778 N.E.2d 80 | Ohio Ct. App. | 2002
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *515
{¶ 3} In March 1989, the Dombroskys incorporated their franchise as Yo-Can, Inc., and they opened for business the next month. Apparently, their capital was depleted within a matter of weeks. They then refinanced their loan with another bank in order to receive more capital. (Both banks are no longer parties to this case but were previously named as defendants on grounds of lender liability.) In October 1991, the franchise closed, and Yo-Can declared bankruptcy.
{¶ 4} In February 1991, the Dombroskys and Yo-Can filed this lawsuit, naming the following defendants: The Yogurt Exchange, Inc.; the four officers in *517 their representative and individual capacities; W.C. Zabel Company; Sterrett Watt, a fellow franchisee who initially encouraged the Dombroskys; and the two banks. In 1995, the trial court dismissed the complaint on the grounds that a bankruptcy suit acted as res judicata to the current suit as to all defendants. This court affirmed the dismissal as to one of the banks and reversed as to all other defendants. Yo-Can,Inc. v. The Yogurt Exchange, Inc. (Dec. 17, 1998), 7th Dist. No. 95CA72. The trustee in bankruptcy was then substituted for Yo-Can as a plaintiff.
{¶ 5} On June 12, 2000, plaintiffs filed a motion for partial summary judgment against The Yogurt Exchange and its officers in their representative capacity. The motion specifically stated that any issue of the officer's individual liability should be left for the jury. On September 6, 2000, Lanasa and Pancallo filed their joint memorandum in opposition.
{¶ 6} On October 23, 2000, in their joint opposition to plaintiffs' partial summary judgment motion, Robert Zabel and R. Lee Zabel countered for summary judgment. They alleged that they are officers who are immune from liability and that no evidence was presented which would present a genuine issue on piercing the corporate veil.
{¶ 7} On December 11, 2000, the court denied plaintiffs' motion for partial summary judgment and granted the Zabels' motion for summary judgment. Thus, on December 26, 2000, Lanasa and Pancallo moved for summary judgment on the same grounds as the Zabels had. Plaintiffs opposed this motion. On February 20, 2001, the court granted summary judgment in favor of Lanasa and Pancallo.
{¶ 8} Meanwhile, Watt, Sky Bank, and W.C. Zabel Co. were discharged as defendants for various reasons, none of which are being contested on appeal. This left only The Yogurt Exchange as a party. On April 12, 2001, a judgment entry was filed which stated that the case was settled (whereby The Yogurt Exchange agreed to pay plaintiffs $30,000). This judgment entry noted that the settlement would be set aside if the appellate court reverses on any issue. Plaintiffs [hereinafter appellants] filed the within timely appeal.
{¶ 11} "The lower court erred in granting summary judgment to defendants Lanasa, Pancallo, Robert Zabel and R. LEE Zabel on the claims of the individual plaintiffs under the Consumer Sales Practices Act."
{¶ 12} This assignment corresponds to the first count of the complaint which alleged violations of the Consumer Sales Practices Act, contained in R.C.
{¶ 13} As aforementioned, summary judgment is a determination as a matter of law. The appellate court reviews the grant of summary judgment de novo. Hence, we make our own decision on whether appellees were entitled to judgment as a matter of law on plaintiffs' first count dealing with the CSPA.
{¶ 14} Under the CSPA, no supplier shall commit an unfair or deceptive act or practice in connection with a consumer transaction. R.C.
{¶ 15} A sale or transfer (or solicitation of a sale or transfer) of the right to operate a yogurt-selling store under the name of The Yogurt Exchange is not "for purposes that are primarily personal, family, or household." Apparently, the statute's use of the word "franchise" distracted both sides in this case. See Black's Law Dictionary (6th Ed.Abr. 1991) 454 (mentioning, besides the more popular thoughts on the definition of a franchise, that cable companies have been granted a franchise by the government to offer cable television services to households). Not only must the thing sold or transferred fit into one of the listed categories, it must also be for purposes that are primarily personal, family, or household.
{¶ 16} Besides relying on the plain language of the statute, we shall set forth other authority in support of our position. The Second Appellate District refused to apply the CSPA where the software at issue was by its very nature only suitable for business applications.Barazzotto v. Intelligent Syst., Inc. (1987),
{¶ 17} A comparison to the Uniform CSPA may also be helpful. After setting forth the "personal, family, or household" language in the definition of a consumer transaction, the Uniform Act then states "or that relate to a business opportunity that require both his expenditure of money or property and his personal services on a continuing basis and in which he has not been previously engaged." 7A Uniform Laws Annotated, Business Financial Laws (1999 Ed.), Uniform Consumer Sales Practices Act, 206, 210. This Uniform Act was approved in 1970. Ohio adopted the act in 1972. However, as can be seen from the language of R.C.
{¶ 18} We also note that in the Heritage Hills case, the Court held that a residential lease did not fall under the protections of the CSPA primarily because there exists a separate specific Act, Chapter 5321, which covers such transactions. Id. at 83. The Court noted that the CSPA is broad and the Residential Landlord Tenant Act, which was specific to the facts of the case, controlled and preempted the field. Id. The court so held even though the CSPA *520
states that its remedies are in addition to those otherwise available. R.C.
{¶ 19} For all of the preceding reasons, the CSPA is inapplicable to the sale of a franchise for a yogurt-selling store. Most specifically, the CSPA is inapplicable as the transaction herein does not have the required characteristic of being primarily for purposes that are personal, family, or household. This assignment of error is without merit.
{¶ 21} "The lower court erred in granting summary judgment to defendants Lanasa, Pancallo, Robert Zabel, and R. Lee Zabel on the claims of plaintiff under the Ohio Business Opportunity Act and in denying plaintiff's motion for partial summary judgment under the Act."
{¶ 22} This assignment corresponds to the second count of the complaint which alleged violations of the Business Opportunity Plans Act, contained in R.C.
{¶ 23} Although the trial court granted summary judgment for the officers, it denied The Yogurt Exchange's motion for summary judgment on plaintiffs' BOPA allegations. It also denied plaintiff's motion for summary judgment on this claim. Thereafter, The Yogurt Exchange and the plaintiffs settled the case. The settlement entry states that the settlement is rescinded if the appellate court reverses any issue in the case; however, this provision only applies to the appealed issues concerning the grant of summary judgment for the other defendants who were not part of the settlement agreement.
{¶ 24} Thus, plaintiffs' appeal cannot complain about the denial of summary judgment with regards to The Yogurt Exchange as any decision by us would be advisory. We are only making this observation because the conclusion section of appellants' brief argues that summary judgment should have been granted against The Yogurt Exchange on the BOPA issue. Yet, the actual assignment of *521 error dealing with BOPA does not make a specific argument concerning the denial of plaintiff's motion for summary judgment against The Yogurt Exchange; so, it appears that plaintiffs realize that their settlement with The Yogurt Exchange precludes them from appealing the denial of summary judgment which they sought against The Yogurt Exchange.
{¶ 25} As aforementioned, the individual officers successfully sought summary judgment. According to an affidavit relied upon by the officers, BOPA was initially relevant to the transaction at issue. However, they claimed immunity because they are officers of a corporation and are not "sellers" under BOPA. In the alternative, they claimed that the transactional documents complied with
{¶ 26} Appellants' first assignment of error is divided into three parts, the first of which contends that "Defendant officers are not exempt from the requirements of the BOPA by virtue of their status as corporate officers and agents." Appellants note that either a seller or a broker can be held liable under the Act. A seller is defined as a person who leases or sells a business opportunity plan. R.C.
{¶ 27} There seems to be a dearth of Ohio law interpreting whether an officer or agent of a corporation who actively participates in the sale of the franchise would fall under the definition of seller or broker. There are cases in which the facts establish that certain individual defendants who were principals of the corporation were sued under BOPA. However, the specific issue of whether they fit the definition of sellers or brokers was not raised before the ruling courts. See Peltier v. Spaghetti Tree, Inc. (1983),
{¶ 28} There is a case where the issue of personal liability was specifically addressed; however, the arguments are distinguishable and the holding appears incorrect. Dreizler v. Destefanor (July 15, 1987), 1st Dist. No. C-860540. In that case, the First District upheld a judgment against the president of a corporation under BOPA. However, the defendant-appellant president did himself an injustice by misconstruing the statute, and due to this misconstruction in his assignment of error and text, the appellate court followed suit. Instead of merely arguing that he did not meet the definition of a seller or broker, he argued that he did not meet the definition of a seller, broker, or affiliated person. The court held that the president fit the definition of "an affiliated person." See R.C.
{¶ 29} In imposing liability under BOPA based upon the affiliated person language, the misconstruction occurred. Even if the president fit the definition for an affiliated person, neither the definitions of seller nor broker include an affiliated person. See R.C.
{¶ 30} Due to the scarcity in case law interpreting Ohio law, we shall review the relevant Uniform Act and the cases interpreting similar laws from other states. Such review establishes that Ohio's BOPA was enacted eight years prior to the Uniform Franchise and Business Opportunities Act, and the Uniform Act differs from Ohio's BOPA. For instance, the Uniform Act precludes "a person" from engaging or failing to engage in certain acts, without limiting it to seller or broker, whereas Ohio's BOPA precludes a "seller or broker" from same. Regardless, the notes and commentary concerning the Uniform Act do not provide guidance on the issue.
{¶ 31} As for the laws of our sister states, the multitude of jurisdictions have franchise and/or business opportunity plan disclosure laws. There is a plethora of case law allowing suits to be filed against officers, directors, or agents of *523 corporations under these laws. However, the laws are highly distinguishable. For instance, California's law, 31302, specifically provides for joint and several liability and defines a seller as every person who directly or indirectly controls the person liable and includes the director of a corporation and even employees who materially aid the violation. Connecticut's law, 36b-61 defines a seller as a person who is engaged in the business of selling or offering for sale business opportunities or any agent or representative of such person. Florida's law, 559.801, includes anyone with a substantial interest or who effectively controls as well as individual officers or directors. New Jersey's law, 56:10-3, mentions one with a majority interest or effective control and includes individual officers, directors, or others. This is just a sampling of the states. Other states have similar language in their definition sections.
{¶ 32} Ohio's statute, however, merely defines seller as a person who sells or leases. Person can include an individual or a corporation. However, this language does not demonstrate an intent to hold officers and directors liable as does the specific language of the other states. The word individual is merely a normal definition of person to be used when the seller is a sole proprietorship or other entity wherein the owners do not have a corporate shield. The Ohio statute specifically holds one type of agent liable, a broker. If seller included any individual involved in the sale on behalf of the seller, then this definition and specific imposition of liability would not be necessary. A broker is defined as a person, other than a seller, who sells or leases, or offers or arranges for the sale or lease of, a business opportunity plan for a commission, fee, or anything of value. An officer of a corporation is not commonly considered a broker merely because the corporation does not hire a broker and rather has its officers act on its behalf. Besides veil-piercing against shareholders (which plaintiffs do not mention until its third assignment of error dealing with fraud) and personal liability for fraud committed by an individual which is discussed infra, a statute creating a new right of redress must express its intent to hold officers personally liable in the area of regulation. Ohio's BOPA does not express this intent facially, especially when compared to the laws of other states.
{¶ 33} Moreover, in comparing the BOPA to other Ohio laws, the same conclusion arises. For example, the previously-mentioned CSPA, defines supplier as including other persons engaged in the business of effecting or soliciting consumer transactions in addition to a seller. R.C.
{¶ 34} The second subpart under this assignment of error alleges that "Defendants are not exempt from the requirements of the BOPA by virtue of Ohio Rev. Code Sec.
{¶ 35} Pursuant to R.C.
{¶ 36} First, plaintiffs contend that they never received a disclosure document. One plaintiff's affidavit claims this nonreceipt; however, prior deposition testimony by this same plaintiff shows otherwise. (Aug. 5, 1994 Depo. 14-15, admitting receipt of a franchise agreement and a disclosure document in the fall of 1988 at the first meeting at Pancallo's house). Defendant Pancallo's affidavit confirmed that plaintiffs were given the document.
{¶ 37} Plaintiffs state that this does not establish that the document was delivered in a timely manner as required by the rule. Plaintiffs also contend that even if they received the document, the document failed to comply with other aspects of the BOPA or the federal trade regulation rule. Plaintiffs set before the trial court various examples of alleged departures from
{¶ 38} Due to our resolution of the first subassignment finding that the officers are not liable under the plain language of BOPA and that summary judgment was properly granted in their favor on this issue, these remaining two subassignments need not be addressed. As aforementioned, the appeal concerns *525 the court's decisions regarding the officers' liability, and because we found that they are not liable under the language of BOPA, we need not evaluate the documents' compliance with BOPA or the federal trade regulation.
{¶ 40} "The lower court erred in granting summary judgment to defendants Lanasa, Pancallo, Robert Zabel and R. Lee Zabel on the fraud claims of plaintiffs."
{¶ 41} This assignment corresponds to the third count of the complaint which alleged fraud. This assignment is broken into the following two alternative subparts: (1) "Corporate officers are personally liable for frauds they commit" and (2) "Plaintiffs are able to `pierce the corporate veil' to hold defendant officers personally liable."
{¶ 42} The tort of fraud or fraudulent inducement has the following elements: (1) an actual or implied false representation concerning a fact or, where there is a duty to disclose, concealment of a fact, material to the transaction; (2) knowledge of the falsity of the representation or such recklessness or utter disregard for its truthfulness that knowledge may be inferred; (3) intent to induce reliance on the representation; (4) justifiable reliance; and (5) injury proximately caused by the reliance. See, e.g., Mussivand v. David (1989),
{¶ 43} Generally, fraud is not predicated on a representation concerning a future event as such representation is more in the nature of a promise or contract or constitutes mere predictions or opinions about what the future may bring. Link v. Leadworks Corp. (1992),
{¶ 44} Here, we have allegations such as: that defendants promised to supply a multitude of items and services to help plaintiffs, that defendants told plaintiffs that the initial $102,000 loan would be sufficient capital, that defendants said plaintiffs would make a profit in the first year and could pay their son $1,000 per month and take salaries and bonuses. In their motions for summary judgment, the defendants' only allegation was that they were immune *526 due to their status as officers of the corporation and that plaintiffs presented insufficient evidence to pierce the corporate veil. However, it seems that the trial court and the defendants failed to recognize a distinction in the law of agency and corporate law. See Krieger Ford,Inc. v. Chase Mot., Inc. (Aug. 3, 1999), Franklin App. No. 98AP-982, unreported, 8 (holding that personal liability of the president of the corporation does not depend on the same grounds as piercing the corporate veil).
{¶ 45} Successfully piercing the corporate veil places personal liability on individual shareholders for the corporation's liabilities. The corporate form can be disregarded and individual shareholders held liable for corporate wrongdoing when control is so complete that the corporation has no separate will, mind, or existence (the alter-ego doctrine) and the control is exercised to commit fraud or an illegal act which injures the plaintiff. Belvedere Condo. Unit Owners' Assn. v. R.E.Roark Cos., Inc. (1993),
{¶ 46} The defendants in this case are not only shareholders of a closely-held corporation, but they are also officers who allegedly personally engaged in various transgressions. There is a distinctive rule applied to officers or directors that is a general rule of agency law. See, e.g., Restatement of the Law 2d, Agency (1958), Sections 343 and 348 (stating that an agent who makes fraudulent representations is liable in tort regardless of whether the corporation is also liable); Morris,Piercing the Corporate Veil in Louisiana (1991), 52 La.L.Rev. 271, 275, fn. 11 (noting the fine distinctions seldom drawn where an officer is also a major shareholder). See, also, Maple v. Cincinnati Hamilton Dayton RR Co. (1883),
{¶ 47} "Ohio law provides that a corporate officer can be held personally liable for a tort committed while acting within the scope of his employment." Atram v. Star Tool Die Corp. (1989),
{¶ 48} In their motions for summary judgment, the defendants in the case before us, merely alleged that they were immune as officers or agents of the corporation and contended that there was no evidence presented on veil-piercing. Plaintiffs did not respond to the first two defendants' motion for summary judgment, but they did set forth some evidence supporting a veil-piercing theory in response to the next two defendants' motion, that being an agreement between the defendants on how the individuals would divide any liability imposed on the corporation. Nevertheless, it does not appear plaintiffs were proceeding under this theory except in response to the late summary judgment motions.
{¶ 49} Regardless, as explained supra, plaintiffs need not pierce the corporate veil to hold individuals liable who allegedly personally committed fraud.1 Hence, this assignment of error is with merit and the trial court's decision granting summary judgment to the individual defendants on plaintiffs' fraud claim is reversed and remanded. In accordance, summary judgment is affirmed on the CSPA count, affirmed on the BOPA count, and reversed and remanded on the fraud count.
{¶ 50} For the foregoing reasons, the judgment of the trial court is hereby affirmed in part, reversed in part and this case is remanded for further proceedings according to law and consistent with this court's opinion.
Judgment affirmed in part, reversed in part and cause remanded.
GENE DONOFRIO and WAITE, JJ., concur.