Smilansky v. Bros

• Decision Date: 01 June 1931
• Docket Number: No. 109.,109.
• Citation: 236 N.W. 866,254 Mich. 575
• Parties: SMILANSKY v. MANDEL BROS. et al.
• Court: Michigan Supreme Court

254 Mich. 575

236 N.W. 866

SMILANSKY

v.MANDEL BROS. et al.

No. 109.

Supreme Court of Michigan.

June 1, 1931.

Appeal from Circuit Court, Wayne County; in Chancery; Maurice H. McMahon, Judge.

Bill by Louis Smilansky against Mandel Bros., in which defendant filed a cross-bill making the Elless Company cross-defendant. From the decree, cross-defendants appeal.

Modified, and affirmed as modified.

Argued before the Entire Bench.

J. Shurly Kennary, of Detroit, for appellants.

Goodenough, Voorhies, Long & Ryan, of Detroit, for appellee.

FEAD, J.

As the pleadings finally stand, this suit is by cross-plaintiff Mandel Bros. for judgment against defendant Elless Company and plaintiff on certain promissory notes executed by them, and for decree of foreclosure of real estate mortgage given by plaintiff to secure the notes. Mandel Bros. had decree for the whole amount claimed.

The question is whether cross-plaintiff, a foreign corporation not authorized to do business in this state, may maintain the suit.

August 9, 1922, cross-plaintiff contracted to sell and install furniture, furnishings, decorations, etc., to an approximate amount of $230,000, in the Whittier Hotel at Detroit, owned by defendant. Plaintiff executed the contract on behalf of defendant and also personally to guarantee its performance. The specific items were to be listed on ‘Mandel Brothers' General Form Contracts,’ which by reference were made part of the parent contract. Further purchases were provided for on similar memoranda, which were to be likewise part of the agreement. Approximately $325,000 of purchases were so listed, the prices of the items appearing in the memoranda. The sum of $150,000 was paid on the contract and $150,000 of notes given before any goods were delivered.

In 1924, the Elless Company defaulted in payment of notes. December 18th, a new agreement was made, reciting that the debt was $139,000, that Elless Company claimed a credit of $6,000 and damages for improper work, and it was agreed that defendant and plaintiff should execute new notes for $139,000, $100,000 to be secured by mortgage executed by plaintiff, and that the claim for credit be adjusted by arbitration if they could not agree.

In 1926, payments were again in default. Mandel Bros. began suit against plaintiff and defendant in Chicago, but obtained no service on them, and garnisheed the proceeds of a bond issue on the Whittier Hotel. The court dismissed the suit, holding the fund not garnishable, and Mandel Bros. appealed. The parties negotiated and, on November 3d, after allowing a credit of $5,000, the notes and mortgage at bar, aggregating about $100,000, were executed. In consideration, all litigation between the parties was dismissed.

Cross-plaintiff states it was conceded in circuit court that part of the total account represented interstate business, part intrastate transactions, and two items, carpets and furniture, were in dispute, both of which it claims were interstate. Plaintiff and defendant do not attack cross-plaintiff's analysis of the account in this respect, except to contend that the furniture item was intrastate.

The first question is whether the adjustment of November, 1926, cleared the transaction of the statutory prohibition against cross-plaintiff maintaining the suit.

Under C. L. 1929, §§ 10118, 10120, a foreign corporation transacting business in Michigan, without having been admitted thereto, is subject to a penalty, as well as to C. L. 1929, § 14027, which reads: ‘Sec. 19. But when, by the laws of this state, any act is forbidden to be done by any corporation, or by any association of individuals, without express authority by law, and such act shall have been done by a foreign corporation, it shall not be authorized to maintain any action founded upon such act, or upon any liability or obligation, express or implied, arising out of, or made or entered into in consideration of such act.’

So far as the transaction at bar covered intrastate business, it was illegal in this state, and no action could be maintained upon it. Seamans v. Temple Co., 105 Mich. 400, 63 N. W. 408,28 L. R. A. 430, 55 Am. St. Rep. 457;People's Mutual Benefit Society v. Lester, 105 Mich. 716, 63 N. W. 977;Swing v. Cameron, 145 Mich. 175, 108 N. W. 506,9 L. R. A. (N. S.) 417,9 Ann. Cas. 332.

The rule, as stated in Comstock v. Draper, 1 Mich. 481, 53 Am. Dec. 78, is: ‘It is a well settled doctrine in the English and American books, that an illegal transaction cannot constitute a good consideration for a promise. If the connection between the original illegal transaction and the new promise can be traced, if the latter is connected with and grows out of the former, no matter how many times and in how many different forms it may be renewed; it cannot form the basis of a recovery, for repeating a void promise cannot give it validity.’ Rhoades v. Malta Vita Pure Food Co., 149 Mich. 235, 112 N. W. 940;Armstrong v. Toler, 11 Wheat. 258, 6 L. Ed. 468; 13 C. J. p. 509; 6 R. C. L. p. 698.

Ordinarily, the settlement of litigation is sufficient consideration for a new promise. But where the litigation is to enforce an illegal contract, a new promise to perform the same contract does not change the nature of the obligation, Union Collection Co. v. Buckman, 150 Cal. 159, 88 P. 708, 9 L. R. A. (N. S.) 568, 119 Am. St. Rep. 164, 11 Ann. Cas. 609; 12 C. j. p. 334; nor can it be permitted to circumvent a statute adopting a public policy.

In Missouri Fidelity & Casualty Co. v. Art. Metal Construction Co. (C. C. A.) 242 F. 630, relied on by cross-plaintiff, no statute like section 14027 was involved, and the defense was interposed by a third party guarantor of the account after the work had been completed. Usually the obligation of such third party is deemed too remote from the illegal transaction to be tainted by it. See discussion in Armstrong v. Toler, supra, and McMullen v. Hoffman, 174 U. S. 639, 19 S. Ct. 839, 43 L. Ed. 1117. Here the new engagement was by the identical parties to the original contract, to provide payment of moneys owning thereon. The notes and mortgage, as far as they cover sums charged upon the intrastate business, evidence ‘a liability or obligation * * * arising out of’ violation of the law by cross-plaintiff. People's Mutual Benefit Society v. Lester, supra. The defense of the statute is open to plaintiff and defendant.

Cross-plaintiff, on the theory that the contract was severable, assumed to apply payments on intrastate items and claims the account as it now stands is wholly for interstate business. Plaintiff and defendant did not authorize nor consent to such application of payments and say the contract is indivisible and suit may not be maintained for any part of it.

We need not determine whether the contract is technically inseparable as regards the right and obligations of the parties. While the agreement is of consequence in ascertaining the character of a transaction, its form is not determinative of the question before us because parties cannot so enlarge or restrict the statute. The character of the transaction must be determined from the things done as well as the agreement therefor.

Even if the contract were...