349 F.2d 378 (5th Cir. 1965), 21080, South Falls Corp. v. Kalkstein

Docket Nº:21080.
Citation:349 F.2d 378
Party Name:SOUTH FALLS CORPORATION et al., Appellants, v. Manuel KALKSTEIN et al., Appellees.
Case Date:July 07, 1965
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 378

349 F.2d 378 (5th Cir. 1965)

SOUTH FALLS CORPORATION et al., Appellants,

v.

Manuel KALKSTEIN et al., Appellees.

No. 21080.

United States Court of Appeals, Fifth Circuit.

July 7, 1965

Rehearing Denied Aug. 24, 1965.

Page 379

Charles Marcus, Robert Hyer Thomas, William M. Taylor, Jr., Marvin Lewis, Dallas, Tex., for appellants.

Page 380

John L. Hauer, Irving L. Goldberg, Carl E. Oates, Dallas, Tex., for appellees.

Before TUTTLE, Chief Judge, and BROWN and GEWIN, Circuit Judges.

GEWIN, Circuit Judge.

The primary controversy in this case centers around the validity and enforceability of a rent bond purportedly issued by the appellant United Benefit Fire Insurance Company (hereinafter United Benefit) to guarantee the rent payable under a sublease of commercial property in Wichita Falls, Texas. Also at issue is the question whether the activities of the lessor under the main lease of this property effected a surrender of the leased property by operation of law which would relieve the main lessee of further liability for rent. A rather detailed statement of facts is necessary to an understanding of the issues presented.

There are three principal groups of parties to this litigation. The plaintiffs are general partners in Long Falls Realty Company, a New York limited partnership whose shares have been sold to the investing public. Long Falls derived its interests in the property in question from Lasro Corporation, a New York corporation, which, in turn, derived its interest from its parent, Tenney Corporation, another New York corporation. Tenney, Lasro, and Long Falls are interrelated enterprises engaged in the promotion of real estate ventures, and they will sometimes be referred to collectively as the Long Falls group.

A second group of parties consists of the defendant South Falls Corporation, a Texas corporation, and its sole shareholders and officers, Morris, Peterson, and Cash. Collectively they will be denominated the South Falls group. South Falls later became the sole shareholder in Giant Stores of Wichita Falls, Inc., a Texas company which was organized to operate a discount department store on the property in question, although at the time of the occurrences described below it owned only about twenty-five per cent of Giant's shares. Giant was at that time a Texas affiliate of a discount department store operation in Indiana.

United Benefit, a Nebraska corporation which in 1961 was engaged in the fire insurance and general bonding business, is the third distinct interest represented in this litigation. Its local recording agent in Dallas, Texas, J. C. Hadsell, issued the rent bond which is the focal point of the present controversy.

The record indicates that the South Falls group conceived the idea of constructing discount department stores on two eight-acre tracts of land in Wichita Falls and Longview, Texas. South Falls apparently hoped to sell the two stores to a New York syndicate, take a lease-back, and sublet to its proposed affiliates, Giant Stores of Wichita Falls, Inc., and Giant Stores of Longview, Inc., which would serve as the operating entities. In turn, the Giant stores would lease space to various concessionaries. 1

In February or March 1961, representatives of South Falls approached Hadsell for the purpose of ascertaining whether one of the companies which he represented would write a bond guaranteeing the payment of rent on a sublease of the premises on which the discount stores were to be located in Wichita Falls. 2 It was thought that such a bond would place credit behind a lease of the premises, thus facilitating interim financing of the construction of the store building. Furthermore, the record is clear that another purpose behind the concept of bonded rent was to facilitate the sale of the store or

Page 381

the acquisition of a permanent loan on the property by providing something which would assure a third party that rent would be forthcoming from Giant under the sublease.

At first Hadsell was dubious, but he mentioned the idea to Earl Cefrey, the Executive Vice-President of United Benefit, when Cefrey was in Dallas. Cefrey became interested and obtained financial and other information about the proposed lessee and subtenants. Prior to May 1, 1961, Cefrey approved the writing of the bond after having discussed the matter with an underwriting committee composed of other United Benefit officials. However, issuance of the rent bond was conditioned on receipt by United Benefit of indemnity agreements from South Falls and its individual shareholders and officers. Such indemnity agreements would insure the bonding company that it would have someone to look to if there were a default and it became obligated to assume the rental payments.

South Falls' negotiations with the original New York syndicate apparently foundered, but in April 1961 another New York group, represented by Tenney Corporation, began considering the possibility of purchasing the Longview and Wichita Falls tracts. The evidence indicates that the Long Falls group was never apprised of any of the negotiations between the South Falls group and Hadsell with reference to the issuance of the rent bonds. In connection with the contemplated purchase of the Wichita Falls tract, Tenney examined a proposed form of the rent bond. Tenney's attorneys deemed the bond unsatisfactory because it gave only South Falls, the sublessor, direct rights to enforce the instrument. Hence, the bond was rewritten by Tenney's attorneys prior to May 1, 1961, in an attempt to give Tenney or its nominee direct rights under the bond.

By a contract dated May 1, 1961, Tenney Corporation agreed to purchase the two tracts from South Falls and South Falls agreed to construct discount department stores on each tract. Closing was to occur before November 1, 1961, after South Falls had given 90-day notice of its expectation to complete the buildings. The agreement provided in part that at the closing South Falls would convey the eight-acre Wichita Falls tract to Tenney Corporation or its nominee. Tenney agreed to execute a lease back to South Falls in accordance with terms stipulated in the contract. South Falls in turn would execute a sublease to Giant Stores of Wichita Falls, Inc. The contract of sale clearly indicates that the sublease to Giant Stores was to be bonded by United Benefit, but there was no reference in this contract to any private indemnity agreements between United Benefit and the South Falls group. South Falls also promised to make a collateral assignment to Tenney or its nominee of the rents due to it from Giant Stores under the sublease. This collateral assignment would secure, through the medium of the rent bond, South Falls' obligations to pay rent to Tenney or its nominee under the main lease. 3 Copies of the proposed bond, the main lease, and the sublease to Giant Stores were attached as exhibits to the contract.

On May 9, 1961, Hadsell executed the rent bond as rewritten, attaching to it a mimeographed power of attorney from the United Benefit home office which authorized him to write bonds up to $750,000. The bond purported to guarantee the payment of rent for ten years under a lease from South Falls to Giant Stores dated 'as of May 1, 1961' in the amount of $75,000 annually. After these bonds were signed by Hadsell, they were delivered to Tenney Corporation for examination. Although the bonds do not so indicate on their face, parol evidence in the record shows that Giant Stores, the principal, did not sign the bonds until some time after they were returned from New York to Texas in late October.

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During the summer of 1961, the South Falls group obtained interim financing of $1,200,000 from Octagon Investment Corporation on the strength of its contract of sale with Tenney. Construction of the building then commenced.

In the late spring and summer of 1961, there was a reorganization and personnel turnover in the bond department at United Benefit's home office in Omaha. A large stockholder had become concerned about the company's lack of financial success in general. There were numerous resignations including that of Cefrey, who had originally approved Hadsell's writing of the bonds. Donald Crocker became the new chief executive officer of the company. In early June the home office revoked the authority of all its recording agents to write bonds by mailing to them a mimeographed letter of revocation dated June 2, 1961. Hadsell received a copy of this letter, which asked that he return all unused powers of attorney to Omaha, but apparently he did not comply with this latter request. There is no evidence that this letter of revocation was ever brought to the attention of anyone connected with the South Falls or Long Falls groups. However, Hadsell was listed as local recording agent for United Benefit pursuant to the terms of Art. 21.14, Texas Insurance Code, Vernon's Annot.Civil Stats.

On June 6 Hadsell forwarded copies of the two rent bonds to Omaha along with a complete execution report, financial statements, and corporate and individual indemnity agreements from the...

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