Bruce Klaasen v. Dennis Jonker ( 2018 )

STATE OF MICHIGAN
COURT OF APPEALS
BRUCE KLAASEN, UNPUBLISHED
July 31, 2018
Plaintiff-Appellee,
v No. 338257
Kent Circuit Court
DENNIS JONKER, LC No. 15-010895-CZ
Defendant,
and
ROBERT SWEEZIE,
Defendant-Appellant.
BRUCE KLAASEN,
Plaintiff-Appellee,
v No. 338336
Kent Circuit Court
DENNIS JONKER and ROBERT SWEEZIE, LC No. 15-010895-CZ
Defendants,
and
VARNUM LLP,
Appellant.
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BRUCE KLAASEN,
Plaintiff-Appellee,
v No. 339167
Kent Circuit Court
DENNIS JONKER, LC No. 15-010895-CZ
Defendant,
and
ROBERT SWEEZIE,
Defendant-Appellant.
Before: HOEKSTRA, P.J., and MURPHY and MARKEY, JJ.
PER CURIAM.
Plaintiff sued defendants, Dennis Jonker and Robert Sweezie, for breach of contract
arising out of the sale of two condominium units to plaintiff, which were part of a beleaguered
condominium development in Costa Rica that was marked by construction problems, funding
issues, incompetence, and fraud and involved suspicious or dubious practices and dealings and
questionable or nonexistent entities. The purchase agreement for the condominium units at issue
was in the name of plaintiff, as buyer, and BreakWater Point SA, as seller, which entity did not
exist. After years of patience and the expenditure of hundreds of thousands of dollars paid for
the units by plaintiff, the condominium units were not delivered to plaintiff per the contract and
he commenced this suit, alleging that defendants were partners in the development and subject to
individual liability on the contract even though BreakWater Point SA was the vendor identified
in the purchase agreement. The record revealed that one of the condominium units designated
for plaintiff was sold to another individual and the second unit was encumbered by a $150,000
lien. This case hinged on whether defendants could be held personally liable for breach of
contract. The trial court granted summary disposition under MCR 2.116(C)(10) in favor of
plaintiff, later awarding him $683,563 in damages, and it denied Sweezie’s competing motion for
summary disposition. 1 The court later granted plaintiff’s motion for sanctions under MCR 2.114,
MCR 2.625, and MCL 600.2591, imposing them in the amount of $75,000 against both Sweezie
and Sweezie’s counsel, Varnum LLP. In Docket No. 339167, Sweezie appeals the trial court’s
ruling granting plaintiff’s motion for summary disposition and the judgment awarding plaintiff
1
Jonker did not challenge plaintiff’s motion for summary disposition. Subsequently, plaintiff
and Jonker reached a settlement after judgment was entered against defendants.
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$683,563 in damages. In Docket No. 338257, Sweezie appeals the order awarding plaintiff
$75,000 in attorney fees and costs as sanctions, while in Docket No. 338336, Varnum appeals
this same order imposing sanctions. We affirm in all three of these consolidated appeals.
I. DOCKET NO. 339167 – SUMMARY DISPOSITION IN FAVOR OF PLAINTIFF
With respect to the order granting summary disposition in favor of plaintiff and denying
Sweezie’s motion for summary disposition, the trial court found that Sweezie, Jonker, and
Patrick Hundley entered into a joint venture to build the condominium complex, develop the
project, and to sell condominium units to individuals. The court determined that the contract in
dispute was signed by plaintiff, that Jonker signed the agreement on behalf of BreakWater Point
SA, that BreakWater Point SA did not exist, and that plaintiff made payments under the contract
totaling $516,666, yet one of his condominium units was sold to another person and the other
unit was subject to a $150,000 lien, not of plaintiff’s making. The trial court further ruled that
two other companies purportedly associated with the development, BreakWater Point
Condominium Corporation SRI and BW Point Condominium Trust SRL, were not parties to the
purchase agreement, so plaintiff had no contract with either company and no basis to sue them.
Additionally, the court indicated that individual contractual liability generally attaches to
stockholders or members of a bogus legal entity if they authorized a contract and that, here,
Sweezie negotiated the purchase agreement with plaintiff on behalf of the developers; therefore,
he implicitly authorized and became personally liable on the contract. The court rejected
Sweezie’s argument that plaintiff’s claim was barred by the doctrines of corporation by estoppel
and misnomer of a corporate entity, where the defenses constituted affirmative defenses that
were waived when Sweezie failed to raise either one in his first responsive pleading.
Subsequently, judgment was entered in favor of plaintiff in the amount of $683,563, which
included damages plus common-law and statutory interest. The judgment was joint and several
against Sweezie and Jonker, but plaintiff then reached a settlement with Jonker for $50,000.
On appeal, Sweezie argues that the trial court erred in granting summary disposition in
favor of plaintiff because Sweezie was not a party to the purchase agreement, because plaintiff
failed to allege or establish facts allowing the court to pierce the corporate veil, because the
doctrines of misnomer of a corporate entity and corporation by estoppel foreclosed plaintiff’s
argument that Sweezie could be held liable, and because the two doctrines are not affirmative
defenses that had to be pleaded in Sweezie’s first responsive pleading, so they were not waived.
Sweezie contends that he rather than plaintiff was entitled to summary disposition.
This Court reviews de novo a trial court’s ruling on a motion for summary disposition.
Hoffner v Lanctoe, 492 Mich 450, 459; 821 NW2d 88 (2012). Additionally, this Court reviews
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de novo issues concerning the proper interpretation of a contract and the legal effect or
application of a contract. Rory v Continental Ins Co, 473 Mich 457, 464; 703 NW2d 23 (2005).2
“The cardinal rule in the interpretation of contracts is to ascertain the intention of the
parties[;] [t]o this rule all others are subordinate.” McIntosh v Groomes, 227 Mich 215, 218; 198
NW 954 (1924). In light of this rule, “[i]f the language of the contract is clear and unambiguous,
it is to be construed according to its plain sense and meaning; but if it is ambiguous, testimony
may be taken to explain the ambiguity.” New Amsterdam Cas Co v Sokolowski, 374 Mich 340,
342; 132 NW2d 66 (1965); see also Frankenmuth Mut Ins Co v Masters, 460 Mich 105, 111; 595
NW2d 832 (1999).
“A party asserting a breach of contract must establish by a preponderance of the evidence
that (1) there was a contract (2) which the other party breached (3) thereby resulting in damages
to the party claiming breach.” Miller-Davis Co v Ahrens Constr, Inc, 495 Mich 161, 178; 848
NW2d 95 (2014). “A valid contract requires five elements: (1) parties competent to contract, (2)
a proper subject matter, (3) legal consideration, (4) mutuality of agreement, and (5) mutuality of
2
In Pioneer State Mut Ins Co v Dells, 301 Mich App 368, 377; 836 NW2d 257 (2013), this
Court set forth the governing principles applicable to motions for summary disposition brought
pursuant to MCR 2.116(C)(10):
In general, MCR 2.116(C)(10) provides for summary disposition when
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 motion brought
under MCR 2.116(C)(10) tests the factual support for a party's claim. 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 issue with respect
to any material fact. A genuine issue of material fact exists when the record,
giving the benefit of reasonable doubt to the opposing party, leaves open an issue
upon which reasonable minds might differ. The trial court is not permitted to
assess credibility, weigh the evidence, or resolve factual disputes, and if material
evidence conflicts, it is not appropriate to grant a motion for summary disposition
under MCR 2.116(C)(10). A court may only consider substantively admissible
evidence actually proffered relative to a motion for summary disposition under
MCR 2.116(C)(10). [Citations and quotation marks omitted.]
“Like the trial court’s inquiry, when an appellate court reviews a motion for summary
disposition, it makes all legitimate inferences in favor of the nonmoving party.” Skinner v
Square D Co, 445 Mich 153, 162; 516 NW2d 475 (1994); see also Dextrom v Wexford Co, 287
Mich App 406, 415; 789 NW2d 211 (2010) (a court must draw all reasonable inferences in favor
of the nonmoving party).
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obligation.” AFT Mich v Michigan, 497 Mich 197, 235; 866 NW2d 782 (2015). “The party
seeking to enforce a contract bears the burden of proving that the contract exists.” Id.Sweezie contends that there could be no breach of contract action against him because he
was not a party to the contract. We note that BreakWater Point SA was not a party competent to
contract, as it was a nonexistent entity, and thus, on its face, the contract would appear to be
invalid. However, for the reasons set forth below, we hold that by operation of law, Sweezie was
properly treated as a party to the contract under the circumstances presented, as well as Jonker,
making them liable for the breach that indisputably occurred and the resulting damages that
indisputably were sustained by plaintiff.
The documentary evidence established that Hundley relocated to Costa Rica to oversee
the development of the project and the construction of the condominiums, while defendants
remained in Michigan to sell individual condominium units, with the proceeds of the sales being
used to finance the construction and project.3 The three men operated under an informal
agreement, and any profits from the venture were to be shared between them. It appears to us
that defendants and Hundley engaged in a “joint venture,” which is defined as “an association to
carry out a single business enterprise for a profit.” Kay Investment Co, LLC v Brody Realty No
1, LLC, 273 Mich App 432, 437; 731 NW2d 777 (2006) (quotation marks omitted). A joint
venture differs from a partnership, in that a partnership is “an association of persons to carry on
as coowners a business for profit.” Id. at 436-437, citing MCL 449.6. Defendants and Hundley
were not operating an ongoing business; rather, they joined forces for a specific condominium
project.4 The Kay Investment panel explained that a joint venture has the following elements: an
3
There were two condominium projects, the Palms and BreakWater Point, the latter of which is
the subject of this case, as plaintiff’s two units were part of the BreakWater Point project.
Plaintiff had earlier purchased a unit in the Palms.
4
In Kay Investment, 273 Mich App at 436, this Court ruled:
The parties dispute whether Robert Brody, George Brody, Joseph
Kaufman, and Harold Kaufman intended to create a partnership or a joint venture.
We hold that the record evidence compels the conclusion that the original parties
to the agreement intended to and did in fact create a joint venture, with the sole
purpose of developing and renting out a retail shopping center in Southgate.
The BreakWater Point condominium project was akin to the development of the retail
shopping center at issue in Kay Investment. Similarly, in Summers v Hoffman, 341 Mich 686,
693; 69 NW2d 198 (1955), the Michigan Supreme Court observed:
A consideration of the salient facts in the instant case shows that the
contract embodied characteristics of a joint venture. A single project was
involved, namely, the development and sale of two large parcels of real estate.
The profits, after expenses, were to be divided 50 per cent to plaintiff and 50 per
cent to defendants. Both made a contribution: plaintiff contributed his time, skill
and supervision, while defendants contributed the capital.
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agreement indicating an intention to undertake a joint venture; a joint undertaking of a single
project for profit; a sharing of profits as well as losses; contribution of skills or property by the
parties; and community interest and control over the subject matter of the enterprise. Id. at 437.
But even if the association between defendants and Hundley was a partnership, it would
not alter our ultimate ruling. 5 In Keiswetter v Rubenstein, 235 Mich 36, 45-46; 209 NW 154(1926), our Supreme Court explained:
A “joint adventure” is defined as an association of two or more persons to
carry out a single business enterprise for profit. While under the present state of
the law courts do not treat a joint adventure as in all respects identical with a
partnership, the contractual relations of the parties and nature of their association
are so similar and closely akin to a partnership that it is commonly held their
rights and liabilities are to be tested by the same rules that govern partnerships.
By the same token it is claimed Rubenstein was in sole control of
construction, Hammel was in sole control of their accounts and the money
essential to finance the enterprise, of which he never let Rubenstein handle a
dollar, except his weekly stipend; but, whatever either was exclusively authorized
to do under their agreement, or did, each was acting for both in furtherance of
their joint adventure, or enterprise for their mutual profit. . . . .
“When two persons are engaged in the prosecution of a joint enterprise,
each has authority to act for both in respect to the means or agencies employed to
execute the common purpose, and the negligence of one in the management
thereof will be imputed to both.” [Citations and quotation marks omitted.]
And under partnership law, subject to some exceptions, all partners are jointly liable “for all . . .
debts and obligations of the partnership.” MCL 449.15(b).
Whether as a joint venture or a partnership, the question is whether Sweezie, working
within the context of that business relationship, could be held liable on the purchase agreement,
even though he was not named as the seller in the contract. In Campbell v Rukamp, 260 Mich
5“A partnership is an association of 2 or more persons . . . to carry on as co-owners a business
for profit . . . .” MCL 449.6(1). “[T]he intent to create a partnership is not required if the acts
and conduct of the parties otherwise evidence that the parties carried on as co-owners a business
for profit.” Byker v Mannes, 465 Mich 637, 653; 641 NW2d 210 (2012). “Stated more plainly,
the statute does not require partners to be aware of their status as ‘partners’ in order to have a
legal partnership.” Id. at 646. “[I]n ascertaining the existence of a partnership, the proper focus
is on whether the parties intended to, and in fact did, carry on as co-owners a business for profit
and not on whether the parties subjectively intended to form a partnership.” Id. at 653 (quotation
marks). Assuming that defendants’ and Hundley’s relationship related to carrying on a business
enterprise, perhaps the ongoing construction and sale of condominiums given the Palms
development, their association would qualify as a partnership.
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43; 244 NW 222 (1932), a proposed corporation was never organized, articles of incorporation
were not executed, and stockholder meetings were not held; there was neither a de jure nor a de
facto corporation. As such, the proposed corporation could not exercise any corporate rights,
assert corporate powers, or assume corporate liabilities. Id. at 44-46. The Supreme Court stated
that where an individual assumes to act as a corporation and contracts as a corporation, but the
corporation is nonexistent, the individual will be held personally liable on the contract. Id. at 46.
And individual liability similarly attaches to ostensible members or stockholders of a pretended
corporation on contracts entered into in the name of the nonexistent corporation if the members
or stockholders authorized the contract, expressly or impliedly. Id. The Campbell Court further
indicated that if promoters of a proposed corporation conduct business with creditors in the name
of the corporation absent its existence, the promoters are generally liable to the creditors as
partners. Id.
We conclude that the Campbell decision supports the proposition that if a contract is
executed in the name of a nonexistent corporation and there is a breach of that contract, the
damaged contracting party can file suit for breach of contract against individual promoters,
subscribers, purported members and stockholders, and, by analogy, joint venturers and partners
involved in authorizing or procuring the contract in furtherance of the joint venture or
partnership, even though those individuals were not signatories to the contract. Here, Jonker
signed the purchase agreement on behalf of BreakWater Point SA, and thus he was properly held
liable for breach of contract for authorizing the sale, perhaps explaining why Jonker wisely did
not challenge plaintiff’s motion for summary disposition. Sweezie was in no better position,
considering that he implicitly authorized and minimally procured the contract in the name of the
nonexistent corporation and in furtherance of the joint venture or partnership, where he stood to
profit had the development been a success. Plaintiff met with Sweezie in Sweezie’s West
Michigan office, and plaintiff was shown artist renditions of BreakWater Point, with Sweezie
representing himself as being involved in the development of the project. Sweezie made the
sales pitch to plaintiff, and after plaintiff later decided to purchase the two condominium units,
Sweezie’s agent presented plaintiff with the purchase agreement, which plaintiff executed.
Plaintiff wired an initial payment to a Costa Rican attorney involved in the development, and
Sweezie or his agent accepted a subsequent payment from plaintiff. Under all of the surrounding
circumstances and Campbell, 260 Mich 43, Sweezie, while not signing or being named as a party
to the contract, was subject to liability for breach of contract, just as if he had been an express
party to the purchase agreement.6
6
There was no evidence indicating that Sweezie was involved in any fraud related to the project,
and it appears that he was an innocent party caught up in a grander scheme perpetrated by
Hundley and others in Costa Rica. But that does not absolve him from liability for breach of
contract. The evidence revealed, including Sweezie’s own testimony, that his role in the
development was to use his skills to generate sales for the project and that he stood to share in
the profits had they been realized. As such, he was a joint venturer or partner and liable on the
contract, given that the corporate entity identified in the contract was nonexistent. And
Sweezie’s assumption that BreakWater Point SA existed or his belief that others would form any
necessary corporate entities also does not absolve him from liability under the contract.
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Sweezie next argues that plaintiff failed to allege or establish facts allowing the court to
pierce the corporate veil. This contention is a nonstarter – BreakWater Point SA was not an
existing corporation; therefore, there was no corporate veil to pierce. And we have already
explained the legal basis for holding Sweezie liable for breach of contract.
Sweezie additionally maintains that the doctrines of misnomer of a corporate entity and
corporation by estoppel foreclosed plaintiff’s argument that Sweezie should be held liable, where
BreakWater Point SA was never properly formed. Sweezie further argues that the two doctrines
are not affirmative defenses that had to be pleaded in Sweezie’s first responsive pleading, so they
were not waived.
The misnomer doctrine provides that “[t]he misnomer of a person or corporation in a
written instrument will not defeat a recovery thereon if the identity sufficiently appears from the
name employed in the writing or is satisfactorily established by proof.” PIM, Inc v Steinbichler
Optical Techs USA, Inc, 468 Mich 896; 660 NW2d 73 (2003). With respect to corporation by
estoppel, in Duray Dev, LLC v Perrin, 288 Mich App 143, 152-153; 792 NW2d 749 (2010), this
Court explained:
Corporation by estoppel . . . is an equitable remedy and does not concern
legal status. The general rule is: Where a body assumes to be a corporation and
acts under a particular name, a third party dealing with it under such assumed
name is estopped to deny its corporate existence. Like the de facto corporation
doctrine, corporation by estoppel often arises in the context of assessing
individual versus corporate liability. The purpose of the doctrine is so that one
who contracts with an association as a corporation is estopped to deny its
corporate existence so as to prevent one from maintaining an action on the
contract against the associates, or against the officers making the contract, as
individuals or partners.
In sum, . . . [t]he corporation by estoppel doctrine prevents a party who
dealt with an association as though it were a corporation from denying its
existence. . . . .
Under MCR 2.111(F)(2), “[a] party against whom a cause of action has been asserted by
complaint . . . must assert in a responsive pleading the defenses the party has against the
claim[,]” and except for lack of subject-matter jurisdiction and failure to state a claim, “[a]
defense not asserted in the responsive pleading or by motion as provided by these rules is
waived[.]”7 Interestingly, this provision does not indicate that it pertains solely to affirmative
7
MCR 2.111(F)(2)(a) and (b) allow a party to raise a defense outside a responsive pleading,
where, respectively, a party asserts the defense in a motion for summary disposition filed under
MCR 2.116 before filing a responsive pleading, or where a responsive pleading is not required,
in which case the defense can first be raised at trial, subject to any pretrial order limiting the
issues to be tried.
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defenses. Indeed, failure to state a claim is plainly not an affirmative defense, yet our Supreme
Court in crafting the court rule felt the need to expressly exclude that defense from being
encompassed by the waiver rule. See Stanke v State Farm Mut Auto Ins Co, 200 Mich App 307,
312; 503 NW2d 758 (1993) (“An affirmative defense is a defense that does not controvert the
plaintiff’s establishing a prima facie case, but that otherwise denies relief to the plaintiff.”).
MCR 2.111(F)(3) goes on to provide:
Affirmative defenses must be stated in a party's responsive pleading, either
as originally filed or as amended in accordance with MCR 2.118. Under a
separate and distinct heading, a party must state the facts constituting
(a) an affirmative defense, such as contributory negligence; the existence
of an agreement to arbitrate; assumption of risk; payment; release; satisfaction;
discharge; license; fraud; duress; estoppel; statute of frauds; statute of limitations;
immunity granted by law; want or failure of consideration; or that an instrument
or transaction is void, voidable, or cannot be recovered on by reason of statute or
nondelivery;
(b) a defense that by reason of other affirmative matter seeks to avoid the
legal effect of or defeat the claim of the opposing party, in whole or in part;
(c) a ground of defense that, if not raised in the pleading, would be likely
to take the adverse party by surprise. [Emphasis added.]
MCR 2.111(F)(3)(c) says nothing about the defense having to be affirmative in nature,
which attribute appears to be fully covered by subrules (F)(3)(a) and (b). Instead, MCR
2.111(F)(3)(c) is concerned with defenses that would likely take an adverse party by surprise.
When MCR 2.111(F)(2) is read in conjunction with MCR 2.111(F)(3)(c), it becomes clear that
some defenses, even if not affirmative in nature, are subject to waiver if not timely pled.8 And
plaintiff specifically argues that “even if a defense is not ‘affirmative,’ it must still be pled if [it]
is ‘likely to take the adverse party by surprise.’ ” (Quoting MCR 2.111[F][3][c]; emphasis
omitted.) Sweezie makes no attempt to counter this argument in his reply brief, ignoring it
completely.
We find implicit support for our position in Campbell v St John Hosp, 434 Mich 608,
616; 455 NW2d 695 (1990), wherein our Supreme Court, after determining that an agreement to
arbitrate constitutes an affirmative defense, further stated:
8
In fact, it is arguable that MCR 2.111(F)(2) stands completely on its own in regard to waiver,
capturing all defenses, aside from the two exceptions, with MCR 2.111(F)(3), which makes no
mention of waiver but mandates that an affirmative defense be raised in a responsive pleading,
setting forth the rules that affirmative defenses must be listed under a separate and distinct
heading and that the facts constituting any affirmative defense must be provided.
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Even if we were to interpret subsection MCR 2.111(F)(3)(a) restrictively,
other language in MCR 2.111(F)(3) suggests that it was incumbent upon the
defendants to assert the arbitration agreement in their responsive pleadings. MCR
2.111(F)(3)(c) requires the inclusion of a ground of defense which would be
likely to surprise the adverse party. While the instant plaintiff may or may not
have been surprised in fact by the existence of the arbitration agreement, personal
representatives of patients who die following the signing of an agreement
generally may be quite likely to be taken by surprise by the existence of such a
document. [Quotation marks omitted.9]
This passage indicates that even if the arbitration agreement did not qualify as an
affirmative defense, our Supreme Court was still prepared to employ waiver on the basis of the
“surprise” provision in MCR 2.111(F)(3)(c). Here, although the trial court did not frame its
decision in terms of plaintiff being surprised by the doctrines or defenses of misnomer of a
corporate entity and corporation by estoppel, it did state that plaintiff would be prejudiced if
Sweezie was permitted to assert those defenses at such a late date, given that discovery had
closed two months earlier, that Sweezie first raised the defenses at the time of summary
disposition, and that plaintiff indicated that further discovery would be necessary to properly
address and confront those defenses. The element or concept of surprise was certainly
encapsulated by the trial court’s ruling. And we hold that, assuming the two doctrines do not
constitute affirmative defenses, they were nonetheless waived by Sweezie’s failure to raise them
in his answer, considering that the defenses were likely to and did take plaintiff by surprise.
Although it was no surprise that Sweezie denied liability under the purchase agreement because
he was not named as a party in the contract, the decision by Sweezie to place reliance on two
doctrines that have produced scant caselaw over the last 100+ years and are not often seen by the
courts would qualify as a surprise. Reversal is unwarranted.
Furthermore, MCR 2.111(F)(3)(a), which provides a list of examples of affirmative
defenses, specifically identifies “estoppel” as an affirmative defense. Although we agree with
Sweezie that there are many forms of estoppel, some of which are not affirmative defenses, e.g.,
promissory estoppel, Sweezie has not provided us with a persuasive argument that corporation
by estoppel is not an affirmative defense. An affirmative defense “accepts the plaintiff's
allegation as true and even admits the establishment of the plaintiff's prima facie case, but . . .
denies that the plaintiff is entitled to recover on the claim for some reason not disclosed in the
plaintiff's pleadings.” Stanke, 200 Mich App at 312. “An affirmative defense is a defense that
does not controvert the plaintiff's establishing a prima facie case, but that otherwise denies relief
to the plaintiff.” Id.
As indicated earlier, corporation by estoppel is often invoked “to prevent one from
maintaining an action on the contract against the associates, or against the officers making the
9
We note that MCR 2.111(F)(3)(a) was subsequently amended and now expressly lists “an
agreement to arbitrate” as an affirmative defense.
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contract, as individuals or partners.” Duray Dev, 288 Mich App at 153. Contrary to Sweezie’s
argument, we conclude that corporation by estoppel does not controvert plaintiff’s establishing a
prima facie case for breach of contract. Rather, the doctrine accepts that a prima facie contract
action against an individual associated with a nonexistent corporation has been made because
there is in fact no legally recognizable corporate entity, but then precludes relief against the
individual on an equitable basis, where it is affirmatively shown that the plaintiff had entered
into the contract on the belief and expectation that he or she was dealing with a valid corporation.
As such, corporation by estoppel operates like any other affirmative defense, e.g., a statute of
limitations defense. Sweezie’s analytical mistake is that he presumes that a prima facie case for
breach of contract can only be made where the defendant was an actual party to the contract. In
examining plaintiff’s complaint, he alleged that the seller was BreakWater Point SA, that there
was no such legal entity, that Sweezie acted as a partner in the development venture, that
Sweezie negotiated the sale with plaintiff, and that Sweezie was thus individually liable for
breach of contract as a partner under the circumstances. Considering the principles from
Campbell, 260 Mich 43, regarding individual liability on a contract when the corporation named
as a party in the contract does not exist, plaintiff had made a prima facie case for breach of
contract. And Sweezie attempted to bar recovery by way of the affirmative defense of
corporation by estoppel.
Additionally, the same can be said for the manner in which Sweezie sought to employ the
doctrine of misnomer of a corporate entity, wielding it not as a means of recovery, see PIM, Inc,
468 Mich at 896, but essentially as an affirmative defense, in that it accepts the existence of a
prima facie case for breach of contract, but then seeks to defeat that case by demanding that
plaintiff sue BreakWater Point Condominium Corporation SRI or BW Point Condominium Trust
SRL, as the doctrine would allegedly have permitted such a suit.
Moreover, in the context of Sweezie’s proffered application of the doctrine of misnomer
of a corporate entity, it is incumbent to find that a valid BreakWater Point-related corporation or
entity did indeed exist and that it had the legal capacity to sell the condominiums; we know that
it was not BreakWater Point SA. There is reference in the record to BreakWater Point
Condominium Corporation SRI, which was apparently established in 2006, and BW Point
Condominium Trust SRL, which, according to a Costa Rican attorney, was a valid entity
established in Costa Rica. The record, however, is unclear with respect to the intent behind these
entities and the role that they served in the condominium development. The record is devoid of
information sufficient to show the nature of these entities. 10 There is no evidence that either one
of these entities could lawfully have conveyed the condominium units to plaintiff under the
contract. It is plain from the record that none of the individuals involved in the various Costa
Rican endeavors were aware of whether the corporate entities existed or the purpose of each
entity. The doctrine of misnomer of a corporate entity presupposes that a valid corporation does
in fact exist but there are issues in how it was identified in the underlying contract. Therefore,
10
This is further proof that the two corporate doctrines raised by Sweezie after discovery had
closed were a surprise.
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you cannot have misnomer of a corporate entity if there is no evidence of any valid corporation
that could have sold the condominium units to plaintiff. On the existing record, there was no
corporation or entity, whatever its moniker, for plaintiff to sue for the wrong done to him.
Finally, as to the substantive merit of corporation by estoppel, we have not been directed
to, nor are we aware of, any cases where the doctrine has been invoked and applied where the
entity at issue never became a valid, legally-recognized corporation or company after the
contract, never had been a valid, legally-recognized corporation or company before the contract,
and had never attempted to take steps to incorporate. Yet, on the existing record, that is the
status of BreakWater Point SA. In Duray Dev, 288 Mich App at 148, the company at issue
obtained “filed” status as a legitimate limited liability company after the contract in dispute was
executed. There is no evidence that BreakWater Point SA ever became, ever was, or ever tried
to be a valid corporation. We envision the doctrine being implicated where an entity failed to
satisfy all of the technical formalities of incorporation, but there is no evidence that BreakWater
Point SA fell into that category. Amongst the very few Michigan cases addressing the doctrine
of corporation by estoppel is the very early case of Doyle v Mizner, 42 Mich 332, 336-337; 3
NW 968 (1879), where our Supreme Court made clear that the doctrine does not automatically
apply simply because a nonexistent corporation was named as a party in a contract:
There are certainly many cases in which a recognition of corporate
existence, by dealing with the corporation, will estop from questioning it. But this
doctrine rests on the ground that such action creates relations and encourages
conduct which there may be difficulty in undoing. In ordinary cases such
recognitions have been considered as binding.
But this rule is one originating in equitable principles and cannot be
applied universally. There would be no sense in applying it where no new rights
have intervened, and where such recognition has itself been brought about by
fraudulent dealings carried on for the very purpose of entrapping a party into the
action on which such recognition is rested. If there was no corporation in fact, and
if there are no facts which make it legally unjust to forbid its denial, it is difficult
to understand what room there is for an estoppel[.]
We conclude that under the circumstances in the instant case, Sweezie was not entitled to
rely on corporation by estoppel, even had he not waived the defense.
II. DOCKET NOS. 338257 AND 338336 – SANCTIONS
The trial court ruled that plaintiff was entitled to sanctions covering attorney fees and
costs under MCR 2.111 (waiver of affirmative defenses) and MCR 2.114(D), where Sweezie
made denials in the answer to plaintiff’s complaint that were not well-grounded in the facts and
were false. The court also determined that sanctions were appropriate under MCL 600.2591,
MCR 2.625(A)(2), and MCR 2.114(F), where Sweezie asserted frivolous defenses, i.e.,
misnomer of a corporate entity and corporation by estoppel, given that they were not timely
raised and were waived. The trial court imposed sanctions in the amount of $75,000 against
Sweezie and Varnum.
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On appeal, Varnum argues that sanctions were not warranted because Sweezie’s answer
and motion for summary disposition were well-grounded in fact and not frivolous. Sweezie
concurs in Varnum’s argument on the matter. Varnum additionally contends that the trial court
erred in awarding sanctions against Varnum, considering that the court did not make any
findings particular to Varnum in ordering sanctions, and because the court deprived Varnum of
due process by not giving it notice and an opportunity to be heard before entering sanctions
against Varnum. We disagree.
With respect to a request for attorney fees under MCL 600.2591 and MCR 2.114, we
review for an abuse of discretion the trial court’s ruling on the request. Edge v Edge, 299 Mich
App 121, 127; 829 NW2d 276 (2012). However, the court’s underlying factual findings,
including a finding of frivolousness, are reviewed for clear error. Kitchen v Kitchen, 465 Mich
654, 661; 641 NW2d 245 (2002); Edge, 299 Mich App at 127. Issues regarding the
interpretation of MCL 600.2591 and MCR 2.114 are reviewed de novo on appeal. Edge, 299
Mich App at 127. The question whether a claim or defense is frivolous is evaluated at the time
the claim or defense was raised. In re Costs & Attorney Fees, 250 Mich App 89, 94; 645 NW2d
697 (2002). The objective of sanctions “is to deter parties and attorneys from filing documents
or asserting claims and defenses that have not been sufficiently investigated and researched or
that are intended to serve an improper purpose.” FMB-First Mich Bank v Bailey, 232 Mich App
711, 723; 591 NW2d 676 (1998). Sanction provisions should not be construed in a manner that
has a chilling effect on advocacy, that prevents a party from bringing a difficult case, or that
penalizes a party whose claim initially appears viable but later becomes unpersuasive. Louya v
William Beaumont Hosp, 190 Mich App 151, 163; 475 NW2d 434 (1991). With respect to MCR
2.114 and MCL 600.2591, “[n]ot every error in legal analysis constitutes a frivolous position”
and “merely because this Court concludes that a legal position asserted by a party should be
rejected does not mean that the party was acting frivolously in advocating its position[,]”
especially in regard to legal issues that are complex and not easily resolved. Kitchen, 465 Mich
at 662-663.
“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.”
MCR 2.625(A)(2).11 “Upon motion of any party, if a court finds that a . . . 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.” MCL 600.2591(1) (emphasis
added).12 The plain and unambiguous language of MCL 600.2591 mandates an award of
attorney fees and costs if a defense to a civil action was frivolous, and it requires assessment of
11
MCR 2.114(F) states that “a party pleading a frivolous . . . defense is subject to costs as
provided in MCR 2.625(A)(2).”
12
“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.” MCL 600.2591(2).
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the fees and costs against both the party and the party's attorney. “Frivolous,” as used in the
statute, means, in part, that a “party had no reasonable basis to believe that the facts underlying
that party's legal position were in fact true” or that a “party's legal position was devoid of
arguable legal merit.” MCL 600.2591(3)(a)(ii) and (iii).
The trial court did not clearly err in finding that Sweezie asserted frivolous defenses –
misnomer of a corporate entity and corporation by estoppel. As explained above, these defenses
or doctrines had been waived, and not only were they waived, there was no factual support for
their application in the first place. Sweezie’s position was devoid of arguable legal merit. And
the trial court did not err in imposing sanctions under MCL 600.2591.
MCR 2.114 concerns the execution of court documents and applies to all pleadings,
motions, affidavits, and other papers mandated by the court rules. MCR 2.114(A). The court
rule provides in pertinent part:
(D) The signature of an attorney or party, whether or not the party is
represented by an attorney, constitutes a certification by the signer that
(1) he or she has read the document;
(2) to the best of his or her knowledge, information, and belief formed
after reasonable inquiry, the document is well grounded in fact and is warranted
by existing law or a good-faith argument for the extension, modification, or
reversal of existing law; and
(3) the document is not interposed for any improper purpose, such as to
harass or to cause unnecessary delay or needless increase in the cost of litigation.
(E) If a document is signed in violation of this rule, the court, on the
motion of a party or on its own initiative, shall impose upon the person who
signed it, a represented party, or both, an appropriate sanction, which may include
an order to pay to the other party or parties the amount of the reasonable expenses
incurred because of the filing of the document, including reasonable attorney fees.
. . . . [Emphasis added.]
In the instant case, the trial court held that sanctions were proper under MCR 2.114 on
basis that Sweezie made “false denials” in his answer when responding to ¶ 7 and ¶ 22 of the
complaint. The court indicated that there were more false denials, but found it unnecessary to
review all of them. With respect to ¶ 22, Sweezie denied that he “invested capital and/or
services in the BreakWater Point project and . . . stood to share in the profits generated by the
development project.” It is clear from the record that Sweezie invested services in BreakWater
Point, as he solicited buyers for condominium units, and his agent maintained records and
opened a bank account for the project. Additionally, in his deposition, Sweezie agreed that up
until 2013, long after the contract with plaintiff was executed, Sweezie was operating on the
belief and understanding that he was a one-third owner in the development and that any profits
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would be divided three ways. Accordingly, contrary to the response to ¶ 22 of plaintiff’s
complaint, Sweezie had invested services in the BreakWater Point project and he “stood to share
in the profits,” although none were ever generated. This answer was not well-grounded in fact.
Indeed, this false answer forced the litigation forward, demanding plaintiff to establish that
Sweezie was in fact a partner or joint venturer as revealed by his contribution of services to the
partnership or joint venture and the agreement to share in any profits; evidentiary demands that
could have been avoided by a truthful response to ¶ 22. We need not even proceed to examine
¶ 7, which concerned the Palms development. We do note that in responding to ¶ 9 of the
complaint, Sweezie denied that he was a partner or held any ownership interest in BreakWater
Point. Sweezie’s deposition testimony belied this answer.
Finally, we address Varnum’s arguments regarding the imposition of sanctions against
Varnum directly. We first reject the due process argument. “Due process in civil cases generally
requires notice of the nature of the proceedings, an opportunity to be heard in a meaningful time
and manner, and an impartial decisionmaker.” Cummings v Wayne Co, 210 Mich App 249, 253;
533 NW2d 13 (1995). Moreover, in regard to notice, “[d]ue process is satisfied when interested
parties are given notice through a method that is reasonably calculated under the circumstances
to apprise them of proceedings that may directly and adversely affect their legally protected
interests and afford them an opportunity to respond.” Wortelboer v Benzie Co, 212 Mich App
208, 218; 537 NW2d 603 (1995).
As noted earlier, MCL 600.2591(1) requires that any award of sanctions be imposed
“against the nonprevailing party and their attorney” (emphasis added), and MCR 2.114(E) allows
the court, on motion of a party “or on its own initiative,” to impose sanctions on the represented
party, counsel, “or both.” Accordingly, Varnum was aware from the start that it would be
sanctioned along with Sweezie if frivolousness was established under MCL 600.2591, regardless
of whom plaintiff requested sanctions against. And Varnum knew that it was potentially subject
to sanctions under MCR 2.114(E), even if plaintiff only sought sanctions against Sweezie,
considering that the court rule gives a trial judge sua sponte authority to impose sanctions against
a party, the party’s counsel, or both. Thus, Varnum necessarily had notice of a proceeding that
might directly and adversely affect its legally protected interests, i.e., notice that it could be
sanctioned, and, in responding to plaintiff’s motion for sanctions by brief and oral argument, it
had an opportunity to be heard on the matter.
Finally, with respect to Varnum’s contention that the trial court made no particular
findings as to Varnum itself and sanctionable conduct, MCL 600.2591 imposes a sanction on
counsel for asserting a frivolous defense, and all that need be found is that the defense was
frivolous. There is no requirement that it be shown that counsel, as opposed to his or her client,
is to blame for asserting the frivolous defense. Further, in the context of frivolous defenses, we
fail to see how Sweezie himself could be faulted for waiving the defenses of corporation by
estoppel and misnomer of a corporation or for not realizing that the record did not support those
defenses; these were plainly Varnum’s miscues. With respect to MCR 2.114, Varnum argues
that the trial court failed to inquire whether reasonable inquiry was made by Varnum in
preparing the answer on Sweezie’s behalf, faulting Sweezie for any falsehoods. The trial court
determined that upon reasonable inquiry, Varnum should have been able to ascertain the correct
responses to the allegations in the complaint. With respect to the response to ¶ 22 of the
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complaint, we certainly agree with the trial court. Sweezie’s involvement in the BreakWater
Point development by way of negotiating sales of condominium units and the prospect of reaping
the benefit of any profits were such elementary matters in this case and so plainly revealed in
discovery that they should have been easily discoverable through reasonable inquiry when
Varnum was drafting the answer. The admissions that were made in the answer, such that
Sweezie had in fact been involved in marketing condominium units, and the nature of the
allegations, including that a nonexistent corporation was the seller, which seemingly could have
been checked, should have enlightened counsel to more fully explore Sweezie’s true
participation in the development. Reversal is unwarranted.
Affirmed. Having fully prevailed on appeal, plaintiff is awarded taxable costs under
MCR 7.219.
/s/ Joel P. Hoekstra
/s/ William B. Murphy
/s/ Jane E. Markey
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