COURT OF APPEALS OF OHIO, EIGHTH DISTRICT COUNTY OF CUYAHOGA NO. 68525 WILLIAM J. THOMPSON : : Plaintiff-appellant : : JOURNAL ENTRY -vs- : AND : OPINION CENTRAL OHIO CELLULAR, : INC., ET AL. : : Defendants-appellees : : DATE OF ANNOUNCEMENT : OF DECISION : AUGUST 29, 1996 CHARACTER OF PROCEEDING : Civil appeal from Court of Common Pleas : Case No. 233511 JUDGMENT : Reversed and remanded. DATE OF JOURNALIZATION : APPEARANCES: FOR PLAINTIFF-APPELLANT: FOR DEFENDANTS-APPELLEES: Richard I. Werder, Jr., Esq. William E. Gerstenslager, Esq. Jones, Day, Reavis & Pogue Robert E. Sweeney Co., L.P.A. 901 Lakeside Avenue 1500 Illuminating Building Cleveland, Ohio 44114 Cleveland, Ohio 44113 Of Counsel: John J. Horrigan, Esq. 2540 Euclid Height Boulevard Cleveland Heights, Ohio 44106 -2- HARPER, P.J.: William J. Thompson ("appellant") appeals from the decision of the Cuyahoga Court of Common Pleas, which granted the motion to dismiss filed by Central Ohio Cellular Inc. (f.k.a. Cellwave, Inc., 1 et al.), appellees ("Central"). I. Central was incorporated in September 26, 1988, as a cellular telecommunications business. In 1989, Central participated in lotteries conducted by the Federal Communications Commission ("FCC") to randomly award licenses for the operation of cellular telecommunications systems in specified areas throughout the United States. Central won two FCC licenses which permitted it to operate systems in Ohio-6 (six rural Ohio counties) and Michigan-9 (nine rural Michigan counties). Under the licenses, Central was required to meet construction deadlines of February 13, 1992 (for Ohio-6) and February 18, 1992 (for Michigan-9) or lose the franchises. Central sold its majority interest in its Michigan-9 Rural Service Area ("RSA") license pursuant to written agreements entered into on November 18, 1991 for $14 million. As a result of the Michigan-9 RSA license sale, Central made a federal tax election pursuant to Section 453(d), Title 26, U.S. Code, which permitted 1 When this complaint was initiated, Central's name was Cellwave, Inc. Central changed its name during the duration of the case. Hereinafter, the appellees will be referred to as "Central." Central is a Subchapter S corporation which does not pay federal incomes taxes, pursuant to Section 1363[a], Title 26, U.S. Code. -3- Central to report all installment sales profit in one year, viz., the first year the taxpayer receives installment income. Central reported the entire $14 million of income in 1991, rather than $2 million in 1991 and $12 million in 1992. As a result of a settlement order, appellant signed a written contract to sell all of his stock in his corporation on July 25, 2 1991 to other Central shareholders. II. Appellant filed a three-count complaint against the Central director/shareholders charging that Central's choice of federal tax election breached a fiduciary duty owed to appellant. Appellant specifically alleges that Central breached a fiduciary duty to him, when Central manipulated the financial terms of the Michigan-9 sale and reported those results to the Internal Revenue Service, pursuant to the federal tax election, in such a way as to shift a significant tax burden to appellant in 1991. Appellant's complaint alleged breach of fiduciary duty; breach of covenant of good faith and fair dealing; and fraud. Central filed a Civ.R. 12(B)(6) motion to dismiss appellant's complaint for failure to state a claim. As it related to the breach of fiduciary duty claim, Central asserted in its brief in opposition to the motion to dismiss, no duty was owed to appellant when the alleged 2 In February 1991, shareholders filed a securities fraud suit against Cellwave's ([Central's]) original promoter (Thomas Rawlings), and its then-majority shareholder (William Thompson). Horrigan v. Thompson N.D. Ohio No. 5:91CV 0253. As a result ofthe terms of a confidentialorder, Thompson was no longera shareholder of Cellwave ([Central]). -4- breach of fiduciary duty occurred, because all fiduciary duties owed to appellant terminated on the day appellant sold and conveyed all of his stock in Central pursuant to a July 25, 1991 integrated written agreement. The trial court granted the motion and dismissed all three counts of appellant's complaint. Appellant appealed the trial court's decision to grant Central's motion to dismiss to this court. In Thompson v. Central Ohio Cellular (1994), 93 Ohio App.3d 530, this court affirmed the common pleas court's decision in part, reversed in part and remanded. With respect to appellant's allegations of breach of good faith and fair dealing, this court noted the trial court's order dismissing the count of breach of good faith and fair dealing was final, because appellant was not appealing the trial court's determination with respect to that allegation. Id. at 537. With respect to appellant's allegation of fraud, this court affirmed the dismissal with prejudice of appellant's fraud count, "*** appellant can show no set of facts which would entitle him to relief on his fraud claim." Id. at 545. Regarding appellant's allegation of breach of fiduciary duty, this court found that a fiduciary duty was owed to appellant by appellees for the time in which appellant was a shareholder. Id. at 537. The case was remanded for further proceedings solely on appellant's claim for breach of fiduciary duty. Central sought Ohio Supreme Court review and the Supreme Court declined to hear the case. -5- Subsequent to the Thompson decision, this court decided Koos v. Central Ohio Cellular, Inc. (1994), 94 Ohio App.3d 579. In Koos, supra, minority shareholders in a shareholder derivative action suit against Central, alleged that majority director/shareholders in Central, breached their fiduciary duties to the minority shareholders when they elected to take advantage of a federal tax provision which allegedly adversely affected the corporation. The minority shareholders charged that the majority director/ shareholders controlled the corporation to their own advantage to the exclusion of the minority shareholders and the federal tax election lacked a legitimate purpose. The Koos Court ruled that, as a matter of law, the Central's majority director/shareholders did not breach a fiduciary duty when they selected a federal tax election which accelerated the payment of taxes, but did not affect the tax liability. Koos, supra. From the point of remand enunciated by this court's decision in Thompson, supra, Central, in the trial court, filed both an answer to appellant's complaint and a Civ.R. 12(C) motion to dismiss on the pleadings. Central's motion to dismiss on the pleadings asserted that, as a matter of law, based on the intervening decision in Koos, supra, neither Central nor its directors breached a duty, fiduciary or otherwise, in making the federal tax election in question. Initially, the trial court denied Central's motion to dismiss. The trial court granted Central a hearing on the motion for reconsideration, because the court indicated that it was not -6- familiar with Koos, supra, when it denied Central's motion. After full briefing, oral arguments from the parties, and reviewing the transcript of the oral argument, the trial court granted Central's motion. Appellant files a timely appeal and asserts one assignment of error. III. Appellant's sole assignment of error states: [Sic] The trial court erred by granting appellee's Civ.R. 12(C) motion. Appellant contends the trial court erroneously applied Koos v. Central Ohio Cellular, Inc. (1994), 94 Ohio App.3d 579 to the facts of this case. The trial court erred as a matter of law by concluding that the manipulation of a corporation's financial results so as to shift income tax liability from the controlling shareholders to plaintiff does not constitute a breach of fiduciary duty. Appellant presents a two-part argument in his sole assignment of error. First, appellant submits that the trial court erred by relying on Koos, supra, when it granted Central's motion to dismiss. Second, appellant asserts his pleadings set forth a cognizable claim of breach of fiduciary duty, and the trial court erred when it failed to liberally construe the pleadings in the complaint as required by the rules of civil procedure. A. Civ.R. 12(C) provides a party may motion for judgment on the pleadings after the pleadings are closed but within such time as not to delay the trial. A motion for judgment on the pleadings simply presents a question of law and the court may look to the allegations in the pleadings to decide the motion. The standard of review a trial -7- court must use in ruling upon a motion for judgment on the pleadings pursuant to Civ.R. 12(C) was articulated by the court in Case Western Reserve Univ. v. Fiedman (1986), 33 Ohio App.3d 347. The court stated, in part: A motion for judgment on the pleadings is the same as a motion to dismiss filed after the pleadings are closed and raises only questions of law. The pleadings must be construed liberally and in a light most favorable to the party against whom the motion is made, and every reasonable inference in favor of the party against whom the motion is made should be indulged. Vaught v. Vaught (1981), 2 Ohio App.3d 264, 2 OBR 293, 441 N.E.2d 811; Peterson v. Teodosie (1973), 34 Ohio St.2d 161, 63 O.O.2d 262, 297 N.E.2d 113. The motion should be denied if it cannot be determined from the face of the pleadings that the pleading does not state a claim upon which relief can be granted. Calhoun v. Supreme Court of Ohio (1878), 61 Ohio App.2d 1,15 O.O.3d 13, 399 N.E.2d 559. Id. at 348. Granting judgment on the pleadings is only appropriate where the plaintiff has failed in his complaint to allege a set of facts which, if true, would establish the defendant's liability. Walters v. First National Bank of Newark (1982), 69 Ohio St.2d 677. "To uphold a dismissal on the pleadings pursuant to Civ.R. 12(C), the court must find, beyond a doubt, that the plaintiff could prove no set of facts in support of his claim which would entitle him to relief." Lin v. Gatehouse Constr. Co. (1992), 84 Ohio App.3d 96, 99. B. In the instant case, appellant asserts the trial court erred when it dismissed his complaint, by not accepting as true his allegations that Central breached a fiduciary duty owed to him. -8- Appellant maintains that his complaint sufficiently set forth facts for a claim for breach of fiduciary duty, as a matter of law. With respect to the claim for breach of fiduciary duties, appellant's complaint charged: 20. In preparing or causing the preparation of Cellwave's [Central's] 1991 federal income tax return and Thompson's related Schedule K-1 attributing taxable income to him by virtue of his status as a Cellwave [Central] shareholder, Cellwave [Central] and the Individual Defendants owed Thompson fiduciary duties of care, honesty, and loyalty. 21. By virtue of the conduct described above, Cellwave [Central] and the Individual Defendants breached their fiduciary duties to Thompson. In addition, Cellwave [Central] aided and abetted the Individual Defendants' breach of fiduciary duties. Defendants' conduct has been intentional and malicious and purposefully designed to injure Thompson. 22. As a proximate result of the breach of fiduciary duty described herein, Thompson has been damaged in an amount to be proved at trial. *** With respect to the duty of good faith and fair dealing, appellant alleged: 24. By various contracts between the parties and the relationship created by those contracts, the Individual Defendants owed Thompson a duty of good faith and fair dealing, which required them, among other things, to cause Cellwave [Central] to consummate the transaction or transactions by which it accomplished the sale of the Michigan System, and to account for tax and other purposes for those transactions, in good faith and in a manner that was fair to Thompson. 25. By virtue of the conduct described above, the Individual Defendants breached their duty of good faith and fair dealing, and Cellwave [Central] aided and abetted the Individual Defendants' breach of that duty. Defendants' conduct has been intentional and malicious and purposely designed to injure Thompson. -9- 26. As a proximate result of the breach of the duty of good faith and fair dealing described herein, Thompson has been damaged in an amount to be proved at trial. Appellant relies on this court's opinion in Thompson, supra, to support both of his arguments that his complaint sufficiently set forth facts for a claim for breach of fiduciary duty, as a matter of law; and that Thompson is controlling. In Thompson, this court set forth the substantive principles of law relative to a former shareholder of a Subchapter S corpora- tion establishing a claim for breach of fiduciary duty against the corporations and its directors. The Thompson court set forth the pertinent analysis at pages 540-544: The creation of a fiduciary duty may arise out of contract or out of an informal relationship where both parties understand that a special trust or confidence has been reposed. Stone v. Davis (1981), 66 Ohio St.2d 74, 78. "'A fiduciary relationship" is one which special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust.'" Stone, supra. A person who occupies a fiduciary relationship to another acts as an agent to that person and owes the utmost loyalty and honesty to the principal. Testa v. Roberts (1988), 44 Ohio App.3d 161, 165. It is axiomatic that corporations and their officers and directors occupy a fiduciary relationship with corporate shareholders. Crosby v. Beam (1989), 47 Ohio St.3d 105, 548 N.E.2d 517. It is a general rule that, in a close corporation, the majority shareholders have a fiduciary duty to minority shareholders. Crosby, supra. Generally, absent a legitimate business purpose, all shareholders are to have an equal opportunity to share in the benefits of a corporation. Crosby, supra. The fiduciary duties owed by majority shareholders is "heightened" when the corporation is a close corporation. Crosby, supra. The fiduciary duties owed by majority shareholders is "heightened" when the corporation is a close corporation. Crosby, supra, at 108. [Citations omitted]. -10- *** Directors of a corporation, as are the individual defendants herein, owe a fiduciary duty to the corporation and to the corporations' shareholders, collectively. R.C. 1701.59(B) defines a director's fiduciary duties as follows: "A director shall perform his duties as a director, including his duties as a member of any committee of the directors upon which he may serve, in good faith, in a manner he reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. ***" In considering the best interests of the corporation, a director must consider the interests of the corporations's shareholders, R.C. 1701.59(E), and may consider the interests of the corporation's creditors. R.C. 1701.59(E)(1). The fiduciary relationship between a corporations's directors and the corporation and its shareholders has also been described to include "a duty of good faith, a duty of loyalty, a duty to refrain from self-dealing and a duty to disclosure." Wing v. Leasing, Inc. v. M&B Aviation, Inc. (1988), 44 Ohio App.3d 178, 181. [Citations omitted]. *** A review of case law indicates that the "shareholder termination" rule is not absolute. Termination of the fiduciary relationship does not shield the fiduciary from its duties or obligations concerning transactions which have their inception before the termination of the relationship. T.A. Pelsue Co. v. Grand Enterprises, Inc. (D. Colo. 1991), 782 F. Supp. 1476, 1485-1486 [Citations omitted]. *** This court determined in Thompson, supra, that appellant, a former shareholder of a Subchapter S corporation, sufficiently set forth a claim for breach of fiduciary duty by the corporation and its directors, and stated at page 543: -11- On the face of appellant's complaint, it is clear that the reporting to the IRS of Cellwave's [Central's] financial results for the year of 1991 is based on transactions which have their inception before the termination of the fiduciary relationship. (Emphasis added). The transaction in question is the reporting to the IRS of Cellwave's [Central's] financial results for the year of 1991, a year in which appellant held stock in the corporation. Due to the "pass-through" nature of a Subchapter S corporation for federal income tax purposes, the income generated is distributed to appellant for the year of 1991, pursuant to the "per share per day" rule. The ultimate effect is to generate income and consequent tax liability to appellant. *** With the applicable principles of law set forth, we turn to the facts of the case sub judice. As to appellant's first contention, we conclude pursuant to Thompson, supra, that appellant's complaint sufficiently set forth facts for a claim of breach of fiduciary duty. Appellant's second contention that Thompson, supra, is the law of the case, with respect to analyzing whether a former shareholder's complaint sufficiently set forth facts for a claim for breach of fiduciary duty, rather than Koos, supra, is correct. The doctrine of the law of the case "'provides that the decision of the reviewing court in a case remains the law of that case on the legal questions involved for all subsequent proceedings in the case at both the trial and reviewing levels.'" Sorina v. Armstrong (1990), 68 Ohio App.3d 800. In the case sub judice, the trial court erred when it relied on Koos, supra, to determine the legal sufficiency of appellant's complaint rather than Thompson, supra, as there are eight critical factors which distinguish Koos, supra, -12- from Thompson, supra. Given the aforementioned, appellant's assignment of error is sustained. Judgment is reversed and cause remanded for proceedings consistent with this opinion. -13- It is ordered that appellant recover of appellees his costs herein taxed. The Court finds there were reasonable grounds for this appeal. It is ordered that a special mandate issue out of this Court directing the Cuyahoga County Common Pleas Court to carry this judgment into execution. A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the Rules of Appellate Procedure. JAMES M. PORTER, J., AND JOSEPH J. NAHRA, J., CONCUR PRESIDING JUDGE SARA J. HARPER N.B. This entry is made pursuant to the third sentence of Rule 22(D), Ohio Rules of Appellate Procedure. This is an announcement of decision (see Rule 26). Ten (10) days from the date hereof, this document will be stamped to indicate journalization, at which .