to achieve low volatility and favorable
long-term returns. Collectively, the investments were the Fund’s “assets under
management.” The Fund was structured as a limited partnership, with Zlot serving as
general partner and the other investors as limited partners. The general partner provided
investment management and administrative services to the Fund and in turn collected
management fees. In 2002, Zlot created Access Management, a subchapter S corporation
that he wholly owned and controlled. Access Management became the Fund’s general
partner.
In 2004, Zlot created Access Fund Management LLC (Access Management LLC).
First Republic Bank (First Republic) acquired 24.9 percent of Access Management LLC
and an option to purchase the remaining 75.1 percent by April 2009 at a multiple of
3.5 times the gross management fees (less third party referral fees) generated by the
Fund’s assets under management for the previous 12 months. As part of the
consideration, First Republic received 8.25 percent of Access Management’s gross
3
While we accept Ehrlich’s evidence as true for purposes of this appeal, “nothing
in this opinion should be construed as proven fact for purposes of later proceedings.
Such facts are properly determined by the trier of fact.” (See Kempton v. City of Los
Angeles (2008) 165 Cal.App.4th 1344, 1347, fn. 1 [review of judgment on the
pleadings].)
3
revenues and agreed to refer clients to the Fund.4 Access Management delegated its
investment management and administration responsibilities to Access Management LLC,
and Zlot controlled operations of both entities.5
B. Ehrlich’s Move to Access Management
In order to maximize revenue from the anticipated sale to First Republic, Zlot
looked for someone who could help him build the Fund’s assets under management
before the 2009 option date. In about October 2004, Zlot met Ehrlich through a mutual
acquaintance. Ehrlich had law and business degrees, state and federal securities licenses,
and he had managed money for high net-worth individuals for three years at Merrill
Lynch. In several conversations, Zlot told Ehrlich “he was looking for a true partner to
help build this and that it could be a very exciting opportunity. First Republic would buy
us in five years, and at that point we can either go our own way[s] or I could stay and
work for First Republic running the fund. He would be retiring.” In December 2004,
Zlot agreed to Ehrlich’s proposed compensation terms (the Agreement), and Ehrlich
joined Access Management on January 3, 2005. The terms of the Agreement were not
memorialized until more than a year later, in a March 2006 e-mail:
“1. $150,000 annual base salary less any extra payments made for automobile
lease and insurance expenses.
“2. Split all gross revenue on new capit[a]l invested in the [Access Management
LLC] by new and existing investors from January 1, 2005[. T]his shall be paid against
4
At some point, the Access Fund established related funds, including Access
Fund II, tailored to the needs of particular clients. Insofar as the record discloses, all
funds were structured similarly: Access Management was the fund’s general partner and
delegated investment management and administrative duties to Access Management
LLC. Distinctions among these funds are largely immaterial to issues raised in this
appeal.
5
Although the parties frequently refer to the two entities and investment fund
indiscriminately as “Access,” we attempt to distinguish between them where possible.
For simplicity, we at times use “Access Management” to refer to either or both of the
management companies because the distinction is not material to any issues raised in
Ehrlich’s complaint. Access Management LLC was dismissed by Ehrlich pursuant to
stipulation prior to trial.
4
the $150,000 base salary. Gross revenue is defined as total fees collected less any
referral fees paid to third parties, including First Republic Securities and less the 8.25%
asset fee payable to [First Republic].
“3. Zlot to pay all reasonable expenses.
“4. [First Republic] has an option to purchase the balance of [Access Management
LLC]. Copy of Option Agreement attached. Option is based on a multiple of Gross
Revenues. Ehrlich to receive his share of potential purchase price equal to the multiple of
50% of gross revenue, as defined above, as against the multiple paid by [First Republic].”
In addition to automobile expenses that were deducted from his $150,000 base
salary, Access Management paid Ehrlich’s health insurance and travel and entertainment
expenses, including Golden State Warrior season tickets that cost more than $20,000 a
year.6 Every quarter, Access Management calculated Ehrlich’s share of management
fees, and any amounts exceeding his base salary for the quarter ($37,500) were either
paid as a bonus, or at Ehrlich’s election, retained in the Access Fund as a personal
investment.
When the parties made their Agreement, they both expected First Republic to
exercise its option in April 2009 and to then engage either Zlot or Ehrlich to help run the
business. No discussion occurred as to how Ehrlich’s position at Access Management
might end other than by way of a sale to First Republic.
C. Representations about Ehrlich’s Position
During the last week of December 2004, Ehrlich sent an e-mail to his Merrill
Lynch clients and other business associates stating: “I accepted an offer yesterday to join
the [Access Fund] as a full Partner.” (Italics added.) By “full Partner,” Ehrlich meant he
was helping run the business as an entrepreneur, in contrast to his position as an
employee at Merrill Lynch, where he was a “partner on a team” that collaboratively
6
Zlot agreed that Access Management would pay all of Ehrlich’s “reasonable
expenses up until we got to the private jet level, and that’s when we would have to
consider splitting expenses.” Although the Fund’s assets under management eventually
reached a peak value of $200 million, it never came close to “private jet” level.
5
managed money for a set of individuals and shared revenues from that work. Ehrlich
forwarded a copy of this e-mail (as part of an e-mail chain) to Zlot, who never voiced any
objection.
When Ehrlich arrived at the Access Management office in January 2005, Zlot
introduced him to Access Management’s administrative assistant, investors, and others in
the office as Zlot’s “new partner.” Zlot also introduced Ehrlich as his “co-portfolio
manager” and “a principal in the firm,” and Ehrlich introduced Zlot as his “business
partner.” Zlot never told Ehrlich not to use the titles “partner,” “true partner,” or “full
partner.”
In January 2005, Access Management issued a 2004 year-end letter signed by Zlot
that stated, “I am very pleased to announce that I have a new partner in the Access Fund,
Michael F. Ehrlich.” (Italics added.) In March 2005, Access Management issued a press
release entitled, “Access Fund Management Names Michael Ehrlich as Partner.” (Italics
added.) A pitch book for investors written by Ehrlich identified Ehrlich as “President
and Co-Portfolio Manager,” and “Principal, The Access Fund.” (Italics added.) A 2006
due diligence questionnaire (prepared by Ehrlich) was provided to potential investors and
described “the firm’s compensation philosophy” as: “The Access Fund’s senior
investment professionals, Harold Zlot and Michael Ehrlich, are partners of the firm.
Senior investment professionals are compensated with a combination of base salary and
a pre-determined percentage ownership of the firm.” (Italics added.) Ehrlich understood
that he had an ownership interest in the Access Management revenue stream (i.e., the
management fees). Zlot saw all of these publications and never told Ehrlich they
misrepresented Ehrlich’s position at the company.
D. Ehrlich’s Duties and Compensation
Both Zlot and Ehrlich cultivated potential investors and referral sources, and both
worked on portfolio management and research. Ehrlich also upgraded the firm’s
technology and filing systems, research reports, due diligence questionnaires, and
marketing materials. He sent out monthly communications to actual and prospective
6
investors and developed a 1,000-person distribution list.7 Ehrlich and Zlot worked by
consensus in choosing individual Fund managers, but Zlot made the final decision.
Ehrlich helped make hiring decisions, but did not have the power to hire or fire
employees. He could not sign Access Fund audit documents or contracts with Access
Fund investors because he was not an equity owner in the Fund. Only Zlot signed and
filed the tax returns for Access Management. Aside from Zlot and Ehrlich, Access
Management engaged a full-time administrative assistant (later, two such assistants), a
part-time employee, and a consultant.
Before Ehrlich joined Access Management, the value of Access Fund’s assets
under management was $64.6 million. That value grew to $85.5 million in 2005,
$106 million in 2006, and $184 million by the end of 2007 (peaking earlier in the year at
$200 million). The Access Fund had added 200 new investors. Ehrlich contributed to
this growth.
Throughout Ehrlich’s time at Access Management, his entire compensation
(including both his base salary and share of management fees) was reported on W-2 tax
forms, which identified him as an Access Management employee. Ehrlich earned
$141,574 in 2005, $149,494 in 2006, $456,337 in 2007, and $659,789 in 2008. Until
2007 or 2008, Zlot’s own compensation was reported as a “partnership distribution”8 and
no employment taxes were withheld. Beginning in 2007 or 2008, Zlot was paid $80,000
a year salary as an officer of Access Management and that salary was reported on a W-2
form with employment taxes withheld; the rest of his compensation was reported as a
7
Both Ehrlich and Zlot also conducted outside business for their personal benefit
that did not directly benefit the Access Fund or Access Management. Zlot was aware of
at least some of the personal business conducted by Ehrlich.
8
Access Management LLC issued K-1 “partnership” tax returns to Zlot and First
Republic. Zlot’s distribution from the LLC was then reported on a return for Access
Management.
7
partnership distribution.9 Zlot paid for his own health insurance. In 2010, Zlot earned
$80,000 in salary and $263,446 in other compensation.
E. Global Financial Crisis
Due to the 2007–2008 financial crisis, the Access Fund’s assets under
management dropped by about $50 million (25 percent) by the end of 2008, and by
another $15 million to $20 million by the end of 2009, ending at $111 million. Both Zlot
and Ehrlich were stressed by the situation and the firm’s atmosphere was tense. Zlot and
Ehrlich decided to close the Access Fund’s leveraged subfund. Zlot asked Ehrlich to
share in the legal expense of doing so, and Ehrlich agreed to pay a share proportionate to
his share of fees from that fund (about 25 percent). Zlot also asked Ehrlich to pay for
more of his travel and entertainment expenses, and Ehrlich agreed to pay for the Golden
State Warriors tickets and to reduce other expenses.
Meanwhile, Merrill Lynch had purchased First Republic, and Bank of America
had then purchased Merrill Lynch. Zlot and Ehrlich realized that First Republic would
no longer exercise its option because both Bank of America and Merrill Lynch had their
own similar investment vehicles. This development was a big disappointment for
Ehrlich, who had lost an important part of his compensation package, his “back-ended
equity.” Ehrlich and Zlot discussed the need to look for another merger partner, and
“Zlot assured me that if this piece were to be brought back, that I would participate. . . .
Anyone else we found afterwards we’d have the same terms and conditions.” In 2008 or
2009, Ehrlich left some of his share of management fees in the Fund because “[t]here
could be a chance for me to buy a piece of the fund” or participate in another sale and
Zlot said “for tax purposes it makes sense to keep some of your money in.”
F. Buyback of First Republic’s Interest in Access Management LLC
During 2009, Zlot and Ehrlich frequently spoke about their agreement that Ehrlich
would participate in any merger, but the understanding was not put into writing. They
9
Access Management, a subchapter S corporation, elected partnership tax
treatment.
8
both looked for merger partners and referral sources for new investors. However, Zlot
spent increasing amounts of time out of the office.
In about August 2009, Zlot negotiated with Bank of America to buy back First
Republic’s 24.9 percent interest in Access Management LLC for $150,000.10 Ehrlich
testified, “I was frustrated by this because . . . this was an opportunity that I could have
potentially purchased some, if not all, of this 25 percent. . . . I had more money than [the
$150,000 price] sitting in the [F]und . . . . I felt hurt.” Zlot, however, assured Ehrlich
“that we would find another partner; I would still be part of any succession and merger.
And I agreed . . . to stick around and work on that.”
G. Ehrlich’s Termination
In 2010, Ehrlich worked harder than ever, trying to attract investments and
exploring alternative investment strategies. Zlot was spending much less time in the
office, and his relationship with Ehrlich was less friendly. In September of that year,
Ehrlich considered leaving Access Management. Because of an impending October 30
“lockup date”—the deadline for investors to withdraw investments from the Fund before
the investments would be locked in for another calendar year—he wanted to talk to Zlot
about whether they should continue working together or go their separate ways, with the
investors free to move their money if they wished. Ehrlich had come to understand that
he was Zlot’s intended successor at Access Management, even though Zlot had never
expressly said so. Ehrlich had been “brought to meetings of some of [Zlot’s] older clients
that had been in the [F]und, people that had been concerned about his age. [¶] [F]or First
Republic meetings, I did almost all the . . . presentations the entire time [I was] there. . . .
[¶] So it was kind of very clear to people that this was sort of the chain. And it was clear
to me.”
Zlot and Ehrlich met on October 15, 2010, two weeks before the October 30
lockup. Ehrlich told Zlot he “wanted to know where I really stood . . . . [¶] . . . If it
10
Zlot represents on appeal that, while not reflected in the trial record, Access
Management LLC was dissolved after this buyback.
9
wasn’t going to work, that’s fine, let’s let the clients know . . . so they will have time to
make a decision for themselves. Otherwise, let’s do something formal and give it a year
option. . . . [¶] And I suggested I would work on a business plan. He told me that he
needed . . . everything updated first, all the marketing materials[,] . . . which I agreed to
do.” Ehrlich suggested they have a check-in in six months and Zlot agreed. Ehrlich
understood that they would be “dedicating time to finding a third party to come in and
help me buy Mr. Zlot out, where we could do some kind of phase-out.” The economy
was starting to improve and the chances of finding a merger partner had increased. Zlot
took notes on the October 15, 2010 meeting. He testified that termination was on his
mind “[s]o I wrote it down so that I would have a record.” He did not, however, tell
Ehrlich he was contemplating termination, and Ehrlich did not believe his position was in
jeopardy or that he was under any sort of deadline to produce the business plan.
Zlot and Ehrlich met again on Friday, October 29, 2010, one day before the
lockup. Zlot asked why Ehrlich had not written a business plan yet, and Ehrlich said he
was focused on updating the other materials. Ehrlich said he could work on the plan
outside business hours and Zlot did not seem “thrilled, but I didn’t get the sense that I had
done something wrong and I was in trouble.”
On the evening of Saturday, October 30, 2010, Ehrlich was in a bar with friends
watching the San Francisco Giants play in the World Series. At 5:02 p.m., just after the
lockup period expired,11 Ehrlich received an e-mail from Zlot: “You said that you had a
plan in mind to grow the business in a 6 to 12 month period. . . . I was a little concerned
on Friday that you were not ready to discuss these issues and needed more time to write
up your plan. . . . [I]f you are serious about a plan that is real let’s get it written up. . . .
[G]et the write up to me by the end of the day on Tuesday and let’s plan to meet at 3pm
on Wednesday to discus[s].”
11
In Zlot’s view, the lockup period expired at 5:00 p.m. on October 30, 2010, and
Fund investors could not withdraw their investments thereafter until October 30 of the
following year.
10
Ehrlich worked on a business plan on Sunday and Monday and presented it to Zlot
on Tuesday, November 2, 2010. In an introduction to the plan, he wrote: “Please keep in
mind this is a very rough first draft.” The business plan listed possible strategies to
increase investments, candidates for “minority investment/strategic partnership,” “second
level opportunities,” changes in Fund offerings to attract investment, third party
marketing alliances, and connections with consulting firms. Zlot read the plan and
discussed it with Ehrlich on November 2. “[Zlot] said it was actually pretty good, but . . .
it seemed like his mind had sort of been made up a little bit. . . . There wasn’t much
conversation.” A meeting with one of the mutual funds on the “strategic partners” list
(Reedland Capital) was already scheduled for the next day, and Ehrlich asked if Zlot
wanted to go ahead with it. Ehrlich made clear “it was not my best idea.” Zlot agreed to
go ahead with the meeting.
On November 4, 2010, Zlot terminated Ehrlich. Zlot testified at trial that he was
dissatisfied with the business plan and with Reedland Capital as a proposed merger
partner. On November 4, he told Ehrlich he had known as early as 2005 that Ehrlich
would never be his successor. Ehrlich asked Zlot why he had never said anything about
this; Zlot did not respond. Zlot said he would pay Ehrlich his share of management fees
through the end of November, “but it wasn’t going to work out and it was time to move
on, and I should consider what I wanted to say to tell people. [¶] . . . [¶] And then I turned
in my card key, and I was out the door.”
Ehrlich was paid through November 30, 2010. Ehrlich gave Zlot a list of investors
who should be given an opportunity to withdraw their funds because of his departure;
some of those investors were allowed to withdraw their investments, and did. Ehrlich
also had extensive communications with Zlot about withdrawing his own investments
from the Access Fund, and Zlot eventually allowed him to do so. Ehrlich did not receive
any management fees or other remuneration from Access Management after
11
November 30, 2010.12 Ehrlich believed, although it had never been expressly stated
orally or in writing, he was entitled under the terms of his engagement with Access
Management to continue receiving his share of management fees on post-2004
investments even after he stopped working there. His belief was based on the Agreement
to split the revenue stream on post-2004 investments, and on industry custom and
practice that fund employees continued to receive fees on clients they brought into a fund
“as long as [the clients] are in the fund.” If Zlot had retired and Ehrlich had continued
working at Access Management, Zlot also would have continued to receive 50 percent of
those fees unless and until those investors withdrew their investments.
H. Gorelick Merger
Around July 2011, Zlot started merger discussions with Gorelick Brothers Capital,
LLC (Gorelick). Gorelick managed a fund of funds with an investment strategy similar
to that of the Access Fund. Although the value of assets under management was only
about $30 million, Gorelick’s fund had a significant infrastructure: five or six investment
professionals and several support staff. The companies agreed to merge because
Gorelick needed additional assets and Access Management needed additional
infrastructure. The deal went into effect on January 1, 2012.
After leaving Access Management, Ehrlich was self-employed. He worked on
some projects that were consistent with his outside work while at Access Management:
he helped pre-IPO Facebook employees gain liquidity by finding buyers for their shares
or options and he helped find investors for a sports team. In 2011, he made $700,000,
and in the first five months of 2012 he made $1.2 million. He had no income from mid-
2012 to April 2013, although he was working on other long-term projects.
Economist Mark Cohen testified as Ehrlich’s damages expert. Cohen assumed
that Ehrlich was entitled to a 50 percent share of management fees (less third-party
12
In 2009, Ehrlich was paid $240,621 and he left some of his share of
management fees in the Access Fund. In 2010, he was paid $550,667, which included
the funds he had left in the Access Fund in 2009. In 2011, he was paid an additional
$32,131 he was owed in 2010 management fees.
12
referral fees)13 on investments in the Fund made during Ehrlich’s tenure, and that Ehrlich
had the right to continue receiving his share of those fees after termination. Cohen
divided Ehrlich’s damages into two categories: (1) Ehrlich’s share of management fees
between December 1, 2010, and the January 1, 2012 effective date of the merger
($321,290), and (2) Ehrlich’s interest in the company as of the date of the merger, which
Cohen valued as the present value of Ehrlich’s anticipated share of management fees
from the date of the merger to the end of Zlot’s estimated life expectancy in 2023
($959,371). Ehrlich’s total damages under this calculation were $1,280,661.
II. DISCUSSION
A. Exclusion of Expert Testimony
Alan J. Andreini was designated by the defense as a testifying expert (Code Civ.
Proc., § 2034.210, subd. (a)) in “financial industry customs and practices concerning non-
equity and equity partnerships, profit-sharing, employment agreements, recruitment, job
titles, and compensation structures, including ‘trailers’ or ‘residuals’ after a person leaves
an organization.” The defense described his expert qualifications as follows: “Alan J.
Andreini has more than 20 years of experience in the financial industry. He has served as
the chief executive officer, managing director, general partner, and/or chairman of hedge
fund companies in California and New York. Mr. Andreini has an A.B. from Princeton
University and a J.D. from Rutgers University Law School.”
Ehrlich sought to introduce portions of Andreini’s deposition testimony in his
case-in-chief. Ehrlich made a written proffer to the court, designating approximately
50 pages of Andreini’s deposition testimony that he wished to read to the jury on the
following issues: “1. His opinion that the 50%-50% revenue split between Zlot and
Ehrlich was ‘high’ for a person who allegedly was only hired as a ‘marketing employee’;
13
Although the original compensation package also required deduction of First
Republic’s 8.25 percent share of the fees, First Republic and its successors no longer had
an ownership interest in Access Management at the time of Ehrlich’s departure. The
record is not clear whether Ehrlich’s share of management fees continued to be adjusted
by this 8.25 percent amount after Zlot bought back the First Republic share of the
company in 2009.
13
[¶] 2. His opinion that no particular ‘documentation’ (or any documentation at all) is
customarily required to make a deal in the industry; [¶] 3. His opinion that while the
50%-50% revenue split would be highly atypical for a marketing employee, it is a
common arrangement for a partnership in the industry; [¶] 4. His opinions on the
customary meaning of certain titles in the industry; [¶] 5. His opinions on the use and
dignity of certain marketing documents in the industry, including the ‘due diligence
questionnaire’, client letters, and others; [¶] 6. His opinion that the structure of
Mr. Ehrlich’s compensation would be characterized as a ‘draw’ in industry custom; [¶]
and 7. His opinion that it is not customary for employees in the financial services industry
to be charged for non-sales related expenses, but is common among partnerships.”
(Record citations omitted.) The trial court excluded the testimony. Ehrlich argues that
this was error. We agree.
California Code of Civil Procedure section 2034.310, subdivision (a), permits a
party to present the testimony of an expert witness who was not previously designated by
that party if that expert was designated by another party and thereafter deposed. (Powell
v. Superior Court (1989) 211 Cal.App.3d 441, 444–445.) It is undisputed that the
defense designated Andreini as an expert witness and Ehrlich thereafter deposed him.
The testimony could nevertheless be excluded if irrelevant (Evid. Code, §§ 210, 350–
352), improper (id., § 801), or “its probative value [was] substantially outweighed by the
probability that its admission [would] (a) necessitate undue consumption of time or
(b) create substantial danger of undue prejudice, of confusing the issues, or of misleading
the jury” (id., § 352). We review the trial court’s exclusion of this evidence for abuse of
discretion. (People ex rel. Lockyer v. Sun Pacific Farming Co. (2000) 77 Cal.App.4th
619, 639–640.) “The trial court’s discretion is only abused where there is a clear
showing [it] exceeded the bounds of reason, all of the circumstances being considered.’
[Citation.]” (Id. at p. 640.)
In excluding the offered evidence, the trial court focused on the testimony’s
relevance. As to the nature and amount of Ehrlich’s compensation, the court said, “The
idea that an expert would say that a 50/50 revenue split was high or low . . . is not really
14
of significance in this case because it’s what was agreed to by the parties and it was
paid.” While Ehrlich could fairly argue he was “something more than, quote, ‘just a
marketing employee[,]’ . . . the whole gist of the defense is it wasn’t a partnership deal.”
We disagree that the offered testimony was not relevant to the issues before the
jury. While the gist of the defense was that no partnership existed, the gist of Ehrlich’s
case was otherwise. As explained post, whether the parties intended to form a
partnership is a central issue that should have been submitted to the jury. Profit sharing is
a factor that is relevant to whether a partnership was formed. In fact, profit sharing
supports a presumption that a partnership has been created unless a jury finds the
payment was nothing more than wages. (Corp. Code, § 16202, subd. (c)(3)(B).) Thus,
evidence about whether payment of 50 percent of management fees is a typical payment
of wages to a person with Ehrlich’s responsibilities, or instead indicated he had the status
of partner, was relevant.
The trial court ruled generally that “what is being offered [through Andreini’s
testimony] . . . relates to various . . . custom-and-practice interpretation of terms. And
what we have here is direct testimony from the two participants, each of whom worked in
an industry but, more important, each of whom was testifying to their intentions in doing
what they did or refrained from doing, orally or in writing. [¶] And although
[section] 1645 of the Civil Code indicates . . . , ‘technical words are to be interpreted as
usually understood by persons in the profession or business to which they relate unless
clearly used in a different sense’—this all seems cumulative. Because both these
individuals who worked in the hedge fund industry have given their view of what these
terms mean. [¶] And I don’t think they are really technical terms.” Finally, the court also
said the proffered testimony “comes . . . too close . . . [to] an expert arguing [the] legal
effect of things.”
Again we disagree. When interpreting any contract, including a contract to form a
partnership, “ ‘ “[t]he existence of mutual consent is determined by objective rather than
subjective criteria, the test being what the outward manifestations of consent would lead a
reasonable person to believe.” [Citation.]’ [Citation.]” (Beard v. Goodrich (2003) 110
15
Cal.App.4th 1031, 1040.) It is undisputed that the parties here did not expressly state in
their Agreement whether their business arrangement was a partnership or an employment
relationship. Ehrlich contends that he reasonably believed, based on the terms of the
agreement and industry practice, that he had entered into a partnership with Zlot.
Evidence that his understanding was consistent with industry custom and practice was
therefore relevant to the jury’s determination of whether Ehrlich’s understanding was
objectively reasonable. Moreover, Andreini’s testimony about industry practice (a
subject within his area of expertise) potentially carried more weight than Ehrlich’s or
Zlot’s self-interested testimony on the subject. As to the legal effect of the Agreement,
Andreini did not testify that Zlot and Ehrlich’s agreement was a partnership agreement.
In fact, he testified that he viewed the arrangement primarily as a marketing agreement.
He simply acknowledged that Ehrlich’s 50 percent share of certain revenues and sales
proceeds, as well as other elements of the Agreement, were inconsistent with industry
practice for a marketing agreement. The jury should have been given the opportunity
determine the significance of those inconsistencies.
The court made no finding that the proffered evidence would have been unduly
time consuming, and it is difficult to see how the reading of relatively few pages of
deposition testimony could be so. Nor did the court find that the evidence would create
substantial danger of undue prejudice, of confusing the issues, or of misleading the jury.
It found only that the testimony would not be “substantially helpful to the jurors’
understanding of the facts,” and it seemed to view the evidence as irrelevant or
cumulative. Testimony related to custom and practice in an industry not within the
knowledge and understanding of a lay jury was a proper subject for expert testimony.
The evidence was, in our view, highly relevant to disputed material issues in the trial—
whether the parties had an employer/employee relationship or a partnership—and the
court abused its discretion in precluding the jury from hearing it.
B. Motion for Directed Verdict
At the close of evidence, Defendants moved for directed verdicts on all causes of
action. The court granted the motion, and subsequently entered a “Statement of Decision
16
on Equitable Causes of Action” denying all equitable claims. The statement of decision
also, however, made credibility determinations and resolved factual questions at issue in
Ehrlich’s legal causes of action. Judgment in favor of Defendants was entered on
June 27, 2013. Ehrlich argues the trial court erred in directing a verdict in favor of
Defendants. We agree.
We consider whether substantial evidence was proffered to prove each of
Ehrlich’s claims, indulging every legitimate inference which may be drawn from
Ehrlich’s evidence and disregarding conflicting evidence. (North Counties Engineering,
Inc. v. State Farm General Ins. Co., supra, 224 Cal.App.4th at p. 919.)
1. Breach of Partnership Agreement
Under the Uniform Partnership Act of 1994 (UPA; Corp. Code, § 16100 et seq.),14
with exceptions not relevant here, “the association of two or more persons to carry on as
coowners a business for profit forms a partnership, whether or not the persons intend to
form a partnership.” (§ 16202, subd. (a).) “In determining whether a partnership is
formed, the following rules apply: [¶] . . . [¶] (2) The sharing of gross returns does not by
itself establish a partnership . . . . [¶] (3) A person who receives a share of the profits of a
business is presumed to be a partner in the business, unless the profits were received for
any of the following reasons: [¶] . . . [¶] (B) In payment for services as an independent
contractor or of wages or other compensation to an employee.” (Id., subds. (c)(2),
(c)(3)(B); see also § 16101, subd. (9) [definition of “partnership”].) A partnership
agreement need not be in writing but may be oral or implied, and a partner may be
terminable at will. (§ 16101, subds. (10)–(11).)
“Generally, a partnership connotes co-ownership in partnership property, with a
sharing in the profits and losses of a continuing business. [Citation.]” (Chambers v. Kay
(2002) 29 Cal.4th 142, 151, italics added & fn. omitted.) Zlot argues that co-ownership is
an essential element of partnership formation. However, the authorities he cites either do
14
Undesignated statutory references are to the Corporations Code.
17
not so hold or predate the enactment of the UPA.15 This district has held that, under the
current version of the UPA,16 no single factor is essential to partnership formation: “[t]he
presence or absence of any of the various elements . . . , including sharing of profits and
losses, is not necessarily dispositive. . . . [T]he rules to establish the existence of a
partnership . . . should be viewed in the light of the crucial factor of the intent of the
parties revealed in the terms of their agreement, conduct, and the surrounding
circumstances when determining whether a partnership exists.” (Holmes, supra,
74 Cal.App.4th at p. 454, italics added.) Zlot also argues comanagement is an essential
element of a partnership. Again, the cases he cites either do not so hold, are outdated, or
are distinguishable.17 Zlot cites section 16401, subdivision (f), which provides that
15
Greene v. Brooks (1965) 235 Cal.App.2d 161, 165, simply cites the definition of
a partnership as “an association of two or more persons to carry on a business for profit
as coowners” and does not support the argument that shared property ownership is
required to establish a partnership. (Italics added.) People v. Holtz (1927) 85 Cal.App.
450 predates the UPA, and Brockman v. Lane (1951) 103 Cal.App.2d 802 addresses a
business relationship that was formed before the UPA went into effect. (Holmes v.
Lerner (1999) 74 Cal.App.4th 442, 453 (Holmes) [UPA first enacted in 1949].)
16
In interpreting former section 15007 of the pre-1999 version of the UPA (former
§ 15001 et seq.), Holmes, supra, 74 Cal.App.4th 442 implicitly recognizes that the
current version of the law that became effective in 1999 (§ 16100 et seq.) was materially
indistinguishable. (Holmes, at pp. 453–454 & fns. 12, 14.) Former section 15007 (as
amended by Stats. 1976, ch. 1171, § 6, p. 5252) was substantially identical to current
section 16202, subdivision (c), except that profit sharing was deemed “prima facie
evidence” of a partnership rather than the basis for an evidentiary presumption as in the
current statute. (See Holmes, at p. 454, fn. 14.)
17
Billups v. Tiernan (1970) 11 Cal.App.3d 372, 379 cites Greene v. Brooks, supra,
235 Cal.App.2d at page 166, which in turn cites Rosenberg v. Broy (1961)
190 Cal.App.2d 591, 597 (“[t]he existence of a partnership is ordinarily evidenced by the
right and obligation of the partners to participate . . . in the management and control of
the business” (italics added)). Similarly, People v. Park (1978) 87 Cal.App.3d 550, 564
cites Holtz v. United Plumbing & Heating Co. (1957) 49 Cal.2d 501, 506–507—a
wrongful death case specifically distinguished by Holmes, supra, 74 Cal.App.4th at page
455—and cases acknowledging that joint management is common in partnerships
(Constans v. Ross (1951) 106 Cal.App.2d 381, 386; Kersch v. Taber (1945)
67 Cal.App.2d 499, 504). However, Constans specifically held that “apportionment of
18
“[e]ach partner has equal rights in the management and conduct of the partnership
business.” However, he overlooks section 16103, subdivision (a), which provides,
“Except as otherwise provided in subdivision (b), relations among the partners and
between the partners and the partnership are governed by the partnership agreement. To
the extent the partnership agreement does not otherwise provide, this chapter governs
relations among the partners and between the partners and the partnership.” (Italics
added.) Evidence that Zlot and Ehrlich did not equally share in management of Access
Management, therefore, does not necessarily defeat Ehrlich’s claim that they formed a
partnership because they could have agreed to an unequal allocation of management
responsibilities—as Ehrlich testified they did.
Our colleagues in Division One previously affirmed an order denying a motion for
judgment notwithstanding the verdict after a jury found an oral partnership agreement
had been created and breached. (Holmes, supra, 74 Cal.App.4th at pp. 452, 459–460.)
Sandra Lerner was an “extremely wealthy” and sophisticated businesswoman; her
personal friend, Patricia Holmes, was not. While Lerner and Holmes were socializing,
Holmes created a nail polish color and named it “Plague.” Together, Lerner and Holmes
came up with similar polish names and a marketing concept, “Urban Decay.” Lerner
suggested they start a company and Holmes agreed. As business development
progressed, Holmes worked without pay and served on the de facto board of directors,
but became increasingly marginalized. She asked to memorialize her partnership
agreement with Lerner, which she understood to be 50/50 co-ownership, and was told she
had at most a 5 percent interest in the company. She then sued, and a jury found inter
alia that Lerner and Holmes had formed a partnership and that Lerner had breached their
agreement and violated her fiduciary duties. (Id. at pp. 445–452.)
The Holmes court found the evidence supported the verdict and rejected Lerner’s
argument that the oral agreement was too indefinite to enforce. “The agreement here, as
duties [between partners] does not preclude the existence of a partnership. One partner
may be given the right of management. [Citations.]” (Constans, at pp. 388–389.)
19
presented to the jury, was that Holmes and Lerner would start a cosmetics company
based on the unusual colors developed by Holmes, identified by the urban theme and the
exotic names. The agreement is evidenced by Lerner’s statements: ‘We will do . . .
everything,’ ‘[i]t’s going to be our baby, and we’re going to work on it together.’ . . . ‘We
will hire people to work for us.’ ‘We will do . . . everything we can to get the company
going . . . .’ The additional terms were filled in as the two women immediately began
work on the multitude of details necessary to bring their idea to fruition.” (Holmes,
supra, 74 Cal.App.4th at pp. 458–459.) “Certainly implicit in the Holmes-Lerner
agreement to operate Urban Decay together was an understanding to share in profits and
losses as any business owners would.” (Id. at p. 457.)
Here, substantial evidence would support a finding that Zlot and Ehrlich formed a
partnership in post-2004 Access Management business. Their Agreement bore several
hallmarks of a partnership: profit sharing, expense sharing, comanagement,
entrepreneurial purpose, and use of the title, “partner.” Zlot and Ehrlich agreed to share
the revenue stream on post-2004 investments 50/50 and they agreed to share 50/50 in the
proceeds of an anticipated sale that derived from post-2004 investments. When the
anticipated sale fell through, they agreed to jointly search for a new merger partner and
share in the proceeds of such a sale on similar terms. When business declined, Ehrlich
shared in company expenses. Zlot and Ehrlich shared management responsibilities in
practice even if Zlot held greater legal authority: they both managed the investment
portfolio and recruited new investors, and they jointly consulted on marketing materials
and personnel decisions. Moreover, the very purpose of Ehrlich’s joining the firm was
entrepreneurial—to build the business in conjunction with Zlot—rather than to provide a
discrete skill or service to the enterprise. Zlot and Ehrlich also represented to others and
each other that Ehrlich held the position of a “partner,” “principal,” and “co-portfolio
manager” at Access Management.
Zlot places great significance on Ehrlich’s lack of formalized equity ownership in
Access Management, his subchapter S corporation, contrasting First Republic’s
documented 24.1 percent interest from 2004 to 2009 in Access Management LLC.
20
However, the terms of Ehrlich’s engagement could reasonably be viewed as granting him
the equivalent of a 50 percent ownership interest in the post-2004 business of Access
Management, by granting him a right to a coequal share in management fees on post-
2004 investments in the Fund. First Republic purchased a formal 24.9 percent ownership
interest in Access Management LLC and received a right to share in the management fees
on all Fund investments. The jury could reasonably have found the benefits were
tantamount to an ownership interest. Notably, when Zlot asked Ehrlich to share in the
expenses of closing a fund during the economic downturn, Ehrlich agreed to do so in
proportion to his financial interest, another indication that his interest was perceived as
tantamount to ownership.
Zlot argues Ehrlich is trying to obtain contract benefits that he failed to negotiate
in the Agreement: a right to share in the Fund revenue stream even after his departure (a
“tail”) and a right to share in the proceeds of a sale or merger even if the anticipated First
Republic deal was not consummated. It is true that the March 2006 e-mail is silent about
what, if anything, Ehrlich was entitled to receive if the First Republic sale fell through.
However, if the jury found Ehrlich and Zlot’s business arrangement to be a partnership,
gaps in the agreement could be supplemented by the UPA and the conduct of the parties.
(See Holmes, supra, 74 Cal.App.4th at p. 457 [“[o]nce the elements of [section 16202,
subdivision (a)’s definition of a partnership] are established, other provisions of the UPA
and the conduct of the parties supply the details of the agreement”].) As stated ante, the
UPA provides default partnership agreement terms where such agreements are silent.
(§ 16103.) If a partner departs and the partnership continues, the dissociated partner must
be paid for his interest in the partnership. (§ 16701.) When a partnership is terminated,
its affairs must be wound up and each partner’s account credited with the partner’s share
of assets remaining after payment of liabilities. (§ 16807.) Thus, the absence of these
terms from the March 2006 e-mail is not necessarily fatal to Ehrlich’s claims.
2. Breach of Employment Agreement
Ehrlich argues that he produced substantial evidence that, if he failed to establish a
partnership with Zlot, he nevertheless had an employment contract that guaranteed him
21
compensation even after he was terminated. The trial court did not expressly address
whether Ehrlich had produced substantial evidence that Zlot breached an employment
contract with him, but impliedly did so in granting a directed verdict on all of Ehrlich’s
claims. The trial court found in its statement of decision that the March 2006 e-mail was
“not susceptible to the interpretation that it entitles [Ehrlich] to a revenue share in
perpetuity,” suggesting that the claim was barred as a matter of law. We conclude the
trial court erred in granting a directed verdict on the claim for breach of an employment
contract.
a. At-Will Contract May Provide for Posttermination Compensation
There is no inherent inconsistency between at-will employment and a
posttermination obligation to pay continuing commissions on sales generated by the
employee during his employment. To the extent the trial court found that the March 2006
e-mail was not susceptible to an interpretation that Ehrlich could receive posttermination
revenue from investments he brought to the fund, we disagree. In Reilly v. Inquest
Technology, Inc. (2013) 218 Cal.App.4th 536 (Reilly), a person with experience and
connections in the high-tech electronic industry (Reilly) agreed to help a start-up
computer hardware company (Inquest) expand. (Id. at pp. 540–541.) The employment
contract provided that “the [ownership] structure of the company” would not be changed
initially, but Reilly would “ ‘be employed by the company and given the title of “Vice
President of Business Development[.”] . . . [¶] . . . ‘It is agreed that any jobs, orders or
contacts that [Reilly] brings to the company that result in orders being placed with the
company . . . , then the profits from these activities will be shared equally with [Reilly].”
(Id. at p. 542.) Reilly attracted a client to Inquest, who placed additional orders after
Reilly had stopped working for Inquest. (Id. at pp. 543–544.) Reilly sued for a
50 percent commission on all orders from that client, including those placed after he left
the company. A jury ruled in Reilly’s favor and awarded him more than $2 million in
damages. (Id. at p. 544.)
The Court of Appeal affirmed. “Inquest makes a factual argument there was no
evidence Reilly was anything more than an ordinary salesperson, hired to get specific
22
orders from [the client] and, therefore, his right to commissions ended with his separation
from the company. Inquest also asserts Reilly asked for the title of vice president of
business marketing simply to help him gain better access to potential customers and not
because he expected a bigger stake in the company’s long-term profits. . . . [¶] By its
plain terms, the agreement created a business relationship contemplating much more than
the hiring of an ordinary salesman. The agreement stated Reilly was expected to grow
the company based on his experience and contacts in the business. As in a partnership,
he was promised 50 percent of the profits from all the business he generated, and he was
promised a greater reward in the future if things went well. . . . The jury properly
interpreted the contract as providing a commission for not only simple one-time orders,
but also for profits generated by longer term jobs and ongoing renewable orders from
new customers.” (Reilly, supra, 218 Cal.App.4th at pp. 555–556.)
Zlot argues that Ehrlich’s construction of the Agreement improperly requires
perpetual performance, citing Nissen v. Stovall-Wilcoxson Co. (1953) 120 Cal.App.2d
316, 319—a case also cited by the trial court in rejecting Ehrlich’s interpretation of the
March 2006 e-mail. The Reilly court acknowledged that “ ‘a contract will not be
construed to call for perpetual performance unless the language of the contract
unequivocally compels such construction.’ [Citations.]” (Reilly, supra, 218 Cal.App.4th
at p. 553.) However, it rejected the argument that a posttermination revenue stream of
indefinite duration is necessarily barred as a perpetual contractual obligation. Under the
court’s construction of the contract with Inquest, Reilly’s “right to receive commissions
was limited to profits that ‘resulted from’ Reilly’s activities. A causal connection was
required and the obligation did not necessarily last indefinitely.” (Reilly, supra,
218 Cal.App.4th at p. 553.) Similarly here, Ehrlich’s right to continue to receive a
50 percent share of management fees on post-2004 investments was of limited duration
even if it continued after his termination date—he would be entitled to receive those fees
only until investments resulting from his efforts were withdrawn from the Access Fund.
(See Lura v. Multaplex, Inc. (1982) 129 Cal.App.3d 410, 413 [“[s]ince respondent’s
obligation to appellant is contingent [on] sales to the accounts he secured, the agreement
23
is of limited duration—until respondent stops selling to those accounts”].) Moreover,
Ehrlich’s right to continued participation in the Access Management revenue stream
faced the practical limitation that Zlot planned to retire and sell the company. In any
event, perpetual obligations are disfavored but not outright prohibited in employment
contracts. (See Schwartz v. Teunisz (1946) 77 Cal.App.2d 258, 263 [interpreting sales
commission contract as “a continuing contract extending even beyond the grave, for it
provided for conditions covering the estates of the parties and even as to the legal
obligations of the ‘heirs, executors, administrators and assigns of each of the parties’ ”].)
Therefore, the fact that perpetual obligations may be disfavored does not defeat Ehrlich’s
employment claim as a matter of law.
Finding no legal prohibition on an at-will employment contract that provides for
posttermination compensation, we consider whether there was substantial evidence that
the Agreement entitled Ehrlich—after involuntary termination—to share in the revenue
stream from post-2004 investments or sales proceeds of the company to the extent those
proceeds were based on post-2004 investments. Assuming the jury found that Ehrlich
failed to prove he and Zlot intended to create a partnership, both parties agree the jury
would have been required to interpret the Agreement as an employment contract.
“The overriding goal of contract interpretation is to give effect to the mutual
intention of the parties at the time of contracting, ‘so far as the same is ascertainable and
lawful.’ (Civ. Code, § 1636.) Faced with contract language that is reasonably
susceptible to more than one meaning, certain general rules of contract interpretation
come into play to aid the court in resolving the ambiguity. (See id., § 1637.) To begin
with, the words of a contract are to be understood in their ordinary and popular sense
unless the parties use them in a technical sense or ‘a special meaning is given to them by
usage . . . .’ (Id., § 1644.) . . . [¶] Further, we can explain a contract by reference to the
circumstances under which it was made, as well as the matter to which it relates. ([Id.],
§ 1647.) . . . [¶] The terms of a writing can also ‘be explained or supplemented by course
of dealing or usage of trade or by course of performance.’ (Code Civ. Proc., § 1856,
subd. (c).) . . . [¶] Extrinsic evidence on all these circumstances and matters can be
24
offered [not only] where it is obvious that a contract term is ambiguous, but also to
expose a latent ambiguity.” (Southern Pacific Transportation Co. v. Santa Fe Pacific
Pipelines, Inc. (1999) 74 Cal.App.4th 1232, 1240–1241.) Because the 2006 e-mail was
not an integrated writing (i.e., did not purport to be a complete and final expression of the
Agreement’s terms), the jury could rely on extrinsic evidence to infer that the parties
agreed to different or additional terms than were expressed in the e-mail. (See
Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013)
55 Cal.4th 1169, 1174.) The jury was also free to infer unwritten terms as necessary to
effectuate the parties’ mutual intent. (See Dameron Hospital Assn. v. AAA Northern
California, Nevada & Utah Ins. Exchange (2014) 229 Cal.App.4th 549, 569–570.)
Employment is statutorily presumed to be at-will, that is, terminable by either
party at any time with or without cause. (Guz v. Bechtel National Inc. (2000) 24 Cal.4th
317, 335.) However, as discussed ante, even an at-will employment contract may require
an employer to pay posttermination compensation. It is undisputed that at the time the
parties made their Agreement they did not discuss whether Ehrlich would be entitled to
posttermination compensation or whether he would be entitled to alternative
compensation if the First Republic deal fell through. They did not consider either
possibility because the evidence indicated they both expected Ehrlich would work for
Access Management until the company was sold to First Republic in 2009. Zlot testified
that he believed he had the power to terminate Ehrlich under their original Agreement, at
which point Ehrlich’s right to compensation would cease. Ehrlich testified that he
understood the Agreement to entitle him to 50 percent of fees on investments made
during his tenure at Access regardless of whether he left the company, just as Zlot was
entitled to 50 percent of those fees even if he retired.
While a contrary conclusion might be equally justified by the evidence, a jury
could find that the Agreement provided that Ehrlich was entitled to 50 percent of the
present and future value generated by post-2004 investments in the Access Fund,
regardless of whether he was terminated or the First Republic sale occurred. According
to Andreini, it was not uncommon for hedge fund industry employees to have “tail”
25
agreements entitling them to compensation after their departure from a firm. Thus, an
interpretation of the Agreement that Ehrlich was entitled to posttermination compensation
based on assets under management at the time of his departure would be consistent with
industry practice.18
Zlot argues that the plain language of the March 2006 e-mail—that Ehrlich and
Zlot would “[s]plit all gross revenue on new capit[a]l invested in the Access Fund
Management LLC by new and existing investors from January 1, 2005[. T]his shall be
paid against the $150,000 base salary” (italics added)—expressly tied Ehrlich’s right to
share in management fees to his entitlement to receive a salary, which in turn was tied to
continued employment at Access Management. The base salary provision, however,
merely guaranteed Ehrlich minimum compensation during a time when he was actively
engaged in management and in generating new business for the company. Following his
termination, he was no longer required to provide services to Access, but his share of
management fees could only remain constant or decrease.
The evidence also could support a jury conclusion that Zlot and Ehrlich agreed to
an oral modification of the Agreement’s terms to include compensation in the event “of
any succession and merger” with a different purchaser if the First Republic acquisition
was not viable. Ehrlich testified that Zlot agreed in early 2009, and again after Zlot’s
mid-2009 buyback of the First Republic interest in Access, that Ehrlich would participate
in an alternative merger deal and that neither agreement was contingent upon Ehrlich’s
procurement of a merger partner.
b. Breach of Implied Covenant of Good Faith and Fair Dealing
A jury could also find that Zlot breached the covenant of good faith and fair
dealing in his employment contract with Ehrlich. “ ‘ “Every contract imposes upon each
18
Ehrlich does not contend that he was entitled to the base salary after his
termination from the company, nor does he contend that he was entitled to a share of
management fees on investments made after his termination. The parties only dispute
whether, following his termination, Ehrlich was entitled to a share of management fees
on investments that had been made while he worked at Access Management.
26
party a duty of good faith and fair dealing in its performance and its enforcement.”
[Citation.] . . . ’ [¶] . . . [¶] [T]he scope of conduct prohibited by the covenant of good
faith is circumscribed by the purposes and express terms of the contract. [Citations.]”
(Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., 2 Cal.4th 342,
371, 373.) For the implied covenant to be imposed, “ ‘ “the implication must arise from
the language used or it must be indispensable to effectuate the intention of the parties; . . .
[and] it must appear from the language used that it was so clearly within the
contemplation of the parties that they deemed it unnecessary to express it . . . .” ’
[Citations.]” (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 804.)
Zlot argues the implied covenant cannot help Ehrlich here because it cannot create
terms that have no foundation in the parties’ actual agreement. However, the jury could
have found on the trial evidence that a material element of the inducement for Ehrlich to
join Access Management was Zlot’s promise that Ehrlich would share in any equity he
created in the company when it was sold or merged. A jury could find that Zlot breached
the implied covenant by forcing Ehrlich out of the company on a pretext and then within
a few months arranging a deal from which Ehrlich was excluded.
c. Breach of Contract Damages
Zlot suggests on appeal that Ehrlich incurred no damages from the alleged breach
of his employment contract because Ehrlich ultimately earned more following his
termination than he had while working with Access Management. Ehrlich, however,
presented evidence that his posttermination earnings were not derived from regular
employment but from entrepreneurial activity that he would have been able to pursue
even if still engaged at Access Management. In any event, we have concluded the
evidence supported a finding of entitlement to posttermination compensation regardless
of other employment.
d. Fraud, Negligent Misrepresentation, and Promissory Estoppel
Ehrlich’s claims for fraud, negligent misrepresentation and promissory estoppel all
required proof of detrimental reliance. (See McClain v. Octagon Plaza, LLC (2008)
159 Cal.App.4th 784, 792–793 [fraud and negligent misrepresentation]; Toscano v.
27
Greene Music (2004) 124 Cal.App.4th 685, 692 [promissory estoppel].) The trial court’s
statement of decision does not expressly address the fraud and negligent
misrepresentation claims, but explains that a directed verdict on the promissory estoppel
claim was based in part on Ehrlich’s failure to prove detrimental reliance. Ehrlich argues
on appeal that Zlot induced him to leave Merrill Lynch by promising him a share of the
First Republic sale and thereafter induced him to stay at Access Management by
promising him a share in a substitute deal. However, Ehrlich cites no evidence in the
record that he would have earned more money or received greater benefit if he had stayed
at Merrill Lynch or left Access Management before his termination. Therefore, we agree
with the trial court that Ehrlich failed to produce evidence of detrimental reliance and
accordingly affirm the trial court’s grant of directed verdict on all three of these claims.
3. Equitable Claims
In adjudicating the equitable claims, the court’s statement of decision made
several findings of material fact which also were central to Ehrlich’s legal claims. The
court erred in doing so.
The findings, adopted largely in the form submitted by Defendants, not
surprisingly recite the evidence in the light most favorable to Defendants. To make those
findings, the court did precisely what it may not do in these circumstances—it weighed
and evaluated conflicting evidence, assessed the credibility of testimony, and ignored or
rejected evidences and inference favorable to Ehrlich. If the court believed Ehrlich’s
evidence was not reliable or credible and preponderated against the verdict, it retained the
power to grant a new trial in the event of a plaintiff’s verdict, notwithstanding substantial
evidence. (Estate of Lances, supra, 216 Cal. at p. 401 [“[a]lthough the trial court may
weigh the evidence and judge of the credibility of the witnesses on a motion for a new
trial, it may not do so on a motion for a directed verdict”].)
And while the court is entitled to make its own findings on trial of purely equitable
issues, it may not do so where the legal issues are tried first and where the facts are, or
should have been, decided by the jury. The jury’s factual findings on legal causes of
action would bind the trial court when granting ancillary equitable remedies based on the
28
same facts. (Hoopes v. Dolan (2008) 168 Cal.App.4th 146, 159–161.) Because we found
a directed verdict was improperly granted as to all but three causes of action, the factual
predicates for resolution of the equitable claims have not been provided and judgment as
to those claims must necessarily be vacated pending a jury determination of the facts.
C. Motion to Tax Costs
Because we vacate the judgment, the trial court’s award of costs to Defendants
must also be vacated. Accordingly, Ehrlich’s appeal of the order denying his motion to
tax costs is dismissed as moot.
III. DISPOSITION
As to appeal No. A139567, the judgment and award of costs are vacated. The
order granting a directed verdict is reversed except as to the claims for fraud, negligent
misrepresentation, and promissory estoppel. Appeal No. 139829 regarding the order
denying Ehrlich’s motion to tax costs is dismissed as moot. Defendants shall bear
Ehrlich’s costs in appeal No. A139567, and the parties shall bear their own costs in
appeal No. A139829.
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_________________________
BRUINIERS, J.
WE CONCUR:
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JONES, P. J.
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NEEDHAM, J.
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