Mary Vandenheede v. Frank Vecchio ( 2013 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 13a0856n.06
No. 13-1253
FILED
UNITED STATES COURT OF APPEALS Oct 01, 2013
FOR THE SIXTH CIRCUIT DEBORAH S. HUNT, Clerk
MARY C. VANDENHEEDE, )
)
Plaintiff-Appellant, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR THE
FRANK B. VECCHIO; FRANK A. ) EASTERN DISTRICT OF MICHIGAN
BORSCHKE; BUTZEL LONG, A )
Professional Service Corporation; and )
DOEREN MAYHEW AND CO., P.C., )
)
Defendants-Appellees. )
Before: COOK, GRIFFIN, and KETHLEDGE, Circuit Judges
COOK, Circuit Judge. Plaintiff Mary C. Vandenheede sued defendants Frank B. Vecchio
and Frank A. Borschke, as well as their respective law and accounting firms, Butzel Long and
Doeren Mayhew and Co., P.C., alleging tax fraud under 26 U.S.C. § 7434, civil conspiracy,
intentional infliction of emotional distress, and breach of contract. The district court granted
defendants judgment on the pleadings under Federal Rule of Civil Procedure 12(c) on all counts, and
Vandenheede appeals. She also asks this court to remand to the district court for consideration of
a sanctions motion she filed against Vecchio and his firm. For the following reasons, we AFFIRM
the district court’s judgment.
No. 13-1253
Vandenheede v. Vecchio et al.
I.
This litigation arises from a dispute between the trustees of the Donald J. Chinn Trust
(“Trust”) and Vandenheede, Chinn’s longtime girlfriend, regarding whether substantial payments
by the Trust to Vandenheede qualified as taxable income. According to the complaint, Chinn
paid his and Vandenheede’s living expenses from this revocable trust. (Compl. ¶ 17.) Vecchio and
Borschke, Chinn’s attorney and accountant, became trustees when Chinn was diagnosed with
dementia, and they filed 1099-MISC forms for tax years 2006 and 2007, showing that the Trust
paid Vandenheede more than $110,000 in “non-employee compensation” during those years. (Id.
¶¶ 14, 18.) The 1099s information returns reporting payments of income to the IRS prompted
the IRS and the Michigan Department of Treasury to assess her taxes and penalties; she has since
succeeded in abating the federal taxes. (Id. ¶¶ 36, 46 47.) Chinn died in 2009, and Vandenheede
filed this action in May 2012 after Vecchio and Borschke refused to correct or retract the filings.
Vandenheede’s tax fraud, civil conspiracy, and intentional infliction of emotional distress
claims challenge the propriety of defendants’ filing the 1099s and their refusal to file retractions.
She characterizes these tax filings as fraudulent because the trustees knew: (1) of her long-term
relationship with Chinn; (2) that the “payments . . . were for the benefit of . . . Chinn, not of
[Vandenheede]”; (3) that Chinn paid her living expenses and bought her a house; and (4) she “never
performed compensated services for . . . Chinn” during their relationship. (Id. ¶¶ 12 13, 15 17,
20 26.) She also alleges “detrimental reliance/breach of contract,” claiming that Vecchio
-2-
No. 13-1253
Vandenheede v. Vecchio et al.
“individually and as trustee of the Donald J. Chinn Trust” reneged on a promise to reimburse her for
attorneys’ fees related to the drafting of a prenuptial agreement. (Id. ¶¶ 75 77.) In that regard, she
alleges that “the intermeddling Vecchio” requested the prenuptial agreement “[t]o prevent . . . Chinn
and [her] from marrying.” (Id. ¶ 51.)
The district court granted defendants judgment on the pleadings on all counts, finding that:
(1) as a matter of law, Chinn, not the trustees, qualified as the “filer” of the 1099s, defeating the
§ 7434 tax fraud claim against the trustees; (2) the state-law claims for conspiracy and intentional
infliction of emotional distress were time-barred; (3) Vecchio’s representative capacity as Chinn’s
attorney precluded an independent claim against him for breach of contract; and (4) Michigan law
precluded Vandenheede, a non-client, from suing the accounting firm Doeren Mayhew.
Vandenheede appeals.
II.
We give fresh review to a Rule 12(c) judgment on the pleadings, utilizing the same pleading
standard applicable under Rule 12(b)(6). Wee Care Child Ctr., Inc. v. Lumpkin, 680 F.3d 841, 846
(6th Cir. 2012). To survive an adverse judgment, then, the complaint must “contain[] sufficient
factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Bartholomew
v. Blevins, 679 F.3d 497, 499 (6th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
Rule 9(b)’s heightened pleading standard applies to Vandenheede’s tax-fraud claim. See Fed. R.
Civ. P. 9(b). Her complaint therefore “must state with particularity the circumstances constituting
-3-
No. 13-1253
Vandenheede v. Vecchio et al.
fraud.” Id. “Although ‘conditions of a person’s mind may be alleged generally,’ Fed. R. Civ. P.
9(b), the plaintiff still must plead facts about the defendant’s mental state, which, accepted as true,
make the state-of-mind allegation plausible on its face.” Republic Bank & Trust Co. v. Bear Stearns
& Co., 683 F.3d 239, 247 (6th Cir. 2012) (second quotation omitted). The Rule requires the
plaintiff: “(1) to specify the allegedly fraudulent statements; (2) to identify the speaker; (3) to plead
when and where the statements were made; and (4) to explain what made the statements fraudulent.”
Id.; see also Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 877 (6th Cir. 2006) (“[A]t a
minimum, Rule 9(b) requires that the plaintiff specify the ‘who, what, when, where, and how’ of the
alleged fraud.” (citation and internal quotation omitted)).
In determining the sufficiency of the complaint, we confine our review to the pleadings,
exhibits attached to or addressed in the complaint, documents included with a motion to dismiss if
referenced in the complaint, and public records. Rondigo, L.L.C. v. Twp. of Richmond, 641 F.3d
673, 680 81 (6th Cir. 2011). We may affirm the district court’s judgment on alternative grounds
supported by the record or pleadings. See, e.g., Bondex Int’l, Inc. v. Hartford Accident & Indem. Co.,
667 F.3d 669, 676 (6th Cir. 2011); Murphy v. Nat’l City Bank, 560 F.3d 530, 535 (6th Cir. 2009).
A. Tax Fraud Under § 7434
The relevant tax code provision states:
-4-
No. 13-1253
Vandenheede v. Vecchio et al.
Civil damages for fraudulent filing of information returns
(a) In general.--If any person willfully files a fraudulent information return with
respect to payments purported to be made to any other person, such other person may
bring a civil action for damages against the person so filing such return.
26 U.S.C. § 7434(a). The question posed to the district court was who “filed” the returns, the
trustees who prepared the documents or the taxpayer Chinn.
Looking to the related provision governing untimely and incorrect information returns, 26
U.S.C. § 6721, and its implementing regulation’s definition of “filer” as the “person that is required
to file an information return,” 26 C.F.R. § 301.6721-1(g)(6), the district court concluded that
Chinn and not the preparers of the documents “filed” the return as a matter of law, because “the
tax consequences, if any, of the 1099-MISCs ran directly to Donald J. Chinn, who reported all
income and deductions of his trust on his personal income tax returns.” Vandenheede counters this,
maintaining that Vecchio and Borschke, by preparing and submitting the documents for the Trust,
filed the 1099s, and that the district court’s narrow interpretation of § 7434 shields trustees from its
tax-fraud proscriptions.
We resolve this appeal on the more direct path noted by the district court in dismissing other
claims in this case: the absence of particularized allegations demonstrating fraud. (See R. 42, Op.
& Order at 7 (explaining that plaintiff “does not claim fraud or intentional misrepresentation by
-5-
No. 13-1253
Vandenheede v. Vecchio et al.
Doeren Mayhew . . . with the requisite particularity”).) The tax-code provision governing these
information returns states in pertinent part:
(a) Payments of $600 or more.--All persons engaged in a trade or business and
making payment in the course of such trade or business to another person, of rent,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments,
or other fixed or determinable gains, profits, and income (other than [excluded
payments covered by other tax code provisions]), of $600 or more in any taxable year
. . . shall render a true and accurate return to the Secretary, under such regulations and
in such form and manner and to such extent as may be prescribed by the Secretary,
setting forth the amount of such gains, profits, and income, and the name and address
of the recipient of such payment.
26 U.S.C. § 6041(a). This broad provision, used by the government to verify incomes for purposes
of assessing and collecting taxes, does not require an employer-employee relationship. Marlar, Inc.
v. United States, 151 F.3d 962, 968 (9th Cir. 1998). The challenged information returns in this case
identified the payments to Vandenheede as “nonemployee compensation.” Vandenheede denies ever
performing compensated services for the Trust or Chinn, and the trustees defend that they lacked
authority to issue Trust funds as gifts, so they needed to record the payments to Vandenheede as
income. Yet, because Vandenheede’s § 7434 claim alleges fraud, her pleadings must do more than
establish an accounting mistake.
Section 7434(a) prohibits the “willful[] fil[ing]” of “a fraudulent information return with
respect to payments purported to be made to any other person.” As Vandenheede acknowledges,
willfulness in this context “connotes a voluntary, intentional violation of a legal duty.” (Appellant
Br. at 35.) Tax fraud typically requires “intentional wrongdoing.” See Maciel v. Comm’r, 489 F.3d
-6-
No. 13-1253
Vandenheede v. Vecchio et al.
1018, 1026 (9th Cir. 2007); Granado v. Comm’r, 792 F.2d 91, 93 (7th Cir. 1986) (per curiam). At
the motion to dismiss stage, then, the complaint must contain specific allegations supporting a
plausible inference that Vecchio and Borschke willfully filed false information returns. Republic
Bank & Trust Co., 683 F.3d at 247. It does not.
To begin with, the complaint does not specify how the Trust made the payments to
Vandenheede after Vecchio and Borschke became trustees or what exactly the payments were for.
Rather, it vaguely asserts that: (1) Chinn previously “paid his living expenses, and those of Plaintiff,
from the . . . Trust” (Compl. ¶ 17); (2) the new trustees “continued paying . . . Chinn’s living
expenses from the . . . Trust” (id. ¶ 19); and (3) that the “payments” to Vandenheede “were for the
benefit of . . . Chinn, not of Plaintiff” (id. ¶ 25). Vandenheede’s briefing, which may not supplement
the pleadings, adds little clarity regarding the money she received, arguing at different points that
the Trust payments were for her benefit, mostly for Chinn’s benefit, living expenses for either, and
gifts. Though she notes that she succeeded in abating her federal taxes, she offers no judicial or
administrative finding supporting her challenge to the information returns. Moreover, she does not
suggest a different or preferable way that the trustees should have categorized the payments for tax
purposes or who (other than her) should have suffered the tax consequences.1
1
The federal tax code generally holds the donor liable for gift taxes, see 26 U.S.C.
§§ 2501 2502, but the donee becomes personally liable for the tax if not timely paid by the donor,
see 47B C.J.S. Internal Revenue § 502.
-7-
No. 13-1253
Vandenheede v. Vecchio et al.
Her complaint also fails to include specific facts supporting an inference of scienter i.e.,
that Vecchio and Borschke willfully filed fraudulent information returns. In this regard, she alleges
only that the trustees knew she “never performed compensated services” for the Trust or Chinn.
(Compl. ¶ 26.) But this allegation carries little weight, because, as noted above, she specifies no
alternative take on how and for what the money was paid. Expanding on her complaint,
Vandenheede’s appellate brief alludes to the “substantial economic motive” of Chinn’s non-party
children and the trustees’ firms. Yet even if we could consider these supplemental allegations, see
Rondigo, L.L.C., 641 F.3d at 680 81, they fail to provide particularized facts from which one
could infer that defendants knowingly issued false notices to the taxing authorities. Finally, her
conclusory allegation that Vecchio prevented her from marrying Chinn by requesting a prenuptial
agreement, discussed more fully below, does not evince fraud in the filing of the 1099s.
In any event, her complaint acknowledges that Vecchio and Borschke maintained that they
lacked the “authority to make gifts from the . . . Trust.” (Id. ¶ 30.) The Trust itself, identified in the
complaint and included in the trustees’ motions, supports their position. It authorizes them to
“distribute . . . or apply for [Chinn’s] benefit such amounts of net income and principal, even to the
extent of exhausting principal, as the Trustee believes desirable from time to time for [his] health,
support in reasonable comfort, best interests and welfare, considering all circumstances and factors
deemed pertinent by the Trustee.” (R. 20-2, Trust art. II(A) “Distributions to Me.”) For others,
though, it only authorizes them to “distribute . . . such amounts of net income and principal as
[Chinn], if not disabled as determined . . . [under this instrument], may from time to time direct in
-8-
No. 13-1253
Vandenheede v. Vecchio et al.
writing.” (Id. art. II(B) “Power of Withdrawal.”) Vandenheede neither disputes these Trust terms
nor asserts that Chinn made written requests for her to receive the payments. In fact, she fails to
point to authority enabling (let alone obliging) the trustees to continue paying her substantial sums
of discretionary money.
Nevertheless, her complaint conclusorily asserts that “[o]bviously . . . Chinn intended that
the . . . Trust pay his living expenses, and those of Plaintiff” (id. ¶ 31), suggesting that “[i]f [the
trustees] had any doubts about the legal authority to make payments from the . . . Trust, they should
have sought direction from the Probate Court” (id. ¶ 33). Her appellate brief goes one step further,
proposing that the trustees could have “ceased” paying her altogether until they received guidance.
(Appellant Br. at 50.) In her view, the trustees could have rationalized the payments as either gifts
or, “if the trustees were not authorized to make gifts from the Trust for Ms. Vandenheede’s benefit,”
an “unauthorized payment.” (Id. at 50 51.) Before the district court, plaintiffs’ counsel offered even
a third categorization: income, just not in a “trade or business.” (R. 46, Hr’g Tr. at 21.)
If, as she says, the trustees could have classified the payments as gifts, income, or
unauthorized payments to justify their disbursement of Trust funds, it stands to reason that the Trust
could report the payments accordingly for tax purposes in good faith. And if, as she admits, the
money “w[as] for the benefit of . . . Chinn, not of Plaintiff,” a person reasonably could conclude that
she performed a caregiving service “for [Chinn’s] health, support in reasonable comfort, best
interests and welfare.” (R. 20-2, Trust art. II(A).)
-9-
No. 13-1253
Vandenheede v. Vecchio et al.
Today’s opinion decides neither the veracity nor the accuracy of the trustees’ justification for
classifying the payments as “nonemployee compensation.” Rather, we conclude that Vandenheede
fails to present particularized allegations supporting the inference that they willfully filed fraudulent
information returns. Absent a well-pleaded foundation, we do not credit appellant’s conclusory
fraud claim, and we affirm the district court’s judgment.2
B. State Law Claims and the Statute of Limitations
With regard to the state-law claims for conspiracy and intentional infliction of emotional
distress, which accrued upon the filing of the 2006 and 2007 information returns, see Mich. Comp.
Laws § 600.5827, the district court correctly found them time-barred under Michigan’s three-year
statute of limitations, see Mich. Comp. Laws § 600.5805(10). Vandenheede does not dispute the
filing of the challenged forms more than three years before she filed her complaint in May 2012.
(See R. 19-14, 02/19/2007 Letter of Robert L. Litt (alerting plaintiff and defendants to problems
with the 2006 form in February 2007).) As the district court correctly noted, the Michigan Supreme
Court recently abrogated the “continuing violation” doctrine, finding it “contrary to the language of
§ 5805.” Garg v. Macomb Cnty. Cmty. Mental Health Servs., 696 N.W.2d 646, 662 (Mich. 2005).
Nevertheless, Vandenheede persists with a “continuing violation” argument, and attempts to
2
Without a viable federal claim, we abjure resolving the dependent Supremacy Clause
argument concerning Vandenheede’s claims against Doeren Mayhew. We likewise bypass her due
process and Seventh Amendment claims as forfeited in the absence of any developed argument. See,
e.g., Conlin v. Mortg. Elec. Registration Sys., Inc., 714 F.3d 355, 360 n.5 (6th Cir. 2013).
- 10 -
No. 13-1253
Vandenheede v. Vecchio et al.
distinguish Garg on the facts. The Michigan Supreme Court did not so limit its holding, and neither
may we. That Vandenheede retained counsel and counsel sent cease-and-desist letters to defendants
in 2012 does not reset the limitations clock.
C. Promissory Estoppel Claim Against Vecchio
On appeal, Vandenheede recharacterizes her “detrimental reliance/breach of contract”
claim as one for promissory estoppel, and she argues that the district court prematurely made factual
findings on the pleadings in concluding that “[a]ny promise made by Vecchio [regarding payment
of attorneys’ fees] would have been a representation made on behalf of his client Mr. Chinn, not one
made on his own personal behalf.” In view of her pleadings, we discern no error.
The complaint acknowledges that Vecchio represented Chinn “[t]hroughout the time” she
dated Chinn, or from 1992 2009. (Compl. ¶¶ 11, 14.) It further avers that “Vecchio, individually
and as trustee of the . . . Trust, told [her] to have a prenuptial agreement prepared, and that if she did
so he would reimburse her the attorney fees.” (Id. ¶ 75.) These allegations reflect Vandenheede’s
understanding that Vecchio served in a representative capacity for Chinn and the Trust, a fact that
she does not contest on appeal.
Michigan’s courts recognize that an agent acting on the behalf of a disclosed principal does
not become a party to a contract absent facts demonstrating that the attorney intended to become a
party to the contract. See, e.g., Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 315 (6th Cir.
- 11 -
No. 13-1253
Vandenheede v. Vecchio et al.
1998); Uniprop, Inc. v. Morganroth, 678 N.W.2d 638, 641 42 (Mich. Ct. App. 2004); Riddle v.
Lacey & Jones, 351 N.W.2d 916, 919 20 (Mich. Ct. App. 1984). For instance, the court in Riddle
affirmed the dismissal of a promissory-estoppel claim against the attorney of a disclosed principal
because “[a]ny promise made by the [attorney] was clearly made on behalf of his principal.” Riddle,
351 N.W.2d at 920. In reaching this conclusion, the court relied on § 320 of the Restatement
(Second) of Agency and its commentary:
We also find plaintiff’s complaint to be deficient based upon principles of agency law
as summarized in 2 Restatement Agency, 2d, § 320, p 67:
“Unless otherwise agreed, a person making or purporting to make a
contract with another as agent for a disclosed principal does not
become a party to the contract.”
Comment (a) to § 320 explains, in pertinent part:
“Whether or not a person purporting to act as agent for another
becomes a party to the contract depends upon the agreement between
such person and the other party. See § 146. As stated in Section 4, a
principal is disclosed if, at the time of making the contract in
question, the other party to it has notice that the agent is acting for
a principal and of the principal’s identity. One who purports to
contract on behalf of a designated person does not manifest by this
that he is making a contract on his own account, and only where he
so manifests does the agent become a party to the contract which he
makes for the principal. In the absence of other facts, the inference
is that the parties have agreed that the principal is, and the agent is
not, a party.”
Id. at 919 (emphasis in Riddle).
- 12 -
No. 13-1253
Vandenheede v. Vecchio et al.
Although the complaint refers to Vecchio as “intermeddling” and faults him for
preventing her marriage to Chinn, it offers no facts supporting a plausible inference that Vecchio
acted in any capacity other than a representative capacity in requesting the prenuptial agreement and
offering to pay for related fees. Her appellate briefing again attempts to fill in these gaps by alleging
ill will harbored by Chinn’s children and arguing that the trustees’ firms viewed Chinn’s company
as an important client, but these allegations neither appear in the complaint nor speak to her claim
against Vecchio. Absent well-pleaded facts supporting a plausible claim that Chinn’s attorney
individually promised to pay Vandenheede’s legal fees, we affirm the district court’s judgment.
III.
For these reasons, we AFFIRM the district court’s judgment and remand for proceedings
consistent with this opinion.
- 13 -