Kent Circuit Court LC No. 06-007152-CZ.
Before: TALBOT, P.J., and WHITBECK and OWENS, JJ.
In this breach of contract action, defendant Carl Perrin appeals as of right from the August 21, 2008 judgment following a bench trial in which the trial court found that Perrin was in breach of contract and owed damages to plaintiff Duray Development, LLC, in the amount of $96,637.68. The judgment did not find defendants Perrin Excavating, LLC, or Outlaw Excavating, LLC, in breach of contract, so neither of those defendants are parties to this appeal.
We find no plain error in the trial court's failure to sua sponte raise the issue of corporation by estoppel. However, we reverse the judgment of the trial court that the de facto corporation doctrine cannot apply to limited liability companies, and we reverse the trial court's decision to bar defendants from calling witnesses. Accordingly, we remand for further proceedings in accordance with this opinion.
I. BASIC FACTS AND PROCEDURAL HISTORY
Duray Development is a residential development company whose sole member is Robert Munger. Munger's responsibilities were to locate and purchase property, and then work with engineering companies and municipalities to have the property zoned and fully developed for residential living. In 2004, Duray Development purchased 40 acres of undeveloped property called "Copper Corners," located at the intersection of 76th Street and Craft Avenue, in Caledonia Township, Michigan.
On September 30, 2004, Duray Development entered into a contract with Perrin, Perrin Excavating, and KDM Excavating for excavating at Copper Corners. In that contract, Munger signed on Duray Development's behalf, Perrin signed on behalf of himself and Perrin Excavating, and Dan Vining signed on behalf of KDM Excavating.
On October 27, 2004, Duray Development and Perrin entered into a new contract, intended to supersede the September 30, 2004 contract. The new contract contained the exact same language and provisions as the earlier contract. However, the new contract was between Duray Development and Outlaw only, and neither Perrin, Perrin Excavating, nor KDM Excavating were parties. Outlaw was an excavation company that Perrin and Vining had recently formed. Perrin and Vining signed the new contract on behalf of Outlaw, and they each held themselves out to Duray Development as the owners and persons in charge of the company. Although the parties did not execute the second contract until October 27, 2004, it was drafted on September 30, 2004, the same day the parties signed the first contract. Once signed, all parties proceeded under the contract as if Outlaw were the contractor for the Copper Corners development.
Two contracts were drafted because Perrin had not yet formed Outlaw at the time of the first contract. However, Duray Development did not want to wait for Perrin to finish forming the company before starting the excavation of Copper Corners. Therefore, the parties entered into the first contract on September 30, 2004, and then entered the second contract once the parties thought Outlaw was a valid limited liability company.
Defendants began excavation and grading work pursuant to the contracts, but did not perform satisfactorily or on time. Duray Development then sued defendants for breach of contract. Defendants answered and filed a counterclaim against Duray Development, alleging that they performed the work according to the terms of the contract and that Duray Development owed defendants approximately $35,000. Duray Development later learned through discovery that Outlaw did not obtain a "filed" status as a limited liability company until November 29, 2004, and therefore Outlaw was not a valid limited liability company at the time the parties executed the second contract.*fn1
Duray Development filed an amended complaint and obtained a default judgment because defendants failed to file an answer. Defendants then moved for entry of an order to set aside the default judgment. The trial court granted defendants' motion and set aside the default. But the trial court subsequently ruled that defendants would not be allowed to call any witnesses at trial because defendants failed to provide a witness list by the deadline set forth in the scheduling order. After trial, the trial court ruled in favor of Duray Development, finding that Perrin was in breach of contract and owed $96,367.68 in damages to Duray Development.
In a post-trial memorandum, Perrin argued that he was not personally liable for Duray Development's damages. He asserted that, although Outlaw was not a valid limited liability company at the time of the execution of the second contract, Outlaw was nevertheless liable to Duray Development under the doctrine of de facto corporation. The trial court opined that if Outlaw were a corporation, then the de facto corporation doctrine most likely would have applied. However, the trial court concluded that the Michigan Limited Liability Company Act*fn2 "clearly and specifically provides for the time that a limited liability company comes into existence and has powers to contract" and therefore superseded the de facto corporation doctrine and made it inapplicable to limited liability companies altogether. Perrin now appeals.
II. PERRIN'S PERSONAL LIABILITY
Perrin argues that he was not personally liable because he signed the second contract on behalf of Outlaw. According to Perrin, even though Outlaw was not yet a properly formed limited liability company, the parties all treated the contract as though Outlaw was a properly formed limited liability company and, therefore, the doctrine of de facto corporation shielded Perrin from personal liability. He further argues that the doctrine of corporation by estoppel precluded Duray Development from arguing that he is personally liable.
The issue whether the doctrine of de facto corporation applies to Perrin requires us to consider the Limited Liability Company Act and Business Corporation Act.*fn3 We review de novo questions of law, including questions regarding whether a statute applies and regarding interpretation of the statute.*fn4
Despite his contention on appeal, Perrin did not preserve the issue of corporation by estoppel. And although Perrin argues on appeal that corporation by estoppel and de facto corporation are doctrines so closely related that raising one of them at trial preserves both on appeal, case law does not support such an argument. Perrin cites PIM, Inc v Steinbichler Optical Techs*fn5 in support of this point. But in that case, although this Court noted that the two doctrines were closely related, it never went so far as to support Perrin's argument regarding preservation of the issue. Further, the Michigan Supreme Court later vacated this Court's decision in that case.*fn6
Therefore, because Perrin did not preserve the issue of corporation by estoppel, we will only review the issue for plain error.*fn7 Plain error occurs at the trial court level if: (1) an error occurred, (2) that was clear or obvious, and (3) prejudiced the party, ...