Santa Clara County Super. Ct. No. 1-09-CV143471 Hon. Aaron Persky
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Law Offices of Russell J. Hanlon and Russell J. Hanlon for Defendants, Cross-complainants and Appellants.
Shea & McIntyre, Marc L. Shea and Myron Moskovitz for Plaintiff, Cross-defendant and Respondent.
Shortly before the collapse of the housing market and the onset of the Great Recession, appellants Eliyahu and Yifah Gavra, respondent Isaac Agam, and Eran Cohen formed a partnership to purchase and develop a parcel of land in Los Altos Hills. The partners planned to subdivide the property and build two or three houses for resale. They successfully purchased and subdivided the property into three lots, but financial issues and personality conflicts derailed their development plans. Between 2009 and 2011, they sold the vacant lots, losing close to $1.3 million on the project.
In 2009, Agam and Cohen sued the Gavras for breach of the Partnership Agreement and breach of their fiduciary duties to the partnership. The Gavras filed a cross-complaint alleging a claim for breach of contract, among others. Cohen reached a settlement with the Gavras and the cross-actions between Agam and the Gavras proceeded to a bench trial. The trial court rejected the Gavras’ breach of contract claim and concluded they had breached both the Partnership Agreement and their fiduciary duties. The court awarded Agam more than $700, 000 in reliance damages on the breach of contract claim, no damages on the breach of fiduciary duty claim, and more than $245, 000 in attorney fees.
On appeal, the Gavras contend the trial court misallocated the burden of proof on Agam’s breach of contract claim. They also challenge the sufficiency of the evidence supporting the judgment. We affirm.
I. Factual and Procedural Background
A. The Partnership Agreement and Purchase of the Los Altos Hills Property
In April 2007, Agam, Cohen, and the Gavras entered into a partnership agreement (the Partnership Agreement). In that contract, they agreed to purchase a parcel of land in Los Altos Hills, “subdivide it[, ]... build two or three houses on it[, ] and sell [them] at a maximum profit.” They further agreed that Agam would have a 45 percent interest in the partnership; Cohen, a 25 percent interest; and the Gavras, a 30 percent interest. The Partnership Agreement required the partners to contribute money and time to the project proportionate to their partnership share. The Partnership Agreement authorized Agama mortgage broker with real estate development experienceto make the final decision on any disputed issues after consulting with the partnership. The Partnership Agreement also permitted any partner to terminate active participation in the partnership upon 45 days notice and to become a passive participant upon the consent of the other partners.
Agam and Cohen purchased the Los Altos Hills property for $4.6 million. The purchase was financed by a seller carryback loan (the Driscoll Loan) of $3.8 million, due in a balloon payment on November 1, 2008. Agam and Cohen executed a grant deed transferring title to the Los Altos Hills property to the partners in proportion to their partnership interests.
B. Early Development and Clashes Among The Partners
In the summer and fall of 2007, the partners met with a real estate agent and an architect to explore options for developing the land. They considered whether to build smaller, less expensive homes (6, 000 square foot homes priced in the $6 million range) that the real estate agent advised would sell more quickly, or larger, more expensive homes (9, 000 square foot homes priced in the $9 million range) that likely would take longer to sell. They favored building larger homes. The partners also began the process of obtaining the necessary approval to subdivide the parcel into three lots, which they obtained in October 2008.
At an October 2007 meeting between the partners and an architect, Agam yelled at Eliyahu Gavra (Eli) when the two disagreed about the design of one of the planned homes. E-mails among the partners following that incident acknowledge the existence of “friction” and “personality and style differences” between Agam and Eli.
Agam and Cohen offered to buy the Gavras out in November 2007. Eli countered with a higher buy-out figure. The partners did not reach an agreement and the partnership remained intact.
C. The Driscoll Agreement
In mid-2008, the partners took various steps to raise the $3.8 million needed to pay off the Driscoll Loan by the November 1, 2008 due date. In particular, they decided to sell one of the lots and, in August 2008, entered into an agreement to sell lot No. 2 for $2.7 million. They also sought to obtain a land loan secured by the other two lots. Agam initially prepared a joint loan application on behalf of the partnership. However, issues related to Cohen’s other investments made him ineligible for a loan. Therefore, Agam and the Gavras obtained loans as individuals. Cohen and the Gavras quit claimed their ownership interests in lot No. 3 to Agam, who obtained a $1, 325, 000 land loan secured by that lot fro Borel Bank in October 2008. Similarly, Cohen and Agam quit claimed their ownership interests in lot No. 1 to the Gavras, who obtained a $1, 325, 000 Borel Bank land loan secured by lot No. 1, also in October 2008. In connection with the land loans, Borel Bank required both Agam and the Gavras to keep $100, 000 on deposit with the bank. The Gavras requested that Cohen contribute his 25 percent share ($50, 000) of those deposits, but Cohen responded that he could not because he was “out of money and maxed out on all [his] credit cards.”
The sale of lot No. 2 fell through in October 2008. The partners had planned to use the proceeds from the sale to pay off the Driscoll Loan. They were out of cash and the recently obtained land loans were insufficient to cover the required $3.8 million payment.
The partners partially paid off the Driscoll Loan using the proceeds from the Borel Bank land loans and negotiated an extension for the remainder of the loan until December 1, 2008. To pay off the remainder of the loan, the partners discussed obtaining a hard money loan secured by lot No. 2. The Gavras were reluctant to participate in a hard money loan due to the high rate of interest associated with such a loan and the requirement that they use their home as cross-collateral. Instead, the Gavras paid their share (about $335, 000) in cash, which they obtained by taking out a $550, 000 home equity line of credit. Agam and Cohen contributed some cash and obtained a $700, 000 hard money loan secured by lot No. 2. Eli testified that his contribution of cash eliminated the need for Agam and Cohen to use their properties as cross-collateral by reducing the amount of the hard money loan.
It was necessary that the Gavras quit claim their ownership interest in lot No. 2 to Agam and Cohen so that they could obtain the hard money loan
secured by that lot. Agam requested that the Gavras do so on Wednesday, November 26the day before Thanksgiving and five days before the Driscoll Loan was due. Initially, the Gavras refused to sign anything without an agreement among the partners “securing [the Gavras’] position” and indicated that their personal attorney was drafting such an agreement. The partnership’s attorney, Desmond Tuck, advised the Gavras “to discuss with your lawyer whether what you are doing constitutes a breach of fiduciary duty towards your partners” by allowing “your desire to protect yourself... to take priority over the interest of the partnership.” Tuck further advised the Gavras to “sign the documents for the sake of the partnership, and if you don’t come to an agreement... before Monday [when the Driscoll loan is due]..., you can revoke your instructions to the title company.” The Gavras signed the necessary documents.
The partners, the Gavras’ attorney, and Tuck, met on the evening of Sunday, November 30, to discuss the Gavras’ proposed agreement. The negotiations extended into the early hours of December 1, the day the Driscoll Loan payment was due. Cohen testified that the Gavras threatened to allow the Driscoll Loan to go into default unless an agreement was reached. Agam likewise testified that the Gavras “refused to bring their cash [to help pay off the Driscoll Loan] unless we signed some guarantees for them.” At approximately 2:00 a.m. on December 1, the parties signed the so-called Driscoll agreement (Driscoll Agreement.
The Driscoll Agreement provided that the Gavras would receive a deed of trust on lot No. 2 to secure their $335, 000 investment. It further required Agam and Cohen to execute a deed transferring title to lot No. 2 to all three partners. That deed would be held by the Gavras and recorded at their “discretion, after considering any detrimental consequences to the partnership, ” “to protect [the] Gavra[s’] interest.” Finally, the Driscoll Agreement called for the proceeds from the sale of any lot to go directly to the partners. (The Partnership Agreement had provided that the proceeds from the sale of partnership property would be paid to the partnership.)
The partners paid off the remainder of the Driscoll Loan on time.
It is undisputed that no deed of trust was executed as called for by the Driscoll Agreement.
D. Continued In-Fighting Leads to Litigation
In a letter to Agam, the Gavras’ attorney stated that, given the “worsening economy and real estate market” and the partners’ “dire financial situation, ” “it is [the Gavras’] position that the partnership cannot proceed to the construction phase and the partners should focus their efforts on selling the lots.” The letter further advised Agam that he had breached the Partnership Agreement by failing to discuss partnership issues with the Gavras and making decisions without consulting with them. Finally, the letter proposed listing lot No. 2 for sale and requested a written response to that proposal by February 16, 2009. (Lots Nos. 1 and 3 already were listed for sale.)
Agam and Cohen responded on February 23, 2009. Each took the position that the decision not to list lot No. 2 had been made by a majority of the partnership. Each also leveled various accusations against the Gavras, including that they had failed to actively participate in the partnership as required by the Partnership Agreement and had breached their fiduciary duties by insisting upon the Driscoll Agreement.
In a response letter, the Gavras’ attorney reiterated the Gavras’ desire to put lot No. 2 on the market and not to proceed with construction. He requested a written response by March 10. Agam and Cohen did not respond. On March 13, 2009, the Gavras’ attorney stated in a letter to Agam and Cohen that the Gavras “cannot be expected to further fund any expenses, other than for the sale of the lots, until I have received responses from you.”
Agam and Cohen retained an attorney. Through that attorney, on March 26, 2009, they proposed that the Gavras withdraw from the partnership, take any one of the three lots, and accept (or make) true-up payments, depending on which lot they selected. Under Agam and Cohen’s proposal, the true-up payments would be calculated using Eli’s own estimated values of the three lots. The Gavras rejected that offer.
On May 28, 2009, Agam and Cohen filed suit against the Gavras, alleging they breached the Partnership Agreement by failing to pay their share of partnership expenses. The Gavras filed a cross-complaint a month later, alleging Agam and Cohen had breached the Partnership Agreement and the ...