Opinion
Case No. 2:21-cv-12087
2024-05-21
IN RE: Joseph G. DUMOUCHELLE and Melinda J. Adducci, Debtors. Michael A. Stevenson, Plaintiff, v. William Noble Rare Jewels, LP and William Noble, Defendants.
Bryan D. Marcus, Brian D. Marcus, P.C., Royal Oak, MI, Elliot G. Crowder, Stevenson & Bullock, P.L.C., Southfield, MI, for Plaintiff. Ryan D. Heilman, Wernette Heilman PLLC, Southfield, MI, for Defendants.
Bryan D. Marcus, Brian D. Marcus, P.C., Royal Oak, MI, Elliot G. Crowder, Stevenson & Bullock, P.L.C., Southfield, MI, for Plaintiff. Ryan D. Heilman, Wernette Heilman PLLC, Southfield, MI, for Defendants. ORDER ADOPTING THE BANKRUPTCY COURT'S RECOMMENDATION AND DENYING DEFENDANTS' OBJECTION STEPHEN J. MURPHY, III, United States District Judge
The present matter before the Court is an adversary proceeding between parties involved in a bankruptcy case and it involves their rights and assets. Plaintiff Michael Stevenson is the Chapter 7 Trustee for the bankruptcy estate of Debtors Joseph DuMouchelle and Melinda Adducci. The adversary case concerns $4.25 million that was allegedly fraudulently transferred from Thomas Ritter to Debtor DuMouchelle and then to Defendants William Noble Rare Jewels (WNRJ) and William Noble. ECF 9, PgID 436-38 (complaint). Plaintiff sued to recover the $4.25 million and argued that the funds should be part of Debtors' bankruptcy estate because the funds were fraudulently transferred and converted. Id. at 438-44.
Fred Dery, the initial Chapter 7 Trustee, filed the complaint that initiated the adversary proceeding against Defendants. ECF 9, PgID 1357. After Dery died, Michael Stevenson was appointed Chapter 7 Trustee and became Plaintiff in the adversary proceeding. Id.
The Court must decide whether to adopt the bankruptcy court's recommendation to dismiss claims five, six, and seven of the complaint. And the Court's decision will rest on the single issue of who obtained voidable title to the $4.25 million after Ritter transferred it to Debtor DuMouchelle's limited liability company (LLC) and DuMouchelle transferred it to Defendants. See id. at 1392 (Plaintiff's objection to bankruptcy judge's Recommendation). After reviewing the parties' summary judgment briefs, the bankruptcy court's opinion, and Defendants' objection, the Court need not hold a hearing. See Fed. R. Bankr. P. 8013(c); E.D. Mich. LR 7.1(f). For the reasons below, the Court will adopt the bankruptcy court's recommendation and dismiss claims five, six, and seven.
BACKGROUND
Because Defendants did not object to the bankruptcy court's factual findings or background, the Court will rely on the bankruptcy judge's background facts. See ECF 9, PgID 1351-57.
Defendant WNRJ is a jewelry company that buys and sells jewelry and jewels on consignment. ECF 9, PgID 1351. Defendant Noble is an owner of WNRJ. Id. WNRJ occasionally did business with Debtor DuMouchelle, a jeweler from Birmingham, Michigan. Id. at 436. DuMouchelle's business involved securing funds from investors to purchase valuable gems, selling the gems for a profit, and then splitting the profits with the investors. Id. In other words, Debtor DuMouchelle was a gemstone flipper.
On several occasions, Debtor DuMouchelle partnered with Ritter, as the investor, to flip gems. Id.; id. at 1353. In 2019, DuMouchelle told Ritter about an investment opportunity to flip a 77.12 carat, yellow diamond called the "Yellow Rose Diamond." Id. at 1353. In fact, the opportunity was a scam that was orchestrated by DuMouchelle to fraudulently obtain millions of dollars from Ritter. DuMouchelle sent fake emails to Ritter that appeared to be from the seller of the Yellow Rose Diamond. Id. In the emails, DuMouchelle included wire transfer information and instructed Ritter to wire $12 million to the "seller's" account. Id.
Unbeknownst to Ritter, the wire account information provided by DuMouchelle resulted in the funds being transferred to DuMouchelle's LLC's bank account—not to the seller of the Yellow Rose Diamond. Id. The day after the transfer, DuMouchelle transferred $4.25 million of the $12 million to Defendant WNRJ to pay off debts that DuMouchelle owed Defendant WNRJ. Id. at 1354. Ritter also did not know that WNRJ was the actual owner of the Yellow Rose Diamond and that WNRJ refused to consign the Yellow Rose Diamond to DuMouchelle. Id. In 2020, DuMouchelle was charged criminally for wire fraud. United States v. DuMouchelle, No. 20-cr-20245 (E.D. Mich. June 16, 2020). He pleaded guilty and is currently incarcerated in Miami, Florida. Id.; ECF 9, PgID 1354.
In October 2019, Debtors DuMouchelle and Adducci voluntarily filed a petition for Chapter 11 bankruptcy that was later converted to Chapter 7 bankruptcy. ECF 9, PgID 1354. One month later, Ritter and WNRJ filed an involuntary Chapter 7 bankruptcy petition against DuMouchelle's LLC. Id. at 1355. Ritter moved for relief from the automatic bankruptcy stay and sought to sue WNRJ and Noble to recover the $4.25 million. Id. The Chapter 7 Trustees in both bankruptcy proceedings objected. Id. Ritter and the Trustees reached a compromise, which the bankruptcy court approved. Id. at 1356. The compromise allowed Frank Dery—the original Chapter 7 Trustee in Debtors' bankruptcy proceeding—to sue Defendants in the present adversary proceeding. Id. at 1356-57.
I. Claims in the Adversary Proceeding
Plaintiff alleged eight counts in the complaint: (1) fraudulent transfer under 11 U.S.C. § 548; (2) recovery of avoidable transfer under 11 U.S.C. § 550(a); (3) preservation of avoided transfer under 11 U.S.C. § 551; (4) claim disallowance under 11 U.S.C. § 502; (5) unjust enrichment/constructive trust; (6) common law money had and received under Texas Law; (7) common law conversion under Michigan law; (8) statutory conversion under Michigan Law. ECF 9, PgID 438-44. Plaintiff pursued the first four claims in his capacity as Trustee of the Individual Debtors' bankruptcy estate. The first four claims were therefore core claims to the bankruptcy proceeding. Id. at 1357; 28 U.S.C. § 157(b)(2) (defining "core proceedings"). The last four claims, however, are non-core because Plaintiff is pursuing them in his capacity as assignee of Ritter's right; to sue under the compromise. Id.
The bankruptcy court oversaw discovery and resolved pretrial issues. See ECF 9, PgID 419-33 (bankruptcy record); see also ECF 3, PgID 19-21 (order requiring the bankruptcy court to resolve all pretrial issues and noting that the parties did not consent to trial before the bankruptcy court). The bankruptcy court issued an opinion in which it granted Defendants' motion for summary judgment as to core claims one, two, three, and four. ECF 9, PgID 1360-67. The bankruptcy court also recommended that the Court dismiss counts five, six, and seven and proceed to trial only on count eight. Id. at 1368-80. Plaintiff objected and argued that counts five, six, and seven should not be dismissed. Id. at 1391-94.
LEGAL STANDARD
District courts have both (1) original and exclusive jurisdiction "of all cases under title 11," and (2) "original but non-exclusive jurisdiction 'of all civil proceedings arising under title 11, or arising in or related to cases under title 11." In re HNRC Dissolution Co., 761 F. App'x 553, 559 (6th Cir. 2019) (quoting 28 U.S.C. § 1334(a), § 1334(b)). The bankruptcy court has jurisdiction to determine cases and enter judgment in "core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § 157(b)(1). The bankruptcy court may issue recommendations that detail its factual findings and legal conclusions with respect to non-core proceedings that are related to a core proceeding under title 11. Id. § 157(c)(1). A district court "may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions." Fed. R. Bankr. P. 9033(d). The district court must review de novo "those matters to which any party has timely and specifically objected" and must issue a final order and judgment after considering the bankruptcy court's proposed findings and conclusions. 28 § 157(c)(1).
I. Summary Judgment Standard
The Court must grant a summary judgment motion "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A moving party must point to specific portions of the record that "it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met its burden, the non-moving party may not simply rest on the pleadings but must present "specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (emphasis omitted) (quoting Fed. R. Civ. P. 56(e)).
A fact is material if proof of that fact would establish or refute an essential element of the cause of action or defense. Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir. 1984). A dispute over material facts is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When considering a summary judgment motion, the Court must view the facts and draw all reasonable inferences "in the light most favorable to the non-moving party." 60 Ivy St. Corp. v. Alexander, 822 F.2d 1432, 1435 (6th Cir. 1987) (citations omitted).
DISCUSSION
The Court need not address the bankruptcy court's dismissal of counts one, two, three, and four because the bankruptcy court had authority to issue a final judgment on those core claims. 28 U.S.C. § 157(b)(1). Because Plaintiff objected to the bankruptcy court's recommendation that the Court dismiss claims five, six, and seven, the Court will review the summary judgment motion as to those claims de novo. 28 § 157(c)(1). The three claims are based on the premise that Plaintiff is still the rightful owner of the $4.25 million that was transferred to Defendants via DuMouchelle.
I. Ownership of the Funds
Whether voidable title passed from Ritter to DuMouchelle, the LLC, or to Defendants is a question of law that is appropriate for resolution at the summary judgment stage because there is no genuine issue of material fact for trial. The parties did not dispute that Ritter voluntarily transferred the funds from his bank account to DuMouchelle's LLC's bank account. ECF 9, PgID 987, 1008-09. Rather, the parties disagreed about who legally and equitably received voidable title to the funds. Defendants argued that voidable title passed from Ritter to DuMouchelle's LLC and then to Defendants, not from Ritter to Defendants directly. Id. at 987. Plaintiff disagreed and argued that title did not pass through DuMouchelle's LLC, but rather through DuMouchelle himself. Id. at 1012-13. Under Plaintiff's theory, the bankruptcy court could void DuMouchelle's title to the funds as a fraudulent transfer. See 11 U.S.C. § 548. Plaintiff's theory "leads to the inescapable conclusion that Defendants did, in fact, receive" funds that belonged to Ritter. Id. at 1393-94.
But Plaintiff's theory is inconsistent with Michigan law. Because Ritter voluntarily and intentionally transferred the funds, voidable title passed from Ritter to DuMouchelle's LLC. See Kitchen v. Boyd (In re Newpower), 233 F.3d 922, 929 (6th Cir. 2000) (distinguishing between passage of title in larceny and false pretense crimes under Michigan law). If an individual obtains property via larceny, title remains with the original owner and does not pass to the thief. Id. But, if an individual obtains property through fraud or under false pretenses, title to the property passes to the recipient of the property. Id.
In Michigan, the property owner's intent determines whether title passes or not. People v. Malach, 202 Mich. App. 266, 271, 507 N.W.2d 834 (1993). If the owner transfers the property and intends to transfer title, but the transfer was procured through fraud, the crime is false pretenses, not larceny. Id. Here, Ritter intended to transfer the $12 million to the account identified on the wire transfer instructions, which was DuMouchelle's LLC's account. DuMouchelle induced Ritter to transfer the funds through false pretenses, not larceny. Title therefore passed to the recipient, DuMouchelle's LLC.
Plaintiff argued in the objection to the bankruptcy court's recommendation that title passed to DuMouchelle himself, not to the LLC, based the Sixth Circuit's explanation in Newpower that an "offender obtains voidable title to the property." 233 F.3d at 929; ECF 9, PgID 1393. Because "there is no question that DuMouchelle was the only party who had anything to do with the fraud committed upon Ritter," Plaintiff argued that DuMouchelle was the "offender" and therefore obtained voidable title to the funds. ECF 9, PgID 1393 (emphasis omitted). The court in Newpower did not distinguish between the offender and recipient of fraudulently induced funds because it was not confronted with a factual scenario in which that distinction mattered. At bottom, however, Newpower stands for the rale that voidable title passes when money is obtained through false pretenses. 233 F.3d at 929. And the Court must decide here whether voidable title passed to DuMouchelle or DuMouchelle's LLC.
"A deposit account is prima facie owned by the person or entity in whose name the account exists." Medilink Ins. Co. v. Comerica Bank, No. 09-13692, 2011 WL 1103644, *7 (E.D. Mich. March 23, 2011) (citing Muskegon Lumber & Fuel Co. v. Johnson, 338 Mich. 655, 62 N.W.2d 619 (1954)). It is undisputed that DuMouchelle's LLC owned the bank account that received Ritter's wire transfer funds. The funds were never transferred to DuMouchelle's personal account. "Michigan law treats limited liability companies separately from their members." Tooling, Mfg. & Techs. Ass'n v. Hartford Fire Ins. Co., 693 F.3d 665, 672 (6th Cir. 2012). And under Michigan law, "a member has no interest in specific limited liability company property." Mich. Comp. Laws § 450.4504. Thus, once Ritter transferred the funds, they belonged to DuMouchelle's LLC and not to DuMouchelle.
Plaintiff argued, however, that the Court should pierce the corporate veil—the legal fiction that treats entities separately from their members or stockholders—because DuMouchelle used the LLC as an instrumentality of wrongdoing. See ECF 9, PgID 1012 (citing Allstate Ins. Co. v. Citizens Ins. Co. of America, 118 Mich.App. 594, 600, 325 N.W.2d 505 (1982)). Piercing a corporate veil is an equitable remedy that should only be invoked in instances of fraud, illegality, or injustice. See Florence Cement Co. v. Vettraino, 292 Mich. App. 461, 468, 807 N.W.2d 917 (2011); Allstate, 118 Mich. App. at 600, 325 N.W.2d 505. In Michigan, veil piercing applies to liability. See Allstate, 118 Mich. App. at 600-01, 325 N.W.2d 505. Veil piercing does not transform an entity's property into the property of the entity's members or stockholders. In re Silver, 647 B.R. 897, 909-10 (Bankr. E.D. Mich. 2022) (ruling that even if the plaintiff successfully pursued veil piercing claims, under Michigan law the corporation's property would not be consolidated with the individual debtor's estate). But the issue involved in the present motion addresses property ownership, not liability. DuMouchelle is not a party to the adversary proceeding. Rather, liability for Defendants in this case depends on DuMouchelle's LLC's property ownership—which cannot be subject to veil piercing. Under Michigan law, the Court cannot treat DuMouchelle's LLC's property as DuMouchelle's property. And as a result, the Court finds that the funds were transferred from Ritter to DuMouchelle's LLC and then to Defendants.
II. Summary Judgment on Claims Five, Six, and Seven
Now that the Court established the chain of title for the funds that Ritter transferred, the Court will turn to the three contested claims.
To prove unjust enrichment (claim five), Plaintiff was required to establish (1) Defendant's receipt of a benefit from Plaintiff, and (2) an inequity resulting to Plaintiff because of the retention of the benefit by Defendant. Morris Pumps v. Centerline Piping, Inc., 273 Mich. App. 187, 195, 729 N.W.2d 898 (2006) (citation omitted) (emphasis added). Plaintiff cannot prevail on the claims because Defendants did not receive voidable title from Ritter. Rather, voidable title passed from DuMouchelle's LLC to Defendants. The Court will therefore dismiss claim five.
Common law conversion (claim seven) is "any distinct act of dominion wrongfully exerted over another's personal property in denial of or inconsistent with his rights." Aroma Wines & Equip, Inc. v. Columbian Distribution Servs., Inc., 497 Mich. 337, 346, 871 N.W.2d 136 (2015) (quotation marks and quotations omitted). Plaintiff argued in support of his claim that Defendants wrongfully possessed Ritter's funds. ECF 9, PgID 443. Thus, to prevail, Plaintiff had to show that the funds involved belong to Ritter. But, as explained above, Michigan law dictates that the funds in dispute legally belonged to Defendants. Accordingly, the Court must also dismiss claim seven.
Common law money had and received (claim six) is an equitable claim for money to which Plaintiff can prove he has a right. See Hoyt v. Paw Paw Grape Juice Co., 158 Mich. 619, 626-27, 123 N.W. 529 (1909); Edwards v. Mid-Continent Office Distribs., L.P., 252 S.W.3d 833, 839-40 (Tex. App. 2008). "An action for money had and received will lie where the defendant has in his possession money which in equity and good conscience belongs to the plaintiff." Beardslee v. Horton, 3 Mich. 560, 560 (1855). Here, it is not equitable to say that Defendants possessed Ritter's money. Ritter voluntarily parted with the money and, although he was defrauded, Defendants played no role in the fraud. Plaintiff even admitted that "there is no question that DuMouchelle was the only party who had anything to do with the fraud committed upon Ritter." ECF 9, PgID 1393 (emphasis omitted). And Plaintiff argued that Defendants cannot retain title to the funds because they did not act in good faith. Id. at 1017. Plaintiff alleged that because Defendants knew about DuMouchelle's "unscrupulous and criminal conduct with respect to his creditors," Defendants "had to know that the funds were 'dirty'." Id. at 1019-20. But there simply is no evidence to support Plaintiff's assertion. Defendants were victims of DuMouchelle's fraud, too. DuMouchelle owed Defendants millions of dollars, so Defendants reasonably believed that the $4.25 million was a partial payment of DuMouchelle's debt. Moreover, "other courts have held that as between two innocent parties, the party that must suffer the loss is the one that mistakenly created the situation and was in the best position to have avoided it." Edwards, 252 S.W.3d 833, 838 (Tex. App. 2008). Ritter mistakenly created the situation by wire transferring money to DuMouchelle's LLC, and Ritter was in the best position to have avoided the fraud. On that basis, the Court must dismiss claim six.
Plaintiff brought the sixth claim under Texas law and did not explain why. ECF 9, PgID 443. It does not matter, however, because Texas law is the same as Michigan law with respect to money had and received.
CONCLUSION
Because DuMouchelle's LLC had voidable title to the $12 million, Defendants cannot be held liable for the alleged wrongdoing in claims five and seven. Although the fraud unfortunately impacted Plaintiff, it would not be equitable to punish Defendants for DuMouchelle's fraud under claim six. At bottom, Defendants received the funds from the LLC, and not from Ritter. The Court will therefore adopt the bankruptcy court's recommendation to grant summary judgment for Defendants as to claims five, six, and seven.
ORDER
WHEREFORE, it is hereby ORDERED that the bankruptcy court's recommendation is ADOPTED.
IT IS FURTHER ORDERED that claims 5, 6, and 7, are DISMISSED.
IT IS FURTHER ORDERED that Plaintiff's objection to the bankruptcy court's recommendation is DENIED.
SO ORDERED.