G & W Warren's, Inc. v. Dabney , 11 Cal. App. 5th 565 ( 2017 )

Filed 5/4/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
G & W WARREN’S, INC., No. H042243
(Monterey County
Plaintiff and Respondent, Super. Ct. No. M122308)
v.
JUDSON V. DABNEY, II,
Defendant and Appellant.
We are confronted here with issues concerning the scope of a guaranty given to
secure the buyer’s obligations under a master agreement and various subsidiary
agreements involving the purchase and sale of a motorcycle dealership. In addition, we
address the circumstances under which the liability of the guarantor, by virtue of
subsequent actions by the seller, may be exonerated.
Granville and Wanda Warren (the Warrens), through their corporation, G&W
Warren’s, Inc. (G&W Warren’s), owned and operated a Harley-Davidson motorcycle
dealership in Salinas for approximately 38 years. Intending to retire, the Warrens
contacted a potential buyer, Judson V. Dabney, II (Dabney), who owned a Harley-
Davidson dealership in Riverside. In November 2006, G&W Warren’s and Dabney
executed various agreements to accomplish the sale of the Salinas dealership, including a
master “Asset Purchase Agreement” (Agreement) that incorporated by reference the other
agreements. One of those agreements was a “Letter of Guaranty” (Guaranty) signed by
Dabney, under which he “covenant[ed] and agree[d] . . . to guarantee . . . the collection
and receipt of all amounts” required under section 2 of the Agreement, under the
promissory note(s), and under the lease. The Agreement also provided that Dabney could
assign his rights and obligations as buyer to a corporation that he controlled, and that
such assignment would relieve Dabney of all obligations under the Agreement. Dabney
assigned his rights under the Agreement to Monterey Motorcycles, Inc. (Assignee or
MMI).
Assignee ultimately defaulted on its obligations under the Agreement and the
accompanying instruments, and the dealership was sold in August 2012 to a third party.
G&W Warren’s brought suit against Dabney. After a court trial based upon G&W
Warren’s claim that Dabney was liable under the Guaranty for Assignee’s obligations, a
judgment was entered in favor of G&W Warren’s for the amount of $2,746,318.
On appeal, Dabney contends that the court erred in finding him liable for $537,399
and $567,136 under the covenant not to compete agreement and two consulting
agreements, respectively. He contends the Guaranty did not cover the obligations under
those three agreements that were signed by the parties at the time of the sale. Dabney
also argues that the court erred in finding him liable at all. He asserts that, by virtue of
G&W Warren’s having agreed with Assignee to extend the deadline for payments and
having provided it with additional loans—concessions to which Dabney did not agree—
he was exonerated from any liability under the Guaranty.
We conclude that the court erred in concluding that Dabney was liable under the
Guaranty for Assignee’s obligations under the covenant not to compete and two
consulting agreements. We reject Dabney’s other claim of error. Accordingly, we will
reverse the judgment and remand the case with instructions that the trial court enter a new
and different judgment in favor of G&W Warren’s and against Dabney in the amount of
$1,641,783.27, plus interest, costs, and attorney fees.
PROCEDURAL BACKGROUND
G&W Warren’s alleged in the first amended complaint filed June 12, 2013
(complaint), a single cause of action for breach of contract against Dabney. It alleged
2
that it entered into the Agreement, as seller (Seller),1 with Dabney, as buyer (Buyer) in
November 2006 for the sale of its Salinas motorcycle dealership for “$1,516,000.00, plus
additional consideration.” That additional consideration included amounts provided
under a lease of the dealership space, a covenant not to compete executed by the
Warrens, and separate consulting agreements signed by the Warrens. G&W Warren’s
alleged further in the complaint that the Warrens assigned their respective interests in the
consulting agreements to G&W Warren’s. The sale of the dealership closed escrow on or
about March 1, 2007. G&W Warren’s alleged that the last payments on the obligations
under the Agreement and accompanying instruments occurred in August 2012, and that
Dabney had failed and refused to make further payments that were owing.
Although no formal amendment of the complaint appears in the record, G&W
Warren’s proceeded to trial under the unpleaded theory that Dabney was liable under the
Guaranty that secured Assignee’s obligations under the Agreement and accompanying
instruments involved in the sale of the dealership. In its pretrial brief, G&W Warren’s
noted that the Guaranty was not attached to complaint, but that it would seek leave to
amend the complaint at trial to conform to proof. Further, at trial, counsel for G&W
Warren’s stated that his client was seeking recovery under the Guaranty of Assignee’s
obligations. Dabney raised no objection to G&W Warren’s trial of the case under this
theory of liability. And the parties’ respective post-trial briefs concerned only Dabney’s
potential liability under the Guaranty.
1
The Agreement and related documents, which are attached to the complaint,
identify Seller as “Warren’s Harley-Davidson, Inc., a Corporation.” G&W Warren’s
alleged in the complaint that it is a California corporation that was formerly known as
“Warren’s Harley-Davidson, Inc.” Wanda Warren testified that when she and her
husband sold the dealership, they—at the request of Harley-Davidson—changed the
name of the corporation to G&W Warren’s, Inc. Any reference herein to the rights and
obligations of the Seller under the Agreement and attendant documents shall be to those
of G&W Warren’s, regardless of the name of the corporation at the time those documents
were executed.
3
After a court trial on September 22, 2014, and submission of the case to receive
post-trial briefs, the court issued its tentative decision in favor of G&W Warren’s. It
found Dabney liable under the Guaranty and rejected Dabney’s affirmative defenses.
Formal judgment was later entered on January 22, 2015, awarding G&W Warren’s
damages against Dabney in the amount of $2,746,318.78, plus interest, costs of $1,281,
and attorney fees according to proof in a separate proceeding. The monetary judgment
was based upon the following components adduced through evidence presented by G&W
Warren’s accountant: $1,611,691.72 (promissory note), $198,167.20 (lease),
$537,399.17 (covenant not to compete), $567,136.34 (consulting agreements), less
$168,075.65 (escrow payment from subsequent sale of dealership). Dabney appealed
from the judgment. On April 13, 2015, a modified judgment was entered, reflecting the
inclusion of an attorney fee award of $23,805 in favor of G&W Warren’s. Dabney
thereafter filed a notice of appeal from the “order after judgment” identified as having
been entered on the date of entry of the modified judgment.2
DISCUSSION
I. Summary of Relevant Agreements
In order to effectuate the sale of the motorcycle dealership, the parties entered into
the Agreement and various other instruments referenced in the Agreement. (Hereafter,
the Agreement and other instruments referenced therein are referred to collectively as the
2
G&W Warren’s argues incorrectly that this second appeal notice, filed June 29,
2015, was untimely pursuant to rule 8.104(a)(1)(A) of the California Rules of Court.
Although the notice was filed 62 days after service of notice of entry of the modified
judgment, it was timely, since the 60th day for filing the notice of appeal fell on a
Saturday (June 27, 2015) and the next business day was June 29, 2015. (See Code Civ.
Proc., § 12a.) But to the extent Dabney purportedly sought, by his second notice of
appeal, to challenge the court’s order awarding attorney fees, he has forfeited that
challenge by failing to raise the issue in his appellate briefs. (Kelly v. CB & I
Constructors, Inc. (2009) 179 Cal.App.4th 442, 451 [failure to assert issue in appellate
briefs resulted in forfeiture of claim of error].)
4
purchase documents.) Although the precise date of execution of the purchase documents
cannot be gleaned from the record, it is apparent that they were signed by the parties in
November 2006.
The Agreement provided in the opening paragraph that it was being entered into
between G&W Warren’s, as Seller, and “ ‘Dabney’ (subject to assignment under section
9.6 hereof to his designated corporation or other entity),” as Buyer. Included among the
recitals were that Seller wished to sell, and Buyer wished to buy the motorcycle
dealership and that the parties also wished to enter into a lease where the dealership was
located.
The Agreement contained specific references to other instruments that were
contemplated in the transaction, and the form of each instrument was attached to the
Agreement. The remaining agreements signed by the parties consisted of, inter alia, (1) a
promissory note in the amount of $1,016,000 signed by Dabney as Maker; (2) a five-year
lease of the business premises signed by Dabney as Tenant, with monthly rent fixed at
$31,400; (3) a covenant not to compete (noncompete agreement) signed by G&W
Warren’s, as Seller, the Warrens, as Principals, and Dabney, as Buyer, calling for Dabney
to pay the Warrens $8,333.33 per month for a term of five years ($500,000 total);
(4) separate consulting agreements signed by Granville and Wanda Warren, as
consultants, and Dabney, as Buyer, calling for Dabney to pay the Warrens $4,166.67 per
month, each, for a term of five years ($500,000 total); and (5) a Letter of Guaranty signed
by Dabney.
II. Liability of Dabney as Principal
Before addressing Dabney’s chief claims of error, we consider the question of
Dabney’s liability as the principal obligor under the purchase documents. A brief review
of this issue is necessitated by the ambiguity created by the allegations of the complaint,
as compared with the theory of the case presented by G&W Warren’s at trial.
5
Dabney asserts in his opening brief that the case was tried and decided solely upon
his alleged liability as surety under the Guaranty. He contends that it was clear that he
could not be held liable as a principal because any such liability was terminated by his
assignment of the Buyer’s rights to Assignee, a proper assignment as contemplated under
the terms of the Agreement.
G&W Warren’s makes two arguments in its respondent’s brief in favor of
Dabney’s liability as a principal. First, it contends that there was no effective assignment
by Dabney to Assignee relieving Dabney of personal liability under the purchase
documents. Second, G&W Warren’s asserts that by the terms of the noncompete
agreement, any assignment by Dabney would not relieve him of personal liability under
that agreement. These arguments fail for several reasons.
First, as noted above, although the case was initially pleaded as one for Dabney’s
liability as a principal under the purchase documents, the case was tried under the theory
that he was liable as surety under the Guaranty. This was confirmed on multiple
occasions by counsel for G&W Warren’s when he (1) stated toward the conclusion of the
trial that G&W Warren’s was seeking recovery from Dabney under the Guaranty of
Assignee’s obligations; (2) did not contend at trial that Dabney’s assignment of his rights
as Buyer to Assignee was ineffective or that the terms of the noncompete agreement
precluded Dabney from assigning his rights thereunder to relieve himself of obligations
as principal; and (3) limited his argument in his post-trial brief to Dabney’s liability under
the Guaranty, stating that “[n]otwithstanding the apparent assignment, [Dabney]
remained liable to [G&W Warren’s] by virtue of a written Letter of Guaranty.”
Moreover, contrary to G&W Warren’s assertion in its appellate brief, the trial
court did not base its decision on Dabney’s liability as principal under the purchase
documents. Instead, the court noted in its tentative decision that upon sale, the dealership
was placed in a corporation formed by Dabney and three others, changing the business
name to MMI; as a result of a later economic downturn, MMI defaulted on the required
6
payments; G&W Warren’s in the action sought recovery from Dabney under the
Guaranty; and that Dabney’s defenses under the Guaranty were without merit. G&W
Warren’s is precluded from now asserting that the judgment should be affirmed based
upon Dabney’s liability as a principal. (See Beroiz v. Wahl (2000) 84 Cal.App.4th 485,
498, fn. 9 [plaintiff cannot assert new theory of liability for the first time on appeal];
Richmond v. Dart Industries, Inc. (1987) 196 Cal.App.3d 869, 874 [same].)
Second, at no time did G&W Warren’s assert below that Dabney’s assignment of
his rights as Buyer to Assignee was ineffective or that any assignment would not relieve
Dabney of obligations as principal under the noncompete agreement. G&W Warren’s
has therefore forfeited these arguments. (See In re Marriage of Arceneaux (1990)
51 Cal.3d 1130, 1133-1134; Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d
180, 184-185, fn. 1.)
Third, the contentions, in any event, lack merit. As to the assignment of the
Agreement, G&W Warren’s states conclusorily in respondent’s brief that Dabney “did
not offer evidence of a signed, written assignment, as required.” In the introductory
paragraph, the Agreement defined “the ‘Buyer’ ” as “Judson V. Dabney, II (subject to
assignment under section 9.6 hereof to his designated corporation or other entity).”
Section 9.6 provided in relevant part: “Assignment. This Agreement shall not be
assignable by any Party without the prior written consent of the other Party; provided,
however, that Buyer may assign its interests hereunder to any corporation or other entity
in which Buyer has a controlling interest whereupon that assignee shall automatically and
without need for consent or approval of any other Party . . . become the Buyer, with the
assignor Buyer being fully and completely relieved of any obligation or duty hereunder.”
Contrary to G&W Warren’s assertion, there was no requirement under section 9.6 that
the contemplated assignment by Dabney be in writing or delivered to the Seller. Further,
Wanda Warren testified that she (1) understood that Dabney had assigned his rights under
the Agreement to Assignee, MMI; (2) had (along with her husband) signed a bill of sale
7
in which the Buyer was identified as MMI; (3) had accepted payments from MMI; and
(4) had no objection to such assignment.
As to the assignability of the noncompete agreement, G&W Warren’s argues on
appeal that any such assignment would not relieve Dabney of liability as a principal. It
cites to section 7 of the noncompete agreement as expressly prohibiting its assignment by
the Buyer. Section 7 provided in part: “No party may assign duties and benefits
hereunder . . . This Agreement shall be binding upon, and shall inure to the benefit of, the
parties to it and their respective heirs, legal representatives, successors, assigns.” But
G&W Warren’s argument ignores the fact that the preamble of the noncompete
agreement identified the “ ‘Buyer’ ” as “[insert JUDSON V. DABNEY II or designated
assignee entity].” This description was consistent with the preamble of the Agreement in
which, as noted above, the “ ‘Buyer’ ” was identified as Dabney, subject to the
assignment provisions of section 9.6 of the Agreement. Reading the two agreements
together, it is plain that section 7 of the noncompete agreement prohibited only further
assignments by Buyer after the contemplated assignment by Dabney to an entity he
controlled, as specified in the Agreement.
Accordingly, there is no basis for G&W Warren’s contention here that Dabney
remained liable as principal under the various purchase documents.
III. Challenge to Judgment Based on Guaranty Liability
Dabney asserts two claims of error with respect to the trial court’s imposition of
liability under the Guaranty. First, he argues that the judgment included liability for three
obligations under the purchase and sale transaction that were not subject to the Guaranty,
namely, the obligations under the noncompete agreement and the two consulting
agreements. Second, he contends that the court erred in imposing any liability at all,
because any undertaking he assumed under the Guaranty to satisfy the obligations of the
principal (Buyer) was exonerated as a result of the Seller’s alteration of the principal’s
obligations without Dabney’s consent. We address these two arguments below.
8
A. Judgment Exceeded Scope of Guaranty
The second paragraph of the Guaranty provided in relevant part: “[Dabney]
covenant[s] and agree[s] . . . to guarantee, in favor of [the Warrens and W&G Warren’s],
the collection and receipt of all amounts to be paid under [sic] by Buyer under Section 2
of the Agreement, the Maker’s obligations under the Promissory Note(s), and the Tenant
under the Lease.” Section 2.1 of the Agreement provided that “[t]he consideration to be
paid by Buyer for the Purchased Assets is the sum (the ‘Purchase Price’) of the
following: . . .” Section 2.1 went on to list monetary payments (based upon specific
formulae or assigned values) for six categories of assets, namely, (a) new motorcycles;
(b) used motorcycles; (c) goodwill, proprietary rights, and other intangible assets
($700,000); (d) fixed assets, equipment, and miscellaneous supplies ($50,000);
(e) MotorClothes, parts, accessories, boutique items, merchandise, and miscellaneous
inventory ($745,000); and (f) work-in-progress ($21,000). Section 2 of the Agreement
did not identify any other assets or items that comprised the “Purchase Price.”
Dabney contends that the Guaranty, by its specific terms, embraced only particular
obligations of the principal (Buyer) under the various purchase documents. He argues
that, simply stated, since the noncompete and consulting agreements were not mentioned,
the obligations thereunder were not secured by the Guaranty. G&W Warren’s responds
that the Guaranty included all obligations under the purchase documents because (1) the
goodwill of the business that was referenced in section 2 of the Agreement included
amounts that were allocated in the sale to payments under the noncompete and consulting
agreements; (2) the Agreement adopted and incorporated by reference all instruments
signed in connection with the sale; and (3) the Warrens understood that the payments
made by Buyer under the Agreement and accompanying instruments (including the
noncompete and consulting agreements) were all part of one purchase price for the
dealership.
9
“A surety or guarantor is one who promises to answer for the debt, default, or
miscarriage of another . . .” (Civ. Code, § 2787.)3 A guarantor or “surety cannot be held
beyond the express terms of his contract.” (Bloom v. Bender (1957) 48 Cal.2d 793, 803
(Bloom).) But a contract of a surety or guarantor “ ‘is to be interpreted by the same rules
used in construing other types of contracts, with a view towards effectuating the purposes
for which the contract was designed. [Citations.]’ [Citations.]” (U.S. Leasing, supra,
69 Cal.2d at p. 284, quoting Bloom, at p. 803; see also §§ 1635, 2837.)
Accordingly, in determining the scope of the Guaranty here, we invoke familiar
principles for the interpretation of contracts. “The basic goal of contract interpretation is
to give effect to the parties’ mutual intent at the time of contracting. (Civ. Code, § 1636;
[citation].) When a contract is reduced to writing, the parties’ intention is determined
from the writing alone, if possible. (§ 1639.) ‘The words of a contract are to be
understood in their ordinary and popular sense.’ (Civ. Code, § 1644; [citation].)”
(Founding Members of the Newport Beach Country Club v. Newport Beach Country
Club, Inc. (2003) 109 Cal.App.4th 944, 955-956 (Founding Members).) “ ‘Contract
formation is governed by objective manifestations, not the subjective intent of any
individual involved. [Citations.] The test is “what the outward manifestations of consent
would lead a reasonable person to believe.” [Citation.]’ [Citation.]” (Allen v. Smith
(2002) 94 Cal.App.4th 1270, 1277.) Thus, “[t]he parties’ undisclosed intent or
understanding is irrelevant to contract interpretation. [Citations.]” (Founding Members,
at p. 956.)
The Guaranty on its face secured only specified obligations assumed by the Buyer
in the purchase and sale transaction. In the instrument, Dabney guaranteed “the
3
Pursuant to a 1937 amendment to Civil Code section 2787, California law
makes no distinction between a surety and guarantor. (See U.S. Leasing Corp. v. duPont
(1968) 69 Cal.2d 275, 284, fn. 10 (U.S. Leasing).) Further statutory references are to the
Civil Code unless otherwise specified.
10
collection and receipt of all amounts to be paid” by the Buyer under the “Purchase Price”
as defined in section 2 of the Agreement, under the promissory note, and under the lease
agreement. As noted, the elements of the “Purchase Price” described in section 2.1 of the
Agreement consisted of specific amounts paid for new and used motorcycles, inventory,
fixed assets, equipment, supplies, merchandise and accessories, and goodwill, proprietary
rights and other intangible assets. In another section of the Agreement (section 3.4),
provisions were made for the Buyer to undertake additional obligations over a five-year
term by signing four separate instruments—a lease ($1,884,000), noncompete agreement
($500,000), and two consulting agreements ($500,000 in the aggregate). And the parties’
apparent intention to identify in the Agreement the obligations under the Purchase Price
as being separate and apart from the Buyer’s other obligations was demonstrated in
section 3.4; there, the Buyer’s obligation to furnish the Purchase Price (section 3.4(b))
was listed separately from the obligations to provide the signed lease, noncompete
agreement, and consulting agreements (section 3.4(c)-(e)).
Further, the Guaranty is described in the Agreement in one subsection as “[a]
personal guaranty of the promissory note executed by Judson V. Dabney, II in the form of
Exhibit 7 hereto.” (Italics added.) And the Agreement identified as one of the conditions
precedent to the Buyer’s obligations as the execution of a lease agreement in a form
attached to the Agreement “and personally guarantied by Judson V. Dabney, II in the
form and content of Exhibit 7 hereto.” These descriptions of the Guaranty—and the
omission in the Agreement of any reference to the Guaranty as securing the Buyer’s
obligations under the noncompete or consulting agreements—constitute further evidence
of the parties’ mutual intention, as expressed in the purchase documents, that the
Guaranty was limited to specific obligations of the Buyer. Had the parties intended the
Guaranty to embrace the obligations of the Buyer under these three agreements, they
could have easily so provided. (Cf. Stephenson v. Drever (1997) 16 Cal.4th 1167, 1174-
1175 [under the maxim expressio unius est exclusio alterius, fact that contract expressly
11
provided a consequence to follow from an event “tend[ed] to negate any inference that
the parties also intended another consequence to flow from the same event”].)
But G&W Warren’s argues that the mutual intentions of the parties and the
circumstances under which the purchase documents were executed show that the
Guaranty was intended to embrace the obligations under the noncompete agreement and
consulting agreements. It adverts to the testimony of Wanda Warren that (1) the parties
relied on their respective accountants to structure the transaction to their mutual tax
advantage; (2) the Warrens “didn’t really retain an attorney,” but had an attorney look at
the purchase documents after they were prepared by Dabney’s attorney; (3) she
understood that the consideration to be paid by the Buyer under the consulting
agreements was part of the purchase price; and (4) she and her husband thought it would
be “prudent” to obtain the Guaranty. G&W Warren’s asserts further that Dabney, in his
testimony, did not contradict Wanda Warren’s testimony concerning her understanding of
the transaction.
We note that the language of the contract governs its interpretation when it “is
clear and explicit, when it does not involve an absurdity.” (§ 1638.) And, generally
speaking, the parties’ intentions are to be ascertained from the contract’s language alone,
where possible. (§ 1639.) “Extrinsic evidence is ‘admissible to interpret the instrument,
but not to give it a meaning to which it is not reasonably susceptible’ [citations], and it is
the instrument itself that must be given effect.” (Parsons v. Bristol Development Co.
(1965) 62 Cal.2d 861, 865; see also Pacific Gas & Elec. Co. v. G. W. Thomas Drayage &
Rigging Co. (1968) 69 Cal.2d 33, 37 [extrinsic evidence admissible to explain contract
not because contract language is clear on its face but when it “is relevant to prove a
meaning to which the language of the instrument is reasonably susceptible”].) Here, the
language of the Guaranty “is clear and explicit” (§ 1638) and on its face bears the
meaning Dabney ascribes to it, namely, that he, as guarantor, agreed to stand behind the
Buyer’s obligations under section 2 of the Agreement (i.e., the consideration comprising
12
the “Purchase Price,” the promissory note, and the lease). And while one may envision a
sale of a business structured differently so that the party issuing a guaranty might agree
specifically to stand behind all obligations undertaken by the buyer, the language in this
instance guaranteeing only certain obligations “does not involve an absurdity.” (Ibid.)
Further, while G&W Warren’s urges—based in part upon Wanda Warren’s
testimony as to her understanding—that the parties’ mutually intended that the Guaranty
include the Buyer’s obligations under the noncompete and consulting agreements, the
objective intent, as shown by the words of the document, rather than the subjective intent
of one of the parties, controls. (Founding Members, supra, 109 Cal.App.4th at p. 956;
see also Winet v. Price (1992) 4 Cal.App.4th 1159, 1166, fn. 3 [“evidence of the
undisclosed subjective intent of the parties is irrelevant to determining the meaning of
contractual language”].) Thus, “[c]ontract formation is governed by objective
manifestations, not subjective intent of any individual involved. [Citations.] The test is
‘what the outward manifestations of consent would lead a reasonable person to believe.’
[Citation.]” (Roth v. Malson (1998) 67 Cal.App.4th 552, 557.) Thus, the fact that the
Warrens may have subjectively intended or believed that the Guaranty would secure all
obligations of the Buyer—where that intention or belief was not disclosed to Dabney—is
of no consequence in construing the Guaranty.
But G&W Warren’s contends that under the plain meaning of the Agreement, the
“goodwill” of the business, as referred to in section 2, “includes the compensation
allocated to the noncompete and consulting agreements.” We acknowledge that,
practically speaking, there is a close connection between the transfer of goodwill in the
sale of a business and a covenant not to compete obtained from the seller. As has been
explained: “[C]ourts may enforce nonsolicitation covenants barring the seller from
soliciting the sold business’s employees and customers. [Citation.] These covenants
prevent the seller from unfairly depriving the buyer of the full value of its acquisition,
including its goodwill. [Citations.] . . . A covenant not to solicit the sold business’s
13
employees and customers prevents the seller from eroding the very goodwill it sold,
while allowing the seller otherwise to pursue its chosen business with whatever
employees and customers it can attract. [Citation.]” (Strategix, Ltd. v. Infocrossing West,
Inc. (2006) 142 Cal.App.4th 1068, 1073.) Nothing in either the Agreement or Guaranty,
however, suggests that the Buyer’s compensation of the Seller under the noncompete
agreement was one of the obligations secured under the Guaranty. Thus, there is no
support for G&W Warren’s bare statement that the goodwill “include[d] the
compensation allocated to the noncompete and consulting agreements.” To the contrary,
there is no reference in section 2.1(c) of the Agreement—in which the Buyer agreed to an
allocation of $700,000 of the “Purchase Price” to “goodwill, proprietary rights and other
intangible assets”—to payments under the noncompete and consulting agreements that
are described elsewhere in the Agreement.
Lastly, we reject G&W Warren’s argument that because the Agreement
incorporated by reference the remaining purchase documents, “the business had one
purchase price, allocated among several contracts,” including the noncompete and
consulting agreements. As mentioned, the “Purchase Price” was specifically described in
section 2 of the Agreement, and that description did not include the consideration
provided under the noncompete and consulting agreements. To construe that section of
the Agreement to include payments made under those agreements would contravene the
principle that “[i]f the plain language of the instrument is unambiguous, a court may not
‘read into’ the document additional terms in order to conform its meaning to what the
court’s ‘intuition’ tells it the parties must have intended. Rather, the court ‘is simply to
ascertain and declare what is in terms or in substance contained therein, not to insert what
has been omitted, or to omit what has been inserted . . . .’ [Citations.]” (PV Little Italy,
LLC v. MetroWork Condominium Assn. (2012) 210 Cal.App.4th 132, 152, quoting Code
Civ. Proc., § 1858.)
14
As noted, a surety (or guarantor) may not be held liable beyond the express terms
of his or her contract. (Bloom, supra, 48 Cal.2d at p. 803; see also U.S. Leasing, supra,
69 Cal.2d at p. 284; Bank of America Nat. Trust & Savings Ass’n v. Kelsey (1935) 6
Cal.App.2d 346, 350 [guarantor’s liability “should not be extended by implication
beyond the express terms of the instrument in which the guaranty is contained”].) Thus,
for instance, it was held that a surety’s guarantee of the principals’ compliance with a
specific statute could not be construed to guarantee the principals’ compliance with
another statute subsequently enacted by the Legislature. (See Brock v. Fidelity & Deposit
Co. of Md. (1938) 10 Cal.2d 512, 518; see also Norton v. Title Guaranty & Surety Co.
(1917) 176 Cal. 212, 215 [surety issuing bond for notary could not be held liable for
principal’s other conduct in acting as the plaintiff’s agent and legal adviser].) Applying
the relevant rules of contract interpretation, and reviewing the trial court’s construction of
the contract de novo (see ibid.; see also Founding Members, supra, 109 Cal.App.4th at p.
955 [where there is no extrinsic evidence or extrinsic evidence is not in conflict, appellate
court construes contract de novo]), we conclude that the court erred in construing the
Guaranty as constituting Dabney’s guarantee of the Buyer’s obligations under the
noncompete and consulting agreements.
B. Guaranty Liability Was Not Exonerated
Dabney also contends that any liability he might otherwise have incurred under the
Guaranty was exonerated under section 2819, which reads in part: “A surety is
exonerated, except so far as he or she may be indemnified by the principal, if by any act
of the creditor, without the consent of the surety the original obligation of the principal is
altered in any respect, or the remedies or rights of the creditor against the principal, in
respect thereto, in any way impaired or suspended.” He asserts that the undisputed
evidence was that G&W Warren’s and Assignee (MMI) entered into agreements among
themselves, without Dabney’s knowledge or consent, that constituted material alterations
of the original obligations of the Buyer under the purchase and sale documents. Dabney
15
cites to evidence adduced at trial that after Assignee had financial difficulties, G&W
Warren’s entered into two separate deferral agreements with Assignee under which the
obligations under the purchase and sale documents (excluding the lease) were deferred
for separate periods of six months, from September 2008 to March 2009, and from March
2009 to September 2009. Dabney also cites to evidence that G&W Warren’s extended
two separate loans to Assignee in September 2007 and February 2010.
G&W Warren’s responds that Dabney’s exoneration defense is without merit for
three principal reasons. First, the evidence showed that Dabney consented to the deferral
agreements. Second, G&W Warren’s argues that Dabney expressly waived the defense
under the terms of the Guaranty. Third, G&W Warren’s argues that, in any event, the
obligation deferrals were not material changes that justified application of the
exoneration defense.
1. Consent
Wanda Warren testified that after the business sold, she learned that Dabney had
an arrangement with three other “partners”—Roger Gilbert, Kyle Dalton, and Lester
Veik—to operate the dealership under the name “Monterey Motorcycles, Inc.” Dabney
testified that he incorporated MMI in January 2007, with himself as the managing
shareholder holding a controlling interest in the company. Gilbert and Dalton were the
on-site managers of the dealership. Payments were made by MMI to G&W Warren’s or
to the Warrens under the promissory note, lease, noncompete agreement, and consulting
agreements. Wanda Warrens testified that in September 2008, MMI defaulted on the
obligations, and, upon the request of Gilbert and Dalton, she and her husband granted
MMI a six-month deferral of payments under the promissory note, noncompete
agreement, and consulting agreements. The Warrens thereafter, in March 2009, granted
MMI a second six-month deferral of those payments. Both deferrals were reduced to
writing. Wanda Warrens also testified that she and her husband made additional loans to
16
MMI of $375,000 in September 2007 and of $250,000 in February 2010. The loans were
negotiated with Gilbert and Dalton, and each was evidenced by a promissory note.4
Dabney testified that he was not consulted about any modifications to the
promissory note. When asked by counsel for G&W Warren’s if he had any “notice of
these extension agreements at the time they were entered into,” Dabney responded, “I
don’t recall.”5
In its tentative decision, the trial court rejected Dabney’s exoneration defense,
holding that he had consented to the deferral agreements. It found that Dabney knew of
the deferral agreements. It reasoned that Dabney was the controlling and managing
shareholder of MMI, and that he “did not deny that he had knowledge of the requested
deferments, but only that he could not recall if he had such knowledge. The court finds
this claim unpersuasive. It strains credulity that one in [Dabney’s] position, as an
experienced businessman, holding the major interest in the corporation supported by his
personal guarantee [sic], would not be actively involved in efforts to fend off corporate
failure and personal liability.”
The determination of this issue—whether Dabney had knowledge of the deferral
agreements—is a question of fact. (See Shapiro v. Sutherland (1998) 64 Cal.App.4th
1534, 1544 [seller’s actual knowledge of undisclosed fact is question of fact]; Hart v.
National Mortgage & Land Co. (1987) 189 Cal.App.3d 1420, 1426 [employer’s
knowledge of supervisor’s harassment and failure to act was question of fact].) We
4
It is clear, as Wanda Warren admitted in her testimony, that G&W Warren’s was
not seeking recovery in this action under these promissory notes executed by MMI.
5
In response to the question of whether the first extension agreement made it
more difficult for MMI to meet its obligations, Dabney responded: “Well . . . what I’m
saying is I didn’t know that these were being extended. And I didn’t have a chance to
discuss or consult with the people who made the decisions about whether to do that or
not . . . So I don’t really know how to respond to that other than I didn’t know of these
extensions at all.”
17
review the court’s factual determination by applying “the familiar substantial evidence
test, [under which we] view the evidence in the light most favorable to the court’s
judgment, giving it the benefit of every reasonable inference and resolving all conflicts in
its favor.” (In re R.V. (2015) 61 Cal.4th 181, 217.) Under this standard, we conclude that
there was substantial evidence supporting the court’s finding that Dabney knew about the
deferral agreements. The fact that Dabney argues that the evidence supports his position
that he had no such knowledge is of no consequence here, where that position was based
upon his own testimony, which the trial court did not credit. “We defer to the trial
court’s determination of credibility and do not reweigh evidence or reassess the
credibility of witnesses. [Citation.]” (Behm v. Clear View Technologies (2015)
241 Cal.App.4th 1, 15 (Behm).)
Dabney argues further in passing—in two partial sentences—that his obligations
under the Guaranty were exonerated by the two loans made to Assignee.6 We decline to
address this conclusory argument. (Benach v. County of Los Angeles (2007)
149 Cal.App.4th 836, 852 (Benach) [“conclusory presentation, without pertinent
argument or an attempt to apply the law to the circumstances of this case, is inadequate”
and deemed forfeited].) Moreover, the argument lacks merit even were we to consider it.
There was brief evidence, submitted through the testimony of Dabney, that he did not
know about the two loans until after they had occurred. And although the trial court did
not specifically mention the loans in its tentative decision, under the doctrine of implied
findings, we must presume that the court resolved this factual question in favor of the
6
In the concluding paragraph of the section of the opening brief concerning
exoneration, Dabney stated: “With section 2819 being applicable, and not being waived,
the modifications at issues [sic] are (1) . . .; and (2) the extension of the additional Loans,
effectively expanding the debt service of the obligor to the Warrens.” In the Conclusion
section of that brief, Dabney stated: “Moreover, the also [sic] erred in failing to find
Dabney exonerated under Civil Code section 2914 by reason of the . . . Loans made
without his consent as surety.”
18
respondent, G&W Warren’s, if supported by substantial evidence. (See Fladeboe v.
American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 58-59.) It may be readily
inferred—based upon the trial court’s conclusion regarding Dabney’s credibility
concerning his claimed lack of knowledge of the two deferral agreements—that the court
similarly rejected his testimony that he did not know about the two loans to Assignee, the
entity in which he was the managing shareholder and held a controlling interest. We
defer to the trial court on questions of witness credibility. (Behm, supra, 241 Cal.App.4th
at p. 15.) Moreover, so long as the court’s determination was not arbitrary—which, here,
it was not—it was free to reject Dabney’s testimony, regardless of whether there was any
evidence contradicting it. (Hicks v. Reis (1943) 21 Cal.2d 654, 659-660 [trier of fact, so
long as it does not act arbitrarily, may reject in toto testimony of a witness, even if that
testimony is uncontradicted].)
Because the trial court’s conclusion that Dabney had knowledge of the two
deferral agreements and two loans to Assignee was supported by substantial evidence,
Dabney’s challenge that his obligations under the Guaranty were exonerated under
section 2819 fails.
2. Waiver
The trial court rejected the exoneration defense on the further ground that, by the
terms of the Guaranty, Dabney had expressly waived that defense. Assuming arguendo
that the court erred in concluding that Dabney had knowledge of the deferral agreements
and the loans to Assignee, the court’s finding that Dabney expressly waived the
exoneration defense was a proper alternative basis for rejecting Dabney’s defense under
section 2819.
A surety (or guarantor) may, prior to the impairment, alteration, or suspension of
the principal’s obligation, waive the protections afforded him or her under section 2819.
“[I]f effective consent to the change in the obligation of the principal will prevent the
otherwise resultant discharge of the surety [under section 2819], such consent may be
19
given in advance of the alteration of the principal’s obligation as well as at or after the
time of such act. [Citations.]” (Bloom, supra, 48 Cal.2d at p. 801.) And the ability of a
surety or guarantor to waive specific defenses otherwise available to him or her,
including exoneration under section 2819, is expressly provided for in section 2856.7
Further, such a waiver, to be effective, need not include particular language, and need not
refer specifically to a statutory provision. (§ 2856, subd. (b).)
Thus, in one instance, the court held that a guarantor’s exoneration defense was
precluded by language in the guaranty that the guarantor’s “liability ‘shall be coextensive
with that of the taxpayer [principal] and no change in the law or extensions, waivers, or
modifications in the liability negotiated between the taxpayer and the State Board of
Equalization shall in any way relieve [guarantor] of his obligation herein.’ ” (State Bd. of
Equalization v. Carleton (1990) 223 Cal.App.3d 1607, 1610, italics omitted (Carleton).)
Citing Bloom, supra, 48 Cal.2d at p. 801, the appellate court concluded “that this
provision constitutes an unconditional promise to pay the liabilities of the taxpayer even
if the principal obligation is materially altered without the knowledge or express consent
of the surety.” (Carleton, at p. 1610.)
The last paragraph of the Guaranty provided: “[Dabney] further agrees that [the]
Letter of Guaranty shall remain in full force and effect notwithstanding and shall also
secure amounts owing under any modifications to the payment terms or amounts
outstanding under the Promissory Note and the Lease so long as those modifications are
consented to in writing by the Borrower or Tenant as the case may be.” On its face, this
provision constituted Dabney’s advance consent to be bound under the Guaranty in the
7
Section 2856, subdivision (a)(1) provides in part: “Any guarantor or other
surety, including a guarantor of a note or other obligation secured by real property or an
estate for years, may waive any or all of the following: [¶] (1) The guarantor or other
surety’s rights of subrogation, reimbursement, indemnification, and contribution and any
other rights and defenses that are or may become available to the guarantor or other
surety by reason of Sections 2787 to 2855, inclusive.”
20
event there was any modification of the terms of payment under the Promissory Note, so
long as the modification was signed by the Borrower. There seems no question that the
provision applies to the written deferral agreements signed by the Warrens and Assignee
here.
Dabney nonetheless contends in his opening brief that he did not waive the
exoneration defense. He asserts that the last paragraph of the Guaranty did not contain
the words “waive” or “waiver,” and there was no other evidence that he voluntarily
relinquished the right to assert the statutory defense under section 2819. But this position
ignores the fact that under section 2856, subdivision (b), no particular words or
references to statutory provisions are required to effect a guarantor’s waiver of defenses.
The language contained in the last paragraph of the Guaranty here was sufficiently clear
to constitute Dabney’s advance consent to (or waiver of) the modification of payment
terms by G&W Warren’s and Assignee. (See Bloom, supra, 48 Cal.2d at p. 801;
Carleton, supra, 223 Cal.App.3d at p. 1610.)
Accordingly, we conclude that there was substantial evidence supporting the trial
court’s finding that Dabney consented to the deferral agreements and the two loans to
Assignee (MMI), and that in any event, by the terms of the Guaranty, Dabney expressly
waived the exoneration defense. It is therefore unnecessary to address G&W Warren’s
contention that the obligation deferrals were not material changes to the Agreement that
supported the defense of exoneration. (Benach, supra, 149 Cal.App.4th at p. 845, fn. 5
[appellate courts will not address issues whose resolution is unnecessary to disposition of
appeal].)
DISPOSITION
The judgment is reversed. The trial court is directed to vacate the judgment and
enter a new judgment in favor of plaintiff G&W Warren’s against defendant Dabney in
the amount of $1,641,783.27, plus interest, costs, and attorney fees. Each party shall bear
its/his own statutory costs on appeal.
21
______________________________________
RUSHING, P.J.
WE CONCUR:
____________________________________
PREMO, J.
____________________________________
ELIA, J.
G & W Warren’s, Inc. v. Dabney
H042243
Trial Court: Monterey County Superior Court
Superior Court No.: M122308
Trial Judges: The Honorable Thomas W. Wills
The Honorable Robert A. O’Farrell
Attorneys for Plaintiff and Respondent STRONG APPELLATE LAW
G & W Warren’s, Inc.: Jeanine G. Strong
DOUGHERTY & GUENTHER, APC
Ralph P. Guenther
Attorneys for Defendant and Appellant ARENT FOX LLP
Judson V. Dabney, II: Halbert B. Rasmussen
G & W Warren’s, Inc. v. Dabney
H042243