LIVONIA BUILDING MATERIALS CO V HARRISON CONSTRUCTION CO
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STATE OF MICHIGAN
COURT OF APPEALS
LIVONIA BUILDING MATERIALS
COMPANY,
Plaintiff-Appellant/Cross-Appellee,
v
UNPUBLISHED
July 26, 2007
APPROVED FOR
PUBLICATION
August 30, 2007
9:05 a.m.
HARRISON CONSTRUCTION COMPANY,
Defendant/Cross-Defendant,
No. 269045
Macomb Circuit Court
LC No. 2003-005049-CH
and
HENRY G. BELL,
Defendant-Appellee,
and
KEITH M. PENNER
Defendant-Appellee/CrossAppellant.
and
BANK ONE and MARTIN STEUDLE,
Defendants/Cross-Plaintiffs.
LIVONIA BUILDING MATERIALS COMPANY,
Plaintiff-Appellee,
No. 271021
Macomb Circuit Court
LC No. 2003-005049-CH
v
HARRISON CONSTRUCTION COMPANY,
Official Reported Version
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Defendant/Cross-Defendant,
and
HENRY G. BELL,
Defendant/Cross-Defendant/Appellant,
and
KEITH M. PENNER,
Defendant/Cross-Defendant,
and
BANK ONE and MARTIN STEUDLE,
Defendants/Cross-Plaintiffs.
Before: Davis, P.J., and Hoekstra and Donofrio, JJ.
PER CURIAM.
Plaintiff, Livonia Building Materials Company (LBM), appeals as of right the trial court's
order granting a motion for judgment notwithstanding the verdict (JNOV) in favor of defendants,
Henry G. Bell and Keith M. Penner, in this claim involving the Michigan builders' trust fund act
(MBTFA), MCL 570.151 et seq. Penner cross-appeals, and Bell separately appeals, the same
order. Because the trial court properly found that Bell and Penner did not personally guarantee
their companies' debts to LBM, we affirm the trial court's grant of directed verdict on that issue.
However, because the record indicates that Bell and Penner acted in direct contravention of the
MBTFA, we reverse the trial court's grant of JNOV on the MBTFA claim, and remand for
reinstatement of the judgment on the jury's verdict. Because of our resolution of the issues on
direct appeal, defendants' issues regarding case evaluation sanctions are moot, and we decline to
address them. We affirm in part, reverse in part, and remand.
I
LBM supplies building materials to contractors for use in the construction of commercial
and retail buildings. Bell was the president and chief operations officer and Penner was the
treasurer and chief financial officer of the Harrison group, which was a longtime customer of
LBM. The Harrison group included three entities: the Harrison Construction Company, the Bell
Company, and the Dietzel Acquisition Corporation. The Harrison group went out of business in
September 2003 when it terminated operations and surrendered its assets to Bank One, a secured
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creditor. When it ceased operations, the Harrison group had unpaid bills to many creditors,
including LBM.
LBM filed a complaint against Harrison Construction, Bell, and Penner in November
2003.1 The complaint alleged violations of the MBTFA, as well as claims against Bell and
Penner, asserting that they had individually guaranteed the Harrison group's obligations to LBM.
The matter proceeded to a jury trial in August 2005. At the close of LBM's proofs, defendants
brought a motion for directed verdict, arguing that LBM had failed to meet its burden of proof on
its MBTFA claim. The trial court took the motion under advisement and continued the trial. At
the close of defendants' proofs, the trial court dismissed the guaranty claims against Bell and
Penner but allowed the MBTFA claim to go to the jury. The jury returned a unanimous verdict
finding Bell liable to LBM under the MBTFA for $60,600 and Penner liable to LBM under the
MBTFA for $40,400. In accordance with the jury verdict, the trial court entered judgment in
favor of LBM. Thereafter, Bell and Penner filed a motion for JNOV in the trial court, asserting
that LBM had failed to present a prima facie case under the MBFTA because it did not
demonstrate that defendants had an intent to defraud. After hearing oral argument on the matter,
the trial court agreed with defendants and granted the motion. The appeals and cross-appeal
followed.
II
LBM argues that the trial court impermissibly granted JNOV where there was ample
evidence to support the jury's verdict that Bell and Penner had misappropriated funds held in
trust for LBM in contravention of the MBFTA. Bell and Penner counter that the trial court
properly granted their motion for JNOV because LBM did not present evidence at trial
establishing the elements of its MBFTA claim. This Court reviews a trial court's decision on a
motion for JNOV de novo. Sniecinski v Blue Cross & Blue Shield of Michigan, 469 Mich 124,
131; 666 NW2d 186 (2003). This Court must view the evidence and all legitimate inferences in
the light most favorable to the nonmoving party, id., to determine whether a question of fact
existed. Zantel Marketing Agency v Whitesell Corp, 265 Mich App 559, 568; 696 NW2d 735
(2005). Only if the evidence failed to establish a claim as a matter of law is JNOV appropriate.
Sniecinski, supra at 131.
The MBTFA imposes a trust on funds paid to contractors and subcontractors for products
and services provided under construction contracts. MCL 570.151 et seq. The statute provides
in its entirety:
Sec. 1. In the building construction industry, the building contract fund
paid by any person to a contractor, or by such person or contractor to a
1
LBM's complaint also included Bank One and another individual, Martin Steudle, as
defendants in this action. However, the parties dismissed Steudle and he is not a party to this
appeal. Bank One brought a successful motion for summary disposition in the trial court, and is
also not a party to this appeal.
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subcontractor, shall be considered by this act to be a trust fund, for the benefit of
the person making the payment, contractors, laborers, subcontractors or
materialmen, and the contractor or subcontractor shall be considered the trustee of
all funds so paid to him for building construction purposes.
Sec. 2. Any contractor or subcontractor engaged in the building
construction business, who, with intent to defraud, shall retain or use the proceeds
or any part therefor, of any payment made to him, for any other purpose than to
first pay laborers, subcontractors and materialmen, engaged by him to perform
labor or furnish material for the specific improvement, shall be guilty of a felony
in appropriating such funds to his own use while any amount for which he may be
liable or become liable under the terms of his contract for such labor or material
remains unpaid, and may be prosecuted upon the complaint of any persons so
defrauded, and, upon conviction, shall be punished by a fine of not less than 100
dollars or more than 5,000 dollars and/or not less than 6 months nor more than 3
years imprisonment in a state prison at the discretion of the court.
Sec. 3. The appropriation by a contractor, or any subcontractor, of any
moneys paid to him for building operations before the payment by him of all
moneys due or so to become due laborers, subcontractors, materialmen or others
entitled to payment, shall be evidence of intent to defraud. [MCL 570.151570.153.]
The MBTFA is a penal statute, but our Supreme Court recognizes a civil cause of action
for its violation. DiPonio Constr Co, Inc v Rosati Masonry Co, Inc, 246 Mich App 43, 48; 631
NW2d 59 (2001), citing BF Farnell Co v Monahan, 377 Mich 552, 555; 141 NW2d 58 (1966).
The MBTFA applies to funds paid to contractors and subcontractors for products and services
provided to them under their construction contracts. DiPonio, supra at 47. Officers of a
corporation may be held individually liable when they personally cause their corporation to act
unlawfully. People v Brown, 239 Mich App 735, 739-740; 610 NW2d 234 (2000). "'[A]
corporate employee or official is personally liable for all tortious or criminal acts in which he
participates, regardless of whether he was acting on his own behalf or on behalf of the
corporation.'" Id., quoting Attorney General v Ankersen, 148 Mich App 524, 557; 385 NW2d
658 (1986). If a defendant personally misappropriates funds after they are received by the
corporation, he or she can be held personally responsible under the MBTFA. Brown, supra at
743-744.
To establish a claim under the MBTFA, a plaintiff must show: (1) that the defendant is a
contractor or subcontractor engaged in the building construction industry, (2) that the defendant
was paid for labor or materials provided on a construction project, (3) that the defendant retained
or used those funds, or any part of those funds, (4) that the funds were retained for any purpose
other than to first pay laborers, subcontractors, and materialmen, and (5) that the laborers,
subcontractors and materialmen were engaged by the defendant to perform labor or furnish
material for the specific construction project. HA Smith Lumber & Hardware Co v Decina, 258
Mich App 419, 426; 670 NW2d 729 (2003), vacated in part on other grds 471 Mich 925 (2004).
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Bell and Penner specifically argue that LBM provided no evidence that they diverted any
funds received on construction projects for which LBM supplied materials to pay for projects on
which it did not supply materials. LBM asserts that it presented evidence that defendants
received funds for jobs on which LBM was the supplier, but that defendants did not in turn pay
LBM for those jobs. When these parties advanced the same arguments before the trial court
during the JNOV arguments, the trial court granted JNOV in favor of Bell and Penner, ruling
that "maybe the accounting practices weren't the best, but . . . it appears that the economy was
the fault of [LBM] not being paid versus anybody's intent to defraud them." The trial court
relied on James Lumber Co, Inc v J & S Constr Inc, 107 Mich App 793; 309 NW2d 925 (1981),
which held that the plaintiff, and not the debtor, has the burden of proof in MBTFA actions.
But James Lumber Co is not binding on this Court. MCR 7.215(J)(1). Moreover, the
plain language of the statute indicates that intent to defraud is evidenced simply by "[t]he
appropriation by a contractor . . . of any moneys paid to him for building operations before the
payment by him of all moneys due or so to become due laborers, subcontractors, materialmen or
others entitled to payment." MCL 570.153. And this Court has further explained that "a
reasonable inference of appropriation arises from the payment of construction funds to a
contractor and the subsequent failure of the contractor to pay laborers, subcontractors,
materialmen, or others entitled to payment." People v Whipple, 202 Mich App 428, 435; 509
NW2d 837 (1993). In Whipple, this Court held that the prosecutor in a criminal matter need not
"prove 'what the defendant did with the money' if a reasonable inference of appropriation is
present." Id. at 436. The same inference is appropriate in a civil action such as this one. HA
Smith Lumber, supra at 426-427.
In the instant case, it is undisputed that the Harrison group had received payment on
projects for which LBM supplied materials, yet the Harrison group did not pay LBM in full for
the materials it provided on the various projects. Pursuant to MCL 570.153, Whipple and HA
Smith Lumber, because the Harrison group received payment for various construction projects
and subsequently did not pay LBM, a reasonable inference of appropriation arises. Bell and
Penner assert that they rebutted this inference when they presented evidence that jobs for which
LBM provided materials were "upside-down," meaning that there was not enough money to pay
all the parties who worked on that particular job. Bell and Penner argue that this evidence shows
that they did not divert funds in contravention of the MBTFA because the funds were not there
as a result of the poor economy at the time or bad business judgment.
But the general assertion that there was not enough money "to go around" is not
sufficient to rebut the presumption of misappropriation. Clearly the record shows that monies
were coming in on jobs for which LBM provided materials. Penner testified that all funds
received on any projects by the three separate entities—the Harrison Construction Company, the
Bell Company, and the Dietzel Acquisition Corporation—were placed in the same "controlled
disbursement account." Penner admitted at trial that checks paying the entities' bills were then
issued from this single account and disbursed on outstanding bills when monies became
available, without regard for the requirements of the MBTFA. Additionally, defendants admit
that monies were paid out of the same account to parties other than the protected contractors,
laborers, subcontractors, or materialmen. The difficulties posed by a downturn in the economy
or poor business acumen do not excuse noncompliance with the MBTFA's obligations in regard
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to accounting practices and ordering of payment. Although Penner and Bell may not have acted
with bad faith and indeed were simply trying to keep their ongoing concern afloat by paying the
most urgent outstanding balances, the MBTFA's requirements must still be followed, and
defendants were certainly required to pay LBM on its projects when monies came in on those
particular projects. But the appropriation of any monies paid to a contractor for building
operations before payment of the protected parties—here, the materialman—is evidence of intent
to defraud. MCL 570.153. Accordingly, evidence was presented from which the jury could
reasonably have concluded that Bell and Penner violated the MBTFA, and the trial court erred
when it granted JNOV in their favor.
III
LBM also asserts that the trial court erred when it granted a directed verdict in favor of
defendants Bell and Penner on its guaranty claim because there was evidence to support the
claim that defendants had signed valid guarantees. Bell and Penner respond that neither of them
personally guaranteed Harrison Construction's debts to LBM and the trial court properly granted
a directed verdict in their favor. We review a trial court's decision on a motion for a directed
verdict de novo. Sniecinski, supra at 131. This Court reviews all the evidence presented up to
the time of the motion in the light most favorable to the nonmoving party to determine whether a
question of fact existed. Zantel, supra at 568.
A
In regard to Bell, LBM points to a document dated January 6, 1988, entitled "Livonia
Building Materials Co. . . . New Customer Credit Form and Individual Guarantee" as the basis of
its claim. LBM asserts that Bell's signature on the document is an individual guaranty of
Harrison Construction's debts to LBM and imposes personal liability for those debts on Bell.
Bell responds that his signature on the document was a corporate signature. He testified that
when he signed it he did not intend to be personally bound, and that there was no evidence that
he intended to be personally bound. The trial court agreed with Bell, stating that it believed
Bell's testimony regarding "when he signed it, how he signed it and why he signed it," and
concluded that the document was not a personal guaranty. The trial court referenced an
unpublished opinion of this Court, Geresy v Dommert, unpublished opinion per curiam of the
Court of Appeals, issued June 3, 2004 (Docket No. 243468), that held that individual defendants
could not be held liable because when they had signed an operating agreement only once, rather
than twice, it indicated that they had signed only as officers or members of a corporation, and not
as individuals. Although we are not bound by Geresy, we find its rationale persuasive.
Geresy reasons that:
As a general rule, "an individual stockholder or officer is not liable for his
corporation's engagements unless he signs individually, and where individual
responsibility is demanded the nearly universal practice is that the officer signs
twice—once as an officer and again as an individual." Salzman Sign Co v Beck,
176 N E 2d 74, 76 (NY 1961); see also 18B Am Jur 2d, Corporations, § 1838, p
690. In this case, each of the signatories signed the operating agreement only
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once, and the document makes clear that they did so in their capacities as
members . . . , [and] not as individuals. [Geresy, supra at slip op p 6.]
Here, the document at issue is signed only once by Bell, and typed under the signature is
the title "President." Further, there is another paragraph on the document that states:
In consideration of the extension of credit, I ___________, the
undersigned, as officer of the above named business, or as duly authorized agent
of that business, guarantee the payment to LIVONIA BUILDING MATERIALS
CO., of all indebtedness of the above named business, whether heretofore or
hereinafter incurred in accordance with the terms and conditions of sale and
payment . . . .
The blank spot was not filled in by Bell. It was left completely blank. Our review of the record
reveals that Bell signed the document at issue only once, and the document is clear that he did so
as president of Harrison Construction Company on behalf of Harrison Construction Company
and not as an individual. Accordingly, we conclude that Bell's signature on the document was a
corporate signature and that he did not personally guarantee Harrison Construction's debts to
LBM. Therefore, the trial court properly granted directed verdict in Bell's favor.
B
In regard to Penner, LBM relies on a document dated March 7, 2002, entitled "Oakland
Building Materials[2] Application for Credit" as the basis of its claim. LBM asserts that Penner's
signature on a document that contained guaranty language–whether affixed by himself or his
employee–acts as an individual guaranty of Harrison Construction's debts to LBM and imposes
personal liability on Penner for those debts. It is LBM's position that the trial court erred when it
did not allow the jury to consider whether Penner instructed another LBM employee to sign his
name on the credit application. LBM specifically argues that the trial court erred because the
evidence presented at trial could support a reasonable inference that Penner intended to be
personally bound for the debts of Harrison Construction in consideration for LBM's extension of
favorable credit terms to Harrison. Penner counters that the directed verdict was proper because
there was no direct evidence presented to support a conclusion that Penner authorized the
execution of a personal guaranty on his behalf, and further that no reasonable person could infer
from the facts presented that Penner had authorized an unidentified third person to execute a
personal guaranty obligating him to the payment of his employer's debts.
The trial court agreed with Penner's position and stated as follows:
I've listened to the testimony and I don't think there's a factual dispute. . . .
The proof is not there. I'm looking at it and reviewing Mr. Penner's testimony, I
don't see how in the world anybody could make the rational jump that on March
2
Oakland Building Materials is an entity owned by LBM.
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7th of '02, after all these years of business that the plaintiff would ask Mr. Penner
for an individual guaranty. I'm not a handwriting expert but I think anybody in
this room can tell that that is not his signature and how anybody could even buy
or suggest that someone would give somebody the authority to sign his signature
on a personal guaranty for thousands, upon thousands, upon thousands of dollars
is not rational, nor factual, nor logical and the claim[] [is] hereby dismissed.
Our review of the record reveals that Penner did admit at trial that he would instruct
employees to sign his name to certain documents; however, he denied directing anyone to sign
his name to a personal guaranty. Penner, in fact, testified that he was not even aware of the
existence of the document on which LBM relies until the litigation of this case began. Penner
also testified that he would not have signed a personal guaranty in 2002 because the company
was already experiencing cash-flow issues. LBM presented testimony from a credit manager,
Michael Minko, who stated that in 2002 he faxed a credit application to Penner and another
Harrison employee because the Harrison group's accounts were becoming delinquent. Minko
testified that he sent out a blank form and it came back to him completed. But neither party
presented evidence regarding the identity of the person who purportedly signed Penner's name
on the document and remitted it to LBM.
Michigan's statute of frauds provides that "an agreement, contract, or promise is void
unless that agreement, contract, or promise, or a note or memorandum of the agreement,
contract, or promise is in writing and signed with an authorized signature by the party to be
charged with the agreement, contract, or promise" in cases involving "[a] special promise to
answer for the debt, default, or misdoings of another person." MCL 566.132(1)(b). Here,
Penner testified that the signature on the credit application was not his, and LBM concedes on
appeal that the signature on the credit application is not Penner's signature. The identity of the
person who signed Penner's name on the document is unknown. Therefore, pursuant to the
requirements of the Michigan statute of frauds, the document is void. MCL 566.132(1)(b).
After reviewing the evidence in the light most favorable to the nonmoving party, Zantel, supra at
568, we conclude that the evidence presented was insufficient to raise a jury question regarding
this issue, and therefore the trial court correctly granted a directed verdict in favor of Penner.
IV
Because our resolution of the foregoing renders defendants' issues regarding case
evaluation sanctions moot, we decline to address the merits of defendants' issues on cross-appeal
and in the separate claim. Commercial Union Ins Co v Liberty Mut Ins Co, 426 Mich 127, 139;
393 NW2d 161 (1986).
Affirmed in part, reversed in part, and remanded for reinstatement of the judgment on the
jury's verdict. We do not retain jurisdiction.
/s/ Alton T. Davis
/s/ Joel P. Hoekstra
/s/ Pat M. Donofrio
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