Michigan

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Michael L. Daymon and Kathryn Daymon v. Ted L. Fuhrman,
No. 249007 (Mich.App. 10/05/2004)

No. 249007

COURT OF APPEALS OF MICHIGAN

October 5, 2004, Decided

NOTICE: [*1] THIS IS AN UNPUBLISHED OPINION. IN ACCORDANCE WITH MICHIGAN COURT OF APPEALS RULES, UNPUBLISHED OPINIONS ARE NOT PRECEDENTIALLY BINDING UNDER THE RULES OF STARE DECISIS.

PRIOR HISTORY: Gratiot Circuit Court. LC No. 00-006637-CZ.

DISPOSITION: Affirmed.

JUDGES: Before: Murray, P.J., and Markey and O'Connell, JJ. MURRAY, P.J. (dissenting).

OPINION: PER CURIAM.

Defendant appeals as of right from an order piercing the corporate veil and holding defendant personally liable for a default judgment plaintiffs previously obtained against defendant's now-defunct corporation, of which defendant was the sole shareholder. Plaintiffs sued defendant personally, alleging that the corporation had been rendered insolvent, precluding them from collecting their judgment, because of wrongful actions by defendant. The trial court concluded that piercing the corporate veil was warranted. We affirm.

A trial court's decision whether to pierce the corporate veil is reviewed de novo because of the equitable nature of the inquiry. Foodland Distributors v Al-Naimi, 220 Mich. App. 453, 456; 559 N.W.2d 379 (1996). However, the trial court's decision "will not be reversed unless the factual findings are clearly [*2] erroneous or the reviewing court is convinced that it would have reached a different result had it occupied the trial court's position." Law Offices of Lawrence J. Stockler v Rose, 174 Mich. App. 14, 43-44; 436 N.W.2d 70 (1989). Statutory interpretation and application of the law to facts are both issues that are reviewed de novo. In re Blackshear, 262 Mich. App. 101, 107; N.W.2d (2004). A trial court's findings of fact are reviewed for clear error. Merkur Steel Supply Inc v City of Detroit, 261 Mich. App. 116, 124; 680 N.W.2d 485 (2004).

In general, a corporation is treated as an entity that is completely separate from its stockholders, even if there is only a single stockholder. Foodland Distributors, supra. However, that independence is a fiction that may be ignored by the courts if it is used to subvert justice. Id. "There is no single rule delineating when the corporate entity may be disregarded." Id. Fraud, illegality, or injustice may warrant piercing the corporate veil, but each case must be decided on its own unique facts. Dep't of Consumer Industry Services v Shah, 236 Mich. App. 381, 393; [*3] 600 NW2d 406 (1999). However, in making this determination this Court considers the following three elements:

First, the corporate entity must be a mere instrumentality of another entity or individual. Second, the corporate entity must be used to commit a fraud or wrong. Third, there must have been an unjust loss or injury to the plaintiff. [Foodland Distributors, supra at 457, quoting SCD Chemical Distributors, Inc v Medley, 203 Mich. App. 374, 381; 512 N.W.2d 86 (1994).]

We conclude that the trial court did not clearly err in determining that defendant treated his corporation as his "alter ego," satisfying the first prong. It was undisputed that for years defendant utilized the corporation to pay his personal bills. And, although defendant's expert testified that defendant properly accounted for each and every such transaction, the trial court specifically found that defendant's "reconciliation of his 'personal revolving account' or 'shareholder loan account' with the corporation is unpersuasive." Because we are reviewing this finding on the written record, we must defer to the trial court's findings when based upon the [*4] credibility of evidence and witnesses. Draggoo v Dragoo, 223 Mich. App. 415, 429; 566 N.W.2d 642 (1997). Additionally, the record supports the trial court's finding that defendant's use of the corporate checking account was done without contemporaneous shareholder loan or corporate documentation. The trial court did not err in finding that plaintiff proved that the corporation was the mere instrumentality of defendant.

We also conclude that the trial court did not err in finding that the corporate veil should be pierced in this case. In so holding, we are mindful that this Court has held that these cases usually come "down to a question of good faith and honesty in the use of the corporate privilege for legitimate ends." Foodland Distributors, supra at 460, quoting Herman v Mobile Homes Corp, 317 Mich. 233, 246; 26 N.W.2d 757 (1947). We recognize that there is no evidence revealing, nor any finding by the trial court, that defendant set out deliberately either to wrong creditors or to avoid any legal obligations. Nevertheless, the trial court found that a wrong had been committed by defendant's "flexible' approach [*5] to the corporation's distinct existence [which] had the foreseeable effect of perpetrating a wrong resulting in unjust loss to [plaintiffs]." Continuing, the court found that had defendant dissolved the corporation in accordance with the law, rather than in a way he simply decided was best, plaintiffs could have received notice and a voice in how or in what amount assets were distributed. We cannot conclude that these findings were clearly erroneous.

The facts presented during the bench trial support the trial court's conclusion that there was no specific plan for dissolution, and that the dissolution was not in compliance with MCL 450.1855a of the Business Corporation Act, MCL 450.1101, et seq. Additionally, there was no dispute that plaintiffs were never given notice to voice any concerns or make any claims during the dissolution. And, although given their unsecured status plaintiffs may not have successfully obtained any funds had they had such notice, they may have taken the opportunity to object to defendant receiving corporate assets at the time of dissolution without consideration. The closing of business and transfer [*6] of the significant corporate assets to defendant without notice to plaintiffs, recent judgment creditors, was wrong and caused injury to plaintiffs. Foodland Distributors, supra.

Our Supreme Court, as well as this Court, has repeatedly recognized that cases involving the piercing of a corporate veil are fact intensive and often hinge on the equities of the case. See Shah, supra; Kline v Kline, 104 Mich. App. 700, 703; 305 N.W.2d 297 (1981). A finding of fraud is not a necessary prerequisite to piercing the corporate veil. Papo v Aglo Restaurants, 149 Mich. App. 285, 302 n 15; 386 N.W.2d 177 (1986). We therefore conclude that, based upon the facts found by the trial court, it was not error to pierce the corporate veil and hold defendant personally responsible for the debt owed plaintiffs. n1

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n1 The trial court also concluded that defendant had violated the Uniform Fraudulent Transfer Act, MCL 566.31, et seq. This finding was in conjunction with the finding that defendant's use of the corporation was wrong and injured plaintiffs. Defendant claims that the trial court's reliance on this statute was in error, since it was not effective until December 30, 1998, allegedly after the dates relevant to this case. However, the same facts found by the court could have supported a violation under the act's predecessor, the Uniform Fraudulent Conveyance Act, MCL 566.11, et seq., so any error in this regard was harmless.

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Affirmed./s/ Jane E. Markey

/s/ Peter D. O'Connell

DISSENTBY: Christopher M. Murray

DISSENT: MURRAY, P.J. (dissenting).

On de novo review of the trial court's decision in this case, Foodland Distributors v Al-Naimi, 220 Mich. App. 453, 456; 559 N.W.2d 379 (1996), I would reverse and remand for entry of a judgment in favor of defendant. In doing so, I would not at all disturb the trial court's findings of fact, for reversal is necessary in this case because plaintiffs failed to submit evidence establishing that they suffered an injury that resulted from defendant's misuse of the corporate entity.

As the majority correctly notes, Foodland Distributors generally requires that three elements be established before a court can disregard the corporate veil. They are:

"'First, the corporate entity must be a mere instrumentality of another entity or individual. Second, the corporate entity must be used to commit a fraud or wrong. Third, there must have been an unjust loss or injury to the plaintiff.'" [Foodland Distributors, supra at 457, quoting SCD Chemical Distributors, Inc v Medley, 203 Mich. App. 374, 381; [*8] 512 N.W.2d 86 (1994).]

Although the majority correctly concludes that the first Foodland Distributors prong has been met, it was nevertheless improper to pierce the corporate veil in the instant case. The second and third elements used to determine whether the corporate veil should be pierced require that the corporate entity be used to commit a fraud or wrong, which in turn caused there to be an unjust injury or loss to plaintiffs. The following principles guide this Court in reviewing these two elements:

Although it is clear that the corporate form may be disregarded to prevent injustice and to reach an equitable result, we believe that the injustice sought to be prevented must in some manner relate to a misuse of the corporate form short of fraud or illegality. If the rule were otherwise, an equal injustice or inequity could result. [Soloman v Western Hills Dev Co (After Remand), 110 Mich. App. 257, 264; 312 N.W.2d 428 (1981).]

Regarding the second prong, plaintiffs contend that they were injured due to defendant's commingling of funds, n1 defendant's seizure of leasehold improvements, defendant's taking of corporate assets [*9] without consideration in order to prevent plaintiffs (and other creditors) from seizing them for collection, and defendant violating the UFTA. First, there is no evidence to demonstrate that defendant seized the leasehold improvements in order to avoid paying creditors such as plaintiffs. Although the evidence demonstrated that defendant personally took title to a number of improvements to the real property, those assets taken were subject to mortgages or perfected security interests with "close to $ 200,000" remaining to be paid. n2 Further, there was no evidence that defendant ceased business in an attempt to avoid plaintiffs as creditors. This is apparent as defendant ceased business operations in April 1998, but plaintiffs did not obtain judgment against the corporation until October 1998. n3 Additionally, plaintiffs' argument that defendant removed assets that would otherwise have been used to pay plaintiffs' default judgment is without merit. It is undisputed that the corporation's debts to creditors with priority over plaintiffs exceeded the corporation's assets, and plaintiffs' judgment would not have been satisfied anyway, so piercing the corporate veil was inappropriate. [*10]

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n1 Although plaintiffs focus on defendant's commingling of funds, this relates to the first element of the test used to determine whether to pierce the corporate veil. Plaintiff must also demonstrate a fraud or wrong and an unjust loss or injury. While defendant and his corporation shared a unity of interest, that alone is insufficient to pierce the corporate veil unless the corporation was used to commit a wrong. SCD, supra at 382.

n2 Assuming defendant had not undertaken the debts owed along with the property improvements, the secured creditors presumably would have collected on them. When a guarantor of debts, such as defendant in this case, pays a third party's debt to a creditor, that guarantor acquires that creditor's rights through subrogation. Shurlow v Bonthuis, 456 Mich. 730, 739-740; 576 N.W.2d 159 (1998).

n3 The complaint was not filed until June 1998.

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Importantly, there is also no evidence establishing that plaintiffs' unsatisfied judgment resulted [*11] from defendant's "flexible" use of the corporate accounts. Both our Court and the Supreme Court have made clear that the excessive control over the corporation must be "exercised in such a manner as to defraud and wrong the complainant, and that unjust loss or injury will be suffered by the complainant as the result of such domination. . . ." Gledhill v Fisher & Co, 272 Mich. 353, 358; 262 NW 371 (1935) (emphasis added). See also Soloman, supra at 263, quoting Kline v Kline, 104 Mich. App. 700, 702-703; 305 N.W.2d 297 (1981), for the proposition that the corporate entity itself must be used to subvert the ends of justice. There was no dispute in the record that the insolvency resulted from an accounting error made some three years before defendant declared insolvency, and which was completely unrelated to defendant's use of corporate funds for his personal matters. As such, there exists no evidence that plaintiffs' injuries resulted from defendant's improper use of the corporate form.

Indeed, this case does not present a scenario where the individual shareholder has funneled money from the corporation, [*12] or saddled it with his own personal debt, which resulted in an injury to the plaintiffs. Rather, plaintiffs have been left without a remedy due to the corporation's insolvency that resulted from an accounting error made years earlier, not from the fortuitous circumstance of defendant's "flexible" use of the corporate accounts. In other words, nothing in the record or trial court decision disputes the fact that plaintiffs would be without a remedy even if defendant had never used the accounts for personal matters.

"A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation." MCL 566.32(1). The evidence shows that the corporation was already insolvent at the time of the transfer. Whether defendant took the assets personally or whether the secured creditors took the assets, plaintiffs were without recourse when the company ceased operations. Even presuming defendant's actions were wrongful, defendant did not affect the company's net worth with respect to plaintiffs and did not, therefore, cause plaintiffs any additional harm.

The trial court also erred in determining that defendant violated the UFTA. [*13] The facts do not show, and the trial court did not conclude, that defendant had any actual intent to hinder, delay, or defraud any creditors. MCL 566.34(1)(a). Therefore, to violate the UFTA, the company must not have received "a reasonably equivalent value in exchange for" the assets transferred to defendant personally. MCL 566.34(1)(b). Although the company received no benefit in exchange for the transfer of assets, the assets were themselves functionally valueless because they were encumbered by more debt than they were otherwise worth, and could be considered, as over-encumbered, "reasonably equivalent" to the value given by defendant. Moreover, defendant was subrogated to the company's secured creditors' rights by paying the liens and was therefore entitled to reach the assets in any event.

As a result of the foregoing, I would reverse and remand for entry of a judgment in favor of defendant./s/ Christopher M. Murray

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