Antioch Co. Litigation Trust v. Lee Morgan , 644 F. App'x 579 ( 2016 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 16a0170n.06
No. 14-3790
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
Mar 24, 2016
ANTIOCH COMPANY LITIGATION ) DEBORAH S. HUNT, Clerk
TRUST, W. Timothy Miller, Trustee, )
)
Plaintiff-Appellant, ) On Appeal from the United States
) District Court for the Southern
v. ) District of Ohio
)
LEE MORGAN; ASHA MORGAN MORAN; )
LEE MORGAN GDOT TRUST #1; )
LEE MORGAN GDOT TRUST #2; )
LEE MORGAN GDOT TRUST #3; )
LEE MORGAN POUROVER TRUST #1; )
LEE MORGAN POUROVER TRUST #2; )
)
Defendants-Appellees, )
and )
)
CHANDRA ATTIKEN, et al., )
)
Defendants. )
_________________________________/
Before: GUY, MOORE, and KETHLEDGE, Circuit Judges.
RALPH B. GUY, JR., Circuit Judge. This court reserved decision with respect to
a portion of this appeal and certified a related question of state law to the Supreme Court of
Ohio. The Supreme Court of Ohio has declined to answer that question, and we now review the
district court’s decision granting defendants’ motions for partial summary judgment with respect
to the claim for breach of fiduciary duty in connection with the tender offer transaction that
closed December 16, 2003 (“ESOP transaction”) (Count 1). The district court found that the
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claim was barred by the statute of limitations provided by Ohio Rev. Code § 2305.09(D), and
refused to extend or toll the limitations period on the grounds of adverse domination, equitable
tolling, or equitable estoppel. For the reasons that follow, we affirm.
I.
The Antioch Company Litigation Trust, through its Trustee W. Timothy Miller, brought
this adversary proceeding asserting various claims that were transferred to it through the
bankruptcy court’s order confirming Antioch’s plan of reorganization. At this juncture,
plaintiff’s only unresolved claim is that defendants Lee Morgan (“Morgan”) and Asha Morgan
Moran (“Moran”) breached the fiduciary duties they owed to Antioch, as directors and officers
of the corporation, by approving the ESOP Transaction despite their conflicts of interest and
when it was not in the best interest of Antioch. Plaintiff maintained that, having failed to obtain
an independent evaluation of the prudence or fairness to the corporation, the defendants
approved an overpriced, highly leveraged transaction that benefitted themselves as non-ESOP
shareholders and left the corporation with too little cash and too much debt. Further, it is alleged
that defendants misrepresented the facts concerning the transaction—including, by implying
fairness to the corporation and failing to disclose the extent of the risks to the corporation—and
concealed the extent of the financial distress experienced by the corporation in the wake of the
transaction.
The tender offer transaction resulted in the leveraged buy-out of all of the non-ESOP
shareholders and conversion to 100% ESOP ownership (through the ESOP’s agreement not to
tender its shares). Among the terms was Antioch’s agreement to guarantee a minimum share
price for all ESOP participants who left or retired over the following three years. Antioch
financed the transaction by taking bank loans, issuing unsecured subordinated notes, and
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spending down the cash on hand. Over the next several years, Antioch’s sales declined, its
workforce shrank, and its stock repurchase obligations required further borrowing and the
issuance of additional subordinated notes. Throughout that period, Morgan, Moran, and other
conflicted directors continued to serve on the Board. Deterioration in the company’s financial
condition finally led the Board to market the company for sale or recapitalization during 2007
and 2008. But, when no buyer or lender was secured, Antioch was forced to file a prepackaged
Chapter 11 bankruptcy petition on November 13, 2008. After the plan of reorganization was
confirmed on January 27, 2009, plaintiff commenced this action as an adversary proceeding on
December 23, 2009.
II.
The claim that Morgan and Moran breached their fiduciary duties to Antioch in
connection with the ESOP Transaction is governed by the four-year statute of limitations
provided by Ohio Rev. Code § 2305.09(D). It was undisputed in the district court that this claim
accrued, at the latest, when the ESOP Transaction closed on December 16, 2003, which was
more than four years before either the bankruptcy filing or the commencement of this action.
Jim Brown Chevrolet, Inc. v. S.R. Snodgrass, A.C., 752 N.E.2d 335, 338 (Ohio Ct. App. 2001)
(holding that a claim for breach of fiduciary duty accrues when the claimant’s interest is
impaired); see also Caghan v. Caghan, No. 2014CA0094, 2015 WL 2194199, at *6 (Ohio Ct.
App. May 11, 2015).
Disavowing reliance on the statute’s limited discovery rule in opposing summary
judgment, plaintiff argued instead that the district court should exercise its equitable powers to
toll or extend the limitations period under theories of adverse domination, equitable tolling, or
equitable estoppel. The district court rejected plaintiff’s arguments and granted summary
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judgment to defendants. The Antioch Company Litigation Trust v. Morgan, et al., No. 3:10-cv-
156, 2013 WL 1338834 (S.D. Ohio Apr. 1, 2013). The district court’s determinations of state
law are reviewed de novo. Salve Regina Coll. v. Russell, 499 U.S. 225, 231 (1991).
A. Adverse Domination
Plaintiff argued that Ohio would apply the doctrine of adverse domination to toll or
extend the limitations period applicable to Antioch’s claims against its directors or officers for
breach of fiduciary duty. Because the Supreme Court of Ohio has not addressed the doctrine of
adverse domination in any context and declined to answer the question certified to it in this case,
the task before us is to “predict how the [state’s highest] court would rule by looking to all the
available data.” Allstate Ins. Co. v. Thrifty Rent-A-Car Sys., Inc., 249 F.3d 450, 454 (6th Cir.
2001).
The Ohio Court of Appeals has twice rejected adverse domination as generally lacking
support in Ohio’s statutes and judicial decisions. See Chinese Merchants Assoc. v. Chin,
823 N.E.2d 900, 903 (Ohio Ct. App. 2004); Squire v. Guardian Trust Co., 72 N.E.2d 137, 146-
47 (Ohio Ct. App. 1947). Although neither of those cases involved Ohio Rev. Code
§ 2305.09(D), both decisions are relevant to our inquiry and should not be disregarded unless we
can conclude that the state’s highest court would decide otherwise. Allstate, 249 F.3d at 454.
Plaintiff argued that the Ohio Supreme Court would recognize adverse domination because it
takes into account the reality that “defendants’ control of the corporation will make it impossible
for the corporate plaintiff to independently acquire the knowledge and resources necessary to
bring suit.” Hecht v. Resolution Trust Corp., 635 A.2d 394, 405 (Md. 1994).
Notably, other courts considering the question of adverse domination have focused on
whether state law would apply a discovery rule to the relevant claim for purposes of the statute
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of limitations. See, e.g., Wilson v. Paine, 288 S.W.3d 284, 287-88 (Ky. 2009); FDIC v. Smith,
980 P.2d 141, 147 (Or. 1999); Resolution Trust Corp. v. Scaletty, 891 P.2d 1110, 1115-16 (Kan.
1995). As one court explained, “adverse domination shares the same theoretical underpinnings
as the discovery rule.” Wilson, 288 S.W.3d at 287; see also Cedar Rapids Lodge & Suites, LLC
v. JFS Dev., Inc., 789 F.3d 821, 824-25 (8th Cir. 2015). But, as several of our sister circuits have
also concluded, adverse domination may be inconsistent with a particular state’s tolling doctrines
and policies regarding the strict construction of its statutes of limitation. See Wilson, 288 S.W.3d
at 288 n.2 (citing cases interpreting Ark., Ga., and Va. law); Beck v. Lazard Freres & Co.,
175 F.3d 913, 914 (11th Cir. 1999) (interpreting Fla. law).
Here, the starting point must be § 2305.09’s limited discovery rule, which provides that:
“If the action is for trespassing under ground or injury to mines, or for the wrongful taking of
personal property, the causes thereof shall not accrue until the wrongdoer is discovered; nor, if it
is for fraud, until the fraud is discovered.” Thus, claims “for fraud and breach of fiduciary duty
based on fraud” are governed by § 2305.09(D)’s four-year statute of limitations “unless the claim
is not discovered despite reasonable diligence.” Cundall v. U.S. Bank, 909 N.E.2d 1244, 1249
(Ohio 2009). However, the Ohio Supreme Court has declined to expand application of the
discovery rule, reasoning that the legislature’s “express inclusion of a discovery rule for certain
torts arising under [§] 2305.09, including fraud and conversion, implies the exclusion of other
torts arising under the statute[.]” Investors REIT One v. Jacobs, 546 N.E.2d 206, 211 (Ohio
1989); see also Flagstar Bank, F.S.B. v. Airline Union’s Mtge. Co., 947 N.E.2d 672, 676 (Ohio
2011). Consistent with this reasoning, the Ohio Court of Appeals has found that the discovery
rule does not toll the statute of limitations for claims for breach of fiduciary duty under Ohio law.
See Caghan, 2015 WL 2194199, at *6 (citing cases).
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Accordingly, the district court did not err in concluding that the Ohio Supreme Court
would not recognize adverse domination as a basis to toll or extend the statute of limitations
applicable to a corporation’s claim for breach of fiduciary duty by its directors or officers under
§ 2305.09(D).
B. Equitable Tolling or Equitable Estoppel
Plaintiff also argued that the limitations period should be tolled under principles of
equitable tolling or equitable estoppel. Under Ohio law, equitable tolling is to be applied
sparingly where a litigant has “diligently pursued his rights, but some extraordinary circumstance
stood in his way and prevented timely action.” Coleman v. Columbus State Comm. Coll.,
__N.E.3d__, 2015 WL 7081159 at *5 (Ohio Ct. App. 2015) (quoting In re Regency Village
Certificate of Need Application, No. 11AP-41, 2011 WL 4541358, at *9 (Ohio Ct. App. Sept. 30,
2011)). Despite plaintiff’s attempt to distinguish this theory from adverse domination, the
asserted basis for equitable tolling was that the defendants so controlled and dominated the
Board of Directors that no one was in a position to bring this claim before the limitations period
expired. We agree with the district court that there is not support in Ohio law for the application
of equitable tolling to these circumstances. Nor did the district court err by refusing to exercise
its inherent equitable power to toll the limitations period in the absence of authority to do so
under Ohio law. See Guaranty Trust Co. v. York, 326 U.S. 99, 105 (1945) (explaining that the
federal courts do not have “the power to deny substantive rights created by state law or to create
substantive rights denied by State law”).
Lastly, a claim for equitable estoppel requires proof “(1) that the defendant made a
factual misrepresentation; (2) that it is misleading; (3) induces actual reliance which is
reasonable and in good faith; and (4) which causes detriment to the relying party.” Doe v. Blue
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Cross/Blue Shield of Ohio, 607 N.E.2d 492, 498 (Ohio Ct. App. 1992). The purpose of equitable
estoppel is “to prevent actual or constructive fraud and to promote the ends of justice.” Doe v.
Archdiocese of Cincinnati, 880 N.E.2d 892, 895 (Ohio 2008). However, in the context of a
statute-of-limitations defense, a plaintiff must show reasonable reliance on a misrepresentation
that “was calculated to induce a plaintiff to forgo the right to sue.” Hoeppner v. Jess Howard
Elec. Co., 780 N.E.2d 290, 297 (Ohio Ct. App. 2002) (citation omitted).
Plaintiff’s claim for equitable estoppel in this case rested on allegations that defendants
misrepresented the benefits and risks of the transaction and concealed the extent of the financial
distress that followed the transaction. Although these misrepresentations related to the merits of
plaintiff’s claims, they do not involve “‘an affirmative statement that the statutory period to bring
an action was larger than it actually was’ or ‘promises to make a better settlement of the claim if
plaintiff did not bring the threatened suit,’ or ‘similar representations or conduct’ on defendant’s
part.” Helman v. EPL Prolong, Inc., 743 N.E.2d 484, 495 (Ohio Ct. App. 2000) (quoting Cerney
v. Norfolk & W. Ry. Co., 662 N.E.2d 827, 831 (Ohio Ct. App. 1995)). As such, plaintiff failed to
make the required showing to toll the limitations period on the grounds of equitable estoppel.
Accordingly, the district court’s order granting partial summary judgment to defendants
with respect to the claim for breach of fiduciary duty in connection with the tender offer
transaction is AFFIRMED.
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KAREN NELSON MOORE, Circuit Judge, dissenting. This case requires us to make
“an Erie guess.” See, e.g., Conlin v. Mortgage Elec. Registration Sys., Inc., 714 F.3d 355, 358-
59 (6th Cir. 2013). Because the Ohio Supreme Court declined to answer our certified question—
and because that court has never opined on whether the theory of adverse domination may be
applied to toll Ohio Revised Code § 2305.09’s statute of limitations when a plaintiff alleges a
breach of fiduciary duty—“we must predict how the [Ohio Supreme Court] would rule” on this
issue “by looking to all available data, including decisions of [Ohio’s] appellate courts.” In re
Darvocet, Darvon, & Propoxyphene Prods. Liab. Litig., 756 F.3d 917, 937 (6th Cir. 2014). The
majority predicts that the Ohio Supreme Court would not toll § 2305.09’s statute of limitations
under an adverse-domination theory. I write separately to emphasize two points. First, the
majority’s “Erie guess” is founded on a dearth of relevant case law. Second, the question of
whether Ohio law in fact recognizes adverse domination does not admit of an easy answer. For
both reasons, I respectfully dissent.
The majority writes that “[t]he Ohio Court of Appeals has twice rejected adverse
domination as generally lacking support in Ohio’s statutes and judicial decisions.” Majority Op.
at 4. To be clear: Ohio’s Eighth District Court of Appeals—one of twelve intermediate appellate
courts in Ohio—has rejected adverse domination in two opinions written roughly sixty years
apart. See Chinese Merchants Ass’n v. Chin, 823 N.E.2d 900, 903 (Ohio Ct. App. 2004); Squire
v. Guardian Trust Co., 72 N.E.2d 137, 146-47 (Ohio Ct. App. 1947). Chin provides: “th[e]
doctrine [of adverse domination] has no support in Ohio either by statute or judicial decision.”
Chin, 823 N.E.2d at 903. And Chin cites exactly one case in support of its proposition that
“Ohio has not adopted the doctrine of adverse domination”: Squire. Id. That means that
Squire—a sixty-nine-year-old opinion from one of Ohio’s dozen intermediate appellate courts—
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is the only Ohio opinion rejecting adverse domination (or, as Squire calls the doctrine,
“continuing dominion”) based on its own organic analysis.
True, the Ohio Supreme Court has held that § 2305.09’s “express inclusion of a discovery
rule for certain torts . . . , including fraud and conversion, implies the exclusion of other torts
arising under the statute, including negligence.” Inv’rs REIT One v. Jacobs, 546 N.E.2d 206,
211 (Ohio 1989). By analogy, one could conclude that the Ohio Supreme Court might decline to
toll § 2305.09’s statute of limitations under the closely related doctrine of adverse domination.
One could argue that judicial discretion and comity might counsel in favor of this approach. See
In re Darvocet, 756 F.3d at 937 (“[F]ederal courts must be cautious when making
pronouncements about state law and ‘[w]hen given a choice between an interpretation of [state]
law which reasonably restricts liability, and one which greatly expands liability, we should
choose the narrower and more reasonable path.’” (quoting Combs v. Int’l Ins. Co., 354 F.3d 568,
577 (6th Cir. 2004))).
The discovery rule, however, is not the only doctrine that shares “theoretical
underpinnings” with adverse domination. Majority Op. at 5 (quoting Wilson v. Paine, 288
S.W.3d 284, 287 (Ky. 2009)). Indeed, the facts of this case suggest a better analog for our
analysis: Ohio law on closely held corporations. See R. 6 (4/28/11 Recommendations for the
United States District Court at 90) (Page ID #355). The Ohio Supreme Court has recognized that
“[c]lose corporations” like Antioch “bear a striking resemblance to a partnership.” Crosby v.
Beam, 548 N.E.2d 217, 220 (Ohio 1989). In turn, a close corporation’s majority shareholders
(like defendants here) owe their minority shareholders “a heightened fiduciary duty”—to wit, “a
duty . . . of the utmost good faith and loyalty.” Id. (internal quotation marks and citations
omitted). “Majority or controlling shareholders breach such fiduciary duty to minority
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shareholders when control of the close corporation is utilized to prevent the minority from
having an equal opportunity in the corporation.” Id. at 221. Those types of breaches are the very
ill that adverse domination addresses: it is “an equitable tolling doctrine that suspends the
running of limitations while [a] corporation continues under the domination of [] wrongdoers.”
F.D.I.C. v. Henderson, 61 F.3d 421, 426 (5th Cir. 1995). In this way, adverse domination
complements and effectuates the heightened fiduciary protections that Ohio close corporations
are supposed to embody. See R. 6 (4/28/11 Recommendations for the United States District
Court at 93–94) (Page ID #358–59). That is a persuasive reason to predict that the Ohio
Supreme Court would endorse the adverse-domination theory.
The facts of this case put the practical consequences of the majority’s decision in stark
relief. For decades, Antioch thrived. It declined into bankruptcy just a few years after
defendants engineered the ESOP transaction, which enriched the Morgan family at the expense
of their employees and the company they had built. In the interim, it seems, defendants took
pains to conceal their efforts at self-enrichment and to stymie attempts to resuscitate Antioch.
Put simply: there is good reason to believe that Lee Morgan and Asha Morgan Moran adversely
dominated Antioch in the years following the ESOP transaction.
The majority’s “Erie guess” insulates both Lee and Asha from liability. I cannot believe
that is the result the Ohio Supreme Court would reach. Faced with what appears to be a clear
example of corporate wrongdoing, and with virtually no meaningful guidance from Ohio’s
highest court, I respectfully dissent.