Agam v. Gavra
236 Cal. App. 4th 91, 2015 Cal. App. LEXIS 338, 186 Cal. Rptr. 3d 295 (2015)
Rule of Law:
In an action for breach of contract seeking reliance damages, the plaintiff bears the burden to establish the amount expended in reliance, after which the burden shifts to the defendant to prove any unnecessary expenses or losses the plaintiff would have incurred even if the contract had been fully performed. Furthermore, an agreement between partners that is procured through a breach of fiduciary duty, such as by adverse pressure, is unenforceable.
Facts:
- In April 2007, Isaac Agam, Eran Cohen, and Eliyahu and Yifah Gavra formed a partnership to purchase, subdivide, build houses on, and sell a parcel of land in Los Altos Hills, with contributions proportionate to their shares.
- The partners purchased the property for $4.6 million, financed by a $3.8 million seller carryback (Driscoll) loan due November 1, 2008, and obtained approval to subdivide it into three lots.
- By late 2008, facing the Driscoll Loan deadline, a planned lot sale fell through, and the Gavras contributed cash and Agam and Cohen obtained a hard money loan, which required the Gavras to quitclaim their interest in Lot No. 2.
- Under significant pressure as the Driscoll Loan payment deadline approached, the partners signed the 'Driscoll Agreement' on December 1, 2008, which granted the Gavras a deed of trust on Lot No. 2 and discretion over recording a deed to Lot No. 2 to protect their interest.
- In early 2009, the Gavras informed Agam and Cohen they would not proceed with construction due to the economy and would only fund expenses related to the sale of the undeveloped lots, reiterating this refusal multiple times.
- Despite the Gavras' refusal, Agam and Cohen sought to proceed with construction, with Agam attempting to secure an individual construction loan after the Gavras refused to participate in a joint application.
- Agam's individual construction loan application for $5.2 million for Lot No. 3 was declined by Borel Bank, and he did not pursue a smaller $3.775 million loan offer, partly due to the Gavras' continued opposition and potential interference.
- The partners ultimately sold the undeveloped lots between December 2009 and February 2011, sustaining a total loss of $1,277,114 on the project.
Procedural Posture:
- In 2009, Isaac Agam and Eran Cohen sued Eliyahu and Yifah Gavra in Santa Clara County Superior Court (trial court) for breach of the Partnership Agreement and breach of fiduciary duties.
- The Gavras filed a cross-complaint against Agam and Cohen, alleging breach of contract, among other claims.
- Cohen subsequently reached a settlement with the Gavras.
- The cross-actions between Agam and the Gavras proceeded to a nine-day bench trial in June 2011.
- The trial court issued its final statement of decision on May 16, 2012, concluding the Gavras breached the Partnership Agreement and their fiduciary duties, awarding Agam over $700,000 in reliance damages and rejecting the Gavras' breach of contract claims.
- The trial court entered a judgment in favor of Agam on May 16, 2012.
- The Gavras, as appellants, timely appealed the judgment on July 12, 2012 (H038537) to the California Court of Appeal, Sixth Appellate District.
- Agam moved for attorney fees on July 13, 2012, which the trial court awarded Agam $245,026.77 on October 26, 2012.
- The Gavras, as appellants, timely appealed the attorney fee award on November 26, 2012 (H039031) to the California Court of Appeal, Sixth Appellate District.
- The California Court of Appeal, Sixth Appellate District, ordered the two appeals (H038537 and H039031) considered together for briefing, oral argument, and disposition.
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Issue:
Does a defendant in a breach of contract action seeking reliance damages bear the burden of proving that the plaintiff would have suffered a loss even if the contract had been fully performed, and is an agreement among partners unenforceable if obtained through a breach of fiduciary duty, specifically by adverse pressure?
Opinions:
Majority - Premo, J.
Yes, the trial court correctly allocated the burden of proof for reliance damages, requiring the breaching partners to demonstrate the non-breaching partner would have suffered losses even with full performance, and properly found the Driscoll Agreement unenforceable due to its procurement by the Gavras' breach of fiduciary duties. The court affirmed that a plaintiff seeking reliance damages must first prove the expenditures made in reliance on the contract. The burden then shifts to the defendant (breaching party) to prove that the plaintiff's expenses were unnecessary or that the plaintiff would have suffered a loss even if the contract had been fully performed. This allocation is justified by the presumption that contract performance generally results in a benefit, and by fairness, as the breaching party created the uncertainty regarding the 'but-for' scenario. The court found Agam proved his expenditures and that the Gavras' breaches (refusal to participate in construction, cutting off contributions) were a substantial factor in causing harm. The Gavras failed to carry their burden to prove with reasonable certainty the amount Agam would have lost had they fully performed, as evidence regarding potential loan approval for construction was speculative, and they did not conclusively show the partners lacked cash for a smaller, viable construction loan. Regarding the Driscoll Agreement, the court found substantial evidence supported the trial court's finding that the Gavras breached their fiduciary duties in obtaining it. Partners are fiduciaries bound to the 'highest good faith' and may not obtain an advantage through 'misrepresentation, concealment, threat or adverse pressure.' The Driscoll Agreement, particularly the provision allowing the Gavras to record a deed at their 'discretion' to protect their own interest over the partnership's, constituted an unfair advantage. The Gavras secured this agreement under 'adverse pressure,' specifically by threatening to allow the Driscoll Loan to go into default at the eleventh hour if their demands were not met. The court rejected the argument that Agam and Cohen's knowledge of the facts negated a fiduciary breach, clarifying that absence of threat or adverse pressure is also required, not just disclosure. Thus, the agreement was unenforceable. Finally, the court found the Gavras failed to prove Agam did not mitigate damages, concluding that Agam's testimony regarding the Gavras' vehement opposition and potential interference made it unreasonable and impracticable for him to pursue a smaller construction loan.
Analysis:
This case clarifies and formally adopts the burden of proof for reliance damages in California, placing the onus on the breaching party to demonstrate that the non-breaching party would have suffered a loss even with full performance. This ruling significantly impacts how parties must litigate damages in contract disputes where lost profits are difficult to ascertain. Furthermore, the decision reinforces the strict fiduciary duties owed between partners, highlighting that agreements obtained through 'adverse pressure,' even with disclosure, are unenforceable. This protects partners from opportunistic behavior at critical junctures and emphasizes the legal system's commitment to upholding good faith in business relationships.
