Judge: Mark H. Epstein, Case: 22SMCV01481, Date: 2025-02-03 Tentative Ruling

Case Number: 22SMCV01481    Hearing Date: February 3, 2025    Dept: I

This case is the result of an agreement that limits the development of certain property, known as Lot 7.  The limit came into effect as the result of a settlement between various parties.  The settlement allowed development on a number of parcels, but not Lot 7.  Monte Nido Valley Community Association was required in the settlement agreement to enforce those limits, and anyone who purchases the land is purportedly bound to those limits because they are included in the CC&R’s.  Sadly, however, even though the restrictions were supposed to be recorded, they were not.  At the time of the settlement, Lot 7 was owned by Saddle Peak Associates.  Saddle Peak and various related entities (referred to collectively as Saddle Peak) sold Lot 7 to West Pointe Homes (WPH).  WPH later decided to sell Lot 7.  One potential buyer dropped out because the lot was not buildable or the low price was suspicious (which turned out to be a very good call).  Plaintiff Reith was then identified as a potentially interested buyer and he purchased Lot 7.  He sues claiming he did not know of the restriction (because it was not recorded).  He sued WPH—the seller—stating that WPH had an affirmative duty to disclose the restriction.  WPH then filed a cross action against the Saddle Peak defendants, seeking equitable indemnity.  WPH asserts that this is all Saddle Peak’s fault because it failed to record the restriction when it had an obligation under the settlement agreement to do so.  The Saddle Peak parties have demurred to the indemnity claim.

Equitable indemnity typically requires that both the indemnitor and the indemnitee be joint tortfeasors, meaning that they are jointly liable to a party in tort.  Here, WPH seems to agree there is no equitable indemnity in tort because Saddle Peak cannot be liable to Reith in tort.  Instead, it appears that Saddle Peak argues for a form of implied contractual indemnity, which is often treated as a form of equitable indemnity.  Such indemnity occurs where the indemnitor and indemnitee are both parties to a contract such that the contract supports a right to indemnification in that both contracting parties are liable to a plaintiff.  For example, if Saddle Peak and WPH had a contractual duty to inform anyone who bought Lot 7 from WPH of the restriction, then there could be indemnity as between them in this case.  (There is no such express term in any contract between WPH and Saddle Peak, though.)  But the bottom line is that there can be no implied or equitable indemnity without liability.  (Jocer Enterprises, Inc. v. Price (2010) 183 Cal.App.4th 559.)  The problem here is finding the contract.  There is the purchase contract by which WPH bought the property from Saddle Peak, but it would not impose any liability in favor of Reith by its terms.  There is the purchase agreement between WPH and Reith, but Saddle Peak is not a party to it.  And there is the settlement agreement.  That is the agreement upon which WPH hangs its hat and that is the agreement by which Saddle Peak had a duty to record the restriction.  However, WPH is not a party to that agreement.  WPH argues, though, that had Saddle Peak recorded the restrictions, then WPH would have had a duty to disclose them to Reith, or even if not, the fact that the restrictions were recorded would put Reith on legal notice of them and there would be no suit at all.  But that is not a joint contractual duty; it is a successive one (at best).  (WPH also argues that the contract itself imposes a sort of duty in the attachments.  The court dealt with that issue in the last demurrer, and the court’s views have not changed in that regard.)

The major problem, as just stated, WPH is not a party to the settlement agreement.  As such, there is no common contract to support the indemnity argument, and that is required.  (Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp. (2003) 111 Cal.App.4th 1328.)  WPH argues, though, that it is a third party beneficiary of the settlement agreement, and that the arguments to the contrary are not proper on demurrer.  The court is not so sure.  The elements for third party beneficiary status are settled.  The party claiming that status must show that it is (1) likely to benefit from the contract; (2) a motivating purpose of the contracting parties was to provide that benefit to the third party; and (3) permitting the breach of contract action against one of the contracting parties is consistent with the contract’s objectives and the contracting parties’ expectations.  (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817.)  The biggest problem here is prong 2.  The settlement agreement expressly states that there are no intended third party beneficiaries.  WPH downplays that language, stating that it is not dispositive.  While it might not be dispositive where the contract otherwise provides for such a benefit in some discernable way, it is a strong indicator of intent.  When the parties expressly state their intent in writing, a court should be slow—even on demurrer—to go the other way absent some good reason to do so grounded in the contract itself or perhaps potential parol evidence.  So, for example, in a case where there was to be a payment made to a third party, the “no third party beneficiary” clause might well have to give way to the third party’s argument that it was intended to benefit from the payment of that money.  Usually, that is not hard to discern from the language.  The court is hard pressed to understand the argument here, though.  To be sure, WPH and all future buyers of Lot 7 were to be burdened by the settlement agreement.  WPH could not develop Lot 7, and neither, arguably, can Reith.  But that is a burden; not a benefit.  The argument has to be that WPH would benefit by the contract that this benefit was a motivating purpose of the contracting parties.  The court has trouble seeing how one can glean that from the contract, and certainly it is hard to see how all contracting parties were motivated to enter into the contract to provide a benefit (if there is a benefit) to a third party.  WPH notes that it was no future phantom.  Its purchase from Saddle Peak was in escrow at the time of the settlement agreement.  But that only makes the no third party beneficiary argument stronger.  If WPH was known to the parties, and if the parties intended WPH to be a beneficiary, then the clause makes no sense at all and WPH is just asking the court to strike it or amend it, which the court cannot do.  WPH argues that “future owners” were to be bound by the Agreement, and WPH was a future owner.  The court agrees with the premise, at least to a point.  The CC&R’s would bind future owners, and the CC&R’s were changed by the contract.  But that is a step removed from saying that future owners are bound by the settlement agreement itself.  For example, under some circumstances the CC&R’s might be amended (although amending this one is a bit harder); but doing so would not change the settlement agreement.  However, even putting that aside, again, it might at most establish that WPH is a third party burden-bearer, not a third party beneficiary.  Moreover, the supposed “benefit”—that of having the restriction recorded so there is knowledge of it—is a bit vague and suggests that at most WPH is an incidental beneficiary, not an intended one where the parties’ motivation was to support.  The settlement agreement settled a dispute between the parties; that was the motivation, not to aid WPH. 

Because WPH is not a third party beneficiary, the demurrer is SUSTAINED.  This is not the first time we are here.  The court sustained the last demurrer on the same ground.  The court granted leave to amend, but it appears that WPH cannot amend.  The real remedy here is for WPH to sue Saddle Peak for breach of contract—if any there was—in the purchase agreement between WPH and Saddle Peak.  There are limits to that ability of course.  WPH must allege an actual breach and it must bring the suit in a timely way.  And there might be a tort that WPH could bring.   But indemnity will not do the trick.  The demurrer is SUSTAINED WITHOUT LEAVE TO AMEND.