Opinion
11CVH-01-1252
03-20-2012
EDWARD W. FRANKS, Plaintiff, v. JOHN A. RANKIN, et al., Defendants.
JOURNAL ENTRY DENYING PLAINTIFF FRANKS' MOTION FOR REIMBURSEMENT OF EXPERT WITNESS FEES BY CSI (Motion Filed January 16, 2012) DENYING POSTPONEMENT OF TRIAL (Motions Filed February 15 and 21, 2012) and DENYING IN PART, GRANTING IN PART CSI'S MOTION FOR SUMMARY JUDGMENT ON COUNT 25 (Motion Filed January 12, 2012)
FRYE, JUDGE
I. Introduction.
The multi-count complaint by a former officer, director and employee of Connectivity Systems, Inc. ("CSI") alleges a failure to fully-pay compensation, and unlawful diversion of corporate assets or other breaches of fiduciary duty owed in the context of a closely-held corporation. The defendants are John A. Rankin and CSI, along with some collateral businesses owned by Mr. Rankin. As explained in prior decisions, since 2001 Mr. Rankin has been the dominant, majority shareholder of CSI. Plaintiff Edward W. Franks is a minority shareholder, former employee, and former Vice President and Treasurer of CSI.
Count 25 of the complaint alleges that Franks was not paid all of the compensation he was due as an employee. This decision addresses (1) whether that claim can be resolved under Civ. R. 56, (2) the plaintiff's recent motion to tax professional fees paid to an outside accounting firm (including those for a CPA who testified as an expert witness at the preliminary injunction hearing) against CSI pending final completion of the case, and (3) defendants CSI's and Rankin's rather surprising motions to postpone trial for roughly six months.
II. Brief Factual Background.
As reviewed at length in the preliminary injunction decision filed October 28, 2011 (2011 Ohio Misc. LEXIS 557) CSI is a closely held corporation. It primarily does business in the computer industry and has five shareholders. Since one of the founders, and former majority shareholder Mark Schare left the company in 2001, the dominant shareholder and president has been defendant John A. Rankin. (Franks Dep. Tr. 20.)
Plaintiff claims that Rankin abused his authority as dominant shareholder and president of CSI in many ways including by not keeping accurate, contemporaneous financial books and records. The court granted a preliminary injunction in an attempt to preserve CSI's continued solvency, if not its existence, pending trial. Defendant Rankin argues, however, that he never abused the heightened fiduciary duty owed minority shareholder Franks, and has vigorously contested the remedial relief imposed under the court's equitable orders in this court and on an interlocutory appeal to the Tenth District Court of Appeals. One of Rankin's key complaints is that this court lacked legal authority to put an interim, emergency Board of Directors in place to manage CSI pending the trial until the case reached final resolution on the fiduciary duty claims.
III. Motion for Reimbursement of Accounting Fees.
As reflected in the decisions issued after the preliminary injunction hearing, the court concluded there were glaring deficiencies in financial record-keeping for CSI that reflected breaches of fiduciary duty owed by Mr. Rankin. To prove the point plaintiff was required to attempt to reconstruct CSI's extensive financial records using only its bank statements, pre-2010 tax returns (because 2010 had not been completed as of October 2011) requiring extensive work by forensic accountant Rebekah Smith, of the GBQ Consulting, L.L.C. firm. The amount of money that had to been traced, and the sheer volume of individual transactions that had to be located and correctly accounted- for, required much costly work, which would not have been required – or which would have been greatly minimized – if CSI had sensibly maintained financial records.
The amounts involved were substantial. According to plaintiff, Mr. Rankin made affirmative misstatements of fact about some $3 million siphoned off to his personal accounts (Franks Tr. 62) and refused Franks' specific requests to review CSI bank statements several years earlier while Franks remained employed. (Id at 91-92)
Based on all of this, plaintiff seeks reimbursement for the expense of reconstructing accurate financial records for CSI. This request must be DENIED without prejudice. As equitable as it might seem to order CSI to advance GBQ's fees, defendant CSI appropriately notes at page 3 of its memorandum filed February 6, 2012 that no final determination has been made of the merits of the case. That awaits a jury trial scheduled for mid-summer.
Moreover, even if this were a post-trial request for litigation expenses by a prevailing party, the normal rule is that expert witness fees are not taxed as court costs or otherwise recoverable. This is known as the "American Rule" - normally, each party pays its own legal fees and litigation expenses. That approach is even more clearly applicable in pretrial situations. For instance, when notices must be sent to members of a Civ. R. 23(B)(3) class there can be no pretrial fee-shifting, even if preceded by a mini-trial to preliminarily evaluate the likely outcome. Eisen v. Calisle & Jacquelin, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974).
Having said all of that, there appear to be several ways in which plaintiff may be entitled to recover these professional fees and this decision does not foreclose requesting them. Plaintiff is, of course, comparable to the minority shareholder who sued in Crosby v. Beam, 47 Ohio St.3d 105, 548 N.E.2d 217 (1989). See also, Adair v. Wozniak, 23 Ohio St.3d 174, 492 N.E.2d 426, (1986) at syllabus. Crosby held: "[w]here majority or controlling shareholders in a close corporation breach their heightened fiduciary duty to minority shareholders by utilizing their majority control of the corporation to their own advantage, without providing minority shareholders with an equal opportunity to benefit the minority shareholder is individually harmed." Id. at 109. The Ohio Supreme Court also observed that the special derivative claim rules did not apply, because of the unfairness of pursuing "an action pursuant to Civ. R. 23.1, then any recovery would accrue to the corporation and remain under the control of the very parties who are defendants in the litigation." Id. at 109.
Subject to a further review at trial, the court concludes that plaintiff Franks may present evidence that Mr. Rankin's breaches of fiduciary duty caused him damages including GBQ's professional fees, and that CSI - not merely Franks - was the beneficiary of that work. Apparently Franks will have spent thousands of dollars to reconstruct CSI's financial books when that cost ought to have been born -predominantly - by the business itself or by Mr. Rankin. Ohio statutes referenced in this court's preliminary injunction decision required CSI to maintain correct, complete and contemporaneous financial books and records. Had CSI done so, the cost economically would have fallen proportionally on all shareholders. So if Mr. Franks ends up being the only person to pay accounting fees, then Mr. Rankin would benefit disproportionately and unfairly.
If a jury finds that GBQ's accounting work was proximately required by Mr. Rankin's misconduct, the court will allow the jury to award damages for it. Alternatively, Mr. Franks might also be seen as conferring a benefit on CSI that is recoverable as a matter of equity in this minority shareholder case, again assuming a jury first finds a breach of fiduciary duty. Sometimes special rules apply in minority shareholder cases. See, Dolgow v. Anderson, 43 F.R.d. 472, 499-500 (E.D.N.Y. 1968) citing Developments in the Law, Multiparty Litigation in the Federal Courts, 71 Harv. L. Rev. 874, 938, n. 462 (1958): "The classic example is the stockholder derivative suit in which the corporate defendant is better able to bear the expense of providing whatever notice is required to be given to absentees during the course of the litigation." However, the parties' briefs do not address damages available at trial, so the court makes no ruling at this time.
Pending trial, however, no basis is apparent to this court to transfer liability for GBQ expenses to CSI. The January 16, 2012 motion is therefore DENIED.
IV. The Continuance Motions
Depositions began last fall. A three day evidentiary hearing was held late last October. Plaintiff understandably objects to postponing trial, since the longer this case drags out, the more expenses mount, and the more uncertain is CSI's ability to survive.
Defendants seek an additional delay of six months before trial, but have not persuaded the court that they cannot reasonably meet the currently assigned trial date. It merits note that Mr. Rankin is investing his lawyer's time and his own resources in an interlocutory appeal challenging this court's preliminary injunction (which merely sought to preserve CSI until the trial), so it seems counterintuitive to suggest that the trial now be extended such that the interim Board and other emergency relief – to which he objects – would be prolonged. Both continuance motions are DENIED.
V. CSI Motion for Summary Judgment on Count 25.
Plaintiff Franks alleged that CSI breached a "written (and/or oral) agreement" such that CSI owes him unpaid back-pay and commission in the millions of dollars. The exact amount owed remains uncertain at least as of the time Franks was deposed last fall. At that time Franks said – perhaps not unreasonably – that he needed accurate financial records for CSI in order to calculate an exact damages figure. (Dep. Tr. 22-23.)
Early in this case, plaintiff contended that CSI owed him $4.9 million in back-pay and commissions. (Affidavit of Franks filed April 13, 2011.)
To the extent the motion for summary judgment is predicated upon the absence of more specific testimony about claimed lost wages or related damages, it is DENIED. See, Malik v. Falcon Holdings, LLC, __ F.3d __, 2012 U.S. App. LEXIS 5336, Case No. 11-2815, (7th Cir. March 14, 2012) ("Defendants do try to defend their judgment by arguing that plaintiffs waited too long to quantify their damages. According to defendants, details should have been set out before the close of discovery . This is absurd. Litigants are entitled to use discovery to learn facts that will affect the remedy; a party can wait until the facts are in hand before adding specifics to the claim adumbrated in the complaint.")
Defendant CSI also argues that there was no written contract; that an oral contract would violate the Statute of Frauds; and that even if there was some contract for Franks' compensation it is unenforceable because Franks waived his rights by not speaking up over the past few years when his compensation was deferred or, perhaps, miscalculated. In the end, CSI affirmatively asserts that it did pay Mr. Franks all back, unpaid salary due (of $313,500) as of the time he was terminated, and that CSI no longer owes him any salary, bonus, commission or other employment-related payments.
GBQ's affirmative evidence that CSI's financial books were in disarray for 2010 and 2011, and that substantial work was needed to unravel the accounting records, is one piece of evidence proving at this stage that CSI operated casually, if not negligently or fraudulently, in respect of its financial record-keeping. Beyond that the record contains evidence of other corporate informalities such as that "impromptu shareholders' meetings" were held at odd times and places by Mr. Rankin. (Tr. 35). When the standard to grant summary judgment is so strict, this background information makes it exceedingly difficult for CSI to claim that Franks was paid everything he was due.
To be sure, the nature of Franks' claimed unpaid compensation is rather opaque. Yet by the time he was discharged Rankin obviously concedes $313,500 in back compensation had been run-up and was undeniably owed to Franks. With all of that in mind, it is difficult to say Franks' claim that he was entitled to more money lacks any conceivable foundation that requires a trial.
Moreover, the variety in compensation arrangements identified in this record adds to the confusion. Apparently some of what Franks claims was in commission or bonus payments. Bonuses, of course, would by common understanding be entirely discretionary with Rankin; but the record on even that is not crystal clear. Franks' own almost unintelligible description of his compensation arrangement - which he says now he cannot remember verbatim from memory – "was declining percentage and increasing percentage based upon new revenues, recurring revenues and, you know, different products. [I]t was not a simple formula." (Tr. p. 19) Franks says it was in writing. (Id.) Unfortunately, no written contract has been produced in discovery, but the court cannot simply throw-away the oral testimony on this question at this stage.
Having said all that, the court is able to narrow the scope of Mr. Franks' claim under Count 25. The only writing(s) relied upon by plaintiff do not constitute a written contract. The closest is an email message from Marc Schare written in 1996. It is attached to both Franks' first affidavit and his longer, second affidavit filed on Jan. 27, 2012. However, the e-mail begins with the words "Ed, before I get this legalized, take a look at this and see if I hit all the terms and conditions that we discussed. Note that I modified the royalty to put it on a sliding scale – I felt that 20% forever is probably a bit high, and I also wanted to include the maintenance component. All things are negotiable. If I left anything out, please let me know. Also, if you prefer some other title to 'Senior Developer' that's fine."
This email was a communication made while working-toward a final contract, not evidence of a final contract. While a draft of a more formal "legalized" contract is appended to the e-mail quoted above that begins with the words "[i]t is my pleasure to offer you a position as a senior developer for Connectivity Systems, Inc. Please indicate your acceptance by signing the below agreement." (emphasis added) there is no evidence Franks ever accepted it. Indeed the record contains no response to Mr. Schare, much less that Franks unequivocally said "I accept the compensation offered in your November 16, 1996 e-mail" or words to that effect.
No specific duration of employment was referenced in the email. Nothing in this document or anything else in evidence shows Franks responded other than by continuing to work for CSI. While the financial arrangement offered in the e-mail may have been used to compensate Franks up until 2001 while Mr. Schare remained in control of CSI, that standing alone does not turn this informal pre-contract communication into a written contract. No reasonable jury could conclude otherwise.
And, the case becomes more complicated once one recognizes that Mr. Rankin got control of CSI in April 2001 when Schare left the company. Thereafter, it is undisputed that Mr. Rankin periodically modified Mr. Franks' compensation – generally upwards – and that he sometimes did so more than once a year. There is no evidence anyone ever went back and modified the claimed 1996 written contract. Accordingly the written contract claim is DISMISSED.
Mr. Franks understandably falls back on a claim there was an oral contract. CSI then argues that an enforceable oral contract does not exist given the facts presented here. Those arguments are not well taken once the court construes the evidence most strongly in favor of Mr. Franks, as it is obligated to do under the standard for granting summary judgment. First, the Statute of Frauds is argued as a bar to any enforceable oral contract. However, the Statute of Frauds is "[n]arrowly construed in Ohio" and "applies only to agreements that, by their terms, cannot be fully performed with a year and not to agreements that may possibly be performed within a year." Landskroner v. Landskroner, 154 Ohio App.3d 471, 2003-Ohio-4945, at ¶ 21 (8th Dist.); see also, Mellino v. Kampinski Co., L.P.A., 163 Ohio App.3d 163, 2005-Ohio-4292, at ¶17 (8thDist.). No one questions the fact that Franks was an at-will employee (albeit protected against being fired arbitrarily or capriciously by the heightened fiduciary duty owed a minority shareholder.) So, his oral employment contract could have been fully performed within a year taking it outside the Statute of Frauds. Moreover, given how Franks' compensation was juggled from time to time by Rankin – apparently without objection by Franks – the compensation arrangement seemingly was capable of being performed within a year after it was made, before the next change in compensation was made – or so a jury might conclude from the record.
During one period Franks' compensation was held back. Apparently for a period of years between 2001-2009 a large loan was outstanding to CSI from Huntington National Bank. (Franks second affidavit signed Jan. 27, 2012, at ¶¶ 5 – 7, filed as Exhibit "B" on January 27, 2012; Franks Tr. 390-396) HNB memorialized this in a formal loan agreement containing covenants that postponed, or capped insider compensation so long as their loan remained outstanding. Seeking to bolster the Statute of Frauds defense, therefore, CSI argues that Mr. Franks conceded in his deposition that it was his expectation that his compensation might be deferred due to the HNB loan covenants for up to four years. Therefore, the argument follows, this was not a contract that could have been performed within a year and the Statute blocks its enforcement. (Reply Memorandum of CSI filed Feb. 13, 2012, at p. 10, citing Deposition at 240.) That is not sufficient. As was true in the noted decisions from the 8th District referenced above, all that the law requires is that it is possible matters might resolve themselves within a year to satisfy the Statute of Frauds. It is not triggered here because, for example, CSI might have paid off the bank loan within a year, lifting the compensation restrictions.
There is evidence that from time to time Mr. Rankin memorialized in writing the amounts that CSI owed Mr. Franks as back pay. Not only the HNB loan, but also other circumstances such as a cash-flow shortfalls when CSI could not meet payroll, might explain holding money due Franks. See, CSI motion exhibits A(1) – (3). While CSI picks up on this and argues Franks never challenged the hold-backs set out in those letters, that too is not dispositive. The question is simply whether CSI paid him his full compensation. Silence alone does not estopp Franks from challenging Rankin's accounting, and whether he is still due back pay or other earnings. (But see, Reply Mem. of CSI filed Feb. 13, 2012, at pp. 1, 9.) Those portions of CSI's motion for summary judgment are, therefore, DENIED.
It is undisputed that in early 2011 when Rankin fired Franks CSI paid out $313,000, ostensibly to clear back payroll, bonus or deferred compensation, and other money due the plaintiff. Franks is not obligated to accept Rankin's pay-out as accurate. Particularly in view of the unusual way CSI's financial books and records were kept, at this stage of this case one cannot say that there is no genuine issue of material fact as to how the $313,000 pay-out was computed, or whether it fully paid-off Franks. Merely because Mr. Rankin thinks that was the correct amount owed cannot support summary judgment.
Franks affirmatively states that CSI has not "include[d] any deferred compensation" in his pay-out. (Affidavit filed Jan. 27, 2012, at ¶ 9) The deposition testimony of Franks is wide-ranging. It spans 493 pages, and contains innumerable references to compensation - which varied from time to time over many years. The court cannot find on this record that no genuine dispute of fact about Frank's compensation exists, so that portion of the defendants' summary judgment motion is DENIED.
Having said all that, pursuant to Civ. R. 56(D) the court memorializes that only a breach of oral contract claim remains as to Franks' wages, deferred compensation, or other employee-based remuneration. An oral contract claim is bounded by the six-year statute of limitations. It covers "a contract not in writing, express or implied." R.C. 2305.07. Practically speaking, Franks' damages claim must be limited (and most of the trial evidence necessarily will be limited as well) to the six-year period immediately prior to the filing of this suit. That is, the focus falls between January 2005 and January 2011. Damages, if any, that pre-date January 2005 are barred by the statute of limitations. Counsel should plan their presentations at trial accordingly.
VI. Additional Pretrial Orders
In anticipation of trial in July the court sets out additional requirements here, over and above those in the trial order filed December 21, 2011.
No later than April 16, 2012, plaintiff shall serve and file a proposed trial witness list, identifying each witness (including Mr. Franks) whose testimony will be offered, their professional field (if claimed to be qualified as an expert under the Evidence Rules), together with a one-paragraph summary of anticipated testimony. As to all witnesses (including plaintiff) the witness list shall supply an estimate of trial time required for direct and re-direct examination.
No later than April 30, 2012, defendants shall serve and file their proposed trial witness lists responding to plaintiff's designations, identifying each witness (including Mr. Rankin) whose testimony will be offered, their professional field (if claimed to be qualified as an expert), together with a one-paragraph summary of anticipated testimony. CSI and Mr. Rankin may filed one joint list, or separate lists; but either way must make clear in what manner they are identifying witnesses and making time estimates. As to all witnesses including Mr. Rankin, the witness list shall supply an estimate of trial time required for direct and re-direct examination and for cross-examination of plaintiff s proposed witnesses.
If any witness will be called by deposition, the duration of the deposition, number of pages of transcript, length of any videotape of the testimony, and other time estimates shall be provided based upon how much testimony is genuinely anticipated to be used.
Statistics from the Supreme Court of Ohio have confirmed over the past few years that this court's per-judge caseload is around 1900 new cases each year, or 58% over the average caseload of all Ohio common pleas judges. With that in mind, the court strongly encourages counsel to work collaboratively to prepare stipulations that simplify the case, plainly state undisputed background facts for the jury, and which will conserve court time. Counsel have an affirmative obligation to the court and to their clients to minimize the duration of trial, and simplify the case to the extent they can do so without genuine prejudice to their client's interests.
Absent realistic efforts to stipulate to background facts, the authenticity of documents, and in general to minimize trial time, the court will place time limits on the presentation of evidence. The inherent authority of a trial court to regulate trial is recognized in Readnower v. Readnower, 162 Ohio App.3d 347, 349, 2005-Ohio-3661, Stukiewicz v. Monroe County Sheriff (C.A.6, 1997), 110 F.3d 352, 361, citing Duquesne Light Co. v. Westinghouse Electric Co. (C.A.3, 1995), 66 F.3d 604, 609-610, and other decisions. It has been said that a "trial judge has an independent duty to manage a jury trial with alert concern for the difficulty of eliciting reliable determinations from the lay persons who make up a jury, and with recognition that the difficulty grows rapidly with the length of the case." United States v. Warner (C.A. 7, 2007), 506 F.3d 517, 520 (Posner, Kanne and Williams, J.J., dissenting from denial of rehearing en banc.)
If reduced to writing, stipulations can be distributed to individual jurors for their reference during trial. Likewise, counsel should discuss the possibility of using exhibit books, summaries of documents, time lines of chronological events, and other tools to aid jurors.
If any party anticipates calling duplicative expert witnesses, or otherwise offering over-lapping or duplicative testimony, the need for it must be explained as to each witness in the trial witness disclosures. Absent good cause the court ordinarily does not allow duplicative expert witnesses, or other duplicative evidence.
Counsel should assume for planning purposes that each side will have no more than 30 minutes for voir dire. Voir dire will be conducted in accordance with Local Rule 27.13(F). Unless prompted by a specific matter on a prospective juror's questionnaire, or a juror's response to a general question directed to the entire panel, individualized questioning of jurors is generally inappropriate. The court will empanel a civil jury of eight (8) plus two (2) alternates.
Each side should plan on 30 minutes for opening statements (which will be preceded by opening instructions from the court on the jury's role, credibility of witnesses, burden of proof, and other general orientation for jurors.)
Jurors may take notes; they may not ask questions of witnesses.
Closing arguments will probably be limited to 50-60 minutes per side, and will be given prior to closing jury instructions from the court.
The charge will be given orally, with a copy to each juror in writing.