Opinion
B158616.
7-29-2003
STANLEY ZIMMERMAN et al., Plaintiffs and Appellants, v. ACCREDITED HOME LENDERS, INC., Defendant and Respondent.
King, King & Fishleder, George King, Daniel A. King and Alexis K. Wodtke for Plaintiffs and Appellants. Gray Cary Ware & Freidenrich, Kathryn E. Karcher and Jay D. Hanson for Defendant and Respondent.
Plaintiffs and appellants Stanley Zimmerman (Zimmerman) and John Tonoyan (Tonoyan) (collectively, plaintiffs) appeal a judgment of dismissal in favor of defendant and respondent Accredited Home Lenders, Inc. (Accredited) after Accrediteds demurrer to their first amended complaint was sustained without leave to amend as to all but one cause of action (which cause of action they did not amend).
Plaintiffs sold their business, Royal Mortgage Partners L.P. dba Royal MortgageBanc (Royal) to ContiFinancial Corp. (Conti), with the payments to be made over a period of five years. The agreement between plaintiffs and Conti (the Conti purchase agreement) required any future buyer to assume Contis obligation to continue making payments to plaintiffs. Conti sold certain assets of the business to Accredited. The agreement between Conti and Accredited disclaimed any obligation to pay the plaintiffs. The essential issue presented is whether plaintiffs stated a cause of action against Accredited for its failure or refusal to make payments to plaintiffs in accordance with the Conti purchase agreement.
Conti is in bankruptcy and Accredited is the sole defendant herein.
We conclude plaintiffs failed to state a cause of action against Accredited because Accredited merely acquired certain Royal assets from Conti. Accredited did not receive all the benefits of the Conti purchase agreement and therefore is not subject to the burdens of that agreement. The judgment of dismissal is affirmed.
FACTUAL AND PROCEDURAL BACKGROUND
Facts
The facts are drawn from the allegations of the complaint and are regarded as true for purposes of demurrer. (Shaeffer v. State of California (1970) 3 Cal. App. 3d 348, 354, 83 Cal. Rptr. 347.)
1. Contis Acquisition Of Royal From Zimmerman And Tonoyan.
Zimmerman and Tonoyan owned Royal, a mortgage banking business. Zimmerman and Tonoyan were limited partners in Royal and the sole shareholders of ZTS Corporation, the general partner of Royal.
On November 15, 1996, Zimmerman and Tonoyan entered into the Conti purchase agreement with Conti for the sale and purchase of Royal. As consideration for the sale, plaintiffs were to be paid $ 165,000 up front, 63 monthly installments calculated as a percentage of loans originated by brokers and retail branches and amounting to about $ 50,000 to $ 60,000 per month, and a final payment equal to a full year of monthly payments, for a total in excess of $ 4 million.
A copy of the Conti purchase agreement was appended to the operative pleading as exhibit A.
The Conti purchase agreement provided in relevant part at paragraph 5.5: "5.5 Change of Control of the Partnership. If, before all payments due Sellers have been made, Purchaser sells the Partnership, consummates any other transaction which would result in [Conti] not having direct or indirect control over the operation of the Business, or enters into an agreement to do either of the foregoing, then either: (a) the entity which following such transaction controls the Business shall have (at the time of the transfer) either a Standard & Poors rating of BB or better or a Moodys rating of Ba2 or better, shall assume in writing all covenants and obligations of the Purchaser hereunder which have not then been fully performed, and shall in the reasonable opinion of Zimmerman and Tonoyan have skills and reputation at least equal to those of [Conti], or (b) on the date scheduled for consummation of such transaction (the "Payout Date") the Purchaser shall pay to the Sellers a lump sum amount in lieu of and in satisfaction of the Purchasers remaining payment obligations hereunder." (Italics added.)
Further, paragraph 11.4 of the Conti purchase agreement provided "all covenants and agreements set forth in this Agreement by or on behalf of the Parties will bind and inure to the benefit of the respective successors and assigns of the Parties, whether so expressed or not . . . ."
2. Contis Default.
In January 2000, thirteen months before the final installment payment was due, Conti defaulted on its payment obligation.
On April 11, 2000, Tonoyan wrote to Conti and Royal advising them of Contis defaults and expressly asserting his and Zimmermans rights under paragraph 5.5 of the Conti purchase agreement to require any purchaser to assume all of Contis obligations under the Conti purchase agreement, or to be paid the remainder of the purchase price.
3. The Accredited Purchase Agreement.
On May 15, 2000, Conti and Royal entered into an agreement with Accredited (the Accredited purchase agreement), whereby Accredited "shall acquire certain assets of, and hire certain individuals currently employed by Conti and/or Royal."
A copy of the Accredited purchase agreement likewise was attached to the complaint as exhibit B.
Under this agreement, Accredited acquired substantially all the assets of Royal, including: the leases held by Royal offices in California, Colorado, Washington, Oregon and Phoenix; all individuals then employed by Royal at those offices; the assignment and assumption of leases for equipment located at Royal offices; furniture, fixtures and equipment owned by the sellers at each Royal office; and the assignment and assumption of all software licenses for software installed in any leased or owned equipment in Royal offices. In addition, Accredited acquired the right to broker each mortgage loan application pending in a Royal office at its own rates, in accordance with its own guidelines and procedures, and retaining all points and fees otherwise payable to Conti and Royal.
The only stated consideration paid by Accredited was $ 26,000 "for the Owned FF&E" (furniture, fixtures and equipment). No consideration was stated for acquisition of other assets of the business, such as goodwill, reputation, existing office leases, existing equipment leases, existing mortgage customers, accounts receivable and other intangible assets.
Accredited did not assume the outstanding obligations of Conti to Zimmerman and Tonoyan in accordance with paragraph 5.5 of the Conti purchase agreement. To the contrary, paragraph 23 of the Accredited purchase agreement provides: "Relationship of the Parties. The parties agree that this transaction is not an acquisition of stock, shares, partnership interest, nor any other form of ownership of Seller; Accredited is not assuming any liability or obligation under the [Conti purchase agreement], it being understood that Seller is and shall remain solely responsible for the fulfillment of Sellers liabilities and obligations under [the Conti purchase agreement]; this transaction only contemplates the acquisition of certain assets at fair market value, with no consideration of going concern value or any other related calculation . . . ."
At the time Accredited entered into the Accredited purchase agreement, Accredited had actual knowledge of the Conti purchase agreement. The Accredited purchase agreement expressly referred to the Conti purchase agreement. Paragraph 10(d) of the Accredited purchase agreement provided: "Except as set forth in the letter dated April 11, 2000 from John Tonoyan, there is no claim, action, suit, proceeding or investigation pending or threatened against [Conti] with respect to any Office or Asset." Further, paragraph 12 of the Accredited purchase agreement stated Conti would indemnify Accredited from any claim arising out of the Conti purchase agreement.
As indicated, in that letter to Conti and Royal, Tonoyan reiterated his rights under paragraph 5.5 of the Conti purchase agreement to require any purchaser to assume Contis obligations under the Conti purchase agreement.
On May 25, 2000, 10 days after the formation of the Accredited purchase agreement, it was amended to clarify certain terms (the amended Accredited purchase agreement). According to plaintiffs, this agreement confirmed that Accredited was assuming operation of the business, including Royals/Contis obligations concerning the servicing of mortgage loans originating with and acquired by Royal and/or Conti.
A copy thereof was appended to the complaint as exhibit C.
4. Events Following Accrediteds Acquisition Of Contis Assets.
On May 18, 2000, three days after selling Royal to Accredited pursuant to the Accredited purchase agreement, Conti sought protection from its creditors, including Zimmerman and Tonoyan, by commencing chapter 11 bankruptcy proceedings.
Since May 2000, Accredited has operated the business with the assets and personnel it acquired from Royal and Conti pursuant to the Accredited purchase agreement.
Proceedings
On April 11, 2001, plaintiffs filed their initial complaint against Accredited, alleging seven causes of action: breach of assumed contractual obligations, intentional interference with contract, intentional interference with prospective economic advantage, fraudulent transfer under
the Uniform Fraudulent Transfer Act (Civ. Code § 3439 et seq.), civil conspiracy, constructive trust and declaratory relief.
The trial court sustained Accrediteds demurrer to the causes of action for breach of assumed contractual obligations, conspiracy and fraudulent transfer with leave to amend, and to the other four causes of action without leave to amend.
The operative first amended complaint, filed December 5, 2001, set forth eight causes of action: successor liability; intentional interference with contract; intentional interference with prospective economic advantage; commission of an unlawful business act or practice and conspiracy to commit an unlawful business act or practice; commission of an unfair business act or practice and conspiracy to commit an unfair business act or practice; commission of a fraudulent business act or practice and conspiracy to commit a fraudulent business act or practice; constructive trust; and declaratory relief.
The gravamen of the complaint was that Accredited, having acquired the business from Conti and Royal, was liable to Zimmerman and Tonoyan for the unpaid obligations under the Conti purchase agreement.
Accredited
demurred again. It asserted the cause of action for successor liability failed to allege facts demonstrating that Accredited should be held liable for the contractual liabilities of the selling corporation; the causes of action for intentional interference with contract, intentional interference with prospective economic advantage, constructive trust and declaratory relief were in violation of the trial courts previous order sustaining demurrers to those causes of action without leave to amend; and the causes of action alleging the commission of an unlawful, unfair or fraudulent business act or practice failed to state a cause of action because plaintiffs could not plead around their barred fraudulent transfer claim by recasting the cause of action as one for unfair competition and because they pled no supporting facts.
On February 20, 2002, the matter came on for hearing. With respect to the first cause of action, denominated as one for successor liability, the trial court sustained the demurrer with 20 days leave to amend. As to the balance of the first amended complaint, the demurrer was sustained without leave to amend. Plaintiffs elected not to amend, and on March 29, 2002, the
trial court entered a judgment of dismissal. This appeal followed.
CONTENTIONS
Plaintiffs contend they adequately pled various causes of action which entitle them to relief, to wit, successor liability, intentional interference with contract, unfair competition, constructive trust and declaratory relief.
DISCUSSION
1. Standard Of Appellate Review.
In determining whether a plaintiff has properly stated a claim for relief, "our standard of review is clear: "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. [Citations.]" (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.) Our review is de novo. (Ibid.)
2. No Cause Of Action Stated For Successor Liability.
a. Plaintiffs Theory.
Plaintiffs contend the first cause of action, captioned "successor liability," pleads all the necessary facts to justify holding Accredited liable for the obligation undertaken by Conti. Plaintiffs assert Accredited took the benefits of the Conti purchase agreement and therefore "must bear the burden." (Civ. Code, § 3521.) Plaintiffs further argue that restitution of the profits earned on loans originated by brokers and retail branches of Royal is required to avoid unjust enrichment, and liability may also be premised on an exception to the general rule that debts owed by the transferor are not assumed by the transferee because in this case the consideration paid by Accredited was inadequate.
b. General Principles Regarding Implied Assumption.
The general rule is that "a purchaser of assets for cash does not assume the sellers liabilities . . . ." (Marks v. Minnesota Mining & Manufacturing Co. (1986) 187 Cal. App. 3d 1429, 1435, 232 Cal. Rptr. 594.) Plaintiffs contend the instant complaint states a cause of action which falls within an exception to the general rule. Plaintiffs rely on Civil Code section 1589, which provides: "A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting."
As a corollary to Civil Code section 1589, Civil Code section 3521 states that "he who takes the benefit must bear the burden." (Recorded Picture Company [Productions] Ltd. v. Nelson Entertainment, Inc. (1997) 53 Cal.App.4th 350, 361, fn. 5, review. den. (hereafter, Recorded Picture.)
Recorded Picture, supra, 53 Cal.App.4th 350, discusses the application of Civil Code section 1589. In that case, the producers of a motion picture entered into a written agreement with a distributor to exploit the picture domestically in the theatrical, television, and home video markets. The agreement contemplated that the distributor would enter into a separate contract with a subdistributor for home video release and obligated the distributor to require that the subdistributor pay 70 percent of the gross receipts directly to the producers. The distributor entered into a subdistribution contract but did not require the subdistributor to pay anything directly to the producers. Moreover, despite the provision in the producer-distributor agreement requiring that the producers receive 70 percent of the gross receipts, the distributor agreed to a 50/50 split of the net receipts between itself and the subdistributor. The subdistributor approved this arrangement without actual knowledge of the terms of the producer-distributor agreement. (53 Cal.App.4th at p. 356.)
The producers sued the distributor (Hemdale) and the subdistributor (Nelson), seeking to recover 70 percent of the gross receipts from the home video release of the picture. The producers and the subdistributor filed cross-motions for summary judgment. The trial court ruled in favor of the producers, concluding that the subdistributor was bound by the 70 percent gross receipts provision in the producer-distributor agreement, not by the 50 percent net receipts provision in its own contract. The subdistributor appealed, arguing that its obligations were governed by its contract with the distributor, not by the producer-distributor agreement to which it was not a party. The reviewing court agreed and reversed. (Recorded Picture, supra, 53 Cal.App.4th at p. 356.)
Recorded Picture acknowledged the maxim of Civil Code section 1589 that one who accepts the benefit of a contract or transaction is also obligated to accept the burdens thereof, but found it inapplicable. (Recorded Picture, supra, 53 Cal.App.4th at pp. 361-362.) Section 1589 " requires the assignee of an executory contract to accept the burdens when all the benefits of a full performance have inured to him. [Citations.] " . . . Where after the assignment is made, the executory provisions of the contract are fully performed, the benefit inuring solely to the assignee, and where by his actions he holds himself out as personally liable and recognizes the original contract as binding upon him, he is liable to the other party equally with the assignor." [Citations.]" (Recorded Picture, supra, 53 Cal.App.4th at p. 362, third italics omitted.)
Nelson, the subdistributor, "was not an assignee of the producer-Hemdale agreement, nor did it accept or receive all of the benefits of that agreement. The producers transferred to Hemdale all domestic distribution rights in [the motion picture]-theatrical, television, and home video-in perpetuity. The producers also assigned the copyright in the picture to Hemdale. In contrast, the Hemdale-Nelson contract authorized Nelson to distribute the picture in the home video market only; Nelson did not receive the distribution rights for theatrical or television release. Further, Nelsons distribution rights terminated after seven years (and reverted to Hemdale), while Hemdale received the distribution rights in perpetuity. Moreover, Hemdale retained the copyright in the picture. Under these circumstances, Nelson was a licensee, not an assignee." (Recorded Picture, supra, 53 Cal.App.4th at pp. 362-363, italics added.)
Recorded Picture concluded, "In sum, since Nelson did not accept the benefit of the producer-Hemdale agreement, it is not subject to the burdens of that agreement under Civil Code section 1589." (Recorded Picture, supra, 53 Cal.App.4th at p. 365.)
c. Accredited Is Not Subject To The Burdens Of The Conti Purchase Agreement Because It Did Not Receive All The Benefits Of That Agreement.
As set forth in the Accredited purchase agreement, Accredited acquired only specified Royal assets, such as certain leases and the liabilities associated with those assets, such as lease obligations. There was no allegation that Accredited acquired all of the Royal offices or all the real and personal property leases. Further, Accredited did not acquire Royals name, goodwill, or accounts receivable. Also, consistent with Accrediteds acquisition of less than all of Royals assets from Conti, the Accredited purchase agreement provided "Accredited has not participated, restricted, nor advised Seller with regard to its plans for assets, locations or personnel continuing with Seller in any respect."
In sum, the Accredited purchase agreement indicates Accredited received less than all of the benefits of the Conti purchase agreement. In marked contrast to Accrediteds limited acquisition of certain Royal branch assets, the Conti purchase agreement represented an acquisition from Zimmerman and Tonoyan of "all rights and interests of every kind and nature [they held] as partners in Royal." In view of Accrediteds acquisition of less than all of Royals assets, Civil Code section 1589 does not subject Accredited to the burdens of the Conti purchase agreement. (Recorded Picture, supra, 53 Cal.App.4th at p. 365.)
Accordingly, the trial court properly found the successor liability claim was not well pled.
We note that in Recorded Picture the subdistributor lacked actual knowledge of the terms of the producer-distributor agreement (Recorded Picture, supra, c53 Cal.App.4th at p. 356), while in the instant case it is alleged that Accredited was aware of the terms of the Conti purchase agreement. However, the reason the subdistributor in Recorded Picture was not liable under Civil Code section 1589 was that it did not receive the entire benefit of the producer-Hemdale agreement. (Id . at pp. 362-365.)
3. Plaintiffs Unfair Competition Claims.
Business and Professions Code section 17200 prohibits "unfair competition," which is defined as "any unlawful, unfair or fraudulent business act or practice . . . ." In the fourth, fifth and sixth causes of action, plaintiffs alleged that Accredited, acting in concert with Conti, conspired and committed an unlawful, unfair, and fraudulent business act or practice by failing to assume Contis obligations to Zimmerman and Tonoyan, and thereby defrauded Contis creditors, including Zimmerman and Tonoyan.
As a preliminary matter, as respondent points out, the bankruptcy court order of December 20, 2000, vests the liquidating trustee with the exclusive authority to pursue any fraudulent transfer claims emanating from actions taken by the debtors. Therefore, to the extent the unfair competition claims are an attempt to resurrect the fraudulent transfer claims, they are barred.
Further, as explained above, a limited asset acquisition, as occurred here, does not by operation of law subject the purchaser to the obligations of an agreement between the seller and another party. It therefore follows that such a transaction cannot be the predicate for a unfair competition claim under Business and Professions Code section 17200.
In this regard, plaintiffs also assert the transaction between Conti and Accredited failed to comply with Corporations Code section 1001, which requires board approval of a sale of all or substantially all of the corporations assets. The argument is meritless because plaintiffs did not plead that Conti was purporting to transfer all or substantially all of Contis assets—rather, plaintiffs alleged that Conti sold "substantially all of the assets of Royal" to Accredited. Therefore, there is no basis for plaintiffs contention that Accrediteds alleged noncompliance with the Corporations Code can give rise to an unfair competition claim.
For these reasons, the trial court properly sustained demurrers to the unfair competition claims without leave to amend.
4. No Interference With Contract.
Plaintiffs contend Accredited interfered with their contract with Conti. This theory flies in the face of the complaint.
"The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendants knowledge of this contract; (3) defendants intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. [Citation.]" (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55, 960 P.2d 513.)
The complaint alleges that commencing in January 2000, thirteen months before the final installment payment was due, Conti defaulted on its payment obligation to Zimmerman and Tonoyan, and "has been in continuous default since that time." Four months later, on May 15, 2000, Conti and Accredited entered into the Accredited purchase agreement.
Plaintiffs allege Accredited acted with an intent to cause, or in a manner substantially certain to cause, Conti to be unable to meet its payment obligations to plaintiffs. However, because Conti was already in default on its payment obligations as of January 2000, plaintiffs failed to allege any facts to show that Accredited induced Conti to breach its contract with plaintiffs.
5. Remaining Theories.
Constructive trust is merely a remedy which rises or falls with plaintiffs substantive claims. Therefore, the preceding discussion disposes of this cause of action.
Finally, plaintiffs allege a claim for declaratory relief. However, at this juncture there is no "actual controversy relating to the legal rights and duties of the respective parties . . . ." (Code Civ. Proc., § 1060.)
DISPOSITION
The judgment of dismissal is affirmed. Accredited shall recover its costs on appeal.
We concur: KITCHING, J., ALDRICH, J.