Geraldine Mund, United States Bankruptcy Judge
Defendants SunCal Management, LLC ("SCM") and Argent Management, Inc. ("Argent" and, with SCM, the "Defendants") brought a motion for summary judgment (dkt. 311; the "MSJ") on the first claim for relief (Breach of Contract) and the second claim for relief (Unjust Enrichment and/or Restitution) by plaintiff Stephen M. Speier (the "Trustee"), as chapter 11 trustee and liquidating trustee for debtor SunCal Oak, LLC (the "Debtor"), or, in the alternative, for partial summary adjudication. The Trustee filed an opposition to the MSJ (dkt. 316; the "Opposition") and the Defendants filed a reply to the Opposition (dkt. 329; the "Reply"). On May 30, 2017 the Court held a hearing on the MSJ.
On August 2, 2017, the Court entered an order (dkt. 343; the "Order") and a memorandum of decision (dkt. 342; the "Memorandum of Decision" or "Memorandum"), which granted the MSJ on the first claim for relief (Breach of Contract) and continued the hearing on the MSJ to give the parties additional time to present evidence on an issue relevant to the second claim for relief (Unjust Enrichment/Restitution): whether SCM's damages arising from the Debtor/Trustee's breach of contract exceeded payments by the Debtor to SCM.
The Memorandum provided in relevant part:
The Oak Knoll Project called for the development of a 168–acre former naval medical center purchased from the United States for $100.5 million (the "Property") into a planned community with 960 residences (single family homes, townhomes, and apartments) and 72,000 square feet of retail, by selling fully-entitled and buildable lots to merchant builders. [UF Nos. 1, 2, 3, 14, 17]1 [Footnotes from the Memorandum are omitted from this tentative ruling.]
In order to develop the Oak Knoll Project, the Debtor and SCM entered into a Development Management Agreement dated December 29, 2005 (Dec. of Bruce V. Cook, Ex. 6; the "DMA"). [UF No. 19] In general terms, the DMA provided that SCM would manage the development of the Project and the Debtor would fund that development, including the payment of management fees to SCM. [UF Nos. 27, 28]
Section 5.1 of the DMA provided that the Debtor would pay SCM (a) an "Operating Management Fee" of 3% of (i) gross sales revenue from the Project and (ii) net proceeds from the funding of any related community facilities districts and (b) a "Sales Management Fee" of 1% of gross sales revenue. [UF Nos. 130, 131] (The Operating Management Fee and the Sales Management Fee are collectively referred to as the "Management Fee.") The first 2% of the gross revenue was to be paid to SCM in equal monthly installments (calculated based on expected gross sales revenues) during the development of the Project, with the remainder of the Management Fee to be paid upon the close of escrow of each sale. [UF Nos. 133–136]
Section 5.3 of the DMA also provided that the Debtor would reimburse SCM for third-party out-of-pocket expenses incurred by SCM and for the compensation SCM paid to employees and contractors who directly worked on the Project. Certain expenses, such as insurance, salaries of senior level management not devoted exclusively to the Project, and overhead expenses relating to SCM's home office, remained the sole responsibility of SCM. [UF No. 132]
....
SCM worked extensively to develop the Oak Knoll Project (see the list of work performed at 13:26–14:28 of the Motion). [UF Nos. 93–117] Between the signing of the DMA on December 29, 2005 and the Debtor's November 19, 2008 petition date the Debtor paid SCM approximately $4 million in management fees (about $158,000/month) and $3 million for expenses. [UF Nos. 162, 163]
After Lehman filed for bankruptcy on September 15, 2008, Lehman refused to fund the Oak Knoll Project. The Debtor accordingly stopped making payments to SCM and SCM was accordingly unable to continue developing the Project. [UF No. 167, 170–173,182] SCM asserts that the Oak Knoll Project was 30 days from the completion of its entitlement package, which would have substantially increased the value of the Project. On November 19, 2008, the Debtor was placed in bankruptcy. The Trustee, as chapter 11 trustee, decided not to continue with entitlement or other development of the Oak Knoll Project. In 2012, under the relevant Plan and Confirmation Orders, the Oak Knoll Project was conveyed to Lehman on an "as is" basis for $48 million. [UF Nos. 200, 201]
....
The Debtor/Trustee's material breach of the DMA excuses SCM's further performance and precludes a breach of contract claim by the Trustee against SCM....
....
An unjust enrichment claim under California law requires "receipt of a benefit and unjust retention of the benefit at the expense of another." Hirsch v. Bank of Am., 107 Cal.App.4th 708, 717, 132 Cal.Rptr.2d 220 (2003) (quoting Lectrodryer v. SeoulBank, 77 Cal.App.4th 723, 726, 91 Cal.Rptr.2d 881 (Cal. Ct. App. 2nd Dist. 2000) ). "[R]elief is available under this theory upon a determination that under the circumstances and as between the two individuals, it is unjust for the person receiving the benefit to retain it. ( Rest., Restitution, § 1, com. c, p. 13 ...." Id. at 722, 132 Cal.Rptr.2d 220. The Trustee asserts that "allowing SCM to retain fees in excess of the Project's final value would unjustly enrich SCM" [SAC ¶ 87] and deprives the Debtor of the exchange it expected [Opposition at 28:5–6].
While a valid contract governing the rights of parties generally serves to bar an unjust enrichment claim, see, e.g.,Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1167 (9th Cir. 1996),
California law allows a breaching party to recover under an unjust enrichment theory for the benefit conferred upon the non-breaching party minus damages to the non-breaching party. SeeUnited States ex rel. Palmer Constr., Inc. v. Cal. State Elec., Inc. , 940 F.2d 1260, 1262 (9th Cir.1991) (citing 12 S. Williston, A Treatise on the Law of Contracts §§ 1479–84 (3d ed. 1970) (Williston); 1 B. Witkin, Summary of California Law (Contracts) §§ 91–96 (9th ed.1987); 55 Cal.Jur.3d (Restitution) § 66 – 67 (1980) ).
Billfish, Inc. v. Campbell , 187 F.3d 646 (9th Cir. 1999) (unpublished opinion); see alsoUnited States v. Alvarez , 999 F.2d 544 (9th Cir. 1993) ("traditionally analyzed as an issue of restitution in favor of a party in breach"); Harriman v. Tetik , 56 Cal.2d 805, 811, 17 Cal.Rptr. 134, 366 P.2d 486 (1961) (to avoid unjust enrichment, even a willfully defaulting party may recover consideration paid to the extent he could show it exceeded damages to other party).
It is undisputed that the Debtor conferred a benefit of $4 million of payments for management fees and $3 million of payments for expenses. Under California law, the Trustee has a claim for unjust enrichment (or restitution) unless the damages to SCM exceeded this $7 million benefit conferred on SCM. So, if the Defendants could establish as a matter of undisputed fact that SCM's damages exceeded the approximately $7 million paid by the Debtor, the Defendants would be entitled to summary judgment on this unjust enrichment claim.
The Court does not know whether SCM could establish that its damages exceeded $7 million. The amount of SCM's damages from the Debtor/Trustee's breach of the DMA was not originally at issue in this MSJ, so the parties have neither briefed nor submitted evidence regarding the amount of such damages.2 The Court will continue this MSJ for the purpose of allowing the parties to provide evidence of the amount of SCM's damages.
As a general matter of contract law, SCM's damages for the Debtor/Trustee's breach of the DMA would be expectation damages.
Damages awarded to an injured party for breach of contract "seek to approximate the agreed-upon performance." ( Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515, 28 Cal.Rptr.2d 475, 869 P.2d 454 (Applied).) The goal is to put the plaintiff "in as good a position as he or she would have occupied" if the defendant had not breached the contract. (24 Williston on Contracts (4th ed.2002) § 64:1, p. 7.) In other words, the plaintiff is entitled to damages that are equivalent to the benefit of the plaintiff's contractual bargain. (Id. at pp. 9–10; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 813, pp. 732–733 ....
Lewis Jorge Const. Mgmt., Inc. v. Pomona Unified Sch. Dist., 34 Cal.4th 960, 967–68, 22 Cal.Rptr.3d 340, 102 P.3d 257 (2004) ; see also Cal. Civ. Code § 3300. For SCM to be put in as good a position as performance, the Court expects that SCM would need to receive (i) its expected net profits under the DMA (the total expected Management Fees less remaining expected, non-reimbursable costs of performance) and (ii) all incurred, reimbursable costs. The Court would consider different measurements of SCM's damages that are supported by relevant fact and applicable law.
The Defendants filed a supplemental statement on this issue (dkt. 347; the "Supplemental Statement"), the Trustee filed a supplemental opposition (dkt. 348; the "Supplemental Opposition"), and the Defendants filed a reply to the Supplemental Opposition (dkt. 354; the "Supplemental Reply"). On November 14, 2017, the Court held a hearing on this issue.
Defendant's Supplemental Statement —The Defendants argue as follows:
Burden of...
