Frank Kern III v. Bonnie Kern-Koskela ( 2017 )

STATE OF MICHIGAN
COURT OF APPEALS
FRANK KERN III, FOR PUBLICATION
June 20, 2017
Plaintiff-Appellant/Cross-Appellee, 9:00 a.m.
v No. 330183
Oakland Circuit Court
BONNIE KERN-KOSKELA, LARRY LC No. 2012-127856-CB
KOSKELA, CHRISTOPHER KELLY,
MAXITROL COMPANY, and MERTIK
MAXITROL, INC,
Defendants-Appellees/Cross-
Appellants,
and
DAVID KALL, MICHAEL LATIFF, and
MCDONALD HOPKINS LLC,
Defendants-Appellees.
Before: STEPHENS, P.J., and K. F. KELLY and MURRAY, JJ.
PER CURIAM.
Plaintiff appeals by right from a final order reforming a lease contract. However, several
issues on appeal relate to the trial court’s prior orders dismissing a number of plaintiffs’ claims
and granting summary disposition. The individual defendants and Maxitrol cross-appeal from
the final order, arguing that they were entitled to attorney fees and costs. Finding no error
warranting reversal, we affirm.
I. BASIC FACTS AND PROCEDURAL HISTORY
Plaintiff and his sister, defendant Bonnie Kern-Koskela, both own a 50 percent interest in
Maxitrol and Mertik Maxitrol. Plaintiff, Kern-Koskela and Kern-Koskela’s husband1, Larry
Koskela, compose Maxitrol’s board of directors. Kern-Koskela serves as the Board’s Chair and
1
We will refer to Kern and Kern-Koskela by name or as individual defendants.
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as the Executive Vice President and Chief Executive Officer of Maxitrol. Koskela serves as the
Board’s Vice Chair and as President and Chief Operating Officer of Maxitrol. Defendant
Christopher Kelly is Maxitrol’s Chief Financial Officer and Vice President of Finance.
Defendants David Kall, Michael Latiff and McDonald Hopkins, LLC, served as counsel for the
corporate defendants.
In 2012, plaintiff sued the individual defendants and Kelly for shareholder oppression
and breach of fiduciary duty, asserting that Kern-Koskela excluded plaintiff from any control or
oversight over the corporations and was mis-managing the businesses so as to enrich herself at
the expense of the corporations and plaintiff. Plaintiff alleged a myriad of wrongdoing. For
purposes of this appeal, the focus is on a lease agreement between Bates Group, LLC, a company
wholly owned by the individual defendants, and Maxitrol – the so-called M-Annex lease.
Plaintiff also made claims against corporate counsel defendants, arguing that they owed a
fiduciary duty to him as a shareholder in a closely-held corporation and breached that duty by
performing legal work for Kern-Koskela at the same time they were serving as corporate counsel
for Maxitrol.
The trial court granted corporate counsel summary disposition, finding that there was no
fiduciary relationship between plaintiff and corporate counsel. Thereafter, Maxitrol moved for
the appointment of a “disinterested person” pursuant to MCL 450.1495 to investigate whether
the continuation of plaintiff’s derivative suit was in the best interests of the corporation. The
trial court appointed attorney Joel H. Serlin to act as a “disinterested person” under the act and
charged him with investigating whether the continuation of plaintiff’s suit was in the best
interests of the corporation. Serlin’s July 7, 2014 report concluded:
As the Disinterested Person, the undersigned has expended considerable
time and effort in reviewing and analyzing all of the information, documentation
and claims presented. Disputes involving family members of a closely held
corporation, where each party is a 50% Shareholder, are among the most difficult
to reconcile, and resolve. During the undersigned’s lengthy investigation of the
issues presented, it was clear that all witnesses, respective counsel, and the
submissions presented to the undersigned were done so in a highly professional
and forthright manner. After a comprehensive investigation, the undersigned
makes the following recommendations:
1. Plaintiff Frank Kern III should be permitted to proceed with a derivative
claim related to the M Annex, and the Annex Lease, entered into by and between
Bates Group, LLC and Defendant Maxitrol Company, because those transactions
may have constituted usurpation of a corporate opportunity and self-dealing.
2. As owners of Bates Group, LLC (the landlord), Defendants Bonnie
Kern-Koskela and Larry Koskela, as well as Defendant Maxitrol Company (the
tenant), are necessary parties to the derivative claim.
3. The Disinterested Person finds that all remaining claims asserted by
Plaintiff Frank Kern III lack merit, and to proceed with those derivative claims
would not be in the best interest of the Companies.
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4. The Disinterested Person further finds that Defendant Christopher Kelly
has not breached his fiduciary duties or acted improperly, and no derivative
claims should proceed against him.
Based on Serlin’s report, Maxitrol sought dismissal solely in reliance on Serlin’s report.
Kern-Koskela, Koskela and Kelly joined the motion. Plaintiff responded, in part, by challenging
the constitutionality of MCL 450.1495 as a violation of the separation of powers doctrine as well
as an improper delegation of the trial court’s constitutionally-mandated function to a non-judicial
court-appointed advisory expert. The trial court indicated that the motion was more properly
characterized as a motion to dismiss brought under MCL 450.1495 and rejected plaintiff’s
constitutional claims. In a written opinion read into the record, the trial court concluded that
Serlin’s determination was made in good faith after conducting a reasonable investigation.
Consequently, MCL 450.1495 required dismissal of those claims that Serlin determined should
not proceed. The trial court dismissed with prejudice plaintiff’s third amended complaint against
Mertik and Kelly. He also dismissed plaintiff’s third amended complaint “as to Defendants
Bonnie Kern-Koskela, Larry Koskela, and Maxitrol Company – with the exception of Plaintiff’s
claim ‘related to the M Annex, and the Annex Lease, entered into by and between Bates Group,
LLC and Defendant Maxitrol Company’ – which may proceed to trial.”
The jury found that the lease was unfair to Maxitrol and that Maxitrol was damaged in
the amount of $51,015. The trial court denied a number of post-judgment motions.
II. DISMISSAL OF CLAIMS BASED ON THE DISINTERESTED PERSON’S REPORT
Plaintiff raises constitutional challenges to MCL 450.1495. First he argues that to the
extent the statute dictates a procedure for summary disposition, the statute should be declared
unconstitutional as a violation of Michigan’s separation of powers doctrine, Const. 1963, art. 3 §
2, Const. 1963 art. 6 § 1, and Const. 1963 art. 6 § 5. Next, plaintiff argues that the statute is also
unconstitutional because it commands the judiciary to delegate its constitutionally mandated
function and adopt the findings of a non-judicial court-appointed disinterested person. Finally,
plaintiff maintains that, even assuming that the statute is constitutional, the trial court erred in
granting summary disposition where there were numerous questions of fact regarding plaintiff’s
claims for removing Kern-Koskela and Koskela as corporate officers and for an accounting. We
reject each of these challenges.
This Court reviews constitutional questions de novo. In re AMAC, 269 Mich. App. 533,
536; 711 NW2d 426 (2006). “[A] statute is presumed to be constitutional unless its
unconstitutionality is clearly apparent.” McDougall v Schanz, 461 Mich. 15, 24; 597 NW2d 148
(1999).
Plaintiff asserts that MCL 450.1495 violates the separation of powers doctrine because
the statute impermissibly infringes on our Supreme Court’s exclusive authority under Const
1963, art 6, § 5, to promulgate rules governing procedure by providing a procedural mechanism
for summary disposition. As observed in McDougall:
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It is beyond question that the authority to determine rules of practice and
procedure rests exclusively with this Court. Indeed, this Court’s primacy in such
matters is established in our 1963 Constitution:
The supreme court shall by general rules establish, modify,
amend and simplify the practice and procedure in all courts of this
state.
This exclusive rule-making authority in matters of practice and procedure is
further reinforced by separation of powers principles. See Const 1963, art 3, § 2;
In re 1976 PA 267, 400 Mich. 660; 255 NW2d 635 (1977). Thus, in Perin v
Peuler (On Rehearing), 373 Mich. 531, 541; 130 NW2d 4 (1964), we properly
emphasized that “[t]he function of enacting and amending judicial rules or
practice and procedure has been committed exclusively to this Court . . . ; a
function with which the legislature may not meddle or interfere save as the Court
may acquiesce and adopt for retention at judicial will.”
At the same time, it cannot be gainsaid that this Court is not authorized to
enact court rules that establish, abrogate, or modify the substantive law. Shannon
v Ottawa Circuit Judge, 245 Mich. 200, 223; 222 N.W. 168 (1928). Rather, as is
evident from the plain language of art 6, § 5, this Court’s constitutional rule-
making authority extends only to matters of practice and procedure. Shannon,
supra at 222-223. . . . [McDougall, 461 Mich. at 26-27 (footnotes omitted; italics
in original).]
This Court need not address plaintiff’s constitutional challenge, however, if MCL
450.1495 and MCR 2.116(C)(10) can be construed so as not to conflict. McDougall, 461 Mich.
at 24. “When there is no inherent conflict, ‘[w]e are not required to decide whether [the] statute
is a legislative attempt to supplant the Court’s authority.’” McDougall, 461 Mich. at 24, quoting
People v Mateo, 453 Mich. 203, 211; 551 NW2d 891 (1996). Moreover, this Court should ‘not
lightly presume that the Legislature intended a conflict, calling into question this Court’s
authority to control practice and procedure in the courts.’ McDougall, 461 Mich. at 24, quoting
People v Dobben, 440 Mich. 679, 697 n 22; 488 NW2d 726 (1992). Despite plaintiff’s
protestations to the contrary, MCL 450.1495 and MCR 2.116(C)(10) do not inherently conflict.
The purpose of MCL 450.1495 was cogently summarized in Virginia M Damon Trust v
North Country Financial Corporation, 406 F Supp 2d 796, 800-801(WD Mich 2005), as follows:
. . . The purpose of the section [MCL 450.1495] is to give a corporate
board an honest, informed, and objective opinion on whether maintaining
particular litigation is in the best interests of the corporation. Derivative claims
are, after all, claims on behalf of the corporation, not an investor. The Michigan
statute allows the court to put this determination in the hands of one or more
disinterested persons appointed by the court. . . . This statutory scheme is
designed to save the corporation money in defending or prosecuting a weak case
originally bought as a derivative claim and to give the corporation the incentive to
take the case if the derivative claims have merit. . . .
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The purpose of MCR 2.116(C)(10) is to “avoid extensive discovery and an evidentiary hearing
when a case can be quickly resolved on an issue of law.” Shepherd Montessori Ctr Milan v Ann
Arbor Charter Twp, 259 Mich. App. 315, 324; 675 NW2d 271 (2003); see also American
Community Mut Ins Co v Commissioner of Ins, 195 Mich. App. 351, 362; 491 NW2d 597 (1992).
In light of these stated purposes, MCL 450.1495 and MCR 2.116(C)(10) do not conflict.
The statute allows a disinterested party to stand in the stead of the corporation and determine, on
behalf of the corporation, whether a continuation or dismissal of any portion of the derivative
suit is in the best interests of the corporation. The court rule allows for an ongoing suit to be
quickly resolved, in the absence of material factual issues, on the merits of the legal questions
raised. Thus, MCL 450.1495 addresses the question whether a suit should be maintained in the
first instance to vindicate the rights of the corporation, while MCR 2.116(C)(10) addresses which
party prevails on the merits. Under MCL 450.1495, the trial court never reaches the merits of the
underlying claims. Rather, the court may only conduct a limited inquiry into the process
employed by the interested person or persons; i.e., whether the investigation was reasonable and
whether the determination was made in good faith, if the independence of the process is
challenged by the plaintiff. Otherwise, the business judgment of the disinterested person or
persons is not subject to judicial scrutiny. Thus, the statute and court rule address different
concerns at different stages of a civil proceeding. For these reasons, the statute and the court rule
do not inherently conflict. McDougall, 461 Mich. at 24.
Plaintiff also argues that MCL 450.1495 is unconstitutional because it mandates that a
trial court delegate its judicial powers to a person or group of persons who are outside the
judiciary.
“It is within the peculiar province of the judiciary to adjudicate upon and protect the
rights and interests of the citizens and to construe and apply the laws.” Carson Fischer Potts and
Hyman v Hyman, 220 Mich. App. 116, 121; 559 NW2d 54 (1996). As observed in Carson Fisher:
. . . The judicial branch is provided for in article 6 of our state
constitution. Const 1963, art 6, § 1 provides:
The judicial power of the state is vested exclusively in one
court of justice which shall be divided into one supreme court, one
court of appeals, one trial court of general jurisdiction known as
the circuit court, one probate court, and courts of limited
jurisdiction that the legislature may establish by a two-thirds vote
of the members elected to and serving in each house.
Further, Const 1963, art 6, § 27 provides:
The supreme court, the court of appeals, the circuit court,
or any justices or judges thereof, shall not exercise any power of
appointment to public office except as provided in this
constitution.
In Michigan, judicial power is vested in the courts under our state
constitution. Johnson v Kramer Bros Freight Lines, Inc, 357 Mich. 254, 258; 98
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NW2d 586 (1959). Although the Supreme Court is empowered by the Michigan
Constitution to authorize persons who have been elected and have served as
judges to perform judicial duties for limited periods or specific assignments,
Const 1963, art 6, § 23, there are no constitutional or statutory authorities
permitting a circuit court judge the power to appoint a retired judge or any other
person to sit as a court in a civil action. Brockman v Brockman, 113 Mich. App.
233, 237; 317 NW2d 327 (1982). Rather, Const 1963, art 6, § 27 specifically
prohibits such action. . . . [Carson Fischer, 220 Mich. App. at 120.]
Plaintiff’s delegation of duties argument is predicated on a misapprehension of the
workings of MCL 450.1495. The statute does not mandate a trial judge to delegate his or her
judicial duties to an individual or individuals outside the judicial realm. Rather, as previously
noted, the disinterested person or group of persons stand in the stead of the corporation, on
behalf of which the derivative suit was brought, and exercises the decision-making authority of
the corporation in good faith and after reasonable investigation to determine whether the best
interests of the corporation will be served if the suit or any portion of the suit continues. The
disinterested person does not make recommendations to the trial judge regarding the merits of
the claim or claims advanced in the derivative action and the trial judge makes no ruling on the
merits. The statute only requires the court to respect and implement the business judgment of the
disinterested person or persons regarding whether any portion of the suit should continue if the
process by which the decision was made was reasonable and undertaken in good faith. For these
reasons, plaintiff’s constitutional challenge must fail.
Finally, plaintiff argues that even assuming that the statute is constitutional, the trial court
erred in granting summary disposition where there were numerous questions of fact regarding
plaintiff’s claims for removing Kern-Koskela and Koskela as corporate officers and for an
accounting, especially in light of the jury’s later determination that the lease was unfair to
Maxitrol. However, the trial court did not grant summary disposition under MCR 2.116(C)(10);
instead, the trial court dismissed the action under MCL 450.1495:
In the present motion, Maxitrol argues that certain of Plaintiff’s claims
should be dismissed as Mr. Serlin determined that continuing their pursuit was not
in the corporations’ best interests.
In response, Plaintiff argues that Maxitrol’s procedural choice to move
under MCR 2.116(C)(10) is wrong because it would not allow the Court to
consider Mr. Serlin’ s report. The Court agrees that Plaintiff’s motion is one
properly brought under MCL 450.1495 (and not MCR 2.116(C)(10), but Maxitrol
also brought the present motion under MCL 450.1495. As a result, the Court
rejects each of Plaintiff’s arguments related to the Court’s ruling on a (C)(10)
motion. The Court’s ruling is based solely on application of MCL 450.1495.
[11/19/14 Opinion and Order, p 2.]
We reject plaintiff’s attempt to frame the issue in a manner inconsistent with the lower court
record.
III. SUMMARY DISPOSITION IN FAVOR OF CORPORATE COUNSEL
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Plaintiff argues that corporate counsel owed him a fiduciary duty under Fassihi v
Sommers, Schwartz, Silver, Schwartz & Tyler, 107 Mich. App. 509; 309 NW2d 645 (1981) and
that the trial court erred in granting corporate counsel summary disposition. We disagree.
Summary disposition under MCR 2.116(C)(10) should be granted where the affidavits or
other documentary evidence show that there is no genuine issue of material fact and that the
moving party is entitled to judgment as a matter of law. Smith v Globe Life Ins Co, 460 Mich.
446, 454-455; 597 NW2d 28 (1999). To avoid summary disposition under MCR 2.116(C)(10)
the party opposing the motion must show, via affidavit or documentary evidence, that a genuine
issue of fact exists for trial. Smith, 460 Mich. 455-456 n 2; MCR 2.116(G)(4). As a general rule
a motion for summary disposition under MCR 2.116(C)(10) is premature if discovery has not
been completed, unless there is no fair likelihood that further discovery will yield support for the
nonmoving party’s position. Liparoto Construction, Inc v General Shale Brick, Inc, 284 Mich
App 25, 33-34; 772 NW2d 801 (2009).
Whether a fiduciary relationship exists is a question of law for the court to decide.
Prentis Family Foundation Inc v Karmanos Cancer Center, 266 Mich. App. 39, 43; 698 NW2d
900 (2005), lv den 474 Mich. 871 (2005).
The trial court did not err when it granted summary disposition on plaintiff’s breach of
fiduciary duty claim against corporate counsel. Even where the number of shareholders is very
small, a corporation exists as a separate legal entity apart from its shareholders. Fassihi, 107
Mich. App. at 514. When an attorney is hired to represent a corporation, his client is the
corporation rather than the shareholders of that corporation. Prentis Family Foundation, 266
Mich. App. at 44; Fassihi, 107 Mich. App. at 514. A fiduciary relationship may arise between
corporate counsel and a shareholder where the non-client shareholder reposed “faith, confidence,
and trust” in the lawyer’s advice or judgment. Beaty v Hertzberg & Golden, PC 456 Mich. 247,
260-261; 571 NW2d 716 (1997); Prentis Family Foundation, 266 Mich. App. at 43-44. However,
that placement of trust, confidence, and reliance must be reasonable, and is not reasonable if the
interests of the client and non-client are adverse or potentially adverse. Id.
Plaintiff’s claim against corporate counsel was not brought on behalf of Maxitrol, but
instead on his own behalf as a shareholder of closely-held corporations. While the shareholders
of a closely-held corporation may often “repose their faith, confidence, and trust” in the advice
or judgment of the corporation’s counsel, courts cannot assume that this is always true. Fassihi,
107 Mich. App. at 516. In this case, plaintiff presented no evidence which would suggest that he
reposed his faith, confidence, and trust in the advice or judgment of the corporate counsel.
Plaintiff’s own affidavit states that he communicated with the corporate attorneys through his
own personal attorney and did so when demanding to review the corporate financial records. He
has presented nothing which suggests that he had any other significant communications with the
corporate attorneys. Since plaintiff had no communications with corporate counsel, he did not
place faith, confidence or trust in their advice or judgment. Even if plaintiff had relied on
communications or advice from the attorney defendants, that reliance would not have been
reasonable under the circumstances. The context of plaintiff’s contacts with corporate counsel,
where he communicated through his own counsel and demanded to review the corporations’
financial records, indicates a potentially adverse relationship with corporate counsel.
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Nor was it improper for the trial court to grant summary disposition on this issue before
discovery was completed. Plaintiff was obviously aware of his own communications with the
attorney defendants and should have been able to identify any instances where he relied upon or
trusted their advice or judgment. He did not set forth any such facts in his own affidavit. Since
there was no fair likelihood that further discovery would provide support for plaintiff’s position,
the court properly granted summary disposition under MCR 2.116(C)(10) before discovery was
completed.
IV. DISQUALIFICATION OF CORPORATE COUNSEL
Plaintiff argues that the trial court erred in denying plaintiff’s motion to disqualify
corporate counsel based on its conflict of interest. We decline to address this issue based on
plaintiff’s failure to provide the relevant transcripts.
Plaintiff moved to disqualify corporate counsel “under both MRPC 1.13 and 1.7, as well
as Fassihi.” Plaintiff argued that, under MRPC 1.13, a lawyer retained by an organization
represents the organization and not the individual shareholders. Plaintiff alleged that corporate
counsel had assisted the individual defendants with their “self-dealing and usurpation of
corporate opportunity” by reviewing the M-Annex lease. Plaintiff argued that MRPC 1.7(b)
required that corporate counsel be disqualified. The trial court denied the motion after a hearing
on November 10, 2014. No hearing transcripts have been provided.
MCR 7.210(B)(1)(a) provides:
(B) Transcript.
(1) Appellant’s Duties; Orders; Stipulations.
(a) The appellant is responsible for securing the filing of the transcript as provided
in this rule. Except in cases governed by MCR 3.977(J)(3) or MCR 6.425(G)(2),
or as otherwise provided by Court of Appeals order or the remainder of this
subrule, the appellant shall order from the court reporter or recorder the full
transcript of testimony and other proceedings in the trial court or tribunal. Once
an appeal is filed in the Court of Appeals, a party must serve a copy of any
request for transcript preparation on opposing counsel and file a copy with the
Court of Appeals.
“[T]his Court will refuse to consider issues for which the appellant failed to produce the
transcript.” PT Today, Inc v Comm’r of Office of Fin & Ins Services, 270 Mich. App. 110, 151–
152; 715 NW2d 398 (2006). However, the Court may consider an issue if the transcript was not
relevant to the issue on appeal or if the issue on appeal is simply one of law. Leelanau County
Sheriff v Kiessel, 297 Mich. App. 285, 289; 824 NW2d 576 (2012). However, here the issue is
one of fact. “The determination of the existence of a conflict of interest that disqualifies counsel
is a factual question that we review for clear error.” Avink v SMG, 282 Mich. App. 110, 116; 761
NW2d 826 (2009) (footnotes omitted). The trial court’s cursory order denying plaintiff’s motion
to disqualify corporate counsel stated simply:
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This matter having come before the Court upon Plaintiffs Motion to
Disqualify McDonald Hopkins as Corporate Counsel, the Court having held oral
argument and being otherwise apprised therein:
IT IS HEREBY ORDERED that Plaintiffs Motion to Disqualify
McDonald Hopkins as Corporate Counsel is denied.
Absent the transcripts, we are unable to discern the trial court’s reasoning and, therefore, we
decline to address this issue.
V. JUDICIAL BIAS
During a September 12, 2014 pre-trial status conference, plaintiff indicated that he
intended to proceed with his statutory claim for removal. The trial court responded that removal
“wasn’t going to happen.” The trial court then threatened that it would “throw out” plaintiff’s
case in its entirety. Plaintiff argues that such statements show bias under MCR 2.003(C)(1)(a)
and (b).2 We disagree.
“We review a trial court’s factual findings regarding a motion for disqualification for an
abuse of discretion and its application of the facts to the law de novo.” In re MKK, 286 Mich
App 546, 564; 781 NW2d 132 (2009). “An abuse of discretion occurs when the trial court’s
decision is outside the range of reasonable and principled outcomes.” Id. (internal quotation
marks omitted).
“Due process requires that an unbiased and impartial decision-maker hear and decide a
case.” Mitchell v Mitchell, 296 Mich. App. 513, 523; 823 NW2d 153 (2012). However “[a] trial
judge is presumed unbiased, and the party asserting otherwise has the heavy burden of
overcoming the presumption.” Mitchell, 296 Mich. App. at 523; see also Cain v Dep’t of
Corrections, 451 Mich. 470, 497; 548 NW2d 210 (1996). Grounds for disqualification are
provided in MCR 2.003(C), which provides:
(1) Disqualification of a judge is warranted for reasons that include, but
are not limited to, the following:
(a) The judge is biased or prejudiced for or against a party or attorney.
(b) The judge, based on objective and reasonable perceptions, has either
(i) a serious risk of actual bias impacting the due process rights of a party as
enunciated in Caperton v Massey, 556 U.S. 868; 129 S. Ct. 2252; 173 L. Ed. 2d 1208
(2009), or (ii) has failed to adhere to the appearance of impropriety standard set
forth in Canon 2 of the Michigan Code of Judicial Conduct.
2
Our review is not hampered by plaintiff’s failure to provide relevant transcripts where the trial
court provided a detailed written opinion and order, which fully detailed its decision.
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Under MCR 2.003(C)(1)(a), a judge must be disqualified from hearing a case in which he
cannot act impartially or is biased against a party. “[J]udicial rulings, in and of themselves,
almost never constitute a valid basis for a motion alleging bias, unless the judicial opinion
displays a deep-seated favoritism or antagonism that would make fair judgment impossible and
overcomes a heavy presumption of judicial impartiality.” Armstrong v Ypsilanti Charter Twp,
248 Mich. App. 573, 597; 640 NW2d 321 (2001), quoting Cain v Dep’t of Corrections, 451 Mich.
470, 503; 548 NW2d 210 (1996). In fact, “a trial judge’s remarks made during trial, which are
critical of or hostile to counsel, the parties, or their cases, ordinarily do not establish
disqualifying bias.” In re MKK, 286 Mich. App. 546, 567; 781 NW2d 132 (2009), lv den 486
Mich. 909 (2010). Under MCR 2.003(C)(1)(b), the test for determining whether there is an
appearance of impropriety is “whether the conduct would create in reasonable minds a
perception that the judge’s ability to carry out judicial responsibilities with integrity, impartiality
and competence is impaired.” People v Aceval, 486 Mich. 887, 888-889; 781 NW2d 779 (2010),
quoting Caperton, 129 S. Ct. at 2255.
Plaintiff has failed to meet his heavy burden of demonstrating that Judge Alexander was
biased. Judge Alexander’s statement that he would not consider removing the individual
defendants as officers is in keeping with Serlin’s report that removal was not in the corporation’s
best interests. Additionally, Judge Alexander’s comment that plaintiff’s entire case might be
dismissed was also based on Serlin’s report, which concluded that the vast majority of plaintiff’s
claims were unfounded. In fact, Judge Alexander warned all parties at various times that they
should seek settlement because no one would be happy with the outcome. The judge
nevertheless conducted the extensive jury trial in a temperate and fair manner.
VI. COMPLETE AND ACCURATE JUDGMENT
Plaintiff argues that the trial court’s judgment was incomplete and failed to show that
plaintiff prevailed on Counts I and II (breach of fiduciary duty) of his complaint. We disagree.
MCR 2.602(B)(2) provides that a “court shall sign [a] judgment or order when its form is
approved by all the parties and if, in the court’s determination, it comports with the court’s
decision.” “The proper interpretation and application of a court rule is a question of law, which
we review de novo.” Henry v Dow Chem Co, 484 Mich. 483, 495; 772 NW2d 301 (2009).
The jury verdict form posed the question: “Was the lease of the M Annex between Bates
Group, LLC and Maxitrol Company fair to Maxitrol at the time of the transaction in 2010?” The
jury answered “No.” The second question asked: “Did Maxitrol incur any damage as a result of
the M Annex Lease between Bates Group, LLC and Maxitrol Company?” The jury answered
“Yes.” Finally, the jury was asked: “What is the amount of damages that Maxitrol Company
has incurred as a result of [the] Lease between Bates Group, LLC and Maxitrol Company?” The
jury answered “$51,015.”
Defendants’ proposed judgment provided:
This matter having been tried before a jury, and the jury having returned a
verdict in this matter in favor of Maxitrol Company and against Defendants
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Bonnie Kern Koskela and Larry Koskela in the amount of $51,015.00 for
overpayment of rent;
IT IS HEREBY ORDERED that a judgment of $51,015.00 is hereby
entered in favor of Maxitrol Company and against Defendants Bonnie Kern-
Koskela and Larry Koskela.
Plaintiff objected to the proposed order, arguing that it failed to reflect the counts upon
which plaintiff prevailed. Plaintiff looked to the trial court’s previous summary disposition
order, which provided that the only surviving claims were plaintiff’s breach of fiduciary claims
(Counts I and II). In that order, the trial court noted:
For all of the foregoing reasons, the Court finds that Mr. Serlin’s
determination was made “in good faith after conducting a reasonable
investigation.” As a result, under MCL 450.1495, the Court DISMISSES with
prejudice Plaintiff’s Third Amended Complaint against Defendants Mertik
Maxitrol and Kelly.
The Court also DISMISSES Plaintiff’s Third Amended Complaint as to
Defendants Bonnie Kern-Koskela, Larry Koskela, and Maxitrol Company - with
the exception of Plaintiff’s claim “related to the M Annex, and the Annex Lease,
entered into by and between Bates Group, LLC and Defendant Maxitrol
Company” - which may proceed to trial. [Emphasis added.]
The trial court rejected plaintiff’s proposed order and ultimately entered an order to
reflect that the jury determined the M-Annex lease to be unfair:
This matter having been tried before a jury, and the jury having
determined that the lease between Maxitrol Company and Bates Group LLC was
unfair to Maxitrol Company and that the Maxitrol Company suffered damages in
the amount of $51,015.00 for overpayment of rent;
IT IS HEREBY ORDERED that a judgment of $51,015.00 is hereby
entered in favor of Maxitrol Company and against Defendants Bonnie Kern-
Koskela and Larry Koskela.
A review of the record makes it clear that the jury was asked to decide the very narrow
issue of whether the lease was fair to Maxitrol under MCL 450.1545a, which provides, in
relevant part:
(1) A transaction in which a director or officer is determined to have an interest
shall not, because of the interest, be enjoined, set aside, or give rise to an award of
damages or other sanctions, in a proceeding by a shareholder or by or in the right
of the corporation, if the person interested in the transaction establishes any of the
following:
(a) The transaction was fair to the corporation at the time entered into.
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(b) The material facts of the transaction and the director’s or officer’s interest
were disclosed or known to the board, a committee of the board, or the
independent director or directors, and the board, committee, or independent
director or directors authorized, approved, or ratified the transaction.
(c) The material facts of the transaction and the director’s or officer’s interest
were disclosed or known to the shareholders entitled to vote and they authorized,
approved, or ratified the transaction.
(2) For purposes of subsection (1)(b), a transaction is authorized, approved, or
ratified if it received the affirmative vote of the majority of the directors on the
board or the committee who had no interest in the transaction, though less than a
quorum, or all independent directors who had no interest in the transaction. The
presence of, or a vote cast by, a director with an interest in the transaction does
not affect the validity of the action taken under subsection (1)(b).
Notably absent from the statute is any language regarding fiduciary duty. Despite how plaintiff
couches the issue, the very narrow question presented to the jury was whether the M-Annex lease
was fair to Maxitrol. The jury determined that it was not and that Maxitrol suffered damages of
approximately $51,000. The judgment was a fair representation of the jury’s verdict and
comported with the trial court’s previous rulings.
VII. AMENDING THE JUDGMENT
Plaintiff argues that the trial court erred in denying plaintiff’s motion to amend the
judgment to provide for additional equitable relief. We disagree.
An appellate court reviews a trial court’s ruling on a motion to amend a judgment for an
abuse of discretion. Ligon v City of Detroit, 276 Mich. App. 120, 124; 739 NW2d 900 (2007). To
the extent these issues involve matters of statutory interpretation, such a question of law is
reviewed de novo. Hecht v Nat’l Heritage Academies, Inc, 499 Mich. 586, 604-605; 886 NW2d
135 (2016).
Again, MCL 450.1545a(1)(a) provides:
A transaction in which a director or officer is determined to have an interest shall
not, because of the interest, be enjoined, set aside, or give rise to an award of
damages or other sanctions, in a proceeding by a shareholder or by or in the right
of the corporation, if the person interested in the transaction establishes any of the
following:
(a) The transaction was fair to the corporation at the time entered into.
Plaintiff reads the statute as one that prohibits “self-dealing.” In so doing, plaintiff seeks
to re-write the statute to provide substantive relief when, in fact, the statute provides neither a
substantive cause of action nor a remedy. Our Supreme Court has admonished:
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When interpreting a statute, we follow the established rules of statutory
construction, the foremost of which is to ascertain and give effect to the intent of
the Legislature. We begin this analysis by examining the language of the statute
itself, as this is the most reliable evidence of that intent. If the language of a
statute is clear and unambiguous, we presume that the Legislature intended the
meaning clearly expressed. Accordingly, the statute must be enforced as written
and no further judicial construction is permitted. [Gardner v Dep’t of Treasury,
498 Mich. 1, 5-6; 869 NW2d 199 (2015) (internal footnotes omitted).]
The plain language of MCL 450.1545a makes no reference at all to “self-dealing.” It does not
set forth the elements of a cause of action nor does it list specific remedies. Instead, the plain
language of the statute provides that the mere fact that a transaction involves an officer of a
corporation does not mean that the transaction should be enjoined, set aside, or give rise to an
award of damages or other sanctions if it is shown that the transaction was fair to the corporation
at the time. The statute’s focus in on whether a transaction is fair to the corporation, not the
behavior of individual corporate officers.
Here, the jury was not asked to judge the corporate officers’ actions but the jury did
determine that the transaction was not fair to Maxitrol. In light of that finding, plaintiff sought to
rescind the lease agreement entirely. However, plaintiff alternatively argued that “[a]s an
alternative to rescission, the Court could reform the lease consistent with the terms as testified to
by Plaintiff’s real estate expert Mr. Milia.” At the hearing on the motion to amend, the trial court
cited Thomas v Satfield Co, 363 Mich. 111, 123; 108 NW2d 907 (1961) and found that it was
within the court’s power to reform the lease: “The Court is going to avail itself of that
opportunity and reform the lease . . .in conformance with the jury verdict.” Thomas involved a
similar situation as the case at bar where two closely held corporations conducted business with
one another. After it was determined that the lease terms were not fair to one of the corporations
the trial court in that case reformed the lease. This Court affirmed, noting that “[o]n all the facts,
it appears that the reformed lease reaches the result which all parties contemplated as being fair
prior to its execution.” Thomas, 363 Mich. at 123. In reforming the lease in this case, the trial
court referenced its equitable powers under Thomas and made no reference to MCL 450.1545a.
The jury had clearly rejected Milia’s opinion that the fair market value of the rental was
$5.60/square foot. Therefore, trial court properly reformed the lease, not on the basis of Milia’s
testimony, but to reflect the jury’s verdict and provide a result that was fair to Maxitrol.
Plaintiff, having requested reformation, should not be heard to complain about receiving what he
asked for. A party may not claim error “premised on an error to which he contributed by plan or
negligence.” People v Bosca, 310 Mich. App. 1, 29; 871 NW2d 307, app held in abeyance 872
NW2d 492 (Mich 2015).
VIII. ATTORNEY FEES
Both plaintiff and the individual defendants believe they are entitled to attorney fees. We
disagree.
An appellate court reviews a trial court’s decision on attorney fees and costs for an abuse
of discretion. Smith v Khouri, 481 Mich. 519, 526; 751 NW2d 472 (2008). “An abuse of
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discretion occurs when the trial court’s decision is outside the range of reasonable and principled
outcomes.” Id. at 526.
As to plaintiff’s claim for attorney fees, the individual defendants aptly note that plaintiff
did not seek attorney fees under the section of the act that enables the court to award costs and
attorney fees in a derivative action. MCL 450.1497(b) provides:
On termination of the derivative proceeding, the court may order 1 of the
following:
***
(b) The corporation to pay the plaintiff’s reasonable expenses, including
reasonable attorney fees, incurred in the proceeding if it finds that the proceeding
has resulted in a substantial benefit to the corporation. The court shall direct the
plaintiff to account to the corporation for any proceeds received by the plaintiff in
excess of expenses awarded by the court, except that this shall not apply to a
judgment rendered for the benefit of an injured shareholder only and limited to a
recovery of the loss or damage sustained by him or her. [Emphasis added.]
Although cited in his verified bill of taxable costs, plaintiff did not cite or argue that MCL
450.1497(b) was applicable in his motion to amend the judgment. Nor does he mention the
statute on appeal except in a footnote to his reply brief. In any event, plaintiff is not entitled to
attorney fees and costs under MCL 450.1497. The statute specifically states that a court “may”
order a corporation to pay the plaintiff’s reasonable expenses and fees if it finds that the
derivative action resulted in a substantial benefit to the corporation. “[T]he term ‘may’ is
relevantly defined as being ‘used to express opportunity or permission’ . . . In general, our courts
have said that the term ‘may’ is ‘permissive,’ as opposed to the term ‘shall,’ which is considered
‘mandatory’ . . .” Manuel v Gill, 481 Mich. 637, 647; 753 NW2d 48 (2008). The trial court,
therefore, had the discretion to award fees and declined to do so, having concluded that the jury’s
verdict provided only “de minimis damages” and, therefore, was not a substantial benefit to
Maxitrol. Additionally, the trial court seemed to conclude that the $51,000 verdict reflected that
plaintiff’s expenditure of over a million dollars was not “reasonable” under the statute.
Instead of addressing MCL 450.1497, plaintiff cites MCL 450.1562 and MCL
450.1564b(4) for an award of attorney fees. MCL 450.1562 provides:
A corporation has the power to indemnify a person who was or is a party
or is threatened to be made a party to a threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, or other enterprise, whether for profit
or not, against expenses, including attorneys’ fees, and amounts paid in settlement
actually and reasonably incurred by the person in connection with the action or
suit, if the person acted in good faith and in a manner the person reasonably
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believed to be in or not opposed to the best interests of the corporation or its
shareholders. Indemnification shall not be made for a claim, issue, or matter in
which the person has been found liable to the corporation except to the extent
authorized in [MCL 450.564c]. [MCL 450.1562 (emphasis added).]
There is a dearth of case law interpreting § 1562. In one unpublished case, Hampton Block Co v
Hampton, unpublished opinion per curiam of the Court of Appeals, entered October 27, 2000
(Docket No. 211468), the plaintiff argued that the trial court abused its discretion in failing to
award him attorney fees in his suit against his brother, a fellow officer in the company. This
Court considered MCL 450.1562, along with MCL 450.1563, which provides:
To the extent that a director or officer of a corporation has been successful on the
merits or otherwise in defense of an action, suit, or proceeding referred to in
section 561 or 562, or in defense of a claim, issue, or matter in the action, suit, or
proceeding, the corporation shall indemnify him or her against actual and
reasonable expenses, including attorneys’ fees, incurred by him or her in
connection with the action, suit, or proceeding and an action, suit, or proceeding
brought to enforce the mandatory indemnification provided in this section.
The Court concluded:
Under the plain language of those statutes, [the plaintiff] is not entitled to attorney
fees. The statutes indicate that directors and officers are protected in defending
themselves against claims by a shareholder and do not compensate plaintiffs who
bring suit against officers and directors of a corporation. MCL 450.1563; MSA
21.200(563) clearly states that indemnification applies when an officer or director
is successful “in defense of an action” (emphasis added). Consequently, there is
no support under either statute for [the plaintiff’s] contention that he is entitled to
attorney fees in connection with the suit that he brought against [his brother].
[Hampton, slip op, p 3.]
Although unpublished opinions are not binding precedent, MCR 7.215(C)(1), an unpublished
opinion may be persuasive or instructive. In re Kanija, 308 Mich. App. 660, 668 n 6; 866 NW2d
862 (2014). Along with the fact that these statutes seem to logically flow to indemnification of
corporate officers made defendants in actions, plaintiff had the obstacle of showing that he acted
in good faith and in a manner the person reasonably believed to be in Maxitrol’s best interests.
Again, such language imbues in the trial court a fair amount of discretion. Plaintiff filed a multi-
count complaint alleging a variety of claims against the individual defendants. Most of these
claims were deemed without merit in Serlin’s report. The trial court may have considered the
fact that plaintiff, even if he acted in good faith, did not act reasonably, again as demonstrated by
the relatively de minimus award in light of the heavy expenditure.
Next, MCL 450.1564b(4) provides: “A provision in the articles of incorporation or
bylaws, a resolution of the board or shareholders, or an agreement making indemnification
mandatory shall also make the advancement of expenses mandatory unless the provision,
resolution, or agreement specifically provides otherwise.” Article XI, § 11.02 of Maxitrol’s by-
laws somewhat mirrors MCL 450.1562 and provides:
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11.02 Derivative Actions. Subject to all of the provisions of this Article
XI, the corporation shall indemnify any person who was or is a party to or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director or officer of the corporation,
or, while serving as a director or officer of the corporation, is or was serving at the
request of the corporation as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation, partnership, joint venture, trust
or other enterprises, whether for profit or not, against expenses (including
attorneys’ fees) and amounts paid in settlement actually and reasonably incurred
by the person in connection with such action or suit if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation or its shareholders. However,
indemnification shall not be made for any claim, issue, or matter in which such
person has been found liable to the corporation unless and only to the extent that
the court in which such action or suit was brought has determined upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification for the reasonable expenses incurred. [Emphasis added.]
However, Article XI, § 11.05 further provides:
11.05 Contract Right: Limitation on Indemnity. The right to
indemnification conferred in this Article XI shall be a contract right, and shall
apply to services of a director or officer as an employee or agent of the
corporation as well as in such person’s capacity as a director or officer. Except as
provided in Section 11.03 of these Bylaws, the corporation shall have no
obligations under this Article XI to indemnify any person in connection with any
proceeding, or part thereof, initiated by such person without authorization by the
Board of Directors.
Therefore, there is no clear obligation to indemnify plaintiff under Maxitrol’s by-laws. Article
XI, § 11.02 requires that the director act in good faith and in a manner reasonably believed to be
in Maxitrol’s best interest. Article XI, § 11.05 requires that a director is not entitled to
indemnification if a proceeding is initiated without the authorization of the board of directors.
Just as plaintiff was not, as a matter of law, entitled to attorney fees, nor were the
individual defendants or Maxitrol under MCL 450.1497. MCL 450.1497(a) provides:
On termination of the derivative proceeding, the court may order 1 of the
following:
(a) The plaintiff to pay any of the defendant’s reasonable expenses, including
reasonable attorney fees, incurred in defending the proceeding if it finds that the
proceeding was commenced or maintained in bad faith or without reasonable
cause. [Emphasis added.]
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Again, “may” indicates that the trial court has discretion in ordering attorney fees. Here, the trial
court may order costs if it determines that the action was commenced or maintained in bad faith
or without reasonable cause. The trial court’s comments clearly indicate that it questioned the
reasonableness of plaintiff’s action. Both the trial court and Serlin noted that Maxitrol was a
profitable company that was properly managed. Still, the trial court was within its right to
determine that plaintiff did not act in bad faith or without reasonable cause, especially in light of
the fact that plaintiff prevailed on the issue of the fairness of the M-Annex lease. In light of the
jury’s verdict in Maxitrol’s favor, it makes sense that the trial court would decline to award the
individual defendants their attorney fees. In addition, Maxitrol has another problem. The statute
clearly provides that a trial court may order the payment of defendant’s reasonable expenses.
True, Maxitrol was a nominal defendant in the technical sense, but it really stood in plaintiff’s
shoes in this shareholder derivative action. The jury’s $51,000 verdict flowed directly to
Maxitrol. Therefore, at least under these particular circumstances, the statute does not appear to
apply to Maxitrol.
IX. TAXABLE COSTS
Finally, each party claims that the trial court erred in failing to award taxable costs. We
disagree.
An appellate court reviews a trial court’s decision on attorney fees and costs for an abuse
of discretion. Smith, 481 Mich. at 526.
MCR 2.625 provides, in relevant part:
(A) Right to Costs.
(1) In General. Costs will be allowed to the prevailing party in an action, unless
prohibited by statute or by these rules or unless the court directs otherwise, for
reasons stated in writing and filed in the action.
(2) Frivolous Claims and Defenses. In an action filed on or after October 1, 1986,
if the court finds on motion of a party that an action or defense was frivolous,
costs shall be awarded as provided by MCL 600.2591.
(B) Rules for Determining Prevailing Party.
***
(2) Actions With Several Issues or Counts. In an action involving several issues or
counts that state different causes of action or different defenses, the party
prevailing on each issue or count may be allowed costs for that issue or count. If
there is a single cause of action alleged, the party who prevails on the entire
record is deemed the prevailing party.
Additionally, MCL 600.2591 provides:
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(1) Upon motion of any party, if a court finds that a civil action or defense to a
civil action was frivolous, the court that conducts the civil action shall award to
the prevailing party the costs and fees incurred by that party in connection with
the civil action by assessing the costs and fees against the nonprevailing party and
their attorney.
(2) The amount of costs and fees awarded under this section shall include all
reasonable costs actually incurred by the prevailing party and any costs allowed
by law or by court rule, including court costs and reasonable attorney fees.
(3) As used in this section:
(a) “Frivolous” means that at least 1 of the following conditions is met:
(i) The party’s primary purpose in initiating the action or asserting the defense
was to harass, embarrass, or injure the prevailing party.
(ii) The party had no reasonable basis to believe that the facts underlying that
party’s legal position were in fact true.
(iii) The party’s legal position was devoid of arguable legal merit.
(b) “Prevailing party” means a party who wins on the entire record.
Plaintiff is not entitled to costs. His claim for costs is based on his assertion that he
prevailed in full on Counts I and II of his third amended complaint. Plaintiff did not come close
to prevailing on each of the allegations couched within Counts I and II of his third amended
complaint. In fact, following Serlin’s report, many of these allegations were dismissed.
However, neither were the individual defendants entitled to taxable costs. Most telling is the
verdict against them in the amount of $51,000.
The trial court is entitled to discretion in awarding taxable costs. The court rule indicates
that a prevailing party is entitled to costs, “unless . . . the court directs otherwise, for reasons
stated in writing.” Here, the trial court observed:
This case has a long, torturous and pretty well-known history to the Court
in parts. Mr. Kern has filed not less than three lawsuits seeking relief because he
claims that he was--has been--because he claims that the directors, being his sister
and brother-in-law, have entered into a willfully unfair and oppressive conduct
and thus other damages.
Plaintiffs filed a multi-count complaint. As a result of that, the Court
appointed a disinterested director. This disinterested director came in and as a
result of his report, in his long and--and completely thorough investigation, the
Court dismissed all of the counts in the complaint, save the count regarding the—
the lease between, basically the sister, Ms. Kern-Koskela and her husband and the
company for a piece of land in Southfield.
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The case was tried to a jury. The jury came back and found the lease was
unfair and awarded, really based on the type of case this was, de minimis damages
in the amount of $50,000--$51,015. As a result, since the Court has--since the jury
has found the lease unfair, the Court is, pursuant to MCL 450.1545a(1), the Court
has pretty large powers to reform the lease.
Under the Court’s equitable powers, once the lease was determined to be
unfair, the Court--Court is within its power to reform the lease, Thomas v
Satfield, 363 Michigan 111. The Court is going to avail itself of that opportunity
and reform the lease . . .in conformance with the jury verdict and will rule that
the lease, for year six through ten, the lease rates are year six, $10.79 per square
foot triple net; year seven, $11.29 per square foot triple net; year eight, $11.79 per
square foot triple net; year nine, $12.29 per square foot triple net and year ten,
$12.79 per square foot triple net.
Next, the Court has to deal with the award for attorney fees--of attorney
fees. The individual defendants, the corporation and the plaintiff has—have all
sought reim--reimbursement for their attorney fees; however, in this case, neither
party prevailed in full. Therefore, the Court will deny all requests for attorney fees
and the individuals and the corporation will remain personally liable for their
attorney’s fees.
The Court has also found that the actions of the defendant directors,
although they may have been unfair, did not rise to the level of willfully unfair
and oppressive conduct, far from it. While these bro—this brother and sister may
still be upset about the fact that somebody got a nicer bike than the other one got
20 or 30 or 40 or 50 years ago, they don’t get along. Okay.
The business is successful. The business is running profitably. Everybody
is making money on this deal. There is no willful and oppressive conduct. They
don’t like each other, but since the Court has found that there is no willful and
oppressive conduct, the Court does not have authority or jurisdiction to do
anything about corporate governance and therefore, the motion to amend the
judgment and for equitable relief, is denied.
The trial court’s statement indicates that no party truly prevailed in this action. It properly
exercised its discretion in denying taxable costs to plaintiff and the individual defendants.
Affirmed.
/s/ Cynthia Diane Stephens
/s/ Kirsten Frank Kelly
/s/ Christopher M. Murray
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