author: T. M. Burns, P. J. Bashara, J.

text:
    MAXMAN v FARMERS INSURANCE EXCHANGE
    Docket No. 77-2794.
    Submitted April 12, 1978, at Detroit.
    Decided August 8,1978.
    Leave to appeal applied for.
    Ida Maxman was injured in an automobile accident when the car she was driving was struck in the rear by a car driven by James Lihov, an insured of defendant Farmers Insurance Exchange. Lihov died six days after the accident from unrelated causes. Neither plaintiffs Ida Maxman and her husband Sidney Maxman nor defendant Farmers Insurance Exchange knew of Lihov’s death. Unsuccessful settlement negotiations were continued until Lihov’s estate had been closed and presentation of claims barred by the Probate Code. Suit was commenced against Lihov after notification of his death and within the statute of limitations for auto-negligence actions. An order was entered in Wayne Circuit Court, Thomas J. Brennan, J., quashing service and striking the complaint on the ground that the claims were barred by the Probate Code. Order affirmed on appeal, Maxman v Goldsmith, 55 Mich App 656; 223 NW2d 113 (1974). A complaint was then filed naming Farmers as defendant. Plaintiffs alleged that Farmers misrepresented its authority to settle plaintiffs original claim against Lihov after Lihov’s death and after his estate had been closed and the time for reopening it had passed. The suit was based solely on a misrepresentation of Farmers authority to settle a claim where no authority existed. Summary judgment for defendant in Oakland Circuit Court, Steven N. Andrews, J. Plaintiffs appeal. Held:

    An insurer acts as an insured’s agent in negotiating possible settlements where third parties are injured by the insured, and as an agent, is liable to third parties for misrepresenting its authority to act on behalf of the insured where no such authority exists in fact. A representation which is false in fact and actually deceives another and is relied on by him to his damage is actionable, regardless of whether the person making the representations acted in good faith in making them, where the loss of the party deceived inures to the benefit of the other.

      References for Points in Headnotes
    [1, 7] 73 Am Jur 2d, Summary Judgment §§ 26, 27.
    [2, 8] 3 Am Jur 2d, Agency § 1.
    [3, 9] 44 Am Jur 2d, Insurance § 1523 et seq.

    Duty of liability insurer to settle or compromise. 40 ALR2d 168.
    [4, 6] 3 Am Jur 2d, Agency §§ 300, 340.
    [5] 37 Am Jur 2d, Fraud and Deceit §§ 17, 18, 228.
    [6] 37 Am Jur 2d, Fraud and Deceit §§ 20, 144-146, 149.
    [7] 73 Am Jur 2d Summary Judgment §§ 15,16, 18, 32, 35.
    [10] 43 Am Jur 2d, Insurance §§ 194,195.
    [11] 44 Am Jur 2d, Insurance §§ 1530,1531,1533.

      Reversed and remanded.
    Bashara, J., dissented. He would hold that the relationship between an insured and insurer is one of contract, not agency. The authority conferred upon an insurer under a contract to settle claims against its insured is for the benefit of the insurer as an element of the consideration given for its indemnification of the insured. Farmers would not be liable under contract principles and any remedy plaintiffs were entitled to was readily available by the exercise of reasonable diligence in prosecuting their claim against defendant’s insured or his estate.
    Opinion op the Court
    1. Judgment — Summary Judgment — Issue of Fact.
    Summary judgment grounded on no genuine issue of fact is improper, whether or not evidentiary facts are disputed, if the factfinder can go either way on a material fact.
    2. Principal and Agent — Definition of Agency.
    Agency in its broadest sense includes every relation in which one person acts for or represents another by his authority.
    3. Insurance — Principal and Agent — Third Parties — Settlements.
    An insurer acts as an insured’s agent in negotiating possible settlements with third parties injured by the insured.
    4. Principal and Agent — Misrepresentation of Authority.
    An agent is liable to third parties for misrepresenting his authority to act on behalf of a principal where no such authority exists in fact.
    5. Principal and Agent — False Representations — Deceit—Damages — Unjust Enrichment.
    A representation which is false in fact and actually deceives another and is relied on by him to his damage is actionable, regardless of whether the person making the representations acted in good faith in making them, where the loss of the party deceived inures to the benefit of the other.
    6. Principal and Agent — Misrepresentation of Authority — Mere Silence.
    Mere silence may constitute misrepresentation of an agent’s authority to act on behalf of his principal.
    Dissent by Bashara, J.
    7. Judgment — Summary Judgment — Issue of Fact — Evidence— Court Rules.

      A motion for summary judgment based on allegations that except as to the amount of damages there is no genuine issue as to any material fact extends the scope of the trial court’s review beyond that of the pleadings to discern whether evidence has been, or will be, presented raising a genuine issue of material fact; the parties must present affidavits, depositions, or documentary evidence from which the court will make its determination, resolving all doubts to the benefft of the nonmoving party (GCR 1963, 117.2[3j).

    8. Principal and Agent — Relationship—Scope of Authority — Duties of Agent — Fidelity to Principal.

      Agency is an expansive legal concept, including within its general scope all those relationships in which one party by the authority of another acts for or represents the latter; there are duties imposed upon the agent in his conduct of the principal’s affairs and fidelity to his principal is the essential basis of an agency.

    9. Insurance — Settlement of Claims — Authority to Settle — Contracts — Consideration—Indemnification.

      The authority conferred upon an insurer under a contract to settle claims against its insured is for the benefft of the insurer as an element of the consideration given for its indemnification of the insured.

    10. Insurance — Insurer—Insured Relationship — Contract— Agency.

      The relationship between an insured and insurer is one of contract, not agency; to hold otherwise would impose rights and obligations upon the contracting parties in derogation of the provisions of their voluntary contract

    11. Insurance — Legal Relationship — Fraud and Bad Faith — Protection of Insured.

      It is unnecessary to facilitate adequate protection for an insured

      and others dealing with an insurer from the insurer’s wrongful deeds because prohibition against fraud or bad faith is imposed by law upon every legal relationship and is a part of every lawful grant of power and it is not necessary to contract for it; the power to control settlements having been granted to an insurer for the purpose of its own protection under an insurance policy, the insurer is bound to use the power in good faith for that purpose.

      Hopping & Boyer (by Donald M. Churilla), for plaintiffs.

      Harvey, Kruse & Westen, P. C. (by James N. Martin and George W. Steel), for defendant.
    Before: T. M. Burns, P. J., and N. J. Kaufman and Bashara, JJ.
   T. M. Burns, P. J.

The question in this case is whether plaintiff, Ida Maxman, injured when the car she was driving was struck in the rear, may maintain an action against the insurer of the other driver based on misrepresentation of authority. To see how this question arises, it is necessary to set out a detailed statement of facts.

James Lihov, Farmers Insurance Exchange’s insured, and plaintiff were involved in an automobile accident on February 10, 1969. The Lihov car struck plaintiffs vehicle from the rear. There has never been any question of Lihov’s responsibility for the accident, the only question was the amount of plaintiffs loss.

Plaintiff retained counsel the day after the accident and the attorneys immediately notified Mr. Lihov and the present defendant. From that point on, plaintiffs attorney dealt only with representatives of Farmers. Settlement negotiations were begun immediately and continued until shortly before suit was filed against Mr. Lihov.

Mr. Lihov died six days after the accident from causes unrelated to the accident. Neither plaintiff nor defendant knew of this fact until after Lihov’s estate had been closed and the period for reopening it for presentation of a claim under the Probate Code had passed. Although the suit against Mr. Lihov was begun within the three-year statute of limitations, it was found to be time barred by the trial court under the Probate Code. This Court affirmed, Maxman v Goldsmith, 55 Mich App 656; 223 NW2d 113 (1974), and plaintiff abandoned the Supreme Court appeal to start this suit, 394 Mich 758 (1975).

In the present case, plaintiff filed a two-count complaint naming Farmers as the defendant. The trial court again granted summary judgment, although the basis of the motion is not readily apparent, counsel and court both having failed to specify the subrule which was being relied upon, GCR 1963, 117.2(1) or (3).

Only the first count is being pursued in this appeal. Plaintiff has alleged that Farmers misrepresented its authority to settle plaintiff’s original claim against Lihov, after Lihov’s death and after his estate had been closed and the time for reopening it had passed. It is this representation of authority, where none existed, which plaintiff claims has caused her injury. She is not alleging that defendant is directly liable for the automobile accident, although this will be the measure of damages in the misrepresentation action, nor is she claiming, at this point, that the defendant concealed Lihov’s death. The suit is based solely on a misrepresentation of Farmers authority to settle a claim where no authority existed.

The trial court granted summary judgment to Farmers after receiving briefs and hearing arguments. The basis of the motion is not readily apparent. Judge Bashara has written to affirm the summary judgment on the basis of GCR 1963, 117.2(3), no issue of material fact. We cannot agree.

Certain evidentiary facts are not disputed. Farmers acted for Lihov only under his policy of insurance, not as a volunteer. Neither Farmers nor plaintiff knew of Lihov’s death until no suit against him or his estate could be maintained. No representative of Farmers ever expressly stated that Lihov was still alive after his death. However, it also appears to be undisputed that the settlement negotiations continued past the point that the company could be held liable on its contract of insurance with Lihov or his estate.

But these evidentiary facts are not the material facts spoken of in the court rule. See, Simerka v Pridemore, 380 Mich 250, 275; 156 NW2d 509 (1968) (opinion of Souris, J.). One authority has stated the proposition thus:

"Whether or not the evidentiary facts are disputed, if the factfinder can go either way on a material fact, summary judgment grounded on no genuine issue of fact is improper.”

Bashara, The Elusive Summary Judgment Rule: Sifting Through the Maze, 1976 Det Col of Law Rev 397, 419.

Even given the undisputed evidentiary facts, if plaintiff has stated a cause of action there are material issues of fact in dispute: Was there a representation of authority? Did this deceive plaintiffs? Was the misrepresentation the proximate cause of plaintiffs loss? These questions are not answered by merely concluding that Farmers’ adjuster never expressly stated that Mr. Lihov was still alive.

The crux of this case is whether plaintiff has pled facts upon which the court will recognize a right to recover. In other words, by pleading that Farmers represented it had authority to settle plaintiffs claim against Mr. Lihov or his estate, where in fact no such authority existed, has plaintiff stated a cause of action for misrepresentation? The answer lies in an examination of the relationship between Lihov, Farmers and plaintiff and the substantive law of the tort of misrepresentation.

Agency in its broadest sense includes every relation in which one person acts for or represents another by his authority. Saums v Parfet, 270 Mich 165, 171; 258 NW 235 (1935), Stephenson v Golden, 279 Mich 710, 734-735; 276 NW 849 (1937). In dealing with plaintiffs, Farmers was acting on behalf of Mr. Lihov, not as a volunteer but because of a contract of insurance. Farmers was contractually given power, but not the duty, to make any compromise within the policy limits and authority to conduct negotiations toward that end.

The relationship admittedly does not fit neatly into the definition of agency with all its ramifications. The insurance company also furthers its own interest by settling claims as quickly and inexpensively as possible. But, the overriding concern in the relationship is for the insured — not the company — as witnessed by those cases imposing liability on the insurer for failing to make a good faith effort to settle the claim within the policy limits. City of Wakefield v Globe Indemnity Co, 246 Mich 645; 225 NW 643 (1929), Citizens Mutual Ins v Nationwide Ins, 29 Mich App 91; 185 NW2d 99 (1970). See also, 40 ALR2d 168. We conclude, therefore, that as to third parties injured by the insured, the insurer acts as the insured’s agent in negotiating possible settlements.

An agent is liable to third parties for misrepresenting his authority to act on behalf of a principal where no such authority exists in fact. 2 Restatement Agency 2d, § 330, pp 86-87.

There is no requirement that misrepresentation of authority be treated any differently than any other tortious misrepresentation. In Michigan, any representation which is false in fact and actually deceives the other and is relied on by him to his damage is actionable, regardless of whether the person making the representations acted in good faith in making them, where the loss of the party deceived inures to the benefit of the other. Phillips v General Adjustment Bureau, 12 Mich App 16; 162 NW2d 301 (1968). The misrepresentation may consist of mere silence. Michigan National Bank v Marston, 29 Mich App 99; 185 NW2d 47 (1970). The rules stated in these two cases apply to the situation raised in plaintiffs complaint.

Under the rules stated in Phillips, plaintiff has stated a cause of action sufficient to avoid summary judgment. The loss that plaintiff did not recover against Lihov inured to the benefit of Farmers. Plaintiff has pled facts to fulfill the other requirements. Whether a jury will conclude that the misrepresentations alleged were the cause of plaintiff’s failure to recover in the first suit is not a question we should be called upon to answer at the present time.

The trial court erred in granting summary judgment.

Reversed and remanded for further proceedings not inconsistent with this opinion. Costs to appellant.

N. J. Kaufman, J., concurred.

Bashara, J.

(dissenting). I must respectfully dissent. In so doing, an exposition of the facts as they are revealed to me becomes necessary.

More than nine years ago plaintiffs allegedly sustained personal injuries from an automobile accident involving defendant’s insured. After receiving notice of the accident from plaintiffs’ counsel, defendant retained an independent claims adjuster to handle the claim. During the next year- and-a-half, in developing the information pertinent to the accident, he made numerous contacts with plaintiffs’ counsel.

When the adjuster attempted to contact the insured, he discovered that the insured had died six days after the accident from unrelated causes. Further investigation disclosed that the insured’s estate had been closed approximately six months prior to the adjuster’s discovery of his death.

This information was communicated by the adjuster to defendant and plaintiffs’ counsel. Settlement negotiations were then terminated, defendant maintaining that plaintiffs’ cause of action against the insured was barred by the Probate Code. Approximately a year later plaintiffs initiated suit against the insured. Defendant entered an appearance on behalf of the insured through its attorneys and moved to quash service of process and strike plaintiffs’ complaints against the insured and his special administrator. The motions were granted and affirmed on appeal to this Court.

An independent action was instituted by plaintiffs against defendant, and it is that litigation that we are called upon to review. Essentially, plaintiffs’ theory contends that by continuing the investigation and settlement negotiation after the insured’s death, defendant breached its implied warranty of authority, resulting in damage to plaintiffs. As a foundation for that theory, plaintiffs maintain that the defendant was the insured’s agent, that the agency terminated upon the death of the insured, and that the defendant was thereafter without authority to settle the claim against its insured.

Upon defendant’s motion for summary judgment, the trial court held that the relationship between defendant and its insured was not that of agency, and found that no misrepresentations were made by defendant concerning the insured’s death. Plaintiffs contend that these findings were erroneous. They claim that a genuine issue of material fact was presented as to defendant’s misrepresentation. Plaintiffs also urge this Court to declare the relationship between defendant and its insured to be that of agent and principal, respectively.

A motion for summary judgment pursuant to GCR 1963, 117.2(3) extends the scope of the trial court’s review beyond that of the pleadings to discern whether evidence has been, or will be, presented raising a genuine issue of material fact. The parties must also present affidavits, depositions, or documentary evidence from which the trial court will make its determination, resolving all doubts to the benefit of the non-moving party. Rizzo v Kretschmer, 389 Mich 363, 370-371; 207 NW2d 316 (1973). See also Durant v Stahlin, 375 Mich 628; 135 NW2d 392 (1965).

Depositions from defendant’s claims adjuster and plaintiffs’ former counsel were filed with the trial court. Both deponents affirmatively stated that no representations were expressed that the insured was alive during the time the adjuster was communicating with plaintiffs’ counsel. Further, the adjuster stated that he did not learn of the insured’s death until approximately six months after the estate of the insured was closed, by which time plaintiffs’ claim was barred by the Probate Code.

Nothing was offered by plaintiffs to show that evidence contrary to the foregoing assertions would be presented. Consequently, I conclude that the trial court properly determined that no genuine issue of material fact existed as to the defendant’s alleged misrepresentations. Durant v Stahlin, 375 Mich 628, 638; 135 NW2d 392 (1965).

The contract of insurance between defendant and its insured required the defendant to assume the defense of any claims against the insured arising from occurrences covered by the policy. Additionally, defendant was empowered under the contract to compromise and settle those claims as it deemed advisable. The viability of plaintiffs’ warranty action depends upon whether these contractual obligations establish defendant as the agent of its insured.

Agency is an expansive legal concept, including within its general scope all those relationships in which one party by the authority of another acts for or represents the latter. Saums v Parfet, 270 Mich 165, 171; 258 NW 235 (1935). However, further identifying characteristics of agency stem from the duties imposed upon the agent in his conduct of the principal’s affairs. Fidelity to his principal is the essential basis of an agency. Horvath v Langel, 276 Mich 381, 385; 267 NW 865 (1936). Our Supreme Court has stated the obligations of an agent in the following terms:

" 'The agent is a fiduciary and owes to his principal the duty of good faith and loyalty. The agent is under the duty to use care, skill, and diligence, and to obey the instructions of his principal. ’
" 'It is a settled principle of equity that where a person undertakes to act as an agent for another, he cannot be permitted to deal in the subject matter of that agency upon his own account and for his own benefit.’ ” Burton v Burton, 332 Mich 326, 337; 51 NW2d 297 (1952) (emphasis added, citation omitted).

In contrast to the foregoing principles forming the foundation of an agency relationship, the indicia of the insured-insurer relation was comprehensively analyzed by our Supreme Court as follows:

"The policy amount constitutes a dead line of contractual power, obligation, and duty. The insured pays for protection to that amount only, and the insurer has no obligation to indemnify him in a greater sum. The insurer has no authority to bind insured by compromise in any amount above such limit, nor to prevent his settling his own possible excess liability as he chooses. Within the policy limit, the insurer has no contract obligation to effect settlement, as the policy contains no promise that it will do so under any conditions or circumstances. Nor within such limit can the insured be injured by any compromise or failure to compromise, as liability to that amount must be paid by the insurer. It seems very plain that the exclusive power to control settlements within the amount of the policy is ceded to the insurer for its sole bene&t, to save itself, as far as may be, on account of its engagement to insured. Because of its purpose, the power is to be used according to the judgment and discretion of the insurer, and, therefore, in attempting exercise of the power, it is not performing, or assuming to perform, a legal duty to insured, either express or implied. Without such legal duty, the obligation to use due care in the exercise of the power cannot be imposed by law.” City of Wakefield v Globe Indemnity Co, 246 Mich 645, 649-650; 225 NW 643 (1929) (emphasis added).

This description of an insurer’s function under its contractual obligations is in nowise characteristic of an agent. The contractual power of the insurer to settle claims is utilized for its own benefit. Moreover, the insurer is precluded from binding the insured to a settlement in excess of the policy limits. Consequently, whatever authority is conferred upon the insurer under the contract to settle claims against the insured is for the benefit of the insurer as an element of the consideration given for its indemnification of the insured.

Plaintiffs cite a number of cases from other jurisdictions and insurance law treatises in support of their position. My review of those authorities, however, discloses that the courts were either seeking a standard by which to measure the insurer’s discharge of its contractual obligations to the insured or declared an agency relationship on a basis more akin to ipse dixit than sound legal reasoning.

Accordingly, I would decline to hold that the relationship between an insured and insurer is one of agency. To do otherwise would impose rights and obligations upon the contracting parties in derogation of the provisions of their voluntary contract. Further, it is unnecessary to facilitate adequate protection for the insured and others dealing with the insurer from its wrongful deeds. For, as our Supreme Court has observed:

"Prohibition against fraud or bad faith is imposed by law upon every legal relationship, is a part of every lawful grant of power, and it is not necessary to contract for it. The power to control settlements having been granted to insurer for the purpose of its own protection under the policy, it is bound to use the power in good faith for that purpose.” Globe Indemnity Co, supra, at 650.

The contract of insurance, in express terms, defined the relationship between defendant and its insured. It was, therefore, within the province of the trial court to conclude, as a matter of law, that plaintiffs’ theory of agency was unavailing. On the basis of the foregoing principles, I would sustain that conclusion.

Any remedy to which plaintiffs were entitled was readily available by the exercise of reasonable diligence in prosecuting their claim against the defendant’s insured or his estate. I do not believe that we should countenance utilization of a theory that comports with neither reason nor principle to relieve plaintiffs from their own negligence in asserting their legal rights.

I would affirm.

       There are actually two plaintiffs in this case, Mr. and Mrs. Maxman. Mrs. Maxman was injured in the automobile accident. Her husband has presented a derivative claim.

       In arguing the motion before the trial court defense counsel stated that "under either theory plaintiffs have simply failed to state a cause of action”. Later when questioned by the trial court defense counsel stated, "There is no statement of law which would support plaintiffs position of false representations”.
      In granting defendant’s motion, the court stated it was relying on the arguments made by defense counsel. The only conclusion that we can draw after examining the record is that the court was granting summary judgment under GCR 1963, 117.2(1), failure to state a cause of action.

       We have examined the cases plaintiff cites for the proposition that the relationship was one of agency and also examined the authority cited by defendant criticizing that conclusion. On balance, we believe that the courts have resorted to calling this relationship agency almost by default. There is no other term in the law which can accurately describe the relationship. Because there is a void in this area, courts have resorted to calling the relationship agency and have applied agency rules.

        See MCL 701.19, 708.18; MSA 27.3178(19), 27.3178(428) and Maxman v Goldsmith, 55 Mich App 656; 223 NW2d 113 (1974), appeal dismissed, 394 Mich 758 (1975).

         Maxman v Goldsmith, 55 Mich App 656; 223 NW2d 113 (1974), appeal dismissed, 394 Mich 758 (1975). Appeal was dismissed on plaintiffs’ motion. Id. The factual scenario to this point in the controversy is delineated in greater detail in this Court’s previous opinion.

       Although not expressed by plaintiffs with any degree of specificity, presumably they contend that reliance upon the defendant’s alleged misrepresentations caused them to refrain from initiating a suit against the insured until after the action was barred by the Probate Code.

       Representative of such cases referring to agency in analyzing the insured-insurer relationship is Georgia Casualty Co v Mann, 242 Ky 447; 46 SW2d 777 (1932). That case involved an action by the insured to recover the amount by which an injured party’s judgment exceeded the insurance limits. In determining whether the insurer acted unreasonably in refusing to settle the claim, the court selected a negligence standard analogous to that inhering in principal-agent relations. Id. at 451; 46 SW2d at 779. There was no apparent intent by the court to denominate the insured-insurer relationship as an agency for all purposes.
      In Hayes v Gessner, 315 Mass 366; 52 NE2d 968 (1944), an insurer by making promises of settlement induced an injured party to forestall instituting an action against the insured until it was barred by the statute of limitations. The court concluded that the insured was estopped from raising the statute of limitations defense, since to do otherwise would enable the insurer to exculpate itself by its own wrongdoing. However, agency principles were unnecessary to attaining the result, because the insurer was responsible for defending the action and would be directly estopped from establishing the consequences of its active fraud as a defense. The import of the decision is evaluated in a treatise cited by plaintiffs, as follows:
      "This result is obviously proper where the insurer is liable for the total amount recovered as it should not be able to avoid being estopped by its own adjuster’s actions by hiding behind the person of its insured. Except where liability insurance is involved, the insurer is sued directly and may be estopped by the actions of its agents.
      "The 'no action’ clause is not meant to change the insurer’s responsibility for its agents. However, the court should not reach this result unless it is willing to place the ultimate liability upon the insurer. The insured has no control over the insurer and its agents — in fact, he specifically surrenders this control by the terms of the contract. To use the analogy referred to in the Hayes case, it is true that the insured is 'liable’ for a settlement within the policy limits since, of course, the insurer makes the settlement and the insurer pays it; but the insurer would not have the authority generally to make a settlement over the policy limits unless participated in by the insured. Accordingly, where the third party has been injured by the adjuster’s representations, so as to create an estoppel, the insurer should be liable for its negligence even though the recovery be over the policy limits.” 16 Appleman, Insurance Law and Practice, § 8646, fn 89.35 (1968) (emphasis added).

        See also Traders & General Insurance Co v Rudco Oil & Gas Co, 129 F2d 621 (CA 10, 1942), Kirchen v Orth, 390 F Supp 313 (ED Wis, 1975), 3 Couch on Insurance 2d, § 25:99 (1960).

       See Stevens v Gulf Oil Corp, 108 RI 209; 274 A2d 163 (1971). The court’s perception of the existence of an agency was limited to the facts of the case, did not follow from any extended reasoning, and was entirely unnecessary to the result reached.

       Where the insurer has the right to control the defense of claims and represents antagonistic interests, the following observation was made concerning the availability of remedies for breach of its contractual duties:
      “In an ordinary case in which the same insurer covers codefendants whose interests are antagonistic, the retention of separate and independent counsel for each will generally suffice to fulfill the insurer’s duty with regard to the matter of representation, and any breach of duty thereafter will be remediable by an action against the insurer for negligence or bad faith or by a professional liability action against the attorney.” 7A, Appleman, Insurance Law and Practice, §4681 (Supp 1978) (footnote omitted).


source: Caselaw Access Project

author: Beasley, P. J.

license: Public Domain

text:
    ANN ARBOR BANK & TRUST COMPANY v COMMISSIONER OF THE FINANCIAL INSTITUTIONS BUREAU
    Docket No. 77-3684.
    Submitted May 8, 1978, at Lansing.
    Decided August 8, 1978.
    Leave to appeal applied for.
    Defendant The Saline Bank, a Michigan bank with its principal office in Saline, Washtenaw County, applied to the Commissioner of Financial Institutions for approval of a branch bank in Pittsfield Township in Washtenaw County. Hearings were held before an administrative law judge at which Ann Arbor Bank and Trust Company, Community Bank of Washtenaw, Huron Valley National Bank, National Bank and Trust Company of Ann Arbor, and Ypsilanti Savings Bank, appeared to oppose the application. The administrative law judge filed a "Proposal for Decision” with the Financial Institutions Bureau wherein he made proposed findings of fact and conclusions of law recommending approval of the application. The opposing banks filed objections and oral argument was had. The commissioner entered an order adopting the proposal for decision of the administrative law judge and approving the branch bank application. The opposing banks filed suit against the commissioner and The Saline Bank alleging the proposed branch did not meet the statutory criteria. The Washtenaw Circuit Court, Edward D. Deake, J., set aside the commissioner’s order and permanently enjoined permission for the proposed branch bank. The Saline Bank appeals. Held:

    1. Appellate review of administrative decisions should not consist of substituting a new judgment as to the facts where there is substantial evidence to support the administrative decision; the reasons for this rule are: (a) that the fact finder who has a visual opportunity to view candor or lack of it on the part of the witnesses is believed to have a superior position from which to draw these conclusions than he who has only a written record to review; and (b) those who spend substantially all of their time in the employ of administrative agencies are deemed to acquire a specialized expertise in determination of the particular issues regularly facing the agency.

      References for Points in Headnotes
    [1, 2] 2 Am Jur 2d, Administrative Law §§ 621, 675, 682 et seq.

    [3-5] 10 Am Jur 2d, Banks § 324.
    What is a "branch bank” within statutes regulating the establishment of branch banks. 23 ALR3d 683.

      2. The responsibility of the Court of Appeals in reviewing on appeal a circuit court’s appellate review of an administrative agency’s decision is to determine if the circuit court correctly applied the substantial evidence test.
    3. In order to approve an application for a branch bank the Commissioner of Financial Institutions must be satisfied that: (1) there is a necessity for establishment of the branch; (2) that the parent bank possesses a suificiency of capital and surplus; and (3) that there are prospects for successful operation of the branch; the term "necessity” means a substantial or obvious need in view of the disclosed circumstances: neither absolute or indispensable need, on the one hand, nor mere convenience on the other.
    4. It was not an abuse of discretion for the Commissioner of Financial Institutions, in reviewing and deciding upon an application for a branch bank, to require the banks opposing the application to show compelling adverse factors in view of the fact that the policy of this state in regard to banking is pro-competition, provided it is not destructive and unsound competition.
    Reversed.
    1. Administrative Law — Appellate Review — Constitutional Law —Statutes—Substantial Evidence Test.
    Appellate review of administrative decisions should not consist of substituting a new judgment as to the facts where there is substantial evidence to support the administrative decision; the reasons for this rule are that the fact finder who has a visual opportunity to view candor or lack of it on the part of the witnesses is believed to have a superior position from which to draw conclusions than he who has only a written record to review and those who spend substantially all of their time in the employ of administrative agencies are deemed to acquire a specialized expertise in determination of the particular issues regularly facing the agency (Const 1963, art VI, §28, MCL 24.306; MSA 3.560[206]).
    2. Administrative Law — Appellate Review — Substantial Evidence Test.
    The responsibility of the Court of Appeals in reviewing on appeal a circuit court’s appellate review of an administrative agency’s decision is to determine if the circuit court correctly applied the substantial evidence test.
    3. Banks and Banking — Branch Banks — Application for a Branch Bank.
    In order to approve an application for a branch bank the Commissioner of Financial Institutions must be satisfied that: (1) there is a necessity for establishment of the branch; (2) that the parent bank possesses a sufficiency of capital and surplus; and (3) that there are prospects for successful operation of the branch; the term "necessity” means a substantial or obvious need in view of the disclosed circumstances: neither absolute or indispensible need, on the one hand, nor mere convenience on the other.
    4. Banks and Banking — Branch Banks — Application for a Branch Bank — Competition—Public Policy.
    It was not an abuse of discretion for the Commissioner of Financial Institutions, in reviewing and deciding upon an application for a branch bank, to require the banks opposing the application to show compelling adverse factors in view of the fact that the policy of this state in regard to banking is pro-competition, provided it is not destructive and unsound competition.
    5. Banks and Banking — Branch Banks — Statutes—Application for New Branch — Location of Branch Banks — Moot Question.
    The 1978 amendment to the statute governing the establishment and operations of branch banks now allows a bank to establish a branch in the same county in which the parent bank is located in any location not in a city or incorporated village and it is no longer necessary for a bank, seeking approval of an application for a branch bank within its home county, to prove the location is within a statutory unincorporated village; it need only show that the location is not in an incorporated city or village and the satisfaction of the Commissioner of Financial Institutions that: (1) there is a necessity for establishment of the branch, (2) that the parent bank possesses a sufficiency of capital and surplus, and (3) that there are prospects for successful operation of the branch; the question of whether the commissioner’s finding that the area is an unincorporated village within the meaning of the statute is now moot [MCL 487.471; MSA 23.710(171)].

      Foster, Meade, Magill, Rumsey & Deloof, for plaintiffs.

      Bodman, Longley, Bogle & Dahling (by Carson C. Grünewald), for defendant Saline Bank.
    Before: Beasley, P. J., and Allen and H. E. Deming, JJ.

       Circuit judge, sitting on the Court of Appeals by assignment.

   Beasley, P. J.

Defendant-appellant, The Saline Bank, a Michigan banking corporation with its principal office in Saline in Washtenaw County and hereinafter referred to as defendant, requested the commissioner of the Financial Institutions Bureau to approve location by defendant of a branch bank in Pittsfield Township, also in Washtenaw County, under MCL 487.471; MSA 23.710(171). Plaintiff banks, which are located in the area, protested the granting of permission.

Hearings were conducted before an administrative law judge, after which he filed a "Proposal for Decision”, making proposed findings of fact and conclusions of law, the effect of which was to recommend approval of defendant’s application.

Plaintiffs filed exceptions, objecting to the proposal pursuant to MCL 24.281; MSA 3.560(181). Defendant responded and oral argument was had.

The commissioner filed an order adopting the proposal for decision of the administrative law judge and granting defendant permission to locate a branch in Pittsfield Township. Continuing to protest, plaintiffs filed a complaint in the Washtenaw County Circuit Court, claiming that the proposed branch did not meet the statutory criteria for establishment of a branch bank. In a thorough opinion, the trial court held with plaintiffs, set aside the commissioner’s order and permanently enjoined permitting the requested branch bank. From that judgment, defendant appeals as of right.

The trial court reversed the administrative finding that the area defined by defendant is an unincorporated village within the meaning of MCL 487.471; MSA 23.710(171) as it existed at the time of hearing, holding there was no substantial evidence to support the finding. However, in 1978, the Legislature amended § 171(1) to read as follows:

"With the written approval of the commissioner, any bank may establish and operate a branch or branches within the same county in which the parent bank has its principal office or, if not in the county, then within 25 miles of the parent bank or in a contiguous county at a point more than 25 miles from the parent bank, if the county does not have a bank. A branch shall not be established in a city or incorporated village in which a state or national bank or branch thereof is then in operation. The commissioner shall not grant approval unless he is satisfied as to the sufficiency of the capital and surplus of the bank, the necessity for the establishment of the branch or branches and the prospects of successful operation if established.” MCL 487.471; MSA 23.710(171), as amended in February, 1978.

The effect of this amendment to the statute is to allow a bank to establish a branch in the same county in which the parent bank is located, in any location not in or part of a city or incorporated village provided the other statutory requirements are met. Thus, it is no longer necessary to do as the defendant bank attempted to do here, i.e., set up the concept of a separate statutory unincorporated village with specific boundaries in which a branch could properly be established and operated. In this case, the location in which defendant seeks permission to open a branch is not in a city or incorporated village.

Also, the branch proposed by defendant bank in the instant case would be in the same county as the parent bank, and would, therefore, meet that requirement of the statute as amended.

Usually in appellate review, we look to the law as it was at the time of the judicial or administrative action from which appeal is taken. To do so here would be to perform an idle and useless action. No longer does it make any difference whether defendant-appellant has proved the existence of an unincorporated village with the specified boundaries. For purposes of this appeal, the question of whether the commissioner’s finding that the area described by defendant is an unincorporated village within the meaning of the statute before the subject amendment is supported by the evidence has become moot. The amendment to the statute eliminates this requirement.

Considering then that it is no longer necessary to decide this issue, we proceed to the standard to be applied to the commissioner’s order on appellate review.

The 1963 Michigan Constitution provides a minimum judicial review for all administrative decisions in the following language:

"All final decisions, findings, rulings and orders of any administrative officer or agency existing under the constitution or by law, which are judicial or quasi-judicial and affect private rights or licenses, shall be subject to direct review by the courts as provided by law. This review shall include, as a minimum, the determination whether such final decisions, findings, rulings and orders are authorized by law; and, in cases in which a hearing is required, whether the same are supported by competent, material and substantial evidence on the whole record.” Const 1963, art 6, § 28.

The Administrative Procedures Act of 1969 implements the review afforded by the constitution, as follows:

"Sec. 106. (1) Except when a statute or the constitution provides for a different scope of review, the court shall hold unlawful and set aside a decision or order of an agency if substantial rights of the petitioner have been prejudiced because the decision or order is any of the following:
"(a) In violation of the constitution or a statute.
"Ob) In excess of the statutory authority or jurisdiction of the agency.
"(c) Made upon unlawful procedure resulting in material prejudice to a party.
"(d) Not supported by competent, material and substantial evidence on the whole record.
"(e) Arbitrary, capricious or clearly an abuse or unwarranted exercise of discretion.
"(f) Affected by other substantial and material error of law.
"(2) The court, as appropriate, may affirm, reverse or modify the decision or order or remand the case for further proceedings.” (Emphasis added.)

In general, the substantial evidence test means that if there is substantial evidence to support the administrative decision, the appellate function should not consist of substituting a new judgment as to the facts. Two reasons are usually given for this rule. First, the fact finder who observes the witness testifying, who sees how the witness reacts to cross-examination, who has a visual opportunity to view candor or lack of it on the part of the witness, and to form a firsthand judgment as to the believability of the witness, is believed to have a superior position and a better vantage point and opportunity to draw these conclusions than he or she who has only a written record to review. Second, those who spend substantially all of their time in the employ of administrative agencies are deemed to acquire a specialized expertise in determination of the particular issues regularly facing the agency. Thus, where the fact finding involves an area peculiarly fitted or adapted to specialization, those exercising the appellate function should hesitate to substitute their judgment for that of him or her who possesses the expertise — at least where substantial evidence supports the expert’s finding.

These two underlying bases for the rule that gives deference and special weight to administrative fact-findings are sometimes in conflict. For example, in the context of this application for permission to open a branch bank case, it is only the administrative law judge who has seen the witnesses and heard their testimony. On the other hand, it is the commissioner of financial institutions who is deemed to possess the peculiar expertise regarding the statutory issues involved in decisions whether to grant permission for a branch bank. However, in this case, we are not called upon to decide the relative weight to be attached to opportunity to see and hear the witnesses as compared to particular expertise regarding branch banking statutory issues because the commissioner has adopted the recommendations of the administrative law judge. While he has amplified some of the conclusions and given consideration to the objections of the protesting banks, it cannot fairly be said that the commissioner’s findings conflict with those of the administrative law judge.

The circuit court judge, here acting in an appellate capacity, has reviewed the commissioner’s findings and order. In so doing, he has expressly acknowledged his duty to refrain from merely substituting his own judgment and has undertaken to apply the substantial evidence test. Our responsibility is to determine whether he has correctly applied that test.

In MERC v Detroit Symphony Orchestra, Inc, Justice Fitzgerald has written a penetrating analysis of the scope of review required in appeals from administrative rulings. Among other things, he says:

“What the drafters of the Constitution intended was a thorough judicial review of administrative decision, a review which considers the whole record — that is, both sides of the record — not just those portions of the record supporting the findings of the administrative agency. Although such a review does not attain the status of de novo review, it necessarily entails a degree of qualitative and quantitative evaluation of evidence considered by an agency. Such review must be undertaken with considerable sensitivity in order that the courts accord due deference to administrative expertise and not invade the province of exclusive administrative fact-finding by displacing an agency’s choice between two reasonably differing views. Cognizant of these concerns, the courts must walk the tightrope of duty which requires judges to provide the prescribed meaningful review.”

Thus, the issues here are:

1) Under the statute, what facts must be found to support giving of consent for a branch bank?

2) Are the findings of fact supported by competent, material and substantial evidence on the whole record?

The requirements for approval under the statute do not seem in dispute. The commissioner must be satisfied that there is a necessity for establishment of the branch, that the parent bank possesses a sufficiency of capital and surplus, and that there are prospects of successful operation of the branch.

The word "necessity”, as used in the pertinent portion of the banking statute, has received careful and full attention in the Michigan cases. In Moran v State Banking Commissioner, the Supreme Court reversed denial of an application for a charter for a new bank in Detroit saying:

"We are in accord with the defendant’s position that mere convenience is not sufficient to satisfy the statutory requisite of 'necessity.’ But when supplemented by proof of facts and circumstances which, as in the instant case, are persuasive of 'necessity,’ it is proper to take into consideration testimony as to the element of convenience. We have not found, nor has there been called to our attention by counsel, a decision wherein there is a precise definition of 'necessity’ when used in a statute relative to the issuance of a bank charter.”

In Wyandotte Savings Bank v State Banking Commissioner, the Supreme Court, in affirming approval of a branch bank in Ecorse Township in Wayne County, said:

"The act requires * * * that the commission shall not permit the establishment of branches unless it is 'satisfied’ as to 'the necessity for the establishment of such a branch.’ * * * The discretion thus vested in the commission as to necessity, however, is not the necessity of absolute or indispensable need, * * * nor at the other extreme is it the imaginary need of whimsy or caprice, or even the 'need’ of mere convenience. It is, rather, a substantial or obvious need in view of the disclosed relevant circumstances.”

In the within case, there is ample evidence to support the finding that the proposed branch will promote the convenience of residents and businesses in the vicinity. While there was conflict in the evidence, the administrative law judge leaned toward finding future growth in the area that would further justify approval of this branch.

In the "Proposal for Decision”, which the commissioner largely adopted, the administrative law judge, in ruling on necessity, took into consideration the commissioner’s pro-competitive policy of December 2, 1975, which he recited as follows:

"Within the context of existing statutory requirements, the Bureau will take a more pro-competitive attitude toward the establishment of branch banks, weighing the benefits to the public of greater competition against the deteriorating impact on other banks in the same area.”

After referring to the evidence, the administrative law judge applied the commissioner’s pro-competitive policy, found no compelling adverse factors sufficient to preclude granting approval of the application and, reviewing the record as a whole, concluded necessity within the meaning of the banking code had been shown.

The commissioner received the Proposal for Decision of the administrative law judge and considered it, along with protestants’ exceptions and applicant’s response. He indicated the he weighed the pro-competitive policy against detrimental impact on other banks. He concluded that granting this application would not cause fragmentation of the banking market to the detriment of existing banks.

While the opinions of the experts are in conflict, there is sufficient evidence to support the commissioner’s conclusions. With respect to necessity, the trial judge appeared to substitute his judgment for that of the commissioner. He says flatly that it was error for the commissioner to give greater weight to the applicant’s expert than the expert testifying for the protesting banks. The trial judge said:

"This Court rules that in making his finding of 'necessity,’ the defendant Commissioner erroneously placed more weight on the testimony of Dr. Austin than on the testimony of Dr. Baxter. Dr. Austin’s computations dealing with the development of deposit potential had nothing to do with the question of necessity. His opinion on the question of necessity made no reference to his alleged study of the primary service area. Dr. Baxter introduced 22 different tables and charts in support of his study of the Ann Arbor/Ypsilanti area. His testimony to the effect that there is no need and necessity for another bank in the existing market stands in contrast to Dr. Austin’s conclusion. This Court finds that the substantial evidence in the record showed that it was Dr. Baxter who made the detailed study of the necessity issue and that the defendant Commissioner should have put greater reliance on the testimony of Dr. Baxter concerning necessity than on the testimony of Dr. Austin.”

These conclusions impinge upon the prerogatives of the fact finder. On this record, the trial judge lacked adequate basis to reverse the findings of the commissioner regarding necessity.

We note that the pro-competitive policy of the commissioner was a factor in his decision.

The Banking Code of 1969 does not declare in so many words a "pro-competitive attitude toward establishment of branch banks”, but it does provide for allowing new banks or branch banks if the requirements are met. The primary function of banking facilities involves the welfare and convenience of the portion of the public concerned. There is no statutory purpose to provide existing banks with a monopoly or to limit competition merely for the sake of limiting competition.

Section 2 of the Banking Code of 1969 provides:

"It is the policy of this state that the business of all banking organizations shall be supervised and regulated in such manner as to insure the safe and sound conduct of such business, to conserve their assets and to eliminate unsound and destructive competition among such banking organizations and thus to maintain public confidence in such business and protect the public interest and the interests of depositors, creditors and shareholders.”

Obviously, the commissioner’s pro-competitive policy must be interpreted so as to be consistent with the declared statutory policy. The statute outlaws only "unsound” and "destructive” competition; competition that is sound and not destructive is not prohibited.

On May 3, 1976, in his executive order 1976-4, Governor Milliken established the Governors Advisory Commission on the regulation of financial institutions, part of which reads as follows:

"The commission shall be charged with, but not limited to, the following responsibilities:
"1. To analyze the present and expected future structure of the Michigan financial community and the competitive relationship between different types of financial institutions and recommend legislation to effect desirable changes in the structure of the financial community and to facilitate competition among the members and components of that structure, consistent with the objectives of capital availability, consumer protection, and the fair and equitable regulation of financial institutions.
"3. To examine the laws granting regulatory powers to the Commissioner of Financial Institutions; and recommend legislation which would clarify the legal considerations which the commissioner must use as his basis for decision in exercising these powers.” (Emphasis added.)

We recognize that this quoted executive order does not deal with branch banks as such, but we cite it to indicate that, in general, in the banking business in this state, a climate of competition is recognized to be in the public interest.

In the Wyandotte Savings Bank case, supra, plaintiffs were a Wyandotte State Bank and a Wyandotte National Bank, each of which maintained branches near the border between the City of Wyandotte and the Township of Ecorse. Defendant, Security Bank, had its home office in the City of Lincoln Park and three branches, one of which was near the border between the City of Lincoln Park and the Township of Ecorse. Defendant Security Bank sought approval of a branch in the Township of Ecorse. When the commissioner granted permission, plaintiff banks sought to have the order vacated and establishment of the branch enjoined. While the litigation revolved around the issue of whether the statute prohibited a branch in an unincorporated village, implicit in plaintiffs’ position was a desire to limit competition. The Supreme Court’s decision in affirming permission for the branch was a vote for competition. The Moran decision, supra, has been interpreted to suggest that banking administrative agencies should not be over-solicitous in protecting existing banks from competition. In enacting the Banking Code of 1969, the legislative hearings appeared to assume a policy of pro-competition.

We conclude that, with respect to branch banking, the policy of this state, as found in.the statutes, case law and administrative practice, is pro-competition, provided the competition is not "destructive and unsound”, any new branch bank is "necessary”, the parent bank possesses sufficient capital and surplus to establish a branch and there are prospects for successful operation of the branch.

In so finding, we reject the protesting banks’ claim that the commissioner’s policy, particularly in requiring them to show "compelling adverse factors”, constitutes an abuse of discretion and an unwarranted amendment to the statutory policy.

The commissioner enjoys broad powers under the statutes. In Commissioner of Banking v Berry, this Court said:

"But it is equally indisputable that the regulation of banks and other such institutions burdened with a public trust have never been treated as an 'ordinary case’ — and rightfully so. The banking business, more than any other, has been the subject of the most careful scrutiny of regulatory agencies. The unique character and tradition of banking often justify the delegation of extremely broad discretionary powers to state banking commissioners which, if attempted elsewhere, would likely violate due process. 1 Davis, Administrative Law Treatise, § 4.04, p 247.”

We believe the clear implication of the statute is to afford the commissioner wide discretion in promulgating policy. We find no abuse of discretion in his adopting a more pro-competition policy for branch banks; on the contrary, for the reasons indicated, we perceive no error of law in the commissioner following such a policy.

The commissioner’s finding that granting the subject application for a branch bank did not constitute such destructive and unsound competition as to outweigh his conclusions regarding necessity was not clearly erroneous. There was substantial evidence to support the finding.

We conclude that the commissioner’s finding that applicants had made a sufficient showing of necessity for permission to maintain the subject branch bank was not clearly erroneous.

On the record in this case, the trial judge was in error when he found that there was not substantial evidence to support the commissioner’s decision. The administrative law judge found that applicant bank had sufficient capital and surplus to justify opening of the requested branch. There was substantial evidence to support the finding.

The administrative law judge also found prospects of successful operation if established. The testimony relevant to this issue was in conflict. The commissioner appeared to recognize this was a close question, but concluded the evidence was sufficient to justify granting the application for the branch.

The trial judge found the prospects for successful operation "dim”, but did not see fit to reverse the commissioner on that issue. Neither did he reverse the commissioner’s finding that there was adequate capital and surplus to support establishment of the proposed branch.

In fact, perhaps the largest reason for the trial judge’s reversal of the commissioner’s grant of the application was his analysis of the "village” requirement. Of course, the trial judge’s decision was prior to the amendment of the statute which, as we have heretofore in this opinion indicated, now makes this issue moot.

In summary, we find the commissioner’s grant of the application to establish and maintain the proposed branch was supported by substantial evidence. The statutory requirements were sufficiently met. It is unnecessary to rule on the commissioner’s disposition of the "village” requirement because the amendment to the statute makes that issue moot.

Thus, the reversal by the trial court of the commissioner’s grant of the application was in error and must be reversed.

Reversed and the findings of the Commissioner of Financial Institutions are affirmed.

       In 1974, defendant-appellant, The Saline Bank, a Michigan Banking Corporation, was acquired by Manufacturers National Corporation, a bank holding company.

       The trial court’s judgment was entered on September 9, 1977, prior to the hereinafter referred to 1978 amendment to the statute.

       1978 PA 17, effective February 14, 1978, amended § 171(1) to read as indicated.

         A branch may not be established in a city or incorporated village if there is already a state bank, a national bank, or a branch of either in operation.

        Cornell Development Co v Ypsilanti, 48 Mich App 261; 210 NW2d 259 (1973), Swinehart v Secretary of State, 27 Mich App 318; 183 NW2d 397 (1970).

       MCL 24.306; MSA 3.560(206).

       393 Mich 116, 124; 223 NW2d 283 (1974). The line between a meaningful review and an evaluation of all the evidence on the one hand and giving due deference to administrative expertise and the province of exclusive administrative fact-finding on the other, is not only narrow, but difficult to draw. It is neither substituting a new judgment on the facts nor rubber-stamping approval of administrative decisions. No one has described it better than Justice Fitzgerald.

       322 Mich 230, 243-244; 33 NW2d 772 (1948); also see, 19 Wayne L Rev 1137 (1973), for discussion of meaning of necessity under the Michigan cases.

       347 Mich 33, 45-46; 78 NW2d 612 (1956).

       1969 PA 319, immediate effect August 20 (MCL 487.301 et seq.; 23.710(1) et seq.).

        Moran v State Banking Commissioner, supra.

       MCL 487.302; MSA 23.710(2).

        See, 71 Yale L J 502 (1962) for an interesting article on banking competition.

       Report on the Michigan Banking Structure, § XI(B), pp 92-93, Prepared for the Joint Senate-House Bank Study Committee of the Michigan Legislature, January 10,1969, which states in part:
      “In particular the case for the present rule which extends 'protection’ to all banking offices, whereby any city or village that has a banking office (main office or branch) is closed to branching by any bank from outside the city or village, strikes us as weak. One effect of this rule is to cause a fragmentation of banking services in metropolitan areas. To the extent that such statutes can be shown to be essential to preserve small, independent banks they may be justified. But too often they serve merely to protect perfectly healthy and vigorous banks from the cold breeze of competition. And it should never be forgotten that healthy competition among banks is always in the best interest of the public, regardless of the fact that it may result in a more difficult or less profitable life for individual bankers.”

       MCL 487.311-487.315, 487.319, 487.335-487.337, 487.425; MSA 23.710(11)-23.710(15), 23.710(19), 23.710(35)-23.710(37), 23.710(125).

       27 Mich App 271, 306-307; 183 NW2d 436 (1970).


author: D. F. Walsh, J.

text:
    HYSLOP v KLEIN
    Docket No. 77-3689.
    Submitted June 19, 1978, at Lansing.
    Decided August 8, 1978.
    Harold Klein owned a small number of farms and was engaged in the dairy and beef cattle business. He made an oral contract with Howard R. Hyslop by which Hyslop agreed to handle the farming in return for a rent-free residence in the farmhouse and 30% of the gross receipts from the sale of milk and a 30% interest in all livestock. The daily operation of the farm was left almost entirely to Hyslop’s discretion. Klein provided all tools and machinery and had arranged for the marketing of milk. No cattle could be sold without Klein’s approval. On November 16, 1971, Howard Hyslop lost the vision in one eye when he suffered an eye injury while helping Klein repair a broken grain elevator. The eye was removed November 13, 1972. On July 19, 1974, Howard Hyslop filed a petition for workmen’s compensation benefits for the loss of the eye. The referee awarded benefits, limited by the "two-year-back” rule. The Workmen’s Compensation Appeal Board reversed the award. Petitioner appeals, raising two issues: (1) was the petitioner an employee of the owner? and (2) did the referee err in applying the two-year-back rule to limit the petitioner’s award? Held:

    1. The petitioner was an employee of the farm owner and was not an independent contractor. As an employee the petitioner was entitled to benefits.
    2. The two-year-back rule was correctly applied to limit the award since the petitioner had complete loss of vision from the date of the injury and the petitioner did not apply for benefits until more than two years later.
    Reversed, and the referee’s award reinstated.
    References for Points in Headnotes
    [1] 82 Am Jur 2d, Workmen’s Compensation § 633.
    [2-4] 81 Am Jur 2d, Workmen’s Compensation §§ 152, 154.
    82 Am Jur 2d, Workmen’s Compensation § 547.
    [5-7] 81 Am Jur 2d, Workmen’s Compensation §§ 168-170.
    [8] 82 Am Jur 2d, Workmen’s Compensation §§ 445, 450.

      1. Workmen’s Compensation — Workmen’s Compensation Appeal Board — Appeal and Error — Findings of Fact — Evidence.
    Evidentiary findings of the Workmen’s Compensation Appeal Board are conclusive if supported by competent, material and substantial evidence in the record.
    2. Workmen’s Compensation — Employee—Worker’s Disability Compensation Act — Economic Reality Test — Statutes.
    The proper guide for determining whether one is an employee under the Worker’s Disability Compensation Act is the test of economic reality; it looks at the task performed, whether or not it is part of a larger common task, a contribution to the accomplishment of a common objective, and at the workmen, to see whether or not their work can be characterized as part of the integrated unit of production and whether the work done, in its essence, follows the usual path of an employee (MCL 418.161[1] [b]; MSA 17.237[161] [1] [b]).
    3. Workmen’s Compensation — Worker’s Disability Compensation Act — Economic Reality Test — Employee.
    The economic reality test for determining whether one is an employee under the Worker’s Disability Compensation Act focuses the Court’s analysis on two basic queries: (1) is the work performed a regular part of the normal operations of the business, and (2) is the worker’s method of operation sufficiently distinct from the employer’s business as to constitute a separate enterprise?
    4. Workmen’s Compensation — Economic Reality Test — Integral Part of Enterprise — Worker’s Disability Compensation Act.
    A plaintiffs work constituted an integral part of a defendant’s enterprise, under the economic reality test for determining whether one is an employee for purposes of the Worker’s Disability Compensation Act, where the defendant’s business was selling beef cattle and milk and the plaintiffs work was the daily operation of that business.
    5. Workmen’s Compensation — Employees—Independent Contractors — Factors.
    Seven factors to be considered in analyzing whether a plaintiff is an employee or an independent contractor in a workmen’s compensation case are: (1) whether plaintiffs work was of a nature customarily performed by an independent contractor, (2) whether plaintiff had held himself out to the public as one ready and able to perform specific tasks, (3) whether the plaintiff furnished his own equipment and/or materials, (4) what liability the defendant would have incurred if he had terminated the relationship without cause, (5) whether the plaintiff depended for his living expenses primarily upon the emolument received from the defendant, (6) whether the method of payment indicated an employment relationship or an independent contract, and (7) whether the defendant exercised significant control over the plaintiffs work.
    6. Workmen’s Compensation — Independent Contractors — Employees — Convincing Accumulation of Factors — Separate Business Enterprise.
    The establishment of an independent contract relationship rather than an employee-employer relationship in a workmen’s compensation case usually requires a convincing accumulation of factors indicating that the services were rendered in the course of the worker’s pursuit of his separate business enterprise of selling those services.
    7. Workmen’s Compensation — Independent Contractors — Employees — Significant Control.
    The correct test for analyzing whether a defendant exercised significant control over a plaintiffs work in a workmen’s compensation case is not the actual exercise of control but the right to control, when determining whether an independent contract relationship or an employee-employer relationship existed between the plaintiff and the defendant.
    8. Workmen’s Compensation — Two-Year-Back Rule — Limiting Award — Delay in Applying for Benefits — Statutes.
    A workmen’s compensation referee properly limited a plaintiffs award for the loss of an eye by application of the "two-year-back” rule where the plaintiffs unequivocal testimony was that he had complete loss of vision from the date of the injury but the plaintiff did not apply for scheduled benefits until over two years had elapsed (MCL 418.381[2]; MSA 17.237[381] [2]).

      The Cox Law Firm, P. C, for plaintiff.

      Foster, Swift, Collins & Coey, P. C. (by David C. Coey and Michael S. Brenton), for defendant.
    Before: R. B. Burns, P. J., and D. F. Walsh and M. E. Clements, JJ.

       Circuit judge, sitting on the Court of Appeals by assignment.

   D. F. Walsh, J.

Plaintiff appeals from a decision of the Workmen’s Compensation Appeal Board reversing the referee’s award of compensation.

Plaintiffs claim derived from an eye injury received on November 16, 1971, while he was helping the defendant repair a broken grain elevator. The eye was removed on November 13, 1972. Plaintiff filed a petition for specific loss on July 19, 1974, and the referee awarded benefits, limited by the "two-year-back” rule of MCL 418.381 (2); MSA 17.237(381X2). The Workmen’s Compensation Appeal Board reversed the award and plaintiff appeals, raising two issues for our consideration:

(1) Was the plaintiff an "employee” within the meaning of MCL 418.161(l)(b); MSA 17.237(161)(l)(b)?

(2) Did the referee err in applying the two-year-back rule of MCL 418.381(2); MSA 17.237(381X2) to limit plaintiff’s award?

I

We premise our analysis upon the evidentiary findings of the Workmen’s Compensation Appeal Board which are conclusive if supported by competent, material and substantial evidence in the record. Dressler v Grand Rapids Die Casting Corp, 402 Mich 243; 262 NW2d 629 (1978). Our inquiry is limited to determining whether those evidential facts established the pertinent jural relationship of employer/employee. Askew v Macomher, 398 Mich 212; 247 NW2d 288 (1976). See Deziel v Difco Laboratories, Inc, 394 Mich 466; 232 NW2d 146 (1975).

The proper guide for determining whether one is an employee under the Worker’s Disability Compensation Act is the dissenting opinion of Justice Smith in Powell v Employment Security Comm, 345 Mich 455; 75 NW2d 874 (1956). Tata v Muskovitz, 354 Mich 695; 94 NW2d 71 (1959), McKissic v Bodine, 42 Mich App 203; 201 MW2d 333 (1972). In Powell, Justice Smith vigorously criticized the "control test” and rejected it in favor of an analysis focusing on the relationship of the worker and his work to the employer’s business operation.

"The test employed is one of economic reality. It looks at the task performed, whether or not it is part of a larger common task, 'a contribution to the accomplishment of a common objective’ * * * [and] at the workmen, to see whether or not their work can be characterized 'as part of the integrated unit of production’ * * * and whether 'the work done, in its essence, follows the usual path of an employee’.” Powell v Employment Security Comm, supra, at 478-479. (Citations omitted.)

The purpose of the "economic reality test” is to more closely conform the definition of "employee” to the objective of the Worker’s Disability Compensation Act, Powell, supra, which is to allocate the human costs of production to the consumer of the product. Whetro v Awkerman, 383 Mich 235; 174 NW2d 783 (1970). It serves that function by focusing our analysis on two basic queries: (1) Is the work performed a regular part of the normal operations of the business, and (2) Is the worker’s method of operation sufficiently distinct from the employer’s business as to constitute a separate enterprise? A number of cases have promulgated several factors to be considered in determining employee status under the act, e.g., Askew v Macomber, supra, Schulte v American Box Board Co, 358 Mich 21; 99 NW2d 367 (1969), McKissic v Bodine, supra, but all of those factors concern one or both of the above inquiries. Mindful of the purpose of the "economic reality test” and guided by the decisions of our appellate courts concerning its application, we turn to the facts of the instant case.

Defendant owned a small number of farms and was engaged in the dairy and beef cattle business. He made an oral contract with the plaintiff by which the latter agreed to farm the land, milk the dairy stock and care for the beef cattle. In return plaintiff received rent-free residence in the farmhouse, 30% of the gross receipts from the sale of the milk, and a 30% interest in all livestock existing at or born after the time of the agreement.

In the daily operation of the farm, plaintiffs manner of performance was left almost entirely to his discretion. Defendant provided all tools and machinery and also had arranged for the marketing of the milk. No cattle could be sold without his approval.

We first consider whether plaintiffs work contributed toward the accomplishment of the defendant’s business objectives so as to constitute an integral part of the business operation. Askew, supra, McKissic, supra. Defendant’s business was selling beef cattle and milk; plaintiffs work was the daily operation of that business. There is no doubt that plaintiff’s work constituted an integral part of defendant’s enterprise.

Defendant argues, however, that the arrangement under which plaintiff undertook to work for him was not an employment relationship but rather a contractual "business arrangement”. Since it is apparent that the plaintiff was working for the defendant, the critical question is whether he was doing so as an employee or as an independent contractor.

" 'An independent contractor is one who, carrying on an independent business, contracts to do a piece of work according to his own methods, and without being subject to the control of his employer as to the means by which the result is to be accomplished, but only as to the result of the work. Generally the circumstances which go to show one to be an independent contractor, while separately they may not be conclusive, are the independent nature of his business, the existence of a contract for the performance of a specified piece of work, the agreement to pay a fixed price for the work, the employment of assistants by the employee who are under his control, the furnishing by him of the necessary materials, and his right to control the work while it is in progress except as to results.’ ” Stratton v Maine, 336 Mich 163, 167; 57 NW2d 480 (1953), Kendrick v Graddis, 75 Mich App 383, 386, n 1; 255 NW2d 14 (1977). (Citations omitted.)

The circumstances mentioned in Stratton, supra, closely correspond to the remaining factors suggested for consideration by Askew, supra, Schulte, supra, and McKissic, supra:

(1) Whether plaintiff’s work was of a nature customarily performed by an independent contractor?

(2) Whether plaintiff had held himself out to the public as one ready and able to perform specific tasks?

(3) Whether the plaintiff furnished his own equipment and/or materials?

(4) What liability the defendant would have incurred if he had terminated the relationship without cause?

(5) Whether the plaintiff depended for his living expenses primarily upon the emolument received from the defendant?

(6) Whether the method of payment indicated an employment relationship or an independent contract?

(7) Whether the defendant exercised significant "control” over the plaintiffs work?

Although one or more of the answers to the above inquiries may tend to show independent contract relationship, its establishment usually requires a convincing accumulation of factors indicating that the services were rendered in the course of the worker’s pursuit of his separate business enterprise of selling those services. 1A Larson, Workmen’s Compensation (hereinafter Larson), § 44.31, p 8-36; see Stratton v Maine, supra, O’Brian v Michigan Unemployment Compensation Comm, 309 Mich 18; 14 NW2d 560 (1944), Begovac v Northwestern Cooperage & Lumber Co, 264 Mich 508; 250 NW 292 (1933). We now apply these principles to the facts before us.

Nothing in the record indicates whether plaintiff’s work was of a type customarily performed by independent contractors or whether plaintiff held himself out to the public as one ready and willing to perform specific farming tasks. The only pertinent finding of the board in this regard is that the plaintiff was sought out by the defendant by referral when the latter was in need of someone to operate his farm. Furthermore, the operation of the farm was a full-time job for the plaintiff.

An employment relationship is strongly indicated where the worker does not hold himself out to the public as performing an independent business service and regularly devotes all his time to a particular employer. 1A Larson, § 45.31(a), p 8-109; see Stratton, supra.

Also indicative of an employment relationship is the fact that defendant provided the tools, machinery and everything else necessary for the operation of the business. Stratton, supra, O’Brian, supra.

Another factor tending to establish plaintiffs status as an employee is that the defendant would have incurred no liability for breach of contract if he had terminated the relationship without cause. Insofar as the unjustified termination of an independent contract would give rise to damages, e.g., Hitchcock v The Supreme Tent of the Knights of the Maccabees of the World, 100 Mich 40; 58 NW 640 (1894), the freedom to terminate employment without liability is inconsistent with the notion of an independent contractual relationship. 1A Larson, § 44.35, p 8-68. See Askew, supra, Powell, supra.

There is no dispute that the plaintiff’s sole sources of maintenance during the relationship was the emolument received from the defendant. Such dependence further evidences plaintiff’s employee status. Powell, supra.

From the method of payment we can draw no conclusion. Although payment was not on a "completed project” basis — which would indicate an independent contract, neither was it on a "time” basis — which would indicate an employment relationship. The method of payment in the instant case was consistent with either characterization.

The final consideration is the degree of defendant’s control over plaintiffs duties. The board’s decision made much of the absence of any instances in which plaintiff was "bossed” by the defendant. Be that as it may, the correct test is not the actual exercise of control but the right to control. Powell, supra, Stratton, supra, O’Brian, supra, Kendrick, supra.

"[T]he test is, and must be, based on the right [to control], not the exercise. Most often the distinction is of importance when a skilled or experienced workman appears to be doing his job without supervision or interference. By an 'exercise’ test, he would seem to be uncontrolled; yet it will often be found that the employer, in any showdown, would have the ultimate right to dictate the method of work if there were occasion to do so.” 1A Larson, § 44.10, pp 8-19, 8-23, 8-24.

Thus, our inquiry is whether the defendant possessed the ultimate right to dictate specific directions to the plaintiff regarding his duties.

Direct evidence of the exercise of that right would be highly probative of its existence, although not necessarily conclusive. However, since the board found no facts substantiating any exercise of supervision, defendant’s right to control, if he had such a right, must be inferred from other factors indicating that the defendant could have imposed his will in matters concerning plaintiffs operation of the farm. See 1A Larson, § 44.10, p 8-19.

One such factor is the defendant’s right to terminate the relationship at will without incurring contractual damages for breach. As a general proposition, such a right to fire implies the power to control. In the instant case this power was magnified by the inclusion of rent-free residence as part of plaintiffs remuneration. Consequently, to the plaintiff termination would have meant not only seeking other employment but also moving his family. The defendant’s right under the arrangement to exercise the power of dismissal at will is strong evidence of his right to exercise the lesser power of supervision.

In the context of the defendant’s right to fire, his reserved powers of "inspection” and the "right to advise” assume greater importance. Advice implies the existence of alternative courses of action concerning which a decision is to be made. Given a situation in which plaintiff and defendant disagreed on a matter affecting the business concerning which defendant exercised his "right to advise”, and given defendant’s right to fire plaintiff, there is little doubt that the defendant "would have the ultimate right to dictate the method of work”.

That conclusion is consistent with the other circumstances of the arrangement. Defendant owned the business, cattle, house, land and machinery. He made the marketing arrangements for the dairy operation and personally decided which cattle were to be sold. He also had the right to fire plaintiff without cause. These facts compel us to rule that the defendant did have the right (albeit largely unexercised) to dictate the plaintiff’s duties and method of operation.

Our analysis of the foregoing factors convinces us that the plaintiff was engaged in work that constituted a regular and integral part of the normal operation of the defendant’s business and that the plaintiff’s rendition of those services was not pursuant to the operation of a separate enterprise of selling those services as an independent contractor. We, therefore, hold that plaintiff was defendant’s employee within the meaning of the Worker’s Disability Compensation Act.

II

Plaintiff contests the applicability of the "two-year-back” rule to his award. The pertinent statutory provision is as follows:

"Whenever weekly payments are due an injured employee under this act, such payments shall not be made for any period of time earlier than 2 years immediately preceding the date on which the employee filed application for hearing with the bureau.” MCL 418.381(2); MSA 17.237(381)(2).

Starting from the premise that the claim for loss of an eye accrued when the loss occurred and not necessarily on the date of the injury, Allen v Kalamazoo Paraffine Co, 312 Mich 575; 20 NW2d 731 (1945), Henderson v Consumers Power Co, 301 Mich 564; 4 NW2d 10 (1942), plaintiff would have us determine that the loss of his eye occurred at the time that medical experts abandoned hope of permanent restoration.

We decline to do so. Plaintiff’s unequivocal testimony was that he had complete loss of vision from the date of the injury, November 16, 1971. He did not apply for scheduled benefits until July 19, 1974. The referee did not err in limiting plaintiff’s award by applying the "two-year-back” rule.

The decision of the Workmen’s Compensation Appeal Board is reversed, and plaintiff shall receive the award granted by the referee.

       There is no claim that the injury did not arise "out of and in the course of” plaintiff’s employment. MCL 418.301(1); MSA 17.237(301X1).

       The act defines an employee, inter alia, as follows:
      “Every person in the service of another, under any contract of hire, express or implied.” MCL 418.161(l)(b); MSA 17.237(161)(l)(b).

       We are not suggesting any "ultimate test” of economic reality such as was disapproved in Askew v Macomber, 398 Mich 212, 220; 247 NW2d 288 (1976). We are attempting merely to establish a rational framework within which to consider and weigh the various factors in a manner consistent with the directive of Powell v Employment Security Comm, 345 Mich 455; 75 NW2d 874 (1956).

         As indicated above, we premise our discussion on the evidential facts found by the board. However, we reject the board’s characterization of the method of payment a “sharing in the profits”. There are no findings in the board’s decision indicating that plaintiffs remuneration was dependent upon the profit made by the business. The findings recited in the text indicate that payment would be made regardless of any profit.

       The board’s characterization of the relationship as having "elements of partnership and joint venture”, by which we are not bound, Deziel v Difco Laboratories, Inc, 394 Mich 466; 232 NW2d 146 (1975), is simply not apt on the instant facts.
      “The definition of employment status almost always takes the form of distinguishing an employee from an independent contractor. The reason is simple. If one wants to get something done without doing it oneself, there are really only two ways open: to hire an employee to do it, or to contract out the work to an independent entrepreneur. The employee-independent contractor distinction is not an artificial dichotomy, invented by legal minds interested in fine distinctions for their own sake. It is a fundamental fact of business life.” 1A Larson, Workmen’s Compensation, § 43.20, p 8-3.

        See Scott v Alsar Co, 336 Mich 532; 58 NW2d 910 (1953). The very first operative fact found by the board provides the factual framework for our statement of the critical question:
      "Defendant owned a rather large farm and some dairy cattle, but he no longer wished to farm and cultivate this himself.”
      Furthermore, the board’s emphasis on facts indicating the plaintiffs independence and the lack of supervision by the defendant illustrates the centrality of the employee/independent contractor distinction to its analysis of the case. Finally, the board apparently recognized the impossibility of finding a partnership or joint venture on the instant facts since it made no attempt to do so other than the perfunctory observation noted above.
      Thus, the dispositive question on this issue is whether the plaintiff worked for the defendant as an independent contractor.

       Implementation of the employee/independent contractor distinction is not inconsistent with Justice Smith’s opinion in Powell, supra. Rather his critique was directed at exclusive reliance on the "control test” to make that distinction.

       The rationale underlying consideration of this factor is twofold: First, an independent contractor normally furnishes his own tools. Second, where the owner of the business provides substantial equipment or machinery, his interest in protecting his investment and in ensuring its productivity raises a fair inference of his right to control its operation. See text at p 154, infra.

       To the extent that the method of payment indicates continuing service it shows employment; to the extent that it lessens the employer’s interest in the details of the worker’s industriousness, it tends to negate employment. 1A Larson, § 44.33(b), p 8-48.

       As evidence of plaintiff’s independence from defendant’s control, the board pointed to the great amount of discretion afforded plaintiff in the discharge of his duties and to the plaintiff’s hiring of a temporary employee to operate the farm during plaintiff’s convalescence. These facts are neither necessarily inconsistent with defendant’s right to control nor are they particularly convincing in view of the other factors we have considered.
      " 'The fact that one * * * exercises judgment as to the work done free of detailed direction by his employer does not make him an independent contractor.’ ” Powell, supra, at 464. (Citations omitted.)
      "The testimony discloses that the applicators fixed the amount of the compensation to be paid to their helpers, and this, plaintiff urges, is in keeping with his claim that the applicators were independent contractors. However it may be noted as a matter of common knowledge that men employed as foremen frequently have the power to 'hire and fire’ employees and to fix the compensation for which they will work; but such authority on the part of the foreman does not render him an independent contractor. And so in the instant case the circumstance just noted is not conclusive.” O’Brian v Michigan Unemployment Compensation Comm, 309 Mich 18, 27; 14 NW2d 560 (1944).

       Plaintiff’s eye was replaced by a prosthesis on November 13, 1972. He contends that it was on that date that he lost his eye. Although literally correct, his argument overlooks the fact that the compensation is for loss of vision.

       MCL 418.361(1X1); MSA 17.237(361X1)0).