Whitney v. Leighton

• Decision Date: 25 April 1947
• Docket Number: No. 34285.,34285.
• Citation: 30 N.W.2d 329,225 Minn. 1
• Parties: WHITNEY et al. v. LEIGHTON.
• Court: Minnesota Supreme Court

30 N.W.2d 329

225 Minn. 1

WHITNEY et al. v. LEIGHTON.

No. 34285.

Supreme Court of Minnesota.

April 25, 1947.

On Rehearing January 2, 1948.

Appeal from District Court, Hennepin County; Wm. A. Anderson, Judge.

Action by George G. Whitney and others against Robert S. Leighton to recover unpaid rent and taxes. Judgment was ordered for defendant. From an order denying plaintiffs' motion for amended findings and conclusions of law or, in the alternative, for a new trial, the plaintiffs appeal.

Affirmed in part and reversed in part with instructions.

Thomas C. Fitzpatrick and Strong, Strong & Tully, all of Minneapolis, for appellants.

Robert Cowling, of Minneapolis, for respondent.

FRANK T. GALLAGHER, Justice.

This is an appeal from an order of the district court of Hennepin county denying plaintiffs' motion for amended findings and conclusions of law or, in the alternative, for a new trial.

Frank I. Whitney, father of plaintiffs, was the fee owner of the Minneapolis premises involved when he leased the same on April 1, 1917, to one Ira E. Meagher. By the terms of the instrument, the lessee was obligated to pay an annual rental and "taxes and assessments." On June 23, 1917, Meagher, as lessee, assigned his interest in the lease to the Marquette Holding Company, a Minnesota corporation, which in turn assigned the lease on December 19, 1924, to defendant herein. This assignment was recorded in the office of the register of deeds for Hennepin county on December 22, 1924. On December 16, 1936, the lease was reassigned by defendant to the Marquette Holding Company by an instrument recorded the same day.

This action was brought by plaintiffs, owners of the real estate described in the lease, to recover of defendant unpaid rent from 1937 to 1942 and taxes against the property for the years 1936 to 1942. The theory of plaintiffs' case, as set out in the complaint, appears to be that the Marquette Holding Company is a corporation in form only; that defendant had at all times owned or controlled all the stock of the corporation and used the company for the purpose of avoiding personal liability; and that the reassignment of the lease in 1936 by defendant to the Marquette Holding Company "was merely colorable as being made to one who is to hold in behalf of the aforesaid defendant, and subject to his control and equity." Plaintiffs further contend that the 1936 reassignment was for the purpose of defrauding plaintiffs and placing them in a position where they could not collect the rents and income from the property described in the lease.

The matter was tried before the court without a jury. The trial judge found that "the Marquette Holding Company was at all times mentioned in the complaint a valid and existing corporation organized and doing business under the laws of the state of Minnesota," and that "plaintiffs have failed to prove any fraud or deceit on the part of the defendant in connection with said lease." Judgment was ordered for defendant, out of which order this appeal arises.

The arguments of plaintiffs are to the effect (1) that the reassignment of 1936 was colorable only and that defendant continued in possession of the property, collecting the rents and profits; and (2) that the reassignment failed to relieve defendant from his liability under the lease because of the fact that at the time the reassignment was made he was under an obligation to pay the 1936 taxes on this real estate.

1. The law with respect to reassignment is set out in 1 Tiffany, Landlord and Tenant, § 158(n), as follows: "The liability of the assignee of the leasehold

on the covenants entered into by the lessee, though based primarily on `privity of contract,' as existing only by reason of such covenants, is also, in a sense, based on privity of estate, as being imposed on him by reason of his ownership of the leasehold. Consequently, such liability endures only so long as this privity continues, and it comes to an end when the privity is ended by the assignment of the leasehold interest of the assignee to another, a `reassignment' by him, as it is frequently expressed. The effect thus given to a reassignment by the assignee is not changed by the fact that it is made for the purpose of freeing him from liability, or that it is made with knowledge on his part that his assignee is entirely insolvent, a mere beggar in fact, or is otherwise unable to perform the covenants of the lease. But if the reassignment by the assignee is merely colorable, as being made to one who is to hold in behalf of the assignor and subject to his control, equity will relieve in favor of the landlord."

The power of an assignee to relieve himself from responsibility to the lessor was considered in McLaughlin v. Minnesota L. & T. Co., 192 Minn. 203, 211, 255 N.W. 839, 842, where this court stated: "Absurd as it may seem to the modern and sensible aversion to anything which smacks of sham, it remains law that an assignee of a lease may, by assigning it, even to a pauper, put an end to his liability in point of time. * * * The legal operation is simple. The holder of it divests himself of the title, the thing to which the obligation is fastened, and so rids himself of the whole burden. By the same token, a mere offer to surrender the lease, unaccepted, can have no such effect because it leaves both title and obligation where they were. So also of mere abandonment of the premises." See, also, 16 R.C.L., Landlord and Tenant, § 369.

For present purposes, it may be assumed that defendant would be liable for the rent and taxes claimed by plaintiffs unless the 1936 reassignment served to relieve him from the obligations of the lease. At the trial, plaintiffs introduced in evidence an assignment dated December 16, 1936, according to the terms of which Robert S. Leighton and Jessie H. Leighton, his wife, assigned the lease here involved to Marquette Holding Company. From an abstract of title to the real estate offered by plaintiffs and received without objection, it appears that this assignment was filed in the office of the register of deeds of Hennepin county on the same day. To avoid the effect of this assignment, the burden was upon plaintiffs to show that it was fraudulent or merely colorable. As a general rule, one who asserts fraud has the burden of proving it, and he carries the burden throughout the trial. 3 Dunnell, Dig. & Supp. § 3837; Shaughnessy v. Shaughnessy, 135 Minn. 262, 160 N.W. 769.

There is little dispute in the evidence pertaining to the relation between defendant and the Marquette Holding Company, upon which plaintiffs base their claim that the reassignment was ineffectual. The corporation itself was organized in 1913 by a group of Minneapolis businessmen. Leighton testified that at the time of the incorporation there were 23 shares issued; 11 were in the name of Jessie H. Leighton, defendant's wife; 9 in the name of James G. Swan; and the remaining three were owned by William Innis, W. B. Elliot, and T. M. Clements. On January 11, 1915, defendant acquired the Clements share, but he has never had any other stock in the corporation. On that same date, 18 shares were issued to Jessie H. Leighton and 17 shares to Swan. In 1917, when the Meagher lease was assigned to the Marquette Holding Company, the officers were Innis, president; Elliot, vice president; and defendant, secretary-treasurer. At that time the holding company owned interests in other real estate in Minneapolis and Florida. On January 12, 1919, the corporation issued 64 shares to Jessie H. Leighton and 64 shares to Swan, so that the stock ownership was divided as follows:

                  William Innis .................   1 share
                  W. B. Elliot ..................   1 share
                  Robert S. Leighton ............   1 share
                  Jessie H. Leighton ............  93 shares
                  James G. Swan .................  90 shares
                                                  ___
                     Total ...................... 186 shares
                

In 1919, Swan endorsed his shares to Jessie H. Leighton as collateral security for personal loans, but the shares were never transferred on the books of the corporation. By February 15, 1921, when the Marquette Holding Company joined with the fee owners in the execution of a mortgage on the premises, Jessie H. Leighton had replaced Elliot as vice president. Swan, who had been the "controlling spirit" of the corporation during its early years, apparently became inactive after 1921, while Innis and Elliot never participated actively in corporate activities. We quote from Leighton's testimony as follows:

"Q. So that from 1921 on the Marquette Holding Company was Mrs. Leighton, yourself, and Innis? A. Yes."

And further:

"Q. From the period of 1924 to date, have you held any stockholders meetings? A. Well, no, not formal.

"Q. Have you held any directors meetings? A. No, there was only Mrs. Leighton and me around, and there was not any occasions for directors or stockholders meetings that I know of."

It thus appears that the assignment of the lease here involved from the Marquette Holding Company to defendant in 1924 was executed on behalf of the corporation by "J. H. Leighton, Its Vice-President and R. S. Leighton, Its Secretary," at a time when they were in effective control of the corporation. The assignment was made because, as defendant testified, the corporation was indebted to him in an amount between $15,000 and $20,000 at a time when it was suffering losses in the management of certain other real estate, and he was afraid that the owners thereof "would grab the lease of the Whitney property." The reassignment in 1936 was occasioned by defendant's belief that "the lease had become a liability." Although there is some evidence indicating that part of the indebtedness had been paid off, the record is clear that the debt had not been extinguished. The 1921 mortgage, in which the Marquette Holding Company had joined, was thereafter extended by agreement. The first of these agreements, dated April 1, 1926...