Gault v. Sass Electric, Inc., 2016 WL 5539872 (Cal. Ct. App. 2016).
In April 2012, Michael Gault and CGE, Inc. (collectively, “Gault”) sued Sass Electric, Inc. and Christopher Sass (collectively, “Sass”) over certain business disputes. In April 2013, Gault and Sass entered into a settlement agreement and a separate promissory note in the amount of $692,000. The settlement agreement provided Sass with three payment options: (i) a payment schedule lasting until May 2020 for total principal payments of $692,000, (ii) a payment schedule with reduced monthly payments lasting until May 2020 with Gault waiving any remaining amounts owed and (iii) a payment option that provided that if Sass paid Gault a total of $386,000 “within three years” of the settlement agreement (i.e. by May 2016), Gault would waive any remaining amounts owed (the “Early Payment Option”). These payment options (including the Early Payment Option) were also stated in the promissory note. The promissory note was secured by a deed of trust over Sass’ real property.
In addition to the settlement agreement and the promissory note, the settlement agreement also attached a stipulated judgment executed by both Gault and Sass. The settlement agreement provided that if a default occurred under the settlement agreement, Gault could file the stipulated judgment on an ex parte basis. The stipulated judgment referenced the settlement agreement as being “attached” and showed that $692,000 was the principal amount.
In February 2014, Gault discovered that his security interest in Sass’ real property was flawed. Sass had secretly recorded a quitclaim deed for the property to his mother prior to the recording of Gault’s deed of trust. Gault sent a notice of default to Sass, but Sass did not respond or take curative actions, resulting in a default under the settlement agreement. In March 2014, Gault filed an ex parte request for entry of the stipulated judgment in the amount of $692,000 less payments made. Over the opposition of Sass, the court entered the stipulated judgment in favor of Gault for the amount of $592,000, and Gault began collection activities.
In June 2015, Sass filed a motion to compel acknowledgment of satisfaction of judgment based on the fact that he had by then paid Gault a total of $386,000 prior to May 2016, the date provided under the Early Payment Option. While Gault acknowledged that the settlement agreement provided Gault with different payment options (including the Early Payment Option), he argued that Sass’s ability to pay less than $692,000 to satisfy his debt was conditioned on Sass “not defaulting.” Gault argued that the entry of the stipulated judgment, which showed $692,000 as the principal amount, extinguished Sass’s rights under the settlement agreement. The trial court, however, disagreed with Gault because nothing in the settlement agreement explicitly provided that the Early Payment Option was contingent on Sass not defaulting.
On appeal, Gault argued that if Sass defaulted and Gault chose to enter into the stipulated judgment as he did, then Sass relinquished his right to pay a total of $386,000 within three years under the Early Payment Option. Gault asserted that the stipulated judgment showed a principal amount of $692,000, less payments made and urged the Court that “any other interpretation would render a default without consequence”. Sass, however, argued that the purpose of the stipulated judgment was to ensure payment, and that the stipulated judgment did not have terms providing for the extinguishment of his Early Payment Option under the settlement agreement upon default and entry of the stipulated judgment. In Sass’ view, any other interpretation would improperly nullify the Early Payment Option.
The Court noted that under California law, “evidence of the undisclosed subjective intent of the parties is irrelevant to determining the meaning of contractual language” and that the mutual intent of the parties at the time the contract is formed governs interpretation. The Court further noted that such intent is to be inferred, if possible, “solely from the written provisions of the contract.”
In deciding the issue of whether Sass could use the Early Payment Option to satisfy the stipulated judgment, the Court found that the mutual intent (based on the text of the settlement agreement) was to provide Sass with sufficient motivation to completely fulfill his monetary obligation to Gault by 2016 instead of 2020. The Court also found that that the settlement agreement did not have any language stating that the Early Payment Option would be extinguished upon default and entry of the stipulated judgment. Notably, the Court did not address Gault’s argument that the stipulated judgment’s listing of $692,000 as the principal amount should be evidence on its face that such amount should be owed to Gault in the event of a default. Instead, the Court effectively read the Early Payment Option to stand on its own and that Sass could “completely satisfy his obligation even if he missed or delayed some monthly payments”. The lesson to lenders in this case is to draft payment options clearly and to list expressly the consequences of any default.
