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Rex Investment Company Ltd. v. S.M.E., Inc.

United States District Court, S.D. California

October 23, 2017

REX INVESTMENT COMPANY LTD, a California corporation, Plaintiff,
S.M.E., INC., a dissolved Nebraska corporation; SHENNEN SALTZMAN, individually; THEODORE SALTZMAN, JR., individually; and DOES 1-20, Defendants.



         On September 12, 2017, Plaintiff Rex Investment Company Ltd (“Rex”) filed a motion for partial summary judgment. (Doc. No. 43.) On October 10, 2017, Defendant S.M.E., Inc. (“SME”) filed an opposition to the motion. (Doc. No. 47.) On October 13, 2017, the Court gave notice that it may construe SME's opposition as a cross motion for summary judgment on each of Rex's remaining claims based on BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach, 14 Cal.App. 5th 992');">14 Cal.App. 5th 992 (2017), a decision from the California Court of Appeal issued on August 29, 2017. (Doc. No. 48.) On October 16, 2017, Rex filed a reply, in which it addressed BRE DDR BR and attempted to distinguish the case on its facts. (Doc. No. 49.) The Court held a hearing on the motion on October 23, 2017. Richard S. Davis appeared for Rex. Patrick Joseph D'Arcy and James Lee appeared for SME. For the reasons below, the Court denies the motion. Because there are no disputed material facts which, if resolved in Rex's favor, would permit Rex to prevail on any of its claims at trial, the Court enters summary judgment for SME.


         I. Factual History

         This diversity action presents the question of whether a company that is not on a commercial real estate lease but occupies the premises is bound by the lease after it ceases occupying the leased property. Rex, the lessor in this case, argues that equitable principles should bind SME, a company that occupied Rex's property from at least the mid-1990s until 2012, but never signed a lease with Rex, to a lease agreement that Rex signed with non-party Northeast Nebraska Development, Inc. (“NE Nebraska”). Invoking BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach, 14 Cal.App. 5th 992');">14 Cal.App. 5th 992 (2017), SME argues that any obligations it had to Rex ended when it vacated Rex's property in 2012. Because California case law clearly holds that an assignee's “obligations terminate when the assignee terminates his possession” of the lessor's property, unless the assignee expressly assumes the lease, id. at 1000 (quotation marks omitted), the Court agrees with Rex.

         On June 5, 1985, Rex entered into a commercial lease agreement (“1985 Lease Agreement” or “Lease Agreement”) with NE Nebraska, wherein Rex agreed to lease the commercial building located at 610 Imperial Avenue in Calexico, California (“Calexico property”) to NE Nebraska for the purpose of operating a Burger King restaurant. (Doc. No. 43-3, Rex's Statement of Undisputed Material Facts, ¶ 1.) The lease agreement commenced on December 5, 1985 and provided for an original term of twenty years with two optional five-year extensions. (Id.)

         At some point during the period of the original lease term, SME took possession of the Calexico property began operating a Burger King restaurant.[1] (Doc. No. 46, SME's Statement of Undisputed Material Facts, ¶ 16.) After SME took possession of the property, it paid rent to Rex, paid all relevant property taxes, made repairs to the property as needed, and maintained liability insurance as required by the Lease Agreement. (Id. ¶¶ 19-23.)

         Upon expiration of the lease agreement's original 20-year term, on December 5, 2005, SME exercised the first five-year extension, including an increase in the rental payments due under the lease. (Doc. No. 16, FAC, ¶ 11.) And upon expiration of that term, on December 5, 2010, SME exercised the second five-year extension, including an additional increase in the rental payments due under the lease. (Id. ¶ 12.)

         On January 6, 2012, SME solid its interest in the Burger King franchise to non-party Calexico Group, Inc. (Doc. No. 46 ¶ 33.) Sometime later that year, SME vacated the Calexico property.[2] (Doc. No. 16 ¶¶ 50, 69-70.) Rex continued to receive rent from non-parties S.M.E., Inc., Burger King, Yuma, AZ and Shen-Dae-Man Properties, LLC- companies that Rex believes are affiliates of SME-until May 2014. (Doc. No. 43-7 at PageID 892-900.)

         On December 20, 2012, SME filed articles of dissolution with the Nebraska Secretary of State. (Doc. No. 43-3 ¶ 34.) Plaintiff alleges that at the time of its dissolution, SME had outstanding obligations to Plaintiff under the lease agreement. (Doc. No. 16 ¶ 78.)

         Plaintiff alleges that around May 2014, it stopped receiving the payments due under the Lease Agreement, and that the current balance due under the agreement is at least $115, 710. (Id. ¶ 53.) Plaintiff also alleges that SME failed to pay property taxes for the Calexico property and caused a mechanic's lien to be recorded on the property. (Id. ¶¶ 55- 56.) Plaintiff alleges that around late 2014 or early 2015, the Calexico property was abandoned, vandalized, and fixtures were stolen and/or removed from the premises. (Id. ¶ 26.) Plaintiff alleges that the vandalism caused $194, 450.00 or more in damages. (Id. ¶ 75.)

         II. Procedural History

         On November 19, 2015, Rex filed a complaint against SME, Shennen Saltzman, and Theodore Saltzman, Jr. (former SME officers), alleging causes of action for: (1) breach of written contract against SME; (2) negligence against SME; (3) negligence against Saltzmans and (4) violation of California Corporations Code § 2116 against the Saltzmans. (Doc. No. 1, Compl.) On May 13, 2016, the Court granted Defendants' motion to dismiss the original complaint for failure to state a claim with leave to amend. (Doc. No. 15.)

         On June 13, 2016, Rex filed a first amended complaint against the Defendants, alleging the same four causes of action that were contained in the original complaint and adding a claim against SME for breach of implied-in-fact contract. (Doc. No. 16.) On August 29, 2016, the Court dismissed all claims against the Saltzmans, but denied SME's motion to dismiss Rex's alternative claims for breach of written contract and breach of an implied-in-fact contract. (Doc. No. 26.) SME answered Rex's contract claims, and the parties proceeded to discovery.

         On September 12, 2017, Rex filed the instant motion for partial summary judgment. (Doc. No. 43.) The parties have completed their briefing on the motion, and the matter is ripe for disposition.


         I. Legal Standards for Summary Judgment

         Summary judgment is appropriate under Federal Rule of Civil Procedure 56 if the moving party demonstrates that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Fortune Dynamic, Inc. v. Victoria's Secret Stores Brand Mgmt., Inc., 618 F.3d 1025, 1031 (9th Cir. 2010). “A genuine issue of material fact exists when the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Fortune Dynamic, 618 F.3d at 1031 (internal quotation marks and citations omitted); accord Anderson, 477 ...

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