Custom Assocs., L.P. v. VSM Logistics, L.L.C.

2020 Ohio 2994, 154 N.E.3d 178

• Court: Ohio Court of Appeals
• Decided: May 18, 2020
• Docket: 2019-P-0104
• Status: Published

Opinion

[Cite as Custom Assocs., L.P. v. VSM Logistics, L.L.C., 2020-Ohio-2994.]

IN THE COURT OF APPEALS

ELEVENTH APPELLATE DISTRICT

PORTAGE COUNTY, OHIO

CUSTOM ASSOCIATES, L.P., : OPINION

Plaintiff-Appellant, : CASE NO. 2019-P-0104 - vs - :

VSM LOGISTICS, LLC, et al., :

Defendants-Appellees. :

Civil Appeal from the Portage County Court of Common Pleas, Case No. 2018 CV 00374.

Judgment: Affirmed.

Timothy N. Toma, Toma & Associates, L.P.A., Inc., 3401 Enterprise Parkway, Suite 340, Beachwood, OH 44122 (For Plaintiff-Appellant).

Sara H. Jodka, Dickinson Wright, PLLC, 150 East Gay Street, Suite 2400, Columbus, OH 43215 (For Defendants-Appellees).

MATT LYNCH, J.

{¶1} Plaintiff-appellant, Custom Associates, L.P., appeals from the judgment of

the Portage County Court of Common Pleas, granting defendants-appellees, Maurice

Vaughn and William Niegsch’s, Motion to Dismiss. For the following reasons, we affirm

the decision of the trial court.

{¶2} On May 3, 2018, Custom Associates filed a Complaint against VSM

Logistics, LLC requesting damages for unpaid rent and utility charges. It alleged that

VSM Logistics had entered into a lease agreement to rent property from Custom Associates beginning June 1, 2016, but had failed to make rent payments as required

under the agreement.

{¶3} On February 5, 2019, Custom Associates filed an Amended Complaint,

adding Vaughn and Niegsch as defendants. The Amended Complaint alleged that

Vaughn and Niegsch, the president and CEO and the CFO of VSM, respectively, “owe a

fiduciary duty to VSM and VSM’s creditors not to waste corporate assets which could

otherwise be used to pay corporate debts,” alleging that VSM Associates was “insolvent

or on the brink of insolvency.” It further contended that Vaughn and Niegsch breached

this duty “by transferring assets of VSM to other business entities and individuals who

were not creditors of VSM,” including companies they owned, which was “to the detriment

of VSM, * * * leaving VSM with insufficient funds to pay its creditors.”

{¶4} Vaughn and Niegsch filed a Motion to Dismiss for failure to state a claim on

which relief can be granted on February 22, 2019, arguing that Custom Associates had

no contract with them and lacked standing to assert a breach of fiduciary duty claim since

the law does not provide such a cause of action in relation to creditors. Custom

Associates filed a Brief in Opposition.

{¶5} On March 27, 2019, the trial court filed an Order granting the motion and

dismissing Vaughn and Niegsch as defendants.

{¶6} VSM Logistics failed to file an answer and the trial court issued an October

22, 2019 Judgment Entry granting default judgment against VSM Logistics in the amount

of $217,752.50.

{¶7} Custom Associates timely appeals and raises the following assignment of

error:

2 {¶8} “The trial court erred in dismissing Custom Associates’ claims against

Vaughn and Niegsch, individually, when the Amended Complaint adequately stated

claims for breach of fiduciary duties to Custom Associates, as a creditor of VSM.”

{¶9} Custom Associates argues that Vaughn and Niegsch should not have been

dismissed as defendants because the law permits claims to be brought against officers

or members of a limited liability company for breach of fiduciary duty to the LLC’s

creditors.

{¶10} A trial court’s decision granting a motion to dismiss is reviewed de

novo. LGR Realty, Inc. v. Frank & London Ins. Agency, 152 Ohio St.3d 517, 2018-Ohio-

334, 98 N.E.3d 241, ¶ 10.

{¶11} As a general rule, “[a] motion to dismiss for failure to state a claim upon

which relief can be granted is procedural and tests the sufficiency of the complaint.” State

ex rel. Hanson v. Guernsey Cty. Bd. of Commrs., 65 Ohio St.3d 545, 548, 605 N.E.2d

378 (1992). In reviewing a Civ.R. 12(B)(6) motion to dismiss, all factual allegations set

forth in the complaint and reasonable inferences must be accepted as true and dismissal

is warranted only when it appears “‘beyond doubt from the complaint that the plaintiff can

prove no set of facts entitling him to recovery.’” Id., quoting O’Brien v. Univ. Community

Tenants Union, Inc., 42 Ohio St.2d 242, 327 N.E.2d 753 (1975), syllabus; Mitchell v.

Lawson Milk Co., 40 Ohio St.3d 190, 192, 532 N.E.2d 753 (1988).

{¶12} “To succeed on a claim for breach of fiduciary duty, a plaintiff must establish

the existence of a fiduciary duty, a breach of that duty, and an injury proximately resulting

therefrom.” Asia-Pacific Futures Research Symposium Planning Commt. v. Kent State

Univ., 2016-Ohio-2691, 63 N.E.3d 780, ¶ 34 (11th Dist.). In general, a fiduciary

3 relationship is one “‘in 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.’” Hope Academy Broadway Campus v. White Hat Mgt., L.L.C.,

145 Ohio St.3d 29, 2015-Ohio-3716, 46 N.E.3d 665, ¶ 43, citing In re Termination of

Employment of Pratt, 40 Ohio St.2d 107, 115, 321 N.E.2d 603 (1974). Generally, “a mere

debtor-creditor relationship without more does not create a fiduciary relationship.” Lippy

v. Soc. Natl. Bank, 100 Ohio App.3d 37, 44, 651 N.E.2d 1364 (11th Dist.1995); Groob v.

KeyBank, 108 Ohio St.3d 348, 2006-Ohio-1189, 843 N.E.2d 1170, ¶ 17.

{¶13} In support of its contention that a fiduciary duty is owed by an officer or

member of an LLC to the LLC’s creditor, Custom Associates cites Thomas v. Matthews,

94 Ohio St. 32, 113 N.E. 669 (1916), and DeNune v. Consol. Capital of N. America, Inc.,

288 F.Supp.2d 844 (N.D.Ohio 2003). It argues that these cases set forth “long standing

Ohio law,” that directors and officers of an insolvent company owe a fiduciary duty to the

company’s creditors “not to waste corporate assets which could be used to pay those

creditors.”

{¶14} In Matthews, the Ohio Supreme Court held that the directors of a

corporation “stand in the relation of trustees to the creditors” when a corporation is

“insolvent or threatened with insolvency, or where a suit for dissolution is pending.” Id. at

47. It concluded “they are not permitted to divert assets from the payment of its debts by

distributing these assets to the stockholders as dividends” and “[i]t is their duty to

conserve these assets until the final judgment of the court in the dissolution proceedings,

and deliver the same to the receiver appointed by the court * * *.” Id. DeNune

subsequently held the following, citing solely to Matthews and providing no additional

4 supporting analysis: “Under long-standing Ohio law, the officers and directors of a

corporation that is insolvent or is on the brink of insolvency owe a fiduciary duty to the

corporation itself and to its creditors not to waste corporate assets which otherwise could

be used to pay corporate debts.” Id. at 859.

{¶15} The foregoing cases address the duties of officers or directors of a

corporation rather than an LLC. Custom Associates argues this analysis should extend

to LLCs, citing to a court of common pleas opinion for that proposition. Arts Rental Equip.

v. Bear Creek Constr., Hamilton C.P. No. A0902785, 2011 Ohio Misc. LEXIS 155 (Feb.

11, 2011). No other case law is set forth for the proposition that the holdings in Matthews

and DeNune extend to LLCs. Even presuming these holdings apply, however,

subsequent case law has persuasively concluded that these holdings are either limited in

scope or no longer applicable given the enactment of applicable statutory provisions in

the century since Matthews was decided.

{¶16} In In re Amcast Indus. Corp., 365 B.R. 91 (Bankr.S.D.Ohio 2007), the court

conducted a thorough examination of the applicability of Matthews, finding that its holding

was made on “much narrower grounds” than its “broad pronouncement[] might suggest,”

as it applied to the transferring of assets to stockholders in the form of dividends. Id. at

109. However, it found that “outside of this limited duty to cease dividend payments, there

is nothing in the Matthews case that suggests to this court that a director’s duty to

creditors upon insolvency expands to the same fiduciary obligations that a director owes

to the corporation itself” and emphasized that other duties to conserve assets were limited

to dissolution proceedings rather than insolvency. Id. at 107. The Amcast opinion further

reasoned:

5 “[T]o read Matthews more expansively to require directors to hold assets in trust and distribute them to creditors upon insolvency would, in essence, require an insolvent company to immediately cease operations and liquidate. Such a reading is not only contrary to the plain language of Ohio Rev.Code § 1701.59(E) [which addresses duties owed by corporate directors], but also runs afoul of general corporate law principles which allow an insolvent company to continue to operate with aspirations of turning a profit.

Id.

{¶17} The Amcast opinion also noted that DeNune relied on Matthews for its

assertion that “long-standing Ohio law” created a fiduciary duty to creditors without

otherwise addressing the impact that subsequent statutory enactments had on Matthews’

applicability. Id. at 106. It concluded that the enactment of R.C. 1701.59(E) (now R.C.

1701.59(F)), well after the issuance of Matthews, forecloses claims against directors for

breach of fiduciary duty to creditors. See Official Commt. of Unsecured Creditors of PHD,

Inc. v. Bank One, NA, N.D.Ohio No. 1:03CV2466, 2004 WL 3721325, *10 (Oct. 24, 2005)

(“Ohio Rev.Code § 1701.59(E) forecloses * * * claims that [the corporation’s] directors

had a legal duty to consider the interests of creditors in carrying out their duties for the

corporation” and claims by creditors against directors for breach of fiduciary duty were

dismissed); R.C. 1701.59(F) (a director, “in determining what the director reasonably

believes to be in the best interests of the corporation,” “shall” consider the interests of the

corporation’s shareholders and “may” consider the interests of the corporation’s

creditors).

{¶18} The rationale in the Amcast opinion has been reiterated by several federal

courts. In Washington Penn Plastic Co., Inc. v. Creative Engineered Polymer Prods.,

LLC, N.D.Ohio No. 5:06CV1224, 2007 WL 2509873 (Aug. 30, 2007), the court found no

fiduciary duty was owed by directors of a corporation to its creditor, and emphasized that

6 “Ohio law respecting duties owed by directors to the corporate creditors cannot be

discerned simply by reference to general statements contained in decisions rendered

more than 80 years ago without consideration of intervening statutory enactments.” Id.

at *2-3, quoting Amcast at 109. See also In re I.E. Liquidation, Inc., Bankr.N.D. Ohio No.

06-62179, 2009 WL 2707223, *12 (Aug. 25, 2009) (“[T]he legislature is presumed to have

known that case law existed which made consideration of the interests of creditors

mandatory when a company was either insolvent or close to insolvency. However, the

legislature specifically chose language that made the consideration of creditors’ interests

permissive, without exception.”). In re Natl. Century Fin. Ent., Inc., 846 F.Supp.2d 828

(S.D.Ohio 2012), also held that “corporate officers and directors in Ohio do not owe a

general fiduciary duty to the company’s creditors while the company is insolvent or in the

zone of insolvency,” citing the foregoing authority. Id. at 895.

{¶19} We agree with the logic of the courts advanced above that Matthews, and

by extension, DeNune, do not allow for a claim for breach of fiduciary duty against a

director or officer of a corporation by a debtor of that corporation. By extension, we also

reject the argument that such a principle should apply to LLCs. Custom Associates’

citation to Arts Rental Equip. 2011 Ohio Misc. LEXIS 155, to support a contrary conclusion

is unavailing. In Arts Rental, the court found that the complaint stated a valid claim for

breach of fiduciary duty against members of an LLC relating to debts owed by the LLC to

the creditor, citing to DeNune in support of this conclusion. In light of the fact that this is

a lower court opinion and given the analysis above, we decline to apply this case for the

proposition that a claim for breach of fiduciary duty can be maintained here.

{¶20} We also find no statutory authority for a claim for breach of fiduciary duty in

7 these circumstances. R.C. 1705.292 sets forth limited fiduciary duties owed by officers

of an LLC “to the limited liability company or its members” which, can include, depending

upon the circumstances, either “the duties that would be owed by a member” or to

“perform the officer’s duties in good faith, in a manner the officer reasonably believes to

be in or not opposed to the best interests of the limited liability company” and with care

exercised by an ordinarily prudent person. R.C. Chapter 1705 does not codify a fiduciary

duty of members or officers to creditors of the LLC. In fact, with limited exceptions not

relevant here, “debts, obligations, and liabilities of a limited liability company, whether

arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the

limited liability company” for which members, managers, and officers are not personally

liable. R.C. 1705.48(A) and (B).

{¶21} We recognize that, in some instances, claims can be maintained against

members, managers or officers of an LLC arising from their own wrongful actions or

omissions and can be pursued through claims for tortious conduct. R.C. 1705.48(D);

Huttenbauer Land Co. v. Harley Riley, Ltd., 1st Dist. Hamilton No. C-110842, 2012-Ohio-

4585, ¶ 15-17. Here, however, the sole claim maintained against appellees was for

breach of fiduciary duty.

{¶22} Custom Associates argues that, contrary to appellees’ position, the

elements of their fiduciary duty claim were properly pled. Since the claim fails as a matter

of law for the reasons outlined above, and there is no fiduciary duty owed, the claim was

properly dismissed regardless of whether Custom Associates pled facts on each element

of the claim.

{¶23} The sole assignment of error is without merit.

8 {¶24} For the foregoing reasons, the judgment of the Portage County Court of

Common Pleas, granting defendants-appellees, Maurice Vaughn and William Niegsch’s,

Motion to Dismiss, is affirmed. Costs to be taxed against appellant.

TIMOTHY P. CANNON, P.J.,

THOMAS R. WRIGHT, J.,

concur.