Matter of Bancroft Dairy, Inc.

• Decision Date: 23 April 1981
• Docket Number: 80-50,80-51 and 80-63.,80-48,Adv. No. 80-52,Bankruptcy No. M 80 00041,80-49
• Citation: 10 BR 920
• Parties: In the Matter of BANCROFT DAIRY, INC., a Michigan Corporation, Debtor. MICHIGAN MILK PRODUCERS ASSOCIATION, Plaintiff, v. In re BANCROFT MILK PRODUCTS, INC., a Michigan Corporation, Defendant. In re MENOMINEE IDEAL DAIRY CO., a Michigan Corporation, Defendant. In re CONSOLIDATED DAIRIES OF MICHIGAN, INC., a Michigan Corporation, Defendant. In re SOO CREAMERY, a Michigan Corporation, Defendant. In re CLOVERLAND CREAMERY, INC., a Michigan Corporation, Defendant. In re BANCROFT CREAMERY, INC., a Michigan Corporation, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Michigan

10 B.R. 920 (1981)

In the Matter of BANCROFT DAIRY, INC., a Michigan Corporation, Debtor MICHIGAN MILK PRODUCERS ASSOCIATION, Plaintiff, v. In re BANCROFT MILK PRODUCTS, INC., a Michigan Corporation, Defendant In re MENOMINEE IDEAL DAIRY CO., a Michigan Corporation, Defendant In re CONSOLIDATED DAIRIES OF MICHIGAN, INC., a Michigan Corporation, Defendant In re SOO CREAMERY, a Michigan Corporation, Defendant. In re CLOVERLAND CREAMERY, INC., a Michigan Corporation, Defendant. In re BANCROFT CREAMERY, INC., a Michigan Corporation, Defendant.

Bankruptcy No. M 80 00041, Adv. Nos. 80-52, 80-49, 80-48, 80-50, 80-51 and 80-63.

United States Bankruptcy Court, W.D. Michigan.

April 23, 1981.

David Vander Haagen, Lansing, Mich., for plaintiff.

Robert Bordeau, Marquette, Mich., for defendants.

OPINION

LAURENCE E. HOWARD, Bankruptcy Judge.

These adversary proceedings are before the court on motions to dismiss complaint or for summary judgment filed by each of the defendants. Since the issues involved are the same for each proceeding, this opinion should apply to all of the proceedings.

The debtor, Bancroft Dairy, Inc., filed a Chapter 11 petition on April 9, 1980. The case was later converted to Chapter 7 on November 26, 1980.

These adversary proceedings were filed by Michigan Milk Producers Association, a Michigan corporation (hereinafter MMPA) pursuant to order of this court dated May 21, 1980, authorizing MMPA to (1) collect balances owing on Bancroft Dairy, Inc.'s accounts receivable generated from sales made prior to April 9, 1980, and (2) to commence suit in this court against any such account debtor refusing payment. The defendants in these adversary proceedings are alleged Bancroft Dairy, Inc. account debtors.

Bancroft Dairy, Inc. executed a security agreement with MMPA on December 21, 1978. The agreement was amended on December 29, 1978. To secure its outstanding debt to MMPA, Bancroft Dairy, Inc. granted MMPA a security interest in all accounts (among other collateral items). Financing statement was filed with the Secretary of State on December 6, 1978.

According to affidavits filed by the defendants, Bancroft Dairy, Inc. and Bancroft Dairy-Newberry Inc. filed a complaint against the account debtors in Michigan Circuit Court for Delta County, on October 12, 1979. On or about December 7, 1979, a settlement was reached among the parties, and the state court action was dismissed with prejudice. MMPA was not a party in this litigation. Also on or about December 7, 1979, Bancroft Dairy, Inc. executed a "Release" of all claims it had against the account debtors, reciting a consideration of $45,000.00 and "other good and valuable considerations, including the matters set forth in that certain agreement between the parties dated December 1, 1979, . . . ".

Another defendant in the state court action was Alvin W. Weiland. The release agreement was signed by Weiland in the following capacities: for Bancroft Creamery, Inc. as Treasurer; for Cloverland Creamery, Inc. as Secretary; for Bancroft Milk Products, Inc., Soo Creamery, Inc., Consolidated Dairies of Michigan, Inc., Brookvale Dairy, Inc., and Menominee Ideal Dairy, Inc., as Secretary-Treasurer for each; and as an individual. Weiland's name also appears on Bancroft Dairy, Inc.'s Directors' resolution to give MMPA the security interest in accounts, dated December 21, 1978; Weiland signs as Treasurer and as a Director of Bancroft Dairy, Inc. Weiland also submitted an affidavit attached to the account debtors' brief saying he is an officer of each of the account debtors, that he had knowledge of Bancroft Dairy, Inc.'s execution of a security agreement on December 21, 1978, in MMPA's favor; and that at no time before the Chapter 11 petition was filed had any of the account debtors been instructed to pay MMPA directly.

MMPA filed Requests for Admissions (pursuant to Fed.R.Civ.P. 36(a)) addressed to the account debtors. Weiland signed the responses in each case. The responses contain admissions that Weiland was an officer and director of the account debtors at the time the security was given, and on December 1, and 7, 1979. Other admissions confirm Weiland was treasurer and a director of Bancroft Dairy, Inc. at the time the security was given.

The remaining admissions indicate that several terms of the agreement incorporated into the release have not been carried out.

Although the account debtors' motions are styled "Motions to Dismiss Complaint or in the Alternative for Summary Judgment," these motions are to be treated as motions for summary judgment since matters outside the pleadings have been presented to, and are being considered by, this court. Bankruptcy Rule 712(b)¹; Fed. R.Civ.P. 12(b); Bankruptcy Rule 756; Fed. R.Civ.P. 56. In Bohn Aluminum & Brass Corp. v. Storm King Corp., 303 F.2d 425 (6th Cir., 1962) the court stated:

"In ruling on a motion for summary judgment, the court must construe the evidence in its most favorable light in favor of the party opposing the motion and against the movant. Further, the papers supporting the movant are closely scrutinized, whereas the opponents\' are indulgently treated.

"It has been stated that: `The purpose of the hearing on the motion for such a judgment is not to resolve factual issues. It is to determine whether there is any genuine issue of material fact in dispute. . . . \'"

Here, MMPA is the non-moving party. However, MMPA is not contending that formal written notice of the assignment of accounts as security was sent from MMPA to the account debtors. On the other hand, there appears to be an issue of fact as to whether the terms of the agreement between Bancroft Dairy, Inc. and the account debtors were ever carried out: answers to MMPA's requests for admission by Alvin Weiland seem to suggest that many of the terms were not carried out.

DISCUSSION

1. Whether the state court's dismissal of account assignor's collection action with prejudice bars the assignee's action to collect the accounts in this court?

The account debtors claim that the state Circuit Judge's order dismissing Bancroft Dairy, Inc.'s action with prejudice bars MMPA from suing account debtors in this court on the assigned accounts. The bar arises under the doctrine of res judicata, according to the account debtors.

Under res judicata, a judgment on the merits in a prior suit involving the same parties or their privies bars a second suit based on the same cause of action. E.g. Lawlor v. National Screen Service Corporation, 349 U.S. 322, 75 S.Ct. 865, 99 L.Ed. 1122 (1955); ¶ 1 B Moore's Federal Practice (2d Ed.) ¶ 0.4051, p. 621. Michigan law also requires the former action to have been between the same parties or their privies, for the judgment to have res judicata effect in a later action. 14 M.L.P. Judgment § 163, p. 608 and cases cited therein. Since MMPA was not a part to the state court litigation, the state court dismissal can not bar MMPA's action in this court unless MMPA was in privity with Bancroft Dairy, Inc.

A privy is one who, after rendition of the judgment, has acquired an interest in the subject matter affected by the judgment through or under one of the parties, as by inheritance, succession, or purchase. Howell v. Vito's Trucking Co., 386 Mich. 37, 43, 191 N.W.2d 313 (1971) (emphasis supplied). "The successor is bound by a judgment adverse to his predecessor only if the transfer of interest occurred after commencement of the suit in which the judgment was rendered." 1 B Moore's Federal Practice (2d Ed.) ¶ 0.4111, p. 1257.

The assignment of the accounts to MMPA took place before the state court action was commenced. Thus under either the Federal or the State rule, MMPA is not considered to be in privity with Bancroft Dairy, Inc. with regard to the state court action. MMPA is not barred from pursuing this action in this court by the state court's dismissal of Bancroft Dairy, Inc.'s action against the account debtors.

2. Whether assignee is subject to account debtor's defense of release?

a. The Michigan U.C.C. provides:

"(1) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in section 9206 the rights of an assignee are subject to:

(a) All the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom; and

(b) Any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives notification of the assignment." M.C.L. 440.9318(1); M.S.A. 19.9318(1) (Callaghan, 1980, Supp.)

If the release could be considered a defense arising from the terms of the contract, it could be asserted against MMPA regardless of any notice to the account debtors. But if it is not considered a contract defense, it can only be asserted if it accrued before the account debtors received notification of the assignment.

Michigan case law on this question is sparse. In Dimmitt & Owens v. Realtek, 90 Mich.App. 429, 280 N.W.2d 827 (1979), the account debtor produced a release it had obtained from the assignor. However the debtor was seeking to use it to obtain a default judgment against the assignor, not as a defense against the assignee. The court's opinion reads:

"Realtek alleged in its cross-claim against Clover that it had received from Clover a release from "all liability arising out of the contract between the parties and for any and all work performed by the defendant". By its own terms, as pleaded by Realtek, the release only covered liability arising out of the contract between Realtek and Clover, and did not purport to cover liability arising out of the contract between Dimmitt & Owens and Clover. Under § 9318(3), Realtek\'s duty as an account debtor to pay Dimmitt & Owens, the assignee, was entirely separate from its duty under its contract with Clover, the assignor. Therefore, we conclude that Realtek failed to plead a release which applied to the instant

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