CITY OF HERMOSA BEACH v. WINDWARD ASSOCIATES MACPHERSON OIL COMPANY

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Court of Appeal, Second District, California.

CITY OF HERMOSA BEACH Petitioner, v. SUPERIOR COURT OF THE STATE OF CALIFORNIA, FOR THE COUNTY OF LOS ANGELES Respondent, WINDWARD ASSOCIATES and MACPHERSON OIL COMPANY, Real Parties In Interest.

B218010

Decided: February 11, 2010

PETITION for writ of mandate from an order of the Superior Court of Los Angeles County, Joanne O'Donnell, Judge.   Denied.  Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, Thomas R. Freeman, Terry W. Bird, Paul S. Chan, Bonita D. Moore;  Jenkins & Hogin and Michael Jenkins for Petitioner.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

Bright and Brown, James S. Bright, Maureen J. Bright and Kristin G. Taylor for Real Parties In Interest.

INTRODUCTION

Petitioner City of Hermosa Beach (the City) seeks a writ of mandate directing respondent superior court to grant its motion for summary judgment or summary adjudication against real parties in interest Windward Associates and Macpherson Oil Company (collectively Machpherson).   We issued to all parties an order to show cause why the relief requested in the petition should or should not be granted.   After reviewing briefs by the City and Macpherson, we conclude that the superior court correctly denied the City's motion.   As we will discuss, we find there is a triable issue of fact as to whether the City's alleged breach of contract proximately caused Macpherson's damages.   The petition therefore is denied.

FACTS AND PROCEDURAL HISTORY

Examining the issues presented by this appeal, we have independently reviewed the record and find it consistent with the factual and procedural background presented in Stop Oil I and Windward.   We therefore adopt and expressly incorporate relevant portions of the factual and procedural background set forth in Stop Oil I and Windward.

1. Authorization of Oil Exploration within the City

“In 1932 the voters of the City enacted a ban on all oil and gas operations within the City, declaring such activity to be both unlawful and a public nuisance.  (Hermosa Beach Mun.Code, § 21-10.)”  (Stop Oil I, supra, 86 Cal.App.4th at p. 540, fn. omitted.)

“In 1984, to generate the funds needed to acquire open space and parklands within the City, the voters adopted Propositions P and Q, council-sponsored ballot measures creating exceptions to the ban on oil exploration and production for two publicly owned sites within the City:  the City Yard Site, a parcel owned by the City and being used as its maintenance yard;  and the School Site, a parcel owned by the local school district.”  (Stop Oil I, supra, 86 Cal.App.4th at pp. 540-541.)

In 1985, the City adopted an ordinance establishing the Hermosa Beach Oil Code (Oil Code), regulating the development and design of oil recovery projects and establishing a permit system for drilling and oil recovery operations in the City. The preamble of the ordinance stated that “the City Council is desirous to allow for oil development, pursuant to the People's Initiative, in a manner that protects the health, safety and welfare of the citizens of Hermosa Beach․”

The Oil Code required drilling and well permits.  (Hermosa Beach Mun.Code, §§ 21A-2.1, 21A-2.2.) Section 21A-2.3 of the code provided, “No person shall be issued a drilling permit until the same has been approved by the Building and Safety Director with concurrence by the Planning Director, and found to be in compliance with all applicable laws, ordinances and regulations.”  (Hermosa Beach Mun.Code, § 21A.2.3.)

2. The Lease between the City and Macpherson

“In June 1986 the City published a request for proposals for oil exploration and production at the two sites.   Macpherson Oil Company, which had in 1976 proposed developing oil resources in the tidelands of Hermosa Beach and had been a leading force in placing the 1984 ballot measures before the voters, was the only company to respond to the City's request.”  (Stop Oil I, supra, 86 Cal.App.4th at p. 541.)

In 1986, the City and Macpherson entered into an oil and gas lease, which was amended in 1988 and 1991.  “In January 1992 the parties entered into a second lease, Oil and Gas Lease No. 2, which superseded the initial lease and its various amendments․  The 1992 lease remain[ed] the operative agreement between the City and Macpherson.

“Under the lease Macpherson obtained the right to conduct oil and gas operations within the City. The City was obligated to deliver the City Yard Site to Macpherson for use as a drill site and to obtain State Lands Commission ․ approval to allow drilling for oil in the tidelands.”  (Stop Oil I, supra, 86 Cal.App.4th at pp. 541-542, fn. omitted.)

Section 15(a) of the lease provided:  “The Lessee shall comply with all laws, rules and regulations of the United States, of the State of California and its political subdivisions, and of the City of Hermosa Beach applicable to the Lessee's operations, including, but not limited to, the applicable provisions of Divisions 3 and 6 of the Public [Utilities] Code and the regulations of the Division of Oil and Gas and State Lands Commission.   The Lessee shall also comply with any special operating requirements set forth in a conditional use permit issued by the City.”

Section 15(b) of the lease provided:  “The Lessee shall also apply for and obtain all necessary drilling and well permits from the City of Hermosa Beach pursuant to the Hermosa Beach Municipal Code․  The Lessee shall also be responsible, at its sole expense, for all necessary permits and approvals to be obtained from the California Coastal Commission.   The Lessee shall also pay all business license fees and comply with all ordinances, rules and regulations established by the City.”

Section 12(b)(1) of the lease required Macpherson to “diligently pursue the acquisition of all permits necessary for conducting drilling and producing operations” on the leased property.   There is nothing in the record, however, indicating that Macpherson applied for drilling or well permits.

3. The Conditional Use Permit and State Lands Commission Approval

After signing the lease, Macpherson began efforts to obtain permits and governmental approvals necessary for production of gas and oil on City-owned property.  “On August 10, 1993, after an extended review process, the City approved a [Conditional Use Permit (CUP) ] for the Macpherson project.   The CUP contained 140 conditions, requiring submission to and approval by the City of a number of additional reports, plans and analyses prior to the issuance of any permit for commencing work.”  (Stop Oil I, supra, 86 Cal.App.4th at p. 542.)

Section 1(9) of the CUP provided:  “All requirements, standards, conditions stated within the Oil Production Code, Chapter 21-A, of the City's Municipal Code [i.e., the Oil Code] shall be met, unless more restrictive requirements are imposed through mitigation measures;  where it cannot be clearly determined whether the City's Oil Ordinance, Chapter 21-A or mitigation measures are more stringent, the appropriate City staff shall make a determination;  appealable to the City Council.”

Section 15(5) of the CUP provided:  “The subject property shall be developed, maintained and operated in full compliance with the conditions of this grant and any law, statute, ordinance or other regulation applicable to any development or activity on the subject property.   Failure of the permittee to cease any development or activity not in full compliance shall be a violation of these conditions.”

“In March 1994, the California State Lands Commission found the project to be in the best interests of the people of California, and re-approved Macpherson's lease with the City.” (Windward, supra, at [p. 5].)

4. Adoption of Proposition E

“Beginning in April 1994 the Hermosa Beach Stop Oil Coalition began a campaign to qualify a ballot initiative to end the Macpherson project and to reinstate the comprehensive prohibition on oil drilling in the City by deleting from the Municipal Code the two exceptions from the ban that had been approved in 1984.  (Hermosa Beach Mun.Code, § 21-10, subds. (a) & (b).)  The measure, Proposition E, appeared on the November 1995 ballot.”  (Stop Oil I, supra, 86 Cal.App.4th at pp. 543-544.)

“The ‘Impartial Analysis of Proposition E’ by the Hermosa Beach City Attorney circulated to all voters explained, ‘The effect of this measure, if adopted, would be to amend the Municipal Code to prohibit oil and gas exploration, drilling and production on these two sites [the two sites then excepted from the citywide prohibition], and eliminate from the Code the authority to use these sites as a potential source of oil and gas revenue for the restricted purposes stated in the Code. [¶] The City has leased the City maintenance yard site to a private entity for oil and gas exploration and production activities which have not yet commenced.   All permits necessary for this project have not been issued and have been delayed by pending litigation.   If Proposition E is adopted, the law is not clear exactly how the measure would affect the project proposed by the lease.’   The ballot arguments in favor of and against Proposition E focused on the potential environmental risks and economic benefits of the Macpherson project on the City Yard Site.

“Proposition E was approved with 56 percent of the vote:  2,505 ‘yes' votes were received;  1940 ‘no’ votes.”  (Stop Oil I, supra, 86 Cal.App.4th at pp. 544-545.)

5. The Stop Oil Plaintiffs File Suit

“Notwithstanding Proposition E's adoption by the voters, the City continued to perform under its lease with Macpherson based on its concern that it would face legal exposure if it terminated the lease agreement.   When notified of the City's decision to continue to respect the lease agreement, Stop Oil commenced [a] lawsuit [on June 9, 1997] for declaratory and injunctive relief to require the City to apply Proposition E to the Macpherson project.” 1  (Stop Oil I, supra, 86 Cal.App.4th at p. 545.)  “Stop Oil named the City as a defendant and identified Machperson as the real party in interest.”  (Windward, supra, at [p. 6].)

“In its complaint, Stop Oil asserted that application of Proposition E was not an unconstitutional impairment of the City's contractual lease obligations with Macpherson, and that section 15(a) of the Lease, quoted above, gave the City the right, as a matter of contract, to apply Proposition E to terminate the project and to terminate the City's contractual obligations to Macpherson without any liability to the City.” (Windward, supra, at [p. 7].)

6. Coastal Commission Approves Project

In support of its application for a permit from the California Coastal Commission, Macpherson submitted reports in 1995 and 1997 prepared by Reese-Chambers Systems Consultants, Inc. (Reese-Chambers) regarding the potential risk to the surrounding community from the proposed oil and gas production project.   The Coastal Commission retained an independent expert, Arthur D. Little, to review the Reese-Chambers reports.   In December 1997, Little released his report (the Little Report).2  “In February 1998, the Coastal Commission authorized the issuance of a coastal development permit for the project.”  (Windward, supra, at,[ p. 7].)

7. Resolution No. 98-5950

In February 1998, following the issuance of the Coastal Commission permit, the City retained the services of the Aspen Environmental Group (Aspen) to perform risk analysis on the project.   The record indicates that Aspen, its subcontractor Dr. Frank Bercha, and entities apparently affiliated with Aspen and Bercha submitted reports to the City regarding the safety risks of the Macpherson project.   The City refers to a document in the record as the “Final Aspen/Bercha Report.”   However, the front page of this document is not in the record, and we cannot ascertain with certainty the date, author or title of the document.3

On September 17, 1998, the City Council held a meeting regarding the Aspen/Bercha report(s) At that meeting, Dr. Bercha testified regarding the safety risks of the project.   The parties vigorously dispute the nature and implications of Dr. Bercha's testimony.   Macpherson contends that Dr. Bercha was pressured into making some sort of statement indicating that the project was unsafe.   The City denies that contention.   At the end of Dr. Bercha's testimony, he stated that the production of methane from the project posed a “substantial” risk to the health and safety of nearby residents.4

On December 8, 1998, the City Council adopted Resolution No. 98-5950.   The resolution stated that Macpherson project “presents an unreasonable risk of harm to persons who live, work and recreate in close proximity to the project site, a risk described by Dr. Bercha in his September 17, 1998 testimony as ‘substantial.’  “ The resolution further stated that “[t]hose who live and work in proximity to the project site should not be forced to live in perpetual fear of occurrence of a catastrophic and potentially fatal event.”

8. Macpherson's Cross-Complaint

“Machperson filed a cross-complaint on December 10, 1998 against the City for breach of contract, alleging that the Aspen/Bercha report did not demonstrate any previously unknown or undisclosed risk that had not already been appropriately mitigated or dismissed as not significant.   The City answered, asserting that it was entitled to exercise its discretion to deny further permits and thus to terminate the project based on public safety concerns identified in the report.”  (Stop Oil I, supra, 86 Cal.App.4th at p. 547.)

9. The Trial Court Judgment on Stop Oil's Complaint

“On November 17, 1999, the trial court entered final judgment denying Stop Oil's complaint for injunctive and declaratory relief.   The trial court found that application of Proposition E to the oil project would ‘constitute a total and unconstitutional impairment’ of the lease between Macpherson and the City. Stop Oil's appeal of this judgment resulted in Stop Oil I, supra, 86 Cal.App.4th 534.”  (Windward, supra, at [p. 9].) The trial court did not at this time enter judgment with respect to Macpherson's cross-complaint.

10. The Judgment on Macpherson's Cross-Complaint

“On December 8, 2000, while the appeal was pending in Stop Oil I, the trial court entered judgment on Macpherson's cross-complaint.   The trial court found that Macpherson's sole remedy was specific performance and ordered the City to honor the lease.”  (Windward, supra, at [p. 10, fn.   Omitted].)

11. Stop Oil I

On January 24, 2001, this court decided Stop Oil I. The essential issue in Stop Oil I was “whether reinstatement of a total ban on oil drilling within the City, adopted through the initiative process in November 1995 (Proposition E), constitutes an unconstitutional impairment of the 1992 lease agreement between Macpherson and the City for oil and gas exploration and production on City-owned property.”  (Stop Oil I, supra, 86 Cal.App.4th at p. 540.)   We held that Proposition E did not unconstitutionally impair the lease and thus reversed the judgment on Stop Oil's complaint.  (Id. at p. 572.) 5  However, we did not reach the issue whether Macpherson has a viable claim against the City for breach of the lease based upon the voter's 1995 passage of Proposition E.

12. Stop Oil II

On June 19, 2002, we decided Stop Oil II. In that opinion, because of procedural irregularities, we reversed the judgment on Macpherson's cross-complaint, and remanded for proceedings consistent with the published opinion in Stop Oil I. (Stop Oil II, supra, at [p. 14].)

13. Macpherson's Amended Cross-Complaint

“On remand from Stop Oil II, Macpherson filed an amended cross-complaint, including a cause of action for breach of lease based upon the City's application of Proposition E to terminate the oil project.   Macpherson alleged the City breached the lease by failing to deliver the City maintenance yard for the drilling operations and by failing to promptly process permits and proceed in good faith so as not to deprive Macpherson of the benefit of its bargain.

“The City filed an amended answer, alleging 14 affirmative defenses, including seven defenses related to application of Proposition E to the oil project.”   (Windward, supra, at [p. 11].)

14. Windward

After Macpherson filed its amended cross-complaint, the parties each filed motions for summary judgment.   The trial court denied Macpherson's motion and granted the City's motion.   Macpherson appealed.

On August 23, 2005, we decided Windward.   In Windward, the issue was “whether Macpherson may pursue breach of contract remedies against the City based upon the fact that Proposition E abrogated the lease and terminated the oil project.”  (Windward, supra, at [p. 2].)

The City argued that Macpherson's breach of contract cause of action was barred as a matter of law because section 15(a) of the lease required Macpherson to comply with all laws, and Proposition E was a law that prohibited Macpherson from enforcing the lease.   We rejected that argument and held that “Machperson has raised a triable issue of material fact as to which party under the lease agreement, the City or Macpherson, was to bear the risk of a future law like Proposition E.” (Windward, supra, at [p. 3].).  “In this case,” we stated, “we will not determine as a matter of law one way or another that either the City or Macpherson bore the risk of a change in the law based upon Section 15(a) of the Lease or section 15(5) of the CUP. Instead, on this record, extrinsic evidence is necessary to determine the intent of the parties.”  (Windward, supra, at [p. 30].)   We thus reversed the trial court's order granting the City summary judgment.  (Id. at [p. 32].)

15. The Trial Court Grants Macpherson's Motion for Summary Adjudication

On March 3, 2008, the trial court issued an order granting Macpherson's motion for summary adjudication and denying the City's motion for summary judgment.6  The trial court rejected the City's argument that section 15(a) of the lease allocated the risk of a voter initiative like Proposition E to Macpherson.   The court ruled, inter alia, that the City breached the lease by adopting Proposition E and that the City “has the legal duty to pay monetary damages to Macpherson as a result[.]” 7  The City filed a petition for writ of mandate seeking reversal of the trial court's March 3, 2008.   We denied that petition without issuing an opinion on April 30, 2008.8

16. The City's Motion for Summary Judgment or Summary Adjudication Based on Resolution 98-5952 and Section 15(b) of the Lease

On April 14, 2009, the City filed a motion for summary judgment or alternatively, summary adjudication of Macpherson's first cause of action for breach of contract or second cause of action for declaratory relief.   The City argued that Macpherson could not prevail on its causes of action because even if Proposition E was a breach of the contract, Macpherson cannot show that such a breach proximately caused Macpherson's damages.   The passage of Resolution No. 98-5950, the City contended, “precluded City officials from issuing to Macpherson a drilling permit, the procurement of which was a condition precedent to Macpherson's contractual right to drill for oil.”

On July 22, 2009, the trial court denied the City's motion.   The trial court rejected the City's proximate cause argument.

The trial court also stated:  “To the extent that the City is arguing that it did not breach the Lease Agreement under section 15(b) of the Lease and Resolution No. 98-5950, this argument is without merit and cannot be considered by the Court.   First, the City has already moved for summary judgment on the issue of liability on the basis that the City did not breach the Lease Agreement.   The City should have presented this argument during that time.   Moreover the issue framed by City for this motion for summary judgment/adjudication was that [Macpherson] did not suffer any damages.   Where summary adjudication is sought, the notice must specify the specific cause of action, affirmative defense, claims for damages, or issues of duty sought to be adjudicated.  [Citation.]  Since the City moved for summary adjudication as to whether [Macpherson] suffered any damages, only that issue may be considered by the Court.   This Court cannot consider whether the City was justified in denying the necessary drilling permit under Resolution 98-5950.”

17. The City's Petition for Writ of Mandate

The City filed a timely petition for writ of mandate seeking a stay of the trial and an order directing the trial court to grant the City's motion for summary judgment or summary adjudication.   On August 17, 2009, we issued an order staying the trial and requiring the parties to show cause why the relief requested in the petition should or should not be granted.   The parties each filed additional briefs, which we have reviewed and considered.

CONTENTIONS

The City argues that Macpherson cannot establish damages proximately caused by the passage of Proposition E because, even if Proposition E did not pass, Macpherson would not have obtained the drilling and well permits it needed to produce oil in light of the passage of Resolution No. 98-5950.   This issue, the City contends, was not addressed in Stop Oil I, Stop Oil II, or Windward.   The City further argues that its finding that the project would expose the public to unacceptable safety risks is “unassailable” because it was made in a “quasi-judicial” proceeding and because this court in Stop Oil I relied on the same evidence to find that the City had met its burden to show dangers of drilling could not be mitigated and thus the voters' judgment in passing Proposition E was reasonable.

Macpherson argues that the City's motion for summary judgment or summary adjudication was procedurally defective as a motion for reconsideration;  Resolution No. 98-5950 was not passed at a quasi-judicial proceeding and was yet another breach of the lease;  the Oil Code did not create discretionary approval power;  the City has no contract defense because section 15(b) of the lease merely imposed an obligation on Macpherson and was not a condition precedent to the City's performance;  and Macpherson was damaged by the City's breach of the lease.

DISCUSSION

1. Standard of Review

We review a trial court's denial of a motion for summary judgment or summary adjudication de novo.  (Buss v. Superior Court (1997) 16 Cal.4th 35, 60.)   A motion for summary judgment or summary adjudication must be denied if there is a triable issue of material fact.  (Code Civ. Proc., § 437c, subds. (c), (g).)

“On appeal from a summary judgment, the reviewing court is not bound by the trial court's construction of a contract where that construction was not based on the credibility of conflicting extrinsic evidence as to which the trial court was in a better position to form a judgment.   Thus, where there is no extrinsic evidence, where the extrinsic evidence is not conflicting or where the conflicting evidence is of a written nature only, the reviewing court is not bound by the rulings of the trial court but rather must make an independent interpretation of the written contract.”  (Milazo v. Gulf Ins. Co. (1990) 224 Cal.App.3d 1528, 1534.)

2. Obtaining Drilling and Well Permits Was a Condition Precedent to the City's Performance

Macpherson argues that its obligation under section 15(b) of the lease to apply for and obtain drilling and well permits was merely a covenant and not a condition precedent.   We disagree.   The obligation was both a covenant and a condition precedent for the City's performance.

“A covenant is a promise to render some performance.”  (1 Witkin, Summary of Cal. Law (10th ed.   2005) Contracts, § 778, p. 867 (Witkin).)  “A condition precedent is an act that must be performed or an uncertain event that must happen before the promisor's duty of performance arises.”  (Id. at § 776, p. 866;  see also Civ.Code, § 1436.)   A condition precedent, like a covenant, may be express or implied.  (Witkin, supra, § 777 at p. 867.)

An obligation under a lease, whether express or implied, can be both a covenant and a condition precedent.  (See Witkin, supra, § 778, p. 868.)   For example, in Acme Oil and Mining Co. v. Williams (1903) 140 Cal. 681 (Acme Oil ), a lessor leased lands to a lessee for the purpose of oil and gas production.   The only consideration the lessor received was prospective oil and gas royalties from the lessee.  (Id. at p. 684.)   When the lessee abandoned the premises, the lessor declared the leased forfeited.  (Id. at pp. 683-684.)   Our Supreme Court held that under the lease the lessee had an implied covenant to diligently produce oil from the property.  (Id. at p. 684.)   The court also upheld the forfeiture because the lessee's production of oil and gas was an implied condition precedent to the lessor's performance under the lease.  (Id. at p. 686.)

Similarly, in Russell v. Johns Manville Co. (1971) 20 Cal.App.3d 405 (Russell ), the lessors entered into a mining lease with the lessee.   The lease did not require the lessees to pay rent but instead provided for the payment of royalties to the lessors.  (Id. at p. 408.)   Although the lease did not expressly obligate the lessee to engage in mining activities, the court implied a covenant on the part of the lessee to proceed with mining operations with reasonable diligence.  (Id. at p. 410.)   This implied covenant was also a condition precedent to the lessor's performance, the nonoccurrence of which allowed the lessor to declare the lease forfeited.  (Id. at pp. 410-413.)

Likewise, in this case, Macpherson was not obligated under the lease to pay the City rent.   Instead, Macpherson was obligated to pay the City royalty payments based on the production of oil from the City's property.  (Lease, § 3.) Although Macpherson was obligated to pay the City a minimum annual royalty payment, that obligation commenced “at the beginning of the fourth (4th) anniversary of the date of the completion of the first well drilled from the Drill Site․”  (Lease, § (2)(b)(1).)   Hence, unless Macpherson obtained the necessary drilling and well permits in compliance with section 15(b) of the lease and began oil production, the City received no consideration.   Accordingly, under Acme Oil and Russell, Macpherson obtaining drilling and well permits was not merely a covenant;  it was also an implied condition precedent to the City's performance of its obligations under the lease.

3. The City Had Discretionary Power to Deny the Permits

Macpherson argues that the Oil Code did not grant City officials discretionary power to approve or disapprove applications for drilling and well permits because the language upon which the City relies does not appear in the Oil Code. Rather, it appears as an uncodified recital of the ordinance adopting the Oil Code. We disagree.

We interpret the Oil Code de novo (see Bohbot v. Santa Monica Rent Control Bd. (2005) 133 Cal.App.4th 456, 462 (Bohbot )) by the same rules applicable to statutes.  (See Carson Harbor Village, Ltd. v. City of Carson Mobilehome Park Rental Review Bd. (1999) 70 Cal.App.4th 281, 290;  Bohbot, at p. 462.)   Our fundamental task is to ascertain the city council's intent.  (See Smith v. Superior Court (2006) 39 Cal.4th 77, 83 (Smith ).)   The meaning of a provision of a municipal code “ ‘may not be determined from a single word or sentence;  the words must be constructed in context․’  “ (See People v. Shabazz (2006) 38 Cal.4th 55, 67.)   Where reasonably possible, we also avoid any construction that would lead to absurd consequences.  (See Smith, at p. 83.)

“ ‘In considering the purpose of legislation, statements of the intent of the enacting body contained in a preamble, while not conclusive, are entitled to consideration.  [Citations.]  Although such statements in an uncodified section do not confer power, determine rights, or enlarge the scope of a measure, they properly may be utilized as an aid in construing a statute.  [Citations.]’  “ (Carter v. California Dept. of Veterans Affairs (2006) 38 Cal.4th 914, 925.)   The same guiding principles apply to statements made in the uncodified preamble of a municipal ordinance.

Here, the preamble to the ordinance that enacted the Oil Code states that the city council sought to allow oil development “in a manner that protects the health, safety and welfare of the citizens of Hermosa Beach.”   This supports the City's argument that it could deny an applicant a drilling or well permit if the applicant sought to produce oil in a manner that endangered the health or safety of Hermosa Beach residents.

Further, the Oil Code expressly permits the City to revoke a drilling or well permit if the permittee's operations pose a danger to the “lives or safety” of persons.  (Hermosa Beach Mun.Code, § 21A-11.1(D).)  Thus, under Macpherson's view, if an oil company sought to engage in oil production that posed a substantial danger to Hermosa Beach residents, the City could not deny the company drilling and well permits for health or safety concerns, but instead would be required to issue the permits then later revoke them.   We reject this strained reading of the Oil Code. If Macpherson had applied for drilling and well permits, the City could have declined to issue such permits on bona fide health or safety grounds.  (See Stop Oil I, supra, 86 Cal.App.4th at pp.   552-553 [The City “retained considerable discretion whether to approve Macpherson's plans and issue the required permits”].)

The City, however, did not have unfettered discretion to deny Macpherson drilling and well permits.   Macpherson could have challenged the City's decision by filing a petition for a writ of administrative mandate.  (See Selby Realty Co. v. City of San Buenaventura (1973) 10 Cal.3d 110, 123 [proper remedy to challenge denial of building permit is administrative mandamus].)   Because Macpherson did not have vested rights in the project (Stop Oil I, supra, 86 Cal.App.4th at pp. 551-553), the court would have granted Macpherson's petition if the City's findings were not supported by substantial evidence.  (Wences v. City of Los Angeles (2009) 177 Cal.App.4th 305, 313.)

4. Under the Implied Covenant of Good Faith and Fair Dealing, the City Could Not Deny Macpherson Permits Based Solely on Information Known at the Time the Lease was Executed

The City's discretion to deny Macpherson permits would have also been limited by the implied covenant of good faith and fair dealing.  “It has long been recognized in California every contract contains an implied covenant of good faith and fair dealing that ‘ “neither party will do anything which will injure the right of the other to receive the benefits of the agreement.”   ‘ [Citations.]  This covenant is ‘read into contracts “in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purpose.”   ‘ “ (Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107, 1120 (Wolf ).)

The implied covenant cannot vary the express terms of the contract (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 374 (Carma ) or impose duties or limits beyond the express terms.  (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350 (Guz ).)   The parties to a contract “ ‘may, by express provisions of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing․’  “ (Carma, at p. 374.)   The implied covenant “will only be recognized to further the contract's purpose;  it will not be read into a contract to prohibit a party from doing that which is expressly permitted by the agreement itself.”  (Wolf, supra, 162 Cal.App.4th at p. 1120.)

The implied covenant cannot be imposed on a subject that is completely covered by the contract's express terms.  (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 804 (Third Story Music ).)   Thus, to the extent an implied covenant claim “seeks simply to invoke terms to which the parties did agree, it is superfluous.”  (Guz, supra, 24 Cal.4th at p. 352.)

In Third Story Music, the court addressed the following issue:  “When an agreement expressly gives one party absolute discretion over whether or not to perform, when should the implied covenant of good faith and fair dealing be applied to limit its discretion?”  (Third Story Music, supra, 41 Cal.App.4th at p. 804;  Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 473) After reviewing the relevant case law, the court set forth following rule:  “The conclusion to be drawn is that courts are not at liberty to imply a covenant directly at odds with a contract's express grant of discretionary power except in those relatively rare instances when reading the provision literally would, contrary to the parties' clear intention, result in an unenforceable, illusory agreement.   In all other situations, where the contract is unambiguous, the express language is to govern, and ‘[n]o obligation can be implied ․ which would result in the obliteration of a right expressly given under a written contract.’  [Citation.]”  (Id. at p. 808.)

In the present case, section 15(b) of the lease provided that Macpherson was required to apply for and obtain “all necessary drilling and well permits from the City of Hermosa Beach pursuant to the Hermosa Beach Municipal Code. ” (Italics added.)   Macpherson and the City therefore agreed that the City could exercise its discretion under the Oil Code to grant or deny drilling and well permits, which would be upheld under a substantial evidence standard of review.  (See Stop Oil I, supra, 86 Cal.App.4th at p. 556 [“By its express mandate that Macpherson obtain a drilling permit, the lease thus incorporates this further command that the Macpherson project operate in compliance with then existing law”].)

The lease, however, cannot be interpreted to allow the City to deny drilling and well permits based solely on information that the parties were aware of when the lease was executed.   If the City had such discretion, it could simply change its mind regarding the project even though it had no additional information regarding health and safety risks associated with oil production.   Such discretion would make the lease illusory and unenforceable, contrary to the parties' intention.  (Third Story Music, supra, 41 Cal.App.4th at p. 808.)   Under the implied covenant, the City could only deny Macpherson a drilling permit or a well permit on reasonable and good faith grounds, namely health or safety grounds based on information that was discovered by the City after the lease was executed.9

5. There are Triable Issues of Material Fact as to Whether Macpherson Would Have Obtained Drilling and Well Permits Even if Proposition E Had Not Passed

Macpherson alleges that the City's passage of Proposition E was a breach of the lease.   Macpherson further alleges that if Proposition E had not passed, it would have made millions of dollars in profits from the production of oil from the leased property.   In order to prevail, Macpherson must prove at trial that the City's alleged breach proximately caused its damages.  (Civ.Code, § 3300;  Witkin, supra, § 870, p. 956.)

The City argues that even if Proposition E had not passed, Macpherson would not have been able to obtain drilling and well permits, which were necessary for Macpherson to commence oil production.   Thus, the City contends, Macpherson cannot prove that its alleged breach proximately caused Macpherson's damages.

We hold that there are triable issues of material fact regarding the element of causation.   The trier of fact must determine (1) whether the City would have denied Macpherson drilling and well permits and, if so, (2) whether Macpherson would have obtained a writ of administrative mandate requiring the City to issue such permits, i.e., whether there was substantial evidence based on information discovered after the lease was executed of health and safety risks associated with the project sufficient to deny Macpherson drilling and well permits.

In the event this case is presented to a jury, the jury should be instructed that the City could have denied Macpherson's application for drilling and well permits only if there was substantial evidence based on information discovered after the lease was executed of health and safety risks associated with the project.   If the jury is given a special verdict, it should be asked questions that are generally consistent with the following:

Question 1:  If Proposition E did not pass, and if Macpherson applied for drilling and well permits, would the City have denied such permits?

Question 2:  If so, was there substantial evidence to support the City's denial of Macpherson's applications for such permits based on information discovered after the lease was executed of health and safety risks associated with the project? 10

6. Resolution 98-5950 Did Not Conclusively Determine Whether Macpherson Would Have Obtained Drilling and Well Permits

The City argues that there were no triable issues of material fact regarding causation because Resolution No. 98-5950 would have precluded City officials from issuing drilling and well permits if, in the absence of Proposition E, Macpherson had applied for them.   However, the City does not explain why under the Hermosa Beach Municipal Code the resolution precluded the building and safety director and the planning director from issuing drilling and well permits, or provide any citations to authority to support its argument.

Assuming without deciding the City council could pass a resolution that prohibited the issuance of a drilling or well permit, Resolution No. 98-5950 was not such a resolution.   Resolution No. 98-5950 was passed on the basis of the testimony given at the meeting held on September 17, 1998.   Contrary to the City's contention, that meeting was not a quasi-judicial proceeding that must be given deference by the courts.

“Quasi-judicial power is defined as ‘[a]n administrative agency's power to adjudicate the rights of those who appear before it.’  “ (People ex rel. Lockyer v. Sun Pacific Farming Co. (2000) 77 Cal.App.4th 619, 636.)   Thus a hearing held by a local public entity to determine whether to grant a permit is a quasi-judicial proceeding.  (See City of Fairfield v. Superior Court (1975) 14 Cal.3d 768, 773, fn. 1 [the denial of an application for a development permit by the city council was a quasi-judicial act].)

Here, the meeting held on September 17, 1998, was held for the purpose of receiving a report by Dr. Bercha;  it had nothing to do with issuing drilling or well permits to Macpherson.   Indeed, there was no discussion of drilling and well permits at the meeting because Macpherson had not applied for such permits and had no intention of doing so in light of Proposition E. The meeting therefore was not a quasi-judicial proceeding which adjudicated whether Macpherson had a right to obtain drilling or well permits.11

Accordingly, Resolution 98-5950 did not conclusively determine whether Macpherson would have obtained drilling and well permits.   Rather, as we have explained, there are triable issues of material fact relating to whether Macpherson would have obtained such permits.

DISPOSITION

The petition is denied and the stay of the trial in the superior court is vacated.   Each party shall bear its own costs related to the petition.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

We concur:

FOOTNOTES

FN1. The plaintiffs were a group of environmental organizations, including Hermosa Beach Stop Oil Coalition, collectively referred to as “Stop Oil.” (Stop Oil I, supra, 86 Cal.App.4th at p. 540.).  FN1. The plaintiffs were a group of environmental organizations, including Hermosa Beach Stop Oil Coalition, collectively referred to as “Stop Oil.” (Stop Oil I, supra, 86 Cal.App.4th at p. 540.)

FN2. The Little Report stated that the “risk associated with the proposed project falls mainly in the ‘Grey Region’ which is classified as a significant impact ‘ ․ but acceptable if mitigated to the maximum extent feasible, preferably to a level of insignificance․’  A review of the safety features that are included in the project's design, as well as additional commitments made by the applicant for additional safety features, would indicate that the proposed project incorporates safety mitigation measures to the maximum extent feasible.   However, potential fire and explosion hazards associated with the project, especially given the location in close proximity to residential areas, would still be classified as a significant impact based on the generally accepted risk criteria used by the applicant.   As a result, the detailed hazard and operability study recommended in this report may be able to identity additional design and operational hazards that could lead to the need for additional safety features or design/operational modifications.”.  FN2. The Little Report stated that the “risk associated with the proposed project falls mainly in the ‘Grey Region’ which is classified as a significant impact ‘ ․ but acceptable if mitigated to the maximum extent feasible, preferably to a level of insignificance․’  A review of the safety features that are included in the project's design, as well as additional commitments made by the applicant for additional safety features, would indicate that the proposed project incorporates safety mitigation measures to the maximum extent feasible.   However, potential fire and explosion hazards associated with the project, especially given the location in close proximity to residential areas, would still be classified as a significant impact based on the generally accepted risk criteria used by the applicant.   As a result, the detailed hazard and operability study recommended in this report may be able to identity additional design and operational hazards that could lead to the need for additional safety features or design/operational modifications.”

FN3. The header of the document states “Hermosa Beach Project Integrated Risk Analysis ․ P9804-Final Report.”   The footer of the document apparently refers to different dates, including “28/8/98,” “27/8/98,” and “31/8/98.”   Resolution 98-5950 does not refer to an “Aspen/Bercha Report.”   Rather, the resolution refers to an Aspen report dated April 2, 1998, “prepared in large part by its subcontractor, system safety expert Dr. Frank Bercha (‘the Aspen Report’)” and a “final draft of the comprehensive safety evaluation prepared by The Aspen Environmental Group/Bercha Internationa, Inc. (‘the Bercha report’) ․ submitted to the City on August 28, 1998.”.  FN3. The header of the document states “Hermosa Beach Project Integrated Risk Analysis ․ P9804-Final Report.”   The footer of the document apparently refers to different dates, including “28/8/98,” “27/8/98,” and “31/8/98.”   Resolution 98-5950 does not refer to an “Aspen/Bercha Report.”   Rather, the resolution refers to an Aspen report dated April 2, 1998, “prepared in large part by its subcontractor, system safety expert Dr. Frank Bercha (‘the Aspen Report’)” and a “final draft of the comprehensive safety evaluation prepared by The Aspen Environmental Group/Bercha Internationa, Inc. (‘the Bercha report’) ․ submitted to the City on August 28, 1998.”

FN4. The following exchange occurred:  “COUNCIL MEMBER EDGERTON:  [¶] ․ [¶] You said that the methane vapor cloud poses one of the biggest risks;  is that correct?  [¶] DR. BERCHA:  Well, it poses the biggest risk associated with the project.  [¶] COUNCIL MEMBER EDGERTON:  Is that risk substantial or not?  [¶] DR. BERCHA:  Again I don't have a definition of ‘substantial.’   It's not a term I use.  [¶] MAYOR OAKES:  Is it in the gray zone?  [¶] DR. BERCHA:  It's in the gray zone.  [¶] ․ [¶] COUNCIL MEMBER EDGERTON:  [¶] ․ [¶] [I]s this a substantial risk that we may accept, but in an objective view, it's still substantial?   Yes or no?   Please.  [¶] And that would go with the methane vapor cloud risk that you have outlined and you've got here up the ying-yang with graphs and everything else.  [¶] DR. BERCHA:  Well, I guess from my experience I'd have to say any risks in the gray region are substantial.”.  FN4. The following exchange occurred:  “COUNCIL MEMBER EDGERTON:  [¶] ․ [¶] You said that the methane vapor cloud poses one of the biggest risks;  is that correct?  [¶] DR. BERCHA:  Well, it poses the biggest risk associated with the project.  [¶] COUNCIL MEMBER EDGERTON:  Is that risk substantial or not?  [¶] DR. BERCHA:  Again I don't have a definition of ‘substantial.’   It's not a term I use.  [¶] MAYOR OAKES:  Is it in the gray zone?  [¶] DR. BERCHA:  It's in the gray zone.  [¶] ․ [¶] COUNCIL MEMBER EDGERTON:  [¶] ․ [¶] [I]s this a substantial risk that we may accept, but in an objective view, it's still substantial?   Yes or no?   Please.  [¶] And that would go with the methane vapor cloud risk that you have outlined and you've got here up the ying-yang with graphs and everything else.  [¶] DR. BERCHA:  Well, I guess from my experience I'd have to say any risks in the gray region are substantial.”

FN5. The contract clauses of the United States and California Constitutions prohibit the State of California from passing any law impairing the obligation of contracts.  (U.S. Const., art I, § 10;  Cal. Const., art.   I, § 9.) Although the passage of Proposition E raised a contract clause issue (Stop Oil I, supra, 86 Cal.App.4th at p. 540), the permit requirements of the Oil Code do not.   Unlike Proposition E which was passed after the lease was executed, the Oil Code existed before the lease.   Thus the City and Macpherson knew, at the time they entered into the lease, that Macpherson could not produce oil from the leased property without drilling and well permits.   Indeed, pursuant to section 15(b) of the lease, Macpherson expressly agreed to obtain the drilling and well permits required by the Oil Code..  FN5. The contract clauses of the United States and California Constitutions prohibit the State of California from passing any law impairing the obligation of contracts.  (U.S. Const., art I, § 10;  Cal. Const., art.   I, § 9.) Although the passage of Proposition E raised a contract clause issue (Stop Oil I, supra, 86 Cal.App.4th at p. 540), the permit requirements of the Oil Code do not.   Unlike Proposition E which was passed after the lease was executed, the Oil Code existed before the lease.   Thus the City and Macpherson knew, at the time they entered into the lease, that Macpherson could not produce oil from the leased property without drilling and well permits.   Indeed, pursuant to section 15(b) of the lease, Macpherson expressly agreed to obtain the drilling and well permits required by the Oil Code.

FN6. On our own motion, we take judicial notice of the March 13, 2008, trial court order that was in the record in connection with the City's petition for review, Case No. B206386.  (See Evid.Code, §§ 452, subd. (d), 459, subd. (a).).  FN6. On our own motion, we take judicial notice of the March 13, 2008, trial court order that was in the record in connection with the City's petition for review, Case No. B206386.  (See Evid.Code, §§ 452, subd. (d), 459, subd. (a).)

FN7. The parties stipulated that the trial court could draw inferences from the undisputed evidence.   The trial court ruled that although the City raised a triable issue of material fact as to whether Macpherson's interpretation of the evidence had merit, Macpherson was nevertheless entitled to prevail on the issue of liability in light of the parties' stipulation..  FN7. The parties stipulated that the trial court could draw inferences from the undisputed evidence.   The trial court ruled that although the City raised a triable issue of material fact as to whether Macpherson's interpretation of the evidence had merit, Macpherson was nevertheless entitled to prevail on the issue of liability in light of the parties' stipulation.

FN8. The summary denial of a petition for writ of mandate is not a decision on the merits and does not preclude an appeal of the substantive issues raised by the petition.  (Gammoh v. City of Anaheim (1999) 73 Cal.App.4th 186, 196.).  FN8. The summary denial of a petition for writ of mandate is not a decision on the merits and does not preclude an appeal of the substantive issues raised by the petition.  (Gammoh v. City of Anaheim (1999) 73 Cal.App.4th 186, 196.)

FN9. The City, of course, had the power to deny Macpherson drilling and well permits on bona fide health and safety grounds regardless of the terms of the contract.   However, the City's denial of such permits based solely on information that existed at the time the lease was executed would raise the issue of whether the City breached the lease..  FN9. The City, of course, had the power to deny Macpherson drilling and well permits on bona fide health and safety grounds regardless of the terms of the contract.   However, the City's denial of such permits based solely on information that existed at the time the lease was executed would raise the issue of whether the City breached the lease.

FN10. We do not seek to limit the trial court's discretion in crafting jury instructions and special verdict questions..  FN10. We do not seek to limit the trial court's discretion in crafting jury instructions and special verdict questions.

FN11. Moreover, there are issues as to whether the meeting held on September 17, 1998, complied with the Ralph M. Brown Act, Government Code section 54950 et seq.  (Brown Act).  “The Brown Act requires open public meetings and gives people the right to attend meetings of local legislative bodies, subject to statutory exceptions․  The Brown Act has the objective of facilitating public participation in local government decisions and curbing misuse of the democratic process by secret legislation.”  (Fischer v. Los Angeles Unified School Dist. (1999) 70 Cal.App.4th 87, 95.)A key component of the Brown Act is providing notice to interested parties of the subject matter of meetings of local legislative bodies.   The legislative body must provide the public with at least 72 hours notice of the agenda of a regular meeting and 24 hours notice of the agenda of a special meeting.  (Gov.Code, §§ 54954.2, subd. (a), 54956.)   Except in certain emergency situations not applicable here, no action can be undertaken or considered at a regular or special meeting on any item not appearing in the notice of the meeting.  (Gov.Code, §§ 54954.2, subd. (a), 54956.)In this case, there was evidence that the City council did not advise the public or Macpherson that it would take any action relating to Macpherson at the September 17, 1998, meeting.   According to evidence presented by Macpherson, the City attorney and City manager assured Macpherson that there was not going to be any action taken at the meeting, and that the purpose of the meeting was simply to receive a report from Dr. Bercha..  FN11. Moreover, there are issues as to whether the meeting held on September 17, 1998, complied with the Ralph M. Brown Act, Government Code section 54950 et seq.  (Brown Act).  “The Brown Act requires open public meetings and gives people the right to attend meetings of local legislative bodies, subject to statutory exceptions․  The Brown Act has the objective of facilitating public participation in local government decisions and curbing misuse of the democratic process by secret legislation.”  (Fischer v. Los Angeles Unified School Dist. (1999) 70 Cal.App.4th 87, 95.)A key component of the Brown Act is providing notice to interested parties of the subject matter of meetings of local legislative bodies.   The legislative body must provide the public with at least 72 hours notice of the agenda of a regular meeting and 24 hours notice of the agenda of a special meeting.  (Gov.Code, §§ 54954.2, subd. (a), 54956.)   Except in certain emergency situations not applicable here, no action can be undertaken or considered at a regular or special meeting on any item not appearing in the notice of the meeting.  (Gov.Code, §§ 54954.2, subd. (a), 54956.)In this case, there was evidence that the City council did not advise the public or Macpherson that it would take any action relating to Macpherson at the September 17, 1998, meeting.   According to evidence presented by Macpherson, the City attorney and City manager assured Macpherson that there was not going to be any action taken at the meeting, and that the purpose of the meeting was simply to receive a report from Dr. Bercha.

KLEIN, P. J. CROSKEY, J.

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