Koos v. Cent. Ohio Cellular, Inc.

• Decision Date: 31 May 1994
• Docket Number: 65838,No. 65121,65121
• Citation: 94 Ohio App.3d 579,641 N.E.2d 265
• Parties: KOOS et al., Appellants, v. CENTRAL OHIO CELLULAR, INC., f.k.a. Cellwave, Inc., et al., Appellees.
• Court: Ohio Court of Appeals

Page 579

94 Ohio App.3d 579

641 N.E.2d 265

KOOS et al., Appellants, v. CENTRAL OHIO CELLULAR, INC., f.k.a. Cellwave, Inc., et al., Appellees.

No. 65121, 65838.

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

Decided May 31, 1994.

Marshman, Snyder, Berkeley & Kapp and William F. Snyder, Cleveland, for appellants.

Kohrman, Jackson & Krantz and Jonathan M. Yarger, Cleveland, Burke, Kainski & Van Buren, James F. Burke, Jr., Dale F. Kainski and Susan K. Van Buren, Akron, Weston, Hurd, Fallon, Paisley & Howley and John J. Horrigan, Cleveland, for appellees.

PORTER, Judge.

Plaintiffs-appellants Kenneth Koos, Brenda Koos, Michael Baglia and Carol Baglia appeal from summary judgment entered against them in their shareholder derivative suit (Civ.R. 23.1) against the defendants-appellees Cellwave, Inc. (n.k.a. Central Ohio Cellular, Inc.) and ten other shareholders of Cellwave, a closely held Ohio corporation. Plaintiffs' sole assignment of error asserts that the lower court erred in granting summary judgment because there were genuine issues of material fact precluding judgment as a matter of law. For the reasons hereinafter stated, we find no merit to appeal No. 65121 and affirm the judgment below. However, we do find merit to appeal No. 65838 and reverse and remand.

Cellwave was incorporated on September 26, 1988. In 1989, Cellwave participated in lotteries conducted by the Federal Communications Commission ("FCC") to randomly award licenses for the operation of cellular telecommunications systems in specified areas throughout the United States. Cellwave won two FCC licenses which permitted it to operate systems in Ohio-6 (six rural Ohio counties) and Michigan-9 (five rural Michigan counties). Under the licenses, Cellwave was required to meet construction deadlines of February 13, 1992 (for Ohio-6) and February 18, 1992 (for Michigan-9) or lose the franchises. In November 1991, these licenses were the only assets of Cellwave, which had a capitalization of $158,000 at that time.

In February 1991, the defendant shareholders filed a securities fraud suit against Cellwave's original promoter (Thomas Rawlings), and its then-majority shareholder (William Thompson). Horrigan v. Thompson N.D.Ohio No. 5:91 CV 0253 ("the Thompson case"). The suit was settled on July 25, 1991 under the terms of a confidentiality order. As a result, Thompson was no longer a shareholder of Cellwave. Thompson's residual claims against Cellwave for allocating income from Michigan-9 have recently been addressed by this court. See Thompson v. Cent. Ohio Cellular, Inc. (1994), 93 Ohio App.3d 530, 639 N.E.2d 462.

The change of corporate control was not approved by the FCC until October 25, 1991. On November 2 and 16, 1991, shareholders meetings were held and attended by all the shareholders. The reconstituted board of directors presented a business plan to exploit the licenses and meet the looming FCC construction deadlines of February 1992. There was a discussion of the business plan which proposed a sale of Michigan-9, the sale of additional stock and necessity of borrowing sufficient funds to permit the building of Ohio-6. The Cellwave shareholders unanimously voted to approve the sale and transfer of the Michigan-9 license to a third party for $14 million upon assurances that most of the proceeds (after expenses) would be distributed to the shareholders pro rata. At the March 7, 1992 meeting, the shareholders voted to distribute the proceeds as agreed. This was done and on March 12, 1992, the plaintiffs each received their proportionate distribution--$837,614.56 to Mr. and Mrs. Koos and the same amount to Mr. and Mrs. Baglia, each couple having made an original $10,000 investment. The remaining shareholders likewise shared in the distributions, which aggregated $12 million.

At the November 16 meeting the plaintiffs advised they would not pledge their stock, which would have helped the corporation obtain a loan to build Ohio-6 in accordance with the business plan. All the other shareholders were willing to pledge their stock for the loan. In order to induce the plaintiffs to pledge their stock along with the other shareholders, by letter dated November 26, 1991, Cellwave offered, inter alia, to make a loan to the plaintiffs.

However, on November 27, 1991, the plaintiffs outlined their "minimum demands" in a letter to Cellwave offering to (1) consent to Cellwave's borrowing "approximately six million" and (2) "pledge their shares of Cellwave stock," provided that Cellwave agree to "loan approximately $100,000 to Ken and Brenda Koos" to be repaid without interest from the proceeds of the Ohio project when sold and that Cellwave "sell the Ohio project to the highest bidder immediately upon its completion." Cellwave declined to meet these terms and continued with its financing plans for Ohio-6.

These plans were known to plaintiffs and were adopted at subsequent shareholders' meetings which plaintiffs did not attend. Having committed to the distribution of most of the Michigan-9 proceeds, the corporation was confronted with the necessity to borrow money or sell additional stock, or both, to construct Ohio-6.

To procure a $3 million loan from a financial institution, National Telecom Finance Corporation ("NTF"), the shareholders made a nonrecourse pledge of their stock to collateralize Cellwave's note. All shareholders, except plaintiffs, agreed to pledge their stock and did so in exchange for a stock pledge commitment fee of $8,000 per share. Plaintiffs were offered the same opportunity to pledge their stock and obtain the fee on the same terms, but declined to do so for personal reasons.

To raise an additional $3.8 million, the corporation authorized the issuance of fourteen new shares of stock made available to the existing fourteen shareholders at a price of $271,428.57 per share ($3,800,000 divided by fourteen). This would give shareholders the option to reinvest some of the Michigan- 9 proceeds they received in return for additional stock. When plaintiffs failed to subscribe, two additional shares were authorized and the price of the shares was reduced to $237,500 ($3,800,000 divided by sixteen). Plaintiffs were given the right to avoid dilution of their share interest by participating on a pro rata basis in the new stock issue, but declined to do so.

Cellwave is a public utility subject to the regulations and supervision of the Public Utilities Commission of Ohio ("PUCO"). It may not issue shares of stock or obtain loans without PUCO approval. PUCO authorized Cellwave "to issue 16 additional common capital shares with no par value to its current shareholders for a total consideration of $3,800,000."

Fees aggregating $600,000 were paid to defendants Horrigan and Burke for their work as officers and directors in selling Michigan-9 and procuring the financing and construction of Ohio-6. These fees were discussed and approved at relevant shareholders' meetings, of which plaintiffs had notice but didn't attend. Horrigan and Burke abstained from voting on their own compensation and left the room when the other shareholders approved their compensation at a February 8, 1992 shareholders' meeting.

An issue subsequently arose in which plaintiffs claimed that Cellwave withheld important financial information from its auditors, allegedly resulting in the filing of improper tax returns which threatened the Subchapter S status of the corporation. These alleged improprieties involved the allocation of the Michigan-9 income distribution received in 1992 to 1991 for tax purposes which placed a tax burden on former shareholder Thompson.

Plaintiffs' amended complaint alleged that the majority shareholders, directors and officers breached their fiduciary duties to the minority shareholders (the plaintiffs) and controlled the corporation to their own advantage to the exclusion of plaintiffs and for no legitimate business purpose. Specifically, plaintiffs claimed: (1) that the sale of Michigan-9 and distribution of the proceeds was to enable the defendants to settle the Thompson lawsuit and buy out his Cellwave shares; (2) that the distribution of $300,000 to defendants for "stock pledge commitment fees" was not proper; (3) that the sale of the sixteen new shares of Cellwave was below fair market value and to the exclusion of plaintiffs, thereby diluting their interests; (4) that the payment of $600,000 in compensation fees to Horrigan and Burke for "services" to the corporation was excessive and without benefit to the corporation; and (5) that the defendants withheld financial information from the tax auditor resulting in the filing of improper tax returns which would affect the corporation in the form of penalties and interest.

Defendants' answer denied these allegations. Defendants filed motions for summary judgment on June 25, 1992, with briefs, affidavits and numerous corporate documents and exhibits. On August 12, 1992, the trial court granted plaintiffs additional time to take discovery. Plaintiffs' opposition papers were filed on October 16, 1992. On January 27, 1993, the trial court granted summary judgment in favor of all defendants, from which appeal No. 65121 proceeded. The trial court issued no opinion to explain its ruling.

Subsequent thereto, defendants filed a motion to tax costs against plaintiffs, which the trial court denied for lack of jurisdiction on the grounds that the underlying case was on appeal. Defendants timely appealed from that ruling in appeal No. 65838. Both appeals have been consolidated for hearing before this panel.

Plaintiffs' original appeal was filed under the accelerated docket procedure of this court, but was transferred sua sponte to the court's regular calendar under Loc.App.R. 25(4). We note in passing that this appeal is by its very nature unsuited for accelerated procedure because of the complex and numerous issues and the volume of record material that must be considered.

We will...