The opinion
Filed 10/15/13
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(San Joaquin)
----
BRIAN K. MCGUIRE et al., C067865
Plaintiffs and Appellants, (Super. Ct. No. CV033853)
v.
MORE-GAS INVESTMENTS, LLC,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of San Joaquin County, Lesley
D. Holland, Judge. Reversed with directions.
Neumiller & Beardslee, Clifford W. Stevens, Elizabeth J. Morrell, and Michael R.
Tener for Plaintiffs and Appellants.
Downey Brand, Kevin M. Seibert, Matthew J. Weber, and Jenny Dione Dennis for
Defendant and Respondent.
In this breach of contract case, plaintiffs Brian K. and Shirley A. McGuire and
Lynn F. and Mary A. Smith (collectively, plaintiffs) sued defendant More-Gas
Investments, Inc. (More-Gas) over two contracts in which plaintiffs agreed to purchase
certain real estate from More-Gas. In each instance, More-Gas had refused to pay
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plaintiffs money More-Gas had promised to pay in the alternative to performing certain
other tasks relating to the properties.
More-Gas successfully moved for summary adjudication of the breach of contract
causes of action on the ground the payment provisions were unenforceable penalty
provisions rather than valid liquidated damages clauses. On plaintiffs‟ appeal, we
conclude the trial court erred because More-Gas‟s motion for summary adjudication
failed to eliminate the possibility that the contractual provisions in question were instead
valid provisions for alternative performance. Accordingly, we reverse.
FACTUAL AND PROCEDURAL BACKGROUND
The Orchard Property
In May 2006, plaintiffs contracted to purchase for $1,050,000 two lots More-Gas
owned on Orchard Road in Acampo. Three addendums to the purchase agreement
required More-Gas to ensure that the owners of three neighboring lots (9, 11, and 13)
would not be permitted to build any structure within 900 feet of the access road to be
constructed along the north side of the lots. As relevant here, the third addendum (which
superseded a paragraph in the first addendum) addressed this subject as follows:
“Seller hereby represents and warrants that Lots 9, 11, and 13 are not or shall not
be permitted to construct or install any structure within nine hundred (900) feet of the
access road to be constructed along the North side of the Lots. Seller will provide written
documentation to Buyer‟s satisfaction prior to the close of escrow that: (i) the Lessor
under the Lease referenced below shall not permit any owner of Lots 9, 11, and 13, to
construct or install any structure within nine hundred (900) feet of the access road to be
constructed along the North side of the Lots; and (ii) a sufficient number of future owners
of the Lots within the subdivision have agreed to amend the CC&Rs, if necessary, to
ensure that the Owners of Lots 9, 11, and 13 are not permitted to construct or install any
structure within nine hundred (900) feet of the access road to be constructed along the
North side of the Lots. If Seller does not provide both (i) and (ii) prior to the close of
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escrow, Seller shall be required to take any steps necessary to amend the CC&Rs to
require that the owners of Lots 9, 11, and 13 shall not be permitted to construct or install
any structure within nine hundred (900) feet of the access road to be constructed along
the North side of the Lots. If Seller is unable to amend the CC&Rs and cause the
amendment to be recorded, as required herein, within two (2) months from the date of the
close of escrow, Seller shall refund to [plaintiffs] Eighty Thousand Dollars ($80,000)
from the purchase price under the Agreement. Buyer may accept, but is not required to
accept, a satisfactory alternative method to amending the CC&Rs.”
Lynn Smith testified at his deposition that the purpose of the desired building
restriction was to preserve the “feel” that the houses plaintiffs planned to build on the two
lots they were buying were “out in the middle of the vineyards” and without the building
restriction plaintiffs believed they would be “substantially damaged.” As for the $80,000
refund to be paid if the restriction was not obtained, Smith testified that he did not
remember how that figure was determined. He admitted plaintiffs did not do any market
research to determine what the diminution in the value of the property would be in the
absence of the building restriction. Instead, Smith testified that, “in all honesty,” he
thought they “just talked about it between Tom Gassner[1] and ourselves and we all
agreed on that eighty thousand dollars.” Smith did not “think [they] were talking about
damages.” Gassner just said, “ „I‟m going to get it done and eighty thousand dollars is
fine.‟ ”
Escrow closed on plaintiffs‟ purchase of the Orchard property on June 22, 2006.
More-Gas failed to amend the CC&Rs to include the building restriction within two
1 Thomas Gassner is one of the members of More-Gas. In his declaration in support
of the motion for summary adjudication, Gassner claimed he was “the individual at
More-Gas [who] had most of the dealings directly with Plaintiffs.” Gassner was named
as a defendant in this action, but the claims against him are not before us on appeal.
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months from the closing. In December 2007, plaintiffs demanded that More-Gas refund
the $80,000, but More-Gas refused to do so.
The Jahant Property
In June 2006, plaintiffs contracted to purchase for $2 million some property More-
Gas owned on East Jahant Road in Acampo. The purchase agreement identified the
property as consisting of six parcels of approximately five acres each. At that time,
however, the property actually consisted of a single parcel that had not yet been
subdivided. A tentative subdivision map for the property had been approved, but no final
map had yet been filed.
The purchase agreement provided an outside closing date of August 5, 2006.
Around the first of August, when it became clear that the final subdivision map would not
be filed by the closing date (because the public works department had not yet approved
the improvement plans), the parties signed an addendum to the purchase agreement
providing for More-Gas to continue its efforts to finalize the subdivision following the
close of escrow.2 As relevant here, the addendum provided as follows:
“ „Seller shall, at the sole expense of Seller, construct the extension of Tretheway
Road (connecting Tretheway to Jahant Road) according to the specifications of San
Joaquin County and as required by the conditions of approval issued with the tentative
map for the Property (“Road Construction”). The Road Construction shall be completed
on or before the date that is twelve (12) months after the Close of Escrow. Purchaser
hereby grants Seller a license to enter onto the Property and perform such work. . . . If
Seller fails to complete the Road Construction within twelve (12) months after the Close
2 The parties elected not to extend the closing date on the purchase agreement in
order to accommodate a 1031 exchange (an exchange of investment property to defer
capital gains taxes).
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of Escrow, Purchaser may complete the Road Construction at Seller‟s expense, as
described in Section 4 as amended by the First Addendum.‟ ”
The amendment to section 4 of the purchase agreement consisted of the following
new language:
“ „In the event that Seller has not recorded a final map creating the six (6) parcels
to be purchased by Purchaser hereunder on or before the Outside Date, the Close of
Escrow shall nevertheless take place on or before the Outside Date, and the following
shall apply. In the event that the Close of Escrow takes place and a final map has not yet
been recorded, the total amount due from Purchaser at the Close of Escrow less any
amount deposited by Purchaser and less Purchaser‟s exchange funds (which shall not be
less than four hundred thousand dollars ($400,000.00)), shall be paid by Purchaser to
Seller in the form of a promissory note accruing no interest (the “Note”). The Note shall
be due and payable within fifteen (15) days of the recordation of a final map creating six
(6) 5-acre parcels within the Property. The Note shall be secured by a deed of trust
covering the Property, which deed of trust shall be subordinate to any deed of trust in
favor of Purchaser‟s lender recorded in connection with a loan used for the acquisition of
the Property or construction of improvements on the Property, if any. Seller shall cause
the final map to be recorded as soon as practicable after the Close of Escrow, but in all
cases on or before twelve (12) months from the Close of Escrow. If the final map is not
recorded on or before twelve (12) months from the Close of Escrow, then [Purchaser]
shall select one of the following options and notify Seller in writing within (15) days
which option [Purchaser] has selected: (i) Purchaser may require Seller to purchase the
Property from Purchaser for two million five hundred thousand dollars ($2,500,000.00);
or (ii) Purchaser may retain the Property and Seller shall be relieved of the responsibility
to cause the final map to be recorded, in which case Seller shall reasonably cooperate
with Purchaser in Purchaser‟s efforts to cause the final map to be recorded. If Purchaser
elects to retain the property as described above, the Note shall be due and payable on or
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before thirteen (13) months from the Close of Escrow. In all cases, if the Road
Construction has not been completed prior to the time payment on the Note is due,
Purchaser may deduct an amount equal to two hundred fifty thousand dollars
($250,000.00) plus the amount of Seller‟s bond required to ensure completion of the
Road Construction, from the amount of payment due on the Note, which setoff amount
shall be due and payable on the first of the following dates to occur: (i) fifteen (15) days
following Seller‟s notice to Purchaser upon completion of the Road Construction by
Seller; or (ii) within six (6) months from date of Purchaser‟s election to retain the
property as described above, less any amount of reasonable actual costs incurred by
Purchaser in completing the Road Construction. Purchaser and Seller agree to cooperate
and take reasonable action in order to accomplish the recordation of the final map in
accordance with this Section.‟ ”
Brian McGuire testified at his deposition that plaintiffs purchased the Jahant
property based on the assumption they were going to be buying “finished buildable lots,”
and he never gave any consideration to what the property would be worth if the final map
was not approved. He did not recall how they came up with $500,000 as the additional
amount More-Gas would have to pay plaintiffs to buy the property back if plaintiffs
elected that option in the event the final map was not recorded within the time allowed.
As for Smith, when he was asked where the $500,000 “repurchase premium” came from,
he said he did not “know how [they] determined or came to that exact amount.” He
testified that they “put in an amount that [they] felt would be an incentive to get the job
done on time which would allow [them] to build the houses.” Because “prices were
going up” and “property was appreciating at that time” and they would have “a year into
the project,” they “felt . . . five hundred thousand dollars would be a -- a fair amount
regardless of what happened.” They did not “do a formal market analysis” but they
“figured that five-hundred-thousand-dollar appreciation in a year at that time, twenty-five
percent was not unheard of.”
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Following the closing of the deal in August 2006, plaintiffs gave More-Gas a
promissory note for $1,594,307.11 for the Jahant property pursuant to the terms of the
addendum to the purchase agreement. The following April, plaintiffs failed to pay the
property tax installment due for the Jahant property. More-Gas elected to treat that
failure as a default under the deed of trust securing the promissory note, and in July 2007
More-Gas recorded and served a notice of default and election to sell the property under
the deed of trust.
Twelve months passed from the close of escrow and More-Gas failed to record the
final map on the Jahant property within that period. Accordingly, on August 9, 2007,
plaintiffs notified More-Gas that they were electing to require More-Gas to repurchase
the property for $2.5 million. More-Gas refused to do so.
The Present Action
In October 2007, plaintiffs commenced this action against More-Gas. The
following month, the court issued a preliminary injunction preventing More-Gas from
proceeding with a nonjudicial foreclosure sale of the Jahant property. In March 2008,
plaintiffs and More-Gas entered into a partial settlement agreement. The terms of that
settlement provided that plaintiffs would convey the Jahant property to More-Gas, and in
exchange the promissory note on the property would be deemed paid in full and the deed
of trust would be reconveyed. In addition, the agreement provided that More-Gas would
deposit a portion of the proceeds from any subsequent sale of the Jahant property, either
in part or in full, in an account to be held pending the resolution of this action, up to a
total of $1,075,000. Those funds were to be available to satisfy any judgment for
damages plaintiffs might receive in this action. The agreement also provided that More-
Gas was to provide plaintiffs with a deed of trust on the Jahant property securing the
performance of More-Gas‟s obligations under the partial settlement agreement.
The partial settlement agreement provided that “[w]ithin ten (10) days of any final
judgment in this matter,” “[i]f Plaintiffs are not awarded damages as part of a final
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judgment, then Plaintiffs shall reconvey the [More-Gas] Deed of Trust.” The agreement
also specified that it was “expressly intended to be an accommodation to the Parties so
that the Property c[ould] be effectively and efficiently entitled, developed, improved, and
sold to the benefit of all Parties,” and that while the agreement “temporarily alter[ed the
Parties‟] rights, the Parties also expect[ed] that all other rights and remedies may continue
to be pursued and w[ould] not be altered by this Agreement.”
In April 2010, plaintiffs filed a third amended complaint in this action, setting
forth 12 causes of action. As relevant here, plaintiffs alleged in their second cause of
action that More-Gas failed to fulfill its obligations under the purchase agreement for the
Orchard property by failing to secure the promised amendment to the CC&Rs and
breached the contract by failing to refund the $80,000 to plaintiffs. As damages,
plaintiffs sought recovery of the $80,000. In their sixth cause of action, plaintiffs alleged
that More-Gas breached the purchase agreement for the Jahant property by failing to
record the final map by the deadline and by refusing to repurchase the property. As
damages, plaintiffs sought $905,692.89, which represented the $2.5 million repurchase
price minus the amount of the promissory note that was deemed paid in full under the
partial settlement agreement.3
In August 2010, More-Gas moved for summary adjudication of the first 11 causes
of action in the third amended complaint. With respect to plaintiffs‟ causes of action for
breach of contract on the Orchard and Jahant properties, More-Gas sought summary
adjudication on the grounds that plaintiffs could not prove they suffered any actual
damages and the damages they sought in their complaint were unrecoverable because the
provisions providing for payment of those amounts were unenforceable penalty
provisions rather than valid liquidated damages clauses.
3 Viewed another way, this damages figure also represented the amount of
plaintiffs‟ down payment on the Jahant property plus the $500,000 repurchase premium.
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In opposing the motion for summary adjudication, plaintiffs addressed only More-
Gas‟s arguments relating to the two breach of contract causes of action (thus effectively
conceding the motion with respect to the other nine causes of action). Plaintiffs argued
that the payment provisions in question were not unenforceable penalty provisions or
even liquidated damages clauses but instead were “bargained-for options for alternative
performance.” Thus, plaintiffs contended that under the purchase agreement for the
Orchard property, More-Gas “could opt not to make [the] amendments [to the CC&Rs]
and [instead] refund to Plaintiffs $80,000 from the Orchard Property purchase price.”
Similarly, plaintiffs contended that under the purchase agreement for the Jahant property,
More-Gas could “opt not to [record the final map] which in turn provided Plaintiffs with
the option, which they exercised, to require [More-Gas] to repurchase the Jahant Property
for a sum of $2,500,000.”
After granting summary adjudication on the nine causes of action plaintiffs did not
address in their opposition to the motion, the trial court addressed whether “the refund
provision of the Orchard Property agreement, and/or the re-purchase provision of the
Jahant Property agreement [were] enforceable.” With respect to the $80,000 refund, the
court concluded there was “no indication in the record that $80,000 was any sort of
estimate of fair damages; rather, the evidence reveals that $80,000 was an arbitrary sum
chosen to „incentivize‟ the amending of the [CC&Rs]. . . . [T]he provision appears
clearly to be a monetary „club‟ -- or penalty, to use the technical legal term -- and, as
such, is unenforceable.” With respect to the $2.5 million repurchase price, the court
concluded it, too, was “an unenforceable penalty” because “the figure was selected not by
any sort of analysis, calculation, formula, or reckoning” and because “Smith . . . testified
that it would have been easy to calculate the damages upon a breach of the Jahant
Property agreement simply by having the repurchase price be the „market‟ price . . . [b]ut,
according to Mr. Smith, Plaintiffs did not intend the $500,000 premium in the First
Addendum to be an estimate of Plaintiffs‟ anticipated damages upon a breach of the
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Jahant agreement,” but instead “intended the $500,000 premium to be an incentive [for
More-Gas] to record the final map.” (Bold text and italics omitted.) Based on these
conclusions, the trial court granted summary adjudication on the second and sixth causes
of action.
Following the granting of More-Gas‟s summary adjudication motion, plaintiffs
apparently dismissed the sole remaining cause of action in their third amended complaint,
paving the way for the entry of judgment in favor of More-Gas, which occurred in
January 2011. In February 2011, More-Gas moved for an order requiring plaintiffs to
reconvey the deed of trust on the Jahant property pursuant to the partial settlement
agreement. Plaintiffs opposed the motion on the ground that More-Gas had not
demonstrated that the trial court had jurisdiction to make such a postjudgment order and
the ground that the judgment was not “final” within the meaning of the partial settlement
agreement because it was still subject to appeal.
The trial court granted More-Gas‟s motion and ordered plaintiffs to reconvey the
deed of trust. Thereafter, plaintiffs timely appealed from the judgment and from the
postjudgment order.
DISCUSSION
I
Summary Adjudication
“A party may move for summary adjudication as to one or more causes of action
within an action . . . if that party contends that the cause of action has no merit . . . . A
motion for summary adjudication shall be granted only if it completely disposes of a
cause of action . . . .” (Code Civ. Proc., § 437c, subd. (f)(1).)
“The rules applicable to summary judgments apply equally to motions for
summary adjudication. [Citation.] Summary judgment is granted when a moving party
establishes the right to the entry of judgment as a matter of law. [Citation.] In reviewing
an order granting summary judgment, we must assume the role of the trial court and
10
redetermine the merits of the motion. In doing so, we must strictly scrutinize the moving
party‟s papers. The declarations of the party opposing summary judgment, however, are
liberally construed to determine the existence of triable issues of fact. All doubts as to
whether any material, triable issues of fact exist are to be resolved in favor of the party
opposing summary judgment. While the appellate court must review a summary
judgment motion by the same standards as the trial court, it must independently
determine as a matter of law the construction and effect of the facts presented. [Citation.]
Accordingly, we are not bound by the trial court‟s stated reasons and review only the
ruling, not its rationale.” (Blue Shield of California Life & Health Ins. Co. v. Superior
Court (2011) 192 Cal.App.4th 727, 732 (Blue Shield).)
“A defendant moving for summary judgment meets its burden of showing that
there is no merit to a cause of action if that party has shown that one or more elements of
the cause of action cannot be established or that there is a complete defense to that cause
of action. [Citation.] If the defendant does so, the burden shifts back to the plaintiff to
show that a triable issue of fact exists as to that cause of action or defense.” (Blue Shield,
supra, 192 Cal.App.4th at p. 732.)
Here, plaintiffs do not argue that a triable issue of fact exists. Rather, their
primary contention essentially is that More-Gas never met its initial burden on the motion
for summary adjudication because, based on the undisputed facts, the refund provision in
the purchase agreement for the Orchard property and the repurchase premium in the
purchase agreement for the Jahant property were not unenforceable penalty provisions
but instead were enforceable provisions for alternative performance. To analyze this
contention, we must first explore the law of liquidated damages.
II
The Law Of Liquidated Damages
“The term „liquidated damages‟ is used to indicate an amount of compensation to
be paid in the event of a breach of contract, the sum of which is fixed and certain by
11
agreement, and which may not ordinarily be modified or altered when damages actually
result from nonperformance of the contract.” (Kelly v. McDonald (1929) 98 Cal.App.
121, 125, disapproved on other grounds by McCarthy v. Tally (1956) 46 Cal.2d 577,
587.) “Liquidated damages constitute a sum which a contracting party agrees to pay or a
deposit which he agrees to forfeit for breach of some contractual obligation.” (ABI, Inc.
v. City of Los Angeles (1984) 153 Cal.App.3d 669, 685, italics omitted.) A liquidated
damages provision in a contract “normally stipulates a pre-estimate of damages in order
that the parties may know with reasonable certainty the extent of liability for a breach of
their contract.” (Ibid.)
“Under the 1872 Civil Code, a provision by which damages for a breach of
contract were determined in anticipation of breach was enforceable only if determining
actual damages was impracticable or extremely difficult.” (Ridgley v. Topa Thrift &
Loan Assn. (1998) 17 Cal.4th 970, 977, citing 1872 Civ. Code, §§ 1670, 1671.)
“Departing radically from the former law, on July 1, 1978, the Legislature repealed Civil
Code section 1670, and amended section 1671 in order to express a new policy favoring
the enforcement of liquidated damage provisions except against the consumer in a
consumer case. (Civ. Code, § 1671, subds. (b) and (c); see Cal. Law Revision Com.
comment on § 1671, subd. (b).) In pertinent part, subdivision (b) of Civil Code section
1671 now provides that „ . . . a provision in a contract liquidating the damages for the
breach of a contract is valid unless the parties seeking to invalidate the provision
establishes that the provision was unreasonable under the circumstances existing at the
time the contract was made.‟ ” (ABI, Inc. v. City of Los Angeles, supra, 153 Cal.App.3d
at pp. 684-685, italics omitted.)
“A liquidated damages clause will generally be considered unreasonable, and
hence unenforceable under section 1671(b), if it bears no reasonable relationship to the
range of actual damages that the parties could have anticipated would flow from a breach.
The amount set as liquidated damages „must represent the result of a reasonable endeavor
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by the parties to estimate a fair average compensation for any loss that may be sustained.‟
[Citation.] In the absence of such relationship, a contractual clause purporting to
predetermine damages „must be construed as a penalty.‟ [Citation.] „A penalty provision
operates to compel performance of an act [citation] and usually becomes effective only in
the event of default [citation] upon which a forfeiture is compelled without regard to the
damages sustained by the party aggrieved by the breach [citation]. The characteristic
feature of a penalty is its lack of proportional relation to the damages which may actually
flow from failure to perform under a contract. [Citations.]‟ [Citation.]
“In short, „[a]n amount disproportionate to the anticipated damages is termed a
“penalty.” A contractual provision imposing a “penalty” is ineffective, and the wronged
party can collect only the actual damages sustained.‟ ” (Ridgley v. Topa Thrift & Loan
Assn., supra, 17 Cal.4th at pp. 977-978.)
It is important to recognize, however, that a provision in a contract that appears at
first glance to be either a liquidated damages clause or an unenforceable penalty
provision may instead merely be a provision that permissibly calls for alternative
performance by the obligor. “A contractual provision that merely provides an option of
alternative performance of an obligation does not impose damages and is not subject to
section 1671 limitations.” (Cellphone Termination Fee Cases (2011) 193 Cal.App.4th
298, 328.) Thus, notwithstanding the limitations on liquidated damages clauses provided
in Civil Code section 1671, the courts “recognize . . . the validity of provisions varying
the acceptable performance under a contract upon the happening of a contingency.”
(Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 738
(Garrett).)
In some cases, though, “a form of alternative performance is used to mask what is
in reality a penalty or forfeiture.” (Blank v. Borden (1974) 11 Cal.3d 963, 970.) “The
mere fact that an agreement may be construed, if in fact it can be, to vest in one party an
option to perform in a manner which, if it were not so construed, would result in a
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penalty does not validate the agreement.” (Garrett, supra, 9 Cal.3d at p. 737.) “[W]hen
it is manifest that a contract expressed to be performed in the alternative is in fact a
contract contemplating but a single, definite performance with an additional charge
contingent on the breach of that performance, the provision cannot escape examination in
light of pertinent rules relative to the liquidation of damages.” (Id. at p. 738.)
“In evaluating the legality of a provision, a court must first determine its true
function and operation.” (Cellphone Termination Fee Cases, supra, 193 Cal.App.4th at
p. 328.) Our Supreme Court has “consistently ignored form and sought out the substance
of arrangements which purport to legitimate penalties and forfeitures.” (Garrett, supra,
9 Cal.3d at p. 737.) Where “the contract clearly reserves to the owner the power to make
a realistic and rational choice in the future with respect to the subject matter of the
contract,” a valid alternative performance provision will be found. (Blank v. Borden,
supra, 11 Cal.3d at p. 971.) On the other hand, where the “arrangement, viewed from the
time of making the contract, realistically contemplates no element of free rational choice
on the part of the obligor insofar as his performance is concerned,” the provision will be
deemed to provide for a penalty. (Ibid.)
“Whether the amount to be paid upon breach of a contractual term should be
treated as liquidated damages or as an unenforceable penalty is a question of law, which
we review de novo.” (Greentree Financial Group, Inc. v. Execute Sports, Inc. (2008)
163 Cal.App.4th 495, 499.) More broadly, unless it turns on the credibility of extrinsic
evidence, the interpretation of a written contract is solely a judicial function, and an
appellate court is not bound by the trial court‟s construction of the contract. (Parsons v.
Bristol Development Co. (1965) 62 Cal.2d 861, 865.) Thus, we review de novo the
question of whether the contracts at issue here involved enforceable provisions for
alternative performance or unenforceable penalty provisions.
With these legal principles in mind, we turn to the arguments in this case.
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III
The Orchard Property Refund Provision
Plaintiffs contend the trial court erred in finding the refund provision in the
purchase agreement for the Orchard property was unenforceable because, in plaintiffs‟
view, that provision is not a penalty provision or even a liquidated damages provision.
Rather, they contend, “the refund provision in the Orchard agreement simply reflects the
fact that [plaintiffs] accepted the Orchard property in incomplete condition” and the
$80,000 refund was “a wholly-proper reduction in the purchase price on account of
More-Gas‟[s] failure to complete the amendment to the CC&Rs.” Stated another way,
plaintiffs contend “the Orchard refund provision does not fix damages for a breach of the
agreement. Rather, the provision specifies alternative performance: More-Gas could
complete the recording of the CC&Rs within two months or could refund $80,000 to
[plaintiffs]. More-Gas could have performed under the agreement by doing either of
those two things.”
In support of this argument, plaintiffs cite Stevens v. Los Angeles Dock etc. Co.
(1912) 20 Cal.App. 743 (Stevens), contending “there is no meaningful distinction
between the Orchard Property situation and the Stevens case.” In Stevens, defendant Los
Angeles Dock & Terminal Company (the company) contracted to sell a subdivision in
Long Beach to plaintiff Stevens and another party. (Stevens, supra, 20 Cal.App. at
p. 744.) The sales price “was $31,850, $12,740 being paid at the date of the signing of
the agreement, $9,555 being payable on or before the fifteenth day of July, 1906, and the
balance of $9,555 on or before the fifteenth day of January, 1907.” (Ibid.) The deed to
the property was to be conveyed when all of the payments were made. (Ibid.) The
contract further provided that the company was to “fill [the] land and raise it to a uniform
height of at least three feet above its present elevation, or such other height as [the
buyers] might desire, not exceeding ten feet,” “grade all streets in [the] tract,” and “put in
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cement curbs and sidewalks,” and if the improvements were not completed within 18
months, “the third payment should not be required.” (Id. at p. 745.)
Stevens subsequently sued the company for specific performance, alleging all of
the payments had been made except the third one because the company did not make the
specified improvements within 18 months. (Stevens, supra, 20 Cal.App. at p. 745.) After
the matter was tried to the court, the trial court granted judgment in Stevens‟s favor,
finding that “the agreement to waive the third payment for [the] land in case [the]
improvements should not be completed within eighteen months was fair and reasonable”
and “the first and second payments expressed in [the] agreement for [the] lands
constituted the reasonable and adequate value thereof in an incomplete and unfilled
condition and [were] not disproportionate to the value of [the] lands.” (Id. at pp. 746-
747.)
On appeal, the company argued that “th[e] waiver of the third payment in default
of the making of the improvements was a contract either for a penalty or for liquidated
damages; that, regarding the same as one for liquidated damages, under [former] section
1670 of the Civil Code, the same is void because from the nature of the case it was
neither impracticable nor extremely difficult to fix the actual damages in the event of
failure to perform the conditions, and that there is no evidence in the record tending to
show the amount of actual damages, if any existed; and further, that if treated as a
penalty, under section 3369 of the Civil Code, specific relief cannot be granted to enforce
a penalty or forfeiture in any event.” (Stevens, supra, 20 Cal.App. at p. 748.) The
appellate court rejected the company‟s argument, concluding as follows:
“The learned trial judge in construing the agreement determined the case evidently
upon the theory that the so-called waiver of the third payment was neither an attempt to
liquidate damages, nor in the nature of a penalty, but was, in effect, an agreement to sell
property in an incomplete condition for a fixed price, which was the cash price plus the
first deferred payment, with an option to make certain improvements thereon within
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eighteen months, which, if made, then the price agreed upon should be the total amount
specified, which included the third payment. In other words, that the specified third
payment was nothing more than a stipulation as to the enhancement in value which would
attach to the property in the event that the contemplated improvements were made within
the specified time, and if so made that the plaintiff should pay therefor a stipulated sum; a
condition somewhat analogous to a contract involving a sale of vacant property at a fixed
price, with an option to construct a house thereon of certain character within a stipulated
time, which, if done by the seller, an additional price should be paid therefor. We are of
opinion that this is a fair construction of this contract, and so construed it is not open to
the criticism offered, and does not come within the provisions of the sections of the Civil
Code above cited, and that the allegations of the complaint were sufficient to warrant the
relief granted.” (Stevens, supra, 20 Cal.App. at p. 748.)
Analogizing this case to Stevens, plaintiffs argue that just as the buyers in Stevens
were “entitled to deduct almost a third of the purchase price because contracted-for
improvements were not timely completed,” here plaintiffs “are entitled to a refund
amounting to less than eight percent of the purchase price . . . because the CC&R
amendment necessary to accomplish the purpose for which [they] purchased the property
was not timely recorded.”
In response to this argument, More-Gas first notes that Stevens is “a 100 year old
case that has never been cited by another California case.” That fact is of no significance.
While it is true Stevens has never been cited by any published appellate decision in
California, that does not undercut the validity of the reasoning in the case. Indeed, the
principle applied in Stevens is well known in the common law, including here in
California. An appellate court in New York that cited Stevens over 70 years ago
succinctly articulated that principle as follows: “Where the agreement of the promisor is
to do a certain thing or in default thereof to pay a certain sum of money, our courts, on
his failure to do the particular thing, consider him as having had his election, and hold
17
him liable to pay the agreed sum of money. This form of contract, while approaching
very near to a stipulation for a penalty for non-performance, is distinguishable therefrom
and enforced according to its terms, and is considered as giving the promisor the election
to refuse to do the act and in lieu thereof to pay the amount agreed.” (Hasbrouck v. Van
Winkle (1941) 27 N.Y.S.2d 72, 76.)
Thus, Stevens is an example of that class of cases where the contract gives the
promisor the option of alternative performance, and in such a case no question of breach
or of liquidated damages arises. Another example of that type of case from California is
Blank v. Borden, supra, 11 Cal.3d at page 963. There, a homeowner entered into an
exclusive-right-to-sell contract with a real estate broker. (Id. at p. 966.) The contract
gave the broker the exclusive right to sell the homeowner‟s property for a seven-month
period in exchange for 6 percent of the selling price and provided that if the homeowner
withdrew the property from sale during that period the broker would receive 6 percent of
the initial listing price. (Id. at p. 966 & fn. 1.)
Before the Supreme Court, the homeowner argued that the withdrawal-from-sale
provision “should be denied enforcement as an unlawful penalty,” but the Supreme Court
rejected that argument on the ground that the terms of the contract before it “in no sense
contemplated a „default‟ or „breach‟ of any obligation by the owner upon whose
occurrence payment is to be made. On the contrary, the clause in question presents the
owner with a true option or alternative: if, during the term of an exclusive-right-to-sell
contract, the owner changes his mind and decides that he does not wish to sell the subject
property after all, he retains the power to terminate the agent‟s otherwise exclusive right
through the payment of a sum certain set forth in the contract. [¶] We do not see in this
arrangement the invidious qualities characteristic of a penalty or forfeiture. . . . [W]hat
distinguishes the instant case from other situations in which a form of alternative
performance is used to mask what is in reality a penalty or forfeiture is the element of
rational choice. . . . [¶] In the instant case, . . . the contract clearly reserves to the owner
18
the power to make a realistic and rational choice in the future with respect to the subject
matter of the contract. . . . In these circumstances, the contract is truly one which
contemplates alternative performance, not one in which the formal alternative conceals a
penalty for failure to perform the main promise.” (Blank v. Borden, supra, 11 Cal.3d at
pp. 969, 970-971, fns. omitted.)
Like the contract in Blank, the contract is Stevens contemplated alternative
performance, giving the company the rational choice of which performance to tender:
either the company could make the specified improvements to the property and collect
the third installment payment or the company could decline to make those improvements
and forego the third payment. The purchase agreement for the Orchard property provided
More-Gas with a similar choice. More-Gas could either secure the specified amendment
to the CC&Rs and keep the $80,000 or decline to secure that amendment and refund the
$80,000 to plaintiffs. Viewed in this manner, the purchase agreement for the Orchard
property can be understood to contain an enforceable provision for alternative
performance rather than an unenforceable penalty provision.4
Attempting to distinguish Stevens, More-Gas first contends “it cannot be argued
the [Orchard] property was in an incomplete condition as [plaintiffs] sold it and set a
price without even considering the lack of the CC&Rs.” This argument is based on
McGuire‟s deposition testimony regarding plaintiffs‟ later sale of one of the two Orchard
lots. McGuire‟s testimony was that he did not have a “specific memory” of whether
anyone told him the condition of the CC&Rs negatively affected the value of the property
and he did not think the condition of the CC&Rs affected “the price [they] listed the
4 As we explain hereafter, we are not concluding that the purchase agreement for the
Orchard property did contain an enforceable provision for alternative performance rather
than an unenforceable penalty provision; we are merely concluding that More-Gas failed
to eliminate the possibility of the former and thereby failed to meet its initial burden on
summary adjudication.
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property for.” This testimony has no bearing on whether the purchase agreement for the
Orchard property falls within the category of cases exemplified by Stevens and Blank. It
does not matter, for our purposes, what plaintiffs may have later believed about the effect
of the absence of the building restriction in the CC&Rs on the value of one of the lots in
the Orchard property on resale. In determining whether a contractual payment provision
is a penalty provision or a provision for alternative performance, we must view the
arrangement “from the time of making the contract.” (Blank v. Borden, supra, 11 Cal.3d
at p. 971.) Thus, what matters is what the parties knew or believed, and more importantly
what they agreed to, at the time they entered into the purchase agreement for the Orchard
property.
What the parties agreed to was that More-Gas would secure an amendment of the
CC&Rs within two months or refund $80,000 of the sales price. More-Gas does not
argue now, nor did it show by undisputed evidence in the trial court, that, viewed from
the time of the making of the contract, it lacked “a realistic and rational choice” (Blank v.
Borden, supra, 11 Cal.3d at p. 971) between securing the CC&R amendment and keeping
the $80,000 on the one hand or foregoing the amendment and refunding the $80,000 to
plaintiffs on the other hand. In fact, because More-Gas‟s summary adjudication motion
was focused on showing that the refund provision was a penalty provision because it was
not a valid liquidated damages clause, the motion did not address at all the factual issues
involved in determining whether the choice between securing the desired amendment to
the CC&Rs or giving back $80,000 was a realistic and rational choice when viewed from
the time of making the contract. Thus, More-Gas failed to make the showing necessary
to distinguish this case from Stevens, Blank, and the like.
More-Gas also attempts to distinguish this case from Stevens because here More-
Gas “was not [to be] paid additional funds when the CC&Rs were recorded, it was
required to pay [plaintiffs] if the CC&Rs were not recorded.” While that is certainly a
factual distinction between the two cases, it is not a material factual distinction. Whether
20
the money was to be held back and never paid (as in Stevens) or paid and then refunded
(as here), the substance of the deal is the same in both instances. Here, the substance of
the deal was that More-Gas would secure the amendment to the CC&Rs or would
receive, in the end, $80,000 less for the Orchard property. That More-Gas initially
received the $80,000 but then had to pay it back does not distinguish this case from
Stevens in any significant manner.
Because More-Gas, as the party that moved for summary adjudication, failed to
show that the refund provision in the purchase agreement for the Orchard property was an
unenforceable penalty provision and not a valid provision for alternative performance, we
conclude the trial court erred in its interpretation of the agreement. By this conclusion,
we are not saying that the refund provision, as a matter of law, presented More-Gas with
a realistic and rational choice when viewed from the time of the making of the contract.
For our purposes, it is sufficient to conclude that on the evidence More-Gas presented in
support of its motion for summary adjudication, More-Gas failed either to negate the
possibility that the refund provision was a legally enforceable provision for alternative
performance or to show that plaintiffs could not prove it was such a provision.5
Accordingly, the trial court erred in granting summary adjudication to More-Gas on the
second cause of action.
5 In this regard, the present case is distinguishable from Stevens, because Stevens
was decided following a court trial, not on summary judgment or summary adjudication,
and thus the trial court there was able to determine based on the evidence produced at
trial that “the first and second payments expressed in [the] agreement for [the] lands
constituted the reasonable and adequate value thereof in an incomplete and unfilled
condition” and therefore “the agreement to waive the third payment for said land in case
said improvements should not be completed [] was fair and reasonable.” (Stevens, supra,
20 Cal.App. at p. 747.)
21
IV
The Jahant Property Repurchase Provision
To a large extent, plaintiffs‟ primary argument regarding the provision in the
purchase agreement for the Jahant property that allowed them to require More-Gas to
repurchase the property for $500,000 more than plaintiffs had paid for it is substantially
the same as their argument regarding the refund provision in the purchase agreement for
the Orchard property. Specifically, plaintiffs contend “[t]he repurchase provision in the
Jahant addendum was neither a „damages‟ provision nor a provision fixing damages „for
breach‟ of the contract.” Rather, in reliance on Stevens, plaintiffs contend they took the
Jahant property “in its incomplete condition” -- that is, without the final subdivision map
recorded -- “subject to an agreement with More-Gas that [More-Gas] would buy [the
property] back at [plaintiffs‟] election if More-Gas failed to make [the property] complete
within one year.” Plaintiffs flesh this argument out further in their reply brief, where they
argue that “[u]nder the addendum to the original agreement, More-Gas had a choice to
make: record the final map within one year, putting the property in the condition [More-
Gas] had originally agreed to sell it to [plaintiffs], or honor the option if the [plaintiffs]
chose to exercise it. Under circumstances More-Gas could reasonably have anticipated at
the time of contracting, either choice might have been rational.” Thus, plaintiffs contend
the purchase agreement for the Jahant property did not contain a liquidated damages
clause or penalty provision but instead contained a provision for alternative performance
by More-Gas -- just like the purchase agreement for the Orchard property.
More-Gas contends plaintiffs‟ interpretation of the purchase agreement for the
Jahant property is not tenable because plaintiffs “expressly alleged causes of action for
promissory fraud against [More-Gas] on the basis that [plaintiffs] were induced to enter
into the Jahant Agreement on the promise that the final map would be recorded even
though [More-Gas] had no intention of performing those acts.” According to More-Gas,
if plaintiffs “truly believed that the Jahant Addendum provided [More-Gas] with the
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option of recording the final map and failure to do so was not a breach, how could
[plaintiffs] have been defrauded by [More-Gas] resulting from its failure to record the
final map? How could [plaintiffs] claim they relied upon a promise they now claim was
nothing more th[a]n an option for [More-Gas]?”
In determining the “true function and operation” (Cellphone Termination Fee
Cases, supra, 193 Cal.App.4th at p. 328) of the repurchase premium in the purchase
agreement for the Jahant property, which is what we are called on to do here, we are not
bound by what plaintiffs may have pled in other causes of action, because they were
entitled to plead inconsistent theories of recovery. (See Roberts v. Ball, Hunt, Hart,
Brown & Baerwitz (1976) 57 Cal.App.3d 104, 110.) Thus, even if plaintiffs‟ fraud
causes of action were inconsistent with the theory they now advance that the purchase
agreement for the Jahant property contained a provision for alternative performance by
More-Gas, it makes no difference.
More-Gas argues that the purchase agreement for the Jahant property did not
contain a provision for alternative performance, like the contract in Stevens, because “if
the improvements on the Jahant Property [we]re not completed by the dates specified,
[More-Gas did] not lose a payment from [plaintiffs] but instead [wa]s required to give
[plaintiffs] all of their money back, plus $500,000.” It is true this case is factually
distinguishable from Stevens on that basis, but the more pertinent question is whether that
factual distinction is material. Under Blank v. Borden, as discussed above, the pertinent
question is whether the terms of the Jahant addendum, viewed from the time of making
the contract, presented More-Gas with a true option or alternative -- a realistic and
rational choice in the future with respect to the subject matter of the contract. It is not
necessarily significant whether the consequences of the choice were identical or even
similar to the consequences of the choice in Stevens -- the loss of an installment payment.
What matters is whether the contract was “truly one which contemplate[d] alternative
23
performance” as opposed to “one in which the formal alternative conceal[ed] a penalty
for failure to perform the main promise.” (Blank v. Borden, supra, 11 Cal.3d at p. 971.)
In a footnote in Blank, the Supreme Court offered the following example from
McCormick‟s treatise on damages to illustrate the difference between a valid contract
providing for alternative performance and an invalid penalty provision: “ „If a contract
provides that A will either convey land then worth about $10,000 within six months at a
price of $10,000 or will pay $250, it is quite clear that a reasonable man might look
forward to either choice as a reasonable possibility, and there is no reason for hesitating
to enforce the promise to pay if the land is not conveyed. If, on the other hand, A‟s
promise provides that he shall either pay $100 on January 1st or $200 on demand
thereafter, a different situation is presented. No reasonable man would, when the contract
was made, consider that there was any rational choice involved (conceding the ability to
pay either sum) in determining which course to pursue. If he can do so, he will pay the
lesser sum, and the agreement necessarily is founded on this assumption, and the only
purpose and effect of the formal alternative is to hold over him the larger liability as a
threat to induce prompt payment of the lesser sum. Consequently, while an alternative
promise to pay money when it presents a conceivable choice is valid, yet, if a contract is
made by which a party engages himself either to do a certain act or to pay some amount
which at the time of the contract no one would have considered an eligible alternative, the
alternative promise to pay is unenforceable as a penalty.‟ ” (Blank v. Borden, supra,
11 Cal.3d at p. 971, fn. 7, quoting McCormick, Damages (1935) § 154, pp. 617-618, fns.
omitted.)
The court in Blank also pointed to Garrett as presenting an example of an
unenforceable penalty provision as opposed to a valid provision for alternative
performance: “There the contract, a promissory note secured by a deed of trust on real
property, provided for the assessment of certain „late charges‟ for failure to make timely
installment payments on the note—such charges to be a percentage of the unpaid
24
principal balance for the period during which payment was in default. We held that these
charges, which did not qualify as proper liquidated damages pursuant to Civil Code
section 1671, constituted illegal penalties. In characterizing the subject provision we
observed that its „only reasonable interpretation . . . is that the parties agreed upon the
rate which should govern the contract and then, realizing that the borrowers might fail to
make timely payment, they further agreed that such borrowers were to pay an additional
sum as damages for their breach[,] which sum was determined by applying the increased
rate to the entire unpaid principal balance.‟ [Citation.] Clearly this arrangement, viewed
from the time of making the contract, realistically contemplates no element of free
rational choice on the part of the obligor insofar as his performance is concerned; rather
the agreement is founded upon the assumption that the obligor will make the lower
payment. In these circumstances, as an eminent commentator has observed, „the only
purpose and effect of the formal alternative is to hold over [the obligor] the larger
liability as a threat to induce prompt payment of the lesser sum.‟ ” (Blank v. Borden,
supra, 11 Cal.3d at pp. 970-971.)
With these examples in mind, the question for us to decide is whether, in its
motion for summary adjudication, More-Gas showed, as a matter of law, that the
repurchase premium in the purchase agreement for the Jahant property was an
unenforceable penalty provision instead of being part of an enforceable provision for
alternative performance. We conclude they did not do so. In reaching this conclusion,
just as with the refund provision in the purchase agreement for the Orchard property, we
are not saying the repurchase premium in the purchase agreement for the Jahant property,
as a matter of law, presented More-Gas with a realistic and rational choice when viewed
from the time of the making of the contract. We are simply saying that on the evidence
More-Gas presented in support of its motion for summary adjudication, More-Gas failed
to show that the repurchase premium was an unenforceable penalty provision instead of
part of a legally enforceable provision for alternative performance.
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The basis for this conclusion is that in moving for summary adjudication, More-
Gas did not address at all the factual issues involved in determining whether the choice
between recording the final subdivision map or giving plaintiffs the option to require
More-Gas to buy the property back for $2.5 million was a realistic and rational choice
when viewed from the time of making the contract. For example, there is no evidence of
what the parties could have reasonably expected, at the time they entered into the Jahant
addendum, that it would cost for More-Gas to finish the subdivision and get the final map
recorded. Absent such evidence -- and whatever other evidence might be material to the
point -- we have no basis for judging whether the choice between finishing the
subdivision or giving plaintiffs the option of forcing More-Gas to repurchase the property
at a $500,000 repurchase premium could have been viewed as a realistic and rational
choice for More-Gas in August 2006.
Essentially what happened here is that More-Gas believed it could get out of the
sixth cause of action on summary adjudication by showing that the repurchase premium
in the purchase agreement for the Jahant property was not a valid liquidated damages
clause but instead was an invalid penalty provision. More-Gas failed to appreciate that
there was a third possibility -- that the repurchase premium was part of a valid provision
for alternative performance. Because More-Gas failed to appreciate that third possibility,
More-Gas‟s motion did not address the facts necessary to negate that possibility, or at
least to show that plaintiffs could not prove that possibility.
For the foregoing reasons, we conclude -- as we did with the purchase agreement
for the Orchard property -- that the trial court erred in interpreting the purchase
agreement for the Jahant property. Because More-Gas failed to establish that the
repurchase premium was necessarily a penalty provision, as opposed to a provision for
alternative performance, the trial court erred in granting summary adjudication on the
sixth cause of action as well.
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V
Reconveyance Of The Deed Of Trust On The Jahant Property
Plaintiffs contend that because the trial court‟s postjudgment order requiring them
to reconvey the deed of trust on the Jahant property was based on the trial court‟s
judgment in favor of More-Gas, which awarded no damages to plaintiffs, “in the event
that th[e] judgment is reversed, the grounds for the order disappear,” and the
postjudgment order should be reversed as well. We agree. The postjudgment order was
premised on the provision in the partial settlement agreement requiring plaintiffs to
reconvey the deed of trust within 10 days of any final judgment in the matter. Our
disposition of this appeal necessarily means there is no final judgment in this case yet.
Accordingly, no reconveyance can be required at this time.
DISPOSITION
The judgment and the postjudgment order are reversed, and the case is remanded
to the trial court with instructions to vacate its order granting More-Gas‟s motion for
summary adjudication in its entirety and to enter a new and different order denying the
motion as to the second and sixth causes of action, but granting the motion as to the
remaining nine causes of action. Plaintiffs shall recover their costs on appeal. (Cal.
Rules of Court, rule 8.278(a)(1).)
ROBIE , J.
We concur:
RAYE , P. J.
NICHOLSON , J.
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