Duration of lease and call and put options

A put option (sometimes simply called a “put”) is a financial contract between two parties, the seller (writer) and the buyer of the option. The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.

Note that the writer of the option is agreeing to buy the underlying asset if the buyer exercises the option. In exchange for having this option, the buyer pays the writer (seller) a fee (the premium). (Note: Although option writers are frequently referred to as sellers, because they initially sell the option that they create, thus taking a short position in the option, they are not the only sellers. An option holder can also sell his long position in the option. However, the difference between the two sellers is that the option writer takes on the legal obligation to buy the underlying asset at the strike price, whereas the option holder is merely selling his long position, and is not contractually obligated by the sold option.)

Exact specifications may differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration. An American put option allows exercise at any time during the life of the option.

The most widely-known put option is for stock in a particular company. However, options are traded on many other assets: financial – such as interest rates – and physical, such as gold or crude oil.

The put buyer either believes it’s likely the price of the underlying asset will fall by the exercise date, or hopes to protect a long position in the asset. The advantage of buying a put over shorting the asset is that the risk is limited to the premium. The put writer does not believe the price of the underlying security is likely to fall. The writer sells the put to collect the premium. Puts can also be used to limit portfolio risk, and may be part of an option spread.

Federal District Court Opinions (Court Case)

FIRST NATIONAL MORTGAGE CO. v. FEDERAL REALTY INV. TR.,
(N.D.Cal. 8-3-2006) FIRST NATIONAL MORTGAGE COMPANY, a
California corporation, Plaintiff, v. FEDERAL REALTY
INVESTMENT TRUST, Defendant. No. C-03-02013 RMW. United
States District Court, N.D. California, San Jose Division.
August 3, 2006

ORDER ON MOTIONS IN LIMINE[fn1]

[fn1] This Order on Motions In Limine was distributed to
the parties, without this footnote, prior to the
commencement of trial but was not filed at the time. The
Order governed the trial proceedings except to the extent
the record reflects subsequent modifications.

RONALD WHYTE, District Judge

1. FRIT’s Motion for an Order (1) Excluding Evidence and
Argument of Implied Duration of Lease and (2) Excluding
Evidence and Argument of a Special Meaning of the Put and
Call Provisions to Establish a Duration, or Alternatively
Setting a Preliminary Hearing under Rule 104 to Determine
Admissibility of Parol Evidence. [Docket Nos. 256, 261,
353].[fn2]

On August 5, 2003 this court granted FRIT’s motion to
dismiss First National’s breach of contract claim. FRIT
contended that the Final Proposal was not a binding
agreement because it did not contain an essential element:
the lease’s duration. The court noted that it must construe
a Page 2 contract on its face unless the plaintiff
specifically alleges that certain terms have a special
meaning. Because First National did not do so, the court
dismissed its claims, but granted leave to amend:

Federal contends that an essential provision — the
term or duration of the lease — is absent from the
Final Proposal. This argument has merit. The duration of
the lease is not explicitly stated in the Final Proposal.
In its opposition motion National argues that the ten year
“call” and “put” options confirm that the intended term of
the lease was ten years. Yet, National has not alleged in
its complaint that any special meaning or effect was
attached to the “call” and “put” options. Absent a special
meaning or effect the court must interpret the Final
Proposal on its face. Thus, as currently pled, an
essential term of the lease is absent and the Final
Proposal is not binding. However, National has
demonstrated that it may be able to cure this defect by
alleging a special effect of the “call” and “put” options,
i.e. to reflect a ten year lease term. Therefore, the
court grants Federal’s motion to dismiss National’s first
claim with leave to amend.

August 5 Order at 3:3-12.

First National then amended to claim that the put and call
provisions had a special meaning that established a lease
term of ten years. On October 24, 2003 the court denied
FRIT’s motion to dismiss or for summary judgment. FRIT
argued that the statute of frauds barred First National
from introducing parol evidence to prove that the put and
call options had a special meaning that established a ten
year lease term. The court rejected this contention,
reasoning that First National “alleges that the ten-year
term is an express term of the Final Proposal, in light of
the special meaning both parties gave to [the put and call
options].” October 24 Order at 3:22-23. The court then held
that extrinsic evidence was admissible to prove this
meaning. Id. at 4:17-18.

On January 25, 2005, the court denied FRIT’s motion for
summary judgment on First National’s breach of contract
cause of action and granted First National’s motion for
leave to file an amended complaint. Under a heading
entitled “[l]ack of an [e]xpress [l]ease [t]erm, the court
opined that “Federal correctly points out that the Final
Proposal contains no express duration for the ground
lease.” January 25 Order at 7:8-9. Although the court then
appeared to re-frame the issue — referring to the
possibility of the lease’s duration being an “implied term”
rather than a special meaning attached to an express term
— it nevertheless concluded that a triable factual
issue remained on whether the Final Proposal was a valid
contract:

Although the court raised the issue of whether the
meaning of the ten-year “put” and “call” had a “special
effect,” the more appropriate question is whether a
ten-year term can be reasonably implied from the nature
and circumstances of the contract. In Zee Medical
Distributor Association, Inc. v. Zee Medical, Inc., the
court recognized that Page 3 California law calls for a
three step analysis for determining a contract’s duration.
“The court first seeks an express term. If one is absent,
the court determines whether one can be implied from the
nature and circumstances of the contract. If neither an
express nor an implied term can be found, the court will
generally construe the contract as terminable at will.” 80
Cal. App. 4th 1, 10 (2000). Federal presents persuasive
evidence that the parties did not agree on a ten-year
term. However, National asserts that the fact that
National was given a ten-year put option, Federal was
provided a call at the end of ten years, the economic
circumstances at the time of negotiation leading to the
Final Proposal, and the negotiations themselves show that
the parties intended a ten-year term, and further that
such term can be implied from the provisions of the Final
Proposal as a whole, as well as the nature and
circumstances of the contract. The court finds that
National has raised a triable issue of fact as to whether
a ten-year duration can be implied.

January 25 Order at 7:16-8:3. First National then filed a
second amended complaint but did not allege that the Final
Proposal contained an implied duration of ten years.

FRIT argues that the statute of frauds bars First National
from contending that the lease’s duration is an “implied
term.”[fn3] FRIT also notes that First National has never
pled such a claim.[fn4] Alternatively, FRIT contends that
the court’s previous orders foreclose the “special meaning”
theory. According to FRIT, the August 5 Order declared that
“[t]he duration of the lease is not explicitly stated in
the Final Proposal.” August 5 Order at 3:4-5. In addition,
FRIT notes that (1) the January 25 Order explained that
California follows a three-step process for determining a
contract’s duration, the first part of which is to “seek[]
an express term” and the second part of which is to
“determine[] whether one can be implied” (2) and then
proceeded to find that factual issues remained “as to
whether a ten-year duration can be implied.” January 25
Order at 7:20-8:3. FRIT asserts that because the court
skipped to the second step, it must have concluded that
there was no express term. In the event that the court
holds otherwise, FRIT requests a preliminary hearing under
Federal Rule of Evidence 104(a) to consider whether parol
evidence is admissible to give the put and call provisions
a special meaning. For the reasons stated below, the court
denies FRIT’s motion. Page 4

Under the statute of frauds, “[a]n agreement for the
leasing for a longer period than one year” must be in
writing and signed by the party to be charged. Cal. Civ.
Code § 1624(a)(3).[fn5] FRIT argues that the Final
Proposal does not constitute a “writing” sufficient to
satisfy the statute of frauds. FRIT cites two secondary
sources for the proposition that a lease cannot be such a
“writing” unless it clearly sets forth its “essential
elements”:

For a writing to satisfy the Statute of Frauds, it must
be one that:

(a) reasonably identifies the subject matter of the
contract,

(b) is sufficient to indicate that a contract with
respect thereto has been made between the parties or
offered by the signer to the other party, and

(c) states with reasonable certainty the essential
elements of the unperformed promises in the contract.

The authorities generally agree on these three elements.
1 Witkin, Summary of California Law, Contracts, §
353, p. 399 (10th ed. 2005).

* * *

In discussing the requirements to create a lease, the
leading treatise on California Real Property law amplifies
that the writing must contain all of the essential
elements:

* * *

The memorandum of the agreement to lease must contain,
clearly and unambiguously, all of the essential elements
of the future lease. If it omits essential terms, it is
merely an unenforceable agreement to agree. 7 Miller &
Starr, California Real Estate, Landlord and Tenant,
§ 19.14, at p. 52 (2001).

Mot. Lim. at 8:22-9:6 (emphasis added). FRIT contends that
Levin v. Saroff, 54 Cal. App. 285 (1921) reveals that a
lease’s duration is an “essential term.” In Levin, the
California court of appeal remarked that “[t]o create a
valid lease, but few points of mutual agreement are
necessary: First, there must be a definite agreement as to
the extent and boundary of the property leased; second, a
definite and agreed term; and, third, a definite and agreed
price of rental, and the time and manner of payment. These
appear to be the only essentials.” Id. at 289 (emphasis
added). FRIT then argues that the statute of frauds
precludes First National from offering parol evidence to
imply a “necessary but omitted term”:

There is, of course, a big difference between resorting
to parol evidence to resolve an ambiguity in an agreement,
on the one hand, and the implication of a “necessary Page
5 missing term,” on the other. In the former situation,
the provision is in the agreement; in the latter
situation, it is not. []. Thus, since there is no
term or duration in the Final Proposal, implication of
such a term would not satisfy the Statute of Frauds.

* * *

The missing essential element of duration cannot be
supplied by parol evidence. Although parol evidence can be
used to clarify an ambiguity in a term of an agreement, it
cannot supply a missing essential term where the Statute
of Frauds applies.

Mot. Lim. at 10:16-11:22.

FRIT is correct that this distinction — whether the
lease duration in the Final Proposal is “ambiguous” or a
whether it is a “necessary missing term” — is key.
If it is the former, First National may introduce parol
evidence to show that the put and call provisions give the
lease a ten year term. If it is the latter, the statute of
frauds prevents First National from doing so and the Final
Proposal cannot be a valid contract. Compare Riley v. Bear
Creek Planning Committee, 17 Cal. 3d 500, 509 (1976),
overruled on other grounds in Citizens for Covenant
Compliance v. Anderson, 12 Cal. 4th 345, 366 n. 6 (1995)
(“Every material term of an agreement within the statute of
frauds must be reduced to writing. No essential element of
a writing so required can be supplied by parol evidence.”)
with In re Marriage of Benson, 36 Cal. 4th 1096, 1108
(2005) (“Since the statute of frauds primarily serves to
prove that a contract exists, the writing need only mention
certain `essential’ or `meaningful’ terms. Ambiguities can
be resolved by extrinsic evidence, which serves as a
reliable indicator of the parties’ intent in commercial or
other arms’ length transactions.”).

Courts have construed contracts that do not contain
important terms as “ambiguous” when the surrounding
circumstances obviate the need to spell them out. For
example, in Hillman v. Koch, 92 Cal. App. 2d 163 (1949),
real estate brokers sold the defendant’s property. The
sales contract had a blank space where the amount of the
brokers’ commission should have appeared. Above this space
someone had written “22,500 net.” Id. at 165. The brokers
argued that this meant that the defendant agreed to accept
$22,500 for his property and that the brokers could keep
any amount in excess. Even though the contract contained no
statement to that effect, the court reasoned the parties
must have so intended:

The essentials of a complete agreement were stated: the
parties were named, the insertion of the net selling price
and the provision that the brokers would pay part of Page
6 the expense clearly indicated that a commission would
be paid, and the amount of the commission appeared on the
face of the instrument.

* * *

The statute [of frauds] requires only that a note or
memorandum of the agreement be subscribed by the party to
be charged. While an essential element of the agreement
may not be supplied by parol, the usual rules of
interpretation are to be applied and the agreement will
not be held deficient for the failure to express that
which is clearly implied when the writing is interpreted
in accordance with the intentions of the parties.

Id. at 168 (emphasis added).

Likewise, in In re Marriage of McGhee, 131 Cal. App. 3d
408 (1982), a former husband and wife agreed to divide his
military retirement benefits as part of their divorce
settlement. The wife remarried. The husband argued that
California Civil Code section 4801(b), which requires
contracts to continue spousal support after remarriage to
be in writing, mandated that the wife’s receipt of benefits
cease. The court disagreed, noting that the purpose of the
agreement was clear:

Statutes which require a writing to make enforceable an
agreement between parties, often referred to generically
as statutes of frauds, fulfill an important function in
sanctifying agreements and facilitating their proof.
Nevertheless, such statutes have not been broadly
interpreted by California courts because of the inequities
which necessarily attend their enforcement. Although the
agreement must be in writing, the writing need only
describe the terms of the agreement with “reasonable
certainty.” Moreover, the agreement will not be held
deficient for the failure to express that which is clearly
implied when the writing is interpreted in accordance with
the intentions of the parties.

* * *

In the instant case, the purpose of the parties in
providing for alternative spousal support payments is
evident. Serving as a substitute for unpaid property
division payments, Darrell’s and Marion’s intent that the
spousal support continue notwithstanding Marion’s
remarriage is “clearly implied” in the words of the
interlocutory decree. By the very nature of their
bargain-an agreed-upon security device to assure continued
performance of an order extending until the death of the
military retiree-remarriage could not have been intended
to terminate that support. We recognize that explicit
exposition of the parties’ intent is missing from the
interlocutory decree. Under most circumstances,
implication of intent would be impossible. But the purpose
and structure of this agreement makes it the unusual
situation.

McGhee, 131 Cal. App. 3d at 414-15 (emphasis added).

Conversely, courts have struck down contracts for lacking
“necessary” terms when nothing in the agreement supports
the urged construction. For instance, Ellis v. Klaff, 96
Cal. App. 2d 471 (1950) involved a lease that stated that
“[t]he lessee agrees to improve said premises by the
construction of a building or buildings as soon as building
conditions reasonably shall permit.” Id. at 473. The lessor
sought to introduce parol evidence that this clause
required the lessee “to Page 7 construct either a brick or
concrete-block building with glass front and service
garage, suitable for an automobile salesroom and repair
shop, and costing approximately $12,000.” Id. The court
held that the lessor could not do so, reasoning that the
contract did not suggest that the parties had agreed on
such minutiae:

The construction clause in the lease, as written,
however, is too vague and uncertain to give rise to a
contractual duty. Aside from the requirement that the
“building or buildings” comply with the city building
code, and the implication that it (or they) be
sufficiently substantial to be a valuable asset after
expiration of the term, the lease is manifestly incomplete
in failing to specify whether the lessee was to construct
one or more buildings and is wholly silent as to the size,
type, materials, location, cost, appearance, or any other
details of construction. . . . This was an attempt, not
to resolve an ambiguity, but to supply essentials of a
complete agreement which were lacking in the writing.

Id. at 478-80 (emphasis added).

Similarly, in Franklin v. Hansen, 59 Cal. 2d 570 (1963)
the defendant orally agreed to let the plaintiff try to
find a buyer for his house. When the plaintiff succeeded,
the defendant sent a telegram “confirm[ing] that I will
sell 608 South Bay Front Balboa Island for 100,000 cash
this offer good until noon 1-19-60.” Id. at 571-72. The
plaintiff claimed that the defendant had agreed to pay him
$5000 for his efforts. Because the telegram said nothing
whatsoever about a commission, the court rejected the
plaintiff’s attempt to introduce parol evidence that he was
entitled to one:

The telegram in the instant case fails to use any words
in recognition of a contractual obligation for a
commission. . . . There are no ambiguities to be resolved
or references to extrinsic materials which would aid in
ascertaining a meaning not made definite on the face of
the document. True, the writer purports to “confirm,” but
he also states in definite and certain language that which
he confirms. The meaning of the telegram is clear and
definite-it requires no aid in its interpretation, and it
does not imply, infer or suggest a commission agreement.
It is only by resort to extrinsic matters not suggested by
the writing that it is possible to determine with any
justification that defendant had agreed to compensate
plaintiff for his services. This is not sufficient under
the established law.

Id. at 574-75 (emphasis added).

The court holds that the lease duration in the Final
Proposal is “ambiguous” and not a “necessary missing term.”
Admittedly, unlike Hillman and McGhee, where common sense
illuminated that the parties intended a certain result
despite the fact that they did not include express
contractual language to that effect, it is less clear that
First National and FRIT agreed on a ten year term.
Nevertheless, the Final Proposal provides some support for
this position. The fact that it contains both a ten year
put and a ten year call raises a triable issue as to
whether the parties Page 8 intended that, one way or
another, FRIT would purchase the property — thus
terminating the lease — within ten years. As the
California Supreme Court has opined, a contract is binding
if it “demonstrate[s] the existence of a contractual intent
on the part of the one to be charged, and extrinsic
evidence [i]s necessary only to define the limits thereof.”
Franklin, 59 Cal. 2d at 573 (emphasis added). Because the
Final Proposal expressly includes every essential element
of a valid agreement except the lease’s duration, it
arguably manifests the parties’ desire to be bound;
extrinsic evidence then “define[s]” the temporal “limits”
of this agreement. Unlike the lessor in Ellis, who tried to
show that the parties understood the words “building or
buildings” to have an extraordinarily specific meaning, or
the broker in Franklin, who argued that a one-sentence
authorization to sell implicitly granted him a $5000
commission, First National’s interpretation of the Final
Proposal has a foothold in the contract’s text. As FRIT’s
own authority states, a writing can satisfy the statute of
frauds even if it only describes the essential elements
with “reasonable certainty.” Witkin, Summary of California
Law, Contracts, § 353, p. 399. Although Miller &
Star describes a higher standard, it cites inapposite cases
for support. Compare Miller & Starr, California Real
Estate, Landlord and Tenant, § 19.14, at p. 51
(citing Birdsong v. Welch, 181 Cal. App. 2d 749 (1960),
Store Properties v. Neal, 72 Cal. App. 2d 112 (1945), and
Levin, 54 Cal. App. at 291 for the proposition that “the
agreement to lease must contain, clearly and unambiguously,
all of the essential elements”) with Birdsong, 181 Cal.
App. 2d at 751 (agreement not binding when it stated that
“the parties . . . will forthwith proceed to arrive at a
definite understanding on the points which are left open”);
Store Properties, 72 Cal. App. 2d at 117 (agreement not
binding when it stated that “if a lease upon the above
terms and conditions has not been executed within 30 days
from date hereof, both parties reserve the right at anytime
thereafter, but prior to the execution of such a lease, to
terminate this offer”); Levin, 54 Cal. App. at 291 (holding
that lease was binding despite the fact that it “does not
Page 9 specify the city and state in which the property is
located”).[fn6] In fact, no case of which this court is
aware has ever invalidated a lease for failing to contain
a duration.[fn7]

Moreover, FRIT’s challenge to the January 25 Order and the
notion that the Final Proposal contains an “implied”
duration rests on a rigid interpretation of the statute of
frauds — an approach that is falling from favor. See
4 Corbin on Contracts (Rev. ed. 1997) § 22.2, p. 709
(“[t]he latter half of this century has seen a discernable
trend toward a less mechanical application of the statute
of frauds, favoring the admission of extrinsic evidence
wherever its exclusion is not necessary to preserve the
statute’s essential purposes”); 10 Williston on Contracts
(4th ed. 1999) § 29:4, p. 438 (“if after a
consideration of the surrounding circumstances, the
pertinent facts and all the evidence in a particular case,
the court concludes that enforcement of the agreement will
not subject the defendant to fraudulent claims, the purpose
of the Statute will best be served by holding the note or
memorandum sufficient even though it is ambiguous or
incomplete”). A recent California case is instructive. In
House of Prayer v. Evangelic Assoc. for India, 113 Cal.
App. 4th 48 (2003), the court held that the statute of
frauds did not invalidate a contract for the sale of real
property even though it did not contain an “essential
element”: the time of payment. Like FRIT, which cites
several cases that suggest — but do not hold
— that a lease duration is an “essential element,”
the defendant in House of Prayer cited numerous cases that
declared — but did not hold — that “the time
of payment is an essential term of a contract for the sale
of real property.” Id. at 53 (citing O’Donnell v. Latter,
68 Cal. App. 2d 376, 381 (1945); Far v. Wells, 156 Cal.
App. 2d 322, 327-28 (1957); King v. Stanley, 32 Cal.2d 584,
589 (1948); Roller v. California Pacific Title Ins. Co.,
92 Cal. App. 2d 149, 156 (1949)). Just like this court’s
January 25 Order, which relied on Zee and the general
principle that courts may imply a duration into a contract,
House of Prayer applied the basic tenet that courts can
imply a time for performance even when none appears:

[We hold that the time of performance of an act required
for the sale of property subject to the statute of frauds
may be implied.

* * * Page 10

It is often stated . . . that the time of payment is an
essential term of a contract for the sale of real
property. However, in none of these cases was the absence
of a term specifying the time of performance an issue.
Accordingly, the statements are dicta, and secondary
sources relying on such cases are not controlling here.
Accordingly, the trial court did not err in concluding
time of performance was not an essential term of this
agreement based on the agreement and its context. We imply
a reasonable time for performance of the agreement, and
with the implied term, the agreement is enforceable.

Id. at 50, 54-54. Thus, like House of Prayer, this court
rejects a formalistic interpretation of the statute of
frauds. Whether conceptualized as express terms that carry
a special meaning or an implied term of duration, First
National is entitled to argue to the jury that the put and
call provisions establish a ten year lease.[fn8] See
Birdsong, 181 Cal. App. 2d at 752 (“The principal question
to be determined is whether or not the agreement . . . was
a binding agreement or whether or not the parties intended
to be bound only when a formal lease was executed. This is
essentially a question of fact.”) (emphasis added).
Although this meaning is “implied” in the sense that it
imbues words with a significance that they do not have on
their face, it is not “implied” in the manner that the
statute of frauds prohibits: the wholesale importation of
rights and duties without an adequate link to contractual
language.

The court also denies FRIT’s request for a Rule 104
preliminary hearing.[fn9] FRIT contends that the court
should consider parol evidence to determine whether the
Final Proposal is reasonably susceptible to First
National’s proffered construction. A court must
provisionally receive extrinsic evidence that can prove a
meaning to which the language of the contract is
“reasonably susceptible.” Pacific Gas & Elec. Co. v. Thomas
Drag, 69 Cal. 2d 33, 39-40 (1968). If the court finds after
considering this preliminary evidence that the language of
the contract is not susceptible to two plausible readings,
“extrinsic evidence cannot be received for the purpose of
varying the terms of the contract. Brobeck, Phleger &
Harrison v. Telex Corp., 602 F.2d 866, 872 (9th Cir.
1979). Page 11

However, “[where the interpretation of contractual
language turns on a question of the credibility of
conflicting extrinsic evidence, interpretation of the
language is not solely a judicial function. As trier of
fact, it is the jury’s responsibility to resolve any
conflict in the extrinsic evidence properly admitted to
interpret the language of a contract.” More v. Vanuatu, 64
Cal. App. 4th 904, 912 (1998). Here, the January 25 Order
determined that First “National has raised a triable issue
of fact as to whether a ten-year duration can be implied.”
January 25 Order at 8:2-3. Although FRIT asserts that this
finding pertained only to the lease’s “implied duration,”
as discussed above, there is no meaningful distinction
between that theory and a “special meaning” theory. In
addition, First National has offered evidence that the
parties intended the lease to last no longer than ten years
because FRIT intended to demolish the existing building and
construct a parking garage. See, e.g., Dryan Depo. at
43:12-22 (“Everyone knew it was for 10 years, because we
were going to have — everyone knew the building was
going to be demolished. So what would we have ended up with
after 10 years, essentially we would have had . . . half a
parking lot on it.”). Although FRIT has ample evidence to
the contrary, First National’s showing is strong enough to
make the contract reasonably susceptible to the view that
the lease has a ten year duration.

FRIT’s authority in support of its contention that the
Final Proposal is unambiguous is distinguishable. In each
of FRIT’s cited cases, courts either (1) rejected attempts
to introduce parol evidence in support of a interpretation
that contradicted the agreement, see Bionghi v.
Metropolitan Water Dist. of So. Cal., 70 Cal. App. 4th
1358, 1363-64 (1999) (extrinsic evidence not admissible to
prove that contract that “may be terminated . . . 30 days
after notice in writing” required good cause for
termination); Winet v. Price, 4 Cal. App. 4th 1159, 1167
(1992) (extrinsic evidence not admissible to prove that
release of “any and all” claims “whether known or unknown”
only applied to some claims); A. Kemp Fisheries v. Castle &
Cook, Inc., 852 F.2d 493, 496-97 (9th Cir. 1988) (extrinsic
evidence not admissible to prove that charter agreement
that disclaimed “warranties, express or implied, with
respect to the [v]essel” constituted a “warrant[y] [of] the
seaworthiness of the vessel, the condition of the engines,
and the capacity of the freezing system”) or (2) involved
extenuating circumstances not present here, see Tahoe Nat’l
Bank v. Phillips, 4 Cal.3d 11, 16-17 (1971) (extrinsic
evidence proffered by bank not admissible to prove that
contract entitled Page 12 “Assignment of Rents and
Agreement Not to Sell or Encumber Real Property” was a
mortgage because (1) “[i]ts title gives no hint of
foreclosure” and (2) the bank created the agreement using a
“carefully drafted” form). Here, nothing in the Final
Proposal directly contradicts First National’s proffered
reading. The court thus denies FRIT’s motion.

2. FRIT’s Motion to Bar Argument that It Committed Fraud
[Docket No. 357].

FRIT seeks to preclude First National from adding a cause
of action for promissory fraud. FRIT notes that the court
has previously dismissed First National’s fraud claims and
that FRIT’s two chief witnesses on this claim, Guttman and
Hannigan, are no longer with the company and will not
testify live at trial. In response, First National argues
that its promissory fraud claim is different from its
previously-dismissed claims. First National explains that,
depending on the evidence adduced at trial, it may seek
leave to amend its complaint to allege that FRIT entered
into the Final Proposal knowing that it was a binding
contract but with the intent to disavow it if the real
estate market took an unfavorable turn. First National also
contends that FRIT’s motion is premature because First
National has not yet sought leave to amend. The court
denies the motion as premature and questions whether First
National will be able to prove up any promissory fraud
claim that would justify an amendment alleging promissory
fraud.

3. First National’s Motion to Exclude Legal Conclusions of
Richard Burt [Docket No. 373].

The parties signed the Final Proposal on August 25, 2000.
Paragraph 7 states that FRIT will “prepare a legal agreement
for First National’s review to finalize the agreement.”
Burt was First National’s lawyer. On November 15, 2000
Steven Casad, FRIT’s attorney, sent Burt a followup
agreement. On December 8, 2000 Burt wrote back, stating (1)
“Because the draft documents represent a significantly
different deal than the one contemplated, my comments are
limited to important business issues,” (2) FRIT “should
investigate the property fully, and if it decides to go
forward with the ground lease, it should do so on the basis
that it assumes all responsibility for the property during
the term of the ground lease,” (3) “The existing landowner,
D & R Partnership, will be converted to a California LLC
before entering into any contractual relationship with
[FRIT],” and (4) “The term of the ground lease, an
essential element, was never addressed in the letter of
intent. The landlord proposes a 50-year term.” During his
January 27, 2004 deposition, FRIT asked Burt Page 13
about these statements and whether he considered the Final
Proposal to be binding. First National moves to exclude
evidence and argument “regarding the legal conclusions”
Burt stated in the letter and his deposition.

The court denies the motion. None of the statements
involve legal conclusions. First National argues that
“California courts repeatedly have emphasized that the
`objective manifestations’ of intent at the time of
execution are determinative to the issue of contract
formation rather than a party’s secret, and potentially
contrary, subjective intent.” Mot. Lim. at 2:15-18. It is
true that “the undisclosed subjective intent of the parties
is irrelevant to determining the meaning of contractual
language.” Winet, 4 Cal. App. 4th at 1166 n. 3.
Nevertheless, Burt’s views are not “undisclosed”: he
expressed them in a letter. Moreover, “[t]he practical
interpretation of the contract by one party, evidenced by
his words or acts, can be used against him on behalf of the
other party[.]” So. Cal. Edison Co. v. Sup. Ct., 37 Cal.
App. 4th 839, 851 (1995). Here, Burt’s feedback on Casad’s
draft agreement tends to show that First National did not
consider or intend the Final Proposal to be binding after
signing it. Burt’s admissions are not the kind of
after-the-fact, wholly subjective, self-serving claims to
which Winet applies. Instead, they are objective
manifestations of the parties’ shared understanding and
therefore admissible.

4. FRIT’s Motion To Limit Testimony of Gayle Lewis.
[Docket Nos. 257,[fn10] 369].

In the parties’ August 24, 2005 joint pretrial statement,
First National listed Lewis as a witness as to
“[c]ircumstances and communications surrounding the Final
Proposal, as well as actions taken by First National and
conduct in reliance on the Final Proposal.” The court
tentatively denied FRIT’s previous motion in limine to
exclude Lewis’ testimony subject to First National making
her available for a deposition. FRIT deposed her on
February 3, 2006. In the parties’ February 27, 2006 joint
pretrial statement, First National described her testimony
as pertaining to “General background on First National, Hal
Dryan, and Mike Rubenstein; background on First National’s
operations and staff; circumstances and communications
surrounding the Final Proposal, including [FRIT’s]
acceptance, First National’s actions and conduct relating
to the Final Proposal, Page 14 including those in reliance
on it such as seeking new space, staff planning meeting
following the signing of the Final Proposal; and events
surrounding [FRIT’s] repudiation of the Final Proposal.”
FRIT moves to limit her testimony to what First National
listed in its August 24 pretrial statement.

The court grants in part and denies in part FRIT’s motion.
On the one hand, First National’s August 24 statement does
not cover “[g]eneral background on First National, Hal
Dryan, and Mike Rubenstein [and] background on First
National’s operations and staff.” Nor is there any
indication that FRIT deposed Lewis on these issues. The
court excludes this testimony. However, because First
National phrased its August 24 pretrial statement so
generally, FRIT overstates the extent to which First
National’s February 27 pretrial statement expands the scope
of Lewis’ testimony.

Indeed, the August 24 statement appears to cover all of the
other topics in the February 27 statement. In addition,
FRIT deposed Lewis on these topics. See Lewis Depo. at
30-38, 43-44. Lewis may testify about them so long as she
does not exceed the scope of her deposition.

5. FRIT’S Motion to Bar Evidence of Conclusions of Fact.
[Docket No. 367].

FRIT claims that First National’s “principals have shown a
propensity to testify to conclusions, such as `Guttman
understood. . . .'” Mot. Lim. at 3:2-3. FRIT argues that
such testimony is “a conclusion and lacks the foundation of
personal knowledge” because “one person cannot read
another’s minds.” Id. at 3:4-5. The court denies FRIT’s
motion without prejudice. Although First National’s
principals likely cannot testify as to what FRIT’s
principals “understood,” and although the court will likely
sustain any objection to such testimony, FRIT does not
single out any particular proposed testimony to which it
objects. Rather than rule in a vacuum, the court will
consider individualized objections.

6. FRIT’s Motion to Exclude Testimony of Steve Guttman That
It Was His `Feeling’ That the Put or Call Would be
Exercised. [Docket No. 361].

FRIT contends that First National intends to offer
Guttman’s deposition testimony that, at the time he signed
the Final Proposal, he felt that the parties would exercise
the put or call within ten years. FRIT claims that, under
Winet, 4 Cal. App. 4th at 1165 n. 3, Guttman’s subjective
understanding is irrelevant. However, as mentioned above,
Winet does not apply when a party articulates his
understanding of an agreement before contracting. First
National argues that it plans to offer evidence that (1)
the parties “discussed” a ten year lease term and (2) Hal
Dryan spoke with Page 15 Guttman about a ten year lease
before the parties signed the Final Proposal. Although
Guttman’s deposition testimony is not a clear admission
that the parties intended the lease to last ten years, it
is consistent with First National’s theory that the put and
call options establish the boundaries of the lease. In
addition, “[t]he practical interpretation of the contract by
one party, evidenced by his words or acts, can be used
against him on behalf of the other party, even though that
other party had no knowledge of those words or acts[.]” So.
Cal. Edison, 37 Cal. App. 4th at 851. Thus, even if Guttman
did not express this precise “feeling” about the options,
his belief at the time of contracting tends to show that
FRIT was aware of the fact that the lease would likely last
no more than ten years.

7. First National’s Motion to Preclude FRIT’s Newly-Added
Affirmative Defense or Counterclaim that First National Did
Not Negotiate in Good FRITh. [Docket No. 374].

First National notes that in the joint pretrial statement,
FRIT has proposed that whether First National “performed
all of its obligations under the Final Proposal prior to
the alleged anticipatory breach, including the obligation
to negotiate in good FRITh towards a formal agreement” is
an issue for the trial. First National asserts that FRIT
must seek leave of court to add either an affirmative
defense or a counterclaim.

FRIT argues that it does not intend to add an affirmative
defense or a counterclaim, but merely intends to show that
First National cannot prove that it performed all of its
obligations before FRIT’s alleged anticipatory breach. The
Final Proposal states “[FRIT] to prepare a legal agreement
for First National’s review to finalize the agreement” and
“[t]he above terms are hereby accepted by the parties
subject only to approval of the terms and conditions of a
formal agreement.” FRIT claims that under Copeland v.
Baskin Robbins U.S.A., 96 Cal. App. 4th 1251, 1255-63
(2002), the Final Proposal required First National to try
to negotiate the formal documents in good FRITh. According
to FRIT, if First National did not do so, this breach
excused FRIT’s performance before the date of the alleged
repudiation.

This argument lacks merit. Copeland recognized that a
breach of contract cause of action could lie for breach of
an agreement to agree “in an appropriate case.” Id. at
1256. Copeland sought to purchase Baskin Robbins’s ice
cream manufacturing plant and “made clear from the outset
his agreement to purchase the plan was contingent on Baskin
Robbins’s agreeing to purchase the ice Page 16 cream he
manufactured there,” otherwise known as a “co-packing
agreement.” Id. at 1253. The parties signed a contract that
provided that they would eventually negotiate a “separate
co-packing agreement.” Id. at 1254. However, they could not
agree on the numerous outstanding issues with respect to
the co-packing agreement. Id. The court of appeal held
that Copeland could have recovered reliance damages for
breach of this agreement to agree if he had pursued such a
theory. Id. at 1262-64. Copeland stands for the proposition
that “[a] party will be liable only if a failure to reach
ultimate agreement resulted from a breach of that party’s
obligation to negotiate . . . in good FRITh.” Id. at 1257.
Unlike Copeland, where Baskin Robins refused to negotiate
an agreement to agree that was “critical,” “a key to the
deal,” and unambiguously part of the underlying contract,
id. at 1253-54, here the parties vigorously dispute whether
the Final Proposal’s “subject to” clause even constitutes
an agreement to agree. Indeed, the Final Proposal states
that the parties accept its terms “subject only to approval
of the terms and conditions of a formal agreement.” This
clause is reasonably susceptible to the interpretation that
a subsequent formal agreement could supersede the Final
Proposal but need not necessarily do so. Because First
National could not have exhibited bad FRITh by proceeding
under the assumption that the Final Proposal did not
contain an agreement to agree, this is not an “appropriate
case” for recognition of the breach of such an agreement.
The court grants First National’s motion.

8. First National’s Motion (1) to Exclude Opinion Testimony
of Mark Hennigh and (2) to Exclude Testimony of Mark
Hennigh (On Only Remaining Issue of Custom and Practice).
[Docket Nos. 269, 376].[fn11]

First National has filed two motions concerning FRIT’s
proffer of testimony from Mark Hennigh. The first seeks to
exclude Hennigh as a witness. At the pretrial hearing, the
court indicated that Hennigh could opine about custom and
practice in the real estate industry, but could not offer
legal conclusions, such as (1) a reasonable person in the
real estate industry would conclude that the Final Proposal
was not binding, (2) the words “subject to” in the Final
Proposal mean that the Final Proposal was conditioned upon
a subsequent event (approval of a ground lease
incorporating the Final Proposal’s terms), (3) the fact the
put and call provisions expire in ten years Page 17 does
not mean the Final Proposal has a term of ten years, (4)
the absence of a disclaimer that “this is not a binding
contract” does not indicate that the Final Proposal is a
binding contract. However, the court indicated that Hennigh
could testify about custom and practice, such as the
meaning technical terms among real estate practitioners.

FRIT then amended Hennigh’s report. First National’s
second motion argues that FRIT’s attempt to recast
Hennigh’s opinions “in a manner that does not state legal
conclusions” is improper. First National asserts that
because (1) it has already structured its trial strategy
and (2) has not deposed Hennigh, it is too late for FRIT to
alter the substance of his testimony. First National also
claims that a proper foundation has not been laid for the
introduction of custom and practice testimony because it
has not been shown that Guttman and Dryan — who
negotiated the Final Proposal — are members of a
trade that conforms to certain general standards when
drafting leases.

“The words of a contract are to be understood in their
ordinary and popular sense . . ., unless used by the
parties in a technical sense, or unless special meaning is
given to them by usage, in which case the latter must be
followed.” Cal. Civ. Code § 1644. “Technical words
are to be interpreted as usually understood by persons in
the profession or business to which they relate. . . .”
Cal. Civ. Code § 1645. Hennigh, however, does not
appear to be intending to testify to the meaning of terms
but rather to the subjects that are normally covered in a
ground lease. FRIT apparently intends to argue that the
Final Proposal was not intended to be a binding ground
lease because many subjects normally addressed were not
covered. In order for any testimony by Hennigh to be
admissible, some foundation must be established that the
negotiating parties had experience with, or familiarity
with, real estate transactions and thus some knowledge
about terms that are customarily included in ground leases.
If that is established, then testimony by Hennigh
concerning what subjects are customarily included in ground
leases could be relevant, depending on the testimony of the
negotiators, on whether the parties considered the Final
Proposal as a contract between them. However, Hennigh has
no basis for expressing, and is precluded from, stating the
opinion that the absence of a more complete agreement
including particular additional subject matter means there
was no valid contract. See, e.g., Indiana Ins. Co. v.
General Elec. Co., 326 F. Supp. 2d 844, 847 Page 18 (N.D.
Ohio 2004) (“testimony of an expert that constitutes mere
personal belief as to the weight of the evidence invades
the province of the jury”).

The court does not find that testimony from Hennigh, as
permitted, would not be unfair to First National. Hennigh’s
report sufficiently put First National on notice of such
potential testimony (and a lot more which the court will
not allow).

9. First National’s Motion to Exclude Evidence of a Fee
Dispute Between Nicholas Feakins and Hal Dryan. [Docket No.
271].

First National moves to exclude evidence of a fee dispute
between its expert Nicholas Feakins and its CEO, Hal Dryan.
The court grants the motion on relevance grounds unless
FRIT can prove that Feakins substantially changed his
report after the dispute. In that case, the dispute could
be relevant to credibility. Of course, this ruling does not
prohibit FRIT from cross-examining Feakins about other
aspects of his compensation.

10. First National’s Motion to Exclude Evidence that Dryan
Inappropriately Touched Phillips. [Docket Nos. 268, 272].

First National moves to exclude evidence that Dryan
“inappropriately touched” Sandra Phillips, a principal of
New Things West, First National’s former tenant. On April
11, 2001 First National and New Things West signed an
agreement whereby First National terminated New Things
West’s lease early in exchange for First National paying
New Things West $100,000. Rice Decl. Ex. M. On April 11,
2002 First National’s attorney learned that Phillips
claimed that Dryan touched her. On December 18, 2002 First
National and New Things West settled all outstanding lease
issues and Phllips’s claim against Dryan as follows: (1)
New Things West pays First National $1,500, (2) First
National retains New Things West’s security deposit of
$10,000 and (3) a promissory note executed by Phillips
“becomes null and void.” Rice Decl. Ex. L.

Because the Final Proposal provides “First National to be
reimbursed $75,000 to buy out the current lease holder, New
Things West,” FRIT argues that it should not have to pay
this amount if the jury determines that First National paid
New Things West to settle Phillips’s tort claims against
Dryan rather than to terminate the New Things West’s lease.
This argument lacks merit. For one, the contract does not
contain a condition precedent: it does not require FRIT to
pay First National $75,000 provided that First National
must pay New Things West $75,000. Thus, it does not matter
Page 19 for what purpose First National uses the money.
Accordingly, evidence of the incident between Phillips and
Dryan is both irrelevant and severely prejudicial. The
court grants the motion as the evidence is irrelevant and
is prejudicial under Rule 403.

11. First National’s Motion to Preclude Edward Storm’s
Testimony. [Docket No. 274].

First National moves to preclude Edward Storm — a
principal in Hunter Storm, a real estate development
company — from testifying about “acquisition,
development, construction, and leasing in the Silicon
Valley, including development activities involving ground
leases . . . and letters of intent.” Specifically, First
National objects to Storm testifying about (1) preparing
letters of intent for non-parties, (2) why Hunter Storm
uses the language “subject to” in its letters of intent and
whether “subject to” means “conditioned upon” and (3) the
method and timing of Hunter Storm’s due diligence. First
National argues that Storm has not prepared a written
expert report. FRIT asserts that Storm need not prepare
such a report because Fed.R.Civ.P. 26(a)(2)(b) requires
experts “who [are] retained or specially employed to
provide expert testimony in the case” to prepare such
reports, and FRIT has neither retained nor specifically
employed Storm here. Apparently, FRIT contends that because
Hunter Storm engaged in negotiations with First National to
purchase the property, Storm is a “percipient expert
witness” and thus not “retained” or “employed.”

Cases involving “percipient expert witnesses” generally
involve treating physicians. The majority rule is that
“Rule 26(a)(2)(B) reports are not required as a
prerequisite to a treating physician expressing opinions as
to causation, diagnosis, prognosis and extent of disability
where they are based on the treatment.” Sprague v. Liberty
Mut. Ins. Co., 177 F.R.D. 78, 81 (D.N.H. 1998) (collecting
cases). However, it is one thing to permit a doctor to
opine about issues that are normally the province of an
expert — such as causation — based on his
observations of the specific patient and another thing to
permit Storm to testify generally about real estate
practices simply because he once negotiated with First
National. For example, the Advisory Committee notes
contemplate an exception for “the expert whose information
was not acquired in preparation for trial but rather
because he was an actor or viewer with respect to
transactions or occurrences that are part of the subject
matter of the lawsuit. Such an expert should be treated as
an ordinary witness.” Because FRIT does not contend that
Storm actually participated in any “transactions” between
FRIT Page 20 and First National, the Rules require Storm
to prepare an expert report. He did not. The court grants
the motion.

12. First National’s Motion to Preclude Brittain Cheney’s
Testimony as to a Limited Topic Area. [Docket No. 274].

First National moves to preclude Brittain Cheney, a
licensed real estate sales person, from testifying about
“acquisition or leasing in the Silicon Valley [and] letters
of intent.” Cheney did not prepare an expert report. FRIT
contends that Cheney did not need to prepare a report
because he is a “percipient expert witness.” The court
grants the motion for the reasons stated with respect to
the Storm motion.

13. First National’s Motion for an Order Instructing the
Jury With Respect to the Relationship Between First
National and D & R Partnership. [Docket No. 273].

First National seeks an order that the jury be instructed
that (1) First National had the right to lease and sell the
land even though D&R Partnership owned it, (2) First
National and Dryan had the authority to act on behalf of
D&R Partnership with regard to execution to the Final
Proposal and prosecuting this action, (3) First National
was at all relevant times willing and able to perform its
obligations under the Final Proposal, (4) D&R was at all
relevant times ready and willing to convey its interests in
the property to First National, and (5) precluding FRIT
from arguing that First National did not have the authority
to act for D&R Partnership or that the absence of a
signature line on the Final Proposal affects the validity
of the contract. D&R owned the underlying parcel. The five
partners of D&R Partnership are also the five shareholders
of First National, and each partner’s share in both
entities is the same. Dryan has control over both entities.

The court denies the motion without prejudice. First
National may be entitled to such an instruction depending
on the proof at trial.

14. First National’s Motion to Exclude Evidence or
Argument that FRIT Did Not Timely Accept the Final
Proposal. [Docket No. 267].

First National moves to exclude evidence or argument that
FRIT did not timely accept the Final Proposal. First
National also seeks a jury instruction that because the
Final Proposal’s deadline for acceptance was for First
National’s benefit, First National could have chosen not to
enforce the deadline. The Final Proposal provided that it
would “automatically expire” if not accepted by 10:00 a.m.
California time on August 25, 2000. This court’s January
25, 2005 Order cited Sabo v. Fasano, Page 21 154 Cal. App.
3d 502, 506 (1984) for the proposition that the time limit
was for First National’s benefit and therefore waivable.

FRIT argues that this court’s reasoning is contrary to
Cal. Civ. Code § 1587(2), which provides that “[a]
proposal is revoked . . . [b]y the lapse of the time
prescribed in such proposal for its acceptance.” However,
Sabo considered and rejected that argument. See Sabo, 154
Cal. App. 3d at 505. FRIT also contends that First National
did not communicate its waiver to FRIT. Sabo expressly
declined to rule on whether a waiver must be communicated
to be effective. See id. at 508 n. 2. Recently, a New York
district court applying California law persuasively
answered the question in the affirmative. See Ellefson v.
Megadeath, Inc., 2005 WL 82022 (S.D.N.Y. 2005). Thus,
factual issues remain as to whether First National informed
FRIT that it had waived FRIT’s alleged late acceptance. The
court denies the motion without prejudice to First National
later seeking such an instruction.

15. FRIT’s Motion to Condition the Admissibility of
Hannigan’s Letter. [Docket No. 219].

FRIT moves to condition the admissibility of a December
20, 2000 letter from John Hannigan, FRIT’s Managing
Director of Retail Development, to Hal Dryan, First
National’s Chairman. On December 15, 2000 Dryan wrote to
Steve Guttman, FRIT’s President and CEO. Dryan stated that
he understood that FRIT had rejected First National’s
response to FRIT’s proposed ground lease and that the
parties were “back to ground zero” and that “[t]his is the
time to act our conclude our negotiations.”

On December 20, 2000 Hannigan, wrote to Dryan that
“[Guttman] is on vacation, but he and I have conferred and
we prefer to proceed with the previously agreed upon Lease
Agreement.” FRIT argues that Hannigan’s statement was not
an admission and thus cannot be offered to prove that the
parties had a binding contract because he was not
authorized to comment upon the matter. FRIT’s contention
lacks merit. Under Fed.R.Evid. 801(d)(2)(C), Hannigan’s
statement is made “by a person authorized by the party to
make a statement concerning the subject.” For example,
Hannigan expressly testified during his deposition that
Guttman authorized him to “proceed with the lease.”
Hannigan Depo. at 47:10-11. The court denies the motion.
Page 22

16. FRIT’s Motion to Exclude Evidence that First National
Would Have Exercised the Put at the End of Ten Years.
[Docket No. 232].

FRIT moves to exclude evidence that First National would
have exercised the put at the end of ten years. The court’s
resolution of the parties early-filed motion in limine with
respect to put damages moots this motion.

17. FRIT’s Motion for an Order Re: Damages from Inability
to Obtain Other Properties. [Docket No. 250].

FRIT moves for an order excluding evidence and argument
relating to damages First National suffered “based on its
inability to obtain other properties at deflated values.”
In First National’s second amended initial disclosure,
Michael Rubenstein claims that First National is entitled
to recover such damages. However, First National did not
disclose Rubenstein as a trial witness and its damages
expert, Nicholas Feakins, did not purport to base his
damages estimate on any such damages. First National claims
that it intends to produce evidence about “its lost ability
to obtain such properties at deflated values . . . so that
[it] can argue that the damages it seeks are conservative
compared to the damages it actually suffered.” First
National also argues that it does intend to introduce
evidence “regarding [FRIT’s] promise that First National
could obtain other properties at deflated values . . . [so]
the jury can understand the context of the put provision
and Mr. Guttman’s promises.” First National offers to
stipulate to an instruction that it believe it was harmed
by the loss of its ability to seek replacement property at
a deflated value, but does not seek to recover damages for
the loss because they would be difficult to calculate.
First National’s proposed purposes for offering the
evidence are confusing and the court grants the motion under
Rule 403.

18. FRIT’s Motion to Exclude Witnesses in the Courtroom.
[Docket No. 262].

FRIT moves to exclude all witnesses from the courtroom
until they are called to testify with the exception of one
representative per side. First National asks that both its
principals, Dryan and Rubenstein, be allowed in the
courtroom at the same time. First National offers to call
Rubenstein first. In the alternative, First National
requests that the court inform the jury about why either
Dryan or Rubenstein are absent. The court denies the motion
as long as First National calls Rubenstein first. Page 23

19. FRIT’s Motion to Exclude Evidence Based on the
Financial Returns FRIT is Experiencing on the Santana Row
Development. [Docket No. 236].[fn12]

FRIT moves to exclude all evidence based on its financial
returns concerning the Santana Row development, where the
property at issue is located. Guttman commented in his
deposition that FRIT’s financial returns at the property
have been lower than expected and that it would be his
company’s last mixed use complex project. Hannigan also
testified that construction costs were higher than
anticipated. FRIT claims that First National intends to
argue that FRIT breached the Final Proposal because of
lower than expected returns on the development. FRIT argues
that JRS Prods. Inc. v. Matsushita Elec. Corp. of America,
115 Cal. App. 4th 168 (2004) held that motive is irrelevant
for breach of contract claims. According to FRIT, even if
the financial returns are relevant, the court should
exclude them under Rule 403.

The court holds that First National can use evidence about
FRIT’s returns on the Santana Row project and the
surrounding business climate to show that First National
understood FRIT’s May 11 letter as an anticipatory
repudiation. “To constitute an express repudiation, the
promisor’s statement . . . must amount to an unequivocal
refusal to perform. . . . To justify the adverse party in
treating the renunciation as a breach, the refusal to
perform must be of the whole contract . . . and must be
distinct, unequivocal and absolute.” Taylor v. Johnston, 15
Cal.3d 130, 137, 140 (1975). First National’s awareness
that Santana Row was not meeting FRIT’s expectations tends
to show that it justifiably viewed the May 11 letter as an
attempt to renounce the contract. In addition, FRIT can
present evidence about the prevailing business climate to
show that First National did not fail to mitigate damages
because neither FRIT nor First National could rent Class A
office space after the market collapsed.

However, First National may not offer financial returns as
evidence to prove that “FRIT truly believed that the Final
Proposal was . . . a binding contract” and thus its May
2001 alleged repudiation “was really just a ruse to get out
of a contract that proved to be a bad deal.” Opp Mot. Lim.
at 3:15-17. First National correctly notes that JRS held
only that a party cannot use the opposing party’s “motive,
no matter how malevolent” to “convert a contract action
into a tort Page 24 claim[.]” JRS, 115 Cal. App. 4th at
182. Nevertheless, whether the Final Proposal is binding
hinges on the text of the document itself, the parties’
pre-signing communications, and their contemporaneous
intent. FRIT’s post-contracting “belief” is not relevant.

First National relies on DCPB v. City of Lebanon, 957 F.2d
912 (1st Cir. 1992). In that case, DCPB, an engineering
firm, sued a City for breach of a construction contract.
The City counterclaimed for overcharges. A jury returned a
verdict in favor of the firm and awarded enhanced damages
for tortious breach of contract. The trial judge held that
this was improper and reduced the award. On appeal, the
City claimed that the trial judge had improperly admitted
“evidence, introduced by the [firm] for the cardinal
purpose of proving an entitlement to enhanced damages,
[that] was unfairly prejudicial in connection with the
claim for ordinary damages.” Id. at 918. The First Circuit
rejected this argument, reasoning that “[t]he City’s
defense centered around its suggestion that DCPB’s charges
were exorbitant,” and thus “[t]he disputed evidence, which
tended to show that the City withheld payment from DCPB not
because of overcharging but for purposes unrelated to the
reasonableness of the invoices involved, was probative of
the City’s real motives, hence, relevant.” Id.

First National reads DCPB to hold that motive evidence can
be relevant in a breach of contract case. However, in DCPB,
the City placed its motivation at issue by arguing that
its nonpayment was justified by DCPB’s overcharges. Here,
First National seeks to use FRIT’s motivation for a
different purpose: to cast light on the contract itself.
The fact that the Final Proposal may have been a “bad deal”
for FRIT cannot speak to the parties’ intent at the time of
contracting.

20. FRIT’s Motion to Exclude Evidence of First National’s
Damages re Lost Opportunity for Tax Deferred Exchange. [Re
Docket No. 224].

FRIT moves to exclude evidence that First National was
damaged by the lost opportunity to execute a tax-deferred
exchange under IRS Code § 1031. First National
admits that it does not seek damages based on this
allegedly lost opportunity, but asks the court to admit the
evidence to “argue that the damages it seeks are
conservative compared to the damages it actually suffered.”
The court grants the motion under Rule 403. Admitting
evidence for First National’s proposed purpose would (1)
add little to the case, (2) risk confusing the jury, and
(3) consume an undue amount of time. Page 25 However, at
oral argument, FRIT stipulated to permit First National
offer this evidence for general background purposes,
including to explain why the Final Proposal was structured
the way it was.

21. FRIT’s Motion to Exclude Evidence that Guttman Ceased
Serving as CEO Ahead of Schedule. [Re Docket No. 233].

FRIT moves to exclude evidence that Guttman ceased serving
as FRIT’s CEO and trustee four months ahead of schedule.
The court grants the motion on relevance grounds.

22. FRIT’s Motion to Exclude Guttman’s Deposition
Statement. [Re Docket No. 241].

FRIT moves to exclude a statement that Guttman made at his
deposition that he didn’t know whether FRIT “had the right”
to “chang[e] its mind” after signing the Final Proposal.
FRIT claims that Guttman’s statement is irrelevant, calls
for a legal conclusion, and is hearsay. However, Guttman’s
statement is relevant to prove that FRIT intended the Final
Proposal to be a binding agreement. In addition, it does
not seek to instruct the jury on the applicable law and
thus is not a legal conclusion. Finally, Guttman’s
statement is a party admission even if he no longer works
for FRIT. See Kinser v. Gehl Co., 184 F.3d 1259, 1275 (10th
Cir. 1999), overruled on other grounds by Weisgram v.
Marley Co., 528 U.S. 440 (2000) (“Because the topics
discussed in Burrough’s deposition excerpts all concerned
events and policies occurring during his employment, the
district court did not err in admitting this testimony
pursuant to Rule 801(d)(2).”). The court denies the motion.

23. FRIT’s Motion to Exclude Evidence that First National
is Entitled to a Reasonable Broker’s Fee. [Docket No. 243].

FRIT moves to exclude evidence that First National is
entitled to a reasonable broker’s commission for reselling
the property because First National did not use a broker to
sell the property. First National argues that it can
recover a broker’s commission even if it does not use a
broker for resale. However, First National’s authority only
supports the contention that a buyer who breaches a land
sale contract can recover the deposit but cannot offset the
amount the seller saved by reselling the property without a
broker. See Caplan v. Schroeder, 56 Cal.2d 515, 521 (1961).
Because First National did not incur broker’s fees
reselling the property, the court grants the motion.

24. FRIT’s Motion to Preclude Stanford Berliner from
Testifying With Respect to First National and D & R
Partnership. [Docket No. 252]. Page 26

FRIT moves to preclude Sanford Berliner — First
National and D&R Partnership’s lawyer — from
testifying about (1) whether the Final Proposal is binding
and (2) any other testimony regarding his knowledge about
First National and D&R Partnership. FRIT claims that First
National did not disclose Berliner as a person who may have
discoverable information or as a potential witness until
the parties exchanged draft Joint Pretrial Statements.
First National contends that Berliner will not offer
opinions about whether the Final Proposal is binding.
However, First National notes that FRIT may argue that (1)
First National could not deliver the property to FRIT
because First National did not own the land itself and (2)
some documents produced by Berliner’s law firm are
inadmissible on the grounds of authentication. If FRIT does
so, First National will use Berliner can establish that
Dryan owned D&R, which owned the land. This seems
reasonable. The court denies the motion.

25. FRIT’s Motion to Exclude May 18 Memo. [Docket No. 229].

FRIT moves to exclude evidence that Dryan wrote a memo on
May 18, 2001. The motion is moot because First National did
not designate it as an exhibit.

26. FRIT’s Motion to Preclude Lefmann from Testifying
About the Use Value of the Property. [Docket No. 223].

The parties’ motion in limine with respect to option
damages moots this motion.

27. FRIT’s Motion to Preclude Dryan and Rubenstein from
Testifying About the Purported Legal Effect of the Final
Proposal or Whether It’s Binding. [Docket No. 245].

First National intends to offer Dryan and Rubenstein to
testify about whether they believe the Final Proposal is
binding and why. FRIT moves to preclude this testimony. In
response, First National notes that FRIT has also
designated for use at trial portions of Hannigan’s and
Guttman’s depositions in which they testify about their
belief that the Final Proposal is not binding.

The court grants the motion. As discussed above, a party’s
self-serving subjective impressions of whether the Final
Proposal is binding is not relevant unless he lays a
foundation that he communicated this understanding to the
opposing party before signing the contract. Because whether
the Final Proposal is binding is a legal conclusion,
neither Dryan nor Rubenstein (nor Hannigan nor Guttman, for
that matter) may offer lay opinion on this issue. See
Evangelista v. Page 27 Inlandboatmen’s Union of the Pac.,
777 F.2d 1390, 1398 n. 3 (9th Cir. 1985) (lay witnesses
“opinion as to the correct construction of the collective
bargaining agreement — i.e., what is or is not the
proper handling grievances — is an inadmissible
legal conclusion”).

[fn2] FRIT contends that this motion “supersedes but is
different from” two previously-filed motions in limine,
Docket Nos. 256 and 261. First National objects to FRIT
re-briefing issues. Because these issues are potentially
dispositive, the court denies the objection.

[fn3] FRIT notes that the court has rejected its statute of
frauds challenge to a different issue: whether the lease
duration was an express term. See October 24 Order at
3:22-23.

[fn4] FRIT also notes that after the court issued the
January 25 Order, only six days remained before discovery
closed. FRIT thus seeks the opportunity to conduct
discovery on the “implied term” theory should the court
permit First National to assert it.

[fn5] Two other statutes of frauds also apply. See Cal.
Civ. Code § 1091 (“[a]n estate in real property,
other than an estate at will or for a term not exceeding
one year, can be transferred only by operation of law, or
by an instrument in writing, subscribed by the party
disposing of the same”); Cal. Code Civ. P. § 1971
(“[n]o estate or interest in real property, other than for
leases for a term not exceeding one year, . . . can be
created, granted, assigned, surrendered, or declared,
otherwise than by operation of law, or a conveyance or
other instrument in writing, subscribed by the party
creating, granting, assigning, surrendering, or declaring
the same”).

[fn6] In addition, the Restatement (Second) of Contracts
section 131 shares Witkin’s view that the essential terms
need only be “reasonabl[y] certain.”

[fn7] Cf. Losson v. Blodgett, 1 Cal. App. 2d 13, 16 (1934)
(holding that agreement was sales contract, not lease,
because, inter alia, “no term whatever is mentioned in the
instrument”).

[fn8] Because the court does not believe that there is a
significant distinction between a “special meaning” or
“implied duration” approach under the circumstances of this
case, the court is not persuaded that FRIT is entitled to
discovery on the latter theory or that First National’s
failure to plead it has prejudiced FRIT.

[fn9] At oral argument, FRIT contended that such a hearing
would be helpful because First National’s only evidence
that the put and call provisions establish the lease term
is its principals’ statements that this “was understood.”
However, as discussed below, First National’s evidence that
the economic realities of the situation made it clear that
one party would exercise the lease within ten years also
supports its interpretation.

[fn10] FRIT originally moved to exclude Lewis and Jim
Enright from testifying. First National has indicated that
it will not call Enright, thus mooting the motion with
respect to him.

[fn11] The court has narrowed the permissible scope of
Hennigh’s testimony from what it suggested it would allow
at the hearing on the motions in limine.

[fn12] First National represented that it would file a
supplemental motion on the issue. However, the court’s
review of the docket indicates that First National has not
done so. Page 1