Duncan v. Wheeler

2010 Ohio 4836

• Court: Ohio Court of Appeals
• Decided: September 29, 2010
• Docket: 09CA3296
• Status: Published

Opinion

[Cite as Duncan v. Wheeler, 2010-Ohio-4836.] IN THE COURT OF APPEALS OF OHIO FOURTH APPELLATE DISTRICT SCIOTO COUNTY

JAMES H. DUNCAN, D.O., et al., : Plaintiffs-Appellees, Case No. 09CA3296 : vs. : TIMOTHY M. WHEELER, M.D. et al., DECISION AND JUDGMENT ENTRY

:

Defendants-Appellants. _________________________________________________________________

APPEARANCES:

COUNSEL FOR APPELLANTS: Felix J. Gora, Jonathan P. Saxton, James J. Englert and Ann K. Schooley, Rendigs, Fry, Kiely & Dennis, LLP, 1 West Fourth Street, Ste. 900, Cincinnati, Ohio 45202

COUNSEL FOR APPELLEES: Michael R. Szolosi, Sr., McNamara & McNamara, LLP, 88 East Broad Street, Ste. 1250, Columbus, Ohio 43215, and Michael R. Szolosi, Jr., 2615 Andover Road, Upper Arlington, Ohio 43221, and Daniel P. Ruggiero, Ruggiero & Haas, 600 National City Bank, 800 Gallia Street, P.O. Box 150, Portsmouth, Ohio 45662

CIVIL APPEAL FROM COMMON PLEAS COURT DATE JOURNALIZED: 9-29-10

ABELE, J.

{¶ 1} This is an appeal from a Scioto County Common Pleas Court judgment

that denied a motion to stay proceedings pending the arbitration of several claims. SCIOTO, 09CA3296 2

Timothy M. Wheeler, M.D., John B. Tudor, Kenneth D. Boggs and Portsmouth

Ambulance, Inc. (PAI), defendants below and appellants herein, assign the following

error for review:

“THE TRIAL COURT ERRED TO THE PREJUDICE OF DEFENDANTS-APPELLANTS IN OVERRULING THEIR MOTION TO STAY PROCEEDINGS PENDING ARBITRATION AND TO COMPEL ARBITRATION.”

{¶ 2} Appellees are minority shareholders in PAI. The corporate shareholders

are also signatories to a certain “Stock Redemption and Shareholder Agreement” (the

shareholder agreement) that provides in Article XXII:

“Subject to the provisions of Article XX, in the event that any controversy or claim arising out of this Agreement cannot be settled by the Parties, the controversy or claim shall be settled by arbitration in the City of Ashland, County of Boyd, State of Kentucky in accordance with the rules of the American Arbitration Association then in effect, and judgment on the award may be entered in a court having jurisdiction thereof. ***”

{¶ 3} On April 8, 2009, appellees filed a complaint and alleged that the

controlling shareholders, Timothy M. Wheeler and John B. Tudor, committed corporate

mismanagement. Some allegations focused on the manner by which appellant,

Kenneth Boggs, was brought in as a PAI investor. Other allegations focused on claims

that (1) Wheeler, Tudor and Boggs used corporate assets for personal benefit, and (2)

appellees were excluded from viewing corporate financial records. Appellees

demanded, inter alia, an accounting of the corporate assets and compensatory

damages.

{¶ 4} On April 20, 2009, appellants Boggs and PAI filed a motion to stay court SCIOTO, 09CA3296 3

proceedings and to compel arbitration. The motion was based on the above noted

shareholder agreement provision. The parties thereafter filed various memoranda with

the trial court. The trial court denied the motion and reasoned that not every dispute is

arbitrable under the “stock redemption shareholder agreement” and that the “significant

and repeated wrongdoing” the controlling shareholders allegedly committed fell outside

its parameters. This appeal followed.1

{¶ 5} In their sole assignment of error, appellants assert that the trial court erred

by denying their motion to stay proceedings pending the outcome of arbitration. Our

analysis begins with a recitation of the proper standard of review. First, shareholder

agreements are contracts, and the ordinary rules of contract law apply. Miller, on

behalf of Miller v. McCann (Dec. 26, 1997), Hamilton App. No. C-970035 Second,

appellate courts employ a de novo standard when reviewing a trial court’s interpretation

of contract provisions, including arbitration provisions. Aftermath, Inc. v. Buffington,

Franklin App. No. 09AP-410, 2010-Ohio-19, at ¶4; Gates v. Ohio Savings Assn.,

Geauga App. No. 2009-G-2881, 2009-Ohio-6230, at ¶¶18&21; Murray v. David Moore

Builders, Inc., 177 Ohio App.3d 62, 893 N.E.2d 897, 2008-Ohio-2960, at ¶7; Carew v.

Seeley, Hamilton App. No. C-050073, 2005-Ohio-5721, at ¶12. Thus, appellate courts

1 The Ohio Supreme Court recently held that an order staying court proceedings pending arbitration, under R.C. 2711.02(C), need not comply with Civ.R. 54(B) and, therefore, the order appealed herein is final notwithstanding the existence of pending claims and the absence of a “no just reason for delay” finding. See Mynes v. Brooks, 124 Ohio St.3d 13, 918 N.E.2d 511, 2009-Ohio-5946. The Court’s ruling overturned a line of precedent that would have otherwise required the dismissal of this case for the lack of a final appealable order. See Mynes v. Brooks, Scioto App. No. 07CA3185, 2008-Ohio-5613, at ¶17; Redmond v. Big Sandy Furniture, Inc., Lawrence App. Nos. 06CA15 & 06CA19, 2007-Ohio-1024, at ¶17; Simonetta v. A & M Bldrs., Inc. (Oct. 7, 1999), Cuyahoga App. No. 74622. SCIOTO, 09CA3296 4

afford no deference to trial court decisions and must conduct an independent review of

the shareholder agreement. See e.g. Wells Fargo Bank, N.A. v. Stovall, Cuyahoga

App. No. 91802, 2010-Ohio-236, at ¶11; Chapman v. S. Pointe Hosp., Cuyahoga App.

No. 92610, 2010-Ohio-152, at ¶9.

{¶ 6} In the case sub judice, we agree with the trial court's conclusion. We do

not believe that the shareholder agreement purports to cover “every dispute between

the parties.” Rather, the pertinent provision (Article XXII) states that it applies to

controversies or claims “arising out of” that agreement. Thus, the issue in this case is

whether the appellees' claims “arise out of” the shareholder agreement.

{¶ 7} Ohio courts have interpreted the phrase “arise out of” to mean “flowing

from” or “having its origins in.” See e.g. Stickovich v. Cleveland (2001), 143 Ohio

App.3d 13, 37, 757 N.E.2d 50; Smith v. Ohio Bar Liab. Ins. Co., Summit App. No.

24424, 2009-Ohio-6619, at ¶18. Do appellees’ claims “flow from” or have “origins in”

the shareholder agreement? We think not.

{¶ 8} As appellants concede in their brief, appellees claims involve common law

breach of fiduciary duty and statutory rights of access to corporate records. What

appellants fail to do, however, is explain how those claims arise out of the shareholder

agreement. Indeed, they do not point to a specific part of the agreement that covers

the claims.

{¶ 9} The preamble to the shareholders agreement states that the contract is

intended to accomplish the following:

“. . . establish certain terms and conditions upon which the [s]hares can be transferred and to provide for certain SCIOTO, 09CA3296 5

arrangements with respect to the management of the [c]orporation and desire to enter into this Agreement in order to effectuate those purposes and to set forth certain respective rights and obligations in connection with their respective investments in the [c]orporation.”

The first part of this preamble (regarding stock transfers) is not implicated. The second

part of the preamble (regarding management of the corporation) suggests that it might

be applicable, except that the explicit language limits it to only “certain” management

arrangements and “certain” rights and obligations within PAI. The agreement,

therefore, does not cover all arrangements or all rights and obligations, but only certain

aspects. Moreover, none of the twenty-nine articles in the shareholder agreement

correspond with the claims in appellees’ complaint.

{¶ 10} Appellants, however, offer a variety of theories concerning the language in

the shareholder agreement. First, they point to the Ohio Supreme Court’s public policy

of favoring the arbitration of disputes. We fully agree that arbitration is an important

policy, but we do not believe that the Ohio Supreme Court advocates the judicial

re-writing of contracts to expand arbitration clauses beyond their original intent.

{¶ 11} Appellants also argue that any doubt as to whether a claim is arbitrable

should be resolved in favor of arbitration. Again, although we fully agree with this

proposition, in the instant case we find no doubt on the issue of arbitrability. The

shareholder agreement calls for the arbitration of disputes arising out of that

agreement, but appellants have not shown that appellees' claims arise from any of the

agreement's provisions.

{¶ 12} Appellants further point to appellees’ status as “shareholders” in PAI and

argue that because the shareholder agreement employs the word “shareholder,” any SCIOTO, 09CA3296 6

dispute is covered under the agreement. However, Article XXII explicitly limits the

disputes the arbitration clause covers to those arising out of the agreement.

Appellants have not shown that appellees' claims flow from that agreement.

{¶ 13} Appellants additionally assert that corporate regulations permit officers to

enter into contracts that extend to some of appellees' claims regarding the breach of

fiduciary duty. However, Article XXII limits arbitrability to claims arising out of that

agreement, as opposed to the corporate regulations, and Article XXVIII expressly limits

the reach of the shareholder agreement to the terms of that document and explicitly

rules out any other written agreements not included therein such as corporate

regulations.

{¶ 14} Appellants cite Durina v. Filtroil, Inc., Columbiana App. No. 07CO24,

2008-Ohio-4803 to support the view that “arising out of” language may be broadly

construed. We note, however, that the opinion cites seven provisions in the

“comprehensive contract” covered by the allegations in the complaint. Id. at ¶37. By

contrast, in the case sub judice appellants do not cite one specific part of the

shareholder agreement implicated by the complaint.

{¶ 15} Appellants also rely on the Ohio Supreme Court's discussion in Academy

of Medicine of Cincinnati v. Aetna Health, Inc., 108 Ohio St.3d 185, 842 N.E.2d 488,

2006-Ohio-657, at ¶18 concerning the implications of “arising out of” language:

“Our next consideration is whether the arbitration clause limits itself only to certain aspects of the underlying contract. ‘To determine whether the claims asserted in the complaint fall within the scope of an arbitration clause, the Court must ‘classify the particular clause as either broad or narrow.’ * * * An arbitration clause that contains the phrase ‘any claim or controversy arising * * * out of or relating to the agreement’ is considered ‘the paradigm of a broad clause.’” (Citations omitted.) SCIOTO, 09CA3296 7

In the case sub judice, we do not dispute that the shareholder agreement's arbitration

clause is a “broad clause.” There is a difference, however, between a broad clause

and an all-encompassing clause. Appellants omit from their citation that Justice

Pfeifer, writing for the majority, described the arbitration provision as purporting to

“cover any disputes about the parties' business relationship.” (Emphasis added.) Id.

We, however, cannot tell from the opinion what provisions were contained in the

“physician provider agreements” at issue in that case. Those agreements may well

have contained provisions, like the ones in Durina, that could be related directly to the

allegations in the complaint. However, as we have repeated numerous times in this

opinion, appellants fail to point to a specific part of the shareholder agreement that

covers the allegations in appellees’ complaint sufficient to trigger the arbitration clause.

Thus, like the trial court, we are not persuaded that appellees’ claims flow from, or have

origins in, the shareholder agreement.

{¶ 16} In summary, we recognize that courts look favorably upon arbitration and

also favor a broad construction of arbitration clauses. In the case at bar, however, the

parties did not simply agree to arbitrate all disputes relating to their business enterprise

without any limitations. Rather, as the trial court aptly concluded, the actual wording of

arbitration clause limits the types of disputes that the parties agreed to submit to

arbitration.

{¶ 17} For these reasons, we hereby overrule appellants' assignment of error

and affirm the trial court's judgment.

JUDGMENT AFFIRMED. SCIOTO, 09CA3296 8

Kline, J., dissenting.

{¶ 18} I respectfully dissent.

{¶ 19} I agree that shareholder agreements are contracts, and the ordinary rules

of contract law apply. See, e.g., Heiser v. Heiser & Jesko, Lake App. No. 2004-L-006,

2005-Ohio-4776, at ¶21-27 (considering a “close corporation agreement”).

{¶ 20} However, based on the analysis that follows, I would find that the present

dispute falls within the arbitration clause. Thus, I would reverse the judgment of the

trial court.

{¶ 21} “[W]here the contract contains an arbitration clause, there is a

presumption of arbitrability in the sense that [a]n order to arbitrate the particular

grievance should not be denied unless it may be said with positive assurance that the

arbitration clause is not susceptible of an interpretation that covers the asserted

dispute. Doubts should be resolved in favor of coverage.” Academy of Medicine of

Cincinnati v. Aetna Health, Inc., 108 Ohio St.3d 185, 2006-Ohio-657, at ¶14 (internal

citations omitted). In determining the scope of arbitration clauses, Ohio Courts have

adopted the test laid out by the Sixth Circuit. Alexander v. Wells Fargo Financial Ohio

1, Inc., 122 Ohio St.3d 341, 2009-Ohio-2962, at ¶23, citing Fazio v. Lehman Bros., Inc.

(C.A.6, 2003), 340 F.3d 386. Under this standard, “[e]ven real torts can be covered by

arbitration clauses ‘[i]f the allegations underlying the claims ‘touch matters’ covered by

the [agreement].’” Alexander at ¶24, citing Fazio at 395, quoting Genesco, Inc. v. T.

Kakiuchi & Co., Ltd. (C.A.2, 1987), 815 F.2d 840, 846. SCIOTO, 09CA3296 9

{¶ 22} In Fazio the plaintiffs alleged that a stockbroker had engaged in fraudulent

activities, including theft. Fazio at 391. The Sixth Circuit noted that the conduct

violated the account agreements, but it also noted: “The lawsuit by necessity must

describe why [the stockbroker] was in control of the plaintiffs’ money and what the

brokerage houses’ obligations were. The plaintiffs therefore cannot maintain their

action without reference to the account agreements, and accordingly, this action is

covered by the arbitration clauses.” Fazio at 395.

{¶ 23} In the present case, among other claims, the plaintiffs allege that the

defendants have violated various duties owed because of the defendants’ status as

officers of the corporation. The defendants’ status as officers of the corporation was

established under Article II(D) of the shareholder agreement. Both Tudor and Wheeler

were established as officers and directors based on an express provision of the

agreement, and Boggs was later made an officer pursuant to Tudor and Wheeler’s

authority to appoint a successor under Article II(D).

{¶ 24} In their first cause of action, the plaintiffs allege that the defendants

breached the fiduciary obligations that they owed to the corporation. The complaint

indicates that those obligations were owed “as Officers and controlling shareholders[.]”

Insofar as their positions were established by the shareholder agreement, I would hold

that any breach of those duties touches on the shareholder agreement and so becomes

subject to the arbitration clause under Fazio.

{¶ 25} As in Fazio, the agreement at issue created the relationship that led to the

legal liability. It may be argued that Fazio can be distinguished on the basis that the SCIOTO, 09CA3296 10

alleged wrongful behavior here did not expressly violate the shareholder agreement.

This argument is unpersuasive. The shareholder agreement, with specific reference to

the particular corporate entity, established certain individuals in particular offices. That

act alone created a series of duties under the law that those officers owed the

corporation, and through it, the shareholders. In a sense, we may justly construe the

shareholder agreement as incorporating those duties through the appointment of

officers. Therefore, I would conclude that we can plausibly interpret the arbitration

clause as covering any breaches occasioned in duties the defendants owed as officers.

{¶ 26} As noted above, the plaintiffs allege the defendants have breached

certain other duties not dependent on their status as officers. The majority opinion is

probably correct that there are claims in the complaint that are not within the arbitration

agreement, e.g. that the majority stockholders breached the fiduciary duties they owed

to the minority stockholders. But, I would nonetheless conclude that the trial court

should have stayed the action as the “action is brought upon any issue referable to

arbitration under an agreement in writing for arbitration[.]” R.C. 2711.02(B).

{¶ 27} Thus, I respectfully dissent. SCIOTO, 09CA3296 11

JUDGMENT ENTRY

It is ordered that the judgment be affirmed and that appellees recover of

appellants 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 Scioto

County Common Pleas Court to carry this judgment into execution.

A certified copy of this entry shall constitute that mandate pursuant to Rule 27 of

the Rules of Appellate Procedure.

McFarland, P.J.: Concurs in Judgment & Opinion Kline, J.: Dissents with Dissenting Opinion For the Court

BY: Peter B. Abele, Judge

NOTICE TO COUNSEL

Pursuant to Local Rule No. 14, this document constitutes a final judgment entry and the time period for further appeal commences from the date of filing with the clerk.