Opinion
A129539
12-21-2011
ROBERT MCDONALD, Plaintiff and Respondent, v. ERIC CLAY et al., Defendants and Appellants.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Lake County Super. Ct. No. CV406098)
Defendants Eric Clay and Freeman Michaels appeal a judgment for plaintiff Robert McDonald, the holder of a secured promissory note (note), after bench trial on an amended complaint for breach of contract and money lent. The judgment, in the amount of $586,234.86, is amended to add fees and costs of $116,588.30. The root issue below and on this appeal, while variously framed, is whether defendants are personally liable on the note or whether the note was without recourse and thus limited plaintiff to foreclosing on the security interest.
We affirm the judgment.
B ACKGROUND
The note arose from defendants' purchase of a membership interest in River Bluff Resort LLC (River Bluff), an enterprise formed to develop a resort near McGregor, Iowa, that was to include a hotel, golf course, indoor water park, and condominiums. River Bluff's shareholders were Jim Daughtry, Jerome Sheldon, Conrad Seymour, and plaintiff, who was president of and apparently held his shares through a Wisconsin entity, Dream Golf Consulting, LLC (Dream Golf).
Defendants learned of the investment opportunity in River Bluff through talks with Daughtry in La Quinta, California, and sought a majority interest in River Bluff. Separately negotiating with Sheldon and Seymour, defendants began phone conversations with plaintiff in January 1995 that led to their purchase of his shares in mid-May 1995 through a buy-sell agreement (the agreement), with the note as partial financing.
The agreement, with Dream Golf as seller, is for a purchase price of $650,000 for seller's 19-percent membership interest in River Bluff, one contingency being that two of the three remaining River Bluff members also sell to buyers their aggregate 55-percent interest. Buyers agree to pay $150,000 and finance the rest with a note. The agreement does not recite that it incorporates the note but recites that the note is attached and refers to some of its basic terms: "Buyers shall make and deliver the promissory note attached as 'Exhibit A' (the 'Note') for the $500,000 balance of the Purchase Price. The entire balance of the Purchase Price is due and payable on May 1, 2008. . . . The repayment schedule shall require quarterly payments of interest only with a balloon payment of all the outstanding principal due and payable on the maturity date." It continues: "The Note is to be secured by a security interest, created by this Agreement and a UCC-1 Financing Statement . . . to be filed with the California Secretary of State as a first lien on the Membership Interest in favor of Seller." The agreement also states that, while any amount remains payable under the note, buyers will not vote their membership interests so as to dilute the interest "sold hereunder."
The agreement includes this integration clause: " Sole Agreement . This instrument constitutes the only Agreement of the parties regarding the sale and purchase of the Membership Interest, and correctly sets forth the rights, duties, and obligations of each to the other. Any prior agreements, promises, negotiations, or representations concerning the Agreement's subject matter not expressly set forth in this agreement are of no force or effect."
Principally at issue in this case is the following statement in the introductory recitals section of the agreement (italics added): "The purpose of this Agreement is to evidence in writing the purchase, without recourse, by Buyers from Seller of the Membership Interest as a final and complete sale. Buyers and Seller recognize the value of having a written agreement to carry out the aforementioned purpose and, therefore, have agreed and do agree to do as follows: . . . ." As will be seen, no "without recourse" language appears in the note itself, but defendants urge that the phrase in the agreement is either admissible to ascribe such a meaning to the note or, by operation of law, is part of the overall transaction and thus part of the note.
The note, titled "SECURED PROMISSORY NOTE," recites in part that defendant "Borrowers" promise to pay Dream Golf Consulting LLC ("Holder") the principal sum of $500,000 "on the terms and conditions and at the times hereinafter set forth," interest accruing at seven percent per annum, with interest-only payments due quarterly, and all outstanding principal and accrued interest due on a maturity date defined as the earlier of May 1, 2008, the borrowers' prepayment, or any accelerated payment date elected by the holder as a result of their default. Borrowers agree to pay all costs of collection and enforcing a judgment, including reasonable attorney fees.
The note refers to the buy-sell agreement in this manner: "This Note evidences a loan (the 'Loan') made by Holder to Borrower for the balance of the purchase price [of] Holder's membership interest in River Bluff Resort, LLC (the 'LLC') by . . . May __, 2005 ('Buy-Sell Agreement'). This Note is secured by Borrower's membership interest in the LLC. . . ." No language indicates that the note is without recourse.
Defendants defaulted on the note, despite a modification that extended the maturity date by a year. Dream Golf assigned the note and modification to plaintiff during the extension, and plaintiff filed his action in early 2009. Defendants cross-complained against him and others but, the judgment states, "elected not to proceed" on those claims at trial.
In cross-motions in limine to exclude or admit parol evidence about use of the phrase "without recourse" in the agreement, plaintiff argued that such evidence could not be used to contradict the absence of nonrecourse language in the note or to show an unexpressed subjective intent of defendants. Defendants argued that it was admissible to resolve ambiguity in the parties' use of the term in the agreement and to show how the two contracts related to the same transaction. The court "conditionally admitted" the evidence, and both sides offered parol evidence on the subject.
The court ultimately ruled by statement of decision that the parol evidence rule barred admission of the evidence because the note's terms were unambiguous and not reasonably susceptible to the interpretation advanced by defendants—that they were not to be personally liable on the note. The court also found the note to be integrated and complete on its face, with a nonrecourse term not the type of agreement one would expect to be made as part of a separate agreement. The court cited defendants' experience with real estate transactions and promissory notes, and their testimony that they understood that, when one signs a promissory note in his personal capacity, he is personally liable.
The court alternatively ruled that, assuming the evidence was admissible, the evidence did not establish an intention that the note be without recourse. The court cited the absence of any such language in the note, the oddity of that silence if, as defendants claimed, lack of recourse was a vital "deal point," and plaintiff's testimony, corroborated by Clay's, that plaintiff was unwilling to sign a note without defendants' "personal guarantee." The court found that defendant Michaels's contrary testimony (that plaintiff agreed to accept the note without recourse) lacked credibility, also finding that deposition testimony by Seymour was too vague to support defendants' position, and that plaintiff's testimony was more credible.
On a claim by defendants that the agreement and note constituted "a single contract" under Civil Code section 1742, the court found from the evidence that they were separate contracts executed as part of the same transaction, but that section 1642, while requiring them to be construed in light of one another, "did not automatically merge the two documents into a single contract." The court further found no intent to incorporate one document into the other.
All unspecified section references are to the Civil Code.
Finally, the court found that defendants, by not objecting before submitting the case, had waived new arguments that the parol evidence rule barred use of testimony to explain use of the "without recourse" language in the agreement or to contradict that language. The court noted that defendants had sought to introduce parol evidence on the meaning of the term. Alternatively, the court ruled that, if the point were not waived, parol evidence would be admissible to interpret the agreement, as opposed to the note. The note's silence was unambiguous, but use of the phrase "without recourse" in just the recitals section of the buy-sell agreement did not "unambiguously" mean that the parties meant it to limit their liability on the note.
We detail further evidence as needed in the discussion that follows.
DISCUSSION
I. General Principles
Defendants offer a litany of familiar code principles for the interpretation of contracts: a contract is interpreted so as to give effect to the mutual intention of the parties at the time of contracting, to the extent ascertainable (§ 1636); contract language governs the interpretation if clear and not involving absurdity (§ 1638); if the intention is uncertain, general rules of interpretation are applied (§ 1637); if the contract is reduced to writing, the parties' intention is ascertained from the writing alone, if possible, subject to other interpretive principles (§ 1639); a contract may be explained by reference to the circumstances under which it was made and the matter to which it relates (§ 1647); the whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other (§ 1641); we may not insert what has been omitted or omit what has been inserted, and where there are several provisions, we adopt a construction that, if possible, gives effect to all (Code Civ. Proc., § 1858); and several contracts relating to the same matters, between the same parties, made as parts of substantially one transaction, "are to be taken together" (§ 1642). We accept those principles, of course.
"The interpretation of a written instrument . . . is essentially a judicial function to be exercised according to the generally accepted canons of interpretation so that the purposes of the instrument may by given effect. [Citations.] Extrinsic evidence is 'admissible to interpret the instrument, but not to give it a meaning to which it is not reasonably susceptible' [citations], and it is the instrument itself that must be given effect. [Citations.] It is therefore solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence." (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865; Johnson v. Greenelsh (2009) 47 Cal.4th 598, 604.)
"In a nonrecourse loan . . . , the borrower has no personal liability and the lender's sole recourse is against the security for the obligation. [Citation.]" (Aozora Bank, Ltd. v. 1333 North California Boulevard (2004) 119 Cal.App.4th 1291, 1295.) The parties agree that a promissory note is not without recourse unless it so provides (see also Gaetani v. Goss-Golden West Sheet Metal Profit Sharing Plan (2000) 84 Cal.App.4th 1118, 1122-1132 [parallel rule for endorsing a note without recourse]; Com. Code, § 3116, subd. (a) ["[e]xcept as otherwise provided in the instrument, two or more persons who have the same liability on an instrument as makers . . . are jointly and severally liable in the capacity in which they sign"]), and the lack of such language in the note here fueled the debate over considering parol evidence, which in turn implicated the parol evidence rule (discussed in part II, post). (See also Com. Code, § 3117 ["Subject to applicable law regarding exclusion of proof of contemporaneous or previous agreements, the objection of a party to an instrument to pay the instrument may be modified, supplemented, or nullified by a separate agreement of the obligor and a person entitled to enforce the instrument."].)
Finally, for determinations of fact and conflicting extrinsic evidence, we review deferentially, for substantial evidence. " 'When a trial court's factual determination is attacked on the ground that there is no substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the determination, . . . If such substantial evidence be found, it is of no consequence that the trial court believing other evidence, or drawing other reasonable inferences, might have reached a contrary conclusion. [Citations.]' Substantial evidence is evidence ' "of ponderable legal significance, . . . reasonable in nature, credible, and of solid value." [Citations.]' [Citation.] It is not synonymous with [just] any evidence. [Citation.]" (Saks v. Charity Mission Baptist Church (2001) 90 Cal.App.4th 1116, 1132.)
II. Extrinsic Evidence and the Parol Evidence Rule
The court's consideration of extrinsic evidence, whether as received provisionally for context, or as interpretive evidence, requires discussion of defendants' argument that the parol evidence rule was misapplied.
Testimony
Plaintiff. Plaintiff described himself as a "golf pro." He had taught golf for about 48 years. He had made some earlier investments through Daughtry, and his $600,000 in River Bluff represented a large investment for him. His role in the venture was as a golf consultant. Daughtry coordinated the business affairs; Seymour's area of knowledge was construction; and Sheldon had skills in negotiating, having once been a lawyer. Plaintiff had not been looking to sell, but he was short of cash and did not have the funds to stay in the venture if it required further investment. When approached with selling his shares to defendants, plaintiff tried for $750,000 but wound up agreeing to $650,000—$150,000 in cash, and the rest financed with the $500,000 note. He knew that defendants were not interested in buying his shares unless they could buy Sheldon's and Seymour's shares at the same time.
Plaintiff had an attorney during the transaction but, until this lawsuit, had never heard the term "without recourse" used. It was important to him during the sale to have what he called a "guarantee" or "personal guarantee" on the note to make sure he got his money back. The sale was a long time ago, and he did not recall specific conversations but must have talked about it with Clay. Referring in a February 2 email to Daughtry about a "long talk" he had with Clay, plaintiff wrote, "I agree on all points except he is not sure about a guarantee on the note," "guarantee" meaning Clay being willing to be personally liable or responsible on the note. Plaintiff also emailed Daughtry the next day: " . . . I'm really low on funds and have no way of staying in the project. I hope Eric will go with a personal guarantee on the unpaid balance for me. That's about my only real lifeline I have left." He had emailed Daughtry days earlier, on January 30: "A note from River Bluff for $450,000 is not worth anything without some type of guarantee"; "[f]or all I know, they could be just putting in a small amount to keep [River Bluff] afloat, have control, and, again, that is why a plain note won't work." His concern arose from a prior, similar experience where a partner with a corporation had "signed a note for me on a corporate check," and he was later unable to get money back on his investment.
Plaintiff testified that he never told Clay or Michaels it would be okay if they were not personally responsible for the balance due under the promissory note if the project failed, and he never told anyone that he was willing to take the note without a personal guarantee. He did not recall any discussion about his having a right to recover the shares; and he never asked Clay or Michaels for the shares or a mortgage on the property as security. He only understood that he had a promissory note as security.
Plaintiff came to his agreement with defendants to sell by around February 6, but did not know the terms Sheldon and Seymour were separately negotiating. He did not want to proceed without full disclosure, and Daughtry assured him there would be full disclosure through a right of first refusal.
Clay. Defendant Clay said he spoke with plaintiff four or five times by phone— never face to face—between late January and signing the agreement and note. He and defendant Michaels had in mind a total dollar amount outlay they could invest up front, and had to work out how to allocate that outlay among the three sellers. He approached plaintiff first, and initially about ballpark figures and "deal points." Plaintiff "strongly" wanted a "personal guarantee" on the note, and Clay said he was not interested but would talk to his partner Michaels. In the next conversation, after speaking with Michaels, Clay told plaintiff that they were not willing to do that, that the membership interest would be the security, but that the value ought to increase with the new investment. Clay recalled (contrary to plaintiff) that plaintiff suggested giving him a mortgage on the resort or other property. Clay rejected that proposition. The ensuing agreement and note, which Clay read before signing, were drafted by his attorney, Lee Lubin.
Clay related extensive past experience as a real estate developer, in which he would pool investors to acquire land, navigate the approval processes, and build and sell homes. He had done this 12 to 15 times before the River Bluff venture. Two projects were 53- and 64-unit tracts in Rosemont and Desert Hot Springs, California, that he and Michaels developed through their company, Developers Investment Group, and he knew Daughtry as a mortgage broker for such projects.
Michaels. Defendant Michaels, whose testimony the court would write lacked credibility, claimed to have had as many as six phone conversations with plaintiff, in most of which they discussed plaintiff wanting him and Clay to be personally liable—to give what plaintiff called a personal guaranty. In the end, however, plaintiff agreed that he would not get it and would have recourse only to the membership shares. Michaels, a former professional actor who had gone into real estate investing and invested for years with Clay through their company, said he first learned of the River Bluff project from Clay and that they had early discussions with just Daughtry. Michaels and his parents provided the entire $1.6 million cash investment for River Bluff, including the cash paid to plaintiff, Sheldon and Seymour in the shares purchased, and Michaels did not want to take on personal liability. Basic agreement with all three sellers was reached by April 19, Michaels said, but agreement with plaintiff about the note being nonrecourse was reached sometime later, between April 20 and 23, and it was oral, not written.
Confronted in testimony with various written or emailed communications he had with plaintiff over those months, including some in mid-April, Michaels conceded that none of them mentioned the note being nonrecourse.
The agreement and note, Michaels recalled, were drafted by his attorney, Lubin, just days after the agreements were reached. Michaels said that Lubin sent him copies, that he read the agreement and note before signing, and that it was very important to him that the note be nonrecourse. He felt he read the note carefully and understood it, yet he conceded that it contained no language that the loan was nonrecourse. At the time, he explained, he had read a dozen and a half promissory notes, and his understanding was that a note was always nonrecourse if it was a loan for real property. On the other hand, he conceded that River Bluff did not own real property, only options to purchase, and that the note was not secured by real property. He could not recall ever having signed a promissory note in which the title or language provided for nonrecourse, but said he relied on the "without recourse" phrase in the agreement as indicating that this note was without recourse, since the documents were attached to and referenced each other. He also understood at the time that, if one signs a promissory note personally, one is personally liable.
Seymour. Deposition testimony by Seymour was read into the record, on an implicit finding that he was unavailable to appear. Seymour said that discussions went on mostly between Daughtry, plaintiff and himself, and that he trusted and relied on plaintiff for much of the process, relying also on the fact that plaintiff had an attorney, although Seymour never met or spoke with that attorney.
Seymour lacked concrete knowledge of how or when plaintiff came to any agreement with defendants on the question of nonrecourse: "[Q] 'Was the purchase proposed, at least at some point in time, as being paid full with an unsecured note?' [¶] [A] 'I would say yes, only because I personally wanted personal guarantees, and after much to do, basically accepted the fact that I wasn't going to get them.' [¶] [Q] 'You accepted the fact you weren't—you weren't going to get a personal guarantee for—for what?' [¶] 'For the money that they were going to have to pay me for my interest.' [¶] [Q] 'Did you have any discussions regarding the terms of your purchase with Bob McDonald?' [¶] [A] 'I did to some degree. But even though it was extremely unusual, they dealt with each one of us as individuals. And really I didn't know what—in the end run, I didn't know what Bob was going to get. . . . It wasn't like we sat down as a group and had a discussion and as such.' " All he could say (that was not stricken by the court as inadmissible) was that, in conversations with plaintiff regarding the final terms, the personal guarantee they both wanted " 'was one main point[;] we discussed that pretty thoroughly.' " Seymour also spoke of the form of guarantee not as recourse against the maker, but as security in River Bluff property: " '[M]aybe there was some other property they had, just something that gave us something other than what I call a promissory note.' " He did not remember whether plaintiff used the term recourse.
Seymour said he had three to five conversations with plaintiff about personal guarantees, all by telephone except for one email, and that their talks started only after all sellers had gotten offers and had documents to review. No talks took place after they got their final offers, however, for " '[a]fter enough refusals, we basically said, "Okay. We'll do it as is." ' " On the other hand, Seymour's testimony did not show that he even thought he had a security interest in the shares he sold: " 'I just felt like basically if the project didn't go forward, we were probably not going to get our money. And I guess that's my own—that was my own thought based on the development of real estate which I've done all my life, that was basically my thought of what the whole thing was all about.' " Seymour said his understanding, based on conversations with plaintiff, was that plaintiff's attorney and Daughtry had told plaintiff ' "we were not going to get the guarantees.' "
Analysis
" 'The parol evidence rule generally prohibits the introduction of any extrinsic evidence to vary or contradict the terms of an integrated written instrument. (Code Civ. Proc., § 1856.) It is based upon the premise that the written instrument is the agreement of the parties. [Citation.] Its application involves a two-part analysis: 1) was the writing intended to be an integration, i.e., a complete and final expression of the parties' agreement, precluding any evidence of collateral agreements (Masterson v. Sine (1968) 68 Cal.2d 222 . . . ); and 2) is the agreement susceptible of the meaning contended for by the party offering the evidence? (Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33 . . . .)' [Citation.]" (Bionghi v. Metropolitan Water Dist. (1999) 70 Cal.App.4th 1358, 1364 (Bionghi).)The court concluded that the note was both integrated and not susceptible of the meaning urged by defendants. We find no error in either conclusion.
In assessing integration, a court considers "the writing itself, including whether the written agreement appears to be complete on its face; whether the agreement contains an integration clause; whether the alleged parol understanding on the subject matter at issue might naturally be made as a separate agreement; and the circumstances at the time of the writing. [Citations.]" (Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 953-954.) "[T]he collateral agreement will be looked to only insofar as it does not directly contradict the express terms of the writing. Further, it must by an agreement which, in the normal course of events, might be made as a separate contract. Spun somewhat differently, are the parol terms such that, if agreed upon, they most certainly would have been included in the writing? [Citations.]" (Software Design & Application, Ltd. v. Price Waterhouse (1996) 49 Cal.App.4th 464, 470.)
The note in this case lacks an integration clause as such, but integration is strongly implied by language that the borrowers promise to repay the holder "on the terms and conditions and at the times hereinafter set forth . . . ." And as the trial court observed, the note is complete on its face. There is no ambiguity in the lack of nonrecourse language, for a note without such language is with recourse, making recourse something unnecessary to state in the instrument. In these circumstances, using the "without recourse" language of the buy-sell agreement's recital to alter the note's silence on that point would amount to introducing extrinsic evidence to create, not resolve, an ambiguity.
Also supported is the conclusion that nonrecourse language was not something that, in the normal course of events, might be made as a separate contract. There is no reason why such an important provision would not normally be made in the note itself. The circumstances also show no unusual events. There was no testimony that the note was just an early draft on that or any other point, and we have no evidence of any drafts bearing differing language. Michaels specifically testified that he did not recall there being any nonrecourse language. Indeed, the notes executed in the related transactions by Sheldon and Seymour also lacked any nonrecourse language.
Also, for many of the same reasons, the note is not susceptible of the meaning contended for by defendants in offering the extrinsic evidence. Given that a promissory note without any express limitation is with recourse, the note's silence is directly contrary to the existence of a contrary understanding.
The bar of the parol evidence rule as determined below is thus unassailable, whether we review the issues de novo or examine them for substantial evidence, and this makes it unnecessary to resolve the parties' debate about whether defendants have briefed the substantial evidence aspect with enough facts, pro and con, to avoid having the issue deemed waived (see generally In re Marriage of Fink (1979) 25 Cal.3d 877, 887-888; Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881).
III. The Note and Agreement as "One Contract"
To avoid the parol-evidence-rule problem, defendants claim misapplication of section 1642, which states, "Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together." In their view, this alone compelled the court to impart the "without recourse" language of the agreement recital to the note.
The parties differ over what it means for related contracts under section 1642 "to be taken together." Venerable case law language is to the effect that such contracts are to be construed together as one contract. (Symonds v. Sherman (1933) 219 Cal. 249, 253 (Symonds) ["to be construed together as one contract"]; Fletcher v. Original Pit Barbecue (1930) 110 Cal.App. 670, 672 [writing on the back of a promissory note was "part and parcel of the entire written agreement"]; McAuliff v. McFadden (1919) 42 Cal.App. 505, 510-511 [disagreeing that documents "did not evidence one single contract" and treating them "as if all had been incorporated in one document"]; Daniels v. Daniels (1906) 3 Cal.App. 294, 297-298 ["as one contract, and construed as a whole"].) On the other hand, as one cited case put it in finding section 1642 inapplicable: " '[J]oint execution would require the court to construe the two agreements in light of one another; it would not merge them into a single written contract.' " (Pankow Const. Co. v. Advance Mortg. Corp. (9th Cir. 1980) 618 F.2d 611, 616.)
Defendants seems to assume that we need look no further than whether two contracts are, in the words of section 1642, "relating to the same matters, between the same parties, and made as parts of substantially one transaction," and they stress that the trial court did find those elements satisfied in this case. Case law, however, shows that the matter is not so simple. "While it is the rule that several contracts relating to the same maters are to be construed together ([§] 1642), it does not follow that for all purposes they constitute one contract." (Malmstedt v. Stillwell (1930) 110 Cal.App. 393, 398 [where documents showed differing intents].) That is commonsensical. In a case like ours, for example, where the instruments are a buy-sell agreement and promissory note, each has due dates and terms that could not apply to the other.
Section 1642 also does not apply where documents conflict. "Being antagonistic, the two instruments are not to be read together, but separately, and the last in date will, if it is valid, supersede the earlier instruments. [Citation.]" (Ucovich v. Basile, Jr. (1938) 26 Cal.App.2d 272, 278.) Section 1642's application also depends on the circumstances shown in any given case (Symonds, supra, 219 Cal. at p. 253), and limited use of extrinsic evidence to show those circumstances does not violate the parol evidence rule (Versaci v. Superior Court (2005) 127 Cal.App.4th 805, 814-815 (Versaci)).
Finally, section 1642's applicability "is a question of fact for the trial court, and the appellate court will affirm the court's resolution if it is supported by substantial evidence. [Citations.]" (Versaci, supra, 127 Cal.App.4th at p. 815; Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1675 & fn. 6.)
Given dependence of the question on the circumstances, we reject any implicit criticism by defendants of the trial court's reference to circumstances beyond the bare "elements" of section 1642.
The trial court correctly observed that the note and agreement here, while relating to the same transaction, did not incorporate each other's terms. "A contract may validly include the provisions of a document not physically a part of the basic contract. . . . 'It is, of course, the law that the parties may incorporate by reference into their contract the terms of some other document. [Citations.] But each case must turn on its facts.' " (Williams Constr. Co. v. Standard-Pacific Corp. (1967) 254 Cal.App.2d 442, 454.) As already noted, the agreement has an integration clause, and the note stands alone, complete on its face, stating that the loan terms and conditions are as "hereinafter set forth," whereas the agreement refers only to some basic terms of the note. Although the agreement refers to the note as an attached exhibit, the note is separately signed, facially complete, and thus, not a list of additional terms for a single agreement.
Thus, substantial evidence—even independent review—supports the court's finding of no intent to incorporate one document into the other. This is not, however, dispositive of whether section 1642 applies. (Cf. Cadigan v. American Trust Co. (1955) 131 Cal.App.2d 780, 786-787.) The parties each discuss case precedents that they feel support them. None, however, deal with facts like those presented here, and little point would be served by summarizing how distinguishable they are.
Moving on, there is no dispute that substantial evidence supports the court's finding that the agreement and note "were separate contracts executed as part of the same transaction" within the meaning of section 1642; nor is there disagreement that both contracts were between the same parties and signed at substantially the same time.
The rub for defendants is that the court did consider the two contracts "in light of one another" but nevertheless found no intent to make the "without recourse" phrase in the agreement's recital a term of the note. Given our limited review for substantial evidence, we cannot say that the court's conclusion is unsupported.
The court alluded specifically to undisputed circumstances that having or not having a personal guarantee was very important to both sides, that plaintiff tenaciously pursued that term throughout the negotiations, that defendants had vast experience with promissory notes, that they signed the note in their individual capacities, that their own understanding was that when one is personally liable signing in one's personal capacity, that the note's lack of nonrecourse language rendered it unambiguously with recourse, and that the "paper trial" of communications leading to the signing made no mention of any agreement that the note would be nonrecourse.
The court wrote at one point regarding parol evidence: "[T]he phrase 'without recourse' is ambiguous. Under the circumstances, and particularly in light of the fact that the phrase appears only in the recitals section of the Buy-Sell Agreement, and not in the Note, the court would find that in this context the phrase 'without recourse' is reasonably susceptible to a variety of potential meanings, and as such, the court would be required to consider parol evidence in determining the meaning given that phrase by the parties." The court could not conclude that the phrase, "appearing as it does in the recitals section of the Buy-Sell Agreement, unambiguously means that the parties intended that defendants would not be personally liable on the Note."
Tailoring that reasoning to the question of what impact the phrase should have under section 1642, we agree that the peculiar context of the phrase militated against treating it as a term of the note. Isolating the words "without recourse," defendants see no ambiguity, but a reasonable judge certainly could, given the context. It would be one thing if the recital spoke of a "promissory note without recourse" or a "loan without recourse," but it does not. It speaks of a "purchase, without recourse," which is odd phrasing if meant to reference a promissory note. More perplexing is that one does not expect to find "deal points" of an agreement in recitals verbiage. Recitals are ordinarily prefatory to the actual terms of the agreement, and so they were here, reading in full: "The purpose of this agreement is to evidence in writing the purchase, without recourse, by Buyers from Seller of the Membership Interest as a final and complete sale. Buyers and Seller recognize the value of having a written agreement to carry out the aforementioned purpose and, therefore, have agreed and do agree to do as follows: . . . ." (Italics added.) No agreement on nonrecourse follows, even in the paragraphs referencing the attached note and basic loan terms. To an objective reader, elevating such a buried and awkward phrase to a critical term of an attached note could appear to be "agreement" by stealth.
Substantial evidence supports the court's ruling under section 1647.
IV. Meaning of "Without Recourse" in the Agreement
Defendants claim multiple errors in the court's conclusion that use of the phrase "without recourse" in the agreement recitals did not constitute an expression of the parties' intention regarding the note. On the assumption that extrinsic evidence was admissible to show the parties' intention, they argue: (a) the conclusion that the term was susceptible of various meanings, and thus ambiguous as to personal liability, is not supported; (b) plaintiff's testimony does not constitute substantial evidence that the term did not mean lack of personal liability; and (c) even if it did, it was inadmissible under the parol evidence rule.
As we understand them, these arguments all depend on the extrinsic evidence being admissible, but this was an alternate to the court's threshold conclusion that the extrinsic evidence was not admissible. Since we have upheld the threshold conclusion (part II, ante), there is no reason to review the alternative or reach argument by plaintiff, once again, that defendants have waived insubstantial evidence claims. Any error, in other words, would still require affirmance of the judgment.
Also unnecessary to reach are defendants' arguments, under a separate heading, challenging support for the court's conclusion that Seymour's deposition testimony was "too vague" to provide "any real support" for their position. The deposition testimony, like all of the extrinsic evidence, was conditionally admitted as showing circumstances bearing on admissibility under the parol evidence rule, and the court ultimately ruled the evidence inadmissible. Thus the attack on the "too vague" finding is, again, an attack on an alternate finding we need not reach.
V. The "Clarification Agreements"
During Clay's testimony, the defense preferred what were marked as Exhibits Nos. 48 and 50, two-page documents titled "AGREEMENT RE: CLARIFICATION OF TERMS OF SECURED PROMISSORY NOTE." Executed in mid-2009 between "holder" Sheldon and defendants, and "holder" Seymour and defendants, they recite that each holder sold his respective membership interests in River Bluff to defendants (makers) in May 2005, taking a promissory note from defendants as part of the purchase, as plaintiff and each other had in related transactions. Each recites that plaintiff had since brought this action claiming that his was a full recourse note, that defendants intended to cross-complain to prove that the notes in all three transactions were non-recourse, and that defendants had asked each holder to state his belief that his own promissory note was without recourse "so that [defendants] can avoid naming" holders in the cross-complaint. Each holder states that his note "is and was intended to be a non-recourse note," that he "understands" that the notes in the related transactions were also non-recourse, and that each holder's note is "hereby modified" to reflect those acknowledgements to the extent that the note "conflicts" with them.
When defendants offered the exhibits in evidence, plaintiff objected on hearsay and relevance grounds. Defense counsel offered that the exhibits were not offered "for the truth of any matter," but as agreements, and that they were relevant to show "what was meant by the term 'without recourse' in the agreement between" defendants and plaintiff since the three related transactions and notes were roughly contemporaneous and nearly identical except for purchase, note and share amounts. The court found no relevance saying: "They, being documents, that some other people signed some four, four years after the event that we're concerned with here to settle some situation that they had between them at that time four years later, and it may have been in light of this litigation, who knows, but it's not relevant to the determination that's before the court."
We review a relevance ruling under the deferential abuse of discretion standard (People v. Jablonski (2006) 37 Cal.4th 774, 821), and defendants fail to show abuse of discretion. They cite no case authority supporting their position, and ignore authority against it. Closely on point is McKee v. State of California (1959) 172 Cal.App.2d 560, where the issue was whether, in transactions with state agencies to purchase federal lieu lands, McKee purchased only indemnity certificates (scrip) or applied for direct purchase of the lands. (Id. at pp. 561-562.) The appellate court found error in admitting testimony as to the departmental practice of the State with respect to sales of lieu lands or scrip to others. "The State seeks to justify the admission of this material upon the theory that since the nature of the transaction in litigation was in issue the State could show its custom and practice concerning other proceedings of like nature had with others. . . . The issue here was as to the contract between appellant and the State. What the State may have contracted for with others would not prove the nature of its contract with appellant." (Id. at p. 569.) The same is true here, of course.
Defendants argue that, since the court's statement of decision ultimately called Seymour's deposition testimony "too vague to provide any real support" for the parties intending the note to be without recourse, Seymour's clarification agreement was relevant to render his deposition testimony less vague. They also argue that, since his prior recorded testimony was already predicated on his unavailability to testify (Evid. Code, § 1237), the agreement was also admissible as a declaration against interest (id., § 1230).
These additional arguments are forfeited, for we do not see that these theories were raised to the court below when it ruled the exhibits irrelevant. (Evid. Code, § 354, subd. (a).) Indeed, parts of the deposition that were read into the record at the close of testimony were not even in evidence yet, and we do not see a later request to reconsider the ruling.
Moreover, these are further arguments which, given support for the threshold conclusion that extrinsic evidence was inadmissible (part II, ante), are unnecessary to reach. Any error would still require our affirmance of the judgment.
DISPOSITION
The judgment is affirmed.
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Lambden, J.
We concur:
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Kline, P.J.
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Richman, J.