CIVIL MINUTES - GENERAL
GARY ALLEN FEESS, District Judge.
Proceedings: (In Chambers)
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This memorandum constitutes the Court's findings of fact and conclusions of law following a bench trial held on October 9 through 11, 2013.
Freyr Holdings, LLC, ("Freyr") operated by principals Bill Lui and Richard Marshall, sues Legacy Life Advisors, LLC, and individuals Derek A. Siewert and William Hutchison (jointly "Defendants") for breach of contract and a common count for money had and received. Freyr contends that it was retained by Defendants to assist them: (1) in securing a potential investor contemplating investments in large face-value life insurance policies (referenced in this memorandum as "life settlements") and (2) thereafter obtaining and delivering such policies to Defendants for sale to the investor in exchange for an acquisition fee that Freyr and Defendants would share. After several months of work and due in significant part to Lui's efforts, Defendants secured a hedge fund, ITC Holdings, LLC ("ITC"), as a client that, over a relatively short time period, invested slightly more than $50 million in life settlements, which generated a fee in excess of $2.5 million that was paid to Defendants. Despite Freyr's work on behalf of Defendants over the period from July 2007 to late summer 2008, Defendants retained the entire acquisition fee and paid Freyr nothing. As part of a failed accord, Defendants paid Freyr $25, 000, and then breached that agreement, which led to this lawsuit in which Freyr claims half of the acquisition fee ITC paid Defendants.
After the presentation of evidence, the Court heard closing argument and received closing briefs from the parties. As discussed in greater detail below, the Court finds and concludes that the parties entered into an oral contract whose terms were both express and implied in fact. Although the parties exchanged competing written drafts that were apparently intended to memorialize and refine the details of their agreement, the agreement was never reduced to writing. Nevertheless, the parties had reached agreement on the material terms of the contract, and Freyr provided the bargained-for services sought by Defendants who breached the agreement by failing to pay Freyr its portion of the sales fee. The Court will enter judgment in favor of Freyr and against the individual defendants; the Court will enter judgment in favor of Defendant Legacy Life Advisors, LLC, because it was not a party to the agreement.
Because the Court's findings are bound up with the general principles of contract formation, the Court will begin with a brief discussion of those principles to put the factual discussion in an appropriate legal context.
A. CONTRACT PRINCIPLES
In first year contracts, one learns that a contract's scope, terms and conditions must be determined objectively through words, written and spoken, and actions taken. The unspoken intentions of a party to a contract impose no obligation on any other party to the same agreement. Thus, the law provides that a contract is formed only when and to the extent that "the parties all agree upon the same thing in the same sense." Bustamante v. Intuit, Inc. , 141 Cal.App.4th 199, 208 (Cal.App. 6th Dist. 2006); Cal. Civ. Code § 1580; see generally Banner Entertainment, Inc. v. Superior Court , 62 Cal.App.4th 348, 357-358 (Cal. App.2d Dist. 1998) (citing Louis Lesser Enterprises, Ltd. v. Roeder , 209 Cal.App.2d 401, 404-405 (Cal. App.2d Dist. 1962); Apablasa v. Merritt & Co. , 176 Cal.App.2d 719, 730 (Cal. App.2d Dist. 1959); Kessinger v. Organic Fertilizers, Inc. , 151 Cal.App.2d 741, 749-750 (Cal. App.2d Dist. 1957).)
The subjective state of mind of either party to a contract has no bearing on the terms of a contract; rather it is the outward manifestation of consent from which the parties' intentions can be gathered that determines the scope and content of their agreement. Patel v. Liebermensch , 45 Cal.4th 344, 352 (2008); Brant v. Calif. Dairies , 4 Cal.2d 128, 133 (1935). "The mere state of mind of the parties is not the object of inquiry. The terms of the contract are determinable by an external, not by an internal standard-or by what has been termed the objective rather than the subjective test." Zurich etc. Assur. Co. v. Industrial Acc. Com. 132 Cal.App. 101 , 104 (1933). The agreement must be determined through some combination of written or spoken words and conduct. 1 Witkin, SUMMARY OF CALIFORNIA LAW, Contracts § 117, at 156-57 (10th Ed. 2005).
The objective theory of contract is especially important in the Court's consideration of the evidence in this case. The Court's decision is based on its conclusion that the Defendants' claims regarding contract terms at most reflect their unstated subjective intent formed at some point during their relationship with Lui and Marshall and more probably amount to an after-the-fact effort to alter the deal. In either case, the objective evidence establishes that the parties reached an agreement that Freyr and its principals would assist Defendants for a 50% share of the ITC fee, that Freyr and its principals provided the requested assistance, and that Defendants failed to pay any portion of that fee for the services that were rendered. The following sets forth the details.
The Court takes the unusual step of addressing credibility issues at the outset because the only witnesses who testified were principals in the relevant transactions, all of whom have a substantial interest in the outcome of this case and who, on a number of critical issues, have offered irreconcilable versions of events. This has left the record muddied in many respects, which is an apt reflection of the way these parties conducted their business. The five men who testified at trial, despite their substantial education and business experience, never got around to documenting the terms of their business arrangement. Their effort to reduce their agreement to writing was a complete failure leaving the Court with competing drafts that widely differ in their terms and conditions. (Compare Exs. 4 and 10.) And yet there is no question that the parties reached some agreement and that Freyr performed under that agreement for nearly a year until the 2008 financial crisis and events in the field of life settlements caused the investments sold to ITC to lose substantial value. In the embarrassing aftermath, the parties have spent the last three years in litigation pointing fingers at each other rather than pursuing a rational attempt at reaching a reasonable settlement. The Court must now sort out the arguments and decide who should be believed.
In these circumstances, the Court has taken the following approach. First, where possible, the Court has attempted to square the testimony of witnesses with the documentary record, such as it is, and to determine whether there was a reasonable explanation where the testimony varied from the documentary record. In some cases the documentary record was helpful; in others not so much. Second, the Court attempted to determine what testimony was reasonable and logical given the factual context in which the events occurred. Through these means, the Court has generally concluded that Freyr's witnesses were more credible than the defense witnesses and presented a more cogent version of the relevant events. Two aspects of the case were critical to this conclusion.
First, in assessing the probabilities associated with the conflicting stories regarding the terms and conditions of the parties' agreement, the evidence discussed below establishes that Defendants needed and sought out Plaintiffs to assist them in securing funding from an institutional investor with whom they had a connection. (See, e.g., II.C.1. infra; Docket No. 114, 1 R.T. 25..) The evidence was uncontradicted that Lui and Marshall, two principals in Freyr, had substantial experience and expertise in the field of life settlements in 2007, and that Defendants hoped to take advantage of that experience and expertise. (II.C.1., infra.) Defendants needed this expertise to realize the potential income to be generated if the investor could be persuaded to invest millions of dollars in life settlements. (Id.; 1 R.T. 27.) On the other hand, while Lui and Marshall were certainly happy to develop a relationship with another purchaser of life settlements, the uncontested evidence established that they already had several other sources purchasing life interests from them when Lui was approached by Hutchison and Siewert to promote Defendants' project. (E.g., R.T. 134-35.) Because Lui and Marshall were plainly in a superior bargaining position, Defendants' contention, for example, that Lui and Marshall would bear the obligation to purchase the policies for investment and retain the obligation to service the policies that were sold to ITC, while handing over half of Freyr's commission income generated on the transactions, is extremely unpersuasive. In short, the relative bargaining positions of the parties undermines Defendants' assertions that Lui and Marshall made substantial concessions to participate in an endeavor that might not have generated any business at all.
Second, where documentation exists, it generally supports the version of events described by Lui and Marshall. For example, there is very little question that, when Defendants' failed to share with Freyr the acquisition fee payments received in the first quarter of 2008, a dispute arose that was resolved through an accord reached in April 2008. Defendants now dispute that such an agreement was reached even though the accord is referenced in a number of documents. (E.g., Exs. 27-29; 32, 34-36, 37, 39.) The documents at least implicitly acknowledge that an agreement was reached (e.g., Exs. 32, 37), and Defendants cannot deny that a payment of $25, 000 was made to Freyr toward that obligation. (E.g., Ex. 39.) When a party testifies to facts directly contrary to unimpeachable contrary evidence, his testimony is not entitled to much weight.
Although less blatant, Defendants claimed that at a meeting in New York, Lui reviewed and approved their December 2007 draft agreement that, among other things, allegedly contained provisions that Freyr share its commissions with Defendants and undertake detailed servicing of all policies sold to ITC. (3 R.T. 18-22.) Lui agreed that he met Defendants in New York in or about December 2007, but flatly denied that any such agreement was presented. (4 R.T. 131-32.) Lui's testimony is consistent with the documentary record, which contains no reference to Defendants' draft of an agreement with Freyr until after the agreement with ITC was signed. Siewert emailed Lui on January 7, 2008, indicating that the draft agreement between Defendants and Freyr was being prepared and that "Adam should have the draft for you tomorrow." (Ex. 6.) The draft was not delivered until January 9, 2008, at which time Lui forwarded it to Erik Nord, who was an attorney. (Ex. 4.) It is therefore clear that Defendants' draft of an agreement with Freyr was not concluded until the agreement with ITC was documented. Thus, to the extent that any document was being drafted in early to mid-December, it was in all likelihood the agreement between Defendants and ITC. (Ex. 5.) In short, the Court finds that Lui did not review a contract with Defendants in December because it did not exist at that time. This is discussed further below.
Finally, the Court briefly notes that, considering the demeanor and manner of the witnesses who testified, Lui impressed the Court as the most credible. Lui presented himself as a consummate professional who gave his best recollection of the events of 2007 and 2008. What the Court observed is consistent with Defendant Siewert who, in an email in which he was introducing a third party to Bill Lui, wrote: "I have known Bill for over a year now. He is very honest and has a great business sense. We are working with him as he is sourcing 100% of the product we are purchasing." (Ex. 14.) Marshall was credible with respect to the operation of his end of the business, but he was not present at any meetings before March 2008 and therefore had nothing to say regarding contract formation. The defense witnesses were less impressive.
In short, where the parties present directly opposing versions of the facts and there is nothing in the record on the specific issue to assist in resolving the conflict, the Court has given greater weight to the testimony of Lui and Marshall over that presented by the defense witnesses.
C. THE TRANSACTIONS
1. The Initial Negotiation
In the 2005-06 time period, Bill Lui, who later became a principal in Freyr Holdings LLC, worked at Plainfield Asset Management ("Plainfield") where he was engaged in management consulting and hedge fund investing with a specialty in life settlements - the investment in life insurance policies purchased from the policy holder. (1 R.T. 17-18.) Through his work at Plainfield, Lui met Hutchison and Alberti, who were involved in a venture attempting to purchase a hospital on Long Island. (1 R.T. 21-22.) Although that project apparently never got off the ground, Hutchison and Alberti learned of Lui's expertise in the life settlement field. (Id. 22-23)
In late spring or early summer of 2007, Siewert, a friend of Hutchison's, had contact with an unnamed investor who was interested in the possibility of making multi-million dollar investments in life settlements. (4 R.T. 13.) Hutchison and Alberti then contacted Lui to begin discussions with him about the possibility of assisting them in the promotion of life settlement interests to an unnamed potential investor. (Id. 23-24, 26-28.) At about that time, Hutchison and Alberti brought Siewert into their discussions and arranged to meet with Lui in Connecticut in approximately June 2007. (Id. 25.) Neither Hutchison nor Siewert, who both had some experience in the insurance industry, had experience in the promotion of investments in life settlement interests and therefore sought out Lui because of his expertise in managing this specific type of investment program. (Id. 26-27.)
As a result of these meetings, Lui, Hutchison, Siewert and Alberti in or about July 2007 reached an understanding that Hutchison and Siewert, with Lui's assistance, would continue in their effort to secure the investor as a funding source, and if successful, would use Lui to analyze and supply Defendants with policies to be sold to the funding source; Lui's work would include an assessment of the value of policies based on a number of factors such as age, health status, amount and duration of premium payments, and the like. (Id. 29, 42.) Defendants would have the right to conduct their own evaluation of the policies supplied by Lui and had the right to reject policies that were presented to them. (2. R.T. 18.) Alberti would act as the trustee of the trusts that owned the insurance policies. (Id. 44.)
Lui made the financial term of the agreement clear: because the details of Defendants' agreement with the investor had not yet been worked out, he advised Hutchison and Siewert that he would do the deal for 50% of what they made from the investor. (Id. 31, 34.) Hutchison and Siewert agreed and accepted that proposal. (Id. 31.) Based on these conversations, Lui understood that Hutchison, Siewert and Alberti would have a direct contractual relationship with the investor, that they would receive payment of the entire fee, that they would account for the fees earned and would pay 50% of those fees to Lui, which Lui described as a standard arrangement in the industry. (Id. 33-34, 56.) Each party would bear its own expenses. (3 R.T. 38-39; 4 R.T. 72-73.) Based on what Defendants told him and his experience in the industry, Lui understood that he was entering into an agreement with Hutchison, Siewert and Alberti and whatever entity they formed in connection with the transaction. (Id. 34, 59; 2 R.T. 108.)
The parties spent the remainder of 2007 working on their project. (Id. 28-29, 97-98.) During that period, Lui spent 10 to 15 hours a week on the project and ultimately developed a portfolio of policies that he received from Richard Marshall. (Id. at 37.) After evaluating the policies, Lui delivered Siewert and Hutchison a portfolio containing approximately 76 life policies that were available for purchase. (Id. 35; Ex. 83.) By August 17, 2007, Siewert, who was in possession of the portfolio, notified Lui that he had a potential investor, and sought additional ...