La Jolla Cove Investors v. Wrobel

Filed 2/14/06 La Jolla Cove Investors v. Wrobel CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment of the Superior Court of San Diego County, S. Charles Wickersham, Judge. Affirmed.

Andrew Wrobel appeals a judgment enforcing a continuing guaranty (guaranty) in the amount of $114,500 he gave to secure a loan given by La Jolla Cove Investors, Inc. (LJCI) to his company Meltronix, Inc. (Meltronix). On appeal he asserts that an agreement between coguarantors on the loan James and Kathy Waring (together, the Warings) and the Norman A. Lizt IRA (Lizt IRA) to purchase a separate $250,000 loan made by the Lizt IRA to Meltronix discharged his liability on the guaranty. Specifically, Wrobel asserts that the court erred by (1) concluding that waiver clauses in the guaranty precluded his defenses based upon Civil Code^[1] sections 1473, 1474, 1476 and 1543; and (2) that to allow the judgment to stand would result in a double recovery for LJCI. We affirm.^[2]

FACTUAL AND PROCEDURAL BACKGROUND

A. LJCI Loan

On December 29, 2000, LJCI loaned Meltronix $250,000 (the LJCI loan). Wrobel and the Warings signed personal guaranties whereby they agreed to be jointly and severally liable for repayment of the loan in the event of a default on the loan by Meltronix. At the time, Wrobel was the president and CEO of Meltronix. Norman Lizt was the president and owner of LJCI.

Wrobel's guaranty contains the following waiver language: " . . . [T]he obligations of Guarantor under this Guaranty shall not be subject to any reduction, limitation, defense, set off, recoupment, impairment or termination for any reason, including, without limitation, by reason of the invalidity, illegality or unenforceability of any of the Guaranteed Obligations . . . . [T]he obligations of Guarantor . . . shall not be discharged or impaired or otherwise affected by any default, failure or delay or by any other act or thing or omission or delay to do any other act or thing that may or might in any manner or to any extent vary the risk of Guarantor or which would otherwise operate as a discharge of Guarantor as a matter of law or equity." (Italics added.)

The guaranty further provides : "Guarantor hereby waives . . . (ii) any and all rights, defenses and benefits arising under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2847, 2848, 2849, 2850, 2899 and 3433, and all other rights, defenses and benefits limiting the liability of or exonerating guarantors or sureties offered by law . . . ." (Italics added.)

Wrobel's liability under his personal guaranty of the LJCI Loan was later, by agreement, limited to 50 percent of any balance due on the loan, plus 50 percent of any interest due.

The LJCI Loan went into default with a balance remaining of $229,000, plus interest at 10 percent from the date of default. That default made Wrobel potentially liable for $114,500, plus one-half of the interest due from the date of default.

B. Lizt IRA Loan

In January 2001 an entity called the Lizt IRA, which was owned by Norman Lizt, the owner of LJCI, loaned Meltronix $250,000 (Lizt IRA loan). On the same date that the Lizt IRA loan was signed, Waring and Wrobel executed letter agreements in favor of Lizt stating that at his discretion the guaranties on the LJCI loan could be switched to the Lizt IRA loan, although their liability would be limited to the amount owed on LJCI loan. In his trial testimony Lizt testified that these "switching agreements" came about because he was unable to get additional guaranties from Waring and Wrobel to secure the Lizt IRA Loan. He explained that he wanted the ability to move the security from the LJCI loan to the Lizt IRA loan because the Lizt IRA was his personal retirement account for which he could not afford to take a loss should a default occur, while a loss on the LJCI loan, being a corporate loan, could be offset against other gains.

In April 2002, after the Lizt IRA loan went into default with the entire balance of $250,000 owing, the Warings entered into an agreement with the Lizt IRA regarding the Lizt IRA Loan. The Warings agreed to purchase the Lizt IRA Loan for the amount of $250,000. As partial consideration for the purchase of that loan, the Warings' liability on the LJCI Loan was also terminated. The Warings paid an additional $59,027.77 for that release of liability, for a total of approximately $309,000 to purchase the Lizt IRA loan. The agreement also provided that Wrobel's liability on his guarantee of the LJCI loan was now limited to one-half of the outstanding balance on the loan, or $114,500, plus one-half of any outstanding interest. The agreement also terminated the switching agreements discussed, ante.

In his trial testimony Lizt explained that Waring was willing to purchase the Lizt IRA loan because at the time it was believed that that loan, which was a convertible note, still had some value. If the stock in Meltronix went up substantially, the loan could be converted into stock with a potential value far exceeding the value of the Lizt IRA loan. As part of that transaction Waring was able to purchase a release of his guaranty, but his primary focus was to purchase the Lizt IRA loan. Waring was not called to testify as a witness in the action, and Lizt's testimony concerning the intent of the parties in entering the agreement was undisputed.

C. The Instant Action

LJCI sued Wrobel on the personal guaranty given to secure the LJCI loan.^[3] The matter proceeded to a court trial in February 2004. Wrobel's principal defense was that the payment made by the Warings to the Lizt IRA to purchase the Lizt IRA loan should have been applied to Wrobel's guaranty. After evidence was presented, as well as argument of counsel, the court found in favor of LJCI, and awarded it $114,500, plus interest at the rate of 10 percent from December 29, 2001.

In rejecting Wrobel's defense to the action on the guaranty, the court found that the agreement between the Warings and the Lizt IRA was an arm's-length transaction, there was some value in the Lizt IRA loan, and there was no evidence the Warings were required to enter into the agreement to purchase the Lizt IRA loan. The court also found that there was sufficient waiver language in Wrobel's guaranty to waive any protections afforded by sections 1474, 1476 or 1543.

DISCUSSION

Wrobel asserts that his liability under the guaranty was discharged under sections 1473, 1474, 1476 and 1543, and that waiver clauses in the guaranty did not affect these statutory defenses. These contentions are unavailing as (1) the statutory provisions are not applicable; and, (2) even if they are, they have been waived by language in the guaranty.

A. Statutory Defenses

Wrobel first relies on section 1476, which provides: " EFFECT OF DIRECTIONS BY CREDITORS. If a creditor, or any one of two or more joint creditors, at any time directs the debtor to perform his obligation in a particular manner, the obligation is extinguished by performance in that manner, even though the creditor does not receive the benefit of such performance."

Wrobel asserts that because Lizt directed Wrobel's coguarantor Waring to pay $309,027.77 to purchase the Lizt IRA loan, and in exchange discharged Waring's liability as guarantor on the $250,000 LJCI loan, this acted as a discharge of the principal obligation on the $250,000 loan and discharged Wrobel's liability under the guaranty.

However, that section, rarely cited by reported decisions, merely provides that if a creditor, such as a lender, directs payment in a particular manner, such as by mail, the risk is upon the creditor if the payment gets lost in the mail. (See Cornwell v. Bank of America (1990) 224 Cal.App.3d 995, 998-1000.) It is directed to the manner of transmission of payment, not to payment of something other than originally bargained for by the parties in the agreement. (Cober v. Connolly (1942) 20 Cal.2d 741, 744.) Thus, section 1476 is inapplicable to this action.

Moreover, there is no evidence that Waring was directed or forced to purchase the Lizt IRA loan to obtain a release of his liability for the guarantee on the LJCI loan. As Lizt testified, Waring entered into that agreement voluntarily and the monies were primarily paid for purchase of a loan that might have some value, not to obtain a release of liability under the guaranty. Waring was not called as a witness to dispute or contradict this testimony. The court found that the purchase of the Lizt IRA loan was an arms'-length transaction between the parties, there was some value in the loan at that time, and there was no evidence the Warings were directed or forced to enter into that agreement.

Wrobel next relies on section 1543, which provides: "A release of one of two or more joint debtors does not extinguish the obligations of any of the others, unless they are mere guarantors; nor does it affect their right to contribution from him or her, except as provided in Section 877 of the Code of Civil Procedure." (Italics added.)

Thus, under California law, the release of one of two joint obligors does not release the obligations of the others. (Brown v. Pacific Coast Agency (1921) 53 Cal.App. 788, 791; Oil Tool Exchange v. Schuh (1944) 67 Cal.App.2d 288, 295-296; Lovetro v. Steers (1965) 234 Cal.App.2d 461, 477.) Rather, the remaining obligor must pay so much of the debt as was not paid by the released obligor. (Sullivan v. Hopkins (9th Cir. 1970) 435 F. 2d 1128, 1132; Lovetro v. Steers, supra, 234 Cal.App.2d at p. 477.) Furthermore, the sureties on one contract are not entitled to a reduction of their liability on account of payments made to their creditor on another contract. (Hammond Lumber Co. v. Richardson Building & Engineering Co. (1930) 209 Cal. 82, 91.) As stated in Brown v. Pacific Coast Agency, supra, 53 Cal.App. at p. 791: "There is no reason why two or more joint guarantors (whose relation among themselves is in the nature of cosureties) should be discharged by the release of one from a joint judgment on the guaranty." Further, the fact that section 1543 has language that exempts from its operation "mere guarantors" does not require a different holding with regard to coguarantors. (Williams v. Reed (1952) 113 Cal.App.2d 195, 202-203; Brown v. Pacific Coast Agency, supra, 43 Cal.App. at pp. 789-791.) Accordingly, section 1543 does not support a defense to the action on the guaranty

Wrobel also relies on section 1473, which provides: "OBLIGATION EXTINGUISHED BY PERFORMANCE. Full performance of an obligation, by the party whose duty it is to perform it, or by any other person on his behalf, and with his assent, if accepted by the creditor, extinguishes it."

Wrobel relies in the same manner upon section 1474, which similarly provides: "PERFORMANCE BY ONE OF SEVERAL JOINT DEBTORS. Performance of an obligation, by one of several persons who are jointly liable under it, extinguishes the liability of all."

However, these sections merely provide that where one of two joint obligors, or a third party, pays the entire debt, that releases the other from liability. (Enscoe v. Fletcher (1905) 1 Cal.App. 659, 664-666; Los Angeles Nat. Bank v. Vance (1908) 9 Cal.App. 57, 59.) Waring did not pay off the entire $229,000 outstanding on the LJCI loan by agreeing to purchase the separate Lizt IRA loan. "Third persons, such as guarantors, sureties . . . and the like, secondarily liable on one of the debts, cannot control the application of a payment by either the debtor or the creditor, and neither the debtor nor the creditor need apply the payment in the manner most beneficial to such persons." (S.W. Towle Lumber Co. v. Anderson, (1929) 208 Cal. 371, 375; see also Hogan v. Paddon (1928) 91 Cal.App. 606, 615-616, Bank of America Nat. Trust & Savings Ass'n v. Kelsey (1935) 6 Cal.App.2d 346, 353; Hollywood Wholesale Elec. Co. v. John Baskin, Inc. (1953) 121 Cal.App.2d 415, 430.) Thus, when the Warings purchased the separate Lizt IRA loan, Lizt or LJCI were not required to apply that payment to the LCJI loan, a separate obligation owing to a separate entity.

Wrobel focuses on the fact that Lizt owned both LJCI and the Lizt IRA. However, he presented no evidence at trial, nor does he on appeal, that Lizt was the alter ego of either entity or that either loan was in any way a sham transaction. Thus, Lizt's ownership of both entities had no bearing on Wrobel's liability on the guaranty.

B. Waiver

Even if one or more of the code sections relied upon by Wrobel could provide a defense to the action on the guaranty, he explicitly waived their benefits in the guaranty.

Section 3268 states:

"Except where it is otherwise declared, the provisions of the foregoing titles of this part, in respect to the rights and obligations of parties to contracts, are subordinate to the intention of the parties, when ascertained in the manner prescribed by the chapter on the interpretation of contracts; and the benefit thereof may be waived by any party entitled thereto, unless such waiver would be against public policy."

Section 2856 provides in part:

"(a) 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. [¶] (2) Any rights or defenses the guarantor or other surety may have in respect of his or her obligations as a guarantor or other surety by reason of any election of remedies by the creditor. [¶] . . . [¶] (b) A contractual provision that expresses an intent to waive any or all of the rights and defenses described in subdivision (a) shall be effective to waive these rights and defenses without regard to the inclusion of any particular language or phrases in the contract to waive any rights and defenses or any references to statutory provisions or judicial decisions." (Italics added.)

"[U]nder section 2856, subdivision (b), a guarantor may waive a surety defense using '[a]ny language that expressly sets forth a waiver . . . .'" (River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1419.) The waiver need not be in any particular language and need not refer to any particular statute. (Ibid.)

As detailed above, the guaranty has waiver language that provides that Wrobel waived any defenses that would "operate as a discharge of Guarantor as a matter of law or equity. . . ." It also states that, "Guarantor hereby waives . . . all other rights, defenses and benefits limiting the liability of or exonerating guarantors or sureties offered by law." (Italics added.) The guaranty elsewhere provides that "the obligations of Guarantor . . . shall not be discharged or impaired or otherwise affected by any default, failure or delay or by any other act or thing . . . [which] might in any manner or to any extent vary the risk of Guarantor or which would otherwise operate as a discharge of Guarantor as a matter of law or equity." (Italics added.) These broad waiver provisions would cover any possible defenses Wrobel could mount based upon sections 1473, 1474, 1476, or 1543.

C. Double Recovery

Wrobel asserts that allowing the judgment to stand will result in a double recovery for LJCI. This contention is unavailing.

At the time of the agreement between the Warings and the Lizt IRA, the balance on the Lizt IRA loan was $250,000. To pay off this loan and receive a release of liability on the LJCI loan guaranty, the Warings paid to Lizt $309,027.77, or $59,027.77 over the amount due. On the LJCI loan, which had a balance of $229,000, LJCI received $114,500, plus interest, leaving a balance owing on that loan of $114,500. Thus, even if the excess amount received under the Lizt IRA loan were applied to the remaining balance on the LJCI loan, there would still be $55,472.77 owing on that loan. There was no double recovery in this case.^[4]

DISPOSITION

The judgment is affirmed.

NARES, Acting P. J.

WE CONCUR:

McDONALD, J.

O'ROURKE, J.

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^[1] All further statutory references are to the Civil Code unless otherwise specified.

^[2] Wrobel also appealed a judgment in favor of codefendant Paul Neuharth on his cross-complaint against Wrobel for indemnity and contribution. However, Wrobel requested dismissal of that portion of the appeal, and a dismissal order was filed on June 1, 2005.

^[3] Several actions were filed by and between LJCI, Wrobel, and others, and the parties stipulated to consolidate the actions. It is only the action on Wrobel's guaranty that is at issue on this appeal.

^[4] These calculations do not include interest owing on the two loans. If interest were added to the calculations, the balance that remained owing would be even larger.