McLaughlin v. Beeghly

• Decision Date: 22 December 1992
• Docket Number: No. 92AP-275,92AP-275
• Parties: McLAUGHLIN, Exr., Appellee, v. BEEGHLY et al., Appellants.
• Court: Ohio Court of Appeals

Page 502

84 Ohio App.3d 502

617 N.E.2d 703

McLAUGHLIN, Exr., Appellee, v. BEEGHLY et al., Appellants.

No. 92AP-275.

Court of Appeals of Ohio, Tenth District, Franklin County.

Decided Dec. 22, 1992.

Thompson, Hine & Flory and James A. Meaney, Columbus, and Kaplan & Davidson and Michael J. Kaplan, Akron, for appellee.

Arter & Hadden, John A. Jenkins, Michael Currie and Nancy Manougian, Columbus, for appellants.

McCORMAC, Judge.

Plaintiff-appellee, Betty K. McLaughlin, as executor of the estate of Hugh P. McLaughlin, instituted this action against defendants-appellants, Blaine Beeghly, individually, and Fireproof Block Company, in its corporate form, seeking recovery for breach of fiduciary duty and for recovery of monies allegedly loaned to the corporation by plaintiff's decedent. McLaughlin also requested the court to convert the corporation into a partnership and order an accounting and partition. The matter was tried to the court and judgment was entered in favor of McLaughlin subject to certain setoffs.

Fireproof Block Company ("Fireproof") is a closely held Ohio corporation purchased by Blaine Beeghly, Abe Mounts and Hugh P. McLaughlin in 1969. Each of the three men owned an equal one-third share of the stock of the corporation. In addition to the corporation, a partnership was formed between the three men to hold the real estate upon which the business was situated. Pursuant to a written instrument, the corporation was obligated to make lease payments to the partnership.

Beginning as early as 1978, questions concerning ownership and control of the corporation began to arise. In that year, Beeghly attempted to purchase McLaughlin's shares. The deal was never finalized, but $20,000 was paid to McLaughlin by Beeghly. As such, McLaughlin remained the one-third shareholder until his death in 1988. Mounts remained a one-third shareholder until 1987, when he entered into an agreement of sale with Columbus, Ltd. The purchaser's interest was later assigned to Beeghly who made an initial up-front payment and then, for a period of time, made monthly payments to Mounts out of the Fireproof checking account.

Throughout the history of this corporation, there existed an ever increasing disregard for the corporate form. Monies were transferred in and out of the corporation, particularly by Beeghly, whenever the need arose and without formal corporate authorization of any kind. The evidence indicates that Beeghly was a major shareholder or owner of several business enterprises; it became his practice to transfer funds from one to another, at times using Fireproof more as a bank than a separate manufacturing corporation. The financial records of Fireproof during the tenure of the current ownership were incomplete at best and were never the subject of a detailed audit, as that term is used in the accounting vernacular. As one witness stated, there was a great deal of "discretionary bookkeeping."

Ultimately, McLaughlin's estate filed suit against Mounts, Beeghly and Fireproof, seeking monies allegedly due the estate. The matter was tried to the court which, after a court-ordered accounting, found that Beeghly had breached his heightened fiduciary duty and that damages in the amount of $86,690.34 resulted. The court awarded this amount to McLaughlin's estate, as well as $36,387.67 for notes payable, plus accrued interest in the amount of $57,371. The court ordered McLaughlin's estate to reimburse Beeghly for the $20,000 payment made pursuant to the aborted 1978 purchase agreement, together with $16,800 in accrued interest.

Beeghly appeals and raises the following assignments of error:

"A. The trial court erred as a matter of law in concluding that Defendant/Appellant Blaine A. Beeghly, who at all relevant times owned not more than one-third of the stock of Defendant/Appellant Fireproof Block Company and was not a majority shareholder, owed a 'fiduciary duty' to Plaintiff/Appellee Betty K. McLaughlin.

"B. The trial court erred as a matter of law in concluding that Defendant/Appellant Blaine A. Beeghly, as a 'majority shareholder,' 'breached his fiduciary duty' to Plaintiff/Appellee Betty K. McLaughlin.

"C. The trial court erred in awarding Plaintiff/Appellee Betty K. McLaughlin, who owned only one-third of the stock of Defendant/Appellant Fireproof Block Company, more than one-third of the 'damages' sustained by the corporation's shareholders as a result of Defendant/Appellant Blaine A. Beeghly's 'breach of fiduciary duty.'

"D. The trial court erred as a matter of law in awarding attorney fees to Plaintiff/Appellee Betty K. McLaughlin.

"E. The trial court erred as a matter of law in ordering a post-trial accounting and in ordering Defendants/Appellants Blaine A. Beeghly and Fireproof Block Company to pay the costs associated with that accounting."

By his first assignment of error, Beeghly contends that the trial court erred in concluding that, between the years 1986 to 1989, Beeghly was a majority or controlling shareholder of Fireproof and, hence, owed a fiduciary duty to McLaughlin. Assuming without deciding that the 1987 transaction involving Mounts, Columbus, Ltd. and Beeghly did not make Beeghly a majority shareholder, we conclude that there was ample evidence to support the trial court's conclusion that Beeghly was the controlling shareholder and that, therefore, he owed a fiduciary duty to McLaughlin.

When addressing the duty owed between shareholders in a closely held corporation, the Supreme Court has stated that a majority or controlling shareholder owes a fiduciary duty to a minority shareholder. Crosby v. Beam (1989), 47 Ohio St.3d 105, 548 N.E.2d 217. This duty has been likened to that owed between partners because of the unique nature of a closely held corporation. Donahue v. Rodd Electrotype Co. of New England, Inc. (1975), 367 Mass. 578, 328 N.E.2d 505. When a controlling shareholder exercises that control to derive a personal benefit not available to those shareholders out of power, the controlling shareholder has breached his heightened fiduciary duty. Crosby, supra. In United States v. Byrum (1972), 408 U.S. 125, 137, 92 S.Ct. 2382, 2390, 33 L.Ed.2d 238, 248, the court stated "[a] majority shareholder has a fiduciary duty not to misuse his power by promoting his personal interests at the expense of corporate interests."

Beeghly argues that he owed no fiduciary duty to McLaughlin since the two persons were equal shareholders and, hence, that a majority, minority relationship did not exist. Typically, cases addressing a dominant shareholder's duty of fair dealing involve factual situations where a single majority shareholder, or coalition group of minority shareholders, manipulate corporate procedures for their own advantage by exercising dominate control. At the heart of the duty is the unfair exercise of that control, which...