Facts

In 2001, plaintiff Michael H. Clement Corp. (MHCC) entered into an agreement to sell an industrial property in Antioch, CA, where MHCC had conducted business since 1985, to defendant Frank Alegre for $1.3 million. The agreement was conditioned on MHCC obtaining entitlements to build improvements on a separate property in Byron, CA. According to plaintiffs counsel, the entitlements were not obtained. Consequently, escrow did not close and the sale of the Antioch property was not consummated.

On Sept. 17, 2003, following extended negotiations, MHCC and plaintiff Michael Clement, individually, entered into another agreement with Frank Alegre and the Alegre Family Trust, entitled the Rental and Development Agreement (RDA). The agreement was drafted by Richard Bowles, of the Walnut creek, California firm, Bowles & Verna. Under the RDA, the plaintiffs agreed to close escrow on the Antioch property and the defendant agreed to allow plaintiffs to remain on the Antioch property while the defendants developed a second property (the Holland Tract) to which the plaintiffs would eventually move. Additionally, the plaintiffs were to take the money received from the sale of the Antioch property and acquire a third property which the plaintiffs would then trade for the Holland Tract. Finally, the agreement provided that if the defendants failed to develop the Holland Tract, then the plaintiffs would be entitled to repurchase the Antioch property. The purpose of this arrangement was, in part, to obtain tax shelters for the parties. In fact, the sale of the Antioch property resulted in a $400,000 tax savings for the defendants.

The plaintiffs sold the Antioch property to the defendants, but the defendants did not build out the Holland Tract. The plaintiffs did not acquire the Navy Drive property which had been approved by the defendants. The plaintiffs, instead, attempted to exercise the repurchase option. The defendants refused to honor the repurchase, citing the plaintiffs' failure to acquire the Navy Drive property as the source of the breach. The plaintiffs claimed that the language of the RDA authorized them to convey to the defendants any property of "like value" to the built out Holland Tract. The defendants contended that approval of the property to be conveyed was essential and that the plaintiffs' failure to acquire the Navy Drive property excused the defendants' further duties under the RDA.

The plaintiffs filed suit against the defendants, seeking multiple remedies including specific performance of the repurchase.

During discovery, the defense sought to to conduct discovery regarding the underlying loan and the plaintiffs financial condition in an effort to prove that the plaintiffs did not have the ability to perform the contract. The plaintiffs' revealed details regarding both the loan commitment and the source of its down payment. However, asserting that it was a violation of financial privacy, the plaintiffs blocked the defense's inquiry into the financial information given to the banks which led to their decision to approve the loan. The defense moved during trial to exclude the testimony of the plaintiff's loan commitment officer and the motion was granted.

Prior to trial, MHCC filed for chapter 11 bankruptcy protection, sought to stay the court action, and removed the case to bankruptcy court. The case was remanded to the superior court and the case was tried to its conclusion.

After four unsuccessful mediations, the case proceeded to trial.

PLAINTIFFS' CONTENTIONS:
The plaintiffs contended that the defendants breached the agreement by failing to acquire and build out the Holland property and by failing to allow the plaintiffs to reacquire the Antioch property. The plaintiffs contended that, under the RDA, plaintiffs' property acquisition was only subject to the defendants' approval if the defendants were called upon to partially finance the purchase of the property. However, with regard to the trading of the property, the RDA did not require that it be the same property as the one financed. All that was required, the plaintiffs claimed, was that the property to be traded be the same value as the Holland Tract. They further contended that the "buy-back" provision of the RDA should be specifically enforced such that MHCC's exercise of the option to buy back in November 2005 should entitle it to buy the property for $1.3 million less commissions paid. Alternatively, the plaintiffs argued that the September 19, 2003 sale of the Antioch property should be rescinded. Finally, the plaintiffs contended that the case was remanded to superior court only for resolution of the issue of whether the plaintiffs had properly exercised the option to repurchase the property sold to the defendants. The court, they contended, should not have been tried to conclusion.

DEFENDANTS' CONTENTIONS:
The defense contended that, under the RDA, the third property was subject to their approval. The reason, the defendants contended, the third property had to be subject to their approval was because it was ultimately going to be traded to them in exchange for the property defendants were to acquire and build out for the benefit of the plaintiffs and because all of the income from the third property above the debt service, taxes and insurance, were to be paid to the defendants. The defense contended that the failure to acquire a third property excused their performance of any obligation to acquire and develop the Holland Tract. The defense further contended that MHCC obtained the entitlements it was to get under the 2001 agreement and, therefore, the Antioch property was sold pursuant to the 2001 agreement. As such, the defense asserted, the proposed rescission would not entitle the plaintiffs to reacquire the Antioch property because it was not sold pursuant to the 2003 agreement. The defense further claimed that the plaintiffs were never able to perform and, therefore, could not get specific performance of the 2003 agreement because they could not show they were able to tender the purchase price.

Result

The court ruled that the plaintiffs were unable to prove ability to perform and the defendants' motion for judgment, pursuant to CCP 631.8, was granted. The defense was awarded fees and costs of $858,000. The defendants' cross-complaint, which remains under the jurisdiction of the bankruptcy court, has not been resolved. The plaintiffs' subsequent claim for malicious prosecution is stayed due to the bankruptcy filing.

Other Information

The case was vigorously litigated and a sanction award against the plaintiffs was affirmed in the reported decision of Clement v. Alegre, 177 Cal.App.4th 1277. The plaintiff also filed a malpractice case against the lawyers who drafted the 2003 agreement; the action was stayed pending the outcome of this action. A timely appeal has been filed. FILING DATE: Feb. 22, 2006.