Court Opinion

ID: 6496884
Source: CourtListenerOpinion
Date Created: 2022-06-30 18:00:37.440924+00
Date Added: 2024-06-11T08:49:23.876449
License: Public Domain

Case: 21-50912      Document: 00516377341          Page: 1     Date Filed: 06/30/2022

            United States Court of Appeals
                 for the Fifth Circuit                                  United States Court of Appeals
                                                                                 Fifth Circuit

                                                                               FILED
                                                                           June 30, 2022
                                    No. 21-50912
                                                                          Lyle W. Cayce
                                                                               Clerk

   Carnegie Technologies, L.L.C.,

                                                               Plaintiff—Appellee,

                                        versus

   Triller, Incorporated,

                                                           Defendant—Appellant.

                   Appeal from the United States District Court
                        for the Western District of Texas
                             USDC No. 5:20-CV-271

   Before Higginbotham, Haynes, and Wilson, Circuit Judges.
   Cory T. Wilson, Circuit Judge:
          What began as a relatively straightforward sale of one company,
   Triller, Inc. (Triller), by a group of owners that included another company,
   Carnegie Technologies, L.L.C. (Carnegie), has ended as a tangled dispute
   between Carnegie and Triller over a promissory note Triller executed in
   favor of Carnegie and then immediately assigned to a group of “legacy”
   owners—including Carnegie—as part of the deal’s closing. After the note
   was defaulted, Carnegie sued Triller to collect the amounts due. Triller
   countered that because its obligations under the note had been assigned,
   resulting in a novation, Triller was excused from further liability. The district
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                                     No. 21-50912

   court disagreed, finding that Carnegie had demonstrated the validity of the
   note and that the note was in default, and rejected Triller’s novation defense.
   We agree based on the record before us that Triller remained liable under the
   note to Carnegie, so we affirm.
                                         I.
                                         A.
          In 2019, Triller, a social media company that owns the Triller internet
   application, was owned by an investment group that included Carnegie. In
   addition to being an owner of Triller, Carnegie also provided human
   resources, accounting, and tax services to Triller under an Administrative
   Services Agreement (the ASA). Triller rarely paid for those services, instead
   recording them as liabilities in its internal recordkeeping. On October 8,
   2019, Triller was sold by Carnegie’s investment group to Triller HoldCo,
   LLC (HoldCo). HoldCo’s ownership was divided between the majority
   stakeholder, an investment group headed by Proxima Media, LLC (Proxima),
   and the minority-shareholder Triller Legacy, LLC (Legacy). Legacy was
   owned by Carnegie and the original investment group.
          The day the transaction closed, Triller executed a Promissory Note in
   favor of Carnegie (the Note). The Note memorialized the debts that Triller
   had incurred under the ASA. The Note provided that Triller would repay a
   principal amount of $4,280,109, as well as interest accruing at ten percent
   per annum. It carried a due date of October 8, 2021. It also provided that if
   Triller failed “to make any required payment of principal, accrued interest
   or any other amount under this Note when due and payable,” or if Triller
   materially failed to comply “with any of its obligations, agreements and
   covenants” contained in the ASA, then Triller would be deemed to have
   defaulted on the Note. In the event of default, Carnegie was permitted to
   accelerate payment of the unpaid principal and accrued interest.

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          Triller immediately assigned the Note to Legacy through an
   Assignment Agreement (the Assignment). The Assignment recited the
   principal and interest due to Carnegie and stated that it was Triller’s desire
   “to assign, transfer, and convey the Note in its entirety to [Legacy].” It
   further stated that Legacy assumed the Note “subject to all of the obligations
   set forth in the Note.”      Legacy “expressly assum[ed] all such rights,
   obligations, liabilities and duties of [Triller] arising with respect to the Note
   and agree[d] to perform any and all unperformed obligations of [Triller]
   under and pursuant to the Note.” Additionally, the parties agreed that the
   Assignment would be “governed by, interpreted under, and construed and
   enforced in accordance with the laws of the State of California, without
   regard to its choice of law principles.”
          The Assignment was signed by Mike Lu, the Chief Executive Officer
   of Triller, and Paul Posner, the Chief Executive Officer of both Legacy and
   Carnegie. Posner signed twice, once for Legacy as the assignee and once for
   Carnegie as acknowledging and agreeing to the Assignment.                   The
   Assignment provided that it was “the final expression of, and contain[ed] the
   entire agreement between, the parties with respect to the subject matter
   hereof and supersede[d] all prior understandings with respect thereto.”
                                         B.
          In March 2020, Carnegie brought suit against Triller in the Federal
   District Court for the Western District of Texas. It alleged that Triller had
   breached the ASA by not paying Carnegie for the ongoing services it had
   provided Triller. Carnegie also alleged that, because breach of the ASA
   constituted default under the Note, Triller had defaulted on the Note and
   payment of the Note was immediately due. In lieu of answering Carnegie’s
   complaint, Triller filed a motion to dismiss under Federal Rule of Civil

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   Procedure 12(b)(6).1 It asserted that Carnegie had failed to state a claim upon
   which relief could be granted because the Note, and any liability for it, had
   been assigned to Legacy.
           The district court denied Triller’s motion, finding that Carnegie had
   sufficiently pled a default under the Note and that Triller had not established
   its affirmative defense of novation2 as a matter of law. Specifically, after
   evaluating the requirements for an effective novation under Texas and
   California law, the district court determined that the two documents Triller
   attached to its motion, the Assignment and the purchase agreement
   conveying Triller to HoldCo, did not establish the necessary elements
   because they were silent regarding any intent to release Triller of its liability
   under the Note.           Observing that “[t]he critical distinction between
   assignment and novation is the intent to completely release the original
   obligor of its obligations under the original contract[,]” the court concluded
   that Triller had offered no evidence bearing on Carnegie’s intent in
   acknowledging the assignment.

           1
              In April 2020, Triller served a demand for arbitration on Legacy, Carnegie, and
   the other members of Carnegie’s investment group. The demand alleged fraud on the part
   of the parties selling Triller based on material misrepresentations to Triller’s purchasers
   regarding elements of Triller’s business. Triller also filed a motion to compel arbitration
   in this case in November 2020, but it was denied by the district court. Triller has not raised
   any appellate argument related to that denial, so we do not address it. Luminant Mining
   Co., L.L.C. v. PakeyBey, 14 F.4th 375, 378 n.1 (5th Cir. 2021) (citing In re Southmark Corp.,
   163 F.3d 925, 934 n.12 (5th Cir. 1999).
           2
             A novation is generally defined as “[t]he act of substituting for an old obligation
   a new one that either replaces an existing obligation with a new obligation or replaces an
   original party with a new party.” Novation, Black’s Law Dictionary (11th ed.
   2019).

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          Three weeks after the court denied Triller’s motion, Carnegie filed a
   motion for summary judgment. Carnegie reiterated the contentions in its
   complaint, asserting that Triller was in breach of the ASA, such that the
   Note was also in default.            Carnegie emphasized that the Assignment
   contained no provisions that absolved Triller of liability under the Note.
          Triller responded that Carnegie’s motion was premature due to a
   dearth of discovery. Triller also reiterated its position that the Assignment
   absolved it of liability under the Note. In support, Triller offered declarations
   from Lu, John Flock, a Triller board member and the Chief Operating Officer
   of Proxima, and Evan Lee, an attorney who represented HoldCo in the sale
   of Triller.3 Lu averred that
          [b]ased on [his] understanding of the day-to-day negotiations
          of the material terms of the transactions leading to the Triller
          Sale, the Triller Sale transaction was at all times contemplated
          and intended to be a takeover of Triller on a debt-free basis, and
          that all debt of Triller would be either paid off or forgiven,
          including but not limited to the debt evidenced by the
          Promissory Note.
   He also stated that at closing, Carnegie’s attorneys made representations
   “orally and in writing . . . that the Closing Documents reflected and
   memorized [sic] a takeover of Triller on a debt-free basis, and that all debt of
   Triller would be either paid off or forgiven, including but not limited to the
   debt evidenced by the Promissory Note.”
          Flock echoed Lu’s declaration. Flock stated that he participated in
   the negotiation of the Triller sale and that Lee told him that Carnegie’s

          3
              Triller did not make any argument related to its alleged breach of the ASA.

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   attorneys had represented that “Triller’s liability under the Promissory Note
   would be wholly extinguished following the Closing.”
           Lee said much the same:
           Based on my discussions and communications with the parties
           to the transaction, it was my understanding that the Triller Sale
           was at all times contemplated and intended to be a takeover of
           Triller on a debt-free basis, and that all debt of Triller would be
           either paid off or forgiven, including but not limited to the debt
           evidenced by the Promissory Note.

   Lee added that shortly before closing, he was contacted by Carnegie’s
   attorneys who wanted to restructure the transaction to create the Note. Lee
   detailed that Carnegie’s counsel “assured me during these conversations
   that this change in structure would not affect the ultimate goal of
   extinguishing Triller’s liability pursuant to the Promissory Note.” Lee
   described the Note as a “last-minute change” done “as a favor to Carnegie
   to permit Carnegie . . . to be repaid by Legacy the amounts owed under the
   [Note] before any distributions were issued to Legacy’s members, who were
   the previous members of Triller and had therefore benefitted from the
   services Carnegie . . . had provided free of charge.”
           The district court held that Carnegie was entitled to judgment on its
   claim that Triller breached the ASA. The court then concluded that
   Carnegie had also proven the elements necessary to enforce the Note under
   both Texas law, the forum for the suit, and California law, the law controlling
   the interpretation of the Assignment. Finally, the court addressed Triller’s
   novation defense.4 Considering Triller’s proffered evidence, the court held

           4
             Shortly before Triller filed its response to Carnegie’s motion for summary
   judgment, Triller filed a motion for leave to file a limited answer. Triller sought to raise
   the defenses of novation and illegality, but the court denied the motion in the same order

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   that nothing in the agreements signed by Triller and Carnegie released Triller
   from its obligations under the Note and none of the declarations reflected
   that the parties (e.g., Carnegie) intended to release Triller. Thus, the district
   court granted summary judgment for Carnegie on its claims related to the
   Note as well. Triller now appeals.5
                                                II.
           We review grants of summary judgment de novo and apply the same
   standard applicable to the district court.6 Luminant Mining, 14 F.4th at 379
   (quoting Renfroe v. Parker, 974 F.3d 594, 599 (5th Cir. 2020)). A “court shall
   grant summary judgment if the movant shows that there is no genuine
   dispute as to any material fact and the movant is entitled to judgment as a
   matter of law.” Fed. R. Civ. P. 56(a). A movant is “entitled to a judgment

   in which it granted summary judgment. The court found that Triller’s motion was
   untimely because it was filed five months after the deadline for amended pleadings under
   the court’s scheduling order. The court also found that Triller had not demonstrated any
   excusable neglect and that Carnegie would be prejudiced by granting the motion because,
   while Carnegie was on notice regarding the novation defense because it was raised in
   Triller’s motion to dismiss, Carnegie had no prior notice of the illegality defense.

           Concluding that Triller had waived both defenses because it had never filed an
   answer, see Fed. R. Civ. P. 8(c), the district court nonetheless elected to address
   novation because Carnegie had notice of that defense. See LSREF2 Baron, L.L.C. v. Tauch,
   751 F.3d 394, 398 (5th Cir. 2014) (citing Levy Gardens Partners 2007, L.P. v. Commonwealth
   Land Title Ins. Co., 706 F.3d 622, 633 (5th Cir. 2013)) (noting district courts’ discretion to
   determine if prejudice militates against addressing a forfeited defense). Neither party
   contends that the court abused its discretion by reaching Triller’s argument on this point.
           5
            On appeal, Triller makes no argument related to Carnegie’s claim for breach of
   the ASA or Triller’s motion for leave to file a limited answer, so we do not further address
   these aspects of the district court’s judgment. See Luminant Mining, 14 F.4th at 378 n.1.
           6
             Triller argues that the magistrate judge’s report adopted by the district court
   applied the wrong standard in analyzing its novation defense. Because we review this case
   de novo and will apply the correct standard, it is not necessary to address this issue further.

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   as a matter of law [when] the nonmoving party has failed to make a sufficient
   showing on an essential element of [its] case with respect to which [it] has
   the burden of proof.” Terral River Serv., Inc. v. SCF Marine Inc., 20 F.4th
   1015, 1018 (5th Cir. 2021) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323
   (1986)). This includes when a nonmovant pleads an affirmative defense but
   fails to establish it. Fed. Trade Comm’n v. Nat. Bus. Consultants, Inc., 376 F.3d
   317, 322 (5th Cir. 2004) (citing United States v. Cent. Gulf Lines, Inc., 974
   F.2d 621, 629 (5th Cir. 1992)).
           Triller contends that summary judgment was improper because
   Triller had demonstrated there was a genuine issue of material fact related to
   novation. This diversity jurisdiction case was filed in Texas, so we apply the
   substantive law of Texas. Huynh v. Walmart, Inc., 30 F.4th 448, 453 (5th Cir.
   2022) (citing Klocke v. Watson, 936 F.3d 240, 244 (5th Cir. 2019)). Texas law
   thus articulates the necessary elements of Triller’s affirmative defense and,
   by extension, determines whether the alleged genuine issues of fact are
   material to the defense. As we discuss below, Texas’s law on novation leads
   us to focus on the Assignment, as that is the agreement that Triller asserts
   caused the novation. Because the parties agreed that the Assignment be
   interpreted using California law, we construe the language of the Assignment
   accordingly.7
                                               A.
           In Texas, a novation can occur in two circumstances: first, where
   there are “such inconsistent provisions of two contracts that both cannot
   stand,” and second, “when the parties to both contracts intend and agree

           7
             Triller argues that we should apply California law to determine the elements of
   its novation defense as well, but California law only bears on our analysis as far as we need
   to interpret the terms of the Assignment.

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   that the obligations of the second shall be substituted for and operate as a
   discharge of the obligations of the first.” Chastain v. Cooper & Reed, 257
   S.W.2d 422, 424 (Tex. 1953). “To establish a novation, the party must
   prove: (1) a previous valid obligation; (2) an agreement of the parties to a
   new contract; (3) the extinguishment of the old contract; and (4) the validity
   of the new contract.” Goldman v. Olmstead, 414 S.W.3d 346, 358 (Tex. App.
   2013) (citing In re B.N.L.-B., 375 S.W.3d 557, 562 (Tex. App. 2012)).
   Notably, “a presumption of an intention to release the first debtor will not
   arise from the mere taking of the second.” Chastain, 257 S.W.2d at 424.
   “[W]hether the taking of a new debtor is intended to operate as a release of
   the liability of the old, in the absence of an express agreement to that effect,
   is usually a question of fact, and can only become a question of law when the
   state of the evidence is such that reasonable minds cannot differ as to its
   effect.” Id.
           The two contracts at issue here are the Note executed by Triller in
   favor of Carnegie and the Assignment by Triller to Legacy (as acknowledged
   by Carnegie). The Note created the original obligations between the parties,
   but Triller contends that the Assignment superseded it. Because Triller does
   not argue that the contracts are inconsistent, and because Triller does not
   contest that it incurred valid obligations under the Note,8 only the language
   of the Assignment is relevant to our analysis. And regarding the Assignment,
   Triller asserts that it absolved Triller of further obligation under the Note,
   i.e., that the parties intended and agreed to discharge Triller through the
   Assignment.

           8
              As observed supra in footnote 4, Triller attempted to raise a defense to the Note,
   i.e., that the Note was illegal (because it imposed an unenforceable penalty). But that
   defense was not properly pled and is not at issue on appeal.

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           The parties’ arguments center on the third novation element, “the
   extinguishment of the old contract[,]” Goldman, 414 S.W.3d at 358, and
   whether Triller presented sufficient evidence to demonstrate a genuine
   dispute of material fact on that point. As noted above, the question is the
   intent of the parties, and in Texas the best indication of the intent of the
   parties is the agreement itself. Murphy Expl. & Prod. Co.–USA v. Adams, 560
   S.W.3d 105, 108 (Tex. 2018). Therefore, we turn to what the Assignment
   says.
           The Assignment contains four relevant provisions. The first is a
   statement providing that Triller “desires to assign, transfer, and convey the
   Note in its entirety to” Legacy and that Triller “hereby assigns the Note to
   [Legacy] . . . subject to all of the obligations set forth in the Note.” Next,
   Legacy “expressly assume[d] all such rights, obligations, liabilities and duties
   of [Triller] arising with respect to the Note and agree[d] to perform any and
   all unperformed obligations of [Triller] under and pursuant to the Note[.]”
   Third, the agreement contains a merger clause stating “[t]his
   Assignment . . . is the final expression of, and contains the entire agreement
   between, the parties with respect to the subject matter hereof and supersedes
   all prior understandings with respect thereto.” Finally, the agreement
   concludes with a choice of law provision stating that the parties “expressly
   agree that this Assignment shall be governed by, interpreted under, and
   construed and enforced in accordance with the laws of the State of California,
   without regard to its choice of law principles.”
           Thus, to interpret the text of the Assignment to determine whether it
   meets the third element of novation under Texas law, i.e., whether it
   extinguished the old contract embodied by the Note, we utilize California
   law.

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                                              B.
           In California, “[t]he fundamental rules of contract interpretation are
   based on the premise that the interpretation of a contract must give effect to
   the ‘mutual intention’ of the parties.” MacKinnon v. Truck Ins. Exch., 73 P.3d
   1205, 1212 (Cal. 2003) (quoting Waller v. Truck Ins. Exch., Inc., 900 P.2d 619,
   627 (Cal. 1995)). “Such intent is to be inferred, if possible, solely from the
   written provisions of the contract.” Id. (quoting Waller, 900 P.2d at 627).9
   California courts direct that the “clear and explicit” meaning of the contract
   terms, deduced when using the terms in their “ordinary and popular sense,”
   are to be applied, unless the parties used the term “in a technical sense.” Id.
           Our goal then is to determine if words such as “assign,” “transfer,”
   or “convey,” as used in the Assignment would, in their ordinary usage,
   indicate the extinction of the obligations carried under the Note, as Triller
   asserts. And while dictionaries may be useful for determining the ordinary
   meaning of a term, under California law the role of a court is to “put itself in
   the position of a layperson” to understand how that layperson would
   interpret the term. Id. at 1214.
                                              C.
           The Assignment is itself a simple document. The actual text of the
   agreement spans two pages. From the usage of “assign,” “transfer,” and
   “convey,” the Assignment plainly shows that Triller is giving, or shifting,
   something to Legacy. See Assign, Merriam-Webster’s Collegiate

           9
            California jurisprudence expresses some reservation regarding the “judicial belief
   in the possibility of perfect verbal expression.” Pac. Gas & Elec. Co. v. G.W. Thomas
   Drayage & Rigging Co., 442 P.2d 641, 643 (Cal. 1968). “This belief is a remnant of a
   primitive faith in the inherent potency and inherent meaning of words.” Id. at 643-44. This
   skepticism in California law is reflected in the extrinsic evidence rule outlined infra.

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   Dictionary (11th ed. 2009) (“to transfer (property) to another esp. in
   trust for the benefit of creditors”); Transfer, Merriam-Webster’s
   Collegiate Dictionary (11th ed. 2009) (“to convey from one person,
   place, or situation to another; . . . to make over the possession or control
   of”); Convey, Merriam-Webster’s Collegiate Dictionary
   (11th ed. 2009) (“to transfer or deliver (as property) to another esp. by a
   sealed writing[.]”). That much would be evident to any ordinary reader of
   the agreement.
          But, as the district court observed, nowhere in the Assignment is there
   any mention of the extinguishment of Triller’s pre-existing obligations to
   Carnegie. See Goldman, 414 S.W.3d at 358 (noting that “[a] novation occurs
   if a contract evidences an intention to relinquish and extinguish pre-existing
   claims and rights of actions); see also Wells Fargo Bank v. Bank of Am., 38 Cal.
   Rptr. 2d 521, 525 (Cal. Ct. App. 1995) (stating that for a subsequent contract
   to constitute a novation, “[i]t must ‘“clearly appear” that the parties
   intended to extinguish rather than merely modify the original agreement.’”
   (quoting Howard v. Cnty. of Amador, 269 Cal. Rptr. 807, 817 (Cal. Ct. App.
   1990))). Based solely on the words of the agreement, no ordinary person
   would understand that the Assignment necessarily absolved Triller of any
   further liability to Carnegie.
          Triller submits the declarations from Lu, Flock, and Lee and argues
   that these demonstrate that the parties clearly meant for the Assignment to
   act as a novation or, at the very least, the declarations demonstrate a genuine
   issue of material fact regarding the extinguishment of Triller’s liabilities
   under the Note. But these declarations do not bear on the language used in
   the Assignment. As noted above, nothing in the text of the Assignment
   indicates a change in the relationship between Carnegie and Triller. Instead,
   the declarations are evidence provided by Triller that an agreement had been
   entered into by Carnegie and others to sell Triller free of any debt.

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           In California, when there is a merger clause stating that the agreement
   is “the final expression of, and contains the entire agreement between, the
   parties[,]” extrinsic evidence of an alternative or additional agreement or of
   negotiations or stipulations cannot be used to supplement or contradict the
   agreement. See Cal. Civ. Code § 1625 (“The execution of a contract in
   writing . . . supersedes all the negotiations or stipulations concerning its
   matter which preceded or accompanied the execution of the instrument.”);
   Cal. Civ. Pro. Code § 1856; see also Mountain Air Enters., LLC v.
   Sundowner Towers, LLC, 398 P.3d 556, 566 (Cal. 2017) (noting that an
   agreement “contained an integration clause, making it the parties’ sole
   binding agreement in this transaction”); Dreyfuss v. Union Bank of Cal., 11
   P.3d 383, 413 n.6 (Cal. 2000) (“The modified loan agreement included a
   clear integration clause, expressly superseding any and all prior agreements
   and understandings, whether oral or written, with respect to the terms of the
   agreement.”); Grey v. Am. Memt. Servs., 139 Cal. Rptr. 3d 210, 213 (Cal. Ct.
   App. 2012) (“This type of clause has been held conclusive on the issue of
   integration, so that parol evidence to show that the parties did not intend the
   writing to constitute the sole agreement will be excluded.” (quoting 2
   Witkin, California Evidence § 70 (4th ed. 2000))).10
           Thus, because (1) the plain meaning of the agreement is silent on the
   extinction of any obligation between Triller and Carnegie, (2) Texas and
   California both require clear evidence to show that the parties intended to
   extinguish an earlier contract, Goldman, 414 S.W.3d at 358, Wells Fargo Bank,
   32 Cal. Rptr. 2d at 525, and (3) the agreement’s merger clause bars evidence

           10
              At best, Triller would be entitled to offer extrinsic evidence only if there was an
   actual ambiguity in the contract, Pac. Gas & Elec. Co., 442 P.2d at 644, but since Triller
   failed to plead or raise a fact issue on ambiguity, there is nothing further for us to address
   on this point.

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   of a contemporaneous or earlier agreement, Triller has failed to demonstrate
   a genuine issue of material fact regarding whether the Assignment was a
   novation extinguishing the liability it bore Carnegie in the Note.
                                        III.
          Because Triller failed to raise a material fact issue that substantiated
   its novation defense, and because Triller does not challenge that the plain
   text of the Assignment and the Note bind it, the district court properly
   entered summary judgment on behalf of Carnegie.
                                                                  AFFIRMED.

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