Cam-Carson, LLC v. Carson Reclamation Auth.

• Decision Date: 23 August 2022
• Docket Number: B312729
• Citation: 82 Cal.App.5th 535,298 Cal.Rptr.3d 482
• Parties: CAM-CARSON, LLC, Plaintiff and Appellant, v. CARSON RECLAMATION AUTHORITY et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

82 Cal.App.5th 535
298 Cal.Rptr.3d 482

CAM-CARSON, LLC, Plaintiff and Appellant,
v.
CARSON RECLAMATION AUTHORITY et al., Defendants and Respondents.

B312729

Court of Appeal, Second District, Division 8, California.

Filed August 23, 2022

Latham & Watkins, Richard P. Bress, Daniel S. Schecter, Robert J. Ellison and Nima H. Mohebbi, Los Angeles, for Plaintiff and Appellant.

Aleshire & Wynder, Sunny K. Soltani and June S. Ailin, Los Angeles, for Defendants and Respondents City of Carson and the Successor Agency to the Carson Redevelopment Agency.

GRIMES, Acting P. J.

82 Cal.App.5th 539

SUMMARY

Plaintiff CAM-Carson, LLC sued the City of Carson (City), the Carson Reclamation Authority (CRA) and others for breach of contract and breach of the covenant of good faith and fair dealing. Plaintiff is a commercial real estate developer. Plaintiff entered contracts with the City and CRA to develop a 40-acre site after the City and CRA remediated soil and groundwater contamination, installed infrastructure, and built roads. Plaintiff alleged the City and CRA engaged in gross mismanagement and malfeasance that created

82 Cal.App.5th 540

a massive funding deficit which derailed the project, causing damages to plaintiff of over $80 million.

Plaintiff seeks to hold the City liable in equity under alter ego principles for the CRA's breach of a contract between plaintiff and the CRA. We hold the alter ego doctrine may be applied to government entities where the facts justify an equitable finding of liability. Here, the allegations in plaintiff's second amended complaint are sufficient to survive the City's demurrer. We cannot say, as a matter of law, the City cannot be held the alter ego of the CRA if plaintiff is able to prove the facts alleged. Accordingly, the trial court erred in sustaining the City's demurrer to plaintiff's breach of contract claim.

For the same reason, the trial court erred in sustaining the City's demurrer to plaintiff's breach of implied covenant claim. Apart from alter ego liability, the court failed to consider plaintiff's allegations that the City breached the implied covenant in connection with a development agreement to which the City was a party.

Accordingly, the judgment of dismissal is reversed.

298 Cal.Rptr.3d 485

FACTS

We recite the facts as alleged in the operative complaint.

1. The Parties and the Background

This case involves an undeveloped site the parties call the "157 Acre Site" in Carson. It was operated as a landfill in the 1950's until its closure in 1965. It has sat vacant since then. The site has soil and groundwater contamination that requires environmental remediation before it can be developed. It is subject to a State remedial action plan.

The plaintiff is a joint venture of subsidiaries of two major U.S. commercial real estate developers. The defendants are the City; the CRA, which is a joint powers authority that was "created by the City solely to oversee environmental remediation on the 157 Acre Site"; the Successor Agency to the now-dissolved Carson Redevelopment Authority; and RE | Solutions, LLC (RES), the CRA's primary contractor. (The first three are sometimes referred to collectively as the city defendants. The CRA and RES are not parties to this appeal.)

Over the years, ownership of the 157 Acre Site changed hands between a number of private entities and developers, but none was able to complete the

82 Cal.App.5th 541

extensive remediation required. In 2006, the site was sold to Carson Marketplace LLC, which entered into an agreement with the Carson Redevelopment Agency to effectuate a redevelopment plan under the State remedial action plan. But that project could not be completed either.

In 2012, the Carson Redevelopment Agency was dissolved in accordance with state law. The Carson city council passed a resolution creating the Successor Agency to serve as successor to the redevelopment agency, and " ‘the City became the Successor Agency of the former redevelopment agency by operation of law.’ "¹ The Successor Agency assumed the redevelopment agency's enforceable obligations, including the obligation to fund the remediation work, "an obligation which the City and Successor Agency admit still exists today." (Boldface & italics omitted.)

By 2015, the City determined that a governmental entity would have to acquire the 157 Acre Site and complete the remediation and basic infrastructure before a private developer would agree to build. Early that year, the City created the CRA to acquire the site and complete the remediation. In May 2015, Carson Marketplace transferred its interest in the 157 Acre Site to the CRA, in consideration for, "among other things, the Successor Agency's obligation to ensure the completion of the remediation work and other infrastructure improvements." The City and the Successor Agency "have admitted that, in the context of [plaintiff's] claims, ‘the Successor Agency is directly liable ... for competently undertaking the Remediation Work and alleviating the Hazardous Substances upon the 157 Acre Site.’ "

From 2016 through 2018, the City and the CRA negotiated with plaintiff, leading to a series of interconnected agreements (the "project agreements") for the development of 40 acres of the 157 Acre Site, called the "Cell 2 Site." The project was to be "a state-of-the-art, first-class, regional

298 Cal.Rptr.3d 486

fashion outlet and retail mall." For plaintiff to develop the Cell 2 Site, it was critical that the CRA and the City first remediate the Cell 2 Site, install infrastructure in the subsurface, construct roads, and much more.

The "project agreements" were executed in September 2018. They included a conveyancing agreement between plaintiff and the CRA (exhibit A to plaintiff's operative complaint); a cooperation agreement between the CRA and the City; and a development agreement between plaintiff and the City.

82 Cal.App.5th 542

Under the conveyancing agreement, the CRA must construct the remedial systems at its sole cost. The parties acknowledged development would be financially infeasible without remediation, and the CRA "has substantial funds to do so." The CRA represented it had $75,873,000 as of December 31, 2017. The CRA and the City advised plaintiff the Cell 2 Site remediation would cost $26,888,698.

The CRA was also responsible under the conveyancing agreement to fund and construct, on behalf of the City, certain offsite improvements to serve the 157 Acre Site, such as roadway improvements, water and other utilities, that were prerequisites for building out the project's infrastructure.

Some of the offsite and site development improvements were subject to advances of funds from plaintiff. Plaintiff was entitled to recoup its advances from future tax revenues generated by the project and paid to the City. The CRA could not use plaintiff's advances to fund any remediation work. Plaintiff had the right to approve the CRA's plan for offsite improvements and site development improvements, including any improvement changes.

The cooperation agreement between the CRA and the City required the CRA to report to the City any change orders over a de minimis amount, and in certain cases to obtain plaintiff's approval. Plaintiff is identified as a third party beneficiary in connection with the project.

The CRA retained RES as its primary contractor. RES was tasked with managing the subcontractors. After completion of remediation of the Cell 2 Site and development improvements, plaintiff would be entitled to develop the site in accordance with rights granted by the City to plaintiff under the development agreement.

2. Mismanagement of the Project

The operative complaint describes at length gross mismanagement of the project by the City, the CRA and RES, resulting in the creation of a massive funding deficit and causing damages to plaintiff of over $80 million.

Before work began on the project, plaintiff deposited $4 million with the CRA, a deposit intended "to secure performance under the Conveyancing Agreement." Without plaintiff's knowledge, the City held these funds in its own account. "In connection with the negotiations, and over the next year," plaintiff invested "more than $80 million in connection with the Project."

In October 2019, just a year after the project agreements were signed, the CRA and RES disclosed they did not have the funding to complete the work

82 Cal.App.5th 543

the CRA was required to complete for the Cell 2 Site. Plaintiff then learned the CRA had not only spent all the funds available for the remediation but also had developed a huge deficit. The City and Successor Agency had failed to provide the necessary funding to cover or cure the shortfall and had taken no action to properly supervise the CRA.

298 Cal.Rptr.3d 487

Unbeknownst to plaintiff, the City and the CRA failed to employ a sufficient project management and financial control process. The assistant city manager in charge of the project had no experience managing a major remediation and construction project. The CRA executive director failed to oversee spending on the project. The City and CRA representatives failed to review, scrutinize and approve millions of dollars in change orders. There were no budget forecasts or reports of variances from budget or notification of a significant budget shortfall until it was too late.

These failures "led to massive, unmonitored spending increases with no attention by RES or the City Defendants to baseline cost estimates, a budget, or an analysis to determine if sufficient funds were available." The City and the CRA "have used [plaintiff's] advances to pay for remediation work," contrary to the conveyancing agreement. "As the City Attorney recognized, in writing, there was a ‘total and utter failure to manage’ by RES," a failure that happened on the CRA's watch.

The CRA did not even know how many tens of millions of dollars were needed to complete the project, "though their numbers have ranged from $40 million to $57 million."

3. The Concealment Allegations

The...