Wednesday, September 30, 2020
Court of Appeal:
By Sandra Hong Staff Writer
A shell company’s breach of a settlement agreement terminated all of its rights under the agreement, including a release clause that shielded it and any related entities from liability, the Court of Appeal for this district held yesterday.
The opinion by Presiding Justice Arthur Gilbert of Div. Six affirms an order by Santa Barbara Superior Court Judge Donna D. Geck. Geck amended a $1.2 million judgment to add alter ego entities of a Victorville-based aviation enterprise as debtors.
“A judgment debtor with an empty shell is easy to crack,” Gilbert remarked in his opinion, joined by Justices Kenneth R. Yegan and Steven Z. Perren.
One of a host of entities controlled by Craig Garrick breached a settlement agreement with Butler America, Inc., to which it owed nearly $900,000 for unpaid staffing and payroll services.
Gilbert concluded that breach of the settlement by Aviation Finance Services (“AFS”) in effect terminated the entire agreement, including a release clause Garrick argued discharged him and all of his entities from any liability to Butler.
“It is a fundamental principle of contract law that a material breach by one party excuses performance by the non-breaching party….Here, AFS’s breach of the settlement agreement terminated the agreement, including the releases. AFS cannot breach the settlement agreement and also demand its benefits.”
Under the 2014 settlement agreement, AFS was to make monthly payments to Butler from income through a contract with Scaled Composites LLC. AFS also granted Butler a security interest in its “revenue and income interest” from the contract.
AFS, however, was not party to the Scaled Composites contract. The contract was entered by another one of Garrick’s entities, Pacific Aviation Group. At the time of settlement, Garrick failed to disclose AFS was not party to the contract and there was no written agreement as to how much AFS would receive from Scaled Composites.
“Most importantly, AFS was nothing but a shell,” Gilbert said. “It had no substantial business activity and no income with which to pay its debts. The trial court could reasonably conclude its only function was to act as a screen for Garrick and the Garrick entities to hide behind to avoid paying Butler.”
Breach and Judgment
AFS defaulted on the settlement agreement after 10 payments to Butler totaling $100,000.
Geck found the security agreement was illusory and ordered Garrick and his other entities be added to the judgment.
Garrick argued the settlement agreement’s release clause shielded him and his other entities from liability. He also argued that a clause in §3.2 of the agreement stating the release clause “shall not apply” to liability arising from breach of the agreement was inapplicable since he and non-AFS entities were not parties to the settlement.
“Nothing in section 3.2 can reasonably be construed as limited to releases between Butler and AFS,” Gilbert wrote.
Gilbert noted if Garrick and his other entities wished to assert rights under the agreement, they would stand as third-party beneficiaries.
Yet, he added:
“A third party beneficiary’s rights are no greater than those of the promisee. When AFS’s breach terminated its rights in the settlement agreement, Garrick and the Garrick entities’ rights were also terminated.”
Gilbert said that when ATS’s breach terminated the settlement agreement, it was merged into the final judgment. As a result, the contractual rights of the parties were extinguished and replaced with the rights under the judgment, he wrote.
“Here, when the stipulated judgment was entered on the settlement agreement, it terminated all of AFS’s and its third party beneficiaries’ rights in the agreement, including the releases,” Gilbert said.
Garrick also argued there was no fraud since Butler knew AFS was not party to the Scaled Composites contract, as it was attached to the security agreement.
Gilbert rejected the contention.
“Both the settlement agreement and the security agreement represented that AFS had a ‘revenue and income interest’ in the contract, and that AFS would pay Butler from its ‘management responsibilities’ under the contract,” Gilbert observed.
“But … [t]here was no chance AFS would ever receive income from the Scaled Composites contract. AFS knew the facts, but failed to disclose them. The entire transaction reeks of fraud on AFS’s part.”
Along with AFS, Garrick’s other entities include Aviation Assurance Company, ComAv, ComAv Asset Management (formerly known as Pacific Aviation Group), ComAv Technical Services (formerly known as Southern California Aviation), and Aviation Finance Services.
The case is Butler America v. Aviation Assurance Co., B298696.
Counsel for Garrick were Robert M. Dato and Joseph M. Welch of Buchalter’s Irvine office. Representing Butler America were Paul P. Young, Joseph Chora, and Armen Manasserian of the Pasadena firm of Chora Young.
Copyright 2020, Metropolitan News Company