Opinion
No C-00-4538 VRW
June 17, 2002
ORDER
Defendants move for summary judgment or, in the alternative, summary adjudication. Doc #12. For the reasons set forth below, defendants' motion (Doc #12) is GRANTED.
I
Plaintiff filed its complaint on December 5, 2000, alleging that defendants had breached a lease agreement with plaintiff and that defendants fraudulently induced plaintiff to enter into the lease agreement. See Compl (Doc #1). Plaintiff is a commercial shopping center. Plaintiff alleges that defendants Deutsche Lufthansa AG and LSG Lufthansa Service Holding AG (collectively, the Lufthansa companies) are German holding companies with a variety of subsidiaries, affiliates and dbas. See id at ¶ 1. One of these dbas, plaintiff asserts, is defendant Venice Market Corporation (Venice Market). Plaintiff asserts that the Lufthansa companies used Venice Market as a shell corporation when they entered into a lease agreement with plaintiff. See id.
The following facts are undisputed, with the exception of the validity of the lease agreement, as discussed below. In December 1997, Helmut Bleckmann and Helmut Woelki, representing defendant companies on behalf of Venice Market, met with Ronald Williams, plaintiff's president, to discuss the possibility of Venice Market leasing space at plaintiff's shopping center. See Bleckmann Decl (Doc #14) at ¶ 5. Venice Market informed Williams that it was interested in using the space for an upscale Mediterranean food market that would include a small seating area for customers to eat food purchased in the store. See id at ¶ 6. Williams assured Venice Market that plaintiff was able to provide a suitable space for such a market and specifically identified a large location, referred to as Bay No 115, which was then occupied by a retailer. See id at ¶ 7.
In late January 1998, Williams prepared and signed a ten-year lease, dated January 20, 1998, on behalf of plaintiff, which he forwarded to Venice Market. See id at Exh A. Woelki, on behalf of Venice Market, added amendments to the lease, signed it and sent it back to Williams. See id.
Plaintiff contends that, as a result of this exchange, the parties entered into a valid lease agreement. Defendants contend that Woelki's amendments represented a counteroffer, which was never formally accepted. See Def B.R. (Doc #12) at 6 n3. For the purposes of their summary judgment motion, however, defendants do not contest the validity of the lease agreement on this ground, although reserving the right to contest the agreement's validity on this ground at trial. See id. Accordingly, for purposes of the instant motion, the existence of a valid lease agreement is assumed.
The lease agreement provides that plaintiff leases Bay No 115 to Venice Market in Town Country Village shopping center "for the purpose of conducting therein an upscale prepared food, wine and beer purveyor with a Mediterranean theme which offers a small amount of both indoor and outdoor seating for its customers" See Doc #14, Exh A at 1. Venice Market hired architects Aumiller Youngquist to prepare plans for its store. See Bleckmann Decl (Doc #14) at ¶ 12. On March 7, 1998 Aumiller Youngquist sent plaintiff a copy of its proposed plans for the market. See Bridges Decl (Doc #17, Exh B). On April 16, 1998, Aumiller Youngquist submitted a tenant improvement floor plan for a conditional use permit to the City of Palo Alto (city). See Milligan Decl (Doc #13, Exh A). In the letter accompanying the floor plan, Jerald Milligan, the project architect, noted that he was seeking confirmation that "our proposed use as a market, will be a Type M Occupancy, similar to the previous tenant." See id. Type M Occupancy is, essentially, retail occupancy.
On or around April 27, 1998, Milligan learned that the city had determined that the Venice Market plans represented a change in occupancy type, from retail occupancy to restaurant occupancy and that, as a result, the entire building would require a seismic upgrade. See Bleckmann Decl (Doc #14, Exh C). Bleckmann and Williams met on July 3, 1998, to discuss this development. See id at ¶ 17. Bleckmann explained that the city was requiring a seismic upgrade to the shopping center as a condition to Venice Market's occupancy. Williams stated that plaintiff was not willing to pay for the seismic upgrade.
On July 6, 1998, Milligan, in a letter to Bleckmann, formalized his conclusions regarding the city's permitting requirements. See Milligan Decl (Doc #13, Exh D). In this letter, Milligan related the conclusion of the City of Palo Alto Building Inspection Department that "the entire building needed to be improved structurally to meet the 1995 Uniform Building Code for seismic construction." Id. Noting that the city requires structural improvements "for any new building projects that either change occupancy types or increase the value of the property," Milligan stated that the permitting of the Venice Market project would necessitate improvements to the building because the city had determined that the project was a shift in occupancy type from the current retail occupancy type (Type M) to a restaurant occupancy type (Type A). Id. Milligan noted that the required structural improvements included improvements of "beams, columns, connections, and shear walls" that extended beyond the lease lines of the proposed Venice Market space. Id. In his declaration, Milligan states that these improvements would have been extremely expensive. See id at ¶ 7. At the time, Milligan estimated that the required improvements would cost 3 million dollars. See id. As a result of this estimate, Bleckmann instructed Milligan to cease all work on the Venice Market project. See id.
On July 15, 1998, Woelki and Bleckmann sent Williams a formal revocation of Venice Market's "offer" to lease premises in Town Country Village. See Bleckmann Decl (Doc #14, Exh E). Defendants now move for summary judgment, asserting that they cannot be liable for breach of the lease agreement, as that agreement was rescinded pursuant to the doctrine of mutual mistake.
In reviewing a summary judgment motion, the court must determine whether there are genuine disputed issues of material fact, resolving any doubt in favor of the party opposing the motion. The burden of establishing that there are no genuine issues of material fact lies with the moving party. See Celotex Corp v. Catrett, 477 U.S. 317, 322-23 (1986). When the moving party bears the burden of proof at trial, the moving party must "show not only the absence of a disputed issue of fact but also that [the party] is entitled to judgment as a matter of law." Calderone v. United States, 799 F.2d 254, 258-59 (6th Cir 1986).
II A
Rescission due to mutual mistake is an affirmative defense to a contract action. In California, "a mutual mistake, whether of fact or law, which affects an essential element of the contract and is harmful to one of the parties is subject to rescission by the party harmed." Guthrie v. Times-Mirror Co, 124 Cal.Rptr. 577, 580 (Cal App. 1975). See also, Cal Civil Code § 1689(b)(1).
Defendants rely heavily on Williams v. Puccinelli, 46 Cal.Rptr. 285 (Cal App. 1965), and do so with good reason, for the facts in Williams are similar to those in the present dispute. In Williams, plaintiff leased a portion of a building to defendant, to be used as a restaurant and bar, for a period of ten years. See id at 286. "Unknown to both parties," however, "substantial alterations in the building, including portions not leased by respondent, were required by law in order to allow the second floor to be used for a restaurant and bar." Id. The trial court determined that the contract was subject to rescission, as it was "not within the contemplation of the parties at the time the lease was executed, [that] the very costly structure changes to the building itself would have to be made before said second floor could be used lawfully as a restaurant." Id at 287, emphasis by court of appeal. The court of appeal affirmed, noting that rescission was appropriate because "both parties were ignorant of the structural weaknesses of the building which would prevent" the desired use unless structural improvements to the building itself were made. Id.
As noted, defendants contend that the instant situation is identical to that in Williams, as neither party was aware when entering into the lease that the area to be leased could not be put to the desired use without structural improvements to the building itself.
Plaintiff concedes that it was unaware that defendants' desired use, as originally proposed, would require structural improvements to the entire building. See Pl Opp B.R. (Doc #16) at 5. Plaintiff does not dispute that it represented to defendants that Bay No 115 would be suitable for defendants intended use. See id. Plaintiff contends, however, that defendants' plans for its market changed over time and that structural improvements to the entire building were only required because defendants decided to expand the size of the Venice Market dining area. See id. Specifically, plaintiff argues that: "Venice Market unilaterally and voluntarily changed the concept of its restaurant to accommodate 100 and 200 diners, thereby requiring a Type A Occupancy use permit." Pl Opp B.R. (Doc #16) at 4.
This allegation, however, is not based on a disputed material fact, but a misunderstanding of statements made by Milligan in a letter to Bleckmann. This misunderstanding is the product of a misunderstanding of some of the technical terms used by Milligan and, in particular, "occupancy load."
In support of its claim that defendants expanded the size of the seating area of the Venice Market, plaintiff cites to the letter written by Milligan to Bleckmann, dated July 6, 1998, describing the city's requirement of structural improvements. In this letter, Milligan states that as the "occupancy load" of the Venice Market is 100 to 200 people, a Type A Occupancy is required. See Doc #13, Exh D at 2. Plaintiff evidently interprets this statement to mean that the Venice Market planned on having 100 to 200 seats and considers this statement to be evidence of an expansion of the market's seating area. This statement, however, does not reference the intended seating area of the Venice Market, but references a technical calculation, which is largely a function of usable area.
"Occupancy load" is a term of art under the California Uniform Building Code (UBC) and is calculated by reference to the square feet of retail space in operation, in light of the classification of the area's use. The previous operator of Bay No 115 was operating under a retail permit, which is a Type M permit. According to defendants' uncontroverted evidence, the city concluded that the Venice Market concept was not eligible for a retail market permit, because it contained a dining area and, therefore, must operate under a restaurant permit.
Under the applicable Palo Alto use regulations, there are two types of restaurant permits: Type A and B. The difference between these permits is the "occupancy load" they cover. The significance of this difference is that, pursuant to its policy, the city determined that although moving from a Type M to a Type B permit would not require a seismic upgrade of the building, moving from a Type M to a Type A permit would require such an upgrade.
As noted, occupancy load is determined by dividing an establishment's total square footage by a predetermined factor, which depends upon the use to which the space is put. For a retail establishment, the UBC allocates 30 square feet per person. See id at 1. For restaurants, however, the UBC calculates 15 square feet per person. See Bleckmann Decl (Doc #14, Exh C) at 3. Accordingly, as Milligan explained to Bleckmann:
Occupancy Type B is for limited dining and drinking establishments with an occupant load less than 50 * * * The total occupant load is calculated by the usable area divided by 15 square feet per occupant. If the area exceeds 735 square feet, then this would push us into a Type A occupancy.
Id.
The usable area of Bay No 115 greatly exceeded 735 square feet. In fact, Milligan noted that pursuant to its plans, the usable area of the Venice Market would be 4080 square feet.
In short, once the city determined that the Venice Market concept required a restaurant permit, Venice Market would not be able to occupy the leased space for its intended purpose, without seismic upgrades occurring for the entire building. There can be no reasonable dispute that both parties were unaware of the unsuitability of Bay No 115 for the Venice Market at the time of the formation of the alleged contract.
At the April 18, 2002, hearing on defendants' motion, plaintiff's counsel acknowledged that plaintiff had failed to produce any evidence to contest defendants' argument that once the city determined that Venice Market required a restaurant permit, seismic upgrades were required. Plaintiff's counsel also acknowledged that this absence of evidence was, essentially, fatal to its opposition of defendants' motion. In light of these concessions, upon request, the court gave plaintiff the opportunity to submit, if possible, a provision of the UBC supporting plaintiff's contention that, if defendants had not modified their floor plan, the Venice Market could have been classified as a restaurant with a Type B permit.
On April 25, 2002, plaintiff submitted two declarations interpreting selected portions of the UBC. Docs ##27 and 28. By way of these declarations, plaintiff appears to be arguing that pursuant to the UBC, the Venice Market could have been classified as consisting of dual occupancy, with the eating area classified as Type A or B and the market area classified as Type M. Moreover, plaintiff contends, the city could have interpreted the UBC to permit the classification of the eating area as an accessory to the major occupancy use: a market. Under this classification, the Venice Market would be considered a Type M major occupancy type and would not require seismic upgrades.
This argument, however, is unavailing for plaintiff. First, the court's invitation to plaintiff to submit provisions of the UBC corroborating the argument made in its opposition brief was not an invitation to raise new arguments with the court. Plaintiff's speculation about alternative possible ways of classifying the Venice Market is a belated attempt to create an issue of material fact, but does not support plaintiff's original argument that the Venice Market, as originally planned, would have been classified as a restaurant, Type B, under the UBC. Second, plaintiff's new theory does not address the uncontroverted evidence that establishes that the major occupancy type of the Venice Market was determined by the city to be a restaurant. Again, plaintiff was given the opportunity to present evidence showing — or at least bringing into question — the fact that this classification by the city meant that defendants had, in fact, changed their plans for the market; plaintiff's new argument does not bring this into question. Finally, plaintiff's belated argument is unpersuasive. The UBC would not appear to permit the Venice Market to have both an eating area and a market in a single open space, without some form of separation.
B
Notwithstanding plaintiff's concession at oral argument that the classification issue was dispositive of defendants' rescission argument, the court will also address the other contentions raised in plaintiff's opposition brief, namely: (1) if there was a mistake, it was not mutual and (2) defendants' mistake resulted from the violation of a legal duty.
The first of these contentions requires little discussion. All evidence points to a mistake by both parties. Both parties were proceeding under the assumption that Bay No 115 would be suitable for the Venice Market, without requiring structural repairs to the entire building. Plaintiff surely did not contemplate that the establishment of the Venice Market would require seismic upgrades to the entire shopping center and makes no contention in these proceedings to the contrary. Moreover, if either party had contemplated such a possibility, it would have been highly prudent to assign the burden of making such repairs in the lease agreement. The silence of the lease on this topic speaks volumes.
The second contention is a more elegant rephrasing of the first. Plaintiff essentially argues that even if the mistake was mutual, defendants must bear the burden of that mistake alone, as the mistake arose from a "neglect of a legal duty." See Pl Opp B.R. (Doc #16) at 7, citing Wal-Noon Corp v. Hill, 119 Cal.Rptr. 646, 652 (Cal App. 1975). By way of this contention, plaintiff seeks to suggest that a triable issue of fact remains — even in the absence of any particular facts in dispute — namely, whether plaintiff neglected a legal duty. This attempt to ward off summary judgment fails.
First, in the circumstances of this case, whether the "neglect of legal duty" analysis should be applied at all is highly questionable. The "neglect of legal duty" analysis applies when the mistake at issue is a mistake of fact. See Cal Civ Code § 1577. When a party to a contract gives consent to the contract based on a mistake of fact, which is not the result of neglect of a legal duty, the contract may generally be rescinded. See id. When both parties, however, are aware of the relevant facts, but make "substantially the same mistake as to the law," the contract may be rescinded, without consideration whether the mistake was due to a neglect of a legal duty. Cal Civ Code § 1578.
In the present matter, the parties were mutually mistaken that Bay No 115 was suitable for the Venice Market, without necessitating structural improvements to the entire building. Because this was largely a mistake of the legal consequences of Venice Market's intended use of the space, it would appear to be a mutual mistake of law, which does not require a neglect of legal duty analysis.
In Adams v. Heinsch, 89 Cal App.2d 300 (Cal App. 1948), in permitting rescission where the parties were unaware that the leased property was unsuitable for the intended use because of rental regulations, the court of appeal deemed it "unimportant whether the alleged mistake * * * be held to be a mistake of fact or one of law." See id at 303, quoting Hannah v. Steinman, 159 Cal. 142, 146 (1911). In Hannah, the California supreme court also determined that rescission was appropriate where the parties were unaware of recent zoning ordinances that prohibited the intended use of the leased space. In both cases, the California courts concluded that, to the extent the analysis was applicable, the failure of the party seeking rescission to ascertain the detrimental consequences of the regulatory scheme on the intended use could not be considered a neglect of a legal duty so as to prevent rescission. See Hannah, 159 Cal at 151; Adams, 89 Cal App.2d at 304.
To the extent the neglect of legal duty analysis is required in this case, the court determines that there is no evidence in the record by which a reasonable juror could determine that the mistake of the parties of the legal consequences of defendants' intended use of the lease property was a neglect of a legal duty. "It is well established * * * that ordinary negligence does not constitute neglect of a legal duty." Donovan v. RRL Corp, 109 Cal.Rptr.2d 807 (2001). Rather, as clarified recently in Donovan by the California supreme court, only extreme cases of negligence can bar rescission based on mistake of fact:
The mere fact that a mistaken party could have avoided the mistake by the exercise of reasonable care does not preclude * * * avoidance * * * [on the ground of mistake]. Indeed, since a party can often avoid a mistake by the exercise of such care, the availability of relief would be severely circumscribed if he were to be barred by his negligence. Nevertheless, in extreme cases the mistaken party's fault is a proper ground for denying him relief for a mistake that he otherwise could have avoided * * * The rule is stated in terms of good faith and fair dealing * * * [A] failure to act in good faith and in accordance with reasonable standards of fair dealing during pre-contractual negotiations does not amount to a breach. Nevertheless, under the rule stated in [§ 1577], the failure bars a mistaken party from relief based on a mistake that otherwise would not have been made.
Id at 825-26, quoting Rest 2d Contracts § 157, com, 4176-417, emphasis added.
There is nothing in the record to suggest that defendants' conduct during pre-contractual negotiations constituted an "extreme case," so that the failure to be aware that the Venice Market would be classified as a restaurant and that this classification would necessitate seismic upgrades to the entire building precludes defendants from rescission. Rather, defendants' conduct reflects that they entered into the contract in good faith and in accordance with reasonable standards of fair dealing. Plaintiff rests entirely on the conclusory allegation that defendants' failure to investigate was unreasonable, without setting forth any evidence to support this allegation. On the record before it, the court concludes that no reasonable juror could determine that defendants' conduct involved such extreme negligence as to bar rescission.
By way of contrast, when California courts have found the existence of a neglect of a legal duty in this context, the mistake at issue is generally a discrete factual mistake regarding information within the control of the offending party. For example, in Wal-Noon Corp, the case cited by plaintiff, the court of appeal determined that a failure to be aware of a provision in the governing contract could not give rise to rescission. The Wal-Noon Corp court, in fact, expressly distinguished situations "where equally innocent persons, laboring under a common mistake, have dealt with one another." 119 Cal Rptr at 652.
The record is clear that this is a case in which parties to a contract, although agreeing on the facts, were unaware of the legal consequences of those facts. "[T]here is no conflict in the evidence as to the impossibility of using the leased portion of the building" for the intended purpose "without structural changes or repairs first being made to" portions of the building beyond the leased portion. Williams, 46 Cal Rptr at 290. As the parties were unaware of this contingency at the time of (alleged) contract formation, the contract did not provide for such repair. To hold defendants to the contract "would inequitably enrich [plaintiff] and unwarrantably penalize" defendants for a mutual misunderstanding of the suitability of the leased space. Adams, 89 Cal App.2d at 304. No reasonable juror could determine that defendants' behavior constituted an extreme case of negligence in pre-contractual negotiations, so as to preclude rescission. Accordingly, summary judgment against plaintiff's breach of contract claim is appropriate.
In their opening brief, defendants argued that a determination of mutual mistake would also operate as a judgment against plaintiff's second cause of action, for fraudulent inducement. Defendants contend that even assuming plaintiff was fraudulently induced to enter into the contract, it did not suffer any damages from the alleged fraud, given the absence of a legally binding contract. See Def B.R. (Doc #12) at 11. Plaintiff has not opposed this contention. That damages were suffered is a necessary element of a fraud claim. See, e g, Service by Medallion v. Clorox Co, 52 Cal.Rptr.2d 650, 655 (Cal App. 1996). Accordingly, summary judgment is also granted against plaintiff's claim for fraudulent inducement.
Finally, the court notes that plaintiff filed a "sur reply" to defendants' motion on April 11, 2002. Doc #22. Plaintiff also filed the declaration of a "new material witness." Doc #23. Civ LR 7-3(d) provides that, with limited exceptions not implicated here, once a reply is filed, "no additional memoranda, papers or letters may be filed without prior Court approval." Plaintiff has neither sought nor obtained court approval for this filing, prior to its filing or otherwise. Accordingly, the court has taken no notice of the arguments contained therein.
III
In sum, defendants' motion for summary judgment (Doc #12) is GRANTED. The clerk is directed to enter judgment for defendants, close the file and terminate all pending motions.
JUDGMENT. [FRCP 58]
This action came to trial or hearing before the Court. The issues have been tried or heard and a decision has been rendered.
IT IS ORDERED AND ADJUDGED that judgment is entered in favor of Defendants.