Weather Underground, Incorporated v. Navigation Catalyst Systems, Incorporated et al

Filing 186

APPENDIX re: 178 MOTION for Summary Judgment filed by Epic Media Group, Incorporated. by Epic Media Group, Incorporated (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13) (Delgado, William)

Exhibit 3

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Only the Westlaw citation is currently available.
United States District Court,
E.D. Michigan,
Southern Division.
FIRST PRESBYTERIAN CHURCH OF YPSILANTI, Plaintiff,
v.
H.A. HOWELL PIPE ORGANS, INC., Timothy E.
Boles, Curt Schmidt, and R. Karstens Organworks,
Ltd., Defendants.
No. 07-13132.
Feb. 1, 2010.
West KeySummaryFraud 184

17

184 Fraud
184I Deception Constituting Fraud, and Liability Therefor
184k15 Fraudulent Concealment
184k17 k. Duty to Disclose Facts. Most
Cited Cases
A pipe organ builder was not liable for a
church's pre-contractual fraud claims under
Michigan law which were based on a silent fraud
theory. The church did not inquire into the builder's
financial condition or its past or pending performance on other contracts, and the builder did not
have a duty to disclose its financial and business
condition. Therefore the builder did not commit
fraud by failing to disclose its cash-flow problems
before entering into the contract to build the organ.
Gary W. Faria, Ufer & Spaniola, Troy, MI, for
Plaintiff.
Jennifer Boueri Chilson, Thomas M. Schehr,
Dykema Gossett, Detroit, MI, Eric D. Scheible,
Frasco Caponigro Wineman & Scheible, PLLC,
Bloomfield Hills, MI, Barbara J. Sullivan, Chicago,
IL, for Defendants.

OPINION AND ORDER
PATRICK J. DUGGAN, District Judge.
*1 Plaintiff First Presbyterian Church of Ypsilanti (“FPCY”) filed this suit against Defendants
H.A. Howell Pipe Organs, Inc. (“Howell”),
Timothy Boles (“Boles”), Curt Schmitt (“Schmitt”),
FN1
and R. Karstens OrganWorks, LTD. (“RKO”)
alleging various claims of fraud, breach of contract,
and unjust enrichment. Presently before the Court
are three motions for summary judgment: one filed
by Howell and Boles, the second filed by Schmitt,
and the third filed by RKO. The motions have been
fully briefed and the Court held a hearing on January 21, 2010.
FN1. As listed in the caption, the case was
originally filed against Curt “Schmidt.”
Since FPCY served him, however, the
parties have been referring to him as
“Schmitt.” The Court will therefore adopt
this spelling as well for purposes of this
Opinion and Order.
I. Facts and Procedural Background
The present action arises out of the failed contractual arrangement between FPCY and Howell regarding the construction and installation of a new
pipe organ at FPCY's church. The basic allegations
underlying the suit are that Boles and Schmitt, purportedly working as agents for Howell, induced
FPCY to enter into a contract and pay large sums of
money for a pipe organ that Howell never produced. When FPCY finally discovered that no organ would be forthcoming, FPCY alleges that Boles
arranged for RKO to take over Howell's business in
an attempt to prevent FPCY from recovering monetary damages.
The dispute between the parties has been developing since late 2000 when FPCY first sought bids
for a pipe organ to replace the one currently in use
at the church. Boles, the president and owner of
Howell, received the bid request but felt he did not
have time to respond personally. Consequently,

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Boles called on Schmitt, the former owner of Howell, for assistance. Schmitt then responded to FPCY
on behalf of Howell and Boles. Schmitt informed
FPCY that he was a former owner of the company,
that business had been good for Howell, and that he
had come out of retirement to help because Boles
was too busy.
After nine months of discussion between Boles
and Schmitt and FPCY's representatives, Howell
and FPCY entered into an agreement on August 22,
2001, that called for the construction of a specified
organ at an agreed price by no later than March
2005. Pursuant to that agreement, FPCY made an
initial payment in August 2001 of $94,672 intended
to cover the costs of imported pipes, preliminary
work, and engineering. After that, FPCY agreed to
make periodic payments based on a “Tentative
Schedule of Payments and Work” attached to the
contract. Howell was to provide periodic invoices
noting the time and materials charged toward the
completion of work on the organ. Pursuant to such
invoices, FPCY made several periodic payments
between April 2002 and August 2004 totaling
$184,606 and bringing the contract total to
$279,278.
As previously indicated, the organ was not
ready by March 2005 as required by the agreement.
Howell, through Boles and Schmitt, made repeated
representations up to October 2006 that performance would be forthcoming. During that time,
however, it became increasingly apparent that
Howell had not been using FPCY's payments to
purchase materials for or to construct the specified
organ. In fact, FPCY discovered that Howell had
been experiencing business and financial difficulties even before signing the FPCY contract. It
appeared that Howell had been using FPCY payments to fund other projects on which it was behind. When Howell signed the FPCY contract in
2001, it was behind on all of its pending projects.
Not receiving satisfactory answers to its inquiries,
FPCY ultimately cancelled the contract in January
2007 and obtained an organ from another company.

*2 On July 26, 2007, FPCY filed its original
complaint asserting claims against Howell, Boles,
and Schmitt. Around the same time, a former Howell employee, Randy Karstens (“Karstens”), purchased Howell's tools, equipment, and inventory
and incorporated RKO. Howell then ceased doing
business in September 2007. After nearly a year of
minimal progress on the case, FPCY retained substitute counsel who filed a motion for leave to
amend on October 1, 2008. The Court granted
Plaintiff's motion on November 18, 2008. FPCY's
amended complaint added RKO as a defendant and
asserts six counts:
(I) pre-agreement fraud in the inducement, silent
fraud, fraudulent misrepresentation, and fraudulent concealment against Boles and Schmitt;
(II) post-agreement silent fraud, fraudulent misrepresentation, and fraudulent concealment
against Boles and Schmitt;
(III) fraud and fraudulent concealment against
Howell and RKO based on respondeat superior
and successor liability;
(IV) breach of contract against Howell and RKO;
(V) personal liability claims against Boles and
Schmitt based on an alter ego theory of liability
for Howell's alleged fraud and breach of contract;
and
(VI) unjust
Schmitt.

enrichment

against

Boles

and

In the three motions for summary judgment
presently before the Court, defendants seek dismissal of all claims except for the breach of contract claim against Howell.
II. Standard of Review
Summary judgment is appropriate only when
there is no genuine issue as to any material fact and
the moving party is entitled to judgment as a matter
of law. See Fed.R.Civ.P. 56(c). The central inquiry
is “whether the evidence presents a sufficient dis-

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agreement to require submission to a jury or whether it is so one-sided that one party must prevail as a
matter of law.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 251-52, 106 S.Ct. 2505, 2512, 91
L.Ed.2d 202 (1986). After adequate time for discovery and upon motion, Rule 56(c) mandates summary judgment against a party who fails to establish the existence of an element essential to that
party's case and on which that party bears the burden of proof at trial. See Celotex Corp. v. Catrett,
477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91
L.Ed.2d 265 (1986).
The movant has an initial burden of showing
“the absence of a genuine issue of material fact.”
Id. at 323. Once the movant meets this burden, the
non-movant must come forward with specific facts
showing that there is a genuine issue for trial. See
Matsushita Electric Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89
L.Ed.2d 538 (1986). To demonstrate a genuine issue, the non-movant must present sufficient evidence upon which a jury could reasonably find for
the non-movant; a “scintilla of evidence” is insufficient. See Liberty Lobby, 477 U.S. at 252, 106 S.Ct.
at 2512.
The court must accept as true the non-movant's
evidence and draw “all justifiable inferences” in the
non-movant's favor. See id. at 255. The inquiry is
whether the evidence presented is such that a jury
applying the relevant evidentiary standard could
“reasonably find for either the plaintiff or the defendant.” See id.
III. Count I: Pre-Contract Fraud
*3 In the first count of its amended complaint,
FPCY alleges that Boles and Schmitt engaged in
fraudulent behavior to induce FPCY to enter into
the underlying contractual agreement. As has been
clarified in the briefing of the present motions,
FPCY specifically alleges that Boles and Schmitt
engaged in “silent fraud” by failing to disclose
Howell's business and financial condition. FPCY
also alleges that Boles and Schmitt made affirmative misrepresentations regarding the use of pay-

ments under the contract. Boles and Schmitt deny
violating any affirmative duty to disclose Howell's
business information and argue that count I is otherwise barred by the future promise rule, the economic loss doctrine, the contract's merger clause,
and the statute of limitations.
A. Silent Fraud
FPCY's primary allegation in count I is that
Boles and Schmitt violated affirmative duties to
disclose material facts regarding Howell's business
condition before execution of the contract between
Howell and FPCY. Under Michigan law, “silence
cannot constitute actionable fraud unless it occurred
under circumstances where there was a legal duty
of disclosure.” M & D, Inc. v. W.B. McConkey, 231
Mich.App. 22, 29, 585 N.W.2d 33, 37 (1998).
Historically, silent fraud claims have been
“based upon statements by the vendor that were
made in response to a specific inquiry by the purchaser, which statements were in some way incomplete or misleading.” Id. at 31, 585 N.W.2d at 39.
As a general rule, then, “in order to prove a claim
of silent fraud, a plaintiff must show that some type
of representation that was false or misleading was
made and that there was a legal or equitable duty of
disclosure.” Id. at 32, 585 N.W.2d at 39. As to the
latter requirement, an equitable duty of disclosure
generally arises only upon an expression of concern
or direct inquiry by a purchaser regarding the particular issue in question. Id. at 33, 585 N.W.2d at
40. Nonetheless, it remains possible that “highly
misleading actions” could support a claim for silent
fraud absent specific inquiry. Id. at 33-34, 585
N.W.2d at 40.
In this case, FPCY argues that the affirmative
duty of disclosure arose upon a statement by
Schmitt that business for Howell had been “very
good.” FPCY asserts that this statement gave the
misleading impression that Howell was operating
its business in a timely, profitable, and reputable
manner. There is no allegation that FPCY specifically inquired into Howell's financial condition or
Howell's past or pending performance on other con-

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tracts. Nonetheless, FPCY maintains that Boles and
Schmitt were required to supplement the incomplete and misleading statement with disclosures regarding Howell's cash-flow difficulties as evidenced by loans made by Boles and Schmitt to Howell, Howell's practice of using customer payments
to fund work on other contracts, and Howell's hisFN2
tory of tardiness on other projects.
Plaintiff's
counsel conceded at the motion hearing that such
details would not need to be disclosed under normal
circumstances but argued that FPCY's commitment
to make payments toward the organ before receiving the finished product gave rise to the duty of disclosure.
FN2. FPCY also takes issue with alleged
representations by Schmitt regarding Howell's pending projects and the fact that
Howell was “approximately 40 months
out” on work at the time of the FPCY contract negotiations. The Court remains unsure whether FPCY alleges that these representations were actually fraudulent or
were incomplete and misleading representations giving rise to a duty of disclosure.
In either case, the Court concludes that the
alleged representations fail to give rise to
an actionable fraud claim. Although Howell was behind on many, if not all, of its
pending projects, it does not appear that
Howell was much more than 40 months
out on any of the projects at the time of the
FPCY contract negotiations. (FPCY's
Resp. to Schmitt's Mot. for Summ. J. at
13-14 .) Furthermore, FPCY made no specific inquiries into Howell's pending
projects that would have given rise to a
duty of disclosure.
*4 FPCY's argument stretches the concept of
silent fraud too far. A statement that business has
been “very good” is ambiguous and subject to multiple interpretations. Nonetheless, FPCY failed to
seek specific clarification and drew unwarranted inferences from what is primarily a statement of opin-

ion. Such circumstances do not give rise to an affirmative duty of disclosure. See Hord v. Envtl. Research Inst. of Mich., 463 Mich. 399, 413, 617
N.W.2d 543, 550-51 (2000) (concluding that disclosure of past financial information does not require disclosure of updated financial information
absent specific inquiry and that unwarranted conclusions drawn from anecdotal references do not
give rise to liability for silent fraud); Van Tassel v.
McDonald Corp., 159 Mich.App. 745, 750, 407
N.W.2d 6, 8 (1987) (“An action for fraud may not
be predicated upon the expression of an opinion or
salesmen's talk in promoting a sale, referred to as
puffing.”). Therefore, to the extent count I is
premised on an alleged affirmative duty to disclose
Howell's financial and business condition, Boles
and Schmitt are entitled to summary judgment.
B. Misrepresentations Regarding the Use of
Contract Payments
FPCY's count I is also premised on alleged
misrepresentations regarding Howell's use of contractual payments. During contract negotiations,
Howell explained to FPCY that a higher initial payment would “pay for imported pipes in full at signing” while a lower payment would only cover a
down payment with no guarantee regarding future
FN3
variations in exchange rates.
(FPCY's Resp. to
Schmitt's Mot. for Summ. J. Ex. 15-L.) Similarly,
Howell impliedly represented that periodic payments made on the contract would correspond with
the completion of work on the organ by presenting
FPCY with a “Tentative Schedule of Payments and
Work.” Furthermore, the contract included language that the periodic invoices would note “time
and materials charged toward the completion of the
work specified” and would be “itemized in a manner which will allow Purchaser's Representative to
document receipt of materials.” (Id. Ex. 14 at 3,
Appendix B.) FPCY alleges that, even before the
contract was signed, Boles and Schmitt knew payments would not be applied toward completion of
FPCY's organ, but that they made the representations to induce FPCY to enter into the contract.

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FN3. FPCY is unsure whether written representations on behalf of Howell came
from Boles or Schmitt. While the source of
the representations would be important for
purposes of assigning personal liability,
the Court need not resolve that issue in this
case.
As noted above, Boles and Schmitt oppose this
claim on a number of grounds including that the
claim is barred by the future promise rule. This rule
requires that “fraudulent misrepresentation ... be
predicated upon a statement relating to a past or an
existing fact [because] [f]uture promises are contractual and do not constitute fraud.” Hi-Way Motor
Co. v. International Harvester Co., 398 Mich. 330,
336, 247 N.W.2d 813, 816 (1976). As an exception
to this rule, though, future promises may be actionable as fraud where they are “made in bad faith
without intention of performance.” Id. at 338, 247
N.W.2d at 816. Where there is no proof of the
promisor's intent, “the facts of the case [may] compel the inference that the promise was but a devise
[sic] to perpetrate a fraud.” Id. at 339, 247 N.W.2d
813, 247 N.W.2d at 817.
*5 At times, FPCY's arguments seem to imply
that Howell's pre-contractual business and financial
condition evidenced an intent not to use FPCY's
payments as described; FPCY also states, however,
that it “does not claim that Howell misrepresented
its ability or future performance.” (FPCY's Resp. to
Boles's and Howell's Mot. for Summ. J. at 5.) Having reviewed the record, the Court concludes that
there is insufficient evidence to justify application
of the bad faith exception to the future promise
rule. There is no direct evidence of intent by Boles
or Schmitt that Howell not perform future promises. And although record evidence establishes that
Howell was running behind schedule on a number
of projects, it appears that the company was trying
to catch up and meet its obligations. The Court can
find no support for the argument that the bad faith
exception was meant to extend to companies such
as Howell whose business struggles create a risk,

not a guarantee, of nonperformance. See Marrero v.
McDonnell Douglas Capital Corp., 200 Mich.App.
438, 444, 505 N.W.2d 275, 279 (1993) (“A mere
broken promise does not constitute fraud, nor is it
evidence of fraud.”); cf. Colby v. Zimmerman, No.
220395, 2001 WL 1219414, at *2 (Mich.Ct.App.
Oct.12, 2001) (acknowledging the relevance of the
bad faith exception where there was evidence that a
landowner previously sold property that he later
promised to lease to another). Therefore, the remainder of FPCY's count I is barred by the future
promises rule and Boles and Schmitt are entitled to
summary judgment on that claim.
IV. Count II: Post-Contract Fraud
In count II, FPCY alleges that Boles and
Schmitt engaged in post-contract fraud by continuing to remain silent as to Howell's business and financial condition and making additional misrepresentations to induce FPCY to make periodic payments on the contract. Because the Court previously determined that Boles and Schmitt were under no affirmative duty to disclose, that portion of
FPCY's count II is likewise subject to dismissal. As
to the misrepresentations inducing payment, Boles
and Schmitt again assert that the claim is barred by
the future promise rule, the economic loss doctrine,
the contract's merger clause, and the statute of limitations.
Before addressing the merits of FPCY's claim,
the Court pauses to consider Schmitt's involvement
in count II. Having dismissed the silent fraud allegations, FPCY's post-contract fraud claim relies on
alleged misrepresentations regarding Howell's progress on the organ intended to induce periodic payments by FPCY. Those alleged misrepresentations
came from Boles in his capacity as Howell's president. Because there is no evidence of post-contract
misrepresentations by Schmitt, Schmitt is entitled
to summary judgment as to count II.
As to the arguments raised by Boles in opposition to count II, several clearly lack merit. First, the
future promise rule does not apply to FPCY's allegations of post-contract fraud because the claim is

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that Boles misrepresented the amount of work completed by Howell, not that he misrepresented Howell's intent to complete work in the future. Second,
the contract's merger clause only restricts FPCY's
ability to rely on statements made before or contemporaneous with the signing of the agreement; it
has no bearing on allegedly fraudulent conduct after
that point in time. Finally, count II is not barred by
the statute of limitations. Because count II alleges
post-contract fraud, the conduct giving rise to the
claim necessarily occurred after August 22,
2001-the day the contract was signed. FPCY filed
the present lawsuit, alleging post-contract fraud, on
July 26, 2007-less than six years after the alleged
misconduct. See Mich. Comp. Laws Ann. §
600.5813 (setting the statute of limitations at six
years). Therefore, Boles is not entitled to summary
judgment on any of these grounds.
*6 This leaves Boles argument regarding the
economic loss doctrine. The economic loss doctrine
generally prohibits plaintiffs from recovering under
tort theory for claims that sound in contract. See
Scarff Bros., Inc. v. Bischer Farms, Inc., 546
F.Supp.2d 473, 487 (E.D.Mich.2008). In one common application, the economic loss doctrine bars
fraud claims based on misrepresentations regarding
the quality or character of goods purchased for
commercial purposes. Huron Tool & Engineering
Co. v. Precision Consulting Services, Inc., 209
Mich.App. 365, 373, 532 N.W.2d 541, 545 (1995).
But while fraud claims sound in tort, the economic
loss doctrine does not bar all fraud claims.
The economic loss doctrine does not bar fraud
claims based on fraud in the inducement or fraud
extraneous to the contract. See id. Therefore, a
fraud action lies where a defendant fraudulently induces a plaintiff to enter into the original agreement
or to enter into additional undertakings. See id.
(quoting Public Service Enterprise Group, Inc. v.
Philadelphia Elec. Co., 722 F.Supp. 184, 201
(D.N.J.1989)). Alleging post-contract fraud,
FPCY's count II does not include claims of frauduFN4
lent inducement to the contract as a whole.

Rather, count II asserts that Boles fraudulently induced FPCY to make periodic payments on the
contract by representing that Howell was completing work on the project. At this stage of the litigation, the Court is satisfied that FPCY has created a
genuine issue of fact as to whether FPCY was obligated to make payments only upon the completion
of work by Howell and whether Boles made affirmative, fraudulent misrepresentations as to the work
completed by Howell in order to induce periodic
payments. Therefore, Boles's motion for summary
judgment as to count II is denied.
FN4. FPCY's fraudulent inducement
claims were analyzed in the Court's discussion of count I.
V. Count III: Fraud Claims against Howell and
RKO Based on Theories of Respondeat Superior
and Successor Liability
In count III, FPCY attempts to hold Howell and
RKO liable for the fraudulent conduct alleged in
counts I and II based on theories of respondeat superior and successor liability. To the extent that
Boles may have engaged in post-contract fraud,
Howell may also be held liable for that conduct
through the doctrine of respondeat superior. Howell
presents no arguments to the contrary, other than to
argue that Boles did not commit fraud in the first
place. Because the Court already rejected that argument for purposes of the present motions, Howell's
motion for summary judgment is denied as to count
III.
Rather than challenge the fraudulent nature of
Boles's conduct, RKO seeks summary judgment on
count III on grounds that it is not subject to liability
as a successor of Howell. FPCY maintains,
however, that the circumstances surrounding RKO's
purchase of Howell's assets renders RKO liable as a
successor under several exceptions to the general
rule of no liability.
The general rule of successor liability is well
established in Michigan law:

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*7 (I)f 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 ....
There are certain instances, however, in which
the purchaser or transferee may become liable for
the obligations of the transferor corporation. The
transferee may be held liable for the debts of the
transferor corporation: (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 were not provided for; or (5)
where the transferee corporation was a mere continuation or reincarnation of the old corporation.
Turner v. Bituminous Casualty Co., 397 Mich.
406, 417 n. 3, 244 N.W.2d 873, 878 n. 3 (1976)
(quotations omitted). FPCY argues that RKO can
be held liable for Boles's alleged fraud under the
last three exceptions or any combination thereof.
Although listed separately, the last three exceptions to the general rule of no liability for successors tend to overlap in application. To determine
if a transferee corporation is a mere continuation or
reincarnation of the transferor, courts typically consider whether the transferee “continues to use the
seller's name, location, and employees, and [if]
there exists a common identity of stockholders and
directors.” 19 Am.Jur.2d Corps. § 2326; see also
Turner, 397 Mich. at 430, 244 N.W.2d at 883-84.
FN5
Under this analysis, “[a] mere change of corporate name will not enable the company to avoid
liability” and “[a]bsolutely identical ownership
between the two corporations ... need not be present
....“ 19 Am.Jur.2d Corps. § 2326. In any case,
though, “there must be insufficient consideration
running from the new company to the old” before
the mere continuation exception can apply. Id. This
last requirement makes the continuation exception

similar to the other exceptions invoked by FPCY.
FN5. Turner specifically considered the
doctrine of successor liability in the context of a products liability claim that did
not arise until after the transfer of corporate assets to the successor corporation. 397
Mich. 406, 244 N.W.2d 873. Ultimately,
the Michigan Supreme Court concluded
that public policy interests favor the expansion of successor liability in such cases.
Id. at 419-29, 244 N.W.2d at 878-83.
Therefore, the Turner court expanded the
second exception to successor liabilitywhere the transaction amounts to a consolidation or merger-to include cash transactions in addition to stock transactions. Id.
The court then explained that a cash transaction could amount to a consolidation or
merger if certain elements of continuity
exist between the transferee and transferor
corporations. Id. It remains unclear to this
Court whether the analysis set forth in
Turner for products liability cases is intended to be any different than the analysis
under the continuation exception applicable to all cases. See id. at 417 n. 3, 244
N.W.2d at 878 n. 3 (listing the continuation exception as part of the “general
rule” regarding successor liability). In any
event, the Court does not read Turner or its
progeny to mean that the continuation exception is applicable only to products liability, and not commercial cases. But see
DeWitt v. Sealtex Co., Inc., Nos. 273387,
273390, 274255, 275931, 2008 WL
2312668, at *4 (Mich.Ct.App. June 5,
2008).
The fraudulent transaction and lack of good
faith exceptions allow successor liability to attach
where transfers between new and old companies
leave the old company's creditors with nothing to
collect. Specifically, the fraudulent transaction exception may apply “[w]here there is a shifting of

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assets of a debtor to a corporation whereby the only
assets from which the creditors could expect to be
paid are placed beyond the reach of their process.”
Id. § 2322. Similarly, a transfer may be said to be
lacking in good faith if “one corporation takes over
all the assets of another corporation and pays no
consideration ..., or the consideration is so inadequate that the creditors of the transferor corporation are unprovided for.” Id. § 2327.
In the present case, FPCY has presented sufficient evidence to establish genuine issue of material
fact as to whether the transfers between Howell and
RKO were either fraudulent or lacking in good faith
and whether RKO is operating as a mere continuation of Howell. As an initial matter, Boles admitted during his deposition that his decision to close
Howell was prompted by the FPCY lawsuit.
(FPCY's Resp. to RKO's Mot. for Summ. J. Ex. 5 at
149-50.) After FPCY began making demands and
threatening to file a lawsuit for money damages,
Howell began transferring assets to Karstens, a
former employee of Howell who would later become owner of RKO. On July 20, 2007, Howell
sold its tools and equipment to Karstens for $8,000.
(Id. Ex. 15.) Karstens did not take possession of the
items but allowed Howell to continue using them as
if no sale had taken place. (FPCY's Supp. Resp. to
RKO's Mot. for Summ. J. Ex. B at 14.) Also in July
2007, Karstens purchased Howell's inventory of organ pipes for $3,000. (Id. Ex. B at 74-75.)
*8 Then in August 2007, Karstens incorporated
RKO and took on Boles as a part-time employee.
(FPCY's Supp. Resp. to RKO's Mot. for Summ. J.
Ex. 16; RKO's Mot. for Summ. J. at 5.) When Howell ceased operating in September 2007, RKO
began leasing the building that had been used by
Howell so that none of the purchased equipment
would have to be relocated. (FPCY's Resp. to
RKO's Mot. for Summ. J. Ex. 18.) Howell previously owned the building but sold it to Schmitt
sometime in 2006 or 2007 for cash-flow purposes. (
Id. Ex. 5 at 150, Exs. 11, 14.) RKO also hired four
out of five of Howell's employees. (Id. Ex. 17 at 22,

Ex. 19.) Although RKO generally executed new
contracts with Howell's former customers, Boles
and Schmitt continued functioning in the same capacity under RKO as they had for Howell, the new
contracts generally required RKO to complete the
work previously promised by Howell, and the
projects continued in the same manner as they had
before the transfer using the works in progress that
had been created by Howell. (See FPCY's Supp.
Resp. to RKO's Mot. for Summ. J. Ex. B at 34,
55-56, 120, 122-24.) Under these circumstances, it
is not surprising that many of Howell's former customers believed that Karstens had “bought out”
Howell and was simply operating the company under a new name. (Id . Ex. A at 71-72, Ex. N.)
Ultimately, the transactions between Howell
and RKO placed Howell's assets beyond the reach
of FPCY and involved such inadequate consideration so as to leave FPCY unprovided for as a creditor. Under these circumstances, there is at least a
genuine issue of material fact as to whether RKO
may be held liable as a successor corporation to
Howell. Therefore, RKO's motion for summary
judgment is denied as to count III.
VI. Count IV: Breach of Contract
In count IV, FPCY presents a breach of contract claim against Howell and RKO. Howell is not
seeking summary judgment on this claim. RKO opposes the claim on grounds that it is not liable as a
successor corporation. For the reasons discussed
above, RKO's motion for summary judgment is also
denied as to count IV.
VII. Count V: Alter Ego Liability for Howell's
Fraud and Breach of Contract
In count V, FPCY seeks to hold Boles and
Schmitt personally liable for the fraud and breach
of contract alleged against Howell in counts III and
IV. To justify imposition of personal liability,
FPCY argues that Boles and Schmitt acted as alter
egos of Howell. Opposing this claim, Boles argues
that FPCY failed to present sufficient evidence to
support the elements of alter ego liability. Meanwhile, Schmitt argues that he cannot be held liable

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as an alter ego because he is neither an owner nor a
shareholder of Howell and is not a signatory to the
contract.
Under Michigan law, the general rule is that
“separate corporate identities will be respected, and
thus corporate veils will be pierced only to prevent
fraud or injustice.” Wodogaza v. H & R Terminals,
Inc., 161 Mich.App. 746, 756, 411 N.W.2d 848,
852 (1987). To succeed in an alter ego claim and
pierce the corporate veil, a plaintiff must establish
three elements: “First, the corporate entity must be
a mere instrumentality of another entity or individual. Second, the corporate entity must be used to
commit a fraud or wrong. Third, there must have
been an unjust loss or injury to the plaintiff.”
Nogueras v. Maisel & Assocs. of Mich., 142
Mich.App. 71, 86, 369 N.W.2d 492, 498 (1985).
Factors considered to determine whether a corporate entity is used as a mere instrumentality include
“undercapitalization of the corporation, the maintenance of separate books, the separation of corporate and individual finances, the use of the corporation to support fraud or illegality, the honoring of
corporate formalities, and whether the corporation
is merely a sham.” Laborers' Pension Trust Fund v.
Sidney Weinberger Homes, Inc., 872 F.2d 702,
704-05 (1988). Ultimately, though, “[e]ach case involving disregard of the corporate entity rests on its
own special facts.” Kline v. Kline, 104 Mich.App.
700, 703, 305 N.W.2d 297, 299 (1981).
*9 Having reviewed the record evidence, the
Court concludes that FPCY failed to adequately
support its alter ego claims. Although Howell was
struggling to meet its obligations to FPCY and other customers during the relevant time period, there
is no indication that the corporation was a mere
sham. Indeed, both Boles and Schmitt tried to keep
the corporation afloat by making personal loans to
FN6
Howell.
That those efforts ultimately failed and
resulted in a breach of the FPCY contract does not
mean that Boles or Schmitt used the company as a
FN7
mere instrumentality.
Therefore Boles and
Schmitt are entitled to summary judgment on count

V.
FN6. This is not an indication that Boles
and Schmitt failed to keep corporate and
individual finances separate. These financial transactions were apparently accounted for in the books because FPCY
presents evidence regarding amounts of
loans and repayments. In other words,
there was no free flowing, unaccounted for
exchange of funds between Howell, Boles,
and Schmitt. Furthermore, the actual concern in the alter ego context is that the individual will take from the corporate coffers for personal use without accounting to
the company, not that the individual will
lend personal money in an attempt to support the corporation.
FN7. It is difficult to imagine that Schmitt
could ever use Howell as an instrumentality given that he is not an owner, shareholder, or officer of the company. Although Schmitt acted as an agent for Howell in negotiating the FPCY contract, there
is no evidence that Schmitt had any authority or ability to control the manner in
which Howell maintained its books or
abided by corporate formalities, among
other things.
VIII. Count VI: Unjust Enrichment
In its fifth count, FPCY seeks recovery of its
contract payments from Boles and Schmitt on a theory of unjust enrichment. FPCY asserts that Boles
and Schmitt induced payments from FPCY so that
Howell could repay loans made by them. Boles and
Schmitt argue that the claim is barred by the existence of an express contract between FPCY and
Howell, the fact that FPCY conferred no benefits
on them, and by the running of the statute of limitations.
As a general rule, “[a] claim of unjust enrichment does not apply if there is an express contract
....“ Able Demolition v. Pontiac, 275 Mich.App.

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577, 586 n. 4, 739 N.W.2d 696, 702 n. 4 (2007).
For an express contract to bar an unjust enrichment
claim, however, the express contract must be
“between the same parties on the same subject matter.” Morris Pumps v. Center Line Piping, 273
Mich.App. 187, 194-95, 729 N.W.2d 898, 903
(2006) (quoting 42 CJS, Implied and Constructive
Contracts, § 34, p. 33). The express contract in this
case is between FPCY and Howell while the unjust
enrichment claim is brought against Boles and
Schmitt. Accordingly, there is “no reason why
[FPCY] should not be allowed to simultaneously
and alternatively assert a contract claim against one
defendant with whom an express contract exists and
a quantum meruit claim against [ ] different defendant[s] with whom no express contract[s] exist [ ].”
Id. at 199-200, 729 N.W.2d at 906.
Next, Boles and Schmitt challenge the unjust
enrichment claims on grounds that FPCY conferred
no benefit on them. To succeed in its unjust enrichment claim, FPCY “must establish (1) the receipt of
a benefit by the defendant[s] from the plaintiff and
(2) an inequity resulting to the plaintiff because of
the retention of the benefit by the defendant[s].” Id.
at 195, 729 N.W.2d at 904. This requires that FPCY
prove that Boles and Schmitt received funds paid
by FPCY. Although FPCY has presented evidence
to establish that Boles and Schmitt received repayments on their loans to Howell during the same
time period that FPCY made payments to Howell,
FPCY failed to present sufficient evidence to establish that the repayments received by Boles and
Schmitt were the actual contract payments made by
FPCY. And even assuming some of the repayments
FN8
consisted of funds from FPCY,
the inability to
trace funds flowing in and out of Howell would
make it impossible for this Court to determine the
extent of personal liability for the individual defendants.
FN8. FPCY itself has proven that the repayments made to Boles and Schmitt could
not have been exclusively derived from
FPCY contract payments; the total amount

of repayments to Boles and Schmitt during
the relevant period exceeds the amount of
contract payments made by FPCY. It is
also notable that, during the relevant period, Boles and Schmitt continued providing
loans to Howell, making it possible that
some of the repayments came from Boles
and Schmitt themselves.
*10 For these reasons, this case is distinguishable from cases where the unjust enrichment came
in the form of construction materials or services
that were unquestionably applied to the benefit of
third parties. See Morris Pumps, 273 Mich.App.
187, 729 N.W.2d 898 (2006); Krammer Asphalt
Paving Co., Inc. v. E. China Twp. Schools, 443
Mich. 176, 504 N.W.2d 635 (1993). Lacking evidence that Boles and Schmitt were unjustly enriched
by the payments made by FPCY, Boles and Schmitt
are entitled to summary judgment.
IX. Conclusion
Even viewing the record evidence in this case
in the light most favorable to FPCY, FPCY's claims
for pre-contract fraud and unjust enrichment fail as
a matter of law. At the same time, however, there
remain genuine issues of material fact as to whether
Boles engaged in post-contract fraud and whether
RKO can be held liable for any of the claims alleged in this case as a successor corporation to
Howell.
Accordingly,
IT IS ORDERED that the Motion for Summary Judgment filed by defendants Boles and Howell is GRANTED IN PART as to counts I, V, and
VI and DENIED IN PART as to counts II and III.
FN9
FN9. As previously noted, Howell does not
seek summary judgment as to count IV.
IT IS FURTHER ORDERED that the Motion
for Summary Judgment filed by defendant Schmitt
is GRANTED and that defendant Schmitt is dis-

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missed from the case.
IT IS FURTHER ORDERED that the Motion
for Summary Judgement filed by defendant RKO is
DENIED.
E.D.Mich.,2010.
First Presbyterian Church Of Ypsilanti v. H.A.
Howell Pipe Organs, Inc.
Slip Copy, 2010 WL 419972 (E.D.Mich.)
END OF DOCUMENT

© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.