Iafrate v. Angelo Iafrate, Inc.

• Docket Number: 355597
• Decision Date: 27 January 2022
• Parties: ANGELO E. IAFRATE, Individually, as Personal Representative of the ESTATE OF ANGELO IAFRATE, SR., and as Successor Co-Trustee of the JOHN IAFRATE IRREVOCABLE TRUST, REBECCA IAFRATE, as Successor Co-Trustee of the JOHN IAFRATE IRREVOCABLE TRUST, and DOMINIC IAFRATE, Plaintiffs-Appellants, v. ANGELO IAFRATE, INC., and ROBERT ADCOCK, Defendants-Appellees.
• Court: Court of Appeal of Michigan — District of US

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ANGELO E. IAFRATE, Individually, as Personal Representative of the ESTATE OF ANGELO IAFRATE, SR., and as Successor Co-Trustee of the JOHN IAFRATE IRREVOCABLE TRUST, REBECCA IAFRATE, as Successor Co-Trustee of the JOHN IAFRATE IRREVOCABLE TRUST, and DOMINIC IAFRATE, Plaintiffs-Appellants, v. ANGELO IAFRATE, INC., and ROBERT ADCOCK, Defendants-Appellees.

No. 355597

Court of Appeals of Michigan

January 27, 2022

UNPUBLISHED

Wayne Circuit Court LC No. 19-009098-CB

Before: Gleicher, C.J., and Borrello and Ronayne Krause, JJ.

Per Curiam

Plaintiffs^[1] appeal as of right the trial court's order granting summary disposition in favor of defendants. We affirm.

I. FACTUAL BACKGROUND

In 1969, Angelo E. Iafrate Sr. (Angelo Sr.)^[2] incorporated Angelo Iafrate, Inc. (the Company), which was "an earth-moving, road building, construction company . . ." The Company issued shares to Angelo Sr. and his children Angelo Jr., Dominic, John, and Anna. Insofar as we can determine, Anna passed away, and was no longer a shareholder in the Company before any of the events that gave rise to this case. Although not expressly stated in so many words, John's interests are apparently represented by the John Iafrate Irrevocable Trust, U/A/D January 1, 1988 (the Trust), of which Angelo Sr. was the trustee at relevant times. In 2000 Angelo Sr., Dominic, and John moved to Florida, and Angelo Jr. remained in Michigan and served as the Company's president and sole director. While Angelo Jr. was president, defendant Robert Adcock was the Company's Executive Vice President.

Slightly more than ten years later, Angelo Sr. and the living children assembled a plan to sell the Company to its employees through an Employee Stock Ownership Plan (ESOP). The plan entailed plaintiffs financing 100% of the purchase price through loans to the company, in exchange for which they each received two Promissory Notes (a senior and a junior note) and Common Stock Warrants.^[3] Plaintiffs' plan and expectation was that their respective Promissory Notes would be receive equal relative priority, such that their respective junior notes would be paid off at the same time as each other, and their senior notes would be paid off at the same time as each other. The Warrants would then allow plaintiffs to benefit from the growth of the Company after their notes were paid in full.

The plan was effectuated in 2013, when a "new Company was formed" by filing articles of incorporation. Plaintiffs contributed all of their stock to the new entity, and received all 30, 000 of its shares. Then the new company formed an ESOP that purchased the 30, 000 shares from plaintiffs. The Company provided the Promissory Notes and Warrants for 7, 500 shares divided between the plaintiffs. The Promissory Notes required quarterly installment payments. They further provided, in relevant part:

1.4 Discretionary Prepayments. Obligor [the Company] may prepay all or part of the principal of this Note at any time . . . Any prepayment made under this Section shall be applied pro rata to the Sellers' [plaintiffs'] [junior or senior] Notes based on the remaining principal balance of each note.

4 Waiver. No waiver by Payee [plaintiff] of any right or remedy under this Note shall be effective except in writing and signed by Payee. Neither the failure nor any delay in exercising any right, power or privilege under this Note will operate as a waiver of such right, power or privilege and no single or partial exercise of such right, power or privilege by Payee will preclude any other or further exercise of any other right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right of Payee arising out of this Note can be discharged by Payee, in whole or in part, by a waiver or renunciation of the claim or right unless in a writing, signed by Payee; (b) no waiver that may be given by Payee will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on Obligor will be deemed to be a waiver of any obligation of Obligor or of the right of Payee to take further action.

The Warrants provided, in relevant part:

1. Exercise. This Warrant may be exercised at any time and from time to time by the Holder hereof, subject to the conditions set forth herein . . . In the event that the Warrant is exercised in respect of less than all of the Shares specified herein, a new Warrant evidencing the remaining Shares will be issued by the Company.

3. Warrant Term. This Warrant shall terminate on, and may no longer be exercised on or after, the date that is 60 days after the date that the Company has paid in full both the Senior Promissory Note and Junior Promissory [sic] issued by the Company in favor of the Holder.

4[a]. Reservation of Shares. . . . The Shares to be issued upon exercise of this Warrant represent 4.5%^[4] of the fully diluted equity interests of the Company at the time this Warrant is executed, and the number of Shares shall be adjusted as determined appropriate by the Company's Board of Directors from time to time to reflect any change in the issued and outstanding equity interests of the Company . . . such that the Shares will represent 4.5% of the fully diluted equity interests of the Company at all times until this Warrant is exercised (in part or in whole) or terminates.

Finally, plaintiffs executed an Intercreditor Agreement amongst themselves "to ensure that no Plaintiff received more favorable treatment than any other when it came to the timing or amount of payments." In relevant part, the Intercreditor Agreement provided:

4. Application of Payments and Collateral. In the event a Creditor receives any payment on the Creditor Indebtedness, or any payment or distribution from any of the Collateral, ^[5] in each case prior to the time all of the Creditor Indebtedness shall have been fully paid, that Creditor shall receive and hold the same in trust for the benefit of all Creditors and shall forthwith apply the same Pro Rata against the Creditor Indebtedness.

Although defendants were technically not parties to the Intercreditor Agreement, defendant executed the following Acknowledgement:

The undersigned, being the Borrower referred to in the foregoing Intercreditor Agreement, hereby acknowledges receipt of a copy of the foregoing Intercreditor Agreement, waives notice of acceptance thereof by the Creditors, consents thereto, and agrees to the foregoing terms and provisions. By execution hereof, the Borrower agrees to be bound by the provisions of the foregoing intercreditor Agreement as they relate to the relative rights of the Creditors in the Collateral. The Borrower further agrees that the terms of the foregoing Intercreditor Agreement are solely for the benefit of the Creditors, and their respective successors and assigns, and that no other party, including the Borrower, shall claim any third-party beneficiary rights or any other rights thereunder.

After the close of the transaction, Adcock became president of the Company, and the board of directors was composed of Dominic, Angelo Jr., and Michael Stefani. Stefani is an attorney who also represented at least two of the Iafrates.^[6] In January 2016, Angelo Jr. resigned from the board of directors.

In March 2016, Adcock informed the board of directors that he asked the Company's bonding company for permission to issue a prepayment of $4 million on the Promissory Notes, but that the bonding company had denied the request. After that discussion, Angelo Jr. told Adcock that he would like his portion of any prepayment to be paid to Angelo Sr. In November 2016, Adcock obtained approval from the bonding company to make a prepayment on the amount owed under Angelo Sr.'s Promissory Notes, and, in December 2016, he authorized the Company to issue a payment for that amount to Angelo Sr. In February 2017, Adcock directed the Company to issue payments to Dominic and the Trust for the amounts owed under their Promissory Notes. Adcock contemporaneously asked Dominic to resign from the Company's board of directors, and apparently Stefani resigned as well.^[7] In February 2018, Adcock authorized the Company to issue a payment to Angelo Jr. for the amount owed on his Promissory Notes.

Plaintiffs believed that the final February 2018 payment was the triggering event for all four of the Warrants, and all four of them attempted to exercise those warrants. Defendants contended that only Angelo Jr's Warrant was timely and would be honored. The other Warrants had all expired because the Promissory Notes held by Angelo Sr., Dominic, and the Trust had each been paid in full by the Company more than 60 days previously. In April 2018, plaintiffs commenced an action in federal district court, where, in due course, plaintiffs' securities fraud claims were eventually dismissed on the merits, and plaintiffs' remaining state law claims were dismissed without prejudice. See Iafrate v. Angelo Iafrate, Inc, 827 F Appx 543, 547 (CA 6, 2020). In July 2019, plaintiffs filed their complaint underlying this appeal which primarily concerned defendants' refusal to honor the expired Warrants. Plaintiffs raised four claims: (1) breach of contract, (2) reformation, (3) unjust enrichment, and (4) fraud.

In lieu of an answer, defendants filed a motion for summary disposition under MCR 2.116(C)(8). The trial court granted the motion, following which plaintiffs promptly moved for reconsideration and for clarification. Following the Sixth Circuit's decision in Iafrate, plaintiffs filed a supplemental brief in support of their motion for reconsideration and a motion for leave to file an amended complaint. The trial court apparently had not realized plaintiffs filed a ...