Weisser v. Mursam Shoe Corporation, 238.

Citation127 F.2d 344
Decision Date27 April 1942
Docket NumberNo. 238.,238.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Emil Weitzner, of New York City (Emil Weitzner and Eugene M. Parter, both of

New York City, of counsel), for plaintiffs-appellants.

Goldfarb & Fleece, of New York City (Stanley S. Goldfarb and Charles L. Fleece, both of New York City, of counsel), for defendants-appellees.

Before AUGUSTUS N. HAND, CLARK, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

The issue before us is the extent to which stockholders and affiliated corporations are liable on a contract made by a so-called "leasehold" corporation.1 The two individual defendants, Murray and Samuel Rosenberg, own substantially all of the capital stock of Murray M. Rosenberg, Inc., which was engaged in operating a chain of retail shoe stores. The shoes sold in these stores bore the name "Miles," a tradename owned by Miles Shoes, Inc., also substantially owned by the individual defendants, and apparently used by Murray M. Rosenberg, Inc., under some undisclosed arrangement.

In 1926, Murray Rosenberg approached the plaintiffs to negotiate the terms of a lease of certain premises in Paterson, New Jersey. Their version of the negotiations is as follows: "When we had agreed upon the terms of the lease, Murray M. Rosenberg told us that the tenant was to be the Mursam Shoe Corporation. I asked him who was the Mursam Shoe Corporation. Murray M. Rosenberg represented to me that the name Mursam was an abbreviation for Murray and Samuel, and that he and his brother were the corporation and `stood behind' the lease. He told us that the store to be opened at the leased premises by them, was to be part of the chain of stores which he and his brother were then operating. Relying upon these representations, the plaintiffs entered into a lease with Mursam for a term of fifteen years." The Mursam Shoe Corporation was organized by the Rosenbergs the day the lease was signed and sealed by the plaintiffs, and two days later it signed and sealed the lease as tenant. According to its books, the original capital investment in Mursam was $1; apart from paying legal and similar fees arising out of the organization of Mursam, the Rosenbergs paid nothing for their stock, and it does not appear that subsequently they made any contributions to capital. Mursam was, therefore, a corporation without assets. Its obligation under the lease was $10,000 annually, for the first five years, $11,000 for the next five and $12,000 for the last five years, or $165,000 for the entire term.

For fourteen years Mursam met its obligations on this lease. It was able to do so because of payments made to it by Murray M. Rosenberg, Inc., which occupied the leased premises under short term subleases. In March 1940, Murray M. Rosenberg, Inc., terminated the sublease then in effect (made February 1, 1939), which was of unspecified duration on a monthly basis, and vacated the premises. Mursam having no assets, this action for damages caused by breach of the lease by failing to pay rent was brought against the other individual and corporate defendants as well.

It is alleged that Mursam is only an instrumentality through which these other defendants carry on their chain store operations, and that it is necessary to pierce its corporate "veil" in order to prevent injustice and circumvent fraud. There is evidence that Mursam's corporate identity was often ignored by the other defendants themselves, and that funds were shifted about from one defendant to another without regard to formality and to suit their immediate convenience. Thus, the very first transaction under the lease was the payment of a $5,000 deposit by the personal check of Murray M. Rosenberg. Although this payment is asserted to be a loan to Mursam, its books are silent as to any arrangement with Murray M. Rosenberg for the borrowing or repayment of this amount. For several years Murray M. Rosenberg, Inc., paid to Mursam the amount of the taxes on the property (which Mursam was required to pay by its lease with the plaintiffs), although no provision in the subleases required Murray M. Rosenberg, Inc., to pay these amounts. Rents due on a tobacco-stand on the premises which was subleased by Mursam to one Mourad Papas were, with a few exceptions, collected by Murray M. Rosenberg, Inc. Although by a surrender dated January 15, 1934, Murray M. Rosenberg, Inc., transferred title to the fixtures on the premises to Mursam, the fixtures were removed by Murray M. Rosenberg, Inc., when it vacated the store. Certainly Mursam was undercapitalized, and the payment of dividends and salaries soon relieved it of any surplus which it managed to accumulate by virtue of favorable subleases with Murray M. Rosenberg, Inc. For a substantial period Mursam lacked a bank account and books of account, and it never paid Murray M. Rosenberg, Inc., or Miles for accounting services rendered to it or for its use of their offices.

Enough of the facts have been stated to indicate that on a full trial it might be found that Mursam was only a tool of the other defendants, deliberately kept judgment-proof, to obtain the benefits of a lease with the plaintiffs without assuming any obligations. The plaintiffs allege that this was done fraudulently, in that Mursam was generally represented as being an integral part of their chain store operations and as having the same business and financial responsibility as the other defendants, so that the public was led to believe that dealing with Mursam was the same as dealing with them. The plaintiffs also state, in the language quoted above, that specific representations of these facts were made to them, and that they relied thereon. The defendants explain or deny many of the facts relied upon by the plaintiffs, but since this case comes up on motion for summary judgment,2 we must give the plaintiffs the benefit of every doubt.

The trial judge granted the motion, saying that Wagner v. Manufacturers' Trust Co., 237 App.Div. 175, 261 N.Y.S. 136, 140, was controlling and that the complaint here is only an "artful attempt" to avoid the ruling of that case. In holding that New Jersey law is the same as New York, the court below was in error, but even if it were correct, we are not sure that the holding of the Wagner case disposes of the case at bar. There, on similar facts, the Appellate Division, affirmed without opinion by the Court of Appeals, 261 N.Y. 699, 185 N. E. 799, held that the Statute of Frauds prevented the substitution of a new party to the lease, and said:

"If, upon the allegations of this complaint, defendant were held equitably estopped from relying upon the statute of frauds, then in many cases a defendant might be impeded in obtaining the benefit of that statute. The courts would abound with cases where a plaintiff would claim that it might be more equitable to prevent the defendant from pleading and relying upon the statute of frauds, than to enforce that statute, and the statute would be, in large measure, nullified. Every litigant, of course, has as much right to rely upon that statute as upon any other legislative enactment and courts are not prone to deny its protection."

The opinion hardly comes to grips with the real issue in such cases as these, which the Supreme Court has said to be whether or not ownership of the subsidiary "is resorted to, not for the purpose of participating in the affairs of the corporation in which it is held in a manner normal and usual with stockholders, but for the purpose of making it a mere agent, or instrumentality or department of another company." United States v. Reading Co., 253 U. S. 26, 62, 63, 40 S.Ct. 425, 434, 64 L.Ed. 760.3 If this is found as a fact,4 courts have seldom found the Statute of Frauds an obstacle to the imposition of liability, since it does not prevent penetration through an alias to hold the "real" signatory.5 Even if, however, New York law were applicable (and, as we shall show, it is not), the rule of the Wagner case would not dispose of the case before us.

For, in that case, the court laid stress on the landlord's knowledge that it was accepting the subsidiary's signature on the lease; there was, the court said, no concealment by the tenant. Here, however, a jury might well have found a fraudulent concealment by the responsible individuals of the fact that the ostensible tenant, although named "Mursam Shoe Corporation," was only a leasehold corporation which, contrary to representations deliberately made by the other defendants, was never intended to operate a shoe store. This alone would, in our opinion, create a triable issue.

Furthermore, Schulte Real Estate Co. v. Pedemode, Inc., 241 App.Div. 732, 270 N. Y.S. 919, affirmed 266 N.Y. 550, 195 N.E. 195, decided after the Wagner case, may indicate a retreat from the doctrine there established. Upon similar facts, the New York Supreme Court held in an unreported opinion that the Wagner case could be distinguished and that the plaintiff's allegations stated a cause of action. No appeal was taken, but thereafter the defendant moved for summary judgment, which was denied. The denial, in the first instance, apparently was based on the theory that, since plaintiff's examination before trial was incomplete, the moving affidavits were not the best evidence of the facts. Judge Finch's dissent in the Appellate Division, however, was squarely on the ground that it would be a waste of time to proceed with an examination since the complaint was inadequate, and implicit in the majority's denial of summary judgment would seem to be a holding that the allegations sufficiently stated a cause of action. The Court of Appeals affirmed without opinion. The allegations in the present case are identical with those in the Pedemode case. As we interpret the results in the Pedemode case, we are constrained to believe that the New York Court of Appeals necessarily held that neither the...

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