Judge: William D. Claster, Case: 19-01114045, Date: 2022-10-24 Tentative Ruling
Defendants move the Court for an order determining an undertaking for their appeal of the judgment in this action. For the reasons set forth below, the Court finds that pursuant to CCP § 917.4, Defendants are to post an undertaking in an amount representing 481 days’ worth of property taxes plus any associated late payment penalties on 2022-23 and 2023-24 property taxes, as well as any late payment penalties that accrue during the appeal period on previous years’ property taxes.
The City’s unopposed request for judicial notice is GRANTED.
I. Relevant Background
The Court assumes the parties’ familiarity with the factual background and procedural history of this case. As relevant to this motion, on September 6, 2022, the Court entered judgment in favor of the City and against Defendants. Specifically, the judgment provided:
Roughly a week later, the City applied ex parte for an order appointing an elisor to execute and deliver the grant deed. Defendants opposed the application, arguing that they had 60 days to decide whether to appeal, and the appointment of an elisor would interfere with their appeal rights. The Court denied the City’s application without prejudice.
Defendants then filed a notice of appeal. They also filed the present motion to determine an undertaking.
II. Discussion
The general rule is that the filing of an appeal automatically stays the judgment appealed from. (CCP § 916.) However, there are numerous exceptions to this rule, two of which are potentially applicable here.
First, CCP § 917.3 provides:
The perfecting of an appeal shall not stay enforcement of the judgment or order in the trial court if the judgment or order appealed from directs the execution of one or more instruments unless the instrument or instruments are executed and deposited in the office of the clerk of the court where the original judgment or order is entered to abide the order of the reviewing court.
Second, CCP § 917.4 provides, in relevant part:
The perfecting of an appeal shall not stay enforcement of the judgment or order in the trial court if the judgment or order appealed from directs the sale, conveyance or delivery of possession of real property which is in the possession or control of the appellant or the party ordered to sell, convey or deliver possession of the property, unless an undertaking in a sum fixed by the trial court is given that the appellant or party ordered to sell, convey or deliver possession of the property will not commit or suffer to be committed any waste thereon and that if the judgment or order appealed from is affirmed, or the appeal is withdrawn or dismissed, the appellant shall pay the damage suffered by the waste and the value of the use and occupancy of the property, or the part of it as to which the judgment or order is affirmed, from the time of the taking of the appeal until the delivery of the possession of the property.
Defendants ask the Court to determine which of these two exceptions applies here. They further ask the Court to set an undertaking if § 917.4 applies. (They contend any such undertaking should be nominal.)
A. Which Statute Applies
Defendants contend the judgment requires Mona10 to execute an instrument, the grant deed. As a result, they assert that the judgment falls within the literal text of § 917.3, and no undertaking is required for a stay of the judgment so long as Mona10 executes the grant deed and deposits it with the clerk of court. The City contends Mona10 reads the judgment too narrowly: while it requires execution of an instrument, the judgment plainly directs the conveyance of real property, and the execution of the grant deed is simply a component of the overall conveyance. As a result, an undertaking is required if Defendants wish the judgment to be stayed.
Upon review of the parties’ authorities, in particular Vangel v. Vangel (1953) 116 Cal.App.2d 615 and Archer v. Miller (1923) 192 Cal. 67, the Court agrees with the City. Defendants’ reading of the judgment focuses on a single clause of the judgment, isolated from its overall context. Because the judgment orders the sale of real property from Mona10 to the City, § 917.4 applies.
B. Undertaking Under § 917.4
Section 917.4 requires the Court to set an undertaking sufficient to cover “the damage suffered by the waste and the value of the use and occupancy of the property, or the part of it as to which the judgment or order is affirmed, from the time of the taking of the appeal until the delivery of the possession of the property.”
1. Time of Appeal
Relying on statistics published by the Judicial Council, the City notes that the median appeal in California takes 568 days from filing to disposition. (City RJN, Ex. 1, at p. 36.) Defendants correctly point out in opposition that they haven’t filed an appeal in California generally, but rather an appeal in the Fourth District, Division Three specifically. The same statistics relied upon by the City show that the median time for an appeal in the Fourth District, Division Three is 481 days, not 568. The Court agrees with Defendants that 481 days is the correct time period for purposes of calculating an undertaking.
2. Property Taxes
The City puts on judicially noticeable evidence, not objected to by Defendants, that Mona10 hasn’t paid property taxes on the properties for several years. (City RJN, Exs. 2-6.) Based on this evidence, the City contends that Mona10 is unlikely to pay property taxes while the appeal is pending. It contends unpaid property taxes are waste, and it asks that the undertaking cover property taxes that will come due while the appeal is pending, plus any late payment penalties.
The City relies on The Nippon Credit Bank v. 1333 North Cal. Boulevard (2001) 86 Cal.App.4th 486 for the proposition that unpaid property taxes constitute waste. (See id. at pp. 495-96.) Defendants object that The Nippon Credit Bank isn’t about an undertaking at all. Rather, it considers whether the failure to pay property taxes gives rise to a cause of action for “bad faith waste.” Furthermore, it arises in the context of a mortgage lender suing a mortgage borrower who failed to pay property taxes, not a specific performance context. The case is ultimately about imperiling the lender’s security.
The Court believes the City has the better argument. The Nippon Credit Bank explains that if tax lien attaches to the mortgaged property, the lender has two options. Either the lender pays the tax bill itself to clear the lien, then forecloses and sells the property, or the lender forecloses and sells the property at a below-market rate, with the difference used by the buyer to pay the tax bill. In both cases, the lender runs a risk of recovering the full debt owed, which constitutes waste. (Id., at pp. 495-96.)
Here, the City still plans to move ahead with a developer to develop the property. (Foulkes Decl. ¶ 8.) That means exactly what happened with BA Hotel and later Mona10: selling the property to a developer who assumes the risk of the project. The City expects Mona10 won’t pay property taxes while the appeal is pending, like the borrower who in fact failed to pay taxes in The Nippon Credit Bank. If the City prevails on appeal, then like the lender, it will have two choices when it comes to selling the property to a new developer. Either the City can pay the taxes itself to deliver the property lien-free, or it can accept a lower purchase price from the new developer, with the new developer using the balance to pay the taxes. That constitutes waste.
Under § 917.4, Defendants’ undertaking must cover the expected amount of taxes, plus any late payment penalties (covering both the 2022-23 and 2023-24 tax years and unpaid property taxes from previous years), that will come due during the expected 481-day pendency of the appeal. Because the City based its previous calculations on 568 days instead of 481, it must recalculate these amounts to reflect the shorter period.
3. Code Enforcement Issues
The City puts on evidence that between 2018 and early 2022, it issued 11 code enforcement citations to Mona10 totaling $8,480. (Foulkes Decl. Ex. 1.) The City’s Community and Economic Development Director has personally observed the property. He estimates that in addition to the ticketed citations, it will take $45,000 to bring the property into compliance. (Foulkes Decl. ¶ 5.) The City also puts on evidence that it has received a number of calls from the community about problems at the property about things like homeless encampments, graffiti, etc. (Foulkes Decl. Ex. 2.) Furthermore, the City attaches logs from its code enforcement officers, who take notes of their own visits to the property to address issues. (Foulkes Decl. Ex. 3.)
Based on this evidence, the City argues code enforcement issues are likely to persist, that they constitute waste, and that an undertaking must be posted. It contends the amount of the undertaking should be $53,480—the sum of the 11 citations and the $45,000 to remediate the property’s current condition.
There are two problems with this argument. First, § 917.4 requires the undertaking to cover waste from “the taking of the appeal until the delivery of the possession of the property.” The code citations and the current condition of the property aren’t waste that will occur as a result of the pendency of the appeal. The undertaking can’t be based on conditions that already exist; it has to cover waste that will occur while the appeal is pending. (In comparison to property taxes, the City seeks to cover taxes and late penalties that will come due, not the back taxes and penalties already owed.)
Second, to the extent the administrative citations, calls from community members, and code enforcement officer logs are meant to prove similar problems are likely to occur during the pendency of the appeal, they are inadmissible hearsay. The only way the citations, phone calls, and enforcement logs can prove similar problems will recur is if the citations, phone calls, and enforcement logs are proof that those problems have occurred. They are out-of-court statements offered to prove the truth of the matter asserted.
The Court agrees that the code enforcement issues identified by the City constitute waste. But the City puts on no competent evidence of the amount of waste that will occur while the appeal is pending. Without such evidence, the Court does not see how it can competently exercise its discretion to set a bond amount. Accordingly, the amount of this type of waste is not included in the undertaking.
4. TOT and Sales Taxes
The City argues that it still intends to develop the property as planned: a hotel with a restaurant, beauty salon, etc. It estimates that the total TOT and sales tax revenue from the planned hotel would be about $1.3 million, and it argues this should be included in the undertaking as “the value of the use and occupancy of the property” during the appeal.
As Defendants point out in reply, however, the properties are vacant. Even if Defendants hadn’t taken an appeal and had simply allowed the City to take possession, there would be no TOT or sales tax revenue until the hotel was built. The City puts on no evidence that the hotel will open to customers while the appeal is pending. Defendants will not be required to post an undertaking that covers tax revenue the City wouldn’t receive if no appeal had been taken in the first place.
5. Market Rental Value
Alternatively, the City contends that the undertaking should cover the fair market value of what the City could get if it rented out the property, in its present condition, during the appeal. The Court agrees this would properly be part of the undertaking.
To establish a market rental value, the City points to a nearby lot it leased to a party called Proforma77, which Proforma77 in turn subleases “to another party for parking of vehicles at a rate of $17,500 per month.” (Opp. at p. 10 [citing Foulkes Decl. ¶ 14 & Ex. 5].) It argues the undertaking should at least cover $17,500 a month for the pendency of the appeal.
The City’s description of the parking arrangement both is inaccurate and obscures the nature of the transaction. Per the parking lease, Proforma77 is “the owner in fee simple” of the comparable property. (Foulkes Decl., Ex. 5, at Recital A.) The City doesn’t own the property and lease it to Proforma77. Proforma77 leases the property to a tenant, 405 Asset Management, and 405 Asset Management in turn has a sub-lessee who uses it for parking. (Id., at Recital B & § 7.d.) In particular, “The Parking Area is for the parking of automotive vehicles owned by Tenant or its sub-lessee, specifically Amazon.” (Id., § 7.d.) The lease shows that Amazon is paying 405 Asset Management a monthly fee (presumably more than $17,500) to park its vehicles on this property, which 405 Asset Management is renting from Proforma77 for $17,500 a month.
This arrangement is much more specific than the City’s general suggestion that the property is worth $17,500 a month as a parking lot. It’s one thing to say that in this particular case, Amazon has chosen this particular property to park a fleet of vehicles, and is willing to pay a monthly parking fee that presumably covers 405 Asset Management’s $17,500 rent. What are those reasons? After all, property isn’t fungible. For example, is there an Amazon distribution center nearby? Are these Amazon delivery trucks? The Court questions whether a paid parking lot for general public use would have the same market value as a dedicated fleet vehicle parking lot for one of the world’s largest logistics companies. Are there any other suitors for fleet parking in the area who might be interested in the properties? It’s for this reason that fair market value is usually determined by a number of comparable transactions, rather than a single transaction.
The Court agrees that the undertaking should cover the market rental value of the properties. But on this record, the Court does not see how it could competently exercise its discretion to determine what the market rental value would be. A single lot subleased by Amazon simply isn’t enough for the Court to base a valuation on. Accordingly, this amount is not included in the undertaking.
C. Archer v. Miller Issue
In reply, Defendants seize on the City’s citation to Archer v. Miller to argue no undertaking is required. The City cites Archer because it held the predecessor to § 917.4, not the predecessor to § 917.3, applied on facts similar to those here. But as Defendants point out, the Supreme Court ended up holding that no undertaking was required.
In Archer, the trial court held the defendant was entitled to a decree of specific performance of a purchase option for real property. The judgment ordered that the plaintiff was to execute and deliver a grant deed to the defendant within 60 days, and that upon delivery of the executed deed, the defendant was to pay the purchase price. The defendant twice tendered the purchase price, and the plaintiff twice rejected it. The plaintiff appealed, and after its arguments about the predecessor to § 917.3 were rejected by the trial court, it moved to set an undertaking under the predecessor to § 917.4. It then refused to post the undertaking, instead petitioning for a writ of supersedeas relieving it of the obligation to post an undertaking.
The Supreme Court agreed with the plaintiff based on the particular facts of the case. The defendant twice tendered the full purchase price to the plaintiff. But after the plaintiff appealed, the defendant took its own appeal, arguing the trial court should have allowed installment payments rather than payment of the full purchase price at once. “Upon the refusal of the plaintiff to accept the purchase price, the defendant could have deposited the money in a bank to the credit of the plaintiff, and thus kept his tender good. Instead, the defendant, claiming that he had a right to spread the payment of the purchase price over a long term of years, elected to take an appeal for the purpose of securing a determination that the [purchase price] is not and should not be declared due. This is entirely inconsistent with a continuance of the tender, and by the taking of the appeal the defendant, in effect, elected to withdraw the tender.” (Archer, supra, 192 Cal. at p. 70.)
The judgment made specific performance contingent on payment of the full purchase price. Because defendant withdrew its tender of the full purchase price, it had no right in the property under the judgment. And because the defendant had no right in the property, the plaintiff could not be required to post an undertaking to secure waste, etc. during the pendency of the appeal. (Id., at p. 71.)
Defendants argue this case is like Archer: there is no record evidence that the City intends to pay the purchase price. Any undertaking should be conditioned on the City paying the purchase price of $2.85 million.
It appears to the Court that Defendants misread the judgment. It provides that upon delivery of the executed deed, the amount the Phams owe the City will be decreased by $2.85 million. Under the terms of the judgment, the City never cuts a check, unlike the defendant in Archer. Instead, the judgment against the Phams is offset accordingly. There is no need for the City to tender the purchase price because the judgment doesn’t require the City affirmatively to pay anything in the first place. Instead, the judgment decreases the City’s other recovery upon delivery of the deed.