Motion to Reinstate or Hold Funds in Escrow

Author: LegalEase Solutions 

BRIEF IN SUPPORT

INTRODUCTION

Plaintiff helped build up a multi-million dollar business, and as the years passed, she planned to retire and hand over her ownership in the business to her nephew.  Plaintiff executed two agreements, a Stock Redemption Agreement and a Covenant Not to Compete.   In exchange for redeeming her stock ownership in the business and for agreeing not to compete with the business, Plaintiff was to get weekly payments towards the amounts due to her under the two agreements.  When it became apparent, after several years after execution of the two agreements, that Plaintiff’s nephew was wrongfully diverting funds from the business for his own personal use, Plaintiff sought an accounting, to determine if any improprieties had been committed, which could, among other things, affect the compensation she was due under the Agreements.  When it became clear that Plaintiff was not backing down from her demands for an accounting, Defendant retaliated by cutting off the weekly payments under the Agreements, despite the fact that the Agreements are valid and enforceable contracts.  Furthermore the Stock Redemption Agreement requires payments be made to Plaintiff through November 2008 and the Covenant Not to Compete requires payments to Plaintiff through June 2013.

Defendant claims that Plaintiff has been paid off fully under the Stock Redemption Agreement and that Plaintiff is not entitled to any further payments.  Defendant fails to provide an accounting to determine whether all the payments made to Plaintiff were strictly to satisfy Defendant’s obligations under the Agreements, or if a portion of the payments were made pursuant to a clause found in both Agreements which require Defendant to pay additional compensation to Plaintiff based on the business’ performance.

Furthermore Defendant claims to rescind his obligation to pay pursuant to the Covenant Not to Compete, alleging that Plaintiff breached the Covenant by allegedly failing to provide for the upkeep of the building where Defendant operates from.  This is despite the fact that the Covenant does not make the upkeep of the building a condition of the agreement.

Defendant’s claims are not supported by the facts or by Michigan law.  Plaintiff, a successful businesswoman who is now retired, stands to lose her means of sustenance if Defendant persists in its non-payment of the weekly sums.  Plaintiff requests that this Court order Defendant to reinstate the weekly payments, or at the least, require Defendant to make the payments and place them in escrow until completion of the present litigation.

STATEMENT OF FACTS

The Plaintiff, Gloria J. Murphy, founded Defendant Corporation, Dictation Sales & Services, Inc. (“DSS”) along with her late husband, Victor Murphy.  Approximately six years later in 1979 after Victor Murphy had passed, a Ronald Latiff, a Joseph T. Murphy, Sr. and his wife Lilia Murphy purchased a one third (1/3) interest in DSS.  After this corporate restructure, Plaintiff owed a one third (1/3) interest in DSS.

In 1994, Joseph T. Murphy, Sr.’s son, Defendant Joe Murphy, Jr. (“Murphy, Jr.”) began employment with Defendant DSS.  Murphy, Jr. is the nephew of Plaintiff.  In 1998, Murphy Jr. approached Plaintiff to purchase her interest in Defendant DSS.  Planning for retirement and with the hope of securing adequate funds during retirement, Plaintiff eventually agreed to sell her interest in the Corporation.

On November 17,1998, the Defendant Corporation, entered into a Stock Redemption Agreement (the “Agreement”) (copies of which are attached as Exhibit A) and a Covenant Not to Compete (the “Covenant” and together with the Agreement, the “Agreements”) ( copies of which are attached as Exhibit B) with her nephew, by which the Plaintiff agreed among others to the  following conditions:  (1) The Plaintiff would sign a Covenant Not to Compete in return for payment by Defendant Corporation to the Plaintiff of $741,700 to be paid out in weekly payments of $503.27 to continue until June 30, 2013, at which time the unpaid balance due of $349,150.00 would be due and payable and (2) The Plaintiff would redeem her interest in stock of the Corporation via the Stock Redemption Agreement for $150,000 to be paid out in weekly payments of $496.72, which payments include interest accrued at annual rate of 12.00%.  These payments were to continue for ten years of date of agreement, and (3) Defendant would made additional periodic payments if the adjusted net income of DSS exceeded certain levels.

Sometime in late 2004, Plaintiff discovered that Defendant had been wrongfully diverting and converting funds of DSS for his personal benefit, thereby reducing the amount of payments that Plaintiff could have received pursuant to the clause contained in both the Stock Redemption Agreement and the Covenant Not to Compete which required Defendant to make periodic payments above and beyond the weekly payments if the adjusted net income of DSS exceeded certain levels.  Exhibit “C” is a sample of a check whereby Murphy, Jr. drew off the corporate bank account for his own personal use to fund construction projects.  This is critical, because pursuant to both agreements discussed above, Plaintiff would obtain accelerated payments if the income of the corporation exceeded a certain level.  Withdrawing said funds prejudiced the Plaintiff since those levels would be compromised.  Further, Defendant’s steadfast refusal to allow Plaintiff access to the books prompted this lawsuit.

Moreover, in a letter dated February 8, 2005 (a copy of which is attached as Exhibit D), Defendant informed Plaintiff that he would not honor his obligation to pay amounts under the Covenant Not to Compete citing Plaintiff’s alleged breach of Section 1(c) of the Covenant Not to Compete.  In addition, Defendant made it clear in this same letter that no more payments would be made pursuant to the Stock Redemption Agreement, on the claim that the entire balance due Plaintiff had been paid.

Finally, Plaintiff’s Federal Tax filings (copies of which are attached as Exhibit E), as compared to an amortization schedule prepared by Defendant’s accountant (copy of which is attached as Exhibit F) reflect a marked difference between what Plaintiff claims was paid to her by Defendant, and what Defendant shows is owing to her per the amortization schedule. This discrepancy, at the very least, points to irregularities in payments by Defendant.

ARGUMENT

  1. DEFENDANT BREACHED A VALID AND ENFORCEABLE AGREEMENT BY REFUSING TO MAKE WEEKLY PAYMENTS TO PLAINTIFF AS REQURIED UNDER THE STOCK REDEMPTION AGREEMENT AND COVENANT NOT TO COMPETE.

 Defendant has ceased making weekly payments to Plaintiff as required under Section 3 of the Stock Redemption Agreement and Section 3 of the Covenant Not to Compete.  Section 11 of the Stock Redemption Agreement and Section 7 of the Covenant Not to Compete, which are identical, address default by Corporation in making any payment due to Plaintiff.  The identical paragraphs state that should Defendant “default on any payment due Seller for a period of Thirty (30) days without curing said default” the Plaintiff would be entitled to keep all monies paid thus far, and proceed with collection of monies due pursuant to the agreement.

Since at least February 8, 2005, Defendant has stopped making weekly payments to Plaintiff as required under the two Agreements, notwithstanding the following: (1) the agreements are valid and enforceable contracts fully executed by both parties (2)  Plaintiff has performed her obligations under the two Agreements, and (3) Section 3 the Stock Redemption Agreement requires weekly payments to be made over the course of ten (10) years from the date of the agreement, which would be November 2008, and Section 3 of the Covenant Not to Compete requires payments to continue through June 30, 2013.

  1. THE STOCK REDEMPTION AGREEMENT AND THE COVENANT NOT TO COMPETE ARE VALID CONTRACTS.

 The construction of the Stock Redemption Agreement and the Covenant Not to Compete and the facts of the case establish that there was meeting of minds upon all essential points necessary to constitute a valid contract.  The Michigan Supreme Court has held in Gonte v. Rosenberg, 221 Mich 283 (1922), that a bargain is closed when nothing mutual between the parties remains to be done to give to either a right to have it carried into effect; either can enforce it against the other,  or recover damages for the non fulfillment of it. Id. at 289.

This principle of “meeting of minds”, has been reiterated by a line of decisions of Michigan courts.  In International Transportation Ass’n v. Bylenga, 254 Mich 236, (1931), at 239, the Michigan Supreme Court held that the “Meeting of minds of the parties upon all essential points is necessary to constitute valid contract”.  See also Sterling & Co. v. Watson & Bennett Co., 193 Mich. 11 (1916); Pangbum v. Sifford, 216 Mich 153, 154 (1921).

In the case at hand the cause of action arises from Defendant’s breach of the Stock Redemption Agreement and the Covenant Not to Compete.  The terms of the Agreements clearly establish that there was a meeting of minds on all essential points.  As indicated above, not only do the Agreements speak to the issue of default by Defendant, both Agreements provide for Plaintiff to keep monies paid to her by Defendant and maintain any action or remedy that is available in law or equity to prosecute her claims. Furthermore, Sections 3, 4 and 5 of the Agreements clearly stipulate the manner in which the payments will be made to the Plaintiff.  Moreover, in Section 9 (b) of the Stock Redemption Agreement, the Defendant represented and warranted to Plaintiff that the agreement is “valid and binding obligation of Corporation in accordance with its terms”.  Finally, both Agreements were fully executed by both Plaintiff and Defendant.

In Henry C. Thayer v. Henry Augustine, 55 Mich. 187 (1884), the Supreme Court of Michigan has recognized the legal sanctity of the enforceability of contracts and observed that “Courts are not called upon when construing contracts, to abrogate or make them for the parties, but when required, to ascertain their provisions and enforce them.”  Id. at 189.  Similarly, the language of the Agreements in the case at bar is clear, and it is equally clear that Defendant is in breach of both Agreements, and that the weekly payments need to be enforced and reinstated.

In summary, a line of decisions of the Michigan Supreme Court support Plaintiff’s position that Defendant is bound to fulfill its obligations under the Agreements. The remedies available to the Plaintiff under the Agreements are legally enforceable under Michigan law.

 DEFENDANT HAS FAILED TO MAKE PAYMENTS TO PLAINTIFF IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT.

Defendant claims that it is not obliged to make any further payments on the Stock Agreement claiming that it has already paid Plaintiff the entire amount due under the Agreement.  In a letter dated February 8, 2005 (See Exhibit D), Defendant presents an amortization schedule, which appears to indicate that Defendant has made payments that satisfy both principal and interest payments due under the Agreement. However a closer look at other provisions of the Agreement subjects Defendant’s claims to factual dispute, and makes apparent irregularities in payments to Plaintiff.

First, the Stock Redemption Agreement requires weekly payments to be made to Plaintiff for a period of 10 years from the date of the Agreement.  The Agreement is dated November 1998, thus requiring regular payments to continue through November 2008.  By stopping payments under the Agreement before November 2008, Defendant has violated the terms of the Agreement.

Second, both Agreements require Defendant to make additional periodic payments if the adjusted net income of Defendant exceeded certain levels.  The sections which pertain to additional periodic payments in both Agreements do not specify when and in what matter those payments are to be made.  It may be possible that a portion of the payments made to Plaintiff, as listed in Exhibit F, were paid to satisfy the additional periodic payment provisions contained in both Agreements.  Without a full accounting by Defendant, it will not be known for certain whether or not those additional payments, as contemplated by both Agreements were ever made or credited towards the weekly payments.  Until such time as this issue is resolved, payments due to Plaintiff under the Agreements should continue, or in the alternative, this Court should require Defendant to put such payments into escrow.

Third, tax filings made with the I.R.S. by Plaintiff in the years 1999 through 2004 (See Exhibit E) as compared with the above mentioned amortization schedules (Exhibit F) highlight a discrepancy between the two, rendering suspect Defendant’s claim that Plaintiff has been properly paid in full under the Agreement.  On the contrary, such discrepancies may illustrate past improprieties in payment and support Plaintiff’s position that payments under the Agreements should be reinstated, or at the very least, held in escrow.

  1. DEFENDANT’S RECISSION OF THE COVENANT NOT TO COMPETE BASED ON PLAINTIFF’S ALLEGED BREACH OF SECTION 1(C) IS MERITLESS.

Defendant claims that Plaintiff had violated Section 1(c) of the Covenant Not to Compete, and that the February 8, 2005 (Exhibit D) letter was to serve as notice that Defendant would discontinue payments called for in the Covenant.  Section 1(c) of the Covenant prohibits Plaintiff from:

[D]irectly or indirectly, whether on her own behalf or on the behalf of another, as an investor in, owner of, or a licensor, licensee, operator, employee, agent and/or supplier, for any other person, firm, or corporation, or otherwise:

(c) Purposefully divert from Corporation or in any manner attempt to adversely influence present and/or future business relations of Corporation to its detriment.

  1. Defendant has misconstrued the unambiguous meaning Section 1(c)

A contract  should be interpreted according to its plain meaning. Wozniak v. John Hancock Mut. Life Ins. Co., 288 Mich 612 (1939).  A contract, though inartfully worded or clumsily arranged, fairly admits of but one interpretation, it may not be said to be ambiguous or fatally unclear.  Every word in the agreement must be taken to have been used for a purpose, and no word should be rejected as mere surplusage if the court can discover any reasonable purpose thereof which can be gathered from the whole instrument. Lichnovsky v. Ziebart International Corp., 414 Mich. 228   at 237.  See also  McIntosh v. Groomes, 227 Mich 215, 218 (1924), Draper v Nelson, 254 Mich 380, 383 (1931), and Laevin v. St Vincent de Paul Society of Grand Rapids, 323 Mich 607, 610 (1949).  Defendant claims that Plaintiffs alleged failure to reply to Murphy, Jr.’s requests to discuss the owner’s responsibility for capital improvements needed to keep Defendant’s building in tenable condition, implicates Plaintiff’s violation of Section 1(c).    Section 1(c) does not indicate a stipulation with regard to Plaintiff’s responsibility to keep the building tenantable, and Defendant’s argument to the contrary is laughable at best.

A plain reading of the section will reveal that it relates to the Plaintiff’s responsibility to refrain from purposefully diverting business form Defendant or purposefully influencing present or future business relations to their detriment.  The key words here are “purposeful” and “business relations”.  Section 1(c) only prohibits Plaintiff from intentionally harming business relations of Defendant. Mere neglect, as is alleged by Defendant here, was not meant to implicate Section 1(c), especially when the alleged neglect has nothing to do with the harming of business relations, but relates to the maintenance and upkeep of Defendant’s building.

In summary, a plain reading of Section 1(c) makes it clear that only purposeful diversion of business relations is prohibited, not mere neglect of real property, if it were even found to be true that Plaintiff neglected the upkeep of the building.

  1. Even if Plaintiff violated Section 1(c), such violation is not a material breach that would justify Defendant’s rescission of the contract 

In order to warrant rescission of a contract there must be a material breach affecting a substantial or essential part of the contract.    In determining whether a breach is material, the court should consider whether the breaching party obtained the benefit it reasonably expected to receive. Omnicom of Michigan v. Giannetti Inv.Co., 221 Mich. App. 341 at 349 (1997).  Other considerations include the extent to which the injured party may be adequately compensated for damages for lack of complete performance, the extent to which the breaching party has partly performed, the comparative hardship on the breaching party in terminating the contract, the willfulness of the breaching party’s conduct, and the greater or lesser uncertainty that the party failing to perform will perform the remainder of the contract. Id.

In the case at bar, even if were found that  Section 1(c) was breached by Plaintiff’s neglect of the general upkeep of Defendant’s building, such breach was not a material breach justifying Defendant’s rescission of the Covenant.  The Covenant Not to Compete deals only with Defendant’s interest in preventing Plaintiff from competing with or interfering with Defendant’s business activities.  If Section 1(c) is deemed to have been breached by Plaintiff’s neglect of the upkeep of Defendant’s building, this is a matter which does not even fall within the subject matter of the Covenant.  Furthermore, as stated in Omnicom, Supra, for a breach to be classified as material, courts need to look at the willfulness  of the breaching party’s actions.  Here, neglect of the upkeep of property is certainly not willful interference with Defendant’s business rising to the level of a material breach.  In summary, since Plaintiff’s alleged conduct in neglecting the upkeep of Defendant’s building is not a material breach vis a vis a Covenant Not to Compete, Defendant was not justified in rescinding the provision of the Covenant Not to Compete requiring Defendant to pay weekly payments to Plaintiff.

            In Walker & Company v. Harrison, 347 Mich 630 (1957), the Michigan Supreme Court discussed the meaning of a breach of contract so fatal to the undertaking of the parties that it is to be classified as material.  Id. at 635.  In this case the Plaintiff brought an action against defendant for breach of a written contract between the parties for the lease of a sign advertising defendant’s business. Defendant stopped making payments to plaintiff after attempting to get plaintiff to maintain the sign as specified in a contract between the parties. The Court here found no valid ground for defendant’s repudiation and failure to make further payments to plaintiff. The Michigan Supreme Court held that Defendant’s failure thereafter to comply with the terms of the contract was itself a material breach, entitling plaintiff to judgment.  Id. at 636.  The Court determined that there was no error in the judgment rendered against defendant for the cash price of the sign, for such services and maintenance as were extended and accepted, and interest upon the amount in default. Id. at 636.

CONCLUSION

The Plaintiff and Defendant have entered into a valid and binding contract wherein the terms have been clearly stipulated with regard to periodic payment of money to the Plaintiff. This is also supported by a default clause which provides remedies for the Plaintiff in case of default of these terms. Michigan Courts, as stated above, have repeatedly recognized the principles governing the enforceability of stipulations in valid contracts. Defendant has no defense for non-payment of the funds, nor justification for rescission of the Agreements.  Therefore the Plaintiff’s motion to reinstate monthly payments/place money in an escrow account is supported by Michigan law and precedent, and should be granted.