Corporate Agreements

Law Talk

Sam K. Abdulaziz
Attorney at Law

This is a case where the Court of Appeal reversed a decision from the trial court on all counts. 607 South Park, LLC (South Park) had entered into an agreement to sell a hotel to "Creative Environments of Hollywood, Inc., as General Partner of 607 Park View Associates, Ltd., a California limited partnership." Several months later Creative Environments executed a contract with 02 Development, LLC (Development) giving up its rights in the hotel agreement to Development.

When Development and Creative Environments had signed the agreement, Development did not yet exist. But later on, Development filed all the appropriate paperwork (articles etc.) with the California Secretary of State. South Park did not go through with the agreement. Development sued South Park for breach of the hotel purchase agreement stating that South Park did not perform under the contract and deprived Development of its rights under the agreement.

South Park argued two different points. One was that there was not an enforceable contract between them and Development since Development did not exist when the agreement was executed. South Park also argued that its denial of the contract did not cause Development harm because they were not ready to fund the purchase of the hotel. The trial court ruled in South Park's favor on both issues. The Court of Appeal reversed the decision on both points.

As stated above, the first issue was that there was no enforceable contract between South Park and Development. The law has long been that corporations can implement pre-incorporation contracts made on its behalf as long as the corporation "has adopted the contract or otherwise succeeded to it." South Park argued that a nonexistent business entity cannot be a party to a contract. South Park's argument does not matter since once Development came into existence, it could enforce any pre-organization contract made on its behalf.

The second issue was that Development did not have the necessary money to fund the sale of the hotel. However, South Park did not give any evidence that Development would have been unable to arrange to get the necessary funding on time if given the opportunity. Since South Park did not give any evidence to support its claim, the burden of proving that they could get the money never shifted to Development. Therefore, the trial court's decision was reversed.