Charter School Capital, Inc. v. Taylor International Academy

Filing 34

OPINION and ORDER (1) Denying Claimant Canstrong Food Services LLC's 22 Motion for Release of Funds, and (2) Granting 29 Motion to Strike Plaintiff's Response to Motion. Signed by District Judge Linda V. Parker. (RLou)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
CHARTER SCHOOL CAPITAL, INC.,
Plaintiff,
Civil Case No. 17-11823
Honorable Linda V. Parker

v.
TAYLOR INTERNATIONAL ACADEMY,
Defendant.
________________________________________/

OPINION AND ORDER (1) DENYING CLAIMANT CANSTRONG FOOD
SERVICES LLC’S MOTION FOR RELEASE OF FUNDS AND (2)
GRANTING MOTION TO STRIKE PLAINTIFF’S RESPONSE TO
MOTION
This lawsuit arises from the closure of Defendant Taylor International
Academy (“TIA”), a charter school previously operating in Southfield, Michigan.
In its Complaint, Plaintiff Charter School Capital, Inc. (“CSC”) alleges that it is a
secured lender to TIA and that it has a first priority lien in all assets of TIA.
Pursuant to the parties’ stipulation and a consent order, a receiver has been
appointed to wind up TIA’s affairs and to dissolve it. (See ECF No. 7.) Thomas E.
Woods currently is serving as the receiver. (ECF No. 12.) TIA has not responded
to CSC’s Complaint and a Default Judgment was entered against it on November
29, 2017. (ECF No. 26.) The matter presently is before the Court on a November

7, 2017 motion for release of funds held by the receiver, filed by claimant
CanStrong Food Services, LLC (“CanStrong”). (ECF No. 22.)
On November 24, 2017, the receiver filed a response to CanStrong’s motion.
(ECF No. 25.) CanStrong filed a reply brief on December 1, 2017. (ECF No. 27.)
CSC filed a response to CanStrong’s motion on December 4, 2017 (ECF No. 28),
which CanStrong has moved to strike as untimely. (ECF No. 29.) The motion to
strike has been fully briefed. (ECF Nos. 30, 31.)
CanStrong’s Motion to Strike CSC’s Response
CanStrong moves to strike CSC’s response brief, arguing that it was filed
well beyond the fourteen days permitted under Eastern District of Michigan Local
Rule 7.1(e)(2)(B). CSC answers that CanStrong’s motion was a dispositive
motion, and thus CSC had twenty-one days from the date of service to file its
response brief. Accordingly, CSC maintains, its response was filed only a few
days late.
Local Rule 7.1(e) lists the motions considered to be “dispositive motions.”
Those motions are:
●for injunctive relief,
●for judgment on the pleadings,
●for summary judgment,
●to dismiss or quash an indictment or information made by a

defendant,
●to suppress evidence in a criminal case,
●to certify or decertify a class,
2

●to dismiss for failure to state a claim upon which relief can be

granted, and
●to involuntarily dismiss an action.
E.D. Mich. LR 7.1(e)(1)(A). Absent from this list are motions for release of funds
held by a receiver. Local Rule 7.1(e) provides further that “[n]ondispositive
motions are motions not listed in LR 7.1(e)(1)(A).” E.D. Mich. LR 7.1(e)(2)(A).
As such, CanStrong’s motion was a nondispositive motion to which a response had
to be filed within fourteen days after service of the motion, or by the end of the day
on November 21, 2017. As indicated, CSC filed its response on December 4,
2017.
The motion was untimely and, therefore, the Court is granting CanStrong’s
motion to strike it.1
CanStrong’s Motion for Release of Funds Held by Receiver
In this motion, CanStrong claims that it is a creditor of TIA based on a
contract appointing CanStrong as TIA’s exclusive food supplier during the 20162017 school year. CanStrong asserts that it is owed $49,951.88 for food and food
services supplied under the contract. Prior to TIA’s closing, CanStrong attempted
to collect the amount due and claims TIA’s representatives misled CanStrong
regarding the payments and lured CanStrong to continue supplying food and
services to TIA despite the lack of payment.
In any event, the Court is persuaded to deny CanStrong’s motion for release of
funds regardless of the arguments asserted in CSC’s response brief.
3

1

According to CanStrong, the United States Department of Agriculture
(“USDA”), through the State of Michigan, provided funds to TIA for the sole
purpose of paying the amount TIA owed CanStrong. As such, CanStrong contends
that a constructive trust should be imposed to pay those funds to it.
The receiver argues in response to CanStrong’s motion that CanStrong fails
to present evidence of a contract between it and TIA for the 2016-2017 school
year. Construing CanStrong’s motion as being brought pursuant to 7 C.F.R.
§ 210.6, the receiver also argues that CanStrong lacks standing to invoke the
regulation. The receiver disputes CanStrong’s assertions that it was misled by
TIA’s representatives regarding the payments owed and that the State of Michigan
provided funding to TIA to be held in trust for CanStrong. The receiver argues
there was no contractual agreement between TIA and CanStrong to hold funds due
the latter in trust. Nor, the receiver argues, does CanStrong identify any statutory
or regulatory directive providing for such a trust.
In reply, CanStrong presents evidence of an agreement between it and TIA
to renew TIA’s vended school meals contract with CanStrong for the 2016-2017
school year.2 (CanStrong’s Reply Ex. 1, ECF No. 27-2.) As the receiver argues,
however, neither that agreement nor the original contract required TIA to hold in
trust the funds owed to CanStrong. (See id.; see also CanStrong’s Mot. Ex 2, ECF
CanStrong first was awarded the food services contract through bidding for the
2014-2015 school year. (See CanStrong’s Mot. Ex. 2, ECF No. 22-3.)
4

2

No. 22-3.) The Court concludes that the regulation cited by CanStrong also did not
establish such a requirement.
The regulation on which CanStrong relies provides:
General. State agencies shall use Federal funds made available
under the Program to reimburse or make advance payments to school
food authorities in connection with lunches and meal supplements
served in accordance with the provisions of this part; except that, with
the approval of FNS, any State agency may reserve an amount up to
one percent of the funds earned in any fiscal year under this part for
use in carrying out special developmental projects. Advance payments
to school food authorities may be made at such times and in such
amounts as are necessary to meet the current fiscal obligations. All
Federal funds paid to any State in place of donated foods shall be used
as provided in part 240 of this chapter.
7 C.F.R. § 210.6. Section 210.6 speaks to the use of funds by state agencies. It
does not address how funds paid to school food authorities, like TIA, shall be used.
It certainly does not require school food authorities to hold the program funds they
receive in trust. For these reason, it is not undisputed—as CanStrong asserts and
on which the premise of its argument is based—“that the program funds provided
by the USDA through the State of Michigan were for the sole purpose of
reimbursing (paying) for school food program expenses” and thus had to be held in
trust. (See CanStrong’s Br. in Supp. of Mot. at 6, ECF No. 22 at Pg ID 358.)
Absent a legal obligation for TIA to hold the money owed to CanStrong in
trust, the Court believes that CanStrong fails to show that it stands in a better
position than any other TIA creditor with respect to the assets held by the receiver.
5

Notably, because there was no obligation to hold the funds in trust, they were
(according to the receiver and not disputed by CanStrong) comingled with TIA’s
other assets. Under Michigan law, “[t]he recognition of a constructive trust
requires that the money or property on which the trust is imposed must be ‘clearly
traced’ to the beneficiary of the constructive trust.” United States v. One Silicon
Valley Bank Account, 549 F. Supp. 2d 940, 955 (W.D. Mich. 2008) (citing Biddle
v. Biddle, 168 N.W. 92 (Mich. 1918)); see also Fidelity & Deposit Co. of Md. v.
Stordahl, 91 N.W.2d 533, 536 (Mich. 1958).
Moreover, the facts presented by CanStrong do not warrant the imposition of
a constructive trust under Michigan law. The Michigan Supreme Court has
explained the basis for constructive trusts as:
“[W]hen it is shown that title has been obtained through fraud,
misrepresentation, concealment, undue influence, duress, taking
advantage of one’s weaknesses, or necessities, or any other similar
circumstances which render it unconscionable for the holder of the
legal title to retain and enjoy the property, and there are no
intervening rights of bona fide purchasers, equity will impress a
constructive trust on the property and turn i[t] over to the one whom it
rightfully belongs.”
Potter v. Lindsay, 60 N.W.2d 133, 136 (Mich. 1953) (brackets added) (quoting
Racho v. Beach, 236 N.W. 875, 877 (Mich. 1931)). Further: “‘A constructive trust
is imposed . . . because the person holding the title to property would profit by a
wrong or would be unjustly enriched if he were permitted to keep the property.’”
Id. (citation omitted).
6

First, there is no evidence that TIA obtained the funds at issue in such a way
as to support the imposition of a constructive trust in favor of CanStrong. The
fraud CanStrong alleges relates to TIA’s promise to pay CanStrong in exchange for
the latter’s continued provision of food and food services. (See CanStrong’s Br. in
Supp. of Mot. at 6, ECF No. 22 at Pg ID 358.) TIA did not receive the funds at
issue from CanStrong; rather, they came from the USDA through the State of
Michigan. (Id.) CanStrong fails to demonstrate fraud by TIA in its receipt of those
funds. In other words, there is no evidence that TIA procured funding through the
school food program with no intent to use the funds for food and food services.
Further, the funds CanStrong seeks, along with TIA’s remaining assets, are
being held by the receiver for the benefit of whichever of TIA’s creditors can be
repaid from those assets. There is no chance of the funds reverting to TIA. Thus,
only innocent third parties will potentially profit if the funds are not released to
CanStrong.
For all of these reasons, the Court concludes that CanStrong is not entitled to
the release of the funds held by the receiver.
Accordingly,
IT IS ORDERED that Claimant CanStrong Food Services, LLC’s motion
to strike Plaintiff’s Response (ECF No. 29) is GRANTED and the response (ECF
No. 28) shall be STRICKEN from the record;
7

IT IS FURTHER ORDERED that Claimant CanStrong Food Services,
LLC’s Motion for Release of Funds Held by Receiver (ECF No. 22) is DENIED.
s/ Linda V. Parker
LINDA V. PARKER
U.S. DISTRICT JUDGE
Dated: March 5, 2018
I hereby certify that a copy of the foregoing document was mailed to counsel of
record and/or pro se parties on this date, March 5, 2018, by electronic and/or U.S.
First Class mail.
s/ R. Loury
Case Manager

8