AREPIII Prop. Tr. v. Relevant Grp.

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AREPIII PROPERTY TRUST, LLC, Plaintiff and Appellant, v. RELEVANT GROUP, LLC, et al., Defendants and Respondents.

B320549

California Court of Appeals, Second District, Third Division

December 21, 2023

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. 21STCV14241 Barbara A. Meiers, Judge. Reversed with directions.

Cozen O'Conner and Brett D. Watson, for Plaintiff and Appellant.

Quantum Law Group, Steven A. Morris, and Jonathan M. Deer for Defendants and Respondents.

EDMON P. J.

This appeal arises out of a failed loan transaction between a real estate developer and an investor. When the contemplated loan did not close, the investor brought the present action for breach of contract, breach of the implied covenant of good faith and fair dealing, quantum meruit, and promissory fraud urging that the developer had violated the parties' written agreement by negotiating with other lenders during a contractual "exclusivity" period and had never intended to honor the agreement.

The trial court sustained the developer's demurrer without leave to amend, concluding that the written agreement was not enforceable and the investor had not adequately alleged a breach of the express or implied terms of the agreement or resulting damages. The court also concluded that the investor had not alleged the elements of quantum meruit and had not pled promissory fraud with sufficient specificity.

We conclude that the complaint adequately pled the causes of action for breach of contract, breach of implied covenant and promissory fraud, and that the investor should have been permitted leave to amend as to the cause of action for quantum meruit. We thus reverse the judgment of dismissal.

FACTUAL AND PROCEDURAL BACKGROUND

I. Background.

Defendant Relevant Group, LLC (Relevant) is a large real estate development firm whose portfolio includes over $1 billion worth of development projects in the Los Angeles area. Plaintiff AREPIII Property Trust, LLC (Arden) is a real estate investment firm.

In 2021, after failing to reach a deal with another lender, Relevant solicited a $67 million loan from Arden to construct two hotels and redevelop a historic building.^[1] The $67 million loan was to be junior to a $133,500,000 loan provided by the senior lender on the project, Calmwater Capitol (Calmwater).

On February 24, 2021, Relevant and Arden entered into a term sheet (the term sheet) that set out the principal terms by which Arden would provide financing for the project, subject to Arden's "satisfactory completion of due diligence and underwriting of the assets and satisfactory documentation." In brief, the term sheet stated that Arden would loan Relevant $67 million for a term of two years, subject to two optional sixmonth extensions, at an interest rate of 15 percent and an origination fee of two percent. The term sheet "constitutes neither an offer nor a commitment by [Arden], but rather summarizes the general terms under which [Arden] would be willing to fund the Loans. The terms outlined . . . will be subject to satisfactory completion of due diligence items customary for such a transaction, including a review of the title, survey, insurance coverage and approval by Arden's investment committee."

Three provisions of the term sheet are of particular relevance to this appeal. They are as follows:

"Expenses: [Relevant] to reimburse Arden for all out-ofpocket expenses associated with the documentation and closing [of] the proposed [loan], including but not limited to, fees for closing expenses, appraisal review, and third-party consultant fees, title, etc. [Relevant] acknowledges that prior to the date hereof [Relevant] has deposited $50,000 with Arden as an expense deposit. At execution of this term sheet, [Relevant] will provide Arden with an additional $150,000 expense deposit."

"Exclusivity/Breakup Fee: [Relevant] agrees that for a period of 21 days following the execution of this term sheet (the 'Exclusivity Period'), [neither] [Relevant] nor its affiliates will directly or indirectly, solicit, accept, discuss, encourage or respond to any inquiries or proposals related to any information concerning the matters discussed in this term sheet[,] and [Relevant] shall (and cause its affiliates to) provide all information and diligence items required by Arden in connection with the underwriting and evaluation of the Arden loans in a timely manner (or the Exclusivity Period shall be extended for a day-for-day basis in connection with any delays in Arden's receipt of such information or diligence items). The provisions of this section are intended to and shall be legally binding upon the parties. In consideration of [Arden's] allocation of time, effort and potential lost opportunity cost for other transactions that Arden might otherwise pursue, and provided that Arden is willing to enter into the transactions contemplated by this term sheet on the same or better terms as those outlined herein, if at any time during the Exclusivity Period, there is any recapitalization of the Property (including, without limitation, any debt and/or equity financing), then [Relevant] agrees, for itself and on behalf of Borrower^[2], that . . . Borrower and [Relevant] will, jointly and severally, pay and be liable to pay Arden an amount equal to $500,000.00 as liquidated damages (the 'Breakup Fee'), in addition to any and all other amounts payable to Arden hereunder, including, but not limited to, reimbursement of Arden's expenses. Under mutual agreement of both parties the exclusivity period can be extended or shortened."

"Legal Effect: Arden and [Relevant] each acknowledge that a transaction of this type involves terms and conditions which have not yet been agreed upon and that this term sheet is in no way intended to be a complete or definitive statement of all the terms and conditions of the proposed transaction but contemplates and is subject to the negotiation and execution of definitive Loan documentation between the parties. Except as provided in the section entitled 'Exclusivity/Breakup Fee' above, neither Arden [n]or [Relevant] will be legally bound in any manner, unless and until such definitive Loan documentation has been executed by both parties."

On March 27, 2021, an agent for Relevant told Arden that Relevant would not pursue a loan from Arden, but instead would obtain the loan from Machine Investment Group (Machine), an investor with whom Relevant had negotiated before approaching Arden.

II. The present action.

A. Complaint.

Arden filed the present action against Relevant in April 2021, and filed the operative third amended complaint in December 2021. The operative complaint alleged as follows:

The intent of the parties in entering into the term sheet was to consummate a loan agreement under which Arden would provide mortgage financing secured by the properties. Completing the due diligence necessary for Arden to evaluate the loan required a significant investment of time and money, and thus Arden required Relevant to refrain from seeking financing from other lenders during the evaluation period, "to give [Arden] a 'first crack' at becoming Relevant's lender for the Project." Without this provision, Arden "would not have invested the time and money necessary to evaluate the potential loans to Relevant."

The exclusivity period defined by the term sheet was 21 days, or through March 17, 2021. However, the term sheet provided that the exclusivity period would be extended" 'for a day-for-day basis in connection with any delays in [Arden's] receipt of such information or diligence items." Relevant did, in fact, delay Arden's receipt of such information, including the information necessary to bind terrorism insurance, organizational documents, a construction budget, and information about the sources and uses of certain funds. As a result, the exclusivity period was extended to March 27, 2021, the date Relevant terminated the term sheet.

During the exclusivity period, and in violation of the exclusivity provision, Relevant communicated with several other lenders about a loan for the properties. Specifically, Relevant continued to contact Machine beginning on February 27, 2021; it spoke with Hyatt on March 8, 2021, Taconic Capital on March 12, 2021, and Related Fund Management on March 17, 2021; and it used the term sheet to negotiate a more favorable loan with Machine. Further, Relevant never intended to abide by the terms of the exclusivity provision; instead, it intended to use Arden's term sheet as a means to achieve better terms from Machine, with whom it had discussed a loan before it approached Arden.

When Relevant pulled out of the Arden term sheet, Arden had already obtained and allocated the funds necessary to finalize the loan, and it was in the process of collecting signatures and finalizing the closing statement. Arden was prepared to close with Relevant the day after Relevant pulled out of the deal. Arden accrued expenses of approximately $1,939,120 in connection with the loan.

Arden alleged that Relevant's actions gave rise to four causes of action: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) quantum meruit, and (4) promissory fraud (fraud in the inducement). The allegations specific to each of these causes of action are discussed more fully below.

B. Prior history.

Relevant demurred to the fourth and sixth causes of action of the first amended complaint. The trial court filed a lengthy minute order describing what it characterized as "problems with the [first amended complaint] [that] appear to be so extensive that the issues raised by [Relevant] as to the Fourth . . . and Sixth causes of action cannot or should...