Butler Am., LLC v. Aviation Assurance Co.

Decision Date29 September 2020
Docket Number2d Civ. No. B298696
Citation55 Cal.App.5th 136,269 Cal.Rptr.3d 284
CourtCalifornia Court of Appeals Court of Appeals
Parties BUTLER AMERICA, LLC, Plaintiff and Respondent, v. AVIATION ASSURANCE COMPANY, LLC, et al., Defendants and Appellants.

Buchalter, Robert M. Dato and Joseph M. Welch, Irvine, for Defendants and Appellants.

Chora Young, Paul P. Young, Joseph Chora, Pasadena, and Armen Manasserian, Glendale, for Plaintiff and Respondent.

GILBERT, P. J.

Alter egos of a judgment debtor appeal an order amending the judgment to add them as judgment debtors. We affirm. A judgment debtor with an empty shell is easy to crack.

FACTS

Craig Garrick controls and has an ownership interest in a number of entities involved in the aviation business. Among the entities are: Aviation Assurance Company, LLC (AAC); ComAv, LLC (ComAv); ComAv Asset Management, LLC, formerly known as Pacific Aviation Group, LLC (PAG); ComAv Technical Services, LLC, formerly known as Southern California Aviation, LLC (SCA); and Aviation Finance Services, LLC (AFS) (collectively "Garrick entities").

The trial court ordered that Garrick individually and the Garrick entities be added to a judgment Butler America, LLC (Butler) has against AFS.

Butler v. AFS

Butler and AFS signed a written contract in which Butler would provide staffing and payroll services to AFS. Butler paid AFS's staff and billed AFS for its services. AFS made partial payment on Butler's invoices, but ultimately defaulted on the agreement, leaving $896,578.40 owing to Butler.

Butler sued AFS to recover the balance owing. In June 2014, the parties entered into a settlement agreement. The parties contemplated that AFS would receive income by managing the leasing of jet engines owned by Scaled Composites, LLC (Scaled Composites contract). Under the terms of the settlement agreement, AFS would pay Butler the greater of $10,000 per month or 50 percent of the monthly revenue AFS received for its management responsibilities to Scaled Composites, LLC.

The settlement agreement provided that AFS would grant Butler "a security interest in AFS's entire revenue and income interest in the [Scaled Composites contract]." AFS executed a security agreement as part of the settlement. The security agreement refers to AFS's "revenue and income interest" in the Scaled Composites contract as security for AFS's performance of the settlement agreement. The Scaled Composites contract was attached as an exhibit to the security agreement. The Scaled Composites contract, however, was between Scaled Composites and PAG, not AFS.

Paragraph 3.1 of the settlement agreement provides for mutual releases as follows: "3.1 Subject to Section 3.2 below, BUTLER and AFS hereby fully and forever release and discharge each other and their parents, subsidiaries and all their respective heirs, attorneys, agents, representatives, affiliates, predecessors, successors, directors, members, managers, officers, and/or employees from any and all claims, suits, causes of action, obligations, damages, liability, costs, fees and expenses, of whatever kind or nature, in law, equity or otherwise, known or unknown, contingent or non-contingent, which in any manner arise from, relate to, or could have been asserted in the Action, and any other claim that exists between BUTLER and AFS, whether related to the Action or completely unrelated to the Action."

Section 3.2 of the settlement agreement provides that the releases in section 3.1 shall not apply to "any claim, cause of action or liability arising from a Party's breach of this Agreement or the Security Agreement ...."

Finally, the settlement agreement provides for a stipulated judgment to be entered on breach of the agreement.

AFS made 10 minimum $10,000 monthly payments to Butler under the settlement agreement, then defaulted. The trial court entered the stipulated judgment against AFS. The judgment now totals $1.2 million. Butler has been unable to collect any of it.

Motion to Add Alter Ego Defendants

AFS was a shell entity. From 2012 it had no substantial assets and conducted no substantial business activities. From February 2012 to February 2014, AAC deposited money in AFS's bank account that AFS passed through to Butler as partial payment on Butler's invoices. AAC also deposited money that AFS passed through to its attorneys to defend AFS in the Butler lawsuit and to pay Butler under the settlement. Garrick claimed the money AFS received from AAC was a loan. But Garrick admitted there are no loan documents and he could not identify the terms of the loan.

AFS did not have any employees who were not also employees of other Garrick entities. Thus, the money Butler was paying for AFS staffing was paying for the staffing of other Garrick entities. Garrick could not identify any transaction that a Butler-paid AFS employee performed for AFS.

All the Garrick entities had the same office in Victorville. When asked about communications between AAC and AFS, Garrick replied that it was silly to ask how he communicated with himself. Garrick acknowledged there was no written agreement between PAG and AFS as to what AFS's role would be in the Scaled Composite contract or what income AFS would receive from the contract.

In making the settlement agreement, AFS disclosed that it had no assets and provided documentation to support that disclosure. AFS, however, failed to disclose that it was not a party to the Scaled Composites contract; that there was no written agreement as to what income AFS would receive under the contract; and that from July 2013, when the Scaled Composites contract was made, through June 2014, when AFS induced Butler to enter into the settlement agreement, PAG had received no income from the contract. The trial court found that the security agreement was illusory.

DISCUSSION
I.Release Clause

The release clause in the settlement agreement releases all subsidiaries, parents, and principals of AFS. Garrick contends he and the Garrick entities are protected by the settlement agreement's release clause. Garrick is wrong for a number of reasons, any one of which is fatal to his argument.

(a) Express Terms of the Release Clause

The settlement agreement's release clause, section 3.1, begins, "Subject to Section 3.2 below ...." Section 3.2 provides in part, "The above releases in Section 3.1 shall not apply to ... any claim, cause of action or liability arising from a Party's breach of this Agreement ...." The stipulated judgment arose directly from AFS's breach of the settlement agreement. By the terms of the settlement agreement, the releases do not apply.

Garrick relegates section 3.2 in his opening brief to a footnote. He does not cite the text of the section. Instead, he cryptically states that the exceptions set forth in section 3.2 concern the parties’ obligations under the settlement agreement, and that only Butler and AFS are parties to the agreement. From this, he expects us to conclude that the exceptions stated in section 3.2 apply only to AFS and Butler. But that is not what section 3.2 says. It says, "The above releases in Section 3.1 shall not apply ...." Nothing in section 3.2 can reasonably be construed as limited to releases between Butler and AFS.

Garrick's reliance on In re Mission Ins. Co. (1995) 41 Cal.App.4th 828, 48 Cal.Rptr.2d 209 is misplaced. There the court stated, " ‘Because appellants knew they had a claim ... against respondents, they had a duty to specifically exclude that claim from the release agreement.’ " ( Id . at p. 839, 48 Cal.Rptr.2d 209, quoting Edwards v. Comstock Ins. Co . (1988) 205 Cal.App.3d 1164, 1169, 252 Cal.Rptr. 807.) That is exactly what section 3.2 does. It excludes from the release any action to enforce the settlement agreement.

(b) Breach of Contract

It is undisputed that AFS breached the settlement agreement. It is a fundamental principle of contract law that a material breach by one party excuses performance by the non-breaching party. ( Civ. Code, § 1439 ; Walker v. Harbor Business Blocks Co. (1919) 181 Cal. 773, 778, 186 P. 356 [promisor's failure to perform releases promisee from performance and justifies promisee in abandoning the contract].) Here, AFS's breach of the settlement agreement terminated the agreement, including the releases. AFS cannot breach the settlement agreement and also demand its benefits.

Garrick argues that he and the Garrick entities are not parties to the settlement agreement. But if Garrick and the Garrick entities have any standing under the agreement, they are third party beneficiaries. A third party beneficiary's rights are no greater than those of the promisee. ( Gietzen v. Covenant RE Management, Inc. (2019) 40 Cal.App.5th 331, 339-340, 253 Cal.Rptr.3d 97 ( Gietzen ).) When AFS's breach terminated its rights in the settlement agreement, Garrick and the Garrick entities’ rights were also terminated.

(c) Merger in the Judgment

When a final judgment is entered, all causes of action arising from the same obligation are merged into the judgment. ( Diamond Heights Village Assn., Inc. v. Financial Freedom Senior Funding Corp. (2011) 196 Cal.App.4th 290, 301, 126 Cal.Rptr.3d 673.) The judgment extinguishes the contractual rights of the parties and substitutes only such rights as attach to the judgment. ( Id . at pp. 301-302, 126 Cal.Rptr.3d 673.)

Here when the stipulated judgment was entered on the settlement agreement, it terminated all of AFS's and its third party beneficiaries’ rights in the agreement, including the releases.

Garrick cites Gietzen , supra , 40 Cal.App.5th 331, 253 Cal.Rptr.3d 97, for the proposition that the entire contract is not merged into the judgment. He concludes that under Gietzen only AFS's rights are merged into the judgment because the question of additional debtors was not before the court when the judgment was entered. Garrick's reliance on Gietzen is misplaced.

In Gietzen , a shopping center tenant sued its landlord for breach of a lease covenant to provide adequate parking. The...

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