Filed 10/3/19 Domingo Villas, Inc. v. Tarnutzer CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

DOMINGO VILLAS, INC., et al.,

Plaintiffs, Cross-defendants and Appellants,

v.

RICK TARNUTZER, as Trustee, etc.,

Defendant, Cross-complainant and Respondent.

G054492

(Consol. with G054529 & G054832)

(Super. Ct. No. 30-2011-00484245)

O P I N I O N

Appeals from judgments and orders of the Superior Court of Orange County, H. Michael Brenner, Judge. (Retired judge of the Orange Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Reversed and remanded with directions.

Thomas Vogele & Associates, Thomas A. Vogele and Timothy M. Kowal; Jeffrey Lewis for Plaintiffs, Cross-defendants and Appellants.

Friedman Stroffe & Gerard, Richard W. Millar, Jr., and Christopher David Lee for Defendant, Cross-complainant and Respondent.

I. INTRODUCTION

Section 592 of the Code of Civil Procedure provides that in breach of contract cases involving both issues of law and fact, the issues of law must be tried first. This case centered on the issue of how much two debtors owed a lender on a real estate loan. There wasn’t any dispute as to whether the debtors made various payments on certain dates. The main dispute was whether the debtors should have been assessed certain late charges and extension fees. Those were legal questions, and should have been tried before the jury heard the case.

Despite a motion citing section 592 and requesting the legal issues be tried first, the trial judge determined that the jury should first decide how much the debtors owed the lender, treating it as entirely a question of fact. This decision resulted in an irregularity of procedure denying the debtors a fair trial. (§ 657, subd. (1).) This mistake was compounded by denying the debtors’ new trial motion even though the anomalous consequences of that mistake had been laid out, including a court-appointed referee’s report that totally disagreed with the jury’s number. We reverse and remand for a “do over.” (See Gamet v. Blanchard (2001) 91 Cal.App.4th 1276, 1285.)

II. BACKGROUND

The record is voluminous. It consists of 20 volumes of reporter’s transcripts and 11 volumes of appendices. We have done our best to boil down events to a few basic categories.

A. The Loan and Guaranty

On May 2, 2007, Domingo Villas, Inc. (Borrower) borrowed $2.6 million from Rick Tarnutzer and the 1997 Troy Trust (Lender) to develop some Newport Beach property it owned into industrial condominiums. The same day, David T. Chamberlain (Guarantor) signed a guaranty agreement for Borrower’s $2.6 million loan. The loan was to be repaid in one year.

A year later, Borrower and Lender signed an amendment to the note. This amendment extended the maturity date of the loan for six months if the Borrower paid Lender $32,500 prior to November 2, 2008. It also provided that the maturity date could be extended a second time, to May 2, 2009, on the payment of another $32,500.

Borrower did not pay either the first or second extensions. Instead, on July 15, 2009, Guarantor and Lender signed an extension agreement. The extension agreement provided that Guarantor now agreed to pay Lender $100,000 a month, commencing August 15, 2009. The forthcoming $100,000 payments – including the $32,500 paid in July – were to be credited against Guarantor’s liability to Lender on the guaranty. Late payment of each $100,000 installment would “result in the assessment of a late fee of Five Thousand Dollars ($5,000) which shall occur on the 11th calendar day after the due date of said payment.”

It is undisputed that Guarantor paid Lender $1.6 million in the period April 2009 through January 2011. But not all of the payments making up that $1.6 million were made at regular monthly intervals. While doing so, Guarantor embarked on a quest to either refinance or sell “most” of his other properties. His “big goal” was to find a new loan to pay off Lender. Specifically, he sought a loan of $1.5 million from Apartment Bank.

There was a dispute in the testimony as to whether Lender ever gave the bank a payoff figure. Guarantor testified that Lender never provided anything in writing about what exactly was owed on the Borrower’s note but a mortgage broker testified Lender provided a “verification of mortgage” (VOM) claiming that $2.1 million was owed. Guarantor, by contrast, had figured he owed less than $1.4 million.

Guarantor’s last set of payments – four of them – to Lender were in late January 2011. In April 2011, Lender recorded a notice of default against the property claiming no less than $3.5 million was owed.

1. The Litigation Through Trial

Litigation commenced in June 2011. when Borrower and Guarantor (collectively Debtors ) filed the original complaint. Foreclosure loomed with a trustee’s sale on the property set for September 2, 2011. But the day before the sale, Borrower filed for bankruptcy. A month later Lender filed his original cross-complaint.

That fall, a third party purchased the property for about $2.9 million, though closing costs reduced the net proceeds to about $2.6 million. From that amount, $400,000 was paid to each side, with the balance ($1,820,000) interpled to the trial court and put into an interest account for safekeeping.

By mid-2012, the parties had developed their causes of action as reflected in the two pleadings that would frame the eventual trial in this case, a second amended complaint by Debtors (2AC), countered by a second amended cross-complaint from Lender (2AXC).

The causes of action in the 2AC alleged violations of Civil Code section 2924, requiring lenders to give estimates of amounts due in good faith. Debtors asked for an accounting to establish exactly what they owed Lender. Though the 2AC was long (79 pages), its theme was that Debtors sustained damages from Lender’s allegedly overstating the amount due when they tried to refinance the loan in January and February 2011. Debtors might have been able to swing a refinance deal if they only had to pay off about $1.4 million but could not if they had to pay off $2.1 million, much less $3.5 million. The 2AC listed as among the defendants The Ryan Firm, the lawyers who had advised Lender on a judicial foreclosure around the time of the $3.5 million notice of default.

The 2AXC was a simpler document. It sought damages from Debtors for breach of contract.

B. The Trial

Proceedings were delayed when The Ryan Firm brought an anti-SLAPP motion. That motion was denied. The denial was appealed. This court reversed. As a result, when the case returned for trial, The Ryan Firm was no longer a defendant.

Trial was scheduled for April 8, 2015. Debtors filed a motion, pursuant to sections 591, 592, and 597, to try the issues of law and the equitable claims prior to any jury trial. They propounded a question of whether, as a matter of law, late fees were owed at all. Their theory was that Civil Code section 2954.5 requires lenders to first provide a specific written form of late notice to a debtor before they can recover late fees.

Up to that point, Judge Frederick Horn had been overseeing the case. But on April 8, 2015, Judge Michael Brenner took Judge Horn’s place. Judge Brenner denied the motion to try the issues of law and equitable issues first. There was no discussion. “That’s how we’ll handle it.” The most he said about his reason was: “That will be a court trial after the jury trial, so the jury will establish the fact [sic] and that will be helpful to the court.” Trial was then continued to the summer.

Trial began on July 1, 2015, and lasted the entire month of July 2015, including 24 court trial days. There were two main accounting witnesses on each side. Debtors’ expert, Guy Puccio, testified that $1,383,420.98 was owed as of January 27, 2011. Lender’s expert, Barbara Luna, testified to a figure some $600,000 higher –$1,953,020 for February 1, 2011.

Debtors proposed specific jury instructions and special verdict forms. The court rejected these proposals in favor of standard CACI jury instructions and special verdict forms. Debtors twice sought to have the judge first determine the amount due – a calculation including late fees and interest – in February 2011. The trial court, however, declared it was only going to give the jury a general verdict to fill out. The judge thought it was a simple matter to determine how much Borrower and Guarantor owed Lender.

The jury returned a no damages verdict against Borrower. On line 3 of the verdict form pertaining to Guarantor, under the question, “Did all of the conditions that were required for Domingo [sic] performance of the Promissory Note and First Amendment occur?” the jury checked “no.”

However, the jury did return a verdict against Guarantor. In response to the question, “What are Rick Tarnutzer, as Trustee for the 1997 Troy Trust, damages for breach of the personal guaranty?” the jury answered $1,968,762.

But the $1,968,762 figure was only for “principal.” The jury filled in zeroes for the categories of late charges, interest, extension fees and consequential damages. Borrower and Guarantor prevailed on none of the claims from their 2AC.

C. The Story of the Referee’s Report

Within four days of the jury’s verdict, Lender sought prejudgment interest of $819,867.58 on the $1,968,762 in the jury’s verdict, calculated from the date the lawsuit was first filed, June 15, 2011. Lender served a proposed judgment incorporating that figure.

Debtors objected to the proposed judgment and requested an evidentiary hearing. They contended the jury had not given them credit for $400,000 already paid to Lender by Borrower from the sale proceeds of the property in 2012. They further contended Lender’s expert had simply failed to credit them for $318,000 in payments which Guarantor had made in January 2011. They argued Lender’s expert had used an Excel program that could only apply one payment per month, even though Guarantor had made four payments in January 2011.

In early October 2015, while the issue of prejudgment interest was still being considered by the trial court, Debtors raised the issue of their 13th cause of action for an accounting. They argued it was unclear from the “vaguely” written verdict form whether the $1,968,762 figure was the principal balance of the loan as of February 1, 2011, or as of July 30, 2015.

The trial judge ruled on the accounting motion on December 21, 2015. He said the jury’s verdict was the equivalent of a trial on the accounting cause of action, and therefore that cause of action was moot. The trial court also ruled Lender was entitled to prejudgment interest on the amount the jury awarded. And it ruled Lender was to receive the funds currently being held by the court within 30 days of the court signing the judgment. The court asked Lender’s counsel for a new proposed judgment.

On January 22, 2016, Debtors filed a 36-page objection to Lender’s new proposed judgment. The motion attacked the judgment on a variety of fronts, but its main point was that the jury’s $1,968,762 figure was unsupportable, even if the jury was inclined to credit Luna’s testimony. The reason? Luna had testified during trial that the “loan balance” due and owing as of February 1, 2011, was $1,953,020 – $16,000 less than even the jury’s figure. But a loan balance would necessarily include all interest, late charges and fees owing as of that date, not just the “principal.”

Debtors also asserted Luna had failed to credit Guarantor with $318,000 in payments because she had used software that didn’t give him credit for three of the four payments he made in January 2011. On top of that missing $318,000, Luna had added in $213,900 in late and extension fees based on what Debtors alleged was an improper interpretation of the loan documents. The result, said Debtors, was that Luna’s figures had overstated the loan balance by some half a million dollars, and if that half a million had been deducted, Luna’s actual figure would be closer to the $1.4 million attested to by Debtor’s expert. Debtors also reminded the trial judge of comments he had made “on numerous occasions” during the trial – that the jury seemed not to be understanding the evidence.

The court rejected Debtor’s challenge, but added, “As to the issue of prejudgment interest, the Court does have an issue on how the numbers were calculated.” Accordingly, it ordered Lender’s counsel to prepare another proposed judgment, this time showing how prejudgment interest was being calculated. But the court also allowed Debtors to file objections to the forthcoming judgment.

Lender’s proposed new judgment was filed March 17, 2016. Debtors’ opposition asserted the proposed judgment had played fast and loose with the jury’s verdict. What the jury had found to be “principal” had become, in the new judgment, “Unpaid loan plus interest.”

It was at the April hearing on the latest proposed new judgment that the trial court changed its mind and decided to appoint a referee. Said the judge: “I have been taking a little bit too cavalier of an attitude during all this. And perhaps what I was asking for wasn’t a hundred-percent clear. [¶] But I think at this point, just reflecting on this, what we need is a little more rudder and a little less sail in that we should clean this up somehow so we know what we are talking about. [¶] Mr. Keathley [Lender’s counsel], you’re going to object to that, and I certainly understand your position. I’m probably contradicting myself but there you go. So what I’m going to do is I’m going to appoint a referee and we’re going to find out – we are going to get some input on what the actual amount is.” (Italics added.)

The court appointed Kenneth D. Rugeti as referee, with this mission: “In accordance with the provisions of CCP §§ 639 and 640, Kenneth D. Rugeti of Rugeti & Associates is appointed as Referee. The purpose of this appointment is to determine the amount due on the note between Domingo Villas, Inc., borrower, and the Troy Trust, lender, on February 11, 2011.”

Rugeti’s report was the subject of a hearing on August 5, 2016. But the referee could not give a single figure for February 2011, because too much depended on several variables which required a legal determination. Rugeti identified four legal questions he could not answer, three of which bore directly on the amount owing as of February 2011: (1) Were payments to be credited on the date the check was written or the date the check cleared? (2) Were late fees to be allowed on periodic amounts due? (3) Should a late fee be applied for the entire outstanding balance as of May 2, 2009?

With these questions unanswered, the best the referee could do was to outline five scenarios based on permutations of how these variables were answered. These scenarios ranged from a low of nearly $1.4 million to a high of about $1.63 million. But even within these permutations, Rugeti still had to make certain legal assumptions, including (1) interest would be computed at 10 percent per annum, (2) payments were to be first applied to interest, then applied to charges other than principal, then to principal, and (3) payments were late if not received by Lender by the 10th day after a payment due date. Rugeti further assumed one extension fee of $32,500 was to be assessed against Borrower as of May 2, 2009.

In the wake of Rugeti’s questions about late fees, Debtors again raised the issue of Civil Code section 2954.5, asserting as a matter of law that late fees and charges were not recoverable by Lender. Concomitantly, Debtors asserted that no prejudgment interest should be available to Lender because their debt was not susceptible of reasonable calculation. But it was academic. The court described the report as merely “helpful.”

On October 17, 2016, 14 and a half months after the jury returned its verdict, judgment was finally entered. The judgment mostly consisted of reproductions of the verdict forms, including the statement that Lender’s damages for breach of the guaranty were “Principal $1,968,762.” Against that, the judgment credited Guarantor with $400,000 paid from the sale of the property. The judgment further provided for $944,973 in prejudgment interest from January 13, 2011 through August 29, 2016. Despite the Debtors’ previous objection, the explanatory calculation of the prejudgment interest changed the jury’s word “Principal” into “Unpaid loan plus interest $1,968,762.”

Debtors then presented, in rapid succession, motions for judgment notwithstanding the verdict (JNOV) and new trial. The JNOV motion asserted the trial court had “reneged” on a promise made in April 2015, when their motion to try the legal issues first had been denied that there would be a court trial on their equitable causes of action, including accounting. Debtors complained they had justifiably relied on the court’s statement in deciding how to present their case.

The new trial motion reiterated the same arguments made in the several objections to the proposed judgments concerning the anomaly that the jury had only found a figure that was the “principal.” The new trial motion also objected to the trial court’s rejection of Debtors’ special verdict forms and reliance on “standard and boilerplate CACI Jury Instructions and Special Verdict form.”

Lender’s opposition asserted that the trial court hadn’t actually promised that Debtors’ equitable causes of action would be tried, pointing to the trial court’s statement that the jury’s verdict might very well “moot” those claims. As to the order of proceeding, Lender cited section 598 that the court had discretion not to try the equitable issues first. Debtors’ reply reemphasized the point that Lender had never provided written notice of late fees. The JNOV and new trial motions were both denied in December 2016.

Debtors have timely appealed from the judgment, the denials of their JNOV and new trial motions, and from the award of $684,341.90 in attorney fees. Debtors present no challenge to the attorney fee award as such. That award must stand or fall on the other challenges.

III. DISCUSSION

While this case has traveled a long and tortuous journey, it ends short of its objective. Section 592 is clear that if a case involves a claim for contract damages which involves issues of both law and fact, “the issue of law must be first disposed of.” The failure to do so deprives both parties of a conclusion to their arduous trek.

The respondent’s brief here, as did the trial judge, ignores section 592. It literally does not mention it. The closest Lender has come to confronting the statute was in its opposition to the new trial motion, saying that section 598 provides a trial court discretion not to try equitable issues first. We cannot agree, however.

Section 598 doesn’t say that a trial court has discretion not to try legal issues first when those issues involve questions of both law and fact. Rather, it is directed to the garden-variety situation where there is a need to try liability prior to trying damages. “‘Its objective is avoidance of the waste of time and money caused by the unnecessary trial of damage questions in cases where the liability issue is resolved against the plaintiff.’” (Cohn v. Bugas (1974) 42 Cal.App.3d 381, 385, quoting 17th Biennial Report, Judicial Council (1959) p. 30; 18th Biennial Report (1961) pp. 56-57; 19th Biennial Report (1963) p. 32.) Section 598 does not give courts discretion to try questions of liability that depend on issues of law as if those questions were entirely questions of fact.

In the present case, as the referee’s report illustrates, the question of the “balance due” as of some certain date in February 2011, could not be determined without first determining a number of discrete legal issues involving both the construction of the several loan documents and the impact of several sections of the Civil Codes, including sections 2924 and 2954.5, on Debtors’ liability for late charges and extension fees.

The trial court incorrectly assumed that the case was a matter of just “total[ing] up the amount that was paid, total[ing] up the amount that’s due on it, and that’s the balance.” This was error. Amounts that are “due” on a loan include applicable interest, late charges, other fees, and sometimes even interest on interest.

On appeal, Lender’s defense of the trial court’s decision to first have the jury determine Lender’s contract claims against Debtors is to rely on the blanket proposition that the question of “the amount due is a question of fact.” For this proposition Lender cites Basic Modular Facilities, Inc. v. Ehsanipour (1999) 70 Cal.App.4th 1480, 1485 (Basic Modular), collaterally supported by J. S. Schirm Co. v. Rollingwood Homes Co. (1961) 56 Cal.2d 789, 795 (Schirm), and Potter v. Pacific Coast Lumber Co. (1951) 37 Cal.2d 592, 601 (Potter).

Lender’s assertion is too broad. It fails to recognize that the question of the “amount due” necessarily depends on what is owing and why. Thus none of the cases relied on by Lender support the idea that a jury should be allowed to decide, as if it were entirely a question of fact, what the amount owing is on a complex series of loan transactions involving late fees and extension charges.

Basic Modular involved not the amount due on a contract, but on a mechanic’s lien. Because the claimant on a mechanic’s lien has the burden of establishing the “reasonable value of the work and/or materials, and the date of completion or cessation of work,” it is no wonder the court said the “actual amount due on the lien presents a question of fact for the trial court[.]” (Basic Modular, supra, 70 Cal.App.4th at p. 1485.)

Schirm likewise involved a mechanic’s lien, though not centered on the reasonable value of labor and materials. Rather the question there was the subjective intention behind certain joint checks. Were they intended to cover future delivered materials or merely to pay for already delivered materials? The “question of fact” that concerned the court was the intention of the parties, not the way disputed terms of a contract should be construed. (See Schirm, supra, 56 Cal.2d at p. 795.)

And Potter seems to us to go in exactly the opposite direction of Lender’s argument. There a buyer received a series of lumber deliveries from the seller, which were not up to the buyer’s satisfaction. With each delivery the buyer sent back a partial payment and a note saying the payment was in full satisfaction of what the buyer thought it owed. The Supreme Court held that the notes compelled the conclusion, as a matter of law, that the parties had reached an accord and satisfaction over the amount due. The court merely noted in passing that often the “amount due” is primarily a matter of fact, quickly adding that wasn’t the case in Potter. (Potter, supra, 37 Cal.2d at p. 601.)

In the present case, a number of discrete legal issues had to be determined before the jury could have a chance of making any factual findings. Letting the jury determine “the amount due” without first deciding those legal issues was an “irregularity in the proceeding” justifying a new trial. (§ 657, subd. (1).) And when we look at this record, it is inescapable the irregularity denied Debtors a fair trial. We need only mention three instances to illustrate that denial:

First, the trial court’s refusal to try the Debtors’ equitable claim concerning Lender’s overstatement of their debt in the period February to April 2011 denied Debtors the chance to show that they might have indeed been able to refinance the loan but for Lender’s overstatement of the existing debt. (See Civ. Code, § 2924.) That was an equitable claim that could only be tried by the court, and wasn’t.

Second, the trial court’s equation of the jury’s number with the actual amount owed denied the Debtors their defense that Lender’s failure to provide notice of late fees should lower or reduce their obligation in light of Civil Code section 2954.5. That was a legal defense that should have been tried first before the jury had to determine a number that might – or might not – reflect that legal defense.

And finally, the jury’s verdict of $1,968,762 as the “principal” owing on the loan – and even that at an ambiguous point in time – shows the jury had become hopelessly confused in being asked to determine a complex accounting issue – one that flummoxed even a court-appointed expert referee prior to legal issues being determined.

Moreover, Luna’s own tables acknowledged that Guarantor had indeed paid $318,000; it just hadn’t been credited as of February 15, 2011. And Lender’s respondent’s brief does not directly address the problem of the uncounted money. It merely suggests the jury must have found the $318,000 was never really paid at all.

The jury’s finding, however, did nothing to make the evidence of the $318,000 go away. (See Potter, supra, 37 Cal.2d at p. 601 [evidence of notes from buyer telling seller each payment was in full satisfaction of the account conclusively established accord and satisfaction despite jury verdict in favor of seller].) This case will have to be re-tried.

IV. DISPOSITION

The judgments of October 17, 2016 and April 10, 2017 are reversed. The orders denying the JNOV and new trial motions are reversed. The attorney’s fee order, which depends on those underlying judgments and orders, is reversed. We remand this

case for a new trial. Debtors Domingo Villas and Chamberlain shall recover their costs on appeal.

BEDSWORTH, ACTING P. J.

WE CONCUR:

MOORE, J.

THOMPSON, J.