Cadle Company II, Inc. v. Lakeside Machine, Inc., No. 290426 (Mich. App. 10/22/2009)

• Court: Court of Appeal of Michigan
• Writing for the Court: Per Curiam
• Decision Date: 22 October 2009
• Docket Number: No. 290426.,290426.
• Citation: Cadle Company II, Inc. v. Lakeside Machine, Inc., No. 290426 (Mich. App. 10/22/2009), No. 290426. (Mich. App. Oct 22, 2009)
• Parties: CADLE COMPANY II, INC., Plaintiff-Appellee, v. LAKESIDE MACHINE, INC., and PAUL D. PAULSON JR., Defendants, and DIXIE PAULSON, Defendant-Appellant.

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CADLE COMPANY II, INC., Plaintiff-Appellee, v. LAKESIDE MACHINE, INC., and PAUL D. PAULSON JR., Defendants, and DIXIE PAULSON, Defendant-Appellant.

No. 290426.

Court of Appeals of Michigan.

October 22, 2009.

Appeal from Delta Circuit Court, LC No. 04-017487-CK

Before: Hoekstra, P.J., and Bandstra and Servitto, JJ.

UNPUBLISHED

PER CURIAM.

Defendant Dixie Paulson (defendant) appeals as of right the trial court's order granting plaintiff Cadle Company II, Inc.'s motion for summary disposition. We reverse and remand for further proceedings consistent with this opinion.¹

This action arises from a default on a revolving loan issued to defendant Lakeside Machine, Inc. (Lakeside), and guaranteed by Lakeside's owners, including defendant Paul Paulson. The loan was originally issued by Old Kent Bank, and was later serviced by plaintiff's predecessor in interest, Fifth Third Bank (referred to collectively hereafter as Fifth Third), which assigned its interests in the loan documents underlying this action to plaintiff in 2006.

Pursuant to the loan agreement between Lakeside and Fifth Third, the amount of revolving loan advances that Lakeside was eligible to receive at any given time was based on a percentage of its accounts receivable and inventory. Consequently, Lakeside obtained loan advances by submitting "collateral reports," specifying the value of Lakeside's accounts receivables and inventory as of a specific date, to Fifth Third. These collateral reports were prepared by inserting certain financial information into computer software provided by Fifth Third.

Paulson served as Lakeside's controller and chief financial officer after joining the company in 1990. Generally, Paulson prepared Lakeside's collateral reports for submission to Fifth Third. However on at least eight occasions in October and November 2002, defendant, who was Lakeside's officer manager at that time, was asked by Paulson to generate, sign and submit these reports, based on financial information provided to her by Paulson. On November 19, 2002, Lakeside provided Fifth Third with a "restated" collateral report, signed by Paulson, which indicated that Lakeside had overstated its accounts receivable and/or inventory in previously submitted collateral reports. Subsequently, an independent review of Lakeside's records, commissioned by Fifth Third, revealed that Lakeside had overstated its accounts receivable and inventory by more than $2 million. As a result, Fifth Third concluded that it had "overadvanced" $2,196,918 to Lakeside under the revolving loan facility. Thereafter, Fifth Third declined to provide Lakeside with any additional credit. Lakeside ceased operation in November 2002; its affairs were wound up by March 2003.

In February 2004, Fifth Third filed suit in February 2004, in Delta Circuit Court, seeking to recover the deficiency on the Lakeside indebtedness remaining after liquidation of all collateral. Fifth Third alleged claims for breach of contract against Lakeside, and its owners, including Paulson, each of whom had signed personal guarantees. Fifth Third also asserted a fraud claim against Paulson, arising from the misrepresentation of Lakeside's financial data in collateral reports.

In June 2004, Paulson filed for Chapter 7 bankruptcy relief and the state court action was stayed.² In September 2004, Paulson was subjected to a debtor's examination as part of his bankruptcy proceeding. During that examination, Paulson declined to answer a series of questions, addressing responsibility for the preparation of the financial data contained in the collateral reports and for providing that data to Fifth Third, on Fifth Amendment grounds.

In September 2005, the pertinent parties resolved the question whether the Lakeside debt was dischargeable in bankruptcy and the automatic stay of proceedings was lifted. Thereafter, plaintiff moved to amend its complaint in the state court action to add a claim of fraud against defendant, based on her having signed collateral reports submitted in the fall of 2002. During discovery in this state court action, plaintiff deposed defendant; it did not depose Paulson.

During her deposition, defendant testified in pertinent part that she had worked for Lakeside for nearly 25 years prior to its closing, beginning with the company as a secretary and becoming its office manager in the mid 1980's. From the time Paulson joined the company, in 1990, he was defendant's supervisor. Defendant testified that on those occasions on which she was asked to do so, she generated collateral reports, based primarily on financial information provided to her by Paulson, and then signed and submitted them to Fifth Third. Defendant did not verify the information Paulson gave her for the collateral reports; she was not asked to do so and the maintenance of that data was not within her job duties. Defendant testified that she submitted collateral reports to Fifth Third only after being instructed to do so, that she was "absolutely not" making any representations or warranties in her individual capacity, and that she was only "the person that faxed the reports."

In May 2008, plaintiff moved for summary disposition of its claim against defendant, pursuant to MCR 2.116(C)(10), asserting that defendant's failure to verify information provided to her by Paulson before submitting the collateral reports to Fifth Third constituted reckless disregard of the truth of those statements sufficient to constitute fraud. In response, defendant submitted an affidavit from Paulson that, in part, confirmed defendant's deposition testimony that she was acting in a ministerial role when she inserted financial information provided by Paulson into the collateral reports, signed them on behalf of Lakeside, and submitted them to Fifth Third, and further that defendant had no responsibility or authority for maintaining or auditing the financial data at issue.

After Paulson's affidavit was filed with the trial court, plaintiff filed a memorandum of law in further support of its motion, asserting that the trial court should not consider Paulson's affidavit because "he previously invoked the Fifth Amendment when questioned in his deposition about the very matters he testifies to in his affidavit." In its memorandum, plaintiff mistakenly asserted that Paulson was deposed in this case and it cited numerous federal cases holding that a party may not invoke its Fifth Amendment privilege against self-incrimination during discovery and then later submit evidence on issues on which it declined to testify in opposition to a summary judgment motion. Plaintiff attached the transcript of Paulson's September 2004 debtor's examination in the bankruptcy proceedings to its memorandum.

The trial court granted plaintiff summary disposition on its fraud claim against defendant, refusing to consider Paulson's affidavit on the grounds asserted by plaintiff. In so doing, the trial court made no mention of the fact that Paulson's prior invocation of his Fifth Amendment privilege against self-incrimination was in response to questions tendered to him during his debtor's examination in the Chapter 7 bankruptcy proceedings.

On appeal, defendant argues that the trial court abused its discretion by refusing to consider Paulson's affidavit. We agree.

This Court reviews a trial court's decision to admit or exclude evidence for an abuse of discretion. Craig v Oakwood Hosp, 471 Mich 67, 76; 684 NW2d 296 (2004). An abuse of discretion occurs when a trial court's decision results in an outcome falling outside the range of principled outcomes. Woodard v Custer, 476 Mich 545, 557; 719 NW2d 842 (2006); Maldonado v Ford Motor Co, 476 Mich 372, 388; 719 NW2d 809 (2006). However, if the trial court's decision involves an examination of the meaning of the Michigan Rules of Evidence, or of the applicability of a legal doctrine or rule, this Court's review is de novo. Davis v Forest River, Inc, 278 Mich App 76, 80; 748 NW2d 887 (2008), rev'd on other grds, 482 Mich 1123 (2008), recon gtd 483 Mich 985 (2009); People v Ackerman, 257 Mich App 434, 442; 669 NW2d 818 (2003); LeGendre v Monroe County, 234 Mich App 708, 721; 600 NW2d 78 (1999). And, a trial court abuses its discretion when it misinterprets, misunderstands or misapplies the law. Bynum v ESAB Group, Inc, 467 Mich 280, 283; 651 NW2d 383 (2002); Miller v Varilek, 117 Mich App 165, 170; 323 NW2d 637 (1982).

There being no Michigan case law discussing the issue, plaintiff cites and the trial court relied on federal case law for the proposition that Paulson could not invoke his Fifth Amendment privilege as a shield during his "deposition" and then later submit an affidavit in opposition to plaintiff's motion for summary disposition. We recognize that a range of federal appellate, district and bankruptcy courts have adopted the rule that a "civil litigant who raised the Fifth Amendment privilege against self-incrimination during discovery may be barred from presenting evidence on that issue during trial and/or in response to a motion for summary disposition." Dunkin' Donuts, Inc v Taseski, 47 F Supp 2d 867, 871 (ED Mich, 1999); see also, Traficant v Comm'r of IRS, 884 F2d 258, 265 (CA 6, 1989); In re Edmond, 934 F2d 1304, 1308-09 (CA 4, 1991); US v Parcels of Land, 903 F2d 36, 43 (CA 1, 1990); Pedrina v Han Kuk Chun, 906 F Supp 1377, 1398 (D Haw, 1995), aff'd 97 F3d 1296 (CA 9, 1996). However, we need not decide whether that rule applies under Michigan law, because the rule would not extend so far as to warrant the trial court's refusal to consider Paulson's affidavit under the circumstances presented here.

In Dunkin' Donuts, Inc v Taseski, 47 F Supp 2d 867, 871 (ED Mich, 1999), the case relied on by the trial court in its opinion granting plaintiff's motion, the United States District Court for the Eastern District of Michigan addressed the issue whether a "civil litigant who raised the Fifth Amendment privilege...