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Courtland Manor, Inc. v. Leeds

347 A.2d 144 (1975)

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Courtland Manor, Inc. v. Leeds

Delaware Court of Chancery

347 A.2d 144 (1975)

Facts

In 1967 Leonard Leeds (defendant) and his accountant, Samuel London, formed Courtland Manor, Inc. (Courtland) (plaintiff), a nursing-home operation. In 1968 nine investors invested in Courtland, including Bertram Widder (plaintiff). Leonard and the investors were made directors. Leonard was elected president, Widder was elected secretary, and London was elected assistant secretary. The stockholders were informed of the anticipated construction cost of $900,000 with the rental rate of 12.5 percent or $112,000 per year. Courtland Manor Associates (CMA) (defendant) was formed as a limited partnership to manage the construction and ownership of the facility. Leonard was the general partner, and Leonard’s father, William Leeds, was a limited partner. The rest of CMA was sold to other individuals, including Widder. A lease was drafted and discussed at a directors’ meeting. The lease was revised to include rent as 12.5 percent of the total construction cost, not to exceed $150,000 per year. On November 6, 1968, the lease was executed, with Leonard signing on behalf of CMA. Construction was completed, and Cortland immediately experienced a cash shortage. By October 1970, Leonard was removed as Courtland’s president. No Courtland stockholder brought action against Leonard before his removal. Widder and two other investors, Joseph and Murdoch, acquired control of Courtland by purchasing most of the existing stock for $4,000, elected themselves directors, authorized issuance of additional shares of stock, and purchased 500 shares each. On November 6, Widder, Joseph, and Murdoch caused Courtland to file suit against Leonard and William, then against Leonard as CMA general partner and CMA. The chancery court consolidated the cases and held trial. Courtland sought judgment against Leonard, alleging the lease was unfair to Courtland and favorable to CMA. Courtland alleged that the annual profit for CMA exceeded $30,000, as opposed to the anticipated profit of $7,000, and that the excessive rent resulted in Courtland’s cash shortage. Courtland alleged that because Leonard stood on both sides of the transaction, he had the burden to demonstrate the lease was fair. Courtland also alleged Leonard withheld a Federal Housing Administration analysis that demonstrated Courtland’s cash shortage under the terms of the lease. Leonard, William, and CMA disputed the allegations, arguing that the lease was fair to Courtland and CMA based on the high-risk nature of the business and investment.

Rule of Law

Issue

Holding and Reasoning (Brown, J.)

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