R.N. and Related Parties V. R.S. Case No. 2012 NS-1 Award of Arbitrator

JOHN PRESTON
1060 CLARENDON CR
OAKLAND, CALIFORNIA
510-763-9131
#87237
JOHNPRESTONMEDIATION@GMAIL.COM

IN RE ARBITRATION 

R.N. AND RELATED PARTIES,Petitioner,vs.R.S.,

Respondent.

Case No.: 2012  NS-1

AWARD OF ARBITRATOR

This matter came on for regularly scheduled hearing on April 8, 9, 10, and 22, 2013 before the arbitrator, John S. Preston.  The arbitrator makes the following findings of fact.

I  FINDINGS OF FACT

(A)  THE TRANSACTION

            On or about October 14, 2008, the Petitioner (Buyers)  and the Respondent (Sellers)  entered into a Purchase and Sale Agreement regarding an eight-unit apartment building located at __________, Oakland, California (hereinafter the “Property”).

Simultaneously therewith or shortly thereafter October 14-15, 2008; the parties entered into Addendums 1 and 2 which essentially turned management of the property over to Petitioners.

On December 31, 2008, the transaction was to close.  Respondents state the Petitioners never attended the escrow.  No explanation was given by Petitioners. The petitioner’s testified they wanted out of the deal, but kept participating presumably at their brokers’ behest.

Nonetheless, the parties entered into Addendum 3 on February 12, 2009 – which changed the structure of the transaction to management function and appears to be an agreement to obtain financing for the entire sale as opposed to assumptions of mortgages and second deed of trusts, with among other things Buyers were to pay the monthly mortgage to Wachovia., Addendum 4 was executed on the same day whereby Buyers were to pay for property taxes and other on-going maintenance and recurring expenses.

On or about October 15, 2008, the parties entered in a Property Management Agreement PMA), which among other things codified in writing the arrangement to turn over the building the Buyers as if they owned it – until the financing and close could occur.  Petitioners were to receive zero compensation for same; but could keep the profits and losses from the operation of the Property.  It should be noted that both of the parties agreed that  PMA was meant to reflect what the parties were actually doing as opposed to being a “pure” property management agreement – and was drafted for the purposes of making the loan to Buyers more bankable by showing they had at least 6 months experience in managing this Property. Further Richard K. testified this agreement was meant to make loan more bankable – to show the experience of RMD.

The evidence shows that the Petitioners received approximately $67,256.00 to $80,000.00[1] in rents over the course of the period of time from October 15, 2008 to October 15, 2009.  These funds were then applied to pay for the routine expenses plus some maintenance and upgrades – with Petitioners keeping the profits and/ or losses of the Property operation[2].

(B) INCOME, REPAIRS, AND MAINTENANCE OF BUILDING

            The parties and the arbitrator went on an on-site inspection to the Property on April 11, 2013.  Present were the parties and Petitioner’s expert witness, Steven Sm..  Petitioners claim that they fixed certain windows and window cranks, repaired and replaced various kitchen tiles, repaired and replaced carpeting, repainted all of the unit interiors, replaced some toilet seats, fixed locks and the mailboxes, and fixed various bathroom fans as well as repainted the exterior of the Property.  At the on-site inspection, the arbitrator noticed that the paint job after four years was already peeling and not done with any primer.  The building exterior was all one color and appeared to be spray painted.  The laundry was full of items and could not readily be inspected.  However, it is small room and assuming plumbing and water were added, it did not seem particularly complex.

On the inside of the building, the Petitioners claim that they refurbished all of the units.  At the on-site inspection of only two units, the arbitrator noticed that the cabinetry was from the 1950s, the flooring was linoleum and was low-income grade carpeting however, all units were serviceable.  The arbitrator notes that given the nature of this low income apartment; it would not make rational sense to invest in high grade quality fixtures and carpeting, etc.  All of the tenants were low income and or Section 8 tenants.

Petitioners further claimed that they did three steps of improvements.  Step one was the initial rehab of the units.  Step two was further rehab and upgrades to make the units serviceable for the Tri-City Agency specifications.  Step three consisted of repairs in the amount of $6,515 as testified by Steven Sm. in order to turn the building back over to the seller Respondent.

Petitioners claim that they spent $133,949.00 on repairs[3] in performing these repairs.  However, on examination of Petitioner, Petitioner readily admitted that the actual “direct costs” were 57% of the total cost; or net of $76,350.93.[4]

Respondent disputes that hardly any money, if any, was actually spent on the building.

The Petitioner submitted evidence of a book containing several hundred receipts indicating that all of these receipts were applicable to this particular apartment.  The evidence shows that the Petitioner owned 30 to 40 other units, whether they be single-family houses or multi-unit apartments.  In order to present evidence that the receipts presented by Petitioner all belonged the Property, Petitioners called as a witness, Thiru K., who testified as to the bookkeeping procedures and the actual binder of the receipts.  The arbitrator notes that the binder presented by Petitioner did not incorporate all of the alleged receipts presented by Petitioner – and actually was comprised of about $20,000.00 of receipts – far short of the amounts claimed.[5]    Jose C. testified he spent 6 weeks working on the property and was paid approximately 10-12,000 dollars for the first stage of the apartment fix-up.  He testified he had 2-4 workers on site and they were paid between 10-12 dollars per hour.  So calculating 3 people per day for 30 days at $12.00 per hour would equal approximately $8640.00.  He further testified there was an additional 10 day’s  work to turn the property over to Abode which only equal $2,880.00.  There would be costs of material and paint, window cranks, tiles, carpeting, and toiled seats as well.  The arbitrator finds that $10,000.00 was spent on materials (not including labor)  including 8 apartments of flooring, locks, mailboxes, tiles, etc.  The arbitrator further finds the exterior paint job was below standard without primer (and was peeling) and estimates its cost was $5,000.00.

In addition, the arbitrator notes that Steven Sm., who was employed by Petitioner, testified that the $6,515 of repairs was the amount necessary to turn the unit back over to Respondent S.  The arbitrator finds Mr. Sm.’s recounting of events to be accurate and accepts the amount of $6,515.00 as actually spent on the building to turn the Property back over to Mr. S.  Petitioner’s claim they paid tenants relocation fees; however, there was no evidence of said payments.

Thus the arbitrator finds (given the benefit of the doubt to Petitioners that a total of $33,035 was spent of repairs and maintenance for the building, not including taxes, mortgage and insurance.[6]  Thus, giving the Petitioner’s the benefit of the doubt; they clearly received more funds than they expe0nded.[7]

(C )VARIOUS ADDENDUMS KEEPING THE TRANSACTION ALIVE

            The initial transaction called for the Petitioners to purchase the Property from the Respondent for a purchase price of $650,000.  This purchase price was to include assumption of the existing mortgage and a second mortgage in the amount of $269,528.92.

At some point in January or February 2009, Petitioner complained to the dual agency broker and indicated that he did not feel represented and that the owner of the company, Richard K., should rectify the situation.  Mr. K. then took over to be the agent for Respondent S.

At this point in this timeframe, the transaction morphed into a different structure wherein the Petitioners agreed that they would purchase the property by obtaining financing and taking out the Respondent..  However, an extension of time was necessary in order to obtain said financing.  Respondent and petitioners agreed to series of increased deposits and a closing date of July 15, 2009 with a 60 day extension   Addendum 3 also called for the original and additional deposits to be treated as “liquidated damages” and to be released to seller if the transaction did not close.  Of February 20, 2009, the parties entered into Addendum #5, wherein escrow was continued until September 15, 2009 in exchange for release of $40,000 to Seller, which was to be treated as “liquidated damages.”[8]  As will be discussed in the Legal Analysis section, while the parties characterized these sums as a deposit to cover “liquidated damages,” the circumstances suggest that these sums actually constituted, at least in part, payment for an option to extend the deadline for the transaction.

Had there been no dispute as to whether the requirements for a valid “liquidated damages” provision been met, it would not matter how the parties characterized these funds.  But in view of the fact that [  ] has raised this issue, it is incumbent upon the Arbitrator to carefully analyze the parties intent as manifested by their conduct so as to determine the proper characterization of these funds.   

On August 21, 2009, the transaction was assigned to D.H. – and the escrow close date was September 15, 2009.  On September 12, 2009, the parties executed Addendum 7 increasing the deposit by an additional $10,000.00 and extending the closing date until October 15, 2009.

(D) ISSUES SURROUNDING THE OCTOBER 15, 2009 DATE OF CLOSE

            On or about September 12, 2009, according to Richard K. (Seller’s Agent and Broker), it appeared as though the buyer RMD was not going to be able to obtain the necessary financing.  The parties modified the terms yet again.  As reflected in Addendum 7 of that date, they agreed to: (1) assign the Buyer’s interest in the transaction to D., (2) extend the “must close by” date to October 15, 2009, and (3) increased the “liquidated damages” amount to $85,000.  Although H. contends he did not initial the liquidated damages provisions, the initials “DH” in writing that appears to match the style of H.’s signature is on the copy of the addendum introduced into evidence and H. did not introduce a document in which his initials do not appear.[9]

 (E) RETURN OF THE PROPERTY TO S.

             On or about August 20-21, 2009, during the negotiations of terms between S. and his broker for what eventually became Addendum 7, S. made it clear he would not extend past the October 15, 2009 deadline.  No evidence was presented as to whether Petitioners were so apprised of this as a “firm” date.  On September 27, 2009, S. unambiguously responded  “No” when asked if he would consider any additional extensions.  On or about October 14, 2009, it became apparent the loan would not close and on October 15, 2009; the transaction was cancelled. It is interesting to note that neither H. orN. ever requested to continue or extend the transaction again – or ever offered any indication that there was any basis for believing that the loan would ever close, let alone that it would close within some short period of time after October 15, 2009. Rather, all parties associated with the buyer proceeded to act as if they had no objection to the cancellation and the buyer cooperated in all steps involved in returning management of the property back to S.

There is a dispute as to the condition of the property at the time it was returned to S.; Petitioner claims that the apartment was in good condition.  Respondent disputes that claim.  The arbitrator finds it was in at least as good a condition as when the buyer originally took over management. Many of the tenants were either relocated or forced to vacate.  Respondent claims that the building was returned to him with only a few tenants.

On October 20, 2009, $60,000 remaining in escrow and Petitioner drafted Addendum 8 (which he signed) indicating that the full $60,000 should be returned to him, i.e., the $45,000 owed to him plus $15,000 for the repairs and improvements.  S. never agreed to this provision.

The parties agreed that Respondent kept $85,000, characterized as “liquidated damages,” and the balance was returned to Petitioners.

Further, the parties have stipulated that the Petitioners are to include all related Parties to Petitioners, including but not limited to, D.H., R.N., DMR Investments LLC, RMD Services, LLC, and DMR Investments of the bay, LLC.

II.        LEGAL ANALYSIS

            Most, if not all of the problems leading to the disputes between the parties can be attributed in large part to the manner in which broker(s)/agents drew up the contracts.[10]

  1. BREACH OF CONTRACT

Both parties agree that the contract was breached.  The principal issues related to the breach are: (1) is who breached the contract and, (2) if so, was the conduct resulting in the breach tortious, and (3) what are the measure of damages.

The original contract dated October 6, 2008 did not have the box checked at item 2.L. regarding “No Loan Contingency.”  As such, had the buyer simply cancelled upon not being able to obtain the referenced outside financing while this arrangement was still in effect, there would have been no breach, and, hence, no damages for breach of contract.

However, on February 20, 2009, the parties executed a document titled Addendum No. 5, which states, in effect, at paragraph 3 that “If Buyer fails to close escrow by September 15, 2009 for any reason, [Buyer will be in breach of the contract.]”  Hence, by virtue of this provision, Buyer waived the benefits of the loan contingency.  The date by which the Buyer could close escrow without being in breach was extended to October 15, 2009 in the document titled Addendum 7, dated September 12, 2009. But that addendum reiterated the provision that left no doubt that the Buyer would be liable for breach if the contract failed because of an inability to obtain financing.  That is what occurred.

  1. BUYER’S DEFENSE THAT CONTRACT FAILED BECAUSE SELLER INTENTIONALLY INTERFERED WITH THE EFFORTS TO OBTAIN FINANCING.

Buyer concedes, as he must, that the contract failed because he did not obtain the requisite financing.  However, he argues that he is nonetheless not liable for breach of contract because the Seller intentionally interfered with the Buyer’s efforts to obtain financing.  There are several problems with this defense/counterclaim.

First and foremost is the fact that the Buyer has presented no evidence establishing that the Seller took any steps to interfere with the efforts to obtain financing, let alone, actually interfered.  The sole piece of evidence upon which the Buyer bases this claim is a notation in the Broadway Financial file indicating “canceled per Broler’s request.”   The notation does not indicate, which broker.  Secondly, petitioner presented no evidence even suggesting that in the absence of this alleged “interference,” the loan would have closed.  And, in fact, petitioner concedes that the lender, Broadway Financial had made it clear that it would not fund the loan in time for the escrow to close by the contract date of October 15, 2009.[11]In short, even if petitioner had established that the notation in Broadway’s file reflected seller’s efforts to prevent petitioner from obtaining the loan, he cannot show that these efforts proximately resulted in harm.

Petitioners admit that they knew in August 2009 that financing through Broadway Financial would take between 120 and 180 days.[12]In the undated Addendum #6 that refers to the August 21, 2009 instructions by which N. assigned his interest to H., they reference that a closing date of September 15, 2009 that was “subject to further agreement.”  Addendum #7 contains no comparable language suggesting the parties were considering a further extension beyond the October 15, 2009. Yet Buyer agreed in that Addendum that they would be in breach of the contract if the escrow did not close by October 15, 2009 – well before the earliest date they believed financing would be available.  There is no evidence that they received any assurance a further extension would be forthcoming or that they were fraudulently induced to agree to the express “drop dead” mid-October date.

PETITIONERS’ CLAIM THAT RESPONDENT WAS UNJUSTLY ENRICHED.

Petitioners’ other claim is that unless they are compensated for the benefits bestowed upon S. based on improvements made to the property during the period in which N. was managing the property, S. will be unjustly enriched.  Petitioners claim that the measure of the unjust enrichment is the amount of money they spent on improvements to the property.  Petitioner originally claimed that they spent on over $130,000 on repairs.

Unjust enrichment is an equitable remedy.  “An individual is required to make restitution if he or she is unjustly enriched at the expense of another.” First Nationwide Savings v. Perry (1992) 11 Cal.App.4th 1657, 1662. “The recipient of the benefit is liable only if the circumstances are such that, as between the two persons, it is unjust for the recipient to retain it.” California Federal Bank v. Matreyek (1992) 8 Cal.App.4th 125, 131.

In evaluating petitioner’s unjust enrichment claim, petitioner must establish that he conferred a benefit on S. while managing the property, the value of that benefit, and that it would be unjust for S. to retain that benefit with reimbursing petitioners.  Under the circumstances present her, petitioner has not presented evidence sufficient to support such a claim.  First of all, petitioner’s claim of funds spent on the building are excessive, such that he cannot claim unclean hands.  For example, upon examination petitioner conceded that less than 60% of the monies claimed were actually “directly” spent on the property.

Moreover, petitioner fails to show that the monies spent actually benefitted S.  However much money may have been spent on the property, no actual evidence was presented indicating that the money spent actually increased the value of the property.[13]  In the absence of evidence that S. received back a property worth more than it would have been worth in the absence of the work petitioner claims he performed, there is no basis for concluding he gained any benefit.

Finally, as noted, petitioner received back more in rent than he actually spent on the property.  Hence, he cannot claim he suffered any loss.  Hence, he cannot show he suffered any detriment.  Further, all of the evidence shows the property was returned basically vacant as Abode had to terminate its leases due to lack of funding.

PETITIONERS’ CLAIMS REGARDING LIQUIDATED DAMAGES.

The original agreement between N. and S. obligates the Buyer to deposit the sum of $20,000 as an “initial” deposit[14] and $10,000 as an “additional” deposit within an unstated number of days after Seller’s acceptance of the offer.[15] The agreement states that the Seller shall keep as liquidated damages the actual amount deposited in the event of Buyer’s default.[16] Both parties initialed the liquidated damages provision. Under Addendum # 3, dated February 16, 2009, Buyer was to make additional deposits[17], but they are not formally designated as anything other than credits toward the purchase price.

Under paragraph 2 of Addendum # 5, dated February 20, 2009, Buyer agreed that $25,000 was to be released to Seller on July 15, 2009 in exchange for Seller having agreed to extend the date by which Buyer must close to August 15, 2009; and another $15,000 on August 15, 2009 in exchange for Seller having extended the close of escrow to September 15, 2009.  The funds are characterized as follows:  “Amount will be considered as down payment of loan/price of purchase.”

In an undated, but signed Addendum #6, Seller agrees under paragraph 1 to allow Buyer to assign its interest pursuant to instructions dated August 21, 2009 and Buyer agrees under paragraph 2 to release $25,000 to Seller on September 11, 2009. These funds are characterized as follows: “Said released deposit shall be credited toward Buyer’s down payment.”

In the last addendum, Addendum #7,[18] provides for an increase in the deposit by $20,000, the first $10,000 is to be deposited by September 15, 2009 and immediately released to the Seller,[19]and another $10,000 is to be deposited by September 30, 2009.[20]Then, in paragraph 3, the term “liquidated damages” appears for the first time in any writing signed by Buyer and Seller since the original October 6, 2008 agreement.  It reads as follows:

In the event Buyer fails to close escrow for any reason by October 15, 2009, . . . escrow shall release to Seller an additional $10,000 and the balance shall be released to Buyer. . . . All deposits released to Seller shall be treated as liquidated damages.  Seller’s total liquidated damages shall be $85,000.[21]

This paragraph is initialed by both Buyer and Seller.

Buyer argues that the amounts to be released to the Seller pursuant to Addendum #5 and #6 should have been contemporaneously understood as “liquidated damages.”  And, hence, since the particular paragraphs in which release of those funds to the Seller is provided for are not initialed, the paragraphs should be deemed void as failing to comply with Civil Code §§1677 and 1678.  Following petitioners’ theory, only $50,000[22] should be considered Seller’s rightful claim to liquidated damages and the other $35,000 should be returned to the Buyer.

There are several problems with Buyer’s position.  First of all, the amounts released pursuant to the Addenda #5 and #6 are never referenced as “liquidated damages” until Addendum#7, pursuant to a paragraph that is initialed by both parties.  Of course the fact that they are not formally labeled as “liquidated damages” (or anything else, for that matter) would not necessarily mean that they should not have been characterized as “liquidated damages.”

How funds discussed in real estate contracts should be characterized was discussed in Allen v. Sm.:[23]

It is established that express terms such as “option” and “liquidated damages” are not dispositive in the interpretation of a real estate contract. Welk v. Fainbarg (1967) 255 Cal.App.2d 269, 273. “Whether any particular document is … an ‘option’ or ‘an agreement of sale’ depends on the nature and terms of the document and the obligation of the parties, regardless of how the parties may label or identify the document. The test is whether … there is a mutuality of obligation. If both parties are obligated to perform, it is an agreement of sale; if only one party (the optionor-offeror) is obligated to perform, it is merely an option.” (1 Miller & Starr, Cal. Real Estate (3d ed. 2000) Specific Contracts, § 2:8, pp. 26–27, fn. omitted.) “When deciding whether a particular contract is bilateral or unilateral, the courts favor an interpretation that makes the contract bilateral. A bilateral contract immediately and fully protects both parties by binding each to its terms on its execution.Id., Contracts, § 1:2, p. 7.

Here, in order to assess what the parties understood the purpose of the funds released under Addenda #5 and #6, the terms of the release of those funds as indicated in those addenda is the best evidence of the parties’ contemporaneous understanding.  In each case, the release of funds was conditioned on the receipt of some additional consideration from the Seller.  In such instances, it is evident that the Buyer understood that it was releasing funds to “pay” for a benefit received

The parties did not specifically decide that those funds should be treated as liquidated damages in the event the deal fell through until Addendum #7 at which point the Buyer specifically acknowledged that the $85,000 it had authorized to be released to the Seller would constitute the measure of liquidated damages.

Perhaps the Buyer had another subjective understanding as to the purpose behind the release of funds pursuant to Addenda #5 and #6.  But the Buyer, a sophisticated business person represented by a licensed real estate agent, accepted the language in those addenda and then expressly acknowledged that the Seller would be entitled to keep those funds in Addendum #7.  He received the benefits of the bargains in which he authorized the earlier release of funds.  Accordingly, however the various components of the $85,000 released to the Seller are characterized, the Seller is entitled to those funds.

  1. RESPONDENT’S AFFIRMATIVE DEFENSES AND CLAIMS FOR AFFIRMATIVE RELIEF CLAIM THAT PETITIONERS MUST DISGORGE MONIES RECEIVED UNDER THE “PROPERTY MANAGEMENT” AGREEMENT.

It is not just the Buyer who seeks to engage in hyper-technical legal arguments in an attempt to defeat the clear intention of the parties.  The Seller’s contentions regarding the “Property Management Agreement” are not well founded.

Almost immediately after N. and S. entered into the initial contract for N.’s company to purchase the apartment building in October 2008, they entered into an agreement titled a “Property Management Agreement” by which N. was to take over management of the apartment building.  Respondent has cross-complained that petitioner held himself out as a licensed real estate broker when he, in fact, was not and that he (S.) relied upon this representation in agreeing to enter into the property management agreement.  S. argues that since N. was not so licensed, he committed fraud and that S. is entitled to various forms of relief; however, further admits he did not rely on such representation.

There are a number of problems with S.’s claims for relief including, e.g., there is no evidence that N. mismanaged the property so S. cannot show he was harmed as a result of N. “misrepresentation.” Hence, there is no basis for a fraud claim.  But the primary problem with S.’s contention is that it is evident that the parties understood that the Property Management Agreement was intended simply to bolster the Buyer’s qualifications to obtain financing.  S. never believed that N. was going to be managing the property for him.  Rather, the facts leave no doubt that the parties intended for the Buyer to take on the benefits and burdens of ownership immediately upon the execution of the purchase agreement even before title actually passed.

S. was not paying any management fee, was not responsible for any of the repair work or other expenses the Buyer incurred in “managing” the property.  This was a “property management agreement” in name only.  S. accepted $85,000 as the measure of damages resulting from the Buyer’s inability to close escrow.  Hence, whether the Buyer had a net profit or loss for the period between October 2008 and October 2009 is irrelevant.[24]

  1. III.       CONCLUSION

It is unclear why Petitioner brought this action.  The argument that the sale’s failure is attributable to the Seller lacked both legal and factual support.  The Petitioners’ own contentions establish that at no point did the Buyer have any rational basis for believing he could comply with his obligations to obtain financing under the time limits the parties negotiated. And, the argument that technical flaws vitiated the Seller’s claim to liquidated damages was contrived.

Similarly, one must question the good faith behind the Seller’s claims regarding the invalidity of the “property management agreement” and fraud.  Finally, the claim for unjust enrichment would have been weak even if the amounts petitioner claimed to have spent on the property could have been proved.[25]

  1. IV.   AWARD

The Arbitrator awards the following:

  1. Petitioners’ claim that the Seller interfered in either Petitioners’ contract with the prospective lender or otherwise prevented the petitioner from completing the sale in a timely manner is decided in favor of the RESPONDENT.
  2. Petitioners’ claim for unjust enrichment is decided in favor of RESPONDENT.
  3. Petitioners’ claim that the Seller should be required to refund some or all of the $85,000 received from deposits is decided in favor of RESPONDENT.
  4. Respondent’s claim that N. defrauded him in entering into the “Property Management Agreement” is decided in favor of PETITIONER.
  5. Respondent’s claim that since N. was not a licensed real estate broker, the “Property Management Agreement” was not valid is decided in favor of PETITIONER.
  6. Within two (2) weeks from receipt of this award; Parties shall file their respective motions for Attorney’s fees and costs, including arbitration fees.
  7. Further, the parties have stipulated that the Petitioners are to include all related Parties to Petitioners, including but not limited to, D.H., R.N., D… Investments LLC, R… Services, LLC, and D…. Investments of the bay, LLC shall be bound by this award.

 

IT IS SO ORDERED:

DATED:     May 28, 2013

BY:     JOHN S. PRESTON

ARBITRATOR

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