Duray Dev., LLC v. Perrin
| Decision Date | 13 April 2010 |
| Docket Number | Docket No. 287722. |
| Citation | 288 Mich.App. 143,792 N.W.2d 749 |
| Parties | DURAY DEVELOPMENT, LLC v. PERRIN. |
| Court | Court of Appeal of Michigan — District of US |
Schenk, Boncher & Rypma, Grand Rapids, (by Frederick J. Boncher) for Duray Development, LLC.
Miller Johnson (by David J. Gass and Joseph J. Gavin, Grand Rapids) for Carl Perrin.
Before: TALBOT, P.J., and WHITBECK and OWENS, JJ.
In this breach of contract action, defendant Carl Perrin appeals as of right the August 21, 2008 judgment following a bench trial in which the trial court found that Perrin was in breach of contract and owed damages to plaintiff, Duray Development, LLC, in the amount of $96,637.68. The judgment did not find defendants Perrin Excavating, LLC, or Outlaw Excavating, LLC, in breach of contract, so neither of those defendants are parties to this appeal.
We find no plain error in the trial court's failure to raise sua sponte the issue of corporation by estoppel. However, we reverse the judgment of the trial court that the de facto corporation doctrine cannot apply to limited liability companies, and we reverse the trial court's decision to bar defendants from calling witnesses. Accordingly, we remand for further proceedings in accordance with this opinion.
Duray Development is a residential development company whose sole member is Robert Munger. Munger's responsibilities were to locate and purchase property, and then work with engineering companies and municipalities to have the property zoned and fully developed for residential living. In 2004, Duray Development purchased 40 acres of undeveloped property called "Copper Corners," located at the intersection of 76th Street and Craft Avenue in Caledonia Township, Michigan.
On September 30, 2004, Duray Development entered into a contract with Perrin, Perrin Excavating, and KDM Excavating for excavating at Copper Corners. In that contract, Munger signed on Duray Development's behalf, Perrin signed on behalf of himself and Perrin Excavating, and DanVining signed on behalf of KDM Excavating.
On October 27, 2004, Duray Development and Perrin entered into a new contract, intended to supersede the September 30, 2004 contract. The new contract contained the same language and provisions as the earlier contract. However, the new contract was between Duray Development and Outlaw only, and Perrin, Perrin Excavating, and KDM Excavating were not parties. Outlaw was an excavation company that Perrin and Vining had recently formed. Perrin and Vining signed the new contract on behalf of Outlaw, and both held themselves out to Duray Development as the owners and persons in charge of the company. Although the parties did not execute the second contract until October 27, 2004, it was drafted on September 30, 2004, the same day the parties signed the first contract. Once signed, all parties proceeded under the contract as if Outlaw were the contractor for the Copper Corners development.
Two contracts were drafted because Perrin had not yet formed Outlaw at the time of the first contract. However, Duray Development did not want to wait for Perrin to finish forming the company before starting the excavation of Copper Corners. Therefore, the parties entered into the first contract on September 30, 2004, and then entered into the second contract once the parties thought Outlaw was a valid limited liability company.
Defendants began excavation and grading work pursuant to the contracts, but did not perform satisfactorily or on time. Duray Development then sued defendants for breach of contract. Defendants answered and filed a counterclaim against Duray Development, alleging that they performed the work according to the terms of the contracts and that Duray Development owed defendants approximately $35,000. Duray Developmentlater learned through discovery that Outlaw did not obtain a "filed" status as a limited liability company until November 29, 2004, and therefore Outlaw was not a valid limited liability company at the time the parties executed the second contract. 1
Duray Development filed an amended complaint and obtained a default judgment because defendants failed to file an answer. Defendants then moved for entry of an order to set aside the default judgment. The trial court granted defendants' motion and set aside the default. But the trial court subsequently ruled that defendants would not be allowed to call any witnesses at trial because defendants had failed to provide a witness list by the deadline set forth in the scheduling order. After trial, the trial court ruled in favor of Duray Development, finding that Perrin was in breach of contract and owed $96,367.68 in damages to Duray Development.
In a posttrial memorandum, Perrin argued that he was not personally liable for Duray Development's damages. He asserted that, although Outlaw was not a valid limited liability company at the time of the execution of the second contract, Outlaw was nevertheless liable to Duray Development under the doctrine of de facto corporation. The trial court opined that if Outlaw were a corporation, then the de facto corporation doctrine most likely would have applied. However, the trial court concluded that the Limited Liability Company Act 2 "clearly and specificallyprovides for the time that a limited liability company comes into existence and has powers to contract" and therefore superseded the defacto corporation doctrine and made it inapplicable to limited liability companies altogether. Perrin now appeals.
Perrin argues that he was not personally liable because he signed the second contract on behalf of Outlaw. According to Perrin, even though Outlaw was not yet a properly formed limited liability company, the parties all treated the contract as though Outlaw was a properly formed limited liability company and, therefore, the doctrine of de facto corporation shielded Perrin from personal liability. He further argues that the doctrine of corporation by estoppel precluded Duray Development from arguing that he is personally liable.
The issue whether the doctrine of de facto corporation applies to Perrin requires us to consider the Limited Liability Company Act and the Business Corporation Act.3 We review de novo questions of law, including questions regarding whether a statute applies and regarding interpretation of the statute.4
Despite his contention on appeal, Perrin did not preserve the issue of corporation by estoppel. And although Perrin argues on appeal that corporation by estoppel and de facto corporation are doctrines so closely related that raising one of them at trial preserves both on appeal, caselaw does not support such an argument. Perrin citesPIM, Inc. v. Steinbichler Optical Technologies USA, Inc.,5 in support of this point. But in that case, although this Court noted that the two doctrines were closely related, it never went so far as to support Perrin's argument regarding preservation of the issue. Further, the Michigan Supreme Court later vacated this Court's decision in that case.6
Therefore, because Perrin did not preserve the issue of corporation by estoppel, we will only review the issue for plain error.7 Plain error occurs at the trial court level if (1) an error occurred (2) that was clear or obvious and (3) prejudiced the party, meaning it affected the outcome of the lower court proceedings.8
The Limited Liability Company Act provides precisely when a limited liability company comes into existence. MCL 450.4202(2) provides that "[t]he existence of the limited liability company begins on the effective date of the articles of organization as provided in [MCL 450.4104]." MCL 450.4104(1) requires that the articles of organization be delivered to the administratorof the Michigan Department of Energy, Labor and Economic Growth (DELEG).9 Under MCL 450.4104(2), after delivery of the articles of organization, "the administratorshall endorse [10] upon it the word 'filed' with his or her official title and the date of receipt and of filing[.]" And under MCL 450.4104(6), "[a] document filed under [ MCL 450.4104(2)] is effective at the time it is endorsed[.]"
Once a limited liability company comes into existence, limited liability applies, and a member or manager is not liable for the acts, debts, or obligations of the company.11 In contrast, a person who signs a contract on behalf of a company that is not yet in existence generally becomes personally liable on that contract.12 However, a company can become liable if, (1) after the company comes into existence, it either ratifies or adopts that contract,13 (2) a court determines that a de facto corporation existed at the time of the contract,14 or (3) a court orders that corporation by estoppel prevented the opposing party from arguing against the existence of a corporation.15
In this case, Perrin signed the articles of organization for Outlaw on the same day as the second contract, October 27, 2004. Perrin then signed the October 27, 2004 contract on behalf of Outlaw. However, the DELEG administrator did not endorse the articles of organization until November 29, 2004. Therefore, pursuantto the Limited Liability Company Act, Outlaw was not in existence on October 27, 2004. And Outlaw did not adopt or ratify the second contract. Therefore, Perrin became personally liable for Outlaw's obligations unless a de facto limited liability company existed or limited liability company by estoppel applied.16
De facto corporation and corporation by estoppel are separate and distinct doctrines that warrant individual treatment. The de facto corporation doctrine provides that a defectively formed corporation—that is, one that fails to meet the technical requirements for forming a de jure corporation—may attain the legal status of a de facto...
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