Opinion
D071311
12-21-2018
MEDICAL ACQUISITION COMPANY, INC., Plaintiff and Respondent, v. TRI-CITY HEALTHCARE DISTRICT, Defendant and Appellant. TRI-CITY HEALTHCARE DISTRICT, Plaintiff and Appellant, v. MEDICAL ACQUISITION COMPANY, INC., Defendant and Respondent.
Horvitz & Levy, Barry R. Levy, Mitchell C. Tilner; Gordon & Rees, Charles V. Berwanger and James E. Hawley for Defendant, Plaintiff and Appellant. Burke, Williams & Sorensen and Benjamin L. Stock for The League of California Cities' and California State Association of Counties' as Amicus Curiae on behalf of Defendant, Plaintiff and Appellant. David A. Kay for Plaintiff, Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 37-2014-00009108-CU-BC-NC) (Super. Ct. No. 37-2014-00022523-CU-MC-NC) APPEAL from a judgment and postjudgment orders of the Superior Court of San Diego County, Earl H. Maas, III, Judge. Affirmed in part, reversed in part, and remanded with directions. Horvitz & Levy, Barry R. Levy, Mitchell C. Tilner; Gordon & Rees, Charles V. Berwanger and James E. Hawley for Defendant, Plaintiff and Appellant. Burke, Williams & Sorensen and Benjamin L. Stock for The League of California Cities' and California State Association of Counties' as Amicus Curiae on behalf of Defendant, Plaintiff and Appellant. David A. Kay for Plaintiff, Defendant and Respondent.
This case involves the construction of a medical office building by a private entity, respondent Medical Acquisition Company, Inc. (MAC), on land that was leased from a public agency, appellant Tri-City Healthcare District (Tri-City). A dispute arose between the parties concerning their respective obligations under their lease agreements, and they sued each other. While the lawsuits were pending, Tri-City began an eminent domain proceeding over MAC's leasehold interest, and Tri-City used its appraisal of the building to calculate the probable amount of just compensation owed to MAC. (See Calif. Const., Art. 1, § 19.) A jury ultimately rejected Tri-City's appraisal and found that MAC was entitled to a much higher amount of compensation for its taken property interest. Tri-City timely abandoned its eminent domain proceeding pursuant to Code of Civil Procedure section 1268.510, but the trial court set aside the abandonment.
Further unspecified statutory references are to the Code of Civil Procedure.
Tri-City contends the court erred in setting aside the abandonment. Tri-City also contends (1) the leases between the parties are void because one of Tri-City's board members had a conflict of interest when she voted to approve them and (2) the jury's award of damages to MAC for Tri-City's breach of the implied covenant of good faith and fair dealing must be reversed.
For reasons we will explain, Tri-City was entitled to abandon its eminent domain proceeding. We do not find merit, however, in Tri-City's other arguments. Therefore, we affirm and reverse in part and remand the case for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
I. Parties and Actors
Since the late 1950s, Tri-City has been a public agency organized under California's Local Health Care District Law (Health & Saf. Code, § 32000 et seq.). The Local Health Care District Law "protect[s] the public health and welfare by furnishing hospital services in areas where hospital facilities are for some reason inadequate . . . ." (Talley v. Northern San Diego County Hospital District (1953) 41 Cal.2d 33, 40, overruled on other grounds in Muskopf v. Corning Hospital District (1961) 55 Cal.2d 211, 213.) Tri-City owns about 31 acres of land in Oceanside and operates the Tri-City Medical Center, a hospital serving the communities of Oceanside, Vista, and Carlsbad. Tri-City's operations are overseen by a board comprised of seven publicly elected members (board). The board relies on key executives to run the daily operations of Tri-City. Between 2009 and 2013, Larry Anderson was Tri-City's chief executive officer (CEO). During Anderson's tenure, Casey Fatch was the chief operating officer.
MAC is a privately held medical factoring company headquartered in Carlsbad. MAC's business model consists of helping individuals who are involved in serious accidents through the fault of others (e.g., a car accident) and in need of surgeries, yet the injured individuals are uninsured and unable to pay for the surgeries. For these individuals, MAC agrees to "factor" their case or transaction; factoring in this context means "the purchase of a receivable or a bill, an outstanding balance," from the treating hospital at a discount. The purchased receivable becomes an asset of MAC, requiring MAC's eventual collection from the party-at-fault. Under MAC's business model, the patient receives expedited surgical services; the hospital eliminates collection risks because it is paid upfront by MAC; and MAC purchases the hospital's receivable at a discount and profits when the receivable is collected. MAC has been in business since the 1990s and handles/processes about 2,000 personal injury cases a year on average. Charles Perez is the founder and chief executive officer of MAC. Through his years of work at MAC, Perez has developed relationships with top surgeons around the country in the fields of orthopedics and neurology (spine surgeons).
MAC receives an assignment of the hospital's lien on the patient's personal injury case.
In 2009, Anderson and Perez met each other through Fatch, who worked with Perez for many years at other hospitals. After several meetings, MAC agreed to factor some of Tri-City's surgeries. Anderson and Perez went on to sign the disputed lease agreements in this case on behalf of Tri-City and MAC.
II. History of Agreements
Prior to Anderson's tenure as CEO, Tri-City was in financial distress and suffering from quality issues. After his appointment as CEO, Anderson sought to implement changes to improve Tri-City's financial condition and quality of services. Among other changes, he wanted to attract top spine surgeons to Tri-City due to the specialized, highly profitable surgeries they performed.
In late 2009 and 2010, Anderson and Perez developed the idea of constructing a first-class medical office building (building) on Tri-City's campus, which would be used to house medical institutes, i.e., groups of spine surgeons who could perform cutting edge procedures. The newly recruited surgeons would generate revenue for Tri-City and factoring opportunities for MAC. Construction of the building was estimated to cost about $15 million, which Anderson knew MAC could not afford on its own.
In 2010, Anderson presented the Tri-City board with the building project, as follows: (1) under a 50-year ground lease, Tri-City would lease land to MAC, and MAC would construct a three-story, approximately 60,000-square-foot building on the land at its own expense; (2) under a 15-year building lease, MAC would lease about 25,000 square feet of the constructed building to Tri-City; and (3) Tri-City would have the option to prepay up to $7.5 million in rent under the building lease to MAC (rent prepayment provision). Anderson, Tri-City's board, and MAC understood that Tri-City would be paying for half of the construction costs of the building through the rent prepayment provision; however, the provision would be phrased in "discretionary," voluntary language to avoid the need to put the project out for public bidding, which is ordinarily required for a hospital district's construction contracts exceeding $25,000.,
Both leases contained extension options.
The rent prepayment provision in the approved building lease states as follows:
"Prepayment of Base Rent. At any time after [MAC] has obtain[ed] all governmental approvals for construction of the Building and related improvements, including, without limitation, all grading and building permits from the City of Oceanside, [Tri-City] may, upon request of [MAC] or upon its own initiative, make prepayments of Base Rent under this Lease to [MAC] during the course of construction of the Improvements in accordance with a mutually acceptable payment schedule; provided, however, in no event shall the sum of such prepayments of Base Rent hereunder exceed the costs incurred and actually paid to date by [MAC] for construction of the Building and related improvements. In no event shall such prepayment of Base Rent exceed the Base Rent payable under this Lease for first one hundred (100) months of the Term of this Lease." (Italics added.)
Health and Safety Code section 32132, subdivision (a), requires competitive bidding on contracts entered by local healthcare districts that involve an expenditure of more than $25,000. Subdivision (b) of that section provides for certain exceptions, such as contracts for professional services.
The board voted to approve the project and authorized Anderson to negotiate and enter leases with MAC. In late December 2010, Anderson and Perez, on behalf of Tri-City and MAC, signed the ground and building leases documenting the board-approved project. Tri-City placed $6.25 million in a separate bank account allocated for construction costs. As security for its ground lease obligations, MAC gave Tri-City a deed of trust to its corporate headquarters building.
The board subsequently approved amendments to the ground lease, which are not relevant to the issues on appeal.
In 2011, MAC hired Rich Landreth as the general contractor and obtained all necessary approvals and permits for construction of the building at its expense of about $2 million. Landreth completed light construction in 2011 and began major construction by January 2012.
Through June 2012, construction of the building proceeded as expected, and the parties paid Landreth for construction costs every month per the following protocol: (1) Landreth submitted his invoice to MAC for payment; (2) MAC paid Landreth, and the check cleared; (3) Landreth submitted proof of MAC's payment to Tri-City; and (4) Tri-City reimbursed MAC for its payment to Landreth, constituting Tri-City's prepayment of rent. By June 2012, Tri-City had paid around $3 million in construction costs in the form of prepaid rent, without any issues.
In July 2012, Tri-City issued a reimbursement check of about $752,000 to MAC following the parties' established payment protocol. Before MAC could cash the check, however, Anderson placed a "stop payment" on it, and Tri-City refused to resume its monthly prepayments of rent. Anderson stopped funding construction because he had been misinformed that Tri-City and MAC must pay for construction costs in dollar-for-dollar matching amounts, and he was seemingly concerned about the public perception of Tri-City's paying for all the construction costs to date. Tri-City additionally sent MAC a "notice of default" on the ground lease even though MAC was not in default; the notice of default stated that Tri-City would be interested in a "mutual termination of the ground lease." Finally, Tri-City recorded its deed of trust to MAC's corporate headquarters building, which had been left unrecorded up until then.
Perez was bewildered by this series of unexpected events. He concluded that MAC could not finish constructing the building without Tri-City's financial support. The parties entered a transition agreement in November 2012, the purpose of which was to terminate the leases, transition the construction project to Tri-City, and compensate MAC for its expenses and efforts. The transition agreement contained an escrow closing date on which Tri-City would take over building construction.
Escrow did not close under the transition agreement, which was then amended five times to provide for later closing dates, the last of which was set in August 2013. Transition of construction to Tri-City was hindered because Tri-City, as a public agency, could not directly assume MAC's contract with Landreth. The project had not been subjected to competitive bidding and Landreth's subcontracts (e.g., for mechanical, concrete, electrical work) involved expenditures of more than $25,000. If Landreth terminated his subcontracts early, Tri-City would incur a penalty of about $2 million. Accordingly, the parties agreed that MAC would continue constructing the building with Landreth as general contractor until the subcontracts were spent down below $25,000 and that MAC/Landreth would not enter any new subcontracts exceeding $25,000.
See ante, footnote 5.
MAC fulfilled its obligations under the transition agreement and amendments, and by late May 2013, the building was substantially complete. Certain off-site traffic work remained to be completed by Tri-City. Had Tri-City and MAC constructed the building as originally contemplated, without delays caused by the stop payment, transition agreement, and related issues, Landreth would have had the building constructed and ready for occupancy by February 1, 2013.
Ultimately, the board voted not to close escrow under the fifth amendment to the transition agreement, leaving MAC uncertain as to Tri-City's intentions and ostensibly putting the parties back to their pretransition-agreement status. In October 2013, the board terminated Anderson. In January 2014, Tri-City sent MAC a letter claiming that the leases were void due to conflicts of interest under Government Code section 1090 and that MAC must return all of Tri-City's prepaid rent and surrender the building.
III. Superior Court Proceedings
In April 2014, MAC filed a complaint in superior court against Tri-City asserting various claims, including breach of the ground lease and breach of the covenant of good faith and fair dealing implied in the leases. The theory of MAC's case was that Tri-City had unreasonably decided to stop prepaying rent (and fund construction costs), leading to delayed construction and lost rental income.
In July 2014, Tri-City filed its own complaint against MAC claiming, inter alia, the leases were void because they were made in violation of Government Code section 1090 et seq. (conflict of interest claim) and the common law prohibition against conflicts of interest (common law claim). Within its conflict of interest and common law claims, Tri-City alleged that two individuals had impermissible conflicts in connection with making/approving the leases: (1) CEO Anderson, and (2) the chairperson of the board, RoseMarie Reno.
Later in July 2014, in a first amended complaint, Tri-City added a cause of action for eminent domain based on the board's resolution of necessity to condemn and take possession of the building. Tri-City sought to condemn "all right, title and interest to the Ground Lease" and pay MAC "just compensation" as required by law. Tri-City deposited $4.7 million with the state treasurer as the probable amount of just compensation owed to MAC based on Tri-City's building appraisal. In September 2014, per the parties' stipulation, the court authorized Tri-City to take immediate possession of the building, which it did. MAC withdrew the deposited funds, "returned to its business of purchasing medical liens," added a new line of business purchasing statutory medical liens, and hired three additional employees.
In January 2016, MAC filed a motion for summary adjudication on Tri-City's conflict of interest and common law claims, arguing that Anderson and Reno did not have impermissible conflicts when they made or approved the leases. In opposition, Tri-City submitted a statement of disputed facts. In reply, MAC accepted Tri-City's facts regarding Reno as undisputed for purposes of the motion and argued that Reno did not have a cognizable financial interest in the leases. The court agreed with MAC, finding there was no triable issue of material fact as to whether Reno had a conflict. Nevertheless, the court denied MAC's motion for summary adjudication on Tri-City's claims because it found there were triable issues of fact as to whether Anderson had a conflict.
By this point, MAC's and Tri-City's actions had been consolidated for all purposes.
In light of the court's findings on summary adjudication, MAC filed a motion in limine to exclude any evidence related to Reno's supposed conflict. The court again heard argument on the Reno conflict issue and granted MAC's motion in limine, reiterating that the facts presented did not appear to the court to constitute an actionable conflict of interest. In addition, the court excluded the Reno conflict evidence under Evidence Code section 352.
Following a lengthy trial, the jury found that Tri-City did not breach the ground lease but did breach the covenant of good faith and fair dealing implied in both leases. The jury awarded $2.9 million in damages to MAC, primarily representing lost rental income, i.e., income MAC would have earned had the building been constructed and occupied by February 1, 2013, until the point of Tri-City's possession of the building in September 2014. The jury further awarded MAC about $16.8 million for its taken property interest, based on MAC's appraisal of the building. The court entered judgment accordingly. Subsequently, the court ordered Tri-City to increase its deposit of probable amount of just compensation owed to MAC by $12.2 million (deposit order).
In December 2016, Tri-City filed a notice of abandonment of the eminent domain proceeding under section 1268.510, subdivision (a). MAC filed a motion to set aside the abandonment. In March 2017, the court heard argument and granted MAC's motion (set-aside order).
Tri-City filed timely appeals of the judgment and various postjudgment orders, including the deposit order and set-aside order.
DISCUSSION
I. The Trial Court Erred in Setting Aside Tri-City's Abandonment of Its Eminent Domain Proceeding
Tri-City contends the trial court erred in setting aside Tri-City's abandonment of its eminent domain proceeding under section 1268.510, subdivision (b). We agree.
A. Further Background
It is undisputed Tri-City filed a timely "notice of abandonment" pursuant to section 1268.510, subdivision (a). MAC sought to set aside the abandonment under subdivision (b) of section 1268.510, arguing that it had substantially changed its position in detrimental reliance on the proceeding and could not be restored to substantially the same position as if Tri-City had not commenced the eminent domain action. As evidence of detrimental reliance, MAC highlighted that the Tri-City board had passed a resolution of necessity in 2014 to take possession of the building and had actually taken possession of the building; MAC withdrew $4.7 million of probable compensation from the state treasurer and spent most of it on business activities rather than on constructing and leasing the building; MAC had ceased leasing efforts; and Tri-City had made nearly $1 million in improvements to the building since taking possession.
In opposition, Tri-City argued that public agencies possess a broad statutory right to abandon their eminent domain proceedings; MAC did not sufficiently show it suffered detrimental reliance on the eminent domain proceeding; there was no reason the parties could not resume their former positions; and MAC could recover any and all damages proximately caused by Tri-City's abandonment (§ 1268.620, subd. (b)), including litigation expenses (§ 1268.610). Tri-City produced undisputed evidence that, throughout the litigation, it repeatedly referenced its right, and potential need, to abandon the eminent domain cause of action depending on the jury's valuation of the building.
At the hearing on MAC's motion to set aside the abandonment, the court explained that it did not believe MAC could be restored to its precondemnation status because of the breakdown in MAC and Tri-City's working relationship. The court granted MAC's motion without making any finding on the element of detrimental reliance.
B. Law and Analysis
The Legislature has established a strict statutory framework regarding the governmental exercise of the power of eminent domain. (See § 1230.010 et seq.; San Bernardino County Flood Control District v. Grabowski (1988) 205 Cal.App.3d 885, 893.) "Abandonment" of an eminent domain proceeding is expressly permitted under the statutory framework. (§ 1268.510.) Section 1268.510, subdivision (a), provides that "[a]t any time after the filing of the complaint and before the expiration of 30 days after final judgment, the plaintiff may wholly or partially abandon the proceeding by serving on the defendant and filing in court a written notice of such abandonment."
Subdivision (b) of section 1268.510 "provides the only limit on that [abandonment] power." (Los Angeles Unified School District v. Trump Wilshire Associates (1996) 42 Cal.App.4th 1682, 1688 (Trump Wilshire Associates).) Under subdivision (b), "[t]he court may . . . set the abandonment aside if it determines that the position of the moving party has been substantially changed to his detriment in justifiable reliance upon the proceeding and such party cannot be restored to substantially the same position as if the proceeding had not been commenced." (§ 1268.510, subd. (b), italics added; Trump Wilshire Associates, supra, 42 Cal.App.4th at p. 1690 [moving party seeking to set aside abandonment must meet a "two-pronged test"].)
" 'In California, unless the condemnor has done some additional act which would estop him, he can abandon with near impunity.' " (Torrance v. Superior Court of Los Angeles County (1976) 16 Cal.3d 195, 203, fn. 5, italics omitted.) The additional act, or element of detrimental reliance, has been found to exist in exceptional circumstances when the condemnee purchased or constructed replacement property and/or where there were "repeated and emphatic assurances from the condemnor that it intended to prosecute the eminent domain proceeding to final judgment." (Community Development Com. v. Shuffler (1998) 198 Cal.App.3d 450, 460 (Shuffler); see also Torrance v. Superior Court, at p. 207; McGee v. City of Los Angeles (1936) 6 Cal.2d 390, 393-394 [condemnee was justifiably led to believe that city would condemn property at specified value]; Times-Mirror Co. v. Superior Court (1935) 3 Cal.2d 309, 332 ["At no time was there a suggestion of the possibility of abandonment, but at all times and upon all occasions whenever the project was discussed it was treated as a foreclosed matter."].) A condemnee's suffering damages from abandonment, alone, is not sufficient to constitute detrimental reliance. (Shuffler, at p. 461; Trump Wilshire Associates, supra, 42 Cal.App.4th at pp. 1688-1689.)
In this case, the element of justifiable, detrimental reliance is missing. Tri-City gave no assurances that it intended to prosecute its eminent domain action to final judgment; quite the opposite, Tri-City repeatedly warned of the possibility of abandoning the proceeding if the jury's valuation of the building was much higher than its own. In addition, MAC did not purchase or construct a replacement medical office building, and the record does not show that its current business activities are incompatible with repossessing the building. MAC "simply did what every other owner of property must be expected to do when faced with the possibility of its loss through condemnation: put a hold on long-term plans involving the property pending the outcome of the litigation." (Trump Wilshire Associates, supra, 42 Cal.App.4th at p. 1691.)
MAC argues it spent most of the funds deposited by Tri-City on other business activities, but fails to adequately explain how that constituted a detriment or how the expansion of its business precludes it from repossessing the building. MAC also argues it will not be able to work cooperatively with Tri-City on leasing issues. However, if the relationship between the parties deteriorated, the rift occurred before Tri-City filed its eminent domain proceeding in July 2014. "Subdivision (b) of section 1268.510 applies only in the relatively rare situation where the [condemnee] affirmatively alters its position after receiving assurances that the condemnation action will not be abandoned." (Trump Wilshire Associates, supra, 42 Cal.App.4th at p. 1691, emphasis added.)
Moreover, if MAC has suffered damages resulting from Tri-City's abandonment of the eminent domain proceeding, e.g., for lost leasing opportunities or business interferences, it is entitled to recover damages and litigation expenses. (§§ 1268.620, 1268.610.) Section 1268.620 "provides for restoration of possession of the property and damages where the defendant was dispossessed from property prior to a dismissal or a final judgment that the plaintiff cannot acquire the property." (Cal. Law Revision Com. com., 19A West's Ann. Code Civ. Proc. (2007 ed.) foll. § 1268.620, p. 238.) MAC will be permitted to "prove up any and all loss of use and loss of opportunity damages proximately caused by the [eminent domain] proceeding and [its] dismissal." (Shuffler, supra, 198 Cal.App.3d at p. 461.)
MAC argues, and the trial court found, that MAC cannot be restored to substantially the same position as if the proceeding had not commenced. Assuming this were true, it is still insufficient to set aside Tri-City's abandonment due to lacking the element of justifiable, detrimental reliance. In any event, the trial court appears not to have considered that an award of monetary damages would restore MAC to substantially the same position as before. MAC expresses concern over Tri-City's ability to exercise "veto power" over proposed building tenants, but if Tri-City acts unreasonably or refuses to honor its lease obligations, MAC has remedies at its disposal, including within the leases themselves. We are not persuaded that setting aside Tri-City's abandonment of the eminent domain proceeding was the appropriate resolution to MAC's concern. Therefore, on remand, the trial court is directed to conduct further proceedings consistent with the views expressed in this opinion to effectuate Tri-City's abandonment of the eminent domain proceeding. In light of the trial judge's perception of the parties and their working relationship, on remand we direct the trial court to reassign this case to a new trial judge. II. RoseMarie Reno Did Not Have a Cognizable Financial Interest in the Leases and Thus, No Conflict of Interest
At trial, the court excluded any evidence related to Reno's alleged conflict of interest, having previously found on summary adjudication that the facts presented by the parties regarding Reno did not constitute a conflict. On appeal, Tri-City maintains that Reno had a conflict of interest when she voted to approve the leases, rendering the leases void.
Preliminarily, Tri-City raises a procedural issue, claiming the court erred by summarily adjudicating the issue of Reno's conflict through a motion in limine. It is generally undesirable for a trial court to decide substantial questions of law through motions in limine, if only because of the time constraints involved at the beginning of a trial. Nevertheless, the court has the inherent power to do so. (Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1595; see also Merenda v. Superior Court (1992) 3 Cal.App.4th 1, 6 [issue improperly decided on summary judgment or adjudication could have been properly reached on motion in limine], disapproved on other grounds in Ferguson v. Lieff, Cabraser, Heimann & Bernstein (2003) 30 Cal.4th 1037, 1052-1053.) When a motion in limine turns on a question of law rather than on evidentiary relevance or prejudice, we review the court's decision de novo and view the evidence in the light most favorable to the nonmoving party. (Miller v. Campbell, Warburton, Fitzsimmons, Smith, Mendel & Pastore (2008) 162 Cal.App.4th 1331, 1338 (Miller).)
In this case, as we previously indicated, the court could not dispose of the conflict-based causes of action through the vehicle of summary adjudication because it found a triable issue of fact regarding Anderson's conflict (but not Reno). (§ 437c, subd. (f)(1) [summary adjudication may not be granted unless it completely disposes of a cause of action].) During MAC's motion in limine, the court essentially accepted all the pertinent facts regarding Reno as true, found she did not have a conflict of interest as a matter of law, and declined to allow Tri-City to present evidence on the issue. The issue was thoroughly briefed and argued during both the summary adjudication and in limine hearings. We conclude the court acted within its power. However, since the exclusion of evidence turned on the resolution of a legal issue—whether the accepted facts constituted an impermissible conflict of interest—our review is de novo. (Miller, supra, 162 Cal.App.4th at p. 1338.)
A. Evidence Regarding Reno's Alleged Conflict
This is the relevant evidence regarding Reno: She was chairperson of the board from 2009 to 2012. She has an adult grandchild (Grandchild). Grandchild lived with Reno in California for several years when he was a minor (along with his parents or his father after his parents divorced). Reno occasionally purchased items for Grandchild but did not consider him to be a dependent. She loved Grandchild, and they were emotionally close. Grandchild moved to Arizona to live with his mother full time when he was in high school. In 2010, Grandchild was 22 years old, married, and living in Arizona. He was not a legal dependent of Reno.
In February 2010, Grandchild was injured in an automobile accident and did not have the money to pay for treatment. Reno took him to see a Tri-City surgeon, who said that Grandchild needed a surgery and referred him to MAC for financial assistance. Reno was familiar with MAC's services because Tri-City's negotiations with MAC regarding the building project were already underway. Reno had met Perez once during a closed session board meeting.
In May 2010, Grandchild received a surgery at Tri-City. Consistent with its business model, MAC purchased Tri-City's receivable, paid Tri-City for Grandchild's medical bills of about $193,000, and acquired a lien against his personal injury lawsuit recovery. MAC was later repaid at a profit from Grandchild's personal injury settlement.
Following Grandchild's surgery, MAC gave him a job as a truck driver for four to six weeks. Reno was aware of Grandchild's job at the time.
Reno contemporaneously disclosed MAC's involvement in Grandchild's case to the board and Tri-City's general counsel, out of concern she may have a conflict of interest. Tri-City's general counsel advised that she did not have a conflict. Reno supported the building project and voted in favor of approving the leases.
During a deposition in Grandchild's personal injury lawsuit, Reno stated that she probably would have mortgaged her home to help Grandchild pay for his surgery had it become necessary. In the instant case, she explained that she would have done the same thing for any of her grandchildren, out of love and a "moral obligation." She denied that her vote to approve the leases was tied in any way to MAC's factoring of Grandchild's receivable.
B. Guiding Principles on Conflicts of Interest
Government Code section 1090, subdivision (a) provides, in relevant part: "Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members." The statute "codifies the long-standing common law rule that barred public officials from being personally financially interested in the contracts they formed in their official capacities." (Lexin v. Superior Court (2010) 47 Cal.4th 1050, 1072 (Lexin).)
"To determine whether section 1090 has been violated, a court must identify (1) whether the defendant government officials or employees participated in the making of a contract in their official capacities, (2) whether the defendants had a cognizable financial interest in that contract, and (3) (if raised as an affirmative defense) whether the cognizable interest falls within any one of section 1091's or section 1091.5's exceptions for remote or minimal interests." (Lexin, supra, 47 Cal.4th at p. 1074.) In this case, the only disputed issue is whether Reno had a "financial interest" in the leases.
"Financial interests prohibited by section 1090 'are not limited to express agreements for benefit and need not be proven by direct evidence. Rather, forbidden interests extend to expectations of benefit by express or implied agreement and may be inferred from the circumstances.' [Citation.]" (Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114, 1127 (Hub City).) Nevertheless, while acknowledging direct or indirect interests are equally prohibited, our Supreme Court has instructed that the inquiry is "whether the [official] had a cognizable financial interest in that contract." (Lexin, supra, 47 Cal.4th at p. 1074, italics added.) "Courts thus generally focus on whether the contract in question could confer some type of pecuniary advantage to the target of a section 1090 inquiry: 'Section 1090 is triggered when a public official receives any profit from a public contract and includes the acceptance of a bribe in return for influencing the public entity to enter into a particular contract.' [Citation.] 'The phrase "financially interested" broadly encompasses anything that would tie a public official's fortunes to the existence of a public contract.' " (Eden Township Healthcare District v. Sutter Health (2011) 202 Cal.App.4th 208, 225 (Eden Township).) "Put in ordinary, but nonetheless precise, terms, an official has a financial interest in a contract if he might profit from it." (People v. Honig (1996) 48 Cal.App.4th 289, 333.)
C. Analysis
Based on our review of the record, the leases themselves did not confer any financial benefit on Reno. (See Eden Township, supra, 202 Cal.App.4th at p. 228 ["if the contract itself offers no benefit to the official, either directly or indirectly, then the official is not financially interested in the contract"].) We see no indication that Reno stood to derive any personal financial benefit from MAC's lease of Tri-City's land or construction of an office building.
Tri-City appears to claim that MAC's conduct toward Grandchild amounted to MAC's bribery of Reno. Yet there is no evidence to support that MAC's decision to factor Grandchild's receivable, which arguably benefited Grandchild, was either expressly or impliedly done in exchange for Reno's vote on the leases. (See, e.g., Torres v. City of Montebello (2015) 234 Cal.App.4th 382, 402 [contributions to official's nonprofit agency were not given in exchange for the official's promise to vote a certain way].) Notably, MAC is a medical factoring company; its business model is premised on the purchase of hospitals' accounts receivables for uninsured personal injury victims. MAC paid Tri-City for Grandchild's receivable—not Reno or Grandchild—and MAC profited from the proceeds of Grandchild's personal injury settlement. There is no indication that Grandchild (and by extension, Reno) received favorable treatment over a similarly situated personal injury client. Tellingly, Reno disclosed the circumstances to the other board members and Tri-City's general counsel. Finally, Grandchild's short-term employment with MAC had no financial impact on Reno. These circumstances did not constitute a cognizable financial interest in the leases as to Reno.
We question how Grandchild received any financial benefit from this arrangement but accept that he did for purposes of our analysis.
Distinct from Government Code section 1090, Tri-City also claims Reno had an amorphous common law conflict of interest because she might have been improperly influenced to vote favorably on the leases. For the same reasons we have discussed, we decline to find that Reno had a common law conflict of interest. Courts are wary of invalidating contracts based on "general principles of conflict of interest" untethered to a legislative rule that the circumstance does, in fact, present a conflict. (BreakZone Billiards v. City of Torrance (2000) 81 Cal.App.4th 1205, 1233 ["We continue to be cautious in finding common law conflicts of interest."].) Cases cited by Tri-City in support of its position are readily distinguishable.
HUB City, supra, 186 Cal.App.4th 1114, involved a clear case of bribery wherein the council members' "votes in favor of the agreement were cast in anticipation of [campaign] contributions, and the payments were made on account of [the votes]." (Id. at p. 1130.) In that case, Compton's council members voted in favor of awarding a waste management franchise to HUB. (Id. at p. 1129.) The same month that the franchise went into effect, HUB used its revenues from the awarded franchise contract to make sizeable campaign contributions to the mayor and two city council members who had voted for the franchise. (Ibid.) HUB also employed two of the council members' relatives "the week after the franchise went into effect." (Id. at p. 1130.) HUB's alter ego, Aloyan, had a prior criminal history involving the use of campaign contributions to bribe public officials. (Id. at pp. 1130-1131.) On the record before it, the court concluded that the campaign contributions constituted prohibited financial interests. (Id. at p. 1131.)
In Clark v. City of Hermosa Beach (1996) 48 Cal.App.4th 1152, property owners applied for permits to demolish a duplex and replace it with a 35-foot-high condominium. (Id. at pp. 1159-1160.) Their permits were denied by a 3-2 vote, and a city councilmember who voted with the majority to deny the permits was found to have a conflict of interest. (Id. at pp. 1164, 1172.) In particular, the councilmember "lived one block inland" of the proposed structure, opined that the structure would " 'further constrict the view of the ocean from homes that are located behind' " it, and he "stood to benefit personally by voting against the . . . project." (Id. at p. 1172.) The court noted that the councilmember's conflict of interest arose "not because of his general opposition to 35-foot buildings, but because the specific project before the Council, if approved, would have had a direct impact on the quality of his own residence." (Id. at pp. 1172-1173, italics added.)
Here, in contrast to HUB City, the record does not support a claim of bribery or a quid pro quo between MAC and Reno. In contrast to Clark, the specific building project before the board did not impact Reno personally—she did not stand to gain or lose anything if MAC was permitted to lease Tri-City's land and construct the building. As a result, Reno did not have a conflict of interest when she voted to approve the leases. The trial court did not err in granting MAC's motion in limine.
III. Tri-City Has Failed to Establish any Basis to Vacate the Jury's Damages Award as to MAC's Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing
The jury found that Tri-City did not breach the ground lease but breached the implied covenant of good faith and fair dealing in the ground and building leases. The jury awarded MAC approximately $2.9 million in damages, consisting of about $2.5 million in lost rental income and additional amounts for MAC's increased costs due to delayed construction.
Tri-City claims the jury's damages award "cannot stand" because the jury's findings necessarily mean that it only found a breach of the implied covenant of good faith and fair dealing as to the building lease (since it found no breach of an express provision of the ground lease) and that the building lease did not give rise to MAC's right to construct the building or collect rental income from third parties. Assuming for purposes of analysis that Tri-City's breach of the implied covenant of good faith and fair dealing related only to the building lease, we conclude the jury's damages award was legally sound.
A party is entitled to recover contract damages for a breach of the implied covenant of good faith and fair dealing. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 684.) "Contractual damages are of two types—general damages (sometimes called direct damages) and special damages (sometimes called consequential damages)." (Lewis Jorge Construction Management, Inc. v. Pomona Unified School District (2004) 34 Cal.4th 960, 968.) "General damages are often characterized as those that flow directly and necessarily from a breach of contract, or that are a natural result of a breach." (Ibid.) Unlike general damages, "[s]pecial damages are recoverable if the special or particular circumstances from which they arise were actually communicated to or known by the breaching party (a subjective test) or were matters of which the breaching party should have been aware at the time of contracting (an objective test)." (Id. at pp. 968-969.) The breaching party always assumes the risk of general damages from a breach of contract and may also assume the risk of special damages depending on the case-specific circumstances. (Id. at p. 969.)
In this case, Tri-City either knew or should have known that if it stopped funding construction through the rent prepayment provision, then construction would be delayed, i.e., it was a reasonably foreseeable and natural consequence. The record shows the following, at minimum: The ground and building leases were negotiated together and part and parcel of the same project. The rent prepayment provision was contained in the building lease, and the purpose of it was for Tri-City to fund construction of the ground lease improvement. As Anderson testified, prepaying rent would "get the building built." Tri-City was well aware that MAC could not afford to construct the building on its own and that Tri-City could not directly hire Landreth due to competitive bidding requirements. Consequently, it was reasonably foreseeable that a breach of the rent prepayment provision would lead to delayed construction. Whether characterized as general or special, MAC was entitled to recover damages from delayed construction caused by Tri-City's breach. The jury did not need to additionally find that Tri-City breached an explicit provision of the ground lease.
Regarding the implied covenant of good faith and fair dealing, the jury had been instructed as follows: "In situations where one party to a contract, including a public agency, is invested with a discretionary power affecting the rights of another, the covenant of good faith requires the party holding such power to exercise it for any purpose within the reasonable contemplation of the parties at the time of formation. A party violates the covenant if it subjectively lacks belief in the validity of its act or if its conduct is objectively unreasonable."
Tri-City alternatively claims that MAC could not have earned lost rental income during its claimed damages period because it did not and could not obtain a certificate of occupancy for the building, which was a requirement for tenants to begin leasing office space. We reject Tri-City's claim, which merely attempts to rehash evidence presented to, and discounted by, the jury. Landreth was the general contractor in charge of constructing the building, and he testified in detail regarding the delays that occurred after Tri-City's "stop payment" and failure to resume monthly prepayments of rent, including the reasons why he did not work on off-site traffic mitigation measures or obtain the certificate of occupancy by February 2013. Landreth was a credible, seemingly impartial witness since he was subsequently hired by Tri-City as its construction manager. Landreth believed that if Tri-City had continued funding construction as the parties and leases had originally contemplated, he would have had the building ready for occupancy by February 1, 2013. MAC's expert witness relied on Landreth's testimony to calculate damages. Thus, the jury reasonably accepted February 1, 2013, as the starting date of MAC's damages period and rejected Tri-City's evidence to the contrary. Tri-City has failed to establish a valid basis to vacate the jury's damages award pertaining to MAC's claim for breach of the implied covenant of good faith and fair dealing.
DISPOSITION
The judgment and postjudment orders are reversed to the extent they are inconsistent with Tri-City's abandonment of the eminent domain proceeding. In all other respects, the judgment and postjudgment orders are affirmed, including as to the jury's award of damages to MAC for its claim of breach of the implied covenant of good faith and fair dealing. The matter is remanded for the trial court to conduct further proceedings as it deems necessary to effectuate Tri-City's abandonment of the eminent domain proceeding, consistent with the views expressed in this opinion. On remand, we direct the trial court to reassign this matter to a judge other than Judge Maas. The parties shall bear their own costs on appeal.
O'ROURKE, J. WE CONCUR: McCONNELL, P. J. HUFFMAN, J.