KEVIN A. COLES, Plaintiff and Respondent, v. BARNEY G. GLASER et al., Defendants and Appellants.
No. A145642
First Dist., Div. One.
Aug. 11, 2016.
2 Cal. App. 5th 384
Farmer Brownstein Jaeger and William S. Farmer for Defendant and Appellant Barney G. Glaser.
Bartko, Zankel, Bunzel & Miller and Marco Quazzo for Defendant and Appellant Fred W. Taylor.
Kevin A. Coles, in pro. per., for Plaintiff and Respondent.
OPINION
HUMES, P. J.—Plaintiff Kevin A. Coles filed this action against defendants Barney G. Glaser and Fred Taylor for allegedly breaching a settlement agreement the parties had entered in a prior lawsuit. Coles brought the prior suit to recover an overdue loan that he had extended to a real estate investment company, Cascade Acceptance Corporation (Cascade), and that was guaranteed by Glaser and Taylor. That case was settled when Cascade ostensibly paid off the loan, and Coles, in return, executed a release. But shortly after the settlement, Cascade filed for bankruptcy, and Coles was forced to surrender most of the settlement proceeds to the bankruptcy trustee as a preferential payment. The trial court in this case found that Glaser and Taylor had breached the settlement agreement, and it entered judgment in favor of Coles. We affirm, holding that a debt of a contractual co-obligor is not extinguished by another co-obligor‘s pre-bankruptcy payment to a creditor that is later determined to be a bankruptcy preference.
I.
FACTUAL AND PROCEDURAL BACKGROUND
In 2005, Coles lent money to Cascade, and defendants guaranteed the loan‘s repayment. In early 2009, Glaser—Cascade‘s president and chairman
A week after the case was dismissed, Cascade filed for bankruptcy. Months later, the bankruptcy trustee demanded that Coles surrender the settlement proceeds he had received from Cascade as a voidable preferential payment under
Coles filed a claim in the bankruptcy proceeding and received some distributions as a creditor. But he was left with a significant shortfall, which he sought to recover by bringing this lawsuit against Glaser and Taylor. The operative complaint asserted a cause of action for breach of contract based on the allegation that Glaser and Taylor violated the settlement agreement because Coles was not paid the full sum he was due.3
After a one-day bench trial on the breach of contract claim, the trial court ruled in Coles‘s favor. It found that Glaser and Taylor were jointly responsible with Cascade for payment of the full sum owed under the settlement agreement and that both were liable for the shortfall because Cascade‘s pre-bankruptcy payment was a legal nullity to the extent it was clawed back.
II.
DISCUSSION
Glaser and Taylor argue that the trial court erred in ruling that they breached the settlement agreement because Cascade paid the full amount due under the agreement and Coles released them from further liability. They argue that it is inconsequential that part of Cascade‘s payment was deemed a preference and clawed back for the benefit of the bankruptcy estate. As we shall explain, they are mistaken.
We review the decision of the trial court de novo where, as here, the facts are not in dispute and the appeal raises only questions of law. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 800–801; see, e.g., Taylor v. Nu Digital Marketing, Inc. (2016) 245 Cal.App.4th 283, 288 [issues of contract interpretation reviewed de novo absent admission of extrinsic evidence]; In re Chang (9th Cir. 1998) 163 F.3d 1138, 1140 [applying de novo review in interpreting and applying a provision of the bankruptcy code].)
Coles‘s breach of contract claim was brought against Glaser and Taylor not on the basis of their status as guarantors under the original note, but instead on the basis of their status as co-obligors under the settlement agreement. Much of the relevant authority in this area has developed in bankruptcy courts and discusses the liability of guarantors, rather than co-obligors, for pre-bankruptcy payments to creditors made by a bankrupt debtor that are later clawed back into the bankruptcy estate as a preference. This authority uniformly holds that guarantors remain liable to creditors for the debt reflected in these clawed-back payments. “[C]ourts have uniformly held that a payment of a debt that is later set aside as an avoidable preference does not discharge a guarantor of [its] obligation to repay that debt.” (Wallace Hardware Co., Inc. v. Abrams (6th Cir. 2000) 223 F.3d 382, 408; see also In re SNTL Corp. (Bankr. 9th Cir. 2007) 380 B.R. 204, 213 [“the return of a preferential payment by a creditor generally revives the liability of a guarantor“]; In re Robinson Bros. Drilling, Inc. (10th Cir. 1993) 6 F.3d 701, 704 [courts “have recognized, without regard to any special guaranty language, that guarantors must make good on their guaranties following avoidance of payments previously made by their principal debtors“]; In re Herman Cantor
California authority is in agreement. In Conner v. Conner (1999) 76 Cal.App.4th 646 (Conner), one brother, FM, guaranteed the payment of a company‘s obligation under a promissory note to another brother, Billie. (Id. at p. 648.) The company filed for bankruptcy, and Billie was forced to surrender as preferences some of the payments he had received from the company. (Ibid.) During the bankruptcy proceedings, Billie opposed a reorganization plan and declined to accept a settlement of his claim. (Id. at p. 649.)
FM sued in state court for declaratory relief. (Conner, supra, 76 Cal.App.4th at p. 649.) He argued that the guarantee could not be enforced because Billie had declined to settle his bankruptcy claim and thereby adversely affected FM‘s interest. (Ibid.) The Court of Appeal affirmed the trial court‘s determination that FM remained liable as a guarantor of the note, observing that “[b]y rejecting the settlement offer, Billie left the personal guarantee just as it was bargained for . . . years earlier.” (Id. at p. 650Id. at p. 652.)
Glaser and Taylor argue that Conner, supra, 76 Cal.App.4th 646 does not control here because Coles‘s breach of contract claim is based not on their status as guarantors but instead on their status as cosignatories of the settlement agreement. They argue that their liability was extinguished when Cascade satisfied the joint obligation to pay the settlement amount. In doing so, they essentially argue that a guarantor‘s liability under a contractual guarantee for a payment later deemed to be a preference is different from a co-obligor‘s liability under a settlement agreement for such a payment. The trial court rejected this argument, finding no “significance in the distinction. The obligations of someone directly making a promise to pay are at least as strong as those of someone making a guarantee.” We are in complete agreement with the court. (See Wagner v. Giles (Ky.Ct.App. 2006) 209 S.W.3d 489, 492 [“The fact that [the defendant] was a co-maker rather than a guarantor of the notes does not dictate a different result“].)
The only disputed element is whether Glaser and Taylor breached the agreement, and we agree with the trial court that they did. The agreement specifically defined the defendants in the previous lawsuit to include Glaser, Taylor, and Cascade, and it was signed, as we mentioned above, by all three. In exchange for Coles‘s release, the settlement required that those defendants “pay directly to [Coles] the sum of . . . [$308,783.85], which sum was received by [Coles] from DEFENDANTS through inter-bank wire transfer.” But this term was violated in at least two ways as a result of the clawback: the full amount of the obligation was not paid, and none of the three defendants paid the amount reflected in the clawback.
The full amount owed under the settlement agreement was not paid even if none of the parties was aware of that fact at the time the settlement agreement was entered. We agree with the trial court that Coles “effectively by operation of law never received . . . payment” to the extent of the clawback. “A preferential payment is deemed by law to be no payment at all.” (In re Herman Cantor Corp., supra, 15 B.R. at p. 750.) “Under the [Bankruptcy Code], a payment which is set aside as a preference is null and void, as if no payment had been made, and the parties are returned to the status quo ante.” (Wagner v. Giles, supra, 209 S.W.3d at p. 491, italics omitted.)
Not only was the full amount not paid, but also the portion reflected in the clawback was not paid by any of the three defendants, including Cascade, as required by the agreement. True enough, Cascade ostensibly paid the full settlement sum at the time of the settlement. But, as a matter of law, the portion of the payment eventually clawed back was actually paid by Cascade‘s creditors, not by Cascade, once it was determined to be a preference, and those creditors had every right to have it surrendered to the bankruptcy estate for proper distribution. (See In re Hackney, supra, 93 B.R. at p. 218.) In short, Glaser and Taylor‘s insistence that “Cascade made the entire payment” is simply wrong as a matter of law.
Having concluded that Glaser and Taylor breached the settlement agreement, we need not address their arguments based on the release, including their contention that Coles‘s breach of contract claim here is covered by the release as a claim “arising out of or connected with the [original] Claims” in the previous lawsuit. Having failed to keep their end of the bargain, Glaser and Taylor are in no position to argue that the release, which Coles gave to keep his end of the bargain, bars Coles from recovering the damages he incurred as a result of their breach.
But on one related matter we disagree slightly with the trial court. It determined that the release “is invalid or ineffective” as a result of Glaser and Taylor‘s breach. Although defendants cannot rely on the release to prevent Coles from asserting that the settlement agreement itself was breached, the release is not otherwise invalid. A party to a contract has two different remedies when injured by a breach of contract: the party may disaffirm the contract, treating it as rescinded, and recover damages resulting from the rescission, or, alternatively, may affirm the contract, treating it as repudiated, and recover damages. (Wong v. Stoler (2015) 237 Cal.App.4th 1375, 1384.) Here, Coles did not treat the contract as rescinded but instead affirmed it by seeking and obtaining the amount of the shortfall the clawback caused. The release, therefore, remains a part of the unrescinded agreement and prevents Coles from pursuing any future claims that may be barred by it.
DISPOSITION
The judgment is affirmed. Coles is awarded his costs on appeal.
Margulies, J., and Dondero, J., concurred.