11 Cal. App. 5th 565
Cal. Ct. App.2017Background
- Granville and Wanda Warren sold their Salinas Harley-Davidson dealership in 2006 to buyer Judson V. Dabney, II; the sale was effected by an Asset Purchase Agreement that incorporated several ancillary instruments (promissory note, lease, covenant not to compete, two consulting agreements, and a Letter of Guaranty).
- The Agreement allowed Buyer (Dabney) to assign his buyer rights to a corporation he controlled, with such assignment relieving Dabney of buyer obligations; Dabney assigned to Monterey Motorcycles, Inc. (MMI).
- MMI defaulted on payment obligations; Warrens sold the dealership to a third party in 2012 and sought recovery from Dabney under the Letter of Guaranty.
- At bench trial G & W Warren’s recovered a judgment of $2,746,318.78 against Dabney; the judgment allocated amounts for the promissory note, lease, noncompete, and consulting agreements.
- On appeal Dabney argued (1) the Guaranty did not cover the noncompete and consulting agreements, and (2) his liability was exonerated because the seller altered the principal’s obligations (deferral agreements and loans) without his consent. The Court of Appeal reversed in part and remanded for a reduced judgment.
Issues
| Issue | Plaintiff's Argument (G & W Warren’s) | Defendant's Argument (Dabney) | Held |
|---|---|---|---|
| Scope of Guaranty — whether it covers noncompete and consulting agreements | Guaranty should secure all buyer obligations under the sale because the transaction was a single economic deal and goodwill allocation implicitly included those payments; Agreement incorporated ancillary instruments | Guaranty expressly references payment of Purchase Price (Section 2), promissory note, and lease only; noncompete and consulting obligations are separate and not within the Guaranty’s plain language | Court held Guaranty limited to obligations expressly described (Purchase Price under §2, promissory note, lease); it did not extend to noncompete or consulting agreements. |
| Whether Dabney remained liable as principal after assignment to MMI | Plaintiff argued assignment did not relieve Dabney or was ineffective; noncompete contained anti-assignment language | Dabney argued Agreement §9.6 allowed assignment to entity he controlled relieving him of principal obligations, and the noncompete’s preamble permitted designated assignee | Court found case tried on guaranty theory; assignment to MMI was effective under §9.6 and noncompete preamble, so Dabney was not liable as principal. |
| Exoneration under Civ. Code §2819 — whether creditor’s modifications (deferrals/loans) exonerated guarantor | Modifications were consented to by Dabney or waived by the Guaranty; changes were not material to trigger exoneration | Modifications (two six-month deferrals and later loans) materially altered principal’s obligations and were made without his consent, thus exonerating him | Court found substantial evidence Dabney knew of/consented to deferrals (and court could infer knowledge of loans); alternatively, Guaranty contained an advance waiver of exoneration defense. Dabney not exonerated. |
| Remedy and judgment amount | Recover full amounts due under all instruments | Limit recovery to amounts actually secured by Guaranty; exclude noncovered agreements | Court reversed and remanded: enter new judgment against Dabney for $1,641,783.27 (excluding noncompete and consulting sums), plus interest, costs, fees. |
Key Cases Cited
- Bloom v. Bender, 48 Cal.2d 793 (clarifies a surety/guarantor cannot be held beyond the express terms of the guaranty)
- U.S. Leasing Corp. v. duPont, 69 Cal.2d 275 (contracts of guaranty are interpreted under general contract rules; no distinction between surety and guarantor)
- Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal.App.4th 944 (contract interpretation focuses on objective manifestations and the written agreement)
- Parsons v. Bristol Development Co., 62 Cal.2d 861 (extrinsic evidence admissible only to explain an instrument’s meaning when language is reasonably susceptible)
- Stephenson v. Drever, 16 Cal.4th 1167 (doctrine expressio unius est exclusio alterius applied to contractual interpretation)
- State Bd. of Equalization v. Carleton, 223 Cal.App.3d 1607 (language in a guaranty can constitute an unconditional advance promise to cover alterations without surety’s separate consent)