Opinion
No. 353312
12-10-2020
VICTOR SIMON, Plaintiff-Appellant, v. FETLEWORK GEBREMARIAM, Defendant-Appellee, and MICHAEL SPRATT, Defendant.
If this opinion indicates that it is "FOR PUBLICATION," it is subject to revision until final publication in the Michigan Appeals Reports. UNPUBLISHED Washtenaw Circuit Court
LC No. 18-001053-CZ Before: JANSEN, P.J., and FORT HOOD and RONAYNE KRAUSE, JJ. PER CURIAM.
Plaintiff, Victor Simon, appeals as of right the trial court's judgment of no cause of action, dismissing plaintiff's claims against defendant-appellant, Fetlework Gebremariam. Plaintiff contends that the trial court erroneously circumvented application of the Michigan Uniform Voidable Transactions Act (MUVTA), MCL 566.31 et seq., and the Michigan Limited Liability Company Act (MLLCA), MCL 450.4101 et seq., on the basis of amorphous notions of equity, and that plaintiff is entitled to relief on appeal on the basis of his MUVTA claim. We affirm in part, reverse in part, and remand to the trial court for further proceedings consistent with this opinion.
The trial court found that no cause of action existed as to defendant Gebremariam after plaintiff had already obtained a default judgment against defendant Michael Spratt. Accordingly, for the purposes of this appeal, the use of defendant throughout is in reference to Gebremariam only.
I. FACTUAL BACKGROUND
As an initial matter, we note that none of the material facts in this case are in dispute were stipulated to at trial by virtue of the entry of the exhibits attached the parties' trial briefs. This action arises out of the sale and ultimate distribution of proceeds related to a piece of real property located at 509 N. Main, Ann Arbor, Michigan (the N. Main property). Spratt purchased the property on October 15, 2010. On December 29, 2010, Spratt executed a quit claim deed conveying the property to 509 N. Main MSS, LCC (the LLC), of which Spratt was the sole member and owner. The N. Main property, which Spratt valued at $650,000, was the primary, if not the sole asset of the LLC.
While not relevant to the case against defendant or her appeal, the parties note throughout the lower court record that Spratt filed for bankruptcy at some point in 2017, but appear to be unaware as to the outcome of the case. The circumstances surrounding the case were never extrapolated, and notably, Spratt became increasingly difficult to contact throughout the events leading up to this case, and at some point, completely disappeared.
On January 31, 2017, plaintiff entered into an agreement with the LLC to purchase the N. Main property. For reasons not at issue, the LLC was unable to go through with the sale, and in June 2017, breached the purchase agreement with plaintiff and agreed to pay $130,300.01 to plaintiff as a result. When the LLC subsequently failed to comply with the agreement, on October 18, 2017, plaintiff sued the LLC for breach of contract. Ultimately, on January 8, 2018, a default judgment was entered against the LLC for the value agreed upon in the termination agreement—$130,300.01.
Occurring simultaneously with the above events was a divorce case between defendant and Spratt. Spratt filed for divorce on April 5, 2017, and a receiver was appointed in the case on October 23, 2017. Among the items placed in receivership were defendant and Spratt's marital home, as well as the N. Main property, both of which the receiver was authorized through an order in the divorce case to list and sell. The N. Main property sold on December 27, 2017, and generated $894,469.69 in proceeds. The marital home was sold on February 21, 2018, generating $134,120.58 in proceeds. On February 28, 2018, a consent judgment of divorce was entered, which provided, in pertinent part:
To our knowledge, apart from the LLC being listed as the seller on the deed from the N. Main property's sale, the actual rights and obligations of the LLC were never contemplated in the divorce case.
12. The net proceeds from the sale of the parties' real properties, located at 3636 West Huron River Drive, Ann Arbor, MI and 509 North Main Street, Ann Arbor, MI will be distributed as follows:
a. Plaintiff [Spratt] is awarded ninety thousand dollars ($90,000).
b. After the Court-Appointed Receiver's fees and expenses and any outstanding expenses related to the sale of either property are paid, the
Thereafter, the receiver disbursed the agreed-upon $90,000 to Spratt, and on March 8, 2018, disbursed a remaining $859,819.65 to defendant.balance of the proceeds shall be awarded to Defendant [Gebremariam]. This amount represents Defendant[ Gebremariam]'s share of the property as well as property in lieu of support for the benefit of the children and property in lieu of spousal support.
On October 10, 2018, plaintiff filed the present action against Spratt and defendant to recover the $130,300.01 that he was never paid. Plaintiff contended that the disbursements made by the receiver to Spratt and defendant violated the law by rendering the LLC insolvent and effectively making distributions to its sole member, Spratt, without distributing first to the LLC's creditor, plaintiff. Plaintiff sought to void the disbursement pursuant to the MUVTA and the MLLCA. As noted above, on April 11, 2019, plaintiff obtained a default judgment as to Spratt for the $130,300.01.
Plaintiff also sought imposition of a constructive trust or recovery via a claim of unjust enrichment. Plaintiff raises no argument as to the dismissal of those claims on appeal.
The issue of defendant's liability ultimately proceeded to trial on November 1, 2019. Following trial, on February 28, 2020, the trial court issued an opinion and order resolving the case in defendant's favor. With specific respect to the MUVTA claim, the court held:
There is insufficient evidence to support a claim for a voidable transaction. This is a case where the Court must weigh the equities. [Defendant] came to the United States after meeting Spratt in Ethiopia. They married and had three children. English is her second language. [Defendant] took the lion's share of the proceeds from the sale of marital properties which included a lump sum payment of child support, spousal support, and her share of the property division. This was a reduced value of what she would have been entitled to receive because there was concern about Spratt and whether or not he would pay support at all. Rather than risk having a support order in place, part of her settlement included her decision to take a lump sum and use that money to support herself and her children. It is also worth noting that Spratt received $90,000.00 from the receiver.
Plaintiff could have filed suit and recorded a notice lis pendens with the Register of Deeds once Spratt breached his contract. Plaintiff also could have filed a claim or affidavit with the Register of Deeds once the breach became apparent. This would have been the only way that [the receiver] would have notice that Spratt owed [plaintiff] damages. [Plaintiff] did not. The deed from Spratt to the LLC shows that Spratt was a "married man" and [plaintiff] should have taken notice of his marital status. [Plaintiff] did not. It appears to the Court that Spratt is still in bankruptcy, but [plaintiff] could have filed a claim with the trustee for his damages or filed an adversarial proceeding in the bankruptcy itself. [Plaintiff] did not. If Spratt is not under bankruptcy protection or if he did not receive a discharge of this claim, [plaintiff] is still able to collect from Spratt. The principals of equity will
not allow this Court to undo the Consent Judgment of Divorce and void the transaction between the receiver and [defendant].With respect to both the MUVTA and MLLCA claims, the trial court determined that the LLC and Spratt were "functionally identical and operated as 'alter egos' of one another with few corporate formalities observed," and that interests in an LLC are "considered personal property to be included in the marital estate and subject to [defendant's] rights." The court noted that plaintiff must have recognized the same to some extent, because he chose to name Spratt as a defendant in this case rather than the LLC. Importantly, the court suggested that MCL 566.42 and MCL 450.4307(7) allowed the court to dispose of both the MUVTA and MLLCA claims on the basis of equitable considerations. The court subsequently issued the judgment of no cause of action that is at issue in this case.
In reality, however, plaintiff had already obtained a judgment against the LLC, and was having difficulty collecting on that judgment, presumably due to the absence or insolvency of Spratt.
II. THE MICHIGAN LIMITED LIABILITY COMPANY ACT
We first address plaintiff's argument that the trial court erred in its analysis of the MLLCA. As with the MUVTA claim, plaintiff contends that the trial court erred by essentially circumventing the statute in favor of vague equitable considerations, however, we elect to dispose of the claim on a simpler ground. We hold that defendant was not liable under the MLLCA as a matter of law.
We note, however, for instructive purposes, some of the analysis below that is applicable to the trial court's equitable considerations as applied to the MUVTA claim, may also be relevant to claims brought under the MLLCA.
"This Court reviews a trial court's findings of fact following a bench trial for clear error and reviews de novo the trial court's conclusions of law." Redmond v Van Buren County, 293 Mich App 344, 352; 819 NW2d 912 (2011). "A finding is clearly erroneous if the reviewing court is left with a definite and firm conviction that a mistake has been made." Berryman v Mackey, 327 Mich App 711, 717; 935 NW2d 94 (2019). We review de novo whether the trial court properly interpreted and applied the relevant statutes. McCormick v Carrier, 487 Mich 180, 188; 795 NW2 517 (2010).
"Our primary objective when interpreting a statute is to discern the Legislature's intent." McCahan v Brennan, 492 Mich 730, 736; 822 NW2d 747 (2012). We do so by first examining the langue of the statute itself, which provides the most reliable evidence of the Legislature's intent. Sun Valley Foods Co v Ward, 460 Mich 230, 236; 596 NW2 119 (1999). Where the language is unambiguous, we assume that the Legislature must have intended the clearly expressed meaning and enforce the statute as written. Id. In examining the language, we interpret each word according to its plain and ordinary meaning unless otherwise defined in the statute. Gurski v Motorists Mut Ins Co, 321 Mich App 657, 668-669; 910 NW2d 385 (2017).
With respect to the relevant MCLLA statute, MCL 450.4307(1)(a) provides:
We note that plaintiff's brief on appeal refers only to MCL 450.4808, which provides that an LLC that is winding up must make distributions to satisfy its liabilities to creditors before making distributions to members. MCL 450.4808(1)(a) and (b). First, defendant was never a member of the LLC, and thus it is not clear how MCL 450.4808 could apply. Second, whether it was the intent of Spratt to dissolve the LLC may seem obvious in light of the fact that the N. Main property was its sole asset, but this was never a factual issue discussed in the lower court record. In any event, plaintiff frequently referred to MCL 450.4307 in the trial court, which prohibits distributions of any kind where they render an LLC unable to pay its debts, and we presume he intended to do so on appeal.
(1) Except as provided in subsection (5), a distribution shall not be made if, after giving the distribution effect, 1 or more of the following situations would occur:" 'Distribution' means a direct or indirect transfer of money or other property or the incurrence of indebtedness by a limited liability company to or for the benefit of its members or assignees of its members in respect of the members' membership interests." MCL 450.4102(g). Members of an LLC that assent to improper distributions in violation of MCL 450.4307 may be held personally liable. MCL 450.4308.
(a) The limited liability company would not be able to pay its debts as they become due in the usual course of business.
On the basis of the facts available to the trial court, had it been necessary to reach the merits of the MLLCA claim as applied to the LLC's only member—Spratt—it would seem that he could have been liable for the LLC's distribution of its only asset to defendant without consideration of its creditor—plaintiff—under MCL 450.4307(1)(a) and MCL 450.4308. Defendant, on the other hand, was never a member of the LLC. We were not able to find any statute in the MLLCA, nor any caselaw, imposing liability on a nonmember of an LLC for being the recipient of an improper distribution from that LLC. It also follows logically that our Legislature might not have intended for the MLLCA to provide creditors a route to penalize innocent nonmembers of an LLC for the improprieties of its members, because as further discussed below, they specifically preserved creditors' ability to recover in such situations to those cases involving particularly egregious conduct. For example, cases involving fraud, which are covered by the MUVTA. To that end, as a nonmember of the LLC that received what may have been an improper distribution from the LLC under the MLLCA, defendant was not liable to plaintiff under that statutory scheme.
III. THE MICHIGAN UNIFORM VOIDABLE TRANSACTIONS ACT
Plaintiff next contends that the trial court erred in its application of the MUVTA, and unlike his argument with respect to the MLLCA, also contends that the undisputed facts as applied to the MUVTA claim entitle plaintiff to entry of a judgment in his favor on appeal. We agree that the trial court relied too heavily on somewhat vague equitable principles, and ultimately failed to apply both the MUVTA and the MLLCA to the facts of the case. However, it is unclear on appeal whether plaintiff is entitled to a judgment in his favor, and to the extent that it appears the trial court attempted to rely on a concrete equitable doctrine—piercing the corporate veil—the trial court's application of the doctrine to the facts and to the MUVTA claim was inadequate. We do note that some factual development and further exploration of the effect of piercing the corporate veil on plaintiff's MUVTA claim may more precisely allow the trial court to determine defendant's liability under the statute, and accordingly, we think it appropriate to remand for the trial court to more fully engage that issue.
The relevant MUVTA statute in this case is found at MCL 566.35(1), which is commonly referred to as pertaining to "fraud in law" or "constructive fraud," as it "deems certain transactions fraudulent regardless of the creditor's ability to prove the debtor's actual intent." Dillard v Schlussel, 308 Mich App 429, 446; 865 NW2d 648 (2014). Notably, with respect to fraudulent transfers, "[a] grantee need not personally participate in a fraudulent conveyance in order to be liable to a defrauded creditor." Regan v Carrigan, 194 Mich App 35, 38; 486 NW2d 57 (1992). Additionally, because the trial court seems to have erroneously concluded otherwise, we note that our Supreme Court has specifically held that the MUVTA "applies to a transfer of property made pursuant to a property settlement agreement incorporated in a divorce judgment," and that a MUVTA "claim is not an impermissible collateral attack on a divorce judgment." Estes v Titus, 481 Mich 573, 576; 751 NW2d 493 (2008) (emphasis added).
MCL 566.35(1) provides:
(1) A transfer made or obligation incurred by a debtor is voidable as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.A creditor seeking relief under MCL 566.35 has the burden of proving the elements of the claim by a preponderance of the evidence. MCL 566.35(3). We have described the statute as encompassing three elements: "(1) the creditor's claim arose before the transfer, (2) the debtor was insolvent or became insolvent as a result of the transfer, and (3) the debtor did not receive 'reasonably equivalent value in exchange for the transfer.' " Dillard, 308 Mich App at 446-447. " 'Claim' except as used in 'claim for relief,' means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." MCL 566.31(c). " 'Reasonably equivalent value' is a commercial concept. The touchstone is whether the transaction conferred realizable commercial value on the debtor reasonably equivalent to the realizable commercial value of the assets transferred." Dillard, 308 Mich App at 459.
As an aside, defendant implies that the trial court did not err with respect to the MUVTA claim because, even to the extent that plaintiff satisfied the elements of the claim, doing so rendered the transaction voidable, but not void ab initio. This is true, but it certainly does not mean that the trial court had complete discretion over whether to void the transaction. Fraudulent transactions generally are voidable at the option of the defrauded party. See Samuel D. Begola Servs, Inc v Wild Bros, 210 Mich App 636, 640; 534 NW2d 217 (1995). See also McMasters v Campbell, 41 Mich 513, 516; 2 NW 836 (1879) ("[F]raudulent conveyances . . . as to the creditors of the grantor they were not void, but merely voidable at their option."); Cleland v Taylor, 3 Mich 201, 206 (1854) ("It is said that a conveyance intended to defraud creditors is not void, but voidable only at the instance of such creditor.").
Plaintiff's contention that the trial court erred by engaging in an amorphous analysis of equitable considerations as a means of contravening the MUVTA, as well as the MLLCA, is valid. Notably, both statutory schemes contain statutes that permit trial courts to engage with equitable considerations, however, we agree with plaintiff that, in this case, the trial court went beyond the pale. Those statutes do not permit the trial court to circumvent other provisions of the MUVTA or MLLCA by appealing to generalized, undefined equitable principles. See Devillers v Auto Club Ins Ass'n, 473 Mich 562, 591; 702 NW2d 539 ("Indeed, if a court is free to cast aside, under the guise of equity, a plain statute . . . . simply because the court views the statute as 'unfair,' then our system of government ceases to function as a representative democracy."). Much of the trial court's opinion and order appeals to generalized, unspecific notions of equity and fairness, and at times it would seem that the trial court made its decision on the basis of what it felt to be the most equitable result without giving any actual effect to either the MUVTA or the MLLCA. That having been said, although it undeniably failed to adequately do so, at the very least, it appears that the trial court attempted to base its decision on a specific equitable principal that might have actually sounded in law and supported the outcome the trial court reached—piercing the corporate veil.
With respect to the MUVTA, MCL 566.42 provides:
Unless displaced by the provisions of this act, the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement the provisions of this act.
In Dawley v Hall, 319 Mich App 490, 496-497; 902 NW2d 435 (2017), vacated on other grounds, 501 Mich 166 (2018), this Court outlined general principles of law that are applicable to an LLC:
First, a limited liability company is a separate legal entity and "has all powers necessary or convenient to affect any purpose for which the company is formed." MCL 450.4210. See also MCL 450.1261; Salem Springs, LLC v Salem Twp, 312 Mich App 210, 223; 880 NW2d 793 (2015) (explaining "that rules regarding corporate form apply equally to limited liability companies"). Second, ownership in a limited liability company is made up of one or more members. MCL 450.4102(p). Third, "[a] member interest is personal property" and "[a] member has no interest in specific limited liability company property." MCL 450.4504(1) and (2). Fourth, a person who is a member or manager of a limited liability
company is not ordinarily liable "for the acts, debts, or obligations" of the company. MCL 450.4501(4). And Fifth, a manger of the limited liability company "is an agent" of the company. MCL 450.4406. [Alterations in original.]With specific respect to liability pertaining to the debts or obligations of an LLC, however, under certain circumstances, it is appropriate for courts to disregard the corporate entity and "pierce the corporate veil." Lakeview Commons v Empower Yourself, 290 Mich App 503, 509-510; 802 NW2d 712 (2010) (explaining that, although "the law treats a corporation as an entirely separate entity from its stockholders," it is occasionally necessary to "ignore this corporate fiction when it is invoked to subvert justice"). See also Florence Cement Co v Vettraino, 292 Mich App 461, 468-469; 807 NW2d 917 (2011) ("The rules regarding piercing a corporate veil are applicable in determining whether to pierce the corporate veil of a limited-liability company.")
"There is no single rule delineating when a corporate entity should be disregarded, and the facts are to be assessed in light of a corporation's economic justification to determine if the corporate form has been abused." Lakeview Commons, 290 Mich App at 510 (quotation marks and citation omitted). "In order for a court to order a corporate veil to be pierced, the corporate entity (1) must be a mere instrumentality of another individual or entity, (2) must have been used to commit a wrong or fraud, and (3) there must have been an unjust injury or loss to the plaintiff." Florence Cement Co v Vettraino, 292 Mich App 461, 469; 807 NW2d 917 (2011).
Preliminarily, and with respect to plaintiff's primary argument on appeal that the trial court erroneously relied on overly vague equitable principals, we note that, had the trial court conducted a more complete analysis as to whether disregarding the corporate form was appropriate under the facts, and how doing so specifically impacted plaintiff's MUVTA claim, we might take less issue with the trial court's implicit determination that both MCL 566.42 and MCL 450.4307(7) permitted the trial court to entertain piercing the corporate form as a matter of equity in relation to plaintiff's legal claims under the MUVTA and MLLCA. See Om-El Export Co, Inc v Newcor, Inc, 154 Mich App 471, 480; 398 NW2d 440 (1986) ("Disregard of the corporate form rests on notions of equity, whether an action is at law or one for equity, and is made in light of the entire spectrum of relevant evidence in a particular case."). That being said, however, on the basis of the trial court's vagueness, it is unclear from the facts of this case whether disregarding the corporate form was appropriate, and it should also be noted that, by piercing the corporate veil sua sponte, the parties did not have an opportunity to brief the issue or otherwise present any arguments or additional evidence as to how or whether the same was appropriate. Moreover, the trial court's decision to disregard the corporate form raised a host of factual issues including but not limited to what entity or individual, if any, was rendered insolvent by the transfer, or whether that entity or individual can be said to have received reasonably equivalent value in exchange for the transfer.
In summation, to the extent that the trial court's equitable considerations were largely centered on its implicit decision to pierce the corporate veil, we are not convinced that the trial court's reliance on MCL 566.42 as permission to consider that equitable principal was erroneous. However, it is also clear that the trial court only pierced the corporate veil by implication, it did not address every element of the doctrine, and its decision to disregard the corporate veil sua sponte deprived the parties of any opportunity to present argument as to the issue. Moreover, irrespective of the corporate veil, we agree with plaintiff's contention that the trial court made a number of vague appeals to generalized fairness, and that it seems to have overly relied on those ideas to circumvent any actual application of the MUVTA, which plainly is not what MCL 556.42 permits. Again, a trial court may not engage in a vague balancing of the equities on the basis of subjective feelings about what is fair under the circumstances. See Devillers, 473 Mich at 591. See also Lansing v Lansing Twp, 356 Mich 641, 650; 97 NW2d 804 (1959) ("Courts of equity, as well as of law, must apply legislative enactments in accord with the plain intent of the legislature. An argument that a statute as construed may in certain circumstances work great hardship is one that should be addressed to the legislature rather than the court.")
MCL 566.42 does not appear to limit the ability of the trial court to consider any equitable doctrine supported by law that might apply to a MUVTA claim; it provides that trial courts may consider "principles of law and equity." However, by way of example, the statute also enumerates a number of specific equitable principles that may be considered in relation to claim under the MUVTA: "the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause . . . ." These specific equitable considerations are not part and parcel to subjective feelings about the fairness of applying the MUVTA to a particular defendant. --------
IV. CONCLUSION
We agree with plaintiff that the trial court exceeded its authority under both MCL 566.42 and MCL 450.4307(7) by relying on vague articulations of equitable considerations and fairness to essentially circumvent the relevant provisions of the MUVTA and the MLLCA. However, we also conclude that defendant was not liable to plaintiff under the MLLCA as a matter of law. We also note that, while the trial court erred by failing to fully apply the MUVTA, it also appears that the trial court attempted to base its decision on a specific equitable principal—piercing the corporate veil—that might have sounded in law and supported the outcome the trial reached. Some factual development and further exploration as to the applicability of piercing the corporate veil, as well as the effect of piercing the corporate veil on plaintiff's MUVTA claim, may more precisely allow the trial court to determine defendant's liability under the statute, and accordingly, we think it appropriate and in the interests of justice to remand for the trial court to more fully engage that issue.
Affirmed in part, reversed in part, and remanded to the trial court for further proceedings consistent with this opinion. We retain jurisdiction.
/s/ Kathleen Jansen
/s/ Karen M. Fort Hood
ORDER
Kathleen Jansen Presiding Judge Karen M. Fort Hood Amy Ronayne Krause Judges
Pursuant to the opinion issued concurrently with this order, this case is REMANDED for further proceedings consistent with the opinion of this Court. We retain jurisdiction.
Proceedings on remand in this matter shall commence within 56 days of the Clerk's certification of this order, and they shall be given priority on remand and concluded within 91 days of the Clerk's certification of this order. As stated in the accompanying opinion, the trial court's March 11, 2020 judgment of no cause of action against defendant Gebremariam is affirmed in part, vacated in part, and this matter is remanded for the trial court to readdress plaintiff's claim under the Michigan Uniform Voidable Transactions Act, MCL 566.31 et seq., in a manner consistent with the opinion. The proceedings on remand are limited to this issue.
The parties shall promptly file with this Court a copy of all papers filed on remand. Within seven days after entry, appellant shall file with this Court copies of all orders entered on remand.
The transcript of all proceedings on remand shall be prepared and filed within 21 days after completion of the proceedings.
/s/_________
Presiding Judge Ronayne Krause, J., would not order a remand for the reasons stated in her concurring in part/dissenting in part opinion.
A true copy entered and certified by Jerome W. Zimmer Jr., Chief Clerk, on
December 10, 2020
Date
/s/_________
Chief Clerk
With respect to the MLLCA, MCL 450.4307(7) provides that, where an improper distribution has been made by an LLC, the MLLCA "does not prevent the person receiving the distribution from "asserting a right of rescission or other legal or equitable rights." MCL 450.4307(7).