Lewis v. Celina Fin. Corp.

• Decision Date: 28 February 1995
• Docket Number: No. 10-94-21,10-94-21
• Citation: 655 N.E.2d 1333,101 Ohio App.3d 464
• Parties: LEWIS et al., Appellants, v. CELINA FINANCIAL CORPORATION et al., Appellees.
• Court: Ohio Court of Appeals

Page 464

101 Ohio App.3d 464

655 N.E.2d 1333

LEWIS et al., Appellants, v. CELINA FINANCIAL CORPORATION et al., Appellees.

No. 10-94-21.

Court of Appeals of Ohio,

Third District, Mercer County.

Decided Feb. 28, 1995.

Hatcher, Diller, Rice & Beebe, W. Edward Hatcher, Van Wert, Wechsler, Skirnick, Harwood, Halebiam & Feffer, Gary Weinstein, New York City, for appellants.

Taft, Stettinius & Hollister, L. Clifford Craig, Mark G. Kobasuk, Cincinnati, Purdy, Lammers & Schiavone, Thomas D. Lammers, Celina, for appellees.

EVANS, Judge.

Appellants, plaintiff Harry Lewis and his counsel Stuart D. Wechsler, and the firm of Wechsler, Skirnick, Harwood, Halebiam & Feffer ("Wechsler Skirnick"), and W. Edward Hatcher and the firm of Hatcher, Diller, Rice & Beebe ("Hatcher Diller") appeal from a judgment of the Court of Common Pleas of Mercer County holding them jointly and severally liable for attorney fees imposed as a sanction for filing a frivolous lawsuit. For the reasons that follow, the judgment of the trial court is affirmed.

I

The judgment of attorney fees stems from the appellants' unsuccessful attempt to certify a shareholder class action lawsuit against the Celina Financial Group ("Celina"). Celina, an Ohio corporation, with its principal office located in Celina, Ohio, was organized in 1965 by three mutual insurance companies--National Mutual Insurance Company, Celina Mutual Insurance Company, and Republic Mutual Insurance Company (the "Mutuals"). The Mutuals and Celina share common management and the Mutuals owned approximately fifty-five percent of Celina's Class A Common shares of stock before the tender offer at issue here was made.

On February 19, 1993, Celina announced in a press release a proposed tender offer in which the National Mutual Insurance Company ("National"), one of Celina's member mutual companies, would take Celina private by offering $5.80 per share for the seven hundred fifty thousand outstanding Class A common shares. The press release, published in the February 22, 1993, edition of the Wall Street Journal, indicated that Celina had exited many businesses--including reinsurance and data processing--making a holding company no longer necessary. According to Don W. Montgomery, Celina's chairman, the expense of being a public company was too high.

After reading about the "going private" transaction in the February 22, 1993, edition of the Wall Street Journal, the plaintiff, Harry Lewis, contacted his lawyer to authorize the filing of a lawsuit. On February 24, 1993, two days after Lewis read the announcement of the tender offer, Wechsler Skirnick, with Hatcher Diller as local counsel, filed a shareholder class action complaint, alleging claims of breach of fiduciary duty. W. Edward Hatcher signed the complaint naming Celina, its six directors, and National as the defendants ("appellees"). The complaint sought unspecified damages and injunctive relief to prevent the consummation of the proposed tender offer, which was scheduled to close on March 22, 1993. Lewis's complaint challenged both the structure and the fairness of the transaction. Specifically, Lewis alleged that the defendants On May 19, 1993, Lewis moved for class certification. Both sides extensively briefed the motion, and in connection with the motion the defendants deposed Lewis on June 2, 1993. The trial court set a July 27, 1993 hearing date for the motion for class certification.

breached their fiduciary duties by enriching themselves at the expense of Celina's public shareholders, recommending the tender offer at an unfair price, failing to maximize shareholder value, and failing to avoid conflicts of interest, especially since Celina and National shared substantially identical officers and directors.

At the June 2, 1993 deposition, Lewis testified to the following: (1) his investigation prior to filing the lawsuit was limited to reading an announcement of the tender offer in the February 22, 1993 edition of the Wall Street Journal; (2) he did not read the sixty-one-page offer to purchase issued by Celina prior to filing suit; and (3) he did not read or review the complaint prior to filing suit.

In response to the tender offer, an overwhelming number of the outstanding shares owned by the minority shareholders--approximately eighty-six percent--were tendered. On June 24, 1993, the appellees announced that the cash-out merger of nontendering shareholders was to occur on July 2, 1993. On July 27, 1993--the hearing date set for the motion for class certification--Lewis, pursuant to Civ.R. 41(A)(1)(a), voluntarily dismissed his action.

On August 6, 1993, the appellees moved for attorney fees pursuant to Civ.R. 11, R.C. 2323.51, and the court's inherent power. The appellees asserted that Lewis's action was unwarranted under existing law and amounted to nothing more than a nuisance "strike suit." ¹ In January 1994, the court conducted a two-day evidentiary hearing on the appellees' motion. During the hearing, both sides produced expert witnesses and submitted affidavits attesting to the complexity and viability of the litigation instituted by Lewis.

At the hearing and in the briefs submitted with the trial court, the appellees established that the Mutuals already possessed a majority of Celina's stock and voting power, and therefore could have bypassed the tender offer and immediately commenced a cash-out merger. The evidence demonstrated that the Mutuals did not gain control over Celina and the concomitant power to cause a merger by virtue of the tender offer; rather, Celina was already controlled by National and its affiliates. Therefore, the transaction was a tender offer for minority shares The trial court's detailed, thoughtful, and well-reasoned decision contained the following relevant findings of fact and conclusions of law:

which amounts to nothing more than a solicitation to purchase the remaining shares without requiring the minority shareholders to sell their shares should someone else offer them a higher price. Thus, Celina asserted that the Board of Directors had no duty to seek other purchasers, because this was not a contest for control.

"1. Neither plaintiff nor his attorneys have offered any evidence that any investigation was made into the facts alleged in the complaint or that either plaintiff or his counsel had a basis to believe that there were grounds to support the allegations of their complaint.

"2. Neither plaintiff nor his counsel have offered any evidence that they had read the complaint prior to filing the same.

"3. Neither plaintiff nor his counsel offered any explanation or evidence that the allegations contained in the complaint were warranted under existing law or that they could be supported by good faith argument for any extension, modification, or reversal of existing law. Furthermore, it appears to this court that the allegations of the complaint are not warranted under existing law and cannot be supported by a good faith argument for an extension, modification, or reversal of existing law.

"4. The allegations of the various pleadings together with the deposition of plaintiff Lewis established prima facie that this suit was not warranted under existing law and cannot be supported by a good faith argument for an extension, modification, or reversal of existing law."

In a judgment entry dated June 24, 1994, the trial court granted judgment against the plaintiff, Harry Lewis, and his counsel, Stuart D. Wechsler and the firm of Wechsler, Skirnick, Harwood, Halebiam & Feffer, and local counsel W. Edward Hatcher and the firm of Hatcher, Diller, Rice & Beebe, jointly and severally in the amount of $81,172.06, plus interest at the legal rate of interest from the date of the entry.

II

From that judgment appellant W. Edward Hatcher ("Hatcher") asserts the following assignments of error for our review Assignment of Error No. I

"The trial court erred in its findings of bad faith on the part of Attorney W. Edward Hatcher pursuant to Civ.R. 11." Assignment of Error No. II

"The trial court erred in sanctioning the law firm of Hatcher, Diller, Rice & Beebe in addition to the attorney who signed the pleadings, W. Edward Hatcher, pursuant to Civ.R. 11."

Assignment of Error No. III

"The trial court erred in its finding of frivolous conduct on the part of Attorney W. Edward Hatcher pursuant to R.C. 2323.51."

Assignment of Error No. IV

"The trial court erred in failing to consider W. Edward Hatcher's relative culpability and subjective intent in determining the appropriate level of sanctions pursuant to Civ.R. 11 and R.C. 2323.51."

As a threshold matter, we must determine whether the trial court was vested with jurisdiction to consider the appellees' motion for sanctions under Civ.R. 11, R.C. 2323.51, and the trial court's inherent power. While a voluntary dismissal under Civ.R. 41(A)(1) generally divests a court of jurisdiction, State ex rel. Hunt v. Thompson (1992), 63 Ohio St.3d 182, 586 N.E.2d 107; Zimmie v. Zimmie (1984), 11 Ohio St.3d 94, 95, 11 OBR 396, 397, 464 N.E.2d 142, 144, a hearing on sanctions is considered collateral to the underlying proceedings, and a trial court therefore retains jurisdiction for the limited purpose of applying Civ.R. 11 and R.C. 2323.51. See Risk Insurers v. Lorenz Equip. (1994), 69 Ohio St.3d 576, 580, 635 N.E.2d 14, 17-18, citing Cooter & Gell v. Hartmarx Corp. (1990), 496 U.S. 384, 396-397, 110 S.Ct. 2447, 2456-2457, 110 L.Ed.2d 359, 375-377 (Rule 11 sanctions are collateral to the action and may be considered by the trial court after an action is no longer pending); Schwartz v. Gen. Acc. Ins. of Am. (1993), 91 Ohio App.3d 603, 606, 632 N.E.2d 1379, 1381 (trial court does not lose jurisdiction to consider properly filed motions for sanctions pursuant to Civ.R. 11 and R.C. 2323.51 following plaintiff's voluntary dismissal of the complaint under Civ.R. 41). Accordingly, the trial court retained jurisdiction for the limited purpose of...