Kline v. The Redevelopment Agency of the City of Pomona

Filed 6/17/08 Kline v. The Redevelopment Agency of the City of Pomona CA2/7

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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 SEVEN

APPEALS from a judgment and an order of the Superior Court of Los Angeles County. Dan Thomas Oki, Judge. Affirmed.

Shernoff Bidart & Darras, Michael J. Bidart and Ricardo Echeverria; the Ehrlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiff and Appellant.

Alvarez-Glasman & Colvin and Arnold Alvarez-Glasman; Squire, Sanders & Dempsey, Stephen T. Owens, Don A. Proudfoot, Jr., and Lan T. Quach for Defendant and Appellant the Redevelopment Agency of the City of Pomona.

Knapp, Petersen & Clarke and Steven Ray Garcia for Intervenor and Respondent Home Depot U.S.A., Inc. and Defendant and Respondent Credit Suisse Leasing 92A.

Robert J. McKay for Defendants and Respondents Pomona Marketplace, CA Fund Investments, Inc. and Northridge Commercial.

_____________________________

In April 1991, plaintiff Debra Kline formed a partnership with plaintiff Calvin Wiekamp and entered into an agreement to purchase a 22.94 acre parcel of commercial property (Property) located in defendant City of Pomona (City) from its owner Cotter & Co. (Cotter) to develop as a retail commercial center. This lawsuit arises from the foreclosure of a $9.3 million loan from defendant the Redevelopment Agency of the City of Pomona (Agency) to Kline.

The court entered judgment in favor of Agency (and others) on the basis the foreclosure was valid. Kline contends that judgment was improper partly because in a previous appeal,[1]this court found the foreclosure was void. Kline also contends the court abused its discretion in awarding excessive attorneys fees to Agency based on an inadequate showing. On cross-appeal, Agency contends the court improperly denied its contract damages (which it would be entitled to only if the judgment is reversed). Agency also contends it was entitled to an award of damages for fraud in the inducement of the $9.3 million loan even if the judgment is affirmed. We affirm the judgment and order.

FACTUAL AND PROCEDURAL SYNOPSIS

I. Factual Background

A. The Parties

When the lawsuit was first filed, there were three plaintiffs -- Kline, Wiekamp and their partnership. The defendants were Agency, the City and nine individuals affiliated with the City.

By the time of filing the second amended complaint, David Weiss, the trustee for the foreclosure sale, had been added as a plaintiff. In September 1997, Home Depot U.S.A., Inc., which had become a ground lessee of a portion of the center after the foreclosure, filed a complaint in intervention. After remand in Kline I, the purchasers of certain portions of the Property from Agency, which had bought the Property at the foreclosure sale, were served as Does. The purchasers added were Credit Suisse Leasing 92A, L.P., Pomona Marketplace LLC, CA Fund Investments, Inc., and Northridge Commercial LLC.

By the time the third amended complaint (TAC) was filed, Wiekamp had settled out of the case, leaving Kline with a claimed 50 percent in the Property, and the partnership had dismissed its claims. The individual defendants affiliated with the City had been dismissed. During trial, Weiss and the City were dismissed.

The remaining parties on appeal are plaintiff Kline, defendants Agency and the subsequent owners, and intervenor Home Depot.

B. Initial Purchase

When Kline and Wiekamp bought the Property, they agreed to pay $11.5 million, with a down payment of $2.2 million and a note for $9.3 million to Cotter secured by a first deed of trust on the Property. Because Kline[2]could not come up with the down payment, the transaction was reconfigured to provide for a $900,000 down payment, a short term loan of $1.3 million, secured by a second deed of trust, and a note for $9.3 million, secured by a first deed of trust. The contract precluded Kline from any work on the site, including demolition of a large warehouse, until the $9.3 million and its related interest were paid.

Kline provided Cotter with a grant deed that Cotter could record at any time stating it was given in lieu of foreclosure.

Shortly before escrow closed, Cotter advised Kline that serious contamination had been discovered on the Property, meaning it would be unusable for an extended period of time.

Almost as soon as escrow closed, disputes about various issues relating to the Property arose between Kline and Cotter. Kline, who was negotiating with Agency for financial assistance as the Property was in a contemplated redevelopment area, notified Cotter she could not and would not make the $1.3 million payment due in August 1991 as called for by the note. Cotter began threatening to record the deed in lieu of foreclosure.

C. Agency Lends Kline over $13 Million Which Was Not Repaid

In December 1991, Kline and Agency entered into an owner participation agreement (OPA) providing for a $2 million loan from Agency to Kline secured by a deed of trust. The loan was for two years and, at Klines suggestion, bore a 20 percent per annum interest rate. Before the first $700,000 of the loan was to be disbursed, signed leases with Toys R Us (Toys) and Kids R Us (Kids) were required. The $1.3 million balance was intended to be disbursed upon Kline procuring letters of commitment from major tenants for 110,000 square feet of additional space and was to be used to repay the $1.3 million short term note to Cotter.

Not long after the OPA was signed and before the loan was disbursed, Kline and Agency entered into a first amendment to the OPA (First Amendment) on February 3, 1992. The First Amendment provided the $2 million loan would be forgiven if certain conditions were met; those conditions were never met. The required square footage for which Kline was to obtain letters of commitment was reduced to 103,000.

On March 3, 1992, Kline obtained signed leases from Toys and Kids, and the first $700,000 was distributed by Agency. In May 1992, after Kline advised Agency she had substantially complied with the terms of the amended OPA, the remaining loan balance was disbursed and paid to Cotter in payment of the overdue note. Throughout this period, Cotter continued to threaten to record the deed in lieu of foreclosure, and Kline continued to conceal its existence from Agency.

Approximately one month after distribution of the $1.3 million, Kline sought Cotters permission to demolish the warehouse prior to paying the $9.3 million in the Cotter contract so she could comply with her obligations for construction of the center; she was unsuccessful.

Shortly thereafter, Kline commenced negotiations with Agency for more financial assistance, including asking for a $9.3 million loan and a restructuring of the arrangement between Kline and Agency. Without the ability to pay off the $9.3 million note to Cotter coming due on December 31, 1992, Kline could not demolish the warehouse and start construction on the center or get financing from any commercial source. The negotiations culminated in the execution of the second amendment to the OPA (Second Amendment) on November 23, 1992.

Two developments paralleled the negotiations. First, Klines dispute with Cotter escalated to federal court litigation which resulted in an agreement to refer Cotters cross-claims to binding arbitration, which Kline ultimately lost.

Second, Toys demanded the termination of the Kids lease. In September 1992, Kline agreed to the lease termination on the condition the termination be concealed until after the Second Amendment had been concluded and the $9.3 million loan had been disbursed by Agency. The funds were disbursed in February 1993. Kline concealed the termination of the Kids lease until late August 1993.

The Second Amendment extended the due date of the original $2 million note to February 3, 1996. Under the terms of the Second Amendment, Agency issued a conditional letter of commitment stating Agency would make Kline a loan of $9.3 million, provided all of the conditions precedent to funding the Loan as set forth in the Second Amendment have been fulfilled. One of the conditions precedent was that Kline had to present evidence the leases with Toys and Kids remain in full force and effect. Despite this requirement, Kline did not advise Agency of the agreement to terminate the Kids lease until after the disbursement of the loan funds.

Kline called on Agency to make the loan. On February 17, 1993, the $9.3 million loan from Agency to Kline funded. The loan was evidenced by a promissory note (Note) secured by a deed of trust (Deed). That same day, Kline and Toys signed the agreement to terminate the Kids lease.

According to Agency, at the close of escrow on the Second Amendment, the principal encumbrances against the Property were a first trust deed of $9.3 million to Agency (with the final balance due in 1998), a second trust deed of $1.45 million to Agency (due on February 3, 1996), a third deed of trust to Cotter in an amount to be determined if Cotter prevailed in the litigation with Kline (as it ultimately did), and a fourth trust deed to Agency for $550,000 (also due February 3, 1996.)

By May 1994, both halves of fiscal year 1993-1994s real estate taxes were delinquent in the amount of $152,975.11, including penalties, and Toys was writing to Kline demanding immediate payment of the delinquent taxes. By the time of foreclosure, the past due real estate taxes and penalties and associated tax liens exceeded $1 million. Kline was aware of the delinquent taxes and warned Agency, in writing, the Property would be lost at a tax sale scheduled for June 1996.

Shortly after the $9.3 million loan funded, Agency approved a third amendment to OPA (Third Amendment). Under the Third Amendment, Agency agreed to make an unsecured loan to Kline for $723,450 partly to enable her to complete the grading of two development pads for Kids and Toys. The loan had a term of one year from the date of funding, which was agreed to be April 5, 1993.

At the beginning of September 1993, Kline wrote to Agency seeking about $1.4 million in additional public assistance, claiming Toys would cease construction of its building and terminate its lease unless further development funds were available. Cancellation of that lease would have meant there was no tenant legally committed to the center. On September 20, 1993, Kline, Agency and Toys entered into a tri-party agreement (Tri-Party Agreement) pursuant to which Agency advanced another $1.4 million, which Kline agreed to repay on the same terms and conditions of the $9.3 million loan. The Tri-Party Agreement recited Kline had defaulted in the performance of various obligations under the OPA and the Lease. The Toys store opened in November 1993.

D. Stalled Development of The Center

In May 1994, Kline entered into a reverse build to suit lease with Circuit City under which Circuit City would advance Kline the money to build the store, but Kline would have to reimburse Circuit City to obtain title to the building. The lease also contained a series of payment dates so that if the money was not repaid by each successive date, the amount of rent rapidly stepped down. Kline never paid back any of the funds advanced by Circuit City. By the middle of 1995, the rent had declined to $0.

Under the Toys lease, as amended by the Tri-Party Agreement, despite opening at the end of 1993, Toys paid no rent until November 1, 1994, and then rent was limited to one percent of retail sales until a co-tenancy requirement was met, and the requirement was never met. As of December 1994, Circuit City and Toys were the only open tenants.

In September 1994, the mandatory arbitration with Cotter ended in its complete victory. The September arbitration award became a November 1994 judgment which was recorded as a lien on the Property. From that time on, no financing was available to Kline without her first dealing with her obligation to Cotter. The project was stymied.

E. Negotiations to Divide The Property

The Second Amendment provided that payment on the loan would begin at the beginning of a calendar quarter 18 months after the date of funding. The date of funding of the $9.3 million loan was February 17, 1993, 18 months from funding was August 17, 1994, so the first quarter thereafter began on October 1, 1994.

During much of this case, Kline contended the first payment was due on April 1, 1995, but was deferred to April 1, 1996.

In Kline I, this court concluded that while the first payment was due on October 1, 1994, it was deferred for up to 12 months and became a deficient amount pursuant to a provision in the Second Amendment.

The Cotter arbitration award brought matters to a head around the time the first payment was due. A string of correspondence between Kline (and her then lawyer Cris Klingerman) and Agency ensued. The thrust of the correspondence was that the project was unable to go forward without financing, she could not obtain financing with the Cotter judgment and deed against the Property, the property taxes were seriously delinquent and could not be paid, the Circuit City lease payments would vanish if the $1.9 million in tenant improvements was not repaid soon to Circuit City, and the only solution was to divide the Property in a way that would leave Kline able to finance her portion. Kline repeatedly suggested using foreclosure in ways designed to defraud her junior secured creditors. The letters show Kline knew she owed a substantial payment to Agency, was seriously delinquent in payment of her property taxes, and her only hope was to get Agency to divide the center in such a way that the portion Agency took would bear the debt.

On December 19, 1994, Kline wrote Agency stating she was negotiating a discount of Cotters note and asking for the City to allow us to utilize the funds that we would have normally used to make payments to the Agency in order to continue to progress with the installation of the improvements needed in the common area.

On December 20, 1994, Darrell George, Agencys economic development director, wrote Kline declaring her in default for not having made the $191,544.31 payment.

On January 4, 1995, Kline wrote, stating in part:

We need to be able to use the rent generated from Circuit City to complete some of the landscaping and additional work required in the improved portion of the common area. We are also willing to forego collecting any construction management fees or our percentage of the rent for our investment, at this time, as agreed in the OPA.

Kline wrote to George on February 7, 1995, again requesting use of the rent proceeds for landscaping in lieu of making a loan payment. Following a meeting with Kline on April 4, 1995, Severo Esquivel, the City Administrator, wrote a memorandum to George with two action items -- Klines request to use funds for landscaping and infrastructure and following through on traffic issues. On May 2, 1995, George wrote to Kline about the Third Amendment and authorized the use of rental income for signalization and landscaping.

In May 1995, there began a series of letters from Kline stressing the projects perilous financial state and proposing a division of the project. On May 3, 1995, Kline proposed that about four acres of the unimproved area designated for stores be transferred to Agency, and, in return, Agency release Kline from all loan and other obligations. Kline stated that would allow Agency to separately finance its portion and would insulate from liability, including potential loss of a portion of [Agencys] investment by [Cotters] forcelosure. The letter noted that possible consequences if no deal was struck included loss of Circuit City rent for the remainder of the lease term and nonpayment of real property taxes currently in excess of $600,000.

On June 8, 1995, Kline wrote to all members of the City Council with copies to Agency and the City Attorney reiterating the proposal in the May 3 letter and suggesting an alternative split and noting the penalties and interest on taxes and other encumbrances continue to accrue. On June 27, Kline wrote to the City Attorney with further variations and noted the proposal would allow her to obtain independent financing to pay the property taxes.

Negotiations continued and Kline made another proposal on October 26 with another variant of the division. The letter noted financing had to be obtained or the Property might be sold for delinquent taxes and independent financing would save the Property from the tax sale scheduled for June 1996. None of the proposals was acceptable to Agency.

F. Foreclosure

On February 1, 1996, the foreclosure trustee under the Agencys trust deed, recorded a statutory notice of default (NOD). The NOD specified three types of default: (1) failure to pay the accelerated principal balance of $9.3 million, plus interest from December 20, 1993; (2) failure to develop the property to the fullest extent to obtain the full base rent of existing tenants Toys and Circuit City; and (3) failure to pay taxes and any delinquent taxes.[3] It is undisputed that at the time the NOD was recorded, Kline had not paid the accelerated principal or any installment and there was a massive delinquency of the property taxes.

Negotiations continued. On March 15, Kline made another proposal to transfer some of the improved property to Agency; rather than reallocating the debt to Agency, Kline now proposed a division of the proceeds of the foreclosure sale if the project was sold to a third party:

This proposal would require the pending foreclosure to be progressed after assignment of a percentage interest in the Note and Deed of Trust to Participants [Klines] assignee or third party to insure title will be unencumbered after completion of the foreclosure process. Should the foreclosure result in cash proceeds at time of foreclosure action, the developer [Kline] will share in those proceeds in consideration for its current full ownership interest in a percentage equal to Participants division of building area as it relates to the total building area.

The proposal also contemplated Agency would cancel all debt owed by Kline and assume the responsibility to pay the back property taxes.

On April 1, 1996, Agency responded and agreed to some portions of the proposal but sought to change other portions and rejected the request for it to pay back taxes. On April 15, Kline reasserted her proposal with a slight improvement in the terms for Agency but without changing the proposal that Agency use the pending foreclosure to eliminate all junior liens against the Property and insisting she would not pay delinquent or future taxes.

On May 17, 1996, Kline made basically the same proposal as in the March 15 and April l5 letters with some tweaking of the provisions. Kline again noted she would not pay for deliquent taxes and reiterated her desire the foreclosure sale proceed, but with provisions to assure her a share unencumbered by junior lienholders. That proposal was renewed on May 24 and May 29.

Although Klingerman drafted a letter requesting reinstatement figures on May 13, 1996, it was never sent. The first letter demanding reinstatement figures was sent by fax to the City Attorneys office after the close of business on May 30, 1996, when reinstatement was no longer statutorily allowed. (See Hicks v. E.T. Legg & Associates (2001) 89 Cal.App.4th 496, 510, fn. 9.)

The first communication from Kline or her attorney that purported to set out alleged deficiencies in the foreclosure was Klingermans letter of June 3, 1996, which asserted that no contractual notice of default could be sent out until April 2, 1996.

The foreclosure sale went forward on June 5, 1996. Agency purchased the Property with a credit bid at the sale.[4]

Over the next two years, Agency brought the property taxes current at a cost exceeding $1.l million, paid Circuit City in excess of $2 million to reimburse it for the tenant improvement loan and restore full rent from Circuit City, sold the land for the Home Depot store to defendant Credit Suisse for approximately $1.1 million, and sold the balance of the center to defendant Pomona Marketplace for approximately $7.9 million.[5]

II. Procedural Background

A. Operative Pleadings

This lawsuit was initiated on May 31, 1996, five days before the foreclosure sale. Kline made no effort to halt the sale by seeking a restraining order or other injunctive relief. The original complaint, which named 12 defendants and had 11 causes of action, was never served.

A first amended complaint was filed, and, following law and motion proceedings, a second amended complaint (SAC) was filed in January 1997. The SAC was the operative complaint at the time Kline I, II and III were decided and until the day jury selection began. It also had many causes of action including one for wrongful foreclosure.

At trial, the operative complaint was the third amended complaint (TAC) filed on January 11, 2005. It withdrew all claims except for two breach of contract claims against the City and Agency and a wrongful foreclosure/quiet title cause of action against Agency and the subsequent owners.

Agencys operative pleading was the third amended cross-complaint (TACC). The gravamen of the TACC was: (1) Kline fraudulently induced Agency to lend her millions of dollars in public funds through numerous misrepresentations and active concealment of important facts regarding her true financial condition (grossly overstating her net worth), the state of her title to the Property (concealing the fact she had given Cotter a grant deed in lieu of foreclosure while seeking ever-larger loans using the Property as security), and the true status of the tenant leases that Agency was looking to a source of income to support the loans (affirmatively concealing she had agreed to cancel the Kids lease immediately after the $9.3 million loan funded and continuing to conceal that fact while seeking and obtaining another loan from Agency); and (2) Kline breached numerous written agreements with Agency by failing to satisfy the conditions precedent of the $9.3 million loan, while falsely representing they had been satisfied, failing to perform in accordance with the schedule of performance set out in the agreements, and failing to repay any of the public funds lent to her.

B. Summary Judgment/Summary Adjudication Motions

1. Klines Motion for Summary Adjudication

In July 1997, Kline filed a motion seeking summary adjudication of the eighth cause of action for wrongful foreclosure/quiet title. The opposition by Agency and Weiss requested a continuance to conduct discovery and argued the motion could not be granted because it did not provide facts on either damages or equitable relief.

At the first hearing, the court continued the hearing because further discovery responses were due from Kline. The court permitted an additional round of papers to be filed.

At the November 1997 hearing, the court denied the motion finding there were triable issues of fact, including the existence of any default by Plaintiff.

2. Agencys Summary Judgment Motion

Between the denial of Klines summary adjudication motion in November 1997 and the scheduled trial date in May 1998, there was significant discovery, including several days of Klines deposition.

In February 1998, Agency moved for summary adjudication of all Klines causes of action except the eighth. In opposition, Klines declaration stated that as for the Third Amendment she signed on March 22, 1993, she denied executing that instrument and stated she believed the signatures had been forged or scanned on the document by computer.[6] The court granted summary adjudication.

On July 1, 1998, Agency filed a motion for judgment on the pleadings or summary judgment. Agency argued that under any interpretation of the documents there was a monetary default before the date the NOD was recorded such that alleging and proving the ability to tender was a requirement to any action by Kline based on the foreclosure. Agency asserted it was undisputed that there had been no allegation of tender and plaintiffs had admitted they had no ability to tender.

Kline argued no tender was due as payment had been extended to April 1, 1996, either by provisions in the Second Amendment and promissory note or by virtue of Klines February 7 and Georges May 2 letters regarding the use of funds for landscaping.

The trial court granted summary judgment, and, based on the parol evidence rule, rejected the argument the initial due date had been extended to April 1, 1996. The court rejected the argument the Kline/George letters extended the payment date on the grounds those letters were not reasonably susceptible to that interpretation.

3. Kline I

Kline filed a notice of appeal from the judgment and preliminary rulings, including the denial of Klines motion for summary adjudication. This court decided the appeal on September 24, 2001. This court reversed the summary judgment on the eighth cause of action, stating that a trier of fact could find that no installment payment was in default when the Citys Notice of Default was recorded on February 1, 1996, and that the requirement of tender did not apply if the Notice of Default is recorded when no indebtedness is owing. This court concluded that provisions in the Second Amendment and Note and the landscape letters operated to extend the due date for the first loan installment. The opinion discussed the denial of Klines summary adjudication motion. This court determined the foreclosure was necessarily void because no payment was due when the only notice to cure was issued on December 20, 1994, meaning the NOD was recorded in violation of the terms of the Deed and Note as there was no monetary default. The disposition stated the judgments in favor of defendants were reversed and the cause [is] remanded for further proceedings consistent with this opinion.

4. Post Remand

Following remand from Kline I, there were substantial law and motion proceedings. Two of the law and motion matters led to further opinions of this court, but only one involved Agency as a party.

Agency made a motion for leave to file a second amended cross-complaint against Kline. The trial judge denied the motion, and Agency filed a writ petition. In briefing, one of Klines arguments was that since this court had already granted summary adjudication on the eighth cause of action, an amended cross-complaint was barred by waiver, res judicata and law of the case.

This court granted the writ petition and ordered that Agency be permitted to file its amended cross-complaint. In Kline II, this court rejected Klines arguments Kline I had ordered summary adjudication of the eighth cause of action in her favor and Kline I was res judicata or law of the case, noting that Kline I stated that [u]pon remittitur from the prior appeal, the case was then at large. This court noted plaintiffs had not established undisputed facts regarding damages or remedies.

Pursuant to that ruling, Agency filed its second amended cross-complaint, which was later superceded by the TACC.

In September 1997, Home Depot, which had purchased a portion of the Property from Agency, moved to intervene and obtained summary judgment in its favor when the trial court granted summary judgment for Agency. After the case was remanded in Kline I, Kline moved to set aside the judgment in favor of Home Depot based on Kline I, the court granted the motion, and Home Depot appealed.[7] In Kline III, this court held the judgment was properly vacated as it was based on the same facts as Kline I.

5. The Trial

Trial commenced on January 10, 2005, before the Honorable Dan Thomas Oki. On the first day of trial, the court ruled on various motions. Agency brought a motion in limine to exclude evidence of or reference to the Court of Appeal decisions because it thought Kline intended to tell the jury the only thing it had to decide with respect to the wrongful foreclosure claim was the amount of her damages. Agency took the position it was entitled to try the wrongful foreclosure cause of action and Kline had to prove both liability and damages or other relief.

After the court granted the motion, Kline unsuccessfully petitioned this court for relief seeking a writ directing the trial court to follow Kline I.

After lengthy jury selection proceedings, opening statements were made on January 18, 2005, and testimony began the next day. This court summarily denied Klines writ petition on January 25. On January 27, Kline announced she had elected to pursue only the equitable relief of quiet title on the eighth cause of action and to dismiss with prejudice the remaining breach of contract and negligence claims. The parties then waived the right to a jury on Agencys cross-complaint, and the trial proceeded as a bench trial. The last day of testimony was February 16.

On March 21, Judge Oki issued his tentative decision and, after the parties had submitted proposals in connection with the tentative decision, he issued a detailed statement of decision (SOD) on April 18. Judgment was entered on May 11. Judge Oki found in favor of defendants and against Kline on the eighth cause of action. Judge Oki ruled against Agency on its fraud claims based on lack of reliance and damages. The factual findings of Judge Oki included:

(1) Exhibit 155, a purported letter to Agency from Kline on February 21, 1996, which Kline testified she had faxed to Agency, is not an authentic document that was drafted and transmitted on that date. (Original emphasis.)

(2) By a preponderance of the evidence, Kline had agreed to terminate the Kids lease in September 1992, and, because the lease was a condition precedent for the $9.3 million loan, she insisted the termination be kept confidential by Toys, the parent of Kids, until after the funding of the loan: For these reasons, Kline wilfully [sic] failed to notify anyone at the Agency of the lease termination prior to the funding of the loan.

Ultimately, Judge Oki found that Klines undisputed failure to pay over $1 million in delinquent taxes, to the point a tax sale was scheduled, and Klines undisputed knowledge of that failure was a substantial breach of [her] obligations to the Agency under the Deed of Trust which authorized the Agency to declare a default and initiate foreclosure proceedings. The court further found that default allowed acceleration and the lack of any specific 10-day written notice from Agency about taxes Kline knew were in default was not sufficiently prejudicial to warrant setting aside the subsequent foreclosure sale.

Finally, Judge Oki stated: The court finds that all of these acts by Kline constitute unclean hands on her part, directly related to the transactions she has brought before the court, that constitute a bar to her obtaining the equitable relief she seeks from this court, even if she were otherwise able to sustain her claim.

The court awarded Agency $4,126,638.98 in attorneys fees.

Kline filed timely notices of appeal from the judgment and the order awarding attorneys fees. Agency filed a timely notice of cross-appeal with respect to the judgment on the TACC. This court consolidated the appeals.

DISCUSSION

Klines Appeal

I. Law of The Case

Kline contends the court erred in failing to follow Kline I with respect to the invalidity of the foreclosure as it was the law of the case. (See Continental Ins. Co. v. Superior Court (1995) 32 Cal.App.4th 94, 108 [trial courts factual findings are reviewed for substantial evidence and its conclusions of law are reviewed de novo].) Kline posits the direction in Kline I to proceed in a manner consistent with this courts decision was not a general reversal putting the entire case at issue for new trial. (See Butler v. Superior Court (2002) 104 Cal.App.4th 979, 982 [When an appellate courts reversal is accompanied by directions requiring specific proceedings on remand, those directions are binding on the trial court and must be followed. Any material variance from the directions is unauthorized and void. (Emphasis deleted.)].) Kline Is disposition did not order the court to enter a particular judgment. (Compare Ibid.)

The law of the case doctrine states that when, in deciding an appeal, an appellate court states in its opinion a principle or rule of law necessary to the decision, that principle or rule becomes the law of the case and must be adhered to throughout its subsequent progress, both in the lower court and upon subsequent appeal. (Quackenbush v. Superior Court (2000) 79 Cal.App.4th 867, 874.) In Quackenbush, in a prior opinion, the Court of Appeal discussed the Insurance Commissioners standing to maintain an action against an auditor of an insolvent insurance company. (Id., at p. 873.) The court had stated that, if as it appeared at that time, the insurance company was the auditors sole client, the commissioner would not be entitled to maintain the action, but expressly declined to rule on the question of standing as the record had not been fully developed. (Id., at p. 874.) The court concluded its prior discussion was dicta and not binding and the commissioner had standing to maintain the action. (Id., at pp. 874-875.)

Kline asserts that part II of Kline I held Kline was entitled to summary adjudication and Agencys foreclosure was wrongful as a matter of law and that holding was binding on the trial court on remand. In part I of Kline I, this court reversed the summary judgment on the eighth cause of action (wrongful foreclosure) in favor of Agency noting a trier of fact could find that no installment payment was in default when the NOD was recorded. Although this court indicated in part II that Kline was entitled to summary adjudication of the wrongful foreclosure cause of action because no payment was due when the notice to cure letter was sent, we did not direct the trial court to enter judgment in favor of Kline. As noted in Kline II, Kline had not established damages or remedies. (See Hindin v. Rust (2004) 118 Cal.App.4th 1247, 1259 [summary adjudication has to dispose of an entire cause of action].)

In Kline I, the principal issue was whether Agency properly foreclosed on its loan to Kline. We concluded the trial court erroneously granted summary judgment because the notice of default was defective to the extent it relied on default in loan repayment because no payment was due when the notice to cure was sent or the NOD was recorded. Consequently, we determined a foreclosure sale based on a default that did not exist at the time the NOD was recorded was void. On remand, the trial court found the foreclosure was proper based on a tax delinquency. This situation is somewhat analogous to a trial court sustaining a demurrer on one ground, being reversed on appeal, and then sustaining the demurrer on another ground.

[A]nother aspect of the doctrine of the law of the case must be considered: [L]aw of the case consists in the propositions of law actually decided and applicable to the facts in judgment. It only applies when, upon a subsequent trial, the issues and facts found remain substantially the same, and has no application where the facts alleged and found are materially different from those considered on a former appeal. The doctrine is applied only to the principles of law laid down by the court on appeal as applicable to a retrial of fact. Insofar as the former decision related to the effect of the evidence or the findings on the former trial there can be no application of the doctrine until the facts have been elicited on a retrial. The doctrine not only does not apply to new and additional evidence, it does not apply when explanation of previous evidence appears in the later trial. (Citations omitted.) (Building Industry Assn. v. City of Oceanside (1994) 27 Cal.App.4th 744, 761; see also Eisenberg, et al., Cal Practice Guide: Civil Appeals and Writs (The Rutter Group 2007) 14:190, p. 14-71 [Appellate courts are not bound by the law of the case in deciding a subsequent appeal on a ground not considered by the prior appeal.].)

Accordingly, Kline I is not law of the case regarding whether the notice to cure and NOD justified the foreclosure based on delinquent property taxes. The fact Agency did not seek summary judgment on that basis did not prevent it from raising that ground at trial. The issue is, of course, whether the foreclosure sale was proper based on the tax delinquency.

II. Foreclosure Sale[8]

Kline contends the court erred in finding Agency had complied with the notice and cure provisions before it recorded the NOD, the NOD was defective, and the foreclosure sale was void. An action to set aside a trust deed foreclosure is an equitable action. (Raedeke v. Gibraltar Sav. & Loan Assn. (1974) 10 Cal.3d 665, 671.)

A. Property Taxes

The NOD specified three types of default: (1) failure to pay the accelerated principal balance of $9.3 million; (2) failure to develop the property to the fullest extent; and (3) failure to pay taxes and any delinquent taxes. Agency does not assert the second ground on appeal, and although it discusses whether there was an extension of the time for a loan payment and whether the loan payment was in default at the time of Agencys notice to cure letter, the trial court found that demand was premature and invalid. Accordingly, the only possible ground for upholding the foreclosure sale was the failure to pay property taxes. If one breach is correctly stated, an erroneous statement of other defaults does not invalidate the [default] notice. (Knapp v. Doherty (2004) 123 Cal.App.4th 76, 98-99.)

After the bench trial, the court found that Klines undisputed failure to pay over $1 million in delinquent taxes, to the point a tax sale was scheduled, and Klines undisputed knowledge of that failure was a substantial breach of [her] obligations to the Agency under the Deed of Trust which authorized the Agency to declare a default and initiate foreclosure proceedings. The court found, Agency, as the lender, was a third party beneficiary of the lease between Kline and Wiekamp and [Toys] and may rely upon the ten-day demand to bring taxes current made by [Toys]. The court further found that default allowed acceleration and the lack of any specific 10-day written notice from Agency about taxes Kline knew were in default was not sufficiently prejudicial to warrant setting aside the subsequent foreclosure sale.

B. Notice

1. Provisions of the Deed and Note

Pursuant to Section 4 of the Deed, Kline agreed, To pay, at least ten days prior to delinquency all taxes and assessments. Section 11 of the Deed gave Agency the right to declare all sums secured thereby immediately due and payable upon default in performance of any agreement[9]thereunder. Section 15 of the Deed provides: Notwithstanding anything to the contrary in this deed of trust, Trustor shall be entitled to a 10-day notice and cure period for all monetary defaults . . . Beneficiary shall not exercise any of its rights and remedies under this deed of trust until the expiration of such notice and cure periods.

Section 1 (The Note) of the Note provides: Any default under said Second Amendment . . . which is not cured as provided herein shall constitute a default under this Note. Any such default with respect to the payment or failure to pay money shall be cured within ten (10) days of written notice, . . . Section 4 (Acceleration on Default) of the Note provides: Payment of all principal and accrued interest on the Loan shall be accelerated and become immediately due and payable upon the occurrence of the follow events. Section 4.A.(5) sets forth one such event: If any part of the principal or interest under this Note is not paid when due and remains unpaid after a date specified by a notice to Participant, or if any default under the Second Amendment or the Deed of Trust is not cured as provided herein. [] Any default described in subsection A.5. involving the payment or failure to pay money shall be cured within ten (10) days of written notice, . . .

2. The Notice to Cure

There is no dispute that at the time Agency sent its notice to cure letter, Kline had not paid $1 million in property taxes on the Property or that the letter did not include notice of that default. Kline concedes the failure to pay property taxes was a default under the Deed.

On January 4, 1996, Toys sent Kline a letter stating she was in default under provisions in its lease for failing to timely pay all real estate taxes. The notice stated that unless Kline cured the default within 10 days, Toys reserved the right to avail itself of the rights and remedies in the lease, including the right to pay off the delinquent taxes and deduct that amount from the rent. The trial court found Agency could rely on that letter.

Kline contends that letter did not satisfy Agencys obligation to provide her with notice because, under the lease with Toys, Agency could not assert rights greater than the promisee, and Toys did not have the right to declare a default. (Syufy Enterprises v. City of Oakland (2002) 104 Cal.App.4th 869, 888.) Moreover, Kline notes that even if that letter had come from Agency, it was inadequate as it failed to inform Kline that any failure to cure the default would result in acceleration of the note, and the letter did not require Kline to take any action to protect her interests.

We agree the notice to cure letter was defective because Kline did not have notice her failure to pay the $1 million in delinquent property taxes would result in foreclosure and acceleration of the Note. However, the trial court found Agencys failure to comply with the notice and cure provisions in the Deed and Note was non-prejudicial. Kline relies on Kline I as support for the propositions that notice was a condition precedent to Agencys ability to exercise its rights under the Deed and tender is not required when a foreclosure is based on invalid notice. Kline I determined no tender was required as the NOD was invalid because it accelerated a loan on which no payment was due meaning a condition precedent to the commencement of foreclosure proceedings not been met. In contrast, payment of the property taxes was delinquent at the time the NOD was recorded so the condition precedent had been met. Moreover, Kline was well aware payment of the property taxes was delinquent and had even attempted to get Agency to pay those taxes.

3. NOD

The exercise of the power of sale in a deed of trust is carefully circumscribed by statute. Under these statutes, the beneficiary of a deed of trust must record a notice of default prior to exercising a power of sale. [ 2924, 2924b.] The contents of the notice of default are specified by section 2924. In addition to identifying the encumbered property, the notice of default must contain[ ] a statement that a breach of the obligation for which the . . . transfer in trust is security has occurred, and set[ ] forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation . . . . ( 2924.)

A purpose of the required statement in the notice of default is to afford the debtor an opportunity to cure the default and obtain reinstatement of the obligation within three months after the notice of default as provided in section 2924c of the Civil Code. The debtor is to be given enough information so the default can be cured. [T]he statute is sufficiently complied with if the notice of default contains a correct statement of some breach or breaches sufficiently substantial in their nature to authorize the trustee or beneficiary to declare a default and proceed with a foreclosure. Because nonjudicial foreclosure is a drastic sanction and a draconian remedy, [t]he statutory requirements must be strictly complied with, and a trustees sale based on statutorily deficient notice of default is invalid. (Citations & fn. omitted.) (Ung v. Koehler (2005) 135 Cal.App.4th 186, 202-203.)

The $1 million delinquent property taxes was a substantial breach (and far exceeded the approximately $200,000 loan payment allegedly due) and authorized Agency to declare a default and proceed with a foreclosure.

One typed portion of the NOD stated: the beneficial interest under such Deed of Trust and the obligations secured thereby are presently held by the undersigned; that a breach of, and default in, the obligations for which such Deed of Trust is secured has occurred in that payment has not been made of: Principal Balance of $9,300,000.00 plus interest from 12/20/93; failure to develop the subject real property . . . ; [] Plus all subsequent installments, together with late charges, advances to senior liens, interest, insurance, taxes, trustee fee, all trustee expenses, attorney fees and assessments; any delinquent taxes and/or insurance. (Emphasis added.)

In Anderson v. Heart Federal Sav. & Loan Assn. (1989) 208 Cal.App.3d 202, 206, the notice stated, payment has not been made of: . . . delinquent taxes and/or assessments, if any. The court concluded the use of if any only stated a potential ground for default and did not square with the requirement of section 2924 that a breach has occurred. (Id., at pp. 212-215.) Kline reasons the NOD was similarly defective. Moreover, Kline contends the NOD was not valid because it did specify the tax delinquency as a basis for default, but rather included taxes in a laundry list of things which must be paid, but did not state those things were in default. As defaults, the NOD stated Kline owed $9.3 million, plus items, which included taxes and any delinquent taxes. The NOD listed taxes as being in default and was not similarly qualified.

Citing Miller v. Cote (1982) 127 Cal.App.3d 888, Kline also complains the NOD did not accurately refer to any monetary default and simply referred to the entire principal balance, i.e., it did not explain what underlying breach created the right to accelerate. In Miller, the court determined no act (a transfer of the property) had triggered a due-on clause and, even if it had, the notice of default was premature as such a transfer would have merely given the beneficiary the option to accelerate the due date of the unpaid balance of the deed of trust, but that nonpayment was not a default specified in the notice of default. (Id., at pp. 894-896.) On the other hand, the NOD listed taxes as being in default a default which gave Agency the right to accelerate under the Deed and the Note.

Thus, the NOD was not defective.

In passing, Kline states Agency did not provide her with an itemization for the overdue taxes when she asked for a reinstatement figure. The NOD contained the provision required by section 2924c: Upon your written request, the beneficiary or mortgagee will give you a written itemization of the entire amount you must pay. You may not have to pay the entire unpaid portion of your account, even though full payment was demanded, but you must pay all amounts in default at the time payment is made. Klines written request for a reinstatement amount was untimely. Thus, the NOD was not defective.

4. Voidable Foreclosure Sale

The court found based on a contractual notice defect, the foreclosure sale was voidable not void.

The public policy underlying the comprehensive framework governing foreclosure sales is a concern for swift, efficient, and final sales. (6 Angels, Inc. v. Stuart-Wright Mortgage, Inc. (2001) 85 Cal.App.4th 1279, 1287.) As a general rule, there is a common law rebuttable presumption that a foreclosure sale has been conducted regularly and fairly. Accordingly, [a] successful challenge to the sale requires evidence of a failure to comply with the procedural requirements for the foreclosure sale that caused prejudice to the person attacking the sale. Whether there is sufficient evidence to overcome this presumption is generally a question of fact. Nonetheless, the presumption must prevail when the record lacks substantial evidence of a prejudicial procedural irregularity. (Citations & italics omitted.) (Id., at p. 1284; see also Moeller v. Lien, supra, 25 Cal.App.4th at p. 831 [[T]he presumption is rebuttable as to purchasers other than bona fide purchasers, but [a]s to a bona fide purchaser, . . . the presumption is conclusive.].) The trial court found Agencys failure to comply with contractual provision to provide a 10-day notice to cure was not prejudicial. (See Knapp v. Doherty, supra, 123 Cal.App.4th at pp. 90-97 [premature notice of sale was not prejudicial because the sale was set 29 days after the notice rather than the statutorily required 20 days.].)

As support for her position the foreclosure sale was void, Kline cites Dimock v. Emerald Properties (2000) 81 Cal.App.4th 868, in which a foreclosure sale was conducted by a former trustee even though a new trustee had been substituted for the former trustee. The court concluded the sale was void as only the new trustee was vested with the power to conduct the sale, but noted the homeowner there was not required to rely upon equity to set aside a voidable deed. (Id., at., pp. 876-878.)

Where proper notice is not given, the sale is ordinarily only voidable, not void, and the mortgagor cannot sue to set it aside or quiet title without offering to do equity or paying the debt. This rule seemingly applies even though the defect is a substantial one, where the recitals in the trustees deed create a statutory presumption of compliance. (Citations omitted; original italics.) (4 Witkin, Summary of Cal. Law (10th ed. 2005) Security Transactions in Real Property, 152, p. 950.)

In Little v. CFS Service Corp. (1987) 188 Cal.App.3d 1354, 1359, which was cited by Witkin, the court discussed whether a defect in a foreclosure sale made the sale void or voidable: Although the extent of the defect is not determinative, what seems to be determinative is the existence and effect of a conclusive presumption of regularity of the sale. A deed of trust, which binds the trustor, may direct the trustee to include in the deed to the property recitals that notice was given as required under the deed of trust and state that such recitals shall be conclusive proof of the truthfulness and regularity thereof.

Where there has been a notice defect and no conclusive presumption language in the deed, the sale has been held void. . . . . [] Where there has been a notice defect and conclusive presumption language in the deed, courts have characterized the sales as voidable. The trustor wishing to set aside a voidable sale must prove to the trial court that the conclusive presumption language does not apply to the sale either because there are grounds for equitable relief, such as fraud related to the provision, or because the conclusive presumption does not apply to the buyer, often on the basis that the buyer is not a bona fide purchaser for value. The trustor may then attempt to prove defective notice. (Citations omitted; original italics.)

Section 11 of the Deed provided: [t]he recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. The trustees deed of sale recited the trustee had complied with all applicable statutory requirements of the State of California and performed all duties required by the Deed of Trust. Next, as the Deed contained conclusive presumption language, we look to see if Kline could prove grounds for equitable relief.

As discussed in Kline I, there was at least an issue of fact whether a payment was due. At the time of trial, Kline knew payment of property taxes was delinquent. In Klines communications with Agency about dividing the Property, she stated she would not pay the property taxes and/or suggested Agency pay those taxes.

In October and November 1995, Kline acknowledged in writing to Agency a tax sale of the Property was set for June 1996 and she did not have the funds to pay the taxes. Even after the 10-day notice to cure from Toys and the January 1996 recording of the NOD, Kline did not bring the taxes current before the foreclosure sale in June 1996. Furthermore, Kline testified that she did not have sufficient cash on hand to pay the taxes.[10] Noting those circumstances and section 3532, the trial court found the failure of Agency to provide Kline with another 10-day notice to cure was not sufficiently prejudicial to warrant setting aside the foreclosure sale because requiring another 10-day notice would be requiring the performance of an idle act. We agree. Consequently, the foreclosure sale here was only voidable, not void.

Moreover, the trial court found Kline had unclean hands. (See Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970, 978.) Kline does not challenge that factual finding; rather, she suggests her concealing the agreement to cancel the Kids lease was beneficial, hiding the fact she had given a deed-in-lieu of foreclosure to Cotter was harmless and her attempts to get Agency to agree to eliminate her junior lienholders were unsuccessful. In addition, Kline argues unclean hands is not a defense to a void sale; but this court has determined the foreclosure sale was voidable not void.

Finally, [a] valid and viable tender of payment of indebtedness owing is essential to an action to cancel a voidable sale under a deed of trust. (Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 117; see also FPCI RE-HAB 01 v. E & G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1022 [[A]n essential prerequisite to challenging the foreclosure sale is the ability to tender the amount of the indebtedness or cure the default.].) Kline did not and could not make a tender to pay the property taxes.

As the foreclosure sale was valid, we need not address the other grounds for affirming the judgments in their favor raised by the other defendants. Accordingly, the judgments on Klines TAC in favor of defendants Agency, Pomona Marketplace, CA Fund, Investments and Northridge Commercial are affirmed as is the judgment in favor of Home Depot on its first amended complaint in intervention.

III. Attorneys Fees

The Note and OPA contained attorneys fees clauses. Agency filed a motion see