THE BELVEDERE CONDOMINIUM UNIT OWNERS’ ASSOCIATION, APPELLEE, V. R.E. ROARK COMPANIES, INC. ET AL., APPELLANTS.
No. 92-30
SUPREME COURT OF OHIO
Submitted April 7, 1993—Decided September 15, 1993.
67 Ohio St.3d 274 | 1993-Ohio-119
APPEAL from the Court of Appeals for Hamilton County, No. C-900581.
- A condominium owners’ association may not maintain an action against a condominium developer for breach of fiduciary duty absent an understanding by both parties that special trust and confidence have been reposed in the developer.
R.C. 5311.26 imposes strict liability for a condominium developer‘s failure to disclose to prospective purchasers relevant financial information concerning the condominium development.- The corporate form may be disregarded and individual shareholders held liable for wrongs committed by the corporation when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.
{¶ 2} There are four major players in this dispute: the Association, RERC, Roark, and Bellhill, Ltd. (“Bellhill“). The Association is composed of the owners of the residential condominium units in the Belvedere, a Cincinnati building that contains both residential and commercial space. The building has a total of eighty-eight residential units. The ground floor of the Belvedere includes forty-seven hundred square feet of commercial space. RERC is a Columbus-based real estate developer and Roark is RERC‘s majority shareholder. Bellhill, a limited partnership, was the developer of the Belvedere Condominiums. RERC was the general partner in Bellhill and held a twenty percent interest in Bellhill. Roark, individually, was neither a general nor a limited partner of Bellhill.
{¶ 3} In 1981 the original developer of the Belvedere Condominiums apparently found itself unable to continue the project. In December 1981, Bellhill was formed to replace the original developer and finish the development. At that time Bellhill purchased the sixty-nine residential units that had not been sold to individual unit owners.
{¶ 4} The Association, which was formed as required by Ohio law, was the owner of all of the common areas in the Belvedere development. The common areas included the forty-seven hundred square feet of ground floor commercial space.
{¶ 6} At the time of the execution of the lease, Bellhill owned a majority of the units in the development and, therefore, controlled the board of the Association. Four of the five members of the board were employees of one or more companies owned or controlled by Roark. At trial, Roark testified that RERC spent approximately $103,400 renovating the commercial space after the lease was executed. Roark also testified that the lease was necessary because federal mortgage insurance agencies would not insure financing of individual residential units unless the commercial space was covered by a long-term lease.
{¶ 7} The existence of the lease was revealed to prospective and former condominium unit purchasers in a disclosure statement required by law. The statement mentioned the lease twice. On the second page it stated that “[t]he Common Areas and Facilities include approximately 4,712 square feet of commerical space. This commercial space has been leased on a long term basis by the R.E. Roark Companies, Inc.” On page twenty, the statement mentioned again that the “Unit Owner‘s Association has entered into a lease with The Roark Companies, Inc. of Columbus, Ohio for all of the commercial space on the first floor of the building.” Roark testified that a copy of the lease was given to the five
{¶ 8} Bellhill was unable to sell on the open market all of the residential units it owned. The remaining units were sold at auction in 1983. At the same time, Bellhill transferred control of the Association‘s board to individual unit owners.
{¶ 9} Between 1981 and 1986, RERC sublet portions of the commercial space to five different sublessees. In May 1986 RERC assigned its entire leasehold interest to the Superior Title Agency, Inc. Superior Title paid RERC over $100,000 in consideration for the assignment.
{¶ 10} In 1987, some four years after the individual unit owners had gained control over the Association‘s board, the Association filed this action against RERC and Roark. The complaint charged that RERC and Roark violated their fiduciary duties to the Association by causing the original lease to be executed. It also alleged that they did not adequately disclose the existence and nature of the lease to prospective purchasers. The Association sought damages in the amount of the difference between the rent agreed to in the lease and the value of the lease had it been negotiated at arm‘s length.
{¶ 11} After hearing evidence from both parties, the trial court entered judgment in favor of the Association against RERC and Roark, jointly and severally, for $100,000 plus interest. The court explained its reasoning in a June 19, 1990 letter to counsel. It found that RERC and Roark were liable for fraudulent self-dealing in entering into the lease agreement with the Association. The court wrote that the “lease on its face is completely one sided” and that “[c]ommon sense tells one that there is something ‘rotten in Denmark’ when a lease such as this is executed.” It focused on the renewal options given to RERC, RERC‘s subsequent
{¶ 12} The trial court concluded that Roark, individually, was liable for the acts committed by RERC. In the briefest sort of way, the court wrote that Roark had “complete domination and control” over RERC and thus was liable for the company‘s wrongs.
{¶ 13} RERC and Roark appealed and the court of appeals affirmed. The court first considered whether the trial court‘s finding of fraud was supported by sufficient evidence. It analyzed the Association‘s fraud claim under the framework of common-law fraud. It specifically found that the evidence adduced at trial supported all five elements of common-law fraud: (1) knowledge of a material fact, (2) concealment of that fact, (3) intent to induce reliance, (4)actual reliance, and (5) injury resulting from reliance.
{¶ 14} The court then reviewed the trial court‘s ruling that Roark was personally liable. Following a three-part test used by the United States Court of Appeals for the Sixth Circuit in Bucyrus-Erie Co. v. Gen. Products Corp. (C.A.6, 1981), 643 F.2d 413, it held that the trial court properly disregarded the corporate fiction in order to reach Roark individually. It was convinced by the record “that Roark engaged in a series of transactions which, if taken as a whole, demonstrate that he acted in his own personal interest to the detriment of the appellee.”
{¶ 15} Finally, the court held that RERC and Roark did breach a fiduciary duty to the Association. The question of whether such a fiduciary duty exists was not raised or answered by the court. It seemed to hold only that the lease was one-sided, RERC and Roark controlled the Association‘s board when the lease was executed and, therefore, a fiduciary duty was breached.
{¶ 16} RERC and Roark appeal from the judgment of the court of appeals. The cause is now before this court upon the allowance of a motion to certify the record.
Griffin & Fletcher and Michael C. Fletcher; H. Fred Hoefle; Bayh, Connaughton, Fensterheim & Malone, G. David Fensterheim and Kevin C. Golden, for appellants.
Lee Fisher, Attorney General, Nancy J. Miller, Deputy Chief Counsel, and Robert A. Zimmerman, Assistant Attorney General, urging affirmance on behalf of amicus curiae Lee Fisher.
Thompson, Hine & Flory, Kenton L. Kuehnle and Margaret R. Carmany, urging reversal on behalf of amicus curiae Ohio Home Builders Association.
WRIGHT, J.
{¶ 17} This appeal requires the court to construe the Ohio Condominium Act,
{¶ 18} We hold that condominium developers do not have a fiduciary duty to condominium owners’ associations under the Act. We also find that the courts below used the wrong criteria in considering whether RERC or Roark is liable for failing to adequately disclose information regarding the lease. Finally, we conclude that the court of appeals erred in allowing RERC‘s corporate veil to be pierced. Therefore, the judgment of the court of appeals is reversed and the cause remanded to the common pleas court to act in accordance with this opinion.
I
A
{¶ 20} As a general rule, this court will not consider arguments that were not raised in the courts below. See State v. 1981 Dodge Ram Van (1988), 36 Ohio St.3d 168, 170, 522 N.E.2d 524, 526. The waiver doctrine, however, is not absolute. Id. at 169-170, 522 N.E.2d at 526; In re M.D. (1988), 38 Ohio St.3d 149, 527 N.E.2d 286. When an issue of law that was not argued below is implicit in another issue that was argued and is presented by an appeal, we may consider and resolve that implicit issue. To put it another way, if we must resolve a legal issue that was not raised below in order to reach a legal issue that was raised, we will do so.
{¶ 21} In this case, the issue of whether condominium developers owe a fiduciary duty to owners’ associations is implicit in the question whether RERC breached that duty. It would be irresponsible for us to assume, for the sake of one case, that such a duty exists. Part of our role in the court system is to decide cases involving issues of broad public interest in such a way that the law can be applied in an orderly and predictable manner. Predictability is highly valued in American jurisprudence. To assume an answer to an unsettled issue would be to ignore our responsibilities and intentionally leave the law unsettled and unpredictable. We therefore choose to decide this issue, which has been fully briefed in this court.
B
{¶ 22} In 1963 the Ohio Condominium Act (“Act“) was enacted by the General Assembly. Am.S.B. No. 18, 130 Ohio Laws 1425. The Act recognized, for the first time under Ohio law, the condominium as a form of real property. See
{¶ 23} One of the Act‘s new requirements was the creation of unit owners’ associations to administer condominium property. Former
{¶ 24} Recognizing this absolutely unavoidable conflict of interest, the General Assembly took specific steps in 1978 to protect condominium unit owners by amending the Act. Am.Sub.H.B. No. 404, 137 Ohio Laws, Part II, 2594. Among other improvements, the amendments added three new provisions,
{¶ 25} Even after the 1978 amendments, the developer controls the owners’ association in its infancy. Initially, the developer has the right to appoint members of the board and to exercise the powers of the association.
{¶ 26} The three new sections added by the 1978 amendments,
“Neither the unit owners association nor the unit owners will be subject to any management contract or agreement executed prior to the assumption of control required by division (C) of this section for more than one year subsequent to that assumption of control unless such a contract or agreement is renewed by a vote of the unit owners pursuant to the bylaws required by section 5311.08 of the Revised Code.”
{¶ 27} We believe, and the parties appear to agree, that this provision entitles the board of the owners’ association, once fully elected by the individual unit owners, to cancel contracts entered into by the developer-controlled board. This provision protects unit owners from inequitable contracts and agreements, including those similar to the lease that led to this litigation.
{¶ 28}
{¶ 29}
{¶ 30} It is clear that the Ohio Condominium Act and the 1978 amendments to the Act created relationships, rights, and remedies that did not exist at common law. The scope of the Act convinces us that it was meant to comprehensively define and regulate the law of condominium development, including the legal relationship between condominium developers and unit owners’ associations.1
C
{¶ 31} Both the Association and amicus curiae the Attorney General argue that there exists some sort of common-law fiduciary duty which is applicable to the relationship between RERC and Roark and the Association. We find simply no Ohio authority that holds, or even suggests, that there is a common-law fiduciary relationship between condominium developers and unit owners’ associations. Contrary to the apparent position of the Attorney General, Ohio most certainly has no “ancient and settled system” of condominium law.
{¶ 32} We believe that the relationships at issue in this case were created by the legislature and are defined in detail by the Ohio Condominium Act alone. Thus, we arrive at the central issue: whether the Act creates a fiduciary relationship between condominium developers and unit owners’ associations.2
{¶ 34} Although a number of Ohio statutes expressly create fiduciary duties,3 nowhere in
{¶ 36} The Act, however, does not create a fiduciary relationship between developers and owners, developers and owners’ associations, or developers and purchasers. In fact, we believe that it does just the opposite—it plainly recognizes that developers, owners, and purchasers have different, and often competing, financial interests.4 Instead of prohibiting such competing interests by imposing a fiduciary duty on developers, the legislature adopted specific measures to regulate the different relationships and to protect the parties in weaker bargaining positions. These include the consumer protection provisions in
{¶ 37} If this court imposed a general fiduciary duty on developers it would literally shatter the statutory scheme.
{¶ 38} Prior to the 1978 amendments to the Act, public policy might have required us to impose some sort of fiduciary duty on developers in order to protect owners and purchasers. With the amendments, however, the intent of the General Assembly to create a regulated commercial relationship rather than a fiduciary relationship became clear. Therefore, as we have done in the context of other types of commercial cases, we hold that a condominium owners’ association may not maintain an action against a condominium developer for breach of fiduciary duty absent an understanding by both parties that special trust and confidence have been reposed in the developer. Because there is no evidence in the record of such an understanding, the Association‘s claim for breach of fiduciary duty must be dismissed.5
II
{¶ 39} Both the parties strenuously dispute the nature of the second issue we must address. The Association contends that its second claim against RERC and Roark is for a violation of the disclosure requirement of the Act,
{¶ 40} The Association argues that RERC and Roark failed to disclose material facts regarding the lease in accordance with the requirements of the Act. In its complaint the Association specifically alleged that the disclosure instruments did not adequately reveal the lease or the terms of the lease. In support of its argument it pointed to the December 1981 lease between RERC and the Association and the disclosure information provided to potential purchasers by Bellhill. The Association did not offer any evidence of actual reliance on the representations made in the disclosure documents.
{¶ 41} The Association asserts, however, that a violation of
{¶ 42}
“No developer or agent, directly or indirectly, shall sell or offer to sell a condominium ownership interest in a condominium development unless he discloses fully and accurately to each prospective purchaser of the interest all material circumstances or features affecting the development, by preparing and providing to each prospective purchaser a readable and understandable written statement of such circumstances or features. The statement shall not intentionally
omit any material fact or contain any untrue statement of a material fact and shall contain all of the following:
“***
“(I) A facsimile of any management contract or other agreement affecting the operation, use, or maintenance of or access to all or any part of the condominium development, with a brief narrative statement of the effect of each agreement upon a purchaser, including a specification of the services to be rendered and the charges to be made thereunder, and a statement of the relationship, if any, between the developer and the managing agent;”
“***
“(L) The significant terms of any encumberances [sic], easements, liens, and matters of title affecting the condominium development;”
“***
“(N) A statement of any restraints on the free alienability of all or any part of the condominium development[.]”
{¶ 43} As discussed above, this is a consumer protection provision designed to shield unsophisticated purchasers from overreaching sellers. As such, we must construe it to effectuate this purpose. We believe that
{¶ 44} To prove a violation of this section, a plaintiff does not have to prove the five elements of common-law fraud. A plaintiff must merely prove a failure to disclose material information. Once this is done, liability attaches and the plaintiff must then prove damages under
{¶ 45} The court of appeals erred by analyzing the Association‘s claim under the common law. The common pleas court erred by merging its analysis of the fiduciary duty issue with analysis suggesting common law fraud or misrepresentation. Accordingly, we must remand this cause to the common pleas court to consider a factual issue: whether the information regarding the lease that was provided to prospective condominium purchasers satisfied the disclosure requirements of
III
{¶ 46} The final issue we must consider is whether Ronald E. Roark, as an individual, can be held jointly and severally liable to the Association. This requires us to address the alter ego doctrine and the ability of a plaintiff to “pierce the corporate veil” in order to reach an individual shareholder.
{¶ 48} This court has not recently addressed the elements which must be proved in order to pierce the corporate veil. See Presser, supra, Section 2.36. North v. Higbee Co. (1936), 131 Ohio St. 507, 6 O.O. 166, 3 N.E.2d 391, involved an attempt to hold a parent corporation liable for the debts of its subsidiary on the ground that the subsidiary was an agent of the parent. A majority of the court flatly rejected the agency theory. It held that proving a mere agency relationship between the parent and its subsidiary was insufficient and that absent an affirmative showing of fraud, the subsidiary‘s corporate veil could not be pierced in order to hold the parent liable. The syllabus stated in part:
“The separate corporate entities of a parent and subsidiary corporation will not be disregarded and the parent corporation will not be held liable for the acts and obligations of its subsidiary corporation, notwithstanding the facts that the latter
was controlled by the parent * * * in the absence of proof that the subsidiary was formed for the purpose of perpetrating a fraud and that domination of the parent corporation over its subsidiary was exercised in such manner as to defraud complainant.” (Emphasis added.)
{¶ 49} North thus required a party seeking to pierce a corporate veil to prove two essential facts: (1) that the corporation was formed in order to perpetrate a fraud, and (2) that the shareholder‘s control of the corporation was exercised to defraud the party.
{¶ 50} We believe that the first prong of the North test no longer reflects the realities of modern corporate life. The requirement that a corporation be formed in order to perpetrate a fraud is simply too strict. The ease with which close corporations and corporate subsidiaries can be created and the ability to transfer ownership of an existing corporation leads us to believe that corporations formed for legitimate purposes can easily be later used to commit fraud or other wrongs. Moreover, it seems that in practice it would be unreasonably difficult to prove that any corporation was actually formed in order to perpetrate a fraud.
{¶ 51} In finding that RERC‘s corporate form could be ignored and Ronald Roark could be held individually liable, the court of appeals below did not follow North. Instead, it followed the opinion of the United States Court of Appeals for the Sixth Circuit in Bucyrus-Erie Co. v. Gen. Products Corp. (C.A.6, 1981), 643 F.2d 413. In Bucyrus-Erie, the Sixth Circuit applied Ohio law in reviewing jury instructions in a veil-piercing case. It held that the corporate form may be disregarded when “(1) domination and control over the corporation by those to be held liable is so complete that the corporation has no separate mind, will, or existence of its own; (2) that domination and control was used to commit fraud or
{¶ 52} One factor recognized by the Sixth Circuit, that the shareholder‘s domination of the corporation was used to commit fraud or another wrong, was part of the North test. The Sixth Circuit also explicitly articulated two elements that we believe were implicit in North: the plaintiff must show that the corporation is so dominated by the shareholder that it has no separate mind, will, or existence of its own, and that injury or unjust loss resulted from the shareholder‘s control of the corporation. See North, supra, at 524-527, 6 O.O. at 173-175, 3 N.E.2d at 397-399. The first element is a concise statement of the alter ego doctrine; to succeed a plaintiff must show that the individual and the corporation are fundamentally indistinguishable. The second element is the requirement that the shareholder‘s control of the corporation proximately caused the plaintiff‘s injury or loss. Both are fairly obvious, but necessary, preconditions to recovery under the alter ego doctrine.
{¶ 53} We feel the Sixth Circuit‘s approach to piercing the corporate veil strikes the correct balance between the principle of limited shareholder liability and the reality that the corporate fiction is sometimes used by shareholders to protect themselves from liability for their own misdeeds. Thus, the corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when
{¶ 54} We hold that the Association did not introduce sufficient evidence to pierce RERC‘s corporate veil and reach Roark individually. The Association did not introduce any evidence that Roark used his control over RERC in such a manner as to defraud the Association. Neither the trial testimony presented by the Association nor the stipulations agreed to by the parties even suggested that Roark, personally, used his influence to defraud or injure the Association or its members. The evidence cited by the court of appeals below clearly shows that Roark did exercise control over RERC, but mere control over a corporation is not in itself a sufficient basis for shareholder liability. The judgment of the court below as to Roark‘s individual liability was not supported by competent, credible evidence and, therefore, must be reversed.9
IV
{¶ 55} The judgment of the court of appeals is reversed. This cause is remanded to the Court of Common Pleas of Hamilton County with instructions to issue judgment in favor of Ronald E. Roark on all claims by the Association and in favor of RERC on the Association‘s claim for breach of fiduciary duty. The court
Judgment reversed and cause remanded.
MOYER, C.J., A.W. SWEENEY, F.E. SWEENEY and PFEIFER, JJ., concur.
DOUGLAS and RESNICK, JJ., separately dissent.
DOUGLAS, J., dissenting.
{¶ 56} I respectfully dissent. This case was tried to the court. A distinguished and thoroughly competent trial court judge, Judge Gilbert Bettman, heard the case, weighed the evidence, determined issues of law presented and wrote a well-reasoned, lengthy opinion letter deciding the case. A thoughtful and also thoroughly competent panel of judges of the First District Court of Appeals, Presiding Judge Doan, Judges Klusmeier and Hildebrandt, reviewed the judgment of the trial court and in an exhaustive twelve-page opinion, unanimously affirmed the trial court. A reading of the opinions of both the trial court and the court of appeals reveals that both courts carefully reviewed the evidence, met their mandates to weigh evidence and review alleged errors of law and entered their judgments accordingly.
{¶ 57} Notwithstanding the foregoing, the majority, in a prolix opinion, reverses the judgment of the court of appeals (and that of the trial court). In doing so, the majority says such things as: “It [the court of appeals] specifically found that the evidence adduced at trial supported all five elements of common-law fraud
{¶ 58} Clearly, the majority has, in order to arrive at its predetermined judgment, reweighed the evidence and substituted its judgment for that of the court of appeals. At best, this seems strange, given
{¶ 59} In addition, and conveniently, the majority misses the whole point of the opinions and judgments of the court of appeals and the trial court. That point is that at the time the lease in question was entered into, the Association was controlled by Bellhill, which was controlled by RERC, which was controlled by Roark. This interlocking control and inside dealing, which resulted in a lease that is generally conceded to be unfair to the Association, brought both lower courts to their assessments of individual, joint and several liability. To ignore this “control” factor is to ignore reality.
{¶ 60} Further, the majority announces that for there to be a fiduciary duty between a developer (builder) and a condominium owners’ association (owners-consumers), there must be an “understanding” by both parties that special trust and confidence have been reposed in the developer (builder). It should come as no surprise that the majority gives no citation for this new and very broad proposition. Let all who will, henceforth, enter into a construction agreement with a developer-
{¶ 61} Finally, the majority says that “[w]hen an issue of law that was not argued below is implicit in another issue that was argued and is presented by an appeal, we may consider and resolve that implicit issue.” This is also curious, given the statement that “[t]his court, however, is constitutionally limited to deciding only issues directly presented by an individual case.” Gallimore v. Children‘s Hosp. Med. Ctr. (1993), 67 Ohio St.3d 244, 260, 617 N.E.2d 1052, 1063 (Wright, J., dissenting). It appears that some would have this court‘s jurisdiction to decide a question depend on whose “implicit issue” is being gored.
{¶ 62} I respectfully dissent.10
ALICE ROBIE RESNICK, J., dissenting.
{¶ 63} I am troubled by the degree of control appellant Roark exercised in “negotiating” the lease at issue. Apparently, Roark (acting as lessor through a partnership he controlled) essentially negotiated a lease, covering the common commercial areas of the Belvedere, with himself (acting through a company he controlled) as lessee. It is not particularly surprising that the lease terms were very favorable to the lessee Roark, because the Association (not lessor Roark) was the owner of the common areas. What is surprising is that the majority apparently sees no problem with lessor Roark acting in this manner. Through this transaction, Roark‘s conduct evinces violations of basic duties of good faith and fair dealing. Consequently, I dissent.
{¶ 65} Although this case has aspects of fraud as well as violation of a fiduciary duty, it should not really be pigeonholed as either. It seems unnecessary to force appellee to prove all the elements of a common-law fraud. Likewise it seems unnecessary to force appellee to demonstrate that appellants owe the Association a strict general fiduciary duty before appellants can be found to have taken unfair advantage of appellee. I cannot believe that the legislature, when it allowed the condominium developer to take control of the owners’ association in the early stages of the development by enacting