Duray Development, a residential developer, hired excavation contractors for its Copper Corners project. On September 30, 2004, it contracted with Carl Perrin, Perrin Excavating, and KDM Excavating. The parties planned to replace that agreement once Perrin and Dan Vining formed Outlaw Excavating, LLC. On October 27, Duray and Outlaw executed a superseding contract, signed by Perrin and Vining for Outlaw. All parties thereafter treated Outlaw as the contractor.
Outlaw’s articles of organization, however, were not endorsed as filed by the state administrator until November 29, 2004. The excavation work was allegedly late and deficient, and Duray sued for breach of contract. After a bench trial, the trial court held Perrin personally liable and awarded Duray approximately $96,000 in damages. It reasoned that Outlaw did not exist when the October contract was signed and that the de facto corporation doctrine could not apply to an LLC.
The court had also barred defendants from calling witnesses because they did not timely file a witness list under the scheduling order. Perrin appealed, arguing that Outlaw should be treated as a de facto LLC, that Duray was estopped from denying Outlaw’s existence, and that barring his testimony was an improper sanction.
Issue #1
Whether the de facto corporation doctrine may apply to a defectively formed limited liability company and shield its organizers from personal liability on a pre-filing contract.
Holding
Yes. The de facto corporation doctrine extends to LLCs, and Outlaw qualified as a de facto LLC on the facts presented; therefore, Outlaw rather than Perrin individually was liable on the October 27 contract.
Reasoning
Michigan’s Limited Liability Company Act provides that an LLC formally comes into existence when the state administrator endorses its articles of organization as filed. Because Outlaw’s articles were not endorsed until November 29, 2004, it was not a de jure LLC when Perrin signed the October 27 contract. Ordinarily, a person who signs for a nonexistent entity is personally liable unless the entity later adopts or ratifies the contract or an applicable doctrine changes that result.
The de facto corporation doctrine recognizes a business entity as an actual entity, against everyone but the state, despite a technical defect in formation. Michigan precedent identifies four elements: the organizers acted in good faith, under a valid statute, for an authorized purpose, and executed and acknowledged organizational articles consistent with that purpose.
Outlaw met those requirements. The LLC Act was a valid enabling statute; operating an excavation business was an authorized purpose; Perrin executed Outlaw’s articles on the date of the contract; and the record contained no evidence of fraud, sham formation, or false representation. Duray itself believed Outlaw was valid, contracted only with Outlaw under the superseding agreement, received Outlaw invoices and insurance information, and treated Perrin and his earlier company as no longer being parties to the agreement.
The trial court erred by treating the LLC Act’s statement of when an LLC formally comes into existence as eliminating the de facto doctrine. The Michigan Supreme Court had held that a statute specifying the steps for complete incorporation did not foreclose de facto-corporation status. Because corporations and LLCs serve similar business-forming purposes and both statutes specify when formal entity existence begins, the statutes should be read consistently. Nothing justified allowing the doctrine for corporations but categorically withholding it from LLCs.
Issue #2
Whether the trial court plainly erred by failing on its own initiative to apply corporation by estoppel, or limited-liability-company-by-estoppel, to prevent Duray from denying Outlaw’s existence.
Holding
No. Although the doctrine may extend to LLCs and the record could support its application, Perrin did not preserve the argument, and the trial court had no duty to raise it sua sponte.
Reasoning
Corporation by estoppel differs from de facto status. A de facto entity has legal corporate status despite defective formation; estoppel is an equitable rule that prevents a party that dealt with an association as a corporation from later denying its existence to impose individual liability on its organizers.
The Court concluded that the equitable doctrine may logically be extended to LLCs. Its purpose does not depend on the particular business form: it prevents a contracting party from accepting an association as an entity and later repudiating that position to pursue its members or officers individually. The record showed that Duray dealt with Outlaw as the contracting entity after the October agreement.
But Perrin raised only de facto-corporation status in the trial court, not estoppel. The unpreserved issue was therefore subject to plain-error review. A trial court is not required to act as a litigant’s research assistant or supply an argument that the party did not make.
No clear or obvious error occurred because Michigan precedent had not previously applied corporation by estoppel to LLCs. The trial court’s failure to adopt that unraised and unsettled theory on its own did not warrant reversal.
Issue #3
Whether the trial court abused its discretion by barring defendants, including Perrin, from presenting witnesses because they failed to file a timely witness list.
Holding
Yes. The blanket exclusion was reversed because the record did not show that the trial court considered the required factors or available lesser sanctions.
Reasoning
Michigan Court Rule 2.401 permits a trial court to exclude an unlisted witness, absent good cause, when a party violates a scheduling order. But exclusion of witnesses is a severe sanction that may effectively prevent a party from proving a defense or counterclaim. It must be selected through a case-specific exercise of discretion, not imposed automatically upon a late witness list.
Before imposing that sanction, the court must consider the circumstances, including whether the violation was willful or accidental, the party’s history of noncompliance or delay, prejudice to the opposing party, the opposing party’s actual notice of the witness, the extent of compliance with other orders, efforts to cure the defect, and whether a lesser sanction would serve justice. The court should also consider whether the party can establish its position through the parties’ testimony or documentary evidence.
The record did not show that the trial court weighed those considerations or explained why barring all defense witnesses was the just and proper response. On remand, the trial court must reassess Perrin’s request to testify, evaluate the relevant factors, consider alternatives to total exclusion, and place its reasoning on the record.