THE BEHLER-YOUNG COMPANY V A C BEAUDRY INC
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STATE OF MICHIGAN
COURT OF APPEALS
THE BEHLER-YOUNG COMPANY,
UNPUBLISHED
September 25, 2008
Plaintiff-Appellee,
v
No. 277775
Genesee Circuit Court
LC No. 04-080526-CZ
A.C. BEAUDRY, INC., DONALD A.
BEAUDRY, and KATHLEEN BEAUDRY,
Defendants,
and
ROBERT L. POMEROY and PEGGY
POMEROY,
Defendants-Appellants.
Before: Cavanagh, P.J., and Jansen and Kelly, JJ.
PER CURIAM.
In this garnishment action, defendants Robert and Peggy Pomeroy appeal by leave
granted an order directing garnishee Merrill Lynch & Company to turn over their IRA accounts,
and garnishee Metropolitan Life Insurance Company to turn over the cash surrender value of
Robert Pomeroy’s life insurance policies to satisfy a consent judgment entered in plaintiff’s
favor. See The Behler-Young Co v A C Beaudry Inc, unpublished order of the Court of Appeals,
entered May 18, 2007 (Docket No. 277775). We reverse and remand for proceedings consistent
with this opinion.
I. Facts
Defendant Robert Pomeroy was treasurer and president of A.C. Beaudry, Inc., which was
involved in the construction business. Defendant Peggy Pomeroy was the secretary of the
company. Plaintiff was a supplier of heating, ventilation, and cooling materials and sold
materials to A.C. Beaudry, Inc. for various construction projects. On December 28, 2004,
plaintiff brought an action against these and other defendants asserting claims for (1) breach of
contract, (2) open account/account stated, (3) violation of the Michigan Building Contract Fund
Act (MBCFA), MCL 570.151 et seq., (4) quantum meruit, and (5) claim and delivery. An
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affidavit attesting to the existence of the open account and a copy of the account, which included
invoices dating from April of 2004 through December of 2004, were attached to the complaint.
On January 17, 2005, plaintiff amended its complaint to add a conversion claim and request for
treble damages pursuant to MCL 600.2919(a).
After various proceedings occurred, an order of consent judgment was entered on
February 8, 2006. The terms of the consent judgment are as follows:
This matter having come before this Court pursuant to The Behler-Young
Company’s complaint, the parties hereby stipulate and agree to the following
Consent Judgment:
1.
Plaintiff, The Behler-Young Company (hereinafter “Behler”) shall have a
Final Money Judgment against Defendant A.C. Beaudry, Inc. in the amount of
$486,475.08 plus a service charge of 1.5% per month calculated from January 5,
2006 and actual attorney fees pursuant to the contract.
2.
Behler shall have a Final Money Judgment against Robert L. Pomeroy,
individually in the amount of $350,000.00 plus interest of 10% per annum
calculated from January 12, 2006, statutory costs and statutory attorney fees
pursuant to MCL 570.151, et al.
3.
Behler shall have a Final Money Judgment against Peggy Pomeroy in the
amount of $15,000.00 pursuant to MCL 570.151 et al. which will be paid as
follows:
a.
$9,000.00 upon execution of the Consent Judgment;
b.
$6,000.00 by November 1, 2006;
c.
Should Peggy Pomeroy default in the payments of paragraphs 3 a
and b above, the Judgment [against Peggy Pomeroy - - -]1 will be automatically
amended to $30,000.00 plus statutory interest, costs and statutory attorney fees.
4.
Upon entry of this Consent Judgment, Donald A. Beaudry and Kathleen
Beaudry are hereby dismissed with prejudice and without costs to all parties.
5.
Defendants, A.C. Beaudry, Inc., Robert L. Pomeroy and Peggy Pomeroy,
forever waive any right to appeal.
Thereafter, Peggy Pomeroy defaulted on the payment provisions and, according to its terms, the
consent judgment was automatically amended. Subsequently plaintiff began collection activities.
Numerous writs for garnishment were issued and defendants Robert and Peggy Pomeroy
underwent discovery examinations before the trial court. This appeal pertains to the garnishment
1
Handwritten note unable to be deciphered but appears to be non-substantive.
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of accounts held by Merrill Lynch & Company and Robert Pomeroy’s life insurance policies
issued by Metropolitan Life Insurance Company.
A. Merrill Lynch & Company Accounts
On October 9, 2006, writs for garnishment were issued to Merrill Lynch & Company
with regard to Robert and Peggy Pomeroy. The garnishee disclosures returned by Merrill Lynch
dated October 26, 2006, included that (1) the disclosed accounts were “likely exempt from
withholding,” (2) they served defendants on October 18, 2006, (3) Robert Pomeroy had an
Individual Retirement Rollover Account in the amount of $264,139.25, a Roth Retirement
Account in the amount of $21,541.53, and a Cash Management Account in the amount of $4.51,
and (4) Peggy Pomeroy had an Individual Retirement Rollover Account in the amount of
$102,241.63, and a Roth Retirement Account in the amount of $18,394.17.
On November 9, 2006, defendants filed an objection to the writs for garnishment served
on Merrill Lynch, arguing that the funds plaintiff sought to garnish were individual retirement
accounts that were exempt under MCL 600.6023(a)(11) et seq., and were otherwise exempt
under the laws of the State of Michigan. On November 20, 2006, plaintiff responded to
defendants’ objection, arguing that:
The funds Plaintiff seeks to garnish are not exempt from garnishment, as they are
trust funds defalcated by the Defendants pursuant to MCL § 570.151 et seq., and
Defendants had no legal authority with which to transfer such funds to Garnishee.
Defendants have violated the Michigan Builders’ Contract Fund Act, MCL §
570.151 et seq., and consented to judgment for such violations. Defendants are
thus collaterally estopped from arguing that the funds held by Garnishee are not
trust funds pursuant to MCL § 570.151 et seq., due to the Consent Judgment.
Plaintiff further argued that the funds were not otherwise exempt under the laws of the State of
Michigan. And, plaintiff argued, pursuant to MCR 3.101(K), defendants waived their right to
object to the garnishment. Defendants had 14 days—until November 1, 2006—in which to
object after being served the writ by garnishee Merrill Lynch on October 18, 2006. Their
objection was filed November 9, 2006; thus, it was untimely and constituted a waiver of their
right to object.
On December 4, 2006, the trial court ordered the funds turned over except that
defendants, who had argued that they were exempt under federal law, had fourteen days to prove
that the accounts were exempt under federal law. On January 8, 2007, another hearing was held
to determine if defendants had proven that the accounts were exempt under federal law. The
court held that defendants failed to meet their burden and ordered the funds turned over to
plaintiff. The court based its decision on the facts that defendants violated the MBCFA and the
documentation they submitted with regard to the Merrill Lynch accounts only addressed the
exempt status if the money was properly in the accounts—not the issue of whether the accounts
were exempt if the money used to purchase them was acquired by violating the MBCFA.
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B. Metropolitan Life Insurance Company
On October 31, 2006, writs for garnishment were issued to Metropolitan Life Insurance
Company with regard to Robert and Peggy Pomeroy. The garnishee disclosures returned by
Metropolitan Life dated November 27, 2006, indicated that (1) they served defendants on
November 27, 2006, (2) Robert Pomeroy had five life insurance policies in the amounts of
$12,653.64, $9,580.97, $30,408.48, $14,650 (overdue), and one “currently assigned,” and (3)
Peggy Pomeroy had two life insurance policies in the amounts of $4,486.02 and $770.69.
On December 12, 2006, defendants filed an objection to the garnishment served on
Metropolitan Life. Defendants argued that their life insurance policies were exempt under MCL
500.2207(1) because all policies at issue had the spouse as beneficiary. On December 21, 2006,
plaintiff responded that the garnished funds were not exempt under MCL 500.2207(1) because
(1) the policies were purchased with trust funds defalcated by defendants in violation of the
MBCFA, MCL 570.151 et seq., (2) some of the life insurance policies were held for the benefit
of the Robert E. Pomeroy Trust, not his wife or children, and (3) defendants failed to timely
object, under MCR 3.101(E)(5), to the garnishment which constituted a waiver of their right to
object.
On December 21, 2006, plaintiff also filed a motion for the turn over of the garnished
funds held by Metropolitan Life. Plaintiff argued that the life insurance policies were purchased
by defendants with money held in trust for plaintiff under the MBCFA, MCL 570.151, et seq.
Thus, pursuant to Massachusetts Bonding & Ins Co v Josselyn, 224 Mich 159, 162; 194 NW 548
(1923), plaintiff was the trust beneficiary with a super priority over those funds. Further,
defendants were collaterally estopped from arguing that the funds held by Metropolitan Life
were not trust funds because they consented to judgment for a violation of MBCFA.
On January 5, 2007, defendants responded to plaintiff’s motion to turn over the garnished
funds held by Metropolitan Life and argued that the motion should be denied. Life insurance
policies, including the cash surrender values, that are payable to a spouse are exempt from
garnishments under MCL 500.2207. All of the policies at issue were exempt as payable to
Robert’s spouse and children. Plaintiff was merely a judgment creditor, regardless of its claims
pertaining to the MBCFA. Further, plaintiff averred in its underlying complaint that defendants
failed to pay for materials from April 2004 through December 29, 2004. A review of the
insurance policies revealed that they were in existence for a number of years prior to 2004, and a
majority of the premiums paid were paid before the claims arose. In addition, once plaintiff
received the garnishment disclosure from Metropolitan Life which indicated that the funds were
exempt under MCL 500.2207, the burden shifted to plaintiff to file a motion to seek an order for
the property—defendants were not obligated to file objections. MCR 3.101(J)(7). Nevertheless,
defendants’ objections were timely filed on December 12, 2006. And, contrary to plaintiff’s
claim, objections can be filed at any time and are not considered waived under MCR 3.101(K).
On January 8, 2007, the court held that the life insurance policies with the Robert
Pomeroy Trust as beneficiary were not exempt, but the others that were to benefit his spouse and
children were exempt from garnishment.
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C. Subsequent Proceedings Related to Both Writs for Garnishment
On March 8, 2007, defendants filed a supplemental brief in support of their objections to
the writs of garnishment. Defendants argued that the court was operating under the
misimpression that the IRAs and life insurance policies were purchased with funds obtained by
them in violation of the MBCFA. In fact, plaintiff’s claim under the MBCFA arose in April of
2004 (from failure to pay invoices) and the vast portion of the approximate $400,000 in the
Merrill Lynch accounts accrued from contributions years and decades prior to that time. Since
April of 2004, only $1,267.50 was contributed to Robert Pomeroy’s accounts and Peggy
Pomeroy never worked at A.C. Beaudry so the accrual of her accounts was not from funds
contributed by A.C. Beaudry. And, even if the funds used to grow the Merrill Lynch accounts
came from both a violation of the MBCFA and personal funds, plaintiff would only be entitled to
that portion of the IRAs traceable to the violation of the MBCFA. In other words, according to
Massachusetts Bonding & Ins Co, supra, there must be a proration.
Further, defendants argued, funds held in an IRA are exempt from garnishment under
MCL 600.6023. And, the cash surrender value of the life insurance policies cannot be garnished
because, as held by Isaac Van Dyke Co v Moll, 241 Mich 255; 217 NW 29 (1928), it did not
represent a debt. Unless and until the policies are surrendered, the cash surrender value is not
owed and does not represent a debt. See Waatti & Sons Electric Co v Dehko, 230 Mich App
582, 588; 584 NW2d 372 (1998). But, even if the cash surrender value could be garnished,
defendants contended that the value was exempt under MCL 500.2207(1). And, contrary to
plaintiff’s claims, defendants’ objections to the garnishments were timely filed under MCR
3.101(K) and (J)(1) in that they were filed within 28 days after service of the writs on the
garnishees and the court rules provide that objections may be filed at any time.
On March 26, 2007, the court heard oral arguments on the various issues before the court.
The court held that, pursuant to MCR 2.612(C)(1)(f), it would reconsider its order of January 8,
2007, primarily because defendants’ argument that the IRA accounts were exempt under state
law, not federal law, might be meritorious. The court scheduled the matter for further arguments
to be held on April 16, 2007.
On April 12, 2007, plaintiff filed its supplemental brief regarding the garnishments.
Plaintiff argued first that, because defendants failed to timely object to the garnishments as
provided by MCR 3.101(K), the funds should have been turned over within 28 days of the
service of the garnishment on the garnishee. Second, plaintiff argued, trust funds are not the
property of the trustee, but the beneficiary; thus, funds once impressed with a trust, continue to
be trust funds indefinitely and such trust follows those funds wherever they go. Third, once the
trust funds were commingled with other funds, the entire vehicle into which the funds were
deposited was held in trust for plaintiff. Fourth, under MCL 600.6023(1)(k), only one individual
retirement account is exempt from levy and sale under execution, if at all. But, here, the IRAs
are not exempt because the accounts consist of, at least, commingled trust funds held for the
plaintiff’s benefit. The same argument holds with respect to the life insurance policies.
Defalcated funds were used to pay the premiums for the life insurance policies thus they are not
exempt.
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On April 12, 2007, defendants filed a brief on reconsideration in support of their position
that the garnishments of the IRA accounts and Robert Pomeroy’s life insurance policies would
be erroneous. First, the consent judgment only stated that a judgment was entered against
defendants “pursuant to MCL 570.151 et al.” It did not state that any assets owned by
defendants represented the proceeds of the trust funds under that Act. The law is wellestablished, consent judgments do not have collateral estoppel effect; the matters were not
adjudicated, they were settled by agreement. Second, IRAs are exempt from garnishment under
MCL 600.6023. Third, defendants argued, to the extent that it was claimed that trust funds under
MCL 570.151 were used to purchase the IRAs, that matter was never determined and there was
no evidence to support that claim. And, the only trust fund money that could have been used, if
at all, to pay into the IRAs was about $1,267.50, considering the time frame (after March of
2004) in which plaintiff’s claim accrued and the contributions that were made by A.C. Beaudry
into Robert Pomeroy’s IRA account. Peggy Pomeroy never worked for A.C. Beaudry so her
IRA account was not funded by trust fund monies. Fourth, defendants argued, they timely
objected to the garnishments under MCR 3.101(J)(1), i.e., within 28 days after the writs were
served; thus, objections were not waived. And, fifth, the cash surrender value of the life
insurance policies on Robert Pomeroy were not subject to garnishment because they were not a
debt and were exempt under MCL 500.2207(1). On April 14, 2007, defendants filed a
supplemental brief in support of their claim of exemptions relating to the IRAs. Citing
Cunningham, Davison, Beeby, Rogers & Alward v Herr, 198 Mich App 258, 259-260; 497
NW2d 575 (1993), defendants argued that, contrary to plaintiff’s claim, all of defendants’ IRAs
were exempt—not just one of them.
Oral arguments continued on April 16, 2007. The same arguments discussed extensively
above were repeated by the parties. After hearing oral arguments, the trial court made the
following conclusions: (1) “there was no timely objection to the garnishment,” and (2) “if there
are any funds that are transmitted into these accounts, that, for all intents and purposes, the – the
trustee has the right to and to invade these accounts were there’s money that’s commingled – and
to obtain those monies to satisfy the judgment that’s been entered.” On those grounds, the court
ordered Merrill Lynch and Metropolitan Life to turn over the garnished funds. Thereafter,
defendants sought a stay pending appeal and leave to appeal from this Court and both were
granted. The Behler-Young Co v A C Beaudry Inc, unpublished order of the Court of Appeals,
entered May 18, 2007 (Docket No. 277775).
II. Analysis
First, defendants argue that they did not waive their right to file objections to the writs of
garnishment by failing to file their objections within 14 days after being served the writs. We
agree. Court rule interpretation and application is subject to de novo review. Colista v Thomas,
241 Mich App 529, 535; 616 NW2d 249 (2000).
Garnishment actions are authorized by MCL 600.4011(1), but court rules set forth the
procedure to be followed. See MCL 600.4011(2); Royal York v Coldwell Banker, 201 Mich App
301, 305; 506 NW2d 279 (1993). The issue here is whether defendants’ failure to file an
objection within 14 days of being served the writs of garnishment constituted a waiver of their
right to object. Plaintiff has persistently argued that it does. The trial court agreed with plaintiff.
But the plain language of the court rule contradicts plaintiff’s argument and the court’s ruling.
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MCR 3.101(K) states, in pertinent part:
(1) Objections shall be filed with the court within 14 days of the date of service
of the writ on the defendant. Objections may be filed after the time provided in
this subrule but do not suspend payment pursuant to subrule (J) unless ordered by
the court.
Clearly defendants did not waive their right to object to the writs of garnishment although
the objections were not filed “within 14 days of the date of service of the writ.” Plaintiff’s
persistent claim of waiver is not only contrary to this rule, but the well-established law of waiver.
“[C]onduct that does not express any intent to relinquish a known right is not a waiver, and a
waiver cannot be inferred by mere silence.” Moore v First Security Cas Co, 224 Mich App 370,
376; 568 NW2d 841 (1997). And, contrary to plaintiff’s claim, the garnishees were not required
to turn over the withheld funds within 28 days from the date of service of the writs because the
garnishees were notified that such objections were filed. See MCR 3.101(J). Thus, the trial
court’s holding that defendants waived their right to object to the writs of garnishment is
contrary to the rule set forth in MCR 3.101(K)(1) and is reversed.
Next, defendants argue that the trial court erroneously denied their objections and ordered
the release of the funds in the Merrill Lynch accounts and the cash surrender value of Robert
Pomeroy’s life insurance policies because the consent judgment does not establish that
defendants financed or purchased these assets with funds in violation of the MBCFA, MCL
570.151 et seq. We agree.
Plaintiff has persistently argued throughout the course of this action that, because
defendants entered into a consent judgment “pursuant to MCL 570.151 et al,” defendants
admitted that funds received in trust under the MBCFA were used to finance their personal
Merrill Lynch accounts and Robert Pomeroy’s life insurance policies. Therefore, plaintiff has
claimed, these typically exempt assets are subject to garnishment. We conclude that, on these
facts, plaintiff’s argument is fatally flawed.
A consent judgment possesses the same force and character as litigated judgments for
purposes of enforcement. Trendell v Solomon, 178 Mich App 365, 368-369; 443 NW2d 509
(1989). But a consent judgment is a settlement agreement and thus its terms, for interpretation
purposes, are governed by contract principles. See Mikonczyk v Detroit Newspapers, Inc, 238
Mich App 347, 349; 605 NW2d 360 (1999); Young v Robin, 146 Mich App 552, 557-558; 382
NW2d 182 (1985). Honoring the intent of the parties is the primary goal in contract
interpretation. UAW-GM Human Resource Ctr v KSL Recreation Corp, 228 Mich App 486, 491;
579 NW2d 411 (1998). Thus, we consider the plain and ordinary meaning of the words used in
the contract. Wilkie v Auto-Owners Ins Co, 469 Mich 41, 47; 664 NW2d 776 (2003). “If the
contract language is clear and unambiguous, its meaning is a question of law.” UAW-GM
Human Resource Ctr, supra, quoting Port Huron Ed Ass’n v Port Huron Area School Dist, 452
Mich 309, 323; 550 NW2d 228 (1996).
Because it appears that the trial court agreed with plaintiff’s argument that by entering
into the consent judgment defendants admitted that funds received in trust under the MBCFA
were used to finance defendants’ personal assets at issue, we turn to the consent judgment. Here,
the consent judgment provides that plaintiff shall have a final money judgment against each
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defendant in specified amounts “pursuant to MCL 570.151 et al.” “Pursuant to” means “[i]n
compliance with; in accordance with; under” and “[a]s authorized by.” Blacks Law Dictionary
(7th ed). And “MCL 570.151 et al” refers to the MBCFA. Thus, next we consider the MBCFA.
The MBCFA is a penal statute, but a civil cause of action for a violation of its provisions
has been recognized for years. DiPonio Constr Co, Inc v Rosati Masonry Co, Inc, 246 Mich
App 43, 48 n 3; 631 NW2d 59 (2001). “The prima facie elements of a civil cause of action
brought under the [MBCFA] include (1) the defendant is a contractor or subcontractor engaged
in the building construction industry, (2) a person paid the contractor or subcontractor for labor
or materials provided on a construction project, (3) the defendant retained or used those funds, or
any part of those funds, (4) for any purpose other than to first pay laborers, subcontractors, and
materialmen, (5) who were engaged by the defendant to perform labor or furnish material for the
specific project.” Id. at 49, citing MCL 570.151 et seq. The Court in DiPonio Constr Co, supra,
further explained:
The builders’ trust fund act “was originally passed in 1931 as a depression-era
measure to afford additional protection to subcontractors and materialmen.”
People v Miller, 78 Mich App 336, 342; 259 NW2d 877 (1977). During that era,
builders often undertook construction projects that were larger than their ability to
finance. Id. Therefore, builders often paid suppliers and materialmen on older
projects with the funds received on more current operations. Id. When difficult
economic times arrived, the builders became insolvent and many subcontractors
and materialmen were never paid. Id. “In light of this history, it is clear that the
design of the act is to prevent contractors from juggling funds between unrelated
projects.” Id. [Id. at 49.]
In light of the unambiguous law related to consent judgments and the MBCFA, it is
unclear to us as to why plaintiff claims that by entering into this consent judgment defendants
admitted that funds received in trust under the MBCFA were used by them to finance the
disputed personal assets. Even assuming that by entering into this consent judgment defendants
admitted to violating the MBCFA, generally all that would mean is that defendants admitted that
they were paid for labor and materials provided on a specific construction project, and they
retained or used those funds, or part of them, for any purpose other than to first pay plaintiff,
who was engaged by defendants to perform labor or furnish material for that specific project.
See DiPonio Constr Co, supra. Nothing in the consent judgment indicates as to what “purpose
other than to first pay [plaintiff]” the funds were retained or used. The funds for one specific
project could have been used to pay for materials on another unrelated project in violation of the
act. Such an explanation is just as plausible as plaintiff’s which is that the money was used to
finance personal assets. Speculation does not establish facts. And the terms of settlement cannot
be rewritten by us. See Upjohn Co v New Hampshire Ins Co, 438 Mich 197, 207; 476 NW2d
392 (1991). Thus, plaintiff’s claim that by entering into the consent judgment defendants
admitted that funds received in trust under the MBCFA were used to finance their personal assets
at issue is without merit.
Plaintiff has also persistently claimed that, because defendants entered into this consent
judgment, defendants are collaterally estopped from arguing that the assets held by the
garnishees were not financed with trust funds in violation of the MBCFA. Again, plaintiff’s
claim is unsupported by the law. In fact, the law on the subject is clear—collateral estoppel does
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not apply to consent judgments. See, e.g., Smit v State Farm Mut Auto Ins Co, 207 Mich App
674, 682; 525 NW2d 528 (1994); Van Pembrook v Zero Mfg Co, 146 Mich App 87, 102-103;
380 NW2d 60 (1985); American Mut Liability Ins Co v Michigan Mut Liability Co, 64 Mich App
315, 326-327; 235 NW2d 769 (1975). Generally, for collateral estoppel to apply three elements
must be satisfied, including that “a question of fact essential to the judgment must have been
actually litigated and determined by a valid and final judgment.” Monat v State Farm Ins Co,
469 Mich 679, 682-684; 677 NW2d 843 (2004), quoting Storey v Meijer, Inc, 431 Mich 368, 373
n 3; 429 NW2d 169 (1988).
Here, plaintiff claims in its brief on appeal that:
the Defendants signed a consent judgment that provided that their liability upon
which the consent judgment was entered rested on violations of the MBCFA. A
violation of the MBCFA means only one thing: trust funds were fraudulently
defalcated. It is disingenuous for Defendants to now assert that they did not
intend to be bound by the admission in the consent judgment that they violated the
MBCFA.
The error in plaintiff’s argument is easily spotted. As discussed above, even assuming that by
entering into this consent judgment defendants admitted to violating the MBCFA, that is not an
admission that defendants used the funds received in trust under the MBCFA to finance their
personal Merrill Lynch accounts and Robert Pomeroy’s life insurance policies. See DiPonio
Constr Co, supra. What happened to the trust funds was never litigated and determined. See
Van Pembrook, supra. Therefore, plaintiff’s argument that defendants are collaterally estopped
from arguing that the funds held by the garnishees were not financed with trust funds in violation
of the MBCFA is also without merit.
Throughout this case, plaintiff has relied on the cases of Long v Earle, 277 Mich 505; 269
NW 577 (1936) and Massachusetts Bonding & Ins Co v Josselyn, 224 Mich 159, 162; 194 NW
548 (1923) in support of its claim that the whole of defendants’ Merrill Lynch accounts and
Robert Pomeroy’s life insurance policies are subject to garnishment. But these cases are
distinguishable from this case.
In Massachusetts Bonding & Ins Co, the defendant trustee commingled trust funds with
his own money and used those monies to pay premiums on life insurance policies. Our Supreme
Court held:
It is an elementary rule that a trustee may make no profit out of the
handling of a trust estate. It is also well settled that where money held upon trust
is misapplied by the trustee and traced into an unauthorized investment in
property of any nature, the investment thus made, in the absence of a claim of
bona fide ownership by a third person, may be treated by the cestui que trust as
made for his benefit. The consideration for the investment is trust money and the
cestui quo trust becomes the equitable owner of the property purchased therewith.
His right thereto is a property right, not one created by any preference or
favoritism shown by a court of equity. [Id. at 162 (citations omitted).]
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Thereafter, the Court held that prorating the proceeds of the policies in the proportion that the
trust funds and private funds were invested was the appropriate remedy. Id. at 163-164.
Similarly, in Long, it was established that the defendant embezzled money belonging to
the beneficiaries of a trust and fraudulently converted that money to his own use by purchasing
real estate in his name and his wife’s name as tenants by the entirety to avoid his creditors. Id. at
515, 517. Our Supreme Court, after quoting some of the paragraph set forth above from
Massachusetts Bonding & Ins Co, held:
Here, there is some claim that defendant [trustee] commingled the trust funds with
funds of his own. If the trustee commingles trust funds with his own, the entire
commingled property “will be treated as subject to the trust, to the extent
necessary to make good the claim of the cestui quo trust to funds traced to, and
still found commingled in, the common fund, except in so far as the trustee may
be able to distinguish and separate that which is his own.” [Long, supra at 526
(citation omitted).]
These facts are quite different than the facts before us. Here, there is no evidence that
defendants commingled their personal funds with funds received in trust under the MBCFA.
And, thus, there is no evidence that defendants used any such commingled funds to purchase
either the Merrill Lynch accounts or the life insurance policies at issue. That is, the funds
received in trust under the MBCFA were not “traced into an unauthorized investment” and there
is no evidence that these trust funds constituted “the consideration for the investment[s].”
Massachusetts Bonding & Ins Co, supra at 162. Again, the consent judgment on which this
garnishment action is premised merely provides that there is a final money judgment against both
defendants “pursuant to MCL 570.151, et al.” It does not state that there was a commingling of
personal and trust funds or that such commingled funds were used to purchase these personal
assets. In both Massachusetts Bonding & Ins Co and Long it was established that the trustee
defendants inappropriately commingled funds. And, contrary to plaintiff’s argument, as these
cases clearly hold, even if funds were commingled, plaintiff would not be entitled to the entirety
of the investments. See, also, Fidelity & Deposit Co of Maryland v Stordahl, 353 Mich 354; 91
NW2d 533 (1958).
Apparently, however, the trial court was persuaded by plaintiff’s arguments, holding “if
there are any funds that are transmitted into these accounts, that, for all intents and purposes, the
– the trustee has the right to and to invade these accounts were there’s money that’s commingled
– and to obtain those monies to satisfy the judgment that’s been entered.” But the holding itself
reveals that the trial court did not know whether funds received in trust under the MBCFA were
used to acquire or contribute to defendants’ personal assets at issue. As discussed above,
defendants did not admit to financing the disputed personal assets with such funds when they
entered into a consent judgment with plaintiff, nor is there any evidence that defendants
commingled personal funds and trust funds or that such commingled funds were used to
purchase these personal assets. Accordingly, the trial court should not have ordered Merrill
Lynch and Metropolitan Life to turn over the garnished funds on the grounds stated and this
decision is reversed.
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Next, defendants argue that Robert Pomeroy’s life insurance policies were exempt from
garnishment under MCL 500.2207(1), contrary to the trial court’s decision. Generally, whether
life insurance policies are exempt from garnishment presents a question of law. Questions of law
are subject to review de novo. See Cardinal Mooney High School v Michigan High School
Athletic Ass’n, 437 Mich 75, 80; 467 NW2d 21 (1991).
Defendants have argued throughout this case that their life insurance policies are exempt
from garnishment under MCL 500.2207 because all policies at issue had the spouse as
beneficiary, even the ones that were in the name of the Robert E. Pomeroy Trust. Plaintiff has
argued that the policies are not exempt because (1) defendants waived their right to object to the
garnishment when they failed to file a timely objection, (2) the policies were purchased with trust
funds defalcated by defendants in violation of the MBCFA, and (3) some of the policies were in
the name of the Robert E. Pomeroy Trust, not his wife or children. For the reasons extensively
discussed above, neither of plaintiff’s first two arguments have merit. Defendants did not waive
their right to object to the garnishment and there is no evidence to support plaintiff’s claim that
the policies were purchased with funds received in trust under the MBCFA. Thus, we turn to the
issue whether the policies held in the name of the Robert E. Pomeroy Trust are exempt from
garnishment under MCL 500.2207(1).
MCL 500.2207(1) provides, in pertinent part:
It shall be lawful for any husband to insure his life for the benefit of his wife, and
for any father to insure his life for the benefit of his children, or of any one or
more of them . . . and the proceeds of any policy of life or endowment insurance,
which is payable to the wife, husband or children of the insured or to a trustee
for the benefit of the wife, husband or children of the insured, including the
cash value thereof, shall be exempt from execution or liability to any creditor
of the insured; and said exemption shall apply to insurance heretofore or
hereafter issued; and shall apply to insurance payable to the above enumerated
persons or classes of persons, whether they shall have become entitled thereto as
originally designated beneficiaries, by beneficiary designation subsequent to the
issuance of the policy, or by assignment (except in case of transfer with intent to
defraud creditors).
Defendants argue that “it is undisputed that the beneficiary under these policies is the Robert
Lewis Pomeroy Living Trust” and, thus, the policies are exempt. Defendants refer us to an
attachment to their brief titled “Beneficiary and Owner Designation” which indicates that, with
respect to two policies in which Robert L. Pomeroy is the insured, “The Policy proceeds will be
paid to Robert Lewis Pomeroy, Trustee of the Robert Lewis Pomeroy Living Trust.”
The trial court denied defendants’ objection to the writ of garnishment with respect to
these policies on the erroneous grounds that the objections were untimely and the policies may
have been financed by defendants with trust funds in violation of the MBCFA. Accordingly, the
trial court did not otherwise decide the issue whether these life insurance policies are exempt
under MCL 500.2207(1). To make that determination, it must first be decided whether, as
plaintiff has claimed, the policies were in fact financed by defendants with trust funds in
violation of the MBCFA. If so, the transactions may be void and the policies may be subject to
garnishment. Defendants have volunteered to give an accounting of the trust funds at issue in the
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underlying case, limited to the time period in which the damages of $437,506.30 claimed in
plaintiff’s first amended complaint accrued.2 We believe that to be the appropriate course of
action in this case, considering the circumstances.
We reject plaintiff’s argument on appeal that defendants’ failure to provide an accounting
in the underlying matter, before the consent judgment was entered, precludes such an accounting.
The underlying matter was not litigated—it was settled. There is no evidence that the trust funds
were used to finance defendants’ personal assets. Thus, but for an accounting, the assets would
be exempt from garnishment under the appropriate statutes. In any event, to the extent that trust
funds were used to finance the policies, prorating the cash surrender value of the policies in the
proportion that the trust funds and private funds were invested is the appropriate remedy. See
Fidelity & Deposit Co of Maryland, supra; Long, supra; Massachusetts Bonding & Ins Co,
supra.
If it is determined that the disputed policies were not financed by defendants with trust
funds in violation of the MBCFA, several issues must still be considered. The first issue is
whether Robert Pomeroy is a beneficiary under the trust. If he is, is his portion of the trust
subject to garnishment? A second issue is whether the purported exempt status of the policies is
impacted by the fact that Robert Pomeroy is the trustee of the trust to which the policy proceeds
will be paid. Does the trust instrument or, for example, MCL 700.7401(2) give Robert Pomeroy
such control over the trust that it becomes subject to garnishment? The record is insufficient for
us to make these or any other determinations.
Therefore, we remand the issue of whether the disputed life insurance policies are exempt
under MCL 500.2207(1) to the trial court for the appropriate proceedings. Defendants are to
provide an accounting of the trust funds at issue in the underlying case, limited to the time period
in which the damages of $437,506.30 claimed in plaintiff’s first amended complaint accrued, i.e.,
April of 2004 through December of 2004. To the extent that trust funds were used to finance the
policies, the court is to prorate the cash surrender value of the policies in the proportion that the
trust funds and private funds were invested. If necessary, the issues of whether Robert Pomeroy
is a beneficiary under the trust and whether the purported exempt status of the policies is
impacted by the fact that Robert Pomeroy is the trustee of the trust to which the policy proceeds
will be paid are to be decided.
Next, defendants argue that their Merrill Lynch IRA accounts were exempt from
garnishment under MCL 600.6023. Generally, whether IRA accounts are exempt from
garnishment presents a question of law. Questions of law are subject to review de novo. See
Cardinal Mooney High School, supra.
As with the life insurance policies, plaintiff has argued that the IRA accounts are not
exempt because (1) defendants waived their right to object to the garnishment when they failed
to file a timely objection, (2) the IRA accounts were purchased with trust funds defalcated by
defendants in violation of the MBCFA, and (3) in any case, only one IRA account is exempt
under MCL 600.6023(1)(k). The trial court denied defendants’ objection to the writ of
2
According to the affidavit and supporting documentation attached to the first amended
complaint, this time period is from April of 2004 through December of 2004.
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garnishment with respect to these IRA accounts on the erroneous grounds that the objections
were untimely and the IRA accounts may have been financed by defendants with trust funds in
violation of the MBCFA. Accordingly, the trial court did not otherwise decide the issue whether
these IRA accounts are exempt under MCL 600.6023(1)(k).
Generally, an IRA is exempt from execution to collect on a judgment. MCL
600.6023(1)(k). It is uncontested here that the Merrill Lynch accounts are IRAs under that
statute. The dispute is whether they were financed in whole or in part by defendants with trust
funds in violation of the MBCFA. If so, those transactions may be void and the IRA accounts, or
some portion of them, may be subject to garnishment. That issue was never decided by the trial
court.
Again, defendants have volunteered to give an accounting of the trust funds at issue in the
underlying case, limited to the time period in which the damages of $437,506.30 claimed in
plaintiff’s first amended complaint accrued. We believe that to be the appropriate course of
action in this case, considering the circumstances. Therefore, we remand the issue of whether
the disputed IRA accounts are exempt under MCL 600.6023(1)(k) to the trial court for the
appropriate proceedings. Defendants are to provide an accounting of the trust funds at issue in
the underlying case, limited to the time period in which the damages of $437,506.30 claimed in
plaintiff’s first amended complaint accrued, i.e., April of 2004 through December of 2004. To
the extent that trust funds were used to finance the IRA accounts, prorating the accounts in the
proportion that the trust funds and private funds were invested is the appropriate remedy. See
Fidelity & Deposit Co of Maryland, supra; Long, supra; Massachusetts Bonding & Ins Co,
supra.
Defendants have also argued that, if it is determined that trust funds were not used to
finance the IRA accounts in violation of the MBCFA, all of the IRA accounts held by each
defendant are exempt from garnishment under MCL 600.6023(1)(k). Plaintiff has claimed that
each defendant may only exempt one of their IRA accounts. Because the trial court did not
address this issue and the record is limited, we remand this issue for consideration by the trial
court if such a determination is necessary.
Reversed and remanded for proceedings consistent with this opinion. We do not retain
jurisdiction. Pursuant to MCR 7.219, defendants are entitled to costs.
/s/ Mark J. Cavanagh
/s/ Kirsten Frank Kelly
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