Opinion
NOT TO BE PUBLISHED
APPEAL from the Superior Court of San Bernardino County No. CIVSS708848. Christopher J. Warner, Judge.
Ward & Ward and Alexandra S. Ward for Defendants, Cross-Complainants and Appellants.
Dill and Showler and Scott Showler for Plaintiff, Cross-Defendant and Respondent.
OPINION
Richli, J.
I. Introduction
Plaintiff Edwin V. Malesky, Jr. (Malesky), an investor, obtained a judgment of $56,064.24 and $48,349.31 and an award of attorney’s fees of $26,250 against defendants San Gorgonio Investors, LLC (San Gorgonio) and Boulder Baseline Investors, a California limited partner (Boulder). Defendants appeal, arguing they could properly deduct a 10 percent fee from the net value of their assets before calculating the redemption price to be paid to Malesky when he exercised his “put” options.
We agree with the trial court that the written agreements which are the subject of dispute are not ambiguous and are not subject to the interpretation urged by defendants. We affirm the judgment.
II. Factual and Procedural Background
The parties generally agree about the pertinent facts.
While Malesky was employed as a physician with Beaver Medical Clinic (Beaver), he purchased a general partnership interest of 7.342 percent in San Gorgonio when it was formed in 1991 and a limited partnership interest of 2.1098 percent in Boulder when it was formed in 1993. The two partnerships engaged in real estate investments for the use and operations of Beaver.
The San Gorgonio general partnership agreement contains “put” and “call” options. The method for valuation of a partnership interest is described at section 7.7 of the agreement and is based on fair market value. Malesky’s general partnership interest was converted to interest in a limited liability company on January 1, 2006. The San Gorgonio operating agreement contains similar provisions to the general partnership agreement. The Boulder limited partnership agreement has redemption valuation provisions that are identical to the San Gorgonio general partnership agreement.
In 1998, defendants’ management committees adopted a 10 percent “brokerage equivalency fee” to be imposed on the redemption of any partnership interest in either entity. The reason for the fee was to cause the redeeming partner to share the cost of any actual sale that would eventually occur. The fee was imposed on all redemptions occurring since 1998.
In March 2007, Malesky exercised his “put” option. After he objected to the deduction of the 10 percent fee, he filed complaints for declaratory relief and breach of contract. Defendants filed cross-complaints for declaratory relief, seeking validation of the fee. Defendants began to redeem Malesky’s interest on an installment payment basis, while deducting the disputed 10 percent fee.
Two separate actions were consolidated by the parties’ stipulation.
After a three-day court trial, the court gave its tentative decision in favor of Malesky, holding that he could successfully oppose defendants’ practice of imposing the reduction. The court found: “There is nothing in the controlling documents... which references or mandates this 10% reduction. Neither is there evidence which reflects formal steps taken to secure amendment of the operating agreements or implementation of a different method for valuing some or all of the assets either by way of the amendment provisions contained within the documents, the valuation provisions or otherwise. Since the valuation provisions of the ownership agreements of each of the entities do not provide for this 10% reduction in the value of the real estate holdings, and since the language in each agreement is plain, construction by reference to extrinsic materials or past practices is both unnecessary and unwarranted. Further, the fact that [defendants] informally implemented this practice for a number of years, whether with or without objection, does not transform the writings, nor does that circumstance bind MALESKY. Notably, Defendants did not plead or seek reformation in these actions.”
At defendants’ request, the trial court issued a statement of decision (prepared by plaintiff’s counsel), which was consistent with the tentative decision, finding the deduction was not authorized and the language of the subject agreements was clear, plain, and unambiguous, making it unnecessary to refer to extrinsic materials or past practices. Additionally, the practice of imposing the fee was not formally approved. The statement of decision deemed that the cross-complaints sought “adjudication of the rights of parties not before the court” and denied such relief.
III. Analysis
The “relatively straightforward issue” before us is the proper interpretation of sections 7.7 of the general and limited partnership agreements and section 8.2 of the operating agreement as set forth below.
Section 7.7 states the purchase price of a partner’s interest is based on the partnership’s net worth, meaning the amount by which the “current fair market value of all of the Partnership’s assets... exceeds the outstanding balance of all indebtedness and liabilities....” After an initial three-year period, current fair market value is established by an independent appraiser and “[n]otwithstanding the foregoing, the Managing Partners may from time to time unanimously determine to set a higher or lower valuation of the Property for purposes of this Agreement if they determine in good faith that such adjustment is necessary in order to better approximate the current fair market value of the Property.”
Section 8.2.1 states the redemption price is based on the company value, meaning “the total value of all assets... less the total liabilities of the Company.” Company value for real property assets is established by an appraisal or by agreement. Other assets and liabilities “may be adjusted, by unanimous agreement of the Managers, where, in the reasonable judgment of the Man[a]gers, such adjustment is required to prevent a material misstatement of the value or amount of the particular asset, class of assets, or liability.”
We focus our analysis on the meaning of the provisions allowing the managers to adjust the fair market value or the company value of defendant’s assets. Defendants argue the adjustment provisions are ambiguous but may be interpreted using extrinsic evidence to permit the managers to apply the 10 percent reduction fee. Not surprisingly, Malesky argues there is nothing in the plain language of the agreements to justify defendants’ interpretation.
Well-established principles govern the standard of appellate review for a trial court’s interpretation of a written agreement: “When there is ambiguity in the contract language, extrinsic evidence may be considered to ascertain a meaning to which the instrument’s language is reasonably susceptible. [Citation.]... [¶] We review the agreement and the extrinsic evidence de novo, even if the evidence is susceptible to multiple interpretations, unless the interpretation depends upon credibility. [Citation.] If it does, we must accept any reasonable interpretation adopted by the trial court. [Citation.]” (Golden West Baseball Co. v. City of Anaheim (1994) 25 Cal.App.4th 11, 21-22.) “In reviewing... the construction of a written instrument, to the extent the evidence is in conflict, we accept the trial court’s implied credibility determinations; to the extent the evidence is not in conflict, we construe the instrument, and we resolve any conflicting inferences, ourselves. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865-866 and 866, fn. 2.)” (Schaefer’s Ambulance Service v. County of San Bernardino (1998) 68 Cal.App.4th 581, 586 [4th Dist., Div.2].) We use a two-step process to determine whether the adjustment provisions are ambiguous, allowing the court to consider extrinsic evidence for purposes of interpretation before deciding whether the court accurately interpreted the agreements as not allowing the 10 percent reduction. (Bill Signs Trucking, LLC v. Signs Family Limited Partnership (2007) 157 Cal.App.4th 1515, 1521.)
On the threshold question of whether the adjustment provisions are ambiguous, warranting extrinsic evidence to aid interpretation, we agree the language used does not precisely explain the circumstances under which the managers could adjust the value of defendants’ assets. Instead, the managers are authorized to act in “good faith” and exercise “reasonable judgment” in making an adjustment that reflects the true value of defendants’ assets. One example of an authorized adjustment was the occasional deduction made for above-market rents. Adjustments were also made for construction in progress. The trial court also received evidence that the managers believed they had the authority to implement the broker equivalency fee beginning in 1998 and continuing until Malesky objected. None of the foregoing is disputed.
But, even considering the understanding and practice of defendants’ managers regarding the adjustment provisions and implementation of the reduction fee, we agree with the trial court’s assessment of the subject agreements as not being ambiguous. On their face, the adjustment provisions allow for adjustment of current fair market value or company value. An adjustment based on current rental values or construction costs would reasonably be encompassed within the language of the adjustment provisions because it would reflect present value. Other examples, cited by defendants, like rental vacancies or required environmental retrofitting might also qualify for adjustment.
The 10 percent brokerage equivalency fee, however, must be characterized differently. Defendants’ witness characterized the reduction fee as a “contingent liability, ” a “potential obligation, ” or “the estimated costs of an actual sale of the appraised property.” All of these terms and phrases describe a possible, but not fixed, diminution in value. But the adjustment provisions do not permit a 10 percent potential future reduction to be applied after the present value has been established. Defendants’ proposed interpretation is convoluted in that it anticipates establishing present value, subtracting a future cost of 10 percent, and making that figure the new value for purposes of redemption.
Courts do not engage in forced construction, “nor will they strain to create an ambiguity where none exists.” (Ray v. Valley Forge Ins. Co. (1999) 77 Cal.App.4th 1039, 1044.) If language is clear and unambiguous, we do not consider extrinsic evidence. (Ibid.) We agree that the adjustment provisions are not ambiguous but, even if extrinsic evidence is considered, the procedure proposed by defendants is not a plausible interpretation of the adjustment provisions.
To put it simply, the adjustment provisions do not permit defendants to reduce present value based on future costs.
In summary, we adopt defendants’ own argument with a twist, holding that “an adjustment based upon the anticipated costs that would be incurred upon an actual sale of the property is not a proper ‘adjustment’ under the language of the agreements, ...”
IV. Disposition
We affirm the judgment.
We concur: Ramirez P. J., McKinster J.