State Mut. Life Assur. Co. of America v. Deer Creek Park

• Decision Date: 28 December 1979
• Docket Number: No. 77-1393,77-1393
• Citation: 612 F.2d 259
• Parties: STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. DEER CREEK PARK et al., Defendants, Burnac Mortgage Investors, Ltd., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 259

612 F.2d 259

STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA, Plaintiff-Appellee, v. DEER CREEK PARK et al., Defendants Burnac Mortgage Investors, Ltd., Defendant-Appellant.

No. 77-1393.

United States Court of Appeals Sixth Circuit.

Argued April 16, 1979.

Decided Dec. 28, 1979.

Stephen Wasinger, Honigman, Miller, Schwartz & Cohn, Detroit, Mich., for defendant-appellant.

Robert S. Bolton, Richard P. Saslow, Butzel, Fruhauf, Keidan, Simon, Myers & Graham, Detroit, Mich., for plaintiff-appellee.

Before WEICK, LIVELY and ENGEL, Circuit Judges.

ENGEL, Circuit Judge.

While the facts are complicated, the dispute in this Michigan diversity action centers on competing mortgage interests held by plaintiff State Mutual Life Assurance Company of America and defendant Burnac Mortgage Investors, Inc., in a Michigan apartment-condominium development known as Deer Creek Park Apartments.

Prior to April, 1972, the Deer Creek project was beneficially owned by a partnership comprised of Mayer Morganroth and Martin Kopitz, encumbered by a $4,950,000 construction mortgage. In April, 1972, State Mutual became interested in acquiring an investment in the Deer Creek development, and entered into a contract with Deer Creek to obtain fee title subject to the construction mortgage. The deal provided for the purchase price of $7,750,000 to be met by a payment of $1,800,000 at execution, assumption of the $4,950,000 construction mortgage, and a promise to pay $1,000,000 upon completion of the project by Deer Creek.

Disputes subsequently developed between State Mutual and Deer Creek, the exact nature of which is not fully disclosed by the pleadings and record. In May, 1973, State Mutual made a demand for rescission of the 1972 contract, which initiated a series of negotiations between the two parties. During this period Burnac arrived upon the scene and in June, 1973, transacted a $750,000 loan to the Three M Construction Company, ¹ guaranteed by Deer Creek partners Mayer Morganroth and Martin Kopitz. The primary security for the loan was a pledge of Deer Creek's account receivable under the disputed 1972 contract with State Mutual. No notice of this pledge was given to State Mutual.

In September, 1973, Deer Creek agreed to rescind the 1972 contract and purchase State Mutual's interest in the development. In effect, the 1973 contract simply reversed the 1972 transaction. Deer Creek regained fee title to the project for $7,750,000, with State Mutual receiving a purchase money mortgage, recorded September 14, 1973, in the full amount of the purchase price. State Mutual then disbursed $1,000,000 from the mortgage proceeds to the credit of Deer Creek, and paid off the construction mortgage in the amount of $4,950,000. This agreement extinguished the expectancy which Burnac looked toward for satisfaction of its loan to Morganroth and Kopitz. However, the Deer Creek partners failed to notify Burnac of the new agreement.

One year later, in November, 1974, Deer Creek filed an action against State Mutual in the Wayne County (Michigan) Circuit Court alleging breach of the 1972 agreement due to fraud and duress amounting to "business compulsion." At this juncture, Burnac became aware of the events which had transpired and made inquiry of Deer Creek. Burnac then learned of the rescission of the 1972 contract and the resultant mortgage interest in the project acquired by State Mutual. Further, Mayer Morganroth stated to Burnac that although State Mutual held a first mortgage on the property, it was invalid for the reasons that it was exacted by means of fraud and duress, and was without consideration. Burnac reacted to the change in circumstances by rewriting and extending the loan, taking as additional security a mortgage on the Deer Creek project and an "assignment of receivables" from Deer Creek's state court action.

On December 26, 1974, State Mutual filed this diversity action against Deer Creek in the United States District Court for the Eastern District of Michigan alleging default on the note executed by Deer Creek and seeking foreclosure of the mortgage securing the debt. Deer Creek answered by again asserting the invalidity of the mortgage. Subsequently, Deer Creek's separate state action was removed and consolidated with State Mutual's federal action. Further, upon notice of Burnac's junior mortgage, State Mutual amended its Complaint on June 12, 1975, to include Burnac as a party defendant. In response, Burnac claimed only the benefit of Deer Creek's defenses "as a junior encumbrancer of the real property in question."

In December, 1975, Deer Creek entered into a Stipulation of Settlement with State Mutual, the repercussions of which present the unique procedural problem in this case. Deer Creek agreed to dismiss its action against State Mutual relating to the 1972 agreement, to withdraw all defenses to State Mutual's foreclosure action, and to admit all of the allegations in State Mutual's complaint. In return, State Mutual agreed not to pursue any deficiency judgment against the personal assets of the Deer Creek partners if sale of the mortgaged premises failed to satisfy the obligation. The Stipulation was incorporated into a Consent Order dismissing both causes of action. The order required State Mutual to serve notice on Burnac, which was still uninformed of the Stipulation due to Deer Creek's failure to obtain prior approval of the settlement as required under the purported assignment of the cause of action.

In compliance with the consent order, State Mutual served notice and also filed a Motion for Summary Judgment against Burnac to complete the foreclosure action. The basis for the motion was that Burnac, as an admitted second mortgagee ² whose only defense to foreclosure stemmed from its claimed derivative advantage of Deer Creek's defenses, could not prevail since Deer Creek's action had been voluntarily dismissed with prejudice and the validity of State Mutual's prior mortgage admitted.

Burnac contested the Motion for Summary Judgment on the basis that it was not bound by the stipulation and admissions made by Deer Creek as to State Mutual's foreclosure action, and that a material question of fact existed as to the validity of the mortgage. Also, since Deer Creek failed to obtain Burnac's prior consent to the voluntary dismissal of its cause of action against State Mutual, Burnac asserts that it is not bound by that part of the stipulation. In order to accomplish its objective, Burnac sought leave to file an amended answer to more specifically detail and incorporate Deer Creek's fraud and duress claims abandoned when Deer Creek requested dismissal of its cause of action.

Judge Damon Keith granted State Mutual's summary judgment motion and denied Burnac's motion to amend its pleadings. Essentially, the ruling stated that no justiciable issue of fact existed because Burnac would not be able to prove the invalidity of State Mutual's mortgage as a matter of law, due to the fact that the later mortgage acknowledged the first, and Deer Creek had admitted the validity of the initial mortgage by stipulation.

Burnac contends that the trial court improperly resolved material questions of fact in granting summary judgment; that the decision to grant the motion was based upon a mistake of law with respect to the effect of the stipulation upon Burnac; that Burnac is not estopped to challenge State Mutual's mortgage; and, that as assignee of Deer Creek's cause of action Burnac has the right to contest the validity of State Mutual's mortgage. On its part State Mutual primarily asserts that Deer Creek's cause of action for fraud and duress is personal and may not be assigned under Michigan law; that the purported assignment was of the "proceeds" only, and did not include the right to bring the cause of action; and finally, that any such claim is derivative and therefore extinguished by Deer Creek's express acknowledgment that the claim is without basis in fact.

I.

Burnac strenuously urges that the existence of material disputes of fact made it error for the trial court to enter summary judgment. In support, Burnac correctly cites cases in our circuit and elsewhere which make it clear that in ruling on motions for summary judgment the court must construe the evidence before it in the light most favorable to the party opposing the motion. See, e. g., Tee-Pak, Inc. v. St. Regis Paper Co., 491 F.2d 1193 (6th Cir. 1974); Broniman v. Great Atlantic & Pacific Tea Co., 353 F.2d 559, 560 (6th Cir. 1965); Bohn Aluminum & Brass Corp. v. Storm King Corp., 303 F.2d 425, 427 (6th Cir. 1962).

The Federal Rules of Civil Procedure permit summary judgment to enter only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Rule 56(c). Fed.R.Civ.P. Rule 56(e) specifies the form of the affidavits which may be employed in summary judgment procedures and requires that they be made on personal knowledge, setting forth such facts as would be admissible in evidence. Affidavits composed of hearsay and opinion evidence do not satisfy Rule 56(e) and must be disregarded. Daily Press, Inc. v. United Press International, 412 F.2d 126 (6th Cir.) Cert. denied, 396 U.S. 990, 90 S.Ct. 480, 24 L.Ed.2d 453 (1969). See also Hanke v Global Van Lines, Inc., 533 F.2d 396 (8th Cir. 1976); Rossi v. Trans World Airlines, Inc., 507 F.2d 404 (9th Cir. 1974); Ritz v. O'Donnell, 185 U.S.App.D.C. 66, 566 F.2d 731 (D.C.Cir. 1971).

The trial judge's application of these well-settled principles to the facts before him was complicated by the fact that in resisting summary judgment on alternative grounds, Burnac asserted that, despite the Stipulation of Settlement and admissions made by Deer Creek, it nevertheless possessed an actionable claim against State Mutual ...