California Court of Appeals, Third District, San Joaquin
BRIAN K. McGUIRE et al., Plaintiffs and Appellants,
MORE-GAS INVESTMENTS, LLC, Defendant and Respondent.
APPEAL from a judgment of the Superior Court of San Joaquin County No. CV033853, Lesley D. Holland, Judge.
Neumiller & Beardslee, Clifford W. Stevens, Elizabeth J. Morrell, and Michael R. Tener for Plaintiffs and Appellants.
Downey Brand, Kevin M. Seibert, Matthew J. Weber, and Jenny Dione Dennis for Defendant and Respondent.
In this breach of contract case, plaintiffs Brian K. and Shirley A. McGuire and Lynn F. and Mary A. Smith (collectively, plaintiffs) sued defendant More-Gas Investments, Inc. (More-Gas) over two contracts in which plaintiffs agreed to purchase certain real estate from More-Gas. In each instance, More-Gas had refused to pay plaintiffs money More-Gas had promised to pay in the alternative to performing certain other tasks relating to the properties.
More-Gas successfully moved for summary adjudication of the breach of contract causes of action on the ground the payment provisions were unenforceable penalty provisions rather than valid liquidated damages clauses. On plaintiffs’ appeal, we conclude the trial court erred because More-Gas’s motion for summary adjudication failed to eliminate the possibility that the contractual provisions in question were instead valid provisions for alternative performance. Accordingly, we reverse.
FACTUAL AND PROCEDURAL BACKGROUND
The Orchard Property
In May 2006, plaintiffs contracted to purchase for $1, 050, 000 two lots More-Gas owned on Orchard Road in Acampo. Three addendums to the purchase agreement required More-Gas to ensure that the owners of three neighboring lots (9, 11, and 13) would not be permitted to build any structure within 900 feet of the access road to be constructed along the north side of the lots. As relevant here, the third addendum (which superseded a paragraph in the first addendum) addressed this subject as follows:
“Seller hereby represents and warrants that Lots 9, 11, and 13 are not or shall not be permitted to construct or install any structure within nine hundred (900) feet of the access road to be constructed along the North side of the Lots. Seller will provide written documentation to Buyer’s satisfaction prior to the close of escrow that: (i) the Lessor under the Lease referenced below shall not permit any owner of Lots 9, 11, and 13, to construct or install any structure within nine hundred (900) feet of the access road to be constructed along the North side of the Lots; and (ii) a sufficient number of future owners of the Lots within the subdivision have agreed to amend the CC&Rs, if necessary, to ensure that the Owners of Lots 9, 11, and 13 are not permitted to construct or install any structure within nine hundred (900) feet of the access road to be constructed along the North side of the Lots. If Seller does not provide both (i) and (ii) prior to the close of escrow, Seller shall be required to take any steps necessary to amend the CC&Rs to require that the owners of Lots 9, 11, and 13 shall not be permitted to construct or install any structure within nine hundred (900) feet of the access road to be constructed along the North side of the Lots. If Seller is unable to amend the CC&Rs and cause the amendment to be recorded, as required herein, within two (2) months from the date of the close of escrow, Seller shall refund to [plaintiffs] Eighty Thousand Dollars ($80, 000) from the purchase price under the Agreement. Buyer may accept, but is not required to accept, a satisfactory alternative method to amending the CC&Rs.”
Lynn Smith testified at his deposition that the purpose of the desired building restriction was to preserve the “feel” that the houses plaintiffs planned to build on the two lots they were buying were “out in the middle of the vineyards” and without the building restriction plaintiffs believed they would be “substantially damaged.” As for the $80, 000 refund to be paid if the restriction was not obtained, Smith testified that he did not remember how that figure was determined. He admitted plaintiffs did not do any market research to determine what the diminution in the value of the property would be in the absence of the building restriction. Instead, Smith testified that, “in all honesty, ” he thought they “just talked about it between Tom Gassner and ourselves and we all agreed on that eighty thousand dollars.” Smith did not “think [they] were talking about damages.” Gassner just said, “ ‘I’m going to get it done and eighty thousand dollars is fine.’ ”
Escrow closed on plaintiffs’ purchase of the Orchard property on June 22, 2006. More-Gas failed to amend the CC&Rs to include the building restriction within two months from the closing. In December 2007, plaintiffs demanded that More-Gas refund the $80, 000, but More-Gas refused to do so.
The Jahant Property
In June 2006, plaintiffs contracted to purchase for $2 million some property More-Gas owned on East Jahant Road in Acampo. The purchase agreement identified the property as consisting of six parcels of approximately five acres each. At that time, however, the property actually consisted of a single parcel that had not yet been subdivided. A tentative subdivision map for the property had been approved, but no final map had yet been filed.
The purchase agreement provided an outside closing date of August 5, 2006. Around the first of August, when it became clear that the final subdivision map would not be filed by the closing date (because the public works department had not yet approved the improvement plans), the parties signed an addendum to the purchase agreement providing for More-Gas to continue its efforts to finalize the subdivision following the close of escrow. As relevant here, the addendum provided as follows:
“ ‘Seller shall, at the sole expense of Seller, construct the extension of Tretheway Road (connecting Tretheway to Jahant Road) according to the specifications of San Joaquin County and as required by the conditions of approval issued with the tentative map for the Property (“Road Construction”). The Road Construction shall be completed on or before the date that is twelve (12) months after the Close of Escrow. Purchaser hereby grants Seller a license to enter onto the Property and perform such work.... If Seller fails to complete the Road Construction within twelve (12) months after the Close of Escrow, Purchaser may complete the Road Construction at Seller’s expense, as described in Section 4 as amended by the First Addendum.’ ”
The amendment to section 4 of the purchase agreement consisted of the following new language:
“ ‘In the event that Seller has not recorded a final map creating the six (6) parcels to be purchased by Purchaser hereunder on or before the Outside Date, the Close of Escrow shall nevertheless take place on or before the Outside Date, and the following shall apply. In the event that the Close of Escrow takes place and a final map has not yet been recorded, the total amount due from Purchaser at the Close of Escrow less any amount deposited by Purchaser and less Purchaser’s exchange funds (which shall not be less than four hundred thousand dollars ($400, 000.00)), shall be paid by Purchaser to Seller in the form of a promissory note accruing no interest (the “Note”). The Note shall be due and payable within fifteen (15) days of the recordation of a final map creating six (6) 5-acre parcels within the Property. The Note shall be secured by a deed of trust covering the Property, which deed of trust shall be subordinate to any deed of trust in favor of Purchaser’s lender recorded in connection with a loan used for the acquisition of the Property or construction of improvements on the Property, if any. Seller shall cause the final map to be recorded as soon as practicable after the Close of Escrow, but in all cases on or before twelve (12) months from the Close of Escrow. If the final map is not recorded on or before twelve (12) months from the Close of Escrow, then [Purchaser] shall select one of the following options and notify Seller in writing within (15) days which option [Purchaser] has selected: (i) Purchaser may require Seller to purchase the Property from Purchaser for two million five hundred thousand dollars ($2, 500, 000.00); or (ii) Purchaser may retain the Property and Seller shall be relieved of the responsibility to cause the final map to be recorded, in which case Seller shall reasonably cooperate with Purchaser in Purchaser’s efforts to cause the final map to be recorded. If Purchaser elects to retain the property as described above, the Note shall be due and payable on or before thirteen (13) months from the Close of Escrow. In all cases, if the Road Construction has not been completed prior to the time payment on the Note is due, Purchaser may deduct an amount equal to two hundred fifty thousand dollars ($250, 000.00) plus the amount of Seller’s bond required to ensure completion of the Road Construction, from the amount of payment due on the Note, which setoff amount shall be due and payable on the first of the following dates to occur: (i) fifteen (15) days following Seller’s notice to Purchaser upon completion of the Road Construction by Seller; or (ii) within six (6) months from date of Purchaser’s election to retain the property as described above, less any amount of reasonable actual costs incurred by Purchaser in completing the Road Construction. Purchaser and Seller agree to cooperate and take reasonable action in order to accomplish the recordation of the final map in accordance with this Section.’ ”
Brian McGuire testified at his deposition that plaintiffs purchased the Jahant property based on the assumption they were going to be buying “finished buildable lots, ” and he never gave any consideration to what the property would be worth if the final map was not approved. He did not recall how they came up with $500, 000 as the additional amount More-Gas would have to pay plaintiffs to buy the property back if plaintiffs elected that option in the event the final map was not recorded within the time allowed. As for Smith, when he was asked where the $500, 000 “repurchase premium” came from, he said he did not “know how [they] determined or came to that exact amount.” He testified that they “put in an amount that [they] felt would be an incentive to get the job done on time which would allow [them] to build the houses.” Because “prices were going up” and “property was appreciating at that time” and they would have “a year into the project, ” they “felt... five hundred thousand dollars would be a -- a fair amount regardless of what happened.” They did not “do a formal market analysis” but they “figured that five-hundred-thousand-dollar appreciation in a year at that time, twenty-five percent was not unheard of.”
Following the closing of the deal in August 2006, plaintiffs gave More-Gas a promissory note for $1, 594, 307.11 for the Jahant property pursuant to the terms of the addendum to the purchase agreement. The following April, plaintiffs failed to pay the property tax installment due for the Jahant property. More-Gas elected to treat that failure as a default under the deed of trust securing the promissory note, and in July 2007 More-Gas recorded and served a notice of default and election to sell the property under the deed of trust.
Twelve months passed from the close of escrow and More-Gas failed to record the final map on the Jahant property within that period. Accordingly, on August 9, 2007, plaintiffs notified More-Gas that they were electing to require More-Gas to repurchase the property for $2.5 million. More-Gas refused to do so.
The Present Action
In October 2007, plaintiffs commenced this action against More-Gas. The following month, the court issued a preliminary injunction preventing More-Gas from proceeding with a nonjudicial foreclosure sale of the Jahant property. In March 2008, plaintiffs and More-Gas entered into a partial settlement agreement. The terms of that settlement provided that plaintiffs would convey the Jahant property to More-Gas, and in exchange the promissory note on the property would be deemed paid in full and the deed of trust would be reconveyed. In addition, the agreement provided that More-Gas would deposit a portion of the proceeds from any subsequent sale of the Jahant property, either in part or in full, in an account to be held pending the resolution of this action, up to a total of $1, 075, 000. Those funds were to be available to satisfy any judgment for damages plaintiffs might ...