Filed 4/28/21 KND Affiliates, LLC v. City of Victorville CA4/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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

FOURTH APPELLATE DISTRICT

DIVISION TWO

APPEAL from the Superior Court of San Bernardino County. Donald R. Alvarez, Judge. Affirmed.

Thorsnes Bartolotta McGuire, Vincent J. Bartolotta, Karen R. Frostrom and J. Domenic Martini for Plaintiff and Appellant.

Graves & King, Harvey W. Wimer III, Randa Farid Ezzat and Brendan J. Coughlin for Defendants and Respondents.

Plaintiff and appellant KND Affiliates, LLC (KND) sued defendants and respondents Southern California Logistics Airport Authority (the Authority) and the City of Victorville (the City) for breach of contract. Following a bench trial, the trial court entered judgment in favor of the Authority and the City. KND contends that there was no ambiguity in the language of the contracts, and therefore the trial court erred by considering the parties’ performance when interpreting the contracts. KND also asserts the trial court erred in its interpretation of the contracts. We affirm the judgment.

FACTUAL AND PROCEDURAL HISTORY

A. CONTRACTS

The Authority controlled the Southern California Logistics Airport (former George Air Force Base; hereafter, the airport). The Authority’s five commissioners were the same people that comprised the city council. The Authority and the city council were served by the same staff with different titles but similar roles. The city attorney also worked for the Authority. The City had one bank account; money for the Authority went into the City’s bank account.

The Authority hired California Building Systems (CBS) to construct two hangars at the airport. As part of that project, the Authority gave ground leases for the hangars to CBS. In 2006, a dispute arose between CBS and the Authority; the Authority hired KND to complete the construction of the two hangars and to build two additional hangars. As part of a settlement of the dispute, CBS, KND, and the Authority entered into an agreement in which CBS’s ground lease rights were sold to KND. The Authority lent money to KND “under the terms of various promissory notes secured by Deeds of Trust upon the Ground Lease . . . for the purposes of providing [KND] with financing required for [KND] to meet its obligations” related to the ground leases and construction of the hangars (the 2006 loans).

The construction was mostly complete by December 2007. At that time, KND owned the hangars. KND agreed to retain ownership of the four hangars and to defend against lawsuits brought by CBS. The Authority wanted KND to retain ownership of the hangars until the CBS litigation was resolved. KND insisted that new leases and promissory notes be generated to document KND’s retention of the hangars. In December 2007, the Authority and KND entered into a series of agreements (the 2007 documents):

• Four ground leases in which the Authority leased the parcels for the four hangars to KND (the 2007 ground leases). The monthly rent to be paid by KND was $0.01 per square foot, which amounted to $2,617.90, $4,948.41, $1,755.47, and $2,069.10.

• Four promissory notes payable to the Authority, three of which restated the 2006 loans but were updated with current amounts owed, and one new promissory note in which the Authority financed KND’s construction of improvements in the hangars and the expense of operating the hangars. The promissory note principal amounts were $10,683,236.84, $21,249,279.51, $13,492,640.67, and $15,187,368.48. The interest rate for the notes was “equal to the interest rate the City . . . is earning on its invested funds (LAIF Rate^[[1]^]), as adjusted from time to time.” KND’s interest-only payments under the promissory notes were scheduled to start January 15, 2008.

• Four deeds of trust as security for the four promissory notes. Each deed of trust corresponded to one of the four hangars.

• Four subleases in which KND sublet the hangars to the Authority. In regard to rent, the subleases provided, “[The Authority] shall pay monthly base rent (the ‘Monthly Base Rent’) for the Leased Premises in the initial total amount identified in the Monthly Base Rent Schedule attached hereto as Exhibit ‘B’ and incorporated herein by this reference (the ‘Monthly Rent Schedule’). [The Authority’s] obligation to pay the Monthly Base Rent shall commence on the first day of the first full calendar month following the Lease Commencement Date (the ‘Rent Commencement Date’). On each annual anniversary of the Rent Commencement Date until expiration of the Term, the Monthly Base Rent shall be adjusted in accordance with the Monthly Rent Schedule.”

“Exhibit B” of the subleases provided that the amount of rent for the hangars was to be comprised of (1) KND’s administrative expenses associated with the subleases (e.g., taxes, utilities, and insurance) the amount of which would be periodically adjusted; (2) the amount of the monthly rent owed by KND for the 2007 ground leases; and (3) the monthly amount owed by KND on the interest-only promissory note payments. As to the promissory note portion of the rent calculation, the precise language from Exhibit B was: “The Monthly Base Rent shall be in an initial amount totaling . . . $109,859.35[,] which is comprised of all of the following . . . : [¶] 1. The monthly debt service due by [KND] under the [corresponding promissory note] in an amount equal to $88,708.35.” The four subleases had the same language but differed as to amounts of money.

The four subleases also included a purchase option, which provided that if the Authority purchased the hangars, then the Authority would pay $1 and forgive the principal and accrued interest on KND’s promissory notes.

B. PERFORMANCE

The 2007 documents were effective from January 2008 through June 2011, which is 42 months. During that period, (1) KND did not make any interest payments on the promissory notes, and the Authority did not demand the interest payments; (2) KND did not make any rent payments to the Authority for the ground leases, and the Authority did not demand the rent payments; (3) the Authority did not make any rent payments to KND for the subleased hangars, and, during that time period, KND did not demand the rent payments; and (4) KND paid its administrative expenses for the four hangars from the loan funds provided by the Authority.

In June 2011, KND and the Authority entered into a memorandum of understanding (the MOU). In the MOU, the parties agreed that construction of the hangars was finished and CBS’s litigation was resolved, so KND would transfer the hangars to the Authority and, in turn, the Authority would forgive the loans it made to KND. The MOU provided, “[T]he Parties desire that this MOU govern the completion of the transactions contemplated under the [2007 documents], including but not limited to, the transfer of the Hangar Facilities.” In June 2011, KND executed quitclaim deeds transferring the ground leases to the Authority and executed bills of sale transferring the hangars to the Authority. The Authority forgave the loans it made to KND.

C. LAWSUIT

1. KND’S CASE

In May 2013, KND sued the Authority for breach of contract. At the bench trial, James Kinsell, who created KND, testified. KND was created for the hangar construction project at the airport. KND did not have any income other than the loan proceeds from the Authority. All of KND’s administrative expenses in managing the hangars were paid for using the loan proceeds from the Authority that were ultimately forgiven. KND’s January 2008 interest-only payment to the Authority for the promissory notes would have been $272,000. If KND had made that payment to the Authority, it would have done so with the loan proceeds from the Authority. Kinsell knew that the interest owed on the promissory notes would be forgiven by the Authority when the hangars were transferred to the Authority. Kinsell considered the deal to be “debt for hangar.”

However, during the recession, the LAIF rate “dropped severely,” from more than five percent in December 2007 to “under half of 1 percent” in June 2011. As a result, according to Kinsell, the rent the Authority owed to KND for the subleases exceeded the interest-only payments that KND owed to the Authority for the promissory notes. The Authority failed to adjust the amount of interest owed on the promissory notes in the June 2011 accounting, which meant KND overpaid interest on the promissory notes by approximately $8,000,000.

2. THE AUTHORITY’S ARGUMENT

The Authority asserted that, under the 2007 documents the parties intended to mutually forgive the payments owed to one another. The Authority asserted that the decrease in the LAIF rate was meaningless because the parties never intended for KND to pay interest. To support its argument, the Authority pointed to the purchase option in the subleases, which reflected all of KND’s debt would be forgiven upon the Authority taking ownership of the hangars.

In another argument, the Authority asserted KND did not suffer any damages because KND had no money invested in the project—all the money in the project came from loans from the Authority. Because all those loans were ultimately forgiven, KND had “no out of pocket loss.” The Authority asserted KND could not recover—in damages—interest payments that KND “has never paid.”

3. STATEMENT OF DECISION

Following the bench trial, the trial court issued a statement of decision. The trial court found that the 2007 documents were “clearly structured in a manner evidencing the intent of the parties that no money would change hands each month. That is the reciprocal amounts that each party owed to the other cancelled each other out, except for the administrative expenses. These expenses were paid in full out of the [forgiven] loan funds as intended. The parties’ actions further confirm their intent that other than the [loan funds] provided by [the Authority], the parties would not be exchanging payments back and forth each month. This circumstance is fortified by the fact that during the 42 months the [2007] documents were in effect, [KND] never paid the ground rent payments or the interest owed on the 4 promissory notes. Likewise, during the 42 month period [the Authority] did not pay rent under the 4 hangar subleases. . . . The court finds it most notable, if not compelling, that there was no claim or demand for payment made by [KND] for nearly two years after the subleases were terminated. The court views the conduct of the parties, after the execution of the [2007] documents and before any controversy ha[d] arisen as to its effect, to be the most reliable evidence of the parties[’] intentions.”

The trial court wrote, “From the evidence presented, the court concludes [KND] suffered no out of pocket loss in connection with this hangar transaction” and “that [KND] and its related entities and principals received nearly 5 million [dollars] from the loan proceeds.” The trial court concluded, “[KND] has failed to carry its burden to establish the damages component of its contract claim.”

DISCUSSION

A. AMBIGUOUS LANGUAGE

KND contends the trial court erred by relying upon evidence of the parties’ performance when interpreting the 2007 documents because the plain language of the 2007 documents was unambiguous regarding payments.

“ ‘ “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. [Citation.] Such intent is to be inferred, if possible, solely from the written provisions of the contract.” ’ ” (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 647.) “Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.” (Civ. Code, § 1642; R.W.L. Enterprises v. Oldcastle, Inc. (2017) 17 Cal.App.5th 1019, 1027.)

“If a contract is susceptible to two different reasonable interpretations, the contract is ambiguous.” (Horath v. Hess (2014) 225 Cal.App.4th 456, 464 (Horath).) If the language of the contract is ambiguous, then the parties’ conduct in performing their obligations under the contract will be given great weight in determining the parties’ intentions. (Crestview Cemetery Assn. v. Dieden (1960) 54 Cal.2d 744, 752-753.)

We examine the language of the 2007 documents to determine if there is any ambiguity regarding payments. In doing so, we apply the de novo standard of review. (Horath, supra, 225 Cal.App.4th at p. 464.) Exhibit B to the subleases provides that a portion of the amount of rent owed by the Authority would be comprised of “[t]he monthly debt service due by [KND] under the [corresponding promissory note] in an amount equal to $88,708.35.” In the promissory note, KND’s monthly payment is described as interest-only and the interest rate is adjustable.

The foregoing language is ambiguous because it is inconsistent. The phrase “[t]he monthly debt service due by [KND] under the [corresponding promissory note]” refers to the adjustable amount owed by KND, while the phrase “in an amount equal to $88,708.35” refers to a fixed amount. It is unclear from these two phrases if the parties intended for the Authority’s monthly rent payment to (1) adjust with KND’s interest-only promissory note payment; or (2) remain fixed at $88,708.35. The two phrases cannot be reconciled. Because the language is ambiguous, the trial court could properly look to the parties’ conduct to determine the parties’ intentions. (Crestview Cemetery Assn. v. Dieden, supra, 54 Cal.2d at pp. 752-753.)

KND contends, “There is nothing ambiguous about that language in the subleases providing for the payments to be made by the Authority; indeed, even the exact amount of rent owed is explicitly spelled out. Additionally, the promissory notes, as corollary contracts, are not ambiguous in describing the means of calculating interest according to the LAIF rates.” KND focuses on the fixed amount language in Exhibit B to the subleases, “e.g., in an amount equal to $88,708.35,” and the adjustable rate language in the promissory note, but ignores the portion of Exhibit B that reads the amount of sublease rent would be comprised in part of “[t]he monthly debt service due by [KND] under the [corresponding promissory note].” Because KND fails to address that relevant portion of the contract language, KND’s argument is unpersuasive.

B. INTERPRETING THE SUBLEASES

Because the trial court resolved the ambiguity by considering evidence of performance, we apply the substantial evidence standard of review. (Horath, supra, 225 Cal.App.4th at p. 464.)

1. MONTHLY RENT

KND contends that the trial court should have interpreted the subleases as “requir[ing] the Authority to pay monthly rent to KND in an exact amo[unt] given.”

The Authority never made a rent payment under the subleases. During the 42-month rental period, KND did not demand payment from the Authority. KND never made a payment on the promissory notes or ground leases. The Authority did not demand payment from KND. Even after the LAIF rate fell from five percent in December 2007 to “under one half of 1 percent” in June 2011, KND did not demand payment for the alleged difference between the promissory note payment and the sublease rent.

The evidence that the parties never exchanged payments and never demanded payments from one another, despite the falling LAIF rate, is substantial evidence of the parties’ intent for their payments to remain equal. If the parties intended for the Authority to pay a fixed sum, while KND’s payments decreased, then the Authority would have started paying the difference or KND would have demanded the difference. The evidence that neither party took any action as the LAIF rate decreased indicates the parties intended for the sublease rent to adjust in the same amount as the promissory note payments, so as to keep the two payments equal. Therefore, substantial evidence supports the trial court’s finding.

2. ADMINISTRATIVE EXPENSES

KND contends the trial court should have interpreted the 2007 documents as “requir[ing] the Authority to pay monthly administrative expenses to KND i[n] an exact amount given.” That is how the trial court interpreted the 2007 documents. In the trial court’s statement of decision, it wrote, “[The Authority] agreed to pay [KND] a total of $63,500 per month in administrative expenses as compensation for managing the hangars. Over the 42 months that [KND] held title to the hangars it was entitled to approximately 2.6 million in administrative expenses.” Thus, the trial court found that the Authority agreed to pay an exact sum to KND for administrative expenses, in particular $63,500 per month. Because it appears KND agrees with the trial court’s interpretation concerning administrative expenses, we conclude the trial court did not err.

3. OFFSET

KND contends that the trial court should have interpreted the subleases as entitling the Authority “to offset [its] monthly subtenant rent with the amount KND owed to pay interest on debt service and a set monthly [ground lease] rent owed by KND.” That is the finding that the trial court made. The trial court found the parties intended “that no money would change hands each month. That is the reciprocal amounts that each party owed to the other cancelled each other out, except for the administrative expenses.” Because it appears that KND agrees with the trial court’s interpretation concerning the offsetting of payments, we conclude the trial court did not err.

4. INTEREST RATE

KND contends the trial court should have concluded that “[t]he interest on the debt was to be set annually at the existing LAIF rate according to the promissory notes.”

The promissory notes provided, “[T]his Note shall bear interest at an interest rate equal to the interest rate the City of Victorville is earning on its invested funds (LAIF Rate), as adjusted from time to time.” (Italics added.) Kinsell testified, “[The] LAIF rate is adjusted quarterly.” (Italics added.) In its statement of decision, the trial court wrote, “The interest rate on the Promissory Notes was to be adjusted to the current LAIF rate.”

KND does not direct this court to contract language or evidence indicating the LAIF rate for the promissory notes was to be adjusted annually, as opposed to “from time to time” or quarterly. Further, KND does not explain how an alleged error concerning the timing of the LAIF rate adjustment caused KND substantial injury. (See Cal. Code Civ. Proc., § 475 [appealing party must demonstrate “substantial injury”]; see also Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785 [issue is forfeited if not supported by reasoned legal analysis].) Accordingly, we are not persuaded the trial court erred.

DISPOSITION

The judgment is affirmed. Respondents are their awarded costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

MILLER

J.

We concur:

McKINSTER

Acting P. J.

MENETREZ

J.

[1] The LAIF rate is the Local Agency Investments Fund rate.