First Motor Grp. of Encino v. Encino Motorcars, LLC

• Docket Number: B303094
• Decision Date: 10 March 2023
• Parties: FIRST MOTOR GROUP OF ENCINO, LLC et al., Plaintiffs and Appellants, v. ENCINO MOTORCARS, LLC et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

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FIRST MOTOR GROUP OF ENCINO, LLC et al., Plaintiffs and Appellants, v. ENCINO MOTORCARS, LLC et al., Defendants and Respondents.

B303094

California Court of Appeals, Second District, Third Division

March 10, 2023

NOT TO BE PUBLISHED

APPEALS from a judgment and order of the Superior Court of Los Angeles County No. LC106723, Virginia Keeny, Judge. Affirmed.

Quinn Emanuel Urquhart &Sullivan, Daniel C. Posner, Zachary Schenkkan; Arent Fox, Aaron H. Jacoby, Victor P. Danhi, Karen Van Essen, and Franjo M. Dolenac for Plaintiffs and Appellants.

Murphy Rosen, David E. Rosen; Greines, Martin, Stein &Richland Robin Meadow and Laurie J. Hepler for Defendants and Respondents.

BENKE J. ^[*]

This consolidated appeal arises from the sale of an automotive dealership by defendants and respondents, Encino Motorcars LLC, David L. Peterson, and Stephen Zubieta (sellers), to plaintiffs and appellants, First Motor Group of Encino LLC and Trophy Automotive Dealer Group LLC (buyers). After the transaction had been completed, buyers sued sellers alleging among other things, that sellers breached the parties' asset purchase agreement (APA) by providing inaccurate financial statements.

The case proceeded to trial on buyers' singular breach of contract claim and the jury rendered a verdict in favor of sellers. The trial court granted sellers their attorney's fees. Buyers now appeal the judgment and attorney's fees order, primarily alleging errors pertaining to the jury instructions. Upon examination of the entire cause, we conclude that buyers have failed to demonstrate a reasonable probability that the allegedly erroneous instructions misled the jury. Therefore, any instructional error was not prejudicial. In light of that conclusion, we find no error with respect to the attorney's fees order. Accordingly, we affirm the judgment and order.

FACTUAL AND PROCEDURAL BACKGROUND^[1]

I. The parties and their negotiations

Buyer's principal, Nasser Watar, attended business school in the United Arab Emirates. He had worked in the automobile industry since approximately 1985, owning or operating businesses around the world involving finance and automobiles. Watar aspired to own hundreds of auto dealerships in the United States. Around 2012 or 2013, Watar was put in touch with two brokers to assist him in buying a dealership. Watar told them that he and his business partner could afford large stores and were eager to move quickly in anticipation of positive industry trends. The brokers proposed several sellers. However, because Watar lacked credibility in the U.S. market having never owned a dealership, no deals came together until the brokers found sellers' dealership, Mercedes-Benz of Encino.

Mercedes-Benz is one of the most coveted luxury brands, and Southern California is a major market. Encino was within the top 10 in sales among the country's Mercedes-Benz dealerships, located near affluent buyers and having been recently remodeled. Watar was interested, and soon came to view the Encino dealership as a "trophy" store-not just a "golden opportunity," but a "diamond" one. He believed that, following the purchase, he could immediately grow the business by 20 percent, as well as possess the credibility to get other deals.

The brokers told Watar that Peterson (the dealership's majority owner) was a willing but not motivated seller who wanted $50 million for the goodwill of the dealership. Watar and Peterson first spoke on a videoconference in April or May 2013. Peterson said that he would take $100 million for the dealership without specifying whether the number was divided into separate portions for real estate and goodwill.

After visiting the dealership in May or June 2013, Watar told the brokers he was interested, so sellers provided him the dealership's 2011 and 2012 financial statements (the financial statements). Mercedes-Benz USA, the supplier of Mercedes-Benz automobiles, required dealers to submit monthly and yearly financial statements to compare their performance and watch for red flags. The company's credit arm, Mercedes-Benz Financial Services USA, LLC, required the submission of financial statements to assess whether the dealerships have sufficient cash flow to repay loans. Sellers' financial statements were prepared "in accordance with the Mercedes-Benz USA reporting requirements and d[id] not strictly follow . . . generally accepted accounting . . . princip[les]." Sellers sometimes adjusted their financials after closing their year-end books-a common practice. The financial statements were important to Watar because he expected they would be accurate, given that they were prepared for Mercedes-Benz well before he entered the picture. Buyers thus used the financial statements to determine the offer price for the dealership's goodwill.

The day after receiving the financial statements, Watar and Peterson met in person, and in less than 15 minutes, Watar offered $40 million for the dealership's goodwill. Watar did not tell Peterson how he arrived at that lump sum figure, and did not say it was based on a multiple of earnings. At the time, Watar's internal audit team had not done a formal analysis. To Peterson, it sounded like a firm offer.

II. The APA

The parties executed the APA to govern the completion of the sale, with the buyers agreeing to, among other things, pay sellers $40 million for goodwill.

Articles 6 and 7 of the APA contained the parties' warranties. Under sections 6.4 and 7.22, each party warranted that none of their statements or warranties contains "any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make such representation or warranty or such statement not misleading." As regarding the accuracy of sellers' financial statements, section 7.6 stated that: "Seller has heretofore delivered to Buyer its annual financial statements for the prior two (2) years, as well as the monthly year-to-date financial statements of the Seller all in the form required by the Manufacturer (the "Financial Statements"). Except as set forth on Schedule 7.6, the Financial Statements have been prepared in a manner consistent with the Seller's past practices and in accordance with the financial reporting standards of the Manufacturer consistently applied throughout the periods covered thereby, and fully and fairly represent the financial condition and results of operations of the Business in all material respects as of and for the respective periods covered thereby." Schedule 7.6, on which seller could have identified any exceptions to this warranty, stated: "None."

Articles 8 and 9 of the APA defined the "conditions precedent" to be "fully satisfied at or before the Closing" before buyer and seller were required "to perform this Agreement at Closing."

Section 8.1 required that sellers provide a certificate at closing stating that "[a]ll of the representations and warranties of the Seller . . . [are] true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date." Section 8.15 defined the buyers' ability to conduct due diligence: "The Buyer and its representatives shall have thirty (30) days from the delivery of all Schedules to be delivered by Seller, except Schedules 2.2(d), 3.1, 3.2, and 6.2, to conduct further due diligence review of the Seller, the Assets, the Assumed Liabilities or the Business (including, without limitation, any investigation into the Corner Lot (as such term is defined in the Property Purchase Agreement) or any environmental issues relating to the Real Property), and in the sole discretion of Buyer, the Buyer shall be satisfied with the results of such due diligence review." If buyers were not satisfied with the due diligence, they could elect to terminate the APA.

In section 9.1, buyers agreed to provide a certification at closing verifying that "[a]ll of the representations and warranties of the Buyer . . . [are] true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date." Section 9.11 required buyers to send sellers "written notice of the Buyer's satisfaction with the Buyer's due diligence review." Consistent with these provisions, the APA's preamble stated that the deal was "specifically conditioned upon and subject to the Buyer's written satisfaction of its due diligence review"

In section 10.5, sellers agreed that the warranties would survive the closing of the transaction for two years, and that sellers would indemnify buyers for any damages buyers suffered "arising out of or based upon the breach or failure of any representation or warranty." According to section 10.14, sellers' obligation to indemnify buyers from losses resulting from sellers' breach of a representation or warranty survives the closing as to any breaches that are uncured as of the closing.

III. Buyers' due diligence and the deal's closing

As Peterson testified, and Watar's broker corroborated, buyers' certification of their completion of due diligence was the "fulcrum" of the contract to sellers because sellers wanted to know that the deal was done at closing and that buyers would honor their commitments, given the negative ramifications of the deal falling through for a dealership of this stature. Watar understood certification as the deal's "point of no return."

To perform due diligence, buyers hired audit firm KPMG, and relied on several lawyers from the law firm of Winston &Strawn, as well as their own in-house team, including Stephen Lee, head of its mergers and acquisitions and internal audit team. KPMG expended more than 400 billable hours on the project, reviewing the financial statements and speaking to Zubieta (the dealership's...