George EMDE, Jr. and Elizabeth Emde, his wife, Plaintiffs, Cross–Defendants and Respondents, v. Ted W. DRESS and Glen Whitcanack, Defendants, Cross–Complainants and Appellants, Oscar Budd Kleinfeld, Cross–Defendant and Respondent.
Defendants and cross-complainants Ted W. Dress and Glen Whitcanack, the guarantors of a secured promissory note, appeal from the summary judgment entered in favor of the holders of the note, George Emde, Jr. and Elizabeth Emde, who sued Dress and Whitcanack on their guarantee. Whitcanack and Dress contend judgment should not have been entered against them because they are exonerated or discharged from their obligation due to the Emdes' impairment of the collateral securing the note. They also argue the court erred in sustaining the Emdes' demurrer to their cross-complaint for negligence without leave to amend.1 In addition, Whitcanack and Dress argue they are entitled to partial satisfaction of judgment in the amount the Emdes received from their attorney Oscar Budd Kleinfeld in the settlement of the Emde's malpractice action against Kleinfeld. The matter must be remanded to the trial court with respect to the claim of partial satisfaction of judgment. In all other respects, we shall affirm.
FACTUAL AND PROCEDURAL BACKGROUND
The Emdes were the sole owners of Happyholme Farms, Inc., a feed business, and in late 1977 agreed to sell all of their 130,000 shares to Whitdress Corporation for $1,000,000 plus certain insurance proceeds and a portion of Happyholme's net profits. Whitdress was a corporation formed by Whitcanack and Dress to purchase the Happyholme Farms shares. The contract of sale provided Whitdress would grant the Emdes a security interest in all of the shares of stock and all of the assets of Happyholme Farms. Mr. Emde placed an $800,000 value on the security interest. Whitdress agreed to execute a financing statement to perfect the security interest as requested by the Emdes.
Whitcanack and Dress were also parties to the contract of sale as guarantors. They agreed to guarantee payment of all notes and indebtedness of Whitdress to the Emdes. Whitcanack and Dress executed a separate continuing guaranty on December 30, 1977. On January 3, 1978, Whitdress executed a promissory note to the Emdes for $710,000, the balance due under the contract of sale, and Whitcanack and Dress were also parties to the instrument as they signed the note as guarantors. Kleinfeld, the Emdes' attorney, prepared and filed a UCC–1 financing statement concerning the stock and assets of Happyholme Farms pledged as collateral to secure the note. On the statement, only Whitdress was listed as the debtor and Mr. Emde was listed as the secured party. Both Whitdress Corporation and the individual guarantors signed the financing statement. The failure of the financing statement to list Happyholme Farms as a debtor lies at the center of this dispute.
In mid–1980, an involuntary Chapter 7 bankruptcy proceeding was commenced against Happyholme Farms by its creditors and on August 5, 1980, the matter was converted to a voluntary Chapter 11 proceeding by Happyholme. On April 9, 1981, the Emdes filed a claim in the bankruptcy proceeding asserting Happyholme was indebted to them in the amount of $676,500. The bankruptcy court ultimately ruled that the Emdes were not general or secured creditors of Happyholme because the financing statement listed Whitdress, and not Happyholme, as the debtor. Moreover, to allow the Emdes to pursue their claim would be a fraud on the other creditors under the circumstances.
On October 7, 1981, the Emdes filed a complaint against Whitcanack and Dress for payment of $676,500, the amount owing on the note, pursuant to their guarantee. Whitcanack and Dress answered that the Emdes “by virtue of their conduct and business dealings with Whitdress Corporation” released defendants from any liability under their guarantee, apparently claiming they were exonerated because the Emdes failed to perfect the security interest, thereby impairing the guarantors' subrogation rights. Whitcanack and Dress also filed a cross-complaint against the Emdes alleging they had been damaged by the Emdes' negligent failure to perfect the security interest.
The Emdes moved for partial summary judgment on March 8, 1984, and their motion was granted on November 19, 1984. The court ruled that Whitcanack and Dress were not exonerated because even if the financing statement had been properly prepared, it would have been set aside by the bankruptcy court as a fraud upon the creditors. Therefore, the flawed financing statement did not impair the guarantors' subrogation rights. The court also found, more importantly, that Whitcanack and Dress in the continuing guarantee agreement, specifically waived their subrogation rights.
On the same day, the court also sustained the Emdes' demurrer to the guarantors' cross-complaint for negligence. The court took judicial notice of its own files in the case (Code Civ.Proc., § 430.30, subd. (a); Evid.Code, § 452, subd. (d)) and found Whitcanack and Dress had waived any duty on the part of the Emdes to perfect the security to protect the guarantors' subrogation rights. Moreover, the court found the failure to perfect the security interest was not the proximate cause of any injury because even if it had been properly done it would have been set aside in a bankruptcy proceeding as a fraud upon the creditors. Whitcanack and Dress amended their complaint and the Emdes again demurred claiming the amended complaint was substantially the same as the prior one and the guarantors could not state a cause of action because they had waived their subrogation rights. The court sustained the demurrer without leave to amend, finding the guarantors had waived their subrogation rights.
On December 24, 1985, a judgment of dismissal was entered with respect to the cross-complaint and judgment was entered in favor of the Emdes with respect to their complaint for payment on the note. Whitcanack and Dress filed a notice of appeal on December 26, 1985.
After the judgment was entered, the Emdes settled an action they had brought against Kleinfeld for his negligence in advising them regarding the sale of Happyholme Farms and for failure to perfect the security interest. The Emdes had sought between $1.7 million and $3 million in damages, alleging that not only were they injured in the amount of the balance due on the promissory note, but that they also were forced to sell their ranch at a substantial loss and suffered emotional distress as a result of Kleinfeld's negligence. The Emdes apparently settled the matter with Kleinfeld for $625,000 with the understanding that they would receive an additional $250,000 from Kleinfeld under certain conditions not disclosed in the appellate record. They dismissed the suit against Kleinfeld with prejudice.
On April 14, 1986, Whitcanack and Dress moved for partial satisfaction of judgment based upon the Emdes' settlement with Kleinfeld. After an evidentiary hearing, the court ruled it was deprived of jurisdiction to determine the issue because a notice of appeal had been filed concerning the judgment in Emde v. Dress. Whitcanack and Dress subsequently filed a notice of appeal concerning this post judgment order. The appeals have been consolidated.
Whitcanack and Dress contend that the court erred in granting the Emdes' motion for partial summary judgment. They allege that had the financing statement been properly drafted and filed, it would not have been set aside as a fraud against the creditors in the bankruptcy proceedings. They also claim the court incorrectly found they had waived their subrogation rights.
“Since a summary judgment motion raises only questions of law regarding the construction and effect of the supporting and opposing papers, we independently review them on appeal, applying the same three-step analysis required of the trial court. [Citations.] First, we identify the issues framed by the pleadings since it is these allegations to which the motion must respond by establishing a complete defense or otherwise showing there is no factual basis for relief on any theory reasonably contemplated by the opponents' pleading. [Citations.] [¶ ] [Second], we determine whether the moving party's showing has established facts which negate the opponent's claim and justify a judgment in movant's favor. [Citations.] The motion must stand self-sufficient and cannot succeed because the opposition is weak. [Citations.] ․ [¶ ] When a summary judgment motion prima facie justifies a judgment, the third and final step is to determine whether the opposition demonstrates the existence of a triable, material factual issue.” (AARTS Productions, Inc. v. Crocker National Bank (1986) 179 Cal.App.3d 1061, 1064–1065, 225 Cal.Rptr. 203.)
Here the Emdes alleged Whitdress Corporation executed and delivered to them a promissory note for $710,000 payable in monthly installments of $6,000 at the interest rate of eight percent per annum. They stated Whitcanack and Dress unconditionally guaranteed and promised to pay any default of Whitdress Corporation. On September 9, 1981, demand was made upon the guarantors for payment of the obligation and approximately $676,500 plus interest remained owing on the note. Defendants generally denied all of the allegations of the complaint and by way of affirmative defense alleged they were released from liability.
Our review of the parties' supporting and opposing papers and the pertinent documents discloses it is not disputed that Whitcanack and Dress guaranteed payment of the promissory note, demand was made upon them for payment, and the last payment made on the note was on September 30, 1980, in the amount of $6,000. It is also not disputed that the remaining principal has not been paid. The sole dispute concerns whether Whitcanack and Dress were exonerated from their obligation as guarantors due to the failure of the security interest. It appears from the cases cited by Whitcanack and Dress in their opposition to the Emdes' motion for summary judgment, that the guarantors are relying on Civil Code section 2819 and California Uniform Commercial Code section 3606.
Civil Code section 2819 provides: “A surety is exonerated, except so far as he may be indemnified by the principal, if by any act of the creditor, without the consent of the surety the original obligation of the principal is altered in any respect, or the remedies or rights of the creditor against the principal in respect thereto, in any way impaired or suspended.”
California Uniform Commercial Code section 3606 provides in pertinent part: “(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder ․ [¶ ] (b) Unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.”
Whitcanack and Dress argued that the Emdes' failure to properly perfect the security interest in the assets of Happyholme Farms unjustifiably impaired the collateral since as a result the Emdes were not accorded secured creditor status in the bankruptcy proceeding and the collateral was therefore used to satisfy the debts owed to Happyholme's general creditors. Consequently, the guarantors' subrogation rights against the security had been impaired. (See Civ.Code, §§ 2848, 2849.) 2
The trial court ruled that even if the UCC–1 financing statement had been properly perfected, it was “extremely questionable” whether the Emdes would have qualified as secured creditors of Happyholme Farms in the corporation's bankruptcy proceeding due to the lack of consideration to Happyholme for the pledge of its assets to secure Whitdress Corporation's promissory note. It noted that although the bankruptcy court ruling was not binding under the doctrine of collateral estoppel, it appeared that the transfer of a security interest in Happyholme's assets would have been set aside in any event as a fraud upon the subsequent creditors. This was an improper ground upon which to grant partial summary judgment for, as the trial court noted, it was “questionable” whether a properly drafted security interest would have been found valid, or conversely set aside, in a bankruptcy proceeding. This question presented a triable issue of material fact.
The appellate record discloses two rulings by the bankruptcy court. On April 9, 1981, the Emdes filed the claim in the bankruptcy proceedings for $676,000, the amount owing on the note. The creditors' committee objected claiming: (1) Happyholme was not a party to the agreement between Whitdress and the Emdes; (2) the Emdes did not hold a valid security interest because a financing statement had not been filed which listed Happyholme as the debtor; and (3) the transfer was fraudulent pursuant to 11 U.S.C. section 548, subdivisions (a) and (d)(1).3 The bankruptcy court disallowed the Emdes' claim.
The Emdes filed a motion for reconsideration which was also unsuccessful. In its ruling, the bankruptcy court stated “[a]s will be discussed more fully below, it is this court's view that even if Mr. Emde had perfected his security interest and had a note executed on behalf of Happyholme for the purchase price of the stocks sold to Whitdress, any such security interests and such obligation by Happyholme would be fraudulent as to its creditors. The basis for this conclusion is the court's finding that Happyholme received no benefit from the sale of its stock by Mr. Emde.”
However, the court's subsequent discussion emphasized the transfer was fraudulent not only because Happyholme received no benefit, but because its creditors, all of whom became such subsequent to the transfer of the security interest, had no notice of the security interest. We note that subsequent creditors would have had notice of the transfer if the security interest had been properly drafted and then filed. Moreover, the bankruptcy court's ruling was concerned with whether the Emdes should be accorded creditor status under the facts as they then existed, not as they might have been, and the facts as they then existed were that the security interest had not been perfected.
In addition, it appears the bankruptcy court neglected to consider that if the security interest had been properly perfected on January 3, 1978, the transfer would have occurred more than one year prior to the filing of the bankruptcy petition in 1980 and arguably section 548, subdivisions (a) and (d) of Title 11 of the United States Code regarding fraudulent transfers would not apply. (See fn. 3, ante.) Furthermore, whether the transfer would have been set aside as fraudulent even if the security interest was properly perfected is speculative. Had subsequent creditors been given adequate notice that a security interest had attached to all of the assets of Happyholme Farms, there may not have been any subsequent creditors as they may all have refused to extend credit and services to the corporation under the circumstances. Absent the existence of subsequent creditors, the transaction would have been valid with respect to the Emdes, Whitdress and Happyholme. (Everly Enterprises, Inc. v. Altman (1960) 54 Cal.2d 761, 762–764, 8 Cal.Rptr. 455, 356 P.2d 199; Cechettini v. Consumer Associates, Ltd. (1968) 260 Cal.App.2d 295, 296–299, 67 Cal.Rptr. 15.)
It is also noteworthy that the bankruptcy court found the only benefit Happyholme received in exchange for the pledge of its assets was the Emdes' covenant not to compete, which the court found comprised inadequate consideration. The court apparently overlooked the provision in the contract of sale which provided the Emdes would absolve Happyholme of liability on the note obligation to an individual named Mary Perrin. Without knowing the amount of the liability assumed, it cannot be said Happyholme received less than fair consideration for its pledge. For all the above stated reasons, we therefore place little weight on the bankruptcy court's apparently gratuitous statement that even if Mr. Emde had perfected his security interest, it would have been fraudulent as to the creditors of Happyholme.
The trial court's reliance on the bankruptcy court's statement was not a proper ground for summary judgment. Whether or not a fraudulent conveyance or transfer will be set aside involves numerous factual questions as can be seen by reviewing the pertinent California and federal laws. (See e.g. former Civ.Code, §§ 3439.01–3439.07; Civ.Code, § 3439.12; 11 U.S.C. § 548, subd. (a).) The Emdes failed to establish as a matter of law that the transfer of a security interest in Happyholme's assets would have been set aside as a fraud upon the creditors even if the security interest had been properly perfected.4
The Emdes also moved for partial summary judgment on the ground they had no duty to perfect the security interest. Furthermore, the guarantors had waived their subrogation rights so they could not claim they were exonerated if these rights were impaired by the Emdes' failure to perfect the security interest. A surety may waive or consent to an impairment of the protection offered by Civil Code section 2819 and California Uniform Commercial Code section 3606. (Bloom v. Bender (1957) 48 Cal.2d 793, 800–801, 313 P.2d 568; cf. Engelman v. Bookasta (1968) 264 Cal.App.2d 915, 916–918, 71 Cal.Rptr. 120; Advance Process Supply v. Litton Industries Credit (7th Cir.1984) 745 F.2d 1076, 1080–1081; see also Uniform Commercial Code Comment 2 following Cal.U.Com.Code, § 3606.) 5
The trial court also found that absent an express agreement to perfect the security interest in the assets of Happyholme Farms, the Emdes had no duty to do so. However, it appears the Emdes may have had a duty to perfect the security interest. At the very least this presented a triable issue of material fact.
A creditor who is a secured party “must use reasonable care in the custody and preservation of collateral in his possession. In the case of an instrument or chattel paper reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.” (Cal.U.Com.Code, § 9207, subd. 1 and Uniform Commercial Code Comment 5 following Cal.U.Com.Code, § 3606.) Numerous cases from jurisdictions that have adopted Uniform Commercial Code section 3–606 have held that a creditor has an implied duty to perfect a security interest in the collateral for the protection of the guarantor and that the failure to do so constitutes an unjustifiable impairment of the collateral. (Langeveld v. L.R.Z.H. Corp. (N.J.1977) 74 N.J. 45, 376 A.2d 931, 934; American Bank of Commerce v. Covolo (N.M.1975) 88 N.M. 405, 540 P.2d 1294, 1297; Shaffer v. Davidson (Wyo.1968) 445 P.2d 13, 15–17.) 6 Our research discloses one case which stated that whether the failure to perfect a security interest constituted an unjustifiable impairment of the collateral was a question of fact. (First Citizens Bank & Trust Co. v. Larson (NC 1974) 22 N.C.App. 371, 206 S.E.2d 775.)
The trial court relied on American Security Bank v. Clarno (1984) 151 Cal.App.3d 874, 199 Cal.Rptr. 127, which held that a lender to a corporation had no duty to perfect a security interest in the assets of the corporations' subsidiary absent an express agreement to do so. (Id., at pp. 881–884, 199 Cal.Rptr. 127.) The trial court's reliance on Clarno is misplaced. First, Clarno cites American Bank of Commerce v. Covolo, supra, 540 P.2d 1294 and Joe Heaston Tractor & Imp. Co. v. Securities Accept. Corp. (10th Cir.1957) 243 F.2d 196, for the proposition there is no duty to perfect a security interest, but these cases do not support its holding. Both cases recognized that a creditor did have an implied duty to perfect a security interest in collateral for the protection of the guarantor but found that this duty had been waived by the guarantors in the terms of the guarantee agreement. (Covolo, supra, 540 P.2d at pp. 1297–1299; Joe Heaston, supra, 243 F.2d at pp. 198–199.)
Second, Clarno is factually distinguishable as there the court noted the creditor bank had loaned money to the debtor corporation, not to acquire a chattel (in which a security interest could be contemplated), but to alleviate the corporation's cash-flow problems. There was no conditional sales contract nor was there an implicit or explicit agreement to secure the assets of the debtor corporation's subsidiary. (Clarno, supra, 151 Cal.App.3d at p. 881, 199 Cal.Rptr. 127.) Here the sales contract, to which the guarantors are parties, grants the Emdes a security interest in the assets of Happyholme Farms as collateral for the promissory note given to purchase the Emdes' shares.7 The contract also provides that Whitdress agrees to execute a financing statement to perfect the security interest as requested by the Emdes. It cannot be stated that as a matter of law under the evidence presented in the motion for summary judgment that there was no agreement to secure the assets of Happyholme.
We also note the Clarno court found the guarantors had waived their right to the protection of the security because they had consented in their guaranty agreement to the creditor's right to release the collateral. (Clarno, supra, 151 Cal.App.3d at pp. 882–883, 191 Cal.Rptr. 127.) We agree that where guarantors have waived their rights to the collateral they may not claim that they are exonerated from honoring their guarantee due to the impairment of the collateral. However, we disagree with the trial court's finding below that such a waiver was present here.
The court quoted the following language from the continuing guaranty: “1. For valuable consideration, TED W. DRESS and GLENN WHITCANACK, hereinafter called ‘guarantors', unconditionally guarantee and promise to pay to GEORGE EMDE and ELIZABETH EMDE, hereinafter collectively called ‘Sellers', or order, on demand, in lawful money of the United States, any default of WHITDRESS CORP., a California corporation to be formed, pursuant to an agreement dated December 21, 1977. [¶ ] 2. The obligations hereunder are joint and several, and independent of the obligations of WHITDRESS CORP. and a separate action or actions may be brought and prosecuted against Guarantors whether action is brought against WHITDRESS CORP. or whether WHITDRESS CORP. be joined in any such action or actions; and Guarantors waive the benefit of any statute of limitations affecting their liability hereunder or the enforcement thereof. [¶ ] 3. Guarantors authorize Sellers, without notice or demand and without affecting their liability hereunder, to: [¶ ] (a) hold all shares of stock in HAPPYHOLME FARMS, INC. as security for the payment of this guaranty or the indebtedness guaranteed, and exchange, enforce, waive, and release any such security; [¶ ] (b) apply such security and direct the order or manner of sale thereof in accordance with the Agreement for Sale of Stock and the laws of the State of California; [¶ ] (c) Release or substitute the guarantors. [Sellers] may without notice assign this guaranty in whole or in part. [¶ ] 4. Guarantors waive any right to require Sellers to: [¶ ] (a) proceed against WHITDRESS CORP.; [¶ ] (b) Proceed against or exhaust any security held from WHITDRESS CORP.; or [¶ ] (c) Pursue any other remedy in their power whatsoever. [¶ ] Guarantors waive any defense arising by reason of any disability or other defense of WHITDRESS CORP. or by reason of the cessation from any cause whatsoever of the liability of WHITDRESS CORP. Until all indebtedness of WHITDRESS CORP. to Sellers have been paid in full, even though such indebtedness is in excess of Guarantors' liability hereunder, Guarantors shall have no right of subrogation, and waive any right to enforce any remedy which they now have or may hereafter have against Sellers, and waive any benefit of, and any right to participate in any security now or hereafter held by Sellers. Guarantors waive all presentments, demands for performance, notices of non-performance, protests, notices of protest, notices of dishonor, and notices of acceptance of this guaranty and of the existence, creation, or incurring of new or additional indebtedness.” (Emphasis added by trial court.)
Many courts have found that where a guarantor agrees to allow the creditor to release collateral securing the debtor's obligation, the guarantor has waived any right to claim the creditor's impairment of the collateral has exonerated the guarantor as he has in effect waived his rights to the collateral. (Continental Bank, etc. v. Utah Sec. Mortg. (Utah 1985) 701 P.2d 1095, 1097–1098; Executive Bank v. Tighe (N.Y.1981) 54 N.Y.2d 330, 445 N.Y.S.2d 425, 429 N.E.2d 1054; Covolo, supra, 540 P.2d at p. 1299.) Here, Whitcanack and Dress authorized the Emdes to “hold all shares of stock in HAPPYHOLME FARMS, INC. ․ and release any such security; ․” They did not agree to allow the Emdes to release the assets of Happyholme Farms.
Although the guaranty was unconditional, this meant only that the Emdes could move against the guarantors without first proceeding against Whitdress or the collateral. (Langeveld, supra, 376 A.2d at p. 935.) “It is one thing to say that a creditor need not pursue the collateral as a condition precedent to pursuing the guarantor of payment and quite another to say that because of this condition precedent the creditor can by misfeasance or nonfeasance prevent the guarantor of payment from ever recovering from the collateral.” (Murray, Secured Transactions–Defenses of Impairment and Improper Care of Collateral, supra, 79 Com.L.Jour. at p. 278.) A guarantor's right of subrogation to unimpaired collateral should not be deemed waived unless clear and unequivocal language to this effect appears in the guarantee agreement. (Langeveld, supra, 376 A.2d at pp. 935–936; D.W. Jaquays & Co. v. First Security Bank (AZ.1966) 101 Ariz. 301, 419 P.2d 85, 89.)
Relying on the factually similar case of American Bank of Commerce v. Covolo, supra, 540 P.2d 1294, the trial court found that according to certain provisions of their guaranty agreement, Whitcanack and Dress had waived their subrogation rights. Certain provisions of the guaranty contract in the Covolo case were substantially identical to paragraphs three and four of the continuing guaranty in the present case. The Covolo court's determination that the guarantors had waived their claim to a discharge under Uniform Commercial Code section 3–606 was based solely on the continuing guaranty, as there were no other loan agreements or contracts touching the guarantors' obligation to the creditor. The court there stated: “From the documents, we observe that the Bank was not, as a prerequisite to the Guarantors' liability, obliged to take any security, although it had a right to do so. No provision of the guaranty requires the Bank to perfect security taken or otherwise deal with it in any particular way. The Guarantors waive their rights to subrogation, the very right they now claim was impaired, and waive and release any claims to the security and ‘any benefit of, and right to participate in any security now or hereafter held by Bank.’ The Bank has the right to ‘waive and release’ the security at any time without the waiver or release affecting the guarantors' obligation to pay. [¶ ] Where a guarantor or surety expressly or unequivocally consents to a waiver or release of his rights in the collateral, he will not be heard to complain of the failure of the guaranty to perfect the security interest therein in the first instance. [Citations.]” (Id. at p. 1298–1299.)
As previously stated, the guarantors in the present case did not authorize the Emdes to release any security in the assets of Happyholme Farms. We do not believe that the language “Until all indebtedness of WHITDRESS CORP. to sellers shall have been paid in full, ․ Guarantors shall have no right of subrogation,” serves to waive the subrogation rights of Whitcanack and Dress so that the Emdes could impair the collateral with impunity. The aforementioned language does nothing more than state when the right to subrogation ordinarily arises. (See § 2848 (fn. 2, ante ); Cal.U.Com.Code, § 3415, subd. 5.)
Although we disagree with the trial court's rationale in granting the motion for partial summary judgment, nonetheless we find that the motion was properly granted. According to the continuing guaranty, the guarantors agreed “Until all indebtedness of WHITDRESS CORP. to Sellers shall have been paid in full, ․ Guarantors ․ waive any right to enforce any remedy which they now have or may hereafter have against Sellers, ․” A remedy is “[t]he means by which a right is enforced or the violation of a right is prevented, redressed, or compensated.” (Black's Law Dict. (5th ed. 1979) at p. 1163.) The term remedy also “means any remedial right to which an aggrieved party is entitled with or without resort to a tribunal.” (Cal.U.Com.Code, § 1201, subd. 34.) Applying these definitions to the above quoted language from the guaranty agreement, it appears the guarantors not only waived the right to bring an action against the Emdes for their negligent impairment of the collateral until the guarantors have paid Whitdress Corporation's obligation to the Emdes, they also waived the right until payment is made to assert they were exonerated or discharged under Civil Code section 2819 and California Uniform Commercial Code section 3606 as an affirmative defense. Moreover, according to the continuing guaranty, Whitcanack and Dress waived any benefit of and right to participate in any security held by the Emdes until the indebtedness of Whitdress had been paid in full. Therefore, having no interest in the security until the debt has been paid, they may not claim they have been injured by any negligent impairment of the collateral until they pay the amount owing on the promissory note. As the moving papers demonstrate that Whitcanack and Dress have not satisfied the obligation of Whitdress to the Emdes, the motion for partial summary judgment was properly granted.
Next, Whitcanack and Dress challenge the trial court's ruling on the Emdes' demurrer, claiming it was error to sustain the demurrer without leave to amend. However, as previously discussed, the guarantors have no cause of action or remedy based upon the alleged negligent impairment of the collateral against the Emdes until they have satisfied their obligation to the Emdes under the continuing guaranty. A demurrer without leave to amend is proper where a cause of action is not yet ripe. (Schell v. Southern Cal. Edison Co. (1988) 204 Cal.App.3d 1039, 1047, 251 Cal.Rptr. 667; 5 Witkin, Cal. Procedure (3d ed. 1985) Pleading, § 945, p. 380.) Not only do the guarantors fail to allege in their complaint that they have made the requisite payment to the Emdes, there is no reasonable probability that under the undisputed facts the guarantors could make such an allegation at this point. Consequently, the trial court did not err in sustaining the Emdes' demurrer without leave to amend and entering a judgment of dismissal. (Green v. Travelers Indemnity Co. (1986) 185 Cal.App.3d 544, 556, 230 Cal.Rptr. 13.)
Upon learning that the Emdes had settled their malpractice action against Kleinfeld for $625,000, Whitcanack and Dress moved for partial satisfaction of judgment. After an evidentiary hearing, the court determined it did not have jurisdiction to decide the matter pursuant to Code of Civil Procedure section 916 8 because a notice of appeal had been filed concerning the Emdes' judgment against Whitcanack and Dress. Whitcanack and Dress contend the court had jurisdiction to decide the issue. They are correct. “[M]atters concerned with the satisfaction of judgment would appear not to be matters as to which the trial court's power is suspended pending appeal.” (Huskey v. Berini (1955) 135 Cal.App.2d 613, 617–618, 288 P.2d 43; see also 9 Witkin, op. cit. supra, Appeal, § 7, p. 38.)
Whitcanack and Dress also assert we need not remand the matter to the trial court as whether they are entitled to a partial satisfaction of judgment involves solely a question of law. We disagree. This is a mixed question of law and fact and it is necessary for the trial court to make factual findings before we may review this issue. For example, it is not clear what portion of the settlement pertains to the amount owing on the promissory note. We do not know the terms of the settlement as the settlement agreement has not been made part of the appellate record. Accordingly, the court's order is reversed and the matter is remanded to the trial court to determine whether Whitcanack and Dress are entitled to partial satisfaction of judgment.
The court's post judgment order pertaining to the guarantors' motion for partial satisfaction of judgment is reversed and the matter is remanded to the trial court so that it may determine the merits of the motion. In all other respects the judgment is affirmed, except as to respondent Kleinfeld, against whom the appellate proceedings are stayed for the reasons expressed in footnote 1, ante. Each party shall bear its own costs on appeal.
1. Whitcanack and Dress also filed a cross-complaint against Oscar Budd Kleinfeld, the Emde's attorney, and on appeal argue that the court erred in sustaining Kleinfeld's demurrer to their cross-complaint without leave to amend. On August 26, 1988, we were advised that Kleinfeld had filed a bankruptcy petition. Accordingly, appellate proceedings were stayed with respect to the portion of the appeal concerning Kleinfeld pursuant to section 362(a) of Title 11 of the United States Code. The parties were directed to promptly notify the court when the bankruptcy proceedings were concluded and the automatic stay provisions of section 362(a) were no longer operative. As we have not been so notified by the parties, we have not addressed the guarantors' contention that the court erred in sustaining Kleinfeld's demurrer to their cross-complaint.
2. Civil Code section 2848 provides: “A surety, upon satisfying the obligation of the principal, is entitled to enforce every remedy which the creditor then has against the principal to the extent of reimbursing what he has expended, and also to require all his co-sureties to contribute thereto, without regard to the order of time in which they became such.”Civil Code section 2849 provides: “A surety is entitled to the benefit of every security of the performance of the principal obligation held by the creditor, or by a co-surety at the time of entering into the contract of suretyship, or acquired by him afterwards, whether the surety was aware of the security or not.”
3. At the time of the bankruptcy proceedings, section 548 of Title 11 of the United States Code provided in pertinent part: “(a) The trustees may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor—[¶ ] (1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer occurred or such obligation was incurred, indebted; or [¶ ] (2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and [¶ ] (B) (i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; [¶ ] (ii) was engaged in business, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or [¶ ] (iii) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured․ [¶ ] (d)(1) For the purposes of this section, a transfer is made when such transfer becomes so far perfected that bona fide purchases from the debtor against whom such transfer could have been perfected cannot acquire an interest in the property transfered that is superior to the interest in such property of the transferee, but if such transfer is not so perfected before the commencement of the case, such transfer occurs immediately before the date of the filing of the petition.”
4. The Emdes argue for the first time on appeal that Civil Code section 3440 renders the transfer of the security interest “void ab initio.” Not only is their claim inadequately briefed, but Whitcanack and Dress were never given an opportunity below to demonstrate that the Emdes' new theory involved triable issues of material fact. The Emdes may not adopt a new and different theory on appeal as it would be unjust to the opposing litigants. (Ernst v. Searle (1933) 218 Cal. 233, 240–241, 22 P.2d 715; Richmond v. Dart Industries, Inc. (1987) 196 Cal.App.3d 869, 874, 242 Cal.Rptr. 184.)
5. Whitcanack and Dress claim that public policy does not permit a predefault waiver as to security and rely on Connolly v. Bank of Sonoma County (1986) 184 Cal.App.3d 1119, 229 Cal.Rptr. 396 and California Uniform Commercial Code section 9504, subdivision 3. The authorities cited are inapposite as they deal with the impropriety of a predefault waiver of the secured party's obligation to give the debtor notice of sale of the collateral prior to the sale. (Connolly, supra, at p. 1123, 229 Cal.Rptr. 396.)
6. See also White & Summers, The Uniform Commercial Code (2d ed. 1980) Accommodation Parties, § 13–14, pp. 525–526; Murray, Secured Transactions—Defenses of Impairment and Improper Case of Collateral (1974) 79 Com.L.Jour. 265; Annotation, Unjustifiable Impairment of Collateral (1979) 95 A.L.R.3d 962, and later cases (1988 pocket supp.) pp. 50–57.)
7. The contract grants the sellers a security interest in unidentified mill equipment, inventory, accounts receivable and all trucks, autos, tractors, forklifts, and equipment. The financing statement that was filed with the Secretary of State discloses that a security interest was given to the Emdes in all of the mill equipment, inventory, accounts receivable, tractors, forklifts, trucks, and autos belonging to Happyholme Farms, Inc. It would therefore appear that the security interest noted in the contract referred to the assets of Happyholme Farms.
8. Code of Civil Procedure section 916 provides: “(a) Except as provided in Section 917.1 through 917.9 and in Section 117.7, the perfecting of an appeal stays proceedings in the trial court upon the judgment or order appealed from or upon the matters embraced therein or affected thereby, including enforcement of the judgment or order, but the trial court may proceed upon any other matter embraced in the action and not affected by the judgment or order. [¶ ] (b) When there is a stay of proceedings other than the enforcement of the judgment, the trial court shall have jurisdiction of proceedings related to the enforcement of the judgment as well as any other matter embraced in the action and not affected by the judgment or order appealed from.”
MARLER, Associate Justice.
SIMS, Acting P.J., and DeCRISTOFORO, J., concur.