Hale Bros. Investment Company, LLC v. StudentsFirst Institute et al

Filing 41

ORDER signed by District Judge John A. Mendez on 02/07/18 DENYING 30 Motion for Summary Judgment. (Benson, A.)

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1 2 3 4 5 6 7 8 9 10 UNITED STATES DISTRICT COURT 11 EASTERN DISTRICT OF CALIFORNIA 12 13 14 HALE BROS. INVESTMENT COMPANY, LLC, a California limited liability company, 15 16 17 18 19 20 Plaintiff, No. 2:16-cv-02284-JAM-EFB ORDER DENYING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT v. STUDENTSFIRST INSTITUTE, a District of Columbia nonprofit corporation; STUDENTSFIRST, a District of Columbia non-profit corporation; 50CAN, Inc., a Connecticut corporation, and DOES 1 through 50 inclusive, 21 Defendants. 22 23 Hale Bros. Investment Company (“Plaintiff”) sued 24 StudentsFirst Institute, StudentsFirst (together, “Students 25 First”), and 50CAN, Inc., (collectively, “Defendants”) for claims 26 stemming from StudentsFirst’s alleged breach of a commercial 27 lease for office space in downtown Sacramento. 28 Summary Judgment on the two claims remaining against them: breach 1 Defendants seek 1 of contract and fraudulent transfer. A hearing on Defendants’ 2 motion was held on January 30, 2018 and the Court took the motion 3 under submission. 4 motion is DENIED. For the reasons explained below, Defendants’ 5 6 I. FACTUAL AND PROCEDURAL BACKGROUND 7 StudentsFirst and Plaintiff entered into a commercial lease 8 (the “Lease”) for office space in downtown Sacramento—for a term 9 of 67 months (5 years, 7 months), ending in October 2017—on 10 October 26, 2011. 11 Undisputed Facts (“RSUF”), ECF No. 38-1, ¶ 1. 12 entered into a related agreement to lease 12 parking spaces for 13 the same term. 14 $41,368.86 security deposit and obtained a Letter of Credit in 15 the initial amount of $1,000,000. 16 took possession of the premises on or about March 6, 2012, and 17 began making rental payments on October 6, 2012. 18 The Letter of Credit reduced to $500,000 on March 21, 2016, per 19 the lease. 20 was proper under the terms of the Lease, in light of 21 StudentsFirst’s plans to dissolve and break the Lease early. 22 Plaintiff’s Response to Statement of RSUF ¶ 2. RSUF ¶ 9. The parties StudentsFirst paid Plaintiff a RSUF ¶¶ 3, 4. StudentsFirst RSUF ¶¶ 5, 6. The parties dispute whether that reduction According to Plaintiff, Kellen Arno, StudentsFirst’s Vice 23 President of Strategy and Communications first informed Plaintiff 24 of StudentsFirst’s intention to vacate the building prior to 25 termination of the Lease in an email dated April 25, 2016. 26 Plaintiff’s Disputed Material Facts (“PDMF”) ¶¶ 58, 59. 27 29, 2016, Kellen Arno, Deana Lord, StudentsFirst’s Vice President 28 of Finance, On April Paul Petrovich, owner of Hale Bros. Investment 2 1 Company, Kenneth King, senior in-house counsel for Plaintiff, and 2 Lisa Montagnino, Vice President of Property Management for 3 Plaintiff, met to discuss the Lease and StudentsFirst’s “merger” 4 with a third party (“April 29th meeting”). 5 71, 72. 6 PDMF ¶¶ 61–65, 69, StudentsFirst made its monthly rental payments through June 7 2016 and vacated the premises by July 1, 2016. 8 Plaintiff retained StudentsFirst’s security deposit and drew on 9 the $500,000 Letter of Credit. 10 RSUF ¶¶ 7, 10. RSUF ¶¶ 20, 21. Plaintiff entered into a lease with a new tenant on or about 11 September 6, 2016. 12 abatements for the first five months of the lease and was 13 expected to pay rent of $216,000 through October 31, 2017, and 14 parking rent of $14,400 through that date. 15 RSUF ¶ 16. The new tenant received rent RSUF ¶¶ 18, 19. The parties’ dispute, for the purposes of this motion, 16 revolves around whether StudentsFirst breached the Lease prior to 17 the Letter of Credit reduction, whether the Lease terms setting 18 forth certain damages in the event of a breach are enforceable, 19 and whether StudentsFirst transferred assets to 50CAN with the 20 intent to prevent Plaintiff from reaching them to satisfy its 21 claims. 22 Plaintiff filed this lawsuit in state court and Defendants 23 removed it to federal court on September 26, 2016. 24 Plaintiff filed its First Amended Complaint the following month, 25 which Defendants then moved to dismiss. 26 This Court subsequently dismissed Plaintiff’s claims for fraud, 27 civil conspiracy, common counts, declaratory relief, and relief 28 under the UCL. ECF No. 23. ECF No. 1. ECF Nos. 8, 9, & 10. The only remaining claims in 3 1 Plaintiff’s suit are for breach of contract and fraudulent 2 transfer. 3 Defendants filed an answer in which StudentsFirst asserted 4 counterclaims against Plaintiff for breach of contract and 5 conversion, primarily based on Plaintiff drawing upon the Letter 6 of Credit. 7 issue in this motion. ECF No. 24. StudentsFirst’s counterclaims are not at 8 9 II. OPINION 10 A. Breach of Contract 11 To prevail on its breach of contract claim, Plaintiff “must 12 prove (1) the existence of a contract, (2) [Plaintiff’s] 13 performance of its obligations under the contract or excuse for 14 nonperformance, (3) [Defendants’] breach, and (4) resulting 15 damage to [Plaintiff].” 16 Inc., No. 2:12-cv-00617-KJM-KJN, 2016 WL 4000932, at *3 (E.D. 17 Cal. July 25, 2016). 18 without damage.” 19 Inc., 119 Cal. App. 4th 468, 473 (2004). 20 Arch Ins. Co. v. Sierra Equip. Rental, “A breach of contract is not actionable Bramalea Cal., Inc. v. Reliable Interiors, Defendants do not concede that they breached the Lease, but 21 argue that even if they breached the Lease, Plaintiff has not 22 suffered a compensable loss that would support its claims. 23 contend Plaintiff cannot prove damages in excess of the security 24 deposit and Letter of Credit that Plaintiff has already drawn 25 upon. 26 providing for damages related to the tenant improvement 27 allowance, leasing commissions, and previously abated rent are 28 punitive in nature and thus unenforceable under California law. Mot. at 8–10. They They argue that the clauses in the Lease 4 1 2 Id. at 11. Plaintiff argues that the damages in question “do not amount 3 to unenforceable late fees or liquidated damages because they do 4 constitute actual harm suffered and are not designed merely to 5 penalize.” 6 Court could treat these lease provisions as liquidated damages 7 clauses. 8 provisions are reasonably related to the range of actual damages 9 that the parties could have anticipated would flow from a breach. Opp. at 13. Alternatively, Plaintiff argues, the As such, they would be enforceable because the 10 Id. at 16. 11 Cal.4th 970, 977 (1998)). 12 13 (citing Ridgley v. Topa Thrift & Loan Ass’n, 17 1. Damages Recoverable Generally, “[a]n injured party may recover for a breach of 14 contract the amount which will compensate it ‘for all the 15 detriment proximately caused [by the breach], or which, in the 16 ordinary course of things, would be likely to result [from the 17 breach].’” 18 Corp., 226 Cal. App. 3d 442, 468 (1990) (quoting Cal. Civ. Code 19 section 3300). 20 of contract seek to approximate the agreed-upon performance.” 21 Lewis Jorge Const. Mgmt., Inc. v. Pomona Unified Sch. Dist., 34 22 Cal. 4th 960, 967 (2004) (citation and quotation marks omitted). 23 “The damages awarded should, insofar as possible, place the 24 injured party in the same position it would have held had the 25 contract properly been performed, but such damage may not exceed 26 the benefit which it would have received had the promisor 27 performed.” 28 Cal. Civ. Code section 3358). Brandon & Tibbs v. George Kevorkian Accountancy “Damages awarded to an injured party for breach Brandon & Tibbs, 226 Cal. App. 3d at 468 (citing “This limitation of damages for 5 1 breach of a contract serves to encourage contractual relations 2 and commercial activity by enabling parties to estimate in 3 advance the financial risks of their enterprise.” 4 Const. Mgmt., 34 Cal. 4th at 968. 5 1951.2 codifies this standard as to leases. 6 Lewis Jorge California Civil Code section Defendants contend that under these principles, Plaintiff’s 7 damages consist of base rent and parking rent for the remainder 8 of the lease—less mitigation—plus costs associated with 9 mitigation efforts. Mot. at 9–10. The money Plaintiff retained 10 from the security deposit and Letter of Credit put Plaintiff in 11 the same position it would have been in had StudentsFirst 12 fulfilled the lease as agreed. 13 which to complain. Thus, Plaintiff has no loss of 14 Plaintiff fails to advance a convincing counterargument. 15 While Plaintiff distinguishes this case from cases in which a 16 court found that contractual damages constituted unrecoverable 17 “penalties,” Plaintiff has not cited a case in which a court 18 awarded damages beyond those that would approximate full 19 performance under the contract (that is, in absence of a 20 liquidated damages clause). 21 would not have been compensated for tenant improvements, leasing 22 commissions, or the abated rent had StudentsFirst performed under 23 the contract. 24 recover both damages approximating full performance and reliance 25 damages. 26 Pursuant to the Lease, Plaintiff Under the principles cited above, Plaintiff cannot The Court further rejects Plaintiff’s contention that 27 StudentsFirst would have owed Plaintiff $554,457.60 for the 28 tenant improvements at the end of the five year Lease. 6 Opp. at 1 14. 2 Per the lease, the Tenant Improvement Allowance was amortized 3 over a 10 year period. 4 that Plaintiff may, upon any draw permitted under the Lease, draw 5 upon the Letter of Credit to reimburse itself for the amortized 6 costs of the Tenant Improvement Allowance and leasing 7 commissions. 8 performed all of its obligations under the Lease, [Plaintiff] 9 agrees to pay to [StudentsFirst] by the Final LC [(Letter of No such term or balloon payment is articulated in the Lease. Article 11.6(c) of the Lease provides It then states that “[p]rovided Tenant has 10 Credit)] Expiration Date the amount of any proceeds of the Letter 11 of Credit received by [Plaintiff] and not applied as allowed 12 above[.]” 13 the remaining balance of the amortized Tenant Improvement 14 Allowance or indicating that Plaintiff could draw upon the 15 remaining credit to satisfy such an obligation. 16 There is no provision requiring Plaintiff to then pay Under the contract principles cited in this section, 17 Plaintiff has already been compensated for any breach. 18 rent owed, parking rent owed, and mitigation amount are all 19 undisputed. 20 more money to relet the premises. 21 2017, Plaintiff’s out of pocket costs for modifications was 22 $2,788.00. 23 for installation of the carpet tile as Responding Party has not 24 yet received the invoice for the installation services. 25 discovery is ongoing and Plaintiff has reserved the right to 26 amend and/or supplement its response.”). 27 argued or suggested that this expense will exceed the 28 approximately $70,000 it retained in excess of the amount owed on See generally RSUF. The base Plaintiff does contend it spent RSUF ¶ 24 (“As of October 18, This amount does not reflect the out of pocket costs 7 Further, But, Plaintiff has not 1 2 the contract. Defendants’ argument that application of the above described 3 general contract damages principles must lead to the conclusion 4 that Plaintiff has already received an amount sufficient to 5 approximate full performance under the lease and therefore 6 summary judgment should be granted in their favor would appear to 7 be meritorious. However, the analysis does not end here. 8 9 2. Liquidated Damages As explained below, Defendants are not entitled to summary 10 judgment because Defendants failed to meet their burden of 11 showing that the damages provisions in the Lease are not valid 12 liquidated damages provisions. 13 “The objective of a liquidated damages clause is to 14 ‘stipulate [ ] a pre-estimate of damages in order that the 15 [contracting] parties may know with reasonable certainty the 16 extent of liability’ in the event of breach.” 17 v. Payless ShoeSource, Inc., 174 Cal. App. 4th 58, 63 (2009) 18 (quoting ABI, Inc. v. City of L.A., 153 Cal. App. 3d 669, 685 19 (1984)). 20 the damages for the breach of the contract is valid unless the 21 party seeking to invalidate the provision establishes that the 22 provision was unreasonable under the circumstances existing at 23 the time the contract was made.” 24 Harbor Island Holdings v. Kim, 107 Cal. App. 4th 790, 795 (2003) 25 (applying section 1671 to an action for breach of a commercial 26 lease). “A liquidated damages clause will generally be considered 27 unreasonable, and hence unenforceable under section 1671(b), if 28 it bears no reasonable relationship to the range of actual El Centro Mall LLC In a commercial lease, “a provision . . . liquidating Cal. Civ. Code section 1671; 8 1 damages that the parties could have anticipated would flow from a 2 breach.” 3 977 (1998). 4 reasonable endeavor by the parties to estimate a fair average 5 compensation for any loss that may be sustained.” 6 Garrett v. Coast & Southern Fed. Sav. & Loan Assn., 9 Cal.3d 731, 7 739 (1973)). 8 9 10 11 12 13 14 Ridgley v. Topa Thrift & Loan Ass’n, 17 Cal. 4th 970, The amount set “must represent the result of a Id. (quoting If there is no such reasonable relationship, then a contractual clause that predetermines damages will be construed as a penalty. Id. A penalty provision operates to compel performance of an act and usually becomes effective only in the event of default upon which a forfeiture is compelled without regard to the damages sustained by the party aggrieved by the breach. The characteristic feature of a penalty is its lack of proportional relation to the damages which may actually flow from failure to perform under a contract. 15 16 Id. (quoting Garrett, 9 Cal.3d at 739) (quotation marks omitted). 17 So, the reasonableness of the clause at the time the contract was 18 signed will determine whether it is a permissible, liquidated 19 damages clause or an unenforceable penalty. 20 Liquidated damages clauses are presumptively valid. Weber, 21 Lipshie, & Co. v. Christian, 52 Cal. App. 4th 645, 654 (1997). 22 “[T]he burden of proving the clause is unreasonable at the time 23 the contract was made is placed on the Defendants.” 24 Hotels Intern., Inc. v. Majestic Towers, Inc., 488 F. Supp. 2d 25 953, 959 (C.D. Cal. 2007) (citing Weber, Lipshie & Co., 52 Cal. 26 App. 4th at 654). 27 28 Defendants failed to meet their burden. In fact, Defendants chose not to engage with this argument at all. 9 Radisson In Footnote 2 of 1 their Reply brief, Defendants wrote: “Plaintiff relies on cases 2 enforcing liquidated damages clauses, but the reasoning in those 3 cases is inapposite because the Lease does not contain such a 4 provision and the extent of any actual loss is ascertainable.” 5 Rep. at 2. 6 arguing that because the loss amounts were ascertainable, the 7 provisions in the contract did not qualify as liquidated damages 8 clauses. 9 “liquidated damages.” 10 Counsel relied on this reasoning at the hearing, Additionally, none of the provisions are labeled But the provisions in question here are liquidated damages 11 provisions. California courts have defined liquidated damages as 12 “an amount of compensation to be paid in the event of a breach of 13 contract, the sum of which is fixed and certain by agreement.” 14 Chodos v. West Publishing Co., 292 F.3d 992, 1002 (9th Cir. 2002) 15 (quoting Kelly v. McDonald, 98 Cal. App. 121, 125 (1929)). 16 Courts look to the substance of the damages provision rather than 17 the form. See Applied Elastomerics, Inc. v. Z-Man Fishing Prod., 18 Inc., 521 F. Supp. 2d 1031, 1045 (N.D. Cal. 2007) (“Where the 19 contract uses the term ‘penalty’ or ‘liquidated damages,’ 20 however, is not determinative. 21 will interpret a liquidated damages clause according to its 22 substance, and if it is otherwise valid, will uphold it even if 23 the parties have referred to it as a penalty.’”) (quoting Weber, 24 Lipshie, & Co., 52 Cal. App. 4th at 656). 25 Defendants rely upon analyzed the damages provisions under the 26 liquidated damages rubric. 27 Loan Ass’n, 17 Cal. 4th 970, 977 (1998) (analyzing a prepayment 28 charge under the liquidated damages statute and finding it As explained in Weber, ‘A court Even the cases See, e.g., Ridgley v. Topa Thrift & 10 1 unenforceable); Harbor Island Holdings v. Kim, 107 Cal. App. 4th 2 790, 795 (2003) (determining the validity of a deferred rent 3 provision under Civil Code section 1671). 4 obvious penalties Defendants cite, see, e.g., Applied 5 Elastomerics, Inc. v. Z-Man Fishing Products, Inc., 521 F. Supp. 6 2d 1031 (N.D. Cal. Sep. 25, 2007) (finding a treble damages 7 provision to be an unenforceable penalty because it could not 8 have been the result of a reasonable endeavor to estimate fair 9 compensation for any loss sustained), the damages provisions at 10 11 Unlike the more issue in this case are tied to expenses Plaintiff incurred. Furthermore, the fact that Plaintiff’s losses may have been 12 ascertainable is not dispositive. 13 damages clauses were only enforceable if determining actual 14 damages was impracticable or extremely difficult. Ridgley, 17 15 Cal. 4th at 977. 16 to certain contracts—including commercial leases—shifting the 17 presumption to one of validity and dropping the previous 18 restriction. 19 Before 1977, liquidated But the 1977 amendment liberalized the rule as Id. Defendants have not shown that these provisions are 20 unenforceable as a matter of law and have failed to present facts 21 concerning the reasonableness of the provisions at the time the 22 parties entered the contract. 23 the provisions may have been reasonable at some point in time. 24 Mot. at 12 (“One can imagine circumstances in which a landlord 25 might be entitled to recover one or more of these types of 26 remedies if it were at an early stage of the lease[.]”). 27 Court denies Defendants’ motion for summary judgment on this Defendants even suggest some of 28 11 The 1 cause of action on the record before it. 1 2 B. Fraudulent Conveyance 3 “A fraudulent conveyance under the [Uniform Fraudulent 4 Transfer Act] involves a transfer by the debtor of property to a 5 third person undertaken with the intent to prevent a creditor 6 from reaching that interest to satisfy its claim.” 7 Bucurenciu, 129 Cal. App. 4th 825, 829 (2005) (quoting Kirkeby v. 8 Super. Ct., 33 Cal.4th 642, 648 (2004) (internal quotation marks 9 omitted)). Under California Civil Code section 3439.04(a)(1), “a Filip v. 10 transfer made or obligation incurred by a debtor is voidable as 11 to a creditor, whether the creditor’s claim arose before or after 12 the transfer was made or the obligation was incurred, if the 13 debtor made the transfer or incurred the obligation . . . with 14 actual intent to hinder, delay, or defraud any creditor of the 15 debtor.” 16 is a question of fact, and proof often consists of inferences 17 from the circumstances surrounding the transfer.” 18 App. 4th at 834. 19 “Whether a conveyance was made with fraudulent intent Filip, 129 Cal Defendants argue, first, that Plaintiff’s fraudulent 20 transfer claim cannot move forward because Plaintiff has not 21 suffered a loss and therefore has not been injured. 22 because Plaintiff’s injury remains in dispute, the Court denies 23 summary judgment on this basis. However, Defendants also contend that Plaintiff cannot show 24 25 Defendants harbored an “intent to defraud” as required to support 26 the claim. Because “StudentsFirst decided to transfer certain of 27 1 28 The Court offers no opinion on the ultimate validity of the provisions in question. 12 1 its programs to 50CAN in order to protect the continued viability 2 of those programs,” “the transfer occurred for a lawful and 3 appropriate purpose” and Plaintiff “cannot satisfy its burden of 4 proving any deceitful intent.” 5 Mot. at 13. As the Court indicated at the January 30 hearing, there are 6 material disputed facts that preclude summary judgment on this 7 claim. 8 for their defense. 9 A. Tessone, a 50CAN employee. First, Defendants have failed to marshal adequate support They rely on the Declaration of Christopher ECF No. 30-3. But a proper 10 foundantion has not been laid for Mr. Tessone’s testimony 11 regarding StudentsFirst’s intent in transferring assets to 50CAN. 12 Mr. Tessone did not work for StudentsFirst and he did not start 13 working for 50CAN until the asset transfers had already been 14 planned. 15 circumstantial evidence in the record that supports an inference 16 that StudentsFirst intended to transfer assets to protect those 17 assets from their obligations to Plaintiff and others. 18 See PDMF ¶¶ 30, 33, 81, 82. Additionally, there is Summary judgment on this second claim is denied as well. 19 20 21 22 23 24 III. ORDER For the reasons set forth above, the Court DENIES Defendants’ Motion for Summary Judgment. IT IS SO ORDERED. Dated: February 7, 2018 25 26 27 28 13

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