Theodore J Dorr v. Wbm LLC

STATE OF MICHIGAN

COURT OF APPEALS

GERALD L. WISNER and KAY E. WISNER, UNPUBLISHED
February 9, 2017
Plaintiffs-Appellants,

v No. 328867
Lenawee Circuit Court
SB INDIANA LLC, WBM LLC, QUANTUM LC No. 13-004674-CB
MANAGEMENT & INVESTMENTS LLC, and
GREGGORY HARDY,

Defendants-Appellees.

THEODORE J. DORR and THEODORE J. DORR
LLC,

Plaintiffs-Appellants,

v No. 333045
Lenawee Circuit Court
WBM LLC, QUANTUM MANAGEMENT & LC No. 12-004566-CB
INVESTMENT LLC, and GREGGORY HARDY,

Defendants-Appellees.

Before: WILDER, P.J., and CAVANAGH and K. F. KELLY, JJ.

PER CURIAM.

In Docket No. 328867, plaintiffs, Gerald L. Wisner and Kay E. Wisner (the Wisners),
appeal by right an order granting defendants, SB Indiana, LLC (SB Indiana), WBM LLC
(WBM), Quantum Management & Investments LLC (Quantum), and Greggory Hardy (Hardy),
an involuntary dismissal of the Wisners’ claims.

In Docket No. 333045, plaintiffs, Theodore J. Dorr and Theodore J. Dorr, LLC (Dorr),
appeal by right an order of no cause of action in favor of defendants, WBM, Quantum, and
Hardy.

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 The cases have been consolidated on the Court’s own motion.1 Finding no errors
warranting reversal in either case, we affirm.

I. BASIC FACTS AND PROCEDURAL HISTORY

Both the Wisners and Dorr sold real property and realized substantial income as a result.
They sought tax deferment under a “1031 Exchange.” To avoid incurring tax liability on the sale
of property, a taxpayer may structure an exchange in accordance with the United States Tax
Code, 23 USC 1031. Such an exchange permits a property owner to take the sales proceeds from
appreciated property and invest the monies in new property to defer the recognition of the
taxable gain. Hardy was a real estate broker who had a history with both the Wisners and Dorr.
Hardy identified two companies – SB Indiana, which held commercial property in Indiana, and
WBM, which held commercial property in Ohio – as a means of accomplishing such an
exchange. The Wisners (now divorced) were members of both, owning a 31% interest in SB
Indiana and an 11% interest in WBM. Dorr was a member of WBM, owning a 28% stake, but
had no interest in SB Indiana. SB Indiana and WBM were managed by Quantum, a company
wholly owned by Hardy.

After a number of years, Quantum and Hardy found it necessary to issue capital calls to
the members of both companies. When the Wisners and Dorr refused to participate in the capital
calls, they were divested of their membership in accordance with the companies’ operating
agreements.

Dorr filed his complaint against WBM, Quantum and Hardy on October 18, 2012. The
Wisners filed their complaint against SB Indiana, WBM, Quantum and Hardy on February 15,
2013. The complaints alleged that Hardy and Quantum had loaned money to both WBM and SB
Indiana as far back as 2006, totaling over $300,000. These loans, which the Wisners and Dorr
claimed were made without notice to the members and without their approval, were ostensibly
made to avoid a capital call. The complaints alleged that “the fact that Hardy supposedly
executed the loans 4 to 5 years ago without executing a capital call at that time and, instead,
continued to issue profit payments to the investors during the same period is not rationale [sic]
and is a strong indication of fraud on behalf of the Defendants.” The complaints alleged that
when Hardy issued the capital call in June 2012, he refused to provide even the most cursory
information regarding the loans and did not provide a copy of the full operating agreements. The
complaints alleged that once Hardy did provide some accounting information, it was clear that a
“vast majority of entries failed to specify what or who the source of the supposed loan was and to
what or who the payments for the loan were made.” The complaints alleged that there was
significant comingling of funds and questionable transfers of assets. The Wisners and Dorr
believed Hardy was fraudulently utilizing funds for purposes outside the scope of their
investment by using funds from separate entities to cover expenses for each other, including
“suspicious” new entities. While Hardy was a sophisticated business person, the Wisners and

1
Gerald L Wisner v SB Indiana LLC, unpublished order of the Court of Appeals, entered January
9, 2017 (Docket No. 328867); Theodore J Dorr v WBM, LLC, unpublished order of the Court of
Appeals, entered January 9, 2017 (Docket No. 333045).

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Dorr claimed to be “simple farmers and had little knowledge or understanding of the nature of
the complex business transactions Hardy was orchestrating.” The complaints’ common counts
included: accounting, unjust enrichment, constructive trust and appointment of a receiver,
breach of fiduciary duty, quantum meruit, membership oppression under MCL 450.4515, and
judicial dissolution and winding up. The Wisners’ complaint included a count for membership
oppression.

The Wisners and Dorr sought to consolidate both cases. Defense counsel objected to a
consolidation, but acknowledged that he did not want to try the cases twice. He suggested that
there be a “joint hearing” where witnesses’ “testimony could count in both trials so that we are
not duplicating that testimony. So, it may be that you can fashion this in a different way other
than complete consolidation . . .” The trial court agreed. The Wisner case went first because it
had more witnesses in common and more defendants.

A. THE WISNER CASE

At trial, the Wisners alleged that Hardy never disclosed that he was loaning the
companies money and never sought any approval from the members. The Wisners claimed
Hardy provided very little information and that he breached his fiduciary duty to the businesses
as well as the members by engaging in a pattern of conduct designed to deceive them. They
contended that Hardy artificially made it look like the entities were profitable when they were
not. When things started to get better, he made a capital call, knowing that the investors would
not be able to meet the call.

At the close of the Wisners’ proofs, defense counsel moved for a “directed verdict,”
arguing that there was no question that Quantum, not Hardy, was the manager of the entities and
that there was no breach of fiduciary duty because the manager’s duty was to the entities, not the
individual members in the absence of a special relationship. Counsel further argued that there
was no shareholder oppression because Quantum acted in conformity with the operating
agreements, which permitted capital calls. Additionally, because of express contracts, the
Wisners’ claims for unjust enrichment and quantum meruit failed.

The trial court corrected defense counsel that his motion was not one for directed verdict
(as in the case of a jury trial) but was a motion for involuntary dismissal under MCR
2.504(B)(2). As such, the trial court was called upon to exercise its role as trier of fact, making
findings of fact and conclusions of law. The trial court indicated that it relied on the
management agreement. The trial court “also paid particular attention to the operating
agreements for these business entities,” including the provisions regarding capital contributions
and failures to contribute.

The trial court noted that § 450.4404 of Michigan’s Limited Liability Company Act,
MCL 450.4401 et seq., requires that the fiduciary duty owed is to the company and not its
individual members:

[A] manager’s fiduciary duties are owed to the company and not to individual
members. That’s important because in this case we do not have a situation where
all the members joined together to sue the manager. Instead we have just a couple

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 of the members who sued not only the manager but also the individual companies
themselves. SB Indiana, WBM and Quantum Management Investment were all
sued in addition to Greggory Hardy.

The trial court determined that there was no real distinction between Hardy and Quantum and
that for all intents and purposes Hardy was the manager. But even if Hardy was the manager,
Hardy had no duty to the Wisners, individually. There was no evidence of a special relationship
between them and there was no evidence that Hardy was guilty of illegally commingling funds.

The trial court sympathized with the Wisners’ hesitancy to make the capital call but that
did not change the fact that the operating agreements and management agreements “do control in
this matter, and those agreements appear to have given Mr. Hardy the authority as manager to
make the capital call as he did. They also appear to have given Mr. Hardy the authority to make
the advances on behalf of the company as he did.” The trial court further noted that there was no
evidence that Hardy used the capital call as a way to force the Wisners out.

As for the Wisners’ claim of member oppression, the trial court noted that MCL
450.4404 had no application if the conduct at issue was authorized by an operating agreement:
“So to the extent that any of Mr. Hardy’s actions were authorized by the agreements, then he
cannot be found to be willfully unfairly or oppressing these members. Likewise the case law has
indicated that even a breach of those operating agreements would not be enough to find that he
was willfully unfair and oppressive in his conduct.”

The trial court summarized the Wisners’ arguments and still found that they were not
entitled to relief:

The plaintiffs have argued that Mr. Hardy was expanding his own
business; that he was an inexperienced manager with only two or three properties
back in 2005; that he wanted to make these investments appear to be doing well;
that he extended the loans to cover the expenses and failed to disclose those loans
specifically to the members; that all communications were from Hardy until the
loans were actually disclosed; that Hardy himself claimed to be the manager on
occasion; that the agreements were executed without the members [sic]
knowledge; and that the members thought Gregg Hardy was the manager. I don’t
disagree with any of those statements, but I don’t believe that any of those, in and
of themselves, would be sufficient to allow plaintiffs the relief that they seek in
this matter.

The trial court concluded that there was no purposeful deceit and that the Wisners would
have been on notice of the financial situation had they reviewed their documents. And while
Hardy’s failure to explain things to the members was troublesome, the trial court concluded that
it did not amount to illegal or oppressive conduct. The trial court further determined that there
was nothing in the operating agreements that prevented Hardy from issuing loans while
simultaneously providing the members with cash distributions. Nor did the trial court conclude
that Hardy was guilty of self-dealing or that he needed to seek approval for the loans under the
operating agreements: “The operating agreements did provide to allow him to make those
advances on behalf of the company. They also provided for interest in excess of what he was

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charging.” The trial court noted that “while the plaintiffs did sustain a significant loss by being
diluted out of their entire investment that does appear based on the evidence to have been
authorized by the agreements under the circumstances. While Mr. Hardy increased his
ownership in the process, and that does cause some concern for the Court, it does appear that it
was again appropriate and allowed for by the agreements.” The trial court ruled that both the
quantum meruit and unjust enrichment claims failed because there was an express contract.

The trial court granted defendants’ motion for involuntary dismissal.

B. THE DORR CASE

The Dorr complaint mirrored the complaint in the Wisner matter with the exception that
the Dorr complaint failed to allege a shareholder oppression claim under MCL 450.4515. The
trial court nevertheless allowed Dorr to amend the complaint because there “does not appear to
be any surprise or prejudice resulting from this Court allowing the addition of a membership
oppression claim” in light of the fact that defendants “were prepared to proceed to trial on the
membership oppression claim in this immediate matter.” Dorr’s failure to properly caption his
causes of action was not the result of undue delay, bad faith, dilatory motive and did not
prejudice defendants.

The trial court further noted that “the prior jurist in this matter effectively consolidated
the claims for discovery purposes and this Court, upon agreement between the parties, ruled that
all evidence and testimony introduced during the Wisner trial, which was to be conducted first,
would be deemed to be evidence and testimony allowed to be used in the immediate case, as the
issues were seen to be largely duplicative.” After allowing Dorr to amend his complaint, the trial
court went on to address defendants’ motion for “Involuntary Dismissal, Directed Verdict, and/or
Summary Disposition”:

Defendants are correct in their position that this Court made previous
rulings in the Wisner matter that will bar claims in this immediate matter. As
previously ruled upon by this Court, Plaintiffs’ claim for unjust enrichment is
precluded as the Operating Agreement has been considered an express contract
covering the disputed subject matter. . . .Likewise, the Operating Agreement also
bars Plaintiffs’ claim for quantum meruit, it having been found to be an express
contract governing the parties’ business with each other. . . .

However, this Court did previously rule that Plaintiffs were members
entitled to an accounting . . .and that Defendant Greggory Hardy was effectively
the manager of the LLC, having held himself out accordingly. Finally, although
this Court has ruled that Defendant Hardy held himself out as the manger [sic],
his fiduciary duty is solely to the company, WBM, LLC, and not the individual
members. . . . While these plaintiffs are bound by the adverse rulings in the
companion Wisner case, they too shall benefit from the prior rulings favorable to
them. Therefore, if Plaintiffs prevail in successfully establishing their member
oppression claims, they may be able to seek dissolution, or any other relief
afforded by MCL 450.4515(1).

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Therefore, the Dorr trial focused solely on his claim that Hardy engaged in oppressive conduct
when he stopped all communications with Dorr following the capital call.

After hearing evidence in the Dorr trial, the trial court dismissed Dorr’s only remaining
claim for membership oppression:

Plaintiff alleges that Defendant Hardy cut him off from further
communication and Defendant admits the same. However, it does not appear that
his rights as a member of the LLC provided by MCL 450.4102(q), including any
right to receive distributions of the LLC’s assets and any right to vote or
participate in management, were substantially interfered with by Defendant
Hardy’s conduct. While this Court previously expressed its concern with the
proposition that cutting off a member from communication could be done so in
good faith and was in the LLC’s best interest, the testimony established the
reasons such drastic action was taken. Although Defendant Hardy substantially
interfered with Plaintiff’s ability to communicate with him as the manager of the
LLC, Defendant Hardy did not engaged [sic] in conduct which was unfair or
oppressive. Plaintiff was not denied any of his rights as a member. He was still
entitled to vote, examine the books, call for a meeting or the membership, or
receive any dividends that were issued.

Plaintiff has not carried his burden of proof to establish a violation of
MCL 450.4515, failing to establish any “willfully unfair and oppressive conduct”
toward him as a member of this LLC. As this Court previously opined, expert
testimony on the standard of care owed to the LLC and its members would have
significantly assisted this Court in understanding the Plaintiff’s complaints
regarding the conduct of Defendant Hardy. None was provided. This Court
cannot make the logical leap that Defendant Hardy’s conduct substantially
interfered with Plaintiff’s interests as a member without evidence sufficient to
draw that inference and reach that conclusion. This is especially true since the
statute specifically excludes conduct or actions that are permitted by the articles
of the organization or an operating agreement. See MCL 450.4515(2). Plaintiff’s
claims relating to the validity of the operating agreement came too late, and were
previously excluded by the Court. Finally the argument that a 100% dilution of
Plaintiff’s membership interests as a result of his failing to make the capitol [sic]
call is in itself unfair and oppressive was not supported by any evidence. This
Court likewise cannot reach that conclusion without any proof to support it.

Both the Wisners and Dorr appeal as of right, raising identical issues on appeal.

II. ANALYSIS

As both the Wisners and Dorr agree, their appeals hinge upon the validity and
enforceability of the operating agreements. Their substantive claims included membership
oppression, unjust enrichment and quantum meruit.

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 There was no shareholder oppression if Hardy’s actions were permitted under the
operating agreements. MCL 450.4515 provides, in relevant part:

(1) A member of a limited liability company may bring an action in the circuit
court of the county in which the limited liability company's principal place of
business or registered office is located to establish that acts of the managers or
members in control of the limited liability company are illegal or fraudulent or
constitute willfully unfair and oppressive conduct toward the limited liability
company or the member.

***

(2) As used in this section, “willfully unfair and oppressive conduct” means a
continuing course of conduct or a significant action or series of actions that
substantially interferes with the interests of the member as a member. Willfully
unfair and oppressive conduct may include the termination of employment or
limitations on employment benefits to the extent that the actions interfere with
distributions or other member interests disproportionately as to the affected
member. The term does not include conduct or actions that are permitted by the
articles of organization, an operating agreement, another agreement to which the
member is a party, or a consistently applied written company policy or procedure.
[Emphasis added.]

Nor could there have been unjust enrichment or quantum meruit if the parties’ were
governed by the operating agreements. “A claim of unjust enrichment requires the complaining
party to establish (1) the receipt of a benefit by the other party from the complaining party and
(2) an inequity resulting to the complaining party because of the retention of the benefit by the
other party.” Karaus v Bank of New York Mellon, 300 Mich App 9, 22–23; 831 NW2d 897
(2012). “[A] contract will not be implied under the doctrine of unjust enrichment where a
written agreement governs the parties' transaction.” King v Ford Motor Credit Co, 257 Mich
App 303, 327; 668 NW2d 357 (2003). Likewise, “[t]he theory underlying quantum meruit
recovery is that the law will imply a contract in order to prevent unjust enrichment when one
party inequitably receives and retains a benefit from another. However, a contract will be
implied only if there is no express contract covering the same subject matter.” Morris Pumps v
Centerline Piping, Inc, 273 Mich App 187, 194; 729 NW2d 898 (2006) (internal quotation marks
and citation omitted).

And, finally, there was no cause of action for an accounting or judicial winding up if
plaintiffs were no longer members, having been divested of their interests pursuant to the
operating agreement. Pursuant to MCL 450.4505(4), “a member ceases to be a member when
the member's entire membership interest is assigned.”

Yet, in spite of the fact that the enforceability of operating agreements – or lack thereof
— was paramount to each claim, neither the validity nor the enforceability of the operating
agreements was ever truly disputed at the trial court level. In fact, in both cases, it was the
plaintiffs who admitted the operating agreements into evidence and sought to use certain
provisions therein to show that Hardy had mismanaged the companies. “It is settled that error

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requiring reversal may only be predicated on the trial court’s actions and not upon alleged error
to which the aggrieved party contributed by plan or negligence.” Lewis v LeGrow, 258 Mich
App 175, 210; 670 NW2d 675 (2003).

At no time did the Wisners allege that the dilution was illegal because the operating
agreements were invalid. This new argument was apparently kept in their back pockets for
purposes of appeal. “A party is not allowed to assign as error on appeal something which his or
her own counsel deemed proper at trial since to do so would permit the party to harbor error as
an appellate parachute.” Dresselhouse v Chrysler Corp, 177 Mich App 470, 477; 442 NW2d
705 (1989).

As for the Dorr matter, it is clear that Dorr challenges the trial court’s decision refusing to
allow Dorr to further amend the complaint to include allegations that the operating agreement
was unenforceable. However, Dorr does not actually brief whether the trial court abused its
discretion in refusing to allow the amendment. Instead, Dorr frames the issue as a legal one.

Additionally, as it pertains to both cases, we reject plaintiffs’ attempt to categorize certain
statements as “findings of fact” by the trial court. Specifically, in granting a directed verdict in
the Wisner matter, the trial court noted:

The plaintiffs have argued that Mr. Hardy was expanding his own
business; that he was an inexperienced manager with only two or three properties
back in 2005; that he wanted to make these investments appear to be doing well;
that he extended the loans to cover the expenses and failed to disclose those loans
specifically to the members; that all communications were from Hardy until the
loans were actually disclosed; that Hardy himself claimed to be the manager on
occasion; that the agreements were executed without the members [sic]
knowledge; and that the members thought Gregg Hardy was the manager. I don’t
disagree with any of those statements, but I don’t believe that any of those, in and
of themselves, would be sufficient to allow plaintiffs the relief that they seek in
this matter.

The trial court’s statement “I don’t disagree with any of those statements” is a far cry from a
finding of fact on each of the enumerated allegations. Instead, the trial court was simply stating
that even if those allegations were accepted as true, plaintiffs had not met their burden of proof in
light of the fact that Hardy’s actions were permitted under the operating agreements.

With these thoughts in mind, we turn to each case.

A. THE WISNER CASE (DOCKET NO. 328867)

On appeal, the Wisners argue that the operating agreements were not binding on them
and that the trial court erred when it concluded that the operating agreements were valid. This
novel argument was never raised during their trial. In fact, the record is replete with instances in
which the Wisners referred to the operating agreements, with no indication that the agreements
lacked enforceability because the Wisners had not signed them. In fact, the Wisners are the ones
that had the operating agreements admitted into evidence at trial.

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 During Hardy’s cross-examination, the Wisners’ attorney referred to the operating
agreements in an attempt to prove that Hardy had not complied with the terms therein. For
example, counsel questioned Hardy about a provision in the agreements providing that each
member’s interest was based on the proportion of their initial capital contribution. The Wisners
alleged that Hardy never, in fact, contributed to WBM or SB Indiana. Counsel used the
operating agreements to support the contention that Hardy never made an initial contribution to
obtain his membership. When defense counsel objected on relevancy grounds, plaintiff’s
counsel explained: “Your Honor, the reason I am pursuing this line of questioning is because I
am trying to question him about the operating agreement which specifically requires that each
member provide their capital contribution in exchange for the membership interest. It is required
by the operating agreement.” Further, plaintiff’s counsel argued: “As the manager he would
have a duty to abide by the very operating agreement that he is in charge of enforcing. So, if
he’s not enforcing the agreement as to himself, how could we expect that he can enforce the
agreement as to the other members?” The Wisners’ attorney believed that the operating
agreements were relevant because “I believe that the members have a derivative right as well to
enforcement of this agreement, so, they would have a right to make sure that the manager of the
entity was, in fact, enforcing this agreement. . . . And, if Mr. Hardy, acting as the manager did
not enforce this agreement to the other members, it would certainly go to breach of fiduciary
duty. It would go to membership oppression. It would go to possibly unjust enrichment. It
would go to all their claims that we are seeking.” In questioning Hardy about the framework of
investment under the operating agreements, the Wisners’ attorney was “trying to lay a foundation
as to the particular duty under this agreement.” Plaintiffs wanted to show that a manager under
the operating agreement was required to ensure that each member made their contribution.
Because Hardy was the sole owner of Quantum, which was the manager of both entities,
plaintiffs were trying to demonstrate that Quantum and Hardy were one and the same and
neglected their duty to manage the entities in compliance with the operating agreement. Hardy
conceded that Quantum, as manager, was “in charge of enforcing this entire agreement, the
operating agreement . . .”

The Wisners’ attorney also questioned Hardy at length about the provision of the
operating agreements governing cash distributions. Counsel tried to point out that Quantum
continued to pay distributions even though there were outstanding expenses, as evidenced by the
continuous loans. He asked Hardy: “Mr. Hardy, if there is being monies loaned to SB Indiana,
and, there is being interest charged for those monies loaned, wouldn’t it have been the correct
move, according to this operating agreement, to not issue distribution checks so it could then pay
the money back that is being charged interest on?”

The Wisners’ attorney even went so far as to have Hardy read a portion of the WBM
operating agreement into the record:

Q. We are on exhibit 25, paragraph three, page three, entitled “Failure to
Contribute.” Let me know when you’ve had a chance to review that.

A. Yeah, I’ve reviewed it.

Q. Um, do you recognize this paragraph?

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 A. Yeah, it is what I used to enforce against your client.

Q. So, if we could start with the first paragraph, it states, “If any member
fails to make a capital contribution when required, the Company may, in addition
to pursuing any rights and remedies the Company --

A. “Any other rights and remedies”

Q. – may have” -- well, why don’t you read it, please.

A. I would be glad to read it. “If any Member fails to make a capital
contribution when required, the Company may, in addition to pursuing any other
rights and remedies the Company may have under this Act or applicable law, take
any enforcement action (including, the commencement and prosecution of court
proceedings) against the Member that the Managers consider appropriate.
Moreover, the remaining Members may elect to contribute the amount of such
required capital themselves, according to their respective Units. The members
who make such contributions shall be entitled to treat these amounts as an
extension of credit to such defaulting Member, payable upon demand, with
interest accruing on the extension at the rate of one (1%) percent per month until
paid. This extension of credit shall be secured by such defaulting Member’s
Interest in the Company. Each Member who defaults grants to each Member who
may later grant an extension of credit, a security interest in the defaulting
Member’s Interest in the Company. Alternatively, at the election of the
Managers, the Managers may make a one hundred (100%) percent reduction in
the Units of the defaulting Member and reallocate the Member’s former Units
among the contributing Members in proportion to their Units.”

Q. This provides the process then for enforcing capital contributions; is
that correct?

A. Yes, absolutely.

Q. And, it provides different remedies that may be taken; is that correct?

A. It has options.

The SB Indiana operating agreement had an identical mechanism for dealing with a member who
failed to contribute. The Wisners were trying to show that Hardy pursued the harshest remedy
available when seeking to dilute their shares.

The Wisners’ attorney even quarreled with Hardy regarding whether the management
agreement superseded the operating agreements. On cross-examination, defense counsel
followed up:

Q. So, the management agreement was signed at the time these operating
agreements were entered into in the first place, correct?

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 A. That is correct.

Q. Now, these operating agreements, when they were first entered into,
the Wisner’s [sic] were not parties to these agreements; were they?

A. Not the operating agreement.

Q. Okay. So, by the time the Wisner’s [sic] come in, after enjoying the
benefits of tax free money by being a tenant in common and deferring their taxes
under 1031, the management agreement has been in place for a couple of years,
the operating agreements have been in place for a couple of years; isn’t that right?

A. That is correct.

Defense counsel then reviewed many provisions of the operating agreements.

Later, the Wisners’ attorney did not object when defense counsel and Hardy had the
following exchange during re-cross-examination:

Q. The operating agreement, as you understand it, gives you the right to
do what if they don’t make the capital call?

A. It gives the management the right to dilute out and allow that dilution
to go to the party or company or entity that pays that capital call.

Q. There are other options that you could have done, correct? One of
them you did do, you waited and negotiated with them for some period of time?

A. We did. We waited.

Q. The other option would have been to treat it as a loan at one percent
per month payable on demand; is that what it provides?

A. It provides for that option.

Q. What if they don’t pay when the loan is demanded?

A. Well, then I could have foreclosed on the entity with that loan.

Q. Or, sue the Wisner’s [sic] for the money?

A. I could have done that as well, get a judgement [sic] against them for
it.

Q. Why did you elect instead after a year of negotiation with the Wisner’s
[sic] and they electioned [sic] not to pay, to choose the avenue of simply diluting
out their interest rather than treating it as a loan and suing them?

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 A. Well, I mean from a practical matter, the process of creating a loan,
defaulting the loan, and then taking court action would certainly be problematic
and troublesome just to accomplish it. I mentioned one time in testimony here,
my job was supposed to be to run the company, spend my time leasing the spaces
and doing those kinds of things, creating another collection problem was not
going to be productive for the company.

Again, the Wisners’ attorney questioned Hardy about the authority to make loans and not
issue a capital call:

Q. Quantum is obligated to follow this management agreement, correct?

A. It is obligated to follow the management agreement, and, the operating
agreement. They relate to each other. You are trying to pick them apart as [if]
only one of them exists.

At one point during Hardy’s redirect-examination, defense counsel objected to a line of
questioning regarding the loss of particular tenants:

[Defense counsel]: Again, Your Honor, I object. He’s trying to blame
fault on a tenant leaving. It’s irrelevant. As the Court just ruled, he has to
demonstrate acts which were illegal, fraudulent or oppressive, meaning not
authorized by the documents. That is not any of those.

THE COURT: . . .any response?

[Plaintiffs’ counsel]: The response would be that in the documents
regarding the management agreement and operating agreement, he does have such
duties as to carry out his management duties in a reasonable manner and if we’re
able to show that he was doing so in an unreasonable manner that would be in
violation of the documents.

The trial court disagreed: “Well, in terms of the statute, in terms of what is actually and willfully
unfair or oppressive conduct, it’s pretty clear from the case law that simple negligence is not
going to be enough a breach of the operating agreement, is not going to be enough to be
oppressive.”

Plaintiff’s counsel then went on to question Hardy about the specific terms of the
operating agreement, including the provision that permitted a capital call to enable the company
to conduct its business as well as the provision that allowed the manager to dilute the members’
shares if the members did not contribute to the capital call.

During arguments on the involuntary dismissal, the Wisners’ attorney stated:

The documents certainly conflict as to who the manager was. Mr. Hardy
wants to point to the operating agreement, but the management agreement states a
different entity, states the actual entity itself will be the managing agent, while the
communications from Mr. Hardy all indicate that he’s the manager. Again, it’s

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 only after the loans are disclosed now that suddenly the Quantum letterhead
appears and they start hiding behind Quantum as being manager.

Apparently Mr. Hardy had executed these operating agreements at some
point on his own without knowledge or disclosing these to the investors when
they became a part of this entity and telling them or explaining to them that
Quantum was going to be the manager of the entities. All along they were told
that Gregg Hardy was the manager.

Counsel then went on to point to provisions in the operating agreements that governed a
manager’s conduct, including: providing reports to investors, prohibiting self-dealing, and
requiring that cash distributions be made after the operating costs are deducted. Counsel argued
that Hardy violated all of these.

The foregoing demonstrates that the Wisners never challenged the enforceability of the
operating agreements in the trial court. We will not permit them to do so for the first time on
appeal.

B. THE DORR CASE (DOCKET NO. 333045)

While the Wisners were completely silent on the enforceability of the operating
agreements, Dorr’s attorney attempted to raise the issue at the beginning of trial. During
opening statements in the Dorr case, Dorr’s attorney set forth his theory of the case:

It is our position that the actions of the manager in diluting him out are not
authorized by statute, and, are not authorized by any agreements between the
parties. Further, it is our position that the manager either intentionally or
unintentionally misled the Plaintiff as to the status of loans that the manager had
purportedly advanced to the LLC and then how he was going to recover
repayment for those loans and that the capital call itself was inappropriate and
came out of the blue and was oppressive in and of itself. And, probably most
importantly, we are going to show that there was no operating agreement in this
case that applied to Mr. Dorr and therefore his requirements for contribution, if
any, were strictly governed by the statute and not by any so called operating
agreement. Hence, the call itself, the demand itself, and the subsequent expulsion
were all unauthorized, inappropriate, and, certainly constituted oppression causing
him damage and resulting in this action and the requests for relief that were
contained in our complaint.

Defense counsel objected to that theory, noting that “the statement that there is no
operating agreement that applied to Mr. Dorr and that only the statute would govern capital calls
is nowhere to be found in that complaint.” Defense counsel noted:

They introduced the operating agreements, and, they introduced them as exhibits
25 and 26. They are the operating agreements. They put them in as the binding
and functional documents that governed the Plaintiffs in this case. They are now
trying to change their complaint that they just amended this week, to allege that
he is not a party to the operating agreement and say that only the statute applies.
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 There is nothing in the complaint that references that. This is an irrelevant line of
questioning based on what is in the pleadings, and, they should not be permitted
to go forward.

The trial court likewise observed that “there is nothing pled in the complaint that there is not a
valid operating agreement between the parties.” The trial court noted that the issue was never
raised in the Wisner matter and that defense counsel would be prejudiced by allowing such a
strategy to go forward. The trial court made the following observations:

If you would have had it a year ago, somebody should have looked at it and
realized that, from your office. This isn’t a case where he was pro per and he just
got lawyers hired in here today. Discovery was conducted. When you had the
opportunity to review the documents, you got through discovery, it should have
been brought up to the court’s attention, to the defense’s attention. You could
have filed, at that point and time, to amend your complaint. I would have granted
that, graciously. We could have had the issue fully explored. The frustrating part
is that you are bringing it up now and it seems to be a very important issue in this
matter. It would have been an important issue if it would have been raised in the
Wisner matter, which I know you don’t want to go back to, but, we spent days in
that case too. So, I am just really concerned about [defendants] being prejudiced
by these things coming up at the last second when these arguments should have
been developed, as you said, years ago.

***

Well, I appreciate the argument.[2] I think it is a good argument. I
appreciate your argument in terms of whether or not your client is bound by this
operating agreement, but, it is the first time that I have heard of it. I haven’t had a
chance to look at any of the case law on this, even look at the statute that you’ve
referenced as it relates to this issue, because it wasn’t brought up before today. I
don’t want to make a decision in this matter sitting here on the bench without
being fully appraised. At the same time, this matter has been delayed and delayed
and delayed. So, I am just really struggling with what is the fair thing to do here
for all the parties that are involved, frankly.

The trial court initially indicated that it wanted the parties to brief the issue and that it
would allow a continuing objection on the line of questioning regarding the operating agreement.
However, the trial court changed its position during the following exchange at which time
defense counsel was arguing that he should not have to brief the issue:

[Defense counsel]: Well, there is a written agreement and it is part of the
evidence. It was argued, endlessly, in the Wisner matter, which is a part of this

2
That a person cannot be charged to contribute to an LLC unless that person has agreed to do so
in writing.

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 record, never raised that Mr. Dorr never signed it in a pleading of any kind,
including the most recent amendment. Now, Judge, here is the point, when you
plead that it is oppression to dilute in the way that they say, and the operating
agreement forgives it, you know that the statute says if it is permitted by the
documents then it is not willful oppression as a matter of law. So, their argument
is, “well, we lost on that already, why don’t we change our attack and say he is
not a signatory to it, and, we knew that all along for the last two and a half/three
years even though the Wisner’s [sic] didn’t sign anything either, we didn’t argue
it there, but, let’s argue it now and let’s see if we can then say, well, it’s
oppressive under the statutory operating agreement.” Judge, it is way too late for
that. It is way too prejudicial. They should have done it a long time ago, and, I
don’t think there is any need to brief it. I think you can find that it is way too
prejudicial, and way too late right now.

THE COURT: Well, in thinking about it further and looking at my notes
and having the chance to digest the rest of this this afternoon, I agree with
[defense counsel]. I think I have enough to be able to make a decision whether or
not I am going to consider the 100 percent dilution, the – as being oppressive in
and of itself as argued by Plaintiff, whether or not Plaintiff is to be bound by the
language of the operating agreement that is in Plaintiff’s exhibit 25. I think that
there has been enough arguments made here today on the record.

In a later order denying defendants’ motion for involuntary dismissal, the trial court
acknowledged that “Plaintiff now argues that the Operating Agreement should only bind
Defendant Hardy alone and not anyone else since Hardy was the only signatory to the
agreement.” In a footnote, the trial court rejected this approach:

This allegation was not made in any pleading prior to trial, and was
objected to vehemently by the Defendants at trial. Defendants are correct in
directing the Court to MCR 2.118(C)(2) which governs the right to amend
pleadings at trial to conform to the proofs. The party seeking to amend has the
burden of establishing that the objecting party has not been prejudiced. That
burden has not been carried, and the objection that this particular issue was not
within the issues raised by the pleadings is sustained. This argument is not being
addressed further.

Without enumerating it as an issue on appeal or briefing it, Dorr takes issue with the trial
court’s conclusion that lack of enforceability of the operating agreements was never pled and the
trial court’s refusal to allow Dorr to pursue such a theory at trial. “Decisions concerning the
meaning and scope of pleading, and decisions granting or denying motions to amend pleadings,
are within the sound discretion of the trial court and reversal is only appropriate when the trial
court abuses that discretion.” Weymers v Khera, 454 Mich 639, 654; 563 NW2d 647 (1997).
“An abuse of discretion occurs when the decision results in an outcome falling outside the
principled range of outcomes.” Radeljak v DaimlerChrysler Corp, 475 Mich 598, 603; 719
NW2d 40 (2006).

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 The real issue on appeal touches upon the admissibility of evidence as it relates to
pleading requirements. Under MCR 2.118(C)(1), pleadings may be amended if an issue was
tried by express or implied consent of the parties. “In that case, amendment of the pleadings to
conform to the evidence and to raise those issues may be made on motion of a party at any time,
even after judgment.” MCR 2.118(C)(1). However, where, as here, the evidence is objected to,
further amendment is not allowed unless the evidence would not prejudice the objecting party.
MCR 2.118(C)(2) provides:

If evidence is objected to at trial on the ground that it is not within the
issues raised by the pleadings, amendment to conform to that proof shall not be
allowed unless the party seeking to amend satisfies the court that the amendment
and the admission of the evidence would not prejudice the objecting party in
maintaining his or her action or defense on the merits. The court may grant an
adjournment to enable the objecting party to meet the evidence.

The rule “establishes strict requirements for amending a pleading during trial. Unless the party
requesting amendment ‘satisfies the court that . . .amendment . . .would not prejudice the
objecting party,’ amendment ‘shall not be allowed.’ This rule contrasts sharply with the free
amendment allowed before trial.” Dacon v Transue, 441 Mich 315, 333; 490 NW2d 369 (1992).
However, where a defendant receives notice “from whatever source” that a plaintiff intended to
assert a claim, there can be no prejudicial surprise. Id. at 334. But a “plaintiff may not rely on a
facially insufficient allegation, which necessitated the amendment, to alleviate prejudicial
surprise caused by the amendment.” Id. at 335.

There is no question that Dorr did not provide reasonable notice that his theory of the
case would contrast with the Wisners’ theory. Nor is there any real question that an amendment
would have caused prejudicial surprise. A claim that the operating agreement was unenforceable
is nowhere to be found in any of the pleadings. Such a new theory posed a significant surprise to
opposing counsel in light of the extensive litigation in the Wisner matter, which contained
absolutely no reference whatsoever to the enforceability of the agreements. The trial court did
not abuse its discretion given Dorr’s failure to meet his burden of demonstrating that an
amendment of the pleadings would not have prejudiced defendants.

It is clear that the enforceability of the operating agreement was never truly in dispute, as
it was not timely raised. Dorr, in fact, relied heavily on the operating agreement to bolster his
claim for membership oppression. We reject Dorr’s attempt to fashion the issue on appeal in a
manner that is in direct contrast to what was presented in the trial court.

Affirmed. As the prevailing party in both cases, defendants may tax costs. MCR 7.219.

/s/ Kurtis T. Wilder
/s/ Mark J. Cavanagh
/s/ Kirsten Frank Kelly

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