Lender Liability: Defending Against Attacks

on Loans in Workout, Modification,

Default and Bankruptcy Lessons From Recent Financial Litigation and Best Practices for Evaluating and Minimizing Claims

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Bank Leumi USA v Agati

2004 NY Slip Op 02273 [5 AD3d 292]

March 25, 2004

Appellate Division, First Department

As corrected through Wednesday, May 26, 2004

Bank Leumi USA, Respondent,

v

Peter Agati, Appellant, et al., Defendants.

—

Order, Supreme Court, New York County (Ira Gammerman, J.), entered May 5,

2003, which, inter alia, granted plaintiff bank's motion for an order of attachment

authorizing seizure of defendant-appellant guarantor's personal property up to a value

of $450,000, including, but not limited to, the property listed in appellant's July 2000

personal financial statement, unanimously modified, on the law and the facts, to

authorize seizure of only those items of personal property identified in the July 2000

financial statement, without prejudice to plaintiff's seeking to expand the scope of the

attachment upon further identification of appellant's personal property, and otherwise

affirmed, without costs. Order, denominated a judgment, same court and Justice,

entered May 13, 2003, which, inter alia, granted plaintiff's motion for partial summary

judgment against appellant on the issue of appellant's liability on the subject

guarantee, unanimously affirmed, without costs.

There is no merit to appellant's claim that under UCC 9-207, he was relieved of

liability on his guarantee by plaintiff's failure to act in a commercially reasonable

manner in connection with the borrower's voluntary sale of an item of collateral.

According to appellant, plaintiff knew, prior to the sale, that the borrower was

insolvent, yet opted not to fully satisfy the borrower's debt out of the proceeds of the

sale. The argument overlooks that UCC 9-207 requires that the secured party be in

"possession or control" of the collateral. Although the sale here was part of a plan

worked out between the borrower and plaintiff to reduce the former's debts to the

latter, including that guaranteed by appellant, plaintiff had no duty to appellant, under

either the loan documents or the guarantee, the latter of which contained a broad and

all encompassing consent to plaintiff's release of security, to collect more of the

proceeds realized at the sale than it did (see Chemical Bank v PIC Motors Corp., 87

AD2d 447, 452-453 [1982], affd 58 NY2d 1023 [1983]; Chemical Bank v Nemeroff,

233 AD2d 239 [1996]). Accordingly, plaintiff was properly granted summary

judgment against appellant on the issue of liability. However, concerning the

attachment, the motion court erred in tracking the provision of the guarantee which,

upon the borrower's default and plaintiff's unsatisfied demand for payment, gives

plaintiff a lien against all of appellant's property "of every description" (see CPLR

7102 [c]; UCC 9-108 [a]-[c]). Accordingly, we modify to limit the attachment to the

personal property identified in appellant's July 2000 financial statement. We note that

such financial statement was provided to plaintiff for the purposes of the loan

extended to the borrower. We have considered appellant's other arguments and find

them unavailing. Concur—Buckley, P.J., Nardelli, Saxe and Marlow, JJ.

Chase Equip. Leasing Inc. v Architectural Air, L.L.C.

2011 NY Slip Op 03663 [84 AD3d 439]

May 3, 2011

Appellate Division, First Department

As corrected through Wednesday, July 6, 2011

Chase Equipment Leasing Inc., Respondent,

v

Architectural Air, L.L.C., et al., Appellants.

—[*1] Chaffetz Lindsey LLP, New York (Peter R. Chaffetz of counsel), for

appellants.

Hahn & Hessen, LLP, New York (Zachary G. Newman of counsel), for

respondent.

Order, Supreme Court, New York County (James A. Yates, J.), entered March 24,

2010, which, insofar as appealed from, granted plaintiff's motion to dismiss the

counterclaims for conversion, breach of the implied duty of good faith, and pre-

possession commercially unreasonable failure to dispose of collateral, and related

defenses, unanimously modified, on the law, to deny the motion as to the

counterclaim for conversion, and otherwise affirmed, without costs.

Plaintiff, as a secured party, was not obligated to act in a commercially

reasonable manner before taking possession of the collateral (Bank Leumi USA v

Agati, 5 AD3d 292, 293 [2004]). Nor was it so obligated by having, as defendants

assert, practical control over the collateral, given defendants' refusal to surrender

possession unless plaintiff modified the underlying loan or capitulated to their other

demands. Plaintiff's refusal to dispose of the collateral while simultaneously not

allowing defendants to do so does not raise an inference of bad faith. In any event,

defendants' claim based on the implied covenant of good faith is barred by the no-

waiver clause permitting plaintiff's delay in exercising its remedies (see Chemical

Bank v PIC Motors Corp., 87 AD2d 447, 450 [1982], affd 58 NY2d 1023 [1983]); the

duty of good faith does not imply obligations inconsistent with contractual provisions

(see 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 153 [2002]).

However, we find that the equipment that defendant Carl added to the airplane

that served as collateral was expressly exempt from becoming collateral itself by the

plain meaning of section 1.5 of the security agreement, regardless of the location of

that provision within the agreement. [*2]Therefore, Carl has a superior right to

ownership or possession of the added-on equipment, which provides a basis for his

conversion counterclaim. Concur—Saxe, J.P., Friedman, Freedman and Richter, JJ.

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WEBSTER BUS. CREDIT CORP. v. DURHAM 650091/2010.

2010 NY Slip Op 51714(U)

WEBSTER BUSINESS CREDIT CORPORATION, Plaintiff, v. TIMOTHY DURHAM, OBSIDIAN ENTERPRISES, INC., AND DIAMOND INVESTMENTS, LLC D/B/A DIAMOND AUTO SALES, Defendants.

Supreme Court, New York County.Decided September 15, 2010.

Zachary G. Newman, Esq., HAHN & HESSEN LLP, 488 Madison Avenue, New York, NY 10022, Attorneys for the Plaintiff.Annie P. Power, Esq., James Maisano, Esq., CROWELL MORING, 590 Madison Avenue, 20th Floor, New York, NY 10022-2524, Attorneys for the Defendants.

BERNARD J. FRIED, J.

Plaintiff, Webster Business Credit Corp. ("Webster"), brings this motion for summary judgment in lieu of complaint, pursuant to CPLR § 3213. Defendants, Timothy Durham ("Durham"), Obsidian Enterprises, Inc. ("Obsidian"), and Diamond Investments LLC d/b/a Diamond Auto Sales ("Diamond"), oppose the motion on several grounds, but argue, primarily, that summary disposition is improper because Plaintiff's entitlement to a sum certain cannot be ascertained without reference to documents outside of the instruments submitted in connection with this motion.

Briefly, the events giving rise to this action are as follows. In 2001, Defendant Durham, through Obsidian, a holding company, acquired U.S. Rubber Reclaiming, Inc. ("U.S. Rubber), a company that reclaims and supplies butyl rubber to the United States tire industry. In June 2008, Webster, a financial services company, entered into a credit and security agreement with U.S. Rubber (the "Credit Agreement"). The Credit Agreement provided for a $3.5 million revolving credit facility and an additional $500,000 term loan to U.S. Rubber. (See Zautra Aff.1 Ex. 1.) Pursuant to the Credit Agreement, U.S. Rubber executed a Revolving Credit Note, in favor of Webster, for the principal sum of $3.5 million, "or such lesser unpaid amount as may be outstanding . . . " (Zautra Aff. Ex. 2), and a Term Loan Note for $500,000 (Zautra Aff. Ex. 3).

Defendants Obsidian and Durham simultaneously entered into two separate Guarantees with Webster (the "Obsidian Guaranty" and the "Durham Guaranty"), whereby

revolving credit facility and the term loan), and agreed to pay all costs of collection, including attorneys' fees. (Seeexecuted a Guaranty whereby it agreed to guarantee payment of U.S. Rubber's obligations under the term loan, and agreed to pay all costs of collection and attorneys' fees (the "Diamond Guaranty"). (See Zautra Aff. Ex. 6.)

There is no dispute that U.S Rubber defaulted on its obligations under the Credit Agreement, and that both U.S. Rubber and the Defendants were timely and properly notified of the defaults. There is also no dispute that U.S. Rubber and Defendants were notified of Webster's acceleration of U.S. Rubber's indebtedness, rendering all obligations immediately due and payable under the Guaranties. On December 4, 2009, Webster sent letters to Durham and Obsidian, demanding payment of $3,011,034.17, which was the principal amount due under the Credit Agreement as of that date, plus interest and costs of collection. (See Zautra Aff. Exs. 11 and 12.) By letter dated December 7, 2009, Webster demanded that Diamond remit to it all proceeds from the sale of a certain automobile (the "Dusenberg"), which had been pledged as collateral for the term loan. (See Zautra Aff. Ex. 13.) There is no dispute that Defendants have not made any payments to Webster.

Webster asserts that the Credit Agreement and the three Guaranties, along with an affidavit setting forth the Guarantors' nonpayment, is sufficient proof of its entitlement to summary judgment under CPLR § 3213. Defendants, however, argue that it is impossible to ascertain the amounts allegedly due without resort to extrinsic documents, and that the evidence submitted by Webster is therefore insufficient to warrant summary judgment.2

A plaintiff establishes a prima facie case under CPLR § 3213 by demonstrating that the instrument at issue is one that is for the payment of money only, and that the defendants failed to make payment thereunder. Seaman-Andwall Corp. v. Wright Machine Corp., 31 A.D.2d 136 (1st Dep't 1968), aff'd 29 N.Y.2d 617 (1971); see also Boland v. Indah Kiat Finance (IV) Mauritius Ltd., 291 A.D.2d 342 (1st Dep't 2002). An unconditional guarantee qualifies as an instrument for the payment of money only under CPLR § 3213. European American Bank & Trust Co. v. Schirripa, 108 A.D.2d 684 (1st Dep't 1985). Moreover, even a guarantee that does not set forth a sum certain may be the proper subject of § 3213 relief. Manufacturers Hanover Trust Co. v. Green, 95 A.D.2d 737 (1st Dep't 1983). Once plaintiff has set forth a prima facie case, the defendant may, nonetheless, defeat the motion by raising a triable issue of fact with respect to a bona fide defense. Banesto Banking Corp. v. Teitler, 172 A.D.2d 469 (1st Dep't 1991).

Here, although Defendants argue that there exists a triable issue of fact as to the amounts due and owing under the Guaranties, this is not sufficient to defeat Plaintiff's motion. The cases that they rely upon to support the proposition that the Credit Agreement and Guaranties do not qualify for § 3213 treatment because they do not provide for payment of a sum certain are inapposite. In Ian Woodner Family Collection v. Abaris Books, Ltd., 284 A.D.2d 163 (1st Dep't 2001), the First Department reversed an order granting summary judgment under CPLR § 3213 because extrinsic evidence was needed to determine not only the quarterly amounts due under a promissory note, but also whether the defendants had actually defaulted according to the note's terms. Likewise, in Bonds Financial, Inc. v. Kestrel Technologies, LLC,48 A.D.3d 230, 231 (1st Dep't 2008), the First Department found that summary judgment under § 3213 was improper where the revolving credit agreement at issue set

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forth several events of default, other than non-payment, and the plaintiff's claim thus required resort to an external document to define an event of default. Furthermore, the defendant established a triable issue of fact by raising the question of whether the default was continuing in accordance with the terms of the agreement. Id. at 231.

Here, there is no dispute that U.S. Rubber defaulted under the terms of the Credit Agreement. Indeed, U.S. Rubber acknowledged as much in writing. (See Zautra Reply Aff. Ex. 3.) There is also no dispute that the Guaranties set forth unconditional promises to pay in the event of such default, and there is thus nothing in Ian Woodner or Bonds Financial that prohibits treating these Guaranties as instruments for the payment of money only.

Defendants also rely on Weissman v. Sinorm Deli, Inc., 88 N.Y.2d 437, 446-48 (1996), but in that case, the instrument at issue was an indemnification agreement, which the Court of Appeals expressly concluded did not amount to a guaranty. The Court concluded that the indemnification agreement did not qualify as an instrument for the payment of money only because it did not adequately describe the present and future liabilities and obligations of the purported indemnitors. Id. at 445. Here, by contrast, the Credit Agreement provided for a revolving credit line of up to $3.5 million, and a term loan of $500,000. The Obsidian and Durham Guaranties expressly provide for the unconditional guaranty of "the punctual payment, when due, whether by acceleration or otherwise, and at all times thereafter, of all Obligations of Borrower to Lender arising under [the Credit Agreement].") (Zautra Aff. Exs. 5 and 6.) The Diamond Guaranty contains the same provision, but then goes on to expressly limit the "maximum amount of Obligations subject to this Guaranty" to the "aggregate amount of Obligations with respect to the Term Loan outstanding from time to time." (Zautra Aff. Ex. 7.) There can be no doubt that each of the Guaranties thus represents an explicit promise by each of the Defendants to pay a sum of money. The fact that the amount to be paid may fluctuate depending on the amount of the revolving credit outstanding at a given time does not take the Guaranties outside the realm of § 3213. See Manufacturers Hanover Trust Co. v. Green, 95 A.D.2d 737, 737 (1st Dep't 1983) ("A guarantee may be the proper subject of a motion for summary judgment in lieu of complaint whether or not it recites a sum certain."); see also European American Bank v. Cohen, 183 A.D.2d 453, 453 (1st Dep't 1992) (although a note did not recite a sum certain, it was an instrument for the payment of money only because it contained "an unconditional promise to pay on a certain day the current balance in defendant's line of credit, an amount readily ascertainable from plaintiff's bank records.")

Webster moved for the instant relief on February 4, 2010, asserting that, as of January 21, 2010, the Defendants were liable for $3,013,558.49 (including principal, fees and interest) in connection with the Revolving Credit Note, and for $350,816.75 (including principal and interest) under the Term Loan Note. (See Zautra Aff. ¶¶ 14-15, Ex. 7.) Due to the subsequent liquidation of certain collateral and Webster's collection of certain accounts receivable, the amount of U.S. Rubber's indebtedness as of June 22, 2010 had been reduced to $158,333.41, plus interest and costs. (See Massave Aff.3 ¶ 3.) According to Don Lagrone, the President of U.S. Rubber, as of June 29, 2010, "all parties agree that this Revolving Credit Note has been fully paid off." (Lagrone Aff.4 ¶ 9.) Mr. Lagrone further averred that the projected balance on the Term Loan Note would be between $95,000 and $105,000 as of July 10, 2010. (Id. ¶ 12.)

There is no dispute that the amount due under the Credit Agreement has been reduced by Webster's collection of accounts receivable and payments on liquidated collateral, and there is no dispute that the Guaranties provide for payment, by the Guarantors, of not only any outstanding balance under the Credit Agreement, but also of interest and the costs of collection, including reasonable attorneys' fees. Moreover, at oral argument, counsel for the Defendants conceded that determination of the amount actually payable under the Guaranties might be properly achieved by inquest.5 (Hr'g Tr. 16, June 23, 2010.) It is therefore appropriate to grant Plaintiff's motion for summary judgment in lieu of complaint as to liability, and to refer the issue of damages, including interest, costs of collection and reasonable attorneys' fees to a special referee.

Accordingly, it is

ORDERED that Plaintiff's motion for summary judgment in lieu of complaint (Mot. Seq. No. 001) is GRANTED as to liability; and it is further

ORDERED that the issue of damages, including calculation of the amount due and owing as of the date of entry of this Order, interest, costs of collection, and reasonable attorneys fees, is hereby referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by C.P.L.R. § 4317, the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further

ORDERED that a copy of this order with notice of entry shall be served on the Special Referee Clerk (Room 119) to arrange a date for the reference to a Special Referee.

FOOTNOTES

1. Affidavit of Joseph Zautra in Support of Plaintiff's Motion for Summary Judgment in Lieu of Complaint.

2. Although they did not cross-move for such relief, Defendants also argue that Webster's action should be dismissed for failure to join a necessary party, and in light of a related action pending in the U.S. District Court for the Northern District of Indiana. I have considered these arguments, and I find them to be unavailing.

3. Affidavit of Gordon Massave in Further Support of Plaintiff's Motion for Summary Judgment in Lieu of Complaint, June 22, 2010.

4. Affidavit of Don Lagrone in Further Opposition to Motion for Summary Judgment in Lieu of Complaint, June 29, 2010. This sur-reply was authorized at the June 23, 2010 motion hearing. (See Hr'g Tr. 3, 5, 21, June 23, 2010.)

5. When asked whether the amount due could be determined at an inquest, Mr. Maisano, for the Defendants, stated, ". . . I think we could probably have inquest hearing and figure out the actual amount due. We can't do it from these papers is my argument. Yes, I agree, if we had an inquest hearing to calculate on that day at that moment the actual amount due, yes." He was then asked, "Why is that not sufficient to grant summary judgment and send it to inquest?" Mr. Maisano replied, "If the Court — if that's what the Court's decision is, I could understand it." (Hr'g Tr. 16, June 23, 2010.)

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J.P. Morgan Sec. Inc. v Ader

2015 NY Slip Op 03071

Decided on April 14, 2015

Appellate Division, First Department

Published by New York State Law Reporting Bureau pursuant to Judiciary Law §431.

This opinion is uncorrected and subject to revision before publication in the OfficialReports.

Decided on April 14, 2015 Sweeny, J.P., Andrias, Moskowitz, Richter, Clark, JJ.

650005/09 13916 13915

[*1] J.P. Morgan Securities Inc., Plaintiff-Respondent,

v

Jason Ader, et al., Defendants-Appellants.

Kasowitz, Benson, Torres & Friedman LLP, New York (Jed I. Bergman of counsel), forappellants.

Satterlee Stephens Burke & Burke LLP, New York (James J. Coster of counsel), forrespondent.

Order, Supreme Court, New York County (Melvin L. Schweitzer, J.), entered June 3,2013, which, insofar as appealed from as limited by the briefs, granted plaintiff's motion forsummary judgment dismissing defendants' counterclaim for negligent misrepresentation,

affirmed, without costs. Order, same court and Justice, entered April 17, 2014, whichgranted plaintiff's motion to strike defendants' demand for a jury trial on their counterclaimfor fraudulent inducement, reversed, on the law, without costs, and the motion denied.

The motion court properly dismissed defendants' counterclaim for negligentmisrepresentation. "A claim for negligent misrepresentation requires the plaintiff todemonstrate (1) the existence of a special or privity-like relationship imposing a duty on thedefendant to impart correct information to the plaintiff; (2) that the information wasincorrect; and (3) reasonable reliance on the information" (J.A.O. Acquisition Corp. vStavitsky, 8 NY3d 144, 148 [2007]). In commercial cases "a duty to speak with care existswhen the relationship of the parties, arising out of contract or otherwise, [is] such than inmorals and good conscience the one has the right to rely upon the other for information"(Kimmell v Schaefer, 89 NY2d 257, 263 [1996]). Reliance on the statements must bejustifiable, and "not all representations made by a seller of goods or a provider of serviceswill give rise to a duty to speak with care" (id.). "Rather, liability for negligentmisrepresentation has been imposed only on those persons who possess unique orspecialized expertise, or who are in a special position of confidence and trust with theinjured party such that reliance on the negligent misrepresentation is justified" (id.). In orderto impose tort liability in a commercial case, "there must be some identifiable source of aspecial duty of care" (id. at 264).

In this context we have held that such a special duty will be found "if the recordsupports a relationship so close as to approach that of privity" (see North Star Contr. Corp. vMTA Capital Constr. Co., 120 AD3d 1066, 1069 (1st Dept 2014] [internal quotation marksomitted). Generally, however, an arm's-length business relationship between sophisticatedparties will not give rise to a confidential or fiduciary relationship that would support acause of action for negligent misrepresentation (Greentech Research LLC v Wissman, 104AD3d 540 [1st Dept [*2]2013]).

The evidence on the record before us, which includes allegations of plaintiff's superiorknowledge of the hedge fund business and its past dealings with defendant Ader, who hadworked for plaintiff's predecessor in interest for some years, is not sufficient to establish aspecial relationship that would justify defendants' reliance on plaintiff's alleged

misrepresentations (see Kimmell v Schaefer, 89 at NY2d 257; Greentech Research, 104AD3d at 540).

With respect to the issue of the application of the jury waiver provision in the parties'agreement to defendants' counterclaim for fraudulent inducement, we find that the courterred in granting plaintiff's motion to strike defendants' jury trial demand.

We have previously held that a contractual jury waiver provision is inapplicable to afraudulent inducement cause of action that challenges the validity of the underlyingagreement (see China Dev. Indus. Bank v Morgan Stanley & Co. Inc., 86 AD3d 435, 436-437 [1st Dept 2011]; Wells Fargo Bank, N.A. v Stargate Films, Inc., 18 AD3d 264, 265 [1stDept 2005]). Moreover, "[i]t is of no consequence that the [counterclaim] does not containthe word rescission' or expressly state that it challenges the validity of the . . . agreement"(Ambac Assur. Corp. v DLJ Mtge. Capital, Inc., 102 AD3d 487, 488 [1st Dept 2013]). Incases where the fraudulent inducement allegations, if proved, would void the agreement,including the jury waiver clause, the party is entitled to a jury trial on the claim (see Bank ofN.Y. v Cheng Yu Corp., 67 AD2d 961 [2d Dept 1979]; see also Ferry v PoughkeepsieGalleria Co., 197 AD2d 913 [4th Dept 1993]).

As our dissenting colleague acknowledges, "a defrauded party to a contract may electto either disaffirm the contract by a prompt rescission or stand on the contract and thereaftermaintain an action at law for damages attributable to the fraud" (Big Apple Car v City ofNew York, 204 AD2d 109, 110-111 [1st Dept 1994]). As a result, a party alleging fraudulentinducement that elects to bring an action for damages, as opposed to opting for rescissionmay, under certain circumstances, still challenge the validity of the agreement (see AmbacAssur. Corp., 102 AD3d at 488).

Thus, where, as here, a party sufficiently pleads that it was fraudulently induced toenter into a contract, and only relies on the agreement as a basis for its defense againstbreach of contract allegations and a claim for reformation to recover overpayments, it is notprecluded from challenging the validity of the contract for purposes of avoiding the jurywaiver clause with respect to the adjudication of its fraudulent inducement claim (seeAmbac Assur. Corp., 102 AD3d at 488; Wells Fargo Bank, 18 AD3d at 265). Although thedissent contends otherwise, we find that the facts of this case fall within Ambac's

parameters, and thus reinstate defendants' demand for a jury trial.

We have considered the parties' remaining arguments and find them to be withoutmerit.

All concur except Andrias, J. who dissents in part in a memorandum as follows:

ANDRIAS, J. (dissenting in part)

I agree with the majority that Supreme Court properly awarded summary judgment toplaintiff dismissing defendants' counterclaim for negligent misrepresentation. However,because defendants' primary claims are for reformation and monetary damages, which donot challenge [*3]the validity of the agreements at issue, I disagree with the majority withrespect to its holding that the court erred when it granted plaintiff's motion to strikedefendants' demand for a jury trial on their counterclaim for fraudulent inducement.Accordingly, I dissent in part.

Following extensive negotiations, in July and August 2003, defendant Jason Ader andplaintiff's predecessor in interest, Bear Stearns, entered into a series of preliminaryagreements in connection with an investment by Bear Stearns in Hayground Cove, a hedgefund that Ader was developing. These included a Letter Agreement setting forth theproposed terms of the parties' deal, subject to the execution of definitive agreements.

On November 24, 2003, the parties executed a "Revenue Sharing Agreement" (RSA)and an "Investment Agreement." These agreements provided that in exchange for BearStearns's seed investment, Hayground would pay Bear Stearns 25% of "gross revenues"less: (i) eligible operating expenses, up to a maximum of $600,000; (ii) customarymarketing fees paid to non-affiliated third parties that were the result of arm's-lengthnegotiations; and (iii) payments on certain loans to Hayground for startup expenses.

Following Bear Stearns's investment, Hayground began to attract further investors, andgrew in size. In February 2005, at defendants' request, the parties executed the FirstAmendment to the RSA which allowed the "Expense Cap" to increase commensurate withHayground's assets under management. In June 2005, the parties again modified their deal

through a "Global Agreement" and a 2005 Investment Agreement under which BearStearns, pursuant to Hayground's request, switched its investment to Hayground's newlyformed market-neutral fund. The 2005 Investment Agreement, however, specificallyacknowledged that "the Partnership Agreement, this Agreement, the Global Agreement andthe Revenue Sharing Agreement are the valid and binding obligations of the Partnership,enforceable against the Partnership in accordance with their respective terms."

In January 2009, plaintiff commenced this action, alleging that defendantsmiscalculated revenue-sharing payments by deducting the Expense Cap from the 25%revenue share, rather than from gross revenues; deducting amounts from revenues formarketing expenses not actually paid to third-party marketers; and inflating the ExpenseCap by improperly calculating assets under management to include leverage and shortpositions rather than basing it on investor equity alone. Plaintiff asserted causes of action forbreach of contract and a declaratory judgment, and sought damages to be determined at trialof not less than $8,000,000.

In their answer, defendants denied liability and asserted multiple affirmative defenses,including that "[p]laintiff's claims are barred, in whole or in part, by the doctrines ofreformation and/or mutual mistake." Defendants also asserted counterclaims for fraudulentinducement, negligent misrepresentation, and reformation.

In support of their fraudulent inducement and negligent misrepresentationcounterclaims, defendants alleged, inter alia, that: (i) in reliance on Bear Stearns's false orreckless representations concerning marketing assistance, access to Bear Stearns's primebrokerage operation, and introductions to potential investors, defendants selected BearStearns's seeding offer over alternative and more favorable offers; (ii) "notwithstandingrepeated and continuing false assurances from Barry Cohen [of Bear Stearns]..., by lateMarch or early April of 2004, it became clear that, as Cohen finally admitted, Bear Stearnswould not ... fulfill its representations, ... ostensibly due to various regulatory and legalobstacles to its doing so"; and (iii) as a result, "Hayground was forced to spend its ownresources in an attempt to replace Bear Stearns's assistance [and] failed to realize additionalprofits." As a remedy for plaintiff's alleged fraud [*4]and/or negligent misrepresentation,defendants did not seek to rescind the RSA. Rather, they sought damages in an amount to be

proven at trial.

In support of their reformation counterclaim, defendants alleged:

"To the extent that the written terms of the RSA fail to reflect the agreement onrevenue-sharing reached between Bear Ste[a]rns and Hayground and set forth in the LetterAgreement, that failure was on account of either mutual mistakes by the parties, orunilateral mistake by Hayground and improper conduct by Bear Stearns in seeking toconceal the mistake through expressing its agreement with Hayground's understanding ofthe parties' agreement."

Stating that the RSA should be reformed to provide that the Expense Cap is deductedafter calculating Bear Stearns's 25% Revenue Share, as provided in the Letter Agreement,defendants sought damages "in an amount to be proven at trial, including, withoutlimitation, all payments made to Bear Stearns that improperly overpaid Revenue Sharebased on the RSA's erroneous reflection of the parties' intent."

In July 2012, plaintiffs filed a note of issue noticing a bench trial. In August 2012,defendants filed a demand for a jury trial on the fraudulent inducement counterclaim.Plaintiff moved to strike the jury demand on the grounds that the RSA provided that theparties "waive all right to trial by jury in any action or proceeding to enforce or defend anyrights under [the RSA]" and that in any event defendants waived any right to a jury trial byjoining their fraudulent inducement counterclaim seeking monetary relief with a claimseeking the equitable relief of reformation. Supreme Court held that the jury waiver in theRSA applied to the fraudulent inducement claim, and that, as a result, there was no need toaddress plaintiff's waiver-by-joinder argument.

Where a fraudulent inducement claim challenges the validity of the agreement, aprovision waiving the right to a jury trial in any litigation arising out of the agreement doesnot apply (see e.g. China Dev. Indus. Bank v Morgan Stanley & Co. Inc., 86 AD3d 435,436-437 [1st Dept 2011]; Wells Fargo Bank, N.A. v Stargate Films, Inc., 18 AD3d 264 [1stDept 2005]). Where fraudulent inducement is the plaintiff's primary claim, "[i]t is of noconsequence that the complaint does not contain the word rescission' or expressly state thatit challenges the validity of the ... agreement" (Ambac Assur. Corp. v DLJ Mtge. Capital,

Inc., 102 AD3d 487 [1st Dept 2013]; MBIA Ins. Corp. v Credit Suisse Sec. [USA], LLC, 102AD3d 488 [1st Dept 2013]).

Relying on Ambac, the majority finds that because defendants have sufficientlypleaded that they were fraudulently induced to enter into a contract, and only rely on thatcontract "as a basis for [their] defense against breach of contract allegations and a claim forreformation to recover overpayments, [they are] not precluded from challenging the validityof the contract for purposes of avoiding the jury waiver clause with respect to theadjudication of [their] fraudulent inducement claim." Because I believe that, on theparticular facts presented, Supreme Court correctly determined that the jury waiver in theRSA applies, I respectfully disagree.

A party alleging fraudulent inducement may "elect to either disaffirm the contract by aprompt rescission or stand on the contract and thereafter maintain an action at law fordamages attributable to the fraud" (Big Apple Car v City of New York, 204 AD2d 109, 110-111 [1st Dept 1994]). "The measure of damages recoverable for being fraudulently inducedto enter into a contract which otherwise would not have been made is indemnity for [the]loss suffered through that inducement" (Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, [*5]956 [1986] [internal quotation marks omitted]; RKB Enters.v Ernst & Young, 182 AD2d 971 [3d Dept 1992]).

Here, defendants' primary claims are for reformation and monetary damages, and theydid not raise fraudulent inducement as an affirmative defense to plaintiff's breach of contractclaim. In their counterclaims for fraudulent inducement and negligent misrepresentation,defendants confirm that after learning of the alleged false or reckless misrepresentations thatinduced them to enter the RSA in 2004, they entered the 2005 Global Agreement and the2005 Investment Agreement, in which they confirmed that the RSA remained a bindingagreement. Moreover, defendants continued to perform under the RSA thereafter.

Although defendants do assert a counterclaim based on fraudulent inducement, theyseek money damages, not rescission. Whereas rescission is based on a disaffirmance of thecontract and seeks to place the parties in the status quo ante the transaction, an award ofdamages affirms the contract while penalizing the fraudulent party for his breach (seeVisionChina Media Inc. v Shareholder Representative Servs., LLC, 109 AD3d 49, 56 [1st

Dept 2013]; Vitale v Coyne Realty, 66 AD2d 562, 568 [4th Dept 1979] [Callahan, J.dissenting]). Furthermore, defendants assert a separate counterclaim seeking to reform theRSA with respect to the Expense Cap and to recover all overpayments of revenue sharebased on the RSA's alleged erroneous reflection of the parties' intent, thereby contesting thevalidity of Bear Stearns's contractual right to those payments under the RSA.

Thus, as the motion court found, unlike Ambac, where there was nothing to indicatethat the plaintiff elected to affirm the contract after discovering the defendant's allegedfraud, here, "Hayground's actions — seeking damages and, in particular, reformation insteadof rescission, declining to assert fraud as a defense to the breach of contract claim, andratifying the RSA through the 2005 amendment — unequivocally demonstrate that it haselected to affirm the RSA and not challenge its validity." Insofar as defendants argue thattheir fraudulent inducement counterclaim does not seek to enforce or defend any rightsunder

the RSA, the argument is unavailing since the parties did not specify that the waiverwould operate as to claims, but rather as to an "action or proceeding."

THIS CONSTITUTES THE DECISION AND ORDER

OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

ENTERED: APRIL 14, 2015

CLERK

Return to Decision List

Filed 4/9/15 Napoleon Pictures Ltd. v. Fox Searchlight Pictures CA2/2

NOT TO BE PUBLISHED IN THE 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.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION TWO

NAPOLEON PICTURES LIMITED, Plaintiff and Appellant, v. FOX SEARCHLIGHT PICTURES, INC., Defendant and Respondent.

B248601 (Los Angeles County Super. Ct. No. SC113978)

APPEAL from a judgment of the Superior Court of Los Angeles County.

Bobbi Tillmon, Judge. Affirmed.

Horwitz & Levy, Jeremy B. Rosen, John F. Querio; Lavely & Singer, Martin D.

Singer, Allison S. Hart for Plaintiff and Appellant.

Caldwell Leslie & Proctor, Linda M. Burrow, Michael D. Roth, Kelly Perigoe for

Defendant and Respondent.

___________________________________________________

2

In a dispute over film revenue, a referee rejected plaintiff’s claim that defendant’s

vice-president orally agreed to pay a high royalty rate of 31.66 percent for video sales.

The claimed undocumented oral understanding contradicts the parties’ written agreement,

which states that rentals have a high royalty rate while sales royalties are at 10 percent.

The evidence amply supports the judgment. We affirm.

FACTS

Napoleon Pictures Limited (Napoleon) premiered its film Napoleon Dynamite (the

Film) at the 2004 Sundance Film Festival. The Film was produced by 24-year-old

Jeremy Romney Coon, with an initial $404,000 from his family. Numerous film

distributors expressed interest; it was the most sought-after film at Sundance.

Napoleon hired John Sloss to negotiate a distribution agreement for the Film.

Sloss, an experienced entertainment lawyer who has sold 400 independent films, wanted

Fox Searchlight Pictures, Inc. (Fox), to distribute the Film. He immediately began to

negotiate terms with a friend, Fox vice-president Joseph De Marco, with whom Sloss had

arranged at least 10 movie distribution deals. Sloss profits from the Film’s distribution

through his “advisory company,” which receives 10 percent of all revenue arising from

commercial exploitation of the Film.

Sloss and De Marco made a handshake deal on January 18, 2004, one day after the

Film premiered. A “Term Sheet” was signed two days later. Fox paid Napoleon an

acquisition price of $4.75 million, with a 50 percent gross profits participation rate. The

acquisition price was high, compared to what Fox paid for other films between 2000 and

2006. When Fox pays a high acquisition price, it takes a more aggressive stance on other

terms of the distribution agreement.

Central to the parties’ dispute are the terms for home video royalties. Video

exploitation of films is a greater source of revenue than theatrical release.1 In 2004, the

standard home video royalty rate was 20 percent. At the time, the home video market

1 “Video” is a generic term for DVD’s or VHS cassettes, the two formats in home movies.

3

was changing rapidly from consumer rentals to consumer purchases. Coon understood

the importance of the home video market. During negotiations with Fox at Sundance, he

was told that the home video royalty for the Film would be approximately 25 percent.

The Term Sheet’s “participation terminology” clause reads, “Payment of any

amounts provided for hereunder and all other terms and conditions related to such

amounts shall be in accordance with the terms and conditions set forth herein or, if not

addressed herein, in Searchlight’s Definitions of Net Profits (High Price Product Royalty

shall be 31.66%, with Schedule ‘1’-Glossary attached thereto (‘Participation

Definition’).” The Term Sheet does not define “High Price Product.” However, it

contemplates that “formal documentation memorializing the parties’ agreement will be

prepared, and will contain the balance of the terms governing this agreement, which other

terms shall be in accordance with Searchlight’s standard agreements of this type . . . .”

Sloss did not see the Participation Definition before the Term Sheet was signed,

and neither did Jeremy Coon. However, Sloss knew that the Participation Definition is a

pre-negotiated, standardized document created by Fox, from his past dealings with

De Marco. At trial, Sloss referred to the Participation Definition as “boilerplate” that

“was never negotiated,” but was part of past agreements. In each distribution deal, Sloss

and De Marco discussed the sell-through rate for video royalties, which “was always the

10 percent in the boilerplate,” although he believed that the 10 percent rate only applied

to “bargain bin” sales. Sloss agreed that “bargain bin” sales are not mentioned in the

Term Sheet or the Participation Definition, or anywhere else, although the Participation

Definition defines other important capitalized terms in the Term Sheet, such as

“Remaining Gross Receipts,” “Net Profit,” and “Distribution Expenses.”

Between February and May 2004, Fox’s in-house counsel Jamie Taylor sent drafts

of a formal agreement to a partner at Sloss’s firm, Paul Brennan. Initial drafts did not

include an exhibit relating to home video royalties (and other issues), entitled

“Exhibit ‘A’ Definition of Defined Net Proceeds/Acquisition” (Exhibit A). Attorney

4

Brennan stated that he only reviewed exhibits provided to him, and might not be aware if

a document referred to in the Term Sheet is missing from the long-form agreement.2

On appeal, Napoleon does not contest that Taylor sent a hard copy of Exhibit A to

Brennan on May 10, 2004, though neither Brennan nor Sloss recalled it. Two days later,

Taylor sent a letter to Brennan that alluded to Exhibit A, along with a copy of the

agreement to be signed by Napoleon. Brennan denied receiving Exhibit A, but never

asked Taylor to provide a copy, despite Taylor’s repeated references to Exhibit A in his

correspondence.

Napoleon’s principal Coon signed the agreement on Brennan’s advice and the

document was returned to Fox on May 20, 2004. A fully executed copy of the

Agreement and its attachments—including Exhibit A—was sent to Brennan in July 2004.

Brennan did not contact Taylor to inquire about Exhibit A, and Sloss did not recall

reading it.

The document signed by the parties is entitled “Standard Terms and Conditions

Distribution Rights Acquisition Agreement” (the Agreement). The signature page of the

Agreement states, “No representations or warranties of any kind have been made by

either of the parties to induce the making of this Agreement, except as set forth

specifically herein.” The Agreement provides that “All terms initially capitalized are

specifically defined terms and shall be defined as set forth in the documents in which

they appear within quotation marks” in the Term Sheet. The words “Participation

Definition” are quoted in the Term Sheet and “High Price Product Royalty” is

capitalized.

The Term Sheet is six pages long and contains capitalized-but-undefined terms.

The main body of the Agreement is 12 pages. By contrast, Exhibit A of the Agreement

(plus its Glossary) is 49 pages. Exhibit A states in bold letters that it “is a contractual

formula for the definition and possible payment of contingent compensation which

2 The referee deemed Brennan’s testimony “illogical and implausible” and “simply not believable.”

5

Participant acknowledges to be highly speculative.” Contingent compensation is money

earned after Fox recouped its acquisition fee of $4.75 million.

Exhibit A addresses video royalties. It defines “High Price Sales/Rental Royalty”

as monies Fox derives from video cassette distribution to wholesale dealers, which are

intended for rental by the public. It defines “Sell-Through Royalty” as 10 percent of the

monies Fox derives from sales of videos intended for purchase by the public. Exhibit A

makes no distinction between full price sales and discounted sales.3 Sloss told De Marco

that the definitions of high price and sell-through royalties in Exhibit A are ”vague” and

“confusing,” but did not ask De Marco to clarify the terms during their negotiations or

have De Marco write down that the high price royalty rate of 31.66 percent will apply to

the great majority of video distribution.

After acquiring the Film, Fox engaged MTV to promote it. MTV and the Film

both appeal to a youthful audience. Fox agreed to pay MTV 5 percent of the Film’s

defined gross proceeds in exchange for promotional support, including airtime and the

creation of advertising spots. MTV hosted live appearances by the Film’s cast and

created nine “interstitial” advertisements ending with the words “Go see Napoleon

Dynamite” that aired on MTV 1,612 times from June to August 2004.

The value of the airtime provided by MTV was over $4.5 million. MTV received

compensation of $2.4 million from Fox. Under the terms of Exhibit A, Fox deducted the

compensation it paid to MTV as a cost “directly related to or allocable to (as Fox may

reasonably determine in good faith) the advertising, publicizing and promoting of the

Picture in any way . . .” in publications, radio or television, websites, and so on.

The Film was successful when released in June 2004, with theatrical revenues of

nearly $45 million. Fox made payments to Napoleon (and to Sloss’s advisory company)

as described in the Term Sheet and Exhibit A. Sloss thought that the home video

3 A prior version of Exhibit A dating to the 1990’s had a formula for determining “Economy Line Sales.” By 2001, the Exhibit A to distribution agreements negotiated by Sloss and De Marco no longer included “economy line sales.”

6

payments were “low” in the 2005-2006 participation statements, but he did not call

De Marco to inquire about the low numbers.

In 2006, Napoleon demanded an audit of Film revenues. Exhibit A authorizes an

audit, as noted by Roy Silva, an attorney Coon consulted, who reviewed all documents

from Fox that Coon had in his possession. Napoleon appointed as its auditor Steven

Sills, a CPA and lawyer who has performed over 2,000 motion picture and television

audits since 1982. Sills negotiates contracts and settlements, and is a certified fraud

examiner.

Sills obtained from Sloss or Napoleon the Term Sheet, the Agreement and

Exhibit A. Coon referenced Exhibit A in an e-mail he sent to Sills on January 9, 2008.

Proceeding from the assumption that these documents govern profit participation, Sills’s

first report in 2010 applied a 31.66 percent rate for High Price royalties and 10 percent

for Sell-Through royalties.

After discussion with Sloss, Sills redrafted his report. Sloss sent Fox the “final

audit report” on February 16, 2011. It states, “The Agreement provides for a 31.66%

royalty on ‘High Price’ receipts and a 10% royalty on ‘Sell Through’ receipts. You have

informed us that during the negotiation of the Agreement, Fox’s representatives informed

you that they anticipated a net overall royalty rate of 25%. [¶] Due to the change in the

video marketplace from a rental market to a sell-through market, 87% of the Picture’s

video sales were at the lower rate, resulting in an overall video royalty rate of 12.88%. It

should be noted that this rate is approximately one-half of the industry standard minimum

rate of 20%. [¶] Had Fox reported to you based on the 25% overall rate provided to you

during the contract negotiations, home video royalties would have been increased by

$16,894,429.” At trial, Sloss felt that Sills “misunderstood” their discussion, resulting in

the language Sills employed about an anticipated overall royalty rate of 25 percent.

In 2012, during this litigation, Sills amended his report yet again, writing that “the

Exhibit A that we had in our file, which we used in preparation of the initial reports, was

not applicable to this contract.” Sills reached this conclusion after speaking to Sloss, who

7

believed that Fox promised a 31.66 percent royalty on everything except “bargain bin”

videos that a shopper might pick up in the center aisle at Walmart.

Sills’s revised 2012 audit report states that all home video sales should be reported

at a 31.66% royalty rate, regardless of whether it was “high price” or “sell-through.” It

concludes, “Had Fox reported to you based on the negotiated terms of the Agreement of

31.66%, home video royalties would have been increased by $26,176,571.” The new

report omits reference to a 25 percent overall rate promised during contract negotiations.

PROCEDURAL HISTORY

Napoleon filed suit against Fox in 2011, alleging claims for breach of contract;

promissory estoppel; negligent misrepresentation; reformation; and an accounting. The

Term Sheet, the Agreement, and Exhibit A were attached to the complaint. The

complaint alleges that Fox’s De Marco (who died in 2008, before this lawsuit was filed)

represented that Napoleon would receive a net overall royalty of approximately 25

percent of the net profits from home video sales. Napoleon relied upon this when

granting Fox distribution rights to the Film. Napoleon claimed that it received Exhibit A

“for the first time” in July 2004, two months after Coon signed the Agreement.

As required by the Agreement, the parties stipulated to the appointment of a

referee, a retired judge. (Code Civ. Proc., § 638.) The referee conducted a 14-day bench

trial. During trial, Napoleon amended its complaint to allege that Fox improperly

deducted payments made to MTV. The referee issued a statement of decision. The trial

court adopted the statement of decision and entered judgment on it.

THE STATEMENT OF DECISION

The referee produced an 80-page statement of decision with an extensive summary

of the evidence. She found that the preliminary Term Sheet incorporated by reference a

Participation Definition.4 Before Napoleon executed the final agreement, it was advised

of the applicable Participation Definition. For nearly seven years, the parties conducted

4 Exhibit A to the Agreement is the Participation Definition, which plaintiff calls “the Definition” and defendant calls “the A-level Acquisition Definition.”

8

themselves in a manner consistent with the understanding that Fox’s Participation

Definition governed their agreement. When the Term Sheet is read in conjunction with

the Participation Definition, it discloses that the High Price Royalty of 31.66 percent

applies only to video rentals and not to consumer purchases of the video: it cannot be

construed to apply to all home video sales except bargain bin. The parties’ agreement

provides a 10 percent royalty rate for all sell-through revenue. The referee characterized

the parties’ agreement with respect to royalties as “not ambiguous.”

The referee declined to reform the parties’ agreement to reflect an oral agreement

that the 31.66 percent royalty rate applies to all video sales (other than bargain bin). The

only evidence of an oral understanding came from Sloss, because De Marco died before

trial. The court rejected Sloss’s testimony because it “is not only contrary to the terms of

an expressly integrated agreement, but is not memorialized or confirmed in a single piece

of paper” or e-mail. It “strains reason” to believe that an aggressive, experienced lawyer

like Sloss would not document a purported oral agreement limiting the 10 percent royalty

rate to bargain bin sales.

Napoleon’s auditor, Sills, initially wrote a report following the terms of the

written Term Sheet and Participation Definition, applying a 10 percent royalty rate to all

sales. No agreement was ever reached defining “bargain bin” and it was never clarified

how Fox’s accounting department could implement an undocumented and undefined

agreement. The “final” audit report that Sloss sent to Fox refers to the Term Sheet and

Exhibit A, but notes an oral representation about a net overall royalty of 25 percent.

Sloss did not claim a purported 31.66 percent agreement for everything but bargain bin

until after this litigation started. There is no proof of a mutual or unilateral mistake, and

Sloss’s version of the parties’ agreement is “inherently incredible.”

Fox cannot be liable on a theory of negligent misrepresentation. As a “shrewd

and experienced negotiator,” Sloss knew that the Fox definitions included a 10 percent

royalty for all sell-through. The alleged oral misrepresentations are inconsistent with the

written agreement, which is fatal to Napoleon’s claim. Parol evidence cannot be used to

contradict the terms of the written contract. The claim for promissory estoppel fails

9

because the alleged promise is not sufficiently delineated, the parties executed a written

agreement for consideration, and Sloss did not reasonably rely on De Marco’s

representations that sell-through royalties would be de minimis.

The referee rejected Napoleon’s claim that Fox misclassified $7.6 million in home

video revenue as sell-through, rather than rental. First, Napoleon did not assert this claim

at trial. Second, the claim was not established. Sills testified that Fox properly accounted

for revenues based on the definitions in Exhibit A.

The referee rejected Napoleon’s contract claims for underreported video on

demand; merchandising fees; residuals; foreign version costs; price protection reserves;

prime time media charges; foreign tax credits; and paying for MTV advertising through a

participation plan. The referee did find that Fox inadequately documented advertising

expenses and credited Napoleon with $125,357. Also, Napoleon was credited with a

small amount for electronic sell-through.

DISCUSSION

1. Appeal and Review

Appeal is taken from the judgment. (Code Civ. Proc., § 904.1, subd. (a)(1).)

Napoleon challenges the sufficiency of the evidence supporting the referee’s decision,

which we review as if made by the trial court. (Code Civ. Proc., § 645.) We must affirm

the judgment if the record contains substantial evidence, contradicted or uncontradicted,

to support the referee’s determinations; we cannot substitute our deductions for those of

the trier of fact. (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874.) Substantial

evidence has ponderable legal significance, is reasonable, credible and of solid value.

(Ibid.; Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651.)

“On substantial evidence review, we do not ‘weigh the evidence, consider the

credibility of witnesses, or resolve conflicts in the evidence or in the reasonable

inferences that may be drawn from it.’” (Do v. Regents of University of California

(2013) 216 Cal.App.4th 1474, 1492.) Because there is a statement of decision setting

forth factual and legal bases, “any conflict in the evidence or reasonable inferences to be

drawn from the facts will be resolved in support of” the determinations made in the

10

decision. (In re Marriage of Hoffmeister (1987) 191 Cal.App.3d 351, 358.) The

statement of decision makes repeated credibility assessments about witness testimony.

The finder of fact “is the exclusive judge of the credibility of the witnesses. [Citations.]

The trial court is free to disbelieve and reject the testimony of witnesses even though they

are uncontradicted and unimpeached.” (Maslow v. Maslow (1953) 117 Cal.App.2d 237,

243; Meiner v. Ford Motor Co. (1971) 17 Cal.App.3d 127, 140-141.)

Although a contract is interpreted de novo, if extrinsic evidence is admitted as an

aid to interpretation, the trial court’s reasonable construction of the agreement—

supported by substantial evidence—will be upheld if it “turns upon the credibility” of

conflicting evidence. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865;

In re Marriage of Fonstein (1976) 17 Cal.3d 738, 746-747; Roddenberry v. Roddenberry,

supra, 44 Cal.App.4th at p. 651.) Extrinsic evidence cannot be used to give the contract a

meaning to which it is not reasonably susceptible. (Parsons, at p. 865.)

2. Breach of Contract Claim

a. Rules of Contract Interpretation

A contract is interpreted to give effect to the mutual intention of the parties at the

time of contracting, if ascertainable. (Civ. Code, § 1636.) The parties’ mutual intent is

determined solely from the language of a written contract whenever possible, analyzing

the clear and explicit meaning of its provisions in their ordinary and popular sense. (Civ.

Code, §§ 1638, 1639; ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th

1257, 1269.) The execution of a written contract “supersedes all the negotiations or

stipulations concerning its matter which preceded or accompanied the execution of the

instrument.” (Civ. Code § 1625.)

Terms contained in a writing intended to be the final expression of the parties’

agreement “may not be contradicted by evidence of a prior agreement or of a

contemporaneous oral agreement.” (Code Civ. Proc., § 1856, subd. (a).) Evidence of an

oral agreement cannot alter the obligations in a written instrument. (Casa Herrera, Inc.

v. Beydoun (2004) 32 Cal.4th 336, 344.) Contractual terms may be explained or

supplemented by evidence of consistent additional terms, unless the court determines that

11

the writing was intended as a complete and exclusive statement of terms; terms may be

explained or supplemented by course of dealing, usage of trade, or by course of

performance; and evidence may be admitted to show a mistake or imperfection in the

writing. (Code Civ. Proc., § 1856, subd. (b).)

Extrinsic evidence is admissible to interpret a contract that is either ambiguous on

its face or is reasonably susceptible of two or more interpretations. (Bill Signs Trucking,

LLC v. Signs Family Limited Partnership (2007) 157 Cal.App.4th 1515, 1521.) A two-

step process applies to the admission of extrinsic evidence. First, the court provisionally

receives any credible evidence concerning the parties’ intentions to determine

“ambiguity,” i.e., whether the contract language is reasonably susceptible to the

interpretation urged by a party. Second, if it finds an ambiguity, the court admits the

extrinsic evidence to interpret the contract. (Ibid.; Pacific Gas & E. Co. v. G.W. Thomas

Drayage etc. Co. (1968) 69 Cal.2d 33, 37.)

b. Exhibit A Is Incorporated into the Parties’ Agreement

Napoleon contends that the referee erroneously interpreted “High Price Product

Royalty” in the Term Sheet. In plaintiff’s view, the term “takes its meaning from the

parties’ mutual understanding at the time the term sheet was signed—i.e., that the 31.66

percent royalty rate applies to all home video sales except bargain bin sales.” This oral

understanding applies, Napoleon argues, because Exhibit A is not incorporated by

reference into its agreement with Fox.

A document may be incorporated by a clear and unequivocal reference that is

called to the attention of and consented to by the contracting party, and is known or easily

available to the parties. (Shaw v. Regents of the University of California (1997) 58

Cal.App.4th 44, 54.) The Term Sheet states that “participation terminology” payment

amounts, if not defined in the Term Sheet itself, “shall be” in accordance with Fox’s

Participation Definition. The Term Sheet does not define “High Price Product Royalty.”

As a result, the participation definitions contained in Exhibit A must be incorporated into

the Term Sheet. On its face, Exhibit A states that it is “a contractual formula for the

definition and possible payment of contingent compensation,” which includes royalties.

12

The reference in the Term Sheet to Fox’s participation definitions is clear and

unequivocal. It is not necessary that the definitions incorporated by reference be

physically part of the basic contract, nor is there a need to recite that the contract

“incorporates” another document, so long as the party is guided to it. (Chan v. Drexel

Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 641; Avidity Partners, LLC v. State

of California (2013) 221 Cal.App.4th 1180, 1194.) Exhibit A is part of previous film

distribution deals that Sloss negotiated with De Marco: Sloss knew that Exhibit A is

always part of Fox’s agreements, even if he dismissed it as “boilerplate.” The distinction

between “High Price” rentals to the public and “Sell-Through” sales to the public in

Exhibit A existed in 2001, when Sloss negotiated terms with De Marco for the movies

Kissing Jessica Stein, The Waking Life, Super Troopers, and The Deep End. In each

instance, the “Sell-Through” rate was 10 percent, as it is here. Fox’s definitions were

always in an “Exhibit A.”5 Between 2001 and 2004, Sloss did nothing to ensure that the

“Sell-Through” rate was only applied to “bargain bin” sales.

The Term Sheet contemplated that “formal documentation memorializing the

parties’ agreement will be prepared, and will contain the balance of the terms governing

this agreement, which other terms shall be in accordance with Searchlight’s standard

agreements of this type . . . .” The Term Sheet authorized the incorporation of Exhibit A,

which is Fox’s standardized, pre-negotiated rider. Sloss acknowledged that De Marco

said during negotiations, “‘I will give you an A-Level Rider’” (meaning Exhibit A), the

best deal that Fox gives to anyone. An experienced film agent like Sloss, who is familiar

with a movie studio’s standard contract, binds his principal to it, even if he fails to

communicate the provisions to his client. (Columbia Pictures Corp. v. DeToth (1948) 87

5 The reply brief pushes boundaries by arguing that Sloss was “under a duty not to disclose” Fox’s standard participation definitions to Napoleon because Exhibit A is privileged and confidential. Fox created Exhibit A. Fox is not Sloss’s client, so information Fox provided to Sloss is not secret. (Bus. & Prof. Code, § 6068, subd. (e) [an attorney must “preserve the secrets of his or her client”].)

13

Cal.App.2d 620, 628-631, cited with approval in O’Riordan v. Federal Kemper Life

Assurance Co. (2005) 36 Cal.4th 281, 288.)

Sloss and Brennan had a duty to familiarize themselves with Fox’s “standard

agreements” (including Exhibit A) that “contain the balance of the terms governing this

[Term Sheet].” If they failed to receive or misplaced Exhibit A, after Taylor referred to it

in correspondence, additional copies were easily available. A contracting party is bound

by terms contained in an unattached, but easily available, Exhibit A. (Wolschlager v.

Fidelity National Title Ins. Co. (2003) 111 Cal.App.4th 784, 787, 791.) There is no

plausible reason why the attorneys failed to examine Exhibit A before Coon signed the

Term Sheet in January 2004, and if necessary, obtain written clarification of the rate for

“Sell-Through” before Coon signed the Agreement in May 2004. Their failure to do so

“flies in the face of reason,” as stated by the referee. Sloss’s reliance on oral assurances

was unfounded, not to mention barred by the Agreement’s integration clause.

Coon and his attorney Roy Silva relied upon Exhibit A in demanding an audit of

the Film’s revenues. Only Exhibit A authorizes an audit, not the Term Sheet or the main

body of the Agreement.6 Silva’s e-mail to Coon referred to Exhibit A as “the contract”

and described it as “pretty clear.” Coon forwarded the e-mail to Sills, who prepared an

initial audit report based on Exhibit A and the Term Sheet.

Napoleon cannot cherry-pick favorable parts of Exhibit A as being incorporated

into the Term Sheet (such as the right to an audit), while claiming that the part that is

unfavorable (the Sell-Through royalty rate) is not incorporated. Sloss sent Fox a 2011

“final audit report” that acknowledged a written agreement to pay 10 percent for Sell-

Through (from Exhibit A), but suggests an oral agreement that Fox “anticipated a net

overall royalty rate of 25%.” The claim that Exhibit A does not apply at all was devised

after this lawsuit was filed.

6 In its reply brief, Napoleon for the first time contends that it relied upon the implied covenant of good faith and fair dealing to request an audit, not on Exhibit A. No evidence supports this newly minted theory.

14

Although the Term Sheet describes Fox’s participation definition as encompassing

“Definitions of Net Profits” and Exhibit A is entitled “Definition of Defined Net

Proceeds,” Sloss acknowledged that the industry moved away from the term “net profits”

but the change in terminology did not affect the “substance of what those agreements

said.” Indeed, before Napoleon signed the Agreement, Fox attorney Jamie Taylor

pointed out in a letter to Napoleon attorney Paul Brennan that the Term Sheet uses the

“obsolete” words “net profits” when referring to Fox’s participation definitions, although

Exhibit A attached to his letter uses “net proceeds.”

No evidence supports Napoleon’s claim that Exhibit A is not incorporated by

reference into the Term Sheet. The Term Sheet contemplates that Exhibit A will provide

necessary participation definitions. Exhibit A was sent to Brennan before Napoleon

signed the Agreement, and it was previously used by Sloss and De Marco in other

distribution agreements. As noted by the referee, the only portion of Exhibit A that did

not “exist” when the Term Sheet was executed was the blank space for Napoleon’s name.

The parties’ conduct in conducting an audit shows their mutual awareness that Exhibit A

was incorporated by reference and governs their relationship.

c. Parol Evidence of an Oral Understanding Does Not Control

Contrary to Napoleon’s claim, parol evidence of an oral understanding between

Sloss and De Marco does not control here. The referee characterized the parties’ written

agreement as “not ambiguous.” We agree. Exhibit A, which was incorporated by

reference into the Term Sheet, clearly draws a distinction between “High Price” royalties

(defined as video rentals to the public) and “Sell-Through” royalties (defined as video

sales to the public). The negotiated rate of 31.66 percent applies to “High Price” sales.

“Sell-Through” was 10 percent. The parties’ agreement is not ambiguous on its face.

Extrinsic evidence may be received to determine whether contract language is

reasonably susceptible to the interpretation urged by plaintiff. (Bill Signs Trucking, LLC

v. Signs Family Limited Partnership, supra, 157 Cal.App.4th at p. 1521.) The referee

rejected plaintiff’s extrinsic evidence, finding it “strains reason” to believe that an

experienced lawyer like Sloss would fail to memorialize or confirm an alleged oral

15

understanding in a single piece of paper or e-mail, particularly when the signed

Agreement expressly forbids reliance on oral representations by either party.

When the trier of fact finds the lead witness’s testimony “inherently incredible,” as

it did here, it is not our role as a reviewing court to credit testimony that the referee

rejected. De Marco, the only person who could gainsay the alleged oral understanding,

died before Napoleon filed suit. Nevertheless, the referee, as exclusive judge of witness

credibility, was free to disbelieve Sloss, even if his testimony was uncontradicted. “The

trier of the facts is not required to accept the testimony of a witness as true though it

stands uncontradicted where the trier of the facts determines that such testimony is false.”

(People v. Woods (1946) 75 Cal.App.2d 246, 248.) Sloss is not a neutral witness: he

stands to benefit from the outcome of this litigation because his advisory company is

entitled to 10 percent of Fox’s payment.

Absent credible evidence of an oral understanding, the parties’ distribution

agreement is not reasonably susceptible of the interpretation that Napoleon places on it.

“High Price” and “Sell-Through” are specifically defined terms, with different royalty

rates. The purported oral understanding—that there was one royalty rate for everything

except bargain bin sales—contradicts the writings. The Term Sheet indicates that the

high rate applies to “High Price” royalties. Just above the signature line, the Agreement

states, “No representations or warranties of any kind have been made by either of the

parties to induce the making of this Agreement.” Applying the usual rules of contract

interpretation, the terms of the writing cannot be contradicted by evidence of a

contemporaneous oral agreement. (Code Civ. Proc., § 1856, subd. (a); Casa Herrera,

Inc. v. Beydoun, supra, 32 Cal.4th at p. 344.)

3. Reformation of Contract Claim

Napoleon asserts that the referee should have reformed the parties’ agreement due

to mutual mistake. A written contract may be reformed when, through fraud or mutual

mistake of the parties, it “does not truly express the intention of the parties.” (Civ. Code,

§ 3399.) Mutual mistake may be shown with undisputed evidence that all parties

incorrectly believed their written documents were sufficient to carry out their manifest

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intentions. (Jones v. First American Title Ins. Co. (2003) 107 Cal.App.4th 381, 389.)

Napoleon maintains that it has “amply demonstrated that Sloss and De Marco intended

the 31.66 percent royalty rate to apply to all home video sales except bargain bin sales

and mistakenly assumed that the term ‘High Price Product Royalty’ in the term sheet

would encompass that understanding.”

The record does not demonstrate that De Marco intended for the royalty rate for

home videos to be anything other than what is expressed in the parties’ written

agreement. Prior film distribution agreements negotiated by Sloss and De Marco had

two-tiered royalty rates, including a 10 percent Sell-Through rate. Fox’s agreement with

Napoleon was consistent with the parties’ prior agreements, not a mistake.7

The concept of “bargain bin” does not appear in the Term Sheet, the Agreement,

or Exhibit A. Nor does it appear elsewhere, such as a letter or e-mail. Sloss admitted as

much at trial. There is no credible showing that the parties ever negotiated a “bargain

bin” price. There was no proof that De Marco instructed Fox’s accounting department to

separate out “bargain bin” sales and make 10 percent royalty payments on those sales

alone. All Fox sales, whether full price or deeply discounted, flow through the “sell-

through” classification in the company’s general ledger. Without any proof of a meeting

of the minds regarding “bargain bin” sales, the written agreement cannot be reformed.

Critically, the referee discounted Sloss’s testimony regarding an undocumented

agreement to pay a high royalty rate for video sales, finding that it “strains reason [that]

he did not document any of the several identical conversations he purports to have had

repeatedly with De Marco” for five movies, including the Film. Sloss could have

pursued a resolution of this purported misunderstanding with De Marco in 2005-2006,

when Sloss first noticed that Fox’s payments were “low.” Instead, Sloss waited until

De Marco’s death to posit the existence of an oral understanding about royalty rates that

7 Sloss and De Marco negotiated a 31.66 percent rate for both high price and sell-through royalties in 2006, for the movie Little Miss Sunshine, as shown in the term sheet for that deal.

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conflicted with Napoleon’s written agreement. The referee properly declined to reform

the parties’ written agreement because there is no substantial evidence of a mutual intent

that is different from what is expressed in the Term Sheet and Exhibit A.

4. Negligent Misrepresentation Claim

The elements of a claim for misrepresentation are a misrepresentation of fact with

reasonable grounds for believing it to be true, made with the intent to induce reliance, and

justifiable reliance on the misrepresentation. (Thrifty Payless, Inc. v. The Americana at

Brand, LLC (2013) 218 Cal.App.4th 1230, 1239.) The alleged misrepresentation is that

De Marco assured Sloss that the overwhelming majority of home video royalties comes

from “high price” receipts, and other video receipts (“sell-through”) were de minimis,

drastically reduced sales to the public.

To the extent that De Marco tried to prognosticate future sales at any price point,

Sloss could not reasonably rely on that speculation because Sloss himself testified that

the video market “was mutating on a daily basis” and “was in complete flux” in 2004. In

any event, as an experienced film agent, Sloss was as well placed as De Marco to predict

whether home video sales trends would continue or dissipate.

Beyond that, Napoleon’s claim of misrepresentation once again seeks to ignore the

terms of the parties’ written, integrated agreement and enforce an undocumented oral

assurance at odds with the written agreement. This cannot be done. (Alling v. Universal

Manufacturing Corp. (1992) 5 Cal.App.4th 1412, 1436-1437.) The parol evidence rule

protects the terms of a valid written contract, although it does not bar evidence

challenging the validity of the agreement itself if the plaintiff wishes to prove that the

instrument is void or voidable because it was procured by fraud. (Code Civ. Proc.,

§ 1856, subds. (a), (f); Riverisland Cold Storage, Inc. v. Fresno-Madera Production

Credit Assn. (2013) 55 Cal.4th 1169, 1174-1175, 1182 [“fraud undermines the essential

validity of the parties’ agreement”].) Napoleon does not argue that its agreement with

Fox is void and invalid; rather, it wants to enforce the agreement but get more money.

Even if Napoleon’s parol evidence was considered, it did not prove its claim because the

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referee disbelieved Sloss, whose testimony about the alleged misrepresentations made by

De Marco was “inherently incredible.”

5. Napoleon’s Challenge to Payments Made to MTV

The Term Sheet specifies that distribution expenses are to be deducted from

Napoleon’s profit participation. Exhibit A defines distribution expenses as the cost of

purchasing advertising time on television (among other costs). There is no limitation on

how payments to advertisers must be structured, only that Fox exercise good faith in

assessing costs directly related to publicizing and promoting the Film.

Napoleon objects to the deal Fox struck with MTV—giving MTV a profit

participation instead of paying outright for the 1,612 interstitial advertisements that ran

on MTV in 2004. Exhibit A, which is incorporated into the Term Sheet, does not

prohibit the arrangement that was reached between Fox and MTV. The advertisements

were a cost of purchasing television time to maximize the Film’s exposure, especially

when tied into appearances by the Film’s cast on MTV. Napoleon’s claim is odd: had

Fox paid MTV directly for the airtime, instead of through a participation agreement, it

would have cost Fox (and Napoleon) over $4.5 million. Fox paid MTV only $2.4

million, less than half the value of the airtime. It makes no sense for Napoleon to argue

that Fox should have paid MTV twice as much for the Film’s MTV air time.

Sloss testified that he wanted Fox to distribute the Film because of its superior

marketing techniques. Obviously, that turned out to be true: the Film’s revenues

exceeded its production costs by tens of millions of dollars. It cannot be said, given the

Film’s success, that Fox’s decision to partner with MTV was foolish, or that charging the

cost to Napoleon was in bad faith. Napoleon must bear its share of the cost of the

agreement to secure advertising on MTV.

CONCLUSION

Despite a lengthy record, this case is not complicated. The parties entered a

written film distribution agreement in 2004 that contains two royalty rates, one for home

video rentals and one for consumer purchases, plus a clause stating that “no

representations or warranties of any kind have been made by either of the parties to

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induce the making of this Agreement, except as set forth specifically herein.” Plaintiff’s

agent-attorney Sloss testified to an oral understanding that contradicts the written

agreement. The trier of fact found the written agreement “not ambiguous” and also found

that the testimony contradicting it is “inherently incredible” and “defies reason.”

Plaintiff insisted that Exhibit A was a newly created and mysterious addition to the

Term Sheet. Exhibit A is always part of Fox’s film deals because it defines participation

terms. The Term Sheet and the Agreement are meaningless without the implementing

language in Exhibit A. That is why the Term Sheet is only six pages, but Exhibit A is 49

pages. Plaintiff relied on Exhibit A to determine its right to an audit and Fox allowed the

audit thanks to Exhibit A. Sloss was familiar with Exhibit A as Fox’s standard agreement

containing the balance of the terms governing the parties’ relationship. This knowledge

is imputed to plaintiff.

DISPOSITION

The judgment is affirmed.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

BOREN, P.J.

We concur:

ASHMANN-GERST, J.

HOFFSTADT, J.