Court Opinion

ID: 9351371
Source: CourtListenerOpinion
Date Created: 2022-12-30 05:06:06.762969+00
Date Added: 2024-06-11T16:59:43.457765
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

AMY MURPHY,                                                          UNPUBLISHED
                                                                     December 29, 2022
               Plaintiff-Appellant/Cross-Appellee,

v                                                                    No. 359654
                                                                     Saginaw Circuit Court
TRI-CITY TREATMENT CENTER, LLC,                                      LC No. 20-043590-NZ

               Defendant-Appellee/Cross-Appellant.

Before: PATEL, P.J., and CAMERON and LETICA, JJ.

PER CURIAM.

       In this successor-liability action, plaintiff Amy Murphy appeals as of right the order
granting summary disposition under MCR 2.116(C)(10) to defendant, Tri-City Treatment Center,
LLC (“Tri-City”). In a cross-appeal, Tri-City appeals as of right the order denying its motion for
sanctions. We affirm.

                 I. BACKGROUND FACTS AND PROCEDURAL HISTORY

        This case arises in the context of an earlier lawsuit by Murphy against her former employer,
EDM Treatment Center, LLC (“EDM”). Murphy eventually prevailed in the lawsuit, and the trial
court in that case ordered EDM to pay $500,000 in damages. EDM was a counseling center that
provided a variety of mental-health services to its clientele. Debbie Mathewson is a licensed social
worker who worked at EDM as a substance abuse counselor.

       In 2019, Mathewson became concerned about EDM’s business practices. She decided to
quit EDM and start her own business, Tri-City. EDM went out of business at about the same time
as Tri-City opened for business. Like EDM, Tri-City offered clients a range of mental-health
services. Many of the employees who previously worked at EDM were hired by Tri-City to
perform the same or similar work. Some of EDM’s clients continued therapy services at Tri-City.
A sign hung on EDM’s door directing clients to its “new location” at Tri-City.

        Murphy filed this lawsuit against Tri-City in expectation of a favorable judgment in the
EDM litigation. Her one-count complaint alleged Tri-City was the “alter-ego” of EDM and
therefore liable for EDM’s conduct. Tri-City moved for summary disposition under MCR

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2.116(C)(10), disputing this theory. It also moved for sanctions against Murphy for filing a
frivolous action. Murphy responded arguing Tri-City was liable under principles of successor
liability. In reply, Tri-City contended that Murphy’s complaint was premised on an alter-ego
theory of liability and not successor liability. The trial court granted summary disposition, finding
Murphy could not prevail under either theory—alter-ego or successor-liability. It also denied Tri-
City’s motion for sanctions. This appeal followed.

                                  II. SUCCESSOR LIABILITY

       Murphy’s argument on appeal is premised solely on her theory of successor liability. She
argues the trial court erred in granting Tri-City’s motion for summary disposition because there
remained a genuine question of fact whether Tri-City was a “mere continuation” of EDM. We
disagree.

                                  A. STANDARD OF REVIEW

         This Court reviews de novo a trial court’s grant or denial of summary disposition.
McDonald v Farm Bureau Ins Co, 480 Mich 191, 196; 747 NW2d 811 (2008). “When ruling on
a motion brought under MCR 2.116(C)(10), the court must consider the affidavits, pleadings,
depositions, admissions, and other documentary evidence submitted by the parties in the light most
favorable to the party opposing the motion.” The Cadle Co v City of Kentwood, 285 Mich App
240, 247; 776 NW2d 145 (2009). “Summary disposition is appropriate only when the evidence
fails to establish a genuine issue regarding any material fact.” Id.

                                    B. LAW AND ANALYSIS

         Corporations are recognized as separate entities and are generally not liable for the debts
of their predecessors. Indeed, “if one corporation purchases the assets of another and pays a fair
consideration therefor, no liability for the debts of the selling corporation exists in the absence of
fraud or agreement to assume the debts.” Turner v Bituminous Cas Co, 397 Mich 406, 418 n 3;
244 NW2d 873 (1976) (quotation marks and citations omitted). Even so, the theory of successor
liability recognizes that there are some circumstances in which a successor corporation may be
liable for the debts of its predecessor. The basic rule of successor liability:

       [E]xamines 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. [Foster v Cone-Blanchard Machine Co, 460 Mich
       696, 702; 597 NW2d 506 (1999).]

       These exceptions are:

               (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 transferor

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       were not provided for; or (5) where the transferee corporation was a mere
       continuation or reincarnation of the old corporation. [Id. (quotation marks and
       citation omitted).]

In other words, a successor is liable for their predecessor’s debts where there is either (a) a merger,
or (b) an exception to a cash-for-assets transaction. Commonwealth Land Title Ins Co v Metro
Title Corp, 315 Mich App 312, 316; 890 NW2d 395 (2016).

         Murphy does not allege a merger between EDM and Tri-City. Rather, Murphy’s arguments
rest on the fifth exception to a cash-for-assets transaction—that Tri-City was a mere continuation
of EDM. To survive Tri-City’s motion for summary disposition on this basis, Murphy needed to
first present evidence that there was a cash-for-assets transaction. If Murphy made this showing,
then she also needed to demonstrate evidence that Tri-City was a mere continuation of EDM.

       The trial court granted Tri-City’s motion for summary disposition, in part, because:

       [A] transaction never occurred here. There’s no evidence to indicate that Tri-City
       purchased anything of value from EDM.

                                               * * *

       [T]he court considered the case law [sic] on this topic of successor liability, as well
       as alter ego liability, and would note that under any of the cases examining
       successor liability, [Murphy’s] case fails as well. That’s for the simple reason that
       no evidence has been introduced to show a sale, merger, de facto merger, or other
       transfer or purchase of assets occurred between EDM and Tri-City.

        Murphy presented evidence to the trial court supporting her argument that Tri-City was a
mere continuation of EDM. However, she offered no arguments or evidence that there was an
exchange of cash for assets between EDM and Tri-City.1 Again, a theory of successor liability on
this basis requires a showing of an exchange of cash for assets. Commonwealth Land Title Ins Co,
315 Mich App at 316; see also Lakeview Commons v Empower Yourself, 290 Mich App 503, 507;
802 NW2d 712 (2010). Murphy’s theory of successor liability was fundamentally flawed and it
was irrelevant whether Murphy presented evidence that Tri-City was a mere continuation of EDM.
Thus, there was no error in the grant of summary disposition to Tri-City.

1
  Murphy argues on appeal that Tri-City’s use of the same software as EDM was evidence of a
cash-for-assets transaction. Even accepting as true that Tri-City “took” the software from EDM,
Murphy fails to prove the corollary—that Tri-City paid EDM for this asset. Moreover, this
argument was not made in the trial court. Therefore, there is no error in the trial court’s failure to
consider it.

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                                         III. SANCTIONS

        Tri-City argues the trial court erred in denying its motion for sanctions without making any
specific findings whether Murphy’s counsel made reasonable inquiries into the allegations or
whether the complaint was frivolous. We disagree.

                                  A. STANDARD OF REVIEW

         “This Court reviews a trial court’s decision regarding the imposition of a sanction for clear
error.” Holton v Ward, 303 Mich App 718, 734 n 20; 847 NW2d 1 (2014). A “decision is clearly
erroneous when, although there is evidence to support it, the reviewing court is left with a definite
and firm conviction that a mistake has been committed.” Id. However, the trial court’s decision
as to the appropriate sanction is reviewed for an abuse of discretion. Pirgu v US Auto Ass’n, 499
Mich 269, 274; 884 NW2d 257 (2016). “An abuse of discretion occurs when the trial court’s
decision is outside the range of reasonable and principled outcomes.” Id. A trial court also “abuses
its discretion when it makes an error of law.” Id.

        We “review interpretation of court rules de novo and under the same principles that govern
the construction of statutes.” Dawley v Hall, 501 Mich 166, 169; 905 NW2d 863 (2018) (quotation
marks and citation omitted). Court rules and statutes are “interpreted according to [their] plain
language, giving each word and phrase its common, ordinary meaning.” Id. (quotation marks and
citation omitted).

                                    B. LAW AND ANALYSIS

        “Awards of costs and attorney fees are recoverable only where specifically authorized by
a statute, a court rule, or a recognized exception.” Keinz v Keinz, 290 Mich App 137, 141; 799
NW2d 576 (2010) (quotation marks and citation omitted). Under MCR 1.109(E)(6), a court may
impose sanctions such as attorney fees and expenses when a document is signed in violation of
this court rule. MCR 1.109(E) states, in part:

               (5) Effect of Signature. The signature of a person filing a document, whether
       or not represented by an attorney, constitutes a certification by the signer that:

               (a) he or she has read the document;

               (b) to the best of his or her knowledge, information, and belief formed after
       reasonable inquiry, the document is well grounded in fact and is warranted by
       existing law or a good-faith argument for the extension, modification, or reversal
       of existing law; and

               (c) the document is not interposed for any improper purpose, such as to
       harass or to cause unnecessary delay or needless increase in the cost of litigation.

              (6) Sanctions for Violation. If a document is signed in violation of this rule,
       the court, on the motion of a party or on its own initiative, shall impose upon the
       person who signed it, a represented party, or both, an appropriate sanction, which
       may include an order to pay to the other party or parties the amount of the

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       reasonable expenses incurred because of the filing of the document, including
       reasonable attorney fees. The court may not assess punitive damages.

              (7) Sanctions for Frivolous Claims and Defenses. In addition to sanctions
       under this rule, a party pleading a frivolous claim or defense is subject to costs as
       provided in MCR 2.625(A)(2). The court may not assess punitive damages.

       Similarly, MCL 600.2591(1) states:

               Upon motion of any party, if a court finds that a civil action or defense to a
       civil action was frivolous, the court that conducts the civil action shall award to the
       prevailing party the costs and fees incurred by that party in connection with the
       civil action by assessing the costs and fees against the nonprevailing party and their
       attorney.

An action may be deemed “frivolous” when it is “devoid of arguable legal merit.” MCL
600.2591(3)(a)(iii).

       Tri-City argues on appeal that the trial court erred because it denied the motion for
sanctions “without making any findings as to whether [Murphy’s] counsel conducted a reasonable
inquiry as required by MCR 1.109(E)(5), or whether [Murphy’s] complaint was frivolous as
defined in MCL 600.2591.” Tri-City asks this Court to reverse the denial of the motion for
sanctions and remand the issue to the trial court for specific findings regarding this issue.

       In the following exchange, Tri-City’s attorney asked the trial court about its decision
regarding sanctions:

                [Defendant’s Counsel]: Your Honor, for [the] sake of the record, am I
       understanding correctly that you’re denying the request for sanctions, and I’ll put
       that in the order?

               The Court: I am.

The trial court also discussed the motion for sanctions in its order, concluding, “that [Tri-City’s]
request for sanctions pursuant to MCR 1.109(E)(6) is denied.”

         It is true the trial court did not make any specific on-the-record findings that Murphy’s
complaint was frivolous or that her counsel failed to make reasonable inquiries. But this does not
necessarily mean that the trial court’s decision was in violation of the court rules or statute. The
trial court considered the motion for sanctions both during oral argument and in its final order.
The plain language of the court rule and statute do not require a court to make any findings on the
record—they only require a court to impose sanctions if a court finds a complaint was frivolous or
an attorney failed to make reasonable inquiries. Here, the trial court’s denial of the motion for
sanctions means it concluded the complaint was not frivolous and that Murphy’s attorney did not
fail to make reasonable inquiries. Therefore, the trial court had no obligation to impose sanctions
and its denial of sanctions was not a clear error.

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         Tri-City’s reference to this Court’s decision in Kelsey v Lint, 322 Mich App 364; 912
NW2d 862 (2017) is not persuasive. In Kelsey, this Court reversed a trial court’s denial of
sanctions and remanded the case to the trial court for specific findings regarding the issue. Id. at
381-382. We concluded the trial court made a clear error because the trial court relied on
impermissible criteria to deny the plaintiff’s motion for sanctions—specifically, that the
defendant’s attorney was a “gentleman” and that “his ‘integrity’ was not in question.” Id. at 381.
Unlike Kelsey, there is no evidence in this case that the trial court used impermissible criteria to
deny Tri-City’s motion for sanctions. Under the clear-error standard, this Court may only reverse
the trial court’s order where this Court “is left with a definite and firm conviction that a mistake
has been committed.” Holton, 303 Mich App at 734 n 20. On this record, we are not left with a
definite and firm conviction that the trial court used impermissible criteria to deny Tri-City’s
motion for sanctions.

       Affirmed.

                                                             /s/ Sima G. Patel
                                                             /s/ Thomas C. Cameron
                                                             /s/ Anica Letica

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