Franks v. Rankin

• Decision Date: 01 May 2012
• Docket Number: C.P.C. No. 11CVH01-1252,No. 11AP-934,No. 11AP-962,11AP-934,11AP-962
• Citation: 2012 Ohio 1920
• Parties: Edward W. Franks, Plaintiff-Appellee, v. John A. Rankin, Defendant-Appellee, (Connectivity Systems, Inc. et al., Defendants-Appellants), Edward W. Franks, Plaintiff-Appellee, v. John A. Rankin, Defendant-Appellant, (Connectivity Systems, Inc. et al., Defendants-Appellees).
• Court: Ohio Court of Appeals

2012 Ohio 1920

Edward W. Franks, Plaintiff-Appellee,

v.John A. Rankin, Defendant-Appellee, (Connectivity Systems, Inc. et al., Defendants-Appellants),Edward W. Franks, Plaintiff-Appellee,

v.John A. Rankin, Defendant-Appellant,

(Connectivity Systems, Inc. et al., Defendants-Appellees).

No. 11AP-934

C.P.C. No. 11CVH01-1252

No. 11AP-962

COURT OF APPEALS OF OHIO TENTH APPELLATE DISTRICT

Rendered on May 1, 2012

(REGULAR CALENDAR)

(REGULAR CALENDAR)

DECISION

Hrabcak & Company L.PA., Michael Hrabcak, Heidi A. Smith; and Dwight I. Hurd Co., LPA, and Dwight I. Hurd, for appellee Edward W. Franks.

Allen Kuehnle Stovall & Neuman LLP, Todd H. Neuman and Rick L. Ashton, for appellant John A. Rankin.

Carlile, Patchen & Murphy LLP, Carl A. Aveni, II and H. Ritchey Hollenbaugh, for appellees Connectivity Systems, Inc. et al.

APPEAL from the Franklin County Court of Common Pleas

KLATT, J.

{¶ 1} Defendant-appellant, John A. Rankin, appeals a judgment of the Franklin County Court of Common Pleas that granted a preliminary injunction against Rankin and his fellow defendants, Connectivity Systems, Inc. ("CSI"); B.I. Moyle Associates, Inc.; CSI Acquisition, LLC; Tuscan Table, LLC; Rankin Enterprises, LLC; and A&C Networks, LLC ("A&C"). For the following reasons, we affirm in part and reverse in part.

{¶ 2} CSI, which is incorporated in Ohio, develops and sells software. Although CSI's main office is in Columbus, it also maintains offices in Circleville and Washington Court House. The company earns approximately $8.5 to $10 million a year in revenue.

{¶ 3} When Rankin and Marc Schare founded CSI in 1995, each was an equal shareholder in the corporation. In 2001, Rankin became the majority shareholder of CSI when he purchased all of Schare's shares. Upon assuming the status of majority shareholder, Rankin became the president of CSI and effectively took control of the company. Currently, Rankin owns approximately 73 percent of CSI's stock, plaintiff-appellee Edward W. Franks owns approximately 17 percent, and three other individuals each own shares that make up the remaining 10 percent.

{¶ 4} In 2003, Rankin formed Rankin Enterprises. Prior to January 1, 2011, Rankin was the sole member of Rankin Enterprises. From 2003 to 2008, Rankin Enterprises acquired four different hospitality businesses located in Circleville, Ohio: The Movie House, a two-screen movie theater; The Screening Room, a combined movie theater and bar; Tootles Pumpkin Inn ("Tootles"), a bar; and J.R. Hooks Cafe, a restaurant. In 2007, Rankin acquired a majority membership interest in Tuscan Table, which operates a restaurant in Circleville. (Hereinafter, we will refer to the businesses owned by Rankin Enterprises and Tuscan Table collectively as "the Circleville businesses.")

{¶ 5} Except for Tootles, the Circleville businesses operate at a loss. Tuscan Table alone loses approximately $20,000 to $40,000 per month. From 2007 to 2009, the Circleville businesses lost a combined total of $2,978,683.¹

{¶ 6} Rankin covered the Circleville businesses' losses by transferring funds from CSI accounts to Rankin Enterprises and Tuscan Table accounts. CSI usually booked the transfers as compensation to Rankin that Rankin received in addition to his wages.² In 2010, CSI transferred $853,313 to the Circleville businesses. These transfers, combined with Rankin's 2010 wages, resulted in annual compensation that exceeded $1.2 million.

{¶ 7} Beginning in 2004, CSI also booked some of the transfers to Rankin Enterprises as research and development costs. In 2009, CSI paid Rankin Enterprises $655,516 so it could engage in research and development at Rankin Enterprises businesses. CSI claimed federal tax credits for the amounts spent on research and development.

{¶ 8} According to Rankin, his decision to conduct research and development at the Rankin Enterprises businesses arose from CSI's need to diversify. CSI's primary product is a TCP/IP stack, which is a suite of programs that allows IBM mainframe computers to connect to the internet. According to Rankin, roughly 60 to 70 percent of CSI's revenues come from the TCP/IP product. The revenues from the TCP/IP product peaked in 2005, and they are now declining at a rate of about 10 percent per year. Currently, IBM pays CSI approximately $600,000 per quarter for its use of the TCP/IP product.

{¶ 9} Rankin claims that CSI employees used what they learned from the Circleville businesses to develop a concept for a point-of-sale software system for the hospitality industry. Additionally, Rankin has invented, and now seeks to patent, a sous vide processor, which cooks vacuum-sealed food in a low-temperature water bath. Rankin intends to begin marketing the sous vide processor in May 2012.

{¶ 10} Although Franks acknowledges that a need to diversify CSI's product line exists, he contends that Rankin pushed CSI into the hospitality market so he could justifyCSI's subsidization of the Circleville businesses. According to Franks, Rankin purchased the two movie theaters because he enjoyed the movie business. Rankin acquired majority ownership of the Tuscan Table to save a local business from failing.

{¶ 11} In early 2009, Rankin established A&C to provide administrative services for CSI, Rankin Enterprises, and Tuscan Table. Although Rankin Enterprises and Tuscan Table benefited from A&C's services, CSI paid A&C's expenses. In 2010, CSI transferred $1,172,772 to A&C. Prior to January 1, 2011, Rankin was the sole member of A&C.

{¶ 12} During the period that CSI was funneling hundreds of thousands of dollars each year to the Circleville businesses and A&C, CSI started experiencing problems paying its own bills. Beginning in 2007, CSI failed to pay its employees on multiple occasions, resulting in an accumulation of back-pay owed to its employees. CSI also did not make timely payments to its employees' 401(k) accounts and missed payments of the premiums for its employees' health insurance. Although CSI always ensured that its employees' health insurance was reinstated, coverage lapsed approximately six times in 2009 and once in 2010 due to nonpayment.

{¶ 13} Since 2008, CSI also has had difficulty meeting its obligations to its creditors. CSI has defaulted on its contractual obligation to pay for an office building purchased from the Greater Columbus Chamber of Commerce ("Chamber of Commerce"). Consequently, the Chamber of Commerce has filed a foreclosure action and seeks over $400,000 in damages.

{¶ 14} In September 2010, Rankin dissolved CSI's board of directors, which included Franks. Rankin then appointed new board members, each of whom worked for either CSI or A&C. Rankin also appointed himself to the board.

{¶ 15} In early 2011, Rankin assigned his ownership interests in Rankin Enterprises, Tuscan Table, and A&C to CSI subsidiaries.³ The effective date of the assignments was January 1, 2011. At the time of the assignments, Rankin did not know the monetary worth of either Rankin Enterprises or Tuscan Table. According to Rankin, the value of the Circleville businesses lay not in their monetary worth, but in the real-world environment they offered for the development of software products.

{¶ 16} Rankin did not seek approval from CSI's board of directors before executing the assignments. In August 2011, Rankin sought and received a retroactive approval and ratification of the assignments from CSI's board of directors. The board took this action without conducting a meeting. Rankin did not disclose anything about the financial condition of Rankin Enterprises or Tuscan Table to the board members before asking each to sign the document approving and ratifying the assignments.

{¶ 17} During the first eight months of 2011, CSI poured over $900,000 into the Circleville businesses to keep them afloat. CSI also transferred an additional $876,997 to A&C.

{¶ 18} On January 27, 2011, Franks initiated the instant suit against Rankin and the other defendants. In his complaint, Franks asserted multiple claims, including a direct claim against Rankin for breach of fiduciary duty.

{¶ 19} After filing the complaint, Franks sought a temporary restraining order and injunction that would require CSI to use the funds from an anticipated legal settlement to pay the compensation due and owing to CSI employees. Ultimately, the parties stipulated that CSI would remit approximately $1.5 million of the $1.8 million settlement to pay its outstanding payroll and commission obligations.

{¶ 20} On August 30, 2011, Franks filed a combined motion for injunctive relief and appointment of a receiver. In the motion, Franks asked the trial court to "freeze" an upcoming payment from IBM until a receiver could be installed. Franks contended that such action was necessary to prevent Rankin from using the IBM funds for himself or the Circleville businesses, and leaving little to no money for CSI to operate.

{¶ 21} In October 2011, the trial court held a three-day evidentiary hearing on Frank's motion. During the hearing, various witnesses testified to the above facts. Additionally, Rankin admitted during his testimony that CSI does not generate monthly, quarterly, or even annual financial statements. CSI's only financial records are its tax returns, which Rankin himself completes. Rankin also admitted that he had not yet finished or filed CSI's 2010 tax return.

{¶ 22} Rebecca Smith, a certified public accountant, testified as Frank's expert witness. Smith reviewed the banking records of CSI, Rankin Enterprises, Tuscan Table, and A&C, as well as CSI's tax returns and 2010 and 2011 general ledgers. According toSmith, both of the general ledgers are incomplete. After comparing CSI's banking records to the general ledgers, Smith estimated that the 2010 general ledger is missing 15 percent of CSI's transactions. The 2011 general ledger fails to record approximately 50 percent of CSI's transactions. Given the unreliability of the general ledgers, Smith could not ascertain whether CSI is currently...