TERRY L. MYERS, U.S. BANKRUPTCY JUDGE.
In this adversary proceeding, Western Capital Partners LLC ("WCP") as third-party plaintiff filed suit against third-party defendants Michael Sandoval ("Sandoval"); xPatterns, LLC, a Washington limited liability company ("xPatterns"); and Opspring LLC ("Opspring"), a Washington limited liability company. The basis of WCP's third-party cause of action is breach of contract and a claim for damages.
The matter was tried before the Court on August 6 and 7, 2018, and taken under advisement following oral closing argument. Adv. Doc. No. 466.
This adversary proceeding arises from a chapter 11 bankruptcy case filed by Edra Blixseth ("Blixseth") on March 26, 2009, in the Bankruptcy Court for the District of Montana. Case No. 09-60452.
The instant action is one of a host of adversary proceedings filed in connection with Blixseth's bankruptcy. On December 7, 2009, Atigeo LLC ("Atigeo"
WCP amended its complaint on May 23, 2011, to add claims against Atigeo. Adv. Doc. Nos. 193, 213 (the complaint as amended is referred to as the "Third-party Complaint"). In the Third-party Complaint, WCP asserted a number of claims against the Third-party Defendants, including several claims that xPatterns breached its obligations under a settlement agreement and a claim that Sandoval breached his guarantee of such. Adv. Doc.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. While the matter is a non-core, "related to" proceeding, the parties have expressly consented to entry of a final judgment by this Court.
At all relevant times, xPatterns was managed by Sandoval as its CEO, and it was owned by Sandoval and others as its members. Opspring was a company formed by Sandoval and, prior to March 31, 2007, it was managed by Sandoval and owned by him and other members. Both xPatterns and Opspring were subsidiaries of Atigeo, their parent company.
In 2006, Blixseth invested $ 8 million in Opspring and $ 10 million in xPatterns. In June 2006, xPatterns made a $ 5 million loan to Sandoval with which he purchased real property in Kirkland, Washington, used by him and his family as a personal residence.
In 2007, disagreements between Sandoval and Blixseth arose. To resolve their disputes, Sandoval and Blixseth agreed to end their business relationship and, on March 31, 2007, executed an agreement to that effect. Ex. 13 (the "Letter Agreement").
Additionally, paragraph 2 mentioned above also provided, in part:
Id. at ¶ 2 (the "Guarantee").
On April 1, 2007, Sandoval, on behalf of xPatterns, executed the required $ 8 million promissory note. Ex. 14 ("Note"). While the first $ 2 million payment required under paragraph 1 of the Letter Agreement was satisfied through agreed upon set-offs and a payment of $ 382,568 on March 10, 2008, the remaining $ 8 million owed under the Note was never paid.
Subsequent to execution of the Letter Agreement, Blixseth guaranteed a $ 13,650,000 loan made by WCP and, as collateral, pledged certain personal property, which included her contractual rights in the Letter Agreement and the related Note. WCP eventually foreclosed its lien and became the owner of Blixseth's interests and rights arising from the Letter Agreement, including Sandoval's Guarantee. Ex. 25.
The litigation before the Court focuses on WCP's claims against Sandoval under the Guarantee, and Sandoval's defenses.
As noted, the parties expressly agreed California law would apply to any issues or disputes regarding the Letter Agreement. Under California law, a cause of action for breach of contract is comprised of the following elements: (1) the contract, (2) the plaintiff's performance or excuse for nonperformance, (3) the defendant's
Under the Letter Agreement, Sandoval guaranteed to Blixseth that the first $ 5 million of xPatterns obligation would be paid when due, "no matter what may happen." This was a "continuing guarantee" until the $ 5 million was paid in full. However, Blixseth no longer has any rights under the Letter Agreement since it (along with other collateral) was foreclosed upon by WCP.
Generally speaking, under California law only a party to the contract may sue for its breach. That rule, however, has exceptions. One exception is that an assignee may sue for breach of contract. Applera Corp. v. MP Biomedicals, LLC 173 Cal.App.4th 769, 786, 93 Cal.Rptr.3d 178 (2009) (assignee had standing to sue for breach of contract providing for royalty payments).
Blixseth pledged her rights under the Letter Agreement as collateral on a loan to WCP. The parties agree that, on March 22, 2010, WCP foreclosed its lien against that collateral and became the holder, and effectively the assignee, of the claims arising under the Letter Agreement. See Adv. Doc. No. 464 at 1. As the assignee of Blixseth's rights under the Letter Agreement, WCP has standing pursuant to California law to sue on the alleged breach of the Letter Agreement's terms.
In such a case, in order to meet its burden on the claim for breach of the agreement, the assignee must prove its predecessor's performance or excuse for nonperformance. See Wall Street Network, Ltd. v. New York Times Co., 164 Cal.App.4th 1171, 1178-80, 80 Cal.Rptr.3d 6 (2008) (requiring assignee to provide evidence of its predecessor's performance under a contract in order to survive a motion for summary judgment). Thus, in order to prevail on a breach of contract claim, WCP bears the burden of establishing Blixseth performed her obligations under the Letter Agreement.
Sandoval asserts that the Letter Agreement was intended to be a fully-integrated agreement to settle all claims among the parties, and Blixseth failed to perform her obligations, thus relieving Sandoval of his liability under the Letter Agreement.
WCP, on the other hand, argues Sandaval's Guarantee is facially unconditional. It contends that Sandoval's agreement to pay "no matter what may happen" obligates him to fulfill the promises in the Guarantee regardless of whether the other parties to the Letter Agreement fulfilled their obligations. Accordingly, WCP argues Sandoval necessarily waived all defenses to the payment of the first $ 5 million owed by xPatterns to Blixseth.
Additionally, WCP argues that xPatterns' obligation to pay $ 10 million to Blixseth, and Sandoval's partial guarantee of such, is severable from the other terms
Whether the phrase "no matter what may happen" creates an unconditional guarantee of the xPatterns obligation by Sandoval, is a matter of contract interpretation. The California Court of Appeals has explained:
Wolf v. Superior Court, 114 Cal.App.4th 1343, 1356, 8 Cal.Rptr.3d 649 (2004) (citations and quotations omitted).
Id. at 1351, 8 Cal.Rptr.3d 649.
There are two arguable interpretations of the parties' intentions with regard to the "no matter what may happen" language. The first, asserted by WCP, is that the parties intended that Sandoval would be absolutely obligated to pay to Blixseth any portion of the initial $ 5 million that xPatterns might fail to pay, regardless of any breaches by any of the other parties to the Letter Agreement. The second, asserted by Sandoval, is that the Letter Agreement was designed to provide a source of funds that xPatterns could use to pay its obligation to Blixseth and, should the funds generated be insufficient for xPatterns to meet its obligation, he guaranteed the first $ 5 million would be paid. In other words, Sandoval asserts "no matter what may happen" refers to the potential that the designed function and interrelated provisions of the Letter Agreement might not be realized, but that it did not mean that he would have to pay $ 5 million to Blixseth regardless of her breaches.
The context of the "no matter what may happen" language within the Letter Agreement provides some evidence of the parties' intent. The first clause of the Letter Agreement provides for $ 10 million to be paid by xPatterns to Blixseth in order to redeem Blixseth's interest in xPatterns. The second clause provides Sandoval's Guarantee of "the first $ 5 million portion of the xPatterns Obligation ... when due, no matter what may happen." Sandoval guaranteed xPatterns' debt; he did not make an absolute, direct payment obligation to Blixseth. Inherent in the use of a
Sandoval's testimony provides additional evidence of the parties' intent. Sandoval testified, in line with his argument, that the parties intended the "no matter what may happen" language to represent a commitment by Sandoval to ensure the first $ 5 million was paid to Blixseth in the event that the various other clauses in the Letter Agreement did not generate sufficient funds to make the payments, as they were designed. This 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.
WCP argues, in essence, that the Letter Agreement is a single document containing two separate and divisible agreements. One agreement is that Blixseth would relinquish her interest in xPatterns in exchange for a $ 10 million debt obligation from xPatterns, $ 5 million of which Sandoval guaranteed. Regarding this first agreement, WCP asserts that Blixseth completed her end of that deal by relinquishing ownership and that xPatterns and Sandoval breached their corollary obligation to pay Blixseth on the debt obligation. As further argued by WCP, all of the other obligations of Sandoval, xPatterns, Blixseth, and Opspring would constitute a second, separate agreement under which Sandoval and Blixseth both have substantial unperformed or underperformed obligations.
Whether multiple obligations in an agreement are divisible or severable—cases on the issue tend to use those terms interchangeably—is a question of state law. Moore v. Pollock (In re Pollock), 139 B.R. 938, 940 (9th Cir. BAP 1992). In this case, under California law, the intentions of the parties control whether parts of a contract or lease, or part performance thereunder, can be separated and treated as independent legal obligations. In re Plitt Amusement Co. of Washington, Inc., 233 B.R. 837, 845 (Bankr. C.D. Cal. 1999); Hudson v. Wylie, 242 F.2d 435, 447 (9th Cir. 1957); Lewis v. Shell Oil Co., 220 Cal. 80, 29 P.2d 413, 415 (1934). If the contracting parties intend an entire contract, not a severable one, the courts will not find it divisible. Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas Co., 116 Cal.App.4th 1375, 1389, 11 Cal.Rptr.3d 412 (2004) (citations omitted). The parties' intent may be revealed by "the nature and character of the agreement." Id. (quoting Jozovich v. Cent. Cal. Berry Growers Ass'n. 183 Cal.App.2d 216, 222-24, 6 Cal.Rptr. 617 (1960). Intent can further be shown by the parties' acts and conduct. Id.
WCP argues the inclusion of a severability clause evidences the parties' intent for the Letter Agreement to be divisible. Paragraph 28 of the Letter Agreement provides:
The Letter Agreement's introductory paragraph provides some evidence of the parties' intent, expressing:
Ex. 13 at 1. To that end, the Letter Agreement outlines the parties' agreement in twenty-nine numbered paragraphs. The introductory language of the Letter Agreement shows the parties intended the Letter Agreement to be an entire encompassing and inclusive contract, creating a global settlement of all issues.
Construing the Letter Agreement as divisible, as urged by WCP, would render several provisions nonsensical. For example, paragraphs 5, 6, 7, and 8 provide that Atigeo and Sandoval would relinquish all interests in Opspring, Sandoval would resign as an employee of Opspring, and Blixseth would own all the issued and out-standing equity interests of Opspring. Absent the context supplied by paragraphs 1, 2, and 3, which provides Blixseth's corollary agreement to relinquish all rights and involvement in xPatterns, the relinquishment of rights in Opspring by Atigeo and Sandoval does not appear to have any rational basis. Rather, the Letter Agreement is a global settlement of the parties' claims in which Blixseth agreed to relinquish all rights in xPatterns and, Sandoval and Atigeo agreed to relinquish their rights in Opspring.
Additionally, paragraph 14 of the Letter Agreement provides a series of releases by the parties. Blixseth released all claims against Atigeo, xPatterns, and Sandoval; Opspring released its claims against Atigeo, xPatterns, and Sandoval; and Atigeo, xPatterns, and Sandoval released all claims against Blixseth. Id. at 4-5. These releases applied "to all claims, whether known, unknown or unanticipated." Id. at 5. These mutual releases also make little sense without the context provided by paragraphs 1 and 2.
Sandoval's uncontroverted trial testimony provides further evidence of the parties' intent. Sandoval credibly explained that the various enumerated clauses in the Letter
For example, in paragraph 9 of the Letter Agreement, Blixseth agreed to cause the Yellowstone Club to pay its $ 1 million obligation to Atigeo within 30 days of the Letter Agreement date. Ex. 13 at 3. Sandoval explained the timing of this payment was deliberately negotiated in order to allow xPatterns to pay its employees' wages during the transition and to partially fund the $ 2 million payment due to Blixseth 120 days after the date of the Letter Agreement.
Additionally, Sandoval testified that at the time the Letter Agreement was entered, Opspring had a $ 100 million "letter of commitment" to provide services to the U.S. Government. In order to satisfy a significant portion of the obligation to Blixseth, paragraph 4 provided that Blixseth would cause Opspring to pay to Atigeo a performance fee equal to 5% of revenue earned by Opspring, up to a maximum performance fee of $ 15 million. Given that letter of commitment from the government, Sandoval was highly confident Opspring would generate $ 100 million in revenue and the $ 5 million "performance fee" would be paid.
According to Sandoval, it was only due to the inclusion of the various provisions designed to ensure funds were available to pay Blixseth that he agreed to guarantee the obligation. His understanding and belief at the time of entering into the Letter Agreement was that, should all parties to the Letter Agreement fulfill their obligations, the entire $ 5 million he guaranteed to Blixseth would be satisfied and, therefore, the likelihood of him being personally required to pay Blixseth was minimal.
Having considered all the trial evidence, especially the plain language of the Letter Agreement and the uncontroverted testimony of Sandoval,
The next issue is whether WCP has met its burden of proving its claim for breach of contract. It is uncontested that the Letter Agreement constitutes a contract under which xPatterns agreed to pay Blixseth $ 10 million and that Sandoval personally guaranteed payment of the first $ 5 million of such obligation. While the evidence at trial showed the first $ 2 million of xPatterns' obligation was satisfied through agreed-upon offsets, it is uncontested that xPatterns failed to pay any part of the remaining $ 8 million. It is further uncontested that WCP, as the successor in interest to Blixseth's interests under the Letter Agreement, suffered damage as a result of the breaches—being deprived of millions of dollars in payments from xPatterns and/or Sandoval. The question, under California law, is whether WCP has met its burden of proving the "plaintiff's performance [of the contract] or excuse for nonperformance." Prof'l Collection Consultants, 8 Cal. App. 5th at 968,
Sandoval alleges Blixseth failed to perform under the Letter Agreement in several respects. First, Sandoval alleges Opspring earned at least $ 2 million in revenue and Blixseth failed to fulfill her obligation to cause Opspring to pay the 5% performance fee required on such revenue. Adv. Doc. No. 448 at 6.
Nicholas Rhodes, Opspring's managing director, testified during his deposition that Opspring generated revenue from a governmental contract. Adv. Doc. No. 454-2 at internal page 92.
Sandoval also alleges Blixseth failed to perform under the Letter Agreement by disclosing the Letter Agreement's terms and by disparaging Sandoval in prior litigation. The Letter Agreement provides that Blixseth would not "disclose (or cause or allow to be disclosed) any terms of th[e] Letter Agreement to any third party or entity without the prior written consent" of Atigeo. Ex. 13 at 6. It further provides that Blixseth agreed "to not, directly or indirectly ... disparage [Atigeo], xPatterns, Sandoval," or other listed parties. Id. at 7.
On May 28, 2008, ten months before her bankruptcy filing, Blixseth filed a lawsuit against xPatterns, Atigeo, and Sandoval, among others. Ex. 19. In her complaint, Blixseth disclosed the following about the Letter Agreement:
Ex. 19. at 4. Additionally, Blixseth made the following statements about Sandoval, xPatterns, and Atigeo in that same complaint:
Id. at 4-9.
The question is whether WCP has shown Blixseth honored her obligations of non-disclosure and non-disparagement. As to nondisclosure, Blixseth did disclose a portion of the terms of the Letter Agreement. In order to properly do so, she was required to obtain Atigeo's written consent. WCP has provided no evidence that Blixseth obtained Atigeo's required consent.
"Disparagement" has been defined as a "false and injurious statement that discredits or detracts from the reputation of another's character, property, product, or business." Black's Law Dictionary 538 (9th ed. 2009). The statements made by Blixseth accused Sandoval, xPatterns, and Atigeo of, among other things, dishonesty, misrepresentation, fraudulent transfer, defrauding investors, and misappropriating funds. These are serious accusations that discredit or detract from the reputation of Sandoval, xPatterns, and Atigeo.
On the record presented, WCP had not met its burden of affirmatively proving Blixseth's performance or an excuse for nonperformance of her obligations under the Letter Agreement. Thus, WCP has failed to meet its burden of proving its claim against xPatterns and Sandoval for breach of contract.
WCP has not shown that Sandoval's Guarantee of xPatterns' obligation to Blixseth "no matter what may happen" creates an unconditional obligation. Nor has WCP shown that the terms in the Letter Agreement are divisible. Finally, WCP has not met its burden of establishing the requisite threshold elements to support its claim for breach of contract against xPatterns and Sandoval.
Upon the foregoing, the Court concludes that relief on the Third-party Complaint is not warranted under the facts and applicable law, and that the Third-party Complaint will be dismissed. The Court will enter judgment accordingly.
