Filed 12/18/19 Cohen v. Smith CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

ANDREW COHEN, as Trustee, etc. et al.,

Plaintiffs and Appellants,

v.

RICHARD CAMERON SMITH,

Defendant and Appellant,

PACIFIC WEST CAPITAL, LLC,

Defendant and Respondent.

D073787

(Super. Ct. No. 37-2015-00024876- CU-BC-NC)

APPEAL from a judgment of the Superior Court of San Diego County, Jacqueline M. Stern, Judge. Reversed with directions.

Bunt & Shaver and David N. Shaver for Plaintiffs and Appellants.

Richard Cameron Smith, in pro. per., for Defendant and Appellant.

No appearance for Defendant and Respondent.

In this action to recover on a $200,000 promissory note (Note) signed by Raphael T. Nussdorf (Nussdorf) and Pacific West Capital, LLC (Pacific West), the court determined that the Note’s provisions for repaying the principal were too “unclear and vague” to be enforced. At the same time, the court awarded Nussdorf’s successor trustee, Andrew Cohen, $73,310.77 for nine years of accrued interest by default judgment against Pacific West, and after a bench trial against Richard Cameron Smith, as Pacific West’s alter ego.

Cohen appeals, asserting the court erred in not awarding the $200,000 principal. Smith cross-appeals, asserting that only $6,219.59 in interest is due. He does not challenge the alter ego finding.

We conclude the Note is unenforceable in its entirety because an essential element of the transaction—the date for repaying principal—was reserved for the future agreement of both parties. As a result, Smith owes no interest under the Note and Cohen is entitled to restitution of $200,000 principal.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Parties and Transaction

Smith is a business consultant. R. Theodore Nussdorf, now deceased, was his longtime client and friend. In 2008, Nussdorf and Smith invested together in real estate. They agreed that Smith would take title for perceived tax advantages. Smith established Pacific West, of which he is the sole member, to hold Nussdorf’s money until they purchased the property.

B. Interest Rate

Nussdorf and Smith structured the transaction as a loan from Nussdorf to Pacific West. In February 2008, Nussdorf caused $100,000 to be transferred to Pacific West under a promissory note that Smith drafted. Smith signed the note as “member” of Pacific West, which promised to repay the principal amount plus interest. The note provides for a variable interest rate as follows:

“1. Minimum simple interest rate equal to the changing Federal Funds rate published on www.bankrate.com. Currently as of January 1, 2008 at 4.25%. Interest to begin accruing 10 days from date of receipt by the company to allow for the funds to be placed.

“2. Maximum interest rate to be determined by the percentage of funds from this loan used for the purchase and operation of any investment or property over the total cost of the investment or property including closing and operating costs and then deducting a reasonable overhead charge from the company.”

The note also provides that no interest will be paid “during the first two years” and thereafter will be paid semi-annually. Smith and Nussdorf expected to hold the property for at least one year, but not more than two years. Smith designed this provision so he would be able to pay Nussdorf from funds generated by selling the property.

C. Repayment of Principal

Regarding repayment of principal, the note provides:

“After the first two years, principal will be paid or reinvested at the mutual discretion of the parties but in no event will the company be forced to liquidate any existing investments or properties unless under favorable terms and mutually agreeable conditions in order to pay any interest or principal payment.”

Smith drafted this provision “to make sure that, regardless of [Nussdorf’s] cash requirements or [Smith’s] cash requirements, we couldn’t sell the property unless it was a good market.” The parties intended the principal to be repaid when “there was a good market” and both of them “wanted to get out . . . .”

Payments were to be first applied to interest and the balance to principal. The note also provides that the “loan” will not be in default “as long as there are underlying non-liquid investments in the company that could be refinanced or sold under favorable terms to both parties and potentially satisfy all claims from this agreement.”

In June 2008, Nussdorf transferred an additional $100,000 to Pacific West. The same parties entered into the Note for $200,000, replacing the $100,000 note. The Note’s provisions for paying interest and principal and defining default are identical to those in the earlier note.

Smith used the entire $200,000 to purchase a single family home in Oceanside and to renovate the home by remodeling the kitchen and installing new landscaping, carpet, wood floors and central air conditioning. Smith and his wife took title in their own names.

D. Litigation, Judgment, and Posttrial Motions

During the economic recession of 2008, the home’s value plummeted “close to $200,000.” In June 2010, Smith paid Nussdorf $3,189.23 in interest due under the Note. In October 2014, Nussdorf demanded “full restitution” of his $200,000. Smith replied, “As soon as I get the money, you will get the money.” (Boldface omitted.)

Subsequently, Nussdorf commenced this action against Smith and Pacific West. The operative complaint (complaint) alleges causes of action for (1) breach of contract; (2) breach of implied covenant of good faith and fair dealing; (3) violation of the unfair competition law; (4) an accounting; (5) fraud; and (6) rescission. Among other things, the complaint alleges that Pacific West “is suspended and lacks capacity to defend this action” and that Smith is Pacific West’s alter ego.

In November 2016, the court entered default against Pacific West. Subsequently, after a two-hour bench trial in which neither party requested a statement of decision, the court found in Cohen’s favor—but “only on the claim for breach of contract and only as to unpaid interest.” The court ruled that 4.25 percent interest “on the $200,000 loan was due June 30, 2010 and payable on a semi-annual basis thereafter.” However, the court denied Cohen’s claim for the $200,000 principal, ruling that provisions for repaying principal were “so unclear and vague as to be unenforceable . . . .” The court entered default judgment against Pacific West “on the identical terms.” The court rejected Cohen’s cause of action for rescission, stating there was “no basis” for that relief.

Cohen moved for a new trial, asserting the court should order rescission and restitution of the $200,000. Cohen’s lawyer argued, “[I]t didn’t make sense to me that I have an unenforceable right with respect to my [$]200,000 but an enforceable right on the interest.” The court denied the new trial motion, stating, “I’m not a magician. So if the contract did not provide that he gets his . . . $200,000 back, I can’t write terms into the contract.”

The court entered judgment against Smith and Pacific West for $73,310.77. Smith, self-represented, moved to vacate judgment on the grounds that (1) the court did not make an express finding that he is Pacific West’s alter ego; and (2) the interest award, based on a fixed rate of 4.25 percent, is erroneous because the Note provides for a substantially lower variable interest rate. In an accompanying declaration, Smith (a certified public accountant) calculated $6,219.59 interest due under the applicable variable rates. Noting that the federal funds rate was exceptionally low during the recession, Smith asserted, “There is no way the interest could be anywhere near the $73,000 number claimed by [Cohen].” Nevertheless, the court denied Smith’s motion because he did not offer this evidence at trial, and later denied his motion for reconsideration.

E. Appeal and Cross-Appeal

Cohen appeals from the judgment, asserting the court erred in not including the $200,000 in the default judgment against Pacific West. Cohen also contends that Smith is liable on the default judgment as Pacific West’s alter ego. Cohen asserts there are “three different ways” to reach this result, one of which is rescission and restitution.

Smith cross-appeals from the judgment. Both in his cross-appeal and as respondent, the only issue Smith addresses is that the court should have awarded only $6,219.59 in interest.

DISCUSSION

I. THE NOTE IS UNENFORCEABLE IN ITS ENTIRETY

A. The Standard of Review

The appellate issues hinge on two fundamental inquiries: (1) What are the terms of the Note; and (2) do those terms constitute a legally enforceable obligation?

The first question is one of contract interpretation. Interpretation of a written contract is a question of law for the court unless that interpretation depends upon resolving a conflict in properly admitted extrinsic evidence. (City of Hope Nat. Medical Center v. Genetech, Inc. (2008) 43 Cal.4th 375, 395.) Extrinsic evidence includes “objective matters as the surrounding circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; and the subsequent conduct of the parties.” (Morey v. Vannucci (1998) 64 Cal.App.4th 904, 912.)

When the extrinsic evidence itself is uncontradicted—that is, when the evidentiary facts themselves are not in conflict, but the parties only disagree about the inferences to be drawn from those undisputed facts—interpreting the agreement is a question of law for the court. (Medical Operations Management, Inc. v. National Health Laboratories, Inc. (1986) 176 Cal.App.3d 886, 892.)

Here, there is no conflict in the extrinsic evidence, which comes solely from Smith’s testimony about the context in which he and Nussdorf conducted this transaction. Therefore, we independently determine the meaning of the parties’ agreement.

The second question—whether the Note is a legally enforceable obligation—is also a question of law. (Bowers v. Raymond J. Lucia Companies, Inc. (2012) 206 Cal.App.4th 724, 734.)

B. Repayment of Principal

“Courts ‘interpret a contract to give effect to the parties’ intentions at the time of contracting.’ [Citation.] When language in a contract is clear and explicit, that language governs interpretation.’ ” (Salgado v. Carrows Restaurants, Inc. (2019) 33 Cal.App.5th 356, 359-360.)

Here, the Note provides that the principal would be “paid or reinvested at the mutual discretion of the parties . . . .” Thus, at the time of contracting, the parties had not agreed upon when or even whether principal would be paid. They instead deferred agreement on these central points to an unspecified future date when they would exercise “mutual discretion.” Moreover, even if and when the parties mutually agreed for repayment of principal, the Note provides that the property would not be used to generate those funds except under “mutually agreeable conditions . . . .” Thus, even if the parties jointly decided at some future time that the principal was due, whether to use the property to finance that payment was also left to both parties’ future agreement.

C. The Repayment of Principal Provision is Unenforceable

“There is nothing unlawful or even unusual about contracting parties agreeing to cross certain bridges when they are reached.” (Herman v. County of Los Angeles (2002) 98 Cal.App.4th 484, 488.) However, “[w]here any of the essential elements of a promise are reserved for the future agreement of both parties, no legal obligation arises ‘until such future agreement is made.’ ” (Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, 1256 (Baskins Robbins), italics added.) ” ‘Since either party by the terms of the promise may refuse to agree to anything to which the other party will agree, it is impossible for the law to affix any obligation to such a promise.’ ” (Ablett v. Clauson (1954) 43 Cal.2d 280, 285.)

“Whether a term is ‘essential’ depends on its relative importance to the parties and whether its absence would make enforcing the remainder of the contract unfair to either party.” (Baskins Robbins, supra, 96 Cal.App.4th at p. 1256, fn. 3.) In this case, whether the $200,000 is characterized as a loan or a capital contribution does not matter—it is difficult to conceive of any term more essential in either type of transaction than return of principal. Moreover, a result in which Smith retains Nussdorf’s $200,000 plus the home plus improvements purchased with that money is manifestly unfair. Because these essential elements were reserved for the future agreement of both parties, the repayment of principal terms in the Note are unenforceable.

The trial court reached the same result, albeit for the wrong reason. The problem in attempting to enforce these provisions is not that the terms are too “unclear and vague.” The terms are clear. The problem is they reserve repayment of principal for future mutual agreement.

After finding these provisions unenforceable, the trial court refused to order rescission and restitution. Instead, the court severed the contract in two, enforcing the interest but not the principal obligations. In so doing, the court erred.

In limited circumstances, courts may enforce valid parts of contracts while severing unenforceable provisions. However, excising unenforceable terms from a contract is appropriate only where the unenforceable provisions are not essential to the parties’ agreement. (See Templeton Development Corp. v. Superior Court (2006) 144 Cal.App.4th 1073, 1084 [unenforceable contract term that mediation occur in Nevada was collateral to main purpose of agreement and severed from other provisions].)

Thus, whether unenforceable provisions can be severed while enforcing the remainder of a contract depends upon the contract’s language and subject matter. A contract is not divisible where “it was the intention of the parties to treat [their] agreement as an entire contract, and where it appears that their engagements would not have been entered into except upon the clear understanding that the full object of the contract should be performed . . . .” (Yeng Sue Chow v. Levi Strauss & Co. (1975) 49 Cal.App.3d 315, 326.)

As explained ante, repayment of principal is an essential term in this transaction. There is no evidence that the parties would have entered into this transaction except with the understanding that the principal would be repaid. Therefore, the Note is not severable into an enforceable interest provision and an unenforceable repayment of principal term. The entire agreement is unenforceable.

D. Pacific West and Smith Do Not Owe Interest Under the Note

Because the Note is unenforceable in its entirety, Smith does not owe any interest under its provisions.

E. Rescission and Restitution

Cohen contends that rescission and restitution is an appropriate remedy for an unenforceable contract. We agree. ” ‘[R]estitution may be awarded . . . when the parties had an express contract, but it was . . . unenforceable or ineffective for some reason.’ [Citation.] Thus, a party to an express contract can assert a claim for restitution based on unjust enrichment by ‘alleg[ing in that cause of action] that the express contract is void or was rescinded.’ [Citation.] A claim for restitution is permitted even if the party inconsistently pleads a breach of contract claim that alleges the existence of an enforceable agreement.” (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 231.)

The complaint alleges a cause of action for rescission. Pacific West’s default admits these allegations and no further proof of liability is required. (Carlsen v. Koivumaki (2014) 227 Cal.App.4th 879, 898.) Accordingly, the trial court was required to enter judgment against Pacific West on Cohen’s rescission cause of action.

“Restitution of the benefits conferred under a contract may be awarded if the contract is rescinded or determined to be unenforceable.” (Chapman v. Skype Inc. (2013) 220 Cal.App.4th 217, 233-234.) Therefore, the judgment against Pacific West should provide that Cohen is entitled to restitution of $200,000, and Smith is entitled to restitution of the $3,189.23 interest payment.

F. Smith’s Alter Ego liability

“Ordinarily a corporation is considered a separate legal entity, distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations. [Citation.] The same is true of a limited liability company (LLC) and its members and managers.” (Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 220.) A court may disregard that legal separation where there is ” ‘such a unity of interest and ownership between the [LLC] and its equitable owner that the separate personalities of the [LLC] and the [member] do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the [LLC] alone.’ ” (Id. at p. 221.)

Here, Smith’s testimony establishes the requisite unity of interest. He created Pacific West solely to hold Nussdorf’s cash until used to purchase the property. Smith is Pacific West’s only member. Pacific West had no telephone, no address other than Smith’s, and never held title to any property. In sum, as Smith testified, Pacific West “didn’t have anything.”

An inequitable result would occur were the transaction treated as Pacific West’s alone. Smith drafted the Note in Pacific West’s name and not his own, “abandoned” the limited liability company in 2010-2011, leaving it with “no assets or cash.” We are not suggesting that Smith did anything wrong in this regard; however, “[a]n inequitable result does not require a wrongful intent.” (Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership (2013) 222 Cal.App.4th 811, 813.) Absent alter ego liability, Smith retains Nussdorf’s $200,000 and the $650,000 home he thereby obtained, which is clearly an inequitable result.

Where, as here, there was no request for a statement of decision, we presume the trial court made whatever findings necessary to support the judgment that are supported by substantial evidence. (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 61.) As explained, the record compels a finding of alter ego, and on appeal Smith does not contend otherwise.

DISPOSITION

The judgment is reversed with directions to enter judgment against Pacific West Capital, LLC by default, and against Richard Cameron Smith as its alter ego, on the fifth cause of action for rescission, for $196,810.77 ($200,000 – $3,189.23). The matter is remanded to the trial court to exercise its discretion in establishing, after receiving input from the parties, a fair and equitable date for Smith to pay Cohen such restitution, which date shall be specified in the judgment.

In the interests of justice, the parties are to bear their own costs on appeal.

HALLER, J.

WE CONCUR:

HUFFMAN, Acting P. J.

DATO, J.