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Hanko v. Nestor

Court of Appeals of Ohio, Sixth District, Erie

June 7, 2019

Michael Hanko Appellee
Michael Nestor, et al. Appellant
Robert Hanko Appellee

          Trial Court No. 2001 CV 0304

          Brent L. English, for appellees.

          Steven B. Beranek, for appellant.


          ARLENE SINGER, J.

         {¶ 1} This is an appeal from the January 19, 2018 judgment of the Erie County Court of Common Pleas denying appellant's motion for a new trial. Finding no error, we affirm the judgment.

         Assignments of Error

         {¶ 2} Appellant sets forth two assignments of error:



         {¶ 3} The facts of this case are fully set forth in our decisions in Hanko v. Nestor, 6th Dist. Erie No. E-11-055, 2012-Ohio-4488 ("Hanko I"), and Hanko v. Nestor, 6th Dist. Erie No. E-15-041, 2016-Ohio-2976 ("Hanko II").

         {¶ 4} In May of 1994, appellant, Michael Nestor, and appellee, Michael Hanko, formed H&N Construction, Inc. ("H&N"). Before establishing H&N, appellee and appellant worked together for another construction company.

         {¶ 5} H&N had two executive directors, appellant and appellee, and both owned 50 percent of the company. Appellant was president, appellee was vice-president, and appellant's wife, Betsy Nestor, was secretary. The company also employed labor workers, and it used equipment that appellant and appellee either brought to H&N or purchased to contribute to H&N's production.

         {¶ 6} Until around mid-1999, appellant and appellee received equal paychecks and profits, and the business was going well. Then appellant and appellee's relationship began to deteriorate, and appellee communicated that he wanted to sell his interest in the company. He demanded around $200, 000 for his share. Appellant was only willing to pay him half of that price. There was no shareholder or operating agreement in place and an impasse ensued.

         {¶ 7} Appellant continued to operate the business while appellee was treated as if he retired and abandoned his interests. Appellee filed a complaint against appellant in November 1999, alleging that appellant had, among other things, breached fiduciary duties to appellee and usurped corporate opportunities. Appellant filed counterclaims against appellee alleging similar causes of action. The case was voluntarily dismissed without prejudice in April 2001.

         {¶ 8} Appellee re-filed the action in June 2001. Appellant again filed counterclaims against appellee. The cases were identical other than the addition of appellee's brother, Robert Hanko, and Hanko Farms, Inc. as parties to a third-party complaint filed by appellant and his wife.

         {¶ 9} In 2009, appellant filed two separate motions to dismiss appellee's claims for failure to prosecute. On July 2, 2009, the trial court dismissed appellee's complaint with prejudice for failure to prosecute pursuant to Civ.R. 41(B)(1).

         {¶ 10} On September 28, 2012, we affirmed the trial court's July 2, 2009 judgment dismissing appellee's claims. See Hanko I. Appellee then filed an application for reconsideration, which we denied. The Supreme Court of Ohio did not accept the case for review. See Hanko v. Nestor, 134 Ohio St.3d 1469, 2013-Ohio-553, 983 N.E.2d 368.

         {¶ 11} On May 12, 2015, appellee filed a motion for relief from the trial court's June 17, 2011 judgment denying appellee's motion for reconsideration of the July 2, 2009 order. In the motion, appellee claimed he was entitled to relief pursuant to Civ.R. 60(A) or Civ.R. 60(B)(5). The trial court held an evidentiary hearing and, on July 24, 2015, the trial court granted appellee's motion. Appellant timely appealed to this court.

         {¶ 12} On May 13, 2016, we reversed the trial court's July 24, 2015 judgment. See Hanko II. We determined the trial court improperly proceeded under Civ.R. 60. Our judgment affirmed that appellee could not bring forth his claims as held in the July 2, 2009 trial court order. This court found, however, that appellant's 2001 counterclaims were preserved and the case was remanded to the trial court.

         {¶ 13} The matter proceeded to trial on appellant's breach of fiduciary duty claim on September 25, 2017. At the close of appellant's evidence, appellee moved for a directed verdict. The trial court granted the motion. The judgment was journalized on October 25, 2017. Appellant then moved the court for a new trial, and the court denied the motion on January 19, 2018. Appellant timely appeals.

         Legal Analysis

         {¶ 14} Although not asserted in an assignment of error, the parties initially place in dispute to what extent this court should address appellant's counterclaims considering he brought forth the claims in a direct, as opposed to a derivative action. This issue is one of law and shall be reviewed de novo. See Heaton v. Rohl, 193 Ohio App.3d 770, 2011-Ohio-2090, 954 N.E.2d 165, ¶ 53 (11th Dist).

         {¶ 15} Appellant asserts a derivative action is not necessary because Ohio law allows business partners and shareholders to bring forth direct, as opposed to derivative claims against other partners or shareholders for a breach of fiduciary duty.

         {¶ 16} Appellee contends appellant's counterclaims should be denied because appellant must, but did not, proceed with a derivative action.

         {¶ 17} Initially, we note H&N was a close corporation because it only had two shareholders and H&N's shares were not traded on a securities market. See Crosby v. Beam, 47 Ohio St.3d 105, 548 N.E.2d 217 (1989), paragraph one of syllabus.

         {¶ 18} Directors and shareholders of a closely held corporation owe the shareholders fiduciary duties to act in good faith and to refrain from self-dealing. See id. at 107-108; Heaton, 193 Ohio App.3d 770, 2011-Ohio-2090, 954 N.E.2d 165, at ¶ 47.

         {¶ 19} Generally, "actions for breach of fiduciary duties are to be brought in derivative suits." Grand Council v. Owens, 86 Ohio App.3d 215, 220, 620 N.E.2d 234 (10th Dist. 1993), citing Cole v. Ford Motor Co., 566 F.Supp. 558, 568-569 (W.D.Pa.1983). One nuanced exception is where the case involves "claims by shareholders in a close corporation." See, e.g., Terry v. Carney, 6th Dist. Ottawa No. OT-94-054, 1995 Ohio App. LEXIS 5754, *17 (Dec. 29, 1995).

         {¶ 20} Appellant argues he was not required to bring forth his counterclaims as a derivative action because his claims involved a close corporation. For support he specifically points to Crosby, where the Supreme Court of Ohio held that "claims of a breach of fiduciary duty alleged by minority shareholders against shareholders who control a majority of shares in a close corporation, and use their control to deprive minority shareholders of the benefits of their investment, may be brought as individual or direct actions and are not subject to the provisions of Civ. R. 23.1." Crosby at 109-110.

         {¶ 21} In this case, we cannot say the facts fit squarely within the explicit framework of Crosby because the parties were both equal owners of H&N, and thus there was no majority or minority shareholder.

         {¶ 22} We look to Crosby's progeny, and note that this court has not applied the rule articulated in Crosby to a case where there has been no minority shareholder. See Frick v. Frick, 6th Dist. Wood No. WD-03-075, 2004-Ohio-6898; Mulchin v. ZZZ Anesthesia, Inc., 6th Dist. Erie No. E-05-045, 2006-Ohio-5773; Binsack v. Hipp, 6th Dist. Huron No. H-97-029, 1998 Ohio App. LEXIS 2370 (June 5, 1998); Terry v. Carney, 6th Dist. Ottawa No. OT-94-054, 1995 Ohio App. LEXIS 5754 (Dec. 29, 1995); Crosby v. Beam, 83 Ohio App.3d 501, 615 N.E.2d 294 (6th Dist.1992); Hall v. Edmonds, 6th Dist. Lucas No. L-91-219, 1992 Ohio App. LEXIS 4349 (Aug. 28, 1992).

         {¶ 23} We first point to Citizens Fed. Bank v. Chateau Constr. Co., 2d Dist. Montgomery No. 13902, 1994 Ohio App. LEXIS 167 (Jan. 19, 1994), where a direct action was allowed.

         {¶ 24} In Citizens, the Second District Court of Appeals applied the holding of Crosby despite there being no minority shareholder. Id. at *4. There were two business partners, Nelson and Ross, who each owned 50 percent of a company they started in 1987. Evidence demonstrated "that [Nelson] was the controlling shareholder." Id. at *5. As a result of Nelson being the controlling shareholder, breach of his fiduciary duty to Ross was actionable. See id. at *4, citing Crosby at 109 (implying "controlling" ...

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