Seymour/Lewis Development v. Otay Water District – $2M

Business Litigation

Case Summary:

A $2,000,000.00 settlement in a contaminated water case involving reclaimed sewage water piped into an industrial park. Seymour Lewis, a family company, developed a high class industrial plaza in the South Bay Eastlake community of San Diego in 2005. The plaza attracted quality tenants and was a good draw in Eastlake during 2005, 2006, and 2007. Unfortunately, in the summer of 2007, the tenants began to complain about water quality (we now know that the reason for the late discovery was that Otay Water completely eliminated the previous practice of diluting the reclaimed water by mixing potable water into its reclaimed water system). Otay Water was called multiple times to address the problem and insisted that there was no problem. Frustrated, Seymour Lewis sent the water out for testing at its own expense. The testing revealed that the water was reclaimed sewer water, containing many toxins and bacteria. The connection of Seymour Lewis’s potable water pipes to the Otay Water reclaimed water system appears to have occurred because, when Otay Water inspected the reclaimed water box on Harold Street in July 2005, they mistakenly determined that it should have been labeled as potable water. They ordered it changed to a potable water box and the Seymour Lewis contractor connected their potable pipes to that reclaimed water strictly due to the “potable water” label.

Plaintiff’s Technical Expert Witnesses:
Pat Kennedy, LECG 655 West Broadway, Suite 1300, San Diego CA 92101
Stephen D. Roach, Shannon L. Cutsinger, MAI, Jones, Roach & Caringella 2221 Camino del Rio South, Suite 202, San Diego, CA 92108
Joel Morrison PE PLS, Morrison Engineering Inc. 1927 Frankfort Street, Suite A, San Diego CA 92110
Stefen E. Gustafson, Nautilus Building Consultants, Inc. 2045 First Avenue, San Diego, CA 92101

Defendant’s Technical Expert Witnesses:
A. Jeff Harris (Bremco)
Steve Marsch (Otay)
Robert Shaffer (Eastlake)
Craig Schlumbohm (MJR)
Chris Pierson (Bremco)
Jeff Lundstrom (Otay)

Facts and Background:

Seymour Lewis Development Ltd. (“Seymour Lewis”) is a property development and management company with its corporate offices in Warren, Ohio. Seymour Lewis owns Fenton Business Center in Chula Vista, California, the business center at issue in this case. Owning and operating the center is the only business in which the company engages. The water pipe misconnection that occurred at the center has cost, and continues to cost, Seymour Lewis millions of dollars in lost rents, lost value, and legal fees.

During development of the Eastlake community in Chula Vista, California, Otay Water District contracted with developer The Eastlake Company LLC (“Eastlake”) for the construction of a “water system” in the area where Fenton Business Center (“FBC”) is now located. In that agreement, Otay agreed to be responsible for the water system (to “accept, operate, and maintain” the system) after it was “completed and accepted.” Otay accepted the water system prior to any tenant occupancy of the property. As such, since March 17, 2005, Otay Water District has been responsible for the maintenance and operation of the Fenton Street-area water system.

On December 29, 2003, Seymour Lewis entered into a purchase agreement with Eastlake to purchase the business center at the corner of Fenton and Harold. When it purchased the property, the property was fully entitled for construction of the business center complex that later became FBC. Seymour Lewis contracted with Bremco Construction for actual construction of the center. Bremco in turn hired the subcontractors and design professionals it needed to complete the job.

As built, there are twenty-eight suites in the business center. When the plumbing at the center was finished, Seymour Lewis applied to Otay Water District for a potable water meter at a cost of over $60,000. On July 6, 2005, Otay Water District employee Doug Marple inspected the water laterals adjacent to the business center and instructed Otay’s meter shop to install meters at the “potable” access points. On July 8, 2005, Otay employees actually installed the potable water meter on the reclaimed water line and charged for a potable water meter.

Seymour Lewis began leasing space at FBC in August 2005. It was not difficult to find tenants willing to pay in the high range of market rent for this prestigious space. The original 2005 tenants were Rhonford Alliance, PC Joe’s, The Dance Spot, Assist 2 Sell, Sin Mancha Transworld, Jumpin Jumps, Unique Wood Designs by C.M., and Dream Dinners, paying rent from $1.50 to $1.65 per square foot. During 2006, Seymour Lewis leased space to C.O.’s Party World, Eastlake Living Party Rentals, R&H LLC, St. Peter Apostolic Community Church, Candy Bouquet, San Diego Electric Sign, Old World Home Interiors, Elements of Hardwood and Stone Design, Mr. Fred’s Music Center, and Sudberry Properties. Only two tenants moved out that year – Rhonford and R&H. In early 2007 (prior to July), Seymour Lewis leased additional space to Body by Bobbie and RC Legacy. Only one tenant left during this time period – Assist 2 Sell. Assist 2 Sell was replaced by RC Legacy at the same rental payment level.

On July 27, 2007, tenants began to complain about water discoloration and smell. Otay’s only diagnosis was to flush the water system, which flushing was done. Otay Water inspected the water system and concluded that the water coming from its meter was “clear” (and therefore potable) and that the problem was within the private system. Tenant complaints continued and Otay Water was called out again on August 9, 2007. Once again, Otay Water insisted that the discoloration was due to internal issues. Otay Water was called a third time on August 14, 2007 and it again insisted that a simple flushing of the pipes would fix the problem. Following that visit and concerned that the Otay Water “solutions” were not solving the problem, Seymour Lewis hired a private laboratory (Trident Technology) to independently test the water on August 14, 2007. Trident took samples from the hose bib and the backflow preventer. Dangerous coliform bacterium (human feces) were found to be present. When Otay Water was provided with these test results, it quickly determined that the “potable” water meter was in actuality connected to the reclaimed water system. Dennis Lewis, Sr. and John Seymour flew from Ohio and Hawaii to San Diego on August 19, 2008 to address the situation. They held a meeting with all of the tenants the next day (Monday). The matter was discussed in detail at the August 20, 2007 Otay Water Special Board Meeting. In an ensuing investigation, Otay Water concluded that its employees had not followed company procedure related to meter installation and that these oversights had allowed the situation to develop.

Following discovery of the water problem – after it was fixed – a number of tenants stopped paying rent. Seymour Lewis was able to obtain some rent payments by agreeing to discount rents. It experienced vacancies at a level never before known. The center could no longer obtain tenants at market rents. To this day, the center has not yet obtained significant rents owed to it. Additionally, a number of tenants have sued Seymour Lewis for rents paid prior to August 2007.

Following the misconnection, the only lease offers were rock-bottom rents (Rhino Marketing, Red Star Wireless, DigaWorks). These tenants knew about the problem and leveraged on it intentionally to extort discounts from Seymour/Lewis. Later in 2008, Seymour/Lewis thought it was fortunate to find a tenant, Rosas, willing to pay close to pre-misconnection rents. That lease turned out too good to be true as Rosas proved unable to pay the rent and quickly vacated. The leasing abilities of the center have continued to be spotty and, when the economy tanked in late 2008, the center was already “behind the curve” and has demonstrably suffered higher vacancies and deeper rental discounts than have neighboring business buildings.

Plaintiff’s Contentions, Allegations:
Seymour/Lewis’s building water source was connected to the Otay Water District irrigation water main. This occurred for two years before the problem was discovered and remedied. Seymour/Lewis lost current and future tenants as a result of the disgust caused by the misconnection.

Injuries and/or Damages:
Under Dr. Kennedy’s Analysis
Lost past rents since August 2007: $386,358-$438,465
Capitalized lost cash flow: $2,049,297-$2,678,187
Lost investor value: $467,484
Plus Collateral Damages: Defense Costs: $277,790.38
Unlawful Detainer Costs: $23,000+
TOTAL: 3,203,929.38+-$3,884,926.38+

Under Mr. Roach’s Analysis
Diminution in Value: $3,090,000
Plus Collateral Damages:
Defense Costs: $277,790.38
Unlawful Detainer Costs: $23,000+
TOTAL: $3,390,790.38+

The strongest challenge to the case was on the amount of damages. Each defendant also contended that the other was the actual cause of the harm. No one contended that the misconnection was appropriate.

Damages: Total damages claimed were $3,203,920 to $3,390,790

Settlements: $2,000,000, 2 days into trial

Attorney for Client: Glenn Mueller and Rhonda Mallory, State of California, Department of Transportation

Attorney for Plantiff:
Vincent J. Bartolotta, Jr., Karen R. Frostrom and Renee Galente
Thorsnes, Bartolotta & McGuire
2550 Fifth Ave 11th Floor, San Diego, CA 92103

Attorney for defendant:
Otay Water District, Jeffrey Morris, A. Cam Lavin, Stutz Artiano Shinoff & Holtz APC Eastlake Companies: Wendy Wilcox, Kent H. Thaeler, Jampol Zimet Skane & Wilcox Bremco Construction: William Hoggard, David A. Brewster, The Horizon Law Group City of Chula Vista: Lindsay R. Brack, Susan L. Mason, Brack & Mason

Individual Plaintiffs: Seymour/Lewis Development

Individual Defendants: Otay Water District, Eastlake Development, Bremco Construction, City of Chula Vista

Civil Trial Lawyers