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Dugan v. Vlcko

United States District Court, E.D. Michigan, Southern Division

March 29, 2018

ZORA DUGAN, Plaintiff,



         I. Introduction

         This is a dispute between siblings about money owed from a failed real estate investment. Plaintiff Zora Dugan claims that her brother, Defendant Miroslav Vlcko, breached a contract with her by not paying her back on a promissory note. Plaintiff moved for summary judgment. Dkt. 19. Defendant failed to respond until the Court entered a text only order instructing him to do so. Defendant then he filed a consolidated response and cross motion for summary judgment. Dkt. 27.

         For the reasons set out below, Defendant's Cross Motion for Summary Judgment will be DENIED, and Plaintiff's Motion for Summary Judgment will be GRANTED in part.

         II. Background

         In October 2007, Plaintiff invested approximately $150, 000 in WV Investments LLC, a real estate venture majority-owned and managed by her brother. Dkt. 11 at Pg ID 89. The money was for a shopping center to be located in the greater D.C. area. From the record, it does not appear that anything memorialized this investment in writing. Nonetheless, Plaintiff received monthly disbursements as returns on this investment from October 2007 through June 2012. Dkt. 11 at Pg ID 89.

         On or around September 29, 2011 Defendant emailed Plaintiff to let her know that the shopping center was being sold, with an anticipated closing of February 1, 2012. Dkt. 11 at Pg ID 389; Dkt 11-1 at Pg ID 108. In that email he also stated “when the loan closes [Plaintiff] will receive the unpaid portion of [her] original contribution, and [her] percentage of the net sale proceeds” after the closing costs and expenses were deducted. Dkt. 11-1 at Pg ID 108.

         Plaintiff continued receiving monthly disbursements until June 2012. But she did not receive a check for her original investment or any percentage of the net sale proceeds. Dkt. 11 at Pg ID 90. Plaintiff made repeated requests to Defendant during July and August 2012 for a return of her principal investment, but Defendant told her he did not have the money. Dkt. 11 at Pg ID 90.

         On September 24, 2012 Defendant emailed Plaintiff and stated “My records show that you're owed $80, 377.00 return on your original investment, and $116, 039.44 as a return on percentage interest, for a total of $186, 416.44.” Dkt. 11-2 at Pg ID 110. In that same email Defendant told her he would make her the same “deal” he had extended to another investor in the property-“50% interest on your money from 9/1/12 until you get paid”-if she would agree not to collect this debt and allow him to use the funds in a new investment: a return of 50% interest on the outstanding amount from September 1, 2012 until she got paid. Dkt. 11-2 at Pg ID 110.

         Plaintiff responded on September 25, 2012 to clarify the terms of the loan. Dkt. 11-2 at Pg ID 110. In his same-day responses to her questions Defendant told her 1) the 50% interest rate would be for each year of the loan; 2) the life of the loan would be until Defendant and his LLC could recoup “the $8, 000, 000 cash I have in the projects, ” and likely by year-end; 3) the loan would be to WV Urban Developments guaranteed by Defendant and Richard Walker (Defendant's partner in the LLC). Dkt. 11-2 at Pg ID 110. According to Plaintiff, Defendant advised her that he would execute a Promissory Note containing the agreed upon terms. Dkt. 11 at Pg ID 91.

         After this email exchange, however, Defendant failed to send Plaintiff a Promissory Note for the loan. Dkt. 11 at Pg ID 91. Finally, after several requests from Plaintiff, Defendant emailed the Note to Plaintiff on June 20, 2013. Dkt. 11-3 at Pg ID 112. Signed by Defendant and Richard Walker[1], the Note guaranteed payment of $194, 288.92 annually to Plaintiff, representing a 20% return on the loan amount. It was effective as of December 12, 2012, personally guaranteed by Defendant and Walker, and payable on demand. Dkt. 1-4 at Pg ID 21.

         Upon seeing that the Note contained a 20% interest term instead of the 50% that she and Defendant had previously discussed, and that it was effective as of December 2012 rather than September 2012, Plaintiff emailed Defendant on June 24, 2013 and asked him to send her “a new note” with the 50% interest term and a September 1, 2012 effective date. Dkt. 11-5 at Pg ID 117. Defendant replied the same day and told her he could not include a 50% interest term in the Note because it was criminal usury and that they would “talk.” Id.

         According to Plaintiff's deposition testimony she and Defendant spoke on the phone shortly after this email exchange and he reiterated that 50% interest was usurious which was why he had included a 20% term instead. Dkt. 27-1 at Pg ID 363, 79:18-81:12. She testified that she understood this to mean that 20% was non- usurious and thus enforceable and that she agreed to the loan under those terms. Id. Defendant does not dispute that this phone conversation occurred or what was discussed during it.

         No interest payments were made on the Note. Plaintiff claims she made her first demand for payment on the Note over the phone in late 2013, and made several subsequent demands throughout 2014. Dkt. 11 at Pg ID 92. Plaintiff states that Defendant responded by indicating that all of the funds she had lent had been used by WV Urban Investments LLC on options to purchase real property, but that those investments had fallen through and she was out of luck. Id. Defendant does not appear to dispute this account.

         In Spring 2015 Plaintiff received an income tax form from Defendant for WV Urban Investments LLC known as a K-1 form. A K-1 form reports income or losses from a partnership.[2] This form named Plaintiff as a partner in WV Urban Investments LLC, though she claims she never joined the partnership. The K-1 form showed an “ordinary business income loss” of $193, 320. Dkt. 11 at Pg ID 92; Dkt. 11-7 at Pg ID 124 (2014 K-1 for WV Urban Investments LLC). Plaintiff claims Defendant told her to write off the loss on her taxes, which she did not do. Dkt. 11 at Pg ID 92.

         On June 3, 2016 Plaintiff made her final demand for payment on the Promissory Note in writing. Dkt. 11 at Pg ID 92; Dkt. 11-8 at Pg ID 129-30 (demand letter from Plaintiff's lawyer). In that letter Plaintiff request a payment of $330, 938.79, which she calculated as her principal investment ($194, 288.93) plus the 20% per year interest ($136, 649.87) over the course of three years.

         Defendant did not respond to that letter, and has made no payments on the Note.

         Plaintiff filed this suit on September 9, 2016. Dkt. 1. In her Amended Complaint, filed November 28, 2016, she claimed: 1) default on promissory note; 2) breach of contract; 3) unjust enrichment; 4) fraudulent misrepresentation; 5) silent fraud; 6) bad faith promise; 7) negligent misrepresentation; and 8) innocent misrepresentation. Dkt. 11.

         Defendant meanwhile filed a Third-Party Complaint against Richard Walker, his partner in WV Investments LLC and the other personal guarantor of Plaintiff's Promissory Note on November 21, 2016. Dkt. 9. The two Defendants entered into a Consent Judgment on January 25, 2017 under which Third-Party Defendant Walker agreed to indemnify Defendant Vlcko for 50% of any judgment Plaintiff won against Defendant Vlcko plus 50% of Defendant Vlcko's costs in defending against this action. Dkt. 17.

         Plaintiff moved for summary judgment on April 4, 2017. Dkt. 240. When Defendant failed to respond, the Court issued a text only order on September 6, 2017 ordering Defendant to respond by September 22, 2017. Defendant filed a Cross-Motion for Summary Judgment and Response to Plaintiff's Motion for Summary Judgment on September 22, 2017. Plaintiff responded on October 13, 2017, Dkt. 29, and Defendant replied on October 27, 2017. Dkt. 30.

         A hearing on the cross motions for summary judgment was held on December 11, 2017.

         III. Standard of Review

         “Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue as to any material fact such that the movant is entitled to a judgment as a matter of law.” Villegas v. Metro. Gov't of Nashville, 709 F.3d 563, 568 (6th Cir. 2013); see also Fed. R. Civ. P. 56(a). A fact is material only if it might affect the outcome of the case under the governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

         On a motion for summary judgment, the Court must view the evidence, and any reasonable inferences drawn from the evidence, in the light most favorable to the non-moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted); Redding v. St. Edward, 241 F.3d 530, 531 (6th Cir. 2001).

         As the moving party, the Defendant has the initial burden to show that there is an absence of evidence to support Plaintiff's case. Selby v. Caruso, 734 F.3d 554 (6th Cir. 2013); see also Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has met its burden, the non-moving party “may not rest upon its mere allegations or denials of the adverse party's pleadings, but rather must set forth specific facts showing that there is a genuine issue for trial.” Ellington v. City of E. Cleveland, 689 F.3d 549, 552.

         Because the Court is dealing with cross motions for summary judgment, it will evaluate each claim to determine 1) if a genuine dispute of material fact exists such that summary judgment should not be granted to either side, and 2) if no genuine dispute of material fact exists whether the undisputed facts as a matter of law decide the claim.

         IV. Analysis

         Plaintiff has made eight claims: 1) Default on Promissory Note; 2) Breach of Contract; 3) Unjust Enrichment/Quantum Meruit (as an alternative to breach of contract theory); 4) Fraudulent Misrepresentation; 5) Silent Fraud; 6) Fraud Based on Bad-Faith Promise; 7) Negligent Misrepresentation; 8) Innocent Misrepresentation. For each cause of action Plaintiff has requested the same relief: a judgment against Defendant in the amount of $344, 107.26-the amount she alleges she is owed under the terms of the promissory note.

         a. Default on Promissory Note/Breach of Contract

         Plaintiff argues that Defendant is in default on the signed Promissory Note that he emailed to her on June 24, 2013, and has thus breached their contract.

         Defendant argues that the Promissory Note is not enforceable because 1) there was no consideration exchanged for it and 2) Plaintiff is not the holder in due course of the Note. Finally the Defendant argues that even if the Note is enforceable, the 20% interest rate is usurious under Michigan law and may not be enforced.

         1. The Promissory Note is a negotiable instrument under the UCC

         In order to be a cognizable negotiable instrument under the UCC as adopted by Michigan, the Promissory Note:

o a) must be payable to the bearer;
o b) on demand or at a definite time, and
o c) must not contain an undertaking other than payment of money (i.e. it cannot impose any other additional conditions of performance for payment).

MCLA §440.3104(2).

         Plaintiff's Promissory Note satisfies this definition because it is a) payable “to the order of Zora Dugan”; b) payable “in full at any time or in part from time to time”; and c) does not include any other additional requirement with which Plaintiff must comply in order to receive that promised payment on demand. Dkt. 1-4 at Pg ID 21.

         Additionally the Note is “certain as to the sum paid”- $194, 288.92 plus interest at 20% per annum-“and the time of payment”- it states “effective as of December 12, 2012.” First Nat Bank v. Carson, 60 Mich. 432, 436; 27 N.W. 589 (1886).

         2. The Promissory note is supported by sufficient consideration

         Defendant argues that because Plaintiff did not actually give Defendant any funds at the time that the Note was executed, it is unenforceable for lack of consideration. Dkt. 27 at Pg ID 323.

         Defendant's argument cannot overcome the presumption of consideration that accompanies negotiable instruments like promissory notes. In re Booth's Estate, 326 Mich. 337, 343 (1949)(quoting C.L 1948 § 439.26) (“Every negotiable instrument is deemed prima facie to have been issued for valuable consideration; and every person whose signature appears thereon to have become a party thereto for value”).

         Whether a negotiable instrument has been transferred for value and consideration is determined under MCL 440.3303, which states that “a negotiable instrument is issued or transferred for value if is issued of transferred as payment of, or as security for an antecedent claim against any person.” MCL 440.3303(1)(c).

         If an instrument is issued for value under 440.3303(1) has also been issued for consideration. MCL 440.3303(2).

         Michigan courts have found that a promissory note “given in payment of a pre-existing debt” satisfies this 440.3303(1)(c) definition and is thus supported by valuable consideration.” See Wienhold v. Pearsall, 2013 WL 3198129 at * 5 (Mich. App. June 25, 2013)(citing Ann Arbor Constr Co. v. Glime Constr. Co., 369 Mich. 669 (1963)(finding that a promissory note for repayment of $105, 000 wired to defendant's bank account was supported by adequate consideration as was a subsequent note issued when the first note was defaulted on).

         Defendant does not dispute that it owed Plaintiff an antecedent debt based on original investment in the shopping center. And the email records attached to Plaintiff's Amended Complaint indicate Defendant communicated to her that she was owed this money. In a September 24, 2012 email to Plaintiff, the authenticity or validity of which Defendant does not dispute, Defendant wrote: “My records show that you're [Plaintiff] owed $80, 377.00 return on your ...

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