Texas 1845 LLC v. Blue Pacific Aviation CA4/1 ( 2014 )

Filed 9/16/14 Texas 1845 LLC v. Blue Pacific Aviation 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
TEXAS 1845 LLC, D064354
Plaintiff and Respondent,
v. (Super. Ct. No. 37-2011-00096397-
CU-BC-CTL)
BLUE PACIFIC AVIATION, INC. et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of San Diego County, John S.
Meyer, Judge. Affirmed.
Law Office of Gregory P. Olson and Gregory P. Olson; Law Office of Robert L.
Kenny and Robert L. Kenny, for Plaintiff and Respondent.
Law Offices of Matthew D. Rifat and Matthew D. Rifat for Defendants and
Appellants.
Defendants Blue Pacific Aviation, Inc. (Blue Pacific) and Dr. James Smith appeal
from a $6,065,141.91 judgment in favor of plaintiff Texas 1845 LLC (Texas) on its
breach of contract and breach of guaranty claims. We conclude defendants' appellate
contentions are without merit and affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
Dr. Smith is a physician practicing in San Diego. In 2004, Dr. Smith formed Blue
Pacific to purchase, own, and operate a jet aircraft. Dr. Smith is Blue Pacific's CEO and
sole shareholder and director.
The next year, in 2005, Blue Pacific borrowed approximately $4.8 million from
Key Equipment Finance, Inc. (Key) to finance the purchase of a jet aircraft. As part of
this transaction, Blue Pacific executed a promissory note (Note) and granted Key a
security interest in the aircraft in the event of a default (Security Agreement). In June
2005, Dr. Smith signed a personal guaranty (Personal Guaranty), guaranteeing the
payment and performance of Blue Pacific's obligations under the Note and Security
Agreement. The parties agreed New York law would govern the transactions.
The Note required Blue Pacific to make monthly payments of about $22,000 (and
later approximately $27,000) for a specified time plus a final payment of $4.2 million.
As amended in 2007, the Note provided for a 6.48 percent interest rate, and an 18 percent
interest rate in the event of a default.
From 2005 through 2009, Dr. Smith used the aircraft for personal travel and for
his airplane charter business. In October 2009, Blue Pacific stopped making the monthly
payments on the Note. In January 2010, Key declared the entire unpaid loan balance
($4,727,029.68) due and payable. Dr. Smith (and/or his attorney) responded by seeking
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additional time to pay the loan, and represented that Dr. Smith was making vigorous
attempts to sell the aircraft.
Six months later, in June 2010, Key entered into a Forbearance and Modification
Agreement (Forbearance Agreement) with Blue Pacific and Dr. Smith. In this
agreement, Blue Pacific and Dr. Smith acknowledged they owed Key $5,089,647.03 (the
loan balance plus interest and late charges). They also agreed they had defaulted on the
Note and "forever waive[d] any and all offsets or defenses to the total indebtedness due to
Key . . . ." In exchange, Key agreed it would forbear from exercising its rights and
remedies under the Note and Security Agreement and would provide certain discounts
and payment extensions if Blue Pacific and Dr. Smith satisfied certain conditions. These
conditions included that Blue Pacific would sell the aircraft and deliver the proceeds of at
least $2.1 million to Key by September 1, 2010, or, if no sale occurred, deliver the
aircraft to Key by this date. Under either option, Blue Pacific/Smith would be required to
pay the outstanding balance (at an agreed-upon discount and reduced interest rate) in
monthly installments over five years beginning in October 2010.
The Forbearance Agreement also provided that until the aircraft was either sold or
turned over to Key, Dr. Smith was required to keep the aircraft engines on a maintenance
schedule, known as a Maintenance Service Plan, and Dr. Smith was not permitted to fly
the aircraft except for required maintenance or a demonstration flight to sell the aircraft.
These conditions were material to the Forbearance Agreement because they provided
assurance that the value of the aircraft would be preserved.
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The Forbearance Agreement stated that if Dr. Smith and Blue Pacific did not sell
the aircraft and turn over the sales proceeds by the September 1 date (or timely return the
aircraft), Key had the right to repossess the aircraft and the Forbearance Agreement's time
extensions and discount provisions would become "null and void." Upon a default, the
total indebtedness under the Note "shall be immediately due and payable to Key" and
Key would have the right to enforce all rights and remedies under the Note, Security
Agreement, and Personal Guaranty.
During the next six months, Dr. Smith breached numerous provisions of the
Forbearance Agreement. He did not sell or turn over the aircraft by September 1, 2010.
He instead continued to fly the aircraft on charter flights to various locations in the
United States, Canada, and Mexico. He also failed to make any payments on the loan.
Dr. Smith also violated his agreement to keep the aircraft engines on the maintenance
plan, causing a substantial decline in the aircraft's value.
On December 29, 2010, Key assigned to Texas its rights to collect under the loan
documents, including the Note and Personal Guaranty. As discussed in more detail
below, the assignment was reflected in a document entitled the "OMNIBUS
ASSIGNMENT OF LOAN DOCUMENTS" (Omnibus Assignment).
On or about the same date, Key provided Texas with an allonge endorsement
(Allonge) that was attached by a paper clip to the Note. The Allonge specifically
identified the Note and stated it was payable to Texas. An "allonge" is an endorsement of
a negotiable instrument contained on a separate piece of paper rather than the back of the
instrument. (See Pribus v. Bush (1981) 118 Cal. App. 3d 1003, 1007-1011.)
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Texas and Key executed the Allonge and the Omnibus Assignment as part of a
"belt and suspenders" plan, believing either would be sufficient to transfer the creditor
rights but providing extra assurance that the transfer would be upheld.
The next month, Texas's managing partner communicated with Dr. Smith's
attorney regarding the Note repayment, but they did not reach any agreements or
resolutions. In late January 2011, Texas took possession of the aircraft. Before it could
sell the aircraft, Texas was required to pay about $475,000 to reinstate the aircraft on the
Maintenance Schedule Plan (a prerequisite to sell an aircraft in a commercially
reasonable manner) and to pay $369,946.54 to refurbish the aircraft to ensure a fair sale
price. Texas later sold the aircraft to a third party for about $2.2 million. After deducting
the amounts to reinstate the Maintenance Schedule Plan, refurbish the aircraft, and pay
broker commissions, Texas received $1,153,425.07.
Texas then filed this action against Dr. Smith and Blue Pacific to collect the
remaining deficiency due on the Note and Personal Guaranty. The first cause of action
was against Blue Pacific for breach of the Note, and the second cause of action was
against Dr. Smith for breach of the Personal Guaranty. Smith and Blue Pacific cross-
complained, alleging conversion and fraud.
The parties waived a jury. At trial, the evidence was undisputed that Blue Pacific
executed the Note and Security Agreement; Blue Pacific was in default on the Note; and
Dr. Smith had executed the Personal Guaranty, promising to pay amounts owed on the
Note but had not done so. To show it had the right to enforce the Note and Personal
Guaranty, Texas produced copies of the Allonge and the Omnibus Assignment. It argued
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that either the Allonge or the Omnibus Assignment was sufficient to show it was the
current holder of the Note and Personal Guaranty and it had the legal right to enforce
these documents. Texas also produced evidence (summarized above) that defendants
breached numerous provisions of the Forbearance Agreement and thus argued that the
Forbearance Agreement no longer governed the parties' relationship. Texas also
submitted a spreadsheet (Exhibit 50) setting forth the amounts owed by Dr. Smith and
Blue Pacific under the Note and Personal Guaranty as of the May 2013 trial date.
Defendants' primary defense was that Texas had no standing to enforce the Note
and Personal Guaranty because: (1) the Allonge did not satisfy Uniform Commercial
Code (UCC) requirements because it was not sufficiently "affixed" to the Note; and (2)
the Omnibus Assignment did not transfer rights to the Personal Guaranty. Defendants
also argued Texas was barred from enforcing the Note because it did not provide
defendants with benefits under the Forbearance Agreement, including additional time to
pay off the debt and an amortization schedule. Defendants maintained that the
Forbearance Agreement superseded the Note and Security Agreement. Defendants
further claimed that Texas did not sufficiently prove the amounts owed on the Note.
In a detailed statement of decision, the court found Texas proved its claims and
rejected defendants' defenses. In relevant part, the court stated:
"The Court concludes that [Texas] has standing to enforce the Note
and Guaranty. The Allonge endorsement states it was attached to
the Note and satisfies the requirements of the Uniform Commercial
Code. . . . Moreover, the Omnibus Assignment independently
provides [Texas] with standing to enforce the Note and
Guaranty. . . . The Omnibus Assignment explicitly referenced the
'Credit Documents' and the attached Schedule 1, which included a
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list of documents which were expressly assigned to [Texas] and
included the Note, Guaranty and Forbearance Agreement. It would
defy logic to conclude that the parties did not intend to include the
documents identified on Schedule 1 as part of the assignment from
Key to Texas . . . .
"Regarding the Forbearance Agreement, it is disingenuous to argue
that Defendants may receive the benefit of the Forbearance
Agreement when Defendants were clearly in default under the
Forbearance Agreement. The Court questions whether Defendants
had the ability or intention to comply with the Forbearance
Agreement, and there is no evidence that Defendants complied with
the Forbearance Agreement. Defendants did not make any payments
under the Promissory Note; did not sell the Aircraft; and continued
to use the Aircraft. Defendants did not turn over the Aircraft to Key
by September 1, 2010 or October 1, 2010. Defendants failed to
make the required . . . maintenance payments on the Aircraft.
"The Court finds that [Texas] established that the sale of the Aircraft
following [Texas's] repossession of the Aircraft was commercially
reasonable. There was no contrary evidence introduced at trial. The
credit against the indebtedness applied by [Texas] of $1,153.425.07
after the resale of the Aircraft was appropriate. Damages were
established in the amount of $6,065,141.91."
Based on these conclusions, the court awarded Texas $6,065,141.91 against both
parties. The court also found defendants did not prove the claims asserted in their cross-
complaint.
Defendants appeal.
DISCUSSION
I. Standing To Enforce Note and Personal Guaranty
Defendants contend the judgment must be reversed because Texas had no standing
to enforce the Note and Personal Guaranty. The argument is without merit. The plain
language of the Omnibus Assignment provided Texas with the right to enforce the Note
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and Personal Guaranty. Based on this conclusion, we do not reach the issue whether the
Allonge was also valid to transfer these rights.
A. The Omnibus Assignment
Following an introductory paragraph in which the parties are identified, the
Omnibus Assignment provides:
"1. Pursuant to that Promissory Note Aircraft Loan dated as of June
24, 2005 as amended, restated, supplemented or otherwise modified,
Assignor made a loan to Blue Pacific Aviation, Inc. ('Borrower') in
the principal amount of $4,817,350.28 ('Loan'). In connection with
the Loan, Assignor and Borrower entered into the documents listed
on Schedule I hereto (collectively, the 'Credit Documents').
"2. Assignor desires to assign, transfer and convey all of its right,
title and interest in the Credit Documents and the Loan to Assignee.
"NOW, THEREFORE, in consideration of the recitals stated
above and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignor agrees as
follows:
"A. Assignor hereby assigns, transfers and conveys to Assignee
all of Assignor's right, title and interest in and to the Credit
Documents and the Loan.
"B. The terms and provisions of this Assignment shall inure to
the benefit of, and shall be binding upon, the successors and assigns
of the parties hereto." (Italics added.)
The attached "SCHEDULE 1" identifies six separate loan-related documents: (1) the
Note; (2) an amendment to the Note; (3) the Security Agreement; (4) the Personal
Guaranty signed by Dr. Smith on June 21, 2005; (5) the Forbearance Agreement; and (6)
a related UCC Financing Statement.
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At trial, Daniel Bruce, the transactional attorney who represented Texas in the
transfer of Key's credit rights in the Note and Personal Guaranty, testified the purpose of
the Omnibus Assignment was to provide for "the overall general assignment of
everything relating to [the] Blue Pacific loan," including "the notes, guaranties, the
security position, everything." (Italics added.) Bruce confirmed the parties intended that
the Omnibus Assignment would transfer each of the credit documents listed in Schedule
1. He said that "the Omnibus Assignment absolutely assigned all the interest—all right,
title and interest of Key in the credit documents. The credit documents are listed on
Schedule 1, being Nos. 1 through 6. The Guaranty is one of those documents. It's at No.
4."
B. Analysis
Under governing New York law, an assignee stands in the shoes of an assignor
and a guaranty agreement may be assigned. (See American States Ins. Co. v. Huff (2014)
990 N.Y.S.2d 489, 490; IRB-Brasil Resseguros S.A. v. Eldorado Trading Corp. Ltd.
(2009) 891 N.Y.S.2d 362, 364.) In determining the scope of the assignment, the court's
fundamental task is to determine the parties' mutual intention when the contract was
formed. (Greenfield v. Philles Records, Inc. (2002) 98 N.Y.2d 562, 569.) " 'The best
evidence of what parties to a written agreement intend is what they say in their
writing. . . .' Thus, a written agreement that is complete, clear and unambiguous on its
face must be enforced according to the plain meaning of its terms . . . ." (Ibid.)
The language of the Omnibus Assignment reflects the parties' intent to assign
Texas rights to the Personal Guaranty. The substantive portion of the Omnibus
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Assignment—contained after the "NOW, THEREFORE" language—states: "A.
Assignor hereby assigns, transfers and conveys to Assignee all of Assignor's right, title
and interest in and to the Credit Documents and the Loan." (Italics added.) The "Credit
Documents" are defined as those "documents listed on Schedule 1 hereto." Schedule 1
includes "Personal Guaranty Aircraft Promissory Note dated as of June 21, 2005 by
Guarantor [Dr. Smith] in favor of Seller [Key]." That document is the Personal Guaranty
signed by Dr. Smith at issue here.
Under this plain language, the parties intended to transfer Key's creditor rights in
the Personal Guaranty to Texas. The document states the parties intend to transfer all
right in the Credit Documents, which include the Personal Guaranty. On its face, the
document unambiguously supports that Key assigned to Texas the right to enforce the
Personal Guaranty.
Defendants suggest the Omnibus Assignment was ambiguous because in the first
paragraph following the introductory clause, the document refers to the loan made
between Blue Pacific and Key. This reference does not create an ambiguity. The fact
that the borrower/lender relationship was initially identified in the introductory provisions
does not reasonably limit the substantive provisions that clearly assign the rights to each
of the documents listed in Schedule 1.
Moreover, even if there was an ambiguity, this fact does not help defendants in
this case. If contract language is susceptible to two or more reasonable interpretations,
the court may admit extrinsic evidence to aid in interpreting the contract. (Greenfield v.
Philles Records, Inc., supra, 98 N.Y.2d at p. 569.) When there is no material conflict in
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the extrinsic evidence, the trial court interprets the contract as a matter of law. (Ibid.)
The undisputed extrinsic evidence made clear that the parties to the Omnibus
Assignment intended that the assignment include the Guaranty Agreement. The Texas
attorney who negotiated the agreement testified that the parties specifically intended to
include the Personal Guaranty in the assignment and believed the language clearly
accomplished this result. Further, as the court noted, a contrary interpretation would be
illogical because the undisputed evidence showed that the parties understood at the time
that Blue Pacific had no assets except for the airplane and that Texas intended to look to
Dr. Smith's assets to collect on the debt. "[A] contract should not be interpreted to
produce an absurd result, one that is commercially unreasonable, or one that is contrary to
the intent of the parties . . . ." (Cole v. Macklowe (2012) 953 N.Y.S.2d 21, 23.)
Defendants alternatively contend the Allonge was ineffective to transfer rights
because it was not "firmly affix[ed]" to the Note. Defendants rely on two unreported
New York decisions. (See HSBC Bank USA N.A. v. Roumiantseva (2013) 975 N.Y.S.2d
709; U.S. Bank N.A. v. Bresler (2013) 971 N.Y.S.2d 75.) We need not reach this
argument because—as defendants conceded at trial and concede in their appellate brief—
if the Omnibus Assignment was valid to assign the Note and Personal Guaranty, it is not
necessary to determine the validity of the Allonge. As Texas's transactional attorney
explained at trial, Texas executed both the Allonge and the Omnibus Assignment as part
of its "belt and suspenders" strategy of employing two alternative methods to assign the
rights to ensure the assignment would be recognized. Because we have found the
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Omnibus Assignment was valid to establish an effective assignment, it is unnecessary to
determine whether the Allonge was enforceable under New York law.
II. Defendants' Breach Rendered Forbearance Agreement Benefits Inapplicable
Defendants contend that even assuming Texas had standing to bring this action, it
had no right to enforce the Note and Personal Guaranty because Texas did not satisfy the
conditions agreed to by Key under the Forbearance Agreement. Defendants argue that a
party seeking to enforce an agreement must show that it complied with the agreement's
conditions precedent. (See HSBC Mortgage Corp. (USA) v. Gerber (2012) 955 N.Y.S.2d
131, 132.)
We agree that generally the satisfaction of a contract's conditions is a prerequisite
to enforcing the contract. However, this principle does not benefit defendants in this
case. The undisputed evidence showed defendants were in material breach of numerous
provisions of the Forbearance Agreement, including by: (1) failing to sell the aircraft or
turn it over to Key within the agreed-upon time period; (2) continuing to fly the aircraft in
defendants' charter business; and (3) failing to comply with the aircraft's Maintenance
Service Program. Under the express terms of the Forbearance Agreement, these breaches
triggered the entire balance of the Note to become due and payable, "without
presentment, demand, protest or notice of any kind whatsoever, all of which are expressly
waived by [Dr. Smith and Blue Pacific]." Once defendants defaulted on the Forbearance
Agreement terms, the "Forbearance Period [was] terminated." Key (or its assignee
Texas) was then entitled to "immediately enforce payment of all obligations and
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indebtedness . . . under the Loan Documents [defined to include the Note, Security
Agreement, and Personal Guaranty] . . . ."
Under these contractual provisions, we reject defendants' claim that Texas was
required to provide "an amortization statement" to permit defendants to "commence
repayment of the deficiency." The right to an amortization statement was available only
if defendants complied with the terms of the Forbearance Agreement. Once defendants
defaulted on the Forbearance Agreement, Key (and/or its assignee) was entitled to require
defendants to immediately pay the entire balance due on the Note and Personal Guaranty,
and defendants no longer had the contractual right to repay the debt over time.
At the conclusion of the trial, the court inquired why defendants would be entitled
to obtain the benefits of the Forbearance Agreement "when [they] didn't do anything [to]
perform [under this agreement]." Defense counsel was unable to provide a satisfactory
response.
On this record, the trial court correctly rejected defendants' claim that Texas was
not entitled to enforce the Note and Personal Guaranty because it did not provide
defendants with the benefit of the discounted deficiency balance and an amortized
repayment schedule. Instead of timely selling or delivering the aircraft to Key, Smith
continued to fly it and profit from these charter flights in violation of the Forbearance
Agreement. This conduct depreciated the value of the collateral, and deprived the
creditor of the benefit bargained for in the Forbearance Agreement: prompt delivery of
the collateral in its existing condition, or the proceeds from its sale, without the necessity
of repossession and litigation.
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III. Substantial Evidence Supports Damage Award
The court found Texas proved damages of $6,065,141.91, reflecting the amount
owed by defendants on the Note and Personal Guaranty, after crediting defendants with
the net sale proceeds. Defendants contend this damage amount was unsupported by the
evidence presented at trial. Specifically, they argue that this amount was based on a
spreadsheet created by Texas (Exhibit 50), and there was no foundation for this evidence
because there was no testimony concerning how the spreadsheet was created, who
created it, and "where the information came from . . . ."
Defendants waived this argument by failing to provide an adequate record for this
court to consider the issue. Although defendants designated more than 40 trial exhibits as
part of the appellate record, they specifically omitted Exhibit 50 from this designation.
Without the ability to examine Exhibit 50, we cannot rule on defendants' evidentiary
challenge. " 'It is the duty of an appellant to provide an adequate record to the court
establishing error. Failure to provide an adequate record on an issue requires that the
issue be resolved against appellant. . . .' . . . This principle stems from the well-
established rule of appellate review that a judgment or order is presumed correct and the
appellant has the burden of demonstrating prejudicial error." (Hotels Nevada, LLC v.
L.A. Pacific Center, Inc. (2012) 203 Cal. App. 4th 336, 348; accord Pringle v. La Chapelle
(1999) 73 Cal. App. 4th 1000, 1003.)
Defendants' contention also fails on its merits. Based on other designated exhibits
and trial testimony, we are satisfied the court's finding on the damages amount was
supported by substantial evidence. Defendants expressly admitted in the Forbearance
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Agreement that they owed $5,089,647.03 as of June 14, 2010. The undisputed evidence
further shows that defendants did not make any payments on the Note after that time.
The evidence also showed that Texas added interest and late charges to this outstanding
balance based on the specified rates provided in the Note, and gave defendants credit for
the net proceeds from the sale of the aircraft.
Defendants did not challenge the accuracy of the calculations or present any
contrary evidence. During closing arguments, defendants' attorney argued that the
Forbearance Agreement was "hearsay" regarding the amount owed. The court properly
overruled this objection. Because the Forbearance Agreement was an operative
agreement between the parties, it was not hearsay. (See Kunec v. Brea Redevelopment
Agency (1997) 55 Cal. App. 4th 511, 524.) Further, even if the Forbearance Agreement
could be considered hearsay, the agreement was signed by Dr. Smith and thus the
statement as to the amounts owed was admissible under the exception for admissions of a
party opponent. (See Evid. Code, § 1220.)
Defense counsel argued there was insufficient evidence as to damages because
Texas did not call any Key witnesses to testify as to the amount owed. The trial court
properly rejected the argument, concluding it was entitled to rely on Dr. Smith's
admissions in the Forbearance Agreement regarding the outstanding loan balance through
June 2010, and then to determine the damages based on this figure, after subtracting the
net sales proceeds and adding the permissible interest and late charges.
In their reply brief, defendants suggest there was a "contradiction" between the
calculations in Exhibit 50 and a "hearsay loan statement issued by Key." However, there
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was no evidence that either party produced a "hearsay loan statement issued by Key," or
relied on this document to establish damages. Additionally, contrary to defendants'
argument, the court did not use Exhibit 50 to establish the amount of the outstanding
debt; rather it determined the debt amount based on evidence in the record (including Dr.
Smith's own admissions) and determined the applicable interest rate and late charges
from the evidence in the record, and then mathematically calculated these amounts based
on the figures in Exhibit 50.
The court's finding as to the amount of damages was supported by the record.
DISPOSITION
Judgment affirmed. Appellants to pay respondent's costs on appeal.
HALLER, J.
WE CONCUR:
HUFFMAN, Acting P. J.
MCINTYRE, J.
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