Green, Hendrickson, Esper, & Libwag, LLC v. Ziegelman, Docket No. 318989.

• Decision Date: 07 May 2015
• Docket Number: Docket No. 318989.
• Citation: 873 N.W.2d 794,310 Mich.App. 436
• Parties: GREEN, Hendrickson, Esper, and Libwag, LLC v. ZIEGELMAN and Ziegelman Architects.
• Court: Court of Appeal of Michigan — District of US

310 Mich.App. 436

873 N.W.2d 794

GREEN, Hendrickson, Esper, and Libwag, LLC

v.ZIEGELMAN and Ziegelman Architects.

Docket No. 318989.

Court of Appeals of Michigan.

Submitted April 7, 2015, at Detroit.

Decided May 7, 2015, at 9:00 a.m.

Stephen M. Ryan, PLLC, Bingham Farms (by Stephen M. Ryan), for plaintiffs.

Mark Granzotto, PC, Royal Oak (by Mark Granzotto ), for defendants.

Before: M.J. KELLY, P.J., and WILDER and KIRSTEN FRANK KELLY, JJ.

M.J. KELLY, P.J.

In this dispute over the separate existence of a corporate entity, defendants, Norman H. Ziegelman and Norman H. Ziegelman Architects, Inc., appeal by right the trial court's judgment ordering them to pay more than $156,000 to plaintiffs, Sanford Green, Jack R. Hendrickson, Thomas Esper, and Libwag, LLC. On appeal, Ziegelman and Ziegelman Architects contend that the trial court erred when it denied their motion for summary disposition premised on the doctrine of res judicata and when it disregarded Ziegelman Architects' separate existence from its owner, Ziegelman, and held Ziegelman personally liable for an earlier judgment against Ziegelman Architects. Because we conclude there were no errors warranting relief, we affirm.

I. BASIC FACTS

This is the second time these parties have appeared before this Court on a matter arising from the underlying events. This Court previously considered an appeal by Ziegelman and Ziegelman Architects from a judgment entered after arbitration in 2006. In the parties' first appearance in this Court, this Court concluded, in relevant part, that the trial court erred when it used a postjudgment proceeding to disregard Ziegelman Architects' separate existence. See Green v. Ziegelman, 282 Mich.App. 292, 299, 303–304, 767 N.W.2d 660 (2009). This Court declined to consider whether Green, Hendrickson, and Esper could file an independent action asking the trial court to disregard the separate existence of Ziegelman Architects or whether such a claim would be barred by the compulsory joinder rule or res judicata. Id. at 305 n. 7, 767 N.W.2d 660.

In 2010, Green, Hendrickson, Esper, and Libwag sued Ziegelman and Ziegelman Architects; they asked the trial court to disregard the separate existence of Ziegelman Architects and hold Ziegelman personally liable for the 2006 judgment. Ziegelman and Ziegelman Architects moved for summary disposition on the grounds that the claims by Green, Hendrickson, Esper, and Libwag were barred by res judicata and should have been joined in the prior suit as required by MCR 2.203(A), but the trial court denied the motion. The parties later agreed to dismiss the 2010 case without prejudice.

In February 2012, Green, Hendrickson, Esper, and Libwag reinstated their suit against Ziegelman and Ziegelman Architects. They alleged that Ziegelman operated his corporation as his alter ego. Because Ziegelman misused the corporate form, they asked the court to disregard Ziegelman Architects' separate existence and hold Ziegelman personally liable for the 2006 judgment. They also alleged that transfers of Ziegelman Architects' property violated the Uniform Fraudulent Transfer Act, MCL 566.31 et seq., and the Business Corporation Act, MCL 450.1101 et seq.

The trial court later entered a stipulated order involving the 2010 case. In part, the parties stipulated that all actions taken in the 2010 case would be treated as though they occurred in the 2012 case, including all discovery, witness lists, case evaluations, and motions and their corresponding orders. The parties also waived their right to have a jury hear the claims.

The trial court held a bench trial in July 2013. Green testified that Hendrickson originally formed Libwag along with John Domiko. Green later purchased Domiko's interest and by early 2003, Esper had also acquired a membership. Green said that he, Hendrickson, and Esper intended to use Libwag to develop 13 acres of land on the corner of Liberty and Wagner in Scio Township, Michigan, for technology or light industrial office space.

In 2003, Green and his partners were looking for a prospective member who might serve as an architect and construction manager. They met with Ziegelman to discuss bringing him in as a member, using Ziegelman Architects as the architectural firm, and using Ziegelman's construction firm, Continental Construction Company, to build the project. Green said that Ziegelman told him that Ziegelman Architects was a "successful architectural firm that had undertaken numerous large-scale office and apartment projects" and was "an ongoing, successful enterprise." Green relied on Ziegelman's representations about Ziegelman Architects, and ultimately, Libwag contracted with Ziegelman Architects to design and supervise the project. The architectural agreement between Libwag and Ziegelman Architects included a fee of approximately $1.4 or $1.45 million, assuming the project would cost around $19.5 million.

After Libwag entered into the agreement with Ziegelman Architects and Ziegelman acquired his membership interest in Libwag, Ziegelman attempted to meet with the other members of Libwag individually. When Ziegelman met with Green, Ziegelman stated his belief that the project was not going in the right direction and "disparaged" Hendrickson and Esper. Ziegelman said Green should join his interest with Ziegelman's interest to "carry the day and proceed in the direction that [Ziegelman wanted]." Green said that none of Libwag's members joined with Ziegelman.

After his unsuccessful attempt to seize control of the project, Ziegelman stopped meeting the required capital calls for Libwag, and he caused Ziegelman Architects to stop performing under its agreement with Libwag. The situation eventually resulted in multiple lawsuits, but the members agreed to submit all of their claims, including the dispute with Ziegelman Architects, to arbitration. The arbitrators ultimately rejected Ziegelman's claims, reduced his membership interest in Libwag to 7%, and directed Ziegelman Architects to pay Libwag and the three other members $156,313. A judgment to that effect entered in May 2006.

Green, Hendrickson, and Esper compelled Ziegelman to appear for a creditor's examination in October 2006. Green attended the examination and learned that Ziegelman Architects had no assets and only $400 in accounts receivable. Ziegelman even stated that, with the exception of a small project for a relative, he could not remember how many years it had been since Ziegelman Architects had done any architectural work. Green said he would not have agreed to let Libwag enter into the agreement with Ziegelman Architects for architectural services had he known about Ziegelman Architects' actual status and history.

Ziegelman testified that he was Ziegelman Architects' sole shareholder, director, and officer. The last project that Ziegelman Architects performed was completed in 1989. Ziegelman Architects had been a tenant in a building owned by one of Ziegelman's other entities for at least 20 years, but had no written lease and never paid rent. The entity that owned the building lent approximately $242,000 to Ziegelman Architects over the years. There were, however, no loan agreements, repayment schedules, or notes to evidence these loans, and Ziegelman Architects never repaid the loans. Ziegelman also personally lent an additional $391,000 to Ziegelman Architects, but again there was no evidence of a promissory note or repayment of the loan. Ziegelman Architects paid Ziegelman's automobile lease, his auto insurance premiums, and his cell phone and travel expenses. Ziegelman agreed that he claimed losses to his personal income for the expenses incurred by Ziegelman Architects; during a three-year span, he deducted $151,000.

Ziegelman formed a new architectural entity 10 days after the judgment against Ziegelman Architects, and Ziegelman Architects ceased to exist as an operating business. Ziegelman admitted that shortly before the creditor's examination, he purchased all of Ziegelman Architects' assets—filing cabinets, drafting boards, tables and other office equipment—for $3,900. The equipment, he stated, was properly valued despite the fact that it was valued at $89,690 on a tax return two years earlier. Ziegelman admitted that one of the reasons he formed the new entity was to "get out from under this judgment." The new entity leased the same space that Ziegelman Architects leased, but again without paying rent. Because the new entity also had no business, it too survived on loans that Ziegelman made to it. The new entity paid Ziegelman's car lease, insurance, travel, and cell phone expenses as well.

Green, Hendrickson, Esper, and Libwag argued before the trial court that the evidence established that Ziegelman Architects was a sham corporation that existed solely to meet Ziegelman's personal needs and shield him from liability. For that reason, they maintained, the trial court should disregard Ziegelman Architects' separate existence and hold Ziegelman personally liable for the 2006 judgment. Ziegelman and Ziegelman Architects responded that the trial court could not disregard Ziegelman Architects' separate existence because there was no evidence that Ziegelman used the corporate form to cause an unjust injury.

In August 1013, the trial court entered its opinion and judgment. The court stated that Ziegelman Architects was "grossly undercapitalized" when it entered into the contract whose breach gave rise to the 2006 judgment. It found that Ziegelman abused the corporate form by using Ziegelman Architects "as a mere instrumentality or as his alter ego." Ziegelman did not observe the "required corporate formalities," and in order to avoid paying on the judgment, Ziegelman created a new entity and fraudulently transferred assets to it. The court further found that Ziegelman used Ziegelman Architects to "commit a fraud or illegality" that resulted in an unjust loss. The court concluded that its findings warranted disregarding the separate existence of...