ELKS BUILDING ASSN. v. J.K. PROPERTIES, INC.

No. G056187.

ELKS BUILDING ASSOCIATION OF SANTA ANA, Plaintiff and Respondent, v. J.K. PROPERTIES, INC., et al., Defendants and Appellants.

Court of Appeals of California, Fourth District, Division Three.

Filed September 10, 2019.


Attorney(s) appearing for the Case

Horvitz & Levy, Peter Abrahams and Scott P. Dixler ; The Cameron Law Firm and Parry G. Cameron for Defendants and Appellants.

AlvaradoSmith, Kevin A. Day and Jacob M. Clark for Plaintiff and Respondent.


NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

OPINION

I. INTRODUCTION

Sometimes a defendant's violation of some right of the plaintiff will have the serendipitous effect of actually conferring a benefit on the plaintiff which mitigates putative damages. This is known as the special benefit doctrine; its application reduces what the defendant owes to the plaintiff by the value of the special benefit.

In this case, a lessee's egregious neglect of an established inn in Santa Ana led to the property being completely demolished. The lessor obtained a judgment of about $6 million against the lessee for various breaches of the lease, including the most obvious: failure to return the buildings on the property. After the lease was terminated the lessor sold the property. In this appeal, the lessee claims it conferred on the lessor the special benefit of free demolition. Its theory is that the lessor was actually able to sell the property for about $4 million more than otherwise because the expense of demolition had been saved.

We disagree. The premise of the argument — that the neglect of the property conferred the benefit of free demolition — was not proved at trial. Additionally, there is a lack of causation between the breaching act of the lessee (neglect to the point of conflagration) and the supposed benefit to the lessor (free demolition). We therefore affirm the judgment.

II. BACKGROUND

In 2002, JK Properties (JK) assumed the existing 55-year lease to the Saddleback Inn in Santa Ana. The lease was set to expire in 2019. The lessor was the Elks Building Association of Santa Ana (the Elks). The four-building property had once been visited by Presidents Nixon and Reagan, but by the early 21st Century its glory days were past. The previous tenant was illegally using the property as an apartment complex. JK thought that, so operated, it could generate "a positive cash flow."

But JK's plans were dashed almost immediately. The City of Santa Ana (City) ordered JK to go back to the property's "approved use" as a motel, not its then-current use as "apartment houses." Additionally, there were a number of structural problems on the property that required expensive repairs. Those problems included nonfunctional restrooms and overhead plumbing leaks.

For the first few years JK "poured in money" for capital improvements. But by 2007, it had decided to put a fence around the property and let it lie fallow, even though it continued to make the lease payments. During this time the property became a home to vandals, vagrants and transients.

Not surprisingly, in early 2011, there was a fire at the southernmost building on the property, severely damaging it. The insurer, Lloyd's of London, initially balked at paying JK, thinking JK did not have an insurable interest in the property.1 However, after considerable litigation, JK was able to recover $2,884,583 for the fire, plus an extra $50,000 in punitive damages.2

In the wake of the fire, the City ordered JK to demolish all four buildings. JK demolished what was left of the southernmost building, but other than that, it "did nothing." It defied the City's order to demolish the remaining three buildings.

The squatters thus stayed on. By January 2013, the City had had enough of its repair orders being ignored, and so obtained the appointment of a receiver over the property. The receiver was given the power to borrow against the property.

Two months after the receiver's appointment, in March 2013, a second fire occurred, damaging all the remaining buildings on the property. The receiver borrowed over $1.2 million, and proceeded to demolish the "entirety" of the property. He had the dirt graded, and left only a fenced lot. The once proud Saddleback Inn had been swept with the broom of destruction.

The Elks filed this action in April 2013. In October 2013, five months or so later, they formally terminated the lease and tried to relet the property. There were no takers. They then decided to sell the property. But the only buyers for it also wanted the adjacent larger parcel used by the Elks for their lodge. The lodge parcel was 4 acres, the inn parcel 2.431. The combined 6.431 acre property was eventually sold to a San Diego development company in May 2016 for $18 million.

The case that had been filed back in April 2013 came to trial in June, 2017. After a two-day bench trial, the court awarded the Elks a total of $5,945,943 in damages, including the $2,884,583 JK had collected from Lloyd's for the first fire.3 JK has timely appealed from both the first judgment and the ensuing attorney fee determination contained in the amended judgment.4

III. DISCUSSION

JK challenges two aspects of the first judgment. Both challenges are variations on the same theme: JK's failure to return the property with its buildings intact did the Elks no harm.

JK's first challenge is to the absence of any credit to JK for what it claims was the extra money the Elks received by being able to sell the property to a developer as a vacant lot, with all its old buildings demolished. Its second challenge is to the $2,884,583 component of the judgment representing the amount JK kept for itself from the insurance payout for the first fire. JK contends there is no evidence the property would have been worth anything more if the lease had been fully performed and the property returned with its buildings intact, ergo the Elks were not damaged by JK's keeping the insurance proceeds. Those proceeds, after all, only represented the value of one building.

JK's argument on appeal for an offset of some $4.1 million from the almost $6 million judgment can be summarized this way: The Elks' appraiser testified the value of the 2.431 acre inn parcel without any buildings on it, and independent of the value of the lodge parcel, was about $2.7 million. That works out, on a per acre basis and assuming the inn and lodge parcels were of equal value, to about $6.8 million for the scraped-off old inn parcel. The difference between what the Elks received for the inn parcel — $6.8 million — and its value as a scraped lot — $2.7 million — thus represents a benefit conferred on the property. The demolition spared either the Elks, or the eventual buyer of the property, the expense of demolishing the buildings on it. That difference, JK asserts, should therefore be considered as mitigation of the Elks' contract damages. Or in statutory terms (see Civ. Code, § 3300), the true "detriment" to the Elks caused by JK's breach of the lease was $4.1 million less than the trial court thought.

There are two reasons we cannot agree with this syllogism. First, the underlying facts weren't proved at trial. As the breaching party, JK had the burden of proving facts in mitigation. (See Carnation Co. v. Olivet Egg Ranch (1986) 189 Cal.App.3d 809, 816-817 & fn. 9; Hunter v. Croysdill (1959) 169 Cal.App.2d 307, 318.) But JK's premise that the $18 million received for the combined inn and lodge parcels represented equal values for each parcel was never proved. A review of the record shows that the Elks' appraiser's $2.7 million value for the inn parcel was only calculated as part of the appraiser's attempt to reduce to present value the stream of rent payments that JK still owed until the lease was set to expire in 2019. To calculate the rent, the appraiser had to come up with a value for the inn parcel in 2014.5 The appraiser never calculated the value of the inn parcel and the value of lodge parcel as they made up the $18 million purchase price actually paid in May 2016. Thus JK cites us to no evidence of the value of the inn parcel in May 2016, when the developer from San Diego bought it. Nor does JK cite us to any evidence that the value of the inn parcel in May 2016 was equal to the value of the lodge parcel in May 2016. For all the record shows, the buyer might have paid a disproportionately large amount for the lodge parcel and a disproportionately small amount for the inn parcel. After all, he was unwilling to buy the inn parcel without the lodge parcel.

Thus, to have shown JK's breach somehow conferred the benefit of free demolition on the Elks, JK would have had to put on its own evidence in mitigation. At the least it would have had to establish (a) the fair market value of the inn parcel in 2016 with the original buildings as JK should have returned them to the Elks, and (b) the fair market value of the inn parcel in 2016 as a piece of vacant land.6 No such evidence was offered.

We also reject JK's free demolition argument because of a lack of causation of benefit. The special benefit doctrine is a common law doctrine enunciated in section 920 of the Second Restatement Torts.7 Comment d. of the Restatement is apt for the present case: "d. Causation. Under the rule stated in this Section to justify a diminution of damages the benefit must result from the tortious conduct. Thus one who, in boring for oil, fails to control the well, thereby causing the plaintiff's land and house to be covered with petroleum, is not entitled to have the damages reduced by showing that his success in drilling for oil in his land resulted in an increase in value of the plaintiff's land; the increase does not result from the tortious inundation but from the fact that oil is discovered." (Italics added.)

It is important in this case to note that JK really didn't even perform the "free" service of demolishing the Elks' property. Strictly speaking, JK neglected the property to the point it was occupied by transients and a fire occurred in one of the four buildings. The ensuing destruction of that building was so bad that JK had to comply with a City order to demolish what was left of that building. But the City also ordered JK to demolish the other three buildings and JK refused to comply. Those buildings were ultimately torn down not by JK, but by the receiver. So, to the degree that the San Diego developer did not have to factor in the cost of demolition when it bought the property in 2016, it was mostly no thanks to JK. The yeoman's work of demolition was done by the receiver. And the only reason JK even bothered to demolish the first building was that a fire had already destroyed most of it.

JK's secondary challenge is to the component of the judgment for the (roughly) $2.9 million it got from an insurer for that first fire. The theory is there is a lack of sufficient evidence to sustain the $2.9 million component of the judgment. Like the first challenge, it founders on the point that it was JK's burden to show evidence in mitigation.

JK points out (correctly) that the Elks presented no evidence of what the value of the property would have been in 2019 if JK had fully performed the lease and the value of the property as a scraped lot. Thus, says JK, there was a failure of the Elks' proof as regards the $2.9 million in proceeds.

No. The Elks proved their case. Paragraph 30 of the 1964 lease required JK to return to the Elks the buildings on the inn property, intact. The fact JK received $2.9 million in insurance proceeds for the 2011 fire was substantial evidence that the Elks' damages for JK's failure to return at least the one building were at least $2.9 million. If JK wanted to show that the money really wasn't necessary to compensate the Elks for the breach of paragraph 30, the onus was on JK to present evidence of the hypothetical value of the property with the buildings if they had been properly returned in 2019, versus the hypothetical value of the property without the buildings. JK failed to present any such evidence.

III. ATTORNEY FEES

Appellant devotes less than a page to the contention the attorney fee award was incorrect. Those two paragraphs assert only that since the fee award was based on an erroneous calculation of damages, reversal of the damages award necessitates reversal of the fee award. Since we find no error in the damages award, we have no basis for adjustment of the fees.

IV. DISPOSITION

Both the original and the amended judgments are affirmed. The Elks will recover their costs on appeal.

O'LEARY, P. J. and THOMPSON, J., concurs.

FootNotes


1. The policy with Lloyds of London mistakenly only listed Saddleback Inn, LLC, as the insured, omitting JK, even though Saddleback was a subsidiary of JK.
2. These facts are set forth in greater detail in Saddleback Inn, LLC v. Certain Underwriters at Lloyd's London (Mar. 30, 2017, G051121) [nonpub. opn].)
3. Here's the breakdown: (1) Unpaid rent, $1,196,770; (2) Receivership costs charged against the property, $1,591,545; (3) Attorneys' fees incurred in connection with the Receivership, $92,952; (4) Unpaid property taxes, $59,574; (5) Insurance proceeds from the first fire $2,884,583; (6) Prejudgment interest, $252,000; Total: $5,945,943.
4. "`When a party wishes to challenge both a final judgment and a postjudgment costs/attorney fee order, the normal procedure is to file two separate appeals: one from the final judgment, and a second from the postjudgment order.' [Citation.]" (Torres v. City of San Diego (2007) 154 Cal.App.4th 214, 222.)
5. The original lease, signed in 1964, provided for reevaluation of rent payments every 10 years.
6. We say "at the very least" because the fact no buyer wanted just the inn parcel suggests a symbiotic effect created by the sale of both parcels, and thus an expert would be needed to adjust the value of the inn parcel to account for that symbiotic effect. We note here that the Elks' appraiser's $2.7 million value was not — and should not have been — adjusted for such a symbiotic effect because his purpose was not to establish the value of the inn parcel, but to figure up the future rent JK owed the Elks.
7. The Restatement's formulation is: "When the defendant's tortious conduct has caused harm to the plaintiff or to his property and in so doing has conferred a special benefit to the interest of the plaintiff that was harmed, the value of the benefit conferred is considered in mitigation of damages, to the extent that this is equitable." We assume, without deciding, that a breach of contract can also result in application of the doctrine.

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