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Mission West Properties v. Republic Properties Corporation

July 18, 2011

MISSION WEST PROPERTIES, L.P., ET AL., PLAINTIFFS, CROSS-DEFENDANTS, AND APPELLANTS,
v.
REPUBLIC PROPERTIES CORPORATION, ET AL., DEFENDANTS, CROSS-COMPLAINANTS AND RESPONDENTS.



Trial Court: Santa Clara Superior Court Trial Judge: Hon. Neal A. Cabrinha (Santa Clara County Super. Ct. No. CV796249)

The opinion of the court was delivered by: Elia, J.

CERTIFIED FOR PUBLICATION

After a court trial, appellants Mission West Properties, L.P. and Mission West Properties, Inc. failed to recover on their complaint for breach of a partnership agreement, breach of fiduciary duty, and related causes of action, while respondents, their partners, recovered on their cross-complaint for reciprocal claims. Appellants assert both substantive and procedural errors in the trial court's legal and factual conclusions. We will affirm the judgment.

Background*fn1

Appellants and respondents were partners in the Hellyer Avenue Limited Partnership, abbreviated by both sides as HALP. Appellant Mission West Properties, L.P. (MWLP) owned a 50 percent interest in HALP and was HALP's general managing partner. The general partner of MWLP was appellant Mission West Properties, Inc. (MWI), which operated as a publicly held real estate investment trust. Carl Berg was the president of MWI. His construction management company, Berg & Berg Enterprises (Berg & Berg), is also an appellant, but it was not one of the original partners in HALP.

The other 50 percent of HALP was held by respondents Republic Properties Corporation (Republic Properties), 1 percent; Steven A. Grigg, its president, 3.6 percent; David L. Peter, its executive vice-president, 1.25 percent; and Mentmore Partners, LLC (Mentmore Partners), 44.15 percent.

Stellex Industries, Inc. (later known as Stellex Technologies) operated through two principal subsidiaries, Stellex Electronics Systems, Inc. (Stellex Electronics) and Stellex Aerostructures, Inc. Stellex Electronics in turn had several subsidiaries, including Stellex Microwave, the center of the present controversy. Mentmore Holdings Corporation owned Stellex Technologies and provided management services to the various Stellex subsidiaries.

While seeking a new location for its facility, Stellex Microwave found 5300 Hellyer Avenue, and retained Republic Properties to acquire the property, develop it for Stellex Microwave's specialized use, and lease it back to Stellex Microwave. The property at that time was owned by a Carl Berg affiliate, BB & K.

In late 1998 or early 1999 Republic Properties contracted with BB & K to buy the property. Republic Properties could not obtain financing, however, so it proposed to Berg that they engage in a joint venture. Berg and Republic Properties agreed to create HALP and lease the property to Stellex Microwave.

Drafting of the HALP limited partnership agreement (LPA) took place between April 1999 and July 2000, when it was finally signed, with an effective date of May 15, 2000. Meanwhile, on June 30, 1999 Berg and Grigg, on behalf of the anticipated HALP, executed a lease of the property to Stellex Microwave. Among the provisions of the lease was section 15.1, which stated that an "Event of Default" would occur if the failure to pay rent or other required payment was not cured within five days of written notice of default. Correspondingly, the LPA included section 6.05, which allowed dilution of respondents' interests should an "Event of Default" occur under the lease between Stellex Microwave and HALP.

After signing the lease with Stellex Microwave, HALP hired Berg & Berg to construct the specialized improvements. Under Carl Berg's personal supervision of the construction, the buildings were ready for occupancy by June 12, 2000. Stellex Microwave began paying rent, and Berg, as president of MWI (the general partner of MWLP), made distributions of rental income to the HALP partners in June, July, and August of 2000 in accordance with the LPA.

Berg & Berg had agreed to bill Stellex Microwave for the entire project upon its completion. Because some construction work remained to be performed when Stellex Microwave took occupancy, however, Berg & Berg could not determine the final amount owed for tenant improvements until August. At that point, Stellex Microwave owed Berg & Berg about $10.5 million, due on August 25, 2000.

On August 21 or 22, 2000, Bradley Jay, vice president of finance for Mentmore Holdings Corporation, informed Carl Berg that Stellex Microwave would be unable to pay for the tenant improvements on August 25. Berg asked about the nature of the delay and when he could expect payment. Jay explained that Stellex Technologies had been trying to resolve its financial difficulties by selling assets and it needed Berg's cooperation. Berg asked whether Jay could procure or guarantee some amount of money while he discussed the situation with his bankruptcy attorneys. Berg also requested the letter of credit that Republic Properties was holding as security for Stellex Microwave's performance under the lease.*fn2

On August 30, 2000 HALP (represented by Berg) and Stellex Microwave executed an agreement extending the time for Stellex Microwave to pay for the tenant improvements until September 15, 2000. It also allowed HALP to draw on the letter of credit to reduce Stellex Microwave's obligation by $2 million. Berg subsequently did draw on the letter of credit, thereby reducing the debt to Berg & Berg to $8.5 million. Among the terms of this new payment agreement was a provision for a further two-week extension (to September 29) in the event that Stellex Microwave sold certain assets. If Stellex Microwave failed to make a timely payment by either of these deadlines, it was entitled to two business days "after receipt of written notice within which to cure such default." This provision replaced the original notice provision in the lease, which allowed five days after Stellex Microwave received written notice of default.

Meanwhile, beginning September 1, 2000 Berg withheld distribution of the rental income to respondents. At trial Berg testified that he "diluted" or "removed" respondents from the partnership five days after the August 21 or 22 conversation with Jay, in the belief that when the "five-day cure period was up," an Event of Default occurred under the LPA, causing an expulsion. He did not believe that notice was required for an Event of Default to occur. Berg reassigned respondents' partnership interests to Berg & Berg.

On September 12, 2000 Stellex Microwave filed for Chapter 11 bankruptcy protection. On January 11, 2001, over HALP's objection, the Bankruptcy Court entered an order approving the purchase by Tyco Acquisition Corp XIV (Tyco) of Stellex Microwave's assets, including the HALP lease, the construction agreement, and the August 30, 2000 payment agreement. All obligations under these contracts would be assumed by Tyco and defaults would be deemed cured. The sale would be binding on all creditors and other third parties, including "all persons asserting Interests in the Transferred Assets . . . ."

On February 2, 2001 Stellex Microwave paid Berg & Berg $8,341,412.00, the amount Stellex Microwave had received from Tyco. Stellex Microwave had continued paying its rent during the entire bankruptcy period, and Tyco continued to pay the rent on time; but Berg did not make any distributions of the income after August 2000. The lease was subsequently assigned to Cobham PLC in an "Assignment of Lease and Landlord's Consent." The parties to that document agreed that the lease was valid and enforceable, and that the assignor (M/A- Com, Stellex Microwave's successor) was not in default.

MWLP and MWI filed their complaint in this action on February 26, 2001, requesting declaratory relief, a constructive trust, and damages for breach of fiduciary duty, concealment, and breach of the partnership agreement and the covenant of good faith and fair dealing. Appellants generally alleged that Republic Properties and its officers, Steven Grigg and David Peter, along with Mentmore Partners, had failed to disclose Stellex Microwave's financial condition before forming HALP. The action was stayed, however, because a related action brought by respondents ...


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