Harte v. Bridgewater
Filed 8/14/13
Harte v. Bridgewater CA1/5
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
FIVE
JACK HARTE
et al.,
Plaintiffs and Respondents,
v.
GARY
BRIDGEWATER,
Defendant and Appellant.
A133168
(Sonoma County
Super. Ct. No. SCV-243407)
In a series
of transactions which the trial court aptly characterized as “very convolutedâ€
and “confusing,†appellant Gary Bridgewater and respondent Jack Harte sought to
acquire equity interests in a firearms business owned by Tyler Jones, a
licensed firearms dealer. In April 2008,
all three parties signed a written
agreement purporting to allocate interests in the business, with Harte
receiving cash from Bridgewater and a promissory note from Bridgewater and
Jones. Neither Harte nor Bridgewater
held a firearms license. Jones
ultimately sold the store’s inventory without notice to Harte or Bridgewater,
closed the business and absconded. Harte
then sued Bridgewater and Jones seeking to recover on the promissory note, and
Bridgewater cross-complained for rescission and restitution of the cash paid to
Harte. Following a bench trial, the
trial court granted judgment to Harte on the promissory note, and denied
recovery to Bridgewater.
We conclude
that the parties’ agreement was an illegal
contract that recognized ownership in and transferred ownership to persons
who were not licensed to own or operate a firearms dealership. Therefore, the contract is unenforceable and
neither Harte nor Bridgewater is entitled to relief.
I. Background
Jones owned
and operated gun stores from 1986 to 2008.
From 2000 to 2008, he operated a gun store in Penryn, California as a
sole proprietor under the name Sportsman’s Access. Sportsman’s Access sold guns both at its
retail location in Penryn and at gun shows around the country. Jones completed multiple state and federal
licensing requirements to operate Sportsman’s Access and held a federal
firearms license throughout his operation of the Penryn store.
Jones met
Harte at a gun show in 1996. They became
good friends and engaged in a number of business ventures together, including
gun sales and investments in boats and real estate. Harte regularly sold guns on consignment
through Jones, with Jones receiving a share of the profits. Between 2006 and 2010, selling guns was
Harte’s sole occupation, and Harte often attended gun shows with Jones. Harte did not have a federal firearms
license.
Jones’s Debt to Harte
In 2007,
Jones began to have financial difficulties and started manipulating his
accounts to cover his bills. Harte
eventually demanded an accounting for several guns he had consigned. In an emailed letter to Harte on
March 11, 2008, Jones admitted that he had been using proceeds from sales
of Harte’s guns to pay unrelated bills rather than to pay Harte his share of
the proceeds and that all of the guns had been sold or traded. Jones testified that he owed Harte about
$147,000 just for the capital costs of the guns; Rebecca Harte testified that
the couple’s financial records showed a debt of about $344,000. Jones apparently also owed Harte money from
their other business ventures. In his
March 11, 2008 email, Jones told Harte he had a tentative deal with
Bridgewater, who was aware of Jones’s debt, to buy a one-half interest in
Jones’s business, which would give him money to pay his debt to Harte.
Jones and Bridgewater Negotiations
Jones and
Bridgewater had met socially around 2005.
Bridgewater attended a gun show with Jones in about October 2007,
and became interested in going into the gun business. Jones and Bridgewater initially discussed a
joint venture that would run Sportsman’s Access and Sportsman’s Access Too as a
new legal entity and obtain a $500,000 bank loan. Jones drafted a proposal (one of several he
prepared) for the sale to Bridgewater of one-half interests in both the Penryn
and Petaluma stores, creation of a new legal entity, and a guaranteed salary
for Bridgewater’s work managing the stores in addition to his share of the
profits. Jones then cooled on the idea
and pursued possible deals with other buyers.
When those efforts were unsuccessful, however, he renewed discussions
with Bridgewater in about January 2008.
After Jones and Bridgewater met with a banker in February 2008,
Jones concluded they would not be able to meet the bank’s requirements for a
$500,000 loan.
By
March 2008, Jones was pressing Bridgewater to consummate a deal. He told Bridgewater that he needed to make
the sale so he could pay off a debt to Harte.
In a March 14 email, Jones told Harte he had informed Bridgewater
that his purchase payment needed to go directly to Harte and Bridgewater had
agreed. As of March 16, Bridgewater
understood that Jones owed Harte about $100,000. Jones told Harte on March 20 that he
“didn’t want to alert [Bridgewater] to the sever[ity] of the situation, as I
feared it might destroy the deal[.]†As
demonstrated by these emails, Jones negotiated with Bridgewater without Harte’s
direct participation, but kept Harte apprised of the negotiations.
Assignment of Sportsman’s Access to Harte
While
negotiating with Bridgewater, Jones, on March 12, 2008, executed the
following assignment and delivered it to Harte:
“The undersigned here by assigns all of his right title and interest to
his retail gun store known as, Sportsmans Access, located [in] . . .
Penryn . . . [i]ncluding, but not limited to the lease for the
building the inventory as of 3/12/2008 and all fixtures.â€
until March 31.
March 16 Sales Agreement and Addendum between Jones and Bridgewater
On March
16, 2008, Jones and Bridgewater entered into a conditional sales agreement and
addendum (the March 16 Sales Agreement) committing Jones to sell a
one-half interest in the Penryn store to Bridgewater for $375,000 subject to
several conditions. Those conditions
included (1) that the business be appraised at no less than $750,000 (or
there would be an adjustment to Bridgewater’s ownership interest or transfer of
an interest in the wholly owned inventory of the store); (2) that the
business be operated by a new legal entity with Jones and Bridgewater as the
“sole owners†with “a new bank account, modified accounting practices, and
specific performance agreements†to be mutually determined by Jones and
Bridgewater; (3) that Jones indemnify Bridgewater for past or future
liabilities incurred by Jones or the business and for liabilities over $2,500
incurred without Bridgewater’s approval after the new entity was created. Bridgewater would pay Jones (in a combination
of cash and vehicles) after these three conditions were met. Both parties agreed to expedite satisfaction
of the conditions and Jones agreed that “[d]uring this ‘interim period,’ and
throughout the association of Bridgewater and Jones,†Jones would “retain all
current licensure so the store may operate†and not take any actions to impair
store operations.
An addendum
to the March 16 Sales Agreement states that Jones’s purpose in selling the
one-half interest in the business was to generate cash to pay off short term
debt, “thus leaving the store debt free,†and to engage Bridgewater’s
assistance in operating and expanding the business. Bridgewater’s stated purpose was to realize a
profit. “HOWSOEVER, said appraisal is
not complete, there has been no entity created, and the short term debt
. . . has become critical to the operation of the business. In order to expedite the immediate
distribution of cash and trucks from [Bridgewater] to [Jones],†Jones assigned
“all of the business, business assets, and inventory for collateral purposes until
Bridgewater and Jones receive the appraisal, make the appropriate adjustments,
create the entity and complete the original agreement.†At that time, Bridgewater “will re-assign
what is NOT to be part of the sale, specifically the inventory, and 1/2 of the
interest in the business back to†Jones.
“In the interim, [the store] will operate as normal, but as of this
date, profit accounting will begin, and Bridgewater will be entitled to 1/2 the
net profit from operations.â€
None of the
conditions in the March 16 Agreement were ever satisfied. Jones provided Bridgewater some of the
financial information he had requested, but it was never reviewed by
Bridgewater’s accountant. Bridgewater
did not have a lawyer review the agreement.
No new ownership entity was created, no fictitious business name
statement filed to show Bridgewater as a part owner of the store, and
Bridgewater’s name was never added to the lease or the business checking
account. Jones testified that he
continued to operate the business as a sole proprietorship and never formally
transferred any part of the business to Bridgewater.
April 8 Agreement Among Jones, Harte and Bridgewater
On
March 27, 2008, Harte set a March 28 deadline for Jones to make at least
partial payment on the outstanding debt.
On March 31, Bridgewater, Jones and Harte met at Harte’s residence. Bridgewater learned for the first time that
Harte claimed Jones owed him about $600,000.
Harte promised Bridgewater an accounting of what portion of this debt
Jones owed specifically for Harte’s guns.
Bridgewater also learned for the first time about Jones’s March 12
assignment of the Penryn store to Harte.
Bridgewater described the assignment as “indicating that the Hartes
. . . were the owners of . . . the Penryn gun store, and
[Jones] had signed over all his rights to them.â€
Harte and
Bridgewater then directly discussed Bridgewater’s acquisition of an interest in
the Penryn store—an arrangement later incorporated in a written agreement
signed by the parties on April 8, 2008, which is the focus of this
litigation. Bridgewater testified that
he and Harte discussed how the firearms business was going to be run and
Bridgewater gave Harte a $5,000 check and the titles to three trucks as a “non
refundable deposit†during the meeting.
Bridgewater emailed Jones the next day:
“I believe [Harte] will allow me to run the business . . . as
we agreed. He will be apprised on a
monthly basis of sales and return on investment.â€
On April 8,
2008, Jones, Harte and Bridgewater met again and executed a written agreement
(the April 8 Agreement).
name="_ftnref5" title="">[5] The agreement recited that Harte had been
assigned “all rights, title and interest in [Sportsman’s Access] and is
hereinafter called lien holder but is to have all the rights of an owner.â€
33 percent interest in the business to Bridgewater for $305,000 “under the
following conditionsâ€:
(1) “Bridgewater to tender†$200,000 to Harte on or before
April 8, and (2) a promissory note for $105,000 at 8.5 percent
interest, payable monthly and signed by Bridgewater and Jones, would be given
to Harte and “when note is paid in full, Harte will deliver†another
17 percent interest in the store, for a total interest of
50 percent. Harte would “retain the
remaining 1/2 of [Sportsman’s Access],†but agreed to sell that interest to
Jones under the following conditions.
First, Jones would give Harte ownership of $350,000 in guns; Jones would
sell those guns and give Harte the first $200,000 in proceeds; and Jones would
give Harte 75 percent of proceeds from all additional sales with a monthly
minimum payment. Second, Jones would
give Harte clean title to a boat and would repair and ultimately sell it on
Harte’s behalf for a credit of $55,000 toward “the master note.†Third, Jones would assign his rights in the
Petaluma store to Harte and pay Harte $60,000 for a $60,000 credit toward the
master note.
On
April 8, 2008, Bridgewater gave Harte and Jones a certified check for
$195,000, which combined with the $5,000 he paid on March 31 satisfied his
$200,000 cash obligation. He and Jones
both also signed a $105,000 promissory note.
Jones further signed a promissory note (in his personal capacity and on
behalf of Sportsmans Access) promising to pay Harte $606,927 by April 1,
2009 with 8.5 percent interest.
Events After April 8, 2008
Bridgewater
did not spend much time in the store in the weeks after he signed the
April 8 Agreement (at most once a week) because the store was being
audited by the Bureau of Alcohol, Tobacco and Firearms (ATF) and there was not
much room for him there.
name="_ftnref7" title="">[7] Also, he had never run a business before and
was not yet knowledgeable enough to run the store independently. However, Bridgewater went to gun shows with
Jones. By October, Bridgewater had
little involvement in the store.
Bridgewater
knew at the time of the April 8 Agreement that a gun store business could only
be operated by a licensed gun dealer.
Bridgewater also knew that Harte did not have a license. Bridgewater testified he was under the
impression that Harte was going to get a license as owner of the store,
although Harte never told him so.
Bridgewater did not have a license and he cites no trial evidence that
he took steps to get one.
Conflicts
among the parties soon arose.
name="_ftnref8" title="">[8] Jones testified that Harte made several
attempts to change the agreement, called the store daily, harassed the
employees, and made demands on Bridgewater.
Ultimately, Bridgewater made only three payments on the $105,000 note.
guns per the April 8 Agreement. He
also never gave Harte monthly reports of sales or returns on investment. However, Jones gave Harte several blank
signed checks on the store’s account, which Harte used to withdraw money from
the store.
Not long
after April 8, 2008, Harte demanded delivery of all of his guns in the
Penryn store that were in Jones’s name.
driver’s license to perform the computerized background checks required by
state law to transfer the guns and asked Harte to come to the store to sign the
forms. Harte asked Jones to sign his
name for him; Jones refused and retained Harte’s license. On July 18, Harte sent Bridgewater and
Jones a written demand for the transfer of all of his firearms to a specified
federal firearms license holder. At some
point, Jones told Harte to stay away from the store.
Jones
ultimately lost his firearms license, apparently as a result of the ATF audit.
remaining inventory to another business without telling Harte or
Bridgewater. Jones then closed the
Penryn store and “just left the area and hid.â€
He used the proceeds (received over the following six to seven months)
to pay store debts and consignors, but did not give any of the money to Harte
or Bridgewater.
Litigation
The
operative second amended complaint filed by Harte and his wife against Jones
and Bridgewater asserts causes of action for breach of contract, conversion,
possession of Harte’s personal property, breach of fiduciary duty, civil
conspiracy, elder financial abuse, and declaratory relief. The breach of contract claim sought
enforcement of the $105,000 note.
Bridgewater filed a cross-complaint that, as amended, asserted claims
against Harte for money had and received, breach
of contract, and fraud.
Bridgewater’s breach of contract claim (apparently brought against both
Harte and Jones) was based on allegations of “[c]hanging the terms and
conditions of the [April 8 Agreement] without consideration and to
[Bridgewater’s] detriment; failing and refusing to transfer 1/2 interest, or
any interest at all in [Sportsman’s Access] to [Bridgewater]; depleating [
consideration; failing to pay rent, and other business expenses.†The fraud claim alleged, “The agreement with
[Jones] by which [Harte] acquired [his] alleged ownership interest [in the
Penryn store] had never been consumated [sic]
and [he] had no right to transfer or sell a 1/2 interest or any interest in
said business.†Several other claims and
cross-claims were brought that are not relevant to this appeal.
A court
trial was conducted in April 2011.
As relevant here, the court entered judgment for Harte and against Jones
and Bridgewater on the breach of contract claim for payment of the $105,000
with joint and several liability, and for Harte and against Bridgewater on
Bridgewater’s cross-claims.
At
Bridgewater’s request, the trial court issued the following statement of
decision:
“ ‘First
of all, the transactions between the parties are very convoluted,
confusing. The documents are not always
prepared by attorneys. The entities
involved are unclear. The relationships
tend to be unclear. And what the court
is left with is looking at what the parties agreed to and holding them to their
agreements. [¶] . . . [¶]
“ ‘I
think it’s clear that Mr. Bridgewater paid to Mr. Harte $200,000 and
signed a note jointly with Mr. Jones for $105,000 to convey any right
which Mr. Harte had in the business.
Mr. Harte had obtained a right in the business by assignment from
Mr. Jones. [¶] Now, why he wanted the assignment rather than
ownership is beyond me, but that’s the transaction and I’m going to hold the
parties to it. [¶] I’m going to find that Mr. Bridgewater is liable
jointly and severally with Mr. Jones on the $105,000 note to
[Harte] . . . . [¶] . . . [¶] Interest will
be awarded at 8-1/2 percent on the $105,000 note from August 4, 2008.
“ ‘And
the one other thing I wanted to cover is that whether Mr. Harte received
the note and the $200,000 from Mr. Bridgewater as the assignor of his
interest or whether he was simply a third-party beneficiary on the contract
between Jones and Bridgewater I don’t think matters. I think it’s clear that Harte had received
the assignment from Jones; that Jones was attempting to convey his half
interest to Bridgewater and did it through this method of the payments to Harte
to absolve Jones of a portion of the debt.’ â€
In
response to Bridgewater’s requests for specific factual findings, the court
found that Jones assigned an ownership interest in the Penryn store to Harte,
which gave Harte legal standing to assign an interest in the store to
Bridgewater; that Harte and Bridgewater were in privity of contract under the
April 8 Agreement as evidenced in part by the $105,000 note; that Harte
assigned an interest in the store to Bridgewater by executing the April 8
Agreement—the court commented, “[Harte] took no steps contrary to [that]
assignment after the agreement was fully executed and after [he] received
partial payment from [Bridgewater]â€; that Jones and Bridgewater were in a
contractual relationship under the March 16 Agreement; that Harte was a
third party beneficiary of the March 16 Agreement and an intended creditor
beneficiary of the April 8 Agreement;
and that Jones and Harte did not conspire to defraud Bridgewater—the
court commented, “At the time [Bridgewater] paid $200,000 to [Harte] for the
purchase of [Harte’s] rights in the Sportsman’s Access gun store, [Bridgewater]
was fully . . . advised of the agreements between [Harte and Jones],
[Jones’s] obligation to [Harte], and the nature of the assignment of the
business to [Harte].â€
Judgment
Bridgewater
filed a motion for a new trial or to vacate the judgment and enter a different
judgment. As relevant here, he first
argued that Harte’s breach of contract claims were necessarily defeated because
Harte did not own the gun store business, but merely held a security interest
in the store. Because Harte did not own
and thus could not convey an ownership interest to Bridgewater, the
April 8 Agreement was void for lack of consideration and mutual mistake of
fact. Second, he argued the April 8
Agreement was void for illegality because the central object of the contract
was to convey ownership from Harte to Bridgewater, neither of whom was licensed
to hold ownership of the store. In
opposition, Harte argued that the release of his lien interest in Sportsman’s
Access was sufficient consideration for Bridgewater’s $200,000 payment and
$105,000 note. On the illegal contract
issue, he argued “the obligation to notify the [ATF] of any change in ownership
falls upon the licensee and the new owner.
Not on a creditor. . . . [¶] [After April 8, 2008, Harte]
had done all he could legally do under the law to cooperate with and
participate in the sales transaction.
The onus at the time was on [Jones] as the licensee of the former sole
proprietor of the establishment and [Bridgewater] as the new owner of a
one-half interest in the store to notify the [ATF] of the change in
structure . . . .â€
The
trial court denied the motions on both procedural and substantive grounds. On the merits of the first argument, the
court ruled, “Whether [Harte] received assignment of an ownership interest, or
as argued by [Bridgewater], an interest as a lien holder, [Harte’s]
relinquishment of that interest provided consideration for [Bridgewater’s]
promise to pay.†On the merits of the
illegal contract argument, the court wrote, “[Bridgewater] argues that any
transfer of an interest by [Jones] to [Bridgewater] was illegal under federal
regulations applicable to gun dealers.
Any failures in this regard by [Jones] and [Bridgewater] may not be
attributed to [Harte], and do not nullify [Bridgewater’s] promise to pay in
exchange for [Harte’s] relinquishing any interest [he] had in the business.â€
II. Discussion
Bridgewater
argues on two grounds that the trial court erred in finding the April 8
Agreement enforceable. First, he argues
(albeit on somewhat different grounds than he argued in his new trial motion)
that the court erred in finding Harte had fulfilled his obligation to assign
Bridgewater a 33 percent interest in the business in exchange for the
$200,000 Bridgewater paid on April 8, 2008. Second, he argues the agreement was an
illegal contract to transfer a firearms dealership to unlicensed persons. We find the second point to be dispositive.
Bridgewater
argues the April 8 Agreement is unenforceable as a contract to carry out
an illegal transaction, specifically a recognition of Harte’s ownership of and
a transfer of ownership in a firearms dealership without compliance with
licensing requirements. As a preliminary
matter, we consider whether the trial court found, and whether the evidence
supports a finding, that Harte held an ownership or a security interest in
Sportsman’s Access at the time the April 8 Agreement was signed. We next consider whether the April 8
Agreement contemplates an illegal transaction and, if so, whether the illegal
nature of that transaction renders the contract unenforceable.
A. Nature
of Harte’s Interest in Dealership
The
trial court observed generally, “ ‘[T]he transactions between the parties
are very convoluted, confusing. The
documents are not always prepared by attorneys.
The entities involved are unclear.
The relationships tend to be unclear.
And what the court is left with is
looking at what the parties agreed to and holding [them] to their agreements.’ †(Italics added.) We construe this statement as a finding that
the extrinsic evidence on the meaning of the parties’ contracts was
inconclusive and the contracts had to be construed based on the plain meaning
of the contract language. A contract
interpretation issue based on contractual language is subject to de novo
review. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865–866.)
The
court generally understood the parties’ various transactions as a combination
of (1) some type of assignment of Jones’s interest in the Penryn store to
Harte to guarantee Jones’s payment of his debt to Harte; (2) the sale of a
one-half interest in the Penryn store to Bridgewater from Jones through Harte
(and release of Harte’s claim in that half interest) with payment by Bridgewater
directly to Harte as a partial satisfaction Jones’s debt to Harte, and
(3) the release of Harte’s other half interest in the store to Jones upon
Jones’s payment to Harte of the remainder of his debt to Harte.
While
this may be a fair characterization of the evidence, we do not agree with the
trial court’s suggestion that all of the contracts signed by the parties were
reconcilable and thus all remained operative.
As noted, the court found the March 16 Sales Agreement and its
addendum remained in effect even after execution of the April 8
Agreement. The March 16 Sales
Agreement, however, conditioned the sale of the business (and Bridgewater’s
obligation to pay $375,000 for the business) on completion of an appraisal,
creation of a new legal entity to run the business, establishment of new
accounting procedures, and execution of an indemnification agreement. The addendum purported to assign Jones’s
inventory and interest in the store to Bridgewater as collateral for his
advance payment of cash and trucks to Jones (so Jones could pay off debt) and
allows Bridgewater to share in the store’s profits immediately. Several of these terms flatly contradicted
the terms of the April 8 Agreement.
Most obviously, the April 8 Agreement recited that it was Harte
that held all rights in the store. Even
if this plain language were properly construed to refer to a security interest
only, Harte’s holding of such an interest would contradict the terms and
eliminate the consideration for the addendum to the March 16 Sales
Agreement. The April 8 Agreement
also requires Jones to assign ownership of part of his gun inventory to Harte
and to remit proceeds from sales of these guns to Harte, which is in tension
with (if not in contradiction to) Jones’s assignment of his inventory to
Bridgewater as collateral for the payments mentioned in the addendum. Finally, the unconditional requirement that
Bridgewater pay $200,000 and $105,000 for the release of Harte’s interest in
the store is inconsistent with his rights under the March 16 Sales
Agreement to demand an appraisal, creation of a new legal entity, establishment
of new accounting procedures, and an indemnity agreement before any payments
were due.
An
irreconcilable tension also exists between the March 12, 2008 assignment
of Jones’s interest in the Penryn store to Harte and the March 16 Sales
Agreement and addendum. If the
March 12 assignment was an assignment of an ownership interest, Jones had
no interest to sell at the time he signed the March 16 Sales Agreement and
that contract must fail for lack of consideration. If the March 12 assignment was an
assignment of a security interest, Jones was not free to commit the store as
collateral to obtain money from Bridgewater per the terms of the addendum and
that agreement must fail for lack of consideration.
Relying
on the plain language of the agreements (and thus applying de novo review), we
conclude the most reasonable interpretation is that the April 8 Agreement
(1) superseded the March 16 Sales Agreement and addendum and
(2) confirmed the March 12 assignment as the transfer of an ownership
interest in the store. First, the plain
language of the March 12 assignment manifested a present and unconditional
intent to transfer “all†rights in the property to Harte. All parties were aware of this assignment at
the time they signed the April 8 Agreement (although Bridgewater was not
aware of it when he signed the March 16 Sales Agreement and
addendum). The language of the April 8
Agreement included some minor ambiguity regarding the nature of Harte’s
interest in the store by stating that he would thereafter be “called lien
holder†(although he was not thereafter called a lien holder in the agreement),
but otherwise unambiguously stated that Harte held “all†rights and interests
in the store and “is to have all the rights of an owner.†It states that when Bridgewater paid the
additional $105,000 in full, “Harte will deliver remaining percentage of
Harte will “retain the remaining 1/2
of [Sportsman’s Access], but will sell
to Jones†(italics added) under specified conditions. The combination of this unambiguous language
and the fact that several critical terms of the March 16 Sales Agreement
and addendum were set aside in the April 8 Agreement support the
conclusion that the April 8 Agreement replaced
rather than modified the March 16 Sales Agreement and addendum.
Under
the combined terms of the March 12, 2008 assignment and the April 8
Agreement, therefore, Harte was confirmed as holding an ownership interest, not a security interest in the Penryn store,
which he agreed to relinquish under the terms of the April 8 Agreement.
B. Illegality
of the Transaction
The
April 8 Agreement contemplates an illegal transaction because it
recognizes a current ownership interest in Harte and anticipates an immediate
transfer of an interest to Bridgewater—both unlawful under federal firearms
licensing law.
“ ‘No
principle of law is better settled than that a party to an illegal contract
cannot come into a court of law and ask to have his illegal objects carried
out; nor can he set up a case in which he must necessarily disclose an illegal
purpose as the groundwork of his claim.’
[Citation.]†(
502; see also Wong v. Tenneco, Inc.
(1985) 39 Cal.3d 126, 134–135 [refusing to enforce contract related to farming
operation conducted in violation of Mexican law].) “Whenever a court becomes aware that a
contract is illegal, it has a duty to refrain from entertaining an action to
enforce the contract. [Citations.]†(Bovard
v. American Horse Enterprises, Inc. (1988) 201 Cal.App.3d 832, 838 (
contract were unaware of its illegality.
(Stockton Morris etc. Co. v.
Calif. Tractor etc. Corp. (1952) 112 Cal.App.2d 684, 689.) The court must raise the issue sua sponte
even if it is not raised by the parties.
(Wells v. Comstock (1956) 46
Cal.2d 528, 532; Yoo v. Jho (2007)
147 Cal.App.4th 1249, 1256; Homami v.
Iranzadi (1989) 211 Cal.App.3d 1104, 1109 (Homami); Russell v. Soldinger
(1976) 59 Cal.App.3d 633, 642.)
Federal
law declares it unlawful for any person except a licensed dealer to engage in
the business of dealing in firearms. (
184, 187; 18 U.S.C. §§ 922(a)(1)(A), 923(a).) Federal regulations specifically require that
the license be obtained before the
person engages in the business. (27
C.F.R. § 478.41 [“[e]ach person intending to engage in business as
. . . a dealer in firearms shall, before
commencing such business, obtain the license . . .†(italics
added)].) Moreover, licenses are not
transferable and “[i]n the event of the lease, sale, or other transfer of the
operations authorized by [an existing] license, the successor must obtain the
license required by this part prior to
commencing such operations.†(27
C.F.R. § 478.51, italics added.)
The only regulatory exception to this rule applies to persons
inapplicable here (such as surviving relatives, estate administrators and
bankruptcy trustees), and those successors must nevertheless comply with
certain administrative requirements within 30 days of assuming control of
the business. (27 C.F.R. § 478.56.)
The
statute that describes the requirements for obtaining a federal firearms
license specifies that, “in the case of a corporation, partnership, or
association,†certain requirements apply to “any individual possessing,
directly or indirectly, the power to direct or cause the direction of the
management and policies of the corporation, partnership, or association.†(18 U.S.C. § 923(d)(1)(B).) Consistent with this provision, the
application for a federal firearms license requires a corporation, partnership
or association applying for a license to identify each owner, partner or other
“responsible person,†which is defined as “any individual possessing, directly
or indirectly, the power to direct or cause the direction of the management,
policies, and practices of the [applicant] insofar as they pertain to
firearms.â€
title="">[12]
As
a result of Jones’s assignment of his interest in the store to Harte on
March 12, 2008 and Harte’s assignment of a 33 percent interest in the
store to Bridgewater on or after April 8, the firearms dealership was no
longer owned by Jones’s sole proprietorship but was then owned by a partnership
or association. There was a transfer of
ownership before the new owner applied for and received a license naming the
new owners and responsible persons. The
assignment, sale and transfer, therefore, were illegal.
C. Enforceability
of the April 8 Agreement
“A contract
must have a lawful object. (Civ. Code,
§ 1550.) Any contract which has as
its object the violation of an express provision of law is unlawful. (Civ. Code, § 1667, subd. 1.) The object of a contract is the thing which
it is agreed, on the part of the party receiving the consideration, to do or
not to do. (Civ. Code, § 1595.) The object must be lawful when the contract
is made. (Civ. Code, § 1596.) And that part of the contract which is
unlawful is void. (Civ. Code,
§ 1599.) [¶] . . . ‘ “The general principle is well
established that a contract founded on an illegal consideration, or which is
made for the purpose of furthering any matter or thing prohibited by statute,
or to aid or assist any party therein, is void.
This rule applies to every contract which is founded on a transaction
statute on the ground of public policy.†’
[Citation.]†(
p. 1109; see,e.g., id. at
p. 1106 [no enforcement of promissory note falsely stating it was
interest-free in order to evade taxes]; Wong
v. Tenneco, Inc. (1985) 39 Cal.3d 126,
128,133–134 [no enforcement of marketing agreement with Mexican farming
business operated in violation of Mexican law]; Yoo v. Jho, supra, 147 Cal.App.4th at p. 1251 [no enforcement
of contract for sale of a business dealing, in part, in counterfeit goods];
pp. 836–838, 841 [no enforcement of contract for the sale of a business
making drug paraphernalia because the business, even though not expressly
outlawed, was counter to public policy].)
In
a case more factually analogous to that before us, the court in Kashani v.
Tsann Kuen China Enterprise Co. (2004) 118 Cal.App.4th 531, 536–537 (
computer products in Iran because the parties to the contract did not have a
federal license to do so. Federal
executive orders and regulations had prohibited “any United States person from
engaging in any transaction, directly or indirectly, relating to the
. . . sale, or supply of goods, technology or services to Iranâ€
without a license. (Id. at p. 539.) The
court rejected the plaintiffs’ argument that the contract should be construed
as legal if possible, taking account of the fact that the plaintiffs could have
applied for and might have received the required license. (Id.
at pp. 548–549.) The court noted
that performance had begun without a license and concluded the circumstances
did not warrant overlooking the illegality.
(Id. at p. 550.) “The Orders and Regulations here are
regulating [rather than revenue-generating] in nature and involve national
security. [Citation.] No one could seriously contend that
enforcement of the agreement in question is not outweighed by the public policy
behind the government provisions.
[Citation.]†(
illegal conducting of the saloon business without a proper license for each
individual partner would ordinarily require the court to refuse upon the ground
of public policy to determine issues between the partners regarding
. . . the assets of the business,†but allowing action for accounting
of partners’ agreement to equally divide assets after termination of
partnership].)
Here,
as in Kashani, supra, 118 Cal.App.4th
531, the licensing requirements violated by the parties to the April 8
Agreement are regulatory rather than revenue-generating in nature and they
involve important public safety concerns.
“The principal purpose of . . . federal gun control
legislation . . . [is] to curb crime by keeping ‘firearms out of the
hands of those not legally entitled to possess them because of age, criminal
background, or incompetency.’
[Citation.] [¶] . . . The principal agent of federal
enforcement is the dealer.†(
U.S. 814, 824.) As in
Agreement was not written to be contingent on compliance with federal licensing
requirements and was in fact performed without compliance with those
requirements. Moreover, the object of
the contract was the sale and transfer of a firearms dealership, the very
transaction that rendered the contract illegal.
(See Homami, supra, 211
Cal.App.3d at p. 1109; Civ. Code, § 1595 [“[t]he object of a contract
is the thing which it is agreed, on the part of the party receiving the
consideration, to do or not to doâ€].)
Under
the aforementioned principles, we conclude that the April 8 Agreement was
generally unenforceable as an illegal contract.
D. Relative
Culpability of the Parties
Ordinarily,
“when the illegality of [a] contract renders the bargain unenforceable,
‘ “[t]he court will leave [the parties] where they were when the action
was begun†’ [citations].†(
p. 541.) “The reason for this
. . . is not that the courts are unaware of possible injustice
between the parties, and that the defendant may be left in possession of some
benefit he should in good conscience turn over to the plaintiff, but that this
consideration is outweighed by the importance of deterring illegal
conduct. Knowing that they will receive
no help from the courts and must trust completely to each other’s good faith,
the parties are less likely to enter an illegal arrangement in the first
place. [Citations.]†(Lewis
& Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 150–151.) However, “In some cases, . . .
effective deterrence is best realized by enforcing the plaintiff’s claim rather
than leaving the defendant in possession of the benefit; or the forfeiture
resulting from unenforceability is disproportionately harsh considering the
nature of the illegality. In each such
case, how the aims of policy can best be achieved depends on the kind of
illegality and the particular facts involved.
[Citations.]†(
Thus,
if the parties are not in pari delicto, an exception allowing enforcement of an
illegal contract may apply “ ‘so long as the party seeking its enforcement
is less morally blameworthy than the party against whom the contract is being
asserted, and there is no overriding public interest to be served by voiding
the agreement.’ [Citations.]†(McIntosh
v. Mills (2004) 121 Cal.App.4th 333, 347.)
For example, the Supreme Court has ruled that a plaintiff who was “not
asking the court to carry out an illegal contract or to enforce rights arising
out of the illegal transaction, [citation], but [was] seeking relief from a contract
which was illegally made†should have an opportunity to show he did not
personally know about the illegal nature of the contract (involving a purchase
of stock by a corporation from its capital assets rather than from its earned
surplus) and seek relief under the in pari delicto exception.
46 Cal.2d 450, 454–455; see also Tri-Q,
Inc. v. Sta-Hi Corp.(1965) 63 Cal.2d 199, 220–221 [in stock transaction,
corporation was responsible for the illegality and other party was permitted to
enforce his rights under the contract].)
Here,
the trial court ruled, “[Bridgewater] argues that any transfer by [Jones] to
[Harte] was illegal under federal regulations applicable to gun dealers.[
[Bridgewater] may not be attributed to [Harte], and do not nullify
[Bridgewater’s] promise to pay in exchange for [Harte’s] relinquishing any
interest [he] had in the business.â€
The
trial court’s statement that “[a]ny failures in this regard by [Jones] and
[Bridgewater] may not be attributed to [Harte]†is not supported by substantial
evidence. The statement suggests an
arrangement whereby Jones sold his business to Bridgewater and Harte was
nothing more than a secured creditor with an interest in the store’s assets to
ensure Jones’s payment of his debt. Such
a view, however, ignores the express terms of the parties’ contracts, and it
ignores the behavior of the parties after April 8, 2008, with Harte allegedly
“harassing†store employees and directly drawing money from store accounts.
As
explained ante, Harte directly
participated in renegotiation and complete restructuring of Jones and
Bridgewater’s initial sales agreement, asserting ownership of the firearms
dealership in his discussions with Bridgewater, and demanding payments from
Bridgewater directly to him. In contrast
to the terms of Jones and Bridgewater’s original deal set forth in the
March 16 Sales Agreement, the April 8 Agreement made no provision for
creating a new legal entity or ensuring that Jones maintained his firearms
license.
title="">[15] Harte, who had been exclusively engaged in
the business of selling firearms since 2006 and was presumably familiar with
regulatory requirements for firearms sales, expressed little if any concern
with the legalities of the transactions, and far more concern for collection of
Jones’s debt. The evidence was that
Harte was at a minimum an equal participant in crafting the terms of the
April 8 Agreement, if not the driving force.
The
evidence further demonstrates that Harte was far more experienced and
sophisticated in the firearms business than was Bridgewater. Harte, but not Bridgewater, was aware of the
ATF audit of the Penryn store at the time the April 8 Agreement was
signed. At the time the April 8
Agreement was signed, Harte told Robert Johnson, Jones’s partner in the
Petaluma store, that Bridgewater was a “fish†and “said that if [Bridgewater’s] dumb enough to
give me $200,000, I’m going to take it.
He says, I don’t care who gets screwed.â€
The
court’s finding that Harte was not in pari delicto with Bridgewater and Jones
is not supported by substantial evidence.
E. Bridgewater’s
Claim for Restitution
Bridgewater
argues he should be awarded restitution of the $200,000 he paid to Harte under
the April 8 Agreement because he was not in pari delicto with Jones and
Harte.
We
conclude that the trial court’s finding that Bridgewater was at least as
blameworthy as Harte is supported by substantial
evidence. Bridgewater was fully
informed of Jones’s debt to Harte and Harte’s ownership of all interests in the
dealership before Bridgewater signed the April 8 Agreement. The terms of the March 16 Sales
Agreement demonstrate that Bridgewater knew how to protect his interests if he
chose to do so (by conditioning the sale on an appraisal and creation of a new
legal entity, for example). He failed to
include those conditions in the April 8 Agreement for reasons not readily
apparent from the record. During his early
negotiations with Jones to purchase an interest in the business, Bridgewater
was advised to consult an attorney, but did not do so. In exchange for his investment he received
what he bargained for—a one-third interest in the Penryn firearms dealership
that became worthless, largely due to Jones’s subsequent conduct.
Harte, therefore, was properly denied.
We reverse
the trial court’s judgment in favor of Harte and against Bridgewater, and affirm
the trial court’s denial of Bridgewater’s cross-claim for restitution. Each side shall bear its own costs.
_________________________
Bruiniers,
J.
We concur:
_________________________
Simons, Acting P. J.
_________________________
Needham, J.
this appeal.
the record of the bench trial. Harte
died in January 2010 before trial in this matter and thus the court did
not have the benefit of his testimony.
Harte’s wife, Rebecca, was granted leave to continue the action on
Harte’s behalf as his successor.
