Opinion
F080581
05-26-2022
AWCC ACQUISITION I, LLC, Plaintiff and Appellant, v. ALTA OAK REALTY, LLC et al., Defendants and Respondents.
McCormick, Barstow, Sheppard, Wayte & Carruth and Scott M. Reddie; Kibler Fowler & Cave and Matthew J. Cave, for Plaintiff and Appellant. Alpha Trial Group, Richard K. Welsh and Jeff Zuidema; Klein, DeNatale, Goldner, Cooper, Rosenlieb & Kimball, Catherine E. Bennett and James R. Harvey, for Defendants and Respondents.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Kern County. No. BCV-17-101734 David R. Lampe, Judge.
McCormick, Barstow, Sheppard, Wayte & Carruth and Scott M. Reddie; Kibler Fowler & Cave and Matthew J. Cave, for Plaintiff and Appellant.
Alpha Trial Group, Richard K. Welsh and Jeff Zuidema; Klein, DeNatale, Goldner, Cooper, Rosenlieb & Kimball, Catherine E. Bennett and James R. Harvey, for Defendants and Respondents.
OPINION
DE SANTOS, J.
AWCC Acquisition I, LLC (AWCC) appeals from a judgment in favor of defendants Alta Oak Realty, LLC (Alta) and Terra-Gen, LLC (Terra-Gen) after the trial court granted defendants' motion for judgment under Code of Civil Procedure section 631.8 on AWCC's breach of contract claims against Alta and Terra-Gen as Alta's alter ego. AWCC contends the trial court erred in finding that Alta did not breach the terms of a royalty agreement between AWCC and Alta. Finding no merit to AWCC's contentions, we affirm.
Since Terra-Gen was sued as Alta's alter ego, we generally refer to Alta as the party making the arguments both below and on appeal.
FACTUAL AND PROCEDURAL BACKGROUND
The Oak Creek Energy Systems, Inc. (OCES) wind farm project comprises approximately 1, 100 acres in the middle of the Tehachapi wind area. The site is shared by different wind farm ownership interests which lease different portions of the site to operate wind turbine generators (WTGs or turbines). The turbines of each ownership interest are next to each other; they are connected to the same power and collection lines and share common facilities.
The Oak Creek Lease and Royalty Agreement
In February 1999, OCES leased land on the wind farm project to Oak Creek Wind Power LLC (Oak Creek) to operate a windfarm pursuant to a "PROJECT LEASE AGREEMENT" (the Oak Creek lease). The Oak Creek lease was amended in January 2010 to extend the term of the lease to 2044 and to grant Oak Creek the right to terminate the lease prior to that date "by written notice to Lessor as to all Project WTGs or as to individual WTGs." If Oak Creek elected not to remove the turbines from the property, the termination would be effective six months after Oak Creek provided written notice of that election.
The Oak Creek lease required Oak Creek to pay OCES monthly royalty amounts based on the amount of revenue generated in connection with the production of electricity. If at the end of the year those royalty payments did not meet a minimum threshold, an additional true-up payment would be due in late February/early March of the following year to reach the "minimum rent" described in the lease.
Under the Oak Creek lease, Oak Creek's failure to timely pay the royalties or minimum rent was considered an "Event of Default." Oak Creek would not be "in default," however, if the "Event of Default" was cured within 30 days of receiving notice of the "Event of Default." If the "Event of Default" remained uncured, OCES, "as its sole and exclusive remedy at law or in equity, shall be entitled to reimbursement for (i) any and all costs incurred in the performance of [Oak Creek]'s obligation hereunder, and (ii) any and all liability, damage, loss, cost or expense (including, but not limited to, reasonable attorneys' fees and costs) suffered as a result of Event of Default by [Oak Creek]."
In March 2010, AWCC and OCES entered into a "ROYALTY ACQUISITION AGREEMENT" to purchase OCES's right to the royalties and minimum rents Oak Creek was required to pay OCES under the Oak Creek lease in exchange for a $6.075 million lump sum payment (the Oak Creek royalty agreement). This allowed OCES to monetize the payment stream without selling the underlying fee interest in the property. Charles Hinckley, AWCC's then president, negotiated the Oak Creek royalty agreement and signed it on AWCC's behalf.
In March 2013, OCES sold Alta the property subject to the Oak Creek lease and assigned the Oak Creek lease and royalty agreement to Alta. AWCC never objected to Alta's acquisition of OCES's property.
The ON Wind Lease and Royalty Agreement
In March 2011, OCES leased land to ON Wind Energy LLC (ON Wind) to operate a windfarm pursuant to a "WIND ENERGY SITE LEASE," which had a 20-year term that would expire in 2031 (the ON Wind lease).
Like the Oak Creek lease, the ON Wind lease required ON Wind to make monthly royalty payments to OCES based on the production of electricity and if those royalty payments did not meet a minimum threshold at the end of the year, an additional true-up payment would be due in late February/early March of the following year to reach the "minimum rent" described in the lease. The ON Wind lease required ON Wind to maintain records reflecting its "Adjusted Gross Revenue" used for the purpose of determining the royalty payments and gave OCES the right to, "upon prior written notice, examine and audit such records for the preceding calendar year, at [OCES]'s expense." The lease further provided if the audit revealed "an understatement of Adjusted Gross Revenue of more than two percent (2%) in any calendar year, [ON Wind] shall reimburse [OCES] for all reasonable costs of the audit."
The ON Wind lease contains a provision entitled "Lessee Event of Default," which provides, in pertinent part: "The occurrence of any of the following events shall constitute a 'Lessee Event of Default' under this Lease (and any of the following events, before the expiration of the applicable grace period specified below, is referred to as a 'Lessee Default'): [¶] (a) The failure by Lessee to pay amounts required to be paid to Lessor hereunder when due, when such failure has continued for thirty (30) days after written notice from Lessor."
The ON Wind lease allows for early termination of the lease by ON Wind as follows: "Provided no Lessee Default has occurred and is then continuing at the time of Lessee's exercise of the following right of termination, or on the effective date of such termination, Lessee shall have the right to terminate this Agreement if Lessee determines in its good faith reasonable discretion, that the operation of Lessee's Project on the Leased Premises will not be profitable or commercially or legally practicable without incurring extraordinary costs or expenses." ON Wind was required to give at least 180 days' prior written notice of the termination, and OCES was given the right to elect to either accept the return of the premises with the improvements remaining in place or require ON Wind to remove the improvements.
The lease contains an attorney fees and expenses provision which provides: "Each of Lessor and Lessee shall be entitled to recover from the other party hereto all reasonable expenses, including reasonable attorneys' fees and expenses incurred in connection with exercising its remedies resulting from a Default of the other party hereto pursuant to this Lease."
At the same time, AWCC and OCES entered into a "ROYALTY ACQUISITION AGREEMENT" to purchase OCES's rights to specific royalties and rents ON Wind was required to pay OCES under the ON Wind lease (the ON Wind royalty agreement).Specifically, for $1.149 million AWCC purchased an interest in ON Wind's rents with a minimum yearly rent of $400,000, escalating to $500,000. Hinckley negotiated the ON Wind lease and royalty agreement and signed them on AWCC's behalf.
As part of the transaction involving the ON Wind lease and royalty agreement, American Wind Capital, the parent company of AWCC, purchased ON Wind from OCES and a Japanese company, each of whom owned a 50 percent interest in ON Wind. The transaction also included the purchase of four additional turbines, a maintenance building, and a truck.
In March 2013, OCES sold Alta the property subject to the ON Wind lease and assigned the ON Wind lease and ON Wind royalty agreement to Alta. AWCC never objected to the sale.
Pursuant to the ON Wind lease, ON Wind had the right of first offer if the lessor proposed to sell the property to a third party.
Oak Creek and ON Wind Cease Making Royalty Payments
By June 2014, Terra-Gen had either acquired or created Oak Creek, ON Wind, and Alta, thereby becoming the lessor and lessee under both underlying ground leases, and the landowner (and counterparty to AWCC) under both royalty agreements. These Terra-Gen entities were under common management and control at all relevant times.
Terra-Gen's affiliation with these entities is as follows: Terra-Gen acquired Oak Creek in 2008, when it bought Oak Creek's owner; Terra-Gen created Alta in 2013 to purchase the land from OCES; and Terra-Gen acquired ON Wind from AWCC in June 2014. ON Wind and Oak Creek are subsidiaries of Terra-Gen-they are directly held by Terra-Gen Wind Power, LLC, which is held by Terra-Gen Finance Company, LLC. Alta is held through a different set of entities, but it also is a subsidiary of Terra-Gen. Terra-Gen operates its projects, including Oak Creek and ON Wind, through its operating organization, Terra-Gen Operating Company, which employs the individuals who run the projects pursuant to agreements between the projects and Terra-Gen Operating Company.
In 2016, the Terra-Gen entities determined neither of the wind farms was profitable, as they had negative, or close to negative, cash flows. Long-term power purchase agreements for the projects were to expire at the end of 2016 and the projects would have to sell power on the open California market where prices "had dropped fairly precipitously." Darren Kelly, the business manager for Oak Creek and ON Wind, entered into negotiations with AWCC to try to restructure the leases, including the minimum rent and the term of the leases. According to Kelly, the royalty rates were extremely high and out of line with other leases in the area, so he proposed lowering them. In October 2016, Kelly advised AWCC that ON Wind intended "to cease operation and lease payments January 1, 2017 unless lease terms can be renegotiated and reflect a market based arrangement." While AWCC was willing to reduce the minimum rents for a few years, it wanted the ability to recover some of the lost rent by extending the terms of the royalty agreements. After some ensuing back and forth, the negotiations broke down.
In March 2017, Kelly advised Terra-Gen accountants and treasury personnel that given ON Wind's "EBITDA" position and royalty obligations, they would "be tracking cash more closely on a month to month basis," and royalty payments would be calculated as the last expense paid. Kelly wanted to discuss the tools available to "track cash, prioritize vendor payments and publish a monthly cash flow waterfall for our records."
EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
The next day, the Terra-Gen treasury department emailed Kelly a "cash waterfall" for ON Wind for 2017, which did not reflect any royalty payments because the cash balance never got to $50,000, which Kelly wanted to maintain before paying the royalty. The email stated Terra-Gen had "in effect already 'loaned' On Wind money" because there was not enough revenue to cover expenses, they had not allowed the checking account to go to a negative balance, and "for this exercise it makes sense to show a negative balance to emphasize why we are not paying royalty." According to Matthew Ward Scobee, who was then the senior vice-president of Terra-Gen, Oak Creek, ON Wind and Alta, the cash waterfall was a cash flow projection that showed the project never had over $50,000 of remaining cash balance at any time.
Two months later, on May 4, 2017, Scobee emailed AWCC in response to an inquiry from AWCC regarding the status of the March 2017 statements and April royalty payments. Scobee stated they suspended all royalty payments due to the poor economic condition of the projects. On May 11, 2017, AWCC emailed Scobee stating they had not seen Oak Creek's and ON Wind's minimum rent true-up payments for 2016 and asked if Scobee's calculations agreed with numbers provided in the email. Scobee responded a week later that "the project cash flows do not support making a payment at this time," but they would "continue to monitor the situation and hopefully be in a position to make some sort of payment once we begin seeing better production or improvements in rates."
AWCC Sends Notices of Default
On June 12, 2017, AWCC sent notices of default to Oak Creek, ON Wind, and Alta. The notices stated Oak Creek and ON Wind failed to make the payments due under their respective leases in February 2017 for the difference between the minimum rent and royalty payments for the 2016 calendar year, which totaled $260,007.29 for Oak Creek and $197,329.68 for ON Wind, as well as the monthly royalty payments owed for the production months of February, March, and April 2017. AWCC advised both Oak Creek and ON Wind that they "will be in default under the Wind Energy Lease" unless they tendered all "Delinquent Payment Amounts" to AWCC within 30 days. ON Wind's default notice further stated: "Please note that this notice of default is being submitted to Landowner and Project Tenant at the same time to limit the legal expenses incurred by AWCC and Landowner, notwithstanding the provisions of the [royalty agreement] that indicate that AWCC should first demand that Landowner send a default notice to Project Tenant."
Scobee asked Kelly, who at that time was no longer employed at Terra-Gen but was acting as an outside consultant, to analyze the ON Wind "royalty matter." On June 22, 2017, Kelly reported back to Scobee via email, outlining a way to potentially avoid ON Wind's rent obligations to AWCC under the ON Wind royalty agreement. Kelly summarized the early termination provision in the ON Wind lease, the rights granted AWCC under the ON Wind royalty agreement pertinent to the lease, and stated it appeared "AWCC did not button up" the royalty agreement as "much as they should have as they should have extended their collection rights through 2031 regardless of On Wind's early termination rights." Kelly suggested having outside counsel assess the "likelihood of AWCC litigating on" certain proposed actions Alta might take that would "adversely affect AWCC's rights to receive Royalty amounts."
A week later, Scobee reported to his boss, Terra-Gen chief executive officer James Pagano, and Jeffrey Cast, another officer of Terra-Gen and Alta who also holds positions in Oak Creek and ON Wind, that the numbers for the Oak Creek and ON Wind projects showed they were "heading on a path of negative EBITDA for the year." Scobee noted the lease payments, which were $730,000 and $440,000, respectively, were "a financial strangle to the project." Scobee explained that despite their "best efforts" to work things out with AWCC to restructure the lease payment obligations, AWCC was unwilling to move, and "[g]iven the financial circumstances," he felt they had "no choice but to terminate the leases and transfer the projects over to the land owner (Alta Oak Realty)." Scobee pointed out that "[i]f the projects were in the hands of Alta Oak Realty and (thus not having to pay any lease payments whatsoever) they would flip to positive EBITDA to the tune of roughly $600K and $200K respectively."
Oak Creek and ON Wind Deliver Notices of Termination
On July 10, 2017, Oak Creek and ON Wind hand-delivered notices of early termination to Alta. The Oak Creek termination notice stated it was giving notice of its "exercise of its right to terminate the Lease" pursuant to section 2.5 of the Oak Creek lease, explaining that the project had been operating at a negative cash flow in 2017 and was projected to do so for the foreseeable future. The notice further stated that pursuant to section 2.5(A)(ii) of the Oak Creek lease, Oak Creek elected not to remove any of the project facilities and, in accordance with this election, it would "continue to pay Rent until the effective date of the Lease termination, which will be January 10, 2018."
The ON Wind termination notice stated that ON Wind had determined the operation of the project was "no longer profitable or commercially or legally practicable without incurring extraordinary costs or expenses"; therefore, it was giving notice of its "exercise of its right to terminate the Lease" pursuant to section 20.1 of the ON Wind lease, with an effective termination date of January 10, 2018. ON Wind asked Alta to confirm within 90 days whether it would either accept the return of the leased property with the improvements in place in their" 'as-is' condition," or have ON Wind remove the improvements. Alta subsequently advised ON Wind it elected to accept the property "as-is" under section 20.1(a) of the lease.
In an email to AWCC attaching the early termination notices, Scobee explained the long-term power purchase agreements for both projects expired in 2016 and since then the projects had been selling into the California market. While the projects remained in good operating condition, the market price of power in California had "dropped to near all-time lows and the projects are no longer economically sustainable." Scobee further explained a project representative had reached out to members of AWCC in the fall of 2016 to try to renegotiate the "out-of-market land leases associated with each of the projects," but the efforts were unsuccessful and there were "no viable alternatives but to terminate the underlying leases." Scobee represented the projects would "continue to work hard to maximize revenues and minimize expenses in order to try and fulfill their lease obligations through the effective termination dates of the underlying leases."
Scobee testified in his deposition the only other available option was to pursue bankruptcy. Given his belief that they had "unambiguous contractual rights" to terminate the leases and AWCC's unwillingness to work out something reasonable, he felt they had no choice but to terminate the leases, have Oak Creek and ON Wind abandon the turbines, and have Alta operate the turbines for its own benefit on its own land without any rent obligation.
On July 27, 2017, AWCC filed this lawsuit against ON Wind, Oak Creek, and Terra-Gen, alleging breach of contract claims for failure to make the royalty payments required in their respective leases and for ON Wind giving notice of early termination while in default and failing to pay rent for the 180-day notice period following the notice of early termination.
The next day, AWCC sent Oak Creek, ON Wind, and Alta letters regarding "Remedies for Payment Defaults and Related Issues." The letter to ON Wind and Alta stated: "Since [ON Wind] has not tendered all Original Delinquent Payment Amounts to AWCC within thirty (30) days after [ON Wind]'s receipt of the June 2017 Notice of Default, pursuant to Section 19.1 of the Wind Energy Lease, such failure has become a Lessee Event of Default under the Wind Energy Lease." AWCC asserted ON Wind's "purported termination" of the ON Wind lease was "invalid and of no force or effect" because a "Lessee Default has occurred and is continuing," and it did not consent to the "purported termination." AWCC further asserted a breach of the "spirit" of the royalty agreement would occur if Alta and ON Wind "have themselves, or together with their parent companies (including Terra-Gen, LLC) and other affiliates, taken action that could impair full payment to AWCC" of the royalty agreement's benefits. The letter to Oak Creek and Alta is substantially similar to the one sent to ON Wind and Alta.
AWCC also demanded, in its own name and as attorney-in-fact for Alta, an audit under the ON Wind and Oak Creek leases and royalty agreements of the amounts payable to AWCC under the royalty agreements for the 2016 and 2017 calendar years. According to Daniel McMahon, the executive vice president for Hannon Armstrong Capital, LLC, which acquired AWCC in 2014, AWCC requested the audit because it stopped receiving information from Oak Creek and ON Wind, such as revenues and utility meter statements, that was needed to calculate the royalties.
An outside auditor conducted the audit and produced a report that identified the royalty amounts owed for the relevant periods. Thereafter, the parties agreed on the amount of past due royalties and minimum rent. The audit cost AWCC approximately $52,000.
On January 9, 2018, shortly after AWCC's auditor issued its report, Oak Creek and ON Wind paid AWCC all rents and royalties owed with interest through the January 10, 2018, termination by wire transfer. Oak Creek and ON Wind's payments, however, did not include the cost of the audit or legal fees AWCC incurred to compel the payments.
Oak Creek wire transferred $1,036,616.93, while ON Wind wire transferred $596,232.62.
Events After the Lease Termination Dates
Once the leases terminated, Oak Creek's and ON Wind's turbines remained in place. The day after the leases terminated, Alta entered into asset purchase agreements (APAs) with ON Wind and Oak Creek to acquire the rights needed to transmit power from the turbines. Under the APAs, when the transaction closed in August 2019, Alta paid ON Wind $281,367 (the difference between the $370,000 purchase price and the net revenue ON Wind received) and Oak Creek $333,224 (the difference between the $1.255 million purchase price and net revenue Oak Creek received) for: (1) certain project agreements; and (2) Oak Creek's and ON Wind's continued operation of the turbines during the transition period while the parties obtained consent to assignment of third-party project agreements (e.g., the transmission agreements) and governmental approvals (e.g., Federal Power Act section 203 approval from the Federal Energy Regulatory Commission (FERC) with respect to Alta's acquisition of the assets). In sum, Alta paid a market rate of $50/kW for each project's transmission rights, plus a payment to Oak Creek for a power purchase agreement.
Scobee explained the purchase price reflected the value of the assets being transferred as well as ON Wind's and Oak Creek's roles in operating the facilities on Alta's behalf.
Scobee claimed Alta waited to secure the consents required to complete the APAs due to the "cloud of litigation" created by this lawsuit. Alta, ON Wind and Oak Creek submitted their application to FERC in April 2019 and began securing the third-party consents needed to operate the wind farms in Alta's name. The approvals and consents were obtained in the summer of 2019. The APAs closed on August 1, 2019, with ON Wind and Oak Creek quitclaiming the wind turbines to Alta, and Alta giving notice to FERC of the completed transaction on August 6, 2019.
The First Amended Complaint and the Lessees' Summary Judgment Motions
AWCC filed the operative first amended complaint (the FAC) in June 2018, which added Alta as a defendant. As pertinent here, in addition to claims against ON Wind and Oak Creek for breach of their leases and breach of the implied covenant of good faith and fair dealing, the FAC alleges claims against Alta for breach of the ON Wind and Oak Creek royalty agreements and for declaratory relief concerning Alta's obligations under the royalty agreements.
Oak Creek and ON Wind each obtained summary judgment on all AWCC's claims against them in November 2018 and February 2019, respectively. In granting summary judgment for Oak Creek, the trial court found the following facts undisputed: (1) the Oak Creek lease provides for early termination, which right Oak Creek exercised; (2) on termination of the Oak Creek lease, Oak Creek's obligation to pay royalties or minimum rent also terminate; (3) Oak Creek paid AWCC the minimum rent and royalty payments, including interest, requested by and due AWCC for the lease period up to and including January 10, 2018; (4) Oak Creek is not a party to the Oak Creek royalty agreement; and (5) after termination, Alta did not lease or demise its property to a third party to generate wind energy for rent or royalties.
AWCC appealed both judgments on March 27, 2019, but AWCC dismissed the Oak Creek appeal. The appeal from the ON Wind judgment is pending in AWCC Acquisition I, LLC v. ON Wind Energy, LLC, F079057.
The Trial on AWCC's Claims Against Alta and Terra-Gen
A court trial proceeded on the remaining four claims against Alta and Terra-Gen as Alta's alter ego: (1) the fifth and sixth claims for breach of the ON Wind royalty agreement and Oak Creek royalty agreement, respectively, by allowing ON Wind and Oak Creek to continue to operate the wind turbines after their "purported early termination" of the ON Wind and Oak Creek leases without paying rent, without AWCC's consent, and for breach of the implied covenant of good faith and fair dealing; and (2) the ninth and tenth claims for declaratory relief, in which AWCC sought a declaration that Alta's obligations under the ON Wind and Oak Creek royalty agreements remain in full force and effect during ON Wind's and Oak Creek's continued use and possession of the premises after termination of the leases.
The parties submitted trial briefs and the trial commenced on August 26, 2019. AWCC called two live witnesses in its case-in-chief: Hinckley and McMahon. Hinckley, who negotiated the royalty agreements, testified about AWCC's intentions in entering into these agreements and his understanding of their terms, over the objection of Alta's counsel on parol evidence grounds, which the trial court reserved ruling on. Hinckley testified that when he entered into the royalty agreements, he would have thought AWCC was adequately protected through the affirmative and negative covenants, and two things occurred that were not envisioned in 2011 when they signed the royalty agreements, namely, Terra-Gen's affiliate came to own ON Wind and Oak Creek, as well as the fee interest in the land. Hinckley admitted the parties did not discuss this scenario as it had not yet occurred.
In addition to testifying as a fact witness, McMahon was asked to testify about calculations he made to determine what he believed AWCC was owed as past due rent. Alta's counsel objected to this as calling for expert testimony, explaining that AWCC did not designate an expert despite Alta's request and adding that McMahon was not qualified as an expert. AWCC's counsel argued the calculations were simple ones that did not require expert testimony and the only expertise McMahon had to establish was his familiarity with the lease and royalty agreements, and how the amounts were calculated under them. The trial court permitted the testimony and reserved ruling on the objection.
Thereafter, McMahon testified he calculated the minimum rents from January 10, 2018, through the end of the royalty agreements' terms, as $6,400,875 on the ON Wind lease and royalty agreement and $5,698,701.65 on the Oak Creek lease and royalty agreement, and from January 10, 2018, to the date of trial as $969,226.86 and $1,573,701.65, respectively. Alta's counsel moved to strike the damages testimony, but the trial court continued to reserve the objection.
After McMahon's testimony, AWCC's counsel advised the trial court excerpts from the deposition transcripts of Scobee, Kelly, and Cast had been lodged with the court along with Alta's counter designations and asked to move exhibits cited in the transcripts into evidence, which the trial court admitted.
The trial court put the trial on hold to permit Alta to file a motion for judgment under Code of Civil Procedure section 631.8. In its motion, Alta argued AWCC failed to: (1) prove its entitlement to declaratory relief, because neither ON Wind nor Oak Creek were in continued use and possession of the premises; (2) present evidence Alta breached any term of the Oak Creek and ON Wind royalty agreements or that Alta's alleged breaches caused any damages under the royalty agreements; (3) prove damages; (4) present evidence to satisfy the elements of its implied covenant of good faith and fair dealing contract claims; and (5) present evidence to support imposing alter ego liability.
In its opposition to the motion, AWCC asserted Alta breached the ON Wind royalty agreement by failing to pay AWCC rent after January 10, 2018, which it owed because the royalty agreement remained in effect since ON Wind's notice of termination was ineffective. AWCC further argued Alta breached both the ON Wind and Oak Creek royalty agreements by: (1) failing to pay rent after January 10, 2018, which Alta owed because the royalty agreements were reinstated pursuant to their terms; (2) actively participating in the plan to terminate the leases for the sole purpose of cutting off AWCC's rights; and (3) failing to obtain AWCC's written consent before Alta consented to Oak Creek's and ON Wind's terminations of the leases. AWCC argued Alta and Terra-Gen breached the implied covenant of good faith and fair dealing by causing Oak Creek and ON Wind to terminate the leases and transfer the projects' assets to Alta to deprive AWCC of its rights under the royalty agreements. AWCC further argued McMahon's damages testimony was admissible and it established a causal link between the breaches and damages. Finally, AWCC argued Terra-Gen should be held liable as Alta's alter ego.
At the hearing on the motion, the trial court began by explaining its tentative decision to grant the motion. After argument by counsel, the trial court took the matter under submission. Five days later, the trial court issued a minute order with its tentative decision to grant the motion and render judgment for the defendants. The trial court tentatively found the leases were terminated according to their terms, Alta's subsequent ownership and operation of the projects did not breach the royalty agreements, it would sustain the parol evidence objections to Hinckley's testimony, and because Alta and Terra-Gen effectuated what the royalty agreements expressly allowed, the alter ego and implied covenant doctrines did not change the result. The trial court stated that given its decision on the merits of the contract and declaratory relief claims, it did not reach Alta's arguments or objections on the evidence of damages.
On October 31, 2019, AWCC requested a statement of decision addressing the factual and legal basis of the following seven issues the trial court tentatively determined: (1) that the agreements' express terms were not ambiguous; (2) the leases were terminated according to their terms; (3) Alta merely assumed ownership and operation of the projects after termination of the leases; (4) there were no breaches of any provision of the royalty agreements as a result of the lease terminations; (5) the trial court's decision to sustain the parol evidence objections; (6) the royalty agreements expressly allowed Alta's conduct; and (7) if the trial court considered whether any of Alta's pre-termination conduct breached the royalty agreements or the implied covenant of good faith and fair dealing.
Alta submitted a proposed statement of decision addressing these issues on November 20, 2019, which the trial court signed and filed on December 2, 2019. The trial court found: (1) the leases and royalty agreements were not ambiguous; (2) the leases were terminated according to their terms; (3) the royalty agreements terminated when the leases terminated, there was no evidence Alta leased or demised its property after the leases terminated, and the lessees no longer owned any turbines on the properties to justify the continued payment of rent to AWCC; (4) AWCC failed to identify any term of the royalty agreements that Alta breached as a result of the lessees' early termination of their respective leases; (5) resort to extrinsic evidence was unnecessary because the relevant terms of the royalty agreements were not ambiguous, the extrinsic evidence, namely, Hinckley's testimony, could not be used to vary, alter, or add to the agreements' terms, and his subjective understanding was irrelevant; and (6) Alta and Terra-Gen could not be liable for breach of the implied covenant of good faith and fair dealing for causing the lessees to terminate their leases because each lessee had an unambiguous right to terminate its lease without AWCC's or Alta's consent.
The trial court issued a minute order on December 3, 2019, which stated it reviewed the proposed statement of decision and found it fairly set forth the court's legal reasoning and factual findings in reaching its decision, so it would execute it. The trial court ordered Alta to prepare and submit a form of judgment. AWCC filed objections to the proposed statement of decision on December 5, 2019.
A judgment was filed on December 12, 2019, which stated, among other things, that Alta and Terra-Gen submitted a proposed statement of decision for the court's consideration and signature, AWCC submitted objections thereto, and "[h]aving considered the proposed statement of decision and objections thereto, the Court finds that the proposed statement of decision sets forth the court's legal reasoning and factual findings in reaching its decision, and for that reason, the Court has executed the proposed statement of decision." Accordingly, it was adjudged and decreed that judgment be entered in favor of Alta and Terra-Gen, and against AWCC, and that Alta and Terra-Gen submit their memoranda of costs or motions for attorney fees, if any, in compliance with the Code of Civil Procedure and California Rules of Court.
DISCUSSION
Standards of Review
In a nonjury trial, a party may move for judgment at the conclusion of the other party's presentation of evidence. (Code Civ. Proc., § 631.8.) The motion serves the same purpose as a motion for nonsuit, enabling the court to dispense with the need for a defendant to produce evidence if, after the court weighs the plaintiff's evidence, it is persuaded that the plaintiff has failed to sustain its burden of proof. (Roth v. Parker (1997) 57 Cal.App.4th 542, 549‒550.) In deciding the motion, the court may weigh the evidence, make findings of fact, and render judgment in favor of the moving party, or decline to render judgment until the close of all evidence. (Code Civ. Proc., § 631.8, subd. (a).)
We review a judgment entered pursuant to Code of Civil Procedure section 631.8 under the substantial evidence standard. (Jordan v. City of Santa Barbara (1996) 46 Cal.App.4th 1245, 1255.) "We resolve all evidentiary conflicts in favor of the prevailing parties, and indulge all reasonable inferences possible to uphold the trial court's findings," and affirm if there is substantial evidence to support those findings. (Id. at pp. 1254-1255.) Where we are called to review a conclusion of law based on undisputed facts, however, we are not bound by the trial court's decision and are free to draw our own conclusions of law. (Pettus v. Cole (1996) 49 Cal.App.4th 402, 424.)
Here, AWCC's case turns on the interpretation of the leases and royalty agreements. The construction of a written instrument is essentially a judicial function to be carried out according to generally accepted canons of interpretation. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865.) When interpreting a contract, a court must give effect to the parties' mutual intention as it existed at the time of contracting. (Civ. Code, § 1636; Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 955 (Founding Members).) The parties' intent must be determined solely from the contract's written language, if possible. (Civ. Code, § 1639.)
"Extrinsic evidence is admissible to prove a meaning to which the contract is reasonably susceptible. [Citations.] If the trial court decides, after receiving the extrinsic evidence, the language of the contract is reasonably susceptible to the interpretation urged, the evidence is admitted to aid in interpreting the contract. [Citations.] Thus, '[t]he test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.'" (Founding Members, supra, 109 Cal.App.4th at p. 955.)
"The threshold issue of whether to admit the extrinsic evidence-that is, whether the contract is reasonably susceptible to the interpretation urged-is a question of law subject to de novo review." (Founding Members, supra, 109 Cal.App.4th at p. 955.) If no extrinsic evidence was introduced or the extrinsic evidence is not in conflict, we independently interpret the written agreement. (Parsons v. Bristol Development Co., supra, 62 Cal.2d at p. 866.) However, if the construction of the contract turns upon the credibility of extrinsic evidence, the trial court's interpretation of the agreement will be upheld if it is reasonably susceptible to that interpretation. (Ibid.; Western Medical Enterprises, Inc. v. Albers (1985) 166 Cal.App.3d 383, 389.)
"California recognizes the objective theory of contracts [citation], under which '[i]t is the objective intent, as evidenced by the words of the contract, rather than the subjective intent of one of the parties, that controls interpretation' [citation]. The parties' undisclosed intent or understanding is irrelevant to contract interpretation." (Founding Members, supra, 109 Cal.App.4th at p. 956.)
The Statement of Decision
As a threshold issue, we note that AWCC complains throughout its opening brief, without citation to authority, that because the trial court executed and filed its statement of decision before it submitted its objections, it was deprived of its statutory right to object to the proposed statement of decision and to have the trial court rule on and address its objections.
The record shows that AWCC filed timely objections to the proposed statement of decision, as it filed the objections within 15 days of service of the proposed statement of decision. (Cal. Rules of Court, rule 3.1590(g).) While the trial court signed and filed the proposed statement of decision before the objections were filed, the trial court retained the inherent power to amend the statement of decision at any time before entry of judgment. (Bay World Trading, Ltd. v. Nebraska Beef, Inc. (2002) 101 Cal.App.4th 135, 141.) The judgment shows the trial court considered the objections and still found the proposed statement of decision fairly set forth its legal reasoning and factual findings. Accordingly, we presume the trial court performed its duty and found AWCC's objections to be without merit. (Evid. Code, § 664 ["It is presumed that official duty has been regularly performed."].)
AWCC does not cite any authority that requires the trial court to expressly rule on its objections and it does not assert what remedy it may be entitled to for its perceived deprivation of its right to have the trial court consider its objections. We note that if a party who has requested a statement of decision brings any ambiguities or omissions in the statement of decision to the trial court's attention, that party may avoid the doctrine of implied findings, which requires an appellate court to infer the trial court made all factual findings necessary to support the judgment. (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 58; Code Civ. Proc., § 634.) The objections must be specific, meaning the alleged omission or ambiguity must be identified with sufficient particularity to allow the trial court to correct the defect. (People v. ConAgra Grocery Products Co. (2017) 17 Cal.App.5th 51, 81.) To the extent AWCC identifies omissions or ambiguities in the statement of decision that were brought to the court's attention, but it failed to address, we will consider them below.
The Termination of the ON Wind Lease
AWCC first contends Alta breached the ON Wind royalty agreement because the ON Wind lease was not properly terminated. AWCC asserts the termination was improper because (1) ON Wind was in default when it gave its notice of termination, since it was not current on its rent payments, and (2) ON Wind also was in default on the effective date of termination, since it had not paid the audit costs and attorney fees AWCC incurred in its efforts to collect the unpaid royalties and minimum rent.
The first issue, whether ON Wind could provide notice of termination when it was in default under the lease, calls for interpretation of the termination provision in the ON Wind lease. The provision in the ON Wind lease that allows the lessee to terminate the lease early is contained in section 20.1, which provides, in pertinent part: "Provided no Lessee Default has occurred and is then continuing at the time of Lessee's exercise of the following right of termination, or on the effective date of such termination, Lessee shall have the right to terminate this Agreement if Lessee determines in its good faith reasonable discretion, that the operation of Lessee's Project on the Leased Premises will not be profitable or commercially or legally practicable without incurring extraordinary costs or expenses.… Lessee shall effect a termination meeting the requirements of this Section 20.1 by giving Lessor at least one hundred eighty (180) days' prior written notice and paying any Rent due for such one hundred eighty (180) day period." The ON Wind lease defines a "Lessee Default" in section 19.1 as, among other things, "[t]he failure by Lessee to pay amounts required to be paid to Lessor hereunder when due," while a "Lessee Event of Default" occurs when the lessee fails "to pay amounts required to be paid to Lessor hereunder when due, when such failure has continued for thirty (30) days after written notice from Lessor."
AWCC asserts that despite its objection to the proposed statement of decision, the trial court did not explain its reasoning or address the fact that there was an existing "Lessee Default" when the notice of early termination was sent. The interpretation of the lease, however, involves a legal issue, and therefore we are unconcerned with any purported inadequacy in the statement of decision. (City of Coachella v. Riverside County Airport Land Use Com. (1989) 210 Cal.App.3d 1277, 1291‒1292.)
Reading these sections together, a lessee has the right to terminate the lease provided it is not in default, namely, it has not failed to pay the lessor amounts required to be paid when due, "at the time of Lessee's exercise of the following right of termination, or on the effective date of such termination." (Emphasis added.) The use of the word "or" shows the two clauses should be read in the disjunctive or alternative, which means the default may not exist either when the lessee provides notice of the termination or on the effective date of termination. In this case, the undisputed evidence shows that while ON Wind was in default when it gave the notice of termination, as it had not paid the minimum rent for 2016 or the royalties for much of 2017, by the time the termination was effective on January 10, 2018, it had paid all past due royalties and minimum rent.
AWCC asserts we should read this provision in the conjunctive, meaning the lessee must not be in default when the lessee provides notice of the termination and on the effective date of termination. AWCC asserts its interpretation makes sense because "a lessee under a lease should be current on its lease in order to take advantage of a provision permitting it to terminate the lease early." But that is not what the lease says. Where the language of a contract is clear and not absurd, it will be followed. (Civ. Code, § 1638.) Here, the lease's language is clear and not absurd, as it ensures that termination will not be complete until the lessee cures any default. Since ON Wind paid the minimum rent and royalties due in full before the effective date of termination, ON Wind properly terminated the lease.
AWCC next contends despite ON Wind's full payment of the minimum rent and royalties, the default was not cured before the effective date of termination because ON Wind did not pay AWCC the costs and attorney fees it incurred when it exercised its remedies resulting from ON Wind's default, namely, the audit costs and attorney fees incurred in relation to the audit and the filing of this lawsuit. AWCC asserts it was entitled to recover these amounts pursuant to section 19.4 of the ON Wind lease, which provides: "Each of Lessor and Lessee shall be entitled to recover from the other party hereto all reasonable expenses, including reasonable attorneys' fees and expenses incurred in connection with exercising its remedies resulting from a Default of the other party hereto pursuant to this Lease."
AWCC asserts the trial court did not address this claim despite having requested that it do so in its objections to the statement of decision. This issue, however, is a legal one that involves interpretation of the lease, and therefore any purported inadequacy in the statement of decision is irrelevant. (City of Coachella v. Riverside County Airport Land Use Com., supra, 210 Cal.App.3d at pp. 1291‒1292.)
To the extent AWCC is entitled to recover its "reasonable expenses" under this provision, the failure to pay those expenses on demand is not a default under the lease. It is not an amount "required to be paid to Lessor hereunder when due" or a failure "to perform any other covenants, conditions or terms of this Lease," as set forth in the lease's default provision (section 19.1), as the expenses do not have a due date and the provision does not state that the lessee is required to perform anything. Instead, section 19.4 is a provision that allows for an award of the "reasonable expenses" a party incurs in attempting to exercise the remedies available when the other party defaults. Here, AWCC exercised the remedy of suing for breach of contract. It was for the trial court to determine whether AWCC was entitled to recover attorney fees and audit costs in bringing this action. Thus, the failure to pay absent a court order was not a default under the ON Wind lease.
Since the ON Wind lease was properly terminated, the ON Wind royalty agreement was also terminated. The royalty agreement defines the "Initial Lease Termination Date" as February 28, 2031, "or such earlier date upon which the Lease is terminated in accordance with its terms," and provides that the agreement terminates "upon the Initial Lease Termination Date." Since the ON Wind lease was terminated in accordance with its terms, the royalty agreement also terminated and ON Wind does not owe any minimum rent due after the termination date and Alta could not have engaged in the additional breaches AWCC claims flowed from the purported improper termination of the lease.
The Reinstatement Clause
AWCC next contends the royalty agreements were reinstated because Alta entered into an arrangement with ON Wind and Oak Creek for continued operation of the wind turbines. Section 7.10 of the ON Wind royalty agreement provides that if ON Wind terminates the lease early, "then, if Landowner enters into any subsequent lease, easement or other similar arrangement within three (3) years after such termination pursuant to which all or a portion of the Property is leased or otherwise demised … by Landowner to a third party for the generation of wind energy, this Agreement shall be reinstated in its entirety on the date such lease or other arrangement is entered into and, AWCC's right to receive the royalties or rents payable in connection therewith shall continue for a term equal to the term remaining under this Agreement as of the date of such termination" (the tail provision). Section 7.3 of the Oak Creek royalty agreement contains a similar tail provision.
The Oak Creek royalty agreement provides that if Oak Creek terminates the lease early "and Landowner enters into any subsequent lease or other arrangement within three (3) years after such termination pursuant to which all or a portion of the Property is leased or otherwise demised to a third party for the generation of wind energy thereon, this Agreement shall be reinstated in its entirety on the date such lease or other arrangement is entered into and AWCC's right to receive the royalties and rents payable in connection therewith shall continue for the term remaining under this Agreement as of the date of such termination."
Pursuant to the plain terms of the tail provisions, if ON Wind or Oak Creek terminate their royalty agreements early, the royalty agreements will be reinstated if (1) Alta "enters into any subsequent lease, easement or other similar arrangement" within three years after the termination, (2) in which the property, either in whole or in part, is "leased or otherwise demised," (3) to a third party, (4) for the generation of wind energy. If triggered, the reinstatement clauses entitle AWCC to receive the rents payable in connection with the new "lease or other arrangement."
The trial court found the tail provisions were not triggered because Alta, who as of the trial date owned and operated the wind farms in its own name, was not a third party, and there was no evidence Alta "leased or otherwise demised" the property to anyone. Instead, the trial court found that after the leases terminated, Alta owned the turbines on the property pursuant to the terms of the leases and entered into APAs with ON Wind and Oak Creek for the provision of transitional services and the sale of project assets not transferred under the leases. The trial court reasoned that because ON Wind and Oak Creek did not own the turbines, there was no basis to justify the payment of rent to Alta.
In its objections to the proposed statement of decision, AWCC objected to the trial court's finding there was no evidence Alta leased or demised the property. AWCC asserted there was considerable evidence Alta granted Oak Creek and ON Wind revocable licenses to operate the wind farms until the APAs closed on August 1, 2019, under which Alta received" 'disguised' lease or rent payments" through the purchase price. On appeal, AWCC asserts the trial court did not explain its rationale for finding Alta did not lease or demise the premises. We disagree, as the trial court adequately explained its reasoning-that Alta did not lease or demise the property since ON Wind and Oak Creek did not own the turbines.
AWCC asserts the tail provisions were triggered because Alta entered into "new arrangements" with ON Wind and Oak Creek for continued operation of the wind turbines to generate wind energy by granting them revocable licenses to operate the wind farms. But as Alta points out, the now-revoked licenses never created real property rights amounting to a lease or demise, as "a license does not create or convey any interest in the real property; it merely makes lawful an act that otherwise would constitute a trespass." (Richardson v. Franc (2015) 233 Cal.App.4th 744, 758‒759; accord San Jose Parking, Inc. v. Superior Court (2003) 110 Cal.App.4th 1321, 1329 ["licenses create no interest in real property"]; Chandler v. Hart (1911) 161 Cal. 405, 413 ["[a] demise is defined as 'a conveyance either in fee, for life, or for years,' and as 'a lease or a conveyance for a term of years' "].) Since the licenses did not convey an interest in the property, it is not similar to a lease or demise and the tail provision does not apply.
Moreover, for the tail provision to apply, ON Wind and Oak Creek must be a "third party." Pursuant to the terms of the tail provision, the "Project Company" first must terminate the lease. The leases define the "Project Company" as ON Wind and Oak Creek. The tail provision goes on to state the royalty agreements are reinstated if the landowner leases or demises the property to a "third party." Since ON Wind and Oak Creek each are a "Project Company" within the meaning of their respective tail provision, they cannot also be a "third party" to whom the landowner leases or demises the property within the same provision. (See, e.g., Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1386 [plaintiff's interpretation of the term "gallon" in the parties' sales agreement "ha[d] a specified meaning that plainly conflicts with plaintiffs' proposed definition of that term"].) The use of the "third party" language required AWCC to prove that Alta entered a lease with a new project company.
Finally, AWCC did not present any evidence that Alta received royalties or rents from ON Wind or Oak Creek. Alta entered into the APAs to transfer assets and pay for operational services because Alta could not take operational control of the wind farms until it received certain consents and approvals, which Alta delayed in obtaining due to this litigation. Under the APAs, Alta paid ON Wind and Oak Creek a purchase price, which included payment for the assets and to compensate them for operating the turbines, which was offset by any net revenues ON Wind and Oak Creek earned. ON Wind and Oak Creek did not pay Alta anything in the form of rent. Instead, the transactions were set up to simulate Alta running the wind farms and keeping the revenues, with Alta paying ON Wind and Oak Creek to operate them. There simply was no rent or royalty payments from ON Wind and Oak Creek to Alta.
AWCC asserts the trial court erred in refusing to consider extrinsic evidence to explain the meaning of the tail provisions. AWCC points to Hinckley's testimony as to why the tail provisions were included in the royalty agreements, namely, to prevent a wind farm operator from negotiating with the landowner "such that the wind farm operator terminated a lease and then just entered into a new lease with the same owner for the purpose of getting out of our royalty payments. Hinckley further explained the "third party concept … mean[t] the wind farm operator," and "[y]ou wouldn't want the wind farm property released to another wind farm operator." He also confirmed the purpose of the tail provisions was to reinstate the royalty agreements if the projects kept operating after termination. AWCC asserts this testimony shows the purpose of the reinstatement clauses was, among other things, "to prevent the continued or reinstated operation of the wind farms without having to pay rents and royalties to AWCC."
The extrinsic evidence AWCC points to, however, is simply Hinckley's subjective intent or understanding of the tail provisions. He essentially testified he looked for certain protections in the legal documents that would prevent a disruption of AWCC's revenue stream from the royalties, but he never testified to any different terms than those stated in the royalty agreements. Rather, he testified the parties never discussed during negotiations over the ON Wind lease or the royalty agreements the possibility a project company could terminate the lease, transfer it to another affiliate and stop paying royalties or rent, and he never considered at the time of negotiation the events as they unfolded. He subjectively believed AWCC was adequately protected through the agreements' express affirmative and negative covenants, which he "thought to be fulsome."
Hinckley's testimony is irrelevant under the objective theory of contracts, as it consists of undisclosed statements regarding intent or understanding of the tail provisions. (Founding Members, supra, 109 Cal.App.4th at p. 960.) Moreover, AWCC does not explain how Hinckley's testimony proves a meaning to which the tail provisions are reasonably susceptible. To the extent Hinckley testified he intended ON Wind or Oak Creek to be included in the definition of "third party" so the provision would apply if they continued to operate the wind farms after termination, it is contrary to the tail provision's express language. Moreover, even if ON Wind and Oak Creek are third parties, the property was not leased or demised to them, and they did not pay rent to AWCC. AWCC asserts "it is reasonable to conclude the parties intended to create a variety of protections against possible bad acts and manipulation." Even so, the arrangement Alta entered into with ON Wind and Oak Creek to continue to operate the wind farms while Alta obtained the necessary approvals to do so in its own name simply does not fall within the express terms of the tail provisions. Accordingly, the trial court did not err when it found Alta did not breach the tail provisions.
The Implied Covenant of Good Faith and Fair Dealing
AWCC contends Alta breached the implied covenant of good faith and fair dealing when it reached an agreement with ON Wind and Oak Creek to terminate the leases early, and have Alta buy the turbines from ON Wind and Oak Creek and operate the turbines itself without having to pay royalties and minimum rents to anyone. AWCC asserts the leases would not have been terminated early but for Alta's "agreement with its affiliates, ON Wind and Oak Creek, to purchase the wind turbines as part of the overall deal and scheme to cut AWCC out of the picture." AWCC argues that even if Alta's actions did not directly breach the royalty agreements, they breached the implied covenant of good faith and fair dealing because Alta engaged in a deliberate act which unfairly frustrated the common purpose of the royalty agreements, disappointed AWCC's reasonable expectations, and deprived AWCC of the benefits of the agreement.
Every contract contains an implied covenant of good faith and fair dealing that" 'neither party will do anything which will injure the right of the other to receive the benefits of the agreement.'" (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 400.) This implied covenant is "read into contracts 'in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purpose.'" (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373 (Carma Developers); see Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107, 1120 ["the implied covenant will only be recognized to further the contract's purpose"].)
The implied covenant "finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith." (Carma Developers, supra, 2 Cal.4th at p. 372; accord, Ladd v. Warner Bros. Entertainment, Inc. (2010) 184 Cal.App.4th 1298, 1306.) Nonetheless, if the express purpose of the contract is to grant unfettered discretion, and the contract is otherwise supported by adequate consideration, then the conduct is, by definition, within the reasonable expectation of the parties and "can never violate an implied covenant of good faith and fair dealing." (Carma Developers, at p. 376 [lessor's termination of lease for lessor's own financial gain was not breach of implied covenant of good faith because it was expressly permitted by the lease and therefore within parties' reasonable expectations]; see Wolf v. Walt Disney Pictures & Television, supra, 162 Cal.App.4th at pp. 1120‒1121; see also Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 808 ["courts are not at liberty to imply a covenant directly at odds with a contract's express grant of discretionary power except in those relatively rare instances when reading the provision literally would, contrary to the parties' clear intention, result in an unenforceable, illusory agreement"].)
"[B]reach of a specific provision of the contract is not a necessary prerequisite to a claim for breach of the implied covenant of good faith and fair dealing." (Schwartz v. State Farm Fire & Casualty Co. (2001) 88 Cal.App.4th 1329, 1339; accord, Carma Developers, supra, 2 Cal.4th at p. 373 ["breach of a specific provision of the contract is not a necessary prerequisite" to an action for breach of the implied covenant of good faith; "[w]ere it otherwise, the covenant would have no practical meaning, for any breach thereof would necessarily involve breach of some other term of the contract"].) However, a claim for breach of the implied covenant "must show that the conduct of the defendant, whether or not it also constitutes a breach of a consensual contract term, demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement." (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395; see Mosley v. Pacific Specialty Ins. Co. (2020) 49 Cal.App.5th 417, 435-436.)
Here, the trial court concluded in the statement of decision that even if Alta or Terra-Gen caused ON Wind and Oak Creek to terminate the leases as affiliated entities, they could not be liable for their alleged part in those terminations because each lessee had an unambiguous right to terminate its lease, which resulted in the termination of the associated royalty agreement. As the trial court found, each lease acknowledged the lessee and lessor entities could be held in common ownership, as shown by the inclusion of merger clauses, and the project agreements do not impose any limitation on termination based on common ownership. In addition, each lease granted ON Wind and Oak Creek the right to terminate the leases without AWCC's or Alta's consent and granted Alta the right to take ownership of the leases on termination. While the royalty agreements gave AWCC the right to receive rent from Alta if Alta leased the property to a third party to generate electricity in exchange for rent within three years of termination, that never occurred. The trial court further found nothing in the royalty agreements could be implied to curtail the lessees' early termination rights or Alta's right to own the turbines on termination.
The Oak Creek lease provides that if the "Lessor's and Lessee's estates in the Property, or any portion thereof, become vested in the same owner, this Agreement shall nevertheless not be destroyed by application of the doctrine of merger except at the express election of the owner." Similarly, the ON Wind lease provides: "There shall be no merger of this Lease, the leasehold estate created by this Lease, or the easements granted herein with the fee estate in the Oak Creek Property by reason of the fact that this Lease, the leasehold estate, any interest in the leasehold estate, or any easement granted hereunder may be held, directly or indirectly, by or for the account of any person or persons who shall own the fee estate or any interest therein, and no such merger shall occur unless and until the persons holding such interests in the Oak Creek Property, and all persons (including the Mortgagee) having an interest [in] this Lease, the leasehold estate, any interest in the leasehold estate, and any easement granted hereunder shall join in a written instrument effecting such merger and shall duly record the instrument."
AWCC contends this analysis unduly focuses on the leases and whether ON Wind and Oak Creek had the unconditional right to terminate them. Instead, AWCC asserts, the focus should be on Alta's role in ON Wind's and Oak Creek's decisions to terminate the leases, namely, that it worked with its affiliates to come up with a "scheme" to cut-off AWCC's rent and royalty payments and keep the wind energy proceeds in the Terra-Gen family, which only worked because the entities were affiliates and Alta agreed to purchase the turbines. AWCC argues it is Alta's "active participation" with ON Wind and Oak Creek to terminate the royalty agreements that constitutes the breach of the implied covenant, noting there is nothing in the royalty agreements that gave Alta the express right to act as it did.
Even if Alta came up with the idea to avoid the royalty payments by having ON Wind and Oak Creek exercise their early termination rights, the leases expressly permitted both early termination and Alta's ability to take possession of the turbines. Neither the leases nor the royalty agreements required Alta to decline to accept the turbines should an affiliate such as ON Wind or Oak Creek decide to exercise early termination rights, or otherwise prohibit Alta from operating the wind farms following early termination by an affiliate. Alta simply enforced its rights under the parties' agreement; it was not attempting to get more than it had bargained for. Had AWCC intended to limit the right of early termination or Alta's ability to accept the turbines only to situations where the lessee is not an affiliate of the lessor, as it now claims, it could have included that restriction in the royalty agreements. It is not the function of the implied covenant of good faith and fair dealing to correct lapses of one party's negotiating team. (See generally Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349‒350 [the implied covenant of good faith and fair dealing "cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement"].)
Since the covenant of good faith and fair dealing is limited to assuring compliance with the contract's express terms, terminating the leases and royalty agreements as permitted under those contracts, even if solely because it was in the financial interests of Alta, ON Wind, and Oak Creek to do so, cannot frustrate the reasonable expectations of the parties and thereby breach the covenant. (See Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1094 [" 'The implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract.' "].)
The No Interference and Non-Contravention Provisions
Finally, AWCC contends Alta breached the "no interference" and "non-contravention" provisions of the royalty agreements. AWCC argues these provisions imposed a contractual obligation on Alta to protect AWCC's rights to receive the royalties and minimum rent, and any action by Alta or its affiliates that interfered with AWCC's rights would constitute a breach of the royalty agreements.
The "No Interference" provision in the ON Wind royalty agreement states in pertinent part: "Neither Landowner's use of the Property nor its development, operation and maintenance of any future wind generation facility shall in any way materially interfere with the use and enjoyment by the Project Owner of its rights in the Property provided pursuant to the terms of the Lease; … Landowner shall not engage in any manner of use of the Property that could reasonably be expected to impair or otherwise interfere with AWCC's right to receive the Royalty Payments or that could diminish the value of such Royalty Payments." Oak Creek's royalty agreement contains a similar provision. We agree with Alta there is no evidence of a breach of this provision, as it only limits Alta's use of the property, i.e., its land, and prohibits Alta from using it in a manner that would impair or interfere with AWCC's right to receive royalty payments. Alta's use of the land, however, is not at issue here.
The "Non-Contravention" provision in the ON Wind royalty agreement provides in relevant part: "[N]either Landowner nor its affiliates will contravene in any material respect any applicable law, this Agreement or any other contractual obligation which would materially interfere with AWCC's right to receive the Royalty Amounts as set forth in this Agreement." The Oak Creek royalty agreement contains a similar provision. This provision prohibits Alta and its affiliates from violating any applicable law, the royalty agreement, or any other contractual obligation that would interfere with AWCC's right to receive royalties. The trial court found in its statement of decision that AWCC failed to present any evidence Alta failed to comply with any term of the royalty agreements, which presumably includes this one.
AWCC asserts that despite its objection to the proposed statement of decision, the trial court did not provide the factual and legal basis for its conclusion that the no interference and non-contravention provisions were not breached. This is a legal issue, however, because the facts are undisputed and the issues involve contractual interpretation. Therefore, we are unconcerned with any purported inadequacy in the statement of decision. (City of Coachella v. Riverside County Airport Land Use Com., supra, 210 Cal.App.3d at pp. 1291‒1292.)
On appeal, AWCC asserts Alta breached the non-contravention provisions because Alta and its affiliates manipulated the terminations of the leases and royalty agreements to eliminate payments to AWCC. AWCC, however, does not identify any provision of the royalty agreements Alta violated that would also constitute a violation of the non-contravention provisions. AWCC asserts that once Alta purchased the land from OCES and became the landowner under the leases and royalty agreements, ON Wind and Oak Creek, as affiliates of Alta, could no longer terminate the project leases early without AWCC's written consent, as to do so would interfere with AWCC's right to receive royalties. But as we have already explained, neither the royalty agreements nor the leases prohibit early termination where the lessor and lessee are affiliates, and therefore exercise of that right cannot violate these agreements. While AWCC asserts Alta breached a contractual obligation when its affiliate, ON Wind, terminated the lease when it was in default, we have concluded ON Wind properly terminated the lease.
AWCC also asserts Alta's failure to unilaterally adjust payments under the leases was a direct violation of the non-contravention provisions, citing to provisions in the royalty agreements that prohibit the landowner from modifying the terms of the leases without AWCC's prior written approval, which the Oak Creek royalty agreement states "shall not be unreasonably withheld." AWCC asserts that "[i]f the projects were truly unprofitable as structured," Alta, ON Wind and Oak Creek could have modified the leases to adjust the payment of royalties and minimum rents so the project would be profitable and under that scenario it would have been unreasonable for AWCC to withhold consent to the modifications. AWCC, however, ignores that ON Wind and Oak Creek did attempt to secure AWCC's consent to modify the payments under the lease, but AWCC refused. Moreover, this provision did not create a contractual duty to restructure the leases.
Given our conclusion that the tail provision was not triggered by ON Wind and Oak Creek's subsequent operation of the wind farms, and there was no breach of the implied covenant of good faith and fair dealing, there is simply no basis to find that Alta violated the non-contravention provisions.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to respondents.
WE CONCUR: POOCHIGIAN, ACTING P. J., SMITH, J.