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05/19/86 JOHN GILROY v. ROBERT CONWAY

COURT OF APPEALS OF MICHIGAN


May 19, 1986

JOHN GILROY, PLAINTIFF-APPELLEE,
v.
ROBERT CONWAY, D/B/A CONWAY STUDIOS, DEFENDANT-APPELLANT

Shepherd, P.j., and R. M. Maher and W. R. Peterson,* JJ.

The opinion of the court was delivered by: Peterson

Defendant cheated his partner and appeals from the trial court's judgment granting that partner a remedy.

Plaintiff was an established commercial photographer in Kalamazoo who also had a partnership interest in another photography business, Colonial Studios, in Coldwater. In 1974, defendant became plaintiff's partner in Colonial Studios, the name of which was changed to Skylight Studios. Under the partnership agreement, defendant was to be the operating manager of the partnership, in return for which he would have a guaranteed draw. Except for the guaranteed draw, the partnership was equal in ownership and the sharing of profits.

Prior to defendant's becoming a partner, the business had acquired a small contractual clientele of schools for which the business provided student portrait photographs. The partners agreed to concentrate on this type of business, and both partners solicited schools with success. Gross sales, which were $40,000 in 1974, increased every year and amounted to $209,085 in 1980.

In the spring of 1981, defendant offered to buy out plaintiff and some negotiations followed. On June 25, 1981, however, plaintiff was notified by the defendant that the partnership was dissolved as of July 1, 1981. Plaintiff discovered that defendant: had closed up the partnership's place of business and opened up his own business; had purchased equipment and supplies in preparation for commencing his own business and charged them to the partnership; and had taken with him the partnership employees and most of its equipment.

Defendant had also stolen the partnership's business. He had personally taken over the business of some customers by telling them that the partnership was being dissolved; in other cases he simply took over partnership contracts without telling the customers that he was then operating on his own. Plaintiff also learned that defendant's deceit had included the withdrawal, without plaintiff's knowledge, of partnership funds for defendant's personal use in 1978 in an amount exceeding $11,000.

The trial Judge characterized the case as a "classic study of greed" and found that defendant had in effect appropriated the business enterprise, holding that defendant had "knowingly and wilfully violated his fiduciary relationship as a partner by converting partnership assets to his use and, in doing so, literally destroying the partnership." He also found that the partnership could have been sold as a going business on June 30, 1981, and that after a full accounting, it had a value on that date of $94,596 less accounts payable of $17,378.85, or a net value of $77,217.15. The division thereof, after adjustments for plaintiff's positive equity or capital and defendant's negative equity or capital, resulted in an award to plaintiff for his interest in the business of $53,779.46. *fn1

Defendant argues that the finding of the trial Judge as to the value of the business as of June 30, 1981, was not supported by the proofs at trial. The gist of the argument, however, is not that there were no proofs to substantiate the finding as to value, but that the witness whose testimony was the basis for the finding was less credible than defendant's accountant who gave the opinion that the business had no value except for its cash on hand and the value of equipment and fixtures. The expert upon whose testimony the trial Judge relied had substantial experience in the field of school portrait photography and was in fact an expert brought to trial by the defendant whose valuation testimony was brought out by cross-examination. The weight and credence to be given to the testimony of the experts was for the trial Judge to determine, Sampson v Veenboer, 252 Mich 660; 234 NW 170 (1931); Coats v Bussard, 94 Mich App 558; 288 NW2d 651 (1980), and a review of the record does not persuade us that his Conclusions were clearly erroneous. GCR 1963, 517.1, now MCR 2.613(C); Precopio v Detroit, 415 Mich 457; 330 NW2d 802 (1982).

Defendant also claims that the trial court committed error in excluding the testimony of one Jack Dehn as to his opinion on the valuation of the partnership. The qualification of a witness to testify is a preliminary question to be determined by the trial Judge, MRE 104(a). The trial court found that the witness was not qualified as an expert and we find no abuse of discretion in his ruling. Elsasser v American Motors Corp, 81 Mich App 379; 265 NW2d 339 (1978).

We do, however, acknowledge the accuracy of defendant's claim that the findings of the trial Judge failed to take into account equipment left at the place of business, which plaintiff took into his possession on July 1, 1981, and checks from customers deposited in the trust account of plaintiff's attorney. Since the trial Judge's award was based on the total value of the partnership business on June 30, 1981, defendant claims that he is entitled to credit for one-half the value of such property and checks. Plaintiff makes no response to this claim.

There is no difficulty in ascertaining from the record the amount of the checks which plaintiff's counsel acknowledged. They total $2,851.33. There is more difficulty determining the value of the equipment left behind by defendant since the trial judge made no finding pertaining thereto. Defendant had prepared a listing of those items of equipment in which listing he placed a valuation thereon. That valuation is clearly highly inflated and is unsubstantiated by any evidence. Plaintiff testified that he sold a phone system for $1,500, but that many of the items listed by defendant were not found, that others were obsolete or out of repair, and that the total value of those items was roughly $690. That testimony was not contradicted and we take it as accurate. Defendant is thus entitled to credit for one-half of the total value of such checks and equipment, $5,041.33, or $2,520.66, and the judgment may be modified accordingly.

Plaintiff also sought exemplary damages. Count II of the complaint alleged that defendant's conduct constituted a breach of defendant's fiduciary duty to his partner under §§ 19-22 of the Uniform Partnership Act, *fn2 and Count III alleged conversion of partnership property. Each count contained allegations that defendant's conduct was wilful, wanton and in reckless disregard of plaintiff's rights and that such conduct had caused injury to plaintiff's feelings, including humiliation, indignity and a sense of moral outrage. The prayer for relief sought exemplary damages therefor.

Plaintiff's testimony on the point was brief. He said:

The effect of really the whole situation, and I think it was most apparent when I walked into the empty building, was extreme disappointment and really total outrage at the fact that something that I had given the utmost of my talent and creativity, energy, and whatever time was necessary to build, was totally destroyed and there was just nothing of any value that was left . . . . My business had been stolen and there wasn't a thing that I could do about it. And to me, that was very humiliating that one day I had something that I worked 10 years on, and the next day I had absolutely nothing of any value . . . .

As noted above, the trial Judge found that defendant had literally destroyed the partnership by knowingly and wilfully converting partnership assets in violation of his fiduciary duty as a partner. He also found that plaintiff had suffered a sense of outrage, indignity and humiliation and awarded him $10,000 as exemplary damages.

Defendant appeals from that award, asserting that plaintiff's cause of action arises from a breach of the partnership contract and that exemplary damages may not be awarded for breach of that contract.

Plaintiff argues that the claim for exemplary damages is not for breach of the partnership contract but rather that the breach of a fiduciary duty and the conversion of partnership assets by a partner are torts independent of the partnership contract, for which torts exemplary damages may be awarded. Plaintiff cites no authority for that proposition, nor do we find any such precedent. *fn3 It is true that decisions may be found in other states allowing punitive damages for breach of a fiduciary duty, as in Jerman v O'Leary, 145 Ariz 397; 701 P2d 1205 (Ariz App, 1985), a partnership case. Those decisions, however, are found in forums in which, unlike Michigan, punitive damages are recoverable as punishment for intentional wrongs. *fn4 In Michigan, however, the purpose of exemplary damages has not been to punish the defendant but to render the plaintiff whole by compensating for mental injury *fn5 in a limited class of cases where such mental injury is the result of outrageous conduct. Wise v Daniel, 221 Mich 229; 190 NW 746 (1922); Smith v Jones, 382 Mich 176; 169 NW2d 308 (1969); Willett v Ford Motor Co, 400 Mich 65; 253 NW2d 111 (1977); Bailey v Graves, 411 Mich 510; 309 NW2d 166 (1981). This is not such a case.

Damages for mental injury are not recoverable for breach of commercial contracts having as their purpose economic rather than personal interests. Valentine v General American Credit, Inc, 420 Mich 256; 362 NW2d 628 (1984); Stewart v Rudner, 349 Mich 459; 84 NW2d 816 (1957); Kewin v Massachusetts Mutual Life Ins Co, 409 Mich 401; 295 NW2d 50 (1980). Moreover, as noted in Kewin, pp 420-421:

allegation and proof of tortious conduct existing independent of the breach (citation omitted) exemplary damages may not be awarded in common-law actions brought for breach of a commercial contract. [Emphasis added.]

If it were to be assumed that a partner's breach of his fiduciary duty or appropriation of partnership equipment and business contracts to his own use and profit are torts, *fn6 it is clear that the duty breached arises from the partnership contract. One acquires the property interest of a cotenant in partnership only by the contractual creation of a partnership; one becomes a fiduciary in partnership only by the contractual undertaking to become a partner. There is no tortious conduct here existing independent of the breach of the partnership contract.

Neither do we see anything in the Uniform Partnership Act to suggest than an aggrieved partner is entitled to any remedy other than to be made whole economically. The act defines identically the partnership fiduciary duty and the remedy for its breach, i.e., to account:

Sec. 21 (1) Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property; [MCL 449.21; MSA 20.21.]

So, the cases involving a partner's breach of the fiduciary duty to other partners have been concerned solely with placing the wronged partners in the economic position that they would have enjoyed but for the breach. See, e.g., Lynn v Arehart, 231 Mich 144; 203 NW 834 (1925); Penner v DeNike, 288 Mich 488; 285 NW 33 (1939); Van Stee v Ransford, 346 Mich 116; 77 NW2d 346 (1956).

And finally, we think that the absurdity of allowing damages for mental injury because of the breach of a partnership contract, or the duties stemming therefrom, is shown by answering the question asked in Veselenak v Smith, 414 Mich 567, 575; 327 NW2d 261 (1982): " injury is sought to be compensated?"

The answer, from plaintiff's testimony, is that the mental injury stemmed from the termination of the business that he had worked hard to create. However disappointing that may have been to plaintiff, he had no right to compel the continuation of the partnership. No definite term having been specified for the duration of the partnership, it was terminable at the will of either partner. MCL 449.31; MSA 20.31. One who enters into such a fragile relationship cannot claim damages for disappointment when it shatters.

Costs

Defendant also argues that the trial court erred in assessing costs, including attorney fees, under GCR 1963, 111.6, which provides *fn7 as follows:

Unwarranted Allegations and Denials. If it appears at the trial that any fact alleged or denied by a pleading ought not to have been so alleged or denied and such fact if alleged is not proved or if denied is proved or admitted, the court may, if the allegation or denial is unreasonable, require the party making such allegation or denial to pay to the adverse party the reasonable expenses incurred in proving or preparing to prove or disprove such fact as the case may be, including reasonable attorney fees.

The trial Judge's findings were as follows:

Plaintiff has further brought to this court's attention the defendant's blatant disregard of the provisions of GCR 1963, 111.6 in defendant's answers to paragraphs 8, 20, and 25 of plaintiff's first amended complaint, thereby requiring plaintiff to interview, subpoena, and present in court, ten witnesses whose testimony could have been avoided by defendant's adherence to the court rules. Accordingly, plaintiff may assess his actual attorney fees and costs resulting therefrom.

The factual allegations of paragraphs 8, 20 and 25 of the first amended complaint referred to by the trial Judge asserted that defendant took for himself the benefits of the partnership contracts and failed to pay the income therefrom to the partnership or to account therefor; that defendant appropriated partnership accounts and assets to his own use; that defendant withdrew capital of the partnership and applied it to his own use without notice to plaintiff or accounting to the partnership; that defendant failed to pay plaintiff the capital and income due plaintiff; *fn8 and that defendant took possession of, and used as his own, partnership property including inventory, equipment, customer lists, contract rights and expectancies, and accounts. Each of the allegations, thus, were factual; indeed, they were allegations of facts the truth or falsity of which had to be within defendant's personal knowledge.

Defendant's answer denied each allegation. Each was proved by plaintiff's evidence to be true; indeed, during the course of his testimony, defendant admitted the truth of many of the allegations.

We find no abuse of discretion in the Conclusions of the trial Judge, Christensen v Christensen, 126 Mich App 640; 337 NW2d 611 (1983). The denials were unreasonable and plaintiff is entitled to recover his expenses of proving that which should have been admitted. Valley National Bank of Arizona v Kline, 108 Mich App 133; 310 NW2d 301 (1981).

The judgment is affirmed as modified herein.


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