Opinion
G057421
10-28-2019
MICHAEL LAMELZA et al., Plaintiffs and Appellants, v. SAM LINDSAY et al., Defendants and Respondents.
Snell & Wilmer and Todd E. Lundell for Plaintiffs and Appellants. Sall Spencer Callas & Krueger, A Law Corporation, Robert K. Sall, Suzanne Burke Spencer and Michael A. Sall for Defendants and Respondents J. Robert Gilroy, First West Capital Corporation and First West-DHS Partners. Weintraub Tobin, Gary A. Waldron and Sherry S. Bragg; Buchalter and Robert M. Dato for Defendant and Respondent Sam Lindsay.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2009-00180150) OPINION Appeal from a judgment of the Superior Court of Orange County, Ronald L. Bauer, Judge. Affirmed. Snell & Wilmer and Todd E. Lundell for Plaintiffs and Appellants. Sall Spencer Callas & Krueger, A Law Corporation, Robert K. Sall, Suzanne Burke Spencer and Michael A. Sall for Defendants and Respondents J. Robert Gilroy, First West Capital Corporation and First West-DHS Partners. Weintraub Tobin, Gary A. Waldron and Sherry S. Bragg; Buchalter and Robert M. Dato for Defendant and Respondent Sam Lindsay.
* * *
This is our third go-round in this unfortunate and lengthy saga. To briefly recap, the facts involve a real estate partnership in the Coachella Valley. Plaintiffs Michael LaMelza and Villa Rossa, LLC (Villa Rossa) sued defendants Sam Lindsay, Robert Gilroy, First West-DHS Partners LP (First West DHS), and First West Capital Corporation (First West Capital), alleging the defendants deprived them of the full value of the property. The trial court initially concluded that Lindsay had a fiduciary duty to LaMelza and breached it by entering into a separate agreement with Gilroy, but that LaMelza later ratified Lindsay's behavior. (LaMelza et al. v. Lindsay et al. (Nov. 27, 2012, G045402) [nonpub. opn.] (LaMelza I).)
The record sometimes spells LaMelza's name as "La Melza." For the sake of consistency, we have standardized it as LaMelza, the spelling used in LaMelza's brief.
First West DHS and First West Capital are hereafter referred to collectively as the entity defendants. Gilroy and the entity defendants are collectively referred to as the Gilroy defendants.
Our principal holding in LaMelza I was that the trial court applied an incorrect legal standard when it concluded LaMelza ratified Lindsay's conduct. (LaMelza I, supra, G045402.) We found that based on the facts included in the statement of decision, which were supported by substantial evidence, the proper course of action upon remand was to enter judgment against Lindsay and in favor of LaMelza, determine the liability of the Gilroy defendants, and fashion appropriate remedies. (LaMelza I, supra, G045402.)
On remand after LaMelza I, the court indicated its intent to bifurcate the remaining issues into separate proceedings. The first phase of those proceedings were conducted, but the court then issued an order disposing of all the issues remaining in the case. All defendants except First West Capital, jointly and severally, were ordered to disgorge unlawful profits plus prejudgment interest in the amount of $63,843,530.82, plus postjudgment interest. First West Capital was ordered to disgorge unlawful profits plus prejudgment interest in the amount of $4,732,876.71, plus postjudgment interest.
In LaMelza et al. v. Lindsay et al. (Jan. 13, 2017, G051506, G051514) [nonpub. opn.] (LaMelza II), our primary findings were that the statement of decision was not adequate and that the trial court had erred by not conducting the second phase of the bifurcated proceedings. We offered considerable guidance on remand. Justice Aronson dissented, suggesting that we should reconsider LaMelza I's dispositional instruction.
For ease to the reader, hereinafter, we only list the lead case No. G051506 when citing to La Melza II, supra.
On remand, as we will discuss in some detail below, the trial court entered judgment in favor of defendants. Plaintiffs argue this is error for numerous reasons, including that it violates our instruction in LaMelza I, and is both unsupported by the evidence and constitutes and abuse of discretion. We disagree, finding that the doctrine of the law of the case does not apply here, and even if it did, we would exercise our discretion not to apply it in this instance. Further, we conclude the trial court's factual findings were supported by substantial evidence and its discretionary rulings were a sound exercise of that discretion. Accordingly, we affirm the judgment.
I
FACTS
A. Historical Facts and LaMelza I
We briefly restate the facts from our second opinion in this case, LaMelza II, supra, G051506: "Lindsay and Gilroy initially attempted to purchase the property known as Stoneridge in early 2003. That effort failed, and LaMelza purchased the property instead. Lindsay thereafter presented himself to LaMelza as a potential employee with experience in gaining entitlements, and LaMelza hired him. LaMelza felt Lindsay performed well, and they later executed a retroactive contract governing their relationship. In the meantime, LaMelza had received an appraisal estimating the fully entitled property would be worth $12 million. (LaMelza I, supra, G045402.)
"By May 2004, the relationship between Lindsay and LaMelza was terminated. There was disagreement about what had been disclosed to LaMelza about Lindsay's relationship with Gilroy, and when. But as the trial court described it, 'On May 3, 2004, LaMelza told Gilroy that Lindsay was now a free agent. Gilroy, in turn, wrote that he now felt free to contract with Lindsay as a project manager. This was almost surely an artful dodge by Gilroy, who had long ago made plans to work together with Lindsay.' (LaMelza I, supra, G045402.)
"In July 2004, First West Capital (a corporation of which Gilroy is a shareholder) purchased Stoneridge from LaMelza for $20 million. A few months later, the property was sold to a home builder for $110 million. LaMelza then filed the instant suit, alleging, among other things, breach of contract and breach of fiduciary duty. (LaMelza I, supra, G045402.)
"As the trial court put it: '"A quick summary of the parties' disputed issues might be as follows: LaMelza contends that Lindsay connived with Gilroy to 'stalk' the Stoneridge project; to gain LaMelza's trust and confidence; to set in place the financing for a purchase; to convince the plaintiff that $20 million was a good price; to effect such a purchase from LaMelza; and then to resell at a vast profit. This plan was kept secret from LaMelza; it all constituted a breach of the fiduciary obligation owed by Lindsay to LaMelza; and the profits of the second sale should be disgorged to the plaintiffs."' (LaMelza I, supra, G045402.) '"The defendants disagree. On the facts, they urge that Lindsay was a mere salaried gofer who never owed any fiduciary obligation to LaMelza; that LaMelza was fully advised before the first sale that Lindsay planned to join with Gilroy to continue with the Stoneridge development efforts thereafter; that the $20 million price gained by LaMelza was then fair and just; and that later profits were a consequence of a sharp contemporaneous boom in the real estate market and of the efforts of [defendants]."' (Ibid.)
"The court disagreed that no fiduciary duty was owed by Lindsay: '"[T]here should be little doubt that Lindsay's employment imposed upon him a duty of utmost loyalty to his employer. Lindsay was paid $20,000 per month for his work, with the further potential of a percentage of any profits gained through the sale of any of LaMelza's three parcels (5% for the Stoneridge project). Lindsay was hardly a scrivener or receptionist. He was hired for his knowledge of real estate development and was given unlimited access to all information known to the plaintiff about these projects. He was encouraged to negotiate with third parties for services, to gain necessary approvals from governmental entities, to seek financing, and to evaluate the properties for potential sales. This was a virtual partnership between LaMelza and Lindsay. Lindsay cannot seriously dispute that he owed a fiduciary obligation of utmost good faith to his employer/co-venturer."' (LaMelza I, supra, G045402.)
"Ultimately, the trial court concluded that although Lindsay breached his fiduciary duty to LaMelza, LaMelza ratified Lindsay's behavior by choosing to proceed with the sale of Stoneridge even after he became aware of Lindsay's self-dealing. The court, accordingly, entered judgment for defendants. (LaMelza I, supra, G045402.)
"On appeal, we concluded the factual findings of the trial court were supported by substantial evidence, particularly accepting the conclusions that Lindsay owed LaMelza a fiduciary duty and breached it by failing to disclose his dealings with Gilroy. But we also found the trial court had applied the wrong standard to determine whether LaMelza had ratified Lindsay's actions. Noting that 'full disclosure of all relevant information is key,' we found the facts demonstrated that 'any disclosure by Lindsay and Gilroy regarding their relationship before Lindsay left LaMelza's employ was anything but full.' (LaMelza I, supra, G045402.)" (LaMelza II, supra, G051506.)
Accordingly, we found the only issue left between LaMelza and Lindsay was the remedy. Regrettably, we used language that has caused no end of problems, directing the trial court to "enter judgment in favor of plaintiffs and determine the proper remedies." As to the Gilroy defendants, we instructed the court, on remand, to consider their liability and decide what, if any remedies were appropriate. (LaMelza I, supra, G045402.) B. Remand After LaMelza I
After remand, the court permitted LaMelza to file an amended complaint alleging further and different theories of liability and remedies. The trial court then bifurcated the case, stating "'issues of liability, causation and the proper remedy and/or measure of damages, if any shall be determined by the Court first, followed by the issues of whether a constructive trust may be imposed on the Defendants' assets, and if so, upon which assets.'" (LaMelza II, supra, G051506.)
After the first phase, plaintiffs decided to rely entirely on a theory of disgorgement of secret profits from the sale of the property by Gilroy and Lindsey to the developer. The court ultimately found First West liable for approximately $4.7 million and the remaining defendants liable for approximately $63.8 million. (LaMelza II, supra, G051506.)
The court did not hold the second part of the bifurcated proceeding, and the statement of decision omitted the court's grounds for determining a number of critical issues. (LaMelza II, supra, G051506.) C. LaMelza II
Unsurprisingly, defendants appealed on numerous grounds. We addressed a few of the issues raised in the appeal on their merits, but essentially, we reversed the judgment and remanded for a more detailed statement of decision. (LaMelza II, supra, G051506.) The lack of a detailed statement of decision "preclude[d] meaningful appellate review of the issues the parties now raise. This includes the legal basis for the amount of disgorgement ordered; the defendants' legal defenses to the remedy of disgorgement; the legal basis for holding First West Capital liable, and the status of First West DHS. As much as we would like to issue the final and conclusive decision in this case, we cannot do so without further input from the trial court. Indeed, we cannot even apply the proper standard of review on some of these issues without additional findings." We also found it was error not to conduct the second phase of the bifurcated proceeding. (LaMelza II, supra, G051506.)
We also, however, issued a mea culpa for the inartful language in LaMelza I with respect to "enter[ing] judgment" in favor of LaMelza, noting it was "intended 'to prevent the parties from relitigating issues that had already been decided, especially the trial court's finding that Lindsay had breached his fiduciary duty to LaMelza.'" (LaMelza II, supra, G051506.) We advised the trial court, as guidance on remand, that "when choosing an equitable remedy, the court is free to take into account all relevant circumstances. Such circumstances might include factors such as changes in the market during the five-month period between property sales, as well as any other pertinent facts. LaMelza also must establish the causal relationship necessary in an equitable case - that the profits sought are attributable to the underlying wrong." (LaMelza II, supra, G051506.)
Justice Aronson dissented on this point.
We also noted that this case has been dragging on for more than a decade - in fact, it is now over 15 years old. We beseeched the parties "to set aside what are obviously long-held and deep-seated emotions about this matter and work with an experienced mediator to settle this case. The alternative, even in the best case scenario, is another two or three years spent in the trial court and in our gracious company, resulting in thousands upon thousands of dollars in fees and costs. The parties would be far better served, and would probably find the ultimate outcome far more satisfactory, if they reached a resolution among themselves." (LaMelza II, supra, G051506.) This, unfortunately, fell upon deaf ears. D. Remand After LaMelza II
On remand, LaMelza, as he had previously, pointed to the parties' earlier stipulation showing that Lindsay and Gilroy had received $34 million in net distributions from the sale of Stoneridge. Defendants offered the testimony of numerous witnesses, including an expert, to demonstrate that the profits were the result of their own efforts, their partner Cameo Homes, and the fluctuations in the market at the time. (We shall expand on this testimony as needed in our discussion below.)
Legally speaking, the evidence was focused on whether the profits from the sale of Stoneridge were so attenuated and remote as a result of the intervening factors that they could not be considered a result of the breach of the fiduciary duty owed to LaMelza, but the culmination of legitimate efforts.
After this hearing, the court issued a tentative, then a final, statement of decision. While the court acknowledged this court's directive in LaMelza I to enter judgment for LaMelza, it decided that it "cannot do" so. Following our guidance in LaMelza II that in determining an equitable remedy, it could consider "'all relevant circumstances' and 'any other pertinent facts,' the court has much to consider. This case plainly lies between two extremes that the court can hypothesize. If this were a quick flip, with Lindsay/Gilroy selling Stoneridge to a wealthy developer while the ink of LaMelza's signature was still wet and the deal with the new buyer had been signed and sealed before Lindsay knocked on LaMelza's door, the case would be easy. Even the defendants acknowledge that such a flip would put them in great jeopardy here. On the other hand, if the defendants labored long to gain governmental approval for their subdivision and then designed ten separate communities within Stoneridge and then built two thousand houses . . . and then marketed these products until the final proceeds, gained seven years after the purchase from LaMelza, was $110,000,000, 'remoteness' and 'attenuation' would be writ large in this history."
After discussion of the legal principles applicable to the case, including the point that the court must find it "unjust" for the defendants to retain the funds in dispute before the plaintiffs can prevail, the court determined: "On the continuum represented by the court's two hypotheticals set forth above, this case is far closer to the second than to the first. Lindsay worked on entitlements while he was on the LaMelza team, but he did not then achieve a product salable to a national home builder. Significant entitlements remained to be completed at a cost of over $4.4 million. [Citation.] As [defendants' witnesses] testified, political winds shift, the economy is unpredictable, and financing is never certain. Cameo Homes (and not Lindsay or Gilroy or LaMelza) had the muscle and stature to see the entitlement process to conclusion and to attract the interest of deep-pocket national home builders. . . . This was not an overnight success story. The process lasted nearly two years from the sale by LaMelza to the deal with Horton. . . . [T]he defendants took an all-or-nothing approach with the contention that they were exclusively responsible for turning a large dirt patch into the birthing of a subdivision. They are right."
"Plaintiffs argue that 'but for the wrongful acquisition of Stoneridge Defendants would not have made the $34 million in profits from the subsequent sale of Stoneridge.' Of course. Defendants could not sell something (Stoneridge) they did not own. But the profits from that sale were the product of efforts undertaken and risks faced by the defendants. In retrospect, we know what happened after LaMelza sold Stoneridge. But, at the time of that sale, it was - in the abstract - equally possible that the project could collapse, perhaps by the recession that arrived a few years later or a shift in the local attitude toward development. LaMelza would then be even happier than he was when he originally sold Stoneridge, and he would rightly feel that he owed nothing to the purchasers. [¶] In summary, it is not unjust for the defendants to retain the proceeds of their efforts in the successful development of Stoneridge."
Further, the court found a second, independent reason for its decision. The court rejected LaMelza's testimony that he would not have sold Stoneridge had he been told of Lindsay and Gilroy's development plans for Stoneridge. "LaMelza had other irons in the fire and limited financing and debts to be paid. He needed to sell. At that time, he could not possibly have been told that Stoneridge would sell for $110,000,000 in the foreseeable future (or ever), and he wisely does not so contend." The court based this conclusion on its findings of facts from its 2011 statement of decision in which the court found it was not proven Lindsay knew of these facts. LaMelza was aware of the unpredictability of the many factors that went into the property's valuation. The court did not find that LaMelza was lying, but that "his testimony and memory were influenced more by the future events than by the facts that existed at the time of the Stoneridge sale. Had he known everything that could have been known when he sold Stoneridge, he would have done so anyway. These facts support a finding that the profits derived from the D.R. Horton sale were remote and attenuated from the underlying wrong. Thus, plaintiff cannot establish the requisite causal link between the profits and the breach required to justify entry of judgment in favor of plaintiffs or a disgorgement award of any amount."
The court entered judgment for defendants, and plaintiffs now appeal.
II
DISCUSSION
A. The Record on Appeal
In an attempt to expedite this matter, this appeal was originally filed by LaMelza as a writ. We denied the writ and deemed it an appeal from the judgment. Subsequently, defendants sought to expand the record from the documents included in LaMelza's writ petition. These efforts include a request for judicial notice filed by Lindsay on May 14, 2019, and a motion to augment the record filed by Lindsay on May 15, 2019. No opposition was received. Pursuant to Evidence Code sections 452 and 459, and California Rules of Court, rule 8.155, both the request for judicial notice and the motion to augment are granted. B. Law of the Case
LaMelza claims the judgment is void for lack of jurisdiction because the trial court did not act in accordance with our direction in LaMelza I to enter judgment in LaMelza's favor. Defendants acknowledge that we gave such instruction in LaMelza I, but state that we never specifically ordered such in LaMelza II. We did not do so explicitly (and LaMelza's claim that we did includes some rather disingenuous out-of-context references and quotations from LaMelza I) but we never directly reversed ourselves, either - had we done so, Justice Aronson's dissent would have been unnecessary. We did give the trial court a broad remit to consider "all relevant circumstances" and consider whether a nominal award to LaMelza would be appropriate. (LaMelza II, supra, G051506.)
But defendants argue that even if this is true, the doctrine of the law of the case either does not apply here, or we should exercise our discretion not to apply it in this instance, and affirm anyway.
Simply stated, "'[t]he doctrine of "law of the case" deals with the effect of the first appellate decision on the subsequent retrial or appeal: The decision of an appellate court, stating a rule of law necessary to the decision of the case, conclusively establishes that rule and makes it determinative of the rights of the same parties in any subsequent retrial or appeal in the same case.'" (Morohoshi v. Pacific Home (2004) 34 Cal.4th 482, 491.)
Defendants argue that our principal finding in LaMelza I was that the trial court applied the wrong legal standard to the ratification issue. They are correct - this was our main legal finding and the reason the case required reversal. As we indicated in LaMelza II, our admittedly unfortunate choice of dispositionary "language was intended to prevent the parties from relitigating issues that had already been decided, especially the trial court's finding that Lindsay had breached his fiduciary duty to LaMelza." (LaMelza II, supra, G051506.) It was simply not apparent to us at the time that defendants had a plethora of affirmative defenses (other than the statute of limitations, which the trial court had considered and rejected) to offer. We were not in possession of all the relevant facts. In any event, our dispositionary language was not necessary to our holding on the substantive issues we decided.
Even if it had been, the doctrine of law of the case is not mandatory on our part. "The doctrine of law of the case is a discretionary policy which should not be followed if it results in a manifestly unjust decision. In looking to a just determination of the rights of the parties, an appellate court is not precluded from reconsidering questions decided on a former appeal." (Amato v. Mercury Casualty Co. (1997) 53 Cal.App.4th 825, 835; see Moore v. Kaufman (2010) 189 Cal.App.4th 604, 617.) Accordingly, we do not find the trial court's actions here in excess of its jurisdiction. C. Causation Verses Attribution to the Underlying Wrong
LaMelza next argues the trial court improperly based its decision on proximate cause arguments we previously rejected. LaMelza claims we "specifically removed proximate cause as a possible issue in recalculating the right amount to disgorge," and that the trial court "let the defendants off the hook by finding that Lindsay's breach did not cause LaMelza['s] harm." But this is disingenuous. We also explicitly stated that LaMelza "must establish the causal relationship necessary in an equitable case - that the profits sought are attributable to the underlying wrong. (Uzyel v. Kadisha (2010) 188 Cal.App.4th 866, 892.)" (LaMelza II, supra, G051506; see generally Rest.3d Restitution and Unjust Enrichment, § 51 (Restatement).)
The Restatement is a valid explanation of California law. (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1487-1488.)
"[A]ttribut[ion] to the underlying wrong" is not identical to cause-in-fact and/or proximate causation used in nonequitable claims, where the specific wrongful act must be connected to the specific damage alleged. Causation in that sense means, for example, that a defendant's collision with a plaintiff's car must have resulted in a specific dent on plaintiff's bumper, for which plaintiff incurred a specific repair bill.
The distinction the court drew, for example, in Uzyel was that the victims of a trustee's breach of duty were not required to trace the misappropriated funds to a specific asset in order to require the trustee to disgorge his profits. They were, however, required to show their loss was attributable to the breach of duty in the first place. (Uzyel v. Kadisha, supra, 188 Cal.App.4th at p. 892.) Attribution, generally speaking, is a broader concept than proximate causation, but it is not meaningless. It is more than mere speculative correlation between a breach and a loss; it is a connection supported by evidence.
The trial court did not "let the defendants off the hook" by reaching conclusions it should not have reached about causation. What the court found, however, was that LaMelza had not suffered any harm that was attributable to defendants' breach of duty. This was not error, and as we shall discuss below, it was supported by substantial evidence. D. The Trial Court's Remaining Substantive Findings
1. Standard of Review
As to the issues remaining, two standards of review apply. We review the trial court's factual findings to determine whether there is substantial evidence, contradicted or uncontradicted, to support those findings. "In applying this standard of review, we 'view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor . . . .'" (Zagami, Inc. v. James A. Crone, Inc. (2008) 160 Cal.App.4th 1083, 1096.) "The ultimate determination is whether a reasonable trier of fact could have found for the respondent based on the whole record." (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1632-1633.) We do not "reweigh the credibility of witnesses or resolve conflicts in the evidence" (Rufo v. Simpson (2001) 86 Cal.App.4th 573, 622), and we are bound by implied findings made by the trial court, such as rejecting a witness's testimony. (Stafford v. Mach (1998) 64 Cal.App.4th 1174, 1182.) A party arguing a lack of substantial "evidence assumes a 'daunting burden.'" (Whiteley v. Philip Morris Inc. (2004) 117 Cal.App.4th 635, 678.)
The trial court's exercise of its discretionary powers are reviewed for abuse of that discretion. "An abuse of discretion occurs if, in light of the applicable law and considering all of the relevant circumstances, the court's decision exceeds the bounds of reason and results in a miscarriage of justice." (Uzyel v. Kadisha, supra, 188 Cal.App.4th at p. 894.)
2. The Disgorgement Analysis
LaMelza first argues the trial court's decision that no disgorgement was required constituted an abuse of discretion because "LaMelza produced sufficient evidence to establish a reasonable approximation that Lindsay and Gilroy were unjustly enriched by the total amount of their net profits from the sale of Stoneridge, which was $34 million, and Lindsay and Gilroy presented no evidence to rebut that reasonable approximation." LaMelza, however, has this somewhat backwards. Our review is not concerned with whether he produced "sufficient evidence" below to prove any fact; the question on appeal is whether the trial court's ultimate decision is supported by substantial evidence.
According to LaMelza, this is among the "simplest" cases for determining the amount of any disgorgement, because when defendants acquired Stoneridge, it was undeveloped land; at the time they sold it 18 months later, it was still undeveloped land. LaMelza argues this is akin to the "easy" cases discussed in the comments to section 51 of the Restatement, where, for example, an embezzler steals $100,000 and buys real estate which appreciates to $150,000; the victim is entitled to $150,000. (Restatement, supra, § 51, com. e.)
Thus, according to LaMelza, the trial court's job here was simple. Take (at minimum) the stipulated profits of $34 million for the sale of Stoneridge and award it to him. He claims: "This is no different than the embezzler of $100 who makes $500 off an investment, or who steals $100,000 from his employer to buy a house that increases in value to $150,000."
As we discussed in LaMelza II, according to defendants, the "stipulation had only been intended to eliminate the need for expert testimony on prejudgment interest, should plaintiffs prevail, and not an admission of liability." (LaMelza II, supra, G051506.)
To the extent that LaMelza is suggesting this court directed this kind of simplistic determination in LaMelza II, he is incorrect. We did not require the court to start with any particular figure as a baseline, and the contested stipulation is not a better number to start with than any other. What we directed the trial court to do was consider all relevant circumstances and pertinent facts in reaching a decision based in equity.
The evidence introduced after remand included many such facts. The court heard testimony from Douglas Neff, the president and CEO of Institutional Housing Partners (IHP), the lender that financed the project. It also heard from James Gianulias and Victor Mahony, officers of Cameo Homes (Cameo), which partnered with First West DHS to form the buying entity, First West DHS Associates, LLC (DHS Associates). Defendants also offered the testimony of Barry Gross, an expert witness who testified as to Stoneridge's value and various events that caused it to increase in value over the 18-month period in question.
According to Neff's earlier testimony, IHP initially declined to get involved because "Gilroy and Lindsay were not adequately capitalized." He was asked to look at the property again when Gilroy and Lindsay said they had found a financial partner to be the primary partner in the project, and IHP decided to make a participating loan. The introduction of Cameo into the project was a significant factor in IHP's decision to participate.
On remand, Neff testified that IHP anticipated a one to two-year process to get Stoneridge entitled, followed by marketing. There were a "wide variety of risk factors." Among them were the uses, lot sizes, and numbers of lots that could be entitled. Beyond that, he testified, "There is considerable risk in timing in any project like this because the markets were very, very strong, and you wanted to make sure that you got to the markets while the markets still were strong because they have a way of changing sometimes quite rapidly."
Further, Neff testified, "another area of risk is the question of whether a raw piece of property that needs considerable investment in order to generate actual lots, whether that raw piece of property will be of interest to the large scale builders, because only a large scale builder could undertake this -- a project of this size, meaning large public builder as a general matter. Very few private builders could do it. [¶] . . . [¶] [W]e were going to be invested in it for more than $20 million, $25 million, but you have considerable investment that you have to put in in the way of utilities, offsite roads, all kinds of amenities and things that actually produce lots before you can build a home. [¶] So there's -- even though the capital for the project, for the land might be 25 million, the capital to build it could well be in the hundreds of millions."
Cameo's involvement in Stoneridge was a "critical" factor in IHP's decision to invest. "[T]he project was quite large in size and required significant financial capabilities. And if there was to be development, a development team to deal with all of the challenges of getting it underway and developed, then there was another very important element in that Cameo was a very large private company, private builder, and they were effective at generating other loans and financing so that they could bring the additional capital to the picture here and, also, likely get our loan paid off so that we would just have a percentage profits interest."
Neff also opined that Gilroy and Lindsay's initial purchase of the land for $20 million was, "[r]oughly speaking," a reasonable price. During cross-examination, when asked if the property was a "flip," Neff said that it was not. He explained that "[A] flip typically is something where the purchaser does nothing of consequence to improve the value of the property and is often within just a month or two of the -- or even simultaneously with the purchase. This was months after -- months after, and there were entitlements secured during that time. So it is not a flip."
Gianulias testified that as part of Cameo's due diligence, the company put together a team of numerous employees to evaluate the property, and they engaged consultants and specialists to assist them. Stoneridge was a "very large" project, the biggest Cameo had ever done. They "hired legal counsel to work on the project."
In 2004, Cameo obtained an assignment of rights from First West Capital for $20 million. After the deal closed, the company was involved in the design of 10 "villages," designed to appeal to different market segments, comprising a total of 2,120 lots. Gianulias, like Neff, testified that timing was important because of market conditions. He said that the project had a degree of risk based on its size. Ultimately, one of the reasons the project was sold to D.R. Horton was to take a profit without maintaining the risk.
Mahony, another executive at Cameo, testified he worked on due diligence with respect to Stoneridge. He testified the company goes through a checklist covering a litany of items for this type of project to determine if it is viable for the company. Cameo conducted the evaluation as raw land, because preexisting entitlements had expired. Cameo ultimately took on the project with the intent to proceed with a new development plan, or in Mahony's words, "a complete redo." A memo from a meeting in April 2004, during the due diligence process, indicated 31 "significant issues as it relates to a raw land project to take it to the next level."
Water was a particular concern; as yet Stoneridge did not have a letter from a water district indicating the ability to obtain water for the site. Stoneridge ultimately obtained a letter in May 2005, Mahony indicated, but this was one of the items on which Cameo had to satisfy itself before it could proceed further, which it eventually did. When asked what accounted for the 14 months between Cameo's involvement and the sale to D.R. Horton, Mahony answered: "The normal work we would have done on any raw piece of land to get the entitlements and move it through the process." In addition to entitlements, this included lining up multiple lenders to take part in the project. Mahony never considered Stoneridge a steal or a guaranteed home run. The project was a risk due to its size and the number of lots.
Gross, a real estate developer and consultant, testified as an expert in numerous respects. There are a few points that are most relevant here. The first is with regard to the completion, as Gross put it, of "significant events," which he defined as "something that would have a significant impact on the land residual valuation." To make the property attractive to a major national developer, he opined, "they would like to have all these items completed prior to them taking ownership to minimize the development risk." These included items such as completion of a specific lot plan, obtaining certain scientific reports, reaching agreement with the city on various matters, arranging utility service, and obtaining certain approvals. Prior to First West DHS taking ownership of the property in July 2004, according to Gross, none of these items had been completed, although some were in process.
Gross also computed the value of the land between May 2004 and April 2005. In May 2004, he opined, it was worth approximately $20.6 million; in April 2005, the value was $109.2 million. The most significant change that led to the increase, he testified, was the increase in the sales value of an average home. As he explained: "In order to calculate the land residual valuation, the net present value cash basis, you have to come up with revenues and the revenues were changing much faster than the costs were in this case." In short, while the expenses were fixed or within a limited range, the income based on escalating home prices was increasing "[a]t a historic rate" at that particular moment. For example, a home worth $234,983 in November 2003 was worth approximately $277,583 in May 2004 and $414,998 in April 2005. At the same time, many items on the "significant issues" memo were being completed, and the completion of each item increased the value of the property. Noting the uncertain nature of the business, Gross pointed out that after the property was sold to D.R. Horton for $110 million in 2005, the housing crash occurred. D.R. Horton sold the property in October 2008 for $7.6 million.
From this testimony, as well as the voluminous documents and earlier testimony, the court concluded that: "Lindsay worked on entitlements while he was on the LaMelza team, but he did not then achieve a product salable to a national home builders. Significant entitlements remained to be completed at a cost of over $4.4 million. [Citation.] . . . As . . . Neff, Gross, Gianulias, and Mahoney [sic] testified, political winds shift, the economy is unpredictable, and financing is never certain. Cameo Homes (and not Lindsay or Gilroy or LaMelza) had the muscle and stature to see the entitlement process to conclusion and to attract the interest of deep-pocket national home builders. According to Mr. Neff's testimony, Cameo's involvement in the project was 'critical' to IHP's decision to provide financing for the project. [Citation.] This was not an overnight success story. The process lasted nearly two years from the sale by LaMelza to the deal with Horton. [T]he defendants took an all-or-nothing approach with the contention that they were exclusively responsible for turning a large dirt patch into the birthing of a subdivision. They are right."
Plaintiffs' protestations notwithstanding, these conclusions are amply supported by substantial evidence. They do not even really try to argue otherwise, but instead, they gloss over the enormous amount of work that was done between the sale of the property by LaMelza and the sale of the property to D.R. Horton, discussing "entitlements" in vague terms. The work that was completed is laid out in extensive documentation and the testimony of the witnesses discussed above, among others. Simply put, this breaks any chain between the wrong done to LaMelza (the lack of complete disclosure) and the defendants' later profits.
3. Justice and the Court's Exercise of Discretion
Plaintiffs spend the remainder of their opening brief arguing the trial court abused its discretion in determining that none of defendants' profits were subject to disgorgement, arguing variously that they are not entitled to keep the profits from a rising market; Lindsay's work with Cameo is not a fact the court should consider; the trial court's conclusion that LaMelza would have sold anyway is not a proper reason to deny disgorgement; and the trial court abused its discretion in how it applied attribution and remoteness.
Plaintiffs spend much of their reply brief arguing what defendants did not show or prove, but that turns the standard of review on its head. It is their burden to show error, not defendants' burden to show the trial court did not error. --------
All of these arguments ignore the trial court's finding that requiring defendants to disgorge their profits under the facts of this case would be unjust. As Justice Aronson noted in his dissent in LaMelza II. (LaMelza II, supra, G051506 (dis. opn.).) "The person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust for the person to retain it." (First Nationwide Savings v. Perry (1992) 11 Cal.App.4th 1657, 1663.) All of plaintiffs' rather specific arguments are swallowed by this overarching conclusion.
The trial court noted: "In retrospect, we know what happened after LaMelza sold Stoneridge. But, at the time of that sale, it was - in the abstract - equally possible that the project could collapse, perhaps by the recession that arrived a few years later or a shift in the local attitude toward development. LaMelza would then be even happier than he was when he initially sold Stoneridge, and he would rightly feel that he owed nothing to the purchasers. [¶] In summary, it is not unjust for the defendants to retain the proceeds of their efforts in the successful development of Stoneridge."
This conclusion was not an abuse of discretion, a finding which exceeds all bounds of reason. According to LaMelza's earlier testimony, he received an appraisal in 2003 from a member of the American Institute of Appraisers. The appraisal stated that assuming no atypical conditions and the availability of essential entitlements, his estimate of the value of the property was $22,500 per acre, or approximately $12,625,000. He sold it to Lindsay for $20 million.
Lindsay did not fully disclose the truth to LaMelza about his intent, a fact the trial court determined was a breach of fiduciary duty. But Lindsay and his partners then proceeded to take a piece of raw land with no finished plans, approvals, or entitlements, and over the course of less than two years, they turned it into something that a national home builder wanted to purchase for $110 million. Lindsay and Gilroy, among others, made a profit, but by that point any profit was too remote and attenuated to be attributable to that initial breach. It was instead the result of a great deal of legitimate effort.
Maybe if Lindsay had never walked through the door, LaMelza would have found a better deal and made more money. Maybe he would not have, and he would have been sucked into the maw of the Great Recession just as completely as D.R. Horton ultimately was, selling an asset it had purchased for $110 million in 2005 for $7.6 million in 2008. There is no way to know for sure. But the trial court's findings here are reasonable, carefully articulated, and by no stretch of the imagination do they exceed the bounds of reason. (Uzyel v. Kadisha, supra, 188 Cal.App.4th at p. 894.)
III
DISPOSITION
The judgment is affirmed. In the interests of justice, each party will bear its own costs on appeal.
MOORE, ACTING P. J. WE CONCUR: ARONSON, J. THOMPSON, J.