Smith v. Hurley

• Decision Date: 02 November 1978
• Docket Number: CA-CIV,No. 1,1
• Citation: Smith v. Hurley, 589 P.2d 38, 121 Ariz. 164 (Ariz. App. 1978)
• Parties: James K. SMITH and Sally Cloe Smith, husband and wife, Appellants, v. Theodore C. HURLEY, Appellee. 3798.
• Court: Arizona Court of Appeals

Page 38

589 P.2d 38

121 Ariz. 164

James K. SMITH and Sally Cloe Smith, husband and wife, Appellants, v. Theodore C. HURLEY, Appellee.

No. 1 CA-CIV 3798.

Court of Appeals of Arizona, Division 1, Department B.

Nov. 2, 1978.

Rehearing Denied Dec. 12, 1978.

Review Denied Jan. 9, 1979.

Murphy, Posner & Froimson by Michael J. LaVelle, K. Bellamy Brown, Phoenix, for appellants.

Law Offices of Donald D. Meyers by Clarke H. Greger, Donald D. Meyers, Phoenix, for appellee.

OPINION

JACOBSON, Presiding Judge.

The primary issue in this appeal is whether the obligor under a "buy out" agreement is relieved from performance because of the breach by the obligee of a contemporaneous partnership agreement.

This litigation was initiated by plaintiff-appellant, James K. Smith and Sally Cloe Smith, his wife (as James K. Smith is the primary responsible party, he shall hereinafter be referred to as Smith), against defendant-appellee Theodore C. Hurley (Hurley), seeking the dissolution of a partnership allegedly existing between Smith and Hurley and an accounting. This complaint was filed on August 28, 1973. Hurley answered, alleging that the partnership that existed between Smith and Hurley was terminated on September 1, 1972, and that a business known as Arizona Medical Plaza Pharmacy (Arizona Pharmacy), which Smith contended was a partnership asset, was his sole property. In addition, Hurley counterclaimed for the sum of $35,000 allegedly due from Smith under a "buy out" agreement.

On September 30, 1974, Smith filed an amended complaint, adding a count for rescission of the partnership and "buy out" agreements. The amended complaint was duly answered.

Subsequently, Smith filed a motion for partial summary judgment on his count for rescission, which was responded to by Hurley filing a motion for partial summary judgment in his favor on this same count. The trial court denied Smith's motion and granted Hurley's motion, dismissing Smith's rescission count. Thereafter, Hurley moved for summary judgment on his counterclaim for $35,000, which was granted. The matter proceeded to a jury trial on the stipulated issue of whether the business known as Arizona Pharmacy was an asset of the partnership between the parties. The jury determined that Arizona Pharmacy and its underlying lease were partnership assets.

The remaining issues of accounting and division of property were then tried to the court. After trial, the court determined that the partnership existing between the parties was terminated on September 1, 1972; that Smith's interest in Arizona Pharmacy was $2,150; that the underlying lease on the Arizona Pharmacy business had no value; and that after offsetting certain amounts Smith owed Hurley, Smith was entitled to the sum of $634.68. On October 27, 1976, the court entered its formal judgment, awarding Smith $634.68 on his claim and awarding Hurley $35,000 on his counterclaim. Smith has appealed.

Before setting forth the facts in this matter, it should be noted that Smith does not contend that the accounting arising out of the Arizona Pharmacy transaction is improper. Instead, his basic contention on appeal is that the conduct of Hurley relieved him of his obligation to pay Hurley $35,000 under the "buy out" agreement, or alternatively, that Hurley's conduct justified a rescission of that agreement. Smith also contends that an offer of judgment made by Hurley during the course of this litigation and accepted by Smith precludes the judgment entered by the court.

The facts follow. In 1961, Hurley founded the business known as Bethany Medical Center Pharmacy (Bethany Pharmacy) in a building housing several doctors' offices. Smith began working for Hurley as a relief pharmacist at Bethany Pharmacy in 1968 or 1969. In May, 1971, the parties began discussions concerning the formation of a partnership between themselves. These negotiations resulted in two agreements executed by the parties on June 1, 1971.

The first of these documents was simply entitled "Agreement" (hereinafter referred to as the "buy out" agreement), which provided in substance that Smith would buy an undivided one-half interest in Bethany Pharmacy and accept an assignment of an undivided one-half interest in the lease on the premises where the pharmacy was located. The purchase price was $35,000 and the assets being purchased by Smith were described in the agreement as:

"an undivided 1/2 interest in and to the business currently conducted by Hurley at 2040 West Bethany Home Road, Phoenix, Arizona, and commonly referred to as Bethany Medical Center Pharmacy, including the receivables, fixtures, stock in trade, customer lists, furnishings and furniture located in and about the premises."

In addition, this agreement provided:

"That at any time within 2 years from the date hereof, Hurley may, at his option and election, sell the remaining 1/2 undivided interest in and to the assets and business of Bethany Medical Center Pharmacy to Smith for a purchase price of $35,000.00 and Smith agrees at the time Hurley exercises such option, he shall buy the remaining 1/2 of the assets and business at Bethany Medical Center Pharmacy and pay to Hurley the sum of $35,000.00."

On the same date, the parties executed a second document, entitled "Partnership Agreement," whereby they agreed to become 50/50 partners operating under the partnership name of "Bethany Medical Center Pharmacy." The partnership agreement provided "that the parties may hereafter from time to time form other businesses to be conducted at other locations." In addition, the partnership was to be terminated if Hurley exercised his option to sell as provided in the "buy out" agreement.

Apparently, prior to the execution of these two agreements, some of the doctors who occupied the building housing the Bethany Pharmacy were discussing the possibility of purchasing land and building their own office structure. Both Smith and Hurley were parties to these discussions, but by June 1, 1971, the date of the execution of their agreements, there were no firm plans for the size, nature, or location of the new building contemplated by the doctors. On July 5, 1971, however, Smith and Hurley borrowed $5,000 to purchase a share in a partnership known as M. D. Realty. M. D. Realty then purchased land upon which the Arizona Medical Plaza was eventually constructed. Subsequently, M. D. Realty acquired additional land. Hurley participated in this purchase, but Smith elected not to acquire an additional interest.

During the summer and fall of 1971, several meetings were held concerning the development of a medical building on the M. D. Realty property. In December, 1971, Hurley, using his own funds, paid $5,000 for an interest in the new building. Smith did not contribute to this acquisition.

On February 14, 1972, Hurley executed a lease for space in the new building to operate Arizona Pharmacy. The deposit on this lease was made by Hurley, Smith not participating. In addition, Hurley borrowed money in his own name to set up Arizona Pharmacy. Smith was not obligated on this loan.

In April, 1972, Hurley stopped working at Bethany Pharmacy, apparently because the income was insufficient to support both partners. In August, 1972, Hurley gave notice to Smith that he was exercising his option to sell the remaining one-half interest in Bethany Pharmacy and terminated the partnership agreement. Hurley began operating the new Arizona Pharmacy in October, 1972.

Smith later brought this action and sought a temporary restraining order to keep Hurley from disposing of Arizona Pharmacy. Apparently, the new Arizona Pharmacy was not a financial success and at the time this litigation arose, a sale of the business to Revco Drug Center was pending. After several court hearings, the parties stipulated on December 12, 1973, that Arizona Pharmacy could be sold to Revco with the proceeds of sale to be used to pay creditors and any excess to be held pending the outcome of the litigation.

Following the sale to Revco, early in April, 1974, Hurley moved to Colorado and obtained employment as a pharmacist with Gates Rubber Company.

Smith did not file his amended complaint for rescission until September 30, 1974.

On February 27, 1975, Hurley filed an Offer of Judgment allowing judgment to be taken against him for the sum of $7,000. On March 7, 1975, Smith accepted the offer and requested through the filing of a form of judgment that the entire litigation be dismissed, including Hurley's counterclaim upon which Hurley had previously obtained summary judgment. This was resisted by Hurley on the grounds that his offer went only to Smith's claim against him and not to his counterclaim against Smith. After a hearing, the court entered an order, finding:

"The court is of the opinion that the defendant's offer of judgment filed February 27, 1975 was conditionally...