Carmel Dev. Co. v. Anderson

• Decision Date: 30 April 2020
• Docket Number: H041005
• Court: California Court of Appeals Court of Appeals
• Parties: CARMEL DEVELOPMENT COMPANY, INC., Plaintiff and Appellant, v. Larry ANDERSON et al., Defendants and Appellants.

48 Cal.App.5th 492

261 Cal.Rptr.3d 879

CARMEL DEVELOPMENT COMPANY, INC., Plaintiff and Appellant,

v.Larry ANDERSON et al., Defendants and Appellants.

H041005

Court of Appeal, Sixth District, California.

Filed April 30, 2020

Joel Franklin, Law Offices of Joel Franklin, Monterey, Anne Frassetto Olsen, Law Offices of Anne Frassetto Olsen, Robert P. Herendeen, Herendeen & Bryan, Salinas, for Plaintiff/Appellant Carmel Development Company, Inc.

Christopher Ross Rodriguez, Lewis Brisbois Bisgaard & Smith LLP, for Defendants/Appellants Larry Anderson, et al.

Robert E. Rosenthal, L&G, LLP, Salinas, for Defendant/Appellant Monterey County Bank.

Grover, J. Plaintiff Carmel Development Company, Inc. provided design and construction work for a luxury subdivision (Monterra) in Monterey County over the course of more than 10 years under an oral contract with property owner Roger Mills, the principal of Monterra Ranch Properties, LLC (Monterra LLC). Plaintiff recorded a mechanic's lien and a site improvement lien against certain lots in Monterra after being informed that Monterra LLC would be unable to continue paying for plaintiff's work. Plaintiff sued several of Monterra LLC's investors with property interests in unsold lots in the development (defendants Larry Anderson et al.) as well as Monterra LLC, alleging causes of action for among other things breach of contract and foreclosure of the mechanic's and site improvement liens. Monterra LLC stipulated to liability before trial; the investor defendants contested liability in a lengthy bench trial.

Defendants appeal from the judgment which validated the mechanic's and site improvement liens and attached them in specified amounts to lots owned by defendants for purposes of lien foreclosure. Defendants argue that the trial court erred by determining: (1) that plaintiff could maximize the amount of money owed under the liens by applying payments received for the liened work to other work it performed at Monterra that was not the subject of the liens; (2) that plaintiff could selectively allocate liability for the liens to certain lots even though the improvements that were the subject of the liens benefited all lots in Monterra; (3) that the lien amounts could include contractual interest; and (4) that plaintiff was entitled to prejudgment interest. Defendants also argue there was no substantial evidence to support the existence of an oral agreement for contractual interest. Plaintiff cross-appealed to preserve its arguments related to contractual interest and the allocation of lien liability.

For the reasons stated here, we will reverse the judgment because it was improper to allocate the water infrastructure lien only to certain benefited lots; the liens could not accrue contractual interest greater than the reasonable value of the improvements; and the trial court applied an incorrect rate to calculate prejudgment interest. We will remand the matter with instructions (detailed in Part II.F.) to remove contractual interest from both liens, reapportion the water infrastructure lien, and recalculate prejudgment interest.

I. TRIAL COURT PROCEEDINGS

The following summary is based on the trial court's written statement of decision, supplemented with evidence from the bench trial.

A. PROJECT HISTORY AND DEVELOPMENT AGREEMENT

The Monterey County Board of Supervisors approved a 2,911-acre subdivision known as Monterra in 1987. Brothers Roger and Basil Mills formed Monterra LLC and purchased the undeveloped Monterra subdivision in 1995. After Monterra LLC acquired the Monterra subdivision, the owners of the Tehama subdivision (located immediately south of Monterra) entered into an agreement with Monterra LLC. Among other things, the agreement provided that Monterra LLC would transfer about 1,000 acres from Monterra to Tehama to create Cañada Woods North (where a golf course and a small number of residential units were to be built). Tehama would also allow lots in Monterra to use Tehama's graywater sewage treatment system, and Monterra LLC would construct a potable water system to be used by lots in Monterra and Cañada Woods North.

Monterra LLC hired plaintiff via a handshake agreement to redesign Monterra as an "exclusive and environmentally-friendly development." The trial court found that the agreement was as follows: for design work plaintiff would charge its billing rate, actual consultant charges, and a five percent markup applied to the consultant charges; for construction work plaintiff would charge its actual costs for equipment and labor performed by plaintiff as well as the actual costs of its subcontractors and materialmen, plus a 25 percent markup of the construction labor costs to account for supervision, overhead, and profit.

Plaintiff developed Monterra between 1996 and 2008. That development work included "lot design and layout, locating building envelopes on each lot, water and sewage system layout and design, roadway design, construction and repair." Plaintiff developed Monterra in phases in order to build and sell a few houses at a time to raise capital to invest in each successive phase. Roughly half the lots in Monterra were developed and sold before Monterra LLC ran out of capital; those sales generated over $100 million. Part of the development included construction of a reverse osmosis water plant, which served the lots in the subdivision that had been sold to third parties.

Plaintiff and Monterra LLC entered into an oral contract providing for contractual interest in late 2000. Monterra LLC agreed to pay interest on unpaid balances at the rate of 10 percent. The trial court found that interest was "to accrue 60 days from the last day of the month in which the work was performed." (In determining the accrual period, the trial court acknowledged that trial testimony on that point was "often unclear, confusing and conflicting.")

Monterra LLC informed plaintiff in 2008 that it could no longer make payments, effectively breaching the contract. Plaintiff recorded two liens¹ to secure its right to money for two categories of work: water improvements throughout Monterra, and site improvements in phases seven and nine. The Water Lien was for water improvements "related to the expansion of a water and sewer system including the installation of new wells, lift stations and a larger reverse osmosis water plant to increase the water and sewer systems capacity to provide services to the last 85 unsold lots of the Monterra subdivision." The Site Improvement Lien "related to the installation of site improvements (roads, driveways, retaining walls, utilities) to benefit the lots located in Phases 7 and 9 of Monterra."

B. LITIGATION, STATEMENT OF DECISION, AND JUDGMENT

Plaintiff sued Monterra LLC and defendants, alleging (among other things) breach of contract as to Monterra LLC and seeking lien foreclosure as to Monterra LLC and defendants. (The case was consolidated with a related breach of contract action by another contractor against Monterra LLC, which settled during trial.) Before trial, plaintiff and Monterra LLC agreed to a stipulated judgment. Monterra LLC stipulated that it owed over $9 million to plaintiff, that the amount due would be satisfied by a foreclosure of the liens against the 85 unsold lots, and that any amount not satisfied by foreclosure would become a judgment against Monterra LLC.

The case proceeded to a lengthy bench trial between plaintiff and defendants. The case was tried in two phases, liability and damages. Following the first phase, the trial court determined that defendants were liable for the Water Lien and the Site Improvement Lien. The trial court found that the liens could accrue contractual interest, but that the claimed lien amounts were based on excessive charges. The court found plaintiff had improperly applied the 25 percent markup for supervision, overhead, and profit to its billing rates rather than to the actual costs of labor, requiring recalculation of the amounts due under the liens. The court found that the excessive charges were not fraudulent, but rather the result of a good faith dispute about the correct billing calculation.

Regarding allocation of lien liability, the trial court considered defendants' argument that the Water Lien and Site Improvement Lien had been improperly recorded against only unsold lots in Monterra. The court determined that Monterra LLC had asked plaintiff to impose the liens on only those lots. The court noted that "completion of the infrastructure, even in areas not contiguous to all of the lots liened, was of benefit to all the lots liened." But the court reasoned the liens did "not have to be allocated evenly across all lots" based on "authority cited by [plaintiff] to the effect that the landowner and the materialman may agree to have a lien attach to some of the property but not others." The court found that Monterra LLC and plaintiff agreed "to such allocation in both (1.) agreeing that payments made were to be applied to non-liened work which benefitted only non-liened lots ...; and (2.) agreeing that work for which the lien amounts are at issue here be apportioned only to certain lots which benefitted from the liened work." The court found the lien allocation a "bona fide attempt by the parties, under extremely difficult circumstances, equitably to avoid financial injury to third-party purchasers who had already purchased lots which were to be free of mechanic['s] liens," and that the parties could "agree to allocate or limit allocation of a lien claim to a specific lot or lots."

In the damages phase of trial, the court calculated the specific amounts due on the liens after hearing testimony from competing experts. The court noted that the claimed total amount due, before making any adjustments for overbilling, was over $6 million. The parties' experts recalculated the amount of the liens based on the court's finding in the first trial phase that the 25 percent markup was to be applied to plaintiff...