in the supreme court of ohioaug 18, 2009 · on january 1, 1999, davis 'trucking company and...

IN THE SUPREME COURT OF OHIO

William Stewart d/b/aStewart Coal Company

Plaintiff-Appellee

V.

R.A. Eberts Company, Inc., et al.

Defendants

On Appeal from the Jackson CountyCourt of Appeals, Fourth AppellateDistrict

Court of AppealsCase No. 08CA10

MEMORANDUM IN SUPPORT OF JURISDICTION OF APPELLANTDEFENDANT PHIL BOWMAN

Williain C. Martin (0006408)P. O. Box 926257 E. Main StreetJackson, Ohio 45640(740) 286-8054Fax No. (740) [email protected]

COUNSEL FOR APPELLANT PHIL BOWMAN

Charles F. Shane (0062494)David C. Greer (009090)BIESER, GREER & LANDIS LLP400 National City Center6 N. Main StreetDayton, Ohio 45402(937) 223-3277Fax No. (937) 223-6339

COUNSEL FOR APPELLEE WILLIAM STEWART

TABLE OF CONTENTS

Page

EXPLANATION OF WHY THIS CASE IS A CASE OF Pt7BLIC ORGREAT GENERAL INTEREST .................................................... I

STATEMENT OF THE CASE AND FACTS ....... .............................. 3

ARGUMENT IN SUPPORT OF PROPOSI'I'ION OF LAW ..................... 7

Proposition of Law: Summary judgment is an appropriateremedy in a claim for piercing the corporate veil wherereasonable minds inust conclude that the defendantshareholder did not commit extreme inisconduct in which theshareholder exercised control over the corporation in such amanner as to commit fraud, an illegal act or a similarlyunlawful act . . . . . . . .. . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 7

CONCLUSION .......................................................................

CERTIF'ICATF. OF SERVICE . ..................................................... I1

APPBNDIX

Decision & Judgment F,ntry of the Jackson County Court of Appeals(August 18, 2009)

EXPLANATION OF WHY THIS CASE IS A CASE OF PUBLIC ORGREAT GENERAL INTEREST

This case revisits the vexed issue of piercing the corporate veil. The Court of Appeals

below misunderstood or misapplied the public policy which this Court made plain in Dombroski

v. WellPoint, Inc., 119 Ohio St.3d 506, 1008-Ohio-4827. This Court declared that "piercing the

corporate veil is the rare exception that should only be applied in the case of fraud or certain

other exceptional circumstances." (Ibid., at 512, references omitted) The Appellant Phil

Bowinan had filed a motion for summary judgment in the trial court upon the issue of piercing

the corporate veil. That motion was granted in the trial court, but the Court of Appeals reversed.

Sound public policy requires that in a case like Mr. Bowman's, the small businessman should be

relieved of the prospect of his corporation's liability falling upon hinl as an individual

shareholder. There was simply no evidence of fraud by Mr. Bowman or otller exceptional

circumstance which sliould permit a claim for individual liability to stand.

In Dombroski, this Court trimmed back the previously burgeoning theory of veil piercing,

recognizing that close corporations are by definition conhrolled by an individual or small group of

shareholders. "Were we to allow piercing every tinie a corporation under the complete control of

a shareholder committed an uqjust or inequitable act, virtually every close coiporation could be

pierced when sued, as nearly every lawsuit sets forth a form of unjust or inequitable action..."

Ibid., at 513.

T'he State of Ohio charters small corporations and expects thern to engage in rough-and-

tumble economic activity in the open marketplace. Commercial disputes will inevitably arise,

and there will be winners and losers. In our business community, competitors with limited

1

liability accept that business risk encompasses the assets of the business, but not the assets of the

business owners, absent individual guarantees or exceptional oircumstances.

Moreover, freely contracting businesses are expected to look after themselves. If a seller

of equipment wishes to restrain the buyer's right to resell the equipmeni purchased, it should

bargain for a security niterest. For the buyer to pursue commercial opportunities allowed by

contract hardly constitutes fraud.

In business litigation one has come to expect the aggrieved party to try to pierce the other

party's corporate veil. The stronger the elaim under this Court's precedents, the greater the

leverage the aggrieved party will enjoy to gain its lawsuit objectives.

This Court has declared quite clearly that, absent fraud or other exceptional

circumstances, the stakes in busnless disputes should be liniited to the assets of the corporations

or limited liability companies involved. Hence defending litigants in a proper case should be

able to dispatch a clainz for veil piercing by summary judgment procedure.

This Court is invited to encourage the use of summary judgment procedure to dispose of

unfounded veil-piercing claims early in commercial litigation.

2

STATEMENT OF THE CASE AND FACTS

The Appellant Phil Bowman ("Phil Bowman") during the decade of the 1990's and

previously had attempted to survive as a small operator in the coal-mining business, by owning

shares in several closely held corporations. The flagsliip of this enterprise was Waterloo Coal

Company, Inc. ("Waterloo"), which for many years had employed dozens of heavy equipment

operators, mechanics, and the like to mine coal and limestone. Waterloo ar7•anged its truckintg

requirements with a related company, Davis Trucking Company. During the times relevant to

this case, Phil Bowman also utilized a separate coal-mining company with similar ownership,

namely R.A. Eberts Company, Inc. ("Eberts Corporation"). Eberts Corporation conducted its

own mining operations with its own employees, parallel to Waterloo, but the companies were

obviously related, with common management, marketing, and the like. During this period Phil

Bowman, William R. Parks ("William Parks"), and R.L. Darlington ("Mr: Darlington") each

owned one third of the shares of Waterloo, Eberts Corporation, and Davis Trucking Company.

Waterloo, Eberts Corporation, Mr. Parks, and Mr. Darlington are all parties in the litigation

below, but Phil Bowman takes no position against them in this appeal. The only party adverse to

Phil Bowman in this appeal is the Appellee Williain Stewart ("Mr. Stewart").

On June 30, 1995, Eberts Corporation contracted with Mr. Stewart to buy out his

proprietorship, the Stewart Coal Company. Mr. Stewart sold to Eberts Corporation eertain coal

mining leases, mining permits, real property and several items of heavy equipment. In return

Eberts Corporation paid $475,000.00 in cash, paid off $345,492.56 of Mr. Stewart's trade debts,

assumed $1,242,702.10 of Mr. Stewart's bank debt, and undertook to pay $1,436,805.40 by an

arrangement which looked like a coal royalty. "I'hese financial obligations added up to

$3,500,000.06. The future payments were supposed to comprise $1.00 per ton of coal mined and

3

removed from the premises, with a minimunr payinent of $5,000.00 per month. Significantly, the

purchase contract included no individual guarantees, and did not grant to Mr. Stewart any

security interest in the equipment sold to Eberts Corporation. The contract did not expressly

restrict assignments or resales.

In its normal course of business after the sale transaction, Eberts Corporation in 1996

resold many of the items of equipment wlrich it had purchased fi-om Mr. Stewart. In the coal-

mining business, one tries to sell used equipment that is not needed at the moment, in order to

avoid loeking up cash which may be needed elsewhere; the notion is similar to just-in-time

inventory control. Additionally, this equipment secured Mr. Stewart's bank debt, which Eberts

Corporation had assumed. Liquidating this surplus equipment thus made good business sense to

Eberts Corporation.

A business dispute later arose between Eberts Corporation and Mr. Stewart. During the

negotiations for the contract, Eberts Corporation had relied upon Mr. Stewart's drilling logs

which disclosed a virtually iniiform thickness of twenty-four inches of low-sulfur coal across the

mining lands. That is what made the deal worth 3.5 million dollars. As the mining developed,

however, the coal seani petered out, with poor sulfur quality. As early as October 23, 1997, Phil

Bowman alerted Mr. Stewart that both contracting parties apparently had mistaken the quantity

and quality of the coal purchased, and that future payments under the contract would have to be

modified.

Nevertheless, Eberts Corporation continued to make its monthly payments. Payments in

fact continued until Febi-uary, 2002, in the total ainount of $771,427.56.

In the meantime, changes took place in the cast of characters. In part because of the

weakness of the Stewart leases, Eberts Corporation was failing. On Deceinber 21, 1998, Eberts

4

Coiporation promised to transfer its assets to Waterloo as of January 1, 1999, and Waterloo

promised in writing to assume the liabilities of Eberts Corporation. On January 1, 1999, Davis

'Trucking Company and Waterloo redeemed Phil Bowman's shares of stock. So far as Phil

Bowman was eoncemed at the end of January 1, 1999, therefore, he had no further ownership

interest at all in Waterloo and Davis Truckiug Company, and all the assets and liabilities of

Eberts Cotporation had transferred to Waterloo.

Almost a year after Phil Bowman left the companies by the stock redemption, a new

entity appeared, namely R.A. E,berts, LLC ("Eberts LLC"). The principals in Eberts LLC were

William Parks, Mr. Darlington, and two new participants, Denton Bowman and Scot Parks.

Denton Bowman and Scot Parks are parties in the litigation below, but they are not adverse to

Phil Bowman. Phil Bowman did not participate in Eberts LLC. Eberts LLC is separate, distinct,

and unrelated to Eberts Corporation.

Eberts LLC apparently fornled on or about December 31, 1999. Obviously the

participants in Eberts LLC had intended to file with the Ohio Secretary of State as a limited

liability company, but that did not happen.

More than two years later, payments to Mr. Stewart stopped, and Mr. Stewart filed a

lawsuit on October 13, 2003. After discovery and various motions, Mr. Stewart filed a Third

Ainended Complaint on Marcli 1, 2007, in part claiming that the corporate veil should be pierced

as to the individual defendants. On September 26, 2007, William Parks, Mr. Darlington, Scot

Parks, and Denton Bowinan filed their Motion for Summary Judgment in the trial court. Phil

Bowman filed a similar Motion for Summary Judgment shortly thereafter. On June 11, 2008, the

trial court granted summaiy judgment in favor of the individual defendants, finding there was no

just cause for delay.

5

Mr. Stewart appealed these summaay judgments to the Fourth District Court of Appeals.

On August 18, 2009, the Court of Appeals reversed the trial court's summary judgments and

remanded the case to the trial court. This Memorandum In Support of Jurisdiction followed.

6

ARGUMENTS IN SUPPORT OF PROPOSITION OF LAW

Proposition of Law No. 1: Summary Judgment is anappropriate remedy in a claim for piercing the corporate veilwhere reasonable niinds must conclude that the defendantshareholder did not commit extreme misconduct in which theshareholder exercised control over the corporation in such amanner as to commit fraud, an illegal act, or a similarlyunlawful act.

This Court originally declared the test for piercing the corporate veil as follows:

The corporate form may be disregarded and individual shareholders held liable forwrongs committed by the corporation when (1) control over the corporation bythose to be held liable was so complete that the corporation has no separate mind,will or existence of its own, (2) control over the corporation by those to be heldliable was exercised in such a manner as to commit fraud or an illegal act againstthe person seeking to disregard the corporate entity, and (3) injurry or unjust lossresulted to the plaintiff from such control and wrong.Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos., Inc. (1993), 67Ohio St.3d 274, 617 N.F..2d 1075.

The first and third prongs in the Belvedere syllabus remain unchanged. The second prong was

modified in Dombroski v. WellPoint, Inc., supra, at the syllabus: "To fulfill the seeond prong of

the Belvedere test for piercing the corporate veil, the plaintiff must demonstrate that the

defendant shareholder exercised control over the corpora6on in such a niamier as to commit

fraud, an illegal act, or a similarly unlawful act."

In explaining the expansion of the language in the second Belvedere prong, this Court

comniented that trial courts should apply this limited expansion cautiously "toward the goal of

piercing the corporate veil only in instances of extreme shareholder misconduct." Ibid. , at 5113.

Leaving aside the question when an artificial entity such as a eorporation ever has a mind

or existence, every closely held corporation at least superficially meets the first prong of the

Belvedere test. Of course when one, two, or three people own a corporation, their control is

7

complete. In this case for the period before January 1, 1999, Eberts Corporation, Waterloo, and

Davis Trucking Company did exactly what Messrs. Phil Bowman, William Parks, and T.L.

Darlington wanted them to do. There is no evidence that during this period the owners fought

amotig themselves; on the contrary, they did their best to work together to run their companies to

mine and sell as much coal as possible. Nothing about this behavior, though, is in the slightest

respect unlawful. These corporations did eniploy their own workers separate from the individual

owners, did keep their own separate books of account, did report their own separate incomes and

losses to the govexnment, and did hold themselves out to be businesses separate from their

owners. For purposes of this appeal orily, we will grant that the first prong of the Belvedere test

is debatable, and hence not appropriate for summary judgment.

The third Belvedere prong appears to depend upon the first prong. If the Plaintiff had not

suffered loss, he would not have filed the lawsuit. This is a breach of eontract case. The plaintiff

asserts that the defendants owe him money, and the defendants set up an affirmative defense. For

purposes of this appeal only, we will grant that the third prong of the Belvedere test is likewise

debatable.

What remains are the second prong and the question of "extreme shareholder

misconduct." According to the Court of Appeals below, Mr. Stewart asserted that the

shareholders acting through their corporations committed fraud and illegal acts in the form of

fraudulent transfers. Decision & Judgment Entry below, at 12. Perhaps the Court of Appeals

was refeiring to the equipment sales which Eberts Corporation conducted in 1996. In the first

place, Eberts Corporation had not granted to Mr. Stewart a security interest in the equipment as

collateral, and the purchase agreement did not expressly restrain resales. In the second place,

there is no indication that Eberts Coiporation failed to receive fair market value for the

8

equipment. In the third place, these equipment sales took place almost six years before Mr.

Stewart stopped receiving monthly payments under the purchase contract! Reasonable minds

cannot fmd extreme shareholder misconduct in the 1996 equipment sale transactions.

Perhaps the Court of Appeals refers to the transfer of the assets and liabilities of Eberts

Corporation to Waterloo as of January 1, 1999. See page 4 of Decision & Judgment Entry,

below. As the Court of Appeals itself noted, at the time of the transfer Waterloo was a highly

capitalized mining corporation that in 1999 had over thirty million dollars in assets and several

million dollars in retained earnings. Ibid. Mr. Stewart was much better off after the failing

Eberts Corporation transferred assets and liabilities to Waterloo tlian before! And indeed, the

monthly payinents under the purchase agreeinent continued for another three years or so.

Reasonable minds cannot find extreme shareholder misconduct in Waterloo's takeover of Eberts

Corporation.

Perhaps the Court of Appeals refers to the fact that a new entity, Eberts LLC, booked the

Stewart liability after December 31, 1999. First, from Mr. Stewart's perspective it was Waterloo

which undertook in writing to pay the debt of Eberts Corporation to Mr. Stewart. Waterloo still

awaits in the trial court below to thrash out the breacli of contract claim and the affirnlaflve

defense. Second, from Phil Bowman's perspective, he had nothing to do with the formation of

Eberts LLC. Four other gentlemen created that entity. Again, reasonable minds cainiot find

extreme shareholder misconduct by Phil Bowman in whatever financial transactions took place

with Eberts LLC a year after he left Waterloo.

Summary judgment may be granted when properly submitted evidence, construed in favor

of the nonmoving party, shows that the material facts in the case are not in dispute and that the

moving party is entitled to judgment as a matter of law because reasonable minds can come to

9

but one conclusion and that conclusion is adverse to the nomnoving party. Cincinnati Bar Assn.

v. Mid-South F.state Planning, L.L.C., 121 Ohio St.3d 214, 2009-Ohio-747.

The dispute in this action is a breach of contract case among Mr. Stewart, Eberts

Corporation, and Waterloo. Eberts Corporation is now an empty shell, and Waterloo has

undertaken legal responsibility for its debts. Mr. Stewart and Waterloo should litigate the

contract liability in the trial court. Reasonable minds must conclude that Phil Bowmau

committed no misconduct at all, let alone extreme shareholder misconduct. The trial court's

judgment granting his motion for summary judgment on the veil-piercing issue should be

reinstated.

10

CONCLUSION

For the reasons discussed above, this case involves matters of public and great general

interest, in that the standard to pierce the corporate veil should be extreme shareholder

misconduct. Summary judgment should be an appropriate tecluiique to dispose of obviously

unfounded claims to pierce the corporate veil. Accordingly, the Appellant Phil Bowman requests

that this court accept jurisdiction in this case so that the important issue presented will be

reviewed on the merits.

Respectfully submitted,

illiam C. MartinCOUNSEI., FOR APPELLANT,PI-IIL BOWMAN

Certificate of Service

I certify that a copy of this Memorandum in Support of Jurisdiction was sent by ordinaiyU.S. mail to couiisel for Appellee, Charles F. Shane and David C. Grcer, Bieser, Greer, andLandis LLP, 400 National City Center, 6 N. Main Street, Dayton, Ohio 45402 on September1,9 , 2009.

ani C. MaCOUNSEL FOR APPELLANT,PIIIL, BOWMAN

IN THE COURT OF APPEALS OF OHIOFOURTH APPELLATE DISTRICT

JACKSON COUNTY

William Stewart d/b/aStewart Coal Company,

Plaintiff-Appellant,

V.

CO^T ALSJACKSO CCS,oWIo

Al1G: 18 2009 Case No. 08CA10SETH 1. MICHAEL, CLERK

R.A. Eberts Company, Inc., et al.,

Defend ants-Appellees.DECISION & JUDGMENT ENTRY

APPEARANCES:

Charles F. Shane and David C. Greer, Bieser, Greer & Landis LLP, Dayton, Ohio, forappellant.

Thomas M. Spetnagel and Paige J. McMahon, Chillicothe, Ohio, for appellees R.A.Eberts, LLC, William R. Parks, T.L. Darlington, Scot Parks and Denton Bowman.

William C. Martin, Jackson, Ohio, for appellees Phil Bowman, R.A. Eberts Co., Inc, andWaterloo Coal Company, Inc.

BRYANT, J.

{¶1} Plaintiff-appellant, William Stewart d/b/a Stewart Coal Company ("Stewart"),

appeals from a June 11, 2008 judgment of the Jackson County Court of Common Pleas

granting partial summary judgment in favor of defendants-appelfees, William R. Parks,

T.L. Darlington, Scot Parks, Denton Bowman, and Phil Bowman (the "individual

defendants"), concluding Stewart failed to meet the requirements of the test established

in Belvedere Condominium Unit Owners'Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio

St.3d 274, that would allow Stewart to pierce the corporate veil and subject the individual

defendants to personal liability for money purportedly owed to Stewart under a 1995

Jackson App. No. 08CA10 2

purchase agreement between R.A. Eberts, Inc. and Stewart. Timely appealing the

June 11, 2008 summary judgment order upon the trial court's express determination

pursuant to Civ.R. 54(B) that "no just reason for delay" exists, Stewart assigns a single

error:

SUMMARY JUDGMENT WAS IMPROPERLY GRANTEDWHERE THERE WERE GENUINE ISSUES OF MATERIALFACT WHEREBY REASONABLE MINDS COULD COME TOTHE CONCLUSION THAT THE CORPORATE VEIL OF THECORPORATE-APPELLEES COULD BE PIERCED SUB-JECTING THE INDIVIDUAL SHAREHOLDER DEFEN-DANTS/APPELLEES TO BE SUED IN THEIR INDIVIDUALCAPACITIES.

Because the amended complaint's allegations, supported with evidence in the record that

creates a genuine issue of material fact, are sufficient for Stewart to seek to pierce the

corporate veil, we reverse the trial court's judgment and remand this cause for further

proceedings.

1. Procedural History

{¶2} On June 30, 1995, Stewart and R.A. Eberts, Inc. ("Eberts Inc.") executed a

purchase agreement in which Stewart agreed to sell all of his interests in a coal mining

operation to Eberts Inc. for the total purchase price of $3,500,000. Pursuant to the terms

of the purchase agreement, Eberts Inc. agreed to: (1) pay Stewart $475,000 in cash when

the parties executed the agreement, (2) assume approximately $1,588,195 in debt

Stewart owed, (3) make royalty payments to Stewart for the remaining balance of

$1,436,805 at a rate of $1.00 for each ton of coal mined, but not less than a minimum

monthly royalty of $5,000, and (4) pay Stewart the total amount due under the agreement

by June 30, 2003.


{¶3} On October 14, 2003, Stewart filed a complaint against Eberts Inc. and its

officers, directors, and shareholders. Stewart claimed, in part, that Eberts Inc. breached

the terms of the June 30, 1995 purchase agreement by stopping its royalty payments to

him (the "Stewart royalty fiability") and, as a consequence, failing to pay him the total

amount due under the contract by June 30, 2003. In January 2005, Stewart amended the

complaint to add a count in which he sought to pierce the corporate veil of Eberts Inc. and

impose personal liability on Eberts Inc.'s officers, directors, and shareholders for the

corporation's alleged breach of contract.

{14} Ultimately, in March 2007, Stewart amended his complaint a third time (the

"amended complaint") to join Scot Parks, Denton Bowman, Waterfoo Coal Co., Inc.

("Waterloo"), and R.A. Eberts, LLC ("Eberts LLC") as additional defendants. Claiming all

defendants were jointiy and severally liable for approximately $920,776 in damages that

Stewart purportedly suffered as a result of the alleged breach, the amended complaint

again sought to pierce the corporate veil and subject all of the individuaf defendants to

personal liability for Stewart's alleged damages.

{¶5} After discovery concluded, defendants-appellees moved for summary

judgment, attaching an affidavit of T.L. Darlington in sole support of their motion.

Defendants-appellees contended, in relevant part, that Stewart cannot satisfy the first two

prongs of the test established in Belvedere to pierce the corporate veil and subject the

individual defendants to personal liability.

{16} In his memorandum contra, Stewart argued that the documentary evidence

he submitted demonstrated material questions of fact remain for a jury's consideration as

to whether the corporate veil can be pierced and the individual defendants be held


personally liable for the wrongful acts of the defendant corporations. Stewart's evidentiary

materials included numerous documents defendants produced during discovery, together

with depositions of the individual defendants and two other persons who are not parties to

this action: Joseph Saloom, a certified public accountant who provided financial services

for defendants, and Rita Edwards, who performed accounting services for and was

familiar with financial matters concerning defendants.

{17} According to Stewart's documentary evidence, Eberts Inc. was severely

undercapitalized and losing money when it entered into the June 1995 purchase

agreement with Stewart, and it continued to be insolvent until December 1998, when it

ceased operations. The corporation remained insolvent throughout a winding up of its

corporate affairs until it was formally dissolved in February 2001.

{18} Pursuant to a December 21, 1998 agreement that the officers of Eberts Inc.

and Waterloo signed, all of Eberts Inc.'s assets and liabilities were to be transferred to

Waterloo, a highly capitalized mining corporation that in 1999 had over 30 million dollars

in assets and several million dollars in retained earnings. From 1995 until the end of 1998

or beginning of 1999, Eberts Inc. and Waterloo had the same officers, directors and

shareholders: Phil Bowman, William Parks, and T.L. Darlington. On December 31, 1999,

Darlington, William Parks, and Phil Bowman, as Eberts Inc.'s officers and shareholders,

signed a resolution to liquidate the corporation and transfer its real estate and tangible

assets to Waterloo and to transfer the corporation's intangibles and ali of its substantiai

liabilities, including the Stewart royalty liability, to Eberts LLC, a newly-formed business

entity.


{¶9} According to Darlington, when Eberts Inc. closed, it simply reopened in

1999 as Eberts LLC with two of Eberts Inc.'s original owners, William Parks and

Darlington, and two new owners, Scot Parks and Denton Bowman, who together acquired

Phil Bowman's former interest. Since 1999, these four individuals have been the sole

officers, directors, and shareholders of Waterloo and co-owners of Eberts LLC.

Documentary evidence shows that Eberts LLC was intended to be a limited liability

partnership, but defendants failed to "fiie the appropriate certificates necessary to alter the

nature of [Eberts LLC's] general partnership." (Darlington affidavit, ¶14.) Documentary

evidence Stewart submitted demonstrated Eberts LLC has been insolvent, has had no

active business operations to generate income, and has had no payroll since the

business entity was created and assumed Eberts Inc.'s liabilities.

{¶10} Rita Edwards stated Darlington made the decision to put the Stewart royalty

liability on the books of Eberts LLC instead.of Waterloo; she stated Waterloo has never

had the Stewart royalty liability on its books. (Edwards depo., 24-25) The evidence is

undisputed that after Eberts LLC assumed the Stewart royalty liability, it paid some

royalties to Stewart but then stopped making the payments. Eberts LLC's most recent

balance sheet, which defendants produced during discovery and Stewart submitted as

documentary evidence, reflects Eberts LLC has an outstanding long-term liability of

$920,766 for the "Stewart Royalty Liability."

{111} On JunP 11, 2008, the trial court entered a decision and order granting

defendants-appellees' motions for summary judgment "as to the issue of the liability of the

corporate officers and shareholders." Specifically, the trial court found Stewart failed to

satisfy the second and third prongs of the Belvedere test and therefore "could not pierce

Jackson App. No. 08CA10

the corporate veil and seek individual liability against Defendants William R. Parks, T.L.

Darlington, Scot Parks, Denton Bowman and Phil Bowman." Although Eberts LLC joined

defendants-appellees in seeking summary judgment, the trial court made no

determinations or ruling concerning the issue of Eberts LLC's liability, either as a business

entity or through its owners individually. In a July 22, 2008 agreed entry and order, the

trial court declared the June 11, 2008 decision to be final and appealable pursuant to

Civ.R. 54(B) and stayed all ctaims not resolved on summary judgment pending Stewart's

appeal to this court.

II. Assignment of Error

(¶12) In his appeal, Stewart asserts the trial court erred in granting summary

judgment and preventing him from seeking to pierce the corporate veil. Stewart contends

the facts set forth in the amended complaint, together with documentary evidence

submitted in support, are sufficient to withstand summary judgment and enable a jury to

consider whether he successfully can pierce the corporate veil in this case.

(¶13) An appellate court's review of summary judgment is conducted under a de

novo standard. Coventry Twp, v. Ecker(1995), 101 Ohio App.3d 38, 41; Koos v. Cent

Ohio Cellular, Inc. (1994), 94 Ohio App.3d 579, 588. Summary judgment is proper only

when the parties moving for summary judgment demonstrate: (1) no genuine issue of

material fact exists, (2) the moving parties are entitled to judgment as a matter of law, and

(3) reasonable minds could comP to but one conclusion and that conclusion is adverse to

the party against whom the motion for summary judgment is made, that party being

entitled to have the evidence most strongly construed in its favor. Civ.R. 56; State ex reL

Grady v. State Emp. Relations Bd., 78 Ohio St.3d 181, 1997-Ohio-221.


{¶14} Pursuant to Civ.R. 56(C), the moving party bears the initial burden of

informing the trial court of the basis for the motion and identifying those portions of the

record demonstrating the absence of a material fact. Dresher v. Burt (1996), 75 Ohio

St.3d 280, 293. The moving party, however, cannot discharge its initial burden under this

rule with a conclusory assertion that the non-moving party has no evidence to prove its

case; the moving party must specifically point to evidence of a type listed in Civ.R. 56(C),

affirmatively demonstrating that the nonmoving party has no evidence to support the

nonmoving party's claims. Id.; Vahita v. Hall, 77 Ohio St.3d 421, 1997-Ohio-259; Blood v.

Nofzinger, 162 Ohio App.3d 545, 2005-Ohio-3859, ¶25. An affida.vit that contains only

conclusory assertions is insufficient to demonstrate a lack of genuine issues of material

fact as to the elements of a plaintiff's claim. Id. at ¶26. Once the moving party discharges

its initial burden, summary judgment is appropriate if the nonmoving party does not

respond, by affidavit or as otherwise provided in Civ.R. 56, with specific facts showing

that a genuine issue exists for trial. Dresher293; Vahila 430; Civ.R. 56(E). See also

Castrataro v. Urban (Mar. 7, 2000), 10th Dist. No. 99AP-219.

{¶15} The general rule is that corporations are legal entities distinct from the

natural persons who compose them; therefore, officers, directors, and sharehotders are

not normally liable for the debts of their corporations. Belvedere 287. "Because '[o]ne of

the purposes of incorporation is to limit the liability of individual sharehotders,' the party

seeking to have the corporate form disregarded bears the burden of proof." RCO

tnternatL Corp. v. Cfevenger, 180 Ohio App.3d 211, 2008-Ohio-6823, ¶10, quoting Univ,

Circle Research Ctr. Corp, v. Gafbreath Co. (1995), 106 Ohio App.3d 835, 840, citing

Section 3, Article Xllt of the Ohio Constitution.


{¶16} In Belvedere, the Supreme Court of Ohio held that in order to pierce the

corporate veil and lmpose personal ► iabi ►ity upon shareholders, the person seeking to

pierce the corporate veil must show that: (1) those to be held liable hold such complete

control over the corporation that the corporation has no separate mind, will, or existence

of its own; (2) those to be held ► iable exercise control over the corporation 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. Id. at paragraph three of the syllabus.

{117} Here, in granting summary judgment for the individual defendants on the

issue of their liability as corporate officers, directors, and shareholders, the trial court

concluded plaintiff failed to meet the requirements of Belvedere. In addressing the second

prong of the three-pronged Belvedere test, the trial court determined Stewart failed to

establish that "control over the corporation by those to be held ► iab ►e was exercised in

such manner as to commit fraud or an illegal act against the person seeking to disregard

the corporate entity." (June 11, 2008 Decision & Order.) The trial court noted "[t]he only

allegation that could relate to this branch is that the assets and liabilities of R.A. Eberts,

Inc. were transferred to the ► imited partnership, R.A. Eberts, LLC" and the court then

noted "[t]he assets and liabilities of R.A. Eberts, LLC were subsequently assumed by

Defendant Waterloo Coal Company, Inc." Id. The trial court determined "Plaintiff has

failed to set forth any facts which show this transfer was commiffed for the purpose of

defrauding P ►aintiff." Id. Finally, the trial court stated, "as to the third prong of the test set

forth in Belvedere, Plaintiff has failed to show the ►oss that allegedly resulted was caused

by the actions of the shareholders of the corporation." ► d.

- Jackson App. No. 08CA10 9

{118} Stewart contends the trial court's decision was based upon an unduly

restrictive interpretation of the second prong of the Belvedere test. Stewart argues Ohio

courts have held the second prong of the test is satisfied upon a showing of "unjust or

inequitable conduct" in addition to "fraud or an illegal act." See, e.g., Sanderson Farms,

Inc. v. Gasbarro, 10th Dist. No. OIAP-461, 2004-Ohio-1460, ¶38-39; Styputa v. Chandler,

11th Dist. No. 2002-G-2468, 2003-Ohio-6413, ¶19; RobertA. SaurberGen. Contractor,

tnc, v. McAndrews, 12th Dist. No. CA2003-09-239, 2004-Ohio-6927, ¶34; Wiencek v.

Atcole Co., Inc. (1996), 109 Ohio App.3d 240, 244. Stewart claims he satisfied the

second and third prongs of the Belvedere test when he presented facts showing that the

individual defendants exercised control over the defendant corporations in such a manner

as to cause "unjust or inequitable consequences" to Stewart, namely, the loss of more

than $900,000 owed to him under the 1995 purchase agreement.

{1119} Subsequent to the trial court's decision in this matter, the Supreme Court of

Ohio squarely addressed the central question posited here: "what conduct must be

demonstrated to fulfill the second prong of the test for piercing the corporate veil created

in Beivedere. " Dombroski v. WetiPoint, Inc., 119 Ohio St.3d 506, 2008-Ohio-4827, ¶15. In

answering the question, the court rejected a proposal to liberally construe the second

prong to include "unjust or inequitable conduct" not rising to the level of "fraud or an illegal

act." Id. at ¶20-27, abrogating Stypula, Sanderson Farms, Saurber Gen. Contractor, and

Wiencek, supra. The court reasoned that such a conatruction would mean "viriually every

close corporation could be pierced when sued, as nearly every lawsuit sets forth a form of

unjust or inequitable action[.]" Dombroski, ¶27. Despite its reluctance to broadly construe

Betvedere's second prong to include "unjust or inequitable conduct," the Ohio Supreme


Court concluded the test in Belvedere, if construed too strictly, "insulates shareholders

when they abuse the corporate form to commit acts that are as objectionable as fraud or

illegality" and thus is too limited to protect potential parties from the wide variety of

egregious shareholder misdeeds that may occur. Id. at ¶28.

{¶20} In resofving the tension between the two constructions, the court found a

limited expansion of the Belvedere test necessary in order to allow the corporate veil to

be pierced when a plaintiff demonstrates a defendant shareholder has exercised control

over a corporation in such a manner "as to commit fraud, an illegal act, ora similarly

unlawful act." (Emphasis added.) Dombroski, syllabus (modifying Belvedere). The court

ernphasized, however, that "[c]ourts should apply this limited expansion cautiously toward

the goal of piercing the corporate veil onfy in instances of extreme shareholder

misconduct." 1d. at ¶29.

{¶21} In this case, the trial court properly declined to broadly construe the second

prong of the Belvedere test to include "unjust or inequitable conduct" not rising to the level

of "fraud, an illegal act, or a similarly unlawful act." Dombroski, syllabus. The trial court

erred, however, in determining Stewart failed to set forth sufficient facts that created a

genuine issue of fact under the second and third prongs of the test clarified in Dombroskl.

In particular, the trial court erred in focusing primarily, if not exclusively, on the allegations

of Stewart's complaint.

{¶22} "Under the Ohio Ruies of Civil Procedure, a complaint need only give the

defendant fair notice of a desired claim and an opportunity to respond." RCO InternatL

Corp. at ¶11, citing Leichliter v. Natl. City Bank of Columbus (1999), 134 Ohio App.3d 26,

31. "Piercing the corporate veil is not a claim, it is a remedy encompassed within a claim.


It is a doctrine wherein liability for an underlying tort may be imposed upon a particular

individual.' " Id., quoting Geier v. Natl. GG Industries, Inc. (Dec. 23, 1999), 11 th Dist. No.

98-L-172. {n accord Trinity Health System v. MDX Corp., 7th Dist. No. 07-JE-1 8, 2009-

Qhio-417, ¶26 (stating "'piercing the corporate veil' is not a cause of action in and of

itself, but rather, is a legal rule or doctrine that permits a court to disregard the formal

corporate structure so that individual shareholders may then be held liable for the action

of the corporation").

{123} Here, the amended complaint alleges, in pertinent part, that "[i]n December

of 1998, Eberts, Inc. was dissolved and by proported corporate resolution or record, all of

its assets and liabilities were to be transferred to Waterloo" but "[c]ontrary to corporate

resolution or record, the Stewart liability resulting from the Purchase Agreement was

transferred to a newly-formed entity named R.A. Eberts, LLC." (Amended Complaint, ¶4

and ¶5.) In seeking to pierce the corporate veil, the amended complaint further alleges

the individual defendants not only "exercised such dominion and control over Eberts, Inc.

and/or Waterloo and/or Eberts, LLC that the entities had no separate mind, will or

existence of their own" but also that "such entities were at all relevant times

undercapitalized," and the individual defendants "failed to follow the legal corporate

formalities permitting a corporate shield." (Complaint, ¶21.) According to the complaint,

the individual defendants used their "dominion and control of Eberts, Inc. and/or Waterloo

andlor Eberts, LLC' "' to commit fraud and illegal acts by dissolving Eborts, Inc. and

reconstituting it as Eberts, LLC and in transferring and disposing of assets of Eberts, Inc.

andlor Waterloo and/or Eberts, LLC," all "in an effort to frustrate Plaintiff's attempts to

collect under the Purchase Agreement." (Complaint, ¶22.) The complaint asserts that


"[ajs a direct and proximate result [ofj the Individual Defendants' fraud and illegal acts,"

plaintiff was damaged "in an amount in excess of Twenty-five Thousand and No/100

Dollars ($25,000.00)." (Complaint, ¶23.) Finally, the complaint alleges "[tjhe Individual

Defendants are ail jointly and severally liable." (Complaint, ¶24.)

{¶24} Plaintiff's allegations are sufficient to notify defendants of Stewart's attempt

to pierce the corporate veil and subject the individual defendants to personal liability for

damages Stewart purportedly suffered as a result of the alleged breach of the 1995

purchase agreement. Specifically, the second and third requirements for piercing the

corporate veil are satisfied in Stewart's allegations that the individual defendants

exercised dominion and control over the defendant corporations in such a manner as "to

commit fraud and illegal acts by dissolving Eberts, Inc. and reconstituting it as Eberts,

LLC" and by transferring and disposing of assets and liabilities "in an effort to frustrate

Plaintiff's attempts to collect under the Purchase Agreement," resulting in unjust losses to

him of more than $900,000.

{¶25} Essentially, the allegations assert the defendant shareholders, acting

through the defendant corporations, committed "fraud and illegal acts" in the form of

fraudulent transfers when they transferred and disposed of assets and liabilities with the

intent to hinder, delay or defraud Stewart as a creditor. See generally Ohio's Uniform

Fraudulent Transfer Act ("UFTA"), R.C. Chapter 1336, and Carter-Jones Lumber Co. v.

Denune (1999), 132 Ohio App.3d 430, 434, discretionary appeal not allowed, 86 Ohio

St.3d 1443 (determining a plaintiff need only show standing as a creditor and a transfer

to hinder, delay, or defraud collection by the creditor in order to establish a fraudulent

transfer). See also Blood v. Nofzinger, 162 Ohio App.3d 545, 2005-Ohio-3859; Atlantic


Veneer Corp. v. Robbins, 4th Dist. No. 01 CA678, 2002-Ohio-5363; Lesick v. MedGroup

Mgt., Inc. (Oct. 29, 1999), 1 st Dist. No. C-990097, discretionary appeal not allowed

(2000), 88 Ohio St.3d 1432; Permasteelisa CS Corp v. The Airolite Co. (S.D.Ohio,

Dec. 31, 2007), No. 2:06-CV-569, 2007 WL 4615779. In a case involving a fraudulent

transfer, the creditor may obtain damages and "any other relief that the circumstances

may require," including punitive damages and attorney fees if warranted. See R.C,

1336.07(A)(3)(c) and 1336.10; Blood, ¶59-60.

{¶26} Unlike common-law fraud that must be pleaded with particularity under

Civ.R. 9(B), no similar requirement applies when the issue of a fraudulent conveyance is

raised. Wagner v. Galipo (1990), 50 Ohio St.3d 194, 197; Atlantic Veneer Corp., ¶49-51;

Carter-Jones, 434-35; RCO lnternatl. Corp., ¶11; Geier, supra. A creditor also need not

prove the elements of common-law fraud in order to establish a fraudulent transfer.

Lesick, citing Comer v. Calim (1998), 128 Ohio App.3d 599. Fraud is imputed to the

debtor when the statutory elements of a fraudulent transfer have been met. Id.;

Locafrance United States Corp. v. Interstate Dist. Servs., Inc. (1983), 6 Ohio St.3d 198,

200. See R.C. 1336.04(A)(1) (providing a transfer made or an obligation incurred by a

debtor is fraudulent as to a creditor if the debtor made the transfer or incurred the

obligation with "actual intent to hinder, delay, or defraud" the creditor), and R.C. 1336.05

(providing a transfer made or an obligation incurred by a debtor is fraudulent as to a

creditor if the debtor either (a) "niade the transfer or incurred the obligation without

receiving a reasonably equivalent value in exchange for the transfer or obligation and the

debtor was insolvent at that time or the debtor became insolvent as the result of the

transfer or obiigation" or (b) made a transfer to an insider at the time the debtor is


insolvent, and the insider had reasonable cause to believe the debtor was insolvent).

Thus, to the extent the trial court determined the allegations in Stewart's complaint were

insufficient, the court erred.

{¶27} In addition, despite the evidence Stewart submitted in connection with his

memorandum contra to support the allegations of his complaint, we cannot discern what

consideration, if any, the trial court gave to that documentary evidence. The issue before

the trial court was procedurally postured as a motion for summary judgment, not a motion

to dismiss; the trial court was required to construe the evidence in a light most favorable

to Stewart, as the nonmoving party, and determine whether Stewart raised a genuine

issue of material fact as to an element of the test for piercing the corporate veil.

{128} Our de novo review reveals initially that defendants failed to discharge their

initial burden under Civ.R. 56 because instead of pointing to specific places in the record

supporting assertions made in their summary judgment motions; they instaad relied solely

on Darlington's affidavit, which contains only conclusory assertions. Such conclusions are

insufficient to demonstrate that no genuine issues of material fact exist in this case.

Dresher293; Uahila; 81ood, ¶26. Moreover, contrary to the decision of the trial court,

Stewart presented sufficient facts to withstand summary judgment on the second and

third prongs of the test for piercing the corporate veil, as the evidence regarding the post-

1995 transfers of assets and liabilities by and between the various defendant entities

creates genuine issues of material fact.

{129} We note the trial court's decision does not address the first prong of that

test, Thus, we are uncertain whether the trial court found Stewart presented sufficient

facts which, if proven, demonstrate "control over the corporation by those to be held liable


was so complete that the corporation has no separate mind, will or existence of its own."

Belvedere, paragraph three of the syllabus.

{¶30} Also unclear is whether the trial court dismissed the individual defendants

from Stewart's action when it granted summary judgment in their favor. Parenthetically, if

evidence at trial establishes that Eberts LLC was a common-law partnership rather than a

limited liability partnership or corporation during the relevant time periods, the individual

defendants that are members of the partnership may be subject to individual liability for

wrongful acts the partnership committed. See generally R.C. Chapter 1775 (Ohio's

uniform partnership law), and see R.C. 1775.14 and 1705.48(C). Each of the individual

defendants is also subject to potential liability for any of his individual wrongful conduct

against Stewart because neither the corporate shield nor a shield of limited liability

insulates a wrongdoer from liability for his or her own tortious acts. Dombroski, ¶17, citing

Belvedere 287; Gator Dev. Corp. v. VHH, Ltd., 1 st Dist. No. C-080193, 2009-Ohio-1802,

¶38; Atram v. Star Tool & Die Corp. (1989), 64 Ohio App.3d 388, 393.

{¶31} While we are uncertain concerning the noted portions of the trial court's

judgment, we conclude the trial court erred to the extent it determined that Stewart's

complaint insufficiently alleges the second and third prongs of the Belvedere test or that

Stewart failed to present evidence creating a genuine issue of fact under those two

prongs. Accordingly, we sustain StewarVs assignment of error. In so doing, however, we

cannot and do not express an opinion as to the ultimate merit of StewarVs claims. The

trial court's June 11, 2008 order granting partial summary judgment is reversed, and this

case is remanded for further proceedings in accordance with law and this opinion,

JUDGMENT REVERSEDAND CAUSE REMANDED.


JUDGMENT ENTRY

It is ordered that the JUDGMENT IS REVERSED and that the CAUSE ISREMANDED. Appellees shall .pay the costs.

The Court finds there were reasonable grounds for this appeal.

It is ordered that a special mandate issue out of this Court directing the JacksonCounty Common Pleas Court to carry this judgment into execution.

Any stay previously granted by this Court is hereby terminated as of the date ofthis entry.

A certified copy of this entry shall constitute the mandate pursuant to Rule 27 ofthe Rules of Appellate Procedure. Exceptions.

"Sadler, J. & BroNin, J.: Concur in Judgment and Opinion.

For the C ^ _

BY:

NOTICE TO COUNSEL

Pursuant to Local Rule No. 14, this document constitutes a final Judgmententry and the time period for further appeal commences from the date of filingwith the clerk.

*Peggy L. Bryant, Lisa L. Sadler, and Susan Brown, from the Tenth Appellate District,sitting by assignment of the Supreme Court of Ohio in the Fourth Appellate District.

in the supreme court of ohioaug 18, 2009 · on january 1, 1999, davis 'trucking company and...

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