Court Opinion

ID: 6115858
Source: CourtListenerOpinion
Date Created: 2022-02-03 16:08:15.006293+00
Date Added: 2024-06-11T08:21:56.984121
License: Public Domain

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
                 revision until final publication in the Michigan Appeals Reports.

                          STATE OF MICHIGAN

                           COURT OF APPEALS

ANGELO E. IAFRATE, Individually, as Personal                        UNPUBLISHED
Representative of the ESTATE OF ANGELO                              January 27, 2022
IAFRATE, SR., and as Successor Co-Trustee of the
JOHN IAFRATE IRREVOCABLE TRUST,
REBECCA IAFRATE, as Successor Co-Trustee of
the JOHN IAFRATE IRREVOCABLE TRUST, and
DOMINIC IAFRATE,

               Plaintiffs-Appellants,

V                                                                   No. 355597
                                                                    Wayne Circuit Court
ANGELO IAFRATE, INC., and ROBERT                                    LC No. 19-009098-CB
ADCOCK,

               Defendants-Appellees.

Before: GLEICHER, C.J., and BORRELLO and RONAYNE KRAUSE, JJ.

PER CURIAM.

       Plaintiffs1 appeal as of right the trial court’s order granting summary disposition in favor
of defendants. We affirm.

                                 I. FACTUAL BACKGROUND

        In 1969, Angelo E. Iafrate Sr. (Angelo Sr.)2 incorporated Angelo Iafrate, Inc. (the
Company), which was “an earth-moving, road building, construction company . . . ” The
Company issued shares to Angelo Sr. and his children: Angelo Jr., Dominic, John, and Anna.
Insofar as we can determine, Anna passed away, and was no longer a shareholder in the Company,

1
 For the sake of clarity, we refer to the members of the Iafrate family by their given names, which
conforms with the designations used by the trial court.
2
  Angelo Sr. was initially a plaintiff in this case, but he passed away during the proceedings and
thus the trial court entered a stipulated order to replace Angelo Sr. with his estate.

                                                -1-
before any of the events that gave rise to this case. Although not expressly stated in so many
words, John’s interests are apparently represented by the John Iafrate Irrevocable Trust, U/A/D
January 1, 1988 (the Trust), of which Angelo Sr. was the trustee at relevant times. In 2000, Angelo
Sr., Dominic, and John moved to Florida, and Angelo Jr. remained in Michigan and served as the
Company’s president and sole director. While Angelo Jr. was president, defendant Robert Adcock
was the Company’s Executive Vice President.

         Slightly more than ten years later, Angelo Sr. and the living children assembled a plan to
sell the Company to its employees through an Employee Stock Ownership Plan (ESOP). The plan
entailed plaintiffs financing 100% of the purchase price through loans to the company, in exchange
for which they each received two Promissory Notes (a senior and a junior note) and Common
Stock Warrants.3 Plaintiffs’ plan and expectation was that their respective Promissory Notes
would be receive equal relative priority, such that their respective junior notes would be paid off
at the same time as each other, and their senior notes would be paid off at the same time as each
other. The Warrants would then allow plaintiffs to benefit from the growth of the Company after
their notes were paid in full.

        The plan was effectuated in 2013, when a “new Company was formed” by filing articles
of incorporation. Plaintiffs contributed all of their stock to the new entity, and received all 30,000
of its shares. Then the new company formed an ESOP that purchased the 30,000 shares from
plaintiffs. The Company provided the Promissory Notes and Warrants for 7,500 shares divided
between the plaintiffs. The Promissory Notes required quarterly installment payments. They
further provided, in relevant part:

               1.4 Discretionary Prepayments. Obligor [the Company] may prepay all or
       part of the principal of this Note at any time . . . Any prepayment made under this
       Section shall be applied pro rata to the Sellers’ [plaintiffs’] [junior or senior] Notes
       based on the remaining principal balance of each note.

                                               * * *

              4 Waiver. No waiver by Payee [plaintiff] of any right or remedy under this
       Note shall be effective except in writing and signed by Payee. Neither the failure
       nor any delay in exercising any right, power or privilege under this Note will
       operate as a waiver of such right, power or privilege and no single or partial exercise
       of such right, power or privilege by Payee will preclude any other or further
       exercise of any other right, power or privilege or the exercise of any other right,
       power or privilege. To the maximum extent permitted by applicable law, (a) no
       claim or right of Payee arising out of this Note can be discharged by Payee, in whole
       or in part, by a waiver or renunciation of the claim or right unless in a writing,
       signed by Payee; (b) no waiver that may be given by Payee will be applicable except

3
  A stock warrant is, in general, a contractual right between a person and a company to purchase
stock at a specific price and at a specific date. In contrast, stock option is generally a contractual
right between two individuals to buy or sell stock at a specific price prior to a specific date. See
< https://www.investopedia.com/ask/answers/08/stock-option-warrant.asp >.

                                                 -2-
       in the specific instance for which it is given; and (c) no notice to or demand on
       Obligor will be deemed to be a waiver of any obligation of Obligor or of the right
       of Payee to take further action.

The Warrants provided, in relevant part:

               1. Exercise. This Warrant may be exercised at any time and from time to
       time by the Holder hereof, subject to the conditions set forth herein . . . In the
       event that the Warrant is exercised in respect of less than all of the Shares specified
       herein, a new Warrant evidencing the remaining Shares will be issued by the
       Company.

                                               * * *

               3. Warrant Term. This Warrant shall terminate on, and may no longer be
       exercised on or after, the date that is 60 days after the date that the Company has
       paid in full both the Senior Promissory Note and Junior Promissory [sic] issued by
       the Company in favor of the Holder.

                                               * * *

                4[a]. Reservation of Shares. . . . The Shares to be issued upon exercise of
       this Warrant represent 4.5%[4] of the fully diluted equity interests of the Company
       at the time this Warrant is executed, and the number of Shares shall be adjusted as
       determined appropriate by the Company’s Board of Directors from time to time to
       reflect any change in the issued and outstanding equity interests of the Company . . .
       such that the Shares will represent 4.5% of the fully diluted equity interests of the
       Company at all times until this Warrant is exercised (in part or in whole) or
       terminates.

Finally, plaintiffs executed an Intercreditor Agreement amongst themselves “to ensure that no
Plaintiff received more favorable treatment than any other when it came to the timing or amount
of payments.” In relevant part, the Intercreditor Agreement provided:

               4. Application of Payments and Collateral. In the event a Creditor receives
       any payment on the Creditor Indebtedness, or any payment or distribution from any
       of the Collateral,[5] in each case prior to the time all of the Creditor Indebtedness
       shall have been fully paid, that Creditor shall receive and hold the same in trust for

4
  The percentage amount varied among the plaintiffs’ individual Warrants; 4.5% was the amount
listed in Angelo Sr.’s Warrant.
5
  Plaintiffs were the creditors, the Intercreditor Agreement defined “Creditor Indebtedness” as the
total amount due to all four plaintiffs, and it defined the “Collateral” as essentially all of the
Company’s assets.

                                                -3-
       the benefit of all Creditors and shall forthwith apply the same Pro Rata against the
       Creditor Indebtedness.

Although defendants were technically not parties to the Intercreditor Agreement, defendant
executed the following Acknowledgement:

               The undersigned, being the Borrower referred to in the foregoing
       Intercreditor Agreement, hereby acknowledges receipt of a copy of the foregoing
       Intercreditor Agreement, waives notice of acceptance thereof by the Creditors,
       consents thereto, and agrees to the foregoing terms and provisions. By execution
       hereof, the Borrower agrees to be bound by the provisions of the foregoing
       intercreditor Agreement as they relate to the relative rights of the Creditors in the
       Collateral. The Borrower further agrees that the terms of the foregoing Intercreditor
       Agreement are solely for the benefit of the Creditors, and their respective
       successors and assigns, and that no other party, including the Borrower, shall claim
       any third-party beneficiary rights or any other rights thereunder.

After the close of the transaction, Adcock became president of the Company, and the board of
directors was composed of Dominic, Angelo Jr., and Michael Stefani. Stefani is an attorney who
also represented at least two of the Iafrates.6 In January 2016, Angelo Jr. resigned from the board
of directors.

        In March 2016, Adcock informed the board of directors that he asked the Company’s
bonding company for permission to issue a prepayment of $4 million on the Promissory Notes,
but that the bonding company had denied the request. After that discussion, Angelo Jr. told
Adcock that he would like his portion of any prepayment to be paid to Angelo Sr. In November
2016, Adcock obtained approval from the bonding company to make a prepayment on the amount
owed under Angelo Sr.’s Promissory Notes, and, in December 2016, he authorized the Company
to issue a payment for that amount to Angelo Sr. In February 2017, Adcock directed the Company
to issue payments to Dominic and the Trust for the amounts owed under their Promissory Notes.
Adcock contemporaneously asked Dominic to resign from the Company’s board of directors, and
apparently Stefani resigned as well.7 In February 2018, Adcock authorized the Company to issue
a payment to Angelo Jr. for the amount owed on his Promissory Notes.

        Plaintiffs believed that the final February 2018 payment was the triggering event for all
four of the Warrants, and all four of them attempted to exercise those warrants. Defendants
contended that only Angelo Jr’s Warrant was timely and would be honored. The other Warrants
had all expired because the Promissory Notes held by Angelo Sr., Dominic, and the Trust had each

6
  Defendants characterize Stefani as the “Iafrate family attorney,” which does appear to be implied
by the record, but we have only found documentary evidence attached to the pleadings showing
that Stefani represented Angelo Sr. and the Trust.
7
 It appears that, in the meantime, Adcock had become a director of the board. See Iafrate v
Warner Norcross & Judd, LLP, ___ FRD ___, ___ (ED Mich) (Docket No. 18-12028), 2021 WL
1232648 at *3.

                                                -4-
been paid in full by the Company more than 60 days previously. In April 2018, plaintiffs
commenced an action in federal district court, where, in due course, plaintiffs’ securities fraud
claims were eventually dismissed on the merits, and plaintiffs’ remaining state law claims were
dismissed without prejudice. See Iafrate v Angelo Iafrate, Inc, 827 F Appx 543, 547 (CA 6, 2020).
In July 2019, plaintiffs filed their complaint underlying this appeal which primarily concerned
defendants’ refusal to honor the expired Warrants. Plaintiffs raised four claims: (1) breach of
contract, (2) reformation, (3) unjust enrichment, and (4) fraud.

         In lieu of an answer, defendants filed a motion for summary disposition under MCR
2.116(C)(8). The trial court granted the motion, following which plaintiffs promptly moved for
reconsideration and for clarification. Following the Sixth Circuit’s decision in Iafrate, plaintiffs
filed a supplemental brief in support of their motion for reconsideration and a motion for leave to
file an amended complaint. The trial court apparently had not realized plaintiffs filed a motion for
reconsideration, but following plaintiffs’ supplemental brief, it entered orders denying
reconsideration and denying leave to file an amended complaint. This appeal followed.

                         II. APPLICABLE STANDARDS OF REVIEW

       On appeal, plaintiffs argue that the trial court erred by dismissing their breach of contract,
reformation, and fraud claims. Plaintiffs do not challenge the trial court’s dismissal of their unjust-
enrichment claim. Plaintiffs also contend that the trial court erroneously applied the wrong
standard when considering the motion for summary disposition.

         A grant or denial of summary disposition is reviewed de novo on the basis of the entire
record 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). A motion brought under MCR 2.116(C)(8)
should be granted only where the complaint is so legally deficient that recovery would be
impossible even if all well-pleaded facts were true and construed in the light most favorable to the
non-moving party. Id. at 119. Only the pleadings may be considered when deciding a motion
under MCR 2.116(C)(8). Id. at 119-120. However, pursuant to MCR 2.113(C), “[i]f 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,” unless, in relevant part, the instrument is “in the possession of the
adverse party and the pleading so states.” Any documents attached to the pleadings are considered
part of the pleadings and may be considered by the trial court when deciding a motion under MCR
2.116(C)(8). El-Khalil v Oakwood Hosp, 504 Mich 152, 163; 934 NW2d 665 (2019).

        This Court reviews questions of contract interpretation de novo. Burkhardt v Bailey, 260
Mich App 636, 646; 680 NW2d 453 (2004). The cardinal rule in the interpretation of contracts is
to ascertain the intention of the parties,” and in so doing, “we give the words used in the contract
their plain and ordinary meaning that would be apparent to a reader of the instrument.” Highfield
Beach v Sanderson, 331 Mich App 636, 654; 954 NW2d 231 (2020) (quotation marks and citation
omitted). Courts must “give effect to every word, phrase, and clause in a contract and avoid an
interpretation that would render any part of the contract surplusage or nugatory.” Klapp v United
Ins Group Agency, Inc, 468 Mich 459, 468; 663 NW2d 447 (2003). “[U]nless a contract provision
violates law or one of the traditional defenses to the enforceability of a contract applies, a court
must construe and apply unambiguous contract provisions as written.” Rory v Continental Ins Co,
473 Mich 457, 461; 703 NW2d 23 (2005). Generally, “separate agreements are treated separately,”

                                                 -5-
but if “parties enter into multiple agreements relating to the same subject-matter,” then those
agreements must be read “together to determine the parties’ intentions.” Wyandotte Electric
Supply Co v Electrical Technology Sys, Inc, 499 Mich 127, 148; 881 NW2d 95 (2016).

        “Whether a grant of equitable relief is proper under a given set of facts is a question of law
that this Court also reviews de novo.” Johnson Family Ltd Partnership v White Pine Wireless,
LLC, 281 Mich App 364, 371; 761 NW2d 353 (2008). “When considering whether a trial court
properly ordered reformation, this Court must be mindful that courts are required to proceed with
the utmost caution in exercising jurisdiction to reform written instruments.” Johnson v USA
Underwriters, 328 Mich App 223, 234; 936 NW2d 834 (2019) (quotation marks and citation
omitted). “To reform a contract, the facts necessary for the allowance of the remedy shall be
proved by clear and convincing evidence and not by a mere preponderance.” Id. (quotation marks
and citation omitted). “Whether a duty exists is a question of law that is solely for the court to
decide.” Harts v Farmers Ins Exch, 461 Mich 1, 6; 597 NW2d 47 (1999).

                    III. CORRECT SUMMARY DISPOSITION SUBRULE

       As an initial matter, plaintiffs contend that the trial court erred by looking beyond the
pleadings when considering defendants’ motion for summary disposition under MCR 2.116(C)(8).
We find no error.

         Plaintiffs attached copies of the Warrants and the Intercreditor Agreement to their
complaint, but they did not attach copies of the Promissory Notes. Defendants attached copies of
the Promissory Notes to their motion for summary disposition. Our Supreme Court has cautioned
that although documents attached to the pleadings may be considered by a court deciding a motion
for summary disposition under MCR 2.116(C)(8), the contents of those documents must not be
considered as “substantive evidence sufficient to” dispose of the nonmoving party’s claims. El-
Khalil, 504 Mich at 163. In context, however, our Supreme Court was referring to certain emails
in that case that had not been adopted by the nonmoving party as true. Id. Its holding was therefore
nothing more than the unremarkable principle that “[a] motion under MCR 2.116(C)(8) may not
be supported by affidavits, depositions, admissions, or other documentary evidence.” Patterson v
Kleiman, 447 Mich 429, 432; 526 NW2d 879 (1994). In contrast, the Promissory Notes were
instruments upon which both plaintiffs’ claims and defendants’ defenses were based. Moreover,
plaintiffs alleged that defendants possessed copies of the Promissory Notes. Therefore, the
Promissory Notes, the Warrants, and the Intercreditor Agreement were all properly considered part
of the pleadings under MCR 2.113(C)(2).

        Plaintiffs do not articulate or identify what other evidence the trial court supposedly
considered beyond the pleadings, and the trial court explicitly stated that it based its decision
entirely on the legal principles applicable to MCR 2.116(C)(8), despite “the colloquy at oral
argument.” We find no indication that the trial court improperly considered evidence beyond the
pleadings.

        Plaintiffs further argue that the trial court necessarily applied the wrong standard because
it found that plaintiffs waived pro rata repayment of the Promissory Notes, which is intrinsically a
factual determination. Plaintiffs correctly observe that, traditionally, what constitutes a waiver is
a question of law, and whether the facts in a case establish such a waiver is a question for the trier

                                                 -6-
of fact. Klas v Pearce Hardware & Furniture Co, 202 Mich 334, 339; 168 NW 425 (1918).
However, that does not establish that the trial court considered any evidence outside the pleadings.
Furthermore, the distinction between a factual determination and a legal determination is not
always so clear. There are circumstances under which a waiver may be found as a matter of law
based on undisputed facts. See Smith v Grange Mut Fire Ins Co of Mich, 234 Mich 119, 122-123;
208 NW2d 145 (1926). As discussed, the interpretation of contracts is a question of law, and it
may be appropriate for a court to determine under MCR 2.116(C)(8) that the legal significance of
the facts in the pleadings establishes a waiver. See Walters v Bloomfield Hills Furniture, 228 Mich
App 160, 165-166; 577 NW2d 206 (1998). Notably, in considering a motion for summary
disposition under MCR 2.116(C)(8), the courts must accept as true all factual allegations in the
complaint and any reasonable inferences from those factual allegations; however, the courts will
not accept a party’s conclusions. State ex rel Gurganus v CVS Caremark Corp, 496 Mich 45, 63;
852 NW2d 103 (2014). Merely phrasing an allegation as factual does not make it so. See Wilcox
v Moore, 354 Mich 499, 504; 93 NW2d 288 (1958).

       Plaintiffs finally argue that they were not obligated to plead in avoidance of the affirmative
defense of waiver. We agree, because “pleading in avoidance” is generally understood to apply in
the context of governmental liability. See Mack v Detroit, 467 Mich 186, 203; 649 NW2d 47
(2002). Plaintiffs further correctly point out that the party claiming waiver has the burden of
proving waiver. See Patel v Patel, 324 Mich App 631, 634; 922 NW2d 647 (2018). Affirmative
defenses are therefore generally not proper grounds for summary disposition under MCR
2.116(C)(8). See Booth Newspapers, Inc v Regents of Univ of Mich, 93 Mich App 100, 108-109;
286 NW2d 55 (1979). Nevertheless, so long as a court does not consider any evidence beyond the
pleadings, we do not think it is categorically erroneous per se for the court to determine that the
pleadings show a claim to be barred by an affirmative defense. See Glazier v Lee, 171 Mich App
216, 217-221; 429 NW2d 857 (1988) (applying the affirmative defense of wrongful conduct in a
motion under MCR 2.116(C)(8).8 We are unpersuaded that the trial court erroneously misapplied
MCR 2.116(C)(8).

                         IV. WAIVER UNDER PROMISSORY NOTES

        Plaintiffs argue that the trial court erred by ruling that plaintiffs waived the pro rata
prepayment term of the Promissory Notes on the grounds that the court disregarded both plaintiffs’
allegation that the Trust never consented to any non-pro-rata prepayments, and the nonwaiver term
in the Promissory Notes. We are not persuaded.

      “[A] waiver is a voluntary and intentional abandonment of a known right.” Quality Prod
& Concepts Co v Nagel Precision, Inc, 469 Mich 362, 374; 666 NW2d 251 (2003). “It is well

8
  See also Rauch v Day & Night Mfg Corp, 576 F 2d 697, 702 (CA 6, 1978), discussing application
of an affirmative defense where a “claim is adequately stated, but in addition to the claim the
complaint includes matters of avoidance that effectively vitiate the pleader’s ability to recover on
the claim . . . the complaint is said to have a built-in defense and is essentially self-defeating”
(quotation omitted). “Although lower federal court decisions may be persuasive, they are not
binding on state courts.” Abela v General Motors Corp, 469 Mich 603, 607; 677 NW2d 325
(2004).

                                                -7-
settled that a course of affirmative conduct, particularly coupled with oral or written
representations, can amount to waiver.” Id. at 379. Furthermore, “it is well established in our law
that contracts with written modification or anti-waiver clauses can be modified or waived
notwithstanding their restrictive amendment clauses . . . because the parties possess, and never
cease to possess, the freedom to contract even after the original contract has been executed.” Id.
at 372. However, any such alteration to the original contract must be demonstrably mutual, and
an anti-waiver provision in the original contract is highly relevant to assessing the parties’
subsequent course of conduct. Id. at 372-375.

       “Magic words are unnecessary to effectuate a valid waiver, but a waiver must be explicit,
voluntary, and made in good faith.” Patel, 324 Mich App at 634. “In order to ascertain whether
a waiver exists, a court must determine if a reasonable person would have understood that he or
she was waiving the interest in question.” Id. “Thus, a valid waiver may be shown by express
declarations or by declarations that manifest the parties’ intent and purpose, or be an implied
waiver, evidenced by a party’s decisive, unequivocal conduct reasonably inferring the intent to
waive.” Id. (quotation marks and citations omitted).

        As set forth above, the Promissory Notes and the Intercreditor Agreement9 both contained
provisions that clearly anticipated the possibility of irregular payments made on a single
Promissory Note instead of all Promissory Notes. Under § 1.4 of the Promissory Notes, the
Company appears to be obligated to apply discretionary prepayments pro rata to all Promissory
Notes of the same priority level (i.e., all senior or all junior Notes). Notwithstanding the anti-
waiver provision, Angelo Jr. told Adcock “that if the Company was going to make a prepayment
on the Senior and Junior Notes, that his portion of any prepayment should be paid to Angelo Sr.
due to Angelo Sr.’s age.” Defendants proceeded to issue a payment of $5.4 million on Angelo
Sr.’s Promissory Notes. Plaintiffs alleged that Angelo Sr. held that amount in trust for all plaintiffs
pursuant to the Intercreditor Agreement. By necessary implication, Angelo Sr. accepted the
payment. Furthermore, at that time, Dominic and Stefani were still on the Company’s board of
directors, and Angelo Sr. was the trustee of the Trust. It is starkly inescapable that plaintiffs and
defendants all mutually agreed to waive the pro-rata provision of § 1.4 of Angelo Sr.’s Promissory
Notes.

         In February 2017, nearly two months after the Company paid $5.4 million to Angelo Sr.,
Adcock directed the Company to issue payments to Dominic and the Trust for the amounts owed
under their Promissory Notes, which was $9,742,485.08 and $3,395,102.86, respectively. Plain-
tiffs alleged that Dominic and the Trust held their payments in trust under the terms of the
Intercreditor Agreement. Again, Dominic and Stefani were still on the board until after those
payments were made, and by necessary implication, Dominic and Angelo Sr. (the latter as trustee
of the Trust10) accepted the payments. Also again, there is no way to interpret these undisputed

9
    We will discuss the Intercreditor Agreement below.
10
   Plaintiffs argue that the Trust never consented, but this conclusory assertion is belied by the
actual facts alleged by plaintiffs. Indeed, plaintiffs alleged that the Trust’s then-trustee, Angelo
Sr., accepted non-pro-rata prepayments in both his personal capacity and in his capacity as a
trustee.

                                                 -8-
facts as anything other than a mutual waiver, through a course of conduct, of § 1.4 of Dominic’s
and the Trust’s Promissory Notes.

        Plaintiffs generally contend that defendants breached the pro-rata provisions of the
Promissory Notes, which, as discussed, caused three of the four Warrants to be triggered earlier
than plaintiffs anticipated. However, the trial court correctly found that the parties, through their
affirmative and fully admitted conduct, mutually waived the pro-rata provisions. The trial court
recognized the anti-waiver provision, but it correctly recognized that the anti-waiver provision was
not dispositive under the circumstances.

                   V. BREACH OF THE INTERCREDITOR AGREEMENT

        Plaintiffs argue that the trial court erred by ruling that defendants were not party to the
Intercreditor Agreement and by overlooking the pro rata payment term of that agreement. We
disagree.

        It is manifestly apparent on its face that defendants were not, in fact, parties to the
Intercreditor Agreement. The Intercreditor Agreement states at the outset that it was between
Angelo Sr., Dominic, Angelo Jr., and the Trust. None of the provisions in the Intercreditor
Agreement appear to place any obligations or responsibilities upon the Company or upon Adcock,
and it specifically stated that the Company was not a beneficiary of the Agreement. The
Company’s president at the time, Angelo Jr., signed a separate acknowledgment indicating that
the Company “agree[d] to the foregoing terms and provisions,” none of which, as noted, imposed
any obligations upon the Company. As set forth above, the acknowledgement stated that the terms
of the Intercreditor Agreement were “solely for the benefit of” plaintiffs, and the only specific
obligation the Company undertook was to respect “the relative rights of the Creditors in the
Collateral.” Nowhere in the Intercreditor Agreement was a non-pro-rata payment on a Promissory
Note forbidden; to the contrary, § 4 unambiguously anticipated that such non-pro-rata payments
might occur. Under such an eventuality, the Company had no obligations; rather, the recipient of
the payment was obligated to hold the payment in trust for the other plaintiffs.

        The trial court properly found that defendants were not parties to the Intercreditor
Agreement. Furthermore, the Warrants did not reference or rely upon the Intercreditor Agreement.
Although the Promissory Notes prohibited non-pro-rata payments, the parties waived that
prohibition. The Intercreditor Agreement only established obligations as between plaintiffs, and
the Company only agreed to respect plaintiffs’ obligations as between each other. Plaintiffs do
not explain how their agreement to hold any payments in trust for one another prevented individual
Promissory Notes from being extinguished until all of them were paid in full. Although plaintiffs
agreed to hold any payments that they received from the Company in trust so that those payments
could be applied pro rata among themselves until all of the Promissory Notes were satisfied, the
Intercreditor Agreement did not restrict the Company’s prerogative to satisfy individual
Promissory Notes with non-pro-rata prepayments. The Intercreditor Agreement also did not, for
example, obligate any recipient of a non-pro-rata payment to refuse that payment. Any acceptance
of such payment would necessarily constitute valid payment by the Company on that particular
Promissory Note.

                                                -9-
                              VI. BREACH OF THE WARRANTS

       Plaintiffs contend that the trial court erred by failing to address how the Company was
required to reissue, amend, or restate the Warrants. We conclude that the Warrants did not require
the Company to take those actions.

        As an initial matter, we observe that the trial court correctly applied the plain language of
the Warrants, which, as set forth above, unambiguously refer to “the date that the Company has
paid in full both the Senior Promissory Note and Junior Promissory [sic] issued by the Company
in favor of the Holder” (emphases added). The only possible interpretation of this language is that
the specific Warrant would be triggered when the particular Promissory Notes held by the holder
of that Warrant were paid by the Company. Plaintiffs apparently expected that all of their
Promissory Notes would be paid off at the same time. However, they did not structure their
contracts to make a simultaneous payoff inescapable, and they waived the provisions that should
have resulted in their payoffs being simultaneous. Notably, they could easily have drafted their
Warrants in such a way that they would be triggered only after the last Promissory Note was paid
in full. As discussed, we enforce the plain language of contracts as written, and as written, the
outcome in this matter was fully permitted.

        Plaintiffs argue that defendants committed the first material breach of the Warrants by
violating § 4.a. of the Warrants, which plaintiffs characterize as an “anti-dilution provision,
providing that the number of shares recited in the Warrants would collectively at all times represent
20% of the Company’s full diluted equity interest” (emphasis omitted). Plaintiffs argue that the
Company issued additional shares, which altered the Company’s equity interests and therefore
mandated reissuance of each Warrant. Generally, one party’s initial substantial breach of a
contract may excuse the other party’s nonperformance of its obligations under that contract. Alpha
Capital Mgt, Inc v Rentenbach, 287 Mich App 589, 613; 792 NW2d 344 (2010). However, the
breach must be substantial, meaning the breach in some way precluded or drastically undermined
either the other party’s ability to perform or the essential purpose of the contract. See Baith v
Knapp-Stiles, Inc, 380 Mich 119, 126; 156 NW2d 575 (1968).

        Accepting as true that defendants indeed breached the Warrants by failing to reissue them,
the evidence does not show that defendants diluted the Company’s equity to the point of rendering
the Warrants shams. More importantly, the evidence does not show that any reissuance of the
Warrants would have entailed changing any terms other than their number of shares. Reissuance
would therefore not have altered the legal effect of plaintiffs’ waiver of the Promissory Notes’
prohibition against non-pro-rata payments. Accordingly, the “first substantial breach” doctrine is
inapplicable.

                         VII. REFORMATION OF THE WARRANTS

        Plaintiffs argued below that reformation of the Warrants was necessary because there was
both a mutual mistake between the parties and a unilateral mistake on the part of plaintiffs. The
trial court disagreed, and it ruled that plaintiffs’ reformation claim failed because their complaint
failed to allege a mutual mistake or actionable fraud. On appeal, plaintiffs also argue that an
amended contract was created after plaintiffs waived the pro rata prepayment term of the
Promissory Notes; that the amended contract was composed of the amended Promissory Notes,

                                                -10-
the Warrants, and the Intercreditor Agreement; and that their reformation claim was directed at the
amended contract because that agreement failed to reflect the parties’ intent that the Warrants all
be exercised on a single date. We find that plaintiffs’ latter argument is not readily apparent from
the lower court record, because plaintiffs’ complaint and argument in the trial court focused solely
on reforming the Warrants rather than a novel amended gestalt contract. We therefore find the
latter argument unpreserved. See Glasker-Davis v Auvenshine, 333 Mich App 222, 227-228; 964
NW2d 809 (2020).

        “Michigan courts sitting in equity have long had the power to reform an instrument that
does not express the true intent of the parties as a result of fraud, mistake, accident, or surprise.”
Johnson Family Ltd Partnership, 281 Mich App at 371-372. “Courts will reform an instrument to
reflect the parties’ actual intent where there is clear evidence that both parties reached an
agreement, but as the result of mutual mistake, or mistake on one side and fraud on the other, the
instrument does not express the true intent of the parties.” Mate v Wolverine Mut Ins Co, 233
Mich App 14, 24; 592 NW2d 379 (1998) (quotation marks and citations omitted). A contract
drafted as the parties intended will not be reformed merely because the parties were mistaken about
the contract’s legal effect. Schmalzreidt v Titsworth, 305 Mich 109, 119; 9 NW2d 24 (1943). In
contrast, a mistake in drafting an instrument, such that the contract as written does not reflect the
parties’ agreement, may warrant reformation of the instrument to comport with the parties’
intentions. Id. at 119-120. A unilateral mistake may warrant reformation where the mistake was
induced by fraud, or where one party knew the contract did not accurately express the other party’s
intentions and concealed that other party’s misapprehension. Johnson Family Ltd Partnership,
281 Mich App at 380.

        Plaintiffs argue that their “claim for reformation of the parties’ contract is founded upon
the fact that the contract does not accurately carry out the parties’ intent, and reformation is sought
to conform the parties’ contract to the actual intent of the contracting parties.” We accept that the
Promissory Notes, Intercreditor Agreement, and Warrants should be considered together. See
Wyandotte Electric Supply Co, 499 Mich at 148. However, plaintiffs’ argument is that some term
was omitted from the contract, or defendants were aware that the contract did not reflect plaintiffs’
intentions and failed to correct the misapprehension. The former theory requires that a term agreed
to by the parties never made its way into a written instrument. Plaintiffs do not articulate what
that term might be.11 The latter theory appears to be that Adcock realized before plaintiffs did that
a Warrant-triggering event had occurred and failed to warn plaintiffs of that event. However,
plaintiffs misapprehend the kind of unilateral mistake that will give rise to reformation: the mistake
must be as to the inadvertent inclusion or exclusion of terms in the contract.12 See Woolner v

11
   Insofar as we can determine, plaintiffs contend that a new contract was created that, for reasons
we find difficult to follow, somehow called for terms other than simply the original contract with
the pro-rata payment prohibition waived. Even if we were to accept this theory, it does not amount
to a claim that the parties negotiated an agreement that, when reduced to writing, omitted a term
without their knowledge.
12
   In the context of an oral contract, the equivalent would be one party misspeaking without
realization, the other party knowing the first party misspoke, and the other party nevertheless

                                                 -11-
Layne, 384 Mich 316, 318-319; 181 NW2d 907 (1970); Baryton State Savings Bank v Durkee, 325
Mich 138, 140-142; 37 NW2d 892 (1949).

        Ultimately, the facts as set forth by plaintiff and in the pleadings simply show that plaintiffs
failed to understand the legal ramifications of their waivers of the prohibitions against pro-rata
payments. The trial court properly refused to reform the parties’ contract.

                                            VIII. FRAUD

       Plaintiffs contend that the trial court erred by dismissing their fraud claims. We disagree.

        The trial court dismissed plaintiffs’ fraud claims on the basis of collateral estoppel, holding
that the dismissal of plaintiffs’ securities fraud claims in federal court precluded plaintiffs’
common law fraud claims. “Collateral estoppel bars relitigation of an issue in a new action arising
between the same parties or their privies when the earlier proceeding resulted in a valid final
judgment and the issue in question was actually and necessarily determined in that prior
proceeding.” Leahy v Orion Twp, 269 Mich App 527, 530; 711 NW2d 438 (2006). Collateral
estoppel may bar subsequent litigation in state courts based on issues determined in a prior federal
action. Pierson Sand and Gravel, Inc v Keeler Brass Co, 460 Mich 372, 380-381; 596 NW2d 153
(1999). The trial court also held that, in any event, plaintiffs failed to plead the necessary elements
of fraud.

        Plaintiffs’ fraud claim is based in part on the general contention that Adcock undervalued
the Company’s performance, which undermined the value of the stock to be redeemed under the
Warrants. Having determined that the Company properly regarded all but Angelo Jr.’s warrants
as expired, this claim applies only to Angelo Jr.’s Warrant. Plaintiffs’ securities fraud claim in
federal court alleged a violation of the Securities Exchange Act, 15 USC § 78j(b), and Securities
and Exchange Commission Rule 10b-5, 17 CFR § 240.10b-5, for precisely that reason: that
Adcock and the Company had intentionally undervalued the Company’s stock price in an effort to
manipulate the value of the Warrants. Iafrate, 827 F Appx at 546-547. Consistent with the
allegations in the complaint in this matter, the federal courts observed that Adcock admitted to the
undervaluing to Angelo Jr. before Angelo Jr. exercised his Warrant. Id. at 551. In Michigan, as
in federal courts, an essential element of fraud is that the plaintiff not only relied on a
misrepresentation but did so genuinely and reasonably. Cooper v Auto Club Ins Ass’n, 481 Mich
399, 414-415; 751 NW2d 443 (2008).13 Plaintiffs alleged that Angelo Jr. relied on defendants’
“materially false and misleading statements” and upon an earlier presentation regarding the
methodology to be used in calculating the fair market value of the stocks. However, as the Sixth
Circuit found, Angelo Jr. actually knew that defendants had manipulated the Company’s stock
value and, instead of challenging the valuation or suing for breach of contract immediately, he

holding the first party to their word. Again, the evidence as set forth by plaintiffs shows that they
knew what they had agreed upon, they simply did not realize the secondary consequences.
13
   Although Cooper addressed fraud in an insurance context, it has long been established that
“fraud is not perpetrated upon one who has full knowledge to the contrary of a representation.”
Beverly v Richards, 255 Mich 508, 514; 238 NW2d 270 (1931).

                                                 -12-
chose to exercise the Warrant despite that knowledge. Iafrate, 827 F Appx at 551-552. Even if
the federal decision lacked preclusive effect, we would agree with its conclusion that plaintiffs
have not alleged actionable fraud on this basis.

        Plaintiffs also alleged that defendants never warned plaintiffs that the Warrants would be
triggered, despite knowing that plaintiffs believed the Warrants would not be triggered and despite
a request from Angelo Jr. that Adcock document how the non-pro-rata payments might alter
plaintiffs’ understandings. In the trial court, plaintiffs contended that Adcock owed them a
fiduciary duty, the exact nature of which seems never to have been made clear. On appeal,
plaintiffs provide only a cursory argument with no citation to authority. We could consider this
argument waived. Wolfe v Wayne-Westland Community Sch, 267 Mich App 130, 139; 703 NW2d
480 (2005). Nevertheless, we presume plaintiffs are probably referring to the common-law duty
of candor, under which a fiduciary or quasi-fiduciary may have an affirmative duty of disclosure
under some circumstances. See Tomkins v Hollister, 60 Mich 470, 479; 27 NW 651 (1886);
Barrett v Breault, 275 Mich 482, 491; 267 NW2d 544 (1936). Plaintiffs’ allegations essentially
articulate a claim for fraudulent misrepresentation, which requires an affirmative duty to disclose.
Titan Ins Co v Hyten, 491 Mich 547, 557; 817 NW2d 562 (2012).14

        It is far from clear that Adcock did owe a fiduciary duty to plaintiffs. The trust a plaintiff
places in a defendant alleged to be a fiduciary must be reasonable. Prentis Family Foundation v
Barbara Ann Karmanos Cancer Inst, 266 Mich App 39, 44; 698 NW2d 900 (2005). Presuming
Adcock owed a fiduciary duty to plaintiffs, a claim of fraudulent misrepresentation does not
require diligence on the part of plaintiffs. Titan Ins Co, 491 Mich at 557. However, a plaintiff
may not “wilfully close his eyes to that which others clearly see.” Id. at 562. Plaintiffs could have
read the plain and unambiguous language of their Warrants. Although there are rare circumstances
under which failing to advise someone of the law—which all persons are otherwise presumed to
know—may be actionable, generally something more than mere silence is required, even where a
fiduciary relationship exists. Tompkins, 60 Mich at 480-484. In any event, as discussed, the
prepayments on the Promissory Notes did not change the nature of the transaction as plaintiffs
argue; rather, plaintiffs simply did not understand their own contracts. Especially in light of their

14
   As the federal courts found, “[p]laintiffs fail to identify any affirmative statement by Defendants
establishing that the Company would only apply prepayments pro rata, that even if non-pro-rata
prepayments were made they would not trigger the warrant-exercise period, or that the Warrants
would be redeemed automatically,” and “Plaintiffs do not allege, with sufficient particularity,
statements establishing the Company’s commitment to [only apply prepayments pro rata or to
automatically redeem the Warrants] in the first place.” Iafrate, 827 F Appx at 549. We would
agree with this assessment, irrespective of whether Iafrate has preclusive effect. Consequently,
this theory turns on whether defendants had an affirmative duty to disclose.

                                                -13-
cursory argument, we are unpersuaded that plaintiffs have articulated a duty on the part of
defendants to explain what those contracts stated or that defendants intended to honor the contracts
as they were actually written.

       Affirmed.

                                                             /s/ Elizabeth L. Gleicher
                                                             /s/ Stephen L. Borrello
                                                             /s/ Amy Ronayne Krause

                                               -14-