Medina County Courthouse

Tuesday, January 09, 2007

Another Take on Issue Preclusion

Below is a decision that I filed today on a motion for dismissal/summary judgment that also involved the issue of collateral estoppal. The issue is somewhat different than the issue presented in an earlier entry on this blog. Please keep in mind that this entry is subject to appellate review. Below is the text of the opinion:

The Farmers Savings Bank (Farmers) has filed a motion for summary judgment alleging that Heartland Homes and Auction Company’s (Heartland) claims against it are barred by the doctrine of res judicata because of settlements entered in prior cases in both the General Division and the Domestic Relations Divisions of the Medina County Common Pleas Court. Farmers was not a party to either of those actions, but Heartland was a party in both actions.

The General Division case was an action brought against Joseph Hartley by Heartland and Dianna Hartley. The Case Number for that case was 02-CIV-0663. The Domestic Relations case was between the two Hartleys, but Heartland was joined as a party. The Case Number for that case was 02-DR-00004. Both cases were settled without a trial. Both cases were settled by the same settlement agreement and Case No. 02-CIV-0663 was then dismissed with prejudice.

Res judicata in Ohio includes both claim preclusion and issue preclusion. Fort Frye Teachers Ass'n v. State Empl. Rels. Bd., ( 1998) 81 Ohio St. 3d 392, 1998 Ohio 435. Issue preclusion is sometimes referred to as the doctrine of collateral estoppal. It precludes the re-litigation of a fact that was actually and directly at issue in a previous proceeding between the same parties or their privies. Ft. Frye, 81 Ohio St. 3d at 395. The requirement that the previous proceeding be between the same parties or their privies is sometimes referred to as the doctrine of “mutuality of estoppal.”

In this case Farmers does not argue that it was a party to the previous litigation or that it was in privty with any parties in either of the two prior cases. Rather, Farmers argues that this Court ought to relax the doctrine of mutuality of estoppal because of the decision of the Ninth Appellate District Court of Appeals, sitting as the Summit County Court of Appeals, in Michaels Building Company v. City of Akron, Case No. 13061.

This Court finds that the Michaels case is not binding on this Court through the doctrine of stare decisis because it was an unreported opinion. Although not binding authority on this Court, it is persuasive authority. In this case, however, the same fact situation does not exist that existed in Michaels Building. In that case Judge Cacioppo relied on an opinion by now Chief Justice Moyers who was on the Tenth Appellate District Court of Appeals. That opinion is McCrory v. Children’s Hospital (1986), 28 Ohio App. 3d 49.

In the McCrory case the Court held that where issues had actually been litigated in the prior proceeding, then the doctrine of mutuality of estoppal would be relaxed and would not require that the present proceeding be between the same parties or their privies. Both in McCrory and in Michaels Building the appeals arose after a trial, not a settlement. Here, in the prior cases, there were no trials, just settlements. Therefore, this Court finds that even if it were to relax the doctrine of mutuality of estoppal it would not do so in cases where the issues sought to be precluded had not been actually litigated. Consequently, this Court finds that summary judgment should not be granted on the basis of res judicata or collateral estoppal.

Farmers has also moved for summary judgment on the grounds that because of the settlement entered into between the parties in the first two cases, there was no damage caused by the tortious actions of Farmers, assuming that such actions occurred. This Court finds, however, that with respect to that argument, which goes to Counts One and Two, there is an issue of material fact and therefore summary judgment is improper.

Finally, Farmers also moves for summary judgment on Count Three of Heartland’s complaint. Again, with respect to that claim, the Court finds that there are issues of material fact and therefore summary judgment is not appropriate on that Count.

The Court consequently overrules the motion for summary judgment and the motion to dismiss for failure to state a claim, which was based on the res judicata argument disposed of above.


Ninth Appellate District Court of Appeals Decision on Piercing the Corporate Veil

The Ninth Appellate District Court of Appeals, sitting as the Medina County Court of Appeals, recently issued a decision affirming a decision that my court had made. One of the issues raised on appeal was whether the trial court had erred when it pierced the corporate veil to find the defendant personally liable for a corporate debt. The case was Potterschmidt v. Klosterman, 2006-Ohio-6964. The language from the opinion dealing with the issue of piercing the corporate veil is reproduced below. Attorneys who do business litigation will find this opinion interesting. Judge Slaby dissented from the opinion on this point, although on the other issues raised, he agreed with the majority.

{¶34} Appellants assert that the trial court erroneously pierced the corporate veil of the original corporation and the new corporation to hold Dr. Klosterman personally liable to Dr. Pottschmidt.

{¶35} “Generally, shareholders are not liable for the debts of the corporation.” Frechette v. Kovanda (Apr. 18, 2001), 9th Dist. No. 20207, citing Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio St.3d 274, 287. However, creditors of a corporation may “pierce the corporation’s veil” and hold individual shareholders liable when the following three conditions are present: “[T]he corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) 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, (2) control over the corporation by those to be held liable was exercised in such a manner 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 Appellees from such control and wrong.” Frechette, at *3, citing Belvedere, 67 Ohio St.3d at 289.

{¶36} We initially acknowledge the cases cited by Appellants that a simple breach of contract is not sufficient to pierce the corporate veil. The trial court found more than a breach of contract here, however, and held that each element of the Belvedere test had been met thus allowing Dr. Pottschmidt to pierce the corporate veil of the new corporation to find Dr. Klosterman personally liable for the judgment rendered. We agree.

A. Alter Ego Doctrine

{¶37} The first prong of the Belvedere test is basically the “alter ego doctrine.” See Willoway Nurseries v. Curdes (Oct. 13, 1999), 9th Dist. No. 98CA007109, at *4. In order to satisfy this requirement, a plaintiff must prove that “the individual and the corporation are fundamentally indistinguishable.” Belvedere, 67 Ohio St.3d at 288. Some of the factors used to determine if this standard has been met include: (1) whether corporate formalities were observed; (2) whether corporate records were kept; (3) whether corporate funds were commingled with personal funds; and (4) whether corporate property was used for a personal purpose. LeRoux’s Billyle Supper Club v. Ma (1991), 77 Ohio App.3d 417, 422-423; Pikewood Manor, Inc. v. Monterrey Concrete Constr., 9th Dist. No. 03CA008289, 2004-Ohio-440, at ¶15.

{¶38} The trial court found that Dr. Klosterman had complete control over both corporations. He was the manager and sole shareholder of both entities. He wrote the paychecks, managed the retirement plan and worked with counsel on all legal matters, including the drafting of legal documents.

{¶39} The record demonstrates that neither Dr. Klosterman nor either of the entities followed corporate formalities in that they did not use the corporate name either on signage or letterhead and did not consistently bill patients or insurance companies in the name of either entity, often issuing billing in the name of Dr. Klosterman, individually.

{¶40} Evidence in the record also establishes that the funds of each corporation and of Dr. Klosterman were commingled. Dr. Klosterman purchased an automobile paying $24,000 in personal funds while titling the vehicle in the name of the original corporation and directing the original corporation to make the car payments and allocate the amount of the payments as income to Dr. Klosterman. The original corporation also depreciated the automobile. After the new corporation was formed, Dr. Klosterman transferred title to the vehicle into his name. Finally, some of the income earned by the original corporation was deposited into the bank account of the new corporation and some of the expenses of the new corporation were paid from the account of the original corporation. Similarly, the original corporation purchased and made payments for equipment and office furniture, which payments were subsequently made by the new corporation, despite the fact that the loan documents and rental agreements related thereto only bound the original corporation for the debt.

{¶41} Finally, it is undisputed that the vehicle was used by Dr. Klosterman personally, although titled in the name of the original corporation.

B. Fraud in Disregard of the Corporate Entity

{¶42} It is undisputed that Dr. Klosterman formed the new corporation one month after the original corporation was sued by Dr. Pottschmidt. It is also undisputed that Dr. Klosterman formed the new corporation to avoid potential liability related to Dr. Pottschmidt’s employment with the original corporation. Finally, it is undisputed that neither the new corporation nor Dr. Klosterman paid any consideration for the assets of the original corporation. While it is not clear the value of the assets of the original corporation, it is undisputed that the original corporation had some accounts receivable that were subsequently collected by the new corporation and that the original corporation possessed equipment and office furniture that is being used by the new corporation. As to the latter, Dr. Klosterman asserts that the value of the office equipment exceeded the debt thereon, which he personally assumed. The appraisal Dr. Klosterman testified that he obtained related to the equipment, however, is not a part of the record.

C. Injury or Loss to Dr. Pottschmidt

{¶43} Finally, the trial court properly found that the final element of the Belvedere test was satisfied because the transfer of all of the original corporation’s assets to the new corporation, without adequate consideration being paid, left the original corporation simply an empty shell and made it impossible for Dr. Pottschmidt to collect the judgment rendered in his favor.

{¶44} Based on the foregoing, we find there was competent, credible evidence before the trial court to support a finding that the corporate veil of the new corporation has been appropriately pierced, rendering Dr. Klosterman liable for the judgment rendered in this action. Appellants’ third assignment of error is overruled.

Sunday, January 07, 2007

Lawyers in Trial: Giving Voice to the Voiceless

This is one reason why I admire trial lawyers: they speak for those who can't speak for themselves. When a client has a case in front of a court, that client, no matter how bright or articulate, can't effectively speak for themselves. They are too caught up in the process, too close emotionally to the case, too concerned with the outcome. They need an advocate, a champion, someone to be their voice in the arena. That's where trial lawyers come in. That's their job. That's what they do. They are speaking for those who can't speak for themselves.

It is not an easy job. It is an awesome responsibility. On the one hand the trial attorney can't be too close to the client because that diminishes the trial attorney's effectiveness to the client. Often the trial lawyer's job is to point out to a client why a particular strategy in a courtroom will not work, and indeed, might be harmful to the client's case.

On the other hand, the trial attorney can't be so distant from the client that he or she no longer conveys passion about the cause. The jury has to know that the trial attorney believes in the client's cause, because if the trial attorney doesn't, then why should the jury?

This role of speaking for the voiceless applies no matter who the client is, or why they are in court. Our system is built around the premise that everyone is entitled to an advocate when they appear in a courtroom.

This means that "trial attorneys" are not attorneys who represent a particular group of people or a particular side in legal disputes. The term applies equally to attorneys who represent plaintiffs as it does to those who represent defendants, equally to prosecutors as to criminal defense attorneys.

What is sometimes distressing is to see trial lawyers take the position that what they do is noble, but what their opponents do is morally wrong. Such attitudes don't benefit the American system of justice. They make trial work, already full of stress, needlessly difficult. They don't encourage respect for our profession.

If you are litigating a case, take a moment and recognize that your opponent is also a trial lawyer, that he or she has the same job to do as you, and that both of you are carrying out one of the missions of our profession: making sure that the voiceless have a voice.

Friday, January 05, 2007

Jury Waiver and Civil Rule 38 (D)

Ohio Rule of Civil Procedure 38 (D) requires that once a jury demand has been filed by a party, that party cannot withdraw or waive the jury trial without getting the consent of all the parties to the litigation, even if they haven't filed a jury demand on their pleadings. This is because if a party files a jury demand, then other parties may rely on that demand being filed and won't file their own demand.

If a party filing a jury demand wishes to waive jury trial and the other parties agree, then a recommended procedure would be to file a pleading with the jury waiver signed by the attornies for all parties. In Medina County we bring jurors in for each trial as opposed to having a standing pool of potential jurors. This means that if a jury trial has been scheduled in our court and we are not informed of a jury waiver, we will tax as costs the fees we pay to the jurors, even if the jury trial doesn't go forward.

Wednesday, January 03, 2007

Judge Kimbler Decision on Issue Preclusion

Below is an language from an entry that I posted on the doctrine of "mutuality of estoppal". This opinion is not a final order and is subject to appellate review:

Ms. Misja filed a motion for summary judgment on the issue of liability. The basis of her motion is that she is entitled to summary judgment because of the doctrine of res judicata. She seeks application of the doctrine because of a judgment entered in the Small Claims Division of the Medina Municipal Court in favor of her parents and against Mr. Kibler for property damage sustained to her parents’ vehicle. The following facts are not in dispute:

Ms. Misja’s parents filed a small claims complaint against Mr. Kibler, his parents, and Allstate Insurance Company for property damage arising out of a motor vehicle collision on June 10, 2003.

At the hearing in Small Claims Court Mr. Kibler was represented by counsel and Mr. and Mrs. Misja were not represented by counsel.

At the hearing evidence was presented on behalf of Mr. and Mrs. Misja and on behalf of Mr. Kibler.

At that hearing the negligence of Mr. Kibler was disputed.

At the conclusion of the hearing, Mr. and Mrs. Kibler were dismissed from the action, as was Allstate Insurance, but judgment was entered in favor of Mr. and Mrs. Misja and against Mr. Kibler in the amount of $2841.37.

Ohio’s doctrine of res judicata involves both party preclusion and issue preclusion. The doctrine of res judicata as it applies to issue preclusion is also known as collateral estoppal. In order for a party to receive the benefit of precluding an issue that such party argues has been determined in a prior proceeding, there must be mutuality of estoppal. Goodson v. McDonough Power Equipment, 2 Ohio St. 3d 193, 1 of the opinion syllabus. This means that the party seeking to have a court apply the doctrine must be a party who would have been precluded from re-litigating the issue if the decision had gone the other way. In this particular case, it means that Ms. Misja cannot seek application of this doctrine if she would not have been bound by an adverse decision of the Medina Municipal Court in the case between Mr. Kibler and her parents.

This doctrine of “mutuality of estoppal” is the reason why Ohio courts only apply the doctrine against the same parties or their privies. Although the decision in Goodson is over 23 years old, the Ninth District Court of Appeals, in 2004, limited the application of the doctrine of res judicata to the original parties or parties in privity with them. Hamrick v. Daimler Chrysler Motors, 2004 Ohio 3415.

In the present case, then, Ms. Misja must show that she was in privity with her parents in order to avail herself of the doctrine of res judicata. In the Hamrick decision, the following language appears at 12-13:

{12}“To be in “privity” with a party on the record of a prior judgment generally means that the relationship between the two is “‘close enough to include th[e] other within the res judicata.’” (Citation omitted.) Brown v. Dayton, 89 Ohio St.3d 245,248, 2000-Ohio-148, quoting Thompson v. Wing (1994), 70 Ohio St.3d 176, 184. Privity exists when both persons have a “mutuality of interest, including an identity of desired result[.]” Brown, 89 Ohio St.3d at 248. More specifically,“‘[p]rivity is defined as mutual or successive relationships to the same right of property, or such an identification of interest of one person with another as to represent the same legal right.’” Buchanan v. Palcra, Inc. (Dec. 31, 1987), 7th Dist. No. E-87-22, quoting Peterson v. Fee Internatl. Ltd. (D.C. Okl. 1975), 435 F.Supp. 938, 942.

{13} Under the doctrine of res judicata, a final judgment is also conclusive as to all claims which might have been litigated in a first lawsuit. Spano Brothers Constr., Inc. v. Leisinger (July 24, 1996), 9th Dist. No. 17438,citing Natl. Amusements, Inc. v. Springdale (1990), 53 Ohio St.3d 60, 62. It is irrelevant to the application of the res judicata doctrine whether the original claim explored all possible theories of relief. Brown, 89 Ohio St.3d at 248. The Supreme Court of Ohio has held that a valid, final judgment upon the merits of a case bars any subsequent action “based upon any claim arising out of the transaction or occurrence that was the subject matter of the previous action.” Grava v. Parkman Twp., 73 Ohio St.3d 379, 382, 1995-Ohio-331, citing 1Restatement of the Law 2d, Judgments (1982), Sections 24-25.”

In this case, this Court has to ask itself whether, if Mr. Kibler had sought to bar Ms. Misja’s action under the doctrine of res judicata, it would have barred her action. If the answer is “no”, then there is not mutuality of estoppal and Ms. Misja is not entitled to have this Court apply the doctrine on the issue of Mr. Kibler’s negligence.

This Court believes, and so finds, that an adult child is not in privity with her parents so as to make a judgment for or against the parent binding on the child, even when the defendant is the same in both cases. While Mr. Kibler may have had the same interest in litigating the small claims case as he does litigating the present case, Ms. Misja and her parents do not have the same interest in litigating their respective cases.
This is shown by the fact that while her parents were willing to avail themselves of the relatively simple to use forum of a small claims division of a municipal court, Ms. Misja has chosen to utilize the procedurally more complex forum of a common pleas court. Her interest in pursuing her personal injury case has led her to employ the services of an attorney while her parents were content to represent themselves. Her parents were willing to accept a verdict of $3,000.00 or less while Ms. Misja apparently feels that such a limitation would not do her justice.

The differences outlined above leads this Court conclude that Ms. Misja is not in privity with her parents so as to allow her to avail herself of a judgment entered in their favor just as it would not find that a judgment entered against them would bar her from proceeding in this Court.

Since this Court finds that there is not mutuality of estoppal, it must find that neither party can use the doctrine of res judicata in this case to bar the re-litigation of issues that may have been decided in the small claims case between Ms. Misja’s parents and Mr. Kibler. Consequently Ms. Misja’s motion for summary judgment is denied.