COURT OF APPEALS OF OHIO, EIGHTH DISTRICT COUNTY OF CUYAHOGA NO. 69473 : LAWRENCE G. LOXTERMAN, : : : JOURNAL ENTRY Plaintiff-Appellant : : and v. : : OPINION CONVENIENT FOOD MART, INC., ET AL., : : : Defendants-Appellees : : : DATE OF ANNOUNCEMENT OF DECISION: AUGUST 1, 1996 CHARACTER OF PROCEEDING: Civil appeal from Common Pleas Court Case No. CV-272028 JUDGMENT: Affirmed. DATE OF JOURNALIZATION: __________________________ APPEARANCES: For Plaintiff-Appellant: For Defendants-Appellees: WILLIAM SEXTON, ESQ. STEVEN J. MILLER, ESQ. 800 Standard Building DANIEL D. DOMOZICK, ESQ. 1370 Ontario Street MATTHEW J. MORELLI, ESQ. Cleveland, Ohio 44113 GOODMAN WEISS MILLER FREEDMAN 100 Erieview Plaza JOHN M. MANOS, ESQ. 1301 E. 9th Street ERIC J. OHANIAN, ESQ. 27th Floor MANOS, PAPPAS & STEFANSKI Cleveland, Ohio 44114-1824 34950 Chardon Road, #206 Willoughby Hills, Ohio 44094 - 2 - - 3 - KARPINSKI, J.: This case arises out of a corporate ownership and debt restructuring. The parties dispute whether the purchase of a holding company and its subsidiary along with their secured debt constituted an offer to purchase a particular corporate asset owned in part by the subsidiary and thus was within the scope of a right of first refusal. Loxterman is a successful businessman who developed the local Convenient Food Mart store franchise operation in northeast Ohio (the "Territory" or "Region 3") as an independent regional franchisor beginning in the early 1960s. In 1986, Loxterman sold the entire business as a going concern and the local stores were subsequently operated without a regional franchisor. Local franchisees became dissatisfied with the arrangement and filed suit in federal district court in 1989, which suit resulted in the settlement agreement at issue in this case. Owner's Association Region 3, Inc. v. Convenient Food Mart, Inc., et al., Case No. 89 CV 0770. The comprehensive thirty-two-page settlement agreement granted Loxterman and the local franchisees respectively a right of first refusal in the event anyone made a 1 bona fide offer to purchase the Territory. The sole issue in this case is whether the corporate stock and debt transactions constituted an offer to purchase the Territory. 1 Paragraph 6 of the settlement agreement is set forth in the Appendix in its entirety. - 4 - The Convenient Food Mart business has a complicated organizational structure. Before the challenged 1993 transactions, the Territory was owned jointly by Convenient Food Mart, Inc. ("CFMI") and its wholly-owned franchising subsidiary Convenient Food Mart Franchising Co. ("CFMF"). (Exhibit 1; Weston affidavit 6). CFMI was owned, in turn, 91 percent by CFM Holding Corp. ("CFM Holding") and 9 percent by certain individuals. Five insurance companies owned all the stock of CFM Holding. The Territory and other assets of CFMI and CFM Holding were pledged as collateral to the five insurance companies and two banks. The insurance companies and banks sold their respective interests in the Convenient Food Mart entities to two different 2 parties, who became substituted in their place, in 1993. Specifically, the 1993 transactions (1) transferred the ownership of CFM Holding and CFMI from the insurance companies to JMAG Corporation, and (2) transferred the secured debt of CFM Holding and CFMI from the insurance companies and banks to XXV Corporation. None of the Convenient Food Mart entities was a party to these transactions. After the transaction, CFMI and its wholly-owned subsidiary CFMF remained the joint owners of the Territory. (Exhibit 2; Weston affidavit). The only result was that CFM Holding, along with its subsidiaries and their secured 2 The individual investors also sold their 9 percent ownership in CFMI. - 5 - debt, which included the Territory as collateral, was owned by different parties. Loxterman argued that this transfer of stock and secured debt of CFM Holding and CFMI constituted an offer to purchase the Territory, which was owned by CFMI and its subsidiary CFMF, and thus within the scope of his right of first refusal. The trial court rejected this argument and granted summary judgment against Loxterman. Loxterman timely appeals raising the following sole assignment of error: THE TRIAL COURT ERRED IN GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT WHEN IT INTERPRETED THE SETTLEMENT AGREEMENT IN A MANNER ALLOWING THE DEFENDANTS TO CIRCUMVENT PLAINTIFF'S RIGHT OF FIRST REFUSAL THROUGH A STEP TRANSACTION. Loxterman's sole assignment of error lacks merit. Loxterman contends that the sale of secured debt and stock by the insurance companies and banks in this case involved an offer by JMAG Corp. and/or XXV Corp. to purchase the Territory to which offer he had the right of first refusal. As noted above, paragraph 6.01 of the settlement agreement granted Loxterman a right of first refusal to purchase the Territory in the event anyone made a bona fide offer to purchase the Territory as follows: 6.01 Right of First Refusal. CFMF shall give written notice to Lawrence Loxterman ("Loxterman Notice") of any bona fide offer including the purchase price and terms ("Offer") and thereafter Loxterman shall have thirty (30) days to notify CFMF and the Owners Association in writing of his intention to acquire the Territory on the same basis as the Offer. If Loxterman fails to provide the notice of intent to acquire or fails to close a purchase of the Territory on the same basis as the offer within thirty (30) days - 6 - of the Loxterman Notice, this Right of First Refusal shall terminate ("Termination of the Right of First Refusal"). The Right of First Refusal granted herein shall not be assignable. The Ohio Supreme Court has recognized that a "right of first refusal" constitutes "a promise to present offers to buy property made by third parties to the promisee in order to afford the promisee the opportunity to match the offer." Latina v. Woodpath Development Co. (1991), 57 Ohio St.3d 212. Loxterman has failed to show that anyone, including either JMAG Corporation and/or XXV Corporation, made an offer to buy the Territory to trigger his right of first refusal in this case. The record shows that Loxterman presented no evidence of any "offer" to purchase the Territory to trigger his right of first refusal. The sale of stock of a corporation is simply not equivalent to an offer, sale, or acquisition of any assets of the corporation. It is well established that shareholders of a corporation have no ownership interest in property held by the corporation. Jost v. Burr (1990), 69 Ohio App.3d 354, 358; Lorain v. Gel-Pak, Inc. (1984), 20 Ohio App.3d 378, 379; LaRose Market, Inc. v. Sylvan Center, Inc. (Mich. App. 1995), 530 N.W.2d 505, 507-508; Engel v. Teleprompter Corp. (5th Cir. 1983), 703 F.2d 127, 131. Moreover, the change of shareholders does not affect title or ownership of the corporation's property. Jost v. Burr, supra. Thus the transfer of the stock in CFM Holding and CFMI did not affect the ownership of the Territory, owned jointly by CFMI and its subsidiary CFMF. - 7 - The same principles apply to the transfer of secured debt. Neither the initial pledge of assets by a corporation as collateral for a loan, nor the transfer of such existing secured debt to another party involves an offer, sale, or acquisition of any of the corporation's assets. The creation or assignment of security interests is generally governed by Article 9 of the U.C.C., R.C. Chapter 1309, and does not involve a present or future sale with the passing of title from a buyer to a seller for a price. R.C. 1301.01(KK). Upon creation of a security interest, the ownership or title to the pledged asset remains with the debtor corporation; the debtor merely grants the secured party a "security interest" in the collateral asset. Upon default, the secured party may repossess and dispose of the collateral (or under certain circumstances purchase the collateral for its own purposes). The assignment of an existing security agreement does not change the terms of the original security interest or grant the assignee title or any greater rights to the collateral than the original security agreement. Loxterman's brief on appeal for the first time raises an argument that the security agreements were in default at the time of this transaction. The implication is that by purchasing obligations already in default, the purchasers could immediately foreclose on the collateral and retain it for their own purposes (so that the purchase of secured debt transaction would constitute an "offer" to purchase the collateral). We need not determine whether this is a viable theory, however, because the - 8 - record contains no evidence that the security agreements were in default when assigned by the banks and insurance companies to XXV Corporation. Without such evidence, this court cannot conclude that the transfer of secured debt was an improper "ruse" or "step transaction" to obtain the Territory and other assets and to defeat Loxterman's right of first refusal. See LaRose Market, Inc. v. Sylvan Center, Inc., supra at 508. Loxterman complains that this transaction was deliberately structured as a sale of stock and secured debt, rather than as the purchase of assets, to defeat his rights. However, the settlement agreement was comprehensive and did not entitle Loxterman to insist that a proposed future deal be configured in a way that would trigger his right of first refusal. Frandsen v. Jensen-Sundquist Agency, Inc. (7th Cir. 1986), 802 F.2d 941, 944. The record, moreover, contains no reason to treat the stock and debt transactions as an asset purchase and no circumstances to justify disregarding the corporate status of any of the entities. Capital Parks, Inc. v. Southeastern Advertising And Sales System, Inc. (5th Cir. 1994), 30 F.3d 627, 630; Engel v. Teleprompter Corp., supra at 134. Finally, Loxterman sought to overcome the limitations of the first refusal provision by claiming that the "intent of the provision was to cover any transfer which affected control of the Territory." (Brief in Opposition to Summary Judgment at p. 11.) However, the plain language of the provision applies only to offers to purchase the Territory. It does not mention other - 9 - transactions, such as the transfer of control of the Territory, either by itself or collectively with the other assets of CFMI. Moreover, none of the additional "right of first refusal" provisions changes this plain meaning. Parol evidence concerning Loxterman's understanding of the "right of first refusal" provision is not admissible to vary the terms of the integrated, written settlement agreement. Latina v. Woodpath Development Co., supra at 214; Aultman Hosp. Assn. v. Community Mut. Ins. Co. (1989), 46 Ohio St.3d 51, syllabus; Jost v. Burr, supra at 358- 359. The authorities cited by Loxterman for the first time on appeal to support his arguments are distinguishable for various reasons. For example, two cases involved broader rights of first 3 refusal covering both the sale of assets and stock ; another case arose from a bad faith transaction to obtain the sole asset of a 4 "paper" holding company through subterfuge ; and the final case involved granting an easement worth 90 percent of the land value to one party before quitclaiming any remaining interest to a 5 relative to defeat a right of first refusal. In the case at bar, however, (1) the right of first refusal covered offers to purchase only the Territory, (2) the Territory was not the sole 3 Continental Cablevision of New England, Inc. v. United Broadcasting Co. (4th Cir. 1989), 873 F.2d 717; Hosakawa Micron (USA) Inc. v. Duncan (S.D.N.Y. 1987), 659 F.Supp. 151. 4 Oregon RSA No. 6, Inc. v. Castle Rock Cellular of Oregon Ltd Partnership (D.Ore. 1993), 840 F.Supp. 770. 5 Wilson v. Whinery (Wash.App. 1984), 678 P.2d 354. - 10 - asset of CFMI, and (3) the transfer of the companies' stock and their secured debt was not equivalent to an offer to purchase the Territory. Accordingly, Loxterman's sole assignment of error is overruled. Judgment affirmed. - 11 - It is ordered that appellees recover of appellant their 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 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. BLACKMON, P.J., and PATTON, J., CONCUR. DIANE KARPINSKI JUDGE 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 time it will become the judgment and order of the court and the time period for review will begin to run. - 12 - Appendix SECTION 6 - RIGHTS OF REFUSAL. 6.01 Right of First Refusal. CFMF shall give written notice to Lawrence Loxterman ("Loxterman Notice") of any bona fide offer including the purchase price and any terms ("Offer") and thereafter Loxterman shall have thirty (30) days to notify CFMF and the Owners Association in writing of his intention to acquire the Territory on the same basis as the Offer. If Loxterman fails to provide the notice of intent to acquire or fails to close a purchase of the Territory on the same basis as the Offer within thirty (30) days of the Loxterman Notice, this Right of First Refusal shall terminate ("Termination of the Right of First Refusal"). The Right of First Refusal granted herein shall not be assignable. 6.02 Right of Second Refusal. CFMF shall notify the Owners Association of any Offer at the time such notice is provided to Loxterman and thereafter, the Owners Association shall have thirty (30) days to notify CFMF ("Owners Notice") of the Franchisees desire to acquire the Territory on the same basis as the Offer. CFMF shall notify the Owners Association of any Termination of the Right of First Refusal in which event the Franchisees shall have thirty (30) days thereafter to close the purchase of the Territory on the same basis as the Offer. If the Owners Association fails to provide the Owners Notice or to close the purchase of the Territory within thirty (30) days of receiving notice of the Termination of the Right of First Refusal, this Right of Second Refusal shall terminate. This Right of Second Refusal shall not be exercisable if at the time of the Owners Notice the members of the Owners Association include less than 80% of franchisees in the territory and a majority of Franchisees of the Owners Association are in material default of their financial obligations under the Combined Agreement and have not cured such defaults within ten (10) days of notice of such defaults. 6.03 Applicability of Rights. Whether or not Loxterman has a right of refusal, the Franchisees' Right of Refusal shall not be applicable to any offer by an affiliate or associate of CFMF or to an offer for .