The Palace at Washington Square v. Mechanics Bank CA1/3 ( 2023 )

Filed 3/17/23 The Palace at Washington Square v. Mechanics Bank CA1/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
THE PALACE AT WASHINGTON
SQUARE, LLC,
Plaintiff and Appellant, A164195, A164799
v. (City & County of San Francisco
MECHANICS BANK, Super. Ct. No. CGC-19-578060)
Defendant and Respondent.
The Palace at Washington Square (Palace), plaintiff in this action,
entered into a loan agreement with defendant Mechanics Bank (Bank) to
fund construction of a residential and commercial building. As the maturity
date of the construction promissory note approached and passed, the parties
engaged unsuccessfully in negotiations to extend it. Bank eventually
demanded payment of the loan balance as well as attorney fees incurred in
efforts to enforce its rights, and subsequently filed an action for appointment
of a receiver. Palace paid the amount Bank demanded, which included
attorney fees already incurred and a reserve for future legal expenses.
In this action, Palace alleges that Bank did not negotiate in good faith
in violation of the implied covenant of good faith and fair dealing and that its
actions amounted to economic duress. After trial, a referee ruled against
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Palace on the causes of action before him, and awarded Bank contractual
attorney fees. Palace appeals the judgment and fee award. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
I. The Construction Loan Documents
Palace and Bank entered into a construction loan agreement on
February 22, 2016, under which Bank agreed to lend an amount not to exceed
$18,500,000 to finance construction of a five-story condominium project in
San Francisco. The loan agreement required Palace to complete construction
no later than December 1, 2017. The loan proceeds were to be advanced to
Palace in disbursements, with all principal, interest, and other amounts “due
and payable in full” on the loan’s maturity date, defined as two years from
the date of the agreement unless an event of default occurred.
Disbursements were to be paid only if there was no default, defined in
Paragraph 19.1 of the loan agreement to include Palace’s failure “to make
any principal, interest, or other payment when due and payable,” Palace’s
failure to perform non-monetary covenants or conditions if certain notice
requirements were met, or a construction delay rendering it unlikely the
project would be completed by the completion date. Palace was prohibited
from “suffer[ing] or permit[ing] any mechanics’ lien to be filed or otherwise
asserted,” and was required to pay all amounts due to anyone that might
result in a mechanic’s lien if unpaid.
The loan agreement provided that no modification would be valid if not
in writing and signed by the party against whom modification was sought,
and it contained an “Entire Agreement” clause.
Palace also executed a construction promissory note, with a loan
maturity date of February 22, 2018. The promissory note provided that
Palace would pay the costs of collecting or attempting to collect sums due
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under the note and loan document, including reasonable attorney fees in the
event of a default. It also provided for a higher rate of interest (the default
rate) to be charged if Palace did not make any payments on time. Also among
the loan documents was a deed of trust, which contained attorney fee and
indemnity clauses that we discuss in further detail below.
II. Project Delays and Request for Extension
The project was not finished by the scheduled completion date of
December 1, 2017, and Bank extended the completion date to February 1,
2018 to allow Palace to continue to receive disbursements and finish the
project, without defaulting on the loan.
On December 11, 2017, Marc Thompson, a senior vice president of
Bank, wrote a letter to Palace’s owner, Joel Campos, telling him that the
construction loan would mature on February 22, 2018, and that Bank would
need updated financial information in order to begin the credit process to
extend the loan. Campos provided the requested documents, and Thompson
told Campos he was working on the extension.
Campos received advice to seek replacement financing from other
lenders, and there was evidence it would have been “very easy” for him to do
so. Campos declined to do so, saying that he intended to continue to work
with Bank.
It appears that subcontractors for the construction project were not
being paid by February 2018, and the contractor, West Builders, Inc. (West
Builders) informed Palace that it and the subcontractors would file liens on
the project as of February 18.
Thompson did not have authority to approve a loan extension; rather,
Bank’s chief credit officer, Scott Givens, had final approval authority.
Because of the uncertainty caused by the conflict between Campos and the
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contractor, the six-month extension request was not submitted to Givens.
Bank did not affirm an extension of the loan in writing before it matured on
February 22, 2018.
III. Further Negotiations and Mechanic’s Liens
At a meeting with Thompson and other Bank representatives on March
1, 2018, Campos asked for the loan to be extended for six months, and for an
increase in the loan amount. Bank told Campos it needed additional
information about the cost to complete the project, the status of the tasks
that remained, and additional items. Palace provided additional information,
but Bank concluded the information was still incomplete.
Bank sent Palace and Campos a notice of default on March 1, 2018,
stating that the construction note had matured and the outstanding balance
was due, and that as a result “events of default” had occurred. The notice
continued that, although Bank as willing to engage in discussions with
Palace about “forbearance or other accommodation,” Bank could terminate
those discussions for any reason, except as provided in written agreements,
and that Bank was not waiving its rights with respect to the maturity default
or any other default. The notice of default did not list the outstanding
balance on the loan.
West Builders sent Bank a stop-payment notice1 on February 28, 2018,
and filed a mechanic’s lien on March 1, 2018 asserting it was owed more than
$3,000,000 for work it had performed. Over the next three months, multiple
subcontractors also filed liens. Palace’s attorney wrote to the contractor on
1 This was a legal notice to withhold construction funds equal to the
value of labor and materials furnished but not paid for, pursuant to Civil
Code sections 8520, 8530, and 9350.
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March 8, 2018, telling it the loan could not be extended unless the lien was
released.
Thompson sent an email to Palace on March 14, 2018, extending to
March 20 the time for Palace to reach a settlement agreement with West
Builders to clear the mechanic’s liens and stop-payment notice, one of a
number of conditions required before Bank could consider extending the loan
maturity date.
Palace’s attorney, Jonathan Rodriguez, sent an email to Bank’s counsel
on March 23, 2018, telling him Palace and West Builders had agreed to terms
to “close out payments” and attaching a draft agreement for review and
comment. The draft agreement included a number of blanks to be filled in,
and it was not signed. Bank replied that its counsel would review the draft
agreement and that Bank would then discuss an extension of the loan. It
appears that Bank did not provide any further response regarding the draft
agreement.
Despite the draft settlement agreement, it appears the disputes
between Palace and West Builders continued. At a meeting on April 20 with
representatives from Palace, West Builders, and Bank, there was a
discussion about extending the loan and reaching a settlement between
Palace and West Builders. Thompson testified it was clear that conflict
between Palace and West Builders remained and that they had not reached
an agreement to settle their differences.
Bank notified Palace on May 25, 2018, that the recording of the
mechanic’s liens was a breach of the loan agreement and that, as of June 12,
2018, it would exercise its rights to procure the release of the liens, with any
amounts it expended deemed to constitute disbursement of the loan proceeds.
But Bank and Palace continued to engage in discussions and negotiations,
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during which Bank proposed the parties enter into a forbearance agreement
but specified it was not making a binding commitment absent a signed
agreement.
On May 29, 2018, before Bank and Palace came to terms on a
forbearance agreement, West Builders filed an action against Palace and
Bank, alleging causes of action including foreclosure of the mechanic’s lien.
Bank notified Palace on June 1, 2018 that in light of West Builders’ action, it
was withdrawing the forbearance proposal. On the same date, Bank wrote to
Palace notifying it that it was invoking the default rate, and that interest
would accrue at that higher rate.
Bank attempted unsuccessfully to negotiate with West Builders, and on
June 28, 2018, Bank informed Palace that if there were no agreement by the
following day, it would cease negotiations with West Builders and demand
full repayment of the loan.
IV. Demand for Payment and Receiver Action
Bank notified Palace on June 29, 2018 that it was in default, both
because it failed to repay the loan by the maturity date and because it had
not cured the mechanic’s liens within 30 days of the May 25 notification. It
demanded payment of all outstanding obligations, including unpaid principal,
interest at the default rate, and attorney fees, costs, and expenses incurred
by Bank as of July 6, 2018, and asked Palace to contact Bank before that date
to obtain a payoff quote.
Palace (through Edward Schmitt, whom Campos had hired to arrange
new financing) requested a payoff demand from Bank. On July 5, Schmitt
informed Bank’s counsel by email that Campos had been approved for
financing on the project and would be able to pay Bank and take care of the
liens, and that Palace was trying to close the deal by July 13. Because the
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communication was “vague at best as to how the loans were going to be paid
off” and lacked a commitment letter, Bank decided to continue to pursue its
remedies under the loan documents. Bank’s attorney forwarded the email to
Palace’s counsel, explaining that because Palace was represented by counsel
he would not respond to Schmitt.
Bank’s counsel emailed Palace’s counsel on July 10, 2018, providing a
loan payoff statement in the amount of $15,928,913.52, with daily interest of
$4,722.13, but explaining that Bank was continuing to incur legal fees and
that a final payoff quotation could not be provided until West Builders’ action
was dismissed with prejudice.
Bank filed an action against Palace on July 10, 2018, alleging a single
cause of action for specific performance and appointment of a receiver to take
possession of the property (the receiver action). Bank alleged that a number
of events of default had occurred, among them that Palace did not pay all
outstanding obligations on the February 22, 2018 maturity date and that
Palace failed promptly to discharge or contest the mechanic’s liens as
required by the construction loan agreement. It also alleged Palace failed to
satisfy its June 29, 2018 payment demand.
On July 12, 2018, Palace’s counsel forwarded to Bank conditional offers
that Palace had obtained from two lenders, and suggested it was unnecessary
for Bank to seek appointment of a receiver. Because it appeared that Palace
might soon be able to pay off the loan, Bank did not file a motion to appoint a
receiver.
On July 24, 2018, Bank emailed a payoff demand to Palace’s counsel in
the amount of $16,376,974.09, including incurred legal fees of $341,370.54
and a $50,000 reserve for future legal fees and costs, and three days later
sent a slightly amended demand.
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Palace paid $16,402,084.74, the amount of the Bank’s amended
demand, on July 26, 2018. Bank refunded the $50,000 reserve legal fee on
August 13, 2018. Campos testified he did not think the amount of legal fees
Bank claimed was reasonable, but he paid it because he thought he would
lose the building otherwise and felt he had no choice.
V. The Current Action
Palace brought this action against Bank, alleging causes of action for
breach of the construction loan agreement, breach of the covenant of good
faith and fair dealing, economic duress, and negligence. The parties
stipulated to have a referee hear and determine the entire case and prepare a
statement of decision, upon which judgment would be entered, and the trial
court so ordered. (Code Civ. Proc, § 638 et seq.; see id., § 644, subd. (a).)
After pretrial proceedings we need not detail here, the referee ultimately
decided two causes of action, those for breach of the implied covenant of good
faith and fair dealing and for economic duress.
The referee ruled against Palace on both causes of action. As to the
cause of action for breach of the implied covenant of good faith and fair
dealing, the referee found Bank had no contractual obligation to modify the
loan agreement by extending the maturity date and therefore could not be
held liable for failing to negotiate in good faith for an extension and that, in
any case, the evidence did not show Bank acted unreasonably. The referee
also rejected Palace’s contention that Bank was estopped from relying on the
lack of a written extension agreement, an argument made on the ground that
Thompson assured Campos the extension would be granted but failed to
submit the extension request for final approval before the maturity date. The
referee found the evidence did not show Thompson made such an assurance
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and that Palace knew Bank had not approved an extension before the
maturity date.2
The referee also rejected Palace’s contention that Bank breached the
implied covenant by failing to review in a timely manner the draft settlement
agreement between Palace and West Builders that Palace submitted in
March 2018, on the ground that Bank had no contractual duty to review and
comment on the submitted agreement and no implied duty to behave
reasonably in reviewing it. And, the referee concluded, the Bank’s failure to
respond to the draft settlement agreement did not create an estoppel, as
Bank did not agree to review the agreement within a specific time period; the
agreement was not complete or final; Palace did not provide a final version or
inquire as to the status of Bank’s review; and Palace and West Builders had
not, in fact, reached a final resolution of their dispute regarding the liens.
Palace was similarly unsuccessful with its claim that Bank breached
the implied covenant when it demanded payment of the loan, interest,
attorney fees, and costs on June 29, 2018, with less than one week’s notice
while refusing to provide the amount required to do so, and when it filed the
receiver complaint. The referee explained that the loan agreement did not
contain provisions governing the period to respond for a demand for payment
or the content of the demand letter, and that the implied covenant did not
impose a duty of “moderation” in enforcing Bank’s rights. And when Palace’s
counsel requested the payoff amount on July 10, Bank’s counsel provided the
outstanding loan amounts, but explained that the amount of its attorney fees
could not be determined while the West Builders action was still pending.
Moreover, although Bank filed the receiver complaint, it did not file a motion
2Palace does not challenge on appeal the referee’s findings regarding
estoppel.
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for appointment of a receiver. Under these circumstances, the referee
concluded, Bank’s failure to provide a final payoff amount was reasonable
and did not breach the implied covenant.
As an independent ground for its ruling, the referee also concluded that
Palace could not prove the cause of action for breach of the implied covenant
because Palace itself breached the loan agreement by failing to pay the
amounts due by the maturity date of February 22, 2018.
As to Palace’s claim for economic duress, the referee concluded the
evidence did not show Bank acted wrongfully either in bringing the receiver
action or in requiring Palace to pay its attorney fees. Nor did it show Palace
had no reasonable alternative to paying the attorney fees, for instance by
raising objections with Bank or commencing litigation.
Judgment was entered in favor of Bank and against Palace. Bank then
moved for an award of attorney fees. The referee granted the motion, ruling
Bank was entitled to attorney fees and costs of $3,014,035.10. Palace
appealed both from the judgment and from the award of attorney fees and
costs, and we consolidated the appeals.
DISCUSSION
I. Implied Covenant of Good Faith and Fair Dealing
A. Palace’s Contentions
Palace contends the referee erred in ruling that Bank owed no duty of
good faith and fair dealing in the absence of a new agreement between the
parties. To the extent the referee’s determination rests of factual
determinations, our review is for substantial evidence, upholding the decision
below if there is any substantial evidence, contradicted or uncontradicted, to
support the judgment, and resolving all conflicts in favor of the judgment.
(Howard v. Owens Corning (1999) 72 Cal.App.4th 621, 631.) To the extent
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the issue is one of law, we review it de novo. (People ex rel. Lockyer v.
Shamrock Foods Co. (2000) 24 Cal.4th 415, 432.)
In the second cause of action, Palace alleged it attempted to negotiate a
forbearance with Bank to secure additional loan disbursements and arrange
financing to complete the construction project. As a result of Bank’s failure to
make what Palace alleged were required disbursements, mechanic’s liens
were recorded against the property. And, Palace alleged, rather than
negotiating in good faith, Bank took the opportunity to generate substantial
fees and charges at Palace’s expense and to place Palace in economic duress
so Bank could take control of the property and sell it for a profit. Bank also
acted in bad faith in failing to agree to new financing or to submit a payoff
demand so the loan could be retired. As a result of Bank’s actions in violation
of the implied contractual covenant of good faith and fair dealing, Palace
alleged, Palace had no choice but to pay Bank’s “exorbitant and outrageous
fees and charges” in order to pay off the loan.
Palace contends the referee made an error of law, subject to our de novo
review, in finding Bank did not violate the implied covenant of good faith and
fair dealing. Specifically, Palace argues Bank had an obligation not to
deprive it of the opportunity to resolve the mechanic’s liens with West
Builders (by reviewing and commenting on the draft settlement agreement)
as well as an obligation to present Palace with the sum that was “due and
payable” to pay off the construction loan.
B. Events of Default
Before deciding the extent of any implied covenant of good faith and
faith dealing, we must consider Palace’s contention that it did not default on
its obligations under the loan agreement. The referee concluded Palace was
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in default as a result of its failure to pay the outstanding amounts by the
maturity date.
Two defined “Events of Default” under Paragraph 19.1 of the loan
agreement are pertinent here. The first is the “[f]ailure of Borrower to make
any principal, interest, or other payment when due and payable.” (Paragraph
19.1(a).) The second is the “[f]ailure of Borrower to observe or perform any of
the other non-monetary covenants or conditions by Borrower to be performed
under the terms of this Agreement or any other Loan Document for a period
of thirty (30) days after written notice from Lender, provided that if any such
failure concerning a non-monetary covenant or condition is susceptible to
cure and cannot reasonably be cured within said thirty (30) day period, then
Borrower shall have an additional sixty (60) day period to cure such failure
and no Event of Default shall be deemed to exist hereunder so long as
Borrower commences such cure within the initial thirty (30) day period and
diligently and in good faith pursues such cure to completion within such
resulting ninety (90) day period from the date of Lender's notice.”
(Paragraph 19.1(b).)
Palace leans heavily on Paragraph 19.1(a)’s requirement that default
occurs when amounts are not paid when “due and payable,” arguing that
Bank delayed providing a payoff quote while attorney fees were accumulating
and that until Bank informed it, in late July 2018, of the total amount due,
including attorney fees and costs, no amount was both due and payable.
Palace contends that until Bank presented a quote, it had no obligation to
pay. And, Palace argues, it did not exceed the time authorized under
paragraph 19.1(b) of the loan agreement in its efforts to remove the
mechanic’s liens. Thus, according to Palace, there were no “events of
default.”
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Two problems with this argument are found in the terms of the
construction loan agreement and promissory note. First, paragraph 4.3 of the
loan agreement provides that “[a]ll principal, interest and other sums due
under the Loan Documents shall be due and payable in full on the Maturity
Date,” or February 22, 2018. (Italics added.) It is undisputed that Palace did
not pay those amounts by that date, and Palace makes no showing that it
could not ascertain how much was due at that point, before Bank began
incurring attorney fees. To the extent Palace needed the Bank to calculate
what it owed, it could have asked for a payoff number in February 2018—or
in March, immediately after receiving notice from Bank of the events
constituting default—instead of waiting until early July to make this request.
Second, paragraph 8 of the promissory note provides that Palace “hereby
waives presentment for payment [and] demand.” Palace contends that this
language waives only a requirement that Bank present the original
instrument as a condition for payment, but the only California law to which
Palace cites gives a broader reading to the term: “ ‘Presentment’ means a
demand [to pay] made by or on behalf of a person entitled to enforce an
instrument.” (See Cal. U. Com. Code, § 3501, subd. (a).) Thus, under the
express terms of the loan agreement and the promissory note, Palace’s
argument that no amounts were “due and payable”—and thus, no default
occurred—until Bank presented a payoff quote fails.
We thus conclude the evidence supports the referee’s finding that an
event of default occurred under Paragraph 19.1(a) when Palace did not repay
the note on the maturity date.
As to Paragraph 19.1(b)’s provision that Palace would have 30 days
after written notice to cure a failure to perform a non-monetary covenant, to
be extended by 60 days if Palace diligently began a cure during that period,
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Palace contends it was entitled to the benefit of the additional 60 days to cure
the mechanic’s liens before being considered in default.3 It points out that
Bank sent an email on March 14, 2018 telling Campos he must enter into a
settlement agreement with West Builders to clear the mechanic’s liens by
March 20, 2018. According to Palace, it then began diligent efforts to clear
the liens by coming to a draft settlement agreement and sending it to Bank
for review. But even assuming paragraph 19.1(b) gave Palace 90 days from
the March 14 email to cure the liens—or until June 12—Palace did not do so
within that 90-day period. Palace suggests, apparently in the alternative,
that the period to cure the liens began only in June 2018, when Bank
“abruptly cut[ ]off its negotiations with West Builders,” but it does not show
that it was not in default as a result of its continuing failure to cure the liens
after receiving notice on March 14. Thus, Palace has not shown that the
evidence compels a conclusion that it did not default under Paragraph 19.1(b)
of the loan agreement.
This conclusion—that substantial evidence supports the referee’s
findings that Palace defaulted on its obligations—will prove dispositive of
Palace’s claims on appeal.
C. Scope of Duty of Good Faith and Fair Dealing
Every contract carries an implied covenant of good faith and fair
dealing, which “prevents one side from unfairly frustrating the other’s right
to receive the benefits of the agreement actually made. . . . A plaintiff
claiming breach must allege the defendant’s wrongful conduct was contrary
to the contract’s purpose and the parties’ legitimate expectations.” (Cordoba
3The referee made no finding on this issue, presumably because—as
Bank argues and Palace does not dispute—Palace did not argue below that it
was entitled to 90 days to cure the mechanic’s liens.
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Corp. v. City of Industry (2023) 87 Cal.App.5th 145, 156.) The covenant is not
“ ‘ “endowed with an existence independent of its contractual
underpinnings,” ’ ” and “cannot impose substantive duties or limits on the
contracting parties beyond those incorporated into the specific terms of the
agreement.” (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349–350;
accord, Avidity Partners, LLC v. State of California (2013) 221 Cal.App.4th
1180, 1204.) While breach of a specific provision of a contract is not
necessary, “[i]t is universally recognized the scope of conduct prohibited by
the covenant of good faith is circumscribed by the purposes and express terms
of the contract.” (Carma Developers (Cal.), Inc. v. Marathon Development
California, Inc. (1992) 2 Cal.4th 342, 373.) If an act is authorized by the
express terms of a contract, “ ‘no covenant of good faith and fair dealing can
be implied which forbids such acts and conduct.’ ” (Id. at p. 374.)
The law is clear that, absent special circumstances, the duty of good
faith and fair dealing does not require a party either to behave reasonably in
negotiations to amend an existing contract or to be moderate in exercising its
rights in the event of default. Racine & Laramie, Ltd. v. Department of Parks
& Recreation (1992) 11 Cal.App.4th 1026 is illustrative. A concessionaire had
a contract with the California Department of Parks and Recreation to operate
at a state historic park under a contract that contemplated that the parties
might negotiate modifications. (Id. at pp. 1028, 1030–1031.) The parties
negotiated for several years to modify the contract to allow expanded
operations at the premises, but the negotiations broke down, and the
concessionaire brought an action against the department for breach of the
implied covenant of good faith and fair dealing. (Id. at p. 1028.) A jury found
for the concessionaire, and the appellate court reversed the judgment. (Id. at
pp. 1028–1029.) Because the Department had no obligation to negotiate new
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terms for the concession contract, the court ruled, “its assumption of an
arbitrary stance at some point in the negotiations cannot therefore be a
breach of any contract term, including implied contract terms of good faith
and fair dealing, even though such conduct might be found by a jury to be
unreasonable, unfair, or otherwise bad faith negotiation tactics.” (Id. at
p. 1031.) Nor had the Department made an agreement to negotiate in good
faith, and the facts did not give rise to an estoppel. (Id. at pp. 1033–1034.)
Finally, there was no indication the Department had exercised discretionary
powers with respect to the modification arbitrarily or in disregard of the
purposes of the contract or the concessionaire’s interests. (Id. at p. 1034.)
Absent such special circumstances or conditions, “there is no obligation in
California to bargain for a new or amended contract in good faith.” (Id. at
p. 1035.)
Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465 (overruled on
another ground in Riverisland Cold Storage, Inc. v. Fresno-Madera
Production Credit Assn. (2013) 55 Cal.4th 1169, 1179, 1182) articulated a
related principle. The plaintiffs in Price obtained loans from a bank but fell
behind on the payments. (Id. at pp. 471–473.) The bank agreed to forbear
publishing notice of a trustee’s sale if, inter alia, the plaintiffs paid all
outstanding amounts by a certain date, on which the plaintiffs made only
partial payment. The bank published a notice of trustee’s sale, and the
plaintiffs finally paid the full amount of the loans. (Id. at pp. 473–474.) The
plaintiffs then sued the bank, alleging as damages that they were forced to
sell assets at distressed prices to make the final payments. (Id. at p. 474.)
The trial court granted summary judgment, and the Court of Appeal
affirmed, rejecting the plaintiffs’ argument that the bank breached the
implied covenant of good faith and fair dealing by taking a “ ‘hard line’ ” in
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negotiations on the ground that the covenant “does not impose any
affirmative duty of moderation in the enforcement of legal rights.” (Id. at
p. 479; accord, Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002) 100
Cal.App.4th 44, 56, fn. 10.) It also noted that the plaintiffs had not raised the
equitable defense of estoppel, which may act to bar unfair tactics in the
enforcement of agreements. (Price, at p. 479.)
Applying these principles, the referee did not err in concluding Bank
did not violate the implied covenant of good faith and fair dealing. There is
evidence Palace was in default as of February 22, 2018, the loan’s maturity
date. When notifying Palace of the default on March 1, 2018, Bank stated it
would engage in discussions of forbearance only on condition it could
terminate negotiations for any reason, and it reserved its rights under the
default. The parties never agreed to a modification of their contract, and
under Racine and Price, Bank was not obligated to behave reasonably in its
negotiations or in enforcing its rights after the default.
Against this conclusion, Palace argues that Bank acted unreasonably in
failing to respond to its draft agreement with West Builders. But, as the
referee pointed out, Bank did not have a contractual duty to review and
comment on the document. And regardless of whether Bank commented on
the draft agreement, the record shows (and the referee found) the conflict
between Palace and West Builders had not actually been resolved, as shown
by the April 20, 2018 meeting at which Palace, West Builders, and Bank
discussed the settlement and it became clear that Palace and West Builders
had not reached an agreement.
Palace also argues that Bank put it in an impossible bind by
demanding payment in June 2018 but failing to provide an immediate payoff
quote. The referee found Bank’s behavior “entirely reasonable under the
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circumstances,” when Palace had not yet obtained the new financing
necessary to pay off the construction loan and Bank was continuing to incur
attorney fees. Substantial evidence supports this finding.
In any event, there is another basis for the referee’s decision that
Palace does not show was erroneous. The referee concluded that Palace was
in default as of February 22, 2018, and as we have discussed, the record
supports that conclusion. In its March 1, 2018 default notice, Bank explained
it was willing to discuss accommodations but that it was not waiving the
default, and that it would not be bound by those discussions unless set forth
in written agreements. Palace did not claim otherwise in response to Bank’s
default notice, and indeed, Campos appears to have acknowledged the
“default status” of the loan in a March 13, 2018 email to West Builders,
which he forwarded to Thompson.
Citing Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222
Cal.App.3d 1371, 1388, the referee concluded that this default prevented
Palace from proving its own “ ‘performance or excuse for nonperformance,’ ” a
prerequisite to a cause of action for breach of the implied covenant of good
faith and fair dealing. This was an independent basis for the referee’s
conclusion that Bank did not violate the implied covenant in failing to review
and respond to the draft settlement agreement or state a payoff amount.
Palace makes no effort to show the referee erred in concluding it must prove
its own performance or excuse for nonperformance to assert a violation of the
implied covenant of good faith and fair dealing (see Merced Irrigation Dist. v.
County of Mariposa (E.D. Cal. 2013) 941 F.Supp.2d 1237, 1280 [among
elements of California cause of action for breach of implied covenant, plaintiff
must have substantively performed under contract or been excused]), instead
arguing only that it was not in default. It has thus forfeited any challenge to
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this basis for the referee’s ruling. (See Children’s Hospital & Medical Center
v. Bontá (2002) 97 Cal.App.4th 740, 777 [we do not consider issues not raised
in appellant’s briefs]; Haight Ashbury Free Clinics, Inc. v. Happening House
Ventures (2010) 184 Cal.App.4th 1539, 1554, fn. 9 [same].)
II. Economic Duress
In its cause of action for economic duress, Palace alleged that during
February and March 2018, the parties operated with the understanding that
the loan agreement was in effect and there had been no events of default;
that, without Palace’s knowledge, Bank was simultaneously preparing to
appoint a receiver and market the building; that in May 2018, Bank indicated
it was willing to enter into a forbearance agreement, but that it proposed
unreasonable terms; that contractors sued Palace as a result of Bank’s failure
to come to a reasonable agreement, putting the project in jeopardy; that the
lawsuits by the contractors seeking to foreclose on the property meant Palace
had to either submit to foreclosure or obtain a new loan; that in early July
2018, Bank rejected Palace’s offer to pay off the loan unless Palace agreed to
its unreasonable economic demands, including paying over $341,000 in
attorney fees, plus an additional $50,000 for future legal fees; that Bank filed
the receiver action so it could take possession of the property and market it;
and that under the circumstances, Palace had no reasonable alternative but
to pay the amount Bank demanded.
The referee rejected this cause of action. First, he concluded, the
Bank’s action in filing the receiver action did not support a claim of economic
duress: the complaint in that action correctly alleged events of default
occurred when Palace failed to pay its outstanding obligation on the maturity
date, when it failed to satisfy the demand for payment, and when it failed to
resolve the mechanic’s liens. Nor did the demand for attorney fees create
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economic duress. The loan agreement provided that Palace would pay Bank’s
reasonable attorney fees in the event of default and, the referee found, the
evidence established that the claimed fees were reasonable. In any case, the
referee reasoned, even if Palace had established a wrongful act, it was not
placed in a position in which it had no alternative but to submit to Bank’s
allegedly unreasonable and coercive demands for payment of attorney fees, as
Palace could have raised its concerns and objections about specific fees sought
by Bank, and it could have sued Bank. Nor did the record show Palace had to
pay the fees to avoid losing the building; no notice of default had been
recorded, and Bank did not schedule a hearing to appoint a receiver.
The economic duress doctrine, based on equity, comes into play “upon
the doing of a wrongful act which is sufficiently coercive to cause a reasonably
prudent person faced with no reasonable alternative to succumb to the
perpetrator’s pressure. [Citations.] The assertion of a claim known to be
false or a bad faith threat to breach a contract or to withhold a payment may
constitute a wrongful act for purposes of the economic duress doctrine.
[Citations.] Further, a reasonably prudent person subject to such an act may
have no reasonable alternative but to succumb when the only other
alternative is bankruptcy or financial ruin.” (Rich & Whillock, Inc. v. Ashton
Development, Inc. (1984) 157 Cal.App.3d 1154, 1158–1159.) The purpose of
the doctrine is not to prevent “[h]ard bargaining, ‘efficient’ breaches [of
contract] and reasonable settlements of good faith disputes,” but to prevent
“the wrongful exploitation of business exigencies to obtain disproportionate
exchanges of value,” serving as “a last resort to correct these aberrations
when conventional alternatives and remedies are unavailing.” (Id. at
p. 1159; accord, Hester v. Public Storage (2020) 49 Cal.App.5th 668, 679.)
The inquiry of whether a party asserting economic duress had a reasonable
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alternative is one of fact. (CrossTalk Productions, Inc. v. Jacobson (1998) 65
Cal.App.4th 631, 644.) We review factual determinations for substantial
evidence. (See Howard v. Owens Corning, supra, 72 Cal.App.4th at p. 631.)
Substantial evidence supports the referee’s findings. Palace argues the
predicate of the demand for attorney fees fails because there was no event of
default that would justify Bank incurring those fees. But, as we have already
explained, there is evidence that an “event of default” occurred when Palace
failed to pay off the loan by the maturity date, and there is also evidence
supporting the finding that Palace failed to resolve the mechanic’s liens in a
timely manner.
Nor are we persuaded by Palace’s contention that the claimed fees’
unreasonableness is demonstrated by the fact that the legal bills were
redacted to protect materials covered by the attorney-client privilege or the
work product doctrine. The records were indeed redacted, but our review
indicates the redactions are primarily of descriptions of the topics of
communications between Bank and its counsel and of legal analysis carried
out by counsel. Palace provides no authority suggesting such redactions are
inappropriate or calling into question the reasonableness of the attorney fees
charged here. Rather, it relies on an inapposite case in which “blocked-billing
entries render[ed] it virtually impossible to break down hours on a task-by-
task basis” between those attributable to a cause of action for which an
award of attorney fees was available and those for which fees were
unavailable. (Bell v. Vista Unified School Dist. (2000) 82 Cal.App.4th 672,
689.) Here, on the other hand, there is no question of apportionment of fees,
and the bills are detailed. Bank’s expert witness on attorney fees described
the billing statements as “meticulous and . . . intelligible to anyone who was
reviewing them.” He also opined that, based on his experience with many
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similar matters, the fees were reasonable, that they were “not only what I
expected to see, but I would not have been surprised had the fees been
higher,” and that Bank and its counsel approached the situation in a “very
measured and thoughtful way,” for instance by not recording a notice of
default or a complaint for appointment of a receiver early on.
Palace points out that the expert could not state with absolute
certainty that any individual redacted entry was reasonable or how much
time counsel spent working on any given document. But Palace does not
show such a level of certainty is necessary to support a finding that fees were
reasonable, and in fact, courts routinely accept billing statements that have
been redacted to protect the attorney-client privilege. (See, e.g., Banning v.
Newdow (2004) 119 Cal.App.4th 438, 454 [redactions in bills did not render
party “unable to challenge the reasonableness of the fees”]; accord, People v.
Kelly (2020) 59 Cal.App.5th 1172, 1186; see also Concepcion v. Amscan
Holdings, Inc. (2014) 223 Cal.App.4th 1309, 1325 [class counsel must prove
reasonable number of hours spent on litigation, “whether through
declarations or redacted or unredacted timesheets or billing records”].)
As an independent basis for rejecting the economic duress cause of
action, the referee found Palace had not established that it had no reasonable
alternative to paying the attorney fees and reserves. Substantial evidence
supports this finding as well. Although Bank filed the receiver action, it did
not schedule a hearing to appoint a receiver once it received confirmation
Palace was arranging new financing. Because the receiver action never
progressed beyond the pleadings stage, we need not resolve Palace’s
contention that Bank’s complaint contained material misrepresentations;
even if true, this would not prove economic duress. Also, Bank’s expert
testified that a borrower who believed that claimed attorney fees were
22
excessive would normally raise the issue and try to negotiate a reduction, and
there is no evidence Palace ever did so. In fact, when Bank’s counsel sent the
fee statements to Palace’s counsel on July 20 and 23, 2018, he asked Palace
to let him know if it had any questions about the amounts owed so the parties
could try to resolve them, and he again invited Palace to raise any issues
when he sent the payoff demand on July 24, 2018.
In short, Palace has not undermined the referee’s finding that Bank’s
actions did not compel Palace to pay unreasonable sums to retire the loan.
III. Attorney Fees
A. Background and General Legal Principles
After the referee ruled in Bank’s favor, Bank moved for contractual
attorney fees and costs as the prevailing party, contending that fees were
available under several provisions of the documents executed in connection
with the project, including the construction promissory note, the loan
agreement, and the deed of trust. The referee found that reasonable attorney
fees and costs were independently available under two sections of the deed of
trust, sections 7.5 and 7.7. He set reasonable attorney fees at $2,856,956.82
and, after granting Palace’s motion to tax costs, set reasonable costs at
$38,184.54.
Each party to a lawsuit must pay its own attorney fees except where a
statute or contract provides otherwise. (Cargill, Inc. v. Souza (2011) 201
Cal.App.4th 962, 966.) Where a contract specifically provides for an award of
attorney fees incurred to enforce that contract, the prevailing party is
entitled to reasonable fees. (Ibid.; Civ. Code, § 1717, subd. (a).) Unless
interpretation of a contract turns on extrinsic evidence, we review de novo
the determination of the legal basis for an award of attorney fees, giving no
deference to the trial court’s ruling. (Yoon v. CAM IX Trust (2021) 60
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Cal.App.5th 388, 391; Alki Partners, LP v. DB Fund Services, LLC (2016) 4
Cal.App.5th 574, 599 (Alki Partners).)
B. Section 7.7 of Deed of Trust
Section 7.7 of the deed of trust provides in pertinent part:
“Indemnification. Borrower will protect, indemnify and save harmless
Lender from and against any and all liabilities, obligations, claims, damages,
penalties, assessments, fines, causes of action and actual expenses (including,
without limitation, attorneys’ disbursements, charges and reasonable fees)
imposed upon or incurred by or asserted against Lender or the Property or
any of Lender’s interest therein, by reason of the execution of this Deed of
Trust, the Note or any other Loan Documents, or the consummation of the
transactions contemplated hereby or thereby, or the occurrence or existence
during or prior to the term of this Deed of Trust of any of the following: (a)
. . . (e) any failure by Borrower to perform its obligations under this Deed of
Trust, the Note, the Loan Agreement, the Assignment of Leases, or any other
Loan Document. . . . Borrower agrees that its obligations under this Section
shall include indemnifying Lender for all attorney’s charges, disbursements
and fees, and all other actual expenses incurred by Lender to enforce the
terms of this Section. . . . If any action or proceeding shall be commenced
(including, without limitation, an action to foreclose this Deed of Trust,
collect the indebtedness secured hereby or to enforce Lender’s rights under
the Assignment of Leases or any other Loan Document) by Lender or
Borrower or any third party, to which action or proceeding Lender is made a
party by reason of the execution of this Deed of Trust, the Note, the Loan
Agreement, the Assignment of Leases, or any other Loan Document in which it
becomes necessary to enforce, defend or uphold the lien of this Deed of Trust or
Lender’s rights under the Note, all actual expenses incurred by Lender in
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connection with any litigation to enforce, prosecute or defend the rights and
lien created hereby or otherwise incurred in connection with any other action
or proceeding referred to in this Section (including, without limitation,
attorneys’ charges, disbursements and reasonable fees) shall be paid by
Borrower to Lender within ten (10) days after Lender’s demand for
payment. . . . The obligations of Borrower under this Section shall survive
repayment of the Secured Obligations and the satisfaction of this Deed of
Trust.” (Italics added.)
The referee concluded that the reasonable meaning of the italicized
portion of section 7.7, as the parties would have understood it, is that Bank
was entitled to attorney fees if it had to enforce the loan documents. That is,
according to the referee, section 7.7 was not simply an indemnity provision,
but “separately provides for the recovery of attorney fees and costs incurred
by Bank in enforcing its rights under the Loan Documents,” as Bank did
when defending against Palace’s claims for breach of contract, breach of the
implied covenant, and economic duress. Thus, according to the referee,
attorney fees and costs were available under section 7.7. Palace contends
this ruling was error.
Indemnity is “an obligation of one party to pay or satisfy the loss or
damage incurred by another party,” which may cover claims between the
contracting parties themselves or claims by third parties. (Rideau v. Stewart
Title of California, Inc. (2015) 235 Cal.App.4th 1286, 1294.) “Generally, the
inclusion of attorney fees as an item of loss in a third-party claim-indemnity
provision does not constitute a provision for the award of attorney fees in an
action on the contract which is required to trigger section 1717.” (Carr
Business Enterprises, Inc. v. City of Chowchilla (2008) 166 Cal.App.4th 14, 20
(Carr).)
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The court in Alki Partners explained that in general, an
indemnification provision “allows one party to recover costs incurred
defending actions by third parties, not attorney fees incurred in an action
between the parties to the contract.” (Alki Partners, supra, 4 Cal.App.5th at
p. 600.) To distinguish the two types of provisions, courts look to several
indicators, including an express reference to indemnification, such as the
words “ ‘indemnify’ and ‘hold harmless,’ ” which indicate the clause applies to
damages the indemnitee must pay to third persons. (Ibid.) And courts
examine the context of the language: “[g]enerally, if the surrounding
provisions describe third party liability, the clause will be construed as a
standard third party indemnification provision.” (Ibid., citing Myers Building
Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949, 970.)
Thus, the court in Alki Partners concluded contractual language stating one
party would “ ‘indemnify’ ” the other for all losses, including attorney fees,
“ ‘resulting in any way from the performance or non-performance of [the
indemnitor’s] duties hereunder’ ” did not authorize recovery of attorney fees
in actions seeking to enforce the contract itself. (Alki Partners, at p. 602.)
Similarly, the court in Carr concluded a provision requiring a
contractor to “ ‘indemnify and hold harmless’ ” a city from “ ‘all claims,
damages, losses and expenses including attorney fees arising out of the
performance of the work described herein,’ ” caused by the negligent act or
omission of the contractor, was a standard indemnity provision that did not
extend to disputes arising out of the contract. (Carr, supra, 166 Cal.App.4th
at pp. 19–23, italics omitted.) It distinguished the provision from that in
Baldwin Builders v. Coast Plastering Corp. (2005) 125 Cal.App.4th 1339,
1344–1345, which included not only standard third-party indemnity language
but also required the indemnitor to pay “ ‘all costs, including attorney’s fees,
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incurred in enforcing this indemnity agreement.’ ” (Italics omitted.) Because
this portion of the provision in Baldwin “unambiguously contemplate[d] an
action between the parties to enforce the indemnity agreements,” it was an
attorney fee clause subject to Civil Code section 1717’s reciprocity
requirements, a conclusion not altered by the placement of the attorney fee
clause in the indemnity agreement. (Baldwin Builders, at pp. 1345–1346; see
Carr, at pp. 22–23.) Carr and Baldwin Builders both relied for this point on
Continental Heller Corp. v. Amtech Mechanical Services, Inc. (1997) 53
Cal.App.4th 500, which concluded a provision obligating a subcontractor to
“ ‘indemnify the Contractor, and save it harmless from any and all loss,
damage, costs, expenses and attorney’s fees suffered or incurred on account of
any breach of the aforesaid obligations and covenants, and any other
provision or covenant of this Subcontract,’ ” entitled the prevailing party to
attorney fees in any action for breach of any provision of the contract. (Id. at
p. 508; Carr, at p. 23; Baldwin Builders, at p. 1345.)
Section 7.7 of the deed of trust likewise expressly contemplates actions
between the parties. It covers not only third-party claims but also actions
“commenced . . . by Lender or Borrower,” including those to foreclose the deed
of trust, collect the secured indebtedness, or enforce Bank’s rights under any
loan document. Although this provision is found within an indemnity clause,
it unambiguously covers attorney fees in actions between the parties to
enforce or defend Bank’s contractual rights.
But, Palace argues, the provision does not extend to this action because
the relevant portion section 7.7 applies to actions in which it “becomes
necessary to enforce, defend or uphold the lien of this Deed of Trust or
Lender’s rights under the Note,” and Bank was not enforcing or defending its
rights under the promissory note. That is because, according to Palace, it
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paid the promissory note in full on July 26, 2018 and Bank reconveyed the
deed of trust, so there was nothing left to enforce, defend, or uphold in
connection with the promissory note, and the case turned on the terms of the
loan agreement, not the deed of trust or the promissory note.
We are unpersuaded. The promissory note recites that it was issued
pursuant to the loan agreement and that payment was governed by the loan
agreement, the terms of which it incorporated by reference; it provides that
the full loan amount is due on the maturity date; and it specifies the default
interest rate. The second amended complaint alleged that Palace executed
the promissory note with a maturity date of February 22, 2018, incorporated
the promissory note by reference, and sought compensation for Bank’s actions
in failing to continue disbursements after the maturity date passed and in
failing to enter into a forbearance agreement on reasonable terms. Palace’s
second amended complaint thus called on Bank to defend its rights under the
promissory note. Also, section 7.7 of the deed of trust expressly provides that
Palace’s obligation “shall survive repayment of the Secured Obligations and
the satisfaction of this Deed of Trust.” That Palace had paid the promissory
note in full before filing this action is therefore immaterial. We are satisfied
that the attorney fees Bank incurred in defending this action fall within the
ambit of section 7.7.
Palace contends that even if section 7.7 applies to this action, it does
not authorize an award of attorney fees to the prevailing party, but merely
allows the amount of the fees to be added to the secured debt. Palace relies
first on Hart v. Clear Recon Corp. (2018) 27 Cal.App.5th 322. In that case, a
lender sought attorney fees under a contractual provision that the lender
could take certain actions, including appearing in court and paying
reasonable attorney fees to protect its interests, and that “[a]ny amounts
28
disbursed by Lender under this Section 9 shall become additional debt of
Borrower secured by this Security Instrument,” which would bear interest
and be payable upon notice. (Id. at p. 325, italics omitted.) This provision,
the Hart court concluded, was not an attorney fee provision for purposes of
Civil Code section 1717, which applies when a “ ‘contract specifically provides
that attorney’s fees . . . shall be awarded’ to one party or the prevailing
party.” (Hart, at p. 327.) The language in question did not meet that
standard; rather than a provision for an award of attorney fees, “it is,
instead, a provision that attorney’s fees, like any other expenses the lender
may incur to protect its interest, will be added to the secured debt.” (Ibid.)
The court in Chacker v. JPMorgan Chase Bank, N.A. (2018) 27
Cal.App.5th 351, examined an identical provision and likewise concluded it
did not authorize the court “to enter an attorney fee award order that
obligates the borrower to pay fees independent of the borrower’s repayment
obligation under the deed of trust and associated promissory note.” (Id. at
pp. 356 & 358, fn. 6.) Rather, it “authorizes attorney fees to be added to the
loan amount.” (Id. at p. 357.)
Palace argues the rule of Hart and Chacker applies equally here. We
disagree. First, unlike the provisions at issue in those cases, section 7.7 of
the deed of trust does not provide for attorney fees to be added to the loan
amount, but merely that they will be paid within 10 days of Bank’s demand.
Palace argues that this gap is filled by section 7.6 of the construction loan
agreement, headed “Single Loan,” which provides: “All of the obligations of
Borrower arising under this Agreement and the other Loan Documents shall
constitute one obligation of Borrower and shall be secured by the Project.”
But section 7.7 of the deed of trust, which we have concluded authorizes
attorney fees here, specifies that Palace’s obligations under that provision
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“shall survive repayment of the Secured Obligations and the satisfaction of
the Deed of Trust.” We are not persuaded that the general “Single Loan”
provision prevents Bank from seeking its attorney fees by motion,
particularly where, as here, the loan has been paid off and the deed of trust
satisfied. The referee properly awarded attorney fees and costs.
Because we reach this conclusion, we need not address the referee’s
conclusion that section 7.5 of the deed of trust provides an independent basis
for an award of attorney fees and costs.
Bank is also entitled to recover its reasonable attorney fees on appeal,
the amount of which is best determined by the trial court. (See Shadoan v.
World Savings & Loan Assn. (1990) 219 Cal.App.3d 97, 109; Beverly Hills
Nat. Bank v. Glynn (1968) 267 Cal.App.2d 859, 870.)
DISPOSITION
The judgment and attorney fee order are affirmed. Bank shall recover
its costs on appeal. The matter is remanded for a determination of the fees
that should be awarded to Bank on appeal.
TUCHER, P.J.
WE CONCUR:
FUJISAKI, J.
PETROU, J.
The Palace at Washington Square, LLC v. Mechanics Bank (A164195, A164799)
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