may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (1996).
STATE OF MINNESOTA
IN COURT OF APPEALS
Charles P. Ehlen,
Mervin C. Johnson, et al.,
Filed December 16, 1997
Stearns County District Court
File No. C7-97-932
Allen H. Gibas, Allen H. Gibas, P.A., 1422 West Lake Street, Suite 320, Minneapolis, MN 55408 (for appellants)
David T. Shay, Shay Law Office, Ltd., 28 Ninth Avenue North, St. Cloud, MN 56303 (for respondent)
Considered and decided by Randall, Presiding Judge, Toussaint, Chief Judge, and Thoreen, Judge[*].
Appellant argues that, contrary to the district court's decision in this unlawful detainer action, it had enforceable rights under a lease agreement because it was the successor-in-interest to the named lessee; that a novation occurred; that, by his conduct, the lessor was estopped from denying the existence of a valid lease; and that it was an alternative party to the lease agreement. We affirm.
According to Johnson, he informed Phil Braun, the property manager for the Corporate Centre property, that he was in the process of incorporating Spirit Communication with the Secretary of State. Prior to executing the lease, the two discussed what would happen if Spirit Communication's incorporation failed and, according to Johnson, both agreed that it would be a simple clerical matter to substitute the name of Riverside for Spirit Communication.
On June 28, 1996, Johnson was informed by the Secretary of State's office that Spirit Communication's incorporation had failed. Johnson stated that he then telephoned Braun and asked him to change the name on the lease from Spirit Communication to Riverside and to install signage naming Riverside as the tenant. The name on the lease was not changed, although the signage naming Riverside as the tenant was installed. Riverside paid the security deposit, first month's rent, and continued to pay each month's rent on time.
In December 1996, Ehlen purchased the Corporate Centre property from Zapp. The rental rolls showed that Spirit Communication was the tenant in Suite 130. Ehlen agreed he did recall seeing "Riverside Mortgage" on the door to Suite 130. In early January 1997, Ehlen suspected that Spirit Communication did not exist and that Riverside did not have a valid lease. Ehlen asked his agent David Kuefler to approach Johnson about moving into a suite on the second floor. Johnson cooperated initially, but later refused to move into the second-floor suite.
By letter dated February 6, 1997, Ehlen informed Johnson that he had no enforceable rights under the June 14, 1996 lease and gave him notice to vacate the premises on or before March 31, 1997. Ehlen did not accept Riverside's April or May rental payments. Believing that it had enforceable rights under the lease agreement, Riverside refused to vacate the premises.
In March 1997, Ehlen commenced an unlawful detainer action in Stearns County District Court against Johnson, claiming that Riverside had no enforceable rights under the lease agreement. An unlawful detainer trial was held on May 9, 1997. The district court ruled against Riverside, and judgment was entered on May 13, 1997.
Riverside argues that Spirit Communication was a de facto corporation at the time the lease agreement was executed and because it could not become a de jure corporation, "it required a successor to carry out its lawful rights and obligations."
Spirit Communication's failed incorporation did not require a successor to carry out its rights and obligations. Spirit Communication, as a corporation, never came into existence, so it never acquired any rights or incurred any obligations as such. The only party that could possibly have acquired any of Spirit Communication's rights or obligations was Johnson, individually, as the promoter and incorporator of Spirit Communication. Cf. Almac, Inc. v. JRH Dev. Inc., 391 N.W.2d 919, 924 (Minn. App. 1986) (holding that unless parties agree otherwise, promoter is individually liable for pre-incorporation contracts), review denied (Minn. Oct. 17, 1986).
Thus, under the theory of promoter liability, the only party that could be an "assignee" or "successor" of Spirit Communication was Johnson, individually.
At the unlawful detainer trial, however, the parties stipulated that the right to possession being asserted was by Riverside and not Johnson, individually, or Spirit Communication. The issue of whether Johnson, as promoter and incorporator of Spirit Communication, had any enforceable rights under the lease agreement was never presented to or ruled on by the district court. Consequently, this issue is not properly before this court and is not decided. See Davis v. Johnson, 415 N.W.2d 755, 759 (Minn. App. 1987) (holding that issue of promoter liability not raised below may not be raised for first time on appeal).
Regardless, we note that both Braun and Johnson testified that, even though Spirit Communication had yet to be incorporated, Johnson signed the lease as president of Spirit Communication and not as an individual. Johnson testified that Riverside was never formed under the name Spirit Communication, and there is no evidence in the record that Riverside acted as the incorporator of Spirit Communication. Thus, neither Johnson nor Spirit Communication acquired any rights under the lease as the promoter and/or incorporator of Spirit Communication.
There is no evidence in the record that the interest of Spirit Communication was assigned to Riverside. The lease agreement requires that any assignment of the tenant's interest to another have the written permission of the landlord. It is undisputed that neither Zapp nor Ehlen gave written permission for Spirit Communication to assign its interest (if it acquired any) to Riverside. Therefore, Riverside does not have any rights under the lease agreement as an assignee of Spirit Communication.
According to Black's Law Dictionary, a successor corporation is defined as
another corporation which, through amalgamation, consolidation, or other legal succession, becomes invested with rights and assumes burdens of first corporation.
Black's Law Dictionary 1431 (6th ed. 1990).
Here, Riverside was not a successor to Spirit Communication. There is no evidence that, after the attempted incorporation failed, Spirit Communication formally assigned any of its rights to Riverside; no evidence that Spirit Communication's assets were purchased by Riverside; and no evidence that Riverside otherwise became invested with the rights and burdens of Spirit Communication. Accordingly, we conclude that Riverside was not the successor corporation of Spirit Communication.
It is not an issue whether Spirit Communication was a de facto corporation. Even assuming Spirit Communication was a de facto corporation and all the parties treated Spirit Communication as such, the evidence at trial establishes that Spirit Communication never transferred, sold, or otherwise conveyed its rights or obligations to Riverside. Riverside never became vested with any of the rights or obligations of Spirit Communication, even assuming those rights and burdens came into existence.
Next, Riverside argues that a novation of the lease occurred and that Spirit Communication was replaced by Riverside.
A novation works to extinguish an original debt or obligation against the original debtor and shifts the debt by mutual agreement to a new party. Albany Roller Mills, Inc. v. Northern United Feeds & Seeds, Inc., 397 N.W.2d 430, 433 (Minn. App. 1986). A novation may never be presumed, and the party asserting it must prove its essential elements. Epland v. Meade Ins. Agency Assocs., 545 N.W.2d 401, 407 (Minn. App. 1996) (Epland I), rev'd on other grounds, Epland v. Meade Ins. Agency Assocs., 564 N.W.2d 203 (Minn. 1997) (Epland II), cert. denied, 118 S. Ct. 181 (1997). For a novation to occur a valid contract must exist; all the parties must agree to a new contract; the new contract must extinguish the old; and the new contract must be valid. Id. "A proper novation * * * requires both mutual agreement and consideration." Albany Roller, 397 N.W.2d at 433. "To have any effective novation * * *, all parties must agree." Epland II, 564 N.W.2d at 207.
Here, a proper novation did not occur because mutual consent and consideration are lacking. There is no evidence that Ehlen or his predecessor Zapp National Bank consented to a novation. Contrary to Johnson's testimony, Braun testified that Johnson never requested that the tenant on the lease agreement be changed to Riverside. Ehlen testified that neither Johnson nor any other entity, including Riverside, ever asked to assign or sublet Spirit Communication's interest as a tenant to any other party. Similarly, Ehlen testified that he never consented to any such assignment or subletting. Likewise, there is no evidence that Riverside paid any consideration for a novation. On these facts we cannot say that the trial court erred when it concluded that, as a matter of law, no proper novation occurred.
Riverside does argue that Ehlen is estopped from denying the terms of the lease agreement. There may be an issue here, but it is not part of this unlawful detainer action.
The granting of equitable relief is within the sound discretion of the district court, and its decision will not be reversed absent a clear abuse of discretion. Nadeau v. County of Ramsey, 277 N.W.2d 520, 524 (Minn. 1979). The elements of equitable estoppel require: (1) conduct, through language, acts, or silence that amounts to a representation or concealment of material facts; (2) these facts are known to the party being estopped at the time of the questioned conduct, or the circumstances must be such that knowledge of them is imputed to him or her; (3) the truth concerning these facts is unknown to the party claiming the benefit of the estoppel; (4) the conduct is done with the intention or expectation that it will be acted on by the other party; (5) the conduct is relied on by the party asserting the estoppel; and (6) that such reliance is to his or her detriment. Olson v. Ronhovde, 446 N.W.2d 690, 692.93 (Minn. App. 1989) (quoting Lunning v. Land O'Lakes, 303 N.W.2d 452, 457 (Minn. 1980)). For equitable estoppel to lie, the reliance must be reasonable. Anderson v. Minnesota Ins. Guar. Ass'n, 534 N.W.2d 706, 709 (Minn. 1995).
This appears to be a case for the application of estoppel by conduct against Zapp. By accepting the rent payments made by Riverside, Zapp acquiesced in the tenancy of Riverside. This is further evidenced by the fact that Braun installed signage naming Riverside as the tenant of Suite 130. The record shows that based on the conduct of Braun and Zapp, Riverside closed its office in Hawaii; and that Riverside hired a number of new employees to staff its St. Cloud office.
However, we conclude that the district court did not abuse its discretion in denying Riverside's claim of estoppel against Ehlen. Riverside may have a claim of estoppel against Zapp, in light of its conduct and acceptance of the rents paid by Riverside. But this estoppel is not transferred or imputed to Ehlen in an unlawful detainer action. The evidence is clear that when Ehlen purchased the Corporate Centre property he relied on the rental rolls provided by Zapp. The rental rolls listed Spirit Communication as the named tenant of Suite 130. Shortly after taking ownership of the property, Ehlen questioned whether Spirit Communication existed. After learning that Spirit Communication was not a corporation, Ehlen took action to have Riverside become a tenant with a valid lease agreement. Only when that failed did he give notice to Riverside to vacate the premises. The fact that signage naming Riverside as the occupant of Suite 130 was in place, while indicative that Ehlen might have had notice that Riverside was the tenant of Suite 130, is not dispositive because a corporation may do business under an assumed name. See Minn. Stat. § 302A.161, subd. 23 (1996) (stating that a corporation may conduct all or part of business under assumed names).
Unlawful detainer actions are narrow. Thus, we do not decide the issue, but it does appear that Johnson and Riverside may have an action against Zapp and Ehlen for breach of contract and corresponding money damages. Since the issue is not before this court, we do not address the likelihood of success of any such action. We do note that our decision today, affirming an unlawful detainer action, is without prejudice to any breach of contract or other action that Johnson or Riverside may have against Ehlen and Ehlen's predecessor, Zapp.
Finally, Riverside argues that the district court erred in failing to conclude that Riverside had enforceable rights under the lease agreement as an alternative party to the lease.
Here, there is no evidence in the record that when the lease was executed, Riverside was an alternative party to the lease. The language of the lease is clear, naming Zapp and Spirit Communication as the parties to the lease agreement. Similarly, Riverside has failed to present any authority for the proposition that a third party, unnamed in a clear and unambiguous agreement between two contracting parties, may enforce rights and privileges granted to one of the contracting parties.
[ ]* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.
[ ]1 It would appear that the doctrine of de facto corporations is no longer recognized in Minnesota. Quoting from the Reporter's Notes, this court has stated that after the enactment of the Minnesota Business Corporations Act, Minn. Stat. ch. 302A (1996), "`the doctrine of de facto corporations is inapplicable in this state after enactment of this act.'" Warthan v. Midwest Consol. Ins. Agencies, Inc., 450 N.W. 2d 145, 148 (Minn. App. 1990) (quoting Minn. Stat. Ann. § 302A.153, Reporter's Notes (West 1985)). But see Ross v. Briggs & Morgan, 520 N.W.2d 432, 436-37 (Minn. App. 1994) (suggesting de facto corporation may have existed where individual was in process of creating corporation under applicable laws and was exercising rights he would have had under law if corporation had been formed), rev'd on other grounds, Ross v. Briggs & Morgan, 540 N.W.2d 843 (Minn. 1995).