Opinion
No. 350238
10-15-2020
JOHN BROOKS, Plaintiff-Appellee, v. PHCN INVESTMENTS, LLC, Defendant-Appellant.
If this opinion indicates that it is "FOR PUBLICATION," it is subject to revision until final publication in the Michigan Appeals Reports. UNPUBLISHED St. Clair Circuit Court
LC No. 18-002662-CK Before: GADOLA, P.J., and RONAYNE KRAUSE and O'BRIEN, JJ. PER CURIAM.
Defendant appeals as of right the trial court's order granting summary disposition to plaintiff. We reverse.
I. BACKGROUND
Physician Healthcare Network, PC (Physician Healthcare) hired plaintiff as an infectious disease specialist in 1997. In 1999, plaintiff became a shareholder of Physician Healthcare and a member of defendant, a division of Physician Healthcare. Plaintiff resigned from his employment with Physician Healthcare on December 16, 2015, effective January 17, 2016. When plaintiff left, he owed Physician Healthcare for cumulative overpayments that he refused to pay, which led to Physician Healthcare's obtaining a judgment against plaintiff for $114,258.71. Also when plaintiff left, defendant, as part of its operating agreement, was obligated to purchase plaintiff's membership interest within 60 days of plaintiff's leaving. Defendant filed a Schedule K-1 form with the Internal Revenue Service (IRS) reflecting that it had distributed $22,495—the amount of plaintiff's membership interest—to plaintiff, but it never actually made that distribution.
This led plaintiff to file suit against defendant for breach of contract and common law and statutory conversion. For his breach of contract claim, plaintiff alleged that defendant failed to pay him his membership interest within 60 days of his leaving. For his common law and statutory conversion claims, plaintiff alleged that defendant retained the value of plaintiff's membership interest and converted the money for its own use to offset the debt that plaintiff owed Physician Healthcare. Plaintiff eventually moved for summary disposition under MCR 2.116(C)(10) on all his claims. Defendant responded that, while it breached the operating agreement, it did not commit common law or statutory conversion because it did not owe plaintiff a distinct legal duty separate from its contractual obligations. After a hearing on the motion, the trial court granted plaintiff's motion, concluding that defendant breached the operating agreement and committed common law and statutory conversion by retaining the value of plaintiff's membership interest to offset the debt that plaintiff owed Physician Healthcare. This appeal followed.
II. STANDARD OF REVIEW
This Court reviews de novo a trial court's summary disposition ruling. Bennett v Russell, 322 Mich App 638, 642; 913 NW2d 364 (2018). A motion under MCR 2.116(C)(10) tests the factual sufficiency of a claim and "may only be granted when there is no genuine issue of material fact." El-Khalil v Oakwood Healthcare, Inc, 504 Mich 152, 160; 934 NW2d 665 (2019). "A genuine issue of material fact exists when the record leaves open an issue upon which reasonable minds might differ." Id. (quotation marks and citation omitted). When deciding a (C)(10) motion, courts are to consider affidavits, pleadings, depositions, admissions, and other documentary evidence submitted by the parties. MCR 2.116(G)(5).
III. ANALYSIS
Defendant argues on appeal that the trial court erred by granting summary disposition to plaintiff on his statutory and common law conversion claims because, absent the operating agreement giving rise to plaintiff's breach of contract claim, defendant did not owe a duty to plaintiff giving rise to plaintiff's conversion claims. We agree.
Common-law conversion is defined as "any distinct act of dominion wrongfully exerted over another's personal property in denial of or inconsistent with his rights therein." Aroma Wines & Equip, Inc v Columbian Distrib Servs, Inc, 497 Mich 337, 351-52; 871 NW2d 136 (2015) (quotation marks and citations omitted). A statutory claim for conversion is governed by MCL 600.2919a, which provides:
(1) A person damaged as a result of either or both of the following may recover 3 times the amount of actual damages sustained, plus costs and reasonable attorney fees:Statutory conversion under MCL 6002919a(1)(a) consists of the same elements as common law conversion, but requires the plaintiff to present evidence that the conversion was for the defendant's "own use." Aroma Wines, 497 Mich at 356. In Aroma Wines, our Supreme Court referred to statutory conversion as a "subset of common-law conversion" in which the conversion must specifically be "to the other person's 'own use.' " Id. at 354-355.
(a) Another person's stealing or embezzling property or converting property to the other person's own use.
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(2) The remedy provided by this section is in addition to any other right or remedy the person may have at law or otherwise.
Defendant failed to pay plaintiff the money it owed him for the purchase of his membership interest. Defendant's argument that this failure could not be the basis for a claim of conversion implicates the general principle that "in a case of nonfeasance in performance of a contract . . . an action sounding in tort cannot be founded thereon." Hart v Ludwig, 347 Mich 559, 562; 79 NW2d 895, 897 (1956) (quotation marks and citation omitted). Relying on this rule, this Court has held that where "there was no breach of duty distinct from the breach of contract, [the] plaintiff's cause of action [arises] from a breach of promise or the nonfeasance of a contractual obligation and her action is in contract, not in tort." Brewster v Martin Marietta Aluminum Sales, Inc, 145 Mich App 641, 668; 378 NW2d 558 (1985). It follows that for us to determine whether plaintiff's conversion claims are actionable, "the threshold inquiry is whether the plaintiff alleges violation of a legal duty separate and distinct from the contractual obligation." Rinaldo's Const Corp v Michigan Bell Tel Co, 454 Mich 65, 84; 559 NW2d 647 (1997).
We conclude that plaintiff does not. All parties agree that defendant breached its contract with plaintiff by failing to pay plaintiff $22,495 to purchase plaintiff's membership interest within 60 days of plaintiff's leaving. Plaintiff contends, however, that defendant did more than just not pay him. According to plaintiff, defendant's filing the Schedule K-1 with the IRS amounted to "irrefutable evidence that the [purchase] was completed, and the funds distributed," and defendant's subsequent act of withholding those funds because of plaintiff's overage with Physician Healthcare gave rise to his tort claim. This argument has a fundamental flaw: defendant's duty to give the funds to plaintiff, and relatedly to not withhold the funds, arose out of the parties' contractual relationship. Plaintiff even recognizes as much on appeal when he states, "There is nothing in the Operating Agreement that gave [defendant] any right to hold the funds for any reason." (Emphasis added.)
Plaintiff also tries to argue that defendant breached a "secondary obligation to return [plaintiff's] money that arose after closing and pursuant to the issuance of the K-1," but that argument is unconvincing. Defendant's failure to pay plaintiff " after closing and pursuant to the issuance of the K-1" was a continued failure to satisfy its obligations pursuant to the parties' contract. No "secondary obligation" was created by defendant's continued nonfeasance.
In sum, plaintiff has not identified any breach of duty separate and distinct from defendant's breach of the parties' contract. And because there was no breach of duty distinct from the breach of contract, plaintiff's cause of action arose from the nonfeasance of a contractual obligation and his action is in contract, not in tort.
In his brief on appeal, plaintiff appears to also contend that defendant breached its duty to plaintiff not by withholding plaintiff's distribution but by giving it to an "attorney" because of plaintiff's overpayments from Physician Healthcare. To the extent that plaintiff alleges that defendant distributed the money to a person or entity other than plaintiff, that act was, at most, "negligent performance" of the parties' contract insufficient to establish a foundation in tort. See Rinaldo's Const Corp, 454 Mich at 85 ("While [the] plaintiff's allegations arguably make out a claim for 'negligent performance' of the contract, there is no allegation that this conduct by the defendant constitutes tortious activity in that it caused physical harm to persons or tangible property; and plaintiff does not allege violation of an independent legal duty distinct from the duties arising out of the contractual relationship.") (Emphasis added.) --------
The parties do not challenge the trial court's grant of summary disposition on plaintiff's claim for breach of contract, so that ruling is affirmed. However, for the reasons explained in this opinion, we reverse the trial court's grant of summary disposition to plaintiff on his conversion claims, and remand to the trial court for reassessment of plaintiff's damages.
Affirmed in part, reversed in part, and remanded for further proceedings. We do not retain jurisdiction.
/s/ Michael F. Gadola
/s/ Amy Ronayne Krause
/s/ Colleen A. O'Brien