Taizhou Golden Sun Arts & Crafts Co Ltd v. Colorbok Inc

STATE OF MICHIGAN
COURT OF APPEALS
TAIZHOU GOLDEN SUN ARTS & CRAFTS, UNPUBLISHED
CO. LTD., August 18, 2015
Plaintiff-Appellant/Cross-Appellee,
v No. 320129
Washtenaw Circuit Court
COLORBÖK, LLC, BRUCE LAZEAR, LC No. 12-001096-CK
CHARLES MCGONIGLE, MARY JO MANLY,
and GEARY PRIEHS,
Defendants-Appellees/Cross-
Appellants,
and
COLORBÖK, INC,
Defendant.
Before: BORRELLO, P.J., and RONAYNE KRAUSE and RIORDAN, JJ.
PER CURIAM.
This appeal arises out of a business arrangement under which a Chinese corporation,
Taizhou Golden Sun (Taizhou), contracted with a Michigan corporation, Colorbök Inc, to
manufacture toys for customers. Colorbök Inc failed and was foreclosed on by a bank, which
then resold Colorbök Inc’s assets to a successor, Colorbök LLC, leaving a substantial amount of
money owed and unpaid to Taizhou, which had already shipped the contracted-for toys directly
to Colorbök Inc’s customers. Taizhou filed suit seeking to recover the debt. The debt itself is
not disputed, but Colorbök Inc has no assets, and Colorbök LLC denies any obligation to pay the
assets of its predecessor. The trial court found in favor of Colorbök LLC and the former officers
of Colorbök Inc. We reverse and remand.
The relationship between Taizhou and Colorbök Inc began in 2006 under an agreement
that entailed Taizhou sending the plush toys it manufactured directly to Colorbök Inc’s
customers, and Colorbök Inc would pay Taizhou for the toys when Colorbök Inc was itself paid
by the customers. Colorbök Inc entered into a contract with Wal-Mart in 2010. Wal-Mart was
Colorbök Inc’s largest customer in 2011, amounting to 38.4% of its net sales, which generated in
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excess of $15 million. From May to August of 2011, Colorbök Inc ordered $2.5 million in plush
toys, and Taizhou honored its end of the deal. However, Colorbök Inc struggled financially for
many years and had difficulty fulfilling its payments to Taizhou. For a time, Taizhou set up
payment plans for Colorbök Inc, and Colorbök Inc sometimes paid interest on those plans.
Nonetheless, in March of 2012, Colorbök’s secured creditor, Fifth Third Bank, foreclosed on its
loan agreements. Colorbök Inc owed approximately $2,750,000 to its secured lenders, Fifth
Third Bank and FdG Associates, and possessed assets worth substantially less than that.
By that time, Colorbök Inc and its officers had already been seeking to sell Colorbök Inc.
At the end of 2011, Colorbök Inc had hired Lazear Capital Partners Ltd (Lazear) as a consultant
to help find a buyer, and in January of 2012 Colorbök Inc’s officers began negotiating for the
purchase of Colorbök Inc’s assets. In certain emails, it was expressed that they wished to
continue to use the name “Colorbök” to have “some brand recognition” and “so our customers
never see the difference.”
On February 10, 2012, Colorbök Inc sent Wal-Mart a letter regarding the corporate
restructuring and organization of Colorbök Inc. The letter explained that Colorbök Inc intended
to transfer all of its business assets to Colorbök LLC, which would be owned and operated by
current executives of Colorbök Inc. Colorbök Inc asked Wal-Mart to consent to the assignment
from Colorbök Inc to Colorbök LLC, provided that Colorbök LLC would assume any of
Colorbök Inc’s obligations under the agreements between Wal-Mart and Colorbök Inc. Notably,
the agreement with Wal-Mart provided that Wal-Mart could cease its relationship with Colorbök
Inc should purchase orders (presumably fulfilled by Taizhou) not be received on time.
Therefore, Taizhou’s reliability was arguably one of the most crucial aspects to allow Colorbök
Inc (then Colorbök LLC) to maintain its relationship with Wal-Mart.
Meanwhile, Taizhou continued to entreat Colorbök Inc regarding outstanding payments.
Defendant Charles McGonigle (a former officer) explained on February 16, 2012, that Colorbök
Inc could not pay because Fifth Third Bank was in control of the company, but he “hop[ed] to
get a new buyer for the business and then have them absorb the agreements I have made with all
our vendors.” Later that month another defendant, Mary Jo Manly/former officer, advised
Lazear that she would prefer Colorbök LLC to use a different law firm because “[w]hen people
make successor in interest liability claims, the more distance we can have the better.” In early
March of 2012, Colorbök LLC acquired Colorbök Inc’s intellectual property and announced
itself as a new entity in partnership with Lazear. Later that month, McGonigle advised Taizhou
of the “situation” and asked “to understand the situation not to like it.” Manly transmitted a list
of invoices worth almost $1.4 million that Colorbök Inc owed to Taizhou and explained that they
would not be paid because Fifth Third Bank had sold the company’s assets. Wal-Mart was the
recipient of over $1 million of products sent by Taizhou on behalf of Colorbök Inc.
Taizhou was not notified of the foreclosure sale or the creation of Colorbök LLC until
after they had occurred. Taizhou received this information when Colorbök Inc sent a letter on
March 8, 2012, to its creditors explaining the foreclosure, informing them that Fifth Third Bank
sold assets for less than the amount owed under the loans, and disclosing that it did not anticipate
any payment to other creditors. The letter also included that Colorbök Inc would be dissolved,
but it did not include any mention of the new partnership with Lazear or the formation of
Colorbök LLC. Taizhou obtained a judgment against Colorbök Inc, but Colorbök Inc has not
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paid the judgment, and as noted, Taizhou sent its products directly to Colorbök Inc’s customers.
Also as noted, Colorbök Inc’s debt to Taizhou is undisputed.
A grant or denial of summary disposition is reviewed de novo on the basis of the entire
record to determine if the moving party is entitled to judgment as a matter of law. Maiden v
Rozwood, 461 Mich. 109, 118; 597 NW2d 817 (1999). When reviewing a motion under MCR
2.116(C)(10), which tests the factual sufficiency of the complaint, this Court considers all
evidence submitted by the parties in the light most favorable to the non-moving party and grants
summary disposition only where the evidence fails to establish a genuine issue regarding any
material fact. Id. at 120. A motion brought under MCR 2.116(C)(8) should be granted only
where the complaint is so legally deficient that recovery would be impossible even if all well-
pleaded facts were true and construed in the light most favorable to the non-moving party. Id. at
119. Only the pleadings may be considered when deciding a motion under MCR 2.116(C)(8).
Id. at 119-120. “When reviewing a grant of equitable relief, an appellate court will set aside a
trial court’s factual findings only if they are clearly erroneous, but whether equitable relief is
proper under those facts is a question of law that an appellate court reviews de novo.”
McDonald v Farm Bureau Ins Co, 480 Mich. 191, 197; 747 NW2d 811 (2008).
Taizhou argues first that Colorbök LLC is a mere continuation of Colorbök Inc and liable
as a successor for Colorbök Inc’s debts. A successor company is generally not liable for the
obligations of the predecessor company. Turner v Bituminous Cas Co, 397 Mich. 406, 426-431;
244 NW 2d (1976). However, “successor liability is derived from equitable principles.”
Lakeview Common Ltd Partnership v Empower Yourself, LLC, 290 Mich. App. 503, 506; 802
NW2d 712 (2010). One of the recognized exceptions to the general rule of successor non-
liability is “where the transferee corporation was a mere continuation or reincarnation of the old
corporation.” Foster v Cone-Blanchard Machine Co, 460 Mich. 696, 702; 597 NW2d 506 (1999)
(internal quotation omitted); Turner, 397 Mich. at 426-431. We believe that the evidence clearly
shows that there is, at a minimum, a genuine factual dispute as to whether Colorbök LLC is a
mere successor to Colorbök Inc. However, the relevant successor liability rule is simply not
available here because this is not a products liability action. Starks v Michigan Welding
Specialists, Inc., 477 Mich. 922; 722 NW2d 888 (2006).1
Taizhou raises other equitable claims of promissory estoppel and unjust enrichment. To
prove a promissory estoppel, a plaintiff must prove: “(1) a promise, (2) that the promisor should
reasonably have expected to induce action of a definite and substantial character on the part of
the promise, and (3) that in fact produced reliance or forbearance of that nature in circumstances
such that the promise must be enforced if injustice is to be avoided.” Novak v Nationwide Mut
Ins Co, 235 Mich. App. 675, 686-87; 599 NW2d 546, 552 (1999). Unjust enrichment may be
established by proving “(1) the receipt of a benefit by defendant from plaintiff, and (2) an
inequity resulting to plaintiff because of the retention of the benefit by the defendant.” Sweet Air
Inv, Inc v Kenney, 275 Mich. App. 492, 504; 739 NW2d 656 (2007) (internal quotation omitted).
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We appreciate the concerns expressed by our concurring colleague, but we conclude that they
would be preferable for them to be addressed by our Supreme Court.
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Taizhou’s promissory estoppel claim must fail, for several reasons. First, it would be
technically impossible for Colorbök LLC to have “promised” anything to anyone prior to
actually coming into existence. Second, while communications made to Taizhou on behalf of
one or the other Colorbök entities may have been misleading, and likely intentionally so, strictly
speaking those communications expressed hopes rather than true promises. Finally, Taizhou had
already sent the plush toys to Colorbök Inc’s customers by the time the alleged promises were
made, so even if they were promises, they did not induce Taizhou to act.
In contrast, we are persuaded that summary disposition was inappropriate regarding
Taizhou’s unjust enrichment claim. The products Taizhou made were not shipped directly to
either Colorbök entity and were never technically “assets” thereof. Consequently, there is merit
to Colorbök LLC’s argument that it paid fair value to Fifth Third Bank for the assets it received;
at the very least, it did not come into possession of any physical assets from Taizhou for which it
did not pay. However, that is a disingenuously superficial argument under the circumstances. It
should be obvious that Colorbök LLC would have been functionally worthless if it could not
maintain or enter into further business relationships with any entity willing to pay it any money.
Physical assets are not the only thing of value that can be acquired. In this case, it is manifestly
apparent that Colorbök LLC owes a significant part of its continued existence to Taizhou
honoring its side of its contracts with Colorbök Inc. In other words, Colorbök LLC has indeed
received and not paid for an enormous benefit at substantial cost to Taizhou, and we conclude
that it would be clearly inequitable to Taizhou for Colorbök LLC to retain that benefit without
compensating Taizhou. The trial court erred in granting summary disposition as to Taizhou’s
unjust enrichment claim.
Regarding Taizhou’s claims against the individual defendants, claims for silent fraud and
fraudulent misrepresentation both require, inter alia, that a plaintiff reasonably rely on an untruth
produced, affirmatively or by omission, by a defendant. See Alfiere v Bertorelli, 295 Mich. App.
189, 193-194; 813 NW2d 772 (2012). The evidence does not support a conclusion that Taizhou
reasonably relied on any misrepresentation, either by affirmative statement or by omission, made
by any of the individual defendants. The alleged misrepresentations concern Colorbök Inc’s
impending insolvency. Irrespective of whether any of the named defendants should have told
anyone at Taizhou that Colorbök Inc was about to become insolvent, Taizhou had already
shipped its products before the alleged misrepresentations were made, and Taizhou was already
aware that Colorbök Inc was suffering financial difficulties. To the extent Taizhou delayed the
commencement of any legal action, we find no support for any conclusion that Taizhou impaired
its position or prejudiced its claims by doing so. Taizhou’s remaining claims against the
individual defendants are all in some way derivative of the above claims. The trial court
properly granted summary disposition in the individual defendants’ favor.
Taizhou next argues that the trial court granted summary disposition prematurely instead
of granting its request to compel discovery of certain documents. We review a motion to compel
discovery for an abuse of discretion. Cabrera v Ekema, 265 Mich. App. 402, 406; 695 NW2d 78
(2005). The documents Taizhou seeks would allegedly contradict any assertion that Colorbök
Inc ceased all business operations on March 8, 2012. In light of our discussions above, we
simply do not perceive any benefit that Taizhou could derive from any such documents, if indeed
they actually exist. We therefore likewise perceive no basis for reversing the trial court’s denial
of Taizhou’s motion to compel.
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On cross-appeal, defendants assert that the trial court erred when it denied their motions
for sanctions, alleging that Taizhou violated MCR 2.114(D)(2) by filing an amended complaint
without factual support. This Court reviews a trial court’s ruling on a motion for sanctions for an
abuse of discretion. Edge v Edge, 299 Mich. App. 121, 127; 829 NW2d 276 (2012). We decline
to reach the merits of whether sanctions are proper, however, because we agree with defendants
that the trial court never actually decided that the court rule had been violated. While it might be
possible to draw such an inference, the trial court merely ruled that it was denying sanctions. A
trial court must indicate why it is granting or denying a motion for sanctions when a pleading has
been filed under MCR 2.114(D). In re Forfeiture of Cash and Gambling Paraphernalia, 203
Mich. App. 69, 73; 512 NW2d 49 (1993). On remand, the trial court shall make that
determination and explain why it concludes that the court rule was or was not violated, and either
impose or refuse sanctions accordingly. Finally, because we are remanding this matter, we
decline to address whether any grants of summary disposition should have been with or without
prejudice.
In summary, we reverse the trial court’s grant of summary disposition in favor of
Colorbök LLC as to Taizhou’s unjust enrichment claim and remand this matter to the trial court
accordingly; on remand, the trial court shall clarify and, if it deems necessary, correct its ruling
on defendants’ motion for sanctions. In all other respects, we affirm. We do not retain
jurisdiction.
/s/ Stephen L. Borrello
/s/ Amy Ronayne Krause
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