Court Opinion

ID: 3193612
Source: CourtListenerOpinion
Date Created: 2016-04-13 15:06:30.563954+00
Date Added: 2024-06-11T14:36:16.213928
License: Public Domain

STATE OF MICHIGAN

                           COURT OF APPEALS

MARTIN HERMAN,                                                     UNPUBLISHED
                                                                   April 12, 2016
               Plaintiff-Appellee,

v                                                                  No. 325920
                                                                   Washtenaw Circuit Court
JEFFREY W. PICKELL and KALEIDOSCOPE                                LC No. 13-000643-NZ
BOOKS AND COLLECTIBLES,

               Defendant-Appellant.

Before: BOONSTRA, P.J., and WILDER and METER, JJ.

PER CURIAM.

        Defendant appeals by right the judgment of the trial court, following a bench trial, in
favor of plaintiff in the amount of $88,000, plus $255 in costs and $10,800 in attorney fees. The
trial court determined that plaintiff and defendant had formed a valid partnership and that
plaintiff remained a 10% partner in defendant’s business, entitling plaintiff to 10% of the
business’s yearly net profits for the previous 6 years1 and 10% of the value of the business’s
inventory. We affirm the trial court’s determination of the existence of a partnership, but vacate
the award of damages and remand for further proceedings.

                   I. PERTINENT FACTS AND PROCEDURAL HISTORY

        Defendant was the sole proprietor of a business, Kaleidoscope Books and Collectibles,
located in Ann Arbor, Michigan. Plaintiff met defendant at some point in the late 1990’s while
plaintiff’s daughter was a student at the University of Michigan. Plaintiff frequented defendant’s
store due to his interest in collectibles and other products that defendant sold. The parties each
claimed that the other was the first to initiate the suggestion of going into business together.
Plaintiff claimed that defendant gave him a document prepared for potential investors, and
introduced this document at the bench trial on this matter. However, defendant denied that he
had prepared the document. Nonetheless, both parties seemed to agree that at some point they
came to an understanding whereby plaintiff would provide defendant with $50,000 in return for a

1
 The six-year timeline appears to have been based on the general statute of limitations for other
personal actions. MCL 600.5813.

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10% interest in defendant’s business. Although defendant at times characterized this tender of
$50,000 as a “loan,” he also testified to his understanding that he and plaintiff were business
partners initially and that he considered the partnership dissolved. Plaintiff testified that by early
1998 he had paid defendant the full $50,000 in a series of checks that ranged from $3,000 to
$5,000 per check. Plaintiff acknowledged that he was unable to locate records of every check
given to defendant. Defendant testified that he received some money from plaintiff, and while
he acknowledged that it was possible that he had received the full $50,000, he contended that he
actually received somewhere between $19,000 and $25,000. Defendant testified that he lost the
money that plaintiff had given him, to a carpenter he had hired to build out a new space for the
store; the carpenter ultimately did not complete the work and was terminated by defendant.

        No writing existed between the parties before a February 1, 1998 letter from defendant to
plaintiff that stated that plaintiff was “a ten percent (10%) silent partner in the business,” that
plaintiff was “not responsible for any business decisions” but that “his expertise in business will
be sought after in an advisory capacity,” that plaintiff’s 10% interest “entitles him to ten percent
(10%) of the monthly net earnings,” and that if the business was sold or dissolved plaintiff “is
entitled to ten percent (10%) of the business assets after all business expenses are deducted in
full.” Plaintiff testified that he never received a single profit check from defendant who, when
asked, would simply tell plaintiff that there were no profits.

         Defendant sent a letter to plaintiff dated June 25, 1998 that stated that plaintiff would
“retain 10% ownership . . . until the $50,000 loan is completely repaid,” that $1,000 monthly
payments would begin in January of 1999, that “[p]ayments will continue until the loan has been
repaid,” and that “[a]t that time,” plaintiff’s “interest in Kaleidoscope is satisfied and the 10%
partnership is dissolved.” On November 15, 1998, plaintiff wrote defendant a letter outlining
terms for repayment that would begin in January 1999 and that described the amount owed to
plaintiff as both an “investment” and a “loan.” The letter also stated that plaintiff would hold his
“10% interest in Kaleidoscope until the final or 50th payment is received.” Plaintiff testified that
any characterization in this letter of the amount owed, as a loan, was a mistake. Plaintiff stated
that he had received between $20,000 and $25,000 from defendant but that, not having received
the full amount, he still considered himself a 10% partner.

       The parties agreed that, at some point, and with defendant’s consent, plaintiff came and
took some items from the store, although the parties’ description of the specifics of this event
varied greatly. Plaintiff described it as a small gift that amounted to one box with a value of less
than $100. Defendant described it as an invitation by him to plaintiff to take “carte blanche”
anything from the store and that plaintiff spent 8 to 10 hours loading “box after box” of
merchandise into a minivan.

        At some point, defendant moved the business to a different location. Plaintiff claimed
that defendant told him that Kaleidoscope was going out of business, but defendant denied this.
The parties did not have any contact between 2001 and 2012. Plaintiff contacted defendant in
2013, after preparing his taxes for the preceding year, because his accountant suggested to him
that he would need to try to collect on the investment before writing it off as a loss. Defendant
did not respond to plaintiff’s attempts to contact him, and this litigation followed.

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        Plaintiff filed suit on June 25, 2013, alleging counts for breach of contract, fraud, unjust
enrichment, promissory estoppel, violation of the uniform partnership act, MCL 449.1 et seq, and
for an accounting. The complaint alleged that a partnership had been formed, that “the
agreement was reduced to [a] writing” that was drafted and signed by defendant, and that “a
copy of the agreement is attached.” However, no attachment was appended to the complaint.
Defendant filed a motion for summary disposition, arguing in part that the statute of limitations
barred all of plaintiff’s claims, and also arguing that summary disposition should be granted on
plaintiff’s uniform partnership act and accounting claims because those claims were based on a
written instrument that was not attached to the complaint as required by MCR 2.113(F). At the
motion hearing, plaintiff made clear that the document that should have been attached was
defendant’s February 1, 1998 letter. Based on the statute of limitations, the trial court granted
summary disposition in favor of defendant on all counts except the uniform partnership act and
accounting claims. With respect to those two claims, the court stated that because defendant had
drafted the document at issue, plaintiff’s failure to comply with MCR 2.113(F) did not require
dismissal. The trial court then entered a written order stating “that the issues remaining for the
Court are dissolution, damages and accounting.”

         The trial court2 subsequently denied defendant’s second motion for summary disposition,
which was again premised on plaintiff’s failure to comply with MCR 2.113(F). The case
proceeded to a bench trial at which plaintiff and defendant were the only two witnesses.
Defendant’s tax returns for 2009, 2010, 2011, and 2012 were admitted into evidence. Each
return included a Schedule C form that showed net profit for defendant’s business for those four
years to be $15,342, $15,268, $10,315, and $14,434, respectively. At the conclusion of the trial,
the trial court found that plaintiff had invested $50,000 in defendant’s business in exchange for a
10% interest in the business and that plaintiff continued to hold this interest at the time of trial.
The trial court found that defendant’s “yearly net profits” were at least $80,000 for the past 6
years, of which 10% or $48,000 belonged to plaintiff. It also found that the value of the
business’s inventory was at least $600,000, of which 10% belonged to plaintiff. The trial court
added these amounts and subtracted $20,000 that it found defendant had paid (approximately) to
plaintiff. The trial court issued a written opinion and order memorializing these findings on
December 26, 2014, and entered a judgment in favor of plaintiff in the amount of $88,000.

        This appeal followed. On appeal, defendant argues that the trial court erred in finding
that a partnership existed, that the trial court erred in denying defendant’s motion for summary
disposition based on plaintiff’s failure to comply with MCR 2.113(F), and that the trial court
erred in its calculation of damages.

                                  II. STANDARD OF REVIEW

      “The determination of whether a partnership exists is a question of fact.” Miller v City
Bank & Trust Co, 82 Mich. App. 120, 123; 266 NW2d 687 (1978). The trial court’s factual

2
  Although the reason for the re-assignment is not clear, the case was assigned to a different trial
judge following the partial grant and partial denial of defendant’s first motion for summary
disposition.

                                                -3-
findings are reviewed for clear error. Killips v Mannisto, 244 Mich. App. 256, 258; 624 NW2d
224 (2001). Questions of law are reviewed de novo. Thomas v City of New Baltimore, 254 Mich
App 196, 201; 657 NW2d 530 (2002). This Court reviews the trial court’s grant of summary
disposition pursuant to MCR 2.116(C)(8) “de novo to determine if the moving party is entitled to
judgment as a matter of law.” Maiden v Rozwood, 461 Mich. 109, 118; 597 NW2d 817 (1999).
“[I]nterpretation of a court rule, like a matter of statutory interpretation, is a question of law that
this Court reviews de novo.” CAM Constr v Lake Edgewood Condo Ass’n, 465 Mich. 549, 553;
640 NW2d 256 (2002). Finally, we “review[] the trial court’s determination of damages
following a bench trial for clear error.” Alan Custom Homes, Inc v Krol, 256 Mich. App. 505,
513; 667 NW2d 379 (2003). “The clear error standard provides that factual findings are clearly
erroneous where there is no evidentiary support for them or where there is supporting evidence
but the reviewing court is nevertheless left with a definite and firm conviction that the trial court
made a mistake.” Hill v City of Warren, 276 Mich. App. 299, 308; 740 NW2d 706 (2007).

                              III. EXISTENCE OF PARTNERSHIP

        MCL 449.6(1) states that “[a] partnership is an association of 2 or more persons . . . to
carry on as co-owners a business for profit.” “The determination of whether a partnership exists
is a question of fact and . . . [t]he burden of proof to show a partnership is on the one alleging the
partnership.” Miller, 82 Mich. App. at 123. “For a partnership to exist, it must be shown by an
agreement, since it is the intention of the parties that is of prime importance in ascertaining the
existence of a partnership.” Le Zontier v Shock, 78 Mich. App. 324, 333; 260 NW2d 85 (1977).
In Byker v Mannes, 465 Mich. 637, 644-653; 641 NW2d 210 (2002), aff’d 469 Mich. 881 (2003),
our Supreme Court interpreted MCL 449.6 as providing that “if the parties associate themselves
to ‘carry on’ as co-owners a business for profit, they will be deemed to have formed a
partnership relationship regardless of their subjective intent to form such a legal relationship.”
465 Mich. at 646. The Supreme Court essentially held that a partnership could be formed even if
the parties were not “aware of their status as ‘partners.’ ” Id. In so concluding, the Supreme
Court stated that “in ascertaining the existence of a partnership, the proper focus is on whether
the parties intended to, and in fact did, ‘carry on as co-owners a business for profit’ and not
whether the parties subjectively intended to form a partnership.” Id. at 653.

        Here, the trial court determined that a partnership existed based on its factual finding that
plaintiff had given defendant the $50,000 in exchange for a partnership interest as opposed to a
loan, as memorialized in the February 1, 1998 letter. The trial court further determined that the
parties had agreed, as memorialized by the June 25, 1998 and November 15, 1998 letters, that
defendant could repurchase plaintiff’s partnership interest by repaying the initial $50,000
investment, but that this agreement was never effectuated. Implicit in this determination,
although not directly stated, is the trial court’s finding that defendant’s claim that plaintiff had
filled a minivan with valuable merchandise in satisfaction of the buyout agreement was not
credible.

        We find no error in the trial court’s determination. Defendant argues that the trial court
drew an improper inference that plaintiff’s right to receive a share of the profits was evidence
that he was a partner in a business. Defendant relies on MCL 449.7(4), which states in pertinent
part:

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       (4) The receipt by a person of a share of the profits of a business is prima facie
       evidence that he is a partner in the business, but no such inference shall be drawn
       if such profits were received in payment:

       (a) As a debt by installments or otherwise . . . .

However, MCL 449.7(4)(a) does not support defendant’s argument. The trial court found that a
partnership was formed between plaintiff and defendant based on the February 1, 1998 letter.
The letter defines the terms of the partnership, including that plaintiff would receive a share of
the monthly net earnings. No mention of repayment of a debt is found in the letter. Nor did any
of the usual accompaniments to a debt exist—there was no promissory note, security agreement,
amortization schedule, specified interest rate, etc. Defendant’s argument that the parties, who
are non-lawyers, later also referred to the initial investment as a “loan” does not invalidate the
trial court’s finding, as the parties clearly referred to the relationship as one of “10% ownership,”
and the parties’ subjective intent to create a “partnership” is not the determining factor. Byker,
465 Mich. at 653. The parties did later establish an installment schedule for the repayment of
plaintiff’s initial investment; however, we agree with the trial court that this was properly
characterized as an agreement for defendant to buy plaintiff out of the partnership. Even if the
parties had intended to somehow convert plaintiff’s partnership interest into a debt owed by
defendant, the documentation makes clear that plaintiff would retain his interest in the business
until the agreement was fully effectuated, which it never was. Defendant himself characterized
the business relationship as a partnership that the parties had attempted to convert to a loan when
“we [plaintiff and defendant] knew this wasn’t gonna work.” We therefore affirm the trial
court’s finding that a partnership existed between plaintiff and defendant that had not been
dissolved at the time of the bench trial.

                                        IV. MCR 2.113(F)

        Defendant further argues that the trial court erred in failing to grant summary disposition
on plaintiff’s remaining claims, pursuant to MCR 2.116(C)(8), for the violation of
MCR 2.113(F). MCR 2.116(C)(8) states that summary disposition is proper if a plaintiff “has
failed to state a claim on which relief can be granted.” “A motion under MCR 2.116(C)(8) tests
the legal sufficiency of the complaint.” Maiden, 461 Mich. at 119. MCR 2.113(F) states:

       (1) If a claim or defense is based on a written instrument, a copy of the instrument
       or its pertinent parts must be attached to the pleading as an exhibit unless the
       instrument is

         (a) a matter of public record in the county in which the action is commenced
       and its location in the record is stated in the pleading;

          (b) in the possession of the adverse party and the pleading so states;

          (c) inaccessible to the pleader and the pleading so states, giving the reason; or

         (d) of a nature that attaching the instrument would be unnecessary or
       impractical and the pleading so states, giving the reason.

                                                 -5-
        In this case, plaintiff’s complaint affirmatively alleges that a partnership exists due to an
agreement of the parties, that the agreement was reduced to writing, that a copy of the agreement
was attached, and that the violation of the uniform partnership act count is based on defendant
allegedly having committed a breach of this partnership agreement. Additionally, plaintiff’s
claim for an accounting incorporated by reference the common allegations and premised
plaintiff’s right to an accounting on the fact that plaintiff was a partner in the business. While it
became clear at a later hearing that the document the complaint referred to was defendant’s
February 1, 1998 letter, that document was not attached to the complaint. Furthermore, none of
the four enumerated exceptions apply in this case. The clear and unambiguous language of
MCR 2.113(F)(1) states that attaching the document to the complaint is mandatory. There is no
dispute that plaintiff failed to do so in this case. The trial court thus erred in determining that
summary disposition was not appropriate under MCR 2.116(C)(8).

       However, “MCR 2.116(I)(5) requires that if summary disposition is appropriate under
MCR 2.116(C)(8) . . . plaintiffs shall be given the opportunity to amend their pleadings, unless
the amendment would be futile.” Granam v Does, 303 Mich. App. 522, 543; 845 NW2d 128
(2014). MCR 2.118(A) states that after 14 days have passed from being served with a responsive
pleading a party “may amend a pleading only by leave of the court or by written consent of the
adverse party” and that “[l]eave shall be freely given when justice so requires.” Therefore, on
remand the trial court should grant plaintiff the opportunity to file an amended complaint under
MCR 2.116(I)(5) and MCR 2.118(A). We note that under MCR 2.118(D), this amendment
would relate back to the date of the original pleading.

                                          V. DAMAGES

        Finally, defendant argues that the trial court’s determination of damages was erroneous.
We agree that the trial court’s damages calculation was not based on evidentiary support and is
clearly erroneous. See Alan Custom Homes, 256 Mich. App. at 513. In both its oral and written
opinion, the trial court stated in conclusory terms that the business had yearly net profits of at
least $80,000 and inventory of a value of at least $600,000. However, there is little to no
evidentiary support for these conclusions in the record. The best evidence of the business’s
yearly net profits would come from the Schedule C’s attached to defendant’s IRS Form 1040 tax
returns. These show net business income for years 2009, 2010, 2011, and 2012 to be $15,342,
$15,268, $10,315, and $14,434, respectively. Additionally, the only evidence in the record that
makes a statement about the value of the business’s current assets is Exhibit D, the business plan
admitted by plaintiff. While that document does state that the business’s assets were worth
$1,000,000, the document is undated and references no figures past year 1998. A purported
business plan from 1998 cannot by itself be used to determine the current value of the business
assets over 17 years later.

        On remand, we direct the trial court to order dissolution of the partnership pursuant to
MCL 449.32, and, in the winding up of the partnership, award plaintiff, if applicable, the value
of his share of the monthly net earnings owed and the value of his 10% ownership interest, as

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requested by plaintiff in Count V of the complaint3, and to order an accounting, if necessary, as
requested by Count VI of plaintiff’s complaint, to determine those values.

        We affirm the trial court’s determination that a partnership existed, vacate the award of
damages, and remand for the trial court to allow amendment of the complaint, to enter an order
of dissolution, and for a determination of the amounts owed to plaintiff.

        Affirmed in part, vacated in part, and remanded for further proceedings consistent with
this opinion. We do not retain jurisdiction.

                                                           /s/ Mark T. Boonstra
                                                           /s/ Kurtis T. Wilder
                                                           /s/ Patrick M. Meter

3
 We note that there is no requirement that the business be sold. See MCL 449.40 for the rules
governing the settling of accounts between partners.

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