Summary
holding that when the plaintiff corporation had sold its vending-machine business to a third party but retained a security interest in the business’s physical assets, the retention was sufficient to establish the plaintiff as a real party in interest
Summary of this case from Olin v. Mercy Health Hackley CampusOpinion
Docket No. 86158.
Decided July 7, 1987.
Miller, Canfield, Paddock Stone (by Michael P. Knapp and Charles L. Sweeris), for plaintiffs.
Law Offices of Thomas VanHattum Associates, P.C. (by Thomas VanHattum), for defendants.
Plaintiff appeals as of right from a circuit court opinion and order which granted defendants' motion for summary disposition and dismissed plaintiff's cause of action on the ground that plaintiff is not the real party in interest, MCR 2.116(C)(5).
Plaintiff Rite-Way Refuse Disposal is a corporation which formerly did business under the registered assumed name of "Wolverine Vending Company." Jerome and Lois Rogers are the principal shareholders and the officers and directors of the corporate plaintiff. On May 20, 1982, plaintiff purchased from defendants the assets, equipment and goods which were owned by defendants and used in the conduct of their business known as Wolverine Vending Company, with the purchase including the trade name. A substantial portion of the assets and equipment purchased were coin-operated commercial bulk vending machines which dispensed gum, candy and novelty items. At the time of the sale, the vending machines were located in numerous stores throughout Michigan.
The purchase price for the business was $250,000, with $100,000 paid at closing and the balance represented by a secured promissory note in the amount of $150,000 with interest at an annual rate of eight percent. The agreement also contained a provision that defendants would not compete with plaintiffs' business within a radius of 250 miles and for a period of five years, and that if this provision was violated the remaining balance of the promissory note at the time of the breach would be totally and unconditionally forgiven and the defendants would be considered paid in full.
In its complaint, plaintiff alleges that defendants have placed in several stores certain commercial bulk vending machines, which vend and dispense novelty items similar to those dispensed by the bulk vending machines purchased by plaintiff. In the September 7, 1983, complaint for declaratory relief, plaintiff alleged that this placement of the machines violates the spirit and the letter of the agreement as it pertains to the covenent not to compete. Defendants maintain that the placement of the subject machines in the stores is not the type of competition prohibited by the agreement.
On August 1, 1983, plaintiff sold the vending machines and operation, including the trade name Wolverine Vending Company, to Castle Enterprises for $460,000. Plaintiff and Castle executed a promissory note and plaintiff retained a security interest in the business for payment of that note. Plaintiff's agreement with Castle also included a covenant that plaintiff would not compete with Castle but does not include or mention defendants' covenant not to compete with the plaintiff.
The lower court initially denied defendants' motion to dismiss on the basis that plaintiff was not a real party in interest, but ordered that Castle Enterprises be joined as a third-party complainant. Plaintiff filed a third-party complaint, but failed to serve Castle. On June 19, 1985, the lower court granted defendants' motion on the ground that the suit was not being pressed by a real party in interest. The court stated that since plaintiff had transferred the assets to Castle plaintiff no longer had an interest in the assets. The court concluded that it was Castle which had the cause of action and, since Castle had not been joined, dismissal was proper.
MCR 2.201(B) provides that "[a]n action must be prosecuted in the name of the real party in interest." 1 Martin, Dean Webster, Michigan Court Rules Practice, p 6, explains:
The purpose of the rule is to protect the defendant by requiring that the claim be prosecuted by the party who by the substantive law in question owns the claim asserted against the defendant.
The commentators then go on to discuss the relationship of the real party in interest rule to MCR 2.205 concerning necessary joinder of parties.
The real party in interest rule is concerned only with the power of the plaintiff before the court to bring suit upon the claim stated. Whether additional parties also have an interest, such that their joinder is required or the plaintiff is prohibited from proceeding without them, is not a question of real party in interest, but of necessary joinder of parties under MCR 2.205 .
Thus, where a collision insurer has paid a part of the plaintiff's damages and taken a partial assignment of the plaintiff's claim, the plaintiff's power to maintain the action cannot be challenged on grounds that he is not a real party in interest. The plaintiff holds a substantive claim against the defendant. The question is whether the joinder of the insurer, an additional party in interest, should be compelled in order to protect the defendant against multiple suits. MCR 2.205 provides defendant with the means to compel such joinder if jurisdiction over the absent party can be acquired. [Emphasis added.]
In the instant case, the court reasoned that, since plaintiff had sold the vending machine business, neither the corporation nor the named shareholders could be real parties in interest. We conclude that the lower court erred and that as a matter of substantive law the plaintiff corporation's retention of a security interest in the assets of the vending machine business is sufficient to establish that it is a real party in interest. To the extent that plaintiff may be able to prove that defendants' activities have adversely affected the business of Castle, Castle's ability to make payments to plaintiff under the promissory note may be diminished. If the alleged breach can be shown to damage Castle's business, then plaintiff's security is of lesser value.
While we have found no Michigan authority that squarely addresses this situation, we analogize this case to cases involving the assignment or subrogation of a mortgage. For example, in Better Valu Homes, Inc v Preferred Mutual Ins Co, 60 Mich. App. 315; 230 N.W.2d 412 (1975), this Court set aside a grant of accelerated judgment for the fire insurer and held that, under a policy with a standard mortgage loss-payable clause, the claim of either the mortgagee or the mortgagor is legally valid and based on contractual obligations and either would be a real party in interest. Similarly, in Capital Mortgage Corp v Michigan Basic Property Ins Ass'n, 78 Mich. App. 570; 261 N.W.2d 5 (1977), this Court held that a mortgagee of real property was a real party in interest with standing to bring suit to recover under a fire insurance policy despite the fact that the mortgage had been assigned, and that it was not necessary to join the assignee.
Although the Michigan courts have not directly addressed this question in relation to a secured party of a promissory note, plaintiff points to a California appellate decision, Baldwin v Marina City Properties, Inc, 79 Cal.App.3d 393; 145 Cal.Rptr. 406 (1978). In Baldwin, plaintiffs sold their interests in a limited partnership to defendant Benscoter taking cash and promissory notes along with security agreements in the limited partnership interests. When plaintiffs filed suit against persons alleged to have injured the partnership, the court held:
(1) A holder of a security interest may maintain an action for the impairment of a security by a third party tort-feasor. ( American Sav Loan Ass'n v Leeds (1968) 68 Cal.2d 611, 614, fn 2, 616 [ 68 Cal.Rptr. 453, 440 P.2d 933]; U S Financial v Sullivan (1974) 37 Cal.App.3d 5, 12-17 [ 112 Cal.Rptr. 18]; Duarte v Lake Gregory Land and Water Co (1974) 39 Cal.App.3d 101, 105 [ 113 Cal.Rptr. 893].) This general rule is not only applicable to real property and the security interest of a beneficiary of a deed of trust or of a mortgagee ( U S Financial v Sullivan, supra, 37 Cal.App. 3 d at p 13, 112 Cal.Rptr. 18) but also includes a security interest in personal property. ( Weingand v Altantic Sav Loan Ass'n (1970) 1 Cal.3d 806, 818-819 [ 83 Cal.Rptr. 650, 464 P.2d 106].) The liability of the wrongdoer for an impairment of a security interest is not limited to intentional actions and includes acts of negligence where it is reasonably foreseeable that such negligence would result in the impairment of the security interest. ( U S Financial v Sullivan, supra, 37 Cal.App.3d 5 at p 13.)
(2) Plaintiffs had retained a security interest in the limited partnership interest that they sold to defendant Benscoter to secure the purchase money indebtedness evidenced by the Benscoter promissory notes. It is not necessary that plaintiffs accept or force a reconveyance of the security interest or foreclose on that interest either satisfying the indebtedness to them or reducing the indebtedness to them before bringing an action against the defendants as third party tortfeasors for the impairment of their security interest and the action for the impairment of the security interest may be brought whether or not the debtor is in default. ( U S Financial v Sullivan, supra, 37 Cal.App.3d at pp 15-17; 145 Cal.Rptr. 411-412.) [ 79 Cal.App.3d 403.]
Accordingly, we are persuaded that plaintiff may maintain an action against defendants to protect its security interest.
We note that, although it was not the stated basis for the trial court's ruling, the court appears to have been troubled by the absence of Castle as a party. However, as stated in the previously quoted commentary from Michigan Court Rules Practice, supra, the real party in interest rule is concerned only with the power of the plaintiff who is before the court. It is the defendant's duty to join necessary parties under MCR 2.205. Moreover, we question whether Castle would be a real party in interest to the covenant between plaintiff and defendants since by its terms it does not extend to assigns and since no reference was made to it in the purchase agreement between plaintiff and Castle. Instead, that purchase agreement contained an entirely separate noncompetition covenant.
We conclude by also noting that, since Michigan jurisprudence looks to the overall reasonableness of this type of covenant, plaintiff has many substantive and evidentiary hurdles to clear in order to prove to the trial court that it is entitled to the declaratory ruling it seeks. We state only that plaintiff's retention of the security interest in the business is sufficient to make it a real party in interest under MCR 2.201. We therefore reverse the grant of summary disposition in favor of defendants.
Reversed.
D.F. WALSH, P.J., concurred.
I concur in the holding of the majority that the trial court's decision must be reversed, but arrive at that decision by different reasoning.
The present action is for breach of the contract executed May 20, 1982, whereby defendants sold to plaintiff the assets, equipment, and goods of their business known as Wolverine Vending Company including the trade name. Said contract contained the following provision:
The Sellers hereby covenant with the Buyer that they shall not, directly or indirectly, as principal, agent, employee, consultant, director, officer, owner of an equity interest, or in any other capacity become engaged or interested in any business which directly or indirectly competes with the business sold by the Sellers to the Buyer within a radius of 250 miles from the present location of any of the commercial bulk vending machines conveyed by the Sellers to the Buyer for a period of five (5) years from and after the closing date then [sic] the entire balance of the Promissory Note executed by the Buyer to the Sellers herein, including principal and any accrued and unpaid business [sic] shall be totally, absolutely, and unconditionally forgiven and shall otherwise be considered by the parties paid in full. [Emphasis added.]
In commencing the present action, plaintiff alleged that defendants had breached the above covenant. Accordingly, plaintiff maintained that the balance of the purchase price it owed to defendants was forgiven. It is undisputed that, prior to any of the alleged violations of the covenant, plaintiff had conveyed its entire interest in Wolverine to Castle Enterprises, Inc., although plaintiff did retain a security interest in the business. The contract of sale between plaintiff and Castle contained a covenant whereby plaintiff agreed not to compete with Castle. However, said contract made no mention of the above-quoted covenant between plaintiff and defendants.
The trial court concluded that, since plaintiff had sold Wolverine to Castle prior to defendants' alleged violations of the above-quoted covenant, plaintiff was not a real party in interest. Since. MCR 2.201(B) provides that "[a]n action must be prosecuted in the name of the real party in interest," the trial court granted defendants' motion to dismiss.
The majority concludes that the trial court erred in finding that plaintiff was not a real party in interest, based upon the following reasoning:
In the instant case, the court reasoned that, since plaintiff had sold the vending machine business, neither the corporation nor the named shareholders could be real parties in interest. We conclude that the lower court erred and that as a matter of substantive law the plaintiff corporation's retention of a security interest in the assets of the vending machine business is sufficient to establish that it is a real party in interest. To the extent that plaintiff may be able to prove that defendants' activities have adversely affected the business of Castle, Castle's ability to make payments to plaintiff under the promissory note may be diminished. If the alleged breach can be shown to damage Castle's business, then plaintiff's security is of lesser value. [Emphasis added.]
Thus, in the view of the majority the fact that plaintiff retained a security interest in Wolverine is determinative as to whether it is a real party in interest. In my view, however, that fact is irrelevant. The fact that a plaintiff holds a security interest might well be sufficient to make him a real party in interest for purposes of maintaining an action for impairment of security by a third-party tortfeasor. However, that is not the question presently before this Court. By way of the present action, plaintiff seeks to enforce contract rights it received under the contract of sale executed on May 20, 1982. Plaintiff never conveyed its right to enforce the restrictive covenant contained in that contract to Castle or to anyone else. Accordingly, plaintiff remains the owner of said right and thus is a real party in interest in seeking its enforcement. This could remain true even if Castle had paid in cash to plaintiff the entire purchase price for Wolverine and plaintiff retained no security interest in the business, as long as plaintiff did not convey to another its right to enforce the above-quoted restrictive covenant. Therefore, I concur in the holding of the majority that plaintiff is a real party in interest for purposes of bringing the present action.
It is necessary to emphasize, however, that neither the majority in its opinion nor I in this concurrence have made any findings as to the extent of the restrictive covenant plaintiff seeks to enforce. The covenant provided that the balance of the purchase price owed by plaintiff to defendants would be forgiven if defendants competed with "the business sold by the Sellers to the Buyer." It will be for the trial court to determine whether the parties intended this phrase to encompass Wolverine only so long as it was owned by plaintiff or whether they intended it to encompass Wolverine no matter who subsequently owned the business as well as any other factual matters.