FC Pier 70 v. City and County of San Francisco CA1/5 ( 2023 )

Filed 2/2/23 FC Pier 70 v. City and County of San Francisco CA1/5
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FIVE
FC PIER 70, LLC,
Plaintiff and Appellant,
v. A164411
CITY AND COUNTY OF SAN
FRANCISCO, (San Francisco City and County
Defendant and Respondent. Super. Ct. No. CGC-21-589577)
The City and County of San Francisco (the City) and FC
Pier 70, LLC (FC Pier) executed a development agreement
governing redevelopment of a portion of the Pier 70 waterfront in
San Francisco. Thereafter San Francisco voters approved
Proposition I, which doubled the transfer tax rate on certain real
estate transactions. FC Pier sued the City, alleging that they
agreed, in the development agreement, to insulate the project
from subsequent increases in the transfer tax rate. The trial
court concluded that the agreement was reasonably susceptible to
such a construction but that (so construed) the agreement
unconstitutionally contracted away the City’s taxation power. FC
Pier appeals from a judgment of dismissal, arguing that the trial
court erred in sustaining the City’s demurrers with respect to its
breach of contract and reformation causes of action. We disagree
and affirm.
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BACKGROUND
A.
To protect the government’s essential taxation power, the
California Constitution provides: “The power to tax may not be
surrendered or suspended by grant or contract.” (Cal. Const., art.
XIII, § 31 (hereafter section 31), italics added; People ex rel.
Franchise Tax Bd. v. Superior Court (1985) 164 Cal.App.3d 526,
542, disapproved on other grounds by Dana Point Safe Harbor
Collective v. Superior Court (2010) 51 Cal.4th 1, 11, fn. 6.)
In Russell City Energy Co., LLC v. City of Hayward (2017)
14 Cal.App.5th 54 (Russell), this Division held that a power
company could not state a cause of action for breach of contract
after the City of Hayward imposed a new utility tax because the
power company’s interpretation of a contractual clause violated
section 31’s prohibition. (Id. at pp. 57-58, 62-64, 66, 69.)
In reaching this conclusion, the Russell court gave the
terms “ ‘surrendered’ ” and “ ‘suspended’ ” their ordinary
meaning—and concluded that surrender means “ ‘to give up
completely or agree to forgo especially in favor of another’ ” and
that suspended is synonymous with “ ‘temporarily debarred,
inactive, inoperative and held in abeyance.’ ” (Russell, supra, 14
Cal.App.5th at p. 64.) Russell also determined that the relevant
clause of the parties’ contract—which provided that the City of
Hayward “ ‘shall not impose any other levies, fees, taxes,
contributions, or charges on [the power company] . . . other than
such levies, fees, taxes, contributions, or charges generally
applicable to similarly situated owners of real property’ ”—
temporarily inactivated the City of Hayward’s power to tax for
the life of the power plant and thereby “unquestionably
suspended its power to tax.” (Id. at pp. 58, 64.)
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B.
In May 2018, FC Pier and the City entered into two
contracts relating to redevelopment of Pier 70: a development
agreement and a disposition and development agreement
(hereafter the disposition agreement).
The disposition agreement makes FC Pier responsible, as
master developer, for subdividing and completing horizontal
improvements on the 28-acre site—i.e., grading, environmental
remediation, construction of streets and utilities—to support the
eventual construction of vertical improvements. The disposition
agreement provides that the City, acting through the San
Francisco Port Commission (Port), will eventually sell or lease
project parcels to “vertical developer[s],” for the construction of
residential and commercial buildings. The agreement further
provides FC Pier with the option to acquire any of the parcels for
its own vertical development. The parcels’ sale and lease prices
are determined through a contractual appraisal process set forth
in the disposition agreement.
In the development agreement, the parties agreed, in
section 5.2, that generally the City would process permits and
other regulatory approvals according to “Existing City Laws and
Standards”—a defined term that means the project approvals,
transaction documents, and applicable “City Laws” (another
defined term that describes zoning, construction, environmental,
and land use laws) in effect on December 15, 2017, when the San
Francisco Board of Supervisors approved the development
agreement. This provision is subject to section 5.3 of the
development agreement, which states that “any Change to
Existing City Laws and Standards” (a third defined term) also
apply unless they would cause certain defined conflicts that
would hinder the development.
None of these key defined terms (which we discuss in more
detail below) mention the City’s tax laws. Notably, Russell,
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supra, 14 Cal.App.5th 54 was decided in August 2017, before the
effective date of the development agreement ordinance. Also
before that time, San Francisco voters increased the particular
tax at issue here—the City’s transfer tax on real property—three
times in eight years, including in 2016. (S.F. Bus. & Tax Regs.
Code, § 1102, amendment history available at
[as of Feb. 1, 2023]; S.F. Voter Information
Pamp., Gen. Elec. (Nov. 2, 2010), Digest, p. 159; S.F. Voter
Information Pamp., Consolidated Gen. Elec. (Nov. 4, 2008),
Digest, p. 175.) All of these events occurred before the
development agreement was signed in May of 2018.
Almost three years after the effective date of the
development agreement ordinance, in 2020, voters increased the
transfer tax again. The City announced its intent to apply the
applicable Proposition I transfer tax rate to any future transfers
of project parcels valued at more than $10 million. FC Pier then
sued the City.
C.
In its initial complaint, FC Pier alleged three causes of
action: (1) anticipatory breach of contract; (2) restitution; and (3)
declaratory and injunctive relief. FC Pier’s first cause of action
alleged that the City’s plan to apply the higher transfer tax rate
to any future transfers of project parcels was in anticipatory
breach of section 5.3 of the development agreement. FC Pier
alleges that the project will be negatively affected because it
involves a symbiotic funding process—whereby FC Pier advances
horizontal development costs and is reimbursed through transfer
proceeds and bond revenues generated in part based on the
underlying value of the parcels.
The City demurred, arguing (among other points) that (1)
the development agreement is not reasonably susceptible to FC
Pier’s interpretation (that the City agreed the project would be
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insulated from any future transfer tax rate increase); and (2)
even if the development agreement could be reasonably construed
that way, any such promise would violate section 31.
The trial court agreed that FC Pier could not state a claim
for breach of contract because adopting FC Pier’s interpretation
means that, under Russell, supra, 14 Cal.App.5th at pages 64-65,
69, the City suspended its power to tax and the contract violates
section 31. Accordingly, the trial court sustained the City’s
demurrer (with leave to amend) as to only the breach of contract
cause of action. The court also granted FC Pier leave to add a
reformation cause of action. The court otherwise overruled the
City’s demurrer.
In its first amended complaint, FC Pier chose not to amend
its breach of contract cause of action. Its new reformation cause
of action alleged that the parties were mutually mistaken about
the legal effect of section 5.3 of the development agreement. FC
Pier asked the court to rewrite the agreement to require the City
to pay the additional amount of transfer tax (attributable to
Proposition I) on any future project parcel transfers or to
reimburse vertical developers for the additional amount of
transfer tax paid on any such parcels.
The City demurred again, arguing FC Pier’s reformation
cause of action either sought to accomplish an unlawful outcome
or to rewrite the contract without the parties’ mutual agreement.
The trial court agreed and sustained the demurrer without leave
to amend with respect to the reformation cause of action.
FC Pier then voluntarily dismissed its remaining causes of
action—for restitution and other equitable relief—without
prejudice. The trial court entered a judgment in the City’s favor.
DISCUSSION
FC Pier contends that the trial court erred in concluding
that, under its interpretation, section 5.3(a) of the development
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agreement violates section 31. However, we agree with the City
that the judgment should be affirmed on an alternate basis—the
development agreement is not reasonably susceptible to FC Pier’s
interpretation. (See Carman v. Alvord (1982) 31 Cal.3d 318, 324
[“judgment of dismissal . . . will be affirmed if proper on any
grounds stated in the demurrer, whether or not the court acted
on that ground”].)
A.
Our review is de novo because this case was resolved on
demurrer (Rosen v. St. Joseph Hospital of Orange County (2011)
193 Cal.App.4th 453, 458) and because contract interpretation
questions ordinarily present pure questions of law. (Parsons v.
Bristol Development Co. (1965) 62 Cal.2d 861, 865; Quantification
Settlement Agreement Cases (2011) 201 Cal.App.4th 758, 797-798
(Quantification).) We accept as true all of plaintiff’s properly pled
material facts and facts that may be judicially noticed. However,
we disregard contentions, deductions, or conclusions of fact or
law. (State Dept. of State Hospitals v. Superior Court (2015) 61
Cal.4th 339, 346.)
In reviewing a breach of contract cause of action on
demurrer, we decide whether the alleged agreement is
“ ‘reasonably susceptible’ ” to the interpretation a plaintiff gives
in their complaint. (Klein v. Chevron U.S.A., Inc. (2012) 202
Cal.App.4th 1342, 1384-1385.) If the pleading does not give the
contract a clearly erroneous construction, we must accept the
plaintiff’s allegations as to its meaning. (Ibid.)
“ ‘Courts will not adopt a strained or absurd interpretation
in order to create an ambiguity where none exists.’ ” (Mercury
Ins. Co. v. Pearson (2008) 169 Cal.App.4th 1064, 1070.) If
possible, a contract is interpreted to give meaning to all of its
provisions (Civ. Code, § 1641) and to make the contract lawful,
operative, definite, and reasonable. (Civ. Code, § 1643; Barham
v. Barham (1949) 33 Cal.2d 416, 429.) “ ‘[E]ven if one provision of
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a contract is clear and explicit, it does not follow that that portion
alone must govern its interpretation; the whole of the contract
must be taken together so as to give effect to every part.’
[Citation.] ‘An interpretation which renders part of the
instrument to be surplusage should be avoided.’ ”
(Quantification, supra, 201 Cal.App.4th at p. 799.)
B.
FC Pier’s breach of contract claim is predicated on the
notion that the parties agreed to freeze municipal tax laws in
section 5.3(a) without explicitly mentioning tax laws. Its
argument requires a convoluted reading of several terms of the
agreement, particularly a reference to the phrase “other laws”
buried in a definition in an appendix to the development
agreement.
First, FC Pier points to section 5.3(a), which reads:
“Existing City Laws and Standards and any Change to Existing
City Laws and Standards will apply to the 28-Acre Site Project
except to the extent that they would conflict with the Project
Approvals, the Transaction Documents, or Applicable Port Laws.
In the event of a conflict, the terms of the Project Approvals,
Transaction Documents, and Applicable Port Laws will prevail.”
(Italics added.) The essential point here is that changes to
existing city laws (as defined) apply to the project unless they
conflict in ways specified by section 5.3(b).
Next, FC Pier points to the definition, provided in the
appendix, of “ ‘Change to Existing City Laws and Standards’ ”:
“any change to Existing City Laws and Standards or other laws,
plans, or policies adopted by the City or the Port or by voter
initiative after the DA Ordinance Effective Date that would
conflict with the Project Approvals, the Transaction Documents,
or Applicable Port Laws as specified in DA § 5.3.” (Italics added
and bold omitted.)
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Finally, FC Pier cites the definition of “law” in the
appendix: “any of the following validly in effect as of the
Reference Date and as later amended, supplemented, clarified,
corrected, or replaced during the DDA Term, whether or not
within the present contemplation of the Parties: [¶] (i) federal,
state, regional, or local constitution, charter, law, statute,
ordinance, code, rule of common law, resolution, rule, regulation,
standard, directive, requirement, proclamation, order, decree,
policy (including the Waterfront Plan and Port and City
construction requirements); [¶] (ii) judicial order, injunction, writ,
or other decision interpreting any law; [¶] (iii) requirement or
condition of any Regulatory Approval of a Regulatory Agency
affecting any portion of the 28-Acre Site; and [¶] (iv) recorded
covenants, conditions, or restrictions affecting any portion of the
28-Acre Site.”
The key to FC Pier’s argument is the reference to “other
laws” in the definition of “Change to Existing City Laws and
Standards.” Because “law” is defined to mean practically any
law, FC Pier argues that “Change to Existing City Laws and
Standards” means both (1) any change to Existing City Laws and
Standards; and (2) any change to any other laws, including tax
laws.
The City, on the other hand, argues that we must construe
the “other laws” language (in the definition of Change to Existing
City Laws and Standards) to mean only new laws (adopted after
the ordinance effective date) that are of the type described in the
definition of “City Laws”—in other words, zoning, construction,
environmental, and land use laws but not tax laws.
To support its position, the City points to the definitions of
“City Law” and “Existing City Laws” provided in the development
agreement’s appendix. “City Law” is defined to mean “any City
ordinance or Port code provision and implementing regulations
and policies governing zoning, subdivisions and subdivision
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design, land use, rate of development, density, building size,
public improvements and dedications, construction standards,
new construction and use, design standards, permit restrictions,
development impacts, terms and conditions of occupancy, and
environmental guidelines or review at the FC Project Area,
including, as applicable: [¶] (i) the Waterfront Plan and the
Design for Development; [¶] (ii) the Construction Codes,
applicable provisions of the Planning Code, . . . the Subdivision
Code, and the General Plan, [¶] (iii) local Environmental Laws
and the City’s Health Code; and [¶] (iv) the Other City
Requirements (DDA Exh A7).” (Italics added and bold omitted.)
“Existing City Laws and Standards” incorporates the above
definition and means “City Laws” in effect on the ordinance
effective date, plus the “Project Approvals” and “Transaction
Documents.”
Although the trial court opined that “the definition of
‘Change to Existing City Laws and Standards’ is somewhat
redundant when read directly into section 5.3,” it ultimately
concluded that the development agreement was reasonably
susceptible to FC Pier’s interpretation. It explained, “There is no
clear textual guidance indicating that the ‘other laws, plans or
policies adopted by the City or the Port or by voter initiative’ is
intended to exclude taxes, except to the extent that those other
laws, plans or policies fail to satisfy the conflict requirement.”
C.
We agree with the City that “other laws” is not reasonably
susceptible to FC Pier’s interpretation. Rather, FC Pier’s
construction is clearly erroneous because, viewed in context, it
creates both surplusage and an absurd result. (See Bank of the
West v. Superior Court (1992) 2 Cal.4th 1254, 1265 [“ ‘language in
a contract must be construed in the context of that instrument as
a whole, and in the circumstances of that case, and cannot be
found to be ambiguous in the abstract’ ”, italics omitted].)
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Here, the context shows that the “other laws” language
appears in a derivative definition, which itself (along with section
5.3(a)) specifically deals with the application of City Laws and
Standards. The definitions of “City Law” or “Existing City Laws
and Standards” carefully describe zoning, construction,
environmental, and land use laws, not tax laws. FC Pier removes
this context and construes “other laws” via the defined term “law”
to mean, literally, any law. This construction would be so broad
as to swallow the “City Law” and “Existing City Laws and
Standards” definitions. Under FC Pier’s reading, the phrase “any
change to Existing City Laws and Standards” becomes
superfluous because any change to the law in those specified
areas would also constitute “laws” adopted after the effective
date.
It is implausible that these sophisticated parties went to
great pains, in negotiating a development agreement, to adopt a
carefully circumscribed list of zoning, construction,
environmental, and land use laws—in their definitions of “City
Laws” and “Existing City Laws and Standards”—only to
obliterate that list by also referring to “laws” of all sorts (such as
corporate governance, discrimination, tax) in a derivative
definition. The Development Agreement Statute (Gov. Code, §
65864 et seq.) allows local governments to enter into valid
agreements that freeze land use regulation so that a developer
will not be affected by changes in such standards during the
period of development. (See Gov. Code, §§ 65864, 65865, 65865.2,
65865.4, 65866; Santa Margarita Area Residents Together v. San
Luis Obispo County Bd. of Supervisors (2000) 84 Cal.App.4th 221,
226.) But there is no mention of tax law in the Development
Agreement Statute. (Gov. Code, § 65864 et seq.) FC Pier’s
interpretation of section 5.3(a) would create an absurd result—by
expanding that freeze in an otherwise strightforward
development agreement, via sleight of hand, well beyond the
scope contemplated by the Development Agreement Statute.
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We agree with the City that the doctrine of ejusdem
generis applies. The doctrine attempts to reconcile
incompatibility between specific and general words “ ‘so that all
words in a statute and other legal instruments can be . . .
construed together, and no words will be superfluous.’ ” (Barrett
v. Superior Court (1990) 222 Cal.App.3d 1176, 1190-1191.) The
rule accomplishes the purpose of giving effect to both the
particular and the general words, by treating the general words
as embracing only objects similar in nature or class to those
objects enumerated by the preceding specific words. (Mountain
Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th
744, 754; Barrett, at pp. 1190-1191.) The City’s construction is
consistent with this rule. FC Pier’s construction is not.
FC Pier argues that the City’s approach ignores the
definition of “law” and makes the phrase “other laws”
meaningless. We are not persuaded. As explained, in the context
in which it is used (the definition of “Change to Existing City
Laws and Standards”), “other laws” refers to city laws of that
same class (zoning, construction, environmental, and land use
laws) that are first adopted by the City or the Port or by voter
initiative after the DA Ordinance Effective date. In other words,
the definition describes two categories of laws—changes to
existing zoning, construction, environmental, and land use laws
and other, similar laws that are first adopted in the future.
Nor is the City’s interpretation inconsistent with the
Development Agreement Statute (Gov. Code, § 65864 et seq.), as
FC Pier insists. Here, it is undisputed that the development
agreement provides that changes to zoning, construction,
environmental, and land use laws will not apply to the project if
they pose a defined conflict. Accordingly, nothing we state herein
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should be construed as “threaten[ing] to upend” the Development
Agreement Statute.1
We conclude that FC Pier’s construction of this agreement
is clearly erroneous. We need not reach the additional arguments
raised in the parties’ briefs, including FC Pier’s challenge to the
trial court’s demurrer ruling on FC Pier’s reformation cause of
action.2
DISPOSITION
The judgment is affirmed. The City is entitled to its costs
on appeal. (Cal. Rules of Court, rule 8.278(a)(2).)
1 FC Pier filed a request for judicial notice of a number of
other development agreements that the City and other
municipalities have executed, as well as a “2022 Statewide
Housing Plan.” We deferred ruling on the request for judicial
notice, which the City opposes. We now deny FC Pier’s request
because it has not demonstrated the relevance of these
documents to the legal issues on appeal. (See Doe v. City of Los
Angeles (2007) 42 Cal.4th 531, 544, fn. 4.)
2At oral argument, FC Pier argued, for the first time, that
it should be given leave to amend its complaint. FC Pier did not
address the issue of leave to amend in either its opening or its
reply brief. FC Pier thereby forfeited the argument and we will
not consider it. (Daniels v. Select Portfolio Servicing, Inc. (2016)
246 Cal.App.4th 1150, 1185, disapproved on another point by
Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 948, fn.
12.)
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______________________
BURNS, J.
We concur:
____________________________
SIMONS, ACTING P.J.
____________________________
WISEMAN, J.*
A164411
* Retired Associate Justice of the Court of Appeal, Fifth
Appellate District, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
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