In 02 Development, LLC, v. 607 South Park, LLC, (— Cal.Rptr.3d —, 2008 WL 240068, Cal.App. 2 Dist., Jan. 30, 2008), a California Court of Appeal considered a corporation’s appeal of a trial court’s ruling that it could not enforce a contract made on its behalf before it had actually incorporated. The court reversed that decision ruling that the corporation could endorse the contract providing it had “adopted the contract or otherwise succeeded to it.”
In 2004, 607 South Park, LLC (“607 South Park”), a limited liability corporation, entered into an agreement to sell a hotel to Creative Entertainments of Hollywood (“Creative”), the general partner in a limited partnership called 607 Park View Associates. In February 2005, Creative and 02 Development, LLC (“02 Development”) executed a contract assigning Creative’s rights in the hotel agreement to 02 Development. However, 02 Development did not exist until May 2005, when articles of incorporation were filed with the California Secretary of State.
607 South Park decided not to go through with the sale, and 02 Development sued 607 South Park for breach of the hotel purchase agreement. 607 South Park moved for summary judgment on the grounds that it had no enforceable contract with 02 Development because it did not yet exist when the assignment agreement was executed, nor had 02 Development demonstrated that it had the funds needed to close the purchase. The trial court granted summary judgment for 607 South Park and 02 Development appealed.
“It is hornbook law that a corporation can enforce preincorporation contracts made in its behalf, as long as the corporation ‘has adopted the contract or otherwise succeeded to it,’” the court said, quoting 1A Fletcher Cyclopedia of the Law of Private Corporations (2002 rev. vol.), Sec. 214, pp. 448-450. Therefore, 607 South Park’s claim that there is no enforceable contract fails as a matter of law. Furthermore, 607 South Park’s argument that there is no evidence that 02 Development ratified the assignment agreement after coming into existence fails because 607 South Park never raised the issue in previous proceedings thus, never shifting the burden to 02 Development to show evidence of ratification.
Additionally, the court said, the argument that 02 Development had neither funds to complete the transaction nor third-party commitments for the funds fails because “607 South Park presented no evidence that 02 Development would have been unable to arrange for the necessary funding to close the transaction on time if 607 South Park had given it the opportunity, instead of repudiating the contract in advance.”
The judgment was reversed and the trial court was directed to enter an order denying the motion for summary judgment allowing 02 Development’s suit for breach of contract to proceed.