Marketos v. American Employers Ins. Co., Docket No. 211775.

• Decision Date: 11 July 2000
• Docket Number: Docket No. 211775.
• Citation: 612 N.W.2d 848,240 Mich. App. 684
• Parties: George J. MARKETOS and Mark Video Enterprises, Inc., Plaintiffs-Appellants, v. AMERICAN EMPLOYERS INSURANCE CO., Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

612 N.W.2d 848

240 Mich. App. 684

George J. MARKETOS and Mark Video Enterprises, Inc., Plaintiffs-Appellants, v. AMERICAN EMPLOYERS INSURANCE CO., Defendant-Appellee.

Docket No. 211775.

Court of Appeals of Michigan.

Submitted December 15, 1999, at Grand Rapids.

Decided April 28, 2000, at 9:25 a.m.

Released for Publication July 11, 2000.

Honigman Miller Schwartz and Cohn (by I. W. Winsten), Detroit, and Kantner and Associates (by Perry M. Kantner and Robert W. Roddis), Ann Arbor, for the plaintiffs.

Cozen and O'Connor (by Thomas McKay, III, and Kathie D. King), Philadelphia, PA, and Miller, Canfield, Paddock & Stone, PLC (by Allyn D. Kantor), Ann Arbor, for the defendant.

Before: FITZGERALD, P.J., and HOEKSTRA and MARKEY, JJ.

HOEKSTRA, J.

Following an extensive fire in January 1986 at plaintiffs' Ann Arbor facility, plaintiff George Marketos filed a claim for insurance proceeds on his own behalf and on behalf of plaintiff Mark Video Enterprises, Inc. Defendant, plaintiffs' insurer, denied the claim several months after plaintiff Marketos submitted to an examination under oath, and almost one year after the fire, on the basis that the fire was arson and that plaintiff Marketos had either set the fire or was responsible for setting the fire. Plaintiffs sued for the insurance proceeds. After an extended procedural history, with the original trial proceeding in 1990 followed by appeals to this Court and the Michigan Supreme Court,¹ plaintiffs' action was retried in September 1997 and resulted in a judgment for plaintiffs. Before entry of judgment, the trial court made several rulings, which plaintiffs now appeal, including allowing a setoff for proceeds paid to plaintiffs' mortgagee, denying penalty interest, and denying mediation and frivolous-defense sanctions. We affirm in part, reverse in part, and remand.

I

A brief history of the events leading up to the lawsuit follows. In late 1982, Marketos negotiated the purchase of NET Enterprises for $100,000 from his former employer, a New York television station. NET Enterprises' primary business was to duplicate television program tapes and distribute them to local stations. Its properties included a duplication facility in Ann Arbor and a small studio/editing facility in Livonia. After acquiring the properties, Marketos changed the name of the company to Mark Video.

At the time Marketos purchased Net Enterprises, it was losing money and owed the Internal Revenue Service (IRS) more than $2 million in back taxes. In spite of this financial predicament, Marketos believed that he could make the company profitable again, and his only risk was the loss of his initial $100,000 investment. When Marketos purchased NET Enterprises' stock, he did not become personally liable for the corporation's debts. Marketos negotiated a long-term payment plan with the IRS, including monthly payments and an understanding that, if Mark Video became profitable, the IRS and Marketos would negotiate for the IRS to receive a percentage of the profits.

Initially after Marketos took over, the business got worse, not better. For example, severe cash-flow problems existed, creditors were not paid on time, and Marketos was forced to personally guarantee a debt to 3M Corporation for video tapes after 3M sued Mark Video on that debt. Eventually, however, Mark Video's financial position improved to the point where it could obtain bank loans. Marketos obtained a loan for approximately $450,000 from First of America in the form of a mortgage, which was secured by the Ann Arbor property and was personally guaranteed by Marketos.

From 1983 to the time of the fire, Mark Video succeeded in cutting its costs, and it reduced insurance coverage to a minimum because it was basically covering the IRS, to which the largest portion of Mark Video's debts were owed. Mark Video acquired approximately $1 million worth of new equipment, increased its revenues by more than $1 million, and its net losses decreased by approximately $900,000. In August 1985, Mark Video actually enjoyed its first profitable month, and two other profitable months followed before the close of 1985.

On the evening of January 4, 1986, a fire alarm went off in Mark Video's Ann Arbor facility. Despite the efforts of firefighters, the building and most of the equipment therein were destroyed. Marketos filed an insurance claim that defendant denied on the basis that Marketos was an arsonist. Marketos thereafter sued for the insurance proceeds. Defendant subsequently paid First of America the balance of plaintiff's mortgage because of the standard mortgage clause in the insurance contract and it took an assignment of the mortgage.

At trial, firefighters testified that the characteristics of the fire did not indicate arson. Further, the firefighters' efforts to contain the fire were hindered where, as a result of an oversight, the gas and electricity to the building were not turned off until several hours into the fire and where the fire spread beyond the firewall when the firefighters left the south fire door propped open when they evacuated the building after an evacuation alarm sounded.

The deputy fire marshal testified that on the basis of his eyewitness observation of the fire and his investigation of the scene days later, having found no evidence of a low burning fire in the storage area or evidence that accelerants had been used, he determined that the fire was a high fire of undetermined origin. To the contrary, defendant's expert concluded that on the basis of his own investigation of the scene after the fire, the fire was an arson fire.

In making this conclusion, defendant's expert partly based his opinion on the containers he found at the scene, some of which smelled like paint thinner, some of which were uncapped, and some of which were surrounded by flat cardboard boxes in the storage area; twisted newspapers and cases of toilet paper in the vicinity; and spalling on the concrete floor, i.e., the floor had broken up as a result of intense heat. He also determined that the north fire door had been propped open before the fire because a mop handle was wedged under the open door and tape cases were stacked neatly against it. However, Mark Video's maintenance supervisor testified at trial that upon his arrival at the fire approximately fifteen minutes after the alarm sounded, he confirmed that the north fire door was closed. A firefighter testified that he did not see the north fire door, and had it been open, he would have noticed it. Another firefighter and the deputy fire marshal testified that on the basis of the conditions, including the intensity of the smoke and its movement, they believed that the north fire door was closed when firefighters arrived. A maintenance engineer at Mark Video confirmed that approximately one hour into the fire the north fire door was closed. He also testified that paint, paint thinner, and cleaning supplies, including a mop, were stored in the storage area, and that there had been trouble with the south furnace.²

The jury returned a verdict in favor of plaintiffs in the amount of $1,707,709. The trial court adjusted the verdict by $456,073.15 because defendant had paid $455,073.15 to First of America, the insured's mortgagee, and because Mark Video had a $1,000 deductible. The trial court denied plaintiffs penalty interest, mediation sanctions, and frivolous-defense sanctions.

II

A

On appeal, plaintiffs first argue that the trial court erred in granting defendant a $455,073.15 setoff from the verdict. Plaintiffs claim that defendant was not entitled to a setoff of the amount that defendant paid to the mortgagee after the fire and pursuant to the standard mortgage clause for multiple reasons, including that defendant never asserted a setoff defense or counterclaim,³ such setoff was time-barred, and defendant had extinguished, discharged, or canceled the note that formed the basis for the purported setoff. In essence, plaintiffs assert that defendant was not entitled to a setoff because defendant failed to pursue payment from the mortgagor, i.e., plaintiffs, based on the assignment of the mortgage obtained by defendant when defendant paid the mortgagee. Plaintiffs argue that defendant was precluded from pursuing a setoff because it did not act to enforce or protect its interests in the mortgage like a traditional mortgagee is required to do. Plaintiffs contend that the insurance policy language makes clear that when defendant paid First of America, it had two choices: either to pay the mortgage debt and become subrogated to First of America's rights or to purchase the mortgage by paying First of America and taking assignment of the mortgage. According to plaintiffs, defendant chose the second option, became the mortgagee, and was required to take action on the mortgage as a mortgagee. Further, plaintiffs advance several arguments to support their theory that defendant, as a mortgagee, extinguished its rights before the setoff was requested and given. Plaintiffs argue that defendant violated the statute of limitations, M.C.L. § 600.5807; MSA 27A.5807, when it did not seek to enforce the mortgage within the applicable time limits. In the alternative, plaintiffs contend that the mortgage debt was satisfied by a quiet title action in 1990 when another party purchased the property or, at the latest, the debt was discharged by defendant following trial but before judgment was entered. None of these arguments need be addressed because they stem from the faulty premise that once defendant took assignment of the mortgage, it was required to act on the mortgage like a traditional mortgagee.

In the present case, the insurance policy that defendant issued to plaintiffs included a standard mortgage clause.⁴ See Federal Nat'l Mortgage Ass'n v. Ohio Casualty Ins. Co., 46 Mich.App. 587, 588-590, 208 N.W.2d 573 (1973). A standard mortgage clause constitutes a separate and distinct contract between...