[Cite as Palmer v. Bowers,

.]

STATE OF OHIO ) IN THE COURT OF APPEALS )ss: NINTH JUDICIAL DISTRICT COUNTY OF LORAIN )

RICHARD PALMER C.A. No. 17CA011137

Appellants

v. APPEAL FROM JUDGMENT ENTERED IN THE ROBERT J. BOWERS COURT OF COMMON PLEAS COUNTY OF LORAIN, OHIO Appellees CASE No. 12CV178356

DECISION AND JOURNAL ENTRY

Dated: April 8, 2019

CALLAHAN, Presiding Judge.

{¶1} Appellants, Richard Palmer, Loretta Frimel, and Mike Taylor, appeal from the

judgment of the Lorain County Common Pleas Court in favor of Appellees, Graham Hall, Robert

Bowers, Judith Bowers, and Hall Contracting Services, Inc.1 For the reasons set forth below, this

Court reverses.

I.

{¶2} Hall Contracting Services, Inc. (“HCS”), a privately held Ohio corporation, was

incorporated in 2005 with Mr. Palmer, Mr. Hall, Mr. Bowers, and others as shareholders. HCS

was engaged in the business of installing and removing printing presses in the newspaper

industry throughout the United States.

1 While Robert Bowers and Hall Contracting Services, Inc. are listed as appellees, Mr. Palmer’s assignments of error only pertain to Mr. Hall and Mrs. Bowers. 2

{¶3} In 2007, eight of HCS’s nine shareholders signed a Majority Shareholder

Agreement (“MSA”). Mr. Bowers did not sign the MSA and thus was not bound by any of the

MSA terms. The MSA placed limitations on the transferability of shares, identified rights of first

and second refusal, and established steps for amending the MSA.

{¶4} In May 2012, Mr. Palmer, Mr. Hall, and a third shareholder, Robert MacKenzie,2

were elected as directors of HCS, and Mr. Palmer was selected as president. Shortly thereafter,

Mr. Hall and Mr. Bowers began discussing a sale of shares in order to “‘kill the shareholders

agreement’” and take control of HCS.

{¶5} Following those conversations, Mr. Bowers sold his shares to Mr. Hall in July

2012, but Mr. Hall did not disclose the transfer to HCS and the other directors and shareholders

until August 2012. This sale of shares resulted in Mr. Hall becoming the majority shareholder of

HCS and Mr. Bowers no longer being a shareholder of HCS. Despite the fact that Mr. Bowers

was no longer a shareholder, Mr. Hall continued to share confidential financial information

regarding HCS with Mr. Bowers.

{¶6} In September 2012, Mr. Hall and Mr. MacKenzie voted as a supermajority to

amend the MSA. The amendment removed the restrictions on the transferability of shares,

including those limitations related to transfers between spouses, and eliminated the right of first

and second refusal. Later the same month, Mr. Hall and Mr. MacKenzie sold their shares in

HCS to Mrs. Bowers, making her the majority shareholder. After the stock transfer, Mrs.

Bowers appointed her husband, Mr. Bowers, as the new president and CEO of HCS.

2 Mr. MacKenzie is a third-party defendant in the underlying case, but not a party to this appeal. 3

{¶7} In response to these events, Mr. Palmer filed a shareholder derivative action on

behalf of HCS (a nominal defendant) against Mr. Hall and Mr. and Mrs. Bowers. Additionally,

Mr. Palmer filed individual claims for injunctive relief, accounting, civil conspiracy, and breach

of fiduciary duty. The verified complaint also asserted various declaratory judgment claims

regarding the validity of the parties’ actions and the parties’ rights and status with respect to

HCS. Mr. Hall, Mr. and Mrs. Bowers, and HCS filed their own counterclaims, cross-claims, and

a third-party complaint.

{¶8} The parties filed various competing summary judgment motions. However, only

two summary judgment motions were granted and are the subject of this appeal.

{¶9} The first concerns Mr. Hall’s motion for summary judgment as to two of the

declaratory judgment claims and the civil conspiracy and breach of fiduciary duty claims in Mr.

Palmer’s verified complaint. The trial court granted Mr. Hall summary judgment on counts 1, 2,

9, and 10 of Mr. Palmer’s verified complaint.

{¶10} The second involves Mr. and Mrs. Bowers and HCS’s motion for summary

judgment as to all of the declaratory judgment claims, the civil conspiracy claim, and the

shareholder derivative action. The trial court granted Mr. and Mrs. Bowers and HCS summary

judgment as to counts 1-9, and 113 of Mr. Palmer’s verified complaint.

3 Mr. Palmer suggests that the trial court’s order referencing Count 11 is an error and in fact should read Count 10. This Court disagrees. First, Count 10 only asserts a claim against Mr. Hall. Second, Mr. and Mrs. Bowers and HCS sought summary judgment as to Count 11, not Count 10, and a trial court may not grant summary judgment on a claim when it was not sought. Urda v. Buckingham, Doolittle & Burroughs, LLP, 9th Dist. Summit No. 22547, 2005-Ohio- 5949, ¶ 13. While there is no count numbered “11” in the verified complaint, the request for a derivative action follows Count 10 and can be construed as being Count 11. Moreover, Mr. and Mrs. Bowers and HCS moved for summary judgment on the derivative action. 4

{¶11} Upon the joint request of Mr. Hall, Mr. and Mrs. Bowers, and HCS, the trial court

amended these two judgments by adding the certification that there was no just reason to delay

an appeal of the two summary judgment orders. Concurrent with the order certifying Civ.R.

54(B) language, the trial court granted Ms. Frimel and Mr. Taylor, other minority shareholders of

HCS, permission to intervene as plaintiffs upon the condition that they “participate in and be

bound by the * * * disposition of the appeal.” Further, the trial court ordered that Ms. Frimel and

Mr. Taylor “shall be bound by all rulings entered in this case to date, including but not limited to

the summary judgment rulings disposing of [Mr.] Palmer’s claims and which are equally

dispositive of their claims.” After the appeal was filed, the trial court stayed the case.

{¶12} Mr. Palmer, Ms. Frimel, and Mr. Taylor timely appeal from the summary

judgment entries, asserting one assignment of error regarding the civil conspiracy (Count 9) and

breach of fiduciary duty (Count 10) claims.4

II.

ASSIGNMENT OF ERROR

THE TRIAL COURT ERRED AS A MATTER OF LAW BY GRANTING SUMMARY JUDGMENT ON THE CONSPIRACY AND BREACH OF FIDUCIARY DUTY CLAIMS.[]

{¶13} Mr. Palmer asserts that the trial erred when it granted summary judgment on the

breach of fiduciary duty and civil conspiracy claims. This Court agrees.

4 During oral argument, Mr. Palmer’s counsel confirmed he is not appealing the trial court’s decision relative to his declaratory judgment claim contained in Count 1. 5

{¶14} This Court reviews an order granting summary judgment de novo. See Bonacorsi

v. Wheeling & Lake Erie Ry. Co.,

,

, citing Doe v.

Shaffer,

(2000). Summary judgment is proper under Civ.R. 56(C) when:

(1) no genuine issue as to any material fact exists; (2) the party moving for summary judgment is

entitled to judgment as a matter of law; and (3) viewing the evidence most strongly in favor of

the nonmoving party, reasonable minds can only reach one conclusion, and that conclusion is

adverse to the nonmoving party. Civ.R. 56(C); Temple v. Wean United, Inc.,

(1977).

{¶15} Summary judgment consists of a burden-shifting framework. The movant bears

the initial burden of demonstrating the absence of genuine issues of material fact concerning the

essential elements of the nonmoving party’s case. Dresher v. Burt,

(1996). Specifically, the moving party must support the motion by pointing to some evidence in

the record of the type listed in Civ.R. 56(C).

. Once the moving party satisfies this

burden, the nonmoving party has a “reciprocal burden” to “‘set forth specific facts showing that

there is a genuine issue for trial.’”

, quoting Civ.R. 56(E). However, “[i]f the moving

party fails to satisfy its initial burden, the motion for summary judgment must be denied.”

.

Count 10 – Breach of Fiduciary Duty against Mr. Hall

{¶16} Mr. Palmer argues that “material fact issues exist” regarding the breach of

fiduciary duty claim and that “[t]he trial court erred in granting summary judgment on the breach

of fiduciary duty claim upon finding that there was no breach of the [MSA].” Mr. Palmer’s

argument suggests that the trial court misapplied the law because it “did not acknowledge or 6

appreciate the distinction between” Mr. Hall’s contractual liability in complying with the terms

of the MSA as opposed to Mr. Hall’s tort liability arising from a breach of his fiduciary duties.

This Court does not reach this argument because Mr. Hall failed to meet his initial Dresher

burden with respect to Count 10.

{¶17} “‘[A] close corporation is a corporation with a few shareholders and whose

corporate shares are not generally traded on a securities market.’” (Alteration sic.) Universal

Real Estate Solutions, Inc. v. Snowden, 9th Dist. Summit No. 27171,

,

quoting Crosby v. Beam,

(1989), paragraph one of the syllabus. There are

different fiduciary duties in a close corporation: duties between shareholders and duties owed by

a director or officer. See Morgan v. Ramby, 12th Dist. Warren No. CA2007-12-147, 2008-Ohio-

6194, ¶ 22.

{¶18} In a close corporation, the majority shareholders owe a heightened fiduciary duty

to deal in the “‘“utmost good faith and loyalty”’” with the minority shareholders.

,

quoting Donahue v. Rodd Electrotype Co. of New England, Inc.,

(1975),

quoting Cardulla v. Landau,

(1952). The fiduciary duty between majority

shareholders and minority shareholders is breached when the majority shareholders, absent a

legitimate business purpose, control the corporation in such a way as to prevent the minority

shareholders from “having an equal opportunity in the corporation.”

.

{¶19} The fiduciary duty of a director of a closely held corporation is owed to the

corporation and to the corporation’s shareholders, collectively. Universal Real Estate Solutions,

Inc. at ¶ 45, quoting Morgan at ¶ 22. These fiduciary duties “‘include a duty of good faith, a

duty of loyalty, a duty to refrain from self-dealing[,] and a duty of disclosure.’” Universal Real

Estate Solutions, Inc. at ¶ 45, quoting Wing Leasing, Inc. v. M & B Aviation, Inc.,

7

App.3d 178, 181 (10th Dist. 1988); Morgan at ¶ 22. R.C. 1701.59(B) requires a director in a

closely held corporation to “perform the director’s duties * * * in good faith, in a manner the

director reasonably believes to be in or not opposed to the best interests of the corporation, and

with the care that an ordinarily prudent person in a like position would use under similar

circumstances.”

{¶20} Here, the verified complaint averred that HCS is a close corporation. See State ex

rel. Spencer v. East Liverpool Planning Comm.,

, 298 (1997); Johnson v. SK

Tech, Inc., 2d Dist. Montgomery No. 23522,

, ¶ 15, fn. 2 (“Because that

complaint is verified, it has evidentiary quality for summary-judgment purposes.”). Mr. Hall

argues, for the first time on appeal, that HCS is not a close corporation. This Court, however,

will not consider an issue raised for the first time on appeal. JPMorgan Chase Bank, Natl. Assn.

v. Burden, 9th Dist. Summit No. 27104,

. As there was no evidence from

Mr. Hall controverting this allegation, nor any challenge in the summary judgment motion as to

this allegation, the allegation pled in the verified complaint that HCS is a close corporation is

sufficient to withstand summary judgment. See Spencer at 298-299.

{¶21} In 2012, Mr. Hall held two different roles at HCS: majority shareholder and

director. Thus, Mr. Hall owed two separate fiduciary duties: 1) a fiduciary duty as a majority

shareholder to the minority shareholders; and 2) a fiduciary duty as a director to HSC and the

shareholders. Mr. Palmer alleged claims of breach of fiduciary duty based upon both roles held

by Mr. Hall. Count 1, a declaratory judgment claim, addressed the amendment of the MSA and

Mr. Hall’s fiduciary duties as a majority shareholder to the minority shareholders, while Count

10 concerned Mr. Hall’s fiduciary duties as a director to HCS and all of the shareholders.

However, only Count 10 is before this Court. 8

{¶22} Mr. Hall argued extensively in Count 1 that he did not breach his fiduciary duty as

a majority shareholder to the minority shareholders because the amendment of the MSA was

contractually permissible and did not prevent the minority shareholders from having an equal

opportunity in the corporation. See Crosby,

. Mr. Hall then argued that the

same arguments asserted in Count 1 applied to Count 10.

{¶23} Mr. Hall’s reliance upon his previous arguments in support of Count 10 is fatal to

his summary judgment motion. While Mr. Hall quoted the language used in Count 10 of the

verified complaint in his summary judgment motion, he failed to recognize that the breach of

fiduciary duty claim pled in Count 10 addressed the fiduciary duty of a director and, thus, was

different from the breach of fiduciary duty allegations pled in the declaratory judgment claim in

Count 1 which concerned the fiduciary duty of a majority shareholder to the minority

shareholders. Because the fiduciary duties of a director and majority shareholder are different

and owed to different parties, Mr. Hall’s summary judgment arguments in support of Count 1

were not applicable to Count 10. See Thompson v. Cent. Ohio Cellular, Inc.,

(8th Dist. 1994) (setting forth the fiduciary duties of a director and a majority

shareholder); Morgan,

. Mr. Hall’s summary judgment motion relied

solely upon the majority shareholder arguments and did not address the various fiduciary duties

of a director that are owed to the corporation and the shareholders as pled in Count 10. See

.

{¶24} Mr. Palmer argued in his response brief that Mr. Hall failed to meet his initial

Dresher burden as to the breach of fiduciary duty of a director and, thus, summary judgment

should be denied. Mr. Hall countered by claiming that Mr. Palmer “cobble[d] together these new 9

theories of liability” and “conflate[d] the fiduciary duties owed by shareholders.” (Emphasis

deleted.) Mr. Hall’s assertion belies the verified complaint.

{¶25} Count 10 set forth allegations that supported a claim of breach of fiduciary duty of

a director and, thus, was not a new theory of liability “cobble[d] together” by Mr. Palmer in his

response brief. For instance, the verified complaint stated “HCS is a close corporation in which

its directors have fiduciary duties, including a duty of good faith, a duty of loyalty, a duty to

refrain from self-dealing[,] and a duty of disclosure.” (Emphasis added.) This allegation

specifically identified directors and then stated the directors’ fiduciary duties under the law. See

Universal Real Estate Solutions, Inc.,

;

. Contrary to

Mr. Hall’s reply argument, there was no reference to a shareholder’s fiduciary duties in Count 10

to conflate.

{¶26} Additionally, the verified complaint stated “[Mr.] Hall breached the fiduciary

duties he owed to the Corporation and its shareholders” and did so by “subordinat[ing] the

interests of the Corporation and its shareholders to his own pecuniary interests, in bad faith,

and in a manner that any reasonable person would know is opposed to the best interests of

the Corporation.” (Emphasis added.) This allegation served as further support that Count 10

was a claim for breach of fiduciary duty of a director, because it specified that the duty is owed

to the corporation and its shareholders and did not reference minority shareholders. See

Thompson,

. Moreover, this allegation referred to the statutory language

of a director’s fiduciary duties to the corporation and shareholders. See R.C. 1701.59(B), (D)(1).

Accordingly, Mr. Palmer pled a claim for breach of fiduciary duty of a director in Count 10. Mr.

Hall, however, failed to realize the distinction between Counts 1 and 10 until his reply brief. 10

{¶27} Mr. Hall addressed the director’s fiduciary duties and the lack of evidence

supporting such a claim for the first time in his reply brief. However, this Court has recognized

that the moving party must meet its initial Dresher burden in the initial motion, and not the reply

brief. See Carl Ralston Ins. Agency, Inc. v. Kenneth A. Boldt Ins. Agency, Inc., 9th Dist. Summit

No. 23016,

. To allow otherwise would circumvent the substance of

Civ.R. 56 and the Dresher burden shifting. See id; Dresher,

.

Accordingly, Mr. Hall’s arguments and evidence in his reply brief regarding the breach of

fiduciary duty of a director did not satisfy his initial burden under Dresher as to Count 10 of the

verified complaint. See Carl Ralston Ins. Agency, Inc. at ¶ 12.

{¶28} As an alternative basis for affirming the trial court’s summary judgment ruling,

Mr. Palmer argues Mr. Hall cannot establish damages. The record reflects that Mr. Hall was

granted leave and filed a supplemental summary judgment motion raising arguments regarding

proximate cause, damages, punitive damages and attorney fees, and the appropriate derivative

plaintiff in a Civ.R. 23.1 claim. While some of these arguments may be relevant to Count 10, the

trial court did not grant summary judgment to Mr. Hall based upon any of those arguments and

this Court will refrain from considering those arguments on appeal. See Lehmier v. W. Res.

Chem. Corp., 9th Dist. Summit No. 28776,

(declining to decide in the first

instance issues raised by the parties in summary judgment briefing, but not decided by the trial

court).

{¶29} In light of the foregoing, this Court concludes that Mr. Hall failed to meet his

initial Dresher burden of demonstrating the absence of genuine issues of material fact as to Mr.

Palmer’s breach of fiduciary duty of a director as alleged in Count 10. Accordingly, the trial 11

court erred in granting summary judgment in favor of Mr. Hall as against Mr. Palmer on Count

10 of the verified complaint.

Count 9 – Civil Conspiracy against Mr. Hall and Mrs. Bowers5

{¶30} A claim for civil conspiracy requires “‘(1) a malicious combination, (2) involving

two or more persons, (3) causing injury to person or property, and (4) the existence of an

unlawful act independent from the conspiracy itself.’” The Wright Safety Co. v. U.S. Bank, N.A.,

9th Dist. Summit No. 24587,

, ¶ 32, quoting Gibson v. City Yellow Cab Co., 9th

Dist. Summit No. 20167,

, *3. “‘[T]he underlying unlawful act must be a

tort.’” (Alteration sic.) The Wright Safety Co. at ¶ 32, quoting Avery v. Rossford, Ohio Transp.

Improvement Dist.,

(6th Dist. 2001).

{¶31} Mr. Hall moved for summary judgment on the civil conspiracy claim on two

separate bases. First, Mr. Hall argued that there were not two separate people to form a

conspiracy because he and Mr. MacKenzie were both directors of HCS. Second, Mr. Hall

argued that there was no evidence of an underlying unlawful act.

{¶32} Mr. and Mrs. Bowers and HCS also moved for summary judgment on the civil

conspiracy claim on the basis that there was a lack of evidence of an unlawful act. They did not

assert the other argument made by Mr. Hall.

{¶33} The trial court initially granted summary judgment as to the civil conspiracy claim

to Mr. Hall, but failed to identify which argument upon which it based its decision. Nonetheless,

5 As an initial matter it is necessary to clarify who the appellees are with respect to the civil conspiracy claim. In reply to Mr. and Mrs. Bowers and HCS’s appellee brief, Mr. Palmer indicates that based upon Mr. Bowers’ Chapter 7 bankruptcy discharge he is not “pursu[ing] relief in this appeal to revive claims against [Mr.] Bowers, individually[.]” Additionally, Mr. Palmer captions his rebuttal argument on the civil conspiracy claim as being against Mrs. Bowers, and not Mr. Bowers or HCS. Accordingly, we will limit our review of the civil conspiracy claim as it applies to Mr. Hall and Mrs. Bowers. 12

the trial court’s summary judgment ruling in favor of Mr. Hall on the declaratory judgment and

breach of fiduciary duty claims implied that the trial court granted summary judgment as to the

civil conspiracy claim based upon a lack of evidence of an unlawful act.

{¶34} Further, support for this implication is contained within the trial court’s second

summary judgment ruling in favor of Mrs. Bowers as to the civil conspiracy claim. In that

judgment, the trial court relied upon its “prior analysis and determination.” Moreover, Mrs.

Bowers only asserted one argument for summary judgment as to the civil conspiracy claim: the

lack of an underlying unlawful act. Because Mrs. Bowers did not move for summary judgment

upon the basis that there was a lack of two separate persons to form a conspiracy, the trial court

was precluded from granting summary judgment on that basis for Mrs. Bowers. Lehmier, 2018-

Ohio-3351, ¶ 46 (holding that “it is error for a trial court to award summary judgment on a

ground not specified in the motion for summary judgment”).

{¶35} As for the lack of an unlawful act, Mr. Hall and Mrs. Bowers limited their

summary judgment argument to the allegations contained in Count 1 regarding a breach of

fiduciary duty by a majority shareholder in amending the MSA. Count 1, however, was not Mr.

Palmer’s only allegation of an unlawful act.

{¶36} On appeal, Mrs. Bowers argues that the trial court’s disposition of the other

counts is evidence of a lack of an unlawful act. However, Mrs. Bowers did not present this

argument to the trial court and it will not be considered for the first time on appeal. See Burden,

.

{¶37} In light of the above analysis as to Count 10, there remains one pending tort claim

relative to the civil conspiracy claim thereby rendering the trial court’s grant of summary

judgment as to the civil conspiracy claim erroneous as a matter of law. Likewise, for this same 13

reason, the trial court also erred in granting summary judgment to Mrs. Bowers on the civil

conspiracy claim as a matter of law.

{¶38} In addition to the multiple other counts in the verified complaint, the civil

conspiracy count also alleged two other acts that formed the basis of the civil conspiracy claim:

“usurping the offices of Chairman and CEO[] and engaging in unauthorized transactions in the

name of the Corporation.” Instead of addressing these other two alleged acts, Mr. Hall asserted a

broad statement that “[Mr.] Palmer has set forth no evidence showing that * * * anything else[]

was an unlawful act.” Such a statement is a conclusory assertion that fails to satisfy Mr. Hall’s

initial Dresher burden. See Dresher,

. Mr. Hall and Mrs. Bowers did not

move for summary judgment on the civil conspiracy claim on these two alternative bases nor on

any of the other counts, thus the trial court could not have granted summary judgment on these

bases either. Lehmier,

.

{¶39} Further, this Court will not address Mr. Hall’s alternative argument regarding the

lack of two separate persons to form a civil conspiracy. As discussed above, there is nothing in

the record to support that the trial court granted summary judgment on this basis, and this Court

will not consider those arguments for the first time on appeal. See

.

{¶40} On appeal, Mr. Hall asserts a new argument: Mr. Palmer cannot establish the

element of an injury to a person because there is a lack of evidence of damages. While Mr. Hall

presented an argument regarding lack of damages in his supplemental motion for summary

judgment, he did so only as to the breach of fiduciary duty claim and not the civil conspiracy

claim. Thus, this Court will not consider the lack of damages argument regarding the civil

conspiracy claim for the first time on appeal. See Burden,

. 14

{¶41} Additionally, Mrs. Bowers also asserts a new argument on appeal: the “civil

conspiracy claim necessarily fails unless the claimant can show an unlawful act attributable to

each co-conspirator.” Likewise, this argument will not be considered as Mrs. Bowers did not

assert this argument in the trial court. See

.

{¶42} In light of the foregoing, this Court concludes that the trial court erred in granting

summary judgment in favor of Mr. Hall and Mrs. Bowers as against Mr. Palmer on Count 9 of

the verified complaint.

{¶43} The sole assignment of error is sustained.

III.

{¶44} Mr. Palmer, Ms. Frimel, and Mr. Taylor’s assignment of error is sustained. The

judgment of the Lorain County Common Pleas Court is reversed as to the breach of fiduciary

duty claim against Mr. Hall and the civil conspiracy claim against Mr. Hall and Mrs. Bowers.

Judgment reversed.

There were reasonable grounds for this appeal.

We order that a special mandate issue out of this Court, directing the Court of Common

Pleas, County of Lorain, State of Ohio, to carry this judgment into execution. A certified copy of

this journal entry shall constitute the mandate, pursuant to App.R. 27.

Immediately upon the filing hereof, this document shall constitute the journal entry of

judgment, and it shall be file stamped by the Clerk of the Court of Appeals at which time the

period for review shall begin to run. App.R. 22(C). The Clerk of the Court of Appeals is

instructed to mail a notice of entry of this judgment to the parties and to make a notation of the

mailing in the docket, pursuant to App.R. 30. 15

Costs taxed to Appellees.

LYNNE S. CALLAHAN FOR THE COURT

HENSAL, J. SCHAFER, J. CONCUR.

APPEARANCES:

JAMES F. KOEHLER and TIMOTHY J. FITZGERALD, Attorneys at Law, for Appellants.

KIRK W. ROESSLER, PATRICK A. HRUBY, and JAMIE L. PRICE Attorneys at Law, for Appellees.

FRITZ E. BERCKMUELLER and MATTHEW A. CHIRICOSTA, Attorneys at Law, for Appellee.