Unpublished Disposition, 874 F.2d 816 (9th Cir. 1984)

MEMORANDUM^** 

Appellants Kinderhill Corporation ("Kinderhill") and Thomas A. Martin timely appeal from a judgment awarding Appellee Ashley S. Orr, Receiver of American Partners, Inc. ("API"), $1,071,109 in damages for the breach of four limited partnership agreements in which API served as a cogeneral partner along with Kinderhill and Mr. Martin. Appellants contend that the district court: (1) erroneously concluded, based on inadmissible extrinsic evidence, that API was entitled to a share of Kinderhill's management fees even after API's interest as a cogeneral partner arguably had been assigned to Kinderhill; (2) erroneously awarded judgment for a stream of future income; and (3) erroneously entered judgment against Mr. Martin individually. The district court's jurisdiction was based on the parties' diversity of citizenship and we have jurisdiction under 28 U.S.C. § 1291 (1982). We affirm.

* FACTS

Kinderhill and Mr. Martin serve as cogeneral partners of various limited partnerships whose purpose is to breed thoroughbred horses and to raise, sell, and in some instances race the offspring. Kinderhill, whose chief executive officer is Mr. Martin, serves as the managing agent of each entity. Before its bankruptcy in 1984 API engaged in the business of syndicating limited partnerships created by itself or others. In 1982 Kinderhill hired API to market and sell interests in its proposed limited partnership, Kinderhill Farm Breeding and Racing Program 1982, Series III ("1982 Agreement"). Under this agreement API earned a 10% commission for each interest sold and 50% of the management fees to be earned by Kinderhill over the life of the limited partnership.

In 1983 the parties agreed that API should also market interests in four additional limited partnerships, Kinderhill California Thoroughbred Associates 1983, Series I, and Kinderhill Farm Breeding and Racing Program 1983, Series II, IV, and VII (collectively "1983 Agreements"). The parties further agreed that it would be easier for API to market these interests if it joined Kinderhill and Mr. Martin as a cogeneral partner. Under each agreement API received a 12% commission for each interest it sold. Further, section 7.01 of each agreement provided that API would receive 40% of the management fees to be earned by Kinderhill, and section 6.02 of each agreement provided that API would receive a "back-end" bonus payment of 10% at the termination of each limited partnership. Finally, each agreement provided that it was to be construed in accordance with the laws of the State of New York.

Even though the parties had already entered into these agreements, Mr. Martin expressed concern about API as an unknown entity. Consequently, the parties entered into four "Letter Agreements" that provided for the automatic assignment of API's partnership interests to Kinderhill if, among other reasons, API should be "sanctioned" by any securities regulatory agency. The Letter Agreements further provided that, notwithstanding any assignment, API would receive any compensation that later became due under section 6.02 of the 1983 Agreements.

Beginning in 1983 the parties contemplated the creation of additional limited partnerships. By letter dated December 16, 1983, Mr. Martin informed API that its status as a cogeneral partner under the 1983 Agreements was a "sham," and that any future business relationships among the parties would not include API as a cogeneral partner. The relationship among the three cogeneral partners deteriorated after API received this letter. Eventually Mr. Martin decided to terminate Kinderhill's relationship with API altogether, informing its president, Carl Zimmerman, by letter dated March 23, 1984, that API would not be invited to market any future Kinderhill limited partnerships. Mr. Martin recognized that he and Kinderhill would adhere to the compensation arrangements under the 1982 Agreement and the 1983 Agreements, but added:

We would prefer that you voluntarily take action to withdraw American Partners, Inc., as a cogeneral partner in those partnerships where it occupies such a position. We recognize the fact that it's your prerogative to remain as a cogeneral partner, unless there is a violation of the terms of our Letter Agreement, which would make withdrawal automatic.

Several weeks after receiving this letter API revealed to the public that its officers had perpetrated a massive fraud on the company and its shareholders. In June 1984 the SEC filed a complaint against API and its affiliates alleging various violations of the 1933 and 1934 Securities Acts. Mr. Martin construed these events as effectuating an automatic assignment of API's general partnership interests under the Letter Agreements, and thereafter ceased paying API its share of Kinderhill's management fees.

Mr. Orr, API's court-appointed receiver, filed a complaint alleging the breach of the 1983 Agreements. At the end of an extensive trial the district court granted Mr. Orr's motion to amend the complaint to allege an additional cause of action for the breach of the 1982 Agreement. Furthermore, during trial the district court had determined that the Letter Agreements were ambiguous under New York law and therefore it admitted extrinsic evidence to aid in their interpretation. The district court used this extrinsic evidence in reaching its decision, which is well documented in twenty-one pages of findings of fact and conclusions of law.

The district court recognized that evidence adduced at trial was inconclusive whether API met all its obligations under the 1982 Agreement and the 1983 Agreements. Nonetheless, the district court ruled that, whatever its nature, any further performance required of API was effectively prevented after API received Mr. Martin's letter dated March 23, 1984. The district court further ruled that it was unnecessary to determine whether the SEC's action against API effected an automatic assignment of API's partnership interest, reasoning that the parties intended the Letter Agreements only to terminate API's status as a cogeneral partner and not to cause any forfeiture of past or prospective compensation due API under section 7.01. Thus, the district court entered judgment against Kinderhill and Mr. Martin, as the sole cogeneral partners of the 1982 Agreement and the remaining cogeneral partners of the 1983 Agreements, for $159,338 for the breach of the 1982 Agreement and for $1,071,489 for the breach of the 1983 Agreements. Both of these figures represent in part the discounted value of the future payments that will become due to API. From this judgment Kinderhill and Mr. Martin appeal.

II

ANALYSIS

The interpretation of a contract is a mixed question of law and fact. If a district court's decision is based on an analysis of the contractual language and an application of principles of contract interpretation, its decision is a matter of law and reviewable de novo. Miller v. Safeco Title Ins. Co., 758 F.2d 364, 367 (9th Cir. 1985). A decision that the contractual language is "ambiguous" is itself an interpretation of the contractual language and thus reviewable de novo. See State Farm Mut. Auto. Ins. Co. v. Fernandez, 767 F.2d 1299, 1301 (9th Cir. 1985). Once a provision is deemed ambiguous, however, its interpretation depends on the parties' intent at the time of execution, see Kemmis v. McGoldrick, 767 F.2d 594, 597 (9th Cir. 1985), which, under New York law, is ascertained by examining extrinsic evidence, see Barclays Bank of N.Y. v. Goldman, 517 F. Supp. 403, 411 (S.D.N.Y. 1981). A district court's factual findings regarding the parties' intent, based on this extrinsic evidence, will not be reversed unless clearly erroneous. Kemmis, 767 F.2d at 597; Miller, 758 F.2d at 367.

1. Are the Letter Agreements Ambiguous?

Under these principles we must first decide whether, as a matter of law, the Letter Agreements are "ambiguous" regarding API's forfeiture of compensation under section 7.01 of the 1983 Agreements. Under New York law, a contract is ambiguous if its "language is susceptible of at least two fairly reasonable interpretations." Heyman v. Commerce & Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir. 1975). Moreover, since forfeiture provisions are disfavored in the law, Kinderhill and Martin's interpretation of the Letter Agreements is to be construed strictly against them. See O & W Lines, Inc. v. St. John, 20 N.Y.2d 17, 23, 228 N.E.2d 370, 373, 281 N.Y.S.2d 302, 306 (1967).

Admittedly the plain language of the Letter Agreements, viewed apart from the 1983 Agreements, would suggest that API's right to further compensation after the automatic assignment of its interests is limited to a "back-end" bonus payment under section 6.02. But the Letter Agreements cannot be read apart from the agreements that they modify, and when read in this context their meaning becomes much less clear. Lack of clarity is especially evident in the testimony of Mr. Matthews, the primary drafter of the relevant documents, in which he could not explain whether section 7.01 of the 1983 Agreements carved out a share of Kinderhill's management fees as an attribute of API's general partner interest or simply created an obligation on the part of the partnership to compensate API for its services as the partnership's marketing agent. The effect of the forfeiture provisions could thus be interpreted to mean either that API would forfeit all its compensation due under the 1983 Agreements except those in section 6.01 or, alternatively, that API would forfeit only its legal status as a cogeneral partner. Mindful of the New York rules governing the construction of forfeiture provisions, we hold that the Letter Agreements are ambiguous as a matter of law.

2. Are the District Court's Findings Clearly Erroneous?

Having concluded that the Letter Agreements are ambiguous, we need only consider whether the district court's findings of fact regarding the parties' intended meaning are clearly erroneous. The district court concluded that the parties did not intend the agreements to effect a forfeiture of compensation after hearing the testimony of, among others, Mr. Martin, Mr. Matthews, and Mr. Zimmerman. The district court concluded that neither Mr. Martin nor Mr. Matthews were credible to the extent that their testimony contradicted Mr. Zimmerman's. Thus, the district court relied heavily on Mr. Zimmerman's testimony that before he signed the Letter Agreements he was assured that API's right to receive compensation under section 7.01 would not be affected even if API's status as a cogeneral partner was later terminated. In addition, the district court relied on Mr. Martin's December 16, 1984, letter stating that API's status as a cogeneral partner under the 1983 Agreements was a "sham." From this the district court surmised that the 1983 Agreements were meant to compensate API for its marketing services on a scale similar to the 1982 Agreement. The district court also relied on Mr. Martin's testimony that the impetus of the Letter Agreements was his concern that API's status as a cogeneral partner may somehow affect Kinderhill's reputation in its industry. Based on this extrinsic evidence, the district court concluded that the parties intended the Letter Agreements to affect only API's status as a cogeneral partner and not its right to receive full compensation under section 7.01.

We find unconvincing Appellants' arguments that these findings are clearly erroneous. Appellants offer no reason why Mr. Matthew's or Mr. Martin's testimony is credible, despite the district court's contrary ruling. Thus, the district court's reliance on Mr. Zimmerman's testimony, along with all the other objective facts, supports the conclusion that the parties intended the Letter Agreements only to affect API's status as a cogeneral partner and not its right to receive compensation under section 7.01. In short, the district court's findings of fact concerning the parties' intended meaning of the Letter Agreements are not clearly erroneous.

The district court found, as a matter of fact, that Kinderhill and Mr. Martin unilaterally terminated their relationship with API, thereby excusing API of any further performance due under the 1983 Agreements. See Royce v. Rymkevitch, 29 A.D.2d 1029, 289 N.Y.S.2d 598, 601 (1968). The district court further found that this act, along with Kinderhill and Mr. Martin's refusal to pay API its fees that had already come due, amounted to a repudiation of the 1983 Agreements, thereby permitting API to recover damages for the total breach of the agreements. See Long Island R.R. Co. v. Northville Indus. Corp., 41 N.Y.2d 455, 462-65, 362 N.E.2d 558, 563-68, 393 N.Y.S.2d 925, 930-33 (1977).

Appellants argue that these conclusions are clearly erroneous because the March 23, 1984, letter does not convey any message that API would be prohibited from operating in its capacity as a cogeneral partner. This argument, however, contradicts the district court's reliance on Mr. Martin's deposition testimony that he had intended the letter "to terminate the relationship in its entirety, period." The district court's conclusion that the letter had just such an effect is not clearly erroneous. Nor does New York Life Ins. Co. v. Viglas, 297 U.S. 672 (1936), command a different result, as Appellants contend, because here the repudiation hinges not so much on their interpretation of the contract but more on their unequivocal intent to sever the entire relationship. Kinderhill and Martin argue alternatively that without an acceleration clause in the contract API cannot recover its share of the management fees until the payments become due. Their argument is misplaced, however, because according to New York law an acceleration clause is unnecessary for a party to recover future payments under circumstances of anticipatory breach. See Long Island Rail Road Co., 41 N.Y.2d at 463, 362 N.E.2d at 563, 393 N.Y.S.2d at 930.

Neither party disputes that under New York partnership law all partners are jointly liable "for all ... obligations of the partnership." N.Y. Partnership Law Sec. 26 (McKinney 1988). Appellants contend, however, that the district court erred by concluding that the obligation to pay API its share of the management fees was the partnership's obligation. Instead, Appellants argue that section 7.01 provides that the management fee is earned by Kinderhill and therefore only Kinderhill, and not Mr. Martin, was obligated to share its fee with API. We disagree. Section 7.01 provides how the earnings of the partnership were to be divided among the partners. The partnership would clearly have been liable if Kinderhill had not received its compensation as specified in section 7.01; the partnership's liability to API is no different. The district court correctly concluded that Mr. Martin, as a partner, was jointly liable for this obligation.

IV

CONCLUSION

The judgment of the district court is AFFIRMED.