Hammes Co. Healthcare v. Tri-City Healthcare Dist.

Citations: 801 F. Supp. 2d 1023; 2011 U.S. Dist. LEXIS 74253; 2011 WL 2708493Docket: 3:09-cr-02324

Court: District Court, S.D. California; July 11, 2011; Federal District Court

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Defendants Tri-City Healthcare District, Larry Anderson, and Pamela Smith filed a motion for partial summary judgment in the case involving Hammes Company Healthcare, LLC, and HC Tri-City I, LLC regarding the failed development of an outpatient surgery center and medical office building in Oceanside, California. The court, led by District Judge Janis L. Sammartino, granted the motion in part and denied it in part, while also denying the plaintiffs' ex parte motion to file a supplemental brief. 

The plaintiffs, Hammes and HC, had engaged in a letter of intent in May 2005 with Tri-City, outlining terms for the project and stipulating Tri-City's reimbursement obligations for initial development costs. In July 2007, HC entered into a ground lease with Tri-City for a 55-year term, which included three contingencies, one of which was a non-waivable condition precedent to construction. Subsequently, in July 2008, HC signed a space lease with Pacific View Surgery Center, LLC, which Tri-City guaranteed. 

The project was ultimately terminated in early 2009 for disputed reasons, leading to claims by Hammes and HC against the defendants for breach of the letter of intent, breach of the ground and space leases, breach of the implied covenant of good faith and fair dealing, fraud, tortious interference with the space lease, and promissory estoppel.

Federal Rule of Civil Procedure 56 allows for summary judgment when the moving party shows there is no genuine issue of material fact and is entitled to judgment as a matter of law. A material fact is one that could influence the case's outcome under applicable law. A dispute is considered 'genuine' if a reasonable jury could find for the nonmoving party. The moving party bears the initial burden to demonstrate the absence of genuine issues, which can be done by negating an essential element of the nonmoving party's case or showing that the nonmoving party has failed to demonstrate an essential element for which they bear the burden of proof. Summary judgment will not be precluded by disputes over irrelevant facts.

Once the moving party meets its burden, the nonmoving party must present facts indicating a genuine issue remains. Mere allegations or denials are insufficient to oppose a proper summary judgment motion. The court must view facts in the light most favorable to the nonmoving party. Rule 56(a) allows for partial summary judgment, where the court can establish material facts that are undisputed, streamlining litigation by eliminating issues without genuine fact disputes. Partial summary judgments are interlocutory and not appealable until final judgment unless a specific statute permits it.

In the analysis section, Tri-City argues for summary judgment on Hammes's breach of contract claim, asserting that Hammes has not incurred damages due to the District's breach. Tri-City claims that all initial development costs were incurred by HC and that Hammes is not entitled to a breakage fee since the project was not terminated. In response, Hammes argues that Tri-City anticipatorily breached the contract by buying out the physician-owners and terminating the project.

Plaintiffs argue that Hammes is entitled to reimbursement for extensive fees and initial development costs, as well as a breakage fee, due to Tri-City's alleged unilateral decision not to proceed with a project as outlined in their letter of intent. Under California law, a breach of contract claim requires proof of a valid contract, performance by the plaintiff, a breach by the defendant, and resulting damages. The letter of intent mandates Tri-City to reimburse Hammes for initial costs and pay a breakage fee if it chooses not to continue with the project. 

Defendants assert that Tri-City did not terminate the letter of intent and that Plaintiffs indicated their intent to terminate on June 30, 2009. In contrast, Plaintiffs claim Tri-City effectively terminated the agreement on April 3, 2009, supported by internal communications from Tri-City expressing intent to terminate as early as March 17, 2009. Ultimately, Tri-City's board approved the termination and partial payment of Hammes's costs on April 30, 2009. 

The Court finds that a genuine issue of material fact exists regarding whether Tri-City's actions constituted a unilateral termination, which would require reimbursement to Hammes. If proven, this would amount to a breach of the letter of intent and could result in damages for Hammes, including the breakage fee. Consequently, Defendants' motion for summary judgment on Hammes's first claim is denied.

Regarding the second claim for breach of the ground lease and space lease, Tri-City argues that Hammes lacks standing since it did not sign the leases, that Plaintiffs did not meet certain conditions precedent, and that there is no evidence of Tri-City defaulting on rent obligations. The Court will evaluate each of these arguments.

Hammes is not considered a third-party beneficiary of either the ground lease or the space lease, as he did not sign either agreement. The court previously stated that Hammes might recover damages if he were an intended beneficiary under California Civil Code § 1559, which allows enforcement of contracts made expressly for the benefit of a third party. Contracts can create intended or incidental beneficiaries; an intended beneficiary is one whom the promisor is obligated to benefit, while an incidental beneficiary has no enforceable rights. For Hammes to qualify as an intended beneficiary, the contract must reflect the parties' intention to confer a benefit on him, which can be interpreted from the contract as a whole and the circumstances surrounding its execution.

The ground lease aimed at constructing a medical facility for HC, while the space lease involved HC leasing premises to Pacific View. Neither lease grants Hammes rights to occupy or receive rent payments, and both contain integration clauses indicating that the agreements represent the complete understanding between the parties involved. These factors suggest that the parties did not intend for Hammes to benefit from the leases. Despite this, plaintiffs maintain that Hammes is an intended beneficiary of both leases.

Hammes was claimed by Plaintiffs to be an intended beneficiary of the ground lease, with the assertion that leasing the land was essential for the project's construction and for Hammes’s role as the schematic designer. However, the court determined that any benefits to Hammes under the ground lease and space lease were incidental. Should the project have proceeded, Hammes would only benefit indirectly through rental income received by its subsidiary, HC. The court emphasized that the absence of admissible evidence of intent for Hammes to benefit from the space lease negated its ability to enforce the agreement, as established in precedent (Dayton Dev. Co. v. Gilman Fin. Servs. Inc.). 

Hammes's argument that the ground lease execution allowed it to continue as the schematic designer was insufficient, as it was to be compensated only for pre-construction services outlined in a letter of intent. There was no indication that HC and Tri-City intended to pay Hammes for any additional work. The declaration from Craig Beam indicated that HC would handle all construction work for the medical office building, further clarifying that Hammes’s role in providing pre-construction services did not qualify as a benefit granting it standing to enforce the ground lease.

Hammes's supporting declarations from Beam, Keller, and Kibler claimed that the ground lease would benefit Hammes in the project's development but lacked specific details on how Hammes would be compensated. These declarations failed to establish a genuine issue of material fact regarding Hammes's status as an intended beneficiary. Additionally, a flow chart presented by Hammes was deemed inadequate, as it merely suggested Hammes's role as an equity investor in the ownership entity rather than confirming its status as an intended beneficiary of the ground lease.

Hammes, as an equity investor in HC, is not considered an intended beneficiary of the ground lease and space lease, and thus lacks standing to assert breaches of these agreements. The court grants summary judgment in favor of dismissing Hammes's claims. Regarding Tri-City's potential breach of the ground lease, it asserts that the agreements were null and void due to unmet conditions precedent. In contrast, HC argues that these conditions were waivable and, in any case, satisfied. The ground lease includes three contingencies—financing, governmental approvals, and a pre-leasing requirement—none of which impose obligations on Tri-City if not met. The financing and governmental approvals contingencies are clearly structured to allow HC to waive them, maintaining the lease's validity. However, the pre-leasing contingency is poorly drafted, complicating the interpretation of the parties' mutual intent, as it mandates HC to secure leases with qualified medical tenants before commencing construction.

The provision related to the pre-leasing contingency did not grant HC the right to waive it, as construction could not commence without Tri-City's consent regarding satisfaction of this contingency. The Pre-Leasing Requirement necessitated that HC secure leases for at least seventy percent of the medical office building (MOB) before construction could begin. If HC failed to obtain the necessary leases by December 31, 2007, it had three options: (1) offer Tri-City a back-up lease, (2) extend the deadline by ninety days, or (3) terminate the lease. Ultimately, HC could either satisfy the contingency with Tri-City's consent or terminate the lease. The pre-leasing contingency stipulated that HC must enter into actual leases with Qualified Medical Tenants covering the specified percentage of the MOB, not merely commitments to lease. HC’s assertion that it had commitments to lease approximately 70% of the building by December 2008 did not meet the requirement, as actual leases were necessary. Since HC did not claim to have entered into any leases, it failed to satisfy the pre-leasing condition, leaving no genuine issue of material fact regarding this failure. HC also argued that the analysis of conditions precedent was irrelevant due to alleged breaches by the District, but this argument was unpersuasive.

Plaintiffs acknowledge that the pre-leasing contingency was not amended or satisfied by December 31, 2007, which was the deadline set in the Ground Lease. Consequently, Tri-City's alleged termination occurred after the deadline for meeting the pre-leasing condition, allowing Tri-City to use the failure of this condition as a defense. HC's argument that Tri-City's statements in April 2009 estop Tri-City from claiming HC's failure to meet this condition is flawed, as the pre-leasing condition expired in 2007, well before the statements were made. Therefore, HC's claim that Tri-City induced its non-performance is untenable. The court finds no genuine issue of material fact regarding HC's failure to satisfy the pre-leasing condition, rendering both parties' obligations under the ground lease null and void, leading to a summary judgment in favor of Tri-City regarding HC's breach claim.

Additionally, HC asserts that Tri-City defaulted on its obligations under the space lease upon project termination. However, Tri-City was merely a guarantor for Pacific View's obligations, and its responsibility was contingent on Pacific View's default. HC's claim relies on anticipatory breach, which requires proof that HC would have been able to perform if not for Tri-City's actions. Since HC failed to satisfy the pre-leasing contingency, it cannot demonstrate that it could have fulfilled its obligations under the space lease, which depended on delivering the medical office building. Thus, the space lease could not commence until that delivery was made.

Without the ground lease, HC was unable to construct the medical office building, as specified in the lease agreement. The failure of a pre-leasing contingency in the ground lease prevented HC from fulfilling obligations under the space lease, resulting in no damages even if Tri-City breached its guaranty obligation. Consequently, the Court granted summary judgment on HC's breach of the space lease claim. 

Regarding the third claim for breach of the implied covenant of good faith and fair dealing, Defendants argued that their reasoning for summary judgment on the second claim applied to this claim as well. Plaintiffs contended that genuine material facts existed that would prevent summary judgment. Under California law, a breach of this covenant requires proving five elements: existence of a contract, fulfillment of obligations by the plaintiff, occurrence of conditions precedent for the defendant, unfair interference by the defendant with the plaintiff's contract benefits, and harm to the plaintiff.

Plaintiffs alleged that Defendants breached this covenant concerning the letter of intent, ground lease, and space lease, claiming that a plan was implemented to undermine these agreements. However, each agreement has distinct purposes and terms, making the allegations complex. The Court noted that for the breach of good faith claim against Defendants Anderson and Smith to succeed, they must be parties to the agreements, which they were not, thus failing the claim as a matter of law. 

The letter of intent explicitly states it is not a binding agreement, except for certain obligations regarding Initial Development Costs, serving only as an outline of intentions and understanding before finalizing agreements.

The letter of intent established that its terms were non-binding and subject to further negotiation, requiring the parties to negotiate in good faith toward binding agreements. Tri-City committed to reimbursing Hammes for initial development costs. The implied covenant of good faith in the letter prohibited Tri-City from undermining Hammes's negotiation efforts or its ability to obtain reimbursement. Tri-City did not breach this covenant, as it did not obstruct negotiations, and Hammes's claim regarding reimbursement relates to a potential breach of the letter itself, not the covenant of good faith.

The Court determined that Tri-City also did not breach the implied covenant of good faith in the ground lease, as HC failed to satisfy a pre-leasing contingency that was essential for Tri-City's performance. Consequently, HC's claim for breach of the implied covenant of good faith in the ground lease was legally insufficient.

Similarly, HC's failure to meet the pre-leasing contingency in the ground lease adversely affected its claim regarding the space lease. Under California law, a plaintiff must demonstrate damages for a breach of the covenant of good faith. Since HC was not damaged by Tri-City's alleged breach—due to the pre-leasing contingency preventing project fruition—this claim also failed.

The Court granted summary judgment in favor of Tri-City regarding HC's claims for breach of the covenant of good faith in both the ground lease and space lease. Additionally, the defendants presented arguments for summary judgment on HC's fourth claim for fraud.

Plaintiffs accuse Larry Anderson and Pamela Smith of committing fraud and omitting critical information in a scheme to dismantle Pacific View and appropriate Plaintiffs' construction drawings and governmental approvals without compensation. The legal elements of fraud include misrepresentation, knowledge of falsity, intent to defraud, justifiable reliance, and resulting damages. Although the complaint asserts that Anderson and Smith misled Plaintiffs by repeatedly claiming the project would proceed, leading to incurred development costs, the Plaintiffs have shifted focus in their legal arguments. They now allege fraud based on a misrepresentation regarding the use of design documents for a medical office building. The court finds that Plaintiffs cannot prove the necessary elements of reliance or damages under this new theory. Actual reliance requires that the defendant's misrepresentation directly caused the plaintiff's actions, which Plaintiffs fail to demonstrate. While they claim reliance on the defendants' assurances, they do not specify how these statements changed their legal relations, failing to establish that they would not have engaged in the transaction but for the alleged misrepresentations.

The Court determined that a change in economic position cannot be inferred from the transaction circumstances. Plaintiffs halted work on the project upon Defendants' notice to terminate, and there is no evidence that they would have acted differently had Defendants revealed their intent to continue the project without them. Therefore, Plaintiffs' fraud claim fails due to the absence of evidence that they would have acted differently but for the alleged misrepresentations. Additionally, Plaintiffs did not demonstrate damages resulting from Defendants' alleged misrepresentations, particularly regarding a claimed $88,040 in costs, since these were only relevant to the fraud theory that was dismissed. Plaintiffs did not allege that Defendants converted their construction documents, leading to a conclusion that there is no genuine issue of material fact regarding damages from the alleged fraud, prompting the Court to grant summary judgment on this claim.

Regarding the fifth claim for tortious interference with the space lease, Defendants argued that HC could not prevail because the termination of the ground lease caused any damages incurred. The Court concurred that HC was not damaged, reaching this conclusion based on the failure of the ground lease's pre-leasing contingency, which negated HC's ability to benefit from the space lease. Consequently, the Court granted summary judgment on this claim as well.

For the sixth claim of promissory estoppel, Defendants asserted that summary judgment was warranted due to Plaintiffs' failure to provide evidence of a changed economic position after an April 2009 meeting. However, Plaintiffs contended that there are triable issues of material fact.

Promissory estoppel requires that a promise, which the promissor should expect to induce action or forbearance from the promisee or a third party, be enforced to prevent injustice if it does induce such action or forbearance. Courts view promissory estoppel claims similarly to contract actions, lacking only the consideration element. In this case, Plaintiffs claim that Defendants assured them the Project would proceed while having no intention to do so. Plaintiffs assert reliance on representations regarding project termination and promises of payment of at least $450,000, believing they should cease work while expecting payment. However, the Court finds that Plaintiffs have not demonstrated a substantial change in position based on these promises, as they had already ceased work and could not stop further. Consequently, the promissory estoppel claim does not hold, leading the Court to grant summary judgment in favor of Defendants. Additionally, the Court grants Defendants' motion for partial summary judgment on other claims, including breach of lease and fraud, but denies it regarding HC's breach of the letter of intent claim. Plaintiffs' request to file a supplemental brief is denied due to a lack of good cause, as they have already presented sufficient opportunities to oppose the motion.

The motion to file a supplemental brief is denied. Defendants' reply exceeds the page limit by three pages, and they are warned that future violations of the Local Rules may lead to sanctions. Both parties have raised objections regarding evidence related to Defendants' summary judgment motion; however, except where noted, these objections are overruled as moot. 

The first claim involves Hammes against Tri-City, focusing on whether the letter of intent constituted a binding contract when Tri-City allegedly breached it in 2009. Tri-City is willing to assume the letter was binding for this motion, though there are doubts regarding its validity. The ground lease executed on June 27, 2005, is stated to have replaced the letter of intent entirely. 

The parties acknowledge that a letter from Plaintiffs terminating the project was incorrectly dated July 29, 2009. Defendants objected to the admissibility of statements made by Defendant Smith concerning the project, but the Court overrules these objections, finding Smith's statements within her employment scope and thus attributable to Tri-City. 

Defendants also argued that a May 28, 2009, letter from Todd Kibler was a settlement proposal and inadmissible under Federal Rule of Evidence 408. The Court overrules this objection, noting that no actual dispute regarding Tri-City’s liability existed at that time, as Tri-City had acknowledged a potential liability prior to that date. Similarly, an objection regarding a statement made by Defendant Anderson is also overruled for the same reasons.

A genuine issue of material fact exists regarding whether Hammes incurred initial development costs, with claims of $333,663 in expenses for pre-construction services and feasibility work presented in declarations. The second claim pertains solely to Tri-City, which argues that the conditions affecting HC's obligations are governed by a prior court interpretation in a related case. Tri-City asserts that the court determined these conditions operate mutually, preventing binding obligations unless satisfied. However, HC counters that the court also indicated HC could void the lease or waive conditions if financing was unobtainable, supporting HC's position. The court retains the authority to reassess prior interpretations under Federal Rules of Civil Procedure.

Further arguments from the plaintiffs concerning Tri-City's waiver of the pre-leasing contingency through conduct are undermined by a "no waivers" provision in the ground lease, which prevents waiver by mere inaction. Additionally, plaintiffs' claim that post-expiration amendments modified the contract fails, as those amendments reaffirmed the pre-leasing contingency's validity. The financing and governmental approval contingencies in the space lease mirror those in the ground lease and could be waived at HC's discretion, allowing HC to assert a breach of contract claim without proving satisfaction of those contingencies.

However, HC's claim of actual breach is not viable because Pacific View did not default under the space lease, as the medical office building was never constructed, negating any obligation for rent payment. Consequently, Tri-City had no opportunity to assume Pacific View's obligations.

Plaintiffs have introduced a theory of anticipatory breach in their opposition, which was not included in the original complaint or discovery responses. They must file a formal motion to amend their complaint to incorporate this new theory. The court notes that a separate claim for anticipatory breach would be redundant to the existing breach claim, referencing Gov't Guarantee Fund of Republic of Finland v. Hyatt Corp., which supports striking such redundant claims. The fourth claim pertains solely to Defendants Anderson and Smith. Evidence indicates that Tri-City decided to terminate the project as early as March 17, 2009; however, Plaintiffs have not provided evidence of any contemporaneous misrepresentations by Defendants Anderson or Smith to support a fraud claim. Additionally, Plaintiffs have failed to demonstrate that a necessary relationship existed between them and Defendants Anderson and Smith, which would impose a duty to disclose intentions regarding the project. Such a relationship requires some transactional basis, and neither Anderson nor Smith was involved in any relevant transactions. The fifth claim for tortious interference with the space lease is asserted by Hammes and HC, but the court previously determined that Hammes was not an intended beneficiary of the lease, so the claim will be considered only as it pertains to HC.