Johnston v. Holiday Inns, Inc., Nos. 78-1362

• Decision Date: 30 March 1979
• Docket Number: Nos. 78-1362,78-1363
• Parties: Alfred M. JOHNSTON, Individually, Alfred M. Johnston, Trustee, and Daniel R. Greenwood, Trustee, Plaintiffs-Appellants, v. HOLIDAY INNS, INC., Defendant-Appellee. Alfred M. JOHNSTON, Trustee, and Daniel R. Greenwood, Trustee, Plaintiffs-Appellants, v. HOLIDAY INNS, INC., Wayne C. Marsh and Lee A. Berthelsen, Trustees,Defendants-Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 890

595 F.2d 890

Alfred M. JOHNSTON, Individually, Alfred M. Johnston, Trustee, and Daniel R. Greenwood, Trustee, Plaintiffs-Appellants, v. HOLIDAY INNS, INC., Defendant-Appellee.

Alfred M. JOHNSTON, Trustee, and Daniel R. Greenwood, Trustee, Plaintiffs-Appellants, v. HOLIDAY INNS, INC., Wayne C. Marsh and Lee A. Berthelsen,

Trustees,Defendants-Appellees.

Nos. 78-1362, 78-1363.

United States Court of Appeals, First Circuit.

Argued Dec. 4, 1978.

Decided March 30, 1979.

John W. Arata and Richard L. Brickley, Boston, Mass., with whom Brickley, Sears & Cole, Boston, Mass., was on brief, for appellants.

Samuel Hoar, Boston, Mass., with whom Thomas H. Lee, II., and Goodwin, Procter &amp Hoar, Boston, Mass., were on brief, for appellees.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

BOWNES, Circuit Judge.

This case is the second attempt by appellants to avoid the consequences of a business deal that went sour. See Johnston v. Holiday Inns, Inc., 565 F.2d 790 (1st Cir. 1977). This is an appeal from an order of the district court granting summary judgment in favor of defendants-appellees, Holiday Inns, Inc., et al. and the subsequent denial of appellants' motion to amend their complaints.

The facts are complex and involve a series of transactions entered into by appellants, Alfred M. Johnston and Daniel R. Greenwood, and two corporations, Holiday Inns, Inc. (Holiday) and Holiday Inns of Massachusetts (Holiday-Mass.), a wholly owned subsidiary of Holiday. Two business agreements were executed and a trust created by the parties acting in different capacities.

The first agreement, entitled Memorandum Agreement, was formed by appellants and Holiday for the purpose of launching a joint business enterprise to operate appellants' restaurant-complex in East Boston known as Boston 1800. In connection therewith, Holiday made a commitment to build a 300 room motel on land owned by appellants located adjacent to the restaurant. Holiday and appellants then created a "nominee trust," known as the Flying Cloud Trust, for the purpose of holding title to the restaurant and some additional real estate. The declaration of trust named appellants and two officers of Holiday, Wayne C. Marsh and Lee A. Berthelsen, as trustees. The sole beneficiary of the trust was a joint venture created by the second agreement, which was between appellants and Holiday-Mass. The joint venture agreement provided for purchase payments to appellants in the sum of $5,000 per month for twenty years and allocated an initial capital account of 50% Of the book value of the assets held by the nominee trust to each of the parties.

Appellants conveyed title to the restaurant and other real estate to the trust. They also transferred title to the land on which the motel was to be built to Holiday. A $1,600,000 mortgage loan commitment from a bank which had been secured jointly by Holiday and appellants was assigned to the trust. The trust, in turn, leased the restaurant to Holiday which, under the lease, agreed to operate it for the benefit of the parties to the Memorandum Agreement, maintain certain liability and fire insurance coverage, and make business interruption payments of $450 for each day that business could not be conducted for any reason. Holiday further agreed to make maximum rental payments to the trust of 7% Of the gross receipts from the operations with a minimum payment of $13,552 per month, the amount necessary for the mortgage installment payments. The lease also provided that in the event rental payments fell below the minimum, the lease could be terminated by the lessor (trust) unless Holiday opted to make up the difference. All of these transactions took place in May and June of 1968.

In the following months, the business of the restaurant began to decline. ¹ Holiday then subleased the premises and sold its contents to a third party, Celebrity Hosts, Inc. While the sublessee was in possession, a fire destroyed the restaurant in January, 1971. Appellants allege that Holiday failed to maintain adequate fire insurance. In November, 1971, the mortgagee bank exercised its option to accelerate the mortgage payments because of the failure by Holiday to construct the motel and allowing someone other than itself to operate the restaurant. Holiday thereupon purchased the mortgage from the bank.

After the fire, Holiday failed to make the business interruption payments called for in the lease, thus forcing the joint venture into default on the mortgage now held by Holiday. On January 18, 1974, Holiday bought the premises at a foreclosure sale.

Appellants, in their capacity as trustees, filed suit against Holiday in federal court in July, 1973, seeking damages for breach of the lease and for conversion of personalty owned by the trust. ² Another action filed in state court against Holiday and its two officers was removed to federal court. The cases were consolidated for trial in May of 1974. On September 16, 1976, Holiday moved for summary judgment and on November 10, 1976, appellants also filed a motion for summary judgment. The trial court granted Holiday's motion on May 11, 1978. Appellants then engaged new attorneys and filed motions to vacate the judgment and amend the complaint, which were denied without hearing on July 10, 1978.

I. Appellants' Authority to Maintain the Action

The district court granted summary judgment for Holiday on the basis that under the trust, appellants lacked the necessary authority to maintain the action. In order to determine the correctness of this ruling, we must first examine the characteristics of a "nominee trust" in Massachusetts.

A nominee trust is an entity created for the purpose of holding legal title to property with the trustees having only perfunctory duties; upon termination of the trust, the beneficiaries accede to title as "tenants in common in proportion to their beneficial interests." R. Birnhaum and J. Monahan, The Nominee Trust in Massachusetts Real Estate Practice, 60 Mass.L.Q. 364 (Winter 1976).

The declaration of trust provided that "(e)xcept as herein provided in case of the termination of this trust, the Trustee shall have no power to deal in or with the trust estate except as directed by all of the beneficiaries." It further stated that "(a)ny three Trustees may exercise the power of all Trustees hereunder." Where a trust instrument requires a specified number of trustees, a lesser number cannot act validly on behalf of the trust. Loughery v. Bright, 267 Mass. 584, 588-89, 166 N.E. 744, 746 (1929); Downey Co. v. Whistler, 284 Mass. 461, 465, 188 N.E. 243, 244 (1933); Restatement (Second) of Trusts § 194. It is undisputed that the instant action was authorized neither by all of the beneficiaries nor by three of the trustees.

Appellants argue that this limitation does not apply because Holiday's alleged breaches constituted a default under the Joint Venture Agreement, which caused the joint venture as well as the trust to be dissolved, leaving appellants free to pursue legal remedies against Holiday. This argument is based on three premises; first, that the nominee trust was merely an entity for holding legal title to the trust property for the sole benefit of the joint venture; second, that a nominee trust cannot exist without a beneficiary; and third, that Holiday's alleged breaches dissolved the joint venture with the resulting extinguishment of the trust, leaving the parties free to sue without the consent of a majority of the trustees.

Before we examine the default clause of the Joint Venture Agreement and the merits of appellants' argument, we must deal with the fact that this position was never advanced below. Holiday's motion for summary judgment was framed in terms of the absence of the requisite number of trustees or all of the beneficiaries as required by the trust instrument and the Joint Venture Agreement. It stated: "There is no genuine issue of material fact as to the plaintiffs' authorization to maintain this law suit on behalf of the Trustees of Flying Cloud Trust and that the defendant is entitled to judgment as a matter of law." In the district court, appellants met Holiday'sargument by contending that "the limitation upon the powers of the trustees relate only to business transactions affecting the trust estate," a theory that they have abandoned on appeal in favor of the argument that the trust was terminated by the breach or default of Holiday.

It is by now axiomatic that an issue not presented to the trial court cannot be raised for the first time on appeal. Roto-Lith, Ltd. v. F. P. Bartlett & Co., 297 F.2d 497, 500 (1st Cir. 1962); Demelle v. Interstate Commerce Commission, 219 F.2d 619, 621 (1st Cir. 1955). Although this rule is not absolute, it is relaxed only "in horrendous cases where a gross miscarriage of justice would occur." Newark Morning Ledger Co. v. United States, 539 F.2d 929, 932 (3rd Cir. 1976); Hormel v. Helvering, 312 U.S. 552, 556-57, 61 S.Ct. 719, 85 L.Ed. 1037 (1941). In addition, the new ground must be "so compelling as virtually to insure appellant's success." Dobb v. Baker, 505 F.2d 1041, 1044 (1st Cir. 1974).

We see no reason here for relaxing the rule against appellate review of a position not advanced in the court below. The record discloses that appellants were experienced businessmen and the possibility of a deadlock was recognized during negotiations. An uncontroverted document ³ submitted by Holiday in support of its motion for summary judgment clearly shows that appellants would not accept any of several proposed methods for resolving the potential for deadlock inherent in the trust agreement and, in fact, insisted that none be included.

Ingenious as appellant's new position is, it is not properly before us. We do not find that failure to consider it would result in a gross miscarriage of justice nor is it "so compelling as virtually to insure appellant's success." Dobb v. Baker, supra. The default...