Court: California Supreme Court; August 21, 1968; California; State Supreme Court
Defendants Michael H. duPont and his wife appeal a judgment in a declaratory relief action initiated by United States Leasing Corporation (USLC) to enforce their liability under a written guaranty related to a lease for restaurant and kitchen equipment leased to Cal-West Aviation, Inc. Cal-West, led by president Howard S. Harper, sought to operate a ferryboat restaurant named 'Harper's Ferry' in San Carlos, California.
On February 23, 1961, USLC provided a lease commitment letter to Cal-West, which Harper acknowledged in writing. This letter detailed a $100,000 lease commitment, requiring a deposit of $10,510 and stipulating that the commitment was effective until April 15, 1961, contingent upon several conditions, including a continuing guaranty from the defendants, a pledge of acceptable securities, and quarterly personal statements from the defendants.
Alongside this commitment, USLC and Cal-West executed a lease agreement that outlined the terms of the lease, including provisions on usage, inspections, repairs, and lessor rights regarding default and bankruptcy. Notably, the lease referenced schedules that were not included or attached. Later that day, the defendants executed a guaranty form and a supplementary agreement in Los Angeles, fulfilling specific conditions of the lease commitment letter.
Defendants have guaranteed, upon demand, the payment of all rents and other sums due under a lease dated February 23, 1961, with a maximum liability of $135,120. USLC received a $150,000 purchase order from Cal-West, executed by a construction company, and issued a confirming order to pay the supplier only upon receiving title to the equipment and Cal-West's acceptance of it. Despite this, on March 7, at Cal-West's request, USLC made a $50,000 progress payment to the supplier, securing 'Schedule No. 1,' which stipulated a total rent of $51,500 over three months, with an advance payment for vendor progress payments noted. This schedule was created to document Cal-West's immediate indebtedness and to compensate USLC for its early payment.
Subsequently, on March 9, USLC approved an additional $50,000 commitment to Cal-West, which was accepted on March 27. An extension of this commitment was executed on March 20 and accepted on April 19, but no copies were provided to defendants. 'Schedule No. 2' was executed on April 5, calling for a $102,000 rent payment due in two months, without immediate cash advances from USLC. A $100,000 letter of credit was issued to the supplier, but no draft was written against it. By April 5, the supplier had not shipped the equipment, and USLC was not obligated to pay the invoice. However, invoices totaling approximately $100,000 were received on April 20, and by May 31, Cal-West's contractor approved these invoices and requested payment from USLC.
In late May, defendants' attorney informed USLC of Cal-West's financial difficulties and suggested terminating the transaction. On May 22, defendants issued a written notice to revoke the continuing guaranty and to proceed against Cal-West. By June 6, Cal-West defaulted under Schedule No. 2 and, by June 9, under Schedule No. 1, with total defaults aggregating $153,000.
On June 9, Cal-West initiated a Chapter XI bankruptcy petition. USLC had only received a $500 payment related to Schedule No. 1. On June 16, USLC demanded $51,000 in overdue rent under the lease and stated that an additional $100,000 payment to the supplier would obligate Cal-West and the defendants under Schedule No. 2, also requesting a financial statement and a $100,000 collateral deposit. By June 20, as debtor in possession, Cal-West approved a supplier invoice totaling $136,429.96, requesting USLC to pay $86,429.96 after deducting an advance payment of $50,000. Around this time, USLC locked Cal-West's aircraft hangars where equipment was stored.
On February 28, 1962, USLC filed an application for reclamation of personal property and a creditor's claim in the bankruptcy proceedings, seeking the return of equipment and allowance for an unliquidated claim due to breach of lease agreements. The trustee counterclaimed, alleging USLC had converted Cal-West's property for its own use. The supplier's claim was settled by USLC for $81,322.87, and on April 30, 1962, USLC filed for declaratory relief, asserting that the defendants were liable under their guaranty for rental payments totaling $135,120 plus interest and required collateral deposits. The defendants denied liability, arguing that their guaranty was contingent on a lease that had not materialized and questioned the impact of Cal-West's executed schedules.
USLC's bankruptcy application and the trustee's counterclaim were postponed to allow USLC's declaratory action against Michael DuPont to proceed to trial. The restaurant equipment was sold by the trustee on May 10, 1963, with proceeds held pending court order. The trial court found that the defendants guaranteed USLC against economic loss due to the lease commitment up to $135,120, that USLC relied on this guaranty for its purchase order, and that the guaranty became irrevocable upon USLC incurring liabilities. The court also determined that Cal-West's execution of the schedules did not materially alter its obligations to USLC, and that USLC demanded compliance with the guaranty, which the defendants refused.
Defendants are liable to USLC under a guaranty for amounts disbursed for purchasing restaurant and kitchen equipment, including interest, attorney fees, and other costs. Defendants raise several defenses:
1. The two schedules included in the lease changed the principal contract without their consent, which they argue should release them from liability, despite an anticipatory consent clause in the guaranty.
2. They claim there was a prior undisclosed agreement to increase the lease commitment by 50%, and USLC's failure to disclose this constituted constructive fraud, rendering the guaranty void.
3. They assert that USLC's failure to require a deposit from Cal-West as stipulated in the agreement released them from liability, and misrepresenting that the deposit had been received also discharged them.
4. They contend that even if they are not released from liability, they owe nothing under the guaranty since Cal-West incurred no liability under the lease.
5. They argue that the damages and interest awarded were contrary to law.
The court found the fourth contention valid, concluding that defendants do not owe USLC any liability under the guaranty, thus not addressing the other defenses. The court emphasizes the need to interpret the guaranty according to its express terms and the agreement it guarantees, noting that a surety is only bound to the terms of their contract. The guaranty explicitly obligates defendants to pay all rents and sums under the lease and perform the required terms, with provisions allowing adjustments to Cal-West's indebtedness without affecting defendants' liability. However, the lease executed on February 23, 1961, had no subject matter at that time, which influences the determination of defendants' obligations.
The leased property was to be detailed in a schedule that had not been executed concurrently with the lease, necessitating subsequent schedules to be incorporated for operational purposes. These schedules were intended to outline the machinery, equipment, lease term, and rental payments. The parties agreed that the obligations guaranteed by the defendants could be determined by examining both the lease form and the lease commitment letter provided at the time of the guaranty execution. Together, these documents indicated that the lease involved $100,000 of restaurant and kitchen equipment over an 8-year term with specific payment structures.
USLC argued that the defendants guaranteed the entire transaction entered into by Cal-West, which included obligations from both the lease and the lease commitment letter, supported by surrounding circumstances. Key evidence included USLC's condition to not order equipment until receiving necessary documents from Cal-West and the commencement of the lease term upon the identification of equipment by purchase orders.
The trial court concluded that the defendants guaranteed USLC against economic loss, thus encompassing obligations under both agreements. However, upon review, it was determined that the defendants only guaranteed Cal-West's performance of the lease, with a defined limit of liability, and did not bear responsibility for USLC's economic losses or reimbursements related to equipment acquisition. The guaranty was specifically for periodic rent payments and lease performance, not for the overall costs incurred by USLC. Additionally, the confirming purchase order stipulated that USLC's obligation to pay was contingent upon Cal-West's acceptance of the equipment and approval of the supplier's invoice.
USLC's claim regarding the timing of economic loss covered by the defendants' guaranty is unfounded. The lease commitment letter specifies that USLC's economic risk would only arise after rental designation, linked to an invoice process whereby USLC would issue a payment schedule based on a 'Lease Payment Proposal' post Cal-West's acceptance of the invoice. The trial court's finding that defendants guaranteed USLC against all economic loss is unsupported.
The court also concluded that the equipment referenced in Cal-West's February 23, 1961 purchase order pertained to the lease commitment letter, and that USLC's confirming purchase order rendered the guaranty irrevocable for liabilities incurred up to the specified limit. However, USLC's purchase order exceeded the lease commitment amount of $100,000 by $50,000, thereby obligating USLC to pay for additional equipment not covered by the original lease.
The trial court noted that both parties intended to formalize an oral agreement for USLC to purchase equipment totaling $150,000, but it was established that defendants only guaranteed Cal-West’s performance related to the initial $100,000 lease. A surety cannot be held beyond the express terms of their contract, and the guaranty did not allow for increases in the equipment amount post-execution unless explicitly stated. Thus, the provisions allowing USLC to alter the lease did not extend the guaranty to cover the increased amount of equipment.
Finally, since the principal (Cal-West) is not liable for the obligation under the revised terms, the guarantor (defendants) similarly cannot be held liable. The liability of a surety cannot exceed that of the principal, affirming that the defendants are not responsible for the additional liabilities stemming from the increased equipment amount.
Liability for the defendants as guarantors cannot be established unless Cal-West is found liable under the lease. The trial court determined that the defendants guaranteed USLC against economic losses related to the lease, but did not assess Cal-West's liability under the lease independently. Legal interpretation of the lease and related documents, in conjunction with uncontradicted extrinsic evidence, is necessary for determining liability. The lease specified that rent for equipment was to be paid in advance as outlined in a schedule. After Cal-West filed for bankruptcy on June 9, 1961, it had already accepted approximately $100,000 worth of equipment. The lease included an invoice procedure stating that payment schedules would be issued upon the acceptance of approved invoices. However, only interim Schedules Nos. 1 and 2 were executed after USLC made progress payments; these were not the final schedules required by the lease. The trial court found these interim schedules were intended as temporary and would be replaced by a final schedule. Liability for rent under the lease must be assessed based on the guaranty provisions allowing USLC to modify payment terms, but these provisions do not authorize the interim schedules to fall under the guaranty. The basic lease terms were outlined in the commitment letter, which detailed fixed payments and required equipment acceptance by a specific date. Schedule No. 1 required Cal-West to pay $51,500, while Schedule No. 2 called for a payment of $102,000, both framed as 'rent' for progress payments to the vendor.
The testimony from the USLC secretary and counsel clarified that "Advance Payment" referred to the amounts USLC had paid or planned to pay suppliers, with the schedules primarily serving as evidence of Cal-West's debt to USLC for these payments. The schedules did not detail the leased property as required and did not link the payment of 'rent' to the delivery or acceptance of equipment by Cal-West. Instead of establishing a rent obligation of $100,000 for equipment leasing, the schedules indicated that USLC made advance payments totaling $150,000 for equipment purchases. They were intended to secure reimbursement for these costs in case a final schedule was not executed. Consequently, Cal-West's obligation was not to pay rent of $135,120 over eight years but rather an unconditional reimbursement of $153,500 within three months, including interest on the equipment costs.
The court found that no final lease schedule had been executed due to Cal-West's bankruptcy, but this alone did not establish liability for Cal-West or the defendants. The lease contained a clause addressing bankruptcy, allowing USLC to terminate the lease and pursue remedies if bankruptcy proceedings occurred. However, since no rent payments were due at the time of Cal-West's bankruptcy, USLC had no remedies available under the lease. The absence of issued schedules designating rent meant the bankruptcy clause could not create a rent liability for Cal-West. Furthermore, USLC was not pursuing remedies under the lease itself but was instead seeking payment based on the collateral schedules that did not specify any rent obligations.
On June 16, a demand letter from USLC to the defendants stated that $51,000 in rent due on June 8, 1961, had not been paid by Cal-West, prompting USLC to demand payment. The record indicates that USLC terminated the lease when Cal-West filed for bankruptcy. USLC's secretary explained that a final payment schedule was not issued due to the lease's bankruptcy provision, allowing USLC to legally terminate the transaction. Although the trial court did not explicitly find the lease terminated, it acknowledged that no final schedule was executed due to Cal-West's bankruptcy. USLC sought recovery based on Schedules Nos. 1 and 2, which were collateral to the lease and not covered by the defendants' guaranty. The court did not address whether these schedules materially altered the lease without the defendants' consent but concluded that the defendants incurred no liability under the guaranty since none had accrued. Consequently, USLC could not complain about the defendants' failure to provide financial statements or collateral. The court reversed the judgment, directing the trial court to amend its findings and enter judgment in favor of the defendants. The petition for rehearing was denied on September 18, 1968. Notes indicate that other conditions related to the case, such as a chattel mortgage on a ferryboat, were not relevant to the appeal.
Upon receiving an invoice from the vendor, it will be forwarded for approval. After the approved invoice is returned, a payment schedule will be established based on the Lease Payment Proposal figures. Payment to the vendor will follow once the schedule is accepted. The liability of the Guarantors is capped at $135,120 but may allow for Lessee's obligations to exceed this amount. Guarantors authorize the Lessor to adjust the lease terms, including payment schedules, without notice, and may assign or modify the lease agreement. The purchase order includes all costs associated with the equipment, revealing a discrepancy between the lease commitment of $100,000 and a $150,000 purchase order, attributed to an internal error. Despite the supplier's invoices being initially rejected due to an unpaid progress payment, a revised invoice reflecting this credit was later approved for payment. Lastly, it remains uncertain whether the defendants justified USLC's termination based on financial conditions or bankruptcy clauses in the lease.
USLC has the authority to demand additional collateral from Cal-West Aviation, Inc. or its Guarantors if it deems the existing security inadequate. Upon receiving written notice from USLC, the Guarantors must provide satisfactory collateral within ten days. A judgment holds the defendants jointly and severally liable to pay USLC $131,322.87 plus interest, which includes $13,646.49 for expenses related to equipment protection and attorney fees from Cal-West's bankruptcy, and $14,180.61 for attorney fees in the current action. Any funds USLC receives from bankruptcy proceedings will be credited against the defendants' liabilities. Additionally, the defendants must deposit collateral valued at no less than $150,000 with USLC.
The amendment to Civil Code section 2787 removed distinctions between sureties and guarantors, applying all suretyship laws to guaranties. The Guaranty executed by the defendants was intended to protect USLC from economic losses related to the lease commitment, limited to $135,120. The lease commitment letter, accepted by Cal-West, does not explicitly hold Cal-West liable for any economic loss incurred by USLC. Instead, Cal-West's potential liability appears to stem from a breach of the agreement to implement the lease, with damages determined by the lease terms rather than USLC’s purchase price.
During trial, USLC sought to introduce the lease commitment letter and related documents to assert that the entire transaction was guaranteed by the defendants. However, the defendants objected, citing that their guarantee was limited to Cal-West's performance under the lease and that the documents aimed to alter the agreement's terms, violating the parol evidence rule. The trial court allowed the lease commitment letter for explaining the lease but rejected the lease payment proposal while admitting the purchase order to demonstrate USLC's actions in procuring property in line with the lease terms.
On February 23, 1961, Cal-West, through an authorized agent, placed a purchase order for restaurant and kitchen equipment, which linked to a guaranty from defendants that became irrevocable upon acceptance of USLC's order, capping liability at $135,120. The guaranty did not encompass any increased obligations of Cal-West beyond this limit. In case of default on rental payments or lease obligations, the lessor has several remedies, including declaring all rent due, suing for accrued payments, repossessing equipment without notice, terminating the lease, and pursuing other legal or equitable remedies. Even with repossession, Cal-West remains liable for all lease obligations. The provision for Cal-West to pay USLC's costs and attorney fees upon exercising rights under the lease is not applicable, as USLC has no available remedies. Additionally, since no rent was reserved and no other sums were due, the interest provision for late payments is also not applicable. A demand letter indicated that USLC would expect Cal-West to fulfill obligations related to a $150,000 lease, with a $100,000 outstanding payment to the manufacturer. If Cal-West fails to meet this obligation, defendants would be called upon under their guaranty. A subsequent demand from June 19 requested $100,000 in cash or marketable securities as collateral for the guaranty due to Cal-West's bankruptcy filing. The provisions for attorney fees and costs in enforcing the guaranty are deemed inapplicable based on the conclusion that defendants have no enforceable liability.
