Unpublished Disposition, 907 F.2d 154 (9th Cir. 1990)

MEMORANDUM^* 

Lion Enterprises, Inc. (Lion), challenges the district court's judgment following a bench trial in favor of Ronald Gerhardt, individually and doing business as Gerhardt Gear Co., and Patricia Gerhardt (collectively Gerhardt). Lion claims that the district court incorrectly calculated the amount owed Lion on a promissory note and improperly found that Gerhardt was not in default of his obligations under that note and the agreement to which the note is attached. We affirm the district court's decision.

FACTS AND PROCEDURAL HISTORY

In November 1982, Grow Gear Company, Inc. (Grow Gear), a gear manufacturing corporation, contracted to sell its business and physical assets to its president, Gerhardt. Gerhardt then resigned from the denuded corporation, and Robert Feldman became its president. In May 1983, the parties executed a new agreement revising the terms of the sale. Under the 1983 agreement, Gerhardt purchased Grow Gear's assets for $600,000 which he agreed to pay according to the terms of a promissory note described in, and attached to, the agreement. Grow Gear subsequently assigned its rights under the 1983 agreement and promissory note to QPT Investors, Inc. (QPT), a corporation owned and controlled by Feldman under the name "Aba Mezie." QPT eventually assigned the promissory note to Lion, which was owned and controlled by Feldman under the name "Robert Faye."

The 1983 agreement and promissory note required Grow Gear to clear title to its assets by settling litigation brought by Hawaiian Motors Corp. (HMC) and removing lis pendens against the property Grow Gear had sold to Gerhardt. Gerhardt, in turn, was to make periodic installment payments on the promissory note, as well as transfer title of an apartment building he owned on Merton Avenue to QPT so that the building could be sold and the proceeds credited against the note. Gerhardt executed a grant deed for the property as required under the agreement and delivered it to be held by QPT until the HMC litigation was settled. QPT, however, immediately recorded the deed. QPT also attempted to renegotiate the settlement agreement with HMC for $15,000 less than it originally had agreed to pay. HMC approached Gerhardt for the $15,000 difference, which Gerhardt reluctantly paid to assure clear title to his business assets.

The Merton Avenue property was then sold to the Merton Avenue Investment Group for $500,000--$240,000 in cash and a promissory note for $260,000 payable with interest at 11% over a period of ten years (the Merton Avenue paper or paper). Under the 1983 agreement, Gerhardt was entitled to have his promissory note reduced by "the actual cash received plus the present fair market value of the 'paper' received as a result of the sale" of the Merton Avenue property. QPT assigned the paper to Lion for $138,000. When Lion refused to subordinate the paper to a construction loan the Merton Avenue Investment Group was negotiating, the Investment Group repurchased the paper for $265,000.

Lion and Grow Gear filed separate suits against Gerhardt for conversion and breach of contract, alleging Gerhardt made late payments on the promissory note and failed to deliver a security agreement on the personal property and a deed of trust on the real property to secure payment of the note. They sought accelerated payment of the remaining balance on the note, foreclosure on the property, and declaratory relief. Gerhardt counterclaimed for breach of contract, fraud, and declaratory relief. The cases were consolidated for trial. The court found in favor of Gerhardt in the cases brought by Lion and Grow Gear, but allowed Gerhardt essentially no recovery on his counterclaim. Lion subsequently appealed.

DISCUSSION

We review the district court's factual findings for clear error. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir. 1989); Fed. R. Civ. P. 52(a).

The interpretation of a contract is a mixed question of law and fact. When the district court's decision is based on an analysis of the contractual language and an application of the principles of contract interpretation, that decision is a matter of law and reviewable de novo. When the inquiry focuses on extrinsic evidence of related facts, however, the trial court's conclusions will not be reversed unless they are clearly erroneous.

Miller v. Safeco Title Ins. Co., 758 F.2d 364, 367 (9th Cir. 1985).

Credit for the Merton Avenue Paper

Under the 1983 agreement,

If the sales price of the Merten [sic ] Avenue property is not all paid in cash, then the credit towards satisfaction of the promissory note shall be the actual cash received plus the present fair market value of the "paper" received as a result of the sale. Should Buyer and Seller or its assign not agree on the present fair market value of the "paper," then the present attorneys to the parties to this Agreement shall select an appraiser whose determination shall be final and binding.

The district court found that Gerhardt was "entitled to a credit against the [promissory] note in the amount of $265,000.00 received by Lion for the sale of the [Merton Avenue] 'paper.' " Lion claims that this finding was erroneously based on "speculative conjecture by [Gerhardt's] counsel during his closing statement." Lion argues that Feldman, an accounting major and corporate treasurer, calculated the value of the paper at $138,000, and Gerhardt originally did not object to this amount or have an independent appraiser value the paper. Thus, according to Lion, Gerhardt implicitly agreed that the value of the paper was $138,000, and the district court committed reversible error by finding a different value.

We disagree. Gerhardt's silence in the face of Feldman's valuation of the paper at $138,000 and Feldman's offer to sell Gerhardt the paper for that amount could be construed as acceptance of that value. Under the circumstances presented here, however, we refuse to construe it as such. The $138,000 "value" of the note as represented to Gerhardt was based on QPT's assignment of the note to Lion for that figure--in reality an assignment from Feldman to himself. Thus Feldman used an illusory arms-length transaction to deceive Gerhardt into believing that $138,000 reflected the fair market value of the note.

Nor is Feldman/Lion's offer to sell the note to Gerhardt for $138,000 indicative of the fair market value of the note. The proceeds of the sale of the Merton Avenue property were to be used to offset the purchase price of Grow Gear's assets. Feldman, whether as Grow Gear, QPT, or Lion, was entitled to $260,000 from that sale, whether that came from Gerhardt or from the Merton Avenue Investment Group. If Feldman/Lion sold the note to Gerhardt for anything less than $260,000, Gerhardt would have to make up the difference on the amount he owed Feldman/QPT for the business. Feldman actually stood to benefit from the sale of the note to Gerhardt for any price. Rather than waiting for the Merton Avenue Investment Group to pay off the note over time, he would have the cash from the note's sale to Gerhardt and could require Gerhardt immediately to pay him the difference between the proceeds of the note's sale and the $260,000 face value of the note. We agree with the district court that Feldman's use of multiple corporations he owned under the aliases "Aba Mezie" and "Robert Faye" deceived Gerhardt. We therefore refuse to reward Feldman's deceit by construing Gerhardt's silence in the face of Feldman's deceptive representations as agreement or lack of objection to the $138,000 valuation of the note.

The district court concluded that the $265,000 the Merton Property Investment Group paid for the paper reflected its fair market value. "Fair market value" is defined, inter alia, as "the price the asset would bring by bona fide bargaining between well-informed buyers and sellers at the date of acquisition." Black's Law Dictionary 537 (5th ed. 1979). The $265,000 Lion received for the paper was the result of "bona fide bargaining between well-informed buyers and sellers."¹  Although the repurchase was negotiated six months after the paper came into existence, $265,000 is not a clearly erroneous valuation of the paper at the time it was executed. The district court, therefore, did not err by crediting $265,000 to the amount Gerhardt owed on the promissory note.

Failure to Settle HMC Litigation

The 1983 agreement was contingent on the complete settlement of the HMC litigation. The district court found that "Feldman and his entities refused to settle the HMC litigation. The Gerhardts and HMC then entered into an agreement which facilitated the complete settlement of the HMC litigation for the sum of $15,000.00." The court concluded that Grow Gear's failure completely to settle the HMC litigation breached the 1983 agreement, entitling Gerhardt to a $15,000 credit against the balance due on the promissory note.

Lion claims that the HMC litigation was in fact settled, and that it would have been settled regardless of any side agreements between Gerhardt and HMC.²  This argument is little more than a disagreement with the district court over the weight and credibility of the evidence. Lion does not dispute that Grow Gear made a "take it or leave it" settlement offer to HMC lower than it had previously agreed to pay. Nor does Lion challenge the fact that HMC approached Gerhardt for the difference. Lion construes these facts to show that Grow Gear successfully negotiated a settlement reduction, and HMC extorted additional money from Gerhardt. The district court found the evidence showed that Grow Gear refused to settle, and Gerhardt paid the "extra" money to facilitate the final settlement. The court's finding was not clearly erroneous.

Whether Grow Gear's interference with the settlement process was a breach of the 1983 agreement is a closer question. The agreement provides only that it is contingent on settlement with HMC; it does not specifically require as part of the agreement that Grow Gear settle the HMC litigation. The district court nevertheless found that Grow Gear had breached the agreement by failing to settle completely the HMC litigation. The court also found that Grow Gear/QPT breached the agreement by recording the grant deed to the Merton Avenue property before the settlement with HMC was finalized, when the agreement provided, "No documents required by this Agreement shall be recorded until said escrow [opened to settle the HMC litigation] has been closed."³  QPT's recordation of the deed had the practical effect of altering the contingent nature of the agreement. QPT now owned the Merton Avenue property, but the business Gerhardt agreed to purchase was still subject to HMC's claims and the lis pendens HMC had placed on the business property. Gerhardt suddenly had a great deal more to lose if the agreement was not completed. Thus, the "contingent" settlement with HMC took on the character of an element of the agreement itself. The district court, therefore, correctly found that Feldman's obstruction of the settlement and recordation of the Merton Avenue deed breached the 1983 agreement, and the court properly credited $15,000 to the balance Gerhardt owes on his promissory note.

Effect of 1983 Agreement on 1982 Contract

The district court found that the 1983 agreement "superseded 'all prior agreements between buyer and seller' and further provided that 'all prior agreements are hereby rescinded and shall have no force or effect.' " Lion challenges this finding and the district court's decision that Lion was not entitled to interest payments under the 1982 contract. Such a position clearly conflicts with the plain language of the 1983 agreement and California law, and therefore is without merit. See Larsen v. Johannes, 7 Cal. App. 3d 491, 501-02, 86 Cal. Rptr. 744, 749-50 (1970); Cal.Civ.Code Secs. 1688 and 1689(a) (West 1985).

Late Payments and Failure to Deliver Security Agreement

The district court found that " [d]espite repeated requests for timely payments, [Gerhardt was] continually late with [his] payments, which were due and payable at the beginning of each month." The court concluded, however, that Gerhardt did not default under the note, finding that the acceptance of these late payments constituted a waiver of any default.

Lion claims that its acceptance of the chronically late payments did not waive its right to declare a default because the security agreement Gerhardt was to have executed contains a waiver clause providing that acceptance of late payments shall not be a waiver of default. Assuming the unexecuted security agreement is binding, however, " [e]ven a waiver clause may be waived by conduct." Bettelheim v. Hagstrom Food Stores, Inc., 113 Cal. App. 2d 873, 878, 249 P.2d 301, 305 (1952). "The existence of a waiver is usually a fact question; therefore, the trial court's finding should be upheld unless it is clearly erroneous." CBS, Inc. v. Merrick, 716 F.2d 1292, 1295 (9th Cir. 1983). Here, Lion does not dispute that it had accepted late payments on the note after Gerhardt began making such payments. The district court's finding of waiver, therefore, was not clearly erroneous.

Lion also challenges the district court's finding that Lion/QPT/Grow Gear was not damaged by Gerhardt's failure to execute and deliver a security agreement which was required under the 1983 agreement.⁴  Lion claims that it was damaged because the unexecuted security agreement precluded waiver of its right to declare Gerhardt in default of the note. Therefore, according to Lion, because the agreement was not executed, Lion was damaged by its inability to accelerate the remaining payments due on the note and to foreclose on the secured property. As noted above, however, Lion's inability to declare a default arose from its waiver of this contractual right under the unexecuted security agreement as well as the 1983 agreement itself, rather than from Gerhardt's failure to execute the security agreement. The district court's finding of no damages, therefore, was not clearly erroneous.

Attorney's fees

Gerhardt seeks his attorney's fees on appeal. Paragraph 17 of the 1983 agreement provides that, in any litigation commenced pursuant to the agreement, the prevailing party is entitled to its attorney's fees. Gerhardt is the prevailing party on this appeal, and therefore we award him reasonable attorney's fees on appeal.

CONCLUSION

The district court's factual findings were not clearly erroneous, and its conclusions of law were correct. Its decision, therefore, is AFFIRMED.