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Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes

December 30, 2010

MAMMOTH LAKES LAND ACQUISITION, LLC, PLAINTIFF AND RESPONDENT,
v.
TOWN OF MAMMOTH LAKES, DEFENDANT AND APPELLANT.



APPEAL from a judgment of the Superior Court of Mono County, (Super. Ct. No. 15954) Roger D. Randall, Judge.*fn1

The opinion of the court was delivered by: Nicholson, J.

CERTIFIED FOR PUBLICATION

Affirmed.

Defendant Town of Mammoth Lakes (the Town) entered into a development agreement with Terrence Ballas to make improvements at the Town's airport and to build a hotel or condominium project at the airport. Ballas would initially lease the land for the hotel/condominium project but would later have the option to purchase it. Plaintiff Mammoth Lakes Land Acquisition, LLC (Developer), later acquired from Ballas the right to build the hotel or condominium project.

The Town eventually changed its priorities and no longer wanted the hotel/condominium project. The Town sought help from the Federal Aviation Administration (FAA) to eliminate the Developer's ability to build the hotel/condominium project. The FAA objected to the hotel/condominium project and threatened to cut off federal funding for the airport. However, the Developer demanded that the Town move forward with the hotel/condominium project as contemplated in the development agreement. Despite the demand, the Town refused to move forward unless the parties could resolve the FAA's objections.

Claiming the Town repudiated the development agreement, the Developer sued the Town for anticipatory breach of contract. A jury found that the Town breached the development agreement and awarded $30 million in damages to the Developer. Later, the trial court awarded $2,361,130 in attorney fees to the Developer.

On appeal, the Town contends that the judgment must be reversed because (1) the Developer could not recover in a breach of contract cause of action because it failed to exhaust its administrative remedies, (2) even if contract remedies are available, three clauses of the development agreement give the Town a complete defense, (3) the Developer failed to establish a repudiation of the development agreement, (4) the evidence of damages was too speculative to support the verdict, and (5) the attorney fees award must be reversed along with the judgment. None of the Town's contentions has merit.

The Developer was not restricted to pursuing the administrative remedies available through the Town's land use application process because the Town violated the development agreement by refusing to move forward with the hotel/condominium project unless the FAA's objections were resolved. Therefore, the judicial remedy is a breach of contract action based on the Town's executive decision not to move forward as required by a contract, not an administrative mandamus action to review a quasi-judicial decision of the Town concerning a land use application. Also, a breach of contract action is appropriate because damages for anticipatory breach of the development agreement are not available in an administrative mandamus action.

With respect to the defenses asserted by the Town based on the language of the development agreement, none requires reversal of the judgment. A clause excusing performance of the development agreement because of governmental restrictions is unhelpful to the Town because those restrictions were under the Town's control. Another clause requiring the parties to comply with the rules and regulations of the FAA did not excuse the Town from performing on the development agreement because the FAA's objections were based on grant assurances made by the Town to obtain FAA funding, not on FAA rules or regulations. And the third clause is likewise unhelpful to the Town. It required the Developer to provide matching funds for the FAA's funding. Contrary to the Town's assertion, providing matching funds did not signal the Developer's consent to the FAA restrictions because the evidence established that the Developer neither knew nor ought to have known about the restrictions when providing the matching funds.

The Town asserts that the Developer failed to establish a breach of the development agreement because (A) the Developer failed to establish a breach attributable to the Town; (B) the evidence was insufficient to establish repudiation; (C) the purchase option for the land under the hotel/condominium project was a unilateral contract not yet ripe for breach; and (D) the Town retracted any repudiation. The Developer established a breach attributable to the Town by evidence of the actions of town officials, acting within their authority. Those actions constituted repudiation of the development agreement because they insisted on resolution of the FAA's objections before moving forward with the development agreement, which resolution was not a condition for performance in the development agreement. Although the development agreement included a purchase option for the land under the hotel/condominium project, the breach was of the development agreement, which was not a unilateral contract. And, despite the claims of town officials that they were willing to move forward with the hotel/condominium project, their actions established that they did not retract the repudiation of the development agreement.

The evidence of damages in the form of lost profits came from three sources: an experienced appraiser of hotel and resort projects, one of the investors in the Developer, and the town manager. Considering the evidence in the light most favorable to the verdict, the evidence of damages was not too speculative to support the $30 million damages award.

And finally, the Town's contention that the award of attorney fees must be reversed is without merit because the Town's sole argument for reversal of the attorney fees award is that it was based on the Developer's status as the prevailing party. The award of attorney fees is valid because we do not reverse the judgment and the Developer remains the prevailing party.

We affirm the judgment and the award of attorney fees.

HISTORY OF DEVELOPMENT AGREEMENTS

A development agreement is a statutorily-authorized agreement between a municipal government (here, the Town) and a property owner for the development of the property. (Gov. Code, § 65865, subd. (a).) One of the main components of a development agreement is a provision freezing the municipality's rules, regulations, and policies governing permitted uses of land and density of the land use, as well as standards and specifications for design, improvement, and construction. (Gov. Code, § 65866.) This provision allows a developer to make long-term plans for development without risking future changes in the municipality's land use rules, regulations, and policies. (Santa Margarita Area Residents Together v. San Luis Obispo County Bd. of Supervisors (2000) 84 Cal.App.4th 221, 227 (SMART).)

The development agreement must be approved by ordinance and is, therefore, a "legislative act." (Gov. Code, § 65867.5, subd. (a).) Because the development agreement is approved by ordinance, it is subject to referendum, which allows the electorate to overturn approval of the agreement. (Ibid.) While, as a legislative act, a development agreement can be disapproved by referendum, an unchallenged development agreement is an enforceable contract between the municipality and the developer. Depending on its terms, it may create vested rights in the Developer with respect to land use. (See SMART, supra, 84 Cal.App.4th at p. 230 [development agreement creates commitments to developers].)

After approval by ordinance, the development agreement is enforceable despite subsequent changes in the municipality's land use laws. (Gov. Code, § 65865.4.) The development agreement may be amended or cancelled only by mutual consent of the parties to the agreement. (Gov. Code, § 65868.)

The Legislature enacted the development agreement statutes in response to the California Supreme Court's jurisprudence on vested rights.

Before 1976, developers in California faced changes in land use laws and policies during the course of long-term development of property. When a change in the land use laws and policies interfered with development already initiated, some developers argued that they had a "vested right" to complete the development despite the changes in the land use laws and policies. It was "the rule in this state and in other jurisdictions that if a property owner has performed substantial work and incurred substantial liabilities in good faith reliance upon a permit issued by the government, he acquires a vested right to complete construction in accordance with the terms of the permit. [Citations.]" (Avco Community Developers, Inc. v. South Coast Regional Com. (1976) 17 Cal.3d 785, 791 (Avco).)

In 1976, the California Supreme Court, in Avco, decided that no right to complete the work vested until the developer obtained a building permit, even if the developer had already performed substantial work and incurred substantial liabilities on the project. (Avco, supra, 17 Cal.3d at p. 793.) The court noted that any change in this common law principle would have to come from the Legislature. (Id. at p. 796.)

In 1979, the Legislature's enactment of the development agreement statutes provided a way for the municipality and developer to depart from the common law rule of vested rights. The Legislature declared that "[t]he lack of certainty in the approval of development projects can result in a waste of resources, escalate the cost of housing and other development to the consumer, and discourage investment in and commitment to comprehensive planning which would make maximum efficient utilization of resources at the least economic cost to the public." (Gov. Code, § 65864, subd. (a).)

The Legislature recognized that the newly-authorized development agreements would provide benefits for both municipality and developer. The agreements allowed the developer to proceed with a project with the assurance that the project would be approved based on rules, regulations, and policies existing at the time the development agreement was approved, even if those rules, regulations, and policies changed over the course of the development project. (Gov. Code, § 65864, subd. (b).) In 1984, the Legislature added a declaration that development agreements would also allow municipalities to extract promises from the developers concerning financing and construction of necessary infrastructure. (Gov. Code, § 65864, subd. (c); Stats. 1984, ch. 143, § 1, p. 431.) This declaration makes it clear that the scope of development agreements need not be limited to freezing land use rules, regulations, and policies but can include other promises between the municipality and the developer. Thus, a legislatively-approved development agreement gives both parties vested contractual rights.

FACTS*fn2

The Town's Acquisition of Airport and FAA Funding

The Town took over operation of the Mammoth Lakes Airport (later known as the Mammoth-Yosemite Airport) in 1991 and annexed the property in 1995. The Town desired to improve the airport to host commercial air service to enhance the Town's appeal as a destination for visitors.

Beginning in 1992, the Town received grants from the FAA under the Airport Improvement Program. As a condition for receiving these federal funds, the Town made assurances to the FAA that it would meet any conditions placed on the funding by the FAA. These grant assurances were made part of the funding agreements. One of the assurances made by the Town to the FAA was that the Town would not sell or lease any part of the airport property without approval from the FAA.

Proposed Development Agreement

In 1997, the Town proposed to enter into a Development Agreement with Terrence Ballas, who had experience in airport development.

The recitals at the beginning of the proposed Development Agreement stated the Town's purposes and goals: "[The] Town has determined that a first-class Airport operation, including an efficient fixed base operation, increased hangar space, modern fuel facilities, a hotel or condominium or residential condominium and related amenities, and space for recreational vehicles, will benefit the economy of the Mammoth Lakes area and promote the goals set forth in the applicable vision statements, adopted by the Town, including the goal of becoming a year around [sic] destination resort." The recitals also stated: "[The] Town has further determined that the interests of its tax paying [sic] citizenry can best be served by providing for the funding of Airport operations and development through private capital rather than taxpayer funds, where reasonably possible, and through the privatization of certain services provided at or in connection with the Airport."

The Development Agreement addressed the procedure upon default of one of the parties. It stated: "Failure by either party to perform any material term or provision of this Agreement for a period of thirty (30) days after delivery of written notice of default from the other party shall constitute a default under this Agreement." Upon the offending party's failure to cure the default, the Development Agreement allowed the offended party to "institute legal action against the party in default . . . ."

Under the Development Agreement, Ballas agreed to make improvements to the airport at his own expense, including construction of hangars, a gas storage building, and a terminal, as well as remodeling of an existing terminal. These improvements were designated as Phase I. In Phase II of the airport development, Ballas would, again at his own expense, build a restaurant building, a gasoline station, and a recreational vehicle park.

As part of Phase I, the Development Agreement allowed Ballas to build a hotel or condominium project (which came to be known as the Hot Creek Project), described in the Development Agreement as "time share or similar units, hotel or residential condominium, or a commercial lodging facility for transient guests of a minimum stay of sixty (60) units to be constructed by Developer." In later phases of the development, Ballas would be allowed to build additional hotel or condominium facilities to a maximum of 250 total hotel or condominium units. The hotel/condominium project was to be built on a 26-acre parcel, adjacent to the aeronautical services. In 2027, Ballas would have an option to purchase that parcel. The construction and operation of the hotel/condominium project was a material part of the consideration for the Development Agreement.

The option to purchase the parcel made the Development Agreement economically feasible for Ballas. He would make the improvements and build the hotel or condominiums, initially leasing the land from the Town, then exercising the option to purchase the land.

The Development Agreement required the Town to act reasonably in moving the project along. It stated: "Town and its agents, employees and contractors shall exercise any discretionary approvals applicable to the Project reasonably, in good faith, and in a timely manner."

The Development Agreement incorporated other documents, such as a commercial development plan and leases. In the lease of the land for the hotel/condominium project, the Town warranted that "it has title to the premises free and clear of liens and encumbrances, that it has the right and power to enter into this lease, and that this lease is made pursuant to the powers vested in [the Town] by laws of the State of California."

Events Leading to Signing of Development Agreement

Before the Town entered into the Development Agreement with Ballas, it sought approval from the FAA for the agreement. William Manning, the Town's airport director, sent correspondence to the FAA with details of the Development Agreement and the accompanying leases. The FAA responded by fax: "We need to review 'options'; 55 yr lease creates problems with FAA policy . . . ." The response also stated: "Under current FAA policy and procedure guidance a release of all federal obligations which encumber the property must be obtained from the FAA prior to the notice to sell/purchase the property. The FAA should be given a copy of the option contract for review and comment prior to recording the document."

The town council approved the Development Agreement by ordinance. After the town council's approval, Ballas and the Town's mayor pro tem signed the Development Agreement on August 21, 1997, just nine days after the FAA made known to the Town its reservations concerning the Development Agreement.

While the Town claimed that the Town's airport director discussed the FAA's concerns with Ballas, Ballas testified that the Town did not disclose to him the FAA's concerns about the Development Agreement until seven years later. On appeal, the jury is deemed to have credited Ballas's testimony in this regard. (Garlock Sealing Technologies, LLC v. NAK Sealing Technologies Corp. (2007) 148 Cal.App.4th 937, 951.)

The Town also did not contact the FAA to discuss its concerns. The Town's airport manager testified: "I believed that [the FAA representative's] form of correspondence was ridiculous. If he had issues or comments that he wanted me to deal with, I believe he would have sent me a formal FAA letter. We correspond regularly with the FAA. This -- the fax notes were highly irregular. I just felt like it wasn't an official correspondence and I wasn't obligated to respond to it."

After signing the Development Agreement, Ballas assigned his interest in the Development Agreement to various other entities. He assigned his right to develop, market, and sell the hotel/condominium project to Mammoth Lakes Land Acquisition, LLC, the plaintiff in this case. Ballas retained a substantial interest in the limited liability company.

The plaintiff, Mammoth Lakes Land Acquisition, LLC, is also known as the Hot Creek Developer. We refer to the plaintiff in this opinion as the Developer.

Phase I Improvements

As part of Phase I of the Development Agreement and within three years of signing the Development Agreement, the Developer spent $15 million to $17 million on improvements to the airport. It built hangars, renovated an existing terminal, and installed a new fueling system and water supply system. The Developer also took over the airport's general aviation operations.

Hotel/Condominium Complex

In 2000, after the airport improvements had been made and were in operation, the Developer formulated and submitted to the Town an application with a plan for the hotel/condominium project. The plan included residential condominiums. In 2002, Town staff raised objections to the plan because it reflected a residential orientation instead of one promoting services to visitors. Town staff urged the Developer to withdraw the application, which the Developer refused to do.

The Developer's application was placed on the agenda for a Town planning commission meeting with a recommendation from staff to deny the application. Even though the Development Agreement allowed residential condominiums, Town staff stated that the plan was "inconsisten[t] with entitlements that have been granted to the applicant under the terms of a Development Agreement, and with zoning regulations applicable to the property." In light of the negative recommendation from Town staff and an assurance from staff that they would negotiate with the Developer concerning the hotel/condominium project, the Developer agreed to withdraw the application from consideration at the planning commission meeting.

After the Developer's application had been withdrawn from consideration at the planning commission meeting, the Town's community development director sent Ballas a letter on April 1, 2002, about five years after the signing of the Development Agreement, apologizing for the delay in processing the application and recognizing the Developer's right to construct a residential condominium project under the Development Agreement. The letter continued: "Since signing the Development Agreement in 1997, major changes in the Town's economic climate have occurred; commercial air service is on the horizon, housing prices have increased significantly, and the village is under construction with commercial tenants selected. With these factors in mind, the Town believes that an opportunity exists in a modified plan for a centralized hotel or condominium facility for transient guests surrounded by uses such as residential condominiums which are designed and located to conveniently utilize the resorts [sic] amenities and to participate in a visitor rental program at the individual owner's desire. We believe that this type of project will be beneficial financially to both the Town and the developer."

At the suggestion of Town staff, the Developer worked with Town staff to revamp the plan to have multiple owners of each condominium with a hospitality company to manage the joint ownership and rent out the units when the owners were not occupying them. In 2004, the Developer submitted a revised plan to Town staff for informal review. The plan, however, was never submitted formally to the Town for approval.

FAA Objections and Town's Change of Priorities

In 1999, the Town began working to get commercial air service into the airport. The FAA approved an environmental assessment in 2000, which concluded that the commercial air service, and the associated improvements to the airport, would not have significant environmental impacts. However, this assessment was overturned by a federal court. (California v. U.S. Dept. of Transp. (N.D.Cal. 2003) 260 F.Supp.2d 969.) In response to this loss in federal court, the FAA reevaluated the hotel/condominium project and concluded that it had not been adequately subjected to environmental review.

In 2004, the FAA took the position that the grant assurances given by the Town required the Town to obtain the consent of the FAA before executing a lease to use airport property for anything other than an aeronautical use. The FAA asserted that it had not given consent for the nonaeronautical use of the airport property to build a hotel/condominium project. The Town resisted this position, stating that the FAA had approved the entire project, including the nonaeronautical uses, in 1998. Nonetheless, the FAA informed the Town that it could either have expanded air service or the hotel/condominium project, but not both.

Soon after this exchange between the FAA and the Town, the Town changed its position with respect to the hotel/condominium project. In early May 2004, deputy town manager Charles Long told the Developer that the hotel/condominium project was the Town's top priority. However, later the same month, Long stated that expanded air service had become the Town's top priority. Robert Clark, who was hired as town manager in June 2004, testified that the town council "shared [the] sentiment" that expanded air service was a higher priority than the hotel/condominium project.

In light of the change in the Town's position, the Developer began to feel less secure in its relationship with the Town. The Developer informed the Town that it was taking a "time-out" from the discussion of issues arising from the Development Agreement and would not be attending any meetings concerning the issues. The proposed length of the "time-out" was not stated.

On June 28, 2004, Town officials, including deputy town manager Long, met with officials of the FAA. Long told the FAA officials that the Developer's option to purchase the hotel/condominium project was inconsistent with the Town's goals. Long said that the hotel/condominium project might never be built. He asked the FAA to help the Town "get rid of Hot Creek," referring to the hotel/condominium project, because it interfered with expanded air service. To obtain the FAA's assistance in stopping the hotel/condominium project, Long asked the FAA to put in writing its objections based upon the grant assurances given to the FAA by the Town.

On June 29, 2004, the day after the meeting with the FAA, deputy town manager Long sent an e-mail to the Developer. Because the Developer relies heavily on the e-mail to support its repudiation argument, we quote the pertinent part of the e-mail here:

"The FAA is primarily concerned about two issues for your project: First, the compliance issues remain paramount. They are concerned that the airport will run out of land for aeronautical purposes as a result of the land used by the non-aeronautical uses your project represents. They are also concerned about the purchase option. And finally they are concerned about whether the airport has enough land to accommodate competing FBOs [fixed base operators]. . . . The FAA intends to send us a specific itemization of these compliance concerns in the next few weeks. Until these issues are resolved, we will be unable to move forward with your project.

"Second, the FAA is concerned that your currently proposed development plan differs significantly from the specifications in the [Development Agreement] and needs NEPA [National Environmental Policy Act] review since it occurs coterminously with the EIS [environmental impact statement] on the airport expansion. This difference in project scope applies to CEQA [California Environmental Quality Act], as the attached CEQA analysis makes clear. For the Town to move forward with your project we will need to conduct an Initial Study and to work with you to bring your project within the parameters of a possible Mitigated Negative Declaration.

"On both issues we are ready to work with you when you re-enter the process."

The Developer, through Ray Johnson, one of the principals, responded on July 1, 2004, with a letter to Robert Clark, the town manager, seeking clarification of Long's e-mail and requesting assurances that the Town would proceed with the Development Agreement. Clark responded that the Town and the Developer "need to resolve the FAA compliance issues as a pre-requisite to . . . knowing whether [the hotel/condominium project] complies with FAA regulations. The need for the project to comply with FAA review requirements is specifically noted in Section 26 of the lease. The Town is ready to proceed working with you and the FAA to resolve the compliance concerns that exist at FAA on your project."

Through counsel, the Developer replied to Clark's letter on August 10, 2004. Counsel stated that "Clark and Long as authorized agents of the Town, now appear to believe that the Town may freely disregard the express terms of the Development Agreement and withhold approvals and other cooperation required by that Agreement to enable Hot Creek to proceed with its entitled development. As is more fully discussed hereafter, it is also apparent that the Town has affirmatively taken actions which threaten to directly undermine Hot Creek's prior contractual and ...


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