FILED
AUG 31 2011
NOT FOR PUBLICATION
MOLLY C. DWYER, CLERK
U.S . CO U RT OF AP PE A LS
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TOLL BROTHERS, INC., a Delaware No. 09-16955
corporation,
D.Ct. No. 08-cv-0987-SC
Plaintiff-Counter-Defendant-
Appellant,
MEMORANDUM *
v.
CHANG SU-O LIN; HONG LIEN LIN;
HONG YAO LIN, individuals,
Defendants-Counter-
Claimants, Appellees.
Appeal from the United States District Court*
for the Northern District of California
Samuel Conti, District Judge, Presiding
Re-hearing and Submission July 13, 2011
San Francisco, California
Before: GOULD, CALLAHAN, Circuit Judges, and KORMAN, District Judge.**
Toll Brothers, Inc. ('Toll') appeals from a judgment entered in the United
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
**
The Honorable Edward R. Korman, Senior United States District Judge,
Eastern District of New Yorµ, sitting by designation.
States District Court for the Northern District of California following a bench trial in
favor of Chang Su-O Lin, Hong Lien Lin, and Hong Yao Lin ('the Lins'). The
complaint, based on diversity of citizenship, arose out of a purchase and sale
agreement ('PSA') in which the Lins agreed to sell Toll-a national homebuilder-
three separate parcels of land in Dublin, California in three separate closings for a total
sale price of ü241,500,000. Toll deposited ü21,735,000 into an escrow account to be
paid out in increments with each property closing. Toll and the Lins successfully
closed on two parcels of land, Sub-Areas 1 and 2. The disputed issue here involves
the Sub-Area 3 closing scheduled for the later of June 30, 2007 or three days after all
of the special and general closing conditions had been met.
The Lins had negotiated and executed a 'temporary non-exclusive easement'
to PG&E across Sub-Area 3 on December 12, 2005 for the construction of temporary
overhead power lines for the purpose of carrying out other provisions of the PSA that
are not relevant here. By September 2006 all of the worµ for which the temporary
power lines were necessary had been completed. Consequently, the Lins asµed PG&E
to remove them. Nevertheless, PG&E delayed (for reasons not reflected in the record)
quitclaiming the temporary non-exclusive easement it had on the strips of land used
to construct the power lines. Notwithstanding numerous emails and phone calls from
the Lins to PG&E throughout 2007 attempting to get the easement extinguished,
2
PG&E did not quitclaim the easement until June 8, 2008.
In December 2007, Toll terminated the PSA and filed suit for a return of escrow
for Sub-Area 3 in the amount of ü7,735,000 alleging inter alia that the yet-to-be
removed power line easement constituted a breach of the PSA. In response, the Lins
alleged that they did not breach the PSA through their conveyance of the power line
easement and that they could not have breached the PSA by failing to have the
easement extinguished by June 30, 2007 because PSA Section 6.1 provided that the
Sub-Area 3 closing would occur on the later of June 30, 2007 or when all of the
special and general closing conditions had been met. This did not occur until June 8,
2008. The Lins argue that they are entitled to retain Toll's ü7,735,000 deposit as
liquidated damages because Toll unjustifiably terminated the PSA without providing
them with a reasonable time to meet the closing conditions.1
After a bench trial, the district judge entered a judgment in favor of the Lins.
This appeal followed. We agree with the district court's disposition of the various
issues raised on appeal. We focus our discussion here on the one issue that we find
more troubling than the district judge did and which requires a remand, namely, the
consequences of the failure of the Lins to obtain a quitclaim of the power line
1
Section 4.4 of the PSA provides that if the sale of property is not 'consummated as a result
of the buyer's default under the agreement and if seller is not also in default,' the deposit 'shall be
retained by seller as liquidated damages.'
3
easement across Sub-Area 3 by June 30, 2007, the date Toll alleges was the closing
date of the agreement.
I.
The plain language of Section 6.1 of the PSA does not provide a fixed date for
closing. Instead, it provides that the closing date is June 30, 2007 or three days after
all of the special and general closing conditions have been met. Toll argues that this
construction of Section 6.1 renders the PSA illusory because it left either party free
to avoid its obligations by deliberately failing to comply with the closing conditions.
This argument is without merit because '[e]very contract imposes upon each party a
duty of good faith and fair dealing in its performance and its enforcement,' Foley v.
Interactive Data Corp., 765 P.2d 373, 389 (Cal. 1988) (citing Restatement (Second)
of Contracts y 205 (1981)), and an obligation under a contract is not illusory under
these circumstances. Milenbach v. C.I.R, 318 F.3d 924, 930 (9th Cir. 2003) (applying
California law on the requirement of good faith and fair dealing to hold that '[a]n
obligation under a contract is not illusory if the obligated party's discretion must be
exercised with reasonableness or good faith.'); see also, Flores v. Am. Seafoods Co.,
335 F.3d 904, 913 (9th Cir. 2003) (same under federal contract law) (Gould, J.). This
principle is complemented by a more specific provision of the California Code which
provides that, '[i]f no time is specified [in a contract] for the performance of an act
4
required to be performed, a reasonable time is allowed.' Cal. Civ. Code y 1657 (West
2011).
Moreover, the unique circumstances that the Lins cite appear to maµe this an
especially appropriate case to read into the PSA a covenant of good faith and
reasonableness. They argue persuasively that 'this particular land development
contract for the purchase and sale of land and construction of improvements and
performance of other obligations, specifically provides for flexible closing dates to
enable the parties to perform their respective obligations and to satisfy general and
special closing conditions.' The PSA, among other things, requires 'the seller . . . to
maµe millions of dollars of relatively undefined 'infrastructure' improvements to each
of three separate sub-parts of raw land and requires the buyer and seller to comply
with multiple conditions in a context of total uncertainty about local governmental and
utility approvals from agencies, entities and utilities over which the parties have no
control.' Indeed, as the district court observed, there were many issues in flux when
the parties signed the PSA. This explains the need for the µind of flexible closing date
to which the parties agreed conditioned only by the covenant of good faith and fair
dealing which is read into the contract under California law.
In ruling on the Lins counterclaim for breach of the covenant of good faith and
fair dealing, the district judge did not maµe any finding that the Lins were acting in
5
good faith in attempting to comply with the closing conditions or that the delay was
not unreasonable under all of the circumstances. Consequently, a remand is necessary
for this purpose. See Peaµ-Las Positas Partners v. Bollag, 90 Cal. Rptr. 3d 775, 782
(Cal. Ct. App. 2009) ('good faith and reasonableness are questions of fact') (citing
Kendall v. Ernest Pestana, Inc. 709 P.2d 837, 845 (Cal. Ct. App. 1985)). On remand,
the factors considered by the district court in holding that the Lins' breach was not
material may also be relevant on this issue as well.
II.
Nor is there any merit to Toll's argument that the conveyance of the temporary
non-exclusive easement to PG&E constituted an independent breach of the PSA that
justified Toll's default. Section 13.2 of the PSA upon which Toll relies provides in
pertinent part that
[e]xcept as necessary to comply with the terms of this Agreement, Seller
shall not; (a) sell, encumber or transfer any interest in all or any portion
of the Property between the date of this Agreement and the Closing Date;
(b) taµe any action that would or could adversely affect title to the
Property; or (c) without Buyer's written consent which shall not be
unreasonably withheld or delayed, enter into any other agreement of any
type affecting the Property that would or could survive the Closing Date.
Passing over the fact that the easement was 'temporary and non-exclusive' and that
the restrictions on the Seller in Section 13.2 contained an exception for conduct
'necessary to comply with the terms of the Agreement,' these restrictions were
6
inextricably linµed to the existence of a closing date. Indeed, as Toll's attorney
acµnowledged at oral argument, any breach of Section 13.2 would have been cured
if PG&E had quitclaimed the easement bacµ to the Lins prior to the June 30, 2007
closing date for which Toll argued. The PSA, however, did not have a fixed closing
date and, on the state of this record, we cannot fix the date when the Lins would have
been obligated to close.
In sum, in this case, the PSA's flexible closing dates do not render the contract
illusory because the covenant of good faith and fair dealing prevents the Lins from
retaining Toll's ü7,735,000 deposit while unreasonably or purposefully failing to meet
the closing conditions to prevent the closing of Sub-Area 3. Nevertheless, because a
question of fact remains as to whether the Lins' acted in good faith and whether the
delay in obtaining the quitclaim was reasonable, we remand the case to the district
court.
REMANDED.
7
FILED
Toll Brothers v. Lin, No. 09-16955 AUG 31 2011
MOLLY C. DWYER, CLERK
CALLAHAN, CIRCUIT JUDGE, dissenting: U.S . CO U RT OF AP PE A LS
In my view, Toll Brothers was justified in rescinding the purchase and sale
agreement ('PSA') due to the Lins' material breach of granting the temporary
indefinite easement to PG&E. Accordingly, I dissent.
Section 6.1 of the PSA sets forth two separate dates for closing: (1) the
scheduled closing date (i.e., June 30, 2007); and (2) if the conditions for closing
are not met by June 30, 2007, the actual closing date, which is three business days
after all the closing conditions are eventually satisfied. However, I do not agree
with the majority's interpretation, that if the closing was not accomplished by June
30, 2007, y 6.1 automatically and unconditionally extended the closing date. If y
6.1 of the PSA is read as a self-executing clause which indefinitely extends closing
until all of the closing conditions are met, even where a closing condition is in the
hands of a third party, the PSA becomes illusory.
Section 6.1 established a specific closing date, June 30, 2007, but also
provided that the scheduled closing date could be extended if either party
anticipated that the closing conditions could not be met by the scheduled closing
date and affirmatively invoµed the right to extend the closing. However, neither
the Lins nor Toll Brothers invoµed y 6.1 to extend the time of closing. It was only
much later, in litigation, that the Lins asserted that y 6.1 of the PSA entitled them
to an indefinite closing date. I would hold that the Lins can not invoµe the 'actual
closing date' language of y 6.1 because they waived that right by granting an
indefinite easement to PG&E. I would further hold that the indefinite easement
encumbered the property as of the closing date and therefore constituted a material
breach of the PSA. Toll Brothers rescission of the contract was justified when the
Lins could provide no date certain as to when PG&E might quitclaim the easement.
See Eason v. Montgomery, 27 P. 280, 282 (Cal. 1891); Crim v. Umbsen, 103 P.
178, 180 (Cal. 1909). Finally, I would hold that there is no need to apply
California's implied duty of good faith to extend the closing date because there is
no 'obvious necessity' for applying the duty. See, e.g., Third Story Music v.
Waits, 41 Cal. App. 4th 798, 809 (1995).
2