Summary
holding that the plaintiffs did not have an individual right of action when a loss of corporate assets ultimately caused them to be liable on loan guaranties
Summary of this case from ORR v. RIEDEREROpinion
No. 85-1090
Decided April 30, 1986.
Torts — Derivative actions — Shareholder does not have independent cause of action, when — No showing of injury other than that suffered in common by all other shareholders.
O.Jur 3d Business Relationships §§ 743, 744, 745.
A plaintiff-shareholder does not have an independent cause of action where there is no showing that he has been injured in any capacity other than in common with all other shareholders as a consequence of the wrongful actions of a third party directed towards the corporation.
APPEAL and CROSS-APPEAL from the Court of Appeals for Summit County.
This is an appeal and cross-appeal from the judgment of the court of appeals that reversed in part and affirmed in part the orders of the court of common pleas dismissing plaintiffs' second amended complaint and granting defendants' motions for summary judgment.
Appellees and cross-appellants Harold W. Adair, Clifford Houk and Jon R. Houk are officers of Houk Machine Company, Inc., a plastic injection molding and tool and die manufacturer. Appellee and cross-appellant Sylvester A. Houk is the chairman of the board of directors for Houk Machine. On August 6, 1984, Adair and the Houks and their wives, hereinafter "plaintiffs," filed a second amended complaint against Thomas J. Wozniak, and against appellants and cross-appellees, William H. Monteith, Jr., and First National Bank of Akron, hereinafter "defendants," for conspiracy to defraud Houk Machine of its personal property in connection with the sale and lease-back of its equipment.
Plaintiffs aver that in early 1981, National Acceptance Corporation filed suit against Houk Machine and threatened to foreclose on equipment of the company which secured a debt owed to National Acceptance. In April 1981, Wozniak proposed to Jon Houk that Wozniak and Monteith would obtain a loan for $121,000 from First National Bank of Akron and use the funds to pay the debt to National Acceptance. Thereafter, Wozniak proposed to secure another loan for $250,000 from First National Bank directly to Houk Machine in order to pay off the first loan and provide working capital for the company. Houk Machine, acting through defendants, accepted Wozniak's proposal.
Prior to the closing of the first loan, Wozniak told Jon Houk that the First National Bank required a bill of sale of Houk Machine's equipment to Wozniak and Monteith. Wozniak proposed a lease-back arrangement until the second loan was obtained from which Houk Machine would repurchase the equipment. Houk Machine, acting through defendants, transferred the bill of sale and signed the lease agreement. Although Wozniak and Monteith were paid large fees for securing both the first and second loan, they never obtained the second loan for Houk Machine.
The terms of the lease agreement were increasingly burdensome and Houk Machine's financial condition steadily worsened. Eventually, Houk Machine filed a petition for bankruptcy. As a result of the bankruptcy, plaintiffs alleged damages, including loss of compensation, potential and real liability for personal guarantees of loans and corporate taxes, loss of loans to the company and mental anguish.
The trial court held that plaintiffs had no standing to sue individually for the alleged injuries and granted defendants' motions for summary judgment. The court of appeals reversed and remanded the trial court's order with respect to the Houks and their wives because they previously had personally guaranteed loans made to Houk Machine. The trial court's order with respect to Adair was affirmed, for the reason he had not guaranteed any loans. The court stated "[a] personal guaranty for a loan to a corporation can be a basis for a personal cause of action by a stockholder," and cited Sacks v. American Fletcher Natl. Bank Trust Co. (1972), 258 Ind. 189, 279 N.E.2d 807 and Buschmann v. Professional Men's Assn. (C.A. 7, 1969), 405 F.2d 659.
This cause is now before this court upon the allowance of the motion and cross-motion to certify the record.
Roderick, Myers Linton, Robert F. Linton, Deborah L. Cook and Lawrence R. Bach, for appellees and cross-appellants, Harold Adair, Jon and Judy I. Houk, Clifford and Elaine Houk and Sylvester and Henrietta Houk.
Roetzel Andress, David M. Best and Jeffrey J. Casto, for appellant and cross-appellee William Monteith.
Brouse McDowell, John W. Solomon and Clair E. Dickinson, for appellant and cross-appellee First National Bank.
The issue to be decided is whether the wrongful acts of third parties directed towards the corporation which injure the shareholders by impairing the capital position of the corporation give an individual right of action to the shareholders. It is well-settled that only a corporation and not its shareholders can complain of an injury sustained by, or a wrong done to, the corporation. United States v. Palmer (C.A. 5, 1978), 578 F.2d 144, 145-146; Mendenhall v. Fleming Co. (C.A. 5, 1974), 504 F.2d 879, 881; Martens v. Barrett (C.A. 5, 1957), 245 F.2d 844, 846. However, this general principle has no application where the wrongful acts are not only against the corporation but are also violations of a duty arising from contract or otherwise owed directly by the wrongdoer to the shareholder. A suit brought by a shareholder on a personal claim is distinguishable from a proceeding to recover damages or other relief for the corporation. Not every allegation of wrongdoing is a sufficient charge of individual injury, but a court must preliminarily determine if the pleadings state injury to the plaintiff upon an individual claim as distinguished from an injury which indirectly affects the shareholders or affects them as a whole.
In the instant case the gravamen of plaintiffs' complaint is that defendants tortiously depleted the assets of Houk Machine. Plaintiffs' alleged injuries include reduction in income, the loss and diminution in the value of their stock, the accumulation of personal debt and liabilities from Houk Machine's business decline, and mental anguish. Viewed in the light most favorable to plaintiffs their second amended complaint alleges injuries as a consequence of their positions as shareholders rather than individual claims they might have apart from their status as shareholders. To the extent defendants are liable for the loss of corporate assets, that liability runs to the corporation and not its individual shareholders. Plaintiffs Houk contend that their personal liability on corporate obligations constitutes an injury distinct from that suffered by other shareholders. However, the loans guaranteed by the Houks are unrelated to the sale and lease-back transaction upon which they base an action for fraud. Plaintiffs do not allege that they transacted business with the defendants in their individual capacities.
Incidental damages such as mental anguish and loss of future compensation have never been held as collectable by officers of a bankrupt corporation.
The circumstances of the instant case are clearly distinguishable from those in Buschmann v. Professional Men's Assn., supra, in which the plaintiff acquired standing to maintain a cause of action for breach of contract, independent of any cause his corporation might have, because of the existence of a separate contract between himself and the defendant corporation. The instant case is also distinguishable from Sacks v. American Fletcher Natl. Bank Trust Co., supra, in which the plaintiff brought a personal cause of action based on a loan to the corporation for which he gave a personal guaranty. In both cases the harm that the plaintiffs alleged was different in kind than that suffered by the corporations and arose from the plaintiffs' direct contractual relationship with the defendants. In contrast to Buschmann and Sacks, the injuries allegedly suffered by plaintiffs are not based on any independent contractual relationship plaintiffs had with defendants.
No authority has been cited or found to support the position that the wrongful acts of third parties which impair the capital position of the corporation, to the indirect injury of the shareholders as a whole, give the shareholders an individual right of action for damages. On the contrary, the overwhelming weight of authority holds that wrongful actions by third parties impairing the capital position of the corporation give no right of action to the shareholders as individuals for damages where there is no violation of duty owed directly to the shareholders. See In re Knight (1965), 60 Ill. App.2d 457, 460-461, 208 N.E.2d 679; Shaffer v. Universal Rundle Corp. (C.A. 5, 1968), 397 F.2d 893, 896; Continental Illinois Natl. Bank Trust Co. of Chicago v. Stanley (N.D. Ill. 1984), 585 F. Supp. 1385, 1388; Mendenhall v. Flemming Co., supra, at 881; ITT Diversified Credit Corp. v. Kimmel (N.D. Ill. 1981), 508 F. Supp. 140, 144; United States v. Palmer, supra, at 145-146; Sacks v. American Fletcher Natl. Bank Trust Co., supra, at 811; Empire Life Ins. Co. of America v. Valdak Corp. (C.A. 5, 1972), 468 F.2d 330, 335; Zokoych v. Spalding (1976), 36 Ill. App.3d 654, 663, 344 N.E.2d 805, 813; Eden v. Miller (C.A. 2, 1930), 37 F.2d 8.
Where the defendant's wrongdoing has caused direct damage to corporate worth, the cause of action accrues to the corporation, not to the shareholders, even though in an economic sense real harm may well be sustained by the shareholders as a result of reduced earnings, diminution in the value of ownership, or accumulation of personal debt and liabilities from the company's financial decline. The personal loss and liability sustained by the shareholder is both duplicative and indirect to the corporation's right of action. See Martens v. Barrett, supra; Peter v. Western Newspaper Union (C.A. 5, 1953), 200 F.2d 867, 873.
Furthermore, in a suit pending before the United States Bankruptcy Court for the Northern District of Ohio, Eastern Division, a counterclaim was filed against plaintiffs herein by Houk Machine based on the same transaction at issue in this case. ( In re Houk Machine Co., Nos. 582-1512 and 583-0135.)
Although this is a case of first impression, we accept and follow the widely recognized rule that a plaintiff-shareholder does not have an independent cause of action where there is no showing that he has been injured in any capacity other than in common with all other shareholders as a consequence of the wrongful actions of a third party directed towards the corporation.
For the reasons stated herein, the judgment of the court of appeals is reversed in part as to plaintiffs Houk and affirmed in part as to plaintiff Adair.
Because Wozniak, an accountant for Houk Machine, did not appeal from the court of appeals' adverse judgment against him, we specifically do not decide any question of law as pertains to the cause against him. We note that we have previously held in Haddon View Investment Co. v. Coopers Lybrand (1982), 70 Ohio St.2d 154 [24 O.O.3d 268], that an accountant may be held liable for negligence in the execution of professional services to a third party whose reliance on the accountant's representation is specifically foreseen.
Judgment reversed in part and affirmed in part.
CELEBREZZE, C.J., SWEENEY, LOCHER, HOLMES and C. BROWN, JJ., concur.
DOUGLAS, J., dissents.
I respectfully dissent. In affirming the judgment of the trial court as to plaintiff Adair and reversing and remanding as to the other plaintiffs, the court of appeals, in a succinct, well-reasoned decision, stated, in part:
"In general a shareholder cannot sue for injuries to his corporation. However, there are two major, often overlapping, exceptions to this general rule: (1) where there is a special duty, such as a contractual duty, between the wrongdoer and shareholder, and (2) where the shareholder suffered an injury separate and distinct from that suffered by other shareholders. 12(B) Fletcher Cyclopedia of the Law of Private Corporations (1984) 421, Section 5911. Although the defendants argue that both of these elements are necessary to justify an individual action, the existence of either one will suffice. Fletcher, supra, Section 5921; Norman v. Nichiro Gyogyo Kaisha, LTD (Alaska 1982), 645 P.2d 191. A personal guaranty for a loan to a corporation can be a basis for a personal cause of action by a stockholder. Sacks v. American Fletcher National Bank T. Co. (1972), 258 Ind. 189, 279 N.E.2d 807; Buschmann v. Professional Men's Assoc. (1969), 405 F.2d 659; Fletcher, supra, Section 5916. Therefore, the Houks as loan guarantors have standing to sue.
"Plaintiff Harold Adair, however, does not have standing to sue. Unlike the other plaintiffs, he has not guaranteed loans for the corporation. The injuries that he suffered were suffered in common by all shareholders and employees. His remedy lies through a Houk Co. claim against the defendants. Thus, summary judgment was proper as to his claim."
It is my judgment that the unanimous court of appeals has properly set forth the applicable law and has done so in verbiage that cannot be improved upon. Thus, I would affirm the decision of the court of appeals in all respects and, accordingly, I dissent herein.