Warren Tool Co. v. Stephenson, Docket No. 1359

• Decision Date: 26 April 1968
• Docket Number: Docket No. 1359,No. 1,1
• Citation: 11 Mich.App. 274,161 N.W.2d 133
• Parties: , 5 UCC Rep.Serv. 1017 WARREN TOOL COMPANY, a copartnership, and Michigan Machine & Broach Co., a Michigan corporation, Plaintiffs-Appellants, v. Jack O. STEPHENSON, and John N. Hillis, Defendants-Appellees
• Court: Court of Appeal of Michigan — District of US

Page 133

161 N.W.2d 133

11 Mich.App. 274, 5 UCC Rep.Serv. 1017

WARREN TOOL COMPANY, a copartnership, and Michigan Machine &

Broach Co., a Michigan corporation, Plaintiffs-Appellants, v. Jack O. STEPHENSON, and John N. Hillis, Defendants-Appellees.

Docket No. 1359.

Court of Appeals of Michigan, Division No. 1.

April 26, 1968.

Released for Publication Sept. 27, 1968.

James M. Skillman, Detroit, for plaintiffs-appellants.

August, Erimet, Goren & Rains, Detroit, for Jack O. Stephenson.

Miles A. Hurwitz, Ecorse, for John N. Hillis.

Before LEVIN, P.J., and BURNS and McGREGOR, JJ.

LEVIN, Presiding Judge.

Plaintiffs seek to hold defendants, Jack O. Stephenson and John N. Hillis, former president and general manager, respectively, of the now defunct Stephenson Industries, Inc., personally liable for the diversion of certain funds which Stephenson Industries agreed to use to pay for work performed by plaintiffs.

The facts are virtually undisputed, possibly because the trial terminated in a judgment in favor of the defendants before they had an opportunity to offer their evidence. The essential facts upon which plaintiffs rely were, however, conceded by Jack Stephenson when he was called by the plaintiffs for cross-examination under the statute. ¹ We state the facts as they appear on the record, but do not intend thereby to find the facts or to preclude the trial judge from making his own findings on the record as it may be supplemented at the new trial herein ordered.

Stephenson Industries accepted plaintiffs' bid to provide tooling required by Stephenson Industries to perform a contract with a company called Highway Products, Inc. However, plaintiffs were unwilling to proceed with the order on the credit of Stephenson Industries and demanded further assurance of payment. Stephenson Industries rejected a suggestion that it assign the Highway Products account, with notification to Highway, fearing that to do so would jeopardize its position with Highway.

Stephenson Industries suggested an alternative security arrangement involving the Second National Bank of Bucyrus, Ohio, the terms of which appear in a letter dated November 5, 1962, from Hillis for Stephenson Industries to the bank. The letter referred to Highway's order No. 19064 directed to Stephenson Industries, which order was supposed to cover the necessary tooling in the amount of $16,820, and stated that such tooling had been ordered from the plaintiffs and Riverside Forge & Manufacturing Company, and that the amounts to be paid for that tooling were $13,785.85 to the plaintiffs and $4,840.00 to Riverside. The letter continued:

'This will leave a deficit of $1,805.85 which will be paid from the proceeds of Order No. 19129 in the amount of $199,994.00. Copies of both orders from Highway Products, Inc., are attached.

'To insure prompt payment of these suppliers, we are requesting that upon presentation for deposit of Highway Products, Inc., checks in payment of the above purchase orders, you agree upon collection of such funds to pay these suppliers their porportionate share based on invoices received and accepted by us. This may be accomplished either by bank draft or our certified checks.'

Copies of this letter were sent to plaintiffs and Riverside.

On November 7, 1962, Stephenson Industries, through Hillis, wrote Warren Tool:

'Enclosed, herewith, is copy of our request to The Second National Bank of Bucyrus, Ohio, asking them to disburse our receipts from Highway Products, Inc., on their purchase orders 19064 and 19129 in favor of your company. Please send a copy of your invoices directly to The Second National Bank to the attention of George Stolz, President, as well as duplicate copies to our company to the attention of Linda Grove.

'The executed letter from this company to The Second National Bank should be self-explanatory, however, if there are any questions, I will be glad to help.'

Plaintiffs thereafter began work on the Stephenson Industries' order; final shipments were completed in February, 1963, and plaintiffs, in accord with the agreement, sent copies of each invoice to the bank as well as to Stephenson Industries. On December 4, 1962, the bank acknowledged to Warren Tool receipt of some of the invoices and stated that, 'When the funds are received from Stephenson Industries payment will be made to you in accordance with our agreement.'

In February, 1963, Highway issued a check for $16,820 to Stephenson Industries in payment of invoices in that amount under order No. 19064, the first order identified in the letter to the bank.

The check from Highway remained in Stephenson Industries' office 2 or 3 days. Deposit of the check with the Bucyrus bank, as contemplated by the agreement between the plaintiffs and Stephenson Industries, was never made. At the trial there was testimony concerning conversations with Hillis, in which Hillis is alleged to have said he wanted to deposit the check in the bank in the usual course, and as contemplated by the above letters, but that Jack Stephenson did not wish to do so. Hillis did not testify. Jack Stephenson testified that the decision not to deposit the Highway check in the bank was a joint one reached by both Hillis and himself.

Jack Stephenson, after the 2 or 3 days' delay, took the Highway check to the drawee bank and had it certified. He took the certified check to still another bank and exchanged it for cashier's checks, eight in the amount of $2,000 each and one for $820. Payee of six checks, totaling $12,000, was E. W. Roberts, Jack Stephenson's brother-in-law. Jack Stephenson was payee of three, totaling $4,820. The cashier's checks were all issued February 26, 1963. Roberts' checks were delivered to him that day.

In November, 1962, Roberts had loaned Stephenson Industries $12,000 obtained for that purpose from Jack Stephenson. When Roberts received the $12,000 in return of his loan, he, in turn, paid the money back to Jack Stephenson.

On March 6, 1963, Stephenson Industries filed a voluntary petition in bankruptcy. Subsequently, Jack Stephenson turned over the entire amount garnered from the Highway check to the trustee in bankruptcy appointed for Stephenson Industries.

Plaintiffs brought this suit against defendants personally. While the complaint and the trial transcript contain references to charges of fraud and conspiracy against Messrs. Stephenson and Hillis, both the pleadings and pretrial statement assert plaintiffs' claim to an interest in the Highway check. The arrangement reflected in the letters was referred to by the plaintiffs as one 'for the purpose of security and assurance' (in the complaint), 'an assignment of the checks to the plaintiffs as a security' (pretrial statement) and as a 'security transaction or assignment' and as creating a 'security interest' (at the time of trial). The complaint referred to the diversion of the proceeds of the check as an act of 'conversion'; the amended answer and 'defendant's version' in the pretrial statement denied that the funds were 'converted.'

After hearing plaintiffs' evidence, the trial judge concluded they could not prove their claims and the trial terminated with a judgment of no cause of action. The trial judge regarded the arrangement between plaintiffs and Stephenson Industries as 'totally illusory. It said they were going to pay if the funds got on deposit. * * * They got the bank to agree that if they did deposit the checks, they would disburse the money on proper presentment of Stephenson's checks, but Stephenson never put it in writing that they would deposit the money.'

Plaintiffs appeal, claiming the evidence was sufficient to establish an equitable lien on the proceeds of the check and, that being established, the defendants, who participated in the destruction of that property interest, are personally liable for their tortious conduct.

I

Pomeroy provides the most authoritative general statement of the applicable law:

'The doctrine (of equitable lien) may be stated in its most general form, that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, or whereby the party promises to convey or assign or transfer the property as security, creates an equitable lien upon the property so indicated, which is enforceable against the property in the hands not only of the original contractor, but of his heirs, administrators, executors, voluntary assignees, and purchasers or encumbrancers with notice. Under like circumstances, a merely verbal agreement may create a similar lien upon personal property.' 4 Pomeroy's Equity Jurisprudence, § 1235, p. 696.

In this context, then, an equitable lien arises from an agreement that both identifies property and evidences an intention that such property serve as security for an obligation. The rule, as stated by Pomeroy, is well supported by both Federal and State authorities and finds expression in several Michigan cases which paraphrase Pomeroy's statement (Kelly v. Kelly (1884), 54 Mich. 30, 47, 19 N.W. 580; and Cheff v. Haan (1934), 269 Mich. 593, 598, 599, 257 N.W. 894).

We could now turn to application of the rule to the facts in this case were it not for the writings of Mr. Justice Swayne, speaking for the United States Supreme Court, in 3 relatively early decisions which language was quoted in Grand Rapids Trust Co. v. Reliable Coal & Mining Co. (1927), 238 Mich. 248, 213 N.W. 100, a precedent much relied upon by the defendants.

In Wright v. Ellison (1863), 1 Wall. 16, 22, 68 U.S. 16, 22, 17 L.Ed. 555, 557, the Supreme Court of the United States declared it was essential 'that there should be a distinct appropriation of the fund by the debtor, and an agreement that the creditor should be paid out of it.'

Next came Christmas v. Russell's Executors (1871), 14 Wall. 69, 84, ...