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Fedway Marketplace West, LLC v. State

Court of Appeals of Washington, Division 2

September 30, 2014

Fedway Marketplace West, LLC, et al., Appellants ,
The State of Washington, Respondent

Oral Argument May 23, 2014

Page 616

Appeal from Thurston Superior Court. Docket No: 12-2-01112-2. Judge signing: Honorable H Christopher Wickham. Judgment or order under review. Date filed: 02/01/2013.

Tyler B. Ellrodt and Anthony L. Rafel (of Rafel Law Group PLLC ), for appellants.

Robert W. Ferguson, Attorney General, and Brian Faller, Assistant, for respondent.

Authored by J. Robin Hunt. Concurring: Thomas R Bjorgen, Linda CJ Lee.


Page 617

Hunt, J.

[183 Wn.App. 864] ¶ 1 Fedway Marketplace West LLC and Garland & Market Investors LLC, landlords of former state liquor store locations (Landlords), appeal the superior court's entry of a CR 12(c) judgment on the pleadings and dismissal of Landlords' complaints against the State of Washington for terminating its leases of Landlords' properties the State had used for selling liquor. After Initiative 1183 (I-1183) privatized the sale of liquor in Washington, the State's Liquor Control Board terminated its leases with the landlords of state-owned liquor store locations and auctioned the right to sell liquor at these locations to private retailers. Landlords argue tat (1) the State deliberately misinterpreted I-1183, wrongfully terminated their leases, and illegally gave auction buyers the right to sell liquor within a one-mile radius of the Landlords' locations; (2) the superior court erred in striking Landlords' extrinsic evidence that the State acted in bad faith in deliberately misinterpreting I-1183 and terminating their leases; (3) the State breached the duty of good faith and fair dealing in terminating their leases; and (4) the State's termination of their leases violated the contract clauses[1] and takings clauses[2] of the federal and state constitutions.

¶ 2 The State responds that (1) its decision to permit auction buyers to sell liquor within

Page 618

a one-mile radius was irrelevant to the lease terminations, which I-1183 required; (2) Landlords failed to state a claim for a breach of the duty of good faith and fair dealing; (3) Landlords' extrinsic evidence was not admissible to interpret an unambiguous [183 Wn.App. 865] contract; and (4) the superior court properly dismissed Landlords' constitutional claims because, once the leases terminated, there could be no contract and no taking. We hold that, because I-1183 triggered the termination provision in the State's leases with Landlords, Landlords cannot state a claim against the State under their former leases. We affirm the superior court's dismissal of Landlords' complaints.


I. Leases

¶ 3 Fedway Marketplace West LLC and Garland & Market Investors LLC are former lessors of State liquor store locations. In 2007, Garland leased its Spokane premises to the State; in 2010, Fedway leased its Federal Way premises to the State. Each lease was for a 10-year term. Both leases included a termination clause (Paragraph 3), which provided that if a newly enacted law prevented either party from complying with the lease,[3] then the lease would terminate and both parties would be released from all liability. As the leases required, Landlords made improvements according to the Liquor Control Board's specifications, and the State paid Landlords rent for using the premises to sell liquor.

¶ 4 On November 8, 2011, Washington voters approved Initiative 1183, which privatized the State-controlled system of liquor distribution and sale, effective December 8, 2011. I-1183, now codified as RCW 66.24.620[4], also directed the Liquor Control Board to cease all liquor sales no later than June 1, 2012, and to auction " the right at each state- [183 Wn.App. 866] owned store location of a spirits[5] retail licensee to operate a liquor store upon the premises." RCW 66.24.620(4)(c).

¶ 5 To implement I-1183, the State auctioned the rights to sell liquor at its 167 State-run liquor store locations. Each of the 128 successful bidders received the exclusive right to apply for a license to sell liquor at the store on which the bid had been placed. The State advised each bid winner (1) to secure a lease with the store's landlord; and (2) if unable to secure such a lease, to consider (a) re-selling the right to sell liquor at that location or (b) requesting " an alternative location within a one-mile radius of the existing location." Clerk's Papers (CP) at 8. Before terminating its leases, the State sent its liquor store lessors, including Landlords, letters notifying them of the upcoming lease terminations. The State terminated its Fedway lease effective May 31, 2012, and its Garland lease effective July 31, 2012.[6]

II. Procedure

¶ 6 Landlords brought a class action against the State, alleging that it had (1) anticipatorily repudiated and breached their liquor store lease contracts; (2) violated an implied covenant of good faith and fair dealing; (3) violated the state and federal contract clauses[7] by engaging in legislative action that impaired the State's contractual obligations; and (4) violated the state and

Page 619

federal takings clauses[8] [183 Wn.App. 867] by taking private property for public use without just compensation. The State moved for judgment on the pleadings under CR 12(c).

¶ 7 Landlords opposed the State's motion with extensive exhibits purporting to show that (1) the State knew its decision--to permit bid winners to sell liquor in alternative locations within a one-mile radius of the existing location--could violate I-1183 and would significantly erode Landlords' leverage in renegotiating lease agreements with bid winners; (2) the State did not require bid winners to accept assignment of the State's existing leases; (3) in February 2012, the State made a commitment to pay for unamortized improvements that Landlords had made to meet the Liquor Control Board's specifications; and (4) the State Department of Revenue failed to perform its duty under RCW 66.24.620 to develop rules and procedures " 'to address claims that [I-1183] unconstitutionally impairs any contract.'" CP at 116 (citation omitted). The superior court granted the ...

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