Stifano v. Slaga CA4/1

Filed 8/17/21 Stifano v. Slaga 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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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or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
MICHAEL STIFANO, D077608
Cross-complainant, Cross-
defendant and Appellant,
(Super. Ct. No. 37-2017-00034101-
v.
CU-CO-CTL)
SCOTT SLAGA,
Cross-defendant, Cross-
complainant and Appellant.
MICHAEL STIFANO, D077865
Cross-complainant, Cross-
defendant and Appellant,
v.
SCOTT SLAGA,
Cross-defendant, Cross-
complainant and Respondent.
APPEALS from a judgment and postjudgment order of the Superior
Court of San Diego County, Joel R. Wohlfeil, Judge. Judgment affirmed in
part, reversed in part. Postjudgment order affirmed.
Ravin Glovinsky; William W. Ravin and Thomas W. Ferrell for Cross-
complainant, Cross-defendant, and Appellant Michael Stifano.
STratege Law and J. Scott Scheper, for Cross-defendant, Cross-
complainant and Appellant Scott P. Slaga.
This case underscores the old maxim that it is best not to mix
friendship and business. Scott Slaga and Michael Stifano ran a bar and
music venue together in Ocean Beach. They rented the property, and when
an opportunity to buy the building arose, the men formed a new LLC, “Blind
Dirt,” to purchase it. Each was supposed to contribute half of the down
payment, but when Slaga ran short on cash, he turned to Stifano for a loan.
Stifano agreed, but only under terms that would give him total ownership of
Blind Dirt if Slaga defaulted—which, ultimately, he did. After more than a
year of delinquency, Stifano called the loan due. Slaga attempted to pay a
reduced amount, only to have Stifano return his check.
Each man then believed he had the rightful claim to Slaga’s interest in
Blind Dirt that served as collateral for the loan. But they did not resolve the
issue for nearly 10 years, when an interpleader action filed by an involved
law firm forced this litigation.
After a bench trial in which Stifano and Slaga both testified, the court
decided largely in Stifano’s favor. As the court observed, Stifano had, after
all, “made the contributions necessary for Blind Dirt to buy the property in
the first place,” and Slaga’s attempt to pay off the loan came too late. Even
so, the court found that Slaga was entitled to a monetary award for
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distributions from Blind Dirt that occurred before he lost his ownership
interest. While we find no abuse of discretion by the trial court in
determining that Stifano is now the sole owner of Blind Dirt, we disagree
with its interpretation of a contract clause that formed the basis for it to
award interim distribution payments to Slaga. As such, we reverse on that
issue alone.
FACTUAL AND PROCEDURAL BACKGROUND
Michael Stifano and Scott Slaga were long-time friends and business
partners. One of their joint enterprises was an Ocean Beach bar and music
venue called Blind Winston’s, which they ran through a limited liability
company (LLC) with the same name.
Blind Winston’s rented the building on Bacon Street in which it
operated, and when the landlord passed away around 2005, Slaga and
Stifano began to have conflicts with the nephew who inherited the property.
After Stifano heard that the nephew was looking to sell, he and Slaga decided
to form a new LLC, “Blind Dirt,” to purchase the property. They employed
attorney Richard Circuit, who had assisted them in the past, to create the
new company.
In order to finance Blind Dirt’s purchase of the Bacon Street property
and pay for renovations, Slaga and Stifano obtained a small business loan.
The two men agreed they would each contribute half of the funds needed for
the down payment, about $100,000. But sometime in late 2006, Slaga
informed Stifano he would not be able to come up with his contribution.
Stifano indicated he could loan Slaga the money on a short-term basis.
Although it is not clear when the two men first discussed the specifics
of the loan, by late January Stifano asked for Circuit’s help to draw up the
loan documents and relayed some details they had decided—namely, that the
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loan would be due in August 2007, subject to nine percent interest, and
secured by Slaga’s 50 percent ownership interest in Blind Dirt.1 Stifano
explained that he and Slaga were still working out the precise amount.
On March 20, 2007, Slaga and Stifano met with Circuit to formally
establish their new LLC. They held the first Blind Dirt company meeting,
signed the operating agreement, and discussed the Promissory Note and
Pledge Agreement that would define the terms of Stifano’s loan to Slaga.
About a week later, escrow closed on the Bacon Street property. Then in mid-
May, Circuit finalized the loan documents and sent them to Slaga and
Stifano to sign.
Because the meaning of some provisions in these documents provide
the basis for controversies in this case, we pause here to describe certain
clauses in detail. Circuit created three documents that were pertinent to the
loan: (1) certificates of ownership for both men representing their respective
50 percent ownership interests in Blind Dirt, (2) a Promissory Note, and (3) a
Pledge Agreement.
The Promissory Note, which stated prominently that it was “Secured by
Pledge of Certificate of Ownership,” contained the essential terms of the loan.
Stifano advanced Slaga $48,138.99, to be paid in full (with nine percent
interest) by August 15, 2007. By its terms, any failure by Slaga to “timely
1 Certain e-mails between Stifano and Circuit, in which Stifano raised
his concern that Slaga would not pay him back on time, also appear to be the
origin of Slaga’s eventual claim that Stifano breached fiduciary duties to him
by planning from the outset to take his Blind Dirt interest. In early e-mails
with Circuit, Stifano expressed an interest in owning the Bacon Street
property without Slaga’s knowledge. In later e-mails, Stifano asked for
contract terms that would provide him with further protections, and
indicated to Circuit that he wanted to make sure the contract was “air tight”
such that he would either be paid in full by August 15 or own Blind Dirt
completely.
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and faithfully perform” his obligations under the note would be considered an
“Event of Default,” which would then “at the option of Payee”2 make “the
entire principal sum,” along with unpaid interest, “immediately due and
payable, without notice or demand.” It further specified that Stifano would
be entitled to “collect all such amounts and to enforce any and all remedies
provided herein . . . .”
The Pledge Agreement accompanied the Note and explained that
Stifano “desires additional collateral to secure payment of the Note” and that
Slaga had agreed to furnish “a security interest to Stifano in Certificate of
Ownership No. 2 representing fifty percent (‘50%’) ownership of Blind Dirt”
for collateral. In more granular terms, the Pledge Agreement provided that
“[o]n the occurrence of an Event of Default under the Note, Stifano may
exercise any one or more of the following rights and remedies” including
“declar[ing] the note immediately due and payable” and “tak[ing] possession
of the Certificate as satisfaction of the Note[.]”
After the men completed the paperwork related to the loan sometime in
May, Circuit became the custodian of Slaga’s Blind Dirt certificate of
ownership, which represented the collateral. Slaga then failed to meet the
August deadline to pay the debt.
That point seems to mark the beginning of the parties’ differing
perspectives as to the ownership of Blind Dirt. As he later testified, Stifano
apparently thought that Slaga’s ownership interest in Blind Dirt reverted to
him automatically if Slaga defaulted. Focusing on the “without notice or
demand” clause of the Promissory Note, Stifano was under the impression
that no further steps were needed for him to exercise his rights as Payee and
2 The document referred to Slaga as the “Maker” and Stifano as the
“Payee.”
5
claim Slaga’s collateral. He also thought that during this time, Slaga could
cure the default and reclaim his interest in Blind Dirt by paying the amount
he owed. What Slaga thought at this point is less clear, but he was
apparently focused on making improvements to the Bacon Street building,
which his lawyer later described as his “sweat equity” in the property.
In late 2008, Stifano was planning to buy a house and requested
repayment of certain debts from business partners—including Slaga’s loan.
Slaga assured Stifano that he would pay him back in time for Stifano to use
the money for a down payment. But by late January, Slaga had not come
through with the promised funds. Stifano sent him a letter indicating he
would take possession of Slaga’s certificate of ownership since Slaga was in
default on the loan.3 Around this same time, Slaga realized that Stifano had
paid himself some distributions from Blind Dirt in 2008. Assuming he was
also entitled to half of these distributions, Slaga did some napkin accounting,
deducted those amounts from his outstanding loan, and sent Stifano a check
for about $33,000 in February 2009. This was 23 days after he received
Stifano’s letter. Stifano promptly returned Slaga’s check with a note saying
it was “not what we agreed to.”4
After this exchange, the ownership dispute between Slaga and Stifano
went dormant until 2016, when Stifano wanted to refinance the Bacon Street
property. To do so, he had to prove he was the sole owner of Blind Dirt.
When Slaga asserted his claim to 50 percent ownership, Circuit found himself
3 Stifano apparently sent this notice after he realized due to an e-mail
exchange with Circuit that he had not yet taken the necessary steps to claim
Slaga’s collateral.
4 This seems to refer to some negotiation where the two men discussed
Slaga’s Blind Dirt ownership being reduced to 25 percent upon his payment
of a lower amount. Slaga disputed ever agreeing to such terms.
6
caught in the middle and urged the two men to work out their differences.
But by September 2017, they had not come to a resolution, and Circuit’s law
firm, Circuit, McKellogg, Kinney & Ross, LLP (CMKR) filed an interpleader
action which initiated the litigation in this case.
Both men were initially named as defendants, and both cross-
complained. Stifano requested declaratory relief against Slaga’s ownership
claim and alleged that Circuit breached fiduciary duties to him. Slaga also
sought declaratory relief, but added accounting and breach of fiduciary duty
claims against Stifano. In a separate filing, Slaga alleged breach of fiduciary
duty and negligence claims against CMKR. The court consolidated the cases
and, after determining the ownership dispute between Slaga and Stifano
should be resolved first, set the actions against CMKR to “trail” afterward.
Following a bench trial in which Stifano, Slaga, and Circuit all
testified, the trial court found that Stifano was the rightful owner of a 100
percent interest in Blind Dirt. This key finding rested on a series of
subsidiary conclusions, which were as follows: (1) Slaga defaulted under the
terms of the Note by not paying off his loan in August 2007; (2) Stifano was
required to give Slaga notice before he exercised his option to foreclose on or
take possession of the collateral; (3) Slaga was entitled to 50 percent of the
distributions Stifano had taken from Blind Dirt in 2008, and thus tendered a
sufficient amount in February 2009 to repay his loan given these offsets; (4)
but Slaga’s tender was untimely under governing statutory authority and, as
a result, (5) Stifano successfully foreclosed on Slaga’s Blind Dirt interest in
February 2009.
The court also considered and rejected four equitable theories of relief
raised by Slaga, noting that Slaga had “not carried his burden [to show] that
Stifano engaged in misconduct, or that Stifano, as an alleged wrongdoer, is
7
‘enjoying the fruits of his transgression.’ ” In the ultimate accounting, the
court ruled that while Stifano owned 100 percent of Blind Dirt, Slaga was
entitled to recoup his 50 percent portion of the Blind Dirt distributions before
February 2009. Accordingly, it awarded him a total of nearly $50,000.
DISCUSSION
In this appeal, Slaga raises three issues for our review. He advances
two theories that the loan was unsecured, arguing first that there was no
consideration for the contract, and second that his interest in Blind Dirt was
not the type of property that can secure a debt under the California Uniform
Commercial Code (UCC).5 As we explain below, he is mistaken on both
points. His final argument that the trial court abused its discretion by not
applying its equitable powers to excuse his late payment to Stifano also fails;
we do not disturb the trial court’s decisions in such matters without a clear
showing of an abuse of discretion.
Stifano’s appeal, however, has more merit. He challenges the trial
court’s construction of a contractual provision in the Pledge Agreement,
which led directly to its conclusion that Slaga was entitled to distributions
from Blind Dirt while in default on his loan. Upon review of the language, we
agree with Stifano and, since we owe no deference to the trial court in purely
textual matters of contract interpretation, we reverse. We disagree, however,
5 We refer to the California Uniform Commercial Code throughout as the
Uniform Commercial Code. (Cal. U. Com. Code, § 1101.) All further
undesignated statutory references are to the California Uniform Commercial
Code.
8
with Stifano’s reading of the contractual provisions regarding attorney’s fees,
and accordingly uphold the trial court’s decision to deny his fee motion.6
1. There Was Consideration for the Loan.
Slaga asks us to find there was no consideration for the loan based on a
technical argument about the order of events. As he tells it, since escrow on
Blind Dirt’s acquisition of the Bacon Street property closed in late March
2007, but Slaga did not see the final paperwork or sign the Promissory Note
and Pledge Agreement until May, the loan was unsecured. And because he
received no new benefit in exchange for pledging his Blind Dirt interest in
May, he says he never truly created a contract using his ownership interest
as collateral.
It would require something more to persuade us that no contract was
formed between these two men. Although the law is full of technical pitfalls
for the unwary, contract law retains many vestiges of its fundamental and
common sense origins; people are entitled to strike deals, and if courts
become involved after the proverbial handshake, we strive to honor the intent
of the parties at the time of the contract’s formation. (See Pacific Gas & Elec.
Co. v. G. W. Thomas Drayage & Rigging Co. (1968) 69 Cal.2d 33, 38 (Pacific
Gas) [“[T]he intention of the parties as expressed in the contract is the source
of contractual rights and duties.”].) Here, there can be little doubt that
Stifano and Slaga intended to make a deal where Stifano advanced Slaga his
portion of the down payment for the Bacon Street property in exchange for
Slaga’s promise to repay him promptly, a commitment secured by his
ownership interest in their new company. While the details of the agreement
6 The joint request of the parties to consolidate these two appeals
(regarding the ownership of Blind Dirt and the award of attorney’s fees) is
granted because the cases are sufficiently related. (See Sampson v. Sapoznik
(1953) 117 Cal.App.2d 607, 609.)
9
were still being worked out after Stifano paid the down payment, the
essential terms were known to the two men.
The trial court concluded as much when it found that the agreement
between the two men was “an enforceable contract supported by good
consideration.” And because the question of “[w]hether . . . there is a
sufficient consideration to support a contract is always a question of fact” (In
re Estate of Thomson (1913) 165 Cal. 290, 296), we need only determine if
substantial evidence supports the trial court’s finding. The record is replete
with evidence that supports such a finding, including Slaga’s own testimony
that he understood his ownership interest in Blind Dirt would secure the loan
he received from Stifano, and that they talked about the Promissory Note and
Pledge Agreement on March 20 (although he did not see the precise terms
until later).
Slaga’s reliance on Rusk v. Johnston (1937) 18 Cal.App.2d 408 does
nothing to salvage his claim. The opinion is short on both facts and analysis,
but poses as its central question whether a guaranty was “either given or
promised before the note transaction was completed, or . . . afterward.” (Id.
at p. 409.) Here, at a minimum, the record certainly supports a finding that
Slaga committed to the general terms of the deal well before Stifano
deposited any money in escrow. Even assuming Slaga did not formally
pledge his ownership interest as collateral until the Note was signed, the
most reasonable reading of the record supports the conclusion that he
promised to do so much earlier. No more is necessary to form a deal with
good consideration. As the trial court observed, “[A] deal is a deal . . . it may
sound awfully simplistic, but I’m going to hold them to their deal.” We do no
more or less in light of the substantial evidence supporting the trial court’s
decision.
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2. The Fact that Slaga’s Ownership Interest in Blind Dirt Is a “General
Intangible” Rather Than a “Security” Does Not Prevent It from Securing
His Loan.
Slaga’s second claim is the result of his confused application of certain
terms. It is true, as Slaga asserts, that under the UCC an interest in an LLC
falls by default into the “general intangible” category of assets. An LLC
interest can become a “security” when certain steps are taken. But Slaga
takes a decided detour from the law when he asserts that because his LLC
interest never became a “security,” it could not provide collateral for a loan.
Under this odd interpretation, only a “certificated security” is imbued by the
UCC with the mythical powers necessary to convey a true security interest to
a creditor.
Although the UCC can be complicated, its application to this case is
not. Slaga’s position reveals two problems: his apparent conflation of the
term “security” with “security interest,” and his assumption that a security
interest cannot attach to a transaction unless the collateral used is itself a
security. As we will explain, neither of these positions are tenable.
We begin with some background on the UCC and its definitions. The
UCC was created to “simplify, clarify, and modernize the law governing
commercial transactions.” (§ 1103, subd. (a)(1).) To facilitate this, the UCC
provides a uniform set of terms, and indicates which kinds of assets and
transactions are governed by each division and section of the Code. Most of
the terms that are relevant to our analysis can be found in the definition
sections of Division 8, which governs investment securities, and Division 9,
which governs secured transactions. (See §§ 8102 and 9102, respectively.)7
7 Reference to the general definitions in UCC section 1201 is also
sometimes necessary to understand the descriptions provided in sections
8102 and 9102.
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Division 8 defines a “security” as a type of “financial asset” (§ 8102,
subd. (a)(9)(A)) with broad characteristics that, at first glance, seem to
include most interests in corporate ventures. (§ 8102, subd. (a)(15); 8103,
subd. (a) [“A share or similar equity interest issued by a corporation, business
trust, joint stock company, or similar entity is a security.”].) However,
Division 8 further specifies that an interest in an LLC is generally not a
security unless it meets criteria not present in this case. (§ 8103, subd. (c).)8
LLCs that are not securities are classified as “general intangibles.” (§ 9102,
subd. (a)(42); see, e.g., Angell v. Faison (In re Faison) (Bankr. E.D.N.C. 2014)
518 B.R. 849, 858 [a nonsecurity LLC interest is a general intangible]; Davis
v. Brown (In re Brown) (Bankr. D.Kan. 2012) 479 B.R. 112, 117 [same].)
There can be little doubt here that Slaga’s interest in Blind Dirt was a
general intangible under the UCC.9 But Slaga makes too much of this when
he argues it could not therefore be used as collateral in a security agreement
to give a creditor a security interest. Apart from sharing the word “security,”
a “security interest” has little, if anything, to do with a “security.” The latter
is a type of financial asset, as discussed above, whereas a “security interest”
is simply an “interest in personal property or fixtures which secures payment
8 This section indicates that an interest in an LLC can be a security if it
is “dealt in or traded on securities exchanges or in securities markets, its
terms expressly provide that it is a security governed by [Division 8 of the
UCC], or it is an investment company security.” (§ 8103, subd. (c).) The
comments provide further elaboration, noting that while “the general rule [is]
that partnership interests or shares of limited liability companies are not
[Division] 8 securities,” they become securities if they are (1) “dealt in or
traded on securities exchanges or in securities markets,” (2) or if the issuer
“explicitly ‘opt[s]-in’ by specifying that the interests or shares are securities
governed by [Division] 8.” (§ 8103, com. 4.)
9 Neither party argues that the interest meets the definition for a
security as defined in section 8103, subdivision (c).
12
or performance of an obligation.” (§ 1201, subd. (b)(35).) General intangibles
include various types of “personal property” that do not fall into other
specified categories (§ 9102, subd. (a)(42) & com. 5(d)), and can be used as
collateral in a security agreement to create security interests. (See, e.g., In re
Tracy Broadcasting Corp. (10th Cir. 2012) 696 F.3d 1051 [dealing with
security interest in general intangible]; BancorpSouth Bank v. Hazelwood
Logistics Center, LLC (8th Cir. 2013) 706 F.3d 888, 891 [same].)
Slaga’s argument raises two related issues for our clarification,
although they are dealt with imprecisely in his brief. The first is whether a
security interest attached to Slaga’s Blind Dirt interest, and the second
concerns whether the security interest was perfected. Division 9, which
regulates “transaction[s], regardless of . . . form, that create[ ] a security
interest in personal property or fixtures by contract,” governs here. (§ 9109,
subd. (a)(1).) It provides that a security interest attaches to collateral when
the debtor (1) owns the collateral in which it is conveying an interest,
(2) takes a loan from a creditor, and (3) signs a security agreement (for
which there is no “magic form”). (§ 9203, subd. (a)‒(b); White et al., Uniform
Commercial Code (6th ed. 2020) § 30:2.)
Because all of these requirements were met by the transaction between
Slaga and Stifano, a security interest attached to Slaga’s 50 percent
ownership of Blind Dirt. And attachment is the only step necessary for the
agreement to be “effective between . . . the debtor and the creditor.” (White et
al., Uniform Commercial Code, supra, § 30:2.) Conversely, perfecting the
security interest becomes relevant when a two or more creditors have
conflicting claims to the same collateral. “An unperfected security interest is
binding between the parties. The lack of perfection creates a problem only
when an intervening third party obtains a perfected security interest that
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trumps the unperfected interest.” (Simon v. Chrysler Credit Corp. (In re
Babaeian Transp. Co.) (Bankr. C.D.Cal. 1997) 206 B.R. 536, 540.) Whether
Stifano failed to perfect his interest is not relevant here because the only
creditor making a claim to the collateral is Stifano.
3. The Trial Court Did Not Abuse Its Discretion by Declining to Excuse
Slaga’s Late Payment
When the trial court analyzed the legal effect of the early 2009
correspondence between Stifano and Slaga, it applied UCC section 9620,
which gives a framework for a secured party to accomplish nonjudicial
foreclosure on collateral if the debtor defaults. As pertinent here, the secured
party can accept collateral in satisfaction of a debt by sending a proposal, to
which the debtor can then either consent or object—but a nonresponse within
20 days constitutes consent. (§ 9620, subds. (a)‒(c) [see subd. (c)(2)(C) for 20-
day rule].) Here, the trial court determined that Stifano’s January 2009
letter was a “proposal” to foreclose on the collateral, and that Slaga’s
“objection,” which came 23 days later, was untimely. It thus concluded that
in February 2009, Stifano effectively foreclosed on Slaga’s 50 percent
ownership interest in Blind Dirt.
Slaga made various equitable arguments in the trial court in an
attempt to evoke leniency for his late objection. He makes those same
arguments on appeal, asserting that his payment should be deemed “[t]imely
[u]nder [e]quitable [p]rinciples [a]pplicable [u]nder the [UCC].” (Bolding
omitted.) He also contends Stifano’s conduct amounted to a breach of
fiduciary duty that merits softer application of the governing law. These
arguments are enmeshed, but they merit brief, separate discussions.
As to the trial court’s decision not to excuse Slaga’s late attempt to
tender the amount he owed based on equitable principles that govern the
UCC (§1103, subd. (b)), we observe merely that a court’s ability to apply
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equitable principles in appropriate circumstances is not a compulsory duty to
do so in every case. When such a decision is committed to the discretion of
the trial judge, only a “plain” abuse of discretion merits a contrary result on
appeal. (Fish v. Title Guarantee & Trust Co. (1936) 8 Cal.2d 7, 8.)
The court here clearly considered—and rejected—Slaga’s request for
leniency based on equitable principles. As it stated, “[n]either party has
given the court any specific authority, other than general principles of equity,
that Slaga’s obligation to serve his ‘objection’ within twenty (20) days was
extended under the Code.” Furthermore, it “discount[ed]” testimony from
Slaga that he called Stifano in January 2009 right after receiving Stifano’s
letter. If the court had found Slaga credible on this point, it could have
deemed the lateness of his written objection excusable in light of an earlier
attempt to object verbally. Given all of this, and the fact that Slaga
benefitted from a grace period of over a year in which he was in default before
Stifano even proposed foreclosure, we find no abuse of discretion in the trial
court’s strict application of the 20-day standard.
Slaga’s argument contains an additional dimension regarding Stifano’s
letter. He takes the position that Stifano’s notice “detrimentally misled his
partner” by omitting the amount due under the loan, failing to tell Slaga he
had only 20 days to respond,10 and phrasing his proposal in the future tense.
Slaga maintains that this made the notice defective, and that Stifano violated
his fiduciary duties by sending such a misleading letter—all of which, he
contends, provides an additional basis for leniency regarding his late reply.
10 There is no evidence that either man was aware at the time that their
early 2009 attempts to resolve the ownership issue were subject to specific
requirements governing nonjudicial foreclosure in the UCC.
15
We note first that the duties Stifano and Slaga owed to each other as
partners in their business venture were of a general nature.11 Slaga points
to no authority indicating that Stifano should have both been aware of and
advised Slaga of his rights as a debtor, and the associated timelines for the
exercise of his rights. Even so, Slaga has further failed to explain how
Stifano’s alleged breach of fiduciary duty caused him to respond late.
More importantly, however, the trial court already determined that
Stifano did not breach his duties to Slaga. It stated it was “not persuaded
that Slaga carried his burden that Stifano breached his duty to act
reasonably and in good faith toward Slaga.” This was based partly on its
credibility finding that Stifano had an honest, good faith belief that Slaga’s
ownership interest in Blind Dirt became Stifano’s upon default. In a
subsequent section evaluating Stifano’s motives, the trial court also
commented that it is “not to be forgotten” that “Stifano made the
contributions necessary for Blind Dirt to buy the property in the first place”—
an observation that undercuts Slaga’s position that Stifano sought to
undermine his interest in Blind Dirt from the outset.
In contrast to these favorable (albeit limited) credibility findings as to
Stifano, the court commented more generally that it received testimony from
Slaga, Stifano, and Circuit with skepticism because their recollections were
11 The duties of loyalty and care are specified in Corporations Code,
section 17704.09. The duty of loyalty primarily concerns members refraining
from undermining the LLC to gain a personal, competitive advantage in
business (Corp. Code, § 17704.09, subd. (b)), and the duty of care is “limited
to refraining from engaging in grossly negligent or reckless conduct,
intentional misconduct, or a knowing violation of law.” (Corp. Code,
§ 17704.09, subd. (c).) Conduct that merely “furthers the member’s own
interest” is not a violation of the member’s duties. (Corp. Code, § 17704.09,
subd. (e)).
16
infected with “bias and prejudice,” which made the court question “the
capacity of the witnesses to accurately recollect and communicate their
perception of the events.” It concluded that they had lied about some things
and told the truth about others, and the court stated it “accepted the part it
perceives to be true and has ignored the rest.”
These credibility findings are key to our review. It is always “the
exclusive function of the trier of fact to assess the credibility of witnesses”
(People v. Sanchez (2003) 113 Cal.App.4th 325, 330), a role appellate courts
do not usurp. Rather, “ ‘the power of an appellate court begins and ends with
a determination as to whether there is any substantial evidence, contradicted
or uncontradicted,’ to support the findings below.” (Jessup Farms v. Baldwin
(1983) 33 Cal.3d 639, 660.) Here, Stifano’s testimony about his
understanding of the terms of the agreement, which the trial court credited,
supported the court’s finding. On this record, we cannot overturn the court’s
conclusion that Slaga failed to demonstrate Stifano breached his fiduciary
duties.
4. The Trial Court Erred in Concluding that Slaga was Entitled to
Distributions During His Period of Default Before Stifano Sent Notice.
There was no dispute at the trial that Slaga failed to pay back Stifano’s
loan by its due date in August 2007. By the terms of the Promissory Note,
this failure to pay constituted an “Event of Default.” The default then
continued for more than a year, because Slaga made no payments at all until
he attempted to pay off the entire loan in early 2009. When he did so, he
deducted from the amount he owed certain distributions from the Blind Dirt
business to which he thought he was entitled. Stifano contests Slaga’s right
to these payments.
As the trial court identified in its statement of decision, resolution of
this question turns on the meaning of paragraph B(3) of the Pledge
17
Agreement, which outlined Slaga’s retention of his rights as a managing
member of the LLC. Because the court’s interpretation was based solely on
the words of the agreement, we owe no deference to its conclusions. (Parsons
v. Bristol Development Co. (1965) 62 Cal.2d 861, 865.) Paragraph B(3) states
as follow: “Providing that Slaga is not in default in the performance of any of
the terms of the Note, Slaga shall be entitled to vote the Certificate[12] and
receive any distributions that may be declared respecting the Certificate.”
Although there is no mention of notice in this paragraph or the
surrounding provisions, the trial court read a notice requirement into the
text. It reasoned that, “Since Stifano did not notify Slaga of his default, and
Slaga remained a 50% owner, Slaga was ‘entitled to vote (his) Certificate.’ [¶]
The Court interprets the operative term to mean that, through the date of
Stifano’s notice to Slaga in January 2009 . . . Slaga was ‘entitled to vote the
Certificate and receive distributions’ from Blind Dirt. Accordingly, Slaga was
entitled to be paid 50% of the distributions paid to Stifano from Blind Dirt
prior to Stifano’s January 2009 notice to Slaga.”
We are hard pressed to find any support for this conclusion in the text
of the provision. There is no mention at all of notice, nor does the related
paragraph explaining Events of Default in the Promissory Note indicate that
notice is required when an Event of Default occurs. Rather, under the
heading entitled “Defaults; Acceleration,” the Note merely recites default
events and indicates that after such an event, the Payee can exercise certain
options—such as immediately demanding full payment.
12 While we need not decide the precise meaning of this term, we infer
from the broader context of the Blind Dirt operating agreement that it refers
to Slaga’s voting rights as a manager and member. As far as this court is
aware, Blind Dirt did not hold any meetings where it took a formal vote after
the founding meeting.
18
Stifano argues for an interpretation rooted in the language of
paragraph B(3). He notes that although the terms are worded positively
(Slaga “shall be entitled” to vote and receive distributions “provid[ed] that
Slaga is not in default”), there is a negative inference that must be drawn
from this phrasing—namely, that if Slaga defaulted, he would not be entitled
to these privileges. In following the interpretative principle that “[w]ords in a
contract are given their ordinary meanings” (People ex rel. Lockyer v. R.J.
Reynolds Tobacco Co. (2004) 116 Cal.App.4th 1253, 1263), we agree. By the
plain terms of the paragraph, Slaga retained his privileges to vote and
receive distributions provided he was not in default. It follows, then, that at
a minimum, a default would suspend those privileges.13 No notice was
required to trigger this consequence.
Consequently, we conclude the trial court erred in awarding Slaga
distributions that accrued during the default period. As we read the contract,
he was not entitled to receive distributions while he was in default (from
August 2007 until February 2009, when Stifano foreclosed on Slaga’s
ownership interest in Blind Dirt).
5. Attorney’s Fees
a. Additional procedural facts
After the conclusion of the bench trial to resolve the ownership dispute
over Blind Dirt, Stifano filed a motion requesting that the trial court
(1) determine he was the prevailing party, and (2) order Slaga to pay his
reasonable attorney’s fees. Stifano’s memorandum in support of his motion
pointed to fee provisions in the Promissory Note and the Pledge Agreement,
13 Whether the provision means Slaga completely forfeited his
distributions by defaulting, or could later receive the distributions if he cured
the default, was also a contested issue. But it is one we need not resolve
because Slaga never properly cured his default.
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and then requested compensation for the value of his attorney’s work,
encompassing the billed hours of four individuals at Ravin Glovinsky, LLP
(RG)—attorneys Ravin, Glovinsky, and Ferrell, and paralegal Coan. The
memorandum did not differentiate between work done on the various claims
for which RG represented Stifano.
Slaga opposed the motion on precisely these grounds, arguing the
requested amounts were inflated because they appeared to reflect all of RG’s
billing to Stifano, which would have improperly included both attorney hours
related to the “contract” dispute14 between Slaga and Stifano and the work
on Stifano’s claim against CMKR. This lack of differentiation, Slaga argued,
rendered Stifano’s request excessive and unreasonable, and demonstrated
that he had failed to carry his burden on the fee motion.
In reply, Stifano asserted that apportionment of the fees was not
necessary because the work was so inextricably intertwined that it would be
impossible to differentiate. But in the same filing, Stifano undermined the
main thrust of that argument by submitting a declaration from Attorney
Ferrell, who identified a small percentage of his billing as exclusively
dedicated to Stifano’s action against CMKR. The reply suggested that, if it
saw fit, the trial court could deduct that amount from the requested fee
award.
In its statement of decision, the trial court determined that Stifano was
the prevailing party but declined to award him any fees because his motion
failed to address the allocation of attorney work between the different claims.
It noted that although it would not consider the Ferrell declaration because it
14 This might be more clearly labelled the Blind Dirt ownership dispute—
but regardless, it was sometimes referred to as the contract action to
distinguish it from the actions involving CMKR.
20
constituted new evidence submitted in reply papers, the declaration
effectively demonstrated that RG had impermissibly included billings in its
motion for fees that “should have been allocated to the non-contract related
claims.” Since it could not “arrive at an allocation [of fees] in the absence of
any evidence,” the trial court denied the motion.
Stifano now challenges the denial, arguing the trial court entirely
ignored the contractual language that entitles him to fees. He urges a literal
construction of certain broad language that would make Slaga responsible to
pay for any of Stifano’s attorney’s fees in any action bearing some connection
to the Promissory Note. In our view, however, this reading of the Note would
stretch the scope and coverage of the fee provision beyond reasonable bounds.
b. Analysis
Where, as here, the trial court’s contractual interpretation does not
involve the credibility of extrinsic evidence, we apply de novo review. (People
ex rel. Lockyer v. R.J. Reynolds Tobacco Co. (2003) 107 Cal.App.4th 516, 520.)
In doing so, we adhere to the “ ‘statutory rules of contract interpretation’ ”
and look first to the “ ‘written provisions of the contract’ ” to infer “ ‘the
mutual intention of the parties at the time the contract [was] formed.’ ” (In re
Marriage of Lafkas (2015) 237 Cal.App.4th 921, 932; Civ. Code, § 1636.)
The fourth paragraph of the Promissory Note, entitled “Costs of
Collection,” states as follows:
“Maker [Slaga][15] promises to pay all costs, expenses, and
attorneys’ fees incurred by the holder hereon in the exercise
of any remedy (with or without litigation), in any
proceeding for the collection of the debt, or in any litigation
or controversy arising from or connected with this Note.
Said proceedings shall include, without limitation, any
15 As noted previously, this document indicates that “Maker” refers to
Slaga and “Payee” refers to Stifano.
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probate, bankruptcy, receivership, injunction, arbitration,
mediation, or other proceeding, or any appeal from or
petition for review of any of the foregoing. Maker shall also
pay all of Payee’s [Stifano] costs and attorneys’ fees
incurred in connection with any demand, workout,
settlement, compromise or other activity in which Payee
engages to collect any portion of this Note not paid when
due or as a result of any other default of Maker. If Payee
obtains judgment hereon which includes an award of
attorneys’ fees, such attorneys’ fees, costs and expenses
shall be in such amount as the court shall deem reasonable
. . . .” (Italics added.)
Stifano’s interpretation that Slaga was contractually obligated to pay
the fees he incurred in litigation with CMKR relies on the first sentence in
the costs of collection paragraph, taken in isolation—that the Maker will pay
the Payee’s attorney’s fees from “any litigation” that is “connected with this
Note.” Stifano thus advances a reading of the first sentence that would
impose liability on Slaga to pay attorney’s fees incurred by Stifano in any
litigation, against any party, for any amount, regardless of the outcome, so
long as it involved some “connection” to the Note. If this were the intended
meaning, Slaga would have essentially agreed to personally insure Stifano’s
legal rights with respect to the Note and fund any litigation he might wish to
pursue against any party that could be loosely “connected” to the Note.
But the rest of the paragraph provides context and indicates there are
some limits beyond a mere “connection” to the Note. The second sentence
clarifies that the provision’s scope includes actions in different types of
courts, such as probate and bankruptcy, and also formal alternative dispute
resolution forums, such as arbitration and mediation. The third sentence
expands on this general theme, indicating that fees incurred in less formal
settlement activities are still within the scope of the provision. In this third
sentence, the provision specifies that the kind of activity “in which Payee
22
engages” that is covered by the provision is activity “to collect any portion of
this Note not paid when due or as a result of any other default of Maker.”
Given this language, it appears that the provision contemplates some
causal connection between Slaga’s conduct and the expenses incurred by
Stifano that Slaga would be responsible to pay. Some controversies between
Stifano and third parties concerning the Note might conceivably come under
that umbrella. The most reasonable reading, however, would limit those to
(1) expenses and fees Stifano incurred in order to collect on the Note and/or
(2) expenses and fees that resulted from a default by Slaga.
The fourth and final sentence of the paragraph also provides
limitations and further clarity by indicating that, in a litigation context,
Stifano could only recover reasonable fees from Slaga, and only if he had a
judgment for fees as the prevailing party. Read as a whole, the entire
paragraph indicates that Slaga’s liability for legal fees and costs incurred by
Stifano has reasonable limits—necessitating something more than a topical
“connection” to the Note. At a minimum, the expenses must be caused by
Slaga’s failure to fulfill his obligations to Stifano before he can reasonably be
made responsible to pay the fees.
We find further support for this interpretation by looking to the fee
provision in the Pledge Agreement. We consider these two provisions
together to discern the intent of the parties, since they contain references to
each other, and were drafted and signed in tandem as part of the same deal.
(Heston v. Farmers Ins. Group (1984) 160 Cal.App.3d 402, 417 [“[D]ocuments
[that] are interrelated . . . must be read together for purposes of
interpretation.”]; Cadigan v. American Trust Co. (1955) 131 Cal.App.2d 780,
783–784 [“[W]ritings . . . made as parts of one transaction . . . are to be taken
23
together.”].) The Pledge Agreement, which includes a fee provision in
paragraph B(9), reads as follows:
“In any suit or proceeding brought or instituted by any of
the parties[16] to enforce or interpret any of the provisions
of this Agreement or on account of any damages sustained
by any party by reason of violation by another party of any
of the terms or provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorney’s fees
in such amount as shall be fixed by the court.”
Here, the attorney’s fees recoverable are limited to fees determined by
the court, and also appear to be confined to enforcing the rights of the parties
under the agreement in litigation brought by one of the parties against the
other. The existence of this decidedly more limited fee provision is further
reason for caution with Stifano’s proposed broader reading of its counterpart.
In the end, Stifano urges a literal reading of one sentence to the
exclusion of the moderating language that surrounds and informs it.
Adopting his construction would both “deny the relevance of the intention of
the parties” as exemplified in the remaining contractual text concerning fees,
and also require that we assign the most literal and abstract meaning to
certain words, which “presuppose[s] a degree of verbal precision and stability
our language has not attained.” (Pacific Gas, supra, 69 Cal.2d 33, at p. 37.)
California courts have long performed a more contextual and holistic form of
contractual interpretation, and we follow that tradition here.
A practical and sensible construction of the fee provision in the Note
does not support Stifano’s position that Slaga should be forced to bear any
and all legal fees vaguely connected with it. Accordingly, Stifano was not
entitled to recover all his attorney’s fees. And because Stifano made no
attempt to differentiate the fees he incurred to collect payment on the Note
16 Stifano and Slaga are the parties to the agreement.
24
from Slaga (or, in lieu of payment, secure his right to the collateral), we
cannot say the trial court abused its discretion in concluding that Stifano
failed to meet his burden on the attorney’s fee motion. (ComputerXpress, Inc.
v. Jackson (2001) 93 Cal.App.4th 993, 1020 [when a party is entitled to
recover attorney’s fees related to some claims but not others, “the parties
seeking fees and costs . . . ‘bear[ ] the burden of . . . documenting the
appropriate hours expended and hourly rates’ ”and of “produc[ing] records
sufficient to provide ‘ “a proper basis for [the trial court to] determin[e] how
much time was spent on particular claims” ’ ”], quoting Hensley v. Eckerhart
(1983) 461 U.S. 424, 437, fn. 12.)
DISPOSITION
The judgment is reversed only insofar as it awards Slaga distributions
and interest that he was contractually barred from receiving. In all other
respects, the judgment is affirmed. The postjudgment order on attorney’s
fees is affirmed. The parties shall bear their own costs on appeal.
DATO, J.
WE CONCUR:
HALLER, Acting P. J.
IRION, J.
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