CYNTHIA L. BURCH, Plaintiff and Respondent, v. PREMIER HOMES, LLC, et al., Defendants and Appellants.
COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION THREE
199 Cal. App. 4th 730; 131 Cal. Rptr. 3d 855; 2011 Cal. App. LEXIS 1240
September 28, 2011, Filed
APPEAL from an order of the Superior Court of Los Angeles County, No. SC101002, Joseph S. Biderman, Judge.
COUNSEL: Gemmill, Baldridge & Yguico, Carlos V. Yguico, Jay Statman; Zimmerman & Kahanowitch, Brian F. Zimmerman and Megan C. Winter for Defendants and Appellants.
Costell & Cornelius, Jeffrey Lee Costell, Alexandre Ian Cornelius, Lewis B. Adelson and Jonathon D. Nicol for Plaintiff and Respondent.
JUDGES: Opinion by Croskey, J., with Klein, P. J., and Kitching, J., concurring.
OPINION BY: Croskey
CROSKEY, J.–In this case, plaintiff and respondent, Cynthia L. Burch, filed a complaint for damages arising out of alleged construction defects. After she filed that complaint, defendants and appellants1 moved to compel arbitration of her claims and now seek reversal of the trial court’s order denying that motion.2The trial court concluded that the arbitration clause in the agreement between Burch and defendants was susceptible to conflicting interpretations with respect to its scope. The court therefore solicited, received and considered extrinsic evidence with respect to the intent of the parties on this issue, and even took the unusual step of receiving oral testimony at a special hearing. After considering such evidence and weighing the credibility of the several witnesses who had provided written and oral testimony, the trial court held that no agreement had been reached between the parties to arbitrate the issues and claims raised by Burch in her complaint.
1 Defendants and appellants are Premier Homes, LLC, Custom Home Builders, Inc., Scott Warren and Daniel Shahar (collectively, defendants).
2 An order denying a motion to compel arbitration is immediately appealable. (Code Civ. Proc., § 1294, subd. (a); Mayhew v. Benninghoff(1997) 53 Cal.App.4th 1365, 1369 [62 Cal. Rptr. 2d 27].)
In our view, the trial court correctly concluded that the arbitration clause was reasonably susceptible to conflicting interpretations and acted within its discretion in considering extrinsic evidence of the parties’ intent, including the receipt of additional oral testimony at a special hearing. As the record before us demonstrates that substantial evidence supports the trial court’s conclusion as to the parties’ intent and that there was no agreement to arbitrate the issues raised in the pending complaint, we will affirm the order denying the motion to compel.3
3 As there was no agreement to arbitrate, we need not reach or discuss the issues raised by defendants under the Federal Arbitration Act (FAA; 9 U.S.C. § 2 et seq.).
FACTUAL AND PROCEDURAL BACKGROUND4
4 It appears that the relevant facts that we recite are essentially undisputed. To the extent that a dispute does exist, we recite the facts as expressly or implicitly found by the trial court in its resolution of such factual dispute. (DiMartino v. City of Orinda(2000) 80 Cal.App.4th 329, 336 [95 Cal. Rptr. 2d 16].)
Defendants developed and built a home at 516 Almar Avenue in Pacific Palisades, California (the property). On February 8, 2007, Burch signed an offer to purchase the property for $3.3 million.5 Burch submitted her offer on a standard California Association of Realtors (CAR) preprinted contract entitled “Residential Purchase Agreement and Joint Escrow Instructions”6 (purchase agreement). To her offer, Burch attached an addendum No. 1 in which she requested certain additional features and fixtures. The preprinted CAR form included a paragraph 17 which provided, in part, “Buyer and Seller agree that any dispute or claim in Law or equity arising between them out of this Agreement or resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration … . “7
5 This was $99,000 less than the price at which defendants had listed it for sale.
6 Although Burch was an experienced attorney and a partner in a major Los Angeles law firm, she specialized in environmental and administrative law. She was not familiar with real estate law.
7 As we discuss below, the parties later agreed that this clause would only apply to disputes arising before the close of escrow.
On or about February 10, 2007, Burch’s broker, Lisa Morrin (Morrin) received a counteroffer from defendants that, among other things, included an addendum No. 2. This addendum related to a new house limited warranty that would be issued by the Home Buyers Warranty Corporation (HBW) based in Denver, Colorado.8Addendum No. 2 included provisions relating to the arbitration of disputes that may arise between Burch, defendants and HBW. Burch was told by Morrin that she had never seen a proposed contractual provision that would require a home buyer to agree to arbitrate with a builder over construction defects.
8 The record reflects that HBW administers a nationwide home buyer warranty program which involves a 10-year insurance-backed new home warranty providing warranty coverage against certain types of construction defects in homes offered for sale by enrolled homebuilders. The builders apply to HBW for admission into the HBW program. Following admission and payment of enrollment fees (paid exclusively by the builder, at no cost to the home buyer), the HBW-enrolled builders issue HBW warranties on the homes that they sell to the public. The builders issue the HBW warranty concurrently with the sale of the new home to the home buyer. The HBW warranties provide that the enrolled home will be free of workmanship defects for a term of one year, free of systems defects (plumbing, electrical, mechanical) for a term of two years, and free of “Structural Defects” for a term of 10 years. The warranties in this program are insured pursuant to the Federal Liability Risk Retention Act. (15 U.S.C. §§ 3901-3906.)
Burch explained to Morrin that she did not want to buy the property if her rights under California law were modified or if she would be forced to arbitrate any disputes that may arise with defendants. However, she and Morrin discussed the idea of executing defendants’ counteroffer to specifically open escrow to buy the property; and then, within the 12-day contingency period provided for under her original offer, negotiate with defendants over the addendum No. 2 terms with which she disagreed. Burch ultimately decided to pursue this approach, but told Morrin to immediately notify defendants that Burch did not approve of all of the terms in addendum No. 2, that she wanted to negotiate the removal of the term that required her to arbitrate any dispute with defendants or that would alter her rights under California law, and that she wanted a copy of the terms of the applicable warranty as soon as possible. Morrin told defendant Scott Warren (Warren) that Burch would not agree to buy the property if Burch had to give up her rights under California law.
On February 11, 2007, in accordance with this decision, Burch executed defendants’ counteroffer with its addendum No. 2 and, over the next few days, negotiated with Warren over the terms of addendum No. 2 and the 2-10 HBW asset protection warranty (the Warranty). At the time that Burch executed defendants’ counteroffer, she had not yet received the booklet for the Warranty that she had previously requested. Burch did not want to commit to buying the property or to lifting any contingencies for its purchase until she had received and reviewed the Warranty booklet and had an opportunity to negotiate the removal of the provisions that would affect her rights under California law for claims against the builder for construction defects. During these conversations, Warren insisted that he could only sell the property to Burch with the unaltered language in addendum No. 2, because HBW required that it be included in the purchase agreement in order for the Warranty to be issued under HBW’s Warranty program. Of particular relevance here is the provision in addendum No. 2 relating to arbitration: “1. ‘Arbitration of Disputes.’ A. Paragraph 17 of the Agreement [(the CAR arbitration provision)] shall only apply to disputes that arise before the Close of Escrow. [¶] B. The following provisions shall only apply to disputes that arise after the Close of Escrow. It is hereby agreed that all claims, disputes, and controversies between Buyer and Seller arising from or related to the Property, or to any defect in or to the Property or the real property on which the Property is situated, or the sale of the Property by Seller including, but not limited to, any claim for breach of contract, negligent, or intentional misrepresentation, shall be submitted to binding arbitration by and pursuant to the arbitration provision contained in the most recent edition of the HBW Limited Warranty Booklet, as of the date of the execution of this Agreement. The Booklet has been made available to Buyer, and is incorporated herein by reference, and made a part of this Agreement. Notwithstanding any provision to the contrary in the Agreement, the arbitration provisions are hereby amended by the following provisions as though fully set forth therein: Builder has elected to adopt the standards and procedures set forth in the California Civil Code commencing at Section 895, et seq. (the ‘Code’). Builder has notified Buyer that it intends to follow the pre-litigation procedures in the Code commencing at Section 910, et seq. In the event Buyer makes a Claim within the purview of the Code, Builder and Buyer agree that the pre-litigation procedures within the Code, as adopted by Builder, shall control the claim process. In the event the pre-litigation procedures do not result in the resolution of Buyer’s claim and Buyer pursues a further action, Buyer and Builder acknowledge the applicability of, and shall be bound by the Arbitration Agreement contained in the 2-10 HBW Asset Protection Program, the terms of which shall control the arbitration process. Buyer and Builder shall be limited to seeking redress within the specific terms of the 2-10 HBW Arbitration provisions.”10
9 This has reference to the Civil Code provisions relating to actions for construction defects enacted in 2002 by Senate Bill No. 800 (2001-2002 Reg. Sess.) and includes Civil Code sections 895 to 945.5.
10 Defendants also attached an addendum No. 3 to their counteroffer which provided: “Warranties. Notwithstanding any provision to the contrary in the Agreement, any warranty provisions set forth in the Agreement are hereby deleted and replaced in their entirety by the following provisions: Seller is hereby providing Buyer with the warranty contained in the most recent edition of the 2-10 Home Buyers Warranty Booklet, as of the date of the execution of this Agreement. That Booklet has been made available to Buyer, and is incorporated herein by reference, and made a part of this Agreement. The warranty contained in the Booklet is the sole warranty provided to Buyer. Any other warranty or warranties, whether express or implied, are disclaimed by Seller and waived by Buyer, unless otherwise prohibited by California law.” There is no issue in this appeal relating to addendum No. 3.
Despite Warren’s repeatedly taking the position that the Warranty provides extra protection for Burch’s benefit, Burch believed that Warren really wanted the Warranty for defendants’ benefit. Warren specifically told Burch that the language in addendum No. 2 applied onlywith respect to the Warranty, rather than with respect to disputes between Burch and defendants. Burch, however, told Morrin and Warren that she “did not really want the Warranty” and “just wanted to make sure that [she retained] all [her] rights under California law.”
When Burch finally obtained a copy of the Warranty booklet on February 14, 2007, she set up a conference call to discuss the Warranty and the language in addendum No. 2. Participating in the conference call were Burch, Morrin, Warren, Joan Riordan (Riordan), general counsel for HBW, and Don Aberbook (Aberbook), who either worked for or was a principal of HBW. Burch took contemporaneous notes of the telephone conference.
Aberbook, who spoke on behalf of HBW, stated that he was an attorney in California before he moved to Colorado and that he had participated in the drafting of the California statute (Sen. Bill No. 800 (2001-2002 Reg. Sess.); Stats. 2002, ch. 722, p. 4247) relating to construction defect litigation (Civ. Code, §§ 895-945.5). Burch responded specifically that she really did not want the Warranty and that having it was not important to her. Aberbook contended that the Warranty was “‘parallel’” to rights and remedies provided by Senate Bill No. 800, but distinct from it and that the Warranty “‘cannot replace buyer’s rights under California law.’” Burch then asked Aberbook about the process of filing a claim under the Warranty and reconfirmed to everyone on the conference call that she did not want anything to affect her rights under California law.
Aberbook described the claims process generally and said that Burch could sue under the California statutory scheme or other law if the defects were not repaired. He noted that outside of the HBW Warranty, arbitration was “not uncommon” but that an express agreement to do so was needed. He indicated that the language in addendum No. 2 was provided by HBW and that HBW required its builders to put that language in their purchase agreements if they wanted to have an HBW Warranty issued. Aberbook then stated that the language was only for the Warranty to which Burch remarked that this is exactly what Warren had said previously. Aberbook agreed that the language in addendum No. 2 did not otherwise apply to disputes between Burch and defendants. Burch then requested that the parties strike the last sentence of addendum No. 2 (“‘Buyer and Builder shall be limited to seeking redress within the specific terms of the 2-10 HBW Warranty Arbitration provisions.’”) in order to clarify that the language in addendum No. 2 would not affect her rights under California law and would only apply where there was a dispute between Burch and HBW with respect to claims made against the Warranty. And, Aberbook agreed to strike that language from the purchase agreement. Warren became noticeably upset at this point and asked, “‘[w]hat did I buy then?’”11
11 This question would seem to support Burch’s impression that Warren thought that the HBW Warranty was very important to defendants as it purported to limit their exposure to construction defect claims that fall within the HBW Warranty coverage.
It is important to note that the language found in the Warranty booklet supports Aberbook’s statement that the Warranty is parallelto Burch’s rights under California law. This language provides, in relevant part: “ARBITRATION. Any and all claims, disputes and controversies by or between the homeowner, the Builder, the Warranty Insurer and/or HBW, or any combination of the foregoing, arising from or related to this Warranty, to the subject Home, to any defect in or to the subject Home or the real property on which the subject Home is situated, or the sale of the subject Home by the Builder, including without limitation, any claim of breach of contract, negligent or intentional misrepresentation or nondisclosure in the inducement, execution or performance of any contract, including this arbitration agreement, and breach of any alleged duty of good faith and fair dealing, shall be settled by binding arbitration. Agreeing to arbitration means you are waiving your right to a jury trial.”
With the exception of the sentence stricken from addendum No. 2 (see below and, specifically, fn. 13, post), the arbitration language above substantively tracks the arbitration language found in addendum No. 2, including language incorporating disputes with the seller/builder. However, the Warranty booklet goes on to state in an addendum that “[t]he protection provided under this Warranty is not in limitation of, but is in addition to, any other rights provided to You under California law.” As the Warranty booklet is incorporated by reference into the purchase agreement, the addendum regarding California law appears to also apply to addendum No. 2.
Based on the forgoing, it was Burch’s understanding and her intent, which she confirmed in the telephone conference call, that the language she wanted stricken from addendum No. 2 would mean that Burch was going to retain all of her rights under California law with respect to the builder, including the right to go to court. After the telephone conference with HBW, Burch agreed to re-sign addendum No. 2 with the last sentence stricken. Both she and Warren initialed the modification and proceeded with the purchase transaction.12
12 In her declaration filed in opposition to defendants’ motion to compel arbitration, Burch testified on this matter as follows: “It was my intent to and I did confirm in the telephone conference that by striking the language from Addendum No. 2 it meant that I was going to have all of my rights under California Law with respect to the builder, including the right to go to court. I was also told that the language in Addendum No. 2 would now only relate to the Warranty. I relied on the agreement to strike the last sentence of Addendum No. 2 and the comments and statements of Mr. Aberbook and the general counsel of HBW in agreeing to go forward with the transaction. If I had been told that my rights under California Law were to be altered or that I had to arbitrate disputes with the builder under the Warranty, then I would not have proceeded with the transaction and would have cancelled within the contingency period. The whole purpose of the telephone conference and the striking of the last sentence in Addendum No. 2 was to make sure that I retained my rights under California Law and to clarify that since the Warranty was in addition to those rights, arbitration would only apply if I elected to pursue legal action against HBW under the Warranty. I have not elected to pursue HBW in any forum or action and thus, it is my understanding, that arbitration does not apply. After the telephone conference with HBW, I agreed to resign Addendum No. 2 with the last sentence being struck out by both Mr. Warren and me and to proceed with the purchase transaction related to the Property.”
Thereafter, defendants and Burch signed an application to request an HBW Warranty from HBW. That application stated, above Burch’s signature, that she had received a sample copy of the Warranty booklet and “consent[ed] to the terms of these documents including the binding arbitration provision.” Defendants then paid an enrollment fee ($8,250) to enroll the home that Burch was purchasing in the HBW Warranty program. A certificate of Warranty coverage was later mailed to Burch. The escrow thereafter closed.
Following the close of escrow on April 11, 2008, Burch submitted a claim to HBW regarding certain construction defects that she found in her home. The claim was thereafter denied by HBW. Burch does not contest that denial.
On December 17, 2008, Burch filed this action against defendants seeking recovery of damages for a variety of alleged construction defects. She pled four separate causes of action: (1) breach of contract, (2) negligence, (3) breach of implied warranties and (4) unjust enrichment. On March 25, 2009, defendants filed the subject motion to compel arbitration based on the arbitration clause in addendum No. 2.13Burch filed opposition to that motion.
13 That arbitration clause reads exactly as quoted above except that the last sentence (“Buyer and Builder shall be limited to seeking redress within the specific terms of the 2-10 HBW Arbitration provisions.”) was stricken (and such strikeout was initialed by the parties).
Although the trial court’s tentative ruling was to grant the motion, it agreed to give further consideration to Burch’s evidence and arguments in opposition; ultimately, at Burch’s request, the trial court decided to hold a hearing at which oral testimony would be taken. In doing so, the trial court denied defendants’ objection, based on the parol evidence rule, to the trial court’s receipt or consideration of any extrinsic evidence. (See Code Civ. Proc., § 1856; Banco Do Brasil, S.A. v. Latian, Inc. (1991) 234 Cal.App.3d 973, 1001-1003 [285 Cal. Rptr. 870].) The trial court ruled that the “strikeout” of the last sentence in the addendum No. 2 arbitration provision created a conflict with respect to the parties’ intent as to the scope of arbitration.14
14 It is important to note here that Burch is not seeking to impose some collateral oral agreement upon the terms of a signed written contract. Rather, she disputes defendants’ interpretation of the arbitration clause in the purchase agreement in light of the negotiated “strikeout” of the last sentence of that clause.
After hearing the testimony of Burch, Morrin and Warren, the trial court, on January 4, 2010, issued its order denying defendants’ motion to compel arbitration. In its order, the court explained: “The Court concludes that Burch on the one hand, and Aberbook and Warren on behalf of Premier Homes, LLC, on the other hand, all agreed to strike out language in Addendum No.  which stated: ‘Buyer and Builder shall be limited to seeking redress within the specific terms of the 2-10 HBW Arbitration provisions.’ The Court has heard live testimony regarding this ambiguity in the contract. Burch’s testimony was more credible than Warren’s testimony regarding what the parties’ intention was in striking out this clause. The Court finds that the parties’ intention was to preserve Burch’s right to make state law claims including her right to a jury trial for any non-warranty claims against the builder. The Court finds that Warren and Premier were aware that Burch’s intention throughout the negotiation process was to restrict arbitration to issues arising during or related to escrow. [¶] … [T]he Court, having reviewed the briefs, declarations, and exhibits, as well as having considered the credibility of the witnesses at the hearing, finds that Burch has met her burden of establishing that no agreement to arbitrate the non-warranty and non-escrow related claims exists.”15
15 The court also, in a subsequent order, issued on April 8, 2010, awarded Burch $53,300 in attorney fees. (Civ. Code, § 1717; Otay River Constructors v. San Diego Expressway(2008) 158 Cal.App.4th 796, 806-808 [70 Cal. Rptr. 3d 434].) No issues are raised in this appeal as to such fee award.
Defendants thereafter filed this timely appeal.
As we view this case, the issues presented are simple and straightforward: (1) Did the trial court have the discretion to receive extrinsic oral testimony as to the parties’ intent in a special evidentiary hearing? (2) Is there substantial evidence to support the trial court’s order resolving the ambiguity? (3) Did the court correctly conclude that there was no agreement to arbitrate the claims plaintiff has asserted against defendants? We answer all of these questions in the affirmative.
1. Standard of Review
This record demonstrates a substantial disagreement between the parties as to the scope of the arbitration clause in addendum No. 2. The parties also disagree as to the standard of review. Defendants argue that a de novo standard of review is required on the basis that the written agreement signed by Burch is being challenged by a parol or collateral agreement or promise. Burch argues that a substantial evidence standard is required on the basis that the arbitration clause’s scope is ambiguous and the parties presented extrinsic evidence to aid in its interpretation. As we explain, we agree with Burch. The critical issue here is not the application of the parol evidence rule, but the determination of the existence of an ambiguity in the purchase agreement and its resolution by the receipt of extrinsic evidence, the sufficiency of which is determined by the substantial evidence standard of review. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 866, fn. 2 [44 Cal. Rptr. 767, 402 P.2d 839]; Schaefer’s Ambulance Service v. County of San Bernardino(1998) 68 Cal.App.4th 581, 586 [80 Cal. Rptr. 2d 385].)
2. The Purchase Agreement Is Ambiguous and Extrinsic Evidence Was Required to Resolve That Ambiguity
Defendants argue that the outcome of this appeal should be determined by the application of the parol evidence rule. This rule, “which is codified in Code of Civil Procedure section 1856, provides that the terms of a writing intended by the parties as a final expression of their agreement cannot be contradicted by evidence of either a prior agreement or a contemporaneous oral agreement. [Citations.] Further, if the parties intended the writing to be a complete and exclusive statement of the terms of the agreement, its terms cannot be explained or supplemented by evidence of consistent additional terms. [Citation.]” (Singh v. Southland Stone, U.S.A., Inc. (2010) 186 Cal.App.4th 338, 352 [112 Cal. Rptr. 3d 455].) “Put another way, ‘[i]f a writing is deemed integrated, extrinsic evidence is admissible only if it is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. [Citations.]‘ [Citation.]” (Banco Do Brasil, S.A. v. Latian, Inc., supra, 234 Cal.App.3d at p. 1001.)
We agree with defendants that the purchase agreement is integrated. That was certainly the intent of the parties as it was clearly expressed in the provisions of the purchase agreement, which include an integration clause: “All understandings between the parties are [i]ncorporated in this Agreement. Its terms are intended by the parties as a final, complete and exclusive expression of their Agreement with respect to its subject matter, and may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement. … Neither this Agreement nor any provision in it may be extended, amended, or modified, altered or changed, except in writing [s]igned by Buyer and Seller.” But the conclusion that the purchase agreement is integrated is only the beginning of the discussion, not the end. Burch argues that the agreement contains a critical ambiguity with respect to the agreed scope of the arbitration clause.
“Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. … [¶] Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. [Citations.] Such evidence includes testimony as to the ‘circumstances surrounding the making of the agreement … including the object, nature and subject matter of the writing …’ so that the court can ‘place itself in the same situation in which the parties found themselves at the time of contracting.’ [Citations.] If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, ‘is fairly susceptible of either one of the two interpretations contended for …’ [citations], extrinsic evidence relevant to prove either of such meanings is admissible.” (Pacific Gas & Elec. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 39-40 [69 Cal. Rptr. 561, 442 P.2d 641], fn. omitted.)
On an appeal challenging the interpretation given to a writing, as we have already noted, the substantial evidence rule will apply in cases where the parties present conflicting extrinsic evidence to aid in the interpretation. (Parsons v. Bristol Development Co., supra, 62 Cal.2d at p. 866, fn. 2; Schaefer’s Ambulance Service v. County of San Bernardino, supra, 68 Cal.App.4th at p. 586.) Before us is a modified written agreement with the critical issue being the meaning or intent of the parties behind that modification. The parties presented conflicting extrinsic evidence on that issue, and, therefore, the substantial evidence rule applies. As long as the trial court’s order was supported by substantial evidence in the record, any evidentiary conflict must be resolved in favor of the prevailing party (i.e., Burch), and any reasonable interpretation of the writing by the trial court will be upheld. (In re Marriage of Fonstein (1976) 17 Cal.3d 738, 746-747 [131 Cal. Rptr. 873, 552 P.2d 1169]; Parsons v. Bristol Development Co., supra, 62 Cal.2d 861; Roden v. Bergen Brunswig Corp. (2003) 107 Cal.App.4th 620, 624-625 [132 Cal. Rptr. 2d 549]; De Anza Enterprises v. Johnson(2002) 104 Cal.App.4th 1307, 1315 [128 Cal. Rptr. 2d 749].)
“[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable.” (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413 [58 Cal. Rptr. 2d 875, 926 P.2d 1061].) “[W]here … the enforceability of an arbitration clause may depend upon which of two sharply conflicting factual accounts is to be believed, the better course would normally be for the trial court to hear oral testimony and allow the parties the opportunity for cross-examination. As the trial court here remarked, ‘it’s pretty difficult to weigh credibility without seeing the witnesses.’” (Id. at p. 414.)
The trial court’s authority to hold an evidentiary hearing to assist it in the interpretation of a contract is set forth very clearly in Rosenthal and is well supported by several other cases. (See Hotels Nevada v. L.A. Pacific Center, Inc. (2006) 144 Cal.App.4th 754, 758 [50 Cal. Rptr. 3d 700] ["The role of the trial court is to sit as a trier of fact, weighing any affidavits, declarations, and other documentary evidence, together with oral testimony received at the court's discretion, to reach a determination on the issue of arbitrability."]; Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, 358 [72 Cal. Rptr. 2d 598] ["Evidence as to the parties' understanding and intent in taking what actions they did take is admissible to ascertain when or whether a binding agreement was ever reached."].) “[T]he paramount consideration [in the interpretation of contracts] is the intention of the contracting parties ‘… as it existed at the time of contracting … .’ ” (Western Camps, Inc. v. Riverway Ranch Enterprises(1977) 70 Cal.App.3d 714, 723 [138 Cal. Rptr. 918]; see Civ. Code, § 1636 ["A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful."].)
Here, the trial court determined that the need for extrinsic evidence required an evidentiary hearing so that it could listen to witness testimony regarding the intent of the parties. With respect to the testimony presented at the hearing, Burch argued that “[a]ll the papers and all the sides keep talking about these extensive negotiations. What did they actually negotiate if not to take out this arbitration? That’s the only thing that got changed after days and days of talks. Nothing else was changed. So if the negotiations didn’t strike out arbitration, what did they negotiate?”
The trial court commented on this point: “I agree [the parties] spent a lot of time talking and they ended up striking out that sentence; that’s really where it all hinges.” It is well settled that, ” ‘ “[u]nless a court can ‘to a certainty and with sureness by a mere reading of the document, determine which is the correct interpretation … extrinsic evidence becomes admissible as an aid to interpretation. …’ ” ‘ ” (Denver D. Darling, Inc. v. Controlled Environments Construction, Inc. (2001) 89 Cal.App.4th 1221, 1236 [108 Cal. Rptr. 2d 213].) That is the approach the trial court took here. It received and relied upon extrinsic evidence to resolve the ambiguity as to the parties’ intended scope of the modified arbitration provision.
Defendants dispute this conclusion and argue that what the court really did was make additions or otherwise reform the purchase agreement. We disagree. The trial court did nothing more than resolve the conflicting interpretations given by the parties, which had arisen as a result of the negotiated modification of the language in addendum No. 2. The intent of the parties became critical as to the meaning and effect to be given to that modification. In cases where there is “any apparent conflict between its different clauses or provisions, the circumstances surrounding its execution and the conditions and motives of the parties as shown by recitals in the contract or matters in evidence should be taken into consideration in order that the true intent of the parties may be ascertained.” (Retsloff v. Smith(1926) 79 Cal.App. 443, 452 [249 P. 886].)
The trial court clearly acted within its discretion in conducting the special evidentiary hearing to receive extrinsic evidence necessary to the resolution of the contractual ambiguity.
3. Substantial Evidence Supports the Trial Court’s Ruling
“[T]he appellate court must defer to a trial court’s assessment of the extrinsic evidence, as it defers to other factual determinations … .” (Solis v. Kirkwood Resort Co. (2001) 94 Cal.App.4th 354, 361 [114 Cal. Rptr. 2d 265].) Moreover, “where the interpretation of [a] contract turns upon the credibility of conflicting extrinsic evidence which was properly admitted at trial, an appellate court will uphold any reasonable construction of the contract by the trial court.” (Morey v. Vannucci (1998) 64 Cal.App.4th 904, 913 [75 Cal. Rptr. 2d 573].) An appellate court will not determine that the trial court erred in construing a contract where the intent of the parties is not clear, and evidence of the circumstances is not before it. (Heslin v. Lapham(1926) 77 Cal.App. 137, 139 [246 P. 150].)
The trial court heard and considered the testimony of both Burch and Warren during the evidentiary hearing. Such testimony was generally consistent with the written evidence previously submitted by the parties in their respective declarations. However, with live testimony, the trial court could and did assess and weigh the credibility of each of the witnesses, which is much more difficult with mere declarations. Under settled principles, we must resolve all evidentiary conflicts in favor of the prevailing party and affirm the order as long as the evidence favoring the prevailing party is sufficient to support it. We may not insert ourselves as the trier of fact and reweigh the evidence.
We have summarized the relevant evidence in an earlier part of this opinion. Based on this evidence, the trial court concluded that the striking and initialing of the last sentence of the arbitration clause in addendum No. 2, when considered in the context of the purchase agreement as a whole (including the Warranty booklet), memorialized defendants’ agreement that Burch would not be required to arbitrate any claims that are unrelated to the HBW Warranty.
After concluding that the modification to addendum No. 2 had created an ambiguity, the trial court summed up its findings by stating, “I don’t understand why that sentence is crossed out. It makes no sense to me in the context of it, and for months now I look at it and I go why would the parties do this. It’s either accomplishing something or it’s not accomplishing something or it’s making someone else believe that it’s accomplishing something that it’s not accomplishing.” The court went on to state that “I think that this hearing was very helpful, more so than I thought it would be than reading declarations when you have genuine controversy over what was said, because you really can’t assess credibility in a declaration.”16
16 On June 1, 2011, during the pendency of this appeal, Burch filed a motion with this court for an order directing correction of the reporter’s transcript with respect to some statements made by the trial court during proceedings on December 17, 2009. Defendants opposed this motion, arguing that there was no error in the record. As we have not relied upon such disputed portion of the transcript and have found, in the undisputed portion of the record, more than substantial evidence to support the trial court’s findings and decision, we have denied Burch’s motion as moot.
The parties’ conduct in total, as manifested in their multiple telephone conversations, extensive negotiations, and the ultimate striking out and initialing of the last sentence of addendum No. 2, supports the trial court’s conclusion that there was no agreement to limit Burch’s litigation of her claims against defendants to the arbitral forum. As Burch made clear in her testimony, she repeatedly explained to defendants that she would not agree to arbitrate against defendants and wanted to preserve her California state law rights. The trial court accepted this testimony as true. All of this evidence was more than sufficient to support the trial court’s ruling as to the intent of the parties and the meaning to be given to the modification of addendum No. 2.
4. There Was No Valid Agreement to Arbitrate Disputes Between Burch and Defendants
Mutual assent is required for there to be an enforceable agreement to arbitrate disputes. “‘[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.’” (Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 83 [154 L. Ed. 2d 491, 123 S. Ct. 588], quoting Steelworkers v. Warrior & Gulf Co. (1960) 363 U.S. 574, 582 [4 L. Ed. 2d 1409, 80 S. Ct. 1347].) “The right to arbitration depends upon contract; a petition to compel arbitration is simply a suit in equity seeking specific performance of that contract. [Citations.] There is no public policy favoring arbitration of disputes which the parties have not agreed to arbitrate. [Citation.]” (Engineers & Architects Assn. v. Community Development Dept. (1994) 30 Cal.App.4th 644, 653 [35 Cal. Rptr. 2d 800].)
In other words, mutual assent exists when a reasonable person would conclude from the outward conduct of the parties that there was mutual agreement regarding their intent to be bound. (Marin Storage & Trucking,Inc. v. Benco Contracting & Engineering, Inc. (2001) 89 Cal.App.4th 1042, 1049-1050 [107 Cal. Rptr. 2d 645].) If such mutual intent to be bound into arbitration cannot be shown, arbitration will not be compelled. (See Badie v. Bank of America(1998) 67 Cal.App.4th 779, 804 [79 Cal. Rptr. 2d 273].)
Regardless of how broad the terms of a contract are, the contract will only extend to those issues for which it appears that the parties intended to contract. (Victoria v. Superior Court (1985) 40 Cal.3d 734, 739 [222 Cal. Rptr. 1, 710 P.2d 833].) The parties must agree on all material terms; otherwise, there is no meeting of the minds between the parties and thus, no contract is formed. (See Elyaoudayan v. Hoffman(2003) 104 Cal.App.4th 1421, 1430 [129 Cal. Rptr. 2d 41].)
The last and now stricken sentence of addendum No. 2 made arbitration the exclusive remedy for all parties involved. When defendants agreed to strike out that sentence it is reasonable to conclude that they were indicating that they understood, consented and agreed that arbitration would not be the exclusive method for seeking redress as to construction defect disputes between Burch and themselves, and that arbitration would, as negotiated by the parties, only be applied to legal proceedings by Burch involving warranty claims under HBW’s Warranty.17
17 Under the purchase agreement, it appears that warranty claims falling within the coverage of the HBW Warranty would be subject to arbitration.
Given the trial court’s conclusion regarding the intent of the parties with respect to the scope of the modified arbitration clause, it is clear that Burch did not enter into an agreement to arbitrate any construction defect disputes she might have with defendants arising out of her purchase of the property.
The order denying the motion to compel is affirmed. Burch shall recover her costs on appeal.
Klein, P. J., and Kitching, J., concurred.
GREG OPINSKI CONSTRUCTION, INC., et al., Cross-complainants, Cross-defendants and Appellants, v. CITY OF OAKDALE, Cross-defendant, Cross-complainant and Respondent.
Consolidated Case Nos. F060219 & F060727
COURT OF APPEAL OF CALIFORNIA, FIFTH APPELLATE DISTRICT
199 Cal. App. 4th 1107; 132 Cal. Rptr. 3d 170; 2011 Cal. App. LEXIS 1279
October 6, 2011, Filed
NOTICE: CERTIFIED FOR PARTIAL PUBLICATION*
* Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this opinion is certified for publication with the exception of parts I.B., C., II., III., and V. of the Discussion.
SUBSEQUENT HISTORY: Review denied by Greg Opinski Constr. v. City of Oakdale, 2012 Cal. LEXIS 555 (Cal., Jan. 18, 2012)
APPEAL from a judgment of the Superior Court of Stanislaus County, No. 381788, William A. Mayhew, Judge.
COUNSEL: Cassinat Law Corporation and John E. Cassinat for Cross-complainants, Cross-defendants and Appellants.
Costanzo & Associates and Neal E. Costanzo for Cross-defendant, Cross-complainant and Respondent.
JUDGES: Opinion by Wiseman, Acting P. J., with Levy and Kane, JJ., concurring.
OPINION BY: Wiseman
WISEMAN, Acting P. J.–After a bench trial in this dispute between the City of Oakdale (city) and its general contractor on a building project, Greg Opinski Construction, Inc. (Opinski), the trial court awarded the city $54,000 in liquidated damages for late completion, $3,266 for repair of construction defects, prejudgment interest, and $97,775 in attorneys’ fees. The claims in a cross-complaint by Opinski and its performance bond surety, Fidelity and Deposit Company of Maryland, were rejected.
In its statement of decision, the trial court stated that it would not consider whether the late completion was caused by actions of the city. This was because the contract required any extension of time to be obtained through certain procedures, procedures Opinski did not use, so the question of fault for the delays did not arise. Opinski argues that, in so ruling, the trial court contravened the rule laid down by our Supreme Court in Peter Kiewit Sons’ Co. v. Pasadena City Junior College Dist. (1963) 59 Cal.2d 241 [28 Cal. Rptr. 714, 379 P.2d 18] (Peter Kiewit). There the court held that an owner is not entitled to damages for late completion if the lateness was caused by the owner’s conduct, even if the contract barred extensions of time unless requested under specified procedures and the contractor admittedly did not make a request.
In the published part of our opinion, we hold that this aspect of Peter Kiewit was superseded by a 1965 amendment to Civil Code section 1511, which allows parties to specify in a contract that a party intending to avoid the effect of its failure to perform by asserting that the other party’s act caused the failure must give written notice of this intention within a reasonable time. In this case, the contractual provisions requiring certain procedures to be followed by a party requesting an extension of time amounted to the type of specification contemplated by the amendment to Civil Code section 1511. Since Opinski did not follow those procedures to claim an extension of time, it cannot rely on Peter Kiewit, and the trial court was correct to enforce the procedural requirements of the contract.
We also hold in the published part of our opinion that the court erred when it awarded prejudgment interest to the city. The city was holding retention funds in an escrow account created pursuant to Public Contract Code section 22300, in an amount that exceeded the damages upon which interest was awarded. The city was entitled to access the funds when it determined that Opinski had breached the contract. It had dominion and control of the funds from that point and therefore was not entitled to prejudgment interest.
The trial court ordered the retention funds in the escrow account to be used as a setoff against the judgment. With the interest included, the award consumed the entire escrow balance. The reversal of the interest award will mean that the escrow funds exceed the total amount awarded to the city. We remand so the trial court can modify the judgment to require the city to pay the residue to Opinski.
In the unpublished part of the opinion, we reject the remainder of Opinski’s and the surety’s arguments in these two appeals (cases Nos. F060219 & F060727).
FACTUAL AND PROCEDURAL HISTORIES
On May 3, 2004, Opinski entered into a contract with the city as the general contractor for the project. The city issued a “Notice to Proceed” effective the same day. The contract required the work to be completed within 300 calendar days and provided for liquidated damages of $250 for each day of delay. The 300th day was February 26, 2005, but, according to the architect’s certification of substantial completion, the project was not substantially complete until September 30, 2005, more than seven months late.
The litigation began when a subcontractor sued Opinski for withholding payment. The subcontractor’s claim was dismissed before trial and is not now at issue. Opinski cross-complained against the city for breach of contract. The city answered and cross-complained against Opinski and the surety, also for breach of contract.
Opinski’s claim against the city was that the city wrongfully refused to pay a balance of $164,839 of the contract price plus $24,436 in excess of the contract price for proposed change orders the city had refused to approve, along with interest and contractual penalties. The $164,839 balance represented an unpaid portion of the “retention” funds. In a construction contract, a retention is a portion of the contract price that is withheld by the owner as a form of security in case of a dispute. “Authorities have noted that a retention occurs when the owner retains a percentage from each progress payment as a form of security against potential mechanics’ liens and as security that the contractor will complete the work properly and repair defects.” (Yassin v. Solis (2010) 184 Cal.App.4th 524, 534 [108 Cal. Rptr. 3d 854].) The contract in this case provided for a retention of 10 percent of the contract price. As the progress payments came due, the retention funds were deposited in an escrow account the parties established for that purpose.
The city’s claim against Opinski was that Opinski owed $54,000 in liquidated damages for lateness, $10,000 for defective conditions, and interest. The city also claimed that it was withholding the balance of the contract price in escrow because it had received stop notices from three subcontractors. Stop notices are notices from subcontractors stating that the city should not pay the general contractor an amount the general contractor had failed to pay the subcontractor.
The city did not, however, argue that the stop notices ultimately meant the amount to be paid to Opinski should be reduced. In its posttrial brief, the city suggested that the court should award the city judgment against Opinski for the damages for lateness and defects, but should also direct the city to authorize the release of the funds in escrow to Opinski. Then, according to the city, Opinski should be ordered to pay the amounts at issue in the stop notices to the subcontractors.
The key provisions of the contract for purposes of these appeals concerned the means by which the contract price and the contract time (i.e., the time by which the project was to be completed) could be changed. The parties could only be bound by changes in the completion time or the price that were made in writing through specified procedures. These procedures were included in a lengthy set of provisions called the “General Conditions of the Contract.” Paragraphs 11.2 and 12.1 of the general conditions provided that the completion time and the contract price could be changed only by means of a change order. A change order was defined as a document signed by the contractor and the city that authorized a change in the price, time, or other provision of the contract.
Paragraph 11.2 provided that “[n]o claim for an adjustment in the Contract Price will be valid if not submitted in accordance with this paragraph 11.2.” Paragraph 12.1 included a similar provision about claims for adjustment to the contract time.
A change order altering the time or price could be executed by either of two routes. First, under paragraph 10.4.2, the parties could execute the order by mutual agreement. Second, under paragraph 10.4.3, an order could be issued to “embody the substance of any written decision rendered by Engineer pursuant to paragraph 9.11 … .” The engineer was defined as “[t]he person, firm or corporation which prepared the Plans and Contract Documents.” The engineer for this project was the firm RRM Design Group.1 Paragraph 10.4 provided that “Owner and Contractor shall execute appropriate Change Orders” covering changes to the time or price arrived at in one of these ways.
1 RRM Design Group provided architectural and engineering services. One of its principals, Kirk Van Cleave, signed the certificate of substantial completion as architect.
Paragraph 9.11 provided a process by which the engineer could be asked to rule on claims by the parties for changes in the time or price. “[C]laims under Articles 11 and 12 in respect [to] changes in the Contract Price or Contract Time” were to be “referred initially to Engineer in writing with a request for a formal decision … .” The party making the claim was required to give written notice of the claim to the engineer and to the other party “promptly (but in no event later than thirty days) after the occurrence of the event giving rise thereto … .” Data supporting the claim were required to be submitted “within sixty days after such occurrence” unless the engineer allowed additional time. After this, the engineer was to render a decision in writing within a reasonable time.
Paragraph 12.2 specified that an extension of time based on circumstances beyond the control of the contractor was to be granted after submission of a claim: “The Contract Time will be extended in an amount equal to time lost due to delays beyond the control of the Contractor if a claim is made [therefor] as provided in paragraph 12.1. Such delays shall include, but not be limited to, acts of neglect by Owner or others performing additional work as contemplated by Article 7, or to fires, floods, labor disputes, epidemics, abnormal weather conditions or acts of God.”
The court issued a written ruling after a bench trial. It awarded the city $54,000 plus interest for lateness and $3,266 for repair of construction defects. It found that the city rightly withheld $43,546 for two stop notices, and that Opinski “failed to meet its burden of proof that it bonded around the two … stop notices … .” It further found that the city’s decision to withhold over $164,000 of the contract price was “not unreasonable” because, under Public Contract Code section 7107, subdivision (c),2 the city was entitled to withhold up to 150 percent of the amount in dispute. The amount in dispute was $54,000, plus $43,546, plus a then unknown amount for defects. The ruling rejected Opinski’s claims for unpaid change orders, stating that Opinski failed to submit them within 30 days as required by the contract. Finally, the ruling directed the city to prepare a proposed statement of decision and judgment.
2 The subdivision provides: “In the event of a dispute between the public entity and the original contractor, the public entity may withhold from the final payment an amount not to exceed 150 percent of the disputed amount.” (Pub. Contract Code, § 7107, subd. (c).)
The ruling did not state that either Opinski or the city was required to pay any of the withheld money to subcontractors and did not state that the contract price was reduced by the amount of the notices or any other amount. It did not include any statement about the disposal of the money in the escrow account.
These omissions led to a dispute over the contents of the proposed statement of decision and judgment. Opinski submitted a request for a statement of decision asking for, among other things, rulings on whether the city was required to release the funds in escrow and whether Opinski was entitled to a judgment in the amount of the difference between the escrow balance and the judgment in favor of the city.
The city prepared, and the court signed and filed, a statement of decision that included a set of responses to the issues raised in Opinski’s request. The responses included a determination that there was no need to answer Opinski’s requests for findings about the causes of the delay in completion. It was “not necessary to separately respond to each of these requests” because, under the circumstances, the terms of the contract made the answers irrelevant. To alter the contract time–regardless of the reason–the contract required the party seeking the alteration to obtain a change order either by mutual agreement or by submitting a claim to the engineer with a request for a formal decision in writing. Neither procedure was used, the court reasoned, so the time was not extended, regardless of which party was to blame for the late completion.
The responses to Opinski’s requests also included the following three reasons why Opinski was not entitled to a judgment for the difference between the escrow balance and the judgment for the city and why no order for the disposition of the escrow funds was called for:
“First, these requests assume that the City is unilaterally withholding and can unilaterally release $164,839 in retention funds. In fact, the money representing the retention funds is deposited and held pursuant to an escrow agreement … . The money held in escrow can only be released with the consent of both parties. It cannot be … unilaterally released, or accessed, by either party. The court’s finding is that since the City could ‘retrieve up to 150% per PCC §7107,’ … the ‘retention is not unreasonable.’ That the principal sum of the judgment to be entered is less than the amount now held in the escrow account provides no legal or factual basis for an entry of judgment in favor of [Opinski or the surety]. Any issues that remain between the parties following entry of judgment in this action, which is premised solely upon alleged breaches of the construction agreement, are not within the subject matter of the issues framed by the pleadings in this case.
“Second, a judgment in favor of Opinski or its surety would necessarily need to be premised upon a breach of the construction contract by the City. Here, the court has found no such breach by the City but has determined that there is a breach of the contract by Opinski. … Thus, there is no legal or factual basis that could support the entry of any judgment in favor of either Opinski or its surety.
“Finally, and as noted, the City is entitled to effectively stop payment of 150% of the amount in dispute under PCC §7107. The presumptive reason for the legislative right to maintain a retention in that amount in the event of a dispute necessarily contemplates, as [do] the terms of the construction agreement, that the City will recover costs and attorneys fees in connection with any dispute arising out of the construction agreement. Accordingly, the court concludes that the City of Oakdale is not required to release for payment to Opinski [the amount of the difference between the escrow balance and the amount of the judgment for the city]; that Opinski is not entitled to a judgment on its cross-complaint in that amount or in any amount; and is not entitled to a net judgment in that amount, or any amount.”
The court entered judgment for the city and against Opinski and the surety on February 3, 2010, stating that attorneys’ fees would be determined later by motion. A motion for a new trial and a number of other motions were denied. In its order denying the new trial motion, the court stated that it was “retaining jurisdiction over the issue of the amount of retention funds that are being retained and to which Opinski is entitled to until that amount is finally determined.” Opinski and the surety filed a notice of appeal, initiating the first of the two appeals (No. F060219) now before us.
The city filed its motion for attorneys’ fees. Relying on article XIII of the parties’ contract, the city requested $104,478.67 in attorneys’ fees. On June 28, 2010, the court awarded $97,775 in fees against Opinski and ruled that no fees could be awarded against the surety. The combined amount of the damages judgment, interest, and fees now exceeded the amount of the funds retained in the escrow account. The court ruled that all the money in the escrow account would be used to satisfy a portion of the judgment. The order awarding fees stated: “During the hearing, [Opinski] asked the Court about the status of the retention monies that are still held in escrow for this Project. After hearing from both counsel on the subject matter of the retention monies, the Court directed [city's counsel] to write to the bank holding the monies and request the release of the retention monies to the [city]. Any such monies paid to the [city] from the retention account shall, to that extent, satisfy the judgment of the [city] against [Opinski] in this action.” Opinski and the surety filed the second appeal, No. F060727.
I. Liquidated damages for late completion
A. Court’s reliance on contractual requirements for extension
Opinski argues that it was error to award liquidated damages for lateness on the ground that if no extension was requested or granted through the required procedures, then it did not matter which party, if either, was to blame for the delays, since the contract barred extensions of time for any reason except pursuant to those procedures. Relying on Peter Kiewit, supra, 59 Cal.2d 241 and on Civil Code section 1511, Opinski contends that liquidated damages could not be awarded for any portion of the delay that was caused by the city, even if Opinski failed to use the contract’s procedures for obtaining an extension. Opinski says its timely performance was impossible because of the city-caused delays.
In Peter Kiewit, the California Supreme Court rejected an analysis like the one the trial court employed here. The contract at issue had similar provisions. The court stated: “The principal question presented concerns the effect, if any, to be given to a provision of the contract that, if the work was not completed within the time specified (300 days after notice to start work), the sum of $25 was to be deducted from the final payment as liquidated damages for each day’s delay after the expiration of that period until final acceptance by defendant [junior college district]. The agreement also provided that, if plaintiff [contractor] considered itself entitled to an extension of time for any cause, it must submit in writing to the architect and defendant an application for such extension. Extensions were to be granted only for delays resulting from causes beyond plaintiff’s control, including, among other things, strikes, alterations of the work delaying completion, and ‘any act of neglect, duty, or default’ of defendant.” (Peter Kiewit, supra, 59 Cal.2d at p. 243.)
The work was not completed on time, but the trial court found that the lateness was caused by matters beyond the contractor’s control. The government agency conceded that its own conduct caused the delays. The contractor did not request extensions of time in connection with those delays in accordance with the required procedures. (Peter Kiewit, supra, 59 Cal.2d at p. 243.)
The Supreme Court rejected the government agency’s contention that the trial court should have enforced the contract’s requirements for extending time and should have awarded the agency liquidated damages even though the agency caused the delays itself. It held, “Noncompliance with a provision requiring an application for an extension of time is not a proper basis for holding a contractor liable in liquidated damages for late completion caused by the owner’s conduct.” (Peter Kiewit, supra, 59 Cal.2d at p. 245.) The court relied on Civil Code section 1511, which provides in part:
“The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:
“1. When such performance or offer is prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse … .” (Civ. Code, § 1511; see also Review of Selected 1965 Code Legislation (Cont.Ed.Bar 1965) p. 55.) Chief Justice Gibson’s opinion explained: “Section 1511 of the Civil Code provides in subdivision 1 that any delay in the performance of an obligation ‘is excused’ when performance is delayed by ‘the act of the creditor … even though there may have been a stipulation that this shall not be an excuse.’ (Italics added.) An owner who is a party to a construction contract is a creditor within the meaning of section 1511 [citation], and, as the italicized portion of the section makes clear, a provision in an agreement that the contractor is not to be excused for late completion caused by the owner is rendered inoperative by the statute. A provision in a contract which would require the contractor to make an application for an extension of time before he may be excused for a delay caused by the owner’s conduct would obviously constitute a substantial limitation on the policy declared by section 1511.” (Peter Kiewit, supra, 59 Cal.2d at pp. 243-244.)
The Peter Kiewit decision was criticized as an unwarranted interference in the power of contracting parties to shift the risk of delays caused by one party onto the other party by forcing the second party to give the first notice of any intention to claim an extension of time based on delays caused by the first. A Boalt Hall professor thundered: “Almost universally, building contracts contain a provision that conditions the contractor’s right to claim an extension of time for delays beyond his control upon giving written notice of his intention to make such a claim. Despite contrary precedents, a unanimous California Supreme Court gutted this sensible provision in [Peter Kiewit]. A questionable application of an obscure provision of California Civil Code Section 1511 was employed to justify the court’s refusal to give effect to this express condition. This decision will undoubtedly hamper fair and effective administration of California construction contracts and should not pass unnoticed by the Bar.” (Sweet, Extensions of Time and Conditions of Notice: California’s Needless Restriction of Contractual Freedom (1963) 51 Cal. L.Rev. 720, 720, fns. omitted.)
In 1965, the Legislature amended section 1511, subdivision 1, to add the following clause after “shall not be an excuse”: “however, the parties may expressly require in a contract that the party relying on the provisions of this paragraph give written notice to the other party or parties, within a reasonable time after the occurrence of the event excusing performance, of an intention to claim an extension of time or of an intention to bring suit or of any other similar or related intent, provided the requirement of such notice is reasonable and just … .” (Civ. Code, § 1511; see also Stats. 1965, ch. 1730, § 1, pp. 3887-3888; see General Insurance Co. v. Commerce Hyatt House (1970) 5 Cal.App.3d 460, 470-471 [85 Cal. Rptr. 317].)
The amendment was a legislative reaction against the Peter Kiewit decision. A Continuing Education of the Bar publication issued at the time explained:
“Formerly, § 1511(1) prevented a contract obligor from contracting to assume to risk of delays or barriers to performance caused by the obligee. Obstructive conduct by the obligee was always an excuse for nonperformance, even if the obligor had accepted a stipulation that this conduct would not be an excuse.
“Many contracts include a provision whereby the obligor is required to give notice of his intention to claim that failure of performance has been excused by the obligee’s conduct. Failure to give timely notice is made a waiver of the excuse. [Citations.] However, these notice requirements have been held contrary to the policy of § 1511(1) and hence void. [Peter Kiewit, supra], followed in Aetna Cas. & Sur. Co. v. Board of Trustees (1963) 223 CA2d 337; see 1 Witkin, Summary, 1963 Supp., Contracts § 252.
“Amended § 1511(1) overcomes the court holding and restores the power of contracting parties to include in their contract a provision requiring the obligor to give notice if he intends to rely on obligee’s conduct as an excuse for delay or nonperformance, or as a basis for damages or other affirmative relief.” (Review of Selected 1965 Code Legislation, supra, at pp. 55-56.)
The contract in this case contained provisions of the type contemplated by the 1965 amendment. If the contractor wished to claim it needed an extension of time because of delays caused by the city, the contractor was required to obtain a written change order by mutual consent or submit a claim in writing requesting a formal decision by the engineer. It did neither. The court was correct to rely on its failure and enforce the terms of the contract. It makes no difference whether Opinski’s timely performance was possible or impossible under these circumstances. The purpose of contract provisions of the type authorized by the 1965 amendment to Civil Code section 1511, subdivision 1, is to allocate to the contractor the risk of delay costs–even for delays beyond the contractor’s control–unless the contractor follows the required procedures for notifying the owner of its intent to claim a right to an extension. There was no error.
Besides Peter Kiewit, Opinski also cites Aetna Cas. etc. Co. v. Bd. of Trustees, supra, 223 Cal.App.2d 337 and General Insurance Co. v. Commerce Hyatt House, supra, 5 Cal.App.3d 460, but both of those cases apply the law as it was before the 1965 amendment. General Ins. Co. of America was decided after the amendment, but the court explained that the preamendment law applied because the contract was made before 1965. (General Insurance Co., supra, at p. 471.)
B., C.* [NOT CERTIFIED FOR PUBLICATION]
* See footnote, ante, page ___.
II., III.* [NOT CERTIFIED FOR PUBLICATION]
* See footnote, ante, page ___.
Opinski argues that the court should not have awarded prejudgment interest to the city because the city was withholding the money the court ultimately awarded to it. Opinski contends that this means the city had the use of that money. Since the purpose of awarding prejudgment interest is to compensate the injured party for the time value of money it recovers, interest should not be awarded where that party was in possession of the money all along, Opinski says.
The city argues that “[i]t is simply not the case that [it] ever had the ability to access” the retention funds in the escrow account. It claims the escrow agreement did not allow one party to withdraw the funds without the consent of the other party.
The rule is that if, during any prejudgment period, a party has dominion and control over money that is awarded to it as damages, it is not entitled to prejudgment interest for that period. In Buckman v. Tucker (1937) 9 Cal.2d 403 [71 P.2d 69], Thompson sued Buckman for $439.72 upon a contract and prevailed at trial. Buckman appealed but did not file a stay bond. Thompson secured a writ of execution and collected on February 18, 1935. The appeal led to a new trial, the result of which was a determination that, under the parties’ agreement, the suit had been brought prematurely because the debt had not yet matured. (Id. at p. 404.)
After the maturation date, Buckman sued and prevailed again. The trial court awarded prejudgment interest from July 16, 1934, to October 29, 1935. (Buckman v. Tucker, supra, 9 Cal.2d at p. 405.) The Supreme Court held that the interest award was erroneous because Buckman had obtained the money on February 18, 1935: “Defendant Thompson had execution issued on February 18, 1935. It is obvious from the date that the defendant thus came into possession of the money that he had dominion and control thereof, and interest should have terminated on that date.” (Id. at p. 409; see also Insurance Co. of North America v. Bechtel (1973) 36 Cal.App.3d 310, 319 [111 Cal. Rptr. 507] [prejudgment interest on judgment against insurer should have terminated on date when insurer deposited funds with court and parties stipulated that funds would be released to insured without prejudice].) The question, therefore, is whether the city had dominion and control over the money in the escrow account. This, in turn, depends on the terms of the parties’ escrow agreement.
The parties’ escrow agreement conforms to the model agreement in Public Contract Code section 22300, subdivision (f). The purpose of an escrow agreement under Public Contract Code section 22300 is to allow the contractor to receive in cash the money that would otherwise be held by the owner as retention, while providing the owner with securities as collateral: “At the request and expense of the contractor, securities equivalent to the amount withheld [as retention] shall be deposited with the public agency, or with a state or federally chartered bank in this state as the escrow agent, who shall then pay those moneys to the contractor. Upon satisfactory completion of the contract, the securities shall be returned to the contractor.” (Pub. Contract Code, § 22300, subd. (a).) In effect, the agreement allows the contractor to borrow against the securities. As an alternative, the contractor can request that the owner pay the retentions in cash to the escrow agent. In that case, the contractor “may direct the investment of the payments into securities,” and interest earned on the investments belongs to the contractor. (Pub. Contract Code, § 22300, subd. (b).)
Like the model agreement in the statute, the parties’ escrow agreement provides in paragraph 7 that the owner is entitled to convert the securities to cash and withdraw the cash “in the event of default by the Contractor.” (Pub. Contract Code, § 22300, subd. (f)(7).) Neither the model agreement nor the parties’ agreement explains what happens if the contractor defaults and the escrow account already contains only cash, as appears to have happened in this case.
Opinski argues that paragraph 7 implies that, in case of breach by the contractor, the owner is entitled to withdraw the principal in the escrow account regardless of its form. The city argues that two other provisions, paragraphs 3 and 6, imply that, once funds are placed in the escrow account, they cannot be withdrawn without the consent of both parties. Paragraph 3 provides that when the owner makes cash retention payments into the escrow account, “the Escrow Agent shall hold them for the benefit of the Contractor until the time that the escrow created under this contract is terminated.” Paragraph 6 states that “Contractor shall have the right to withdraw all or any part of the principal in the Escrow Account only by written notice to Escrow Agent accompanied by written authorization from the Owner to the Escrow Agent that Owner consents to the withdrawal of the amount sought to be withdrawn by Contractor.”
We agree with Opinski. The purpose of the practice of withholding retention payments is to give the owner security in case of breach by the contractor. Nothing in Public Contract Code section 22300 evinces a legislative intent to limit an owner’s recourse. Although paragraph 7 of the model escrow agreement (and the parties’ actual escrow agreement) does not expressly state that an owner can withdraw cash if the contractor defaults and the account never contained securities, the inclusion of that paragraph presupposes that the owner has a right to possession of the retention when the owner deems the contractor to be in breach. The purpose of withholding retention would be undermined if this were not the case, and there is no reason why the form of the retention–securities or cash–would make a difference in this regard. For these reasons, we conclude that the city had the power to withdraw the money from the escrow account when it determined that Opinski had breached the contract. Therefore, it had dominion and control over the money from the time of the breach and was not entitled to prejudgment interest.
The court’s order in its ruling on the attorneys’ fees motion is consistent with this view.6 It directed the city to “write to the bank holding the monies and request the release of the retention monies to” the city. The court did not direct Opinski to give consent. The record does not show, and the city does not claim, that it turned out to be impossible to release the money to the city on the city’s sole authorization.
6 Its statement of decision in support of the February 1, 2010 judgment, however, was not consistent with this view. The court opined that the city could not have accessed the money without Opinski’s consent. We reject this position, as we have said.
The city’s reliance on paragraphs 3 and 6 of the escrow agreement is misplaced. Paragraph 3 states that the escrow agent “shall hold” retention payments “for the benefit of the Contractor” until the escrow is terminated, but this cannot mean the owner lacks power to direct the escrow agent to return the principal if the contractor breaches, since paragraph 3 would in that case conflict with paragraph 7. Paragraph 3 would also conflict with the basic purpose of retention under that interpretation, for it would deprive the owner of security against the contractor’s breach. Paragraph 6 says only that the contractor cannot withdraw funds without the consent of the owner. The omission of the converse provision–that the owner cannot withdraw funds without the consent of the contractor–shows that the converse provision is not intended. Further, once again, the purpose of retention–to provide security to the owner–would be defeated if the placement of retention in escrow meant the money was inaccessible to the owner absent the consent of the contractor.
We conclude the award of prejudgment interest to the city was error and reverse the award. The effect of the reversal is that the escrow balance will exceed the total award to the city. The escrow balance is sometimes stated in the record as $164,839 and sometimes as $164,781. Without prejudgment interest, the total award to the city is $54,000 for late completion, $3,266 for repair of construction defects, and $97,775 for attorneys’ fees, a total of $155,041.
The difference between the escrow balance (whichever it is) and the city’s recovery must be awarded to Opinski on remand. We agree with the Fassberg court that, where there is no remaining dispute to justify continued withholding of retention, the owner must release any retention funds that exceed the court’s award to the owner, and the court should order the owner to do so. (Fassberg Construction Co. v. Housing Authority of City of Los Angeles (2007) 152 Cal.App.4th 720, 764 [60 Cal.Rptr.3d 375].) The trial court’s assertion in the statement of decision that the question of a release of retention funds to Opinski was not within the issues framed by the pleadings is inconsistent with the holding in Fassberg that no special procedures are needed to “invoke the equitable power of the court to effect a setoff, when appropriate.” (Id. at p. 763.)
V. Surety’s claims* [NOT CERTIFIED FOR PUBLICATION]
* See footnote, ante, page ___.
The award of prejudgment interest in No. F060219 is reversed. No. F060727 is remanded to the trial court with directions to determine the amount by which the total award in both matters is exceeded by the amount that was retained in escrow and to order the city to pay Opinski the difference. The judgments are affirmed in all other respects. The parties shall bear their own costs on appeal.
Levy, J., and Kane, J., concurred.
PROMENADE AT PLAYA VISTA HOMEOWNERS ASSOCIATION, Plaintiff and Respondent, v. WESTERN PACIFIC HOUSING, INC., et al., Defendants and Appellants.
COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION ONE
200 Cal. App. 4th 849; 133 Cal. Rptr. 3d 41; 2011 Cal. App. LEXIS 1400
November 8, 2011, Filed
APPEAL from an order of the Superior Court of Los Angeles County, No. BC424950, Emilie H. Elias, Judge.
COUNSEL: Wood, Smith, Henning & Berman, Stephen J. Henning, Sheila E. Fix, Tracy M. Lewis and Robert G. Amundson for Defendants and Appellants.
Fenton Grant Mayfield Kaneda & Litt, Daniel H. Clifford, Joseph Kaneda and Bruce Mayfield for Plaintiff and Respondent.
JUDGES: Opinion by Mallano, P. J., with Chaney and Johnson, JJ., concurring.
OPINION BY: Mallano
MALLANO, P. J.–This appeal presents the question of whether, in response to a construction defect action brought by a condominium homeowners association, the developer can compel binding arbitration of the litigation pursuant to an arbitration provision in the declaration of covenants, conditions, and restrictions (CC&R’s). The answer is no.1
1 This issue is pending before our Supreme Court in Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2010) 187 Cal.App.4th 24 [113 Cal. Rptr. 3d 399], review granted November 10, 2010, S186149 (lead case).
We reach this conclusion because the developer does not rely on a contract with the homeowners association to compel arbitration but instead on the arbitration provision in the CC&R’s. Yet, under California law, the provisions in the CC&R’s are equitable servitudes and can be enforced only by the homeowners association, the owner of a condominium, or both. Developers are not among those permitted to enforce CC&R’s.
The facts and allegations in this appeal are taken from the pleadings, the exhibits submitted in connection with the motion to compel arbitration, and the standard procedure for creating a common interest development.
Defendants Western Pacific Housing, Inc., and Playa Capital Company, LLC (Developers), constructed, marketed, and sold a 90-unit condominium complex located on West Pacific Promenade in Playa Vista, California. Before the homeowners association (Association) came into existence or a single unit was sold, the Developers drafted and recorded the CC&R’s. Only the Developers signed that document.
The CC&R’s contained a mandatory arbitration provision, requiring that any disputes between the Developers, on the one hand, and the Association or a condominium owner, on the other hand, be submitted to binding arbitration. According to its terms, the provision could not be amended without the consent of the Developers. The CC&R’s made the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1-16) applicable in interpreting and enforcing the arbitration provision.
Sales of the units began in 2004. In addition to the CC&R’s, each “Purchase Agreement and Escrow Instructions” contained a mandatory arbitration provision, requiring that postclosing disputes between the Developers and the buyer be submitted to binding arbitration. The purchase agreements, unlike the CC&R’s, were signed by both the Developers and the buyer.
Initially, the members of the Association’s board of directors were appointed by the Developers. Ultimately, the Developers sold all the units and no longer had any ownership interest in the complex. The owners replaced the initial board members with individuals of their own choosing.
On October 29, 2009, the Association filed this action against the Developers, alleging construction defects in the roofs, stucco, windows, and doors, and the structural, electrical, plumbing, and mechanical components and systems. The Developers responded with a motion to compel arbitration, relying on the arbitration provision in the CC&R’s and the individual purchase agreements.
The Association filed opposition, contending the CC&R’s were not subject to arbitration because they were equitable servitudes, not a contract, and, alternatively, if they were a contract, enforcement was barred because the contract was unconscionable. The Association also pointed out that 30 of the original buyers had sold their units, and the arbitration provision in their purchase agreements with the Developers did not apply to the subsequent purchasers.
The motion was heard on April 12, 2010. By order of the same date, the trial court denied the motion to compel. The Developers appealed.
We review the trial court’s decision independently because it involves interpreting the CC&R’s and applicable statutes. (See P&D Consultants, Inc. v. City of Carlsbad (2010) 190 Cal.App.4th 1332, 1340 [119 Cal. Rptr. 3d 253]; Redding Medical Center v. Bontá (2004) 115 Cal.App.4th 1031, 1037 [9 Cal. Rptr. 3d 759].)
On appeal, the parties focus primarily on whether the CC&R’s are unconscionable. In their opening brief, the Developers state they no longer rely on the arbitration provision in the purchase agreements with the original buyers to compel arbitration. Rather, the Developers base their alleged right to arbitrate solely on the arbitration provision in the CC&R’s, arguing that the original purchase agreements constitute evidence that procedural unconscionability is lacking–an issue not relevant to our analysis because we view the CC&R’s as equitable servitudes, not as a contract to arbitrate.
For its part, the Association again argues that the Developers cannot enforce the CC&R’s because that document consists of equitable servitudes; it is not a contract and is therefore not enforceable by the Developers, who have no ownership interest in the condominium complex. We agree with the Association and affirm.
Under the FAA, “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2, italics added.) But this case involves equitable servitudes, not a contract, making the FAA inapplicable.
As our Supreme Court has explained at length: “To divide a plot of land into interests severable by blocks or planes, the attorney for the land developer must prepare a declaration that must be recorded prior to the sale of any unit in the county where the land is located. … The declaration, which is the operative document for the creation of any common interest development, is a collection of covenants, conditions and servitudes that govern the project. ? Typically, the declaration describes the real property and any structures on the property, delineates the common areas within the project as well as the individually held lots or units, and sets forth restrictions pertaining to the use of the property. …
“Use restrictions are an inherent part of any common interest development and are crucial to the stable, planned environment of any shared ownership arrangement. … The viability of shared ownership of improved real property rests on the existence of extensive reciprocal servitudes, together with the ability of each co-owner to prevent the property’s partition. …
“The restrictions on the use of property in any common interest development may limit activities conducted in the common areas as well as in the confines of the home itself. … Commonly, use restrictions preclude alteration of building exteriors, limit the number of persons that can occupy each unit, and place limitations on–or prohibit altogether–the keeping of pets. …
“Restrictions on property use are not the only characteristic of common interest ownership. Ordinarily, such ownership also entails mandatory membership in an owners association, which, through an elected board of directors, is empowered to enforce any use restrictions contained in the project’s declaration or master deed and to enact new rules governing the use and occupancy of property within the project.” (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 372-373 [33 Cal. Rptr. 2d 63, 878 P.2d 1275], citations & fn. omitted.)
The court continued: “One significant factor in the continued popularity of the common interest form of property ownership is the ability of homeowners to enforce restrictive CC&R’s against other owners (including future purchasers) of project units. … Generally, however, such enforcement is possible only if the restriction that is sought to be enforced meets the requirements of equitable servitudes or of covenants running with the land. …
“Restrictive covenants will run with the land, and thus bind successive owners, if the deed or other instrument containing the restrictive covenant particularly describes the lands to be benefited and burdened by the restriction and expressly provides that successors in interest of the covenantor’s land will be bound for the benefit of the covenantee’s land. Moreover, restrictions must relate to use, repair, maintenance, or improvement of the property, or to payment of taxes or assessments, and the instrument containing the restrictions must be recorded. …
“Restrictions that do not meet the requirements of covenants running with the land may be enforceable as equitable servitudes provided the person bound by the restrictions had notice of their existence.” (Nahrstedt v. Lakeside Village Condominium Assn., supra, 8 Cal.4th at p. 375, italics added, citations omitted.)
“Under the law of equitable servitudes, courts may enforce a promise about the use of land even though the person who made the promise has transferred the land to another. … The underlying idea is that a landowner’s promise to refrain from particular conduct pertaining to land creates in the beneficiary of that promise ‘an equitable interest in the land of the promisor.’ … The doctrine is useful chiefly to enforce uniform building restrictions under a general plan for an entire tract of land or for a subdivision. … ‘It is undoubted that when the owner of a subdivided tract conveys the various parcels in the tract by deeds containing appropriate language imposing restrictions on each parcel as part of a general plan of restrictions common to all the parcels and designed for their mutual benefit, mutual equitable servitudes are thereby created in favor of each parcel as against all the others.’ …
“In choosing equitable servitude law as the standard for enforcing CC&R’s in common interest developments, the Legislature has manifested a preference in favor of their enforcement. This preference is underscored by the use of the word ‘shall’ in the first phrase of [Civil Code] section 1354: ‘The covenants and restrictions shall be enforceable equitable servitudes … .’ ” (Nahrstedt v. Lakeside Village Condominium Assn., supra, 8 Cal.4th at pp. 379-380, citations omitted.)
“Having a single set of recorded restrictions that apply to the entire subdivision would also no doubt fulfill the intent, expectations, and wishes of the parties and community as a whole. ‘One of the prime policy components of the law of equitable servitudes and real covenants is that of meeting the reasonable expectations of the parties and of the community.’ …
“By requiring recordation [of the CC&R's] before execution of the contract of sale, … [a]ll buyers could easily know exactly what they were purchasing. … ‘Where a tract index is in effect, a plan of the proposed development should be recorded against the entire tract, which would give notice to all purchasers by placing the restriction in the direct chain of title to each lot in the tract.’ … ‘The burden should be upon the developer to insert the covenant into the record in a way that it can be easily found. Recording a declaration of covenants covering the entire area or filing a map which referred to the covenants would be sufficient.’ … When a developer does follow this simple procedure, it should suffice; future buyers should be deemed to agree to the restrictions.” (Citizens for Covenant Compliance v. Anderson (1995) 12 Cal.4th 345, 364-365 [47 Cal. Rptr. 2d 898, 906 P.2d 1314], citations omitted.)
That brings us to the question of who may enforce the CC&R’s. The Legislature answered that question in Civil Code section 1354, subdivision (a), which states: “The covenants and restrictions in the declaration shall be enforceable equitable servitudes, unless unreasonable, and shall inure to the benefit of and bind all owners of separate interests in the development. Unless the declaration states otherwise, these servitudes may be enforced by any owner of a separate interest or by the association, or by both.” (Italics added; all undesignated section references are to the Civil Code.) “The provision’s express reference to ‘equitable servitudes’ evidences the Legislature’s intent that recorded use restrictions falling within section 1354 are to be treated as equitable servitudes. … Thus, although under general rules governing equitable servitudes a subsequent purchaser of land subject to restrictions must have actual notice of the restrictions, actual notice is not required to enforce recorded use restrictions covered by section 1354 against a subsequent purchaser. Rather, the inclusion of covenants and restrictions in the declaration recorded with the county recorder provides sufficient notice to permit the enforcement of such recorded covenants and restrictions as equitable servitudes.” (Nahrstedt v. Lakeside Village Condominium Assn., supra, 8 Cal.4th at p. 379, citation & fn. omitted.)
Under the “plain meaning” rule used to interpret statutes (Simke, Chodos, Silberfeld & Anteau, Inc. v. Athans (2011) 195 Cal.App.4th 1275, 1284 [128 Cal. Rptr. 3d 95]), we construe the “benefit and bind” language of section 1354 to link ownership in the condominium complex with enforcement of the CC&R’s: The owners, the homeowners association, or both, may enforce the CC&R’s unless the CC&R’s provide otherwise. But under any rationale interpretation of section 1354, the Developers cannot enforce the CC&R’s once they have completed the project and sold all the units; they no longer have any ownership interest in the property. “Section 1354 … confers standing on owners of separate interests in a development and on the association to enforce the equitable servitudes … .” (Nahrstedt v. Lakeside Village Condominium Assn., supra, 8 Cal.4th at p. 378, fn. 9, italics added.)
In Martin v. Bridgeport Community Assn., Inc. (2009) 173 Cal.App.4th 1024 [93 Cal. Rptr. 3d 405], a husband and wife, the Petersons, bought property in a planned development community and agreed that their daughter and her husband, the Martins, could live there. The Petersons executed a power of attorney stating that the Martins would be responsible for all costs associated with the property, including mortgage payments, and would deal directly with the homeowners association on all issues. The homeowners association accepted the power of attorney. During the construction of the house, the Petersons and the Martins noticed that the size of the lot was smaller than represented in the purchase transaction. As a result of negotiations with the Martins, the homeowners association agreed to move the northern property line. The agreement was confirmed in two letters addressed to the Martins, who undertook the expense of fencing, importing dirt, and landscaping the additional land. When the homeowners association failed to cooperate timely in obtaining city approval of the lot adjustment, the Martins filed suit against the association, alleging causes of action for breach of contract and breach of the CC&R’s. After the trial court sustained demurrers to the complaint on the ground that the Martins lacked standing, judgment was entered in favor of the homeowners association. The Martins appealed.
Relying on section 1354, the Court of Appeal affirmed, stating: “In the instant case, as owners of lot 33, the Petersons qualify as ‘an owner of a separate interest’ entitled to enforce the CC&R’s … and other governing documents of [the Bridgeport community]. … The Martins do not qualify. What is bound by an equitable servitude enforceable under CC&R’s is a parcel, a lot, in a subdivided tract, not an individual who has no ownership interest in the lot. (See § 1354, subd. (a).) ‘ “[W]hen the owner of a subdivided tract conveys the various parcels in the tract by deeds containing appropriate language imposing restrictions on each parcel as part of a general plan of restrictions common to all the parcels and designed for their mutual benefit, mutual equitable servitudes are thereby created in favor of each parcel as against all the others.” …’ … Accordingly, the right of enforcement is inextricable from ownership of real property–a parcel, a lot–in a planned development such as Bridgeport and, thus, cannot be assigned absent a transfer of ownership of the parcel to which it applies.” (Martin v. Bridgeport Community Assn., Inc., supra, 173 Cal.App.4th at p. 1036, italics added, citations omitted.) To the same effect is Farber v. Bay View Terrace Homeowners Assn. (2006) 141 Cal.App.4th 1007 [46 Cal. Rptr. 3d 425], in which the Court of Appeal held that the seller of a condominium lacked standing under the CC&R’s to require the homeowners association to repair a leaking roof because the sale had closed, and the seller no longer owned the unit (id. at pp. 1011-1013).
And so it is here. The Developers do not own any property in the Playa Vista complex and therefore have no standing to enforce the CC&R’s, including the arbitration provision. By analogy, where grant deeds contain identical restrictions applicable to several lots in a tract, “[i]t is not open to question that building restrictions of the kind contained in the deed[s] … are valid and enforceable at the suit of the grantor so long as he continues to own any part of the tract for the benefit of which the restrictions were exacted.” (Firth v. Marovich (1911) 160 Cal. 257, 260 [116 P. 729], italics added.) “[A]fter a grantor has parted with the property which would derive benefit from a continuance of the restrictions, such grantor has no standing in court to enforce the restrictions.” (Kent v. Koch (1958) 166 Cal.App.2d 579, 586 [333 P.2d 411].)
Our conclusion that the Developers cannot enforce the arbitration provision in the CC&R’s is in harmony with section 1375, which requires a homeowners association to initiate and pursue mediation with a developer, builder, or general contractor before filing suit. “In 1995, § 1375 was added to the Civil Code to impose a complex set of prerequisites to an action by a common interest development association against a builder of a common interest development. Since then, § 1375(a) has been expanded to encompass actions against developers and general contractors … . The association must give written notice with a preliminary list of defects, a summary of any survey of homeowners concerning defects and a summary of any testing or the actual test results. Section 1375(b) specifies the nature and content of the notice and the manner of its service in detail. This notice commences a period of time up to 180 days, subject to an extension for a second 180-day period on agreement of the association, the builder, developer or general contractor, and any parties not deemed peripheral, as defined in the section, during which the association and the defendants must attempt to settle the dispute or attempt to agree to alternative dispute resolution. The notice tolls any applicable statute of limitations and any contractual limitations periods against all parties who may be responsible for the damages claimed, whether or not named in the notice, including claims for indemnity.
“Within 25 days of the notice, § 1375 entitles the defendants to meet and confer with the association’s board of directors and to inspect the property and conduct testing appropriate to evaluate the claim. Following receipt of the notice, the builder, developer or general contractor and the association have 60 days to comply with a number of requirements set out in the statute, including production of relevant documents (or a privilege log), notice to insurers, including insurers of subcontractors and design professionals, arrangement of a meet and confer conference to attempt to select a dispute resolution facilitator to preside over the mandatory dispute resolution process. The defendants and the association must meet and confer about the settlement offer within 20 days, although this and other time periods may be modified by mutual consent.
“Subcontractors and design professionals can petition the facilitator to be excused from the dispute resolution process at any time if they could not possibly be responsible for the defect at issue, and the court may authorize the taking of depositions, resolve disputes about inspection, testing and discovery, and determine whether a proposed settlement is in good faith.” (1 Schwing, Cal. Affirmative Defenses (2011 ed.) § 12:39, p. 775, fns. omitted.)
Simply put, the Legislature’s enactment of section 1375–a complex alternative dispute process–supports the view that the CC&R’s cannot mandate a second alternative dispute process for claims against the developer once it has no ownership interest in the land.
The Developers’ reliance on B.C.E. Development, Inc. v. Smith (1989) 215 Cal.App.3d 1142 [264 Cal. Rptr. 55] (B.C.E. Development) is misplaced. In that case, the developer had authority to enforce the CC&R’s through an architectural committee that had the power to approve or reject residential building plans after the developer had sold all the units. The CC&R’s created the committee and gave the developer the right to appoint its members and carry out its administrative duties. (Id. at pp. 1144-1145 & fn. 1.) Two owners, the Smiths, obtained committee approval to construct a house, but the construction did not comply with the approved plans. The successor in interest to the original developer obtained an injunction halting the work. The Smiths appealed, arguing the successor in interest had no standing to sue because it did not own any property in the complex. The Court of Appeal affirmed the injunction on the ground that the developer and its successors retained authority to make “[l]and use decisions” through the architectural committee and therefore could enforce the CC&R’s even though they had no ownership interest in the development. (Id. at pp. 1148-1149.)
The court also emphasized: “We note that this is not a case in which a developer is shown to have retained unreasonable or imperious control over artistic decisions of homeowners long after having completed the subdivision. Equity might well decline to enforce such asserted control, especially if it were shown to be contrary to the then desires of the homeowners. That is not this case. Under the provisions for amendment of the declaration the homeowners at any time, by the vote of two-thirds of their members, could have ousted the developer’s designated enforcement agency and substituted their own committee. In accordance with Civil Code section 1356 (part of the Davis-Stirling Common Interest Development Act) the homeowners since 1985 could have petitioned for the right to amend their declaration by a vote of only a plurality of their members. The homeowners in this subdivision having permitted the continuance of the architectural committee named by [the developer], and having tolerated [the developer's] administration, for apparently many years following completion of the subdivision, it may be inferred that they have ratified the continuance of the status quo.” (B.C.E. Development, supra, 215 Cal.App.3d at pp. 1149-1150, italics added.)
Here, after the Developers sold the last unit, they retained no authority or control of any kind with respect to the Playa Vista condominiums. Further, unlike the CC&R’s in B.C.E. Development, the CC&R’s in this case preclude the owners from amending or deleting the arbitration provision unless the Developers consent to the amendment, which they refuse to do. The Association represents the views of the owners, and it has opposed the Developers’ alleged right to enforce the CC&R’s, indicating that the Association and the owners share the same desire. Finally, B.C.E. Development did not address or even mention section 1354.
A leading treatise, Miller and Starr, has observed: “Unless a clear intention to allow enforcement by others is expressed in the covenant, the party seeking to enforce a covenant running with the land must have a legal interest in the benefited property. Third parties lack standing to enforce the covenant against the obligor or burdened property, and the seller or transferor of the benefited property cannot enforce the covenant after conveying away title to another.”5 (8 Miller & Starr, Cal. Real Estate (3d ed. 2011) § 24:25, p. 24-96, fns. omitted (rel. 8/2009).) The treatise also states: “As long as the subdivider retains an interest in the benefited property, the subdivider has standing to enforce the restrictions under the preceding authorities. The situation is different after the subdivider no longer owns any property in the subdivision. If the restrictions evidence a clear intent to permit enforcement by the declarant, there is authority for the original declarant and its successors who hold no remaining interest to sue to enforce the restrictions as equitable servitudes even after they have transferred all interests in the subdivision.” (Id. at pp. 24-96 to 24-97, fns. omitted, italics added, citing B.C.E. Development, supra, 215 Cal.App.3d at pp. 1146-1148.)
2 In a footnote at this point, the treatise cited: “B.C.E. Development, Inc. v. Smith, 215 Cal.App.3d 1142, 1146, 264 Cal.Rptr. 55 … (equitable servitude).”
3 In a footnote at this point, the treatise cited: “Farber v. Bay View Terrace Homeowners Ass’n, 141 Cal.App.4th 1007, 1011, 46 Cal.Rptr.3d 425 … .”
4 In a footnote at this point, the treatise cited: “… Farber v. Bay View Terrace Homeowners Ass’n, 141 Cal.App.4th 1007, 46 Cal.Rptr.3d 425 … (seller of a condominium unit had no standing to sue the homeowners’ association to enforce the CC&Rs and to compel the homeowners’ association to perform its obligation to repair the roof of the unit she had sold.) … .”
5 In a footnote at this point, the treatise cited: “Farber v. Bay View Terrace Homeowners Ass’n, 141 Cal. App. 4th 1007, 1011 … .”
Nevertheless, although the treatise acknowledges B.C.E. Development, the authors go on to explain: “Under Civ. Code, § 1354, subd. (a), only an owner of an interest in the land in the development has standing to enforce the obligations of the association under the CC&Rs.” (8 Miller & Starr, Cal. Real Estate, supra, § 24:25, p. 24-96, fn. 13, italics added.) “In a common interest development, the rights of the subdivider to enforce the restrictions are prescribed in and limited by the Davis Stirling Act. See Civ. Code, [§] 1354, subd. (a) (no reference to subdivider’s standing to enforce [CC&R's] in describing right of owner or association to enforce [them]).” (8 Miller & Starr, Cal. Real Estate, supra, § 24:25, p. 24-97, fn. 16.)
Thus, B.C.E. Development is distinguishable. Here, the Developers have no input or continuing authority of any type over the complex, and the owners at the Playa Vista condominiums cannot amend or delete the arbitration provision in the CC&R’s even though they so desire. In addition, section 1354, which was enacted in 1985 (Stats. 1985, ch. 874, § 14, p. 2774), indicates that B.C.E. Development, decided in 1989, is wrong; the homeowners association or a property owner, not the developer, should have filed suit to stop the flawed construction.
Another secondary authority–on which B.C.E. Development somehow drew support (see B.C.E. Development, supra, 215 Cal.App.3d at p. 1147)–states: “The benefit of a promise respecting the use of land of the beneficiary of the promise can run with the land only to one who succeeds to some interest of the beneficiary in the land respecting the use of which the promise was made; and generally, a restrictive covenant can be enforced only by the owner of some part of the dominant land for the benefit of which the covenant was made.
“One who seeks to enforce a restrictive covenant must show that he is the owner of, or has an interest in, the premises in favor of which the benefit or privilege has been created; otherwise, he has no interest in the covenant and is a mere intruder. Equity will protect equitable titles as well as legal titles.
“However, the law in regard to covenants is not so strictly defined as to require in all cases that a stranger to the covenant, who is seeking enforcement, must show some right or beneficial interest in the land affected by the covenant, or in the adjoining lands. An incorporated association of homeowners within an area subjected to planned and uniform restrictive covenants, which association, has no legal title to any property in the area, but whose primary purpose is to enforce the covenants for the good and on behalf of all the property owners, acting as the agent or representative of such property owners, and whose formation for the purpose of requiring conformance was set forth in the declaration establishing the restrictive covenants, has been held entitled to sue to enjoin violations of the covenants.
“As a general rule, subject to some exceptions, a grantor or covenantee may not enforce a restrictive covenant where he no longer has an interest in the land to be affected by violations, and a similar rule obtains in regard to enforcement by persons other than the grantor.
“Homeowners’ associations appear to be a relatively modern device, a natural outgrowth of the development of housing projects on a large scale, particularly in urban communities where the general good of all within the community requires adherence to some common standards. … [T]he enforcement of such standards had to be centralized and homeowners’ associations came into being. The primary purpose of … an association of homeowners organized as a nonprofit corporation whose membership consists of the owners of real property within an area subject to planned and uniform restrictive covenants, is to enforce the covenants on behalf and for the good of all … property owners who constituted its membership.” (Annot., Who May Enforce Restrictive Covenant or Agreement as to Use of Real Property (1973) 51 A.L.R.3d 556, 586-587, § 5, fns. omitted, italics added.) This authority provides no solace to the Developers: It is one thing to say that a homeowners association, which consists of property owners, may enforce the CC&R’s. (See §§ 1368.3, subd. (a), 1351, subd. (j).) It is quite another to jump to the conclusion that a developer, which has no ownership interest in the property, direct or indirect, may also enforce them.
Last, our conclusion that the Developers lack standing is in harmony with the regulations promulgated by the Department of Real Estate governing alternative dispute resolution procedures in the CC&R’s as to claims between developers and owners (Cal. Code Regs., tit. 10, § 2791.8) and with the department’s task of reviewing CC&R’s before allowing the sale or lease of land (Bus. & Prof. Code, §§ 11010, 11018, 11018.2). Nothing in the regulations or pertinent statutes authorizes a developer to insert a provision in the CC&R’s requiring binding arbitration of construction defect claims brought against it where the provision is, by its terms, not subject to amendment by the eventual owners.
Accordingly, the trial court properly denied the motion to compel arbitration.
The order is affirmed.
Chaney, J., and Johnson, J., concurred.
GARY GRAVELIN, Plaintiff and Appellant, v. PAUL SATTERFIELD et al., Defendants and Respondents.
COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT, DIVISION FOUR
200 Cal. App. 4th 1209; 132 Cal. Rptr. 3d 913; 2011 Cal. App. LEXIS 1427; 76 Cal. Comp. Cases 1298
November 15, 2011, Opinion Filed
SUBSEQUENT HISTORY: Petition for Review Filed December 22, 2011
Mendocino County Superior Court No. SCUKCSPM0851334–Hon. John A. Behnke, Judge
COUNSEL: Liccardo Law Firm, Salvador A. Liccardo and Paul S. Liccardo for Plaintiff and Appellant.
Roberts Law Firm, Harvey Lewis Roberts, Jr., and Heather Bussing for Defendants and Respondents.
JUDGES: Opinion by Sepulveda, J., with Reardon, Acting P. J., and Rivera, J., concurring.
OPINION BY: Sepulveda, J.
SEPULVEDA, J.–Plaintiff Gary Gravelin, a hired worker, was injured while installing a satellite dish on the roof of a residence. He received workers’ compensation and brought this separate action against the homeowners for premises liability. The trial court granted a defense summary judgment. We affirm the judgment.
Defendants are Raymond and Charlotte Coolidge and their grandson, Paul Satterfield. Defendants own a home in Mendocino County. The Coolidges contracted with DISH Network to replace their existing satellite dish. DISH Network outsourced the job to Linkus Enterprises, Inc., which sent plaintiff Gary Gravelin to perform the installation job. Plaintiff Gravelin was an employee of Linkus Enterprises, Inc., or an independent contractor retained by that company.
Plaintiff arrived at defendants’ home on April 26, 2006. One of the homeowners, Charlotte Coolidge, showed him where the existing satellite dish was installed on the roof. Plaintiff could not directly access the roof where the satellite dish was located because his ladder was too short. Plaintiff owned a 24-foot extension ladder but did not bring it to the worksite. Plaintiff supplied his own truck for work, and his recently purchased pickup truck did not have a ladder rack to transport the long extension ladder. The only ladder plaintiff brought to the worksite was an eight-foot, A-frame ladder.
The homeowners did not tell plaintiff how to access the roof. Plaintiff did a site survey and decided to access the roof using a small roof extension located between the house and carport that was at a lower height than the rest of the roof. Plaintiff told homeowner Charlotte Coolidge where he intended to access the roof, and she expressed no reservations.
The roof extension, or “awning” as plaintiff called it in his deposition, was about four feet square and pitched forward with the front lower than the rear. It was constructed of wood with a rafter at each end. Plaintiff Gravelin testified that the roof extension looked like it was constructed of roofing plywood. It was attached with nails to the house and carport, had supporting wood members that looked like “two by fours,” and was covered on the top with asphalt shingles. The roof extension was added to the house “sometime after 1999 or 2000,” years after the original construction in the 1970′s. Homeowner Raymond Coolidge testified in his deposition that the roof extension was built to provide rain cover as one walked between the house and carport. It was constructed by a local builder, Doug Moyer, who, as a friend of the homeowners, did not charge for his labor. In defendants’ answers to interrogatories, defendants stated that the roof extension was “very small” and was never meant to have people climb or walk on it.
Raymond Coolidge is a retired pastor who is 94 years old. As a younger man, Coolidge built several buildings: churches, schools, houses, and a barn. Coolidge never had a building contractor’s license. He did not build or help in the building of the roof extension. Raymond Coolidge did not obtain a building permit to construct the roof extension and does not think he asked Moyer to obtain one. No permit was obtained. Coolidge testified that he was satisfied with the roof extension that Moyer built, believed it was constructed safely, and never had any complaints about it. Raymond Coolidge did not talk with plaintiff Gravelin when Gravelin arrived to install the satellite dish. At the time, Coolidge was bedridden following surgery.
Plaintiff Gravelin testified at his deposition that he looked at the roof extension in selecting it as his access point to the main roof and determined that the extension “appeared to be in good shape.” Plaintiff retrieved his eight-foot ladder from the truck and set it up near the roof extension. The height of the lowest edge of the roof extension from the ground is about eight feet. Plaintiff climbed the ladder to a high rung, either the top rung or the one beneath it. Plaintiff stepped up about 24 inches and placed his foot on the roof extension. Plaintiff is six feet seven inches tall and at the time of the accident weighed about 225 pounds. He was carrying tools and equipment weighing about 46 pounds.
As plaintiff stepped off the ladder onto the roof extension, the roof extension collapsed. The roof extension pulled away from the main structure, and its braces struck the ladder. The ladder, roof extension, and plaintiff Gravelin crashed to the ground. Plaintiff felt a shooting pain in his back. Plaintiff was airlifted to a hospital in Santa Rosa, where he remained for four days. Plaintiff suffered a vertebral compression fracture. He takes daily medication to manage the pain. Plaintiff resumed full-time employment around August 2008. He received a workers’ compensation settlement from Linkus Enterprises, Inc., in December 2008.
A. Summary judgment standard
“On appeal after a motion for summary judgment has been granted, we review the record de novo, considering all the evidence set forth in the moving and opposition papers except that to which objections have been made and sustained. [Citation.] Under California’s traditional rules, we determine with respect to each cause of action whether the defendant seeking summary judgment has conclusively negated a necessary element of the plaintiff’s case, or has demonstrated that under no hypothesis is there a material issue of fact that requires the process of trial, such that the defendant is entitled to judgment as a matter of law.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 334 [100 Cal. Rptr. 2d 352, 8 P.3d 1089].)
B. Limitations on the liability of the hirer of an independent contractor
Plaintiff Gravelin was an independent contractor or the employee of one. “Generally, when employees of independent contractors are injured in the workplace, they cannot sue the party that hired the contractor to do the work.” (SeaBright Ins. Co. v. US Airways, Inc. (2011) 52 Cal.4th 590, 594 [129 Cal. Rptr. 3d 601, 258 P.3d 737], citing Privette v. Superior Court (1993) 5 Cal.4th 689 [21 Cal. Rptr. 2d 72, 854 P.2d 721] (Privette).) The same rule applies when the independent contractor, rather than his or her employee, is injured. (Tverberg v. Fillner Construction, Inc. (2010) 49 Cal.4th 518, 522 [110 Cal. Rptr. 3d 665, 232 P.3d 656] (Tverberg).) It therefore does not matter, for purposes of this appeal, whether plaintiff Gravelin was an independent contractor as he asserts, or an employee of one as defendants assert.
The California Supreme Court has explained why the hirer of an independent contractor is usually not held liable for injuries to the contractor or its employees. The independent contractor “has authority to determine the manner in which inherently dangerous … work is to be performed, and thus assumes legal responsibility for carrying out the contracted work, including the taking of workplace safety precautions” to protect himself and his employees. (Tverberg, supra, 49 Cal.4th at p. 522 [contractor's duty to protect himself]; see Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 671 [36 Cal. Rptr. 3d 495, 123 P.3d 931] (Kinsman) [contractor's duty to protect its employees].) Thus, the hirer will not be held vicariously liable for injuries resulting from the contractor’s negligence in failing to perform its task safely. (Privette, supra, 5 Cal.4th at p. 695.) The remedy for the contractor’s injured employee is workers’ compensation, which is a cost ultimately borne by the contractor’s hirer. (Id. at p. 692.)
The general rule that a contractor and its employees may not recover tort damages from the contractor’s hirer has few exceptions. The undisputed facts show plaintiff Gravelin was either an independent contractor or employed by an independent contractor to perform work on defendant landowners’ property and was injured while performing that work. Accordingly, Privette bars plaintiff’s action absent a triable issue of fact as to whether an exception applies that would permit plaintiff to recover against defendants. (Privette, supra, 5 Cal.4th at p. 692.) Plaintiff invokes the exception that imposes direct liability upon a landowner for maintaining premises with a preexisting hazardous condition and failing to warn of that condition. Plaintiff argues that the roof extension was a preexisting hazardous condition.
C. Premises liability for a preexisting hazardous condition
” ‘[T]he basic policy of this state set forth by the Legislature in section 1714 of the Civil Code is that everyone is responsible for an injury caused to another by his want of ordinary care or skill in the management of his property. … The proper test to be applied to the liability of the possessor of land in accordance with section 1714 of the Civil Code is whether in the management of his property he has acted as a reasonable man in view of the probability of injury to others, and, although the plaintiff’s status as a trespasser, licensee, or invitee may in the light of the facts giving rise to such status have some bearing on the question of liability, the status is not determinative.’” (Kinsman, supra, 37 Cal.4th at p. 672, quoting Rowland v. Christian (1968) 69 Cal.2d 108, 118-119 [70 Cal. Rptr. 97, 443 P.2d 561] (Rowland).) “Applying these principles to the facts before it, in which a social guest injured his hand on a cracked water faucet, the court [in Rowland] stated: ‘Where the occupier of land is aware of a concealed condition involving in the absence of precautions an unreasonable risk of harm to those coming in contact with it and is aware that a person on the premises is about to come in contact with it, the trier of fact can reasonably conclude that a failure to warn or to repair the condition constitutes negligence. Whether or not a guest has a right to expect that his host will remedy dangerous conditions on his account, he should reasonably be entitled to rely upon a warning of the dangerous condition so that he, like the host, will be in a position to take special precautions when he comes in contact with it.’” (Kinsman, supra, at pp. 672-673, quoting Rowland, supra, at p. 119.)
In Kinsman, supra, 37 Cal.4th at page 673, the California Supreme Court considered “how these general principles apply when a landowner hires an independent contractor whose employee is injured by a hazardous condition on the premises.” The court modified the general principles and concluded that a hirer may be liable if (1) the hirer “knows or reasonably should know of a concealed, preexisting hazardous condition on its premises; (2) the contractor does not know and could not reasonably ascertain the condition; and (3) the landowner fails to warn the contractor.” (Id. at pp. 674-675.) As an example, the court referred to a pre-Privette case (Privette, supra, 5 Cal.4th 689) in which “the employee of an independent contractor, en route to repair a ventilation fan on the hirer’s roof, was injured when a mezzanine railing inside the building gave way.” (Kinsman, supra, at p. 675, citing Markley v. Beagle (1967) 66 Cal.2d 951, 955 [59 Cal. Rptr. 809, 429 P.2d 129] (Markley).) The Kinsman court indicated that, even after Privette, the hirers would be liable because “‘[t]hey knew or should have known that [the worker] would use the mezzanine to get to the fan on the roof, and the jury could reasonably conclude that … the owners were negligent in failing to discover the dangerous condition of the railing and to either correct it or adequately warn [the worker] of it.’” (Kinsman, supra, 37 Cal.4th at p. 675, quoting Markley, supra, 66 Cal.2d at pp. 955-956.)
But there are important limitations on the liability of a landowner who hires an independent contractor to perform work on the property. The Kinsman court emphasized that liability would “not apply to a hazard created by the independent contractor itself, of which that contractor necessarily is or should be aware.” (Kinsman, supra, 37 Cal.4th at p. 675, fn. 3.) As an illustration of this point, the court cited a case in which an employee of a concrete subcontractor at a construction site was injured when he fell from an unsecured plank placed by the subcontractor. (Zamudio v. City and County of San Francisco (1999) 70 Cal.App.4th 445, 454-455 [82 Cal. Rptr. 2d 664].) Nor is a hirer liable if the hazard is apparent, or becomes apparent, and “the contractor nonetheless failed to take appropriate safety precautions.” (Kinsman, supra, at p. 676.) An example is where a worker continued excavations despite increasing ground saturation and was injured when the oil-saturated ditch caved in. (Id. at pp. 675-676, citing Abrons v. Richfield Oil Corp. (1961) 190 Cal.App.2d 640, 646 [12 Cal. Rptr. 271].) A hirer is also not liable where a worker is injured because the contractor “has failed to engage in inspections of the premises implicitly or explicitly delegated to it.” (Kinsman, supra, at p. 677.) Although “[a] landowner’s duty generally includes a duty to inspect for concealed hazards,” the “responsibility for job safety delegated to independent contractors may and generally does include explicitly or implicitly a limited duty to inspect the premises as well.” (Ibid.) “Thus, for example, an employee of a roofing contractor sent to repair a defective roof would generally not be able to sue the hirer if injured when he fell through the same roof due to a structural defect, inasmuch as inspection for such defects could reasonably be implied to be within the scope of the contractor’s employment. On the other hand, if the same employee fell from a ladder because the wall on which the ladder was propped collapsed, assuming that this defect was not related to the roof under repair, the employee may be able to sustain a suit against the hirer.” (Id. at pp. 677-678.)
D. There was no preexisting hazardous condition on the facts presented
Under the Kinsman premises liability exception, defendants could be liable notwithstanding the Privette doctrine were there evidence showing (1) defendant homeowners knew or reasonably should have known of a concealed, preexisting hazardous condition on their premises; (2) plaintiff Gravelin did not know and could not reasonably ascertain the condition; and (3) defendants failed to warn plaintiff. (Kinsman, supra, 37 Cal.4th at pp. 674-675.) There is no such evidence.
The alleged hazard–the roof extension–was not a concealed preexisting hazard. The roof extension was fit for its intended and obvious purpose as a small roof that provided rain shelter. The roof extension became hazardous only when plaintiff misused it as an access point and climbed onto it from a small ladder, applying over 250 pounds of man and equipment in a dynamic movement. The unsuitability of the roof extension for that purpose was open and obvious. A photograph of the roof extension showed it to be a small, tilted structure placed between the main roof and the carport roof. Plaintiff himself described the roof extension as an “awning” no more than four feet square constructed of plywood and supported by “two by fours.” Plaintiff would not have climbed on the structure had he brought a ladder adequate to the task. By his own admission, plaintiff decided to use the roof extension as an access point because his ladder was too short to access the main roof where the satellite dish was located. It is true, as plaintiff notes on appeal, that a homeowner should anticipate people walking on a roof to perform maintenance and repairs. But a homeowner does not reasonably anticipate that a worker will use a small roof extension only four feet square to climb upon on his way to the main roof because he neglected to bring the right ladder.
This case is not “eerily analogous” to Markley, as plaintiff contends. (Markley, supra, 66 Cal.2d 951.) In Markley, the employee of an independent contractor, en route to repair a ventilation fan on the landowners’ roof, was injured when a mezzanine railing inside the building gave way, and he fell to the floor below. (Id. at p. 955.) The owners were liable because “[t]hey knew or should have known that [the worker] would use the mezzanine to get to the fan on the roof …” and, given recent renovations by the owners that removed bins built around the railing, “the jury could reasonably conclude that … the owners were negligent in failing to discover the dangerous condition of the railing [that now lacked sufficient support] and to either correct it or adequately warn [the worker] of it.” (Id. at pp. 955-956.) The worker in Markley did not misuse the railing. He apparently used the railing for its intended purpose, as support while walking in the building, and was injured when the railing “gave way” because the owners removed bins previously built around the railing and the bin removal deprived the railing of support necessary to make it safe. (Id. at p. 955.) In contrast, plaintiff here used a small roof extension, not for its intended and apparent purpose as a rain shelter, but to climb across to the main roof because he did not bring a ladder tall enough to reach the site of the satellite dish he was asked to replace. A structurally weakened railing that collapses when used for its intended purpose as a handhold is a preexisting concealed hazard. A roof extension that collapses when misused as a climbing base is not a preexisting concealed hazard.
It must also be emphasized that a landowner cannot be held liable where a hazard is “created by the independent contractor [himself], of which that contractor necessarily is or should be aware.” (Kinsman, supra, 37 Cal.4th at p. 675, fn. 3.) As noted above, the Kinsman court used the example of an employee of a concrete subcontractor at a construction site who was injured when he fell from an unsecured plank placed by the subcontractor. (Kinsman, at p. 675 & fn. 3, citing Zamudio v. City and County of San Francisco, supra, 70 Cal.App.4th at p. 455.) Here, plaintiff Gravelin was responsible for choosing a safe access point, and it was his poor choice to use a small ladder to climb upon a roof extension that created the hazard.
A landowner is also not liable where a worker is injured because the contractor “has failed to engage in inspections of the premises implicitly or explicitly delegated to it.” (Kinsman, supra, 37 Cal.4th at p. 677.) Although “[a] landowner’s duty generally includes a duty to inspect for concealed hazards,” the “responsibility for job safety delegated to independent contractors may and generally does include explicitly or implicitly a limited duty to inspect the premises as well.” (Ibid.) In his deposition, plaintiff conceded that he was trained to conduct site surveys as part of his duties as a satellite dish installer and made a site survey at defendants’ home. It was as a result of that site survey, not any instruction from defendant homeowners, that plaintiff chose to access the satellite dish by climbing upon the roof extension. Defendants were not required to warn plaintiff against using his chosen access point. Plaintiff, not the homeowners, assumed responsibility for determining a safe approach to the satellite dish. An independent contractor “has authority to determine the manner in which inherently dangerous … work is to be performed, and thus assumes legal responsibility for carrying out the contracted work, including the taking of workplace safety precautions.” (Tverberg, supra, 49 Cal.4th at p. 522.) It was plaintiff’s unfortunate miscalculation of an appropriate access route, not any negligence by defendants, that led to his injury.
Plaintiff maintains that defendants were, at a minimum, negligent in failing to obtain a permit for construction of the roof extension. Plaintiff argues that a landowner’s duty to obtain a permit, and to comply with building code requirements generally, are nondelegable duties that defendants could not assign to the builder who constructed the roof extension. But even if this is true, plaintiff has not shown specific violations of the building code and resulting harm that the building code was designed to prevent.
Statutes may be used to establish a standard or duty of care in negligence actions. (Evid. Code, § 669.) Evidence Code section 669 “codifies the common law doctrine of negligence per se” and “allows proof of a statutory violation to create a presumption of negligence in specified circumstances.” (Elsner v. Uveges (2004) 34 Cal.4th 915, 927 [22 Cal. Rptr. 3d 530, 102 P.3d 915].) Specifically, Evidence Code section 669, subdivision (a) provides: “The failure of a person to exercise due care is presumed if: [¶] (1) He violated a statute, ordinance, or regulation of a public entity; [¶] (2) The violation proximately caused death or injury to person or property; [¶] (3) The death or injury resulted from an occurrence of the nature which the statute, ordinance, or regulation was designed to prevent; and [¶] (4) The person suffering the death or the injury to his person or property was one of the class of persons for whose protection the statute, ordinance, or regulation was adopted.” Subdivision (b) of Evidence Code section 669 sets out limited circumstances under which a defendant may rebut this presumption.
Here, only general provisions of the building code are alleged to have been violated. Defendants’ alleged violations are failure to obtain a permit for constructing the roof extension, and failure to comply with a general provision defining a “dangerous building” as one that, among other things, was constructed in violation of the permit requirement or has a portion likely to collapse from faulty construction. It is the permit violation that plaintiff emphasizes on appeal. Missing from plaintiff’s briefs in the trial court and on appeal is any citation to building code provisions setting forth specific structural requirements alleged to be violated by defendants. The omission is critical.
Plaintiff was injured when the roof extension collapsed. His injury did not result from the absence of a building permit but from applying too much weight to a small roof extension. It is true, as plaintiff argues, that obtaining a permit would have subjected the roof extension to a county inspection for compliance with building regulations. But that process becomes important only if the roof extension was noncompliant with building regulations specifying structural requirements like standards for minimum weight-bearing capacity. It is compliance with building regulations setting forth specific structural requirements–not the permit process itself–that is relevant here.
On that point, defendants submitted deposition testimony of a mechanical engineer with expertise in the analysis of construction accidents. Defendants’ expert witness testified that the roof extension constituted light wood frame construction under the building code and that, in his opinion, “the structural members in the roof extension and their connections complied in the Uniform Building Code for light wood frame construction for residential structures.” In response, plaintiff offered his expert’s opinion that the roof extension was not properly constructed because it was attached to the building with nails rather than with a metal joist hanger. But no building code regulation requiring attachment by joist hangers was identified. Presumptive negligence under Evidence Code section 669 requires proof of a specific statutory or regulatory violation and resulting harm “of the precise nature a statute [or regulation] was designed to prevent.” (Bologna v. City and County of San Francisco (2011) 192 Cal.App.4th 429, 435 [121 Cal. Rptr. 3d 406].) Plaintiff failed to identify a specific regulation designed to prevent his injury that was violated by defendants. The trial court properly found that there was no breach of a nondelegable duty.
The judgment is affirmed.
Reardon, Acting P. J., and Rivera, J., concurred.
DOLLINGER DEANZA ASSOCIATES, Plaintiff and Appellant, v. CHICAGO TITLE INSURANCE COMPANY, Defendant and Respondent.
COURT OF APPEAL OF CALIFORNIA, SIXTH APPELLATE DISTRICT
199 Cal. App. 4th 1132; 131 Cal. Rptr. 3d 596; 2011 Cal. App. LEXIS 1269
September 9, 2011, Filed
The Publication Status of this Document has been Changed by the Court from Unpublished to Published October 6, 2011.
Request denied by Dollinger Deanza Assocs. v. Chi. Title Ins. Co., 2012 Cal. LEXIS 19 (Cal., Jan. 4, 2012)
PRIOR-HISTORY: Superior Court of Santa Clara County, No. CV119224, James P. Kleinberg, Judge.
COUNSEL: Allen Matkins Leck Gamble Mallory & Natsis, Robert R. Moore, Michael J. Betz and Nicholas A. Subias for Plaintiff and Appellant.
Holme Roberts & Owen, Dena M. Cruz, Richard J. Mooney, Linnea Brown; Scott Noble and Peter K. Wolff for Defendant and Respondent
Garrett & Tully, Ryan C. Squire, Michael K. Dewberry and Zi C. Lin for California Land Title Association as Amicus Curiae on behalf of Defendant and Respondent.
JUDGES: Opinion by Bamattre-Manoukian, Acting P. J., with Mihara and Lucero, JJ., concurring.
OPINION BY: Bamattre-Manoukian
BAMATTRE-MANOUKIAN, Acting P. J.–
This appeal arises from a dispute concerning title insurance coverage. In 2004, appellant Dollinger DeAnza Associates (Dollinger) purchased real property in Cupertino that it believed was divided into seven parcels, with the intention of selling parcel 7. In conjunction with the purchase, Dollinger obtained a title insurance policy from respondent Chicago Title Insurance Company (Chicago Title). Dollinger later entered into an agreement to sell parcel 7, but the sale was not completed because the purchaser, Pacific Peninsula Group, withdrew after learning that the City of Cupertino had recorded a notice of merger in 1984 that stated all seven parcels were merged into a single parcel. The notice of merger was not included in Chicago Title’s title report.
Dollinger tendered a claim under the Chicago Title policy due to the failed sales transaction for parcel 7. Chicago Title initially denied Dollinger’s claim under the wrong policy, then accepted the claim under the policy that Dollinger had actually purchased. Chicago Title subsequently determined that Dollinger’s claim was not covered. Dollinger then filed a complaint against Chicago Title that included causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.
Chicago Title moved for summary judgment, or, in the alternative, summary adjudication, arguing that Dollinger could not establish a breach of contract and as a result the causes of action for breach of the implied covenant of good faith and fair dealing and for declaratory relief also failed. The trial court granted the motion for summary judgment, determining as a matter of law that Chicago Title’s policy did not provide coverage for Dollinger’s claim and Chicago Title was not equitably estopped from denying coverage due to its postclaim conduct. Judgment was entered in Chicago Title’s favor, and Dollinger appeals.1 For the reasons stated below, we agree with the trial court and therefore we will affirm the judgment.
1 We granted the application of the California Land Title Association to file an amicus curiae brief in support of respondent Chicago Title and have considered Dollinger’s opposition to the filing of the brief and its argument on the merits.
II. FACTUAL BACKGROUND
A. The Real Property Purchase
A parcel map recorded in 1979 indicates that the property located at 1601 South De Anza Boulevard was comprised of seven separate legal parcels. In 1984, the South Bay/Cupertino limited partnership (South Bay/Cupertino), the owner of the property, sought permission from the City of Cupertino (City) to build an office building. The City issued a conditional use permit that included a requirement that the owner merge all seven parcels within the project boundary. The City filed a notice of merger with the Santa Clara County Recorder on October 9, 1984, where it was indexed in the grantor-grantee index under the name “City of Sunnyvale.”2
2 Chicago Title asserts that the notice of merger was not legally recorded in the absence of compliance with all of the procedural requirements for recording. As we will explain, whether the notice of merger was legally recorded is not relevant to our analysis of the parties’ title insurance coverage dispute.
The notice of merger states, “This notice is filed under the provisions of Section 66424.2. The real property in the City of Cupertino, County of Santa Clara, described in the attached Exhibit A and owned by South Bay/Cupertino … is, under the provisions of the Subdivision Map Act and Ordinance of the City of Cupertino, merged for the purpose of the Subdivision Map Act into a single parcel.” Exhibit A to the notice of merger describes the property as consisting of seven parcels.
In September 2004, Dollinger purchased the property, including the office building and other improvements. It was essential to Dollinger that the property was divided into seven parcels, because Dollinger intended to sell parcel 7, which was being used as an overflow parking lot. By 2007, Dollinger had entered into an agreement to sell parcel 7 to Pacific Peninsula Group for $3 million.
In March 2008, Pacific Peninsula Group withdrew from its commitment to purchase parcel 7 and cancelled escrow after learning from the City that a notice of merger, which merged all seven parcels into one parcel, had been recorded in 1984.
B. The Title Insurance Claim
1. The Chicago Title Policy
Dollinger purchased an American Land Title Association (ALTA) title insurance policy from Chicago Title dated September 24, 2004. The insuring agreement for the policy states in part, “Subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the conditions and stipulations, Chicago Title … insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of: [¶] 1. Title to the estate or interest described in Schedule A being vested other than as stated therein; [2.] Any defect in title or encumbrance on the title; [¶] 3. Unmarketability of title; [¶] 4. Lack of a right of access to and from the land.”
The schedule A attachment to the policy describes the land referred to in the policy as comprised of seven parcels. The schedule B attachment to the policy lists the “exceptions from coverage,” such as easements, liens, and leases, for which the policy did not “insure against loss or damage” arising therefrom. Schedule B did not include the notice of merger as one of the exceptions.
2. Dollinger’s Claim
In April 2008, Dollinger’s attorney tendered a claim to Chicago Title, “based on the fact that the Property does not contain separate legal parcels and in connection with the fact that our client will be unable to profit from the portion of its Property which it thought was a separate legal parcel. Our client had agreed to sell this portion of the Property to a housing developer for three million dollars.”
In a letter dated May 19, 2008, Chicago Title denied Dollinger’s claim on the ground that the claim fell within the policy exclusion that excluded from coverage any losses or damage arising from “governmental regulation restricting the separation in ownership or a change in the dimensions or area of the insured property or any part thereof, whether or not this restriction was shown in the public records on the date the policy was issued. We have concluded that the Notice of Merger and the affect [sic] thereof are excluded from the coverage of the policy issued to [Dollinger].”
Dollinger responded by filing, on August 5, 2008, an action against Chicago Title for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. Thereafter, in an e-mail dated September 7, 2008, Chicago Title reversed its coverage decision, stating, “Your client [(Dollinger)] tendered a claim to Chicago [Title] arising [from] a recorded Notice of Merger, which claim was denied based upon exclusionary language in the CLTA [(California Land Title Association)] owners policy. The company had issued a CLTA policy to your client in September 2004. However, upon further review of this matter we have determined that [Chicago Title] should have issued an ALTA policy to your client. Under the coverage afforded by an ALTA policy the Notice of Merger is a covered matter. Accordingly [Chicago Title] accepts the claim and will retain counsel to undertake curative action on behalf of your client with respect to the Notice of Merger. [¶] You agreed to give [Chicago Title] an extension within which to answer the complaint filed in the above action. …”
3 “Two types of title insurance policies are available to owners of real property interests in California, CLTA and American Land Title Association (ALTA). CLTA insures primarily against defects in title which are discoverable through an examination of the public record, and ALTA additionally insures against off-record defects, including rights of parties in possession and not shown on the public records, water rights, and discrepancies or conflicts in boundary lines and shortages in areas that are not reflected in the public record. [Citation.]” (Elysian Investment Group v. Stewart Title Guaranty Co. (2002) 105 Cal.App.4th 315, 318, fn. 1 [129 Cal. Rptr. 2d 372] (Elysian).)
Thereafter, Dollinger’s attorney received a letter dated October 15, 2008, from Scott A. Sommer, an attorney retained by Chicago Title, which stated, “This office has been retained by [Chicago Title] to evaluate the effect, if any, of the Notice of Merger recorded October 9, 1984, … upon the real property described as Parcel 7 in the above-referenced policy, acquired by [Dollinger] on September 24, 2004. [¶] … [¶] Our office is not defending [Chicago Title] in the action that you filed in Santa Clara County for damages and declaratory relief. Instead, our role is to evaluate and potentially help remedy the situation with the Notice of Merger before the City of Cupertino.”
A few months later, Chicago Title again reversed its coverage decision, as stated in a letter dated February 9, 2009, to Dollinger’s attorney. In that letter, Chicago Title’s claims counsel wrote that Chicago Title had “reviewed the claim anew” under the ALTA policy and was taking the “opportunity to provide you with our analysis and preliminary opinion regarding coverage.” Claims counsel then gave Chicago Title’s preliminary opinion that Dollinger’s claim was not covered, because “the Notice of Merger had no legal effect on the land described in the ALTA policy. Notwithstanding that fact, even if we assume (solely for purposes of this analysis) that Parcel 7 was not a separate legal parcel at the time the policy was issued, the claimed defect would impact only the value and use of the property, not the validity of Dollinger’s title (ownership interest) to it. As such, any losses caused by that defect would not fall within the affirmative coverage provisions of the policy.” Alternatively, claims counsel stated that Dollinger’s claim was excluded under the government regulation exclusion.
In December 2009, Chicago Title’s person most knowledgeable, Michael E. Busch, testified in his deposition that he believed that Chicago Title had not made a final determination as to Dollinger’s claim.
III. PROCEDURAL BACKGROUND
A. The Pleadings
The first cause of action for breach of contract in Dollinger’s August 5, 2008 complaint alleges that “Chicago Title breached the Title Insurance Policy by, among other things, refusing to honor or accept Dollinger’s claim where: (a) the Title Insurance Policy represented that the Property consisted of seven separate legal parcels, when it did not; (b) the Title Insurance Policy failed to disclose the existence of the Notice of Merger, recorded in October 1984; and (c) the title to Parcel Seven is not marketable.”
In the second cause of action, Dollinger alleges that Chicago Title’s refusal “to fulfill its obligations under the Title Insurance Policy” constitutes a violation of the implied covenant of good faith and fair dealing, which frustrated Dollinger’s ?enjoyment of its rights under the Title Insurance Policy.”
The third cause of action for declaratory relief seeks a determination of the parties’ respective rights, liabilities, and obligations under the Chicago Title policy.
B. The Motion for Summary Judgment
Chicago Title filed a motion for summary judgment, or, in the alternative, summary adjudication, that was set for hearing in December 2009. Its chief argument was that Dollinger could not establish the cause of action for breach of contract because the Chicago Title policy did not cover Dollinger’s claim, and therefore the related causes of action for breach of the implied covenant of good faith and fair dealing and for declaratory relief necessarily failed.
Specifically, Chicago Title argued Dollinger could not establish breach of contract because “[t]o the extent that plaintiff’s complaint can be construed as alleging that the policy issued by Chicago Title insured plaintiff against loss that plaintiff might sustain if Parcel Seven were not a separate and distinct legal parcel, the evidence presented in support of the motion shows that this claim is without merit because the Notice of Merger was void and did not effect a merger of Parcel Seven and the other parcels.” Relying on public records for which it requested judicial notice, Chicago Title asserted that the 1984 notice of merger was void because there had been no compliance with various procedural requirements for recording a notice of merger, as set forth in the Government Code, including, among other things, a failure to properly index either a notice of intention to determine status or a notice of merger under the name of the property owner in 1984, South Bay/Cupertino (Gov. Code, § 66451.19, subd. (a)).4
4 All statutory references hereafter are to the Government Code unless otherwise indicated.
Alternatively, Chicago Title contended that the notice of merger did not affect Dollinger’s title to parcel 7 or make the title unmarketable. Chicago Title explained that restrictions imposed under the Subdivision Map Act (§ 66410 et seq.) on a property owner’s right to sell or develop a property do not affect an owner’s title because such restrictions do not give anyone else an interest in the property.
Also, to the extent Dollinger was attempting to allege a claim for deceit or negligence, Chicago Title argued that the claim would lack merit because a cause of action for misrepresentation or negligence cannot be based on a title insurance policy’s failure to disclose a recorded document affecting title.
C. Dollinger’s Opposition
Dollinger opposed the motion for summary judgment on the ground that its breach of contract cause of action was meritorious because its title insurance claim fell within Chicago Title’s policy coverage for losses or damage incurred due to the unmarketability of the title to the insured property. Dollinger relied upon the definition of “unmarketability of the title” in the Chicago Title policy, as follows: “an alleged or apparent matter affecting the title to the land, not excluded or excepted from coverage, which would entitle a purchaser of the estate or interest described in Schedule A to be released from the obligation to purchase by virtue of a contractual condition requiring the delivery of marketable title.”
According to Dollinger, “[t]he risk insured by Chicago Title is exactly what occurred. The parties to the sale discovered a notice of merger and the buyer was released from its obligation because Dollinger could not deliver marketable title.” Dollinger further asserted that it was sufficient for the notice of merger to merely appear to affect the title for the title to be unmarketable. Therefore, in Dollinger’s view, even if the notice of merger did not actually affect the title to parcel 7, its claim fell within the coverage for losses or damage incurred due to the unmarketability of the title. For that reason, Dollinger maintained that Chicago Title’s argument that the notice of merger was void was irrelevant.
Dollinger also argued that Chicago Title should be estopped from denying coverage because it had initially accepted Dollinger’s claim without any reservation of rights. Dollinger also complained that the attorney retained by Chicago Title, Scott Sommer, had actually aided Chicago Title’s defense while purporting to represent Dollinger. Finally, Dollinger contended that Chicago Title’s “flip flopping” positions on whether Dollinger’s claim was covered showed the existence of a triable issue of material fact barring summary judgment.
D. The Trial Court’s Order
The trial court issued its order on March 3, 2010, granting Chicago Title’s motion for summary judgment. After granting Chicago Title’s request for judicial notice of certain public records maintained by the Santa Clara County Recorder, the trial court ruled that Chicago Title had met its burden to establish that the cause of action for breach of contract lacked merit as a matter of law.
The trial court determined that Chicago Title’s evidence demonstrated that the notice of merger recorded on October 9, 1984, was void because it was not indexed under the name of South Bay/Cupertino, and therefore the notice of merger did not effect a merger of parcel 7 with the other six parcels. The trial court further determined that the notice of merger did not affect the marketability of Dollinger’s title to parcel 7, because, as stated in Hocking v. Title Ins. & Trust Co. (1951) 37 Cal.2d 644 [234 P.2d 625] (Hocking), “restrictions imposed on an owner’s right to develop or sell property do not cast doubt on the owner’s title.”
Since Chicago Title had carried its burden to show that the cause of action for breach of contract lacked merit as a matter of law, the trial court ruled that Chicago Title had also met its burden as to the causes of action for breach of the implied covenant of good faith and fair dealing and for declaratory relief. The court reasoned that “a bad faith claim cannot be maintained unless policy benefits are due under the contract. [Citation.] [Chicago Title] also carries its burden as to the third cause of action for declaratory relief, since the actual controversy alleged … is simply the coverage dispute between the parties regarding Parcel Seven and the effect of the Notice of Merger.”
The trial court rejected Dollinger’s argument that its claim fell within the policy coverage for losses or damage incurred due to unmarketability of title. The court stated, “Here, the policy’s definition of ‘unmarketability of title’ is quite clearly based on whether there is an alleged or apparent matter affecting title, but as discussed above, impaired market value due to code violations or local ordinances that restrict the right to develop or sell the property does not affect the marketable quality of the title.” The court also noted the rule that the opinions of claims adjusters or other employees of an insurer are inadmissible to interpret an insurance contract.
The trial court rejected Dollinger’s contention that Chicago Title should be estopped from denying coverage due to its postclaim conduct. Noting that Dollinger had failed to plead a claim for equitable estoppel, the court ruled that Dollinger had failed to make the requisite showing that it had detrimentally relied upon Chicago Title’s representation of coverage. While Dollinger argued that its detrimental reliance consisted of giving Chicago Title a five-month extension to respond to the complaint, the court found that Dollinger had not argued that it suffered any prejudice due to the extension. Moreover, the court determined that “[d]etrimental reliance is not established by voluntary delay in serving a summons and complaint in an action that otherwise lacks merit. [Citation.]”
Judgment on the order granting the motion for summary judgment was entered in Chicago Title’s favor on March 30, 2010. Dollinger filed a timely notice of appeal from the judgment on May 12, 2010.
On appeal, Dollinger contends that the trial court erred in granting Chicago Title’s motion for summary judgment after rejecting Dollinger’s contentions that (1) its breach of contract cause of action has merit (and consequently the causes of action for breach of the implied covenant of good faith and fair dealing and for declaratory relief also have merit) because its claim was covered under Chicago Title’s policy coverage for unmarketability of title and (2) Chicago Title should be estopped from denying coverage due to its postclaim conduct. Before addressing Dollinger’s contentions, we will outline the applicable standard of review.
A. The Standard of Review
The standard of review for an order granting a motion for summary judgment is de novo. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860 [107 Cal. Rptr. 2d 841, 24 P.3d 493] (Aguilar).) The trial court’s stated reasons for granting summary judgment are not binding on the reviewing court, “which reviews the trial court’s ruling, not its rationale. [Citation.]” (Ramalingam v. Thompson (2007) 151 Cal.App.4th 491, 498 [60 Cal. Rptr. 3d 11].)
In performing our independent review, we apply the same three-step process as the trial court. “Because summary judgment is defined by the material allegations in the pleadings, we first look to the pleadings to identify the elements of the causes of action for which relief is sought.” (Baptist v. Robinson (2006) 143 Cal.App.4th 151, 159 [49 Cal. Rptr. 3d 153].)
“We then examine the moving party’s motion, including the evidence offered in support of the motion.” (Baptist v. Robinson, supra, 143 Cal.App.4th at p. 159.) A defendant moving for summary judgment has the initial burden of showing that a cause of action lacks merit because one or more elements of the cause of action cannot be established or there is a complete defense to that cause of action. (Code Civ. Proc., § 437c, subd. (o); Aguilar, supra, 25 Cal.4th at p. 850.)
If the defendant fails to make this initial showing, it is unnecessary to examine the plaintiff’s opposing evidence and the motion must be denied. However, if the moving papers make a prima facie showing that justifies a judgment in the defendant’s favor, the burden shifts to the plaintiff to make a prima facie showing of the existence of a triable issue of material fact. (§ 437c, subd. (p)(2); Aguilar, supra, 25 Cal.4th at p. 849; Kahn v. East Side Union High School Dist. (2003) 31 Cal.4th 990, 1002-1003 [4 Cal. Rptr. 3d 103, 75 P.3d 30].)
In determining whether the parties have met their respective burdens, the court must ” ‘consider all of the evidence’ and ‘all’ of the ‘inferences’ reasonably drawn therefrom [citation], and must view such evidence [citations] and such inferences [citations], in the light most favorable to the opposing party.” (Aguilar, supra, 25 Cal.4th at p. 843.) “There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.” (Id. at p. 850, fn. omitted.) Thus, a party “cannot avoid summary judgment by asserting facts based on mere speculation and conjecture, but instead must produce admissible evidence raising a triable issue of fact. [Citation.]” (LaChapelle v. Toyota Motor Credit Corp. (2002) 102 Cal.App.4th 977, 981 [126 Cal. Rptr. 2d 32].)
We will begin our evaluation of the order granting Chicago Title’s motion for summary judgment with a brief overview of title insurance and the rules governing the interpretation of a title insurance policy.
B. Title Insurance
The Insurance Code provides that “[t]itle insurance means insuring, guaranteeing or indemnifying owners of real or personal property or the holders of liens or encumbrances thereon or others interested therein against loss or damage suffered by reason of: [¶] (a) Liens or encumbrances on, or defects in the title to said property; [¶] (b) Invalidity or unenforceability of any liens or encumbrances thereon; or [¶] (c) Incorrectness of searches relating to the title to real or personal property.” (Ins. Code, § 104; see id., § 12340.1.)
Thus, as the California Supreme Court has stated, “Title insurance, as opposed to other types of insurance, does not insure against future events. It is not forward looking. It insures against losses resulting from differences between the actual title and the record title as of the date title is insured. The policy does not guarantee the state of the title. Instead, it agrees to indemnify the insured for losses incurred as a result of defects in or encumbrances on the title. [Citation.]” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 41 [77 Cal. Rptr. 2d 709, 960 P.2d 513].)
In other words, the title insurer ” ‘does not represent expressly or impliedly that the title is as set forth in the policy; it merely agrees that, and the insured only expects that, the insurer will pay for any losses resulting from, or [the insurer] will cause the removal of, a cloud on the insured’s title within the policy provisions.’ [Citation.]” (Lawrence v. Chicago Title Ins. Co. (1987) 192 Cal.App.3d 70, 75 [237 Cal. Rptr. 264].) ” ‘A title policy is not a summary of the public records and the insurer is not supplying information; to the contrary [the insurer] is giving a contract of indemnity. … Every insurer can and does contract to indemnify against specific risks. …’ [Citation.]” (Ibid.)
A title insurance policy is interpreted under “the well-established rules on interpretation of insurance agreements.” (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 881 [221 Cal. Rptr. 509, 710 P.2d 309].) “In general, interpretation of an insurance policy is a question of law and is reviewed de novo under settled rules of contract interpretation. [Citations.] ‘The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the “mutual intention” of the parties. “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ. Code, § 1636.) Such intent is to be inferred, if possible, solely from the written provisions of the contract. [Citation.] The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’ [citation], controls judicial interpretation. [Citation.]” ‘ [Citation.]” (Ameron Internat. Corp. v. Insurance Co. of State of Pennsylvania (2010) 50 Cal.4th 1370, 1378 [118 Cal. Rptr. 3d 95, 242 P.3d 1020].)
“An insurance policy provision is ambiguous when it is susceptible of two or more reasonable constructions. [Citation.] If ambiguity exists, however, the courts must construe the provisions in the way the insurer believed the insured understood them at the time the policy was purchased. (Civ. Code, § 1649.) In addition, if, after the court evaluates the policy’s language and context, ambiguities still exist, the court must construe the ambiguous language against the insurer, who wrote the policy and is held ‘ “responsible” ‘ for the uncertainty. [Citation.]” (Ameron Internat. Corp. v. Insurance Co. of State of Pennsylvania, supra, 50 Cal.4th at p. 1378.)
Keeping these rules in mind, we turn to Dollinger’s contentions on appeal.
C. Breach of Contract
1. Marketability of Title: The Parties’ Contentions
Dollinger contends that the trial court erred in finding that the cause of action for breach of contract lacked merit as a matter of law. According to Dollinger, its title insurance claim–for losses incurred when the Pacific Peninsula Group withdrew from its agreement to purchase parcel 7 after learning of the 1984 notice of merger–fell within the coverage provided by the Chicago Title policy for losses or damage incurred due to unmarketability of the title.
According to Dollinger, because the policy defines “unmarketability of title” to include “an alleged or apparent matter affecting the title to the land,” it was not necessary for the notice of merger to actually affect title, since “it need only have a declared but legally unproven impact; a ‘so-called’ impact; or an apparent (but not necessarily) real or true [e]ffect or impact on title.” Dollinger therefore contends that since the notice of merger appeared to affect the title to parcel 7 and entitled Pacific Peninsula Group to be released from the purchase agreement, the Chicago Title policy provided coverage for its claim. Dollinger also asserts that the policy’s definition of “unmarketability of the title” is extremely broad, and therefore any ambiguity in the definition must be construed in Dollinger’s favor.
Chicago Title disagrees, insisting that any effect the notice of merger had on Dollinger’s ability to sell or develop parcel 7 was due to the restrictions placed on property owners under the Subdivision Map Act, sections 66451.10 through 66451.20. Relying on the decision in Hocking, supra, 37 Cal.2d 644, Chicago Title argues that “restrictions or burdens imposed on the sale or use [of] property by governmental land use regulations are not matters that affect the title to real property … .”
Chicago Title further asserts that Dollinger is able to convey good title to a buyer of parcel 7, and therefore the title is marketable, but Dollinger would violate the Subdivision Map Act “if it conveyed or developed the property before a subdivision map or a parcel map establishing Parcel Seven as a separate legal parcel was properly recorded.” (Fn. omitted.) Chicago Title also argues that Dollinger’s claim is excluded under the policy exclusion for losses or damage resulting from government regulations,5 since Dollinger’s claimed loss was the result of restrictions imposed under the Subdivision Map Act.
5 The Chicago Title policy exclusion regarding government regulation states in part, “The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys fees or expense which arise by reason of: [¶] 1. (a) Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of any improvement now or hereafter erected on the land; (iii) a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part; or (iv) environmental protection, or the effect of any violation of these laws, ordinances or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy.”
Alternatively, Chicago Title reiterates its argument below that the notice of merger did not render the title to parcel 7 unmarketable because the notice of merger was void, due to the lack of compliance with the Government Code procedural requirements for recording a notice of merger. According to Chicago Title, since the void notice of merger did not operate to effect a merger of parcel 7 with parcels 1 through 6, the notice of merger did not affect the marketability of title.
2. Marketability of Title: Analysis
We will begin our analysis by reviewing the pertinent language of the Chicago Title policy. The insuring agreement states in part, “Subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the conditions and stipulations, [Chicago Title] insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of: [¶] … [¶] 3. Unmarketability of title.” In the definitions section, the policy defines “unmarketability of the title” as follows: “an alleged or apparent matter affecting the title to the land, not excluded or excepted from coverage, which would entitle a purchaser of the estate or interest described in Schedule A to be released from the obligation to purchase by virtue of a contractual condition requiring the delivery of marketable title.”
Thus, the key issue in the present case is whether the notice of merger recorded in 1984, which states that parcels 1 through 7 are merged into one parcel, constitutes a “matter affecting the title to the land … which would entitle a purchaser … to be released from the obligation to purchase by virtue of a contractual condition requiring the delivery of marketable title.”6
6 In California, “it is the general rule, in case of an executory contract that there is an implied agreement on the part of the vendor to convey a merchantable title, and failure to do so on demand and upon tender of final payment is a breach of the contract which justifies rescission and recovery of the money paid by the purchaser. [Citations.]” (Craig v. White (1921) 187 Cal. 489, 494 [202 P. 648].)
We agree with the trial court that the notice of merger did not constitute a “matter affecting the title to the land.” The California Supreme Court has stated that the word “title,” in the context of land ownership, may be defined as follows: ” ‘The words “good title” import that the owner has the title, legal and equitable, to all the land, and the words “defective title” mean that the party claiming to own has not the whole title, but some other person has title to a part or portion of the land.’ [Citations.]” (Hocking, supra, 37 Cal.2d at p. 649.)
Our Supreme Court has also defined “marketable title”: ” ‘ “A marketable title, to which the vendee in a contract for the sale of land is entitled, means a title which a reasonable purchaser, well informed as to the facts and their legal bearings, willing and anxious to perform his [or her] contract, would, in the exercise of that prudence which business men [or women] ordinarily bring to bear on such transactions, be willing and ought to accept.” [Citations.]‘ ” (Hocking, supra, 37 Cal.2d at pp. 649-650.) Thus, the test for a marketable title is “whether a reasonable purchaser, knowing that a third party might claim an interest in the property, would nevertheless proceed with the transaction.” (Mellinger v. Ticor Title Ins. Co. of California (2001) 93 Cal.App.4th 691, 695-696 [113 Cal. Rptr. 2d 357] (Mellinger).)
In Hocking, the plaintiff purchased two unimproved lots in a subdivision that did not meet the City of Palm Springs’s requirements for the issuance of a building permit. The plaintiff made a claim under the title insurance policy for the lots, contending that the title to the lots was unmarketable. (Hocking, supra, 37 Cal.2d at pp. 646-647.) Our Supreme Court ruled that “[a]lthough it is unfortunate that plaintiff has been unable to use her lots for the building purposes she contemplated, it is our view that the facts which she pleads do not affect the marketability of her title to the land, but merely impair the market value of the property. She appears to possess fee simple title to the property for whatever it may be worth; if she has been damaged by false representations in respect to the condition and value of the land her remedy would seem to be against others than the insurers of the title she acquired. It follows that plaintiff has failed to state a cause of action under the title policy.” (Id. at p. 652.)
As this court noted in Lick Mill Creek Apartments v. Chicago Title Ins. Co. (1991) 231 Cal.App.3d 1654 [283 Cal. Rptr. 231] (Lick Mill), the Hocking court emphasized the distinction between the marketability of land and the marketability of its title. (Lick Mill, at p. 1661.) ” ‘One can hold perfect title to land that is valueless; one can have marketable title to land while the land itself is unmarketable.’ ” (Hocking, supra, 37 Cal.2d at p. 651.) In Lick Mill, the plaintiffs incurred costs for the removal and cleanup of hazardous substances on land they had purchased. They sought indemnity under their title insurance policy on the ground that the presence of hazardous substances impaired the marketability of the property. (Lick Mill, supra, 231 Cal.App.3d at p. 1658.) When the title insurer denied coverage, the plaintiffs filed a complaint to which the defendant title insurer demurred. This court determined that since the plaintiffs had claimed coverage for the property’s physical condition, they had pleaded “facts relating to marketability of the land rather than marketability of title.” (Id. at p. 1662.) Therefore, this court rejected the plaintiffs’ contention that “California courts have adopted a definition of marketable title that encompasses the property’s market value.” (Id. at p. 1660.) “Because marketability of title and the market value of the land itself are separate and distinct, plaintiffs cannot claim coverage for the property’s physical condition under [the unmarketability of title] clause of the insurance policies.” (Id. at p. 1662.)
Other courts have similarly limited coverage under the unmarketability of title provision in a title insurance policy to claims that arise from matters affecting title. In Elysian, supra, 105 Cal.App.4th 315, the plaintiff purchased a residence and later discovered that a notice that the premises were classified as substandard had been recorded. The title insurance policy for the property did not list the notice as an exception to coverage. (Id. at p. 318.) After the title insurer denied the plaintiff’s claim, the plaintiff filed an action for breach of contract and breach of the implied covenant of good faith and fair dealing, but the trial court granted the defendant insurer’s motion for summary judgment. (Id. at pp. 318-319.) The appellate court affirmed the judgment after determining that a notice of substandard dwelling does not affect title and therefore the plaintiff’s claim did not fall within the policy coverage for losses arising from unmarketability of title. (Id. at p. 325.) The court reasoned, “The fact that [the plaintiff] was required to bring the property up to code does not cast doubt on who owns the property.” (Id. at p. 324.)
In Nishiyama v. Safeco Title Ins. Co. (1978) 85 Cal.App.3d Supp. 1 [149 Cal. Rptr. 355], the appellate division considered whether title to a property was unmarketable because the property had been subdivided in violation of the Subdivision Map Act. The plaintiffs asserted in their complaint that their title insurer was liable for the amount of the policy because the unlawfully subdivided property had no market value. (85 Cal.App.3d at p. Supp. 2.) The appellate division affirmed the order sustaining the title insurer’s demurrer, determining that “it may be necessary for plaintiffs to comply with reasonable conditions with respect to their property as could have been required of the grantor as a condition of subdividing the latter’s tract of land under the provisions of the Subdivision Map Act and any county ordinances [citation] but such conditions cannot be said to make the title unmarketable … .” (Id. at p. Supp. 7.)
In contrast, in Mellinger, supra, 93 Cal.App.4th 691, a triable question of fact was found as to whether the title to subdivided property was marketable. After purchasing the property, the plaintiffs determined that a busy street encroached on the property up to 20 feet. (Id. at p. 693.) The plaintiffs’ title insurance claim, which the title insurer denied, was based upon the discrepancy in the property line. (Ibid.) The appellate court reversed the judgment in the title insurer’s favor, determining that the “encroachment represented both a physical condition and a possible interest in the plaintiff’s property. To the extent it was a road that crossed a portion of plaintiffs’ property, it might have affected the market value of the property. But it also had the potential to affect plaintiffs’ ownership or title to a portion of the property.” (Id. at p. 696.)
The present case is distinguishable from Mellinger since, under the provisions of the Subdivision Map Act governing merger, the notice of merger that the City recorded on October 9, 1984, has no potential to affect Dollinger’s title.
The Subdivision Map Act provides that “[a] local agency may, by ordinance which conforms to and implements the procedures prescribed by this article, provide for the merger of a parcel or unit with a contiguous parcel or unit held by the same owner if any one of the contiguous parcels or units held by the same owner does not conform to standards for minimum parcel size, under the zoning ordinance of the local agency applicable to the parcels or units of land … .” (§ 66451.11.)
” [T]he purpose of the [Subdivision Map] Act and the interests protected by the Act are furthered by the merger of substandard parcels to limit the impact of development in areas unable to handle increased demands on common resources and services. At one time, merger of substandard parcels was automatic [citations][.] That provision was limited as the statutes were modified successively over the years, the modifications presumably responding to concerns that lots were being merged without affording affected landowners notice and an opportunity to be heard, and also because of a state concern over local regulation of parcel merger for purposes of development. [Citations.]” (Kalway v. City of Berkeley (2007) 151 Cal.App.4th 827, 833-834 [60 Cal. Rptr. 3d 477].)
The California Supreme Court has instructed that “[t]he literal terms of the Subdivision Map Act regulate the division of land into parcels only for purposes of sale, lease, or financing. The overall purpose of the act is to regulate subdivisions. [Citations.]” (Morehart v. County of Santa Barbara (1994) 7 Cal.4th 725, 748 [29 Cal. Rptr. 2d 804, 872 P.2d 143] (Morehart).) The merger of parcels is governed by sections 66451.10 through 66451.21. (Morehart, supra, 7 Cal.4th at p. 749.)
“Section 66451.10(b) provides that sections 66451.10 through 66451.21 ‘shall provide the sole and exclusive authority for local agency initiated merger of contiguous parcels. On and after January 1, 1984, parcels may be merged by local agencies only in accordance with the authority and procedures prescribed by [those sections].’” (Morehart, supra, 7 Cal.4th at p. 749.) “Section 66451.11 prescribes the conditions under which ‘[a] local agency may, by ordinance which conforms to and implements the procedures prescribed by this article, provide for the merger of a parcel or unit with a contiguous parcel or unit held by the same owner.’ The immediately subsequent sections specify the prescribed procedures and include detailed provisions for notice to the property owner, opportunity for hearing, and recordation by the local agency of a notice of the merger.” (Ibid.)
This court discussed the Subdivision Map Act and the act’s merger provisions in van’t Rood v. County of Santa Clara (2003) 113 Cal.App.4th 549 [6 Cal. Rptr. 3d 746] (van’t Rood). “‘As now codified in the Government Code, the Subdivision Map Act constitutes the major land use permit control vehicle for urban planning and environmental protection. [Citations.]‘ [Citations.] When ‘a landowner wishes to subdivide its property, the proposed subdivision must be consistent with applicable zoning ordinances and the landowner must comply with the Subdivision Map Act. [Citation.]‘ [Citations.]” (Id. at p. 564.) “To comply with the Act, the landowner must secure local approval and record an appropriate map. [Citation.] … Subdivided lands may not be legally sold, leased, or financed without the required approval and map. [Citations.]” (Ibid.)
Thus, as this court noted, “[t]he [Subdivision Map] Act’s current merger provisions ‘appear to reflect two overall concerns. First, they provide landowners with elaborate procedural safeguards of notice and opportunity to be heard before their lots can be involuntarily merged.’ [Citation.] Second, they reveal ‘a state concern over local regulation of parcel merger for purposes of development‘ as well as for purposes of sale, lease, or financing. [Citation.]” (van’t Rood, supra, 113 Cal.App.4th at p. 567.)
Accordingly, under the Subdivision Map Act, where, as here, a city has recorded a notice of merger for the purpose of involuntary merger of a landowner’s contiguous parcels, the notice of merger serves the purpose of regulating local development and thereby impacts the landowner’s ability to sell, lease, or finance the land. (Morehart, supra, 7 Cal.4th at p. 748.) The notice of merger may restrict a landowner’s ability to sell a portion of the merged land without compliance with the applicable provisions of the Subdivision Map Act, but the notice of merger does not affect the landowner’s title to the land.
Therefore, while the notice of merger at issue in this case may impact Dollinger’s ability to market parcel 7, the notice of merger has no effect on Dollinger’s title to parcel 7. Since the definition of “unmarketability of the title” in the Chicago Title policy expressly limits the coverage for losses or damages caused by unmarketability of the title to a “matter affecting the title to the land,” Dollinger’s claim arising from the notice of merger does not fall within the coverage. We need not address Chicago Title’s contention that the notice of merger did not affect the title to parcel 7 because it is void due to noncompliance with the Subdivision Map Act, since whether it is valid or void, the notice of merger does not affect Dollinger’s title.
We are not convinced by Dollinger’s argument that because the policy definition of “unmarketability of the title” includes “an alleged or apparent matter affecting the title to the land,” coverage is available since the evidence showed that the buyer of parcel 7, Pacific Peninsula Group, believed that the notice of merger affected the title to parcel 7 and withdrew from the purchase agreement. (Italics added.) The allegation that a notice of merger was recorded does not constitute an alleged or apparent matter affecting the title to land, since a notice of merger does not represent a third person’s claim to an interest in the property (Mellinger, supra, 93 Cal.App.4th at p. 695) or otherwise cast doubt on who owns the property (Elysian, supra, 105 Cal.App.4th at p. 324).
For these reasons, we determine the Chicago Title policy does not provide coverage for Dollinger’s claim under the unmarketability of the title coverage provision, and Dollinger’s cause of action for breach of contract based on Chicago Title’s denial of coverage lacks merit as a matter of law. We therefore need not address Chicago Title’s additional contention that Dollinger’s claim is excluded under the policy exclusion for losses or damage resulting from government regulations.
Alternatively, Dollinger argues that summary judgment is precluded because triable questions of fact exist as to whether Chicago Title should be estopped from denying coverage due to its postclaim conduct. Specifically, Dollinger asserts that Chicago Title accepted coverage without a reservation of rights, and that Dollinger relied upon that acceptance to its detriment when it agreed to give Chicago Title an extension of time to answer the complaint and also agreed to cooperate with Scott Sommer, the attorney retained by Chicago Title, whose analysis was the partial basis for Chicago Title’s subsequent denial of coverage.
Chicago Title contends that for several reasons the trial court properly rejected Dollinger’s estoppel argument. Since Dollinger did not plead in its complaint any facts that would support an estoppel or waiver claim, Chicago Title contends that Dollinger is procedurally barred from claiming waiver or estoppel. Chicago Title also points to the rule that waiver and estoppel cannot create insurance coverage where none exists, and argues the exception to the rule, for a liability insurer that defends the insured without a reservation of rights, does not apply. Further, Chicago Title argues that Dollinger failed to present any evidence to show detrimental reliance, in support of its estoppel claim, or to show Chicago Title’s intentional relinquishment of a known right, in support of its waiver claim.
We understand Dollinger to argue that summary adjudication of the cause of action for breach of contract cannot be granted because triable questions of fact exist as to whether Chicago Title should be estopped from denying coverage due to its postclaim representation of coverage, as set forth in a Chicago Title representative’s e-mail dated September 7, 2008, that states, “Your client [(Dollinger)] tendered a claim to Chicago [Title] arising [from] a recorded Notice of Merger, which claim was denied based upon exclusionary language in the CLTA owners policy. The company had issued a CLTA policy to your client in September 2004. However, upon further review of this matter we have determined that [Chicago Title] should have issued an ALTA policy to your client. Under the coverage afforded by an ALTA policy the Notice of Merger is a covered matter. Accordingly [Chicago Title] accepts the claim and will retain counsel to undertake curative action on behalf of your client with respect to the Notice of Merger. [¶] You agreed to give [Chicago Title] an extension within which to answer the complaint filed in the above action.”
The rules governing the application of the doctrines of estoppel and waiver in the context of insurance coverage are well established. ” ‘ “[I]t is the general and quite well settled rule of law that the principles of estoppel and implied waiver do not operate to extend the coverage of an insurance policy after the liability has been incurred or the loss sustained.” ‘ [Citations.]” (Advanced Network, Inc. v. Peerless Ins. Co. (2010) 190 Cal.App.4th 1054, 1066 [119 Cal. Rptr. 3d 17]; see also R & B Auto Center, Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th 327, 352 [44 Cal. Rptr. 3d 426]; Manneck v. Lawyers Title Ins. Corp. (1994) 28 Cal.App.4th 1294, 1303 [33 Cal. Rptr. 2d 771].) Thus, Dollinger’s contention that coverage under the Chicago Title policy exists pursuant to the doctrines of estoppel and waiver lacks merit, unless there is an applicable exception to the general rule.
However, only liability insurers are subject to an exception. ” ‘The general rule supported by the great weight of authority is that if a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage. In other words, the insurer’s unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert such grounds.’ [Citation.]” (Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 755 [161 Cal. Rptr. 322].)
The exception does not apply here because Chicago Title is a not a liability insurer; instead, it is a title insurer that provides first party coverage. ” ‘First-party coverage refers to types of insurance under which the insurer contracts to pay benefits directly to the insured, as distinguished from liability or third-party coverage under which the insurer contracts to indemnify the insured against liability to third parties. First-party coverage includes life insurance, health and accident insurance, disability insurance, title insurance, property damage insurance, fire insurance, medical payments coverage and other types of policies providing for payments directly to the insured.’ [Citation.]” (McKinley v. XL Specialty Ins. Co. (2005) 131 Cal.App.4th 1572, 1576 [33 Cal. Rptr. 3d 98], italics omitted.)
Even assuming that Chicago Title could be estopped from denying coverage due to its postclaim conduct in accepting Dollinger’s claim, then subsequently denying coverage, we agree with the trial court that estoppel is not available here because Dollinger failed to make an evidentiary showing of detrimental reliance.
” ‘[E]stoppel requires: (1) the party to be estopped knew the facts; (2) the other party was ignorant of the true facts; (3) the party intended his [or her] conduct would be acted upon, or acted in a manner that the party asserting the estoppel had a right to believe it so intended; and (4) the other party relied upon the conduct to his [or her] injury. Where one of the elements is missing, there can be no estoppel. [Citations.]‘ ” (Michaelian v. State Comp. Ins. Fund (1996) 50 Cal.App.4th 1093, 1110 [58 Cal. Rptr. 2d 133] (Michaelian).)
In Michaelian, the insured employer claimed that the defendant insurer’s workers’ compensation policy provided coverage for an employee’s sexual harassment action. (Michaelian, supra, 50 Cal.App.4th at p. 1104.) The appellate court determined that the policy provided no coverage and rejected the employer’s estoppel argument, stating, “While California law recognizes the doctrine of promissory estoppel, the party claiming it must plead all facts establishing the doctrine’s elements. [Citation.] One of those elements is detrimental reliance. [Citation.] The only reliance alleged by Michaelian was his delay in serving the summons and complaint in a bad faith action which had no merit. He could not have suffered detriment from that delay.” (Id. at p. 1112.)
The present case is similar. Dollinger argues that it relied to its detriment on Chicago Title’s representation of coverage by granting Chicago Title an extension of time to answer the complaint and by cooperating with the attorney retained by Chicago Title. However, Dollinger has provided no evidence to show actual detriment or harm from the delay in litigating its action against Chicago Title or cooperating with Chicago Title’s attorney. Had Dollinger refused to grant an extension of time to Chicago Title to answer the complaint and also refused to cooperate with Chicago Title’s attorney, the result would have been the same: as a matter of law, the Chicago Title policy does not provide any title insurance coverage for Dollinger’s claim arising from the notice of merger.
Consequently, we find no merit in Dollinger’s contention that a triable issue of fact exists under the doctrines of waiver and estoppel that would preclude summary adjudication of the cause of action for breach of contract.
D. Breach of the Implied Covenant of Good Faith and Fair Dealing
Dollinger contends that because triable issues of material fact exist as to the cause of action for breach of contract, the cause of action for breach of the implied covenant of good faith and fair dealing must be “reinstated.”
Chicago Title responds that the trial court properly held that there can be no breach of the implied covenant of good faith and fair dealing absent a breach of the insuring agreement.
The California Supreme Court has ruled that a claim for breach of the implied covenant of good faith and fair dealing cannot be maintained unless benefits are due under the plaintiff’s insurance policy. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36 [44 Cal. Rptr. 2d 370, 900 P.2d 619]; see also Rios v. Scottsdale Ins. Co. (2004) 119 Cal.App.4th 1020, 1027 [15 Cal. Rptr. 3d 18].) Since we have determined as a matter of law that the Chicago Title policy provides no coverage for Dollinger’s claim arising from the notice of merger, we also determine as a matter of law that Dollinger’s cause of action for breach of the implied covenant of good faith and fair dealing lacks merit as a matter of law.
E. Declaratory Relief
Dollinger also contends because triable issues of material fact exist as to the cause of action for breach of contract, the cause of action for declaratory relief must be “reinstated.”
According to Chicago Title, the trial court properly granted summary adjudication of the cause of action for declaratory relief because the cause of action for breach of contract lacks merit as a matter of law.
We determine that the trial court did not err in granting summary adjudication of the cause of action for declaratory relief. The court may properly grant summary adjudication of a claim for declaratory relief. (Allis-Chalmers Corp. v. City of Oxnard (1981) 126 Cal.App.3d 814, 818, fn. 3 [179 Cal. Rptr. 159].) “[D]eclaratory relief does not lie in a case in which a complaint makes no case on the merits and would merely produce a useless trial. [Citation.]” (People v. Ray (1960) 181 Cal.App.2d 64, 67 [5 Cal. Rptr. 113].) Here, as we have discussed, Dollinger’s causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing arising from Chicago Title’s denial of coverage lack merit as a matter of law. Summary adjudication of the remaining cause of action for declaratory relief, which seeks a declaration of the parties’ rights, liabilities, and obligations under Chicago Title policy, is therefore appropriate.
Since all three causes of action in Dollinger’s complaint lack merit as a matter of law, we conclude that the trial court did not err in granting Chicago Title’s motion for summary judgment, and therefore we will affirm the judgment.
The judgment is affirmed. Costs on appeal are awarded to respondent Chicago Title Insurance Company.
Mihara, J., and Lucero, J.,* concurred.
* Judge of the Santa Clara Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
BARBARA CADAM, Plaintiff and Appellant, v. SOMERSET GARDENS TOWNHOUSE HOA et al., Defendants and Appellants.
COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION SIX
200 Cal. App. 4th 383; 132 Cal. Rptr. 3d 617; 2011 Cal. App. LEXIS 1350
September 28, 2011, Filed
As modified Oct. 28, 2011.
The Publication Status of this Document has been Changed by the Court from Unpublished to Published October 28, 2011.
Review denied by Cadam v. Somerset Garden Townhouse Hoa, 2012 Cal. LEXIS 57 (Cal., Jan. 4, 2012)
PRIOR-HISTORY: Superior Court of Santa Barbara County, No. 1248561, Arthur A. Garcia, Judge.
COUNSEL: AlderLaw, C. Michael Alder; Law Offices of John B. Richards, John B. Richards; The Ehrlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiff and Appellant.
Horvitz & Levy, Mitchell C. Tilner, Wesley T. Shih; Stub, Boeddinghaus & Velasco, Gerald B. Velasco; Early, Maslach & Van Dueck and John C. Notti for Defendants and Appellants.
JUDGES: Opinion by Gilbert, P. J., with Coffee and Perren, JJ., concurring.
OPINION BY: Gilbert
GILBERT, P. J.–A trivial defect is no less trivial when it exists on a walkway in a privately owned townhome development.
Barbara Cadam appeals a judgment notwithstanding verdict (JNOV) and alternatively, a new trial order regarding damages, in favor of Somerset Gardens Townhouse HOA (Somerset), a homeowners association, and Goetz Manderley (GM), a homeowners association management firm. (Code Civ. Proc., §§ 629, 657.)1 We affirm.
1 All further statutory references are to the Code of Civil Procedure.
FACTS AND PROCEDURAL HISTORY
Somerset Gardens is a recently built townhome development in Santa Maria, consisting of 93 townhomes sited among four streets. In 2006, Cadam leased a Somerset Gardens townhome at 2355 Westbury Way. The townhome had a cement walkway extending from the driveway to the front door. Cadam usually entered the townhome, however, through the garage. She explained: “I had no reason to walk the walkway. It wasn’t something that I normally did. I also didn’t go out and look at the plants or anything. That was maintained by the homeowners’ association.”
On October 19, 2006, Cadam returned to her townhome during her lunch break from her bank employment. She parked her vehicle in the garage but then noticed that the gardeners were working nearby. Cadam decided to discuss a lawn sprinkler problem with them. She and a gardener subsequently walked across her lawn to discuss the irrigation.
Following the conversation, Cadam walked on the walkway toward the garage. When the gardener made an additional comment, however, she turned to look at him. At that point, her right foot caught in a walkway separation. Cadam fell forward on her hands, shoulder, elbow, and right knee. She described her fall as: “I kind of looked [at the gardener], and my right foot caught, I hit with … the toe of my right shoe, and I started to go forward, and I tried to catch myself with my left foot, and it also hit this rise in the cement, and I went down … .”
Cadam was wearing business attire, including high-heeled shoes, at the time of the accident. The cement walkway was clean and dry and it was a bright day. As agreed by the parties, the difference in height between the two walkway segments was between three-fourths and seven-eighths inch.2
2 We have examined the six photographs depicting the separation, admitted into evidence as Cadam’s exhibit No. 35.
Cadam suffered injuries to her hands, wrists, elbows, and right knee. She has had six surgeries, performed over a two and one-half year period, as well as physical therapy to ameliorate her pain and injuries. Cadam was 63 years old at the time of the accident and her hand injuries have caused permanent nerve damage and disability.
In September 2006, James Perry, the president of Somerset, inspected the development with a gardener. During the inspection, Perry tripped over a sidewalk separation at 2326 Eastbury Way because he “wasn’t watching where [he] was going … . [He] was looking at a tree.” Perry “guess[ed]” that the sidewalk separation was one-half inch in depth and stated that the separation was uniform in appearance. He instructed the gardener to place a warning flag near the separation.
Perry knew of two other sidewalk separations that required repair. On October 12, 2006, he learned of the walkway separation at 2355 Westbury Way. Perry did not instruct that warning flags be placed at any of these separations.
Perry directed GM to contact the builder of the development, Inland Pacific Builders, and request that it repair various sidewalk problems immediately. On September 19, 2006, GM contacted the builder who later repaired the sidewalks pursuant to warranty.
Paragraph 5.01 of the Somerset Declaration of Covenants, Conditions and Restrictions requires Somerset to “maintain all landscaping (including trees, shrubs, grass and walks) within the individually owned Lots.” Somerset employed GM to assist it in managing the affairs of the development.
On August 8, 2007, Cadam brought an action against Somerset, GM, and Inland Pacific Builders for premises liability and negligence. The matter proceeded to trial.3 At the close of Cadam’s case, Somerset and GM moved for nonsuit, asserting that the walkway separation was trivial as a matter of law. Following argument by the parties and examination of Cadam’s photographs of the walkway separation, the trial court denied the motion.
3 At the beginning of trial, Cadam and Inland Pacific Builders agreed to settle the lawsuit for $155,000. The trial court subsequently found the settlement to be in good faith. Cadam then dismissed Inland Pacific Builders from the action.
Following trial, the jury decided in favor of Cadam and awarded her $1,336,197 damages. It found that Somerset and GM were each 50 percent responsible for her injuries. Somerset and GM filed a motion for JNOV and, in the alternative, for a new trial. Following written and oral argument, the trial court granted the JNOV, ruling that “[n]o reasonable person could find this was not a trivial defect looking at the photographs, … the height, [and] the surrounding circumstances.”
The trial court also granted the motion for a new trial but limited it to the issue of damages “only in the sense that the jury’s verdict reflected a finding that plaintiff was not negligent in any manner or for any reason.”
Cadam appeals the JNOV and the alternative order granting the motion for a new trial regarding apportionment of fault and damages. Somerset and GM have filed a protective cross-appeal, asserting that the damages awarded Cadam are excessive.
Cadam argues that the trial court erred by granting the JNOV because the walkway separation that caused her fall was not a trivial or insignificant defect. (Stathoulis v. City of Montebello (2008) 164 Cal.App.4th 559, 566 [78 Cal. Rptr. 3d 910] [general discussion of rule that property owner is not liable for damages caused by minor or trivial defects in property].) She asserts that she seldom used the walkway and that Somerset did not exercise reasonable care in maintaining it. (Graves v. Roman (1952) 113 Cal.App.2d 584, 586-587 [248 P.2d 508] [policy underlying trivial defect rule is the impossibility of maintaining heavily travelled surfaces in perfect condition].) Cadam adds that other sidewalks had shifted or deteriorated within the Somerset Gardens development (including six walkways or sidewalks on Westbury Way), but Somerset and GM did not warn residents. (Clark v. City of Berkeley (1956) 143 Cal.App.2d 11, 16 [299 P.2d 296] [city may not ignore cumulative perils presented by an "entire sidewalk crumbling and falling apart"].)
Cadam also contends that the height of the walkway separation is a factual issue, asserting that photographs admitted into evidence at trial do not fairly depict the separation height. She also relies upon the testimony of Somerset’s president Perry that any defect over one-half inch in height was, in his opinion, “probably” dangerous. (Laurenzi v. Vranizan (1945) 25 Cal.2d 806, 812 [155 P.2d 633] [city inspector's testimony that sidewalk defect as depicted in photographs was hazardous precludes finding that defect trivial as a matter of law].)
Cadam adds that the danger presented by the walkway separation must be viewed in light of the circumstances surrounding the accident. (Ursino v. Big Boy Restaurants (1987) 192 Cal.App.3d 394, 397 [237 Cal. Rptr. 413] [depth of walkway depression is but one factor in determining whether defect trivial]; Aitkenhead v. City & County of S. F. (1957) 150 Cal.App.2d 49 [51, 309 P.2d 57] ["[I]t is incumbent upon the appellate court in each case to review the evidence adduced in the trial court and determine whether in the light of all of the surrounding circumstances the defect was minor or trivial as a matter of law.”].) The aggravating circumstances on which she relies include the irregular shape of the separation, lack of color differential, newness of the walkway, and her unfamiliarity with the walkway.
The trial court may grant a JNOV only if the evidence, viewed most favorably to the prevailing party, is insufficient to support the verdict. (Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107, 1138 [76 Cal. Rptr. 3d 585].) As a general rule, an appellate court reviewing a JNOV also considers whether sufficient evidence supports the verdict. (Ibid.) “If the appeal challenging the denial of the motion for judgment notwithstanding the verdict raises purely legal questions, however, our review is de novo.” (Ibid.)
It is well settled that a property owner is not liable for damages caused by a minor, trivial, or insignificant defect in his property. (Caloroso v. Hathaway (2004) 122 Cal.App.4th 922, 927 [19 Cal. Rptr. 3d 254] [sidewalk crack less than one-half inch in depth].) This principle is sometimes referred to as the “trivial defect defense,” although it is not an affirmative defense but rather an aspect of duty that a plaintiff must plead and prove. (Ibid.) Persons who maintain walkways–whether public or private–are not required to maintain them in absolutely perfect condition. (Ibid.) “The duty of care imposed on a property owner, even one with actual notice, does not require the repair of minor defects.” (Ursino v. Big Boy Restaurants, supra, 192 Cal.App.3d 394, 398.) The rule is no less applicable in a privately owned townhome development. Moreover, what constitutes a minor defect may be a question of law. (Id. at p. 397 [raised edge of three-fourths inch trivial as a matter of law]; Fielder v. City of Glendale (1977) 71 Cal.App.3d 719, 724, fn. 4 [139 Cal. Rptr. 876] [citing decisions finding trivial defects ranging from three-fourths inch to one and one-half inches].)
In our de novo review of the evidence, the walkway defect here was trivial as a matter of law. (Stathoulis v. City of Montebello, supra, 164 Cal.App.4th 559, 569 [court properly may determine whether defect is trivial if evidence is not in conflict].) The parties agreed that the walkway separation was three-fourths to seven-eighths inch in depth. Cadam testified that the accident occurred at noon on a sunny day. Cadam’s photographs of the separation do not reflect a jagged separation, shadows, or debris obscuring the separation. (Caloroso v. Hathaway, supra, 122 Cal.App.4th 922, 927 [court should consider whether walkway had broken pieces, jagged edges, debris or water concealing the defect, and the lighting of the area, among other things].) There were no protrusions from the separation and other persons had not fallen there. The crack in the sidewalk does not appear to be on a slant as Cadam’s counsel suggests. The walkway was newly constructed and the view of the separation was not obstructed. Moreover, Cadam testified that she did not see the separation because she “wasn’t looking at [it].” Nor does she show where on the sidewalk she fell.
Although other sidewalk or walkway separations existed in the Somerset Gardens development of 93 townhomes, Cadam’s accident did not occur on those separations. We do not consider the circumstances or nature of them for that reason.
The opinion of Somerset’s president that a defect of one-half inch or more is “probably” dangerous does not preclude our conclusion that the defect on which Cadam stumbled is trivial. (Fielder v. City of Glendale, supra, 71 Cal.App.3d 719, 732 ["For in this area there is no need for expert opinion."].) “It is well within the common knowledge of lay judges and jurors just what type of a defect in a sidewalk is dangerous.” (Ibid.)
Moreover, the duty of care imposed on a property owner, even one with actual notice of a defect, does not require the repair of minor or trivial defects. (Caloroso v. Hathaway, supra, 122 Cal.App.4th 922, 929.) “Minor defects such as the crack in [the plaintiff's] walkway inevitably occur, and the continued existence of such cracks without warning or repair is not unreasonable. Thus, [the defendant] is not liable for this accident irrespective of the question whether he had notice of the condition.” (Ibid.)
In view of our discussion, we do not resolve Cadam’s arguments regarding the trial court’s alternative grant of a new trial regarding apportionment of fault and damages. We also need not resolve Somerset and GM’s protective cross-appeal regarding asserted excessive damages awarded Cadam.
The judgment is affirmed. Somerset and GM shall recover costs on appeal.
Coffee, J., and Perren, J., concurred.
RENTAL HOUSING OWNERS ASSOCIATION OF SOUTHERN ALAMEDA COUNTY, INC., Plaintiff and Respondent, v. CITY OF HAYWARD, Defendant and Appellant.
COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT, DIVISION THREE
200 Cal. App. 4th 81; 133 Cal. Rptr. 3d 155; 2011 Cal. App. LEXIS 1330
September 30, 2011, Filed
The Publication Status of this Document has been Changed by the Court from Unpublished to Published October 25, 2011.
PRIOR-HISTORY: Superior Court of Alameda County, No. HGO9433908, Frank Roesch, Judge.
COUNSEL: Michael Lawson, City Attorney, Rafael Alvarado, Deputy City Attorney; Jarvis, Fay, Doporto & Gibson, Andrea J. Saltzman, Benjamin P. Fay and Rick W. Jarvis for Defendant and Appellant.
James P. McBride and Verne A. Perry for Plaintiff and Respondent.
Heidi Palutke for California Apartment Association as Amicus Curiae on behalf of Plaintiff and Respondent.
JUDGES: Opinion by Jenkins, J., with McGuiness, P. J., and Pollak, J., concurring.
OPINION BY: Jenkins
Following entry of judgment in favor of Rental Housing Owners Association of Southern Alameda County, Inc. (RHOA), on its petition for writ of mandate, the trial court issued a peremptory writ of mandate enjoining the City of Hayward (City) from enforcing the “Mandatory Inspection Program” (MIP) incorporated in its Residential Rental Inspection Ordinance (ordinance). The trial court concluded the ordinance was unconstitutional on its face because it forced landlords to grant City inspectors access to occupied units without the consent of the tenant, in violation of Civil Code section 1954 and the Fourth Amendment of the United States Constitution. Accordingly, the trial court enjoined enforcement of Hayward Municipal Code sections 9-5.306 (Entry) and 9-5.401 (Fees/Penalty Charges), and commanded the City to repeal or cure the constitutional and statutory defects in these sections.
In response to the writ, the City amended the ordinance and filed a return to writ of mandate.1 RHOA filed objections to City’s return to writ of mandate, asserting that the amended ordinance failed to cure the constitutional defects identified by the trial court in its earlier judgment. The trial court sustained two of the five objections raised by RHOA. The court found that the amended ordinance was unconstitutional on its face because landlords continued to be responsible for obtaining tenants’ consent and could incur fines or penalties when tenants refused to permit entry to officials for inspection.
1 Hereafter, we shall refer either to the “ordinance” (meaning the original ordinance) or to the “amended ordinance” (meaning the ordinance as amended in response to the writ).
The City appeals the trial court’s order sustaining RHOA’s objections to its return to writ of mandate. Having considered the arguments presented, including those of amicus curiae for RHOA, California Apartment Association (CAA),2 we vacate the trial court’s order and remand with instructions that the trial court enter a new and different order consistent with this opinion.
2 CAA filed a request to file an amicus curiae brief on December 6, 2010. We issued on order granting the application and CAA filed its brief on December 13, 2010. The City filed a response to the amicus curiae brief on January 24, 2011. We have considered these briefs in disposing of the issues before us.
Facts and Procedural Background
A. The Residential Rental Inspection Ordinance
The City initiated its comprehensive rental housing inspection program in 1982 and first implemented the ordinance at issue here in 1989.3 The stated purpose of the ordinance is to “safeguard the stock of decent, safe, and sanitary rental housing units within the City and to protect persons entering or residing in them by providing for inspection of rental housing units and the common areas when certain indicators show that violations of the Hayward Housing and Building Codes may exist in a unit or pursuant to a systematic area-wide inspection program.” (§ 9-5.102.) The ordinance is administered under the authority of the enforcement official (the city manager, or his or her designee). (§ 9-5.301.)
3 The ordinance is set forth in article 5 of chapter 9 of the Hayward Municipal Code. The parties included a copy of the ordinance in their joint appendix and we shall cite to it by section number.
The ordinance authorizes two types of inspection by City officials of rental housing units, viz., (1) the MIP (§ 9-5.302), which targets all rental housing units in specified areas, and (2) a “for cause” inspection (under § 9-5.303) of a particular rental unit at the request of a tenant who reports a housing code violation at the property. Only the MIP concerns us here.
The MIP, as described in section 9-5.302 of the ordinance, is a part of the City’s “effort to encourage conservation of existing rental housing units, motels, and hotels” by requiring owners of these types of structures “to bring these units to Housing and Building Code standards.” (§ 9-5.302.) Section 9-5.302 also provides, “Owners and managers shall allow for the inspection of these units. If an Owner or manager refuses to permit an inspection, the Enforcement Official is authorized to procure an inspection warrant.” (§ 9-5.302, italics added.)
The ordinance also delineates the method of entry into units for inspection purposes. Section 9-5.306 provides: “Upon presentation of proper credentials, the Enforcement Official, after having obtained the consent of the Owner or occupant, may enter any rental housing unit … at reasonable times during daylight hours to perform any inspection required by this code. [¶] … [T]he Enforcement official shall not enter any rental housing unit … without the consent of the Owner or occupant thereof unless an inspection warrant therefor has been issued. …” (§ 9-5.306, italics added.)
Finally, in regard to fees and penalty charges, the ordinance provides: “The annual fee and fees or penalty charges for any inspection or re-inspection performed pursuant to the provisions of this code shall be established from time to time by resolution of the City Council. Payment of such fees shall be made by Owner of the rental housing unit … upon demand by the City.” (§ 9-5.401.) The City may recover fees and penalty charges from an owner by way of a special assessment levied against the property on the tax roll after the enforcement officer prepares a report, the owner is notified of a hearing on the report, and a hearing is held. (§§ 9-5.501 to 9-5.503.) At the hearing, “the City Council shall hear and pass upon the report of the Enforcement Official together with any objections or protests thereto” and may correct or revise the report or the fees charged “as it may deem just.” (§ 9-5.503.)
B. RHOA’s Petition for Writ of Mandate
RHOA filed its petition for writ of mandate in February 2009. In its petition, RHOA states that it is pursuing the action on behalf of its 200 plus members who own and operate approximately 12,500 dwelling units in the City, representing some 60 percent of the City’s rental housing stock.
RHOA challenged the language of the MIP on several grounds. First, RHOA asserted that the portion of the MIP (§ 9-5.302) that states “Owners and managers shall allow for the inspection of these units” is preempted by Civil Code section 1954 (section 1954). Section 1954 describes circumstances under which a landlord may enter a tenant’s unit, and as relevant here, it allows a landlord entry for inspection purposes only at the request of a tenant upon termination of the lease.4 Second, RHOA asserted that the “shall allow” language violates the Fourth Amendment of the United States Constitution because it requires landlords to permit entry into residential units absent tenants’ consent or a warrant. Third, RHOA asserted that the fee and penalty provisions in section 9-5.501 violate owners’ rights to substantive due process under the state and federal Constitutions because owners incur fees and penalties for their refusal to allow City inspections without tenant consent. RHOA requested that the court issue a writ of mandate enjoining the City’s enforcement of sections 9-5.302 (MIP) and 9-5.501 (Report on Fees/Penalty Charges).
4 Civil Code section 1954 is described in pertinent part in the Discussion, post.
The City opposed RHOA’s writ petition. The City argued that RHOA’s facial challenge to the MIP fails because the express language of section 9-5.302 does not require landlords to facilitate illegal entry into a tenant’s dwelling. Rather, the language of the MIP, in conjunction with section 9-5.306 (Entry), makes clear that enforcement officials must obtain the consent of the owner or occupant prior to entry. If consent is refused, the City must obtain an inspection warrant.
In reply, RHOA argued that the City’s reliance upon the consent required under the “entry” provision of section 9-5.306 was misplaced. According to RHOA, “[t]he conjunction ‘or’ placed between the nouns ‘owner’ and ‘occupant’ ” provides alternative means to obtain entry into tenant units. Therefore entry into residential units could be accomplished upon consent of the owner.
C. Issuance of the Writ and the City’s Response
The trial court held a hearing on RHOA’s writ petition and thereafter issued a statement of decision (SOD) on July 1, 2009. In its SOD, the trial court held that the ordinance was facially invalid. The court determined that sections 9-5.302 and 9-5.306 violate Civil Code section 1954 and the Fourth Amendment of the United States Constitution because they compel the landlord to provide access to residential units without tenant consent. The trial court further ruled that the penalty provision of the ordinance violates landlords’ substantive due process rights because it “prescribes a monetary sanction against the landlord even in these instances where the landlord may not be an obstruction to an inspection without a warrant.” The court entered judgment in favor of RHOA granting the petition for writ of mandate, enjoined the City from enforcing sections 9-5.306 and 9-5.401 of the ordinance, and issued a peremptory writ of mandate on August 4, 2009, commanding the City to “repeal or cure the Constitutional and statutory defects” identified in the ordinance.
In November 2009, the city attorney and Director of Development Services submitted a report to the mayor and city council proposing amendments to the ordinance. The report informed the city council of the grounds upon which the trial court issued the writ enjoining enforcement of the ordinance. The report recommended the city council adopt proposed amendments that establish “a clear process by which the owners and tenants are notified of the inspections and the manner in which entry can be made to conduct the inspections.”
After consideration of the report, the city council adopted the proposed amendments. As amended, section 9-5.306 is entitled “Notice and Entry,” and provides that the City shall mail notice of an inspection to owners and rental units at least 14 days prior to the date of inspection. It further provides: “It shall be the responsibility of the Owner … to make a good faith effort to obtain the consent of the tenants to inspect the subject rental housing units or otherwise obtain legal access to the units.” (Italics added.)
Thereafter, the City filed its final return to writ of mandate, notifying the court that the amendment to section 9-5.306 of the ordinance would become effective on December 31, 2009. The City asserted that by enacting the amendment “it has fully complied with the writ” and requested the writ be discharged.
D. Trial Court’s Ruling on the City’s Return on the Writ
RHOA filed timely objections to the return, arguing that the amendments ratified by the city council failed to correct constitutional and state law infirmities identified by the court. The City filed a response to RHOA’s objections. Thereafter, the trial court held a hearing on RHOA’s objections, entertained argument of counsel, and took the matter under submission. On March 26, 2010, the trial court issued an order sustaining RHOA’s objections on two grounds. To facilitate our review of the issues raised by appellant on appeal, we set forth below each objection raised by RHOA to the City’s return, and the trial court’s rulings.
RHOA argued that the City failed to comply with the writ of mandate by failing to delete the “shall allow” language in section 9-5.302 (which states that landlords “shall allow” for inspection) as that language compels landlords to permit entry into residential units without tenant consent. The trial court overruled this objection, finding that the amended ordinance now clearly requires the consent of both owner and tenant prior to inspection.
Second, RHOA argued that the requirement of landlord presence at inspections was an arbitrary exercise of police power in violation of landlords’ right to substantive due process because the requirement was not substantially related to the purpose of the MIP. The trial court overruled this objection, stating that “requiring the landlord’s presence is neither arbitrary nor unreasonable as the landlord frequently bears the burden of making repairs of habitability defects discovered by the inspectors.”
RHOA’s third and fourth objections relate to section 9-5.306, as amended, which requires landlords to make a good faith effort to obtain the consent of the tenant to an inspection. Specifically, RHOA argued that the good faith requirement was constitutionally vague, in violation of due process, because it imposes “an arbitrary obligation without standards” that will result in a “regime of unjust fines.” The trial court rejected RHOA’s contention, stating that “the concept of ‘good faith’ is not, on its face, a violation of the Constitutional requirement of due process.” RHOA also argued that the “good faith” requirement, coupled with the requirement that a landlord be present at the inspection, creates the likelihood of an unlawful landlord inspection in violation of Civil Code section 1954 and also makes the landlord an “involuntary agent” of the City in violation of the California Constitution. The trial court sustained this objection. The court ruled that a landlord “may not be held responsible to obtain the tenant’s consent to permit the governmental entry for inspection.”
Finally, RHOA objected to the amended ordinance arguing that it allowed the City to arbitrarily impose sanctions on a landlord for costs associated with a tenant’s refusal to consent to inspection. The trial court sustained this objection as well. The court ruled that “while it is a policy choice by the City if it chooses to not sanction a tenant for their refusal to consent to the City’s inspection, it is not within the City’s discretion to sanction the landlord/owner for the tenant’s act.”
Having sustained RHOA’s fourth and fifth objections to the City’s return on the writ, the court directed the City to cure the constitutional defects “and make further return on the Writ showing full compliance with the Court’s writ within 90 days.” The City filed a notice of appeal on April 9, 2010.
The City contends that the trial court erroneously sustained RHOA’s objections to the City’s return and that its order finding the amended ordinance facially invalid should be reversed. As discussed below, we conclude the trial court erred when it sustained RHOA’s facial challenge to the amended ordinance.
A. Applicable Legal Standards
“A facial challenge to the constitutional validity of a statute or ordinance considers only the text of the measure itself, not its application to the particular circumstances of an individual. [Citation.]” (Tobe v. City of Santa Ana (1995) 9 Cal.4th 1069, 1084 [40 Cal. Rptr. 2d 402, 892 P.2d 1145].) “A claimant who advances a facial challenge faces an ‘uphill battle …’ [citation]” (Home Builders Assn. v. City of Napa (2001) 90 Cal.App.4th 188, 194 [108 Cal. Rptr. 2d 60]), and ” ‘ “petitioners cannot prevail by suggesting that in some future hypothetical situation constitutional problems may possibly arise as to the particular application of the statute … . Rather, petitioners must demonstrate that the act’s provisions inevitably pose a present total and fatal conflict with applicable constitutional prohibitions.” ‘ [Citation.]” (Tobe v. City of Santa Ana, supra, 9 Cal.4th at p. 1084.)5 “Under a facial challenge, the fact that the statute ‘ “might operate unconstitutionally under some conceivable set of circumstances is insufficient to render it wholly invalid … .” ‘ [Citation.]” (Sturgeon v. Bratton (2009) 174 Cal.App.4th 1407, 1418 [95 Cal. Rptr. 3d 718].) “All presumptions favor the validity of a statute. The court may not declare it invalid unless it is clearly so. [Citation.]” (Tobe v. City of Santa Ana, supra, 9 Cal.4th at p. 1102.) ” ‘ “The interpretation of a statute and the determination of its constitutionality are questions of law. In such cases, appellate courts apply a de novo standard of review.” [Citations.]‘ [Citation.]” (Samples v. Brown (2007) 146 Cal.App.4th 787, 799 [53 Cal. Rptr. 3d 216].)
5 RHOA asserts that in Alviso v. Sonoma County Sheriff’s Dept. (2010) 186 Cal.App.4th 198 [111 Cal. Rptr. 3d 775] (Alviso), we endorsed a more “lenient formulation” of the “total and fatal conflict” standard for facial challenges described by our Supreme Court in Tobe v. City of Santa Ana, supra, 9 Cal.4th 1069. Not so. We merely observed that in some cases the court had applied a formulation requiring a petitioner to demonstrate that a statutory scheme is unconstitutional only in “the ‘vast majority of its applications.’ ” (Alviso, supra, 186 Cal.App.4th at p. 205.) While we stand by our observation that, as between the two, “the ‘vast majority of its applications’ ” is a more lenient standard than a “total and fatal conflict,” our analysis here would be no different under either standard.
The City contends the trial court erred when it sustained RHOA’s objection, on agency grounds, to the amended ordinance’s “good faith” requirement. On appeal, RHOA more clearly articulates the basis of its agency argument. RHOA argues that by requiring landlords to exercise good faith in attempting to obtain tenant consent to City inspection, section 9-5.306 forces landlords to act as “agents” of the City.6 RHOA asserts the agency relationship imposed upon landlords by operation of the good faith requirement is “compulsory” or “unilateral,” in violation of California law on creation of agency. Therefore, RHOA concludes, the amended ordinance is preempted under article XI, section 7 of the California Constitution.7 RHOA’s argument, however, is a mere tautology founded upon a concept alien to California law–”compulsory” or “unilateral” agency.
6 Civil Code section 2355 and the Restatement Third of Agency (2006), section 1.01 require mutual agreement and assent in the creation of an agency relationship.
7 Article XI, section 7 of the California Constitution, provides: “A county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws.” (Cal. Const., art. XI, § 7.) A charter city ordinance like the one here conflicts with state law, and is thereby preempted, only if the ordinance ” ‘ ” ‘duplicates, contradicts, or enters an area fully occupied by general law, either expressly or by legislative implication.’ ” ‘ [Citations.]” (Sherwin-Williams Co. v. City of Los Angeles (1993) 4 Cal.4th 893, 897 [16 Cal. Rptr. 2d 215, 844 P.2d 534].)
California law recognizes a relationship known as agency where one party, the agent, “represents another, called the principal, in dealings with third persons.” (Civ. Code, § 2295; see 3 Witkin, Summary of Cal. Law (10th ed. 2005) Agency and Employment, § 1, p. 40.) An agency relationship is a bilateral matter created through mutual consent. (See van’t Rood v. County of Santa Clara (2003) 113 Cal.App.4th 549, 571 [6 Cal. Rptr. 3d 746] [" ' "Agency is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." [Citation.]‘ “].) Absent mutual consent, therefore, there can be no agency.
Here, the amended ordinance requires that landlords make good faith efforts to obtain tenant consent to City inspections. However, the “good faith requirement” is not a bilateral agreement between City and landlords, a necessary prerequisite for creation of an agency relationship. Simply put, RHOA’s argument rests upon a legally unsupported premise that the imposition of a good faith requirement creates an agency relationship. In sum, we see no conflict, express or implied, between the amended ordinance’s good faith requirement and the general law of agency. Accordingly, the amended ordinance is not preempted under article XI, section 7 of the California Constitution. (See Sherwin-Williams Co. v. City of Los Angeles, supra, 4 Cal.4th at p. 897.)
RHOA further asserts that the trial court’s ruling sustaining its objection to the good faith requirement violates the Fourth Amendment and section 1954. We address each argument in turn below.
RHOA contends that the good faith requirement violates the Fourth Amendment because “tenants’ Fourth Amendment rights are put in jeopardy if owners are tasked with obtaining knowing and voluntary waivers from tenants.” First, we note that RHOA lacks standing to assert such a Fourth Amendment claim on behalf of tenants because RHOA has no privacy interest in units occupied by tenants. (See, e.g., U.S. v. Taketa (9th Cir. 1991) 923 F.2d 665, 669-670 [a party lacks 4th Amend. standing if that party's reasonable expectation of privacy has not been infringed].) Even if RHOA had standing to assert this Fourth Amendment claim, we would reject it.
The Fourth Amendment protects citizens against ” ‘unreasonable searches and seizures’ ” of their homes and persons. (Camara v. Municipal Court (1967) 387 U.S. 523, 528 [18 L. Ed. 2d 930, 87 S. Ct. 1727].) A governing principle of Fourth Amendment jurisprudence is that “a search of private property without proper consent is ‘unreasonable’ unless it has been authorized by a valid search warrant.” (Camara, at pp. 528-529; see id. at p. 534 [holding that "administrative searches" of the sort contemplated under the amended ordinance violates the 4th Amend. unless conducted with proper consent or accompanied by a warrant].) A corollary principle is that “because the ultimate touchstone of the Fourth Amendment is ‘reasonableness,’ the warrant requirement is subject to certain exceptions. [Citations.]” (Brigham City v. Stuart (2006) 547 U.S. 398, 403 [164 L. Ed. 2d 650, 126 S. Ct. 1943].) Here, nothing in the language of the amended ordinance offends either the warrant requirement or the Fourth Amendment’s requirement of reasonableness. The amended ordinance requires tenant consent before a City inspection can proceed. Absent tenant consent, the City must obtain an inspection warrant. We fail to see how the amended ordinance’s good faith requirement violates the Fourth Amendment’s prescription of reasonableness.
We also reject RHOA’s contention that the amended ordinance is preempted by Civil Code section 1954. Section 1954 provides in pertinent part: “(a) A landlord may enter the dwelling unit only in the following cases: [¶] (1) In case of emergency. [¶] (2) To make necessary or agreed repairs, decorations, alterations or improvements, supply necessary or agreed services, or exhibit the dwelling unit to prospective or actual purchasers, mortgagees, tenants, workers, or contractors or to make an inspection pursuant to subdivision (f) of Section 1950.5. [¶] (3) When the tenant has abandoned or surrendered the premises. [¶] (4) Pursuant to court order.” (§ 1954, subd. (a).)
8 Civil Code section 1950.5, subdivision (f) provides that a tenant may request a joint inspection of the property (landlord and tenant) “to remedy identified deficiencies, in a manner consistent with the rights and obligations of the parties under the rental agreement, in order to avoid deductions” from his or her security deposit. (§ 1950.5, subd. (f)(1).)
Patently, Civil Code section 1954 addresses the circumstances under which landlords are authorized “to enter an occupied residential dwelling.” (Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1049 [90 Cal. Rptr. 3d 453] [noting civil penalties may be imposed "for 'a significant and intentional violation' " of § 1954 "if done 'for the purpose of influencing a tenant to vacate a dwelling' "].) In contrast to section 1954, the amended ordinance authorizes City officials to enter a tenant’s residence to conduct inspections. Thus, we see no conflict between the amended ordinance, which governs inspections conducted by City officials, and section 1954, which limits the circumstances under which landlords can enter tenant residences.9
9 RHOA also argues that section 9-5.306 of the amended ordinance conflicts with Civil Code section 1954 because it requires landlord presence at inspections. This requirement does not render the amended ordinance facially invalid under section 1954. While it is conceivable a tenant might consent to an inspection by City officials yet deny the landlord permission to enter at the inspection, the amended ordinance does not address such a scenario. On a facial challenge, we must presume the validity of the ordinance. (See Tobe v. City of Santa Ana, supra, 9 Cal.4th at p. 1102 [stating that "[a]ll presumptions favor the validity of a statute” and a court “may not declare it invalid unless it is clearly so”].) Thus, if such a scenario arose, we presume City officials would not, on the basis of the tenant’s consent to inspection by City officials, insist that they be accompanied by the landlord if the tenant objects to the landlord’s presence. (See Arcadia Unified School Dist. v. State Dept. of Education (1992) 2 Cal.4th 251, 266 [5 Cal. Rptr. 2d 545, 825 P.2d 438] ["We have no reason to believe, in this facial challenge, that the statute will be applied improperly."].)
In sum, we conclude the trial court erred when it concluded that the good faith requirement of the amended ordinance was facially invalid under the law of agency. In addition, RHOA cannot demonstrate that the good faith requirement is facially invalid under the Fourth Amendment or section 1954.
Last, we consider whether the trial court properly sustained RHOA’s objection to the amended ordinance’s fee provisions on substantive due process grounds. The concept of “due process of law” guarantees both procedural and substantive rights.10 (Gray v. Whitmore (1971) 17 Cal.App.3d 1, 21 [94 Cal. Rptr. 904].) Substantive due process protects against “arbitrary legislative action, even though the person whom it is sought to deprive of his right to life, liberty or property is afforded the fairest of procedural safeguards.” (Ibid.) To satisfy substantive due process concerns, “the law must not be unreasonable, arbitrary or capricious but must have a real and substantial relation to the object sought to be attained. [Citations.]” (Ibid.)
10 Patently, the notice and hearing provisions set forth in sections 9-5.502 and 9-5.503 of the amended ordinance provide owners adequate procedural due process rights to contest any fee or penalty imposed pursuant to the residential rental inspection program.
The trial court held the amended ordinance facially invalid on substantive due process grounds because the penalty/fee provisions arbitrarily and unreasonably allow the City to sanction a landlord for reinspection costs unconnected to the landlord’s conduct (i.e., costs occasioned by a tenant’s refusal to permit an inspection). Likewise, RHOA argues here that “substantive due process is implicated for lack of a conditional nexus” between a recalcitrant tenant’s noncooperation and a consequential monetary sanction against the owner.11
11 RHOA also suggests the amended ordinance “offends due process” because it is “overbroad.” The overbreadth doctrine, however, applies only to activities sheltered by the First Amendment and is limited to and not recognized outside of the First Amendment context. (See United States v. Salerno (1987) 481 U.S. 739, 745 [95 L.Ed. 2d 697, 107 S. Ct. 2095].) We fail to see how the overbreadth doctrine has any relevance to the claims asserted by RHOA.
However, even assuming an inspection ordinance that affirmatively allowed sanctions against a landlord arising from tenant noncompliance would raise substantive due process concerns,12 the amended ordinance we vet here raises no such concerns. To the contrary, as demonstrated below, the amended ordinance does not provide for a monetary sanction against an owner for a recalcitrant tenant’s noncooperation in every case, or even in the vast majority of cases, therefore a facial challenge cannot be sustained on the substantive due process grounds asserted here. (Cf. Tobe v. City of Santa Ana, supra, 9 Cal.4th at p. 1084; Alviso, supra, 186 Cal.App.4th at p. 205.)
12 In its reply brief, the City for the first time raises the argument that under its police powers it is authorized to charge landlords “regulatory fees” for reinspection costs occasioned by a tenant’s lack of consent to inspection. This issue is not properly before us and we decline to consider it. (Smith v. Board of Medical Quality Assurance (1988) 202 Cal.App.3d 316, 329, fn. 5 [248 Cal. Rptr. 704] [declining to address issue raised in reply brief because "it is unfair for an appellant to raise issues for the first time on appeal in a reply brief ..."]; accord, Shimmon v. Franchise Tax Bd. (2010) 189 Cal.App.4th 688, 694, fn. 3 [117 Cal. Rptr. 3d 430] ["arguments raised for the first time in the reply brief will not be considered unless good cause is shown for failing to raise them earlier"].)
The amended ordinance authorizes the imposition of fees or penalties under sections 9-5.401 and 9-5.306. Section 9-5.401 (Fees/Penalty Charges) states, “[A]nnual fee and fees or penalty charges for any inspection or re-inspection performed pursuant to the provisions of this code shall be established from time to time by resolution of the City Council. Payment of such fees shall be made by Owner of the rental housing unit or hotel or motel upon demand by the City.” (§ 9-5.401, italics added.) True, section 9-5.401 provides that only owners, not tenants, are responsible for payment of penalty charges. However, it does not describe any of the circumstances under which owners may incur such penalties, and certainly does not call for imposition of a penalty on the owner when a tenant fails to cooperate.
Section 9-5.306 (Notice and Entry), on the other hand, does describe the specific circumstances under which owners may incur penalties in connection with notice and entry attendant to City inspections. First, section 9-5.306 provides: “The Owner or the Owner’s designated representative shall be present at the rental housing property at the time of the inspection. The time of the inspection shall be at the time indicated in the notice issued pursuant to this code, or the time that the inspection was properly rescheduled in accordance with the provisions of this code. Violations of this paragraph may result in a re-scheduling fee.” (§ 9-5.306, as amended, italics added.) Second, section 9-5.306 provides: “An inspection may be rescheduled once by the Owner … by giving notice to the Enforcement Officer at least five (5) calendar days prior to the scheduled inspection date. An inspection may only be rescheduled to a date within fourteen (14) calendar days of the previously scheduled inspection date. Violations of this paragraph may result in a re-scheduling fee.” (Italics added.) Significantly, section 9-5.306 does not authorize the imposition of a penalty on the owner for a tenant’s noncooperation. Section 9-5.306 provides that a landlord may be sanctioned in only two circumstances in connection with notice and entry attendant to City inspections–(1) where the owner fails to appear for inspection, and (2) where the owner attempts to reschedule an inspection without requisite notice to the City. (See § 9-5.306.)
Accordingly, because sections 9-5.401 and 9-5.306 do not sanction the imposition of penalties on owners for any tenant noncompliance, the amended ordinance does not violate principles of substantive due process and therefore cannot be declared facially invalid on that basis under either the “total and fatal conflict” standard (Tobe v. City of Santa Ana, supra, 9 Cal.4th at p. 1102), or the “vast majority of its applications” standard (Alviso, supra, 186 Cal.App.4th at p. 205).13
13 Amicus curiae CAA contends the requirement that the owner make a good faith effort to gain the tenant’s consent for City inspectors to enter an occupied unit violates constitutional guarantees of procedural and substantive due process. RHOA did not cross-appeal and does not challenge here the trial court’s ruling that “the concept of ‘good faith’ is not, on its face, a violation of the Constitutional requirement of due process.” Generally, “an amicus curiae accepts a case as he or she finds it … [¶] … [¶] … ‘ “and … additional questions presented … by an amicus curiae will not be considered.” ‘ ” (California Assn. for Safety Education v. Brown (1994) 30 Cal.App.4th 1264, 1274-1275 [36 Cal. Rptr. 2d 404], citation omitted.) In all events, CAA’s procedural due process contention is premised on the “risk of unfair deprivation of … property interests.” Among these alleged deprivations are “penalty and lien provisions of the Ordinance and … potential damages … associated with defending against a tenant’s lawsuit.” Similarly, its substantive due process argument is founded on the specter of “harsh and oppressive” penalties on owners for tenant noncompliance. However, as discussed above, the amended ordinance does not, on its face, violate section 1954 or the Fourth Amendment, and does not impose fees on a landlord for tenant noncompliance. Accordingly, we reject CAA’s due process contentions.
To conclude, having considered the opposing contentions of the parties, and upon de novo review of the language of the amended ordinance, we conclude the trial court erred in sustaining RHOA’s objections to the City’s return on the writ. Accordingly, we vacate the trial court’s order.
The trial court’s order sustaining RHOA’s objections to the City’s return on the writ is vacated and the matter is remanded for the trial court to enter a new and different order consistent with this opinion. Costs are awarded to City.
McGuiness, P. J., and Pollak, J., concurred.
DAVID DUNCAN et al., Plaintiffs and Appellants, v. THE McCAFFREY GROUP, INC., et al., Defendants and Respondents.
COURT OF APPEAL OF CALIFORNIA, FIFTH APPELLATE DISTRICT
200 Cal. App. 4th 346; 133 Cal. Rptr. 3d 280; 2011 Cal. App. LEXIS 1347
October 28, 2011, Filed
APPEAL from a judgment of the Superior Court of Fresno County, No. 08CECG04136, Howard R. Broadman, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.).
COUNSEL: Law Offices of Keith C. Rickelman, Keith C. Rickelman; Law Offices of Sara Hedgpeth-Harris and Sara Hedgpeth-Harris for Plaintiffs and Appellants.
Cooley, Patrick P. Gunn and Charles M. Schaible for Defendants and Respondents.
JUDGES: Opinion by Cornell, J., with Wiseman, Acting P. J., and Kane, J., concurring.
OPINION BY: Cornell
CORNELL, J.–Plaintiffs David Duncan, Lynne Y. Duncan, Michael V. Fillebrown, Gerald Lung, Jeannie Lung, the Lung Family Revocable Trust, Richard Marino, Angela Marino, Weldon K. Schapansky, individually and as the sole beneficiary of the Grabe, Schapansky, Moss, Levy & Julian DDS PC 401 Retirement Plan, Noah Sever, Linda Washington, Carl D. West, and Chung C. Faulkner (hereafter collectively, plaintiffs) appeal from the judgment entered after the trial court sustained the demurrers filed by defendants The McCaffrey Group, Inc., McCaffrey Home Realty, Robert A. McCaffrey, McCaffrey Development LP, Bullard Grantland No. 1, Inc., and Ron Pottorff (hereafter collectively, defendants)1 to plaintiffs’ sixth amended complaint.
1 The demurrer was sustained with leave to amend. Plaintiffs chose not to amend and allow judgment to be entered to permit an appeal from the ruling.
Defendants are the developers of a tract of land marketed as the Treviso Custom Home Development (hereafter the Development). Plaintiffs are individuals who purchased lots from defendants with the intent to build custom homes on each lot, with some having completed construction on their homes.
The complaint alleged, in essence, that plaintiffs paid a premium price for their lots because the Development was marketed as one that would be limited to custom homes with at least 2,700 square feet of living space. Plaintiffs alleged that, unbeknownst to them, defendants at all times intended to build tract homes on some of the lots that would be much smaller than 2,700 square feet of living space. As a result of the construction of smaller tract homes, plaintiffs alleged the value of their lots plummeted.
In the various versions of their complaint, plaintiffs have alleged numerous causes of action attributable to the purchase of the lots. As we understand plaintiffs’ argument, they contend only that the trial court erred in sustaining the demurrer to their causes of action for alleged unfair competition, in violation of Business and Professions Code section 17200, false advertising, in violation of Business and Professions Code section 17500, and fraud. In addition, plaintiffs challenge the trial court’s order granting defendants’ motion for summary adjudication on their causes of action for breach of fiduciary duty and constructive fraud.
The primary basis for the trial court’s order sustaining defendants’ demurrers was that the parol evidence rule precluded any testimony about facts inconsistent with the contract between the parties and the purchase and sale agreement (hereafter the Agreement) and therefore there was no factual basis for any of plaintiffs’ claims. As we shall explain, the trial court was correct that the fraud cause of action lacked any factual support because the parol evidence rule precluded the evidence on which plaintiffs relied. The trial court erred, however, in sustaining the demurrer to the causes of action for false advertising and unfair competition because the allegations on which plaintiffs relied were not offered to vary, alter, or add to the terms of the Agreement, and thus the parol evidence rule was inapplicable.
We also conclude the trial court erred in granting the motion for summary adjudication. Plaintiffs alleged that defendant McCaffrey Home Realty acted as their real estate agent in the purchase transaction and therefore owed them a fiduciary duty, which was breached by various acts of defendants. The trial court concluded that the Agreement established that defendant McCaffrey Home Realty acted as a broker only for defendants and therefore there was no fiduciary relationship between plaintiffs and defendants. As we shall explain, we conclude the Agreement was ambiguous and therefore a triable issue of fact exists as to the meaning of the contract, which may require extrinsic evidence to resolve. Therefore, the order granting summary adjudication also must be reversed.
FACTUAL AND PROCEDURAL SUMMARY
Sixth Amended Complaint
We begin with the sixth amended complaint (SAC) because that was the operative pleading at the time judgment was entered. As relevant to the issues we must decide, the SAC alleged plaintiffs were the owners of lots in the Development. The lots were purchased between July 28, 2006, and August 8, 2007. Defendants were corporate entities or partnerships doing business in the state of California, primarily the development, construction, and sale of new residential homes, except for Ron Pottorff, who was an employee of defendants.
Plaintiffs’ first cause of action alleged defendants committed acts of unfair competition, in violation of Business and Professions Code section 17200. According to plaintiffs, defendants authored and caused to be recorded a declaration of covenants, conditions, and restrictions (CC&R’s) applicable to the Development. As initially recorded, and at the time plaintiffs bought their lots, the CC&R’s required each home built within the Development to be at least 2,700 square feet and ” ‘architecturally compatible with each other.’ ”
In addition, Pottorff told plaintiffs Richard Marino and Angela Marino that the Development contained the only custom home lots in that area. The sales office for the Development exhibited numerous pictures and architectural plans for custom homes built at defendants’ other developments and that were similar to the Development’s.
After each plaintiff had purchased his or her lot, defendants, without notice, caused the CC&R’s to be amended to reduce the minimum size of each residence built in the Development to 1,700 square feet. Approximately one month later, defendants caused the CC&R’s to be amended a second time without notice, this time reducing the minimum size of a residence built in the Development to 1,400 square feet.
After each plaintiff had purchased his or her lot, defendants began selling tract homes on lots within the Development. The price for some of these tract homes was essentially the same as the price paid by plaintiffs for their undeveloped lots. As a result of defendants’ construction of tract homes, the Development no longer was a custom home development. Defendant Robert A. McCaffrey admitted to plaintiffs that the Development never was intended to be limited to custom homes.
These actions allegedly violated Civil Code sections 15672 (freedom of consent), 15723 (fraud), 15734 (constructive fraud), 15755 (undue influence), 16676 and 16687 (contracts contrary to law), 1670.58 (unconscionable contracts), 17099 and 171010 (deceit), and Business and Profession Code sections 1101211 (unlawful material change in setup), 11018.712 (unlawful amendment of the CC&R’s), 1101913 (order prohibiting violations), 1102214 (false or misleading advertising), and 1753015 (misleading publications). The SAC alleged that these statutory violations constituted unlawful business acts within the meaning of Business and Professions Code section 17200 et seq., the unfair competition law (UCL). Because plaintiffs actually and reasonably relied on defendants’ representations, defendants’ acts also constituted fraudulent business practices within the meaning of the UCL and false advertising within the meaning of Business and Professions Code sections 11022, 17200, and 17500. Finally, the SAC alleged that each plaintiff was damaged as a result of defendants’ unlawful conduct.
2 Civil Code section 1567 states: “An apparent consent is not real or free when obtained through: [¶] 1. Duress; [¶] 2. Menace; [¶] 3. Fraud; [¶] 4. Undue influence; or [¶] 5. Mistake.”
3 Civil Code section 1572 states: “Actual fraud, within the meaning of this Chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract: [¶] 1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; [¶] 2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; [¶] 3. The suppression of that which is true, by one having knowledge or belief of the fact; [¶] 4. A promise made without any intention of performing it; or, [¶] 5. Any other act fitted to deceive.”
4 Civil Code section 1573 states: “Constructive fraud consists: [¶] 1. In any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him; or, [¶] 2. In any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud.”
5 Civil Code section 1575 states: “Undue influence consists: [¶] 1. In the use, by one in whom a confidence is reposed by another, or who holds a real or apparent authority over him, of such confidence or authority for the purpose of obtaining an unfair advantage over him; [¶] 2. In taking an unfair advantage of another’s weakness of mind; or, [¶] 3. In taking a grossly oppressive and unfair advantage of another’s necessities or distress.”
6 Civil Code section 1667 states: “That is not lawful which is: [¶] 1. Contrary to an express provision of law; [¶] 2. Contrary to the policy of express law, though not expressly prohibited; or, [¶] 3. Otherwise contrary to good morals.”
7 Civil Code section 1668 states: “All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”
8 Civil Code section 1670.5 states: “(a) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. [¶] (b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.”
9 Civil Code section 1709 states: “One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.”
10 Civil Code section 1710 states: “A deceit, within the meaning of … section , is either: [¶] 1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; [¶] 2. The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true; [¶] 3. The suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact; or, [¶] 4. A promise, made without any intention of performing it.”
11 Business and Professions Code section 11012 states: “It is unlawful for the owner, his agent, or subdivider, of the project, after it is submitted to the Department of Real Estate, to materially change the setup of such offering without first notifying the Department of Real Estate in writing of such intended change. This section only applies to those changes of which the owner, his agent, or subdivider has knowledge or constructive knowledge.”
12 Business and Professions Code section 11018.7 states: “(a) No amendment or modification of provisions in the declaration of restrictions, bylaws, articles of incorporation or other instruments controlling or otherwise affecting rights to ownership, possession, or use of interests in subdivisions as defined in [Business and Professions Code] Sections 11000.1 and 11004.5 which would materially change those rights of an owner, either directly or as a member of an association of owners, is valid without the prior written consent of the Real Estate Commissioner during the period of time when the subdivider or his or her successor in interest holds or directly controls as many as one-fourth of the votes that may be cast to effect that change. [¶] (b) The commissioner shall not grant his or her consent to the submission of the proposed change to a vote of owners or members if he or she finds that the change if effected would create a new condition or circumstance that would form the basis for denial of a public report under [Business and Professions Code] Sections 11018 or 11018.5. [¶] An application for consent may be filed by any interested person on a form prescribed by the commissioner. A filing fee to be fixed by regulation, but not to exceed twenty-five dollars ($25), shall accompany each application. [¶] There shall be no official meeting of owners or members nor any written solicitation of them for the purpose of effectuating a change referred to herein except in accordance with a procedure approved by the commissioner after the application for consent has been filed with him or her; provided, however, that the governing body of the owners association may meet and vote on the question of submission of the proposed change to the commissioner.”
13 Business and Professions Code section 11019 states: “(a) Whenever the commissioner determines from available evidence that a person has done any of the following, the commissioner may order the person to desist and refrain from those acts and omissions or from the further sale or lease of interests in the subdivision until the condition has been corrected: [¶] (1) Has violated or caused the violation of any provision of this part or the regulations pertaining thereto. [¶] (2) Has violated or caused a violation of [Business and Professions Code] Section 17537, 17537.1, or 17539.1, in advertising or promoting the sale of subdivision interests. [¶] (3) Has failed to fulfill representations or assurances with respect to the subdivision or the subdivision offering upon which the department relied in issuing a subdivision public report. [¶] (4) Has failed to inform the department of material changes that have occurred in the subdivision or subdivision offering which have caused the subdivision public report to be misleading or inaccurate or which would have caused the department to deny a public report if the conditions had existed at the time of issuance. [¶] (b) Upon receipt of such an order, the person or persons to whom the order is directed shall immediately discontinue activities in accordance with the terms of the order. [¶] (c) Any person to whom the order is directed may, within 30 days after service thereof upon him, file with the commissioner a written request for hearing to contest the order. The commissioner shall after receipt of a request for hearing assign the matter to the Office of Administrative Hearings to conduct a hearing for findings of fact and determinations of the issues set forth in the order. If the hearing is not commenced within 15 days after receipt of the request for hearing, or on the date to which continued with the agreement of the person requesting the hearing, or if the decision of the commissioner is not rendered within 30 days after completion of the hearing, the order shall be deemed to be vacated. [¶] (d) Service and proof of service of an order issued by the commissioner pursuant to this section may be made in a manner and upon such persons as prescribed for the service of summons in Article 3 (commencing with Section 415.10), Article 4 (commencing with Section 416.10) and Article 5 (commencing with Section 417.10) of Chapter 4 of Title 5 of Part 2, of the Code of Civil Procedure.”
14 Business and Professions Code section 11022 states: “(a) It is unlawful for an owner, subdivider, agent or employee of a subdivision or other person, with intent directly or indirectly to sell or lease subdivided lands or lots or parcels therein, to authorize, use, direct, or aid in the publication, distribution, or circularization of an advertisement, radio broadcast, or telecast concerning subdivided lands, that contains a statement, pictorial representation, or sketch that is false or misleading. [¶] (b) An owner, subdivider, agent, or employee of an owner or subdivider may, prior to the use, publication, distribution, or circulation of any advertisement concerning subdivided lands, submit the same to the department for approval. The submission shall be accompanied by a fee of not more than seventy-five dollars ($75). The commissioner shall prescribe by regulation the amount of the fee. [¶] If disapproval of the proposed advertisement is not communicated by the department to the owner, subdivider, agent, or employee within 15 calendar days after receipt of the copy of the proposed advertisement, the advertisement shall be deemed approved, but the department shall not be estopped from disapproving a later distribution, circulation, or use of the same or similar advertising. [¶] (c) Nothing in this section shall be construed to hold the publisher or employee of any newspaper, or any job printer, or any broadcaster, or telecaster, or any magazine publisher, or any of the employees thereof, liable for any publication herein referred to unless the publisher, employee, or printer has actual knowledge of the falsity thereof or has an interest either as an owner or agent in the subdivided lands so advertised.”
15 Business and Professions Code section 17530 states: “It is unlawful for any person, firm, corporation, or association, or any employee or agent therefor, to make or disseminate any statement or assertion of fact in a newspaper, circular, circular or form letter, or other publication published or circulated, including over the Internet, in any language in this state, concerning the extent, location, ownership, title, or other characteristic, quality, or attribute of any real estate located in this state or elsewhere, which is known to be untrue and which is made or disseminated with the intention of misleading. [¶] Nothing in this section shall be construed to hold the publisher of any newspaper, or any job printer, liable for any publication herein referred to unless the publisher or printer has an interest, either as owner or agent, in the real estate so advertised.”
The second cause of action sought rescission and restitution because defendants failed to notify the Real Estate Commissioner of the amendments to the CC&R’s as required by Business and Professions Code sections 11012, 11018.7, and 11019. In addition, defendants allegedly violated Business and Professions Code sections 11012, 11018.7, 11019, and 11022 by building and marketing a limited number of models of tract homes. Plaintiffs also alleged the tract homes were not reviewed by the architectural control committee, as required by the CC&R’s. These facts allegedly constituted a material change in the Development without notice to the Department of Real Estate, resulting in violation of the identified code sections entitling plaintiffs to rescission and restitution.
The third cause of action (false advertising) alleged that defendants falsely advertised the Development as limited to custom homes with the intent to induce plaintiffs to purchase lots, in violation of Business and Professions Code section 11022, subdivision (a). As a result of defendants’ conduct, plaintiffs each suffered substantial damages.
The fourth cause of action (trespass) alleged that defendants trespassed on the lots owned by plaintiffs Lung, Marino, Schapansky, and Washington, causing damage to the lots and decreasing their value.
Defendants’ Demurrer to the SAC
In response to the SAC, defendants, as they had to each preceding complaint, filed a demurrer and motion to strike certain portions of the pleadings. Defendants argued that plaintiffs could not recover for any alleged unfair competition because any reliance on the alleged misrepresentations was unreasonable as a matter of law. Defendants pointed out that paragraph 9(a) of the Agreement specifically permitted defendants to change the “product, development plan … and marketing methods”16 for the Development.
16 Paragraph 9(a) of the Agreement states in full: “Changes in Price, Product, Development Plan and Marketing Methods. Buyer acknowledges that Seller may, in its sole discretion, change its pricing, product, development plan, incentive program and marketing methods. Without limitation, Seller may elect to sell residences or lots in this phase of the project, or in future phases, under terms and conditions which are more favorable than those set forth in this Agreement, including, without limitation, more favorable terms and conditions resulting from the sale of residences (or lots) in bulk to another builder or by auction (with or without reserve) to members of the general public. Seller may elect not to build residences on each lot of this phase or future phases of the project, or may elect to build a different type or size of residence on a smaller or larger lot, or may use different construction methods to build such residences. Seller may further elect to build residences of the same type in this or future phases, but to reduce the sales price for such residences, or to improve such residences with more or less expensive features and amenities. Any of the foregoing events may adversely affect the value of the Property. Nothing herein shall be interpreted as an express or implied warranty or representation that the Seller will refrain from any pricing program, product design program, development strategy or marketing plan which in any manner adversely affects the value of the Property, and Buyer acknowledges that no sales representative has made any contrary representation, or has made any representation regarding any potential appreciation of the Property, any resale value of the Property, or the effect of any component, option or amenity of the Property upon the value of the Property.”
Defendants argued that plaintiffs could not recover on the second cause of action because any material change to the setup and offering that may have occurred at the Development occurred after plaintiffs had purchased their lots. According to defendants, since they were in compliance with the Subdivided Lands Act (Bus. & Prof. Code, § 11000 et seq.) at the time of the sale, there were no grounds for rescission or restitution.
Finally, defendants argued that plaintiffs could not recover on the third cause of action because the alleged misrepresentations were directly contradicted by paragraph 9(a) of the Agreement, which gave defendants the right to alter the Development. Therefore, any alleged misrepresentations were barred by the parol evidence rule. In addition, defendants argued that even if the alleged misrepresentations were considered, plaintiffs could not recover because the statements were true at the time they were made.
Trial Court’s Ruling
The trial court sustained the demurrer to the first cause of action on several grounds. To the extent plaintiffs were alleging that defendants acted fraudulently, the trial court concluded that plaintiffs did not plead actual reliance on the alleged fraudulent statements contained in the SAC. To the extent plaintiffs were alleging that defendants acted in an unfair manner, the trial court concluded that the contract was not unfair as a matter of law. To the extent plaintiffs were basing this cause of action on statutory violations, the trial court concluded that plaintiffs failed to identify any statutory violation that could form the basis of an unfair competition cause of action.
The trial court sustained the demurrer to the second cause of action as it concluded there was nothing to indicate that the public report was invalid or illegal. Instead, the trial court concluded the report prepared by defendants was valid.
The trial court sustained the demurrer to the third cause of action because plaintiffs improperly sought monetary damages, a remedy not available under the statute. In addition, the trial court concluded that any allegation of false advertising on which plaintiffs might rely would be inadmissible under the parol evidence rule as the claimed false statements directly contradicted the written agreement, specifically paragraph 9(a) of the Agreement.
The trial court also granted defendants’ motion to strike specific items in the SAC. The trial court ordered stricken allegations that (1) defendants engaged in unfair competition by including in the CC&R’s a paragraph requiring each residence to be at least 2,700 square feet, (2) plaintiffs actually and reasonably relied on defendants’ allegedly deceptive practices and false advertising, and (3) plaintiffs were entitled to recover monetary damages for alleged violations of the Subdivided Lands Act. The trial court ruled that the first item was precluded by the parol evidence rule, the second item was irrelevant, and the third item was improper because violations of the Subdivided Lands Act did not permit monetary recovery.
Prior Rulings by the Trial Court
The SAC was preceded by six pleadings that attempted to state various causes of actions against defendants. Each complaint was attacked by defendants through a demurrer and/or a motion to strike. The trial court’s rulings on these motions were similar to the above ruling.
The ruling on the motions directed at the original complaint sustained demurrers to several causes of actions based on allegations that defendants advertised and promoted the Development as requiring each residence constructed to be a custom home of at least 2,700 square feet. The trial court concluded that such allegations were barred by the parol evidence rule because the Agreement specifically allowed defendants to build other types of homes. The trial court also sustained demurrers to fraud causes of action because plaintiffs did not plead reasonable reliance. The trial court concluded it was unreasonable to rely on representations made by defendants that directly were contradicted by the written documents. The arguments of the parties and the reasoning of the trial court were similar on the motions directed at the subsequent complaints filed by plaintiffs.
The trial court granted plaintiffs leave to amend the complaint. When plaintiffs failed to do so, defendants moved for judgment in their favor. Judgment was entered accordingly and plaintiffs appealed.
Standard of Review
“For purposes of a demurrer, we accept as true both facts alleged in the text of the complaint and facts appearing in exhibits attached to it. If the facts appearing in the attached exhibit contradict those expressly pleaded, those in the exhibit are given precedence. [Citation.]” (Mead v. Sanwa Bank California (1998) 61 Cal.App.4th 561, 567-568 [71 Cal. Rptr. 2d 625].) We review a ruling sustaining a demurrer de novo, independently determining whether the complaint states a cause of action as a matter of law. (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115 [55 Cal. Rptr. 2d 276].)
Defendants assert that many of plaintiffs’ allegations may not be considered because they contradict the terms of the Agreement and the CC&R’s.17 These documents were attached to each of the complaints filed by plaintiffs. Three paragraphs from these documents form the basis for defendants’ arguments.
17 The Agreement and the CC&R’s were both attached to each of plaintiffs’ complaints and therefore were properly considered when the trial court ruled on the demurrer. (City of Port Hueneme v. Oxnard Harbor Dist. (2007) 146 Cal.App.4th 511, 514 [52 Cal. Rptr. 3d 878].)
Defendants first point to paragraph 9(a) of the Agreement, which states in relevant part: “Buyer acknowledges that Seller may, in its sole discretion, change its pricing, product, development plan, incentive program and marketing methods. Without limitation, Seller may elect to sell residences or lots in this phase of the project, or in future phases, under terms and conditions which are more favorable than those set forth in this Agreement … . Seller may elect not to build residences on each lot of this phase or future phases of the project, or may elect to build a different type or size of residence on a smaller or larger lot … . Any of the foregoing events may adversely affect the value of the Property. Nothing herein shall be interpreted as an express or implied warranty or representation that the Seller will refrain from any pricing program, product design program, development strategy or marketing plan which in any manner adversely affects the value of the Property, and Buyer acknowledges that no sales representative has made any contrary representation, or has made any representation regarding any potential appreciation of the Property, any resale value of the Property, or the effect of any component, option or amenity of the Property upon the value of the Property.”
The next paragraph of the Agreement deemed relevant by defendants is paragraph 18(d), which states: “Merger. This is the only agreement between the parties and all prior and contemporaneous negotiations are merged herein and superseded hereby. The only representations, agreements and warranties made by Seller are those set forth in writing in this Agreement. No representations, agreements or warranties, express or implied, not expressly set forth in writing in this Agreement are made by Seller to or with Buyer.”
Finally, defendants point out paragraph 6.1 of the CC&R’s, which states: “Amendment Procedure. This Declaration may be amended or revoked in any respect with the vote or written consent of the holders of not less than 51% of the voting power of the Owners (including Declarant) and the vote or written consent of Declarant until: (i) Declarant no longer owns any Lots in the Development or any lots that may be annexed into the development; or (ii) the tenth anniversary of the recordation of this Declaration, whichever occurs first. For purposes herein, each Lot is entitled to one vote. If there are two or more Owners of any one Lot, the vote cast by any one Owner shall be conclusively presumed to be the vote cast for all the Owners of that Lot. If more than one vote is cast for any one Lot on any single issue, the vote of that Lot shall not be counted for that issue. Notwithstanding anything herein to the contrary, during the period commencing with the recordation of the Declaration and terminating on the 15th anniversary date thereof, the provisions of Article 7 may not be amended or rescinded without the prior written consent of the Declarant regardless of whether Declarant owns any Lots in the Development.”
These paragraphs informed plaintiffs that (1) defendants had the option to change the marketing strategy for the Development, including the construction of tract homes; (2) defendants could construct homes of varying sizes in the Development; (3) the sales price for lots sold in the future may be different than that paid by plaintiffs and therefore may adversely affect the value of plaintiffs’ lots; (4) defendants specifically disavowed any warranty or promise to limit the type or size of dwelling to be built within the Development; and (5) defendants retained the right to amend the CC&R’s at any time, including the right to reduce the minimum size of any residence within the Development, so long as they owned more than 51 percent of the lots subject to the CC&R’s.
In addition, plaintiffs agreed in the Agreement that (1) no representative for defendants had made any representation different from the above; (2) no representative of defendants had made any representation about possible future appreciation of the lots within the Development; and (3) the Agreement was the only agreement between the parties pursuant to the merger clause.
In addition to the portions of the documents on which defendants rely, we also find relevant paragraph 5.10 of the CC&R’s. Paragraph 5.10 states: “Declarant Exemption. Declarant, or its successor or assign, shall not be subject to the approval requirements of this Article 5 in connection with the construction or alteration of any Improvement on the Development or the installation of any landscaping, provided that this exemption shall expire 90 days after Declarant has transferred title to the last Lot in the Development.”
Article 5 of the CC&R’s provides for establishment of an architectural committee and requirements for committee approval before constructing on the lot. An “improvement” is defined in paragraph 1.5 of the CC&R’s as including the residence built on any lot. Therefore, defendants are specifically exempt from compliance with the provisions of article 5 when constructing any residence, thus rendering any claim by plaintiffs that defendants failed to do so irrelevant.
Parol Evidence Rule
Defendants’ motions to the trial court, and their arguments in this court, largely relied on the assertion that the parol evidence rule, when applied to the above paragraphs, precluded admission of many of the allegations made by plaintiffs.
The parol evidence rule, codified in Code of Civil Procedure section 185618 and Civil Code section 1625,19 generally prohibits the introduction of either oral or written extrinsic evidence to vary, alter, or add to the terms of an integrated written agreement, although extrinsic evidence introduced to explain the meaning of a written contract is admissible if the interpretation of the contract urged is consistent with the document. (Casa Herrera, Inc. v. Beydoun (2004) 32 Cal.4th 336, 343 [9 Cal. Rptr. 3d 97, 83 P.3d 497] (Casa Herrera).) The rule is one of substantive law based on the concept that a written integrated contract establishes the terms of the agreement between the parties and evidence that contradicts the written terms is irrelevant. (Id. at pp. 343-344.) ” ‘[A]s a matter of substantive law [evidence that contradicts an integrated written agreement] cannot serve to create or alter the obligations under the instrument.’ [Citation.]” (Id. at p. 344.) In essence, the written agreement supersedes any prior or contemporaneous negotiations, either oral or written. (Alling v. Universal Manufacturing Corp. (1992) 5 Cal.App.4th 1412, 1434 [7 Cal. Rptr. 2d 718] (Alling).)
18 Code of Civil Procedure section 1856 states: “(a) Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement. [¶] (b) The terms set forth in a writing described in subdivision (a) may be explained or supplemented by evidence of consistent additional terms unless the writing is intended also as a complete and exclusive statement of the terms of the agreement. [¶] (c) The terms set forth in a writing described in subdivision (a) may be explained or supplemented by course of dealing or usage of trade or by course of performance. [¶] (d) The court shall determine whether the writing is intended by the parties as a final expression of their agreement with respect to such terms as are included therein and whether the writing is intended also as a complete and exclusive statement of the terms of the agreement. [¶] (e) Where a mistake or imperfection of the writing is put in issue by the pleadings, this section does not exclude evidence relevant to that issue. [¶] (f) Where the validity of the agreement is the fact in dispute, this section does not exclude evidence relevant to that issue. [¶] (g) This section does not exclude other evidence of the circumstances under which the agreement was made or to which it relates, as defined in [Code of Civil Procedure] Section 1860, or to explain an extrinsic ambiguity or otherwise interpret the terms of the agreement, or to establish illegality or fraud. [¶] (h) As used in this section, the term agreement includes deeds and wills, as well as contracts between parties.”
19 Civil Code section 1625 states: “The execution of a contract in writing, whether the law requires it to be written or not, supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument.”
An integrated agreement is a writing that constitutes the final expression of one or more terms of an agreement. (Alling, supra, 5 Cal.App.4th at p. 1434.) Whether a writing is an “integration” is a question of law to be decided by the trial court. (Ibid.) The trial court concluded, and we agree, that the Agreement was an integrated contract, specifically so stating in the above quoted merger clause. Plaintiffs do not contend otherwise.
With the above principles in mind, we now consider the demurrers to plaintiffs’ causes of action.
Plaintiffs’ Cause of Action for Unfair Competition
Plaintiffs assert that they have pled sufficient facts to state a cause of action for unfair competition, in violation of the UCL. This statute makes actionable any unlawful, unfair, or fraudulent business act or practice, or any unfair, deceptive, untrue, or misleading advertising. The statute specifically makes unlawful any act prohibited by Business and Professions Code section 17500 et seq., the chapter on false advertising. As relevant here, section 17500 makes it unlawful to advertise real property for sale in a manner that is untrue and misleading. Business and Professions Code section 17530 makes it unlawful to advertise for sale real property in a manner that is untrue and intended to mislead. Similarly, the Subdivided Lands Act makes it unlawful to advertise real property subject to its provisions in a manner that is false or misleading.
Plaintiffs cite these statutes and then make a blanket claim that the complaint contained sufficient allegations to overcome defendants’ demurrer. We understand plaintiffs to be contending that their allegations that defendants’ representation to the public that the Development was to consist exclusively of custom homes of at least 2,700 square feet and three-car garages was indeed an advertisement and was knowingly false when made.
Defendants rely on the parol evidence rule to assert that each of plaintiffs’ factual allegations is contradicted by the terms of the written agreement and thus not admissible. We reject defendants’ argument because it is an attempt to misuse the parol evidence rule. As explained ante, parol evidence is not admissible to vary, alter, or add to the terms of a written agreement. This cause of action does not attempt to vary, alter, or add to the terms of the written agreement between the parties. Instead, plaintiffs argue defendants engaged in a campaign of false advertising when marketing the lots in the Development.
The case on which defendants and the trial court relied demonstrates our point. In Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258 [48 P.2d 659] (Pendergrass), the plaintiff sued the defendants to recover money lent to the defendants and evidenced by a note. The terms contained in the note stated that the sum lent was payable on demand. The plaintiff introduced the note into evidence and presented testimony that the note had not been paid. The defendants attempted to introduce evidence that the plaintiff agreed the defendants would not be required to make any payments on the note, either principal or interest, until after the defendants had sold their crop for that year.
The Supreme Court observed that the defendants’ argument was, in essence, that the plaintiff agreed not to require any payments for one year, a promise “in direct contravention of the unconditional promise contained in the note to pay the money on demand.” (Pendergrass, supra, 4 Cal.2d at p. 263.) The Supreme Court held that such evidence was barred by the parol evidence rule. “Our conception of the rule which permits parol evidence of fraud to establish the invalidity of the instrument is that it must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.” (Ibid.)
In Pendergrass the parol evidence rule precluded evidence that the terms of the agreement were other than those terms contained in the writing (was the note payable on demand or did the parties agree that no payments would be due for one year?).
Here, plaintiffs are not arguing that the terms of the Agreement and the CC&R’s prohibited defendants from building tract homes in the Development. Indeed, this cause of action is not an action on the contract. Instead, plaintiffs are alleging that defendants advertised the Development as one where only custom homes would be built, thus justifying selling the lots at a premium price. According to plaintiffs’ theory, had defendants advertised the Development as a mixed custom/tract home development, the lots purchased by plaintiffs would have been worth considerably less than the price they paid. Thus, Pendergrass is distinguishable (allegations do not seek to vary or change the terms of the written agreement) and does not support defendants’ argument.20
20 In the section of their brief titled “The Parol Evidence Rule Fully Applies to Claims Under the UCL,” defendants cite only one case, Wang v. Massey Chevrolet (2002) 97 Cal.App.4th 856 [118 Cal. Rptr. 2d 770] (Wang). Defendants argue that Wang is distinguishable from this case because it addresses causes of action related to the Consumers Legal Remedies Act (Civ. Code, § 1770 et seq.). We agree that Wang does not stand for the proposition that the parol evidence rule is inapplicable to actions under the UCL. However, neither does Wang stand for the proposition that the parol evidence rule is applicable to actions under the UCL.
Instead, the issue in this cause of action is whether plaintiffs reasonably relied on this allegedly false advertising. This issue recently was addressed in In re Tobacco II Cases (2009) 46 Cal.4th 298 [93 Cal. Rptr. 3d 559, 207 P.3d 20] (Tobacco II). The case was presented to the trial court as a class action lawsuit against various tobacco companies alleging the companies engaged in a systematic and deceptive advertising campaign that resulted in the members of the class becoming addicted to cigarettes and suffering injuries as a result. The trial court originally granted class certification but later granted the defendants’ motion to decertify the class. One of the issues addressed by the Supreme Court was the causation element of a UCL cause of action based on false or misleading advertising. (46 Cal. 4th at p. 306.) The issue presented itself because the 2004 amendment to the UCL added a requirement in private enforcement actions that the plaintiff must have “suffered injury in fact and has lost money or property as a result of the unfair competition.” (Bus. & Prof. Code, § 17204, italics added, as amended by Prop. 64, § 3.)
The Supreme Court first noted the UCL identifies three forms of unfair competition: (1) practices that are unlawful; (2) practices that are unfair; and (3) practices that are fraudulent. (Tobacco II, supra, 46 Cal.4th at p. 311.) The allegation that the tobacco industry engaged in deceptive advertisements and misrepresentations about its products was an allegation of a fraudulent practice. (Id. at pp. 311-312.) ” ‘[T]o state a claim under either the UCL or the false advertising law, based on false advertising or promotional practices, “it is necessary only to show that ‘members of the public are likely to be deceived.’ ” ‘ [Citation.]” (Id. at p. 312.) “The fraudulent business practice prong of the UCL has been understood to be distinct from common law fraud. ‘A [common law] fraudulent deception must be actually false, known to be false by the perpetrator and reasonably relied upon by a victim who incurs damages. None of these elements are required to state a claim for injunctive relief’ under the UCL. [Citations.] This distinction reflects the UCL’s focus on the defendant’s conduct, rather than the plaintiff’s damages, in service of the statute’s larger purpose of protecting the general public against unscrupulous business practices. [Citation.]” (Ibid.)
The Supreme Court then turned its attention to the “as a result of” language of the 2004 amendment and concluded that it imposed “an actual reliance requirement on plaintiffs prosecuting a private enforcement action under the UCL’s fraud prong.” (Tobacco II, supra, 46 Cal.4th at p. 326.)
“This conclusion, however, is the beginning, not the end, of the analysis of what a plaintiff must plead and prove under the fraud prong of the UCL. Reliance is ‘an essential element of … fraud … . [¶] … [R]eliance is proved by showing that the defendant’s misrepresentation or nondisclosure was “an immediate cause” of the plaintiff’s injury-producing conduct. [Citation.] A plaintiff may establish that the defendant’s misrepresentation is an “immediate cause” of the plaintiff’s conduct by showing that in its absence the plaintiff “in all reasonable probability” would not have engaged in the injury-producing conduct.’ [Citation.]
“While a plaintiff must show that the misrepresentation was an immediate cause of the injury-producing conduct, the plaintiff need not demonstrate it was the only cause. ‘ “It is not … necessary that [the plaintiff's] reliance upon the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor in influencing his conduct. … It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision.” [Citation.] [¶] Moreover, a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material. [Citations.] A misrepresentation is judged to be “material” if “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question” [citations], and as such materiality is generally a question of fact unless the “fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.” [Citation.]‘ [Citation.]” (Tobacco II, supra, 46 Cal.4th at pp. 326-327.)
Plaintiffs allege that when they decided to purchase their lots, they relied on the various advertisements as well as the statements of Pottorff that the Development would remain a custom home development. Defendants assert that plaintiffs’ reliance was unreasonable because the written contracts specifically gave defendants the ability to change the nature of the Development.
This case comes before us after the trial court sustained defendants’ demurrer to this cause of action. In sustaining defendants’ demurrer, the trial court must have concluded as a matter of law that it was reasonably probable plaintiffs would have bought the lots even if defendants had not advertised the Development as a custom home development. Moreover, to overcome the presumption or inference of reliance, the trial court must have concluded that the advertisements and Pottorff’s statements were not material, i.e., they were ” ‘ “so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by [them].” ‘ ” (Tobacco II, supra, 46 Cal.4th at p. 327.)
We conclude plaintiffs have pled the element of reliance sufficiently. We cannot conclude as a matter of law that plaintiffs would have bought their lots had they known that defendants intended to build tract homes in the Development or that the advertisements were not material. A reasonable jury might conclude that the advertisements and statements were material and that plaintiffs’ reliance on them was reasonable. The jury rationally could conclude that defendants’ retention of the right to alter the nature of the Development did not necessarily mean they would do so.
Accordingly, the trial court erred in granting defendants’ demurrer to the UCL cause of action based on false or misleading advertising. Because plaintiffs have pled sufficient elements to maintain a cause of action under the UCL, we need not consider the viability of other theories under the UCL.
Plaintiffs’ Cause of Action for False Advertising
Plaintiffs argue that they have pled sufficient facts to overcome defendants’ demurrer to plaintiffs’ cause of action for false advertising, in violation of Business and Professions Code section 17500. The Supreme Court has noted that any violation of this section also necessarily must violate the UCL. (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 950 [119 Cal. Rptr. 2d 296, 45 P.3d 243] (Kasky).) Therefore, since plaintiffs have alleged sufficient facts to overcome defendants’ demurrer to the cause of action for violation of the UCL based on false or misleading advertising, they necessarily have pled sufficient facts to defeat defendants’ demurrer to the cause of action for violation of Business and Professions Code section 17500.
Kasky also supports our conclusion that the trial court erred in granting defendants’ demurrers to the UCL and false advertising causes of action. In Kasky, the Supreme Court emphasized that both causes of action need only plead advertising that is false or misleading. The Supreme Court noted that both laws prohibit “not only advertising which is false, but also advertising which[,] although true, is either actually misleading or which has a capacity, likelihood or tendency to deceive or confuse the public.” (Leoni v. State Bar (1985) 39 Cal.3d 609, 626 [217 Cal. Rptr. 423, 704 P.2d 183], cited with approval in Kasky, supra, 27 Cal.4th at p. 951.) “Thus, to state a claim under either the UCL or the false advertising law, based on false advertising or promotional practices, ‘it is necessary only to show that “members of the public are likely to be deceived.” ‘ [Citations.]” (Kasky, at p. 951.) Thus, the terms of the contract are irrelevant to the cause of action. Instead, the focus is on whether the advertising was misleading or had a tendency to deceive or confuse the public.
Plaintiffs’ Cause of Action for Fraud
Plaintiffs argue they also have pled sufficient facts to overcome defendants’ demurrer to their cause of action for fraud based on a willful misrepresentation. They contend that defendants’ advertising campaign intentionally was misleading and induced plaintiffs to buy lots in the Development. They further allege that defendants misrepresented what was meant by paragraph 9 of the Agreement.
Once again, defendants assert that the parol evidence rule precludes consideration of any statements that are inconsistent with the contract terms. They also argue that plaintiffs’ reliance on the oral statements was not justifiable as a matter of law because the statements were contradicted by the written documents. In response, plaintiffs contend that the oral statements are admissible under the fraud exception to the parol evidence rule. (Code Civ. Proc., § 1856, subd. (g).)
The scope of the fraud exception to the parol evidence rule is the crux of this issue. Our analysis must begin with Pendergrass, discussed ante. In summary, the Supreme Court held that the parol evidence rule precluded evidence that the bank promised it would not enforce a note for one year when the note stated it was payable on demand, i.e., at any time.
The Pendergrass rule has been criticized by some scholars because it prevents some actions based on a theory of promissory fraud. It is more properly characterized, however, as a rational policy choice that has never been reconsidered by the Supreme Court. (Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465, 485 [261 Cal. Rptr. 735] (Price).) This rule is consistent with the basis for the parol evidence rule: an integrated contract establishes the terms of the agreement between the parties, and evidence suggesting the terms are other than those stated in the agreement is irrelevant. (Casa Herrera, supra, 32 Cal.4th at pp. 343-344.) Accordingly, the tort of promissory fraud based on an oral promise is limited by the parol evidence rule when the oral promise directly contradicts the terms of the contract to which the parties agreed. (Price, at p. 485.)
Pendergrass, therefore, reflects a choice by the Supreme Court when faced with a conflict between contract principles and tort principles. The Supreme Court concluded that in this situation contract principles should be paramount to avoid injecting tort principles into commercial contexts, where such principles do not readily fit. By doing so, the Supreme Court limited litigation over the terms of contracts under the “guise of a promise made without intention to perform” (Price, supra, 213 Cal.App.3d at p. 485) based on proof that the contract does not contain terms consistent with the alleged oral promises. “While the decision was by no means logically inevitable, it represents a rational policy choice that should be reconsidered only by the Supreme Court itself.” (Id. at p. 486.)
The Pendergrass rule has been the subject of numerous opinions, some of which attempt to avoid its effects. In Bank of America v. Lamb Finance Co. (1960) 179 Cal.App.2d 498 [3 Cal. Rptr. 877] (Lamb Finance), Bank of America filed an action to recover on a note executed by Lamb Finance and guaranteed by the president of Lamb Finance, Leah Lamb Poyet. The guaranty stated that Poyet promised to pay the note signed by Lamb Finance and agreed that Bank of America could proceed against her in the event of default. Poyet attempted to testify that a bank employee told her when she executed the note that she was not personally liable for the debt since it was a corporate note. The appellate court found the testimony inadmissible. “It is obvious from the face of the record that [this] portion of defendant Poyet’s testimony directly contradicts the written guarantee signed by her; and that such testimony, falling squarely within the parol evidence rule, is clearly inadmissible to vary the terms of the instrument sued upon.” (Id. at p. 501.)
In Price, the issue was presented in the context of a loan for a mobilehome. Price claimed he had arranged for a loan from another institution at a specific interest rate. Wells Fargo then told Price it would loan him the money to buy the mobilehome at a lower interest rate. By the time the application process was completed, the interest rate charged by Wells Fargo exceeded the original interest rate offered by the other institution. The other institution, however, no longer offered the lower interest rate, so Price entered into an integrated contract to borrow the money from Wells Fargo at the higher interest rate. Price argued in his complaint that Wells Fargo committed fraud by promising him a lower interest rate than the other institution, with no intent of doing so. The appellate court concluded that Price’s allegation was barred by the parol evidence rule because it reflected a contemporaneous oral agreement that contradicted the terms of the contact. (Price, supra, 213 Cal.App.3d at p. 486.)
In Continental Airlines, Inc. v. McDonnell Douglas Corp. (1989) 216 Cal.App.3d 388 [264 Cal. Rptr. 779] (Continental), Continental purchased several commercial passenger aircraft from McDonnell. Prior to entering into the contract for the purchase, McDonnell presented Continental with numerous sales brochures and participated in numerous meetings regarding the proposed purchase. The brochures represented that the fuel tanks in the wings of the aircraft ” ‘will not rupture under crash load conditions.’ ” (Id. at p. 400.) Similar representations were made during meetings held before the contract was executed. The contract, however, which was an integrated document, stated that the fuel tanks were ” ‘not likely’ to rupture” in a specific type of crash. (Ibid.) Continental sued when one of the wing fuel tanks ruptured during an aborted takeoff.
McDonnell moved in limine to preclude Continental from introducing the statement in the sales brochure that represented that the fuel tanks would not rupture. Continental argued the statement was admissible under the fraud exception to the parol evidence rule. The appellate court, citing Pendergrass, held the statements were not admissible because they contradicted a term of the integrated sales contract. (Continental, supra, 216 Cal.App.3d at p. 419.)
The appellate court, however, concluded other similar statements were admissible. The sales brochures also stated that the wing and landing gear had already been designed so that in the event of a crash the landing gear would fail first to avoid the possibility that the wing fuel tank would rupture. Continental established at trial that these representations were false; no such design had been developed. These representations were admissible as factual representations made by McDonnell that it had already completed design of the wing/landing gear assembly as described. (Continental, supra, 216 Cal.App.3d at p. 423.)
Banco Do Brasil, S.A. v. Latian, Inc. (1991) 234 Cal.App.3d 973 [285 Cal. Rptr. 870] (Banco Do Brasil) involves a complicated fact pattern. In a very simplified form, Latian was formed to acquire the assets of another business. These assets were security for loans made by Banco Do Brasil to the original owners of the assets. To accomplish the acquisition, Latian agreed to assume liability for a portion of the amount due to Banco Do Brasil. When Latian had difficulty making the payments required by the loan agreements, the guaranty that formed the basis of the lawsuit was executed by Latian. When required payments were not made, Banco Do Brasil sued on the guaranty. Latian filed a cross-complaint alleging that Banco Do Brasil had promised to provide them with a new $2 million line of credit, but failed to do so. This promise was alleged to be an integral part of the agreement to guarantee the original loan. Latian alleged causes of actions for fraud and breach of contract.
The appellate court observed that Latian’s defense to Banco Do Brasil’s complaint, and the basis of the cross-complaint, was the assertion that Banco Do Brasil orally had promised to extend to Latian a $2 million line of credit. (Banco Do Brasil, supra, 234 Cal.App.3d at p. 999.) Indeed, Latian repeatedly testified at trial and argued to the appellate court that the line of credit was critical to Latian’s decision to purchase the assets. Latian asserted that without the oral promise to extend the line of credit, Latian would not have purchased the assets. Banco Do Brasil argued the oral promise should have been excluded under the parol evidence rule. The trial court concluded it was an independent agreement, thus avoiding the parol evidence rule.
The appellate court concluded that because Latian took the position that the line of credit was an essential part of the guaranty agreement, and the contract stated that the obligation to repay the debt was unconditional, the alleged oral agreement contradicted the contract and was inadmissible under the parol evidence rule. (Banco Do Brasil, supra, 234 Cal.App.3d at pp. 1004-1005.)
The appellate court also rejected Latian’s argument that the parol evidence rule was inapplicable because the evidence fell under the fraud exception to the rule. (Banco Do Brasil, supra, 234 Cal.App.3d at pp. 1009-1010.) Relying on Pendergrass and its progeny, the appellate court concluded that the alleged oral promise to extend a line of credit to Latian constituted promissory fraud and thus was inadmissible. (Banco Do Brasil, at pp. 1009-1010.)
Alling, supra, 5 Cal.App.4th 1412 is another case with complicated facts. Alling21 owned a company attempting to develop and market an electronic ballast to be used with florescent lights. Alling had the right to develop and market a specific ballast design. He entered into several agreements with different parties to do so, but each venture failed, generally because producing the complicated design proved difficult. Alling decided the difficulties in production were the result of insufficient capital investment. He developed a business plan and began looking for investors, eventually entering into negotiations with Universal. The business plan was overly optimistic. Nonetheless, Alling repeatedly attempted to incorporate the terms of the business plan into the purchase contract, including a requirement that Universal invest large amounts of capital into the product. Universal refused to include any reference to the business plan or any promise about the amount of capital it would invest in producing the ballast. The final contract included a commitment not to terminate production for a period of two years but gave Universal the option to do so after the initial two-year period.
21 We refer to the parties simply as Alling and Universal to ease the reader’s task and because the issue of interest to us is not affected by the numerous additional parties, including wholly owned corporations, subsidiaries, and successor corporations.
Initially, Universal’s attempts to produce the ballast based on the design advanced by Alling were unsuccessful. Nonetheless, after five years Universal finally solved the design and production issues and began producing and marketing the ballasts. Alling quit before the issues were resolved, asserting that all the production problems were directly related to inadequate investment by Universal.
Alling then sued Universal on various grounds. Prior to trial, Universal moved to prohibit any testimony suggesting that Alling’s business plan was part of the purchase contract. Alling argued that Universal had promised to implement the business plan, and its failure to do so was the basis of the action. The trial court eventually allowed the business plan into evidence and judgment was entered in favor of Alling.
Universal argued on appeal that admission of the business plan violated the parol evidence rule. The appellate court found the purchase agreement was an integrated contract and that the business plan was inconsistent with the contract. Accordingly, the appellate court concluded the trial court erred in permitting the business plan to be introduced into evidence. (Alling, supra, 5 Cal.App.4th at pp. 1435-1436.) The appellate court also rejected Alling’s argument that the business plan was admissible under the fraud exception to the parol evidence rule.
” ‘Promissory fraud’ is a promise made without any intention of performing it. [Citations.] The fraud exception to the parol evidence rule does not apply to such promissory fraud if the evidence in question is offered to show a promise which contradicts an integrated written agreement. Unless the false promise is either independent of or consistent with the written instrument, evidence thereof is inadmissible. [Citations.] [¶] … [¶]
“Here, plaintiffs offered the business plan for the express purpose of showing a fraudulent oral promise which was directly at variance with the terms of the Purchase Agreement. The alleged unequivocal oral promise to fund the business plan, elicited in testimony and referred to repeatedly by plaintiffs’ trial attorney both in opening and in closing argument, varied and contradicted the specific language in paragraph 5 of the Purchase Agreement giving Universal ‘the sole right to determine any amounts of capital resources which it may invest in [Alling's company] … .’ The evidence of that alleged promissory fraud was therefore improperly admitted. [Citation.]” (Alling, supra, 5 Cal.App.4th at pp. 1436-1437.)
Edwards v. Centex Real Estate Corp. (1997) 53 Cal.App.4th 15 [61 Cal. Rptr. 2d 518] (Edwards) addressed the application of the parol evidence rule to a release and settlement agreement. The plaintiffs had purchased homes from the defendants that had been built on salt marshes. When the defendants first received complaints from homeowners (not the plaintiffs) about cracks in the foundations of their homes, the defendants hired an engineering firm and made extensive modifications to the foundation pursuant to the firm’s recommendations.
Approximately one year later, the plaintiffs discovered cracks in the foundations of their homes and they contacted the defendants. The defendants again retained an engineering firm to investigate, but the investigation was neither as thorough nor as extensive as in the previous repair. The engineer recommended a different, less extensive and cheaper repair to the plaintiffs’ homes. The plaintiffs received the engineer’s report, reached an agreement with the defendants, and permitted the defendants to complete repairs consistent with the report. The plaintiffs also signed a settlement agreement releasing the defendants from any and all liability ” ‘in any way connected with the design and construction of the concrete slab foundation, adjoining soil areas … and the investigation of defects or damages claimed to such improvements.’ ” (Edwards, supra, 53 Cal.App.4th at p. 24, fn. 4.)
Approximately five years later, the plaintiffs discovered new cracks in the foundations of their homes and learned the problems related to a design defect not remedied by the initial repairs. The plaintiffs sued, alleging various causes of action including fraud, negligent misrepresentation, and breach of contract. The trial court concluded that the parol evidence rule precluded introduction of any evidence about communication between the defendants and the plaintiffs prior to entering into the settlement agreement.
The appellate court held that the trial court erred in excluding such evidence. The defendants argued that the plaintiffs were attempting to change the terms of the settlement agreement by alleging the defendants made false promises that the proposed repairs would remedy all possible future foundation problems. The appellate court disagreed. “[Defendants'] argument misses the mark. It assumes [plaintiffs'] rescission claim is for promissory fraud based on alleged independent false promises by [defendants] contradicting the terms of the release. Such a claim would be barred by the parol evidence rule. [Citations.] Here, however, [plaintiffs] argue for rescission of the releases based not on promissory fraud, but on fraud in the inducement or procurement through alleged misrepresentations of fact. [Citation.] Evidence of such fraud is admissible in an action for rescission because it does not go to contradict the terms of the parties’ integrated agreement, but to show instead that the purported instrument has no legal effect. [Citations.] Thus, the trial court erred in granting [defendants'] motions in limine on the ground of the parol evidence rule.” (Edwards, supra, 53 Cal.App.4th at p. 42.)
Wang, supra, 97 Cal.App.4th 856 involved Wang’s acquisition of a vehicle from Massey Chevrolet. Wang asserted that he repeatedly told Massey’s representatives that he wanted to make a large downpayment, finance the remaining balance for a few months, and then pay the balance of the purchase price. Massey convinced Wang to sign a lease that Massey asserted would allow Wang to accomplish his goal of paying off the vehicle in two or three months. A few days later Massey called Wang and informed him that Massey had found a new loan company to fund the lease with a lower monthly payment. Massey represented to Wang that he could pay off the vehicle at any time with no penalty. When Wang attempted to pay off the vehicle a few months later, he learned that the lease contained a substantial penalty for early payment. Wang sued Massey for fraud, violation of the Consumers Legal Remedies Act, and violation of the UCL. The trial court granted Massey’s motion for summary judgment based primarily on its conclusion that the oral statements made by Massey’s representatives were barred by the parol evidence rule.
The appellate court concluded that the parol evidence rule was inapplicable to statutory claims under the Consumers Legal Remedies Act because the language of the statute contemplated actions involving contemporaneous oral promises, and to prohibit such promises through the parol evidence rule would defeat the Legislature’s intent in enacting the statutory scheme. (Wang, supra, 97 Cal.App.4th at pp. 867-870.) Similarly, the appellate court concluded that the parol evidence rule did not apply to the UCL cause of action because it incorporated the allegations of violation of the Consumers Legal Remedies Act.
The appellate court found, however, that summary adjudication of the fraud cause of action was proper because the parol evidence rule precluded evidence of the statements made by Massey’s employees that Wang could terminate the lease early without penalty because these statements directly contradicted the lease. (Wang, supra, 97 Cal.App.4th at p. 876.) The court relied on Alling and Pendergrass to support its conclusion. “The fraud exception to the parol evidence rule [citation], ‘does not apply to such promissory fraud if the evidence in question is offered to show a promise which contradicts an integrated written agreement. Unless the false promise is either independent of or consistent with the written instrument, evidence thereof is inadmissible.’ ([Alling, supra,] 5 Cal.App.4th [at p.] 1436 … .) Under the Pendergrass rule, the fraud exception to the parol evidence rule does not apply where parol evidence is offered to show a fraudulent promise ‘ “directly at variance with the promise of the writing.” ‘ ([Continental], supra, 216 Cal.App.3d at p. 419, italics omitted.)” (Wang, at p. 873.)
Pacific State Bank v. Greene (2003) 110 Cal.App.4th 375 [1 Cal. Rptr. 3d 739] (Greene) created an exception to the rule stated in Pendergrass. Greene’s husband entered into several loan agreements with Pacific State Bank using various items as collateral. One item of collateral was a trailer that Greene agreed to purchase from her husband. Greene agreed to assume the loan secured by the trailer as the purchase price. Pacific State Bank agreed to this arrangement and prepared two guaranty agreements for Greene to sign (one for Greene personally and one for her business). Each agreement listed the amount of the loan on the trailer as the maximum liability to which Greene was exposed. Each guaranty, however, defined the indebtedness to which the guaranty applied as all of the husband’s loans.
Greene made all payments on the trailer loan, but her husband defaulted on the other loans. Pacific State Bank sued Greene and her husband for the amounts due under the loans. Greene opposed Pacific State Bank’s motion for summary judgment by executing a declaration that claimed Pacific State Bank’s employees had told her that the guaranty she signed related only to the loan secured by the trailer. Greene asserted she told Pacific State Bank that she would not guaranty any of her husband’s other loans with the bank, and Pacific State Bank’s employee assured her that she was not doing so. Pacific State Bank objected to this portion of Greene’s declaration, arguing that the evidence was inadmissible because it violated the parol evidence rule. The trial court agreed, sustained the objection, and granted the motion for summary judgment.
The appellate court agreed that Greene’s statements contradicted the terms of the guaranty agreement and thus were not admissible to interpret the language of the guaranties. (Greene, supra, 110 Cal.App.4th at pp. 385-387.) The appellate court, however, held Greene’s statements were admissible under the fraud exception to the parol evidence rule. It interpreted Greene’s argument as asserting that she was induced to enter the guaranty agreements due to the fraud perpetrated by Pacific State Bank’s employees. (Id. at p. 389.) It recognized Pendergrass‘s limitation on the admission of parol evidence of promises that contradict the terms of an integrated contract (promissory fraud), but concluded this limitation was inapplicable because Greene was alleging that there was a misrepresentation of the terms of the document, i.e., a misrepresentation of fact over the contents of the document at the time of its execution. (Greene, at p. 391.) The appellate court found significant that in many respects the guaranty agreements appeared to be consistent with Greene’s contention that she guaranteed only the trailer loan, and the expansion of liability was found in the “fine print of a definition.” (Id. at p. 393.)
The viability of the reasoning of Greene is uncertain. On April 20, 2011, the Supreme Court accepted for review Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2011) 191 Cal.App.4th 611 [119 Cal. Rptr. 3d 380], review granted April 20, 2011, S190581, an opinion from this court. Riverisland relied on Greene in holding that the parol evidence rule did not bar evidence that a party misrepresented the contents of a written agreement. The issue to be decided is whether “the fraud exception to the parol evidence rule permit[s] evidence of a contemporaneous factual misrepresentation as to the terms contained in a written agreement … .” (Admin. Office of Courts, Supreme Ct. Summary of Cases Accepted During the Week of April 18, 2011.) Thus, Greene may be overruled in the future.
We have reviewed these cases in an attempt to establish some parameters for the parol evidence rule. Appellate courts have consistently excluded evidence that the party seeking to enforce a contract made promises inconsistent with the contract. (Pendergrass, supra, 4 Cal.2d 258 [promise not to demand payment for one year]; Lamb Finance, supra 179 Cal.App.2d 498 [promise that defendant would not have any personal liability on the note]; Continental, supra, 216 Cal.App.3d 388 [promise that fuel tank would not rupture in a crash]; Banco Do Brasil, supra, 234 Cal.App.3d 973 [promise to extend a line of credit as inducement to sign a personal guaranty]; Alling, supra, 5 Cal.App.4th 1412 [promise to comply with terms of business plan specifically excluded from contract]; Wang, supra, 97 Cal.App.4th 856 [representation contract could be terminated early without penalty].) The appellate courts also have concluded, however, that the fraud exception to the parol evidence rule permitted testimony that (1) the defendants falsely represented that an aircraft had been designed to react in a specific manner in the event of a crash (Continental), (2) the defendants made misrepresentations of fact that induced the plaintiffs to enter into the contract (Edwards), and (3) the defendants misrepresented the contents of a contract (Greene).
Here, we do not agree with plaintiffs that their claims fall within the fraud exception to the parol evidence rule. Plaintiffs’ argument is, in essence, that defendants promised them that the Development would contain only custom homes, even though the Agreement specifically reserved to defendants the right to build other types of houses, including tract homes. In other words, plaintiffs allege that defendants promised they would not utilize a right included in the contract. This promise was no different than the promises allegedly made in Pendergrass, Lamb Finance, Continental, Banco Do Brasil, Alling, and Wang and thus is not admissible.
Although it is unclear whether plaintiffs are asserting that defendants misrepresented the terms of the contract, as in Greene, such an argument would not change our conclusion, even assuming the continued viability of Greene. In Greene the defendant allegedly told Greene that her liability would extend only to a specific loan and not other loans made to her husband. The guaranty she signed made her liable on all of the loans made to her husband. Thus, the bank’s employee represented that the contract did not contain a term that was included in the document.
We are not certain of the extent of the Greene exception to Pendergrass. We are confident, however, that if the exception has any continued validity, it does not encompass the facts in this case. Unlike Greene, the language about which plaintiffs now complain was not hidden in the fine print, but was highlighted for them specifically as evidenced by their initials being placed next to the paragraph. Instead, plaintiffs assert defendants lied to them about what the paragraph meant.
Accordingly, the trial court did not err in granting defendants’ demurrer to this cause of action.
III. Causes of Action for Breach of Fiduciary Duty and Constructive Fraud
In addition to filing numerous demurrers and motions to strike, defendants also made a motion for summary adjudication directed at the fifth (breach of fiduciary duty) and sixth (constructive fraud) causes of action. The trial court granted defendants’ motion to these causes of action in the third amended complaint. Plaintiffs argue the trial court erred in doing so.
Standard of Review
A party may move for summary adjudication of a cause of action if that party contends that there is no merit to the cause of action. (Code Civ. Proc., § 437c, subd. (f)(1).) A defendant moving for summary adjudication establishes that there is no merit to a cause of action if he or she has shown that one or more elements of a cause of action cannot be established. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 849 [107 Cal. Rptr. 2d 841, 24 P.3d 493].)
“We review the trial court’s decision de novo, considering ‘all of the evidence set forth in the [supporting and opposition] papers, except that to which objections have been made and sustained by the court, and all [uncontradicted] inferences reasonably deducible from the evidence.’ [Citation.] ‘ “To succeed, [the moving party] must … demonstrate that under no hypothesis is there a material issue of fact that requires the process of a trial.” ‘ [Citations.]” (Artiglio v. Corning Inc. (1998) 18 Cal.4th 604, 612 [76 Cal. Rptr. 2d 479, 957 P.2d 1313].)
The fifth cause of action alleged a breach of fiduciary duty against each defendant. The basis for this cause of action was the allegation that defendants, as real estate brokers, agents, and developers, owed a fiduciary duty to plaintiffs, and they breached that duty by concealing that tract homes were to be built in the Development. The sixth cause of action, titled “constructive fraud,” alleged defendants committed constructive fraud against plaintiffs based on the same relationship and acts described in the fifth cause of action.
Each plaintiff signed an identical Agreement. Paragraph 9(i) of this agreement addresses the nature of the relationship between the real estate broker, McCaffrey Home Realty, and the plaintiff buyers. This paragraph states in full: “Agency Confirmation (California Civil Code § 2079.17). McCaffrey Home Realty is both the ‘listing agent’ and the ‘selling agent’ in the purchase and sale transaction contemplated by this Agreement. The ‘listing agent’ is the real estate broker who has obtained a listing of real property from the Seller to act as an agent of the Seller for compensation. The ‘selling agent’ means an agent who sells or finds and obtains buyers for real property and presents offers to purchase to the Seller. MCCAFFREY HOME REALTY IS THE AGENT OF [X] THE SELLER EXCLUSIVELY; OR [ ] BOTH THE BUYER AND SELLER. IN ITS CAPACITY AS BOTH THE LISTING AGENT AND THE SELLING AGENT, MCCAFFREY HOME REALTY IS ACTING AS THE AGENT OF BOTH BUYER AND SELLER IN CONNECTION WITH THE PURCHASE AND SALE CONTEMPLATED BY THIS AGREEMENT. McCaffrey Home Realty is affiliated by ownership with the Seller.”
In addition to this paragraph of the Agreement, plaintiffs were provided with a document titled “DISCLOSURE REGARDING REAL ESTATE AGENCY RELATIONSHIPS.” This document identified McCaffrey Home Realty as the “AGENT” and the respective plaintiffs as the “BUYER/SELLER.” It also explained the duties of a real estate broker when acting as the seller’s agent, the buyer’s agent, and when representing both the buyer and seller (dual agency). This document, and the information contained therein, is required by Civil Code section 2079.14 et seq.
Finally, during their depositions, several plaintiffs testified that they thought McCaffrey Home Realty was acting as their agent throughout the purchase process.
Defendants’ motion asserted that none of the defendants had a fiduciary relationship to plaintiffs, and thus there was no fiduciary duty between the parties that could be breached. Plaintiffs countered that there was a fiduciary relationship between the parties because defendants acted as their broker in the transaction.
Trial Court’s Ruling
The trial court concluded that paragraph 9(i) of the Agreement established that none of the defendants acted as a real estate agent or broker for plaintiffs, therefore no fiduciary duty existed. The trial court found that the Agreement was clear and unambiguous because an “X” was placed in the portion of the fourth sentence of paragraph 9(i) to indicate that McCaffrey Home Realty was acting as the agent for only the seller.
Defendants contend, and plaintiffs do not argue otherwise, that the causes of action for breach of fiduciary duty and constructive fraud are both based on the assertion that defendants owed a fiduciary duty to plaintiffs. Therefore, the only issue decided by the trial court, and the only issue we must decide, is whether there is a triable issue of fact about whether McCaffrey Home Realty acted as an agent for both parties or acted as an agent for only the seller.
Defendants’ argument, and the basis for the trial court’s ruling, was that paragraph 9(i) of the Agreement was susceptible of only one interpretation, and that interpretation established that McCaffrey Home Realty was acting as an agent for only the seller.
When interpreting a contract, we must give effect to the mutual intention of the parties at the time of contracting, to the extent such intent is ascertainable and lawful. (Civ. Code, § 1636.) We begin our interpretation by reviewing the language of the contract, because “The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.” (Id., § 1638.) Generally, the words of a contract are to be understood in their ordinary and popular sense, unless used by the parties in a technical sense. (Id., § 1644.)
A contract provision is considered ambiguous when it may be interpreted in two or more ways, both of which are reasonable. (TRB Investments, Inc. v. Fireman’s Fund Ins. Co. (2006) 40 Cal.4th 19, 27 [50 Cal. Rptr. 3d 597, 145 P.3d 472].) The language of a contract, however, must be interpreted as a whole (Civ. Code, § 1641), and a contract cannot be found ambiguous in the abstract. (TRB Investments, at p. 27.)
The ambiguity in paragraph 9(i) is apparent when each sentence is considered in isolation. The first sentence unequivocally states that McCaffrey Home Realty is both the listing and selling agent. The next two sentences define the terms “listing agent” and “selling agent.” The fourth sentence is in all capital letters and, as marked with the “X,” states that McCaffrey Home Realty is the agent for the seller exclusively. The fifth sentence, also in all capital letters, then states that McCaffrey Home Realty, in its capacity as both the listing and selling agent, is acting as the agent for both the buyer and the seller. Finally, the last sentence informs the buyer that McCaffrey Home Realty is owned by at least some of the same principles as the seller.
It is impossible to reconcile these sentences. The first and fifth sentences state that McCaffrey Home Realty is acting as both the listing and selling agent. The fourth sentence is prepared so that, depending on how it is marked, it could indicate that McCaffrey Home Realty is acting as the seller’s agent exclusively, or is acting as the agent for both the buyer and the seller. As marked, it indicates that McCaffrey Home Realty is acting exclusively as the agent for the seller. But this statement cannot be reconciled with the first and fifth sentences, which both state McCaffrey Home Realty is acting as the agent for both the buyer and seller. Clearly, paragraph 9(i) is a model of ambiguity.
Since paragraph 9(i) is ambiguous, two additional principles are applicable. First, when a contract is uncertain, the language of the contract should be interpreted “most strongly against the party who caused the uncertainty to exist.” (Civ. Code, § 1654.) Second, extrinsic evidence can be admitted to explain the ambiguity in the contract. (Appleton v. Waessil (1994) 27 Cal.App.4th 551, 554 [32 Cal. Rptr. 2d 676]; Sweeney v. Earle C. Anthony, Inc. (1954) 128 Cal.App.2d 232, 235 [275 P.2d 56].) Once extrinsic evidence is considered, the interpretation of the contract becomes a question of fact for the trier of fact. (Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 847 [57 Cal. Rptr. 3d 363].)
The trial court erred in granting summary adjudication for two reasons. First, it refused to consider extrinsic evidence because it found no ambiguity in paragraph 9(i). As explained above, paragraph 9(i) plainly is ambiguous, and therefore relevant extrinsic evidence should be admitted and considered by the trier of fact. Second, the ambiguity in paragraph 9(i) compels the conclusion that there is a triable issue of fact as to whether McCaffrey Home Realty was the exclusive agent for the seller or was the agent for both the buyer and seller, giving rise to a fiduciary relationship with plaintiffs.
We emphasize the limited scope of our decision. We determine only that plaintiffs have pled sufficient facts to proceed on their unfair competition and false advertising causes of action and that a triable issue of fact exists as to the breach of fiduciary duty and constructive fraud causes of action. We express no opinion on the merits of plaintiffs’ claims.
The judgment is reversed. The trial court is directed to vacate the order sustaining defendants’ demurrer to the causes of action for false advertising and unfair competition and enter a new order overruling the demurrers. The trial court also is directed to vacate the order granting defendants’ motion for summary adjudication on the causes of action for breach of fiduciary duty and constructive fraud and to enter a new order denying this motion. Plaintiffs can therefore proceed on their causes of action for unfair competition (Bus. & Prof. Code, § 17200), false advertising (id., § 17500), breach of fiduciary duty, constructive fraud, and trespass (to which the demurrer had been overruled when plaintiffs chose not to file a seventh amended complaint). Since plaintiffs did not argue the validity of any other cause of action, they are deemed to have abandoned those causes of action and may not pursue them any further. Plaintiffs are awarded their costs on appeal.
Wiseman, Acting P. J., and Kane, J., concurred.