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Avidity Partners, LLC v. State

California Court of Appeals, Third District, Sacramento

December 4, 2013

AVIDITY PARTNERS, LLC, as Trustee, etc., Plaintiff and Appellant,
v.
STATE OF CALIFORNIA, Defendant and Respondent.

APPEAL from a judgment of the Superior Court of Sacramento County, No. 34-2009-00042016-CU-BC-GDS Raymond M. Cadei, Judge.

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COUNSEL

Pillsbury Winthrop Shaw Pittman, Robert L. Wallan, John M. Grenfell and Kimberly L. Buffington for Plaintiff and Appellant.

Kamala D. Harris, Attorney General, Kathleen A. Kenealy, Assistant Attorney General, Robert W. Byrne, Denise Ferkich Hoffman, Daniel S. Harris and Jan Zabriskie, Deputy Attorneys General for Defendant and Respondent.

OPINION

BLEASE, Acting P. J.

This case involves the historic Headwaters Agreement (Agreement) between Pacific Lumber Company (Pacific Lumber), the federal government, and the State of California (defendant or State) pursuant to which Pacific Lumber transferred 7, 000 acres of old growth redwood forest land to the State in exchange for other forest land and $495.5 million dollars. The Agreement was negotiated over the course of three years and included specified regulatory approvals required for Pacific Lumber’s harvest of its forest land. The complaint was originally filed by Pacific Lumber and Scotia Pacific Company, LLC, a wholly owned subsidiary of Pacific Lumber. Plaintiff Avidity Partners, LLC, (Avidity) is the litigation trustee for the bankruptcy estate of Scotia Pacific Company, LLC.

Avidity’s complaint for damages for breach of contract is based upon the claim that defendant State promised Pacific Lumber it would be able to harvest the trees on its remaining 211, 000 acres of timberland at an average level of 176.2 million board feet per year during the first decade of the Agreement. The breach of the covenant of good faith and fair dealing claim is

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based upon Avidity’s argument that in order for Pacific Lumber to harvest at that rate, defendant had to consider and approve Pacific Lumber’s timber harvest plans in a timely manner, and that the delay in processing the timber harvest plans denied Pacific Lumber the contemplated benefits of the Agreement. Avidity’s promissory estoppel claim is an alternative claim, by which Avidity argues the State’s promises can be enforced even if we determine the promises were not supported by consideration.

Avidity’s arguments are based on the premise that the State has exercised its legislative and environmental powers to circumvent the promises made to it by the State in the Agreement, thereby breaching the Agreement and entitling it to damages. (United States v. Winstar Corp. (1996) 518 U.S. 839 [135 L.Ed.2d 964, 116 S.Ct. 2432] (Winstar).) We find it unnecessary to reach these arguments because the State’s contracts with Pacific Lumber do not contain a promise that Pacific Lumber could harvest at the rate of 176.2 million board feet per year for the first ten years.

The trial court granted the State’s motion for summary judgment. Avidity appeals from the ensuing judgment.

We shall affirm the judgment. The express terms of the Agreement do not promise Pacific Lumber a particular harvest level. The covenant of good faith and fair dealing does not operate to supply a term that the express contract does not otherwise contain. The term Avidity seeks to imply, a guaranteed harvest level, was specifically rejected in negotiations.[1] Moreover, such term is not necessary to prevent the Agreement from being illusory or unenforceable. Finally, the claim of promissory estoppel fails because Pacific Lumber’s alleged reliance was the bargained-for consideration it promised as its part of the Agreement, making this case unsuited to a claim of promissory estoppel.

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FACTUAL AND PROCEDURAL BACKGROUND[2]

We begin with a few background facts as related in the Supreme Court opinion Environmental Protection Information Center v. California Dept. of Forestry & Fire Protection (2008) 44 Cal.4th 459 [80 Cal.Rptr.3d 28, 187 P.3d 888] (EPIC), an earlier case arising out of the Agreement. Pacific Lumber owned “approximately 211, 000 acres of timberland in Humboldt County that have been used for commercial timber production for some 120 years. In 1986 Pacific Lumber was acquired by Maxxam Incorporated, and in order to pay off Maxxam’s debt for the buyout, Pacific Lumber began cutting down old growth redwoods at a faster rate than ever before. The deforestation led to litigation and considerable local protest. [¶] In the 1990’s, as a result of federal and state litigation, Pacific Lumber was enjoined from harvesting a particular stand of old growth timber that served as the habitat for the marbled murrelet, an endangered bird. Pacific Lumber, in turn, filed lawsuits alleging an unlawful taking by the state and federal governments of the land declared unusable for timber production and harvesting. [¶] To resolve the existing controversies, Pacific Lumber entered into the Headwaters Agreement of 1996 with the State of California and the United States. The Agreement provided for the sale of some 7, 000 acres of Pacific Lumber’s timberland to the federal government and the State of California, and for Pacific Lumber to obtain... various regulatory approvals... for its remaining 211, 000 acres.” (EPIC, supra, 44 Cal.4th at pp. 472-473.)

The Agreement contemplated the approval of an HCP, an ITP, and an SYP. The approvals expressly contemplated by the Agreement did not include a THP. As explained in EPIC, “A[n SYP] is a kind of master plan for logging a large area, authorized by statute (Pub. Resources Code, § 4551.3) and regulation (Cal. Code Regs., tit. 14, §§ 1091.1–1091.14), designed to achieve the Forest Practice Act’s objective of obtaining the maximum timber harvest consistent with various short- and long-term environmental and economic objectives. (Z’berg–Nejedly Forest Practice Act of 1973; Pub. Resources Code, § 4511 et seq.)... [T]he SYP does not replace the more specific timber harvest plan (THP), but inasmuch as the SYP adequately analyzes pertinent issues, a THP may rely on that analysis. Although SYP’s are usually

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voluntary at the option of the landowner, in this case the SYP was required by the Headwaters Agreement.[3]” (EPIC, supra, 44 Cal.4th at p. 471, fn omitted.)

“Also required... under federal law was a[n HCP]. Although the ‘taking’ of a federally listed endangered species, i.e., the killing, capturing or harming of such species (16 U.S.C. § 1532(19)), is generally unlawful (id., § 1538), a permit for the taking of a species incidental to an otherwise lawful activity, known as an [ITP], may be issued when an applicant submits to the Secretary of the Interior a[n HCP]. (16 U.S.C. § 1539(a)(2)(A).) The plan is to specify, among other things, the impacts that will likely result from the taking and the steps the applicant intends to employ to minimize and mitigate those impacts. (Ibid.)... In addition to a federal [ITP], Pacific Lumber in this case was required to obtain a state [ITP] for species listed as endangered or threatened under the California Endangered Species Act (Fish & G. Code, § 2050 et seq.). [¶] In conjunction with approval of the HCP, the United States Fish and Wildlife Service, Pacific Lumber, and various state agencies entered into an Implementation Agreement for the HCP, defining the obligations of each party under the HCP.” (EPIC, supra, 44 Cal.4th at pp. 471-472.) The deadline for obtaining the regulatory approvals necessary to close the Agreement was March 1, 1999. (EPIC, supra, at p. 470.)

The 1996 Agreement was entered into by Maxxam, Inc., Pacific Lumber, the United States, and the State, and was signed on behalf of the State by Douglas Wheeler, who was then the Secretary of Resources. The Implementation Agreement was entered into by various agencies of the federal government, California’s Department of Fish and Game, [4] California’s Department of Forestry and Fire Protection (CDF), [5] and Pacific Lumber. A letter of approval (the Approval Letter) was sent to Pacific Lumber’s president and CEO by Richard Wilson, the Director of CDF on March 1, 1999.

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Escrow instructions for the Agreement were executed on February 28, 1999. The instructions required that the parties deposit into escrow, inter alia, the Implementation Agreement, the Agreement, the SYP, and the HCP. These documents, together with the Approval Letter are the documents on which Pacific Lumber relies in this action.

General Allegations

Avidity’s second amended complaint alleged the following. The federal and state agencies provided written assurances that the implementation of the HCP and SYP would allow harvest levels that were acceptable to Pacific Lumber, and that the harvest level in the SYP was “approved at 176.2 mmbf [(million board feet)]” per year. Avidity also alleged that since 1987, the state and regional water boards have waived WDR's) for timber harvesting, and have taken the position that timber harvesting operations were not subject to WDR’s because the forest practice rules constituted best management practices. Avidity claims this position was relied upon by the parties in negotiating and carrying out the Agreement.

A few months after the Agreement closed, the Legislature passed Senate Bill No. 390 (1999-2000 Reg. Sess.), requiring that all waivers of WDR’s that were in place in 1999 to sunset on January 1, 2003, and limiting the duration of any new waivers to five years or less. (Wat. Code, § 13269.) The North Coast Regional Water Quality Control Board (Regional Water Board) thereafter ordered Pacific Lumber to submit applications for WDR’s for timber harvesting, and drafted and adopted eligibility requirements for categorical waivers of WDR’s that effectively excluded Pacific Lumber from the waiver, even for its THP’s that had already been approved.[6]

The Implementation Agreement contained an adaptive management provision, the purpose of which was “to provide a mechanism to ensure that HCP prescriptions are implemented in a manner that reflects sound science, taking into account new data and analysis. Adaptive management also provides flexibility by allowing alternative approaches for achieving biological goals under certain circumstances, in order that the HCP can be implemented in a manner that is sensitive to both economic concerns and biological necessities.” The Implementation Agreement’s adaptive management section provided: “[Pacific Lumber] may at any time propose changes to elements of the

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Aquatics Conservation Plan [(ACP)] that are not in conflict with [Assembly Bill No.] 1986[7] as part of adaptive management. At [Pacific Lumber]’s request, any such changes proposed... shall be promptly reviewed by the peer review panel established pursuant to Section 3.1.3.1(k) of this Agreement.[8]... The Wildlife Agencies will consider [Pacific Lumber]’s proposed changes, the peer review panel’s written evaluation, if any, and other available information. The Wildlife Agencies shall approve [Pacific Lumber]’s proposed changes that are not in conflict with [Assembly Bill] 1986 unless they find, in writing, that [Pacific Lumber]’s proposed changes will impair the ability of the plan to maintain or achieve, over time, properly functioning aquatic habitat conditions.”

The complaint alleged that all of the agencies taking part in the watershed analysis for the Freshwater Creek watershed except the Regional Water Board agreed to modify certain prescriptions that had previously limited the areas that could be harvested, finding harvest activities to be insignificant contributors of sediment in the watershed. The complaint asserted that the Regional Water Board recommended to the peer review panel that the prescriptions on harvesting be heightened, rather than relaxed, but that the peer review panel did not adopt the Regional Water Board’s recommendations. The Regional Water Board did not accept the resolution of the peer review panel and continued to unilaterally seek to impose the conditions it had proposed to the peer review panel.

In 2003 the Legislature passed Senate Bill No. 810 (2003-2004 Reg. Sess.; hereafter Senate Bill 810) (Pub. Res. Code § 4514.3), which gave the Regional Water Board an additional mechanism to influence timber harvesting plans. Prior to the passage of Senate Bill 810, timber operations were exempt from specified WDR's if the federal Environmental Protection Agency certified that provisions of the Forest Practice Act constituted the best management practices for silviculture pursuant to the Federal Water Pollution Control Act (33 U.S.C. § 1251 et seq.). (Stats. 2003, ch. 900, § 1, p. 6592.) Senate Bill 810 provided that both the State Water Resources Control Board and the federal Environmental Protection Agency must certify that provisions of the Forest Practice Act constitute best management practices for silviculture. (Pub. Resources Code, § 4515.3, subd. (a).)

The complaint alleged that in December 2003, the Regional Water Board called for the development of WWDR’s) for Pacific Lumber’s scheduled operations in the Elk River and Freshwater Creek watersheds, even though other timber companies were given a categorical waiver of WDR’s for their

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THP’s. While the WWDR’s were being prepared, Pacific Lumber sought coverage for some of its approved THP’s under the general WDR’s. The complaint alleged that the Regional Water Board agreed to grant coverage to only a reduced number of Pacific Lumber’s THP’s, thereby preventing Pacific Lumber from proceeding with scheduled operations under THP’s already approved by the CDF as consistent with the HCP and SYP.

The complaint alleged that in December 2005, the Regional Water Board informed Pacific Lumber that no further THP’s would be approved under the general WDR’s until the WWDR process was complete and told Pacific Lumber to refrain from filing any THP’s. It also alleged that the Regional Water Board stated it would veto any THP’s filed by Pacific Lumber.

Key to the dispute is the State’s failure to approve Pacific Lumber’s THP’s. Logging may be “ ‘carried out only in conformance with a [THP] submitted by the timber owner or operator and approved by [CDF] after determining, with an opportunity for input from state and county agencies and the general public, that the proposed operations conform to the [Forest Practice] Act and rules and regulations.... Since 1976, the THP preparation and approval process developed under the [Forest Practice] Act has been certified as the functional equivalent to, and hence an adequate substitute for, the full environmental impact report (EIR) process required by CEQA. [Citations.]’ [Citation.]” (EPIC, supra, 44 Cal.4th at p. 481, citations omitted.)

Defendant moved for summary judgment as to the breach of contract cause of action on the grounds: (1) the Agreement did not promise economic viability or regulatory certainty, (2) the HCP and SYP[9] did not assure economic viability, (3) defendant’s only duty to defend the Agreement was against third parties, (4) the enactment and enforcement of water quality laws is an exercise of the State’s police power, and (5) the California Resources Agency director who signed the Agreement did not have the authority to exempt Pacific Lumber from legislative actions or from actions of the state or regional water boards.

Defendant moved for summary judgment as to the breach of covenant of good faith and fair dealing cause of action on the grounds: (1) the cause of action was duplicative of the breach of contract claim; (2) there were no substantive duties beyond the specific terms of the Agreement; (3) any alleged promise was not so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (4) a promise pertaining to the exercise of police powers had to be explicit, unambiguous, and in writing;

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and (5) Pacific Lumber had no reasonable expectation that the defendant would exempt it from environmental regulations and guarantee its economic viability when defendant repeatedly rejected Pacific Lumber’s requests to include such provisions.

Defendant moved for summary judgment on the cause of action for promissory estoppel on the grounds: (1) Pacific Lumber did not perform any act that was different from the act it performed as consideration for the contractual promise, (2) there was no clear and unambiguous promise, and (3) applying estoppel would effectively nullify a strong rule of policy adopted for the benefit of the public (protecting water quality).

The trial court appointed a discovery referee in the action and authorized the referee to hear any motions for summary judgment. The referee recommended the denial of the motion for summary judgment. As to the breach of contract cause of action, the referee rejected defendant’s position that the only agreement the complaint alleged to have been breached was the actual Agreement executed in 1996. The referee reasoned that Avidity’s claim that the Agreement together with the closing documents reflected the final terms of the agreement was adequately pled in the complaint, and since there was substantially one transaction, the documents were to be taken together. Citing various provisions in the Implementation Agreement and a letter to Pacific Lumber from the federal government with which the CDF and the Department of Fish and Game concurred in part, the referee determined defendant failed to show that the breach of contract claim could not be established. The referee also rejected defendant’s summary judgment motion as to the breach of the implied covenant of good faith and fair dealing and promissory estoppel causes of action.

Defendant objected to the referee’s recommendation and requested that the trial court independently review the motion. The trial court held a hearing on defendant’s objection, and initially issued a tentative ruling adopting the recommendation in full to deny defendant’s motion. However, after a hearing, the trial court reversed course and declined to adopt the referee’s ruling. The court granted the motion for summary judgment on the ground the Implementation Agreement included an express provision waiving the right of either party to recover monetary damages for a breach of the Agreement, a ground not specifically tendered by defendant in its notice of motion. The trial court concurred with the referee’s conclusion that the Agreement should be considered to include the closing documents for purposes of the motion.

DISCUSSION

Avidity’s arguments are based on the premise that the State has exercised its legislative and environmental powers to circumvent the promises made to

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it by the State in the Agreement thereby breaching the Agreement. In particular the complaint alleged that all of the agencies taking part in the watershed analysis for the Freshwater Creek watershed except the Regional Water Board agreed to modify certain prescriptions that had previously limited the areas that could be harvested, finding harvest activities to be insignificant contributors of sediment in the watershed. As a result the Regional Water Board refused to sign the timber harvesting plans necessary to harvest at the level of 176.2 million board feet per year. It alleges that the federal and state agencies provided written assurances that the implementation of the HCP and the SYP would allow harvest levels that were acceptable to Pacific Lumber, and that the harvest level in the SYP was “approved at 176.2 mmbf [(million board feet)]” per year.

The SYP was declared invalid in 2008 by the Supreme Court in EPIC, supra, 44 Cal.4th at page 526, and statutory authority granted to the State's agencies after the Agreement impeded Avidity from reaching its agreed-upon harvest levels. Avidity’s arguments are based upon the view that while an agreement to limit the future exercise of the State’s police power may be unenforceable, the government nevertheless is liable in damages for breaching the Agreement. In Winstar, supra, 518 U.S. 839, the court held that the contracts at issue were enforceable in damages as long as the enforcement did not bar the exercise of the government’s sovereign power. (Id. at p. 880.) The State argues that a promise to limit the future exercise of police power cannot be enforced by a suit for damages.[10]

We find it unnecessary to reach these arguments because the State’s contracts with Pacific Lumber do not contain a promise that Pacific Lumber could harvest “176.2 mmbf [(million board ...


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