Terry Martin v. Stanley Smith , 192 Wash. App. 527 ( 2016 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
TERRY MARTIN, an individual, and No. 72597-1-1
M & M TECHNOLOGIES, INC., a
Washington corporation, DIVISION ONE
Respondents,
v.
STANLEY SMITH and JANE DOE PUBLISHED
SMITH, husband and wife; and KERRY
SIMSHAUSER and JANE DOE FILED: February 8. 2016
SIMSHAUSER, husband and wife,
Appellants.
NUPOWER TECHNOLOGIES, INC.,
Third Party Plaintiff,
TERRY MARTIN, an individual, and
M & M TECHNOLOGIES, INC., a
Washington corporation,
Third Party Defendants.
Cox, J. - Stanley Smith appeals the trial court's dismissal of his breach of
warranty counterclaim against M& MTechnologies Inc. He argues that M&M
breached the express warranties in two agreements with him. Specifically, he
argues that M&Mwas the subject of a material adverse claim by the Securities
and Exchange Commission (SEC) at the time M&Mwarranted otherwise. He is
correct. We reverse.
No. 72597-1-1/2
This is a commercial dispute between M & M and Smith over a license
agreement and option agreement, both of which are dated April 11, 2007. Prior
to the execution of these agreements, M & M became aware of an investigation
by the SEC of a "Ponzi scheme" involving an entity known as International
Fiduciary Corporation (IFC). The SEC informed Terry Martin, a principal of M &
M, that it believed IFC paid M & M with funds from the Ponzi scheme. There was
no indication that either Martin or M & M was involved in the scheme, only that
they had received funds from the scheme.
In February 2007, the SEC sent a letter informing Martin and M & M that
its staff was considering recommending them as relief defendants in its lawsuit
against IFC in the federal district court in Virginia. The letter also stated that the
SEC might seek disgorgement of investor funds they received from IFC. In
March 2007, the SEC's assistant director further corresponded with Martin and M
& M concerning its investigation.
After these communications with the SEC, in March 2007, Smith met with
Martin and M & M's accountant, Craig Forhan, to discuss a pending business
arrangement involving licensing of M & Mtechnology to Smith. At this meeting,
Martin and Forhan disclosed to Smith that the SEC was investigating M & M and
provided him with the SEC letters concerning its investigation. They also
informed him that M & M had a cash flow problem. After this meeting, Smith
loaned M & M $200,000.
No. 72597-1-1/3
By its First Amended Complaint dated April 9, 2007, the SEC named
Martin, M & M, and others not involved in this litigation as "relief defendants" in
an action in the U.S. District Court for the Eastern District of Virginia. According
to this complaint, the "relief defendants" possessed illegally obtained investor
funds or assets acquired from IFC. The relief sought against the relief
defendants appears to be limited to return of these funds. A copy of this
complaint was admitted as an exhibit in the trial of this action.
In April 2007, M & M and Smith entered into three agreements, all of
which are dated April 11, 2007. The License Agreement between M & M and
Smith provides for licensing of certain property in three states. The Option
Agreement between M & M and Smith provides for licensing of property in other
states. The Research, Development and Testing Agreement between M & M
and Smith provides for certain services. The parties changed Smith's $200,000
loan, and the interest owed, into a down payment towards the license agreement.
As part of the license agreement, M & M warranted that it was not
presently the subject of any claim that would have a material adverse effect on
Smith. A similar provision is contained in the option agreement. "Claim" is not
defined in either agreement.
In May 2007, Smith learned that M & M had been named as a relief
defendant in the federal court action in Virginia. That same month, M & M and
Martin were served with process in that litigation.
After Smith failed to meet his obligations under the license and option
agreements, Martin and M & M commenced this action against Smith for breach
No. 72597-1-1/4
of contract. In response, Smith asserted several counterclaims, including breach
of warranties under the license and option agreements.
After a bench trial, the court decided that Smith failed to prove there was a
breach of the warranties in the two agreements. The court also found against
Smith on other claims that he asserted.
Smith appeals.
BREACH OF WARRANTIES
Smith's sole argument on appeal is that the license and option
agreements are void because M & M breached the warranties stated in the
agreements.1 Specifically, he argues that M &Mwas the subject of a material
adverse claim by the SEC as of the date of both agreements. Accordingly, Smith
claims he is entitled to relief. We agree.
"When the trial court has weighed the evidence, our review is limited to
determining whether the trial court's findings are supported by substantial
evidence and, if so, whether the findings in turn support the conclusions of law."2
Substantial evidence "exists so long as a rational trier of fact could find the
necessary facts were shown by a preponderance of the evidence."3
1Appellant's Opening Brief at 13; Appellant's Reply Briefat 8.
2 Prostov v. Dep't of Licensing, 186 Wn. App. 795, 819, 349 P.3d 874(2015).
3 In re Welfare of A.W., 182 Wn.2d 689, 711, 344 P.3d 1186 (2015).
No. 72597-1-1/5
'"We will not disturb findings of fact supported by substantial evidence
even if there is conflicting evidence.'"4 Additionally, unchallenged findings are
verities on appeal.5 We review de novo the trial court's conclusions of law.6
Washington courts "follow the objective manifestation theory of
contracts."7 When interpreting an agreement, we focus on the agreement's
objective manifestations to ascertain the parties' intent.8 "We impute an intention
corresponding to the reasonable meaning of the words used."9 The parties'
subjective intent is irrelevant if we can ascertain their intent from the words in the
agreement.10
We give words "their ordinary, usual, and popular meaning unless the
entirety of the agreement clearly demonstrates a contrary intent."11 We interpret
only what was written in the agreement, not what the parties intended to write.12
4 Cumminqs v. Dep't of Licensing, 189 Wn. App. 1, 11, 355 P.3d 1155(2015) (internal quotation marks omitted) (quoting McClearv v. State, 173 Wn.2d
477, 514, 269 P.3d 227 (2012)).
5A.W.. 182Wn.2dat711.
6 In re Pers. Restraint of Cross. 180 Wn.2d 664, 681, 327 P.3d 660(2014).
7 Hearst Commc'ns, Inc. v. Seattle Times Co., 154 Wn.2d 493, 503, 115
P.3d 262 (2005).
8id,
9!d,
10 jd, at 504.
11 Id.12
Id.No. 72597-1-1/6
Additionally, "[a] contract provision is not ambiguous merely because the parties
to the contract suggest opposing meanings."13 We "will not read ambiguity into a
contract 'where it can reasonably be avoided.'"14
In Berg v. Hudesman,15 the supreme court "recognized the difficulties
associated with interpreting contracts solely on the basis of the 'plain meaning' of
the words in the document."16 Interpreting a contract "involves 'one person giving
a meaning to the symbols of expression used by another person.'"17 The
supreme court adopted the "context rule" and recognized that the parties' intent
"cannot be interpreted without examining the context surrounding an instrument's
execution."18
Since Berg, the supreme court has further explained the "context rule." It
explained "that surrounding circumstances and other extrinsic evidence are to be
used 'to determine the meaning of specific words and terms used' and not to
13 GMAC v. Everett Chevrolet, Inc.. 179 Wn. App. 126, 135, 317 P.3d
1074, review denied. 181 Wn.2d 1008 (2014).
14 Jd (internal quotation marks omitted) (quoting Mayer v. Pierce County
Med. Bureau, Inc.. 80 Wn. App. 416, 421, 909 P.2d 1323 (1995)).
15115Wn.2d657, 801 P.2d 222 (1990).
16 Hearst Commc'ns. Inc.. 154 Wn.2d at 502.
17 id. (alternation in original) (internal quotation marks omitted) (quoting
Berg. 115 Wn.2d at 663).
18
Id.No. 72597-1-1/7
'show an intention independent of the instrument' or to 'vary, contradict or modify
the written word.'"19
"When the parties by the terms of their contract expressly stipulate that a
representation shall be regarded as material, it ceases to be a representation
only, and becomes a warranty."20 "'Warranties differ from representations, then,
in that falsity of a representation will defeat the contract only where it is material,
as representations are merely inducements to the making of the contract.'"21 For
a warranty, "'the statement is made material by the very language of the contract,
so that a misrepresentation of a matter warranted is a breach of the contract
itself.'"22 "Therefore the falsity of a statement which is made a warranty will
avoid the contract without regard to whether it can be considered as material in
any way to the risk or the loss.'"23 "'A warranty must be strictly true.'"24
Claim
A threshold issue is the meaning of the word "claim" in the warranty
provisions of the agreements. They both state:
19 ]d at 503 (emphasis omitted) (quoting Hollis v. Garwall. Inc., 137 Wn.2d
683, 695-96, 974 P.2d 836 (1999)).
20 Miller v. Commercial Union Assur. Co., 69 Wash. 529, 534, 125 P. 782(1912).
21 Id. (quoting Emlin McClain, Fire Insurance, in 19 Cyclopedia of Law
and Procedure 565, 683 (William Mack ed., 1905)).
22 jd. (quoting McClain, supra, at 683).
23 ]d. (quoting McClain, supra, at 683).
24 id. at 535 (quoting Poultry Producers' Union v. Williams, 58 Wash. 64,
66, 107 P. 1040(1910)).
No. 72597-1-1/8
Each party (the "Warranting Party") warrants and represents
to the other Party that... the Warranting Party is not presently the
subject of, nor the proponent of, any claim that would have a
material adverse affect [sic] on the other Party.[25]
Neither agreement defines the word "claim." But there does not appear to
be any dispute that both warranties are effective as of the dates of the
agreements: April 11, 2007. Likewise, there is no dispute that the SEC request
for return of funds M & M received from IFC is one that "would have a material
adverse [effect] on [Smith]."26 In its oral decision, the trial court also stated that
"[i]f such a claim existed, it would be a material claim that might have a material
adverse effect on [Smith]. . . ,"27 And neither party in this appeal challenges this
observation by the trial judge.
The primary dispute between the parties is over the meaning of the word
"claim" in section 12.1(g) of the license agreement warranty and section 5.1(g) of
the option agreement warranty. Because this term is undefined in the
agreements, we turn to Black's Law Dictionary for a definition, which defines
claim as, among other things:
A demand for money, property, or a legal remedy to which one
asserts a right; esp., the part of a complaint in a civil action
specifying what relief the plaintiff asks for.[28l
Another dictionary gives the word a similar meaning:
25 Trial Exhibit 1, p. 7 (emphasis added): accord Trial Exhibit 2, p. 6.
26 id,
27 Report of Proceedings (the court's oral decision) (July 22, 2014) at 11.
28 Claim, Black's Law Dictionary, 301 (10th ed. 2014).
8
No. 72597-1-1/9
[something claimed in a formal or legal manner [or] [t]he sum of
money demanded.[29]
With these definitions in mind, we turn to the question whether substantial
evidence supports the trial court's finding on the claim issue. The court found as
follows:
[A]t the time of the signing of the contracts, a SEC claim against M
& M Technologies, as a relief defendant for $550,000, was an
inchoate potential claim only, and no amended complaint naming M
& M Technologies as a relief defendant had been filed or served by
the SEC.™
A close reading of these definitions shows that they include a demand for
money. Notably, the definitions say nothing to limit a claim to the filing of a
lawsuit. Thus, we conclude that a claim may be asserted in a complaint (whether
or not filed).
Nothing in these definitions restricts a claim to something asserted in a
complaint (whether or not filed). This is particularly important here because the
plain words of the warranties make no reference to either a "filed claim" or a
"lawsuit." Rather, the warranties simply state the word "claim."
Applying these definitions of claim to the facts of this case, we conclude
that the SEC had a claim against M & M as of the April 9, 2007 date of its First
Amended Complaint. The SEC's First Amended Complaint, a copy of which was
admitted into evidence, states a demand for return of "illegally obtained investor
funds" from IFC that M & M and others possessed.
29 The American Heritage Dictionary, 350 (5th ed. 2015),
https://www.ahdictionary.com/word/search.html?q=claim.
30 Finding of Fact 3.22, Clerk's Papers at 14.
No. 72597-1-1/10
At oral argument in this court, M & M argued that the context of the
negotiations between the parties requires that we conclude that the word "claim"
in the warranties must mean "filed claim." We disagree.
First, the plain words of the warranties state "claim," not "filed claim." We
know of no authority that permits us to add words to the agreements that M & M
drafted in the guise of this court construing these documents. Rather, our task is
to interpret only what was written in the agreement, not what the parties (or the
drafter) intended to write.31
Second, under Hearst Communications, Inc. v. Seattle Times Co.,
"surrounding circumstances and other extrinsic evidence are to be used 'to
determine the meaning of specific words and terms used' and not to 'show an
intention independent of the instrument' or to 'vary, contradict or modify the
written word.'"32 The context of the parties' negotiations cannot be used to
modify the word claim in the warranty provisions of the two agreements.
For these reasons, we reject M & M's attempt to add words to the
agreements that are not there.
The trial court characterized the SEC's actions as "an inchoate potential
claim only."33 This appears to have been based on the evidence that the SEC
was investigating the Ponzi scheme prior to the date of the agreements.
31 Hearst Commc'ns, Inc., 154 Wn.2d at 504.
32 id at 503 (emphasis omitted) (quoting Hollis, 137 Wn.2d at 695-96).
33 Clerk's Papers at 14.
10
No. 72597-1-1/11
We need not address whether a claim by the SEC existed during its
investigation. That is because the record is clear that as of April 9, 2007, the
date of the SEC's First Amended Complaint, the investigation had ripened into a
SEC claim for return of the investor funds that M & M received from IFC.
In short, there is no substantial evidence to support the finding that there
was "an inchoate potential claim only" by the SEC as of the April 11, 2007 date of
the agreements.34 To the contrary, there is substantial evidence that a claim by
the SEC existed when the warranties in the agreements were executed. That
evidence is the First Amended Complaint dated April 9, 2007.
Warranties and Representations
The next question is whether there was a breach of the warranties of the
agreements. We hold that there was.
The supreme court stated the law on warranties and representations in
Miller v. Commercial Union Assurance Co.35 As that case states, "the falsity of a
statement which is made a warranty will avoid the contract without regard to
whether it can be considered as material in any way" to the warranted matter.36
Miller also states "'[a] warranty must be strictly true.'"37
Here, the documents before us clearly state that the text pertaining to
warranties is just that. They are not mere representations. Thus, the falsity of
34 id
35 69 Wash. 529, 125 P. 782 (1912).
36 ]d at 534.
37 Id at 535 (quoting Poultry Producers' Union, 58 Wash, at 66).
11
No. 72597-1-1/12
the warranties that there were no claims at the time the agreements were
executed must void the agreements.
It is not legally significant whether the warranted matter is material. In any
event, we have the unchallenged observation by the trial court that the existence
of a claim by the SEC against M & M would be material. That observation makes
sense under the circumstances of this case.
Whether the warranties are affected by M & M's apparent lack of
knowledge of the SEC's First Amended Complaint when the parties executed the
warranties is an issue that the parties do not completely address on appeal. The
trial judge appears to have relied on the fact that neither party knew of the First
Amended Complaint until sometime in May 2007. But that is analytically
immaterial under the case authority we have located.
Jefferv v. Hanson involved a contract for the sale of a tractor.38 Sidney
Jeffery sought to buy a tractorfrom Virgil Pague.39 Jeffery agreed to buy the
tractor if it were warranted to be 90 percent new and never used in salt water.40
Pague signed a statement stating: '"I hereby make statement that [the tractor] is
90% new and has never been in salt water. I make this statement based upon
facts given to me by the seller from whom I purchased this bulldozer and to the
best of my knowledge believe that this statement is true.'"41
38 39 Wn.2d 855, 239 P.2d 346 (1952).
39 id at 856.
40 id
41 id at 856-57.
12
No. 72597-1-1/13
As it turned out, the tractor "was not as warranted when delivered to
Jeffery."42 In the suit that followed, the trial court entered a judgment against
Pague, concluding that Pague's statement was a warranty and that he breached
the warranty.43
Pague appealed, arguing that the statement was not a warranty.44
The supreme court concluded that the statement was a warranty, stating
that it was "a positive statement of the condition of the tractor," and that Pague
could not "escape" by relying on the statement's language.45 The court
specifically stated that Pague could not rely on the fact that the statement "was
based upon facts given to him by his vendor, and that he believed it to be true to
the best of his knowledge."46 Most importantly, the court stated:
The source of his information is not material. He affirmed a fact
regarding the equipment, and he did so to meet [Jeffery's
requirements] before the sale. It was not sales talk or an
expression of his opinion, nor was it intended to be. It tended to
and did induce the sale, and Jeffery relied upon it as Pague knew
he would. It meets the requirements of an express warranty set
forth in the statute w
Accordingly, the supreme court affirmed the judgment. 48
42
id at 857.
43
id
44
id
45
Id,
46
id at 857-58.
47
id. at 858.
48
Id. at 859.
13
No. 72597-1-1/14
Here, following Miller and Jeffery, we must conclude that the warranties in
this case are not affected by the fact that M & M did not know of their falsity as of
the date of making the warranties. It does not matter that it only learned of the
falsity in May 2007. The case law is clear that what is material is the truth or
falsity of the warranty when made. On this record, the warranties were clearly
false when made: April 11, 2007.
Because the warranties were false, the agreements are void. Smith is
entitled to appropriate relief due to the breach of the express warranties.
Because the parties have not fully briefed on appeal the extent of relief, we
remand with directions to the trial court to address that question.
We reverse the judgment and remand with these instructions.
Ccn<%~3.
WE CONCUR:
"TrUKcY, ^J
14