2017-00219737-CU-OR

Next Phase Holdings LLC vs. Wang Brothers Investments LLC

Nature of Proceeding: Motion to Expunge Lis Pendens

Filed By: Cohen, Joshua D.

Defendant Wang Brothers Investment, LLC’s (“Defendant” or “Seller”) motion for an order expunging plaintiff Next Phase Holdings, LLC’s (“Plaintiff” or “Buyer”) Notice of Pendency of Action, filed on September 27, 2017 (the “Lis Pendens”) is GRANTED.

This action arises from an alleged breach of a commercial real estate purchase agreement. In short, Plaintiff alleges Defendant wrongfully cancelled the purchase agreement on the grounds Plaintiff failed to timely remove a title contingency.

The property at issue is a 234,800 square foot commercial building located at 8110 Power Ridge Road in Sacramento (the “Property”). Plaintiff intended to purchase the

property to use in connection with its cannabis business.

In October of 2016, Plaintiff and Defendant executed a written option agreement for Plaintiff to purchase the Property (the “Agreement”). (Barnes Decl., Exh. A.) Brian Barnes at Cornish & Carey Commercial acted as a dual broker for the transaction. Plaintiff was also represented by its in-house counsel, John Sinadinos.

In June of 2017, Plaintiff exercised its option to purchase the Property and escrow was opened with Fidelity National Title Company in July 2017. (Sinadinos Decl. ¶¶ 4, 6.)

The Agreement required Defendant or the escrow officer to provide Plaintiff with a preliminary title report, disclosures, Title Commitment with Underlying Documents ,and a map with all easements plotted to scale. (Sinadinos Decl. ¶ 7.) On August 16, 2017, Fidelity provided Mr. Barnes, Plaintiff, and Defendant with a copy of the Title Commitment identifying the exceptions Fidelity would not insure unless they were addressed to Fidelity’s satisfaction. (Barnes Decl. ¶ 3, Exh. B; Rood Decl. ¶ 2, Exh. A.)

Pursuant to section 9.1(f) of the Agreement, Plaintiff had ten days from receipt of the Title Commitment to advise Defendant which exceptions Plaintiff would accept and which it disapproved. (Barnes Decl., Exh. A.) On August 25, 2017, Mr. Sinadinos emailed Mr. Barnes and directed him to ask Defendant to extend Plaintiff’s deadline to respond to the Title Commitment from August 28 to September 6. Mr. Barnes responded and rejected the request, indicating the deadline would remain August 28th. (Barnes Decl., Exh. C.)

On August 28, 2017, Plaintiff informed Defendant in writing that it would not accept Exceptions No. 10 and 18. (Barnes Decl., Exh. D.) Ten days later, on September 7, 2017, and pursuant to the Agreement, Defendant provided written notice that it would not remove Exceptions 10 and 18 from title and stated Plaintiff “must proceed to close timely and accept title subject to Exceptions 10 and 18, unless of course they choose to terminate the Agreement pursuant to Section 9.3.” (Barnes Decl., Exh. E.)

Section 9.3 provides, in relevant part:

“If any of Buyer’s Contingencies or any other matter subject to Buyer’s approval is disapproved as provided for herein in a timely manner (“Disapproved Item”), Seller shall have the right within 10 days following the receipt of notice of Buyer’s disapproval to elect to cure such Disapproved Item prior to the Expected Closing Date (“Seller’s Election”)…If Seller elects, either by written notice or failure to give written notice, not to cure a Disapproved Item, Buyer shall have the right within 10 days after Seller’s Election, to either accept title to the Property subject to such Disapproved Item, or to terminate this Agreement.
Buyer’s failure to notify Seller in writing of Buyer’s election to accept title to the Property subject to such Disapproved Item without deduction or offset shall constitute Buyer’s election to terminate this Agreement.” (Emp hasis added.)

Mr. Barnes spoke to Mr. Sinadinos on September 17 and read section 9.3 of the Agreement aloud, but at no time during this call did Mr. Sinadinos advise Mr. Barnes that Plaintiff would accept title subject to Exceptions 10 and 18. (Barnes Decl. ¶ 7.)

Defendant contends Plaintiff never provided written (or even verbal) notice by

September 17, 2017, regarding whether Plaintiff would accept title. (Barnes Decl. ¶ 8.) On September 19, 2017, Defendant notified all parties “Buyer has failed to give the required notice to Seller about Disapproved Items timely pursuant to Section 9.3 of the Purchase Agreement and that failure has resulted in the termination of the Agreement.” (Wang Decl. ¶ 3, Exh. B.; Barnes Decl., Exh. F.) Defendant requested that escrow send both parties cancellation instructions. (Id.) Plaintiff refused to sign the cancellation instructions. (Rood Decl., Exh. A.)

On September 21, 2017, Mr. Sinadinos contacted Ms. Lew, Fidelity’s escrow officer handling the transaction, and stated Buyer was “ready, willing and able to close” and requested Ms. Lew to contact Buyer’s lender’s mortgage broker, Simon Darvish, to coordinate lender’s instructions and closing documents. (Rood Decl., Exh. B Lew Depo. at 57:13-58:1.) Ms. Lew never received lender instructions or anything further from Mr. Darvish or Buyer’s lender. (Rood Decl., Exh. B. Lew Depo. at 58:2-25.)

Plaintiff then filed its complaint for specific performance and damages on September 27, 2017, alleging causes of action for breach of fiduciary duty, breach of contract, breach of the implied covenant, unjust enrichment, and promissory estoppel. Plaintiff concurrently recorded a Notice of Pendency of Action, filed on September 28, 2017 (the “Lis Pendens”). Defendant now seeks to remove the Lis Pendens on the grounds that Plaintiff’s is only entitled to damages and, therefore, this is not a real property claim or, even if a real property claim is at issue, Plaintiff cannot establish the probable validity of any real property claim.

CCP § 405.30 provides, in pertinent part, “At any time after notice of pendency of action has been recorded, any party, or any non-party with an interest in the real property affected thereby, may apply to the court in which the action is pending to expunge the notice….” (CCP § 405.30.) Further, “In proceedings under this chapter,

the court shall order the notice expunged if the court finds that the pleading on which the notice is based does not contain a real property claim. The court shall not order an undertaking to be given as a condition of expunging the notice where the court finds the pleading does not contain a real property claim.” (CCP § 405.31.)

A “real property claim” is defined by CCP § 405.4 as a cause of action that, if meritorious, would “affect title to, or the right to possession of, specific real property.” That is, a claim that would result in an award of damages is not sufficient to justify a lis pendens. “[A]n action for money only, even if it relates in some way to specific real property, will not support a lis pendens.” (BGJ Associates v. Superior Court (1999) 75 Cal.App.4th 952, 967.)

Here, Plaintiff has alleged a claim for breach of contract by which they seek specific performance of the Agreement. If Plaintiff is meritorious on this claim, the Property would be sold to Plaintiff, which would clearly affect title and the right to possession of the real property. Accordingly, the Court is not persuaded by Defendant’s argument that no real property claim is at issue.

Next, CCP § 405.32 provides that “the court shall order that the notice be expunged if the court finds that the claimant has not established by a preponderance of the evidence the probable validity of the real property claim.” (CCP § 405.32.) Pursuant to CCP § 405.3, “probable validity” means “that it is more likely than not that the claimant will obtain a judgment against the defendant on the claim.” (CCP § 405.3.)

The burden was on Plaintiff to produce evidence establishing the probable validity of the real property claim. (See CCP §§ 405.30, 405.32.)

First, to establish a claim for breach of contract, Plaintiff must establish: (1) the existence of the contract, (2) Plaintiffs’ performance or excuse for nonperformance, (3) defendants’ breach, and (4) the resulting damage to Plaintiff.”(Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.) Then, to obtain specific performance following a breach of contract Plaintiff must show “(1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity of the requested performance to that promised in the contract.” ( Real Estate Analytics, LLC v. Vallas (2008) 160 Cal.App.4th 463, 472.)

Plaintiff contends there is a probable validity it will prevail on its claim for specific performance even though it did not fully perform. In support, Plaintiff contends specific performance can still be enforced where the “failure to perform is only partial, and either entirely immaterial, or capable of being fully compensated.” (Civ. Code § 3392.) Plaintiff reasons its purported failure to technically accept the exceptions to title did not delay the transactions, delay payment, or otherwise cause any disruption in the transaction. Therefore, Plaintiff contends the failure was immaterial as it in no way damaged Defendant. However, Plaintiff presents no evidence showing the failure, in fact, did not delay the transaction, payment, or otherwise cause any disruption in the transaction and has failed to meet its burden as to this argument.

Plaintiff also claims specific performance must be awarded to avoid substantial forfeiture pursuant to Civil Code § 3275 because Plaintiff has already expended a lot of money in anticipation of closing escrow in the Property. Section 3275 provides “Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.” First, this argument conflates relief from forfeiture with specific performance. Plaintiff’s complaint does not allege relief from forfeiture and this argument does not demonstrate Plaintiff will be able to satisfy the elements required to establish specific performance. In addition, even if an argument regarding forfeiture were relevant, Plaintiff has also failed to establish it tendered “full compensation” to Defendant. That is, the purchase price of the Property was $9,150,000, but Plaintiff has not presented any evidence that it tendered anything beyond the initial $100,000 deposit towards the purchase price. (Rood Decl., Exh. A at 58:2-15.) While Plaintiff identifies $842,903.72 of payments made to Defendant, those payments were rent expenses or payments for the option. (Sinadinos Decl. ¶5, Exh. 1.) The Agreement required Plaintiff to pay $3,000 per month for the option, in addition to requiring Plaintiff to lease the Property for $80,00 per month. (Sinadinos Decl. ¶ 3.)

In the alternative, Plaintiff argues Defendant waived its right to require strict adherence to the contract deadlines. In support, Plaintiff presents the following evidence. During the escrow, only Plaintiff’s deposit of $100,000 was timely in the contingency phase. (Sinadinos Decl. ¶ 7). Otherwise, the parties complied with the contingencies, but not within the time frames set forth in the agreement. (Id.). More specifically, the Agreement required that Defendant or the escrow officer provide Plaintiff with a preliminary title report, disclosures, and Title Commitment with Underlying Documents

and a map with all easements plotted to scale with dimensions by August 9, 2017. (Id.) While the preliminary title report was provided on August 3, 2017, the other required documents were not provided until after the deadline. (Id.). The map purporting to be the color-coded easement map was not provided until August 15, 2017 (although the map actually required was never provided). (Id.). The Title Commitment was not provided until August 16, 2017, and Defendant’s disclosures, to the extent some were provided, were not provided until August 14, 2017. (Id.). Nonetheless, Plaintiff contends the parties continued to perform under the Agreement with neither party expressing a desire to not close escrow within or close to the September 26, 2017 proposed close of escrow date. (Id. Exh. 7.)

Indeed, “where the subsequent conduct of parties is inconsistent with and clearly contrary to provisions of the written agreement, the parties’ modification setting aside the written provisions will be implied.” (Diamond Woodworks, Inc. v. Argonaut Ins. Co. (2003) 109 Cal.App.4th 1020, 1038.) Further, “When the requirement as to time has been waived by one party he must, in order to put the other in default, not only give notice that strict compliance will thereafter be required but must allow the other party a reasonable time within which to perform.” (Tancredi v. Garrett (1962) 210 Cal.App.2d 818, 824.)

While it appears some deadlines were missed, these relate primarily to deadlines missed due to the escrow officer’s delayed provision of the Title Commitment and collateral documents, not Defendant’s delay. Plaintiff has not rebutted Defendant’s evidence that the Agreement clearly requires Plaintiff to provide written notice of its intent to accept title or terminate the Agreement and that Defendant clearly communicated that no extension of the September 17 written notice deadline would be granted. On September 17, Mr. Sinadinos even read section 9.3 aloud to Mr. Barns and at no time thereafter did Plaintiff provide written notice that Plaintiff would accept title subject to Exceptions 10 and 18.

In the alternative, Plaintiff argues the Court can find that it did timely advise Mr. Barnes that Plaintiff intended to close escrow despite any title exceptions. Plaintiff has presented evidence that on or about September 7, 2017, Mr. Sinadinos called Mr. Barnes and told Mr. Barnes that while he disapproved of some of the exceptions contained in the Commitment, Plaintiff was going to purchase the Property even if they did not get resolved. (Sinadinos Decl. ¶ 12.) He told Mr. Barnes Plaintiff wanted to close escrow, regardless of the existence of uncorrected contingencies in the Purchase Agreement as nothing was material to the purchase. (Id.) However, this evidence simply shows Plaintiff advised Defendant verbally, rather than in writing as required by the Agreement. Therefore, the Court is not persuaded this constitutes timely performance.

Lastly, Plaintiff argues the Court can find Plaintiff’s requirement to perform never arose because Plaintiff was never provided with a “scaled and dimensioned plot showing the location of any easements to be delivered to Buyer within 10 … days after the date of Agreement.” (Sinadinos Decl. ¶ 18, Exh. 19.) Plaintiff argues that as Defendant failed to perform a necessary condition precedent, it could not cancel the Agreement. The Court is not persuaded this Argument establishes Plaintiff’s likelihood of success on its claim for breach of contract and specific performance. Even accepting this as true, this would only establish the likelihood of Defendant’s breach, but Plaintiff fails to address all of the required elements to establish breach of contract and, in turn, specific performance.

Based on the foregoing, Plaintiff has failed to establish the probable validity of its claims. Accordingly, the motion to expunge the Lis Pendens is GRANTED and the Lis Pendens is expunged.

Defendant’s request for attorneys’ fees is GRANTED in the amount of $8,800 (reasonable attorneys’ fees for 10 hours at $385/hour and 10 hours at $495/hour). Plaintiff shall pay the amount to Defendant’s counsel no later than November 25, 2018.

The Court will sign the proposed order.