Michigan Bank-Midwest v. D J Reynaert, Inc

419 N.W.2d 439, 165 Mich. App. 630, 1988 WL 13806

• Court: Michigan Court of Appeals
• Decided: January 19, 1988
• Docket: Docket 92285, 94573, 94574
• Status: Published

Opinion

Cynar, P.J.

In these consolidated cases, defendants, D. J. Reynaert, Inc., Donald J. and Patricia K. Reynaert, and G. Alex Monteith, and intervenors, Kip D. Anderson, Peter C. Hanley and Elias A. Shaptini, appeal as of right from a judgment of foreclosure by default entered on August 26, 1985, by Calhoun Circuit Judge Paul Nicolich. We affirm in part, reverse in part and remand for an evidentiary hearing. For purposes of clarity, separate facts will be summarized for each of the cases.

Docket No. 92285:

Intervenors allege that sometime during 1982 they entered into an oral partnership agreement with Donald Reynaert, wherein the intervenors (and possibly Michael J. Kelly, not a party to the instant suit) agreed to contribute funds for the purpose of buying and selling real estate for profit. Pursuant to this alleged oral agreement, the intervenors contributed $6,781 each toward the purchase of the Warnock Spring Warehouse Building located at 227 Iron Street, Detroit, Michigan. The intervenors did not execute and file a formal partnership agreement. However, they did file a certificate of copartnership with the Wayne County Clerk’s office.

On December 13, 1982, Reynaert, Kelly and the three intervenors entered into a written "memorandum agreement” whereby each of these individuals acquired a one-fifth interest in the warehouse property and its liabilities. Reynaert was empowered to perform all acts necessary and incidental to the purchase and management of the warehouse, including making, executing, acknowledging, mortgaging and insuring the property. Reynaert was not empowered to sell or transfer the property.

Reynaert executed a valid first mortgage for $53,000 on December 14, 1982, with Michigan National Bank of Detroit.

The next day, December 15, 1982, Reynaert, Kelly and the intervenors executed an amendment to the memorandum agreement. The amendment read as follows:

1. We acknowledge that Donald J. Reynaert is the sole title holder to the property described in the Memorandum Agreement and further assert no real property interest in the described property.

2. We recognize the validity of that Mortgage executed December 14, 1982 between Donald J. Reynaert as Mortgagor and Michigan National Bank of Detroit as Mortgagee and hereby waive any rights to challenge the Mortgage.

3. We acknowledge that the above Mortgage is a valid first lien upon the property.

4. We hereby subordinate any rights which we may have in the subject property to the rights of Michigan National Bank of Detroit as contained in the Mortgage.

Afterwards, on July 3, 1984, Reynaert and Monteith, as partners, entered into a $600,000 construction loan agreement with plaintiff, Michigan Bank-Midwest. The loan was secured by a real estate mortgage on an Albion, Michigan, restaurant site for $600,000 and a real estate mortgage on the Detroit warehouse in the amount of $200,000. Interveners Anderson, Hanley and Shaptini had no knowledge of nor did they consent to the $200,000 mortgage.

Reynaert and Monteith defaulted on the construction loan and, on January 2, 1985, plaintiff commenced foreclosure on the two mortgaged properties. Subsequently, on August 26, 1985, intervenors filed a motion to intervene, alleging inter alia that, pursuant to an oral partnership agreement, intervenors advanced money to Reynaert for the purchase of the warehouse and that Reynaert had mortgaged the property without the partnership’s authority.

That same day (August 26, 1985), Judge Paul Nicolich entered a default judgment of foreclosure against Reynaert and Monteith.

Thereafter, on December 17, 1985, Judge Stanley Everett entered an order allowing intervention and restraining disposition of the warehouse. While the instant action was pending, Reynaert defaulted on the first mortgage on the warehouse, and, consequently, Michigan National Bank sought foreclosure by advertisement.

Intervenors filed an action in Wayne Circuit Court and obtained an order restraining Michigan National Bank from disposing of the warehouse property until the intervenors’ equitable rights were adjudicated and the title quieted.

In a deposition connected with the Wayne Circuit Court action, the existence of the memorandum agreement and amendment was revealed to plaintiff. Based on this revelation, on February 21, 1986, plaintiff filed a motion to set aside the order of intervention under MCR 2.612(C)(1)(c), alleging that intervenors had perpetrated fraud and misrepresentation upon the court and plaintiff by failing to disclose the existence of the memorandum agreement and the amendment thereto.

Plaintiff’s motion was heard on March 17, 1986, before Judge Nicolich. At the hearing, Judge Nicolich concluded that intervenors had misled the court by not revealing the memorandum agreement and its amendment. The judge found that the language of the amendment was clear and unambiguous as to the fact that the intervenors had relinquished any property rights to the warehouse. Accordingly, he granted plaintiff’s motion and imposed costs and reasonable attorney fees. An order setting aside the intervention was entered on April 14, 1986.

Intervenors moved for reconsideration on April 18, 1986, seeking an evidentiary hearing on plaintiff’s fraud claim. Judge Nicolich denied the motion on May 16, 1986, by way of a written opinion. Judge Nicolich recognized that, when a party alleges fraud on the court, an evidentiary hearing is normally necessary to determine whether such fraud exists. However, the judge concluded that a hearing was unnecessary because his decision was based on the existence of the memorandum agreement and its amendment. Intervenors had not denied that they executed these documents. Further, in reaffirming his earlier decision, Judge Nicolich stated:

The basis of this Court’s finding that fraud or misrepresentation was perpetrated on this Court was the withholding of such evidence of a material fact, of which, had the Court been made aware of this document’s existence and its contents, the Court would not have allowed such intervention. The document clearly speaks for itself; is clear and unambiguous; and, in this Court’s opinion, does not assert any rights by the movants on the Wayne County property against the Mortgagee.

On June 17, 1986, Judge Nicolich entered an order denying intervenors’ motion for reconsideration and awarded costs, expenses and reasonable attorney fees incurred by plaintiff in responding to the intervention motion in the amount of $2,853.50. The instant appeal followed. On September 26, 1986, this Court consolidated this appeal with the other two appeals considered herein.

Docket No. 94573:

As previously indicated, a judgment of foreclosure was entered on August 26, 1985, against Reynaert and Monteith. On November 4, 1985, Monteith moved to set aside the default judgment pursuant to MCR 2.603(D) and 2.612(B) and (C). In the motion, Monteith alleged that the judgment was procured by fraud, mistake and other misconduct on the part of plaintiff. Specifically, Monteith averred that he did not retain counsel and defend against the foreclosure due to plaintiffs representation that such action was unnecessary since defendants had sufficient collateral to satisfy the loan obligation and all attendant expenses. In addition, Monteith averred that plaintiff told him that it would pursue only Reynaert should a deficiency exist after the disposal of the mortgaged properties. Monteith’s motion was accompanied by an affidavit which contained the same averments as those alleged in his motion.

Some of the averments in Monteith’s motion included the following: (1) plaintiff failed to avail itself of the collateral in a timely manner; (2) plaintiff failed to dispose appropriately of the collateral; and (3) substantial defects and irregularities existed in the default proceedings and the default was taken without notice.

The motion was heard on November 25, 1985, before Judge Nicolich. At the hearing, Monteith’s counsel asked that the default judgment be set aside only as to Monteith and that Monteith be permitted to adjudicate any deficiency judgment. Monteith did not request a stay of the intended foreclosure sale. The court took the motion under advisement.

On December 3, 1985, Judge Nicolich issued a written opinion in which he set aside the default judgment as to Monteith but only as to the deficiency portion of that judgment. In the opinion, the court also ruled that the proposed foreclosure sale could proceed and that Monteith could file an answer to plaintiffs complaint for foreclosure and a counterclaim against plaintiff.

The order granting Monteith’s motion was entered on January 3, 1986. The same day, plaintiff filed a motion for reconsideration. Attached to the motion were four affidavits, three from employees of plaintiffs commercial loan department and one from plaintiffs counsel. The affidavits indicated that none of plaintiffs employees had made any representations to Monteith that plaintiff bank would not proceed against him should a deficiency result from the foreclosure nor had they advised Monteith not to retain legal counsel.

An evidentiary hearing on plaintiffs motion was held before Judge Nicolich on April 7, 1986. At the hearing, Paul Sowards, vice-president of commercial loans with Michigan National Bank-Mid Michigan, testified that he was the loan officer who handled the construction loan taken out by Monteith and Reynaert. Sowards essentially denied that he or anyone associated with plaintiff bank had advised Monteith not to retain counsel or that the bank would not hold him responsible for any deficiency resulting from the foreclosure sale. Finally, Sowards also denied ever telling Monteith that there was sufficient collateral to satisfy any obligations still owing under the loan agreement.

Monteith also testified. He stated that he never had any discussion with Sowards concerning the retention of counsel. In fact, Monteith admitted that no one associated with the bank told him not to obtain an attorney. He also admitted that he was told that the bank would proceed against him if a deficiency resulted from the foreclosure. Finally, Monteith admitted that Sowards never represented to him that there was sufficient collateral to preclude any deficiency.

Following the testimony, Judge Nicolich issued his opinion from the bench. Based on the testimony taken at the hearing and plaintiffs affidavits from its employees and counsel, the judge concluded that there was no evidentiary support for the averments in Monteith’s affidavit attached to his motion to set aside the default judgment. Consequently, plaintiffs motion to reinstate the de fault judgment was granted. An order incorporating the court’s oral ruling was entered on May 12, 1986.

Subsequently, on July 23, 1986, Monteith moved for reconsideration, which was denied on July 28, 1986. On the same day, the court also denied Monteith’s motion to compel an evidentiary hearing or trial to determine the amount of the deficiency, if any, resulting from the foreclosure sale. Monteith, thereafter, appealed to this Court.

Docket No. 94574:

As noted, plaintiff filed its complaint for foreclosure on January 2, 1985. On March 3, 1985, after Monteith and Reynaert failed to file their answers within the prescribed time provided by the court rules, plaintiff filed an affidavit of default. On the same day, and pursuant to plaintiff’s motion, Judge Nicolich entered an order appointing Julius Hoffman as receiver of the mortgaged properties. As receiver, Hoffman was empowered to collect the revenues from the operation of the properties and to apply the funds to the maintenance and operation of the properties. On April 18, 1985, Hoffman petitioned the court for permission to complete construction of the restaurant facilities on the Albion property or to sell it.

Judge Nicolich entered an order on April 29, 1985, authorizing Hoffman to sell the Albion property at a private sale for cash of not less than $400,000. The buyer was to assume all outstanding obligations owed to the construction lienholders. No redemption period was provided. The Albion property, in its uncompleted state, was valued at $347,000.

On July 3, 1985, counsel for D. J. Reynaert, Inc., and the Reynaerts filed an appearance. These defendants did not attempt to set aside the default judgment once it had been entered on August 26, 1985.

Pursuant to the April 29, 1985, order, Hoffman sold the Albion property on December 20, 1985, to Steakhouses, Inc., for $400,000. An order confirming the sale was entered the same day by Judge James Kingsley. On January 13, 1986, Judge Nicolich entered an order allowing the receiver’s final account and discharge. On February 7, 1986, Judge Kingsley entered an order which reserved the right to adjudicate a deficiency against Reynaert and Monteith.

After a hearing held on June 16, 1986, Judge Nicolich concluded that, pursuant to MCR 2.603, defendants Reynaert and defendant Monteith lacked standing to challenge the foreclosure sale because of the default judgment. He also found the appointment and conduct of the receiver to be proper. Finally, the judge ruled that a deficiency was shown at the time the property was sold and, thus, was not subject to determination through post-sale proceedings. Defendants appealed.

In Docket No. 92285, intervenors raise two issues. First, intervenors allege an abuse of discretion by the trial judge when he granted plaintiff’s motion to set aside the intervention, because the judge’s finding that intervenors had no interest in the warehouse property was against the great weight of the evidence and the judge should have conducted an evidentiary hearing to determine whether plaintiff’s claim of fraud and misrepresentation by defendants was true. We disagree.

Plaintiff sought to set aside the intervention order pursuant to MCR 2.612(C)(1)(c) [fraud (intrinsic or extrinsic), misrepresentation, or other misconduct of the adverse party]. A trial court’s decision based on this court rule is discretionary and will not be disturbed absent an abuse of discretion. Huber v Frankenmuth Mutual Ins Co, 160 Mich App 568, 576; 408 NW2d 505 (1987).

We cannot conclude that the trial judge abused his discretion in setting aside the intervention. The motion to intervene was filed on August 26, 1985. In it, intervenors averred that an oral partnership existed between Reynaert and intervenors and that the property was purchased with partnership funds to be held by Reynaert and his wife in trust for the partnership. Initially, when the court granted the motion to intervene, the court did not have knowledge of the December 15, 1982, amendment to the December 13, 1982, memorandum agreement. The amendment clearly indicated that intervenors were relinquishing any interests they may have to the warehouse property and that Reynaert would be the sole titleholder thereto. Had the court been aware of this amendment, denial of the motion to intervene would not have been an abuse of discretion.

Although we are cognizant of the general rule that, where a party alleges fraud has been committed on the court, the court must conduct an evidentiary hearing to determine whether the alleged fraud exists, St Clair Commercial & Savings Bank v Macauley, 66 Mich App 210, 214-215; 238 NW2d 806 (1975), lv den 396 Mich 864 (1976), we do not conclude that the court erred by not holding an evidentiary hearing on this issue because, as we indicated earlier, the trial judge would have been absolutely correct in denying the motion to intervene on the basis that the amendment to the memorandum agreement extinguished any rights of the intervenors. Thus, intervenors have not established error.

As to their second claim of error, intervenors contend that the court abused its discretion by ordering intervenors to pay costs and attorney fees to plaintiff. Again, we must disagree. Michigan adheres to the general rule that awards of costs and attorney fees are recoverable only where specifically authorized by statute, the court rules or a recognized exception. Warren v McLouth Steel Corp, 111 Mich App 496, 507; 314 NW2d 666 (1981), lv den 417 Mich 941 (1982).

MCR 2.114(B) requires that every pleading of a party represented by an attorney is to be signed by at least one attorney of record. MCR 2.114(D) provides that, by signing the pleading, the signer certifies:

(1) he or she has read the pleading:

(2) to the best of his or her knowledge, information, and belief formed after reasonable inquiry, the pleading is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and

(3) the pleading is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

If the pleading is signed in violation of MCR 2.114(D), the court is empowered to impose an appropriate sanction, "which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, including reasonable attorney fees.” MCR 2.114(E). MCR 2.113(A) makes the provisions of MCR 2.114 applicable to motions and affidavits.

Because intervenors made false representations in their motion to intervene and accompanying affidavits by claiming they had an interest in the warehouse property when they did not, the court appropriately imposed costs and reasonable attor ney fees since the motion and affidavits were signed contrary to MCR 2.114(D)(2) and (3). Thus, we affirm the lower court in Docket No. 92285.

In Docket No. 94573, Monteith claims that the trial judge incorrectly granted plaintiffs motion for reconsideration of the court’s order which set aside the default judgment against Monteith.

Plaintiffs motion was brought pursuant to MCR 2.119(F)(3), which provides:

Generally, and without restricting the discretion of the court, a motion for rehearing or reconsideration which merely presents the same issues ruled on by the court, either expressly or by reasonable implication, will not be granted. The moving party must demonstrate a palpable error by which the court and the parties have been misled and show that a different disposition of the motion must result from correction of the error.

In Brown v Northville Regional Psychiatric Hospital, 153 Mich App 300, 309; 395 NW2d 18 (1986), this Court stated the following with respect to the foregoing rule:

Martin, Dean & Webster, Michigan Court Rules Practice, Rule 2-119, p 537 states:

"... It is hard to give literal application to this language — for example, it would seem unlikely that the original losing party was 'misled’ and irrelevant that the original winning party was misled. Instead, the language, taken as a whole, can be interpreted as an expression of great reluctance to entertain or grant motions for reconsideration. Nonetheless, it would be a strange result to perpetuate an error on the grounds that it was not 'palpable’ or more generally upon a reluctance to reconsider issues (especially when the same error, if not harmless, would presumably be subject to correction on appeal, but at much greater expense).”

We read this provision governing rehearings as not restricting the discretion of the trial judge to reconsider motions where he later determines that he or his predecessor made a serious error, based on an intervening change in the law or otherwise.

Similarly, in Smith v Sinai Hospital of Detroit, 152 Mich App 716, 723; 394 NW2d 82 (1986), this Court stated that this court rule merely provides a trial judge with some guidance on when to deny motions for rehearing. The court rule does not prevent a court’s exercise of discretion on when to give a party a "second chance” on a motion it has previously denied.

In our case, the trial judge correctly granted plaintiffs motion for reconsideration. Attached to the motion were four affidavits with averments that seriously called into question the veracity of the factual allegations contained in Monteith’s affidavit supplied in support of his motion to set aside the default judgment. These averments could not be ignored. As a matter of fact, had plaintiff presented this evidence at the hearing on Monteith’s motion to set aside the default judgment, the court would never have set aside the default judgment. Thus, we find no error.

Defenant Monteith in his final issue in Docket No. 94573 and defendants Reynaert in Docket No. 94574 allege that error resulted when the court ruled that the entry of a default judgment barred them from challenging the foreclosure sale and any resulting deficiency in the post-sale proceedings. Defendants argue that, pursuant to MCR 2.603(B) and MCL 570.1124; MSA 26.316(124), they possess standing to challenge the foreclosure sale and any resulting deficiency judgment.

Specifically, defendants argue that MCR 2.603(B)(3)(b) provides them with standing to chai lenge the manner of the property sale in light of the alleged improprieties committed by the receiver and to adjudicate the amount, if any, of the deficiency.

This is an issue of first impression. Initially, we must decide the issue of the receiver. Plaintiff sought and obtained the appointment of a receiver pursuant to the Michigan Construction Lien Act, MCL 570.1101 et seq.; MSA 26.316(101) et seq. More specifically, the receiver was appointed under MCL 570.1122(1); MSA 26.316(122X1). This section of the statute permits a mortgagee to petition for the appointment of a receiver in any foreclosure sale on real property upon which an incomplete improvement exists. Once a receiver is appointed, the receiver is deemed a fiduciary for the benefit of all persons having or claiming interests in the real property. MCL 570.1122(2); MSA 26.316(122X2). MCL 570.1124(1); MSA 26.316(124X1) sets forth the procedures for disbursement of proceeds from a foreclosure sale when a receiver is involved and provides:

Upon the completion of the sale of the real property, the receiver shall prepare and submit a final account for examination and approval by the court. The court shall enter a final order directing the distribution of all funds or other assets held by the receiver. Repayment of funds borrowed by the receiver, under court authority, for the completion of improvements, or for any other purpose shall have priority in the distribution, unless a different priority has been ordered by the court. The next priority shall be that of funds expended by the receiver, including his or her fees and those of his or her attorneys and agents. The remaining funds shall be distributed to the parties in the order of the priority of their respective liens, encumbrances, or other rights as determined by the court. The court shall adjudicate the right, if any, to a deñciency judgment against any contracting party. [Emphasis supplied.]

Once plaintiff invoked its rights to a receiver, it obligated the court and the receiver to disburse the proceeds from the foreclosure sale in accordance with the above provision of the Construction Lien Act. Thus, the court was required, by the use of the term "shall,” to adjudicate the right, if any, to a deficiency judgment against any contracting party.

However, before we determine whether defendants were entitled to an adjudication, we must initially decide whether defendants, as defaulted parties, had standing to challenge the accuracy of the deficiency judgment in a post-default judgment hearing. We conclude that they did.

Generally, a defaulted party may not proceed with the action until the default has been set aside. MCR 2.603(A)(3). However, a defaulted party does have a right to participate in post-default judgment proceedings if the conditions set forth in MCR 2.603(B)(3)(b) have been met. That rule provides:

If, in order for the court to enter judgment or to carry it into effect, it is necessary to

(i) take an account,

(ii) determine the amount of damages,

(iii) establish the truth of an allegation by evidence, or

(iv) investigate any other matter,

the court may conduct hearings or order references it deems necessary and proper, and shall accord a right of trial by jury to the parties to the extent required by the constitution.

See also Wood v DAIIE, 413 Mich 573; 321 NW2d 653 (1982). The holding of post-default judgment proceedings is within the trial court’s discretion. Id., p 585. The rule appears to require a post-default judgment hearing to determine damages only when it is necessary.

In this case, the court should have held an evidentiary hearing on the issue of the right to a deficiency judgment. Because plaintiff secured the appointment of a receiver, and because the receiver was required to disburse the proceeds of the foreclosure sale in accordance with MCL 570.1124(1); MSA 26.316(124X1), defendants Reynaert and Monteith were entitled to an adjudication of the right of the bank to a deficiency judgment. We deem these defendants to be "contracting parties” within the meaning of MCL 570.1103(4); MSA 26.316(103)(4), since they contracted with a series of contractors to build the necessary restaurant facilities. Because MCL 570.1124(1); MSA 26.316(124)(1) requires the court to adjudicate the right, if any, to a deficiency judgment, a post-default judgment hearing was necessary within the meaning of MCR 2.603(B)(3)(b)(ii). Thus, we remand to the lower court for an evidentiary hearing on the question of the right to a deficiency judgment. In all other respects, the trial court is affirmed.

Affirmed in part, reversed in part and remanded. We do not retain jurisdiction.