Ocean Services Corp. v. Ventura Port Dist.

• Decision Date: 25 May 1993
• Docket Number: No. B057637,B057637
• Citation: 19 Cal.Rptr.2d 750,15 Cal.App.4th 1762
• Court: California Court of Appeals Court of Appeals
• Parties: OCEAN SERVICES CORPORATION, Plaintiff and Appellant, v. VENTURA PORT DISTRICT, etc., Defendant and Appellant.

Page 750

19 Cal.Rptr.2d 750

15 Cal.App.4th 1762

OCEAN SERVICES CORPORATION, Plaintiff and Appellant, v. VENTURA PORT DISTRICT, etc., Defendant and Appellant.

No. B057637.

Court of Appeal, Second District, Division 6, California.

May 25, 1993.

Certified for Partial Publication ^*

As Modified on Denial of Rehearing June 23, 1993.

Review Denied Aug. 19, 1993.

Rogers & Wells, Christine A. Page and David J. Cowan, Los Angeles, Bryan Cave and William I. Chertok, Santa Monica, for appellant Ventura Port Dist.

Heily & Blase and DeWitt F. Blase and John R. Johnson, Ventura, Hugh J. Haferkamp, Santa Barbara, for appellant Ocean Services Corp.

GILBERT, Associate Justice.

An action is brought against a governmental entity. The governmental entity asserts as a defense the party's failure to comply with the governmental claims statute. We hold, among other things, that through its conduct a governmental entity may be estopped from asserting failure to comply with the claims statute.

We also hold the governmental entity breached a covenant of good faith and fair dealing.

In addition, the five-year mandatory dismissal statute was tolled.

Ventura Port District (VPD) appeals from a $16,971,767 judgment in favor of respondent, Ocean Services Corporation (OSC), and an order denying its motion for judgment notwithstanding the verdict. We affirm. [[/]]

FACTS

VPD was established in 1952 to operate and develop the Ventura Harbor, a small coastal harbor consisting of 24 parcels and 189 acres of land and water. During the first 25 years of its existence, it lacked the necessary capital to develop a commercial marina. In 1977 VPD hired Gerald Barney to act as the port district general manager and to create a comprehensive development plan.

Barney devised a plan to lease sections of the harbor for commercial development. In 1979 he offered OSC an option to lease three parcels, 3A, 3C and 5, in order to develop a commercial marina with restaurants and retail shops. The option agreement gave OSC the right to lease the property for 50 years. During the lease term it would share the rents and profits with VPD. Barney described the project as "a joint venture between private enterprise and the Port District."

The first phase of the project required that OSC construct a commercial fishing and wharf facility on parcel 3A and a marine science building on parcel 5. OSC did not expect a profit from this phase because the property was dedicated for public use. OSC could recoup its investment during the second phase of the project by constructing restaurant and retail facilities on parcel 3C. Everyone involved with the development recognized that the financial success of the entire project depended on parcel 3C.

When OSC executed the option to lease agreement on October 1, 1979, VPD failed to disclose that parcel 3C was burdened by a restrictive covenant. The restrictive covenant was in favor of STH Development Company (STH). VPD and STH had previously entered into a lease agreement to develop the other side of the harbor. In that agreement VPD had covenanted that no restaurant or retail facilities would be built on parcels 3C and 5 for 10 years.

After the option agreement was signed, OSC received a preliminary title report that made a general reference to the STH lease. Edward Jenks, president of OSC, asked Barney about the lease. Barney told him that it had been terminated, and assured him that VPD would talk to the title company and have the matter straightened out.

OSC proceeded with the project and, pursuant to the option agreement, exercised Barney finally disclosed the problem in March 1980 and told Jenks the matter would be quickly resolved. He assured OSC that parcel 3C could still be developed and that VPD would stand by its promise. VPD, nevertheless, was concerned about the litigation and asked that no retail or restaurant facilities be built on parcel 5 until the restrictive covenant was removed. Because of Barney's assurances, OSC continued with the project and preleased 97 percent of the parcel 3C facilities.

"due diligence" by expending $1.5 million for permit fees and [15 Cal.App.4th 1769] engineering services. VPD approved the preliminary plans on February 20, 1980, but failed to mention that STH's assignee and lender, Marina Cabrillo and Mitsui Manufacturers Bank, had filed two actions in the Los Angeles County Superior Court to enforce the restrictive covenant. On February 22, 1980, the Marina Cabrillo plaintiffs amended their complaint to allege that OSC's project violated the restrictive covenant.

Jenks later discovered that construction lenders were reluctant to fund the project because of the restrictive covenant. The parties agreed to extend the option period 18 months. In a letter dated September 17, 1980, Barney, on behalf of VPD, admitted that the restrictive covenants were cause for concern. He pointed out that the parties seemed to be working in a " 'gray area,' " that was not covered in the respective options or leases. In another letter, also dated September 17, 1980, Barney informed OSC that VPD was trying to settle the matter, and suggested that they develop "mutually satisfactory contingency plans in the event the matter is not resolved to the satisfaction of potential lenders."

Weeks later, the Economic Development Administration advised VPD that the delay would cause it to lose a $1.3 million grant for the parcel 3A facilities. Barney urged OSC to proceed with the project because of their understanding that VPD would take care of the restrictive covenant. Jenks agreed. OSC had already attended 49 public hearings and 1,200 meetings to obtain the necessary permits.

On November 19, 1980, the parties executed the ground leases for parcels 3A, 3C and 5. The parcel 3C lease made no mention of the restrictive covenant and expressly warranted that the property could be used for restaurant and retail purposes. Having salvaged the $1.3 million federal grant, OSC used the funds to build the commercial fishing facility.

The next phase of the development required that the parties obtain tax-exempt financing for the wharf facilities, a marine center, and a quay. OSC intended to obtain private financing for three other quays on parcel 3C, known as Fisherman's Quays 2, 3, and 4. The quays were two-story structures with ocean view offices and ground floor space for 3 restaurants and 21 retail shops.

VPD devised a plan to finance construction of the wharf facilities with a 10-year, $9.5 million tax-exempt bond offering through the Municipal Funding Corporation of America (MUFCOA). VPD hired Brown & Caldwell, a major engineering and project consultant firm, to prepare a financial feasibility study for the bond offering. The report stated that the project was worth $30 million and at least 50 percent of the project revenues would come from the parcel 3C restaurant and retail operations.

In July 1981, the underwriter concluded that the bond offering would not sell unless OSC guaranteed the loan payments. OSC declined to sign the loan documents because it had no source of income until parcel 3C was built out.

Jenks was concerned about the project because the STH plaintiffs were seeking a preliminary injunction to enforce the restrictive covenant. Barney urged Jenks to go forward with the financing because of their understanding that VPD would assume responsibility for losses caused by the restrictive covenant.

Jenks wanted written assurance. Barney consulted with VPD's board of directors and gave OSC a letter on July 10, 1981, acknowledging that the restrictive Because of the letter, and Barney's verbal assurances, OSC signed the MUFCOA loan documents on July 15, 1981. Parcel 3A was pledged as security in a sale-leaseback agreement between VPD and the MUFCOA trustee. OSC, in turn, executed a sublease and agreed to pay VPD $1.7 million per year for 10 years. The payments would be used to service the MUFCOA loan subject to the condition that OSC could keep $1.4 million of the loan funds in an interest bearing account.

covenant was VPD's problem. The letter stated that "... there are too many variables to allow a firm agreement at this time between OSC and VPD in the event OSC is unable to proceed due to the covenant or any litigation surrounding it. [p] If it is acceptable to OSC, the Port District would prefer to continue with the lease purchase financing with the understanding that in the event OSC cannot proceed due to the covenant that we will negotiate towards a modification of the ground lease at that time when the facts are established."

OSC started construction after the loan documents were signed. On September 8, 1981, Mitsui Manufacturers Bank, a coplaintiff in the Los Angeles action, obtained a preliminary injunction enjoining VPD and its agents from violating the restrictive covenant. OSC stopped construction on the retail and restaurant improvements but completed the remainder of the wharf facility.

On July 6, 1982, Jenks sent a letter to Barney concerning OSC's project losses. The letter confirmed that the parties would amicably settle the matter after the restrictive covenant was removed and OSC's total losses were known. Barney testified that OSC and VPD were "[v]ery cooperative.... [T]he principle I was operating under was no matter what the agreement said, if the two parties are working together, we could probably solve all the problems. And if the two parties couldn't work together, no amount of paper in the agreement was going to solve the problem."

In fact it came to pass that the parties could not work together. This happened when VPD terminated Barney and hired Richard Parsons to oversee the project and to act as the new port district manager. On November 15, 1982, Jenks wrote to Parsons and advised him that OSC's losses would approach $1.8 million. Parsons asked for more data because VPD's attorneys wanted to use the information to settle the Los Angeles action.

The STH pl...