Rhodes v. Paragon Molding, Ltd. , 2011 Ohio 4295 ( 2011 )

[Cite as Rhodes v. Paragon Molding, Ltd.,, 2011-Ohio-4295.]
IN THE COURT OF APPEALS FOR MONTGOMERY COUNTY, OHIO
ROY RHODES, et al. :
Plaintiffs-Appellants : C.A. CASE NO. 24491
v. : T.C. NO. 06CV1427
PARAGON MOLDING, LTD., et al. : (Civil appeal from
Common Pleas Court)
Defendants-Appellees :
:
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OPINION
Rendered on the 26th day of August , 2011.
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RONALD J. KOZAR, Atty. Reg. No. 0041903, Kettering Tower, Suite 2830, 40 N. Main
Street, Dayton, Ohio 45423
Attorney for Plaintiffs-Appellants
ROBERT J. SURDYK, Atty. Reg. No. 0006205 and KEVIN A. LANTZ, Atty. Reg. No.
0063822, 1 Prestige Place, Suite 700, Miamisburg, Ohio 45342
Attorneys for Defendants-Appellees
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DONOVAN, J.
{¶ 1} Plaintiff-appellant Roy Rhodes appeals from a decision of the Montgomery
County Court of Common, General Division, sustaining in part and overruling in part a
motion for summary judgment filed by defendant-appellees Paragon Molding, Ltd.
Plaintiff-appellant filed his timely notice of appeal on February 16, 2011.
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I
{¶ 2} Plaintiffs Roy and Jimmie Rhodes were the member-owners of a limited
liability company called Huntin’ Buddy Industries (hereinafter “Huntin’ Buddy”). Huntin’
Buddy manufactured and sold turkey and duck calls designed by Roy Rhodes. When
Jimmie Rhodes decided to retire from the hunting call business, the Rhodeses put Huntin’
Buddy’s assets up for sale. In September 2004, Huntin’ Buddy was purchased by Paragon.
Paragon is a limited liability company owned by Jim and Vicki Miller, with its principal
place of business in West Milton, Ohio.
{¶ 3} Paragon and the Rhodeses entered into two separate agreements in relation to
Huntin’ Buddy’s assets and Roy Rhodes’ employment with Paragon. The assets were
purchased pursuant to the “Contract for Purchase of Corporate Assets” (hereinafter
“purchase contract”). The purchase price for the assets was $250,000. According to
paragraph 6 of the purchase contract, Paragon was to pay $200,000 at the time of closing,
with $50,000 due at a later time. Roy Rhodes was to maintain a 35% value in the “Roy
Rhodes Championship Call division” (hereinafter “RRCC”) of the Paragon company. If
RRCC was sold, Roy Rhodes would have been entitled to 35% of the net purchase price of
that division. If Paragon, the parent company, was sold, Roy Rhodes would only have been
entitled to 35% of the net value of RRCC. In addition, Roy Rhodes would have been
entitled to 35% of any distributed profits after taxes. Furthermore, paragraph 6 of the
purchase contract states that RRCC would be a division separate from Paragon.
{¶ 4} Paragon and Roy Rhodes also signed an “Employment and Relationship
Agreement” (hereinafter “Employment Agreement”) whereby Rhodes became employed by
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Paragon as the VP of Marketing and R & D. Paragon, however, was still managed solely by
the Millers. The Employment Agreement, signed on September 25, 2004, was to run for
five years, beginning October 1, 2004. Rhodes was to be paid an annual salary of $44,000,
and was to receive full benefits and two weeks of paid vacation each year. Rhodes was also
guaranteed 5% sales commission for bringing in any new molding business to Paragon. In
addition, if Paragon secured any endorsements for Rhodes, Paragon was to receive 20%
commission for those endorsements.
{¶ 5} On December 9, 2005, Paragon terminated Rhodes. In February 2006, Rhodes
filed several claims against Paragon pursuant to his termination: breach of the employment
contract, unpaid salary, breach of fiduciary duty, wrongful discharge, conversion, and claims
relative to a promissory note. On November 13, 2008, Paragon filed a motion for summary
judgment on Rhodes’ retaliation claims, the breach of fiduciary duty claim, and the claims
relative to the promissory note. On December 15, 2008 Rhodes filed his response to that
motion, and Paragon filed a reply on January 5, 2009. On February 6, 2009 the trial court
granted the motion for summary judgment in favor of Paragon on the claims for retaliatory
discharge and the breach of fiduciary duty, as well as, all the claims relative to Jim and Vicki
Miller as individual defendants. However, Paragon’s claims as to the promissory note were
overruled.
{¶ 6} All other claims that were not decided on summary judgment proceeded to a
jury trial, which resulted in a verdict for Rhodes on February 13, 2009, with a judgment
awarded in the amount of $258,125.00 Following the trial, Rhodes filed a notice of appeal.
The only issue before this court on appeal is the trial court’s finding in the summary
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judgment decision that the defendants owed no fiduciary duty to Rhodes.
II
{¶ 7} Rhodes’ sole assignment of error is as follows:
{¶ 8} “THE TRIAL COURT’S ENTRY OF SUMMARY JUDGMENT IN FAVOR
OF DEFENDANTS JAMES AND VICKI MILLER ON PLAINTIFF ROY RHODES’
CLAIM FOR BREACH OF FIDUCIARY DUTY WAS ERROR.”
{¶ 9} In his sole assignment, Rhodes contends that the trial court erred when it
sustained Paragon’s motion for summary judgment regarding his claim that Jim and Vicki
Miller breached their fiduciary duties to him since he was a thirty-five percent co-owner of
RRCC. Specifically, Rhodes asserts that a genuine issue of material fact exists as to
whether a partnership was formed between he and the Millers when Paragon purchased
Rhodes’ hunting business and gave him an ownership interest in the newly formed company
such that a fiduciary relationship existed which required Paragon to act in the best interests
of Rhodes regarding the management of RRCC.
{¶ 10} In its merit brief, Paragon argues that no partnership was ever formed with
Rhodes. While it is undisputed that Rhodes was given a thirty-five percent ownership
interest, Paragon argues that RRCC was merely a division of the larger company, and that
Rhodes was only an employee of RRCC to which no fiduciary duty was owed. Paragon
also asserts that Jim and Vicki Miller cannot be held personally liable to Rhodes in their
capacity as principals and managers at Paragon.
{¶ 11} An appellate court reviews an award of summary judgment de novo. Grafton
v. Ohio Edison Co. (1996), 77 Ohio St.3d 102, 105. We apply the same standard as the trial
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court, viewing the facts in the case in a light most favorable to the non-moving party and
resolving any doubt in favor of the non-moving party. Viock v. Stowe-Woodward Co. (1983),
13 Ohio App.3d 7, 12.
{¶ 12} Pursuant to Civil Rule 56(C), summary judgment is proper if:
{¶ 13} “(1) No genuine issue as to any material fact remains to be litigated; (2) the
moving party is entitled to judgment as a matter of law; and (3) it appears from the evidence
that reasonable minds can come to but one conclusion, and viewing such evidence most
strongly in favor of the party against whom the motion for summary judgment is made, that
conclusion is adverse to that party.” Temple v. Wean United, Inc. (1977), 50 Ohio St.2d
317, 327. To prevail on a motion for summary judgment, the party moving for summary
judgment must be able to point to evidentiary materials that show that there is no genuine
issue as to any material fact, and that the moving party is entitled to judgment as a matter of
law. Dresher v. Burt (1996), 75 Ohio St.3d 280, 293. The non-moving party must then
present evidence that some issue of material fact remains for the trial court to resolve. Id.{¶ 14} Because “every business relationship is unique, no single fact or circumstance
can operate as a conclusive test for the existence of a partnership.” In re Estate of Nuss
(1994), 97 Ohio App.3d 191, 195. Partnership contracts also need not be in writing, but
may “ ‘be proven by showing acts and conduct of the parties from which the fact may be
inferred that the parties have agreed to become partners.’ ” Brewster v. Bigham, Lake App.
No. 2004-L-113, 2005 -Ohio- 6071, at ¶ 16 (citation omitted).
{¶ 15} A partnership exists where there is “(1) an express or implied contract
between the parties; (2) the sharing of profits and losses; (3) mutuality of agency; (4)
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mutuality of control; (5) co-ownership of the business and of the property used for
partnership purposes or acquired with partnership funds.” Grendell v. Ohio EPA (2001), 146
Ohio App.3d 1, 13. In the absence of a written partnership agreement, an implied
partnership can be found from the totality of attendant facts and circumstances. Madden
Investment Co. v. Stephenson’s Apparel, 162 Ohio App.3d 51, 53, 2005-Ohio-3336.
{¶ 16} A fiduciary duty is generally defined as “ ‘ [a] duty of utmost good faith, trust,
confidence, and candor owed by a fiduciary * * * to the beneficiary * * *; a duty to act with
the highest degree of honesty and loyalty toward another person and in the best interests of
the other person.’ ” In re Trust of Bernard, Summit App. No. 24025, 2008-Ohio-4338, at ¶
20, quoting from Black's Law Dictionary (8 Ed.Rev.2004) 545. For example, “[p]artners
in Ohio owe a fiduciary duty to one another.” Dunn v. Zimmerman, 69 Ohio St.3d 304,
306, 1994-Ohio-351. We note that the law governing partnerships closely resembles that of
close corporations. Schafer v. RMS Realty, 138 Ohio App.3d 244, 273; citing Crosby v.
Beam (1989), 47 Ohio St.3d 105, 108. Controlling shareholders in close corporations owe
fiduciary duties to minority shareholders.
{¶ 17} In Busch v. Premier Integrated Med. Assoc., Ltd., Montgomery App. No.
19364, 2003-Ohio-4709, we stated that “like partners, controlling shareholders of a close
corporation owe a fiduciary duty to minority shareholders, a duty which is violated when the
majority takes action it is authorized to take which nevertheless operates to the disadvantage
of the minority and was not undertaken in good faith and for a legitimate business purpose.”
Id. at ¶ 79, citing Schafer v. RMS Realty (2000), 138 Ohio App.3d 144.
{¶ 18} Good faith is “defined generally as ‘honesty in fact in the conduct or
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transaction concerned.’ ” Casserlie v. Shell Oil Co., 121 Ohio St.3d 55, 57, 2009-Ohio-3, at
¶ 10, quoting from R.C. 1301.01(S). The Supreme Court of Ohio has also defined the term
as follows:
{¶ 19} “ ‘A lack of good faith is the equivalent of bad faith, and bad faith, although
not susceptible of concrete definition, embraces more than bad judgment or negligence. It
imports a dishonest purpose, moral obliquity, conscious wrongdoing, breach of a known
duty through some ulterior motive or ill will partaking of the nature of fraud. It also
embraces actual intent to mislead or deceive another.’ ” Hoskins v. Aetna Life Ins. Co., 6
Ohio St.3d 272, 276 (citation omitted).
{¶ 20} It is undisputed that the parties did not enter into an express partnership
agreement regarding the ownership and management of RRCC. The purchase contract
containing the terms of the sale of RRCC, however, states in pertinent part:
{¶ 21} “6. Purchase Price: The purchase price is $250,000. ***
{¶ 22} “c. Roy Rhodes will maintain 35% of the value of the Roy Rhodes
Championship Call division only of Paragon Molding Limited.
{¶ 23} “d. Should [RRCC] be sold, Roy Rhodes will be entitled to 35% of the net
purchase price related to the [RRCC] division.
{¶ 24} “e. Should Paragon Molding Limited be sold as an entirety including [RRCC],
Roy Rhodes will be entitled to 35% of the net value of the [RRCC] division only.
{¶ 25} “f. Should any profits be distributed from the [RRCC] division of Paragon
Molding Limited, Roy Rhodes will be entitled to 35% of said profits after taxes.”
{¶ 26} Based on its interpretation of “Paragraph 6" of the purchase contract, the trial
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court held that no fiduciary duty was owed to Rhodes by Paragon because “there [was] no
ownership in a classic stock or partnership sense.” The trial court further held that 35%
interest contemplated by the purchase contract was merely “designed to incentivize [sic]
[Rhodes] to enhance the value of the acquired assets, this in connection with his continued
employment, rather than an ownership interest in the company.”
{¶ 27} Construction of written contracts is “a matter of law that we review de novo.
*** Our primary role is to ascertain and give effect to the intent of the parties. * * * We
presume that the intent of the parties to a contract is within the language used in the written
instrument. * * * If we are able to determine the intent of the parties from the plain language
of the agreement, then there is no need to interpret the contract.” Saunders v. Mortensen,
101 Ohio St.3d 86, 88, 2004-Ohio-24, at ¶ 9 (citations omitted). Accord, Courtyards of
Crystal Lake Homeowners Assn. v. Bradesca, Cuyahoga App. No. 90966, 2008-Ohio-6157,
at ¶ 24.
{¶ 28} Upon review, we conclude that the trial court’s interpretation of the purchase
contract ignores the plain language in the document which affirmatively states that Rhodes
“will maintain 35% of the value” of RRCC. “Maintain” is variously defined as “bear the
expense of; carry on; commence; continue; furnish means for subsistence or existence of;
hold; keep in an existing state or condition; keep in existence or continuance ***.” Black's
Law Dictionary (5 Ed.1979) 859. In the context of the purchase contract, the only plausible
interpretation of “maintain” is that the parties intended that Rhodes retain ownership of
thirty-five percent of RRCC after Paragon purchased the company. This interpretation is
supported by the clause in the purchase contract which states that Rhodes is entitled to
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thirty-five percent of any profits distributed by RRCC. While the purchase contract does
not affirmatively state that Rhodes owns thirty-five percent of RRCC, the document
essentially makes Rhodes a minority shareholder in RRCC, with the majority shareholder
being Paragon. While we agree with the trial court that the thirty-five percent interest was
designed to entice Rhodes to sell RRCC to Paragon, the practical effect of the offer was to
provide Rhodes with a minority ownership interest in RRCC.
{¶ 29} This interpretation is further supported by the following deposition testimony
provided by one of the owners of Paragon, Jim Miller:
{¶ 30} “Plaintiff’s Counsel: *** And isn’t it also true that you also gave [Rhodes] a
thirty-five percent interest in the [RRCC] division?
{¶ 31} “Jim Miller: That is true also.” (Trans. p. 189, lines 13-17)
{¶ 32} ***
{¶ 33} “Q: Well, we talked before about how a thirty-five percent interest was
reserved to [Rhodes], right?
{¶ 34} “A: Uh-huh.
{¶ 35} “Q: Is that a yes?
{¶ 36} “A: Yes.
{¶ 37} “Q: And so someone other than Paragon Molding owned thirty-five percent of
Roy Rhodes Championship Calls business?
{¶ 38} “Defense Counsel: Objection. Calls for a legal conclusion. But go ahead.
{¶ 39} “Jim Miller: Yes.”
{¶ 40} As the excerpt clearly establishes, even the owner of Paragon intended for
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Rhodes to retain a thirty-five percent ownership interest in RRCC. Accordingly, this
evidence supports a conclusion that an implied partnership existed between Rhodes and
Paragon such that Rhodes was entitled to ownership of thirty-five percent of the company
itself, thirty-five percent of any profit distribution instituted by the company, and thirty-five
percent of the net profits generated during the sale of the company. It, therefore, follows
that a genuine issue exists regarding whether Paragon owed a fiduciary duty to Rhodes, who
was, ostensibly, a minority owner of RRCC.
{¶ 41} The trial court also held that, assuming a fiduciary relationship, Rhodes failed
to establish that breach of that relationship had occurred. Upon review, ample evidence
exists in the record which creates a genuine issue regarding whether Paragon engaged in
conduct which breached its fiduciary duty to Rhodes. Specifically, Rhodes points out that
Jim Miller admitted in his deposition that he essentially stripped Rhodes of his thirty-five
percent ownership interest in RRCC when he terminated his employment. Additionally,
Rhodes argues that he was excluded by Paragon from any involvement in or information
regarding his thirty-five percent interest in the company. These allegations are sufficient to
create a genuine issue with respect to whether Paragon breached its fiduciary duty to Rhodes.
Thus, the trial court erred when it sustained Paragon’s motion for summary judgment with
respect to Rhodes’ claim for breach of fiduciary duty.
{¶ 42} Lastly, the trial court held that the individual defendants, Jim and Vicki
Miller, could not be found personally liable for the actions of Paragon, the company which
they managed and directed. A corporation is a separate legal entity from its shareholders
even where there is only one shareholder in the corporation. Zimmerman v. Eagle Mtge.
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Corp. (May 3, 1996), 110 Ohio App.3d 762, 771. Therefore, shareholders, officers, and
directors will generally not be held personally liable for the acts of a corporation. Charvat v.
Farmers Ins. Columbus, Inc., 178 Ohio App.3d 118, 133, 2008-Ohio-4353. In Belvedere
Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc (1993), 67 Ohio St.3d 274, the
Ohio Supreme Court recognized a limited exception to that rule, holding that the corporate
veil could be pierced to allow creditors to personally reach shareholders who had used the
corporation for criminal or fraudulent purposes. Specifically, the Belvedere court held that
the corporate form may be disregarded and individual shareholders held liable for wrongs
committed by the corporation when (1) control over the corporation by those to be held
liable was so complete that the corporation had no separate mind, will, or existence of its
own; (2) control over the corporation by those to be held liable was exercised in such a
manner as to commit fraud or an illegal act against the person seeking to disregard the
corporate entity; and (3) injury or unjust loss resulted to the plaintiff from such control and
wrong.
{¶ 43} Ohio courts have recognized that there is no precise test to determine whether
the elements required to pierce the corporate veil have been satisfied, and each case should
be “regarded as ‘sui generis’ and decidable on its own facts.” RCO Internatl. Corp. v.
Clevenger, 180 Ohio App.3d 211, 214, 2008-Ohio-6823; quoting Bucyrus-Erie Co. v. Gen.
Prods. Corp. (C.A.6, 1981), 643 F.2d 413, 418. Because “[o]ne of the purposes of
incorporation is to limit the liability of the individual shareholders,” the party seeking to
have the corporate form disregarded bears the burden of proof. Univ. Circle Research Ctr.
Corp. v. Galbreath Co. (1995), 106 Ohio App.3d 835, 840, citing Section 3, Article XIII of
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the Ohio Constitution.
{¶ 44} Most recently, however, in Dombroski v. WellPoint, Inc., 119 Ohio St.3d 506,
2008-Ohio-4827, the Ohio Supreme Court held that control of a corporation must have been
exercised to commit fraud or an otherwise illegal act, and not merely an unjust act or act
committed in bad faith, in order to permit piercing of the corporate veil. In the instant case,
Rhodes does not argue nor has he presented any evidence which establishes that Jim Miller
or Vicki Miller committed fraud or an illegal act. Rhodes simply asserts that the Millers, as
the owners and principal officers of Paragon, “stripped” him of any value or benefit
associated with his thirty-five percent interest in RRCC. Thus, Rhodes has failed to meet
his burden of proof in order to disregard the corporate form and pursue the Millers in their
individual capacities. Accordingly, the trial court did not err when it held that Rhodes was
precluded from taking such an action.
{¶ 45} Rhodes’ sole assignment of error is sustained in part and overruled in part.
III
{¶ 46} Rhodes’ sole assignment of error having been sustained in part and overruled
in part, the judgment of the trial court is reversed in part, affirmed in part, and the matter is
remanded to the trial court for proceedings consistent with this opinion.
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FAIN, J. and VUKOVICH, J., concur.
(Hon. Joseph J. Vukovich, Seventh District Court of Appeals, sitting by assignment of the
Chief Justice of the Supreme Court of Ohio).
Copies mailed to:
Ronald J. Kozar
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Robert J. Surdyk
Kevin A. Lantz
Hon. Gregory F. Singer