Opinion
F052301
4-18-2008
LOST HILLS TRAVEL CENTER, INC., et al., Plaintiffs and Respondents, v. BALBIR SINGH BIRK, Defendant and Appellant.
Darling & Wilson and Joshua G. Wilson for Defendant and Appellant. Law Offices of Walter W. Whelan and Walter W. Whelan for Plaintiffs and Respondents.
NOT TO BE PUBLISHED
This is an appeal from a final judgment entered on the parties settlement agreement pursuant to Code of Civil Procedure section 664.5. Appellant Balbir Singh Birk contends the trial court erred in its interpretation of the terms of the settlement agreement and that, as interpreted, the agreement imposes an unlawful penalty or forfeiture. We conclude the trial court did not err and appellant has waived the forfeiture issues. Accordingly, we affirm the judgment.
FACTS AND PROCEDURAL HISTORY
Appellant does not contend there is insufficient evidence to support the trial courts express and implied findings of fact. Accordingly, we set forth the facts in the light most favorable to the judgment. (See Osumi v. Sutton (2007) 151 Cal.App.4th 1355, 1360.)
In 2002, respondent Lost Hills Travel Center, Inc. (LHTC), purchased a truck stop in Lost Hills. The enterprise consisted of gasoline and diesel fueling facilities, a restaurant, and a convenience store; it operated pursuant to an ARCO franchise agreement. (ARCO apparently is a trade name of BP West Coast Products LLC.)
All shares of LHTC were owned by respondent Balbir Singh. The property was purchased for $1.3 million, of which just over $500,000 was paid as a capital contribution from Singh and the balance as a loan to LHTC secured by property Singh owned in the State of Washington. Singh agreed with Birk and Kuldip Sahota that if they made capital investments in LHTC each would receive a 25 percent interest in LHTC. By 2005, Sahota had made cash contributions directly to Singh, and Birk had made contributions by paying for extensive remodeling of the property. Because the ARCO franchise agreement required the franchisors approval for sale or transfer of the stock of LHTC, when the parties formalized this relationship in an October 25, 2005, "Memorandum of Understanding," the corporation was stated to be "beneficially owned" by Singh, Birk, and Sahota in percentages consistent with their prior agreement. The memorandum stated that upon obtaining relevant third party consents, including that of ARCO, Singh would surrender his stock and LHTC would issue new stock reflecting the percentages of equitable ownership.
Birk was the general manager of the enterprise at all relevant times. Shortly after execution of the October 25, 2005, memorandum, Singh came to believe Birk had used funds generated by LHTC, rather than Birks own money, to pay for the remodeling. In December of 2005, LHTC and Singh sued Birk to rescind the memorandum of understanding, for an accounting, and for other relief. The parties, together with Sahota, entered into mediation to try to resolve the dispute. After an all-day session with a private mediator, the parties on January 6, 2006, entered into the settlement agreement that is at issue in the present appeal.
In part, the settlement agreement provided that, in return for release of all claims against each other, Birk would buy all of the stock of LHTC from Singh and Sahota. The price of the stock was to be based on a net value of the property of approximately $1.95 million (after payment of the original loan for its purchase, the exact balance of which was not known at the time of the mediation). Birk would pay 50 percent of this net sum to Singh and 25 percent to Sahota.
There were numerous other provisions of the settlement agreement (memorialized in a handwritten exhibit A to the short, typewritten signed agreement), the following being directly pertinent to this appeal:
"9. Payment of the estimated balance of $1,962,500 to Sahota & Singh will be on the following terms: [¶] a) $150,000 within 7 days of stock transfer. [¶] b) For four months from execution no interest on the balance. [¶] c) 5% interest on the balance begins accruing after 4 months. [¶] d) ... [¶] e) If Birk does not pay the balance (including accrued interest) by the 6 month deadline ... then the stock in LHTC reverts to Sahota (33-1/3% interest) and to Singh (66-2/3% interest) without any further consideration to Birk. [¶] f) LHTC and Birk will cooperate w/ execution of pledge agreement to transfer stock back to Singh and Sahota automatically if balance not paid by Birk in a timely manner."
"10. All parties will cooperate with the transfer by LHTC/Singh of the ARCO license to Birk as expeditiously as possible. Neither Singh nor Sahota will guarantee that the ARCO transfer will occur."
"11. Singh/LHTC will exercise best efforts to transfer the alcoholic beverage license to Birk. Birk/LHTC may continue w/ beer & wine sales under Singhs license until the stock has transferred. Once stock has transferred, Birk/LHTC may not operate under the Singh license."
"12. Even if Birk is not successful in having the liquor license transferred to him, this deal goes forward anyway. The transfers of liquor license is not a contingency."
"12A. In the event Arco refuses to permit the transfer of the franchise agreement to Birk, and Birk is unwilling individually and through LHTC to indemnify Singh from liability arising from any alleged breach by Singh or LHTC of the ARCO franchise agreement or arising from Birk/LHTCs decision to obtain an alternate supply of fuel/petroleum products then this will be treated as the nonfulfillment of a condition subsequent and this agreement will not be enforceable."
"16. The parties agree that [a designated] accounting firm will do a first stage fraud review of two months of LHTC operations (one month from 2004 after March and one month from 2005). The review will be exclusive of fuel sales and of industry shrink standard and must rise to the level of 3% missing revenue for either of the two months. If that occurs, a second stage review will take place for this period (4/1/04 through 12/31/05) unless the parties agree to a payment by Birk to Sahota & Singh in lieu of the second stage review (for period after March 2004 thru December 2005) will be paid by Birk to Sahota (33-1/3%) and Singh (66-2/3%). The cost of the audit will be borne by LHTC."
The parties and their attorneys signed the agreement on January 6, 2006. Within a week, the parties realized there were elements that they wanted included in the settlement, and the attorneys began negotiating about those. In particular, Birk wanted a financing condition similar to the franchise-assignment condition, such that Birks equitable interest in the business would not be lost if he could not obtain financing for the money he was to pay the others. Singh and Sahota wanted additional controls to prevent theft and embezzlement during the six months prior to full payment of the purchase price. The parties were not able to agree on any proposed modification of the settlement agreement.
In addition, the parties belatedly realized ARCO had a right of first refusal to buy the business on any terms proposed as part of an application to transfer the franchise. The parties agreed on a short summary of the transaction and submitted it to ARCO, which declined to exercise its purchase right by letter of March 16, 2006. ARCO sent Singh the application package necessary to seek transfer of the franchise.
By the middle of April 2006, Singhs attorney was complaining that Birk had not supplied the accounting material necessary to conduct the fraud review; he asked that Birks attorneys confirm that Birk intended to perform under the settlement agreement. Counsels response, dated April 20, 2006, did not address the request for accounting materials; instead, it stated Birks insistence on addition of a financing contingency clause and suggested Birk might need "additional time ... to find and finalize the financing."
When the ARCO packet had come to Singh in March of 2006, his attorney forwarded it to Birks attorney, since information was requested primarily concerning Birk as the potential franchisee. By the beginning of May 2006, Birk had not submitted the packet to ARCO and its representative contacted Singh to see if the deal was proceeding. Birk was now proposing to modify the settlement agreement to provide for seller financing of the purchase price through 10-year promissory notes.
By letter of June 1, 2006, Singhs counsel again asked for the accounting information and an assurance Birk intended to "abide by the terms of the January 6, 2006 settlement agreement." Counsel responded that Birk no longer trusted the designated accounting firm and asserted for the first time that oral modifications of the settlement agreement had been accepted by all parties. Counsel stated that Birk would not submit the ARCO transfer package unless Singh and Sahota provided assurances they accepted the "modified terms" of the settlement agreement, including a requirement that, if financing were unavailable, Singh and Sahota would purchase Birks 25 percent interest in LHTC for one-quarter of the $1.95 million assigned value of the corporation. Counsel concluded with a demand that Singh and Sahota sign a "final, written modified agreement" and transfer the LHTC stock to Birk. There were additional letters between counsel, essentially reiterating the same positions.
As all of these exchanges were taking place, a case management conference was approaching in the still-pending civil action. The court had ordered Birk to file his answer to the complaint and any cross-complaint before that July 5, 2006, conference. Birk filed an answer. At the case management conference, the court permitted further mediation upon agreement of the parties and set the next conference for November 3, 2006.
Further mediation did not occur, and the situation at the truck stop itself deteriorated. On August 10, 2006, respondents filed a motion for judgment on the January 6, 2006, settlement agreement, and for temporary and preliminary injunctions concerning management of the property pending resolution of the issues.
The parties filed numerous declarations and the court held several hearings concerning these motions. At the first hearing on the motion to enter judgment, Birk took the position that the January 6, 2006, agreement was not a final settlement agreement, that there had been no subsequent agreement resolving disputed terms, and, therefore, Singh was not entitled to have judgment entered pursuant to Code of Civil Procedure section 664.6. The court issued a ruling on September 25, 2006, granting the motion for entry of judgment on terms set out in the January 6, 2006, settlement agreement.
Code of Civil Procedure section 664.6 states: "If parties to pending litigation stipulate, in a writing signed by the parties outside the presence of the court or orally before the court, for settlement of the case, or part thereof, the court, upon motion, may enter judgment pursuant to the terms of the settlement. If requested by the parties, the court may retain jurisdiction over the parties to enforce the settlement until performance in full of the terms of the settlement."
At a hearing on the form of the judgment, Birk took the position that if the settlement agreement was enforceable, he was ready to perform and had deposited the $150,000 down payment with his attorney. Counsel attempted to argue that there was a difference between holding the agreement to be enforceable and holding that Birk had breached the terms of the agreement, but the court cut him off, saying: "It has a lot of sound like reconsideration of the motion .... Im not here to hear a motion for reconsideration." The hearing was continued for procedural reasons.
Before the next hearing, Birk submitted written objections to Singhs proposed form of judgment. In addition to finding the settlement agreement enforceable, the proposed judgment stated that Birk had failed to make timely payment under the agreement (six months from the date of the agreement) and that "based on [Birks] failure to pay the stock purchase price by the July 6, 2006 deadline, Defendant Singh owns 66 2/3 percent of the stock of LHTC, third party Kuldip Sahota owns 33 1/3 percent of the stock of LHTC, and [Birk] owns zero percent of the stock of LHTC." Birks objections argued that, for various reasons, he was entitled to additional time to perform and that factual issues concerning these contentions were still to be decided by the court. Without a further statement of reasons, the court entered respondents proposed judgment as the judgment of the court.
Birk filed a motion for new trial and to set aside and vacate the judgment. He contended that Singhs transfer of the LHTC stock to him was a condition precedent to Birks obligation to make the down payment and final payment. He contended transfer of the ARCO franchise likewise was a condition precedent and that Singh had failed to take the steps required of him to accomplish the transfer. Because of the failure of these two conditions, "Birk had not breached the Agreement. The time for Birks performance had not yet come ...." Further, he argued the settlement agreement had been orally modified; he contended the evidence upon which he previously had relied to show that there was no binding settlement agreement showed, in fact, that there was a binding settlement agreement with modified terms to which the parties had agreed.
At the hearing on the motion, counsels position changed somewhat: Referring to Birks option stated in paragraph 12A of the settlement agreement to indemnify Singh if ARCOs refusal to transfer the franchise led Birk to obtain a different petroleum supplier, counsel argued that Birks failure to follow through with ARCO could not excuse Singhs failure to transfer the shares of LHTC stock, in fulfillment of the condition precedent, and therefore Birks nonpayment of the purchase price by July 6, 2006, was excused. By minute order of January 24, 2007, the court denied the new trial motion.
Birk filed a timely notice of appeal.
DISCUSSION
On appeal, Birk renews his contention that his failure to pay for the LHTC stock within six months of the date of the January 6, 2006, settlement agreement was excused by Singhs failure to transfer the stock to Birk. In addition, Birk makes the entirely new argument that the settlement agreement provided for an unlawful forfeiture or penalty, since his failure to pay for the LHTC stock resulted in divesting him of his 25 percent equitable interest in the corporation. Singh and LHTC (together respondents) contend transfer of the stock was not a condition precedent to the commencement of the time during which Birk was entitled to exercise his right to purchase the stock, that Birk waived the forfeiture issue by failing to raise it in the trial court, and that implementation of the settlement agreement involved neither a forfeiture nor a penalty.
A. Condition Precedent
Birk contends transfer of the stock to him was a condition precedent to the commencement of his time for payment under the agreement. His sole citation of legal authority in support of this argument is Civil Code section 1436, which states, in full: "A condition precedent is one which is to be performed before some right dependent thereon accrues, or some act dependent thereon is performed." The balance of his argument is an examination of the language of the settlement agreement.
As described in our procedural summary, the nature of Birks argument changed at each stage of the proceedings, and he did not raise the condition precedent argument until the new trial motion. By that point, the trial court already had considered the evidence twice in rejecting Birks arguments that there was no settlement agreement and that it had been orally modified. Appellant complains that the "trial courts written ruling focuses on the validity of the Settlement Agreement and not on its interpretation." That complaint is meritless, because the only issue appellant presented to the court on the original motion for enforcement of judgment was, precisely, the validity or invalidity of the settlement agreement, not its interpretation.
When the court rejected subsequent versions of appellants theory of the case, it did not specify whether it considered those theories waived by the failure initially to present them or whether, in the alternative, it found them meritless in light of the evidence before the court. Appellant does not consider the first alternative and his presentation on the second alternative is based on a claim that the "interpretation of a contracts terms is a question of law that is reviewed de novo on appeal."
The correct standard of review is that when the trial court has properly used extrinsic evidence to interpret a contract, we accept the trial courts resolution of disputed facts where supported by substantial evidence. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865.) We then review the language of the contract, when viewed in all of the circumstances, de novo. (Ibid.) Here, ample evidence supports the trial courts implied findings of fact, and those findings lead us to interpret the settlement agreement to reject appellants condition-precedent claims, even if we assume the trial court decided those claims on the merits.
There obviously was an ambiguity concerning the timing and sequence of duties of the respective parties to the settlement agreement. On the one hand, the agreement contemplated that appellant would continue to operate the store under respondents franchise agreement and liquor license until these were properly transferred to appellant. The ability to sell petroleum products and alcoholic beverages was of clear importance to the success of the business, yet the franchise agreement prohibited transfer of stock ownership until the new ownership was approved by ARCO, and the settlement agreement specifically forbade appellant from continuing under Singhs beer and wine license after the stock was transferred. On the other hand, the agreement called for a down payment "within 7 days of stock transfer."
This ambiguity did not affect the underlying terms of the parties settlement agreement. An interpretation of the agreement to call for outright transfer of the stock immediately after execution of the agreement, however, would not have furthered the interest of the parties in successfully transferring the business to appellant; instead, such an interpretation would have caused the business immediately to fail.
The evidence impliedly credited by the trial court (evidence that was in most instances undisputed) showed that the parties, including appellant, treated the agreement in a manner that would not cause the business to fail. Thus, appellant did not demand transfer of the stock until the agreement clearly had unraveled. At all earlier times, he merely negotiated for additional time to pay for the stock, for seller-financed sale of the stock, and for a new contingency permitting rescission of the settlement agreement if appellant was unable to obtain timely financing. The trial court impliedly concluded the parties did not intend immediate transfer of the stock, nor that outright transfer was a precondition to payment of the sales price. In light of that implied finding, and the facial ambiguity of the contract, we conclude the transfer of the stock was not a condition precedent to appellants duties under the contract.
As appellant notes, in some respects the settlement agreement was much like any other contract for sale of real estate. A conundrum like that described in the text is usually resolved by means of an escrow account into which the parties deposit documents and money pending full performance by each side. In that case, the executed stock transfer documents would have been deposited, but not delivered to appellant until his full performance under the agreement. There was no such escrow in the present case and no request by any party to open an escrow.
Appellant further argues that the payment deadlines, interest-free owner financing for four months "from execution" and full payment "by the 6 month deadline," are ambiguous because "execution" is undefined and apparently refers back to a provision stricken from the handwritten portion of the agreement. Paragraph 9(a) of the settlement agreement reads as follows, where the words in italics represent those struck out in the agreement: "9. Payment of the ... balance ... to Sahota & Singh will be on the following terms: [¶] a) $150,000 within 7 days of execution of this stock agreement transfer." By virtue of the repetition of the word "of" and the placement of the words "stock" and "transfer" on the page, one can conclude the provision originally read "within 7 days of execution of this agreement" and then was changed by placement of new words at the end of handwritten lines to read: "within 7 days of stock transfer."
In normal usage, "execution" would mean "execution of the present agreement," but appellant, with some justification in the structure of the handwritten provisions, argues that transfer of the stock must be the event referred to as "execution" after the modification of paragraph 9(a). The trial court, however, impliedly found that, whatever else the agreement meant concerning the timing of transfer of the stock, the parties contemplated a deadline of six months (extendable by two more months "if Birk is close to arranging financing by 6 months from execution") from execution of the settlement agreement for completion of the transaction. In other words, the trial court impliedly concluded the intent of the parties was that if Singh wanted a down payment, he had to transfer the stock. If he did not transfer the stock, he got no down payment but the full purchase price was still due six months from "execution" of the agreement. As suggested in footnote 2, ante, the parties probably intended that "stock transfer" as inserted into paragraph 9(a) would reflect an agreement to place the stock into an escrow account, since an unconditional transfer, under other terms of the agreement, would have resulted in failure of the business. The trial courts implied conclusion is supported by substantial evidence: for the first few months after the execution of the agreement, Birks counsel negotiated for an extension of time for payment based on an interpretation of the agreement as expiring on July 6, 2006.
In light of this implied finding, we conclude the contract required payment of the full purchase price, absent further agreement by the parties, by a date no later than six months from "execution" of the January 6, 2006, settlement agreement. There is no evidence that appellant tendered such payment or had access to such funds at any time — and certainly not by the required date.
Appellant deposited the down payment of $150,000 with his attorney, but not until long after the payment deadline had expired.
It is not inconceivable appellant might have had a cause of action against Singh if Singh had unilaterally transferred the stock to appellant, thereby causing the business to fail. In any event, it would be unreasonable and in conflict with the parties intent to conclude Singh had a duty under the terms of the contract to take such steps. (See City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473-474.) We conclude the date for appellants payment of the contract price was six months from the execution of the settlement agreement and appellant was not excused from performance under the contract merely because Singh did not transfer the LHTC stock to him.
Appellant relies on paragraph 5 of the settlement agreement for the proposition that mere "transfer [of] ownership of 100% of the stock" of LHTC (in the language of paragraph 5) was the goal of the contract. Such an interpretation likewise would be entirely unreasonable, since the assets of the business derived their value almost entirely from the existing and ongoing business operations. It is clear from the terms of the contract that the parties sought to transfer ownership of the ongoing business to appellant and the vehicle for doing so was transfer of the stock.
B. Forfeiture/Penalty
For the first time on appeal, appellant contends the divestment of his beneficial interest for nonperformance of the buy-out provisions of the settlement agreement constitutes an illegal penalty and results in an impermissible forfeiture. He contends, citing Timney v. Lin (2003) 106 Cal.App.4th 1121, 1128, "[w]here the effect of a contract provision is to allow forfeiture for lateness without regard to any damage caused it is an illegal forfeiture." In addition to contending appellant should not be able to raise the issue for the first time on appeal, respondents contend the divestment of appellants beneficial interest is reasonably related to their release of embezzlement claims against appellant. Although our reasoning differs in some respects from respondents, we agree the divestment is neither a penalty nor illegal forfeiture, even if appellant were permitted to raise the issue on appeal.
The reason an issue normally cannot be raised for the first time on appeal is that the opposing party has not been given an opportunity to respond with any evidence it may have and the trial court has not been permitted to evaluate such evidence and determine the issue. (9 Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 399, pp. 451-453.) Appellant contends this case falls into an established exception to that limitation in that, according to appellant, the issue is purely one of law and public policy involving no fact questions. (Id. at § 406, p. 457.)
We disagree, for the simple reason that determination whether a divestment operates as a penalty requires a comparison between the divestment and the reasonably foreseeable damages of the opposing party, viewed as of the time of the agreement. Although there may be cases in which this comparison can be made as a matter of law, that is not true here: Had the issue of forfeiture been raised in the trial court, respondents could have presented evidence to show the scope and amount of any fraud or embezzlement by appellant in order to show that their own relinquishment of claims had a value proportionate to appellants divestment under the terms of the agreement. Accordingly, this issue does not present solely questions of law, and we conclude appellant waived the issue by failing to timely raise it in the trial court.
In any event, appellant has mischaracterized the nature of the divestment provision in relationship to the overall settlement agreement. Based on properly admitted extrinsic evidence, the trial court impliedly concluded the following: The primary purpose of the settlement agreement was to resolve respondents claims against appellant. If respondents claims were true, appellant obtained his 25 percent beneficial interest in LHTC through fraud and the beneficial interest would be subject to extinguishment.
The parties agreed on two alternative methods of resolving the claims against appellant, both of which gave value to the parties; appellant was given the choice of which method he would select. The first method of resolution was that appellant would voluntarily waive his 25 percent beneficial interest. This choice was mutually beneficial to the extent it obviated the need for respondents to quantify their losses through proof and it limited appellants exposure for a potential judgment in excesses of his claimed $150,000 contribution to the remodeling project. The benefit to each party, while somewhat difficult to quantify on the present record, was real and substantial.
The second method of resolution was that appellant would buy the interest of Singh and Sahota in LHTC at its current (2006) market value, which was greater than the value after the remodeling was done in 2003. This choice was mutually beneficial in that Singh and Sahota would recover their investment in LHTC and not have to continue the contentious management relationship with appellant, who would then have full, sole ownership of LHTC to manage as he wished.
The parties agreed that these alternatives, both mutually beneficial and both reasonably fair resolutions of respondents claims against appellant, would be the basis for settlement of the litigation. They were the core provisions of the settlement agreement. Appellant had six months to choose and implement an alternative. The first alternative was the "default" choice if appellant was not able to accomplish the second alternative.
This view of the settlement agreement is supported by substantial evidence and is a reasonable construction of the agreement in all of the circumstances. We have explicated this view of the agreement in significant detail because is clearly demonstrates that divestment of appellants beneficial interest in the corporation was not, as appellant claims, a penalty for late payment of the purchase price. The first alternative, by itself, would have been a perfectly acceptable and equitable resolution of respondents claims against appellant. It became no less so when joined with a second alternative that permitted appellant to gain control of LHTC if he wanted to do so (and could obtain financing). Appellant was required to select the second alternative, if at all, through performance within six months of the settlement agreement. He did not do so and the first alternative became operative.
We conclude that even if appellant were permitted to raise the forfeiture/penalty issue on appeal, the settlement agreement, construed in light of all the circumstances, adequately compensated appellants relinquishment of his beneficial interest in LHTC and did not constitute a penalty or forfeiture.
DISPOSITION
The judgment is affirmed. Respondents are awarded costs on appeal.
We concur:
CORNELL, J.
GOMES, J.