Menhennick Family Trust v. Timothy Menhennick

927 N.W.2d 741, 326 Mich. App. 504

• Court: Michigan Court of Appeals
• Decided: November 27, 2018
• Docket: 342391
• Status: Published

Opinion

Per Curiam.

*743 *506 This case presents a question of first impression, namely whether MCL 450.1421(6) precludes voiding a shareholder's proxy on the basis of incompetence when the shareholder had not been declared incompetent before the proxy was given. We conclude that it does not.

Plaintiff Harvey Oil Company, Inc., is a home-heating fuel business that primarily sells fuel oil and propane. It also operates convenience stores with gas stations. When created, Harvey Oil issued 130 shares of stock, which were jointly owned by Alva and Ilean Menhennick. Their children, Gary, Dennis, Paul, Patrick, and Timothy, all worked in the business at one time or another. Dennis took over as general manager after Alva's death in January 1993. Around that time, some of the assets of Harvey Oil were spun off into a new company, Menhennick Enterprises, Inc. One hundred and thirty shares of stock were also issued for Menhennick Enterprises. Sixty-five shares of each company were held by the Menhennick Family Trust and 65 shares of each company were held by the Ilean Menhennick Irrevocable Trust. Thereafter, Ilean, through her trust, made gifts of 10.4 shares of each company to each of her five sons. After Gary's death in 2000, his shares were transferred back to the trust.

A dispute arose over the voting of the shares held by the Menhennick Family Trust, of which Paul and Ilean were cotrustees. This dispute was resolved by the *507 probate court in 2008 when it ruled that each cotrustee would vote half the shares held by the Menhennick Family Trust. Accordingly, from 2008 until 2013, for each company, Ilean voted 55.9 shares of the 130 shares outstanding held by each of the two trusts, Paul voted 42.9 shares (32.5 shares held by the trust and 10.4 shares held by him individually), while Dennis, Timothy, and Patrick each voted 10.4 shares held by themselves.

Other disputes continued through the years regarding the management of the companies and whether to sell assets. The basis for the instant dispute arose when defendant, Timothy Menhennick, obtained proxies from Ilean on December 11, 2013, in advance of the annual shareholders' meeting on December 12. This gave defendant the power to vote 66.3 shares of the 130 shares for each company. In other words, defendant now had majority control. Defendant used this power to amend the bylaws to provide for a single-member board of directors with himself as the sole director. Defendant subsequently issued an additional 110 shares in both companies, which he purchased, making him the majority shareholder in each company even without the shares he voted by proxy.

This eventually led to the instant lawsuit, filed in 2015, challenging various actions taken by defendant, including the bylaw amendment and the issuance of the additional stock. At the heart of the dispute was defendant's obtaining Ilean's proxies. Plaintiffs argue that the proxies were invalid because Ilean was incompetent when she signed them. Defendant moved to preclude the attack on the proxies because Ilean had not been previously adjudged incompetent before she signed the proxies. The trial court denied the motion. Later, following a bench trial, the court concluded that *508 Ilean had lacked the mental capacity to grant the proxies. The court also determined that defendant had exercised undue influence over Ilean to obtain the proxies. The court additionally concluded that defendant had breached his fiduciary duties to the companies and the shareholders. The court declared the proxies void, as well as the amendment of the bylaws. It ordered the parties returned to the relative interests they owned before *744 the proxies were issued. Defendant now appeals and we affirm.

The principal issue in this case is the effect of MCL 450.1421(6) on the challenge to the validity of the proxies. That statute provides as follows:

The authority of the holder of a proxy to act is not revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of the incompetence or death is received by the corporate officer responsible for maintaining the list of shareholders.

Defendant argues that under this provision, Ilean's incompetency cannot be the basis for holding the proxies invalid because she was not adjudicated incompetent and the required notice given of that fact before the proxies were exercised. Plaintiffs argue that this provision does not restrict the ability to challenge whether the proxies were valid in the first place. We agree with plaintiffs.

We review de novo issues of statutory and contractual interpretation. Madugula v. Taub , 496 Mich. 685 , 695, 853 N.W.2d 75 (2014). The flaw in defendant's argument is that the question in this case is not whether Ilean's incompetency operated to revoke the proxies; rather, it is whether the proxies were void ab initio because of her incompetency. The purpose of MCL 450.1421(6) appears to be to link a notice requirement *509 to the basic principle that the death or incompetence of a principal revokes the authority of the agent. See, e.g., In re Capuzzi Estate , 470 Mich. 399 , 402, 684 N.W.2d 677 (2004) ("It is also well-settled that the death of the principal revokes the authority of the agent...."). That is, MCL 450.1421(6) requires that notice of death or incompetence be given to the appropriate corporate officer before a proxy is deemed revoked by the death or incompetence of the shareholder. But, more importantly to the resolution of this case, MCL 450.1421(6) does not address the initial validity of a proxy or the authority of a court to declare an invalid proxy void.

In sum, MCL 450.1421(6) does not restrict the trial court's authority to determine that the proxies were never validly issued in the first place. Accordingly, we must turn to defendant's next argument, that the trial court erred by finding that Ilean was incompetent at the time she executed the proxies. We are not persuaded that the trial court clearly erred.

We review for clear error the trial court's findings of fact following a bench trial and review de novo its conclusions of law. Trader v. Comerica Bank , 293 Mich. App. 210 , 215, 809 N.W.2d 429 (2011). A finding is clearly erroneous if there is no evidentiary support for the finding or, after reviewing the entire record, this Court is definitely and firmly convinced that the trial court made a mistake. Augustine v. Allstate Ins. Co , 292 Mich. App. 408 , 424, 807 N.W.2d 77 (2011). This Court gives "due regard to the special opportunity of the [trial] court to judge the credibility of the witnesses who appeared before it ...." In re Clark Estate , 237 Mich. App. 387 , 395-396, 603 N.W.2d 290 (1999).

Whether a person was mentally competent is determined by a preponderance of the evidence.

*510 In re McIntyre Estate , 355 Mich. 238 , 248, 94 N.W.2d 208 (1959). Generally, "whatever a person may lawfully do if acting in his own right and on his own behalf he may lawfully delegate to an agent ...." Link, Petter & Co. v. Pollie , 241 Mich. 356 , 359-360, 217 N.W. 60 (1928). However, in order to do so, the person "must be free to enter into a valid contract of agency." Id . at 360, 217 N.W. 60 . "The test of mental capacity to contract *745 is whether the person in question possesses sufficient mind to understand in a reasonable manner the nature and effect of the act in which the person is engaged." In re Erickson Estate , 202 Mich. App. 329 , 332, 508 N.W.2d 181 (1993). A person is mentally unsound to contract if "the person had no reasonable perception of the nature or terms of the contract." Id . A person may be incapable of conducting business successfully and still be mentally competent. Id . at 333, 508 N.W.2d 181 .

Testimony was offered by family members and Ilean's physicians. Dr. Amy Fletemier, Ilean's family physician, testified that in April 2013, Ilean had difficulty following directions to do basic and simple things. Dr. Roman Politi, a neurologist, testified that Ilean could not recall three words after a minute. Dr. Fletemier also testified that Ilean was diagnosed with moderate dementia in May 2013, which Dr. Fletemier described as a "pretty significant impairment" and only "moderate" in comparison to severe dementia, which renders a person nonverbal and unable to function. Patrick described his mother as talking to people who were not there, and he stated that she could not correctly place a phone call even while looking at the written phone number.

Defendant testified that Ilean read the proxies and signed them. He did not recall discussing the proxies with Ilean the day she signed them, and he did not *511 recall her asking questions. Defendant believed that Ilean understood that if she signed the proxies, she would not have to attend the shareholders' meeting.

Patrick testified that on the day after the shareholders' meeting when asked if she had signed a proxy, Ilean only knew that she had signed some papers for the business. Dr. Fletemier saw Ilean less than two weeks later. At that time, Ilean's "talk was very vague." She could not interact in a complex conversation. She was not capable of complex thought. Dr. Fletemier testified that one of Ilean's issues was "severe memory impairment," such that Ilean had a limited ability to even recall the events of her day-to-day routine. Dr. Fletemier testified that Ilean likely could not have "[understood] business complexities with a moderate dementia." Dr. Fletemier testified that while Ilean may have been able to sign her name to a document, "would she truly understand it? No." Ilean would not have been able to understand a business meeting to the extent that she would have been able to decide whether she was comfortable having someone else make decisions for her. In her condition, Ilean would not necessarily have understood proxies and voting ramifications, and she even might not have understood the concept of voting.

The trial court determined that Ilean lacked the mental capacity to understand the nature of the proxies she signed. Specifically, it determined that Ilean could not have understood the ramifications of what she had signed and that the day after the meeting, Ilean did not understand what she had signed or the ramifications of naming defendant as her agent. Accordingly, the trial court determined that Ilean had lacked the capacity to understand the nature and effect *512 of the proxies she signed when Timothy presented them to her the day before the shareholders' meeting.

We are not persuaded that the trial court clearly erred. There was substantial evidence of Ilean's incompetence. Moreover, even if the trial court accepted defendant's testimony as true, the testimony did not establish that Ilean understood that the proxy agreements meant that defendant would vote for her at the shareholders' meeting. Defendant testified that he believed Ilean understood that if she signed the proxies, she would not have to attend the shareholders' meeting. This is not the same as understanding that by *746 signing the proxies, Ilean would be allowing Timothy to vote for her at the meeting. Nor are we persuaded by defendant's argument that Ilean's ability to execute a power of attorney and patient-advocate documents in June 2013 established her competency. First, competency in June does not mean that Ilean was competent in December. Indeed, there was testimony that Ilean's condition had rapidly deteriorated in the second half of 2013. Second, the nature of the documents is different. Just because she could adequately understand the nature of the power-of-attorney and patient-advocate documents and was competent to execute them does not necessarily mean that she could understand the nature and effect of the proxies.

Because we have concluded that there was an adequate basis for the trial court to void the proxies on the basis of incompetence, we need not address defendant's argument that the trial court erred by finding undue influence. Similarly, we need not address defendant's arguments regarding the trial court's alternative findings regarding breach of fiduciary duties, failure to provide information to the shareholders, and the issuance of the additional stock for defendant's purchase.

*513 Because we affirm the trial court's determination that the proxies were void, all actions taken by defendant at the December 2013 shareholders' meeting and thereafter are invalid. That is, the trial court properly ruled that the parties were to be returned to the status quo ante .

Affirmed. Plaintiffs may tax costs MCR 7.219.

Murphy, P.J., and Sawyer and Swartzle, JJ., concurred.