SIDNEY J. CORRIE, JR., Plaintiff and Appellant, v. ELIZABETH SOLOWAY, as Trustee, etc., et al., Defendants and Respondents.
No. A135963
First Dist., Div. One.
May 16, 2013.
216 Cal. App. 4th 436
Gagen, McCoy, McMahon, Koss, Markowitz & Raines and Gregory L. McCoy for Plaintiff and Appellant.
Doyle Low, Michael J. Low and Jaime B. Herren for Defendant and Respondent Elizabeth Soloway.
Gordon, Watrous, Ryan, Langley, Bruno & Paltenghi, Bruce C. Paltenghi and Richard S. Bruno for Defendant and Respondent East Bay Regional Park District.
Opinion
MARGULIES, Acting P. J.—Appellant Sidney J. Corrie, Jr., petitioned the probate court to enforce an option he held to purchase a portion of a property owned by the Armand Borel Trust dated June 20, 1994, as amended and restated in 2008 (Borel Trust or the trust). Respondents successor trustee, Elizabeth Soloway, and trust beneficiary, the East Bay Regional Park District (the District), objected to the petition on the grounds that Corrie’s option agreement with the trust was void and unenforceable for illegality in that it failed to comply with the Subdivision Map Act (SMA),
I. BACKGROUND
Armand Borel was the settler and trustee of the Armand Borel Trust dated June 20, 1994, a revocable trust. On June 14, 2004, Borel and Corrie entered into a “Real Property Option and Purchase Agreement” (the Option Agreement) pertaining to a 16.65-acre parcel of real property Borel owned in Danville, California (the Danville property). The Option Agreement granted Corrie a five-year exclusive and irrevocable option to purchase up to seven acres of the Danville property at a price of $500,000 per acre. In return for the purchase option, Corrie was required to pay Borel a nonrefundable option fee of $100,000 up front, plus another $5,000 per month during the option period. The Option Agreement provided that if the option was exercised, “Buyer shall purchase and Seller shall sell the Property on the terms and conditions set forth in this Agreement,” and it included detailed provisions specifying buyer’s and seller’s covenants and conditions precedent to closing the sale, the deposits required to be made into escrow by buyer and seller, and the title company’s duties at the closing. The Option Agreement also gave Corrie a right of first refusal to purchase “the balance of the [Danville property] that is not part of this Option Agreement.” No language in the Option Agreement expressly conditioned a future sale of property subject to the option on compliance with the SMA.2
As required by the Option Agreement, Borel, individually and as trustee, and Corrie executed a “Memorandum of Option,” incorporating the Option Agreement by reference, which was recorded on August 3, 2004.
On July 14, 2008, Borel executed a revised trust instrument, creating the Borel Trust. The Borel Trust provided that upon Borel’s death the Danville property would be distributed to the District “so long as it used [sic] as and for an agricultural park.” In the event the District could not create and operate such a park, the Borel Trust provided that the property would go to the City of San Ramon or the Town of Danville to create and operate the park.
In March 2009, Borel and Corrie entered into and recorded an agreement with a lender entitled “Subordination, Nondisturbance and Attornment Agreement Regarding Option and Right of First Refusal” (the subordination agreement). The subordination agreement recited that the lender had conditionally agreed to make a $1.4 million loan to Borel as trustee of the Borel Trust, secured in part by a deed of trust on the Danville property. The agreement generally addressed the relative rights and duties of Corrie, the lender, and the foreclosure purchaser in the event of a future foreclosure sale pertaining to the Danville property. A promissory note for $1.4 million secured by the property was recorded on April 14, 2009.
Borel died on April 19, 2009, and Noelle Flanagan became the successor trustee of the Borel Trust. At the end of April 2010, Corrie and Flanagan (as trustee) signed a writing, in the form of a letter addressed to Flanagan, stating: “The option agreement provides that the parties will fully cooperate with each other during the term of the option. In order to facilitate our parcel map application with the Town of Danville, we both need to acknowledge that the terms and conditions of the Option Agreement are incorporated . . . herein and allow Sidney Corrie, Jr. to proceed with an application for a parcel map, while the Borel Trust remains the record owner of the Property. Corrie and the Borel Trust also acknowledge that the obligations of each expressed in the Option Agreement are conditioned upon the approval and filing of a final subdivision map or parcel map as required pursuant to Government Code sections 66410 et seq.” (Italics added.)
On November 16, 2010, Flanagan and Corrie executed a document captioned “Amendment #2 to Real Property Option and Purchase Agreement” (Amendment No. 2). The amendment recited that the Option Agreement had been amended on March 25, 2009 (Amendment No. 1), and on March 1, 2010 (the March 2010 letter agreement). Amendment No. 2 extended the
In April 2011, the District, as a beneficiary of the restated Borel Trust, filed a probate petition to have Flanagan removed as trustee. With Flanagan’s authorization, Corrie filed a parcel map application with the Town of Danville on September 27, 2011. In November 2011, he applied to the probate court for an order authorizing and instructing the trustee to join in the application and to execute a deed conveying the seven acres covered by the application, as the Town of Danville was requiring. The District opposed the application, stating that sale of the seven acres subject to the option at a below-market price would undermine or destroy its ability to operate and maintain an agricultural park on the Danville property by reducing the net monetary inheritance it would receive along with the land.
Flanagan died in December 2011, and in January 2012, Elizabeth Soloway was appointed as successor trustee of the Borel Trust. Soloway filed an objection to Corrie’s petition shortly after becoming trustee. She requested a separate trial be held on the issue of whether the Option Agreement was void for failing to condition sale of the property on compliance with the SMA, and the District joined in that request. The trial court decided to proceed on that basis.
Following briefing and argument, the trial court ruled the Option Agreement was void and unenforceable. The court held (1) the agreement was void at its inception because it permitted the sale of a parcel of real property before the filing of a final subdivision or parcel map and without being expressly conditioned upon the approval and filing of such a map, and (2) subsequent acts by the parties, such as Amendment No. 2, were ineffective to revive its validity. The trial court denied Corrie’s motion for a new trial, and this appeal followed.3
Corrie contends the trial court erred in finding Amendment No. 2 and the March 2010 letter agreement ineffective to cure the original agreement’s noncompliance with the SMA. Because the material facts are undisputed, the trial court’s ruling presents a pure question of law which we review de novo. For the reasons discussed post, we agree with Corrie.
A. Applicable Statutory Law
As relevant here, the SMA generally prohibits the sale of any parcel of real property for which a map is required, unless a map compliant with its provisions has been filed: “No person shall sell, lease, or finance any parcel or parcels of real property or commence construction of any building for sale, lease or financing thereon, except for model homes, or allow occupancy thereof, for which a final map [or parcel map] is required by this division or local ordinance, until the final map [or parcel map] thereof in full compliance with this division and any local ordinance has been filed for record by the recorder of the county in which any portion of the subdivision is located.” (
Notwithstanding the foregoing prohibition, the SMA permits parties to offer or enter into contracts for the future sale of divided portions of land without first filing subdivision maps as long as such contracts are expressly conditioned on compliance with the SMA before the close of escrow: “ ‘Nothing contained in [section 66499.30,] subdivisions (a) and (b) shall be deemed to prohibit an offer or contract to sell, lease, or finance real property . . . where the sale, lease, or financing ... is expressly conditioned upon the approval and filing of a final subdivision map or parcel map, as required under this division.’ ” (Black Hills, supra, 146 Cal.App.4th at p. 891, italics added & omitted.) Thus, under
B. Preliminary Issues
“An option is an offer by which a promisor binds himself in advance to make a contract if the optionee accepts upon the terms and within the time designated in the option.” (Simons v. Young (1979) 93 Cal.App.3d 170, 182.) As a type of offer to sell real property, an option contract comes within the literal terms of section 66499.30(e). Since no subdivision map was filed when the Option Agreement was created in this case, the agreement was therefore subject to section 66499.30(e) if it contemplated any subdivision of the Danville property.5 Nonetheless, both sides put forward arguments they assert would allow this court to decide the appeal in their favor without reaching the issue of illegality. We address those threshold arguments first.
Corrie contends the trial court lacked jurisdiction to enter an order finding the Option Agreement and the subsequent amendments void because of the absence of a necessary party, Fremont Bank (Fremont), which held an unspecified security interest of some nature in Corrie’s option. Fremont’s motion for leave to intervene and for a new trial, filed after the court entered the subject order, was denied. We agree with the trial court that Fremont failed to demonstrate this was a proper case for intervention, its motion was untimely, and it was estopped by its prior conduct in expressing its willingness to waive notice from belatedly changing its position.
Corrie further contends the Option Agreement is ambiguous and could be construed to give him an option to purchase the entire Danville property, in
On very different grounds, respondents also maintain we need not reach the issues pertaining to illegality. According to respondents, we need not consider the potential curative effect of Amendment No. 2 because the amendment is void as a matter of trust law. Respondents assert (1) Flanagan breached her duties as trustee by executing Amendment No. 2; (2) the evidence shows Corrie was aware of the breach and was therefore not protected as an innocent party by
Amendment No. 2 included an indemnity clause in which Corrie promised to indemnify and hold the Borel Trust harmless “for matters arising out of this Agreement.” Respondents insist the presence of this clause showed Corrie’s knowledge that Amendment No. 2 “constituted a breach of trust that
C. Is the Option Void for Illegality?
“ ‘The illegality of contracts constitutes a vast, confusing and rather mysterious area of the law.’ ” (McIntosh v. Mills (2004) 121 Cal.App.4th 333, 344, quoting Strong, The Enforceability of Illegal Contracts (1961) 12 Hastings L.J. 347.)
The trial court held the March 2010 letter agreement and the parties’ subsequent agreement reflected in Amendment No. 2 could not “revive” the illegal contract. In support of its holding, the court quoted the following language from Stonehocker v. Cassano (1957) 154 Cal.App.2d 732 (Stonehocker): “The subsequent conduct of the parties does not give validity to the sale made in violation of the law. If an agreement grows immediately out of an illegal act, a court will not lend its aid to enforce it.” (Id. at p. 736.)7 The trial court continued as follows: “In [Black Hills], a vendor’s belated recordation of a parcel map after execution of the contract but before closing did not revive a void contract. Similarly here, an acknowledgement
The three cases cited by the trial court are distinguishable. In Stonehocker, unlike here, the parties took no action to correct the illegality of their original transaction such as by returning the initial payments and restructuring their agreement to condition payment of consideration on consent from the Corporations Commissioner to the sale. In Black Hills, although one party unilaterally and voluntarily recorded the necessary map before the sale closed, there was no attempt to rewrite the contract to meet the statutory requirement that recordation be an express condition of the contract. People v. Sidwell merely held that the test of the legality or illegality of the sale of a security cannot be the ultimate success or failure of the venture as determined after the sale. It does not stand for any general principle that legality or illegality is properly assessed at the time of sale. If it did exist, such a principle would work in favor of Corrie’s position since there had been no sale nor even a contract of sale prior to the execution of Amendment No. 2, because Corrie had not yet exercised his option to purchase at that point.
With regard to the trial court’s policy concerns, it is not at all clear that allowing parties to correct a technical violation in their option agreement by mutual consent would allow the SMA and its underlying public policies to be easily circumvented. Certainly no public policy forbids parties from abandoning a void, illegal contract, and entering a new, enforceable contract covering the same subject matter. (See Boloyan v. Contente (1952) 113 Cal.App.2d 439, 442 [direct purchase of property negotiated after an illegal straw purchase by a third party was abandoned did not carry any taint from the prior transaction]; Wise v. Radis (1925) 74 Cal.App. 765, 781 [recognizing doctrine that if the parties make a new, lawful contract settling their rights as between themselves after an illegal contract has been executed, the new contract is enforceable]; In re Estate of Jackson (N.Y.App.Div. 1986) 120 A.D.2d 309 [parties abandoned usurious contract and entered new, enforceable contract for the same loan amount on nonusurious terms].)
There is no bright-line rule that the parties’ subsequent conduct cannot save their intended transaction from illegality. In Robbins v. Pacific Eastern Corp. (1937) 8 Cal.2d 241 (Robbins), a seller and buyer of stock entered into an illegal executory contract for the sale of the stock in violation of the Corporate Securities Act. The California Supreme Court nonetheless
Moore v. Moffatt (1922) 188 Cal. 1 (Moore), discussed with approval in Robbins, supra, 8 Cal.2d at pages 281–283, upheld the validity of a stock sale made pursuant to a stock subscription agreement that was deemed void at its inception for lack of a permit from the Corporations Commissioner. The permit had been granted before the stock was issued and sold. (Moore, at pp. 5–6.) The Moore court stated: “[T]he parties to the transaction could not, nor did they, as a matter of law, by their adoption of the [subscription] agreement ratify and thereby validate as of the time of its original making or any time thereafter an agreement which may have been void in the first instance. But the parties could, and we think they did, when the bar of the statute to the making and acceptance of a valid agreement had been removed, elect to adopt and accept and stand upon the subscription agreement already signed as embodying—even though it may have been ineffectual at the time it was signed—the terms and conditions of a new agreement by which their future dealings were to be governed.” (Id. at pp. 6–7.)
Waring v. Pitcher (1933) 135 Cal.App. 493 (Waring), also discussed with approval in Robbins, involved shares of stock subscribed and paid for before a permit was secured, but delivered to the buyer after the permit was obtained. The court held: “[P]rior to the time of receiving and accepting the certificate appellant could have demanded the return of her money. . . . [H]owever, ... as the corporation was in existence when the certificate was delivered to plaintiff and held a valid permit to issue stock at that time, appellant’s act of accepting and retaining the certificate had the same legal effect as a new and independent contract for the sale of the stock as of the time of such delivery.” (Waring, at pp. 496–497.)
It is admittedly hard to reconcile Robbins, Moore, and Waring with Stonehocker and other cases that have taken a similarly expansive view of the effect of illegality. (See, e.g., Bourke v. Frisk (1949) 92 Cal.App.2d 23; Miller v. California Roofing Co. (1942) 55 Cal.App.2d 136.) Perhaps the best formulation of the approach courts should
The “realities of the situation” in this case convince us the option agreement between Corrie and the Borel Trust that is currently in effect is enforceable notwithstanding its relationship to the original 2004 Option Agreement which did not comply with section 66499.30(e). First, we find the parties’ transactions in this case consisted in substance of two or possibly three severable option agreements, the last of which—reflected in Amendment No. 2—was not unlawful under section 66499.30(e). Although drafted as an amendment to the original 2004 Option Agreement, and incorporating its terms, Amendment No. 2 established a different option period than either the Option Agreement or Amendment No. 1, exacted a higher price for maintaining the option, added new option terms, and made additional property subject to the option. It was in substance a new and different option agreement relative to those reflected in the Option Agreement and Amendment No. 1. In our view, the parties created a “new and independent” option contract (Waring, supra, 135 Cal.App. at p. 496) that stood on its own feet independently of the prior illegality (Robbins, supra, 8 Cal.2d at pp. 277, 279). As more fully discussed below, the option agreement created by Amendment No. 2 satisfied the requirements of section 66499.30(e) notwithstanding that it incorporated the terms of the original option.
Second, neither the option created in 2004, nor the new option created by Amendment No. 1 in 2009, was ever exercised. No contract of sale or sale ever occurred under these instruments, no interest in the property was created or transferred, and no subdivision of the property—legal or illegal—ever took place. (See Schmidt v. Beckelman (1960) 187 Cal.App.2d 462, 468 [absent exercise or attempted exercise of an option, no binding agreement to convey an interest in real property comes into existence]; 1 Miller & Starr, Cal. Real Estate (3d ed. 2000) § 2:7 [an option is not a transfer of the title or any estate in the property].) By their express terms, the original Option Agreement expired in June 2009, and Amendment No. 1 expired in June 2011. Although both option agreements may have been illegal under section 66499.30(e), both are completed transactions fully performed on both sides in the sense that the buyer paid all option fees required to be paid and the seller held the offer open for the full option period. As indicated in Norwood, it is difficult to see how the public would be protected by declaring that these completed transactions taint the option agreement Corrie is seeking to enforce.
Third, there is no question the trust will be unjustly enriched if Amendment No. 2 is not enforced. Corrie’s option payments have significantly enriched the trust, to the tune of $1,327,860, and we find nothing in the trial court’s ruling to indicate Corrie would have a claim against the trust for the return of any part of this. “In compelling cases, illegal contracts will be enforced in order to ‘avoid unjust enrichment to a defendant and a disproportionately harsh penalty upon the plaintiff.’ ” (Asdourian v. Araj (1985) 38 Cal.3d 276, 292.)
Finally, concerning the “moral fault” criterion in Norwood, neither side can be held guilty of greater fault than the other for the deficiency in the Option Agreement and Amendment No. 1. It was an error in drafting for which both sides are equally responsible, at least as far as can be shown on the record before us. However, the Borel Trust, by granting potentially inconsistent rights concerning the property to Corrie and the District, and by acting
In our view, the fundamental purpose of the rule barring the enforcement of illegal agreements would not be advanced by its application here. In 2010, recognizing their earlier option agreements were legally defective, the parties mutually agreed to add a condition to their option agreement for the period beginning on June 14, 2011, intended to correct the problem. No discernible purpose of the SMA would be served by precluding them from doing so. (Cf. Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1535–1536 [a party’s unilateral, unaccepted offer to modify a contract cannot resuscitate a legally defective contract].) While the parties may also have thought they could fix the problem retroactively to cover the earlier option terms that ran from June 14, 2004, until June 14, 2011, we do not believe the law permits that result. We merely hold that the illegality of the former option agreements does not taint the option that came into effect on the latter date.
Notwithstanding the condition of SMA compliance the parties agreed to in Amendment No. 2, respondents maintain Amendment No. 2 was ineffective to create a lawful option agreement because it incorporated the terms of the original Option Agreement, which include certain waiver provisions that nullify the condition. Clauses permitting waiver of SMA map requirements were found to invalidate real property purchase agreements in Black Hills, supra, 146 Cal.App.4th at pages 893–894, and in Sixells, LLC v. Cannery Business Park (2008) 170 Cal.App.4th 648, 653–654 (Sixells), notwithstanding that the contracts in both cases otherwise purported to require SMA compliance as a condition of the sale.
We find both cases distinguishable. The fatal clause in Black Hills required the seller to comply with the SMA but then provided the seller the option of either satisfying that condition or waiving it in writing, without liability. (Black Hills, supra, 146 Cal.App.4th at p. 893.) In Sixells, the contract allowed the purchaser to complete the contract if, at its election, a final map was recorded or it waived the recording. (Sixells, supra, 170 Cal.App.4th at p. 653Ibid.) The Option Agreement in this case contains no such right to waive SMA compliance. The first waiver clause respondents point to in the Option Agreement, section 5.3, gives the buyer specified rights to either waive or obtain monetary consideration at closing for certain title exceptions set forth in the preliminary title report or otherwise discovered. This language cannot reasonably be construed to encompass SMA compliance, which is not a title issue.
Section 66499.30(e) does not specify a particular form of words required to expressly condition a sale of real property on compliance with the SMA. We decline to construe it as a trap for the unwary. The parties in this case used language obviously designed to track and comply with section 66499.30(e), not to evade it. “A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.” (
Respondents further contend Amendment No. 2 is unenforceable because Corrie and Borel stipulated and agreed they would not modify the Option Agreement without the lender’s written consent, and evidently no such
For these reasons, we find the trial court erred by finding the option agreement in effect at the time of trial void and unenforceable. We reverse and remand the matter to the trial court for entry of a new order resolving the issue of enforceability in favor of Corrie. We imply no judgment as to any other issues and defenses raised by the successor trustee or the District.
III. DISPOSITION
The orders appealed from are reversed, and the matter is remanded to the trial court with directions to enter a new order finding the option agreement as amended on November 16, 2010, was not void or unenforceable on grounds of illegality, and for further proceedings consistent with the views expressed in this opinion.
Dondero, J., and Jenkins, J.,* concurred.