Fred J. Schwaemmle Const. Co. v. Department of Commerce, Corp. and Securities Bureau
| Citation | 360 N.W.2d 141,420 Mich. 66 |
| Decision Date | 28 December 1984 |
| Docket Number | Docket No. 68656,No. 1,1 |
| Parties | FRED J. SCHWAEMMLE CONSTRUCTION COMPANY, a Georgia corporation, and Westinghouse Electric Corporation, a Pennsylvania corporation, Plaintiffs-Appellants, and Burton Abstract and Title Company, St. Paul Title Insurance Company, and Kelly Mortgage and Investment Company, Intervening Plaintiffs-Appellants, v. DEPARTMENT OF COMMERCE, CORPORATION AND SECURITIES BUREAU, Defendant-Appellee, v. Harry BADER, George L. Phillips, Dr. Phyllis Helcher, M.D., Arthur Hafke and Warren C. Tyner, on behalf of themselves and all of the Limited Partners of Foote Hills Associates, a Michigan limited partnership, Intervening Defendants-Appellees, and Leonard J. Grabow and Gordon J. Ginsberg, Intervening Defendants. Calendar420 Mich. 66, 360 N.W.2d 141, Blue Sky L. Rep. P 72,151 |
| Court | Supreme Court of Michigan |
Paul A. Ward, Gary P. Schenk, Grand Rapids, for Burton Abstract and Title Co., St. Paul Title Ins. Corp. and Westinghouse Elec. Corp.
Peter W. Steketee, Grand Rapids, for Fred J. Schwaemmle Const. Co.
Dennis M. Rauss, Detroit, for Kelly Mortg. and Inv. Co.
James G. Halverson, East Lansing, for intervening defendants-appellees.
This appeal involves the disbursement of $125,000, plus interest, which remains in an escrow account. The issue of first impression presented here is whether the Michigan Corporation and Securities Bureau has the authority to impose conditions concerning the disbursement of funds acquired from the sale of a registered security, beyond the condition that these proceeds be impounded until the issuer of the security receives a specified amount from the sale. We hold that the bureau has no such authority.
In 1972, Robert L. Foote decided to develop a 182-unit apartment complex in Kentwood, Michigan. Foote was the principal and owner of Springfield Corporation, a general contracting firm which was ultimately retained as the general contractor for the project. Foote attempted to develop the project with his own resources, but later decided to make a limited partnership offering to finance the completion. The underwriter of the offering was Financial Services Corporation of America (FSC). The limited partnership was named Foote Hills Associates. Foote was designated the general partner and FSC Properties the only special Class B limited partner. Six hundred sixty-seven Class A limited partnership interests were to be offered at $1,000 per unit.
This offering was properly registered by qualification pursuant to the Michigan Uniform Securities Act, M.C.L. Sec. 451.501 et seq.; M.S.A. Sec. 19.776(101) et seq. On April 16, 1973, the Corporation and Securities Bureau of the Michigan Department of Commerce authorized Foote Hills Associates and FSC (issuer) to make the offering, subject to several conditions. Condition 3 provided in pertinent part:
"The issuer shall deposit or cause selling broker-dealer to deposit and leave with the depositary until further order of the Bureau in a special impoundmend [sic ] account 100 percent of the gross receipts accepted, being 100 percent of the offering price, derived from the offer of securities pursuant to this registration statement, subject to the rules of the Bureau and the terms of an impoundment agreement satisfactory to the Bureau between the issuer and the depositary". (Emphasis added.)
The impoundment (escrow) agreement between FSC (broker-dealer/underwriter) and Michigan National Bank (escrow agent), dated April 12, 1973, contained a schedule for the disbursement of the impounded proceeds:
A similar disbursement schedule was included in the offering circular and limited partnership agreement, which were given to the prospective limited partners.
All of the 667 limited partnership interests were sold to the intervening defendants. The first two disbursements were subsequently made pursuant to conditions 5(i) and (ii) and under the bureau's orders.
In the spring of 1974, it became apparent that Springfield Corporation would be unable to complete the project. FSC hired plaintiff Fred J. Schwaemmle Construction Company as a consultant. Extensive negotiations ultimately led to the complete withdrawal of Foote and Springfield Corporation from the project and the substitution of Schwaemmle as the general contractor. On May 30, 1974, a construction completion agreement was entered into by Foote Hills Associates, intervening plaintiff Kelly Mortgage and Investment Company (the construction mortgage lender), and Schwaemmle. The parties agreed that Schwaemmle would receive a $75,000 fee, over and above the costs of construction, for completing the project. Kelly Mortgage subsequently agreed to waive past defaults on the nearly $2 million construction loan, declined to commence foreclosure proceedings, and advanced another $150,000 to complete the project.
As part of its administrative duties as the special limited partner, FSC Properties sent a letter to the limited partners in May, 1974, advising them of these developments. Specifically, the partners were told that Foote was unable to complete construction and that the funds from the original construction loan were insufficient. They were warned that it might be necessary to release the final $125,000 limited partners' capital toward completion of construction prior to the closing of a permanent loan. If this became necessary, the partners would have to approve this change in the disbursement schedule since it was included in the offering circular and limited partnership agreement. It was also noted that the permanent loan commitment had expired in March, 1974, and that permanent financing might not be obtained until the end of 1974 or early 1975. Nevertheless, the partners were assured that there was hope for the project on the basis of Schwaemmle's successful construction record and Kelly Mortgage's willingness to cooperate.
Schwaemmle subsequently completed construction in the fall of 1974. On September 12, 1974, FSC Properties notified the limited partners of this progress. After briefly referring to the May report, the letter stated that the partnership had to advance an additional $125,000 from the funds being held for Springfield Corporation pursuant to Sec. 8.5 of the limited partnership agreement. Although Springfield had agreed to relinquish its claim to this money because it had not completed the project, at least 51% of the Class A limited partners had to approve the change. The limited partners were asked to complete an enclosed ballot concerning the amendment of Sec. 8.5, which would purportedly allow the funds to be paid toward the actual costs of completing the project.
All of the limited partners agreed to this modification. However, the Corporation and Securities Bureau was never notified of this proposed amendment before the ballots were sent out. Plaintiffs maintain that after the ballots were returned, they petitioned the bureau in November, 1974, for the disbursement of the final $125,000 from the escrow account. That petition apparently was never acted upon.
Even though construction was completed and the apartment units were leased, permanent financing could not be obtained. In addition, some of the subcontractors, laborers, and materialmen had not been paid. 1 Kelly Mortgage foreclosed on its construction mortgage and purchased the complex in May, 1976, for approximately $3.5 million. In September, 1977, Kelly Mortgage sold the property for $2.75 million.
In late 1977, Schwaemmle petitioned the bureau for the release of the $125,000. It asserted that it had never been paid its $75,000 fee and that it had performed all of its contractual obligations. The bureau issued a preliminary order on November 22, 1977, directing that the remaining escrowed funds be returned on a pro-rata basis to the individual limited partners because a permanent loan commitment had never been obtained.
An administrative hearing was subsequently conducted. The hearing officer informed the parties at the outset that the only issues that would be determined were whether the terms of the escrow agreement had been met or waived and, if not, whether the limited partnership or the individual limited partners should receive the escrowed funds. The officer believed that he did not have the power to evaluate the parties' other equitable and legal claims to the fund. However, he did allow the parties to make a limited record for appellate purposes.
In an order dated January 25, 1978, the hearing officer upheld...
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