Summit Props., Inc. v. New Tech. Elec. Contractors, Inc. - Nos. CV-03-748-ST, CV-03-6394-ST, 2004 U.S. Dist. LEXIS 13053 (D. Or. July 2, 2004)

Rule:

Implied ratification may take many forms: it may occur where a corporation retains the benefits of an unauthorized act, where a corporation acquiesces in an unauthorized act, or where some other conduct by a corporation demonstrates affirmance. A corporation must have full knowledge of the material facts surrounding the agent's unauthorized act. Silent acquiescence with full knowledge of the material facts may amount to a ratification if continued for an unreasonable length of time, especially in cases where silence operates to prejudice innocent parties. A corporation is deemed to have knowledge of those facts which its officers and agents, acting within the scope of their offices or employment, have acquired knowledge or been given notice. However, it is well settled that an officer or agent, dealing with a corporation or his principal on his own account, is not presumed to communicate knowledge which it would be to his interest to conceal, and the corporation or principal is not chargeable with such knowledge.

Facts:

On June 8, 1999, Coleman (and the other owners) sold New Tech (OR) to IES through an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, New Tech (OR) was merged with and into New Technology Acquisition Corporation in accordance with the laws of the state of Delaware. On October 16, 2001, New Technology Acquisition Corporation changed its name to New Technology Electrical Contractors, Inc. After the sale to IES, Coleman remained the president of New Technology Acquisition Corporation, and later New Tech, by virtue of Section 2.3 and Schedule 2.3 of the Merger Agreement. The Merger Agreement appointed Crouser as New Tech's Vice President of Finance. After the sale to IES, New Tech continued to do business as it had previously. However, Coleman and Crouser reported to IES' Regional Operating Officer ("ROO"), *** Muth ("Muth"), as well as others within the IES chain of command, such as Bob Weik ("Weik"), Muth's immediate superior; Ben Mueller ("Mueller"), Weik's immediate superior and IES' Chief Operating Officer ("COO")); and David Ramm ("Ramm"), IES' Chief Executive Officer ("CEO"). At the time of the Merger Agreement, New Tech was the lessee in two buildings owned by Milestone. Coleman owned Milestone, New Tech's lessor. In 1999 and 2000 after the Merger Agreement, while still housed in Milestone's buildings, New Tech's business began to grow. As a result, IES decided to restructure its regional governance structure. That restructuring plan included creating a new "Northwest" region to be run by Coleman as IES' ROO. In early 2001, Ramm, Mueller, and Muth met with Coleman in Portland, Oregon. They discussed Coleman serving as IES' ROO and whether New Tech had adequate facilities for its operations. Based on a tour of Milestone's buildings leased by New Tech, they determined that the facilities were not adequate. Ramm and Coleman discussed whether to move New Tech into an uncompleted facility on the Campus Way Property also owned by Milestone, and Ramm told Coleman "lets go, or words to that effect.” However, Ramm also told Coleman to prepare a package of documents on the move for IES' approval, including the tenant improvements that would be necessary. Coleman and Crouser prepared documents concerning the tenant improvements and comparing New Tech's options of staying in its present Milestone-owned buildings or moving to the Campus Way Property with a lease dated April 1, 2001. In late January or early February 2001, they claim that they sent these documents to Muth, their immediate superior at IES, intending for Muth to take them to an IES meeting in Houston scheduled for February 2001. According to Coleman, Muth never got these documents or lost them because he did not bring them with him to the February 2001 IES meeting. Coleman sent the documents, except the lease, to Muth again on March 20, 2001, as shown by the date on a fax cover sheet accompanying the documents. During this period of time prior to April 1, 2001, Crouser also sent the package of documents to IES' senior-counsel, Ray Holan ("Holan"), and spoke with other IES officers regarding the Campus Way lease. On April 18, 2001, Coleman traveled to Houston, Texas to meet with IES' officials and interview for the position of IES' ROO, as discussed at the prior meeting in Oregon. After the interview, Coleman was appointed as IES' Northwest ROO, and he stayed in Houston to attend IES meetings in his new capacity. While in Houston on April 18, 2001, Coleman hand-delivered a copy of the Campus Way Property documents, including the lease, to Weik. According to Coleman, the lease was unsigned and dated April 1, 2001, as had been all earlier drafts. Ramm, Mueller, Weik, and Coleman reviewed the documents. Mueller orally approved New Tech's move to the Campus Way Property and the improvements necessary for New Tech to use that facility. Coleman's notes from the IES Regional Leadership meeting on April 18, 2001, state that "Ben [Mueller] said go ahead on Building," which was a reference to New Tech's lease of the Campus Way Property. After receiving Mueller's approval, Coleman returned to Portland and signed the lease of the Campus Way Property on behalf of Milestone. Crouser signed the lease on behalf of "New Tech Electric, Inc.," which, as Coleman admits, was the wrong name for New Tech. The executed lease was dated April 1, 2001, even though it was signed on or after April 18, 2001. Coleman explains that all draft leases prepared since early 2001 were dated April 1, 2001, because he anticipated that it would be approved during IES' February meeting. The lease was for a seven year period beginning on October 1, 2001, and could be "amended or modified" only in writing. After the lease was signed, Milestone began paying for the improvements required for New Tech to occupy the premises. New Tech performed the improvements itself, and was paid 10% profit above its costs by Milestone. After the lease was signed and the improvements were underway, Summit learned that the Campus Way Property was for sale and being marketed by Grub & Ellis, a real estate broker, as subject to a seven-year lease with New Tech. Before deciding to buy the property, Summit sought to fulfill its duties of due diligence by thoroughly investigating the circumstances surrounding the lease. In a report forwarded by Summit's president, Yoshio Kurosaki ("Kurosaki"), to Summit's Board members on July 18, 2001, Grub & Ellis alerted potential purchasers that "IES is not a financial guarantor of the lease, but does represent a strong financial backer, committed to the success of the company [New Tech]."  However, in an e-mail dated July 19, 2001, to the real estate broker handling the transaction with Summit, Coleman wrote that "New Tech is a D.B.A. of IES and when I, as an officer of New Tech, am signing on behalf of IES [sic]. So IES is the guarantee [sic]. That's what I've just been told." Additionally, on August 6, 2001, Milestone's attorney wrote to Summit clarifying the terms of the Campus Way Property lease. After reviewing the lease and receiving these reports, Summit requested certain modifications to the lease. A broker for Grub & Ellis met with Kurosaki and informed Coleman by letter dated August 14, 2001, that Summit would lift its remaining contingencies and submit a deposit if certain modifications were made in the lease, including a clarification that the lessee was "New Tech Electric, Inc. a wholly owned subsidiary of Integrated Electrical Services." A few hours later, Coleman faxed Summit four replacement pages to the lease that made several changes, including identifying the tenant as "New Technology Electrical Contractors, Inc., a wholly owned subsidiary of Integrated Electrical Services, Inc." An unsigned copy of these documents ("Second/Modified Lease") was placed in the New Tech lease file maintained by IES in Houston. The next day, August 17, 2001, Summit informed Milestone that it had "become comfortable with the financial situation of the tenant" and would remove the contingencies it previously placed on the purchase if Milestone agreed to an attached Lease Addendum and certain construction warranties. The Lease Addendum requires the tenant to give 12 months' notice of an intent to renew following expiration of the seven-year lease term (rather than six months as set out in the lease); use of the Arbitration Service of Portland, rather than the American Arbitration Association, to arbitrate any dispute over the market rate for a renewal terms; the insertion of the word "casualty" in section 5(b) of the lease to clarify the type of insurance the tenant was required to maintain; and a change in the name of the tenant from "New Tech Electric, Inc." to "New Technology Electrical Contractors, Inc., a Delaware Corporation. On August 17, 2001, Coleman signed a copy of the Lease Addendum on behalf of Milestone and Crouser signed it on behalf of "New Technology Electrical Contractors, Inc., dba New Tech Electric Inc." Before signing the Lease Addendum, Crouser claims that he discussed it with IES' senior counsel, Holan, who was responsible for managing real estate at IES and who also held the title of Assistant Secretary of New Tech. However, Holan does not remember reviewing the Lease Addendum and did not have authority to approve any lease or addendum. Summit then made an offer to buy the Campus Way property, as did several other prospective purchasers. Summit closed on the purchase and took formal assignment of the lease ("the Assignment") on September 27, 2001, four days before New Tech was to begin occupying the premises. A signed copy of the Assignment was placed in the New Tech lease file maintained by IES in Houston. New Tech and Coleman, now IES' Northwest ROO, moved their offices to the Campus Way Property in late September or early October of 2001, commensurate with the October 1, 2001 beginning of the lease. After the lease term began, Holan called Crouser to request that Milestone relieve New Tech of its obligations under the two leases for the buildings it previously occupied. Milestone complied by letter dated October 1, 2001, even though one of the prior leases continued through November 2004. Pursuant to the lease, New Tech paid the rent, property taxes, maintenance costs, and insurance on the property during this period. IES occupied a portion of the building for its Northwest region operations and also paid at least some portions of the monthly rent under the lease, as well as other expenses associated with maintenance and operation. Second In the Texas lawsuit, New Tech and IES indicated that "IES pays all of the rent for the Lease in question from Houston, Harris County, Texas," and that the lease payments were "authorized and directed from Houston." IES also paid portions or all of the salaries of the employees working on IES' Northwest regional operations at the Campus Way Property.

New Tech's economic fortunes deteriorated after its move to the Campus Way Property, coinciding with the collapse of the Oregon high-tech market it served. As a result of New Tech's loss of business, IES directed New Tech to sublet some or all of the Campus Way building. New Tech began that process in about July 2002 and continued through late June 2003. Given the bleak economic conditions in the Sunset Corridor where the Campus Way Property is located, New Tech's brokers, Cushman & Wakefield, could identify only one prospective tenant for the property. The effort to sublet the property eventually failed, and New Tech asked that the signs advertising the space available for sublet be removed in late June 2003. By 2002, Stalvey asked Coleman, Crouser, and Milestone several times for a copy of the lease on the Campus Way Property. However, Stalvey did not receive a copy of the lease until August 2002, when he traveled to Oregon in order to fire Coleman. Stalvey claims he did not look at it at that time, but instead placed it in his briefcase. Coleman signed a severance agreement with IES on September 3, 2002, but IES' Lease Committee did not review the lease for the Campus Way Property until sometime in 2003. IES' investigators concluded that the lease was executed without the requisite corporate authority, among other procedural defects. On April 4, 2003, New Tech and IES served Summit with a complaint in the Texas lawsuit alleging that the misconduct of Coleman and Crouser rendered the lease "void ab initio or voidable." Summit then filed a Complaint against New Tech and IES. These consolidated cases essentially dispute the validity of the lease of the Campus Way Property.

Issue:

Does New Tech’s conduct after moving into the premises amount to ratification of the lease?

Answer:

Yes.

Conclusion:

The evidence cited by Summit overwhelmingly demonstrated that New Tech and IES were aware of the material facts surrounding the lease. Ramm, IES' CEO and New Tech's sole director, specifically testified that he said "let's go" during his visit to Portland in early 2001 when asked for a decision on whether to move New Tech into Milestone's building; he knew New Tech was moving into a new building owned by Coleman or one of his companies, and therefore that IES' subsidiary would be leasing space in Coleman's buildings, when he accepted an invitation from Coleman to attend New Tech's open house around October 1, 2001; and he stated that "both I as IES CEO/President and Ben Mueller as the Chief Operating Officer, reviewed the plan for New Electric to move out of its existing lease space and into a new lease space at the Campus Way property owned by Bill Coleman or his company. We approved this basic plan[.]" IES and New Tech have not presented any evidence to counter Ramm's sworn statements beyond Warnock's conclusory opinion that he is a biased witness. Warnock's opinion alone is not enough to create a material issue of fact on this ratification issue. Furthermore, IES cannot raise an issue that the lease lacked proper corporate authority because it was unaware of the lease until the Lease Committee discovered it or Stalvey obtained a copy of it. Prior to receiving a copy of the lease in August 2002, Stalvey had ample knowledge such an agreement was in place and that IES and New Tech were benefitting under the lease. Indeed, Stalvey visited the premises himself for New Tech's open house in the fall of 2001. Furthermore, copies of the lease and reports concerning the lease were found in the files of unbiased IES employees in the accounting and legal departments. At the very least, IES ratified the lease by doing nothing between August 2002, when Stalvey obtained a copy of the lease, and 2003 when the Lease Committee reviewed the lease. IES and New Tech's counsel admitted at oral argument that it was sheer negligence for IES' Lease Committee not to have reviewed the lease prior to 2003, even though Stalvey obtained a copy in August 2002. Finally, the evidence also demonstrates that at the very least, New Tech and IES acquiesced to the lease. Both New Tech and IES' employees occupied the Campus Way Property for a period of almost two years, with both companies engaging in numerous activities to maintain the premises, advertise them, and take advantage of them. Under these circumstances, by accepting even a portion of the benefits under the lease, both companies ratified all of the lease transaction.