Opinion
Court of Appeals No. L-19-1019
01-29-2021
Estate of Jerome R. Mikulski Appellee/Cross-Appellant v. The Toledo Edison Company Appellant/Cross-Appellee
Joseph M. Sellers, Julie Selesnick, Dennis P. Barron, Michael F. Becker, Eric H. Zagrans, Thomas R. Theado, Robert D. Gary, and Jori Bloom Naegele, for appellee/cross-appellant. Peter B. Morrison, Allen L. Lastra, Zachary Faigen, Fred T. Goldberg, Jr., Mitchell G. Blair, Tracy S. Johnson, and Ronald M. McMillan, for appellant/cross-appellee. Joseph F. Albrechta and John A. Coble, amicus curiae, on behalf of The Toledo Edison Company.
Trial Court No. CI0200206364 DECISION AND JUDGMENT Joseph M. Sellers, Julie Selesnick, Dennis P. Barron, Michael F. Becker, Eric H. Zagrans, Thomas R. Theado, Robert D. Gary, and Jori Bloom Naegele, for appellee/cross-appellant. Peter B. Morrison, Allen L. Lastra, Zachary Faigen, Fred T. Goldberg, Jr., Mitchell G. Blair, Tracy S. Johnson, and Ronald M. McMillan, for appellant/cross-appellee. Joseph F. Albrechta and John A. Coble, amicus curiae, on behalf of The Toledo Edison Company. SINGER, J.
{¶ 1} This is an appeal and cross-appeal from the January 29, 2019 judgment of the Lucas County Common Pleas Court denying certification of the class, in a class action lawsuit, and granting certification of the subclass. The action was brought by appellee and cross-appellant, Estate of Jerome R. Mikulski ("Estate"), individually, and on behalf of the class and subclass, against appellant and cross-appellee, Toledo Edison, ("TE"), alleging fraudulent misrepresentation by TE. TE appealed the trial court's certification of the subclass, and the Estate filed a cross-appeal of the court's denial of certification of the class. For the following reasons, we reverse the trial court's judgment certifying the subclass, and affirm the judgment not to certify the class.
{¶ 2} In its appeal, TE sets forth one assignment of error:
Error 1: The trial court abused its discretion by certifying the Subclass under Rule 23(B)(3).
{¶ 3} In its cross-appeal, the Estate sets forth five assignments of error:
1. The trial court committed reversible error as a matter of law when it added "pecuniary loss" as an additional element that a plaintiff must show in order to support an Ohio common-law claim for fraudulent misrepresentation, then concluded on the merits that Plaintiff's claims for informational injury and increased tax liability injury did not provide the required "pecuniary loss," and on those bases denied certification of the Class.
2. The trial court committed reversible error as a matter law in concluding that Felix's classwide-injury requirement barred certification of the Class, under any part of Rule 23(B), because Plaintiff had failed to show classwide "pecuniary loss."
3. The trial court committed reversible error as a matter of law by denying certification of the Class without mentioning, let alone performing the required "rigorous analysis" of, [sic] any of the prerequisites of Civ.R. 23.
4. The trial court committed reversible error as a matter of law in concluding, contrary to law of the case, that any claim on account of Toledo Edison's "accounting misfeasance and tax fraud ... belongs to federal and state authorities on behalf of the government" and not to Plaintiff, and in barring on that basis Plaintiff's claim for fraudulent misrepresentation from class certification.
5. The trial court committed reversible error as a matter of law by ruling that the equitable remedy of disgorgement is limited to a breach-of-fiduciary-duty claim to the exclusion of all other claims, including fraudulent misrepresentation.
Facts and Procedural History
{¶ 4} In 2001 and 2002, Jerome and Elzetta Mikulski filed four lawsuits against various Ohio utilities. Those lawsuits included: the action before this court; two lawsuits against Centerior Energy Corporation ("Centerior"), which lawsuits later merged; and another action against the Cleveland Electric Illuminating Company in the Cuyahoga County Court of Common Pleas, which is stayed due to bankruptcy. In each of the lawsuits, it is alleged that the utility companies intentionally misinterpreted a 1984 tax law which governed how corporations determine if distributions to shareholders were dividends or return of capital. The Estate contends since dividends are taxed at a higher rate, all shareholders including the Estate, overpaid taxes during the years at issue and each are entitled to a refund for the amounts overpaid.
{¶ 5} The Estate asserts TE misrepresented its earnings and profits to its shareholders in 1985 and 1986, such that when TE distributed cash to the Estate and other class members, the amount was mischaracterized as dividends rather than a return of capital. The Estate asserts that because the distribution was mischaracterized as a dividend, the Estate and other class members were subject to additional taxes in 1985 and 1986.
{¶ 6} The Estate filed a lawsuit seeking an accounting of TE's earnings and profits, a declaration requiring the records to be corrected and disgorgement of ill-gotten benefits which TE received because of its fraudulent misrepresentation of its earnings and profits. The Estate sought to certify a class of all of TE's shareholders between January 1985 and April 1986, which included all shareholders who were issued IRS 1099-DIV forms during that time period. The Estate also sought to certify a subclass who were shareholders during the time period, were issued 1099-DIV forms, and paid income taxes in 1985 and 1986.
{¶ 7} The Estate originally filed its action in the trial court in 2002. TE sought to have the case removed to federal court one month later. After making its way through the federal system, the case was remanded back to the trial court because the federal court lacked jurisdiction. A visiting judge was assigned to the case in the trial court, from 2009 through 2016, but no action was taken during that time because all of the parties agreed to allow a companion case in Cuyahoga County to be decided.
{¶ 8} Due to a mistake at the clerk's office, the original case filed was destroyed. In March 2017, the Estate filed an amended class action complaint alleging fraudulent misrepresentation, and in February 2018, the Estate moved for class certification of the class and subclass.
{¶ 9} The Estate defined the class as:
[A]ll common shareholders of * * * TE, and all beneficial owners of TE common shares, from January 1985 through April 1986, inclusive, who were issued, in either of the calendar years 1986 or 1987, a Form 1099-DIV or substitute therefor by TE or its agents reporting the tax status of distributions made by TE during either of the calendar years 1985 or 1986, and the communities comprised of them and their spouses, if any, excluding therefrom:
(i) Registered shareholders identified by a federal taxpayer identification number other than a social security number, excepting nominees which held shares of TE common stock for or on behalf of beneficial owners who are identified for tax purposes by a social security number;
(ii) Defendants, their predecessors and successors;
(iii) The officers and directors of Defendant, its predecessors and successors;
(iv) Counsel of record in this action and their respective parents, spouses and children;
(v) Judicial officers who enter an order in this action and their respective parents, spouses and children.
{¶ 10} The subclass was defined as:
All members of the Class who were issued, in either of the calendar years 1986 or 1987, a Form 1099-DIV or substitute therefor by TE or its agents reporting the tax status of distributions made by TE during either of the calendar years 1985 or 1986, and who paid a state or federal income tax for either such year, excluding therefrom common shareholders and beneficial owners who sold such shares during the three full tax-reporting years immediately preceding the date of the entry of the Court's ruling certifying the Class (which had by that time been converted to shares of
FirstEnergy Corp.), that is, on or after [here insert the date corresponding to the three full tax-reporting-year exclusion].
{¶ 11} Following oral arguments by the parties, the trial court certified the subclass, but did not certify the class, finding the Estate failed to demonstrate an actual injury with respect to its fraudulent misrepresentation claim.
Companion Cases
{¶ 12} The Estate's first attempt to certify a class was denied by the Cuyahoga County Court of Common Pleas, and appealed to the Eighth District Court of Appeals in Mikulski v. Centerior Energy Corp., 8th Dist. Cuyahoga No. 94536, 2011-Ohio-696. The Eight District found "liability could not be determined on a class-wide basis for the class defined." Id. at ¶ 15. The appellate court further found a class could be defined to include only shareholders who overpaid taxes, and the matter was remanded to the trial court. Id. at ¶ 21.
{¶ 13} On remand, the trial court merged the two cases against Centerior. The Estate sought to obtain class certification based on a new class injury, which it alleged was an informational injury caused by the shareholders receiving incorrect information on their IRS Form 1099-DIV. The original injury claim of overpaying taxes was pursued by the Estate as a subclass. The Cuyahoga County Court of Common Pleas certified both the class and the subclass. On appeal, the Eighth District reversed, finding the trial court abused its discretion in certifying the class and subclass. Estate of Mikulski v. Centerior Energy Corp., 8th Dist. No. 107108, 2019-Ohio-983, 133 N.E.3d 899, ¶ 75. The appellate court found the subclass did not meet the predominance requirement of Civ.R. 23(B)(3), and the Estate's alleged informational injury for the class was not sufficient to constitute standing to bring the suit. Id.
Standard of Review
{¶ 14} In the appeal brought by TE, both the Estate and TE agree the standard of review is abuse of discretion. However, in the cross-appeal brought by the Estate, the Estate argues the proper standard of review is de novo because the trial court based its decision on an erroneous standard or misconstruction of law. The Estate refers to several cases where courts deviated from an abuse of discretion standard because the issues involved a question of law. The Estate attempts to equate the trial court's denial of the certification of the class as an interpretation of Civ.R. 23, which involved a question of law. The Estate also argues the question of standing is based on a de novo standard. Yet, the Estate failed to provide any case law in support of its position that a de novo standard is applied to a class certification determination. We observe the Estate did not make this argument before the Eighth District. Rather, the Estate argued the proper standard of review was abuse of discretion.
{¶ 15} Despite the Estate's contentions now in our court, the Ohio Supreme Court has clearly stated the standard of review for class certification determinations is abuse of discretion. Hamilton v. Ohio Savings Bank, 82 Ohio St.3d 67, 70, 694 N.E.2d 442 (1998).
Abuse of Discretion Standard
{¶ 16} A trial court has broad discretion in deciding whether to certify a class action, and an appellate court should not disturb that decision absent an abuse of discretion. Hamilton, citing Marks v. C.P. Chem. Co., 31 Ohio St.3d 200, 509 N.E.2d 1249 (1987), syllabus. However, a trial court's discretion must be exercised within the framework of Civ.R. 23. Hamilton at 70. "[A]ny doubts about adequate representation, potential conflicts, or class affiliation should be resolved in favor of upholding the class, subject to the trial court's authority to amend or adjust its certification order as developing circumstances demand, including the augmentation or substitution of representative parties." Baughman v. State Farm Mut. Auto. Ins. Co., 88 Ohio St.3d 480, 487, 727 N.E.2d 1265 (2000). An abuse of discretion occurs when a trial court's decision is unreasonable, arbitrary or unconscionable. Blakemore v. Blakemore, 5 Ohio St.3d 217, 219, 450 N.E.2d 1140 (1983).
Class Certification - Burden
{¶ 17} The party seeking to maintain a class action pursuant to Civ.R. 23 has the burden of demonstrating by a preponderance of the evidence that all factual and legal prerequisites to class certification have been satisfied. Warner v. Waste Mgt., Inc., 36 Ohio St.3d 91, 94, 521 N.E.2d 1091 (1988).
TE's Assignment of Error
{¶ 18} In its brief, TE only takes issue with the trial court's finding that the subclass met the predominance requirement under Civ.R. 23(B)(3). TE does not challenge the court's conclusion that the subclass satisfies the numerosity, commonality, typicality and adequacy requirements, or that the subclass is identifiable, the definition of the class is unambiguous and the class representative is a member of the subclass. See Civ.R. 23(A)(1) - (4); Warner at paragraph two of the syllabus; Warner at 96. Thus, we will limit our analysis accordingly.
Civ.R. 23(B)(3) - Predominance
{¶ 19} Class certification under Civ.R. 23(B)(3) requires the trial court to make two findings: (1) "the questions of law or fact common to the members of the class predominate over any questions affecting only individual members" and (2) "a class action is superior to other available methods" for the fair and efficient adjudication of the controversy.
The Estate's Motion for Class Certification of the Subclass
{¶ 20} In its motion filed with the trial court, the Estate argued the subclass should be certified under Civ.R. 23(B)(3), as common questions of law and fact predominate over individual questions, and "'[t]he focus of the [predominance] inquiry is directed toward the issue of liability.' Cicero v. U.S. Four, Inc., 10th Dist. Franklin No. 07AP-310, 2007-Ohio-6600, ¶ 38 (Internal quotation omitted.)." The Estate contended "[t]he only additional question germane to the Subclass members is related to the additional remedy they seek - money damages to compensate them for overpaying their income taxes as a result of TE's fraud." The Estate asserted this question does not raise individualized questions because its experts have opined aggregate damages for the subclass can be reliably calculated with statistical models.
TE's Opposition
{¶ 21} In its opposition filed in the trial court, TE countered the subclass includes members who did not overpay their taxes, therefore class certification must be denied under Civ.R. 23(B)(3) because the Estate did not satisfy the predominance requirement. TE noted the Estate must demonstrate it can show, through common evidence, that all class members were injured by TE's actions, and if the Estate fails to show all members were injured, there is no showing of predominance. In support, TE cited to Felix v. Ganley Chevrolet, Inc., 145 Ohio St.3d 329, 2015-Ohio-3430, 49 N.E.3d 1224.
{¶ 22} TE argued its experts opined that a significant percentage of subclass members did not overpay their taxes, and the Estate's expert admits that uninjured shareholders exist in the subclass. TE maintained since common evidence cannot show that all subclass members overpaid their taxes, individualized inquiries would be required to determine which member did or did not overpay their taxes.
The Estate's Reply
{¶ 23} The Estate responded that every subclass member suffered two separate injuries - one as a result of being a member of the class, and the second, additional injury of overpayment of taxes. The Estate contended any concern that a subclass member did not overpay taxes can be addressed through adjustments to the formula that will distribute overpaid taxes to subclass members.
Trial Court's Opinion Regarding the Subclass
{¶ 24} In its January 29, 2019 opinion, the court observed "TE argues that [the Estate] can present no common evidence of class-wide reliance on the IRS Forms 1099-DIV, and individual issues therefore predominate." The court noted the Estate "alleges TE provided fraudulent IRS Forms 1099-DIV to shareholders, and in reliance on the information provided on those forms, the putative Subclass filed tax returns and paid state or federal income tax on fictitious taxable earnings."
{¶ 25} In certifying the subclass under Civ.R. 23(B)(3), the court found "[t]he matter to be proven at trial, therefore, may be presented by common proof, with reliance 'established by inference or presumption' based on the use of standardized, IRS forms." In support, the court cited to Hamilton, 82 Ohio St.3d at 84, 694 N.E.2d 442.
{¶ 26} The court also found the Estate "demonstrates that damages for the Subclass may be demonstrated using statistical models for distribution based on a common formula, and the predominance determination is based more on common issues than individualized determinations regarding damages." The court further found "[t]his common proof * * * is a significant aspect of the fraudulent misrepresentation claim, and would resolve the matter for all members of the putative Subclass in on adjudication." The court relied on Wachovia Natl. Bank of Delaware, NA v. Ball, 6th Dist. Huron No. H-08-022, 2010-Ohio-1479, ¶ 53.
Arguments on Appeal
{¶ 27} In its brief, TE claims it argued before the trial court that the Estate cannot show subclass-wide injury with common evidence, yet the court did not address this element. Rather, the court focused on the reliance element of fraud and damages, when TE did not raise any reliance arguments with respect to the subclass, and injury is the issue, not damages, under Civ.R. 23(B)(3).
{¶ 28} TE submits the Estate admitted, in response to request for admissions, that the subclass includes members who could not have overpaid their taxes. In addition, TE argues the Estate's expert, Dr. Gale, acknowledged that some subclass members were not injured - they did not overpay their taxes. Moreover, TE offers evidence that as many as 38% of subclass members did not overpay their taxes. In support, TE cites to Felix, supra, as well as Estate of Mikulski v. Centerior Energy Corp., 8th Dist. No. 107108, 2019-Ohio-983, 133 N.E.3d 899, ¶ 50.
{¶ 29} TE notes in order to certify a class under Civ.R. 23(B)(3), Felix requires that class-action plaintiffs demonstrate they can prove, through common evidence, that all class members were injured by the defendant's actions. Felix at ¶ 33. TE argues if a subclass member did not overpay taxes, that member was not injured. TE observes damages are the amount of injury, so the "damages are the amount of overpaid taxes once [the Estate] has established that all Subclass members suffered some - and not zero - injury." TE contends the trial court did not apply Felix in its consideration of certifying the subclass, therefore, the portion of the order certifying the subclass must be reversed.
{¶ 30} In its response brief, the Estate observes, with respect to TE's argument in its opposition as to TE's "expert's purported 'evidence' that from 25% to 38% of the Subclass did not overpay their taxes" that "TE and its experts * * * have not actually identified a single individual * * * that hypothetically did not overpay their taxes." The Estate also argues that Felix is inapplicable because its "classwide injury-in-fact proof requirement for class certification only applies to claims brought under the OCSPA [Ohio Consumer Sales Practices Act]."
Felix v. Ganley Chevrolet , Inc.
{¶ 31} In Felix, 145 Ohio St.3d 329, 2015-Ohio-3430, 49 N.E.3d 1224, at ¶ 1, the issue before the Supreme Court of Ohio was "whether all members of a plaintiff class alleging violations of the OCSPA, R.C. Chapter 1345, must have suffered injuries as a result of the conduct challenged in the suit." The court found they must. Id. The court addressed the following propositions of law, posed by Ganley:
A class action cannot be maintained on behalf of a putative class that includes individuals who did not sustain actual harm or damage as a result of the challenged conduct, which is a required part of the rigorous analysis under Ohio R. Civ. P. 23; [and]
In a class action brought under the Ohio Consumer Sales Practices Act, R.C. 1345.09(B) requires the consumers to have sustained actual damages as a result of the challenged conduct. Id. at ¶ 22.
{¶ 32} The court noted "[t]he procedural aspects of class-action litigation in Ohio are controlled by Fed.R.Civ.P. 23 and Civ.R. 23, depending on whether the matter proceeds in a federal or state court * * *. [Since] the Ohio Rules of Civil Procedure are modeled after the Federal Rules of Civil Procedure, federal law interpreting the federal rule is appropriate and persuasive authority in interpreting a similar Ohio rule." Id. at ¶ 24.
{¶ 33} The court also observed:
Plaintiffs in class-action suits must demonstrate that they can prove, through common evidence, that all class members were in fact injured by the defendant's actions. In re Rail Freight Fuel Surcharge Antitrust Litigation-MDL No. 1869, 725 F.3d [244] at 252 [(D.C.Cir.2013)]. Although plaintiffs at the class-certification stage need not demonstrate through common evidence the precise amount of damages incurred by each class member, [Comcast Corp. v.] Behrend, 569 U.S. [27], 133 S.Ct. [1426] at 1433, 185 L.Ed.2d 515 [(2013)], citing Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 563, 51 S.Ct. 248, 75 L.Ed. 544 (1931), they must adduce common evidence that shows all class members suffered some injury. In re Rail Freight Fuel Surcharge Antitrust Litigation at 252, citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623-624, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997), and Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 815-816 (7th Cir.2012).
The inquiry into whether there is damage-in-fact is distinct from the inquiry into actual damages: the "[f]act of damage pertains to the existence of injury, as a predicate to liability; actual damages involves the quantum of injury, and relate to the appropriate measure of individual relief." Martino v. McDonald's Sys., Inc., 86 F.R.D. 145, 147 (N.D.Ill.1980).
If the class plaintiff fails to establish that all of the class members were damaged (notwithstanding questions regarding the individual damages calculations for each class members), there is no showing of predominance under Civ.R. 23(b)(3). See Behrend, 569 U.S. [27], 133 S.Ct. at 1432, 185 L.Ed.2d 515; see also Cullen v. State Farm Mut. Auto. Ins. Co., 137 Ohio St.3d 373, 2013-Ohio-4733, 999 N.E.3d 614, ¶ 48. * * *
"Perhaps the most basic requirement to bringing a lawsuit is that the plaintiff suffer some injury. Apart from a showing of wrongful conduct and causation, proof of actual harm to the plaintiff has been an indispensable part of civil actions." Schwartz & Silverman, Common Sense Construction of Consumer Protection Acts, 54 U.Kan.L.Rev. 1, 50 (2005). Id. at ¶ 33-36.
Applicability of Felix
{¶ 34} In Felix, with respect to Civ.R. 23(B)(3) and Rule 23(b)(3), the Ohio Supreme Court cited state and federal authority in support of the rule of law that common evidence is needed to show that all class members suffered some injury. Id. at ¶ 33-36. The court then applied the law to the specific facts of the case, finding that "all members of a class in class-action litigation alleging violations of the OCSPA must have suffered injury as a result of the conduct challenged in the suit." Id. at ¶ 36.
{¶ 35} The Felix decision, in part, provides general principles of law applicable to all class action suits, that common evidence is needed to show that all class members suffered some injury, regardless of whether the action is brought under the OCSPA. The decision also addresses the specific law as to class action damages under the OCSPA. Thus, the Estate's attempt to distinguish Felix, and limit its application to only cases involving the OCSPA, is misguided. Moreover, the Eighth District Court of Appeals has applied Felix to non-OCSPA cases. See Estate of Mikulski, 8th Dist. No. 107108, 2019-Ohio-983, 133 N.E.3d 899, at ¶ 45 and Ford Motor Credit Co. v. Agrawal, 8th Dist. No. 103667, 2016-Ohio-5928, 71 N.E.3d 671, ¶ 28.
{¶ 36} We conclude Felix applies to non-OCSPA class action cases with respect to the issue that common evidence is needed to show all class members suffered some injury.
Other Cases Interpreting Civ.R. 23(B)(3) and Rule 23(b)(3)
{¶ 37} The Civ.R. 23(B)(3) inquiry "requires a court to balance questions common among class members with any dissimilarities between them, and if the court is satisfied that common questions predominate, it then should 'consider whether any alternative methods exist for resolving the controversy and whether the class action method is in fact superior.'" (Citation omitted.) Cullen, 137 Ohio St.3d 373, 2013-Ohio-4733, 999 N.E.2d 614, at ¶ 29. "For common questions of law or fact to predominate, it is not sufficient that such questions merely exist; rather, they must represent a significant aspect of the case." Marks, 31 Ohio St.3d at 204, 509 N.E.2d 1249; Cullen at ¶ 30. The plaintiff must establish, and the trial court must find, "that questions common to the class in fact predominate over individual ones." Cullen at ¶ 34. "The * * * predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem Products, Inc., 521 U.S. at 594, 117 S.Ct. 2231, 138 L.Ed.2d 689.
{¶ 38} In Behrend, 569 U.S. at 34, 133 S.Ct. 1426, 185 L.Ed.2d 515, the United States Supreme Court cited Amchem, and observed the trial court has a "duty to take a 'close look' at whether common questions predominate over individual ones. [Amchem] at 615." In Amchem at 623-624, the United States Supreme Court noted the predominance inquiry "trains on the legal or factual questions that qualify each class member's case as a genuine controversy." Thus, the plaintiff must show it can establish, through common evidence, that all class members were injured by the defendant. See In re Rail Freight Fuel Surcharge Antitrust Litigation-MDL No. 1869, 725 F.3d at 252, citing to Amchem.
Hamilton v. Ohio Sav. Bank
{¶ 39} In Hamilton, 82 Ohio St.3d at 84, 694 N.E.2d 442, the Ohio Supreme Court held "class action treatment is appropriate where the claims arise from standardized forms or routinized procedures, notwithstanding the need to prove reliance * * * [which] may be sufficiently established by inference or presumption." However, the court noted while "a fraud perpetrated on numerous persons * * * may be an appealing situation for a class action[,] * * * a fraud case may be unsuited for treatment as a class action if there was material variation in the representation made or in the kinds or degrees of reliance by the persons to whom they were addressed." Id. at 83-84.
Wachovia Natl. Bank of Delaware , NA v. Ball
{¶ 40} In Ball, 6th Dist. Huron No. H-08-022, 2010-Ohio-1479, at ¶ 54, we found the bank's use of standardized practices and procedures, specifically estimates of value, to enter into loan transactions with the putative class members, supported the trial court's Civ.R. 23(B)(3) finding that common questions of law and fact predominated over issues related to individual claims. In reaching this decision, we relied on the Ohio Supreme Court case of Cope v. Metro. Life Ins. Co., 82 Ohio St.3d 426, 429, 696 N.E.2d 1001 (1998).
{¶ 41} In Cope, the court held the trial court abused its discretion in failing to give adequate consideration as to whether the asserted claims were susceptible of class-wide proof, thereby obviating the need for separate adjudications. Id. at 426. The complaint in Cope alleged the insurance company "approved a widespread scheme to obtain higher commissions and extra charges by selling existing * * * policyholders policies that were classified and/or charged as new policies when, in fact, they were replacement policies and should have been classified and/or charged as such." Id. at 427. The court identified several cases "involving similar form documents or the use of standardized procedures and practices" as presenting opportunities for common proof of claims on a class basis. Id. at 430-431.
Analysis
{¶ 42} The issue before us is whether the trial court abused its discretion by finding the Civ.R. (B)(3) predominance requirement was satisfied, and thus, certifying the subclass.
{¶ 43} Upon review, the "common proof" among subclass members are that each member was issued a 1986 or 1987 IRS Form 1099-DIV by TE and each member paid state or federal income tax for either 1986 or 1987. While the IRS forms may be standardized, the information on each form is specific to each subclass member.
{¶ 44} Moreover, there is no common evidence which shows that all subclass members suffered an injury, as it cannot simply be assumed that any payment by the shareholder was an overpayment. Thus, the 1986 and 1987 state and federal tax returns of each subclass member will have to be individually scrutinized to make this determination. Likewise, there is no generalized, common proof of the amount of each member's damages, assuming an injury was suffered. Therefore, the 1986 and 1987 state and federal tax returns of each subclass member will have to be further examined, individually, to arrive at this sum. These undertakings cannot be accomplished by a statistical model for the entire subclass, as the circumstances surrounding whether each subclass member was injured, and if so, to what extent, will have to be separately decided based on each subclass member's individual situation.
{¶ 45} For instance, after an individual examination of each subclass member is carried out to determine whether each member was injured, the amount of each member's damages would then have to be calculated on a member-by-member basis. The individual inquiries of each subclass member would include: whether the member overpaid state taxes in 1986, and if so, how much; whether the member overpaid state taxes in 1987, and if so, what amount; whether the member overpaid federal taxes in 1986, and if so, in what amount; and whether the member overpaid federal taxes in 1987 and if so, how much. In addition, other distinct factors for each subclass member would have to be considered, such as the member's tax bracket for 1986 and/or 1987, whether the member filed a tax return for 1986 and/or 1987 individually or jointly, and the difference between what the member would have paid in taxes (federal and/or state, for 1986 and/or 1987) if TE's distributions to shareholders were classified as return of capital rather than dividends.
{¶ 46} We conclude the questions common to subclass members do not predominate over the questions affecting individual members issues, thus the subclass fails to satisfy the predominance requirement of Civ.R. 23(B)(3). Therefore, we conclude the trial court abused its discretion in granting class certification of the subclass. Accordingly, TE's assignment of error is well-taken.
The Estate's Assignments of Error on its Cross-Appeal
Trial Court Opinion Regarding the Class
{¶ 47} In its January 29, 2019 opinion, the court observed the Estate argued the class suffered two different types of injuries: informational injury, which resulted from TE's failure to provide disclosures required by 26 U.S.C. 6042(c)(2); and increased tax liability injury, "considered in the absence of any overpayment of federal and/or state income taxes." The court found the Estate failed to demonstrate an injury which would support a fraud claim. The court couched its decision in economic terms, finding the Estate's implicit, non-pecuniary injury failed to prove an actual injury, preventing certification of the class.
{¶ 48} With respect to the first type of claimed injury, the court noted "while the pleading alleges injury arising from fraudulent misrepresentation, [the Estate] appears to argue that no actual, economic injury is required. Instead, [the Estate] argues that the tax code violation demonstrates sufficient injury." The court found "no authority that construes any tax code as a law enacted to protect the public," and, in essence, found the tax code provided no private right of action for violations. The court further found '"because [the Estate] relies on implicit, non-pecuniary injury to support a claim on behalf of the putative Class, contrary to law, [the Estate] fails to demonstrate an actual injury."
{¶ 49} Regarding the second type of claimed injury, the court noted the injury "lacks any articulation of a pecuniary loss * * * necessary to support a common law claim for fraudulent misrepresentation."
The Estate's First Assignment of Error
{¶ 50} The Estate argues the trial court erred when it found the Estate would have to suffer pecuniary loss in order to sustain its claims for fraudulent misrepresentation. The Estate relies on several cases where, it contends, a plaintiff's claim was permitted based on an informational injury. One such case held "[a] harm is not an informational injury simply because it has something to do with information. An informational injury occurs when the defendant refuses to provide the plaintiff with information that a law-typically a sunshine law-entitles him to obtain and review for some substantive purpose." Carello v. Aurora Policemen Credit Union, 930 F.3d 830, 835 (7th Cir.). That court then cited to several cases where information was sought but access to the information was denied. Id. It was the denial of the access to the information that caused the informational injury, rather than failure to provide that information in the first place. Id.
{¶ 51} The Estate also asserts the trial court contradicted itself when it permitted the Estate's amended complaint to continue past a motion to dismiss, but then found the Estate's alleged injury was not sufficient.
{¶ 52} TE counters that even if the trial court was incorrect on this particular point, the Estate failed to provide any injury to support its fraud claim. TE suggests we bypass the issue of whether an informational injury is a valid injury in a fraud claim, and address whether the Estate's alleged injury was adequate to support a fraud claim from the start.
Law
{¶ 53} "To have standing, plaintiffs must show that they have suffered an injury that is fairly traceable to the defendants' allegedly unlawful conduct and that is likely to be redressed by the requested relief." Estate of Mikulski, 8th Dist. No. 107108, 2019-Ohio-983, 133 N.E.3d 899, ¶ 59, citing Moore v. Middletown, 133 Ohio St.3d 55, 2012-Ohio-3897, 975 N.E.2d 977, ¶ 22. "''Perhaps the most basic requirement to bringing a lawsuit is that the plaintiff suffer some injury. Apart from a showing of wrongful conduct and causation, proof of actual harm to the plaintiff has been an indispensable part of civil actions.''" Id., quoting Felix, 145 Ohio St.3d 329, 2015-Ohio-3430, 49 N.E.3d 1224 at ¶ 36. An "injury-in-fact" is essential to find the class representative possesses standing to pursue redress for common injury, shared by the class. Strickler v. Ohio Banc & Lending, Inc., 9th Dist. Lorain No. 12CA010178, 2013-Ohio-1221, ¶ 8.
{¶ 54} In order to demonstrate a party has standing, the party must allege an injury that is "concrete and not simply abstract or suspected to be compensable." State ex rel. Food & Water Watch v. State, 153 Ohio St.3d 1, 2018-Ohio-555, 100 N.E.3d 391, ¶ 20. Most importantly, a concrete injury is required even when the party alleges a statutory violation. Spokeo, Inc. v. Robins, ___ U.S. ___, 136 S.Ct. 1540, 1549, 194 L.Ed.2d 635 (2016). The demonstration of a concrete injury is still necessary because a statutory violation "may result in no harm" or even "any material risk of harm." Id. at 1550.
Analysis
{¶ 55} Upon review, the Estate relied on several cases which it contends supports the proposition that an informational injury is sufficient to sustain a fraud claim. However, the Estate did not seek information from TE, and was denied access to that information by TE. Rather, the Estate was provided information that it asserts was incorrect. The Estate refers to several cases in support of its contentions, but these cases are based on statutes which include a private cause of action for violating the statute.
{¶ 56} We find the case Smith v. Bank of Am., N.A., 679 Fed.Appx. 549 (9th Cir.2017), more on point.
{¶ 57} The Smith court found the district court did not have jurisdiction to hear the case because the plaintiffs failed to demonstrate injury in fact, where the plaintiffs alleged they received an erroneous tax form. Id. at 549, 550. The appellate court found there was no private cause of action against the entity and plaintiffs failed to allege they filed tax returns in reliance on the form or received a lower tax deduction prior to the form being issued. Id.
{¶ 58} We conclude the Estate's claim of informational injury is not sufficient to confer standing. The Estate failed to demonstrate how the erroneous form affected its reliance on the information, or how it relied on the erroneous info, or it paid more in taxes based on the erroneous information contained in the tax form. The Estate has not demonstrated its claimed informational injury was concrete enough to confer standing. Therefore, we conclude the trial court did not err in finding the Estate did not have standing.
{¶ 59} We further conclude the Estate's claims of injury based on increased tax liability are ambiguous, and thus, insufficient to support a fraud claim. The Estate's claimed injury is based on an allegation that it may be subject to liability if audited by the IRS. This claimed injury is not concrete because it is only a possibility that the IRS would punish a taxpayer-shareholder for relying on a form provided to it by a corporation. Thus, we conclude the trial court properly found the Estate's claimed injuries were not concrete or sufficient enough to sustain the fraud claim. Accordingly, the Estate's first assignment of error is not well-taken.
The Estate's Second Assignment of Error
{¶ 60} The Estate contends there are four reasons why the Felix case does not apply: (1) Felix only applies to OCSPA claims; (2) Felix is not an opinion based on standing; (3) even if Felix applied outside of the OCSPA, it carved out informational injury torts; and (4) Felix does not apply to class certification under Civ.R. 23(B)(1) and (B)(2). These arguments are identical to those presented by the Estate on the same issue in TE's appeal.
{¶ 61} TE counters the Estate's argument is moot because the trial court determined the informational injury and tax liability injury were not fraud injuries. TE also argues Felix does not apply to the class, but to the subclass.
{¶ 62} Upon review, the trial court cited Felix once in the analysis portion of its opinion regarding certification of the class. The court found "because [the Estate] relies on an implicit, non-pecuniary injury to support a claim on behalf of the putative Class, contrary to law, [the Estate] fails to demonstrate an actual injury, preventing certification of the putative Class under Civ.R. 23." Hence, the trial court did not reach the issue of whether Felix applied to the proposed class because the court found the Estate lacked standing to bring the suit in the first place. Accordingly, the Estate's second assignment of error is not well-taken.
The Estate's Third Assignment of Error
{¶ 63} The Estate argues the trial court committed error when it failed to perform the rigorous analysis required by Civ.R. 23, in denying certification of the class. TE counters the court was not required to apply Civ.R. 23 after the court determined the Estate did not have standing.
{¶ 64} "Standing to sue is an essential threshold which must be crossed before any determination as to class representation under Rule 23 can be made. Without standing, one cannot represent a class, but standing to sue does not, of itself, support the right to bring a class action." Paoletti v. The Travelers Indemnity Co., et al, 6th Dist. Lucas No. L-75-196, 1977 WL 198462, * 3 (May 6, 1977), quoting Weiner v. Bank of Prussia, 358 F.Supp. 684, 694-696 (E.D.Pa).
{¶ 65} As we previously found, the trial court did not err in determining the Estate did not have standing. Consequently, the court was not required to apply all of the provisions of Civ.R. 23. The Estate was required to have standing when it filed suit, and the Estate could not cure this deficiency by filing a class action lawsuit. Accordingly, the Estate's third assignment of error is not well-taken.
The Estate's Fourth and Fifth Assignments of Error
{¶ 66} The Estate argues that a single footnote within the trial court's opinion created error. The footnote reads:
[The Estate] argues that TE manipulated its accounting for its own benefit, at the expense of the putative Class, and seeks "disgorgement" of unpaid tax and other financial benefits. The evidence proffered demonstrates a clear dispute exists regarding TE's accounting practices. Any claim based on accounting misfeasance and tax fraud, however, belongs to federal and state authorities on behalf of the government * * * .
{¶ 67} The footnote closes by finding "'disgorgement is an available remedy for a claim of breach of fiduciary duty. Typically, it is seen in an action by shareholders against the corporation for disgorgement of profits.' * * * [The Estate] asserts no claim for breach of fiduciary duty."
{¶ 68} Neither of these issues, the proper place for a lawsuit and disgorgement as a remedy, was directly addressed by the trial court in its opinion, and there is no indication that the court's decision as to whether the class should be certified was influenced by these issues. Rather, this footnote represented the court's denial of the remainder of the Estate's claims. Accordingly, the Estate's fourth and fifth assignments of error are not well-taken.
Conclusion
{¶ 69} We conclude the trial court abused its discretion in certifying the subclass, and we further conclude the trial court did not abuse its discretion in not certifying the class.
{¶ 70} The January 29, 2019 judgment of the Lucas County Common Pleas Court denying certification of the class is affirmed, and the portion of the judgment certifying the class is reversed, and this matter is remanded to the trial court for proceedings consistent with this opinion. Pursuant to App.R. 24, the Estate is ordered to pay the costs incurred on appeal.
Judgment affirmed, in part, and reversed, in part, and cause remanded.
A certified copy of this entry shall constitute the mandate pursuant to App.R. 27. See also 6th Dist.Loc.App.R. 4.
Mark L. Pietrykowski, J.
Arlene Singer, J.
Thomas J. Osowik, J.
CONCUR. /s/_________
JUDGE /s/_________
JUDGE /s/_________
JUDGE