Mikulski v. Toledo Edison Co.

167 N.E.3d 1042

ESTATE OF Jerome R. MIKULSKI, Appellee/Cross-Appellant

v.The TOLEDO EDISON COMPANY, Appellant/Cross-Appellee

No. L-19-1019

Court of Appeals of Ohio, Sixth District, Lucas County.

Decided: January 29, 2021

Joseph M. Sellers, Julie Selesnick, Dennis P. Barron, Cincinnati, Michael F. Becker, Cleveland, Eric H. Zagrans, Thomas R. Theado, Avon, Robert D. Gary, and Jori Bloom Naegele, Lorain, for appellee/cross-appellant.

Peter B. Morrison, Allen L. Lastra, Zachary Faigen, Fred T. Goldberg, Jr., Mitchell G. Blair, Tracy S. Johnson, and Ronald M. McMillan, Cleveland, for appellant/cross-appellee.

Joseph F. Albrechta and John A. Coble, Fremont, amicus curiae, on behalf of The Toledo Edison Company.

DECISION AND JUDGMENT

SINGER, J.

{¶ 1} This is an appeal and cross-appeal from the January 29, 2019 judgment of the Lucas County Common Pleas Court denying certification of the class, in a class action lawsuit, and granting certification of the subclass. The action was brought by appellee and cross-appellant, Estate of Jerome R. Mikulski ("Estate"), individually, and on behalf of the class and subclass, against appellant and cross-appellee, Toledo Edison, ("TE"), alleging fraudulent misrepresentation by TE. TE appealed the trial court's certification of the subclass, and the Estate filed a cross-appeal of the court's denial of certification of the class. For the following reasons, we reverse the trial court's judgment certifying the subclass, and affirm the judgment not to certify the class.

{¶ 2} In its appeal, TE sets forth one assignment of error:

Error 1 : The trial court abused its discretion by certifying the Subclass under Rule 23(B)(3).

{¶ 3} In its cross-appeal, the Estate sets forth five assignments of error:

1. The trial court committed reversible error as a matter of law when it added "pecuniary loss" as an additional element that a plaintiff must show in order to support an Ohio common-law claim for fraudulent misrepresentation, then concluded on the merits that Plaintiff's claims for informational injury and increased tax liability injury did not provide the required "pecuniary loss," and on those bases denied certification of the Class.

2. The trial court committed reversible error as a matter law in concluding that Felix's classwide-injury requirement barred certification of the Class, under any part of Rule 23(B), because Plaintiff had failed to show classwide "pecuniary loss."

3. The trial court committed reversible error as a matter of law by denying certification of the Class without mentioning, let alone performing the required "rigorous analysis" of, [sic] any of the prerequisites of Civ.R. 23.

4. The trial court committed reversible error as a matter of law in concluding, contrary to law of the case, that any claim on account of Toledo Edison's "accounting misfeasance and tax fraud ... belongs to federal and state authorities on behalf of the government" and not to Plaintiff, and in barring on that basis Plaintiff's claim for fraudulent misrepresentation from class certification.

5. The trial court committed reversible error as a matter of law by ruling that the equitable remedy of disgorgement is limited to a breach-of-fiduciary-duty claim to the exclusion of all other claims, including fraudulent misrepresentation.

Facts and Procedural History

{¶ 4} In 2001 and 2002, Jerome and Elzetta Mikulski filed four lawsuits against various Ohio utilities. Those lawsuits included: the action before this court; two lawsuits against Centerior Energy Corporation ("Centerior"), which lawsuits later merged; and another action against the Cleveland Electric Illuminating Company in the Cuyahoga County Court of Common Pleas, which is stayed due to bankruptcy. In each of the lawsuits, it is alleged that the utility companies intentionally misinterpreted a 1984 tax law which governed how corporations determine if distributions to shareholders were dividends or return of capital. The Estate contends since dividends are taxed at a higher rate, all shareholders including the Estate, overpaid taxes during the years at issue and each are entitled to a refund for the amounts overpaid.

{¶ 5} The Estate asserts TE misrepresented its earnings and profits to its shareholders in 1985 and 1986, such that when TE distributed cash to the Estate and other class members, the amount was mischaracterized as dividends rather than a return of capital. The Estate asserts that because the distribution was mischaracterized as a dividend, the Estate and other class members were subject to additional taxes in 1985 and 1986.

{¶ 6} The Estate filed a lawsuit seeking an accounting of TE's earnings and profits, a declaration requiring the records to be corrected and disgorgement of ill-gotten benefits which TE received because of its fraudulent misrepresentation of its earnings and profits. The Estate sought to certify a class of all of TE's shareholders between January 1985 and April 1986, which included all shareholders who were issued IRS 1099-DIV forms during that time period. The Estate also sought to certify a subclass who were shareholders during the time period, were issued 1099-DIV forms, and paid income taxes in 1985 and 1986.

{¶ 7} The Estate originally filed its action in the trial court in 2002. TE sought to have the case removed to federal court one month later. After making its way through the federal system, the case was remanded back to the trial court because the federal court lacked jurisdiction. A visiting judge was assigned to the case in the trial court, from 2009 through 2016, but no action was taken during that time because all of the parties agreed to allow a companion case in Cuyahoga County to be decided.

{¶ 8} Due to a mistake at the clerk's office, the original case filed was destroyed. In March 2017, the Estate filed an amended class action complaint alleging fraudulent misrepresentation, and in February 2018, the Estate moved for class certification of the class and subclass.

{¶ 9} The Estate defined the class as:

[A]ll common shareholders of * * * TE, and all beneficial owners of TE common shares, from January 1985 through April 1986, inclusive, who were issued, in either of the calendar years 1986 or 1987, a Form 1099-DIV or substitute therefor by TE or its agents reporting the tax status of distributions made by TE during either of the calendar years 1985 or 1986, and the communities comprised of them and their spouses, if any, excluding therefrom:

(i) Registered shareholders identified by a federal taxpayer identification number other than a social security number, excepting nominees which held shares of TE common stock for or on behalf of beneficial owners who are identified for tax purposes by a social security number;

(ii) Defendants, their predecessors and successors;

(iii) The officers and directors of Defendant, its predecessors and successors;

(iv) Counsel of record in this action and their respective parents, spouses and children;

(v) Judicial officers who enter an order in this action and their respective parents, spouses and children.

{¶ 10} The subclass was defined as:

All members of the Class who were issued, in either of the calendar years 1986 or 1987, a Form 1099-DIV or substitute therefor by TE or its agents reporting the tax status of distributions made by TE during either of the calendar years 1985 or 1986, and who paid a state or federal income tax for either such year, excluding therefrom common shareholders and beneficial owners who sold such shares during the three full tax-reporting years immediately preceding the date of the entry of the Court's ruling certifying the Class (which had by that time been converted to shares of FirstEnergy Corp.), that is, on or after [here insert the date corresponding to the three full tax-reporting-year exclusion].

{¶ 11} Following oral arguments by the parties, the trial court certified the subclass, but did not certify the class, finding the Estate failed to demonstrate an actual injury with respect to its fraudulent misrepresentation claim.

Companion Cases

{¶ 12} The Estate's first attempt to certify a class was denied by the Cuyahoga County Court of Common Pleas, and appealed to the Eighth District Court of Appeals in Mikulski v. Centerior Energy Corp. , 8th Dist. Cuyahoga No. 94536, 2011-Ohio-696, 2011 WL 553463. The Eight District found "liability could not be determined on a class-wide basis for the class defined." Id. at ¶ 15. The appellate court further found a class could be defined to include only shareholders who overpaid taxes, and the matter was remanded to the trial court. Id. at ¶ 21.

{¶ 13} On remand, the trial court merged the two cases against Centerior. The Estate sought to obtain class certification based on a new class injury, which it alleged was an informational injury caused by the shareholders receiving incorrect information on their IRS Form 1099-DIV. The original injury claim of overpaying taxes was pursued by the Estate as a subclass. The Cuyahoga County Court of Common Pleas certified both the class and the subclass. On appeal, the Eighth District reversed, finding the trial court abused its discretion in certifying the class and subclass. Estate of Mikulski v. Centerior Energy Corp. , 2019-Ohio-983, 133 N.E.3d 899, ¶ 75. The appellate court found the subclass did not meet the predominance requirement of Civ.R. 23(B)(3), and the Estate's alleged informational injury for the class was not sufficient to constitute standing to bring the suit. Id.

Standard of Review

{¶ 14} In the appeal brought by TE, both the Estate and TE agree the standard of review is abuse of discretion. However, in the cross-appeal brought by the Estate, the Estate argues the proper standard of review is de novo because the trial court based its decision on an erroneous standard or misconstruction of law. The Estate refers to several cases where courts deviated from an abuse of discretion standard because the issues involved a question of law. The Estate attempts to...