Estate of Mikulski v. Centerior Energy Corp.

• Decision Date: 21 March 2019
• Docket Number: No. 107108,107108
• Citation: 2019 Ohio 983,133 N.E.3d 899
• Parties: ESTATE OF Jerome R. MIKULSKI, et al., Plaintiffs-Appellees v. CENTERIOR ENERGY CORPORATION, et al., Defendants-Appellants
• Court: Ohio Court of Appeals

133 N.E.3d 899

2019 Ohio 983

ESTATE OF Jerome R. MIKULSKI, et al., Plaintiffs-Appellees

v.CENTERIOR ENERGY CORPORATION, et al., Defendants-Appellants

No. 107108

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

RELEASED AND JOURNALIZED: March 21, 2019

Mitchell G. Blair, Tracy S. Johnson, Ronald M. McMillan, Calfee, Halter & Griswold, L.L.P., The Calfee Building, 1405 East Sixth Street, Cleveland, Ohio 44114, Zachary Faigen, Allen L. Lanstra, Peter B. Morrison, Douglas A. Smith, Skadden, Arps, Slate, Meagher, & Flom, 300 S. Grand Avenue, Los Angeles, California 90071, ATTORNEYS FOR APPELLANTS.

William Craig Bashein, Bashein & Bashein Co., L.P.A., 35th Floor Terminal Tower, 50 Public Square, Cleveland, Ohio 44113, Eric H. Zagrans, Zagrans Law Firm, L.L.C., 5077 Waterford Drive, Suite 302, Sheffield, Ohio 44035, Subodh Chandra, Chandra Law Firm, L.L.C., 1265 West 6th Street, Suite 400, Cleveland, Ohio 44113, Joshua R. Cohen, Cohen, Rosenthal & Kramer, L.P.A., 3208 Clinton Avenue, 1 Clinton Place, Cleveland, Ohio 44113, Steven M. Goldberg, Steven M. Goldberg Co., L.P.A., 31300 Solon Road, Suite 12, Solon, Ohio 44139, Daniel R. Karon, Karon, L.L.C., 700 West St. Clair Avenue, Suite 200, Cleveland, Ohio 44113, James M. Kelley, III, Elk & Elk Co., Ltd., 6105 Parkland Boulevard, Suite 200, Mayfield Heights, Ohio 44124, Robert E. Kennedy, Daniel P. Goetz, Weisman, Kennedy & Berris Co., L.P.A., 1600 Midland Building, 101 Prospect Avenue, West, Cleveland, Ohio 44115, Jack Landskroner, Landskroner Grieco Merriman, L.L.C., 1360 West 9th Street, Suite 200, Cleveland, Ohio 44113, Dennis R. Lansdowne, Spangenberg, Shibley & Liber, L.L.P., 1001 Lakeside Avenue, East, Suite 1700, Cleveland, Ohio 44114, Eben O. McNair IV, Schwarzwald McNair & Fusco, L.L.P., 1215 Superior Avenue, Suite 225, Cleveland, Ohio 44114-3527, David M. Paris, Nurenberg Paris Heller & McCarthy, 600 Superior Avenue, East, Suite 1200, Cleveland, Ohio 44114, Patrick J. Perotti, Dworken & Bernstein Co., L.P.A., 60 South Park Place, Painesville, Ohio 44077, Adam Savett, Savett Law Offices, L.L.C., 6100 Oak Tree Boulevard, Suite 200, Independence, Ohio 44131, Michael F. Becker, The Becker Law Firm, L.P.A., 134 Middle Avenue, Elyria, Ohio 44035, Thomas R. Theado, Gary, Naegele & Theado, L.L.C., 401 Broadway Avenue, Unit 104, Lorain, Ohio 44052-1745, Dennis P. Barron, 582 Torrence Lane, Cincinnati, Ohio 45208, Attorneys for Elzetta C. Mikulski.

Robert D. Gary, Jori Bloom Naegele, Gary Naegele Theado, L.L.C., Duane Building, 401 Broadway Avenue, Unit 104, Lorain, Ohio 44052-1745, Joseph M. Sellers, Michelle C. Yau, 1100 New York Avenue, N.W., Suite 500, West Tower, Washington, D.C. 20005, Attorneys for Jerome R. Mikulski.

Charlotte Beck, pro se, 501 E. Orangethorpe, 27 Magnolia Via, Anaheim, California 92801-0000, For Charlotte Beck.

BEFORE: Boyle, P.J., E.A. Gallagher, J., and Sheehan, J.

JOURNAL ENTRY AND OPINION

MARY J. BOYLE, P.J.:

{¶1} Defendants-appellants, Centerior Energy Corporation and First Energy Corp., as successor-in-interest to Centerior Energy Corporation (collectively "defendants"), appeal from the trial court's order granting class certification. They raise six assignments of error for our review:

1. The trial court erred by certifying the Subclass under Rule 23(B)(3).

2. The trial court erred by considering whether to certify the Class.

3. The trial court erred by certifying the Class due to lack of standing.

4. The trial court erred by certifying the Class under Rule 23(B)(3).

5. The trial court erred by certifying the Class under Rule 23(B)(2).

6. The trial court erred by certifying the Class under Rule 23(B)(1)(a).

{¶2} Finding merit to defendants' first and third assignments of error, we reverse and remand.

I. Procedural History and Factual Background

{¶3} In December 2001, plaintiffs-appellees, Elzetta C. Mikulski and the estate of Jerome R. Mikulski¹ ("plaintiffs" or "the Mikulskis"), filed four separate actions against defendants for breach of contract in the following cases:

1. Estate of Jerome R. Mikulski v. Cleveland Elec. Illum. Co. , Cuyahoga C.P. No. 02-CV-490019;

2. Estate of Jerome R. Mikulski v. The Toledo Edison Co. , Lucas C.P. No G-4801-CI-200206364-000;

3. Estate of Jerome R. Mikulski v. Centerior Energy Corp. , Cuyahoga C.P. No. 01-CV-457866 ("Centerior I "); and 4. Mikulski v. Centerior Energy Corp. , Cuyahoga C.P. No. 02-CV-490020 ("Centerior II ").²

In their actions, the Mikulskis alleged that they "owned shares of common stock of Centerior and both of its predecessor companies, The Toledo Edison Company * * * and The Cleveland Electric Illuminating Company[.]" As this court explained in a previous appeal from Centerior II , plaintiffs asserted

that in the mid-1980's, Centerior began improperly manipulating its corporate earnings to appear more profitable. Centerior made payments to shareholders that it purported were dividend payments, which caused appellants to pay taxes on those payments as ordinary income. [Plaintiffs] argue these payments largely consisted of returns of capital, which were not taxable or taxable only at the lower rate applicable to capital gains. According to [plaintiffs], this resulted in substantial overpayment of state and federal taxes for many years.

Id. at ¶ 2. Plaintiffs alleged that Centerior's misstatement

occurred because of Centerior's improper use of construction loan debt servicing costs in calculating its earning and profits ("E & P"). The calculation of E & P is important because any payment to shareholders up to E & P is accounted as a dividend and taxed as ordinary income, but amounts that exceed E & P are classified as a return of capital, which reduces the shareholder's basis in the stock — resulting in no current tax liability — or is taxed as a capital gain to the extent that the payments exceed the shareholder's basis.

Id. at ¶ 3.

{¶4} In Centerior I — the instant case — plaintiffs' complaint set forth a claim for breach of a written contract and alleged that defendants "over-reported the amount or percentage of the 1986 distributions that was taxable as a dividend for income tax purposes" and provided "materially incorrect" information "with respect to the division between dividend and return of capital." Plaintiffs alleged that by "misreporting" the taxable dividends of the 1986 distributions, defendants breached the contract that they had with their shareholders. Plaintiffs' complaint stated that they were bringing the instant action on behalf of

all common shareholders of Centerior (including without limitation to its predecessor entities) and beneficial owners of Centerior common shares, who in 1987 received a Form 1099-DIV or substitute therefor from Centerior or its agents reporting the tax status of distributions made by Centerior during the calendar year 1986, and the communities comprised of them and their spouses, if any.

{¶5} In January 2002, plaintiffs filed an amended class action complaint, which contained the same class definition as above and added a claim for fraudulent misrepresentation. Defendants filed a joint answer and set forth defenses. Defendants denied that the Form 1099-DIVs "over-reported the estimated amount or percentage of the 1986 distributions that was taxable as a dividend for income tax purposes" and "under-reported the estimated amount or percentage of the 1986 distribution that was a return of capital[.]"³ Defendants also wholly denied that it provided its common shareholders any materially incorrect information.

{¶6} In May 2002, plaintiffs filed a motion for class certification.

{¶7} Between 2002 and 2003, defendants removed all of plaintiffs' actions to the United States District Court of the Northern District of Ohio, rendering all of the motions before the court of common pleas moot by the removal.

{¶8} Between 2008 and 2009, the United States District Court remanded the cases back to their respective court of common pleas for lack of jurisdiction. As a result, the cases proceeded to discovery and motion practice regarding class certification.

A. The Trial Court Denies Class Certification in Centerior II

{¶9} The first of plaintiffs' cases to decide the class-certification issue was Centerior II. The class definition that plaintiffs set forth in that case was nearly identical to that in Centerior I , except it covered the shareholders and beneficial owners of Centerior and its common shares who were issued Form 1099-DIVs from 1988 through 1998.⁴ In December 2009, the trial court in that case denied class certification to plaintiffs, finding that "liability as to each plaintiff's claim could not be ascertained on a class-wide basis in a single adjudication[.]"

{¶10} In January 2010, plaintiffs appealed the trial court's decision. In February 2011, we reversed and remanded the trial court's decision in Estate of Mikulski v. Centerior Energy Corp. , 8th Dist. Cuyahoga No. 94536, 2011-Ohio-696, 2011 WL 553463 ("the First Mikulski Appeal"). Foremost, we agreed with the trial court and found that "liability could not be determined on a class-wide basis for the class as defined by appellants." Id. at ¶ 15. We explained that

Centerior's misstatements could only have been harmful if they affected the plaintiffs' tax liability. Those class members who did not pay taxes in any relevant year in which they received a 1099-DIV from Centerior could not have suffered any actual damage from the misstatement. The individual question of whether the class member paid taxes and, if so, how Centerior's misstatement affected their tax liability, would predominate over common questions. The trial court did not abuse its discretion by finding that, for the class as defined by appellants, individual questions predominate.

Id. As a result, we found that the trial court did not abuse its discretion in denying class certification for lack of predominance. Id. at ¶ 16.

{¶11} In that same appeal, we also considered whether the trial court abused its discretion in failing to amend the...