Court Opinion

ID: 9926844
Source: CourtListenerOpinion
Date Created: 2024-01-25 19:02:36.710301+00
Date Added: 2024-06-11T09:22:03.776197
License: Public Domain

Filed 1/25/24 Hot Rods v. Northrop Grumman Systems Corp. CA4/3

                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

                IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FOURTH APPELLATE DISTRICT

                                                 DIVISION THREE

 HOT RODS, LLC,

      Plaintiff and Respondent,                                        G062150

           v.                                                          (Super. Ct. No. 30-2009-00118853)

 NORTHROP GRUMMAN SYSTEMS                                              OPINION
 CORPORATION,

      Defendant and Appellant.

                   Appeal from a postjudgment order of the Superior Court of Orange County,
Ann L. Kough, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.) Reversed.
                   Lewis Brisbois Bisgaard & Smith, R. Gaylord Smith, Ernest Slome and
James A. Geocaris for Defendant and Appellant.
                   Horvitz & Levy, David M. Axelrad, John B. Sprangers, Jeremy B. Rosen;
Jackson Tidus, A Law Corporation, Michael L. Tidus and Kathryn M. Casey for Plaintiff
and Respondent.
                                             *               *               *
              In 1995, the predecessors in interest of plaintiff Hot Rods, LLC (Hot Rods)
purchased environmentally compromised property from defendant Northrop Grumman
Systems Corporation (Northrop). The Purchase and Sale Agreement (PSA) obligated
Northrop to, among other things, remediate the property and indemnify Hot Rods against
first and third party claims. The parties have been litigating the extent of those
obligations since 2009, and those disputes were heard by a referee.
              In the latest chapter of the long-running saga, Hot Rods sought an order
requiring Northrop to pay for Hot Rods’ alleged loss of use of the property due to
remediation activities. The referee issued a statement of decision ordering Northrop to
pay approximately $1.4 million in back rent and $32,000 a month in rent going forward
until remediation is complete. The trial court confirmed that order, which Northrop now
challenges.
              We conclude the referee and the court erred. The PSA provides Northrop
with the right to conduct remediation activities without the payment of rent. The
evidence Hot Rods submitted was based on a square foot valuation that was untethered to
any actual damages or losses, the only type of compensation to which Hot Rods is
entitled. Accordingly, we reverse the postjudgment order.

                                              I
                                          FACTS
Prior Appeals
              We have seen this case on numerous prior occasions. The first time, we
affirmed the denial of Northrop’s anti-SLAPP motion. (Hot Rods, LLC v. Northrop
Grumman Systems Corporation (Mar. 8, 2012, G044976) [nonpub. opn.]).) In 2015, we
considered Northrop’s appeal after judgment. (Hot Rods, LLC v. Northrop Grumman
Systems Corp. (2015) 242 Cal.App.4th 1166 (Hot Rods II).) The underlying facts are set
forth in that opinion. In 2018, we affirmed judgment after remand in favor of Hot Rods.

                                              2
(Hot Rods, LLC v. Northrop Grumman Systems Corporation (Dec. 5, 2018, G054432)
[nonpub. opn.] (Hot Rods III).) Additional appeals are pending, including one that is
stayed pending the outcome of this case and the companion case to this appeal, case No.
G061449.
              As we mentioned previously: Simply put, this case involves environmental
contamination of a property in Anaheim that was sold by Northrop to Dan and Kathy
Welden, who assigned their interest to Hot Rods, an LLC owned entirely by the Weldens.
(Hot Rods II, supra, 242 Cal.App.4th at p. 1172.) The trial court, pursuant to a referee’s
recommendation, originally awarded Hot Rods $1,116,450 in damages plus $2,091,130
in attorney fees and costs. (Id. at pp. 1174-1175.) The court also granted Hot Rods’
request for declaratory relief, finding an indemnity clause in the relevant contract covered
both first and third party claims. (Id. at p. 1182.)
              This court affirmed in part and reversed in part. For a number of reasons,
we reversed the bulk of the damage award. The Purchase and Sale Agreement (PSA)
between the parties included a sentence in its integration clause stating: “‘The Parties
further intend that this Agreement constitutes the complete and exclusive statement of its
terms and that no extrinsic evidence whatsoever may be introduced in any judicial
proceedings involving this Agreement.’” (Hot Rods II, supra, 242 Cal.App.4th at pp.
1175-1177.) We concluded the referee erroneously interpreted the PSA between the
parties to permit the introduction of extrinsic evidence at trial. (Ibid.) We found, due to
the absence of this extrinsic evidence and for other reasons, including a lack of
substantial evidence, that only $117,050 of the original damage award could be upheld.
(Id. at p. 1185.) We also affirmed the award of declaratory relief with respect to the
indemnity clause and remanded for further proceedings. (Id. at pp. 1182, 1186.)
              On remand after Hot Rods II, the referee awarded a judgment of $117,050
in damages, $1,344,823.80 in attorney fees, and $258,390 in costs in favor of plaintiff
Hot Rods. The court also ordered declaratory relief regarding future losses, which we

                                               3
will discuss infra. Northrop appealed the attorney fee award, which we ultimately
affirmed. (Hot Rods III, supra, G054432.)

Relevant Background Facts
              As we stated in Hot Rods II, supra, 242 Cal.App.4th at pages 1170-1171:
“For many years, Northrop operated the property at 301 East Orangethorpe Avenue in
Anaheim (the property) for the purpose of manufacturing floor beams for Boeing 747
aircraft. The facility was closed in the mid-1990’s, and in 1994, Northrop retained
Canonie Environmental (Canonie), a consultant, to conduct what was referred to as a
‘Phase I Environmental Assessment’ . . . of the property. . . . Canonie identified 15 areas
of potential concern and recommended further investigation.”
              After a further investigation and second consultant’s report, Northrop
requested the Regional Water Quality Control Board (the Board) close the site. “The
Board requested a work plan to address additional groundwater monitoring wells and
quarterly water sampling. With respect to the soil, the Board indicated that
contamination did not exist in concentrations that would require further cleanup at the
time. If, however, information became available in the future that significant
concentrations of contaminants existed, the Board might take further remedial action.”
(Hot Rods II, supra, 242 Cal.App.4th at p. 1171.)
              “While this series of tests and discussions with the Board was ongoing, in
mid-1995, Northrop began negotiations with Dan Welden to sell the property. . . . [¶]
For Welden, who was looking for a new location for his auto parts reselling business,
buying a property with unremediated contamination was a nonstarter. He did not want to
be responsible for any cleanup costs.” (Hot Rods II, supra, 242 Cal.App.4th at p. 1172.)
The Weldens ultimately purchased the property for $3.5 million in December 1995, under
a PSA that included numerous provisions pertinent to environmental liability and
cleanup. (Ibid.)

                                             4
                                                                                             1
              The total area of the property, which is located in an industrial-zoned area
of Anaheim, is approximately 9.75 acres or 434,712 square feet. A series of buildings
occupy the central portion of the site, and hundreds of parking spaces and a 25 to 35 foot
wide drive aisle occupy the perimeter. The property’s buildings, according to Hot Rods,
have been fully occupied since 2013 primarily by two rent-paying tenants, an auto parts
company owned by Weldon and a church. Those tenants pay an approximate total of
$155,000 per month in base rent.
              At the time Northrop sold the property to the Weldens in 1995, it reserved
the right to use a 10-foot strip of land for a water system to treat deep water
contamination. In 2003, the Board issued a cleanup and abatement order ordering
Northrop to submit a plan to characterize and remediate the groundwater contamination.
The contamination was more extensive than originally believed and included soil as well
as groundwater contamination.
              In 2004, a Northrop consultant submitted a plan at the direction of the
Board, proposing several methods of recovering the contaminants released at the site.
The proposed system was tested, installed and activated in 2008. It has operated on a
continuous basis since 2008/2009. These remediation facilities include 86 wells, piping,
and monitoring equipment, which are primarily located outside the buildings.
Accessibility to this equipment requires a drive aisle, manhole access, a fenced
equipment area, and parking spaces.
              Over time, the rate of recovery of contaminants has slowed as the
concentration has decreased. To put it mildly, this work is highly technical. Various
issues have slowed down remediation, and government agencies have intervened and
instructed Northrop to revise its plans. In 2020, the property was designated part of a

1
 Over 97 percent of the property is zoned industrial; approximately 2.69 percent is zoned
as transitional. According to Hot Rods’ appraisers, “the Transition zone has little bearing
on the development potential of the property.”

                                              5
Superfund site by the Environmental Protection Agency (EPA). Much work – which is
Northrop’s responsibility – remains to be done.

The Instant Litigation
              In November 2020, Hot Rods filed a motion seeking an order for Northrop
to pay $1,847,902 for its loss between February 7, 2013 and September 30, 2020, a time
period not covered by previous orders. Hot Rods’ theory was that Northrop was liable
for its use of approximately 59,000 square feet of the property for remediation activities.
The motion was based, in part, on the language in the amended 2016 judgment, which
stated: “[Northrop] shall be responsible to pay [Hot Rods] for any damage or reasonable
future expense suffered by [Hot Rods] after the close of evidence in this case, February 7,
2013, arising from any Environmental Action(s) or Remediation (as those terms are
defined in the PSA) involving environmental contamination or liability involving the
Subject Property caused by any act or omission of [Northrop], its employees, agents and
contractors, and any property damage (real or personal) arising out of hazardous
materials used, handled, generated, transported, disposed or related by [Northrop] and its
employees, agents and contractors at the Subject Property. This includes, without
limitation, all reasonable future costs, losses, and other reasonable costs and expenses
incurred by [Hot Rods] in connection with the foregoing events including but not limited
to reasonable environmental consulting fees and reasonable attorneys’ fees.”
              Additionally, Hot Rods sought $33,049 per month in rent beginning
October 1, 2020, for Hot Rods’ loss of use of approximately 76,000 square feet of the
property. The rent would terminate when Hot Rods was no longer experiencing an
alleged loss from the ongoing remediation activities. Hot Rods argued such relief was
contemplated by the amended judgment entered on November 26, 2016 (the amended
judgment), which ordered Northrop to pay for future costs and losses incurred by Hot
Rods in connection with contamination or remediation activities.

                                             6
                   Hot Rods’ motion contended that Northrop’s remediation activities, which
had “no end in sight” had prevented it from redeveloping or rehabilitating buildings on
the property. It argued that it was entitled to rent for four areas Northrop used to conduct
remediation activity: the drive aisle around the property comprising 36,167 square feet; a
manhole and access area (21,623 square feet) (eventually increased to 38,862 square feet
due to a new installation); two parking spaces (174 square feet); subterranean piping (252
               2
square feet); a fenced equipment area (753 square feet); an electric transformer area (232
square feet); and an electric pole used for remediation (4 square feet). Only these four
latter areas were alleged to be for Northrop’s exclusive use, comprising 989 square feet.
                   According to Hot Rods, Northrop’s remediation activities were
accompanied by a persistent presence on the site that sometimes blocked part of the drive
aisle. The monitoring activity also limited certain uses of the property, such as bolting
into the walls or floors, without the consent of the Board and Northrop. In support of its
motion, Hot Rods included an appraisal by its consultant, Integra Realty Resources
(Integra), providing measurements, rent assessments, and other details.
                   Northrop argued that providing access to the property to perform the work,
without requiring payment or limiting the space needed, was contemplated by the PSA.
It also argued that Hot Rods’ claim was barred by collateral estoppel and the statute of
limitations. Northrop contended that Hot Rods could not recover under theories of
trespass or unjust enrichment, and further, the purported loss was not akin to a temporary
construction easement, as Hot Rods contended. Even if the use should be interpreted that
way, the amounts Hot Rods sought were not supported.
                   In April 2021, the previous referee, Justice Wallin (ret.), recused himself
from the case for personal reasons. A new referee was eventually appointed.

2
    This is the only area inside a building for which Hot Rods seeks rent.

                                                  7
              The new referee found “that Justice Wallin previously determined that Hot
Rods is entitled to compensation for loss of use of a portion of the Property, providing in
the Statement of Decision that any future damages Hot Rods suffers for environmental
contamination or remediation related to Northrop’s activities on the Property remain
Northrop’s responsibility. Justice Wallin rejected Northrop’s argument that it was
entitled under the PSA to have access to, and use, any portion of the Property necessary
for its remediation efforts without compensation to Hot Rods. While the Court of Appeal
reversed Justice’s Wallin’s award of $1,000,000 in such loss of use damages, it did so
based upon the lack of evidence supporting that amount (or any amount). The Court did
not reverse Justice’s Wallin’s determination that damages for loss of use were
recoverable.” The referee also rejected Northrop’s claims that the statute of limitations or
collateral estoppel applied, because Northrop’s liability had previously been determined:
“[A]ll Hot Rods is seeking is damages which had not yet been incurred at the time of the
trial in this matter.” Because the amended judgment “ruled on the issue of damages
under the PSA for loss of use” the referee did not reach the issues of unjust enrichment or
trespass.
              The referee found the fair market rental value was an appropriate measure
of damages because the remediation was far more extensive than what was contemplated
by the PSA. Hot Rods was also prevented from reconfiguring or redeveloping the
property. Accordingly, the referee found rental value “an appropriate methodology for
determining the value of a temporary construction easement.” The referee concluded the
back rent owed was $1,403,370 and “that the appropriate monthly rent from October 1,
2020 until remediation” was complete was $32,057, subject to future review every five
years. Northrop now appeals.

                                             8
                                              II
                                       DISCUSSION
Impact of Documents, Orders, and Decisions
              At the outset, we must define the universe of information that will be used
to decide this dispute. Obviously, the PSA is still in effect, and we interpret the PSA
according to typical principles of contract law. Second, the amended judgment dated
November 29, 2016, includes declaratory relief which remains in effect. Third, our prior
published opinion in Hot Rods II, supra, 242 Cal.App.4th 1166, is law of the case for any
issues addressed therein.
              We are not, however, bound by Justice Wallin’s findings or reasoning in his
statement of decision, which was issued before our opinion in Hot Rods II. The
statement of decision is separate from the judgment.
              It is critical to understand the scope of declaratory relief afforded by the
amended judgment. “[Northrop] shall be responsible to pay [Hot Rods] for any damage
or reasonable future expense suffered by [Hot Rods] after the close of evidence in this
case, February 7, 2013, arising from any Environmental Action(s) and/or Remediation (as
those terms are defined in the PSA) involving environmental contamination or liability
involving the Subject Property caused by any act or omission of [Northrop] . . . , and any
property damage (real or personal) arising out of hazardous materials used, handled,
generated, transported, disposed or related by [Northrop] and its employees, agents and
contractors at the Subject Property. This includes, without limitation, all reasonable
future costs, losses, and other reasonable costs and expenses incurred by [Hot Rods], in
connection with the foregoing events including but not limited to reasonable
environmental consulting fees and reasonable attorneys’ fees.” (Italics added.)
              The words “damage,” “future expense,” and “future costs [and] losses” are
key here. We interpret them to mean, in accordance with general principles of contract
law, actually incurred damages. Uncertain and speculative damages are not recoverable.

                                              9
(See Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004)
34 Cal.4th 960, 975.)

Standard of Review
              Legal issues, including the interpretation of contractual language, are
reviewed de novo. (Hot Rods II, supra, 242 Cal.App.4th at p. 1178.) Factual findings
are reviewed for substantial evidence. (Zagami, Inc. v. James A. Crone, Inc. (2008) 160
Cal.App.4th 1083, 1096.)

Res Judicata and Statute of Limitations
              Northrop argues that Hot Rods’ entire claim is barred by either the doctrine
of res judicata, the statute of limitations, or both. We need not belabor this point. Hot
Rods’ motion was brought under the terms and within the scope of the declaratory relief
awarded in the amended judgment, which permitted it to seek compensation “for any
damage or reasonable future expense” arising from remediation. We find its request for
damages here within the scope of the declaratory relief order, and therefore, we find that
neither res judicata nor the statute of limitations apply to its claim.
              We also disagree with Northrop that Justice Wallin’s determination that
damages for loss of use were recoverable was not binding on the current referee. It is
binding because it is part of the declaratory relief portion of the amended judgment.
Despite the fact that this court partially reversed the prior damage award, declaratory
relief allowing such recovery was issued after remand in 2016. It was not the subject of
an appeal. That determination is now final.

The PSA Consented to Access to Conduct Remediation Activities
              The fact that the declaratory relief award permits Hot Rods to recover its
losses as stated therein, however, is the beginning of the inquiry, not the end. As we shall

                                              10
explain, we find the award of damages here was unsupported, based both on the relevant
law and the evidence presented.
              We begin with the PSA. Exhibit F to the PSA set forth remediation
procedures. Among other things, Northrop was required to prepare a draft plan for
remediation and select a contractor. The remedial work was not to “interfere with the
flow of vehicle traffic on the Real Property or the normal operation of Buyer’s business
unless otherwise mandated by a government agency.” Northrop was further required to
provide Hot Rods with information about the contractor, a description of the proposed
scope of work and schedule, quarterly reporting, and other information. Northrop was
required to “use its best efforts to undertake work so as not to interfere with normal
business operations” and Hot Rods was required to provide access “necessary for the
responsible party to perform the Remedial Work.”
              We apply the ordinary principles of contract interpretation to the PSA. As
we noted in Hot Rods II, supra, 242 Cal.App.4th at page 1178, “‘A contract must be so
interpreted as to give effect to the mutual intention of the parties as it existed at the time
of contracting, so far as the same is ascertainable and lawful.’ [Citations.] ‘The language
of a contract is to govern its interpretation, if the language is clear and explicit, and does
not involve an absurdity.’ [Citation.] ‘Where contract language is clear and explicit and
does not lead to absurd results, we ascertain intent from the written terms and go no
further.’”
              We conclude the only reasonable interpretation of Exhibit F is that it
granted Northrop permission to conduct the work necessary to remediate the property,
even if it was beyond the scope of the groundwater cleanup that was originally
contemplated. One provision in Exhibit F states: “Unless otherwise required by a
governmental agency, wells and equipment including, without limitation, any pipes must
be located within a ten-foot wide strip of land along the East, West, or North property
lines at the Real Property.” The Regional Board has required Northrop to conduct

                                              11
remediation beyond this strip of land, but Hot Rods contends it is not required to provide
access to any other part of the property rent free.
              An interpretation of the PSA as anything but providing consent to access
the parts of the property necessary to conduct remediation would lead to an absurd result.
Northrop would be required to pay for the privilege of conducting both necessary and
government-mandated environmental cleanup, regardless of whether remediation
activities caused Hot Rods any actual harm. This was not contemplated by the PSA,
which under its terms treated both parties as sophisticated and stated each had consulted
with professional advisors. The PSA defined “Hazardous Materials” broadly, to include
“any substance, . . . whose nature and/or quantity of, presence, or effect at the Real
Property render it subject to Environmental Laws as being potentially injurious to public
health or the environment.” Further, the term “Hazardous Materials Conditions” is
defined to mean “the presence on, in or under the Real Property of Hazardous Materials
. . . that requires Remediation and/or removal under standards established and required by
applicable Environmental Laws.” The PSA contemplated that environmental remediation
could be more expansive than the parties knew at the time of the PSA’s execution, and
the environmental indemnity provision provided for such contingencies. Northrop made
no “representations or warranties regarding the compliance of the Real Property and
Improvements with Environmental Law.”
              As we noted in Hot Rods II, it was important to Welden at the time the PSA
was negotiated and executed that he not be responsible for any environmental cleanup
costs. (Hot Rods II, supra, 242 Cal.App.4th at p. 1172.) The PSA reflects this with its
carefully drafted indemnity and cleanup provisions. It also follows that to implement
cleanup, Northrup must be given access to any parts of the property where environmental
remediation is required. Accordingly, we interpret the PSA as providing consent for
Northrup to access the property to conduct remediation. No payment for this is
contemplated by the PSA, and therefore none is necessary.

                                             12
Hot Rods is Entitled to Actual Damages Only
              Under the PSA, as interpreted by the amended judgment, Hot Rods is
entitled to damages or reasonable expenses incurred as a result of Northrop’s
environmental remediation activities. If Northrop’s activities result in a building
exploding, for example, Northrop would be liable. If one of Northrop’s trucks knocks
out several electrical poles and nobody can work on the property for the days it takes
power to be restored, Northrop would be liable. But Northrop is not liable for
hypothetical or speculative losses.
              The referee’s award was based almost entirely on the report of Hot Rods’
consultant, an appraisal which assessed “damages” for Northrop’s use of the property for
remediation activities. As we stated above, Hot Rods is not entitled to compensation
under a rent theory, given the consent Hot Rods provided to Northrop to conduct cleanup
activity stated in the PSA.
              The appraisal upon which the referee relied, as we summarized above,
added up the entire square footage that Northrop apparently touched at any point during
remediation, with the exception of the strip of property identified specifically in the PSA.
The appraiser’s calculations specified the largest portion, the drive aisle around the
property which comprised 36,167 square feet, and a manhole and manhole access area,
which comprised 21,623 square feet. However, less than 1,000 square feet of the area for
which Hot Rods sought “rent” was exclusively used by Northrop, Hot Rods’ own
evidence demonstrated that Northrop used the drive aisle and manhole access areas only
intermittently, and Hot Rods submitted no evidence it suffered a financial loss as a result.
              Hot Rods argues that we should treat Northrop’s use of the property as a
temporary construction easement, but the cases it cites deal with exclusive possession of
property. (See, e.g., Property Reserve, Inc. v. Superior Court (2016) 1 Cal.5th 151, 199.)
Because Northrop’s use of the majority of the contested square footage is intermittent, we
find this analogy misguided. Further, Northrop’s use is covered by Hot Rods’ consent for

                                             13
Northrop to conduct remediation activities as stated in the PSA. Accordingly, Hot Rods
is only entitled to actual damages.
              We find no evidence of damages here that would support this award. There
were minor problems, such as improperly bolted manhole covers that “people say”
caused flat tires, with complaints occurring less than once a month. Generally, the
manhole covers can be driven over. There was no evidence that such complaints caused
Hot Rods any direct financial losses. Northrop’s contractors have occasionally blocked
off the entire driveway, but less than once a year. When the contractors blocked a
loading dock, they moved when asked to do so. Again, there is no evidence of specific
financial losses tied to these inconveniences.
              Nor is there evidence of lost rent: the leased buildings on the property have
been occupied since 2013. Welden testified he had no knowledge that either of Hot
Rods’ tenants had avoided using any part of the property due to fear of contamination.
No tenant had even threatened to withhold rent due to remediation activities on the
property.
              In short, we can find no evidence of actual damages or losses incurred by
Hot Rods to justify the referee’s award of past “rent,” and obviously, any future losses
are pure speculation at this point. Accordingly, both must be reversed.
              Hot Rods is entitled only to damages or reasonable expenses incurred as a
result of Northrop’s environmental remediation activities. This opinion does not
foreclose Hot Rods from seeking such damages in the future, but such damages must be
tied to actual, demonstrable losses. As contemporary vernacular might put it, Hot Rods
must show the receipts. While the scope and length of the cleanup to this property is
unfortunate, it was always a possibility, and that possibility was, or should have been,
baked into the sale price the Weldens agreed to pay. Hot Rods cannot claim damages for
speculative losses or opportunity costs it reasonably should have considered at the time it
purchased an environmentally compromised property.

                                             14
                                         III
                                  DISPOSITION
           The postjudgment order is reversed. Northrop is entitled to its costs on
appeal.

                                               MOORE, J.

WE CONCUR:

O’LEARY, P. J.

GOODING, J.

                                         15