Middendorf v. Fuqua Industries, Inc.

• Decision Date: 16 June 1980
• Docket Number: 78-3148,Nos. 78-3147,s. 78-3147
• Parties: Herbert A. MIDDENDORF et al., Plaintiffs-Appellees, v. FUQUA INDUSTRIES, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 13

623 F.2d 13

Herbert A. MIDDENDORF et al., Plaintiffs-Appellees, v. FUQUA INDUSTRIES, INC., Defendant-Appellant.

Nos. 78-3147, 78-3148.

United States Court of Appeals Sixth Circuit.

Argued April 3, 1980.

Decided June 16, 1980.

Louis J. Schneider, Jr., Cincinnati, Ohio, for defendant-appellant.

James W. Farrell, Jr., Gerald V. Weigle, Jr., Dinsmore, Shohl, Coates & Deupree, Cincinnati, Ohio, for plaintiffs-appellees.

Before LIVELY and BROWN, Circuit Judges, and PECK, Senior Circuit Judge.

LIVELY, Circuit Judge.

This is a diversity action in which the district court entered judgment declaring the defendant liable for rents and for damage to the reversionary interest of the plaintiffs under a long-term lease of real estate. Following lengthy proceedings the court entered its findings of fact and conclusions of law which included a finding that the reversionary interest of the plaintiffs in the real estate had been damaged to the extent of $350,000 by the defendant's breach of an obligation of the lease to keep the premises in good repair at all times. The parties then stipulated that rents due the plaintiffs to the date of judgment (adjusted to reflect other lease provisions) totalled $443,170.80. Judgment was entered for the plaintiffs in the amount of $793,170.80. The defendant presents two issues

on appeal: (1) The defendant contends that it was not the lessee of the plaintiffs at the time of default and is liable neither for rents nor damages. (2) The defendant contends that if it is liable under the lease, the district court applied the wrong measure of damages for breach of the covenant to keep in good repair. We affirm the judgment of the district court.

I.

The parties filed a stipulation and agreed statement of facts pursuant to Federal Rules of Appellate Procedure 10(d). Among other facts stipulated were the following:

The plaintiffs purchased a tract of commercial real estate in Hamilton, Ohio which is zoned for heavy industrial use and is improved with several buildings constructed between 1919 and 1965. At the time of the purchase by the plaintiffs on October 11, 1967, the real estate was subject to a lease dated July 15, 1967 between Ashley F. Ward as lessor and Ward Manufacturing, Inc., an Ohio corporation (Ward (Ohio)), as lessee. The lease was for a term of 20 years expiring September 1, 1987. At the time of the lease and at the time of the purchase of the property by the plaintiffs Ward (Ohio) was manufacturing camping trailers on the property which were sold under the name "Nimrod."

On December 10, 1968 a wholly-owned subsidiary of the defendant Fuqua, Interstate Motor Freight System, Inc., a Delaware corporation formed by Fuqua to take over the "Nimrod" trailer business, acquired Ward (Ohio) through a statutory merger in which Interstate Motor Freight System, Inc. was the surviving corporation. Immediately following this merger Interstate Motor Freight System, Inc. changed its name to Ward Manufacturing, Inc., a Delaware corporation, hereafter referred to as Ward (Delaware). From the time of the merger until October 6, 1970 Ward (Delaware), a wholly-owned subsidiary of the defendant Fuqua, continued to manufacture camping trailers on the leased property under the "Nimrod" name. On October 6, 1970 Ward (Delaware) was dissolved and all of its assets and liabilities passed to the defendant Fuqua, its sole shareholder. All of the assets of Ward (Delaware) were sold to Ward Interfinancial Corporation, a Delaware corporation, whose name was subsequently changed to Eldorado Industries, Inc. In connection with this sale Ward (Delaware) and Fuqua assigned all of their interests under the July 15, 1967 lease to Eldorado Industries, Inc. by an instrument styled "Assignment of Lease and Agreement." The Assignment was signed on behalf of Ward (Delaware) on October 6, 1970 and on behalf of Fuqua on October 7, 1970. Included in the Assignment was the following language:

(1) This assignment and agreement has been made on the basis of the following facts:

(e) On or about October 6, 1970 Ward (Manufacturing, Inc. i. e., Ward (Delaware)) was dissolved and Fuqua became entitled to all the assets of Ward.

Between 1970 and 1974 part of the premises was occupied by a sub-tenant of Eldorado Industries, Inc. which paid a proportionate share of the rental due under the lease up to January 1, 1974. Although plaintiffs demanded that Fuqua acknowledge and discharge the obligations of lessee under the lease on several occasions from 1971 to 1973, Fuqua never did acknowledge such obligations, but consistently referred the demands of the plaintiffs to Eldorado. By October 1971 plaintiffs knew that Ward (Delaware) had been dissolved and its assets and liabilities passed to Fuqua which had immediately transferred them to Eldorado.

Plaintiffs also knew by October 1972 that the rent was being paid by Eldorado or its successors rather than by Ward (Delaware) after October 6, 1970. The defendant Fuqua never occupied the premises and never paid any of the rental due under the lease to the plaintiffs.

II.

A.

Fuqua contends that it is only secondarily liable under the lease as sole shareholder of the dissolved corporation Ward (Delaware) and is not subject to an action by the plaintiffs because the plaintiffs failed to secure a judgment against Ward (Delaware). A Delaware statute ¹ provides that no action may be brought against an officer, director or stockholder for the debt of any corporation until judgment has been obtained against the corporation and execution returned unsatisfied. Fuqua argues that the present action against it as sole shareholder of Ward (Delaware) is for a debt of that corporation and that the action is barred because of the plaintiffs' failure first to obtain a judgment against Ward (Delaware). An action against a corporation in dissolution must be commenced within the three-year statutory period allowed by Delaware law. ² It is conceded that the plaintiffs did not begin an action or obtain a judgment against Ward (Delaware) within three years after its dissolution.

The district court disposed of this argument by analyzing both transactions involving the two Ward corporations. The court found that the effect under Ohio law of the merger of Ward (Ohio) into Ward (Delaware) was to transfer the leasehold by operation of law and not by assignment. All of the obligations of Ward (Ohio) under the lease became the obligations and liabilities of Ward (Delaware). Thus Ward (Delaware) stepped into the shoes of Ward (Ohio) as lessee and was not a mere assignee under the lease.

The court also found that when Ward (Delaware) was dissolved, Fuqua as its sole stockholder succeeded by operation of law to all of the assets of Ward (Delaware), including its interests under the lease of July 15, 1967. Having stepped into the shoes of the original lessee, Fuqua remained liable as principal obligee. Its subsequent assignment to Ward Interfinancial did not make Fuqua secondarily liable. In the present action plaintiffs did not sue Fuqua on a debt of the dissolved corporation, Ward (Delaware), but as a principal under the lease. Thus, the district court held that the Delaware limitations statute which refers to shareholder liability for debts of a corporation is not applicable to this case.

Finding no Ohio law on the effect of a corporate dissolution on lease obligations, the district court looked to decisions of other jurisdictions. The district court found case law support for the following statement in an annotation entitled "Dissolution of Corporate Lessee as Affecting Lease and Rights and Liabilities Incident Thereto."

Assuming that the liquidating trustees of a dissolved corporate lessee find the lease a valuable asset of the corporation, which they desire to preserve for the benefit of the stockholders, rather than abandon it with the consequence of rendering the estate in liquidation accountable to the lessor in damages (as brought out supra, V), the stockholders or other persons who are in equity entitled to the property of the corporation step into the shoes of the corporate lessee with the same rights and liabilities in respect to the lease as attached to the corporate lessee.

147 A.L.R. 360, 369 (1943).

See e. g., Abbott v. Fluid Power Pump Co., 112 Ill.App.2d 303, 251 N.E.2d 93 (Ill.App.1969). The district court concluded that Fuqua, after dissolution of Ward (Delaware), treated the lease as a valuable asset by including it in the assets transferred to Ward Interfinancial Corporation. Since it recognized the lease as a valuable asset of the dissolved corporation, Fuqua, as sole shareholder, stepped into the shoes of Ward (Delaware).

Fuqua seeks to distinguish the cases relied upon by the district court by pointing out that in those cases the party who sought to resist liability had actually taken possession of the leased premises. However, the rule upon which the court relied does not require actual possession by the one charged with liability. The test is whether the leasehold interest of a corporation in dissolution is treated as a valuable asset or abandoned. Only if it is abandoned or disclaimed does it remain a primary obligation of the corporation. If this interest passes to the shareholders and is treated as a valuable asset, they become the principal obligees under the lease. That Fuqua did so consider the lease is shown by its inclusion in the property sold and transferred to Ward Interfinancial. Further, at least from dissolution of Ward (Delaware) on October 6, 1970 until assignment of the lease to Ward Interfinancial on October 7, 1970, Fuqua, as the sole owner of all assets of the dissolved lessee, was entitled to possession of the leased premises.

Though Ohio has never adopted the rule relied upon by the district court, we conclude that its application led to the correct result in this case. One overriding fact to be kept in mind is that Fuqua controlled each corporate...