Hickerson v. Hickerson

[Cite as Hickerson v. Hickerson, 2010-Ohio-4070.]

IN THE COURT OF APPEALS OF OHIO
THIRD APPELLATE DISTRICT
HANCOCK COUNTY

JAMES C. HICKERSON, ET AL.,

PLAINTIFFS-APPELLEES, CASE NO. 5-10-08

v.

JAMES R. HICKERSON, ET AL. OPINION

DEFENDANTS-APPELLANTS.

Appeal from Hancock County Common Pleas Court
Trial Court No. 2007-CV-741

Judgment Affirmed

Date of Decision: August 30, 2010

APPEARANCES:

William E. Clark for Appellants

Timothy A. Magee for Appellees
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PRESTON, J.

{¶1} Defendants-appellants, James R. Hickerson (hereinafter “Father”)

and Hickerson Excavating, Inc. (hereinafter “Hickerson Excavating” or “the

company”) (hereinafter collectively “the appellants”), appeal the Hancock County

Court of Common Pleas’ judgment, which found Father had breached his fiduciary

duty to plaintiff-appellee, James C. Hickerson (hereinafter “Son”). For the reasons

that follow, we affirm.

{¶2} This matter concerns the operations of a closely-held corporation,

Hickerson Excavating, Inc., owned and operated by Father and Son. In particular,

this appeal concerns Father’s decision to terminate dividend payments to Son,

which allegedly amounted to a breach of fiduciary duty.

{¶3} The general facts of this case are largely not in dispute. In 1982,

Son started working for Father, who was involved in the excavating business in

and around Hancock County. The two worked together under the d.b.a. of

“Hickerson Excavating” from its inception. Eventually, the business was formally

incorporated on October 28, 1999, when Father and Son executed a close

corporation agreement. Under the terms of the close corporation agreement, Son

had a twenty-percent (20%) ownership interest in Hickerson Excavating, and

Father had an eighty-percent (80%) ownership interest in the company. Because

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of their positions with the company, the parties received both weekly dividend1

and salary payments.

{¶4} Soon after the company was incorporated, Son’s wife, Toni

Hickerson, started working for Hickerson Excavating, first as a secretary and then

as the company’s office manager. Also, later in 2003, Father and Son started a

second business called “J and J Topsoil,” which was an unincorporated d.b.a. and

essentially operated as an informal 50/50 partnership, with the Hickersons splitting

the profits equally. Eventually, Father decided to retire. As a result, he left Son in

charge of the day-to-day operations of both of the businesses, and started spending

six-to-seven months out of the year in Florida.

{¶5} There were no major problems between the parties or with their

businesses until June 2007, when a dispute arose concerning Son’s decision to

settle a corporate lawsuit. The underlying facts of the corporate litigation are also

not in dispute. Essentially, the city of Mt. Blanchard hired Hickerson Excavating

to demolish a house. The owner of the house was allegedly incarcerated at the

time Hickerson Excavating actually demolished the house. However, when the

owner was released, he sued both the city and Hickerson Excavating claiming that

1
We note that during the trial, both of the parties continuously referred to this money as a “dividend”;
however, the company’s accountant testified that while this money was reported as an S corp. dividend in
the company’s financial records, it technically went out as a profit distribution. The trial court noted the
distinction in its judgment entry, but for ease of its discussion labeled this money as a “dividend,” thus for
purposes of our discussion, we will also refer to this amount of money as a “dividend,” even though we
recognize that it was technically considered a profit distribution.

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one of the parties had stolen a lawn mower out of his shed, which had been on the

property in question.

{¶6} At the time of the lawsuit, Father was in Florida, but specifically told

Son not to settle because he did not want Hickerson Excavating to admit liability.

Nevertheless, Son decided to settle the case and did not inform Father of his

decision. Son claimed that his attorney had told him that the company would not

be admitting liability by settling, and that it would end up costing the company

more money to defend the action at trial than to settle. When Father returned from

Florida in June of 2007, he discovered the company’s attorney’s bill, which listed

the settlement offer paid by Hickerson Excavating.

{¶7} Upon discovering the bill, Father went out searching for Son, and

eventually had Toni call Son on the phone so he could confront him about the

settlement decision. At this point, there is conflicting testimony as to whether Son

quit or Father fired Son;2 nevertheless, neither party disputes that as a result of the

settlement decision, an argument between the two parties ensued, and Son stopped

working for the companies.

{¶8} Soon after this event, Toni separated from the companies, and Father

took over the operation of the businesses. While Father’s salary increased and Son

2
The trial court found that as a result of the incident Son had quit and was not fired from the companies.
(Nov. 23, 2009 JE).

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stopped receiving a salary paycheck subsequent to Son’s departure, both parties

stopped receiving dividends.

{¶9} Consequently, Son and Toni filed suit against Father, Hickerson

Excavating, Inc., and J and J Topsoil. In their complaint they alleged claims of

breach of fiduciary duty, wrongful termination, conversion, fraud, and they asked

for a court ordered accounting and dissolution. On December 22 and 23, 2008, the

matter was tried to the court. Thereafter, on June 22, 2009, the trial court issued

an oral decision, and upon a request by the appellants for findings of fact and

conclusions of law, the trial court issued a written decision on November 23, 2009.

{¶10} Ultimately, in its decision, the trial court found in favor of Son with

respect to his breach of fiduciary claim, and awarded him $12,500.00 (100 weeks

at $125.00 per week), plus interest at the statutory rate from June 22, 2009. With

respect to the remaining claims asserted by Toni and Son, the trial court found in

favor of the appellants.

{¶11} The appellants, Father and Hickerson Excavating, now appeal and

raise the following two assignments of error.3

ASSIGNMENT OF ERROR NO. I

THE TRIAL COURT ERRED AS A MATTER OF LAW BY
RULING THAT OHIO DOES NOT RECOGNIZE A
REDUCED FIDUCIARY DUTY TO A MINORITY
SHAREHOLDER OF A CLOSE CORPORATION WHO
3
We note that Son filed a cross-appeal on March 17, 2010, but consequently withdrew his cross-appeal on
June 14, 2010.

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ACQUIRED HIS MINORITY STATUS VIA A GIFT FROM A
MAJORITY SHAREHOLDER

{¶12} In their first assignment of error, the appellants argue that the trial

court erred in applying the heightened fiduciary duty standard in this particular

case. While they acknowledge that the heightened fiduciary duty standard is

usually applicable in close corporation disputes, here the appellants claim that

because Son obtained his minority interest in Hickerson Excavating by way of a

gift from Father, the heightened fiduciary standard should not apply.

{¶13} In support of their position, the appellants point to a South Dakota

Supreme Court case, Mueller v. Cedar Shore Resort, Inc. (S.D., 2002), 643

N.W.2d 56. This case held that there should be a lesser standard for breaches of

fiduciary duties in close corporations where the minority shareholder receives their

shares by gift or inheritance and does not invest any capital. Mueller, 643 N.W.2d

at 64, 66-67. In those particular situations, the South Dakota Supreme Court held

that the standard should be “somewhat lower, requiring only ‘decent’ conduct by

controlling shareholders.’” Id. at 66-67. The appellants argue that because Son

received his interest by way of a gift and did not contribute any capital investment,

this Court should adopt the proposition that there is a lesser fiduciary standard

owed to minority shareholders in close corporations who receive their interests

from gifts or bequests. Nevertheless, despite the appellants’ arguments, we find

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that the proposition in Mueller is irrelevant in this particular case since it is clear

that Son did not receive his 20% interest in the form of a gift from Father.

{¶14} “There are three general elements to a gift: (1) intent of the donor to

make a gift, (2) delivery of the property to the donee, and (3) acceptance of the

gift by the donee.” Citizens National Bank v. DeLuca (Sept. 27, 2000), 3d Dist.

No. 3-2000-12, at *3, citing Barkley v. Barkley (1997), 119 Ohio App.3d 155, 171

fn.2, 694 N.E.2d 989, citing Bolles v. Toledo Trust Co. (1936), 132 Ohio St. 21, 4

N.E.2d 917.

{¶15} At trial, Son testified that he and Father decided to incorporate the

business because Father was getting ready to retire. (Dec. 22, 2008 Tr. at 174).

As a result of the incorporation and Father’s retirement, Son received a 20%

interest in the company and was left “pretty much” running the company while

Father was away in Florida six-to-seven months out of the year. (Id.). Moreover,

Son stated that the original plan had been for him to receive an additional 5% of

the company each year, which would relieve Father of the tax burdens and slowly

turn everything over to Son. (Id. at 174-75). While Son never received the

additional 5% interest each year nor did he contribute any initial capital when the

company was incorporated, his job responsibilities increased to the point where he

was eventually running the company. (Id. at 174-75, 198-99).

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{¶16} With respect to Father’s testimony, when asked about the ownership

in Hickerson Excavating, he said that he considered himself to be the “sole owner”

of Hickerson Excavating. (Dec. 22, 2008 Tr. at 14). However, Father later

admitted that Son still possessed a 20% interest in the company, which Father said

Son had received when the company was first incorporated. (Id.). Nevertheless,

Father stated that despite Son’s 20% ownership, he believed that Son was still not

entitled to anything from the company because he had quit the business. (Id. at

39-40). Essentially, “if he didn’t work, he is not entitled to” some of the benefits

as a partial owner. (Id.).

{¶17} Based on the above evidence, we believe that, even though Son

never paid money for his 20% interest, his interest was not the result of a gift.

First of all, despite Father’s argument that he had “gifted” 20% of the company to

Son when the company was incorporated, Father never formally “gifted” any

shares over to Son when the parties incorporated the business. Rather, after

working so many years as a d.b.a. both parties agreed to formally incorporate the

business, and executed a close corporation agreement. The agreement specifically

delineated that Father owned 80% of the company, while Son owned 20% of the

company. Thus, unlike the situation in Mueller, here Father never legally

possessed 100% of the company’s shares and then “gifted” 20% of the shares to

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Son. Rather, in this particular instance, Hickerson Excavating, Inc. started as 80-

20 balance in ownership, and no formal transfer of shares ever took place.

{¶18} Second, it is clear that Son received his interest with the expectation

that he would remain with the company and eventually take it over. Son stated

that he and his father decided to incorporate the business once Father decided that

he wanted to retire. As a result, Son and Father executed a close corporation

agreement, Son received a 20% interest in the company, and Son essentially

started running the company in Father’s absence. While there was never any

written agreement that Son was supposed to receive an additional 5% of the

company each year, it is undisputed that over the subsequent years Son became

more in charge of the business, while Father spent more time in Florida.

{¶19} Even Father’s testimony supports the finding that Son’s interest in

the company was not intended to be a gift. He specifically stated that since Son

was no longer working for the company, he was not entitled to receive anything

from the company. Consequently, then the only reason Son ever received any

interest in the company was because he was expected to work and run the

company for Father once he retired. Contrast Hobson v. Eaton (C.A.Ohio, 1968),

19 Ohio Misc. 29, 399 F.2d 781, 784-85.

{¶20} Overall, because Son’s 20% interest in Hickerson Excavating was

not the result of a gift, we find it unnecessary to discuss the law concerning

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minority shareholders who receive their interest from gifts that the appellants cite

and rely on in this assignment of error.

{¶21} The appellants’ first assignment of error is, therefore, overruled.

ASSIGNMENT OF ERROR NO. II

THE TRIAL COURT ERRED AS A MATTER OF LAW BY
HOLDING THAT A MAJORITY SHAREHOLDER
BREACHES HIS FIDUCIARY DUTY TO A MINORITY
SHAREHOLDER WHEN THE MAJORITY SHAREHOLDER
SUSPENDS DIVIDEND DISTRIBUTIONS FOR BOTH
HIMSELF AND THE MINORITY SHAREHOLDER UPON
LEARNING OF THE CORPORATION’S LACK OF
SOLVENCY.

{¶22} In their second assignment of error, the appellants argue that the trial

court’s finding that Father had breached his fiduciary duty to Son was in error. In

particular, the appellants claim that regardless of whether this Court determines

that he owed a heightened fiduciary duty to Son, a breach of fiduciary duty claim

can be defeated when the majority shareholder acts with a legitimate business

purpose. Crosby v. Beam (1989), 47 Ohio St.3d 105, 105, 548 N.E.2d 217, at

paragraph two of the syllabus. See, also, Morrison v. Gugle (2001), 142 Ohio

App.3d 244, 755 N.E.2d 404; Priebe v. O’Malley (1993), 89 Ohio App.3d 8, 623

N.E.2d 573. Here, they argue that there was enough evidence to find that Father’s

decision to terminate the dividend payment was based on a legitimate business

purpose, which was the business’ lack of solvency. As a result, they argue that the

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trial court’s finding that Father had breached his fiduciary duty to Son was

essentially against the manifest weight of the evidence.

{¶23} In determining whether a judgment is against the manifest weight of

the evidence, we cannot substitute our judgment for that of the trier of fact. The

trier of fact is in a better position to observe the demeanor of the witnesses,

examine the evidence, and weigh the credibility of the testimony and evidence.

Seasons Coal Co. v. Cleveland (1984), 10 Ohio St.3d 77, 80, 461 N.E.2d 1273.

Instead, we must determine whether the trier of fact’s decision is supported by

some competent, credible evidence going to all the essential elements of the case.

Id.; C.E. Morris Co. v. Foley Constr. Co. (1978), 54 Ohio St.2d 279, 280, 376

N.E.2d 578. See, also, Kelly v. Wellsville Foundry, Inc. (Dec. 6, 2000), 7th Dist.

No. 99-CO-27, at *6 (considering whether the trial court’s finding that appellants

had failed to demonstrate that they had had a legitimate business purposes for

eliminating minority shareholders’s interest was against the manifest weight of the

evidence.)

{¶24} The elements for a breach of fiduciary duty claim are: “(1) the

existence of a duty arising from a fiduciary relationship; (2) a failure to observe

the duty; and (3) an injury resulting proximately therefrom.” Werthmann v.

DONet, Inc., 2d Dist. No. 20814, 2005-Ohio-3185, ¶42 (citations omitted).

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{¶25} As the facts indicate, Hickerson Excavating is a close corporation,

which is defined as an entity with “few shareholders and whose corporate shares

are not generally traded on a securities market.” Tinter v. Lucik, 172 Ohio App.3d

692, 2007-Ohio-4437, 876 N.E.2d 1026, ¶23. “[O]wnership of close corporations

is ‘limited to a small number of people who are dependent on each other for the

enterprise to succeed.’” Wheeler v. Johnson, 2nd Dist. No. 22178, 2008-Ohio-

2599, ¶24, quoting Tinter, 2007-Ohio-4437, at ¶23. Because of the nature of close

corporations, it has been well recognized that majority shareholders owe minority

shareholders a heightened fiduciary duty. Thomas v. Fletcher, 3d Dist. No. 17-05-

31, 2006-Ohio-6685, ¶14. Essentially, shareholders in a close corporation owe

each other a fiduciary duty to deal in utmost good faith. Herbert v. Porter, 165

Ohio App.3d 217, 2006-Ohio-355, 845 N.E.2d 574, ¶12. As the Ohio Supreme

Court explained in Crosby v. Beam:

Close corporations bear a striking resemblance to a partnership.
In essence, the ownership of a close corporation is limited to a
small number of people who are dependent on each other for the
enterprise to succeed. Just like a partnership, the relationship
between the shareholders must be one of trust, confidence and
loyalty if the close corporation is to thrive. While a close
corporation provides the same benefits as do other corporations,
such as limited liability and perpetuity, the close corporation
structure also gives majority or controlling shareholders
opportunities to oppress minority shareholders. For example,
the majority or controlling shareholders may refuse to declare
dividends, may grant majority shareholders-officers exorbitant
salaries and bonuses, or pay high rent for property leased from
the majority shareholders. Donahue v. Rodd Electrotype Co. of

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New England, Inc. (1975), 367 Mass. 578, 588-589, 328 N.E.2d
505, 513.

47 Ohio St.3d at 107-08 (footnote omitted). Therefore, whenever a majority

shareholder uses their control of the corporation to obtain benefits that are not

shared by the minority shareholder, the majority shareholder has breached their

fiduciary duty to the minority shareholder. Thomas, 2006-Ohio-6685, ¶14, citing

Crosby, 47 Ohio St.3d at 109, citing Alaska Plastics, Inc. v. Coppock (Alaska

1980), 621 P.2d 270. Absent a legitimate business purpose, such a breach is

actionable. Morrison, 142 Ohio App.3d at 225.

{¶26} Here, with respect to the breach of fiduciary duty, in its judgment

entry, the trial court found that based on the evidence presented, it was clear that

“dividends were paid on a regular basis, irrespective of the company’s

profitability,” and that Father’s decision to terminate the dividends had been

“punitive action taken against his son settling a company lawsuit against his

express wishes and leaving employment.” (Nov. 23, 2009 JE). Moreover, the trial

court found that based on Father’s testimony it was clear that Father did not

“understand the important distinction between a shareholder and an employee.”

(Id.). As a result, the trial court ultimately concluded that “regardless as to how

the transfer of stock was made to James C. Hickerson, James R. Hickerson’s

failure to continue to pay a ‘dividend’ to his son upon his separation from

employment constitutes a breach of the heightened fiduciary duty owed to a

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minority shareholder from a majority shareholder.” (Nov. 23, 2009 JE, citing

Crosby v. Bean (1989), 47 Ohio St.3d 105. See also, Thomas v. Fletcher, et al.,

2006-Ohio-6685).

{¶27} Nevertheless, the appellants claim that the reason Father terminated

the payment of the dividends was because the company had become unprofitable

by the time Son left and he took over. In fact, they point to the fact that upon

learning of the company’s financial situation, Father personally loaned

$150,000.00 to Hickerson Excavating so that it could meet its ongoing obligations

and operating expenses. Therefore, because of the financial situation with the

company, corroborated by the fact that Father had to personally loan money to the

company, there was a legitimate business purpose for terminating the dividend

paychecks. However, after reviewing the record, we find that the trial court’s

decision is supported by competent, credible evidence and, thus, is not against the

manifest weight of the evidence.

{¶28} First of all, it is clear that starting in 2004 and continuing up until

Son left around June of 2007, Hickerson Excavating was paying dividends to

Father and Son: in 2004, Father received $31,168.98, and Son received $7,792.25;

in 2005, Father received $26,325.00, and Son received $6,500.00; in 2006, Father

received $26,325.00, and Son received $6,500.00; and in 2007, Father received

$13,500.00, and Son received $3,375.00. (Dec. 22, 2008 Tr. at 83-85); (Plaintiff’s

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Ex. 22). Father always received $500.00 a week, and Son always received

$125.00 a week, which was consistent with their ownership interests in Hickerson

Excavating. (Id. at 85). In addition, John Pinski, the company’s accountant,

testified that the last dividend checks were issued on July 7, 2007, and that there

were no additional dividend checks made for the remainder of 2007 or for the

entirety of 2008. (Dec. 22, 2008 Tr. at 79, 85). Moreover, Pinski acknowledged

that before Son stopped working at the companies, the dividends had been paid

consistently to both parties, and that from July 5, 2007, everyone stopped

receiving dividends. (Id. at 112-13). Furthermore, his testimony reveals that

dividends were consistently paid regardless of whether the company had suffered

a loss for that particular year. (Id. at 122). For example, the company suffered

losses in 2004 and 2007, and showed a profit in 2005 and 2006; nevertheless, in

the years that the company suffered losses, the dividends were still paid weekly to

the parties. (Id.). In particular, Pinski stated that the money for the dividends

would come from the prior year’s money or loans that the company had taken that

current year. (Id. at 123).

{¶29} In addition, there is evidence indicating that Father’s decision to

terminate the dividends was punitive in nature and not based on a legitimate

business purpose. Son and Toni testified that Father had been extremely upset

when he discovered Son had decided to settle a lawsuit against the company over

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his specific instructions not to settle the lawsuit. (Dec. 22, 2008 Tr. at 183-84,

216-18). Even though there was conflicting evidence as to whether Father fired

Son over the incident, or whether Son quit in response to Father’s reaction, the fact

remains that soon after Son stopped working for the company, he stopped

receiving not only a paycheck, but also a dividend check. While we acknowledge

that Father also terminated his dividend payments as well as Son’s dividend

payments, up until Son stopped working for the company, Hickerson Excavating

consistently paid the dividends regardless of whether the company was making a

profit or not. Moreover, Father unilaterally made the decision to terminate the

dividend payments after the incident with Son. In particular, Pinski testified that

although he believed that the shareholders discussed the decisions regarding the

distribution of the dividends, as of the date that Son stopped working for the

company, Pinski said Father was making all of those decisions unilaterally,

without holding a shareholder meeting or putting the issue to a vote. (Id. at 158).

{¶30} Furthermore, Father’s own testimony at trial clearly establishes that

his motive for terminating the dividend payments was punitive and not based on a

legitimate business purpose. Father clearly believed that since Son was not

working for the company, he was not entitled to anything from the company:

Q. I meant with your company?
A. No, he hasn’t made nothing with my company.
Q. Why is that?
A. He quit Hickerson Excavating.

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Q. And isn’t he a part owner of Hickerson Excavating?
A. Well, in a sense, yeah. I give him 20 percent of the company
years ago, in an S corporation deal.
Q. And like you, isn’t he entitled to some of the benefit as a
partial owner?
A. Not if he don’t work at it and he quits, he quit.
Q. So if he didn’t work, he is not entitled, but if you don’t
work you are, is that your company? [sic]
A. That’s right.
***
Q. You testified that as an owner you were entitled to money
from the company whether or not you worked, correct?
A. I worked all my life to get this company going, and I should
be given something out of it when I wanted to retire.
Q. So that’s a yes?
A. Yes.
Q. And you also testified that your son even though he is a part
owner isn’t entitled to any money unless he works?
A. Exactly.

(Dec. 22, 2008 Tr. at 39-42).

{¶31} Not only does this testimony illustrate that Father believed that Son

was not entitled to anything from the company because he “quit,” but it also

clearly demonstrates that Father did not appreciate the difference between his son

as an employee and his son as a part owner of Hickerson Excavating. Despite

Father’s opinion, even though Son was no longer working for the company, Son

was still a partial owner by virtue of his 20% interest in the company. As a result

of this interest and Son’s shareholder status, Father still owed Son a duty to deal in

the utmost good faith. However, because of the reasons he so adequately

described above, Father failed to deal in the utmost good faith when he unilaterally

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decided to terminate the parties’ dividend payments. We note that we are not

stating that Hickerson Excavating could never decide not to declare dividends.

Father could have taken corporate action and declared a shareholder meeting, and

thus could have put the issue of the dividends to a vote, which would have made

the decision to terminate the dividends less punitive and more like a “legitimate

business” decision. However, in this particular case, there is no evidence that

Father took any formal corporate action in terminating the dividend payments.

Essentially, the problem in this particular case is that Father clearly acted as an

individual, or as a father who was upset with his son, instead of as a corporate

officer making a rational business decision.

{¶32} Nevertheless, we acknowledge that there is evidence that Father did

personally loan the company money when he took over the operations of the

business in order to pay off the company’s then existing debts and obligations,

which, at a minimum, would suggest that Father may have had a legitimate

business reason for terminating the dividend paychecks. However, as

demonstrated by the evidence above, Father’s decision to unilaterally terminate

the dividends was clearly not based on a legitimate business purpose. Father was

upset with Son about the unilateral settlement of a corporate litigation and for

subsequently leaving the company, and he believed that if Son was not going to

work for the company, then he should not receive anything from the company –

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regardless of the fact that Son was still a partial owner. Therefore, we find that the

trial court’s decision is supported by competent, credible evidence, and, thus, is

not against the manifest weight of the evidence.

{¶33} The appellants’ second assignment of error is, therefore, overruled.

{¶34} Having found no error prejudicial to the appellants herein in the

particulars assigned and argued, we affirm the judgment of the trial court.

Judgment Affirmed

WILLAMOWSKI, P.J. and SHAW, J., concur.

/jlr

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