Opinion
NOT FOR PUBLICATION
FINDINGS OF FACT AND CONCLUSIONS OF LAW RE: ESTOPPEL AND WAIVER [AMENDED]
LOUISE CARL ADLER, Judge.
INTRODUCTION
In response to the pre-trial motions of the consortium of Senior Lenders and their Collateral Agent, Wells Fargo Bank (collectively "WFB") and South Bay Expressway, L.P. ("SBX") to try their estoppel and waiver affirmative defenses first in order, the Court granted the motion over the objection of Otay River Constructors ("ORC"). The motion argued, and the Court agreed, that trying these affirmative defenses first might obviate the need to hear voluminous evidence to determine the scope of the Toll Road "work of improvement," and the extent of pre-contract work, if any, by ORC and others on the Toll Road "work of improvement," commencing prior to May 22, 2003.
On October 25, 26, and 27, 2010, the Court took testimony and considered documentary evidence on the issues of waiver and estoppel. In an oral ruling on the record on October 27, 2010, the Court held that ORC was equitably estopped to assert that construction on the Toll Road "work of improvement" had commenced prior to the Financial Closing of the transaction on May 22, 2003. These Supplemental Findings of Fact and Conclusions of Law are filed at the request of the parties and to further supplement the Court's comments on the record.
In arriving at its ruling, the Court considered the Statement of Undisputed Facts contained in the Amended Pre-Trial Order (ECF No. 168) and numerous documents which were admitted into evidence, including the following:
a. The Consent and Agreement between ORC, SBX and WFB [Ex. 245];
b. The Amended and Restated Toll Road Design Build Contract ("Toll Road DBC") [Ex. 276];
c. Progress Reports submitted by ORC [Ex. 325, 339, 358 and 389];
d. Pay Applications submitted by ORC [Ex., 322, 332, 366, 399 and 401]; and
e. Appendix 10(c) to the Toll Road DBC [Ex. 276, at 276-429].
Additionally, the Court considered the testimony of the witnesses at trial, including D. Richard Linford ("Mr. Linford"), Patrick Flaherty ("Mr. Flaherty") and Richard Fierce ("Mr. Fierce").
FINDINGS OF FACT
1. SBX developed and operates a four-lane toll road in Southern California commonly referred to as the SR 125 Toll Road or the South Bay Expressway ("Toll Road"). SBX's rights arise from a Toll Road Development Franchise Agreement ("DFA") and Toll Road Lease Agreement between SBX and Caltrans.
2. SBX, as the developer under the DFA, hired ORC as its general contractor to design and construct the Toll Road segment of State Route 125 (the "Toll Road project"). The Toll Road project was privately funded from financing obtained from WFB. By separate contract, SBX also hired ORC to be the general contractor for the two additional segments of State Route 125 known as the gap and the connector which connect to the Toll Road to State Route 54 (the "G/C DBC" and "G/C project"). The G/C project was publicly funded, and the public's use of these segments is toll-free.
ORC contends the Toll Road project and the G/C project comprise a single "work of improvement" within the meaning of California Civil Code § 3106, but the Court did not reach this issue.
A. ORC's Representations and Warranties that it Had No Claim and No Lien as of the May 22. 2003
3. On May 22, 2003, ORG, along with WFB and SBX, participated in a Financial Closing to execute and exchange the various transactional documents. ORC's representatives at this Financial Closing were Mr. Linford, Mr. Flaherty and Mr. Fierce.
4. At this Financial Closing, WFB and SBX executed the various financing documents, including a construction deed of trust granting a first priority lien to WFB on virtually all of SBX's assets in exchange for the construction financing ("2003 CTD"). As well, ORC and SBX executed the Toll Road DBC pursuant to which ORC would serve as general contractor for the Toll Road project. Additionally, ORC through its representatives Mr. Flaherty and Mr. Linford executed a "Consent and Agreement" in favor of WFB for the Toll Road DBC. [Ex. 245]. Paragraph 3(f) of the Consent and Agreement states as follows:
ORC executed another identical "Consent and Agreement" in favor of WFB for the separate G/C DBC. [Ex. 244] However, references to the Consent and Agreement in this decision are to the Toll Road document only, not the G/C document.
The Obligor [ORC] has no present claim against the Assignor [SBX] or lien upon the Project arising out of the Obligor's performance of am; work or service under the Assigned Agreements [the Toll Road DBC, the G/C DBC, and the Coordination Agreement].
As part of the collateral granted to WFB, SBX assigned all of its rights under the Assigned Agreements. In the Consent and Agreement, ORC expressly acknowledged and consented to WFB's security interest in the Assigned Agreements.
[Ex. 245, at 245-0004 (emphasis added)]
5. As more fully set forth below, the evidence supports a finding that at the time of the Financial Closing, ORC understood that execution of the Consent and Agreement was material to SBX and WFB. ORC understood that WFB required a first priority trust deed as a condition to its agreement to finance construction of the Toll Road project. ORC also understood that WFB intended to rely upon the representations and warranties made in the Consent and Agreement, including ORC's representation and warranty that it had no "present claim" or "lien" to assure WFB would have a first priority lien. Finally, ORC also understood that without the construction financing, there would be no Toll Road construction.
6. The evidence is that ORC could not start construction of the Toll Road project before it received a Notice to Proceed from SBX. Pursuant to Paragraph 8.1.1 of the Toll Road DBC, this Notice to Proceed would be issued on the Effective Date of the Toll Road DBC. Article 2 of the Toll Road DBC set forth the conditions precedent to the Effective Date, which could not have occurred prior to execution of the Toll Road DBC on May 22, 2003. [Ex. 276, at 276-0021; 276-0036]
7. Upon receipt of the Notice to Proceed, ORC could commence certain Phase 1 Work. [Id. at 276-0055] Pursuant to Paragraph 8.1.2, Phase 1 Work involved pre-construction design and engineering work.
8. Pursuant to Paragraph 8.2.1 of the Toll Road DBC, ORC could commence Phase 2 Work (the actual construction work) at any time after the issuance of the Notice to Proceed, subject to Paragraph. 8.2.2 which provides:
The Toll Road DBC defines "Site" to mean: (i) those areas designated in the Scope of Work [Appendix Al] for the performance of the Work; and (ii) the property on or about which ORC is required to perform any of the Temporary Work or the Permanent Work. [Id. at 276-0031]
Unless Contractor [ORC] has received the prior written approval of Developer [SBX], in no case snail Contractor commence any portion of the construction work at the Site"* prior to the occurrence of the following events:
(a) Developer and Caltrans shall have approved the Baseline Schedule and Contractor's Quality Assurance and Control Plans;....
[Id. at 276-0056 (emphasis added)]
9. The evidence supports a finding that as of May 22, 2003, SBX had not provided ORC with prior written consent, or a formal Notice to Proceed; nor had the Baseline Schedule been approved.
10. The evidence is that ORC represented that construction work had not begun in its Payment Applications and Progress Reports presented to SBX during the period immediately after the Financial Closing. Specifically:
■ Toll Road Payment Application No. 1
Payment Application No. 1 for the period of May 22, 2003 through May 30, 2003 contains an Invoice Certificate, with the notarized signature of Jan Bohn, project director, stating in relevant part:
In order to induce [SBX]... to make payment as requested by this Invoice, the undersigned Contractor hereby certifies, represents and warrants to [SBX] as follows:
2. The Work described in Attachment A and the other exhibits attached hereto has been fully performed ... and the information contained in such exhibits is true, complete, and correct in all material respects.
[Ex. 322, at 322-0005] Attachment A to Exhibit 322 shows no Phase 2 work was performed during this pay application period. [Id. at 322-0004]
■ Toll Road Progress Report No. 1
Progress Report No. 1 for the period of May 22, 2003 through May 30, 2003 states on the Executive Summary that ORC would submit the Baseline Schedule for the Toll Road construction on June 11, 2003. [Ex. 325, at 325-0004]
■ Toll Road Payment Application No. 2
Payment Application No. 2 for the period of May 31, 2003 through June 30, 2003 indicates in Attachment A that no construction work had been performed during that period. [Ex. 332, at 332-0003]
■ Toll Road Progress Report No. 2
Progress Report No. 2 for the period of May 31, 2003 through June 30, 2003 in the Executive Summary states that the Baseline Schedule for construction had been submitted on June 11, 2003. No approval of the Baseline Schedule was reported. [Ex. 339, at 339-0004]
■ Toll Road Payment Application No. 3
Payment Application No. 3 for the period of July 1, 2003 through July 30, 2003 contains another Invoice Certificate with the notarized signature of Jan Bohn, project director, reciting the same relevant language set forth above. [Ex. 366, at 366-0007] As well, Attachment A to this pay application shows that no construction work had been performed. [Id. at 366-0003]
■ Toll Road Progress Report No. 3
Progress Report No. 3 for the period of July 1, 2003 through July 30, 2003 in the Executive Summary states that the Baseline Schedule for construction had been approved on July 18, 2003. [Ex. 358, p. 358-0004].
■ Toll Road Payment Application No. 4
Payment Application No. 4 for the period of July 31, 2003 through August 31, 2003 contains the same Invoice Certification by Jan Bohn as recited above [Ex. 399, at 399-0035], and Attachment A for the first time reflects an allocation of cost to the Phase 2 (construction work) element of the contract. [Id. at 399-0004]
■ Toll Road Progress Report No. 4
Progress Report No. 4 for the period of July 31,2003 through August 30, 2003 states in the Executive Summary under the item "Specific Construction Issues": "There are no issues because construction has just barely begun." [Ex. 389, at 389-0005]
B. ORG'S Agreement to Use a Compliant Lien Release Form
11. In Paragraph 19.3.3 .(ii) of the Toll Road DBC, ORC agreed it would submit lien release forms in connection with its monthly pa5mient invoices substantially in the form attached as Appendix 10(c) to the Toll Road DBC. [Ex. 276, at 276-0113,276-0429] It is uncontroverted the lien release form attached as Appendix 10(c) is substantially similar to the form prescribed in California Civil Code § 3262, and use of the Appendix 10(c) form would have been effective to release all liens covered by the monthly invoices, if paid.
12. On June 19, 2003, ORC submitted a lien release form attached to Payment Application No. 1. The lien release attached to Payment Application No. 1 requested payment in the sum of $2,137,500. [Ex. 322, at 322-0006] The uncontroverted evidence is that SBX paid that amount.
13. On June 30, 2003, ORC submitted a lien release form attached to Payment Application No. 2. The lien release covered the period from May 31, 2003 through June 30, 2003. The Ken release requested payment in the sum of $2,137,500. [Ex. 332, at 332-0004] The uncontroverted evidence is that SBX paid that amount.
14. On August 1, 2003, ORG submitted a lien release form attached to Payment Application No. 3. The lien release covered the period from July 1, 2003 through July 30, 2003. The lien release requested payment in the amount of $2,137,500. [Ex. 366, at 366-0005] The uncontroverted evidence is that SBX paid that amount.
15. It is uncontroverted that each of the above lien release forms are not substantially in the form attached as Appendix 10(c); nor are they substantially in conformance with the form prescribed by California Civil Code § 3262. Each of the above lien release forms were on ORC's letterhead. Jan Bohn, ORC's project director, who signed and submitted the Payment Applications with the lien release forms, testified he had no knowledge who prepared the lien release forms or why they were changed from the form ORC agreed to use in the Toll Road DBC [Ex. 276]. However, he did not contend that someone had sneaked into ORC's offices and prepared non-compliant lien release forms on ORC's letterhead. The highly probable inference is that they were prepared by ORC. Importantly, the lien release forms submitted with ORC's Payment Applications, contained no clear and conspicuous language alerting recipient that the form was altered and may no longer substantially comply with the agreed upon form or Civil Code § 3262.
16. All Findings of Fact that are Conclusions of Law shall be deemed to be Conclusions of Law.
CONCLUSIONS OF LAW
17. SBX and WFB argue that ORG should be estopped from asserting priority of its lien dating before May 22, 2003. Calif. Evid. Code § 623; Ware Supply Co. V. Sacramento Sav. & Loan Assn., 246 Cal.App. 2d 398, 406-09 (1966) (holding that a subcontractor was estopped from asserting a mechanic's lien when it executed contracts intending to induce reliance by the lender). After consideration of all the evidence, the Court concludes that equitable estoppel should be applied to bar ORC from introducing any evidence that construction began before May 22, 2003, and from asserting priority of its lien before that date.
18. The doctrine of equitable estoppel arises from the declarations or conduct of the party estopped from asserting a position. There must be a false representation or concealment of a material fact concerning the matter for which estoppel is claimed, and the party to whom the representation was made or from whom the facts were concealed must be ignorant - actually and permissibly - of the truth. The doctrine of equitable estoppel is founded on justice and good conscience, and is based on the theory that the party to be estopped has, by his own statements or conduct, misled another to his prejudice. Ware Supply Co., 246 Cal.App. 2d at 407; see also 1 B. Russell, Bankruptcy Evid. Manuel, § 5.1, 555-56 (2010-2011 ed.).
19. To establish equitable estoppel in California, a party must prove four elements: (1) the party to be estopped must be apprised of the true facts; (2) the party to be estopped must intend that its conduct be acted upon, or must so act that the party asserting estoppel has a right to believe it was so intended; (3) the party asserting estoppel must be ignorant of the true state of facts; and (4) the party asserting estoppel must rely on the conduct to its detriment and injury. Ware Supply Co., 246 Cal.App. 2d at 407.
20. The burden of proof is on the party asserting estoppel. It must be met by clear and convincing evidence. In re Marriage of Brinkman, 111 Cal.App. 4tli 1281, 1289 (2003). This standard of proof requires a higher degree of proof than the usual preponderance of evidence standard. It requires a finding of "high probability" that the fact is true - i.e., evidence so clear as to leave no substantial doubt. Lillian F. v. Sup. Ct. (Kretz), 160 Cal.App. 3d 314, 320 (1984).
21. California Evidence Code § 623 provides that whenever a party has, by its own statement or conduct, intentionally and deliberately led another to believe a particular thing is true and to act upon such belief, he is not, in any litigation arising out of such statement or conduct, permitted to contradict it. California Evidence Code § 620 states that Evidence Code § 623 is a conclusive presumption.
22. The Court concludes there is clear and convincing evidence that the elements for equitable estoppel are met. First, ORC was the party most knowledgeable as to the state of its work, if any, on the Toll Road project. ORC affirmatively represented and warranted that it had no present claim or lien upon the Toll Road project arising from any of its work or services under any of its agreements with SBX. [Ex. 245]
23. Additionally, there is clear and convincing evidence that ORC intended for WFB and SBX to believe it had no present claim or lien. ORC knew that SBX needed the Consent and Agreement, including the representations and warranties made in Paragraph 3(f), in order for WFB to agree to provide the construction financing for the Toll Road project. Clear and convincing evidence establishes that ORC understood that if there was no loan, there would be no Toll Road project, and there would be no Toll Road DBC.
A. Mr Flaherty, who represented ORC at the Financial Closing, testified as follows:
Q: Did ORC intend for SBX to rely on the representations and warranties in [paragraph] 3f [of Ex. 245]?
A: Yes because SBX told us that they needed that representation to secure their financing.
Q : And specifically did ORC intend for SBX to rely on e very fast sentence of paragraph 3f?
A: Yes.
Q: You also knew, didn't you, sir, that the lenders wanted these representations to be assured that any potential claims had been disclosed and resolved prior to the financial close, didn't you?
A: Yes, that's correct.
Q: And you knew in fact that they wanted a clean slate; isn't that right, sir?
A: Yes.
[Trial Tr. vol. 2, 222:17-23; 223:3-10, October 26, 2010]
B. Mr. Fierce, legal counsel present at the Financial Closing who represented the interests of Mr. Flaherty/ORC, testified as follows:
Q: When you say they're "entitled to rely on," what do you mean by that?
A. ...The other side is entitled to read it and rely on it, and that reliance would be deemed, you know, justifiable.
[Trial Tr., vol. 2, 307:25-308:5] Further, he stated:
Q: If we could look at paragraph 3(f) [of Ex. 245] ...You also understand that this is within the representations and warranties provision of this contract?
A: Correct.
Q: And these are representations and warranties made by ORC; correct?
A: Correct.
Q: And the parties to whom these representations and warranties were made could justifiably rely on ORC's word; right?
A: Correct.
Q: Were these representations and warranties true on May 22, 2003?
A: Yes.
Q: They're still true today?
A: Yes.
Q: So as far as you could tell on May 22, 2003, ORC had no present claim against SBX?
A: That's correct.
Q: And on May 2, 2003, ORC had no lien against the toll road?
A: Correct.
[Mat 315:7-316:5]
This evidence leaves no substantial doubt that ORC intended WFB and SBX to rely on their representations. The testimony of Mr. Flaherty and Mr. Fierce not only confirms ORC intended to induce reliance, but also confirms a belief that such reliance was justifiable.
24. Clear and convincing evidence also establishes that WFB and SBX were ignorant of the facts that ORC now seeks to introduce into evidence. There is no evidence that either was aware that ORC, or persons hired by ORC, may have been already working on the Toll Road project. ORC was the general contractor for the Toll Road project, and it possessed the superior knowledge of status of construction on the Toll Road project. If ORC, or someone hired by ORC, had commenced any work or services under the Toll Road DBC prior to May 23, 2003, or any of the other Assigned Agreements, ORC should have disclosed these facts at the Financial Closing so that WFB and SBX would know the "slate" was not clean.
25. Despite Mr. Fierce's testimony in Paragraph 23 above, ORC contends that WFB and SBX could not justifiably rely upon ORC's representations and warranties in the Consent and Agreement. They contend that WFB and SBX should have physically inspected the site to confirm that ORC's representations and warranties were, in fact, correct. Under the circumstances, this argument is silly. Although no one from WFB or SBX walked the undeveloped Toll Road route before of the Financial Closing, a physical inspection would not have been convenient or helpful. The evidence shows the Toll Road project extended some 14 miles in length through undeveloped scrub land. The evidence also shows that the Toll Road project had somewhat uncertain boundaries, and there were adjacent construction projects underway by other landowners. Logically, the Financial Closing was orchestrated to avoid the need for WFB or SBX to walk the entire site, guessing whether any materials or construction work in the vicinity might, or might not, be part of the Toll Road project. The Court is not aware of any legal authorities, nor has ORC cited to any authorities requiring a construction lender to determine for itself that no construction has commenced instead of relying on the written word of the estopped party who possessed superior knowledge of the facts.
26. Clear and convincing evidence also supports that WFB and SBX would be seriously injured if ORC is not estopped from asserting priority of its lien dating before May 22, 2003. ORC is asserting a lien for unpaid construction work of approximately $145 million. From the evidence derived from SBX's schedules, it appears there is insufficient value in SBX's rights under the Franchise Agreement and its accompanying Toll Road Lease to fully secure its obligations to WFB.
These obligations include $140,000,000 owed to the United States Department of Transportation. [Adv. Proc. 10-90180-LA, ECF No. 59]
27. ORC claims there can be no waiver or estoppel of a mechanic's lien except by execution of a waiver and release form substantially in the form set forth in Civil Code § 3262, and the Consent and Agreement clearly does not comply with this statute. ORC's argument is nonsensical. It is clear, from a cursory review of the statutorily-compliant lien release forms, that these forms deal with waiver and release of liens in connection with progress payments made during a construction contract, or a final payment upon performance of the contract. They do not address this situation where ORC - the general contractor - at the outset of the Toll Road DBC, represented and warranted that it had no present claim or lien for any work or services arising out of any of its agreements with SBX knowing this agreement would be relied upon by SBX and WFB to their financial detriment. There is ample authority in California applying the doctrine of equitable estoppel to bar mechanic's liens to prevent fundamental unfairness where (as here) the factual elements were met. See Ware Supply Co., 246 Cal.App. 2d at 406-08.; A.A. Baxter Corp. v. Home Owners & Lenders, 7 Cal.App. 3d 725, 733-35 (1970); R. D. Reeder Lathing Co. v. Allen, 66 Cal. 2d 373, 377-78 (1967)(recognizing that estoppel to assert mechanic's lien rights may be inferred from the circumstances and conduct of the parties). ORC has not cited any legal authorities to support its argument that these cases are superceded by Civil Code § 3262.
28. Further, ORC contends that the word "Hen" in the Consent and Agreement meant a "recorded Hen" and did not mean an off-record or inchoate Hen. The argument ignores the definition of lien in California Civil Procedure Code § 1180 which provides:
DEFINITION OF LIEN. A lien is a charge imposed upon specific property, by which it is made security for the performance of an act.
More importantly, ORC's argument ignores realities of this case. WFB and SBX could have obtained "recorded lien" information from the public records, and did not need a representation from ORC to assure themselves there were no "recorded liens." However, the public records would not have revealed off-record liens such as a mechanic's lien which could not have been recorded by law, and which might later ripen into a recorded lien with priority relating prior to May 22, 2003. The obvious concern was with this off-record, or inchoate, lien claim - not recorded liens. Since ORC was the only contractor yet hired - to both design and build the Toll Road project - ORC's representation that it had no "present claim" or "lien" must be construed in this context to mean that it had no off-record or inchoate lien on the project.
29. The Court also concludes that clear and convincing evidence estops ORC from asserting that its lien release forms are void. It is uncontroverted that ORC's lien releases do not substantially conform with the statutorily-prescribed Hen release forms in Civil Code § 3262. [Ex. 322, 332, 366, 399 and 401] However, it is also uncontroverted that ORC agreed it would submit lien release forms substantially in the form attached as Appendix 10(c) to the Toll Road DBC. [Ex. 276, at 276-0113, 276-0429] Instead, ORC submitted lien release forms with minor language changes which ORC now contends rendered the Hen releases void. ORC obviously intended for SBX and WFB to rely upon these altered lien releases, and it knew that SBX and ORG would indeed rely upon them to their detriment (if void). It is fundamentally unfair for ORG to alter the agreed upon statutorily-compliant form to a void form without alerting SBX or WFB, and then to contend that these altered releases are void.
30. All Conclusions of Law that are Findings of Fact shall be deemed to be Findings of Fact. A separate judgment will be entered on these Findings of Fact and Conclusions of Law.