The Town of Mammoth Lakes has been ordered to pay more than $32 million for violating a development agreement.

In upholding a jury's award of damages to the developer, the Third District Court of Appeal made clear that local government agencies are treated like any other private contracting party when it comes to development agreements and can be held liable for damages if the agency breaches the agreement.

As previously established in Building Industry Association of Central California v. City of Patterson, (2009) 171 Cal.App.4th 886, (see CP&DR Legal Digest, April 2009), the interpretation of development agreements is governed by contract law and not statutory interpretation principles. In the Mammoth Lakes case, that breach of a development agreement by a municipality came with a hefty price tag. Under contract law, there are no immunities protecting the municipality from having to pay up.

In 1997, Terrence Ballas and the Town of Mammoth Lakes entered into a development agreement whereby Ballas would lease the land encompassing and surrounding the airport from the town with an option to purchase. Ballas would operate the airport in conjunction with developing the land near the airport into a 250-unit condominium or hotel complex. In 2000, after Ballas helped form Mammoth Lakes Land Acquisition, LLC, and invested $15 million to $17 million in required airport improvements, the developer submitted an application for development of a residential condominium complex.

The development agreement stated: "Town and its agents, employees and contractors shall exercise discretionary approvals applicable to the project reasonably, in good faith, and in a timely manner." However, town officials disliked the residential concept, and, in 2004, the developer submitted another application for what is known as the Hot Creek project. The new proposal involved a time-share condominium hotel in which units could be rented out when the owners were not using them.

Meanwhile, the town had been working to gain Federal Aviation Administration (FAA) approval to expand the airport facilities to accommodate commercial jets. About the same time the revised development proposal came forth, the FAA – which, unbeknownst to Ballas, questioned the development agreement before it was approved in 1997 – stated that it would not approve the airport expansion. The FAA further advised that the town was in jeopardy of losing federal grant funding for airport improvements if a condominium/hotel complex were built on the surrounding property. Based on this admonition, the town proceeded to work against the Hot Creek project and refused to process the application without first resolving the FAA issues.

Mammoth Lakes Land Acquisition sued the town in 2006 for anticipatory breach of contract. A Mono County jury found in favor of the developer and awarded $30 million in damages for breach of contract. Subsequently, the judge also granted the developer $2.3 in attorneys fees under the prevailing party provision of the development agreement. The town appealed on three grounds: (1) The developer failed to exhaust its administrative remedies; (2) three clauses in the development agreement excused the town's performance; and (3) there was no substantial evidence to support the jury's determination of breach. The appellate court found none of the town's arguments meritorious and upheld the award for damages and attorneys fees.

On the first issue of exhaustion, the town argued the developer was required to engage in the administrative process before filing suit. The appellate court disagreed. The lawsuit, the court ruled, rested solely on the terms of the development agreement and whether the town breached those terms. Therefore, exhaustion of the administrative process was not required, and the principles of contract law applied.

"There was no remedy available to the developer in the administrative process," Justice George Nicholson wrote for the unanimous three-judge Third District panel. "[O]nce the developer gave notice of default [which occurred in early 2005] and the town failed to cure the default, there was no longer a proposed land use to adjudicate in the town's quasi-judicial administrative process."

On the second issue of excused performance, the court rejected all of the town's attempts to assert defenses under the agreement. The court found that development agreement clauses requiring compliance with governmental restrictions and FAA regulations provided no protection because the restrictions at issue were under the town's control, and the grant assurances between the FAA and the town did not constitute FAA regulations. Additionally, the developer knew nothing of the grant assurances between the town and the FAA and, thus, did not assume any responsibility in regards thereto, the court ruled.

On the third issue of substantial evidence, the appellate court found that evidence was adequate to support the jury's determination. Therefore, the appellate court affirmed the jury's award of damages and attorneys fees.

This case acts as a reminder to local agencies that development agreements cannot simply be dismissed after they are executed. Future consequences must be taken into account before the agreement is entered into, as with any other contractual agreement between private parties.

The Case:

Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes, No. C059239, 2011 DJDAR 92. Filed December 30, 2010.

The Lawyers:

For Mammoth Lakes Land Acquisition: Daniel L. Brockett, Quinn, Emanuel, Urquhart & Sullivan, (212) 849-7345.

For the town: Peter E. Tracy, (760) 872-1101.

CP&DR's Legal Digest is reported by the attorneys of Abbott & Kindermann, LLP.