Has the Michigan Court of Appeals given safe harbor to would be debtors?

In a recent opinion in Green v Ziegelman, 282 Mich App 292 (2009), the Michigan Court of Appeals took up the case of whether a creditor can pierce the corporate veil of a corporate creditor pursuant to the Proceedings Supplementary to Judgment Act and enter a judgment against the shareholder of that corporate judgment debtor. In an astonishing reversal, the Court of Appeals held that the creditor may NOT do so.

The court stated:

MCR 2.621(A)(2) is the provision implicated in this case, and it directs attention to the PSJA. MCL 600.6104, which is the relevant statute here under the PSJA, provides:
After judgment for money has been rendered in an action in any court of this state, the judge may, on motion in that action or in a subsequent proceeding:
(1) Compel a discovery of any property or things in action belonging to a judgment debtor, and of any property, money, or things in action due to him, or held in trust for him;
(2) Prevent the transfer of any property, money, or things in action, or the payment or delivery thereof to the judgment debtor;
(3) Order the satisfaction of the judgment out of property, money, or other things in action, liquidated or unliquidated, not exempt from execution;
(4) Appoint a receiver of any property the judgment debtor has or may thereafter acquire; and
(5) Make any order as within his discretion seems appropriate in regard to carrying out the full intent and purpose of these provisions to subject any nonexempt assets of any judgment debtor to the satisfaction of any judgment against the judgment debtor.
The court may permit the proceedings under this chapter to be taken although execution may not issue and other proceedings may not be taken for the enforcement of the judgment. It is not necessary that execution be returned unsatisfied before proceedings under this chapter are commenced.

For purposes of the question posed to us, § 6104(5) is the only provision that could conceivably support the circuit court’s ruling; however, on close examination of the language in § 6104(5), it is clear that it did not authorize the entry of the judgment against Ziegelman.

However, the court clearly lacked imagination in holding that 6104(5) was the only language that could allow a trial court to use Proceedings Supplementary to Judgment (“PSJ”) to pierce a corporate veil. Indeed, the structure of 6104(1) is not aimed at the judgment debtor, but rather at anyone or any entity that is holding property belonging to the judgment debtor. The Green Court’s ruling was correct in holding that the language of 6104(5) is broad., But its attention, in my opinion, did not need to be focused on 6104(5), but it should have considered the entire statute and its purpose in aiding creditors to seek relief from judgment debtors and any third parties aiding them.
As attorneys, we know that if a creditor obtains a judgment against a corporate debtor and that corporation is merely the alter-ego of an individual, then clearly that individual is holding assets or property that belongs to the entity. Actions to pierce a corporate veil are usually aimed at convincing a court to disregard a corporate entity and reach an individual. The PSJ rules are , if not harmonious with actions to pierce a corporate veil and hence, I think the court’s opinion in Green was incorrect.
This holding as several unpleasant implications for creditors Section 6104(1) allows a court to reach the assets of third parties that are holding assets for the benefit of a judgment debtor. However, the Green Court’s holding now forbids the entry of a judgment against a party not originally named in the underlying complaint. This makes no sense. There has never been a requirement to name a party in an underlying complaint as a prerequisite to obtaining a judgment against that party, post judgment. We know this is true because the whole structure of garnishments contemplates obtaining property from third parties who owe money or hold property of the judgment debtor. If a garnishee fails to respond to a garnishment within 14 days, the Plaintiff can obtain a judgment against that third party.
A the trial court’s powers to enter a judgment against a third party is not circumscribed anywhere under Section 6104(1). It is only because the Green Court held that the trial court did not have the power to enter a judgment against a third party, that this Court may have unwittingly taken a large sanction away from the lower court to enforce its own judgments.
So where does this leave us? I don’t rightly know. It seems to me that the the Green Court requires creditors to plead a piercing the corporate veil in the substance of their complaints or to file a new lawsuit post judgment to pierce the corporate veil. Judicial economy would favor allowing such issues to be decided in the underlying case pursuant to the PSJ Act. But, if creditors have to file such lawsuits against third parties, do they not have a Res Judicata defense to the action? Remember Res Judicata bars subsequent actions between parties or their privies that involve the same issues that could have or should have been brought in the prior action. If corporate shareholders are able to defeat Plaintiffs pursuing an action to pierce the corporate veil using the Res Judicata defense, then the Court of Appeals will have created a large and certainly unanticipated safe harbor for shareholders to defeat creditor claims.
In many instances, this is the same as putting the proverbial cart before the hoarse. Plaintiffs, many times, have a action against a corporate defendant for breach of contract claims. Yet these cases do not involve an issue of the corporation’s financial position, solvency or whether its shareholders respected the corporate formalities. Defense counsel, in these cases, are well within their rights to object to questions directed at these irrelevant issues. Lets face it; until this case, if defense posited an objection to questions related to the corporate structure in a breach of contract action and instructed her client to not answer those questions, which one of us Plaintiffs’ attorneys would really file a Motion to Compel the answer to such a question? Its unlikely that very many of us would do so.
2. In order to preserve the issue of a piercing the corporate veil claim, you must plead that claim in your underlying complaint or it will be waived. As harsh as a position as this might be, the Green case puts most Plaintiffs in a position to have to plead this cause of action even though we usually don’t have sufficient facts to plead such a claim prior to conducing a creditors examination.
Moral of the Story to Plaintiff’s attorneys – If you have any opportunity to plead a piercing of the corporate veil claim in your complaint, you must plead it or risk losing that claim forever. You can no longer rely upon the PSJ Act to pursue a piercing of the corporate veil claim. If you file a subsequent lawsuit, you may have to address the Res Judicata defense and there is certainly no guaranty that you will win.

If you have any debt collection related questions, call or email Attorney Gary Nitzkin for a free consultation.  Visit our website at www.creditor-law.com.  For more information about collection law, follow our blog at www.michigancollectionlawblog.com or call (888) 293-2882.

This entry was posted on Sunday, June 27th, 2010 and is filed under Collection Laws Michigan . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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