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06/01/87 John Ed Thomas, v. Frederick J. Borgsmiller

June 1, 1987

JOHN ED THOMAS, PLAINTIFF-APPELLEE

v.

FREDERICK J. BORGSMILLER, INC., ET AL., DEFENDANTS-APPELLANTS



APPELLATE COURT OF ILLINOIS, FIFTH DISTRICT

508 N.E.2d 1235, 155 Ill. App. 3d 1057, 108 Ill. Dec. 658 1987.IL.729

Appeal from the Circuit Court of Williamson County; the Hon. Robert H. Howerton, Judge, presiding.

APPELLATE Judges:

JUSTICE KASSERMAN, KARNS, P.J., and HARRISON, J.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE KASSERMAN

Plaintiff, John Ed Thomas, instituted this action against the defendants, Frederick J. Borgsmiller, Inc., and Frederick J. Borgsmiller, for breach of a lease agreement. In defense, the defendants contend that a novation had occurred. The trial court, sitting without a jury, found that no novation had occurred and that defendant Frederick J. Borgsmiller, Inc., was liable to the plaintiff and additionally that Frederick J. Borgsmiller was individually liable for the indebtedness of the corporation. Defendants appeal.

Defendants raise three issues on appeal: (1) whether a novation occurred when defendant Borgsmiller, Inc., assigned to a third party, Grandpa John's, Inc., its interest in its lease with plaintiff; (2) whether the trial court erred in the admission of plaintiff's exhibit No. 7; and (3) whether the defendant Frederick J. Borgsmiller was individually liable for the debt of the corporation, Frederick J. Borgsmiller, Inc.

The relevant facts are as follows: On October 28, 1974, the plaintiff, John Ed Thomas, and the defendant, Frederick J. Borgsmiller, Inc., entered into a 10-year lease on a building located in Energy, Illinois, for the purpose of the defendant's operating a retail outlet store known as Grandpa John's. Pursuant to the lease agreement, lease payments by the defendant were to be made to the Herrin Security Bank. The bank would then credit plaintiff's account, deduct any charges, and forward the balance directly to the plaintiff. Borgsmiller, Inc., operated a Grandpa John's store at the location listed in the lease. On September 18, 1981, the lease was assigned by Borgsmiller, Inc., to a separate corporation, Grandpa John's, Inc., with which Borgsmiller, Inc., had no connection. Grandpa John's, Inc., had purchased the Grandpa John's store from Borgsmiller, Inc. In April of 1982, Frederick J. Borgsmiller, Inc., was voluntarily dissolved.

In May of 1982 Grandpa John's, Inc., defaulted on the lease payment. At the time of the default, there were rents, real estate taxes, and insurance payments for the remaining term of the lease due in the amount of $112,278.50. After its default, Grandpa John's, Inc., declared bankruptcy and the trustee in bankruptcy paid the plaintiff $18,000 for the use of the building for a six month period in 1982. Plaintiff filed a claim for the lease payments due in the bankruptcy of Grandpa John's, Inc.

After the trustee in bankruptcy vacated the premises, the plaintiff leased one-half of the premises, receiving $47,500 in rent payment for the remainder of the lease term. In addition, plaintiff incurred certain obligations in dividing his building into separate portions in order to rent it. These obligations were listed in plaintiff's exhibits Nos. 2 through 6. Also, the plaintiff was provided an estimate from Gentry Plumbing and Heating regarding potential sewer work on the building which was set forth in plaintiff's exhibit No. 7.

Plaintiff brought suit against the defendant corporation and its sole shareholder Frederick J. Borgsmiller, individually, to recover the balance of the lease payments due subsequent to the default by Grandpa John's, Inc. After a bench trial, the court entered judgment against both defendants in the total sum of $73,533.52. It is from these judgments that the defendants appeal.

The first issue we address is whether the trial court correctly found there was not a novation regarding the lease executed between plaintiff and defendant, Frederick J. Borgsmiller, Inc. The trial court found that the purported assignment from defendant Frederick J. Borgsmiller, Inc., to Grandpa John's, Inc., was not effective because it was not executed on behalf of the corporation, Frederick J. Borgsmiller, Inc. On appeal defendants do not dispute the trial court's finding but rather urge this court to uphold the validity of the assignment because the plaintiff allegedly accepted certain benefits.

Defendants first seek to establish a novation by showing that plaintiff's bank accepted rental payments from Grandpa John's, Inc. Plaintiff and defendant, Frederick J. Borgsmiller, Inc., agreed that the rental payments under the lease would go directly to plaintiff's bank for deposit into plaintiff's account. The defendants attempt to convert this fact into a broad grant of agency from the plaintiff to his bank. Defendants further argue that since plaintiff's bank accepted the rental payments from Grandpa John's, Inc., the plaintiff himself relied upon the purported assignment. We find defendants' position to be unsupported by the case law. Knowledge of an agent can be imputed to the principal only when it relates to facts within the scope of the agency. (Wieboldt v. Best Brewing Co. (1911), 163 Ill. App. 246, 249.) In the instant case, the scope of the agency was the collection of rental payments, a procedure frequently used by businesses today as a matter of convenience. The scope of the bank's authority to act on behalf of the plaintiff did not extend beyond the collection of rent. Thus, its authority could not extend to accepting an assignment or imputing the plaintiff's reliance on a purported assignment. Furthermore, an agent authorized to collect rent has no authority to change the terms of the underlying lease or to consent to substitution of tenants. (Wieboldt v. Best Brewing Co. (1911), 163 Ill. App. 246.) Accordingly, plaintiff could not have relied upon the purported assignment simply because his bank accepted, as a matter of convenience, the rental payments under the lease agreement.

Defendants next assert that plaintiff relied upon the purported assignment when he permitted the trustee to occupy the building until the liquidation of Grandpa John's inventory. Our review of the record reveals that the arrangement between the plaintiff and the trustee was separate and apart from the original lease and the purported assignment and that it was done by plaintiff to mitigate his damages with the express ...


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