Rdm Holdings v. Continental Plastics

• Decision Date: 16 December 2008
• Docket Number: Docket No. 278912.
• Parties: RDM HOLDINGS, LTD v. CONTINENTAL PLASTICS CO.
• Court: Court of Appeal of Michigan — District of US

762 N.W.2d 529

281 Mich. App. 678

RDM HOLDINGS, LTD v. CONTINENTAL PLASTICS CO.

Docket No. 278912.

Court of Appeals of Michigan.

Submitted December 9, 2008, at Detroit.

Decided December 16, 2008, at 9:00 a.m.

Clark Hill P.L.C. (by William G. Asimakis, Jr., and Paul C. Smith) for the plaintiffs.

Bellanca, Beattie & DeLisle, P.C. (by James C. Zeman), Harper Woods, for the defendants.

Before: MURPHY, P.J., and SAWYER and WHITBECK, JJ.

MURPHY, P.J.

Plaintiffs appeal as of right the trial court's order granting summary disposition in favor of defendants pursuant to MCR 2.116(C)(7) on the basis of res judicata grounded on earlier bankruptcy proceedings conducted under title 11 of the United States Code, the Bankruptcy Code, and more specifically chapter 7, 11 U.S.C. 701 et seq. (liquidation). Defendants cross-appeal, arguing alternative grounds, which were raised but not decided below, in support of the trial court's ruling to summarily dismiss plaintiffs' action.¹ We affirm in part, reverse in part, and remand in part for further proceedings consistent with this opinion.

I. OVERVIEW

In an earlier lawsuit filed by plaintiff RDM Holdings, Ltd. (RDM), against Continental Lighting, L.L.C. (Con-Lighting), formerly known as Continental-Chivas, L.L.C. (Con-Chivas), neither of which is a party here, RDM obtained an order granting partial summary disposition in its favor, but Con-Lighting then filed for chapter 7 bankruptcy protection, staying further proceedings. That lawsuit, which we shall refer to as the RDM I litigation, concerned commercial property located on Merrill Road in Sterling Heights that was leased to Con-Lighting and used to manufacture automobile parts for General Motors Corporation (GM) and DaimlerChrysler. Corporation. RDM alleged breach of the lease with respect to Con-Lighting's obligations to pay holdover rent, insurance, and damages for building repairs and cleanup.²

Following the bankruptcy stay that halted the RDM I litigation, RDM and Chestnut Properties, L.L.C. (Chestnut), filed the instant suit against defendants Continental Plastics Co. (Con-Plastics) and Continental Coatings, L.L.C. (Con-Coatings), alleging successor liability, violation of the Uniform Fraudulent Transfer Act (UFTA), MCL 566.31 et seq., and a claim seeking to pierce the corporate veil. We shall refer to the present lawsuit as the RDM II litigation. In RDM II, the theories of recovery reflected efforts to hold defendants liable for Con-Lighting's alleged breaches of the Merrill Road lease, which were also the subject matter of the RDM I lawsuit. Plaintiffs further alleged in RDM II that Con-Lighting breached leases, under which Chestnut was the landlord, with respect to two additional business properties rented to Con-Lighting.

The trial court granted summary disposition in favor of defendants under MCR 2.116(C)(7) on the basis of res judicata, ruling that the allegations raised in the RDM II complaint could have been addressed in the bankruptcy proceedings had plaintiffs pursued the matter. Plaintiffs appeal that determination, arguing that the elements of res judicata had not been satisfied, and they appeal the trial court's denial of their motion for partial summary disposition on the UFTA claim. Defendants argue that the trial court properly applied the doctrine of res judicata arising out of the bankruptcy proceedings and that plaintiffs were not entitled to summary disposition on the UFTA claim. Moreover, defendants cross-appeal, contending that, even if the trial court erred in applying res judicata in the context of the court's reliance on the earlier bankruptcy proceedings, res judicata grounded on the RDM I lawsuit would apply. Further, defendants maintain that they were entitled to summary disposition under MCR 2.116(C)(10) with regard to the successor liability, UFTA, and corporate veil claims.

II. REVIEW OF THE CHAPTER 7 BANKRUPTCY PROCEEDINGS

On August 19, 2005, 11 days after the order granting partial summary disposition was entered in RDM I, Con-Lighting filed a voluntary petition for bankruptcy under chapter 7 in the United States Bankruptcy Court for the Eastern District of Michigan, Southern Division. The petition referred to past names used by Con-Lighting, i.e., Chivas Products, Ltd., and Con-Chivas, it was signed by Kenneth Lamb as president of Con-Lighting,³ and the petition estimated that there existed between 50 to 99 creditors. A summary of bankruptcy schedules, and the schedules themselves, indicated that Con-Lighting had zero assets, while its liabilities amounted to approximately $2.4 million. A statement of financial affairs provided that Con-Lighting had annual gross income from sales in the amounts of $15.7 million in 2002, $12.7 million in 2003, and $9.5 million in 2004. Additionally, the statement of financial affairs indicated that $940,233 in property and assets had been surrendered to Comerica Bank.⁴ In an October 19, 2005, § 341 hearing,⁵ with bankruptcy trustee Mark Shapiro presiding, Lamb testified that there was a mistake in the petition and that the Con-Lighting property and assets had actually been surrendered to Con-Plastics. Lamb was unaware of any appraisals being done in regard to the Con-Lighting property before its surrender.

The bankruptcy petition stated that Gregory Eaton held a 51 percent interest in Con-Lighting and that the remaining 49 percent interest was held entirely by Con-Plastics. The petition provided that Con-Plastics currently had possession of Con-Lighting's books of account and records, along with records of a Con-Lighting inventory. Bankruptcy schedule F (creditors holding unsecured nonpriority claims) listed, among many other creditors, plaintiff Chestnut, with a claim amount of $1,600, and RDM, with the claim amount expressed as "unknown." Also listed as creditors holding unsecured nonpriority claims were Con-Coatings, owed $1.5 million, and Con-Plastics, owed $303,286.

Bankruptcy trustee Shapiro testified in his deposition that his job in conducting a chapter 7 bankruptcy was to ascertain whether any assets were available for distribution and to liquidate available assets for the benefit of the creditors. He stated that the Con-Lighting bankruptcy was a zero asset estate, which ultimately led to the filing of a "no distribution report" and the closing of the bankruptcy estate. Shapiro testified that claims of successor liability, piercing the corporate veil, alter ego, and fraudulent conveyances were all claims that could be brought or raised by a trustee in the context of a bankruptcy proceeding, usually taking the form of an adversarial proceeding. He asserted that he had done so in the past in other cases. According to Shapiro, he could have pursued those claims against Con-Plastics and Con-Coatings in the bankruptcy court on his own initiative or if requested and justified; plaintiffs, however, never made such a request. Had those claims been successfully pursued in the bankruptcy proceedings, Shapiro could have taken monies recovered from Con-Plastics and Con-Coatings and distributed the funds to creditors, including plaintiffs. He indicated that he has a fiduciary duty to all creditors to look into the validity of such claims. All creditors would have received notice of the bankruptcy. Shapiro was not aware of any laws that obligated or mandated a creditor in bankruptcy proceedings to come forward with claims such as those alleged in RDM II.

We recognize that, while providing some helpful insight, Shapiro's testimony concerning the authority of a trustee and the bankruptcy court relative to successor liability, corporate veil, and fraudulent conveyance claims and issues does not control. Such matters are governed by the Bankruptcy Code and relevant caselaw construing the code.

III. STANDARD OF REVIEW

This Court reviews de novo a trial court's decision on a motion for summary disposition. Kreiner v. Fischer, 471 Mich. 109, 129, 683 N.W.2d 611 (2004). The issue whether the doctrine of res judicata bars a subsequent lawsuit constitutes a question of law that this Court likewise reviews de novo on appeal. Stoudemire v. Stoudemire, 248 Mich.App. 325, 332, 639 N.W.2d 274 (2001).

IV. SUMMARY DISPOSITION TESTS

We shall first address the issue of res judicata and whether application of the doctrine could be grounded on the bankruptcy proceedings under the circumstances presented. Under MCR 2.116(C)(7) (claim barred by prior judgment, i.e., res judicata), this Court must consider not only the pleadings, but also any affidavits, depositions, admissions, or other documentary evidence filed or submitted by the parties. Horace v. City of Pontiac, 456 Mich. 744, 749, 575 N.W.2d 762 (1998). The contents of the complaint must be accepted as true unless contradicted by the documentary evidence. Patterson v. Kleiman, 447 Mich. 429, 432, 526 N.W.2d 879 (1994). This Court must consider the documentary evidence in a light most favorable to the nonmoving party. Herman v. Detroit, 261 Mich.App. 141, 143-144, 680 N.W.2d 71 (2004). If there is no factual dispute, whether a plaintiff's claim is barred under a principle set forth in MCR 2.116(C)(7) is a question of law for the court to decide. Huron Tool & Engineering Co. v. Precision Consulting Services, Inc., 209 Mich.App. 365, 377, 532 N.W.2d 541 (1995). If a factual dispute exists, however, summary disposition is not appropriate. Id.

Because we conclude that the trial court erred in part in applying res judicata, we shall also consider defendants' arguments under MCR 2.116(C)(10). MCR 2.116(C)(10) provides for summary disposition where there is no genuine issue regarding any material fact and the moving party is entitled to judgment or partial judgment as a matter of law. A trial court may grant a motion for summary disposition under MCR 2.116(C)(10) if the pleadings, affidavits, and other documentary evidence, when viewed in a light most favorable to the nonmovant, show that there is no genuine...