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Shell Game Tricks No One
by Ron Davis

A franchisor’s use of a “shell” company to avoid honoring the terms of a lease with a New Jersey shopping center has obviously not fooled anyone.

The shopping center, located in Edison, had leased space to the franchisor—International Blimpie Corp.—for the operation of a sandwich shop at the center. Or at least the shopping center owner believed that the lease was with International Blimpie. In fact, a subsidiary of that company was the true tenant.

The subsidiary, IBC Services, Inc., actually held the lease and then sublet to a franchisee. But IBC had virtually no assets, no business premises of its own, no income other than the rental payments by the franchisee, and apparently no employees or office staff. To confuse matters more, IBC eventually assigned the shopping center lease to another wholly owned lease-holding subsidiary of Blimpie.

So when the franchisee fell behind in paying his rent and the shopping center owner tried to collect from Blimpie, the company denied any responsibility for payment.

As a result, the shopping center owner sued Blimpie, the leasing subsidiary IBC, as well as the lease-holding subsidiary of Blimpie to whom IBC had assigned the shopping center lease. By that time, the rent owed to the shopping center amounted to $150,000.

A New Jersey court rejected Blimpie’s arguments that IBC was a separate entity and thus Blimpie was not responsible for the lease obligations of a franchisee. The court therefore ordered Blimpie to pay $208,000 to cover back rent owed, plus interest. Blimpie appealed.

A New Jersey appellate court upheld the decision of the lower court, explaining, “The separate corporate shell created by Blimpie to avoid liability may have been mechanistically impeccable, but in every function and operational sense, the subsidiary had no separate identity. It was moreover not intended to shield the parent from responsibility for its subsidiary’s obligations but rather to shield the parent from its own obligations. And that is an evasion and an improper purpose, fraudulently conceived and executed.” (OTR Associates v. IBC Services, 801 A.2d 407 [N.J.Super. A.D. 2002])

Decision: July 2002
Published: September 2002



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