The tortured history of a development in downtown Oakland added another chapter when a state appellate court overturned a lower court decision against Citicorp Real Estate, which had foreclosed on the project. The appellate panel found that the jury had been instructed incorrectly and that Citicorp had done nothing legally wrong in respect to its handling of the "Old Oakland" project. A jury had awarded the project developers $41.82 million. However, the trial court judge threw out all but $900,000 of the award because of a technicality. The latest setback for the developers came when the First District Court of Appeal overturned the trial court decision in full. The Old Oakland project has been around since the early 1980s. It involved restoration of 19th century buildings and other construction on a strip of land bordered by Broadway, Clay, Eighth and Tenth streets. Acting as architects, developers and building managers, brothers Glenn and Richard Storek pursued redevelopment of the area as an office, retail and nightclub district. In 1984, the Storeks borrowed $30 million from the City of Oakland, which raised the money by issuing bonds backed by letters of credit from Citibank. Over time, it became clear the Storeks needed more money to complete the project. In 1989, they signed an agreement with Citicorp, which loaned them an additional $8.9 million. Citicorp, however, placed a number of conditions for when it would disburse the loan funds: the project could not go over budget, the developers had to deliver executed leases, and there could be no default or potential default by the Storeks. From August 1989 through August 1990, Citicorp disbursed $8 million. However, the bank's construction monitor found millions of dollars of cost overruns, and the developers never raised $1 million in equity capital that they had promised to deliver as part of the second loan deal. The Storeks said they would get $5.6 million from other sources, but they did not deliver that either. By August 1990, a Storek partnership that owned property in San Francisco � which had secured the original loan � was in bankruptcy. By December of 1990, a court had found the developers in default and appointed a receiver. The development partnership filed for bankruptcy, and Citibank foreclosed on Old Oakland. A Citibank affiliate purchased the property for $6 million, Citibank put more money into the project, and much of it was completed � although the project has never reached its initial promise. The developers sued Citicorp, alleging that Citicorp deliberately engineered the project's collapse so that the bank could foreclose. They contended the bank never had any intention of fully financing the development. One trial resulted in a hung jury. After a second trial, a jury awarded the developers the $900,000 that Citicorp never disbursed from the second loan, and $40.92 million in punitive damages for fraud. Later, Alameda County Superior Court Judge Richard Hodge ruled that the plaintiffs (Glenn Storek and 39 limited partners) were not eligible to receive punitive damages because they were assignees of the original plaintiffs (Storek & Storek, Inc.). Both Citicorp and the plaintiffs appealed. At issue was whether Citicorp had breached an implied covenant of good faith and fair dealing. Citicorp argued that there could have been no breach because it acted based on the express terms of the contract. A three-judge panel of the First Circuit essentially agreed with Citicorp. The court held that Citicorp only had to act reasonably. "Citicorp owed no duty of good faith in determining whether the conditions precedent to its performance had been fulfilled," Justice Lawrence Stevens wrote for the court. "The loan agreement was a freely negotiated contract entered into by sophisticated business entities. Under the terms of that contract, expressly agreed to by Old Oakland, Citicorp's obligation to disburse the loan funds was conditional on its objectively reasonable determination that the project budget was in balance. No obligation to act in good faith can be implied to contradict or limit that express condition precedent. No inquiry into good faith can be made. In our view, the jury was incorrectly instructed to evaluate Citicorp's determination regarding the loan balance for both reasonableness and good faith." If the developers wanted to claim Citicorp breached an express obligation � not simply an implied obligation � they should have said so, the court ruled. However, the plaintiffs dropped that claim from the lawsuit early on. Because there had been no breach of the contract, there was no fraud on which the jury had based the punitive damages, the court concluded. The Case: Storek & Storek, Inc., v. Citicorp Real Estate, Inc., Nos. A092772, A093724, 02 C.D.O.S. 6284, 2002 DJDAR 7838. Filed July 15, 2002. The Lawyers: For Storek: Elliot Bien, Bien & Summers, (415) 898-2900. For Citicorp: Jerome Falk Jr., Howard Rice Nemerovski, Canady, Falk & Rabkin, (415) 434-1600.
