Old Kent Bank v. Kal Kustom Enterprises

Citations: 660 N.W.2d 384; 255 Mich. App. 524Docket: Docket 231915

Court: Michigan Court of Appeals; May 6, 2003; Michigan; State Appellate Court

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Old Kent Bank, as assignee of J. M Marine, Inc., initiated legal action against Kal Kustom Enterprises after a powerboat purchased by Daniel Popp through J. M Marine failed to meet specified standards. The trial court granted summary disposition to Kal Kustom, but this decision was reversed and remanded. 

The factual background reveals that J. M Marine, acting as a guarantor for Old Kent, contracted with Kal Kustom for the sale of the boat, which was manufactured by Magic Powerboat Sales, Inc. Following the boat's delivery in summer 1997, defects were reported by J. M Marine's attorney to Kal Kustom. Correspondence ensued, but it is unclear if Kal Kustom received the necessary documentation regarding these defects. 

In November 1997, Old Kent sued Popp and J. M Marine for payment on the installment sales contract, leading to Popp counterclaiming against Old Kent for misrepresentation and other claims. A stipulated order in August 1998 allowed Old Kent to sell the boat to satisfy the contract balance, with Popp waiving notice rights. A settlement agreement between J. M Marine and Popp released Popp from further liability for the boat, while J. M Marine assigned its claims against Kal Kustom to Old Kent.

Old Kent subsequently filed this action in April 1999, claiming breach of contract and warranty against Kal Kustom. Kal Kustom countered, arguing that Old Kent lacked standing to assert claims due to a failure to notify it of the earlier litigation involving J. M Marine and Popp. Kal Kustom maintained that its liability was limited to the $4,800 settlement, contending it was not a party to the retail installment sales contract.

Old Kent contended that Kal Kustom had multiple chances to defend a previous lawsuit but chose not to. Old Kent acknowledged that while Kal Kustom was aware of defects in a boat from an August 1997 letter, it did not learn of the prior litigation until 1999 and did not receive written notice of J. M Marine's defenses until May and July 2000. The trial court ruled in favor of Kal Kustom, citing M.C.L. 440.2607(5)(a), determining that Kal Kustom did not receive proper notice of the 1997 lawsuit, and the subsequent notices in 2000 were too late to protect Kal Kustom's interests. The court noted that significant events had occurred since the 1997 lawsuit, including the sale of the boat and waivers affecting rights under the UCC, which prejudiced Kal Kustom. Old Kent argued that the trial court erred in granting summary disposition, asserting that notice was not required by M.C.L. 440.2607(5)(a). The trial court's decision, which was reviewed de novo, found no genuine issues of material fact and concluded that timely notice was essential for Kal Kustom's protection. The court's analysis emphasized that Old Kent was not trying to bind Kal Kustom to the 1997 proceedings and that 'vouching in' was not the sole means of recovery for a nonconforming sale.

The analysis focuses on M.C.L. 440.2607(5)(a) to determine whether notice was required to be given to Kal Kustom and the implications of any failure to provide such notice. The plaintiff argues that the statute is inapplicable because the buyer of the defective boat did not accept it, claiming that M.C.L. 440.2607 applies only to accepting buyers. However, the court does not address the applicability of the statute to rejecting buyers, instead concentrating on whether notice was required. M.C.L. 440.2607(5)(a) allows a buyer sued for breach of warranty to give written notice to the seller, stating that the seller may defend in the litigation; failure to do so binds the seller to factual determinations in any subsequent actions by the buyer. The statute is part of Michigan's Uniform Commercial Code, intended to vouch in potentially liable sellers in lawsuits regarding nonconforming sales. The only relevant case, Ford Motor Co. v. Bendix Corp., dealt with the timeliness of the notice rather than its necessity, providing limited guidance for the current issue. The court emphasizes that statutory interpretation aims to ascertain and fulfill legislative intent, requiring examination of the statute's language, which must be clear and unambiguous. M.C.L. 440.2607(5)(a) is deemed clear, indicating that providing notice is at the buyer's discretion when facing litigation regarding the seller's obligations.

MCL 440.2607(5)(a) employs the term 'may,' indicating the provision is permissive, not mandatory. In contrast, 'shall' signifies a mandatory requirement, as established in case law. The Legislature’s choice of language suggests that subsection 2607(5)(a) allows a buyer certain actions without imposing a duty to provide notice, differing from other subsections that explicitly require notice. The trial court incorrectly interpreted the notice requirement as mandatory, thereby erring in its summary disposition favoring the defendant. The statute, part of the Uniform Commercial Code adopted in Michigan, does not obligate a buyer to notify a seller of ongoing litigation or risk barring future claims against the seller. Consequently, the failure to provide notice in this case means that Kal Kustom is not bound by prior factual determinations from a 1997 lawsuit, allowing Old Kent to pursue its claims. The trial court's decision did not address issues related to breach of contract and implied warranties, which the appellate court does not need to consider further, as there are unresolved genuine issues of material fact regarding Old Kent's claims as an assignee of J. M Marine. The appellate court has reversed the trial court's decision and remanded the case without retaining jurisdiction. Kal Kustom had previously been dismissed from the case, and Magic Powerboat Sales, Inc. was not part of the appeal. A judgment had already been rendered in favor of Old Kent in the earlier litigation. The court noted Kal Kustom's argument regarding liability stemming from a contract it was not part of, but this was not examined further as the trial court had not addressed it.