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Buschmann v. Professional Men's Association

January 3, 1969


Swygert, Fairchild and Cummings, Circuit Judges.

Author: Swygert

SWYGERT, Circuit Judge.

Plaintiff, C. Severin Buschmann, Jr., appeals from the district court's judgment dismissing his second amended complaint on the ground that it failed to state a claim upon which relief could be granted. Buschmann brought this action to recover damages which were alleged to have arisen out of a breach of contract by the defendant, Professional Men's Association, Inc.

The facts as alleged by Buschmann which give rise to this lawsuit are that prior to March 30, 1965, Professional Men's Association of Indiana and Kentucky, Inc., a Kentucky Corporation (Old Corporation), was engaged in the business of financing and collecting medical, dental, and other professional fees for services rendered by doctors and dentists. The corporation further financed hospitals, clinics, and other medical accounts and the purchase of medical and dental equipment and facilities. This corporation operated under a franchise from the defendant and conducted its business under a procedure known as P.M.A. Plan of Operation.

At that time, Old Corporation was indebted to Merchants National Bank & Trust Company, Indianapolis, Indiana (Bank), in the sum of $40,000, which indebtedness had been guaranteed by the plaintiff and his wife. Old Corporation was also indebted to the plaintiff in the sum of $100,000 which he had borrowed from the Bank and reloaned to Old Corporation.

As security for the said indebtedness of Old Corporation to Buschmann, Old Corporation had given Buschmann a security interest in all of the assets of Old Corporation. This security interest, consisting of notes and accounts receivable from patients to hospitals, doctors, and dentists which had been assigned and endorsed to Old Corporation, was duly perfected.

Because Old Corporation was in default under the terms and conditions of its security agreement, on March 30, 1965, Buschmann took possession of Old Corporation's notes and accounts receivable, which amounted to $377,000. Pursuant to his rights under the Uniform Commercial Code, Buschmann claims he had the right to collect and dispose of this collateral and to use the proceeds to satisfy the $140,000 in loans that he was obligated to pay the Bank.

At this point the defendant intervened and represented to Buschmann that liquidation of Old Corporation by him would injure the defendant's business and that the defendant desired to continue the operation of the business formerly carried on by the Old Corporation. In addition, the defendant further represented to Buschmann that it did not want to assume operation of Old Corporation directly until the $140,000 indebtedness had been eliminated, because the defendant did not want to show the indebtedness as a liability on its balance sheet. As an interim arrangement the defendant proposed that a new corporation be set up to operate the business until the indebtedness had been paid off out of operating revenues. The defendant represented that it would then merge the new corporation into itself.

To implement this understanding, on April 23, 1965 the defendant, Buschmann, and the Bank entered into a contract, which is the foundation of this litigation. The contract provided that a new corporation, Indiana Professional Men's Association, Inc. (New Corporation), was to be formed and to take over the assets and business of Old Corporation. Old Corporation's $140,000 indebtedness was to be secured by the assets of New Corporation. The parties agreed that the defendant would operate or manage the New Corporation and certain individuals would comprise the board of directors. It was provided further that if the operations of New Corporation were successful, it would be merged into the defendant. To cover this contingency, the stock of New Corporation was issued in Buschmann's name and an option was given to the defendant to acquire it from Buschmann.

Pursuant to the terms of this contract, New Corporation was organized and Buschmann transferred all of the assets of Old Corporation in which he held an interest to New Corporation. The Bank became a creditor of New Corporation for the sum of $140,000 which was unconditionally guaranteed by Buschmann and his wife. On May 3, 1965, New Corporation entered into a security agreement with the Bank whereby the Bank was granted a security interest in the accounts receivable and proceeds then owned and thereafter to be acquired by New Corporation as security for the $140,000 indebtedness of New Corporation to the Bank.

About one year later, on June 22, 1966, the Bank, deeming itself insecure, called its loan to New Corporation and demanded payment in full by August 1, 1966. On that date, the defendant refused to permit New Corporation to make the payment and the indebtedness went into default. Thereupon, the Bank demanded payment by Buschmann of the note under his guaranty. Upon payment of the interest due, the Bank agreed not to proceed against Buschmann and his wife, but required them to sign the note as comakers.

On August 19, 1966, the Bank exercised its rights under the terms of its security agreement and demanded that New Corporation surrender possession of the collateral covered by the security agreement to the Bank. This demand was refused by New Corporation because the collateral had been dissipated.

Since August 1, 1966, Buschmann has paid the interest on the defaulted note and has sustained a liability of $140,000 by reason of Old Corporation's refusal to pay. After alleging the foregoing facts, Buschmann asserts that the contract of April 23, 1965 contained an implied promise by the defendant not to misuse its control over New Corporation so as to prevent New Corporation from fulfilling its obligations to the Bank under the security agreement and that the defendant breached this implied promise to the detriment of Buschmann. It is also alleged that the defendant further breached the contract in that it liquidated the business in violation of the express provisions of the contract.

In granting the motion to dismiss, the court held that the duty assumed by the defendant under the contract to operate and manage the business of New Corporation and the implied promise not to misuse its control over New Corporation so as to prevent New Corporation from fulfilling its obligation to the Bank under the security agreement ran directly to New Corporation and that Buschmann had no right to sue thereon after the adoption of the contract by New Corporation. The court also held that the contract itself was ...

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