RDM HOLDINGS LTD V CONTINENTAL PLASTICS CO
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STATE OF MICHIGAN
COURT OF APPEALS
RDM HOLDINGS, LTD., and CHESTNUT
PROPERTIES, L.L.C.,
FOR PUBLICATION
December 16, 2008
9:00 a.m.
Plaintiffs-Appellants-CrossAppellees,
v
No. 278912
Macomb Circuit Court
LC No. 2006-000343-CK
CONTINENTAL PLASTICS CO. and
CONTINENTAL COATINGS, L.L.C.,
Defendants-Appellees-CrossAppellants.
Advance Sheets Version
Before: Murphy, P.J., and Sawyer and Whitbeck, JJ.
MURPHY, P.J.
Plaintiffs appeal as of right the trial court’s order granting summary disposition in favor
of defendants pursuant to MCR 2.116(C)(7) on the basis of res judicata grounded on earlier
bankruptcy proceedings conducted under title 11 of the United States Code, the Bankruptcy
Code, and more specifically chapter 7, 11 USC 701 et seq. (liquidation). Defendants crossappeal, arguing alternative grounds, which were raised but not decided below, in support of the
trial court’s ruling to summarily dismiss plaintiffs’ action.1 We affirm in part, reverse in part,
and remand for further proceedings consistent with this opinion.
I. Overview
In an earlier lawsuit filed by plaintiff RDM Holdings, Ltd. (RDM), against Continental
Lighting, L.L.C. (Con-Lighting), formerly known as Continental-Chivas, L.L.C. (Con-Chivas),
neither of which is a party here, RDM obtained an order granting partial summary disposition in
1
It was unnecessary for defendants to file a cross-appeal to present alternative arguments in
support of the trial court’s ruling. See In re Herbach Estate, 230 Mich App 276, 284; 583 NW2d
541 (1998) (“Although a cross appeal is necessary to obtain a decision more favorable than that
rendered by the lower tribunal, a cross appeal is not necessary to urge an alternative ground for
affirmance, even if the alternative ground was considered and rejected by the lower court.”).
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its favor, but Con-Lighting then filed for chapter 7 bankruptcy protection, staying further
proceedings. That lawsuit, which we shall refer to as the RDM I litigation, concerned
commercial property located on Merrill Road in Sterling Heights that was leased to ConLighting and used to manufacture automobile parts for General Motors Corporation (GM) and
DaimlerChrysler Corporation. RDM alleged breach of the lease with respect to Con-Lighting’s
obligations to pay holdover rent, insurance, and damages for building repairs and cleanup.2
Following the bankruptcy stay that halted the RDM I litigation, RDM and Chestnut
Properties, L.L.C. (Chestnut), filed the instant suit against defendants Continental Plastics Co.
(Con-Plastics) and Continental Coatings, L.L.C. (Con-Coatings), alleging successor liability,
violation of the Uniform Fraudulent Transfer Act (UFTA), MCL 566.31 et seq., and a claim
seeking to pierce the corporate veil. We shall refer to the present lawsuit as the RDM II
litigation. In RDM II, the theories of recovery reflected efforts to hold defendants liable for ConLighting’s alleged breaches of the Merrill Road lease, which were also the subject matter of the
RDM I lawsuit. Plaintiffs further alleged in RDM II that Con-Lighting breached leases, under
which Chestnut was the landlord, with respect to two additional business properties rented to
Con-Lighting.
The trial court granted summary disposition in favor of defendants under MCR
2.116(C)(7) on the basis of res judicata, ruling that the allegations raised in the RDM II
complaint could have been addressed in the bankruptcy proceedings had plaintiffs pursued the
matter. Plaintiffs appeal that determination, arguing that the elements of res judicata had not
been satisfied, and they appeal the trial court’s denial of their motion for partial summary
disposition on the UFTA claim. Defendants argue that the trial court properly applied the
doctrine of res judicata arising out of the bankruptcy proceedings and that plaintiffs were not
entitled to summary disposition on the UFTA claim. Moreover, defendants cross-appeal,
contending that, even if the trial court erred in applying res judicata in the context of the court’s
reliance on the earlier bankruptcy proceedings, res judicata grounded on the RDM I lawsuit
would apply. Further, defendants maintain that they were entitled to summary disposition under
MCR 2.116(C)(10) with regard to the successor liability, UFTA, and corporate veil claims.
II. Review of the Chapter 7 Bankruptcy Proceedings
On August 19, 2005, 11 days after the order granting partial summary disposition was
entered in RDM I, Con-Lighting filed a voluntary petition for bankruptcy under chapter 7 in the
United States Bankruptcy Court for the Eastern District of Michigan, Southern Division. The
petition referred to past names used by Con-Lighting, i.e., Chivas Products, Ltd., and ConChivas, it was signed by Kenneth Lamb as president of Con-Lighting,3 and the petition estimated
that there existed between 50 to 99 creditors. A summary of bankruptcy schedules, and the
2
The order granting partial summary disposition in RDM I provided that Con-Lighting was “a
holdover tenant and obligated under the lease agreement for a term of an additional year.”
3
We note that at the time of the bankruptcy filing, Lamb was a manager for Con-Coatings and
had been in that position since October 18, 2004.
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schedules themselves, indicated that Con-Lighting had zero assets, while its liabilities amounted
to approximately $2.4 million. A statement of financial affairs provided that Con-Lighting had
annual gross income from sales in the amounts of $15.7 million in 2002, $12.7 million in 2003,
and $9.5 million in 2004. Additionally, the statement of financial affairs indicated that $940,233
in property and assets had been surrendered to Comerica Bank.4 In an October 19, 2005, § 341
hearing,5 with bankruptcy trustee Mark Shapiro presiding, Lamb testified that there was a
mistake in the petition and that the Con-Lighting property and assets had actually been
surrendered to Con-Plastics. Lamb was unaware of any appraisals being done in regard to the
Con-Lighting property before its surrender.
The bankruptcy petition stated that Gregory Eaton held a 51 percent interest in ConLighting and that the remaining 49 percent interest was held entirely by Con-Plastics. The
petition provided that Con-Plastics currently had possession of Con-Lighting’s books of account
and records, along with records of a Con-Lighting inventory. Bankruptcy schedule F (creditors
holding unsecured nonpriority claims) listed, among many other creditors, plaintiff Chestnut,
with a claim amount of $1,600, and RDM, with the claim amount expressed as “unknown.” Also
listed as creditors holding unsecured nonpriority claims were Con-Coatings, owed $1.5 million,
and Con-Plastics, owed $303,286.
Bankruptcy trustee Shapiro testified in his deposition that his job in conducting a chapter
7 bankruptcy was to ascertain whether any assets were available for distribution and to liquidate
available assets for the benefit of the creditors. He stated that the Con-Lighting bankruptcy was
a zero asset estate, which ultimately led to the filing of a “no distribution report” and the closing
of the bankruptcy estate. Shapiro testified that claims of successor liability, piercing the
corporate veil, alter ego, and fraudulent conveyances were all claims that could be brought or
raised by a trustee in the context of a bankruptcy proceeding, usually taking the form of an
adversarial proceeding. He asserted that he had done so in the past in other cases. According to
Shapiro, he could have pursued those claims against Con-Plastics and Con-Coatings in the
bankruptcy court on his own initiative or if requested and justified; plaintiffs, however, never
4
In actuality, Con-Lighting property and assets had been surrendered to Con-Plastics pursuant to
an agreement executed on February 15, 2005, and that surrender agreement indicated that the
value of the property and assets was $1.3 million. Before February 15, 2005, Con-Lighting had
been obligated to repay certain Comerica Bank loans, which had been issued over the years and
secured by Con-Lighting property, and there was a total outstanding balance of approximately
$4.6 million. By agreement also dated February 15, 2005, Comerica assigned to Con-Plastics all
of the bank’s rights under the promissory notes and security instruments that had been executed
by Con-Lighting. In exchange, Con-Plastics executed a note in favor of Comerica in the amount
of $4.6 million, representing the debt that had been owed by Con-Lighting to the bank. ConPlastics thereby became itself indebted to Comerica, taking Con-Lighting out of the picture.
There was documentary evidence indicating that Con-Lighting property had made its way to
Con-Coatings months before the surrender agreement was executed, that some of Con-Lighting’s
employees began working for Con-Coatings in October 2004, and that Con-Lighting’s operations
ceased in October 2004, with operations and production shifting to Con-Coatings.
5
This is a reference to 11 USC 341, which concerns the meeting of creditors.
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made such a request.
Had those claims been successfully pursued in the bankruptcy
proceedings, Shapiro could have taken monies recovered from Con-Plastics and Con-Coatings
and distributed the funds to creditors, including plaintiffs. He indicated that he has a fiduciary
duty to all creditors to look into the validity of such claims. All creditors would have received
notice of the bankruptcy. Shapiro was not aware of any laws that obligated or mandated a
creditor in bankruptcy proceedings to come forward with claims such as those alleged in RDM
II.
We recognize that, while providing some helpful insight, Shapiro’s testimony concerning
the authority of a trustee and the bankruptcy court relative to successor liability, corporate veil,
and fraudulent conveyance claims and issues does not control. Such matters are governed by the
Bankruptcy Code and relevant caselaw construing the code.
III. Standard of Review
This Court reviews de novo a trial court’s decision on a motion for summary disposition.
Kreiner v Fischer, 471 Mich 109, 129; 683 NW2d 611 (2004). The issue whether the doctrine of
res judicata bars a subsequent lawsuit constitutes a question of law that this Court likewise
reviews de novo on appeal. Stoudemire v Stoudemire, 248 Mich App 325, 332; 639 NW2d 274
(2001).
IV. Summary Disposition Tests
We shall first address the issue of res judicata and whether application of the doctrine
could be grounded on the bankruptcy proceedings under the circumstances presented. Under
MCR 2.116(C)(7) (claim barred by prior judgment, i.e., res judicata), this Court must consider
not only the pleadings, but also any affidavits, depositions, admissions, or other documentary
evidence filed or submitted by the parties. Horace v City of Pontiac, 456 Mich 744, 749; 575
NW2d 762 (1998). The contents of the complaint must be accepted as true unless contradicted
by the documentary evidence. Patterson v Kleiman, 447 Mich 429, 432; 526 NW2d 879 (1994).
This Court must consider the documentary evidence in a light most favorable to the nonmoving
party. Herman v Detroit, 261 Mich App 141, 143-144; 680 NW2d 71 (2004). If there is no
factual dispute, whether a plaintiff’s claim is barred under a principle set forth in MCR
2.116(C)(7) is a question of law for the court to decide. Huron Tool & Engineering Co v
Precision Consulting Services, Inc, 209 Mich App 365, 377; 532 NW2d 541 (1995). If a factual
dispute exists, however, summary disposition is not appropriate. Id.
Because we conclude that the trial court erred in part in applying res judicata, we shall
also consider defendants’ arguments under MCR 2.116(C)(10). MCR 2.116(C)(10) provides for
summary disposition where there is no genuine issue regarding any material fact and the moving
party is entitled to judgment or partial judgment as a matter of law. A trial court may grant a
motion for summary disposition under MCR 2.116(C)(10) if the pleadings, affidavits, and other
documentary evidence, when viewed in a light most favorable to the nonmovant, show that there
is no genuine issue with respect to any material fact. Quinto v Cross & Peters Co, 451 Mich
358, 362; 547 NW2d 314 (1996), citing MCR 2.116(G)(5). “A genuine issue of material fact
exists when the record, giving the benefit of reasonable doubt to the opposing party, leaves open
an issue upon which reasonable minds might differ.” West v Gen Motors Corp, 469 Mich 177,
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183; 665 NW2d 468 (2003). A court may only consider substantively admissible evidence
actually proffered relative to a motion for summary disposition under MCR 2.116(C)(10).
Maiden v Rozwood, 461 Mich 109, 121; 597 NW2d 817 (1999).
V. Analysis—Res Judicata and Bankruptcy Proceedings
A. Governing Principles
Our starting point is to determine the applicable res judicata test. Chronologically, we are
confronted with a situation in which a federal proceeding was initiated before the complaint in
RDM II was filed and the bankruptcy case was closed before the hearing on the motion for
summary disposition. In Beyer v Verizon North, Inc, 270 Mich App 424, 428-429; 715 NW2d
328 (2006), this Court stated:
This Court must apply federal law in determining whether the doctrine of
res judicata requires dismissal of this case because the consent judgment in the
prior suit was entered by a federal court. Pierson Sand & Gravel, Inc v Keeler
Brass Co, 460 Mich 372, 380-381; 596 NW2d 153 (1999). Under federal law, res
judicata precludes a subsequent lawsuit if the following elements are present: (1)
a final decision on the merits by a court of competent jurisdiction; (2) a
subsequent action between the same parties or their “privies”; (3) an issue in the
subsequent action which was litigated or which should have been litigated in the
prior action; and (4) an identity of the causes of action. Becherer v Merrill Lynch,
Pierce, Fenner & Smith, Inc, 193 F3d 415, 422 (CA 6, 1999), quoting Bittinger v
Tecumseh Products Co, 123 F3d 877, 880 (CA 6, 1997) (emphasis omitted in
Becherer). [Some internal quotation marks omitted.][6]
In Pierson Sand, supra at 380-381, our Supreme Court, quoting 18 Moore, Federal
Practice, § 131.21(3)(d), p 131-50, stated:
“If a plaintiff has litigated a claim in federal court, the federal judgment
precludes relitigation of the same claim in state court based on issues that were or
could have been raised in the federal action, including any theories of liability
based on state law. The state courts must apply federal claim-preclusion law in
determining the preclusive effect of a prior federal judgment.”
6
We note that the United States Supreme Court has stated that, pursuant to the doctrine of res
judicata, a final judgment on the merits precludes the parties or their privies from relitigating
matters that were or could have been raised in the first action. San Remo Hotel, LP v City & Co
of San Francisco, California, 545 US 323, 336 n 16; 125 S Ct 2491; 162 L Ed 2d 315 (2005).
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Accordingly, federal law guides our res judicata analysis, and we will look to any
relevant opinions issued by the United States Court of Appeals for the Sixth Circuit, absent
pertinent United States Supreme Court precedent, on matters concerning creditors’ rights and the
extent of the authority exercisable by the bankruptcy court and the trustee in the context of this
case. See In re Livingston, 379 BR 711, 725 (WD Mich, 2007) (“It is . . . understood that district
courts and bankruptcy courts within this circuit are bound by published Sixth Circuit
decisions.”);7 In re Dow Corning Corp, 244 BR 634, 651 (ED Mich, 1999) (subsequent history
omitted) (Michigan bankruptcy court is bound by Sixth Circuit ruling on an issue). Opinions
issued by the United States District Court for the Eastern District of Michigan, as well as those
issued by the United States Bankruptcy Court for the Eastern District of Michigan, would also be
relevant on issues concerning exercisable authority and creditors’ rights. And of course, the
Bankruptcy Code is the bedrock of any review.
While Michigan bankruptcy courts are bound by reported Sixth Circuit rulings construing
the Bankruptcy Code, thereby making it appropriate for us to examine the rights, duties, and
authority of those involved in bankruptcy proceedings under Sixth Circuit precedent, this
consideration naturally extends only to the res judicata question whether the issues in RDM II
could or should have been litigated in the bankruptcy court. For example, if the United States
Court of Appeals for the Fifth Circuit differed from the Sixth Circuit on an issue regarding
whether the Bankruptcy Code granted a chapter 7 trustee authority to initiate an adversarial
proceeding on an alter ego theory, it would make little sense for us to follow Fifth Circuit
precedent in determining whether trustee Shapiro could or should have pursued an alter ego
theory in a bankruptcy court located within the Sixth Circuit’s jurisdiction. But, and again
appreciating that we must apply federal law, this does not mean that we are required to apply
federal law as interpreted by the Sixth Circuit on other res judicata issues, such as whether the
bankruptcy court issued a final decision on the merits, whether the same parties or privies are
involved, whether there is an identity of the causes of action, or whether other res judicata
principles are implicated. These issues are, for the most part, inextricably linked to interpretation
of the United States Bankruptcy Code. Under Abela v Gen Motors Corp, 469 Mich 603, 606;
677 NW2d 325 (2004), our Supreme Court ruled that state courts are bound by decisions issued
by the United States Supreme Court that construe federal law. But “there is no similar obligation
with respect to decisions of the lower federal courts.” Id. If there are conflicting decisions
rendered by lower federal courts, we are free to choose the view that seems most appropriate to
us. Id. And even if no such conflict exists, we are not bound “to follow the decisions of even a
single lower federal court.” Id. at 607. Lower federal court rulings may be persuasive, but they
are not binding on a state court. Id.8 Furthermore, in Pierson Sand, the federal court action,
which predated the state court action, originated in the United States District Court for the
7
The bankruptcy judge in Livingston, supra at 726, further stated that “the policies of both the
Supreme Court and the Sixth Circuit require that I accept their interpretations of the Bankruptcy
Code regardless of whether my own interpretation may be different.”
8
Abela concerned the proper interpretation of the Magnuson-Moss Warranty—Federal Trade
Commission Improvement Act, 15 USC 2301 et seq. Abela, supra at 605-606.
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Western District of Michigan, eventually winding up before the Sixth Circuit for decision.
Pierson Sand, supra at 375-377. The Pierson Sand Court, in conducting its res judicata analysis,
relied not only on Sixth Circuit precedent, but also cited Second, Third, Fifth, and Ninth circuit
opinions. Id. at 384, 386.
We also make the observation that both the Michigan Supreme Court and the United
States Supreme Court have held that application of the doctrine of res judicata can be grounded
on earlier bankruptcy proceedings. In Gursten v Kenney, 375 Mich 330, 335; 134 NW2d 764
(1965), our Supreme Court stated that res judicata applies to every issue that belonged within the
subject matter of the bankruptcy action, including those that the parties, exercising reasonable
diligence, could have brought forward at the time. The Court concluded:
While plaintiff may have had an election of remedies for the alleged
tortious conduct of the defendants, he elected to pursue the matter before the
referee in bankruptcy. Having made that choice, he was under obligation to
pursue it or abide by an adverse result because of his failure to do so. [Id.]
In DePolo v Greig, 338 Mich 703; 62 NW2d 441 (1954), our Supreme Court applied res
judicata to bar a circuit court action in which the plaintiffs already sued the president of a
corporation for selling them unvalidated stock, where the plaintiffs had the full opportunity to
present the same issues in the corporation’s bankruptcy proceedings. The Court stated,
“Defendant as president and principal stockholder of the corporation was a stranger to the
bankruptcy proceedings in only the strictest sense of the term[, and] [p]laintiffs had full
opportunity to present the same issues now presented against the defendant.” Id. at 711-712.
In Katchen v Landy, 382 US 323, 334; 86 S Ct 467; 15 L Ed 2d 391 (1966), the United
States Supreme Court expressed:
[O]nce a bankruptcy court has dealt with the preference issue nothing
remains for adjudication in a plenary suit. The normal rules of res judicata and
collateral estoppel apply to the decisions of bankruptcy courts. More specifically,
a creditor who offers a proof of claim and demands its allowance is bound by
what is judicially determined, and if his claim is rejected, its validity may not be
relitigated in another proceeding on the claim. [Citations omitted.]
Accordingly, as a general principle, res judicata can be invoked in a lawsuit on the basis
of an earlier bankruptcy proceeding. And with respect to chapter 7 in particular, the United
States Court of Appeals for the Second Circuit in EDP Medical Computer Systems, Inc v United
States, 480 F3d 621, 624-625 (CA 2, 2007), observed:
Res judicata “is a rule of fundamental repose important for both the
litigants and for society.” It “relieve[s] parties of the cost and vexation of
multiple lawsuits, conserve[s] judicial resources, and, by preventing inconsistent
decisions, encourage[s] reliance on adjudication.” These virtues have no less
value in the bankruptcy context; this is particularly true in a Chapter 7 liquidation
where it is desirable that matters be resolved as expeditiously and economically as
possible. . . . “[I]t is more imperative than ever that the doctrine of res judicata be
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applied with unceasing vigilance” to Chapter 7 proceedings[.] [Citations omitted;
first three alterations in original.]
B. Element 1: Final Decision on the Merits by a Court of Competent Jurisdiction
We now examine the first element of federal res judicata, which requires a final decision
on the merits by a court of competent jurisdiction. Plaintiffs argue that the bankruptcy court did
not render a judgment on the merits for purposes of res judicata. We disagree. In a chapter 7
bankruptcy, the trustee marshals the assets of the debtor, liquidates the estate, and distributes the
proceeds, if any, to the creditors. 11 USC 721 et seq. (subchapter II of chapter 7 - collection,
liquidation, and distribution of the estate); In re Conference of African Union First Colored
Methodist Protestant Church, 184 BR 207, 218 (D Del, 1995). The Federal Rules of Bankruptcy
Procedure (FRBP) address the closing of a chapter 7 liquidation case, providing:
If in a chapter 7 . . . case the trustee has filed a final report and final
account and has certified that the estate has been fully administered, and if within
30 days no objection has been filed by the United States trustee or a party in
interest, there shall be a presumption that the estate has been fully administered.
[FRBP 5009.]
Here, there is no dispute that trustee Shapiro filed the necessary documents, that he
certified that the estate was fully administered, and that there were no objections. “After an
estate is fully administered and the court has discharged the trustee, the court shall close the
case.” 11 USC 350(a). The Con-Lighting chapter 7 case was closed by order of the bankruptcy
court.
With respect to determining the finality of a bankruptcy order, each matter that arises
between the filing of a bankruptcy petition and the issuance of a closing order is treated as a
separate proceeding, and a final order can be any order that concludes a discrete judicial unit in
the larger case. In re Moody, 817 F2d 365, 367-368 (CA 5, 1987). A bankruptcy order that
entirely resolves all the issues pertaining to a claim will satisfy the res judicata requirement of a
final judgment. In re Iannochino, 242 F3d 36, 43-44 (CA 1, 2001). For purposes of res judicata
grounded on bankruptcy proceedings, “[c]losing orders are, of course, final judgments on the
merits.” In re Coastal Plains, Inc, 338 BR 703, 713 n 5 (ND Tex, 2006). Here, the case was
closed after the trustee earlier issued a “no distribution report” on determination that the
bankruptcy estate had zero assets. There were no further matters to resolve.9 Thus, we conclude
9
Any suggestion by plaintiffs that there was no final decision on the merits because the
bankruptcy court never determined whether there were fraudulent conveyances or other wrongful
acts lacks logic. The bankruptcy court never entertained these issues because they were never
brought to its attention, and such a suggestion would effectively eliminate res judicata being
applied in the context of an argument that a claim could have been presented but was not.
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that there was a final decision on the merits by a court of competent jurisdiction, thereby
satisfying the first element of res judicata.10
We acknowledge that when a chapter 7 proceeding concludes with regard to a corporate
entity, there is no discharge of debts. 11 USC 727(a)(1) (“The court shall grant the debtor a
discharge, unless . . . the debtor is not an individual[.]”); In re Strada Design Assoc, Inc, 326 BR
229, 240 (SD NY, 2005) (debtor corporations not entitled to discharge or a fresh start).
However, this does not negate the fact that the bankruptcy court closed the case, nor does it run
contrary to our conclusion that there was a final decision on the merits. Con-Lighting’s debts
were not and could not be discharged and there remained potential liability on the debts by ConPlastics and Con-Coatings, but any claims against these defendants were still subject to
principles of res judicata.
C. Element 2: A Subsequent Action Between the Same Parties or Their Privies
Next, we examine whether the RDM II lawsuit was between the same parties or their
privies as those involved in the bankruptcy proceedings. Plaintiffs contend that the parties in
RDM II were not parties to Con-Lighting’s bankruptcy case. We disagree.
There is no dispute that RDM and Chestnut, as well as Con-Plastics and Con-Coatings,
were all listed as creditors in the bankruptcy proceedings. Creditors in bankruptcy proceedings
10
Plaintiffs place great reliance on Hatchett v United States, 330 F3d 875 (CA 6, 2003), for the
proposition that there was no final decision on the merits. Hatchett concerned an action by the
plaintiffs, husband and wife, against the government for a wrongful levy on entireties property,
where it was only the plaintiff husband who owed more than $8 million in taxes. The central
theme of the government’s defense and argument was that levies may attach to entireties
property. A secondary argument was that the husband fraudulently conveyed the property to
himself and his wife while insolvent; the argument was referred to as the fraudulent conveyance
defense. The conveyance issue was the subject of previous and finalized bankruptcy proceedings.
The lower court refused to allow presentation of the fraudulent conveyance defense because, in
part, the bankruptcy trustee alone had standing to pursue a claim for a fraudulent conveyance and
res judicata barred further litigation on the matter after the trustee abandoned the fraudulent
conveyance claim and officially settled the bankruptcy. Id. at 878-879, 885. The Hatchett court
reversed, holding that the trustee abandoned the fraudulent conveyance claim, that the
government was entitled to pursue the claim or defense after the bankruptcy proceedings
concluded, and that res judicata was not applicable because there was no final judgment on the
merits regarding a fraudulent conveyance, given that the trustee abandoned the claim. Id. at
886. We decline to give any weight to Hatchett. First, it involved a procedural posture (defense
in a civil suit against the government) radically different from the proceedings here or in any of
the other cases we have reviewed and cited. Second, the court relied on, in part, cases involving
the rights of the Internal Revenue Service and the government to take action. Id. Also, there
was a formal abandonment of the fraudulent conveyance claim by the trustee, which did not take
place in the instant action. Further, the res judicata analysis was woefully cursory. To the extent
that Hatchett has any relevance here and runs contrary to our ruling, we are not bound by it and
reject its application, favoring instead the authorities cited earlier in this opinion.
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must be considered parties for purposes of res judicata. Sanders Confectionary Products, Inc v
Heller Financial, Inc, 973 F2d 474, 480-481 (CA 6, 1992); Federated Mgt Co v Latham &
Watkins, 138 Ohio App 3d 815, 823; 742 NE2d 684 (2000). “It is undisputed that a creditor of
the debtor qualifies as a party for res judicata purposes.” In re G-P Plastics, Inc, 320 BR 861,
865 (ED Mich, 2005); see also In re Farmland Industries, Inc, 376 BR 718, 727 (WD Mo,
2007), remanded on other grounds, 378 BR 829 (CA 8, 2007). The rights and obligations of
debtors, creditors, shareholders, and other parties in interest are adjudicated in bankruptcy
proceedings for purposes of res judicata. In re Xpedior Inc, 354 BR 210, 224 (ND Ill, 2006).
Among other rights, creditors are entitled to notice of various bankruptcy proceedings, FRBP
2002, they can participate in the meeting of creditors, 11 USC 341; FRBP 2003, and they can file
proofs of claim, 11 USC 501(a). A creditor is a party in interest under the Bankruptcy Code. In
re Thompson, 965 F2d 1136, 1147 (CA 1, 1992). Accordingly, we conclude that the “same
parties” requirement of res judicata was satisfied in the case at bar.11
D. Element 3: RDM 2 Issues Could or Should Have Been Litigated in Bankruptcy Court
Next, we examine element three of res judicata, which is whether the claims in RDM II
could or should have been litigated in the bankruptcy proceedings. We find that this issue poses
the most difficult part of our analysis and requires careful contemplation of each particular claim.
We begin by emphasizing that under federal res judicata law “[a] final judgment on the
merits of an action precludes the parties or their privies from relitigating issues that were or
could have been raised in that action.” Federated Dep’t Stores, Inc v Moitie, 452 US 394, 398;
101 S Ct 2424; 69 L Ed 2d 103 (1981) (emphasis added). If a party had a full and fair
opportunity to litigate a claim in the bankruptcy court but chose not to do so, res judicata bars
litigating that claim thereafter in a state court. Ins Co of State of Pennsylvania v HSBC Bank
USA, 10 NY3d 32, 40; 882 NE2d 381; 852 NYS2d 812 (2008). The important aspect to
remember is not whether a particular claim is compulsory; rather, it is whether the claim should
have been considered during the bankruptcy proceedings. Winget v JP Morgan Chase Bank, NA,
537 F3d 565, 580 (CA 6, 2008).
With respect to plaintiffs’ cause of action for a fraudulent conveyance, the claim arose
out of the collateral surrender agreement discussed in footnote 4 of this opinion. Count II of the
RDM II complaint alleged a violation of the UFTA, asserting that the lease breaches arose before
the transfer of assets and obligations, that the transfer was made with the intent to hinder, delay,
or defraud plaintiffs and other creditors, that Con-Lighting did not receive reasonably equivalent
value in exchange for the transfer, and that at the time of the transfer Con-Lighting was left with
an unreasonably small amount of assets despite the fact that it continued to engage in business
with plaintiffs under the leases. The UFTA count further alleged that at the time of the transfer
Con-Lighting should have been aware that it would incur debts beyond its ability to pay, that
11
We note that Con-Plastics held the status of a party in the bankruptcy proceedings not only on
the basis of its position as a creditor, but also because it was a creditor-shareholder. Browning v
Levy, 283 F3d 761, 777 (CA 6, 2002).
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Con-Lighting was insolvent at the time of the transfer, or became insolvent because of the
transfer, that defendants had reasonable cause to believe that Con-Lighting was or became
insolvent, and that defendants were “insiders” as defined under the UFTA. Plaintiffs contended
that they were entitled “to an attachment against the transferred assets or other property” of
defendants to the extent of Con-Lighting’s obligations to plaintiffs.
28 USC 157(b)(1) provides that “[b]ankruptcy judges may hear and determine all cases
under title 11 and all core proceedings arising under title 11, or arising in a case under title 11,
. . . and may enter appropriate orders and judgments[.]” Core proceedings under the Bankruptcy
Code include “proceedings to determine, avoid, or recover fraudulent conveyances[.]” 28 USC
157(b)(2)(H). Therefore, a claim under the UFTA would constitute a core proceeding in
bankruptcy, allowing the bankruptcy court to render a ruling on a fraudulent conveyance claim.
In re Bliss Technologies, Inc, 307 BR 598, 604-605 (ED Mich, 2004). A final decision by a
bankruptcy court in core proceedings can be res judicata. Sanders Confectionary, supra at 482.
In general, a trustee represents the estate of the debtor, 11 USC 323(a), and he or she has
the capacity to sue others or to be sued, 11 USC 323(b). Under 11 USC 544(b)(1), a “trustee
may avoid any transfer of an interest of the debtor in property or any obligation incurred by the
debtor that is voidable under applicable law by a creditor holding an unsecured claim . . . .” This
section has been coined a strong-arm provision that allows a trustee to step into the shoes of a
creditor in an effort to nullify transfers that are voidable pursuant to state fraudulent conveyance
acts for the purpose of benefiting all the debtor’s creditors. In re Fordu, 201 F3d 693, 698 n 3
(CA 6, 1999); Nat’l Labor Relations Bd v Martin Arsham Sewing Co, 873 F2d 884, 887 (CA 6,
1989), mod on reh on other grounds, 882 F2d 216 (CA 6, 1989); In re Forbes, 372 BR 321, 330
(CA 6, 2007); In re Harlin, 321 BR 836, 838 n 2 (ED Mich, 2005); Bliss Technologies, supra at
604. Additionally, 11 USC 548(a)(1) provides a trustee with a mechanism to avoid fraudulent
transfers of a debtor’s interest without reliance on particular state law, where the statute itself
sets forth criteria for determining whether a transfer is fraudulent and can be avoided. See
Donell v Kowell, 533 F3d 762, 776 n 7 (CA 9, 2008) (11 USC 548 is viewed as the federal
fraudulent transfer provision, whereas 11 USC 544[b] authorizes fraudulent transfer actions by
the trustee under, in part, applicable state law). 11 USC 550 addresses the liability of a
transferee when a transfer of property has been avoided. Accordingly, a trustee has the authority
to pursue fraudulent conveyance actions.
Under chapter 7, in relation to the statutory duties of a trustee, the trustee is required to
“collect and reduce to money the property of the estate for which such trustee serves, and close
such estate as expeditiously as is compatible with the best interests of parties in interest[.]” 11
USC 704(a)(1). A chapter 7 trustee must also “investigate the financial affairs of the debtor[.]”
11 USC 704(a)(4). As reflected in the testimony of trustee Shapiro, he would have a duty to
pursue a claim in an adversarial proceeding, FRBP 7001 et seq., seeking to avoid the transfer of
Con-Lighting’s property had he considered the transfer to actually have been fraudulent. This is
because of his duty and obligation to “collect . . . the property of the estate” for which he served.
Plaintiffs, however, never brought their concerns to Shapiro’s attention, although the record
suggests that Shapiro, or his office, had information that might have called for further inquiry,
i.e., the discrepancies between the surrender agreement and the bankruptcy documents filed by
Con-Lighting’s president. Shapiro himself conceded this point in his testimony. If a fraudulent
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transfer action had been successfully pursued, it would have enlarged the debtor’s estate for the
benefit of all creditors.
The question becomes whether the authority and duty of the trustee to bring a fraudulent
transfer action, when justified, permit us to conclude that there was a full and fair opportunity to
litigate the matter and that it should have been litigated, where it would be somewhat speculative
whether trustee Shapiro would have actually brought an action even if plaintiffs vigilantly
pursued the matter with Shapiro. Our concerns, however, are alleviated by the Sixth Circuit’s
ruling in In re Automated Business Systems, Inc, 642 F2d 200 (CA 6, 1981). In that case, a
creditor brought an action in bankruptcy court seeking to require another creditor to return
money that had been transferred to it by the debtor, which transfer was allegedly made in an
effort to defraud other creditors. The case arose out of a chapter 7 liquidation. An initial
question that the Sixth Circuit had to answer was whether the creditor plaintiff could bring the
action for a fraudulent transfer, rather than the bankruptcy trustee. The Sixth Circuit found that
the creditor had standing to pursue the claim, reasoning:
Generally if a trustee in bankruptcy defaults in the performance of any
duty, such as seeking to set aside a fraudulent transfer, “the court may upon
application direct him in his duty or, if he be recalcitrant, remove him for
disobedience, or permit a creditor to act in his name.” [Id. at 201 (citation
omitted).]
The Sixth Circuit court agreed with the bankruptcy court that a creditor who believes that
a lawsuit should be commenced has the right to petition the bankruptcy court in an effort to
compel the trustee to take action, or to seek permission to prosecute the lawsuit. Id.
In a case involving an alleged fraudulent transfer, In re Gibson Group, Inc, 66 F3d 1436,
1446 (CA 6, 1995), the Sixth Circuit applied a rule comparable to that utilized in Automated
Business, but did so in the context of a chapter 11 case. The court, referring to Automated
Business, stated that “[w]e established in that case that a creditor could initiate an avoidance
action with the permission of the court, after making a demand upon the trustee and if the trustee
defaulted in his duty.” Gibson Group, supra at 1443.
On the strength of Automated Business and Gibson Group, we find no merit in plaintiffs’
argument here that they could not force the trustee to act and that, therefore, it could not be said
that their fraudulent conveyance claim could have been litigated in the bankruptcy court. Had
plaintiffs pursued the matter with trustee Shapiro, and had Shapiro refused to file a fraudulent
transfer action, plaintiffs would have had redress with the bankruptcy court, possibly leading to
plaintiffs filing their own claim or Shapiro being ordered to pursue the claim. While it is true
that the bankruptcy court, in such a scenario, could conceivably reject plaintiffs’ efforts, an
appeal would be possible and the bankruptcy court’s decision-making process on the matter
would necessarily have contemplated the validity and soundness of a fraudulent transfer claim.
In other words, plaintiffs would have had their day in court to some degree. With the avenues
available to plaintiffs in the bankruptcy proceedings to have their fraudulent transfer issues
addressed, their decision to do nothing implicates some of the underlying purposes of res
judicata, which include conservation of judicial resources and prevention of inconsistent
decisions. Indeed, if plaintiffs were allowed to pursue the UFTA claim in state court, and were
-12-
they successful in obtaining the requested relief attaching the transferred assets, MCL
566.37(1)(b) (attachment relief for UFTA violation), an underlying premise upon which the
relief was awarded would be that the property should have remained in the hands of ConLighting. This conclusion would run contrary to the trustee’s accounting in bankruptcy showing
that Con-Lighting had zero assets to disburse and it would offend the rights of other creditors.
We conclude that the third element of res judicata was satisfied in regard to the
fraudulent conveyance claim.
With respect to the claim seeking to pierce the corporate veil, plaintiffs asserted that ConPlastics was a 49 percent owner of Con-Lighting, that Con-Lighting was a mere instrumentality
of Con-Plastics, that the corporate entity known as Con-Lighting was used to commit a fraud or
wrong against plaintiffs, and that plaintiffs suffered an unjust loss as a result of the fraud or
wrong. We initially note that the complaint, as well as the documentary evidence, lends no
support for a conclusion that Con-Coatings, which held no interest in Con-Lighting, nor holds
any interest in Con-Plastics, is liable to plaintiffs under a corporate veil theory. Thus, ConCoatings is entitled to summary disposition on this claim under both MCR 2.116(C)(8)12 and
(10). The claim pertains solely to Con-Plastics.
As stated above, 11 USC 704(a)(1) provides that the trustee is required to “collect and
reduce to money the property of the estate for which such trustee serves[.]” “Property of the
estate” is comprised of, in part, “all legal or equitable interests of the debtor in property as of the
commencement of the case.” 11 USC 541(a)(1). This definition applies to property “wherever
located and by whomever held[.]” 11 USC 541(a). “It is clear that causes of action belonging to
the debtor prior to bankruptcy constitute estate property, and that [11 USC 704(a)(1)] grants the
bankruptcy trustee the authority to pursue such causes of action.” In re RCS Engineered
Products Co, Inc, 102 F3d 223, 225 (CA 6, 1996). (Emphasis added.) The question whether a
particular cause of action is available to a debtor, thereby constituting property of the estate
under 11 USC 704(a)(1) and 11 USC 541(a)(1), is determined by applicable state law. RCS
Engineered, supra at 225, citing Butner v United States, 440 US 48; 99 S Ct 914; 59 L Ed 2d 136
(1979).
In Kalb, Voorhis & Co v American Financial Corp, 8 F3d 130, 132 (CA 2, 1993), the
federal court stated:
The initial inquiry herein is whether a claim alleging that the debtor or
bankrupt is the alter ego of its controlling stockholder constitutes “property” of
the bankruptcy estate or debtor-in-possession within the scope of [11 USC
541(a)]. Property of the estate does not belong to any individual creditor. If
under governing state law the debtor could have asserted an alter ego claim to
pierce its own corporate veil, that claim constitutes property of the bankrupt estate
12
MCR 2.116(C)(8) provides for summary disposition when the plaintiff “failed to state a claim
on which relief can be granted.”
-13-
and can only be asserted by the trustee or the debtor-in-possession. As this Court
stated:
***
. . . “If a claim is a general one, with no particularized injury arising from
it, and if that claim could be brought by any creditor of the debtor, the trustee is
the proper person to assert the claim, and the creditors are bound by the outcome
of the trustee’s action.” [Citation omitted.]
If an alter ego claim is indeed the property of a bankruptcy estate, the trustee has full
authority over the claim, and before a creditor may pursue such a claim, there must be a judicial
determination that the trustee has abandoned the claim. Steyr-Daimler-Puch of America Corp v
Pappas, 852 F2d 132, 136 (CA 4, 1988). Without an abandonment determination, a creditor
cannot pursue an alter ego claim. Id. Alter ego theories cannot be pursued by anyone other than
a chapter 7 trustee in the absence of abandonment or the grant of derivative standing. In re
Charles Edwards Enterprises, Inc, 344 BR 788, 790 (ND W Va, 2006).13
We now turn to the issue whether, under Michigan law, the debtor Con-Lighting, and
thus the trustee, could have asserted a claim to pierce Con-Lighting’s own corporate veil in the
chapter 7 bankruptcy proceedings. We conclude that RCS Engineered commands us to conclude
that the answer is no, given a lack of subsequent authority to the contrary. In RCS Engineered,
the court addressed an alter ego claim and a bankruptcy trustee’s standing to assert the claim
against a parent corporation under the “property of the estate” provisions in 11 USC 704 and 11
USC 541. The court ruled, “A review of Michigan alter ego cases and basic principles of the law
of corporations leads us to conclude . . . that under Michigan law a subsidiary does not have
standing to sue its shareholders or its parent company under an alter ego theory.” RCS
Engineered, supra at 226. Rather, “courts apply the alter ego theory and disregard a company’s
separate corporate identity for the benefit of third parties, e.g., creditors of the corporation, who
would suffer an unjust loss or injury unless the shareholders or the parent corporation were held
liable for the subsidiary’s debts.” Id. The court held:
Since a subsidiary may not bring an alter ego claim against its parent
company under Michigan law, the claim does not become the property of the
estate under [11 USC 541(a)(1)] of the Bankruptcy Code when the subsidiary files
a petition for bankruptcy. Accordingly, the subsidiary’s bankruptcy trustee may
not bring an alter ego claim under [11 USC 704(1)] of the Code. Thus, we
13
Generally speaking, courts that allow a trustee or debtor to bring an alter ego claim do so
under 11 USC 541. In re Icarus Holding, LLC, 391 F3d 1315, 1319 (CA 11, 2004) (citing
precedent from the Second, Fifth, and Seventh circuits). Following the lead of many other
courts, the Eleventh Circuit has held that in order for a trustee to bring an alter ego claim, the
claim should be (1) a general claim that is common to all the debtor’s creditors and (2) is
allowable under state law. Id. at 1319-1320.
-14-
conclude that the bankruptcy court erred in holding that . . . [the] bankruptcy
trustee ha[d] standing under these sections to assert an alter ego claim . . . .” [Id.
at 227.]
We agree with defendants’ assertion that Con-Lighting was not technically a subsidiary,
which has been defined as a company with more than half of its stock owned by another
company, because Con-Plastics held only a 49 percent interest. See Liggett Group, Inc v Ace
Prop & Cas Ins Co, 798 A2d 1024, 1035 (Del, 2002). However, although RCS Engineered
spoke at times in terms of subsidiaries, it also used very broad language at other times, stating
that “[t]he general rule is that the corporate veil is pierced only for the benefit of third parties,
and never for the benefit of the corporation or its stockholders,” and that “[t]here is simply
nothing in the cases to suggest that Michigan courts would allow an alter ego claim to be brought
in other than third-party situations.” RCS Engineered, supra at 226-227. Moreover, the United
States District Court for the Eastern District of Michigan has relied on RCS Engineered in
disallowing a trustee to pursue an alter ego claim, stating that alter ego claims not involving
third-party situations are not recognized in Michigan. Nieto v Unitron, LP, 2006 US Dist LEXIS
54443, unreported opinion of the United States District Court for the Eastern District of
Michigan, Southern Division, issued August 7, 2006 (Docket No. 06-11966).14 Furthermore, in
Rymal v Baergen, 262 Mich App 274, 293; 686 NW2d 241 (2004), this Court stated that “‘[t]he
traditional basis for piercing the corporate veil has been to protect a corporation’s creditors[.]’”
(Citation omitted; emphasis added.) Accordingly, trustee Shapiro, despite his testimony to the
contrary, could not pursue an alter ego theory piercing Con-Lighting’s corporate veil because
such a claim was not “property of the estate” under Michigan law. Further, because Shapiro did
not have the authority to proceed on a theory to pierce Con-Lighting’s corporate veil, thereby
making the issue of claim abandonment moot, plaintiffs themselves could not have pursued the
claim on a derivative basis; nor does there exist an independent basis under the Bankruptcy Code
for them to file such a claim against Con-Plastics. Therefore, for purposes of res judicata, it
cannot be concluded that plaintiffs could or should have litigated the corporate veil claim in the
bankruptcy proceedings. The trial court erred in dismissing this claim or theory on the basis of
res judicata arising out of the bankruptcy proceedings. We will later discuss defendants’
arguments that the corporate veil claim should be summarily dismissed under MCR 2.116(C)(10)
and res judicata grounded on the RDM I litigation.
With respect to the successor liability claim, plaintiffs asserted that defendants expressly
or implicitly assumed the obligations of Con-Lighting, that the transfer of assets and certain
obligations in advance of bankruptcy was fraudulent and undertaken in bad faith to avoid
liability to plaintiffs and other Con-Lighting creditors, that Con-Lighting did not receive
14
While Nieto is an unreported opinion, it has value because the bankruptcy court at issue here is
also from the Eastern District, Southern Division. Therefore, Nieto sheds light on the issue
whether trustee Shapiro could have pursued the corporate veil claim. Bankruptcy court appeals
go to the federal district court for review. 28 USC 158(a); In re DSC, Ltd, 486 F3d 940, 943 (CA
6, 2007). And the district court reviews de novo questions of law that had been presented to the
bankruptcy court. In re Gardner, 360 F3d 551, 557 (CA 6, 2004).
-15-
reasonably equivalent value in return for the asset transfer, and that defendants were engaged in a
mere continuation or reincarnation of Con-Lighting’s business. Therefore, according to
plaintiffs, defendants were liable to plaintiffs for the full amount of Con-Lighting’s debts owed
to plaintiffs. We initially note that the documentary evidence lends no support for a conclusion
that Con-Plastics was Con-Lighting’s corporate successor or that it carried on the business
operations of Con-Lighting after Con-Lighting ceased operations. Rather, the evidence pointed
only to Con-Coatings continuing the business operations previously undertaken by ConLighting, although Con-Plastics served as a conduit to some degree. Con-Plastics’ role as an
alleged successor is tied solely to plaintiffs’ allegations concerning the fraudulent transfer of
assets; however, we find that this aspect of the successor liability claim was subsumed under the
UFTA claim, which was properly dismissed on the basis of res judicata. Thus, Con-Plastics is
entitled to summary disposition on this claim under MCR 2.116(C)(10). For the same reasons,
we will not permit plaintiffs to pursue any fraudulent transfer allegations against Con-Coatings
under the guise of a successor liability claim. Further, there is no evidence that Con-Coatings
expressly or implicitly assumed Con-Lighting’s lease obligations. Thus, continuity of enterprise
or operations relative to Con-Coatings is the only basis that could potentially serve to support the
successor liability claim. We now proceed with the res judicata analysis of the successor liability
claim, as whittled down by us.
We are not aware of any relevant Sixth Circuit precedent on whether a successor liability
claim by a predecessor company against a successor company is considered property of the
bankruptcy estate, so that a trustee could have pursued a claim in the bankruptcy proceedings.
The analytical framework for addressing the successor liability claim is the same as used earlier
in this opinion with respect to the corporate veil claim, in that 11 USC 704(a)(1) and 11 USC
541(a)(1) serve as the foundation of the analysis. However, we find it unnecessary to perform a
review of Michigan law to determine if a predecessor company, if not yet defunct or dissolved,
can sue a successor company.15 We cannot conclude with any level of confidence, for reasons
discussed later in this opinion, that plaintiffs could have pursued a successor liability claim in the
United States Bankruptcy Court for the Eastern District of Michigan, Southern Division.
Initially, we reject defendants’ contention that the successor liability claim, as well as the
other claims, all constituted core proceedings that could only be addressed in the bankruptcy
court. While the UFTA claim qualified as a core proceeding as indicated already in this opinion,
the corporate veil and successor liability claims did not. In Sanders Confectionary, supra at 483,
the Sixth Circuit stated:
15
While we have not fully surveyed Michigan caselaw on the matter, we are not aware of
anything that would preclude such a lawsuit, although it is typically third parties, e.g., creditors
and victims of defective products or negligence, that pursue such suits. See, e.g., Craig v
Oakwood Hosp, 471 Mich 67; 684 NW2d 296 (2004); Foster v Cone-Blanchard Machine Co,
460 Mich 696; 597 NW2d 506 (1999); Turner v Bituminous Cas Co, 397 Mich 406; 244 NW2d
873 (1976). And there certainly are bankruptcy courts that have entertained successor liability
lawsuits. See, e.g., In re Sunsport, Inc, 260 BR 88 (ED Va, 2000).
-16-
The bankruptcy judge rules on whether a particular proceeding is a core
proceeding. 28 U.S.C. § 157(b)(3). The court looks at both the form and the
substance of the proceeding in making its determination. . . . A core proceeding
either invokes a substantive right created by federal bankruptcy law or one which
could not exist outside of the bankruptcy. . . . In non-core proceedings that are
“related to” the bankruptcy case, the bankruptcy judge may hear the matter and
“submit proposed findings of fact and conclusions of law to the district court,” but
without the parties consent the bankruptcy court may not make a final decision on
the matter. 28 U.S.C. § 157(c).
Successor liability and alter ego claims are not core proceedings because they are not
claims against the assets of the estate and they do not deal with the relationship between a debtor
and its creditors, but instead target the assets of a nondebtor. In re G-I Holdings, Inc, 295 BR
211, 217 (D NJ, 2003). “Case law dealing with bankruptcy litigation of successor liability and
veil piercing issues confirms that this action is not a core proceeding.” Id.; see also Phar-Mor,
Inc v Coopers & Lybrand, 22 F3d 1228, 1239 (CA 3, 1994); In re Julien Co, 120 BR 930, 937
(WD Tenn, 1990) (“veil piercing or alter ego theory could not be a core proceeding”); but cf.
Central Vermont Pub Service Corp v Herbert, 341 F3d 186, 192 (CA 2, 2003). A successor
liability claim can exist outside bankruptcy, it is not created by the Bankruptcy Code, and it does
not require resort to concepts peculiar to bankruptcy for resolution; therefore, it is not a core
proceeding. G-I Holdings, supra at 217. At best, plaintiffs’ successor liability and corporate veil
claims were related to the bankruptcy case. Accordingly, defendants’ arguments that the
successor liability and corporate veil claims entailed core proceedings and that they had to be
litigated in the bankruptcy court lack merit.16 Furthermore, pursuant to 28 USC 1334(b), which
governs jurisdiction in bankruptcy cases, bankruptcy courts have full and exclusive jurisdiction
over the bankruptcy case itself, but they lack sole and exclusive jurisdiction over civil
proceedings, including core proceedings. In re Lenke, 249 BR 1, 6 n 4 (D Ariz, 2000). “The
bankruptcy court has original but not exclusive jurisdiction over fraudulent transfer claims.” In
re Int’l Admin Services, Inc, 211 BR 88, 95 n 4 (MD Fla, 1997).
The caselaw is split with respect to whether res judicata attaches to a non-core
proceeding. Some of the cases rejecting the application of res judicata to non-core proceedings
are Barnett v Stern, 909 F2d 973, 979 (CA 7, 1990) (district court claim by creditor only barred
by res judicata if the claim would have been a core proceeding in bankruptcy), Howell
Hydrocarbons, Inc v Adams, 897 F2d 183, 190 (CA 5, 1990), and SMI/USA, Inc v Profile
Technologies, Inc, 38 SW3d 205, 211 (Tex App, 2001) (disposition of non-core proceedings in
bankruptcy “is not res judicata as to subsequent state court proceedings regarding the same
claims”). The Sixth Circuit, however, allows imposition of res judicata in regard to non-core
proceedings. Sanders Confectionary, supra at 483 (even though bankruptcy court may not be
able to issue a final decision, federal district court has the authority to do so). In Cabrera v First
16
We note that the mere fact that the UFTA claim was a core proceeding does not mean that the
non-core successor liability claim becomes a core proceeding. In re Exide Technologies, 544
F3d 196, 206 (CA 3, 2008).
-17-
Nat’l Bank of Wheaton, 324 Ill App 3d 85, 97; 753 NE2d 1138 (2001), the Illinois appellate
court, with supporting citations, observed that “[s]everal federal circuits reject the distinction
between core and noncore claims for the purpose of res judicata[,]” generally because the
bankruptcy judge and the district court can together provide full and fair litigation of a noncore
claim. The Cabrera court also noted that a legal commentator has charged that the courts
rejecting application of res judicata to non-core proceedings demonstrate confusion between
jurisdiction and power. Id. “It thus appears that the position of the Fifth and Seventh Circuits
has been widely rejected, with the opposite view holding prominence in the federal courts.” Id.
We decline to become embroiled in this debate for a very practical reason, which is the
unreported opinion of Nieto, supra, by the United States District Court for the Eastern District of
Michigan, Southern Division, issued in 2006, the same year that the bankruptcy case here was
closed. In Nieto, Unitron, Inc., filed for chapter 7 bankruptcy, claiming that it had $12,000 in
assets and in excess of $300,000 in liabilities. At the same time the bankruptcy petition was
filed, Unitron, LP, unilaterally terminated vested benefits of former employees of a Unitron plant
in Troy. The employees and their union filed suit in the district court against Unitron, LP,
alleging that it was a “disguised continuance and the alter ego” of Unitron, Inc., where they had
“substantially identical management, business, purpose, operation, equipment, customers,
supervision and ownership.” Id. at *5-6. The court addressed the issue whether the plaintiffs
had standing to pursue their claims in district court, or whether the claims had to be pursued by
the trustee in the bankruptcy proceedings involving Unitron, Inc. The court noted that the parties
agreed that the “‘property of the estate’” did not belong to any individual creditor. Id. at *13
(citation omitted). The court, relying on RCS Engineered, supra, held that the claims were not
property of the estate under 11 USC 541(a)(1), that the trustee thus did not have standing to
pursue the claims, and that therefore the automatic stay provision of the Bankruptcy Code did not
operate as a bar to the plaintiffs’ lawsuit in district court. Nieto, supra at *21-22.
Regardless of the fact that Nieto was unreported, and without commenting on the
correctness of the ruling, it certainly provides some insight into how a bankruptcy court in that
same federal district and division may have handled an attempt to pursue a successor liability
claim by trustee Shapiro. We cannot in good faith rule that a successor liability claim should and
could have been pursued and fully litigated in the bankruptcy court when the district court in that
jurisdiction has rejected a nearly identical claim.
E. Element 4: Identity of the Causes of Action
Finally, we examine the fourth element of res judicata, which requires an identity of the
causes of action. Given the rulings we made earlier, only the fraudulent conveyance claim
remains relevant. We first conclude that plaintiffs have failed to address this element.
Moreover, this element is satisfied if the claims arose out of the same transaction or same series
of transactions, or where the claims arose out of the same core operative facts. Winget, supra at
580. “In determining whether the causes of action are the same, a court must compare the
substance of the actions, not their form.” I A Durbin, Inc v Jefferson Nat’l Bank, 793 F2d 1541,
1549 (CA 11, 1986). Here, of course, no claims were raised in the bankruptcy court. It would be
incorrect, however, to conclude that because the particular claims were not raised in the
bankruptcy proceedings, no identity of claims exists. Sanders Confectionary, supra at 483-484.
Instead, “[i]dentity of causes of action means an ‘identity of the facts creating the right of action
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and of the evidence necessary to sustain each action.’” Id. at 484, quoting Westwood Chemical
Co v Kulick, 656 F2d 1224, 1227 (CA 6, 1981). Had plaintiffs raised the fraudulent conveyance
claim in the bankruptcy proceedings, as they should have done, the claim would have arisen out
of the same transaction and core operative facts giving rise to the claim contained in RDM II;
the substance of the actions would be identical. Accordingly, the fourth element of res judicata
was satisfied. Therefore, defendants were entitled to summary disposition with respect to the
fraudulent conveyance claim on the basis of res judicata grounded on the bankruptcy
proceedings.
VI. Res Judicata Grounded on RDM I
Defendants present a cursory argument that plaintiffs’ claims are barred by res judicata
grounded on the RDM I lawsuit. In Dart v Dart, 460 Mich 573, 586; 597 NW2d 82 (1999), our
Supreme Court stated:
Res judicata bars a subsequent action between the same parties when the
evidence or essential facts are identical. A second action is barred when (1) the
first action was decided on the merits, (2) the matter contested in the second
action was or could have been resolved in the first, and (3) both actions involve
the same parties or their privies. [Citations omitted.]
Here, although an order granting partial summary disposition in favor of RDM was
entered, the case was left open and hanging in limbo by the filing of Con-Lighting’s bankruptcy
petition and the entry of a stay. Moreover, the evidence or essential facts in RDM I dealt only
with the alleged lease breaches in connection with the Merrill Road property, and while those
breaches formed part of the RDM II litigation, the evidence and essential facts related to the
successor liability and corporate veil claims were not identical to those in RDM I and they
developed later in time and required exposure through the discovery process. Further, Chestnut
was not a party to the RDM I lawsuit, nor were defendants before the bankruptcy stay or before
the RDM II suit was filed.17 Additionally, defendants’ assertion that they were “putative privies”
is not a claim that they were actual privies for purposes of res judicata and is instead, effectively,
a contention that they were not privies.
Defendants’ argument is more in the nature of a claim that they should have been joined
as parties in RDM I and that plaintiffs, upon joinder, should have litigated the successor liability,
fraudulent conveyance, and corporate veil claims. Such an argument is not one of res judicata,
17
Through an unusual procedure, the trial judge in RDM II, who also presided over RDM I,
permitted defendants to intervene in RDM I during the pendency of RDM II. The purpose was
to give defendants the opportunity to seeks reconsideration of the order granting partial summary
disposition in RDM I. The trial court denied reconsideration. To the extent that this occurrence
made them “parties” to the RDM I lawsuit, no further litigation or rulings took place in RDM I,
and we are not prepared to hold that res judicata was implicated merely by this quirky procedural
step. Furthermore, when they became “parties” to RDM I, they were already parties to the RDM
II lawsuit.
-19-
but necessary joinder under MCR 2.205, which we find was not implicated under the
circumstances presented.
VII. MCR 2.116(C)(10): Piercing of the Corporate Veil and Successor Liability
We conclude that issues of fact abound in regard to the corporate veil and successor
liability claims. We first address plaintiffs’ claim seeking to pierce the corporate veil. “The law
treats a corporation as an entirely separate entity from its shareholders, even where one
individual owns all the corporation’s stock.” Rymal, supra at 293. However, as explained in
Rymal, id. at 293-294, the protection afforded by the corporate veil can be pierced under certain
circumstances:
“The traditional basis for piercing the corporate veil has been to protect a
corporation’s creditors where there is a unity of interest of the stockholders and
the corporation and where the stockholders have used the corporate structure in an
attempt to avoid legal obligations.” . . .
For the corporate veil to be pierced, the corporate entity must be a mere
instrumentality of another individual or entity. Further, the corporate entity must
have been used to commit a wrong or fraud. Additionally, and finally, there must
have been an unjust injury or loss to the plaintiff. There is no single rule
delineating when a corporate entity should be disregarded, and the facts are to be
assessed in light of a corporation’s economic justification to determine if the
corporate form has been abused. [Citations omitted.]
Here, there was documentary evidence that Con-Plastics, a 49 percent owner of ConLighting, and its president, Anthony Catenacci, fully controlled every aspect of the operations at
Con-Lighting, including the decision to cease operations and file for bankruptcy to the detriment
of numerous creditors. Gregory Eaton testified that, despite an operating agreement indicating
that he had provided $204,000 for his 51 percent interest in Con-Lighting, he never paid any
money for his interest. Rather, the funds were “loaned” to him by either Con-Plastics or
Catenacci; however, there was no loan agreement, Eaton never paid any money toward the loan,
and no one ever asked Eaton to repay the loan. Eaton testified that he had no knowledge of the
Comerica assignment or the surrender agreement. He did not make the decision to cease ConLighting’s operations or to file for bankruptcy, nor did he authorize anyone to make those
decisions on his behalf. Further, Eaton did not have any involvement in shifting property or
operations from Con-Lighting to Con-Coatings. Catenacci testified that he made the decision to
shutter operations. The evidence suggested that Eaton was a mere figurehead placed in the
position solely to allow Con-Lighting to claim minority-ownership status.
Additionally, documentary evidence was presented showing that Con-Plastics had loaned
millions of dollars to Con-Lighting and its predecessors over the years to keep the business
operating and afloat, despite the fact that the enterprise continued to lose money. There was
evidence that Con-Lighting did not honor various lease obligations, although the decision to
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cease operations had already been made and a plan conceived to convert operations to ConCoatings.18 There was evidence that Con-Lighting equipment started to be moved out in
September or October 2004 and found its way to Con-Coatings, which had hired several ConLighting employees in mid-October, even though evidence also showed that Con-Lighting
benefited by remaining on the Merrill Road property past the lease expiration date, implicating
the holdover provision and payment obligation. This could be viewed as wrongfully taking
advantage of the corporate entity, which life was coming to an end with bankruptcy on the
horizon, to the detriment of plaintiffs.
In sum, there was sufficient documentary evidence to create an issue of fact regarding
whether Con-Lighting was a mere instrumentality of Con-Plastics, whether the corporate entity
of Con-Lighting was used to commit a wrong or fraud, and whether there was an unjust injury or
loss to plaintiffs. Con-Plastics was not entitled to summary disposition under MCR 2.116(C)(10)
with respect to the corporate veil claim.19
With respect to the successor liability claim against Con-Coatings, our Supreme Court
explained the theory in Foster v Cone-Blanchard Machine Co, 460 Mich 696, 702-704; 597
NW2d 506 (1999):
The traditional rule of successor liability examines the nature of the
transaction between predecessor and successor corporations. If the acquisition is
accomplished by merger, with shares of stock serving as consideration, the
successor generally assumes all its predecessor’s liabilities. However, where the
purchase is accomplished by an exchange of cash for assets, the successor is not
liable for its predecessor’s liabilities unless one of five narrow exceptions applies.
The five exceptions are as follows:
“(1) where there is an express or implied assumption of liability; (2) where
the transaction amounts to a consolidation or merger; (3) where the transaction
was fraudulent; (4) where some of the elements of a purchase in good faith were
lacking, or where the transfer was without consideration and the creditors of the
18
The record contains several documents generated by GM referencing contracts and stating
under the heading “line item notes”:
Purchase order is being issued per request from John Lowe, Continental
Lighting, dated 8/19/04 to transfer business from . . . Continental Lighting to
Continental Coatings.
19
We do wish to emphasize that, in light of our ruling that the UFTA claim should have been
litigated in the bankruptcy proceedings and is thus barred, plaintiffs are not permitted to claim a
fraudulent conveyance arising out of the surrender agreement as evidence in support of piercing
the corporate veil. This applies equally to the successor liability claim.
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transferor were not provided for; or (5) where the transferee corporation was a
mere continuation or reincarnation of the old corporation.”
***
[P]olicy concerns shaped this Court’s expansion of the traditional rule in
Turner [v Bituminous Cas Co, 397 Mich 406; 244 NW2d 873 (1976)]. After
examining the relevant policy concerns, this Court in Turner concluded that a
continuity of enterprise between a successor and its predecessor may force a
successor to “accept the liability with the benefits” of such continuity. Turner
held that a prima facie case of continuity of enterprise exists where the plaintiff
establishes the following facts: (1) there is continuation of the seller corporation,
so that there is a continuity of management, personnel, physical location, assets,
and general business operations of the predecessor corporation; (2) the
predecessor corporation ceases its ordinary business operations, liquidates, and
dissolves as soon as legally and practically possible; and (3) the purchasing
corporation assumes those liabilities and obligations of the seller ordinarily
necessary for the uninterrupted continuation of normal business operations of the
selling corporation. Turner identified as an additional principle relevant to
determining successor liability, whether the purchasing corporation holds itself
out to the world as the effective continuation of the seller corporation. [Citations
and some quotations omitted.]
As indicated earlier in this opinion, the continuing enterprise theory (mere continuation
or reincarnation of the old corporation) is the only theory that can be pursued by plaintiffs at
trial. Much of the evidence discussed above in relation to the corporate veil claim is equally
relevant to the successor liability claim. There was documentary evidence reflecting a continuity
of management, personnel, assets, and general business operations.20 There was also evidence
that Con-Lighting ceased operations around the time of the changeover to Con-Coatings, or the
plan to so proceed, and sought liquidation in chapter 7 bankruptcy proceedings soon thereafter.
Eaton testified that Con-Lighting customers, chiefly GM and DaimlerChrysler, communicated
concerns about obligations being satisfied and that Kenneth Lamb and John Lowe worked on
alleviating those concerns. There was evidence that GM and DaimlerChrysler began sourcing or
procuring parts from Con-Coatings that had previously been provided by Con-Lighting.21 There
20
Con-Lighting president Kenneth Lamb became a manufacturing manager for Con-Coatings,
John Lowe, a plant manager for Con-Lighting, became a manager for Con-Coatings, and other
former Con-Lighting personnel became employed by Con-Coatings. Much of Con-Lighting’s
equipment flowed to Con-Coatings.
21
John Lowe testified that he met several times with GM and DaimlerChrysler personnel about
Con-Lighting shutting down production. Kenneth Lamb and others were also present at these
meetings, which took place between August and October 2004. Lowe indicated that there was a
general goal or plan that Con-Lighting’s equipment and operations would eventually move or be
resourced to Con-Coatings. Lowe conceded that, at some point, some of Con-Lighting’s
equipment and business did indeed end up at Con-Coatings. Equipment started to be moved in
(continued…)
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was evidence that Con-Lighting’s suppliers started supplying Con-Coatings and that ConCoatings’s books showed a dramatic increase in gross receipts in 2005, at least partly attributable
to business generated by GM and DaimlerChrysler purchasing parts from Con-Coatings. A
reasonable juror could surmise from the evidence that Con-Coatings was holding itself out to the
world as the effective continuation of Con-Lighting. In sum, a genuine issue of material fact
exists whether Con-Coatings can be held liable under a successor liability theory.22
VIII. Conclusion
The trial court did not err in dismissing the UFTA claim on the basis of res judicata with
respect to both defendants. The trial court, however, did err in dismissing the corporate veil and
successor liability claims on the basis of res judicata grounded on the bankruptcy proceedings.
Neither defendant is entitled to summary disposition on the basis of res judicata grounded on the
RDM I lawsuit. Defendant Con-Coatings is entitled to summary disposition under MCR
2.116(C)(8) and (10) in regard to the corporate veil claim. Defendant Con-Plastics is entitled to
summary disposition under MCR 2.116(C)(10) in regard to the successor liability claim. Finally,
there are genuine issues of material fact with respect to the successor liability claim against ConCoatings and in regard to the corporate veil claim against Con-Plastics.
Accordingly, we affirm in part, reverse in part, and remand for further proceedings
consistent with this opinion.
/s/ William B. Murphy
/s/ David H. Sawyer
/s/ William C. Whitbeck
(…continued)
either September or October 2004. Lowe indicated that Con-Lighting had about 50 to 70
purchase orders in 2004 and was manufacturing 30 different parts at the time. According to
Lowe, GM and DaimlerChrysler “approved the resource of all of the business that Continental
Lighting had over to Continental Coatings.” Lowe stated that GM had not previously done
business with Con-Coatings and that he had to obtain a DUNS (identification) number for ConCoatings. Lowe testified that on customer approval, contracts were issued to Con-Coatings.
22
Of course, plaintiffs must also prove the underlying allegations regarding the lease breaches.
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