[Cite as Dana Partners, L.L.C. v. Koivisto Constructors & Erectors, Inc., 2012-Ohio-6294.]
IN THE COURT OF APPEALS
ELEVENTH APPELLATE DISTRICT
TRUMBULL COUNTY, OHIO
DANA PARTNERS, LLC, : OPINION
Plaintiff-Appellee/ : Cross-Appellant, CASE NO. 2011-T-0029 : - vs - : KOIVISTO CONSTRUCTORS & ERECTORS, INC., et al., :
Defendants-Appellants/ : Cross-Appellees.
Civil Appeal from the Trumbull County Court of Common Pleas, Case No. 2009 CV 03127.
Judgment: Modified and affirmed as modified.
William L. Hawley and Matthew G. Vansuch, Harrington, Hoppe & Mitchell, Ltd., 108 Main Avenue, S.W., Suite 500, P.O. Box 1510, Warren, OH 44482-1510. (For Plaintiff- Appellee/Cross-Appellant).
Robert F. Burkey, Burkey, Burkey & Scher Co., L.P.A., 200 Chestnut Avenue, N.E., Warren, OH 44483-5805 (For Defendants-Appellants/Cross-Appellees).
THOMAS R. WRIGHT, J.
{¶1} This case involves both an appeal and cross-appeal from a final order of
the Trumbull County Court of Common Pleas. In the appeal, appellants/cross-
appellees, Rudolph F. Koivisto and his two construction companies, contest the merits
of the trial court’s decision entering judgment against the two construction companies, but not Koivisto personally, on appellee/cross-appellant, Dana Partners, L.L.C.’s
“contract” claim. In the cross-appeal, Dana Partners contest the trial court’s separate
ruling that, even though Koivisto’s companies are liable for the sum of $137,115.83,
Koivisto himself is not personally liable because there is no showing that he engaged in
fraudulent behavior.
{¶2} Dana Partners is an Ohio business entity with its principal place of
operations in Warren, Ohio. The managing partner of the entity is Richard Thompson,
who also owns, or has an interest in, other local businesses that engage in some form
of manufacturing. As part of its business interests, Dana Partners owns a building
located on Dana Street in the City of Warren. This building contains facilities for four
separate manufacturing companies.
{¶3} In early 2007, a serious problem developed with the roof of the building in
question. Acting on behalf of Dana Partners, Richard Thompson contacted a consulting
engineer, Kurt Sauer, and Rudolph Koivisto. At that time, Koivisto was the sole owner
of Koivisto Constructors and Erectors, Inc., an Ohio corporation, existing since 1994.
{¶4} After temporary repairs had been finished, Thompson decided to replace
all three sections of the roof. Upon consulting with Engineer Sauer, Thompson chose to
hire two companies to perform the work. The first company was Connell, Inc., a roofing
contractor. Connell was primarily responsible for the actual removal of the old roof and
the installation of the new roof.
{¶5} Thompson also hired Koivisto and his corporation to perform two general
functions at the work site. First, Koivisto contracted to act as construction manager over
the entire project. Under this aspect of their agreement, Dana Partners was required to
2 pay Koivisto the sum of $1,500 per week. Second, Koivisto’s company was to provide
“plan protection” regarding the various equipment and facilities inside the building. The
essential purpose of the “plan protection” services was to enable the four manufacturing
companies to continue to use the building while the new roof was installed. As to these
services, the parties’ agreement only stated that Dana Partners’ costs would not exceed
$88,000.
{¶6} Work on the “roof” project officially began in September 2007, and lasted
approximately four months. During the course of the work, Koivisto’s company soon
began to perform certain duties that had not been referenced in the agreement between
it and Dana Partners. For example, Koivisto’s company started to dispose of the scraps
Connell’s workers generated in removing the old roof.
{¶7} Each month during the project, Koivisto’s company sent Dana Partners a
numbers of invoices covering the work performed. These invoices were separated into
one of four categories. For example, the company sent separate invoices for managing
the construction site and for providing the “protection” services. Furthermore, included
in the invoices were statements of the costs of the following expenses: (1) the wages of
Koivisto’s company employees; (2) the wages of subcontractors hired by Koivisto; and
(3) payments for certain rental equipment. Upon receiving each invoice, Dana Partners
promptly paid it, never questioning the legitimacy of the expenses.
{¶8} Connell did not submit any invoices for its work until near the conclusion of
the job. When Thompson reviewed the invoices on behalf of Dana Partners, a dispute
arose concerning whether Connell was overcharging for the work it performed. As a
result of this dispute, Thompson decided to again review the Kiovisto invoices that had
3 previously been paid. As part of his investigation into the matter, Thompson asked
Koivisto to personally give information supporting certain charges in the prior invoices.
Kovisto never responded to Thompson’s request.
{¶9} At some point after the completion of the “roof” project on the Dana Street
facility, Koivisto created a new corporation in the state of Arizona. This new entity had
the same name as Koivisto’s Ohio company. In addition, the Arizona entity engaged in
the same type of business as the Ohio company, i.e., construction.
{¶10} When Thompson and Koivisto were not able to settle the dispute as to the
propriety of the charges in the invoices, Dana Partners instituted the underlying action
against Koivisto personally and his two companies. In relation to the Ohio corporation,
Dana Partners asserted claims in breach of contract and fraud. Regarding the Arizona
corporation, the complaint alleged that the new company could be found liable for the
debt of the Ohio corporation because it was merely a successor in interest of the Ohio
entity. As to Koivisto himself, Dana Partners asserted that the corporate veil of both
companies should be pierced so that he could be found personally liable.
{¶11} As part of the allegations in its complaint, Dana Partners stated that it had
been agreed that Koivisto and his company would predicate its work invoices upon its
actual costs and a reasonable markup for profits and overhead. In their answer under
Civ.R. 12, the three defendants maintained that the parties to the underlying agreement
had a prior course of dealing as to the manner in which the charges for the completed
work would be calculated. Moreover, during the course of discovery, Koivisto averred in
a deposition that he had based the charges in the invoices upon a national estimator’s
guide entitled “RSMeans.” Koivisto’s use of the national guide resulted in substantially
4 higher charges for the costs of the rental equipment, the wages of the subcontractors,
and the wages of the company employees.
{¶12} A one-day bench trial was held in November 2010. In support of its claims
for relief, Dana Partners primarily relied upon the testimony of Thompson and Engineer
Sauer. In relation to the cost of certain equipment Koivisto used on the project, Dana
Partners presented the testimony of the manager of a local rental entity. In response,
Koivisto testified on behalf of his two companies and himself.
{¶13} In its final judgment, the trial court found in favor of Dana Partners on its
claim for breach of contract. Specifically, the court found that there had been a meeting
of the minds between the parties that the project would be billed at actual costs, plus a
reasonable markup. As to damages, the trial court determined that Koivisto’s Ohio
company overcharged Dana Partners a total of $137,115.83, and entered judgment
against both the Ohio and Arizona companies for that amount. Regarding the fraud
claim, the court concluded that Koivisto himself had not engaged in any fraudulent acts
because RSMeans was an acceptable authority for setting costs. Based upon this, it
was further held that the corporate veils of Koivisto’s companies could not be pierced.
{¶14} In bringing the initial appeal from the foregoing judgment, Koivisto and his
two companies, as appellants/cross-appellees, have raised three assignments of error:
{¶15} “[1.] The trial court erred in finding the parties had a meeting of the minds
for an actual costs plus reasonable mark-up for overhead profit contract but not an RS
Means cost data contract.
{¶16} “[2.] The trial court erred in finding specific percentages for the reasonable
markup and in setting forth a number for actual costs that was inaccurate.
5 {¶17} “[3.] The trial court erred in finding against both the Arizona and the Ohio
corporations when there was no evidence presented that the Arizona corporation was
part of the contract.”
{¶18} Under their first assignment, appellants challenge the trial court’s factual
finding that there was a meeting of the minds that the “actual costs” method would be
employed to determine the amount to be charged for the work performed in accordance
with their “plan protection” agreement. Specifically, appellants contend that no evidence
was presented showing an objective manifestation on their part to agree to that specific
method of calculation. In support of their contention, they note that the parties’ written
correspondences concerning this agreement did not contain any precise language as to
this point.
{¶19} “To prevail on a contract action, the complaining party must prove all of
the essential elements of a contract, including an offer, acceptance, manifestation of
mutual assent, consideration, and certainty as to the essential terms of the contract.
* * *. In order for a party to be bound to a contract, the party must consent to its terms,
the contract must be certain and definite and there must be a meeting of the minds of
the parties. * * *.” (Citations omitted.) Ameritech Publishing, Inc. v. Mayfield, 7th Dist.
No. 10 MA 27, 2011-Ohio-2971, ¶13.
{¶20} As previously discussed, the “roof” contract between Dana Partners and
Koivisto basically had two distinct parts: management of the construction site and “plan
protection.” As to the latter aspect of the contract, the trial evidence readily shows that
the governing terms were not set forth in a single written document. Instead, the
contract was formed through the exchange of two written correspondences in July 2007,
6 approximately two months before the installation of the new roof began. The first
correspondence was sent by Koivisto to Thompson and Dana Partners. In addition to
stating a brief description of the “protection” which would be provided, the Koivisto letter
indicated that the total contract price for the protection would be $88,000. His letter also
stated that the extent of the protection coverage would be consistent with a prior bid that
had been submitted by Connell.
{¶21} Approximately three weeks after receiving the Koivisto letter, Thompson
sent a return correspondence on behalf of Dana Partners. Unlike the Koivisto letter, the
Thompson correspondence only referenced the “protection” aspect of their agreement.
Specifically, Thompson indicated that his correspondence was intended to serve as a
purchase order for the protection services. In regard to the price for such services, the
Thompson correspondence had the following sentence: “Said work will be completed at
a not to exceed cost of $88,000.00.”
{¶22} Besides introducing copies of these two correspondences into evidence at
trial, Dana Partners also presented a copy of a contract bid that Connell had mailed to
Thompson in relation to the installation of the new roof. Under the original proposal for
the entire project, Connell had intended to also provide the protection services for Dana
Partners. Ultimately, the parties agreed that the “protection” work would be transferred
from Connell to Koivisto’s company. This switch was referenced and explained as part
of a note in Connell’s contract bid. As to the price for the protection services, Connell’s
bid indicated that Koivisto was to provide the work “at a cost Not-to-Exceed 88,000.00.”
{¶23} Before the trial court, Koivisto did not contest that the language in the
Thompson reply correspondence was controlling as to the calculation of the amount his
7 company could charge for the protection services; i.e., the contract price would be at a
cost “not to exceed” $88,000. However, Koivisto did contend that the phrase “not to
exceed” must be interpreted in light of the parties’ prior course of dealing. As part of his
direct testimony, Koivisto stated that his company had been hired to perform other work
for Thompson and Dana Partners in the years prior to the “roof” project. He also stated
that, in billing Thompson for the prior work, he had always used the “RSMeans” guide to
set his costs, and that Thompson had never questioned the prior bills. Based upon this,
Koivisto indicated that, in determining the amount to be charged under the “protection”
aspect of the “roof” contract, he had merely used the procedure he had followed for the
prior work.
{¶24} In contrast, it was the position of Dana Partners that the disputed phrase
had to be construed in light of the industry standard for construction in Trumbull County,
Ohio: i.e., the usage of trade. At trial, Thompson expressly testified that, in light of his
years of experience in the local construction industry, he was aware that the phrase “not
to exceed” had a specific meaning in a construction contract. According to Thompson,
if a contract stated that the costs of a service would not exceed an exact dollar amount,
it meant that “I will be billed at actual costs plus a reasonable markup” for overhead and
profits. This testimony was collaborated by Engineer Sauer, who also testified that he
had sufficient experience in Trumbull County to know the special meaning given to the
disputed phrase.
{¶25} Under Ohio law, evidence of usage of trade or prior course of dealing can
be admitted for purposes of clarifying an indefinite contractual term. Baldwin v. Rieger,
11th Dist. No. 2001-T-0106, 2002-Ohio-4368, ¶17, quoting Nilavar v. Osborn, 127 Ohio
8 App.3d 1, 14 (2nd Dist.1998). In regard to the admissibility of “usage of trade” evidence
specifically, the Sixth Appellate District has noted:
{¶26} “‘Evidence of a custom or usage existing at the time of a contract is
frequently admitted for the purpose of explaining the contract or ascertaining the
understanding of the parties to it, interpreting the otherwise indeterminate intention and
acts of the parties, explaining words or technical terms, or showing that the mode in
which the contract has been performed is the one customarily followed by others
engaged in the same calling or trade.’ (Footnotes deleted and emphasis added.)”
Marisay v. Perrysburg Machine & Tool, Inc., 37 Ohio App.3d 35, 38 (6th Dist.1987),
quoting 54 Ohio Jurisprudence 2d, Usages and Customs, Section 14, at 453-455
(1962).
{¶27} In order to qualify as a “usage of trade,” the use of the dispute contractual
language must occur so regularly within a vocation or trade “‘as to justify an expectation
that it will be observed with respect to a particular agreement.’” Fidelity Mortgage Corp.
v. Bruno, 2nd Dist. No. 1544, 1981 Ohio App. LEXIS 10437, *9, quoting Restatement of
Contracts 2d, Section 221 (1981). Furthermore, a contract should only be interpreted
consistent with a usage of trade “‘if each party knows or has reason to know of the
usage and neither party knows or has reason to know that the other party has an
intention inconsistent with the usage.” Id. Finally, even though the existence of a usage
of trade must be proven by clear and satisfactory evidence, the ultimate determination
to construe the contract in light of the usage of trade lies within the discretion of the trier
of fact. Id. at *10.
{¶28} In our case, the trial court expressly found that there had been a meeting
9 of the minds between the parties that the protection services would be billed by Koivisto
at actual costs, plus a reasonable markup. The court further found that there had been
no meeting of the minds regarding the use of the “RSMeans” guide. Thus, it is readily
apparent that, in rendering its findings of fact, the court concluded that Dana Partners’
evidence concerning the usage of trade should be accorded greater weight than
Koivisto’s testimony concerning the prior course of dealing.
{¶29} The trial transcript indicates that, during the course of their respective
direct examinations, both Thompson and Engineer Sauer testified that they had over 20
years of experience in the local construction industry. Each man also testified that
whenever he had seen the inclusion of the “not to exceed” language in the
“price” term of a construction contract, it had always meant that the bill of the contractor
would be limited to his actual costs and a reasonable markup for profit and overhead.
Furthermore, our review of the transcript does not reveal any legitimate reason why the
credibility of either witness would be doubted on this particular point. Thus, the record
before this court contains competent, credible evidence upon which the trial court could
justifiably find that the phrase “not to exceed” was a term of art in the Trumbull County
construction industry, and that the “usage of trade” testimony of Thompson and Sauer
helped to explain the meaning of the phrase in the context of the written contract
between Dana Partners and Koivisto.
{¶30} As part of the evidence, it was further established that Koivisto had been
operating his own construction company in Trumbull County for over 12 years when the
contract for the protection services was negotiated; therefore, it could be inferred that he
was also aware of the meaning of the phrase “not to exceed” in the context of a
10 construction contract. Based upon this, the trial court was justified in also finding that,
by not objecting to the language in Thompson’s reply correspondence in July 2007, he
was agreeing to only charge Dana Partners for his actual costs and a reasonable
markup in regard to the rental equipment, the wages of his employees, and the wages
of the subcontractors. Accordingly, because the evidence supported the trial court’s
ultimate conclusion that there had been a meeting of the minds as to all terms of the
“plan protection” contract, appellants’ first assignment is without merit.
{¶31} Under their second assignment, appellants assert that the trial court erred
in making specific findings concerning the amount of a reasonable markup for the three
different types of charges under the protection services. They submit that such findings
should not have been made because there was no meeting of minds as to amounts of
the markups. According to them, there was no discussion between the parties as to the
amount of the markups until after Dana Partners had paid all of the invoices.
{¶32} In addition to its finding on the “not to exceed” phrase, the trial court also
found that: (1) a reasonable markup on the wages of the Koivisto company employees
was 20 percent; (2) a reasonable markup on the wages of the subcontractors was 10
percent; and (3) a reasonable markup on the costs of the rental equipment was 18
percent. The trial transcript again shows that these findings were predicated upon the
testimony of Thompson and Engineer Sauer. That is, each man testified, based upon
his general knowledge of the construction industry in Trumbull County, as to what would
be viewed as a reasonable markup under each of the three types of charges. To the
extent that both men relied upon their experience in the local industry, this particular
testimony was essentially a continuation of their respective descriptions of the meaning
11 of the phrase “not to exceed” in the context of a construction contract.
{¶33} Given that the purpose of the “markup” testimony was to fully explain the
intent of the parties in relation to the inclusion of the “not to exceed” phrase in the “plan
protection” contract, it was also admissible as evidence of the governing usage of trade
in the local construction industry. Furthermore, since the trial transcript does not show
that the credibility of Thompson or Sauer was successfully challenged, the trial court did
not abuse its discretion in basing his factual findings upon their testimony. Thus, since
there was some competent, credible evidence upon which the trial court could conclude
that there had been a meeting of the minds as to the percentages of the markups for the
three types of charges, appellants’ second assignment also lacks merit.
{¶34} Under their final assignment, appellants contend that the trial court erred
in holding Koivisto’s Arizona company liable for the judgment debt of the Ohio
corporation. Regarding this point, appellants emphasize that the Arizona entity was not
a party to the agreement with Dana Partners, and had not even been formed until after
the work on the roof was completed. In response, Dana Partners assert that the trial
court’s holding was correct because the evidence supported the finding that Koivisto
essentially merged the Ohio company into the new Arizona entity.
{¶35} “The well-recognized general rule of successor liability provides that the
purchaser of a corporation’s assets is not liable for the debts and obligations of the
seller corporation.” Welco Industries, Inc. v. Applied Cos., 67 Ohio St.3d 344, 346
(1993). However, Ohio law also recognizes four exceptions to the basic rule; i.e., there
can be successor liability when: (1) there is an express or implied agreement by the
buyer corporation to assume the liabilities; (2) there is a de facto merger of the two
12 corporations; (3) the buyer corporation is merely a continuation of the seller corporation;
or (4) the sale of the original corporation was entered into fraudulently for the exact
purpose of escaping liability. Id. at 347.
{¶36} In our case, Dana Partners focuses its argument upon the second of the
four exceptions: de facto merger. Generally, in order for the doctrine of de facto merger
to apply, there must exist a sufficient nexus between the two corporate entities to
warrant the imposition of successor liability. Permasteelisa CS Corp. v. The Airolite
Co., S.D.Ohio No. 2:06-cv-569, 2007 U.S. Dist. LEXIS 95860, *31 (Dec. 31, 2007),
quoting Turner v. Bituminous Cas. Co., 397 Mich. 406, 244 N.W.2d 873, 880 (1976).
Under Ohio law, the determination of whether the required nexus is present in a given
case turns upon the consideration of the following four factors: (1) whether there was a
continuation of the prior business activity and corporate personnel; (2) whether there
was continuity of shareholders based upon a sale of assets in exchange for stock; (3)
whether the existing company was immediately dissolved; and (4) whether the new
entity assumed the ordinary liabilities and obligations of the existing company. State ex
rel. H.C.F. Inc. v. Ohio Bur. of Workers’ Comp., 80 Ohio St.3d 642, 648 (1997), quoting
Welco, supra, at 349.
{¶37} The H.C.F. Inc. standard is stated in the conjunctive. In our case, though,
only some of the common features of a de facto merger existed. For example, the
testimony established that the corporate personnel of the two companies, i.e., Rudolph
F. Koivisto as the sole owner, are identical. In addition, there was some testimony
tending to show that Koivisto’s Ohio corporation essentially ceased operations around
the same time that the Arizona entity was formed.
13 {¶38} However, the evidence does not show that the Arizona entity assumed the
day-to-day obligations of the Ohio company. More importantly, there was no showing
that the Arizona entity assumed the actual business activity of the Ohio company. That
is, the Arizona entity will only be engaging in construction work in Arizona, not Ohio.
Thus, this was not a situation in which Koivisto created a second corporation, and then
transferred the existing business opportunities and assets of his original Ohio company
to the new entity. Instead, Koivisto was discontinuing his Ohio business to start a totally
new business in a different state.
{¶39} As part of its argument on the “de facto merger” issue, Dana Partners
makes the general assertion that the Arizona company was simply a continuation of the
Ohio company. As previously mentioned, the continuation of the original corporation by
a purchaser corporation is the third recognized exception to the general rule against
successor liability. Although Dana Partners did employ the word “continuation” in its
appellate brief, it did not cite to the separate standard for this exception and did not
develop a separate argument on this point. Despite this, we will address the question of
whether the third exception is applicable.
{¶40} In describing the “mere-continuation” exception, the Supreme Court of
Ohio has stated:
{¶41} “We have held that the basis of this [exception] is the continuation of the
corporate entity, not the business operation, after the transaction. [Flaugher v. Cone
Automatic Machine Co., 30 Ohio St.3d 60 (1987)]. Such would be the case when ‘one
corporation sells its assets to another corporation with the same people owning both
corporations. Thus, the acquiring corporation is just a new hat for, or reincarnation of,
14 the acquired corporation. This is actually a reorganization.’ [Turner v. Bituminous Cas.
Co., 397 Mich. 406, 449 (1976)]. This type of transaction is executed to escape
liabilities of the predecessor corporation. [Cyr v. B. Offen & Co., Inc., 501 F.2d 1145,
1151 (C.A.1, 1974)]. Because the goal is to escape liability, inadequacy of
consideration is one of the indicia of mere continuation. Jackson v. Diamond T.
Trucking Co. (1968), 100 N.J.Super. 186, 196, * * *.” Welco, at 350.
{¶42} Pursuant to the Supreme Court precedent, the “mere-continuation”
exception only applies when the assets of the original corporation are acquired by a
new corporation which has the same owner. The assets of Koivisto’s Ohio company,
such as its heavy equipment, employees, and contracts, were not transferred to the
Arizona company. Regarding the Ohio company’s construction equipment, Koivisto
expressly testified that, before the “roof” project began, he disposed of the Ohio
company’s heavy equipment, and only retained some fabricators, scaffolding, and small
hand tools. In light of this, Koivisto rented equipment needed to perform the required
work on the “roof” job.
{¶43} Similarly, there is no evidence showing that any of the employees of the
Ohio company became employees of the Arizona entity. The evidence shows that
Koivisto already released the majority of his Ohio employees even before he entered
into “roof” contract with Dana Partners. As a result, although Koivisto did hire some of
his former employees to work on the “roof” project, he had to designate them as
subcontractors for purposes of his invoices. In addition, he also hired temporary help to
work as employees for his Ohio company.
{¶44} Given the disposition of the heavy equipment and the release of its
15 employees, Koivisto’s Ohio company had minimal assets before it entered into the
contract with Dana Partners for the “roof” job. The rationale supporting the “mere-
continuation” exception is that a corporation cannot move assets that were existing in
the corporation and available to satisfy a potential judgment to a successor corporation
for inadequate consideration in order to avoid liability. Koivisto Ohio did not have any
significant assets at the time it contracted with Dana Partners, and there is no evidence
any retained equipment was transferred to Koivisto Arizona for inadequate
consideration. Absent evidence of an asset transfer, Koivisto Arizona has no assets of
Koivisto Ohio from which Dana Partners could have satisfied a judgment in the event of
breach by Koivisto. See Welco, at 350.
{¶45} Pursuant to Koivisto’s testimony, he intended for his Arizona company to
perform construction work similar in nature to the work his Ohio company had done
through the years. However, in the absence of any transfer of assets between the two
corporations, this single similarity is not sufficient to establish that the Arizona company
was engaged in a continuation of the Ohio company’s business. Cf., Mohammadpour v.
Thomas, 8th Dist. No. 85474, 2005-Ohio- 3853, ¶14. To this extent, Dana Partners
failed to carry its burden of proving that the “mere-continuation” exception is applicable.
{¶46} Finally, since Koivisto’s Ohio company was never sold to his Arizona
company, the fourth exception to the general rule of no successor liability is not
applicable. That is, this is not a situation in which Koivisto Ohio was fraudulently sold to
the Arizona company for the purpose of escaping liability.
{¶47} Taken as a whole, the facts in this case weighed in favor of the finding that
Koivisto did not engage in any “transaction” which resulted in a de facto merger or a
16 continuation of the operations of his Ohio company. Therefore, since the Arizona
company was not a successor in liability for Koivisto’s Ohio entity and was not a party to
the disputed contract between Koivisto and Dana Partners, the trial court erred in
holding that it could be held responsible for the judgment debt. For this reason,
appellants’ third assignment is well taken.
{¶48} Dana Partners filed a timely cross-appeal from the trial court’s final
judgment, and advances two assignments of error for review:
{¶49} “[1.] The finding by the trial court that Koivisto did not commit fraud was
contrary to the manifest weight of the evidence.
{¶50} “[2.] The finding by the trial court that insufficient evidence to pierce the
corporate veil was presented was contrary to the manifest weight of the evidence.”
{¶51} Since the two assignments under the cross-appeal are interrelated, they
will be addressed together. As previously discussed regarding Rudolph F. Koivisto
individually, Dana Partners sought personal liability for the contract overcharges by
piercing the corporate veil of his Ohio company. As the factual foundation for this
distinct claim, Dana Partners alleged that the piercing of the veil was warranted
because Koivisto had acted fraudulently in submitting invoices which were not
consistent with the terms of the “plan protection” agreement.
{¶52} Under the first assignment of its cross-appeal, Dana Partners asserts that
the evidence it presented at trial established fraudulent behavior on the part of Koivisto.
According to Dana Partners, given that there had been an agreement that the protection
services would be billed on actual costs, Koivisto committed fraud by seeking payments
for significantly larger amounts. Building upon this, Dana Partners further asserts that
17 the trial court erred in refusing to pierce the corporate veil and find Koivisto personally
liable on the judgment.
{¶53} Pursuant to well-settled Ohio case law, three basic facts must be proven
before a shareholder/owner of a corporate entity can be found legally responsible for a
corporate debt:
{¶54} “‘The corporate form may be disregarded and individual shareholders held
liable for wrongs committed by the corporation when (1) control over the corporation by
those to be held liable was so complete that the corporation has no separate mind, will,
or existence of its own, (2) control over the corporation by those to be held liable was
exercised in such a manner as to commit fraud or an illegal act against the person
seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the
plaintiff from such control and wrong.’” Dombroski v. Wellpoint, Inc., 119 Ohio St.3d
506, 2008-Ohio-4827, ¶18, quoting Belvedere Condominium Unit Owners’ Assn. v. R.E.
Roark Cos., Inc, 67 Ohio St.3d 274, paragraph three of the syllabus (1993).
{¶55} In Dombroski, the primary issue before the Ohio Supreme Court involved
whether the piercing of the corporate veil should be allowed when the person exercising
control over the corporation has engaged in an act that, although not illegal, was unjust
or inequitable. In concluding that the general scope of the Belvedere standard should
not be extended beyond fraud, an illegal act, or a similarly unlawful act, the Dombroski
court emphasized that the purpose of the corporate veil would be defeated unless there
was a strict limit to the instances in which the piercing of the veil was permissible. Id. at
¶27. Thus, the Dombroski court continued to follow the guiding proposition that piercing
the corporate veil should only occurred in rare instances of extreme shareholder/owner
18 misconduct. Id. at ¶26.
{¶56} In our case, the evidence presented by Dana Partners was readily
sufficient to establish the first and third prongs of the Belvedere standard. In relation to
the first prong, Koivisto’s own testimony on cross-examination indicated that he was the
sole shareholder in his Ohio company; therefore, he had total control over the operation
of the company. As to the third prong, the testimony of Richard Thompson established
that Dana Partners sustained a financial “injury” as a result of Koivisto’s failure to abide
by the terms of the parties’ agreement regarding the method for calculating the charges
covering the protection services. Accordingly, for purposes of deciding whether Koivisto
could be held personally liable for the overcharges, the sole dispute centered upon the
second prong of the Belvedere standard; i.e., did the evidence of Dana Partners support
a finding that Koivisto had acted fraudulently in submitting invoices that were not based
upon his actual costs, plus a reasonable markup?
{¶57} In essence, Dana Partners’ fraud claim was based upon the allegation that
Koivisto had purposely made false representations in the monthly invoices concerning
the amount due for the services rendered by his company. In order to prove a claim of
fraudulent misrepresentation in a contract action, five basic elements must be satisfied:
“(1) a false representation concerning a fact material to the transaction; (2) knowledge
of the falsity of the statement or utter disregard for its truth; (3) intent to induce reliance
on the misrepresentation; (4) reliance under circumstances manifesting a right to rely;
and (5) injury resulting from the reliance.” Sanfillipo v. Rarden, 24 Ohio App.3d 164,
166 (1st Dist.1985). In regard to the second element of the claim, it has been held that
a finding of fraud cannot be predicated upon an innocent mistake of fact; rather, it must
19 be shown that the defendant had actual knowledge or was grossly negligent in failing to
ascertain the truth. Id.
{¶58} Consistent with the foregoing precedent, the Third Appellate District has
indicated that mere negligent behavior is not sufficient to establish fraud for purposes of
piercing the corporate veil; rather, the behavior must either be purposeful or reckless in
nature. Advantage Bank v. Waldo Pub, LLC, 3rd Dist. No. 9-08-67, 2009-Ohio-2816,
¶42.
{¶59} In considering the general elements for fraud as they relate to the second
prong of the Belvedere standard, this court has expressly concluded that the decision to
pierce the corporate veil cannot be based solely upon the failure to comply with a term
of a contract:
{¶60} “A simple breach of contract, in the absence of a more substantial factual
predicate indicative of some corporate malfeasance, with direct bearing on the plaintiff’s
injury, is insufficient to meet the second prong of the Belvedere test. To decide
otherwise, would completely vitiate the holding in Belvedere.” Connolly v. Malkamaki,
11th Dist. No. 2001-L-124, 2002-Ohio-6933, ¶34.
{¶61} As the grounds for its fraud assertion in this case, Dana Partners does not
maintain that Koivisto had acted negligently in his performance of the “plan protection”
contract. Instead, it is the position of Dana Partners that, despite the fact that Koivisto
was aware that the terms of the contract required him to only bill for his actual costs and
a reasonable markup, he still decided to use the RSMeans guide to calculate his costs
and, therefore, overcharged for his company’s services. To this extent, Dana Partners
contends that the overcharges were intentional.
20 {¶62} In concluding that Koivisto had not engaged in any fraud in submitting his
invoices, the trial court provided the following analysis:
{¶63} “It is not disputed that [Koivisto] did use the RS Mean’s calculation as
authority for establishment of his price. Furthermore RS Means is an acceptable
authority. Therefore the Court finds no fraud or attempt to perpetrate a fraud. The
Court also finds there is insufficient evidence in order to pierce the corporate veil as
Dana Partners and managing partner, Dick Thompson, were well aware and had
previously dealt with [Koivisto’s] corporate entities.”
{¶64} Although not expressly stated in the foregoing quote, it is readily apparent
that the trial court’s finding on the fraud issue was based upon Koivisto’s testimony as to
the parties’ prior course of dealing. As previously noted, Koivisto testified that, in billing
Dana Partners for work performed under prior contracts, he had always employed the
“RSMeans” guide to set his company’s costs. He further testified that, since Thompson
had never contested the prior bills, he simply followed the identical procedure in billing
Dana Partners on the “roof” project.
{¶65} As part of our earlier analysis as to the proper interpretation of the “not to
exceed” clause, this court concluded that the trial court could justifiably decide to give
more weight to Dana Partners’ “usage of trade” evidence than Koivisto’s “prior course of
dealing” testimony. Nevertheless, this decision did not necessarily mean that Koivisto’s
testimony was not entitled to any weight. As the trier of fact, the trial court could have
further found that Koivisto’s testimony was entitled to some weight to the extent that it
provided an explanation for his behavior during the performance of the “plan protection”
contract.
21 {¶66} Specifically, in light of the “prior course of dealing” testimony, the trial court
could have inferred that, despite the “meeting of the minds” at the original formation of
the contract, Koivisto had acted in conformity with the parties’ prior course of dealing in
calculating the amount owed for the work performed by his company. In other words,
Koivisto based his behavior upon what had been acceptable under the prior contracts
between the parties. Given that it was shown that the “RSMeans” guide is a legitimate
means for determining costs in the construction industry, the trial court could have also
found that Koivisto had only acted negligently in not calculating his costs in compliance
with the “not to exceed” clause in the contract. That is, while Koivisto acted purposefully
in using the “RSMeans” guide because it was consistent with his prior performance, he
did not expressly intend to breach the governing term of the contract.
{¶67} Based upon the foregoing findings, the trial court could justifiably conclude
that this case involved a simple breach of contract, and that Koivisto did not deliberately
attempt to overcharge Dana Partners for the work his company performed. In turn, this
means that Koivisto could not be held personally liable for the debt of his corporation
because there was some evidence to support the finding that he did not engage in any
fraudulent behavior during his performance of the underlying contract.
{¶68} Pursuant to the foregoing discussion, the trial court’s decision regarding
Dana Partners’ claim to pierce the corporate veil was not against the manifest weight of
the evidence. Thus, both of Dana Partners’ assignments of error in its cross-appeal are
without merit.
{¶69} Based upon our holding under appellants’ third assignment, it is the order
of this court that the judgment of the Trumbull County Court of Common Pleas is
22 modified and affirmed as modified. That is, the judgment is hereby modified to state
that Dana Partners is entitled to recover the sum of $137,115.83 only from Rudolph F.
Koivisto’s Ohio corporation, Koivisto Contractors and Erectors, Inc. Koivisto’s Arizona
corporation is no longer liable for the judgment debt.
DIANE V. GRENDELL, J., concurs,
CYNTHIA WESTCOTT RICE, J., concurs in part, dissents in part with Concurring/Dissenting Opinion.
____________________
CYNTHIA WESTCOTT RICE, J., concurring in part and dissenting in part.
{¶70} I concur with the majority finding Koivisto’s first two assignments of error
are without merit. I also concur with the majority’s decision denying Dana Partners’
cross assignments of error. The trial court did not err when it found there was
insufficient evidence to pierce the corporate veil because there was no evidence of
fraud by Koivisto.
{¶71} However, I disagree with the majority’s decision finding merit in Koivisto’s
third assignment of error alleging that the trial court erred in holding Koivisto’s Arizona
company liable for the debt of Koivisto Ohio. For the reasons that follow, I respectfully
dissent.
{¶72} The trial court found liability under the contract against Koivisto “in its Ohio
and its Arizona forms.” Thus, the trial court found Koivisto to be one business with two
names or “forms.” The trial court does not explain what facts it utilized in making this
23 finding. Therefore, it must be determined whether this finding was supported by some
competent, credible evidence. McDonald Indus. Park Prop. Owners Ass’n v. Am. Indus.
Renovation, Inc., 11th Dist. No. 2003-T-0075, 2004-Ohio-3509, ¶9, citing C.E. Morris
Co. v. Foley Constr. Co., 54 Ohio St.2d 279 (1978), syllabus.
{¶73} In Welco Industries, Inc. v. Applied Companies, 67 Ohio St.3d 344 (1993),
the Supreme Court of Ohio held that “a corporation that purchases the assets of another
corporation is not liable for the contractual liabilities of its predecessor corporation
unless 1) the buyer expressly or impliedly agrees to assume such liability; (2) the
transaction amounts to a de facto consolidation or merger; (3) the buyer corporation is
merely a continuation of the seller corporation; or (4) the transaction is entered into
fraudulently for the purpose of escaping liability.” Id. at 349. Successor corporate
liability under any of these theories requires a transfer of assets from the original to the
successor corporation. Cattron, Inc. v. Overhead Crane & Hoist, Inc., 32 Ohio App.3d
80, 81 (1st Dist.1987). However, the case law does not specify the type of transfer
necessary; whether the transfer of proceeds from the sale of assets suffices; whether
the transfer must occur at one time or whether a series of transfers suffices; or how or
when the transfer(s) must occur.
{¶74} There is no evidence in this case that would support a finding that there
was an express or implied agreement by the Arizona company to assume the liabilities
of the Ohio company. Thus, the first prong of Welco does not apply. The second prong
of Welco is also inapplicable here. The majority conducts a thorough analysis of the
facts in this case and correctly determines that there was no de facto merger.
{¶75} The record does not support the majority’s conclusion that “the evidence
24 does not indicate that the Arizona entity was created merely to escape potential
liability.” Conversely, there was no factual finding by the trial court that the Arizona
entity was created merely to escape potential liability. I believe the facts presented do
not support a finding either way under the fourth prong of Welco.
{¶76} Mr. Koivisto testified at trial that he lives in Arizona and that he has been
working out of Arizona. Appellants’ counsel stated in trial that Mr. Koivisto moved to
Arizona in 2000 due to his wife’s health and he was “winding down his Ohio operation
and keeping more of his time and business in Arizona.”
{¶77} Mr. Koivisto testified that he formed his Arizona corporation with the same
name as his Ohio corporation in February 2008, after the completion of the disputed
contract with Dana. The Ohio company was an ongoing entity while he was working
construction jobs in Arizona as Koivisto Ohio. He made no initial contribution of assets
or capital to the Arizona corporation. Mr. Koivisto testified that he had power tools,
fabrication equipment, and scaffolding here in Ohio when he started working on the
Dana project. He had previously “got rid of” most of the rolling stock, scissor lifts, dump
trucks, and excavating equipment. The record does not support the majority’s
statement that Koivisto’s Ohio company, including its heavy equipment, employees, and
contracts were not transferred to the Arizona company. Mr. Koivisto stated that he was
the sole owner of both corporations, and exercised complete control over both.
{¶78} Between 2000 and 2008, Koivisto Ohio was operating out of Arizona. Mr.
Koivisto testified concerning a project he worked on in Arizona for Dick’s Sporting
Goods during this period. After Koivisto Arizona was formed in February 2008, the tools
and equipment previously owned by Koivisto Ohio and used in Arizona were obviously
25 used by Koivisto Arizona in its business. Mr. Koivisto said that the Arizona company
engaged in the same business that had formerly been performed by the Ohio company.
Following the formation of Koivisto Arizona, all operations of Koivisto Ohio ceased and
were continued by Koivisto Arizona.
{¶79} As a result, the trial court’s finding of liability on the part of Koivisto’s
Arizona company could only be affirmed under the third Welco prong. I believe there
was some competent, credible evidence that Koivisto’s Arizona company was a mere
continuation of his Ohio company.
{¶80} Successor corporation liability can be found if the record would support a
finding of mere continuation, which is the “continuation of the corporate entity, not the
business operation, after the transaction.” Welco Indus., Inc., supra, at 350. An
example of this theory occurs when “one corporation sells its assets to another
corporation with the same people owning both corporations. Thus, the acquiring
corporation is just a reincarnation of the acquired corporation. Id. Inadequate
consideration is indicia of mere continuation. Id.
{¶81} The majority correctly notes that Mr. Koivisto stated that he was the sole
owner of both companies; that the new entity would be engaging in the identical
business as the Ohio company; and that the Ohio company no longer had any assets or
work. Mr. Koivisto testified that he considered shutting down the Ohio company, but
was advised to keep it open in case he might need to do work in Ohio.
{¶82} The exhibits before the trial court reinforced Koivisto’s testimony regarding
his ongoing business activity in Arizona prior to becoming involved with the Dana
contract. He utilized his Arizona address when renting equipment or making materials
26 purchases for the Dana contract. This was the same address he used when
incorporating his Arizona company after completion of the Dana contract.
{¶83} Since Koivisto Ohio owned tools and fabrication equipment when it began
working on the Dana project in 2007, and its business is now performed by Koivisto
Arizona, the evidence supported the finding that, upon the incorporation of the Arizona
company in 2008, Koivisto Arizona acquired all assets formerly owned by Koivisto Ohio.
This acquisition constituted a transfer of assets from the Ohio to the Arizona entity.
Further, because Koivisto Ohio now has no assets or funds, the evidence supported the
finding that, in acquiring Koivisto Ohio’s assets, the Arizona company did not pay
adequate or, in fact, any consideration for them. Thus, the evidence supported the
finding that Koivisto Arizona is a mere continuation of Koivisto Ohio as a result of the
foregoing transfer and the same person owning and operating both companies. See
e.g. Mohammadpour v. Thomas, 8th Dist. No. 85474, 2005-Ohio-3853, ¶15.
{¶84} Based upon the testimony and evidence before the court, the trial court’s
finding of liability on the part of Koivisto’s Arizona company is supported by the mere
continuation theory of successor corporate liability. As a result, I cannot find that the
trial court’s finding was against the manifest weight of the evidence. Therefore, I would
affirm the trial court.