Hotel California

HOTEL CALIFORNIA LAWSUIT 8/22/2008 1 Presented By Group 1: J.P. Lopez; Micaela Griffin; Taquenah Bryant; Zach Mendelsohn; Josiah Baldivino INTRODUCTION LEGAL EAGLES - GROUP 1 PRESENTING MS. WARREN LAWSUIT LEGAL REPORT GROUP MEMBERS: J.P. LOPEZ: ACCOUNTING MICAELA GRIFFIN: ACCOUNTING TAQUENAH BRYANT: ACCOUNTING ZACH MENDELSOHN: LAW JOSIAH BALDIVINO: LAW 8/22/2008 MENDELSOHN 2 SUMMARY Client is offered Hotel California for 4.3 Million Client required extended escrow period Client was unable to receive financing for Hotel California without removal of lien on Laguna Beach Property Mechanics National Bank fails to remove lien upon client’s request Client hires Desert Mirage Accounting to appraise Hotel California but loan value is not sufficient Client is unable to receive financing for Hotel California Client seeks recovery for her damages of lost opportunity to acquire Hotel California 8/22/2008 MENDELSOHN 3 HOTEL CALIFORNIA VALUE VERFICATION THE FACTS HOTEL CALIFORNIA INCOME STATEMENT REVIEW 4 X PAST 2 YEARS’ AVERAGE GROSS MARGIN HOTEL CALIFORNIA IMPLIED VALUE HOTEL CALIFORNIA APPRAISED VALUE 8/22/2008 BRYANT 4 THE FACTS Ms. Warren Hired Desert Mirage Accounting to prepare an appraisal using techniques banks employ to determine loan values of small hotels Desert Mirage Accounting concluded there was not enough loan value to justify Hotel California as sole collateral on the loan To reach this conclusion Desert Mirage researched valuation approaches and found banks place weights on appraisals resulting from 2 methods: – 4 x THE PAST 2 YEARS’ AVERAGE GROSS MARGIN @ 40% WEIGHT – PRESENT VALUE OF THE AVERAGE OF THE PAST 3 YEARS’ CASH FLOWS @ 8% DISCOUNT RATE FOR 10 YEARS @60% WEIGHT Legal Eagles’ analysis of the value of Hotel California determined by Desert Mirage Accounting is as follows: 8/22/2008 GRIFFIN 5 INCOME STATEMENT REVIEW FIRST STEP: Determine the accuracy of Hotel California’s Income Statement for the years’ ended 2004, 2003, 2002 HOTEL CALIFORNIA ORIGNAL INCOME STATEMENT FOR THE YEARS ENDED DEC, 31 2004 Rental Revenue Other Revenues Total Revenues Cost of Revenue Included In: Cost of Revenue Building Property Improvements Furniture Gross Profit Operating Expenses Marketing General and Administrative Included In: G&A Equipment Total Operating Expeses Income From Operations $892,513 212,432 $1,104,945 $441,978 $50,000 72,000 88,000 $662,967 2003 $796,500 183,195 $979,695 $411,472 $50,000 68,500 82,000 $568,223 2002 $759,656 171,923 $931,579 $419,211 $50,000 65,000 82,000 $512,368 $110,495 287,286 22,000 397,781 $265,186 $97,970 254,721 23,000 352,691 $215,532 $93,158 242,211 27,000 335,369 $176,999 8/22/2008 BRYANT 6 INCOME STATEMENT REVIEW SECOND STEP: Adjust Hotel California Income Statement to determine true figures 8/22/2008 BRYANT 7 4 x PAST 2 YEARS’ AVERAGE GROSS MARGIN Based on the adjusted Income Statement the past 2 years Gross Margins were: Average Gross Margin: $593,095 4 x Average Gross Margin: $2,372,380 8/22/2008 LOPEZ 8 IMPLIED VALUE To determine Hotel California’s implied value we found the present value of the average of the past 3 years’ Cash Flows discounted at 8% for the next 10 years Average of Past 3 Years Net Cash: $362,451.00 Implied Value: $2,432,075.71 8/22/2008 GRIFFIN 9 APPRAISED VALUE 40% of the 4 x Average Gross Margin: $948,952 + 60% of the Implied Value: $1,459,245.43 = Weighted Appraised Value of Hotel California: $ 2,408,197.43 8/22/2008 LOPEZ 10 APPRAISED VALUE There are 2 Options based off of the weighted Appraised Value determined 1. Max Loan Value + 25% of Purchase Price Down in Cash 25% of Purchase Price: $1,075,000 $3,225,000 Needs to be Covered by Loan 2. Max Loan Value + Pledge of First Priority Lien on Vacant Land 8/22/2008 LOPEZ 11 CONCLUSION In Summary: – 4 x Past 2 Years Average Gross Margin: $2,372,380 – Implied Value: $2,432,075.71 – Appraised Value: $ 2,408,197.43 Desert Mirage Accounting should not have relied on the Income Statement provided by Ms. Ramirez’s accountant because: – Hotel California Income Statement Required Adjustments – The Adjustments lead to different Gross Margins and Net Cashes Unfortunately our verification lead to the same conclusion. There is not enough loan value to justify the hotel property as the sole collateral on the loan 8/22/2008 BRYANT 12 ELEMENTS OF NEGLIGENCE CAUSE OF ACTION NEGLIGENCE – Address all elements of Ms. Warren’s negligence cause of action against Mechanics National Bank. GREEN CIVIL CODE – Discuss contracts that must be in writing in order to be valid CONTRACT – Requirements for a contract 8/22/2008 BRYANT 13 NEGLIGENCE DEFINED Negligence: Failure to use reasonable care which causes the harm of a person or property Referring to [Commercial Escrow Company v. Rockport Rebel, Inc, No. 13-89-004- CV, August 31, 1989] “Every one is responsible, not only for the result of his willful acts, but also for an injury occasioned to another by his want of ordinary care or skill in the management of his property or person, EXCEPT so far as the latter has, willfully or by the want of ordinary care, brought the injury upon himself.” 8/22/2008 MENDELSOHN 14 ELEMENTS OF NEGLIGENCE In order to win a negligence case, the following three elements must be proven: – Defendant owed duty of care to the plaintiff – Defendant committed a breach of duty – Breach was the actual and proximate cause of injury 8/22/2008 MENDELSOHN 15 DUTY OF CARE The Defendant owed a duty of care to the Plaintiff Example in Case: Mechanics National Bank did not release the lien upon the request of Ms. Warren. 8/22/2008 MENDELSOHN 16 BREACH OF DUTY Defendant committed a breach of duty Example in Case: Using [Commercial Escrow Company v. Rockport Rebel, Inc, No.13-89-004-CV, August 31,1989] as a reference we see that Mechanics National Bank did breach by not releasing the lien upon request. “Specifically, in performing services for a client, an escrow company has the duty to strictly follow instructions drafted in the escrow instructions.” 8/22/2008 MENDELSOHN 17 CAUSE OF INJURY Breach was the actual and proximate cause of injury Example in Case: The injury and/or damages Ms. Warren incurred were $400,000 and the opportunity cost she had to forfeit. But, by using [Commercial Escrow Company v. Rockport Rebel, Inc, No.13-89-004-CV, August 31,1989] we find that “the plaintiff must demonstrate that she sustained actual loss or damage RESULTING from the negligence.” 8/22/2008 MENDELSOHN 18 VERDICT Loss or damage did not result from the negligence of Mechanics National Bank but rather from her own misunderstanding of a legally binding contract. 8/22/2008 MENDELSOHN 19 GREEN CIVIL CODE DIVISION 3. Obligations Part 2. Contracts TITLE 2. Manner of Creating Contracts § 1624. Statute of Frauds; Qualified financial contracts; Personal Property leases The following contracts are invalid, unless they, or some note or Memorandum thereof, are ion the writing and subscribed by the party to be charged or by the party’s agent: An agreement that by its terms is not to be performed within a year from the making thereof. A special promise to answer for the debt, default, or miscarriage of another, except in the cases provided for in Section 2794. An agreement for the leasing for a longer period than one year, or for the sale of real property, or of an interest therein; such an agreement, if made by an agent of the party sought to be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party sought to be charged. An agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate, or to lease real estate for a longer period than one year, or to procure, introduce, or find a purchaser or seller of real estate or a lessee or 20 of real estate where the lease is for a longer period than one year, for compensation or commission. 8/22/2008 MENDELSOHN 20 SIMPLE ELEMENTS OF A CONTRACT • OFFER • ACCEPTANCE • CONTRACT QUALIFICATIONS: Set of promises must be based on a voluntary agreement which is made up of an offer and acceptance of that offer. There usually must be consideration to support each party’s promise. Contract must be between parties who have capacity to contract and objective and performance of the contract must be legal. 8/22/2008 BALDIVINO 21 OFFER Offer Defined: Offer is a proposal to enter into a contact and can be expressed by acts or words. Example of Offer in Case: Ms. Ramirez called and offered Ms. Warren Hotel California for 4.3 million, excluding the furniture, within a 45 day escrow period. 8/22/2008 BALDIVINO 22 COUNTER OFFER Counter Offer Defined: An offer made in response to a previous offer by the other party during negotiations for a final contract Example of Counter Offer in Case: Ms.Warren replying to Ms. Ramirez via fax stating that she would accept Ms. Ramirezs’ original offer BUT would need more time to arrange financing therefore requiring a 60 day escrow. 8/22/2008 BALDIVINO 23 CAYETANO J. APABLASA V. MERRITT & COMPANY, CIV. NO. 24046, DEC 29, 1999 According to Civ, Codes, §1565, 1550 and 1580, “It is fundamental that without the consent of the parties, which must be mutual, no contract can exist. Consent cannot be mutual unless all parties agree upon the same thing in the same sense.” 8/22/2008 BALDIVINO 24 CAYETANO J. APABLASA V. MERRITT & COMPANY, CIV. NO. 24046, DEC 29, 1999 The following cases demonstrate that a “qualified acceptance amounts to a new proposal or counteroffer putting an END to the original offer.” [Cayetano J. Apablasa v. Merritt & Company, Civ. No. 24046, December 29, 1999] (citing) Niles v. Hancock, 140 Cal. 157 [73 P. 840]; Hunkins-Willis etc. Co. v. Los Angeles etc. Co., 155 Cal. 41 [999 P. 369]; Pattterson v. Clifford F. Reid, Inc., 132 Cal.App. 454 [23 P.2d 35] 8/22/2008 BALDIVINO 25 CAYETANO J. APABLASA V. MERRITT & COMPANY, CIV. NO. 24046, DEC 29, 1999 The following cases demonstrate that an “offer must be approved in the terms in which it is made. The addition of any condition or limitation is tantamount to a rejection of the original offer and the making of a counteroffer. A counteroffer containing a condition different from that in the original offer is a new proposal and, if not accepted by the original offeror, amounts to nothing.” [Cayetano J. Apablasa v. Merritt & Company, Civ. No. 24046, December 29, 1999] (citing) Alexander v. Bosworth, 26 Cal.App. 589 [147 P. 607]; Cooper v. Stansbury, 28 Cal.App. 444 [152 P. 948] 8/22/2008 BALDIVINO 26 STATEMENT OF SIGNIFICANCE “I would like to close escrow within 60 days.” –Ms. Warren 8/22/2008 BALDIVINO 27 ACCEPTANCE Acceptance Defined: Voluntary commitment to other By referencing back to the case [Cayetano J. Apablasa v. Merritt & Company, Civ. No. 24046, December 29, 1999] and using the previous cases as examples we strongly feel that “no binding contract ever came into existence” because there was never an acceptance by Ms. Ramirez to Ms. Warrens counteroffer. 8/22/2008 BALDIVINO 28 FINAL CONCLUSION We evaluated and verified the value of the Hotel California that was determined by Desert Mirage Accounting We also addressed all elements regarding the cause of action against Mechanics National Bank We hope that our analysis provided all the information that you needed Open to discussion 8/22/2008 GRIFFIN 29 WORKS CITED Cayetano J. Apablasa, Appellant, v. Merritt and Company, Respondent. Civ. No. 24046. 29 December 1999 Commercial Escrow Company Appellant, v. Rockport Rebel, Inc., Appellee. No.13-89-004-CV. 31 August 1989. Green Civil Code. Division 3, Part2, Title 2. 8/22/2008 30