Filed 1/13/21 Verotel Merchant Services B.V. v. Rizal Commercial Bank CA2/4
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
VEROTEL MERCHANT SERVICES B276120 consol’d. with B281869
B.V., et al.,
(Los Angeles County
Plaintiffs and Appellants, Super. Ct. No. BC467109)
v.
RIZAL COMMERCIAL BANK, et al.,
Defendants and Appellants.
APPEAL from a judgment and post judgment orders of the Superior
Court of Los Angeles County, Michael J. Raphael, Judge. Affirmed.
David Steiner & Associates, David Paul Steiner; Rome & Associates,
Eugene Rome; Greines, Martin, Stein & Richland, Robert A. Olson and Gary
J. Wax for Plaintiffs and Appellants.
Bahar Law Office, Sarvenaz Bahar for Defendants and Appellants.
INTRODUCTION
This appeal involves multiple entities engaged in processing internet
credit card purchases in three roles: a merchant, a bank, and an intermediary
agent between them. Defendant Bankard, Inc. (Bankard) is a banking
institution based in the Philippines. Bankard, together with its parent,
defendant Rizal Commercial Banking Corporation (Rizal),1 acted as the bank
in processing credit card transactions for internet merchants between 2004
and 2006.
Plaintiff Verotel Merchant Services B.V. (VMS), together with its
Philippines-based subsidiary, Verotel International Industries, Inc. (VII),
operated as a merchant, sending internet credit card purchases to accredited
banks for processing and payment. Plaintiffs contend that VMS sent its
credit card transactions to defendants for processing from 2004 to 2006, using
an agent of the bank as an intermediary to handle the transactions. Thus,
VMS sent credit card purchases made on its websites through the agent to
the bank, the bank received payment for those purchases from the credit
cardholder’s own bank, and the bank paid VMS for the purchases. For its
services, the bank charged VMS transaction fees and subtracted these fees
from the payments sent to VMS.
For most of the relevant period, Janet Conway acted as an
intermediary in VMS’s transactions with the bank. In addition, several
entities she owned or controlled performed various services in connection
with the bank’s card processing services. Plaintiffs contend they believed
Conway was working as an agent of the bank. After the credit card
Associations suspended defendants’ online processing business in 2006 for
violating their rules, plaintiffs discovered that the bank’s transaction fees
were actually lower than the rate Conway had represented, and Conway had
pocketed the difference.
Plaintiffs sued defendants, alleging that defendants used Conway and
the entities she owned to manage their online credit card processing business
and were therefore liable for her actions. Plaintiffs alleged they were
1Theparties largely treated Bankard and Rizal as a single entity in this
case. We refer to them collectively as “defendants” or “the bank.”
2
damaged in the amount of almost $1 million in unpaid fees. Plaintiffs also
contended defendants failed to repay other money owed, resulting in a total
claim of $1.5 million in damages.
For their part, defendants contend that Conway was never defendants’
agent, but rather acted as plaintiffs’ agent while defrauding the bank.
Defendants also claim that they never had any relationship or agreement
with VMS. Instead, they assert that VMS and Conway knowingly submitted
VMS’s transactions under a contract Bankard had with a different merchant,
Grupo Mercarse Corp. According to defendants, they paid Grupo Mercarse
for those transactions, and if VMS suffered losses while acting improperly as
a sub-merchant in violation of the Associations’ rules, that was not the bank’s
responsibility.
The jury found in favor of plaintiffs on all causes of action and awarded
VMS compensatory and punitive damages. Defendants filed a motion for
judgment notwithstanding the verdict (JNOV) and for a new trial. The court
granted the motion for JNOV in part, striking the punitive damages award,
but denied the remainder. The court also awarded cost of proof sanctions
against defendants under Code of Civil Procedure section 2033.4202 for
several factual denials made by defendants during discovery.
Defendants appealed from the entry of amended judgment and the trial
court’s order awarding sanctions. Plaintiffs appealed from the court’s order
striking the punitive damages award. We consolidated the appeals for all
purposes.
In defendants’ appeal, they contend that the statute of limitations bars
plaintiffs’ claims and that VMS lacks standing to sue. They further argue
that there was insufficient evidence of agency or causation to support the
jury’s verdict and that the trial court erred in making several evidentiary
rulings at trial. Finally, they assert that the trial court abused its discretion
in awarding cost of proof sanctions against them. In plaintiffs’ appeal, they
contend that the court erred in overturning the jury’s award of punitive
damages, as there was sufficient evidence that Conway was a managing
agent for defendants.
2Allfurther statutory references are to the Code of Civil Procedure
unless otherwise indicated.
3
We conclude neither party has met its burden to establish error. We
therefore affirm.
FACTUAL AND PROCEDURAL HISTORY
I. Structure of Online Credit Card Transactions
The rules governing credit card purchases are set by credit card
associations/networks Visa and MasterCard (the “Associations”); these rules
set “the infrastructure under which all the transactions flow.” In general,
there are four parties to every credit card transaction: (1) the credit card
holder (the consumer); (2) the issuing bank (the cardholder’s bank); (3) the
merchant; and (4) the acquiring bank (the merchant’s bank). An acquiring
bank must be a member of the Associations in order to process credit card
payments; in return, the bank agrees to abide by the Associations’ rules.
When a consumer makes a purchase using a credit card, the acquiring bank
acquires the credit card transaction, pays the merchant (minus fees and
charges), and receives payment from the cardholder’s issuing bank (which, in
turn, charges the consumer).
The Associations’ rules require acquiring banks to have written
merchant agreements with each merchant from whom it acquires
transactions, which are called tripartite merchant agreements (TMAs). The
bank then issues a merchant identification number (MID) to a merchant to
allow the merchant to submit transactions for processing and allow the bank
to track those transactions. In exchange for its processing services, the bank
charges the merchant a transaction fee—here, a set percentage of the
transaction amount as well as a per-transaction charge. The bank deducts
these fees from the amount it pays the merchant; thus, the merchant receives
less than the face value of the transaction.
If a customer seeks a refund for a purchase (also called a “chargeback”),
and the merchant does not issue a refund, the acquiring bank is responsible.
Accordingly, the bank may hold a certain amount in reserve from the
merchant in order to cover any refunds. Also, if a merchant engages in illegal
or “brand damaging” transactions, it could result in a fine from the
Associations to the acquiring bank, which the bank may pass on to the
merchant.
4
The acquiring bank may use intermediaries as agents to handle some
components of this process. These third parties are called independent
service organizations (ISOs) or member service providers (MSPs)3 and must
be registered in this role with the Associations. Under the Associations’
rules, some duties cannot be delegated to an ISO and must be performed by
the member bank. Such non-delegable duties include settlement (i.e.,
payment for transactions) and approval of merchants for processing. Aspects
of the merchant-bank relationship that can be delegated to a registered ISO
include routing transactions for processing from the merchant to the bank.
Purchases made with a credit card online or over the telephone are
called “card-not-present” purchases, as the merchant does not physically view
the credit card. This type of purchase carries a higher risk for fraud, because
the merchant cannot confirm the cardholder’s identity. As such, fewer banks
are willing to process card-not-present transactions, and those that do charge
higher fees.
II. The Parties
Plaintiff VMS is a Netherlands corporation that operates as an internet
payment service provider, providing payment services for merchants selling
content on websites. Plaintiff VII is a Philippines corporation and, according
to plaintiffs, is VMS’s wholly-owned subsidiary. According to plaintiffs, from
2004 to 2006 VMS acted as the merchant in a processing relationship with
defendants, sending transactions from VMS’s websites to the bank through
the bank’s ISO.
Defendant Rizal is a Philippines corporation and a member of the
Associations. Defendant Bankard is a Philippines corporation and Rizal’s
wholly-owned subsidiary. Defendants processed card-not-present
transactions from 2004 through October 2006, when its processing rights
were suspended by the Associations for various violations of the Associations’
rules.
III. The Parties’ Claims and Pleadings
A. Overview of Claims
Although they do not expressly acknowledge any agreement, both
parties’ pleadings alleged misconduct by Conway and related third parties,
3These terms were used interchangeably throughout trial.
5
none of whom were ultimately involved in the litigation. Both plaintiffs and
defendants contend that defendants’ card-not-present processing business
began as a proposal by Conway and two associates, Michael Conway,4 and
Simoun Ung, to use several of their companies as intermediaries between
defendants and merchants. Sometime between 2003 and 2005, Conway,
Michael, and Ung presented defendants with a business model in which CNP
Worldwide, Inc. (CNP) would act as Bankard’s official ISO for its card-not-
present processing business, conducting merchant solicitation, customer
service, and other services for Bankard. As alleged by defendants, under this
business model, CNP would act as the “hub in a wheel,” surrounded by other
companies acting as “independent third party providers of services” for CNP
and Bankard. These companies included Merchant Risk Recovery, Inc.
(MRRI), which vetted new merchants proposed by CNP; Grupo Mercarse,
which acted as the merchant; and its affiliate, MerCarSe, which handled
payment from the bank to merchants. The parties also both alleged that
Conway, Michael, and Ung owned and controlled Grupo Mercarse, MerCarSe,
and MRRI. The parties agree that Ung served as CNP’s chief executive
officer. Plaintiffs contend that Conway also owned or controlled CNP, which
defendants dispute.
Defendants claim that they agreed to participate because the business
model was presented as a legitimate, “‘profitable, self-sustaining business
conceptual product’ with the necessary third party quality control and risk
assessment servicing entities.” As such, defendants claim they were unaware
that Grupo Mercarse, MerCarSe, and MRRI shared ownership or that “they
were self-dealing and acting in direct contrast to the interests of Bankard and
innocent third parties.”
While the parties dispute who knew what and when they knew it, they
agree that the shared ownership and control of these entities was
problematic. It enabled Conway and her associates to both solicit and
“independently” vet new merchants, including Conway’s own company Grupo
Mercarse, which functioned as a “master merchant” between the bank and
numerous sub-merchants. Similarly, it allowed Conway to control
4We refer to Michael Conway by his first name to avoid confusion. He
is described in the record as either Conway’s husband or stepson.
6
distribution of all payments made by the bank through MerCarSe.
Ultimately, this allowed Conway to abscond with funds due to merchants,
including plaintiffs.
However, the parties dispute key factual issues. Defendants contend
that all of the transactions at issue here were processed under two
agreements. First, there was a TMA signed in February 2005 among the
bank, Grupo Mercarse as the merchant, and CNP as the ISO (the Grupo
TMA). Second, there was a TMA among the bank, VII as the merchant, and
Grupo Mercarse as the ISO (the VII TMA), which plaintiffs signed in
December 2005. The bank never signed the VII TMA. It later claimed this
was because the TMA contained several “clerical” errors, including the listing
of Grupo Mercarse, rather than CNP, as the bank’s ISO. We discuss the
relevant provisions of these agreements further below.
Defendants contend that prior to the VII TMA, they processed and paid
for all relevant transactions under the Grupo TMA. They assert that VMS’s
claims for losses relating to those transactions are improper, as VMS was
improperly “aggregating” its transactions under Grupo Mercarse’s contract at
the time. Further, defendants contend that they acted properly under the VII
TMA, because Bankard sent payment for those transactions to MerCarSe’s
bank account, in full compliance with the terms of the VII TMA. As to
Conway’s theft of money owed to plaintiffs under either of these agreements,
defendants contend they are not responsible, because Conway actually was
acting as plaintiffs’ agent and defendants performed their duties under the
TMAs.
For their part, plaintiffs dispute that they submitted their transactions
under the Grupo TMA. Instead, they contend they had a direct processing
relationship with defendants starting in 2004 and continuing unabated
through 2006, altered only to the extent that Conway secured them a reduced
processing rate in mid-2005. Plaintiffs also contend that defendants
improperly delegated the entire operation of the card-not-present processing
business to Conway and her companies, in violation of the Associations rules.
In doing so, the bank used Conway and her companies as its agents, thus
enabling Conway first to solicit plaintiffs’ business and then to steal
plaintiffs’ funds. In addition to the money stolen by Conway, plaintiffs
7
contend defendants failed to repay some of their reserves upon termination of
the relationship.
B. Complaint
Plaintiffs filed their complaint on August 8, 2011 against Rizal,
Bankard, Grupo Mercarse, CNP, Ung, and CNP employee Joy Martinez.5
They alleged causes of action for fraud, breach of contract, breach of the
implied covenant of good faith and fair dealing, money had and received,
accounting, conversion, unjust enrichment, and breach of trust. They
attached to the complaint a copy of the VII TMA, signed by Paul
Kraaijvanger as president of VII.
Plaintiffs filed a first amended complaint (FAC) in June 2013, adding a
ninth cause of action for negligence against Bankard and Rizal. In the FAC,
plaintiffs alleged that VMS had been “an internet payment service provider
for websites on the internet since 1997.” Plaintiffs alleged that Bankard
began processing transactions for VMS in October 2004 “without a written
agreement in place.” In 2005, based on instructions from Conway, VMS
incorporated affiliate VII in the Philippines to serve as the merchant of
record with Bankard. VII then signed the VII TMA with Bankard,
designating VII as the merchant, Bankard as the member bank, and Grupo
Mercarse as the bank’s agent. Plaintiffs later learned that Bankard refused
to sign the VII TMA because of “glaring defects” in the agreement, including
the designation of Grupo Mercarse as the agent when it was not registered to
serve that function, and the designation of MerCarSe as the payee for all
funds due to plaintiffs. However, Bankard “proceeded to act under the very
agreement it rejected, because it processed Plaintiffs’ transactions and paid
out all proceeds” to MerCarSe.
The FAC alleged that MasterCard issued several warnings to Bankard
that ISOs were not allowed to control merchant funds. On September 20,
2006, MasterCard terminated Bankard’s accreditation for card-not-present
processing, “as a result of its repeated violations” of the Associations’ rules.
Plaintiffs claimed defendants improperly retained possession of over $1.5
5Plaintiffs
ultimately dismissed Grupo Mercarse, CNP, Ung, and
Martinez without prejudice from their complaint. It does not appear that any
of these defendants ever appeared in the case.
8
million of plaintiffs’ funds and ignored plaintiffs’ requests to return the
money after the processing relationship ended. Plaintiffs also sought
punitive damages.
C. Cross-Complaint
Rizal filed a cross-complaint in June 2012 against plaintiffs,
Kraaijvanger, Ung, Grupo Mercarse, CNP, MerCarSe, MRRI, Conway,
Michael, and multiple other individuals and entities. The cross-complaint
alleged, in pertinent part, that Conway was a “shareholder, director and/or
officer” of MerCarSe, MRRI, and Grupo Mercarse, and that those companies
shared the same shareholders, directors, officers, and employees. Defendants
also alleged that all of the cross-defendant entities were “own[ed], operated
and controlled by Conway, Michael, and Ung” and were their alter egos.
Conway, Michael, and MRRI moved to quash service of the summons
and cross-complaint. The court granted the motion in August 2013,
dismissing them as cross-defendants. Based on the evidence before it, the
court found that defendants failed to meet their burden to establish personal
jurisdiction over Conway, including by failing to show that Conway was ever
an officer, director, shareholder, or employee of Grupo Mercarse.
Defendants moved to amend their cross-complaint in August 2013 to
add Bankard as a cross-complainant and to correct “factual allegations to
conform to the evidence learned during discovery and in the course of
litigation.” The court granted the motion and defendants filed an amended
cross-complaint. Defendants again alleged that Conway was an officer,
director, or shareholder of MerCarSe, MRRI, and Grupo Mercarse.
Defendants alleged causes of action for accounting and breach of
fiduciary duty against plaintiffs and Kraaijvanger, and for fraud, conversion,
breach of fiduciary duty, accounting, promissory estoppel, and unjust
enrichment against the other cross-defendants. Defendants alleged that as
instructed by the Grupo TMA and VII TMA, they sent payments owed to
merchants Grupo Mercarse and VII under the agreements to MerCarSe’s
bank account. Defendants further alleged that unbeknownst to them,
Conway and MerCarSe diverted these funds and did not pay the merchants
and/or commingled funds “which prevented them from properly making the
correct payments to the correct entities.” As a result, defendants were sued
9
in “multiple lawsuits” and were exposed to claims from “merchants and sub-
merchants on the various TMAs.” Defendants alleged that Conway, Michael
Conway, and Ung intentionally designed their business model as an
“intricate Ponzi Scheme,” misrepresenting the nature and legitimacy of their
businesses to defendants and inducing defendants to enter into the TMAs.
Defendants sought an accounting from plaintiffs and claimed plaintiffs
had breached their fiduciary duties to properly account for their merchant
funds and to “properly supervise their agent [MerCarSe]’s handling and
management of such monies.” The court granted plaintiffs’ motion for
summary judgment on the cross-complaint in July 2014. The remaining
cross-defendants were ultimately dismissed or had defaults entered against
them.
IV. Pretrial proceedings
Defendants filed a motion for summary judgment in 2013 arguing,
among other things, that VMS lacked standing to sue and the complaint was
untimely under the applicable statutes of limitations. The court denied
summary judgment, finding triable issues of material fact as to VMS’s
standing and the statute of limitations.
Trial was scheduled to begin in December 2014. After a mistrial,6 the
second trial began in January 2016.
V. Evidence at Trial
Plaintiffs proceeded to trial against Bankard and Rizal on six causes of
action: fraud, conversion, money had and received, negligence, breach of
contract, and breach of the covenant of good faith and fair dealing. Plaintiffs
called as witnesses Joost Zuurbier and Paul Kraaijvanger, VMS’s co-
presidents; Oscar Biason, Rizal’s president and chief executive officer; Rafael
Reyes, Bankard’s executive vice-president and chief operating officer;
Bankard employees Mylene Bico and Jane Andeza; and expert Kenneth
Musante. In addition to eliciting evidence through these witnesses,
defendants called experts Matthew Talbot and Justice Jose Vitug. Justice
6During voir dire, the trial judge declared a mistrial and recused
herself, based on misconduct of plaintiffs’ counsel related to a mandatory
settlement conference.
10
Vitug, an associate justice of the Supreme Court of the Philippines, testified
to the court outside the presence of the jury on issues of Philippine law.
A. Bankard begins processing card-not-present transactions
Biason testified that Bankard became licensed as an acquiring bank for
card-not-present transactions in 2004. Reyes testified to the online payment
processing business model proposed to Bankard by Conway, Michael, and
Ung. Under this proposal, the trio offered to research potential merchants for
Bankard, perform audit and quality control services, and ensure payment
remittance was properly conducted. Bankard then used CNP to identify and
solicit merchants for the processing business. CNP, in turn, hired MRRI, and
Conway, its owner, to investigate potential merchants that CNP brought to
Bankard. CNP contracted with MRRI and submitted MRRI’s investigative
reports to Bankard, which Bankard used in granting final approval of
merchants. Bankard did not investigate MRRI or Conway before using them;
instead, it relied on CNP to have done so.
Bico, a Bankard employee, testified that CNP was initially a merchant
with Bankard but simultaneously functioned as an agent, referring other
merchants to the business. Bankard was new to the business and confused
about the terminology at the time. After CNP was cited by MasterCard for
not being registered as an ISO, Bankard registered CNP and signed an
agency agreement in February 2005.
B. VMS starts sending transactions to Bankard for processing
Zuurbier, the co-president of VMS, testified that VMS as a merchant
started sending transactions to Bankard for processing in October 2004
through Gary Broadner, who said he was an agent for Bankard. VMS’s
system would send transactions to CNP (acting as the ISO) and then receive
an authorization code identifying the transaction as authorized. VMS needed
a MID number from the bank in order to process transactions. Bankard gave
VMS a MID number through Broadner in 2004.7
7With respect to whether there was a written agreement between
plaintiffs and defendants prior to the VII TMA, Kraaijvanger testified that
“at some point there was an earlier agreement” but acknowledged that
plaintiffs did not produce any such agreement in the litigation.
11
Starting in 2004, VMS submitted sales from its TicketsClub websites
for processing with Bankard. During this time period, VMS was operating
TicketsClub as a brand for its websites, selling tickets to shows. Zuurbier
testified that the bank paid VMS weekly for these transactions by depositing
funds into its bank account at Rabo Bank in the Netherlands.
Defendants claimed that VMS was submitting TicketsClub
transactions in 2004 and 2005 under Grupo Mercarse’s MID and without a
separate merchant agreement between VMS and Bankard. Biason testified
that Grupo Mercarse represented that it owned the TicketsClub website and
Bankard therefore processed those transactions under Grupo Mercarse’s
merchant account and paid it as the merchant. He asserted that defendants
did not know VMS claimed to own TicketsClub until after litigation began.
Kraaijvanger denied that VMS was submitting its TicketsClub
transactions as a sub-merchant under Grupo Mercarse. He acknowledged
that VMS was processing transactions for other merchants in 2004, and
therefore was “aggregating” those transactions and sending them to the bank
under VMS’s merchant account. However, Kraaijvanger contended this
practice complied with the Associations’ rules at the time. He stated that
VMS was never contacted by the bank with complaints about improperly
aggregating.
C. The Grupo TMA
One of the merchants CNP proposed to Bankard was Grupo Mercarse.
Bankard signed the Grupo TMA in February 2005 with CNP as the agent,
and Grupo Mercarse as the merchant. The agreement included an affiliate
personal guaranty agreement, with MerCarSe as the designated affiliate,
signed by Conway as the guarantor.
Grupo Mercarse sent transactions from over 100 websites to Bankard
for processing, out of a total of 124 websites handled by Bankard between
2004 and 2006. Reyes testified that Bankard understood that these websites
were all owned by Grupo Mercarse, pursuant to the Grupo TMA. But he also
acknowledged his prior deposition testimony that the websites were sub-
merchants of Grupo Mercarse, and that Grupo Mercarse’s function was to
distribute the money paid by Bankard to these sub-merchants. Reyes
insisted that Bankard fulfilled its obligations under the Grupo TMA by
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paying Grupo Mercarse as the merchant. He testified that whether or how
Grupo Mercarse paid its sub-merchants was “not our concern.”
As set forth in the payment service schedule in the Grupo TMA, the
bank charged a transaction fee rate of 3.35 percent and a per transaction
charge of $0.10. The payment provision, paragraph 2.4, provided that all
money owed to the merchant would be paid by the bank “to the bank account
in the name of the MERCHANT that is to be specified in writing
(‘MERCHANT’s Account’).” Grupo Mercarse directed Bankard to send
payment for all of the websites processed under this agreement into a single
MerCarSe bank account.8 Reyes testified that this did not violate any of the
Associations’ rules, as long as the payment did not go to a registered ISO and
went to a third party as directed by the merchant in the TMA. According to
an investigative report prepared by MRRI, Bankard knew that Conway was
the president of MerCarSe.
D. VMS switches from Broadner to Conway
In the summer of 2005, Conway approached VMS on behalf of
Bankard.9 Zuurbier testified that Conway showed him marketing materials
for Bankard and told him she could lower the transaction fees Bankard was
charging VMS by two percent, but nothing else would change. VMS agreed,
and began sending its transactions for processing through Conway to the
bank in October 2005. The bank continued to pay VMS for those transactions,
deducting the lower rate of transaction fees as Conway had promised.
Zuurbier testified that the bank paid VMS weekly, minus the newly reduced
8Defendants contend this request was made through submission of
affiliate boarding requests, which served as the “written directive to Bankard
where and to whom and under whose credit payments from the TMAs should
be made.”
9 During cross-examination, Zuurbier acknowledged that VMS worked
with Conway on at least two occasions unrelated to the Bankard relationship:
once in 2003 when she connected VMS with a bank in the Caribbean, and
once around 2009 when VMS hired her to collect on a Korean processor that
did not pay. Kraaijvanger testified that in his experience, agents such as
Conway would have relationships with, and serve as agents for, multiple
banks.
13
transaction fees of 4.5 percent plus $0.20 per transaction. These payments
matched the weekly statements VMS received from Conway and MerCarSe.
Zuurbier testified that he never considered Conway to be VMS’s agent.
Instead, he believed that “an agent in this business is always more the
external salesperson for an acquiring bank trying to use his or her
relationships to get transaction processing going” and that is what Conway
did by acting as the “liaison” between VMS and the bank.” According to
Zuurbier, VMS decided to work with Conway because he believed she was the
bank’s representative, as evidenced by the fact that she was able to provide
valid MID numbers to VMS so it could send transactions to defendants.
Kraaijvanger also testified that he “absolutely” viewed Conway as an agent of
Bankard, because she successfully negotiated lower transaction fees for VMS
with the bank and he did not think “anybody else, except for somebody that
represents that bank, can actually physically change” the amount of
transaction fees the bank charged.
Biason denied that Conway was the bank’s agent. He testified that the
bank did not use individuals as agents, and it used only CNP for card-not-
present transactions. He also denied that Grupo Mercarse ever acted as the
bank’s agent, claiming it was only a merchant and sent in transactions for
websites it claimed it owned.
E. Formation of VII
In December 2005, Conway told VMS that it needed to set up a
company in the Philippines to comply with Bankard’s license.10 Zuurbier
testified that Conway told him it was a formality, nothing would change, and
that she and CNP would set up the company for VMS. Conway told him that
she “ordered another agency to incorporate or change the name of an existing
company and put the ownership in our name for compliance reasons of the
bank with Mastercard.” This Philippines entity was VII. According to
Conway, nothing else had to be done to open VII. Meanwhile, VMS continued
10Asplaintiffs’ expert explained, the Associations’ rules against “cross-
bordering” required that merchants work with a member in the same region
where the merchant is domiciled. Thus, for VMS to process transactions with
Bankard, located in the Philippines, VMS needed to have a presence in the
Philippines.
14
to send transactions to Bankard and receive weekly payments in return.
Conway provided weekly processing reports to VMS, which showed the
payments from the bank coming through MerCarSe to VMS’s account at
RaboBank. Kraaijvanger testified that VMS never moved any accounts to
VII or opened any offices under VII’s name, and VMS’s processing continued
unchanged.
F. The VII TMA
1. Plaintiffs sign the agreement
Conway asked VMS in December 2005 to sign a written processing
agreement between VII and Bankard. Kraaijvanger signed the VII TMA on
December 22, 2005 as president of VII. Zuurbier testified that he understood
the agreement pertained to VMS, not VII, because “we were sending in the
transactions as VMS.” Zuurbier testified that he saw the agreement as a
formality to reflect the lower transaction fees the bank had been charging
VMS since October. Nothing changed after VMS signed the TMA; it
continued to send its transactions for processing to CNP, and VMS continued
receiving payment for those transactions into its bank account at RaboBank.
VMS sent the signed VII TMA to Conway. Although VMS never
received a signed copy of the VII TMA from the bank, Kraaijvanger testified
that VMS continued to trust Conway as a bank representative because the
transactions continued to flow on an uninterrupted basis, which he took to
mean “that everything is in good standing.”
2. Relevant provisions
Two versions of the VII TMA were introduced at trial—one version that
VMS reviewed and signed and one that the bank received from Conway, but
never signed.
The provisions of the agreement itself were the same on both versions.
The agreement listed three parties: Bankard as the member bank, VII as the
merchant, and Grupo Mercarse as the agent. Kraaijvanger testified that this
was consistent with his understanding of the relationship between Grupo
Mercarse and Bankard. The agreement further stated that “AGENT and
MEMBER [i.e., the bank] each desire that AGENT perform services, on
behalf of MEMBER,” and that under the agreement, “the AGENT is the
15
exclusive agent of the MEMBER; [and] the MEMBER is at all times and
entirely responsible for, and in control of, AGENT[’s] performance.”
The agreement also provided that Bankard would hold cash reserves of
10 percent of gross sales volume as security against any merchant liabilities,
to be repaid to VII on a rolling basis after six months. Upon termination of
the relationship, Bankard would retain the money in the merchant’s reserve
account for “a minimum period of six months” and thereafter repay the
balance in the account according to a specified schedule. The agreement
restricted the agent from “access, directly or indirectly, to any account for
funds or funds due to MERCHANT and/or funds withheld from MERCHANT
for chargebacks arising from, or related to, performance of this
AGREEMENT.” The agreement also barred Bankard from assigning or
transferring to its agent the obligation to pay or reimburse the merchant
under the agreement.
The payment provision, paragraph 2.4, stated that all money owed to
the merchant (VII) under the agreement would be paid weekly “from
MerCarSe’s account in the Merchant’s name at MerCarSe,” and further that
Bankard would deduct any applicable Philippine taxes from its payments to
VII. This provision notably differed from the payment paragraphs contained
in both the Grupo TMA and a template TMA that Mastercard had approved
for use when it approved CNP as the bank’s ISO in 2005.11 Specifically, the
VII TMA directed Bankard to pay MerCarSe, rather than VII, and omitted
the language requiring payment to be made “by the MEMBER” (Bankard).
In addition to directing payment to be made by MerCarSe, paragraph 2.4 of
11Both the Grupo TMA and the template contained a payment provision
providing that all money owed to the merchant will be paid by the member
bank “to the bank account in the name of the MERCHANT that is to be
specified in writing (‘MERCHANT’s Account’). Payment will be made by the
MEMBER, except in those cases where 1) funds are not settled by the
AGENT processor and/or member due to technical delays outside AGENT’s
control (in which case AGENT will notify the MERCHANT . . .) or 2) if the
MEMBER and/or AGENT in its sole discretion, determines that certain funds
should be withheld. . . . The MEMBER and/or AGENT will not withhold
payment unreasonably.”
16
the VII TMA listed “MerCarSe” in all of the places where the template and
the Grupo TMA referred to the bank’s “AGENT.”
Both versions of the VII TMA contained Kraaijvanger’s signature for
VII. Both versions also included a blank signature line for Biason on behalf
of Bankard. However, defendants’ version of the signature page also included
a signature by Michael Conway as president of Grupo Mercarse (the agent).
The two versions contained other key differences. First, plaintiffs’
version of the agreement included a “payment service schedule” listing the
transaction fees at $0.20 per transaction, plus 4.5 percent (also called a
“merchant discount rate”). Defendants’ version included a different payment
services schedule, listing transaction fees of $0.10 per transaction and a
merchant discount rate of 3 percent. Second, plaintiffs’ agreement included a
sheet of payment instructions directing payment to VII’s account at
RaboBank. On defendants’ version, the page of payment instructions was
missing.
Bankard’s version also attached a list of websites and a warranty,
purportedly signed by Kraaijvanger, that the websites listed were owned by
VII. Zuurbier testified that the list, which was omitted from plaintiffs’
version, included some websites that were not owned by or affiliated with
plaintiffs. Both Zuurbier and Kraaijvanger testified that Kraaijvanger’s
signature was forged on the portions of defendants’ version of the TMA that
differed from plaintiffs’ version.12
3. Defendants refuse to sign the agreement
Biason acknowledged that in general, Bankard would sign a TMA
before starting to process transactions for a merchant, and that it was a
requirement of the Associations to have a signed processing agreement in
place before processing began Reyes agreed that as a general practice,
Bankard would have the merchant sign the TMA first, then CNP, then
Bankard, as the “final line of defense” to approve the merchant before
beginning to process its transactions. However, both Biason and Reyes
testified that Bankard did not sign the VII TMA because the agreement
contained a “clerical error” or “typographical error” listing the agent as Grupo
12Defendants did not challenge plaintiffs’ claim that they never
approved or signed defendants’ version of the agreement.
17
Mercarse. Bankard did not have an agent by that name and its only agent
was CNP. Reyes also noted that it was irregular for the VII TMA to direct
that payment be sent to MerCarSe, and stated this was one of the reasons
Bankard did not sign the VII TMA.
Despite acknowledging these errors and irregularities, defendants
admitted that Bankard processed VII’s transactions under the unsigned
TMA. Specifically, defendants claimed that Bankard processed these
transactions under the payment services schedule (in the bank’s version of
the agreement), where there were agreed terms, including the amount of
transaction fees. Biason and Reyes also acknowledged that Bankard sent
payment for VII’s transactions to MerCarSe pursuant to the agreement
terms. Biason claimed that the bank paid MerCarSe as VII’s agent.
Bankard charged transaction fees of 3 percent and $0.10 in accordance with
the payment services schedule on Bankard’s version of the VII TMA.
Zuurbier testified that VMS was charged transaction fees of 4.5 percent
and $0.20, reflected in the version of the VII TMA that plaintiffs reviewed
and signed, and matching the rate VMS had been charged by Bankard since
October 2005, when VMS began processing through Conway. This was a
higher percentage than the amount the bank charged under its version of the
VII TMA. Zuurbier believed that Conway pocketed the difference between the
amount the bank charged and what VMS ultimately received.
Plaintiffs never received a fully executed copy of the VII TMA and were
never told that Bankard had refused to sign the agreement. Plaintiffs only
discovered defendants’ version of the VII TMA after commencing litigation.
Accordingly, Kraaijvanger testified that he was under the impression that
the agreement he signed and sent in to the bank “was the basis upon which
we were processing already and receiving payments, and that matched up
with . . . the charges that were being charged by the bank. And I thought it
represented the relationship as . . . it was already happening.”
According to both Biason and Reyes, Bankard communicated with CNP
about the issues with the VII TMA, and it was CNP’s job to deal with the
merchant. Biason agreed that the issue should have been resolved “much
earlier.”
18
G. The end of the processing relationship
VMS continued to process with Bankard until the end of October 2006,
when VMS learned from Conway that Bankard had lost its license with Visa
and MasterCard. At that point, VMS noticed that it was missing money from
transactions starting in April 2006. In early 2007, Zuurbier asked for a
reconciliation report, which was prepared by VMS employee Rico Vogel. The
report used VMS’s own Oracle database, which listed all the transactions
VMS sent to CNP for processing with the bank and the authorization codes
for those transactions received from Visa and MasterCard. VMS compared
that data with the transactions reported on the spreadsheet provided by
Conway, which Zuurbier understood reflected the data supplied by Bankard,
through Conway as its representative. The reconciliation report showed no
significant discrepancy between the data in 2004 and 2005. Beginning in
April, 2006, there were larger discrepancies, with VMS getting “heavily
underpaid.”
Once VMS reconciled the millions of transactions, it discovered
discrepancies totaling an underpayment of $975,036. After losing its license,
Bankard also failed to repay VMS about $500,000 from VMS’s reserves.
There was also about $26,000 owed to VMS related to chargebacks. In total,
Zuurbier testified that Bankard owed VMS $1,526,169.01. Although
defendants claimed they withheld some funds to pay taxes for plaintiffs in
the Philippines, Kraaijvanger testified he never received any evidence that
any such taxes were paid.
Reyes testified that Bankard performed an accounting to analyze all of
the sales processed under the Grupo TMA and VII TMA. According to
Bankard, the TicketsClub transactions were processed under the MID
number issued to Grupo Mercarse under the Grupo TMA.
H. VMS’s actions to recoup its funds
After VMS realized it was missing money from Bankard in early 2007,
Zuurbier spoke to Conway about recovering the money owed. VMS paid
Conway’s company, MRRI, a $6,000 retainer to try to collect the debt. He
testified that Conway “kept us a little bit on the leash” in early 2007 and
VMS received two partial reserve repayments that year. VMS continued to
work with Conway to recover its funds. In December 2007, Conway
19
suggested that VMS retain the law firm of Baker McKenzie in an attempt to
retrieve what Bankard owed. The firm purportedly had a “personal
relationship” with the Yuchengco family, which owned Bankard. Zuurbier
testified that at this point, he believed Conway was acting on behalf of
Bankard. She told him the law firm was engaging in “discussions” with the
Yuchengco family and she would keep VMS apprised of any progress.
Kraaijvanger testified he thought Conway was working to get VMS’s money
and he felt this was the best route to “hopefully get this resolved in an
amicable way.”
By the spring of 2008, Baker McKenzie had not netted any further
recovery of VMS’s money, so Zuurbier again reached out to Conway. In April
2008, Conway told him she was still handling the case and that “MerCarSe
was trying to see what they can do with the Yuchengco family to obtain the
money or make Bankard pay.” A short while later, Kraaijvanger took over
the relationship while Zuurbier was out of the country. Kraaijvanger
testified that he met with Conway in 2009 to discuss the issue, and she said
she “was working on it.” After Zuurbier returned in September or October
2009, he got an update from Conway by phone or email regarding the
“financial situation of Bankard and the moneys owed.” Zuurbier set up a
meeting with Conway in London in May or June 2010. She did not show up
and stopped responding to his phone calls. After that, VMS “began preparing
ourselves for a lawsuit.”
I. Bankard’s indemnity agreement with CNP
Plaintiffs claimed that Bankard failed to return all of their reserves
owed, and instead improperly sent that money to CNP in 2008. Biason
testified that Bankard was unhappy with CNP because of Bankard’s license
suspension, and Bankard therefore terminated its sponsorship of CNP as an
ISO in September 2008. Nevertheless, Bankard entered into an indemnity
agreement with CNP in December 2008, under which the bank stated it
retained possession of over $1.1 million in funds from its card-not-present
transactions, and CNP warranted that these funds would be used for settling
obligations of the merchants, including “various tax liabilities” due in the
Philippines. Bankard therefore agreed to release the funds to CNP for the
purpose of paying those liabilities, as well as for fees and charges due under
20
the applicable TMAs. CNP, in exchange, agreed to defend and indemnify the
bank. The funds identified included almost $24,000 for plaintiffs and over
$37,000 for “Mercarse.”
Biason testified that the funds sent to CNP in 2008 were “no longer
merchant funds,” but rather taxes. He stated that the government in the
Philippines directed Bankard to pay the $1.1 million in funds to CNP as the
withholding agent. Reyes similarly testified that Bankard no longer
considered the funds to be due to the merchants. CNP was no longer acting
as an ISO, but instead was handling payments owed to the tax authorities.
Defendants did not introduce any documents at trial demonstrating that
CNP ultimately paid the taxes as promised.
J. Expert testimony
Plaintiffs’ expert, Musante, opined that defendants violated the
Associations’ rules in multiple ways. He noted that Grupo Mercarse was
listed as the agent in the VII TMA, although that entity was not a registered
ISO. He also pointed to the provision directing payment through MerCarSe,
which he concluded violated the Associations’ rules because it gave control of
merchant money to a third party, rather than providing payment directly to
the merchant. Moreover, that third party was not a registered agent and did
not even appear to be a signatory to the agreement, which was a “huge issue.”
Musante testified that he did not “understand [in] what world or what
universe Bankard could have looked at the rules . . . and put together the
contract that they did and tried to service it in the way in which they did and
not know that they were operating outside of the rules.”
In addition, Musante opined that defendants violated the Associations’
rules by processing plaintiffs’ transactions without a signed TMA. He
testified that defendants should have notified the merchant that there was a
problem and stopped processing. Based on his review of documents in the
case, Musante testified that he believed Bankard did not sign the VII TMA
because it knew the agreement did not comply with the rules, although it still
proceeded to process transactions under its terms.
Musante also took issue with defendants’ payment of merchant
reserves, including some from VMS, to CNP after it was no longer authorized
as an ISO in 2008. He opined that it violated the Associations’ rules in
21
multiple ways: (1) holding the reserves between 2006, when defendants
stopped processing, and late 2008, rather than repaying the merchants; (2)
paying the reserves to a third party rather than directly to the merchants;
and (3) paying a third party that was no longer in good standing.
Musante also compared the VII TMA with the Grupo TMA between
Bankard, CNP as the agent, and Grupo Mercarse as the merchant. He noted
that the Grupo TMA had a compliant payment provision where the money
was going directly to the merchant, rather than to a third party as provided
in the VII TMA.
When questioned about defendants’ contention that VMS violated the
Associations’ rules by aggregating transactions, Musante noted that
“regardless of whether that is true or not, the bank must pay the merchant.
If they are processing for the merchant, they must pay the merchant.” He
also discussed his review of documents suggesting that Bankard knew VMS
was acting in a non-conforming manner by managing other websites and
acting as the merchant.
In addition, Musante testified that it was improper for Bankard to hire
MRRI to investigate merchants and use a related company, CNP, as an
agent, as Conway was an owner of both MRRI and CNP. Musante also
testified that it was “extremely rare” for a bank to have its privileges
suspended by the Associations, and that Bankard was operating “far outside
of the norms” in terms of charge-back and fraud ratios. According to
Musante, Bankard’s charge-back ratio at the time from their card-not-present
portfolio was more than 30 times the average and its fraud ratio was more
than 16 times the average. He opined that Bankard had an “exceedingly
excessive” number of violations, which resulted in the termination of
defendants’ processing and led to VMS’s losses.
Defendants’ expert, Talbot, testified that VMS was operating as an
internet payment service provider, which “provides some form of technology
and processing that allows websites, submerchants . . . to basically channel
transactions to various acquirers.” But he saw no evidence that VMS
obtained the required approval to operate as an internet payment service
provider during that period. Talbot acknowledged that it was a violation of
the Associations’ rules for Bankard to process VII transactions without
22
signing the VII TMA. Talbot also opined that Conway was an agent for
plaintiffs, not defendants, because defendants were not allowed to use an
unregistered agent. He testified that there was no evidence that Grupo
Mercarse was acting as an unregistered ISO.
Talbot also testified that it was not a violation of the Associations’ rules
for Bankard to send VII’s payments to MerCarSe. A merchant can designate
a third party account where the member can route payment, as long as that
third party is not the bank’s agent. Thus, it would have been compliant with
the rules for VMS or VII to designate payments to go to MerCarSe, provided
that MerCarSe was not Bankard’s agent. He believed that Bankard
performed the essence of the VII TMA; thus the fact that it was never signed
did not cause any losses to plaintiffs.
Talbot agreed with Musante that it was uncommon for the Associations
to suspend a bank’s license to process credit card transactions. In his
opinion, the suspension was a “massive overreaction by Mastercard,” and
that Mastercard and Visa “got cold feet on this business.”
VI. Verdict
On January 27, 2016, the jury reached a verdict in favor of VMS and
VII on all claims (unanimously other than a vote of 11-1 on VII’s conversion
claim), awarding $1,526,168.96 in compensatory damages to VMS and zero
damages to VII. Regarding punitive damages, the jury found that plaintiffs
demonstrated by clear and convincing evidence that defendants engaged in
the conduct with malice, oppression, or fraud. Following a brief punitive
damages trial, the jury awarded punitive damages of $7.5 million against
defendants, jointly and severally.
VII. Post-trial Proceedings
During trial, defendants filed a motion for nonsuit on the FAC, again
raising arguments regarding VMS’s standing and the statute of limitations,
among others. The parties filed further briefing on the nonsuit motion
following the jury’s verdict. Ultimately, defendants withdrew the motion for
nonsuit.
The court entered judgment on March 11, 2016. Defendants
subsequently moved for a new trial and for judgment notwithstanding the
verdict.
23
The court heard argument on defendants’ motions and then took the
matter under submission. The court issued its ruling on May 13, 2016,
granting defendants’ motion for JNOV as to punitive damages and otherwise
denying the motions. As relevant here, the court rejected defendants’
challenges regarding the statutes of limitations, VMS’s standing, and the
jury’s findings of agency and causation. However, the court agreed with
defendants that there was insufficient evidence to support a punitive
damages award. We discuss the relevant details of the ruling further below.
The court also denied defendants’ motion for a new trial, finding
sufficient evidence to support the verdict, other than as to punitive damages.
The court rejected defendants’ argument that plaintiffs’ counsel engaged in
misconduct during closing argument, finding defendants forfeited the
argument by failing to object at trial and also failed to establish prejudicial
misconduct. The court also found defendants failed to establish that evidence
was improperly introduced at trial, noting that defendants did not cite any
specific evidence admitted contrary to a ruling on a motion in limine.
The court entered amended judgment on June 28, 2016. The court
subsequently granted plaintiffs’ motion for cost of proof sanctions pursuant to
section 2033.420, subdivision (b) (section 2033.420(b)), finding that two of
defendants’ denials to plaintiffs’ requests for admissions lacked a reasonable
basis. The court awarded plaintiffs $80,658.75 in sanctions. We discuss the
details of these rulings in the related Discussion section below.
The parties timely appealed.
DISCUSSION
I. Statutes of Limitations
Defendants asserted below that this action is time-barred, but the court
found that the applicable statutes of limitations were equitably tolled while
Conway represented that she was attempting to recover funds from
defendants. In a two-part argument, defendants contend that the court
erred. First, they assert that the relevant doctrine is equitable estoppel,
rather than equitable tolling. Second, they argue that equitable estoppel
does not apply, because plaintiffs did not properly raise it and the evidence
does not support its application. We agree that the applicable doctrine is
24
equitable estoppel, rather than equitable tolling. However, we find no error
in the court’s determination that plaintiffs’ claims are timely.
A. Scope of Review
In their opening brief, defendants’ entire argument regarding the
statute of limitations is limited to three paragraphs. Defendants argue that
plaintiffs “waived” equitable tolling as a defense, because plaintiffs conceded
that there was no basis for delayed discovery and “there is no distinction
between equitable tolling and delayed discovery in this case.” Defendants
also contend that equitable estoppel, rather than equitable tolling, is the
applicable doctrine here, but that plaintiffs did not properly raise it below.
Moreover, they assert that “the undisputed facts make clear that equitable
estoppel does not apply,” because plaintiffs “understood that legal action was
necessary to recover the funds as early as December 2007.”
In their reply brief, defendants devote approximately 15 pages to the
statute of limitations, including different and significantly more detailed
arguments regarding the applicability of the statutes of limitations. For
example, they describe at length the circumstances under which equitable
tolling is applicable, citing new authority, and arguing that the doctrine is
inapplicable here because defendants did not have notice of the theory.
Defendants also assert that the court “had no authority to toll the limitations
period under equitable estoppel.” Finally, defendants spend almost five
pages arguing that equitable estoppel does not apply to this action, again
citing new authority and fleshing out the elements of their claim.
It is well established that the purpose of a reply brief is to address
arguments made in the respondent’s brief; it may not be used to raise new
arguments or present new authorities. “Obvious reasons of fairness militate
against consideration of an issue raised initially in the reply brief of an
appellant. [Citations.]” (Varjabedian v. City of Madera (1977) 20 Cal.3d 285,
295, fn. 11.) “‘[T]he rule is that points raised in the reply brief for the first
time will not be considered, unless good reason is shown for failure to present
them before.’” (People v. Smithey (1999) 20 Cal.4th 936, 1017, fn. 26.) No
good reason was shown here; instead, plaintiffs and the court had no
25
opportunity to respond to these arguments.13 Thus, we address the
arguments made in defendants’ reply brief only to the extent that they were
adequately raised in the opening brief or made in response to arguments
presented in plaintiffs’ response brief. We take the same approach with
respect to the other issues as well, including defendants’ arguments
regarding sufficiency of the evidence, which span only seven pages in the
opening brief but 55 pages in reply. Tellingly, defendants’ reply brief is twice
as long as their opening brief, which includes the statement of facts.
B. Legal Standards
The longest limitations period available to plaintiffs is four years for
the breach of contract claim. (§ 337, subd. (a).) The complaint was filed in
August 2011. Thus, if plaintiffs’ claims accrued prior to August 2007, they
are time-barred unless an exception applies. “The statute of limitations
usually commences when a cause of action ‘accrues,’ and it is generally said
that ‘an action accrues on the date of injury.’ Alternatively, it is often stated
that the statute commences ‘upon the occurrence of the last element essential
to the cause of action.’” (Bernson v. Browning–Ferris Industries (1994) 7
Cal.4th 926, 931.)
Over the course of the case, the parties have argued regarding the
applicability of three exceptions to the statute of limitations bar: delayed
discovery, equitable tolling, and equitable estoppel. Under the discovery rule,
“‘the statute of limitations begins to run when the plaintiff suspects or should
suspect that her injury was caused by wrongdoing, that someone has done
something wrong to her.’” (Bernson v. Browning–Ferris Industries, supra, 7
Cal.4th at p. 932; see also Vaca v. Wachovia Mortgage Corp. (2011) 198
Cal.App.4th 737, 743.)
Similarly, equitable tolling operates “to suspend or extend a statute of
limitations as necessary to ensure fundamental practicality and fairness.”
(Lantzy v. Centex Homes (2003) 31 Cal.4th 363, 370 (Lantzy).) Equitable
tolling has been applied to suspend the statute of limitations in a select set of
circumstances, including where a plaintiff “has several legal remedies and,
13We also note that both parties’ failure to accurately present the facts
(whether disputed or undisputed) unnecessarily complicated our review of
this case.
26
reasonably and in good faith, pursues one,” but it then becomes necessary to
pursue a second remedy. (McDonald v. Antelope Valley Community College
Dist. (2008) 45 Cal.4th 88, 100; see also Elkins v. Derby (1974) 12 Cal.3d 410,
412-413.) In addition, the statute may be tolled where a defendant has
fraudulently concealed a cause of action. (See Regents of Univ. of Calif. v.
Sup.Ct. (Molloy) (1999) 20 Cal.4th 509, 533.)
On the other hand, equitable estoppel applied against a limitations
defense “usually ‘arises as a result of some conduct by the defendant, relied
on by the plaintiff, which induces the belated filing of the action.’” (Spray,
Gould & Bowers v. Associated Internat. Ins. Co. (1999) 71 Cal.App.4th 1260,
1267–1268, quoting Prudential–LMI Com. Insurance v. Superior Court (1990)
51 Cal.3d 674, 689–690.) ‘“‘Four elements must ordinarily be proved to
establish an equitable estoppel: (1) The party to be estopped must know the
facts; (2) he must intend that his conduct shall be acted upon, or must so act
that the party asserting the estoppel had the right to believe that it was so
intended; (3) the party asserting the estoppel must be ignorant of the true
state of facts; and, (4) he must rely upon the conduct to his injury.’”’ (Ashou
v. Liberty Mutual Fire Ins. Co. (2006) 138 Cal.App.4th 748, 766–767.)
For estoppel to apply, “[i]t is not necessary that the defendant acted in
bad faith or intended to mislead the plaintiff. [Citations.] It is sufficient that
the defendant’s conduct in fact induced the plaintiff to refrain from
instituting legal proceedings.” (Shaffer v. Debbas (1993) 17 Cal.App.4th 33,
43.) However, “[r]eliance by the party asserting the estoppel on the conduct
of the party to be estopped must have been reasonable under the
circumstances.” (Mills v. Forestex Co. (2003) 108 Cal.App.4th 625, 655.) “The
defendant’s statement or conduct must amount to a misrepresentation
bearing on the necessity of bringing a timely suit; the defendant’s mere denial
of legal liability does not set up an estoppel.” (Vu v. Prudential Property &
Casualty Ins. Co. (2001) 26 Cal.4th 1142, 1149–1153.)
“Equitable tolling and equitable estoppel are distinct doctrines.
‘Tolling, strictly speaking, is concerned with the point at which the
limitations period begins to run and with the circumstances in which the
running of the limitations period may be suspended. . . . Equitable estoppel,
however, . . . addresses . . . the circumstances in which a party will be
27
estopped from asserting the statute of limitations as a defense to an
admittedly untimely action because his conduct has induced another into
forbearing suit within the applicable limitations period. [Equitable estoppel]
is wholly independent of the limitations period itself and takes its life . . .
from the equitable principle that no man [may] profit from his own
wrongdoing in a court of justice.’” (Lantzy, supra, 31 Cal. 4th at pp. 373-374.)
We review the trial court’s factual determinations for substantial
evidence. (See Hopkins v. Kedzierski (2014) 225 Cal.App.4th 736, 756
(Hopkins) [“‘The determination of whether a defendant’s conduct is sufficient
to invoke [equitable estoppel] is a factual question entrusted to the trial
court’s discretion.’”].) To the extent defendants argue that the trial court’s
factual findings were not legally sufficient to support the application of
equitable estoppel, that presents a question of law that we review de novo.
(See, e.g., id. at p. 748; R.D. v. P.M. (2011) 202 Cal.App.4th 181, 188.) As
discussed further in Section III.B., post, these same standards apply to our
review of the trial court’s factual and legal determinations in its ruling on the
motion for JNOV, with the trial court acting as the trier of fact. (See Wolf v.
Walt Disney Pictures & Television (2008) 162 Cal.App.4th1107. 1138 (Wolf);
Hopkins, supra, 225 Cal.App.4th at p. 745.)
C. Background
Because the processing relationship between plaintiffs and defendants
ended in 2006, but plaintiffs did not file their lawsuit until 2011, the issue of
a statute of limitations bar has been present from the beginning of the case.
In both the complaint and the FAC, plaintiffs alleged that defendants
“intentionally misled” them and made false representations and assurances
of payment, causing plaintiffs “to retain counsel in order to informally
procure Defendants’ compliance with its obligations and secure payment of
sums owed,” and that they made these efforts “well into 2009.” Plaintiffs
further alleged that defendants and their agents “intended Plaintiffs to rely
upon their statements and defer commencing legal action against them,” and
that if plaintiffs had known the truth about Conway and their money, they
would have filed suit “much earlier.”
Defendants moved for summary judgment, arguing in part that the
statutes of limitations barred plaintiffs’ claims. In opposition, plaintiffs
28
argued that both equitable estoppel and equitable tolling applied, because
defendants fraudulently concealed their causes of action and defendants and
their agents made misstatements, so plaintiffs were “fraudulently induced to
defer acting” on the missing funds. The court found plaintiffs presented
sufficient evidence of fraudulent concealment to defeat summary judgment.
Defendants again raised the statute of limitations in their motion for
JNOV, and the parties and court continued to discuss equitable estoppel and
equitable tolling somewhat interchangeably. For example, in their
opposition, plaintiffs argued that their claims were not barred because of
defendants’ fraudulent concealment, and therefore that the statutes of
limitations should be equitably tolled. However, plaintiffs also contended
that Conway “lulled Plaintiffs into inactivity by misrepresenting that her
personal contacts at Bankard and Rizal would obtain VMS’s money” without
litigation, categorized this conduct as “equitable tolling by estoppel,” and
cited to cases relying on both doctrines. (See Gaglione v. Coolidge (1955) 134
Cal.App.2d 518, 527 [finding estoppel where appellant relied on continuing
promise of repayment by respondent]; Cross v. Bonded Adjustment (1996) 48
Cal.App.4th 266, 281 [tolling].)
During the hearing, defense counsel acknowledged her understanding
of plaintiffs’ argument that Conway led plaintiffs to believe litigation was
unnecessary, but suggested that argument was based on equitable tolling.14
Plaintiffs’ counsel stated he agreed with the court that the applicable
doctrine was equitable tolling, rather than delayed discovery, but pointed to
evidence that plaintiffs waited to sue in reliance on Conway’s statements that
she could procure an informal resolution of their claims through her contacts
with Baker McKenzie and the Yuchengco family.
In its ruling on the motion for JNOV, the court rejected plaintiffs’
argument that defendants waived the defense by failing to submit the issue
to the jury. The court found that defendants had raised the statute of
limitations defense “at all relevant stages in the lawsuit,” both parties sought
14Defendants did not argue below, as they have here, that equitable
estoppel was the applicable doctrine as distinct from equitable tolling, nor did
the trial court or plaintiffs make that distinction.
29
to have the affirmative defenses tried to the court, and further, the
substantive issue of equitable tolling was not an issue for the jury.
Noting that plaintiffs argued both delayed discovery and “equitable
tolling by estoppel,” the court rejected the former theory, “as plaintiffs
learned of the actual damages at issue in this case more than four years
before the complaint was filed.” However, citing Lantzy v. Centex Homes,
supra, 31 Cal.4th at p. 370, the court concluded that “the statute of
limitations was equitably tolled during the time that Janet Conway
represented that she could recover the funds from defendants, as an
alternative to filing a lawsuit.” The court found the testimony of plaintiffs’
witnesses credible that “through 2010, they relied on Janet Conway as an
ostensible agent of the defendants to recover Verotel’s money” and that such
reliance was reasonable.
The court also noted that even if equitable tolling ended in December
2007, when Conway stated she no longer had contacts at Bankard, the
complaint filed in August 2011 was timely. However, the court found that
Conway continued to induce plaintiffs to rely on her to seek recovery of their
money through her connections to defendants’ owners until 2010. As such,
“the Court is persuaded to apply equitable estoppel particularly due to the
credible testimony from VMS that indicated it was not sleeping on its rights
but was actively attempting to recover the funds.”
The court rejected defendants’ argument that plaintiffs were required
to plead equitable estoppel in the complaint, noting that because the issue
was being adjudicated by the court after trial, the court could order the
complaint amended to conform to the proof at trial. Further, the court found
defendants had adequate notice “about the facts underlying [the] equitable
estoppel argument during this litigation” and there was no unfair prejudice
to defendants from a ruling “based on the facts developed at trial.”
D. Analysis
As an initial matter, we reject plaintiffs’ contention that defendants
forfeited their statute of limitations defense by failing to submit the issue to
the jury. We agree with the trial court’s findings that both parties agreed to
have the affirmative defenses tried to the court and plaintiffs are not entitled
to a jury trial on the issue. (See C & K Engineering Contractors v. Amber
30
Steel Co. (1978) 23 Cal.3d 1, 9 [where an “action is essentially one in equity
and the relief sought ‘depends upon the application of equitable doctrines,’
the parties are not entitled to a jury trial.”]; Hopkins, supra, 225 Cal.App.4th
at p. 745 [finding no right to jury trial on claims of equitable estoppel or
equitable tolling].)
Turning to defendants’ contentions, they first assert that the court
improperly applied equitable tolling to relieve plaintiffs from the bar of the
statutes of limitations. Instead, defendants argue that equitable estoppel is
applicable to plaintiffs’ claim that they were induced to pursue retrieval of
their money through informal means, rather than immediately through
litigation.
We agree that plaintiffs’ claim is properly analyzed as one for equitable
estoppel, rather than equitable tolling. Plaintiffs acknowledge that they
knew in late 2006 or early 2007 that they were missing money from their
transactions with defendants, but delayed filing their lawsuit based on
assurances from Conway that she could secure their funds through her
relationship with defendants, and later, with defendants’ owners. Thus, at
its core, plaintiffs’ claim is one of fraudulent inducement to delay litigation,
rather than concealment of that claim. As such, it is properly considered as a
claim that the conduct by defendants and their agents should estop
defendants from asserting a statute of limitations defense.
Next, defendants argue that plaintiffs cannot assert equitable estoppel
because they did not plead it in the FAC, did not assert it in opposition to the
motion for JNOV, and the court did not rely on it. We are not persuaded that
plaintiffs’ failure to clearly label their claim as equitable estoppel is fatal
here. The timeliness of plaintiffs’ claims was fully litigated below. Both
parties and the court used the terms estoppel and tolling either in
combination or interchangeably throughout the case, and defendants never
objected or sought clarification. More importantly, plaintiffs consistently
presented facts—first alleged in the complaint and then as evidence at trial—
supportive of an estoppel defense. We reject defendants’ contention that
plaintiffs were required to specifically identify their claim as estoppel in their
complaint, where plaintiffs alleged facts of fraudulent inducement that would
31
establish the defense, and then introduced evidence supporting those
allegations at trial.
Defendants’ citation to Lantzy, supra, 31 Cal.4th at pp. 384-385, does
not suggest otherwise, as that case involved an appeal from a demurrer,
rather than a post-trial motion for JNOV. Moreover, the court in Lantzy
examined the facts alleged in the complaint, and concluded that the
complaint was “devoid of any indication that defendants’ conduct actually
and reasonably induced plaintiffs to forbear suing.” (Id. at p. 385.) Lantzy,
therefore, does not support defendants’ contention that plaintiffs’ FAC was
deficient. Further, defendants have not shown that application of estoppel to
this case is erroneous or prejudicial to them, where plaintiffs have
consistently argued that they were fraudulently induced (supporting a
finding of estoppel) and defendants had multiple opportunities to respond to
those arguments.
Defendants also contend there is insufficient evidence to support a
finding of equitable estoppel, because Conway “did not ‘promise’ to recover
the money without the necessity of filing suit” and plaintiffs were
unreasonable in waiting to file suit until 2011. Instead, defendants contend
it is “undisputed that plaintiffs understood that legal action was necessary”
to recover their money as of December 2007. We conclude that substantial
evidence supports the trial court’s conclusion. Both representatives from
VMS testified that between 2006 and 2010, they trusted Conway as a
representative of the bank and relied on her representations that she was
working first with Bankard and then with the Yuchengco family to retrieve
the missing funds. The trial court found this testimony credible and
concluded that VMS “was not sleeping on its rights but was actively
attempting to recover the funds.” We will not reweigh the evidence or disturb
these credibility findings on appeal.15
15During oral argument, defendants’ counsel also argued that other
elements of an equitable estoppel claim were neither established by plaintiffs
nor found by the trial court, particularly the requirement of notice to
defendants. Defendants did not raise the issue of notice until their reply on
appeal. Moreover, even in reply, they argued that the lack of notice meant a
failure to meet the elements of equitable tolling, but made no similar claim
32
II. VMS’s Standing
Next, defendants challenge VMS’s standing to bring both its contract
and tort claims. We affirm the trial court’s denial of JNOV on this issue.
A. Background
Defendants unsuccessfully raised the issue of VMS’s standing in a
motion for summary judgment, a motion for nonsuit, and the motion for
JNOV. In their motion for JNOV, defendants argued that VMS had no
standing to pursue contract claims because it was not a party to the VII
TMA, “upon which all of plaintiffs’ claims are based.” Defendants additionally
argued that plaintiffs’ tort claims arose out of the same contractual
relationship, and therefore failed for the same reason.
At the post-trial hearing, plaintiffs argued that the applicable contract
was composed of the totality of defendants’ “agreement to pay” VMS, because
it was VMS’s money and VMS whose “rights were affected,” pursuant to the
transactions VMS submitted “and in accordance with the Association rules.”
Plaintiffs also pointed to the account boarding requests that the parties used
to facilitate processing prior to the VII TMA and argued there was an
“implied” contract between VMS and defendants.
The court concluded that VMS had standing to bring its contract and
tort claims, although it was not a signatory to the VII TMA. The court
reasoned that by awarding the full amount of actual damages to VMS, and
nothing to VII, the jury implicitly found that “VMS was the party actually
due the funds, and . . .VII was merely a conduit established for VMS to
contract in the Philippines.” Further, the court concluded that “VMS and
defendants entered into a business relationship” in 2004 for “processing a
significant volume of credit card transactions,” based on the evidence that
transaction processing occurred and defendants paid. Accordingly,
“[w]hatever instrument governed this relationship –and whatever the details
of the contract at any given time – the relationship that began in 2004 was a
contractual one for purposes of standing.”
In addition, the court found that this contractual relationship between
VMS and defendants was not replaced by the VII TMA, noting that
with respect to equitable estoppel. As such, defendants have forfeited this
claim.
33
defendants did not sign the agreement and that one version “appears to have
been void as a matter of law” because it contained a forged signature of
plaintiffs’ principal. The court also noted that the contractual relationship
continued after the introduction of the VII TMA and that the “jury may
reasonably have relied on the instruction that the contract could be oral, or
part oral and part written, in awarding VMS the funds.”
Moreover, even if VMS lacked standing to bring a contract claim on the
VII TMA, the court found that VMS had standing to bring its tort claims.
The court found that VMS was directly harmed by defendants’ actions and
that VMS and VII “had no functionally separate existence.” Thus, the court
inferred “that the jury was applying the equivalent of an alter ego theory.”
B. Standard of review
Standing is a question of law we review de novo. (San Luis Rey Racing,
Inc. v. California Horse Racing Bd. (2017) 15 Cal.App.5th 67, 73; Fry v. City
of Los Angeles (2016) 245 Cal.App.4th 539, 548-549.) However, we defer to
the trial court’s underlying factual findings relevant to the question of
standing, and review those findings for substantial evidence. (Fry v. City of
Los Angeles, supra, 245 Cal.App.4th at p. 549.) As discussed further in
Section III.B., post, these same standards apply to our review of the trial
court’s factual and legal determinations in its ruling on the motion for JNOV.
(See Wolf, supra, 162 Cal.App.4th at p. 1138.)
C. Analysis
“In general terms, in order to have standing, the plaintiff must be able
to allege injury—that is, some ‘invasion of the plaintiff’s legally protected
interests.’” (Angelucci v. Century Supper Club (2007) 41 Cal.4th 160, 175,
quoting 5 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 862, p. 320; see
§ 367 [“Every action must be prosecuted in the name of the real party in
interest, except as otherwise provided by statute”].) “It is elementary that a
party asserting a claim must have standing to do so. In asserting a claim
based upon a contract, this generally requires the party to be a signatory to
the contract, or to be an intended third party beneficiary.” (Berclain America
Latina v. Baan Co. (1999) 74 Cal.App.4th 401, 405.)
Plaintiffs have not claimed to be third party beneficiaries to any
contract at issue here. Thus, to have standing to assert their breach of
34
contract claim, plaintiffs must establish their right to recover as a party to an
applicable contract. (See Roth v. Malson (1998) 67 Cal.App.4th 552, 557 [“It
is, of course, basic hornbook law that the existence of a contract is a
necessary element to an action based on contract.”]; Hale v. Sharp Healthcare
(2010) 183 Cal.App.4th 1373, 1387 [“A cause of action for breach of contract
requires pleading of a contract, plaintiff’s performance or excuse for failure to
perform, defendant’s breach and damage to plaintiff resulting therefrom.”].)16
Defendants argue that the jury’s verdict must be based on the VII TMA
because “at all times through trial, plaintiffs claimed that its [sic] loss was
caused by Bankard’s violation” of that contract. Thus, because VMS was not
a signatory to the VII TMA, defendants contend VMS cannot bring a claim
for its breach. Defendants further argue, without support, that VMS cannot
show it has standing under the VII TMA “because it conceded [after trial]
that this contract was irrelevant and did not cause its loss and waived its
claim that it had any interest in this contract.”
As a preliminary matter, we disagree with the factual premise of
defendants’ argument that plaintiffs first claimed the VII TMA was the only
basis for their injuries, and then reversed course post-trial to contend that
the VII TMA was irrelevant. VMS argued throughout the case that its
contract claim was not based on the VII TMA alone, citing their prior
processing relationship with Bankard, defendants’ refusal to sign the
agreement, and defendants’ subsequent willingness to continue processing
without the signed VII TMA. At the same time, plaintiffs relied on parts of
the VII TMA, most notably the payment instructions directing payment to
VMS’s bank account, as evidence of terms to which the parties had agreed,
but with which defendants failed to comply.
16We reject defendants’ assertion that VMS “falsely” referred to itself as
“Verotel” in its appellate briefs in order to “blur the distinction” between
VMS and VII and “put itself in VII’s position as it relates to the TMA-VII
Contract.” Although defendants suggest that there was no dispute at trial
that the term “Verotel” referred exclusively to VII, in fact, plaintiffs and their
counsel referred to both VMS and VII at times as “Verotel.” In any event, we
analyze the standing issue with respect to entities VMS and VII.
35
Plaintiffs’ contractual theory, while hardly a model of clarity, was never
as blatantly contradictory as defendants contend.17 Defendants’ contention
that plaintiffs never argued that VII itself was a “sham” until after trial is
similarly unsupported. While plaintiffs never used that term, they presented
substantial evidence and argument suggesting that VII never operated as a
separate company apart from VMS, including testimony that it never had
any offices or employees, and that the transactions and corresponding
payments therefore belonged to VMS.
Further, we find substantial evidence supports the jury’s verdict and
the trial court’s conclusion that the jury found a contractual relationship
between VMS and defendants that began well before the VII TMA and
continued until the end of the processing relationship. The jury was
instructed that contracts may be written, oral, or partly written and partly
oral. Plaintiffs introduced evidence that VMS discussed terms with Conway,
as an agent for the bank, including the amount of transaction fees the bank
would charge; CNP would act as the processor or administrator between
Bankard as the bank and VMS as the merchant; and VMS would receive
payment into its bank account at Rabo Bank. Zuurbier also testified that
VMS found this proposal “acceptable” and began processing under these
terms in mid-2005.
In addition, Kraajivanger testified that under the “earlier agreement”
with Bankard and CNP, VMS received MID numbers from Bankard to begin
processing with the “lower rates” in 2005, as promised by Conway. The jury
could have found these terms constituted an oral or oral/written contract
between VMS and Bankard, supported by the evidence that Bankard
processed VMS’s transactions, charged the agreed-upon transaction fees, and
paid VMS by depositing funds into its bank account. Defendants’ citation to
Defendants’ repeated suggestion that the court made a “post-verdict
17
ruling” that the VII TMA was “void as a matter of law,” is imprecise, if not
misleading. In ruling on the motion for JNOV, the court stated that the
version of the VII TMA possessed by defendants, and under which they
claimed to be processing transactions for VII, “appears to have been void”
because it contained forged signatures, and therefore plaintiffs could not be
bound by that version.
36
evidence supporting a contrary inference is insufficient to meet their burden
on appeal.
In their responding brief, defendants argue that, at most, the evidence
of the parties’ conduct cited by plaintiffs and the court could support an
implied contract, but the jury was not instructed regarding implied contracts
and therefore could not have found a breach of contract on that basis. We
need not reach this contention, as we conclude the evidence was sufficient to
support a finding of an express contract.
Defendants also contend that VMS lacks standing to assert its tort
claims because those claims arose out of the contract, and therefore fail along
with the contract claims. Because we conclude that VMS established
standing for its contract claims, our conclusion applies to the tort claims as
well. Defendants’ contention that VMS and Bankard “were strangers” and
Bankard therefore owed VMS no legal duty was clearly rejected by the jury.
We will not reweigh that evidence on appeal.
III. Sufficiency of the Evidence
Defendants challenge the sufficiency of the evidence to support two
aspects of the jury’s verdict: (1) that Conway was defendants’ agent and was
acting within the scope of that agency; and (2) that defendants’ conduct
caused plaintiffs’ damages. We conclude that substantial evidence supports
the verdict.
A. Background
In their motion for JNOV, defendants argued that there was no
evidence that Conway was defendants’ agent or was acting within the scope
of any such agency in taking money from plaintiffs. The court found
sufficient evidence that Conway acted as defendants’ agent in dealing with
VMS. The court explained that defendants “entered into a venture with
Conway in which she would renegotiate or re-fashion their agreements with
VMS and defendants’ other customers.” The court noted that the evidence
showed Conway was empowered to negotiate for defendants, as she
successfully secured lower transaction fees charged by the bank to plaintiffs.
Thus, “defendants’ apparent agreement with Conway that she could
represent them in their dealings with customers is sufficient intentional
conduct to create the impression of agency, if not an actual agency
37
relationship.” The court also pointed to the TMAs, which listed Bankard as
the “Member” and “a Conway company” as the “Agent,” and stated that the
agent would perform services on behalf of the member. The court noted that
defendants’ allegations of agency in their original cross-complaint further
supported the jury’s verdict.
Defendants also raised a cursory challenge based on causation in their
motions for JNOV and new trial, arguing in a single paragraph that
“plaintiffs suffered no harm as a result of any transaction processed under”
the VII TMA and further, that plaintiffs’ loss “arose from TicketsClub
transactions processed under the TMA-Grupo Mercarse contract.” The court
did not specifically address this argument in its ruling, but found that “there
was sufficient evidence to support the verdict.”
B. Standard of Review
When reviewing an order granting or denying JNOV, an appellate
court will use the same standard the trial court used in ruling on the motion,
by determining whether it appears from the record, viewed most favorably to
the party securing the verdict, that any substantial evidence supports the
verdict. If there is any substantial evidence, contradicted or uncontradicted,
or reasonable inferences to be drawn therefrom in support of the verdict, the
motion should be denied. (See Wright v. City of Los Angeles (1990) 219
Cal.App.3d 318, 343; Wolf, supra, 162 Cal.App.4th at p. 1138.) “‘The purpose
of a motion for judgment notwithstanding the verdict is not to afford a review
of the jury’s deliberation but to prevent a miscarriage of justice in those cases
where the verdict rendered is without foundation.’” (Sukoff v. Lemkin (1988)
202 Cal.App.3d 740, 743.) The “focus is on the quality, not the quantity of the
evidence.” (Toyota Motor Sales U.S.A., Inc. v. Superior Court (1990) 220
Cal.App.3d 864, 871.) We resolve all evidentiary conflicts and indulge all
reasonable inferences in support of the judgment. (Leung v. Verdugo Hills
Hospital (2012) 55 Cal.4th 291, 308.) If the appellant raises purely legal
questions, we conduct a de novo review. (Hirst v. City of Oceanside (2015)
236 Cal.App.4th 774, 782; Wolf, supra, 162 Cal.App.4th at p. 1138.)
38
C. Agency
The trial court found sufficient evidence that Conway was operating as
defendants’ agent (either actual or ostensible) to support the jury verdict. We
agree.
“It is settled that a principal is liable for compensatory damages for the
wrong committed by an agent in transacting the principal’s business
regardless of whether the wrong is authorized or ratified by the principal,
and this rule applies even where the wrong is intentional and malicious.”
(Hudson v. Nixon (1962) 57 Cal.2d 482, 484, citing Civ. Code, § 2338.) “Proof
of an agency relationship may be established by ‘evidence of the acts of the
parties and their oral and written communications.’” (Van't Rood v. County
of Santa Clara (2003) 113 Cal.App.4th 549, 573.)
Plaintiffs introduced evidence at trial that Conway solicited their
business in 2005, purportedly as an agent of the bank. As evidence of her
relationship with Bankard, Conway showed plaintiffs marketing materials
from the bank and offered to lower the rate of transaction fees charged by the
bank. Both Kraajivanger and Zuurbier testified that they believed Conway
was working on behalf of the bank because in mid-2005, VMS began to be
charged at the rate of 4.5 percent and $0.20 (reduced from 5.65 percent and
$0.45), as Conway promised. In addition, Broadner and Conway supplied
VMS with MIDs, which the bank issued to its merchants to allow them to
submit transactions. Once plaintiffs began processing, they received
authorization codes indicating that the transactions were approved by the
Associations.
There was also evidence that Conway owned or controlled both Grupo
Mercarse and its affiliate, MerCarSe, as well as MRRI. Conway’s control of
MerCarSe and MRRI was undisputed. Further, the investigative report
produced by MRRI regarding MerCarSe lists Conway as both the president of
MerCarSe and a principal of Grupo Mercarse.18 In addition, defendants
Defendants argue that this finding would be “contrary” to the court’s
18
2013 ruling quashing service of process on Conway for the cross-complaint.
Defendants contend that ruling “expressly found that Conway did not own or
control Grupo Mercarse. We do not find this contention persuasive. That
ruling was made based on Rizal’s failure to present evidence in 2013 to
39
alleged in their amended cross-complaint that Conway was a “shareholder,
director, and/or officer” of MerCarSe, MRRI, and Grupo Mercarse.19 This
evidence supported the conclusion that Conway, through Grupo Mercarse
and/or MerCarSe, was acting as Bankard’s agent in dealing with plaintiffs.
The jury’s agency finding was further supported by the fact that Grupo
Mercarse was identified as the bank’s agent on both versions of the VII TMA.
Although the bank claimed Grupo Mercarse’s identification as its agent was a
“clerical error,” that claim is undercut by the fact that the agreement was
signed by Michael Conway on behalf of Grupo Mercarse, and the bank’s
admission at trial that it processed VII transactions under this agreement.
In addition, the payment provision of the VII TMA lists MerCarSe’s name in
each place where the template and the Grupo TMA referred to the bank’s
agent.
We also note that defendants admitted agreeing to operate their card-
not-present processing business under the “self-sustaining business model”
run by Conway, Michael, and Ung, through CNP and the “Mercarse Group of
Companies” (including Grupo Mercarse, MerCarSe, and MMRI). Defendants
alleged the operation of this business plan in their amended cross-complaint
and Reyes confirmed the arrangement at trial. This evidence further
supports a finding that Conway was acting as Bankard’s agent when engaged
in the conduct plaintiffs alleged here.
Defendants’ attempts to undercut the evidence of agency do not alter
our conclusion. First, defendants challenge the court’s reliance on Conway’s
ability to reduce the transaction fee rate by arguing that it is “uncontroverted
that the rate charged by Bankard for the two years never changed and it was
establish a basis for jurisdiction over Conway in California, after the court
specifically noted that Rizal had failed to conduct any jurisdictional
discovery.
19
The parties argue at length about the import of citations to the
original cross-complaint by plaintiffs and the court. We note that the court
stated it was not relying on the allegations in the cross-complaint as judicial
admissions, but citing them as further support for the jury’s verdict.
Moreover, contrary to defendants’ contention that the cited paragraphs “were
all amended,” most of the relevant allegations remained in the amended
cross-complaint.
40
significantly lower than the rate charged by Conway.” This appears to be a
reference to the rate of 3.35 percent and $0.10 that Bankard charged Grupo
Mercarse as a merchant under the Grupo TMA. In other words, defendants
claim that all of plaintiffs’ transactions prior to the VII TMA were processed
under the Grupo TMA (a claim plaintiffs dispute); therefore, any reduction in
the rate charged to VMS did not affect the contract rate charged by Bankard
and was done by Conway “on behalf of Grupo Mercarse,” without any
knowledge or approval by the bank. Defendants further argue that “by its
own admission, VMS was aggregating which means that it had no processing
relationship with Bankard and was processing through Grupo Mercarse,” and
thus any actions by Conway were done to benefit Grupo Mercarse, rather
than the bank.
We are not persuaded that this is the only reasonable inference the jury
could draw from the evidence. Plaintiffs’ witnesses at trial denied processing
their transactions under Grupo Mercarse’s contract or MID numbers. In
addition, plaintiffs testified that VMS began processing with Bankard under
Broadner in 2004, before the Grupo TMA was signed in early 2005.
Similarly, plaintiffs presented evidence that the rates, process, and payments
for their transactions with Bankard did not change after signing the VII
TMA, under which the bank was admittedly dealing with VII as the
merchant.
Indeed, the rate Bankard charged Grupo Mercarse under the Grupo
TMA (3.35 percent and $0.10) was lower than both the initial rate VMS paid
through Broadner in 2004 (5.65 percent and $0.45) and the reduced rate VMS
paid once it began processing with Conway in 2005 (4.5 percent and $0.20).
Thus, defendants’ claim that VMS was processing under the Grupo TMA
requires an assumption that both Broadner and Conway were inflating the
rate charged to VMS (as a sub-merchant) above what Bankard was charging
Grupo Mercarse (as the master merchant). Defendants never introduced any
evidence to support this assumption; moreover, even if true, defendants offer
no explanation how Conway’s reduction of the inflated rate charged to VMS
in 2005 was done to benefit Grupo Mercarse.
Further, although Kraaijvanger testified that VMS was “aggregating”
in 2004, which he described as “processing transactions for other people that
41
you’re not allowed to process for,” he claimed it was in compliance with the
Associations’ rules “at the time,” and did not further specify what he meant.
Based on the rest of the testimony by Kraaijvanger and Zuurbier, the jury
could have concluded that VMS was operating as the master merchant,
aggregating transactions for other sub-merchants and sending them for
processing under VMS’s account, rather than the inference suggested by
defendants, that VMS was operating as the sub-merchant under Grupo
Mercarse.
Next, defendants argue that neither Conway nor any of her entities
could have acted as the bank’s agent because only CNP was authorized by the
Associations to operate as an ISO for the bank. But there was evidence from
which the jury could have found such agency, despite the lack of
authorization. Indeed, defendants’ witnesses acknowledged that CNP was
initially only a merchant, but was actually functioning as the bank’s agent,
because Bankard was “confused about the terminology.” Once the
Associations issued a citation for noncompliance, Bankard applied to have
CNP approved as an ISO. Thus, the jury could have concluded that
defendants were able to use Conway and her entities as unauthorized agents,
just as defendants had initially used CNP.
We also reject defendants’ contention that there is insufficient evidence
Conway was acting within the scope of any agency. In essence, defendants
contend that any duties of Bankard’s agent must be limited to services
performed under the VII TMA. Therefore the scope of the agency would
exclude any services to VMS, because it was not a party to the VII TMA.
Because we have concluded that plaintiffs’ claims are not limited to those
arising solely under the VII TMA, we also reject these contentions.
Additionally, defendants contend Conway could not have been their
agent because she was also defrauding Bankard. However, as their cited
authority demonstrates, that defense requires a showing that the plaintiffs
conspired with Conway, or, at a minimum, knew of the scheme to steal from
Bankard. For example, in Saks v. Charity Mission Baptist Church (2001) 90
Cal.App.4th 1116, 1120, the plaintiff became involved in a real estate scheme
with a developer and the former pastor and president of a church. The
plaintiff sought to hold the church liable for two promissory notes signed by
42
the pastor in the name of the church, after the plaintiff paid to purchase
property in furtherance of the scheme. (Ibid.) The uncontradicted evidence
at trial established that the three individuals openly discussed their plan to
use the church as a front to obtain a governmental loan with which to repay
the plaintiff, and that the church was never intended to be an owner of the
property. (Id. at pp. 1120, 1129-1130.) Accordingly, the court held that
“where an officer of a corporation is openly using the corporation to obtain a
benefit for himself and his cohorts in a transaction, in which the corporation
will ultimately not benefit, the other parties to the transaction cannot later
seek to hold the corporation liable for his actions.” (Id. at pp. 1120, 1139-
1140; see also Civ. Code, § 2306 [“An agent can never have authority, either
actual or ostensible, to do an act which is, and is known or suspected by the
person with whom he deals, to be a fraud upon the principal.”]; Meyer v.
Glenmoor Homes, Inc. (1966) 246 Cal.App.2d 242, 264 [“A corporation is not
chargeable with the knowledge of an officer who collaborates with an outsider
to defraud it”].)
Here, while defendants sought to convince the jury that plaintiffs were
working with Conway to defraud Bankard by submitting unsanctioned
transactions for processing, the jury rejected that theory. The fact that
Conway’s scheme may not have ultimately benefitted defendants (which
plaintiffs also dispute) is insufficient to absolve defendants of liability.
D. Causation
Defendants also challenge the evidence supporting a finding that they
caused VMS’s losses. They offer two bases for this contention. First, they
argue that the opinion offered by plaintiffs’ expert, Musante, was based on
the VII TMA, even though VMS conceded the VII TMA did not cause its loss.
We have already rejected the argument that VMS made such a concession.
Defendants also contend Musante’s opinion was conclusory. “[W]hen an
expert’s opinion is purely conclusory because unaccompanied by a reasoned
explanation connecting the factual predicates to the ultimate conclusion, that
opinion has no evidentiary value because an ‘expert opinion is worth no more
than the reasons upon which it rests.’” (Jennings v. Palomar Pomerado
Health Systems, Inc. (2003) 114 Cal.App.4th 1108, 1117, quoting Kelley v.
43
Trunk (1998) 66 Cal.App.4th 519, 523–525.) We find this argument
unpersuasive.
Here, Musante testified at length about the problems he perceived with
the VII TMA, including the designation of Grupo Mercarse as the bank’s
agent when it was not registered as an MSP; the designation of MerCarSe as
the recipient for the merchant funds, rather than the bank paying plaintiffs
directly; and the failure of the bank to sign the VII TMA, while continuing to
process transactions without notifying plaintiffs of its concerns. He further
opined that Bankard’s lack of control over its own system and delegation of
its own duties to third parties, such as Grupo Mercarse and MerCarSe, led to
the losses by VMS, allowing Conway to steal funds from plaintiffs under the
guise of agency from the bank. In addition, Musante testified that the bank
acted improperly by retaining VMS’s reserves after the relationship ended in
2006, and then transferring those funds to CNP, purportedly to pay taxes.
These opinions had a sufficient factual basis to allow the jury to rely on them
in support of its conclusion that defendants caused VMS’s losses.
Second, defendants assert that there was “uncontradicted” evidence
“that VMS’s loss was caused by its aggregation, not by defendants,” a
contention we have already rejected. Defendants note that their expert,
Talbot, opined that aggregation caused VMS’s loss, and argue that we must
treat that opinion as “binding in this appeal.” They cite Huber, Hunt &
Nichols, Inc. v. Moore (1977) 67 Cal.App.3d 278 (Huber), for the proposition
that “when the matter in issue is within the knowledge of experts only and
not within common knowledge, expert evidence is conclusive and cannot be
disregarded.” (Id. at p. 313 [regarding professional standard of care], citing
Engelking v. Carlson (1939) 13 Cal.2d 216, 220-221 [same]; Danielson v.
Roche (1952) 109 Cal.App.2d 832 [same].) This argument is frivolous. First,
Talbot’s opinion regarding the cause of VMS’s loss, as well as the facts upon
which it relied, were disputed by plaintiffs at trial. Indeed, Talbot himself
also testified that he found VMS’s accounting “impossible to reconcile” as to
“which contracts, which agreements, which merchant I.D.’s, or which
websites those numbers relate to.” Thus, it was up to the jury to evaluate all
of the evidence, including the testimony of both experts.
44
Second, Huber and the cases on which it relies concern expert
testimony regarding the professional standard of care. (See Huber, supra, 67
Cal.App.3d at p. 313 [“Ordinarily, where a professional person is accused of
negligence in failing to adhere to accepted standards within his profession
the accepted standards must be established only by qualified expert
testimony.”].) These cases are inapplicable to Talbot’s testimony regarding
contracts and monetary losses. Indeed, defendants do not even attempt to
explain how Talbot’s opinions were limited to matters exclusively within the
knowledge of experts. The jury was free to disbelieve him.
As such, defendants have not met their burden to establish that the
court erred in concluding that substantial evidence supported the jury’s
verdict for plaintiffs.
IV. Admission of Evidence
Defendants challenge the trial court’s admission of evidence regarding
Bankard’s suspension by the Associations and tax payments Bankard claims
it paid to CNP on behalf of merchants other than plaintiffs. Defendants
contend this evidence was irrelevant and unduly prejudicial to them. We find
no abuse of discretion.
A. Background
Defendants filed numerous motions in limine prior to trial, including a
motion seeking to exclude all evidence of Bankard’s audit and subsequent
suspension by the Associations. Defendants also sought to exclude all
evidence related to the indemnification agreement between CNP and
Bankard, and Bankard’s payment under that agreement of any money from
merchants other than plaintiffs. They argued that this evidence was
irrelevant, would result in an undue consumption of time, and was highly
prejudicial.
Prior to the first trial, the court denied defendants’ motions in limine,
finding they were improper dispositive motions. Defendants renewed their
motions in advance of the second trial and the court heard extensive
argument by the parties. Defendants argued that the suspension was
irrelevant, as it was not based on issues related to plaintiffs’ websites, the VII
TMA, or any conduct similar to what plaintiffs alleged. Defense counsel
acknowledged that Visa and MasterCard found violations related to the
45
TicketsClub websites, but argued that plaintiffs had no evidence that they
owned TicketsClub, and also that the violations occurred because of
misconduct by TicketsClub, rather than by defendants.
Plaintiffs argued that the suspension cited incidents of merchant
agreement non-compliance, and that defendants’ compliance with the
Associations’ rules about merchant agreements was “one of the critical issues
in the case.” As such, plaintiffs contended that “the suspension was
predicated on the very wrongful conduct whether related specifically to
[plaintiffs] or not that led to funds being wired to a third party rather than to
the proper party,” and the bank’s “pattern of negligence,” shown by its
repeated rules violations, was the same conduct that ultimately led to
plaintiffs’ losses. The court denied the motion to exclude, reasoning that
there seemed to be an issue of fact and it would be up to the jury to determine
the weight of the evidence of rules violations relating to plaintiffs’ allegations.
The court also found that evidence of whether Bankard paid taxes with
the money it turned over to CNP was relevant and presented a factual
dispute for trial. Defendants argued that the only relevant evidence related
to approximately $23,000 paid on behalf of plaintiffs, not the entire $1.4
million Bankard sent to CNP from 79 merchant accounts. Plaintiffs argued
that evidence of the entire amount Bankard paid was relevant to show that
after its suspension, “the bank took 1.4 million dollars, paid it to the very
entity [CNP] the bank is crediting with causing the termination. Told the
merchants your money is gone because we paid taxes.” The court indicated
that it would allow evidence of the total amount paid and “general testimony
about what is going on,” but would not allow plaintiffs to go “item by item”
through the details of payments related to other merchants, as that would be
“far afield and a waste of time.”
At trial, the parties introduced several exhibits related to the
suspension, including the September 2006 letter informing defendants that
MasterCard was suspending defendants’ right to acquire card-not-present
transactions. The letter cited 35 “incidents of compliance program
violations,” including violations of the Associations’ rules regarding excessive
chargebacks, merchant agreements (Rule 9.1.1), illegal or brand-damaging
transactions, and fraud. Over defendants’ objection, the court also admitted
46
a response letter from defendants to MasterCard, in which defendants
acknowledged that they had “identified major issues in our internet merchant
acquiring business that needs [sic] serious attention, thus drastic measures
are being implemented to improve practices.” In the letter, Bankard outlined
the steps it was taking to address the issues, including requiring CNP “to do
a reorganization of its management towards stricter risk monitoring and
control.”
In his testimony, plaintiffs’ expert Musante opined that having 35
violations was “exceedingly excessive” and that the same conduct for which
Bankard was cited led to VMS’s losses. He also discussed at length the
Associations’ rules, including MasterCard rule 9.1.1, requiring a written
merchant agreement before the member bank could begin processing
transactions for a merchant, and the rule prohibiting the bank from allowing
a third party to have access to merchant money or reserves. In explaining
the bases for these rules, Musante testified that “because of Bankard’s lack of
control, they had merchants in this system that were engaged in child
pornography and were engaged in other illicit activities like online pharmacy
and sports betting.” When plaintiffs’ counsel asked a further question
whether Musante had “seen indications that Bankard processed payments for
companies engaged in child pornography,” the court sustained defendants’
objection.
Plaintiffs also introduced the indemnity agreement between Bankard
and CNP, as well as evidence that Bankard was unhappy with CNP because
of the suspension, terminated its sponsorship of CNP, and then sent more
than a million dollars to CNP under the indemnity agreement. Bankard
offered testimony by its executives that the amounts paid to CNP were “no
longer merchant funds,” but taxes paid to CNP as the collecting agent for the
Philippine government.
B. Standard of review
Under Evidence Code section 352, a trial court “in its discretion may
exclude evidence if its probative value is substantially outweighed by the
probability that its admission will (a) necessitate undue consumption of time
or (b) create substantial danger of undue prejudice, of confusing the issues, or
of misleading the jury.” We review the trial court’s decision to admit or
47
exclude evidence for abuse of discretion and will not disturb that
determination “‘except on a showing the trial court exercised its discretion in
an arbitrary, capricious, or patently absurd manner that resulted in a
manifest miscarriage of justice.’” (Christ v. Schwartz (2016) 2 Cal.App.5th
440, 446-447, quoting People v. Rodriguez (1999) 20 Cal.4th 1, 9–10.)
C. Analysis
1. Audit and suspension
Defendants contend that the court erred in admitting evidence related
to Bankard’s audit and suspension by the Associations because this evidence
“had no relevance to VMS’s claim of loss.” Apart from a citation to portions of
its statement of facts, defendants offer no further argument regarding
relevance in their opening brief and have therefore failed to establish error.
(See In re S.C. (2006) 138 Cal.App.4th 396, 408 [“To demonstrate error,
appellant must present meaningful legal analysis supported by citations to
authority and citations to facts in the record that support the claim of
error.”]; Atchley v. City of Fresno (1984) 151 Cal.App.3d 635, 647 [“Where a
point is merely asserted by appellant’s counsel without any argument of or
authority for the proposition, it is deemed to be without foundation and
requires no discussion by the reviewing court.”].)
Moreover, we find no support in the record for defendants’ suggestion
that the trial court based its decision to deny the motion in limine on a
misrepresentation by plaintiffs as to the import of the evidence. The parties
argued this issue at length prior to trial and submitted briefing, including the
relevant exhibits. Defendants argued at the time that the incidents cited by
the Associations as the basis for the suspension were not related to any
transactions from plaintiffs. Plaintiffs responded that defendants’ failure to
adhere to the Associations’ rules, particularly those regarding signed
merchant agreements and payment directly to merchants, led to defendants’
suspension and plaintiffs’ losses. To the extent that defendants believed
plaintiffs failed to prove a connection between the suspension and their
damages, defendants were free to make that argument to the jury. We find
no error in the trial court’s conclusion that the issue was one of weight,
rather than admissibility, and that plaintiffs had sufficiently shown that the
suspension by the Associations was relevant to their claims.
48
Defendants also contend that any relevance of the evidence related to
the suspension was outweighed by its prejudicial effect, because it allowed
Musante to suggest that “Bankard promoted on-line child pornography and
the illegal sale of pharmaceuticals and facilitated the flow of money to
terrorist endeavors such as 9/11.” Musante referred to these issues while
explaining the importance of the Associations’ rules, and the problem with
banks, such as Bankard, failing to verify the websites of its merchants or
ceding control of its processing to a third party. To the extent defendants
objected to this evidence at trial and the trial court overruled the objections,
we find defendants have failed to demonstrate any abuse of discretion. The
references to these topics were limited and do not compel a conclusion that
their prejudice to defendants substantially outweighed any probative value.
(See Evid. Code § 352.) Indeed, defendants offered evidence that TicketsClub
(and therefore potentially plaintiffs) was engaged in illegal sales of
pharmaceuticals and had one of the highest percentages of fraud of any
website.
2. Tax payments
Defendants also assert error regarding evidence related to the 2008
indemnity agreement between Bankard and CNP, and Bankard’s payment to
CNP under that agreement, purportedly to satisfy Philippine tax obligations
of VII and 78 other merchants. Defendants contend that the trial court
limited the admission of evidence on this issue to whether the $24,000 tax
payment was made on behalf of VII, and “expressly prohibited any inquiry
into tax payments on behalf of the other 78 merchants,” but plaintiffs
“violated” these limits at trial “with impunity” and the court “inexplicably
refused to enforce its own ruling.”
These contentions are not supported by the record. In ruling on
defendants’ motion in limine on this issue, the trial court noted that inquiry
into the details of amounts purportedly paid by Bankard for taxes for
merchants other than plaintiffs would be a “waste of time.” However, the
court agreed to allow evidence regarding the nature of the indemnity
agreement reached between Bankard and CNP, and the total amount
Bankard paid. At trial, plaintiffs introduced evidence consistent with these
rulings. This included the indemnity agreement and the opinion of their
49
expert, Musante, that Bankard violated the Associations’ rules by
transferring merchant funds to CNP after CNP was deregistered, even
though Bankard blamed CNP for the bank’s termination by the Associations.
Contrary to defendants’ assertions, plaintiffs did not present evidence
or argument focused on “Bankard’s tax payments for other merchants and the
lack of documents to evidence these other payments.” Rather, plaintiffs
pointed to the total amount paid by Bankard to CNP, purportedly in
satisfaction of tax obligations for all of the merchants, including plaintiffs. It
argued that this was both an improper use of merchant funds and that there
was no evidence the taxes were actually paid. For example, plaintiffs’ counsel
argued that “My client’s money was eventually stolen. We were told that
money was paid in taxes, and there is no proof anywhere.” This was within
the scope of the trial court’s pretrial rulings.20
We also reject defendants’ contention that evidence of the total amount
of tax payments was more prejudicial than probative and confusing to the
jury because it suggested that defendants “stole money from 79 merchants.”
Defendants made no showing of undue prejudice, and we find no abuse of
discretion by the trial court in admitting this evidence. Further, because we
conclude there was no error, we need not reach defendants’ claim that any
error was prejudicial.
V. Cost of Proof Sanctions
Defendants contend the trial court abused its discretion when it
awarded $80,658.75 to plaintiffs as cost of proof sanctions pursuant to section
2033.420. They argue that the court erroneously concluded that plaintiffs
had established all of the requisite factors with regard to Rizal’s denial of two
requests for admission. We are not persuaded.
A. Legal Standards
A party to a civil action may propound a written request that another
party “admit . . . the truth of specified matters of fact, opinion relating to fact,
or application of law to fact.” (§ 2033.010.) Correspondingly, “[i]f a party
fails to admit . . . the truth of any matter when requested to do so under
Indeed, the trial court rejected this same argument in defendants’
20
motion for new trial, as well as defendants’ claim that plaintiffs’ counsel
committed misconduct during his closing argument.
50
[section 2033.010], and if the party requesting that admission thereafter
proves . . . the truth of that matter, the party requesting the admission may
move the court for an order requiring the party to whom the request was
directed to pay the reasonable expenses incurred in making that proof,
including reasonable attorney’s fees.” (§ 2033.420, subd. (a).) Once the party
requesting the admission has made the showing under subdivision (a), the
trial court is required to make such an order against the responding party,
“unless [the court] finds any of the following: [¶] (1) An objection to the
request was sustained or a response to it was waived under Section 2033.290.
[¶] (2) The admission sought was of no substantial importance. [¶] (3) The
party failing to make the admission had reasonable ground to believe that
that party would prevail on the matter. [¶] (4) There was other good reason
for the failure to admit.” (§ 2033.420, subd. (b).)
“Requests for admissions differ fundamentally from other forms of
discovery. Rather than seeking to uncover information, they seek to
eliminate the need for proof.” (Stull v. Sparrow (2001) 92 Cal.App.4th 860,
864 (Stull).) “The primary purpose of requests for admissions is to set at rest
triable issues so that they will not have to be tried; they are aimed at
expediting trial. The basis for imposing sanctions [under section 2033.420 ]
is directly related to that purpose. Unlike other discovery sanctions, an
award of expenses . . . is not a penalty. Instead, it is designed to reimburse
reasonable expenses incurred by a party in proving the truth of a requested
admission . . . such that trial would have been expedited or shortened if the
request had been admitted.” (Id. at p. 865, quoting Brooks v. American
Broadcasting Co. (1986) 179 Cal.App.3d 500, 509.)
The determination of whether a party is entitled to expenses under
section 2033.420 is within the sound discretion of the trial court. “More
specifically, ‘[s]ection 2033[.420] clearly vests in the trial judge the authority
to determine whether the party propounding the admission thereafter proved
the truth of the matter which was denied.’” (Stull, supra, 92 Cal.App.4th at
p. 864.) We review the trial court’s determination for an abuse of that
discretion. (Brooks v. American Broadcasting Co., supra, 179 Cal.App.3d at
p. 508.) “An abuse of discretion occurs only where it is shown that the trial
51
court exceeded the bounds of reason.” (Piscitelli v. Friedenberg (2001) 87
Cal.App.4th 953, 972.)
B. Background
After the trial, VMS filed a motion for cost of proof sanctions pursuant
to section 2033.420, seeking reimbursement of the expenses it incurred in
proving the truth of facts denied by defendants in seven requests for
admission. Plaintiffs propounded this set of requests for admission on Rizal
on May 31, 2012.21 At issue here are requests for admission number 26,
which asked Rizal to “[a]dmit YOU failed to comply with Association Rules,”
and number 27, which asked Rizal to “[a]dmit Bankard failed to comply with
Association Rules.” Rizal responded on July 3, 2012. Rizal’s response
included objections and unqualified denials of request numbers 26 and 27.
The court granted plaintiffs’ motion with respect to request numbers 26
and 27 on July 15, 2018. Although it noted that defendants “put [plaintiffs]
to proof at trial on a number of matters that were ultimately uncontested—
such that the trial could have been significantly shortened,” the court
concluded that only the denials to request numbers 26 and 27 met the
standard under section 2033.420. Specifically, the court found plaintiffs
proved that defendants did not comply with the Associations’ rules and that
the matter was “effectively conceded” by defendants. The court pointed to the
fact that defendants were suspended by the Associations for violating the
Associations’ rules and that at trial, defendants “did not argue the suspension
was erroneous or that they did not violate the rules.” The court also noted
that defendants’ expert testified that defendants had violated the
Associations’ rules by processing plaintiffs’ transactions without a signed
contract in place and delegating the obligation to pay to a third party, here,
Grupo Mercarse. Additionally, the court pointed to defendants’ concession
21
At the time the discovery was propounded, Bankard was challenging
jurisdiction in the case through a still-pending motion to quash. On May 25,
2012, the court granted plaintiffs’ request to conduct jurisdictional discovery
related to the motion to quash, noting that plaintiffs had agreed to limit
discovery to Bankard to jurisdictional matters. Thus, plaintiffs addressed
these discovery requests only to Rizal.
52
during closing argument that Bankard “failed to sign one contract” (the VII
TMA), but argued that the failure did not matter.
The court also concluded that the matters at issue were of substantial
importance to plaintiffs’ case, reasoning that “[i]f plaintiffs did not establish
that defendants acted in violation of rules by (a) delegating obligations to the
third parties that committed the fraud, and (b) making payments without a
contract in place, then, at a minimum, defendants would have had an
argument that handing over all the account processing to third parties was
an acceptable business practice that was not negligence . . ., and defendants
would have had a stronger argument that they had no reason to expect that
Grupo Mercarse or Conway would act in a wrongful manner on their behalf.”
The court further found that defendants had no reasonable ground, even in
2012, to believe that they could prevail in showing that they did not violate
any of the Associations’ rules, given Bankard’s suspension in 2006 and
Talbot’s admission that defendants violated the rules in failing to sign the
VII TMA. The court also rejected defendants’ contention that they were
justified in their denials based on their objections to the requests, noting that
the objections “do not excuse a flat denial; at most they would support a
qualified denial or admission that explains how defendants are interpreting
the RFA.”
In a subsequent order, the court awarded $80,658.75 as appropriate
cost of proof sanctions to plaintiffs. Defendants do not challenge the
calculation of this amount on appeal.
C. Analysis
Defendants first contend the trial court erred in finding that plaintiffs
had proved that defendants violated the Associations’ rules. However, they
acknowledge that their expert “agreed that Bankard violated the rules by
processing under the [VII TMA] without having a signed contract in place.”
Defendants cannot possibly demonstrate error on an issue they have
conceded. Their attempt to argue that only Bankard, not Rizal, committed
any violations, even if valid, does not excuse the response to request number
27, in which Rizal denied that Bankard had violated any of the Associations’
rules.
53
Defendants also argue that the trial court erred in concluding that
their violation of the Associations’ rules was of substantial importance to the
trial, because “VMA has conceded and it is beyond dispute that the [VII
TMA] did not cause the loss and, thus, what happened with this contract is
irrelevant.” Defendants provide no citation for this purported concession. We
rejected this argument above. Further, contrary to defendants’ assertion,
plaintiffs argued repeatedly that the VII TMA contract was not the only
applicable contract between the parties in this case, and that defendants’
failure to sign the contract, while continuing to process transactions under
the problematic version they received from Conway, was at least partially
responsible for plaintiffs’ damages.
We also find no error in the trial court’s conclusion that defendants had
no reasonable ground to believe they would prevail in the claim that they had
not violated any of the Associations’ rules. Although defendants cite to
testimony by their witnesses that they believed the suspension was
unjustified because Bankard was improving, none of those witnesses
contested that Bankard had violated the Associations’ rules. Additionally, as
the trial court noted, to the extent Rizal desired to rely on its objections that
the requests were overbroad and ambiguous, or that request number 27 was
improper as non-jurisdictional discovery related to Bankard, it could have
done so or offered a qualified response. But because defendants issued a
denial and later conceded the truth of the request, the court was well within
its discretion to award plaintiffs their costs of proof.
VI. Plaintiffs’ Appeal: Punitive Damages
Plaintiffs contend the trial court erred in granting the motion for JNOV
on the issue of punitive damages, and its finding that Conway was not a
managing agent within the meaning of Civil Code section 3294, subdivision
(b) (section 3294(b)). We affirm.
A. Legal Standards
Civil Code section 3294, subdivision (a) permits an award of punitive
damages “for the breach of an obligation not arising from contract, where it is
proven by clear and convincing evidence that the defendant has been guilty of
oppression, fraud, or malice.” Section 3294(b) provides that a corporate
employer is not liable for punitive damages based upon the acts of its
54
employees unless the acts were committed, authorized, or ratified by a
corporate officer, director, or managing agent.
We review an award of punitive damages for substantial evidence. In
evaluating the sufficiency of the evidence to support a finding made under
the clear and convincing evidence standard, as with punitive damages, the
court “must make an appropriate adjustment to its analysis” to reflect the
higher standard of proof before the trial court. (Conservatorship of O.B.
(2020) 9 Cal.5th 989 (O.B.).)22 Thus, the question before us is “whether the
record as a whole contains substantial evidence from which a reasonable fact
finder could have found it highly probable that the fact was true.” (Id. at p.
1011.) We “view the record in the light most favorable to the prevailing party
below and give appropriate deference to how the trier of fact may have
evaluated the credibility of witnesses, resolved conflicts in the evidence, and
drawn reasonable inferences from the evidence.” (Id. at pp. 1011-1012.)
Similarly, as discussed above, we review an order granting or denying JNOV
by “determining whether it appears from the record, viewed most favorably to
the party securing the verdict, that any substantial evidence supports the
verdict.” (Trujillo v. North County Transit Dist. (1998) 63 Cal.App.4th 280,
284; see also e.g., Wright v. City of Los Angeles, supra, 219 Cal.App.3d at p.
343.)
B. Background
The jury was instructed with CACI No. 3944 regarding punitive
damages as follows: “If you decide that any of Rizal’s and/or Bankard’s
agents’ conduct caused VMS’ or VII’s harm, you must decide whether that
conduct justifies an award of punitive damages against them for their agents’
conduct. At this time you must decide whether VMS and/or VII have proved
by clear and convincing evidence that Rizal’s and/or Bankard’s agents
engaged in that conduct with malice, oppression, or fraud. . . . VMS and/or
VII must also prove one of the following by clear and convincing evidence: 1.
That Rizal’s and/or Bankard’s agents were officers, directors, or managing
22
The court in O.B. resolved a split of opinion on the appropriate level of
review of a factual finding made by clear and convincing evidence. Although
the trial court here did not have the benefit of that ruling, it applied the
correct standard under the line of cases ultimately approved in O.B.
55
agents of Rizal and/or Bankard who were acting on behalf of Rizal and/or
Bankard; or . . . 3. That an officer, a director, or a managing agent . . .
authorized Rizal’s and/or Bankard[’s] agents’ conduct; or 4. That an officer, a
director, or a managing agent . . . knew of Rizal’s and/or Bankard’s agents’
wrongful conduct and adopted or approved the conduct after it occurred. An
employee is a ‘managing agent’ if he or she exercises substantial independent
authority and judgment in his or her corporate decision making such that his
or her decisions ultimately determine corporate policy.”
The jury awarded $7.5 million in punitive damages to VMS. In their
motion for JNOV, defendants argued that the punitive damages award was
not supported by substantial evidence Plaintiffs did not address punitive
damages in their opposition to JNOV. However, in opposing the motion for
new trial, plaintiffs argued that the jury properly found Conway was a
managing agent because defendants “ceded to Mercarse and Conway, et al.
all authority . . . to manage a host of merchants, including VMS.”
In its ruling on defendants’ motion for JNOV, the court rejected
defendants’ argument that there was insufficient evidence that Conway acted
with fraud. However, the court agreed with defendants that there was
insufficient evidence an officer, director, or managing agent of defendants
authorized or ratified Conway’s conduct to support a punitive damages
award. The court noted that plaintiffs failed to address this argument in
their opposition to JNOV or directly address the requirements for punitive
damages during closing argument at trial. However, the court stated it had
considered plaintiffs’ arguments on this issue made in their opposition to the
motion for new trial.
Taking the evidence in the light most favorable to plaintiffs, the court
found there was “no evidence at trial that a corporate officer or director knew
of, authorized, or ratified Conway’s fraud. Thus, the question appears to be
whether Conway was a ‘managing agent’ for purposes of” section 3294(b).
The court relied on White v. Ultramar, Inc. (1999) 21 Cal.4th 563, 577
(White), for the proposition that a managing agent for punitive damages
purposes requires a showing that “the employee exercised substantial
discretionary authority over significant aspects of a corporation’s business.”
The court concluded the evidence was insufficient to meet that burden as to
56
Conway, noting that “her work did not involve ‘formal policies that affect a
substantial portion of the company’ or ‘substantial discretionary authority
over significant aspects of a corporation’s business.’” The court also noted
that defendants were “a large banking company,” with a net worth of over a
billion dollars. Although plaintiffs argued that defendants put Conway in
charge of processing the transactions of over 120 online merchants, the court
found that this evidence that Conway was in charge of “a modest portion of a
large company” could not “bear the weight of a conclusion that Conway or an
associate is making formal policies that affect a substantial portion of the
company and that are the type likely to come to the attention of corporate
leadership to justify punishing the entire company for fraud.”
C. Analysis
Plaintiffs contend the trial court erred in concluding there was no
substantial evidence from which the jury could have found that Conway was
a managing agent, or that defendants’ officer or director ratified or approved
Conway’s conduct. We disagree.
Generally, “principal liability for punitive damages [does] not depend
on employees’ managerial level, but on the extent to which they exercise
substantial discretionary authority over decisions that ultimately determine
corporate policy.” (White, supra, 21 Cal.4th at pp. 576–577.) Thus, to
establish that an individual is a managing agent, a plaintiff seeking punitive
damages must show that “the employee exercised substantial discretionary
authority over significant aspects of a corporation’s business.” (Id. at p. 577;
see also Roby v. McKesson Corp. (2009) 47 Cal.4th 686, 715; Cruz v.
HomeBase (2000) 83 Cal.App.4th 160, 167–168 [“‘corporate policy’ is the
general principles which guide a corporation, or rules intended to be followed
consistently over time in corporate operations,” and thus “[a] ‘managing
agent’ is one with substantial authority over decisions that set these general
principles and rules”].) The key inquiry thus concerns the employee’s
authority to change or establish corporate policy. (Myers v. Trendwest
Resorts, Inc. (2007) 148 Cal.App.4th 1403, 1437; see also CRST, Inc. v.
Superior Court (2017) 11 Cal.App.5th 1255, 1273
Plaintiffs contend the trial court used an incorrect standard. We
disagree. Citing to the court’s language that Conway managed “a modest
57
portion of a large company,” plaintiffs attempt to cast the trial court’s
reasoning as requiring a strict “quantitative showing as to the percentage of
the defendants’ overall business the agent’s particular authority represents.”
We do not view the trial court’s reasoning as improper. The court focused on
the evidence of defendants’ large size, compared to the small amount of
business managed by Conway, as well as the lack of evidence that Conway’s
work involved any formal policies for defendants. This analysis is squarely in
line with the requirement under Ultramar that a managing agent have the
ability to affect a “substantial portion” of defendants’ business and is
similarly reflected in the jury instructions given here.
Plaintiffs also briefly argue that even if the court’s standard for a
managing agent was legally correct, the court could not rely on it to grant the
JNOV, as the jury was never instructed that it should analyze “(1) whether
Conway’s work involved ‘formal policies that affect[ed] a substantial portion
of the company,’ and (2) whether Conway had ‘substantial discretionary
authority over significant aspects of [the Bank’s] business.’” The jury was
instructed that an employee is a managing agent if “he or she exercises
substantial independent authority and judgment in his or her corporate
decision making such that his or her decisions ultimately determine
corporate policy.” Plaintiffs fail to provide either an explanation or citation to
authority suggesting how the agreed-upon jury instruction was inconsistent
with the standard applied by the court.
Furthermore, we conclude that there was insufficient evidence from
which the jury could have found it highly probable that Conway was
defendants’ managing agent.23 Viewed in the light most favorable to the
verdict, the evidence suggested that Conway managed the bank’s processing
relationships with most of its roughly 124 card-not-present merchants,
assuming several roles through her various entities. However, there was no
However, we reject defendants’ contention that Conway could not be a
23
managing agent because she was not an employee. Defendants did not raise
this argument below, nor did they request a corresponding jury instruction.
Moreover, defendants ignore the cases finding a third party was a managing
agent under section 3294(b). (See Major v. Western Home Ins. Co. (2009) 169
Cal.App.4th 1197, 1220 (Major) [holding that third party claims adjuster
could be a managing agent of insurer defendant].)
58
evidence at trial that Conway had any role in making formal policies that
affected a substantial portion of defendants’ company. While Conway’s
position as an outside agent may not have automatically excluded her as a
potential managing agent, it certainly did not position her as able to affect
significant aspects of defendants’ banking business, nor do plaintiffs point to
any evidence to suggest otherwise. Thus, we agree with the trial court that
the evidence does not support the conclusion that Conway held a sufficient
level of authority to “justify punishing the entire company for fraud.” (See
Roby v. McKesson Corp., supra, 47 Cal.4th at pp. 714–715 [“When we spoke
in White about persons having ‘discretionary authority over . . . corporate
policy’[ ], we were referring to formal policies that affect a substantial portion
of the company and that are the type likely to come to the attention of
corporate leadership. It is this sort of broad authority that justifies
punishing an entire company for an otherwise isolated act of oppression,
fraud, or malice.”].)
The cases cited by plaintiffs reflect instances of broader decision
making authority and therefore are distinguishable. For example, in Major,
supra, 169 Cal.App.4th at p. 1220, the court found a regional manager for a
third party claims adjuster was a managing agent, where the adjuster was
hired by the defendant insurer to handle “a significant aspect” of the
defendant’s business: the claims handling functions for the entire business.
The regional manager “managed 35 employees in an office in Minnesota that
handled claims as far away as California, oversaw the claims operation,
supervised lower ranking supervisors, trained adjusters, worked on the
budget, supervised the handling of certain files, and authorized payment of
benefits.” (Ibid.; see also Mazik v. Geico General Ins. Co. (2019) 35
Cal.App.5th 455, 465-466 [finding that regional liability administrator was a
managing agent of insurer, where administrator had “wide regional authority
over the settlement of claims” and “broad decisionmaking responsibility for
establishing GEICO’s settlement standards”]; Powerhouse Motorsports
Group, Inc. v. Yamaha Motor Corp., U.S.A. (2013) 221 Cal.App.4th 867, 886
[regional sales manager for four states was managing agent where he
managed between 140 and 240 dealerships, a group of “district managers”
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and was “ultimately responsible for the total well-being of Yamaha Motor
Corporation Dealers”].)
Alternatively, plaintiffs argue there was sufficient evidence for the jury
to award punitive damages based on a finding that defendants ratified
Conway’s conduct. Plaintiffs acknowledge that they did not expressly argue
ratification during closing argument. Despite this, they contend the jury
could have found, based on the evidence, that a bank officer or director
adopted and approved Conway’s conduct.
We are not persuaded. Plaintiffs’ argument regarding ratification
focuses on two pieces of evidence: 1) defendants’ decision to process
transactions without signing the VII TMA; and 2) defendants’ transfer of
money to CNP under the indemnity agreement, purportedly for payment of
taxes owed by the merchants. On the first point, although defendants
admitted they did not sign the VII TMA, there was no evidence that
defendants knew Conway had supplied them with a different version of the
agreement, including changes to the rates charged, or that she was pocketing
some of the money they paid for plaintiffs’ transactions. Plaintiffs’
representatives testified that their processing with defendants (including
where they sent the transactions and where they received payment)
remained unchanged after plaintiffs signed the VII TMA. Thus, plaintiffs’
own evidence does not support a finding that defendants ratified Conway’s
misconduct by continuing to process transactions without signing the VII
TMA.
Second, plaintiffs point to defendants’ decision to sign the indemnity
agreement with CNP and pay CNP money that plaintiffs claim was due to
merchants. But at most, defendants owed plaintiffs $23,000. Plaintiffs’
suggestion in their appellate brief that defendants transferred “$1.1 million
of [plaintiffs’] money” to CNP is therefore meritless. Even assuming none of
the money was actually paid to settle tax liabilities, there was no evidence
that defendants knew the tax liabilities would not be paid, and plaintiffs’
contentions are contrary to the language of the indemnity agreement.
Under these circumstances, it is not highly probable that the jury could
reasonably conclude that defendants ratified Conway’s misconduct. We
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therefore conclude that the court did not err in granting the motion for JNOV
as to punitive damages.24
DISPOSITION
The judgment and post-judgment orders are affirmed. The parties are
to bear their own costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
COLLINS, J.
We concur:
WILLHITE, ACTING P.J.
CURREY, J.
24Thus,we need not reach defendants’ contentions that the claim for
punitive damages was forfeited, barred by the statute of limitations, or that
there was insufficient evidence of malicious conduct to support the jury
verdict.
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