PURITAS METAL PRODUCTS, Appellee v. RICHARD COOK, et al., Appellants
C.A. No. 10CA009866
IN THE COURT OF APPEALS NINTH JUDICIAL DISTRICT COUNTY OF LORAIN, OHIO
May 14, 2012
2012-Ohio-2116
DICKINSON, Judge.
APPEAL FROM JUDGMENT ENTERED IN THE COURT OF COMMON PLEAS COUNTY OF LORAIN, OHIO CASE Nos. 07CV151740 07CV152715
Dated: May 14, 2012
DICKINSON, Judge.
INTRODUCTION
{¶1} This appeal presents a complicated question regarding whether a share-transfer restriction in a close corporation‘s code of regulations applies to shares that the company issued to a trust when the beneficiary of that trust dies. In the 1990s, Robert Cook and four others formed Puritas Metal Products Inc. According to the company‘s original code of regulations, before a shareholder could transfer his shares to a non-shareholder, he had to offer them for purchase to the corporation and the other shareholders. In 1998, the company cancelled the shares it had issued to Mr. Cook and reissued them to the Robert S. Cook Trust. Mr. Cook and his wife, Barbara, were co-trustees of the trust, and Mr. Cook was its sole beneficiary. Between 1998 and Mr. Cook‘s death in 2002, the trust acquired additional shares and became Puritas‘s majority shareholder.
{¶3} Mrs. Cook obtained a judgment in the Lorain County Probate Court adopting her interpretation of the trust document. She also, allegedly, had Mr. Cole arrested for trespassing on Puritas‘s property. Mr. Cole subsequently filed a complaint in the Lorain County Common Pleas Court requesting a declaratory judgment regarding the status of Mr. Cook‘s trust‘s shares and seeking damages against Mrs. Cook for fraud, malicious prosecution, intentional infliction of emotional distress, tortious interference with a business relationship, defamation, abuse of process, breach of fiduciary duty, and sheltering of assets. Following a hearing, the trial court declared that the marital trust was a separate trust and that Mr. Cook‘s trust‘s shares had to be offered to Puritas before they could validly transfer to it. The court also concluded that, because the marital trust did not validly own the shares, any votes Mrs. Cook had cast over the past few years were void. Mrs. Cook has appealed, assigning five errors. We conclude that we have jurisdiction over this appeal and that the trial court incorrectly determined that Mr. Cook‘s death resulted in a “transfer” under Puritas‘s code of regulations.
{¶4} Before reaching the merits of Mrs. Cook‘s appeal, we must determine whether we have jurisdiction. Mr. Cole has moved to dismiss the appeal, arguing that the trial court‘s decision is not a judgment or final order and that, even if it is, the claims that have been decided are so inextricably intertwined with those that have not that we do not have jurisdiction at this time.
{¶5} Under the
{¶6}
{¶7} Mrs. Cook has argued that the trial court‘s decision is a final order under
{¶8} As Mrs. Cook has correctly noted, the Ohio Supreme Court has held that a declaratory judgment action is a special proceeding. Gen. Acc. Ins. Co. v. Ins. Co. of North Am., 44 Ohio St. 3d 17, paragraph two of the syllabus (1989). The question, therefore, is whether the trial court‘s decision affected a substantial right. Under
{¶9} We conclude that the trial court‘s order affected a substantial right. The shares of a corporation are personal property, and property rights are expressly protected by the Ohio Constitution.
{¶10} Even if a decision is a final order, it is not appealable if it does not comply with the rules prescribed by the Ohio Supreme Court regarding the timing of appeals. Under
{¶11} Acknowledging the dual requirements of finality and appealability, the Ohio Supreme Court has explained that “[a]n order which adjudicates one or more but fewer than all the claims or the rights and liabilities of fewer than all the parties must meet the requirements of
{¶13} In addition to requesting a declaratory judgment regarding Mr. Cook‘s trust‘s shares, Mr. Cole sued Mrs. Cook for fraud for not telling the probate court about the controversy over the shares or the buyout provisions in Puritas‘s code of regulations, then using its judgment to remove him as president of the corporation. He sued her for malicious prosecution for having the police department arrest him for trespassing on Puritas‘s property. He also sued her for intentional infliction of emotional distress, alleging that she knows he has a condition that can be fatal if he is put under a lot of stress; for tortious interference with a business relationship, alleging that his removal from Puritas caused discussions he was having with the federal government regarding another business he is involved with to fall through; for defamation because of the way he was characterized in a company press release after his removal; for abuse of process for jeopardizing his work visa and potentially subjecting him to deportation; for breach of fiduciary duty because of her attempts to terminate him just because he questioned her ability to exercise Mr. Cook‘s trust‘s shares after his death; and for sheltering assets, alleging she
{¶14} The trial court determined that Mr. Cook‘s trust‘s shares had to be offered to the corporation before they could validly pass to Mrs. Cook‘s marital trust. It ordered Mrs. Cook to offer the shares to Puritas and Puritas‘s other shareholders to respond to the offer within the time period designated in the code of regulations. Although it did not decide any of Mr. Cole‘s tort claims, it noted that, if Puritas‘s board of directors named or elected him as an officer or employee of the corporation, he would have the unconditional right to enter the corporation‘s premises at any time.
{¶15} Under Chef Italiano, claims are inextricably intertwined if the “eventual relief sought [is] the same[.]” Chef Italiano Corp. v. Kent State Univ., 44 Ohio St. 3d 86, 90 n.5 (1989). In this case, the trial court resolved Mr. Cole‘s request for declaratory relief but not his tort claims, which seek monetary relief. Not only is the relief Mr. Cole seeks by his tort claims of a different nature than what he seeks by his declaratory judgment claim, his tort claims are not dependent on a determination that Mr. Cook‘s trust and the marital trust are separate trusts or a determination that Mrs. Cook must offer the shares to Puritas for purchase. Accordingly, we conclude that this case does not involve inextricably intertwined claims that negate the application of
THE SHARE-TRANSFER RESTRICTIONS
{¶16} Mr. Cook was one of five original shareholders when Puritas was incorporated in July 1997. The original code of regulations provided that no shareholder could transfer shares, “except as provided by this Agreement.” It then provided that a shareholder could transfer
{¶17} In January 1998, with the consent of the other shareholders, Mr. Cook transferred his shares to the Robert S. Cook Trust. In July of that same year, the shareholders modified the share-transfer restrictions by amending the code of regulations to take away the option of transferring shares to another shareholder without first offering them to the corporation and all the other shareholders. Under the modified restrictions, a shareholder wishing to sell shares to anyone was required to first offer them to the corporation at the value established under the formula included in the regulations. If the corporation did not purchase them, the shareholder could then offer them to the existing shareholders on a pro rata basis, in order to maintain the existing parity. If the shareholders did not agree to purchase on a pro rata basis, the shareholder could then offer them to any existing shareholder or shareholders in any proportion. Finally, if no shareholder agreed to purchase them, the shareholder could offer them to an outside party.
{¶18} In August 1998, Puritas cancelled Mr. Cook‘s original shares and issued replacement shares, most of which it issued to the Robert S. Cook Trust. It issued the remainder of Mr. Cook‘s shares to a new shareholder. Puritas cancelled the shares of the other four original shareholders on that same day and issued replacement shares for them as well. As with Mr. Cook, it issued most of the replacements for the shares of three of the other original shareholders to trusts they had created. Apparently there were tax advantages to holding the shares in trust.
{¶19} Ohio corporations are authorized to include share-transfer restrictions in their regulations by
{¶20} Mrs. Cook‘s first assignment of error is that the trial court incorrectly concluded that Mr. Cook‘s trust‘s shares were improperly transferred to a separate marital trust in violation of Puritas‘s code of regulations. She has argued that the court incorrectly determined that the marital trust was a new, independent trust. According to her, the marital trust was the same trust and the designation of it as a marital trust was simply a recognition that she, as Mr. Cook‘s surviving spouse, was now the beneficiary. She has further argued that, even if the marital trust was a new, separate trust, the fact that the shares were now held in that trust did not constitute a transfer in ownership because, as one of the trustees of the original trust, she was a legal owner of the shares and, as the trustee of the marital trust, she remains the legal owner of the shares.
{¶21} Trust law is located between contract law and property law, occupying its own space but also overlapping its two neighbors. Thomas P. Gallanis, The New Direction of American Trust Law, 97 Iowa L. Rev. 215, 234 (2011). Scholars debate whether trust law is closer to contract law or property law. Id. at 234-235. Those who view trust law as closer to contract law see a trust as a contract between the settlor and the trustee, with the trust‘s beneficiaries being “akin to contractual third-party beneficiaries.” Id. at 235. Those who view trust law as closer to property law, view a trust as “a property arrangement arising from a conveyance or devise, not a contract.” Id. The difficult issue underlying this debate is whether a trust beneficiary has a proprietary interest in the subject matter of the trust or whether he or she has only a third-party beneficiary interest in the contract between the settlor and the trustee. See 3 Austin Wakeman Scott, William Franklin Fratcher, & Mark L. Ascher, Scott and Ascher on Trusts § 13.1, 808 (5th ed. 2007). As it relates to this case, if trust law is viewed as closer to contract law, Mrs. Cook did not acquire any additional property interest in the Puritas shares
APPLICABILITY OF RESTRICTION
{¶22} As previously noted, because the share-transfer restrictions adopted by the Puritas shareholders are a form of contract, they are subject to the same rules of construction as ordinary contracts. See Algren v. Algren, 183 Ohio App. 3d 114, 2009-Ohio-3009, at ¶ 42; 12 Jennifer L. Berger & Carol A. Jones, Fletcher Cyclopedia of the Law of Private Corporations, Section 5455
{¶23} We agree with the majority view expressed by the Eleventh District Court of Appeals and the courts of many other states that, because share-transfer restrictions limit the alienation of property, they should be “looked upon with disfavor” and “strictly construed.” Osborne v. Farinacci, 11th Dist. No. 6-215, 1978 WL 216020 at *1, 2 (Sept. 11, 1978). See 12 Berger & Jones, Fletcher Cyclopedia of the Law of Private Corporations, Section 5455 (collecting cases); see also First Fed. Sav. & Loan Ass‘n of Toledo v. Perry‘s Landing Inc., 11 Ohio App. 3d 135, 142 (6th Dist. 1983). One of the consequences of strictly construing share-transfer restrictions is that, for this Court to conclude that a particular type of transfer is prohibited, the restriction must be “expressly provided and not merely implied.” Osborne, 1978 WL 216020 at *2. For example, unless a company‘s regulations contain an “express restriction on intestate or testamentary disposition, . . . none can be implied.” Vogel v. Melish, 203 N.E.2d 411, 413 (Ill. 1965). We also note that the Ohio Supreme Court has recognized that, absent a provision to the contrary, share-transfer restrictions “apply only to voluntary transfers and not to transfers by operation of law.” Lehtinen v. Drs. Lehtinen, Mervart & West Inc., 99 Ohio St. 3d 69, 2003-Ohio-2574, at ¶ 25.
{¶24} Puritas‘s original code of regulations provided that “[n]o Shareholder may transfer shares to any person except as provided by this Agreement.” It also provided that
{¶25} Upon review of the original code of regulations’ share-transfer restrictions, we note that they contain only broad, general language limiting transfers of shares. There is no language defining what is meant by “transfer” or that specifically addresses shares that are owned by a trust. The ordinary meaning of the word “transfer” is “to carry or take from one person or place to another[,] . . . to move or send to a different location[,] . . . [or] to cause to pass from one person or thing to another . . . .” Webster‘s Third New Int‘l Dict. 2427 (1993).
{¶26} According to Mr. Cook‘s trust instrument, the trust he created was to be known as the “Robert S. Cook Trust.” The instrument contained sections regarding the “Trust During Donor‘s Life” and one regarding its “Disposition at Donor‘s Death.” According to Paragraph 6, the disposition section, “A. If my wife, Barbara Cook, survives me, then there shall be paid and distributed to my lineal descendants who survive me, per stirpes, (i) all assets which are not
{¶27} Under the terms of the trust, at Mr. Cook‘s death, Puritas‘s shares were retained by the trustees of the trust to be “held” as a Marital Trust. Regardless of whether the Marital Trust is deemed a new trust or is merely a continuation of the Robert S. Cook Trust, we conclude that nothing can be considered to have “transfer[red]” under Puritas‘s code of regulations. Although the beneficiary of the trust corpus changed from Mr. Cook to Mrs. Cook, there is nothing in the code of regulations that suggests that such an event would trigger the corporation‘s right of first refusal.
{¶28} Two other considerations support our conclusion that there was no transfer under the code of regulations. In this case, Mr. Cook did not simply place shares that the company had issued to him in trust. Rather, in August 1998, the corporation explicitly cancelled the shares it had issued to Mr. Cook and reissued most of them to the “Robert S. Cook Trust.” At the time that the corporation issued the shares to the trust, it could have ascertained what would happen to
{¶29} We also note that, after Mr. Cook died, the two other shareholders that held Puritas stock at the time did not object to Mrs. Cook‘s exercise of his trust‘s shares or demand that she offer the shares to the corporation under the share-transfer restrictions. A few months after Mr. Cook‘s death, the other shareholders, in fact, transferred some of their shares to the Robert S. Cook Trust and, later, allowed Mrs. Cook to buy over 500 additional shares on behalf of the trust. We, therefore, conclude that, even if the share-transfer restriction could be viewed as applying, Puritas forfeited its right to enforce it by acquiescing to Mrs. Cook‘s control over the trust‘s shares. See 12 Jennifer L. Berger & Carol A. Jones, Fletcher Cyclopedia of the Law of Private Corporations, Section 5460.80 (Rev. Vol. 2004) (“A share transfer restriction may be waived by the corporation, shareholders, or other persons. Waiver of a share transfer restriction may occur by failing to exercise a right of first refusal within a specified or reasonable time,
{¶30} Upon review of Puritas‘s original code of regulations and the 1998 amendments, we conclude that Mr. Cook‘s death did not trigger the application of the share-transfer restrictions to the shares held by his trust. As the remaining trustee of the Robert S. Cook Trust and the sole trustee of the marital trust formed by that same instrument, Mrs. Cook had authority to exercise all powers related to the Robert S. Cook Trust shares. Mrs. Cook‘s first assignment of error is sustained.
REMAINING ASSIGNMENTS OF ERROR
{¶31} Mrs. Cook‘s second assignment of error is that the trial court incorrectly concluded that, as trustee of the marital trust, she is required to offer to sell the marital trust‘s shares to Puritas and its other shareholders. Her third assignment of error is that the trial court incorrectly concluded that Puritas‘s other shareholders did not waive their right to compel the marital trust to offer its shares for purchase. Her fourth assignment of error is that the trial court incorrectly declared that all of the shareholder votes that she has cast since December 31, 2004, are void. Her fifth assignment of error is that the trial court incorrectly enjoined her from exercising her shareholder voting rights and granted Mr. Cole the voting rights of a 95% shareholder.
{¶32} For the reasons stated in our disposition of Mrs. Cook‘s first assignment of error, we conclude that the trial court incorrectly determined that Mrs. Cook must offer the shares that she controls to the corporation and its other shareholders and that the votes she cast on behalf of
CONCLUSION
{¶33} Mr. Cook‘s death did not trigger Puritas‘s share-transfer restrictions. The judgment of the Lorain County Common Pleas Court is reversed, and this matter is remanded for proceedings consistent with this opinion.
Judgment reversed, and cause remanded.
There were reasonable grounds for this appeal.
We order that a special mandate issue out of this Court, directing the Court of Common Pleas, County of Lorain, State of Ohio, to carry this judgment into execution. A certified copy of this journal entry shall constitute the mandate, pursuant to
Immediately upon the filing hereof, this document shall constitute the journal entry of judgment, and it shall be file stamped by the Clerk of the Court of Appeals at which time the period for review shall begin to run.
Costs taxed to Appellee.
CLAIR E. DICKINSON
FOR THE COURT
BELFANCE, J.
CONCUR.
APPEARANCES:
STEPHEN W. FUNK, Attorney at Law, for Appellant.
RICHARD S. MITCHELL, Attorney at Law, for Appellant.
JOHN KEYSE-WALKER, Attorney at Law, for Appellee.
SHAWN W. MAESTLE, SAMUEL J. LAURICIA, III, and RANDY L. TAYLOR, Attorneys at Law, for Appellee.
DANIEL D. MASON, Attorney at Law, for Appellee.
GINO PULITO, Attorney at Law, for Appellee.