Courtland Manor, Inc. v. Leeds

347 A.2d 144 (Del.Ch. 1975)

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Nature of the Case

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Facts

Leeds (D) and his accountant, London, planned to construct a nursing home. The construction of the home would be done by a limited partnership, and the operation would be done by a corporation. The corporation was formed, and raised capital from investors; a total of $70,000 was raised from nine different people. The stockholders were informed that the anticipated construction costs would be $900,000 and that the rental rate would be 12.5% or $112,000. The limited partnership was eventually formed and with D holding 29.5% and general partner and William Leeds (D1), owning 40.5% and the rest going to three other investors. A draft lease was prepared for the FHA, and it was circulated and agreed that the lease would not exceed $150,000 per year. D was representing that the lease would be $125,000. D completed the construction of the home while drawing a salary from the corporation. The home was completed, and patients were accepted for care. Things went bad. D was severed from the corporation, and a plaintiff stockholder, Widder together with three others acquired control of the corporation by purchasing most of the existing stock for $4,000. They then elected themselves as directors issued additional shares at $10 per share with each purchasing 500 shares. For an additional outlay of $19,000, they gained control of the corporation. They (Widder, Joseph, and Murdoch) then had the corporation sue Ds. They wanted $45,377 from D. The ultimate cost of construction was $1.1 million, and the annual rent was $142,000 per year. The annual profit to the partnership landlord exceeded $30,000 per year when it was initially calculated to be $7,000 per year. P charged that this excessive rent was the reason that it was having serious financial difficulties and cash flow problems. P argued that D had the burden of showing the fairness of the lease to the corporation because he straddled both sides of the transaction. P also sued D1 and the partnership as well.