Albright v. Varicon, L.L.C.

2014 Ohio 209

• Court: Ohio Court of Appeals
• Decided: January 23, 2014
• Docket: 99967
• Status: Published

Opinion

[Cite as Albright v. Varicon, L.L.C., 2014-Ohio-209.]

Court of Appeals of Ohio EIGHTH APPELLATE DISTRICT COUNTY OF CUYAHOGA

JOURNAL ENTRY AND OPINION No. 99967

ROGER ALBRIGHT, ET AL., TRUSTEES PLAINTIFF-APPELLANT

vs.

VARICON, L.L.C. DEFENDANT-APPELLEE

JUDGMENT: AFFIRMED IN PART, REVERSED IN PART, AND REMANDED

Civil Appeal from the Cuyahoga County Court of Common Pleas Case No. CV-784918

BEFORE: McCormack, J., Boyle, A.J., and E.T. Gallagher, J.

RELEASED AND JOURNALIZED: January 23, 2014 ATTORNEYS FOR APPELLANT

James Brian Kenney Jessica Weekley J. Brian Kenney Co., L.P.A. 20545 Center Ridge Rd. Suite 420 Rocky River, OH 44116

ATTORNEYS FOR APPELLEE

Michael P. O’Donnell Christopher J. Carney Brouse McDowell, L.P.A. 600 Superior Avenue, East Suite 1600 Cleveland, OH 44114 TIM McCORMACK, J.:

{¶1} This appeal concerns a dispute over a commercial lease.

Plaintiff-appellant, a Connecticut trust whose trustees are Roger Albright and John

Labanca (“landlord” or “appellant”), appeals from a decision of the trial court denying its

motion for summary judgment and granting summary judgment in favor of

defendant-appellee tenant, Varicon, L.L.C. (“tenant” or “appellee”). For the following

reasons, we affirm the trial court’s decision denying the landlord’s motion for summary

judgment, reverse its decision granting summary judgment in favor of the tenant, and

remand the case for further proceedings consistent with this opinion.

Substantive Facts and Procedural History

{¶2} This commercial lease case involves three entities — the landlord, the

original tenant (not a party in this case), and a corporate entity who purchased the assets of

the original tenant and continued to occupy the premises after the original tenant ceased to

exist.

{¶3} On December 10, 2007, Innovative Container Operating Company, L.L.C., a

South Carolina company (hereafter “ICOC”), entered into a five-year lease with the

landlord Roger Albright and John LaBanca, trustees of a Connecticut trust whose office is

located in Texas, to rent 41,350 square feet of warehouse and office space in Bedford

Heights, Ohio. The rent was $12,182.71 per month, and the lease was to expire

December 12, 2012. Original Tenant Sold its Assets to Varicon

{¶4} One year after the lease was signed, the original tenant, ICOC, experienced

financial difficulties. On December 31, 2008, ICOC sold almost all its assets to an entity

called ICOC Acquisitions, L.L.C., which was formed by business partners Mark Daniels

and Rod Grandy for the sole purpose of purchasing the assets from ICOC.

{¶5} ICOC Acquisitions paid four million dollars for ICOC’s assets, including its

receivables, machinery, equipment, and inventory. Days after the sale of its assets, ICOC

was dissolved; the South Carolina secretary of state’s website indicates ICOC was

“dissolved” as of January 8, 2009.

{¶6} According to Mark Daniel’s affidavit, there was no stock transfer in the

assets-purchase transaction, and none of the ICOC’s former owners participated in the

management of ICOC Acquisitions. Nothing in the record indicates who the former

owners or principals of the new company are, however.

{¶7} ICOC Acquisitions is in the bulk container business, selling plastic

containers and related tracking services. Three months after purchasing the assets of

ICOC, on March 9, 2009, ICOC Acquisitions changed its name to Varicon, L.L.C. In its

brief, Varicon states that for the purposes of this appeal, ICOC Acquisitions and Varicon

are one and the same. We refer to the entity as Varicon in the following.1

There was another entity, Container Management Systems, controlled by the two business 1

partners Daniels and Grandy. A letter dated April 14, 2009, from Varicon’s president to landlord announced the merger of ICOC Acquisitions and Container Management Systems. (In his affidavit, however, Daniels stated Container Management Systems merged into Varicon on January 15, 2012.) This fact is only important for the clarification that there was indeed a merger in this case, but it was {¶8} As evidence of landlord’s knowledge of the former tenant ICOC’s

insolvency, Varicon submitted a letter dated January 5, 2009, addressed to “Colors for

Plastics,” presumably a creditor of ICOC. The letter informed the recipient that ICOC

was no longer able to continue its operations, had sold its assets to ICOC Acquisitions

for four million dollars, used the funds to retire ICOC’s debts to its senior secured creditor,

and was unable to pay its debts to other creditors. The letter stated the buyer corporation

“is operating under a different name,” without specifying what the new name was.

Landlord alleged it never received a copy of this letter.

The Alleged Sublease

{¶9} The Bedford Heights lease was specifically referenced in the Asset Purchase

Agreement (hereafter “APA”) between ICOC and ICOC Acquisitions. Article 5 of the

APA, titled “Related Transactions,” addressed ICOC’s leases. Two sections in Article 5

dealt with the three leases ICOC was currently under: two of them related to locations in

South Carolina and one of them was the Bedford Heights lease. Under the APA, the two

South Carolina leases were expressly assumed by Varicon.

{¶10} However, Section 5.5 (titled “Sublease Agreement”) stated that ICOC

Acquisition “shall have entered into” a sublease agreement with ICOC regarding the

Bedford Heights warehouse. Meanwhile, in Schedule 1.1 of the APA (“List of Assets”),

the security deposit of the Ohio lease was listed as an asset.

the merger of Varicon and Container Management Systems, not the merger of Varicon and ICOC. {¶11} Furthermore, Schedule 3.2 of the APA stated that “The Ohio Lease may not

be subleased without the written consent of the Ohio Landlord. Seller will be seeking the

Ohio Landlord’s consent in connection with the sublease to the Buyer.”

{¶12} In moving for summary judgment, Varicon submitted a copy of a “Sublease

Agreement” between ICOC and ICOC Acquisitions, which stated a sublease was effective

as of January 1, 2009, and the sublease would provide for a twice-renewable 30-day

sublease between those two entities. The agreement was signed by officers of ICOC and

ICOC Acquisitions. It was not dated, however.

{¶13} Although the APA required the landlord’s consent, the evidence does not

contain the landlord’s consent to the sublease, written or otherwise. In fact, there is no

evidence that the landlord was even aware of the sublease agreement or its terms.

{¶14} The sublease, pursuant to its terms, expired April 2009, but Varicon

continued to occupy the premises and paid rents for 20 more months. On December 30,

2011, Mark Daniels sent a correspondence to landlord, stating: “Please allow this letter to

serve as notice of our intent to terminate our current month-to-month tenancy” regarding

the subject premises. The termination was to be effective January 31, 2012. Despite

the reference to the month-to-month tenancy, Varicon, in moving for summary judgment,

did not submit evidence showing how and when the purported “month-to-month” lease

came into existence. Despite the notice of “termination,” Varicon remained on the

premises and continued to pay rent through March 2012. {¶15} Landlord filed a complaint in the common pleas court to recover rents from

April 2012 to December 2012 (when the five-year lease was to expire), totaling

$109,689.39, plus outstanding utility bills of $1,900.82.

{¶16} Both parties then moved for summary judgment. The trial court denied the

landlord’s motion for summary judgment, but granted summary judgment in favor of

Varicon, holding that Varicon was not liable for the balance of the lease because it did not

“impliedly assume” the five-year lease.

{¶17} On appeal, appellant landlord raises two assignments of error for our review.

Under the first assignment of error, landlord claims the trial court erred in denying its

motion for summary judgment. Under the second assignment of error, appellant landlord

claims the trial court erred in granting Varicon’s motion for summary judgment. We

address these claims together.

Summary Judgment Standard

{¶18} We review summary judgment de novo. Grafton v. Ohio Edison Co., 77

Ohio St.3d 102, 105, 671 N.E.2d 241 (1996).

{¶19} Pursuant to Civ.R. 56, summary judgment is proper when

(1) no genuine issue as to any material fact remains to be litigated;

(2) the moving party is entitled to judgment as a matter of law; and

(3) it appears from the evidence that reasonable minds can come to but one conclusion, and viewing such evidence most strongly in favor of the party against whom the motion for summary judgment is made, that conclusion is adverse to that party.

Temple v. Wean United, Inc., 50 Ohio St.2d 317, 327, 364 N.E.2d 267 (1977). {¶20} “Since summary judgment denies the party his or her ‘day in court’ it is not

to be viewed lightly as docket control or as a ‘little trial’. The jurisprudence of summary

judgment standards has placed burdens on both the moving and the nonmoving party.”

March v. Steed Ents., 5th Dist. Muskingum No. CT 2012-0058, 2013-Ohio-4448, ¶ 18-19,

citing Welch v. Ziccarelli, 11th Dist. Lake No. 2006-L-229, 2007-Ohio-4374. The

moving party seeking summary judgment “bears the initial burden of informing the trial

court of the basis for the motion and identifying those portions of the record before the

trial court that demonstrate the absence of a genuine issue of fact on a material element of

the nonmoving party’s claim.” Dresher v. Burt, 75 Ohio St.3d 280, 293, 662 N.E.2d 264

(1996).

The Successor Liability Rule and the Exceptions

{¶21} This case concerns successor liability as it applies to claims sounding in

contract. The issue is whether a corporation who purchased the assets of another

corporation may be held liable for the contractual obligations of the seller corporation.

The law regarding successor liability was discussed by the Supreme Court of Ohio in Welco

Indus., Inc. v. Applied Cos., 67 Ohio St.3d 344, 617 N.E.2d 1129 (1993).

{¶22} In Welco, the Supreme Court of Ohio reiterated the well-established general

rule of successor liability: the purchaser of a corporation’s assets is not liable for the debts

and obligations of the seller corporation, unless one of the exceptions applies. Id. at

346-347. A successor corporation may be held liable when “(1) the buyer corporation

expressly or impliedly agrees to assume such liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the buyer corporation is merely a continuation of the

seller corporation; or (4) the transaction is entered into fraudulently for the purpose of

escaping liability.” Id. at 347.

{¶23} The court in Welco elaborated on the concepts of “de facto” merger and “mere

continuation.” Regarding a de facto merger, it is a

merger in fact without an official declaration of such. The hallmarks of a de

facto merger include (1) the continuation of the previous business activity

and corporate personnel, (2) a continuity of shareholders resulting from a

sale of assets in exchange for stock, (3) the immediate or rapid dissolution of

the predecessor corporation, and (4) the assumption by the purchasing

corporation of all liabilities and obligations ordinarily necessary to continue

the predecessor’s business operations. One court has indicated that a

transfer of assets for stock is the sine qua non of de facto merger.

(Citation omitted.) Id. at 349.

{¶24} Regarding the “mere continuation” exception, the court in Welco explained

that

the basis of this theory is the continuation of the corporate entity, not the business operation, after the transaction. Such would be the case when “one corporation sells its assets to another corporation with the same people owning both corporations. Thus, the acquiring corporation is just a new hat for, or reincarnation of, the acquired corporation. This is actually a reorganization.” This type of transaction is executed to escape liabilities of the predecessor corporation. Because the goal is to escape liability, inadequacy of consideration is one of the indicia of mere continuation.

(Citations omitted.) Id. at 350. Bases of the Parties’ Motions for Summary Judgment and Issue Presented in this Case

{¶25} Turning to the instant case, the parties’ dispute centers on the first exception,

under which a successor corporation such as Varicon may be held liable if it expressly or

impliedly agreed to assume the seller corporation’s contractual liability. It is undisputed

that under the APA, Varicon did not expressly assume the five-year lease between ICOC

and the landlord. The issue is whether Varicon impliedly assumed the lease.

{¶26} The landlord moved for summary judgment on two grounds. It claimed that

Varicon, through its conduct, either (1) impliedly assumed the lease — the first of the four

exceptions to successor liability — or (2) should be estopped from denying its assumption

of the lease. Varicon moved for summary judgment claiming that none of the four

exceptions to the successor liability rule existed in this case.

{¶27} We first clarify the question to be resolved in this appeal. The trial court

granted summary judgment in favor of Varicon based on its finding that Varicon did not

impliedly assume the lease. Even though there could be an issue of fact regarding

whether one of the three other exceptions would be applicable to render Varicon liable, the

trial court was silent regarding these other exceptions in its judgment.

{¶28} However, because the trial court granted summary judgment in favor of

Varicon, we must assume it found that none of these other three exceptions existed to

create liability for Varicon. On appeal, landlord primarily argues that the trial court erred

in denying its motion for summary judgment (first assignment of error). Although

landlord also claims the trial court erred in granting summary judgment in Varicon’s favor (the second assignment), landlord devotes merely two paragraphs in its brief addressing

this contention.

{¶29} In these two paragraphs, landlord argues only that certain evidence submitted

by Varicon for its motion for summary judgment, such as Mark Daniel’s affidavit, the

undated sublease, and the January 5, 2009 letter to the creditors, was not competent

evidence meeting the requirement of Civ.R. 56. Landlord does not specifically argue that

a genuine issue of a material fact remains regarding any of the three other exceptions to

preclude summary judgment in Varicon’s favor. As a result, we do not have a specific

claim regarding the other three exceptions to review in this appeal.

{¶30} Consequently, there is only one question to resolve in this appeal:

whether there is a genuine issue of a material fact regarding whether Varicon impliedly

assumed the five-year lease.

Implied Assumption/Equitable Assignment

{¶31} The trial court found Varicon did not impliedly assume the lease. Our

review of the evidence, however, indicates the contrary. As we explain in the following,

the evidence before the trial court created a triable issue of fact regarding whether

Varicon impliedly assumed the lease.

{¶32} The Supreme Court of Ohio in Welco, 67 Ohio St.3d 344, 617 N.E.2d

1129, explained the concepts of de facto merger and mere continuation, but did not

elaborate on the notion of implied assumption. Implied assumption is also referred to as

equitable assignment. See Crown Oil & Wax Co. of Del., Inc. v. Glen Constr. Co. of Va., Inc., 320 Md. 546, 578 A.2d 1184 (1990). In a much earlier decision, the court described

the general concept of equitable assignment as follows:

An equitable assignment requires no particular form. It is accomplished where there is an intention on one side to assign and an intention on the other to accept, supported by a sufficient consideration and disclosing a present purpose to make an appropriation of a debt or fund.

The intent and effect of an equitable assignment are to be ascertained from all the language used, construed in the light of the surrounding circumstances. The object sought to be accomplished may be considered, as well as the conduct of the parties.

Gen. Excavator Co. v. Judkins, 128 Ohio St. 160, 190 N.E. 389 (1934), paragraphs three

and four.

{¶33} “Any right of action arising out of contract may be assigned.” Langhals v.

Holt Roofing Co., 47 Ohio App.3d 114, 116, 547 N.E.2d 401 (6th Dist.1988), citing 6A

Corpus Juris Secundum, Assignments, Section 36, at 641 (1975). “[A]ny words or

transactions which show an intention on one side to assign and an intention on the other to

receive, if there is a valuable consideration, will operate as an effective equitable

assignment.” Id., quoting Morris v. George Banning, Inc., 49 Ohio Law Abs. 530, 533,

77 N.E.2d 372 (2d Dist.1947).

{¶34} The doctrine does not appear to have been applied in the lease context in

Ohio, but courts in other states have applied this doctrine to find an assignment of a lease.

“Where a person, other than the lessee, is shown to be in possession of leased premises

and paying rent therefor, the law presumes that the lease has been assigned to him.”

Indep. Gin Co. v. Parker, 19 Ariz. App. 413, 508 P.2d 78 (1973), citing Holcomb v. Clark, 27 Ariz. 573, 234 P. 1075 (1925); Leadbetter v. Pewtherer, 61 Ore. 168, 121 P. 799

(1912); Quine v. Sconce, 209 Ore. 486, 306 P.2d 420 (1957); Baehr v. Penn-O-Tex Oil

Corp., 258 Minn. 533, 104 N.W.2d 661 (1960); Abbott v. Bob’s U-Drive, 222 Ore. 147,

352 P.2d 598 (1960); Risolo v. Bruno, 36 Misc.2d 247, 232 N.Y.S.2d 436 (1962);

Karbelnig v. Brothwell, 244 Cal.App.2d 333, 53 Cal.Rptr. 335 (1966); Clasen v. Moore

Bros. Realty Co., 413 S.W.2d 592 (Mo.App.1967).

{¶35} Here, after ICOC sold its assets to Varicon and quickly ceased to exist,

Varicon continued to occupy the premises and paid rents for more than three years.

Varicon claims that it rented the premises under a sublease between ICOC and Varicon.

{¶36} Varicon’s claim regarding the sublease is problematic in several regards.

First, the photocopy of the sublease Varicon submitted was undated — although the text of

the document stated the sublease was effective January 1, 2009 — and, even though the

sublease was signed by a “VP” of Varicon, the identity of the “VP” is unknown because

the signature was illegible.

{¶37} Second, the validity of the sublease was called into question by the very

terms of the APA. The APA required the landlord’s consent in writing regarding the

Ohio lease, yet the evidence does not reflect appellant landlord’s consent, in writing or

otherwise.2

A review of the original lease between ICOC and the landlord also reveals a provision in the 2

lease that stated that the tenant shall not sublease the premises without written consent of the landlord. {¶38} Third, the sublesssor, ICOC, ceased to exist as of January 8, 2009, a week

after the purported sublease began — according to a copy of the South Carolina secretary

of state printout submitted by Varicon itself. The question naturally arises as to who

Varicon was subleasing the property from after January 8, 2009. Fourth, even if ICOC

still existed, the sublease, pursuant to its own terms, was only to last three months.

{¶39} Thus, even if there were a valid sublease, the sublease expired in April 2009,

yet Varicon continued to occupy the premises and pay rents for 20 more months, long after

the purported sublease had expired. The state of the evidence thus leaves the key

question unanswered: even if there were a valid sublease for the first three months of

2009, what was the contractual basis for Varicon’s continuous occupation of the premises,

implied or otherwise? Varicon appears to claim that there was a “month-to-month” lease

between Varicon and the landlord, but offered no evidence regarding when and how the

“month-to-month” lease came into existence.

{¶40} Based on our review of the evidence, therefore, there is a genuine issue of a

material fact regarding whether Varicon impliedly assumed the five-year lease, given the

parties’ conduct after the original tenant ICOC ceased to exist. Therefore, the trial court

improperly granted summary judgment in favor of Varicon based on its finding that

Varicon did not impliedly assume the lease.

{¶41} For the same reason, the trial court properly denied the landlord’s motion for

summary judgment predicated on the landlord’s assertion that no genuine issue of a

material fact remains regarding Varicon’s implied assumption of the lease. {¶42} Appellant landlord’s first assignment of error is without merit, and its second

assignment of error is sustained. The judgment of the trial court denying appellant’s

motion for summary judgment is affirmed, and its judgment granting appellee’s motion for

summary judgment is reversed. The case is remanded to the trial court for further

proceedings consistent with this opinion.

It is ordered that appellant and appellee share the costs herein taxed.

The court finds there were reasonable grounds for this appeal.

It is ordered that a special mandate issue out of this court directing the common

pleas court to carry this judgment into execution.

A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the

Rules of Appellate Procedure.

______________________________________________ TIM McCORMACK, JUDGE

MARY J. BOYLE, A.J., and EILEEN T. GALLAGHER, J., CONCUR