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Inc. v. Dabney

California Court of Appeals, Sixth District

May 4, 2017

G & W WARREN'S, INC., Plaintiff and Respondent,
v.
JUDSON V. DABNEY, II, Defendant and Appellant

          Superior Court of Monterey County, No. M122308, Thomas W. Wills, Robert A. O'Farrell,[*] Judges.

Page 566

[Copyrighted Material Omitted]

Page 567

         COUNSEL

         Arent Fox and Halbert B. Rasmussen for Defendant and Appellant.

         Strong Appellate Law, Jeanine G. Strong; Dougherty & Guenther and Ralph P. Guenther for Plaintiff and Respondent.

         Opinion by Rushing, P. J., with Premo and Elia, JJ., concurring.

          OPINION

Page 568

          [218 Cal.Rptr.3d 78] RUSHING, P. J.

          We are confronted here with issues concerning the scope of a guaranty given to secure the buyer's obligations under a master agreement and various subsidiary agreements involving the purchase and sale of a motorcycle dealership. In addition, we address the circumstances under which the liability of the guarantor, by virtue of subsequent actions by the seller, may be exonerated.

         Granville and Wanda Warren (the Warrens), through their corporation, G & W Warren's, Inc. (G& W Warren's), owned and operated a Harley-Davidson motorcycle dealership in Salinas for approximately 38 years. Intending to retire, the Warrens contacted a potential buyer, Judson V. Dabney, II (Dabney), who owned a Harley-Davidson dealership in Riverside. In November 2006, G& W Warren's and Dabney executed various agreements to accomplish the sale of the Salinas dealership, including a master " Asset Purchase Agreement" (Agreement) that incorporated by reference the other agreements. One of those agreements was a " Letter of [218 Cal.Rptr.3d 79] Guaranty" (Guaranty) signed by Dabney, under which he " covenant[ed] and agree[d] ... to guarantee ... the collection and receipt of all amounts" required under section 2 of the Agreement, under the promissory note(s), and under the lease. The Agreement also provided that Dabney could assign his rights and obligations as buyer to a corporation that he controlled, and that such assignment would relieve Dabney of all obligations under the Agreement. Dabney assigned his rights under the Agreement to Monterey Motorcycles, Inc. (Assignee or MMI).

         Assignee ultimately defaulted on its obligations under the Agreement and the accompanying instruments, and the dealership was sold in August 2012 to a third party. G& W Warren's brought suit against Dabney. After a court trial based upon G& W Warren's claim that Dabney was liable under the Guaranty for Assignee's obligations, a judgment was entered in favor of G& W Warren's for the amount of $2,746,318.

         On appeal, Dabney contends that the court erred in finding him liable for $537,399 and $567,136 under the covenant not to compete agreement and two consulting agreements, respectively. He contends the Guaranty did not cover the obligations under those three agreements that were signed by the parties at the time of the sale. Dabney also argues that the court erred in finding him liable at all. He asserts that, by virtue of G& W Warren's having agreed with Assignee to extend the deadline for payments and having provided it with additional loans--concessions to which Dabney did not agree--he was exonerated from any liability under the Guaranty.

Page 569

         We conclude that the court erred in concluding that Dabney was liable under the Guaranty for Assignee's obligations under the covenant not to compete and two consulting agreements. We reject Dabney's other claim of error. Accordingly, we will reverse the judgment and remand the case with instructions that the trial court enter a new and different judgment in favor of G& W Warren's and against Dabney in the amount of $1,641,783.27, plus interest, costs, and attorney fees.

         PROCEDURAL BACKGROUND

         G& W Warren's alleged in the first amended complaint filed June 12, 2013 (complaint), a single cause of action for breach of contract against Dabney. It alleged that it entered into the Agreement, as seller (Seller),[1] with Dabney, as buyer (Buyer), in November 2006 for the sale of its Salinas motorcycle dealership for " $1,516,000.00, plus additional consideration." That additional consideration included amounts provided under a lease of the dealership space, a covenant not to compete executed by the Warrens, and separate consulting agreements signed by the Warrens. G& W Warren's alleged further in the complaint that the Warrens assigned their respective interests in the consulting agreements to G& W Warren's. The sale of the dealership closed escrow on or about March 1, 2007. G& W Warren's [218 Cal.Rptr.3d 80] alleged that the last payments on the obligations under the Agreement and accompanying instruments occurred in August 2012, and that Dabney had failed and refused to make further payments that were owing.

         Although no formal amendment of the complaint appears in the record, G& W Warren's proceeded to trial under the unpleaded theory that Dabney was liable under the Guaranty that secured Assignee's obligations under the Agreement and accompanying instruments involved in the sale of the dealership. In its pretrial brief, G& W Warren's noted that the Guaranty was not attached to complaint, but that it would seek leave to amend the complaint at trial to conform to proof. Further, at trial, counsel for G& W Warren's stated that his client was seeking recovery under the Guaranty of Assignee's obligations. Dabney raised no objection to G& W Warren's trial of the case under this theory of liability. And the parties' respective posttrial briefs concerned only Dabney's potential liability under the Guaranty.

Page 570

         After a court trial on September 22, 2014, and submission of the case to receive posttrial briefs, the court issued its tentative decision in favor of G& W Warren's. It found Dabney liable under the Guaranty and rejected Dabney's affirmative defenses. Formal judgment was later entered on January 22, 2015, awarding G& W Warren's damages against Dabney in the amount of $2,746,318.78, plus interest, costs of $1,281, and attorney fees according to proof in a separate proceeding. The monetary judgment was based upon the following components adduced through evidence presented by G& W Warren's accountant: $1,611,691.72 (promissory note), $198,167.20 (lease), $537,399.17 (covenant not to compete), $567,136.34 (consulting agreements), less $168,075.65 (escrow payment from subsequent sale of dealership). Dabney appealed from the judgment. On April 13, 2015, a modified judgment was entered, reflecting the inclusion of an attorney fee award of $23,805 in favor of G& W Warren's. Dabney thereafter filed a notice of appeal from the " order after judgment" identified as having been entered on the date of entry of the modified judgment.[2]

         DISCUSSION

         I. Summary of Relevant Agreements

         In order to effectuate the sale of the motorcycle dealership, the parties entered into the Agreement and various other instruments referenced in the Agreement. (Hereafter, the Agreement and other instruments referenced therein are referred to collectively as the purchase documents.) Although the precise date of execution of the purchase documents cannot be gleaned from the record, it is apparent that they were signed by the parties in November 2006.

         The Agreement provided in the opening paragraph that it was being entered into between G& W Warren's, as Seller, and [218 Cal.Rptr.3d 81] " 'Dabney' (subject to assignment under section 9.6 hereof to his designated corporation or other entity)," as Buyer. Included among the recitals were that Seller wished to sell, and Buyer wished to buy the motorcycle dealership and that the parties also wished to enter into a lease where the dealership was located.

Page 571

         The Agreement contained specific references to other instruments that were contemplated in the transaction, and the form of each instrument was attached to the Agreement. The remaining agreements signed by the parties consisted of, inter alia, (1) a promissory note in the amount of $1,016,000 signed by Dabney as Maker; (2) a five-year lease of the business premises signed by Dabney as Tenant, with monthly rent fixed at $31,400; (3) a covenant not to compete (noncompete agreement) signed by G& W Warren's, as Seller, the Warrens, as principals, and Dabney, as Buyer, calling for Dabney to pay the Warrens $8,333.33 per month for a term of five years ($500,000 total); (4) separate consulting agreements signed by Granville and Wanda Warren, as consultants, and Dabney, as Buyer, calling for Dabney to pay the Warrens $4,166.67 per month, each, for a term of five years ($500,000 total); and (5) a letter of guaranty signed by Dabney.

         II. Liability of Dabney as Principal

         Before addressing Dabney's chief claims of error, we consider the question of Dabney's liability as the principal obligor under the purchase documents. A brief review of this issue is necessitated by the ambiguity created by the allegations of the complaint, as compared with the theory of the case presented by G& W Warren's at trial.

         Dabney asserts in his opening brief that the case was tried and decided solely upon his alleged liability as surety under the Guaranty. He contends that it was clear that he could not be held liable as a principal because any such liability was terminated by his assignment of the Buyer's rights to Assignee, a proper assignment as contemplated under the terms of the Agreement.

         G& W Warren's makes two arguments in its respondent's brief in favor of Dabney's liability as a principal. First, it contends that there was no effective assignment by Dabney to Assignee relieving Dabney of personal liability under the purchase documents. Second, G& W Warren's asserts that by the terms of the noncompete agreement, any assignment by Dabney would not ...


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