Crye-Leike Realtors v. WDM

• Court: Court of Appeals of Tennessee
• Decided: September 23, 1998
• Docket: 02A01-9711-CH-00287
• Status: Published

Opinion

IN THE COURT OF APPEALS OF TENNESSEE, AT JACKSON

_______________________________________________________

) CRYE-LEIKE REALTORS, INC., ) Shelby County Chancery Court A Tennessee Corporation, ) No. 104720-3 R.D. ) Plaintiff/Appellant. ) ) VS. ) C.A. No. 02A01-9711-CH-00287 ) WDM, INC., a subsidiary of DERLAN, ) INDUSTRIES LIMITED, and GEORGE C. RICHERT, TRAMMELL ) ) FILED CROW SE, INC. and SCOTT ) PAHLOW. ) September 23, 1998 ) Defendants/Appellees. ) Cecil Crowson, Jr. Appellate C ourt Clerk ) ______________________________________________________________________________

From the Chancery Court of Shelby County at Memphis. Honorable D. J. Alissandratos, Chancellor

Roger A. Stone, STONE, HIGGS & DREXLER, Memphis, Tennessee Attorney for Plaintiff/Appellant.

Anthony Sammons, BRANSON & BEARMAN, PLLC, Memphis, Tennessee Attorney for Defendants/Appellees WDM, Inc. and George C. Richert.

William L. Hendricks, Jr., GLANKLER BROWN, PLLC, Memphis, Tennessee Attorney for Defendant/Appellee Trammell Crow SE, Inc.

OPINION FILED:

REVERSED AND REMANDED

FARMER, J.

CRAWFORD, P.J.,W.S.: (Concurs) LILLARD, J.: (Concurs) In this action for breach of contract and procurement of breach of contract, Plaintiff

Crye-Leike Realtors, Inc., appeals the trial court’s final order entering summary judgment in favor

of Defendants/Appellees WDM, Inc., George C. Richert, Trammell Crow SE, Inc., and Scott

Pahlow. We reverse the trial court’s judgment because we conclude that the record reveals the

existence of genuine issues of material fact which preclude summary judgment on these claims.

On November 10, 1993, George C. Richert and Colman Borowsky executed a

Buyer’s/Tenant’s Agreement under which Richert appointed Borowsky, a real estate broker with

Crye-Leike Realtors, Inc., as his sole and exclusive real estate broker to aid him in the leasing and/or

acquisition of industrial property. In executing the agreement, Richert agreed to inform Borowsky

of any property of which he became aware in order for Borowsky to contact the owner or the owner’s

broker. Richert also agreed that, if he entered into any lease or purchase agreement within twenty-

four months after the period of the agreement, Richert would recognize and provide for Borowsky

as the broker in the transaction. The agreement provided for an initial term of twelve months but

could be terminated by either party upon thirty days written notice.

At the time they executed the agreement, the parties understood that Richert was

representing a company called Derlan Industries and that they would be relying on Derlan’s credit

report to secure a lease. They also understood, however, that Richert would be forming a new

corporation which would actually acquire the property. Richert informed Borowsky that the newly-

formed company would use the space to assemble and distribute pumps. To this end, the agreement

provided that the purpose of the industrial property was “to manufacture, test and distribute pumping

equipment.” Richert represented that he would be the chief executive officer of the new company

and that he would have the authority to execute agreements on its behalf. Because the corporation

was not yet in existence, however, Richert signed the agreement in his individual capacity.

Borowsky signed the agreement on behalf of Crye-Leike.

In accordance with the agreement, Borowsky began attempting to locate suitable

space for Richert’s business. Based upon specifications provided by Richert, Borowsky prepared

some sketches of the type of space Richert desired. Borowsky then sent out a request for proposals

to prospective bidders. Borowsky kept a list of about fifty to sixty commercial real estate industrial brokers whom he regularly contacted, and he contacted many of these brokers by telephone to

discuss Richert’s space needs. In late November or early December 1993, Borowsky learned that

the name of Richert’s new company would be WDM, Inc.

On December 7, 1993, Richert formed WDM, Inc. Initially, Richert and two other

people owned all of WDM’s stock. They later sold the stock to E.G. Corporacion. The principal

stockholder of E.G. Corporacion was Derlan Industries. Richert became WDM’s president and chief

executive officer.

Sometime in December 1993, Borowsky showed Richert a potential space at

Interstate Industrial Park off of Brooks Road in Memphis. Borowsky subsequently prepared a

written offer to lease the space and submitted it to Belz Enterprises. The offer was made on behalf

of WDM, Inc., and Richert signed the offer as WDM’s president. Borowsky and Belz employees

proceeded to negotiate the terms of the proposed lease agreement. Borowsky believed that a lease

agreement with Belz was “a done deal.” When the deal was not consummated as planned, however,

Borowsky became concerned that Richert and WDM were “bailing out” on him. At some point,

Borowsky began to suspect that Richert was instead dealing with Trammell Crow SE, Inc.

Accordingly, Borowsky telephoned his contact at Trammell Crow, Brad Kornagey, and reminded

him that Crye-Leike had an exclusive agreement with Richert. Borowsky previously had contacted

Kornagey in an effort to find suitable space for Richert and WDM.

Richert indeed had contacted Trammell Crow to inquire about space in a facility

named Bellbrook Business Park. Borowsky had suggested showing this space to Richert in early

December 1993, but Richert claimed not to be interested in the space at that time. When he

contacted Trammell Crow, Richert informed its leasing agent, Scott Pahlow, that Richert and WDM

were being represented by Borowsky and Crye-Leike. Pahlow did not inquire as to the details of

Borowsky’s representation, however, and, specifically, he did not ask if a contract existed between

Richert and Borowsky, although he knew that brokers attempted to get their clients to sign such

contracts. Pahlow also was not informed by his coworker, Brad Kornagey, about the existence of

such a contract, despite the fact that they both attended weekly sales meetings at which agents

discussed what deals they were working on. On February 22, 1994, Richert, on behalf of WDM, executed a lease agreement with

Memphis Zane May Associates for space in the Bellbrook Business Park on Fleetbrook Drive. The

lease agreement described WDM as a wholly-owned subsidiary of Derlan Industries. Neither

Borowsky nor Crye-Leike received a commission from the lease transaction. According to Richert,

Pahlow advised him that Borowsky did not need to be involved in the transaction because Borowsky

neither had shown Richert the Bellbrook property nor had contacted Pahlow about the property.

By letter dated February 23, 1994, Richert terminated his agreement with Crye-Leike

and Borowsky. Richert wrote the letter on WDM stationary, and he signed the letter on behalf of

WDM as its president and chief executive officer. Some time after receiving the termination letter,

Borowsky learned about the lease transaction handled by Pahlow for the Bellbrook property.

Consequently, Crye-Leike filed this action for breach of contract against WDM and Richert. Crye-

Leike later amended its complaint to assert a claim for procurement of breach of contract against

Pahlow and Trammell Crow. All of the Defendants filed motions for summary judgment, which

were granted by the trial court. This appeal followed.

Summary judgment is appropriate only when the parties’ “pleadings, depositions,

answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there

is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a

matter of law.” T.R.C.P. 56.04. In determining whether or not a genuine issue of material fact exists

for purposes of summary judgment, the trial court is required to consider the question in the same

manner as a motion for directed verdict made at the close of the plaintiff’s proof. Byrd v. Hall, 847

S.W.2d 208, 210 (Tenn. 1993). That is, “the trial court must take the strongest legitimate view of

the evidence in favor of the nonmoving party, allow all reasonable inferences in favor of that party,

and discard all countervailing evidence.” Id. at 210-11.

This appeal first requires us to determine whether the record contains evidence to

support Crye-Leike’s claim that WDM ratified or adopted the November 10, 1993, agreement

between Richert and Crye-Leike. A corporation may become liable on a preincorporation contract

executed by its promoter if the corporation subsequently ratifies or adopts the contract. Equitec Real

Estate Investors Fund XII v. Poplar Pike, Inc., No. 02A01-9506-CH-00127, 1996 WL 460269, at *7 (Tenn. App. Aug. 15, 1996) (citing Kemmons Wilson, Inc. v. Allied Bank of Texas, 836 S.W.2d

104, 109 (Tenn. App. 1992)); 18 C.J.S. Corporations § 71b (1990). Ratification is the express or

implied adoption and confirmation by the corporation of a contract entered into on the corporation’s

behalf by a promoter who purported to have the authority to act as the corporation’s agent. Bells

Banking Co. v. Jackson Centre, Inc., 938 S.W.2d 421, 427 (Tenn. App. 1996). In order for a

ratification to occur, the corporation, having full knowledge of the facts, must accept the benefits of

the promoter’s contract. Id. (citing 2A C.J.S. Agency § 71 (1972)). Moreover, the corporation,

either by the circumstances or by its affirmative election, must indicate an intention to adopt the

contract as its own. Id.

Applying the foregoing standard, we conclude that a genuine issue of material fact

exists as to whether WDM ratified or adopted the preincorporation contract entered into between

Richert and Crye-Leike. The record contains evidence that, after it was incorporated on December 7,

1993, WDM began to receive the benefits of Richert’s contract with Crye-Leike. For purposes of

these summary judgment proceedings, it was undisputed that Borowsky continued to search for

suitable property for WDM to conduct its business. These efforts included contacting various

landlords and other brokers, showing different properties to WDM, and, on at least one occasion,

preparing an offer to lease space on behalf of WDM.1 The corporation also had full knowledge of

the facts in this case because Richert, WDM’s president and chief executive officer, had full

knowledge of the contract executed by Richert and of Borowsky’s subsequent efforts to find suitable

space for WDM. Finally, the record contains evidence that the corporation intended to adopt the

contract. Pursuant to the contract, in January 1994 Borowsky submitted an offer to Belz Enterprises

on behalf of WDM for the lease of industrial space. Richert signed the offer on behalf of WDM,

Inc., as the corporation’s president. This evidence supports Crye-Leike’s claim that WDM ratified

or adopted the contract after its incorporation and that, in actuality, Borowsky was representing

WDM, and not Richert.

In defending the trial court’s summary judgment, WDM and Richert contend that

1 Contrary to WDM’s and Richert’s argument on appeal, we conclude that these efforts resulted in a direct, tangible benefit to WDM, despite the fact that the efforts did not result in the execution of a lease. Crye-Leike, through Borowsky, contracted to provide its services and did provide services. As a realtor, it is in the business of providing services. Richert’s knowledge of the facts could not be imputed to WDM and that, upon becoming a corporate

officer, Richert could not ratify his prior actions as a promoter. We conclude that this argument is

without merit. Although, as a general rule, the knowledge of a single promoter cannot be imputed

to the corporation, exceptions to this rule have been found “where the promoters become directors

and stockholders in the corporation or are the sole or controlling stockholders.” 18 Am. Jur. 2d

Corporations § 127 (1985) (footnotes omitted). Moreover, we can find no suggestion in the record

that anyone in authority at WDM was unaware of the pertinent facts in this case. The only evidence

in the record indicates that, during all times relevant hereto, Richert had authority to act on the

corporation’s behalf and to bind the corporation.

We also reject the Defendants’ contention that WDM could not ratify or adopt the

contract with Crye-Leike because Richert signed the contract in his individual capacity and not on

behalf of the corporation. This argument was rejected by the court in In re Dynamic Enterprises,

Inc., 32 B.R. 509 (M.D. Tenn. 1983). In that case, the plaintiff and the individual defendant,

Martin J. Bloeman, signed an agreement which granted Bloeman an exclusive franchise to operate

a fitness center in Jackson, Michigan, under the trade name “Fitness World.” The agreement

contained signature lines for the plaintiff and for the Fitness World franchisee. Bloeman signed the

agreement as the guarantor of Fitness World’s obligations, but the Fitness World signature line

remained blank because Bloeman’s corporation, Fitness World of Jackson, Inc., had not yet been

formed on the date the agreement was finalized. After its incorporation, Fitness World of Jackson,

Inc., proceeded to operate Fitness World in accordance with the provisions of the franchise

agreement. In re Dynamic Enters., 32 B.R. at 513-15.

Applying Michigan law, the court first discussed the concept of ratification in

deciding whether the franchise agreement was enforceable against the corporation:

Subsequently formed corporations are not automatically and irreversibly bound, . . . by the acts of promoters and incorporators. Individuals risk that their actions will not be ratified and that personal liability will ensue. The court must scrutinize the actions of the corporate entity following incorporation to determine whether that corporation should be held liable on the particular contract. The Michigan Supreme Court noted in Johnson & Carlson v. Montreuil’s Estate: American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized, and that the corporation is then liable, both at law and in equity, on the contract itself, and not merely for the benefits which it has received.

291 Mich. 582, 289 N.W. 262, 264 (1939). If the corporation recognizes the existence of the contract and accepts the benefits bestowed under the contract, equity demands that the corporation also share the liabilities.

Id. at 515-16.

The court then held that, despite the absence of the corporate signature on the

franchise agreement, Fitness World of Jackson, Inc., was bound by the agreement. The court

reasoned:

Postincorporation, Fitness World of Jackson, Inc. affirmed and ratified the franchise agreement. Fitness World operated under the guidelines established in the franchise agreement. Fitness World tendered payments and license fees by checks drawn on a corporate account, accepted goods, advertising and other services and substantially complied with other terms of the franchise agreement. Fitness World never sought to reject the contract and instead operated consistent with the agreement. These acts constitute ratification and adoption of the preincorporation contract. . . . Despite the absence of the corporate signature on the franchise agreement, Fitness World of Jackson, Inc. is bound by the agreement.

Id. at 516 (citations omitted).

The record in the present case contains evidence that WDM accepted the benefits of

the contract between Richert and Crye-Leike. As previously discussed, these benefits consisted of

Borowsky’s continued efforts to locate suitable space for WDM to conduct its business. The record

contains no evidence that WDM ever sought to reject the contract or the benefits it received

thereunder. When Borowsky submitted a lease proposal to Belz Enterprises, Richert signed the

proposal on behalf of WDM as the corporation’s president. Even when Richert sent the letter to

Borowsky notifying him that the agreement was being terminated, Richert used WDM stationery and

signed the letter as WDM’s president and chief executive officer. We conclude that this evidence

of WDM’s ratification of the contract was sufficient to withstand the Defendants’ motions for summary judgment on Crye-Leike’s breach of contract claim, despite the fact that Richert signed the

contract in his individual capacity rather than in his capacity as an officer of the to be formed

corporation.

Having concluded that a genuine issue of material fact exists as to whether WDM

ratified the preincorporation agreement signed by Richert, we next must determine whether the trial

court erred in granting summary judgment in favor of Trammell Crow and Pahlow on Crye-Leike’s

claim for procurement of breach of contract. In order to recover for procurement of a breach of

contract, Crye-Leike was required to prove the following elements: (1) that a legal contract existed

between Crye-Leike and a third party, such as Richert or WDM; (2) that Pahlow knew of the

contract’s existence; (3) that Pahlow intended to induce a breach of the contract; (4) that Pahlow

acted maliciously; (5) that the contract was breached; (6) that Pahlow’s conduct caused the breach;

and (7) that Crye-Leike suffered damages as a result of the breach. Myers v. Pickering Firm, 959

S.W.2d 152, 158 (Tenn. App. 1997).

As with Crye-Leike’s breach of contract claim, we conclude that genuine issues of

material fact precluded an award of summary judgment in favor of Trammell Crow and Pahlow on

Crye-Leike’s claim for procurement of breach of contract. The record contains evidence (1) that

Richert and Crye-Leike entered into a contract which later was ratified by WDM; (2) that Pahlow

knew Richert was being represented by Borowsky of Crye-Leike; (3) that Pahlow informed Richert

he would not have to involve Borowsky in the transaction because Pahlow, and not Borowsky,

showed the leased property to Richert; (4) that Richert and WDM breached the contract with Crye-

Leike by executing a lease agreement through Pahlow and Trammell Crow; and (5) that Borowsky

and Crye-Leike were paid no commission for the transaction.

In asking this court to uphold the trial court’s grant of summary judgment in its favor,

Trammell Crow contends that the record contains no evidence that Pahlow had knowledge that a

contract existed between Richert and Crye-Leike. We note, however, that Pahlow’s actual

knowledge of the existence of a contract between Richert and Crye-Leike was not essential to Crye-

Leike’s claim for procurement of breach of contract. In order to satisfy the knowledge requirement,

Crye-Leike only was required to show that Pahlow “had knowledge of such facts and circumstances that would lead a reasonable person to believe in the existence of the contract and the plaintiff’s

interest in it.” Exxon Corp. v. Allsup, 808 S.W.2d 648, 656 (Tex. Ct. App. 1991); 86 C.J.S. Torts

§ 62 (1997). In the present case, Pahlow was notified by Richert that he was being represented by

Borowsky of Crye-Leike. In addition to knowing that Borowsky already represented Richert, Pahlow

knew that brokers usually attempted to get their clients to sign agreements with them. Despite this

knowledge, Pahlow did not inquire further as to the relationship between Richert and Borowsky or

the possibility of an existing contract between Richert and Crye-Leike. Based on this evidence, we

conclude that a genuine issue of material fact exists as to whether Pahlow had knowledge of such

facts and circumstances that would lead a reasonable person to believe in the existence of a contract

between Richert and Crye-Leike.

We likewise reject Trammell Crow’s argument that Crye-Leike’s evidence fails to

support the malice requirement of the tort of procurement of breach of contract. In this context,

“malice is ‘the wilful violation of a known right.’” Dorsett Carpet Mills, Inc. v. Whitt Tile &

Marble Distrib. Co., 1986 WL 622, at *6 (Tenn. App. Jan. 2, 1986) (quoting 45 Am. Jur. 2d

Interference § 3), modified on other grounds, 734 S.W.2d 322 (Tenn. 1987). Contrary to Trammell

Crow’s argument, Crye-Leike was not required to show that Pahlow felt ill will toward Borowsky

and Crye-Leike. It was sufficient if the evidence showed that Pahlow’s conduct was intentional and

without legal justification. Hutton v. Watters, 179 S.W. 134, 135 (Tenn. 1915); 86 C.J.S. Torts § 62

(1997). Interference is without justification if it “is done for the indirect purpose of injuring the

plaintiff or benefiting the defendant at the plaintiff’s expense.” Bismarck Realty Co. v. Folden, 354

N.W.2d 636, 642 (N.D. 1984) (emphasis added). Here, Crye-Leike presented evidence that Pahlow

knew Richert was being represented by Borowsky and, thus, that Borowsky expected to earn a

commission from Richert’s and WDM’s future lease of property. Rather than inquiring into the

nature and extent of this relationship, Pahlow advised Richert that Borowsky would not be involved

in the transaction because Borowsky did not show the subject property to Richert. Pahlow then

proceeded to conduct a lease transaction which benefited himself and Trammell Crow at the expense

of Borowsky and Crye-Leike. We conclude that this evidence was sufficient to withstand the

motions for summary judgment filed by Trammell Crow and Pahlow.

The trial court’s judgment is reversed, and this cause is remanded for further proceedings consistent with this opinion. Costs of this appeal are taxed to the Defendants, for which

execution may issue if necessary.

____________________________________ FARMER, J.

______________________________ CRAWFORD, P.J., W.S. (Concurs)

______________________________ LILLARD, J. (Concurs)