Judge: Gregory Keosian, Case: 21STCV22613, Date: 2023-08-10 Tentative Ruling
Case Number: 21STCV22613 Hearing Date: August 10, 2023 Dept: 61
Plaintiff Niagara Bottling, LLC’s
Motion for Summary Judgment or Adjudication is DENIED.
I.
MOTION FOR SUMMARY
JUDGEMENT
A party may move for summary judgment “if it
is contended that the action has no merit or that there is no defense to the
action or proceeding.” (Code Civ. Proc.
§ 437c, subd. (a).) “[I]f all the evidence submitted, and all inferences
reasonably deducible from the evidence and uncontradicted by other inferences
or evidence, show that there is no triable issue as to any material fact and
that the moving party is entitled to judgment as a matter of law,” the moving
party will be entitled to summary judgment.
(Adler v. Manor Healthcare Corp.
(1992) 7 Cal.App.4th 1110, 1119.) A motion for summary adjudication may be made
by itself or as an alternative to a motion for summary judgment and shall
proceed in all procedural respects as a motion for summary judgment. (Code Civ. Proc. § 437c, subd. (f)(2).)
The moving party bears an initial burden of
production to make a prima facie showing of the nonexistence of any triable
issue of material fact, and if he does so, the burden shifts to the opposing
party to make a prima facie showing of the existence of a triable issue of
material fact. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850;
accord Code Civ. Proc. § 437c, subd. (p)(2).) Plaintiffs moving for summary
judgment may meet their initial burden by “prov[ing] each element of the cause
of action entitling the party to judgment on the cause of action.” (Code Civ.
Proc. § 437c(p)(1).)
Once the plaintiff
has met that burden, the burden shifts to the defendant to show that a triable
issue of one or more material facts exists as to that cause of action or a
defense thereto. (Code Civ. Proc. §
437c(p)(1).) The defendant may not rely
upon the mere allegations or denials of its pleadings to show that a triable
issue of material fact exists but, instead, shall set forth the specific facts
showing that a triable issue of material fact exists as to that cause of action
or a defense thereto. (Code Civ. Proc. §
437c(p)(1).) To establish a triable
issue of material fact, the party opposing the motion must produce substantial
responsive evidence. (Sangster v. Paetkau (1998) 68
Cal.App.4th 151, 166.)
Plaintiff Niagara
Bottling, LLC (Plaintiff) moves for summary judgment or adjudication on its two
causes of action for breach of contract and declaratory relief against
Defendant Leon Farahnik (Defendant).
“[T]he elements of a
cause of action for breach of contract are (1) the existence of the contract,
(2) plaintiff's performance or excuse for nonperformance, (3) defendant's
breach, and (4) the resulting damages to the plaintiff.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.)
Plaintiff has
satisfied its initial burden to show an absence of triable issues of material
fact as to the elements of its breach of contract claim. Plaintiff presents a promissory
note executed between Plaintiff and CarbonLite Holdings, LLC on September 2,
2020, for which Defendant signed as CarbonLite’s CEO. (Safieddin Decl. Exh. A.)
Plaintiff also presents the personal guaranty of the note executed by Defendant
concurrent with the note. (Safieddin Decl. Exh. B.) The loan is for the
principal amount of $5 million dollars, with a ten-percent annual interest
rate, to be paid in 12 consecutive monthly installments commencing on January
31, 2021, with a loan maturity date of December 31, 2021. (Safieddin Decl. Exh.
A.)
The parties do not
dispute that no payments have been made under the note. (Defendant’s Separate
Statement of Undisputed Material Facts (DUMF No. 40, 41, 44.) No payment was
made by February 10, 2021, for the first installment payment, and Defendant on
March 8, 2021, CarbonLite filed for bankruptcy, an event of default under the
Note. (DUMF No. 41, 42.) Per Plaintiff’s calculations, the amount due in
damages are as follows:
·
The
note’s principal of $5 million;
·
The
agreed interest rate of ten percent, calculated from the date of the Note’s
execution on September 2, 2020 to January 31, 2021, the due date of the first
payment, amounting to $211,835.00;
·
Default
interest, calculated at the rate of 12% per annum under Section 8 of the note,
calculated from the date of Defendant’s first unpaid installment on January 31,
2021, to the date of hearing on this motion, amounting to $1,586,919.23; and
·
Late
fees under section 6 of the note, each amounting to two percent of each delayed
monthly installment payment, which, for 12 monthly installments of $454,416.00,
amounts to $9,088.32 per payment, for a total of $109,059.84.
(Ratzlaff Decl. ¶¶
8–11.) This amounts to a total claimed damages of $6,907,814.07. (Ratzlaff
Decl. ¶ 12.)
Defendant in
opposition makes two arguments against Plaintiff’s breach of contract claim,
both centered on the amount of damages claimed. First, Defendant contends that
per the guaranty agreement, he is personally liable only on the “loan,” by
which is meant the $5 million principal of the note, rather than the
accompanying interest, default interest, and late fees that Plaintiff seeks
here. (Opposition at pp. 5–6.) Second, Defendant contends that the default
interest and late fees sought by Plaintiff here constitute unreasonable
penalties not permitted under Civil Code § 1671, subd. (b). (Opposition at pp.
6–8.)
The first of these
arguments is unpersuasive. Defendant relies on one of the recitals contained in
the guaranty, which states: “WHEREAS, to induce Lender to extend the Loan to
Borrower, Guarantor has agreed to guaranty repayment of the Loan pursuant to
and in strict accordance with the conditions hereinafter set forth.”
(Opposition at p. 5; Safieddin Decl. Exh. A.) Defendant reasons that because
his obligation is to “guaranty repayment of the Loan,” defined elsewhere to
mean “the original principal amount of $5,000,000.00” paid to CarbonLite,
therefore the other items of damages claimed by Plaintiff cannot be imposed
upon him. (Opposition at p. 5.) This argument neglects “the conditions
hereinafter set forth” in the guaranty, which lay out Defendant’s obligations
more broadly:
Guarantor
jointly and severally hereby absolutely and unconditionally promises and agrees
to make to Lender prompt payment, as they severally mature or are due and
payable . . . of the Loan and the Note (hereinafter referred to in the
aggregate as “Liabilities”). This is understood and intended to be a continuing
promise and agreement and shall apply to and cover any and all Liabilities due
or which may hereafter become due from Borrower to Lender, whether such be
direct or indirect, liquidated or unliquidated, absolute or contingent, single,
joint, by the entirety or several, now existing or hereafter arising, . . .
(Safieddin Decl.
Exh. B.) Defendant’s obligations under the guaranty are not merely to satisfy
the obligation to repay the $5 million principal, but any “Liabilities”
attaching to CarbonLite by virtue of “the Note” as well. This includes the
associated obligation to pay interest, default interest, and late fees.
But Defendant’s
argument as to the unlawful nature of these other fees — particularly the
default interest sought here by Plaintiff — is persuasive. Civil Code §
1671 states that “a provision in a contract liquidating the damages for
the breach of the contract is valid unless the party seeking to invalidate the
provision establishes that the provision was unreasonable under the
circumstances existing at the time the contract was made.” (Civ. Code § 1671,
subd. (b).) Here, the default interest provision of the note states as follows:
So
long as (a) any monthly installment under this Note remains past due past ten
(10) days, or (b) any other Event of Default
. . . has occurred and is continuing, interest under this Note shall
accrue on the unpaid principal balance from the earlier of the due date of the
first unpaid monthly installment or the occurrence of such other Event of
Default, as applicable, at a rate (the “Default Rate”) equal to the lesser of
(i) the Loan Interest Rate [10 percent] otherwise in effect notwithstanding
such default, plus two point zero percent (2.0%) per annum; or (ii) the Maximum
Interest Rate [allowable by law]. If the unpaid principal balance and all
accrued interest are not paid in full on the Maturity Date or the date of any
mandatory prepayment or acceleration, the unpaid principal balance and all
accrued interest shall bear interest from the Maturity Date or such other date
at the Default Rate.
(Safieddin Decl. Exh. A, § 8.)
Defendant relies on the case Garrett
v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, in
which the California Supreme Court declared unlawful a provision in a loan
agreement which required the borrower, “in the event that payments of either
principal or interest on this note becomes in default, the holder may, without
notice, charge additional interest at the rate of two (2%) per cent per annum
on the unpaid principal balance of this note from the date unpaid interest
started to accrue until the close of the business day upon which payment curing
the default is received.” (Id. at p. 735.) The court stated:
In the instant case, the only reasonable
interpretation of the clause providing for imposition of an increased interest
rate is that the parties agreed upon the rate which should govern the contract
and then, realizing that the borrowers might fail to make timely payment, they
further agreed that such borrowers were to pay an additional sum as damages for
their breach which sum was determined by applying the increased rate to the
entire unpaid principal balance. Inasmuch as this increased interest charge is
assessed only upon default, it is invalid unless it meets the requirements of
section 1671.
(Id. at p. 738.) In assessing whether the default
interest provision of the loan was an invalid penalty under Civil Code § 1671,
the court held as follows:
The contractual provision as alleged in the
complaint in the instant case provides that in the event of a late payment a
borrower is to be charged an additional amount equal to 2 percent per annum for
the period of delinquency assessed against the Unpaid principal balance of the
loan obligation. We are compelled to conclude that a charge for the late
payment of a loan installment which is measured against the unpaid balance of
the loan must be deemed to be punitive in character. It is an attempt to coerce
timely payment by a forfeiture which is not reasonably calculated to merely
compensate the injured lender. We conclude, accordingly, that because the
parties failed to make a reasonable endeavor to estimate a fair compensation
for a loss which would be sustained on the default of an installment payment,
the provision for late charges is void.
(Id. at p. 740.)
Defendant argues that the court should apply this holding
from Garrett to the present case. Because the default interest provision
here requires the assessment of an additional two-percent interest upon the
entire unpaid principal balance beginning with the occurrence of any default,
it is an unreasonable penalty under Civil Code § 1671.
Plaintiff in reply does not do much to distinguish Garrett.
It notes that other cases have upheld default interest provisions in loan
agreements, and that Garrett itself validated the holding of a prior
case — Thompson v. Garner (1894) 104 Cal. 168 — stating that in that
case
the full amount of the note was in default and
the parties contracted for an increased rate beginning with the moment of
default on sums which became payable to the lender. No penalty was assessed as
the borrower at the amount of default owed only what he had contracted to pay
had there been no default, the principal amount plus accrued interest. If these
amounts were not then paid the parties agreed that interest at the higher rate
would accrue.
(Id. at p. 738; Reply at p. 8.)
This language does not help Plaintiff, because as other
courts interpreting both Garrett and Thompson have explained, the
default interest scheme validated in Thompson reflects only a policy of
permitting “default interest following note maturity.” (In re 3MB, LLC
(Bankr. E.D. Cal. 2019) 609 B.R. 841, 848, cited with approval in Honchariw
v. FJM Private Mortgage Fund, LLC (2022) 83 Cal.App.5th 893, 905.) The
court in Honchariw v. FJM Private Mortgage Fund, LLC (2022) 83 Cal.App.5th
893, likewise held invalid a purported “late fee” that included “a default
interest charge of 9.99% per annum assessed the total amount of unpaid
principal balance of the Loan.” (Id. at p. 901.) The court there
reasoned that prior cases upholding default interest had done so “on fully
matured obligations.” (Id. at p. 904.) The court indeed held that, “based
on Garrett and its progeny, liquidated damages in the form of a penalty
assessed during the lifetime of a partially matured note against the entire outstanding
loan amount are unlawful penalties.” (Id. at p. 905.) Yet that is nature
of the default interest that Plaintiff seeks to claim here: an increased rate
of interest on the unpaid principal balance collectable from the moment of
default on February 10, 2021.
Accordingly, Defendant is correct that triable issues
remain as to Plaintiff’s damages under its contract claim. As damages are an
essential element of the claim, no summary disposition is appropriate. (See
Paramount Petroleum Corp. v. Superior Court (2014) 227 Cal.App.4th 226,
241.)
The motion is therefore DENIED.