Unpublished Disposition, 900 F.2d 262 (9th Cir. 1988)

No. 88-1818.

United States Court of Appeals, Ninth Circuit.

Before BRUNETTI and NOONAN, Circuit Judges, and HARRY L. HUPP^** , District Judge.

MEMORANDUM^* 

OVERVIEW

This is a diversity case alleging breach of contract. Plaintiff corporation, Gould, Inc., brought this action to collect on promissory notes signed by appellees, James Bell, Lonnie Berry, Tom Lash, C.W. Oliver, Paul Parker and Ron Paulson. The district court found that the promissory notes were part of an employment and bonus incentive contract. After plaintiff presented its case, the district court granted defendants' motion for dismissal based upon a lack of performance by plaintiff. Plaintiff appeals that judgment. We affirm.

STATEMENT OF FACTS AND PROCEEDINGS

The following is a summary of the trial court's twelve findings of fact. These findings of fact shall not be set aside unless clearly erroneous, and we give due regard to the district court's opportunity to judge the credibility of the witnesses. Fed. R. Civ. P. 52(a); Wood v. Sunn, 852 F.2d 1205, 1208 (9th Cir. 1988). Appellees were employees and shareholders of Millennium Systems, Inc., a California corporation (Millennium), on and before August 30, 1978. On August 30, 1978, the shareholders of Millennium and American Microsystems, Inc. (AMI) approved a plan of reorganization in which AMI acquired all of the outstanding Millennium stock for shares of AMI. Shortly after, the price of AMI stock fell dramatically due to the announcement of previously undisclosed AMI operating losses. The old Millennium stockholders believed that this information had been unfairly withheld, causing them to receive less shares of stock than they would have received had they known of the losses. Gerald Casilli, president of Millennium, received permission to "boost the morale" of his executives by offering them, (1) a lump sum covered in a promissory note (Note) to be paid back at 6% interest within five years, (2) an Employment Agreement providing for, among other things, annual incentive bonus payments, and (3) a Binding/Offset Agreement (Binding Agreement) whereby each executive agreed to offset his annual payment on the Note with his incentive bonus. The three documents were presented at the same time, and the appellees were told to and did sign all three documents on May 4, 1979.

On February 17, 1982, Gould, Inc. (Gould), a diversified, multi-million dollar, international corporation, acquired all outstanding stock of AMI and AMI's wholly owned subsidiary, Millennium. Gould then merged Millennium and a second company, Biomation, into the Gould Instrument Division (the Division). This Division is not a separate legal entity and can be dissolved at Gould's discretion. After the merger, in 1982, bonuses were computed from the Division's pretax profits and credited against the loans of all defendants except Lash. The bonuses, if calculated from the pretax profits of Gould, would have satisfied defendants' total indebtedness, as Gould's pretax profits were in excess of ninety-five million dollars. No bonuses were paid after 1982.

Gould filed this action on September 23, 1985, after appellees failed to honor the promissory notes when due on May 4, 1984. At the conclusion of Gould's case, the district court granted the appellees' motion to dismiss in an order dated February 8, 1988, awarding costs and fees to the appellees. Appellant filed a notice of appeal on March 4, 1988, which was technically premature, as the final judgment was not entered until May 19, 1988. However, a notice of appeal filed after the announcement of an order but before the entry of the judgment "shall be treated as filed after such entry and on the day thereof." Fed. R. App. P. 4(a) (2); Jackson v. Tennessee Valley Authority, 595 F.2d 1120, 1121 (6th Cir. 1979) ("An appeal should not be dismissed because it was technically premature if in fact an appealable judgment or order was rendered below.").

DISCUSSION

A. Promissory Note as Part of the Contract.

Appellant urges that the Note should be considered an "independent, unilateral instrument" and not part of an entire contract. California law applies as specified in the contract. Consul Ltd. v. Solide Enterprises, Inc., 802 F.2d 1143, 1146-47 (9th Cir. 1986) (under California law, choice of law provisions given effect where the transaction bears a "reasonable relation" to the chosen state and does not violate public policy); Bos Material Handling v. Crown Controls Corp., 137 Cal. App. 3d 99, 108, 186 Cal. Rptr. 740, 744-45 (1982) (same). The cases appellant cites to support this contention deal with the parol evidence rule and whether extrinsic evidence was admissible to show a different intention by the parties than that evidenced by the bare instrument itself. [Blue at 16] See e.g., Bank of Beverly Hills v. Catain, 128 Cal. App. 3d 28, 30, 180 Cal. Rptr. 67, 68 (1982) (court held parol evidence admissible to show promissory note was to be replaced at the end of a six-month period with a repayment schedule); Glendale Fed. S. & L. Assn. v. Marina View, 66 Cal. App. 3d 101, 158, 135 Cal. Rptr. 802, 836 (1977) (guarantors who committed fraud on bank could not present evidence of alleged false promises and representations inconsistent with agreement under parol evidence rule); Oakland Medical Bldg. Corp. v. Aureguy, 41 Cal. 2d 521, 523, 261 P.2d 249 (1953) (parol evidence of oral agreement not allowed to show promissory note was conditional). However, a promissory note does not necessarily stand alone as a contract. See Masterson v. Sine, 68 Cal. 2d 222, 65 Cal. Rptr. 545, 548, 436 P.2d 561, 564 (1968) ("For example, a promissory note given by a debtor to his creditor may integrate all their present contractual rights and obligations, or it may be only a minor part of an underlying executory contract that would never be discovered by examining the face of the note.").

The promissory notes here are "independent instruments" only if they are "integrated" agreements. Masterson, 65 Cal. Rptr. at 547; A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc., 852 F.2d 493, 495 (9th Cir. 1988) (Under California law " [i]f a contract is not integrated, the parol evidence rule does not apply"). An agreement is "integrated" if the "parties intended their writing to serve as the exclusive embodiment of their agreement." Masterson, 65 Cal. Rptr. at 547; A. Kemp Fisheries, 852 F.2d at 495. The court may admit all evidence relevant to the parties' contractual intent, including negotiations and prior agreements. Id. As the promissory note here did not contain an "integration" clause or indicate whether the parties intended that it stand alone, the collateral agreements and the circumstances at the time of the writing must be considered. Masterson, 65 Cal. Rptr. at 547; A. Kemp Fisheries, 852 F.2d at 495.

California law provides that a written instrument must be construed as a whole and " [s]everal contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together." Cal.Civ.Code Sec. 1641, 1642; Nish Noroian Farms v. Agr. Labor Rel. Bd., 35 Cal. 3d 726, 735, 201 Cal. Rptr. 1, 5-6, 677 P.2d 1170 (1984). The circumstances and factual context in which parties reach an agreement is also relevant to establish its meaning unless the words themselves are susceptible to only one interpretation. Cal.Civ.Code Sec. 1647; Nish, 35 Cal. 3d at 733-35 (Court looked to a collective bargaining agreement, a settlement agreement, the negotiation of the parties and circumstances surrounding the case to determine if a discrimination charge exempted from the agreements could be transformed to a refusal to bargain charge); see also Meier v. Paul X. Smith Corp., 205 Cal. App. 2d 207, 22 Cal. Rptr. 758, 765 (1962) (court construed six letters between buyer and seller of machinery as part of one transaction).

The district court read the Employment Agreement and the Binding Agreement in the context of the circumstances of the falling AMI stock. The district court found here that the "three documents, the Note, the Binding Agreement and Employment Agreement, that each Defendant [appellee] executed comprise one contract and have been construed as such. These documents were all presented to the Defendants for signing, were all signed at the same time, and were merged by specific reference in the Binding Agreement to both the Note and Employment Agreement." [Conclusion of Law No. 1, emphasis added.]

The promissory note was part of an entire contract made up of the three instruments and the agreements were sweetened with the lump sum distribution because of the disappointment over the undisclosed AMI losses. The terms of the Notes, the Employment Agreement and the Binding Agreement were for five years and the "loan" amount was essentially an advance on the next five years' bonuses to give the executives incentive to stay for the next five years. The district court found the parties intended the three instruments to be one contract (Employment Contract) and made reasonable inferences from the evidence which were not clearly erroneous. Rozay's Transfer v. Local Freight Drivers, L. 208, 850 F.2d 1321, 1326-27 (9th Cir. 1988).

B. Basis for Incentive Bonus.

Appellant contends the district court erred when it concluded that the incentive bonuses should be paid from Gould, Inc.'s total pretax profits rather than "Gould Instruments Division." [Blue 19] Appellant cites The Felsway Corp. v. Froomer, 75 Civ. 4970, Slip Op. of September 4, 1979 to support its argument. Froomer is an unpublished, New York district court opinion not binding on this circuit, and factually inapplicable to this case.

The Employment Agreement states:

Employee shall also receive an annual incentive bonus during the period this Agreement is in effect based upon the Company's pre-tax annual profits ...

[Blue, appendix 2, p 4(d), emphasis added.] "Company" is defined in the contract as "Millennium Systems." [Id., preamble] The Employment Agreement further states that the agreement is binding upon the successors and assigns of both parties. [Id., p 9] The district court determined that, as the Contract had never been amended or modified and that as Gould, Inc. merged with Millennium, it was Gould, Inc. not the Division that was obligated to pay bonuses. Legal Conclusions Nos. 2-6. The court explained that "the profits of Gould Instrument Division cannot be used to satisfy the legal obligations of Plaintiff under the contract. Gould Instrument Division is not a legal entity, and the division exists or ceases to exist solely at the discretion of Plaintiff." Legal Conclusion No. 10.

Gould admits that "by reason of the merger of Millennium into the Division, Gould became subject to the debts and liabilities of Millennium." [Blue at 20] An acquiring corporation assumes all liabilities, known and unknown, after a merger, in the same manner as if the surviving corporation had itself incurred them. Cal.Corp.Code Sec. 1107 (West 1982); Treadaway v. Camellia Convalescent Hospitals, Inc., 43 Cal. App. 3d 189, 199, 118 Cal. Rptr. 341, 346-47 (1974) (construing Sec. 4116, predecessor to Sec. 1107). However, Gould asserts that its unincorporated Division is the proper entity to put its feet in the shoes of Millennium, and that to calculate the bonuses from the gross pretax profits of Gould, Inc. would be a windfall to the defendant-appellees.

The district court found the Contract to be clear. The "company" which took over Millennium was Gould, Inc., not a subsidiary or another corporation or legal entity owned by Gould. The fact that Gould placed Millennium in a Division does not shield the corporation from assuming the liability of the Employment Contract. The Division as an entity cannot be held legally liable separate from Gould, Inc. The fact that the amount of bonuses depends on the calculation of pretax profit and are unknown or speculative until the calculation does not save Gould. Liabilities assumed in a merger include tort claims and potential punitive damages, the cost of which is not known at the time, and could be "merely speculative". Moe v. Transamerica Title Insurance Company, 21 Cal. App. 3d 289, 304-05, 98 Cal. Rptr. 547, 557 (1971).

Furthermore, Gould had the opportunity, before the merger, to negotiate its liability under the Employment Contract. A surviving corporation is charged with at least constructive knowledge of the liabilities of the corporation it is merging with, and therefore has the ability to protect itself. Treadaway, 118 Cal. Rptr. at 346 n. 4, 348 ("Warranties can be obtained from the acquired corporation or its principal shareholders guaranteeing the nature and amount of liability."). It cannot protest now that the deal it made when it merged with AMI is "unfair."

C. Failure of a Material Condition.

When Gould merged with Millennium, it paid bonuses based on the pretax profits of its Division in 1982, but paid no bonuses after that (due to the unprofitability of the Division). The district court found that the promise to pay incentive bonuses based upon Gould's actual pretax profits was a material condition of the Contract. Legal Conclusion No. 9 It further found that as Gould did not pay the bonuses as promised, it failed to satisfy the condition and this failure excused appellees' performance under the promissory notes. [Id.]

"A condition subsequent is one referring to a future event, upon the happening of which the obligation becomes no longer binding upon the other party, if he chooses to avail himself of the condition." Cal.Civ.Code, Sec. 1438 (1982); Lindsay v. Clossco, 642 F. Supp. 250, 254 (D. Ariz.) (applying California law) aff'd 816 F.2d 479 (1986); Wein Consol. Airlines, Inc. v. C.I.R., 528 F.2d 735, 737 n. 1 (9th Cir. 1976) (failure of a condition subsequent extinguishes a duty under the contract). The promise to pay the bonuses was a material condition subsequent to the liability under the promissory notes. The loans covered by the promissory notes were essentially advances on incentive bonuses and, construed in light of the whole contract, were an integral part of the employment package. Nish, 201 Cal. Rptr. at 5-6. Gould made its own performance impossible either by enveloping Millenium or by refusing to pay the bonuses based on Gould's gross profits as agreed under the Contract. Appellees did not anticipate they would have to repay the "loans" without the help of the incentive bonuses, and the refusal by Gould to pay the bonuses as stated in the Contract thwarted the appellees' expectations by depriving them of the benefits of the Contract. Thus, appellees' liability under the promissory notes is excused by failure of Gould's condition to pay bonuses and the district court's factual finding of a material "breach" of a condition, thus excusing appellees' performance, was not clearly erroneous. Rozay's Transfer, 850 F.2d at 1326-27.

D. T. Lash's 1982 Bonus Payment.

Lash left Gould in July 1982 and went to work for another company. Stipulated Fact No. 19. The district court made no particular finding as to Lash, except that Lash's performance was also excused by Gould's failure to pay the bonuses as indicated in the Contract. Legal Conclusion No. 9. The district court had concluded that Gould never intended to pay bonuses based on its pretax profits. Legal Conclusion No. 7. Therefore, Gould breached in February, 1982, before Lash left in July, 1982, thereby excusing Lash's performance under the Contract as of the time of Gould's breach.

E. Waiver or Novation.

Appellant contends that appellees "waived" any additional claims, including that the bonuses were calculated erroneously and were thereby a breach of the contract, when they accepted without objection the incentive bonuses for 1982 paid from the Division. [Blue at 29] Whether appellees waived their contractual right to the bonuses is a question of fact and the district court's findings will not be disturbed unless clearly erroneous. Kern Oil & Refining Co. v. Tenneco Oil Co., 840 F.2d 730, 736 (9th Cir. 1988). Mr. John Fink, a former Millennium officer, discussed with the defendants that the 1982 bonuses were being calculated from the Division's and not Gould's profits. [Blue at 9] The defendants, according to appellant, accepted the bonuses without objection and never demanded or complained about additional bonuses. [Id.] Appellant concludes that the appellees failure to complain at this point waived any further assertion of rights to bonus payments. [Blue at 31] To be valid, the waiver of a provision in a contract must be a clear expression made with a full knowledge of the facts and an intent to waive the right. Spellman v. Dixon, 256 Cal. App. 2d 1, 63 Cal. Rptr. 668, 671 (1967). "Doubtful cases will be decided against the one who claims a waiver." Id. The district court found that the 1982 bonus payments from Gould's Division were "partial" performances. Legal Conclusion No. 11 A partial performance does not constitute an entire performance but may only "extinguish [ ] a corresponding proportion thereof." Cal.Civ.Code Sec. 1477, 1486 (West 1982). Therefore, the bonus payments, absent a waiver, were partial and did not extinguish Gould's obligation under the contract.

In Spellman, the buyers of real property agreed to waive a certain contract condition if the sellers agreed to the terms and conditions of the escrow agreement. The court found that this waiver was conditional and ambiguous and therefore not valid. Id., 63 Cal. Rptr. at 671. Here, Gould is claiming that because an old Millennium employee and manager of its Divisions paid and appellees accepted the 1982 bonus, that appellees waived any claims to further bonuses, or to complain about the bonus calculation. This is incorrect. First, Fink is an employee and an agent of Gould not Millenium, so Gould essentially paid the bonuses as the Division is not a separate legal entity. Second, until Gould called the notes, the employees had no reason to protest the bonus payment at that time, as one hundred percent of the bonuses were applied to the promissory notes. Under the Employment Contract, their payment of the notes depended largely upon receipt of the bonus. Third, there is no evidence showing that the defendants accepted these partial bonuses with the intent to waive further claims. "The burden is upon the party claiming a waiver to prove it." Perini v. Perini, 225 Cal. App. 2d 399, 37 Cal. Rptr. 354, 359 (1964).

Appellant also argues that the acceptance of the 1982 bonuses was a novation. Whether or not a novation exists is a factual inquiry. Olympic Finance Co. v. Thyret, 337 F.2d 62, cert. denied, 380 U.S. 963 (1964); Louison v. Yohanan, 117 Cal. App. 3d 258, 268, 172 Cal. Rptr. 602, 607-08 (1981). Novation has four essential requisites: 1) a previous valid obligation; 2) agreement of all the parties to the new obligation; 3) extinguishment of the old contract; 4) the validity of the new contract. Olympic Finance Co., 337 F.2d at 65. Gould urges us to imply agreement to a "new contract," containing the change in calculation, and extinguishment of the "old contract" when appellees accepted the partial bonuses. More than one inference can be made from the acceptance of the 1982 bonuses, and absent evidence of intent to create a new contract beyond accepting the bonuses, the district court's factual finding will not be disturbed. Rozay's Transfer at 1326-27. The district court did not find waiver or novation here and those findings are not clearly erroneous.

F. Failings in the Pleadings.

1. Failure to Raise Counterclaims.

Appellant contends that the only way appellees could allege that Gould breached their contract and thus excused them from performance was through a counterclaim, citing Fed. R. Civ. P. 13(a). However, appellees assert that they were excused from performance by virtue of appellant's breach as an affirmative defense in their answer to the complaint. [ER 2] This can either be a failure of consideration or an excused condition, both of which may be asserted as defenses to an action on a contract. Riverside Memorial Mausoleum, Inc. v. UMET Trust, 581 F.2d 62, 68 (3rd Cir. 1978) ("A counterclaim may entitle the defendant in the original action to some amount of affirmative relief; a defense merely precludes or diminishes the plaintiff's recovery."). Here, defendants are not asking for any affirmative relief and thus may assert their claim of excused condition as an affirmative defense. Id.

2. Failure to Raise Affirmative Defense of Offset.

Appellant contends that appellees had to plead "offset" as an affirmative defense in order to avoid their obligation under the promissory note. Appellees pled the material breach of contract by appellant as an affirmative defense excusing their performance and that is all that is necessary here. Universal Pictures Co. v. Cummings, 150 F.2d 986, 987 (9th Cir. 1945) (producer's failure to pay agreed compensation justified actor's abandonment of contractual obligations).

3. Statute of Limitations.

Appellant's argument that the statute of limitations has run on appellees' defense is likewise erroneous. Appellees are not pleading affirmative relief here as a cause of action. They are asserting they were excused from further performance on the contract because of appellant's breach. Appellees correctly state California law as holding that defenses, so long as they do not state a cause of action for affirmative relief, are not barred by the statute of limitations. Sec. 1 Witkin California Procedure, page 601; Bank of American NT & SA v. Vannini, 140 Cal. App. 2d 120, 295 P.2d 102 (1956). See also Index Fund, Inc. v. Hagopian, 91 F.R.D. 599, 604 n. 2 (S.D.N.Y. 1981) (Even if statute of limitations prevented defendant from asserting counterclaim, court could have permitted him to amend his answer to assert such claim as a defense.).

CONCLUSION

The district court's conclusion that all three documents constituted one contract, that appellant materially breached a condition of that contract and that appellees' performance under the promissory notes was therefore excused is substantiated by the evidence and is affirmed.

AFFIRMED.