[Cite as Washington Cty. Bd. of Dev. Disabilities v. United Re AG, 2013-Ohio-3419.]
IN THE COURT OF APPEALS OF OHIO FOURTH APPELLATE DISTRICT WASHINGTON COUNTY
WASHINGTON COUNTY : BOARD OF DEVELOPMENTAL : DISABILITIES : Case No. 12CA47 : Plaintiff-Appellee, : : vs. : DECISION AND JUDGMENT : ENTRY UNITED RE AG., ET AL., : : Defendants-Appellants. : Released: 07/26/13 _____________________________________________________________ APPEARANCES:
George J. Cosenza, Parkersburg, West Virginia, for Appellant Hugh Scott.
Ethan Vessells, Fields, Dehmlow & Vessels, Marietta, Ohio, for Appellee. _____________________________________________________________
McFarland, P.J.
{¶1} Hugh Scott (hereinafter “Appellant”) appeals the judgment of
the Washington County Court of Common Pleas, granting judgment in favor
of Washington County Board of Developmental Disabilities (hereinafter
“Appellee”) and against Appellant in his individual capacity. Upon review
of the record, we find competent, credible evidence going to the material
elements of the claim of Appellee for piercing the corporate veil and, as
such, we decline to disturb the judgment of the trial court as being against Washington App. No. 12CA47 2
the manifest weight of the evidence. Because we find no error in the trial
court’s judgment, we overrule Appellant’s sole assignment of error.
FACTS
{¶2} To a certain extent, we recount the facts as previously set forth in
Washington Co. Bd. of Developmental Disabilities v. United Re AG., et al.,
4th Dist. No. 11CA23, 2012-Ohio-3338, 2012 WL 3017864. Appellee is a
state agency with 65 employees, and it provides a health plan for its
employees. In 2005, Appellee decided to use a partially self-funded health
insurance plan that called for Appellee to acquire a re-insurance or “stop
loss” policy. Employee Benefit Services of Ohio (“EBS”) provided third
party administrative services to Appellee. EBS processed Appellee’s claims
and billings. EBS also provided Appellee a quote from United Re AG
(hereinafter “United”) for a reinsurance policy. Based on the quote from
EBS, Appellee enlisted with United. The stop-loss coverage plan stated
United promised to provide stop-loss coverage for Appellee’s employee
health plan if: (1) individual employee claims exceeded $20,000.00 per
individual employee (“specific coverage’), or (2) payment of any claims
over $393,520.00 for the collective employees during the plan year
(“aggregate coverage”). The plan year was February 1, 2006, through
January 31, 2007. Appellee signed a Trust Agreement with United for stop- Washington App. No. 12CA47 3
loss coverage. Appellee paid the premiums and fees to EBS to administer
the claims. EBS also paid the premiums to United for the stop-loss
coverage.
{¶3} Appellee submitted a claim to United for over $200,000.00.
After United failed to respond to Appellee’s demands for payment, Appellee
filed suit against multiple parties, including United, EBS, and two other
companies, Vado AG and Texcess Re Inc. Appellee also sued Appellant
claiming Appellant was personally liable for Appellee’s claims against
United. Appellant is an attorney in Texas and Appellant has served as
United’s general counsel, president, and owner. (Appellee also filed suit
against other entities not relevant to the first appeal or to this one.)1
{¶4} EBS filed cross-claims against United and Appellant. (EBS filed
suit against other entities also not relevant to either appeal). United filed a
cross-claim against EBS. On March 25, 2011, EBS voluntarily dismissed its
cross-claims against United and Appellant. Additionally, on March 30,
2011, EBS filed a notice of automatic stay with the trial court indicating that
EBS had filed for bankruptcy. The trial court stayed the proceedings against
EBS. Thus, both Appellee and United’s claims remained pending at the
time of trial.
1 The complaints against Vado AG and Texcess Re Inc. were mailed in care of Appellant to his law firm address in San Antonio, Texas. Washington App. No. 12CA47 4
{¶5} Prior to trial, United admitted that it was liable to Appellee for
$200,496.44. The parties conducted a bench trial solely on the issue of
whether Appellant could be held personally liable for Appellant’s claims
against United.
{¶6} At trial, Appellee argued United established a trust fund for
employers to contribute their stop loss premiums, which United called “trust
contributions.” United utilized an “overlay endorsement” as part of their
trust agreement, essentially a promise that United would procure additional
insurance, “reinsurance” for the employers participating in the trust fund.
Appellee argued Appellant established another company, Vado AG,
(“Vado”) to provide the reinsurance. However, Vado was not a licensed
insurance company, and there was never any stop-loss coverage for
Appellee. Appellee argued all the trust fund contributions/premiums were
deposited in a bank account in Texas. United or its representatives would
automatically take twenty percent from the account, leaving the remainder to
pay for claims. Eventually, there was not enough money to pay claims.
{¶7} In summary, Appellee contended it had been defrauded by a
Ponzi scheme established and operated by Appellant. Appellee argued
Appellant owned all the shares of United and Vado; the companies never
observed corporate formalities; and United and Vado were sham Washington App. No. 12CA47 5
corporations set up for the sole purpose of perpetuating fraud. There were
only two witnesses testifying live at trial, and the evidence consisted chiefly
of Appellant’s testimony and the videotaped deposition testimony of Van A.
Workman, (hereinafter “Workman”).
{¶8} The trial court admitted various exhibits, including the
following:2
1) Defendant’s Exhibit 1-Articles of Incorporation for United Re AG;
2) Defendant’s Exhibit 2-Assignment of shares of United Re AG to Jon R. Galland;
3) Plaintiff’s Exhibit 2- March 27, 2006 letter;
4) Plaintiff’s Exhibit 3- November 24, 2008 letter;
5) Videotaped deposition Workman;3 and,
6) Plaintiff’s Exhibit 10-Transcript of Appellant’s deposition testimony.
{¶9} Defendant’s Exhibit 1, the Articles of Incorporation for United
Re AG are written in German. Defendant’s Exhibit 2 is a purported
assignment of shares of United from Appellant to Jon Galland. The
document was unauthenticated and contained only Appellant’s signature.
Plaintiff’s Exhibit 2 is a 2006 letter identifying Appellant as U.S. counsel for
United. Plaintiff’s Exhibit 3 was a 2008 letter which was authorized by 2 The exhibit numbers are listed exactly as they appear in the index of the trial transcript. 3 On the front page of the original deposition, it is written: “This is an admitted exhibit at Court trial 03/28/11.” It is signed by the trial judge. Washington App. No. 12CA47 6
Appellant and sent under his signature, although Appellant denied the
signature was his. Plaintiff’s exhibit 10 was a transcript of Appellant’s
deposition testimony taken in January, 2010.
{¶10} There was much to be gleaned from the November 17, 2010
deposition transcript of Workman, president of EBS. Workman testified to
36 years of experience in insurance. Workman testified he met Jon Galland
(hereinafter “Galland”) and Appellant in Texas at a meeting hosted by
Galland in 2002. At that time, United was known as Texcess Re. The
meeting took place in Appellant’s law office in Texas. At the initial
meeting, Appellant was identified as corporate counsel. Workman testified
from the beginning, he thought Appellant had an ownership interest in the
business, despite the ownership of the company being kept secret.
Workman explained Texcess Re was a managing general underwriter while
United was the trustee of a trust. The name “Texcess Re” changed to United
in 2005. Workman’s testimony, like Appellant’s, was lengthy. It will be
discussed in detail below.
{¶11 At trial, Appellant testified he did not own any of the companies,
own shares in the companies, nor was he a member of the board of directors
during the time in question. He acted only as president and corporate
counsel. Appellant testified that he briefly acquired shares of United Washington App. No. 12CA47 7
(pursuant to Swiss law) in August 2002 and immediately transferred them to
Galland. After Galland died in 2008, Appellant reacquired the shares in
2010 from Galland’s children. Appellant testified the purpose of acquiring
the shares in 2010 was that by then, he was embroiled in legal proceedings
and being deposed.4 In order to “become knowledgeable” for the purposes
of defending himself and testifying, he needed to have access to the
corporate documents. Again, pursuant to Swiss law, he had to become a
shareholder to gain access to the documents. Appellant reiterated during the
relevant time period, (February 1, 2006 through January 31, 2007), he had
no ownership interest in the United or Vado.
{¶12} After the trial concluded, Appellant and Appellee submitted
alternate proposed findings of fact and conclusions of law. Ultimately, the
trial court found in favor of Appellee and against Appellant. On August 5,
2011, the trial court issued a judgment entry in favor of Appellee against
both United and Appellant for compensatory and punitive damages. On
September 14, 2011, the trial court issued a judgment entry in favor of
Appellee against both United and Appellant for attorney’s fees.
{¶13} Appellant timely filed a notice of appeal. We eventually
dismissed the first appeal based on our finding of no jurisdiction to consider 4 Appellant, along with the United, Vado, and Texcess companies, was a named defendant in Franklin County Common Pleas case number 09CVA04-5784, captioned The Ohio State University vs. Merchants 5 Star, Inc., Employee Benefit Plan, et al., filed in April 2009. The case is now closed. Washington App. No. 12CA47 8
the appeal and thus, lack of a final appealable order. On October 30, 2012,
Appellant timely filed the instant appeal. Where relevant, additional facts
adduced at trial will be set forth more fully below.
ASSIGNMENT OF ERROR
I. THE TRIAL COURT ERRED WHEN IT GRANTED JUDGMENT FOR COMPENSATORY AND PUNITIVE DAMAGES AGAINST THE DEFENDANT, HUGH SCOTT, ON THE ASSERTION THAT THE DEFENDANT HUGH SCOTT WAS AN OFFICER OF UNITED RE AG AND OPERATED SAID COMPANY AS ITS ALTER-EGO OR OPERATED THE DEFENDANTS UNITED RE (sic) AND VADO IN SUCH A MANNER AS TO PERPETUATE A FRAUD AGAINST THE PLAINTIFF CREATING UNJUST AND INEQUITABLE CONSEQUENCES.
STANDARD OF REVIEW
{¶14} In reviewing a trial court’s judgment, it is well established that
every reasonable presumption must be made in favor of the judgment and
findings of fact. Shemo v. Mayfields Hts., 88 Ohio St. 3d 7, 722 N.E.2d
1018, (2000); Seasons Coal Co., v. Cleveland, 10 Ohio St. 3d 77, 461
N.E.2d 1273 (1984). Furthermore, judgments supported by competent,
credible evidence going to the material elements of the case will not be
disturbed as being against the manifest weight of the evidence. Shemo,
supra; C.E. Morris Co. v. Foley Constr. Co, 54 Ohio St. 2d 279, 376 N.E.2d
578 (1978), syllabus. Washington App. No. 12CA47 9
LEGAL ANALYSIS
{¶15} The general rule is that corporations are legal entities distinct
from natural persons who compose them; therefore, officers, directors, and
shareholders are not normally liable for the debts of their corporations.
Belvedere Condominium Unit Owners’ Assoc., v. R.E. Roark Cos., Inc., 67
Ohio St. 3d 274, 287, 617 N.E.2d 1075 (1993); Stewart v. R.A. Eberts Co.,
Inc., 4th Dist. No. 08CA10, 2009 Ohio-4418, 2009 WL 2684497, ¶15.
“Because ‘[o]ne of the purposes of incorporation is to limit the liability of
individual shareholders,’ the party seeking to have the corporate form
disregarded bears the burden of proof.” Id.; RCO Internatl. Corp. v.
Clevenger, 180 Ohio App. 3d 211, 904 N.E.2d 941, 2008-Ohio 6823, ¶ 10,
quoting Univ. Circle Research Ctr. Corp. v. Galbreath Co., 106 Ohio
App.3d 835, 840, 667 N.E. 2d 445 (1995), citing Section 3, Article XIII of
the Ohio Constitution.
{¶16} In Belvedere, the Supreme Court of Ohio held that in order to
pierce the corporate veil and impose personal liability upon shareholders, the
person seeking to pierce the corporate veil must show that: (1) those to be
held liable hold such complete control over the corporation that the
corporation has no separate mind, will, or existence of its own; (2) those to
be held liable exercise control over the corporation in such a manner as to Washington App. No. 12CA47 10
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. Id., at paragraph three of the syllabus; Eberts,
supra.
{¶17} In Dombroski v. Wellpoint, Inc., 119 Ohio St. 3d 506, 895
N.E.2d 538 (2008), the Supreme Court of Ohio addressed the question of
“what conduct must be demonstrated to fulfill the second prong of the test
for piercing the corporate veil created in Belvedere?” The Court concluded
the test in Belvedere, if construed too strictly, “insulates shareholders when
they abuse the corporate form to commit acts that are as objectionable as
fraud or illegality” and thus was too limited to protect potential parties from
the wide variety of egregious shareholder misdeeds that may occur.
Dombroski, at ¶ 28, 617 N.E.2d 1075. Ultimately, the Dombroski court
found a limited expansion of the Belevedere test necessary in order to allow
the corporate veil to be pierced when a plaintiff demonstrates a defendant
shareholder has exercised control over a corporation in such a manner “as to
commit fraud, and illegal act, or a similarly unlawful act.” (Emphasis
added.) Dombroski, syllabus (modifying Belvedere); Eberts. ¶ 20. The
Court emphasized, however that “[c]ourts should apply this limited
expansion cautiously toward the goal of piercing the corporate veil only in Washington App. No. 12CA47 11
instances of extreme shareholder misconduct.” Id., at ¶ 29, 617 N.E.2d
1075; Eberts, supra.
A. The arguments on appeal.
{¶18} Appellant argues nothing in the evidence presented to the trial
court demonstrated: (1) that he had an ownership interest in United, Vado,
Texcess Re, or any of the other defendants during the relevant time period
herein, February 1, 2006- January 31, 2007; (2) that he was a shareholder of
any of the companies in question on the relevant dates; or (3) that he was a
director of any of the companies in question during the relevant time period.
Appellant contends Appellee’s proof and the trial court’s decision relied
heavily on the deposition of Van Workman, president of EBS, and it was in
Workman’s interest to deflect responsibility of wrongdoing from his
company EBS to Appellant and the other defendants. Appellant emphasizes
EBS filed bankruptcy during the pendency of the litigation and had, thus far,
escaped liability for wrongdoing to Appellee.
{¶19} Appellant further argues Appellee has not provided proof
regarding the factors noted by the appellate court in Leroux’s Billyle Supper
Club v. Ma, 602 N.E.2d 685, 77 Ohio App.3d 417: (1) grossly inadequate
capitalization; (2) failure to observe corporate formalities; (3) insolvency of
the debtor corporation at the time the debt is incurred; (4) shareholders Washington App. No. 12CA47 12
holding themselves out as personally liable for certain corporate obligations;
(5) diversion of funds or other property of the company for personal use; (6)
absence of corporate records; and (7) the fact that the corporation was a
mere façade for the operations of the dominant shareholder(s).
{¶20} Appellee argues the trial court believed Appellant owned shares
of United and “operated a Ponzi scheme under the guise of United Re, a
sham corporation.” Appellee counters the trial court had overwhelming
evidence that Appellant perpetrated a fraud in his capacity as a corporate
officer and overwhelming evidence to pierce the corporate veil of United
and hold Appellant personally liable. Also citing Leroux’s Billyle Supper
Club, supra, Appellee submits, indeed, there was no evidence that United
observed corporate formalities, such as having directors meetings, keeping
corporate records, and maintaining a corporate bank account. Appellee
concludes the trial court simply did not find Appellant a credible witness and
it was inconceivable that Appellant was unaware that a fraud was being
perpetrated. Upon review of the evidence contained in the record below, we
agree with the trial court’s decision.
B. Evidence regarding the history and formulation of United and Vado. Washington App. No. 12CA47 13
{¶21} Appellant was sued in his personal capacity as both a
shareholder and an officer of United Re AG and Vado AG. The trial court
held:
“This Court finds that Hugh Scott has had complete control over the corporations known as United Re AG and Vado AG from their inception to the present time and he used his control to commit illegal and fraudulent acts in total disregard of the corporate entities directly and proximately causing injury and unjust loss to the Plaintiff from the numerous intentionally fraudulent, illegal, wanton, willful and wrong acts set forth herein above.”
{¶22} Appellant testified Galland was the owner of a company called
Texcess Re. Galland was in the insurance business and asked Appellant to
incorporate Texcess, which had previously been a sole proprietorship.
United was a company Appellant formed in Switzerland in 2002. Appellant
testified to the tax advantages for a company doing business in Switzerland.
{¶23} At trial, Appellant denied being owner or shareholder of United
between August 22, 2002 and September 2010. Galland was the only
shareholder from 2002 until his death in 2008. 5Appellant denied ownership
of Texcess or Vado. He denied being a director for United or Vado.
{¶24} Appellant testified Swiss law required shares to be issued to an
individual who physically receives them in Switzerland. 100 bearer shares
were issued for United. Appellant received 98 shares from Hans Hagmann,
5 Appellant also testified Galland was widely believed to have committed suicide after personal and financial setbacks culminated with his attempt to set fire to a courthouse in Texas in 2007. Washington App. No. 12CA47 14
a Swiss attorney who assisted Appellant, and then assigned to them Galland.
It was never Appellant’s intention to own or become shareholder of the
company. The chief reason was to comply with Swiss law. Also, the
assignment to Galland was in case something happened to Appellant on his
way home. Appellant produced an assignment document at trial. The
document was never executed by Galland.
{¶25} Appellant testified he had been president of United since 2004.
He reacquired United in 2010 for the purpose of “gaining knowledge” as to
the company’s operations. By that time, he was going through hearings and
depositions. Appellant claimed he did not know the identity of the
shareholders, directors, and investors involved with United. He did not
know the answers to questions when he was being deposed. Hagmann, the
Swiss attorney, explained to him the only way to get access is if one is a
shareholder. Appellant approached Galland’s father and eventually worked
out an assignment of shares from Galland’s children through an attorney in
Texas. Appellant currently owns all shares of United. He testified United
ceased operation on December 31, 2010, without having paid all outstanding
claims.
{¶26} Appellant testified Vado was a Swiss company, formed in
1983, which he reinstated. It had not been publicly traded since 2003. Vado Washington App. No. 12CA47 15
was not an insurance company in the United States or in Europe. Appellant
agreed Vado was the company that was actually supposed to be providing
the stop loss coverage for Appellee and other employers that selected the
overlay provision. Appellant explained Vado would solicit individuals to
agree to be responsible if Vado had to pay excess claims. Appellant further
explained Vado was like Lloyds of London risk pools. However, he testified
he had never seen a list of risk investors and did not know who they were,
other than an individual named Tony Vaughn, now deceased. He admitted
his parents were involved with Vado in 2005. Appellant testified he did not
know how much risk was accepted. Vado’s activities were performed
without any oversight by federal and state governments.
{¶27} Appellant testified Vado was disclosed to EBS as the entity
providing the stop loss coverage, but he was unaware if it was disclosed to
the employers, such as Appellee. Appellant minimized his involvement at
the initial meeting with Workman and others, hosted by Galland at
Appellant’s law office in Texas, in 2002. He testified he was present as
counsel, answered one question, and did not see the others until 2004.
{¶28} The evidence at trial demonstrated Appellant was the only
person to give testimony regarding the history and formation of United and
Vado. The trial court pointed out various discrepancies between Appellant’s Washington App. No. 12CA47 16
previous depositions and his trial testimony. The court remarked Appellant
“testifies in a manner which always comports with his best interests.” We
agree.
C. Evidence regarding the fraud perpetrated upon Appellee.
{¶29} The trial court’s decision states:
“Mr. Scott knew that WCBDD had retained EBS of Ohio to establish its employee health plan and ended up selecting United Re to provide the stop-loss coverage for its partially self-funded employee health plan. He knew that the stop-loss coverage was procured using the “overlay” endorsement, as part of the United Re Trust Agreement.”
{¶30} The trial court found Appellant knew many of the employers
such as Appellee selected an “overlay” provision. When an employer
selected the overlay provision, that meant United was supposed to use
employer contributions (premiums) to acquire reinsurance coverage for the
participating employer. The trial court noted Van Workman’s testimony that
the overlay endorsement specifically stated United would procure
reinsurance with an insurance carrier. The trial court found Appellant knew
United never purchased actual insurance with an insurance carrier. The trial
court noted the absence of any certificate or document evidencing stop-loss
insurance was provided to Appellee.
{¶31} Appellant’s testimony demonstrated Appellee was to send its
contributions/premiums to EBS, the third party administrator, in order to get Washington App. No. 12CA47 17
stop loss coverage for its employee health plan. EBS would take its fees and
commissions and send the rest to United. Many employers selected an
overlay provision, which meant United was to use the premiums to buy
reinsurance coverage for the participating employer. Appellant identified
the overlay provision which had been added as an exhibit to Workman’s
deposition. Appellant acknowledged the overlay provision indicated a
carrier would be selected for reinsurance. However, Appellant also
acknowledged there was no documentation from Vado that Appellee
actually had stop loss coverage. The trial court found Appellant knew Vado
was supposed to be providing the stop-loss coverage for Appellee’s health
plan.
{¶32} In addition, Appellant testified employer monthly contributions
were placed in the Blanco National Bank in Texas. Appellant further
testified there were two accounts at Blanco National Bank, a claims account
and an operating account. The money was paid into the claims account.
Then 20% was taken out and put in to the operating account for United. The
remaining 80% was to pay claims, plus funds acquired by the risk pool
investors. As president of United since 2004, Appellant had authority to
write checks. Eventually, there was not enough money in the Blanco
National Bank account to pay the stop-loss claims. Appellant also testified Washington App. No. 12CA47 18
Vado did not keep a separate bank account in the United States. The trial
court held:
“The evidence (most of it admitted) clearly shows that United Re purported to be a financially-solvent stop-loss carrier promising to procure actual insurance to cover the risks of its clients. This was a complete fraud. There never was insurance….Money was deposited in, and then taken out of, the same bank account with no regard for whether the participating employer’s risks were covered.”
{¶33} The trial court further opined:
“[M]r. Scott does not see any impropriety in using the employer contributions to fund the stop-loss claims for the other employers. He knew the overlay provision which provided for the procurement of re- insurance was not properly funded nor even in place. He sees no impropriety even when the overlay provision promised the participating employer that re-insurance would be acquired using an insurance carrier… This Ponzi scheme, as with all Ponzi schemes, collapsed from its own fraudulent weight. In view of all of this, this Court concludes a fraud has been perpetrated on WCBDD.”
{¶34} We agree with the trial court’s conclusions herein, based on the
additional considerations which will be discussed below, the lack of
corporate formalities and Appellant’s lack of credibility.
D. Evidence regarding the lack of corporate formalities.
{¶35} The testimony presented to the trial court demonstrated a
significant absence of observance of corporate formalities. Appellant
testified United was not publicly traded. United is not and had never been a
licensed insurance company. United has never had a type of insurance Washington App. No. 12CA47 19
rating.6 He testified United did not keep a balance sheet, cash flow
statement, profit and loss statement, or separate bank account. There were
never any shareholder meetings or directors meetings.
{¶36} Appellant testified United had no employees, only a few
“independent contractors” who worked from home to process claims. He
indicated the business essentially “ran itself.” Debbie Williams, an
independent contractor who processed claims, consulted with Appellant at
times as to whether or not to pay certain claims. 7 Again, Appellant had
authority to write checks. The trial court reasoned because Appellant was
United’s chief counsel and United and Vado had only one or two employees,
Appellant had to know of their day to day operations and transactions.
E. Appellant’s sheer lack of credibility.
{¶37} In its findings of fact and conclusions of law, the trial court
explicitly commented four times on Appellant’s lack of credibility.
Appellant testified as to his practice of law and work record since 1977.
Appellant’s experience was in setting up offshore companies and has
established businesses in the Cayman Islands and Switzerland.
6 Van Workman testified an A.M. Best rating is a financial rating given to an institution by a firm and it is based on the firms “financials.” He summarized that an A. M. Best Company rating will shed light on an insurance company’s strength. 7 Appellant testified Debbie Williams, whose medical experience or background he had no knowledge of, processed claims out of her home. He further testified due to threats on her life from an unhappy claimant, she started identifying herself at times as “Susannah Jones.” Documents and email support the testimony that two names were used. Washington App. No. 12CA47 20
{¶38} The trial court wrote:
“Hugh Scott claims that he initially owned the shares and conveniently transferred all of the shares during the entire period of a classical fraudulent Ponzi scheme, only to end up with all the shares once again after all the damage had been done. This entire scenario is not believable and is not supported by credible evidence.”
{¶39} The trial court noted Appellant’s deposition testimony that he
had no records of who owned the shares of United or when the shares may
have been transferred. The trial court noted this contrast with the trial
testimony that Galland was the owner of the initial shares. The trial court
emphasized Appellant’s testimony that the heirs of Galland transferred
shares to him in 2010, while acknowledging that there was no probate for
the estate of Galland, that it was a ‘no asset” estate. The court noted such a
transfer would have been completed without any supervision of a Texas
probate court. The court noted there were no stock certificates to
memorialize the transfer. The court further scoffed at Appellant’s
explanation that he reacquired the shares in order to obtain knowledge of
United’s operations. 8 The trial court concluded that there was no “transfer”
of shares to Appellant and that he had them from inception.
{¶40} The trial court also noted Appellant’s trial testimony that
several years ago, he signed an employment contract in which he purported
8 The trial court noted in parentheses “Apparently being president and chief counsel was not sufficient status to obtain the necessary information.” Washington App. No. 12CA47 21
to be the president of Vado AG. The trial court found this testimony
contradicted Appellant’s January 2010 deposition testimony wherein he
stated he knew nothing about Vado. The trial court further noted in the
January 2010 deposition testimony, Appellant stated he had “no idea” whom
the risk investors were for Vado AG, yet at trial disclosed his own parents
had invested in the Vado AG risk pool.
{¶41} Also at trial, Appellant identified a letter explaining Vado’s
operations he signed as president of United in 2008. Appellant testified
Galland composed the letter and asked him to sign it. The trial court found
this letter directly contradicted Appellant’s January 2010 testimony in which
he claimed to know nothing about Vado’s operations and further, that he did
not know who Vado’s shareholders were.
{¶42} The trial court also noted Appellant’s trial testimony that Vado
was not an insurance company in the United States or Europe, as contrasted
with the January 2010 deposition testimony that Vado was the “reinsurer”
for United. He testified he did not know how much risk was accepted.
Appellant testified there was no intent to defraud anyone although he
regretted Appellee did not get the benefits of its “stop-loss” insurance.
Appellant commented “[A] lot of deal don’t work out and this is just one of
them.” Washington App. No. 12CA47 22
{¶43} The trial court held:
“Hugh Scott created and readily participated in [this] ongoing fraud. He has a history of participating in fraudulent schemes.”
{¶44} Finally, the trial court also noted Appellant’s history of being
involved with fraudulent schemes and taking bankruptcy. At trial, Appellant
admitted during the 1990’s he was involved in setting up an enterprise
involving yogurt franchises in Texas. The investment failed, and the yogurt
investors believed they had been defrauded and sued Appellant and other
defendants. He acknowledged a judgment was entered against him, he filed
personal bankruptcy, and the lawsuit was settled by way of a non-
dischargeable agreed judgment. 9The trial court noted the evidence showed
Appellant had never disclosed the yogurt enterprise and subsequent litigation
to the people at EBS or others when promoting the United business.
{¶45} The trial court was in the best position to weigh the evidence
and assess the credibility of the witnesses. We defer to its judgment.
CONCLUSION
{¶46} Based on our review of the record, we believe the trial court
had competent credible evidence of the required factors set forth in
Belvedere, supra, to pierce the corporate veil and hold Appellant personally
9 The court’s findings of fact and conclusions of law discuss the yogurt case at length. The case proceeded to the Texas Court of Appeals, Crescendo Investments, Inc. v. Brice, 61 S.W.2d 465 (2001). The Texas Court of Appeals opinion stated “The Plaintiffs were victims of an investment scheme directed by Hugh Scott.” Washington App. No. 12CA47 23
liable for the compensatory and punitive damages entered in judgment
against him. Like the trial court, we find it suspect that Appellant
established the company in 2002, immediately transferred the shares to
Galland, and then reacquired the shares after Galland’s death, and after the
damage was done to Appellee and others. Appellant offered no physical
proof or written evidence to support his contention that Galland was the true
owner and operator of United and Vado. We also find both the
unauthenticated assignment of shares document and the assignment to
Appellant from the estate of Galland, with no probate court oversight,
suspect. We also find the fact Appellant solicited business and held himself
out at times as president and/or corporate counsel of United, signed letters,
trust documents, and checks as president or on behalf of United, yet claimed
no knowledge of the day to day workings of United to be suspect. We find
the evidence established Appellant had complete control over United since
its inception in 2002 and through the relevant time period of 2006-2007, to
the present. The evidence demonstrates United had no separate mind, will,
or existence of its own, apart from Appellant.
{¶47} We further find United’s lack of observance of corporate
formalities, especially with regard to bank records, and the use of
independent contractors, suspect. The main claims reviewer held herself out Washington App. No. 12CA47 24
under two names. The purported owner at the time of the fraud perpetuated
on Appellee, Galland, is dead. The only known risk sharer of Vado, (aside
from Appellant’s parents who are elderly and supposedly unable to be
deposed), Tony Vaughn, is also dead. The only person who can provide
knowledge of how the two companies, United and Vado, operated is
Appellant, whose track record with at least one previous corporate enterprise
is not only not successful, but also deemed fraudulent by the Texas appellate
court.
{¶48} We find, as did the trial court, it is obvious from the evidence
Appellee paid for stop loss coverage and did not receive it. It is obvious
United and/or Vado did not purchase the stop loss coverage and that Vado
was not fully funded, although Appellee and other fraud victims were lead to
believe otherwise. We agree with the trial court’s conclusion that Appellant
owned the shares of United during the entire period after 2002 and the
inconceivability of the suggestion that Appellant did not know fraud was
being perpetrated on Appellee and its employees. Appellant’s control of
United and wrongful actions resulted in injury and unjust loss to sick and ill
people. We find the judgment of the trial court was supported by competent
credible evidence. We overrule Appellant’s sole assignment of error and
affirm the judgment of the trial court entering judgment against Appellant Washington App. No. 12CA47 25
for compensatory damages in the sum of $200,496.44, plus court costs and
legal interest from the date of journalization of the trial court’s entry, as well
as a punitive damages award of $400,00.00 against both United and
Appellant, individually.
JUDGMENT AFFIRMED. Washington App. No. 12CA47 26
JUDGMENT ENTRY
It is ordered that the JUDGMENT BE AFFIRMED and that the Appellee recover of Appellants costs herein.
The Court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate issue out of this Court directing the Washington County Common Pleas Court to carry this judgment into execution.
Any stay previously granted by this Court is hereby terminated as of the date of this entry.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the Rules of Appellate Procedure. Exceptions.
Abele, J.: Concurs in Judgment Only. Harsha, J.: Dissents.
For the Court,
BY: _________________________ Matthew W. McFarland Presiding 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.