Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_07-cv-01572/USCOURTS-caed-1_07-cv-01572-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Declaratory Judgement

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IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

SAVE MART SUPERMARKETS, CASE NO. CV F 07-1572 LJO SMS

Plaintiff, ORDER ON DEFENDANT’S MOTION TO

DISMISS

vs. (Docs. 15, 17.)

ALBERTSON’S, LLC,

Defendant.

 /

INTRODUCTION

Defendant Albertson’s, Inc. (“Albertsons”) seeks to dismiss plaintiff Save Mart Supermarkets’

(“Save Mart’s”) declaratory relief claim that Save Mart is not obligated to accept liability for underlying

litigation which, according to Save Mart, should not have been transferred to it by an agreement to

purchase and accept certain Albertsons’ assets and liabilities. This Court considered Albertsons’

F.R.Civ.P. 12(b)(6) motion to dismiss on the record and VACATES the February 27, 2008 hearing,

pursuant to Local Rule 78-230(h). For the reasons discussed below, this Court DENIES Albertsons’

F.R.Civ.P. 12(b)(6) motion to dismiss Save Mart’s declaratory relief action.

BACKGROUND

The Parties

Save Mart and Albertson’s have been engaged in owning and operating retail grocery stores and

distribution centers in California and Nevada. Save Mart and Albertsons are parties to a securities

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28 Unless otherwise noted, all further references to “section” will be to specific sections of the agreement. 1

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purchase agreement which is the subject of this action and will be discussed below.

Underlying Litigation

In 1998, Albertsons sold its Deans Dairy in San Leandro to Dean Foods Company (“Dean

Foods”) and agreed to indemnify Dean Foods for dairy employee claims. Dairy employees brought a

discrimination action (“dairy action”) against Dean Foods. Federal Insurance Company (“Federal

Insurance”), Dean Foods’ insurer, supplied a defense and contributed to settle the dairy action. Dean

Foods and Federal Insurance took the position that Albertsons was responsible under the dairy purchase

agreement with Dean Foods to indemnify liabilities arising out of the dairy action.

On June 28, 2006, Federal Insurance commenced in the U.S. District Court for the Northern

District of California an action entitled Federal Insurance Company v. Albertson’s, Inc., et al., Case No.

CV 06-04000 MHP (“Federal Insurance action”), to seek to recover monies expended on the dairy

action. In May 2007, the Northern District granted partial summary judgment against Albertsons and

issued Albertsons a November 28, 2007 indemnification order.

Purchase Agreement

Save Mart and Albertsons entered into a November 20, 2006 Securities Purchase Agreement

(“agreement”) by which Save Mart acquired for $575 million Albertsons’ Northern California

operations, comprising retail grocery stores and distribution centers under the “Albertson’s” and “Lucky”

banners in northern California and Nevada. Under the transaction, Albertsons transferred its northern

California operations to its subsidiary Lucky Stores, Inc. (“LSI”), the stock of which was sold to Save

Mart.

The agreement’s fifth recital states that “Purchaser will acquire all of the assets and liabilities

(both historical and future) of the Northern CA Operations other than as expressly excluded pursuant

to this Agreement . . .” Save Mart agreed to accept liability associated with existing litigation against

Albertsons relating to Albertsons’ northern California operations. The agreement’s section 5.2(b) 1

provides: “Prior to the Closing Date, Seller (x) will cause . . . all other assets and liabilities relating to

the Northern CA Operations other than those assets and liabilities required to be retained or assumed

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by Seller or its Affiliates pursuant to Section 5.2(a), to be transferred to or assumed by LSI . . .”

The agreement’s Schedule 3.11 listed litigation, including the Federal Insurance action,

contemplated as a liability to be accepted by Save Mart. 

Under the agreement’s section 8.3(v), Save Mart agreed to indemnify Alberstons as to:

All liabilities for claims related to occurrences prior to or on the Closing Date by

or relating to any Purchaser Employee or any former employee of the Northern CA

Operations . . ., including workers’ compensation, employment practices, and similar

claims as well as third party general liability claims, automobile liability claims,

employment practices claims and similar claims relating to Northern CA Operations. 

Save Mart claims that on October 22, 2007, it learned that Albertsons had mistakenly transferred

the Federal Insurance to Save Mart in that the Federal Insurance action did not arise out of Albertson’s

northern California operations. Save Mart further claims that it “unwittingly paid for the defense of the

action.” Albertsons denies responsibility for the Federal Insurance action and questions Save Mart’s

nearly one year delay to address propriety of transfer of the Federal Insurance action.

Save Mart’s Declaratory Relief Claims

On October 26, 2007, Save Mart filed this action to seek this Court’s declaration that the Federal

Insurance action “does not relate to Albertson’s Northern CA Operations as that term is used in the

Agreement” and that in turn Save Mart is not obligated to accept liability for the Federal Insurance

action.

DISCUSSION

F.R.Civ.P. 12(b)(6) Motion To Dismiss Standards

Albertsons seeks dismissal of Save Mart’s declaratory relief claims on grounds that the

agreement expressly transferred the Federal Insurance action to Save Mart. A F.R.Civ.P. 12(b)(6)

motion to dismiss is a challenge to the sufficiency of the pleadings set forth in the complaint. “When a

federal court reviews the sufficiency of a complaint, before the reception of any evidence either by

affidavit or admissions, its task is necessarily a limited one. The issue is not whether a plaintiff will

ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” Scheurer

v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683 (1974); Gilligan v. Jamco Development Corp., 108 F.3d

246, 249 (9 Cir. 1997). A F.R.Civ.P. 12(b)(6) dismissal is proper where there is either a “lack of a th

cognizable legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.”

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Balisteri v. Pacifica Police Dept., 901 F.2d 696, 699 (9 Cir. 1990); Graehling v. Village of Lombard, th

Ill., 58 F.3d 295, 297 (7 Cir. 1995). th

In resolving a Rule 12(b)(6) motion, the court must: (1) construe the complaint in the light most

favorable to the plaintiff; (2) accept all well-pleaded factual allegations as true; and (3) determine

whether plaintiff can prove any set of facts to support a claim that would merit relief. Cahill v. Liberty

Mut. Ins. Co., 80 F.3d 336, 337-338 (9th Cir. 1996). “However, conclusory allegations of law and

unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto v. F.D.I.C., 139 F.3d

696, 699 (9 Cir. 1998). A court need not permit an attempt to amend a complaint if “it determines that th

the pleading could not possibly be cured by allegation of other facts.” Cook, Perkiss and Liehe, Inc. v.

N. Cal. Collection Serv. Inc., 911 F.2d 242, 247 (9 Cir. 1990). th

In a F.R.Civ.P. 12(b)(6) motion, a court generally cannot consider material outside the complaint.

Van Winkle v. Allstate Ins. Co., 290 F.Supp.2d 1158, 1162, n. 2 (C.D. Cal. 2003). Nonetheless, a court

may consider exhibits submitted with the complaint. Van Winkle, 290 F.Supp.2d at 1162, n. 2 A court

may also consider “documents ‘whose contents are alleged in a complaint and whose authenticity no

party questions, but which are not physically attached to the [plaintiff’s] pleading.’” Parrino v. FHP,

Inc., 146 F.3d 699, 705 (9 Cir. 1998) (quoting Branch v. Tunnell, 14 F.3d 449, 454 (9 Cir. 1994). As th th

such, this Court may consider the agreement.

Agreement’s Plain Terms

Albertsons argues that the agreement’s plain terms transferred the Federal Insurance action to

Save Mart and govern. Albertsons notes that its northern California operations “were, to the extent not

already a part of LSI, carved out of Albertson’s and transferred to LSI. Save Mart then purchased all

the stock of LSI from Albertson’s. Through this transaction, Save Mart acquired all historic liabilities

associated with such operations” in that “the underlying deal was a stock purchase.” Albertsons

construes the agreement’s fifth recital and section 5.2(b) to the effect that Save Mart acquired all

historical liabilities of its northern California operations, other than those retained by Albertsons, and

including the Federal Insurance action identified on the agreement’s Schedule 3.11. 

Save Mart responds that the Federal Insurance action is wholly unrelated to “Albertson’s

operation of grocery stores and distribution centers in Northern California.” Save Mart argues that

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The governing law section 11.2 provides that California law will govern the agreement’s interpretation and 2

construction.

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“nothing in the Agreement . . . requires Save Mart to defend Albertson’s in a lawsuit that is unrelated

to the grocery stores and distribution centers that Save Mart purchased from Albertson’s.” Save Mart

concludes that the Federal Insurance action is “outside the definition of Northern CA Operations because

it is a liability of Albertson’s former dairy operations, not a liability of its ownership and operation of

stores and distribution centers.” Save Mart notes that it neither purchased nor operated Deans Dairy.

Under California law, the fundamental goal of contractual interpretation is to give effect to the 2

mutual intention of the parties. Bank of the West v. Superior Court, 2 Cal.4th 1254, 1264, 10

Cal.Rptr.2d 538 (1992) (citing Cal. Civ.Code, § 1636)). Under statutory rules of contract interpretation,

the parties’ mutual intention at the time the contract is formed governs interpretation. Efund Capital

Partners v. Pless, 150 Cal.App.4th 1311, 1322, 59 Cal.Rptr.3d 340, 347 (2007). Contracts are to be

interpreted as a unified whole, with effect given to each provision to the “greatest extent possible.”

United States v. 1.377 Acres of Land, 352 F.3d 1259, 1265 (9 Cir. 2003). “If contractual language is th

clear and explicit, it governs.” Bank of the West, 2 Cal.4th at 1264, 10 Cal.Rptr.2d 538 (citing Cal.

Civ.Code, § 1638)).

To support its plain terms argument, Albertsons points to specific agreement provisions. As a

reminder, the agreement’s fifth recital states in part: “Purchaser will acquire all of the assets and

liabilities (both historical and future) of the Northern CA operations other than as expressly excluded

pursuant to this Agreement . . .” (Bold added.) Under section 5.2(b), Albertsons transferred certain

stores and their associated real and personal propertyand employees plus “all other assets and liabilities

relating to the Northern CA Operations other than those assets and liabilities required to be retained

or assumed by the Seller or its Affiliates pursuant to Section 5.2(a).” (Bold added.) According to

Albertsons, the agreement provides that if a liability relates to the northern California operations, Save

Mart acquired it unless it was identified in section 5.2(a) as an asset to be retained or assumed by

Albertsons. Albertsons argues that since the Federal Insurance action was not an excluded liability under

section 5.2(a), it was transferred to Save Mart.

Section 3.11 provides in pertinent part: “Except as set forth on Schedule 3.11, there is no legal,

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administrative, arbitration or other similar suit, proceeding, claim, action or governmental or regulatory

investigation of any nature . . . at law or in equity against LSI or any Retained Subsidiary or affecting

the Northern CA Operations pending . . .” Schedule 3.11 identifies the Federal Insurance action.

Albertsons concludes the plain language of the fifth recital, section 5.2(b), section 3.11 and schedule

3.11 transferred the Federal Insurance action to Save Mart.

Save Mart responds that the parties agreed that Save Mart did not acquire Albertsons’ remaining

obligations arising from its ownership of Deans Dairy. Save Mart points to the agreement’s section

3.9(d), which addresses the dairy services agreement between Albertsons and Dean Foods and which

provides in pertinent part:

The Dairy Services Agreement dated March 1, 1998 (as subsequently amended)

(“Dairy Agreement”) between Dean Foods Company . . . and Albertson’s LLC, or its

affiliates, including LSI shall be amended as of the Closing Date in accordance with the

term sheet attached hereto as Schedule 3.9(d) and, except as provided in such modified

agreement, neither Purchaser nor LSI and the Retained Subsidiaries shall have any

further obligation or liability under such Dairy Agreement.

Save Mart argues that the agreement’s section 8.3(v) indemnity provision evidences that the parties

agreed to limit Save Mart’s acquisition of liabilities to stores and distribution centers in that it “describes

the claims accepted by Save Mart as those claims brought by employees and former employees ‘of the

Northern CA Operations.’” Save Mart faults Albertsons position that Save Mart “accepted liabilities for

anything and everything ever having to do with Albertson’s in Northern California.”

Albertsons counters that the agreement’s section 3.9 establishes that Deans Dairy and historic

operations associated with it relate to its northern California operations, including the Federal Insurance

action. Albertsons notes that after Save Mart purchased LSI, Save Mart excised its option to terminate

the Dairy Services Agreement, a dairy supply contract between Dean Foods and LSI. Albertsons adds

that Save Mart desired to discontinue the Dairy Services Agreement and provided for Albertsons to

amend it to permit Save Mart to terminate it. As to the section 8.3(v) indemnity provision, Albertsons

contends it “does not speak to the scope of current and historic liabilities assumed by Save Mart.”

Albertsons takes an “all or nothing approach.” Distilled to its essence, Albertsons position is that

since the Federal Insurance action was included on a schedule of litigation for which Save Mart

accepted, Save Mart is responsible for the Federal Insurance action. Save Mart more correctly points

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to interpretation of assets and liabilities of “the Northern CA Operations.” A key point is that through

its stock purchase, Save Mart acquired limited stores and distribution centers. Save Mart acquired no

interest in Dean Farms and championed termination of the Dairy Services Agreement. In fact,

Albertsons and Save Mart agreed that Save Mart has no obligation under the dairy services agreement

between Albertsons and Dean Foods. At this early pleading stage, this Court is not in a position to

conclude that the agreement’s plain terms support Albertsons position that Save Mart accepted

responsibility for the Federal Insurance action. 

“Arising Out Of” Vs. “Relating To”

Albertsons argues that Save Mart’s complaint inaccurately describes the Federal Insurance action

as not “arising out” of the northern California operations. Albertsons points to the agreement’s provision

that Save Mart acquired assets and liabilities “relating to” the northern California operations. Albertsons

notes the broad meaning of “relating to”: “to stand in some relation; to have bearing or concern; to

pertain; refer; to bring into association with or connection with.” Morales v. Trans World Airlines, Inc.,

504 U.S. 374, 383, 112 S.Ct. 2031 (1992). Albertsons cites Aloha v. Islandair, Inc. v. Tseu, 128 F.3d

1301, 1302 (9 Cir. 1997), where the Ninth Circuit Court of Appeals evaluated “relating to” in the th

context of a section of the Airline Deregulation Act and observed: “The phrase ‘relating to’ should be

construed broadly to mean ‘has a connection with or reference to.’” Albertsons also cites to MHC

Financing Ltd. Partnership Two v. City of Santee,125 Cal.App.4th 1372, 23 Cal.Rptr.3d 622, 643

(2005), where in addressing a California Civil Code section, the California Court of Appeal construed

“arising out” more narrowly than “relating to.”

Albertsons notes that the agreement’s first recital defined “Northern CA Operations” as

Albertsons and LSI’s “retail grocery stores and distribution centers under the ‘Albertson’s’ and ‘Lucky’

banners in Northern California and Nevada (the ownership and operation ofsuch stores and distribution

centers in northern California and Nevada . . .)” Albertsons argues that the Federal Insurance action

relates to the northern California operations as defined in the agreement “because it is a liability in

connection with the ‘ownership and operation of . . . stores and distribution centers in Northern

California.’” Albertsons notes that the Federal Insurance action was identified in the schedule of

litigation affecting the northern California operations and thus properly transferred to Save Mart.

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Save Mart responds that as interpreted by Albertsons, the phrase “relating to” is “virtually

without limit in that it would include anything that ever had anything to do with the stores and

distribution centers it used to operate in Northern California.” Save Mart points to Justice Scailia’s

concurring comment addressing application of the Employee Retirement Income Security Act

(“ERISA”): “But applying the ‘relate to’ provision according to its terms was a project doomed to

failure, since, as many a curbstone philosopher has observed, everything is related to everything else.”

Cal. Div. Of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 335, 117

S.Ct. 832, 843 (1997 concur. opin.) In anther decision addressing the scope of ERISA preemption, the

United States Supreme Court observed:

If “relate to” were taken to extend to the furthest stretch of its indeterminacy, then for all

practical purposes pre-emption would never run its course, for “[r]eally, universally,

relations stop nowhere,” H. James, Roderick Hudson xli (New York ed., World's

Classics 1980). But that, of course, would be to read Congress's words of limitation as

mere sham . . .

New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655,

115 S.Ct. 1671, 1677 (1995); see District of Columbia v. Greater Washington Bd. of Trade, 506 U.S.

125, 130 n. 1, 113 S.Ct. 580, 583 n. 1 (1992) (“[p]re-emption does not occur . . . if the state law has only

a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general

applicability.”)

Save Mart directs this Court to the “context” where “relating to” appears in the agreement, that

is, section 5.2(b): “all other assets and liabilities relating to the Northern CA Operations . . .” The

agreement defines “Northern CA Operations” as “retail grocerystores and distribution centers under the

‘Albertson’s’ and ‘Lucky’ banners in northern California and Nevada (the ownership and operation of

such stores and distribution centers in northern California and Nevada . . . )” Save Mart correctly argues

that “relating to” must be interpreted to require “a logical and causal connection to the operation and

ownership of grocery stores and distribution centers as contemplated by the Parties.” Albertsons

attempts to stretch “relating to” to a dairy operation which Albertsons sold 10 years ago. At this

pleading stage, this Court is unable to conclude that Deans Dairy relates to liabilities of Albertsons

/ / /

/ / /

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Save Mart argues that if the agreement is ambiguous, it is entitled to proffer evidence to validate its

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interpretation of the agreement. At this pleading stage, this Court need not determine whether the agreement is ambiguous.

This Court need only determine whether Save Mart’s complaint alleges a cognizable claim. The complaint does, especially

given the parties’ controverted interpretations and applications of the agreement.

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northern California operations as Albertsons advocates.3

Mistake

Albertsons faults Save Mart’s failure to allege sufficient facts that Save Mart “mistakenly”

assumed liabilityfor the Federal Insurance action. Albertsons contends that Save Mart’s claim that it did

not understand that the Federal Insurance action was to be transferred to it is a unilateral

misinterpretation. Albertsons argues that Save Mart’s subjective misinterpretation of the agreement

warrants dismissal of its declaratory relief claims.

“When the parties are dealing in an arm's length transaction with an opportunity to accept, reject

or modify the terms of the agreement, different rules apply. The parties are bound by the terms of the

contract even if they do not read it.” Markborough California, Inc. v. Superior Court, 227 Cal.App.3d

705, 277 Cal.Rptr. 919, 927 (1991). “A party who signs a written agreement is bound by its terms, even

though the party neither reads the agreement nor considers the legal consequences of signing it.”

Employee Painters’ Trust v. J & B Finishes, 77 F.3d 1188, 1192 (9 Cir. 1996). th

“[I]n the interest of preserving some reasonable stability in commercial transactions, the courts

will not set aside contractual obligations, particularly where they are embodied in written contracts,

merely because one of the parties claims to have been ignorant of, or to have misunderstood, the

provisions of the contract.” Hedging Concepts, Inc. v. First Alliance Mortgage Co., 41 Cal.App.4th

1410, 1421, 49 Cal.Rptr.2d 191 (1996). In Hedging Concepts, 41 Cal.App.4th at 1421-1422, 49

Cal.Rptr.2d at 198, the California Court of Appeal further explained:

There are two reasons courts will not set aside contracts for mere subjective

misinterpretation. First, to declare rescission based upon mistaken undisclosed subjective

interpretation would conflict with the objective theory of enforceable contracts. If this

were the law, the objective theory of contracts would give with one hand, while the

subjective misunderstanding theory of rescission would take away with the other. This

is not the law. Second, a unilateral misinterpretation of contractual terms, without

knowledge by the other party at the time of contract, does not constitute a mistake under

either Civil Code section 1577 or 1578. See, generally, 1 Witkin, Summary of California

Law (9th ed. 1987) Contracts, section 379, pages 345-346.

Save Mart accuses Albertsons of overstretching Save Mart’s claims. Save Mart notes that it

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seeks neither to disavow the agreement because the Federal Insurance action was transferred nor to

rescind the agreement based on mistake. Save Mart notes it “seeks to enforce the terms of the

Agreement so that it need not accept liability for something clearly outside the Northern CA

Operations.” Save Mart adds that the parties contemplated mistakes and to reconcile them and points

to the agreement’s section 5.2(d):

In the event that, subsequent to the Closing Date, Seller or Purchaser shall either

. . . determine that certain assets or liabilities relating solely to the Northern CA

Operations were transferred . . . and should not have been so transferred, then (assuming

the accuracy of such determination) as promptly as practicable thereafter, Purchaser or

Seller, as appropriate, shall take all steps reasonably necessary to transfer and deliver any

and all of such assets . . .

At this pleading stage, this Court need not determine whether Save Mart is bound to the

consequences of a mistake from not adequately reviewing the agreement. The present situation does not

arise to a rescission or setting aside the agreement. The pertinent issue is limited to interpretation of the

agreement.

CONCLUSION AND ORDER

For the reasons discussed above, this Court DENIES Albertsons’ F.R.Civ.P. 12(b)(6) motion to

dismiss Save Mart’s declaratory relief action.

IT IS SO ORDERED.

Dated: February 21, 2008 /s/ Lawrence J. O'Neill 

66h44d UNITED STATES DISTRICT JUDGE

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