Hakenjos Hall Prof. Services v. Bland CA4/1 ( 2016 )

Filed 3/2/16 Hakenjos Hall Prof. Services v. Bland CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
HAKENJOS HALL PROFESSIONAL
SERVICES, INC.,
Plaintiff,
(Super. Ct. No.
v. 37-2013-00077851-CU-BT-CTL)
KATHY BLAND et al.,
Defendants.
D067385
HAKENJOS HALL PROFESSIONAL
SERVICES, INC., et al.,
Plaintiffs,Cross-defendants and
Respondents, (Super. Ct. No.
37-2014-00019111-CU-BC-CTL)
v.
KORTE/SCHWARTZ, INC., et al.,
Defendants, Cross-complainants and
Appellants.
APPEAL from an order of the Superior Court of San Diego County, Judith F.
Hayes, Judge. Affirmed.
Lawton Law Firm, Dan Lawton and Joseph C. Kracht for Defendants. Cross-
complainants and Appellants.
Hall & Associates, Jim S. Hall; Gillaspey & Gillaspey and Steele N. Gillaspey for
Plaintiffs, Cross-defendants and Respondents.
After establishing a successful accounting practice for over 30 years, Martin
Schwartz sold the business, including its goodwill and extensive client list to Hakenjos
Hall Professional Services, Inc. (Hakenjos Hall) for about $2 million. As part of the sale,
Schwartz agreed, for 10 years, to not solicit or accept accounting work from the 3,100
clients on the customer list.
Schwartz remained with Hakenjos Hall to facilitate the transition. After two years,
Schwartz left, taking some of the clients with him. Hakenjos Hall claims Schwartz stole
clients it paid nearly $2 million to acquire. Schwartz contends he was merely trying to
fix errors Hakenjos Hall had made for clients who were calling Schwartz in a panic about
payroll tax errors and penalties.
Hakenjos Hall sued Schwartz and sought a preliminary injunction to prohibit
Schwartz from soliciting or accepting work from those on the client list. The court
granted the preliminary injunction, determining Schwartz "did what he contracted not to
do, and so that's going to cause difficulty for Hakenjos and it's got to be solved . . . ."
Schwartz appeals the order granting the preliminary injunction. He asserts the
court granted a mandatory injunction (as distinguished from a prohibitory injunction),
2
which requires close appellate scrutiny. Schwartz also contends the court abused its
discretion in determining (1) Hakenjos Hall would likely prevail on the merits, and (2)
the balance of hardships supported issuing the injunction. Additionally, for the first time
in the reply brief, Schwartz contends the preliminary injunction is a "nullity" and void
because the court did not require Hakenjos Hall to furnish a bond.
We affirm because the injunction is prohibitory, not mandatory; the court did not
abuse its discretion, and the court found "defendants waived their right to require a
bond." (See Smith v. Adventist Health System/West (2010) 182 Cal. App. 4th 729, 744
["the injunction bond requirement of [Code of Civil Procedure] section 529 can be
waived or forfeited by the party to be enjoined"]).
FACTUAL AND PROCEDURAL BACKGROUND
A. Introduction
In relating the events underlying this dispute, we emphasize that no trial on the
merits has occurred; therefore, many significant facts remain in dispute at this stage of
the litigation. Nevertheless, in the procedural posture of the case—a motion for a
preliminary injunction—the trial court was required to make certain findings, expressly
or by implication, to which we defer to the extent they are supported by substantial
evidence. (Allliant Ins. Services, Inc. v. Gaddy (2008) 159 Cal. App. 4th 1292, 1309
(Gaddy).) Accordingly, we view the facts in the light most favorable to the prevailing
party—here, Hakenjos Hall.
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B. Schwartz Sells the Business, Including Goodwill and Client List
Martin Schwartz is the president of Korte/Schwartz, Inc., which does business as
Martin Schwartz & Associates (Schwartz).1 Schwartz has been providing accounting,
bookkeeping, tax preparation, sales tax and payroll tax preparation, and related services
in San Diego for over 30 years.
In January 2012 Schwartz sold the business to Hakenjos Hall. The assets sold
included the business premises in La Mesa and the "assets of the business including
. . . client lists . . . [and] goodwill." Exhibit A to the purchase agreement contains a list
of approximately 3,100 Schwartz clients (hereafter Exhibit A clients).
Hakenjos Hall paid Schwartz approximately $1.8 million cash, plus a promissory
note secured by the business assets, in the principal amount of $259,375, requiring
monthly payments of approximately $6,084 beginning February 2014.
Purchasing exclusive rights to the Exhibit A clients as part of the business
goodwill was a "key" provision. As Carl Hakenjos, Jr. stated, "The clients of the
business belonged to the business, and I was buying the business." Of the total
approximate $2 million purchase price, the parties allocated $1.145 million to goodwill,
$875,000 for the La Mesa real property, and $40,000 for Schwartz's covenant not to
compete.
1 In their brief, appellants refer to themselves collectively as "Schwartz" and state
where necessary to distinguish one appellant from another by name, they do so. We
adopt the same convention. For clarity, we refer to Martin Schwartz as Martin, and his
son, Jacob Schwartz, as Jacob.
4
C. Schwartz's Covenant not to Compete
In the purchase agreement, Schwartz agreed "[w]ith regard to the clients listed on
Exhibit A" to "not engage in the practice of public accounting . . . for a period of ten (10)
years from close." Schwartz further agreed to not:
"a. Canvas, solicit, or accept any business from any clients listed on
Exhibit A;
"b. Give any other person, firm, partnership, or corporation the right
to canvas, solicit, or accept any business for any other accounting
firm from any clients listed on Exhibit A;
"c. Directly or indirectly request or advise any clients listed on
Exhibit A to withdraw, curtail, or cancel its business with the Buyer;
"d. Directly and indirectly disclose to any other person, firm,
partnership or corporation the names of clients listed on Exhibit A."
In a separate "Non-Compete Agreement," Schwartz also agreed that for 10 years
he would "not perform services for any person or entity [¶] (a) who was a client of the
Company at the time of the Closing; [¶] (b) who had been a client of the Company within
two (2) years prior to the Closing; or [¶] (c) who was an active prospect of the Company
at the time of the Closing." Schwartz agreed that for the same 10-year period, he would
not "perform any accounting services for any person or entity, nor will he market or
solicit to new clients, within a 25 mile radius" of the La Mesa business property.
In addition to these provisions, each party made certain representations and
warranties. Hakenjos Hall represented and warranted that it "will operate the Business in
a professional manner."
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D. Martin Remains for Two Years to Facilitate the Transition
To facilitate the transition, Martin agreed to "be available, as needed, at buyer's
request for assistance with transition for the first year." The purchase agreement provides
this "does not constitute a partnership, nor an employment agreement, but is an
agreement for seller to assist with clients during the transition agreement as needed,
solely at buyer's discretion, and for reasonable compensation for seller's time required for
preparation of specific returns." Hakenjos Hall asked Martin to provide such services,
and he did so for over two years, until resigning in May 2014.
Carl Hakenjos explained, "The business deal was a good deal—for both Martin
and me. Martin got a big chunk of money ($2,000,000), got a continuing income doing
work for me without any of the ownership headaches, and got his son, Jacob,
employed—amongst other things. I got what due diligence convinced me was a great
business—with a long term, very loyal client base that more than established the business
value. The Martin Schwartz name and client relationships over some 30 years was the
business."
E. Disputes Arise
In May 2014 disputes arose. According to Martin, clients "were calling me in a
state of panic, telling me that Hakenjos Hall was making serious mistakes on their
financial documents related to payroll and bookkeeping." These mistakes were causing
"payroll late fees, payroll tax penalties" and in some cases "payroll tax liens and bank
account levies." Martin contends Hakenjos Hall's negligence was "rampant" and resulted
in a staggering number of mistakes.
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Martin asserts he "constantly offered to help Mr. Hakenjos fix the mistakes.
However, Mr. Hakenjos rejected every offer." After continuing to receive "phone calls
from clients complaining about the lack of competency and diligence of Hakenjos Hall,"
Martin resigned, opened a new business more than 25 miles away, and, in response to
client requests, "agreed to help correct the mistakes and to right the wrongs Hakenjos
Hall's negligence has caused them." Martin admits these persons were "clients of
[Korte/Schwartz] for over a decade . . . ." He performed these "corrective" services at no
charge and "for the sole purpose of fixing the mistakes of Hakenjos Hall." Martin denies
soliciting any clients, but instead contends "[t]he clients who have left Hakenjos Hall
have left because they are dissatisfied with the quality and care of services provided by
Mr. Hakenjos. Said clients are calling me and asking for my help because they trust me
personally and professionally."
Hakenjos Hall's version of events is completely different. A former Schwartz
employee, Regina Harnois, stated, "Martin Schwartz and Jacob Schwartz discussed with
me and among themselves their intention to, in their words, 'steal' all of Mr. Hakenjos'
clients from him. They formed plans to contact all of their former clients by mail,
telephone calls and personal visits and to solicit their business for the Schwartz' new
company. They repeatedly said they intended to 'destroy' Mr. Hakenjos and his business
and put him out of business by contacting their old clients, soliciting their business and
inducing them to leave Mr. Hakenjos' company and come to the Schwartz' company. [¶]
The Schwartzes also told me that they know all their former clients' financial secrets and
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that they intended to use that knowledge to frighten the clients into turning their business
over to the Schwartzes."
F. Hakenjos Hall Sues Schwartz and Seeks a Preliminary Injunction
In June 2014 Hakenjos Hall filed a complaint and, later that same month, a first
amended complaint against Schwartz. The first amended complaint alleges Schwartz
breached the noncompete provisions of the purchase agreement and the separate
noncompete agreement.
In October 2014 Hakenjos Hall filed a motion for a preliminary injunction to
enjoin Schwartz from providing services to the Exhibit A clients. The motion was
supported by: (1) Harnois's declaration, excerpts of which are quoted above; and (2)
declarations from several clients, each stating they had been a Schwartz client for many
years, and that in June or July 2014, Martin solicited their business, "reminding me that
he knows my business very, very well after all the years we have done business
together"; and (3) Carl Hakenjos's declaration, discussed below.
Carl Hakenjos's declaration states Hakenjos Hall was losing substantial amounts of
income and "is in immediate danger" of failing due to the exodus of clients to Schwartz.
He identified 26 clients who told him Martin had "contacted them directly seeking their
business" and had "gone with Schwartz." Hakenjos identified an additional 35 Exhibit A
clients who refused to discuss the situation, but had "left my business since Martin
Schwartz left, started his competing business, and began soliciting those clients of mine."
Hakenjos stated, "Martin has gotten my $2,000,000 . . . and is now
obtaining . . . the monthly payments for services to the clients that I was given exclusive
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right to as part of the contract—clients that Martin promised by contract that he would
not accept or service. . . . [¶] . . . [¶] If I go under because Martin got enough of my
clients, then Martin ends up with both my $2,000,000 and the business which was worth
$2,000,000 when purchased."
Opposing the motion, Martin filed a declaration, which denied soliciting Exhibit A
clients, but admitting accepting work from them, stating:
"I never solicited any former or existing clients of Hakenjos Hall.
Rather, it is the exact opposite. Former and existing clients of
Hakenjos Hall are calling me furious and in a state of panic about the
ongoing egregious mistakes Hakenjos Hall is making on their
bookkeeping and payroll records and asking me to help them correct
the problems. The persons calling me were clients of
[Korte/Schwartz] for over a decade; persons with whom I have
developed a substantial personal and professional relationship. At
their request, I agreed to help correct the mistakes and to right the
wrongs Hakenjos Hall's negligence has caused them. All 'corrective'
services I have performed for said clients have been free of charge
and for the sole purpose of fixing the mistakes of Hakenjos Hall."
Schwartz also filed 13 cookie-cutter declarations from Exhibit A clients, each
stating: (1) "Hakenjos Hall made serious mistakes on my company's bookkeeping and/or
payroll records"; and (2) "I called Martin Schwartz to tell him about the serious
mistakes . . . [and] I asked Martin Schwartz for help and to correct the serious mistakes
made by Hakenjos Hall." In a supplemental filing, Schwartz submitted 12 more similar
declarations.
Jacob Schwartz also filed a declaration, denying Harnois's assertions that he and
Martin conspired or planned to steal business. Schwartz's attorneys sought to impeach
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Harnois with evidence of a prior felony conviction and her involvement in numerous
other civil cases.
Significantly, although the parties disputed Schwartz's motives, there was no
dispute that Schwartz accepted and performed accounting work for Exhibit A clients.
Schwartz's opposition essentially hinged on a legal argument that he was excused from
his obligations under the noncompete provisions because Hakenjos Hall breached first—
by failing to conduct the business "in a professional manner," as required by the purchase
agreement. Schwartz also asserted any duty to perform the noncompete provision was
excused by Hakenjos Hall's breach in failing to make installment payments on the
promissory note in June 2014 and thereafter.
G. Temporary Restraining Order
Pending a ruling on the motion for preliminary injunction, the court granted a
temporary restraining order (TRO). The TRO enjoined and restrained Martin,
Korte/Schwartz, and Jacob from "soliciting bookkeeping, accounting and/or tax
preparation business from, doing [such business] for, [and] accepting any bookkeeping,
accounting and/or tax preparation business from, any person listed on Exhibit A of the
Purchase Contract."
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H. The Court Grants the Preliminary Injunction
The court conducted a hearing on the motion for preliminary injunction. Although
Schwartz's attorneys had impermissibly filed an oversized opposition (25 pages instead of
the allowed 15), the court assured Schwartz's lawyer "we read it."2
At the hearing, the court stated it was inclined to grant the preliminary injunction
because Schwartz admitted working for Exhibit A clients. Explaining the ruling, the
court stated:
"The problem is that your client basically admitted, perhaps for
some very, very compassionate reasons, he did what he contracted
not to do, and so that's going to cause difficulty for Hakenjos and it's
got to be solved, but go ahead. There are lots of good CPA's around
and if the clients are having a difficulty with Hakenjos, they have to
go out and find somebody else."
After taking the matter under submission, on January 9, 2015, the court issued a
minute order granting the motion for a preliminary injunction.3 In the minute order, the
court "limit[ed] the preliminary injunction to include conduct enumerated in the TRO of
Martin Schwartz, Korte/Schwartz, and any person directly affiliated with Martin
Schwartz and who is under the direction, control and authority of Martin Schwartz." The
2 A responding memorandum may not exceed 15 pages. (Cal. Rules of Court, rule
3.1113(d).) A memorandum that exceeds the page limits will be considered in the same
manner as a late-filed paper (rule 3.1113(g)), meaning the trial court has discretion to
disregard the filing. (Rule 3.1300(d).) Schwartz's lawyer explained he mistakenly
confused federal rules with state rules, and the court accepted the explanation, stating,
"[a]nd that's happened, so I didn't go after you too terribly."
3 Contrary to the court's comment at the hearing, the minute order states the court
"did not consider" Schwartz's opposition because it was "25 pages long and in violation
of the Rules of Court." The parties do not explain this discrepancy.
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court's order notes this limitation "is meant to remedy defendant Jacob Schwartz'
concerns that he be able to practice his profession freely as long as he obtains
independent employment unfettered by his father's direction, control or authority." The
minute order states, "Plaintiff is directed to submit a proposed order for preliminary
injunction in accordance with the Court's ruling herein."
On January 28, 2015, Schwartz appealed from the January 9, 2015 order granting
the preliminary injunction. For reasons the parties do not explain, the court did not enter
a separate order granting the preliminary injunction until March 20, 2015. The order
entered March 20, 2015 states in part: "Martin Schwartz, Korte/Schwartz and all persons
or entities acting in concert with them . . . are ENJOINED and RESTRAINED from soliciting
bookkeeping, payroll, accounting . . . and/or accepting any bookkeeping, payroll,
accounting . . . from any person listed on Exhibit A of the Purchase Contract . . . ."4
DISCUSSION
I. APPEALABILITY
Schwartz's brief correctly states that an order granting a preliminary injunction is
an appealable order. (Code Civ. Proc., § 904.1, subdivision (a)(6); NewLife Sciences,
LLC v. Weinstock (2011) 197 Cal. App. 4th 676, 686.) However, in this case, there are
two orders granting the preliminary injunction. Schwartz appealed from the January 9,
4 Consistent with the court's statement at the hearing, this order states, "[Schwartz's]
Opposition Papers . . . were 25 pages long and in violation of the Rules of Court. . . .
While the court was inclined to not consider the Schwartz opposition papers, as it is
entitled to do, the Court nevertheless did consider [them]."
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2015 minute order, but did not file a notice of appeal from the March 20, 2015 written
order.
The parties do not discuss which of the two orders (or both) are appealable, or
whether the notice of appeal filed January 28, 2015, could effectively appeal from the
written order entered almost two months later. Although the parties have not raised these
issues, we have an independent obligation to raise and address issues of appealability.
(Judge v. Nijar Realty, Inc. (2014) 232 Cal. App. 4th 619, 629.)
The January 9, 2015 minute order granting the preliminary injunction was not
appealable because it expressly required a written order to be prepared. (Cal. Rules of
Court, rule 8.104(c)(2) ["if the minute order directs that a written order be prepared, the
entry date is the date the signed order is filed"]; Eisenberg et al., Cal. Practice Guide:
Civil Appeals and Writs (The Rutter Group 2015) ¶ 3:50, p. 3-24 ["if the order is entered
in the minutes and the minute order expressly directs that a written order be prepared,
signed, and filed, the order is 'entered' on the date the signed order is filed," italics
omitted].)
However, the written order granting the preliminary injunction, filed March 20,
2015, is appealable. (Code Civ. Proc., § 904.1, subdivision (a)(6).)
Thus, Schwartz filed a notice of appeal from the nonappealable minute order and
failed to file a notice of appeal from the appealable formal order. Nevertheless, the
notice of appeal filed on January 28, 2015, is effective to appeal from the March 20, 2015
order. The notice of appeal was premature, but is deemed effective as of the date the
formal order was entered because the notice of appeal was filed after the court rendered
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its decision. (Rule 8.104(d)(1); In re Marriage of Zimmerman (2010) 183 Cal. App. 4th
900, 906 [notice of appeal filed after minute order but before entry of signed order treated
as filed immediately after entry of signed written order].) Moreover, a notice of appeal is
liberally construed to protect the right of appeal if it is reasonably clear what appellant
was trying to appeal from, and so long as the respondent could not possibly have been
misled or prejudiced. (Luz v. Lopes (1960) 55 Cal. 2d 54, 59; D'Avola v. Anderson (1996)
47 Cal. App. 4th 358, 361.) Here, Schwartz was attempting to appeal from the order
granting the preliminary injunction, and Hakenjos Hall could not possibly have been
misled or prejudiced by a purported appeal from the January 9, 2015 minute order rather
than the March 20, 2015 order containing the same injunctive relief.
II. THE INJUNCTION IS PROHIBITORY, NOT MANDATORY
An injunction may be either mandatory or prohibitory. A prohibitory injunction is
"a writ or order requiring a person to refrain from a particular act." (Code Civ. Proc.,
§ 525.) A mandatory injunction requires a person to take affirmative action that changes
the parties' position. (See, e.g., Warsaw v. Chicago Metallic Ceilings, Inc. (1984) 35
Cal. 3d 564, 572 [injunction requiring removal of structure].)
The distinction between a mandatory and prohibitory injunction impacts the
standard of review. Where the injunction is mandatory, it changes the status quo, and
therefore is scrutinized "'"more closely"'" for abuse of discretion. (Oiye v. Fox (2012)
211 Cal. App. 4th 1036, 1047-1048.) "'The judicial resistance to injunctive relief increases
when the attempt is made to compel the doing of affirmative acts. A preliminary
14
mandatory injunction is rarely granted, and is subject to stricter review on appeal.'" (Id.
at p. 1048.)
Schwartz contends the injunction here is mandatory because it compelled
Schwartz to "take action changing the status quo (i.e., stop serving clients all parties
agree he had been serving before the order issued.)" As explained below, Schwartz's
assertion is incorrect because he misapprehends what "status quo" means in this context.
In the context of injunctions, the status quo is "'the last actual peaceable,
uncontested status which preceded the pending controversy.'" (United Railroads v.
Superior Court (1916) 172 Cal. 80, 87 (United Railroads); see Agricultural Labor
Relations Bd. v. Tex-Cal Land Management, Inc. (1985) 165 Cal. App. 3d 429, 440 (Tex-
Cal Land.) Here, the status quo—the last peaceable, uncontested status of the parties
which preceded the controversy— is a state of affairs where Schwartz was not
performing bookkeeping or accounting services for the Exhibit A clients.
The injunction compels a return to the status quo by prohibiting Schwartz from
performing accounting and bookkeeping services for Exhibit A clients. Therefore, the
injunction is prohibitory. "An injunction designed to preserve the status quo as between
the parties and to restrain illegal conduct is prohibitory, not mandatory . . . ." (Oiye v.
Fox, supra, 211 Cal.App.4th at p. 1048.)
The status quo is not, as Schwartz argues, simply any situation existing before the
filing of the lawsuit. The status quo is not a state of affairs where Schwartz is violating
the noncompete provisions. Rather, the status quo is the last "'peaceable, uncontested
status'" before the dispute arose. (United Railroads, supra, 172 Cal. at p. 87.) Here, the
15
injunction returns the parties to, and restores, the status quo; therefore, it is a prohibitory
injunction.
To comply with the order, Schwartz has to stop current work for the Exhibit A
clients, in addition to not accepting such work pending the outcome of the trial. But
having to stop current work for Exhibit A clients does not change the character of the
injunction. If this were not so, almost any injunction against the doing of repeated acts
would be mandatory if the performance of the acts had begun. (Jaynes v. Weickman
(1921) 51 Cal. App. 696, 701-702.) The injunction does not compel Schwartz to do any
affirmative act, but merely prohibits him from doing the very things he agreed under his
contract with Hakenjos Hall not to do. It is therefore a prohibitory injunction.
Citing Feinberg v. One Doe Co. (1939) 14 Cal. 2d 24 (Feinberg), Schwartz
contends an injunction ordering a person to stop doing something he is already doing is
always and necessarily a mandatory injunction. In Feinberg, the court entered an order
compelling the defendant to discharge an employee because she was not a union member.
The Supreme Court held the injunction was mandatory because it "compell[ed]
affirmative action on the part of the defendants." (Id. at p. 27.)
However, in Feinberg, the court carefully limited its holding to the facts presented
in that case, namely, an injunction compelling the defendant to discharge a single
employee. (Feinberg, supra, 14 Cal.2d at pp. 27-28.) The Feinberg court stated, "in
view of the fact that the order appealed from was directed solely to this issue, no
contention may be legitimately made that the order although mandatory was only
16
ancillary to or subsidiary to another or main order which was prohibitive . . . ." (Id. at p.
28.)5
In contrast to the situation in Feinberg, other types of injunctions, such as the one
at issue here, are prohibitory even if they have incidental mandatory features. For
example, in United Railroads, the plaintiff street railway company obtained a preliminary
injunction against defendant city, prohibiting the city from using plaintiff's tracks. The
city contended the injunction was mandatory because it compelled the city to surrender
an existing right to use the tracks. The Supreme Court disagreed, stating the fact that the
defendant had been enjoying its asserted right to use the tracks, and must now stop, does
not change the fundamental nature of the order, which was a prohibition on using the
tracks. (United Railroads, supra, 172 Cal. at pp. 88, 91.)
Similarly, in Jaynes v. Weickman, supra, 51 Cal. App. 696, defendants, who were
enjoined from using a trade name, contended the injunction was mandatory because it
compelled them to stop an existing use, and remove the name from their trucks, business,
and advertising. The court rejected that argument, and held the injunction was
prohibitory, stating: "An order or decree restraining the further continuance of an
existing condition does not take on the character of a mandatory injunction merely
5 Shoemaker v. County of Los Angeles (1995) 37 Cal. App. 4th 618 (Shoemaker),
which Schwartz cites for a similar proposition, also involved a single employee—in that
case, a physician, who was removed from a certain administrative position with a
university and a county medical center. The injunction was mandatory because it ordered
defendants to take affirmative steps to restore the physician to his former position. As in
Feinberg, the order in Shoemaker, which pertained to one person, could not be viewed as
ancillary to a main order that was prohibitive in other respects.
17
because it enjoins the defendants from continuing to do the forbidden acts." (Id. at p.
699.) The Jaynes court added, "the affirmative acts necessary to be done by defendants
in order to continue the transaction of their business without disobeying the injunctive
features of the judgment are but acts that are necessary to effectuate the principal purpose
of the injunction, which is to forbid further infringement upon plaintiff's right to the
exclusive use of the business name that she had adopted before the defendants entered the
field of competition. The injunctive parts of the decree, therefore, only incidentally
involve the doing of any affirmative act." (Id. at p. 700.)
Similarly here, to the extent the preliminary injunction compels Schwartz to stop
serving Exhibit A clients, it simply effectuates the principal purpose of the injunction,
which is to forbid further infringement upon Hakenjos Hall's right to perform work for
Exhibit A clients exclusive of Schwartz. Because any mandatory component of the
injunction is incidental to its overall prohibitory character, the injunction is properly
considered to be prohibitory. (People v. Mobile Magic Sales, Inc. (1979) 96 Cal. App. 3d
1, 13 [injunction requiring mobile homes to be removed from mobile home park is
"incidental" to the injunction's objective to restrain further violations and therefore is
prohibitive in character]; People ex rel. Brown v. iMergent, Inc. (2009) 170 Cal. App. 4th
333, 342 [injunction prohibiting defendants from selling products and services without
required statutory disclosures is prohibitory—"any aspects of the injunctions that require
defendants to engage in affirmative conduct are merely incidental to the injunction's
objective to prohibit defendants from further violating" the law].)
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Having determined the injunction is prohibitory, the rule requiring courts to give
greater scrutiny to mandatory injunctions is not implicated.
III. PRINCIPLES OF PRELIMINARY INJUNCTIVE RELIEF
AND STANDARD OF REVIEW
"'"[T]he decision to grant a preliminary injunction rests in the sound discretion of
the trial court."'" (People ex rel. Herrera v. Stender (2012) 212 Cal. App. 4th 614, 629
(Stender).) "'"A trial court will be found to have abused its discretion only when it has
'"exceeded the bounds of reason or contravened the uncontradicted evidence."'"
[Citation.] "Further, the burden rests with the party challenging the [trial court's ruling on
the application for an] injunction to make a clear showing of an abuse of discretion."'"
(Id. at pp. 629-630.)
Courts should evaluate two interrelated factors when deciding whether or not to
issue a preliminary injunction. "'"The first is the likelihood that the plaintiff will prevail
on the merits at trial. The second is the interim harm that the plaintiff is likely to sustain
if the injunction were denied as compared to the harm that the defendant is likely to
suffer if the preliminary injunction were issued."'" (Stender, supra, 212 Cal.App.4th at p.
630.) The latter factor "'involves consideration of such things as the inadequacy of other
remedies, the degree of irreparable harm, and the necessity of preserving the status quo.'"
(14859 Moorpark Homeowner's Assn. v. VRT Corp. (1998) 63 Cal. App. 4th 1396, 1402
(Moorpark).)
"'An appeal from an order granting a preliminary injunction involves a limited
review of these two factors—likelihood of success on the merits and interim harm. If the
19
trial court abused its discretion on either factor, we must reverse.'" (Stender, supra, 212
Cal.App.4th at p. 630.) "On appeal, we do not reweigh conflicting evidence or assess the
credibility of witnesses; we only determine whether, interpreting the facts in the light
most favorable to the prevailing party and indulging all reasonable inferences in favor of
the trial court's order, the trial court's factual findings are supported by substantial
evidence." (Ibid.) "Where the evidence for and against an injunction is conflicting, we
do not reweigh it but merely determine whether substantial evidence supports the trial
court's determination." (Gaddy, supra, 159 Cal.App.4th at p. 1309.) Where an issue is
resolved upon declarations, "[those declarations] favoring the contention of the prevailing
party establish not only the facts stated therein but also all facts which reasonably may be
inferred therefrom." (Brunzell Const. Co. v. Harrah's Club (1967) 253 Cal. App. 2d 764,
773.)
Where, as here, the trial court did not make express findings, the appellate court
will presume the trial court made appropriate factual findings and review the record for
substantial evidence to support the ruling. (Moorpark, supra, 63 Cal.App.4th at p.
1402.)
IV. THE TRIAL COURT DID NOT ABUSE ITS DISCRETION
IN GRANTING THE PRELIMINARY INJUNCTION
A. A Covenant Not to Compete Is Enforceable in Sale of Business Assets
"California's public policy affirms a person's right to pursue the lawful occupation
of his or her choice." (Strategix, Ltd. v. Infocrossing West, Inc. (2006) 142 Cal. App. 4th
20
1068, 1072 (Strategix).) However, as provided in Business and Professions Code6
section 16601, "[c]ourts will enforce a noncompetition covenant . . . if the parties entered
into it as part of the sale of a business." (Strategix, at p. 1072.) Section 16601 provides
in part, "Any person who sells the goodwill of a business . . . may agree with the buyer to
refrain from carrying on a similar business within a specified geographic area in which
the business so sold . . . has been carried on, so long as the buyer . . . carries on a like
business therein." This exception in section 16601 serves an important commercial
purpose by protecting the value of the business acquired by the buyer. "The thrust of
. . . section 16601 is to permit the purchaser of a business to protect himself . . . against
competition from the seller which competition would have the effect of reducing the
value of the property right that was acquired." (Monogram Industries, Inc. v. Star
Industries, Inc. (1976) 64 Cal. App. 3d 692, 701.)
"[C]ourts may enforce nonsolicitation covenants barring the seller from soliciting
the sold business's . . . customers." (Strategix, supra, 142 Cal.App.4th at p. 1073, italics
omitted.) "A covenant not to solicit the sold business's . . . customers prevents the seller
from eroding the very goodwill it sold, while allowing the seller otherwise to pursue its
chosen business with whatever . . . customers it can attract." (Ibid.)
6 All further statutory references are to the Business and Professions Code unless
otherwise specified.
21
B. The Court Did Not Abuse Its Discretion in Determining Hakenjos Hall Would
Likely Prevail on the Merits
The court did not abuse its discretion in determining Hakenjos Hall would likely
succeed on the merits. Under the purchase agreement, Schwartz promised to not "canvas,
solicit, or accept any business from any clients listed on Exhibit A." However,
declarations Schwartz himself submitted establish Schwartz did "accept" accounting
business from many such clients. Schwartz's own declaration admits he performed such
work.
Schwartz contends he performed work for these clients only because they sought
him out "in panic" to fix Hakenjos Hall's errors. He states he performed the work for
free, out of a sense of loyalty to his longtime clients. But even if true, Schwartz's good
motives are, on this issue, irrelevant. The law generally does not distinguish between
good and bad motives for breaching a contract. (JRS Products, Inc. v. Matsushita
Electric Corp. of America (2004) 115 Cal. App. 4th 168, 182.) As the trial court aptly
noted, there are thousands of qualified accountants in San Diego County, "and if the
clients are having a difficulty with Hakenjos, they have to go out and find somebody
else."
Moreover, there is substantial evidence Schwartz did not merely accept business to
help fix problems; rather, several clients signed declarations stating Schwartz actively
solicited their accounting business. One such declaration states:
"Martin told me that he had started a new bookkeeping business and
asked me to switch . . . . Martin reminded me of how long he had
done [our] books, and that he really knew the business and its
22
history. Martin said he could do the best job . . . and we should stay
with him and go over to his new place."
Another declaration states Jacob Schwartz "came by our restaurant and picked up
the books as usual" along with a check to pay for the work, without disclosing that
Schwartz had left Hakenjos Hall and started a new business.
These declarations are consistent with portions of the declaration of Regina
Harnois, a former Schwartz employee, who stated, "The Schwartzes also told me that
they know all their former clients' financial secrets and that they intended to use that
knowledge to frighten the clients into turning their business over to the Schwartzes. . . .
[¶] I observed many of Hakenjos' clients the Schwartzes affirmatively solicited come to
the Schwartz' company and they were serviced by that company." And, as noted, Harnois
also stated "Martin Schwartz and Jacob Schwartz discussed with me and among
themselves their intention to, in their words, 'steal' all of Mr. Hakenjos' clients from him."
Although Schwartz contends Hanois is lying, the trial court was not required to
accept Schwartz's version of events or his assessment of witness credibility. Where the
evidence for and against an injunction is conflicting, we do not reweigh it but merely
determine whether substantial evidence supports the trial court's determination. (Gaddy,
supra, 159 Cal.App.4th at p. 1309.)
Nevertheless, Schwartz contends the court abused its discretion, and was
compelled to conclude he would likely win on the merits. Schwartz points to Hakenjos
Hall's promise to operate the business "in a professional manner," and contends there was
"unrebutted" evidence Hakenjos Hall breached this provision. Schwartz therefore
23
contends Hakenjos Hall committed the first material breach of the purchase agreement,
thereby relieving Schwartz of his own contractual duty to abide by the noncompete
provisions.
The trial court did not abuse its discretion by rejecting this argument. The law
distinguishes between material and nonmaterial breaches of contract. In contract law,
only a material breach excuses further performance by the innocent party. (See generally
1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 813, p. 906.) Whether a
breach is material is generally a question of fact. (Porter v. Arthur Murray, Inc. (1967)
249 Cal. App. 2d 410, 421-422.) The determination of the materiality of the breach often
depends upon the intent of the parties as well as the particular circumstances of the case.
(Id. at p. 422.)
Here, Hakenjos Hall's fundamental contractual obligation to Schwartz was to pay
him approximately $2 million. The trial court could reasonably conclude that any failure
by Hakenjos Hall to operate the business in a professional manner as to Hakenjos Hall
clients is not a material breach as to Schwartz. According to the purchase agreement,
once Schwartz sold the business, he was neither an employee nor a partner of Hakenjos
Hall. Not surprisingly, Schwartz cites nothing suggesting he would have any personal
liability for Hakenjos Hall's errors or omissions.
Schwartz contends Hakenjos Hall's failure to run the business in a professional
manner "is a failure of consideration, which undermines any chance he [Hakenjos Hall]
might have of prevailing on the merits of his claim at trial." In his reply brief, Schwartz
24
asserts such negligence by Hakenjos Hall makes it "impossible" for Hakenjos Hall to
prevail on the merits.
However, Schwartz's argument ignores the nearly $2 million Hakenjos Hall has
already paid for the rights to the Exhibit A clients, as well as Harnois's declaration that
Martin and Jacob planned, and began to implement, a scheme to steal the business back.
Ultimately, the trier of fact will have to decide if any failure by Hakenjos Hall to render
professional services to its own clients is a material breach of the parties' agreement. For
purposes of ruling on the motion for preliminary injunction, given the undisputed fact
that Hakenjos Hall already paid Schwartz nearly $2 million cash for the Exhibit A clients,
the trial court acted well within its discretion in determining that on balance, Hakenjos
Hall is likely to prevail on the merits. (Gaddy, supra, 159 Cal.App.4th at pp. 1309-1310
[in an appeal from an order granting a preliminary injunction barring soliciting clients,
rejecting an argument that defendant's performance was excused by a breach of contract
by plaintiffs].)
In a related argument, Schwartz contends Hakenjos Hall committed the first
material breach by defaulting on the $259,000 promissory note. Schwartz contends this
is a material breach, relieving him of his obligations under the noncompete provisions.
In his reply brief, Schwartz argues, "No reasonable person would view failing to pay
ninety percent (90%) of a debt as 'not substantial or material.'"
Schwartz again overstates the merits of his own case. The total monetary
consideration due under the purchase agreement was $2.175 million. Hakenjos Hall paid
Schwartz approximately $1.8 cash at closing, and was obligated under a promissory note
25
to pay an additional $259,375. Contrary to Schwartz's assertion that Hakenjos Hall still
owed 90 percent, actually Hakenjos Hall already paid approximately 88 percent of the
total amount.
In a transaction where Hakenjos Hall paid approximately $1.8 million cash, the
court could reasonably conclude a failure to make these installment payments
(representing approximately 12 percent of the total monetary consideration) is not a
material breach that would relieve Schwartz of his obligation to perform the noncompete
provisions. Significantly, the parties themselves valued the business goodwill and
noncompete covenant at $1.185 million. When the dispute arose, Hakenjos Hall had
already paid well in excess of that sum.
Moreover, Schwartz concedes that Hakenjos Hall made the required installment
payments beginning in February 2014 and continued making installment payments
through June 2014. Hakenjos Hall stopped making installment payments after Schwartz
violated the noncompete provisions in May 2014. Carl Hakenjos' declaration states,
"That money [the $250,000 promissory note] is presently in dispute due to Martin being
in breach of the business raiding provision of the contract between us." Under the
circumstances here, it was not an abuse of discretion for the court to determine Hakenjos
Hall's failure to make installment payments is not a material breach relieving Schwartz of
its obligations under the noncompete provisions of the parties' agreements.
C. The Trial Court Did Not Abuse Its Discretion in Balancing the Hardships
Schwartz contends the court abused its discretion in determining the balance of
hardships supports injunctive relief. He argues: (1) there is no irreparable harm because
26
money damages afford an adequate remedy, and (2) preventing Schwartz from
performing work for Exhibit A clients will only harm Schwartz and not benefit Hakenjos.
The court did not abuse its discretion in determining Hakenjos Hall would suffer
irreparable harm absent injunctive relief. The loss of goodwill and clients is an
unquantifiable loss because it is difficult to know how many Exhibit A clients Schwartz
might be able to solicit in competition with Hakenjos Hall. Moreover, it is also difficult
to estimate what additional services Hakenjos Hall would have been called upon to
provide had the client stayed, or to know how long a departed client might have stayed
with and generated profits for Hakenjos Hall.
On similar facts, courts have granted preliminary injunctions to enforce
noncompete provisions. (See, e.g., Ragsdale v. Nagle (1895) 106 Cal. 332 [affirming
injunction enforcing noncompete provisions in sale of business with its goodwill];
Newlife Sciences, LLC v. Weinstock (2011) 197 Cal. App. 4th 676 [affirming order
granting preliminary injunction to enforce noncompete clause]; Greenly v. Cooper (1978)
77 Cal. App. 3d 382 [affirming order granting preliminary injunction prohibiting soliciting
customers on client list]; Gaddy, supra, 159 Cal. App. 4th 1292 [affirming order granting
preliminary injunction to enforce noncompete provision]; Monogram Industries, Inc. v.
SAR Industries, Inc., supra, 64 Cal. App. 3d 692 [affirming order granting preliminary
injunction to enforce covenant not to compete in connection with sale of business];
Huong Que, Inc. v. Luu (2007) 150 Cal. App. 4th 400 [affirming order granting
preliminary injunction restraining use of customer list].)
27
In determining whether to grant a preliminary injunction, the court is required to
assess the interim harm that the plaintiff is likely to sustain if the injunction were denied,
as compared to the harm the defendant is likely to suffer if the preliminary injunction is
granted. (IT Corp. v. County of Imperial (1983) 35 Cal. 3d 63, 69-70.)
Schwartz contends the balance of hardships is in his favor because "without an
injunction, the status quo remains. . . . Both parties will remain in the same position they
were in before the injunction was granted, and the underlying lawsuit will proceed."
Schwartz's argument is flawed because he misapprehends the term "status quo." The
status quo refers to the last peaceable status, before the controversy arose. The status quo
here is one where Schwartz is not performing work for Exhibit A clients. (United
Railroads, supra, 172 Cal. at p. 87; Tex-Cal Land, supra, 165 Cal.App.3d at p. 440
["'"The status quo has been defined as the last uncontested status which preceded the
pending controversy."'"].)
Moreover, the trial court could reasonably determine that restricting Schwartz
from performing work for Exhibit A clients will result in minimal injury to Schwartz.
Schwartz already received a material benefit of the agreement—nearly $2 million cash.
Schwartz will still be able to earn a living; he may continue to solicit and perform work
for anyone other than the approximately 3,100 clients on the Exhibit A list.
In contrast, there is substantial evidence supporting a finding that Hakenjos Hall's
business would be substantially damaged absent injunctive relief. Carl Hakenjos's
declaration states, "The business has taken, and continues to take, severe hits. I continue
to lose clients from the acts of Martin Schwartz. I do not know how much longer I can
28
sustain the continuing attacks and losses. My business is in immediate danger.
[¶] . . . The most damnable thing about this matter is that Martin has gotten my
$2,000,000. Now he is taking the key property I paid him the $2,000,000 for, and is now
obtaining money that he is not entitled to—the monthly payments for services to the
clients that I was given exclusive right to as part of the contract—clients that Martin
promised by contract that he would not accept or service."
Citing Shoemaker, supra, 37 Cal. App. 4th 618, Schwartz contends the court abused
its discretion in determining the balance of equities favored Hakenjos Hall. In
Shoemaker a physician was removed from the administrative positions he held with a
private university medical program and with the Los Angeles County Medical Center.
Earlier, the physician had been appointed as chairperson of the university's department of
emergency medicine, and the chief of the medical center's emergency medical services
department. (Id. at p. 622.) However, two years later he was removed as unqualified in
emergency medicine. The physician sought a preliminary injunction, ordering defendants
to refrain from replacing him as chairperson of the department of emergency medicine
and chief of the medical center's emergency medicine services department. (Id. at p.
624.)
The trial court in Shoemaker granted the preliminary injunction; however, the
appellate court reversed. In evaluating interim harm the Court of Appeal noted that if the
injunction were granted, "the injunction will jeopardize the accreditation of the residency
program in emergency medicine." (Shoemaker, supra, 37 Cal.App.4th at p. 634.)
Moreover, "if an injunction is issued, the residency program will be put in jeopardy, and
29
the health of the community put at risk. The injury facing Shoemaker in the absence of
an injunction pales in comparison to the injury that the injunction would impose on the
defendants and the public." (Ibid.)
As is readily apparent, the facts in Shoemaker are significantly different from
those here. Enjoining Schwartz from soliciting and accepting accounting work from
Exhibit A clients poses no threat of injury to public health or welfare. It merely enforces
a promise that Schwartz voluntarily made and received over $1 million cash as
consideration for the sale of goodwill and promise not to compete.
In sum, we find no abuse of discretion in the superior court's decision to grant the
preliminary injunction in this case. It may be that the merits ultimately favor Schwartz;
however, at this stage, the court properly exercised its discretion in determining it was
important to preserve the status quo, particularly since a contrary ruling could reasonably
result in the failure of Hakenjos Hall's business, and Schwartz has already received
approximately 88 percent of the monetary consideration in the bargain.
V. SCHWARTZ HAS FORFEITED THE ISSUE OF WHETHER THE COURT ERRED
IN NOT REQURING A BOND
Code of Civil Procedure section 529 provides in part: "On granting an injunction,
the court or judge must require an undertaking on the part of the applicant . . . ."
On page 24 of his 25-page opposition to the motion for preliminary injunction,
Schwartz asked the court to require a bond of "at least $2.5 million." In reply, Hakenjos
Hall asserted, "Schwartz's inability to service clients he is already prohibited from
30
servicing is not compensable. Accordingly, the bond in this case should be for the
minimum required by law."
At the hearing, the subject of a bond was not raised by the parties or the court.
Both the minute order, and the subsequent formal order, are silent as to any bond.
For the first time in his reply brief, Schwartz contends the court's failure to order a
bond renders the injunction a "nullity." Schwartz concedes his failure to raise this issue
in his opening brief would ordinarily result in this issue being deemed waived or
forfeited. However, citing Fortenbury v. Superior Court (1940) 16 Cal. 2d 405, ABBA
Rubber Co. v. Seaquist (1991) 235 Cal. App. 3d 1 (ABBA Rubber), and Condor
Enterprises, Ltd. v. Valley View State Bank (1994) 25 Cal. App. 4th 734 (Condor),
Schwartz contends the court's failure to require a bond is a "jurisdictional defect" that
cannot be waived.
Schwartz's argument is without merit. His reliance on Fortenbury v. Superior
Court, supra, 16 Cal. 2d 405 is misplaced because Fortenbury does not involve the
effects, if any, of not requiring a bond under Code of Civil Procedure section 529. The
issue in Fortenbury was whether the trial court had jurisdiction to enjoin certain picketing
during a labor dispute. "Decisions are not controlling authority for propositions not
considered in the case." (Natkin v. California Unemployment Ins. Appeals Bd. (2013)
219 Cal. App. 4th 997, 1007.)
Moreover, Schwartz's brief fails to cite authority that contradicts his argument,
Smith v. Adventist Health System/West (2010) 182 Cal. App. 4th 729 (Smith). The court in
Smith distinguished the cases Schwartz relies on and, contrary to Schwartz's assertions,
31
held "the injunction bond requirement of section 529 can be waived or forfeited by the
party to be enjoined." (Smith, at p. 744.) The appellate court in Smith explained that the
reference to the failure to require a bond as a "jurisdictional defect" in Condor (supra, 25
Cal.App.4th at p. 741) "is best suited to situations involving the court's authority in
subsequent matters, such as those involving contempt proceedings or sanctions." (Smith,
p. 743, fn. 11.)
Rejecting an argument like Schwartz makes here, the Court of Appeal in Smith
held, "Condor[, supra, 25 Cal. App. 4th 734,] and ABBA Rubber[, supra, 235 Cal. App. 3d
1,] did not involve findings of fact by the trial courts that the injunction bond requirement
had been waived or forfeited by the party to be enjoined." (Smith, supra, 182
Cal.App.4th at p. 742.) The Smith court further held that "ABBA Rubber does not stand
for the proposition that a party may never waive the injunction bond requirement of
section 529." (Smith, at p. 744.)
Here, in addition to not citing Smith, Schwartz has also failed to acknowledge the
court entered a minute order expressly finding he waived the bond requirement in the trial
court. On March 11, 2015, the court entered a minute order stating, among other things:
"The Court finds defendants waived their right to require a bond in the ruling on the
preliminary injunction." Schwartz's brief does not mention this finding, much less
challenge it.
Accordingly, Schwartz has forfeited the bond issue on appeal. Under Smith, the
bond requirement of section 529 is not jurisdictional and "can be waived or forfeited by
the party to be enjoined." (Smith, supra, 182 Cal.App.4th at p. 744.) Schwartz forfeited
32
this issue by not raising it in his opening brief. "'Points raised for the first time in a reply
brief will ordinarily not be considered, because such consideration would deprive the
respondent of an opportunity to counter the argument.'" (Holmes v. Petrovich
Development Co., LLC (2011) 191 Cal. App. 4th 1047, 1064, fn. 2.)
Moreover, Schwartz has also forfeited the issue by not contesting the court's
finding that he waived a bond. In a minute order entered nine days before the court's
formal order granting the preliminary injunction, the court determined Schwartz waived
the bond requirement. Schwartz's briefs do not challenge this finding; in fact, they do not
mention it. A reviewing court starts with the presumption that the record contains
evidence to sustain every finding of fact. (Foreman & Clark Corp. v. Fallon (1971) 3
Cal. 3d 875, 881.) "A fundamental principle of appellate law is the judgment or order of
the lower court is presumed correct and the appellant must affirmatively show error by an
adequate record." (Parker v. Harbert (2012) 212 Cal. App. 4th 1172, 1178.) As the party
with the burden to show error, Schwartz must establish no substantial evidence supports
the court's finding that he waived the bond requirement. He made no effort to do so.
Therefore, the court's finding of waiver must be affirmed.
33
DISPOSITION
The order is affirmed. Hakenjos Hall to recover costs on appeal.
NARES, Acting P. J.
WE CONCUR:
McINTYRE, J.
IRION, J.
34