Rauch v. Circle Theatre

• Decision Date: 31 March 1969
• Citation: 176 Ind.App. 130,374 N.E.2d 546
• Parties: Gertrude S. RAUCH, John G. Rauch, Jr., as Administrator of the Estate of John G. Rauch, Deceased, American Fletcher National Bank & Trust Company, Daniel I. Glossbrenner, Jr., and Roger Batchelor, as Co-Executors, Estate of Edna S. Glossbrenner, Deceased, John M. Kitchen, Ancillary Administrator, C. T. A. Estate of Bertha S. Fauvre, Deceased, Plaintiffs-Appellants, v. The CIRCLE THEATRE, an Indiana Corporation, the Indiana National Bank, as Executor of the Estate of Albrecht R. C. Kipp, Deceased, Shubrick T. Kothe, as Executor of the Estate of Kurt Lieber, Deceased, Reily G. Adams, Ralph W. Lieber, William N. Salin, Secretary of the State of Indiana, Greater Indianapolis Amusement Company, Inc., an Indiana Corporation, American Fletcher National Bank & Trust Company, as Escrow Agent under Escrow Agreement Dated
• Court: Indiana Appellate Court

Page 546

374 N.E.2d 546

176 Ind.App. 130

Gertrude S. RAUCH, John G. Rauch, Jr., as Administrator of the Estate of John G. Rauch, Deceased, American Fletcher National Bank & Trust Company, Daniel I. Glossbrenner, Jr. and Roger Batchelor, as Co-Executors, Estate of Edna S Glossbrenner, Deceased, John M. Kitchen, Ancillary Administrator, C. T. A. Estate of Bertha S. Fauvre Deceased, Plaintiffs-Appellants, v. The CIRCLE THEATRE, an Indiana Corporation, the Indiana National Bank, as Executor of the Estate of Albrecht R. C Kipp, Deceased, Shubrick T. Kothe, as Executor of the Estate of Kurt Lieber, Deceased, Reily G. Adams, Ralph W. Lieber, William N. Salin, Secretary of the State of Indiana, Greater Indianapolis Amusement Company, Inc., an Indiana Corporation, American Fletcher National Bank & Trust Company, as Escrow Agent under Escrow Agreement Dated March 31, 1969, with the Circle Theatre Company, Defendants-Appellees.

No. 1-277-A-24.

Court of Appeals of Indiana, First District.

April 11, 1978.

John M. Kitchen, Dutton, Kappes & Overman, Robert G. Elrod, Elrod & Elrod, Indianapolis, for plaintiffs-appellants.

C. Severin Buschmann, Pete A. Pappas, Buschmann, Carr & Schabel, Clark & Clark, R. Stanley Lawton, Ice, Miller, Donadio & Ryan, David L. Martenet, Raikos, Martenet & Raikos, Indianapolis, for defendants-appellees.

Theodore L. Sendak, Atty. Gen., Alembert W. Brayton, Deputy Atty. Gen., Indianapolis, for Sec. of State.

ROBERTSON, Judge.

Plaintiffs-appellants, Gertrude S. Rauch et al. (Lessors) filed suit against defendants-appellees, The Circle Theatre Company (Lessee), Greater Indiana Amusement Company, Inc., (Assignee), and others seeking damages for anticipatory breach of contract, injunctive relief, appointment of a receiver and attorney's fees. After trial to the court, all relief was denied. Appellants now appeal from the denial of their motion to correct errors.

We affirm.

The relationship between the parties in this action dates back to April 3, 1926, at which time a lease was executed by and between Lessors and Lessee. The lease, which was to run until the year 2015, covered a building known as the Indiana Theatre in Indianapolis. At that time the theatre was located on two parcels of land, one of which was owned by Lessors and the other of which was owned by Lessee.

From about 1938 until 1968, the theatre was operated quite profitably by Assignee under various management contracts with Lessee. However, when Assignee refused to renew its management contract in 1968, Lessee felt that it would be best to dispose of its interest in the theatre. On August 22, 1968, Lessee sold its parcel of land and assigned its interest in the lease to Assignee. As a part of this transaction, Lessee entered into voluntary dissolution proceedings, liquidated its other assets, and procured a Certificate of Dissolution from the Indiana Secretary of State. At various times in 1968 and 1969, distributions were made to the Lessee's shareholders totaling $475,145.00 (the bulk of that amount, $325,000.00, was derived from the sale of its interest in the theatre). In addition to those distributions, the sum of $122,000.00 was placed in escrow for the benefit of Lessee's shareholders to facilitate payment of expenses pending the final determination of the dissolution proceedings and any litigation resulting as a consequence of that procedure.

Lessors filed their complaint on June 11, 1970, and their amended complaint on June 21, 1973, alleging breach of the lease and demanding damages for that breach, appointment of a receiver for the preservation of Lessee's assets, an injunction restraining the Secretary of State from issuing a Certificate of Dissolution for Lessee, and attorney's fees. After extensive proceedings and a full trial, the trial court entered findings of fact and conclusions of law and entered judgment in favor of Lessee and against Lessors. Summarily stated, the trial court held that:

(1) Future rentals under the lease did not constitute debts or liabilities within the purview of the Indiana dissolution statute;

(2) In the alternative, "adequate provision" for all corporate debts and liabilities, within the meaning of the dissolution statute, had been made by virtue of the assignment of the lease to another solvent corporation and no recovery could therefore be allowed;

(3) Further, the conclusion of the board of director's of Lessee as to "adequate provision" for all debts was made in good faith and was therefore conclusive on all parties; and,

(4) Because Lessors were not entitled to any recovery under the lease, no attorney's fees should be awarded.

Lessors have raised the following issues for review:

1. Did the trial court err in finding that Lessees did not breach their lease?

2. Were "adequate provisions" made for discharge of the lease obligations, and if so, would this constitute a defense to the Lessor's action for damages?

3. Is the trial court's decision allowing an abrogation of Lessee's obligation under the lease an unconstitutional impairment of a contract?

4. Did the trial court err by refusing to award attorney's fees despite a provision in the lease allowing such an award?

Lessors first argue that the assignment of the lease did not constitute a payment or discharge of Lessee's covenant to pay rent and that the dissolution of the Lessee corporation was an anticipatory breach of the lease which entitled Lessors to a recovery of damages. Lessors further argue that the shareholders and directors of the Lessee are liable for damages to the extent of the distributions made by the dissolving corporation.

Under well-established principles of property law, a lessee under a lease of real estate is liable to the lessor for rent by virtue of privity of estate. This liability for rent arises by operation of law from the relationship of the parties, and will be discharged by an effective assignment of the lease by the lessee. In most cases, however, the lease executed between the parties will also contain an express provision requiring the payment of rentals by the lessee, in which case there is also privity of contract between the parties. While liability for rent under the former theory may be discharged by assignment of the lease, liability under privity of contract will not, absent a novation by the lessor, abrogate the lessee's liability to pay rent under the express contractual provision. Jordan v. Indianapolis Water Company (1902), 159 Ind. 337, 64 N.E. 680. The liability of a lessee to the lessor after an assignment of the lease is often described as being in the nature of a surety relationship. While a true surety relationship, with all the attendant defenses, is not in fact created by an assignment of a lease, this does provide an apt analogy which is descriptive of the lessee's liability. The assignee, by privity of estate, becomes liable for all rentals accruing subsequent to the assignment. The assignee is further bound by all covenants that run with the land, and, in cases in which he expressly assumes the lessee's obligations under the lease, he is bound to the lessor under privity of contract, even where the lessor is not a party to the assignment. 49 Am.Jur.2d Landlord and Tenant § 467 (1970). The lessor may, at his option, sue either the original lessee or the assignee for accrued rentals, and, as between the assignee and the lessee, the assignee bears the primary liability for rent accruing subsequent to the assignment. 49 Am.Jur.2d Landlord and Tenant § 437 (1970). The lessee, however, is still bound upon the covenants contained in the lease until such time as the lease expires or the lessor grants an express novation or commits acts which give rise to an implied novation, such as the execution of a new lease or a material alteration of the existing lease.

From an application of these principles of law to the facts of the case at bar, it is clear that the Lessors are correct in their contention that Lessee remained liable under the lease subsequent to its assignment. The lease executed by the parties contained no provisions that would discharge Lessee from its contractual obligations. Further, Lessee has not argued that Lessors have either granted a novation or performed any other act that would discharge its obligation of performance. ¹ We hold, therefore, that Lessee's assignment of the lease in 1968 did not abrogate its duty of performance under the lease to Lessors.

The trial court's finding that Lessee was not liable to Lessors for damages was based on the terms of IC 1971, 23-1-7-1 (Burns Code Ed.) which governs corporate dissolutions. In rendering judgment for Lessee, the trial court reasoned that future rentals did not fall within the provisions of subsection (b)(3) of this statute which requires the board of directors of a dissolving corporation to "pay and discharge all the corporate debts and liabilities." It further relied on the provisions in subsection (b)(4) which requires a statement in the articles of dissolution reciting:

That all debts, obligations and liabilities of the corporation have been paid and discharged or that adequate provision has been made therefor. (Emphasis added).

As a further justification for its judgment, the trial court held that the determination of "adequate provision" by Lessee's board of directors, being in good faith and without fraud, was conclusive as to all parties.

The trial court's application of these provisions of the dissolution statute is clearly erroneous for it has obviously confused a corporation's statutory right to voluntarily dissolve with a creditor's right to sue for a breach of a lease or contract which may result from the dissolution. While the provisions of IC 23-1-7-1 outline the necessary procedures for effecting a voluntary dissolution, nowhere in the statute is it provided that a valid dissolution will provide immunity from civil actions alleging damages as a result of the dissolution. The...