Nevis v. Fillmore

Filed 4/28/06 Nevis v. Fillmore CA3

Received for posting 5/3/06

NOT TO BE PUBLISHED

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sutter)

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Galen Fillmore wanted to purchase some agricultural property. He had little money to invest, but had substantial equity in two rest homes. Working with real estate broker Alfred Nevis, Fillmore entered into an agreement with H.B. Orchards Company, Inc. (H.B. Orchards). The agreement was in the form of an agricultural lease with an option to purchase. The lease gave him immediate possession of the property, so he could harvest the current crop. Fillmore was unable to obtain the necessary financing for crop production and defaulted on the lease and did not exercise the option to purchase. Considerable litigation followed.

Fillmore and his wife (collectively Fillmore) appeal from a judgment following a court trial involving claims between Fillmore and H.B. Orchards, and between Fillmore and Nevis. The court found the lease agreement with an option to purchase between Fillmore and H.B. Orchards was valid and enforceable and Fillmore's option money, $50,000^[1] in cash and a note for $2,500,000, was nonrefundable. The court further found that Alfred Nevis did not breach any duty to Fillmore as a broker.

Fillmore contends the trial court erred in concluding that paragraph 22 of the lease created a true option rather than a penalty or forfeiture. Even if there was a true option, Fillmore contends H.B. Orchards terminated the lease before the option expired, so the option money is refundable, or the option provision is unconscionable and should not be enforced. Finally, Fillmore contends Nevis breached his duty as a broker by structuring the transaction so it was doomed to fail, failing to disclose his financial conflict of interest, failing to advise Fillmore as to financing contingencies or to seek legal advice, and failing to investigate the cash flow of the transaction.

We conclude, based on the economic effect of the transaction, the language of the documents, and the undisputed extrinsic evidence, that the agreement between Fillmore and H.B. Orchards was a purchase contract, not an option. The forfeiture of the $2,500,000 note when the sale fell through bore no relationship to anticipated losses and was therefore an unenforceable penalty or forfeiture. We reverse the judgment in favor of H.B. Orchards, except as to the release of the $50,000 deposit to H.B. Orchards.

Substantial evidence supports the trial court's finding that Nevis did not breach his duty as a broker. Fillmore cannot change his theory of the case on appeal and rely on different acts to constitute the breach. We affirm the judgment in favor of Nevis.

FACTUAL AND PROCEDURAL BACKGROUND

Galen Fillmore is a well-educated dentist and orthodontist. His degrees include bachelor degrees in industrial technology and civil engineering, a doctorate of dental surgery, a master of public health, and a master of science in orthodontics. While in college he took courses in business law, accounting, production operations, economics, and advertising and marketing. In addition to his dental practice, he owns two assisted living facilities for seniors.

Fillmore had an interest in and experience with farming. He grew up on a farm and after dental school owned a farm for several years with his father and brother. In late 1999, when he learned that Sac Valley Farm Credit would loan on nonagricultural property, he began to look for agricultural property to buy.

Fillmore made three offers on property before his offer to H.B. Orchards, but he backed out of each deal. The first property was Herriger Ranch on Highway 70. Fillmore had about 20 days to determine if the property would support the loan, before his deposit became nonrefundable. Dave Burroughs of Sac Valley Farm Credit advised him to have a cash flow analysis prepared and told him George Post could provide the analysis. Fillmore received the cash flow analysis from Post two days before the deadline for the purchase. It showed the property would lose $300,000 before any loan payments, so Fillmore cancelled the sale.

Fillmore's second offer was to Surjit Gill; this offer had a contingency period for a feasibility study and financing. Using the tonnage figures the sellers provided and the expenses summarized on Post's cash flow analysis, Fillmore determined this property could not support the loan payments and cancelled the sale.

The third offer was to Gavin Spaich for Rednall Ranch for $3,500,000. This offer had no contingencies and a $50,000 deposit. When Fillmore cancelled the escrow, he lost his $50,000 deposit.

Burroughs, from Sac Valley Farm Credit, called Fillmore and told him Alfred Nevis was looking for someone to purchase some orchard property. Nevis was a real estate broker with his own company. He had gone to law school, but did not pass the bar exam and abandoned his legal career. In early 2000, Nevis approached the Hatamiya brothers about selling H.B. Orchards. The Hatamiyas were not willing to give Nevis an exclusive listing, but would entertain offers from him. Nevis brought the Hatamiyas an offer from Roy Lanza; that deal fell through on April 16.

Although Burroughs had suggested Fillmore as a buyer for the river bottom portion of the property, Fillmore wanted to see the entire property. On April 11, Nevis showed Fillmore the property and gave him some maps and information about the orchards and crops.

Nevis understood that the Hatamiyas were going to take the property off the market on May 1 to begin thinning of the crop. Nevis believed a lease was the only way for Fillmore to take possession of the property before the crop was harvested. The Hatamiyas valued the crop at over $2,000,000 and wanted protection if they gave up possession under a lease. They told Nevis they wanted protection before they would turn over possession of the property, but did not mention a specific figure. The Hatamiyas were willing to sell the entire property for $8,500,000 in cash; they also wanted to do a section 1031 exchange to avoid taxes.

Nevis asked Fillmore if he wanted to make an offer on the river bottom property and Fillmore responded he was interested in the entire property. Fillmore told Nevis he would max out his resources at $8,500,000 and Nevis replied the property had been appraised at that amount. Fillmore told Nevis he could put down only $50,000 because the rest of his equity was tied up in his rest homes.

At their meeting on April 18, Nevis presented Fillmore with an agreement he had prepared; it was called an agricultural lease and Nevis said he had used the lease form in the past. The lease agreement began on May 1, 2000, and terminated on October 20, 2000. Fillmore was to pay $39,666.67 per month in lease payments beginning June 20 and 10 percent interest on a $2,500,000 note. Further, he had to assign all crop payments to H.B. Orchards as security for all lease payments and reimburse the Hatamiyas for all cultural costs, the expenses of raising the crops, incurred before May 1.

In paragraph 22, the lease provided for an option to purchase: Fillmore had the option to purchase the property for $8,500,000 on or before October 20, 2000. Paragraph 22 of the lease further provided: â€