Brown v. M St. Five, LLC, Nos. 11–CV–103

• Decision Date: 06 December 2012
• Docket Number: 11–CV–152,Nos. 11–CV–103,11–CV–607,11–CV–834.
• Citation: 56 A.3d 765
• Parties: Alex BROWN, Appellant, v. M STREET FIVE, LLC, Appellee.
• Court: D.C. Court of Appeals

56 A.3d 765

Alex BROWN, Appellant,

v.M STREET FIVE, LLC, Appellee.

Nos. 11–CV–103, 11–CV–152, 11–CV–607, 11–CV–834.

District of Columbia Court of Appeals.

Argued April 4, 2012.

Decided Dec. 6, 2012.

Robert C. Gill, with whom Shannon H. Rutngamlug and Justin Sadowsky, Washington, were on the brief for appellant.

Roger D. Luchs, with whom Richard W. Luchs and Gregory T. DuMont, Washington, were on the brief for appellee.

Before FISHER and BLACKBURNE–RIGSBY, Associate Judges, and KING, Senior Judge.

BLACKBURNE–RIGSBY, Associate Judge:

Following a bench trial, appellee M Street Five, LLC (“M Street Five”) was granted possession of the commercial property located at 3213 M Street N.W., Washington, D.C. (the “Property”), on the basis that the lease extension agreement between the parties was void because appellant Alex Brown (“Brown”) d/b/a Papillon Stores, Inc. (“Papillon”), lacked contractual capacity to enter into a lease extension agreement after Marylandrevoked its corporate charter. On appeal, Brown argues that: (1) Papillon had capacity to contract despite the revocation of its corporate charter; (2) alternatively, Brown contends that M Street Five cannot challenge the validity of the lease extension agreement because it had knowledge of Papillon's corporate revocation since 2006 and considered Brown its actual tenant; and (3) if the lease extension was void, the trial court erred by awarding M Street Five attorney's fees pursuant to an attorney's fees provision incorporated by reference in the lease extension agreement. Additionally, Brown contends for the first time on appeal that the judgment granting possession of the property to M Street Five was invalid because the notice to quit did not stipulate that Papillon's revoked corporate status was the basis for terminating the tenancy. We affirm the judgment granting possession of the property to M Street Five but reverse the judgment awarding attorney's fees to M Street Five.

I.

On August 14, 1995, M Street Five executed an agreement to lease its property to Papillon for a term of five years. Although it had not yet incorporated, Papillon identified itself as “Papillon Stores, Inc.,” and Brown executed the lease on its behalf. In April 2000, Papillon, identifying itself as a Maryland corporation, exercised its lease extension option (as provided in the original lease), which extended its lease of the Property until August 2005. Papillon incorporated in Maryland on August 22, 2000, and subsequently, on September 22, 2000, obtained a certificate of authority to do business in the District of Columbia. However, due to the failure to file its Maryland tax returns, Papillon forfeited its Maryland incorporation charter on October 7, 2002. According to the record from the trial court, its articles of incorporation were never reinstated by Maryland.

Papillon and M Street Five entered a second five-year extension agreement (the “Second Extension Agreement”) on August 12, 2004. The Second Extension Agreement, which is the crux of the dispute before us, granted Papillon an option to extend the lease for an additional five-year term. The District of Columbia revoked Papillon's certificate of authority to conduct business on September 13, 2004.¹ Nevertheless, Papillon continued to adhere to the terms of its lease with M Street Five. The parties entered into additional lease modification agreements on April 13, 2009 and March 1, 2010.² Both lease modification agreements listed “Papillon Stores, Inc.” as the tenant and were signed by Brown on Papillon's behalf.

In January 2010, Brown attempted to exercise the option in the Second Extension Agreement to extend Papillon's lease of the property by another five years.³However, on June 15, 2010, M Street Five served Papillon with a 90–day notice to terminate the lease. When Papillon refused to leave the Property by M Street Five's September 30, 2010 deadline, M Street Five filed a suit for possession against Papillon in the Landlord and Tenant Division of the District of Columbia Superior Court. Papillon responded by filing a suit in the Civil Division of the Superior Court (2010 CA 008109), which was consolidated with M Street Five's suit for possession. M Street Five filed a motion for summary judgment three weeks prior to trial, raising for the first time, the issue that the Second Extension Agreement was void because Papillon's articles of incorporation had been revoked prior to Brown's signing of the Second Extension Agreement on behalf of Papillon. Therefore, M Street Five contended that without a corporate charter, Papillon was a legal non-entity without the ability to enter a contract, thereby rendering the Second Extension Agreement void ab initio. The trial court entered judgment in favor of M Street Five on December 13, 2010, concluding that the Second Extension Agreement was void because Papillon was not a valid corporation when it executed the Second Extension Agreement. In this judgment, the trial judge also granted M Street Five's oral motion to amend the complaint, such that Alex Brown, d/b/a Papillon Stores, Inc., replaced Papillon Stores, Inc., as the defendant in the trial proceedings.

Brown filed a motion to amend judgment, or alternatively, for a new trial, pursuant to Super. Ct. Civ. R. 59 and 60(b), claiming that a “recently discovered” letter, dated February 20, 2006, from M Street Five's counsel to Papillon proved that M Street Five had notice of Papillon's revoked corporate status, but continued to assent to the Extension Agreement. Brown alleged that M Street Five misrepresented its ignorance of this fact at trial, had treated Alex Brown as its tenant, and was therefore estopped from claiming that Papillon remained the legal tenant.⁴ The trial court denied the motion, concluding that even if the court considered the letter and assumed M Street Five had notice of the revocation as early as 2006, Brown would still not be entitled to relief because Papillon had no legal capacity to enter into the 2004 Extension Agreement. The trial court subsequently granted M Street Five's request for attorney's fees pursuant to D.C.Code § 29–101.139 (2001), finding that the attorney's fees were liabilities that Brown incurred by assuming to act on behalf of a corporation, i.e. Papillon, without authority to do so, making Brown liable in his individual capacity. This appeal followed.

II.

A.

Brown relies upon two doctrines to support his argument that the trial court erred in finding that the lease was void ab initio because Papillon lacked legal capacity to contract under Maryland law in 2004:(1) Papillon was a de facto corporation when it executed the Second Extension Agreement; or (2) the doctrine of corporation by estoppel allows the court to enforce the Second Extension Agreement regardless of Papillon's actual legal status because M Street Five had recognized Papillon as a corporation and dealt with it as such, and was thereby estopped from claiming otherwise.⁵

“On appeal from a bench trial, we review the trial court's legal conclusions de novo, but defer to its factual findings if they are supported by the record.” Chibs v. Fisher, 960 A.2d 588, 589 (D.C.2008) (citing D.C.Code § 17–305 (2001)). The trial court concluded as a matter of law that the Second Extension Agreement was void because both Maryland and the District of Columbia have statutes preventing a revoked corporation from conducting any business for purposes other than winding up the corporation. See D.C.Code § 29–101.123 (2001) (repealed 2011) ⁶ and Md.Code Ann., Corps. & Ass'ns §§ 3–503(d) and –515(c)(4) (2007).⁷ Further, in light of the punitive purpose of these statutes, the trial court refused to invoke an equitable remedy to prevent the eviction of Brown.

In the District of Columbia, the “substantive law governing the powers of a corporation derive from the state in which it is incorporated.” Behradrezaee v. Dashtara, 910 A.2d 349, 356 (D.C.2006) (citation omitted); see alsoRestatement (Second) of Conflict of Laws § 299(1) (1971) (“Whether the existence of a corporation has been terminated or suspended is determined by the local law of the state of incorporation”). Because Papillon was originally incorporated in Maryland, we look to Maryland's law. Consequently, the central issue in this appeal is whether Papillon, a lapsed Maryland corporation as of 2002, was able to enter into an enforceable contract under Maryland law when it executed the Second Extension Agreement in 2004. ⁸

Brown argues that Papillon was a de facto corporation when it entered the Second Extension Agreement because it was validly organized but failed to comply with conditions subsequent to organization necessary to preserve its charter and that, as a de facto corporation, Papillon existed as a corporation de jure against all persons but the state. This argument fails to consider the Maryland statutory scheme governing corporations, which explicitly establishes that once the charter of a Maryland corporation has been forfeited, “the powers conferred by law on the corporations are inoperative, null, and void as of the date of the proclamation, without proceedings of any kind either at law or in equity.” Md.Code Ann., Corps. & Ass'ns § 3–503(d) (2007). Furthermore, “the directors of the corporation become the trustees of its assets for purposes of liquidation” and their powers are restricted to actions necessary to “wind up” the corporation. Md.Code Ann., Corps. & Ass'ns § 3–515(c)(4) (2007); see also Dual Inc. v. Lockheed Martin Corp., 383 Md. 151, 857 A.2d 1095, 1102 (2004) (“[t]he powers granted to directors-trustees by § 3–515 clearly are intended only for the ‘winding up’ of a corporation's affairs.”). Accordingly, when Papillon forfeited its corporate charter in 2002, its powers became “inoperative, null, and void,” and it acted without authority when it entered the 2004 Lease Extension, which was a new contract that was not related to winding up the...