Kukla v. Perry

• Citation: 105 N.W.2d 176,361 Mich. 311
• Decision Date: 16 September 1960
• Docket Number: No. 75,75
• Parties: Mary KUKLA, formerly known as Mary Pabis, Plaintiff-Appellee, v. Alexander P. PERRY and West Dearborn Motor Sales, Inc., a Michigan corporation, Defendants-Appellants.
• Court: Michigan Supreme Court

Page 176

105 N.W.2d 176

361 Mich. 311

Mary KUKLA, formerly known as Mary Pabis, Plaintiff-Appellee, v. Alexander P. PERRY and West Dearborn Motor Sales, Inc., a Michigan corporation, Defendants-Appellants.

No. 75.

Supreme Court of Michigan.

Sept. 16, 1960.

Joseph H. McMicken, Michael J. Hand, Detroit, for plaintiff and appellee.

Arthur C. Lumley, Detroit, for defendant and appellant Alexander P. Perry, Charles H. King, Detroit, of counsel.

Before the Entire Bench, except SOURIS, J.

SMITH, Justice.

This is a suit in equity brought by the plaintiff, Mary Kukla, for various accountings by the defendant, Alexander P. Perry, for cancellation of various items of indebtedness and mortgages securing the same, and for placing in receivership West Dearborn Motor Sales, Inc., control of which had passed from her to the defendant. The defendant has appealed from an adverse decree of the chancellor.

The plaintiff was one of the incorporations of West Dearborn Motor Sales, Inc., a Michigan corporation. The other incorporators were Ernest Pabis, the plaintiff's son, and Raymond Beeler. The original subscribed capital was $2,000, consisting of 100 shares of common stock, of which the plaintiff held 50, Ernest 25, and Beeler 25. Later in 1945 Ernest conceived the idea of entering the automobile sales business and was introduced to the defendant by a mutual acquaintance. Ernest sought the defendant to assist him in procuring a loan to build the showroom and establish the business. This the defendant did by securing a building loan from the Guardian Life Insurance Company.

Before proceeding further in our review of the facts, a basic issue must be considered. This is the nature of the relationship that existed between the defendant and the plaintiff from the time of the formation of West Dearborn Motor Sales, Inc., until it ceased doing business in 1954. The plaintiff maintains that the defendant was during all this period her attorney and counsellor. This the defendant denies, claiming, in brief, that 'he was not her attorney or the attorney for the corporation except in connection with certain specific transactions, and that he was not bound by the obligations of an attorney to his client when engaged in the various financial transactions here.'

The chancellor concluded that the defendant was the attorney of the plaintiff and, later that of the corporation, 'from the first contract.' He held, in part, that:

'* * * during all this time, the evidence is convincing that the plaintiff considered defendant Perry to be her attorney and also the attorney for West Dearborn Motor Sales, Inc., of which he also became an officer and director in January of 1948. There is no evidence that defendant Perry ever did anything to negative the idea that he was their attorney; that, in connection with any of his financial and insurance transactions with plaintiff and the corporation, he ever advised the plaintiff or her son, Ernest Pabis, that his interests might be adverse to theirs or those of the corporation and that independent advice should be sought or other counsel consulted.'

We agree, as the chancellor stated, that this relationship 'was fostered rather than abated by defendant Perry. It did not wink on and off, dependent on whether he was negotiating for them, drafting documents for them, giving them advice, selling insurance to them, or engaging in a financial transaction with them.' The layman does not see the attorney remove his counsellor's hat and don that of the insurance man, or the shrewd businessman, or the lender of money. The uninformed regard the attorney as just that especially when he is met in the same surroundings, regarding the same business transactions, and without any semblance of warning that he is anything but their counsellor. As we have before stated, the attorney who assumes the double position of purchaser and confidential legal adviser is bound to observe the utmost good faith towards the party with whom he is dealing. Payne v. Avery, 21 Mich. 524; Coveney v. Pattullo, 130 Mich. 275, 89 N.W. 968. The attorney not only has duties of care and professional skill, but he must also conduct himself in a spirit or loyalty to his client, assuming a position of the highest trust and confidence. Rippey v. Wilson, 280 Mich. 233, 273 N.W. 552. His position is not one 'measured by the rule of dealing at arm's length.' Id., 280 Mich. at page 243, 273 N.W. at page 555. In addition to this, in all dealings between the attorney and the client, the burden is upon the attorney to show full information and freedom from restraint on the part of the client. If he cannot produce evidence which puts the transaction beyond reasonable controversy or question, it will be set aside and he will be held as a trustee for his client. McIntosh v. Fixel, 297 Mich. 331, 297 N.W. 512. It is in this light that we must review the transactions which took place between the parties themselves and the corporation.

One of the first transactions was the formation of West Dearborn Motor Sales, Inc., preparation and filing of the articles of incorporation, preparation of the stock certificates and stock record, drafting the by-laws and minutes and related matters. Soon after this occurred the first transaction to be examined by us. In the fall of 1947, Beeler wished to leave the corporation and sought to dispose of his stock. The plaintiff and Ernest agreed to purchase his 25 shares for $35,000. In regard to financing this transaction, they consulted the defendant, who 'thought it was outrageous, knowing the financial condition of the corporation and seeing the statements.' The transaction was consummated, however, after the plaintiff and Ernest had given Beeler cash and automobiles amounting to $10,334. The balance of $24,666 was represented by a promissory note. The defendant agreed to lend this money to the plaintiff and Ernest but not by a direct loan. It was accomplished by a note executed by plaintiff and Ernest as makers and Beeler as payee, and by an agreement which contained a clause providing for the the endorsement in blank by Beeler of his stock certificate. This note the defendant purchased from Beeler. The note and agreement were executed on June 10, 1948. It was on June 12th, however, that defendant paid Beeler the amount of the note and also on that same day the stock certificate was endorsed. The certificate was kept by the defendant in his office, contrary to the agreement a clause providing for the endorsement the plaintiff and Ernest.

Pending the purchase of this stock, the defendant was elected to Beeler's office in the corporation--vice-presidency. On January 5, 1949, defendant had 25 shares of stock of the corporation transferred on the stock records to himself. This stock 'could only have been that originally held by Beeler.' 'There is no evidence that this was done as nominee for the plaintiff and Ernest Pabis; nor is there any evidence that it was by way of foreclosure of a pledge.' For the moment, we will leave this transaction, to consider another closely related to it.

In December, 1949, the corporation was in need of working capital and, in addition, the plaintiff and Ernest were in default on their Beeler note, held by the defendant. the defendant agreed to rewrite the Beeler note to keep them out of default. A new note for $23,900 was executed by the plaintiff, Ernest and the corporation. This figure was arrived at by deducting the 3 payments which had been made on the note and adding accured interest. The new note was secured by 2 real mortgages, one on the corporation's property and one on a bar owned by plaintiff. In addition, a chattel mortgage was referred to in the note, but the defendant in his brief conceded that this is an error, for 'no chattel mortgage was executed incident to this note.'

On the same date the defendant issued to the plaintiff, Ernest, and the corporation, 2 checks in the amount of $10,000 and $8,000. In return the plaintiff, Ernest, and the corporation executed to the defendant a promissory note in the amount of $18,000. The plaintiff also executed 2 real mortgages, again on the property she owned on Michigan avenue on which the salesroom was situated, and on the bar she owned. The corporation, in addition, executed a chattel mortgage on 'all its property, including the business, good will, trade name, dealership franchise, leasehold interest in the Michigan avenue property, and all its stock furniture, fixtures, tools and equipment.' More regarding this chattel mortgage will appear later.

In scrutinizing the transaction involving the Beeler stock, the trial chancellor made a careful analysis of the conflicting and irreconcilable testimony, concluding as follows:

'From all the evidence presented, the court is convinced that Perry, from the date of the transfer, if not before, considered the stock his--at least, he so conducted himself in his dealings thereafter. The consideration therefor must have been at least satisfaction of the debt of the plaintiff and Ernest therefor, if not more.

* * *

* * *

'Further, to hold other than that Perry took the stock in satisfaction of the indebtedness for its purchase is to brand Perry a converter of the stock.

'This court cannot give credence to the implausible story of defendant Perry that the twenty-five shares were given to him as consideration for his forebearing to bring action to collect on the Beeler note, with the understanding they would pay when able to do so. * * *

'If Perry's holding of the stock could be considered, originally, as a pledgee thereof, the manner of its appropriation by him was a violation of the Michigan statute governing foreclosure of pledges. Mich.Sts.Ann., Sec 19.411 (CL 1948, sec. 442.301). Unless the same be waived by agreement of the parties, a sale or disposition of pledged stock without notice to the pledgor and without a public sale is a conversion of the stock. Feige v. Burt, 118, ...