IN THE SUPREME COURT OF OHIO
FRANKLIN MANAGEMENT INDUSTRIES, INC.,
Plaintiff- Appellee, On Appeal from the Cuyahoga County Court of Appeals, Eighth Appellate District MOTORCARS INFINITI, INC. and MOTORCARS EAST, INC., Court of Appeals Case No. CA-10-0935391 Defendants-Appellants.
MEMORANDUM IN SUPPORT OF JURISDICTION OF APPELLANTS MOTORCARS INFINITI, INC. AND MOTORCARS EAST, INC.
Jon J. Pinney (0072761) (COUNSEL OF RECORD) Valoria C. Hoover (0059596) Gregory P. Amend (0081247) KOHRMAN JACKSON & KRANTZ PLL One Cleveland Center - 20`h Floor 1375 East Ninth Street Cleveland, Ohio 44114 Telephone: (216) 696-8700 Fax: (216) 621-6536
Counselfor Appellants Motorcars Infiniti, Inc. and Motorcars East, Inc.
James B. Rosenthal (00628722) (COUNSEL OF RECORD) COHEN ROSENTHAL & KRAMER LLP The Hoyt Block Building - Suite 400 700 West St. Claire Avenue Cleveland, Ohio 44113
Counsel for Appellee Franklin Management Industries, Inc. RIE M,QY 23 2oit CL^P{i OF COURT SUPREPI;E CCUtiI GE OHiO TABLE OF CONTENTS
EXPLANATION OF WHY THIS CASE IS A CASE OF PUBLIC AND GREAT GENERAL INTEREST ...... :...... :...... I
STATEMENT OF THE CASE AND FACTS ...... 3
ARGUMENT IN SUPPORT OF PROPOSITIONS OF LAW ...... 5
Proposition of Law No. 1: THE GENERAL ASSEMBLY SUPPLANTED THE "TRUST FUND DOCTRINE" WITH THE CODIFICATION OF CORPORATE DISSOLUTION STATUTES THAT EXPRESSLY GOVERN AND LIMIT THE ...... 5 LIABILITY OF SHAREHOLDERS ..
Proposition of Law No. 2: IN ORDER FOR JUDGMENT CREDITORS TO IMPOSE LIABILITY UPON SHAREHOLDERS OF DISSOLVED CORPORATIONS, THE JUDGMENT CREDITOR IS REQUIRED TO ESTABLISH SHAREHOLDF,R ...... 11 LIABILITY UNDER R.C. 1701.95 :.
Proposition of Law No. 3: ASSUMING ARGUENDO THAT THE "TRUST FUND DOCTRINE" HAS NOT BEEN SUPPLANTED BY STATUTE, OHIO SHOULD IMPOSE REASONABLE PARAMETERS ON THE APPLICATION OF THIS ARCHAIC DOCTRINE IN ORDER TO PREVENT THE IMPOSITION OF UNENDING PER SE LIABILITY ON SHAREHOLDERS OF DISSOLVED CORPORATIONS ...... 13
CONCLUSION..:...... 15
CERTIFICATE OF SERV ICE ...... 16
APPENDIX Appx. Paee
Journal Entry and Opinion of the Cuyahoga County Court of Appeals (April 7, 2011) ...... :...... :...... 1 EXPLANATION OF WHY THIS CASE IS ONE OF PIJBLIC AND GREAT GENERAL INTEREST
This case involves issues that will have far reaching implications on every former, current and future shareholder of an Ohio coiporation. If the appellate court's erroneous decision is left to stand, the State of Ohio would be the only jurisdiction in the United States to hold
shareholders forever per se liable for corporate debts.
R.C. 1701.95 governs and limits the liability of directors and shareholders of Ohio
corporations. Specifically, R.C. 1701.95(D) expressly limits the liability of shareholders to
dividends, distributions, or other payments that are "knowingly" received in violation of law. In
the case at hand, however, the appellate court ignored this statutory mandate and relied upon an
arcane and outmoded comrnon law theory known as the "trust fund doctrine." In effect, the
appellate court held, in clear violation of the statutory limitations and protections afforded by
R.C. 1701.95(D), that shareholders are per se liable for the debts of dissolved corporations in
perpetuity.
In this case, the Appellants sold their assets to an unrelated third party in 2000. After
paying all creditors, Appellants' Board of Directors distributed the remaining corporate assets to
their respective shareholders. In 2002, Appellants dissolved in full compliance with Ohio's
corporate dissolution statutes. In October 2007, over five years after their dissolution, the
Appellee filed claims against Appellants. In July 2008, over six years after their dissolution,
the Appellee obtained a judgment against Appellants for lost profits that the Appellee incurred
between January 1, 2005 and July 31, 2008 - damages that did not even exist at the time
Appellants dissolved.
Thereafter, Appellee attempted to collect that judgment by garnishing the personal assets
of Appellants' shareholders, who were never named as parties in any of the proceedings. The
I trial court erroneously granted Appellee's motion for garnishment and the appellate court erroneously affirmed that decision.
The resulting impact of the appellate court's unprecedented decision cannot be
understated. If upheld, the State of Ohio would be the only jurisdiction in the United States to
hold shareholders of dissolved corporations forever per se liable for corporate debts. Prior to the
appellate court's decision, no Ohio court had ever authorized, under the so-called "trust fund
doctrine" or otherwise, a creditor of a dissolved corporation to impose shareholder liability under
facts or circumstances remotely analogous to those presented. The effect of the appellate court's
erroneous decision is a complete abrogation of the statutory mandates and limitations set forth in
Revised Code Chapter 1701.
With the enactment of corporate dissolution statutes, the General Assembly supplanted
the so-called "trust fund doctrine." Courts throughout the country (including this one) have
recognized the principle that, with the enactment of modern day corporate dissolution statutes,
common law remedies, such as the "trust fund doctrine," have been supplanted and otherwise
invalidated. If permitted to stand, the holding of the appellate court would make Ohio one of the
least business-friendly states in the nation, effectively eliminating any and all protections
afforded to shareholders with respect to liability for corporate debts. No shareholder of any Ohio
corporation (public or private) could receive a dividend, distribution or payment without fear of
the unknown and unending per se liability that would result. Faced with this exposure,
corporations will undoubtedly leave Ohio and conduct business in any of the forty-nine other
states that do recognize and afford protection to their respective shareholders. As such, this
Court must grant jurisdiction to hear this case and review the erroneous and dangerous decision
of the court of appeals.
2 STATEMENT OF THE CASE AND FACTS
1. OVERVIEW OF RELEVANT FACTS.
A. Background Facts.
Defendants-Appellants Motorcars Infiniti, Inc. f/k/a Motorcars Infiniti ("Motorcars
Infiniti") and Motorcars East, Inc. f/k/a Motorcars Mercedes ("Motorcars Mercedes")
(collectively, "Motorcars Infniti/Mercedes") are dissolved Ohio corporations that formerly
owned and operated automobile dealerships in Bedford, Ohio.
Beginning in February 1994, pursuant to the terms of an Agreement for the Establishment
of Automobile Repair Shop (tlie "Body Shop Agreement"), Plaintiff-Appellee Franklin
Management Industries, Inc. ("FMP') operated a body shop in the sub-basement of another
Motorcars dealership also located in Bedford, Ohio. Both Motorcars Infiniti and Motorcars
Mercedes were parties to the Body Shop Agreement. Generally, the Body Shop Agreement
required FMI to pay rent and commissions in exchange for certain Motorcars dealerships -
including Motorcars Infiniti and Motorcars Mercedes - referring body shop customers to FMI.
On February 11, 2000, Motorcars Infiniti/Mercedes entered into an Asset Purchase
Agreement in which Motorcars Infiniti/Mercedes agreed to sell their assets to the United Auto
Group n/k/a Penske Auto Group ("UAG"). Following the closing of that transaction, on May 1,
2000, UAG formerly terminated the Body Shop Agreement but advised FMI that it intended to
continue using FMI's services in the future. In fact, for nearly four years after the termination
letter was sent by UAG, and more than three years after the dissolution of Motorcars
Infiniti/Mercedes, UAG continued to refer body shop customers to FMI.
3 B. The Dissolution of Motorcars Infiniti/Mercedes.
Prior to the formal dissolution of Motorcars Infiniti /Mercedes and only after all creditors of the corporations had been paid, the directors of Motorcars Infiniti/Mercedes distributed the remaining corporate assets to their respective shareholders. Then, nearly two years after UAG's acquisition of the Motorcars Infiniti/Mercedes dealerships, Motorcars Infiniti and Motorcars
Mercedes lawfully dissolved as corporations in full compliance with Ohio law. Specifically,
Motorcars Mercedes dissolved on April 26, 2002 and Motorcars Infiniti dissolved on September
9, 2002. As part of the dissolution process, both Motorcars Infiniti and Motorcars Mercedes
issued public notice to all creditors by publishing legal notice of the filing of their Certificates of
Dissolution.
C. The Motorcars Arbitration.
On October 1, 2007, over five years after the dissolution of Motorcars Infiniti/Mercedes,
FMI filed a demand for arbitration against various Motorcars entities, including Motorcars
Infiniti and Motorcars Mercedes (the "Motorcars Arbitration"). In that demand, FMI alleged,
inter alia, that Motorcars Infiniti/Mercedes had breached the Body Shop Agreement by failing to
assign the Body Shop Agreement to UAG in connection with the Asset Purchase Agreement.
Notably, none of the directors, officers or shareholders of Motorcars Infiniti/Mercedes were
named as parties to the Motorcars Arbitration.
On July 7, 2008, nearly six years after the dissolution of Motorcars Infiniti/Mercedes,
the Motorcars Arbitration panel determined that Motorcars Infiniti/Mercedes breached the Body
Shop Agreement and awarded FMI lost profits, incurred between January 1, 2005 and July 31,
2008 (the date that the Body Shop Agreement expired on its terms), in the amount of $1,100,000.
4 II. PROCEDURAL OVERVIEW.
FMI filed an action to confirm the Motorcars Arbitration award before the Cuyahoga
Court of Common Pleas, After the award was confirmed, FMI immediately attempted to collect the judgment through the filing of Motions for Garnishment against the shareholders of
Motorcars Infiniti/Mercedes. Although FMI's request was without precedent under Ohio law, the trial court authorized FMI to "garnish" the personal assets of Motorcars InfinitilMercedes'
shareholders, thereby imposing per se liability upon Appellants' shareholders for the post- dissolution debts of the corporations. The Appellants appealed the trial court's decision to the
Eighth District Court of Appeals, which erroneously affirmed the trial court's decision. Both the
trial court and the appellate court relied solely upon an arcane and outmoded common law
doctrine, known as the "trust fund doctrine" which, as set forth herein, is no longer viable under
Ohio law. As a result of the precedent created by these erroneous rulings, shareholders of Ohio
corporations are forever per se liable for the debts of Ohio corporations.
ARGUMENT IN SUPPORT OF PROPOSITIONS OF LAW
Proposition of Law No. 1: THE GENERAL ASSEMBLY SUPPLANTED THE "TRUST FU-ND DOCTRIN-E" W-ITH THE CODIFICATION OF CORPORATE DISSOLUTION STATUTES THAT EXPRESSLY GOVERN AND L[MIT THE LIABILITY. OF SHAREHOLDERS.
The appellate court ignored the clear mandate of R.C. 1701.95 and instead held that FMI,
who was not a creditor of Appellants at the time of dissolution and did not become a creditor
until six years after the corporations had dissolved, was permitted to garnish the personal assets
of Motorcars Mercedes/Infiniti's shareholders in order to satisfy the post-dissolution debts of the
corporations. The appellate court reached its erroneous decision by relying upon an arcane and
outmoded common law principle known as the "trust fund doctrine," which has been supplanted
by statute and is no longer viable under Ohio law. 'the trust fund doctrine was first adopted by an American court in the early nineteenth century, prior to the enactment of statutes regulating corporate governance or the Bankruptcy
Code. In re: Mortgage Am. Corp. (C.A. 5, 1983), 714 F.2d 1266, 1269. Under the cominon law, a corporation, once dissolved, ceased to exist and was not amenable to suit. The "trust fund
doctrine" was created to provide a remedy to creditors of corporations that had distributed their
assets and dissolved for the purpose of defrauding them. Courts have described the "trust fund
doctrine" as follows:
Where the assets of a dissolved corporation have been distributed among the stockholders, a creditor of the dissolved corporation may follow such assets as in the nature of a trust fund into the hands of the stockholders. The creditors have the right to subject such assets to their debts and for the purpose the stockholders hold them as though they were trustees. In other words, the assets of the dissolved corporation are a trust fund against which corporate creditors have a claim superior to that of the stockholders.
Koch v. U.S. (C.A. 10, 1943),138 F.2d 850, 852.
A review of the origins and history of the now-supplanted "trust fund doctrine"
demonstrates that it is no longer viable under Ohio law. The first cited reference to the trust fund
doctrine by an Ohio court occurred in 1923, with the decision in Krug v. Roberts (App. 1923), 1
Ohio L. Abs. 750. At the time of the Krug decision, Ohio corporate statutes were silent with
respect to a creditor's rights against shareholders of dissolved corporations.
In 1940, however, the Ohio legislature limited the application of the trust fund doctrine
with the enactment of corporate dissolution statutes. That year, the Ohio legislature enacted
Ohio General Code §§ 8623-28 and 8623-123(b), which provided that:
No creditor of a corporation shall have any claim or right of action against shareholder as such, other than to reach and apply the debt, if any of the shareholder to the corporation arising out his contract of subscription or purchase. **^ Any shareholders, who knowingly accept or receive any dividend or distribution not authorized by this act to be made, shall be liable to the corporation in the
6 amount accepted or received by him with interest at the rate of six per centum per annum until the same shall be repaid.
The enactment of these statutes undermined the foundation of the trust fund doctrine by expressly limiting shareholder liability to unauthorized distributions that were "knowingly accept[ed] or receive[d]" by a shareholder. Ohio Gen. Code § 8623-123(b). Notably, in 1942, this Court acknowledged the limiting effect of the 1940 statutes and stated:
While we shall keep in mind the trust fund doctrine, its exceptions and limitations...in view of our statutory provisions it will not be necessary to discuss them at length. case, Chisnell v. The Ozier Co. (1942), 140 Ohio St. 355, 360 (emphasis added).' In the Chisnell this Court held that shareholders of dissolved corporation could be held liable only if it was established that those shareholders "knowingly accepted or received a distribution not authorized
by law" - as required by the corporate dissolution statutes enacted in 1940. Chisnell, 140 Ohio
St. at 360.
Subsequent to the enactment of the Ohio General Code and the Chisnell decision, the
Ohio legislature delivered the fatal blow to the trust fund doctrine with the codification of the
Ohio Revised Code in 1955. With the enactment of the Ohio Revised Code, the legislature
eliminated the ability of a creditor to directly pursue actions against shareholders who allegedly
received unlawful distributions from a dissolved corporation. Specifically, the former R.C.
1701.95(C) read, in relevant part:
1 The Ohio Supreme Court's decision in Chisnell is consistent with the universally recognized principle of Ohio law that a statute enacted in derogation of common law displaces or supersedes common law rights. See Miller v. Fairley (1943), 141 Ohio St. 327, 334; Leis v. Cleveland Railway Co. (1920), 101 Ohio St. 162, 165; Drake v. Rodgers (1861), 13 Ohio St. 21, 28; NCS Healthcare, Inc. v. Fifth Third Bank (8"' Dist.), 2005 Ohio 3125, P46; Olympic Title Ins. Co. v. Fifth Third Bank (2d Dist.), 2004 Ohio 4795, P31; Nat'l City Bank v. Citizens Nat'l. Bank of (4"' Dist. Southwest Ohio (2d Dist.), 2004 Ohio 6060, P30; State ex. rel. Meyers v, Baldwin 1953), 94 Ohio App. 381, 383. A shareholder who knowingly receives any dividend, distribution, or payment made contrary to law or the articles shall be liable to the corporation for the amount received by him which is in excess of the amount which could have been paid or distributed without violation of the law or the articles.
With the exception of revising the use of masculine terms when referencing shareholders, the modern day R.C. 1701.95(D) mirrors the former R.C. 1701.95(C). Compare R.C. 1701.95(C)
(1955) with R.C. 1701.95(D) (2009).
Ohio courts have interpreted the modern statutory scheme to limit the liability of
shareholders to circumstances in which: (i) the corporation, or a third party through a derivative
action, files a timely claim against the sliareholder(s) under R.C. 1701.95, and (ii) the dissolved
corporation's creditor establishes that the shareholder(s) "knowingly" received a distribution in
Dist. 1983), 11 violation of law. See Chisnell, 140 Ohio St. at 360; Schaefer v. Dechant (6`"
Ohio App.3d 271; Hall v. Cannaley (1990), Lucas App. No. L-89-153, 1990 Ohio App. LEXIS
1873, *25 (unreported); R. H. Snyder v. Yoder (N.D. Ohio 1959), 176 F. Supp: 617, 623. The
supplanting of the trust fund resulted in the statutory scheme set forth in R.C. 1701.95 becoming
the exclusive means of imposing liability upon a shareholder for debts of the corporation.
In e-rroneously affirming the trial court's decision, the appellate court relied exclusively
upon this Court's decision in Cay Machine Co. v. Firestone Tire & Rubber (1963), 175 Ohio St.
295. However, the appellate court's reliance upon that case was misplaced since that case
actually supports Appellants' arguments. In Cay Machine, this Court held that "[t]he General
Assembly intended to codify the `trust fund' doctrine." Cay Machine, 175 Ohio St. at 299.
Accordingly, since this Court acknowledged in Cay Machine that the General Assembly codified
the trust fund doctrine, the statutory scheme enacted by the legislature - not the common law -
should control. Nonetheless, the appellate court erroneously ignored the statutory rnandates of
that scheme.
8 Other Ohio courts have expressly held that the trust fund doctrine has been supplanted by
Ohio's statutory scheme governing corporate dissolution. See In re: Amcast Indus. Corp, v.
the Southern District of Ohio Baker (Bankr. S.D. Ohio 2007), 365 B.R. 91. In Amcast,
Bankruptcy Court thoroughly analyzed and rejected the application of the "trust fund doctrine" under current Ohio law, holding that "[s]ome of the common law corporate principles such as
the `trust fund doctrine' have been gradually supplanted and modified by statutes aimed at
protecting" shareholders of dissolved corporations on one hand, and providing remedies to
creditors on the other. In re: Amcast Indus. Corp., 365 B.R. at 109-110 (emphasis added).
The Ohio legislature is not alone in its decision to supplant the trust fund doctrine.
Modern day courts and treatises have acknowledged that the 187-year-old trust fund doctrine "is
notoriously squishy" and "[p]erhaps no concept has created as much confusion in the field of
corporate law as has the trust fund doctrine." Terr. of the U.S, V.I. v. Goldman, Sachs & Co.
(Del. 2007), 937 A.2d 760, 768; Fletcher, 15A Cylcopedia of Law of Corporations § 7369
(2006). As the Delaware Chancery Court recently explained:
The trust fund theory involved the recognition of an open ended obligation on the part of stockholders of dissolved corporations to return distributions they had received from the dissolved corporation whenever a post-dissolution claimant can prove that the corporation owed its funds based on its pre-dissolution activities. As thus conceived, this variant of the trust fund doctrine would impose a trust on the funds received by stockholders from a dissolving corporation, for the benefit only of creditors that the directors of the dissolving corporation knew about or had reason to suspect axisted during the dissolution process, but also as to unsuspected future claimants.
Terr. Of U.S. V.L, 937 A.2d at 789. In that case, the Delaware Chancery Court conducted a
nationwide survey outlining the derogation of the trust fund doctrine and held that the statutory
scheme governing corporate dissolution, not the common law, governed the potential liability of
shareholders for corporate debts. Id. at 768-90.
9 As numerous other courts and authorities have observed, the trust fund doctrine runs contrary to one of the most important goals of corporate dissolution law: to provide certainty and finality to corporations and their shareholders. See Terr. Of U.S. V.L, 937 A.2d 760; Pacific
Scene, Inc, v. Penasquitos, Inc. (Cal. 1985), 758 P.2d 1182, 1187; Blakenship v. Demmler Mfg.
Co. (1980), 89 Ill. App.3d 569, 573; Hospes v. Northwestern Mfg. & Car Co. (1892), 48 Minn.
174; Norten, Relationship of Shareholders to Corporate Creditors Upon Dissolution Nature and
Implications of the "Trust Fund" Doctrine of Corporate Assets, 30 Bus. Law 1061 (1975);
Warren, Safeguarding the Creditors of Corporations, 36 HARV. L. REv. 509, 544-47 ( 1923).
For this reason, many states, including Ohio, have adopted statutes governing corporate dissolution that abrogated the trust fund doctrine by requiring that judgment creditors establish that a shareholder is actually liable to the corporation before permitting the judgment creditor to
utilize a shareholder's personal assets to satisfy corporate debts.
As this Court has previously held, when enacting legislation that supplants common-law
principles, "the General Assembly is charged with making the difficult policy decision on such
issues and codifying them into law. This court is not the forum to second-guess such legislative
choices." Arbino v. Johnson & Johnson, 116 Ohio St.3d 468, 482, 2007 Ohio 6948. The
appellate court erred by affirming the trial court's decision to authorize FMI to pursue
Appellants' shareholders under the trust fund doctrine and thereby impermissibly "second-
guessing" the statutory scheme enacted by the Ohio General Assembly.
10 Proposition of Law No. 2: IN ORDER FOR JUDGMENT CREDITORS TO IMPOSE LIABILITY UPON SHAREHOLDERS OF DISSOLVED CORPORATIONS, THE JUDGMENT CREDITOR iS REQUIRED TO ESTABLISH SHAREHOLDER LIABILITY UNDER R.C. 1701,95.
R.C. 1701.95(D) represents the exclusive means by which shareholders may be held liable for dividends, distributions and/or payments that they received from a dissolved corporation. Specifically, R.C. 1701.95(D) provides:
A shareholder who knowingly receives any dividend, distribution, or payment made eontrary to law or the articles shall be liable to the corporation for the amount received by that shareholder that is in excess of the amount that could have been paid or distributed without violation of law.
Accordingly, pursuant to the express language of 1701.95(D) and as a matter of Ohio law: (i) any
liability arising out of a shareholder's receipt of an allegedly unlawful distribution is derivative
in nature and, therefore, owed to the corporation - not creditors; and (ii) prior to the imposition
of liability, it must be established that the shareholder "knowingly" received an unlawful
dividend, distribution or payment.
Numerous Ohio courts have confirmed that "liability imposed upon a shareholder of a
corporation by R.C. 1701.95[D] clearly runs to the corporation and not creditors directly."
Schaefer, 11 Ohio App.3d at 283; see also, Hall, 1990 Ohio App. LEXIS 1873 at *25 (holding
that "[t]he liability imposed by R.C. 1701.95 upon directors and shareholders of a corporation for
unlawful distribution of corporate assets runs to the corporation and not creditors directly.");
R.H. Snyder, 176 F. Supp. at 623 (holding that, as a matter of Ohio law, any right of action for
the unauthorized distribution of corporate assets "devolves through the operations of R.C.
1701.95"). Moreover, as this Court has previously held, pursuant to the express language of
R.C. 1701.95(D), it must be established that the shareholder "knowingly" received a distribution
"made contrary to law or the articles" before liability for corporate debts may be imposed.
11 Chisnell, 140 Ohio St. at 364. Nonetheless, the appellate court erroneously ignored these legislative mandates by authorizing FMI to assert direct claims against Appellants' shareholders and failing to require FMI to establish that the distributions at issue were "knowingly" received in violation of law.
In an effort to sidestep the statutory directives set forth in 1701.95(D), FMI argued before the lower courts that creditor claims under the trust fund doctrine were somehow preserved by
R.C. 1701.95(G). Specifically, R.C. 1701.95(G), states:
Nothing contained in this section shall preclude a creditor whose claim is unpaid from exercising the rights that the creditor otherwise would have by law to enforce that creditor's claim against assets of the corporation paid or distributed to the shareholders.
However, Ohio courts have expressly rejected the argument that R.C. 1701.95(G) somehow
"impliedly creates a right in creditors to bring a cause of action pursuant to R.C. 1701.95."
Schaefer,ll Ohio App.3d at 282. The Schaefer decision is consistent with a plain reading of the
statute and furthers one of the fundamental objectives of corporate law: to provide certainty and
finality to corporations and their shareholders.
The most relevant word of R.C. 1701.95(G) is "otherwise." The purpose of the FMI's
Motion for Garnishments is to recover distributions paid to Motorcars Infiniti/Mercedes'
shareholders. R.C. 1701.95(D) is the exclusive mechanism to recover those distributions - there
are no rights that FMI "otherwise" would have to achieve this end. The exception that FMI
claims to be created by R.C. 1701.95(G) would wholly consume and render meaningless the
rules and limitations set forth in R.C. 1701.95(D).
Accordingly, it is necessary for this Court to take jurisdiction of this case in order to
correct the appellate court's erroneous decision to ignore the express language of R.C.
1701.95(D) and, thereby impose per se liability upon the shareholders of dissolved corporations.
12 Proposition of Law No. 3: ASSUMING ARGUENDO THAT THE "TRUST FUND DOCTRINE" HAS NOT BEEN SUPPLANTED BY STATUTE, OHIO SHOULD IMPOSE REASONABLE PARAMETERS ON THE APPLICATION OF THIS ARCHAIC DOCTRINE IN ORDER TO PREVENT THE IMPOSITION OF UNENDING PER SE LIABILITY ON SHAREHOLDERS OF DISSOLVED CORPORATIONS.
The precedent created by the appellate court's decision would affect every former, current, and future shareholder of Ohio corporations, effectively imposing per se liability to corporate creditors for any corporate dividends, distributions and/or payments that they receive.
Accordingly, assuming arguendo that the trust fund doctrine has not be supplanted or otherwise
remains a viable remedy under Ohio law, this Court should impose reasonable parameters on its
application.
In Chisnell, this Court acknowledged that there are "exceptions and limitations" on the
application of the trust fund doctrine. Chisnell, 140 Ohio St. at 360. However, the appellate
court failed to recognize any such "exceptions and limitations," instead imposing unending per
se liability upon the shareholders for the debts of dissolved corporations. If this precedent is
permitted to stand, the State of Ohio would be the only jurisdiction within the United States to
apply such a rule and, as a result, would immediately become one of the least desirable states to
conduct business.
Even the few jurisdictions that still recognize the trust fund doctrine have set parameters
significantly limiting its application. Specifically, these jurisdictions have done so by: (i)
narrowly limiting the ability of corporate creditors to pursue shareholders for debts that existed
prior to the date of dissolution; andlor; (ii) imposing a strict statute of limitations on the ability of
a creditor to pursue such claims after dissolution. See Terr. of the U.S. V.I., 937 A.2d 760
(Delaware - applying a three-year statute of limitations to claims by corporate creditors);
Penasquitos, Inc. v. Superior Court of San Diego (Cal. 1991), 812 P.2d 154, 161 (California -
13 holding that "once a corporation's assets have been properly distributed to the shareholders, the assets are beyond the reach of plaintiffs who possess claims that arose after the dissolution");
Oliver v. American Motors Corp. (E.D.Va. 1986), 616 F. Supp. 714, 717 (Virginia - holding that corporate creditors may only pursue certain types of claims that arose prior to dissolution); Seavy v. I.S. L. Laundry Co. (1941), 108 P.2d 853, 855 (Nevada - applying a three-year statute of
692 P.2d 1290; 3 limitations to claims by corporate creditors), overruled on an unrelated point,
Model Bus. Corp. Act. Ann. (3d ed.) § 14.07 (adopted by numerous states - imposing a strict five-year statute of limitations on any claims against a dissolved corporation or its shareholders, starting on the date of notice of dissolution). Without such limitations, the trust fund doctrine
"would mean that the corporation could never completely dissolve but would live indefinitely through its shareholders." Blakenship, 411 N.E.2d 1153, 1156.
Accordingly, even if it is determined that the trust fund doctrine remains a viable remedy
under Ohio law, this Court should use this case as an opportunity to place reasonable parameters
upon the trust fund doctrine's application and otherwise delineate the specific "exceptions and
limitations" that it has acknowledged to exist, Appellants respectfully submit that Ohio law
should (at minimum) adopt the following parameters: (i) apply a two-year statute of limitations
to claims against shareholders of dissolved corporations for distributions that they received,
thereby affording corporate shareholders the same protection expressly granted to corporate
directors in R.C. 1701.95(F);2 and/or, (ii) prohibiting the application of the trust fund doctrine to
2 R.C. 1701.95(F) states, "[n]o action shall be brought by or on behalf of a corporation upon any cause of action arising under division (A)(1)(a) or (b) of this section at any time after.two years from the date on which the violation occurs." Generally, R.C. 1701.95(A)(1)(a) and (b) govern the liability of corporate directors for the making of dividends, distributions, and payments contrary "to law or the articles" (sub-section (a)) and/or "without the payment of all known obligations of the corporation or without making adequate provision for their payment" (sub- section (b)).
14 circumstances where the debt sought to be collected accrued after the dissolution of the corporation.
CONCLUSION
For these reasons, this case involves a matter of great public and general interest.
Accordingly, the Appellants respectfully request that this Court accept jurisdiction so that these important issues may be reviewed on the merits.
Respectfully sub itted, Jon J. Pjtjney, Cunsel of Record
Counselfor Appellants Motorcars Infiniti; Inc. and Motorcars East, Inc.
15 CERTIFICATE OF SERVICE
The undersigned hereby certifies that on this 23d day of May, 2011, a copy of the foregoing Memorandum in Support of Jurisdiction was sent via Regular U.S. Mail, postage pre- paid, to the following:
James B. Rosenthal COHEN ROSENTHAL & KRAMER LLP 7'he Hoyt Block Building - Suite 400 700 West St. Clair Avenue Cleveland, Ohio 44113
Counsel for Appellee Franklin Management Industries, In
Vatbria q
16 APPENDIX court of appeat5 o
LIGHTH APPELLATE DISTRICT COUNTY OF CL'YAIIOGA
JOURNAL ENTRY AND OPINION No. 95391
FRANKLIN MANAGEMENT INDUSTRIES, INC.
PLAINTIFF-APPELLEE
vs. MOTORCARS INFINITI, INC., ET AL.
DEFENDANTS-APPELLANTS
JUDGMENT: AFFIRMED
Civil Appeal from the Cuyahoga County Court of Common Pleas Case No. CV-666009
BEFORE: Rocco, J., Kilbane, A.J., and Blackmon, J.
RELEASED AND JOURNALIZED: April 7, 2011 ATTORNEYS FOR APPELLANTS
Sarah Gahinet Gregory P. Amend Jon J. Pinney Kohrinan, Jackson & Krantz PLL 1375 East Ninth Street One Cleveland Center, 20" Floor Cleveland, Ohio 4411.4
ATTORNEY FOR APPELLRR
Jaines B. Rosenthal Cohen, Rosenthal & Kramer, LLP IIoyt Block Building -- Suite 400 cit 700 West St. Clair Avenue Clevel.and, Ohio 44113 APR X T ZQlt ,LD E.,FUER5T R G°W APPEAA.S S't-F. -1-
KENNETH A. ROCCO, J.: Defend ants- appellants Motorcars Infiniti, Inc. and Motorcars 1:ast, Inc.
("Motorcars") appeal from the trial court's decisions that permitted execution to proceed on an arbitration award against them in favor of plaintiff-appellee
Franklin Management Industries, Inc. ("FMI"), and subsequently grantedFMI's
st Motorcars' sole shareholders, James motions for orders of garnishment again
G. Pilla and Lee G. Seidman.l Motorcars present five assignments of error, arguing the trial court
improperly granted FMI's motions for several reasons. Motorcars contend that:
1) orders of garnishment cannot be issued against "non parties"; 2) the "trust
fund doctrine" has been supplanted by R.C. 1701,95, therefore, the trial court
could not use it to enable FMI to garnish personal assets of Motorcars'
shareholders;3) FMI failed to establish shareholder liability for the debt owed
by Motorcars to FMI; 4) FMI's claim.s against Motorcars' shareholders were
time-barred; and, 5) since Motorcars retains an asset sufficient to satisfy FMI's
judgment, the personal assets of Motorcars' shareholders cannot be subject to,
garnishment.
I'h s court finds this appeal falls under thc definition of a "final ordcr'^pursuait (vlay 25, 1918) Cuyahoga . Cf., Maryn^^ount Hoep. u Mitchell to R C 2505.02(B)(2) ^moneyA' i`' c€inentsa App. No. 37344 (order directing urtprior judgnzent debtor is not itself a judgls to R.C. 2505.02). -2-
Upon a review of the record, this court cannot find the trial court erred in this matter, Consequently, Motorcars' assiglrments of errOr arc o`orruled, and the trial court's order is af.firnied. Franklin `Phis court previoitsly reviewed some of the fact,s of this case iri
Infiniti, In.c., Cuyahoga App. No. Management Industrties, Izic. u. Motorcars
93630, 201.0-Ohio-1871, st,ating as follows at ¶2-9:
"In February 1.994, FMI and Motorcars entered into an agreement that
allowed FMI to operate a bodyshop out of the basement of one of Motorcars'
dealerships. Pursuant to the agreement, FMI paid Motorcars rent and
commissions in exchange for exclusive referrals to FILI's bodyshop.
"On February 11, 2000, Motorcars entered into an Asset Purchase
Agreement with United Auto Group ("UAG"), which elected to terminate the
existing agreement between FMI and Motorcars for bodyshop referrals. FMI
puisued,claims aga.inst Motorcars and TiAG, and eve.nt.ually arbitrated its
claims separately against both entities. Only the outcome of the arbitration
between FMI and Motorcars is relevant to this appeal.
"0n July 7, 2008, a panel from the American Arbitration Association
awarded approximately $1,100,000, including prejudgment interest, toFMI and
against Motorcars and other parties not relevant to this appeal. "On July 25, 2008, FMI sought to confirnl the arbitration award in the trial court. "On December 1.2, 2008, the trial court adopted the findings of the arbitration panel. "On February 1.2, 2009, the trial court entered juclgment against
Motorcars. "On March 6, 2009, FMI filed multiple writs of execution upon Motorcars
in an attempt to collect upon the judgment debt. [These attempts were
unsuccessful.] "On April 30, 2009, FMI filed what it termed a motion for orders for
garnishment of property other than personal earnings, in which it requested
that the trial court garnish the personal assets of two of Motorcars'
shareholders. The trial court, granted this rxrotion on June 1.8, 2009."
Motorcars filed a notice of appeal: froin t,he.June 18, 2009 order. This
cour•t dismissed the appeal for lack of a final order. Id., 1j16•17.
By the time the matter came before the trial court once again, the court
already had conducted a garnishment hearing. Id., at Footnote 1. Thus, on
June 25, 2010, the trial court issued a judgment entry permit.ting"garnishment
[to] proceed." -4-
On July 6, 201.0, the trial court is.sued a journal. entry that stated in pertinent part as follows: ***[T]he Court hereby fiiids that garnishee Lee G. Seidman has in his possession money of Judgment Debtors [Motorcars) in t.he amoi.mt of
$2 , 241,876, and he is hereby "ORDERED to pay *'' * the sum of $1,100,000 plus $42,433.60 in interest
throi:tgh December 31, 2008, plus $627.80 in costs through June 0, 2010, plus
interest at the rate of $55,000 in interest from January 1, 2009 througll
Deceinber 31, 2009, plus interest at the rate of $120.55 per day from January
1., 2010 through such date as the amount is paid.
"It is further ordered that the Clerk shall place such funds in an
interest-bearing account and f.rom such funds shall remit to Judgrnent Creditor
[F1VllJan amount sufficient to sati.sfy the judgment entered in this case on
February- 12, 2009, and remit any remaining balance back to the garnishee.
A A *
That same day, the trial c.ourt issued an identical order that referred to
"garnishee James G. Pi11a." Motorcars filed theii° notice of appeal in this case frorn those JLily 6, 2010 orders, and from the June 25, 2010 order that permitted.garl^l.ishsnent to proceed.z They present the following six assignments of error:
"I, The Trial Court erred by authorizing the issuance of Orders
of. Garnishment against non-parties.
"II. The Trial Court erred by failing to recognize that the `trust
fund doctrine' was supplanted by the Ohio General Assernbly with the
1955 codification of corporate dissolution statutes that expressly
govern the liability of shareholders of a dissolved corporation.
"III. The Trial Court erred by authorizing FMI to `garnish' the
personal assets of Motorcars Infiniti and Motorcars Mercedes'
shareholders without requiring FMI to establish shareholder liability
under R.C. 1701.95. that any claim "IV. The Trial Court erred by failing to recognize
that FMI could have against the sbareholders is time-barred.
Court erred by permitting FMI to `garnish' the "V. The Trial
personal assets of Motorcars' shareholders even though FMI has
2Motorcars raises no challenge to the trial court's February 12, 2009 clecision to enter judgment on the arbitrators' award and the amounts of the judgment set forth therein. _ 6. admitted that Motorcars Infiniti and Motorcars Mercedes have a corporate asset sufficient to satisfy the judgment.
"VI, The Trial Court erred by holding that the `trust fund
doctrine' enables FMI to garnish the personal assets of Motorcars
Infiniti and Motorcars Mercedes' shareholders."
In their first assignment of error, Motorcars argue t,he trial court could
not lawfully authorize FMI to obtain a judgment against their shareholders,
because the shareholders were never xnade parties to this p'oceeding. Taking
this argument to its logical conclusion, Motorcars would lack standing to raise
it. Nevertheless, this court disagrees. to an Civ.R. 71 provides in pertinent part that *[W1h,en obedience
order may lawfully be enforced against a person who is not a party, he is liable
to the same process for enforcing obedience to the order as if he were a party."
According.to the 9hio Supreme Court: is not a party to "Prior case law has unequivocally held that a ga.rnishee
As stated in the second paragraph of the syllabtis a garnishment proceedting. (1883), 39 Ohio St. 218, "' "' * a garnishee who is summoned in Secor u. Witter to answer is not a party, nor has he his day in court, in that [garnishsneni'J
action. His duty is to appear and answer all questions touching the property
[etis possession or undea, his contr•ol, and truly disclose and credits of defendant in the amount owing by him to defendant, whether due or not "* i'." The :Secor
assigned the d,efendant clebtor :s court held that an order to pay into court merely
Seeid. at paragraph four claim agai»,st the garnishee to the plai.wtrff creditor.
of the syllabus. It remained for the plaintiff to enforce the assigned claim
civil action authorized by statute, Id. against the garnishee in a separate
. aa k ^: 'k ......
"Tlie present statutes gouerni.ng post,judgrnent garnishment continue to
The garnishee continues to be treated as a nonp arty for apply these principles. is a purposes of the garnishment proceeding. *" * In short, the garnishee
to the garnishment proceeding for stakeholder or witness and not a party Januzzi u. Hickman purposes of the present statutes. (Emphasis added.)"
(1991), 61 Ohio St.3d 40, 572 N.E.2d 642.
R.C. 2716.11 presently provides:
property, other than personal earnings, "Aproceedting forgarnishment'of
a judginent creditor may be commenced after a judgrnent has been obtai n.ed. by
by the judgment creditor or the by the filing of an affidavit in writing rnade
judgment creditor's attorney setting forth all of the following:
"(11.) The name of the judgment debtor whose property the judgment
creditor seeks to garnish;
°(B) A description of the property; .H. ii,)^o rna.y Yta,ue in the °(C) The name and address of the garn.^si^ee property, or credits, other than personal garnishee's hands or control rrzone,y,
(Emphasis added.)" earnings, of t he jtiidgm.ent debtor. FMI filed such an affidavit on April 20, 2009: It full,y complied with the
requirements set forth in the statute.
Moreover, R.C. 2716.01(B) states:
"(13) A person who obtains a juclgment against another person .nay
garnish the property, other than personal earnings, of the person against whom other than the possession of aperson judgment was obtained, if the property is in only throii,gh a proceeding in the person against whonti judgment was obtain.ed.,
and only in accordance with this chapter (Emphasis added)." garntishnient The record reflects the trial court conducte.d a hea.ring pursuant to R.C.
27I6.13(A.), at which the court had the opportunity to consider, in accordance
with that section of -the statute, "the amount of money, property,, or. credit,s, .,
other than personal earnings, of [Motorcars] in the hands of the garnishee[s],
if any; that can be used to satisfy all or part of the debt owed by the judgment
debtor to the judgment creditor."
In fact, at that hearing, Seidman and Pilla informeci the trial court
through their attorney that thcy dici not dispute FA111's asserti.on that. "they
received distributions of [Mot,orcarsj assets in excess of the anlount of FMI's .9- claim." Motorcars also has not appealed from the trial court's decision to confirm the arbitration award in FMI's favor.
In light of those facts, the trial court committed rio error in granting FMI's motion for orders of garnishment against Motorcars' shareholders Nlotorcars first assignment of error, therefore, is overruled.
Motorcars argues in its second and sixth assignments of error that the
"trust fund doctrine," upon which FMI relied inseeki.ng garnishment from
Motorcars' shareholders, has been abrogated by statute, viz., R.C. 1701.95,
enacted in 1955.3 The Ohio Supreme Court has held otherwise.
jR.C. 1701.95, Liability of directors and shareholders for unlawful loans, dividends, or distributions, provides in pertinent part: "(A)(1) In addition to any other liabilities imposed by law upon directors of a corporation and except as provided in division (B) of this section, directors shall be jointly and severally liable to the corporation as provided in division (A)(2) of this
section
who knowingly receives any dividend, distribution, or "(D) A shareholder for the payment made contrary to law or the articles shall be liable to the corporaii.on amount received by that shareholder that is in excess of the ainount t.hat, could have been paid or distributed without violation of law or the articles. „* * ^ "(F) No action shall be brought by or on behalf of a corporation upon any cause at any time after two of action arising under division (A)(1)(a) i r (b) of this section years from the day on which the violation occurs. "(G) Nothing containedi:n this section shall preclude a creditor u)hose clainti is unpaid from exercising the rights that t.hat creditor olherwtise would lv,aue by law to enforce that creditor's claim against assets o/'the corporattion paid or dtistributed to -io-
In discussing the statut,ory scheme with re.spect to this very issue, the supreme court stated as follows: intended to codify the `trust-fund' doctrine "***[`l']he Gei-ieral Assembly (1889), Trustee u. Mercha,ri,ts' Nattional Bank expressed by this court in Rouse,
46 Ohio St. 493, 22 N.E. 293, 5 L.R.A. 378. Judge Williams, speaking for a
unanimou.s court, after stating that when a corporation becoxnes insolvent the
corporate property becomes a trust furrd for the benefit of creditors, stated
further: the property of the creditors, 'In equity the corporate property becornes
and their equities are equal. Every creditor, who became such by parting with
his money, property or other things of value to the corporation, contributed to
the accomplishment of its purposes, and augmented its corporate fund; and
where the fund is no longer demanded for the purposes of the corporation, the
rights of the creditors become fixed instantly and equally, for each, having
contributed to the common fund, has an interest in it, in proportion to his claim,
equally with every other creditor.'
shareholders (Emphasis added)" -].1-
'The trust,cornes tinto being wh.en t;he, certificate of dtissoli.ttion is filed.
'I`hereafter the assets are no longer needed to carry out the purposes for which
the corporation was formed. This property is held by those in charge of winding
up the affairs of the corporation to satisfy claims against the corporation and to
The credi.t,ors of a dissolved distribute what remains to the shareholders.
is the theory insolvent r,orporation are the beneficial owners of its assets. 7'his
to the Common Pleas Court to issue behind the statutory grant of power
injunctions, stay proceedings, determine claims and issue other orders. The
to ensure that each beneficial owner receives his due according to the court is Cay Machine Co, u. Firestone Tire equities of the situation (Emphasis added)."
& Rubber Co. (1963), 175 Ohio St. 295, 194 N.E.2d 425.
In light of the supreme court's endorsement of the continued viability of
the "trust fund doctrine," Motorcars' second and sixth assignments of error also
are overruled. '
Motorcars argues in its third assignment of error that before authorizing
Motorcars to garnish its shareholders' assets, FMI should have been required
to establish "shareholder liability." However, this was the purpose of the
hearing the trial court held pursuant to R.C. 2713.16(A), Since Motorcars'
shareholders did not dispute the fact that corporation assets were distributed -12- tothem that were sufficient to satisfy FMI's jiidgment, this assignn7ent of error
al5o is overruled.. In its fourth assignment of error, Motorcars argues that FMI's clainis
against the corporation are barred by the limitations period contained in. R.C.
1.701.95(F). By its terms, however, R.C. 1701.95(F) applies only to actions
brought "under Division (A)" against a corporation's "directors." FMI's action
to confirm.the arbitration award did not fall under that provision. See, also,
Uctauia Coal Co. v. Cooper T. Smith Corp. (June 15, 2001), Licking App- No.
00CA00223.
R.C. 1701.95(G), onthe other hand, provides that °nothing" in the statute
precludes a creditor of a corporation "whose claim is unpaid from exercising the
to enforce that creditor's rights that that creditor otherwise would have by law
claim against assets of the corporation paid or distributed to shareholders
(Emphasis added)." According to the Ohio-Supreme Court, under the'law of
equity, an unpaid creditor may invoke the "trust fund doctrine" to obtain
corporate funds that were distributed to shareholders. Cay Machine Co.
Motorcars' fourth assignment of error, therefore, also is, overruled.
Motorcars next argues that since it still ret.ains a corporate asset even
after its dissolution, viz., the "Indemnification I.,etter," the trial court should
have required FMI to garnish that asset, rather than assets of the shareholders. -1a-
Motorcars presents no legal au.thority for this argument as required by AhpR-
16(A)(7). Consequently, pursuant to App.R. 12(A)(2), this court declines to address it, and Motorcars' fifth assignment of error is overruled.
The trial court's orders, accordingly, are affirmed.
It is ordered that appellee recover from appellants costs herein taxed.
The court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate be sent to said, court to carry this judgment into execution.
A certified copy of this eritry shall constitute the mandate pursuant to
Rule 27 of the Rules of Appellate Procedure.
KENNETH A. RbCCb, JUDGE
MARY EILEEN KILBANE, A.J., and PATRICIA ANN BLACKNION, J., CONCUR,