Appellate court rules agreement wasn't breached in dispute with North Valley Mall, Longs Drug Stores

By Charmaine Little | Nov 1, 2018

SACRAMENTO – On Sept. 25, the 3rd Appellate District in the Court of Appeal of California in the affirmed a lower court’s decision in a triangular merger case.

Justice Cole Blease authored the opinion while Justices Harry E. Hull Jr. and Andrea Lynn Hoch concurred. 

"At issue in this case is whether the court should 'go behind' the form of a corporate reorganization in order to alter contractual obligations, when the corporation utilized the type of reorganization it used in order to avoid altering its contractual obligations. ... We conclude that where the form of reorganization was not chosen to disadvantage creditors or shareholders, we will not ignore the form of reorganization chosen by the corporation. We will affirm the judgment," the ruling states.

North Valley Mall LLC sued Longs Drug Stores California LLC and CVS Caremark Corp. over an allegation of breach of contract in hopes of recovering fees from a common area maintenance (CAM) agreement dating to 1968. It also sued for specific performance to enforce its clause under the construction agreement, as well as declaratory relief to enforce an additional CAM charge provision and to enforce its option to repurchase the property in question.

Longs and CVS filed a cross-complaint and asked for the extra CAM charges that were allegedly overpaid and motioned for summary judgment. The Butte County Superior Court granted the motion and pointed out “the acquisition 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,” according to the ruling.

Considering there wasn’t a sale or lease of the property, the agreement was never breached, the Superior Court ruled.

The appeals court agreed, affirming the summary judgment. It pointed out that while CVS got the issue and outstanding shares of Longs, Longs is still entrusted with the legal title of the property. It reiterated the trial court’s argument that there was never a sale or lease of the property. Even though North Valley Mall said the lower court shouldn’t have granted summary judgment in the breach of contract and breach of implied covenant of good faith and fair dealing claims, those claims were brought because of CVS and Longs’ failure to pay the extra CAM charges. 

“Nevertheless, we cannot ignore the fact that Longs has not sold or leased the property, which is the prerequisite under the Further agreement to increased CAM charges,” the Appeals Court added. 

It also ignored North Valley Mall’s challenge that the court should evaluate California tax law. It ultimately determined North Valley Mall wasn’t owned an increase in CAM charges, and that Longs didn’t breach the Further agreement. It added North Valley Mall doesn’t have any foundation to claim a right to repurchase the property via the construction agreement.

The appeals court wrapped its opinion with the notion that CVS and Longs’ decision to pay the extra CAM charges for two years doesn’t mean they waived their right to state there wasn’t a sale or lease of the property.

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