Opinion
NOT TO BE PUBLISHED
Appeal from an order of the Superior Court of Los Angeles County No. BC368319, William F. Fahey, Judge. Reversed.
Law Offices of M. Candice Bryner and M. Candice Bryner; Law Office of Matthew R. Seifen and Matthew R. Seifen for Plaintiffs and Appellants.
Venable and Jon-Jamison Hill for Defendants and Respondents.
CROSKEY, Acting P. J.
Nelson Lopez and Fernando Moreno (collectively, “Plaintiffs”) sued Debtwave Credit Counseling, Inc. (“Debtwave”) for monies allegedly owed to them under agreements with Sterling Debt Management, Inc. (“Sterling”). Plaintiffs had previously sued Sterling under the same agreements, but the parties settled and the suit was dismissed with prejudice. Debtwave demurred on the grounds that Plaintiffs’ claim is barred because the terms of the settlement agreement also released Debtwave. The trial court sustained the demurrer and dismissed the complaint without leave to amend. We reverse.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiffs entered into written agreements with Sterling Debt Management, Inc., a debt management services corporation. Sterling agreed to pay Plaintiffs a monthly referral fee for each client referred to Sterling so long as that client was making payments under Sterling’s debt management plan. Plaintiffs allege that they have referred over 7,500 clients to Sterling.
On January 1, 2005, Sterling stopped paying referral fees to Plaintiffs. On October 19, 2005, Plaintiffs sued Sterling, inter alia, to recover the referral fee payments they believed were due to them under their agreements with Sterling (“Agency Agreements”). On July 7, 2006, Plaintiffs added Debtwave, another debt services management company, as a “Doe” defendant to the Sterling action. Plaintiffs would subsequently assert that Debtwave was the successor-in-interest to the Sterling Agency Agreements.
On July 31, 2006, Plaintiffs entered into a Settlement and Mutual Release Agreement (“Settlement Agreement”) with Andres F. Nino, aka Juan Carlos Jaramillo, Mary Nino, Platinum Management Services, Inc., Sterling Debt Management, Inc., Financial Success, Moises Ruiz, and Luis Hernandez (collectively, the “Sterling Parties”). The Sterling Parties consisted of all the originally-named defendants in the Sterling action. Section 2, subsection A of the agreement contains a “release provision” which provided: “Upon full execution of this Agreement, the Plaintiffs, for themselves, and their collective and respective agents, employees, officers, shareholders, directors, members, parents, affiliated corporations, divisions, affiliates, partnerships, subsidiaries, limited liability companies, predecessors, partners, joint venturers, attorneys, other related entities, insurers, sureties, and the heirs and personal representatives of their respective estates (“Affiliated Parties”) of the Plaintiffs, do hereby release and forever discharge the Sterling Parties and their Affiliated Parties of and from any and all claims … arising out of or related to the Agency Agreements [and] the Referral Fee Payments . . . . ” Significant to this action, “Affiliated Parties” was not defined to expressly include successors and assigns. They were discussed in a subsequent section of the agreement. Section 9, entitled “Successors and Assigns,” provided that “[t]his Agreement and the obligations undertaken herein shall be binding upon and shall inure to the benefit of the successor, or assigns of each of the parties hereto, including their Affiliated Parties . . . . ”
The Settlement Agreement also provided that Plaintiffs shall dismiss the action against the Sterling Parties with prejudice upon satisfaction of the Sterling Parties’ payment obligations as outlined in the agreement. The Sterling action was dismissed with prejudice on December 21, 2006, pursuant to these terms. However, prior to this dismissal, on August 15, 2006, Plaintiffs voluntarily dismissed Debtwave from the Sterling action without prejudice.
On March 22, 2007, Plaintiffs sued Debtwave for failure to pay the referral fees due to them under the Sterling Agency Agreements. Plaintiffs allege in their complaint that Debtwave is Sterling’s successor-in-interest to the rights and obligations arising out of the Agency Agreements between Sterling and Plaintiffs. Plaintiffs further allege that, in January 2006, Debtwave entered into a written Asset Purchase Agreement with Sterling whereby Debtwave purchased Sterling’s client list, including clients referred to Sterling by Plaintiffs.
Debtwave demurred to the complaint, arguing that as Sterling’s successor-in-interest, it was released from any and all claims related to the Agency Agreements pursuant to the terms of the Settlement Agreement. Debtwave also sought judicial notice of certain documents, including the Settlement Agreement between Plaintiffs and the Sterling Parties. At the hearing on the demurrer, Plaintiffs requested permission to present extrinsic evidence regarding whether the settling parties had intended Debtwave to be a third party beneficiary of the Settlement Agreement.
In Debtwave’s Memorandum on Points and Authorities in support of the demurrer, Debtwave also argued that the Agency Agreements are illegal based on California Finance Code section 12104(n)(9), which prohibits non-profit debt management organizations such as Debtwave from paying referral fees to third parties who refer new clients to the agency. Debtwave does not pursue this argument on appeal.
Plaintiffs argued that since neither Debtwave nor “successors” is specifically named as a party in the release provision, Debtwave is not covered by the Settlement Agreement and should not be permitted to rely on the broader language of the “Successors and Assigns” provision. Although Plaintiffs alleged in their complaint that Debtwave is a successor-in-interest to the Sterling Agency Agreements, Plaintiffs asserted that the settling parties intended the “Successors and Assigns” provision to pertain only to future successors and assigns, and was not meant to include any successors or assignees already known to Plaintiffs, as was the case with Debtwave. Because they were aware of Debtwave’s status as a successor-in-interest and a potential third-party beneficiary, Plaintiffs argued that the fact that they failed to specifically name Debtwave in both the release and “Successors and Assigns” provisions is evidence of the settling parties’ intent to exclude Debtwave from the benefits of the Settlement Agreement. Given these facts, Plaintiffs argued that the language of the Settlement Agreement is ambiguous regarding the settling parties’ intent to include Debtwave, and therefore Plaintiffs should be allowed to introduce extrinsic evidence regarding such intent.
At the demurrer hearing, Plaintiffs also argued that Debtwave was a successor-in-interest only to the Agency Agreements, and not a successor-in-interest to Sterling itself. Therefore, Plaintiffs argued that Debtwave was not a successor for the purposes of the “Successors and Assigns” provision of the Settlement Agreement. Plaintiffs do not pursue this argument on appeal.
Debtwave primarily relied on the Settlement Agreement’s “Successors and Assigns” provision in arguing that the Settlement Agreement releases Debtwave from any and all of Plaintiffs’ claims related to the Sterling Agency Agreements. While the release provision did not name Debtwave or “successors” as a party to be released, Debtwave argued that, as Sterling’s successor-in-interest, the “Successors and Assigns” provision entitled Debtwave to the benefits of the Settlement Agreement when read with the agreement as a whole. Because the Settlement Agreement is unambiguous on its face, Debtwave argued that extrinsic evidence regarding the settling parties’ intent should be barred.
The court rejected Plaintiffs’ request to introduce extrinsic evidence on the basis that there was no ambiguity in the language of the agreement, and therefore extrinsic evidence is inadmissible. The court sustained Debtwave’s demurrer and dismissed the complaint without leave to amend. Plaintiffs appeal.
ISSUES ON APPEAL
Plaintiffs argue that the court erred in dismissing their complaint without allowing them to introduce extrinsic evidence regarding the settling parties’ intentions about whether Debtwave was an intended third-party beneficiary of the Settlement Agreement.
DISCUSSION
1. Standard of Review
“In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.’ [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
2. Admission of Parol Evidence
In determining whether parol evidence is admissible, “ ‘[d]ifferent standards of appellate review may be applicable . . . depending upon the context in which an issue arises. The trial court's ruling on the threshold determination of “ambiguity” (i.e., whether the proffered evidence is relevant to prove a meaning to which the language is reasonably susceptible) is a question of law, not of fact. [Citation.] Thus the threshold determination of ambiguity is subject to independent review. [Citation.]” (ASP Properties Group v. Fard, Inc. (2005) 133 Cal.App.4th 1257, 1267.)
Because Debtwave was not a contracting party to the Settlement Agreement, any rights Debtwave may have under the agreement are those of a third party beneficiary. (See Garcia v. Truck Ins. Exchange (1984) 36 Cal.3d 426, 436 (Garcia); see also Hess v. Ford Motor Co. (2002) 27 Cal.4th 516 (Hess).) “A third party beneficiary may enforce a contract made for its benefit.” (Hess, supra, at p. 524.) However, “[t]he circumstance that a literal contract interpretation would result in a benefit to the third party is not enough to entitle that party to demand enforcement. The contracting parties must have intended to confer a benefit on the third party. [Citations.]” (Neverkovec v. Fredericks (1999) 74 Cal.App.4th 337, 348; see also Garcia, supra, at p. 436.) “Ascertaining this intent is a question of ordinary contract interpretation. [Citation.]” (Hess, supra, at p.524.)
“A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” (Civ. Code, § 1636.)
When the terms of a contract are uncertain or ambiguous, extrinsic evidence may be used to aid in contract interpretation. (See Schmidt v. Macco Const. Co. (1953) 119 Cal.App.2d 717, 730.) “[The parol evidence] rule, presently codified in Code of Civil Procedure section 1856[,] precludes evidence of a prior agreement or of a contemporaneous oral agreement to contradict terms included in a written instrument which the parties intend as the final expression of their agreement, but it does not exclude ‘other evidence of the circumstances under which the agreement was made or to which it relates . . . or to explain an extrinsic ambiguity or otherwise interpret the terms of the agreement . . . . ’ (Code Civ. Proc., § 1856, subd. (g).)” (Garcia, supra, at p. 435.) “The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. [¶] [Citations.] A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained.” (Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co. (1968) 69 Cal.2d 33, 37 (Pacific Gas).)
“Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms.” (Pacific Gas, supra, at p. 39.) “Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. [Citations.] Such evidence includes testimony as to the ‘circumstances surrounding the making of the agreement . . . including the object, nature and subject matter of the writing . . . ’ so that the court can ‘place itself in the same situation in which the parties found themselves at the time of contracting.’ Citations.” (Id. at p. 39-40 (emphasis added).) “In determining the meaning of a written contract allegedly made, in part, for the benefit of a third party, evidence of the circumstances and negotiations of the parties in making the contract is both relevant and admissible. And, ‘[i]n the absence of grounds for estoppel, the contracting parties should be allowed to testify as to their actual intention. . . . ’ [Citations.]” (Garcia, supra, at p. 437 (emphasis added).) “If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, ‘is fairly susceptible of either one of the two interpretations contended for . . . ’ [Citations], extrinsic evidence relevant to prove either of such meanings is admissible.” (Pacific Gas, supra, at p. 40 (emphasis added).)
In other words, “[t]he interpretation of a contract involves ‘a two-step process: “First the court provisionally receives (without actually admitting) all credible evidence concerning the parties’ intentions to determine ‘ambiguity,’ i.e., whether the language is ‘reasonably susceptible’ to the interpretation urged by a party. If in light of the extrinsic evidence the court decides the language is ‘reasonably susceptible’ to the interpretation urged, the extrinsic evidence is then admitted to aid in the second step—interpreting the contract. [Citation.]” [Citation.]” (Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1351.)
In this case, the trial court was unable to even reach step one of the analysis—consideration of the parol evidence offered by Plaintiffs to determine whether the Settlement Agreement is reasonably susceptible to their interpretation—because on demurrer the court does not consider evidence outside the face of the complaint except for matters of judicial notice. Plaintiffs’ interpretation of the Settlement Agreement is not wholly unreasonable on its face. The Sterling Parties, with whom Plaintiffs entered into the Settlement Agreement, consist of all the named defendants in the original Sterling litigation. Debtwave, who was later added as a “Doe” defendant, was not named as one of the Sterling Parties. Debtwave was dismissed from the Sterling action without prejudice prior to the dismissal of the entire Sterling action with prejudice as mandated by the Settlement Agreement. It is plausible, as Plaintiffs argue, that in doing so Plaintiffs desired to preserve their rights to pursue Debtwave in a separate action in order to recover the referral payments. Although the release provision states that the Sterling Parties and their Affiliated Parties are released from all claims relating to the Agency Agreements, the Settlement Agreement’s definition of “Affiliated Parties” contains a long list of entities which does not include “successors and assigns.” The only mention of successors and assigns is the one-sentence provision titled “Successors and Assigns,” on which Debtwave primarily relies. If Plaintiffs can provide supporting extrinsic evidence, this provision would be reasonably susceptible to the interpretation that it was meant to pertain only to future successors and assigns and not Debtwave, thus creating an ambiguity regarding the settling parties’ intent. (See Appleton v. Waessil (1994) 27 Cal.App.4th 551, 555-56 (holding that the fact that respondent, a named defendant to a previous action, was not specifically named in the release agreement between appellant and the other defendants created an ambiguity regarding the parties’ intent to benefit respondent).) Additionally, there is no evidence regarding whether the Sterling Parties intended for Debtwave to be a third party beneficiary when they entered into the Settlement agreement with Plaintiffs. Since “[t]he goal of contract law is to ascertain the parties’ actual intent at the time they made the contract (Civ. Code, § 1636)” (Hess, supra, at p. 528), parol evidence is necessary to determine whether an ambiguity actually exists and to aid in interpreting any such ambiguities.
Plaintiffs suggest that Debtwave paid Sterling a “discounted price” for the Agency Agreements in light of the possibility that Debtwave could be sued on the Agency Agreements.
If, after preliminary consideration of the extrinsic evidence, the trial court reaches the conclusion that there are no latent ambiguities and the contract terms are not reasonably susceptible to the interpretation offered by Plaintiffs, then the court may deem the extrinsic evidence inadmissible and proceed to the second step—interpretation of the contract. Resolving this case on demurrer was premature because the trial court interpreted the terms of the contract without having first considered Plaintiffs’ evidence. Therefore, the order dismissing Plaintiffs’ complaint must be reversed. Debtwave is, of course, free to pursue its argument by means of a motion for summary judgment, which would enable Plaintiffs to introduce extrinsic evidence of an ambiguity, and allow the trial court to consider this evidence in interpreting the contract.
DISPOSITION
The order dismissing Plaintiffs’ complaint is reversed. Plaintiff shall recover their costs on appeal.
We Concur: KITCHING, J. ALDRICH, J.