Wentworth v. Process Installations, Inc

122 Mich. App. 452 (1983) 333 N.W.2d 78

WENTWORTH
v.
PROCESS INSTALLATIONS, INC

Docket No. 56176.

Michigan Court of Appeals.

Decided January 19, 1983.

Running, Wise & Wilson (by Patrick J. Wilson), for plaintiffs.

Murchie, Calcutt & Sondee (by Harry Calcutt) and Taft, Settinius & Hollister (by Robert G. Stachler and W. Stuart Dornette), of counsel, for defendants.

Before: R.B. BURNS, P.J., and MacKENZIE and T.L. BROWN,^[*] JJ.

R.B. BURNS, P.J.

Defendants appeal a May 15, 1980, circuit court judgment ruling that the buildings and fixtures located on plaintiffs' property are to be included in assessing the fair market value of the property for the purpose of the exercise of the option to purchase contained in the lease held by defendant Process Installations, Inc., an assignee of defendant Vulcan-Cincinnati, Inc. Plaintiffs have filed a delayed cross-appeal, challenging an August 8, 1977, determination of the trial court declaring that defendant Process Installations, Inc., had a right to continued possession of plaintiffs' property under the terms of the lease dated June 23, 1970.

Plaintiffs initiated this suit as a tenancy proceeding in district court, contesting Process Installations' right to possession of a 14-acre plot of land located near the Village of Northport and owned by plaintiffs. Defendants pled an equitable defense, causing the matter to be removed to circuit court. The property at issue in this case (hereinafter referred to as the Northport property) consists of the acreage and three buildings: a boiler, a storage facility, and a plant for the production of a catalyst used in the manufacture of industrial grade methanol.

The facts out of which this suit arose are extensive and complicated. This case basically resulted from the continuing financial difficulties of the chemical plant which was originally owned by plaintiff Theodore Wentworth and two of his brothers.

Wentworth and his brothers owned an Ohio-based firm, Vulcan-Cincinnati, in equal shares. In the early 1960's, they agreed that Theodore would form a second corporation, Chemical Processes of Ohio, Inc., to manage the Northport operations.

The essence of the scheme contemplated by the Wentworth brothers was that Chemical Processes would develop processes for the exclusive benefit of Vulcan-Cincinnati. To facilitate construction of the catalyst plant, Wentworth borrowed $160,000 from the Michigan National Bank, secured by a mortgage on the Northport property. This money was turned over to Vulcan-Cincinnati, which used it, along with funds of its own, to develop the property. Vulcan-Cincinnati made the mortgage payments. On January 1, 1962, a lease was executed between Theodore Wentworth as lessor and Chemical Processes of Ohio, Inc., as lessee. This lease, which will be discussed more thoroughly below, covered a term of ten years and was granted for the nominal consideration of $12 per year. The lease was drafted by Theodore Wentworth's attorney.

Theodore Wentworth went into semi-retirement in 1964. Returning from California in 1966, he found the company $1.2 million in debt. Wentworth took over the operation of Vulcan-Cincinnati, which then merged with Chemical Processes, Inc.

In 1966, a committee composed of the principal creditors of Vulcan-Cincinnati was formed in an effort to resolve the problems posed by the corporation's indebtedness. One of these creditors was Allstates Design and Development Company, a firm that was later to figure prominently in events relevant to this litigation. While Wentworth was able to convince the creditors' committee not to proceed with bankruptcy proceedings, the committee required as an alternative that Wentworth sign a debenture issue and that he and Shirley Wentworth personally guarantee the debentures. The debenture issue was executed on July 1, 1967, and represented $903,413 in indebtedness. Unfortunately, Vulcan-Cincinnati's financial problems continued.

In 1970, with Vulcan-Cincinnati insolvent, Wentworth began searching for a fresh source of working capital. As a result, an agreement was made between Allstates and Vulcan-Cincinnati during June of 1970. A number of documents of greater or lesser significance were executed during that month; the essential elements of the agreement were as follows:

1. Allstates received 51% of the outstanding Vulcan-Cincinnati stock. Theodore Wentworth retained 35% of that stock. Allstates also received the right to elect four of the seven directors of Vulcan-Cincinnati.

2. Theodore Wentworth received $10,000 for his relinquished shares of stock. Wentworth continued as the chief executive officer of Vulcan-Cincinnati and was granted a salary increase. The agreement also resulted in the cancellation of the Wentworths' debenture guarantee.

3. Vulcan-Cincinnati received a loan from Allstates to cover its operating requirements.

4. Wentworth was to execute a new ten-year lease covering the Northport property, with Vulcan-Cincinnati as lessee. According to the testimony of an officer of Allstates, the execution of a new lease was central to this agreement as far as Allstates was concerned.

Pursuant to this agreement, a lease was prepared naming Wentworth as lessor and Vulcan-Cincinnati as lessee by Conrad Magrish, Vulcan-Cincinnati's attorney. Although Shirley Wentworth signed the agreement between Allstates and Vulcan-Cincinnati, her name does not appear on the 1970 lease.

In 1971, with Vulcan-Cincinnati continuing to operate at a deficit, Wentworth sought financing from the First National Bank of Boston. In 1972, an agreement was executed between Vulcan-Cincinnati, the First National Bank of Boston (hereinafter bank), and the First Capital Corporation of Boston, a wholly owned subsidiary of the bank. Vulcan-Cincinnati received a $300,000 loan from First Capital; in return, First Capital received a five-year promissory note and a stock purchase warrant. A security agreement was made as between Vulcan-Cincinnati and the bank, acting as agent for First Capital. Significantly, all assets of Vulcan-Cincinnati, real and personal, were pledged as collateral. In the wake of this agreement, Vulcan-Cincinnati was solvent until the spring of 1973. Thereafter two attempts at refinancing occurred, with First Capital and Allstates acting as co-guarantors of approximately $295,000 in loans.

In May of 1975, things looked bad for Vulcan-Cincinnati. The corporation owed Allstates approximately $1.1 million and owed $850,000 to general trade creditors. Moreover, it owed the bank $530,000, secured by the February 11, 1972, security agreement, and was in default on these loans. Vulcan-Cincinnati's employees were terminated, as there were insufficient funds to maintain the payroll. Following that, on May 12, 1975, the bank stepped in and took possession of Vulcan-Cincinnati's assets.

Charles Rydell, and officer of the bank, was the agent of all secured parties for the purpose of protecting the assets of Vulcan-Cincinnati. Rydell's highest offer for these assets came from one A.M. Kinney of defendant Process Installations, Inc. On June 2, 1975, an agreement was entered into between the bank, Vulcan-Cincinnati, Allstates, and Process Installations whereby the latter purchased all of Vulcan-Cincinnati's assets for $75,000. Pursuant to this agreement, the bank assigned the 1970 lease covering the Northport property to Process Installations. Process Installations also requested, and received, an assignment of this lease to it by Vulcan-Cincinnati. Process Installations then proceeded to occupy the facility at Northport and sent Wentworth a notice of intent to exercise the option to purchase which had been included in the 1970 lease. An anti-assignment clause had also been incorporated in that lease, and Wentworth invoked it in suing for possession of the property.

Following a bench trial, the circuit court concluded that the 1970 lease was valid, despite the fact that Shirley Wentworth did not sign the lease and the fact that the property was owned by both plaintiffs as tenants by the entireties. The trial court further found that, despite the anti-assignment clause in the lease, the lease was effectively assigned by operation of law, because it was embraced by the security agreement which had been defaulted on by Vulcan-Cincinnati. An alternative justification advanced by the court for its finding that the lease was legally assigned was that, by pledging the leasehold interest to secure financing for the corporation of which he was chief executive officer, Wentworth had consented to its assignment. The court concluded that defendant Process Installations was properly in possession of the premises. Having resolved the issue of which party was properly entitled to possession of the premises, the trial court turned to the other issue surrounding Process Installations' purported exercise of the option contained in the lease. This option provided that the purchaser would pay the fair market value of the premises at the time of the exercise of the option. The question before the court was whether this amount would include the value of the buildings constructed by Vulcan-Cincinnati on the leasehold premises during the 1960's.

The court found that the option was valid despite the fact that Shirley Wentworth did not sign the lease, as under the circumstances Theodore Wentworth acted as the authorized general agent of Shirley Wentworth in signing the lease agreement. Treating the issue as a matter of the intent of the parties at the time the lease was executed, the trial court determined that the buildings and fixtures became part of the lessor's interest. As a result, the court held that the fair market value for purposes of the option should include both the land and the buildings.

The trial court's finding that Shirley Wentworth was bound by the terms of the lease executed by Theodore Wentworth was correct. The court noted that she generally left the operation of the Northport property to her husband. Furthermore, although she did not sign the lease, she signed the agreement with the creditors' committee which extended the term of the lease. This was a definite step toward the lease of the property. See Eadus v Hunter, 249 Mich. 190; 228 N.W. 782 (1930). More nearly on point is Schram v Burt, 111 F2d 557, 562 (CA 6, 1940). That case involved a mortgage, executed by the husband alone, upon property belonging to the husband and wife by the entireties. The Schram court would not hold that the husband had authority to enter into a contract on his wife's behalf merely from the fact of their relationship. However, the court stated: "The contract of the husband is binding upon the wife whenever he is shown to have been invested with the power of a general agent with regard to the management of the property or the subject matter of the contract."

Thus, because Mr. Wentworth was the general agent for Mrs. Wentworth, who admittedly knew nothing about the business and acquiesced in all of her husband's business decisions, the trial court correctly concluded that the lease and option were valid.

However, the decisive issue in this appeal is raised by plaintiffs in their cross-appeal. Plaintiffs claim that the anti-assignment clause in the 1970 lease prohibited the assignment to Process Installations without their written consent. We agree. The trial court erred in concluding that the leasehold interest was to be regarded as personalty rather than a real estate interest. With the leasehold interest treated as chattel property, the trial court had no difficulty in upholding the manner in which the bank took over the asset and subsequently assigned it to Process Installations. Crouse v Mitchell, 130 Mich. 347; 90 N.W. 32 (1902), was referred to as procedurally analogous. The trial judge articulated his belief that, if the leasehold was looked upon as real estate, it was not effectively foreclosed upon:

"There was no judicial foreclosure of the lease assignment in issue, and no recognition of the debtor's exclusive right of possession as part of an equity of redemption pending foreclosure. If the security instrument were viewed as a real estate mortgage, there can be no question that there has been no effective foreclosure."

It is ironic that the trial court, which relied so extensively on Crouse v Mitchell, seems to have ignored a significant part of it. Construing several statutory provisions, one of which originated two years after the case of Grover v Fox, 36 Mich. 453 (1877), relied on by the trial court, the Crouse Court held that a leasehold interest which has an unexpired term which exceeds three years is real estate for the purposes of recording laws and levy procedures. Crouse v Mitchell, supra, pp 356-357. See MCL 600.6057; MSA 27A.6057; MCL 565.35; MSA 26.552.

In Crouse a lessee executed an assignment of his interest in a lease as security for a debt. The first issue before the Court was whether the assignment or pledge of the lease as security in good faith was a violation of a clause in the lease against assignment. The Court decided that the lease was not violated by such an assignment. The second question, regarding which of two mortgages had priority, required the Court to decide, as it did, that the conveyance was such an interest in land as to make the real estate recording laws applicable to it. More critically, it must be noted that the action in Crouse was a bill by the assignees under the security agreement to foreclose a lien upon a leasehold interest. The defendants had argued that the assignment was void as to them, because the leasehold interest was a chattel real, which had to be sold as a personal estate and could only be seized on execution as a chattel interest. The defendants claimed the assignment was, therefore, ineffectual by reason of the failure to file with the city clerk as provided by statute. The Court found that the instrument was properly filed in accordance with the real estate recording laws and held for the plaintiffs.

Although at common law leasehold interests were identified as a chattel real and considered to be personal property, Michigan law recognizes leasehold interests as being a classification of real property. Fidelity Trust Co v Wayne County, 244 Mich. 182; 221 N.W. 111 (1928); Crouse v Mitchell, supra.

Because the leasehold is to be considered real property, and the trial court noted that the leasehold was not properly foreclosed upon, Process Installations did not receive a valid assignment and hence is not properly in possession of the Northport property. Also, because the property was not properly foreclosed upon, the trial court's alternative finding that Mr. Wentworth impliedly consented to the assignment by using the property as collateral cannot overcome the defective procedures employed by the bank.

In light of the foregoing disposition, we find it necessary to discuss the question of whether the buildings and improvements erected by defendant Vulcan-Cincinnati on the Northport property during the first lease became part of the leased premises when the second lease was executed.

The buildings constructed by Vulcan-Cincinnati were trade fixtures. As defined by this Court in Michigan National Bank, Lansing v Lansing, 96 Mich. App. 551, 555; 293 NW2d 626 (1980):

"A trade fixture is merely a fixture which has been annexed to leased realty by a lessee for the purpose of enabling him to engage in a business. The trade fixture doctrine permits the lessee, upon termination of the lease, to remove such a fixture from the lessor's real property."

As such, the trade fixture is considered to be the personal property of the lessee. A chattel is a trade fixture if devoted to a trade purpose, regardless of its form or size. Waverly Park Amusement Co v Michigan United Traction Co, 197 Mich. 92; 163 N.W. 917 (1917). See also Wycoff v Garriloff Motors, Inc, 362 Mich. 582; 107 NW2d 820 (1961).

The policy behind the above postulates, as expressed in Cameron v Oakland County Gas & Oil Co, 277 Mich. 442, 552; 269 N.W. 227 (1936), is significant to the determination of this appeal:

"The right of the tenant to remove the erections made by him in furtherance of the purpose for which the premises were leased is one founded upon public policy and has its foundation in the interest which society has that every person shall be encouraged to make the most beneficial use of his property the circumstances will admit of. * * *

"The reason property of this kind is personal, rather than real, is based upon the rule the law implies an agreement that it shall remain personal property from the fact the lessor contributes nothing thereto and should not be enriched at the expense of his tenant when it was placed upon the real estate of the landlord with his consent. There is no unity of title between the owner of the land and the owner of the structures, and the buildings were not erected as permanent improvements to the real estate, but to aid the lessee or licensee in the use of his interest in the premises."

Against this background we shall examine the effect of a second lease on the trade fixture doctrine.

Plaintiffs claim that in Kerr v Kingsbury, 39 Mich. 150 (1878), the Supreme Court recognized that a new lease set forth a completely new arrangement, effectively terminating whatever rights of removal a tenant had under the original lease. This is incorrect. Under Kerr, continued possession by the lessee maintains, rather than forfeits, his right to retain trade fixtures, provided a renewal lease does not make contrary declarations or a contrary intent is otherwise inferable.

Some confusion in Michigan law was generated by certain language in Waverly Park Amusement Co v Michigan United Traction Co, supra. The facts of that case are so unique and so complex that it is useless to attempt to compare it with the instant case, but the following statements, adopted by the Supreme Court from the lower court opinion, were considered controlling by the trial court:

"`The rule is different in some of the States, but Michigan does not hold that trade fixtures pass to the landlord or become a part of the realty until the lessee surrenders his right of occupancy, and if that right does not end with one lease, but is continued under renewals by way of new leases, having practically the same kind of tenancy in view, he may wait until his agreed use of such fixtures is near an end and remove his fixtures at any time before the expiration of the leased right of occupancy.'" 197 Mich. 95-96. (Emphasis supplied.)

While older property law cases are often susceptible to a variety of interpretations, in our opinion a fair reading of these cases indicates that forfeiture is not to be presumed, despite the above reference to "practically the same kind of tenancy". Recalling the rationale behind the trade fixture doctrine, as expressed in Cameron v Oakland County Gas & Oil Co, supra, that a lessor should not be enriched at the expense of his tenant, we find the rule of Kerr and Waverly Park to mean that trade fixtures remain the personal property of the lessee as long as the lessee remains in legitimate possession of the property unless: 1) it is expressed or clearly implied in a second lease, executed after the term in which the fixtures were erected, that the fixtures belong to the leasehold, or 2) such a fundamental change in the nature of the tenancy has occurred that it would not unjustly enrich the lessor to include the fixtures as a permanent part of his real property.

It is not disputed that Vulcan-Cincinnati, as successor to Chemical Processes by merger, remained in possession of the property until 1975. The first clause of the 1970 lease following recitations of the parties provides that at least one of the buildings was to be included in the leasehold estate. But Exhibit A of the lease, purporting to be a more complete description of the leased premises, makes no mention of the buildings. Other documents and testimony demonstrate that the intent of the parties was that the buildings and improvements were personal property of the lessee, Vulcan-Cincinnati.

The second part of the Michigan test is whether there was such a significant change in the character of the tenancy that no forfeiture would result from consideration of the buildings as part of the leasehold. This question does not turn on whether or not the 1970 and 1962 leases contained approximately the same terms. The two leases were drafted by two different attorneys and are different in several respects. But it is not dispositive that the second lease does not include a provision allowing the lessee to remove fixtures at the end of the leasehold. For example, in Daly v Simonson, 126 Iowa 716; 102 N.W. 780 (1905), the tenant did not forfeit his right to remove fixtures reserved to him under the original lease by taking a new lease containing no reservation of the right to remove the fixtures but providing instead that the lessee should protect the buildings and improvements.

Plaintiffs' best argument in this regard is that, in effect, there was a de facto change of lessees. Prior to execution of the 1970 lease, Theodore Wentworth had been a majority stockholder of Vulcan-Cincinnati; after the 1970 lease Wentworth owned only 35% of the stock in that company. But under the circumstances of this case, we believe that a forfeiture would still occur if the 1970 lease were held to include the buildings as part of the leasehold. The same corporate entity, Vulcan-Cincinnati, was lessee before and after the 1970 lease. As part of the 1970 deal, Allstates gave, and Wentworth received, valuable consideration in exchange for a majority stock position. The new lease was central to this agreement, which, among other consideration, relieved Mr. and Mrs. Wentworth of the debenture guarantee. Moreover, Wentworth was still the chief executive officer of Vulcan-Cincinnati. It is obvious from a reading of the trial transcript of Wentworth's testimony that he was still intimately involved with Vulcan-Cincinnati even after his loss of majority stock control. For example, in 1975, with foreclosure by the bank near. Theodore Wentworth was still out looking for fresh capital sources for his company. Taking these circumstances into account, we would conclude that it would be unfair to hold that in 1970 the buildings and improvements suddenly ceased to be the personal property of Vulcan-Cincinnati. The nature of the tenancy simply had not undergone so radical a transformation.

Reversed and remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.

NOTES

[*] Circuit judge, sitting on the Court of Appeals by assignment.