Summary
dismissing claim where plaintiff could prove no set of facts to show defendant was an “outsider”
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Case No. 3:03 CV7651
April 8, 2004
ORDER
This is a suit by John Duggan against his former employer, Orthopaedic Institute of Ohio, Inc. ("OIO"), his former colleagues, and OIO's administrative director, Paul Clark.
Plaintiff was president of OIO. Plaintiff and the individual defendants, who are all physicians, were minority shareholders in OIO. The individual defendants relieved plaintiff of his responsibilities as president of OIO after Clark, who, as administrative director, worked with plaintiff in his capacity as president, complained about plaintiff's allegedly abusive behavior toward him.
Plaintiff remained employed by OIO as a physician after his termination as president. Plaintiff, however, quit his position and filed this action. Plaintiff asserts three claims: 1) violation of the Age Discrimination in Employment Act ("ADEA"); 2) breach of fiduciary duty by the individual defendants; and 3) tortious interference with contract by Clark.
Pending is defendants' Fed.R.Civ.P. 12(b)(6) motion to dismiss Counts II and III of plaintiff's complaint for failure to state a claim upon which relief can be granted. For the following reasons, defendants' motion with respect to Count II shall be denied and defendants' motion with respect to Count III shall be granted.
STANDARD OF REVIEW
A court may dismiss a claim "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). For purposes of this motion, plaintiff's factual allegations are assumed to be true. Gahafer v. Ford Motor Co., 328 F.3d 859, 861 (6th Cir. 2003). Legal conclusions or unwarranted factual inferences, however, need not be accepted. Id.
DISCUSSION A. Plaintiff's Breach of Fiduciary Duty Claim
OIO is a corporation and the individual defendants and plaintiff are its minority shareholders. Plaintiff claims the individual defendants breached the fiduciary duty owed to plaintiff when they terminated plaintiff as president of OIO. Defendants assert they owed plaintiff no fiduciary duty.
Generally, a shareholder does not owe a fiduciary duty to other shareholders. 18A Am.Jur.2d Corporations § 732 (1985) ("[M]ere ownership of stock does not create a fiduciary relation between shareholders . . ."). In Ohio, however, majority or controlling shareholders owe a fiduciary duty to minority shareholders in a close corporation. Crosby v. Beam, 47 Ohio St.3d 105, 109 (1989). Accordingly, at issue is: 1) whether the individual defendants can be considered majority or controlling shareholders; and 2) whether OIO is a close corporation.
As to the first issue, Ohio courts impose heightened fiduciary duties on minority shareholders when they dominate corporation to the exclusion of other minority shareholders. Morrison v. Gugle, 142 Ohio App.3d 244, 255 (2001) (an equal shareholder was the "controlling" shareholder, and thus owed a fiduciary duty to the other equal shareholder, because the "controlling" shareholder denied access to business premises, business records, and the business checking account to the other shareholder); McLaughlin v. Beeghly, 84 Ohio App.3d 502, 507 (1992) (same); Citizens Fed. Bank v. Chateau Const. Co., No. 13902, 1994 WL 12488 at *2 (Ohio Ct.App. Jan. 19, 1994) (an equal shareholder was the "controlling" shareholder, and thus owed a fiduciary duty to the other equal shareholder, because the "controlling" shareholder managed the corporation, handled the books, records, bank accounts, and negotiations).
Although these cases involved corporations with two equal shareholders, as opposed to those with multiple minority shareholders, as in the instant case, the same principles apply when minority shareholders collectively dominate the corporation to the exclusion of the other shareholders. McLaughlin, 84 Ohio App.3d at 507-08 ("[t]ypically, cases addressing a dominant shareholder's [fiduciary] duty . . . involve factual situations where a single majority shareholder, or coalition group of minority shareholders, manipulate corporate procedures for their own advantage by exercising dominant control.") (emphasis added). Thus, Ohio law provides that equal shareholders can be "controlling" shareholders if they, individually or collectively, dominate the corporation to the exclusion of the other minority shareholders.
Here, the individual defendants, acting collectively, exerted complete control over OIO to terminate the plaintiff from his position as the corporation's president. Accordingly, the individual defendants can be deemed the "controlling" shareholders with respect to that decision.
As to the second issue, whether OIO is a close corporation, defendants contend plaintiff has not alleged, nor can he allege, that OIO is a close corporation because OIO shareholders did not adopt a "close corporation agreement" as required by Ohio Rev. Code § 1701.591. Defendants rely on the committee comment to Ohio Rev. Code § 1701.591, which notes the provision was intended
to permit closely held corporations and their shareholders to be governed in effect as if the corporation was a partnership. This is accomplished solely by the adoption of a `close corporation agreement' meeting all three requirements set forth in division (A) so long as no disqualifying event under division (H) has taken place.
Ohio Rev. Code § 1701.591, 1981 Comm. Cmt. (emphasis added).
Plaintiff argues OIO is a close corporation even though the shareholders did not adopt a close corporation agreement. Despite Ohio Rev. Code § 1701.591 and its accompanying comment, it appears that plaintiff is correct.
In Ohio, a close corporation is defined as "a corporation with few shareholders and whose corporate shares are not generally traded on a securities market." Crosby, 47 Ohio St.3d at 107. It is not disputed that OIO has few shareholders and its corporate shares are not publicly traded on a securities exchange.
In addition, Ohio courts have consistently classified corporate entities that have met the above criteria yet failed to adopt a close corporation agreement as "close corporations." See id. (finding a close corporation without mentioning the existence of a close corporation agreement); Benincasa v. Flight Sys. Auto. Group L.L.C., 242 F. Supp.2d 529, 536 (N.D. Ohio 2002) (finding a close corporation where the corporation at issue was not publicly traded and its seventeen shares were owned by a total of three individuals.); Gigax v. Repka, 83 Ohio App.3d 615, 622 (1992) (finding a close corporation despite the corporation's failure to adopt a close corporation agreement). Moreover, Crosby, Benincasa, and Gigax were decided after the enactment of Ohio Rev. Code § 1701.591.
In conclusion, Ohio courts, despite the enactment of § 1701.591, have traditionally declined to deem adoption of a close corporation agreement to be a precondition to finding that a corporate entity with few shareholders and whose corporate shares are not traded on a securities exchange as a close corporation. If § 1701.591 was intended to require the adoption of a close corporation agreement as a prerequisite to achieving the status of a close corporation, amending the statute to explicitly promote this effect is for the Ohio legislature. I find that, under Ohio case law, OIO has the indicium of a close corporation. It is not fatal that plaintiff's complaint does not prove that OIO is a close corporation so long as there remains the ability to do so. Thus, defendants' motion to dismiss Count II of plaintiff's complaint for failure to state a claim shall be denied.
B. Plaintiff's Tortious Interference with Contract Claim
In Ohio, a claim for tortious interference with contract can only be maintained against "outsiders" to the contractual relationship. See Anderson v. Minter, 32 Ohio St.2d 207, 213 (1972); Pannozzo v. Anthem Blue Cross Blue Shield, 152 Ohio App.3d 235, 241 (2003). In Anderson, plaintiff alleged that her supervisor "maliciously induced" the employer to suspend plaintiff. 32 Ohio St.2d at 213. The court held that plaintiff's allegations failed to state a cause of action, stating:
Causes of action have been recognized against `outsiders' for malicious interference with employment. Where, however, the act complained of is within the scope of a defendant's duties, a cause of action in tort for monetary damages does not lie. Nor can liability be predicated simply upon the characterization of such conduct as malicious.Id. at 213 (internal citiations omitted).
Plaintiff's complaint states that Clark, the administrative director of OIO, interfered with the contractual relationship between plaintiff and his fellow shareholders by sending an inflammatory letter containing allegations of plaintiffs abusive behavior to the individual defendants. Plaintiff claims dark's letter and continued interference made it impossible for plaintiff to continue as a shareholder of OIO.
Plaintiff, therefore, says his claim for tortious interference with contract against Clark can be maintained because Clark was an outsider to plaintiff's contractual relationship as a fellow shareholder with the other individual defendants.
Plaintiff can prove no set of facts to show Clark was an "outsider" to plaintiff's shareholder relationship with the individual defendants. In Pannozzo, the court held that a tortious interference claim does not lie against an employee when the allegedly discontinued relationship concerns only the plaintiff and the employee's employer. Pannozzo, 152 Ohio App.3d at 241 (citing Anderson). Moreover, in Moses v. Budd Co., No. 92WD041, 1993 WL 496639 at *4 (Ohio Ct.App. Dec. 3, 1993) (citing Anderson), the court held that subordinates are "immune from suit for interference with a supervisor's business relations unless the interference was accomplished entirely outside the employment setting." Although Moses involved a claim for tortious interference with business relations, as opposed to a claim for tortious interference with contract, as in the instant case, the only difference between the two claims is that "the former tort does not require proof of a contractual relationship." See RE/MAX Int'l., Inc. v. Smythe, Cramer Co., 265 F. Supp.2d 882, 890 (N.D. Ohio 2003).
Here, Duggan was employed as president of OIO. Clark, as administrative director, was OIO's agent and subordinate of plaintiff and the individual defendants. The discontinued relationship at issue is that between plaintiff, OIO, and the individual defendants. Plaintiff, therefore, cannot maintain a claim against Clark for tortious interference with contract unless the interference was accomplished outside the employment setting. See Moses, 1993 WL 496639 at *4.
Plaintiff asserts dark's interference with plaintiffs contractual relationship was outside the scope of Clark's employment. Plaintiff claims Clark was not hired to act as a watchdog over plaintiff, but to function as a practice administrator. In Ohio, an employee's actions are outside the scope of employment where the employee's behavior is not "calculated to facilitate or promote the employer's business." See Byrd v. Faber, 57 Ohio St.3d 56, 58 (1991). See also Thomas v. Ohio Dep't of Rehab. and Corr., 48 Ohio App.3d 86, 89 (1998) (holding that an employees actions are outside the scope of employment "where the act has no relationship to the conduct of the [employer's] business or the conduct is so divergent that its very character severs the relationship of employer-employee."). Although Byrd and Thomas involved the assessment of liability under the doctrine of respondeat superior, it is clear that an employee's conduct is outside the employment setting when the conduct does not promote the employer's business. See Byrd, 57 Ohio St.3d at 58; Thomas, 48 Ohio App.3d at 90.
In light of the foregoing discussion, I find that plaintiff can prove no set of facts to support his claim against Clark for tortious interference with contract. The administrator was employed by the corporation and is being sued for activities he undertook in that capacity. Accordingly, defendants' motion to dismiss Count III of plaintiff's complaint for failure to state a claim shall be granted.
CONCLUSION
In light of the foregoing, it is hereby
ORDERED THAT
1) Defendants' motion to dismiss the breach of fiduciary claim be, and hereby is, denied;
2) Defendants' motion to dismiss the tortious interference with contract claim be, and hereby is, granted.
So ordered.