National Distillers & Chemical Corp. v. First National Bank of Highland Park

Decision Date31 October 1986
Docket NumberNo. 3433,No. 86-1447,D,3433,86-1447
Citation804 F.2d 978
PartiesNATIONAL DISTILLERS & CHEMICAL CORPORATION and Bridgeport Brass Corporation, Plaintiffs-Appellees, v. FIRST NATIONAL BANK OF HIGHLAND PARK, as Trustee under Trustefendant-Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

Robert F. Fuchs, Vihon, Fuchs, Temple & Berman, Ltd., Chicago, Ill., for defendant-appellant.

Michael J. Wall, Rothschild, Barry & Myers, Chicago, Ill., for plaintiffs-appellees.

Before FLAUM and EASTERBROOK, Circuit Judges, and SWYGERT, Senior Circuit Judge.

EASTERBROOK, Circuit Judge.

Bridgeport Brass Co. (Old Bridgeport) leased a warehouse in 1960 from the trustee (Landlord) under an Illinois real estate trust. Old Bridgeport promised to maintain the warehouse, pay all taxes, and pay rent. Old Bridgeport had options to extend the lease to 1998. Our dispute arises out of Art. VIII, Sec. 1 of the lease, which provides:

Assignment or Sub-Lease by Tenant. Tenant agrees not to assign this agreement or its interest herein or hereunder except to a successor to all or substantially all of its business and assets.... Any assignment, except as permitted above, or sublease without the previous written consent of Landlord shall be null and void. Landlord may not arbitrarily or unreasonably withhold consent to assignment or sublease, provided the assignee or sublessee, as the case may be, shall be of financial responsibility reasonably satisfactory to Landlord....

In 1961 Old Bridgeport merged with National Distillers & Chemical Corp., a transaction that was exempt from scrutiny under Sec. 1 (because a merger is not an "assignment") and would in any event have satisfied the terms of that clause (National received "all" of Old Bridgeport's business and assets). In 1984 National, a Fortune 500 firm and therefore a prime tenant, spun off the brass business, which it had maintained as a division. The spinoff creates difficulties under Sec. 1.

During July 1984 National wrote Landlord about the impending spinoff and requested consent. The letter did not contain any information about the financial structure and prospects of the soon-to-be-independent assets. National and the newly created Bridgeport Brass Corp. (New Bridgeport) closed their transaction on August 17 without waiting for Landlord's written response. On August 30 National wrote Landlord informing it of the assignment and asking again for consent. Under the terms of the lease, if National needed Landlord's assent, it was in default.

In mid-September Landlord received a pro forma balance sheet for New Bridgeport. This unaudited, unsigned document showed that New Bridgeport had assets valued by the author (whoever that was) at some $42 million and debts about $200,000 less. Debt service came in at $6 million or more a year. About $30 million of the debt was secured by the assets. The document did not contain projections of income, disposable cash flows, or operating profits. Landlord replied quickly to this missive, refusing consent on September 23, 1984. The record does not reveal whether National ever supplied additional financial information or whether there were oral exchanges. It does show that on October 3 National wrote to Landlord that it had "determined no consent is required" because the transfer to New Bridgeport conveyed "substantially all of [the brass division's] business and assets". Landlord then sent National a notice that it was in default, which under the lease gave National 30 days to cure--here by ousting New Bridgeport from the warehouse and resuming payment. Instead of doing so National filed this diversity action, seeking a declaratory judgment that Landlord's consent is not required.

Although the principal battleground was the meaning of the first sentence of Sec. 1, the district court granted summary judgment for National on the basis of the third sentence. The court concluded that National had satisfied its burden, see Arrington v. Walter E. Heller Int'l Corp., 30 Ill.App.3d 631, 638-41, 333 N.E.2d 50, 57-58 (1st Dist.1975), of showing that Landlord's decision not to consent was "unreasonable". See Losurdo Bros. v. Arkin Distributing Co., 125 Ill.App.3d 267, 272, 80 Ill.Dec. 348, 352, 465 N.E.2d 139, 143 (2d Dist.1984) (standards for assessing reasonableness include "the credit and financial responsibility" of the subtenant or assignee). The court observed that the monthly rent for the warehouse is $2,453.33, tiny compared with New Bridgeport's $42 million in assets and only half a percent of New Bridgeport's expected monthly expenses. Although Landlord expressed concern about New Bridgeport's lack of a record of paying bills, the court thought that such "reasons are improbable in the context of this case where the proposed assignee holds more than $42 million in assets."

It was a mistake to grant summary judgment for National on this record. The party opposing the motion receives the benefit of reasonable inferences. If a jury hearing the evidence adduced in the affidavits could come out either way, summary judgment is inappropriate. Anderson v. Liberty Lobby, Inc., --- U.S. ----, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). The only pertinent evidence of New Bridgeport's financial responsibility in this record is the pro forma balance sheet. This shows that New Bridgeport had $42 million in assets, securing about $42 million in debt. Debt service would exceed $6 million a year. Whether New Bridgeport could make a go of it would depend on the prospects of the brass business. Yet Landlord had no projections of New Bridgeport's cash flow; without these, it was not able to tell whether there would be money left over, after paying the existing debts, to maintain the warehouse and pay the taxes, let alone pay the rent. It is not irrational for a lessor to be concerned about ending up as a creditor in its tenant's bankruptcy--unable to evict the tenant and unable to collect overdue rent, while senior creditors realize on their security. (Perhaps Landlord could proceed against National as assignor, but a chose in action is not a perfect substitute for a good tenant.)

For all we know, New Bridgeport has been and will be a success and a splendid tenant, but Landlord was entitled to the information necessary to make this decision for itself. It did not have any information, so far as the record shows, until after the assignment had taken place, and it was entitled to stop hunting for information when National took the position that consent was not required. The existing record might well support summary judgment for Landlord. A landlord is entitled to know something about projected income as well as about existing assets, at least when the assets are so encumbered. Thus, we must remand for further proceedings on the issue what Landlord knew (or should have found out) about New Bridgeport by October 3, 1984. *

National's principal argument was that it did not need Landlord's consent. The district judge disagreed, reasoning that National, the tenant under the lease, had not transferred all or substantially all of its assets to New Bridgeport. It transferred only the assets of its Bridgeport Brass Company Division, less than 2% of its total assets (some $1.9 billion). Landlord defends this on appeal by pointing to the "plain language" of the lease and to the fact that it went from having a large and solvent tenant to a fledgling, highly leveraged firm. New Bridgeport is not by any means a continuation of National.

This is not, however, the inevitable reading of the first sentence of Sec. 1. The clause refers to "Tenant", with a capital T, and when the lease was signed Tenant was Old Bridgeport. It is possible that the function of the first sentence of Sec. 1 is to say that so long as the firm holding the group of assets then organized as Old Bridgeport continues to occupy the warehouse, Landlord's consent is unnecessary. The record does not reveal the differences, if there are any, between the operations and assets of Old Bridgeport and New Bridgeport, but the two firms apparently have the same line of business and the same principal plant, a brass mill on 112 acres near Indianapolis. The warehouse in Illinois continues to be used for the same purposes as in 1960. If Old Bridgeport had existed throughout, and had issued new debt in 1984, Landlord would not have had a right to refuse its consent. If Old Bridgeport had become a wholly owned subsidiary of National, and its stock had been sold in 1984 to the same people who own New Bridgeport's stock, Landlord would...

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