Judge: Daniel S. Murphy, Case: 20STCV49781, Date: 2023-08-04 Tentative Ruling

Case Number: 20STCV49781    Hearing Date: August 4, 2023    Dept: 32

BACKGROUND

            This action was initially filed on December 30, 2020. The operative First Amended Complaint was filed on March 1, 2023. The FAC is brought by Plaintiffs Harridge Development Group, LLC, Met East Holdco, LLC, Inglewood Partners, LLC, and 3240 Wilshire Associates, LLC (collectively, Harridge) against Defendants Varde Partners, Inc., Mountain Real Estate Capital, LLC, VP Met LLC, VP Inglewood, LLC, VP Wilshire, LLC, and MRECV Blake Street, LLC (collectively, Varde and MREC).

            Harridge is a real estate development company who partnered with investors Varde and MREC on numerous projects. Some of the projects sold at a profit and others sold at a loss. As a safety net for Varde and MREC to recoup their investments in the event of a loss, the parties agreed to reserve a portion of proceeds from the projects to pay for Varde and MREC’s capital contributions and minimum preferred returns. These funds are referred to by the parties as the “Withheld Promote” or “Designated Reserve.” This lawsuit involves two disputes, both concerning funds which Varde and MREC seek to withhold to cover project losses but which Harridge claims it is entitled to as profits. Harridge alleges that Varde and MREC have improperly withheld Harridge’s rightful profits. Accordingly, the FAC asserts causes of action for breach of contract, bad faith, conversion, declaratory relief, unjust enrichment, and money had and received.

            The first dispute concerns $3.4 million of Designated Reserve funds that Varde argues must be used to recoup losses from the Blake Street Project. Harridge claims that the parties agreed to transfer the funds from the Blake Street Project to the Met Project such that the funds only secured the Met Project and no other project. According to Harridge, the parties agreed that once Varde recouped its losses from the Met Project, the remainder would go to Harridge. Since the Met Project sold at a profit and Varde did not need to tap into the reserve, Harridge claims it is entitled to the entire $3.4 million.

            The second dispute concerns $730,000 of Withheld Promote funds from the profitable Inglewood Project which Varde seeks to use to cover losses from the Koreatown Project. It is undisputed that a portion of Inglewood profits were cross-collateralized to cover Koreatown losses. However, Harridge contends that Varde is not entitled to the funds because it was Varde’s own bad faith actions that caused the Koreatown Project to sell at a loss.

            On June 2, 2023, Varde filed the instant motion for summary judgment. MREC stipulated to cease defending the action in its own name and agreed to abide by any judgment entered in the action. (See May 26, 2023 Stipulation.) Harridge filed its opposition on July 12, 2023. Varde replied on July 26, 2023.

 LEGAL STANDARD

 The function of a motion for summary judgment or adjudication is to allow a determination as to whether an opposing party cannot show evidentiary support for a pleading or claim and to enable an order of summary dismissal without the need for trial. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) Code of Civil Procedure section 437c, subdivision (c) “requires the trial judge to grant summary judgment if all the evidence submitted, and ‘all inferences reasonably deducible from the evidence’ and uncontradicted by other inferences or evidence, show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” (Adler v. Manor Healthcare Corp. (1992) 7 Cal.App.4th 1110, 1119.) “The function of the pleadings in a motion for summary judgment is to delimit the scope of the issues; the function of the affidavits or declarations is to disclose whether there is any triable issue of fact within the issues delimited by the pleadings.” (Juge v. County of Sacramento (1993) 12 Cal.App.4th 59, 67, citing FPI Development, Inc. v. Nakashima (1991) 231 Cal. App. 3d 367, 381-382.)

As to each claim as framed by the complaint, the defendant moving for summary judgment must satisfy the initial burden of proof by presenting facts to negate an essential element, or to establish a defense. (Code Civ. Proc., § 437c, subd. (p)(2); Scalf v. D. B. Log Homes, Inc. (2005) 128 Cal.App.4th 1510, 1520.) Once the defendant has met that burden, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. To establish a triable issue of material fact, the party opposing the motion must produce substantial responsive evidence. (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 166.) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.)

DISCUSSION

I. Choice of Law

            Each Operating Agreement associated with the pertinent projects contains a choice of law provision selecting Delaware law to govern disputes. (Defendant’s Statement of Facts (UF) 13.) Courts favor freedom of contract and therefore apply a “strong policy favoring enforcement of [choice of law] provisions.” (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 465.) A choice of law provision will be enforced “unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue.” (Ibid.)

            All of the parties involved in this action are Delaware companies. This demonstrates a sufficient connection to Delaware. “A party's incorporation in a state is a contact sufficient to allow the parties to choose that state's law to govern their contract.” (Nedlloyd, supra, 3 Cal.4th at p. 467.) Moreover, Harridge has “identified no fundamental policy of our state at issue in its essentially contractual dispute with” Varde. (See id. at p. 468.) Therefore, there is no fundamental policy in conflict and no reason why California has a greater interest in this dispute. Therefore, the analysis will proceed under Delaware law in accordance with the parties’ choice of law provision.

II. Dispute 1 (Blake Street Project/Met Project)

It is undisputed that $3.4 million of Promote Proceeds were withheld from the Silver Lake, Pinecrest, and Tramonto Projects in order to secure the Blake Street Project. (UF 19.) This is the Designated Reserve at issue. (UF 20.) Varde contends that the funds were properly calculated and withheld under the applicable Operating Agreements. (UF 22-23.) Harridge contends that the funds were initially properly withheld, until the Designated Reserve was transferred from the Blake Street Project to the Met Project in March 2018. (Plntf.’s Resp. to UF 22-23.) In other words, but for the purported transfer in March 2018, the funds would be properly withheld under the Operating Agreements. Therefore, the issue is whether such a transfer occurred.

            To that end, Harridge relies on phone calls and a Term Sheet between the parties, which purportedly demonstrate the parties’ intent to transfer the $3.4 million security from the Blake Street Project to the Met Project. (Plntf.’s Additional Facts (AF) 76, 82, 84, 88.) Varde’s managing director, Brendan Bosman, supposedly told Harridge’s CEO, David Schwartzman, that Varde needed more cross-collateralization for the Met Project and proposed that the Withheld Promote securing the Blake Street Project be transferred to the Met Project. (AF 76.) Furthermore, the parties executed a Term Sheet providing that “Harridge has agreed to provide certain promote reserves . . . amounting to approximately $3.4mm, as additional security for the return of Värde Member’s capital contributions and Preferred Return on the [Met] Project.” (UF 29.) The Term Sheet further provides that if the Met Project results in a loss, “the Reserves will be distributed first to Värde until it has achieved such Preferred Return and return of capital, with any remainder then being distributed to Harridge.” (Ibid.)         

However, the Term Sheet served merely as a letter of intent that was by its own terms nonbinding. (UF 32.) Harridge acknowledges that the Term Sheet is nonbinding and confirms that it is not suing on the Term Sheet. (UF 33; Opp. at p. 12, fn. 7.) In any case, the Term Sheet does not state that the reserve funds from the Blake Street Project would be transferred to the Met Project. Furthermore, the Operating Agreements for the pertinent projects contain integration clauses and prohibit modifications without written consent. (UF 17.) In other words, neither the oral conversations between Bosman and Schwartzman, nor the nonbinding Term Sheet, could modify any of the Operating Agreements. (See Kanno v. Marwit Capital Partners II, L.P. (2017) 18 Cal.App.5th 987, 1002.) And Harridge does not contend that either the oral conversations or the Term Sheet are themselves contracts. Therefore, the Operating Agreements are the only contracts that Varde could have breached.

A plaintiff alleging breach of contract must prove (1) the existence of a contractual obligation, (2) breach of that obligation, and (3) damages resulting from the breach. (VLIW Tech., LLC v. Hewlett-Packard Co. (Del. 2003) 840 A.2d 606, 612.) Here, none of the Operating Agreements contains a term providing for the transfer of reserve funds from the Blake Street Project to the Met Project. In fact, the Operating Agreements indisputably provide, to this day, that the Designated Reserve funds are available to secure Varde and MREC’s return of capital contributions and preferred returns on the Blake Street Project. (UF 23.) Even if the parties initially intended to modify the Operating Agreements to effectuate the transfer that Harridge advocates for, it is undisputed that they ultimately did not amend the Operating Agreements to that effect. Therefore, Varde and MREC did not breach any contract term by withholding the $3.4 million to cover their Blake Street losses.

“The implied covenant of good faith and fair dealing inheres in every contract and requires ‘a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits’ of the bargain.” (Kuroda v. SPJS Holdings, L.L.C. (Del.Ch. 2009) 971 A.2d 872, 888.) Varde and MREC also could not have acted in bad faith. The Blake Street Project sold at a loss through no fault of either party (FAC ¶ 19), and Varde/MREC merely withheld funds that they were contractually entitled to under such circumstances. (See Glaxo Grp. Ltd. v. Drit LP (Del. 2021) 248 A.3d 911, 920 [“One generally cannot base a claim for breach of the implied covenant on conduct authorized by the terms of the agreement”].) Therefore, Varde and MREC cannot be liable under the first and second causes of action as a matter of law.  

III. Dispute 2 (Inglewood Project/Koreatown Project)

            As with above, it is undisputed that the pertinent Operating Agreements provided for the cross-collateralization of project proceeds to cover shortfalls. (UF 46-47.) Specifically, the Inglewood Withheld Promote was contractually dedicated to making up the Koreatown shortfall. (UF 67.) Varde exited the Koreatown Project, as it was entitled to under the Operating Agreement. (UF 51-52.) Harridge wished to remain as the developer on the Koreatown Project and assisted in the efforts to find a buyer for Varde’s interest. (UF 54.)

In March 2020, as a deal was approaching to sell Varde’s interest, Harridge requested additional capital from Varde to fund debt service for Koreatown. (UF 59, 63.) Varde declined to provide additional capital, purportedly because it was about to exit the project. (UF 60.) However, Harridge and Varde entered into a Letter Agreement, whereby Harridge and its new capital partner would service the debt, but Harridge would be reimbursed for the payments. (UF 61.) There was no default on the debt, and Varde reimbursed Harridge for the debt payments. (UF 62.)

The Koreatown Project was sold in July 2020. (UF 58.) The sale resulted in a deficiency that did not provide Varde with its full preferred return. (UF 65-66.) The Inglewood Project was sold at a profit, and Varde withheld approximately $730,000 to cover the Koreatown shortfall. (UF 68.) This is the Withheld Promote that is the subject of this second dispute.

While Harridge does not dispute that the pertinent Operating Agreements cross-collateralized the Inglewood proceeds to cover Koreatown, Harridge argues that Varde cannot create the conditions that cause the shortfall and then force Harridge to pay for its mistake. Specifically, Harridge contends that Varde forced a distressed sale of Koreatown by exiting when it lacked capital to continue the investment and making Harridge find a buyer as quickly as possible, which resulted in a purchase price that was lower than what would otherwise have been obtained. (FAC ¶¶ 24-25; Plntf.’s Resp. to UF 51.) In essence, Harridge argues that Varde breached the implied covenant of good faith and fair dealing.

“The implied covenant [of good faith and fair dealing] seeks to enforce the parties' contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them.” (Gerber v. Enter. Prods. Holdings, LLC (Del. 2013) 67 A.3d 400, 418.) “Express contractual provisions always supersede the implied covenant, but even the most carefully drafted agreement will harbor residual nooks and crannies for the implied covenant to fill.” (Id. at p. 419.) While parties are expected to exercise contractually-granted discretion in good faith, the implied covenant “should not be used to imply terms that modify or negate an unrestricted contractual right authorized by an agreement.” (Glaxo, supra, 248 A.3d at p. 920.)

            Here, it is undisputed that the Koreatown Operating Agreement gave Varde the “absolute and unconditional right to sell or require the sale of the project at any time.” (UF 52.) Because the contract gave Varde an unrestricted contractual right to withdraw from Koreatown, that right cannot be altered by the implied covenant. (See Glaxo, supra, 248 A.3d at p. 920.) To imply a term into the contract whereby Varde cannot recoup its losses from Koreatown if its withdrawal causes a shortfall would contradict the express terms of the contract by restricting Varde’s right to withdraw. In sum, Varde did not breach the implied covenant of good faith and fair dealing because there can be no implied term restricting its right to withdraw from Koreatown.

            Varde also did not breach any express contract term because the right to unilaterally withdraw, and to withhold the Inglewood Promote to cover shortfalls, is indisputably expressly allowed by the Operating Agreements. Therefore, both the fifth and sixth causes of action fail.

IV. Declaratory Relief

            Four elements are required to consider a controversy suitable for declaratory judgment: (1) the controversy must involve a claim of right or other legal interest of the party seeking declaratory relief; (2) the claim of right or other legal interest must be asserted against one who has an interest in contesting the claim; (3) the conflicting interests must be real and adverse; and (4) the issue must be ripe for judicial determination. (Weiner v. Selective Way Ins. Co. (Del. Super. Ct. 2002) 793 A.2d 434, 439.)

            Varde argues that there is no actual controversy regarding the parties’ rights and duties with respect to the Designated Reserve and Withheld Promote. As demonstrated above, Varde/MREC properly withheld the funds as a matter of law as their contractual right. Accordingly, the fourth and eighth causes of action fail.

V. Conversion, Unjust Enrichment, Money Had and Received

            “Conversion is an act of dominion wrongfully exerted over the property of another, in denial of his right, or inconsistent with it.” (Arnold v. Society for Sav. Bancorp, Inc. (Del. 1996) 678 A.2d 533, 536.) Unjust enrichment occurs when a defendant receives a benefit and unjustly retains the benefit to the loss of another. (Kuroda, supra, 971 A.2d at p. 891.) “Whenever one person has in his hands money equitably belonging to another, that other person may recover it by assumpsit for money had and received.” (Mass. Mut. Life Ins. Co. v. Certain Underwriters at Lloyd's of London (Ch. Sep. 24, 2010, No. 4791-VCL) 2010 Del. Ch. LEXIS 198, at *12.)

            It is undisputed that the Designated Reserve has been maintained in a segregated account at Harridge’s request and that the Withheld Promote continues to be held in the Inglewood joint venture entity. (UF 72-73.) This prevents wrongful distribution of the money while the dispute is pending. Therefore, Defendants have not wrongfully taken any money for purposes of conversion, unjust enrichment, and money had and received. Additionally, as discussed above, Varde and MREC properly withheld the funds under the applicable contracts. The third, seventh, ninth, and tenth causes of action fail as a matter of law.

CONCLUSION

            Defendants’ motion for summary judgment is GRANTED.