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Exculpatory Clause Declawed
by Michael Blahy

A tenant sued its landlord for not having adequate parking. The landlord’s attempt to limit its liability failed.

K&G/Seabridge II, LLC (K&G) and Rocklin Covenant Group, LP (Rocklin) negotiated leases at the Seabridge Shopping Center, in Oxnard California. While negotiating with Yolanda, an owner and operator of restaurants, they were also negotiating with a gym for a unit in the same center. This fact, they failed to disclose to Yolanda. A lease, personally guaranteed by Rod Gietzen, Yolanda’s president, was signed.

The gym was popular, and its clients took up much of the available parking. Yolanda’s lost business as a result.

Yolanda’s sued K&G, Rocklin, and their agent, Kahl and Goveia Commercial Real Estate (KGCRE) in March of 2012, for fraud and breach of lease. After four years, Yolanda’s won a judgment of almost $2 million plus attorney fees and costs. KGCRE appealed saying that they were not a party to the lease. KGCRE was almost $500,000 in attorney fees.

During the appeal process, the shopping center lenders foreclosed on the property, causing Yolanda to bring a motion in June 2017, to amend the judgment to add KGCRE and Covenant Real Estate Management, Inc. (CREM) as judgment debtors. The claim is that the two are alter egos of K&G and Rocklin and under the Corporations Code are liable for the former’s obligations.

KGCRE and CREM denied they are alter egos and asserted they have no liability per article 39 of the lease., which states:

    The liability of Landlord under this Lease shall be limited to Landlord’s interest in the Shopping Center. Tenant agrees to look solely to Landlord’s interest in the Shopping Center for the satisfaction of any liability, duty or obligation of Landlord with respect to this Lease, or the relationship of Landlord and Tenant hereunder, and no other assets of Landlord shall be subject to any liability therefor. In no event shall Tenant seek, and Tenant does hereby waive, any recourse against shareholders and/or constituent partners of Landlord and the partners, directors, officers or shareholders thereof, or any of their respective personal assets for such satisfaction.”

The trial court ruled that KGCRE is the alter ego of K&G, but that CREM was not the alter ego of Rocklin. It declined to add either as debtors, but did strike the previous award of almost half a million dollars in attorney fees against Yolanda.

Yolanda appealed all, but the striking of the previous award.

Yolanda’s argued CREM is a general partner in a limited partnership which has Rocklin as a limited partner. Yolanda pointed to Corporations Code, which states that “[A]ll general partners are liable jointly and severally for all obligations of the limited partnership unless otherwise agreed by the claimant or provided by law.”

CREM argued that article 39 of the lease is an agreement by the claimant not to hold it liable.

Yolanda’s argued that the entire lease was merged into the foreclosure judgment, therefore article 39 does not limit enforcement of the judgment to the lessor’s interest in the shopping center.

The California Court of Appeals said:

    It is undisputed that all of Rocklin’s interest in the shopping center was acquired by Rocklin’s lender at a trust deed foreclosure sale. It is also undisputed that under the terms of the trust deed, Rocklin assigned all of its interest in all leases of the shopping center in the event of default. Thus, Yolanda’s lease was assigned to Rocklin’s lender.

    Upon assignment, all rights in the lease belong to assignee and the assignor’s rights are extinguished …

    The general rule is that an assignment extinguishes the rights of the assignor and its third party beneficiaries. CREM presents no reason why that rule should not apply here. Article 39 and similar lease provisions are in the nature of an exculpatory clause. Such a clause allows a landlord to establish an under-capitalized entity as a nominal landlord. This insulates an actual landlord from liability for harms to its tenants. CREM cites no policy affording such clauses preferential treatment after assignment. Nor can we think of any”.

The California Court of Appeals ruled:

    The judgment (order) is reversed with instructions to amend the judgment to include CREM as a judgment debtor.

    Costs are awarded to appellants. ”

(Gietzen v. Covenant RE Management, Inc. (California Courts of Appeal, Docket: B287339(Second Appellate District)))

Decided: September, 2019
Published: September, 2019

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