What Happens At the End of an LLC’s Term?

In its operating agreement, a Limited Liability Company, or LLC, may specify a termination date or other event that will result in the dissolution of the LLC. On the termination date or occurrence of another specified event, the LLC is “dissolved” (Corporations Code section 17707.01(e)), with only limited powers to “wind up” its affairs (Corporations Code section 17707.04).

Generally, after the dissolution has occurred, a certificate of dissolution must be filed with the California Secretary of State. Corporations Code section 17707.08(a). Upon the completion the winding up of the LLC’s affairs, a certificate of cancellation of the articles of organization must be filed with the California Secretary of State. Corporations Code section 17707.08(b). When the certificate of cancellation is filed, “a limited liability company shall be cancelled and its powers, rights and privileges shall cease.” Corporations Code section 17707.08(c).

Even after the filing of a certificate of cancellation, the LLC continues to exist for the purpose of prosecuting and defending actions by or against it in order to collect and discharge obligations, disposing of and conveying its property, and collecting and dividing its assets. Corporations Code section 17707.06(a). However, “A limited liability company shall not continue business except so far as necessary for its winding up.” Corporations Code section 17707.06(a).

Even after a certificate of dissolution has been filed, the LLC can be revived under limited circumstances enumerated in Corporations Code Section 17707.09, by the filing of a “certificate of continuation,” which has the effect of nullifying the certificate of dissolution.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

Riverisland, Parol Evidence, and the Fraud Exception

We recently wrote about contract integration clauses, which will usually state that the contract is “completely integrated,” and the parol evidence rule, which works to keep out prior or contemporaneous statements or writings that would modify the contract.  In this post we discuss Riverisland Cold Storage, Inc. v. Fresno–Madera Production Credit Assn., 55 Cal. 4th 1169 (2013).   In short, Riverisland states that the parol evidence rule is not a bar to evidence that goes to show fraud in connection with the contract, and the court may look to, for example, prior statements and emails, to determined what agreement was made by the parties.

In Riverisland, the plaintiffs restructured and reaffirmed a debt owed to the Fresno-Madera Production Credit Association (“Credit Association”).  The restructuring agreement provided that the Credit Association would take no enforcement action for three months if the plaintiffs made specified payments and pledged eight (8) parcels of land as additional collateral.

Later, the plaintiffs fell behind on payments and the Credit Association instituted foreclosure proceedings. Eventually, the plaintiffs repaid the loan and the Credit Association dismissed its foreclosure proceedings.

However, the plaintiffs filed an action seeking damages for fraud and negligent misrepresentation, and included causes of action for rescission and reformation of the restructuring agreement. In their complaint, the plaintiffs alleged that the Credit Association’s vice president told them two weeks before the agreement was signed that the Credit Association would extend the loan for two years in exchange for two “ranch properties” as the additional real-property collateral, but the written contract actually allowed for only an additional three months of forbearance and identified eight (8) parcels as additional collateral.

The plaintiffs did not read the agreement, but simply signed it at the locations tabbed for signature. The Credit Association moved for summary judgment, contending that the plaintiffs could not prove their claims because the parol evidence rule barred evidence of any representations contradicting the terms of the written agreement.

At the time that the plaintiffs brought their complaint, California had operated under the longstanding rule set forth in Bank of America etc. Assn. v. Pendergrass, 4 Cal. 2d 258 (1935), which prohibited the use of parol evidence in cases where fraud is alleged in connection with a purportedly “integrated” contractual agreement.

In Riverisland the Supreme Court concluded that the limitations Pendergrass placed on the fraud exception to the parol evidence rule were not supported by the language of the statute establishing that exception (CCP § 1856(f)(g)) or consistent with prior case law. (55 Cal.4th at 1182)  Further, it held that “Pendergrass failed to account for the fundamental principle that fraud undermines the essential validity of the parties’ agreement. When fraud is proven, it cannot be maintained that the parties freely entered into an agreement reflecting a meeting of the minds. . . . Parol evidence is always admissible to prove fraud, and it was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud.” (Id. at 1180–1182)

How will this affect contract related litigation in California?   Riverisland leans against a court granting dispositive motions, like demurrers, motions for summary judgment, and motions for judgment on the pleadings, where the plaintiff alleges or can show that there is parol evidence supporting their claims, even if the contract is “fully integrated” and/or has an integration clause.

What is the Parol Evidence Rule?

A key part of understanding why an integration clause is important is understanding what the parol evidence rule is.

What is the Parol Evidence Rule?

Generally speaking, the parol evidence rule bars (or keeps out) extrinsic evidence of a prior or contemporaneous agreement.  In English, this means that once parties to a contract sign and agree to the terms of the contract, the parol evidence rule will keep the parties to the agreement from trying to submit prior oral or written statements to modify or contradict terms or clauses in the contract.

Take the example we posted in our previous blog post on integration clauses.  In that example, Party B agreed to buy “industry standard gears” for a specified sum, but in Party B’s conversations with Party A, they discussed “type-1” gears.  Thus, when Party A delivers “type 3” gears, Party B will go to court and attempt to submit parol evidence that the agreement was for 100 “type-1” gears.

As we noted in prior posts, the parol evidence rule is codified in California Code of Civil Procedure section 1856, which states that the “[t]erms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.”   Likewise,  California Civil Code section 1625 states that “[t]he execution of a contract in writing, whether the law requires it to be written or not, supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument.”

As we explained in our prior blog post, most contracts have an integration clause, which will be used  to determine whether the contract is “a final expression” of the parties’ agreement.  Assuming that is the case, a party will have to show that an exception to the parol evidence rule applies.

What are the Exceptions to the Parol Evidence Rule?

Generally, the parol evidence rule will not allow a party to a written agreement to submit prior inconsistent statements (written or oral), although there are exceptions.  The following general circumstances are exceptions to the parol evidence rule:

  • Incomplete writings
  • Collateral or independent agreements
  • Subsequent agreements
  • Ambiguity or uncertainty in instrument
  • Illegality or bad faith
  • Fraud
  • Mistake
  • Lack of consideration

If one of these exceptions applies a party may then be able to submit evidence that was prior to or contemporaneous with the written contract in order to explain or contradict the terms of the deal.

Ninth Circuit: Section 16600 Applies to Settlements

Section 16600 of the California Business and Professions Code prohibits contracts from restraining individuals “from engaging in a lawful profession, trade, or business of any kind.”  While the reach of Section 16600 is broad (recently reaching as far as the  Delaware Court of Chancery), it has traditionally been applied only to employment contracts or agreements that contain non-competition or non-compete clauses where the former employee is prevented from working with a competitor.

But what about a settlement agreement that prohibits employment with a former employer, i.e., an agreement that a former employee can only work for competitors?  Last week the 9th Circuit Court of Appeals addressed that very issue in Golden v. California Emergency Physicians Medical Group, No. 12-16514, 2015 WL 1543049 (Apr. 8, 2015).

In that case, Donald Golden (“Golden”), an emergency room doctor, sued his former employer, California Emergency Physicians Medical Group (“CEP”), and others alleging various causes of action including racial discrimination.  In open court CEP agreed to pay a “substantial monetary amount” to Golden, and Golden agreed to withdraw his claims against CEP and “waive any and all rights to employment with CEP or at any facility that CEP may own” now and in the future.  (Notably, CEP is a consortium of more than 1,000 physicians and staffs and manages emergency rooms and inpatient centers throughout California.) 

Golden later refused to sign the settlement agreement.  The district court ultimately granted a motion by Golden’s former counsel to intervene and ordered that the settlement agreement be enforced. Golden appealed to the 9th Circuit on the single issue that the settlement agreement was void under Section 16600.

After addressing the issue of ripeness, the majority began by noting that the California Supreme Court had not ruled on whether Section 16600 applies outside of “typical so-called ‘non-compete covenants,’” and specifically “whether a contract can impermissibly restrain professional practice, within the meaning of the statute, if it does not prevent a former employee from seeking work with a competitor and if it does not penalize him should he do so.”

The majority found that the breadth of the statute meant that Section 16600 was not so limited and that the district court improperly determined that the settlement agreement need not comply with Section 16600.  As the court noted, Section 16600 prohibits “every contract” (not specifically excepted by another statute) that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.”  Therefore, Section 16600 applies to all such restrictions “no matter [their] form or scope.”  The case was reversed and remanded to the district court for further proceedings.

Notably, former 9th Circuit chief justice Alex Kozinski filed  a dissenting opinion accusing the majority of ruling on the case despite the fact that, according to him, “the settlement agreement does not limit Dr. Golden’s ability to practice his profession at this time—except to the extent that he can’t work for CEP.”  In his opinion, the majority misconstrued Section 16600 and allowed it to preserve “an unfettered right to employment in all future circumstances, no matter how remote or contingent.”  Judge Kozinski would have dismissed the case for lack of standing until Golden had actually been fired or denied a position due to the settlement agreement. 

Cardinal Change vs. Abandonment

Previously on the blog, we defined what constitutes a cardinal change in a construction contract. Importantly, California is one of the few states that differentiates between a cardinal change and the related legal theory of  “abandonment.”  It is important for property owners and contractors to understand the difference and the implications of both.

A cardinal change is a change that goes beyond the permitted changes detailed in the contract.  It is usually a request so far outside the scope of the original contract that it frustrates the very purpose of the contract (click here for examples from our previous blog).

“Abandonment” occurs when a property owner is said to have “abandoned” a project or property.  Abandonment can be shown where parties fail to follow change order procedures, when the final product differs substantially from the original contract, and even when there are impermissible cardinal changes.

The legal implications of cardinal changes and abandonment, and specifically the remedies and damages that are available to both, provide that a contractor may recover damages that are a result of excessive, owner-directed changes to a project, beyond what the parties could have reasonably anticipated at the time of contracting.

In fact, in most jurisdictions the two terms are sometimes used interchangeably.  However, according to the California Supreme Court, the two doctrines are “fundamentally different” and the scope of damages available also differ.  This nuanced issue in construction contract law may seem small, but it can have a significant affect on the amount of damages a contractor may recover.

In Amelco Electric v. City of Thousand Oaks, 15 Cal.Rptr.2d 900 (2002), the California Supreme Court held that under an abandonment claim, a contractor is entitled to recover the total cost (less payments received) for work both before and after the contract was abandoned. Under a cardinal change claim, however, the contractor is only entitled to breach of contract damages for the additional work constituting a cardinal change.

If you have any questions about construction contracts, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you.

What is a Partition Action?

As a business law firm, we often deal with partnership disputes.  We have shared information on our blog on how to protect against partnership disputes, as well as tips for solving them such disputes.  Unfortunately, not all disputes can be prevented or solved.  In these circumstances, partnerships often dissolve. When that is the case, , and a partition action may be necessary to distribute partnership assets.

In a partition action, known as a partition of partnership property, a court is asked to divide partnership property equally between amongst interested parties. The guidelines for distributing assets in a partition action are set out in California Code of Civil Procedure section 872.010, et seq.  Although most partition actions involve real estate, but the laws of partition actions can be applied to distributing any type of partnership property, such as manufacturing equipment. Specifically, this type of action would be referred to as an action for partition of partnership property.

If a partner wants to file for a partition action, he or she will have to file a complaint with the court seeking a partition action is initiated like any other legal dispute, meaning that the partner would file a complaint in the appropriate court alleging a cause of action for partition of partnership property.  When the action involves real property, the plaintiff will shall also have to record a notice of pendency of the action, called a ““lis pendens,” in the office of with the county recorder of each county in which any real property described in the complaint is located.  Once recorded, the party should file a Notice of Lis Pendens with the court. This will prevent the other partner from selling or taking loans out on the property by putting buyers and lenders on notice of the pending action.

In general, a court will allow a partition unless it is against the interest of the parties. To determine whether the partition is in the best interest of the parties, the court will consider the character of the property and expenses associated with the partition.

If a court finds that a partition is in the best interest of the parties, it will usually order that the business or property be sold and the proceeds be divided amongst the partners. However, sometimes the parties are able to come to a partition settlement agreement, and the court will merely issue a judgment so that the agreement will be enforced.

If you have questions about partition actions or partnership disputes, consult an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, commercial and real property claims. Contact us at (310) 277-7747 to see how we can help you.

Contract Law: Defining Conflicting Terms- Part 2

Previously on the blog, we discussed ambiguous and conflicting terms in contracts. Most contracts include clauses which provide interpretation rules for ambiguous and conflicting terms. In the absence of such a clause (or if the provisions of the clause do not resolve the conflict), certain California statutes, and case law interpreting and applying those rules, will provide the method of determining  which, if any, ambiguous or conflicting terms can be enforced.

Generally speaking, an ambiguous term can reasonably be read in more than one way.  Likewise, a conflicting term exists where compliance with one or more contractual provisions would violate another contractual provision.

The California Legislature codified contract interpretation rules in the California Civil Code to cover a variety of circumstances that can arise with ambiguous or conflicting terms. A summary of a few of the most common principles  follows below.

Contract Interpretation in General

  • A contract must be interpreted to give effect to the mutual intention of the parties as they existed at the time of contracting, so far as such intentions are both ascertainable and lawful. Civil Code § 1636
  • The whole of a contract should be taken together, so as to give effect to every part, if reasonably practicable, with each clause helping to interpret the other. Civil Code § 1641
  • Several contracts relating to the same matters, between the same parties, and made as part or parts of substantially one transaction, are to be taken together. Civil Code § 1642
  • A contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates. Civil Code § 1647
  • No matter how broad a contract is, it extends only to those things the parties intended to contract. Civil Code § 1648
  • Inconsistencies in a contract must be reconciled, if possible, by an interpretation that will give some effect to the inconsistent clauses, subordinate to the general intent and purpose of the whole contract. Civil Code § 1652

Interpreting Specific Contract Language

  • Contract language should be understood in an ordinary and popular sense, not in its strict legal meaning. The exception to this is when parties use words meant to be taken in a technical sense. For example, construction contracts often use language that references published trade standards, which can be used to interpret the contract. Civil Code § 1644
  • Technical words should be interpreted as usually understood by individuals in the profession or business to which they relate, unless clearly used in a different sense. Civil Code § 1645
  • Contract words that are wholly inconsistent with a contract’s nature, or with the main intention of the parties, are to be rejected. Civil Code § 1653

If you have any questions about ambiguous or conflicting terms in a contract, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.