Lim v. Miller Parking Co.

Citations: 548 B.R. 187; 2016 U.S. Dist. LEXIS 48507; 2016 WL 1399253Docket: Case Number 11-14422

Court: District Court, E.D. Michigan; April 11, 2016; Federal District Court

SummaryOriginalCytator Case TreatmentAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The case centers on the financial dealings of the Miller family, particularly concerning Bruce Miller and the companies linked to him: Miller Parking Company LLC (Miller Detroit) and an Illinois corporation, Miller Parking Company (Miller Chicago). Following a $3 million judgment against Miller Detroit on June 30, 2009, it filed for bankruptcy, leading K. Jin Lim, the bankruptcy trustee, to initiate legal action against James N. Miller, Bruce Miller's son and president of Miller Detroit, as well as other family members and their trusts.

Lim alleges that Miller Detroit transferred assets to Miller Chicago, claiming the latter operates as its alter ego, and that both companies engaged in fraudulent transfers to hinder creditor recovery. Miller Detroit, which did not own parking facilities, provided administrative support for other entities where the Millers had interests. The bankruptcy's origins date back to 2004 when a partnership dispute arose, culminating in a judgment against Miller Detroit in 2009.

In September 2009, after the judgment, James Miller distributed approximately $9 million from Miller Chicago to the family shareholders before dissolving it. Lim's legal complaint, filed after Miller Detroit's bankruptcy, asserts that the financial activities of the Millers were intended to evade creditor claims, with specific counts alleging voidable transfers under various legal statutes, including 11 U.S.C. §§ 547(b) and 548, as well as Michigan law.

Count IV alleges that distributions made by Miller Chicago to its shareholders are voidable. Counts V and VI seek substantive consolidation of Miller Chicago and Miller Detroit and a judicial finding that Miller Detroit is the alter ego of Miller Chicago in the context of bankruptcy. Count VII claims damages against James N. Miller for breaches of fiduciary duty as president of Miller Detroit. Count VIII asserts a breach of contract, arguing that Miller Detroit is owed $4.6 million from Miller Chicago based on a spreadsheet from James N. Miller. Count IX calls for an accounting of transactions between the two entities, claiming that defendants have not accurately disclosed the consideration for promissory notes issued by Miller Detroit to Miller Chicago. 

On February 3, 2015, a pretrial conference resulted in an agreement to bifurcate the claims, with Counts IV, V, VI, and IX to be decided by the Court without a jury. A bench trial commenced on February 17, 2015, concluding on March 10, 2015, during which the plaintiff's attorney abandoned the request for an accounting (Count IX). The trial included testimony from eleven witnesses and 438 exhibits, supplemented by stipulations of fact. The Court directed that proposed findings of fact be supported by record evidence, although some exhibits cited were not formally entered into evidence. 

The findings of fact begin with the Miller family's history in car parking services, starting with Nathan V. Miller in 1935 and continuing with Bruce Miller joining in 1959. Miller Chicago, which underwent several ownership changes and name modifications, was established in 1933 and transitioned to an 'S' corporation in 1999. The company has been involved in significant parking operations, including the construction of the Bismark Deck and a notable sale to Parking Properties, LLC in 1998, which involved seller financing of $4.4 million.

Bruce Miller transferred his interest in Miller Chicago to his children and grandchildren by early 2002, resulting in him having no financial stake in the company. At the time relevant to the lawsuit, the directors included James Miller, Bruce, and his wife Doris. James served as president, while Arleen, his wife, was secretary. By the end of 2001, Miller Chicago owned four parking properties in Chicago and had contracted Standard Parking in August 2000 to manage operations, including the Bismark Deck, which remained under Miller Chicago's ownership until its sale in 2009. Following the agreement, the company primarily operated as a landlord, generating income from parking properties and distributing revenue to shareholders. The administrative office in Chicago closed on September 30, 2000, with operations managed from Miller Detroit thereafter.

Bruce Miller systematically divested his shares in Miller Chicago, transferring them to his children and grandchildren or their trusts, culminating in his complete divestiture by February 2002. The new shareholders included his children and grandchildren. Miller Detroit, established as a partnership in 1961 between Bruce and his father, Nathan, provided management services for about 20 parking facilities without owning any. After Nathan's death in 1975, Bruce became the sole owner, and in 2000, the company transitioned into a limited liability company with Bruce assigning his interest to his trust.

James Miller, who had been with the company since graduating law school in 1978, began taking on greater operational responsibilities in 2000, eventually becoming president. The company hired Aaron Gerstman as controller in January 2000, responsible for maintaining financial records. Miller Detroit operated with a single bank account for client parking facilities and acted as a 'common paymaster,' managing separate internal accounts that were reconciled monthly. Gerstman worked on improving the accounting system to ensure accuracy, completing necessary journal entries by August 24, 2001, when the financial records were reconciled. Bruce Miller later filed for personal bankruptcy protection, and Miller Detroit also entered bankruptcy after his death post-2009.

Miller Detroit provided administrative services to Miller Chicago, particularly managing shareholder distributions, although post-2000, Miller Chicago ceased operations related to parking facilities and functioned primarily as a landlord. It retained its own bank account and continued to own assets while distributing income to shareholders, primarily family members, who allowed personal expenses to be paid by the corporation. Miller Detroit acted as a ‘common paymaster’ for all parking entities, reconciling expenses as shareholder distributions and ensuring taxes were settled.

Bruce Miller, accustomed to a comfortable income from investments in parking properties, particularly the Center Garage, saw his income decline after 2004. During 2003 and 2004, he took partner draws from Miller Detroit rather than a salary, as the corporation lacked sufficient cash flow to support these payments, prompting it to borrow funds from Miller Chicago. Initially, his family members supported these distributions, allowing funds intended for Miller Chicago shareholders to be redirected to Bruce Miller.

This arrangement treated the transfers as inter-company loans. Notably, there was a pre-existing $950,000 obligation from Miller Detroit to Miller Chicago for prior withdrawals by Bruce Miller. After undergoing brain surgery in January 2004, Bruce's involvement in Miller Detroit diminished, although he remained influential in major decisions. Despite this, he required substantial funding, with Miller Chicago providing approximately $1.7 million from 2005 to 2008 to cover his financial needs. In 2007, Miller Chicago converted some of Bruce Miller's loans into salary, paying him $744,000, grossed up to account for taxes.

Janet Stein, a shareholder of Miller Chicago, was aware that any funds distributed to Bruce Miller via Detroit would reduce the amount available for Miller Chicago shareholders. Miller Chicago typically distributed $75,000 quarterly, but after Stein sold her interests, distributions decreased to $65,808.93 per quarter. By January and February 2009, Bruce Miller's children and grandchildren owned all shares of Miller Chicago. Accounting expert Harry Cendrowski testified that their decision to allow Bruce Miller to receive funds in this manner complied with accounting principles. 

Loans from Miller Chicago to Bruce Miller were documented, including a $50,000 loan at 4.255% interest approved by the Board of Directors on April 13, 2004. However, in 2008, James Miller and his siblings decided to stop deducting amounts from their distributions to support Bruce Miller. On December 13, 2008, James instructed that all payroll to Bruce should cease, leading to the last payment to him in September 2008. 

James Miller communicated to attorney Richard Roth that Miller Chicago shareholders would not cover Bruce and Doris Miller's professional fees. He also expressed concerns about family pressure regarding financial distributions, specifically mentioning the potential for legal action if Amy Weinstein did not receive her share of Bismark proceeds. James indicated he might distribute significant amounts to shareholders to avoid conflict. Furthermore, he stated that while he was unwilling to guarantee a specific sum to Doris Miller, he would consider her selling an asset back to the shareholders. 

From 2000 onwards, James Miller and Miller Detroit employees aimed to maintain accurate financial records for the managed entities, driven by the need to allocate administrative expenses and justify the substantial cash transfers from Miller Chicago to Miller Detroit that supported distributions to Bruce Miller.

Aaron Gerstman established a computerized accounting system that streamlined payment processing, payroll, and expense tracking for various entities using a unified accounts payable system. In March 2000, James Miller instructed that payroll and expense distributions reflect actual weekly realities, leading to allocations for office rent and other obligations among managed parking properties. Gerstman communicated system changes to employees in May 2001, outlining a new invoicing and allocation process. By August 2001, Arleen Miller was tasked with regular invoicing, check issuance, and preparing corporate filings for multiple entities.

Allocations for parking overhead were discussed for several properties, and if employees at Miller Detroit worked on other entities' matters, weekly allocations were made. Salaries for officers and owners were allocated annually starting in 2001. A secondary motive for these documentation practices stemmed from James Miller's concern over Miller Detroit's significant debt to Miller Chicago, which was unlikely to be repaid due to poor cash flow. Following the transfer of operational obligations to Standard Parking in August 2000, Miller Chicago had entered into an administrative services agreement with Miller Detroit earlier that year, which included an 8% management fee for minimal consulting services. Despite not tracking consulting hours, Miller Chicago continued to pay management fees to Miller Detroit from 2000 to 2004.

On May 26, 2004, a new administrative services agreement was established between the two entities, alongside a Promissory Note from Miller Detroit to Miller Chicago for $1,471,444, detailing repayment terms. The new agreement clarified that Miller Detroit was not an employee or agent of Miller Chicago. An accounting expert testified that these administrative services agreements were conducted at arm's length, despite Miller Chicago not actively operating parking facilities at that time.

The new agreement between Miller Detroit and Miller Chicago excluded expense reimbursement, yet Miller Detroit charged Miller Chicago approximately $60,000 to $70,000 monthly. Despite this, Gerstman testified that both companies adhered to the 2004 administrative services agreement, which stated that Miller Detroit would manage Miller Chicago's day-to-day operations and perform mutually agreed services, including reimbursing certain expenses. Notably, the agreement did not specify the exact expenses or services, apart from managing shareholder personal expenses. 

From 2005 to 2008, Miller Chicago experienced significant increases in administrative expenses, particularly wages, without clear justification for the wage fluctuations during 2003-2007. Allocations of wages for James and Arleen Miller to Miller Chicago rose over 100%, while wages at Miller Detroit decreased despite stable or reduced operations at Miller Chicago. Other properties managed by Miller Detroit did not face similar expense burdens, suggesting that James Miller may have used these allocations to offset debts incurred by Miller Detroit due to cash transfers for Bruce Miller's distributions.

In August 2004, the Miller family executed a 'Round Robin' agreement to restructure debts among various parking entities, resulting in some debt reductions and the issuance of a promissory note from Miller Detroit to Miller Chicago for $841,974. The parties believed that the financial impacts were neutral. Miller Detroit made consistent monthly payments on this note from June 2004 to September 2009, with provisions for debt conversion to equity and a setoff that were ultimately unused.

From 2000 until mid-2009, Miller Detroit was profitable and met its obligations, but faced challenges following a judgment in favor of CH Holding Company and Alan Ackerman in unrelated litigation initiated on November 4, 2004. The litigation did not influence the inter-company transactions prior to that date. CH Holding was established in 1981, with Bruce Miller as the general partner receiving compensation, and management services provided by him through Miller Parking Company.

Bruce Miller was a significant stockholder in Chicago Service Parking Company, while Ackerman became a limited partner in CH Holding in 1981, aware that Bruce Miller's interests in Miller Chicago were distinct from his role in Miller Detroit. Concurrently, Brandoff Corporation formed a partnership with CH Holding to create CH Brand Parking Associates, enabling the consolidation of land for a parking facility near Greektown Casino in Detroit. After 2000, Ackerman received partnership distributions from CH Holding via checks from Miller Parking Company, LLC, along with regular revenue breakdowns. However, on November 16, 2000, Ackerman expressed his desire to exit CH Holding, and subsequent correspondence with Bruce Miller’s attorney occurred, but no legal action was initiated until 2004.

Ackerman and CH Holding later sued Miller Detroit and Bruce Miller for breach of fiduciary duty, alleging that restrictive clauses in lease and sales agreements harmed their investment and prevented timely sales. A jury ruled in their favor in June 2009, awarding Ackerman $625,784.71 and CH Holding $3,101,835.83, leading to Miller Detroit's bankruptcy filed on October 9, 2009, followed by Bruce Miller on October 20, 2009. James Miller subsequently acquired Miller Detroit’s assets through a new company, Miller Parking Services, LLC, which he operated profitably.

In parallel, James Miller was involved in selling the Bismark Deck, a process initiated in 2002 with a ten-year lease by Next Realty, LLC, which included a purchase option after January 1, 2009. Despite potential adverse tax implications for Miller Chicago due to its S corporation status, the sale closed for $20 million in February 2009, yielding net proceeds of $9,764,654. James Miller had previously communicated his fiduciary duty to shareholders to avoid conflicts that might be legally challenged.

James Miller committed to distributing proceeds from a future sale of the Bismark Deck while reserving a portion for expenses and contingencies. He acknowledged his sisters' desire for independence from him and Miller Chicago, promising to allocate most net sale proceeds to Miller Chicago shareholders after reasonable reserves. Tensions arose during a January 2009 family meeting regarding the future of Miller Chicago, with James wanting to preserve the business and his sisters seeking to cash out, alongside disputes over support for their parents. Mediation by family friend Andy Jacobs was sought over eight months, culminating in a dissolution plan signed on August 24, 2009. Concerns were raised about a judgment against Miller Chicago and how it might impact assets, particularly regarding an agreement Janet Stein signed in May 2004 to sell her shares in Miller Chicago for a promissory note of $1,199,250, which was paid after the Bismark Deck sale. In May 2009, James agreed to distribute $1.5 million to shareholders through a two-step redemption process, requiring payment of claims and establishment of reserves for contingencies. Robert Gordon, the attorney involved, believed there were no active claims against Miller Chicago at that time, but no provisions were made for claims against Bruce Miller and Miller Detroit. By September 3, 2009, multiple transactions were completed, including the redemption of Miller Chicago shareholders and its eventual dissolution. James Miller received all promissory notes and accounts receivable following the liquidation. Bruce and Doris Miller did not benefit from the redemption. The plaintiff claimed Miller Chicago was merely an instrumentality of Miller Detroit, but evidence indicated Miller Chicago operated independently, although it provided significant cash support to Miller Detroit, primarily benefiting Bruce Miller.

Decisions regarding payments were made by Miller Chicago shareholders rather than Bruce Miller, with evidence indicating differing opinions among shareholders that led to the discontinuation of 'maintenance payments' to Miller Detroit in December 2008. Miller Detroit relied on concessions from other family-owned businesses, deferring payments to Madison Randolph, Lafayette Shelby, and Miller Valet partnerships, yet this did not classify Miller Detroit as an 'instrumentality' of those entities. Miller Detroit maintained distinct financial records for each entity involved in management agreements and kept its accounts separate from Miller Chicago, particularly post-August 2001 when an electronic accounting system was adopted. Although the accounting records lacked the precision of a Fortune 500 company, they were sufficient to delineate the financial transactions of the separate family businesses. 

Miller Detroit served as a common paymaster for these entities and utilized a shared bank account, while Miller Chicago operated its own separate bank accounts and filed distinct tax returns. There is no significant evidence suggesting that Miller Detroit and Miller Chicago presented themselves as a singular entity or that they combined expenses or revenues. The plaintiff's reference to a consolidated cash flow projection from 2002 does not support claims of combining the businesses, as it clearly delineated revenue streams for each entity. Similarly, a 2002 bid presentation identified the family businesses separately without representing them as a unified entity. 

Miller Detroit accurately recorded expenses it paid on behalf of Miller Chicago shareholders and reconciled these records. Additionally, Miller Detroit covered personal expenses for Miller Chicago shareholders, allocating them as distributions from Miller Chicago, while also paying benefits for non-employee family members and expenses related to Bruce Miller, none of which were charged to Miller Chicago. Common management existed through James Miller, who was president of Miller Detroit by 2009 and had been involved with both entities from 1978 to 2014. Both Miller Chicago and Miller Detroit shared professional service providers and had employees, such as Aaron Gerstman and Arleen Miller, who worked for both organizations.

Two companies operated from the same Detroit office after 2000, sharing a telephone number, letterhead, and website, but there is no evidence that anyone was misled into believing they were one entity. Miller Chicago adhered to corporate formalities, including holding annual meetings post-divestment of Bruce Miller's shares. Arleen Miller served as Secretary from 2000 to 2009, maintaining corporate minutes and stock certificates, all of which were kept organized and accessible, even at the time of the bankruptcy trustee's control of the office. 

In the legal context, a dispute has arisen regarding which state's law governs the alter ego claim, with the plaintiff favoring Michigan law and the defendants advocating for Illinois law. The choice-of-law dispute is deemed insubstantial since the elements of an alter ego claim are similar under both Michigan and Illinois law. The primary contention concerns the proof required to demonstrate that the separate corporate identity was used to commit fraud or wrongdoing. The defendants argue, based on precedent, that the plaintiff must show a substantial wrong beyond just an impediment to judgment recovery, asserting that merely having an unsatisfied judgment is insufficient to pierce the corporate veil.

The plaintiff asserts that under Michigan law, demonstrating that the Miller Detroit estate or its creditors would incur harm from the alleged wrongs of an alter ego entity suffices for the "fraud or wrong" element of her claim. She references Servo Kinetics, Inc. v. Tokyo Precision Instruments Co. to support her position, indicating that the plaintiff's losses due to the defendant subsidiary's breach of contract constitute an unjust loss relevant to veil-piercing liability. However, this quote pertains to a distinct aspect of an alter ego claim, separate from the "fraud or wrong" requirement, which must also be established.

The Servo Kinetics case indicates that if a jury finds that the parent company used the subsidiary to commit fraud or wrong, veil piercing is justified. The plaintiff further cites Pfaffenberger v. Pavilion Restaurant Co., but this case is not applicable as it deals with agency claims rather than corporate veil piercing. The current pleadings suggest an agency relationship rather than a parent-subsidiary dynamic requiring disregard of corporate identities.

There is no conflict between Michigan and Illinois laws regarding alter ego claims or the proof needed for the "fraud or wrong" element. Under Illinois law, the plaintiff must demonstrate that a wrong beyond a mere decrease in recovery prospects would occur if the court does not pierce the corporate veil. Examples include situations where a parent corporation would evade liability or where assets are transferred to escape obligations.

The Sixth Circuit's findings in Servo Kinetics align with these examples, as it involved a parent corporation abusing control over a subsidiary to breach contractual obligations. Recent Michigan appellate decisions reaffirm that proving "fraud or wrong" is distinct from demonstrating unjust loss. The Michigan Court of Appeals, in Green v. Ziegelman, emphasized that evaluating the "fraud or wrong" element requires determining if the controlling entity's use of the subsidiary as a mere instrumentality inflicted fraud or wrong on the complainant. It noted that simply creating an entity to avoid personal liability does not in itself constitute a wrong warranting disregard of the entity's separate existence, and the plaintiff must also demonstrate that the wrong would lead to an unjust loss.

Michigan courts require that proof of "fraud or wrong" in alter ego claims must demonstrate deliberate wrongful conduct by a controlling entity that causes injury to creditors, distinct from just showing an unjust loss to the plaintiff. The choice-of-law rules favor Michigan law unless there is a compelling reason to apply another jurisdiction's law. Specifically, under Michigan's rules, there is a presumption that Michigan law governs tort claims unless it can be rationally displaced. Although alter ego claims are equitable in nature, they have elements akin to tort claims and should apply Michigan law regardless of the claim's nature. Courts will only apply another state's law if that state has a significant interest in the matter, which is not the case here. Consequently, Michigan law will govern the alter ego claim. The Michigan Court of Appeals emphasizes that while corporations are distinct legal entities, this distinction can be disregarded in instances of fraud or injustice, allowing courts to pierce the corporate veil. The plaintiff asserts that Miller Chicago is the alter ego of Miller Detroit, making the Illinois corporation liable for the debts of the Detroit limited liability company.

To establish a claim of piercing the corporate veil, the plaintiff must demonstrate by a preponderance of the evidence that: (1) the corporate entity was merely an instrumentality of another; (2) the entity was used to commit a fraud or wrong; and (3) the plaintiff suffered an unjust loss or injury. The court must evaluate whether the owner operated the entity as their alter ego or as a mere agent, and whether this operation resulted in wrongdoing against the plaintiff. It is sufficient for the owner to have exercised control over the entity in a way that wronged the complainant, without needing to prove direct harm. However, merely establishing an entity to evade personal liability does not justify disregarding its separate existence.

Factors to determine if an entity is a "mere instrumentality" include undercapitalization, maintenance of separate financial records, adherence to corporate formalities, and whether the corporation is a sham. In this case, Miller Chicago was not undercapitalized, and Miller Detroit maintained its own revenue and paid its obligations. The companies kept separate books and followed corporate formalities, with substantial historical roots, indicating they were not shams. The plaintiff's argument that the entities facilitated tax fraud by converting Bruce Miller’s debt into wages was countered by evidence that he reported this income for tax purposes, and there is no requirement for specific services to be performed for compensation to be valid. Thus, the characterization of these loans as income did not constitute fraud.

Miller Chicago did not operate in a manner that defrauded its creditors or those of Miller Detroit, nor did the evidence show that Miller Detroit's creditors suffered an “unjust loss” due to actions by Miller Chicago. The creditors primarily sought recovery from Miller Detroit and Bruce Miller, who were found to lack assets to satisfy their judgments. Evidence indicated that cash flow generally moved from Chicago to Detroit, and transfers of funds were executed through loans and payments for services, demonstrating that the entities maintained separate assets. 

The court noted specific transfers totaling $510,000 in payments on promissory notes from Miller Detroit to Miller Chicago, which were made from September 2004 to September 2009. These payments were characterized as loans, aimed at alleviating financial demands placed on Miller Detroit by Bruce Miller's substantial partner draws. While these cash transfers benefited Bruce Miller, they were not deemed gifts but structured as loans to Miller Detroit, with creditors of Miller Detroit bearing the ultimate costs until judgments were awarded. 

The significant cash flow ultimately benefited Bruce Miller, leading to Miller Detroit's financial demise. However, the court determined that Miller Chicago's financial support did not constitute evidence of fraud or imply that the two entities were not separate. The blame for the losses sustained by Miller Detroit's creditors was placed on Bruce Miller, not Miller Chicago. Consequently, the court dismissed the plaintiff's alter ego claim against Miller Chicago, ruling that the plaintiff failed to meet the burden of proof.

The plaintiff requests substantive consolidation of Miller Chicago's and Miller Detroit's assets and liabilities, treating them as a single entity. Substantive consolidation merges separate legal entities, eliminating inter-entity liabilities, and reclassifying creditor claims against the original entities to claims against the consolidated entity. This remedy is considered extreme, typically used when no other adequate remedies exist, especially if the entity is not already a debtor in bankruptcy. Key factors for substantive consolidation include whether prepetition the entities disregarded their separateness, leading creditors to treat them as one, or whether postpetition asset and liability separation is impractical and detrimental to all creditors. The Third Circuit's broader equitable standard, as articulated in *In re Owens Corning*, is referenced, while the Sixth Circuit has adopted similar principles without a rigid checklist. The plaintiff does not argue that the second basis for consolidation applies, as there has been no post-petition scrambling of assets. Evidence supporting the first basis for consolidation would largely overlap with that for an alter ego claim, allowing courts to bypass the legal separateness typically afforded by corporate law. Factors considered in these assessments include the existence of consolidated financial statements, ownership unity, intercorporate guarantees, challenges in asset segregation, and any informal asset transfers.

The Court dismissed Counts IV, V, VI, and IX of the amended complaint with prejudice. The dismissal of Count V was based on the lack of evidence supporting the notion that Miller Chicago and Miller Detroit operated as a single legal entity, thus creditors of Miller Detroit could not rely on Miller Chicago's assets. Count IV was also dismissed as the plaintiff could not claim disgorgement of distributions made to Miller Chicago's shareholders, given that the Court found Miller Chicago not to be the alter ego of Miller Detroit and denied substantive consolidation. Count IX’s dismissal was due to the plaintiff's refusal to proceed with the trial on this equitable claim for an accounting, which requires specific allegations and proof. The Court refrained from entering final judgment on these counts due to their substantial relation to remaining claims still reserved for jury trial, suggesting that further developments may affect the need for review of this decision. An appropriate order will follow.