Mediation In Lieu Of Case Evaluation: A Practical Solution For Mixed Equitable And Legal Claims

By: Kenneth F. Neuman and Stephen T. McKenney[1]

In current state court practice, almost all claims filed in the circuit court are ordered to case evaluation. Indeed, the wide ranging scope of claims that can be submitted to case evaluation, together with the general efficacy of case evaluation as a dispute resolution process, makes this general practice appealing.

But there are certain subsets of cases – business cases in particular that present problems with the case evaluation approach. Specifically, business disputes that involve claims for equitable relief, but which may also contain claims for monetary relief, can be sent to case evaluation.[2] Examples of mixed claims include claims for a breach of contract seeking both specific performance, or alternatively, monetary damages; claims for minority member or minority shareholder oppression which seek both legal and equitable relief (in the form of a mandatory redemption, dissolution, etc.);[3] claims for breaches of restrictive covenants, which seek both injunctive and monetary relief; claims for breaches of loan agreements, which seek the both repossession or liquidation of collateral and monetary relief; and many others.

An action that contains claims for both legal and equitable relief can be sent to case evaluation and the court rules instruct that “[t]he evaluation may not include a separate award on any claim for equitable relief, but the panel may consider such claims in determining the amount of the award.”[4] Further complicating this issue is the fact that when a case evaluation award is accepted by the parties it is a complete resolution of the entire claim – legal and equitable remedies.[5] So, parties to claims involving mixed relief, who submit those claims to case evaluation, must further weigh the risks of accepting and rejecting the award (with its attendant consquences), with the risk of losing their claim to permanent equitable relief. Indeed, this conundrum may further increase the pressure on a party to reject an otherwise acceptable case evaluation award for fear of losing its right to permanent equitable relief.

But a solution may exist in the form of MCR 2.403(C), which allows the parties and the Court to remove a case from case evaluation. This can be accomplished by motion; but can also be the subject of a discussion between the parties and the Court at any early status or scheduling conference.[6]

In the place of traditional case evaluation, the better option for parties dealing with mixed equitable and legal claims may be facilitation. In fact, facilitation can offer the parties a wide range of tools to resolve the entirety of their dispute – the legal and the equitable claims – which are not available through case evaluation. For example, on a claim for member or shareholder oppression, in which the member or shareholder seeks a dissolution of the limited liability company or corporation,[7] and an award of damages for the acts of the other shareholders or members, the case evaluation panel can only make an award of damages; it cannot order a dissolution of the corporation or company. In facilitation, however, the facilitator can work with the parties to come to an agreement on the division of the interests in the company and exchange of payments to compensate parties for their interest and possible damages.

Likewise, on a claim for breach of a real estate purchase agreement that seeks both specific performance and money damages,[8] the case evaluation panel can only award money damages. If the plaintiff in that action accepts the award, it is compelled to accept the damages and abandon its claim for specific performance. But, in the context of facilitation, the parties can pursue a broad range of possibilities for settlement; including, re-negotiating the transaction, increasing or decreasing the purchase price, or making other concessions that were not in the original purchase agreement in order to get the transaction back on track.

Similarly, claims made by a lender against a borrower may include mixed claims for money damages (repayment of the money owed) and equitable relief (including the disposition of certain collateral,[9] or the appointment of a receiver[10]). Allowing the case to proceed through case evaluation will only address the money damages issues and will not address the equitable issues, leaving in doubt the status of the collateral, or forcing the lender to chose between accepting the award, or foreclosing on the collateral. Likewise, any receiver’s interest in the action is not likely to be addressed through case evaluation, because the receiver is not a party to the action, but instead is an “arm of the court” charged with acting neutrally between the lender and the borrower.[11] But, through facilitation, the parties can work though several options for restructuring and repaying the indebtedness, including possibly bringing in a new lender; refinancing the terms of the loan; or selling the collateral in a manner that resolves the matter entirely and forecloses further objections about the reasonableness of the sale. Likewise, facilitation can allow the receiver to be directly involved in a manner that cannot be accomplished through case evaluation.

Moreover, facilitation offers the parties the ability to address collateral issues that cannot be addressed through the case evaluation process. For example, in an action alleging a wrongful termination of a company’s key employee, and attempting to remove the employee as a member or shareholder of a company, the case evaluation panel can only make an economic award of money damages. Moreover, that award of money would, ordinarily, be treated as ordinary income to the employee. But, in facilitation, the facilitator can address issues regarding the payment of damages and the payment for the redemption of the employee’s ownership interest in the company and can structure that transaction in a manner that can produce clear and positive tax consequences for all parties (such as possibly recasting the income tax consequences as long-term capital gain versus ordinary income).

Likewise, in an action involving a claim for breaking up a closely held corporation, the case evaluation panel may only be able to award financial damages if one of the owners acted contrary to his or her duties under the operating agreement or statute.[12] But, in a facilitation, the menu of available tools can be expanded to include all manner of collateral issues related to splitting up the business. The facilitator can address issues such as the division of customers or clients; which party will continue on in the leased space; how the parties will address their break up to their existing customers or clients, etc.

Facilitation does have certain drawbacks, as opposed to case evaluation. For instance, facilitation will be more costly than a case evaluation. Further, facilitation is a truly voluntary process in that there are no sanctions that are awarded if the parties fail to reach an agreement. But, in the case of mixed equitable and legal claims, those drawbacks are more often outweighed by the advantages available through the flexibility that facilitation provides. The issue of costs is likely mooted by the fact that the very nature of these types of mixed equitable and legal claims means the parties are going to have significant costs in the case and the difference between the costs of mediation and case evaluation are likely to be among the smaller category of costs. Additionally, the threat of case evaluation sanctions is not likely to carry much weight in these mixed cases for two reasons: (1) the threat of abandoning claims for equitable relief is going to have a greater impact on a party’s decision to accept or reject the case evaluation award than the sanctions; and (2) case evaluation sanctions are ripe for denial where the case contains both mixed equitable and legal claims.[13]

Case evaluation can be a helpful tool for resolving many types of claims for monetary relief. It is a less helpful tool, however, and may even be a hindrance, to resolving claims for mixed equitable and legal relief. Parties in those types of mixed equitable and legal cases should, at the outset of the action, give serious consideration to the question of whether their case is better suited to case evaluation or facilitation. Parties should raise this question with the court at the scheduling conference, if possible, and, if not possible, should consider a motion in the early stages of the action to remove the matter from case evaluation and submit the matter to facilitation instead.

[1] The authors are partners in the boutique business litigation firm of Neuman Anderson Grieco & McKenney, P.C.  Mr. Neuman has over 30 years of experience as a trial attorney in complex business litigation and is also a certified public accountant with formal training in tax and financial accounting issues.  Over the last ten years, he has helped successfully resolve numerous business litigation disputes as a facilitator/mediator in Oakland, Wayne, Macomb and St. Clair County Circuit Court matters.   Mr. McKenney is a former law clerk to the Hon. James C. Cacheris, United States District Judge for the Eastern District of Virginia.  He has over fifteen years of business litigation experience, including trying cases in federal and state courts and arbitrations . He has represented lenders, borrowers, and receivers in receivership matters.  He has served as a case evaluator in Oakland County.

[2] MCR 2.403(A)(1) provides that “any civil action in which the relief sought is primarily monetary damages or division of property” may be submitted to case evaluation.

[3] See MCL §450.4515 (claims for minority member oppression may include, as relief, inter alia, dissolution of the company; changes to the articles of organization or membership agreement, prohibiting the company or members from taking certain actions; requiring a buyout of the oppressed member; and money damages); see also MCL §450.1489 (similar mixed remedies for minority shareholder oppression).

[4] MCR 2.403(K)(3) (emphasis added).

[5] MCR 2.403(M)(1); see also CAM Construction v Lake Edgewood Condominium Association, 465 Mich 549, 555-57; 640 NW2d 256 (2002)

[6] The early status conference for the purpose of addressing alternative dispute resolution is an explicit focus of the business courts under MCL §600.8039(2).

[7] MCL §450.1489(1)(a); MCL §450.4515(1)(a).

[8] See Frakes v Eighan, 358 Mich 327; 100 NW2d 297 (1960).

[9] See, e.g., MCL §440.9609 (allowing secured lender to take possession of collateral after default through judicial process).

[10] See, e.g., MCL §600.2926, et seq. (allowing for the appointment of receivers “where appointment is allowed by law.”).

[11] Ypsilanti Fire Marshal v Kircher, 273 Mich App 496, 528; 730 NW2d 481 (2007).

[12] MCL §450.189 and MCL §450.4515 only apply to allow a shareholder or member who has been subject to “willfully unfair and oppressive conduct” to maintain a claim for oppression. That standard may be difficult to meet in an action and may cause the case evaluation panel to depress its award for the plaintiff. But those issues can be cast aside in facilitation in favor of reaching the practical goal of the clients to separate their interests as members or shareholders of a closely held entity.  

[13] MCR 2.403(O)(5) outlines the process for awarding sanctions in the event the ultimate verdict includes equitable relief. In those instances the court must consider the value of the combined monetary and equitable relief. MCR 2.403(O)(5)(a). It must also consider whether “it is fair to award costs under all of the circumstances.” MCR 2.403(O)(5)(b). These rules grant broad discretion to the court to effectively excuse case evaluation sanctions.

*Article first appeared in the May 2017 edition of Laches.