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Kern v. Kern-Koskela

Court of Appeals of Michigan

June 20, 2017

FRANK KERN III, Plaintiff-Appellant/Cross-Appellee,

         Oakland Circuit Court LCNo. 2012-127856-CB

          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.


         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 husband[1], Larry Koskela, compose Maxitrol's board of directors. Kern-Koskela serves as the Board's Chair and 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.
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.


         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 N.W.2d 426 (2006). "[A] statute is presumed to be constitutional unless its unconstitutionality is clearly apparent." McDougall v Schanz, 461 Mich. 15, 24; 597 N.W.2d 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:

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 N.W.2d 635 (1977). Thus, in Perin v Peuler (On Rehearing), 373 Mich. 531, 541; 130 N.W.2d 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 N.W.2d 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 N.W.2d 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. . . .

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 N.W.2d 271 (2003); see also American Community Mut Ins Co v Commissioner of Ins, 195 Mich.App. 351, 362; 491 N.W.2d 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 N.W.2d 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 N.W.2d 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 N.W.2d 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.


         Plaintiff argues that corporate counsel owed him a fiduciary duty under Fassihi v Sommers, Schwartz, Silver, Schwartz & Tyler, 107 Mich.App. 509; 309 N.W.2d 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 N.W.2d 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 N.W.2d 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 N.W.2d 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 N.W.2d 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 ...

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