257 F.3d 615 (6th Cir. 2001), 00-1198, Imperial Hotels Corp. v Dore

Docket Nº:00-1198
Citation:257 F.3d 615
Party Name:Imperial Hotels Corporation, Plaintiff-Appellant, v. Arthur P. Dore; Jay Ambe Corporation; and Dore Development Company, Defendants, Mainstream Capital Corporation, Defendant-Appellee.
Case Date:July 18, 2001
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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257 F.3d 615 (6th Cir. 2001)

Imperial Hotels Corporation, Plaintiff-Appellant,


Arthur P. Dore; Jay Ambe Corporation; and Dore Development Company, Defendants,

Mainstream Capital Corporation, Defendant-Appellee.

No. 00-1198

United States Court of Appeals, Sixth Circuit

July 18, 2001

Argued: June 5, 2001

Appeal from the United States District Court for the Eastern District of Michigan at Bay City, No. 98-10139, Victoria A. Roberts, District Judge.

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[Copyrighted Material Omitted]

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David M. Caplan, CAPLAN & ASSOCIATES, Farmington Hills, Michigan, for Imperial Hotels Corp.

Lawrence A. Hurlburt, J. David Perez, HURLBURT, TSIROS, ALLWEIL & PEREZ, Saginaw, Michigan, Rita M. Lauer, Wasinger, Kicklam & Hanley, Royal Oak, MI, for Arthur P. Dore, Jay Ambe Corp., Mainstream Capital Corp. and Dore Development Co.

Before: GUY, BOGGS, and GILMAN, Circuit Judges.


BOGGS, Circuit Judge.

Imperial Hotels Corp. sued three corporations and one individual to collect on a note originally executed by another party. On Mainstream Capital Corp.'s motion for summary judgment, the district court held that Imperial was an intended third-party beneficiary of Mainstream Capital Corp.'s agreement with Jay Ambe Corp. to assume responsibility for payments on the original note. The court further held that a subsequent assumption agreement between Dore Development Co. and Jay Ambe Corp., to which Imperial expressed consent, constituted a novation relieving Mainstream of its liability to Imperial. Because Michigan law on novations looks to the subjective intent of all the parties and because in this case there is a genuine issue of material fact as to intent, the court erred in entering summary judgment for Mainstream. We therefore reverse and remand for further proceedings.


This diversity case arises out of a dispute concerning the financing of a motel in Bay City, Michigan, known as the Gateway Regency Motel. In 1983, Nick Khatiwala purchased from a division of Imperial '400' National, Inc., 1 the furniture, fixtures, furnishings, and equipment of a motel located at 50 Sixth Street in Bay City, along with the leasehold interest in and improvements upon that property. Khatiwala executed a

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security agreement and a promissory note in favor of Imperial in the amount of $160,000, payable over 25 years with 10% annual interest on the unpaid balance. A 1984 amendment to the note raised the interest rate to 10.5% and re-amortized the payment schedule. Neither the original note nor the amendment (collectively, the "Khatiwala Note") contained an acceleration clause, although the final note automatically raised the interest rate to 11% should Khatiwala transfer his interest in the property.

In the ensuing years, apparently, Khatiwala transferred his rights in the motel and obligations under the Khatiwala Note to Jay Ambe Corp. ("Ambe"). In September 1987, Mainstream Capital Corp. ("Mainstream") purchased the motel from Ambe, at which time it executed a note in favor of Ambe in the amount of $318,000. This "Mainstream Note," which gave Ambe the right to accelerate Mainstream's debt in the event of default, provided that Mainstream assumed Ambe's debt payable to Imperial based on the Khatiwala Note, on which $153,095.81 in principal remained outstanding. Mainstream agreed to make its payments to Ambe, with Ambe to remit payments to Imperial in accordance with the terms of the Khatiwala Note. This sort of arrangement is known in the trade as "wrap-around" financing because, as here, a promissory note encompasses a promise to pay an amount equal to a prior existing debt plus additional funds advanced by a second lender. See Mitchell v. Trustees of United States Real Estate Inv. Trust, 375 N.W.2d 424, 428 (Mich. Ct. App. 1985).

In 1989, Mainstream defaulted on its obligation to Ambe under the Mainstream Note, but Ambe did not accelerate the indebtedness. On September 9, 1990, Mainstream and Arthur P. Dore, then acting "only as agent for a corporation then in existence or to be formed" (presumably Dore Development Co.), entered into a "Purchase Agreement" whereby Dore promised to purchase the motel from Mainstream for a total of $550,000. This purchase price included a cash component, a promise concerning services to be rendered, and the assumption of five separate debts. With respect to two of these debts, the Purchase Agreement provided: "F) The assumption of the principal balance of the outstanding obligation as is evidenced by a Note and Mortgage due to [Imperial]," a copy of which was attached, and "G) The assumption of the principal balance of the outstanding obligation as is evidenced by a Note as amended and extended due to Jay Ambe Corp.," a copy of which was attached. Thus, the parties planned to have Dore Development Co.'s obligation wrap around both the Khatiwala Note and the Mainstream Note. The Purchase Agreement required Dore Development Co. to ascertain from Imperial the amount of debt due and outstanding under the Khatiwala Note.

Ambe and Dore Development Co. closed their transaction on November 20, 1990. As part of the consideration called for by the Purchase Agreement, Ambe and Dore Development Co. executed a "Debt Assumption Agreement," effective November 20, 1990, by which Dore Development assumed Mainstream's obligations. Mainstream was not a party to this agreement, nor was Imperial. Jay Ambe Corp. and Dore Development Co. executed the Debt Assumption Agreement, as did Arthur P. Dore as guarantor. As of November 20, 1990, $146,240.48 in outstanding principal remained due on the Khatiwala Note, with interest accruing at 11%. Under the Mainstream Note, Mainstream owed Jay Ambe Corp. $30,000 in principal, plus interest and a late fee, for a total indebtedness of $38,798.18. By the Debt Assumption Agreement, Ambe amended the Mainstream Note, and Dore Development

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Co. assumed it as amended. The provisions "relating to payments to [Imperial] . . . remain[ed] unchanged." Dore Development Co. promised to repay the full $38,798.18 that Mainstream owed to Ambe by paying $10,000 immediately and the remainder in installments over time. Arthur P. Dore personally guaranteed performance of Dore Development Co.'s obligation.

As Dore Development and Ambe prepared for their November 20th closing, Imperial sent a fax to Dore Development Co.'s attorney, Kenneth Schmidt, on November9, 1990. Signed by Imperial's Controller and Assistant Secretary, the transmission stated, "Ken, included are the...

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