Superior Court of Pierce County. Superior Court Docket No. 92-2-01861-1. Date Filed In Superior Court: November 28, 1994. Superior Court Judge Signing: Donald Thompson.
Written By: Bridgewater, J., Concurred In By: Armstrong, J, Turner, J
BRIDGEWATER, J. -- Dennis and Mary Norton (Nortons) appeal a superior court order reforming a security agreement stipulated to by the Nortons and Frank and Janice Balmer (Balmers), recommended by a court-appointed receiver, and previously approved and court-ordered as part of the distribution of assets in a corporate dissolution action. We hold that, following a final judgment, reformation of a court-approved security agreement may be based only on legal grounds justifying contract reformation, not on equitable grounds. Without fraud, mutual mistake, lack of consent, or misrepresentation, the superior court
had no basis under CR 60 to modify the priority of security interests stipulated to by the parties and memorialized in the court's earlier final judgment. We reverse.
The Balmers and the Nortons were equal shareholders in a corporation, Balton, Inc., that owned six Little Caesar's Pizza stores. Disputes arose; the Nortons entered into a lease for a prospective new pizza store, the Green Firs store, under a new and separate corporation. The Balmers sued for judicial dissolution of Balton, Inc.
Judgment was entered on July 2, 1993. The judgment ordered the Nortons to transfer the assets of their separate corporation, including any interest in the Green Firs store, to Balton, Inc.; that Balton, Inc. be dissolved; and that Dennis Norton not interfere in any application Frank Balmer made for approval as a Little Caesar's franchisee. The judgment also appointed a receiver to wind up and liquidate the business.
The parties then agreed how to divide the stores and drafted reciprocal indemnity agreements to hold each other harmless from existing and potential liabilities. Liabilities included the principal balances of Michigan National Bank loans, lease obligations, and general liabilities arising out of the operation of Balton, Inc. The indemnity agreements were backed by security agreements for which the stores constituted the collateral. The security agreements provided that their respective security interests were subordinated to the existing liens of Michigan National Bank, the franchise creditor of the several stores, and that no property could be further encumbered without the secured parties' prior written consent. Dennis Norton also established a price of $12,500 for the Green Firs lease; Frank Balmer exercised a court option to assume the lease, knowing there was neither an agreement nor financing in place for a Little Caesar's franchise. The receiver recommended that the superior court adopt the parties' stipulated agreements. Thereafter, the superior court entered orders on September 29, 1993, and
November 12, 1993, memorializing the stipulated agreements of the parties and the recommendation of the receiver.
Sometime in February, 1994, the Nortons received notice from the lessor of the Green Firs store that they were in default on the Green Firs lease because the Balmers, now operating as B & J Pizza, Inc., were not paying the obliged rent. Separately, and without mention of the purported default, the receiver submitted his final report on April 1, 1994. The superior court ordered the receiver discharged on April 8, 1994. Other supplemental judgments were entered on April 20 and May 13, 1994, concerning the final distribution of assets.
While the Nortons were being warned of a possible default on the Green Firs lease, the Balmers sought to obtain franchise financing for the Green Firs store and refinancing for the other three B & J Pizza stores from Michigan National Bank. Michigan National Bank denied the Balmers' request to obtain financing because the bank's security interest would be subordinated to the security interests created by the judgment.
The Balmers filed a CR 60(b) motion on November 15, 1994, seeking to "clarify" or "modify" the judgment by reforming the security agreement so that the Nortons' security interest would be subordinated to future security interests obtained by Michigan National Bank in B & J Pizza. The superior court granted the motion. The Nortons appeal, contending the ...