Jessup Farms v. Baldwin

• Decision Date: 28 March 1983
• Docket Number: No. 31478,31478
• Citation: 660 P.2d 813,33 Cal.3d 639,190 Cal.Rptr. 355
• Parties: , 660 P.2d 813, 36 UCC Rep.Serv. 230 JESSUP FARMS et al., Plaintiffs, Cross-defendants and Respondents, v. Eileen BALDWIN, Defendant, Cross-complainant and Appellant. L.A.
• Court: California Supreme Court

Page 355

190 Cal.Rptr. 355

33 Cal.3d 639, 660 P.2d 813, 36 UCC Rep.Serv. 230

JESSUP FARMS et al., Plaintiffs, Cross-defendants and Respondents, v. Eileen BALDWIN, Defendant, Cross-complainant and Appellant.

L.A. No. 31478.

Supreme Court of California,

In Bank.

March 28, 1983.

Milo V. Olson, Los Angeles, for defendant, cross-complainant and appellant.

Hill, Wynne, Troop & Meisinger, Louis M. Meisinger and C. Dennis Loomis, Los Angeles, for plaintiffs, cross-defendants and respondents.

REYNOSO, Justice.

Eileen Baldwin appeals from a judgment awarding respondents--Jessup Farms, a general partnership, and its partners, individual members of the Jessup family--contribution for payments made on an obligation for which appellant was a co-obligor; ordering specific performance in favor of respondents of a contract for the purchase of securities in Holstein Heifer Ranch, Inc. (HHR); and denying appellant's cross-complaint for an equitable lien on stock transferred to respondents.

The primary issue we consider is whether payments made by HHR, in which appellant and respondents owned stock, were properly apportioned by the trial court among four outstanding obligations. We examine Civil Code section 1479, subdivision Three, which provides in pertinent part that unspecified payments be first applied to the obligation with the earliest maturity date. Particularly, we inquire whether a subsequent instrument can renew the maturity date of an earlier note so that both obligations can be said to mature simultaneously. This case thus presents a narrow question of statutory construction. A subsidiary issue involving respondents' purchase of stock from appellant's husband requires us to examine the record to determine if substantial evidence supports the trial court judgment that respondents were bona fide purchasers without notice of an alleged unperfected security interest in favor of appellant.

In 1972 HHR had executed a promissory note for which it was principal obligor. Appellant and respondents signed the note as co-obligors. Three subsequent notes executed by HHR were signed by respondents but not appellant. Prior to 1975, HHR made payments in excess of the amount due on the 1972 note but did not specify to which of the outstanding obligations the payments should be applied. After 1975 respondents made additional payments for which they sought contribution from appellant. Further, in 1973 appellant had executed a property settlement agreement which assigned to her husband her interest in HHR stock subject to a purported lien in her favor. Later, in 1974, respondents acquired this stock from appellant's husband pursuant to an option contract.

Appellant makes two contentions on appeal: (1) HHR's payments should have been first applied to the 1972 note thereby extinguishing that obligation prior to the time respondents made the payments for which the trial court awarded contribution, and (2) she has an equitable lien on the HHR stock transferred by her husband to respondents.

For the reasons discussed below, we conclude that the 1972 note had the earliest maturity date irrespective of subsequent renewal instruments and that, therefore, HHR's unspecified payments should have been first applied to extinguish this obligation. Accordingly, we reverse that part of the trial court judgment ordering appellant to make contribution to respondents. With respect to appellant's second contention, we conclude that substantial evidence supports the trial court's ruling that respondents were bona fide purchasers of the Baldwin stock; we therefore affirm that part of the judgment ordering specific performance of the option contract and dismissing appellant's cross-complaint for an equitable lien.

I Summary of Facts

Appellant's two contentions make necessary a detailed discussion of somewhat complex facts. The principal evidentiary matters relevant to this appeal, however, were substantially undisputed as the parties stipulated to the various transactions by which Jessup Farms obtained ownership of all the stock in HHR and made payments on debts incurred in its operation. We summarize the events and transactions central to this appeal.

In early 1970 appellant and her then husband, codefendant Wayne Baldwin, ¹ both residents of Idaho, owned 100 percent of the stock in HHR, an Idaho corporation. On February 16, 1970, Jessup Farms of Glendale, California, purchased 200 shares of HHR stock directly from the corporation. Concurrently with this stock transaction, the parties entered into a separate, written stock purchase agreement whereby the Baldwins agreed to sell and Jessup Farms agreed to buy an additional 150 shares of HHR stock for $105,000. ² The 350 shares so acquired by Jessup Farms represented 50 percent of the stock of HHR, with the Baldwins then owning the remaining 50 percent as husband and wife.

Since 1969 HHR had been incurring a substantial indebtedness to Fresno-Madera Production Credit Association (PCA), an agricultural lender, in connection with the purchase, care and feeding of HHR livestock. On May 19, 1972, HHR executed in favor of PCA a promissory note in the amount of $5,135,571. This note (entitled "Renewal Promissory Note") constituted a renewal of certain existing indebtedness to PCA plus a commitment by PCA to make additional advances in the sum of $2,485,029.67. The 1972 note was executed by HHR and by appellant and Mr. Baldwin in their individual capacities. PCA also demanded that the Jessups ³ sign the note in light of their status as sole partners of Jessup Farms which, as noted, at the time owned 50 percent of HHR. The partnership itself, however, was not named as a primary obligor on the note. The documents provide and the trial court found ⁴ that the Baldwins and Jessups were individually liable as co-obligors with HHR on the 1972 note. The documents specifically provide that the note was due on demand or, if no demand was made, on May 6, 1973. There being no demand by PCA, as of the due date on the note a balance of $3,218,804 remained unpaid.

At about this time, appellant and her husband separated and divorce proceedings were initiated. On June 15, 1973, one month after the 1972 note became due, the Baldwins executed a property settlement agreement whereby Mr. Baldwin assigned to appellant his interest in the 1971 stock purchase agreement with Jessup Farms. (See fn. 2, ante.) Concomitantly, appellant agreed to convey to her husband her interest in the remaining 50 percent of HHR stock, held by the Baldwins as community property (the Baldwin stock), in exchange for the sum of $267,000 to be paid by Mr. Baldwin over a period of years. It was further agreed that the 350 shares of Baldwin stock transferred to Mr. Baldwin as his separate property were subject to a lien in favor of appellant to secure payment of the $267,000 obligation, and that Mr. Baldwin would place the stock in escrow to secure his performance of the property settlement agreement. This property settlement agreement was incorporated into the final decree of divorce executed in Idaho on March 18, 1974. Appellant stipulated at trial, however, that her ex-husband never performed his obligation to pledge the Baldwin stock and place it in escrow, and that her alleged security interest in the stock was never otherwise perfected pursuant to the method sanctioned by the Idaho Uniform Commercial Code. Instead, a certificate representing the Baldwin stock was executed in blank and left in the possession of appellant's attorney.

On June 22, 1973, one week after execution of the property settlement agreement transferring appellant's interest in the Baldwin stock to her husband, HHR executed in favor of PCA a second renewal promissory note in the amount of $6,282,838. This note incorporated the unpaid principal plus interest on the 1972 note ($3,268,753.26) as well as new advances. The 1973 note, in addition to evidencing the obligation created by the new advances, expressly provides that it is given not in satisfaction of, but only for the purpose of renewing the unpaid balance on the 1972 note. This second note, by its terms, matured on May 6, 1974, if no prior demand was made; it also specifically states on its face that the maturity date of the first note was May 6, 1973. The 1973 note was thus executed one month and sixteen days after the 1972 note had matured.

The 1973 note was executed by HHR, the Jessups, and Mr. Baldwin. Appellant, however, did not execute the 1973 note in her individual capacity although she did sign it in her capacity as treasurer of HHR. This is consistent with the parties' stipulation at trial that the Jessups and Baldwins had entered into an oral apportionment agreement whereby they agreed that any personal liability arising from the PCA indebtedness would be apportioned in accordance with their respective stock ownership in HHR. Thus, appellant understandably refused to sign the 1973 note as an obligor as she no longer owned stock in HHR (having conveyed her interest in the remaining 50 percent of HHR stock to Mr. Baldwin pursuant to the property settlement agreement). It will be recalled, however, that at the time the 1972 note was executed (by the Jessups and both Baldwins), Jessup Farms owned 50 percent of the HHR stock and the Baldwins owned the remaining 50 percent. The execution of the 1972 note is thus also consistent with the stipulated apportionment agreement.

On January 10, 1974, HHR executed a third note, payable on demand, in favor of PCA in the amount of $42,000. This note was executed by the Jessups, but was not signed by appellant or her ex-husband Wayne Baldwin. The record does not disclose why Mr. Baldwin was not required to sign the third note.

Subsequent to the execution of the 1973 note, and continuing until after execution of the third note, HHR had made numerous payments to PCA. As earlier noted, at the time the 1973 note was executed an unpaid balance of $3,268,753.26 was...