Allen & Allen Properties LLC v. Jason Smith ( 2022 )

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
revision until final publication in the Michigan Appeals Reports.
STATE OF MICHIGAN
COURT OF APPEALS
ALLEN & ALLEN PROPERTIES, LLC, UNPUBLISHED
and CURTIS SMITH, July 28, 2022
Plaintiffs-Appellants,
v No. 358047
Wayne Circuit Court
JASON SMITH, LC No. 20-016562-CB
Defendant-Appellee.
Before: SHAPIRO, P.J., and RICK and GARRETT, JJ.
PER CURIAM.
The instant matter involves a contract and arbitration agreement dispute. Plaintiffs, Curtis
Smith (Curtis) and Allen & Allen Properties, LLC (the Company), filed a delayed application for
leave to appeal, challenging the trial court’s order granting defendant, Jason Smith’s, motion for
summary disposition.1 We reverse and remand.
I. BACKGROUND
In 2004, Curtis and Howard Smith formed Allen & Allen Properties, LLC. Howard
contributed $710,216, resulting in a 90% ownership of the Company, while Curtis contributed
$41,560, resulting in 10% ownership. On January 1, 2010, Curtis and Howard signed an Operating
Agreement to govern the Company’s affairs. Section 8.12 of the Operating Agreement contained
an arbitration clause, which provides, in relevant part, “Any disputes arising out of or pertaining
to the interpretation of this Agreement shall be submitted to an arbitrator upon the request by any
of the Members.” The Operating Agreement also contained the following pertinent clauses related
to new members:
1
Allen & Allen Prop, LLC v Jason Smith, unpublished order of the Court of Appeals, entered
October 13, 2021 (Docket No. 358047).
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4.2 Restrictions on Members. No Member, without the prior written
consent of all the Members shall:
(a) Sell, assign, transfer, mortgage, or pledge any material assets of the
Company;
* * *
5.1 New Members; Substitute Members and Transferees. New
Members may be admitted to the Company without the prior written consent of all
Members. Unless otherwise required by law, no Member has the right to sell,
assign, transfer, mortgage, or pledge his Interest, or any part of his Interest, in this
Company or grant the right to become a substitute member to an assignee of all or
any part of his interest, except with the prior written consent of all Members, and
any attempt to do so is null and void.
The Operating Agreement was allegedly amended in 2014 as a result of a handwritten
memorandum signed only by Howard, which reduced Howard’s ownership to 50%, increased
Curtis’s share to 25%, and gave defendant a 25% ownership interest. Curtis did not sign the
amendment, and he claims he was not aware of the amendment until after Howard died in August
2020. Thereafter, defendant submitted a letter to plaintiffs claiming an ownership in the Company,
and stating his intent to begin termination of the Company and liquidation of its assets.
Plaintiffs filed a complaint for declaratory judgment, which he subsequently amended,
requesting the trial court to find that: (1) defendant did not have an interest in the Company; (2)
Curtis, as the sole remaining member of the company, is now the only owner of 100% of the
Company; and (3) an award of costs, interest, and attorney fees in favor of plaintiffs. Defendant
moved for summary disposition under MCR 2.116(C)(7), arguing that the dispute was subject to
arbitration under the Operating Agreement because he was a member of the Company as
evidenced by the 2014 amendment. Plaintiffs responded, contending arbitration was
inappropriate because defendant was not a party to the Operating Agreement and was not
unanimously approved as a new member, and, therefore, not a member of the Company with
rights under the Operating Agreement.
In an attached affidavit, Curtis explained that the correct language of section 5.1 of the
Operating Agreement should state: “No new Members may be admitted to the company without
the prior consent of all Members.” However, the copy submitted by defendant omitted the word
“No” in the first statement sentence of section 5.1. Curtis argued that this was either a
typographical error or the result of altering the sentence. Subsequently, plaintiffs argued that the
error in section 5.1 was actually an intentional and fraudulent alteration of the Operating
Agreement.
The trial court found there was a question regarding whether defendant was a legitimate
party to the Operating Agreement. However, the court granted defendant’s motion and stated that
the remaining questions should be decided in arbitration concluding, “The question of
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membership . . . is simply a question for the arbitrator.” This Court granted plaintiffs’ delayed
application for leave to appeal.2
II. STANDARD OF REVIEW
Summary disposition is proper under MCR 2.116(C)(7) when a claim is barred because
of an agreement to arbitrate. Tinsley v Yatooma, 333 Mich App 257, 261; 964 NW2d 45 (2020).
A trial court’s decision on a motion for summary disposition is reviewed de novo. Id. “In
reviewing a motion under MCR 2.116(C)(7), this Court accepts as true the plaintiff’s well-
pleaded allegations and construes them in the plaintiff’s favor.” Watts v Polaczyk, 242 Mich
App 600, 603; 619 NW2d 714 (2000). This Court must “consider the pleadings, affidavits,
depositions, admissions, and documentary evidence filed or submitted by the parties to determine
whether a genuine issue of material fact exists.” Id. “Whether a claim is subject to arbitration is
also reviewed de novo, as is the construction of contractual language.” Tinsley, 333 Mich App
at 261.
III. LAW AND ANALYSIS
Plaintiffs argue that the trial court committed several errors. First, it erred when it failed
to determine whether defendant was a party to the Operating Agreement, which was essential to
determining the issue of arbitrability. Second, plaintiffs maintain, the trial court erroneously
concluded that the issue of whether there was an enforceable arbitration agreement between the
parties was a question for the arbitrator to decide. We agree.
Arbitration proceedings in Michigan are governed by statute and court rule. Michigan’s
Uniform Arbitration Act, MCL 691.1681 et seq., outlines different responsibilities of the trial
court and the arbitrator in an arbitration action. MCL 691.1686 provides, in relevant part:
(2) The court shall decide whether an agreement to arbitrate exists or a
controversy is subject to an agreement to arbitrate.
(3) An arbitrator shall decide whether a condition precedent to
arbitrability has been fulfilled and whether a contract containing a valid
agreement to arbitrate is enforceable. [MCL 691.1686(2) and (3).]
2
Plaintiffs attempted to appeal the trial court’s order once before. This Court dismissed the claim
of appeal for lack of jurisdiction because the May 2, 2021 order appealed was not a final order.
Rather, the final order was entered on April 9, 2021, making the appeal not timely filed within 21
days of the order. Allen & Allen Properties LLC v Jason Smith, unpublished order of the Court of
Appeals, entered May 25, 2021 (Docket No. 357237). This Court also denied the plaintiffs’
subsequent request for reconsideration. Allen & Allen Properties LLC v Jason Smith, unpublished
order of the Court of Appeals, entered July 21, 2021 (Docket No. 357237).
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“Arbitration is a matter of contract.” Altobelli v Hartmann, 499 Mich 284, 295; 884 NW2d
537 (2016) (quotation marks and citation omitted). “[A] valid agreement must exist for arbitration
to be binding.” Ferndale v Florence Cement Co, 269 Mich App 452, 460; 712 NW2d 522 (2006).
As recognized by our Supreme Court, “[a] party cannot be required to arbitrate an issue which [it]
has not agreed to submit to arbitration.” Lichon v Morse, 507 Mich 424, 437; 968 NW2d 461
(2021) (quotation marks, citation, and alterations omitted; alterations in original). “[W]hen
interpreting an arbitration agreement, we apply the same legal principles that govern contract
interpretation.” Id. (quotation marks and citation omitted). When interpreting a contract, our goal
is to “ascertain the intent of the parties at the time they entered into the agreement.” Id. (quotation
marks and citation omitted).
The general policy of this State is favorable to arbitration. The burden is on the
party seeking to avoid the agreement, not the party seeking to enforce the
agreement. In deciding the threshold question of whether a dispute is arbitrable, a
reviewing court must avoid analyzing the substantive merits of the dispute. If the
dispute is arbitrable, the merits of the dispute are for the arbitrator. [Altobelli, 499
Mich at 295-296 (quotation marks and citations omitted).]
Plaintiffs argue the trial court did not find that defendant was a party to the Operating
Agreement, which was essential to determining the issue of arbitrability. We agree.
In the instant case, it is undisputed that the Operating Agreement contains an arbitration
clause. However, because defendant’s membership in the LLC is in doubt, as admitted by the trial
court, the enforceability of the arbitration clause as to the parties of this dispute is still in question.
“The existence of an arbitration agreement and the enforceability of its terms are judicial questions
for the court, not the arbitrators.” Fromm v Meemic Ins Co, 264 Mich App 302, 305; 690 NW2d
528 (2004). Therefore, whether there exists an enforceable arbitration agreement between parties
is a question that must be decided by the trial court, not an arbitrator. Id. If defendant has a right
to enforce the arbitration clause in the Operating Agreement, it can only be because he is a member
of the LLC, and thus is bound by the requirements in the Operating Agreement. Consequently,
the trial court erred when it concluded that “[t]he question of [defendant’s] membership” was a
question for the arbitrator.
Further, the trial court acknowledged that there were multiple questions relating to
defendant’s membership status. It is undisputed that defendant did not sign the Operating
Agreement. Therefore, defendant only has rights if he is found to be a member of the Company
as a result of Howard’s 2014 handwritten amendment. Plaintiffs argued that the 2014 amendment
did not validly transfer membership to defendant because it lacked written consent from all
members, and according to section 7.2 of the Operating Agreement, it was impossible for
defendant to have been assigned a share of the profits without becoming a member of the
Company. There is also a question whether § 5.1 of the Operating Agreement contained a
typographical error or was fraudulently altered by defendant to give him rights to the Company.
See Jozwiak v Northern Mich Hosps, Inc, 207 Mich App 161, 166; 524 NW2d 250 (1994)
(“Evidence of fraud or mistake could rebut the statutory presumption of validity” and a factual
dispute regarding fraud or mistake “bears directly on the validity of the arbitration agreement.”).
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We conclude that a question of fact remains as to whether defendant has the right to invoke
arbitration and that the trial court erred when it granted defendant’s motion for summary
disposition. Because there exists a factual dispute bearing on the validity of the arbitration
agreement, we remand to the trial court to hold an evidentiary hearing. See id. Although the
validity of the arbitration clause itself is not in question in the instant case, multiple questions arise
as to whether defendant is a proper party to the Operating Agreement, and, thus, whether defendant
can enforce the arbitration clause in the instant dispute. Our analysis need not go any further
because this Court must “avoid analyzing the substantive merits of the dispute.” Altobelli, 499
Mich at 296.
Reversed and remanded. We do not retain jurisdiction.
/s/ Douglas B. Shapiro
/s/ Michelle M. Rick
/s/ Kristina Robinson Garrett
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