Opinion
NO. 301-11305, CONTESTED MATTER
May 23, 2003
MEMORANDUM OPINION
This matter is before the Court on cross motions for summary judgment filed by the debtor and Bakersfield Grand Canal, LLC (hereinafter "Grand Canal") regarding the debtor's objection to Grand Canal's proof of claim. For the reasons discussed below, the Court finds that the debtor's motion for summary judgment should be granted and that Grand Canal's claim should be disallowed.
I. UNDISPUTED MATERIAL FACTS
On September 19, 1996, Yehuda Netanel, President of Daystar Development, Inc. (hereinafter "Daystar"), the managing member of Grand Canal, negotiated an option to purchase a 65-acre parcel of land from John G. Giumarra, Jr., for the purpose of constructing a Venetian style entertainment/shopping center.
On March 20, 1997, the debtor and Grand Canal entered into a commercial lease (hereinafter "Lease") for a proposed theater in the proposed shopping center in Bakersfield, California. The Lease did not identify the debtor as an "anchor tenant," nor did it indicate that other tenants would have "co-tenancy" provisions tied to the Lease with the debtor.
The theater and shopping center were never constructed, and Grand Canal asserts that the debtor breached the Lease by improperly terminating the Lease and by failing to construct a theater as was required.
Under Section 3.06, Grand Canal was obligated to obtain title to the property by December 9, 1998, which was 630 days after the signing of the Lease. Grand Canal did not obtain title to the real property where the proposed shopping center and theater were to be constructed. In fact, as of December 9, 1998, Grand Canal had not only failed to obtain title to the real property, it had also failed to secure construction financing and had not signed a sufficient number of leases to secure such financing.
On January 27, 1999, Grand Canal's managing member, Daystar, entered into a letter agreement with ORIX Real Estate Equities, Inc. (hereinafter "ORIX"). Stephen C. Hess, as Vice-President of Development for ORIX, signed the letter of intent to finance the $54 million construction through a combination of loan and 50% joint venture agreement. ORIX agreed to consider funding the venture if certain conditions were met. In particular, ORIX made its commitment "[s]ubject to a lease signed with Regal theatres coupled with other leases and/or letters of intent for a total pre-leasing commitment of not less than 390,000 square feet." Mr. Hess signed the agreement on behalf of ORIX without any conversation with anyone from the debtor about the debtor's intentions or on any subject relative to the Lease. Moreover, Grand Canal did not notify ORIX of its failure to meet the title date contingency, nor did Grand Canal inform the debtor of its letter agreement with ORIX.
Attorneys for ORIX prepared a draft amendment to Grand Canal's Lease with the debtor to conform with its letter agreement with Grand Canal. The draft amendment was then faxed to the debtor on March 15, 1999. The proposed amendment indicated that "certain time periods provided for in the Lease relating to the progress of the development of the [theater] have expired," including the title date contingency. John Roper, vice-president for the debtor, testified at his deposition that the debtor was not put on notice of Grand Canal's failure to obtain title until it received the faxed amendment. On March 17, 1999, the debtor orally terminated the Lease based on the title date contingency. The debtor provided written confirmation of its decision to terminate the Lease on April 12, 1999. Thereafter, on May 7, 1999, ORIX informed Grand Canal that its deal was also terminated.
The debtor asserts that under the express terms of the Lease, it was entitled to terminate the Lease based on Grand Canal's failure to satisfy the title date contingency within the time allowed under the Lease.
Grand Canal challenges the debtor's termination of the Lease on several grounds:
1. The debtor was not entitled to terminate because the debtor's delay in providing construction plans caused Grand Canal's delay in obtaining title, because the debtor did not give 30 days written notice of nonperformance before terminating the Lease, and because the debtor failed to execute the first amendment to the Lease thereby causing Grand Canal's failure to obtain title;
2. The debtor's termination of the Lease violated the implied covenant of good faith and fair dealing;
3. By its conduct, recorded representations, and other actions taken after the title date contingency deadline, the debtor waived its right to terminate the Lease based on the title date contingency; and
4. The debtor should be equitably estopped from terminating the Lease.
III. SUMMARY JUDGMENT STANDARD
Federal Rule of Bankruptcy Procedure 7056, which incorporates Federal Rule of Civil and any reasonable inferences that may be drawn from the facts must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356 (1986). To prevail, the nonmoving party must show sufficient evidence to create a genuine issue of material fact. Klepper v. First Am. Bank, 916 F.2d 337, 342 (6th Cir. 1990). The Court finds that, according to these standards, no material facts remain in dispute, and the Court, therefore, determines that the debtor is entitled to judgment as a matter of law. The parties agree that California law governs this dispute.
IV. DISCUSSION A. DEBTOR'S ALLEGED BREACH
Grand Canal makes several assertions that the debtor's termination of the Lease constituted a breach of the Lease.
1. SECTION 3.06
First, Grand Canal asserts that the debtor was not entitled to terminate the Lease because Grand Canal's failure to meet the title date contingency was "due to" the debtor's delay in providing its theater construction plans. The Court disagrees.
Section 3.01 (20) defines the "Title Date" as "the day on which LANDLORD delivers to TENANT written notice that accurately states that LANDLORD has obtained and recorded in Kern County, California, fee simple absolute title to the Land." The Title Date is also defined as a contingency in Section 3.01(5).
Section 3.06 of the Lease provides as to contingencies:
If any of the Contingencies has not occurred within six hundred thirty (630) days from and after the date of this Lease, then at any time thereafter until all the Contingencies occur, either LANDLORD or TENANT (unless the nonoccurrence of such contingency was caused by such party or is due to such party's failure to perform any of its obligations under this Lease) may terminate this Lease by providing written notice of such termination to the other. TENANT's obligation in this Lease to perform any of TENANT's Work is expressly contingent upon the prior occurrence of all of the Contingencies.
It is undisputed that Grand Canal did not obtain title to the real property within the time allowed by the Lease. Grand Canal's defense is that its failure to obtain title was due to the debtor's failure to present its construction plans. There is no support in the Lease or in the record to support Grand Canal's argument. Indeed, both the Lease and the record refute Grand Canal's "due to" defense under Section 3.06.
There is no connection in the Lease between obtaining title and presenting construction plans — neither is contingent on completion of the other. Indeed, Mr. Netanel, Grand Canal's General Manager, testified in his deposition that the construction plans contingency and the title date contingency were "somewhat unconnected."
Debtor's provision of construction plans was instead tied into Section 3.04 of the Lease to the Development Approvals Date or the Design Plans Approval Date. Ninety (90) days from the latest to occur of these dates, the debtor's construction plans were due. It was Grand Canal's responsibility to obtain the requisite design approvals from the city of Bakersfield and to provide written notice to the debtor of the occurrence of the Development Approvals Date. The uncontroverted proof is that the only written notice of development approvals was sent to the debtor on May 5, 1999, almost a month after the debtor had provided written notice of termination.
Not only is Grand Canal's reliance on the debtor's failure to provide construction plans as an excuse for timely acquiring title misplaced, Grand Canal's entire effort to blame the debtor for missing the title deadline fails on the record presented. Mr. Netanel testified at his deposition that Grand Canal could have taken title to the property at any time. However, it wanted to avoid debt service until construction of the shopping center and theater was to begin. Even Mr. Netanel's supplemental affidavit shows that the reason for the delay in taking title was "to minimize the costs." Mr. Netanel stated in his supplemental affidavit that the "working relationship with the owner of the property, John Giumarra, was so cooperative that [Grand Canal] had essentially all of the rights and benefits as the land owner." Mr. Guimarra confirmed that Grand Canal had the option to purchase the property at any time during the option agreement. If Grand Canal had wished to delay taking title to avoid debt service prior to construction, it should have included such a provision in the Lease. The Lease represents an arms-length, well negotiated agreement, and Grand Canal has no basis for arguing that it failed to obtain title due to the debtor's actions or because it was concerned that the debtor might back out of the Lease. Accordingly, Grand Canal's failure to perform is not excused by the "due to" clause in Section 3.06 of the Lease.
2. SECTION 17.01
Grand Canal also asserts that the debtor was required to provide 30 days written notice of nonperformance. Specifically, Grand Canal points to Section 17.01 of the Lease, which provides in part:
Except as otherwise provided in this Lease, LANDLORD shall be in default under this Lease if LANDLORD fails to perform any of its obligations hereunder including those affirmative covenants or any misrepresent or breach of warranty and said failure continues for a period of thirty (30) days after written notice thereof from TENANT to LANDLORD.
Section 17.01 does not apply to contingencies discussed in Article 3. Failure to comply with contingencies, as defined in Section 3.01(5), is controlled by Section 3.06, which does not require a 30-day waiting period. If a contingency is not met by one of the parties to the Lease and the nonoccurrence was not caused by the other party or due to the other party's failure to perform any of its obligations, written notice pursuant to Section 3.06 results in automatic termination of the Lease.
3. SECTION 18.04
Grand Canal argues that the debtor's failure to execute the first amendment to the Lease was a further breach of the Lease and also caused its failure to obtain title. As support for this argument, Grand Canal relies on Section 18.04, which states:
LANDLORD and TENANT agree that, upon the request of the other party to this Lease, or any mortgagee or trustee, LANDLORD or TENANT shall execute and deliver whatever instruments may be required for such purposes to carry out the intent of this Article 18.
Article 18 of the Lease, which is titled "SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE AGREEMENT" has no bearing on the first amendment prepared by ORIX. Article 18 would apply only after Grand Canal obtained title to the real property. Section 18.01 provides that the Lease is to be subordinate to a mortgage; Section 18.02 requires the debtor to atom to and recognize a purchaser of the real property as its new landlord in the event that a purchaser becomes the owner following a foreclosure on the mortgage; and Section 18.03 addresses Grand Canal's reciprocal obligation of non-disturbance of the debtor's rights. None of these Sections bear on the signing of the amendment in question. Thus, Section 18.04 is not a basis for finding that the debtor breached the Lease by not signing the proposed first amendment to the Lease. Moreover, as found above, the reason Grand Canal did not take title timely is that it chose to delay in order to save money. Grand Canal's failure to timely fulfill its responsibility was certainly not caused by the debtor's refusal to sign this first amendment to the Lease, which was offered by Grand Canal after the title date had passed.
Accordingly, the Court finds that the provisions of the Lease dealing with termination are unambiguous. The debtor complied with these provisions, and certainly did not cause Grand Canal's failure to take the requisite title to the property in a timely fashion.
B. COVENANT OF GOOD FAITH
Grand Canal also asserts that the debtor's termination violated the covenant of good faith and fair dealing.
California courts have long recognized "that every contract imposes upon each party a duty of good faith and fair dealing in the performance of the contract such that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Storek Storek, Inc. v. Citicorp Real Estate, Inc., 100 Cal.App.4th 44, 55 (2002) (citations omitted). However, an implied covenant of good faith cannot contradict the express terms of a contract. Carma Developers (Cal.), Inc. v. Marathon Dev. California, Inc., 826 P.2d 10, 728 (Cal. 1992). In Carma, the court held that the lessor's termination of the lease was expressly permitted by the lease and was clearly within the parties' expectations. Accordingly, such conduct, as a matter of law, could never violate an implied covenant of good faith and fair dealing. Id. at 729. The court reasoned:
We are aware of no reported case in which a court has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement. On the contrary, as a general matter, implied terms should never be read to vary express terms. "The general rule [regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing. . . . This is in accord with the general principle that, in interpreting a contract `an implication . . . should not be made when the contrary is indicated in clear and express words.'"
Id. at 728 (citations omitted). See also Balfour, Guthrie Co., Ltd. v. Gourmet Farms, 108 Cal.App.3d 181, 191 (1980) ("[a]cts in accord with the terms of one's contract cannot without more be equated with bad faith."); Third Story Music, Inc. v. Waits, 41 Cal.App.4th 798 (1995) (offending conduct of the defendant was expressly allowed under the contract); Price v. Wells Fargo Bank, 213 Cal.App.3d 465, 479 (1989) (implied covenant of good faith and fair dealing does not impose an affirmative duty on a party to forbear from enforcing rights expressly given under the contract).
In the present case, the Lease provides that at anytime after the contingency date expires, the other party may terminate the contract. See Section 3.06. The only caveat is that the failure to meet the contingency not be "due to" or "caused by" the other party, which is not the case here. Accordingly, the debtor had the right to terminate the Lease at anytime after Grand Canal failed to meet the title date contingency, and an implied covenant of good faith and fair dealing cannot be used to defeat the express requirement of the Lease which was negotiated and agreed to by both parties.
As stated in Walnut Creek Pipe Distributors, Inc. v. Gates Rubber Co. Sales Division, 228 Cal.App.2d 810 (1964):
The courts cannot make better agreements for parties than they themselves have been satisfied to enter into or rewrite contracts because they operate harshly or inequitably. It is not enough to say that without the proposed implied covenant, the contract would be improvident or unwise or would operate unjustly. Parties have the right to make such agreements. The law refuses to read into contracts anything by way of implication except upon grounds of obvious necessity. "[I]mplied covenants are not favored in the law; and courts will declare the same to exist only when there is a satisfactory basis in the express contract of the parties which makes it necessary to imply certain duties and obligations in order to effect the purposes of the parties to the contract made." Cousins Inv. Co. v. Hastings Clothing Co., 45 Cal.App.2d 141 at p. 143, 113 P.2d 878.
Id. at 815.
C. WAIVER
Grand Canal also argues that the debtor waived the title date contingency by its actions, representations, and its failure to immediately terminate the Lease on December 9, 1998. Again, the Court disagrees.
Waiver is defined under California law as "the intentional relinquishment of a known right after full knowledge of the facts." DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Café and Takeout III, Ltd., 30 Cal.App.4th 54, 59 (1994). "Waiver does not require act or conduct by the other party." Id. The party claiming waiver of a known legal right must prove it by "clear and convincing evidence that does not leave the matter to speculation, and `doubtful cases will be decided against a waiver.'" Id. at 60 (quoting City of Ukiah v. Fones, 64 Cal.2d 104, 107-108 (1966)).
Initially, the Court recognizes that the Lease provides for all waivers be in writing. Accordingly, to succeed on a waiver claim, Grand Canal would have to show by clear and convincing evidence that the debtor not only waived the title date contingency provision but also the waiver provisions of the Lease. The waiver clause, Section 23.10, provides:
(a) The waiver LANDLORD or TENANT of any term, covenant, agreement or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant, agreement or condition herein contained. No covenant, term, agreement or condition of this Lease shall be deemed to have been waived by LANDLORD or TENANT, unless such waiver be in writing.
(b) No waiver of any covenant, term, agreement or condition of this Lease or legal right or remedy shall be implied by the failure of LANDLORD or TENANT to take any action or declare a forfeiture or termination when those rights are given by the terms of this Lease or for any other reason. No consent or approval by LANDLORD or TENANT shall be effective or operate to change any condition, requirement or other provision of this Lease unless made in writing and executed by an authorized officer or partner of LANDLORD or TENANT.
The clear and unambiguous language of this Section requires that any waiver be in writing and that waiver cannot be implied from the failure to declare termination when those rights are given by the terms of the Lease. Moreover, the only proof of waiver presented by Grand Canal is a five minute conversation between Mr. Roper of the debtor and Stephen Hess of ORIX, a nonparty to the Lease, during which the title date contingency was not discussed. Mr. Roper's unrefuted testimony at his deposition was that the debtor did not know Grand Canal had failed to obtain title until it received the faxed amendment on March 15, 1999. Thus, it is impossible to find that the debtor knowingly waived its right to terminate the Lease based on the title date contingency of Section 3.06 or the waiver requirements of Section 23.10.
D. EQUITABLE ESTOPPEL
Grand Canal also asserts that the debtor is equitably estopped from terminating the Lease. In particular, Grand Canal asserts that the debtor's delay in terminating the Lease caused Grand Canal and ORIX to expend effort in moving the project forward. The pleadings do not support this contention.
Equitable estoppel comes into play "`where the conduct of one side has induced the other to take such a position that it would be injured if the first should be permitted to repudiate its acts.'" Leasequip, Inc. v. Dapeer, 103 Cal.App.4th 394, 403 (2002) (quoting DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Café and Takeout III, Ltd., 30 Cal.App.4th 54, 59). The four elements that must ordinarily be proven to establish the right to equitable estoppel include: "(1) The party to be estopped must know the facts; (2) he must intend that his conduct shall be acted upon, or must so act that the party asserting the estoppel had the right to believe that it was so intended; (3) the party asserting the estoppel must be ignorant of the true state of facts; and, (4) he must rely upon the conduct to his injury." DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Café and Takeout III, Ltd., 30 Cal.App.4th 54, 59 (citations omitted). As the party asserting estoppel, Grand Canal has the burden of proving all of the requisite elements. See Wells Fargo Bank, N.A. v. Bank of America NT SA, 32 Cal.App.4th 424, 438 (1995).
Here, there is no proof to support equitable estoppel, and the uncontroverted evidence supports the debtor. First, as previously discussed, the debtor had the right to terminate the Lease at any time after Grand Canal failed to meet the title date contingency. Moreover, the parties agree that ORIX sent its letter setting forth the terms on which it would agree to become involved with the project without contacting or notifying the debtor beforehand, thereby precluding any detrimental reliance on the debtor's representations or actions. In fact, Grand Canal did not notify or discuss with the debtor its efforts to involve ORIX in funding the project or that ORIX would require an amendment to the Lease. Again, reliance is an impossible factor under the facts of this case.
In addition, as discussed earlier, the debtor did not know that the title date contingency had not been met until after the draft amendment was faxed on March 15, 1999. Without knowledge, the debtor could not have known the true facts or intend that its delay in terminating the Lease would cause Grand Canal to rely on its conduct.
Finally, even if Grand Canal did rely on conduct of the debtor, Grand Canal cannot show that the debtor's conduct caused injury to the project. Mr. Netanel's correspondence with the investors in the project, as well as his deposition testimony, show that Grand Canal was in fact having financial difficulties caused by a lack of tenants and an inability to secure construction financing. The problems with the project were unrelated to the debtor's actions, the debtor was unaware of Grand Canal's dealings with ORIX, and there is simply no basis for equitable estoppel.
V. CONCLUSION
Accordingly, the Court finds that there are no material issues of disputed facts and that the debtor is entitled to judgment as a matter of law. Consequently, the Court finds that Grand Canal is not entitled to its claim for damages and that the debtor is entitled to summary judgment on its objection to Grand Canal's claim.
An appropriate order will enter.