Judge: Monica Bachner, Case: 21STCV24843, Date: 2023-02-21 Tentative Ruling

Department 71: Attorneys who elect to submit on these published tentative rulings, without making an appearance at the hearing, may so notify the Court by communicating this to the Department's staff at (213) 830-0771 before the set hearing time.  See, e.g., CRC Rule 324(b).   All parties are otherwise encouraged to appear by Court Call for all matters.

Case Number: 21STCV24843    Hearing Date: February 21, 2023    Dept: 71

Superior Court of California

County of Los Angeles

DEPARTMENT 71

TENTATIVE RULING

Defendant’s motion for summary judgment is denied.  Defendant’s motion for summary adjudication is denied as to Issues 1, 3, and 4, and granted as to Issue 2.

Defendant Mechanics Bank (“Defendant”) moves for summary judgment or, in the alternative, summary adjudication against Plaintiff Bear Valley 2005, LLC (“Plaintiff”) on the following grounds: (1) Plaintiff’s first cause of action for breach of contract has no merit because it is premised upon a promissory estoppel and/or waiver claim, and there is no triable issue of fact as to whether Plaintiff can meet its burden of proof on such a claim [Issue No. 1], (2) Plaintiff’s second cause of action for breach of the implied covenant of good faith and fair dealing has no merit because there is no special relationship between the parties to support the claim, the claim is premised on a promissory estoppel and/or waiver claim and Plaintiff cannot prove a triable issue of one or more material facts exists at to those claims, and MB’s payoff demand was provided within the statutory deadline [Issue No. 2], (3) Plaintiff’s third cause of action for fraud has no merit because it is premised on a promissory estoppel and/or waiver claim and there is no triable issue of fact as to whether Plaintiff can meet its burden of proof for that claim [Issue No. 3], and (4) Plaintiff’s fourth cause of action for negligent misrepresentation has no merit because it is also premised on a promissory estoppel and/or waiver claim and there is no triable issue of fact as to whether Plaintiff can meet its burden of proof for that claim [Issue No. 4].  (Notice of Motion, at pgs. 2:15-3:5.)

Procedural Background

On July 6, 2021, Plaintiff filed its complaint, alleging four causes of action: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) fraud, and (4) negligent misrepresentation.  On June 10, 2022, Defendant filed the instant motion.  Plaintiff filed its opposition on February 7, 2023.  Defendant filed its reply on February 16, 2023.

Summary of Allegations

On or about January 11, 2015, Plaintiff and Rabobank, N.A. a National Banking association (“Rabobank”) entered into a written agreement (the “Credit Agreement”), whereby the bank agreed to loan Plaintiff up to $26,000,000 and actually lent $14,000,000 (the “Loan”).  (Compl. ¶¶ 5, 6; Ex. 1 – a copy of the agreement.)  Pursuant to the Credit Agreement, Plaintiff also entered into a “swap agreement” titled the Hedging Agreement (“Swap Agreement”) with Rabobank. (Compl. ¶ 7.)  The Swap Agreement enabled Plaintiff to protect itself against the risk of interest rate fluctuations as to an amount equal to the unpaid principal balance of the Loan through the maturity date of the Loan.  (Compl. ¶ 7.)  On or about August 29, 2019, Rabobank merged with Defendant and the latter assumed all of the former’s assets and liabilities, including the Credit Agreement and the Loan.  (Compl. ¶ 9.)

The maturity date for the Loan was January 10, 2021, but the Credit Agreement provided Plaintiff with the right to extend the term of the Loan for a period of 5 years at one of two interest rates selected by Plaintiff.  (Compl. ¶ 10.) 

Therefore, in 2018, Plaintiff’s managing member, Joseph Michael (“Michael”), began discussing with Defendant’s vice president Lourdes Raval (“Raval”), about refinancing or extending the Loan.  (Compl. ¶¶ 12, 13.) 

Raval accepted Michael’s verbal notice of Plaintiff’s decision to extend the Loan and, subsequently, when Michael inquired about the status of the underwriting for the Loan extension, Raval told Michael that the underwriting was in process and that she expected it to be completed well in advance of the Loan’s maturity date on January 10, 2021.  (Compl. ¶¶ 10, 15, 16.)  In October 2020, Raval again confirmed Plaintiff’s right to extend the Loan under the Credit Agreement and throughout November and December 2020, informed Michael that Defendant was still conducting its underwriting process.  (Compl. ¶ 17.)  In reliance on Ms. Raval’s representations that the bank will extend the Loan, Plaintiff did not pursue formal loan applications with third-party lenders.  (Compl. ¶ 18.)

“Finally, on December 28, 2020 – 13 days before the Loan was due, [Defendant] informed Plaintiff that it had completed its underwriting and made a written proposal to Plaintiff to extend the term of the Loan by 3 years at a fixed interest rate of 4.25%.”  (Compl. ¶ 21.) 

“Plaintiff rejected the proposal, informing [Defendant] that the Credit Agreement allowed Plaintiff to select either a variable rate equal to the existing variable rate and fixed by a swap agreement or a fixed rate of 3.82%.  Plaintiff informed [Defendant] that given the current swap rate and Plaintiff’s belief as to the direction interest rates would go in the next five years, Plaintiff would select the variable rate fixed by a swap agreement which would result in a significant savings to Plaintiff on the intertest due under the Loan.”  (Compl. ¶ 22.) 

“[Defendant] refused to extend the Loan under the terms provided by the Credit Agreement.”  (Compl. ¶ 23.) 

As a result of Defendant’s conduct, Plaintiff was unable to extend the Loan or obtain alternative financing in time to repay the Loan prior to its maturity date.  (Compl. ¶ 26.)  Instead, Plaintiff was forced to obtain funds from a new lender sufficient to repay the amount due under the Loan as quickly as possible in order to avoid defaulting under the Loan and incurring additional interest and penalties.   (Compl. ¶ 26.) 

“On February 19, 2021, Plaintiff paid under protest the full amount demanded by [Defendant] in the sum of $12,828,795, which included default interest for the entire period from the maturity date of the Loan to February 19, 2021.”  (Compl. ¶ 29.) 

Evidentiary Objections

Plaintiff’s 2/7/23 evidentiary objections overruled as to 1, 5, 6 and 7, and sustained as to 2, 3, and 4.  

Defendant’s 2/16/23 evidentiary objections to are sustained as to 1, 2, 3, 4, 5, 6, 7, 8, 9, 12, 13 and overruled as to 10, 11, 14, 15, 16, 17, 18, 19, 20, 21, 22, and 23.

Analysis

Breach of Contract (1st COA)

“To prevail on a cause of action for breach of contract, the plaintiff must prove (1) the contract, (2) the plaintiff’s performance of the contract or excuse for nonperformance, (3) the defendant’s breach, and (4) the resulting damage to the plaintiff.”  (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1186.)

Defendant argues that Plaintiff’s breach of contract claim fails because the Credit Agreement clearly required Plaintiff to give written notice of its election to exercise the five-year extension and Plaintiff did not give the written notice.  (Motion, p. 10:22-23, citing Defendant’s Separate Statement of Undisputed Facts (“DUF”), ¶¶ 8, 9.) 

The Credit Agreement states in relevant part:

Borrower may elect to extend the Maturity Date for a period of five (5) years (the “Extension Period”) subject to the satisfaction of each of the following [among three other] terms and conditions (all of which must be satisfied prior to the commencement of the Extension Period):

(i) Borrower gives written notice to the Lender of its election to extend the Maturity Date not less than one hundred eighty (180) days prior to the initial Maturity Date (provided that the failure to give such notice will be deemed an election by the Borrower not to extend the Maturity Date of the Loan) ….

([DUF ¶ 8] Complaint, Ex. 1 – the Credit Agreement, p. 2, Section 1.04(d) [emphasis added].)

           The Credit Agreement also states that “[t]he unpaid principal balance of, all unpaid accrued interest on, and all other charges under this agreement with respect to the Loan, shall be paid on January 10, 2021, or in the event the Maturity Date is extended as provided in clause (d) [above], January 10, 2026 (the ‘Maturity Date’).”  (Complaint, Ex. 1 – the Credit Agreement, p. 2, Section 1.04 (c) [emphasis in original].)

           Therefore, according to the Defendant, Plaintiff was required to give written notice of its election to extend the Loan by July 14, 2020, no less than 180 days prior to January 10, 2021 (the Maturity Date), but failed to do so.  ([DUF ¶¶ 6, 9] Evid. Code, § 452, subd. (f) [providing that a court may take judicial notice of “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy”].) 

Defendant submits as evidence the declaration of Raval, its Vice President/Lead Relationship Manager.  Raval attests to the following facts.  She was Plaintiff’s primary point of contact for the duration of the loan at issue in this case.  (Raval Decl., ¶ 2; Compl., ¶ 12 [alleging that Plaintiff’s managing member, Michael, “dealt primarily with [Raval],” the relationship manager responsible for Plaintiff’s dealing with the bank”].)  Plaintiff did not give Raval written notice of its election to exercise the option to extend the maturity date of the Loan by five years by or before July 14, 2020.  ([DUF ¶ 9] Raval Decl., ¶ 3.)  In addition, although the Complaint alleges that Raval accepted Michael’s verbal notice of its decision to extend the loan (Compl. ¶ 15), Plaintiff did not give Raval any notice (whether written, verbal, or other form) of its election to exercise the five-year extension by or before July 14, 2020.  ([DUF ¶ 10] Raval Decl., ¶ 6.)  It was not until October 2020 that Plaintiff gave Raval notice of its desire to exercise the five-year extension.  ([DUF ¶ 8] Raval Decl., ¶ 8.)  However, at that point, it was too late for Plaintiff to give written notice of its desire to exercise the five-year-extension and, therefore, an extension was entirely at the discretion of the Defendant.  ([DUF ¶ 8] Raval Decl., ¶ 8.) 

Defendant also argues, to the extent Plaintiff is alleging that it did not need to provide written notice, Plaintiff is required to show that the Defendant waived or is estopped from asserting the provision in the Credit Agreement, which prohibits any amendment, change, modification, alteration, and termination without Defendant’s written consent.  (Motion, pgs. 10:24-11:2, fn. 1, citing Compl., Ex. 1, Section 10.07 [“The Loan Documents may not be amended, changed, modified, altered, or terminated without the prior written consent of all Parties to the respective Loan”].)

           Defendant has met its burden of showing that Plaintiff’s first cause of action for breach of contract has no merit by showing that at least one element (Plaintiff’s performance) cannot be established.  (Civ. Code Proc., § 437c, subd. (p)(2).)  Therefore, 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. 

           In opposition, Plaintiff argues that Article 8 of the Credit Agreement gave it the right to give verbal notice of its decision to extend the Loan and it exercised that right.  (Plaintiff’s Separate Statement of Undisputed Material Facts (the “Parties UMF”), ¶¶ 8, 9.)  Article 8, which is titled “Notices,” provides in relevant part:

Borrower requests that Lender accept, and Lender may, at its option, accept and is entitled to rely and act upon any Notices purportedly given by or on behalf of Borrower, even if not made in a manner specified herein (including Notices made verbally, by telephone, telefacsimile, email, or other electronic means of communication), were incomplete or were not preceded or followed by any other form of Notice specified herein, or the terms thereof, as understood by the recipient, varied from any confirmation thereof.

(Complaint, Ex. 1 – the Credit Agreement, p. 15, Article 8 - Notices [emphasis added].)  Michael testifies in his declaration that in June 2020, he spoke with Raval on the telephone and exercised Plaintiff’s option to extend the loan over the phone.  ([UMF, ¶ 9] Michael Decl., ¶ 23.)

           In reply, Defendant argues that when general (here, Article 8) and specific (here, the written notice requirement) provisions of a contract are inconsistent, the specific provision controls.  (Reply, pg. 3:3-22.)  Defendant argues that Article 8 is not only general, “ungrammatical, and …impossible to parse” (Reply, pg. 3:23-24), but that “[e]ven assuming that Article 8 of the Credit Agreement were interpreted to render the specific ‘written notice’ requirement of Section 1.04(d) meaningless or nugatory, it is important to point out that Article 8 vests the lender with discretion to accept otherwise non-conforming oral notice by the borrower (‘Lender may, at its option, accept …’).  In other words, Article 8 does not create any affirmative obligation on the part of the Defendant to accept purported oral notice.”  (Motion, pg. 4:10-14.) 

           Contrary to Defendant’s argument, the Court does not find that the written notice requirement (found in Section 1.04(d) of the Credit Agreement) general or impossible to parse.  The Court also does not find the written notice requirement and Article 8 inconsistent.  The latter does not state, for example, that Article 8 requires the lender to accept verbal notice even though Section 1.04(d) requires written notice.  Instead, it gives the lender the option of choosing to accept the notice via verbal.  In other words, the lender does not have to accept the verbal notice under the express terms of the contract, but can choose to do so.

Plaintiff has met its burden of showing a triable issue of material fact exists as to its first cause of action for breach of contract, specifically, its performance under the Credit Agreement.  On one hand, Raval testifies that she never received verbal or other notice of Plaintiff’s election to extend the Loan.  On the other hand, Michael testifies that he gave Raval verbal notice and she accepted it.  The Court cannot determine which witness is more credible on this motion.  (American Airlines, Inc. v. Sheppard, Mullin, Richter & Hampton (2002) 96 Cal.App.4th 1017, 1049 [“Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge, whether he is ruling on a motion for summary judgment or for a directed verdict”] (internal quotations and citations removed).) 

For those reasons, summary adjudication is DENIED as to the first cause of action for breach of contract.

Breach of the Implied Covenant of Good Faith and Fair Dealing (2^nd COA)      

“Every contract imposes on each party a duty of good faith and fair dealing in each performance and in its enforcement.” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1393 (“Careau”).) “Simply stated, the burden imposed is ‘“that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.”’ [Citations.] Or, to put it another way, the ‘implied covenant imposes upon each party the obligation to do everything that the contract presupposes they will do to accomplish its purpose.’ [Citation.]” (Ibid.)

“A ‘“breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself” and it has been held that “[b]ad faith implies unfair dealing rather than mistaken judgment.... [Citation.]” [Citation.]’ [Citation.]” (Careau, supra, 222 Cal.App.3d at p. 1394.)

Defendant argues that Plaintiff’s breach of the implied covenant of good faith and fair dealing fails (among other things) because an ordinary arm’s length commercial lender-borrower relationship is insufficient basis for the tort.  (Motion, pg. 11:5-7.)  Moreover, that Plaintiff’s Complaint does not allege facts establishing a special relationship” exists between the parties to justify extending tort liability.  (Motion, pg. 11:12-14.) 

“[T]he recognition of a tort remedy for a breach of the implied covenant in a noninsurance contract has little authoritative support.” (Careau, supra, 222 Cal.App.3d at p. 1399.)  In addition, “a lender and commercial borrower [do] not share a special relationship sufficient to justify a tort claim.”  (Ibid.)

However, a tort claim may arise where “the nature of the contract … reflects unequal bargaining strength between the parties, an inadequacy of ordinary contract damages or other remedies, adhesiveness of contract provisions adversely impacting the damaged party which are either neutral toward or benefit the other, public concerns that parties to certain types of contracts conduct themselves in a particular manner, the reasonable expectations of the parties or a fiduciary relationship in which the financial dependence or personal security by the damaged party has been entrusted to the other.”  (Mitsui Manufacturers Bank v. Superior Court (1989) 212 Cal.App.3d 726, 731.)

In Careau, the Court of Appeal held the case presented a common commercial banking transaction because (among other things) there was “no indicia of unequal bargaining here, no adhesive agreements, no indication that one party had any particular advantage over the other,” and the central document “was the product of meaningful negotiations between the parties.”  (Careau, supra, 222 Cal.App.3d at p. 1400.)

Here, it is undisputed that Plaintiff’s manager was Michael, he was a
sophisticated businessman who has taken out many commercial loans,” and “read every single word of the Credit Agreement before signing it.”  (The Parties’ UMF, ¶¶ 2, 3, and 4.)

Accordingly, Defendant has met its burden of showing that Plaintiff’s second cause of action for breach of the implied covenant of good faith and fair dealing has no merit by showing that a special relationship or other factors that can give rise to the tort cannot be established.  (Civ. Code Proc., § 437c, subd. (p)(2).)   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. 

In opposition, Plaintiff argues that the Complaint does not allege a claim for tortious breach of the implied covenant and does not seek tort damages.  (Opposition, pg. 17:8-9.)  Instead, “[i]t alleges a contractual breach of the implied covenant and seeks the same contract damages sought in the first cause of action for breach of contract ….”  (Opposition, pg. 17:9-11.)  However, “[i]f the allegations [in a complaint] do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated.”  (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d at p. 1395.)  “Thus, absent those limited cases where a breach of a consensual contract term is not claimed or alleged, the only justification for asserting a separate cause of action for breach of the implied covenant is to obtain a tort recovery.”  (Ibid.)

Here, Plaintiff has admitted in its opposition that the complaint seeks the “same contract damages” sought in the first cause of action for breach of contract.  The first cause of action for breach of contract and second cause of action for breach of implied covenant of good faith and fair dealing are also based on the same facts.  The first cause of action alleges that the Defendant breached the Credit Agreement by failing and refusing to extend the term of the loan on the terms and conditions provided under the Credit Agreement.  (Compl., ¶ 32.)  The second cause of action also essentially alleges the same thing; that the Defendant failed to honor the Credit Agreement by (1) affirming to Plaintiff that the option to extend the loan under the agreement was effective, (2) waiting until 13 days prior to the Maturity Date of the Loan to inform Plaintiff that it had completed the underwriting in order to coerce Plaintiff to accept the Loan, (3) not accepting Plaintiff’s offer to repay the Loan on time, and (4) failing to provide an immediate proper payoff statement for the Loan so that the Loan could be repaid on February 2, 2021.  (Compl., ¶ 38.)  To the extent Plaintiff is alleging that the Credit Agreement did not expressly require Defendant to do any of those things, “[t]he scope of conduct prohibited by the implied covenant depends on the purposes and express terms of the contract.”  (Digerati Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal.App.4th 873, 885.)  Therefore, to the extent that Plaintiff’s second cause of action “alleges a breach of obligations beyond the agreement's actual terms, it is invalid.”  (Guz v. Bechtel Nat. Inc. (2000) 24 Cal.4th 317, 352.) 

Accordingly, the Court finds that Plaintiff has failed to meet its burden of showing a triable issue of material fact exists as to its second cause of action for breach of the implied covenant of good faith and fair dealing. 

For those reasons, summary adjudication is GRANTED as to the second cause of action for breach of the implied covenant of good faith and fair dealing.

Fraud and Negligent Misrepresentation (3^rd and 4^th COA)

The elements of fraud are: “(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.”  (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 184.)

“The tort of negligent misrepresentation is similar to fraud, except that it does not require scienter or an intent to defraud.”  (Tenet Healthsystem Desert, Inc. v. Blue Cross of California (2016) 245 Cal.App.4th 821, 845.)  “[T]he same elements of intentional fraud also comprise a cause of action for negligent misrepresentation, with the exception that there is no requirement of intent to induce reliance [citation]….”  (Ibid.)  To sufficiently plead misrepresentation, the pleading must state “facts which show how, when, where, to whom, and by what means the representations were tendered. [Citation].”  (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1060 [internal quotations omitted].) 

Here, Defendant argues that Plaintiff’s fraud and negligent misrepresentation claims fail because Plaintiff relies on the claim that Defendant waived or is estopped from asserting the written notice requirement in the Credit Agreement.  (Motion, pgs. 12:19-13:5.)

However, as discussed above, the Court has found that Plaintiff has met its burden of showing that a triable issue of material fact exists as to whether Plaintiff gave verbal notice to exercise its right to extend the contract before the Maturity Date expired.  Defendant has not filed a reply explaining why Article 8 – Notices in the Credit Agreement fails to support Plaintiff’s argument when it expressly states the lender can accept notices under the agreement verbally even if the agreement provides otherwise.  

In addition, Defendant’s other argument, that the fraud claim fails because the Complaint is vague is not enough to meet its burden on summary judgment.  (Motion, pg. 12:21-25.)  If the Defendant found the Complaint vague, it should have filed a demurrer.  In its reply, Defendant does not address Plaintiff’s opposition to the request for summary adjudication of the fraud and negligent misrepresentation causes of action. 

For those reasons, summary adjudication is DENIED as to the third cause of action for fraud and fourth cause of action for negligent misrepresentation.

Based on the foregoing, Defendant’s motion for summary judgment is denied.  Defendant’s motion for summary adjudication is granted as to the second cause of action, but denied as to the first, third, and fourth causes of action. 

Dated:  February 21, 2023

Hon. Monica Bachner

Judge of the Superior Court