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Airport Road Development, LLC v. Lithia Real Estate Inc.

July 10, 2009

AIRPORT ROAD DEVELOPMENT, LLC, PLAINTIFF,
v.
LITHIA REAL ESTATE INC., DEFENDANT.



The opinion of the court was delivered by: Gregory G. Hollows United States Magistrate Judge

ORDER

Introduction and Summary

Previously pending on this court's law and motion calendar for June 18, 2009 was defendant's, Lithia Real Estate Inc. (Lithia), motion for summary judgment, filed May 12, 2009.*fn1

Craig Allison and Daniel Croxall appeared for plaintiff, Airport Road Development, LLC (ARD). Fred Blum and Ruben Ruiz appeared for Lithia. For the reasons that follow, Lithia's motion for summary judgment is granted.

The penultimate issue here is the point at which the parties to a contract may determine that a condition precedent to the obligations in a contract, here the act of a third party to purchase property, is not going to be accomplished. Put another way, when may a party stop actively seeking the accomplishment of a condition precedent. The undersigned finds here that when a condition precedent is dependent on a third party's actions, conduct by that third party which reasonably and substantially negates the accomplishment of the condition, excuses the obligor from further duty to work to accomplish the condition. Such is the case here, and Lithia is entitled to summary judgment.

BACKGROUND

The following background facts are without material dispute.

On June 23, 2005, Lithia Real Estate and ARD's predecessor, Clover Creek, entered into a Joint Venture/Development Agreement to develop a parcel of land in Redding referred to as the "New Property."*fn2 During the interim period for two and a half years, the parties jointly spent hundreds of hours and over $600,000 in their joint efforts to develop an auto mall on the New Property, and agreed to split these costs. On September 21, 2005, they purchased the New Property as tenants in common, each owning half of it.

In November 2007, Lithia entered into a Purchase and Sale/Consulting Agreement ("Agreement" or "Purchase Agreement") to purchase ARD's half share of the New Property so that Lithia could develop it into the auto mall. Allison Decl., Ex. F. Lithia agreed to pay $3,847,730 which was comprised of $3,697,730 for the ownership interest and $150,000 for ARD's consulting and planning services to Lithia for development. The purpose was to relocate two auto dealerships from another property owned by Lithia ("Current Property") which the dealerships had apparently outgrown. A series of events was to first occur which involved the Redding Redevelopment Agency ("Agency") buying the Current Property for approximately $8 million and leasing it back to Lithia pursuant to a lease back agreement ("PSA Agreement").*fn3

Also planned was that the City of Redding was to pay for improvements to the New Property before development of the new auto mall ("Cooperative Agreement"). Lithia would then purchase ARD's half ownership interest in the New Property which all parties agree Lithia claims was contingent on the Agency's purchase and leaseback of the Current Property. The parties had also agreed that a parcel adjacent to the New Property which Lithia refers to as the ARD Parcel*fn4 (but which ARD does not own) would be developed pursuant to a CC&R Agreement by March 31, 2008.*fn5 The Agency did not purchase the Current Property as planned, but rather offered Lithia only a conceptual option-to-purchase agreement. The inability of the Agency (essentially the City of Redding) to purchase the Current Property initiated events which by itself, or as ARD claims, in combination with others, doomed the Agreement.

ARD has sued Lithia for breach of contract, breach of the covenant of good faith and fair dealing, specific performance, and breach of contract - consulting agreement. In addition to specific performance, ARD seeks damages for the loss of the sale of the New Property to Lithia, and also for lost opportunities related to the development of the ARD Parcel. Lithia claims that since ARD does not own any interest in the ARD Parcel, it cannot claim damages for loss of this property. The complaint was filed in the Superior Court of Shasta County and removed to this court based on diversity.

FURTHER FACTS PERTAINING TO THE AGREEMENT

The Agreement signed by the parties in November, 2007,*fn6 provides the following conditions to closing:

Lithia's obligation to purchase ARD's Interest in the New 35 under this Agreement is conditioned upon: (i) the execution, prior to Closing, of that certain Cooperative Agreement between the City of Redding, a municipal corporation of the State of California (the "City"), ARD and Lithia regarding the planning and development of improvements to Airport Road (the "Airport Road Improvements") adjacent to the New 35 (the "Cooperative Agreement"), a draft copy of which is attached hereto and incorporated herein as Exhibit C; (ii) the execution, prior to Closing, of a Commercial Property Purchase Agreement and Commercial Lease Agreement between the City of Redding Redevelopment Agency (the "Agency"), as Buyer, and Lithia, as Seller, of Lithia's four parcels, located at Cypress Avenue and Hemsted Avenue in Redding California; and (iii) resolution of any issues arising from or related to the Title Report.

Agreement, ¶ 4. (Allison Decl., Ex. F; Ruiz Decl., Ex. B.) (emphasis added). In a separate paragraph entitled, "Closing; Closing Date," it was provided that Closing would occur no later than ten days after satisfaction of the conditions set forth in paragraph 4 above, and "in the event Closing occurs after November 30, 2007," Lithia acknowledges adjustments in calculating interest. (Id. , ¶ 5.) The purchase price of the Current property was to be approximately $8,000,000. This Order identifies the proposed purchase by the Agency and the leaseback to Lithia as the "PSA Agreement."

"Closing" refers to ARD's sale of its half ownership interest in the New 35 property to Lithia. (Id. at p. 1, ¶ 5.)

The Agreement contained other subsidiary agreements. For example, it provided in part:

CC&R Agreement. Following closing, Lithia and ARD agree to enter into a comprehensive agreement covering the New 35 and ARD's adjacent 45 acre property... placing covenants, conditions and restrictions and creating easements, ... (the "CC&R Agreement"). The parties agree to work together to have the CC&R Agreement in place by no later than March 31, 2008.

(Ruiz Decl, Ex.B, Ex. 4 to Compl., ¶ 13.)

Another portion of this purchase agreement required Lithia to construct a permanent regional storm water detention basin servicing the New Property ("New 35"). (Id. , ¶ 9.) ARD had the responsibility to obtain all "necessary permits, certificates and approvals from all applicable government sources for the Detention Basin." (Id.)

The purchase by the Agency (Redding) of the Current Property never materialized, however. The facts leading up to the Agency vote are significant. It is apparent that the parties undertook substantial work to prepare the way for the Agency (in effect the City Council) to approve the PSA Agreement (the purchase and lease-back agreement).*fn7 The point person within the City of Redding was the City manager, Kurt Starman. At first, all seemed to be proceeding on track. However, as the clouds over the economy started to gather in early 2008, public dissent concerning purchase of the Current Property was heard by the Agency.

Although the vote by the Agency (members of the City Council) was to take place at a February 19, 2008 public meeting, it was postponed to the March 4, 2008 meeting as there was significant public opposition concerning whether the purchase price was fair, as well as numerous other issues, including "unfairness to other businesses not being offered the same type of assistance, Lithia's parent company was not local, Lithia is a wealthy corporation that should not receive government assistance, defining the Cypress Avenue lot as blighted, the proposed location for Lithia on Highway 44 would negatively impact nearby residences and destroy the natural beauty of the area, lack of incentives offered to other car dealers to move to the Highway 44 location and the lack of a plan for rehabilitation of the Cypress Avenue property ...." (Ruiz Decl., Ex. I, REDD00011-REDD00013.) Agency member Dickerson supported the purchase. Agency member Jones expressed reservations with the purchase because although he supported the partnership between the City and Lithia, "he did not support this type of project, but would continue to consider the matter to find a working relationship to make this happen." (Id. at REDD00012.) Agency member Murray opined that the parcel represented a great commercial opportunity, but that the Agency would not purchase the property unless Lithia expended the funds to make it environmentally clear. He voiced other restrictions also, such as that the redevelopment money could not be used for other purposes. (Id. at REDD00012-13.) Redding Vice Mayor/Agency Chair Bosetti opposed the purchase because it would set a dangerous precedent. He suggested that Lithia instead be offered certain incentives to assist with the project. (Id. at REDD00013.)

In February, 2008, Lithia, acquiring some cold feet of its own, indicated that it might be time to start looking at possible cost saving measures due to the impact of the recession. (Allison Decl., Ex. I, Sid DeBoer Depo., at 68-69.) On February 22, 2008, Sid DeBoer sent an internal email to sons Bryan and Mark DeBoer, stating, "If I can get Bryan to agree - we need to pull our offer, sell the land in Redding, and remodel where we are - getting some storage somewhere.*fn8 Timing on Cap ex is bad currently." (Allison Decl., Ex. H.) Mark DeBoer later testified that his father "shoots out odd e-mails from time to time." He also testified that his brother "made it clear that it's a deal we want to do." (Allison Decl., Ex. G, Mark DeBoer Depo., at 138.)

At a March 4, 2008 public meeting, the Agency was scheduled to vote on an approval to the PSA Agreement; however, no vote on this agreement took place at this meeting. (Ruiz Decl., Ex. C, Starman Depo., at 84:4-14.) Instead, the Agency proposed an option agreement to Lithia which at that point in time was a concept and was not yet drafted ("Option Agreement").*fn9 Nevertheless, a vote took place at this meeting on this concept which was to take the place of the PSA Agreement. ( Id. at 84:17-24.)

The minutes of this meeting describe the Option Agreement:

[T]he proposed Option Agreement would seek to encumber the property with an 18-month option to purchase by the Agency for the below-appraised amount of $7.93 million, with a nonrefundable $1 million property encumbrance fee that would apply to the purchase price in the event the Agency exercised its option to purchase. During the 18-month term of the agreement, Mr. Starman said that the Agency would actively market the property utilizing the request for proposal process and the Option Agreement would be contingent on Lithia's proceeding with development of a new auto dealership at Airport Road and State Route 44 (SR 44). (Ruiz Decl., Ex. J at REDD00001.)

A vote was taken on the Option Agreement, with three agency members voting for entering into this agreement with Lithia, and two members voting against it.*fn10 (Id. at REDD00004.) The City also voted at this meeting four to one in favor of Cooperative Agreement, with the only dissenter being Council Member Bosetti. (Id. at REDD00003.)

Mr. Starman testified that prior to the March 4th meeting, Lithia never expressed any indication that it was no longer interested in entering into the PSA Agreement with the Agency. (Starman Depo., at 85:2-10.) The testimony was that to the contrary, Lithia continued its interest in pursuing both agreements, the PSA Agreement and the Cooperative Agreement. (Id.)

After the March 4th meeting, Starman testified that he communicated with Lithia to see if Lithia would be willing to enter into the Option Agreement instead of the PSA Agreement. Lithia responded that it was willing, but under two circumstances which Starman believed either converted the Option Agreement back to a sale and purchase agreement or changed the nature of the agreement so that it was no longer an option agreement but permitted a sale to a third party. (Id. at 86.) Mr. Starman conveyed this counteroffer information to the Agency which did not agree with Lithia's conditions. (Id. at 87.)

Also after the March 4, 2008 meeting, Thomason met with Patrick Jones, one of the Agency members who had voted against the Option Agreement and who had expressed reservations about the Agency's purchase of the Current Property due to the outdated 2006 appraisal which might not reflect the current value of the property. (Thomason Decl., ΒΆ 15.) Jones testified at his deposition that he was interested in exploring a new appraisal further. (Allison Decl., Ex. L, Jones Depo., at 21; Ruiz Decl., Ex. K.) Jones testified that he had told Starman that Thomason had indicated ...


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