Filed: Dec. 16, 2019
Latest Update: Mar. 11, 2020
Summary: FILED DEC 16 2019 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT In re: BAP No. MT-19-1057-FBH EDRA D. BLIXSETH, Bk. No. 2:09-bk-60452-TLM Debtor. Adv. Pro. 2:09-ap-00105-TLM WESTERN CAPITAL PARTNERS, LLC, Appellant, v. MEMORANDUM* ATIGEO LLC; XPATTERNS LLC; MICHAEL SANDOVAL, Appellees. Argued and Submitted on November 21, 2019 at Las Vegas, Nevada Filed – December 16, 2019 Appeal from the United
Summary: FILED DEC 16 2019 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT In re: BAP No. MT-19-1057-FBH EDRA D. BLIXSETH, Bk. No. 2:09-bk-60452-TLM Debtor. Adv. Pro. 2:09-ap-00105-TLM WESTERN CAPITAL PARTNERS, LLC, Appellant, v. MEMORANDUM* ATIGEO LLC; XPATTERNS LLC; MICHAEL SANDOVAL, Appellees. Argued and Submitted on November 21, 2019 at Las Vegas, Nevada Filed – December 16, 2019 Appeal from the United ..
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FILED
DEC 16 2019
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. MT-19-1057-FBH
EDRA D. BLIXSETH, Bk. No. 2:09-bk-60452-TLM
Debtor. Adv. Pro. 2:09-ap-00105-TLM
WESTERN CAPITAL PARTNERS, LLC,
Appellant,
v. MEMORANDUM*
ATIGEO LLC; XPATTERNS LLC;
MICHAEL SANDOVAL,
Appellees.
Argued and Submitted on November 21, 2019
at Las Vegas, Nevada
Filed – December 16, 2019
Appeal from the United States Bankruptcy Court
for the District of Montana
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Honorable Terry L. Meyers, Bankruptcy Judge, Presiding
Appearances: Christopher Conant of Hatch Ray Olsen Conant LLC
argued on behalf of appellant Western Capital Partners,
LLC; James Morrison of Baker Hostetler LLP argued on
behalf of appellee Michael Sandoval.
Before: FARIS, BRAND, and HERCHER,** Bankruptcy Judges.
INTRODUCTION
The bankruptcy court concluded that chapter 71 debtor Edra D.
Blixseth’s assignee, Western Capital Partners, LLC (“WCP”), could not
enforce a contractual guaranty against appellee Michael Sandoval and his
companies because Ms. Blixseth breached her obligations under the
contract. WCP appeals.
We hold that the bankruptcy court did not misconstrue the
agreement and guaranty or clearly err in its factual findings. We AFFIRM.
**
The Honorable David W. Hercher, U.S. Bankruptcy Judge for the District of
Oregon, sitting by designation.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2
FACTUAL BACKGROUND2
A. The three companies: Atigeo, xPatterns, and Opspring
Mr. Sandoval was the founder and CEO of technology company
Atigeo LLC. In late 2005, he became friends with Ms. Blixseth, who agreed
to invest a total of $18 million in xPatterns LLC and Opspring LLC, which
were subsidiaries of Atigeo.3 Mr. Sandoval was the CEO of the three
companies, and Ms. Blixseth was a director of xPatterns and Opspring.
xPatterns made a $5 million loan to Mr. Sandoval. He used the loan
proceeds to purchase real property in Kirkland, Washington (“Kirkland
Property”).
In 2007, Opspring negotiated and received a letter of intent from the
United States government that could have produced $100 million of
revenue for Opspring. But Opspring ultimately received only $2 million to
$2.5 million under that agreement.
B. The Letter Agreement
Also in 2007, various disputes arose between Ms. Blixseth and
2
We exercise our discretion to review the bankruptcy court’s docket, as
appropriate. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2
(9th Cir. BAP 2008). We also borrow the factual background from our previous decision,
Western Capital Partners, LLC v. Atigeo LLC (In re Blixseth), BAP Nos. MT-11-1574-JuHPa,
MT-11-1575-JuHPa,
2012 WL 3234205 (9th Cir. BAP Aug. 9, 2012).
3
Sometime in or around 2007, Opspring ceased operations and merged into
Blxware LLC. For ease of reference, we refer to both entities as “Opspring.” Similarly,
Atigeo was preceded by Azimyth LLC, but we will refer to both entities as “Atigeo.”
3
Mr. Sandoval, including a dispute over xPatterns’ $5 million loan to
Mr. Sandoval. To resolve their disputes, they entered into an agreement
(“Letter Agreement”)4 in which they agreed that Mr. Sandoval would
become the sole owner of xPatterns and Ms. Blixseth would obtain full
ownership of Opspring and recover $10 million. More specifically:
• Ms. Blixseth’s $10 million investment in xPatterns was to be
“redeemed” by: (1) a $2 million payment due within 120 days and (2) an $8
million unsecured note payable by xPatterns over three years.
• Mr. Sandoval agreed to guarantee the first $5 million of xPatterns’
obligation (the “Guaranty”):
By signing this Letter Agreement, Sandoval guarantees to the
Blixseth Family that the first $5 million portion of the xPatterns
Obligations will be paid when due, no matter what may
happen. This is a continuing guaranty until the final payment
in full of all of the first $5 million portion of the xPatterns
Obligations.
• Opspring would pay Atigeo a quarterly performance fee
(“Performance Fee”) of five percent of Opspring’s revenue, up to $15
million. Atigeo would pay the first $5 million to Ms. Blixseth to reduce
xPatterns’ obligation on the promissory note.
• The parties agreed to not disclose the companies’ trade secrets and
4
The Letter Agreement also involved people and entities related to Mr. Sandoval
and Ms. Blixseth, respectively. For ease of understanding, our references to
Mr. Sandoval and Ms. Blixseth encompass these related parties, as well.
4
confidential information and the Letter Agreement’s terms and promised
not to disparage each other.
C. Performance under the Letter Agreement
Mr. Sandoval, on behalf of xPatterns, executed the $8 million
promissory note pursuant to the Letter Agreement. The first $2 million due
under the Letter Agreement was eventually paid, about a year late,
through set-offs and a lump-sum cash payment. xPatterns did not make
any further payments to Ms. Blixseth.
Opspring and Ms. Blixseth failed to pay the Performance Fee to
Atigeo. Ms. Blixseth induced third parties to breach their confidentiality
agreements with Atigeo and to provide Opspring with proprietary
information. Further, Ms. Blixseth sued Atigeo and others in Washington
state court in connection with the Letter Agreement and the outstanding
balance on the promissory note. She publicly disclosed the terms of the
Letter Agreement and asserted that Mr. Sandoval made significant
misrepresentations, engaged in fraud, and depleted xPatterns’ assets.
The state court later dismissed the lawsuit with prejudice because
Ms. Blixseth’s claims were premature: payment was not yet due under the
promissory note.
D. Ms. Blixseth’s bankruptcy case and the adversary proceeding
On March 26, 2009, Ms. Blixseth initiated a chapter 11 case, which
was later converted to chapter 7. Atigeo and xPatterns filed an adversary
5
complaint against Ms. Blixseth, Opspring, and others, alleging that
Ms. Blixseth had breached the Letter Agreement.
The chapter 7 trustee filed a counterclaim against the plaintiffs and a
third-party complaint against Mr. Sandoval and others. He asserted that
Mr. Sandoval wrongfully converted Ms. Blixseth’s investment in xPatterns
when he borrowed money from xPatterns to purchase the Kirkland
Property. He also asserted that Mr. Sandoval misrepresented the
technology owned by Atigeo and xPatterns and fraudulently induced
Ms. Blixseth to enter into the Letter Agreement. He requested that the court
void the Letter Agreement.
WCP moved to intervene in the adversary proceeding. Ms. Blixseth
had guaranteed a loan made by WCP to her son and pledged certain
personal property, including her rights in the Letter Agreement and the
promissory note. WCP foreclosed on its security interest and purchased the
contract claims and accounts arising out of the Letter Agreement. The
bankruptcy court granted WCP’s motion to intervene.
WCP, standing in Ms. Blixseth’s shoes as her assignee, filed a third-
party complaint against the Atigeo entities. It sought to enforce the Letter
Agreement and collect the $8 million due under the promissory note.
In July 2011, the chapter 7 trustee filed a stipulation for declaratory
judgment on the first count (repudiation of the Letter Agreement) of the
complaint. The trustee acknowledged that Ms. Blixseth and her related
6
entities had breached the Letter Agreement. He agreed that all of the terms
of the Letter Agreement were repudiated.
The chapter 7 trustee had additionally negotiated a settlement with
the Atigeo parties regarding the estate’s tort claims against them. He filed a
motion to approve the settlement.
The court approved the settlement and stipulation, concluding that
the Letter Agreement was repudiated such that it was invalid and
unenforceable as a matter of law. However, this Panel vacated the orders,
agreeing with WCP that the bankruptcy court had deprived it of due
process.
The adversary proceeding was delayed due to other pending appeals
and WCP’s own bankruptcy case. After the Ninth Circuit held in 2017 that
the transfer of Ms. Blixseth’s interest in the Letter Agreement to WCP was
not a fraudulent transfer, the chapter 7 trustee sought to be dismissed from
the adversary proceeding. He argued that he had no interest in the
litigation following the appeal but that the estate would have rights to
commercial tort claims against Mr. Sandoval if Mr. Sandoval, Atigeo, and
xPatterns were successful in repudiating the Letter Agreement. The
bankruptcy court did not immediately rule on the trustee’s motion.
E. The trial and decision
The bankruptcy court held a trial on WCP’s third-party complaint in
early 2018. Only Mr. Sandoval and a representative of WCP testified live.
7
Ronald Warren, who managed WCP after its reorganization, testified
on behalf of WCP. He said that xPatterns’ current obligation to Ms. Blixseth
exceeded $19 million. He stated that his calculations credited xPatterns
$100,000 for the Performance Fee as of March 2009.
Mr. Sandoval testified as to his business relationship with
Ms. Blixseth and the creation of the Letter Agreement. He testified that he
agreed to the Letter Agreement’s terms to “avoid a lot of the conflict . . . so
that the companies could continue.”
He admitted that the first payment of $2 million was made about a
year late. He agreed that xPatterns never paid the additional $8 million due
under the promissory note.
Mr. Sandoval testified that the $5 million amount of the Guaranty
was not pegged to the $5 million loan he obtained from xPatterns to buy
the Kirkland Property. Rather, he stated that it was “mutually arrived at”
based on five percent of the anticipated $100 million government contract.
Regarding the “no matter what may happen” language of the
Guaranty, Mr. Sandoval testified that he understood the provision to mean
that he might be responsible for a portion of the balance of the $5 million
Guaranty. However, he balked at the “ludicrous” suggestion that he would
agree to pay the Guaranty even if no one else performed their obligations
under the Letter Agreement.
He stated that he would not have signed the Letter Agreement
8
without the nondisclosure and nondisparagement provisions. He testified
that these terms were critical to the Letter Agreement in order to protect his
companies’ business relationship with the government. He testified that
people connected to Ms. Blixseth and her companies stole source code,
contact information, backup hard drives, and other confidential materials.
The bankruptcy court took the matter under submission and entered
its written decision and judgment on February 27, 2019.
The court first considered the Guaranty and the “no matter what may
happen” language. It stated that the interpretation of the Guaranty turned
on the mutual intention of the parties. It held that, based on the language of
the Letter Agreement and Mr. Sandoval’s testimony regarding his intent,
the Guaranty was not an unconditional promise to satisfy the $5 million
owed by xPatterns even if Ms. Blixseth breached the Letter Agreement.
Rather, based on the language of the Guaranty, “Sandoval guaranteed
xPatterns’ debt; he did not make an absolute, direct payment obligation to
Blixseth. Inherent in the use of a guarantee is the understanding that the
underlying obligation is legally enforceable.” It held that Mr. Sandoval’s
“plausible explanation, coupled with the context of the structured
payments and mutual obligations of all parties, leads the Court to conclude
the parties to the Letter Agreement did not intend the Guarantee to be an
absolute, independent commitment to pay $5 million to Blixseth despite
any breaches on her part.”
9
The court next concluded that, under California law,5 the Letter
Agreement was a single, indivisible agreement, rather than a single
document containing divisible and independent agreements. It held that
the language of the Letter Agreement showed that “the parties intended
the Letter Agreement to be an entire encompassing and inclusive contract,
creating a global settlement of all issues.” Additionally, the bankruptcy
court credited Mr. Sandoval’s trial testimony in which he explained how
the various provisions were dependent and interrelated.
Finally, the court held that WCP failed to prove that Ms. Blixseth
performed her obligations or was excused from nonperformance. It found
that she failed to pay the Performance Fee, even though Opspring received
at least $2 million under the government contract. WCP’s proposed credit
for the unpaid $100,000 Performance Fee was ten years late and insufficient
to cure the breach. It also held that Ms. Blixseth breached the Letter
Agreement by disclosing the terms of the agreement and publicly
disparaging Mr. Sandoval during the state court litigation.
The bankruptcy court dismissed the third-party complaint because
WCP failed to establish that it could enforce the Guaranty due to
Ms. Blixseth’s breach of her obligations. WCP timely appealed.
5
The parties agreed that the Letter Agreement was governed by California law.
10
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334
and 157(c)(2).6 We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in dismissing WCP’s third-party
complaint and holding that WCP cannot enforce Mr. Sandoval’s $5 million
Guarantee.
STANDARDS OF REVIEW
We review questions of contract interpretation de novo. See DP
Aviation v. Smiths Indus. Aerospace & Def. Sys. Ltd., 268 F.3d 829, 836 (9th Cir.
2001) (“We review the interpretation and meaning of contract provisions
de novo.” (citation omitted)). This includes “the determinations of whether
6
We have an independent obligation to satisfy ourselves that the bankruptcy
court had subject matter jurisdiction, even though neither party has raised this issue. See
Allstate Ins. Co. v. Hughes, 358 F.3d 1089, 1093 (9th Cir. 2004). At first blush, it is not clear
that the bankruptcy court had subject matter jurisdiction. This is a dispute between two
creditors that does not turn on bankruptcy law and has no immediately apparent effect
on the bankruptcy estate. However, as this Panel noted in the prior appeal, WCP
acquired Ms. Blixseth’s claims against Mr. Sandoval and his related entities but did not
assume her liabilities to the parties. Therefore, the outcome of this proceeding could
affect the validity and amount of Mr. Sandoval’s claims against Ms. Blixseth’s
bankruptcy estate. In re Blixseth,
2012 WL 3234205, at *12 (“Whether the Letter
Agreement is enforceable or unenforceable under Count I is directly related to Edra’s
potential liability for breach of contract damages as alleged in other Counts in the
complaint. . . . In addition, the bankruptcy court’s decision on the enforceability of the
Letter Agreement was inextricably intertwined with the existence of the estate’s tort
claims against the Atigeo Parties.”). For the same reasons, the bankruptcy court still had
subject matter jurisdiction when the case came to trial.
11
contract language is ambiguous, and whether the written contract is
reasonably susceptible of a proffered meaning.” Cellular Inv. Co. v. GTE
Mobilnet, Inc., 281 F.3d 929, 934 (9th Cir. 2002) (internal citations and
quotation marks omitted). It also includes whether a contract’s obligations
are dependent or independent. See Chevron U.S.A. Inc. v. Sheikhpour, 469 F.
App’x 593, 596 (9th Cir. 2012) (interpreting the language of the contract to
determine whether provisions were dependent or independent); see also
Verdier v. Verdier,
133 Cal. App. 2d 325, 334 (1955) (holding that the
determination whether contractual provisions are independent “is wholly
one of construction of the agreement.”).
“De novo review requires that we consider a matter anew, as if no
decision had been made previously.” Francis v. Wallace (In re Francis), 505
B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted).
But if the bankruptcy court properly relied on extrinsic evidence to
interpret the contract, we review the court’s factual findings for clear error.
See Captain Blythers, Inc. v. Thompson (In re Captain Blythers, Inc.), 311 B.R.
530, 534 (9th Cir. BAP 2004), aff’d, 182 F. App’x 708 (9th Cir. 2006)
(“Questions of contract interpretation are subject to de novo review unless
extrinsic evidence was introduced on issues such as intent, in which event
the pertinent factual findings are reviewed for clear error[.]” (internal
citations omitted)).
Whether a contractual breach was material is also a factual question
12
that we review for clear error. See Sunstone Behavioral Health, Inc. v. Alameda
Cty. Med. Ctr., 399 F. App’x 237, 237 (9th Cir. 2010) (“The district court’s
conclusion that Sunstone’s breach was not material, and its careful and
thorough analysis of that issue, contain no clear error.” (citations omitted)).
Factual findings are clearly erroneous if they are illogical,
implausible, or without support in the record. Retz v. Samson (In re Retz),
606 F.3d 1189, 1196 (9th Cir. 2010). “To be clearly erroneous, a decision
must strike us as more than just maybe or probably wrong; it must . . .
strike us as wrong with the force of a five-week-old, unrefrigerated dead
fish.” Papio Keno Club, Inc. v. City of Papillion (In re Papio Keno Club, Inc.),
262
F.3d 725, 729 (8th Cir. 2001) (citation omitted). “Review for clear error is
‘significantly deferential.’” Roth v. Educ. Credit Mgmt. Corp. (In re Roth),
490
B.R. 908, 915 (9th Cir. BAP 2013) (quoting Baker v. Mereshian (In re
Mereshian),
200 B.R. 342, 345 (9th Cir. BAP 1996)). If two views of the
evidence are possible, the court’s choice between them cannot be clearly
erroneous. Anderson v. City of Bessemer City,
470 U.S. 564, 574 (1985).
DISCUSSION
A. The bankruptcy court did not err in finding that Ms. Blixseth’s
breaches of the Letter Agreement bar WCP from enforcing it.
WCP argues that the bankruptcy court erred in finding that it could
not enforce the Guaranty because Ms. Blixseth breached the Letter
Agreement. We disagree.
13
“The elements of a breach of contract action under California law are:
(1) the existence of a contract, (2) plaintiff’s performance or excuse for
nonperformance, (3) defendant’s breach, and (4) damages to plaintiff as a
result of the breach.” Moss v. Infinity Ins. Co., 197 F. Supp. 3d 1191, 1201
(N.D. Cal. 2016) (citing Buschman v. Anesthesia Bus. Consultants, LLC, 42 F.
Supp. 3d 1244, 1250 (N.D. Cal. 2014)).
WCP does not deny that Ms. Blixseth breached her obligations. She
disparaged Mr. Sandoval and his companies and disclosed the terms of the
Letter Agreement. She also failed to cause Opspring to pay the quarterly
Performance Fee to Atigeo.7
But this is not the end of the inquiry. Even if the plaintiff has
breached the contract, the plaintiff may still enforce the contract in certain
circumstances. California law evaluates this issue in two different ways.
One line of cases bars recovery only if the plaintiff’s breach was
“material.” See Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1289
n.12 (9th Cir. 2009) (“The general rule is that if the breach is a material
breach, it may give grounds for the non-breaching party to cancel the
contract, but if the breach is a partial breach, the non-breaching party’s
7
WCP takes issue with the bankruptcy court’s finding that Ms. Blixseth failed to
pay the Performance Fee. It contends that it did “pay” the Performance Fee with the
$100,000 credit and that the timing of the payment was irrelevant. But the Performance
Fee had a specific due date. WCP cites no authority for its position that it can nullify a
material breach years after the fact by offering a setoff at trial.
14
remedy is for damages.” (citations omitted)). A material breach occurs
where the failure to perform “is so dominant or pervasive as in any real or
substantial measure to frustrate the purpose of the contract.’” Aslan v.
Sycamore Inv. Co. (In re Aslan), 909 F.2d 367, 370 (9th Cir. 1990) (quoting
Superior Motels, Inc. v. Rinn Motor Hotels, Inc.,
195 Cal. App. 3d 1032, 1051
(1987)). “Whether a partial breach of a contract is material depends on ‘the
importance or seriousness thereof and the probability of the injured party
getting substantial performance.’” Brown v. Grimes,
192 Cal. App. 4th 265,
278 (2011) (citations omitted). This line of cases is consistent with the
Restatement (Second) of Contracts. See Restatement (Second) of Contracts
§ 237 cmt. b (Am. Law Inst. 1981) (“Where performances are to be
exchanged under an exchange of promises, each party is entitled to the
assurance that he will not be called upon to perform his remaining duties
of performance with respect to the expected exchange if there has already
been an uncured material failure of performance by the other party.”).
The second line of cases asks whether the promises that the plaintiff
breached are dependent on or independent of the promises that the
plaintiff seeks to enforce against the defendant. The breaching plaintiff can
enforce any of the defendant’s obligations that are independent of the
plaintiff’s breached obligations, subject to an offset from any damages the
defendant incurred due to the plaintiff’s breach; but the plaintiff cannot
enforce any of the defendant’s promises that are dependent on the
15
plaintiff’s promises. “If the covenants are independent, breach of one does
not excuse performance of the other.” Verdier, 133 Cal. App. 2d at 334
(citation omitted). Whether provisions in an agreement are dependent or
independent “is wholly [a question] of construction of the agreement.”
Id.
(citation omitted).
California case law does not explain how to choose between the two
approaches.8 In fact, one decision by the California court of appeal applies
both approaches without explanation. Brown applies the materiality
standard, 192 Cal. App. 4th at 277-78, and the independence standard,
id. at
278-79, without noting that the two standards are different.
One court has reasoned that the two approaches are nearly the same:
“One way of determining whether a breach is material is to decide whether
the covenant breached was independent or dependent. Breach of an
independent covenant is not, as a matter of law, a material breach. By
definition, an independent covenant does not go to the essence of a
contract.” Flagship W., LLC v. Excel Realty Partners, L.P., No. 102-CV-05200
OWW DLB, 2005 WL 4701939, at *4 (E.D. Cal. Sept. 30, 2005), vacated on
other grounds and remanded, 337 F. App’x 679 (9th Cir. 2009) (citations
omitted). But the converse is not necessarily true. “[T]he fact-finder need
8
The problem is compounded because “the precedential value of a California
Court of Appeal decision does not extend to another panel within the same appellate
district, let alone to another appellate district in California.” Tomkow v. Barton (In re
Tomkow), 563 B.R. 716, 728 (9th Cir. 2017).
16
not necessarily answer the question whether the covenant breached is
independent in order to decide that the breach was material. California
case law has long held that the answer to the materiality question is
determinative.” Id.
Fortunately, we need not decide which of these approaches is correct
or applicable to the facts of this case. As the following sections will show,
the bankruptcy court’s decision was correct under both approaches.
1. Ms. Blixseth’s breaches were material.
The bankruptcy court correctly determined that Ms. Blixseth’s
breaches of the nondisclosure and nondisparagement provisions and the
Performance Fee obligation were material.
“Normally the question of whether a breach of an obligation is a
material breach, so as to excuse performance by the other party, is a
question of fact.” Brown, 192 Cal. App. 4th at 277. The bankruptcy court
properly accepted extrinsic evidence about the materiality of the breach.
See Schellinger Bros. v. Cotter,
2 Cal. App. 5th 984, 1002 (2016) (“Whether a
breach is material is usually left to the trier of fact ‘to determine from all the
facts and circumstances shown in evidence.’” (citation omitted)).
Mr. Sandoval testified that these terms were major considerations in
the bargained-for Letter Agreement. He explained how the money
generated by the Performance Fee was intended to offset the monies due
under the Letter Agreement and fund the start-up companies. He also
17
testified that the confidentiality and nondisparagement provisions were
vital to securing new investors and business; he testified that Ms. Blixseth’s
breach devastated the companies and made it impossible to secure new
funding. The court did not err in crediting Mr. Sandoval’s testimony and
finding that the breaches were material.
WCP argues that there is a legally significant difference between a
breach of a material term of a contract, on the one hand, and a material
breach of the contract, on the other. This is sophistry. WCP relies on
Superior Motels, but that case merely stands for the well-accepted
proposition that not every breach of a contract is material. 195 Cal. App. 3d
at 1051. Superior Motels makes no distinction between a “breach of a
material term” and a “material breach.”
Therefore, the bankruptcy court did not err in finding that
Ms. Blixseth materially breached the Letter Agreement.
2. Ms. Blixseth’s obligations under the Letter Agreement were
not independent of the Guaranty.
WCP urges us to follow the second approach. It argues that
Ms. Blixseth’s obligations under the Letter Agreement were independent of
the Guaranty, such that her breaches had no effect on Mr. Sandoval’s
obligation under the Guaranty. It relies heavily on Colaco v. Cavotec SA, 25
Cal. App. 5th 1172 (2018), reh’g denied (Aug. 10, 2018), review denied (Oct. 24,
2018). In that case, both parties breached their obligations under an asset
18
purchase agreement. The California court of appeal held that, where the
agreement called for performance at different times, the provisions were
not dependent. Id. at 1183. It also held that, “[w]hen a covenant or promise
goes only to a part of the consideration, and a breach thereof may be paid
for in damages, it is an independent covenant or promise.”
Id. (citations
omitted).
The language of the agreement and the intent of the parties
determine whether the provisions are dependent or independent. See id.
(“Whether specific contractual obligations are independent or dependent is
a matter of contract interpretation based on the contract’s plain language
and the parties’ intent”); Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas
Co.,
116 Cal. App. 4th 1375, 1389 (2004) (“Generally, the parties’ intent
[regarding severability] is revealed by the nature and character of the
agreement . . . . Intent can further be shown by the parties’ subsequent acts
and conduct.” (citations and internal quotation marks omitted));
Brown, 192
Cal. App. 4th at 279 (“The determination of whether a promise is an
independent covenant, so that breach of that promise by one party does not
excuse performance by the other party, is based on the intention of the
parties as deduced from the agreement.”).
The bankruptcy court properly considered the language of the Letter
Agreement and Mr. Sandoval’s testimony and found that the parties did
not intend that Ms. Blixseth’s obligations were independent from
19
Mr. Sandoval’s Guaranty. The context makes this obvious. At the outset,
Ms. Blixseth and Mr. Sandoval jointly owned two companies. Under the
Letter Agreement, they agreed to rearrange things so each of them would
become the sole owner of one of the two companies and Ms. Blixseth
would recover her investment in the company allocated to Mr. Sandoval.
They also agreed to other terms, such as the confidentiality and
nondisparagement provisions, that were needed to protect the value of
each company. A “business divorce” such as this one only makes sense if
viewed as a single, integrated transaction.
Likewise, nothing in the language of the Letter Agreement indicates
that the parties intended that it was actually two or more separate
agreements. The bankruptcy court correctly observed that the parties’
desire, memorialized in the introduction to the Letter Agreement, for a
“reasonable separation” to “resolve[] the issues between us” supports “an
entire encompassing and inclusive contract, creating a global settlement of
all issues.” The court additionally noted that some provisions would be
rendered nonsensical if it were to sever certain provisions.9
The court also relied on Mr. Sandoval’s testimony. This was not error;
9
Contrary to WCP’s argument, the severability clause of the Letter Agreement
has nothing to do with this issue. It comes into play only if one or more provisions of
the agreement is “invalid and unenforceable.” (Emphasis added.) The bankruptcy court
did not hold that any provision of the Letter Agreement was invalid, only that WCP
could not enforce it due to Ms. Blixseth’s breaches.
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extrinsic evidence is admissible to determine whether the parties intended
the agreement to contain dependent or independent promises. See Brown,
192 Cal. App. 4th at 279 (holding that the trial court properly relied on
parol evidence to determine “whether a promise is an independent
covenant . . . .”). The court credited his explanation of the reasons for and
importance of the various provisions, as well as the parties’ intention that
the Letter Agreement was a “global resolution of all issues, rather than a
series of independent agreements.” These findings are not clearly
erroneous.
WCP also argues that Mr. Sandoval’s payment obligations under the
Guaranty were independent of Ms. Blixseth’s obligations under the
nondisparagement and confidentiality provisions because she was
obligated to obey those terms into the indefinite future, while
Mr. Sandoval’s payments were due on specific dates. But the bankruptcy
court did not need to consider the effect of a possible future breach of those
provisions: Ms. Blixseth breached the Letter Agreement when she filed the
state court action disclosing the Letter Agreement and disparaging
Mr. Sandoval in May 2008, before the full amount under the Guaranty was
due.
Therefore, the bankruptcy court did not err in holding that the Letter
Agreement was a unified contract and that Mr. Sandoval’s obligations
under the Guaranty were dependent on Ms. Blixseth’s performance of the
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cited provisions of the Letter Agreement.
B. The bankruptcy court correctly interpreted the phrase “no matter
what may happen” in Mr. Sandoval’s Guaranty.
The Guaranty provided that Mr. Sandoval guaranteed “that the first
$5 million portion of the xPatterns obligations will be paid when due, no
matter what may happen.” WCP argues that, by virtue of the “no matter
what may happen” phrase, Mr. Sandoval was absolutely obligated to pay
the $5 million Guaranty to Ms. Blixseth, even if she materially breached the
Letter Agreement. We disagree.
WCP argues that the Letter Agreement was unambiguous and that
the court therefore erred in receiving Mr. Sandoval’s testimony. Under
California law, “[i]f contractual language is clear and explicit, it governs.”
Bank of the W. v. Superior Court, 2 Cal. 4th 1254, 1264 (1992) (citing Cal. Civ.
Code §§ 1636, 1638); see also Shaw v. Regents of Univ. of Cal.,
58 Cal. App. 4th
44, 54-55 (1997) (“Although the intent of the parties determines the
meaning of the contract, the relevant intent is ‘objective’—that is, the
objective intent as evidenced by the words of the instrument, not a party’s
subjective intent.” (citations omitted)). The court only needs to consider
extrinsic evidence where there is an ambiguity. See Crow Winthrop
Operating P’ship v. Jamboree LLC (In re Crow Winthrop Operating P’ship),
241
F.3d 1121, 1124 (9th Cir. 2001) (“Under California law, if a contract’s terms
are unambiguous, a court may interpret the contract without recourse to
22
extrinsic evidence.” (citing City of Santa Clara v. Watkins, 984 F.2d 1008, 1012
(9th Cir. 1993)).
The bankruptcy court correctly held that the phrase “no matter what
may happen” had “two arguable interpretations.” WCP’s argument, that
Mr. Sandoval was liable on the Guaranty despite any breach by
Ms. Blixseth, is consistent with the literal language of the quoted phrase
read in isolation. Mr. Sandoval’s argument to the contrary is supported by
a reading of the entire Letter Agreement and an understanding of the
integrated transactions that it documented.
The court employed a correct analytical process to decide which
interpretation was correct. The bankruptcy court properly considered the
nature of a guaranty. As the court noted, the Guaranty made Mr. Sandoval
liable for a portion of xPatterns’ debt. This implies that Mr. Sandoval was
liable under the Guaranty only to the extent that xPatterns was liable to
Ms. Blixseth. xPattern’s debt, and Mr. Sandoval’s Guaranty, became
unenforceable when Ms. Blixseth committed material breaches of the Letter
Agreement. The court discounted WCP’s interpretation of the phrase “no
matter what may happen,” partly because it was inconsistent with the
usual meaning of a guaranty. It correctly deduced the meaning of the
Guaranty from the language of the Letter Agreement itself.
Moreover, the court correctly considered Mr. Sandoval’s testimony.
He testified that he would not have entered into the Letter Agreement
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absent the confidentiality and nondisparagement provisions and that
Atigeo and xPatterns were relying on the Performance Fee promised by
Ms. Blixseth in order to make the payments that they owed to her and
continue business operations. The bankruptcy court properly credited this
testimony.
WCP argues that the bankruptcy court found that Mr. Sandoval only
agreed to the Guaranty because he thought he would never have to satisfy
the debt. It states that the bankruptcy court found that Mr. Sandoval “never
intended to actually pay it.” WCP then argues that the bankruptcy court
improperly substituted Mr. Sandoval’s subjective expectation for the Letter
Agreement’s terms, thereby “exonerating” Mr. Sandoval.
This distorts the bankruptcy court’s findings beyond recognition. The
bankruptcy court never found that Mr. Sandoval believed that he would
never have to actually pay the Guaranty. Rather, it found that he thought
the Guaranty would be a backup means to satisfy the debt if “various other
clauses in the Letter Agreement did not generate sufficient funds to make
the payments, as they were designed.” In other words, Mr. Sandoval
signed the Guaranty because he expected that Ms. Blixseth would carry out
her side of the Letter Agreement, which in turn was crucial to Atigeo’s and
xPatterns’ success and ability to pay Ms. Blixseth. This is not the least bit
surprising: few people would sign a guaranty if they did not think that the
principal obligor would probably pay the debt. The bankruptcy court’s
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interpretation of the Letter Agreement and the Guaranty was reasonable.
CONCLUSION
The bankruptcy court did not err in entering judgment in
Mr. Sandoval’s favor on WCP’s third-party complaint. We AFFIRM.
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