Sparling Plastic Industries, Inc. v. Sparling

583 N.W.2d 232, 229 Mich. App. 704

• Court: Michigan Court of Appeals
• Decided: August 26, 1998
• Docket: Docket 190180, 190181
• Status: Published

Opinions

Hood, J.

In Docket No. 190180, plaintiffs-appellants Sparling Plastic Industries, Inc., and Anthony and Peter DeMarco appeal as of right from the March 25, 1994, trial court order denying their motion for summary disposition. In Docket No. 190181, defendants-appellants Peter, Katherine, Anthony, and Mary Ann DeMarco appeal as of right from the August 22, 1995, trial court judgment in favor of plaintiffs Robert and Evangeline Sparling and the October 6, 1995, trial court order denying their motion for additional or amended findings of fact. Appellants also appeal from a January 22, 1993, order denying their motion for partial summary disposition. This order was issued in lower court case no. 91-126755CK, which was dismissed and subsequently refiled as case no. 93-326751CK. The appeals were consolidated. We affirm in part, reverse in part, and remand.

These cases were consolidated before a bench trial pursuant to a stipulation by all parties. The controversy arose out of a sale of stock transaction in which appellants, through the negotiation of two promissory notes, for $400,000 and $12,600 respectively, agreed to purchase all the outstanding stock in Sparling Plastic Industries, Inc., from appellee Robert Sparling (hereafter Sparling). In conjunction with this sale, appellants received all the corporate assets. Contemporaneous with the stock transaction, the parties negotiated a lease agreement that provided that appellants would lease the property on which the business was located. The promissory notes and the lease agreement were negotiated in March 1991. By May 1992, appellants had made only one of the monthly payments on the $400,000 note, no payments on the $12,600 note, and only three of the monthly lease payments. Sparling therefore reentered the premises. When he did, he found that the electrical service had been disconnected because of nonpayment and that equipment and supplies had been removed from the premises. Sparling remained in possession for a short while before selling the remaining equipment and leasing the premises to a third party.

In Docket No. 190180, appellants Sparling Plastic Industries, Inc., and Anthony and Peter DeMarco filed a complaint against Sparling, alleging conversion, a violation of MCL 600.2919a; MSA 27A.2919(1), and civil conspiracy. In Docket No. 190181, Sparling and his wife, Evangeline, filed a complaint against appellants Peter, Katherine, Anthony, and Mary Ann DeMarco, alleging breach of the two promissory notes and the lease agreement. After a bench trial on the consolidated cases, the trial court found in favor of the Sparlings on every claim. The trial court entered judgment against all appellants in the amount of $574,638.73 with regard to the first promissory note, which included statutory and judgment interest, and a credit to appellants for $70,000 for the sale of the company assets by Sparling. The trial court also entered judgment against appellant Anthony DeMarco only in the amount of $19,378.25 with regard to the second promissory note. The trial court also found the appellants who signed the lease, Anthony, Peter, and Mary Ann DeMarco, liable for $42,406.18 for breaching the lease and found all appellants liable for $44,316.07, which was Sparling’s cost of cleanup after retaking possession of the premises.

Appellants raise numerous issues on appeal, several of which we have combined for our consideration. First, appellants argue that they were entitled to summary disposition because, pursuant to § 301 of the Uniform Securities Act, MCL 451.701; MSA 19.776(301), Sparling was required to register the securities sold to appellants before the sale. Because the securities were not registered, appellants argue that, pursuant to § 410 of the Uniform Securities Act, MCL 451.810; MSA 19.776(410), they could rescind the stock sales transaction and recover the consideration given for the stock and attorney fees. We disagree that summary disposition should have been granted. The trial court did not err in finding that a genuine issue of material fact existed with regard to whether the stock transaction between appellants and Sparling fell within one of the exemption provisions in the Uniform Securities Act thereby making registration of the securities unnecessary. Paul v Lee, 455 Mich 204, 210; 568 NW2d 510 (1997).

Appellants also argued in a motion for summary disposition below that although Sparling did not perfect a security interest in the property that was leased to appellants, Sparling behaved as if he had a security interest when he seized the property and all the assets on the leased premises. They claimed that because Sparling behaved as if he had a security interest, he should have abided by the laws applicable to secured parties and should have given appellants notice before seizing the property and selling the assets. Because Sparling did not, appellants claimed that they were entitled to summary disposition regarding his claims. The trial court properly denied this motion for summary disposition because appellants were seeking equitable relief, which depends on the factual circumstances of the case. Sparling’s claims could have been supported by evidence presented at trial and, therefore, the trial court properly denied appellants’ motion for summary disposition. SSC Associates Ltd Partnership v General Retirement System of Detroit, 192 Mich App 360, 364-365; 480 NW2d 275 (1991).

Next, appellants argue that they were entitled to rescind the stock transaction pursuant to MCL 451.810; MSA 19.776(410), which provides, in part, that a person who sells a security in violation of § 301 of the Uniform Securities Act, MCL 451.701; MSA 19.776(301), is liable to the purchaser for the consideration paid for the security plus interest and attorney fees.

Section 301 provides as follows:

It is unlawful for any person to offer or sell any security in this state unless (1) it is registered under this act or (2) the security or transaction is exempted under section 402.

Section 402 of the Uniform Securities Act, MCL 451.802; MSA 19.776(402), describes all the securities and transactions that are exempt from the requirement of registering under § 301. A review of the twenty-one exemptions enumerated in the act does not reveal an exemption that was applicable to the transaction in this case. Moreover, if Sparling wanted to defend this claim by claiming that an exemption applied, he was required to prove that an exemption applied. MCL 451.802(c); MSA 19.776(402)(c). He did not do so at any time during the trial. Therefore, appellants were entitled to prevail on this claim.

We disagree with the proposition argued by Spar-ling in the trial court that the “sale of business” doctrine applies to the case at bar.¹ Under the “sale of business” doctrine, when a stock purchase constitutes the purchase of a business, the restrictions and requirements imposed on the sale of stock do not apply. MCL 451.815; MSA 19.776(415) provides that the Uniform Securities Act should be construed to coordinate its interpretation with the related federal regulation. It is therefore appropriate to examine how the similar federal provision has been interpreted. This issue was addressed in an almost identical factual situation in Landreth Timber Co v Landreth, 471 US 681; 105 S Ct 2297; 85 L Ed 2d 692 (1985). In that case, the United States Supreme Court rejected the sale of business doctrine, stating that if an instrument bears the usual characteristics of stock then it falls within the definition of a security and, therefore, is within the purview of the Securities Act of 1933, 15 USC 77a et seq., and is subject to all the same requirements and restrictions. Landreth, at 686. In the case at bar, uncontroverted evidence was introduced at trial that the stock at issue possessed all the usual characteristics of a security. Applying the reasoning in Landreth, we conclude that the stock transaction in this case was subject to the registration requirements of the Uniform Securities Act.

The trial court erred in denying appellants’ claim under MCL 451.810; MSA 19.776(410). Appellants were entitled to rescind the transaction and seek statutory damages. We therefore reverse the order of the trial court with regard to this claim and remand for the calculation of appellants’ damages pursuant to the statute. However, the trial court shall set off from that amount the value of the equipment removed from the premises by the appellants and any damage to the plant to which Sparling was found to be entitled.

Appellants also argue that they were entitled to recover the compensation paid for the stock under MCL 451.810(a)(2); MSA 19.776(410)(a)(2), which provides that a person who offers or sells a security by making any untrue statement of a material fact or by the omission of a material fact to a buyer who does not know of the untruth or omission and in the exercise of reasonable care could not know of the untruth or omission is liable for the consideration paid for the security plus interest and attorney fees. A review of the record does not reveal that the trial court clearly erred in finding that Sparling did not make any untrue statements of material fact or omit any material facts. People v Truong (After Remand), 218 Mich App 325, 330; 553 NW2d 692 (1996).

Appellants next argue that the trial court erred in finding that Sparling did not convert their property in violation of MCL 600.2920; MSA 27A.2920, when he seized the property without first notifying them. MCL 600.2920; MSA 27A.2920 provides, in part, as follows:

(1) A civil action may be brought to recover possession of any goods or chattels which have been unlawfully taken or unlawfully detained and to recover damages sustained by the unlawful taking or unlawful detention, subject to the following conditions:

* * *

(c) An action may not be maintained under this section by a person who, at the time the action is commenced, does not have a right to possession of the goods or chattels taken or detained.

MCL 600.2920; MSA 27A.2920 applies only to tangible property. A party may not bring an action for replevin for a business or for the good will of a business. Powers v Fisher, 279 Mich 442, 449; 272 NW 737 (1937). Therefore appellants cannot recover under this section for the value of the business. Although this provision can be applied to the physical assets of the business, appellants were not in possession of the property at the time Sparling reentered the premises. Appellants had abandoned the property and had stripped the premises of most of the machinery and office equipment before Sparling’s reentry. Moreover, there was undisputed testimony that appellants made only one payment on the promissory notes and only a few payments on the lease. Sparling was entitled to reenter the premises pursuant to the lease agreement when appellants failed to make payments in accordance with the terms of the lease. Because Sparling properly took and maintained possession, the trial court correctly determined that he was not liable for conversion.

Next, appellants argue that the trial court erred in finding that Sparling did not breach the purchase agreement. We disagree. Appellants first claim that Sparling violated ¶ 7(B) of the purchase agreement, which assured that there were “no suits, governmental proceedings, or litigation pending” that might affect the ownership or use of the assets or property owned by the company. In support of this claim, appellants argue that Sparling knew that there were hazardous wastes located on the property and these wastes were present in violation of Department of Natural Resources regulations. They also point out that, at the time of the transaction, there was an existing fire code citation for failing to properly store flammable materials on the premises of the company. At trial, there was conflicting testimony regarding how much hazardous waste was on the premises at the time appellants purchased the company. The trial court found that, although there were environmental problems and code violations, these would constantly occur because of the nature of the business and would have to be constantly corrected. It concluded that Sparling made no misrepresentation regarding these issues. This finding was not clearly erroneous and, therefore, we are required to accept it. Beason v Beason, 435 Mich 791, 803; 460 NW2d 207 (1990).

Appellants next claim that Sparling violated ¶ 7(F) of the purchase agreement. In ¶ 7(F), Sparling warranted that no representation or warranty contained in the agreement contained false statements or omissions of material fact. Appellants argue that Sparling violated this paragraph by misstating the amount of the company’s accounts receivable and payable, its current tax liabilities, the value and existence of the company’s assets and inventory, and the nature of his customer relationships. There was conflicting testimony regarding these issues at trial. Therefore, the trial court did not clearly err in finding that the value of the accounts receivable and inventory were not misrepresented in the purchase agreement and that appellants had every opportunity to evaluate the assets of the business before purchasing it.

Finally, appellants claim that Sparling violated ¶ 9 of the purchase agreement. Paragraph 9 prohibited Sparling from competing with the business for a period of five years. Appellants argue that this provision was violated after Sparling reentered the premises. They allege that he ran the business for a short period before he sold the assets of the business to a third party. As previously noted, there was testimony that at the time Sparling reentered the premises, the appellants had abandoned them. The electricity had also been disconnected and items of furniture and equipment had been removed to the extent that regular operations could not be resumed. On these facts, it was clear that appellants were not operating the business at the time Sparling reentered the premises and attempted to salvage what remained of the plant and the business. Therefore, Sparling was not violating the agreement by competing with appellants.

In sum, the record supports the conclusions reached by the trial court and thus, the trial court’s findings that Sparling did not breach the purchase agreement were not clearly erroneous. There was conflicting testimony presented at trial regarding all these issues. Due regard shall be given to the trial court’s superior opportunity and ability to judge the credibility of witnesses. Hofmann v Auto Club Ins Ass’n, 211 Mich App 55, 99; 535 NW2d 529 (1995).

Appellants also raise issues concerning their liability under the lease agreement. First they argue that Sparling breached the lease agreement by misrepresenting the condition of the premises and viability of the inventory left on the premises. We disagree, as did the trial court. Appellant Anthony DeMarco admitted visiting the premises several times before the purchase. Although he claims that he did not fully inspect the backyard area or the drums because the area was muddy and snow-covered, he had ample opportunity to do so. Further, Sparling testified that the inventory was usable and that the waste products were recyclable. Second, appellants take issue with the trial court’s findings of fact that individual appellants Anthony DeMarco, Peter DeMarco, and Mary Ann DeMarco were the tenants under the lease. Although these individual appellants argue that they signed the lease only as officers of the company and not as personal guarantors, there is nothing on the face of the lease that supports this argument. In the body of the lease, Sparling Plastic Industries, Inc., was named as the tenant, but on the page where the signatures appear, these individual appellants signed as individuals under the heading “Tenant.” We find that the trial court did not clearly err in finding that Sparling did not breach the lease agreement and that these individual appellants were personally liable for the lease payments.

Next, appellants complain that the trial court’s finding that appellants had abandoned the leased premises before Sparling’s reentry was erroneous. They argue that the evidence presented at trial established that the premises were not abandoned. Appellants rely on Ludington & N R Co v Epworth Assembly, 188 Mich App 25; 468 NW2d 884 (1991). Two requirements must be met to establish abandonment. First, it must be shown that there is an intent to relinquish the property and, second, there must be external acts that put that intention into effect. Id. at 33; Van Slooten v Larsen, 410 Mich 21, 50; 299 NW2d 704 (1980). Nonuse alone is insufficient to prove abandonment. Emmons v Easter, 62 Mich App 226, 237; 233 NW2d 239 (1975). We agree with the trial court that there was sufficient evidence to support a finding that appellants abandoned the leased premises. Specifically, the evidence showed that Detroit Edison had disconnected the electricity because of nonpayment and that, when Sparling reentered the premises, several pieces of equipment were missing as well as trucks, office furniture, copiers, files, tools, and computers, the value of which was between $60,000 and $70,000.

Appellants also claim on appeal that Sparling’s act of selling the remaining assets to a third party amounted to an accord and satisfaction, which precluded an award of damages. We disagree. Appellants argue that they attempted to rescind the contract before Sparling’s reentry. They conclude that there was an accord and satisfaction because Sparling reentered and released the premises and sold the assets of the business to another party after their offer of rescission.

“[Accord and satisfaction] relates to a situation where one party tenders an item in full satisfaction of a claim and the other party accepts the thing tendered. In such a situation, an accord and satisfaction may arise regardless of the lack of an agreement between the parties. An accord and satisfaction may be effected by payment of less than the amount which is claimed to be due if the payment is tendered by the debtor in full settlement and satisfaction of the claim. In order to effect an accord and satisfaction under such circumstances, the tender must be accompanied by an explicit and clear condition indicating that, if the money is accepted, it is accepted in discharge of the whole claim.” [Nationwide Mut Ins Co v Quality Builders, Inc, 192 Mich App 643, 646; 482 NW2d 474 (1992), quoting Fuller v Integrated Metal Technology, Inc, 154 Mich App 601, 607-608; 397 NW2d 846 (1986).]

Appellants cite no facts and this Court does not find any within the record that would support the conclusion that an accord and satisfaction had arisen between the parties. Appellants did not offer to pay any money for the outstanding promissory notes; they only claim that they attempted to rescind the contract by offering to return the shares of stock. This never occurred. There was no evidence that appellants offered a payment to Sparling in satisfaction of the amounts due on the purchase agreement or on the lease. Appellants have therefore failed to establish the elements of an accord and satisfaction.

We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion. We do not retain jurisdiction.

Kelly, P.J., concurred.

1 Sparling has not filed briefs in either of the appeals before this Court.