Lemat Corp. v. American Basketball Ass'n

San Francisco) and Charles E. (Pat) Boone, part owner in 1967 of the then newly formed American Basketball Association (ABA) franchise for the Oakland Oaks, appeal from adverse judgments in actions they had separately filed against the ABA that were consolidated for trial. Lemat and Boone sought enforcement of an alleged indemnity agreement resting upon proceedings at an ABA trustees’ meeting held in Denver on August 18 and 19, 1967, and a resolution contained in the minutes thereof. An understanding of the issues involved in the appeal requires a somewhat lengthy statement óf the background of that meeting and both prior and subsequent events.

ABA was formed and incorporated as a Delaware corporation early in 1967. NBA had been the sole pro basketball league until that time. ABA intended to become a “major league” and envisioned a super-bowl type playoff between NBA and ABA champions. ABA’s management was vested in a board of trustees, one member designated for each of the 11 franchises that had been issued. In June 1967 ownership of the Oakland franchise had vested in S. Kenneth Davidson and appellant Boone with Davidson as trustee therefor. At the time, Richard F. Barry III, now the outstanding super-star of pro basketball, had completed his first season (1965-1966) under contract to the Warriors with great success.^[2] He signed with the Warriors for 1966-1967 and the contract contained an option for 1967-1968 and perhaps options for several years thereafter.^[3]

There was uncontradicted evidence that during the formative period (spring-summer 1967) ABA and its franchised teams were experiencing the vicissitudes of any new league whose teams were unable to contract the services of any pro stars whose mere presence might draw a reasonable gate because those stars were all under contract to NBA teams. If ABA had to wait a year or two to develop its own stable of such from high school and college talent ready to turn pro, there was serious doubt that its teams could secure the kind of money necessary to finance a season. Further, its ability to recruit amateur players of potential star status was limited by NBA’s established position. There were background noises about possible anti-trust violations and a player’s serf or chattel status that resulted from the renewal clause (cf. fn. 11 post).

OBI then proceeded to sign Barry to a contract, basically blank, on September 29, 1967. Barry was paid $75,000 for 1967-1968 as had been guaranteed. Salary ($75,000 plus a gate percentage per year) and time of service (three years beginning October 2, 1968, or sooner if the injunction were lifted) were supplied by amendment on October 31, 1967. The August injunction' was not lifted.^[4] Barry chose not to play for the Warriors and “sat out” the 1967-1968 season. He played in the ABA for four seasons beginning 1968-1969.

On November 30, 1971, Lemat v. Boone, et al. (L.A. No. 915895) was settled and a stipulated judgment for $1 million was entered against Boone, Davidson and Hale, who assigned to Lemat their claimed rights under the August resolution for indemnity as to two-thirds of the obligation.^[5] ABA refused Lem at’s demand and Lemat as assignee filed the present action against ABA to recover $666,667 for breach of the claimed contract of indemnity.

Boone and his associates retained their alleged rights under the resolution as against one-third of the legal fees expended in defense of litigation related to the Barry deal. Boone sued ABA to recover one-third of the legal expenses in defending L.A. No. 915895. The Alameda County Superior Court consolidated the two cases for trial. All parties waived jury. After commencement of trial the parties agreed to a bifurcation of the issues and to first dispose of the issue of liability. After five days of trial and argument, ABA moved for judgment pursuant to Code of Civil Procedure section 631.8. This was granted. The court found that said resolution did not create a contractual obligation between ABA on the one hand and Boone or Davidson on the other; and if it did, it was illegal. It interpreted the agreement to cover only the owner of the Oakland franchise, which it found was OBI on the date of the resolution. Its interpretation was to the effect that neither the obligations of Boone et al. arising out of the judgment in L.A. No. 915895 nor the legal expenses incurred in defense thereof were contemplated or covered by the resolution. Judgment in favor of ABA was accordingly entered. The appeals of Lemat and Boone present the following issues.

Article IV, section 3 of the ABA bylaws requires that extraordinary obligations must be approved by a majority vote of all trustees before payment^[6] by the commissioner. The fact that the potential liability that might arise under the resolution was indeterminate at the time of the meeting does not alter the nature of obligations entailed in it. The trial court correctly found that the resolution purported to create an extraordinary expense. The finding is supported by substantial evidence and may not be disturbed on appeal. (Green Trees Enterprises, Inc. v. Palm Springs Alpine Estates, Inc. (1967) 66 Cal.2d, 782 , 784 [ 59 Cal.Rptr. 141 . 427 P.2d 805 ].) There were 11 trustees at the time of the vote. Approval of six of them was required. The resolution received only four approving votes. It is accordingly unnecessary to explore the contentions that are based upon Delaware corporation law.

II. Is ABA Estopped to Deny that the Resolution was an Indemnification Agreement? Yes.

Respondent contends that estoppel is not available to appellant because it was not pleaded, although it was raised in the trial court. As plaintiffs below, appellants could not have known that their claims must ultimately rest upon a claimed estoppel. Because a “plaintiff is not advised of the defenses that may be pleaded, he is not required to plead an estoppel in order to overcome any affirmative matter set up in the answer or by way of defense.” (First Nat. F. Corp. v. Five-O Drilling Co. (1930) 209 Cal. 569 , 576 [ 289 P. 844 ]; cf. Higson v. Montgomery Ward & Co. (1968) 263 Cal.App.2d 333 , 342 [ 69 Cal.Rptr. 497 ].)

In classic or traditional cases of equitable estoppel four elements must be proved: “(1) that the party to be estopped must be apprised of the facts; (2) he must intend that his conduct will be acted upon, or act in such a manner that the party asserting the estoppel could reasonably believe that he intended his conduct to be acted upon; (3) the party asserting the estoppel must be ignorant of the true state of the facts; and (4) he must rely upon the conduct to his injury.” (Crestline Mobile Homes Mfg. Co. v. Pacific Finance Corp. (1960) 54 Cal.2d 773 , 778 [ 8 Cal.Rptr. 448 , 356 P.2d 192 ].)

The evidence shows that ABA had no more knowledge of the invalidity of the vote than Boone and Davidson had. The minutes recite

that it was passed. Also the testimony shows that thereafter everyone involved assumed that it had been passed. Erickson, the attorney for the ABA, stated that at no point did he believe that the vote was insufficient. Any knowledge of the bylaws imputed to the trustees must also be imputed to Davidson, who was a trustee. Davidson was acting as Boone’s agent in representing the franchise. Therefore, either the ABA was not apprised of the facts or Boone and Davidson had equal knowledge. In either case, the first or third essential of an equitable estoppel is missing.

But California cases on estoppel have not strictly adhered to the four-point test set forth above. Exceptions have arisen to prevent injustices. (E.g., Driscoll v. City of Los Angeles (1967) 67 Cal.2d 297 , 305 [ 61 Cal.Rptr. 661 , 431 P.2d 245 ].) When dealing with corporate contracts which were invalid due to lack of authorization by a proper vote of the directors, courts, have not allowed a corporation to avoid liability when it has received and retained the benefits of the contract. (Main v. Casserly (1885) 67 Cal. 127 [ 7 P. 426 ]; Blood v. La Serena Land and Water Co. (1901) 134 Cal. 361 [ 66 P. 317 ]; Gribble v. Columbus Brewing Co. (1893) 100 Cal.67 [ 34 P. 527 ]; First Nat. F. Corp. v. Five-O Drilling Co., supra, 209 Cal. 569 ; Tierney & Lawford v. Wilshire Cafe Co. (1930) 209 Cal. 605 [ 289 P. 621 ]; Bradley v. Butchart (1933) 217 Cal. 731 , 734 [ 20 P.2d 693 ]. See also, Higson v. Montgomery Ward & Co., supra, 263 Cal.App.2d 333 .) Inquiry must then focus upon the question whether ABA received and retained any benefits from the signing of Rick Barry by Oakland.

In the context of the exhibits and minutes as amplified by uncontradicted testimony of the discussion of the resolution at the meeting, the consideration therefor was the continuation of Oakland’s efforts to sign Rick Barry to an ABA players’ contract which if successful would be a “break-through” and make it easier for other ABA teams to contract players of established star status.^[7] There is evidence that Boone and Davidson would not have proceeded to sign Barry if ABA would not agree to share the risk of potential litigation; that the trustees were informed that the potential liabilities of the recently filed litigation were such that undertaking further action in the Barry matter involved risks that the Oakland owners believed they could not assume without league

support. Erickson, ABA’s attorney, explained that the matter presented a challenge that ABA had been working toward since its inception and the league “needed to take a stand as a league if we were to succeed.”^{[8] [9]} The name of the game is money. Although difficult to apportion a percentage of increased gate or public interest accruing from the presence of a particular name player, increased gate and potential television revenue were at stake. Concerning Barry, the minutes of the August meeting state that “it was the consensus that . . . the position to be taken by the Oakland franchise would be of considerable importance to the whole League.” Although no concrete benefits may have accrued to ABA during the 1967-1968 season, the evidence reflects that the publicity surrounding the situation was, in itself, of value. Again without contradiction, the evidence shows that during the four years Barry played for ABA it received exactly the benefits it hoped would flow from a successful outcome of Oakland’s attempt to procure Barry’s signature to a contract.

To allow the ABA to receive these benefits and later to repudiate the contract would be inequitable. The cases cited above establish that the ABA is estopped from asserting its failure to properly adopt the resolution. Therefore, a contractual obligation exists. Conclusions of Law 2 and 3^[9] are incorrect.

III. Is the Indemnity Void as an Illegal Contract? .No.

The statutes involved in respondent’s contention of illegality are Civil Code sections 2773, 2774 and 1668.^[10] If section 1668 applied to

agreements to indemnify persons against unlawful acts then all agreements to indemnify against violations of the law would be illegal. The distinctions made in section 2773 and section 2774 between unlawful acts “thereafter to be done” and an unlawful act already done would be given no effect. Statutes are to be construed as a whole and, when reasonably possible, full force and effect given to all of their provisions. (Hough v. McCarthy (1960) 54 Cal.2d 273 , 279 [ 5 Cal.Rptr. 668 , 353 P.2d 276 ].)

The distinction between an exemption (§ 1668) whereby a person seeks to avoid liability to a victim who has suffered due to that same person’s unlawful conduct and an indemnity has been recognized by the courts. (Compare Tunkl v. Regents of University of California (1963) 60 Cal.2d 92 [ 32 Cal.Rptr. 33 , 383 P.2d 441 , 6 A.L.R.3d 693 ] (true exculpatory agreement) with Goldman v. Ecco-Phoenix Elec. Corp. (1964) 62 Cal.2d 40 , 48 [ 41 Cal.Rptr. 73 , 396 P.2d 377 ]; John E. Branagh & Sons v. Witcosky (1966) 242 Cal.App.2d 835 , 838-839 [ 51 Cal.Rptr. 844 ]; and County of San Joaquin v. Stockton Swim Club (1974) 42 Cal.App.3d 968 , 971-972 [ 117 Cal.Rptr. 300 ] (indemnity agreements).) A public'policy consideration exists. An exemption may deprive a victim of compensation for injuries but an agreement to indemnify a person who may be responsible for a loss is additional assurance that the loss will be compensated. In support of its claim that section 1668 is applicable to indemnity agreements, respondent cites Abbott v. Western Nat. Indem. Co. (1958) 165 Cal.App.2d 302 [ 331 P.2d 997 ], However, the reference to section 1668 therein is dicta and, in any event, is inapplicable to the facts before us. Conclusion of Law 4^[11] in this case is incorrect. Section 1668 is not applicable to indemnity agreements.

Conclusion of Law 5 is based on Civil Code section 2773 which voids indemnification of future acts known to be unlawful by the actor. The finding necessarily implies that the indemnity agreement involved a

future act. The indemnity agreement was to encourage the Oakland franchise to continue its efforts to sign Barry to a contract. While the agreement also involved an act already done (the signing of the option and the guaranty), when both past and future acts are covered by an indemnity agreement, section 2773 should apply. Both section 2773 and section 2774 are intended to prevent the encouragement of illegal acts. Section 2773, concerned with future acts, involves a potential for increased damage to society from future unlawful acts. In section 2774, the act and any damage therefrom have been accomplished. We, accordingly, hold that when any part of an indemnity agreement involves a future act, section 2773 applies.

The resolution contemplated the future signing of Rick Barry to a contract. The contract was entered into about six weeks after the Denver meeting. The starting date was October 2, 1968, or the earliest date that Barry would be free from injunctions. The question is whether Boone and Davidson knew at the time the contract was signed that the act of signing Barry was unlawful. Civil Code section 2773, by its language, requires actual knowledge. Even if, in retrospect, Boone and Davidson perhaps should reasonably have known that signing Barry was illegal (because of their knowledge and experience) the contract would not be void. Compare Civil Code section 2773 (be known) with Penal Code section 311.4 (knows or has possession of such facts that he should reasonably know).

Findings 21 and 22 are that on or after August 8, 1967, Boone and Davidson knew it would be unlawful to sign Barry.

A search of the record reveals nothing to support these findings. From January 1967, when the ABA began to function, until the permanent injunction was issued in the case of Lemat Corp. v. Barry, supra, 275 Cal.App.2d 671 , nobody knew whether the option clause in Barry’s contract with the Warriors was valid or not. There is no contradiction to Boone’s and Davidson’s testimony that they sought legal advice and acted in a good faith belief that the Warriors’ option was not valid and that Barry was free to sign with the Oakland franchise.^[12] After the August 8th preliminary injunction in Lemat v. Barry, supra, and the August 15th Los Angeles suit filed against them by Lemat, Boone and

Davidson knew of the possibility that the courts might uphold the validity of the Warriors’ option. The fact that they took measures to protect themselves in such event is not evidence that they knew on August 8, 1967, that Barry’s signing of the option in the preceding June was unlawful or that it would be unlawful for them to proceed if the initiative for the eventual contract (in the face of the injunction) came from Barry. The Oakland-Barry contract was worded so that it would not become effectual as to playing date until the preliminary injunction was dissolved.

In Continental Baking Co. v. Katz (1968) 68 Cal.2d 512 , 528 [ 67 Cal.Rptr. 761 , 439 P.2d 889 ], the court stated: “ ‘The granting or denial of a preliminary injunction does not amount to an adjudication of the ultimate rights in controversy. It merely determines that the court, balancing the respective equities of the parties, concludes that, pending a trial on the merits, the defendant should or that he should not be restrained from exercising the right claimed by him.’ ” The permanent injunction did not issue until July 1968, well past the time Barry was signed and 11 months after the indemnity resolution had been acted upon.

An indemnity against a future knowing violation of an injunction is unlawful and void. (Bujfendeau v. Brooks (1865) 28 Cal. 641 .) But there is no evidence that Boone and Davidson attempted to have Barry play for Oakland in violation of the August injunction. The documents were carefully written to leave Barry legally free to play for the Warriors so long as the injunction was in effect. There is no contradiction to the evidence that as to both option and eventual contract, Boone and Davidson and “the consensus” of ABA’s trustees believed that the actions would be unlawful only if the initiative came from either of them and Barry did not make his own decision whether or not to play for the Warriors during 1967-1968.^[13] The uncertainty of the law^[14] at the time of option and contract removes any inference of actual knowledge of illegality by Boone and Davidson or by the ABA trustees.

Conclusion 6(e)). But the option recites that Boone and Davidson were the owners of the Oakland franchise. The option ran to the “owners.” The three documents of June 19, 1967 are but a single contract. In view of the unambiguous language of the option (signed only by Barry), the fact that the two documents comprising the consideration for the option were signed only by Boone did not constitute Boone the exclusive owner of Barry’s option. There is not the slightest inference in the record that Boone considered the option as his sole right or that he ever attempted to use it for his sole advantage. All of the testimony concerning the presentation of the resolution at ABA’s Denver meeting compels the conclusion that it contemplated any obligation incurred by the owners of the Oakland franchise arising from Oakland’s prior and future dealings with Barry. The minutes and testimony show that Lemat v. Boone was discussed.^[15] In the light of the presentation by Oakland’s attorney, strongly corroborated by the testimony of ABA’s attorney as well as subsequent events, the minutes and the resolution would be meaningless if Oakland Basketball, Inc. was the only indemnitee contemplated by the resolution. At that time OBI had had nothing to do with Barry. The only reasonable inference that could be drawn from the undisputed evidence is that the parties intended to indemnify the obligations of the defendants in Lemat v. Boone to the extent of two-thirds thereof and also for one-third of their attorneys’ fees.

Our conclusion that the resolution contemplated any obligation arising out of Lemat v. Boone is supported by the rule that the construction given to an ambiguous contract by the acts and conduct of the parties with knowledge of its terms before any controversy has arisen as to its meaning is entitled to great weight and, when reasonable, will be adopted by the court. (Universal Sales Corp. v. Cal. etc., Mfg. Co. (1942) 20 Cal.2d 751 , 761-762 [ 128 P.2d 665 ].) On or about December 18, 1967, Oakland’s attorney (Eilers) requested $7,293.63 from ABA for its share of legal fees arising from Lemat v. Boone. ABA’s attorney’s (Erickson) testimony shows that he recommended payment. Eilers testified that he received ABA’s check therefor. It was signed, according to Erickson’s recollection, by ABA’s Commissioner Mikan. Neither ABA’s counsel nor Mikan denied forwarding the check. At least as to one-third of any attorneys’ fees in Lemat v. Barry, ABA’s counsel and its chief executive officer believed that the resolution was an effective indemnity agreement covering Lemat v. Boone.