News

Court overturns ruling in $18M home dispute

Palo Alto contractor's compensation would top $6 million after court-awarded attorney fees

A Woodside couple will be stripped of $125,000 in attorney fees stemming from a 7-year feud with a Palo Alto contractor, the California Court of Appeals has decided.

Three First Appellate District justices handed down the decision on May 24. It caps what the court called a "spirited" breach-of-contract battle between Vance Brown, Inc., and venture capitalist Jeffrey Drazan and his wife, Stacy, which included three trips to the appeals court.

The Drazans previously paid Vance Brown $5.09 million in damages and other attorney fees after an arbitration panel ruled against them in the contract case in 2010.

The court's May 24 decision on attorney's fees relates to costs incurred before the arbitration hearing -- fees accrued just to determine if arbitration would take place. That one point took two years to resolve, the court noted.

The appeals justices sided unanimously with Vance Brown and have ordered the case back to the San Mateo County Superior Court for a final award, which could total $350,000, the contractor said.

The dispute began shortly after Vance Brown began work on the Drazans' Woodside estate.

The couple hired Vance Brown in 2002 to build their $18-million estate on Bridle Lane in Woodside. (The land valuation in 2003 was $7 million, according to the County of San Mateo Treasurer-Tax Collector.)

The Drazans created a holding company, Frog Creek Partners, to manage the project, but the couple always controlled the company, the arbitrators noted in their 66-page finding. Vance Brown was to build a main house, guesthouse, multi-car garage, pool, tennis courts, "ancillary" structures, plus irrigation and landscaping on 12 acres.

Work began in September 2002 before a contract was signed. Woodside doesn't allow construction during the rainy season, and Frog Creek was concerned about the narrow seasonal window, according to court documents.

Frog Creek's attorney suggested various changes to the proposed contract, which included elimination of a $50,000 cap on disputes subject to arbitration. Both sides agreed to most of the changes.

Frog Creek then made additional handwritten notations on a typed version of the contract. The changes included upping a $1.05-million landscaping and irrigation estimated budget to $1.3 million. Jeff Drazan signed this version in December.

But Vance Brown signed a separate "clean" version of the contract without the notations. The contractor's version did not include the $1.3 million landscaping change. The terms for dispute resolution, arbitration and attorney-fee provisions in both versions were identical, the court noted.

The Drazans insisted on a "not to exceed" $11,316,901 price. Vance Brown was to be paid monthly based on the estimated percentage of completion of each item on the contract.

The contractor submitted several bills, and the Drazans made the payments -- seemingly to everyone's satisfaction, arbitrators noted.

But instead of adding the approximately $250,000 landscaping increase to the overall budget, Drazan asserted in 2003 that the budgets for the other contract items were to be proportionately reduced. The project essentially added $250,000 worth of work for which Vance Brown would be responsible but for which it would not be paid. Under this arrangement, the Drazans would get the work for free, according to the arbitrators.

Drazan also altered the way the percentage of the monthly payments was calculated, the arbitrators found. At one point Frog Creek underpaid the contractor by approximately $1 million.

Vance Brown ended the contract for nonpayment and stopped working on the project in 2005; Frog Creek hired others to complete the work.

Frog Creek sued Vance Brown for breach of contract. The Drazans wanted a jury trial. But the contractor filed a motion to compel arbitration. Vance Brown cited its version of the contract. The case went to Superior Court, then to the Court of Appeals, which rejected the contractor's motion. The court found that Frog Creek had never signed Vance Brown's version of the agreement.

Vance Brown returned to Superior Court with a new motion based on the Frog Creek version of the contract. Frog Creek fought back by claiming there was "no valid agreement to arbitrate." The trial court first sided with the Drazans, but on appeal in 2007, the court sided with Vance Brown to compel arbitration.

The 2010 arbitration hearing on the breach of contract took 51 days.

Frog Creek Partners "materially breached" the contract, the arbitrators said. The Drazans had failed to tell Vance Brown that the project's plans and specifications were incomplete prior to signing the agreement -- called "fast tracking."

The contractor had based its estimate on the belief that plans were finalized, but the plans were still evolving even as Vance Brown was doing the work, the arbitrators noted.

"The evidence showed that Mr. Drazan, the architects, and the engineers knew they were not final and were still in the process of being developed, but nobody told Vance Brown," the arbitrators wrote.

The justices also rejected the validity of Drazan's unilateral payment reductions.

Vance Brown was awarded $1.9 million in damages, $2.5 million in attorney fees, and costs of $666,422.78 -- in total $5.09 million.

But the battle wasn't finished. Both sides wanted to recover attorney's fees incurred prior to the arbitration hearing.

Frog Creek went to court again in 2010 claiming it was the "prevailing party" on Vance Brown's initial unsuccessful effort to compel arbitration. They said they should recover costs for that court battle.

Vance Brown filed a cross-complaint. The contractor asserted it was the prevailing party in the overall lawsuit, and Frog Creek should not receive any money. The contractor should instead receive $128,000 for costs incurred to compel arbitration, it maintained.

Superior Court Judge Rosemary Pfeiffer granted Vance Brown $663,293 in net pre- and post-arbitration fees for prevailing in the arbitration case. But she denied the $128,000 claim and instead granted Frog Creek its claim for $125,000.

The appeals court, however, in reversing Pfeiffer's ruling stated: "The critical issue of statutory interpretation is whether Frog Creek's success in defeating Brown's March 2005 petition to compel arbitration ... made Frog Creek 'the party who recovered a greater relief in the action on the contract.' ... Frog Creek argues the petition was a distinct action on a contract ... but Brown contends the petition and subsequent appeal were 'really just a forum fight' that could not provide a basis for a separate attorney-fee award."

The appeals court determined that Vance Brown's first petition to compel arbitration did not resolve the contract dispute; the dispute remained in both side's claims of a breach of contract.

Since Vance Brown won the contract case overall, the lower court erred in awarding any monies to Frog Creek, the justices said. The court also agreed with the contractor's contention that it was entitled to the attorney fees.

"The party who ultimately prevails on a contract action is entitled to all of its fees including fees incurred during the lawsuit in proceedings where it did not prevail," the court said.

The case now returns to Superior Court to determine a reasonable attorney-fee award to Vance Brown. Those fees would include costs in the latest appeal.

The pre-arbitration and appeals fees are estimated at $350,000, Vance Brown said in a statement, and the company chided the Drazans for the long years in court.

"It made little sense that the Drazans refused to pay for their changes in 2004, and it made even less sense for the Drazans to make us chase them in court for the past seven years. What could have been settled in 2004 for $459,000 has cost Jeff and Stacy Drazan over $11 million in after-tax dollars," said Loren Brown, president of Vance Brown.

Jeff Drazan is currently managing partner at Bertram Capital. He was previously managing director of Sierra Ventures. The Drazans could not be reached for comment, and their attorney in the appeals case did not return requests for comment.

Comments

 +   Like this comment
Posted by ConstructiveCritic
a resident of South of Midtown
on Jun 20, 2012 at 5:53 pm

I would like to see this article re-written. Its quite confusing. I think there are a lot of unnecessary details, and way too many 1-sentence paragraphs. It reads like a legal brief. On the positive side, it gives all the details.


 +   Like this comment
Posted by Waldo
a resident of another community
on Jun 20, 2012 at 8:41 pm

How is it that a trio allegedly intelligent people could screw up a contract like this as much as they did? Clearly they both have lawyers, where were they when these contracts were being drawn up and modified? It's hard to have much sympathy for either case here, the obscenely wealthy vs the luxury builder...


 +   Like this comment
Posted by Carrie
a resident of Downtown North
on Jun 20, 2012 at 9:31 pm

Next time do a pre-fab.


 +   Like this comment
Posted by Hmmm
a resident of East Palo Alto
on Jun 20, 2012 at 11:08 pm

I'm there w/you, Waldo. The attorneys clearly made a lot of $$ off of this. What a waste of time/energy/$$ for those involved, & there was a lot at stake.

Money is always a problem- there's either not enough, enough but you still have to deal with it, or you have a lot & then have to pay others to manage it & at the higher stakes, be careful of problems like these. It's how you are about money that makes the difference, imo. Having an estate is a *huge* responsibility - not an issue that I have, but I've had friends who've had to deal w/buying an estate, then running it. I can see how easy it is to get caught up in protecting one's wealth/$$/investment & before you know it, there's a huge lawsuit. Ugh.


 +   Like this comment
Posted by Guest
a resident of Another Palo Alto neighborhood
on Jun 21, 2012 at 7:41 am

A billable hours bonfire for the respective attorneys and experts/consultants to warm to.

Just spreading the wealth...


 +   Like this comment
Posted by tract homeowner
a resident of Crescent Park
on Jun 21, 2012 at 10:50 am

Another mish mash of an article. Either the author does not understand what happened or lacks the ability to describe the situation in a clear and meaningful way. I suspect the latter.

The takeaway: get everything in writing, and avoid lawyers as much as possible.


 +   Like this comment
Posted by Felicity
a resident of Portola Valley
on Jun 21, 2012 at 11:49 am

Working for the rich sucks. Fair minded people take the jobs and the rich look for a way to screw them and get something for nothing every time. Good thing I believe in karma. (okay, i admit there are exceptions but they are very limited.)


 +   Like this comment
Posted by Sylvia
a resident of Midtown
on Jun 21, 2012 at 12:45 pm

I work for a sub-contractor who has done jobs for Vance Brown in the past. They are an honest company with a solid reputation. While the article is a bit difficult to understand, it certainly sounds to me like the clients, the Drazens, were trying to figure out ways to get something for nothing. Hope Vance Brown gets every dime!

And for those commenters who seem to say "a plague on both their houses" I would say this: I work for an honest company that bends over backwards to make sure the client is very happy with the work. From what I know of Vance Brown, they operate the same way. Some people seem to want to always point fingers at contractors. We are real people, hiring workers in California, and, many of us, trying to keep going in a difficult economy.


 +   Like this comment
Posted by Tara
a resident of Old Palo Alto
on Jun 21, 2012 at 12:55 pm

Interesting article. It does read like a legal brief a bit, but then it is giving the legal procedural history of the case, which it does quite well I thought. It sounds like the Drazens just got too emotionally involved in the case, to their eventual financial detriment. Sometimes it is better to settle, even if you feel you are in the right!


 +   Like this comment
Posted by lindsey
a resident of Community Center
on Jun 21, 2012 at 1:01 pm

And this is newsworthy? Pls publish articles that are humanitarian and interesting. Who cares to read of such greedy people building another monster house?? These VC people are the ultimate in showcasing.....its disgusting. Donate some of your money to the needy you greed mongers....


 +   Like this comment
Posted by jm
a resident of Evergreen Park
on Jun 21, 2012 at 1:56 pm

I think this article is newsworthy and I read all the way through with interest. Some people have a need to feel powerful, which includes the pleasure of outwitting others to get something for nothing. In some areas of work success is measured by how much money you can make at the expense of others, being ethical not a consideration. How does Mr. Drazon make his money again?


 +   Like this comment
Posted by Optimist
a resident of Old Palo Alto
on Jun 21, 2012 at 3:01 pm

I think its great the the Drazens are supporting our local economy by putting money into the pockets of a bunch of lawyers and ultimately Vance Brown Co. What might have only been a $450,000 stimulus package has become an $11 million package. Kudos. Also, for proving the efficacy of the courts and their ability to get it done right. The system works!


 +   Like this comment
Posted by Common sense
a resident of Professorville
on Jun 21, 2012 at 3:34 pm

Ha. The drazan's got exactly what they asked for. Cheers to Brown and justice.


 +   Like this comment
Posted by Cid Young
a resident of another community
on Jun 21, 2012 at 5:43 pm

"It made little sense that the Drazans refused to pay for their changes in 2004, and it made even less sense for the Drazans to make us chase them in court for the past seven years. What could have been settled in 2004 for $459,000 has cost Jeff and Stacy Drazan over $11 million in after-tax dollars," said Loren Brown, president of Vance Brown.

Jeff Drazan is currently managing partner at Bertram Capital. He was previously managing director of Sierra Ventures. The Drazans could not be reached for comment, and their attorney in the appeals case did not return requests for comment.

NOPE,
I would not put my "Capital" with someone who went out of their way to screw a contractor and then play hardball by dragging it out for-EVER! The Vance Brown Co. deserves to prevail against such ruthless, Power-hungry control freaks. I have heard that some contractors refuse to do ANY extras unless a new contract or addendum is IN WRITING. That may not have helped in the case since they thought scribbles in the margins were "putting it in writing". "Frog Creek's attorney suggested various changes to the proposed contract, which included elimination of a $50,000 cap on disputes subject to arbitration. Both sides agreed to most of the changes. Frog Creek then made additional handwritten notations on a typed version of the contract. The changes included upping a $1.05-million landscaping and irrigation estimated budget to $1.3 million. Jeff Drazan signed this version in December....But Vance Brown signed a separate "clean" version of the contract without the notations. The contractor's version did not include the $1.3 million landscaping change. The terms for dispute resolution, arbitration and attorney-fee provisions in both versions were identical, the court noted."

Frog Creek Partners "materially breached" the contract, the arbitrators said. The Drazans had failed to tell Vance Brown that the project's plans and specifications were incomplete prior to signing the agreement -- called "fast tracking." The contractor had based its estimate on the belief that plans were finalized, but the plans were still evolving even as Vance Brown was doing the work, the arbitrators noted. "The evidence showed that Mr. Drazan, the architects, and the engineers knew they were not final and were still in the process of being developed, but nobody told Vance Brown," the arbitrators wrote."


 +   Like this comment
Posted by Walter_E_Wallis
a resident of Midtown
on Jun 21, 2012 at 7:24 pm

Walter_E_Wallis is a registered user.

I agree with Silvia, Vance Brown is an honest company, as are most of the licensed contractors. There is a need for licensing and this dispute shows it. An unscrupulous contractor, seeing which the wind was blowing, would have buried the owner under a blizzard of change orders. Brown apparently tried good face negotiation and got shat on. Such is the reward of good face.
This was a contest of attorneys. As is often said, only the lawyers get rich.


 +   Like this comment
Posted by Pat
a resident of Portola Valley
on Jun 22, 2012 at 12:10 am

Reading the article, I was coming to the conclusion Mr. Drazen works for Bain Capital, but then one VC company's ethics are much like anothers ethics. Such a shame that people can't get filthy rich without screwing over the little guy. Good luck to Mr. Vance. I hope he gets every nickel.


 +   2 people like this
Posted by Loren Brown
a resident of Ventura
on Jun 22, 2012 at 10:09 am

Thank you to those that provided positive comments regarding Vance Brown. Admittedly, we made a mistake allowing ourselves to get involved with Jeff Drazan in the first place. We missed seeing an article written in 1999 by the SF Chronicle that prominently featured Mr. Drazan - do an internet search on "Drazan Double-Crossed" to view the article. Over the years, Mr Drazan has been involved in at least 18 lawsuits stretching from Florida to New York to LA to the SF Bay Area (i.e. he is seemingly no stranger to the legal process). In our situation, were were faced with losing $2 million that we couldn't collect from the Drazans through normal means OR fighting our way out of the situation via the legal process. We knew we were right in taking the position that we did. We stood up for what we believed in, never gave in and hung on for 7 years through a very long and costly legal battle to be made whole.


 +   Like this comment
Posted by just saying
a resident of Woodside
on Jun 22, 2012 at 1:00 pm

I think the Drazans should consider themselves lucky that this dispute went to arbitration rather than a jury trial. Do they really not realize how reprehensible their behavior was? Their attorney wanted a jury trial? Does he honestly believe that his clients appear to be the wronged party in this case? They knowingly fast-tracked without letting their contractor know (leaving him to bid on incomplete plans), made changes but didn't expect to pay for them and underpaid the contractor by one million dollars. Put me on that jury and I'd vote for punitive damages on top of the award.


 +   1 person likes this
Posted by contractor
a resident of Palo Alto Hills
on May 20, 2013 at 2:46 pm

1. This article should be required reading in business 101.
2. Refusing to pay $459,00. 'Thinking--I've always got my way!'
Then forking out 11 million. Ouch!
3. I've never understood greedy rich people.
4. I'm so glad I never married one.
5. Oh yea--you can spot greedy people early on. It's the little
things--like cheap Christmas gifts, and thinking success is making
money.


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