Jersey Boulevard Corp. v. Lerner Stores Corp.

Bond, C. J., delivered the opinion of the Court. In this case a landlord of one of a chain of stores, after an adjudication in bankruptcy has ended the lessee’s tenancy and left the landlord without any present, provable claim for the loss of future rents, seeks a remedy against a holding company, stockholder of the lessee corporation. It is complained that one single interest, incorporated as lessee, stockholder of the lessee, chief creditor of it, and purchaser of the assets in bankruptcy, has contrived to continue the stores with the original store assets, but with the obligation under the lease practically cast off, and that in this there is a remediable wrong to the landlord. The suit is in equity, and the appeal is from a dismissal of the bill of complaint on demurrer.

It is averred that the defendant holding company was incorporated in Maryland in 1929, and with all the other corporations mentioned in the bill was controlled and conducted by four men, Joseph J. Lerner, Michael Lerner, Samuel A. Lerner, and Harold Lane, from their office in New York City. The lessee, of the same name, was an older, operating corporation of the State of Delaware, all the stock of which was acquired by the defendant company by an exchange of its own stock; and, at the beginning of the transactions averred, this holding company was also a creditor of the lessee for about $2,000,000, of which $500,000 represented dividends declared but unpaid. The older Delaware corporation was the direct lessee and operating company of nearly all of one hundred and sixty stores in a chain, situated in thirty-nine jurisdictions, thirty-eight states and the District of Columbia. A few of the stores were leased and conducted by two corporations subsidiary to this Delaware corporation; the latter owning all their stock.

The store of ⁵³⁵ this particular landlord, in Newark, New Jersey, had been leased to the Delaware company in 1926, at an annual rental of $33,000, and the complainant became landlord by an assignment. The lease was exhibited below, but it is stipulated that the only clause now relevant is one concerning a right of re-entry by the landlord on default in payment of rent, and it is conceded that the lease contained no special covenant that would commute its future rentals or otherwise give the landlord a present claim provable on a bankruptcy of the lessee. Compare Irving Trust Co. v. A. W. Perry, Inc., 293 U. S. 307 , 55 S. Ct. 150 , 79 L. Ed. 174 . And the bankruptcy proceeding was concluded before the amendment to section 63a of the Bankruptcy Act [ 48 Stat. 923 , 991, 11 U. S. Code Ann., sec. 103 (a)], giving landlords provable claims for amounts of rents which would have fallen due in one year after surrender of the leased premises.

Beginning in the year 1931, the lessee, or its holding company of the same name, sought to have its rents reduced by consent, warning the landlords of danger of receivership because of “tremendous operating losses.” It was declared to be the purpose to arrange as many reductions as possible, so that, if receivership should result, the prior arrangements would nevertheless provide for continued operation of the stores. And these efforts were continued into the following year, 1932. Danger of bankruptcy was mentioned, too. Reduction was refused by the complainant, landlord of the Newark store, and by others.

The defendant, or those in control of it, then adopted the plan which brought about, as one step, the bankruptcy of the lessee corporation, on September 30th, 1932. As described in the bill, it was a plan by which the single controlling interest, in the double position of stockholder and chief creditor, sought to escape the obligation for future rentals by abandoning the Delaware corporation as lessee and operating company, and at the same time continuing the business in the hands of new lessees, by exchanging the assets of the stores for preferred non ⁵³⁶ voting stock, and notes bearing no interest, of new lessee corporations. For this exchange, thirty-nine corporations, one in each jurisdiction, were formed and made use of; and the defendant took the voting stock of all of them. Each of the thirty-nine was named Lemer Shops.

And each had the same officers as those of the defendant corporation. The name of the original lessee corporation was changed; the name Lerner being omitted. The corporations subsidiary to the Delaware corporation made the same sales or exchanges. Then all of the lessee’s bills for merchandise, and those of the subsidiaries, and all accrued rents on the stores, were paid in full; and, in addition, the lessee paid over to the defendant $97,500 in cash on account of the debt due the defendant in the much larger amount.

With the stock and equipment of the stores thus removed to the new storekeepers, and the debts cleared off so far, the existing lessees passed into bankruptcy upon the petitions of the lessees themselves, on the ground of inability to pay their debts; and, the holding company having supplied money sufficient to pay all proved debts other than that due to itself, the stock and notes received by the trustee as assets were bought from it by means of the money and the latter debt, in the name of another newly formed corporation under the same control. Subsequently the landlords of most of the stores, accepting the abandonment by the original lessee, and the reduction of rentals which was the object sought, made new leases to the new corporations at reduced rentals. The bill itself does not make it clear whether the Newark store was continued at the same place. The trustee in bankruptcy did not, of course, take over the original leases, for the bankrupt corporation was already out of the business.

Upon these facts the lessor prays that the defendant be declared a trustee for it of the stock and notes of the thirty-nine corporations substituted for the store assets of the lessee, and purchased from the trustee in bankruptcy, that this substitution be annulled, and that receivers be appointed for the property and assets of the ⁵³⁷ defendant and its subsidiaries, to the end that the appropriate remedies may be fully secured to the complainant. It is averred in one part of the bill that the defendant agreed to assume the obligations of the lessee corporation, but that the actual terms of the agreement are undisclosed and unknown to the complainant. And no other party to the agreement is specified. The defendant questions the sufficiency of such uncertain allegations to show any definite undertaking, either for the future rents or for damages, enforceable by the complainant.

Ewing v. Composite etc. Co., 169 Mass. 72 , 47 N. E. 241 ; Pennsylvania Steel Co. v. New York City R. Co., (C. C. A.) 198 Fed. 721, 749 . If a new lease was subsequently made with that one of the thirty-nine corporations in New Jersey, or with any new lessee, the specific obligation for the future rents under the original lease was terminated by it, whatever undertaking of the defendant there might have been to replace it. Leonard v. Apartments Co., 161 Md. 451, 454 , 157 A. 752 ; Calvert Building Co. v. Winakur, 154 Md. 519, 534 , 141 A. 355 ; Deane v. Caldwell, 127 Mass. 242, 248 ; In re H. M. Lasker Co. (C. C. A.) 251 Fed. 53 ; Drew v. Billings-Drew Co., 132 Mich. 65 , 92 N. W. 774 ; note, 40 A. L. R. 198. And, if there was such an undertaking, which would greatly simplify the complainant’s case, the forum for its enforcement would seem to be at law.

Small v. Schaefer, 24 Md. 143 . It would be an undertaking rendering purposeless, and contradicting, all the remaining and principal complaint that the defendant by its maneuvers effectually destroyed the complainant’s rights under its lease. Two distinct cases would be combined in the bill if this averment were good. We find it not good, because not a ground of relief in equity.

In the argument for equitable relief, the transactions are viewed as combining wrongs in interference with fulfillment of a contract by another, and in an obligor’s removal of assets out of reach of a future creditor while continuing in enjoyment of them. Protection is claimed analogous to that provided in corporate reorganizatins ⁵³⁸ by consent and judicial decree, by requiring that creditors shall be paid or allotted shares in new distributions before stockholders are admitted to share, or analogous to the protection afforded even to future, and sometimes contingent, creditors, against fraudulent conveyances. Angle v. Chicago, St. P., Minn. & Omaha R. Co., 151 U. S. 1 , 14 S. Ct. 240 , 38 L. Ed. 55 ; Northern Pac. Co. v. Boyd, 228 U. S. 482, 504 , 33 S. Ct. 554 , 57 L. Ed. 931 ; Kansas City Southern R. Co. v. Guardian Trust Co., 240 U. S. 166 , 36 S. Ct. 334 , 60 L. Ed. 579 ; Howard v. Maxwell Co. (D. C.) 269 F. 292 .

And see Burrill, Assignments, sees. 9 and 10; Williamson v. Wilson, 1 Bland, 418 , 430; McCall v. Hinkley, 4 Gill, 128, 136 ; Sangston v. Gaither, 3 Md. 40, 49 ; Green v. Trieber, 3 Md. 11, 35 ; Williams v. Banks, 11 Md. 198, 243 ; Spuck v. Logan, 97 Md. 152 , 54 A. 989 , 99 Am. St. Rep. 427 ; Central Imp. Co. v. Cambria Steel Co. (C. C. A.) 201 Fed. 811, 820 . The precise relief demanded, by a return of the original store assets, is rather the undoing of a fraudulent transfer.

To some extent the assets of the individuals owning or controlling the enterprise and those of the lessee corporation seem not to be distinguished as the law requires. The corporation’s assets do not, of course, include those of the stockholder, and the complaint cannot be concerned with anything the stockholder may have done with its separate assets, or which may have been done with those of the individuals. Bethlehem Steel Co. v. Concrete Pile Co., 141 Md. 67, 81 , 118 A. 279 ; Dollar Cleansers v. McGregor, 163 Md. 105, 108 , 161 A. 159 . And the fact that the present proceeding follows after one of bankruptcy of the lessee corporation differentiates it from the proceedings in which the analogies are sought.

Stockholders of a corporation have a clear right to liquidate, applying the corporation’s assets to its debts, at any time, by bankruptcy when the jurisdictional facts exist, by dissolution, or otherwise; and every obligation undertaken is subject to the exercise of that right. The ordinary effect upon those for future performance is that of commutation and conversion into present debts by ⁵³⁹ valuation; but, where the common law conception of rents has prevailed, as it now prevails in Maryland, and presumably in New Jersey, for there is no averment to the contrary, obligations for future rents have not been regarded as susceptible of this commutation and conversion. According to that conception, rent