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A federal appellate court has considered whether the current holder of a beneficial interest in a land trust could enforce the purchase contract rights that the prior holder of the beneficial interest had obtained from the seller.
Shure Brothers, Inc. ("Seller") sold a piece of property it owned to RBK Furniture, Inc. ("Buyer"). In the purchase contract, the Seller represented that the property had never been used for industrial production or storage of hazardous materials nor, to the best of the Seller's knowledge, had the property ever been used as a dump or a landfill. The purchase contract stated that the Seller's representations would survive the closing and that the Seller would be liable for money damages if any of these representations were breached. The Buyer financed its purchase through the American National Bank and Trust Company ("Bank"). The Bank and the Buyer agreed that the property would be placed into a land trust ("Trust"), and the Bank would act as trustee and the Buyer would be the trust's beneficiary. At closing, the property's title was conveyed to the land trust.
Following the closing, the Buyer refinanced the loan on the property. As part of security for the loan refinancing, Robert Kaplan executed a personal guarantee for the refinancing funds. Kaplan had personally guaranteed the first loan from the Bank, and was also the majority shareholder, an officer, and director of the Buyer. In return for the guarantee, the Buyer assigned its entire beneficial interest in the Trust to Kaplan. Eventually, it was discovered that there was environmental damage to the property. Kaplan brought a lawsuit against the Seller, claiming the Seller had breached the representations it made about the property's condition in the purchase contract. After a lengthy pretrial history, the trial court eventually ruled that Kaplan lacked standing to make allegations against the Seller and therefore dismissed Kaplan's lawsuit. Kaplan appealed.
The United States Court of Appeals, Seventh Circuit, affirmed the ruling of the trial court. The court reviewed whether Kaplan had "standing" to bring this lawsuit against the Seller. "Standing" refers to a judicially-created doctrine which requires that a party who is bringing a lawsuit must demonstrate an injury to the court that the court can remedy by the claims being made in the lawsuit. The Seller argued that it lacked contractual privity with Kaplan, since Kaplan was not a party to the contract between him and the Buyer nor had the Buyer assigned to Kaplan its contractual rights. Therefore, the Seller argued that Kaplan could not enforce the representations in the purchase contract against the Seller because there was no express written instrument demonstrating the Buyer's intent to assign these rights to Kaplan. Conversely, Kaplan argued that he had received all rights held by the Buyer when the Buyer had assigned him its interest in the Trust, including the ability to enforce the representations made in the purchase contract by the Seller.
The court rejected Kaplan's argument and ruled that he lacked standing to bring this lawsuit against the Seller. The court found that the assignment of the Trust interest to Kaplan did not, as a matter of law, operate as a transfer of the Buyer's contractual rights to Kaplan. The court stated that without a clear indication that those rights were transferred to Kaplan, Kaplan could not enforce the purchase contract representations against the Seller. Despite the fact that the transfer of the Trust rights to Kaplan gave Kaplan all of the Buyer's rights in the Trust, it did not give him any right to enforce a separate contract between the Buyer and Seller. The beneficiary rights that Kaplan received from the Buyer did not include the rights to enforce the purchase contract, and thus the court ruled that Kaplan lacked standing to enforce those representations against the Seller. Therefore, the court affirmed the trial court's ruling.
Kaplan v. Shure Bros., Inc., 266 F.3d 598 (7th Cir. 2001).