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Fred KAYNE, Plaintiff and Appellant, v. FIRST CHARTER BANK, Defendant and Respondent.
Plaintiff and appellant Fred Kayne (Kayne) appeals an order dismissing his original complaint following the sustaining without leave to amend of a demurrer interposed by defendant and respondent First Charter Bank (Charter).
The essential issue presented is whether a “no oral modifications” clause precludes the parties to a written contract from entering into an enforceable oral modification.
We conclude an oral modification is enforceable despite such a clause only to the extent the oral modification has been executed by the parties. (Civ.Code, § 1698, subd. (b.) 1 Because the complaint discloses the alleged oral modification was executed by Kayne but not by Charter, Kayne has not and can not allege an enforceable oral modification. The order therefore is affirmed.
FACTUAL AND PROCEDURAL BACKGROUND
a. The complaint.
On December 24, 1990, Kayne filed suit against Charter setting forth causes of action for (1) breach of the implied covenant of good faith and fair dealing; (2) willful and wanton misconduct; (3) negligence; (4) rescission; (5) breach of contract; and (6) declaratory relief.
We summarize Kayne's extensive allegations as follows:
In early 1987, Kayne brought a potential borrower to Charter named Barry Epstein (Epstein). Epstein wanted to borrow up to $500,000 from Charter and offered to secure the loan fully with equine collateral. In March 1987, Kayne executed a Continuing Guarantee agreement (the Continuing Guarantee), wherein he agreed to serve as guarantor on Epstein's Charter loan and assumed a maximum liability of $500,000. A copy of the Continuing Guarantee was appended to the complaint as Exhibit A.
Paragraph 4 of the Continuing Guarantee (paragraph 4) provided in relevant part: “[U]pon such terms and at such times as it considers best and with or without notice to Guarantor, the Bank may alter, compromise, accelerate, extend or change the time or manner for the payment of any indebtedness hereby guaranteed, increase or reduce the rate of interest thereon, release or add any one or more guarantors or endorsers, accept additional or substituted security therefor, or release or subordinate any security therefor. No exercise or non-exercise by the Bank of any right hereby given it, no dealing by the Bank with Debtor or any other person, and no change, impairment or suspension of any right or remedy of the Bank shall in any way affect any of the obligations of Guarantor hereunder or any security furnished by Guarantor or give Guarantor any recourse against the Bank.”
Paragraph 16 of the Continuing Guarantee (paragraph 16) stated: “No provision of this guarantee or right of the Bank hereunder can be waived ․ except by a writing duly executed by an authorized officer of the Bank.”
Paragraph 18 thereof (paragraph 18) stated: “Except as provided in any other written agreement now or at any time hereafter in force between Bank and the Guarantor, this guarantee shall constitute the entire agreement of the Guarantor with Bank with respect to the subject matter hereof and no representation, understanding, promise or condition concerning the subject matter hereof shall be binding upon Bank unless expressed herein.”
Notwithstanding these provisions, several months later, Kayne and Charter entered into an oral modification of the Continuing Guarantee, pursuant to which Kayne agreed to hire counsel at his expense to monitor jointly with Charter the release and sale of any horses securing the loan, to ensure they were being sold for fair consideration and that the sales proceeds went directly to reduce Epstein's loan balance. In turn, Charter agreed it would take no action with respect to any of the collateral without Kayne's prior consent.
Kayne hired counsel to monitor the collateral and performed his obligation under the orally modified agreement. As a result of this careful monitoring, the Charter balance was reduced by approximately $150,000.
In mid–1988, Epstein contacted Charter to advise it he wanted to restructure his debt, and sought to substitute a second mortgage on his Kentucky farm for the equine collateral. Charter told Epstein that because of its oral agreement with Kayne, it could not consent to the substitution without Kayne's approval. Epstein contacted Kayne with his request. In response, Kayne indicated to Charter he would only agree to the proposed substitution if it would better collateralize the loan, create no greater risk of loan default, and leave Charter's second mortgage on the Kentucky farm subordinate only to an existing first mortgage securing a $750,000 obligation, with all junior liens and mortgages paid in full and released.
Charter assured Kayne it would handle the transaction consistent with all his conditions. However, Charter performed its duties in a grossly negligent and reckless manner. As a result, the substitution did not better collateralize the loan and instead resulted in the creation of a worthless second mortgage.
In 1989 and 1990, Kayne made several payments at Charter's request after Epstein defaulted. Finally, in the spring of 1990, the holder of the first mortgage initiated foreclosure proceedings on the Kentucky farm. Kayne then learned the second mortgage was worthless.
Based on the above allegations in his complaint, Kayne sought compensatory and punitive damages, rescission of the Continuing Guarantee agreement and restitution, attorney's fees and costs.
b. Charter's demurrer and ruling thereon.
Charter demurred to all causes of action. It argued, inter alia: Kayne sought to vary the express written Continuing Guarantee which authorized Charter to modify its arrangement for securing the indebtedness; the Continuing Guarantee explicitly provided the guarantor waived any right to obtain recourse against Charter for actions taken concerning the indebtedness; and, the Continuing Guarantee prohibited any oral agreements or understandings.
The trial court sustained demurrers as to all causes of action without leave to amend. It ruled the Continuing Guarantee allowed Charter “clearly, in its own discretion, and even without notice to any party to modify the security for their loan.” Further, even accepting the allegations of an oral modification as true, such modification was unenforceable.
This appeal followed.
CONTENTIONS
Kayne contends: (1) the parol evidence rule does not apply to the oral modification of a written guaranty agreement; (2) the written Continuing Guarantee here is subject to a valid, binding and enforceable oral modification; (3) the oral modification is valid and enforceable notwithstanding the fact it was not reduced to a writing; (4) a contractual clause requiring modifications to be in writing will not preclude enforcement of an executed oral modification; (5) the doctrines of waiver and estoppel preclude enforcement of the clause requiring modifications to be in writing; (6) the complaint is well pled; and (7) none of the claims is time-barred.
DISCUSSION
1. Standard of appellate review.
The function of a demurrer is to test the sufficiency of a pleading by raising questions of law. (Buford v. State of California (1980) 104 Cal.App.3d 811, 818, 164 Cal.Rptr. 264.) When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.) The allegations are regarded as true and are liberally construed with a view to attaining substantial justice. (Shaeffer v. State of California (1970) 3 Cal.App.3d 348, 354, 83 Cal.Rptr. 347; King v. Central Bank (1977) 18 Cal.3d 840, 843, 135 Cal.Rptr. 771, 558 P.2d 857.)
Generally, when a demurrer is sustained without leave to amend, we decide whether there is a reasonable possibility the defect can be cured by amendment. If it can be, the trial court has abused its discretion and a reversal is proper; if not, there has been no abuse of discretion and the ruling is affirmed. (Blank v. Kirwan, supra, 39 Cal.3d at p. 318, 216 Cal.Rptr. 718, 703 P.2d 58.)
However, where, as here, a demurrer is sustained to the original complaint, denial of leave to amend constitutes an abuse of discretion if the pleading does not show on its face that it is incapable of amendment. (King v. Mortimer (1948) 83 Cal.App.2d 153, 158, 188 P.2d 502.)
2. Alleged subsequent oral modification to written agreement is not barred by parol evidence rule, but immaterial.
The parol evidence rule prohibits the introduction of prior or contemporaneous extrinsic evidence, oral or written, to vary the terms of a final written agreement, because the written agreement supersedes the prior or contemporaneous negotiations. (Hotle v. Miller (1959) 51 Cal.2d 541, 546, 334 P.2d 849.) However, the parol evidence rule “has no corresponding power to preclude future negotiations.” (Ibid., italics added.)
Because the alleged oral modification occurred subsequent to the execution of the written guaranty agreement, the alleged oral modification is not barred by the parol evidence rule. Nonetheless, the alleged oral modification is unenforceable, for the reasons discussed below.
3. Kayne has not pled an enforceable oral modification under section 1698.
a. Introduction.
The existence of a valid oral modification to the Continuing Guarantee is essential to Kayne's theory against Charter because under the Continuing Guarantee, Charter had the right to accept substituted security at any time and without notice to Kayne. Relying on section 1698, Kayne argues the alleged oral modification of the Continuing Guarantee is valid and enforceable because it was fully executed by him and was supported by new consideration. The question becomes whether, notwithstanding the terms of the Continuing Guarantee which required any modification to be in writing, Kayne has stated a cause of action based upon an alleged oral modification pursuant to section 1698.
The terms of the Continuing Guarantee disclose Charter did everything possibe to ensure no modification other than one in writing would be recognized. Charter clearly and expressly reserved unto itself (i.e., “upon such terms and at such times as it considers best and with or without notice to [Kayne]”) the absolute right to “accept additional or substituted security [for the debt guaranteed by Kayne], or release or subordinate any security therefor.” To ensure a waiver of any guarantor's rights otherwise available, Charter's Continuing Guarantee contained an explicit integration clause at paragraph 18 and a specific prohibition on modification except by a duly executed writing at paragraph 16.
Our analysis of the Continuing Guarantee and section 1698 compels the conclusion Kayne's alleged oral modification is barred. Under section 1698, a modification to a written agreement can only be made by:
(a) another written agreement;
(b) an oral modification which is fully executed by both parties;
(c) an unexecuted oral modification provided there is both (1) new consideration for the modification and (2) an absence of any provisions in the original contract precluding an oral modification; or,
(d) application of rules of law concerning estoppel, oral novation and substitution of a new agreement, rescission of a written contract by an oral agreement, waiver of a provision of a written contract, or oral independent collateral contracts.
The alleged oral modification does not come within any of these provisions; none of the provisions supports Kayne's theory the oral modification was enforceable because it was fully executed by him and was supported by new consideration.
b. Section 1698, subdivision (b), is unavailing to Kayne because the modification was executed solely by him.
Relying on D.L. Godbey & Sons Const. Co. v. Deane (1952) 39 Cal.2d 429, 246 P.2d 946, a 40–year–old case, Kayne contends he provided new consideration and that the oral modification need only be executed by one party to be enforceable. However, Godbey was decided prior to the 1976 rewriting of section 1698.2 Godbey held where there was consideration for the oral modification and full performance of its terms by the promisee alone, performance or execution by the promisor would not be required in order to give effect to the modification. (Godbey, supra, 39 Cal.2d at pp. 433–434, 246 P.2d 946.) Prior to Godbey the courts had diverged on the question of whether section 1698, as it then read, required execution of an oral modification by both parties. (Godbey, supra, at p. 433, 246 P.2d 946.) Therefore, Godbey resolved the case conflicts.
(1) Post–Godbey amendment requires full execution by both sides, pursuant to section 1698, subdivision (b).
In amending section 1698 to its present form in 1976, the Legislature provided for oral modifications by a showing of execution by both sides (§ 1698, subd. (b)), or when unexecuted on both sides, in situations in which there is new consideration and no contrary agreement by the parties (§ 1698, subd. (c)).
The comments of the California Law Revision Commission are instructive with respect to the meaning which should be given to the amended version of section 1698 in light of Godbey. “Subdivisions (a) and (b) continue the substance of former Section 1698 [as interpreted in prior decisions requiring execution by both parties ]․ [¶] Subdivision (c) retains the requirement of the rule in D.L. Godbey & Sons Construction Co. v. Deane, ․, that the oral modification be supported by new consideration․ However, the requirement in Godbey that the party seeking enforcement of the oral modification must have executed his part of the agreement is not continued [under subdivision (c) ].” (Cal.Law Revision Com. com., 9 West's Ann.Civ.Code (1985 ed.) § 1698, pp. 721–722, italics added; see also, Beggerly v. Gbur (1980) 112 Cal.App.3d 180, 188–190, 169 Cal.Rptr. 166.)
While modifying the Godbey rule requiring new consideration in subdivision (c), the Legislature also adopted the full execution requirement in subdivision (b).3
Such a rule has obvious salutory purposes. An oral modification actually performed by both parties, although creating new terms between the parties, is not likely to be one which will be the subject of dispute. As its terms already have been performed, there is no need to impose procedural requirements which might provide the indicia of trustworthiness presented by a writing. Nor is there need for a concern about any prohibition on oral modification which might be contained in the original contract.4
Here, while Kayne claims he performed his part of the alleged oral bargain by hiring counsel at his own expense to assist Charter, the alleged oral modification clearly was not fully executed by both parties. Due to the lack of full execution by both parties, subdivision (b) will not permit Kayne's alleged oral modification. Further, for the reasons discussed infra, at section 3(c), subdivision (c) of section 1698 also is unavailing to Kayne.
(2) Marani v. Jackson (1986) 183 Cal.App.3d 695, 228 Cal.Rptr. 518, misconstrued section 1698.
Marani was decided utilizing the current statute. In that case, a real estate salesperson sought to recover from the broker employer a commission on the sale of a parcel of real property upon terms different than those provided for in their written contract. The written contract precluded modifications other than in writing. (Marani, supra, 183 Cal.App.3d at pp. 697–699, 228 Cal.Rptr. 518.)
After quoting section 1698, Marani quoted Jefferson, who paraphrased the statute as follows: “ ‘A contract in writing may be subsequently modified by an oral agreement only if (i) the written contract does not contain an express provision requiring that modification be in writing; and (ii) such oral agreement has been performed by the parties, which may consist of full performance by one party only to the oral agreement, or, as an executory oral agreement, is supported by a new consideration.’ (2 Jefferson [Cal. Evidence Benchbook (2d ed. 1982) ] § 32.5, p. 1162, ․)” (Marani, supra, 183 Cal.App.3d at p. 704, 228 Cal.Rptr. 518, italics ours, original italics deleted.)
This recitation in Marani is at odds with section 1698. While subdivision (c) states a clause barring oral modifications will preclude a modification under that subdivision, as discussed ante at footnote 3, subdivision (b) does not contain a comparable provision.
Accordingly, notwithstanding a written prohibition on oral modifications, an oral modification of a written contract is enforceable under subdivision (b) to the extent it has been executed by the parties.
Consequently, in the case before us, it is not the Continuing Guarantee's prohibition on oral modifications, but the lack of execution by both parties, which renders Kayne's alleged modification unenforceable under subdivision (b).
c. Section 1698, subdivision (c), is unavailing to Kayne because the Continuing Guarantee expressly prohibited oral modifications.
Section 1698, subdivision (c), allows oral modifications regardless of whether there has been partial or total execution, provided there is new consideration and no contrary agreement by the parties.
It provides in part: “Unless the contract otherwise expressly provides, a contract in writing may be modified by an oral agreement supported by new consideration.” (§ 1698, subd. (c), italics added.) Because the Continuing Guarantee expressly precluded oral modifications, subdivision (c) by its terms will not permit Kayne's alleged oral modification.
4. Trial court properly sustained Charter's demurrer as to each cause of action.
Kayne's entire case is premised upon the existence of a valid oral modification of the Continuing Guarantee.
In the first count, Kayne pled Charter breached the covenant of good faith and fair dealing which was implied in the oral modification.5 In the second and third counts, Kayne alleged Charted committed willful and wanton misconduct and negligence, respectively, in failing to ensure the substituted collateral better secured the loan. In the fourth count, Kayne sought to rescind the Continuing Guarantee due to Charter's breach of its duties under the alleged oral agreement. In the fifth count, Kayne alleged Charter breached the contract by failing to comply with his instructions regarding the substitution of collateral. Lastly, in the sixth count, Kayne sought a judicial declaration he owed Charter nothing under the Continuing Guarantee.
Because the alleged oral modification is barred by the parties' written agreement disallowing such modifications, the trial court properly sustained Charter's demurrer in its entirety.
5. Trial court did not abuse its discretion in denying leave to amend.
Section 1698, subdivision (d), provides nothing in the statute precludes in an appropriate case the application of rules of law concerning estoppel or waiver of a provision of a written contract. Relying thereon, Kayne contends he stated facts to show Charter either waived or is estopped to assert paragraph 16, which required written modifications. In the alternative, Kayne contends he is entitled to amend to allege such facts.
When a plaintiff's cause of action depends upon estoppel or waiver, those theories must be specially pled in the complaint. (Judelson v. American Metal Bearing Co. (1948) 89 Cal.App.2d 256, 266, 200 P.2d 836; Cohen v. Metropolitan Life Ins. Co. (1939) 32 Cal.App.2d 337, 347, 89 P.2d 732; 5 Witkin, Cal. Procedure (3d ed. 1985) Pleading, §§ 1044, 1045, pp. 460–461.) Kayne failed to set forth the necessary facts to support such theories. There is no allegation by Kayne that Charter intentionally and deliberately led him to believe it would disregard paragraph 16 so as to give rise to an estoppel. (See 11 Witkin, Summary of Cal. Law (9th ed. 1990) Equity, § 177, p. 858.) Also, Kayne concedes there is no specific waiver allegation in the complaint.
Further, while Kayne seeks an opportunity to amend his pleading “to adequately allege such facts,” he has failed to meet his burden of “show[ing] in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading. [Citations.]” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349, 134 Cal.Rptr. 375, 556 P.2d 737.) Accordingly, leave to amend is unwarranted.6
6. Kayne's reliance on California Uniform Commercial Code section 9504 is unavailing.
In his letter brief, Kayne contends a guarantor of a secured debt is entitled to the protections afforded a debtor under California Uniform Commercial Code section 9504, regardless of any purported waiver of rights executed by the guarantor prior to a default on the debt. (Canadian Commercial Bank v. Ascher Findley Co. (1991) 229 Cal.App.3d 1139, 1149–1153, 280 Cal.Rptr. 521.) Further, section 9504 of the California Uniform Commercial Code requires the secured party to dispose of any collateral in a commercially reasonable manner. (Canadian Commercial Bank, supra, at p. 1149, 280 Cal.Rptr. 521.)
Based thereon, Kayne contends Charter owed him a duty, regardless of any contrary or inconsistent provisions in the Continuing Guarantee, to conduct its disposition of collateral in a commercially reasonable manner. Kayne maintains Charter breached that duty by substituting Epstein's heavily mortgaged farm for the valuable equine collateral which originally secured the loan.
Kayne is correct in his assertion that section 9504 protects guarantors as well as debtors. (Canadian Commercial Bank, supra, 229 Cal.App.3d at pp. 1151–1153, 280 Cal.Rptr. 521.) It is also true the protections of section 9504 of the California Uniform Commercial Code are not waivable by a debtor prior to default. (Canadian Commercial Bank, supra, at p. 1150, 280 Cal.Rptr. 521.)
Nonetheless, there is no merit to Kayne's argument he was deprived of the benefits of California Uniform Commercial Code section 9504.
That statute, which begins with the phrase “[a] secured party after default may ․ dispose of any or all of the collateral” (Cal.U.Com.Code, § 9504, subd. (1), italics added), governs the secured party's disposition of collateral after default. Here, Charter substituted Epstein's farm for the equine collateral prior to Epstein's default. Consequently, California Uniform Commercial Code section 9504 by its terms is inapplicable.
Further, because the protection afforded to debtors by section 9504 of the California Uniform Commercial Code derives from statute, any expansion of the scope of the statute to pre-default dispositions of collateral is a matter for the Legislature, not for the courts.
CONCLUSION
Section 1698 enables parties to a contract to ensure their written agreement is the agreement of the parties. Where a written contract expressly prohibits oral modifications, an oral modification is enforceable only to the extent it has been executed by both parties (§ 1698, subd. (b)), unless the oral modification is enforceable under the estoppel, waiver or other grounds of subdivision (d).
DISPOSITION
The order is affirmed. Kayne to bear costs on appeal.
FOOTNOTES
1. Civil Code section 1698 provides: “(a) A contract in writing may be modified by a contract in writing. [¶] (b) A contract in writing may be modified by an oral agreement to the extent that the oral agreement is executed by the parties. [¶] (c) Unless the contract otherwise expressly provides, a contract in writing may be modified by an oral agreement supported by new consideration. The statute of frauds (Section 1624) is required to be satisfied if the contract as modified is within its provisions. [¶] (d) Nothing in this section precludes in an appropriate case the application of rules of law concerning estoppel, oral novation and substitution of a new agreement, rescission of a written contract by an oral agreement, waiver of a provision of a written contract, or oral independent collateral contracts.”All further statutory references are to the Civil Code, unless otherwise specified.
2. Section 1698, prior to the 1976 amendment, provided in its entirety: “A contract in writing may be altered by a contract in writing, or by an executed oral agreement, and not otherwise.” (Italics added.)
3. As the California Law Revision Commission noted in its comment, “The introductory clause of subdivision (c) recognizes that the parties may prevent enforcement of executory oral modifications by providing in the written contract that it may only be modified in writing. See Com.Code § 2209(2) for a comparable requirement. Such a provision would not apply to an oral modification valid under subdivision (b).” (Cal.Law Revision Com. com., 9 West's Ann.Civ.Code (1985 ed.) § 1698 p. 722.)This distinctive treatment of written contractual proscriptions on oral modifications only makes sense if subdivision (b) is literally enforced as written and the application of the Godbey rule requiring new consideration is limited to the circumstances described in subdivision (c).
4. In any event, such an unlikely dispute has been fully anticipated by the waiver and estoppel provisions of subdivision (d) of section 1698.
5. Because the Continuing Guarantee disclaimed any duty to the guarantor, Kayne on appeal abandons his theory Charter breached a duty of good faith implied in the Continuing Guarantee.
6. Kayne's supplemental letter brief also seeks leave to amend based upon an assertion counsel recently has discovered a letter agreement executed by Charter, Kayne and Epstein, dated the same date as the Continuing Guarantee. According to Kayne, this letter agreement “supplements, modifies, amends and supersedes the Guaranty.” However, Kayne has not appended a copy of this document to his letter brief. Further, the letter brief does not indicate what is in the alleged letter agreement. We therefore are unmoved by this alleged recently discovered document.
KLEIN, Presiding Justice.
CROSKEY and HINZ, JJ., concur.
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Docket No: No. B056683.
Decided: February 01, 1993
Court: Court of Appeal, Second District, Division 3, California.
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