October 4, 2002

On July 3, 2002, the Superior Court of New Jersey, Appellate Division, held that a parent company of a wholly-owned subsidiary tenant on a lease for retail space in a shopping mall was responsible to the landlord for the rent arrearages of the wholly-owned subsidiary, although the parent company had not signed the lease, was not named as a tenant on the lease, and had not guaranteed any obligations under the lease. OTR ASSOCIATES V. IBC SERVICES, INC., 353 N.J.Super. 48, 801 A.2d 407.

FACTS
In 1985, the landlord entered into a space lease with IBC Services, Inc. (\"IBC\") for the operation of a Blimpie\'s restaurant in landlord\'s shopping center. On the same day, and with landlord\'s consent, IBC subleased the space to a franchisee of IBC\'s parent company, Blimpie International, Inc. (\"Blimpie\"). The lease was later assigned to Garden State Blimpie, Inc. (\"Garden State\"). Blimpie was the sole shareholder of IBC and Garden State. The sublessee was habitually late on its rental payments, ultimately owing landlord more than 0,000 in back rent. Landlord sued not only IBC and Garden State, but also Blimpie, for all rent arrearages plus interest. The trial court entered a judgment in favor of the landlord against the two judgment-proof subsidiaries and Blimpie for the full amount of the rent arrearages plus interest. Blimpie appealed.

ON APPEAL
The issue before the appellate court was whether the trial court was justified in piercing the corporate veil and holding a parent corporation liable for the debt owed by the wholly-owned subsidiary. The appellate court held that it was. The two factors relevant to the issue were: (i) did Blimpie so dominate IBC and Garden State that they had no separate existence but were merely conduits of Blimpie; and (2) did Blimpie abuse the privilege of incorporation by using IBC and Garden State to perpetrate a fraud or injustice? Based on the facts shown at trial of Blimpie\'s always acting on IBC\'s and Garden State\'s behalf, the use of the same office, each subsidiary\'s lack of assets, income, profit, employees or staff, the requirement for Blimpie\'s consent to any lease assignment, and especially Blimpie\'s acknowledgment that it created the subsidiaries for the sole purpose of holding the lease for Blimpie\'s franchisee, the court determined that the named tenant on the lease had no separate existence.

Furthermore, the landlord testified that based on Blimpie\'s behavior, it always believed that it had entered a lease with the parent corporation and did not know the tenant was a separate entity until after the eviction. The court found that Blimpie \"affirmatively, intentionally and calculatedly\" led landlord to believe that the tenant was really Blimpie, which belief led the landlord to allow back rent to accumulate. Having created the subsidiaries for the sole purpose of insulating Blimpie from liability, while at the same time intentionally creating the impression that Blimpie was the tenant on the lease, was to use its separate corporate status as an evasion and for a purpose \"fraudulently conceived and executed.\" The court distinguished another, similar situation where a Blimpie subsidiary held a lease for a franchise operation, noting that this other lease expressly disclosed the tenant was a wholly-owned, thinly capitalized subsidiary.

SIGNIFICANCE
Some might argue with the court\'s acceptance of the landlord\'s claim that it did not know who it had on its lease (especially if the landlord was a sophisticated owner of multiple shopping centers) and would expect the landlord to have inquired as to the corporate status of its tenant. However, this case still establishes good support for unwitting landlords who enter into a lease with a shell tenant and have a good faith belief, based on the actions of the parent company, that the lease really is with the parent company. Since this corporate structure is commonly used by national franchisors and other national retailers to hold retail property under lease, this case should be a caution to them to avoid practices that in essence nullify the existence of the subsidiary. Such operators should establish very clearly at the outset of the relationship, in the lease, and throughout the term that the tenant is the wholly-owned subsidiary, and not the parent company.

For more information or to arrange an interview, please contact Vanessa Amin, The Hoyt Organization, 310-373-0103 or the following attorney at Pircher, Nichols & Meeks Chicago: Rosie Rees, 312-915-3112 ext.3127
Founded in 1983, Pircher, Nichols & Meeks is a national real estate law firm with a diversified real estate practice that includes litigation, bankruptcy, corporate, tax and public finance matters. Based in Los Angeles, the 45-attorney firm also maintains a full-service office in Chicago. The Los Angeles office is located at 1925 Century Park East, Suite 1700, Los Angeles, CA 90067; phone: (310) 201-8900.