Agam v. Gavra ( 2015 )

Filed 4/23/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
ISAAC AGAM, H038537, H039031
(Santa Clara County
Plaintiff, Cross-defendant and Super. Ct. No. 1-09-CV143471)
Respondent,
v.
ELIYAHU GAVRA et al.,
Defendants, Cross-complainants and
Appellants.
Shortly before the collapse of the housing market and the onset of the Great
Recession, appellants Eliyahu and Yifah Gavra, respondent Isaac Agam, and Eran Cohen
formed a partnership to purchase and develop a parcel of land in Los Altos Hills. The
partners planned to subdivide the property and build two or three houses for resale. They
successfully purchased and subdivided the property into three lots, but financial issues
and personality conflicts derailed their development plans. Between 2009 and 2011, they
sold the vacant lots, losing close to $1.3 million on the project.
In 2009, Agam and Cohen sued the Gavras for breach of the Partnership
Agreement and breach of their fiduciary duties to the partnership. The Gavras filed a
cross-complaint alleging a claim for breach of contract, among others. Cohen reached a
settlement with the Gavras and the cross-actions between Agam and the Gavras
proceeded to a bench trial. The trial court rejected the Gavras’ breach of contract claim
and concluded they had breached both the Partnership Agreement and their fiduciary
duties. The court awarded Agam more than $700,000 in reliance damages on the breach
of contract claim, no damages on the breach of fiduciary duty claim, and more than
$245,000 in attorney fees.
On appeal, the Gavras contend the trial court misallocated the burden of proof on
Agam’s breach of contract claim. They also challenge the sufficiency of the evidence
supporting the judgment. We affirm.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. The Partnership Agreement and Purchase of the Los Altos Hills Property
In April 2007, Agam, Cohen, and the Gavras entered into a partnership agreement
(the Partnership Agreement). In that contract, they agreed to purchase a parcel of land in
Los Altos Hills, “subdivide it[,] . . . build two or three houses on it[,] and sell [them] at a
maximum profit.” They further agreed that Agam would have a 45 percent interest in the
partnership; Cohen, a 25 percent interest; and the Gavras, a 30 percent interest. The
Partnership Agreement required the partners to contribute money and time to the project
proportionate to their partnership share. The Partnership Agreement authorized Agam--a
mortgage broker with real estate development experience--to make the final decision on
any disputed issues after consulting with the partnership. The Partnership Agreement
also permitted any partner to terminate active participation in the partnership upon 45
days notice and to become a passive participant upon the consent of the other partners.
Agam and Cohen purchased the Los Altos Hills property for $4.6 million. The
purchase was financed by a seller carryback loan (the Driscoll Loan) of $3.8 million, due
in a balloon payment on November 1, 2008. Agam and Cohen executed a grant deed
transferring title to the Los Altos Hills property to the partners in proportion to their
partnership interests.
B. Early Development and Clashes Among The Partners
In the summer and fall of 2007, the partners met with a real estate agent and an
architect to explore options for developing the land. They considered whether to build
smaller, less expensive homes (6,000 square foot homes priced in the $6 million range)
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that the real estate agent advised would sell more quickly, or larger, more expensive
homes (9,000 square foot homes priced in the $9 million range) that likely would take
longer to sell. They favored building larger homes. The partners also began the process
of obtaining the necessary approval to subdivide the parcel into three lots, which they
obtained in October 2008.
At an October 2007 meeting between the partners and an architect, Agam yelled at
Eliyahu Gavra (Eli) when the two disagreed about the design of one of the planned
homes. E-mails among the partners following that incident acknowledge the existence of
“friction” and “personality and style differences” between Agam and Eli.
Agam and Cohen offered to buy the Gavras out in November 2007. Eli countered
with a higher buy-out figure. The partners did not reach an agreement and the
partnership remained intact.
C. The Driscoll Agreement
In mid-2008, the partners took various steps to raise the $3.8 million needed to pay
off the Driscoll Loan by the November 1, 2008 due date. In particular, they decided to
sell one of the lots and, in August 2008, entered into an agreement to sell lot No. 2 for
$2.7 million. They also sought to obtain a land loan secured by the other two lots. Agam
initially prepared a joint loan application on behalf of the partnership. However, issues
related to Cohen’s other investments made him ineligible for a loan. Therefore, Agam
and the Gavras obtained loans as individuals. Cohen and the Gavras quit claimed their
ownership interests in lot No. 3 to Agam, who obtained a $1,325,000 land loan secured
by that lot from Borel Bank in October 2008. Similarly, Cohen and Agam quit claimed
their ownership interests in lot No. 1 to the Gavras, who obtained a $1,325,000 Borel
Bank land loan secured by lot No. 1, also in October 2008. In connection with the land
loans, Borel Bank required both Agam and the Gavras to keep $100,000 on deposit with
the bank. The Gavras requested that Cohen contribute his 25 percent share ($50,000) of
those deposits, but Cohen responded that he could not because he was “out of money and
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maxed out on all [his] credit cards.”
The sale of lot No. 2 fell through in October 2008. The partners had planned to
use the proceeds from the sale to pay off the Driscoll Loan. They were out of cash and
the recently obtained land loans were insufficient to cover the required $3.8 million
payment.
The partners partially paid off the Driscoll Loan using the proceeds from the Borel
Bank land loans and negotiated an extension for the remainder of the loan until December
1, 2008. To pay off the remainder of the loan, the partners discussed obtaining a hard
money loan secured by lot No. 2. The Gavras were reluctant to participate in a hard
money loan due to the high rate of interest associated with such a loan and the
requirement that they use their home as cross-collateral. Instead, the Gavras paid their
share (about $335,000) in cash, which they obtained by taking out a $550,000 home
equity line of credit.1 Agam and Cohen contributed some cash and obtained a $700,000
hard money loan secured by lot No. 2. Eli testified that his contribution of cash
eliminated the need for Agam and Cohen to use their properties as cross-collateral by
reducing the amount of the hard money loan.
It was necessary that the Gavras quit claim their ownership interest in lot No. 2 to
Agam and Cohen so that they could obtain the hard money loan secured by that lot.
Agam requested that the Gavras do so on Wednesday, November 26--the day before
Thanksgiving and five days before the Driscoll Loan was due. Initially, the Gavras
refused to sign anything without an agreement among the partners “securing [the
Gavras’] position” and indicated that their personal attorney was drafting such an
1
The Gavras covered 30 percent of the remainder of the Driscoll Loan despite the
fact that their Borel Bank land loan had already covered a sizable portion of that loan
while Cohen had contributed nothing. Thus, as Eli testified, he and his wife were
required to pay approximately 45 percent of the Driscoll Loan; more than their 30 percent
share in the partnership.
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agreement. The partnership’s attorney, Desmond Tuck, advised the Gavras “to discuss
with your lawyer whether what you are doing constitutes a breach of fiduciary duty
towards your partners” by allowing “your desire to protect yourself . . . to take priority
over the interest of the partnership.” Tuck further advised the Gavras to “sign the
documents for the sake of the partnership, and if you don’t come to an agreement . . .
before Monday [when the Driscoll loan is due] . . . , you can revoke your instructions to
the title company.” The Gavras signed the necessary documents.
The partners, the Gavras’ attorney, and Tuck, met on the evening of Sunday,
November 30, to discuss the Gavras’ proposed agreement. The negotiations extended
into the early hours of December 1, the day the Driscoll Loan payment was due. Cohen
testified that the Gavras threatened to allow the Driscoll Loan to go into default unless an
agreement was reached. Agam likewise testified that the Gavras “refused to bring their
cash [to help pay off the Driscoll Loan] unless we signed some guarantees for them.” At
approximately 2:00 a.m. on December 1, the parties signed the so-called Driscoll
Agreement.
The Driscoll Agreement provided that the Gavras would receive a deed of trust on
lot No. 2 to secure their $335,000 investment.2 It further required Agam and Cohen to
execute a deed transferring title to lot No. 2 to all three partners. That deed would be
held by the Gavras and recorded at their “discretion, after considering any detrimental
consequences to the partnership,” “to protect [the] Gavra[s’] interest.” Finally, the
Driscoll Agreement called for the proceeds from the sale of any lot to go directly to the
partners. (The Partnership Agreement had provided that the proceeds from the sale of
2
“In practical effect, if not in legal parlance, a deed of trust is a lien on the
property.” (Monterey S.P. Partnership v. W. L. Bangham, Inc. (1989) 49 Cal. 3d 454,
460.) It is a security instrument that entitles the lender on a real property loan to reach
some asset of the debtor if the note is not paid. (Alliance Mortgage Co. v. Rothwell
(1995) 10 Cal. 4th 1226, 1235.)
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partnership property would be paid to the partnership.)
The partners paid off the remainder of the Driscoll Loan on time.
It is undisputed that no deed of trust was executed as called for by the Driscoll
Agreement.
D. Continued In-Fighting Leads to Litigation
In a letter to Agam, the Gavras’ attorney stated that, given the “worsening
economy and real estate market” and the partners’ “dire financial situation,” “it is [the
Gavras’] position that the partnership cannot proceed to the construction phase and the
partners should focus their efforts on selling the lots.” The letter further advised Agam
that he had breached the Partnership Agreement by failing to discuss partnership issues
with the Gavras and making decisions without consulting with them. Finally, the letter
proposed listing lot No. 2 for sale and requested a written response to that proposal by
February 16, 2009. (Lots Nos. 1 and 3 already were listed for sale.)
Agam and Cohen responded on February 23, 2009. Each took the position that the
decision not to list lot No. 2 had been made by a majority of the partnership. Each also
leveled various accusations against the Gavras, including that they had failed to actively
participate in the partnership as required by the Partnership Agreement and had breached
their fiduciary duties by insisting upon the Driscoll Agreement.
In a response letter, the Gavras’ attorney reiterated the Gavras’ desire to put lot
No. 2 on the market and not to proceed with construction. He requested a written
response by March 10. Agam and Cohen did not respond. On March 13, 2009, the
Gavras’ attorney stated in a letter to Agam and Cohen that the Gavras “cannot be
expected to further fund any expenses, other than for the sale of the lots, until I have
received responses from you.”
Agam and Cohen retained an attorney. Through that attorney, on March 26, 2009,
they proposed that the Gavras withdraw from the partnership, take any one of the three
lots, and accept (or make) true-up payments, depending on which lot they selected.
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Under Agam and Cohen’s proposal, the true-up payments would be calculated using Eli’s
own estimated values of the three lots. The Gavras rejected that offer.
On May 28, 2009, Agam and Cohen filed suit against the Gavras, alleging they
breached the Partnership Agreement by failing to pay their share of partnership expenses.
The Gavras filed a cross-complaint a month later, alleging Agam and Cohen had
breached the Partnership Agreement and the Driscoll Agreement; the cross-complaint
also sought to dissolve the partnership.
E. Borel Bank’s Loan Requirements and Agam’s Loan Application
Despite the Gavras’ position that construction was not an economically viable
option, Agam and Cohen opted to proceed towards construction. Agam testified that they
“decided to go in two parallel paths[:] . . . prepar[e] all the lot[s] for sale, and at the same
time . . . [obtain] building permit[s] and even . . . [a] construction loan.” According to
Agam, he and Cohen had not decided yet whether “to actually construct.” He viewed
obtaining a construction loan as a way to pay off the Borel Bank land loans. In addition,
obtaining planning approval and construction loans would, in his view, make the lots
more attractive to buyers. He noted that it was difficult to obtain a land loan at the time;
thus, he believed that putting a construction loan in place “was the only way a potential
buyer would be able to” finance purchasing the land. Agam represented to a Borel Bank
loan officer on August 11, 2009, that the partners would start construction if approved for
a construction loan.
In a June 2009 e-mail to the Gavras, Cohen characterized obtaining a construction
loan as the only “alternative” to “default [on the land loans] and foreclosure.” He further
stated “[w]hile we have decided to try and sell lots ([a]t least one), we have never decided
not to construct, and if this will be our only alternative, then we will probably construct.”
In June 2009, Agam prepared a joint application for a $4.878 million construction
loan for lot No. 3 on behalf of all the partners. That application estimated the future
value of the home to be built on that lot to be $9.4 million. It also estimated that the
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Gavras had $865,000 in liquid assets and that, collectively, the partners had more than
$1.6 million in liquid assets. Eli testified that after paying off the Driscoll Loan his liquid
assets consisted of “basically just the money from the line of credit.” He further testified
that the partners never discussed a joint construction loan application. According to Eli,
they discussed Agam obtaining a construction loan for lot No. 3 and the Gavras obtaining
a construction loan for lot No. 1.
The Gavras reiterated their refusal to proceed with construction on several
occasions in June and July 2009. Agam testified that, accordingly, he did not submit the
joint application and instead opted to apply for a construction loan as an individual.
Borel Bank loan officer John Noble testified for Agam. Noble testified that Borel
Bank decides whether to make a loan on a case-by-case basis based on various factors.
Among the “primary underwriting criteria” are the cost-to-equity (or loan-to-cost) ratio
and the loan-to-value ratio. For construction loans, Borel Bank generally requires a loan-
to-cost ratio of no greater than 73 or 74 percent. Put differently, there must be at least 26
percent equity invested in the project. The required loan-to-value ratio varies depending
on whether the planned home will be occupied by the borrower (“owner occupied”) or
not. Noble testified that Borel Bank “might do a higher loan to value [ratio] for an owner
occupied project” because they are considered less risky. He further testified that Borel
Bank might allow a higher loan-to-value ratio if the borrower’s cash flow is strong.
Noble noted that the identity of the borrower must match the identity of the
property owner. So if “[t]he property is vested in the name[] of [an] individual[]” then
“the borrower is an individual.” On cross-examination, the Gavras’ counsel asked Noble
whether Borel Bank would have approved a joint construction loan application, had one
been submitted on behalf of all of the partners. The trial court sustained Agam’s
counsel’s objection to the question on the ground that it was an incomplete hypothetical.
Agam applied to Borel Bank for a $5.2 million construction loan for lot No. 3 in
July 2009. The loan-to-cost ratio on Agam’s application was 77 percent. He met with
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Borel Bank executives in August 2009 regarding that application. He testified that, at
that meeting, he was told the loan-to-cost ratio “is not an issue.” Following the meeting,
Borel Bank required an appraisal of the property. The appraiser valued the proposed
home on lot No. 3 at $7.2 million. Agam, who had valued the home at $9 million,
disagreed with the appraisal. He believed the appraiser undervalued the finished
basement square footage. Agam requested a second appraisal, but none was completed.
The lower than expected appraisal negatively impacted the loan-to-value ratio.
Agam’s application was declined. Noble testified that the application was
declined because of the cost-to-equity and loan-to-value ratios, and because of other
concerns. Agam testified he was told the loan was denied based on the loan-to-value
ratio only, which he believed had been skewed by the too-low appraisal.
In July 2009, Eli met with Noble to discuss a possible construction loan from
Borel Bank. They discussed Borel Bank’s lending criteria, including the 26 percent
equity requirement. The Gavras never applied for a construction loan.
Noble testified that while Borel Bank dealt with Agam and the Gavras separately,
he was aware of their partnership and the friction between them and that he reported that
friction to his superiors.
In a letter dated March 4, 2010, Borel Bank notified Agam that “the maximum
loan [it] would approve for the project would be $3,775,000 and would require minimum
cash equity approximately equal to one-third of the total project costs.” Agam did not
pursue the smaller loan. He testified that he opted not to do so because the Gavras held a
grant deed indicating their interest in lot No. 3, which he believed would enable them to
prevent construction or interfere with the loan.
Agam testified that he nevertheless considered various construction scenarios
based on a $3,775,000 loan. One scenario involved the construction of the originally
planned 9,000 square foot house. To construct such a house using the smaller loan,
Agam testified that the partners would have been required to come up with $1.4 million.
9
He opined that the partners had $1.6 million in reserves. Moreover, he noted that by
2010 the partners had sold lot No. 1 and, absent the Driscoll Agreement, the proceeds
from that sale would have gone to the partnership. A second scenario involved building a
house with a smaller basement. In that scenario, the partners would have needed to come
up with $845,000 and, according to Agam’s projections, would have lost a total of
$220,000 on the development project. Instead, they lost $1,277,114 on the project.
F. Sale of the Undeveloped Lots
The partners sold lot No. 1 for $1.7 million in December 2009. They sold lot No.
2 in November 2010, for $1.9 million and lot No. 3 for $1.92 million in February 2011.
G. Evidence of Agam’s Claimed Damages
Agam sought damages in the form of out-of-pocket losses, lost time and
opportunities, and lost profits. With respect to his out-of-pocket losses, Agam presented
evidence that the partnership spent a total of $6,441,519 to purchase and improve the lots.
He also adduced evidence that the partnership received $5,164,405 when it sold the lots,
resulting in a loss of $1,277,114. Agam’s 45 percent share of that loss was $574,701.
The evidence further indicated that Agam made payments of $157,500 to the hard money
lender. Finally, Agam presented evidence that the Gavras owed him $4,255.74 for
partnership expenses.
H. Bench Trial, Final Statement of Decision, and Judgment
The court held a nine-day bench trial in June 2011. It issued its final statement of
decision on May 16, 2012.
The court concluded the Gavras had breached the Partnership Agreement by
refusing to go to construction or “to pay for any Partnership expenses other than those
dedicated to the sale of the undeveloped lots.” According to the court, “[t]he Gavras’
breaches were both actual (cutting off their contributions of time and money for a period
of time) and anticipatory (declaring they will not support a construction loan).” With
respect to causation, the court found persuasive Agam’s contention that the Gavras’
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breaches caused the partners not to submit a joint construction loan application. The
court concluded that “the Gavras’ refusal to participate in any way in obtaining a
construction loan prevented Agam from applying for a construction loan backed in part
by the Gavras’ assets” and thus “effectively prevented Agam from pursuing the chief
aims of the Partnership Agreement: obtain a construction loan, build a home on the
property, and ‘sell it at a maximum profit.’ ” The court then concluded that “the Gavras’
breaches were a substantial factor in causing harm to the Partnership, and hence to
Agam.”
As to damages, the court concluded Agam had failed to establish lost profits or
opportunity losses with sufficient certainty. However, it found he had shown $732,201 in
out-of-pocket losses. According to the court, the Gavras bore the burden to show that
amount should be reduced because the contract was a losing one for Agam, and they
“failed to establish any projected loss with reasonable certainty.” The court further
awarded Agam $4,255.74 on an internal partnership accounting.
The court also held that the Gavras had breached the implied covenant of good
faith and fair dealing and breached their fiduciary duties, but it awarded no additional
damages on those claims. One of the fiduciary duty breaches the court found was “[t]he
Gavras’ conduct in securing the Driscoll Agreement,” which the court found “constituted
adverse pressure on Agam and Cohen.”
The court rejected the Gavras’ claim that Agam breached the Partnership
Agreement and the Driscoll Agreement. With respect to the Partnership Agreement, the
court concluded the Gavras’ own breaches precluded them from recovering for Agam’s
alleged breaches. And the court reasoned that enforcing the Driscoll Agreement would
reward the Gavras for breaching their fiduciary duties to Agam and the partnership.
The court entered a $736,456.74 judgment in favor of Agam on May 16, 2012.
The Gavras timely appealed on July 12, 2012 (H038537).
Agam moved for an award of attorney fees on July 13, 2012. The trial court
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awarded Agam $245,026.77 in attorney fees on October 26, 2012. The Gavras timely
appealed that award on November 26, 2012 (H039031).
This court ordered the two appeals--H038537 and H039031--considered together
for purposes of briefing, oral argument, and disposition.
II. DISCUSSION
The Gavras challenge the trial court’s resolution of the parties’ breach of contract
claims. With respect to Agam’s breach of contract claim, they contend the court
erroneously allocated the burden of proof on certain elements to them. They further
maintain that even if the court properly allocated the burden of proof, the damages award
cannot stand because (1) they proved Agam would have suffered a loss had they not
breached such that he is not entitled to reliance damages, (2) the damages award is
excessive, and (3) Agam failed to mitigate his damages. As to their claim that Agam
breached the Driscoll Agreement, the Gavras argue that agreement was not the product of
a fiduciary duty breach, such that the court erred by refusing to enforce it. Finally, the
Gavras assert the attorney fee award must be reversed if this court reverses the judgment
in favor of Agam on their breach of contract claim. We address each contention in turn.
A. Agam’s Breach of Contract Claim
“A cause of action for damages for breach of contract is comprised of the
following elements: (1) the contract, (2) plaintiff’s performance or excuse for
nonperformance, (3) defendant’s breach, and (4) the resulting damages to plaintiff.”
(Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal. App. 3d 1371,
1388.) “Implicit in the element of damage is that the defendant’s breach caused the
plaintiff’s damage.” (Troyk v. Farmers Group, Inc. (2009) 171 Cal. App. 4th 1305, 1352,
citing Civ. Code, § 3300.)
The first three elements of Agam’s claim are undisputed. The Gavras do not
contest (1) the existence and validity of the Partnership Agreement, (2) that Agam
performed under the Partnership Agreement, or (3) that they breached the Partnership
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Agreement. At issue is the fourth element--causation of damages. According to the
Gavras, the trial court erroneously allocated the burden of proof on that element to them
by requiring them to prove that Agam would have suffered a loss even if they had
proceeded to construction. The Gavras maintain the burden should have been placed on
Agam to show that, absent a breach, the partners would not have suffered a loss because
(1) Borel Bank would have approved a $5.2 million joint construction loan application;
(2) the partners would have used the loan funds for construction; and (3) construction of a
home would have generated a gain.
Agam agrees he bore the burden to prove the Gavras’ breach caused his damages,
but he says the trial court properly held him to that burden. Agam maintains that,
because he sought so-called reliance damages, he discharged his burden by showing the
expenditures he made in reliance on the Partnership Agreement. It was the Gavras’
burden, he urges, to prove Agam would have suffered a loss even if they had not
breached.
Thus, the primary dispute on appeal centers on the nature of the burden of proving
damages and causation where the plaintiff seeks damages in the amount of reliance
expenditures.
1. Proving Causation of Reliance Damages
One proper “measure of damages for breach of contract is the amount expended
[by the nonbreaching party] on the faith of the contract.” (Mendoyoma, Inc. v. County of
Mendocino (1970) 8 Cal. App. 3d 873, 879 (Mendoyoma); 1 Witkin, Summary of Cal.
Law (10th ed. 2005) Contracts, § 883, p. 970 [“[One] measure of contract damages is the
amount of the plaintiff’s expenditures, together with the reasonable value of his or her
own services, in preparation and performance in reliance on the contract.”].) As our
Supreme Court explained in Buxbom v. Smith (1944) 23 Cal. 2d 535, 541, “ ‘[w]here,
without fault on his part, one party to a contract who is willing to perform it is prevented
from doing so by the other party, the primary measure of damages’ ” includes “ ‘his
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reasonable outlay or expenditure toward performance.’ ” That the nonbreaching party’s
damages include his or her “outlay incurred in making preparations for the contract” has
been the law in California for over a century. (Cederberg v. Robison (1893) 100 Cal. 93,
99 (Cederberg); see also United States v. Behan (1884) 110 U.S. 338, 345-346 (Behan)
[nonbreaching party’s damages include “actual outlay and expenditure”].)
This measure of damages often is referred to as “reliance damages.” (US Ecology,
Inc. v. State of California (2005) 129 Cal. App. 4th 887, 907; Rest.2d Contracts § 349.) It
has been held to apply where, as here, “one party to an established business association
fails and refuses to carry out the terms of the agreement, and thereby deprives the other
party of the opportunity to make good in the business.” (Caspary v. Moore (1937) 21
Cal. App. 2d 694, 699; see also 13 Williston on Contracts (4th ed. 2013) § 39:12, pp. 605-
606 [where the defendant’s breach of contract “consists of the violation of the implied
promise of cooperation present in all contracts” and prevents the plaintiff’s performance,
the plaintiff is “entitled to recover . . . any actual expenditures made in reliance on the
contract”].)
With respect to the burden of proof, the United States Supreme Court stated in
Behan that the nonbreaching party “is clearly entitled to recover” (Behan, supra, 110
U.S. at pp. 344-345) his or her “actual outlay and expense” (id. at p. 344) “unless the
other party, who has voluntarily stopped the performance of the contract, can show the
contrary.” (Id. at p. 345.) The court reasoned that the breaching party, “who has
voluntarily and wrongfully put an end to the contract, [cannot] say that the party injured
has not been damaged at least to the amount of what he has been induced fairly and in
good faith to lay out and expend . . . unless [the breaching party] can show that the
expenses of the party injured have been extravagant, and unnecessary for the purpose of
carrying out the contract.” (Id. at pp. 345-346.) California courts have espoused the
same rule. (Cederberg, supra, 100 Cal. at p. 99; Blair v. Brownstone Oil & Refining Co.
(1917) 35 Cal. App. 394, 396; Navarro v. Jeffries (1960) 181 Cal. App. 2d 454, 461.)
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Thus, the burden is on the plaintiff to establish “the amount which he has been induced to
expend.” (Mendoyoma, supra, 8 Cal.App.3d at p. 879.) The burden then shifts to the
defendant to show the nonbreaching party’s expenses were unnecessary, such that his or
her recovery of reliance damages should be reduced. (Ibid.)
Courts also have recognized a second limitation on reliance damages awards
(aside from proof of unnecessary expenditures)--proof that the plaintiff would have
suffered a loss even if the defendant had fully performed. “[I]n such a case the plaintiff
should not be permitted to escape the consequences of a bad bargain by falling back on
his reliance interest.” (Dialist Co. v. Pulford (Md. Ct. Spec. App. 1979) 399 A.2d 1374,
1380.) Put differently, the plaintiff should not be put “ ‘in a better position than he would
have occupied had the contract been fully performed.’ ” (Bausch & Lomb Inc. v. Bressler
(2nd Cir. 1992) 977 F.2d 720, 729 (Bausch & Lomb).) Thus, much like courts allow the
breaching party to prove the nonbreaching party’s expenditures were unnecessary, courts
allow the breaching party “to reduce [the nonbreaching party’s recovery] by as much as
he can show that the [nonbreaching party] would have lost, if the contract had been
performed.” (L. Albert & Son v. Armstrong Rubber Co. (2nd Cir. 1949) 178 F.2d 182,
189 (L. Albert); (Holt v. United Sec. Life Ins. & Trust Co. (1909) 76 N.J.L. 585, 597
(Holt) [“if he who, by repudiation, has prevented performance, asserts that the other party
would not even have regained his outlay, the wrong-doer ought at least to be put upon his
proof”]; Westfed Holdings, Inc. v. United States (Fed. Cl. 2002) 52 Fed. Cl. 135, 155
(Westfed Holdings) rev’d in part on other grounds, 407 F.3d 1352 (Fed. Cir. 2005)
[plaintiff “must show that the expenses submitted as reliance damages were incurred in
reliance on the contract . . . while defendant may prove, in diminution of the amount of
losses proved by plaintiff, any losses that plaintiff would have incurred in the event of
full performance of the contract”]; Bausch & Lomb, supra, at p. 729 [“a reliance recovery
will be offset by the amount of ‘any loss that the party in breach can prove with
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reasonable certainty the injured party would have suffered had the contract been fully
performed.’ ”].)
Courts allocate the burden of proof in this manner for two reasons. First,
“[o]rdinarily, the performance of agreements results in advantage to both parties over and
above that with which they part in the course of its performance; otherwise there would
soon be an end of contracting.” (Holt, supra, 76 N.J.L. at p. 597.) Therefore, it is
reasonable to impose a rebuttable presumption “that the plaintiff’s earnings from
performance would have been at least sufficient to defray the plaintiff’s reliance
expenditures.” (Rest.3d Restitution and Unjust Enrichment § 38, com. a; Holt, supra, at
p. 597 [presuming “that complete performance of the agreement would . . . have resulted
in at least reimbursing the injured party for his outlay fairly made in part performance of
it”]; Fuller and Perdue, The Reliance Interest in Contract Damages: 2 (1937) 46 Yale L.J.
373, 375 n. 84 [“the courts seem to assume in favor of the plaintiff that he would have
‘broken even,’ unless, at least, the defendant is able to prove the contrary”].) Second,
“[i]t is often very hard to learn what the value of the [breaching party’s] performance
would have been[,] and it is a common expedient, and a just one, . . . to put the peril of
the answer upon that party who by his wrong has made the issue relevant to the rights of
the other.” (L. Albert, supra, 178 F.2d at p. 189.) That is, fairness requires placing the
onerous burden of proving what would have been on the party at fault.
The requirement that the breaching party prove any losses the nonbreaching party
would have incurred had the contract been fully performed does not, as the Gavras
suggest, eliminate the requirement that the defendant’s breach caused the plaintiff’s
damages. In the context of reliance damages, “[t]he value of the expenditures must have
been lost as a result of the breach.” (Westfed Holdings, supra, 52 Fed.Cl. at p. 161;
Chevron U.S.A., Inc. v. United States (Fed. Cl. 2014) 116 Fed. Cl. 202, 208 [“To
demonstrate entitlement to reliance damages, a plaintiff must proffer evidence that ‘. . .
the breach is a substantial causal factor in the damages.’ ”].)
16
No California court appears to have addressed the “ ‘losing contract’ limitation
upon awards of reliance damages.” (Bausch & Lomb, supra, 977 F.2d at p. 729.)
However, the reasoning employed in Cederberg, Blair, Navarro, and Mendoyoma
indicates the burden lies with the breaching party to prove the nonbreaching party’s
reliance damages should be limited. Accordingly, we hold that, in the context of reliance
damages, the plaintiff bears the burden to establish the amount he or she expended in
reliance on the contract. The burden then shifts to the defendant to show (1) the amount
of plaintiff’s expenses that were unnecessary and/or (2) how much the plaintiff would
have lost had the defendant fully performed (i.e., absent the breach). The plaintiff’s
recovery must be reduced by those amounts.
2. The Trial Court Properly Assigned the Burden of Proof
In assessing Agam’s breach of contract claim, the trial court properly held the
parties to their respective burdens. It concluded Agam carried his burden to establish his
expenditures and that “the Gavras’ breaches were a substantial factor in causing harm to
the Partnership, and hence to Agam.” (The Gavras do not challenge the finding that
Agam established his expenditures on appeal.) The court then concluded the Gavras did
not discharge their burden to show Agam would have incurred a loss even if they had
fully performed. The Gavras challenge this second finding as unsupported by sufficient
evidence.
To the extent the Gavras challenge the trial court’s finding that Agam carried his
burden to show causation as unsupported by sufficient evidence, we reject that argument.
As the Gavras knew or should have known, the success of the partnership depended on
the construction of homes for sale. This was the sole goal of the partnership as set forth
in the Partnership Agreement. In reliance on that agreement, Agam made significant
expenditures. The Gavras refusal to participate in construction prevented the partnership
from attaining its goal. No greater causal link between the Gavras’ breach and Agam’s
damages need be established.
17
3. Sufficiency of the Evidence
The Gavras maintain that, even assuming they bore the burden of proving Agam
would have lost money had they fully performed, the trial court erred by finding that they
did not sustain that burden.
a. Standard of Review
Where, as here, “ ‘the trier of fact has expressly or implicitly concluded that the
party with the burden of proof did not carry the burden and that party appeals’ ” (Sonic
Manufacturing Technologies, Inc. v. AAE Systems, Inc. (2011) 196 Cal. App. 4th 456, 465
(Sonic)), “ ‘the question for a reviewing court becomes whether the evidence compels a
finding in favor of the appellant as a matter of law. [Citations.] Specifically, the
question becomes whether the appellant’s evidence was (1) “uncontradicted and
unimpeached” and (2) “of such a character and weight as to leave no room for a judicial
determination that it was insufficient to support a finding.” ’ ” (Id. at p. 466.)
b. Uncontradicted and Unimpeached Evidence Does Not Prove
With Reasonable Certainty the Amount Agam Would Have
Lost Absent the Gavras’ Breach
The question before us, then, is whether uncontradicted and unimpeached
evidence compelled the conclusion that Agam would have lost a particular sum of money
had the contract been fully performed.3 It does not. To the contrary, what might have
happened had the parties attempted to proceed with construction is speculative--an
argument the Gavras themselves advanced at trial.
3
The Gavras argue that the partners could not have made a profit if they had
proceeded to construction on lot No. 3. But that argument misconstrues the relevant
inquiry. The question is not whether the partners (and thus Agam) would have suffered
some undefined loss even if they had proceeded to construction. As discussed above,
Agam’s reliance damages award may be reduced by the amount of proven losses.
Therefore, the Gavras must prove with reasonable certainty the amount Agam would
have lost had they not breached.
18
The Gavras contend Borel Bank would not have approved a $5.2 million joint
construction loan because the partners could not satisfy the loan-to-cost ratio and loan-to-
value ratio requirements for such a loan and because all three partners did not hold title to
any lot. Even assuming they are right, that the partners could not have obtained a $5.2
million joint construction loan does not compel the conclusion that Agam’s reliance
damages must be reduced. The evidence shows the partners may have been able to
proceed to construction by obtaining one or more smaller loans as individuals. Evidence
was presented that Borel Bank was willing to loan Agam $3.77 million, subject to the
condition that he have an amount equal to one-third of the total project costs invested in
the property. Agam testified that, using such a loan, the partners could have built a
smaller house and reduced their loss from $1,277,114 to $220,000.
The Gavras contend that the partners could not have obtained a $3.77 million loan
because they did not have enough cash to meet Borel Bank’s minimum cash equity
requirement.4 For that argument, they rely on Agam’s estimated total project costs for
the planned 9,000 square foot house. But they offer no evidence as to the cost of a
smaller house. Nor do they cite to uncontradicted evidence showing how much cash the
partners actually had on hand. They argue the partners had no more than $959,000 in
liquid assets in June 2009, based on Agam’s estimates of his and Cohen’s assets and on
Eli’s vague testimony that “I think what I got [in November 2008] is basically just the
money from the line of credit.” But the Gavras themselves question the validity of
Agam’s estimates. Moreover, the Gavras had an additional $100,000 deposited with
4
Oddly, in the context of their failure to mitigate argument, the Gavras credit
Agam’s testimony that the partners could have reduced their losses by approximately $1
million by accepting a $3.77 million construction loan. In faulting Agam for not taking
such a loan, they ignore their irreconcilable claim that all of the partners combined (let
alone Agam, without their additional assets) could not have satisfied the minimum cash
equity requirement.
19
Borel Bank in connection with the lot No. 1 land loan. The December 2009 sale of lot
No. 1 also provided the partners with an additional $262,740 in cash. Therefore,
uncontradicted evidence does not show that the partners lacked the cash necessary to
qualify for a $3.77 million construction loan.
For the same reasons, the evidence does not prove that the partners could not have
constructed a home and at least reduced their losses, if not profited.5 Of course, one can
only speculate as to what size loan the partners would have obtained, how much
construction would have cost, and how much they would have sold a house for in the but-
for world of no breach. Accordingly, the Gavras failed to prove what losses Agam would
have suffered had they fully performed by cooperating with the construction phase of
development and the trial court did not err in refusing to reduce Agam’s reliance
damages.6
4. The Damages Awarded Are Not Excessive
The Gavras argue the award of damages was excessive because it included
Agam’s expenditures on lot No. 2. The Gavras contend those expenses should not be
5
The Gavras also maintain the evidence shows Agam and Cohen did not plan to
build even if they obtained a construction loan, such that the acceptance of any loan
would have been fraudulent. Not so. Both Agam and Cohen testified that they always
considered constructing on at least one lot to be a viable option. Thus, uncontradicted
and unimpeached evidence does not compel the conclusion that any construction loan
would have been fraudulent because Agam and Cohen did not intend to build.
6
In view of the foregoing, we conclude the Gavras have failed to carry their
burden to show the trial court committed reversible error when it precluded Noble from
testifying as to whether Borel Bank would have approved a $5.2 million joint
construction loan application. Assuming the court erred, the error is not reversible absent
a showing by the Gavras of prejudice, meaning “ ‘ “it is reasonably probable a result
more favorable to [them] would have been reached absent the error.” ’ ” (Tudor
Ranches, Inc. v. State Comp. Ins. Fund (1998) 65 Cal. App. 4th 1422, 1431-1432.) The
admission of Noble’s testimony could not have altered the outcome because, as discussed
above, even assuming the bank would have denied a joint loan application, the Gavras
failed to show how much Agam would have lost had they fully performed.
20
included because the partners had agreed to sell that lot before the Gavras refused to
proceed with construction. Accordingly, they say, Agam’s lot No. 2 expenses were not
incurred in reliance on the Gavras’ promise to cooperate with a joint construction loan.
That argument misconstrues the nature of both the promise at issue and reliance
damages. At issue is the Gavras’ promise to cooperate with construction. That promise
was made in the Partnership Agreement at the outset of the development project. All of
the partners’ expenditures on the project--regardless of the lot--were made in reliance on
the Partnership Agreement. The partners treated the development of all three lots as a
single venture designed to maximize profits. The Gavras offer no persuasive argument as
to why the expenditures on the different lots should be segregated at the damages stage.
5. Failure to Mitigate
The Gavras maintain Agam failed to mitigate his damages by obtaining a $3.77
million construction loan from Borel Bank and building a smaller home on lot No 3.
“The doctrine of mitigation of damages holds that ‘[a] plaintiff who suffers
damage as a result of . . . a breach of contract . . . has a duty to take reasonable steps to
mitigate those damages and will not be able to recover for any losses which could have
been thus avoided.’ ” (Valle de Oro Bank v. Gamboa (1994) 26 Cal. App. 4th 1686,
1691.) Under the doctrine, “[a] plaintiff may not recover for damages avoidable through
ordinary care and reasonable exertion.” (Ibid.) However, “[t]he duty to mitigate
damages does not require an injured party to do what is unreasonable or impracticable.”
(Ibid.)
“Whether a plaintiff acted reasonably to mitigate damages . . . is a factual matter to
be determined by the trier of fact.” (Powerhouse Motorsports Group, Inc. v. Yamaha
Motor Corp. U.S.A. (2013) 221 Cal. App. 4th 867, 884.) The burden of proving a plaintiff
failed to mitigate damages is on the defendant. (Ibid.) Here, the trial court concluded the
Gavras did not carry that burden. Therefore, the question on appeal is whether there was
“ ‘ “uncontradicted and unimpeached” [evidence] “of such a character and weight as to
21
leave no room for a judicial determination that it was insufficient to support” ’ ” the
finding that Agam failed to mitigate his damages. (Sonic, supra, 196 Cal.App.4th at p.
466.)
As noted above, the Gavras undermine their failure to mitigate argument by
claiming elsewhere in their brief that Agam did not have the cash necessary to carry out
the mitigation they contend was required. Regardless, their argument fails for other
reasons. Agam testified that he did not pursue the $3.77 million loan, in part, because his
partners were not willing to proceed with construction and might have prevented him
from doing so by asserting their ownership interest in lot No. 3. That evidence, combined
with evidence of the Gavras’ vehement opposition to even discussing the subject of
construction, supports the conclusion that it would have been unreasonable and
impracticable for Agam to mitigate his damages by building a home on lot No. 3.7
B. The Gavras’ Breach of Contract Claim
The Gavras also challenge the trial court’s refusal to enforce the Driscoll
Agreement, a ruling premised on the theory that the agreement was procured by a breach
of the Gavras’ fiduciary duties to the partnership. The Gavras contend they did not
breach their fiduciary duties in connection with the Driscoll Agreement, such that it is
valid and enforceable.
As a threshold matter, we note the Gavras’ do not dispute that an agreement
procured by way of a fiduciary duty breach is unenforceable. However, neither they, nor
Agam, cites to any authority for that proposition and we have found no case directly on
7
We are unpersuaded by the Gavras’ attempt to blame Agam for failing to inform
them about Borel Bank’s interest in a $3.77 million loan, which it expressed in a March
2010 letter. By that time, the Gavras (and their attorney) repeatedly had informed Agam
they would not participate in construction and the parties were embroiled in litigation.
Moreover, Eli had made clear he was unwilling even to engage in conversation related to
construction, stating “[t]he only discussion we’ll have from now on is on one and only
one issue--dissolving the partnership or selling the lots.”
22
point. At least two justifications for such a rule exist. First, illegal contracts are not
enforceable. One type of illegal--and thus unenforceable--contract is “[a] promise by a
fiduciary to violate his or her fiduciary duty, or one that tends to induce such a violation.”
(1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 454(b)(3)(d)(5), p. 497,
citing Rest.2d Contracts, § 193.) It follows that a contract procured by a fiduciary duty
breach likewise is illegal and unenforceable. Second, “ ‘partners are held to the standards
and duties of a trustee in their dealings with each other.’ ” (Enea v. Superior Court
(2005) 132 Cal. App. 4th 1559, 1564 (Enea).) “[A] contract . . . entered into between a
trustee and his beneficiary through which the former gains an inequitable advantage . . . is
voidable at the election of the beneficiary.” (Estate of Berry (1925) 195 Cal. 354, 362;
BGJ Associates v. Wilson (2003) 113 Cal. App. 4th 1217, 1229.) Under similar reasoning,
a contract between partners that unfairly advantages one over the other might be deemed
voidable by the disadvantaged partner. In any event, because the Gavras do not raise the
issue on appeal, “[a]ny error has been waived.” (Stoll v. Shuff (1994) 22 Cal. App. 4th 22,
25, fn. 1.) Thus, we shall proceed on the premise that the Driscoll Agreement was
unenforceable if, in negotiating it, the Gavras breached their fiduciary duties to their
partners.
1. Substantive Law and Standard of Review
“The defining characteristic of a partnership is the combination of two or more
persons to jointly conduct business. [Citation.] It is hornbook law that in forming such
an arrangement the partners obligate themselves to share risks and benefits and to carry
out the enterprise with . . . the loyalty and care of a fiduciary.” (Enea, supra, 132
Cal.App.4th at p. 1564.) “ ‘Partnership is a fiduciary relationship, and partners are held
to the standards and duties of a trustee in their dealings with each other. “ ‘ “[I]n all
proceedings connected with the conduct of the partnership every partner is bound to act
in the highest good faith to his copartner and may not obtain any advantage over him in
the partnership affairs by the slightest misrepresentation, concealment, threat or adverse
23
pressure of any kind.” ’ ” ’ ” (Ibid.) “[A] partner who seeks a business advantage over
another partner bears the burden of showing complete good faith and fairness to the
other” (i.e., that the advantage was not procured by misrepresentation, concealment,
threat or adverse pressure). (Everest Investors 8 v. McNeil Partners (2003) 114
Cal. App. 4th 411, 424.)
“A partner does not violate [his or her fiduciary duties] merely because the
partner’s conduct furthers the partner’s own interest.” (Corp. Code, § 16404, subd. (e).)
“The apparent purpose of this provision . . . is to excuse partners from accounting for
incidental benefits obtained in the course of partnership activities without detriment to the
partnership.” (Enea, supra, 132 Cal.App.4th at p. 1566.)
Whether a fiduciary duty has been breached is a question of fact. (Amtower v.
Photon Dynamics, Inc. (2008) 158 Cal. App. 4th 1582, 1599.) Accordingly, we review the
trial court’s finding that the Gavras’ breached their fiduciary duties for substantial
evidence. (Pellegrini v. Weiss (2008) 165 Cal. App. 4th 515, 524.) In determining
whether substantial evidence, contradicted or uncontradicted, supports the court’s
finding, “we draw all reasonable inferences from the evidence to support the findings and
orders of the [trial] court; we review the record in the light most favorable to the court’s
determinations; and we note that issues of fact and credibility are the province of the trial
court.” (In re Heather A. (1996) 52 Cal. App. 4th 183, 193.)
2. Substantial Evidence Supports the Finding That the Gavras
Breached Their Fiduciary Duties
There was substantial evidence before the trial court from which it could have
found that the Gavras obtained an unfair advantage over their partners in the Driscoll
Agreement.
The Driscoll Agreement called for the transfer of title to lot No. 2 from all of the
partners to Agam and Cohen to secure the hard money loan. A related provision
authorized the Gavras to record a deed transferring title back to all of the partners at their
24
“discretion, after considering any detrimental consequences to the partnership,” “to
protect [the] Gavra[s’] interest.” Notably, while that provision required the Gavras to
“consider[]” the impact of recording the deed on the partnership, it did not require them
to defer to the interests of the partnership. To the contrary, it permitted them to allow
their own interest to trump that of the partnership. As such, the provision constituted an
unfair advantage in favor of the Gavras.
The trial court implicitly found that the Gavras did not carry their burden of
showing that advantage was procured fairly and in good faith (not by misrepresentation,
concealment, threat or adverse pressure). Uncontradicted evidence does not compel the
opposite conclusion. (Sonic, supra, 196 Cal.App.4th at pp. 465-466.) Rather, the
evidence shows the Gavras’ procured the Driscoll Agreement using adverse pressure:
Agam and Cohen testified that the Gavras threatened to allow the Driscoll Loan to go
into default if Agam and Cohen did not agree to the Driscoll Agreement, which was
negotiated and signed at the eleventh hour. The Gavras contend e-mails the partners
exchanged in the days leading up to the signing of the Driscoll Agreement show Agam
and Cohen agreed in principle to the agreement days in advance. Our review of those e-
mails belies that characterization. A Thanksgiving Day e-mail from Eli to Tuck indicates
that Agam and Cohen had, in Eli’s view, “reject[ed] all the essence of the agreement
proposed” by the Gavras. In that e-mail Eli threatened: “if an agreement won’t be reach
by Sun[day] night I will have to revoke my instruction to the title company.” An e-mail
from Cohen to Tuck the following day reflects the desperate mood of the partners
immediately prior to the signing of the Driscoll Agreement. He wrote: “you are our only
practical hope to save . . . lot #2 from a probable foreclosure, by trying to come up with a
quick and simple agreement everybody can live with.”
That Agam and Cohen knew all of the relevant facts before signing the Driscoll
Agreement does not vindicate the Gavras, as they contend. For that argument, the
Gavras’ rely on Skone v. Quanco Farms (1968) 261 Cal. App. 2d 237. There, the court
25
explained that a “partner who deals with partnership property” does not breach his or her
fiduciary duties “if there has been a full and complete disclosure,” meaning the partner
“first discloses all of the facts surrounding the transaction to the other partners and
secures their approval and consent.” (Id. at p. 241.) We read Skone as recognizing that
full and fair disclosure of all material facts is one prerequisite to a fiduciary duty
compliant transaction. This court held as much in Enea. (Enea, supra, 132 Cal.App.4th
at p. 1564 [in partnership-related transactions, partners may not obtain any advantage
over copartners “by the slightest misrepresentation, concealment, threat or adverse
pressure of any kind,” quotations omitted, italics added].) But Skone does not stand for
the proposition that disclosure is the only prerequisite. As this court noted in Enea, the
absence of any threat or adverse pressure also is required. Here, the Gavras wielded such
pressure, thereby violating their fiduciary duties. For the foregoing reasons, the trial
court did not err in entering judgment in favor of Agam on the Gavras’ breach of the
Driscoll Agreement claim.
C. Attorney Fees
Finally, the Gavras maintain the award of attorney fees in Agam’s favor should be
reversed if we reverse as to their breach of contract claim against Agam. Because we
find the trial court did not err in connection with the Gavras’ breach of contract claim, we
likewise find no error in its award of attorney fees.
III. DISPOSITION
The judgment is affirmed. Agam shall recover his costs on appeal.
26
Premo, J.
WE CONCUR:
Rushing, P.J.
Márquez, J.
Agam v. Gavra et al.
H038537; H039031
Trial Court: Santa Clara County Superior Court
Superior Court No. 1-09-CV143471
Trial Judge: Hon. Aaron Persky
Counsel for Defendants/Cross- Law Offices of Russell J. Hanlon
complainants and Appellants: Russell J. Hanlon
Eliyahu Gavra, Yifah Gavra
Counsel for Plaintiff/Cross-defendant Shea & McIntyre
and Respondent: Marc L. Shea
Isaac Agam
Myron Moskovitz
Agam v. Gavra et al.
H038537; H039031