Martin v. Smith
| Decision Date | 08 February 2016 |
| Docket Number | No. 72597–1–I.,72597–1–I. |
| Citation | 192 Wash.App. 527,368 P.3d 227 |
| Court | Washington Court of Appeals |
| Parties | Terry MARTIN, an individual, and M & M Technologies, Inc., a Washington Corporation, Respondents, v. Stanley SMITH and Jane Doe Smith, husband and wife; and Kerry Simshauser and Jane Doe Simshauser, husband and wife, Appellants. Nupower Technologies, Inc., Third Party Plaintiff, v. Terry Martin, an individual, and M & M Technologies, Inc., a Washington Corporation, Third Party Defendants. |
192 Wash.App. 527
368 P.3d 227
Terry MARTIN, an individual, and M & M Technologies, Inc., a Washington Corporation, Respondents,
v.
Stanley SMITH and Jane Doe Smith, husband and wife; and Kerry Simshauser and Jane Doe Simshauser, husband and wife, Appellants.
Nupower Technologies, Inc., Third Party Plaintiff,
v.
Terry Martin, an individual, and M & M Technologies, Inc., a Washington Corporation, Third Party Defendants.
No. 72597–1–I.
Court of Appeals of Washington, Division 1.
Feb. 8, 2016.
Kenneth Lee Karlberg, Karlberg & Associates PLLC, Bellingham, WA, for Appellants.
Douglas Ross Shepherd, Shepherd and Abbott, Bellingham, WA, for Respondents.
COX, J.
¶ 1 Stanley Smith appeals the trial court's dismissal of his breach of warranty counterclaim against M & M Technologies Inc. He argues that M & M breached the express warranties in two agreements with him. Specifically, he argues that M & M was the subject of a material adverse claim by the Securities and Exchange Commission (SEC) at the time M & M warranted otherwise. He is correct. We reverse.
¶ 2 This is a commercial dispute between M & M and Smith over a license agreement and option agreement, both of which are dated April 11, 2007. Prior to the execution of these agreements, M & M became aware of an investigation by the SEC of a "Ponzi scheme" involving an entity known as International Fiduciary Corporation (IFC). The SEC informed Terry Martin, a principal of M & M, that it believed IFC paid M & M with funds from the Ponzi scheme. There was no indication that either Martin or M & M was involved in the scheme, only that they had received funds from the scheme.
¶ 3 In February 2007, the SEC sent a letter informing Martin and M & M that its staff was considering recommending them as relief defendants in its lawsuit against IFC in
the federal district court in Virginia. The letter also
stated that the SEC might seek disgorgement of investor funds they received from IFC. In March 2007, the SEC's assistant director further corresponded with Martin and M & M concerning its investigation.
¶ 4 After these communications with the SEC, in March 2007, Smith met with Martin and M & M's accountant, Craig Forhan, to discuss a pending business arrangement involving licensing of M & M technology to Smith. At this meeting, Martin and Forhan disclosed to Smith that the SEC was investigating M & M and provided him with the SEC letters concerning its investigation. They also informed him that M & M had a cash flow problem. After this meeting, Smith loaned M & M $200,000.
¶ 5 By its First Amended Complaint dated April 9, 2007, the SEC named Martin, M & M, and others not involved in this litigation as "relief defendants" in an action in the U.S. District Court for the Eastern District of Virginia. According to this complaint, the "relief defendants" possessed illegally obtained investor funds or assets acquired from IFC. The relief sought against the relief defendants appears to be limited to return of these funds. A copy of this complaint was admitted as an exhibit in the trial of this action.
¶ 6 In April 2007, M & M and Smith entered into three agreements, all of which are dated April 11, 2007. The License Agreement between M & M and Smith provides for licensing of certain property in three states. The Option Agreement between M & M and Smith provides for licensing of property in other states. The Research, Development and Testing Agreement between M & M and Smith provides for certain services. The parties changed Smith's $200,000 loan, and the interest owed, into a down payment towards the license agreement.
¶ 7 As part of the license agreement, M & M warranted that it was not presently the subject of any claim that would have a material adverse effect on Smith. A similar provision
is contained in the option agreement. " Claim" is not defined in either agreement.
¶ 8 In May 2007, Smith learned that M & M had been named as a relief defendant in the federal court action in Virginia. That same month, M & M and Martin were served with process in that litigation.
¶ 9 After Smith failed to meet his obligations under the license and option agreements, Martin and M & M commenced this action against Smith for breach of contract. In response, Smith asserted several counterclaims, including breach of warranties under the license and option agreements.
¶ 10 After a bench trial, the court decided that Smith failed to prove there was a breach of the warranties in the two agreements. The court also found against Smith on other claims that he asserted.
¶ 11 Smith appeals.
BREACH OF WARRANTIES
¶ 12 Smith's sole argument on appeal is that the license and option agreements are void because M & M breached the warranties stated in the agreements.1 Specifically, he argues that M & M was the subject of a material adverse claim by the SEC as of the date of both agreements. Accordingly, Smith claims he is entitled to relief. We agree.
¶ 13 "When the trial court has weighed the evidence, our review is limited to determining whether the trial court's findings are supported by substantial evidence and, if so, whether the findings in turn support the conclusions of law."2 Substantial evidence "exists so long as a rational
trier of fact could find the necessary facts were shown by a preponderance of the evidence."3
¶ 14 " ‘We will not disturb findings of fact supported by substantial evidence even if
there is conflicting evidence.’ "4 Additionally, unchallenged findings are verities on appeal.5 We review de novo the trial court's conclusions of law.6
¶ 15 Washington courts "follow the objective manifestation theory of contracts."7 When interpreting an agreement, we focus on the agreement's objective manifestations to ascertain the parties' intent.8 "We impute an intention corresponding to the reasonable meaning of the words used."9 The parties' subjective intent is irrelevant if we can ascertain their intent from the words in the agreement.10
¶ 16 We give words "their ordinary, usual, and popular meaning unless the entirety of the agreement clearly demonstrates a contrary intent."11 We interpret only what was written in the agreement, not what the parties intended to write.12 Additionally, "[a] contract provision is not ambiguous merely because the parties to the contract
suggest opposing meanings."13 We "will not read ambiguity into a contract ‘where it can reasonably be avoided.’ "14
¶ 17 In Berg v. Hudesman,15 the supreme court "recognized the difficulties associated with interpreting contracts solely on the basis of the ‘plain meaning’ of the words in the document."16 Interpreting a contract "involves ‘one person giving a meaning to the symbols of expression used by another person.’ "17 The supreme court adopted the "context rule" and recognized that the parties' intent "cannot be interpreted without examining the context surrounding an instrument's execution."18
¶ 18 Since Berg, the supreme court has further explained the "context rule." It explained "that surrounding circumstances and other extrinsic evidence are to be used ‘to determine the meaning of specific words and terms used’ and not to ‘show an intention independent of the instrument’ or to ‘vary, contradict or modify the written word.’ "19
¶ 19 "When the parties by the terms of their contract expressly stipulate that a representation shall be regarded as material, it ceases to be a representation only, and becomes a warranty."20 " ‘Warranties differ from representations, then, in that falsity of a representation will defeat the contract only where it is material, as representations
are merely inducements to the making of the contract.’ "21 For a warranty, " ‘the statement is made material by the very language of the contract, so that a misrepresentation of a matter warranted is a breach
of the contract itself.’ "22 " ‘Therefore the falsity of a statement which is made a warranty will avoid the contract without regard to whether it can be considered as material in any way to the risk or the loss.’ "23 " ‘A warranty must be strictly true.’ "24
Claim
¶ 20 A threshold issue is the meaning of the word "claim" in the warranty provisions of the agreements. They both state:
Each party (the "Warranting Party") warrants and represents to the other Party that ... the Warranting Party is not presently the subject of, nor the proponent of, any claim that would have a material adverse affect [sic] on the other Party.[25 ]...
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