Klager v. Robert Meyer Co.
| Decision Date | 23 December 1982 |
| Docket Number | J,Docket No. 64686,No. 3,3 |
| Citation | 329 N.W.2d 721,415 Mich. 402 |
| Parties | Wayne G. KLAGER and Marjorie Klager, Husband and Wife, and Gretchen J. Meyer, Plaintiffs-Appellees, v. ROBERT MEYER COMPANY, a Partnership, Packard Platt Plaza, Inc., a Michigan Corporation, Benjamin H. Rabin, Meyer C. Weiner, and Joshua T. Weiner, Jointly and Severally, Defendants-Appellants. une Term 1981. Calendar |
| Court | Michigan Supreme Court |
Ulrich Pear Barense & Eggan, P.C., Andrew M. Eggan, Ypsilanti, for plaintiffs-appellees.
Clark, Hardy, Lewis, Fine & Pollard, P.C. by A. Bart Lewis, Birmingham, for defendants-appellants.
The plaintiffs are the landlord under a 50-year lease with the defendant Robert Meyer Company, a partnership. The lease was of vacant land and was entered into to develop a shopping center in Ann Arbor. The development fell through when efforts to rezone part of the parcel and to obtain building permits on the rest failed.
Before the lease became "legally effective", the partnership, with the consent of the landlord, assigned the lease to a corporation with capitalization of $1,000 which assumed "due performance" of the tenants' obligations under the lease.
The trial judge, sitting without a jury, "pierced the corporate veil" and entered a judgment for unpaid rent and real estate taxes against the partnership, the corporation, and three stockholders of the corporation, two of whom were partners and one of whom was not.
We conclude that the trial judge clearly erred in finding for the plaintiff and that the Court of Appeals, 95 Mich.App. 319, 290 N.W.2d 132, erred in affirming his decision.
The lease provided that upon an assignment, so consented to, the obligations on the part of the tenant "shall terminate" and "thereafter all liabilities and obligations shall be binding only upon the assignee".
At the time the assignment was executed, the partnership had the right, under the agreement of the parties, to rescind the lease and thereby avoid personal liability under the lease. The assignment was thus executed before the lease became "legally effective" and the obligation to pay rent or taxes commenced under the lease. The members of the partnership had no personal liability when the assignment was made.
The landlord's attorney was apprised of the thin capitalization of the assignee corporation, and that the purpose of the assignment was to limit the liability of the partners of the assignor partnership, and there is no suggestion that any of the defendants misrepresented either the capitalization of the assignee corporation or denied that their purpose in assigning was to relieve themselves of personal liability so that the lease need not be rescinded before the obligation to pay rent became effective.
The plaintiffs landlord, recognizing that unless they consented to the assignment, the partnership, because of problems encountered in obtaining rezoning of the property, would exercise its option to rescind the lease, consented to the assignment to the undercapitalized corporation with knowledge that it was undercapitalized and that the purpose was to insulate the individuals involved in the defendant partnership from personal liability. The trial judge erred in piercing the corporate veil.
Early in 1971, agents of the Robert Meyer Company, a partnership, approached the plaintiffs to secure a lease to develop a shopping center on ten acres of land in Ann Arbor, Michigan.
This land was comprised of two parcels, one zoned for commercial use, and the other restricted to residential use. From the outset of the lease negotiations, the parties understood that development of the entire tract depended upon rezoning the residential parcel.
By July, 1971, the details of the lease were made final. The parties agreed to a 50-year lease at an annual rent of $36,000. Besides this fixed sum, the lease provided that once the shopping center was in operation, plaintiffs would receive 15% of the rent from each of the subtenants.
Thereafter, the lease was placed in escrow to "become legally effective" if the land was rezoned. 1 If it was not rezoned by January 3, 1972, the partnership had the option of cancelling the lease by delivering written notice. Failure to exercise the option was to operate as a waiver of the conditional delivery in escrow and render the lease binding. However, a time when the cancellation privilege would become inoperative was not specified. The lease was actually released from escrow on March 14, 1972, approximately a month after the February 17, 1972 date of the assignment and consent to assignment. 2
In the ensuing months of 1971, the partnership's efforts to rezone the land aroused considerable local opposition. The rezoning problem was still unresolved as the deadline for cancelling the lease approached. The members of the partnership, Meyer Weiner and Benjamin Rabin, did not wish to terminate the lease since there was still a possibility that the land might be rezoned. But, at the same time, they were unwilling to hazard personal liability on a lease which absent rezoning was valueless to them. To solve this dilemma, they approached plaintiffs' lawyer and requested assignment of the lease to a corporation created for the purpose of reducing their personal exposure. Unless such steps were taken, the partnership would exercise its rights under the escrow agreement and cancel the lease. 3 The parties signed an agreement dated February 17, 1972, assigning the lease to Packard Platt Plaza, Incorporated. 4
Shortly after the lease assignment, the Ann Arbor Planning Commission refused to rezone the property. Instead of abandoning the project, the developers scaled down their plans and sought a building permit to develop a shopping center on the land already zoned for commercial use. To reflect this change, the parties orally agreed to modify the lease provisions. The noncommercial parcel was deleted from the lease, and the annual rent was cut from $36,000 to $18,000. Mr. Rabin testified without rebuttal that the plaintiffs at no time suggested that they need not agree to such a reduction because the defendants were, by reason of the release of the lease from escrow, personally liable despite the assignment to the corporation.
The prospects for this smaller development project soon dimmed as well. The building permit application was not only denied, but the planning commission initiated a petition to return the commercial parcel to residential zoning. The developers filed a writ of mandamus in the circuit court to overturn the planning commission's decision. The writ was denied, and the Court of Appeals affirmed the denial. In April, 1976, this Court refused to grant leave to appeal.
After five years of effort and development expenditures in excess of $178,000, all attempts to develop the property had proved futile, and the developers had no alternative but to abandon the development plans.
Though appellants' unsatisfied rental obligation dates back to May 1, 1972, the time at which monthly rent became due under the terms of the lease, no attempt was made to enforce the lease until April 21, 1975, when an action was filed in the circuit court to collect back rent. Following a bench trial, judgment was entered against the defendants in the amount of $203,446.59. Meyer Weiner and Benjamin Rabin, both partners in the Robert Meyer Company and stockholders of Packard Platt Plaza, Incorporated, were found personally liable on the lease, along with Joshua Weiner, a stockholder in the assignee corporation.
Plaintiffs contend that the partnership's failure to cancel the lease pursuant to the escrow agreement bound the defendants and placed the risk of the development scheme's failure on defendants' shoulders. The lease assignment to a corporation without meaningful assets is viewed as an impermissible attempt to evade this liability. This contention rests on an incorrect reading of Cinderella Theater Co. v. United Detroit Theaters Corp., 367 Mich. 424, 116 N.W.2d 825 (1962).
By limiting an investor's financial risk to the amount of his stock contribution, the corporate form serves important social policies by creating an incentive to pool resources and to channel them into productive activity. 5 By the same token, freeing shareholders from all personal liability runs the risk that the corporate form may be used as a shield for action the law would not condone if done by an individual and as a subterfuge for increasing one's personal autonomy at the expense of others.
In an effort to strike a balance between these opposing policies, this Court has held that fraud or other attempts to evade the law justify invoking equity's power "to look through and behind the legal entity of corporate existence". Gledhill v. Fisher & Co., 272 Mich. 353, 262 N.W. 371 (1931). This test is not to be applied in a mechanistic fashion. Brown Bros. Equipment Co. v. State Highway Comm., 51 Mich.App. 448, 215 N.W.2d 591 (1974). The entire spectrum of relevant fact forms the background for such an inquiry, and the facts are to be assessed in light of the corporation's economic justification to determine if the corporate form has been abused.
Plaintiffs did not plead or prove at trial fraud or other violation of law. No evidence was introduced at trial that defendants misrepresented the capitalization of the corporation or their intended purpose in organizing the corporation and assigning the lease to the corporation. A pre-existing obligation was not assigned to the corporation; rather, the assignment was made at a time when the partnership still had the option of rescinding all liability under the lease that was assigned to the corporation, and the partnership obtained the landlord's written consent to the assignment.
The plaintiffs and the defendant partnership undertook a problematic and speculative real estate venture. The developers staked their...
To continue reading
Request your trial
-
Pulte Home Corp., Inc. v. Ply Gem Industries, Inc., 89-205-CIV-T-17A.
...piercing the corporate veil. Compare Dania Jai-Alai Palace, Inc., v. Sykes, 450 So.2d 1114 (Fla.1984); Klager v. Robert Meyer Co., 415 Mich. 402, 329 N.W.2d 721 (1982). 3. Theories of Derivative Pulte argues: 1. That the corporate veil of Hoover Universal should be pierced to hold Johnson C......
-
Wells v. Firestone Tire and Rubber Co.
...corporate veil. We recognize the general principle that in Michigan separate entities will be respected. See Klager v. Robert Meyer Co., 415 Mich. 402, 329 N.W.2d 721 (1982), Finley v. Union Joint Stock Land Bank of Detroit, 281 Mich. 214, 274 N.W. 768 (1937), and Gledhill v. Fisher & Co., ......
-
Gallagher v. Persha
...Court has recognized the many social and economic benefits resulting from respecting the corporate form. Klager v. Robert Meyer Co., 415 Mich. 402, 411 & n. 5, 329 N.W.2d 721 (1982).3 Nor did Aioi Seiki Inc., 11 F.Supp.2d at 953–954 (holding that because a piercing of the corporate veil act......
-
Green, Hendrickson, Esper, & Libwag, LLC v. Ziegelman, Docket No. 318989.
...that whether to disregard the separate existence of an entity depends on the totality of circumstances. See Klager v. Robert Meyer Co., 415 Mich. 402, 411–412, 329 N.W.2d 721 (1982) (warning that the test is not to be applied in a "mechanistic fashion" and stating that "[t]he entire spectru......