Hood Brothers v. USCO Distribution

• Court: Court of Appeals for the Eleventh Circuit
• Decided: May 13, 1998
• Docket: 96-9194
• Status: Published

Opinion

PUBLISH

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

_____________________

No. 96-9194 _____________________ (District Court No. 1:95-CV-784-WBH)

HOOD BROTHERS PARTNERS, L.P.,

Plaintiff-Appellee,

versus

USCO DISTRIBUTION SERVICES, INC.,

Defendant-Appellant.

________________________

Appeal from the United States District Court for the Northern District of Georgia _________________________ (May 13, 1998)

Before DUBINA, Circuit Judge, HILL and GIBSON*, Senior Circuit Judges.

JOHN R. GIBSON, Senior Circuit Judge:

USCO Distribution Services, Inc. appeals from the summary

judgment entered against it in favor of its landlord, Hood Brothers

Partners, Inc. Hood Brothers sued to terminate two long-term

leases of property used for a warehouse. The leases were first

signed in 1961 and 1972, respectively, and both leases have been

amended to extend the term until 1998, with options until 2013.

The annual rental was to remain the same throughout the life of the

*Honorable John R. Gibson, Senior U.S. Circuit Judge for the Eighth Circuit, sitting by designation. leases. Hood Brothers claims that USCO's predecessor in interest

under the leases, Uniroyal, Inc., repudiated the leases by

undergoing corporate dissolution without making adequate provision

for its liability under the leases. The district court entered

summary judgment for Hood Brothers, and USCO appeals. We reverse

and remand for entry of judgment in favor of USCO.

The original tenant on the leases was Uniroyal. Uniroyal

assigned its interest in the leases to one of its subsidiaries, an

entity named USCO (now known as "old USCO"). Just before Uniroyal

dissolved in 1986, old USCO subleased the property to the USCO

involved in this suit. Uniroyal dissolved old USCO and received

back ownership of the prime leases, although, of course, the

subleases to new USCO were still in effect. Later, after the

present controversy began to take shape, Uniroyal decided an

assignment was preferable to a sublease, and so executed an

assignment of the leases to new USCO. Both the sublease and the

assignment are permitted under the leases, which provide that the

tenant can sublease or assign the leases without the landlord's

permission, but that the original tenant will nevertheless remain

liable on the leases.

After subleasing the property to new USCO, Uniroyal filed its

articles of dissolution in December 1986. Uniroyal was a New 1 Jersey corporation. Under New Jersey law, upon dissolution a

1 The law of the state of incorporation ordinarily governs the legal effect of a corporation's dissolution, including the questions of the corporation's status, rights, and liabilities. See Oklahoma Nat'l Gas Co. v. Oklahoma, 273 U.S. 257, 259-60 (1927) (Dissolution not procedural or controlled by law of forum; "[i]t

-2- corporation does not cease to exist, but continues its corporate

existence for the purpose of winding up its affairs. N.J. Stat.

Ann. § 14A:12-9 (West 1996). Its property does not automatically

revert to its shareholders, but must be transferred. Id. 2 Uniroyal set up a trust, CDU Liquidating Trust, and transferred

some of its assets and liabilities to the trust, but it did not

transfer its liability on the leases to the trust. According to

Uniroyal's officer, David O'Boyle, Uniroyal's plan for taking care

of its liability under the leases was simply to rely on USCO to

fulfill its responsibilities as subtenant, and later, as assignee.

There is no evidence that USCO has ever committed any breach of its

duties as tenant. USCO has always paid the rent on time. In

addition, USCO recently spent $700,000 to put a new roof on the

warehouse.

Hood Brothers filed suit against USCO for a declaratory

judgment that Uniroyal had repudiated the lease and that the leases

had either been terminated or Hood Brothers was entitled to

terminate them. Hood Brothers and USCO filed cross-motions for

summary judgment. The district court held that Uniroyal had

repudiated the leases because, upon dissolution, its shareholders

concerns the fundamental law of the corporation enacted by the state which brought the corporation into being"); Restatement (Second) of Conflicts of Law ,§ 299, comment h and § 302 (1971). Hood Brothers does not cite any interest of the State of Georgia that would weigh against application of New Jersey law on this point. See generally Restatement § 302, comment e. 2 At the same time Uniroyal dissolved, its parent corporation, CDU Holding, Inc., also dissolved. CDU Liquidating Trust was set up to liquidate assets and liabilities of CDU Holding.

-3- did not take up the leases. Therefore, the district court held:

Uniroyal has put itself knowingly in a position where it cannot perform its portion of the contract if called upon to do so; it has abandoned its obligations under the Leases. In so doing, Uniroyal has breached the Leases by intentionally putting itself in a position where it cannot perform its contractual obligations.

Alternatively, the district court held that if Uniroyal actually

did transfer the leases to its shareholder, CDU Holding, and if CDU

Holding transferred the leases to CDU Liquidating Trust, then the

Trust repudiated the leases by a letter in which Uniroyal stated

that the Trust and its beneficiaries "have no liability in their

capacity as such beneficiaries under the lease at issue."

We review the grant of summary judgment de novo, applying the

same standards as the district court. See Jones v. Firestone Tire

& Rubber Co., 977 F.2d 527, 535-36 (11th Cir. 1992), cert. denied,

508 U.S. 961 (1993). A motion for summary judgment should be

granted only if, viewing the record in the light most favorable to

the non-moving party, there is no genuine issue of material fact

and the moving party is entitled to judgment as a matter of law.

See id. at 535; Fed. R. Civ. P. 56(c). See generally Celotex Corp.

v. Catrett, 477 U.S. 317, 322 (1986). I.

USCO argues that Uniroyal did not repudiate the leases, and

that the district court erred in so holding.

The district court acknowledged that dissolution of a

corporation, by itself, does not constitute a breach of the leases.

Slip op. at 10. It quoted Kelly v. Alstores Realty Corp., 613 A.2d

-4- 1163 (N.J. 1992), stating: "[T]he dissolution of a corporate lessee

does not terminate a real estate lease unless the terms of the

lease provide for its termination on the lessee's dissolution or

unless the lessee has intentionally abandoned the lease." Id. at

1165 (emphasis added by district court). In this case, the leases

do not provide that they terminate upon the tenant's dissolution.

However, the district court concluded that Uniroyal had

intentionally abandoned the leases. The district court reasoned

that Uniroyal has made "no obvious provision . . . for the

liabilities in question," slip op. at 11, because "Uniroyal has

made no provision for the acceptance of this liability by its

shareholders." Id. The district court implicitly held that

assumption of the leases by the shareholders was the only way to

provide for performance; and that since Uniroyal's shareholders had

not taken up the leases, this must be deemed an intentional

abandonment of the leases.

The district court's reasoning is based on two faulty

premises: that Uniroyal made no provision for performance of its

lease and that the only acceptable provision would be for

Uniroyal's shareholders to assume the leases.

First, it is simply not true that Uniroyal made no provision

for performance of the lease. In his deposition, Uniroyal officer

O'Boyle testified:

Q: Do you know how as part of the liquidation any remaining liabilities under the subject lease of this litigation was to be addressed or were to be addressed?

. . .

-5- A: The buyer was supposed to pay them.

That didn't necessarily eliminate the other liability for the same liabilities but that was what was intended to happen and so far for I guess about ten years happened.

Considering the high value of these leases in light of the

favorable rental terms they guarantee, selling the leases to

someone who wanted to use the warehouse was an eminently practical

way to provide for performance of the tenant's duties under the

leases. Moreover, it is relevant that this method has in fact

worked and that USCO has fulfilled the duties of the tenant under

the leases.

If a landlord leases property to a corporation by a lease that

permits assignment and imposes no net worth requirements on the

original tenant, he cannot complain if the original tenant assigns

the lease and dissolves itself--so long as the assignee performs

all its duties. In Kelly v. Alstores Realty Corp., 613 A.2d 1163

(N.J. 1992), the tenant leased land used for a shopping center for

a 99-year term. As inflation rendered the rental terms unfavorable

to the landlord, the landlord attempted to avoid the lease on the

ground that the corporate tenant had dissolved and assigned the

lease to another corporation as part of a corporate reorganization.

The New Jersey Supreme Court rejected the argument that the

tenant's dissolution amounted to a repudiation of the lease. The

court analogized the dissolution of a corporate tenant to the death

of an individual tenant; in either case, the tenant's successors in

interest ordinarily continue to be subject to the burdens and -6- entitled to the benefits of the lease. 613 A.2d at 1165-66. The

court reasoned that this general rule enhanced the stability of

leases and was consistent with the reasonable expectations of the

parties. Id.

Kelly then considered whether the terms of the particular

lease contained an exception to the general rule. The landlord

relied on the lease term providing that the tenant should remain

liable on the lease even if it assigned the lease or sublet the

property. The landlord argued that this clause amounted to an

implied covenant that the original tenant would not dissolve

itself. The New Jersey Supreme Court rejected this argument,

stating:

The terms of the lease refute [the landlord's] contention that her reliance on the financial dependability of [the original tenant] should lead us to interpret [the lease] to imply a covenant against dissolving [the tenant]. [The landlord] does not claim that [the tenant] made any representation concerning its net worth in the lease itself or in any accompanying document. It did not enter into any covenant to maintain any specified net worth. . . . In the absence of any guarantees of net worth, any limitations on [the tenant's] operation of its business, or any security for rent, [the landlord] could only have been relying on the shopping center itself, or on its prospects, to assure her receipt of rent for the next ninety nine years.

Id. at 1167.

The leases in this case were similar in key respects to the

Kelly lease. The leases provided that the tenant could assign or

sublease without the landlord's permission; they defined "tenant"

to include the original tenant's successors and assigns; and they

placed on the tenant no net worth requirements or other hindrances

-7- to dissolution. Therefore, by Kelly's rationale, Hood Brothers did

not bargain for Uniroyal's continued existence in any particular

corporate form. Hood Brothers is getting all that it bargained

for, which is performance of the tenant's duties under the leases.

Hood Brothers contends that even if Uniroyal provided for

performance of its duties by assigning to USCO, it has repudiated

by failing to transfer the leases to its shareholders. This, Hood

Brothers contends, has put Uniroyal in the position of being unable

to perform its contingent liability of performing the tenant's

duties if USCO ever fails to do so.

The argument is unpersuasive. Under New Jersey law a

dissolved corporation may continue its corporate existence for the 3 purpose of winding up its affairs. The corporation's assets do

3 The New Jersey corporate dissolution statute provides:

(1) Except as a court may otherwise direct, a dissolved corporation shall continue its corporate existence but shall carry on no business except for the purpose of winding up its affairs . . . .

(2) Subject to the provisions of [section(1)], and except as otherwise provided by court order, the corporation, its officers, directors and shareholders shall continue to function in the same manner as if dissolution had not occurred. In particular, and without limiting the generality of the foregoing . . .

(b) title to the corporation's assets shall remain in the corporation until transferred by it in the corporate name . . .

(e) the corporation may sue and be sued in its corporate name and process may issue by and against the corporation in the same manner as if dissolution had not occurred. . . .

-8- not automatically pass to its shareholders, but must be

affirmatively transferred.

In fact, while Uniroyal did transfer some assets to CDU

Holding, Inc., Uniroyal's David O'Boyle testified that Uniroyal

continues to have officers and directors, as well as corporate

assets in the form of "several hundred million dollars of

insurance." When asked whether the insurance would cover any

liabilities under the leases in this case, O'Boyle said, "Could."

In arguing that only assumption of the lease by shareholders

would keep the lease in force after Uniroyal's dissolution, Hood

Brothers relies on Rauch v. Circle Theater, 374 N.E.2d 546 (Ind.

Ct. App. 1978). In Rauch, a corporate tenant dissolved,

distributed some of its money to shareholders, kept some money in

escrow to pay debts, and assigned the lease to a going concern.

The landlord sued the original tenant for future rent. The trial

court held that the tenant had adequately discharged its obligation

by assigning the lease, but the court of appeals reversed, finding

an anticipatory repudiation.

Hood Brothers argues from Rauch that if the stockholders of a dissolving corporation do not take up the lease, they must be

deemed to have abandoned the lease and committed an anticipatory

repudiation, even if they actually provided for performance of the

lease by assigning it to a third party who fulfills all the

tenant's duties under the lease.

The case before us is distinguishable from Rauch in a crucial

N.J. Stat. Ann. § 14A:12-9.

-9- way. The inference in Rauch that shareholders of a dissolving

corporation abandon any lease they do not affirmatively take up is

based on the common law model of corporate dissolution, under which

the dissolving corporation ceases its legal existence and its

assets are automatically distributed to the shareholders. See 16A

Fletcher Cyclopedia of the Law of Private Corporations, § 8142

(1995 rev. ed.) ("At common law, a dissolved corporation ceased to

exist and could not sue or be sued in its corporate name.") New

Jersey law, under which Uniroyal was incorporated, has changed from

the common law model to a statutory scheme by which the dissolved

corporation continues to exist for the purpose of winding up its

affairs, and its assets do not automatically revert to its

shareholders. It can sue and be sued. A New Jersey court

summarized this distinction between the common law of dissolution

and the New Jersey statute:

The law in this state must not be confused with the rules applicable in some other states by reason of a fiction whereby it is deemed that after dissolution a corporation is to be considered legally "dead." . . . Our statute, however, expressly continues the corporate entity for the purpose of prosecuting and defending suits.

New Jersey Title Guarantee & Trust Co. v. Berliner, 40 A.2d 790, 793 (N.J. Ch. 1945). Accord Penasquitos, Inc. v. Superior Court,

812 P.2d 154, 156 (Cal. 1991) (applying similar California

statute). We have already recited evidence in this case that

Uniroyal has in fact continued its corporate existence and

continues to own assets in its own right. Because Uniroyal is

legally able to own assets, pay debts, and be sued, it is

-10- altogether unwarranted to infer that unless the shareholders take

up the lease, Uniroyal repudiated it.4

II.

Hood Brothers also argues that the lease was expressly

repudiated by CDU Holding, Inc. It quotes a letter from Mr.

O'Boyle to Hood Brothers' lawyer, in which he enclosed a copy of

the lease assignment from Uniroyal to USCO. The letter states:

I would also advise you that the enclosed assignment does not have the purpose of releasing Uniroyal, Inc. for any obligations it may have. . . .

I am enclosing herewith a copy of the latest financial report for CDU Holding, Inc. Liquidating Trust (the "Trust") which, until the present, has been the entity forwarding the rent checks under its lease. I want to caution you, however, that in the future, your rent will come from the assignee, USCO Distribution Services, Inc. and also advise you that the Trust has not assumed any obligations under the lease.

(emphasis added). The very letter Hood Brothers uses to support

its claim of repudiation implicitly states that Uniroyal does not

consider the assignment to have extinguished its own liability

under the leases. The statement that CDU Holding, Inc. Liquidating

Trust has not assumed the lease does not amount to a repudiation,

since, as we have noted, Uniroyal was legally able both to pay

4 In addition to the question of whether Uniroyal exists as a legal entity that can be sued, at oral argument the factual question arose of whether Uniroyal actually has assets to pay the contingent liability. We must conclude from Kelly that the state of Uniroyal's pocketbook is none of Hood Brothers' business, since Hood Brothers did not obtain in the lease a covenant to maintain any particular net worth. See Kelly, 613 A.2d at 1167. See also Berliner, 40 A.2d at 793 ("The mere failure to provide for the future satisfaction of a contingent liability does not, ipso facto, create a cause of action in favor of the holder of such a contingent claim.")

-11- debts and to be sued. The letter said that Uniroyal did not

transfer the contingent liability to CDU Holding, Inc. Liquidating

Trust, but continued to acknowledge its own obligation under the

leases. One cannot read this letter as a repudiation.

In sum, there is no evidence that Hood Brothers has been

injured in any way by anyone repudiating the leases. To the

contrary, USCO wants only to keep the leases in force, and Hood

Brothers wants to find a technical breach to help it out of a bad

bargain. There is no legal basis to support the district court's

grant of summary judgment for Hood Brothers. Moreover, the record

supports summary judgment for USCO. We REVERSE and REMAND with

instructions for the district court to enter judgment for USCO.

-12-