Med. Acquisition Co. v. Tri-City Healthcare Dist.

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MEDICAL ACQUISITION COMPANY, INC., Plaintiff and Appellant, v. TRI-CITY HEALTHCARE DISTRICT, Defendant and Respondent.

D079471, D079904

California Court of Appeals, Fourth District, First Division

April 17, 2024

NOT TO BE PUBLISHED

CONSOLIDATED APPEALS from a judgment and postjudgment orders of the Superior Court of San Diego County, Nos 37-2014-00009108-CU-BC-NC, 37-2014-000022523-CU-MC-NC Robert P. Dahlquist, Judge. Affirmed.

David A. Kay for Plaintiff and Appellant.

Buchalter, Robert M. Dato, Paul J. Fraidenburgh, and Douglas C. Straus for Defendant and Respondent.

O'ROURKE, J.

This is the second appeal arising from a dispute over the construction of a medical office building by a private entity, respondent Medical Acquisition Company, Inc. (MAC) on land that was leased from a public agency, appellant Tri-City Healthcare District (Tri-City).

MAC argues the trial court erred by: (1) failing to consider on remand its inverse condemnation cause of action and whether its leases with Tri-City had terminated; (2) awarding MAC no damages as a result of Tri-City's abandonment of its eminent domain proceeding; (3) declining to award the full amount of attorney fees and costs it requested; and (4) awarding Tri-City interest on excess compensation MAC withdrew out of Tri-City's just compensation deposit following the jury trial.

For reasons we will explain, we disagree with each of MAC's contentions.

FACTUAL AND PROCEDURAL BACKGROUND

I. Factual Background^[1]

Tri-City is a public agency organized under California's Local Health Care District Law (Health &Saf. Code, § 32000 et seq.). The Local Health Care District Law "protect[s] the public health and welfare by furnishing hospital services in areas where hospital facilities are for some reason inadequate ...." (Talley v. Northern San Diego County Hospital District (1953) 41 Cal.2d 33, 40, overruled on other grounds in Muskopf v. Corning Hospital District (1961) 55 Cal.2d 211, 213.) Tri-City owns property in Oceanside on which it operates a hospital campus.

MAC is a privately held medical factoring company headquartered in Carlsbad. MAC's medical factoring involves purchasing a receivable or a bill at a discount from a hospital treating an uninsured patient in need of, but unable to pay for, surgery after an accident caused by another party. MAC then seeks collection from the party at fault for the accident.

In 2009, MAC began factoring some of Tri-City's surgeries. Subsequently, Tri-City and MAC developed the idea of constructing a medical office building on Tri-City's campus for surgeries. Construction of the building was estimated to cost about $15 million, which MAC could not afford on its own.

In December 2010, MAC and Tri-City executed two agreements in furtherance of the project: (1) under a 50-year ground lease, Tri-City would lease land to MAC, and MAC would construct a three-story, approximately 60,000-square-foot building on the land at its own expense (the ground lease); and (2) under a 15-year building lease, MAC would lease about 25,000 square feet of the constructed building to Tri-City, and Tri-City would prepay up to $7.5 million in rent (the building lease). The parties understood that Tri-City would be paying for half of the construction costs of the building through the rent prepayment provision; however, the provision was phrased in "discretionary," voluntary language to avoid the need to put the project out for public bidding, which is ordinarily required for a hospital district's construction contracts exceeding $25,000.

In 2011, MAC hired a general contractor, obtained all necessary approvals and permits for construction of the building, and began construction.

Through June 2012, construction of the building proceeded as expected. In July 2012, however, Tri-City stopped making its monthly prepayments of rent and sent MAC a "notice of default" on the ground lease even though MAC was not in default.

The parties entered a transition agreement in November 2012, the purpose of which was to terminate the leases, transition the construction project to Tri-City, and compensate MAC for its expenses and efforts.

However, escrow did not close under the transition agreement because the project had not been subjected to competitive bidding and the subcontracts involved expenditures of more than $25,000. Accordingly, the parties agreed that MAC would continue constructing the building until the subcontracts were spent down below $25,000 and that MAC would not enter any new subcontracts exceeding $25,000.

MAC fulfilled its obligations under the transition agreement and amendments, and by late May 2013, the shell of the building was substantially complete. At that stage, the building required tenant improvements, otherwise known as stabilization, before it could be occupied.

In January 2014, Tri-City sent MAC a letter claiming that the leases were void due to conflicts of interest under Government Code section 1090 and that MAC must return all of Tri-City's prepaid rent and surrender the building. In all, Tri-City had paid $5 million of prepaid rent.

II. Initial Superior Court Proceedings

In April 2014, MAC filed a complaint in superior court against Tri-City asserting various claims, including breach of the ground lease, breach of the implied covenant of good faith and fair dealing in both the ground and building leases, inverse condemnation, and declaratory relief. The theory of MAC's contract-based causes of action was that Tri-City had unreasonably decided to stop prepaying rent (and fund construction costs), leading to delayed construction and lost rental income. As to inverse condemnation, MAC alleged Tri-City had taken possession of the property covered by the ground lease and the improvements on the property. MAC sought a declaration that the ground and building leases were valid, not void, "except as MAC's interest has been taken by [Tri-City's] exercise of its powers of eminent domain ...."

In July 2014, Tri-City filed its own complaint against MAC claiming, inter alia, the leases were void because of conflicts of interest.^[2] Tri-City later amended its complaint to include a cause of action for eminent domain of MAC's leasehold interest and pursued immediate possession using quick take procedures. (Medical Acquisition Co., Inc. v. Superior Court (2018) 19 Cal.App.5th 313, 323-324 [citing Cal. Const., art I, § 19; Code Civ. Proc.^[3]§§ 1255.410, 1255.220; and Mt. San Jacinto Community College Dist. v. Superior Court (2007) 40 Cal.4th 648, 653].) Tri-City sought to condemn "all right, title and interest to the Ground Lease" and pay MAC "just compensation" as required by law. Tri-City deposited $4.7 million with the state treasurer as the probable amount of just compensation owed to MAC for the taking based on Tri-City's building appraisal. On September 12, 2014, Tri-City was awarded possession of the building. MAC withdrew the deposited funds, "returned to its business of purchasing medical liens," added a new line of business purchasing statutory medical liens, and hired three additional employees.

Before trial, the parties and the court discussed the overlap between MAC's inverse condemnation cause of action and Tri-City's eminent domain cause of action. MAC's attorney explained to the court the inverse condemnation claim and its overlap with the eminent domain proceeding as follows:

"[W]e filed first and we filed inverse condemnation. And it was months later when Tri-City then filed for eminent domain, which I think overlapped and subsumed the inverse condemnation claim. Even though it is still pending, I think it mirrors claims on the same issue. It's essentially for taking the leasehold interest and the improvements on it."

Because the parties agreed that Tri-City was taking the property, the trial on the eminent domain cause of action was limited to the valuation of the property.

MAC's counsel later raised the issue that, although the causes of action overlap, Tri-City had stated it might attempt to abandon the eminent domain proceeding. The court responded that it was aware Tri-City could still abandon the proceeding, but the court nonetheless did not have any intention of giving any instructions on inverse condemnation.

Prior to selecting jury instructions, the court reminded the parties that they could preserve their right to appeal by stating "over our objection" in response to the court's decisions. MAC sought jury instructions on inverse condemnation and just compensation after a taking. The court denied MAC's proposed inverse condemnation instructions, and MAC's attorney responded that the inverse condemnation instruction was "[d]enied over our objection."

Following the trial, the jury found that Tri-City did not breach the ground lease but did breach the covenant of good faith and fair dealing implied in both leases. The jury awarded approximately $2.9 million in damages to MAC, primarily consisting of lost rental income of $126,605 per month. This amount represented income MAC would have earned had the building been constructed and occupied by February 1, 2013, the date MAC's contractor testified that the building would have been ready for occupancy without delays caused by the stop payment, transition agreement, and related issues, until the point of Tri-City's possession of the building on September 12, 2014. For Tri-City's eminent domain taking, the jury used MAC's appraisal and valued the property at approximately $16.8 million.

The jury verdict form did not provide for jury findings on inverse condemnation. The court entered judgment accordingly. The judgment also provided that MAC was entitled to reasonable attorney fees for any appeal and postjudgment proceedings.

Based on the jury's...