Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos., Inc.

• Decision Date: 15 September 1993
• Docket Number: No. 92-30,92-30
• Citation: 67 Ohio St.3d 274,617 N.E.2d 1075
• Parties: BELVEDERE CONDOMINIUM UNIT OWNERS' ASSOCIATION, Appellee, v. R.E. ROARK COMPANIES, INC. et al., Appellants.
• Court: Ohio Supreme Court

Page 274

67 Ohio St.3d 274

617 N.E.2d 1075

BELVEDERE CONDOMINIUM UNIT OWNERS' ASSOCIATION, Appellee, v. R.E. ROARK COMPANIES, INC. et al., Appellants.

No. 92-30.

Supreme Court of Ohio.

Submitted April 7, 1993.

Decided Sept. 15, 1993.

SYLLABUS BY THE COURT

1. A condominium owners' association may not maintain an action against a condominium developer for breach of fiduciary duty absent an understanding by both parties that special trust and confidence have been reposed in the developer.

2. R.C. 5311.26 imposes strict liability for a condominium developer's failure to disclose to prospective purchasers relevant financial information concerning the condominium development.

3. 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.

This appeal stems from a lawsuit brought by appellee, the Belvedere Condominium Unit Owners' Association ("the Association"), against appellants, R.E. Roark Companies, Inc. ("RERC") and Ronald E. Roark ("Roark"). The Association's complaint alleged that RERC and Roark had breached alleged fiduciary duties to the Association and violated the Ohio Condominium Act.

There are four major players in this dispute: the Association, RERC, Roark, and Bellhill, Ltd. ("Bellhill"). The Association is composed of the owners of the residential condominium units in the Belvedere, a Cincinnati building that contains both residential and commercial space. The building has a total of eighty-eight residential units. The ground floor of the Belvedere includes forty-seven hundred square feet of commercial space. RERC is a Columbus-based real estate developer and Roark is RERC's majority shareholder. Bellhill, a limited partnership, was the developer of the Belvedere Condominiums. RERC was the general partner in Bellhill and held a twenty percent interest in Bellhill. Roark, individually, was neither a general nor a limited partner of Bellhill.

In 1981 the original developer of the Belvedere Condominiums apparently found itself unable to continue the project. In December 1981, Bellhill was formed to replace the original developer and finish the development. At that time Bellhill purchased the sixty-nine residential units that had not been sold to individual unit owners.

The Association, which was formed as required by Ohio law, was the owner of all of the common areas in the Belvedere development. The common areas included the forty-seven hundred square feet of ground floor commercial space.

In December 1981 the Association leased all of the Belvedere's commercial space to RERC. Prior to the execution of the lease, less than one thousand square feet of the commercial space was occupied. The lease was for a term of five years and RERC was given renewal option rights for four subsequent five-year periods at the same price, terms, and conditions. The rent was fixed at $21,600 per year. Under the lease the Association was responsible for obtaining and maintaining insurance coverage, parking facilities, and lighting in all common areas. The Association was also responsible for general maintenance and repair of the property. Finally, the Association agreed to pay all utilities, taxes, and assessments on the common areas. At trial, an expert witness for the Association testified that this lease was unfair and one-sided.

At the time of the execution of the lease, Bellhill owned a majority of the units in the development and, therefore, controlled the board of the Association. Four of the five members of the board were employees of one or more companies owned or controlled by Roark. At trial, Roark testified that RERC spent approximately $103,400 renovating the commercial space after the lease was executed. Roark also testified that the lease was necessary because federal mortgage insurance agencies would not insure financing of individual residential units unless the commercial space was covered by a long-term lease.

The existence of the lease was revealed to prospective and former condominium unit purchasers in a disclosure statement required by law. The statement mentioned the lease twice. On the second page it stated that "[t]he Common Areas and Facilities include approximately 4,712 square feet of commercial space. This commercial space has been leased on a long term basis by the R.E. Roark Companies, Inc." On page twenty, the statement mentioned again that the "Unit Owner's Association has entered into a lease with The Roark Companies, Inc. of Columbus, Ohio for all of the commercial space on the first floor of the building." Roark testified that a copy of the lease was given to the five or six prospective purchasers who requested one and the disclosure documents were given to all of the unit owners who had bought their property prior to the execution of the lease. The disclosure documents did not reveal that RERC held a twenty percent interest in Bellhill and was Bellhill's general partner.

Bellhill was unable to sell on the open market all of the residential units it owned. The remaining units were sold at auction in 1983. At the same time, Bellhill transferred control of the Association's board to individual unit owners.

Between 1981 and 1986, RERC sublet portions of the commercial space to five different sublessees. In May 1986 RERC assigned its entire leasehold interest to the Superior Title Agency, Inc. Superior Title paid RERC over $100,000 in consideration for the assignment.

In 1987, some four years after the individual unit owners had gained control over the Association's board, the Association filed this action against RERC and Roark. The complaint charged that RERC and Roark violated their fiduciary duties to the Association by causing the original lease to be executed. It also alleged that they did not adequately disclose the existence and nature of the lease to prospective purchasers. The Association sought damages in the amount of the difference between the rent agreed to in the lease and the value of the lease had it been negotiated at arm's length.

After hearing evidence from both parties, the trial court entered judgment in favor of the Association against RERC and Roark, jointly and severally, for $100,000 plus interest. The court explained its reasoning in a June 19, 1990 letter to counsel. It found that RERC and Roark were liable for fraudulent self-dealing in entering into the lease agreement with the Association. The court wrote that the "lease on its face is completely one sided" and that "[c]ommon sense tells one that there is something 'rotten in Denmark' when a lease such as this is executed." It focused on the renewal options given to RERC, RERC's subsequent assignment of the lease for $100,000, the provisions of the assignment, and the "devious" way in which the terms of the lease had been disclosed to unit buyers.

The trial court concluded that Roark, individually, was liable for the acts committed by RERC. In the briefest sort of way, the court wrote that Roark had "complete domination and control" over RERC and thus was liable for the company's wrongs.

RERC and Roark appealed and the court of appeals affirmed. The court first considered whether the trial court's finding of fraud was supported by sufficient evidence. It analyzed the Association's fraud claim under the framework of common-law fraud. It specifically found that the evidence adduced at trial supported all five elements of common-law fraud: (1) knowledge of a material fact, (2) concealment of that fact, (3) intent to induce reliance, (4) actual reliance, and (5) injury resulting from reliance.

The court then reviewed the trial court's ruling that Roark was personally liable. Following a three-part test used by the United States Court of Appeals for the Sixth Circuit in Bucyrus-Erie Co. v. Gen. Products Corp. (C.A.6, 1981) 643 F.2d 413, it held that the trial court properly disregarded the corporate fiction in order to reach Roark individually. It was convinced by the record "that Roark engaged in a series of transactions which, if taken as a whole, demonstrate that he acted in his own personal interest to the detriment of the appellee."

Finally, the court held that RERC and Roark did breach a fiduciary duty to the Association. The question of whether such a fiduciary duty exists was not raised or answered by the court. It seemed to hold only that the lease was one-sided, RERC and Roark controlled the Association's board when the lease was executed and, therefore, a fiduciary duty was breached.

RERC and Roark appeal from the judgment of the court of appeals. The cause is now before this court upon the allowance of a motion to certify the record.

Manley, Burke & Fischer and Timothy A. Fischer, Cincinnati, for appellee.

Griffin & Fletcher and Michael C. Fletcher, H. Fred Hoefle, Cincinnati, Bayh, Connaughton, Fensterheim & Malone, G. David Fensterheim and Kevin C. Golden, Washington, DC, for appellants.

Lee I. Fisher, Atty. Gen., Nancy J. Miller, Deputy Chief Counsel, and Robert A. Zimmerman, Asst. Atty. Gen., urging affirmance on behalf of amicus curiae Lee Fisher.

Thompson, Hine & Flory, Kenton L. Kuehnle and Margaret R. Carmany, Columbus, urging reversal on behalf of amicus curiae Ohio Home Builders Ass'n.

WRIGHT, Justice.

This appeal requires the court to construe the Ohio Condominium Act, R.C. Chapter 5311. It presents three primary issues: whether a condominium developer owes a fiduciary duty to a condominium owners' association, whether there is sufficient evidence in the record to support a...