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-