Las Palmas Associates v. Las Palmas Center Associates

• Decision Date: 05 November 1991
• Docket Number: No. B051688,B051688
• Citation: 1 Cal.Rptr.2d 301,235 Cal.App.3d 1220
• Court: California Court of Appeals Court of Appeals
• Parties: LAS PALMAS ASSOCIATES, a Limited Partnership; Hahn Devcorp, a California Corporation; Ernest W. Hahn, Inc., a California Corporation, Appellants, v. LAS PALMAS CENTER ASSOCIATES, a General Partnership; Villa Pacific Building Company, a California Corporation; Ronald C. Waranch, an individual, Respondents.

Page 301

1 Cal.Rptr.2d 301

235 Cal.App.3d 1220

LAS PALMAS ASSOCIATES, a Limited Partnership; Hahn Devcorp, a California Corporation; Ernest W. Hahn, Inc., a California Corporation, Appellants, v. LAS PALMAS CENTER ASSOCIATES, a General Partnership; Villa Pacific Building Company, a California Corporation; Ronald C. Waranch, an individual, Respondents.

No. B051688.

Court of Appeal, Second District, Division 2, California.

Nov. 5, 1991.

Review Denied Feb. 11, 1992.

Kaye, Scholer, Fierman, Hays & Handler, Pierce O'Donnell, Roger Furman and Hoon Chun, Los Angeles, Irell & Manella, Steven L. Sloca, William M. Hensley, and Patricia A. Hubbard, Los Angeles, for appellants.

Terry M. Giles, Alton G. Burkhalter and Sean A. Davitt, Santa Ana, for respondents.

NOTT, Associate Justice.

This lengthy and acrimonious litigation involves the sale of the Rancho Las Palmas Shopping Center, a 165,472 square-foot commercial complex located in Rancho Mirage, California. Appellants Las Palmas Associates, et al., built and sold the property to respondents Las Palmas Center Associates, et al. When a dispute arose concerning their duty to guaranty the rents of two tenants, appellants commenced an action for declaratory relief. Respondents in turn filed a cross-complaint for, among other things, fraud and breach of contract. A jury rendered verdicts awarding respondents $232,393 for breach of contract, $1.27 million for fraud, and $10 million in punitive damages. In a separate trial, the court, sitting without a jury, denied appellants declaratory relief. The court then awarded respondents $352,918 in contractual attorney's fees and entered judgment in the sum of $11,622,918. Appellants now appeal.

Because the undisputed evidence establishes that respondents' fraud damages are identical to their losses under the breach of contract theory, we hold that the fraud award must be reduced to $232,393. Additionally, we find it necessary to lower the punitive damage award to $2 million. Lastly, inasmuch as respondents have elected to take under the tort claim, the award for contractual attorney's fees allocated to prosecute that action must be reversed. However, because respondents were the prevailing parties in appellants' declaratory relief lawsuit, which was an "action on the contract," respondents are entitled to recover their attorney's fees incurred in defense of that litigation.

CONTENTIONS

Appellants seek a reversal of the judgment on the basis that (1) the trial court erroneously denied their motion to bifurcate the punitive damage trial from respondents' underlying action for fraud, in violation of Civil Code section 3295, subdivision (d); (2) there are no grounds to hold respondent Hahn Devcorp as the alter ego of its sister corporation, respondent Ernest Hahn, Inc.; (3) the fraud verdict is unsupported by substantial evidence and is invalid as a matter of law; (4) respondents' trial counsel committed prejudicial misconduct; (5) the $1.27 million fraud award, among other things, improperly compensates buyers for a claim that they previously relinquished; and, (6) the punitive damage verdict is unsupported by the evidence, excessive, unconstitutional, and the product of the jury's passion and prejudice. Appellants do not, however, complain that the breach of contract award is defective.

INTRODUCTION

In 1978, Las Palmas Associates (Associates), a limited partnership, agreed to build and then sell the Rancho Las Palmas Shopping Center (shopping center) to Villa Pacific Building Company (Villa Pacific), a corporation. Villa Pacific's sole shareholder and board chairman was Ronald Waranch, a real estate developer. Under the terms of the purchase agreement, Villa Pacific acquired an 84 percent interest in the yet to be constructed shopping center. The remaining 16 percent share belonged to Stanley Gribble, president of Hahn Devcorp (Devcorp), a builder of community and neighborhood shopping centers. Gribble received his interest in the shopping center as part of his executive compensation package from Devcorp. Besides being Associates' general partner, Devcorp was also at For the sake of clarity, we will refer to Associates, Devcorp and Hahn Inc. collectively as "sellers." Similarly, we will identify Villa Pacific, Waranch, and Las Palmas jointly as "buyers."

the time a wholly owned corporate subsidiary of Ernest W. Hahn, Inc. (Hahn Inc.), a nationwide developer of regional shopping centers. Together, Gribble and Villa Pacific formed a general partnership known as Las Palmas Center Associates (Las Palmas), which would eventually hold title to the property.

FACTS

Viewing the evidence, as we must, in the light most favorable to the prevailing party (Mozzetti v. City of Brisbane (1977) 67 Cal.App.3d 565, 570, 136 Cal.Rptr. 751; Little v. Stuyvesant Life Ins. Co. (1977) 67 Cal.App.3d 451, 462, 136 Cal.Rptr. 653), the record reveals that the initial price for the shopping center was $10,727,499. That amount, though, was subject to being either increased or decreased, depending on the project's completion date and the rental income generated from the leases of commercial tenants. Buyers paid up-front $2 million in cash to sellers. To protect that investment, Hahn Inc. in 1978 issued two guaranties to assure buyers the cash payment would be refunded if the deal collapsed.

In conjunction with the sale, buyers leased back the property to sellers. The parties also entered into various other amended purchase agreements, the effect of which was to require sellers to secure construction and permanent financing, build the complex, and sublease the property to tenants meeting certain financial and operating specifications. As consideration for the lease, sellers promised to pay buyers a portion of the gross rentals beginning in March 1980. The parties, moreover, had title to the property placed into an escrow account scheduled to close upon the completion of the shopping center and the subleasing of the stores to tenants. At the end of escrow, the parties planned for buyers to assume the permanent financing and pay sellers another cash payment. They also agreed that after the transaction closed, sellers would manage the facility for a period of three years.

One component of the purchase price was the capitalization of the shopping center's rental income. ¹

To establish the final purchase price, Waranch testified at trial that the parties selected a 7 percent capitalization rate. They then divided that percentage into the net operating income of the shopping center as of the date of closing. The parties defined net operating income as the actual rental income less operating expenses and debt service. The result of that operation was then multiplied by 84 percent, which represented buyers' interest in the property.

In 1980, a dispute arose between the parties concerning the amount of rental income sellers had collected. Buyers contended they were entitled to approximately $1.6 million in rents. In contrast, sellers asserted there was no rental income because operating expenses exceeded rents by $400,000. As a compromise, buyers relinquished their claim for the rents in exchange for sellers taking $2,187,683 of the purchase price in the form of buyers' promissory note. The note had a rate of 7 percent interest and was secured by a deed of trust to the shopping center.

Sometime in either 1980 or 1981, Hahn, Inc. merged with Trizec Centers, Inc., a subsidiary of Trizec Corporation Ltd. At trial, the court admitted into evidence the proxy statement of that transaction. According to the document, Ernest Hahn, the board chairman and chief executive officer of Hahn, Inc., agreed to sell his 1.6 million shares of the company to Trizec Centers. The proxy statement further revealed that Furthermore, the proxy statement revealed that in 1980 Devcorp had 25 shopping centers either under development or in operation. The document stated Devcorp owed over $30 million in outstanding loans, had secured $43.2 million in loan commitments, and that Hahn, Inc. had fully guarantied the financing.

on May 19, 1980, Ernest Hahn executed an employment agreement to serve as chief executive officer for Hahn, Inc. and Trizec Centers. Under the employment agreement, the board of directors of Hahn, Inc. and Devcorp would consist of two persons appointed by Ernest Hahn and five directors named by Trizec Centers. It was also anticipated that Ernest Hahn would appoint himself and Robert W. Lees, the former president of Hahn, Inc., to both boards.

On March 20, 1981, Hahn, Inc. transferred all 10,000 of its shares of Devcorp to Trizec Centers. Three days later, Trizec Centers conveyed 659 shares of Devcorp to Goldlist Acquisition Corp. and the remaining 9,341 shares of Devcorp to Trizec Equities, Inc.

By early 1982, the shopping center had two problem tenants. Franchise Stores Realty Corp. (Franchise) held a ten-year lease that it assigned to one Robert Young. He, however, eventually abandoned the store, leaving the leasehold to revert back to Franchise with $6,000 owed in back rent. At the same time, Phanny's Phudge Pharlors (Phanny's Phudge), which had signed a 15-year lease, was out of business and attempting to sublet its store.

As the closing date approached, buyers objected to including Phanny's Phudge and Franchise into the capitalized purchase price. To persuade buyers to consummate the transaction, sellers had Devcorp guaranty the stores' two leases. Pursuant to the guaranties, Devcorp essentially pledged to pay all sums due under the leases until Phanny's Phudge and Franchise paid their rents for consecutive periods ranging from three to six months. The guaranties also obligated buyers not to unreasonably withhold their permission to assignments of the leases. ²

With the rents capitalized, the total face value of the cash and financing paid by buyers was $15,046,800. Of that amount, $639,898 represented the capitalized rents from the Franchise and...