HAMMES COMPANY HEALTHCARE, LLC, a Wisconsin limited liability company, and HC TRICITY I, LLC, a Wisconsin limited liability company, Plaintiffs,
TRI-CITY HEALTHCARE DISTRICT, a California public entity, et al. Defendants,
FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING BENCH TRIAL
GONZALO P. CURIEL, District Judge.
On August 19, 2013, the Court concluded a four-day bench trial on plaintiff Hammes Company Healthcare, LLC's ("Hammes") claim for breach of a letter of intent ("LOI") pertaining to the development of a medical office building and ambulatory surgery center on defendant Tri-City Healthcare District's ("District") hospital campus in Oceanside, California ("Project").
Hammes asserts the District unilaterally terminated the Project or, at a minimum, frustrated Hammes' efforts at bringing the Project to fruition. Hammes therefore seeks, under the terms of the LOI, its initial development costs and a breakage fee for the work it completed prior to the Project's termination.
Following trial, the Court ordered Hammes and the District to submit their closing arguments in writing, which they did. (ECF Nos. 187, 189, 190.) After considering all the evidence admitted at trial, the parties' arguments, and the applicable law, the Court finds in favor of the District.
More specifically, the Court finds that, while the parties intended the Initial Development Costs provision of the LOI to be enforceable, the parties intended the later executed Ground Lease to supersede the LOI. In reaching this conclusion, the Court concludes that Hammes and the entity it created to be the owner of the Project, HC Tri-City I, LLC ("HC"), should be treated as the same party under the alter ego doctrine. Thus, because the Court finds that the Initial Development Costs provision of the LOI became unenforceable upon execution of the Ground Lease, the Court does not address the issues of breach or damages.
I. Summary Judgment
Prior to trial, both the District and Hammes moved for summary judgment. In December 2010, the District moved for partial summary judgment as to the first through sixth claims (out of seven total claims) asserted against it. (ECF No. 38.) The first claim (breach of the LOI) was asserted against the District by Hammes alone. The second through seventh claims were asserted against the District by Hammes and by plaintiff HC-the entity formed by Hammes to develop, own, and lease the Project.
In July 2011, prior to this case's transfer to the undersigned judge, the Honorable Janis L. Sammartino, U.S. District Judge, granted the District's Motion for Summary Judgment as to Hammes' and HC's second through sixth claims against the District. (ECF No. 85.) Thus, Hammes's first claim (breach of the LOI), along with Hammes' and HC's seventh claim (declaratory relief), were the only claims remaining after Judge Sammartino's July 2011 Order. This Court later dismissed Hammes' and HC's seventh claim for declaratory relief in December 2012, leaving Hammes' first claim for breach of the LOI as the only remaining claim to be tried. (ECF No. 147.)
With regard to Hammes' claim for breach of the LOI, Judge Sammartino noted that "[a] threshold question is whether the letter of intent was a binding contract when [the District] allegedly breached it in 2009." (ECF No. 85 at 4 n.5.) At the District's insistence, Judge Sammartino proceeded under the assumption-for purposes of Deciding the District's Motion for Summary Judgment-that the LOI was a binding contract. (Id.) She noted, however, that "there is some reason to doubt that this is the case." (Id. (emphasis added).)
Under the assumption that the LOI was a binding contract, Judge Sammartino found a genuine issue of material fact existed as to whether the District unilaterally terminated the project, thus obligating it to reimburse Hammes for its initial development costs and to pay a breakage fee. (Id. at 6.)
Thereafter, in September 2011, Hammes moved for summary judgment as to its first claim for breach of the LOI. (ECF No. 92.) Relying on the analysis set forth in her July 2011 Order, Judge Sammartino denied Hammes' Motion for Summary Judgment. (ECF No. 110 at 29-31.) That is-without addressing whether the LOI is a binding agreement-Judge Sammartino found that a genuine issue of material fact existed as to whether "either party decided' not to proceed with the project or the ambulatory surgery center under the terms of the [LOI]." (Id. at 31.)
II. Hammes' Claim for Relief
In its only remaining claim after summary judgment, Hammes alleges that, in May 2005, it entered into a written agreement with the District to proceed with the development of an out-patient services and medical office building adjacent to an existing medical center operated by the District ("Project"). (ECF No. 1, Compl. ¶¶ 11, 14.)
Hammes claims the agreement "expressly included provisions related to Hammes' and [the District]'s obligations with respect to Initial Development Costs, ' which would be binding and operate as a final expression of the parties' obligations." (Id. ¶ 14.) The alleged agreement, attached as Exhibit A to Hammes' Complaint (and admitted at trial as Trial Exhibit 1), is entitled: "Letter of Intent" ("LOI").
Hammes alleges that, pursuant to the LOI, Hammes would be reimbursed for its "Initial Development Costs" regardless of whether the Project proceeded. (Id. ¶ 16.) Hammes claims that, under the LOI, "if the Project failed to come to fruition, including the construction of the out-patient services and medical office building, along with leasing of such, then the District agree[d] to reimburse one hundred percent (100%) of, ' Plaintiff Hammes' Initial Development Costs." (Id. ¶ 17.)
Hammes further claims the District "also agreed that if the Project should not be completed or was terminated by the District, then the District shall pay Plaintiff a breakage fee... in addition to the Initial Development Costs." (Id. ¶ 18.) Hammes alleges the parties agreed to a breakage fee of $10, 000 per month for each month Hammes spent working on the Project. (Id.)
Hammes claims it fully performed under the LOI, except those obligations that the District waived, excused, or prevented from being performed. (Id. ¶ 19.)
Hammes alleges the District breached the LOI "by solely determining not to proceed with the Project, and thus frustrating Hammes' intention to proceed with long-term development and leasing of the Project. (Id. ¶ 20.)
Hammes asserts the LOI was never superseded or altered by Hammes and the District. (Id. ¶ 21.)
Hammes claims it "has damages unique to it, which entitles [Hammes] the agreed upon Initial Development Costs and Breakage Fees" in an amount Hammes believes to exceed $1, 000, 000, "plus loss of use of funds, fees, costs, and interest as allowed by contract and/or law." (Id. ¶¶ 22-23.)
FINDINGS OF FACT & CONCLUSIONS OF LAW
To succeed on a breach of contract claim, a plaintiff must prove (1) the existence of an enforceable contract, (2) the plaintiff's performance or excuse for nonperformance under the contract, (3) the defendant's material breach of the contract, and (4) resulting damages to the plaintiff. Reichert v. Gen. Ins. Co. of Am. , 68 Cal.2d 822, 830 (1968).
I. Enforceable Contract
Hammes argues the LOI is an enforceable contract with regard to the Initial Development Costs and Breakage Fee provisions. (ECF No. 187 at 6.) The District argues the LOI is no longer an enforceable contract because it was superseded by the Ground Lease. (ECF No. 189 at 4.)
The Court will address these arguments, but first, some explanation about letters of intent in general:
"Letter of intent" is not a legal term of art. The term is seen in real estate development documents, securities underwriting, and sales of corporate assets, among other areas. Generally, "letter of intent" refers to a writing documenting the preliminary understandings of parties who intend in the future to enter into a contract.
Rennick v. O.P.T.I.O.N. Care, Inc. , 77 F.3d 309, 315 (9th Cir. 1996) (citing A/S Apothekernes Laboratorium v. I.M.C. Chem. Grp., Inc. , 873 F.2d 155, 158 (7th Cir. 1989); Black's Law Dict. at 814 (5th ed. 1979)).
"The purpose and function of a preliminary letter of intent is not to bind the parties to their ultimate contractual objective. Instead, it is only to provide the initial framework from which the parties might later negotiate a final... agreement, if the deal works out." Rennick , 77 F.3d at 315 (internal quotation marks omitted) (citing A/S Apothekernes , 873 F.2d at 158). Thus, "calling a document letter of intent' implies, unless circumstances suggest otherwise, that the parties intended it to be a nonbinding expression in contemplation of a future contract, as opposed to its being a binding contract." Rennick , 77 F.3d at 315.
Here, the LOI reflects the above principles, as it expressly states it "is not intended... to be a binding agreement, but is intended merely as a statement of the present intentions and understandings of the parties." (Trial Ex. 1 at 1.) With this in mind, the Court examines whether the Breakage Fee and Initial Development Costs provisions are binding and enforceable.
A. Breakage Fee Provision
The LOI provides it "is not intended, except for the provisions relating to the parties' obligations with respect to the Initial Development Costs, to be a binding agreement." (Trial Ex. 1 at 1 (emphasis added).) The LOI states it "is intended merely as a statement of the present intentions and understandings of the parties and an outline of the economic and business terms of the proposed transaction to determine whether there is a basis acceptable to the parties before proceeding toward final and binding agreements."
Considering the LOI's express language, the Court is unable to conclude the LOI is binding with regard to the Breakage Fee provision because the LOI unambiguously states it is binding only "with respect to the Initial Development Costs." While the Breakage Fee provision immediately follows the Initial Development Costs provision in the LOI, the Court finds the two provisions to be distinct.
First, the Breakage Fee provision begins with the language: "In addition to the reimbursement of out-of-pocket Initial Development Costs...." (Trial Ex. 1 at 6.) The "in addition to" language-instead of, for example, "included in" language-implies the two provisions were included separately and for different reasons.
Second, the Initial Development Costs provision expressly limits "Initial Development Costs" to "reasonable, out of-of-pocket costs paid by [Hammes] to third parties." (Trial Ex. 1 at 6 (emphasis added).) Thus, because a breakage fee is not a cost paid to third parties, it falls outside the express definition of "Initial Development Costs."
Third, while the Breakage Fee provision uses the mandatory term "shall" with regard to the District's supposed obligation to pay a breakage fee, the term "shall" is used at least eleven other times in provisions that neither party asserts are binding. (Trial Ex. 1 at 2, 3, 4.) Thus, the use of the word ...