Sanborn v. Kennedy

1

ELIZABETH SANBORN, Plaintiff and Respondent, v. WILLIAM KENNEDY, Defendant and Appellant.

H050910

California Court of Appeals, Sixth District

March 5, 2024

NOT TO BE PUBLISHED

Santa Clara County Super. Ct. No. 21CV376894

BAMATTRE-MANOUKIAN, J.

I. INTRODUCTION

In 2021, plaintiff Elizabeth Sanborn filed a civil action against defendant William Kennedy for breach of a written guaranty. Defendant had personally guaranteed the payment of an earlier 2007 judgment that plaintiff had obtained against defendant's home building business, Weeks Street LLC (the LLC). The written guaranty by defendant provided that it "may not be enforced by [plaintiff] or anyone else until - unless an amount is owing to [plaintiff] on [the 2007] judgment that hasn't been paid by the time the last of the units of [the housing] project have been sold." Plaintiff alleged that the homes were sold while the LLC was in bankruptcy, that the business had no remaining assets after a bankruptcy stay was lifted in 2020, and that defendant refused to pay pursuant to his personal guaranty despite a demand for payment by plaintiff. In response defendant contended that the civil action was barred by the statute of limitations, among other defenses. After a bench trial, the trial court determined that the action was timely, and a judgment was entered in plaintiff's favor in the amount of $57,472.35 plus interest.

On appeal, defendant contends that the judgment must be reversed because plaintiff's 2021 complaint for breach of the guaranty was barred. First, defendant contends that the 10-year enforcement period under Code of Civil Procedure section 683.020^[1] for plaintiff's 2007 judgment against the LLC expired in 2017, during the LLC's bankruptcy proceedings. Second, defendant argues that the four-year statute of limitations for breach of the guaranty (see § 337, subd. (a)) commenced upon the sale of the last house in 2009, because the judgment against the LLC had not been paid by that time, and therefore plaintiff's civil action for breach of the guaranty was time-barred. Third, defendant contends that the trial court improperly applied a demurrer standard at trial. Fourth, defendant argues that the trial court provided an inadequate statement of decision.

We determine that defendant fails to demonstrate that the unenforceability of the 2007 judgment under section 683.020 precludes plaintiff from seeking enforcement of defendant's personal guaranty. However, based on the express terms of the guaranty, we agree with defendant's second contention that plaintiff's civil action for breach of the guaranty is barred by the statute of limitations under section 337, subdivision (a). Having reached this conclusion, we need not reach defendant's remaining contentions. We will reverse the judgment and direct the trial court to enter a new judgment in defendant's favor.

II. FACTUAL AND PROCEDURAL BACKGROUND

A. The 2005 Civil Action by Plaintiff Against the LLC

In 2005, plaintiff filed a breach of contract action against the LLC, a home builder. Defendant was the sole member of the LLC. In the civil action, plaintiff alleged that she was owed loan brokerage commissions for the financing of a second phase of construction in the LLC's residential development (Weeks Street Project). The entire residential project apparently consisted of 29 houses.

B. The Settlement, Guaranty by Defendant, and 2007 Judgment

On July 18, 2007, plaintiff's civil action against the LLC was settled at a mandatory settlement conference. The terms of the settlement were orally recited in court by the parties. The parties agreed that a stipulated judgment providing for monetary relief would be entered in favor of plaintiff and against the LLC. The parties expected that the LLC would pay the judgment with the proceeds from the sale of the remaining houses to be built. As additional security, defendant orally agreed to personally guarantee the payment of the judgment.

On August 16, 2007, a judgment was entered against the LLC in the amount of $57,472.35^[2] pursuant to the terms of the settlement. The judgment indicated that the "terms [and] conditions" of defendant's personal guaranty were set forth in the reporter's transcript of the mandatory settlement conference.

On March 27, 2008, defendant signed the written guaranty, which reflected his oral agreement from the mandatory settlement conference. The written guaranty states that defendant "personally guarantee[s] payment of the judgment entered on August 16, 2007 . . . per the conditions and terms set forth in the transcript" of the mandatory settlement conference, which states: "Mr. Kennedy has agreed to execute a personal guarantee of the judgment against Weeks Street, LLC, provided that the personal guarantee may not be enforced by Ms. Sanborn or anyone else until - unless an amount is owing to Ms. Sanborn on this judgment that hasn't been paid by the time the last of the units of this project have been sold."

C. The LLC's 2007 to 2020 Bankruptcy Proceedings

In the meantime, in December 2007, the LLC filed a bankruptcy petition in federal bankruptcy court. The LLC had been unable to sell any houses after becoming engaged in a dispute with its general contractor and construction lender. The dispute caused the construction and the sale of houses to cease.

At the time of the 2007 settlement, the LLC was not in bankruptcy and defendant did not believe that bankruptcy was imminent. However, later at the trial for breach of the guaranty, defendant admitted that at the time of the 2007 settlement, there were millions of dollars in liens placed on the project, which made it difficult or impossible to pay the LLC's bills.

The LLC built and sold homes under the supervision of the bankruptcy court. The last house was sold in August 2009. Plaintiff, who was identified in the bankruptcy case as contract creditor of the LLC, did not receive any payment for the 2007 judgment through the bankruptcy proceeding.

The bankruptcy case continued for 13 years and finally closed on March 27, 2020. The bankruptcy stay was lifted on that date. No LLC assets remained to pay plaintiff's 2007 judgment against the LLC.

D. The 2020 Demand by Plaintiff for Payment Under the Guaranty

On May 28, 2020, plaintiff demanded, based on the guaranty, that defendant pay the judgment. Defendant refused to pay the judgment.

E. The Instant 2021 Civil Action by Plaintiff Against Defendant

1. The Complaint

In February 2021, plaintiff filed the instant breach of contract action against defendant based on his failure to pay the judgment pursuant to his personal guaranty.

2. The Demurrer ^[3]

Defendant demurred to the complaint on the ground that it was barred by the statute of limitations. He contended that a "10-year statute of limitations" for enforcement of the 2007 judgment had expired before plaintiff filed her lawsuit against him in 2021. Defendant argued that his liability as a guarantor was separate from the obligation of the debtor LLC. According to defendant, plaintiff could have sued him under the guaranty within the 10-year limitations period because although collection activity was stayed against the LLC while it was in bankruptcy, defendant was not a party to the LLC's bankruptcy proceeding and therefore the bankruptcy stay did not apply to him. Defendant further argued that the limitations period on the judgment was not tolled by the bankruptcy stay, and that plaintiff could have, but did not, renew the 2007 judgment under federal or state law. In support of the demurrer, defendant sought judicial notice of several court filings, including documents filed in bankruptcy court.

In opposition, plaintiff contended that her claim against defendant for breach of the written guaranty was not time-barred. She argued that she filed a creditor's claim with the bankruptcy court. A bankruptcy trustee sold the residential properties and the funds were held until disbursed through the bankruptcy proceedings. Plaintiff argued that she could not otherwise seek enforcement of the judgment against the LLC during the bankruptcy stay, and that the bankruptcy stay tolled the statute of limitations for a claim against the LLC. Upon the bankruptcy discharge and the lifting of the stay on March 27, 2020, the LLC had no assets and plaintiff was not paid anything from the bankruptcy estate. Plaintiff argued that defendant's guaranty "only bec[a]me operable" when the LLC did not pay or was unable to pay the debt. Plaintiff contended that a claim against a surety or guarantor does not arise until the principal/obligor defaults, and a four-year statute of limitations applies to a claim against the guarantor. Plaintiff contended that on May 28, 2020, she demanded payment from defendant. Whether the accrual date for her breach of the guaranty was in March 2020 when the bankruptcy stay was lifted and no funds were paid to plaintiff, or May 2020 when she demanded payment from defendant, plaintiff argued that her 2021 lawsuit against defendant was timely.

In reply, defendant contended that although the judgment against the LLC was "stayed" by its bankruptcy, the statute of limitations continued to run and eventually expired after 10 years in 2017. Although federal law extended the deadline for commencing an action until 30 days after termination of the bankruptcy stay, and although state law allowed for the renewal of a judgment before it has expired, defendant argued that plaintiff failed to renew the judgment within either timeframe. He contended that plaintiff could not enforce a guaranty for a judgment that had expired. Further, defendant argued that pursuant to the language of the guaranty, the guaranty was enforceable if the last unit in the project was sold and the...