Court Opinion

ID: 4093811
Source: CourtListenerOpinion
Date Created: 2016-10-31 07:08:30.907722+00
Date Added: 2024-06-11T14:36:43.954142
License: Public Domain

STATE OF MICHIGAN

                           COURT OF APPEALS

GLEN SCHILKEY, MICHELLE SCHILKEY, and                              UNPUBLISHED
GLEN AND MICHELLE SCHILKEY                                         October 27, 2016
REVOCABLE TRUST,

              Plaintiffs/Counter Defendants-
              Appellants,

v                                                                  No. 327243
                                                                   St. Clair Circuit Court
PROSPER MANAGEMENT, LLC, PROSPER                                   LC No. 12-000861-CZ
TECHNICAL INDEX FUND, LP, and SCOTT P.
WORDEN,

              Defendants/Counter Plaintiffs,

and

DA REAL PROPERTIES, LLC,

              Garnishee Defendant-Appellee.

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

PER CURIAM.

       In this action to void the allegedly fraudulent transfer of assets by defendant Prosper
Management, LLC (Prosper Management) to garnishee defendant, plaintiffs appeal as of right,
challenging an order denying their motion for summary disposition pursuant to MCR
2.116(C)(10) (no genuine issue of material fact), as well as an order granting garnishee
defendant’s motion for summary disposition pursuant to MCR 2.116(C)(7) (dismissal is
appropriate on the basis of release). We affirm.

        Plaintiffs entered into a settlement agreement with defendants in May 2013. In
accordance with the terms of that agreement, defendants agreed to pay plaintiffs $500,000 in two
installments in exchange for plaintiffs withdrawing the complaint it had filed against defendants

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as well as certain administrative complaints.1 Defendants did not make the required second
payment and a judgment was entered against defendants and in favor of plaintiffs. Immediately
preceding entry of the judgment, a member of Prosper Management that was also dissatisfied
with the performance of the company and had threatened litigation—the Andrew and Dana
Kotsovos Revocable Trust (the Kotsovos Trust), through its trustees, Andrew and Dana
Kotsovos—entered into an agreement whereby promissory notes and mortgages related to two
properties on Huron Avenue in Port Huron, Michigan were assigned to the Kotsovos Trust. The
Kotsovos Trust in turn assigned the promissory notes and mortgages to garnishee defendant, DA
Real Properties, LLC, a company owned by Andrew and Dana Kotsovos.

        Plaintiffs argue on appeal that the trial court erred by denying their motion for summary
disposition because they proved that these asset transfers were fraudulent under MCL 566.34(1)
and MCL 566.35(2). We disagree. We review de novo a trial court’s decision on a motion for
summary disposition under MCR 2.116(C)(10). Jimkoski v Shupe, 282 Mich. App. 1, 4; 763
NW2d 1 (2008). A genuine issue of material fact exists when the evidence submitted might
permit inferences contrary to the facts as asserted by the movant. Dillard v Schlussel, 308 Mich
App 429, 445; 865 NW2d 648 (2014). We similarly review de novo issues of statutory
construction. Id. at 444. When interpreting a statute, we

       give the words of a statute their plain and ordinary meaning, looking outside the
       statute to ascertain the Legislature’s intent only if the statutory language is
       ambiguous. Where the language is unambiguous, we presume that the Legislature
       intended the meaning clearly expressed—no further judicial construction is
       required or permitted, and the statute must be enforced as written. [Id. at 445
       (quotation marks and citations omitted).]

       The Uniform Fraudulent Transfer Act (UFTA), MCL 566.31 et seq., is “designed to
prevent debtors from transferring their property in bad faith before creditors can reach it.”
Dillard, 308 Mich. App. at 446 (quotation marks and citation omitted). It provides that a “transfer
made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s
claim arose before or after the transfer was made or the obligation was incurred, if the debtor
made the transfer or incurred the obligation” under any of the following circumstances:

                 (a) With actual intent to hinder, delay, or defraud any creditor of the
       debtor.

               (b) Without receiving a reasonably equivalent value in exchange for the
       transfer or obligation, and the debtor did either of the following:

               (i) Was engaged or was about to engage in a business or a transaction for
       which the remaining assets of the debtor were unreasonably small in relation to
       the business or transaction.

1
 The agreement also provided a penalty of $25,000 if defendants failed to make the full payment
within a certain period of time.

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               (ii) Intended to incur, or believed or reasonably should have believed that
       he or she would incur, debts beyond his or her ability to pay as they became due.
       [MCL 566.34(1).]

        The UFTA provides a non-inclusive list of factors (historically referred to as the “badges
of fraud”) that may be considered to determine actual intent under MCL 566.34(1). See MCL
566.34(2) (listing the factors). These statutory factors correspond to the historical badges of
fraud, which were “circumstances so frequently attending fraudulent transfers that an inference
of fraud arises from them.” Dillard, 308 Mich. App. at 449 (quotation marks and citation
omitted). “[O]nce a creditor establishes the presence of multiple badges of fraud, he or she has
established a fact question regarding actual intent.” Id. at 454.

        Plaintiffs assert that they were entitled to summary disposition pursuant to MCL
566.34(1)(a) because the evidence allegedly established six badges of fraud: (1) the transfers
were to an insider, MCL 566.34(2)(a), specifically to the Kotsovos Trust, which assigned the
assets to garnishee defendant; (2) plaintiffs sued defendants before Prosper Management made
the transfers, MCL 566.34(2)(d); (3) the transfers were substantially all of Prosper
Management’s assets, MCL 566.34(2)(e); (4) the value of the consideration received by Prosper
Management was not reasonably equivalent to the value of the assets transferred or the amount
of the obligation incurred, MCL 566.34(2)(h); (5) Prosper Management was insolvent or became
insolvent shortly after making the transfers, MCL 566.34(2)(i); and (6) the transfers occurred
shortly before or after Prosper Management incurred a substantial debt, MCL 566.34(2)(j).
Plaintiffs set forth evidence supporting these six factors. However, it is unnecessary to address
the merits of the evidence supporting each factor because, even if we were to conclude that the
asserted evidence supports those factors, it would only establish a factual question regarding
Prosper Management’s intent, not a definite conclusion of law regarding actual intent. Dillard,
308 Mich. App. at 454. If the trial court ignored the factors supporting Prosper Management’s
claim that the transfers were not made to defraud plaintiffs and credited plaintiffs’ claims and
evidence, it would have invaded the province of the fact-finder. Id. Therefore, plaintiffs were
not entitled to summary disposition on this basis.

        Plaintiffs next argue that they were entitled to summary disposition because the proofs
established a case of constructive fraud under MCL 566.35(2), which provides the following:

              A transfer made by a debtor is fraudulent as to a creditor whose claim
       arose before the transfer was made if the transfer was made to an insider for an
       antecedent debt, the debtor was insolvent at that time, and the insider had
       reasonable cause to believe that the debtor was insolvent.

We agree with plaintiffs that the transfers in this case were to an insider for purposes of this
statute. The term “insider” is defined in MCL 566.31(g) as including five categories. The word
“includes” may be a term of enlargement or limitation, Frame v Nehls, 452 Mich. 171, 178-179;
550 NW2d 739 (1996), or may signal the presence of an illustrative list, Samantar v Yousuf, 560
U.S. 305, 317; 130 S. Ct. 2278; 176 L. Ed. 2d 1047 (2010). We conclude that the language of the
statute is not limited to only the enumerated categories of what constitutes an “insider” under
MCL 566.31(g), particularly when it is clear that the UFTA is designed “to prevent debtors from
transferring their property in bad faith before creditors can reach it.” Dillard, 308 Mich App at

                                               -3-
446 (quotation marks and citation omitted). Limiting the definition of “insider” to only the
enumerated categories absent such an express requirement by the Legislature would not
effectuate the UFTA’s purpose.

        The Kotsovos Trust was a member of Prosper Management, a limited liability company.
Although the UFTA does not explicitly define an insider with respect to relationships arising
from a limited liability company and a member of that company, the transaction between Prosper
Management and the Kotsovos Trust is tantamount to an “insider” deal for purposes of the
UFTA because, as a member of Prosper Management, the Kotsovos Trust possessed knowledge
regarding the settlement between Prosper Management and plaintiffs as well as the success (or
lack thereof) of Prosper Management’s investments. Further, Andrew Kotsovos is a member of
garnishee defendant, to whom the notes and mortgages were transferred. See, e.g., Coleman–
Nichols v Tixon Corp, 203 Mich. App. 645, 660; 513 NW2d 441 (1994) (under the former
statute—the Uniform Fraudulent Conveyance Act, MCL 566.11 et seq., as enacted by 1919 PA
310—the “badges of fraud” included “a close relationship between transferor and transferee”);
Gen Trading Inc v Yale Materials Handling Corp, 119 F3d 1485, 1499 (CA 11, 1997)
(construing Florida’s version of the UFTA and concluding that “[a] close relationship between a
transferor debtor and a transferee is a factor equivalent to a badge of fraud that should be
considered in determining fraudulent intent”). Although plaintiffs demonstrated that the
transfers were to an insider, there were issues of material fact regarding whether Prosper
Management was insolvent at the time of the transfers and whether garnishee defendant, as the
assignee of the Kotsovos Trust, had reasonable cause to believe that Prosper Management was
insolvent at that time. See Dillard, 308 Mich. App. at 456 (“Summary disposition is inappropriate
for deciding cases premised on intent, good faith, or reasonableness.”) (emphasis added).
Accordingly, plaintiffs were also not entitled to summary disposition on this basis.

         Finally, plaintiffs argue that the trial court erred by concluding that its claim was barred
by the release in the settlement agreement. We review de novo whether the trial court properly
determined that a release barred a plaintiff’s claim pursuant to MCR 2.116(C)(7). Adair v State,
470 Mich. 105, 119; 680 NW2d 386 (2004). “When it grants a motion under MCR 2.116(C)(7),
a trial court should examine all documentary evidence submitted by the parties, accept all well-
pleaded allegations as true, and construe all evidence and pleadings in the light most favorable to
the nonmoving party.” McLain v Lansing Fire Dep’t, 309 Mich. App. 335, 340; 869 NW2d 645
(2015). “An agreement to settle a pending lawsuit is a contract, governed by the legal rules
applicable to the construction and interpretation of other contracts[,]” Reicher v SET Enterprises,
Inc, 283 Mich. App. 657, 663; 770 NW2d 902 (2009), and this Court reviews de novo a trial
court’s interpretation of contract language, id. at 664.

        “The validity of a release turns on the intent of the parties. A release must be fairly and
knowingly made to be valid.” Batshon v Mar-Que Gen Contractors, Inc, 463 Mich. 646, 649 n 4;
624 NW2d 903 (2001). “If the language of the release is unambiguous, it must be construed, as
a whole, according to its plain and ordinary meaning.” Radu v Herndon & Herndon
Investigations, Inc, 302 Mich. App. 363, 374; 838 NW2d 720 (2013). “A release is invalid if (1)
the releasor was acting under duress, (2) there was a misrepresentation as to the nature of the
release agreement, or (3) there was fraudulent or overreaching conduct to secure the release.”
Brooks v Holmes, 163 Mich. App. 143, 145; 413 NW2d 688 (1987).

                                                -4-
       In this case, plaintiffs do not challenge the validity of the terms of the release, but rather
challenge whether garnishee defendant is protected by the release contained in the settlement
agreement. The settlement agreement provides, in relevant part, the following:

                1. Plaintiffs [sic] Release of Ownership Interests: Upon execution of this
       Settlement Agreement, Plaintiffs unconditionally agree and acknowledge that
       Plaintiffs have no ownership interest in Prosper Management, LLC[,] Prosper
       Technical Index Fund, L.P., Prosper Technical Index Fund, LLC[,] or any
       affiliated or subsidiary entity. Plaintiffs further irrevocably release and waive any
       claim that has previously arisen or might arise in the future from an ownership in
       Prosper Management, LLC[,] Prosper Technical Index Fund, L.P., Prosper
       Technical Index Fund[,] LLC[,] or any affiliated or subsidiary entity. Upon
       execution of this Settlement Agreement, Plaintiffs authorize [Prosper
       Management] and [Prosper Technical Index Fund, L.P.] to cancel any certificates
       or documents indicating plaintiffs have any ownership interest in [Prosper
       Management] and [Prosper Technical Index Fund, L.P.].

                                              * * *

               3. Release: Upon execution of this Settlement Agreement, Plaintiffs
       release and forever discharge the Defendants and all affiliated or subsidiary
       entities, all of their respective past, present and future officers, employees,
       members, partners, agents, insurance carriers, vendors, contractors, accountants,
       administrators, successors and assigns of, from and against all claims, demands,
       actions, causes of actions, obligations, and damages.

        We conclude that the release language in the settlement agreement is clear and
unambiguous and must be interpreted as written. Section 3 of the settlement agreement
expressly states that, upon execution of the agreement, plaintiffs release and forever discharge
the defendants, its members, and its assignees from and against all claims, demands, and actions.
Garnishee defendant is an assignee of the Kotsovos Trust, which was a member of Prosper
Management at the time the parties executed the settlement agreement, and thus is protected by
the broad terms of the release. The language in Section 1 further states that, upon execution,
plaintiffs “irrevocably release and waive any claim that has previously arisen or might arise in
the future from an ownership in Prosper Management, LLC . . . .” (emphasis added). Contrary to
plaintiffs’ argument, the release language is not limited to any claims related to plaintiffs’
ownership in Prosper Management; instead, the release refers to any claims that arise from “an
ownership in” Prosper Management, which includes garnishee defendant as an assignee of the
Kotsovos Trust. As an investor, the Kotsovos Trust attempted to settle its potential claims
against Prosper Management by entering an agreement for the assignment of the Huron Avenue
properties’ promissory notes and mortgages to garnishee defendant. Under Section 1 of the
settlement agreement, plaintiffs expressly released any claim regarding this assignment because

                                                -5-
it arose from “an ownership in” Prosper Management.2 Therefore, the trial court properly
granted garnishee defendant’s motion for summary disposition under MCR 2.116(C)(7).

       Affirmed.

                                                         /s/ Michael F. Gadola
                                                         /s/ Kurtis T. Wilder
                                                         /s/ Patrick M. Meter

2
  We reject plaintiffs’ assertion that such an interpretation of the release could result in
defendants avoiding their obligation to pay the entire $500,000 due under the terms of the
settlement agreement. Section 2 of the settlement agreement expressly provides the terms of
payment and for the entry of judgment if defendants defaulted on the payment. The release of
garnishee defendant from this action does not obviate defendants’ obligations under the
agreement. Further, if plaintiffs wanted the release to be dependent on defendants’ payment of
the full amount due, they were free to negotiate that term, but failed to do so.

                                             -6-