Magnus Int'l Grp., Inc. v. Forster

114 N.E.3d 690

2018 Ohio 2192

MAGNUS INTERNATIONAL GROUP, INC., et al., Plaintiffs–Appellees

v.Scott FORSTER, Defendant–Appellant

No. 105948

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

RELEASED AND JOURNALIZED: June 7, 2018

Alexandra Forkosh, Matthew Chiricosta, Christopher S. Williams, Calfee, Halter & Griswold, L.L.P., 1405 East 6th Street, Cleveland, Ohio 44114, ATTORNEYS FOR APPELLANT

John F. Hill, Amanda M. Gatti, Buckingham, Doolittle & Burroughs, L.L.C., 3800 Embassy Parkway, Suite 300, Akron, Ohio 44333, ATTORNEYS FOR APPELLEES For Magnus International Group, Inc., Hardy Animal Nutrition, L.L.C., Hardy Realty, L.L.C., Hardy Industrial Technologies, L.L.C., Hardy Technical Services, L.L.C., and 300 MPH Acres, L.L.C.

Mark R. Koberna, Rodd A. Sanders, Sonkin & Koberna Co., L.L.C., 3401 Enterprise Parkway, Suite 400, Beachwood, Ohio 44122, Matthew Romano, Law Office of Matthew S. Romano, 7100 E. Pleasant Valley Road, # 110, Independence, Ohio 44131, For Eric Lofquist

BEFORE: Blackmon, J., Stewart, P.J., and Jones, J.

JOURNAL ENTRY AND OPINION

PATRICIA ANN BLACKMON, J.:

{¶ 1} Defendant-appellant, Scott Forster ("Forster"), appeals from the order of the trial court that denied his motion for advancement of attorney fees and litigation expenses in defense of litigation commenced by plaintiffs-appellees, Magnus International Group, Inc. ("Magnus"), various affiliated companies,¹ and Eric Lofquist ("Lofquist") (collectively referred to as "plaintiffs"). Forster assigns the following error for our review:

The trial court erred in denying appellant Scott Forster's motion for an order entitling him to advancement of his litigation expenses pursuant to R.C.1701.13(E)(5)(a).

{¶ 2} Having reviewed the record and pertinent law, we reverse and remand for further proceedings consistent with this opinion. The apposite facts follow.

{¶ 3} Magnus is a closely held corporation formed in 2007 by Lofquist and Forster as equal owners. Together with the affiliated companies, Magnus develops and manufactures animal food ingredients.

{¶ 4} On March 12, 2017, Lofquist, the president of Magnus, and the affiliated companies, filed an eight-claim complaint against Forster. In relevant part, plaintiffs alleged that at all relevant times, Lofquist and Forster were "co-owners, officers, directors and employees" of Magnus and the affiliated companies, and that Forster converted corporate checks and misappropriated substantial corporate funds for his sole benefit. Plaintiffs set forth claims for breach of fiduciary duty, misrepresentation, conversion, civil damages for theft, and unjust enrichment. They also sought injunctive relief barring Forster from the companies, imposing a constructive trust, and ordering an accounting, and prayed for damages, punitive damages and/or treble damages, and attorney fees.

{¶ 5} Forster denied wrongdoing and asserted that Lofquist assented to his receipt of the disputed funds in order to "true up," or make up a payment disparity caused by Lofquist's prior withdrawals of corporate funds. Forster also maintained that Lofquist filed the instant litigation in order to force Forster to sell his 50% interest in the companies at a discount.

Forster set forth various individual and derivative counterclaims against Lofquist alleging breach of fiduciary duty, wrongful termination, breach of contract, defamation, and abuse of process, and he prayed for judicial dissolution of Magnus.²

{¶ 6} On June 2, 2017, Forster filed a motion for advancement of attorney fees and litigation expenses in defense of Magnus' complaint. He argued that advancement was mandatory under R.C. 1701.13(E)(5)(a) because Magnus did not disclaim advancement rights in its articles or regulations. Forster also asserted that he complied with all statutory preconditions for advancement, including a demand, and an agreement to "reasonably cooperate" with Magnus and to "repay the amounts advanced if it is proved by clear and convincing evidence" that his actions or omissions were "undertaken with deliberate intent or reckless disregard for the best interests of Magnus." In opposition, Magnus asserted that there was no right to advancement because it filed its complaint "by and in the right of the corporation" against Forster for his own alleged misconduct, and did not sue him simply "by reason of the fact" that he was a director. Additionally, Magnus cited to discovery issues and asserted that Forster was not reasonably cooperating with Magnus, as required in order to obtain advancement under R.C. 1701.13(E)(5)(a).

{¶ 7} Following a hearing on the matter, the trial court denied Forster's motion for advancement. The court determined that advancement was not warranted because the matter "is an action by or in the right of the corporation, and it is not ‘by reason of the fact’ that Forster was associated with the corporation." The court held that the plain language of the statute indicates that advancement is not appropriate in actions where the corporation is suing the director. The court distinguished this matter from Miller v. Miller , 132 Ohio St.3d 424, 2012-Ohio-2928, 973 N.E.2d 228, and noted that "Forster's counsel admitted in open court that Forster cashed corporate checks for his personal use that were made out to both Lofquist and Forster."

R.C. 1701.13(E)(5)

{¶ 8} Within his sole assignment of error, Forster argues that he is entitled to advancement of expenses and fees incurred in defending the claims of Magnus' complaint by operation of R.C. 1701.13(E)(5)(a), which provides for mandatory advancement of such sums unless disclaimed in the articles of incorporation. In opposition, Magnus argues that advancement is not available because Forster was not sued as the result of a "director's act or omission," but rather, was sued as an employee, who happens to also be a director, "over his theft of corporate funds."

{¶ 9} Preliminarily, we note that a motion hearing panel of this court sua sponte dismissed this appeal for lack of a final, appealable order. On reconsideration, Forster's appeal was reinstated and the question of whether the trial court's ruling is a final, appealable order was referred to this merit panel. This panel concludes that the trial court's denial of advancement is a final, appealable order under R.C. 2505.02(B)(4) because this ruling: (1) denied a provisional remedy; and (2) both determined the action with respect to the provisional remedy and prevented a judgment for Forster on the provisional remedy. Accord Miller at ¶ 38 ("postponement of the determination whether [right to advancement of fees] exists would render the right meaningless."). Moreover, this matter is distinguishable from MD Acquisition, L.L.C. v. Myers , 173 Ohio App.3d 247, 2007-Ohio-3521, 878 N.E.2d 37 (10th Dist.), which involved the granting of a motion for advancement. Therefore, we grant motion No. 508770, in which Forster sought reconsideration of the dismissal, and we reinstate the appeal.

{¶ 10} Next, with regard to our standard of review, the sole question presented herein is whether Forster is entitled to advancement under R.C. 1701.13(E)(5). As such, the issue involves statutory construction and raises a question of law that we review de novo. See Cleveland Clinic Found. v. Cleveland Bd. of Zoning Appeals , 141 Ohio St.3d 318, 2014-Ohio-4809, 23 N.E.3d 1161, ¶ 25 ; Lang v. Dir., Ohio Dept. of Job & Family Servs. , 134 Ohio St.3d 296, 2012-Ohio-5366, 982 N.E.2d 636, ¶ 12 ; accord Dorsey v. Fed. Ins. Co. , 154 Ohio App.3d 568, 2003-Ohio-5144, 798 N.E.2d 47, ¶ 12–13 (7th Dist.).

{¶ 11} In this case, the trial court denied Forster's motion for advancement, stating, in relevant part as follows:

Advancement only applies to director's act or omission that is the subject of an action, suit, or proceeding referred to in R.C. 1701.13(E)(1) or (2), "other than an action by or in the right of the corporation, by reason of the fact that the person is or was director, officer, employee, or agent." R.C. 1701.13(E)(1). The plain language of the statute indicates that advancement is not appropriate in actions where corporation is suing director. * * *

Regardless of whether Forster was acting in his role as director, officer, employee, or agent at the time that these actions occurred, this is an action by and in the right of the corporation and it is not "by reason of the fact" that Forster was associated with the corporation that this lawsuit has been brought. The facts in this case are distinguishable from those in Miller , where the director in question was arguably acting in the interest or on behalf of the corporation. This lawsuit has been brought due to Forster's alleged theft and conversion of corporate funds and property for his personal use for his rare car collection, home maintenance, and landscaping, among other things.

{¶ 12} As mentioned, R.C. 1701.13(E)(5) provides for advancement, or immediate recoupment of funds prior to the outcome on the merits, of expenses including attorney fees for a director's acts or omissions, unless such recovery is disclaimed in the corporations articles or regulations. Advancement serves as an " ‘inducement for attracting capable individuals into corporate service.’ " Miller at ¶ 23, quoting Homestore, Inc. v. Tafeen , 888 A.2d 204, 211 (Del.2005). Permissive advancement is governed by R.C. 1701.13(E)(5)(b). Mandatory advancement is governed by R.C. 1701.13(E)(5)(a), which states:

(a) Unless at the time of a director's act or omission that is the subject of an action, suit, or proceeding referred to in division (E)(1) or (2) of this section, the articles or the regulations of a corporation state, by specific reference to this division, that the provisions of this division do not apply to the corporation and unless the only liability asserted against a director in an action, suit, or proceeding referred to in division (E)(1) or (2) of this section is pursuant to section 1701.95 of the Revised Code, expenses,

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