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Specific Performance, CAM Charges and The Reverse Triangular Merger

Perhaps the title is not sexy enough.  But this California real estate case reeks of greed and overreaching enough to compete with any soap opera.  The case is North Valley Mall, LLC v. Longs Drug Stores California, LLC and was decided by the California Court of Appeal on September 25, 2018.

 

The Lawsuit:

North Valley Mall filed a lawsuit against Longs Drug Store for (1) breach of contract to recover additional Common Area Maintenance (CAM) charges; (2) specific performance to enforce its option under a construction agreement; and (3) declaratory relief to enforce the additional CAM provision and to enforce its option to repurchase the property.

 

The 1968 Contracts:

In 1968—50 years ago—Longs and F. H. & C. Enterprises entered into two agreements.  In the first agreement Longs agreed to construct a drug store on property it had purchased from FHC and to continuously operate the building as a drug store for 10 years.  If Longs did not construct and operate the drug store for 10 years, or otherwise breached the construction agreement, FHC had the right to repurchase the property at cost less depreciation.  FHC owned the property adjacent to Longs and operated a shopping center there.

The second agreement provided that Longs would pay FHC a proportionate share of the common area maintenance (CAM) charges for the shopping center capped at one-fourth of 1 percent of its gross.  However, if Longs sold or leased any portion of the property to a third party, that party’s proportional share of the CAM fees would not be limited to a percentage of gross sales.

The second agreement also provided that if Longs sold or otherwise disposed of the property, FHC shall have an option to purchase it.

 

The Reverse Triangular Merger:

Fast forward 40 years to 2008. North Valley Mall, LLC is FHC’s successor.  Longs has become the target of a reverse triangular merger, its parent company now being CVS Caremark Corporation (CVS).  NVM demanded that CVS pay additional CAM charges, citing the transfer of Longs to CVS as an event triggering the obligation to pay CAM charges without any cap.  NVM further argued that the breach entitled it to exercise its rights under the construction agreement to repurchase the property at cost less depreciation—40 years later!

 

NVM then filed its lawsuit.

 

CVS responded that Longs still owned the property and therefore its CAM obligations remained the same.  NVM argued that Longs was merely a shell entity for the sole purpose of holding legal title, that CVS operated and controlled the property, that the store was renamed CVS, that Long’s headquarters had been moved to CVS’s headquarters and all of Longs’ executives and employees were terminated or resigned after the merger.

 

The Trial Court Ruling:

The trial court granted a motion for summary judgment, holding that the acquisition via a reverse triangular merger did not transfer the real property owned by Longs because in a reverse triangular merger the ownership of the assets of the surviving corporation remain with the surviving corporation, Longs, after the merger.  The trial court found that because there was no sale or lease of the property, the second agreement was not breached.

 

The Appellate Court Analysis:

Corporations have an identity apart from that of the owners.  Therefore, the transfer of corporate stock is not deemed a transfer of the real property of a legal entity because the separate legal entity still owns the property.

A traditional merger—one in which two or more corporations merge, one survives and the others disappear—results in the transfer of the assets of each disappearing corporation to the surviving corporation.

The reverse triangular merger—sometimes referred to as a triangular phantom merger—is used when the target corporation (e.g., Longs) has licenses, permits, or property which is impossible or highly burdensome to attempt to transfer.  The usefulness of such a merger is to leave the target corporation intact as a subsidiary of the acquiring corporation where the target corporation has contracts or assets that are not easily assignable. In this case Longs became a wholly owned subsidiary of CVS and was converted to a limited liability company.  Longs remained vested with the legal title to the property.

The Court of Appeal found that reverse triangular mergers are a “well-recognized” method of reorganization that preserve the corporate entity of the target corporation.  Moreover, a plaintiff who deals with a corporation must have known that shares of stock therein might be owned by different stockholders and are subject to being assigned to others in the ordinary course of business.  The Court concluded that Longs never transferred title to the property and continues to hold title to the property.

A prerequisite to increasing the CAM charges under the second agreement was that the property be sold or leased to a third party.  Since Longs had not sold or leased the property to a third party, the CAM charges should not have been increased.

And if the second agreement was not breached, then NVM had no basis for claiming a right to repurchase the property under the construction agreement.

The California Court of Appeal affirmed the grant of the motion for summary judgment.

 

Contact an Experienced Real Estate Trial Attorney

Specific performance, common area maintenance charges, options to purchase and corporate structure are all issues that we deal with at Wagenseller Law Firm in downtown Los Angeles.  We are real estate trial lawyers who aggressively and competently handle real estate lawsuits for our clients. If you are looking for an experienced real estate litigation attorney in Los Angeles, please contact Laine Wagenseller at (213) 286-0371.

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