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(Contra Costa County Super. Ct. No. MSC08-03057)
This case arises from a real estate transaction in which both parties failed to comply with their obligations under an installment land sale contract. The judgment on appeal reflects the continued confusion of the parties as to their respective rights and obligations under the contract, under a judgment in a prior lawsuit in which defendant and appellant Gary Drocco prevailed, and under the applicable law.
In 1996, Drocco purchased residential property from plaintiffs and respondents Trudy and Edward Ortega through the device of an installment land sale contract. Drocco made a down payment and was to make monthly principal and interest payments for 30 years; the Ortegas would retain title until the last of the payments was made. In 2002, the Ortegas breached the contract by encumbering the property. Drocco stopped making payments and sued for breach of contract and equitable relief, including eliminating the contractual prohibitions against prepayment and recording the contract. During 2004 and 2005, that case was tried and the jury found the Ortegas to be in material breach of the contract and Drocco not to be in breach. As part of the equitable relief awarded to him, Drocco was given the opportunity to immediately complete the purchase. If he did not, he was to resume making installment payments under the land sale contract, and the Ortegas were ordered to record the contract. Drocco failed to complete the purchase, the Ortegas failed to record, and apparently believing this constituted another material breach of the contract, Drocco continued to withhold payment.
Nearly three years later, in 2008, the Ortegas brought this action for ejectment and damages, claiming Drocco's failure to resume payments put him in default and resulted in a termination of the contract by its own terms. The trial court found against Drocco, rejecting his claimed right of equitable redemption under Petersen v. Hartell (1985) 40 Cal.3d 102 (Petersen), awarding $144,753.64 in damages for wrongful possession and prejudgment interest since 2002 (when he originally stopped making payments), and finding he had not carried his burden of establishing any offset for improvements to the property. While the trial court properly found Drocco was in default under the contract, the court erred in ruling he had no right of redemption under Petersen. We therefore reverse and remand for further proceedings.
I. FACTUAL AND PROCEDURAL BACKGROUND
In July 1996, Drocco and the Ortegas entered into an installment land sale contract. Drocco agreed to buy a residential property located in Lafayette, California, for $215,000. The Ortegas agreed to finance the sale with a $10,750 down payment and the balance to be paid over 30 years, at 9 percent interest, through monthly payments of $1,643.45. Paragraph 7 of the contract prohibited the Ortegas from encumbering the property, paragraph 9 prohibited Drocco from prepaying the note, and paragraph 11 recited the parties' agreement that no documents regarding the transaction would be recorded. Further, paragraph 5 called for the contract to automatically terminate if a payment was not received within 60 days of its due date. Drocco made 76 monthly payments, totaling $124,902.20 in principal and interest.
Paragraph 7 provided: "As and for further consideration for the performance of Buyer under this contract, Seller covenants that it shall not thereafter in any way transfer, hypothecate, encumber or in any way alter the title to the subject property so long as Buyer makes timely payments as set forth hereinabove. Seller affirms his understanding that any hypothecation, further sale to a third party, or encumbrance by Seller, other than involuntary, may constitute fraud and subject Seller to criminal as well as civil penalties."
Paragraph 9 provided: "PREPAYMENT. Buyer hereby waives its right to pay to Seller all or part of the full remaining unpaid principal balance of the purchase price specified hereinabove at any time before it becomes due. Except that on the death of both Edward Ortega and Trudy Ortega . . . ."
Paragraph 11 provided: "As and for further consideration and as a condition precedent to Seller's execution of this agreement, the PARTIES AGREE THAT NO DOCUMENTS REGARDING THIS TRANSACTION SHALL BE RECORDED UNLESS AND UNTIL THIS CONTRACT IS PAID IN FULL. Buyer affirms that it is fully aware of the dangers of not recording the deed to the property, including, but not limited to the danger of having another instrument recorded prior which could interfere with its title. . . ."
Paragraph 5 provided: "In the event any payment due is not received by Seller within 60 days of the date on which that payment is due, or in the event of any other breach by Buyer, all Buyer's rights under this contract shall terminate . . . and all legal and equitable title and other rights in and to the real property shall be Seller's . . . ."
In 2002, the Ortegas breached the contractual prohibition on encumbrances when they refinanced a personal loan and provided a security interest in the property. As a result, in December 2002, Drocco stopped making monthly payments and sued for breach of contract and equitable relief.
Drocco's case went to trial in 2004. On March 8, 2004, the jury returned a verdict in his favor and against the Ortegas. It expressly found that the Ortegas were in breach of the contract and Drocco was not, and awarded Drocco nominal damages of $1.00.
On March 25, 2005, nearly a year later and following several hearings, the trial court entered judgment in favor of Drocco on his equitable claims. The court barred the Ortegas from encumbering the property. It also gave Drocco the opportunity to pay for the property in full by April 30, 2005; if he did not, he was to resume making monthly payments under the contract. In addition, if Drocco did not close on the stated deadline, the parties were required to record the installment contract. The trial court also awarded Drocco $35,000 in contractual attorney fees as the prevailing party, and ordered the Ortegas to pay these fees by May 5, 2005.
Drocco also claims the trial court awarded him $6,138.98 in costs. This does not appear anywhere in the record, but the Ortegas have not disputed that costs were awarded.
Drocco attempted to pay for the property in full but was unable to close within the time specified, and the trial court denied a request for additional time. The attorney who represented Drocco at the time testified in the instant lawsuit that Drocco was "ready, willing, [and] able to close escrow," but encountered bank-related delays, compounded by delays arising from squabbles with opposing counsel. After the April 30 deadline passed, the Ortegas failed to record the installment contract, despite requests by Drocco's attorney.
Drocco did not resume monthly payments, apparently believing the Ortegas' failure to record again put them in material breach of the contract. On May 12, 2005, the Ortegas' lawyer wrote to Drocco's attorney asserting Drocco was in default and claiming the contract had terminated.
On January 30, 2006, Drocco attempted to pay for the property in full and sent a letter to the Ortegas stating he had received a loan commitment and was "tender[ing] full performance of his payment obligations." The Ortegas refused to accept any payment.
In March 2008, Drocco filed a second lawsuit seeking specific performance of the land sale contract as "modified" by the March 25, 2005, judgment. The trial court sustained the Ortegas' demurrer on res judicata grounds without leave to amend. Drocco appealed, and in August 2009, this court reversed on the ground he should have been allowed an opportunity to amend to allege a breach of the contract different than the breach at issue in the first lawsuit. (Drocco v. Ortega (Aug. 31, 2009, A123502) [nonpub. opn.].)
In the meantime, in December 2008, the Ortegas brought the instant action for ejectment and damages, claiming Drocco's failure to pay had resulted in a termination of the contract under paragraph 5. Although the Ortegas' complaint alleged "[s]ince November of 2002," Drocco had not made "a single payment," the Ortegas' later-filed pretrial and posttrial briefs both asserted Drocco's default commenced when he failed to resume payments after not completing the purchase by April 30, 2005, as specified by the March 2005 judgment.
Drocco answered, alleging the Ortegas were again in breach of the contract, thus excusing his performance, and filed a cross-complaint, alleging that even if his performance was not excused and he was now in breach of the contract, he had a right of equitable redemption under Petersen, supra, 40 Cal.3d 102.
On June 1, 2010, two months before trial commenced, Christine Cunningham, Drocco's girlfriend who had begun residing at the property in 2006, filed a complaint in intervention and cross-complaint claiming a potential 75 percent interest, acquired from Drocco, in the property. She raised the same claims and asserted the same right to equitable redemption as Drocco.
The record is not clear about the impetus of Cunningham's belated entry into the lawsuit. Apparently, the trial court urged her intervention in light of her occupancy of the property and claimed interest in the property granted by Drocco.
Although the parties were litigating Drocco's second lawsuit, the instant ejectment action by the Ortegas proceeded to trial first. After conducting a two-day bench trial and receiving posttrial briefing, the court took the case under submission on September 10, 2010. On the one hand, the Ortegas invoked the provisions of the installment contract to establish that Drocco had defaulted and the contract had terminated by its own terms, entitling them to possession of the property. On the other hand, they claimed the judgment in the first lawsuit had subsumed the contract and had already provided Drocco with a right of redemption, which he had failed to exercise. Drocco, in turn, insisted the Ortegas were again in material breach of the contract by failing to record the document, further excusing his own performance. He also maintained no right of equitable redemption had been afforded in the first lawsuit, nor could it have been, since the doctrine applies to defaulting purchasers at risk of losing their property interests. He, in contrast, had been found not to be in breach of the contract in the first lawsuit and therefore had had no imperiled property interest subject to redemption in that action.
On October 22, 2010, the trial court issued an "Intended Decision." The court ruled in favor of the Ortegas, finding Drocco had breached his payment obligation and defaulted, and the installment contract had terminated by its own terms. The court also ruled against Drocco and Cunningham on their claims for equitable redemption under Petersen. Despite this, the court stated Drocco "shall be allowed to purchase the property provided that within no longer than 45 days from the date of this Intended Decision, he pay the amount owed to Plaintiffs pursuant to the Judgment which incorporated the Land Sale Contract of principal and interest through 7/31/10 in the amount of $411,254.88, together with property taxes and costs of insurance." If Drocco and Cunningham did not make this lump sum payment within the time specified, they were required to vacate the property and pay back rent damages of $1,500 a month since December 1, 2002—the date Drocco stopped making payments when he learned of the Ortegas' breach of the anti-encumbrance provision of the contract—plus prejudgment interest. The trial court also rejected Drocco's request for an offset for improvements he had made to the property. Although Drocco testified as to the current value of the property (between $650,000 and $700,000) and significant expenditures on improvements (about $135,448 in materials and labor), he did not offer any evidence of increased value due to the expenditures. The court also awarded the Ortegas costs and contractual attorney fees, the amounts to be subsequently determined.
Eleven days later, on November 2, 2010, Drocco and Cunningham renewed the request they had made before and after trial for a statement of decision. At the trial court's request, the Ortegas, on November 18, 2010, submitted a proposed statement of decision and judgment. The proposed statement of decision not only incorporated the terms of the Intended Decision, but further specified Drocco and Cunningham were jointly and severally liable for all damages and attorney fees, damages against Drocco were to be offset by the $35,000 in attorney fees he had been awarded in the first lawsuit and, which the Ortegas had never paid, and Drocco was required to file a full satisfaction of judgment in that lawsuit. The proposed judgment awarded the Ortegas $144,753.64 in damages, including prejudgment interest.
Ten days later, on December 8, 2010, Drocco and Cunningham objected to these proposed documents. Their objections included: (1) Drocco, not the Ortegas, should be the prevailing parties on the cross-complaint for redemption given the trial court seemed inclined to permit him some opportunity to redeem the property; (2) the time period for redemption should not run from the "Intended Decision," but for a reasonable period of time following entry of final judgment; (3) any damages award against Drocco should not be offset by the $35,000 award of attorney fees he won in the first lawsuit because he had assigned the judgment to his attorney; and (4) the Ortegas should not receive an attorney fee award.
The trial court issued the proposed statement of decision and proposed judgment as its own on December 20, 2010.
On January 5, 2011, Drocco and Cunningham (hereinafter collectively referred to as Drocco) filed a notice of appeal from the judgment. The trial court subsequently awarded the Ortegas $124,870 in contractual attorney fees and $3,488.77 in costs. It also belatedly overruled Drocco's objections to the proposed statement of decision and judgment, which it had previously overlooked, and ordered Drocco to file a full satisfaction of judgment in his first lawsuit against the Ortegas.
Standard of Review
" 'In general, in reviewing a judgment based upon a statement of decision following a bench trial, "any conflict in the evidence or reasonable inferences to be drawn from the facts will be resolved in support of the determination of the trial court decision. [Citations.]" [Citation.] In a substantial evidence challenge to a judgment, the appellate court will "consider all of the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference, and resolving conflicts in support of the [findings]. [Citations.]" [Citation.]' " (Cuiellette v. City of Los Angeles (2011) 194 Cal.App.4th 757, 765.) However, where the material facts are not in dispute and the parties present the appellate court with questions of law, such questions are reviewed de novo. (Ibid.)
An ejectment action is somewhat of a rarity, now "largely superseded" by causes of action for quiet title and unlawful detainer. (See 5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 634, p. 633; 12 Witkin, Summary of Cal. Law (10th ed. 2005) Real Property, §§ 702-703, pp. 823-824.) The essential elements of an ejectment action are (1) the plaintiff's valid interest in the property and (2) the defendant's wrongful possession and withholding of it. (Payne & Dewey v. Treadwell (1860) 16 Cal. 221, 243 (Payne); Baugh v. Consumers Associates, Ltd. (1966) 241 Cal.App.2d 672, 675, superseded by statute on other grounds as noted in WDT-Winchester v. Nilsson (1994) 27 Cal.App.4th 516, 526.) The validity of the plaintiff's property interest is ordinarily inferred from the plaintiff's ownership. If the defendant's withholding of possession "rests upon any existing right, he should be compelled to show it affirmatively, in defense." (Payne, supra, at p. 244; cf. Tobin v. Stevens (1988) 204 Cal.App.3d 945, 952 [" 'A denial of the allegation of ownership or right to possession allows the defendant in an ejectment or quiet title suit to offer any evidence which tends to defeat the plaintiff's claim.' "].)
Drocco raises two challenges to the trial court's determination that the Ortegas were entitled to prevail on their ejectment claim. First, he contends he was not in breach of the installment contract and his failure to make payments was excused by the Ortegas' own failure to record the contract and note. Second, he contends that even if he was in breach of the contract, he was entitled to a reasonable redemption period under Petersen, supra, 40 Cal.3d 102, and the trial court's rejection of Petersen was erroneous. He further contends the gratuitous 45-day period for purchase in the court's intended decision was procedurally improper and insufficient.
Breach of Contract
One party's material breach of a contract, or failure to perform a condition precedent set forth in a contract, may excuse the other party from performing its contractual obligations. (See Brown v. Grimes (2011) 192 Cal.App.4th 265, 277 ["When a party's failure to perform a contractual obligation constitutes a material breach of the contract, the other party may be discharged from its duty to perform under the contract."]; Sanchez v. County of San Bernardino (2009) 176 Cal.App.4th 516, 530 ["A reasonable jury could conclude that the County's breach of the confidentiality provision excused any further performance by Sanchez."], citing 1 Witkin, Summary of Cal. Law, supra, Contracts, § 813, p. 906; County of Solano v. Vallejo Redevelopment Agency (1999) 75 Cal.App.4th 1262, 1275 & fn. 6 ["Due to the Agency's anticipatory breach, Solano County was excused from fulfilling any conditions, whether precedent or concurrent, under the contract."].)
Drocco insists the Ortegas were in material breach of the installment contract, excusing his own performance, because they had not recorded it. However, the Ortegas' obligation to record arose not from the installment contract—indeed, the contract, itself, provided it was not to be recorded—but from the equitable relief awarded in the March 2005 judgment entered in Drocco's first lawsuit against them.
Even if, as Drocco argues, courts occasionally treat judgments like contracts (see Becker v. Becker (1950) 36 Cal.2d 324, 326 [" ' "An interlocutory judgment of divorce is . . . so far as it determines the rights of the parties, a contract between them . . . ." ' "]), he cites no authority for the proposition that a breach of one "contract" (in this case, the March 2005 judgment) would excuse performance of another contract (in this case, the 1996 installment land sale contract). In short, the Ortegas' failure to comply with the equitable relief ordered by the March 2005 judgment to record the installment contract, is not comparable to their December 2002 breach of the anti-encumbrance provision of the contract—a breach which the jury in Drocco's first lawsuit found excused any failure to meet his own obligations under the contract.
Accordingly, the trial court correctly found Drocco's failure to resume monthly payments constituted a breach of the installment contract.
Right of Redemption
"For at least a century in this state, a seller of land being sold under an installment contract who sues to quiet title because of the vendee's default in installment payments has been required to give the vendee a reasonable opportunity to complete performance." (Petersen, supra, 40 Cal.3d at p. 112.) Whether the default is willful or not, a purchaser who has "paid a substantial part of the purchase price nonetheless retains an absolute right to redeem the property by paying the entire balance of the price and any other amounts due," including "interest and any consequential damages." (Id. at pp. 106, 117.)
Over six years, Drocco made 76 monthly payments, totaling $124,902.20, toward the purchase of the residential property he bought in July 1996 for $215,000. He also testified, without contradiction, that he spent approximately $135,448 on materials and labor on repairs, maintenance, and other projects (such as retaining walls and an extensive deck) related to the property. Drocco contends he had a right to equitable redemption under Petersen and the trial court erred in ruling otherwise, and further erred in gratuitously providing in its intended decision only a 45-day period, running from the date of that decision, to complete the purchase.
The Ortegas do not dispute that a defaulting purchaser under an installment land sale contract has a right to redeem under Petersen, but maintain, as they did in the trial court, that Drocco was accorded that right in his first lawsuit, failed to exercise it, and is barred from seeking that right a second time.
The trial court, by adopting the Ortegas' proposed statement of decision, appears to have embraced their view that Drocco was accorded the right of equitable redemption in his first lawsuit and that the March 2005 judgment is preclusive. This misapprehends both the doctrine of equitable redemption and the March 2005 judgment.
As the concurrence in Petersen noted, both installment land sale contracts and traditional mortgages secured by deeds of trust, are devices for the purchase and financing of real property. (Petersen, supra, 40 Cal.3d 117, 118-121 (conc. & dis. opn. of Bird, C.J.).) However, unlike the statutory foreclosure provisions that applied to mortgages secured by deeds of trust, which provided numerous procedural protections for defaulting purchasers, including the right to resume payments after delinquency, no such provisions applied to installment land sale contracts. (Id. at p. 121.) To provide some safeguards for defaulting purchasers under installment contracts, the court endorsed the longstanding application of equitable redemption in this context. (Id. at p. 117.) Thus, there is now a parallel scheme with respect to defaulting purchasers—there is foreclosure and statutory cure protections in connection with mortgages secured by deeds of trust, and there is default and equitable redemption in the context of installment land sale contracts. (Id. at pp. 106, fn. 1, 118-121.)
Drocco's first lawsuit against the Ortegas was not akin to a foreclosure or quiet title action. On the contrary, Drocco, the purchaser, sued the Ortegas, the sellers, for their material breach of the installment contract and prevailed. The jury also expressly found Drocco was not in breach of the contract. Therefore, he was not facing the equivalent of foreclosure and loss of his property interest, and the doctrine of equitable redemption had no application at that time.
Drocco also in his first lawsuit largely prevailed on his request for equitable relief. He wanted, among other things, relief from the paragraphs prohibiting early payoff and precluding recording of the contract. The trial court granted relief that was similar to, and an amalgam of, what Drocco requested. As we have recited, the court struck the paragraph prohibiting prepayment and specified Drocco could pay the full amount within a specified time period. If Drocco did not close within that time frame, he would return to making installment payments under the contract and the Ortegas would be required to record the contract. Thus, the early payoff period afforded by the March 2005 judgment was part of the affirmative equitable relief Drocco sought in light of the Ortegas' material breach of the installment contract—it was not the period of equitable redemption to which a defaulting purchaser is entitled under Petersen. (See Petersen, supra, 40 Cal.3d at p. 112.)
Although the trial court in this action erroneously ruled Drocco was not entitled to equitable redemption under Petersen, it nevertheless included in its tentative decision a 45-day period in which he could fully pay for the property. Drocco asserts this was not adequate under Petersen procedurally or substantively. The Ortegas maintain that it was and therefore Drocco has no basis to complain about the court's rejection of his claim for equitable redemption under Petersen. We agree with Drocco.
In mandating equitable redemption, the Supreme Court must have intended that defaulting purchasers (a) be assured of a redemption period and (b) have a reasonable period to redeem. Otherwise, the right of equitable redemption would be illusory.
Here, Drocco was given no assurance of a redemption period. On the contrary, the only document supposedly giving him such a period was the court's intended decision, which was subject to challenge and could have been modified or entirely changed. (See Horning v. Shilberg (2005) 130 Cal.App.4th 197, 203 [courts " 'may enter a wholly different judgment than that announced' in [a] statement of intended decision"]; In re Marriage of Ditto (1988) 206 Cal.App.3d 643, 647 [" '[A] court is not bound by its statement of intended decision and may enter a wholly different judgment than that announced.' "].) The Ortegas had consistently taken the position the March 2005 judgment barred any period to redeem, and the trial court could have changed its intended decision at any time. Thus, the intended decision gave Drocco no more than an inchoate right to redeem which might or might not survive objection and further consideration by the court. No reasonable person or lender would commit money on such a tentative basis. Accordingly, the gratuitously provided period to complete the purchase set forth in the intended decision did not supply the redemption period to which Drocco was entitled under Petersen.
We are aware that in Petersen, the Supreme Court stated "the right of redemption may be exercised before judgment or within a reasonable time thereafter set by the court." (Petersen, supra, 40 Cal.3d at p. 106.) We read this language to mean a defaulting purchaser need not wait until he or she is sued to invoke the right of equitable redemption and take action to redeem the property. Such preemptive invocation of the right to redeem will be successful, however, only when the seller acknowledges the defaulting purchaser is entitled to redeem. Here, however, after the Ortegas claimed Drocco was in default for failing to resume making installment payments and the contract had terminated by its own terms, they disputed that he had a right to redeem under Petersen. Drocco thus had no prejudgment opportunity to exercise his right of redemption as a defaulting purchaser under Petersen. Instead, he had to litigate his right to redeem and has only succeeded in vindicating it on appeal.
In sum, we conclude the trial court erred in ruling Drocco was not entitled to a period of equitable redemption under Petersen. We therefore reverse the judgment and remand for further proceedings to determine a reasonable period of time for redemption, to run from entry of judgment. While we understand the Ortegas have received no payments on the property since December 2002, they were in material breach of the contract until judgment was entered against them in March 2005. They then refused to record the contract as ordered by that judgment, precipitating a second and third round of litigation. And upon claiming Drocco was in default by failing to resume payments, they refused to acknowledge any right of equitable redemption under Petersen and rebuffed all efforts to redeem the property. Thus, the equities are not wholly in their favor.
On remand, in determining a "reasonable" redemption period, the trial court should be guided by the purpose of equitable redemption and the import of Petersen that it afford defaulting purchasers a meaningful opportunity to protect interests for which they have already paid a significant amount.
The trial court will also need to determine the amount Drocco must pay to redeem the property. In setting the amount, the goal is to make sure the seller "gets all he expected when he entered into the contract"—that is, to make "the seller whole." (Petersen, supra, 40 Cal.3d at pp. 112, 114.) The amount includes the "entire balance of the price" due "and any other amounts due under" the contract, plus "interest and any consequential damages." (Id. at pp. 106, 117.) Analogizing to foreclosure proceedings, Petersen suggests damages might include " 'costs of court, the expenses of levy and sale, and the amount due plaintiff, including, where the mortgage provides for the payment of attorney's fees, such sum for attorney's fees as the court shall find reasonable, not exceeding the amount named in the mortgage.' " (Id. at p. 114, fn. 4, quoting Code Civ. Proc., § 726, subd. (a).)
Here, the trial court must also take into account the fact Drocco's performance under the installment land sale contract was excused between December 2002 and April 2005 because the Ortegas were in material breach during that time. As the jury in Drocco's first lawsuit expressly found, only the Ortegas were in breach of the contract, not Drocco. Accordingly, the Ortegas were not entitled to performance, including interest payments, by Drocco during that time. In addition, the court must decide whether the Ortegas should have recognized Drocco's January 2006 offer to fully pay for the property as an attempt to exercise his right of equitable redemption under Petersen. The court must determine whether Drocco, in fact, had the capability of purchasing the property at that time. If so, the Ortegas failure to allow him to exercise that right must also reduce any interest or consequential damages Drocco must now pay to redeem the property.
In other words, by their own breaching conduct, the Ortegas effectively extended the installment land sale contract by the period they were in breach, and Drocco is therefore not liable for any "interest" during that period of time. (See also, infra at pp. 18-21, discussing the damages legally recoverable for wrongful possession if Drocco fails to redeem.)
We could, at this juncture, simply reverse and remand for further proceedings to determine a reasonable redemption period and redemption amount. If Drocco successfully redeems the property, the Ortegas are made whole, mooting their ejectment claim and the damages issues raised by the trial court's judgment. However, if Drocco does not redeem the property, the damages issues raised on appeal and which have been fully briefed by the parties, will remain. "[I]n the interests of judicial economy and for the guidance of the trial court on remand, we address" several of these issues. (Environmental Protection Information Center v. Department of Forestry & Fire Protection (2010) 190 Cal.App.4th 217, 228; Californians for Responsible Toxics Management v. Kizer (1989) 211 Cal.App.3d 961, 970.)
Setoff for Value of Improvements
Drocco contends he is entitled to a setoff against any damages award for improvements he made to the property. Drocco presented evidence of the value of the property when he entered the purchase agreement in 1996 ($215,000) and the value of the property at the time of trial in 2010 (between $650,000 and $700,000). He also presented detailed evidence of his expenditures on the property, totaling around $135,448 in materials and labor. This evidence, however, did not meet his burden to show the increased in value of the property attributable to the improvements.
Section 741 of the Code of Civil Procedure provides: "When damages are claimed for withholding . . . property recovered, and improvements have been made on the property by a defendant or his predecessor in interest as a good faith improver, the amount by which such improvements enhance the value of the land must be allowed as a setoff against such damages." (Code Civ. Proc., § 741, subd. (b).) The Legislature amended section 741 in 1968 to substitute " 'the amount by which such improvements enhance the value of the land' for 'the value of such improvements.' The new language clarifies the former wording and assures that the value of the improvement, for purposes of setoff, will be measured by the extent to which the improvement has increased the market value of the land. [(Recommendation, March 1968.)]" (Cal. Law Revision Com. com., 17A West's Ann. Code Civ. Proc. (1980 ed.) foll. § 741, p .278.) This insures the owner is not shortchanged by expensive improvements that do not provide a correlative increase in property value, and insures the occupier that he or she receives fair value for improvements made to the property in good faith.
While Drocco cursorily suggests in his opening brief that his setoff request "is equitable in nature" and therefore, it would seem, unbound by the language of section 741, he provides no legal argument and cites no authority on this point. Nor does he discuss how section 741 intersects with these supposed equitable principles. We therefore do not consider the point. (See McComber v. Wells (1999) 72 Cal.App.4th 512, 522-523 [" '[E]very brief should contain a legal argument with citation of authorities on the points made. If none is furnished on a particular point, the court may treat it as waived, and pass it without consideration.' "].) Drocco also appears to have abandoned his equitable argument in his reply brief, focusing instead on setoff under section 741.
Drocco, while showing the property increased in value over the course of 14 years, offered no testimony showing how his improvements in particular "increased the market value of the land." Indeed, during this period of time, land values soared throughout the bay area simply due to market pressure. Accordingly, the trial court did not err in finding Drocco did not meet his burden of establishing a right to a setoff.
In fact, Drocco's answer to the ejectment complaint did not even allege setoff as an affirmative defense. (Wood v. Henley (1928) 88 Cal.App. 441, 462 ["The first requisite for the granting of such relief is that a demand, properly set out, shall be made for such reimbursement in the pleading of the party asking for such relief."].)
Setoff of Prior Attorney Fees Award
The trial court ordered the damages awarded against Drocco offset by $36,230.90, a sum that included the $35,000 in contractual attorney fees he was awarded in the March 2005 judgment but which the Ortegas had never paid. This setoff issue was never raised during the trial court proceedings—until the Ortegas submitted their proposed statement of decision, which included both the offset and a mandate that Drocco file a full satisfaction of judgment in his first lawsuit. Drocco objected on the ground he had notified the Ortegas several months earlier that the fee award had been assigned to his lawyer in late 2009 as payment for services. The trial court never saw his objection until after judgment was entered. Drocco continues to assert the setoff was improper since the fee award had been duly assigned to his attorney.
Only in passing do the Ortegas question the validity of the assignment, which apparently took place during Drocco's chapter 13 bankruptcy. They make no separate argument and cite no legal authority for why the assignment would be invalid. Nor do they point to any finding of invalidity by any court. It is not this court's job to examine a party's unsupported musing, and we do not consider the validity of the assignment further. (See McComber v. Wells, supra, 72 Cal.App.4th at pp. 522-523.)
"It is a general rule that the right to setoff exists when the parties hold mutual cross-demands under such circumstances that in equity they should be applied one against the other. [Citations.] However, in order to warrant an offset the debts must be mutual and the principle of mutuality requires that the debts should not only be due to and from the same person, but in the same capacity." (Eistrat v. Humiston (1958) 160 Cal.App.2d 89, 91.) An assignee in California—even an attorney assignee—acquires a judgment subject to some risk of setoff. (Machado v. Borges (1915) 170 Cal. 501, 502-503 [" 'A purchaser and assignee of a judgment, even for a valuable consideration and without notice, takes subject to a right of set-off existing at the time of the assignment, for an assignee takes subject to all equitable as well as legal defenses which can be urged against the assignor.' "], cited by Harrison v. Adams (1942) 20 Cal.2d 646, 649 ["a set-off may be compelled even against an assignee of the judgment who took without notice and for value"].)
However, the concept of contractual attorney liens—that is, fee agreements awarding attorneys de facto assignments of judgments as compensation for legal services (see Haupt v. Charlie's Kosher Market (1941) 17 Cal.2d 843, 845-846)—significantly impacts equitable setoff in the context of judgments assigned as compensation for legal services. There is a strong public policy in favor of protecting such liens because they enable litigants to pursue meritorious claims and defenses by assuring lawyers a greater likelihood of recouping fees. " 'If an attorney's claim for a lien on the judgment based on a contract for fees earned prior to and in the action cannot prevail over the lien of a subsequent judgment creditor, persons with meritorious claims might well be deprived of legal representation because of their inability to pay legal fees . . . .' " (See Brienza v. Tepper (1995) 35 Cal.App.4th 1839, 1849-1850.)
" 'A lien, however, may be created by contract of the parties. Here the contract did provide for a lien. . . . In such a case it has been held that the agreement for a lien is decisive as to its existence and amount, and it constitutes a valid equitable assignment of the judgment pro tanto . . . .' " (Haupt v. Charlie's Kosher Market, supra, 17 Cal.2d 843, 845.)
Here Drocco's attorney was expressly and separately assigned the 2005 judgment awarding fees in 2009 as payment for legal services—well before the Ortegas became judgment creditors by virtue of the 2010 judgment entered in this case. In such circumstances, Drocco's attorney's interest has priority over the Ortegas' as a matter of law. (Brienza v. Tepper, supra, 17 Cal.2d at pp. 1843, 1849 ["Mazzanti by his contractual lien established on January 24, 1991, had priority over FIB's Colorado judgment obtained on April 4, 1991, and later assigned to Tepper. On these facts alone, we are satisfied the court was correct in according Mazzanti's lien for attorney fees priority over Tepper's offset claim . . . ."], fn. omitted; Wujcik v. Wujcik (1994) 21 Cal.App.4th 1790, 1793-1794 ["Under the general time-of-creation rule, the contractual liens of Mr. Wujcik's medical providers and attorney take precedence over a judgment lien of Ms. Wujcik because the contractual liens predated the divorce judgment by several years."]; cf. Margott v. Gem Properties, Inc. (1973) 34 Cal.App.3d 849, 856857 ["Appellants have raised issues concerning the trial court's determination of the priority of the lien for attorney's fees as against their claim of offset" requiring consideration on remand.].)
Accordingly, the trial court erred in ordering the damages against Drocco offset by the attorney's fees awarded to him in his first lawsuit. The trial court likewise erred in ordering Drocco to file a full satisfaction of judgment in that lawsuit. According to Drocco, he was awarded $6,138.98 in costs, as well as attorney fees, in his first lawsuit. Therefore, even if an offset for the fees was permissible, which it was not, he could not be compelled to file a full satisfaction of judgment in that lawsuit if in fact the Ortegas also have never paid these costs.
Although now a moot point, we are constrained to add that we are troubled by the manner in which the Ortegas blindsided Drocco and his attorney on the attorney fee setoff issue by slipping the language into their proposed statement of decision and judgment, and by the trial court's ordering a setoff without a motion or request of any kind from the Ortegas, let alone without reviewing Drocco's objection to the offset. (See 8 Witkin, Cal. Procedure, supra, Enforcement of Judgment, § 512, pp. 549-550 [noting "[t]hree methods" for enforcing offset right: a separate action, a cross-complaint, or a motion].)
The trial court awarded the Ortegas damages for wrongful possession and pre-judgment interest from December 1, 2002, when Drocco stopped making monthly payments after becoming aware of the Ortegas' breach of the anti-encumbrance provision of the contract.
On appeal, Drocco contends the trial court was statutorily barred under Civil Code section 3334 from awarding damages that occurred more than five years before the Ortegas filed their ejectment complaint and therefore could not award damages predating December 5, 2003. Civil Code section 3334 provides: "The detriment caused by the wrongful occupation of real property . . . is deemed to include the value of the use of the property for the time of that wrongful occupation, not exceeding five years next preceding the commencement of the action or proceeding to enforce the right to damages, the reasonable cost of repair or restoration of the property to its original condition, and the costs, if any, of recovering the possession." (Civ. Code, § 3334, subd. (a), italics added.)
The Ortegas do not dispute that this five-year limitations period applies, but argue Drocco waived the statutory limitation on damages by failing to raise it in the trial court. While Drocco's delay in raising the issue was extremely imprudent, "[a] party may raise a new issue on appeal if that issue is purely a question of law on undisputed facts." (Phillips v. TLC Plumbing, Inc. (2009) 172 Cal.App.4th 1133, 1141.) Here, there is no dispute as to the relevant facts. The Ortegas filed their complaint for ejectment on December 5, 2008. Accordingly, the trial court erred in awarding damages and pre-judgment interest for any period prior to December 5, 2003.
In light of the jury's express finding in the prior action that Drocco was not in breach of the installment contract, we asked the parties to provide additional briefing on whether damages and prejudgment interest can be awarded for any period prior to the March 2005 judgment in that action. In his supplemental letter brief, Drocco asserts the March 2005 judgment conclusively determined his possession from December 2002 through the date of the judgment was not wrongful and therefore precludes damages for wrongful possession for that period. In their supplemental letter brief, the Ortegas do not dispute that the March 2005 judgment determined Drocco was not in breach, and they concede it "excused" Drocco's failure to make contract payments for that period of time. Nonetheless, they assert the March 2005 judgment "did not excuse Drocco's payment obligation absolutely" and point out that the judgment states "Drocco did not pay 28 consecutive monthly payments." They therefore contend any ejectment damages must include these missing payments. They further contend it would be inequitable for Drocco to be excused from paying anything for use of the land prior to the March 2005 judgment.
In analyzing the period of recoverable damages in this case, it is critical to stay focused on the fact this is an ejectment action. As we have recited, the essential elements of an ejectment action are: (1) the plaintiff's valid interest in the property; and (2) the defendant's wrongful possession and withholding of it. (Payne, supra, 16 Cal. at p. 243; Baugh v. Consumers Associates, Ltd., supra, 241 Cal.App.2d at p. 675.) Accordingly, in an ejectment action, the plaintiff can only recover damages resulting from wrongful possession. (Civ. Code, § 3334 ["The detriment caused by the wrongful occupation of real property . . . is deemed to include the value of the use of the property for the time of that wrongful occupation . . . ."], italics added; see Carpentier v. Mitchell (1865) 29 Cal. 330, 334 [judgment was erroneous to the extent it awarded rents and profits accruing prior to a wrongful ouster].)
As the parties acknowledge, the jury in the first lawsuit between them expressly found Drocco was not in breach of the installment land contract even though he had made no payments after learning of the Ortegas' material breach. Drocco therefore recovered not only nominal damages for the Ortegas' breach of contract, but also affirmative equitable relief. Thus, as the jury's findings necessarily establish, at all times during the pendency of that litigation, Drocco was lawfully in possession of the property. The parties also acknowledge the March 2005 judgment in the first lawsuit is long since final and conclusive as to the lawfulness of Drocco's occupancy prior to the judgment.
The Ortegas acknowledge in their supplemental briefing that Drocco's refusal to make payments was raised and at issue in the first lawsuit. As we have discussed, one party's material breach of a contract can excuse the other party's performance of its obligations under the contract. (See Brown v. Grimes, supra, 192 Cal.App.4th at p. 277; Sanchez v. County of San Bernardino, supra, 176 Cal.App.4th at p. 530.)
"Collateral estoppel, or issue preclusion, precludes the relitigation of issues argued and decided in prior proceedings." (Bridgeford v. Pacific Health Corp. (2012) 202 Cal.App.4th 1034, 1042.) It applies when a second case involving the same parties raises an identical issue actually litigated and necessarily decided in the first case. (Ibid.; Amin v. Khazindar (2003) 112 Cal.App.4th 582, 590 [" 'even though the causes of action be different, the prior determination of any issue is conclusive in a subsequent suit between the same parties as to that issue and every matter which might have been urged to sustain or defeat its determination' "].)
Indeed, in their briefing in the trial court in this ejectment action, the Ortegas identified the time Drocco went into default—resulting in the contract terminating by its own terms and making his occupancy wrongful—as April 2005, when he failed to resume making installment payments (after failing to complete the purchase in accordance with the terms of the equitable relief he had been awarded).
That the March 2005 judgment also stated "Drocco did not pay 28 consecutive monthly payments" is immaterial here for two reasons. First, Drocco's refusal to make payments was excused in light of the Ortegas' material breach and does not change the critical fact for purposes of this ejectment action that Drocco was lawfully on the property prior to the March 2005 judgment (and, indeed, prior to April 2005). Second, the recitation of his payment history was relevant only to the equitable relief that court awarded to Drocco in response his request that the pre-payment penalty be stricken. As we have noted, that court fashioned an election of sorts—Drocco could pay a lump sum determined by the court, or he could return to making installment payments under the contract. The affirmative equitable relief that court chose to provide to Drocco has no bearing on the damages for wrongful possession the Ortegas can legally recover in this ejectment action if Drocco fails to redeem.
While the Ortegas assert it would be "inequitable" for Drocco to effectively pay nothing for the time he occupied the property between December 1, 2002, and April 2005 (when he went into default under the contract), a court cannot in the name of equity alter the essential elements of an ejectment claim or expand the legally recoverable damages to include a period of time when the occupant was permissibly on the property. Furthermore, as we have already observed, the Ortega's put themselves in breach of a significant provision of the installment land sale contract, forcing Drocco to sue for relief. Accordingly, they are in no position to complain about where the equities fall during that time frame. (See Civ. Code, § 3517 ["No one can take advantage of his own wrong."].)
Cunningham's Liability for Damages and Fees
The trial court ruled Cunningham is jointly and severally liable for the damages for wrongful possession and prejudgment interest, as well as the attorney fees, awarded against Drocco. This issue also was never raised during the trial court proceedings—until the Ortegas included a provision for joint and several liability in their proposed statement of decision and judgment. Cunningham contends she cannot be responsible for damages for wrongful use of the property before she began living there (in approximately 2006), nor can she be responsible for the full amount of the Ortegas' attorneys fees because she appeared in the lawsuit at the suggestion of the trial court only two months before trial.
We agree Cunningham cannot bear responsibility for wrongful possession damages and prejudgment interest that occurred before her arrival on the property. She neither caused, nor has any derivative liability for, such damages and interest. Only Drocco can owe damages and prejudgment interest for the period he, alone, wrongfully occupied the property. Any damages and prejudgment interest awarded against Cunningham must be based on her own wrongful occupancy.
We have addressed the time period for which such damages can be awarded against Drocco in the preceding section of this opinion.
We also conclude Cunningham cannot be liable for any attorney fees awarded against Drocco. The Ortegas sought attorney fees under Civil Code section 1717 and paragraph 19 of the installment land sale contract—in other words, they sought contractual attorney fees. However, Cunningham was not a party to the contract. Because the parties' briefs did not squarely address Cunningham's relationship, if any, to the installment contract, we also asked for supplemental letter briefs on this issue. Drocco now contends Cunningham cannot be liable for attorney fees since she was not a signatory to the contract. The Ortegas posit two theories as to why Cunningham is purportedly liable for contractual attorney fees.
First, the Ortegas claim section 1717 applies directly to Cunningham because "she sued to enforce the land sale contract." This is not a fair characterization of Cunningham's claim. While Cunningham's unverified complaint and cross-complaint in intervention, by no means a model of clarity, did allege she acquired rights in the property under "the LSC," no additional allegations fleshed out this cryptic allegation. There was no allegation she was entitled to attorney fees. And the prayer relief, while seeking costs of suit (a boilerplate request in any complaint), also did not seek an award of attorney fees. In any case, Cunningham attached to her complaint and cross-complaint the written assignment of rights from Drocco on which she based her claim to an interest in the property. (See Kim v. Westmoore Partners, Inc. (2011) 201 Cal.App.4th 267, 282 [when a litigant attaches a written agreement to a complaint, "the terms of that written agreement take precedence over any contradictory allegations in the body of the complaint"].) This assignment coveys a 75 percent contingent interest in the property from Drocco (not from the Ortegas), it is signed by Cunningham and Drocco alone, and it makes no mention of the installment land sale contract between Drocco and the Ortegas.
Moreover, when the parties present evidence at trial, the pleadings are not dispositive of whether an action is "on a contract" and subject to section 1717. (Hyduke's Valley Motors v. Lobel Financial Corp. (2010) 189 Cal.App.4th 430, 436.) For purposes of trial, the parties stipulated "[a]ny rights Christine Cunningham has in the Property were assigned to her by Gary Drocco," with no reference to the installment contract. And after trial, the Ortegas' proposed statement of decision and the statement the trial court ultimately adopted both state "Cunningham was not an original party to the LSC, and she derives any rights that she may have in the Property and this matter from Drocco." Both statements continue: the Ortegas "were . . . within their rights to treat Drocco as the only party (other than themselves) to the LSC."
Thus, whatever rights and liabilities Cunningham may have in connection with the property, they do not arise from the installment land sale contract that she did not sign. Accordingly, she cannot be liable for contractual attorney fees under the attorney fees provision of that contract and section 1717. (See Wilson's Heating & Air Conditioning v. Wells Fargo Bank (1988) 202 Cal.App.3d 1326, 1335, citing Glynn v. Marquette (1984) 152 Cal.App.3d 277, 281 [cannot hold defendant liable for fees if she is not "sued on a contract as if he were a party to it"]; Sessions Payroll Management v. Noble Constr. Co. (2000) 84 Cal.App.4th 671, 680 [fee award against unnamed, non-signatory plaintiff erroneous when contracting parties did not intend to benefit the unnamed party and the agreement reflected no such intent]; cf. Diamond Heights Village Assn., Inc. v. Financial Freedom Senior Funding Corp. (2011) 196 Cal.App.4th 290, 307 ["Civil Code section 1717 covers signatories to a contract containing a fee provision and those who are sued as alleged parties to the contract or otherwise alleged to be bound by its terms."],italics added.)
Second, the Ortegas' contend section 1717 applies to Cunningham simply by virtue of her status as an intervenor aligned with Drocco. They assert Drocco exposed himself to a fee award as a signatory to the contract, and, by siding with him, Cunningham is likewise exposed. Not so. Intervenors may "for the purposes of allocating costs pursuant to section1032" be "entitled to an award of costs or may be held liable for costs in the same manner as the original parties" based on their "alignment with the original parties." (Catello v. I.T.T. General Controls (1984) 152 Cal.App.3d 1009, 1015.) However, intervenors are not similarly liable for contractual attorney fees. (Big Bear Mun. Water Dist. v. Bear Valley Mutual Water Co. (1989) 207 Cal.App.3d 363, 384-386 [there is a distinction between costs, for which an intervenor may be liable as party to an action, and contractual attorney fees, for which an intervenor should be liable for only if a party to the contract].)
The trial court therefore erred in ruling Cunningham is jointly and severally liable for all wrongful possession damages, prejudgment interest and contractual attorney fees awarded against Drocco. If Drocco fails to his exercise his right of equitable redemption, the trial court must separately determine the amount of the wrongful possession damages for which Cunningham is jointly liable. Cunningham is not liable for any contractual attorney fees that may be awarded against Drocco.
Attorney Fee Award
Because we are reversing the judgment, the award of contractual attorney fees must likewise be reversed. (See Steinman v. Malamed (2010) 185 Cal.App.4th 1550, 1562 ["order awarding attorney's fees falls as matter of course when judgment on which it was based is reversed"].) On remand, the trial court will need to revisit the issue of contractual attorney fees as between the Ortegas and Drocco, both as to entitlement and amount. We again set forth some of the salient legal principles to assist the trial court in this endeavor.
Civil Code section 1717, subdivision (b)(1), defines "prevailing party" as follows: "[T]he party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract. The court may also determine that there is no party prevailing on the contract for purposes of this section." (Civ. Code, § 1717, subd. (b)(1).) Thus, section 1717 allows "those parties whose litigation success is not fairly disputable to claim attorney fees as a matter of right, while reserving for the trial court a measure of discretion to find no prevailing party when the results of the litigation are mixed." (Hsu v. Abbara (1995) 9 Cal.4th 863, 876 (Hsu).) " 'Typically, a determination of no prevailing party results when both parties seek relief, but neither prevails, or when the ostensibly prevailing party receives only a part of the relief sought.' " (Id. at p. 875.)
In Hsu, supra, 9 Cal.4th at page 876, the Supreme Court explained "that in deciding whether there is a 'prevailing party on the contract,' the trial court is to compare the relief awarded on the contract claim or claims with the parties' demands on those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources. The prevailing party determination is to be made only upon final resolution of the contract claims and only by 'a comparison of the extent to which each party ha[s] succeeded and failed to succeed in its contentions.' " Additionally, "in determining litigation success, courts should respect substance rather than form, and to this extent should be guided by 'equitable considerations.' For example, a party who is denied direct relief on a claim may nonetheless be found to be a prevailing party if it is clear that the party has otherwise achieved its main litigation objective." (Id. at p. 877, italics omitted.)
Here, the results are mixed. We have agreed the Ortegas established a prima facie case that Drocco breached the contract, but we have also ruled Drocco is entitled to prevail on his claim for a reasonable redemption period, rendering the Ortegas' recovery on their ejectment claim premature. If Drocco does redeem, then the Ortegas have been made whole and are not entitled to a judgment of ejectment and damages for wrongful possession. If Drocco does not redeem, we have agreed with his contentions on appeal (although sometimes for different reasons) that there can be no setoff for the attorney fee judgment he assigned to his attorney, that the time period for which damages for wrongful possession and prejudgment interest can be awarded is limited, and that Cunningham is not jointly and severally liable for all damages and prejudgment interest awarded against Drocco and is not liable for any contractual attorney fees awarded against Drocco. We express no opinion as to how the trial court should ultimately resolve the "prevailing party" issue, but rather note matters pertaining to this issue. (See De La Cuesta v. Benham (2011) 193 Cal.App.4th 1287, 1292-1299 [comprehensive review of cases addressing "prevailing party" determination].)
We also express no opinion as to whether the amount of any fee award, if one is made, should be adjusted to reflect equitable considerations. Again, we note the issue for the trial court's benefit on remand. (See EnPalm, LLC v. Teitler (2008) 162 Cal.App.4th 770, 774 [discussing equitable considerations that can reduce "lodestar" amount in determining reasonable contractual attorney fees].)
The judgment and attorney fee award are reversed, and the case is remanded for further proceedings consistent with this opinion. Each party shall bear its own costs on appeal.
Marchiano, P. J.