Articles Posted in Business

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California recognizes a cause of action against noncontracting parties who interfere with the performance of a contract. If you and I have a contract, and John Doe (not part of our contract) tells you that I’m a bum and will never be able to perform the contract, and convinces you to terminate or breach our contract, Joe Doe may be liable. Sacramento attorneys see this issue arise where it comes down to whether there was merely competition – aggressive, but not wrongful, tortuous conduct. The elements of a cause of action for intentional interference with contractual relations are “(1) the existence of a valid contract between the plaintiff and a third party; (2) the defendant’s knowledge of that contract; (3) the defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” In a recent decision the court found that the stranger to the contract could have a financial interest in it but still be stranger enough to be liable for intentional interference.

Sacramento-intentional-interference-attorneyIn Wayne Redfearn v. Trader Joe’s Company, Redfearn owned a food brokerage business. It represented manufacturers of food products to place their goods in Trader Joe’s. When a Trader Joe’s rep met with one of Redfearn’s clients, and falsely accused Redfearn of spreading Rumors that paying bribes to Trader Joe’s employees was the only way to get their product in the stores, and that the client must terminate its relationship with Redfearn or Trader Joe’s would replace them with a different supplier. The clients split with Redfearn, and this interference lawsuit followed.

TJ’s argued that it was not a stranger to Redfearn’s contracts with its clients – performance of those contracts required TJ’s to buy products from these suppliers. TJ’s relied on a Supreme Court decision that the duty not to interfere falls only on interlopers who have “no legitimate in the scope or course of the contract’s performance.” In that case the issue was whether a party could be liable for conspiring with another to interfere in its own contract. (Applied Equipment)

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A settlement agreement resulting in entry of a judgment results in a ‘stipulated’ or ‘consent’ judgment, which is not appealable. However, settlement agreements often include provisions for future enforcement – such as penalties, fines, and injunctive relief. But once a judgment is entered the trial court loses jurisdiction to consider the matter further. One recent decision involved a settlement that misfired on all procedural cylinders – the trial court had no jurisdiction, and the consent judgment (and the trial court’s order after it) could not be appealed because consent judgments are not appealable. I discuss the details of what went wrong, and suggest some possible solutions.

Sacramento-settlement-attorneyIn Joseph Howeth v. Tina Coffelt, the parties were neighbors in adjoining beachfront houses in Oceanside. They shared a common driveway on their property line which provided the only vehicle access to their two properties. They had reciprocal easements providing equal rights. Nonetheless, they could not get along, and argued over parking and access. Eventually this suit was filed by one to enjoin the other from parking. At the mandatory settlement conference they entered a settlement agreement (full language at the end of this post) agreeing to a specified parking regime. They also provided an enforcement procedure. For violation of the agreement there was a $500 fine, enforceable in contempt proceeding. Lastly, the settlement provided that it would be entered as a stipulated judgment.

Of course the problems did not end, and 6 months later one party filed a motion for “entry of interim money judgment.” The trial court denied the motion because it did not have jurisdiction – there had been a final judgment. The party was required to file a new breach of contract action to enforce the terms of the settlement agreement. The appellate court then said the trial court ruling was not appealable.

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Liquidated damages provisions in California Business and Real Estate contracts are an attempt to establish ahead of time what the damages for breach would be. Rather than have to prove to a judge what the damages are, the parties agree to what they would be. There are specific statutory restrictions for residential real estate contracts, but other agreements are governed by a more general rule that any penalty must bear a proportional relationship to the damages the might actually result from a breach. In addition, they must be reasonable under the circumstances that existed at the time the contract was entered. Any provision by which money or property is forfeited without regard to the actual damages would be an unenforceable penalty. Sacramento real estate and business attorneys see the issue pop up often in settlement agreements that require future performance – the plaintiff wants leverage to force the defendant to perform. In one decision it was clear that the plaintiff went too far, and the court found the leverage to be an unenforceable penalty provision.

Settlement-attorneyIn Greentree Financial Group, Inc. v. Execute Sports, Inc., Greentree Financial had a contract to provide financial advisory services to Execute Sports. Greentree sued because Execute failed to pay $45,000 in fees. Execute claimed prior breach of the contract by Greentree. On the day of trial they filed a notice of settlement.

The Stipulation for Settlement provides that Execute would pay Greentree a total of $20,000, in two installments. If Execute defaulted on either one of its installment payments, Greentree would be entitled to “immediately have Judgment entered against [Execute] for all amounts prayed as set forth in [Greentree]’s Complaint in the above-entitled action, including interest, attorney fees and costs, less any amounts already paid by [Execute]”

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Piercing the corporate veil, (the alter ego doctrine) is a procedure which creditors use when their judgment is against a corporation or LLC which is owned by, or controlled by, a sole shareholder. Usually, the corporation has no assets to collect from, and the goal of the creditor is to go after the shareholder’s personal assets, claiming that the corporation is a sham. In effect, the corporation is the shareholder’s alter ego and the shareholder should not hide behind the corporation. Reverse veil piercing is a newer concept in which a creditor with a judgment against an individual goes after the assets of the corporation which the debtor controls. Sacramento business attorneys seldom see this scenario, as the point of forming an entity (corporation or LLC) is to avoid personal liability in the first place. But in a recent decision, a wealthy developer did some extensive estate planning, probably to shield his assets, and suffered a judgment for personal liability. The court found that reverse piercing could apply.

Sacramento-reverse-veil-piercing-attorneyIn Curci Investments, LLC. v. James P. Baldwin, Baldwin is a wealthy Orange County real estate developer. Baldwin borrowed over $5 million dollars and did not pay it back. After borrowing the money he created eight family trusts for his grandchildren. He formed JPBI LLC, which loaned over $42 million to some partnerships composed of the family trusts. Of course, these loans were not paid back.

Since he didn’t pay the original loan, Curci obtained a judgment against Baldwin personally for $7.2 million. Curci then sought, through reverse veil piercing, to add JBPI LLC to the judgment. This appeal resulted.

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There is a difference between an “Agreement to Agree” and an Agreement to Negotiate the Terms of an Agreement. An agreement to agree is not an enforceable contract, and thus there is no duty to negotiate. In the case of the agreement to negotiate, failure to reach the ultimate agreement alone is not a breach of the agreement to negotiate. Only if the failure is due to one party’s failure to negotiate in good faith is there a breach. That is because California law imposes an implied covenant of good faith and fair dealing in contracts. Parties entering preliminary agreements in expectation of further negotiations and a formal contract should be very careful how they describe that initial agreement. For example, a Letter of Intent regarding purchase of real property may be interpreted as containing a duty to negotiate in good faith, unless the Letter expressly disclaims such as agreement. The Agreement should also include waivers of the implied covenant of good faith and fair dealing and damages, and state that it does not create an obligation to negotiate. A party considering a Letter of Intent in a large real estate transaction may want to consult with an experienced real estate attorney to be sure the Letter describes what their actual intent is.

sacramento-letter-of-intent-attorneyIn one case a letter to the plaintiff from the defendant began: “ It is a pleasure to draft the outline of our future agreement ….” After outlining the terms of the agreement, the letter concluded: “If this is a general understanding of the agreement, I ask that you sign a copy of this letter, so that I might forward it to Corporate Counsel for the drafting of a contract. When we have a draft, we will discuss it and hopefully shall have a completed contract and operating unit in the very near future.” (Beck v. Am Health) The court concluded that it was an agreement to agree, because the language of the letter showed an intention that no binding contract would exist until there was a formal contract.

When parties begin the negotiation process with no obligation to do so, they do not have a duty to negotiate in good faith. It is only if the parties are contractually compelled to negotiate doe the covenant to negotiate in good faith become implied.

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In the ordinary real estate or business sale escrow, the escrow officer owes duties to the parties to only the parties to the escrow, and not to third parties. There are a few exceptions, such as when the parties real estate sale escrow instructions require following a third party’s instructions, such as lender’s instructions for closing a loan. But it is generally difficult to prove that an escrow holder owes a duty to a third party, the breach of which would result in a finding of negligence. Such was the case in a recent decision which resulted from a misguided and tangled effort to avoid the “no assignment” clause in a commercial lease; parties concerned with suck lease provisions should consult with a real estate attorney.

Sacramento-escrow-liability-attorneyIn Alereza v. Chicago Title, the plaintiff Bobby wanted to buy a gas station which was on leased property, which would require assignment of the lease to the buyer. Escrow #1 was opened, but the landlord required a personal guaranty to allow assignment and the plaintiff did not want to do that. The plaintiff formed an LLC and assigned the purchase contract to the LLC, but the landlord still wanted a personal guaranty. Escrow #1 was cancelled.

The parties had a new idea – plaintiff would buy the interest in the seller’s LLC, thus the tenant would not change, and there would be no assignment. They opened escrow #2. The landlord found out, and said he would consider it a breach of the lease. Escrow #2 closed, and the plaintiff was not a party to the escrow. The escrow officer obtained an insurance certificate for the purchased business, but incorrectly got it in the name of the plaintiff’s LLC (created for escrow #1), not the Seller’s LLC. The parties were not speaking at the time, and nobody knew what was happening. The insurer sent a notice of cancellation of the original policy, and the landlord demanded a personal guaranty. It was not given, and there was an eviction action. The plaintiff gave the personal guaranty, and sued the escrow company for negligence. The court found that, as the individual plaintiff Bobby was not a party to the escrow, there was no liability.

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When someone who owes a debt transfers property out of their name in order to prevent the creditor from collecting against that property, the transfer may be set aside under the Uniform Fraudulent Transfer Act. A classic move seen by business and real estate attorneys is the transfer of real estate to someone who disappears and cannot be served with a summons and complaint. This does not necessarily end the story, as the fraud is so obvious that the courts will not aid them in their fraud. In a recent decision involving an obviously fraudulent conveyance, the new owner of the property had been in prison and was subsequently deported to Mexico. That was not enough to keep the creditor from undoing the transaction.

Sacramento fraudulent transfer attorneyIn Diana Buchanan v. Ramon Soto, Maria Soto bought a business from Buchanan for over $300 thousand but did not pay for it. The plaintiff was in the process of obtaining a judgment against Maria, when Maria transferred her real estate in Vista, CA to her husband Ramon as his separate property. Plaintiff sued Maria & Ramon to undo the fraudulent conveyance. Of course, Ramon could not be found, because he was deported due to criminal activity, and was somewhere in Mexico. The plaintiff asked Maria where, but Maria did not know where other than rural Mexicali.

The court allowed plaintiff to serve Ramon by publication. A trial was held, and the plaintiff won. Ramon tried to set aside the judgment due to lack of service, but failed. They appealed, claiming that the California court lacked personal jurisdiction because Ramon had not been properly served.

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Parties such as corporate directors, partners and managers of LLC’s owe each other a fiduciary duty, which is a duty of loyalty and a duty of care. These are legal duties to act solely in another party’s interests, and not profit from their relationship with their principals unless they have the principals’ express informed consent. Violating this duty can result in liability. But, even if you do not owe someone a fiduciary duty, you can be found liable for aiding and abetting someone else in breaching such a duty, something to be aware of in any any transaction.. Under California Law, liability may be imposed on one who aids and abets the commission of an intentional tort if the person-

(a) knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act, or

(b) gives substantial assistance to the other in accomplishing a tortious result and the person’s own conduct, separately considered, constitutes a breach of duty to the third person.

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When the same debt is secured by liens on both real property and personal property, the lender has options as to how they are allowed to enforce their security interest. They can enforce against the real property under real property law, against personal property under the Commercial Code, or both. There are specifics under both areas of law which must be observed, or the lender may lose their security, and a party in this situation may want to consult with a business and real estate attorney. Otherwise, they may run into the problem faced by a lender recently when they failed to adequately describe the personal property in the deed of trust. The Court of Appeals found that the deed of trust did not successfully describe personal property as additional security, and thus any further recourse for the lender would be contrary to the purpose of the antideficiency laws.

mixed collateral attorney sm.jpgIn Thoryk v. San Diego Gas and Electric Company, the owner of an avocado ranch in San Diego County wanted to subdivide it into two-acre homesites. The owner borrowed $1 and ½ million from Highland for this purpose. There was a wildfire which did extensive damage to the property, and the project stopped. Highland foreclosed and obtained title to the property. The owner believed that San Diego Gas and Electric was at fault and sued for damages. Highland joined the suit, claiming that its deed of trust was secured by more than just the property, and extended to any of the owner’s recovery of damages caused to the property; i.e. it was also secured by personal property. Highland argued that it was entitled to a judicially imposed lien under the terms of its deed of trust and related note.

The owner argued that he was protected by the antideficiency laws, which prohibits collecting money from the owner after a trustee’s sale. However, where there are liens established upon both personal and real property in the subject transaction, a foreclosing lienholder using the power of sale may continue to pursue remedies against the former property owner/borrower. The creditor is not seeking a personal judgment for the unpaid balance of a loan, but instead seeks to enforce additional security secondarily liable for the principal loan.

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Individuals create LLCs, same with corporations, for ownership and investment purposes primarily to enjoy limited liability. If you invest $10 in an LLC and someone gets a huge judgment against the LLC, the most you could lose is your investment -the $10. The judgment creditor would not be able to come after you personally to collect the balance of their judgment. However, not all LLCs or corporations have assets from which a judgment may be collected. Sacramento area business and real estate attorneys are occasionally asked by clients withe judgments what can be done to go after the members, managers, directors or shareholders. As one group of LLC members recently discovered, if the LLC’s distributions to them leaves the LLC penniless and essentially dissolved, the creditor may collect from the members.

Yolo LLC attorney.jpgIn CB RICHARD ELLIS, INC. v. TERRA NOSTRA CONSULTANTS, the real estate broker was seeking their commission on sale of 38 acres in Murrieta for $11.8 million. While the broker had the property listed, the buyer made an offer. Before closing, either the listing ended or the LLC which owned the property fired the broker, it was not clear. The sale closed. A few days after the cash went from escrow to the seller LLC’s bank account, it all left the account and was distributed to the members. The broker arbitrated its dispute with the LLC (because there was an arbitration provision in the listing agreement) and obtained a judgment against the LLC. But, of course, the LLC had no money.

The broker than filed suit against the members. Its argument was in the Corporations code, which provides for liability in the event the entity has been dissolved. Applicable was the old Section 17350 (which was replaced by the equivalent section 17707.07) provides:

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