Philips Industries, Inc. v. Smith

• Decision Date: 21 May 1979
• Docket Number: Docket No. 77-5230
• Citation: 282 N.W.2d 788,90 Mich.App. 237
• Parties: PHILIPS INDUSTRIES, INC., an Ohio Corporation and Mobil Temp, Inc., an Ohio Corporation, Plaintiffs-Appellees-Cross Appellants, v. Charles SMITH and Lois A. Smith, jointly and severally, Defendants- Appellants- Cross Appellees. 90 Mich.App. 237, 282 N.W.2d 788
• Court: Court of Appeal of Michigan — District of US

Page 788

282 N.W.2d 788

PHILIPS INDUSTRIES, INC., an Ohio Corporation and Mobil Temp, Inc., an Ohio Corporation Plaintiffs-Appellees-Cross Appellants, v. Charles SMITH and Lois A. Smith, jointly and severally Defendants- Appellants- Cross Appellees.

Docket No. 77-5230.

90 Mich.App. 237, 282 N.W.2d 788

Court of Appeals of Michigan.

May 21, 1979.

Rehearing Denied July 26, 1979.

Released for Publication Aug. 22, 1979.

[90 MICHAPP 239] Robert G. Corace, Detroit, for defendants-appellants-cross appellees.

Bayer, Gornbein & Kaplan by Robert B. Bayer and Barbara Klarman, Southfield, for plaintiffs-appellees-cross appellants.

Before CYNAR, P. J., and HOLBROOK and RILEY, JJ.

RILEY, Judge.

A full understanding of the present suit requires a detailed exposition of its labyrinthine factual history.

By complaint filed April 22, 1974, plaintiffs allege that on March 15, 1966, defendants, as landlords, entered into a lease with Mobil Temp, Inc., a Michigan corporation (hereinafter referred to as Mobil Temp of Michigan) as tenant. Under the terms of the lease, defendants agreed to construct a factory building upon property owned by them at 11871 Grand River Avenue, Brighton, Michigan, and to lease said building to Mobil Temp of Michigan. The term of the lease was for a period of "10 years from and after the time when the building to be erected thereon is completed". A monthly rental, equal to 1/12Th times 9 percent of the actual cost of the land, building and improvements, was to be paid in advance.

The lease provided the tenant with an option to purchase the property and its improvements for a price equal to the total cost of the land, buildings and improvements, plus 10 percent of that total cost. Said option could be exercised by the tenant at any time during the term of the lease when not in default in the performance of its terms.

The subject lease further contained a provision prohibiting assignment or sublease of the premises absent written consent of the landlord.

On March 31, 1969, after obtaining defendants' consent, Mobil Temp of Michigan assigned its [90 MICHAPP 240] tenant's interest in the lease to Mobil Temp, Inc., an Ohio corporation, wholly owned by Philips Industries (hereinafter both referred to as plaintiffs).

The complaint further alleged that plaintiffs sought to exercise their option to purchase the subject property after defendants refused to consent to a further assignment of the lease. Plaintiffs requested that defendants deliver to them an itemized statement, made under oath, setting forth the cost of the land, buildings, and improvements, showing in each case the date of acquisition, the person from whom acquired, and the defendants' cost of acquisition.

Convinced by a subsequent exchange of letters that defendants were unduly dilatory, plaintiffs commenced a civil action on April 22, 1974, requesting, Inter alia, damages representing an overpayment of rent due, a full and complete accounting of the actual cost to defendants of the land and improvements, and a preliminary injunction awarding the above relief. Notice of deposition and production of documents was also filed contemporaneously with plaintiffs' complaint.

Defendants answered, affirmatively asserting, among other things, that plaintiffs had breached the lease by abandoning and failing to maintain the premises and had attempted to assign or sublease the property without the consent of the landlords.

A hearing on plaintiffs' requested injunction was held on April 29, 1974, at which time the court denied plaintiffs' petition, but instructed defendants to supply any account records relative to the cost of the building.

On May 8, 1974, defendants filed with the court [90 MICHAPP 241] a Bill of Particulars outlining the cost of constructing the subject property.

At a hearing on May 13, counsel for plaintiffs advised the trial court that the portion of their petition which requested the documents pertaining to thecost of the building should be treated as a motion to produce documents pursuant to GCR 1963, 310.1(1). The court, at defendants' request, limited the scope of plaintiffs' discovery to certain relevant matters, including copies of invoices, receipts, cancelled checks, income tax returns from 1966, contracts pertaining to the purchase of materials or construction of the buildings, and all insurance policies on the building since 1966. The court indicated that defendants should comply with said order within a reasonable period of time.

Defendants filed additions to their Bill of Particulars on May 24, 1974, revealing that the exhibits were still incomplete but that additional documents would be forthcoming. On June 10, they advised that they did not have copies of all the income tax returns sought by plaintiffs.

Ten days later, plaintiffs moved the trial court to impose sanctions pursuant to GCR 1963, 313 on the grounds that defendants had refused to fully comply with the trial court's May 13, 1974, order. The motion did not specify what sanctions the plaintiffs were seeking.

At a hearing on June 24, concerning plaintiffs' motion for sanctions, still unspecified, defense counsel indicated that the defendants did not keep the cancelled checks requested by plaintiffs, but that the tax return would be obtained from the Internal Revenue Service, although it would require some time. At the conclusion of the proceeding the court made the following statements to defense counsel:

[90 MICHAPP 242] "THE COURT: Have the man produce the last four income tax returns by Friday together with an order to the Internal Revenue Service for the true copies of the tax returns from 1966 to that date or I'll entertain an order holding him in contempt of Court, and most likely to default them.

"THE COURT: I am saying: they will be here by Friday or your man will be in contempt. That will be the twenty-eighth."

Four days later, on June 28, 1974, a written order to produce the requested documents was signed by the trial judge. The order provided that, in the event the order was not fully complied with, defendants would be held in contempt of court, their default would be entered and plaintiffs would be permitted to take a default judgment. A copy of the order was not mailed to defendants' attorney until at least July 10, 1974.

On July 22, plaintiffs filed an entry of default and affidavit in support thereof, averring that while they believed defendants' tax returns for 1970 through 1973 had been delivered to the court, the defendants had failed to produce a copy of an order to the Internal Revenue Service for the returns filed by defendants for 1966 through 1969.

Further proceedings were held upon plaintiffs' motion for default judgment on July 29, 1974. Defendants' counsel argued that the default should be set aside on the grounds that defendants' failure to comply with the trial court's June 28 order was attributable to defense counsel's misunderstanding of the trial court's oral order of June 24; that defendants did not approve the written order before it was entered on June 28, 1974, and therefore were not aware of the specifics of the trial [90 MICHAPP 243] court's order. ¹ The lower court concluded the hearing in the following manner:

"THE COURT: Well, I think you (defendants) would have been in default on the 28th without an order. * * *."

Proceedings were set for August 5, 1974, on the possible default judgment. At the hearing, counsel for defendants orally moved the court to set aside the default, and again reiterated that he understood the trial judge at the June 24 hearing to have ordered defendants to provide the court with only their 1970 through 1973 income tax returns on or before June 28, 1974. Counsel further maintained[90 MICHAPP 244] that he became aware other documents were required when he received a photostatic copy of the June 28 order approximately two weeks later. Thereafter, he advised defendants that they should order from the IRS copies of their tax returns for 1966 through 1969. To his knowledge defendants had received no prior communication regarding the need for returns prior to 1970. Defendant Charles Smith testified in a manner substantially corroborating his attorney's assertions.

The hearing concluded with a dispute as to the context of the court's oral order of June 24, 1974, the propriety of entering default judgment on the court's June 28, 1974 order, and the nature of the default proceeding. The trial judge indicated that the default would stand until it was set aside or perfected. Defense counsel stated that he would file a motion to set aside the default, which motion was filed on August 12, 1974.

In a written opinion filed October 24, 1975, the court denied defendants' motion to set aside the default and granted plaintiffs' motion for default judgment. An order to that effect was entered December 1, 1975, and filed nine days later. ²

Several issues are raised on appeal, only one of which we need consider at length. Defendants claim that the lower court erred in failing to set aside plaintiffs' entry of default and in granting default judgment. We agree, despite our belief that the actions of defendants and their original attorneys in the case at bar could be characterized as less than a good faith effort to expedite the litigation.

GCR 1963, 520 governs default proceedings. GCR 1963, 520.1 authorizes the Entry of default by a party to the action:

[90 MICHAPP 245] ".1 Entry. When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules and that fact is made to appear by affidavit or otherwise, the person seeking the relief or his attorney shall enter the default of that party by filing with the clerk a statement called a default, signed by the person seeking the relief or his attorney, stating that default is entered and stating the reasons therefor."

GCR 1963, 520.2(2) provides for a judicially imposed...