In Mountain Air Enterprises, LLC v. Sundowner Towers, LLC, decided on July 31, 2017, the California Supreme Court upheld a Marin County trial court decision, that the integration clause in an agreement between the plaintiff and the owners of a company, cancelled a completely separate loan agreement between the plaintiff and the company, when the company was determined to be the alter ego of those owners.
The integration clause is one of those boilerplate sections at the end of most written contracts, that the written contract supersedes and replaces all previous contracts, proposals, negotiations and communications. If the parties have other relationships and contracts, such a clause in a new agreement, will reach out and cancel or at least alter all of the parties' prior agreements, even if either of them might not have meant to. For example, when a commercial dispute between a landlord and a tenant or a lender and a borrower, is resolved by negotiations and the compromise is recorded in a settlement agreement, if an integration clause is included in the settlement agreement and the lease agreement or promissory note is not excluded from the integration clause, then it will cancel the lease or promissory note, destroying the landlord's right to the rent, the tenant's right to occupy the premises, or even the lender's right to collect the remainder of the amount owed.
In the Mountain Air case, Sundowner borrowed Seven Million Dollars from Mountain Air. The loan was documented by selling Sundowner's property to Mountain Air, and signing a contract which required Sundowner to buy back the same property from Mountain Air, plus 12% per annum. Subsequently, the owners of Sundowner signed a separate contract with Mountain Air, granting the owners an option to buy the same property. The option agreement included a standard integration clause, and it had no exclusion for the buy-back agreement with Mountain Air.
In footnote 4 of the Mountain Air case, the Supreme Court accepts, without discussion, the factual determination by the trial court that Sundowner was the alter ego of its owners. Based on that finding, the courts all agreed that the purchase agreement and the option agreement were between the same parties. Therefore, the later option agreement superseded the purchase agreement. Therefore, Sundowner and its owners no longer were required to buy back the property, but instead had the option to do so, and were allowed to not do so and walk away from the agreement. Even though Sundowner's owners were the ones who had done something to cause the court to disregard Sundowner as a separate entity from its owners, Sundowner could keep Mountain Air's Seven Million Dollars, not pay the 12% per annum interest agreed to, and Mountain Air was stuck owning a property it never wanted, the south tower of a three-building casino complex in Reno.
The decision does not describe what actions by the owners of Sundowner caused the Marin trial court to pierce-the-corporate-veil and treat Sundowner as a mere subterfuge and alter ego of its owners, not even in footnote 4. Other articles on this website include some cautions on this subject. The Mountain Air case shows how the combination of a broadly written integration clause and an alter ego finding that the owners have not adequately treated their company as a separate entity, can lead to complete cancellation of a contract, even a debt.
Keep your personal activities, contracts and payments completely separate from your business ones. As a landlord or creditor, how do you make sure your debtors do, too?
Should you have any questions on how to keep such matters separate, please call us.