Oakhurst Industries v. Tubeway Associates

Filed 12/7/09 Oakhurst Industries v. Tubeway Associates CA2/8

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION EIGHT

APPEAL from a judgment of the Superior Court for the County of Los Angeles. Elizabeth A. Grimes, Judge. Affirmed.

Caldwell Leslie & Proctor, Michael R. Leslie, Robyn C. Crowther and Michael D. Roth for Defendant and Appellant.

King, Holmes, Paterno & Berliner, Howard E. King, Stephen D. Rothschild and Seth Miller for Plaintiff and Respondent.

______________________________________

SUMMARY

The trial court ordered specific performance of a lessees option to purchase industrial property from the lessor after a jury, in a general verdict, (a) found that the lessee did not breach the contract, but (b) found that the lessee did breach the implied covenant of good faith and fair dealing, and (c) in that connection awarded the lessor damages of one dollar. On appeal, the lessor contends the courts award of equitable relief to the lessee in the form of specific performance was impermissible, because it was inconsistent with the jurys earlier verdict that the lessee had breached the implied covenant of good faith and fair dealing. The lessor also argues the judgment ordering specific performance must in any event be reversed because (a) the lessee failed to prove it was ready, willing and able to pay the $6.4 million purchase price, and (b) the lessee did not prove it complied with a provision of the option which required the parties to attempt to agree in good faith upon a single appraiser to determine the fair market value of the property.

We conclude the trial court did not err in ordering specific performance and accordingly affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

The dispute in this case arises from a lessees exercise of a purchase option contained in a lease executed in 1997 for a commercial property located in the City of Commerce.

1.      The parties and principal actors.

Respondent Freund Baking Company (now Oakhurst Industries, Inc., doing business as Freund Baking Company (Freund Baking)) is the lessee. Freund Baking is a family-owned wholesale bakery business that employs some 400 people and also owns commercial bakery facilities in Glendale and Hayward. James Freund operated the commercial bakery business on the Commerce property and had done so for nine years by the time of trial, spending almost $10 million over the years to improve the property and install fixtures and equipment for the business. His son Jonathan was vice president and an attorney for the company. At his fathers request, Jonathan Freund represented Freund Baking in connection with the lease of the property.

Appellant Tubeway Associates, the owner and lessor of the property, is a California limited partnership, the majority owners of which were Eric Sussman and his family. Sussman managed the Tubeway property (as well as 10 to 15 other industrial, retail and multi-family properties) and was very experienced in real estate matters; he is a certified public accountant and a lecturer at UCLA, teaching real estate investment and finance.

2.      The purchase option.

The lease, which was drafted for Tubeway by Sussmans lawyers, OMelveny & Myers, gave Freund Baking an option to purchase the property.[1] The principal terms of the option were these:

        The option was exercisable by written notice at any time on and after March 1, 2005, and prior to August 31, 2005.

        Once notice was given, Tubeway was required to promptly open escrow for the sale of the Premises with an escrow company of its choosing.

        The date of delivery to Tubeway of Freund Bakings written notice of its exercise of the purchase option was designated the purchase option exercise date. (This occurred on August 25, 2005.)

        Within ten business days after the purchase option exercise date, Freund Baking was required to deposit $100,000 with the escrow company, which would be applied against the purchase price at closing or paid to Tubeway as liquidated damages if closing failed to occur in accordance with the terms of the purchase option. (This date was Friday, September 9, 2005.)

        The purchase price was to be the fair market value of the property (a term defined in the option).

        The parties would determine the propertys fair market value as follows:

o       Lessor and Lessee shall meet in an effort to negotiate, in good faith, the Fair Market Value of the Premises as of the Purchase Option Exercise Date.

o       If Lessor and Lessee have not agreed upon such Fair Market Value within thirty (30) days after the Purchase Option Exercise Date, then Lessor and Lessee shall attempt to agree in good faith upon a single appraiser not later than forty (40) days after the Purchase Option Exercise Date. (The 30-day period expired on September 24, 2005, and the 40-day period expired on October 4, 2005.)

o       If the parties are unable to agree on a single appraiser within the allotted time period (by October 4, 2005), they shall each appoint one appraiser not later than fifty (50) days after the Purchase Option Exercise Date. (This date was October 14, 2005.)

o       The two appraisers appointed are then required to appoint a third appraiser, within ten days after their appointment.

o       If either Lessor or Lessee fails to appoint its appraiser within the prescribed time period [by October 14, 2005], the single appraiser appointed shall determine the Fair Market Value of the Premises.

o       All appraisers were required to be independent and to have certain professional qualifications.

        The purchase price determination date was defined as [t]he date upon which the Purchase Option Purchase Price is fixed, whether by agreement of the parties or by appraisal .

        Closing was required to occur within 30 days after the purchase price determination date.

        If the closing did not occur within the 30-day period, for any reason other than [Tubeways] default, the purchase option would terminate and the $100,000 deposit plus any interest shall be paid to and retained by [Tubeway] as liquidated damages. Once Freund Baking exercised the purchase option, this was supposed to be Tubeways sole remedy in the event of [Freund Bakings] failure to close the purchase of the Premises.

3.      A brief sketch of the dispute.

The genesis of the dispute was as follows: On August 25, 2005, Freund Baking exercised its option and, 50 days later, appointed its appraiser. Tubeway did not, as a consequence of which Freund Bakings appraisal $6.4 million, or approximately $80 per square foot became, under the terms of the option, conclusive and binding upon both parties.

When Jonathan Freund transmitted Freund Bakings appraisal to Eric Sussman and advised him that the appraisal was conclusive, Sussman who had consistently insisted that the value of the property was $100 per square foot or higher was shocked and responded angrily, saying the appraisal was worth diddly-squat. The next day, in a handwritten note, Sussman sought to continue the negotiations on price, sent Freund the name of an appraiser Tubeway would use if needed, and ten days later, asked Freund to meet to hammer this thing out. Freund did not respond to these overtures. On January 2, 2006, Sussman wrote to Freund again, laying out his position, including among other things that Sussman had interpreted Freunds letter selecting an appraiser to mean that Freund was going to solicit third-party assistance in our continued negotiations, to determine the Propertys fair market value, not that Freund was appointing an appraiser pursuant to the option provisions of the lease. Sussman gave Freund two choices: to litigate or to try to agree on a single appraiser and, if unsuccessful, follow the lease provisions on appointing appraisers. Freund Baking chose the litigation option.

4.      The lawsuit.

On February 6, 2006, Freund Baking sued Tubeway, seeking an order of specific performance compelling Tubeway to transfer title to the property to Freund Baking in compliance with the terms of the purchase option.

Tubeway answered and filed a cross-complaint for declaratory relief, breach of contract, and breach of the implied covenant of good faith and fair dealing. Among other things, Tubeway alleged that Jonathan Freund wanted Tubeway to believe he was engaging in good-faith negotiations, while, in reality, Freund was unbeknownst to Tubeway executing Freunds scheme to acquire the Property at a price far below market. Tubeway also alleged that in March 2006 (after Freund Baking had sued for specific performance), Freund attempted to increase the pressure on Tubeway by delaying the payment of rent, continuing its pattern of bad faith. (Tubeway had not received Freund Bakings March rent payment by the afternoon of March 6, 2006 (after which date late penalties would apply), and proceeded to serve a three-day notice to pay or quit, including demands for payment of late and administrative fees permitted by the lease. Tubeway alleged Freund Baking delivered a rent check the next day, but did not pay late or administrative fees.)

Tubeway alleged Freund Baking breached the following material provisions of the Lease: the obligations 1) to negotiate in good faith as to the propertys fair market value; 2) to negotiate in good faith as to the appointment of a single appraiser; 3) to participate in the process for appointment of a third appraiser; 4) to pay rent on or before the first day of each month; and 5) to pay late and administrative fees when a payment is received after its due date. In its cause of action for breach of the implied covenant of good faith and fair dealing, Tubeway recited the same breaches of the lease and further alleged that Freund Bakings repeated failures to perform under the Lease as well as its on-going efforts to thwart the purpose of the Lease by attempting to obtain the Property at below market value, were conscious and deliberate acts designed to unfairly frustrate the agreed common purpose of the contract and to disrupt Tubeways reasonable expectations under the Lease.

5.      The evidence.

Tubeways cross-claims for breach of contract and breach of the implied covenant of good faith and fair dealing were tried to a jury, and Freund Bakings suit for specific performance (and Tubeways cross-complaint for declaratory relief) were tried to the court. The evidence adduced may be summarized as follows.

Both parties had long anticipated that Freund Baking would exercise the purchase option. (During the course of the lease and prior to the option period, Freund Baking had made two offers to purchase the property; both were rejected.) Earlier in the year, in April 2005, James Freund had contacted Manufacturers Bank (Bank), which handled all of Freund Bakings banking, telling the Bank that Freund Baking intended to buy the Tubeway property. (Still earlier, on March 10, 2005, Sussman wrote to Jonathan Freund telling him that his (Sussmans) broker had told him that the fair market price was $85 a foot; Sussman enclosed comps ranging from the mid-$70 per foot to $105 per foot.) James Freund asked the Bank to proceed with an appraisal of the property.

Freund wanted to leverage the loan as much as possible and told the Bank he preferred SBA (Small Business Administration) financing to conventional financing. (Under a conventional loan, the down payment would be 25 percent of the appraised value, while with an SBA loan, the down payment would be 10 percent.) On May 20, 2005, the Bank issued a proposal letter for Freund Bakings consideration, for discussion purposes, describing the terms and conditions of a proposed SBA financing package. Freund signed the proposal letter, and the Bank sent him a list of items required for its appraisal file. An internal Bank e-mail indicated the Bank need[ed] to get started ordering an appraisal and [t]he completed appraisal will be the negotiating tool for Freund to go the owner of the property.

The Banks appraiser valued the property at $80 per square foot ($6.372 million) as of June 22, 2005.[2]

After Freund Baking exercised the option on August 25, 2005, the following occurred:

        The option required Tubeway to promptly open escrow with an escrow company selected by Tubeway in its sole and absolute discretion. Eight days later, on September 2, 2005, Sussman wrote to Jonathan Freund, telling him to [p]lease open escrow and place the requisite deposit at Design Escrow, and suggesting Freund draft escrow instructions.[3] Sussman also enclosed recent comps from his broker, all indicating prices over $90 a foot, and said the broker believed the property would sell for over $100 a foot in the current market.

        On September 7, 2005, Jonathan Freund sent Alexis Ostensen (at the escrow company) the lease provisions regarding the option and Sussmans September 2nd letter, and said he believed the dates should be calculated from September 2, or the date of the option exercise notice (August 25), or when escrow instructions were signed by both sides.

        On September 8, 2005, Ostensen sent Freund an escrow number and told him to refer to that number when he remitted the $100,000 deposit. That same day, Ostensen reported to Sussman that Freund had initially called her on Friday, September 2, but she had had voice mail trouble, and Freund called again on Tuesday, September 6, that she couldnt prepare escrow instructions without a price, that Jonathan Freund was going to send in the deposit that day (September 8), and then based on the information you guys already have, hes going to calculate time frames for determining price, and then let us both know.

        The option provisions required Freund Baking to make the $100,000 deposit within 10 business days after August 25 (or September 9, 2005). A check was issued from Linda Freunds (James Freunds wife) Charles Schwab account on September 9, 2005, and Jonathan Freund sent the check to the escrow company via Federal Express on Monday, September 12, 2005.

        On September 23, there was an e-mail exchange between Sussman and Ostensen of Design Escrow. Ostensen confirmed she had received the $100,000, and [w]e also have a lender calling us about the escrow instructions, but we cant prepare them until you and he have a price. Sussman responded that, [h]opefully we will agree on a price in the next few weeks, though well have to see.

        Jonathan Freund testified about his discussions with Sussman as follows:

o       Shortly before Freund Baking exercised the option, Freund met with Sussman and showed him a brokers opinion of the value of the property, which James Freund had requested in order to give Freund Baking an understanding of the value of the property. The broker, Dave Hess of Trammell Crow, thought the value was a little over $6 million. Jonathan Freund also gave Sussman a sheet of sales comparables prepared by another real estate company for sales in 2004 ranging from $43 to $87 per square foot.

o       Earlier, in March 2005, Sussman had told Freund that Sussmans broker had said that Sussman should not take one penny less than $85 per square foot. So Freund was pretty shocked when Sussman took the position in his September 2nd letter that the price should be over $100 a foot.

o       On September 23rd, Sussman sent Freund a listing for a property in Commerce at over $100 per square foot. Freunds reaction to receiving the various listings Sussman sent was that properties can be listed at any price, but that doesnt mean it sells for that.

o       After Freund Baking exercised the option, Jonathan Freund told Sussman what Freund Baking would be willing to pay for the property. Freund told Sussman that he (Freund) was in the 75 to 80 range. (Freund testified he wanted to pay somewhere in the 80s, but I started at 75 dollars a foot.) Freund also gave Sussman the comparable sales that had been included in the Banks appraisal. Sussman told him they were worthless.

        Freund began to look for appraisers. (Freund Baking could not use the Banks appraiser because he was not a Member of the Appraisal Institute (MAI) as required by the lease.) Freund found it very difficult to find qualified appraisers who would be available because they were all very busy. He testified about his telephone discussions with Sussman on the difficulty of obtaining appraisers:

A Well, we had different discussions. We met once earlier in the month in September and had a brief discussion about that [the difficulty of obtaining appraisers], and basically we both understood that they were all really busy. We spoke to several other conversations in the course of September and October, and we both confirmed they [appraisers] were both really busy and difficult to get in touch with.

Q Did in any of these discussions, did Mr. Sussman tell you that he thought it might be difficult for you and him to agree on a single appraiser?

A Yeah. He actually told me that before we exercised.

Q What did he tell you before you exercised?

A Well, we were going to go according to the lease, and he basically outlined the procedure. And he said, I dont know how wed ever be able to agree on a single appraiser, so we either agree on a price or ultimately just do the appraisals according to the lease.

Q Was this in your earlier

A Right before we exercised, yes. And then there was in general, we just had discussions about that, yes, after we exercised.

Before December 13, 2005, Sussman never gave Freund the name of an appraiser that he proposed using.

        Freund and Sussman met on October 3, 2005, and the two talked about both the difficulty of obtaining an appraiser and the comps that Freund gave Sussman. According to Freund, Sussman tried to convince Freund to take his valuation of the property, and gave Freund the names of several brokers who Sussman said would know about the value. At this meeting, Sussman also said he didnt know any appraisers, but he said I [Freund] could call some of these brokers and get the name of an appraiser. Freund said he put in calls to the brokers Sussman had named and asked those with whom he spoke for the names of appraisers. The appraiser Freund ultimately appointed (Lucas) was referred (or Lucass partner was referred) by one of the people I was calling to try and get an appraisers name.

        Jonathan Freund hired Joseph G. Lucas to appraise the property. In an e-mail exchange on October 13, 2005, Freund told Lucas, I hope you have time to do a brief check in comps to tell me if you are comfortable in performing a valuation of the property. Lucass reply a few hours later stated that [a]fter a quick review, it appear[s] there are no comps out there that would hurt us yet, and I feel pretty confident around the $80 PSF `number. Freund testified that he told Lucas about the prior appraisal by the Banks appraiser.

        On October 14, 2005, Jonathan Freund wrote a letter to Sussman, sent by hand delivery and mail, stating that:

In our ongoing attempt to determine a Fair Market Value for the building regarding Freunds Exercise of the Purchase Option, Freund Baking has selected Joseph G. Lucas of Manhattan Realty Advisors to appraise the Property. [] As I understand he is very busy at this time, I will forward to you his appraisal as soon as I receive it.

        Before Freund delivered his October 14th letter to Sussman, he left a message for Sussman on his answering machine, telling Sussman: Im delivering you a letter appointing an appraiser, and if you have any names of appraisers, please tell me now. I know theyre all really really busy. In the meantime, we can still talk price, if you want.

        Sussman responded on October 16, 2005, stating in part:

Got your letter dated October 14th. I too have solicited some names for appraisers and will contact them. I know they are all really, really busy. In the meantime, I am absolutely in favor of trying to agree to the fair value between the two of us, but at this point we seem reasonably far apart. I remain convinced that the value is in the $100 range given what rents would be achieved for the vacant building and what recent comparable transactions indicate.

        Thereafter (on October 17, November 1, November 16, November 28), Sussman continued to send Freund listings or comps and other messages indicating his belief that $100 is the magic # and [w]e need to get this thing moving, and [y]ou [Freund] cannot drag this out indefinitely.

He received little or no response from Jonathan Freund, and during the same period, James Freund advised the Bank (on October 28, 2005) that Tubeway had missed the deadline for ordering an appraisal, so that the appraisal ordered by Freund Baking would be binding. (An internal Bank e-mail dated November 18, 2005, indicated Freund had told the Bank that Tubeway continued to deliver copies of listings reflecting a value of $100 per square foot for the property, that both the Banks appraisal and Freunds appraisal reflected a value of $80 per square foot, and that Freund believed the purchase price would be determined by the Freund Baking appraisal or in litigation.) Jonathan Freund testified he and Sussman had supper together in late November, and the price Sussman wanted then was going up. He was above 100.

Lucas sent his appraisal to James Freund on December 6, 2005. The valuation of $6,400,000 was stated as of November 4, 2005, the date of the appraisers personal inspection of the premises.

On December 13, 2005, Jonathan Freund transmitted Lucass appraisal to Sussman, [p]ursuant to 50.4(b) of the Lease, advising Sussman that because Mr. Lucas was the single appraiser appointed, his appraisal is now conclusive and binding on both [Tubeway] and [Freund Baking]. Sussman was shocked and responded angrily, by voicemails and then in a writing on December 15, 2005, stating that you know where you can stick that letter. Sussman sought to continue the negotiations on price and sent Freund the name of an appraiser Tubeway would use if needed,[4] but Freund did not respond.

In addition to testimony from the Freunds and Eric Sussman, the jury heard testimony from Alexis Ostensen of Design Escrow, Joseph Lucas, and several witnesses from Manufacturers Bank (Irene Iwamoto, a real estate lender for the Bank; Stacy Garrison, an SBA loan officer for the Bank; and Drucilla Garcia-Richardson, a Bank vice president and relationship manager who managed the Freund familys commercial lending relationship with the Bank). Tubeway also presented testimony from Don T. Hirose, an expert on the appraisal and valuation of industrial real estate in Los Angeles, who was retained by Tubeway in late September 2006 to appraise the market value of the property as of December 6, 2005, and who opined that the value on that date was $94.01 per square foot. (On cross-examination, Hirose testified that he later learned that another appraiser, Kathy Malmfeldt, had looked at the property on behalf of Sussman and had valued it somewhere in the 80s per square foot.)[5]

As to the late payment of the March 2006 lease payment, Sussman testified he checked his mailbox after close of business on March 6 and the payment was not there. James Freund testified he personally delivered the payment on March 6, asking the person manning the postal center to place it in Sussmans box. The payment was in Sussmans box when he checked it on March 7.

6.      The jury instructions.

The jury was instructed, as to Tubeways breach of contract claim, that:

Tubeway claims that Freund Baking breached this contract by failing to negotiate in good faith regarding the option to purchase the property, by failing to negotiate in good faith for the appointment of a single appraiser to evaluate the property, by failing to appoint an appraiser that was independent, by failing to timely pay rent and by failing to pay late and administrative fees in connection with late rent payments.

And:

To recover damages from Freund Baking for breach of contract, Tubeway must prove all of the following:

1.      That Tubeway did all, or substantially all, of the significant things that the contract required it to do, or that it was excused from doing those things;

2.      That all conditions required by the contract for Freund Bakings performance had occurred;

3.      That Freund Baking failed to do something that the contract required it to do; and

4.      That Tubeway was harmed by that failure.

The jury was also instructed on liquidated damages, including that:

There is no requirement that actual damages must be suffered in order for Tubeway to recover under the liquidated damages clause. Thus, if you find that the transaction did not close within thirty days of the Purchase Price Determination Date, for any reason other than Tubeways default, then you must award Tubeway $100,000 in liquidated damages, plus interest.

As to Tubeways claim that Freund Baking breached the implied covenant of good faith and fair dealing, the jury was instructed as follows:

In every contract or agreement there is an implied promise of good faith and fair dealing. This means that each party will not do anything to unfairly interfere with the right of any other party to receive the benefits of the contract; however, the implied promise of good faith and fair dealing cannot create obligations that are inconsistent with the terms of the contract. Tubeway claims that Freund Baking violated the duty to act fairly and in good faith. To establish this claim, Tubeway must prove all of the following:

1.      That Tubeway did all, or substantially all of the significant things that the contract required it to do or that it was excused from having to do those things;

2.      That all conditions required for Freund Bakings performance had occurred;

3.      That Freund Baking unfairly interfered with Tubeways right to receive the benefits of the contract; and

4.      That Tubeway was harmed by Freund Bakings conduct.

7.      Tubeways arguments to the jury

In its opening statement, Tubeway told the jury that its second claim was that they [Freund Baking] breached the covenant of good faith and fair dealing. In other words, they didnt act in good faith. They breached the obligation that parties have in a business relationship to treat each other in good faith and be straight with what theyre trying to do, not to try to trick each other. Tubeway argued Sussman thought Freund was getting an appraiser to help engage on the comps to get some neutral advice so that [the parties] can finally narrow the gap and get to whats the fair market value of the property, but Freund intended that October 14th designation to be the gotcha in the case, where we made it on the last day, you didnt, and now were gonna stick you with the appraisal at the end of the day .[6] Tubeway also mentioned the late rent issue, pointing out that Freund Baking had never paid the rent as late as the sixth or seventh day of the month, but in March 2006, the rent check had not been delivered by the close of business on March 6 (the last day before late penalties would accrue); the rent check was in Tubeways mailbox facility the next day.

In its closing argument Tubeway said that, as the court had previously told the jury, the court would decide Freund Bakings claim for specific performance of the purchase option under the lease. Tubeway explained that if the purchase option failed to close in other words, if title was not transferred within 30 days of the purchase price determination date, and thats for any reason other than a default or breach by Tubeway, then Tubeways damages are limited to the $100,000 deposit. And, [i]f for some reason you were to say, no thats not true, and the court were to make other rulings, then if it was Tubeways fault, well, then they [Freund Baking] get the $100,000. Tubeway then told the jury that [t]he only other cause of action is breach of the covenant of good faith and fair dealing, which theres an instruction about in the judges instructions on that, as well. The damages are the same.

Tubeways counsel several times mentioned Sussman having been lulled. Counsel said that:

       The first time Freund gave Sussman comps was at a lunch meeting on October 3, and that counsel would explain why that makes sense in the theory of lulling Mr. Sussman. Counsel later argued that the response to Sussmans September 2nd letter (enclosing comps and stating the property was worth $100 per square foot) was silence until the October 3 lunch, when Freund showed up with comps. The reasonable inference Sussman drew from this (and from Freund Bakings posting the $100,000 deposit after the September 9 deadline), Tubeway argued, was that Jonathans not going by the dates specifically, and Sussman reasonably believed that they werent going forward according to the strict timelines under the lease.[7]

       Now, Mr. Sussman, despite the fact that hes a professor and an experienced guy in business, that doesnt mean that you cant make a mistake. That doesnt mean that you cant trust somebody and be lulled by them into being lax about the deadlines.[8]

       Because Jonathan Freunds October 14th letter selecting Lucas as its appraiser did not state Freund was doing so pursuant to the clause in the lease requiring both parties to appoint appraisers if they failed to agree on a single appraiser, and because Freund never otherwise told Sussman were going to go to the next step, Mr. Sussman was lulled and was reasonable in being lulled . The best evidence of that, counsel argued, was a whole series of e-mails where after the [October 14th] letter went out, Mr. Sussman was sending faxes, was writing letters, and finally he [Sussman] said werent we supposed to get together to discuss the price? And although James Freund was telling his bank (in mid-November) that Tubeway had missed the deadline and Freund Bakings appraisal would be binding, Freund Baking never gave [Sussman] the courtesy of letting him know that that was true.

Tubeways counsel then enumerated the breaches of contract it claimed: failure to negotiate in good faith as to the purchase price, failure to negotiate in good faith as to a single appraiser ([y]ou at least have to propose a name in order to meet that), failure to make the escrow deposit on time, and failure to use an independent appraiser. And if you find that any one of these things are true, then, yes, its a breach, and thats it. Then the $100,000 gets transferred to Tubeway, and thats the end of the case.[9] In addition, counsel argued the March 2006 rent payment was late, and Freund Baking failed to pay the late fees, thus breaching the contract. (In the course of this argument, counsel stated that Sussman knew he had been sued. He knew that there was a chance that he was gonna try to be squeezed, where they [Freund Baking] were gonna try to withhold the rent, which would put him in a difficult position with the mortgage, so he was nervous, as he had never received the rent as late as the 6th of the month.)

Tubeway concluded by urging the jury to look at the exhibits for the key time period from April 2005 through December 2005, and I would submit that youre gonna check the box, breach, on any one of the grounds that we just went over.

8.      The verdict.

The jury rendered a verdict in favor of Freund Baking on Tubeways breach of contract claim (the vote was 9-3), and in favor of Tubeway on its claim for breach of the implied covenant of good faith and fair dealing (the vote was 11-1). The jury awarded Tubeway nominal damages of $1.00 (12-0).[10]

9.      The evidence on whether Freund Baking was ready, willing

and able to perform.

While the jury was deliberating, the court heard additional testimony on the equitable issues it had to decide: Freund Bakings claim for specific performance of the purchase option, and Tubeways claim for declaratory relief. The court heard testimony from John Polen, Freund Bakings expert on conventional real estate loans, and from Gary Tenzer, Tubeways expert in real estate financing. The evidence from Polen and Tenzer was addressed to issues relating to whether Freund Baking was ready, willing and able to close the transaction within the required 30-day period.[11] The principal question was whether Freund Baking could have obtained a loan within that period. A separate strand of this same issue involved whether an environmental problem some contamination from two oil wells on the property would have prevented the timely closing of a loan.

a.      The loan issue.

There was considerable testimony (and the trial court later found) that it would not have been possible to close an SBA loan within the 30-day period. Other testimony was as follows:

James Freund testified that, if the Bank had told him the SBA loan could not be accomplished within the 30-day deadline, [w]e would have gone to Manufacturers Bank and gotten a standard real estate loan. He further testified that Freund Baking had the ability to come up with a 25 percent down payment ($1.6 to $1.7 million on a $6.5 million purchase price), as well as to make the loan payments (which would be approximately the same amount as Freund Bakings lease payments).

Tubeways expert, Gary Tenzer, opined that Freund Baking could not have closed an SBA loan in the 30-day period required by the lease. He also saw no evidence that a conventional real estate loan was under consideration during that period, and opined that closing a conventional loan during that time of year is a very, very difficult thing to accomplish.[12]

Tenzer also looked at the Freunds personal financial statement as of March 3, 2006. He opined they would need $1.75 to $1.8 million for a 25 percent down payment on a conventional real estate loan, and the statement showed ready cash (cash and readily marketable securities) of roughly $1,275,000, so there was a shortfall of $400,000 to $500,000 necessary for the down payment. (The statement showed a net worth of over $40 million, $30 million of which was attributed to their stock in Freund Baking Company; the Freunds also had a residence worth $2.95 million (with a mortgage of $476,000), and other real estate worth $7.5 million (with mortgages of $3.5 million).)

Drucilla Garcia-Richardson, who managed the Freunds commercial lending relationship with the Bank, testified that she was intimately aware of the financial condition of Jim and Linda Freund and their company as of the fall of 2005, and in looking at their personal balance sheet and personal cash flow, I would be willing to recommend for approval a credit of that magnitude [approximately $5 million]. And as an experienced commercial banker, yes, I feel that this company, that they could get a loan at the Bank, and/or at other banks. Garcia-Richardson further testified that she would have the same answer as of today; that the Freund family and bakery were a strong customer of the Bank; and that [t]he Freunds are wealthy individuals. Their company is well capitalized and profitable . She testified that, once the Bank has an appraisal and quantifies the environmental risk and has an accepted credit report and credit analysis, the Bank has the ability to close a real estate loan within 30 days. (Garcia-Richardson also testified that the Bank operated within market conditions in which other bankers were lurking around trying to take your relationships away and that means the Bank wanted to make sure no other bank would get that real estate loan.) [13]

John Polen, who had extensive experience as a bank executive in the underwriting and approval of conventional real estate loans, including on industrial properties, opined that the Freunds would be able to obtain a conventional loan to buy the Tubeway property within 30 days of filing an application with a conventional lender.[14] He also analyzed the Freunds personal financial statements and concluded they had more than sufficient resources to come up with the [25 percent cash] down payment. [15] He further opined the Freunds could have gotten a loan on similar terms and circumstances in 2006, and it appears as though they were stronger in 2006.

Irene Iwamoto of Manufacturers Bank was asked whether, based on her 30 years of banking real estate loans, if Jim Freund one morning would have said to you, the SBA loan is taking too long; Id like to switch to a conventional loan, would that have been doable with the Bank? and she replied affirmatively. She further testified that, while 30 days was a tight turnaround, the Bank had been able to close loans which had been prescreened and had had an appraisal within 30 days.

b.      The environmental issue.

In May 2005, when Manufacturers Bank issued its proposal letter for an SBA financing package, one of the conditions to be satisfied was a Phase I Environmental Report for the property (on which two oil wells were situated) to be reviewed and approved by the Bank. An environmental site assessment dated June 21, 2005 (the Phase I report, prepared by an environmental consultant approved by the Bank), concluded that total petroleum hydrocarbon levels, believed to have originated from gasoline and diesel releases, were above levels requiring site remediation. The report recommended a further subsurface soil investigation in order to fully characterize the lateral and vertical extent of petroleum hydrocarbon contamination.

On July 7, 2005, the Banks environmental approval officer, Russell Wettmarshausen, wrote to Irene Iwamoto, reporting on his review of the environmental report. He stated his understanding that Freund did not want to do additional testing at this time, but want[ed] to have the owner of the well investigate the problem. Wettmarshausen further reported he had obtained a worst case cost for remediation, from the environmental consultant that prepared the Phase I report, at about $150,000.[16] He recommended, if the Bank intended to proceed with the loan, that an allowance for the possible remediation costs be factored into the loan, such as a hold back, until the issue is resolved.

The following day, July 8, 2005, Iwamoto wrote to James Freund and his wife, noting that because the extent of the contamination was not delineated in the June 21 report, additional borings and testing would be required, and the Bank looked forward to hearing from the Freunds regarding the resolution of the environmental contamination problems identified in the report. Jonathan Freund sent the June 21 report to Sussman, and Sussman in turn demanded remediation of the contamination by an entity that owned an easement for operation of the wells. E-mails on September 12, 2005, between Iwamoto and Garcia-Richardson observed that [a]t this point there has been no resolution to the toxicity problem, and [t]he borrower understands that we can move forward only after the toxicity issues are resolved. Garcia-Richardson confirmed at trial that the Phase Two environmental report had not been ordered, and the SBA loan was basically on hold pending the Phase Two and the borrower indicating that the property was available for a specific price to purchase.

At trial, Iwamoto was asked whether it was typical that the existence of some amount of environmental contamination prevents the closing of a loan with Manufacturers Bank, and answered: No. Could be a quantified number that we know exactly what the risk might be, and weve made loans under those circumstances. And Polen (Freund Bakings expert on real estate finance) pointed out that the environmental consultant had quantified the extent of the solution to the environmental problem at $150,000, and that basically quantified what the risk was on the loan, and a bank would probably put that [a]side, or 150 percent of that aside, or some amount, as a cushion to make sure that there was money to take care of that, that cleanup. Thus because it was identified, the solution was quantified, I believe that that was that mitigated the problem of getting the loan.

10. The trial courts decision.

After post-trial briefing, the trial court issued its decision, finding no basis in law or equity to deny equitable relief as requested by Freund Baking. The court further found that specific performance will not work a forfeiture, including because the purchase price of $6,400,000 is fair and reasonable and that [t]o the contrary, denial of specific performance would be inequitable and would cause [Freund Baking] to forfeit its rights under the option agreement. Among other things, the court stated:

        Sussman did not respond to Freunds August 25 letter exercising the option until September 2, and then, instead of opening escrow as Tubeway was obliged to do, told Freund to do so.[17] To the extent there were relatively minor delays in opening escrow, such delays were excused because Mr. Sussman either caused or contributed to the delays, and neither party acted at the time as though the delays terminated the purchase option process.

        Both parties acted in good faith during the 30-day negotiation period, which was to end on September 24, 2005. They told each other their thoughts on value, neither party modified his position, and each believed they had good reasons for refusing to alter their positions. In addition, the two agreed to meet on October 3 to discuss value further.

        Freund and Sussman had some discussions about appraisers, mostly limited to the observation that it would be difficult to find an MAI appraiser because they were all busy, and met for lunch on October 3 to discuss value and the selection of an appraiser, but reached no agreement. The court found that both parties acted in good faith in their attempt to select a single appraiser; their efforts complied with the option agreement; and apart from the agreement to meet on October 3 to further negotiate price, there was no express or implicit agreement to extend any of the deadlines in the option agreement.

        Freunds letter of October 14, 2005 designating an appraiser was not misleading and clearly notified Tubeway that [Freund Baking] had designated Mr. Lucas as its appraiser under the option agreement.

        Lucas was an independent appraiser within the meaning of the option agreement, his appraisal was fair and reasonable, and his discussions with Freund Bakings representatives about the value of the property did not change his status as an independent appraiser.

        Sussmans reaction of surprise and anger and his testimony that he felt sandbagged when he received Freund Bakings appraisal on December 13th does not appear to have been reasonable, as he was aware of the terms of the option, understood the deadlines, and knew Freund Baking had designated Lucas as its appraiser on October 14th.

        The court does not find that Mr. Freund said or did or omitted to say or do anything that any reasonable person in Mr. Sussmans position would understand to mean that the parties had agreed to disregard or to extend the purchase option deadlines. Nor did the court find that any representative of Freund Baking said or did or omitted to say or do anything amounting to a waiver or estoppel to assert [Freund Bakings] rights in the purchase option agreement .

        The purchase price determination date under the option agreement was December 13, 2005, the date on which Freund sent the Lucas appraisal to Tubeway fixing the price at $6.4 million.

        Sussman immediately informed Freund that Tubeway would not convey the property to Freund Baking for that price, thereby relieving [Freund Baking] of any further obligation under the purchase option, including to obtain financing or to tender the purchase price within thirty days.

        At all relevant times Freund Baking was ready, willing and able to purchase the property. The court did not believe Freund Baking could have obtained an SBA loan within 30 days, but found that [Freund Baking] or its principals were and are able to obtain sufficient cash and traditional real estate financing within 30 days to pay the $6.4 million purchase price, including that [Freund Bakings] principals were willing to use their personal assets to finance the transaction, [Freund Bakings] bank would have provided a conventional real estate loan within thirty days, and any number of other banks would have been willing to do the same given [Freund Bakings] financial situation.

        [T]he environmental issues associated with the two oil wells on the property were relatively minor and would not have prevented [Freund Baking] from obtaining a conventional real estate loan within thirty days.

Judgment was entered, and the court subsequently awarded attorney fees to Freund Baking based upon the prevailing party provision of the lease. Tubeway filed timely appeals from the judgment and the attorney fee award.

DISCUSSION

Tubeway contends the trial courts award of specific performance was erroneous as a matter of law because (1) it was inconsistent with the jurys verdict that Freund Baking breached the covenant of good faith and fair dealing implied in the lease agreement; (2) Freund Baking failed to prove it was ready, willing and able to pay the $6.4 million purchase price within the requisite time and through trial; and (3) Freund Baking failed to prove it satisfied the condition precedent of negotiating in good faith as to a single appraiser. Tubeways contentions are without merit.[18]

As the parties agree, we review the trial courts decision to grant specific performance for abuse of discretion, and we review findings related to Freund Bakings readiness and ability to perform under the substantial evidence standard.

A.     The trial court was not precluded from ordering

specific performance of the purchase option by the

jurys verdict for Tubeway on its claim for breach of

the implied covenant of good faith and fair dealing.

Tubeway asserts that the trial courts judgment granting specific performance is inconsistent with, and therefore precluded by, the jurys finding that Freund Baking breached the implied covenant of good faith and fair dealing. While the point is not an easy one, we conclude Tubeways position is without merit for several reasons (on which we elaborate, post):

        The first is that Tubeway has improperly applied an established legal principle that a jurys factual findings on legal causes of action are binding on a trial court when it subsequently considers equitable remedies based on the same facts (Hoopes v. Dolan (2008) 168 Cal.App.4th 146, 158-159 (Hoopes) to a situation in which the jury made no factual findings, but merely rendered a general verdict on a cause of action.

        The second (which is related to the first) is that when a trial court considers whether the unclean hands doctrine should bar a claim for specific performance, the court must consider, among other factors, the nature of the misconduct. (See Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 979 (Kendall-Jackson).)

        The third is the general principle that all that is required of a plaintiff, in a specific performance action, is that there be substantial performance by that plaintiff of his obligations under the contract. (Superior Bedding Co. v. Erenberg (1961) 193 Cal.App.2d 86, 92.)

Because there were no factual findings by the jury identifying the nature of [Freund Bakings] misconduct (Kendall-Jackson, supra, 76 Cal.App.4th at p. 979), there is no demonstrable conflict between the trial courts fact findings and any issue[] of fact previously adjudicated by the jury. (Hoopes, supra, 168 Cal.App.4th at p. 158.) It was necessary for the trial court to assess any alleged misconduct in order to determine whether the misconduct made it inequitable to require specific performance of the contract. Since the jury awarded Tubeway only $1.00 in damages for Freund Bakings breach of the implied covenant, thus suggesting that Freund Bakings breach was not substantial enough to preclude the equitable remedy of specific performance, we see no basis upon which the trial court can be precluded, as a matter of law, from concluding that Freund Baking was entitled to equitable relief.

1.      The absence of factual findings by the jury.

Tubeway is correct to the extent it points out that [f]irst-tried factual findings must be given conclusive effect . It is well established that a jurys factual findings on legal causes of action are binding on a trial court when it considers equitable remedies based on the same facts. (E.g., Hoopes, supra, 168 Cal.App.4th at p. 159.) (Likewise, a court may decide equitable issues first, and this decision may result in factual and legal findings that effectively dispose of the legal claims.) (Id. at p. 157.) Hoopes tells us that in federal cases where legal issues are usually tried before equitable issues, the presumptive rule is that the first factfinder binds the second on factual issues actually litigated and necessary to the result. (Id. at p. 158 [[w]here legal claims are first tried by a jury and equitable claims later tried by a judge, the trial court must follow the jurys factual determinations on common issues of fact].) Thus, Hoopes held that the trial court erred in disregarding the jurys verdict when ruling on equitable remedies that relied on common issues of fact previously adjudicated by the jury. (Ibid.)

But here, the jury made no factual findings (and was not asked to do so).[19]Because the jury made no factual findings, the parties are left to argue (and do so at considerable length) about what the jurys verdict must have meant. But at the end of the day, we simply do not know what specific facts the jury found in concluding Freund Baking breached the implied covenant of good faith and fair dealing. It follows that the trial court did not err in its treatment of this general verdict. All we know is that the jury apparently found that Freund Baking did something that, in the words of the jury instruction, unfairly interfered with Tubeways right to receive the benefits of the contract, yet caused no harm to Tubeway. Tubeways only specific argument to the jury on the point was that Freund Baking breached the obligation that parties have in a business relationship to treat each other in good faith and be straight with what theyre trying to do, not to try to trick each other. There appear to be at least three possibilities:

(1)  Freund Baking argues the verdict on breach of the implied covenant must have related to its conduct with respect to the March 2006 rent payment, rather than its conduct relating to the purchase option. It theorizes that the jury could have credited Sussmans testimony that Freund Baking paid the March 2006 rent after normal business hours on March 6, and could have considered this an attempt to harass Sussman, thus breaching the implied covenant of good faith and fair dealing, but causing no damages. Freund Baking points out that the jury did not award Tubeway the $100,000 in liquidated damages, which it was required to do if Freund Baking breached the purchase option contained in the lease. (The court instructed the jury that it must award Tubeway $100,000 in liquidated damages if it found that the transaction did not close within 30 days of the purchase price determination date for any reason other than Tubeways default, and Tubeway told the jury that damages on both of its claims (breach of contract and breach of the implied covenant) were the same.)

(2)  In its reply brief, Tubeway argues that the jury must have found that Freund Bakings purchase-option conduct breached the implied covenant, because (so it argues) that is the only interpretation of the implied covenant verdict that comports with the jurys verdict that Freund Baking did not breach the contract (and comports with the instructions and arguments to the jury). Among other things, Tubeway argues that Freund Bakings theory (that its conduct relating to the March 2006 lease payment accounted for the implied covenant verdict) is wrong, because (a) the jury must have found the March 2006 lease payment was timely (or it would have awarded the several thousand dollars in late penalties provided in the lease) and (b) no one pled, argued or testified that a timely-but-last-second rent payment could breach the implied covenant. (But Tubeway did plead in its cross-complaint that in March 2006, Freund attempted to increase the pressure on Tubeway by delaying the payment of rent, continuing its pattern of bad faith. And Tubeways counsel argued in closing that Sussman knew he had been sued. He knew that there was a chance that he was gonna try to be squeezed, where they [Freund Baking] were gonna try to withhold the rent, which would put him in a difficult position with the mortgage .)[20]

(3)  A third possibility is that the jury may have thought that Freund Bakings actions after it appointed its appraiser on October 14 constituted the conduct by which Freund Baking was not be[ing] straight with what theyre trying to do, and thus breached the implied covenant of good faith. Thus in late November, Jonathan Freund and Sussman met (according to Freund), but Freund apparently said nothing to Sussman about Freund Bakings appraisal of the property (of which Freund by then knew the results). Tubeway expressly argued that the best evidence that Sussman was lulled into inactivity and was reasonable in being lulled was the whole series of e-mails where after the [October 14th] letter went out, Mr. Sussman was sending faxes, was writing letters, and finally he [Sussman] said werent we supposed to get together to discuss the price. Despite telling the Bank that Tubeway had missed the deadline and its appraisal would be dispositive, Freund Baking [n]ever said that to Eric Sussman, and never gave [Sussman] the courtesy of letting him know that that was true. Tubeway