Tang v. Avitable

• Decision Date: 14 December 1953
• Docket Number: No. 5675,5675
• Citation: 76 Ariz. 346,264 P.2d 835
• Parties: TANG et al. v. AVITABLE.
• Court: Arizona Supreme Court

Page 835

264 P.2d 835

76 Ariz. 346

TANG et al. v. AVITABLE.

No. 5675.

Supreme Court of Arizona.

Dec. 14, 1953.

Hugh M. Caldwell, and Conner & Jones, Tucson, for appellants.

Darnell, Robertson & Holesapple, and Thomas Chandler, Tucson, for appellee.

UDALL, Justice.

Anthony G. Avitable, plaintiff (appellee), sought to recover damages from copartners Joe W. Tang, Joe Y. Wey, and Sam Dong for the breach of a contract to sell a nightclub business. The cause was tried to the court without a jury and plaintiff was awarded $32,300 in damages. The partners perfected this appeal and raise several interesting questions of law. For convenience we shall refer to the parties by their last names.

The trial of this case lasted some three days; the reporter's transcript covers 588 pages and there are numerous exhibits. Our task in preparing the opinion in this involved matter has been greatly facilitated by the excellent briefs filed by counsel for the respective parties. As to various phases of the case the evidence is in sharp conflict. On appeal, however, it is our duty to view the facts in the light most favorable to sustaining the judgment of the lower court, and stated in this light, the material facts are as follows:

Tang, Wey, and Dong, as partners, owned a nightclub business called the 'Flamingo Club', in Tucson. Tang was the active partner and represented the partnership in all its transactions with third parties. On May 10, 1948, Philip R. Vetari by written contract purchased this business from the partners.

The agreed sale price was $40,000. Vetari paid $5,000 cash, transferred a piece of real estate agreed to be worth $7,000, assumed an installment loan contract in the sum of $5,000 owed by the partners to the Southern Arizona Bank & Trust Company, and executed a $23,000 promissory note payable eighteen months from date with interest at 6% payable monthly. The note was secured by a mortgage on the business and all of its assets. Vetari went into possession of the premises as sublessee of Tang, who was lessee of Ivancovich, the owner. Vetari spent more than $11,000 for repairs and capital improvements. By January, 1949, for unexplained reasons, Vetari was in dire financial circumstances and in default under many terms of his contract of purchase.

Tang instructed Glenn Ginn, a Tucson attorney, to proceed to forfeit Vetari's rights under the contract. Vetari engaged Frank Watkins, another Tucson attorney, to represent him in a series of negotiations with the partnership designed to arrive at some workable, reasonable and fair settlement of the financial problems. These negotiations culminated in a written contract dated April 21, 1949.

Under this contract the parties intended that Tang should go into possession and operation of the business in an undefined capacity: (1) Tang would enter as owner, declaring a forfeiture of whatever rights the purchaser had acquired by his payments, but, (2) if during the ensuing 18 months Vetari paid his accrued defaults he should have the right to take back the business as owner, in which event Tang would be treated as having entered as a creditor, not as owner, operating the business for the purpose of realizing a profit to be applied to the satisfaction of Vetari's debts. The whole gross income from the business would then be treated as Vetari's, Tang would receive some reasonable compensation for his personal services, and an accounting would be had from Tang to Vetari to determine the amount still due upon the undefaulted obligation (the $23,000 note).

The agreement provided Vetari should execute promissory notes due one year from date, to cover his accrued defaults on rent, the bank loan, interest payments on the $23,000 note, $888 on a collateral liquor purchase contract, and smaller amounts on utilities and prorated insurance. These accrued defaults totaled approximately $6,000.

As security for payment of the newly-executed promissory notes, Vetari assigned to Tang a $24,000 note he owned which was secured by a mortgage on Tucson real property. Furthermore, Vetari executed an option whereby he granted to Tang the right to purchase the $24,000 note for about $6,000 less than the face value thereof.

In the agreement of April 21, 1949, there is the following paragraph:

'7. That within the eighteen (18) calendar months from the date hereof the said Buyer-Lessee (meaning Vetari) shall have the right to purchase back said business at a price equal to the original purchase price agreed to by the Sellers and the Buyer-Lessee on or about May 10, 1948, less intervening credits, Provided also that all the promissory notes mentioned in this agreement are fully paid by the Buyer-Lessee in the manner provided therein.'

The notes referred to in the proviso were those executed to cover the accrued defaults. They were all paid by Vetari on May 7, 1949. Several preliminary attempts were then made to 'alert' Tang that Vetari was going to step back into the operation of the business; and about October 1 there was a conference in the offices of attorney Watkins, between the latter, Vetari, and Tang. Watkins informed Tang clearly and unequivocally that Vetari was exercising his option. Tang demanded $10,500 cash to cover claimed operational losses and other items of alleged indebtedness before he would permit Vetari to take over the business. However, it is clear that Tang was not entitled to any amount in cash, because Vetari, according to the trial court's accounting, was entitled to a net credit of at least $17,300, and the balance of approximately $23,000 due Tang was to be represented by a note. The demand, therefore, was wholly unjustified. Mr. Watkins informed Tang that his demands were 'ridiculous', but Tang was adamant, insisted that he receive the cash, and walked away.

At this time Vetari was indebted to Avitable, plaintiff-appellee here, in the sum of $12,000, and on December 15 assigned to him whatever rights he, Vetari, had against Tang. Avitable talked to Tang who demanded $33,000 cash, apparently no note from Avitable would be acceptable, before the latter would be permitted to take over the operation of the Flamingo Club.

Avitable brought this action upon the theory that Tang had breached a contract of sale between Tang and Vetari, to the latter's damage in the sum of $32,300, and that Avitable, as assignee of Vetari, was entitled to prosecute the action. The judgment of the lower court in the sum of $32,300 was entered in favor of Avitable, and defendants appeal.

We hold that after Vetari paid the $6,000 in arrears and declared he wanted the business restored to him, Tang was thereby put in the position of having entered ab initio as creditor and not owner, pursuant to his mortgage, and with the consent of the mortgagor, and that he thereby became what the law terms a 'mortgagee in possession', blessed or afflicted with all the incidents the law attaches to such a position, except insofar as he and his debtor had by contractual stipulation changed those incidents.

Normally, the mortgagee in possession is entitled to retain his dominion and control of the 'true pledge' until the debt is fully paid, being liable for strict accounting of the income of the property, and bearing any loss himself. On this general subject, see 14 C.J.S., Chattel Mortgages, §§ 185-188; Jones, Chattel Mortgages and Conditional Sales, Bowers Edition, §§ 696-697a.; Glenn on Mortgages, Vol. 2, Chapter 18; Osborne on Mortgages, §§ 160-173. Certainly here the right of repossession was contractual in nature to the extent that the written agreement provided the debtor could repossess upon payment of the accrued defaults. Perhaps use of the term 'repurchase' to describe the debtor's rights is not strictly apropos, but there is no strong magic in words, and it suffices that we understand the debtor could pay approximately $6,000 to cover his arrears, then ask to be put in possession under the terms of his original purchase contract. The creditor would then render an accounting, ascertain the balance due upon the $23,000 indebtedness, a new note would be executed reflecting the unpaid balance, and the same would be secured by a mortgage on the business and its assets.

The legal purist may insist there was but one contract, that of April 21, and that the 'option' to retake the business upon payment of the notes was but a provision therein, and that an unequivocal declaration of intent to retake was not acceptance of some standing offer, but only the exercise of a legal right bargained for in the contract. The practical result is the same, here we have a debtor who has invested large sums in a business, and a creditor who has both the money and the business and refuses to relinquish either.

There is some question raised whether the contract of April 21, 1949, or the option clause therein, was supported by consideration. In the law of contracts, an option is but a contract to keep an offer open, 17 C.J.S., Contracts, § 100(e), and when there is no claim that the offer was revoked or expired, it is somewhat idle to discuss why it was not revoked. However, if consideration be insisted upon, certainly the debtor forebore several legal rights, the right to insist upon foreclosure and sale instead of the creditor arrangement, the right to escape liability for losses occurring during the creditor's operation; he agreed to pay accrued defaults, whether or not Tang's repossession would eventually result in forfeiture of his interest in the business; he gave additional security for the debt, and gave the creditor the legal right to...