Dear members of the constituency list of the Business Litigation Committee:

The following is an examination of a recent case authority of interest:

Albert Kanno v. Marwit Capital Partners II, L.P. et al.

California Court of Appeal Analyzes the Parol Evidence Rule as it Applies to a Breach of Oral Agreement Claim

On December 22, 2017, the California Court of Appeal, Fourth Appellate District, issued a decision in Albert Kanno v. Marwit Capital Partners II, L.P., --- Cal.Rptr.3d --- (2017) (“Kanno”), holding that an oral agreement entered prior to the execution of three separate written agreements, which each had integration provisions, was not barred by the parol evidence rule. To read the full published decision, click here: http://www.courts.ca.gov/opinions/documents/G052348.PDF.

Background

In Kanno, Defendant, Marwit Capital Partners II, L.P. (“Marwit Capital”), entered into contracts to purchase Plaintiff’s interests in three companies for a purchase price of $23.5 million as follows:  $19.5 million in cash, $1 million in escrow, and $2.5 million in the form of Series A Preferred Stock in the acquiring company.

The preferred stock had a mandatory redemption right three years from closing, an annual dividend rate of 8 percent and a tax deferral.  During the parties’ negotiations, Marwit Capital verbally agreed to purchase the stock at its full value within three years after the deal closed and pay the 8 percent annual dividend (the “Oral Agreement”).

The transaction was documented in three written agreements: the Contribution and Purchase Agreement, the Stock Subscription Agreement and the Stockholder Agreement, each of which contained integration provisions. None of the written agreements, however, included the terms of the Oral Agreement.

Three years after the transaction closed, Marwit Capital refused perform the Oral Agreement and purchase the Series A Preferred Stock. Plaintiff then filed suit for breach of oral contract, specific performance and promise without intent to perform.

A jury found in favor of Plaintiff on the breach of oral contract cause of action, and in favor of Marwit Capital on the false promise/fraud claim and awarded Plaintiff damages of $2.5 million plus the 8 percent annual dividend.  The trial court, in a second phase bench trial on the equitable and legal defenses raised by Marwit Capital, upheld the Oral Agreement, holding that the parties did not intend for the three written agreements to be the final and complete expression of the parties’ agreement.

Court of Appeal’s Holding

The California Court of Appeal, Fourth District, affirmed the judgment.  In reaching its decision, the Court of Appeal analyzed the parol evidence rule as it applied to the Oral Agreement under both California law and Delaware law and concluded that an integration clause is “not conclusive evidence the parties intended their written contract to be their complete agreement.” Kanno, supra, G052348, Orange County Superior Court No. 30-2011-00441894, slip. op., at *2.  The Court of Appeal applied the parol evidence rule to conclude that the three written transaction agreements were, at most, partial integrations and, as a result, the Oral Agreement was enforceable because it was consistent with and did not directly contradict the three written agreements. Id.

With respect to the Contribution and Purchase Agreement, which was governed by California law, the Court of Appeal analyzed Code of Civil Procedure §1856 and found that the parties did not intend the Contribution and Purchase Agreement to be a complete and exclusive statement and, as a result, evidence of the Oral Stock Redemption Agreement was “admissible as a separate oral agreement or to supplement the Contribution and Purchase Agreement with additional terms.” Kanno, supra, at *27. Applying the factors set forth in Banco Do Brasil, S.A. v. Latican, Inc., 234 Cal.App.3d 973, 1002-1003 (1991), the Court of Appeal also found that the integration clause in the Contribution and Purchase Agreement did not preclude enforcement of the Oral Agreement, in part, because the presence of three written agreements was “persuasive evidence” that the parties did not intend the Contribution and Purchase Agreement to be the “complete and exclusive statement” of the parties’ agreement. Kanno, supra, at *23.  The Court of Appeal held the parties intended the terms of the Oral Agreement to be part of their overall agreement, and that the Oral Agreement “naturally would be a separate agreement and would not have been included in the writing.”  Id. at *25.  Importantly, the Court of Appeals also held that the Oral Agreement did not contradict the Contribution and Purchase Agreement. Id. at * 27.

The Court of Appeal arrived at similar conclusions regarding the other two written agreements (the Stock Subscription Agreement and the Stockholder Agreement), even though those agreements were governed by Delaware law.  The Court of Appeal concluded that neither the Stock Subscription Agreement nor the Stockholder Agreement was a complete integration, and that the Oral Agreement was consistent with the terms of those written agreements. Id. at *29, 32-33.

In short, the Court of Appeal held that an oral agreement may be enforced under applicable California and Delaware laws, notwithstanding the existence of integration clauses in three written contracts documenting the parties’ agreement.

These materials were written by the Business Litigation Committee by Philip J. Bonoli of Brutzkus Gubner (pbonoli@bg.law).  Editing contributions were provided by Bahram Seyedin-Noor of Alto Litigation (bahram@altolit.com)