In a case out of Oakland County, Elkins
v Benner, Nos 331701, 332664, 333114, the plaintiff Elkins argued the alter-ego
rule to make the defendant Nancy Benner, spouse, responsible for her ex-husband/disbarred
attorneys’ failure to pay the agreed upon referral fee. The defendant filed a
motion for summary disposition. In
addition to opposing defendant’s motion for summary disposition, plaintiff
filed a motion to amend his complaint to add or clarify claims and
to impose a constructive trust on
the proceeds of the sale of the defendant’s home. The Michigan Court of Appeals
disagreed with the alter-ego argument but upheld the arguments on conversion
and the Uniform Fraudulent Transfer Act.
Facts: Plaintiff-Elkins, an attorney, alleges that defendant-Nancy’s
former husband, Brian Benner, failed to pay a referral fee ($169,000) for a
client that Elkins referred to Benner. Elkins’ theory was that Benner misappropriated
client funds, including funds for the attorney referral fee that Benner owed
plaintiff, and that defendant-Nancy acted in concert with Benner to defraud Elkins
through a sham divorce and property settlement, and that she was unjustly enriched by Benner’s misdeeds.
The Alter-Ego Rule
Elkin’s complaint alleges that
defendant-Nancy acted as Benner’s alter ego to misappropriate client funds and
shield those funds from creditors, and therefore, defendant could be held
personally liable for the attorney referral fee that Benner agreed to pay
plaintiff. The trial court agreed with her that Elkins
failed to state a “claim for alter ego because there’s no corporate entity
involved.”
The trial court refused to allow
plaintiff to amend his complaint to further clarify this claim because “there
is no such thing as alter ego, and you don’t plead any specificity as to that
anyways, as to the fraud you allege.” We agree with the trial court that there
is no basis in this situation for applying the alter-ego rule to allow the
imposition of liability on defendant for Benner’s alleged misdeeds.
The alter-ego theory allows a court to disregard a corporate
entity in order to impose liability on a person or a subservient corporation for
the corporation’s misdeeds. The theory allows a defendant who is the victim of
fraud, illegality or injustice to pierce the corporate veil to seek justice.
In this case, Elkins argues that
the rule can be extended to individuals. The lower court disagreed saying a
spousal relationship is not enough to hold one spouse liable for the illegal
acts of the other. There must be evidence of some legal relationship besides
the marriage for the rule to apply. The MCOA agreed and affirmed the lower
court’s denial of the Alter-ego claim.
Conversion
Plaintiff Elkins argued that he had
a claim for statutory conversion (MCL600.2919a) because he had an intangible
property right to the referral fee, which Benner converted and defendant Nancy
aided that conversion.
First, the court looked to the
Rules of Professional Conduct for guidance, concluding the rules and case law
support the reasoning that an action for conversion can be brought where one
attorney fails to turn over another attorney’s referral fee. Second, although
Benner can be held liable for converting the alleged referral fee, can Elkin’s
show a legal basis for imposing liability on Nancy, Benner’s ex-wife?
The statute does allow liability be
placed on a party who knowingly receives converted property. The MCOA stated
that Elkins alleged enough facts to argue that Nancy knew and participated in a
scheme to convert client funds for personal use, therefore the matter was
remanded for further proceedings
The Uniform Fraudulent Transfer Act
The trial court also denied
plaintiff’s motion to amend his complaint to add a claim under
the UFTA. Plaintiff’s proposed
amended complaint alleged that defendant and Benner conspired
to use their divorce property
settlement to facilitate the transfer of property from Benner to
defendant to shield the property
from Benner’s creditors, including plaintiff. The trial court
erred in ruling that plaintiff was
precluded from challenging the property settlement as an
improper transfer of marital assets
under the UFTA because such a challenge amounted to an
improper collateral attack on the
divorce judgment.
While defendant argues that the
property transferred to her through the divorce is property held
as tenants by the entirety, and
therefore, cannot be the subject of any claim under the UFTA, the status of the
property was not addressed or decided below and cannot be ascertained on the
basis of the current record. Thus, the MCOA reasoned that it was not apparent
that any amendment to add a claim under the UFTA would be clearly futile. The
trial court did not identify any basis other than futility to deny plaintiff’s
motion to amend. Because the record fails to demonstrate that a claim under the
UFTA would be futile, the MCOA reversed the trial court’s order denying plaintiff’s
motion to amend his complaint to add a claim under the UFTA.
Conclusion:
The MCOA affirmed in part and
reversed in part the trial court’s order granting defendant’s motion for
summary disposition and denying plaintiff’s motion to amend his complaint,
vacated the trial court’s orders granting defendant’s motion for sanctions and
denied plaintiff’s motion for sanctions, and remanded for further proceedings.
Labels: Alter-Ego, constructive trust, conversion, Oakland County, referral fee, Uniform Fraudulent Transfer Act