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144721 - Woodbury v Res-Care Premier, Inc

Scott and Jeannie Woodbury,
 
 
 
Plaintiffs,
 
and
 
 
Center Woods, Inc.,
Plaintiff-Appellant,
 
Thomas A. Basil, Jr.
v
(Appeal from Ct of Appeals)
(Saginaw – Crane, W.)
 
Res-Care Premier, Inc.,
Defendant-Appellee,
Le Roy L. Asher, Jr.
and
 
 
Ruth Averill,
Defendant.
 

Summary

​This case concerns the 2009 sale of a house in the Center Woods subdivision in Saginaw. Center Woods, Inc. was incorporated as a nonprofit corporation in 1941. That same year, owners of Center Woods properties entered into articles of agreement, which were filed in the property records. The articles of agreement provided in part:

 

1. Center Woods shall be maintained as residential property only and no

property shall be used for any trade, commercial, industrial, or any other use

whether or not herein specified, except for single family dwellings.

* * *

 

12. All property owners in Center Woods shall be members of Center

Woods, Inc., a non-profit corporation, organized to provide for the improvement

and maintenance of Center Woods as a desirable residential community.

* * *

 

15. No property in Center Woods may be sold, assigned, mortgaged or

conveyed to or let, leased, rented or occupied by Hewbrews, [sic] or by any

persons other than those of the Caucasian (white) race.

 

16. No property in Center Woods shall be sold without first giving Center

Woods, Inc. thirty (30) days notice thereof and first opportunity to purchase said

property at a price equal to a bonafide offer.

 

The articles of incorporation also provided that, if any Center Woods property owner violated these covenants, “it shall be lawful for any other person or persons owning any real property situated in Center Woods Subdivision to prosecute any proceedings at law or in equity against the person or persons violating, or attempting to violate, any such covenant.”

 

In 1993, Center Woods, Inc. was automatically dissolved under MCL 450.2922 because it had failed to file its annual report and pay the annual filing fee for the second consecutive year. On October 13, 2009, the same day this lawsuit was filed, Center Woods filed renewal-of-existence papers with the state of Michigan. In the intervening years, Center Woods continued to collect association dues from residents and performed other functions, such as holding meetings, keeping minutes, and arranging for snow plowing and other maintenance.

 

In 2001, Ruth Averill bought the property known as #2 Center Woods; Scott and Jeanne Woodbury own #3 Center Woods next door.

 

On July 10, 2009, Averill entered into a contract to sell the property to Moshen H. Zadeh, an investor in Res-Care Premier, Inc., which operates adult foster care homes for those with mental or developmental disabilities. On July 20, 2009, Averill sent a memo addressed to Jack Short, the head of the Center Woods homeowners’ association, and “Center Woods Association,” stating that she was moving on August 14 and that the closing was scheduled for that date. Averill gave the names of her and Zadeh’s realtors, and stated that she did not know the buyer. Averill added, “Since I have NOT received notification of three previous sales in The Woods . . . I assume this stipulation is no longer necessary.” No one contacted Averill or her realtor regarding the pending sale.

 

When Zadeh was unable to obtain financing, Res-Care decided to purchase the property on its own at the same terms. The closing tool place on September 25, 2009.

 

On October 7, 2009, Averill sent another memo, this one addressed to Short and his wife, the Woodburys, and the Center Woods Association. She stated that she was moving, and that Res-Care was the new owner.

 

Two days later, an “emergent” meeting of the homeowners in Center Woods and a board of directors meeting for Center Woods were held. Averill was not invited. At the meeting, the board was authorized to take steps to prevent the “improper use” of #2 Center Woods as a group home. On October 12, 2009, the board’s counsel sent a letter to Averill claiming that she violated paragraph 16 of the articles of agreement and requesting the details of the transaction “so [Center Woods] may consider exercising its right to purchase the property.” The letter also stated:

 

This correspondence also confirms that subsequent to your July 20, 2009

correspondence to Jack Short on your previous potential sale, which did not

ultimately close, you were instructed that the Building and Use Restrictions were

still in effect and you were required to provide Center Woods, Inc. formal notice

and the terms and conditions of the bonafide offer.

 

This is apparently a reference to a conversation that Short testified that he had with Averill. According to Short, Averill called him and asked “if she had to do the right of first refusal,” and he told her “that if it was me and I was selling my house, I would want to make sure that everything was done properly.” Averill testified that this conversation never occurred and that she never spoke with Short. She also testified that she had continued to pay dues to Center Woods, that she had attended at least one business meeting, and that Center Woods continued to handle various business and maintenance functions during the years the corporation’s charter was dissolved.

 

On October 13, the Woodburys and Center Woods, Inc. filed a lawsuit against Res-Care and Averill, alleging two counts of breach of “building and use restrictions,” one for the right of first refusal and one for noncommercial use, and requesting a permanent injunction preventing Res- Care from occupying the property. The plaintiffs also requested a temporary restraining order and preliminary injunction.

 

Res-Care responded in part that Center Woods had waived the right to enforce the right of first refusal and that Center Woods’s failure to maintain corporate status deprived it of standing. Moreover, the articles of agreement were clearly discriminatory and, therefore, invalid under state and federal law; even if the articles were enforceable, Res-Care’s use of the property was a valid residential use not in violation of any restrictions, Res-Care said.

 

But the trial court ruled in favor of the Woodburys and Center Woods. Center Woods had the right of first refusal to purchase Averill’s property, and Averill failed to provide 30 days’ notice of the sale to Res-Care as required by the articles of agreement, the judge held. The judge emphasized that he was not addressing any civil-rights claims, but only the enforceability of the 30-day notice provision, the propriety of the notice Averill gave, and the related issue of Center Woods’s corporate status. While the plaintiffs had not enforced the notice provision at other times, they had not abandoned their right to do so, the court said.

 

But in a published per curiam opinion, the Court of Appeals reversed and remanded the case to the trial court. “[B]ased on the plain language of the articles of agreement, the trial court erred by holding that Averill ought to have provided notice to anyone other than the corporation. And the trial court further erred by holding that Center Woods was entitled to notice of the sale between Averill and Res-Care because Center Woods did not exist at that time.”

 

Res-Care and Averill argued that, because Center Woods did not exist as a corporation, there was no entity that Averill was required to notify. The plaintiffs countered that, by virtue of the renewal-of-existence papers filed on the same day as the lawsuit, Center Woods had the same rights at the time of the 2006 sale as if the corporation had never been dissolved.

 

Under MCL 450.2925, “A domestic corporation which has been dissolved pursuant to [MCL 450.2922(1)] . . . may renew its corporate existence . . . by filing the reports for the last 5 years or any lesser number of years in which the reports were not filed and paying the annual filing fees for all the years for which they were not paid . . . . Upon filing the reports and payment of the fees and penalties, the corporate existence . . . is renewed. . . . Upon compliance with the provisions of this section, the rights of the corporation shall be the same as through the dissolution or revocation had not taken place, and all contracts entered into and other rights acquired during the interval shall be valid and enforceable.”

 

“There are no cases that have interpreted MCL 450.2925,” the Court of Appeals observed. “Plaintiffs rely on Bergy Bros, Inc v Zeeland Feeder Pig, Inc. 415 Mich 286 which interpreted a previous version of this statute.”

 

In Bergy Brothers, the Michigan Supreme Court ruled that a corporation had a “de facto existence” during the years its corporate charter was void for failing to file reports and pay fees. The plaintiff in that case sought to hold officers and directors personally liable for amounts he claimed the corporation owed him for pig feed. The defendant corporation’s charter had been revived by the time of trial as provided by the reinstatement statute of that time. The Court opined, “The effect of the reinstatement statute is to make the voidance of the charter more in the nature of a suspension of corporate privileges than an absolute termination of corporate existence. . . . . . . Where, as here, the corporate charter has been reinstated pursuant to the statute, the corporation should be considered to have had at least de facto existence during the period of forfeiture, which would preclude application of the partnership theory of liability.”

 

The Bergy Brothers Court observed, citing Stott v Stott Realty Co., 288 Mich 35 (1939), that “The corporation does not cease to exist upon its charter becoming absolutely void.” In Stott, stockholders sued the corporation, arguing that its corporate charter was void and that a receiver should be appointed to wind up the corporation’s affairs. The Supreme Court held in that case that, despite the corporate charter becoming void for failure to pay fees for two years, “It still continues a body corporate and remains a legally existing corporation for certain purposes. . . . While a corporation having had its charter declared void cannot carry on corporate business for the purposes for which it is authorized on the granting of its charter, it still exists for certain other purposes of winding up its business and closing its affairs. The corporation not having been dissolved and still being in existence, its corporate powers may be revived . . . .” Moreover, the stockholder who pursued the appeal against the corporation had himself “attended a stockholders’ meeting, voted for directors, participated in a directors’ meeting, took part in an election of officers, and was himself elected vice-president,” the Court noted. By his own conduct, the shareholder in effect recognized “the company as a functioning corporation” and hence was estopped from maintaining that the corporation had ceased to exist.

 

But Bergy Brothers and Stott do not apply to the Woodburys’ suit against Res-care and Averill, the Court of Appeals said. “Neither case … provides guidance in answering the question whether a party who is required to provide notice of some event to the corporation, which has ceased to exist for 16 years, could be deemed to have failed to properly give notice on the grounds that, sometime in the future, the corporation might seek reinstatement.”

 

The appellate panel added, “It is not reasonable to require persons to give notice to a nonexistent corporation on the contingent basis that at some unknown time in the future, some unknown person might elect to reinstate the corporation. Simply because someone can reinstate a corporation under MCL 450.2925 does not mean anyone will.”

 

The plaintiffs argued that Center Woods, Inc. had a “de facto existence” while it was dissolved because the homeowners’ association continued to collect money from the residents and exercise other duties, but the Court of Appeals rejected that contention. A corporation may have a de facto existence beyond the date of its dissolution, but only for a reasonable amount of time; “[o]therwise, a dissolved corporation would languish in perpetuity.”

 

The Court of Appeals reasoned, “The type of legal, de facto existence created by MCL 450.2925 and Bergy Bros is based on the idea that corporations that are reinstated pursuant to the statute should be granted the benefits of corporate status—such as no individual liability. It is reasonable to give such corporations the benefits of the contracts they entered into and whatever rights they acquired. This de facto legal existence, however, is just a legal creation. It provides a retroactive legal existence to a corporation even though, at that moment in the past, factually, the corporation had no such existence.”

 

Center Woods’s reinstatement in October 2009 may have “created some type of legal existence for those prior 16 years,” but at the time of the sale to Res-Care, Center Woods did not exist in fact, the appellate panel said. “Accordingly, we conclude that Averill had no obligation to provide notice of the pending sale to Center Woods because, although it obtained a retroactive legal existence, it was, at the time of the pending sale, a nonexistent corporation.”

 

Center Woods appealed and, in an order dated November 7, 2012, the Supreme Court granted leave to appeal. The Court directed, “The parties shall include among the issues to be briefed: (1) whether the common law doctrines of de facto corporation, see, e.g., Bergy Bros, Inc v Zeeland Feeder Pig, Inc, 415 Mich 286 (1982), and corporation by estoppel, see, e.g., Stott v Stott Realty Co, 288 Mich 35, 48 (1939), survived enactment of the Nonprofit Corporation Act, MCL 450.2101 et seq.; (2) if so, whether plaintiff corporation, Center Woods, Inc., which was administratively dissolved in 1993 under § 922 of the Nonprofit Corporation Act, but reinstated in 2009 under § 925, continued to exist as a de facto corporation during the period of dissolution such that defendant Ruth Averill, a member and shareholder of the corporation, was required to provide notice to the corporation pursuant to its Articles of Agreement of the pending sale of her property; and (3) whether defendant Averill is estopped to deny the existence of the corporation, see Estey Mfg Co v Runnels, 55 Mich 130 (1884); Flueling v Goeringer, 240 Mich 372 (1927).”