Reported by Ai M. Kelley:

Pre-organization agreements assumed by LLC are enforceable
A seller of a hotel entered into a purchase agreement with a buyer who was a syndicator. The syndicator then assigned his purchase rights to acquire the hotel to a limited liability company (LLC) he intended to form to fund the purchase. The LLC did not exist at the time of the assignment. Articles of organization were later filed with the California Secretary of State. The seller cancelled the purchase agreement on learning of the assignment to the LLC, claiming the assignment was unenforceable since the LLC did not exist when the assignment took place. The LLC claimed the assignment of the purchase agreement, and thus the purchase agreement, was enforceable by the LLC since an LLC can enforce pre-organization agreements made on their behalf. A California appeals court held the assignment, and therefore the purchase agreement rights assigned, were enforceable since entities are entitled to enforce pre-organization contracts made on their behalf.

Editor’s note—The hornbook or blackletter law which establishes that corporations, and in this case, LLCs, can enforce pre-organization agreements made on their behalf also requires the corporation/LLC to adopt or ratify the agreements, called an assumption.

Also at issue in this case:

If challenged, buyer need only show financing would have been available to close
A seller of a hotel entered into a purchase agreement with a buyer who was a syndicator. The syndicator then assigned his purchase rights to the hotel to a limited liability company (LLC). The LLC did not exist at the time of the assignment agreement. Articles of organization were later filed with the California Secretary of State. The seller then repudiated the purchase agreements due to the assignment and refused to sell the hotel to the LLC. The LLC sought to recover its money losses from the seller for breach of contract. The seller then claimed his repudiation of the agreements did not cause the LLC any harm since the LLC was not ready, willing, and able to purchase the hotel. The LLC claimed it only had to show that it could arrange for the necessary funding to close the transaction. A California appeals court held the LLC could recover its money losses for the seller’s breach of contract since the LLC only had to show that it would have been able to arrange mortgage and equity financing prior to close of escrow had the seller not repudiated the agreements prior to the date scheduled for closing. [02 Development, LLC v. 607 South Park, LLC (January 30, 2008) __CA4th__]

Reported by David F. Crane:

Buyer’s broker compels buyer to arbitrate based on purchase agreement
A buyer, upon discovering the existence of zoning violations on the real estate he had purchased, sues his broker for failure to disclose the zoning violations. The purchase agreement included an arbitration clause signed by both the seller and the buyer, but not the broker. The broker petitioned for arbitration of the buyer’s dispute, but the buyer opposed the petition, claiming his broker could not enforce the arbitration clause in the purchase agreement since the broker was not a party to the purchase agreement. The broker claimed he could compel arbitration since he had an agency relationship with the buyer and the buyer did sign the purchase agreement’s arbitration clause. A California appeals court held that the broker could compel the buyer to arbitrate their dispute since the buyer signed the purchase agreement’s arbitration clause agreeing to arbitrate disputes and the broker had a pre-existing agency relationship with the buyer on the transaction. [Nguyen v. Tran (December 7, 2007) __CA4th ___]

Reported by Giang Hoang:

Quick-take evaluation set on date compensation deposited
A government agency exercised its power of eminent domain to take a property. To take immediate possession, called a quick-taking, the agency deposited with the court the amount of the property’s value set by an appraisal as just compensation which the owner could withdraw. The owner did not withdraw the funds, intending to contest the amount deposited as sufficient compensation. The property’s value increased in the one year period between the deposit and the trial. The owner filed a request to increase the amount of compensation based on its value at the time of trial, claiming he was entitled to the value of the property at the later date since the amount originally deposited did not adequately compensate him for the taking. The agency claimed the date of the valuation was the time of the deposit and while an owner whose property is subject to a quick-taking may request an increase in the amount of the probable just compensation for his property, he may not change the date of valuation to benefit from changing market conditions. A California appeals court held the date of valuation was properly set as the date of the deposit since an owner may not request a change in date of valuation to benefit from changing market prices when the request to increase the amount of probable compensation was available to him at the time of the deposit. [Eastern Municipal Water District v. Superior Court (November 19, 2007) __CA4th___]

Editor’s note—The court relied on the 2007 case Mt. San Jacinto Community College District v. The Superior Court of Riverside County in its decision, digested by first tuesday here.

Landlord liable when lease agreement deceptively obtained
The landlord of a nonresidential space advised a prospective tenant that the square footage of the space and the common area as represented by the landlord was accurate and that the prospective tenant need not confirm the square footage. The tenant entered into a lease agreement for the space which called for the amount of rent and common area maintenance expenses (CAMs) to be based on the square footage of the leased space.The lease agreement contained a provision stating the amount of rent and CAMs were not subject to revision whether or not the stated size of the space was greater or lesser than represented. The tenant later learned the square footage of the space was less than what was represented, while the square footage of the common area was greater, resulting in the tenant overpaying for both the space and the common area expenses based on square footage calculations. The tenant sought to recover his overpayment of rent from the landlord, claiming the lease agreement was obtained through deceit since the landlord misrepresented the square footage of the space and the common area to charge the tenant artificially higher rents. The landlord claimed he was not liable for any payment of excess rent by the tenant since the lease agreement contained a no-contest provision stating rent was not subject to revision for a difference in square footage. A California appeals court held the landlord was liable for the overpayment of rent and CAMs on the difference in square footage since a landlord may not claim protection under any provision in a lease agreement when he obtains the lease agreement through deception.[McClain v. Octagon Plaza, LLC (January 31, 2008) __CA4th___]

Quiet title rights run from original date of boundary-fixing
The eastern boundary of a Native American reservation was fixed in the middle of a river by United States government legislation. The tribe was granted oil and gas rights to the land within the new boundaries. The statute of limitations on quiet title actions by others with claims to the land granted to the tribe was limited to twelve years, except for quiet title actions initiated by the state. Several decades later, the state entered into an oil and gas lease with a development company on land which included land within the reservation. The development company then sought to quiet title to the land, claiming the twelve year statute of limitations did not apply since the development company was successor to the state with no limitation on time for initiating claims to the reservation land. The US government claimed successors in interest to the state were not protected against expiration of the statute of limitations on the quiet title actions. The United States Court of Appeals held the development company could not quiet title to the land since only the state was protected against expiration of a right to quiet title, not the state’s successor. [Fidelity Exploration and Production Company v. United States (November 6, 2007) ­­__US___]

FTB may not tax income on out-of-state sales
A limited liability company (LLC) registered with the California Secretary of State in order to do business in California. Registered LLCs must pay a minimum franchise tax of $800 every year and an additional amount based on the total income of the LLC from all sources for each taxable year. The LLC paid the minimum $800, but failed to pay the additional fees based on its total income. The California Franchise Tax Board (FTB) notified the LLC of the amount of fees due, including late penalties and interest. The LLC paid the fees demanded, and timely filed a claim for a refund on the amount, which the FTB denied. The LLC claimed the taxation of income earned outside of California was unenforceable since the fees were a tax on all income received by the LLC, not just income generated in California, a violation of the federal Commerce Clause. The FTB claimed the fees did not violate the Commerce clause since they were regulatory fees for the purposes of regulating a registered LLC. A California appeals court held the fee was a tax since no regulatory program existed for registered LLCs and thus the tax on all income of the LLC was unconstitutional as a tax on income earned outside of California. [Northwest Energetic Services, LLC v. California Franchise Tax Board (2008) __ CA4th___]

Policy limits settlement rescinded when based on deceit
A housing development which sustained heavy damaged during an earthquake was covered by an insurance policy for the loss. The insurer represented the maximum policy limit as $5,000,000.  The homeowners’ association (HOA) and the carrier entered into a settlement agreement; the carrier paid nearly $5,000,000 the HOA executed a release of liability. Later, the HOA discovered the policy limit was nearly $12,000,000. The HOA sought to rescind the settlement agreement and to obtain $7,000,000, the amount of the remaining coverage due. The insurer claimed the HOA could not recover the remaining $7,000,000 since the HOA could not both keep the settlement amount they received and attempt to rescind the settlement agreement. The HOA claimed it was entitled to rescind the agreement and recover the remaining $7,000,000 under the insurance policy since the insurer misrepresented the policy limit in order to avoid paying the full amount owed under the policy. A California appeals court held the HOA was entitled to rescind the settlement agreement without returning the settlement funds since an insurance carrier may not misrepresent the limits of coverage and its liability under the policy it issued and obtain an enforceable settlement agreement. [Village Northridge Homeowners’ Association v. State Farm Fire and Casualty Company (December 17, 2007) __CA4th___]