AFC-Low Income Housing v.
Filed 10/17/13 AFC-Low Income Housing v. POZ Village Development CA2/25
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
FIVE
AFC-LOW INCOME HOUSING PARTNERS
et al.,
Plaintiffs and Appellants,
v.
POZ
VILLAGE DEVELOPMENT et al.,
Defendants and Respondents.
B244108
(Los Angeles
County
Super. Ct.
No. BC354676)
APPEAL from
a judgment of the Superior Court
of
County, Ralph Dau, Judge.
Affirmed.
Reuben
Raucher & Blum, Timothy D. Reuben, Stephen L. Raucher and Ashley J. Brick
for Plaintiffs and Appellants.
Kennedy
Kamrowski and J. Grant Kenney for Defendants and Respondents.
The
plaintiffs in this case include United Housing Preservation Corporation
(United), AFC-Low Income Housing Partners (AFC-Low Income) and AFC-American
Housing (AFC-American). The defendants
are POZ Village Development Inc. (POZ) and The Bedford Group (Bedford). The parties were partners in the same
partnership.
United
sought to purchase the general partnership interests of defendants. Pursuant to an agreement, the purchase price
was to be determined by an independent appraisal. When the appraisal was completed it included
a debt of nearly two million dollars owed to POZ and Bradford. Plaintiffs sought to rescind the purchase of
the partnership on the ground that United suffered from a mistaken belief that
the appraised value of the two partnership interests to be purchased would not
include the debt owed.
Following a
court trial, judgment was entered in favor of defendants. The court concluded the evidence did not
demonstrate United was mistaken about the interest to be acquired in the
purchase. Plaintiff contends the trial
court erred in its determination. We
disagree and affirm the judgment.
FACTS
The Coliseo Housing Partnership
(hereafter the Partnership) was formed in 1988 to construct and operate a low
to moderate income housing project on Martin Luther King
Boulevard near the Los Angeles Memorial Coliseum. The purpose of the Partnership was to qualify
for and sell low-income housing tax credits.
By October 1990, there were six partners in the partnership: United (a general partner with a .5%
interest), co-plaintiffs AFC- Low Income and AFC American (limited partners
with a combined 97% interest), defendants POZ and Bedford (general partners
with a combined 1.5% interest), and Housing Preservation Partners (a limited
partner with a 1% interest). (Exh.
77) The partnership was governed by the
Amended and Restated Agreement of Limited Partnership of Coliseo Housing
Partnership, effective May 1, 1990, (hereafter the
Agreement). (Exh. 73)
The Partnership’s financial
statements for the years ended December 31, 1991, 1992, 1993, 1994, 1995 and
1996 show, in the notes under “liabilities other than current,†notes due to
the general partners in the amount of $1,743,000. (Exhs. 112, 113, 114,
&115) The statements for 2004 and
2005 do not show these debts. They
contained a note which states: “During
2004, it was discovered that the general partner notes totaling $1,743,000 were
not valid notes and should never have been recorded on the books of the
Partnership. . . .†(Exh. 117) The letter from the auditors transmitting these
two financial statements to the Partnership is dated February 10, 2005.
On November
21, 2005, Charles Quarles, the president of Bedford, faxed a copy of a
promissory note dated May 2, 1989 in the amount of $1,743,000
to United’s attorney Max Perry. The note
was drawn in favor of POZ from the Partnership. (Exh. 99) The parties refer to the note as the
Developer’s Note. Quarles sent the copy
at Perry’s request. Quarles later told
Perry that Bedford had a one-half interest in
the Developer’s Note. Perry sent a
letter to Quarles contending the Developer’s Note had been superseded by the
May, 1990 Agreement.
name="_ftnref1" title="">[1] (Exh. 136)
United’s president Deane Ross saw
the Developer’s Note after it arrived at United in November 2005. He understood there was a disputed claim
concerning whether a debt existed as a result of the note.
On April
26, 2006, the limited partners of the Partnership notified POZ and Bedford that
they had been removed as general partners.
2006,
United gave notice of its intention to buy out POZ and Bedford’s interest in
the Partnership pursuant to section 9.02(f) of the Agreement. That section provides “In the event of the
removal . . . of a General Partner . . . , the General Partner’s General
Partner Interest shall be converted into a Limited Partner Interest. . . unless
the remaining . . . General Partner or the Partnership elects to buy out the
General Partner’s General Partner Interest at its fair market value determinedâ€
by the appraisal process set forth in Section 9.01(b). “General Partner Interest†is defined as “the
interest of each General Partner in the Partnership pursuant to the terms of
this Agreement.†(Section 1.20)
Pursuant to Section 9.01(b) of the
Agreement, POZ and Bedford together selected an appraiser, while United
selected a second appraiser. There was a
difference of approximately $13 million between the two appraisals. The Agreement provides: “If the two appraisers . . . shall be unable
to agree on the fair market value of the [removed] General Partner’s General
Partner Interest . . . they shall appoint a third appraiser. The decision, in writing, of the third
appraiser shall be binding and conclusive†on the removed and remaining general
partners. Ultimately, the superior court
appointed the third appraiser, William Hanlin.
Hanlin served his award on March
19, 2009, and a revised award on April 29, 2009. (Exh. 308) Hanlin awarded POZ $4,891,658 and Bedford $3,052,554, for a total
amount of $7,944,212. Each award
included $2,857,474 for “Debt Equity – Developer’s note.†This amount represented the original principal
of $1,743,00 plus unpaid interest.
agreement does not define a General Partner’s Interest as being limited to only
the capital interest.†The appraisal
also found the “term “buy-out†is not defined in the partnership
agreement. One definition of “buy outâ€
is “The purchase of the entire holdings
or interests of an owner or investor.â€
On May 19, 2009, United and the other
plaintiffs moved the court to vacate the appraisal award. On May 26, 2009, United sent a Conditional
Notice of Rescission which gave notice that if the arbitrator’s award was
confirmed, “United rescinds any and all
notices that United will buy out the partnership interests of POZ and Bedfordâ€
on the grounds of mutual and/or unilateral mistake. On June
12, 2009, the trial court confirmed the award. An interlocutory judgment was entered on August 3, 2009.
On January 11, 2010, United and the other plaintiffs filed
their First Amended and Supplemental Complaint which included two causes of
action for rescission. In its Fourth
Cause of Action for Rescission – Mutual Mistake, United alleged that when it
served notice of its intention to buyout POZ’s and Bedford’s Partnership
interests, it did so “under a material, mutual mistake of fact in that –
despite the parties’ understanding and instructions to the Appraiser to the
contrary – the Appraiser’s Award included the Developer’s Note in the valuation
of [POZ and Bedford’s] Interest, and the Appraiser included within his Award a
purported obligation for the Developer’s Note representing most of the value of
the appraisal.†United further alleged
that it “was induced to enter the contract because of its mistaken belief that
the Developer’s Note would not be part of any appraisal.†In the Fifth Cause of Action for Rescission –
Unilateral Mistaken, United alleged that even if POZ and Bedford did not share
United’s mistaken belief, they “were aware or should have been aware of the
mistake of United and unfairly used that mistake to take advantage of United in
that they used the Developer’s Note and inserted it into the appraisal process
in order to gain a more favorable appraisal.â€
In February, 2011, the court held a
bench trial on United’s causes of
action for rescission. United offered
the testimony of Ross and industry expert Richard Devine. In addition, United offered numerous
documents which were admitted into evidence.
Bedford offered the
testimony of Quarles and POZ the testimony of Rev. Hardwick, the chairman of
POZ’s Board.
The pertinent testimony can be
easily summarized. Ross was asked if he
thought that when he signed the notice of intent to buy out POZ and Bedford
that United was electing to buy out POZ or Bedford’s interest in a promissory
note. Ross replied, “Absolutely
not.†When asked why he said that, Ross
stated: “[T]his letter was 2006. The Amended Partnership Agreement itself said
that all the notes were superseded that were to POZ or Bedford, so there were no
notes effective at that time, as far as I knew.†When asked what United believed was
included in the scope of the buy-out, Ross stated: “the fair market value of the former general
partners’ interests.â€
The court
found that United did not have a mistaken belief about a “fact past or presentâ€
or a belief “in the present existence of a thing material to the contract which
does not exist.†The court summarized
United’s belief as “a mistaken expectation concerning the outcome of an
upcoming contested proceeding.†The
court found that United was not entitled to rescission.
On May 12,
2011, on its own motion, the court issued a minute order stating that it was
reconsidering its June 12, 2009 order confirming the appraisal award and the
resulting interlocutory judgment of August 3, 2009 based on “the evidence and
briefs received in the Phase One trial†of the rescission claims. POZ and Bedford appealed. In an unpublished opinion filed on August 31, 2012, we reversed the
trial court’s October 2011 orders vacating the appraisal award and directed the
court to reinstate its June 12, 2009
order confirming the appraisal order and the August 3, 2009 interlocutory judgment. (AFC-Low
Income Housing Credit Partners v. POZ Village Development, Inc. (August 31, 2012, B237721).)
On September 21, 2012, following the
entry of judgment on the Phase One and Phase Two trials, United filed its
DISCUSSION
In its
statement of decision on the rescission causes of action, the trial court
analyzed United’s belief as follows:
“United’s position amounts to this:
if it had known how the appraisal and post-appraisal motions would come
out, it would not have given the notice of intent to buy out POZ’s and
Bedford’s partnership interests.
United’s inability to predict the future outcome of that process, which
it put in play by its notice, is not a past or present fact, or a belief in a
present existence of a thing, about which United was mistaken when it gave
notice of intent to buy out, and the situation here does not entitle United to
rescind that notice.â€
United contends the trial court
erred in characterizing its mistake as a mistaken belief as to the outcome of a
future event, rather than a mistake of fact concerning the interest being
acquired by the purchase.
A. Requirements for rescission based on mistake
of fact
A party may
rescind a contract “[i]f the consent of the party rescinding, or of any party
jointly contracting with him, was given by mistake . . . . (Civ. Code, § 1689, subd. (b)(1).) The “general rule is that where an agreement
is founded upon a mutual mistake of
fact which is material and goes to the essence of the contract, relief will be
granted to the one against whom it is sought to be enforced.†(Estate
of Barton (1950) 96 Cal.App.2d 234, 239 [emphasis added].) When the mistake of fact is unilateral,
rescission will be granted if the non-mistaken party knew or had reason to know
of the mistaken party’s error or if enforcement of the resulting contract would
lead to an unconscionable result. (
261, 281.)
“The type
of ‘mistake’ that will support rescission is defined in Civil Code section 1577
(‘mistake of fact’) and Civil Code section 1578 (‘mistake of law’).†(Hedging
Concepts, Inc. v. First Alliance Mortgage Co. (1996) 41 Cal.App.4th 1410,
1421.) Civil Code section 1577 applies
only to a mistake of “objective existing fact.â€
(Ibid.)
B. The nature of United’s mistake
The reason
for the trial court’s characterization of United’s mistake as being a mistake
concerning the outcome of a future event is clear. United’s conditional notice of rescission
states: “United . . . did not know that
Mr. Hanlin would include the Developer’s Note in his appraisal of POZ and
Bedford’s partnership interests, and indeed United . . . believed that Mr. Hanlin’s appraisal of POZ
and Bedford’s partnership interests would not include the Developer’s
Note.†(Exh. 121) The allegations of United’s complaint refer
to “its mistaken belief that the Developer’s Note would not be part of any
appraisal.†The outcome of a future
event is not an “objective existing fact.â€
A mistake about that outcome is not a basis for rescission.
Ross’s
testimony showed that United’s belief about the outcome of the appraisal was
based on its interpretation of the Agreement, but this underlying belief does
not provide a basis for rescission either.
Ross testified he understood the Agreement to bar inclusion of the
Developer’s Note in the buy-out valuation of a partner’s interest. Thus, he did not expect the note to be
included in the appraisal. As we
explained in our earlier opinion, “[t]he appraiser’s scope of authority is set by the
agreement. Section 9.01(b) provides the
process to be used when a general partner or successor general partner elected
to buy out the withdrawing ‘General Partner’s General Partner Interest’ at fair
market value . . . . [¶] The language in the agreement does not
specify what methodology should be used.
It does not define present market value.
The agreement which appears to be negotiated by business entities leaves
it up to the appraisers to determine what methodology should be utilized. The appraiser, Hanlin, did not exceed his
powers [when he included the Developer’s Note in his valuation of POZ and
Bedford’s partnership interests]. No
limitation was set in the agreement.†Thus, Ross’s belief about the preclusive
effect of the Agreement was a subjective misinterpretation of the Agreement. (See Hedging
Concepts, Inc. v. First Alliance Mortgage Co., supra, 41 Cal.App.4th at p.
1421 [party’s incorrect belief that contract only required him to introduce
clients in order to be entitled to commissions was a subjective
misinterpretation of the contract, not a mistake of an objective existing
fact].)
C. There is no evidence of any mistake by United
There is an
even more fundamental flaw with United’s claim than the nature of United’s
mistake. As the party seeking
rescission, United had the burden of proving that it had the requisite mistaken
belief. It did not do so.
“In general, in reviewing a
judgment based upon a statement of decision following a bench trial, ‘any
conflict in the evidence or reasonable inferences to be drawn from the facts
will be resolved in support of the determination of the trial court decision.
[Citations.]’ [Citation.] In a substantial
evidence challenge to a judgment, the appellate court will ‘consider all of
the evidence in the light most favorable to the prevailing party, giving it the
benefit of every reasonable inference, and resolving conflicts in support of
the [findings]. [Citations.]’ [Citation.]
We may not reweigh the evidence and are bound by the trial court's
credibility determinations.
[Citations.] Moreover, findings
of fact are liberally construed to support the judgment. [Citation.]â€
(Estate of Young (2008) 160 Cal.App.4th 62, 75–76.)
The court attached “no weight to
Ross’s assertion on the witness stand that, when United gave its buyout notice
to POZ and Bedford in October, 2006, he (Ross) did not think United would be
buying out defendants’ interests in the Developer’s Note because the Amended
and Restated Agreement said the note was superseded.â€
name="_ftnref5" title="">[5] There is no other relevant evidence of
United’s mistake.
United
claims that the documentary evidence of this mistake is overwhelming and
undisputed. We see no such
evidence.
The trial court summarized the
documents relied by United in its closing trial brief as: the Amended and Restated Agreement; Perry’s
letters to Quarles (Exh. 135 &136); the October 25, 2006 letter from POZ
and Bedford’s lawyers to United’s lawyer ; plaintiff’s appraisal (Exh. 365);
the Scope of Engagement description POZ and Bedford’s appraiser’s report (Exh.
138); POZ and Bedford’s response to appraiser Hanlin’s First Request for
Information (Exh. 371); plaintiffs’ briefs to Hanlin (Exh. 366) and POZ and
Bedford’s brief to Hanlin (Exh. 367).
The trial court also considered the notice of conditional rescission
sent by Ross on October 26, 2009. (Exh. 121)
Three of the documents were
prepared by United’s lawyers. Exhibits
135 and 136 are letters containing arguments by United’s lawyer that the
Developer’s Note is not valid. Exhibit
366 is a legal brief. It argues the
Developer’s Note is not included in the interest being bought out. These arguments are not proof of United’s
understanding. The fourth document,
Ross’s notice of conditional rescission, was prepared in anticipation of
litigation. It states: “United . . .
believed that Mr. Hanlin’s appraisal of POZ and Bedford’s partnership
interests would not include the Developer’s Note.†The remaining documents were prepared by POZ
and Bedford or their lawyers and are not evidence of United’s beliefs.
Although
the court primarily focused on United’s beliefs at the time it made its buy-out
offer, the court also considered the parties beliefs in 1990 when they executed
the Agreement. The court found “there is
no evidence that the parties to the Agreement (Exh. 73) executed it under the
shared assumption that the Developer’s Note would not be a part of any
appraisal of a former General Partner’s General Partnership Interest as defined
in section 1.21 of the agreement.â€
DISPOSITION
The
judgment is affirmed. Defendants are to
recover costs on appeal.
NOT
TO BE PUBLISHED IN THE OFFICIAL REPORTS
KUMAR,
J.
We concur:
TURNER,
P. J.
KRIEGLER,
J.
understanding and agreement among the parties hereto with respect to the
subject matter hereof, and there are no agreements, understandings,
restrictions, representations or warranties among the parties other than those
set forth herein or herein provided for.
Following is a description of other agreements entered into by and among
the parties which are merged into and superseded by this Agreement: [¶] . . . [¶]
3. Promissory Notes to POZ and
Bedford dated May 2, 1989 . . . .â€
AFC Capital Corporation. That
corporation is a general partner in AFC – Low Income one of the limited
partners.
