Opinion
Case No. CV 02-4710 JFW (RNBx)
September 3, 2002
ORDER GRANTING DEFENDANT ORIX REAL ESTATE EQUITIES MOTION FOR PARTIAL SUMMARY JUDGMENT OF COUNTS I, II and III OF PLAINTIFFS' THIRD AMENDED COMPLAINT
I. INTRODUCTION
Plaintiff VHB Associates, Inc. ("VHB") and defendant ORIX Real Estate Equities, Inc. ("ORIX") agreed to form a general partnership, through their designees, to develop a parcel of property in the City of Hawthorne (the "Project"). After the parties discovered environmental contamination on the site, ORIX withdrew from the Project. As a result of ORIX's withdrawal, Plaintiffs filed this action. ORIX has moved for partial summary judgment on Count I (breach of contract and the implied covenant of good faith and fair dealing), Count II (breach of fiduciary duty and Count III (fraud) of Plaintiffs' Third Amended Complaint.
II. PROCEDURAL BACKGROUND.
Plaintiffs filed their complaint on March 26, 2001 and their "corrected second amended complaint" on August 20, 2001. In ruling on defendants' motion to dismiss the corrected second amended complaint, the Court dismissed the fraud claim with leave to amend and permitted the breach of contract and breach of fiduciary duty claims to stand.
Defendant ORIX Hawthorne was also dismissed, without opposition.
On December 18, 2001, Plaintiffs filed their Third Amended Complaint, the operative pleading subject to this Motion, alleging claims for relief based upon breach of contract and the implied covenant of good faith and fair dealing (Count I), breach of fiduciary duty (Count II), fraud (Count III) and breach of contract against defendants regarding the Whittwood Project (Count TV).
Count IV alleges an unrelated claim between the parties and is not part of this Motion.
III. FACTUAL BACKGROUND
VHB owned rights to develop a portion of a commercial development in the City of Hawthorne. Unable to finance its portion of the Project, VHB asked ORIX to supply 100% of the financing in exchange for a share of the potential profits.
In February and March 2000, after preliminary negotiations between the parties, ORIX prepared two letters of intent which stated: (1) that they "outline[d] the business terms under which [ORIX] would be interested" in pursuing a joint venture; (2) the parties intent to form a general partnership with ORIX, "or its designee" as the managing partner and VHB, "or its designee" as a general partner; (3) that VHB would provide "information which will assist ORIX in its due diligence effort" including "soils tests"; and (4) that "ORIX board approval" was necessary. (Third Amended Complaint ("TAC") Exhs. 2-3.)
According to the parties, the standards of the lending industry generally require borrowers involved in real estate projects to establish single-asset entities to hold title to the project to insulate the project from the effects of a borrower's bankruptcy or other events that would otherwise affect the borrower or the loan. Here, VHB and ORIX established VHB Hawthorne and ORIX Hawthorne, respectively, as their single-asset entities.
In April 2000, ORIX sent VHB a long-form draft joint venture agreement. (ORIX's Separate Statement of Uncontroverted Facts ("UMF") 14-15.) On April 26, 2000, VHB was notified that ORIX's Board was preparing to discuss the Project and that one "critical" item to be completed "to keep the Orix approval process moving forward" was the preparation of a Venture Agreement. (UMF 17-18.)
The formal title of the agreement is "Partnership Agreement of ORIX VHB Hawthorne Venture" (hereinafter "Venture Agreement"). The name of the partnership formed by the parties was "ORIX VHB Hawthorne Venture".
In order to obtain ORIX Board approval, ORIX's representatives sent a package, known as the ORIX Board Application ("Application"), to the Board for approval of the joint venture. VHB admits it received a copy of the Application, which provided that Board approval was subject to satisfactory completion of all due diligence, including environmental studies and soil studies, and execution of a joint venture agreement. (UMF 21-24.) In late May, 2000, ORIX's Board approved the Application.
After additional negotiations between counsel for the parties, in August 2000, ORIX sent the final "execution" version of the Venture Agreement to VHB. ORIX asked VHB to execute the Venture Agreement and return it to ORIX. VHB and its designee, VHB Hawthorne, immediately signed the Venture Agreement and returned it to ORIX. ORIX and its designee, ORIX Hawthorne, then signed the Venture Agreement. (UMF 30-32.)
Before the parties were required to make their respective contributions to the partnership, they discovered that the soil was contaminated. Environmental consultants hired by the parties tested the soil in association with the California Regional Water Quality Control Board ("RWQCB"). (TAC ¶¶ 51-54.) ORIX was not satisfied that the environmental contamination could be fully contained or rectified and chose to withdraw from the Project in accordance with Section 2.4(b) of the Venture Agreement which provides that ORIX "in its sole discretion" must be satisfied with and approve, among other things, all soils tests, environmental issues, and all other matters that arise in due diligence before the partnership would construct the Project.
In an effort to resolve this issue, ORIX requested that Autonation USA, the owner of a portion of the real property to be developed by the partnership, assume responsibility for the remediation and indemnify ORIX in the event the contamination was linked to a problem with the regional groundwater. (TAC ¶ 58.)
IV. LEGAL STANDARD.
Summary judgment is proper where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party has the burden of demonstrating the absence of a genuine issue of fact for trial.Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). A party opposing a properly made and supported motion for summary judgment may not rest upon mere denials but "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). In particular, when the non-moving party bears the burden of proving an element essential to its case, that party must make a showing sufficient to establish a genuine issue of material fact with respect to the existence of that element or be subject to summary judgment. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
Where the non-moving party fails to offer evidence establishing the existence of an essential element, "there can be no genuine issue of material fact since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Celotex, 477 U.S. at 322-323. In such a case, the moving party is entitled to a judgment as a matter of law "because the non-moving party has failed to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof."Id.
V. COUNT I — BREACH OF CONTRACT AND THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING. A. The Letters of Intent Did Not Constitute a Binding Agreement.
Plaintiffs' contend that the letters of intent and the conduct of the parties constituted a binding joint venture that governed the parties' relationship before they entered into the Venture Agreement. The Court rejects this contention.
Letters of intent are commonly used "in real estate development deals."Rennick v. O.P.T.I.O.N. Care, Inc., 77 F.3d 309, 316 (9th Cir. 1996). The letters of intent at issue here could not be binding because the Project was conditioned on Board approval and execution of the Venture Agreement. Id. (not an offer where subsequent Board approval is required). The letters of intent merely "outline[d] the business terms under which [ORIX] would be interested in working with [VHB]," they did not purport to bind ORIX or VHB to perform. (TAC, Exhs. 2-3.) See Beck v. American Health Group Int'l, Inc., 211 Cal.App.3d 1555, 1562 (1989) (unenforceable letter of intent where letter was merely an "outline of our future agreement").
B. The Venture Agreement is Binding.
The Court also rejects Plaintiffs' claim that the Venture Agreement did not become binding because ORIX never returned a fully executed copy to Plaintiffs. ORIX prepared the Venture Agreement and delivered it to Plaintiffs for execution. After Plaintiffs signed the Venture Agreement, they returned it to ORIX. (TAC ¶ 47.) ORIX's President signed the Venture Agreement on behalf of ORIX and its designee. (UMF 32.) Accordingly the Court finds that the parties intended to enter into the Venture Agreement and there was a meeting of the minds as to its terms.
In fact, in an effort to expedite the development of this Project, Plaintiff signed a draft version of the Venture Agreement in early May, 2000. (TAC ¶ 41.)
Plaintiffs do not dispute any of the facts offered by ORIX regarding the Venture Agreement, they simply attempt to avoid the consequence of the Venture Agreement by arguing that the Venture Agreement did not replace or alter the joint venture relationship that Plaintiffs erroneously believe existed before the parties entered into the Venture Agreement.
Returning a fully executed copy of the Venture Agreement, under these circumstances, would merely have been a formality. Under California law, Plaintiffs could have been compelled to perform even if ORIX did not sign. Bernard v. Walkup, 272 Cal.App.2d 595, 602 (1969) ("It is well established that the receipt and acceptance by one party of a writing signed by the other only, and purporting to embody all the terms of a contract between the two, binds the acceptor as well as the signor to the terms of the writing."); E.O.C. Ord, Inc. v. Kovakovich, 200 Cal.App.3d 1194, 1199-1200 (1988) (contract enforceable even though one party had not signed the agreement); Cal. Civ. Code § 3388 (party who has signed a written contract may be compelled to specifically perform it, though the other party has not signed it).
Although the terms of the Venture Agreement provide that it is to be "governed by and enforced in accordance with the laws of the State of Illinois without regard to principles of conflicts of law" (Venture Agreement § 15.2), at oral argument the parties advised the Court that because there is no difference between California and Illinois law, they agreed that the Motion should be decided under California law.
ORIX's failure to return a signed copy of the Venture Agreement to Plaintiffs cannot be construed as a failure to consent to be bound to the contract. ORIX's consent is evidenced by its preparation of the document, ORIX's delivery of the document to Plaintiffs and ORIX's written statement to VHB that ORIX would sign the Venture Agreement. (UMF 29-32.) James De Nicholas Associates, Inc. v. Heritage Constr. Corp., 5 Cal.App.3d 421, 425 (1970) (acceptance of contract terms by defendant shown where defendant prepared the agreement). ORIX consent is further evidenced by offering to and actually undertaking to perform. (UMF 47-48.)
One of ORIX's real estate attorneys explained that, due to the press of other work on the Project, he simply forgot to send a fully executed copy of the Venture Agreement to VHB. (Becker Depo. 55:15-56:23.) VHB does not dispute this fact.
C. ORIX was Entitled to Rely on the Terms of Venture Agreement.
Having determined that the Venture Agreement was binding, the Court now must decide whether Section 2.4(b) permitted ORIX to withdraw from the Project after environmental contamination was discovered on the property. Plaintiffs' contend that the implied covenant of good faith and fair dealing restricts the subjective discretion granted to ORIX, under the express terms of the Venture Agreement, to approve the environmental risks. However, the "implied covenant cannot be utilized to limit or restrict an express grant of discretion in a contract to one of the parties thereto." New Hampshire Ins. Co. v. Ridout Roofing Co., Inc., 68 Cal.App.4th 495, 504 (1998), citing Carma Developers, Inc. v. Marathon Development California, Inc., 2 Cal.4th. 342, 374 (1992). See also Third Story Music, Inc. v. Waits, 41 Cal.App.4th 798, 808 (1995) (". . . courts are not at liberty to imply a covenant directly at odds with a contract's express grant of discretionary power . . ."); PMC, Inc. v. Porthole Yachts, 65 Cal.App.4th 882, 891 (1998) (rejecting claim that the covenant of good faith and fair dealing could be used to limit contract provision which conditioned performance on party's subjective satisfaction).
ORIX immediately expressed concern regarding the potential liability that could result from the contamination and ultimately decided not to accept the attendant risks. Although Plaintiffs contend that this concern was a sham, they fail to offer any evidence to support this contention. Indeed, the Court's review of the evidence results in the opposite conclusion because ORIX, VHB and others spent months working with environmental consultants and the RWCOB trying to resolve this problem before ORIX withdrew from the Project. (UMF 36, 47; TAC ¶¶ 48-55; Hess Decl. ¶¶ 27-39.)
The Court rejects Plaintiffs' contention that the environmental conditions were satisfied or waived when ORIX signed the Venture Agreement. A party does not waive the provisions of a contract by entering into that contract. Moreover, the Venture Agreement required that waiver of any of its terms had to be in writing. (Venture Agreement § 15.8.)
The Court also rejects Plaintiffs' claim that the Venture Agreement does not apply to ORIX because ORIX signed a "limited joinder" to the Venture Agreement. First, ORIX and VHB contemplated from the beginning that they would each name a "designee" as the actual partner in the joint venture to be created. (UMF 8.) VHB named VHB Hawthorne and ORIX named ORIX Hawthorne. Second, both VHB and ORIX were third party beneficiaries of the Venture Agreement and subject to its terms. See Stratosphere Litigation L.L.C. v. Grand Casino, Inc., 2002 DJDAR 9285, 9288 (9th Cir. Aug. 14, 2002) (internal citation omitted) (rights of a third party beneficiary are based on the contract between the promisor and promisee); Votaw Precision Tool Co. v. Air Canada, 60 Cal.App.3d 52, 56 (1976) ("the beneficiary's right is subject to the conditions in the contract"); Sanders v. American Casualty Co. of Reading, 269 Cal.App.2d 306, 310 (1969) (third party beneficiaries have the same rights as granted to the contracting parties). Third, ORIX was a guarantor of the Venture Agreement, and, therefore, it may assert all the same rights as its designee. Cates Constr., Inc. v. Talbot Partners, 21 Cal.4th 28, 48 (1999) (guarantor is entitled to assert all the defenses as the principal); U.S. Leasing Corp. v. DuPont, 69 Cal.2d 275, 290 (1968) ("where principal is not liable on the obligation, neither is guarantor"). Accordingly, ORIX was entitled to rely on all the provisions of the Venture Agreement, including section 2.4(b) which allowed ORIX to withdraw from the Project because of concerns over environmental contamination.
Section 2.4(b) is an enforceable term of the Venture Agreement and the Court will not strike a provision after the fact merely because one party does not like the result. The parties intended the Venture Agreement to govern the transaction and, pursuant thereto, ORIX was contractually entitled to withdraw from the Project. Storek Storek, Inc. v. Citicorp Real Estate, Inc., 100 Cal.App.4th 44, 56-58 (2002) (when conditions precedent to lender's performance had not been fulfilled to its satisfaction, lender was entitled to withhold loan disbursements pursuant to express terms of the loan agreement). Accordingly, ORIX's Motion for Partial Summary Judgment is GRANTED as to Count I of Plaintiffs' Third Amended Complaint.
VI. COUNT II — BREACH OF FIDUCIARY DUTY.
Plaintiffs claim that ORIX breached its fiduciary duty by intentionally slowing down the Project, inflating the construction budget, requiring indemnification from Autonation USA, revoking its counsel's authority to work on the Project, not disclosing its policy of complete resolution of all environmental issues, failing to deposit the non-binding documents into escrow to extend the final closing deadline, and trying to elicit a response from the government environmental agency that linked the environmental condition on the Project to the ground water. None of ORIX's alleged conduct, whether occurring before or after the parties entered into the Joint Venture, constituted a breach of fiduciary duty.
A. ORIX Did Not Owe Plaintiff A Fiduciary Duty Prior To Entering Into the Venture Agreement, But Even If ORIX Owed Such A Duty, That Duty Was Not Breached.
Prior to entering into the Venture Agreement, ORIX did not owe a fiduciary duty to Plaintiffs. The letters of intent and conduct of the parties prior to the execution of the Venture Agreement, did not constitute a binding agreement. See City of Los Angeles v. Superior Court of Los Angeles County, 51 Cal.2d 423, 433 (1959) ("The general rule is that if an `essential element' of a promise is reserved for the future agreement of both parties, the promise gives rise to no legal obligation until such future agreement is made.") While the parties negotiated the terms and provisions of the Venture Agreement that would govern the development of the Project, no fiduciary relationship existed between them. Rennick v. O.P.T.I.O.N. Care, Inc., 77 F.3d 309, 317 (9th Cir. 1996).
Assuming arguendo, however, that a fiduciary relationship existed between ORIX and Plaintiffs before they entered the Joint Venture, as discussed below, none of ORIX's alleged conduct constituted a breach of fiduciary duty.
B. None Of The Acts Complained Of By Plaintiffs Establish A Breach of Fiduciary Duty.
"Like partners, joint venturers are fiduciaries with a duty of disclosure and liability to account for profits." Weiner v. Fleischman, 54 Cal.3d 476, 482 (1991) (en banc) (internal citations omitted). However, "[t]he fiduciary duty among partners is not unlimited. This duty applies only to situations where one partner could take advantage of his position to reap personal profit or act to the partnership's detriment."Crouse v. Brobeck, Phleger Harrison, 67 Cal.App.4th 1509, 1551 (1998) (internal citations omitted). None of the acts complained of by Plaintiffs establish that ORIX breached its fiduciary duty. Moreover, Plaintiffs have failed to offer any evidence that ORIX engaged in bad faith or attempted to gain an advantage over them. There is no evidence that ORIX continued to move forward with the Project alone, or with anyone other than Plaintiffs. Likewise, there is no evidence that ORIX used its contractual right to withdraw as leverage to obtain an advantage over Plaintiffs. Like Plaintiffs, ORIX lost its initial investment in the Project in addition to its' share of the potential profits had the Project been successful.
Finally, "the presumption of good faith embodied by the business judgment rule" protects ORIX's business decisions from second-guessing by the Court. Lee v. Interinsurance Exchange, 50 Cal.App.4th 694, 711 (1996) ("business judgment rule" establishes a presumption that business decisions are based on sound business judgment). See Duffy v. Piazza Const., Inc., 62 Wn. App. 19, 23 (1991) (generally, a joint venturer is not liable to his or her co-joint venturers for damages caused by mistakes in business judgment.) Absent evidence of bad faith or a conflict of interest, to the extent any of ORIX's allegedly breaching acts required it to exercise its discretion, ORIX is entitled to the protections afforded by the business judgment rule. Wyler v. Feurer, 85 Cal.App.3d 392, 402-03 (1978) ("a general partner may not be held liable for mistakes made or losses incurred in the good faith exercise of reasonable business judgment").
C. None Of ORIX's Conduct Caused Plaintiffs Harm.
As a matter of law, none of ORIX's conduct supports a claim for breach of a fiduciary duty because none of these acts resulted in any harm to Plaintiffs. Stanley v. Richmond, 35 Cal.App.4th 1070, 1086 (1995) (elements of breach of fiduciary duty include damages proximately caused by breach).
To the extent Plaintiffs were harmed, that harm was as a result of ORIX's legitimate withdrawal from the Project. Because the Project never went forward, the progress of the Project, the budget, the request for indemnification, and the financial terms of the deal, among other things, did not cause Plaintiffs' harm.
Accordingly, ORIX's Motion for Partial Summary Judgment is GRANTED as to Count II of Plaintiffs' Third Amended Complaint.
VII. COUNT III — FRAUD.
The thrust of Plaintiffs' claim for fraud is that "[ORIX] did not intend to proceed with the acquisition of the . . . Project." (Boyd Decl. ¶ 89.) Specifically, Plaintiffs' claim that: ORIX did not disclose its policy of requiring complete resolution of all environmental issues; ORIX demanded written approval of the remediation plan from the RWQCB, rather than the earlier agreed to oral approval; "giving the impression" that it was willing to proceed with the Project if it obtained indemnification from Autonation USA; "giving the impression" it was willing to proceed with the Project by negotiating the extensions to the developer closings; stating that it would not encourage the RWQCB to link the hot spot to the ground water; stating it would fund pre-development expenses up to $1 million; and overstating the construction budget.
The elements of a fraud claim are (1) a misrepresentation, (2) knowledge of falsity of the misrepresentation, (3) intent to defraud, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.Lazar v. Superior Court, 12 Cal.4th 631, 638 (1996).
Plaintiffs have failed to present a genuine issue of material fact on the element of intent. See Hill Transportation Co. v. Southwest Forest Indus., Inc., 266 Cal.App.2d 702, 708 (1968) (plaintiff must show intention of promisor not to keep promise at the time it was made). A breach or a later failure to comply with the terms of the Venture Agreement will not suffice, because nonperformance is not sufficient to support a fraud claim. Magpali v. Farmers Group, Inc., 48 Cal.App.4th 471, 482 (1996) (something more than nonperformance is required to show intent, "if plaintiff produces no further evidence of fraudulent intent than proof of nonperformance of an oral promise, he will never reach a jury."); Cedars Sinai Medical Center v. Mid-West National Life Ins. Co., 118 F. Supp.2d 1002, 1013 (C.D. Cal. 2000) (without something more than nonperformance to prove defendant's intent, fraud claim will not survive).
There is no evidence in the record from which a jury could conclude that ORIX did not intend to perform at the time it entered into the Venture Agreement. Berkey v. Halm, 101 Cal.App.2d 62, 69 (1950) (the existence of the intent not to perform must be present at the time of making the promise). It is undisputed that both parties spent substantial time, energy and money trying to resolve the environmental contamination. However, when ORIX's concerns about the environmental contamination could not be satisfied, ORIX relied on its rights under the Venture Agreement to withdraw from the project.
Likewise, Plaintiffs have failed to present any evidence that they were harmed by any of ORIX's alleged misrepresentations. Plaintiffs were harmed because ORIX withdrew from the Project, which pursuant to the express terms of the Venture Agreement, ORIX was entitled to do.
Although not necessary to the Court's decision, Plaintiffs' attempt to characterize themselves as a victim without recourse is not accurate. The terms of the Venture Agreement allowed Plaintiffs' to terminate the Venture Agreement and to timely seek alternative sources of financing if they had any doubt as to whether ORIX would perform. (Venture Agreement § 2.5(b); Beck Depo. 84:17-85:17; Boyd Decl. ¶ 89.)
ORIX did not proceed with the Project because of its concerns about the environmental problems discovered on the property. Accordingly, ORIX's Motion for Partial Summary Judgment is GRANTED as to Count III of Plaintiffs' Third Amended Complaint.
VIII. CONCLUSION
ORIX's Motion for Partial Summary Judgment of Plaintiffs' Third Amended Complaint is granted in its entirety.
Docket No. 40.