Court Opinion

ID: 815034
Source: CourtListenerOpinion
Date Created: 2013-01-09 15:00:18+00
Date Added: 2024-06-11T18:00:54.398698
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 13a0047n.06

                                          No. 11-1660

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT

OAK STREET FUNDING, LLC,                               )
                                                                                      FILED
                                                                                  Jan 09, 2013
                                                       )
                                                                            DEBORAH S. HUNT, Clerk
       Plaintiff-Appellant,                            )
                                                       )
v.                                                     )   ON APPEAL FROM THE
                                                       )   UNITED STATES DISTRICT
LYNN S. INGRAM, PAUL MURPHY, and 360                   )   COURT FOR THE EASTERN
RISK MANAGEMENT, INC.,                                 )   DISTRICT OF MICHIGAN
                                                       )
       Defendants-Appellees.                           )

Before:        BATCHELDER, Chief Circuit Judge, KEITH, and MARTIN, Circuit Judges.

       PER CURIAM. Plaintiff-Appellant Oak Street Funding, LLC (“Oak Street”) appeals from

a district court order granting summary judgment and dismissing its claims of conversion and unjust

enrichment against Lynn S. Ingram, Paul Murphy, and 360 Risk Management, Inc.

       Ingram was a founding member of Ponta Castle Ingram Agency, Inc. (“PCI”), an insurance

company. Oak Street loaned PCI money that was secured by PCI’s business assets. Oak Street

alleges that Ingram wrongfully obtained PCI customer accounts with the help of Murphy and 360

Risk Management.

       The district court dismissed Oak Street’s conversion and unjust enrichment claims because

it found that they were based on the Employment and Non-Compete Agreements that were raised

in Oak Street’s original contract claims. Oak Street now appeals the judgment against it. Because

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Oak Street was properly barred from bringing the conversion claims, and because Oak Street has no

basis on which to bring the unjust enrichment claim, we AFFIRM the district court’s judgment.

                                   FACTUAL BACKGROUND

       This case involves a dispute regarding business relationships between the parties. Plaintiff-

Appellant Oak Street Funding, LLC (“Oak Street”) is a Delaware limited liability company. Oak

Street is in the business of lending funds to insurance professionals. Defendant-Appellee Ponta

Castle Ingram Agency, Inc. (“PCI”) is a Michigan insurance agency. In July 2007 Appellant Oak

Street loaned PCI $1,900,000. The loan was secured by all of PCI’s assets.1 PCI defaulted on the

loan and surrendered all of its assets to Oak Street on February 11, 2009.

       Defendant-Appellee Lynn Ingram is a former employee of PCI. Defendant-Appellee Paul

Murphy was an independent contractor and (the record is unclear on this point) possibly one-time

employee of PCI. On November 1, 2005—prior to the execution of the loan between PCI and Oak

Street—Ingram entered into a Stock Purchase Agreement with PCI for $65,000, making him partial

owner of PCI. Ingram also entered into an Employment Agreement and a Non-Compete Agreement

with PCI the same day.

       The Employment Agreement contains a clause regarding Ingram’s compensation. It states:

       Payments to Ingram. For the period from January 1, 2006 through December 31,
       2007, PCI shall pay Ingram, on bi-weekly payroll, the annual wage of $250,000 per

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         Oak Street’s position is that the assets that were offered as collateral included any accounts
originated by Ingram prior to the date of the Employment Agreement (“Accounts”), all other
accounts, contract rights, rights to payment of money, agreements of any kind or nature, general
intangibles and payment intangibles, and PCI’s insurance “book of business” or “expirations”
(collectively the “Collateral”). “Expirations” is a term used in the insurance field to refer to the
account by account records of an insurance agency, which include such information as the name and
address of the insured, a description of the property insured, the value of the policy, the amount of
the premiums, and particularly the expiration date of the policy.

                                                  2
        year, less such deductions as may be required by law or authorized by Ingram, plus
        automobile expenses for two vehicles (including auto insurance) (the expenses for
        such vehicles (but not insurance) not to exceed $25,669 per year); and PCI shall pay
        such other expenses incurred by Ingram in connection with his duties under this
        Agreement, including entertainment, travel and auto, and mobile phone, but such
        other expenses not to exceed $2,500 per month.

R. 1-4. at ¶ 3 (emphasis in original). The agreement also provided that PCI would pay for Ingram’s

life insurance, additional compensation, and provide him with certain fringe benefits.

        The Employment Agreement includes two other relevant clauses. It contains an exclusivity

clause, which states:

        Exclusivity. Ingram agrees that he shall not conduct any property/casualty insurance
        business other than pursuant to the terms of this Agreement. All commissions on
        sales of property/casualty insurance during the term of his Agreement, as long as PCI
        shall not be in breach of this Agreement, shall be paid through PCI. Other than
        Ingram’s accounts, as defined in Section 17, all accounts shall be deemed the
        property of PCI.

Id. at ¶ 12 (emphasis in original). In addition to agreeing to exclusivity with PCI, Ingram assigned

his own insurance accounts to PCI. Section 17 of the Employment Agreement states:

        Assignment of accounts. Ingram hereby assigns and transfers and conveys to PCI,
        effective on January 1, 2006, all of his right title and interest in and to Ingram’s
        accounts. “Ingram’s accounts”, [sic] as used herein, means accounts originated by
        Ingram prior to the date of this Agreement.

Id. at ¶ 17 (emphasis in original).

        The Non-Compete Agreement provides that:

        During the term of the Employment Agreement and for a period of three (3) years
        after termination of the relationship with PCI, Employee shall not, directly or
        indirectly, on behalf of the Employee or any other person or entity, solicit the
        personal or commercial property or casualty insurance business of any customer of
        PCI.

R. 1-5, ¶ 4, at 2.

                                                 3
       Things at PCI began to change in 2008. Appellee Ingram attests that by July 2008, it was

clear that PCI was in financial turmoil. From August 2008 until October 2008—the date Ingram

terminated his employment with PCI—Ingram attests that PCI failed to make many of the payments

owed to him under the Employment Agreement. On October 8, 2008, Ingram’s counsel sent a letter

to PCI alleging breach of contract due to the failures to make payments under the Employment

Agreement. Ingram claims that PCI did not respond to the letter or deny the breaches. On October

10, 2008, Ingram terminated his employment with PCI.

       Shortly after he left PCI, Ingram began working for Defendant-Appellee 360 Risk

Management, on October 24, 2008. The Articles of Incorporation for 360 Risk Management were

filed in Michigan on July 29, 2008 by Defendant-Appellee Murphy. Oak Street claims that Ingram

and Murphy were moving several accounts from PCI to 360 Risk Management as early as April 2008

with the help of other PCI employees. Oak Street further alleges that Ingram and Murphy were likely

soliciting PCI clients before 2008 and that they used an offer of employment by 360 Risk

Management to induce PCI employees to help them wrongfully transfer the business in violation of

the contract with PCI. PCI, in default on its loan from Oak Street, surrendered its assets to Oak

Street in July 2009.

                               PROCEDURAL BACKGROUND

       Oak Street filed its complaint on July 10, 2009, against Ingram, Murphy, and 360 Risk

Management. The complaint alleged six counts: Count I for breach of contract against Ingram for

violating the Employment and Non-Compete Agreements; Count II for conversion against Ingram,

alleging conversion of Oak Street’s collateral in the form of PCI accounts; Count III against Murphy

and 360 Risk Management for aiding and abetting conversion of Oak Street’s collateral in the form

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of PCI accounts; Count IV for tortious interference with contract against Murphy and 360 Risk

Management; Count V for unjust enrichment against Ingram, based on a claim of improper

solicitation of PCI’s clients; and Count VI for accounting. Oak Street maintains that it brought the

complaint in two capacities, as subrogee of PCI and also as a secured creditor of PCI.

       On August 10, 2010, in lieu of answering, Defendants filed a Motion for Summary Judgment

on all counts. The district court held a hearing on Defendants’ motion and eventually entered an

order granting in part and denying in part Defendants’ Motion for Summary Judgment.

       With respect to the two contract-based claims—breach of contract (Count I) and tortious

interference with contract (Count IV)—Appellees argued that Oak Street was barred from bringing

the contract claims under the doctrine of first substantial breach (i.e. failing to pay Ingram the

required payments under the Employment Agreement). Oak Street argued that Ingram breached his

Employment and Non-Compete Agreements by soliciting PCI clients to join 360 Risk Management.

Oak Street also argued that Murphy and 360 Risk Management tortiously interfered with a contract

by inducing Ingram to violate his agreements.

       The district court ultimately denied the motion as to Counts I, IV, and VI for breach of

contract, tortious interference with contract, and accounting. First, however, the district court

allowed Oak Street to conduct discovery on those counts. Specifically, the district court allowed

discovery to determine whether Ingram actually solicited PCI customers to leave and join 360 Risk

Management prior to the substantial breaches committed by PCI in September and October 2008.

       The district court granted summary judgment as to Counts II, III, and V for conversion

against Ingram; aiding and abetting conversion against Murphy and 360 Risk Management; and

unjust enrichment against Ingram. The district court held that Oak Street was barred from bringing

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the conversion claims because the tort claims were based on alleged violations of the Employment

and Non-Compete Agreements; therefore, Oak Street was impermissibly restating its contract claims

as tort claims.

        The court also dismissed Oak Street’s unjust enrichment claim, which was based on an

implied contract theory of recovery. The court reasoned that there was no basis for the court to imply

a contract since the claim was based on a violation of the Employment and Non-Compete

Agreements, which were express contracts.

        On August 24, 2010, Oak Street filed a motion for reconsideration with respect to the

dismissal of Counts II, III, and V. On October 28, 2010, the district court issued an order denying

Plaintiff’s motion for reconsideration and the litigation continued as to the remaining counts.

        On March 16, 2011, Defendants filed a motion for summary judgment as to Counts I, IV, and

VI. The district court entered a stipulated order of dismissal on April 18, 2011. The parties

stipulated to dismiss the contract and tortious interference counts—Counts I, IV, and VI—with

prejudice, but reserved Plaintiff’s right to appeal the district court orders with respect to Counts II,

III, and V—the conversion and unjust enrichment counts.

        Oak Street filed a timely Notice of Appeal. On appeal Oak Street argues that the district

court improperly dismissed the conversion and unjust enrichment claims and improperly denied its

motion for reconsideration. Accordingly, this opinion is limited to those issues.

                                    STANDARD OF REVIEW

        We review a district court’s grant of a motion for summary judgment de novo, construing the

evidence and drawing all reasonable inferences in favor of the non-moving party. Ireland v. Tunis,

113 F.3d 1435, 1440 (6th Cir. 1997). Summary judgment is proper if, after viewing the evidence

                                                   6
that way, there are no genuine issues of material fact, and the moving party is entitled to judgment

as a matter of law. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986);

Fed. R. Civ. P. 56(a). The moving party has “the burden of showing the absence of a genuine issue

as to any material fact.” Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970).

                                           DISCUSSION

I.      Conversion Claims

        Oak Street’s claims fail whether it brings them as a subrogee—stepping in the shoes of

PCI—or as a secured creditor of PCI.

        A. Oak Street as Subrogee of PCI

        As a subrogee of PCI, Oak Street appeals the district court’s decision barring it from bringing

its conversion claims on the basis that Oak Street simply recast its contract claims as tort claims.

Upon de novo review, we agree with the district court’s judgment.

        Michigan courts have taken care to “avoid confusing contract and tort law.” Huron Tool &

Eng’g Co. v. Precision Consulting Servs., Inc., 532 N.W.2d 541, 546 (Mich. Ct. App. 1995).

Michigan law provides that “an action in tort requires a breach of duty separate and distinct from a

breach of contract.” Haas v. Montgomery Ward & Co., 812 F.2d 1015, 1016 (6th Cir. 1987) (citing

Hart v. Ludwig, 79 N.W.2d 895, 898–99 (Mich. 1956)). In some cases a breach of contract may give

rise to an independent tort action, but only where there is a breach of a duty that is distinct from the

breach of contract. Brewster v. Martin Marietta Aluminum Sales, Inc., 378 N.W.2d 558, 569 (Mich.

Ct. App. 1985) (citing Hart, 79 N.W.2d at 898). A claim that is based on a breach of a promise is

an action in contract, not in tort. Id.; see also Haas, 812 F.2d at 1016.

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        “[T]he threshold inquiry is whether the plaintiff alleges a violation of a legal duty separate

and distinct from the contractual obligation.” Rinaldo’s Constr. Corp. v. Mich. Bell Tel. Co., 559
N.W.2d 647, 658 (Mich. 1997). “Entering into a contract with another pursuant to which one party

promises to do something does not alter the fact that there was a preexisting obligation or duty to

avoid harm when one acts.” Id. (internal citation and quotation omitted). The duty, however, does

not extend to “intangible economic losses.” Id. (internal citation omitted).

        Oak Street argues that the district court improperly characterized its conversion claims as

arising out of PCI’s Employment and Non-Compete Agreements with Ingram. Appellant’s Br. at

17-22. The record, however, shows that the district court’s determination was correct and that Oak

Street simply recast its contract claims as tort claims. The only damages that Oak Street alleges flow

from the alleged breaches of the Employment and Non-Compete Agreements. Id. at 18. Oak Street

does not allege any separate duty that was breached by Ingram apart from his contractual obligations.

Id. at 19.

        The Complaint makes the following allegations regarding Ingram’s duty and Oak Street’s

damages, as subrogee of PCI:

                23. Currently, Defendants are deriving income from that part of PCI’s book
        of business and Oak Street’s collateral that they collectively solicited and removed
        from PCI by execution of the AOR Letters or otherwise.
                                                 ...

                                             Count I
                                        Breach of Contract

               26. Pursuant to UCC Article 9, PCI’s claims against Ingram are subrogated
        to Oak Street, and Oak Street is thereby permitted to assert PCI’s claims against
        Ingram. MCL § 440.9607(1)(c).

                                                  8
              27. As a proximate result of the breach of the Employment Agreement and
       Non-Compete Agreement by Ingram, Ingram and/or the 360 Agency is believed to
       be receiving commission income or some or all of PCI’s book of business and
       thereby has impaired Oak Street’s collateral.

              28. As a proximate result of Ingram’s actions, Oak Street, as subrogee of PCI,
       has been damaged.
                                                ...

                                            Count II
                                       Conversion (Ingram)

              30. By the actions described above, Defendant Ingram unlawfully converted
       Oak Street’s collateral to his own use.

Compl. at 5–6.

       Here, Oak Street’s failure to allege a violation of a legal duty that is separate and distinct

from contractual obligations precludes it from bringing the conversion claims. Oak Street’s theory

is that PCI’s client accounts were collateral, and by taking its customers, Appellees converted PCI’s

property. There is no allegation in the Complaint that Appellees had a fiduciary duty or any other

duty to PCI. The only duty that is mentioned in the pleadings is related to the contracts.

       Oak Street characterizes PCI’s client accounts as “collateral.” As the district court noted,

there is no allegation that the clients had anything other than an at-will agreement with PCI for

coverage. There is no allegation that the clients were unable to switch to another agency for any

reason, or even for no reason at all. As Appellees argued in the district court proceedings, “Oak

Street does not ‘own’ PCI insurance accounts, i.e. client relationships, in perpetuity. In the absence

of a contractual agreement barring such conduct, free enterprise permits anyone to solicit and service

PCI’s clients.” Oak Street Funding, LLC v. Ingram, 749 F. Supp. 2d 568, 579 (E.D. Mich. 2010)

                                                  9
(describing the arguments of the defense). Therefore, it is unclear how Appellees, let alone anyone,

could be held liable for converting accounts that are not necessarily the property of Oak Street.

          The district court did not err in finding that Oak Street attempted to recast its contract claims

as tort claims. Accordingly, Oak Street’s conversion claims are barred as a matter of law.

          B. Oak Street as a Secured Creditor

          Alternatively, Oak Street claims that as a secured creditor, it should have been able to

proceed with the conversion claims.

          As the district court held, with respect to the secured creditor arguments, “[n]one of [the

cases cited by Oak Street] involve Michigan law and none are claims in which the alleged

‘converted’ assets are terminable-at-will agreements with third parties.” Oak Street Funding, 749
F. Supp. 2d at 579. Oak Street has not provided a basis on which it could bring such claims as a

secured creditor. Accordingly, even as a secured creditor, Oak Street’s conversion claims are barred.

II.       Unjust Enrichment Claim

          Finally, Oak Street argues that the district court improperly dismissed its unjust enrichment

claim. The dismissal was not improper.

          A plaintiff must establish the following to sustain a claim of unjust enrichment: “(1) the

receipt of a benefit by defendant from plaintiff, and (2) an inequity resulting to plaintiff because of

the retention of the benefit by defendant.” Belle Isle Grill Corp. v. City of Detroit, 666 N.W.2d 271,

280 (Mich. Ct. App. 2003) (citing Barber v. SMH (US), Inc., 509 N.W.2d 791, 796 (Mich. Ct. App.

1993)). If the plaintiff can establish this, “the law will imply a contract . . . to prevent unjust

enrichment.” Id. (citing Martin v. E. Lansing Sch. Dist., 483 N.W.2d 656, 661 (Mich. Ct. App.

1992)).

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       Because Oak Street’s conversion claims are based on the terms of the unenforceable

agreements between PCI and Ingram, the district court was correct in barring the implication of a

contract where an express contract covered the same subject matter. See Belle Isle, 666 N.W.2d at

280 (“[A] contract will be implied only if there is no express contract covering the same subject

matter.”).

                                        CONCLUSION

       For the foregoing reasons, we AFFIRM the district court’s judgment.

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