LaRose Market, Inc. v. Sylvan Center, Inc.

Citation209 Mich.App. 201,530 N.W.2d 505
Decision Date06 March 1995
Docket NumberDocket No. 155517
PartiesLaROSE MARKET, INC., a Michigan corporation, Plaintiff-Appellant/Cross-Appellee, v. SYLVAN CENTER, INC., a Michigan corporation, Defendant-Appellee/Cross-Appellant.
CourtCourt of Appeal of Michigan (US)

Hertz, Scham & Saretsky, P.C. by Robert S. Hertzberg, Bloomfield Hills, for plaintiff.

Dean & Fulkerson, P.C. by George J. Fulkerson, Troy, for defendant.

Before HOLBROOK, P.J., and McDONALD and EVANS, * JJ.

HOLBROOK, Presiding Judge.

Plaintiff appeals as of right from an order of the Oakland Circuit Court, which granted summary disposition to defendant pursuant to MCR 2.116(C)(8), for failure to state a claim upon which relief could be granted. Defendant cross appeals from the trial court's denial of its motion for costs and attorney fees, which were sought on the basis that plaintiff's action was frivolous. We affirm.

Plaintiff leased space to operate a supermarket in a shopping center owned by defendant. Plaintiff and defendant executed the lease on June 17, 1982, with the original term to be from October 1, 1985, to September 30 1990. Plaintiff had two renewal options that, if exercised, would allow it to continue leasing the property until September 30, 2000.

The last paragraph of the lease, entitled "Right of First Refusal," provided as follows:

Landlord agrees to offer to tenant right of first refusal of any bona fide offer to purchase premises described herein during the term of lease and further provided Tenant exercises option to purchase within ten (10) days from date of notification from Landlord of said offer to purchase, under the same terms and conditions and with payment of the same security deposit as provided in said offer.

Plaintiff filed a complaint on April 21, 1992, seeking specific performance of its right of first refusal to purchase the parcel of real property leased from defendant. In its complaint, plaintiff alleged that it had uncovered a "scheme" by defendant's officers or agents "to circumvent LaRose's right of first refusal," and that defendant had "taken steps" to convey plaintiff's demised property by selling the capital stock of defendant corporation to Robert Kato. 1

Following some discovery, the court granted defendant's motion for summary disposition, but denied its motion for sanctions.

I

The principal issue presented is one of first impression in this state, requiring us to decide whether the sale of all of a corporate lessor's stock constitutes a "sale" of the corporation's real property triggering a lessee's right of first refusal to purchase the demised property. We agree with defendant and the overwhelming majority of courts of other jurisdictions that have addressed this issue, and conclude that it does not.

A

A motion for summary disposition under MCR 2.116(C)(8) for failure to state a claim tests the legal sufficiency of a claim and is decided only by reference to the pleadings. Patterson v. Kleiman, 447 Mich. 429, 432, 526 N.W.2d 879 (1994). If the claim is so clearly unenforceable as a matter of law that no factual development could justify recovery, the motion should be granted. Holland v. Liedel, 197 Mich.App. 60, 63-64, 494 N.W.2d 772 (1992). This Court reviews a summary disposition determination de novo as a question of law. Borman v. State Farm Fire & Casualty Co., 198 Mich.App. 675, 678, 499 N.W.2d 419 (1993), aff'd 446 Mich. 482, 521 N.W.2d 266 (1994).

B

A provision in a leasehold contract providing a tenant with a right of first refusal to purchase the demised property is valid in Michigan. Nu-Way Service Stations, Inc. v. Vandenberg Bros. Oil Co., 283 Mich. 551, 278 N.W. 683 (1938). Consistent with construction of contracts in general, rights of first refusal are to be interpreted narrowly. Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941 (CA 7, 1986).

C

In K.C.S., Ltd. v. East Main Street Land Development Corp., 40 Md.App. 196, 388 A.2d 181 (1978), the stockholders of a corporate landlord sold all the shares in the corporation to two individuals who had previously expressed an interest in purchasing land owned by the corporation. The lessee of the property sued to enjoin the sale. The appellate court held that the lawsuit had been properly dismissed inasmuch as the sale had encompassed the stock and not the real estate. Id. at 199, 388 A.2d 181. The court explained:

Tenant is in no worse position than it was before the sale of the stock. Tenant still possesses all the rights and privileges conferred on it by the lease, including the "right of first refusal" to purchase the property demised to the Tenant.

There appears to be a dearth of cases dealing with the issue raised by Tenant.... Perhaps this is true, because, as one authority suggests, the answer is usually obvious. Annot., 70 ALR3d 203, 206 (1976). We think it obvious in the matter now before us.... If, perchance, a large corporation with a multitude of stockholders entered into a lease ... no one would seriously contend that a transfer of some of the corporate stock from a seller thereof to a buyer would operate so as to trigger [a] "right of first refusal" on the theory that the sale of the stock is the equivalent to a sale of the demised premises. Yet, the only difference between that hypothetical and the case sub judice is the quantity of the stock being sold. The fact that as a result of the stock sale the control of the corporate landlord will be altered did not change the ownership of the East Main Street property. [Id. at 199-200, 388 A.2d 181. Citations omitted.]

See also Cruising World, Inc. v. Westermeyer, 351 So.2d 371 (Fla.Dist.Ct.App.1977), cert. den. 361 So.2d 836 (Fla., 1978); Torrey Delivery, Inc. v. Chautauqua Truck Sales & Service, Inc., 47 A.D.2d 279, 366 N.Y.S.2d 506 (1975).

We find the reasoning of the above cases to be persuasive and hold that a corporate lessor's stock sale, standing alone, does not constitute a "sale" of corporate real estate triggering a lessee's right of first refusal to purchase the demised property.

II

In its complaint, plaintiff alleges that the sale of stock in this case was a scheme by defendant's owners or agents to circumvent plaintiff's right of first refusal under the lease. 2 Thus, plaintiff asserts that equity requires us to examine the motives of defendant's corporate owners in making the stock sale to Kato.

A

Plaintiff asks this Court not to follow K.C.S., Ltd., supra, arguing that the court ignored the apparent subterfuge involved in the sale. However, we find that the court in that case was fully apprised of the buyers' original desire to purchase the real estate rather than the stock, as well as the fact that they bought the stock for the same price they had offered to buy the land. Id., 40 Md.App. at 197-198, 388 A.2d 181. Similarly, the court in Cruising World, Inc., supra, was aware that the stock purchaser had originally inquired about purchasing the land, which was adjacent to the buyer's land. Id. at 372. Neither court entered into the equitable analysis proposed by plaintiff.

Other cases have examined the motives of the corporate owners in making a stock sale. For example, in Prince v. Elm Investment Co., Inc., 649 P.2d 820 (Utah, 1982), the Utah Supreme Court agreed that a sale of stock generally should not be equated with a sale of corporate assets, but went on to note:

Although a transfer of corporate stock to a stranger to the lease may not be a "sale," and a transfer [of land] from a corporation to its stockholders (or vice versa) may not be a "sale," there would probably be a sale if these two steps occurred in sequence according to a pre-arranged plan. Otherwise, a lessor could incorporate and sell the stock [sic, "land" is intended] to himself individually, and the parties would have accomplished in a step transaction what they could not have accomplished directly. [Id. at 823, n. 3.]

Absent a showing of bad faith or wrongdoing on the part of the corporate lessor, such multistep transactions do not trigger a lessee's right of first refusal. See Power Test Petroleum Distributors, Inc. v. Baker-Tripi Realty Corp., 190 A.D.2d 845, 594 N.Y.S.2d 266 (1993); Kings Antiques Corp. v. Varsity Properties, Inc., 121 A.D.2d 885, 503 N.Y.S.2d 575 (1986), app. dis. 70 N.Y.2d 641, 518 N.Y.S.2d 1031, 512 N.E.2d 557 (1987); Midland Container Corp. v. Sophia Realty Corp., 65 A.D.2d 784, 410 N.Y.S.2d 638 (1978). Cf. Frandsen, supra at 946-947.

In harmonizing a number of cases presenting a variety of transactions, the Prince court formulated a rule:

[F]or purposes of a right of first refusal, a "sale" occurs upon the transfer (a) for value (b) of a significant interest in the subject property (c) to a stranger to the lease, (d) who thereby gains substantial control over the leased property. [Id. at 823.]

See also Belliveau v. O'Coin, 557 A.2d 75 (R.I., 1989) (finding no sale where conveyance of a parcel of property to the corporation was not made at arms' length and was "solely for legitimate tax-avoidance reasons"); Sand v. London & Co., Inc., 39 N.J.Super. 513, 121 A.2d 559 (1956) (same); Kroehnke v. Zimmerman, 171 Colo. 365, 467 P.2d 265 (1970) (same; conveyance was "solely for the convenience of the lessors in managing the property"). From these cases and the Prince court's analysis, we discern that where a sale of property occurs between an individual and a corporation, rather than a mere corporate stock transfer, equitable considerations such as the parties' motives for the sale and the relationship between the parties become relevant. These considerations are not relevant to a stock sale because the identity of the corporate landlord does not change.

Here, plaintiff asserts that the transfer of defendant's corporate stock to Kato constituted the first step in a prearranged plan to deprive plaintiff of its right of...

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