Lough v. Lough
Filed 6/28/12 Lough v. Lough CA2/1
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
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IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
ONE
RICHARD STEVEN LOUGH,
Defendant,
Cross-complainant and Appellant,
v.
RODGER LOUGH,
Defendant,
Cross-defendant and Respondent.
B229119
(Los Angeles
County
Super. Ct.
No. NC050332)
APPEAL from
a judgment of the Superior Court
of
County, Joseph E. DiLoreto, Judge. Affirmed as modified.
Buchalter
Nemer, Robert M. Dato; HamptonHolley, George L. Hampton IV and Colin C.
Holley for Defendant, Cross-complainant and Appellant Richard Steven Lough.
Callahan
Law Corporation, Rebecca Callahan; Snell & Wilmer and Richard A. Derevan
for Defendant, Cross-defendant and Respondent Rodger Barrett Lough.
——————————
>
Richard
Lough appeals the trial court’s judgment in his action against his mother
Vinetta Lough and his brother Rodger Lough for
fiduciary duty, indemnity, and an accounting. On appeal, he contends the court erred in numerous
respects in adopting the findings of a court-appointed referee determining
issues relating to the parties’ extensive real estate holdings, compensation
due Rodger, and the extent of equalizing payments due Richard. We affirm the judgment as modified to provide
that postjudgment interest runs from the date of entry of judgment.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Richard and
Rodger’s mother Vinetta
name="_ftnref1" title="">[1] was born in 1914 and widowed in 1958, when
Richard and Rodger were eight and 11 years old, respectively. Vinetta’s husband Darwin had been a real
estate developer; after his death, in the 1960’s, Vinetta began to invest in Southern
California real estate with the help of a friend, Dana
Poulsen. Vinetta purchased run-down
houses in foreclosure, repaired them, and rented them out. As a result, over the years, Vinetta amassed
a large real estate portfolio that included both income and non-income
properties worth several million dollars.
Her two sons began to participate in her empire after they became
adults. Generally, Richard contributed
capital, while Rodger assisted his mother in managing and renovating
properties.
Richard
became a CPA and began working at Coopers & Lybrand in 1972. Rodger became a dentist in 1978, and in the
1980’s, Vinetta asked Rodger to help manage her properties full time, so Rodger
gave up his dental practice. Pursuant to
Richard’s advice, Vinetta put Richard and Rodger’s names on some of the
properties for estate planning purposes, although the parties orally agreed that
the properties would continue to belong to Vinetta and returned to her upon her
request.
The parties
kept an operational bank account, which they called the “R&R Account” (for
“Richard” and “Rodger”
into which the proceeds of the properties were distributed,the expenses associated with the properties were paid, and into which Richard
and Rodger made contributions. At times,
they used separate accounts for specific projects. Beginning in mid-1980 until approximately
2005, Rodger began to receive a monthly stipend on account of his work on the
properties in the amount of $4,000; later, the stipend increased to
$5,000. According to Rodger, this
stipend was not “full compensation” for his work on the properties.
In October
2007, Vinetta commenced an action against Richard and Rodger for
duty, breach of contract, declaratory relief, and partition by sale, and
sought to recover title to properties in her portfolio where title had been
transferred to Richard and Rodger. At
issue were the following 18 properties:
1. Unimproved property on Latigo Canyon
Road in Malibu consisting of 193 acres entitled for development by the Coastal
Commission (Malibu Acreage).
2. Residential real property located on
Bayview in Sunset Beach (Bayview).
3. Unimproved property on Portshead Road
in Malibu consisting of 1.56 acres in a residential community with private
beach access rights (Point Dume).
4. Unimproved property located on Shangri
La Drive in Beverly Hills consisting of one-half acre that is rented and
improved as a garden by the next-door property owner (Shangri La).
5 and 6. Improved real property located at 220
and 222 Clarissa, Avalon, Catalina Island, consisting of two side-by-side
bungalows (Clarissa).
7. Improved real property located at 319
Flint Avenue, Long Beach, consisting of a single-family residence built by
Vinetta where Rodger resides with his family (Flint Street House).
8 and 9. Unimproved real property located at
317, 321, and 323 Flint Avenue, Long Beach (Flint Lots).
10. Improved real property located at 6936
Pacific View Drive, Los Angeles, consisting of a single-family residence built
by Vinetta that its rented out to third parties (Pacific View).
11. Unimproved real property located in
Fresno, California, consisting of 900 acres of ranch land in which Vinetta had
a two-thirds interest (Fresno Ranch).
12. Improved real property located at 20214
South Walnut Drive East, Diamond Bar, consisting of a single-family residence
that its rented out to third parties (Walnut).
13. Improved real property located at 1946
Lynda Lane, West Covina, consisting of a single-family residence that its
rented out to third parties (Lynda Lane).
14. Improved real property located on
California Place in McCloud, California, consisting of a single-family house
(McCloud House).
15 and 16. Unimproved real property consisting of two
lots located on Main Street in McCloud, California (McCloud Lots).
17. Unimproved real property located in
Lancaster, California (Lancaster Land).
18. Unimproved real property located at 2737
Laurel Canyon Boulevard, Los Angeles (“Amor” or Laurel Canyon Property).
Vinetta
alleged that Richard and Rodger had honored the oral agreement regarding these
properties by depositing rents, issues and profits from the properties into
Vinetta’s bank accounts and permitting Vinetta to make all decisions concerning
the properties, including whether they were rented, sold, or improved. In 2006, Richard stopped honoring the
agreement, and asserted certain properties belonged to him.
Richard
cross-complained against Vinetta and Rodger, claiming that Vinetta had
defrauded him of ownership of the properties and wrongfully diverted rents to
Rodger. Richard alleged that all
properties had been acquired jointly by all three with funds based upon their
inheritance from Richard and Rodger’s father and grandfather, and that all properties
were owned 50/50 by Richard and Rodger.
In particular, Richard claimed that Rodger and Vinetta had appropriated
the rents from the Shangri La property and permitted Rodger to reside at the
Flint House rent-free. In 2005, Richard
and Rodger purportedly agreed to begin to divide their joint holdings in into
individual holdings, and orally agreed to engage in exchanges of the Clarissa
properties and sale of Richard’s interest in the West Covina and Diamond Bar
properties. Among other things, Richard sought an accounting from Rodger.
Trial commenced on May 5,
2008. The matter was settled, as
evidenced by a judgment entered May 16, 2008, pursuant to which the parties
agreed that title to the Bayview Property, Point Dume Lot, Shangri La property,
and Laurel Canyon properties was quieted in Vinetta as her sole and separate
property.
On May 16,
2008, the parties agreed to a modification
of the settlement. The parties agreed to
the appointment of a referee pursuant to Code of Civil Procedure section 639
(reference proceedings), and further agreed that Vinetta would relinquish all
interest in the remaining 14 properties
that the properties would have a stipulated value as of May 5, 2008, as set
forth in the order appointing referee.
Richard and Rodger confirmed that the two bungalows located at 220 and
222 Clarissa, Avalon, had previously been deeded to Rodger and Richard,
respectively as part of a prior settlement.
Further,
the parties agreed Malibu Acres and Fresno Ranch would be sold and the net
proceeds divided between Richard and Rodger, and Richard and Rodger would own,
50/50, the Flint Avenue properties, Pacific View, McCloud House, McCloud Lots,
and Lancaster Property.
Finally, to
the extent Richard and Rodger disputed their respective contributions in four
remaining properties (the two Clarissa bungalows, Lynda Lane, and Walnut), the
parties agreed to submit the matter to a referee. The court instructed the referee to consider,
among other things, monetary contributions made by the parties towards the
acquisition, management, improvements, repair, development and entitlement of
such properties, as well as any efforts to increase the value of the properties,
and to determine the value of such nonmonetary contributions. The referee was to consider any discrepancy
in value of the properties divided between Richard and Rodger pursuant to the
settlement; all prior agreements between Richard and Rodger regarding the
Walnut and Lynda Lane properties, the value of benefits received by Richard and
Rodger related to these properties, including any tax benefits, and
unreimbursed expenses.
On August
1, 2008, Richard and Rodger agreed to a property settlement in which they
agreed to the values of 317, 319, 321, and 323 Flint, Pacific View, the McCloud
House, the McCloud Lots, and the Lancaster Land. Further, they agreed that the properties
would be divided between them, with Richard receiving the 321 and 323 Flint
Lots and the two McCloud Lots. Rodger
received the house at 319 Flint and the 317 Flint Lot. The parties agreed to sell and divide the
proceeds of Pacific View, the McCloud House, and the Lancaster Land.
Referee’s Hearings
The referee
conducted 11 days of evidentiary hearings
during November and December 2008, culminating in a report dated January 12,
2009. During the hearings, the parties
testified as to the following issues, and the referee made the following
findings:
(a) Pacific
View
The Pacific
View property was a lot given to Vinetta.
The lot was a hillside lot and required Rodger to hire an engineer to
make it suitable for building. Rodger
built a house on the lot at a cost between $92,000 and $118,000, all of which
was contributed by Vinetta. The parties
stipulated to a value of $800,000 for the property, and though Saddington,
Rodger’s expert accountant, opined the Rodger was entitled to 20 percent of the
net profit upon sale and a five percent project manager’s fee, plus $30 an hour
for Rodger’s physical labor in doing interior finish work on the house. Richard’s expert witness John Tollman
disagreed with Saddington, finding Rodger’s figures excessive, but offered no
testimony as to what Rodger’s compensation should be. The referee recommended a fee of 20 percent
of the net proceeds of sale of the Pacific View property, and denied an
owner/builder fee.
(b) Malibu
The Malibu
Acreage consists of 193 acres assembled by Vinetta over a period of years. The first 10 acres were a gift from Dana
Poulsen in 1978. At Vinetta’s request,
Rodger contacted neighboring parcel holders and over a period of seven years,
acquired another 110 acres; the $240,000 in funds for the purchase came from
Vinetta. In 1989, an additional 73 acres
were acquired from an adjacent parcel, with Richard paying $178,078 and Rodger
$43,978.
Once the
acreage was assembled, over a period of four years Rodger obtained the
necessary permits to allow development of the acreage. He obtained lot line adjustments, easements
for access and utilities, fire department approval for a fire access road,
designed floor plans for houses to be built, and obtained necessary permits
from Los Angeles County and the California Coastal Commission. The property is permitted for construction on
six lots. Once the process was completed
in 1994, Rodger insured that the permits were properly renewed. At the time of the referee’s report, the
property was listed for sale for $8.5 million.
Rodger’s
accountant, Hugh Saddington, testified that developers who handle entitlement
issues usually receive a “success fee” or profit participation fee that can be
as much as 40 percent of the net profits.
John Andreotti, a real estate developer, also testified as an expert to
success fees in the range of 30 to 40 percent for entitlement work. Nonetheless, in this case Saddington adopted
a 20 percent figure. The referee adopted
Saddington’s recommendation of a 20 percent fee from the sales proceeds of the
Malibu land.
(c) 220/222
Clarissa
Richard
contributed $95,525 towards the purchase of 222 Clarissa (bought in 1993) and
$187,200 towards the purchase of 220 Clarissa (bought in 1996). Vinetta provided the balance of the purchase
prices. The properties were 1909
bungalows, and had deficient foundations.
The parties rebuilt 222 and 220 Clarissa. Rodger did much of the work himself.
The parties
had an undivided one-half interest in both properties; however, pursuant to a
prior 2006 agreement, the parties agreed to exchange these one-half interests
in an Internal Revenue Code section 1031 (26 U.S.C. § 1031) tax-free exchange
such that Richard became the owner of 222 Clarissa and Rodger became the owner
of 220 Clarissa.
Due to the
fact Richard reported the transfers were of equal value on his tax return, the
referee denied Richard’s claim of offset for unequal values based on the
declarations on Richard’s tax returns.
(d) Flint
Lots
Vinetta
acquired 317 and 319 Flint in 1981 for $45,000.
Neither Richard nor Rodger contributed any funds. The lots contained abandoned oil wells,
requiring remediation at a cost of $90,000 before construction could take
place. Rodger undertook the remediation
work and built a house on 319 Flint using proceeds from Vinetta’s sale of a
non-R&R property; Rodger did some exterior finish work on the house
himself. The lot at 317 Flint has the
necessary permits and other services (sewer, etc.) required for building. Rodger was awarded 317 and 319 Flint in the
June 20, 2008 property division. The
referee denied Rodger’s claim for compensation for physical labor and
management fees because Rodger had been awarded the property and thus was
enjoying the benefit of the property’s increased value.
Richard and
Rodger acquired 321 and 323 Flint in 1996 for $70,000. Richard paid approximately $35,000 of the
purchase price and R&R funds paid the balance. Richard claimed his funds were an “interest
free advance” on account of Rodger’s improvement work. Rodger undertook the remediation work on the
lots, which had abandoned oil wells, and entitled them for building, including
obtaining site plan reviews and sewer hookups.
Richard was awarded 321 and 323 Flint in the June 20, 2008 property
division. Saddington recommended
physical labor costs be awarded to Rodger of between $40 to $60 per hour, a
five percent manager’s fee, and a 20 percent “success” fee. The referee recommended a 10 percent success
fee to Rodger because the four lots underwent remediation at the same time and
321 and 323 Flint were factored into the recommendation for 319 Flint.
(e) The
“Napkin Agreement”
Pursuant to
an informal handwritten agreement (the Napkin Agreement) made in September
2005, Richard and Rodger agreed that Richard would transfer Lynda Lane and Walnut
to Rodger for $380,000; the purchase price would be interest free; and the
monies would be due upon the sale of the Malibu property. They further agreed to compare Richard’s
loans and advances with Vinetta’s records and any amounts owed would be paid
out of the Malibu property.
Referee’s Report
The referee
made findings on 24 disputed issues. In
addition to the findings noted above, the referee also found, as relevant here:
1. At the November 25, 2008 hearing, the
parties stipulated that Richard made monetary contributions to the R & R
account to cover acquisition costs in the amount of $1,297,269, and Rodger owed
$648,635 to equalize Richard’s contributions.
2. At the November 25, 2008 hearing, the
parties stipulated that Richard was entitled to a credit of $63,000 by reason
of Rodger’s use of the house at 319 Flint rent-free since November 2004. The court found no further rent was due
Richard after the August 1, 2008 property division order.
3. At the November 25, 2008 hearing, the
parties stipulated that Richard should be credited with $380,000 on account of
the Napkin Agreement when Richard quitclaimed his one-half interest in Walnut
and Lynda Lane to Rodger.
4. At the November 25, 2008 hearing, the
parties recognized a value discrepancy of $500,000 between Richard and Rodger
pursuant to the Division order of August 1, 2008, resulting in the referee
recommending a credit to Richard of $250,000.
Further, the division order failed to award the Lancaster Land to
Rodger; thus, including the value of this land of $50,000 plus an additional
$25,000 Rodger owes to Richard increased the value discrepancy to $275,000.
5. With respect to the McCloud House,
although Rodger claimed a five percent project manager’s fee for building the
house, Rodger did not keep records of his time spent. As the property was to be sold, the referee
awarded Rodger 50 percent of the sales proceeds on the belief that the
increased value would compensate him for work done.
6. The court awarded various other
credits, including $413,940 representing Rodger’s salary, to be credited
against his nonmonetary contributions; rents Rodger collected from Bayview in
the amount of $100,309, to be credited against his nonmonetary contributions;
and Richard’s payments to Rodger of $30,000 as compensation for work, to be
credited against his nonmonetary contributions.
With
respect to tax benefits, the referee was unable to make any findings due to the
unavailability of the bulk of Richard’s tax returns.
Referee’s Supplemental Report
After
considering objections filed by Richard and Vinetta, on March 26, 2009, the
court entered its order on the referee’s recommendation. The court adopted the findings and
recommendations of the referee with six exceptions, and sent the matter back to
the referee. The court requested, among
other things, further explanation of Rodger’s success fee calculations and
ordered Richard to produce his tax returns.
On October
14, 2009, the referee issued his supplemental report and recommendations.
1. The referee stated that the 20 percent
success fee was selected for Rodger because “it was deemed the most reliable
means to arrive at the value of his work.”
With respect to the building of the Pacific View house, Saddington
testified that Rodger should be compensated three ways, for (1) hours
spent constructing the home; (2) a five percent management fee for
overseeing contractors; and (3) a 20 percent success fee. As Rodger had not kept time records,
Saddington could only rely on estimates; hourly rates were questionable because
Rodger was not a trained contractor; a management fee was inappropriate because
Rodger was an owner/builder; thus, a success fee was the most reliable
compensation. With respect to the Malibu
lots, although no construction was involved, because Rodger kept no time
records, it was similarly “difficult, if not impossible, to assign a fixed
dollar amount for his efforts.” All
three experts (Saddington, Andreotti, and Tollman) agreed that a success fee
was an acceptable means to compensate someone who had not made a monetary
contribution to property but who had created value. The Malibu property was appraised as having
an approximate “as is” market value of $3.75 million.
2. Richard’s request for $141,363 from
Rodger on account of the Clarissa properties was denied. The claim was based upon Richard’s total
monetary contributions of $282,725, one half of which was $141,363. However, Rodger rebuilt both properties,
creating a substantial increase in their value—the parties stipulated 220
Clarissa was worth $650,000 and 222 Clarissa was worth $1 million.
3. Based upon a review of Richard’s tax
returns, the referee’s analysis of the shifting of the tax benefits resulted in
a finding that Richard owed Rodger $52,992.
4. With respect to the two sets of Flint
lots (317/319 and 321/323), the referee found that 317, 321 and 323 were
unimproved lots, while 319 Flint is improved with a residence. Neither Richard nor Rodger contributed any
funds to the purchase of 317 and 319 Flint.
Thus, Rodger enjoyed the increased value of 317 and 319, offsetting his
monetary contribution.
Court’s Judgment
The trial court’s judgment
incorporated the referee’s findings and the agreements of Richard and Rodger
regarding the division of properties.
The court found that Richard made monetary contributions of $1,297,269
and was entitled to credit from Rodger of one-half of that amount
($648,635). In addition, Richard was
entitled to an additional credit of $481,703 consisting of:
(a)
$63,000 for rents from 319 Flint,
November 2004 through July 2008.
(b) $9,852 for one-half of payments made from the R&R account
for Rodger’s taxes.
(c) $41,800 for one-half of rents for Pacific
View from June 2005 to July 2008.
(d) $8,947 for one-half of taxes paid for an
unrelated property belonging to Rodger.
(e) $206,970 for one-half of the stipend
payments made to Rodger during July 1997 through June 2005.
(f) $100,309 representing one-half of the
rents for Pacific View from 1984 and 1986 through June 30, 1997.
(g) $30,000 representing reimbursement to
Richard for payments to Rodger from his personal account in 1985, 1989 and
1992.
(h) $5,818 for one-half of the rents for the
Walnut house from 1996 to 1997.
(i) $9,755 for one-half of miscellaneous
expenses of Rodger paid from the R&R account.
(j) $5,252 for one-half of the personal
insurance expenses of Rodger paid from the R&R account.
The court
awarded credits to Rodger as follows:
(a) $197,766, for one-half of Rodger’s
monetary contributions of $395,531 to acquire the R&R properties.
(b) $10,332 for one-half of the “hard costs”
paid from the R&R account to Richard for the 315 Flint property.
(c) $52,992 for one-half of the discrepancy
in tax benefits.
(d) $80,000 for 20 percent of one-half of the
stipulated value of the Pacific View House.
(e) $25,000 for 10 percent of one-half of the
stipulated value of the 321 and 323 Flint Lots.
(f) 20 percent of the net proceeds of the
sale of the Malibu Acres;
Upon the
sale of the Malibu Acres, the parties’ total credits were to be compared and
any discrepancy adjusted.
On appeal,
Richard contends the court erred in (1) awarding success fee commissions
to Rodger; (2) finding that the value of the Clarissa properties offset
Richard’s claim to an equalizing payment; (3) failing to assign a value to
Richard’s interest-free advances to Rodger, and in failing to assign a value to
Richard’s inclusion of Rodger as an owner during periods of rapid appreciation;
(3) denying Richard’s claim for an equalizing payment due as a result of
the use of personal funds to purchase and improve the Bayview Property; (4)
finding Richard owes Rodger $52,992 based upon Richard’s enjoyment of shifted
tax benefits; (5) limiting the scope of the reference to a subset of the
R&R properties; (6) failing to award prejudgment interest; and
(7) limiting postjudgment interest accrual until after escrow closed on
the Malibu property and finding the parties agreed interest must come out of
the proceeds of the sale of that property.
I. SUCCESS FEE
COMMISSIONS
Richard
contends: the record demonstrates he and
Rodger carried on a partnership, and thus Rodger may not recover any additional
compensation for “sweat-equity” efforts; even if there was not a partnership,
the trial court erred in supplanting the parties’ agreed method of compensation
for a reasonable value computation; the success fee commissions are arbitrary
and should not have been based on sales price or current value of the
properties; and Richard did not waive his right to contest the success fee
commissions. Rodger contends: by agreeing to an accounting, Richard gave up
his rights to compensation; Richard waived his right to contest Rodger’s right
to have his nonmonetary contributions valued; and no evidence supports the
finding of a partnership.
A. Existence of Partnership
Ordinarily,
a partner is not entitled to compensation from the partnership other than his
or her share of the partnership’s profits.
(Bardis v. Oates (2004) 119
Cal.App.4th 1, 14.) “Except as otherwise
provided in subdivision (b), the association of two or more persons to carry on
as coowners a business for profit forms a partnership, whether or not the
persons intend to form a partnership.”
(Corp. Code, § 16202, subd. (a).)
The existence of a partnership is a question of fact. (Filippo
Industries, Inc. v. Sun Ins. Co. (1999) 74 Cal.App.4th 1429, 1444.) “‘An essential element of a partnership or
joint venture is the right of joint participation in the management and control
of the business. [Citation.] Absent such right, the mere fact that one
party is to receive benefits in consideration of services rendered or for
capital contribution does not, as a matter of law, make him a partner or joint
venturer. [Citations.]’” (Kaljian
v. Menezes (1995) 36 Cal.App.4th 573, 586, quoting Bank of California v. Connolly (1973) 36 Cal.App.3d 350, 364.)
With
respect to partnership property, all property acquired by a partnership is
property of the partnership and not the individual partners. (Corp. Code, § 16203.) “A partner may use or possess partnership
property only on behalf of the partnership.”
(Corp. Code, § 16401, subd. (g).)
Partnership property is acquired by a partnership when it is either
(1) acquired in the name of the partnership, or (2) acquired in the
names of one or more partners when the transferring instrument indicates the
person’s capacity as a partner or the existence of the partnership even if the
partnership’s name is not indicated.
(Corp. Code, § 16204, subd. (a).)
Property is
acquired in the name of the partnership when it is acquired by a transfer to
the partnership in its name (Corp. Code, § 16204, subd. (b)(1)),
transferred to one or more of the partners in their capacity as partners if the
name of the partnership is indicated in the transferring instrument (Corp.
Code, § 16204, subd. (b)(2)). If
these conditions are not met, there is a rebuttable presumption property is
partnership property (when the partners fail to express their intent regarding
the ownership of property) if the property is purchased with partnership
assets. (Corp. Code, § 16204,
subd. (c).)
Finally, a
partnership is dissolved where, among other circumstances, it is not reasonably
practicable to carry on the partnership in conformity with the partnership
agreement. (Corp. Code, § 16801,
subd. (5)(C).) Dissolution in such case
is an equitable solution to the situation where “bitter and antagonistic
feeling between partners has developed to the point that the partners cannot
continue the partnership to their mutual advantage.” (See Wallace
v. Sinclair (1952) 114 Cal.App.2d 220, 228.) Profits and losses resulting from the
liquidation of partnership must be credited and charged to the partner’s
accounts; upon dissolution the partnership distributes to a partner an amount
equaling credits in excess of charges in the partner’s account. (Corp. Code, § 16807, subd. (b).)
Here, the
parties had an agreement to share equally in profits; an agreement to match
each other’s investments; a joint bank account for the R&R properties; and
sharing of tax benefits. However,
Richard and Rodger had joint tenancy title to the properties, and Vinetta made
many decisions relating to the parties’ property venture and contributed funds
to the properties’ acquisition.
These facts
support the finding of an existence of a partnership between Richard, Rodger,
and Vinetta, and that the properties held in Richard and Rodger’s names were
actually partnership properties based upon the parties’ agreement to share
profits, tax benefits, and the existence of the joint bank account. However, the finding of a partnership does
not end the compensation inquiry in the manner Richard advocates; rather, the
facts indicate the partners (including Vinetta) had serious disputes concerning
management of the partnership. Hence,
the litigation and the settlement of the matter by agreeing to divide the
properties among the partners and submit the remaining issues to the
referee. Once the parties did so, the
matter became one of dissolution of the partnership, and the referee was within
his power to consider the partner’s contributions, etc., in order to equitably
distribute the property of the partnership.
We conclude
that to the extent Richard argues he and Rodger had a “pre-existing
compensation agreement,” such agreement was overridden by the parties’
settlement and submission of the matter to a referee. The settlement and agreement to have the
referee determine remaining factual issues constituted a novation of any prior
agreements. (Civ. Code, § 1530 [novation
is the substitution by agreement of a new obligation for an existing one, with
the intent to extinguish the latter]; see Ebensteiner
Co., Inc. v. Chadmar Group (2006) 143 Cal.App.4th 1174, 1181 [settlement
agreement superseded original dispute].)
A novation is a “new contract which supplants the original agreement and
‘completely extinguishes the original
obligation . . . . ’ [Citations.]”
(Wells Fargo Bank v. Bank of
America (1995) 32 Cal.App.4th 424, 431.)
By agreeing to submit the matter to a referee pursuant to the order
appointing referee to determine among other things, monetary contributions made
by the parties towards the acquisition, management, improvements, repair,
development and entitlement of such properties, as well as any efforts to
increase the value of the properties, and to determine the value of such
nonmonetary contributions, the parties replaced any prior agreements with the
settlement agreement. Thus, Richard
cannot rely on any prelitigation compensation agreements to attempt to
repudiate the settlement and submission of the matter to the referee. In any event, the facts indicate the referee
considered the parties’ prior agreements where relevant, including regarding
their tax benefit sharing arrangement.
B. Basis of Success Fee
Commissions
Richard
contends the success fee commissions were arbitrary because they were based
upon incorrect factors. We disagree.
1. Factual Background
Rodger’s
expert Saddington opined that Rodger was entitled to three types of compensation
with respect to the Malibu, Flint, McCloud, and Pacific View properties: (1) twenty percent on account of the
entitlements obtained, (2) reimbursement for labor; and (3) a
builder/owners’ fee. He did not believe
Rodger was entitled to a twenty percent entitlement fee with respect to the
Clarissa properties because Rodger was not required to obtain any entitlements
for those properties. Saddington based
his calculations on the parties’ money contributions to the property and the
net value created by Rodger’s efforts.
John Andreotti testified as an expert for Rodger that developers who
entitle property for building generally get “success fee” compensation up to 30
to 40 percent. Compensation depends upon
the difficulty of getting the entitlements to the property.
2. Analysis
“We have no
power on appeal to weigh the evidence, consider the credibility of witnesses,
or resolve conflicts in the evidence or the reasonable inferences that may be
drawn from the evidence.” (
797, 803.) Under our standard of review,
“‘we look only to the evidence supporting the prevailing party. [Citation.]
We discard evidence unfavorable to the prevailing party as not having
sufficient verity to be accepted by the trier of fact.’” (Felgenhauer
v. Soni (2004) 121 Cal.App.4th 445, 449.)
Credibility is a matter of judicial discretion and “[e]ven though
contrary findings could have been
made, an appellate court should defer to the factual determinations made by the
trial court when the evidence is in conflict.”
(Shamblin v. Brattain (1988)
44 Cal.3d 474, 479.)
The record
here indicates that the work Rodger did on the Malibu Acres, Pacific View, and
Flint Lots was the type of entitlement work entitling developers to a “success
fee” portion of the net profits realized from the development. The experts calculated the success fee from
hard numbers: the initial purchase cost
of the property and its increased value due to the work Rodger did in obtaining
permits, utilities, and other services to put the properties in buildable
condition. Ultimately, the referee
carefully balanced the expert’s testimony and various factors relative to the
properties and arrived at Rodger’s “sweat” contributions. We therefore conclude that the valuation of
Rodger’s contribution was not “arbitrary” and was supported by an adequate
factual basis.
II. VALUE OF CLARISSA PROPERTIES AS AGREED IN THE 1031 EXCHANGE
AND REFEREE’S DENIAL OF AN OFFSET OF RICHARD’S CLAIM TO AN EQUALIZING PAYMENT
Richard argues that the trial
court erred in adopting the referee’s recommendation to deny Richard a claim
for an equalizing payment of $141,363 based upon his contribution of $282,725
in personal funds towards acquisition of the Clarrisa properties. He contends the party’s previous Internal
Revenue Code section 1031 exchange precludes such a result because Rodger
acknowledged that his interest and Richard’s interest “were of equal value” on
the section 1031 transfer date of January 18, 2006. In addition, Rodger acknowledged that he
would “‘continue to account for and make all reports to taxing authorities
consistent with the foregoing transfer of ownership.’” Having accepted the benefits of a tax-free
exchange of properties, Richard contends Rodger is estopped to later claim that
he was owed something more. (See
2004) [2004 Conn. Super. LEXIS 3433 at *7] [party estopped from later claiming
that a “like/kind” exchange was inequitable]; see also Eustace v. Lynch (1941) 43 Cal.App.2d 486, 490–491 [party accepting
benefits of contract is estopped to deny contract’s existence].)
A. Factual Background
In January
2006, Richard and Rodger agreed to exchange pursuant to Internal Revenue Code
section 1031 their undivided one-half interests in 220 and 222 Clarissa so that
Richard became the sole owner of 222 Clarissa and Rodger became the sole owner
of 220 Clarissa. As memorialized in
their agreement of June 29, 2007, the parties agreed that “on the Transfer
Date, Richard’s [] interest and Rodger’s [] interest were of equal value, [and]
neither party intended by making the foregoing transfers to make any type of
gift to the other party . . . .”
In making
his recommendation regarding the Clarissa properties, the referee found that
“[a]ll of Rodger’s efforts on [the Clarissa properties] brought about a
substantial increase in their respective values
which . . . exceeds Richard’s monetary contribution.” Based on the stipulated value of $650,000 for
Clarissa and the stipulated value of $1 million for 222 Clarissa, the referee
denied Richard’s claim.
B. Analysis
Richard’s
argument fails. First, in connection
with the 2008 reference order, the parties stipulated to a new value for the
properties, thus superseding any agreement regarding value they have made in
connection with the 2006 Internal Revenue Code section 1031 exchange. In general, the gain or loss on the sale or
exchange of property is taxable. (See 26
U.S.C. § 1001.) One exception to this
rule is Internal Revenue Code section 1031 which provides for the
nonrecognition of gain or loss in the case of like-kind exchanges of property
held for productive use in a trade or business or for investment. “The legislative intent underlying [section] 1031
was that taxpayers should be permitted to avoid present tax liability when
exchanging one property for another of like-kind since taxes should not be
imposed on a realized gain where the taxpayer maintained a continuity of
investment in like-kind property.” (
(S.D.N.Y. 1990) 736 F.Supp. 1285, 1287.)
For purposes of section 1031, three things are required: (1) there must be an exchange;
(2) the properties exchanged must be of a like-kind; and (3) the
property transferred and the property received must be held by the taxpayer for
productive use in a trade or business, or for investment. (26 U.S.C. § 1031(a).) Thus, here the purpose of the 1031 exchange
was to avoid taxes on the transfer of the parties’ respective interests to each
other. Although they enjoyed the tax
benefits of such transaction at the time, the parties were free to stipulate to
a different value for the properties at a later date.
Second,
with respect to his request for an equalizing payment for the Clarissa
properties, the evidence shows Richard obtained a increase in value $838,637
benefit from 222 Clarissa based upon Rodger’s
renovations ($1 million less Richard’s $141,363 contribution), while Rodger
obtained a $650,000 total value benefit for his labor from 220 Clarissa. Thus, no equalizing payment is required and
the court did not err.
III. ASSIGNMENT OF VALUE TO RICHARD’S ADVANCES TO RODGER AND
RICHARD’S INCLUSION OF RODGER AS TITLE OWNER DURING PERIODS OF APPRECIATION
Richard
contends the interest he waived on monies he advanced to Rodger was
compensation and thus should have been offset against Rodger’s claim for
nonmonetary contributions. Further,
Rodger received additional compensation by being included as a record title
owner on properties during periods of rapid appreciation in value, yet the
court erred in failing to consider this.
As a result, Richard requests that the judgment be reversed with
directions to determine a value for the waived interest and a value for the
compensation benefit Rodger received by way of Richard’s inclusion of him on
title, all of which should be offset against Rodger’s success commissions. We disagree.
With
respect to his first argument, Richard relies on exhibit 1, which set forth
Richard’s monetary contributions ($1,297,269)
percent interest charge for the years 1979 to 2008 to Rodger totaling
$383,854. To this figure, Richard and
adds Rodger’s stipulated salary of $377,447 for the years 1984 through 2005,
for a total of $761,301. Rather than
requesting that Rodger pay him interest, Richard requested the referee to
offset such interest against Rodger’s claim for nonmonetary contributions, an
offset he contends the referee erred in failing to make.
With respect
to his second argument, Richard argues the court “erred in failing to recognize
the substantial value of the compensation benefit Rodger received by way of
Richard’s inclusion of Rodger as an owner of title during the periods of rapid
appreciation in the value of the
properties. . . . [I]n all cases in which Richard
paid his personal funds, Rodger benefits from the appreciation in value of land
and improvements even though Rodger paid nothing.”
We reject
both of these arguments that attempt to reassess the referee’s findings by
placing a higher value on Richard’s capital and devaluing Rodger’s labor
contribution to the enterprise. With
respect to the first argument, expert Saddington recognized the possibility of
imputed interest to Rodger based on Richard’s contributions, and that such
interest was compensation. However, he
also testified, “I don’t think the business transaction really called for
interest . . . .
Rodger was putting in his sweat and Richard was putting in his money and
they were to share equally in the benefits.”
With
respect to the second argument, we interpret it to mean that Rodger benefited
from the increased value of the properties during periods of appreciation. However, the argument misses that Richard
equally benefited from the increased value of the properties during any such
period of appreciation, and any gain that Rodger obtained was an unrealized
gain because none of the properties had been sold. Rodger’s only “benefit” occurred during the
reference proceedings, when the referee undertook to value each party’s share
in the properties, and placed a number on Rodger’s labor contributions.
IV. RICHARD’S CLAIM FOR EQUALIZING PAYMENT BASED ON HIS USE OF
PERSONAL FUNDS TO PURCHASE AND IMPROVE BAYVIEW PROPERTY AND SCOPE OF REFERENCE
Richard
contends the trial court erred in denying him an equalizing payment for the use
of his personal funds to purchase and improve the Bayview Property because
title to the property was given to Vinetta as part of the May 2008 settlement. He contends he and Rodger jointly owned the
Bayview property for over 20 years, and his unmatched monetary contributions
improved the value of the property.
Richard
also argues the trial court erred in limiting the scope of the reference to a
subset of the R&R Properties, which he contends was contrary to the
parties’ agreement as set forth in the record at the May 5, 2008 hearing. Indeed, he points to the reference order
which required the court to consider issues relating to the use of the R&R
account, which account was used to service properties other than the R&R
properties; the reference order specifically stated that the referee “shall
taken into account unreimbursed expenses from the R&R account which
benefitted only Richard and Rodger.” As
a result, he contends he was unable to put in evidence concerning his claim for
contributions to the Point Dume property, the Shangri La property, and other
matters.
At the May
5, 2008 hearing, the parties placed on the record their settlement with respect
to the cross-complaint. The parties
agreed that Vinetta would receive as her sole property the Point Dume property,
the Shangri La property, the lot on Laurel Canyon, and her house in Huntington
Harbor (Bayview). Richard and Rodger
agreed to divide the remaining properties, which the parties enumerated for the
record; those properties are known as the R&R properties. In the May 16, 2008 judgment, Vinetta
received Bayview, and it was not listed as one of the R&R properties in the
order appointing the referee.
Nonetheless,
at a November 4, 2008 hearing before the commencement of the reference
proceedings, Richard argued that the reference order required the referee to
consider additional properties beyond the R&R properties in determining the
amounts owed to the brothers. The court
responded: “Let me try to make it
specific, I’m talking about the 14 properties, that’s all that was before this
court, that’s the jurisdictional limit as far as I’m concerned of the
reference.” Further, the court stated if
additional information regarding non-R&R properties were submitted to the
referee and “he thinks it’s consistent with the court’s order, he can consider
it. If he doesn’t think it’s consistent
with the court’s order, he cannot consider it.” Finally, with respect to the settlement, the
court stated: “the properties that went
to [Vinetta] are hers, period. . . . [¶] Nobody’s entitled to any contribution one way
or the other, period. If it went to
[Vinetta], it’s a gift to her . . . .”
A judgment obtained by
stipulation is construed according to ordinary principles of contract
interpretation. (Roden v. Bergen Brunswig Corp. (2003) 107 Cal.App.4th 620,
624.) Where the language of a writing is
unambiguous, its interpretation is solely a judicial function, with the
threshold question of ambiguity also a question of law. (Parsons
v. Bristol Development Co. (1965) 62 Cal.2d 861, 865; Appleton v. Waessil (1994) 27 Cal.App.4th 551, 554–555.) In the interpretation of the contract, “parol
evidence is only admissible if the contract terms are ambiguous. [Citation.]”
(Appleton, at p. 554.) “The decision
whether to admit parol evidence involves a two-step process. The first is to review the proffered material
regarding the parties’ intent to see if the language is ‘reasonably
susceptible’ of the interpretation urged by a party. [Citation.]
If that question is decided in the affirmative, the extrinsic evidence
is then admitted to aid in the second step, which involves actually interpreting
the contract. [Citation.]” (Ibid.)
In
interpreting a contract, we must give effect to the mutual intention of the
parties to the extent such intention can be ascertained from the written
provisions of the contract. (Civ. Code,
§ 1636; Thompson v. Miller (2003) 112
Cal.App.4th 327, 335.) Whenever
possible, the whole of a contract is to be read so that each clause helps to
interpret the other and give effect to every part thereof. (Civ. Code, § 1641; Bear Creek Planning Committee v. Ferwerda (2011) 193 Cal.App.4th
1178, 1183.) “‘“‘[L]anguage in a
contract must be construed in the context of that instrument as a whole,
[under] the circumstances of [the] case, and cannot be found to be ambiguous in
the abstract.’”’” (Nava v. Mercury Casualty Co. (2004) 118 Cal.App.4th 803, 805.) Finally, we “consider the circumstances under
which [the] agreement was made, including its object, nature and subject
matter. (Civ. Code, § 1647 . . . .)” (Badie
v. Bank of America (1998) 67 Cal.App.4th 779, 800.)
Here, the
language of the May 16, 2008 judgment and order appointing referee is
unambiguous. The judgment provides title
to the four properties (Bayview, Point Dume Lot, Shangri La Lot, and Laurel
Canyon property) was quieted in Vinetta and further that “to the extent Richard
Lough and/or Rodger Lough have held any title or interest in such property, it
is declared that they at all times they held such interest in trust for Vinetta
Lough.” This language makes clear that
not only was title quieted in Vinetta, but that any competing claims of Rodger
and Richard to compensation or reimbursement in those four properties were
wiped out by the May 16, 2008 judgment.
Further,
the order appointing referee provides that the subject matter of the reference
was, and the referee was to hear evidence regarding, the R&R Properties,
which were defined in the order to exclude Bayview, Shangri La, Laurel Canyon,
and Point Dume. Thus, the court ordered
the referee to consider Richard and Rodger’s “respective contributions made and
benefits received related to the R&R Properties [excluding Bayview, Shangri
La, Laurel Canyon, and Point Dume], and to make a recommendation to the Court
as to an accounting as between Richard and Rodger with respect to their various
contributions with respect to the R&R Properties [excluding Bayview,
Shangri La, Laurel Canyon, and Point Dume] for purposes of ensuring that the
division of the said properties is fair and equitable as between Richard an
Rodger . . . .” The
language “related to the R&R Properties” unequivocally excludes any
consideration of Bayview, Shangri La, Laurel Canyon, or Point Dume, or
contributions made in connection therewith.
V. INTEREST AWARDS
A. Prejudgment Interest
Richard
contends the court erred in failing to award him prejudgment interest because
the amounts Rodger owed him were a sum certain which was readily
calculable. Richard contends the sums
due him stem in large part from the referee’s findings that Rodger
misappropriated rental proceeds, failed to pay agreed-upon rent for the use of
a jointly-owned property, inappropriately used joint bank account funds for his
own personal benefit, and failed to match certain monetary contributions as of
June 30, 2005, and failing to award prejudgment interest on these amounts will
result in Rodger further benefitting from his
Here, the
trial court denied prejudgment interest because “[t]his was not an action for a
sum certain or one which was readily calculable.” Prejudgment interest may be awarded where
“damages [are] certain or capable of being made certain by calculation,” and
the right to recover such damages is vested in the plaintiff on a particular
day. (Civ. Code, § 3287, subd.
(a).) The test of certainty is whether
the defendant actually knows the amount owed or could have computed the amount
from reasonably available information. (
Bontá (2002) 97 Cal.App.4th 740, 774; Wisper
Corp. v. California Commerce Bank (1996) 49 Cal.App.4th 948, 960.)
The
requirement of certainty ensures that “in situations where the defendant could
have timely paid the amount demanded and has deprived the plaintiff of the
economic benefit of those funds, the defendant should therefore compensate with
appropriate interest.” (
“Where the amount of damages cannot be resolved except by account,
verdict or judgment, interest prior to judgment is not allowable.” (Stein
v. Southern Cal. Edison Co. (1992) 7 Cal.App.4th 565, 573;
Machined Products, Inc. v. Swingline, Inc. (1968) 263 Cal.App.2d 642,
plaintiff by letter demanded $29,609.64 in its complaint for parts the
defendant had ordered; ultimately the plaintiff recovered $26,076.49. (Id.
at pp. 645–646.) The court found the sum
due was ascertainable from the date of the letter sent, even though there was a
slight difference in the damages ultimately awarded. “‘The mere fact that there is a slight difference
between the amount of damages claimed and the amount awarded does not preclude
an award of prejudgment interest.’” (
landlord sought $55,000 on account of the lessee’s damage to the demised
premises, but did not provide the lessee with any repair estimates. The parties exchanged correspondence
concerning damages, and a settlement offer was made; ultimately, after trial,
the landlord recovered $7,836. (
not a sum certain because the lessee was never aware of any amount that would
compensate the landlord; further, the amount awarded at trial was inconsistent
with a sum certain or capable of being made certain. (Ibid.)
Here, the
amounts due were not “readily calculable.”
The action required the calculation of amounts owed based upon the
parties’ respective contributions of capital and/or labor, and required a
complex factual inquiry by a court-appointed referee over numerous dates that
included expert testimony. Further, the
ultimate amount due could not be determined until the sale of several
properties took place, and required the parties to stipulate to the value of
the properties divided between them. The
amount Rodger would ultimately owe Richard was hardly certain at the outset of
trial.
Nonetheless,
Richard contends prejudgment interest is warranted because of Rodger’s
defalcations for withholding rent and other items, and is further due on the
$275,000 property value discrepancy because Rodger knew what he owed Richard
for these items at the outset of the referee’s proceedings. We disagree.
The function of these equitable proceedings was to find a value that
would equalize the amounts contributed by the parties to the increase in value
of Vinetta’s real property portfolio given that their contributions were of a
vastly different character (capital versus labor). (See Chesapeake
Industries v. Togova Enterprises, Inc. (1983) 149 Cal.App.3d 901, 909
[accounting action prima facie evidence claim is uncertain].) Thus, prejudgment interest is not warranted.
B. Postjudgment Interest
Richard contends the trial court
erred in ruling that postjudgment interest does not accrue on the Malibu
Acreage until escrow closes, and in finding the parties agreed the interest
would come out of the net proceeds of sale.
Pursuant to
section 685.010,
title="">[6] it is not necessary that the judgment provide
for payment of postjudgment interest; the obligation follows
automatically. (County of Alameda v. Weatherford (1995) 36 Cal.App.4th 666,
670.) Postjudgment interest runs from
the date a judgment is originally entered, not from the date it is ultimately
upheld on appeal. (Code of Civ. Pro.,
§ 685.020;
title="">[7] Ehret v.
Congoleum Corp. (2001) 87 Cal.App.4th 202, 207; In re Marriage of Green
(2006) 143 Cal.App.4th 1312, 1321.)
Here, the
trial court’s judgment provided that interest would be payable to Richard in
the event that Rodger’s share was determined to be less than Richard’s, and
specified that “interest at the legal rate from the date escrow closes on the
Malibu Acres” would be “paid to Richard from Rodger’s share of the net proceeds
from the share of the Malibu Acres.”
Pursuant to Code of Civil Procedure section 685.010, the trial court
erred in specifying that interest would accrue from the date of the close of
escrow on the Malibu Acreage. However,
nothing in that statute prohibits the trial court from specifying the source of
interest, and thus the trial court was within its equitable powers given the
nature of the proceedings before it to declare that any interest that accrued
would be payable from the proceeds of the Malibu Acreage.
Thus, the
judgment must be modified to specify that postjudgment interest runs from the
date of the entry of judgment, and is to be paid from the proceeds of sale of
the Malibu Acreage.
VI. SHIFTING OF TAX BENEFITS
Richard
argues that the trial court erred in adopting the referee’s findings on the
shifting of tax benefits because (1) the referee’s findings were based
upon the “inherently flawed methodology” of Rodger’s expert Saddington and the
court should have used the methodology of Richard’s expert Christian Tregellis;
and (2) the referee ignored deductions Rodger eliminated by way of not
reporting salary and other compensation Richard paid him having a value of
$362,447.
A. Factual Background
Richard and
Rodger’s experts used different methodologies to arrive at the tax benefits
due. The referee found that the parties
agreed that because Richard was in a higher tax bracket, Richard would take
deductions that Rodger could have otherwise taken, and Richard would pay Rodger
50 percent of any tax benefit received through Richard’s use of these
deductions. Rodger’s methodology
combined the tax benefits of the venture and divided it by two; Rodger
subtracted his allowable deductions from his one-half of combined deductions,
and shifted the excess to Richard.
Richard and Rodger separately computed their taxes.
On the other
hand, Richard’s method combined the parties’ income and losses using each
party’s marginal tax rate, and then divided the result by two and assigned
equal shares to each party. Richard’s
method used this figure to calculate Richard’s gained tax benefit, Rodger’s
saved self-employment tax, Rodger’s lost tax benefit, and the total tax savings
or loss to both of them.
The referee
adopted Rodger’s method, which resulted in a total benefit to Richard of
$213,410, leaving $106,705 due Rodger from Richard; on the other hand,
Richard’s methodology resulted in Rodger owing Richard $10,221. The referee noted, “Roger’s
method . . . appears to be a more accurate
method . . . .” The
referee also took into account Rodger’s unreported income of $236,970 for the
years 1985 through 2004 and rents Rodger kept from some of the R&R
properties in the sum of $125,447, resulted in a savings to Rodger of
self-employment tax of $53,713. The
referee deducted this amount from the sums due Richard to find that Richard
owed Rodger $52,992.
B. Discussion
Richard’s
challenge to the referee’s findings amount to an attack on the sufficiency of
the evidence. In determining whether
substantial evidence supports a trier of fact’s finding, we “are bound by the
trial court’s credibility determinations” (Estate
of Young (2008) 160 Cal.App.4th 62, 76) and we must make all reasonable
inferences in favor of the finding; we do not reweigh the evidence. (Little
v. Amber Hotel Co. (2011) 202 Cal.App.4th 280, 292.) If we conclude such substantial evidence
exists, “‘it is of no consequence that the [fact finder], believing other
evidence, or drawing other reasonable inferences, might have reached a contrary
conclusion.’” (Jameson v. Five Feet Restaurant, Inc. (2003) 107 Cal.App.4th 138,
143, italics omitted.)
Here, the
referee adopted Rodger’s methodology because the referee found it was more
straightforward. It is axiomatic that
the order in which different arithmetical operators are applied to figures can
dramatically change the result.
| Description | Richard Lough appeals the trial court’s judgment in his action against his mother Vinetta Lough and his brother Rodger Lough for fraud, breach of contract, breach of fiduciary duty, indemnity, and an accounting. On appeal, he contends the court erred in numerous respects in adopting the findings of a court-appointed referee determining issues relating to the parties’ extensive real estate holdings, compensation due Rodger, and the extent of equalizing payments due Richard. We affirm the judgment as modified to provide that postjudgment interest runs from the date of entry of judgment. |
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