Kozel v. Andrews

[Cite as Kozel v. Andrews, 2013-Ohio-3887.]

COURT OF APPEALS
TUSCARAWAS COUNTY, OHIO
FIFTH APPELLATE DISTRICT

MARK D. KOZEL, JUDGES:
AS CHAPTER 7 TRUSTEE Hon. W. Scott Gwin, P.J.
FOR TWIN CITY HOSPITAL Hon. William B. Hoffman, J.
Hon. Patricia A. Delaney, J.
Plaintiff-Appellant
Case No. 2012 AP 11 0066
-vs-

GREGG ANDREWS, ET AL. OPINION

Defendants-Appellees

CHARACTER OF PROCEEDING: Appeal from the Tuscarawas County Court
of Common Pleas, Case No.
2012 CT 05 0474

JUDGMENT: Reversed and Remanded

DATE OF JUDGMENT ENTRY: September 5, 2013

APPEARANCES:

For Defendants-Appellees For Plaintiff-Appellant

DAVID L. DINGWELL JONATHON M. YARGER
EDMOND J. MACK VICTOR D. RADEL
LEE E. PLAKAS ANDREW J. YARGER
JOSHUA E. O'FARRELL Yarger, Radel & Pentz, LLC
Tzangas, Plakas, Mannos, LTD 1111 Superior Avenue, Suite 530
220 Market Avenue South Cleveland, Ohio 44114
Eighth Floor
Canton, Ohio 44702
Tuscarawas County, Case No. 2012 AP 11 0066 2

Hoffman, J.

{¶1} Plaintiff-appellant Mark D. Kozel, as Chapter 7 Trustee for Twin City

Hospital, appeals the October 12, 2012 Judgment Entry entered by the Tuscarawas

County Court of Common Pleas, which granted summary judgment in favor of

defendants-appellees Gregg Andrews, et al.

STATEMENT OF THE CASE AND FACTS

{¶2} Twin City Hospital (hereinafter “Twin City”) is a small rural acute care

hospital located in Dennison, Tuscarawas County, Ohio. Twin City has served the

community for over one hundred years.

{¶3} On October 13, 2010, Twin City filed Chapter 11 Bankruptcy. The

creditors of Twin City duly elected Appellant as Trustee, replacing the originally

appointed Trustee. The proceeding under Chapter 11 was subsequently converted to a

Chapter 7 proceeding.

{¶4} On January 23, 2012, Appellant filed a complaint in the U.S. Bankruptcy

Court for the Northern District of Ohio, Eastern Division, against Appellees Carol

Hoffman, Marge Jentes, Darrell Pancher, John Rypien, Bill Surber, Jim Weaver, Dr.

Gregg Andrews, Fred Bollon, Greg DiDonato, Tim McKnight, Rod Rafael, and Doug

Ross as defendants. Appellees are the former Board Members of Twin City. Appellant

asserted Appellees acted improperly by issuing approximately $17.3 million in tax

exempt revenue bonds to fund new construction and renovations to Twin City and to

refinance the hospital’s outstanding long term obligations while its finances were in poor

condition. On March 12, 2012, Appellees filed their motion for abstention, asking the

bankruptcy court to exercise its permissive authority to abstain from hearing the
Tuscarawas County, Case No. 2012 AP 11 0066 3

adversary proceeding pursuant to 28 U.S.C. § 1334(c)(1), and allow the matter to be

heard by the Tuscarawas County Court of Common Pleas. The bankruptcy court

granted Appellees’ motion and ordered the case be filed in the Tuscarawas County

Court of Common Pleas.

{¶5} Appellant filed the instant action on May 22, 2012. A visiting judge was

assigned to the case. Appellees filed a Civ. R. 12(B)(6) motion to dismiss. Appellant

filed a brief in opposition thereto. Via Order of the Court filed August 15, 2012, the trial

court found the parties’ motions presented matters outside the complaint and ordered

the motion to dismiss be treated as a motion for summary judgment, and permitted the

parties to file supplemental briefs and supporting evidence.

{¶6} The evidence presented in support of and in opposition to summary

judgment revealed the following. Effective January 1, 2001, Twin City received full

accreditation from the Center for Medicare and Medicaid Services for a critical access

hospital designation. Such designation allowed Twin City to receive reasonable, cost-

based reimbursement for both inpatient and outpatient services provided to Medicare

beneficiaries, thereby affecting Twin City’s revenue.

{¶7} The Joint Commission on the Accreditation of Healthcare Organizations

(“JCAHO”), a peer review organization, conducted independent reviews of hospitals to

assess the appropriateness of the admission of Medicare program beneficiaries. In

July, 2004, JCAHO conducted an inspection of Twin City after which the organization

mandated Twin City upgrade its emergency room or lose its accreditation. JCAHO

required Twin City to have construction of the new emergency room underway by the

next inspection, which was to be conducted in late 2006. JCAHO’s mandate was the
Tuscarawas County, Case No. 2012 AP 11 0066 4

result of a number of concerns including the fact stronger standards required better

patient flow, increased privacy, and less overcrowding; the outdated infrastructure could

not support new technologies; space constraints limited the emergency room’s

capabilities; and emergency room visits had reached capacity.

{¶8} The limitations of and the need to replace the emergency room were

discussed at Board Meetings. Twin City physicians advised Appellees improvements to

the emergency room would increase visits, admissions, and the use of outpatient

services. Twin City physicians saw the emergency room as “the greatest obstacle to

the success of Twin City Hospital”. As a result, Appellees retained Alberici

Constructors, Inc. of St. Louis, Missouri, in April, 2005, to create drawings for the

emergency room capital improvement project. Appellees also retained Carnegie

Consulting, Inc. of Akron, Ohio, to facilitate the creation of a comprehensive financial

feasibility study and implementation plan to determine the viability of the project. In

July, 2005, the cost of the emergency room capital improvement project was estimated

at $10 million. Carnegie investigated possible lenders. Appellees evaluated a variety of

fundraising and grant opportunities. Carnegie advised Appellees the “[a]verage trend is

a 20% increase in volumes after opening new construction.”

{¶9} In 2005, Twin City had a net operating income of $24,870. However, in

2006, the operating income fell to negative $407,216. The operating income loss

continued in 2007, at negative $795,000; in 2008, at negative $895,000; and in 2009, at

negative $2,146,000.

{¶10} Appellees began the fundraising efforts and by January, 2006, $2.8 million

in donations had been pledged to Twin City. In addition, the City Councils of
Tuscarawas County, Case No. 2012 AP 11 0066 5

Uhrichsville and Dennison approved a resolution to place a property tax levy which

would generate $1.5 million over a ten year period. The levy passed by a two to one

margin.

{¶11} At a Special Board Meeting held November 14, 2005, Appellees received

a “Rural Hospital Replacement Study” which outlined the impact of new construction on

the operations and bottom lines of critical access hospitals. The Study highlighted four

main points:

 Rural communities which built new critical access hospitals experienced

increased market share and local usage of services;

 Rural communities which built new critical access hospitals reported

enhanced clinical performance, improved workforce recruitment and

retention, and improved quality performance efforts overall;

 New rural critical access hospitals experienced volume, efficiency, and

profitability gains in excess of industry averages; and

 While growth could not be attributed solely to the new facility, the results

of the 20 rural critical access hospitals which built new facilities were

“nearly universally positive.”

{¶12} Appellees retained the certified public accounting firm of Arnett & Foster

PLLC to provide projected balance sheets, statements of operations, and other

analyses to facilitate the completion of the financial feasibility study for the emergency

room capital improvement project.

{¶13} Appellees contemplated expanding the scope of the emergency room

capital improvement project to include improvement to the second floor of the facility.
Tuscarawas County, Case No. 2012 AP 11 0066 6

Carnegie advised Appellees, “From a financial standpoint, the project looks favorable

with no different risk level with completion of the second floor.” Thereafter, in August,

2006, Carnegie provided Appellees with a business plan for Twin City which was based

upon Appellees’ projection of a 6% growth in revenue in 2006. In actuality, Twin City

only experienced a 2% growth in revenue in 2006. The business plan set forth a

comprehensive description of the revised capital improvement project, which was

projected to cost over $21 million.

{¶14} In Janurary 2007, Appellees were advised all of the compliance

information had been submitted to JCAHO, and Twin City was no longer in danger of

losing its Medicare/Medicaid accreditation. Nonetheless, Appellees researched

financing options, and retained the law firm of Peck, Shaffer and Williams, LLP, to act

as bond counsel. Upon review of the financing options, Appellees decided to utilize the

financial advising services of Fifth Third Securities with potential financing to be

underwritten by B.C. Ziegler and Co. On April 25, 2007, Appellees entered into a

resolution which set forth Appellees’ approval of Twin City’s intent to finance the cost of

the project through “the consummation of a tax-exempt financing transaction * * *

subject to the [acceptance of the] final Feasibility Study” prepared by Arnett & Foster,

“showing [Twin City] will be able to service the necessary debt”. Arnett & Foster

presented a tentative draft of the Feasibility Study to Appellees on or about June 21,

2007. Arnett & Foster concluded:

The accompanying financial projection indicates sufficient funds

could be generated to meet [Twin City’] operating expense, working

capital needs, and other financial requirements including the debt service
Tuscarawas County, Case No. 2012 AP 11 0066 7

requirements associated with the $16.9 million bond issuance during the

projection periods. However, the achievement of any financial projection

is dependent upon future events, the occurrence of which cannot be

assured.

{¶15} In a letter to Appellees, Arnett & Foster identified “Significant deficiencies”

in Twin City’s internal control. Arnet & Foster explained a significant deficiency is:

a control deficiency, or combination of control deficiencies, that

adversely affects the entity’s ability to initiate, authorize, record, process,

or report financial data reliably in accordance with generally accepted

accounting principles such that there is more than a remote likelihood that

a misstatement of the entity’s financial statements that is more than

inconsequential will not be prevented or detected.

{¶16} Sometime during 2007, Twin City was forced to fire its CFO. Appelllees

met with Peck, Shaffer and Williams, bond counsel, to review all of the documents

associated with the emergency room capital improvement project. Peck, Shaffer and

Williams informed Appellees, “The feasibility study does show that we should be able to

meet the debt service ratio.” On August 1, 2007, Appellees approved a “resolution to

proceed with bond transaction as means of providing financing for the building project.”

At the August 1st meeting, Appellees were advised Twin City had suffered an operating

loss of $407,216 in 2006.

{¶17} On August 8, 2007, Arnett & Foster completed the final financial feasibility

study, which was identical to the tentative draft in all respects except for the amount of

the bond issuance. The evidence indicates Appellees never read the feasibility study
Tuscarawas County, Case No. 2012 AP 11 0066 8

despite conditioning approval of the bond on a positive feasibility study. The amount of

the bond issuance increased from $16.9 million to $17.3 million. Appellees finalized the

bond transaction. Ultimately, tax exempt revenue bonds in the amount of $16,775,000

were issued to finance the Twin City emergency room capital improvement project.

Appellees postponed approval of the financial statements, which would have shown the

incorrect projections, until after the bond transaction was approved and underway.

{¶18} Construction of the emergency room capital improvement project was

completed in the spring of 2009. During 2009, Twin City began to experience a

dramatic change in payor mix, seeing a significant increase in Medicaid and self-pay

patients. As a result, by mid-2010, Twin City was writing off 61% of charges which

included Medicaid and charity care. Twin City filed Chapter 11 bankruptcy in October

2010. Twin City’s assets including the physical building were sold through the

bankruptcy court to Trinity Hospital Twin City in May, 2011. Trinity Hospital Twin City

operates as part of the ministry of Sylvania Franciscan Health which is operated by the

Sisters of St. Francis of Sylvania, Ohio.

{¶19} Via Judgment Entry filed October 12, 2012, the trial court granted

summary judgment in favor of Appellees. The trial court found Appellant had failed to

establish by clear and convincing evidence any Appellee “was conscious that Board

approval of the bond transaction would, in all probability, result in the failure of Twin City

Hospital.” October 12, 2012 Judgment Entry at p.5.

{¶20} It is from this judgment entry Appellant appeals, raising the following

assignments of error:
Tuscarawas County, Case No. 2012 AP 11 0066 9

{¶21} “I. THE TRIAL COURT ERRED IN GRANTING THE DEFENDANTS-

APPELLEES’ MOTION FOR SUMMARY JUDGMENT.

{¶22} “II. THE TRIAL COURT ERRED IN GRANTING THE DEFENDANTS-

APPELLEES’ MOTION FOR SUMMARY JUDGMENT.

{¶23} “III. THE TRIAL COURT ERRED IN GRANTING THE DEFENDANTS-

APPELLEES’ MOTION FOR SUMMARY JUDGMENT.

{¶24} “IV. THE TRIAL COURT ERRED IN GRANTING THE DEFENDANTS-

APPELLEES’ MOTION FOR SUMMARY JUDGMENT.

{¶25} “V. THE TRIAL COURT ERRED IN GRANTING THE DEFENDANTS-

APPELLEES’ MOTION FOR SUMMARY JUDGMENT.”

STANDARD OF REVIEW

{¶26} Summary judgment proceedings present the appellate court with the

unique opportunity of reviewing the evidence in the same manner as the trial court.

Smiddy v. The Wedding Party, Inc., 30 Ohio St.3d 35, 36, 506 N.E.2d 212 (1987). As

such, this Court reviews an award of summary judgment de novo. Grafton v. Ohio

Edison Co., 77 Ohio St.3d 102, 105, 671 N.E.2d 241 (1996).

{¶27} Civ.R. 56 provides summary judgment may be granted only after the trial

court determines: 1) no genuine issues as to any material fact remain to be litigated; 2)

the moving party is entitled to judgment as a matter of law; and 3) it appears from the

evidence that reasonable minds can come to but one conclusion and viewing such

evidence most strongly in favor of the party against whom the motion for summary

judgment is made, that conclusion is adverse to that party. Temple v. Wean United, Inc.,

50 Ohio St.2d 317, 364 N.E.2d 267 (1977).
Tuscarawas County, Case No. 2012 AP 11 0066 10

{¶28} It is well established the party seeking summary judgment bears the

burden of demonstrating that no issues of material fact exist for trial. Celotex Corp. v.

Catrett, 477 U.S. 317, 330, 106 S.Ct. 2548, 91 L.Ed.2d 265(1986). The standard for

granting summary judgment is delineated in Dresher v. Burt, 75 Ohio St.3d 280 at 293,

662 N.E.2d 264 (1996): “ * * * a party seeking summary judgment, on the ground that

the nonmoving party cannot prove its case, bears the initial burden of informing the trial

court of the basis for the motion, and identifying those portions of the record that

demonstrate the absence of a genuine issue of material fact on the essential element(s)

of the nonmoving party's claims. The moving party cannot discharge its initial burden

under Civ.R. 56 simply by making a conclusory assertion the nonmoving party has no

evidence to prove its case. Rather, the moving party must be able to specifically point to

some evidence of the type listed in Civ.R. 56(C) which affirmatively demonstrates the

nonmoving party has no evidence to support the nonmoving party's claims. If the

moving party fails to satisfy its initial burden, the motion for summary judgment must be

denied. However, if the moving party has satisfied its initial burden, the nonmoving party

then has a reciprocal burden outlined in Civ.R. 56(E) to set forth specific facts showing

there is a genuine issue for trial and, if the nonmovant does not so respond, summary

judgment, if appropriate, shall be entered against the nonmoving party.” The record on

summary judgment must be viewed in the light most favorable to the opposing party.

Williams v. First United Church of Christ, 37 Ohio St.2d 150, 309 N.E.2d 924 (1974).
Tuscarawas County, Case No. 2012 AP 11 0066 11

I

{¶29} In his first assignment of error, Appellant contends the trial court erred in

granting summary judgment in favor of Appellees as the trial court applied the incorrect

standard of care.

{¶30} R.C. Chapter 1702.01 et seq. set forth Ohio's non-profit corporation law.

R.C. 1702.30 specifically outlines fiduciary duties which apply to boards of directors of

non-profit corporations, and provides, in pertinent part:

(E) * * * a director is liable in damages for any act that the director

takes or fails to take as director only if it is proved, by clear and convincing

evidence, in a court with jurisdiction that the act or omission of the director

was one undertaken with a deliberate intent to cause injury to the

corporation or was one undertaken with a reckless disregard for the best

interests of the corporation.

{¶31} The trial court found “’recklessness’ as used in R.C. 1702.30 means a

perverse disregard of a known risk. It necessarily requires something more than mere

negligence. The actor must be conscious that his/her conduct will, in all probability,

result in injury.” The trial court concluded, Appellant “may not succeed on any of his

claims * * * because his Civ. R. 56 material does not create, by clear and convincing

evidence, a genuine issue of fact that any [Appellant] was conscious that Board

approval of the bond transaction, in all probability, [would] result in the failure of Twin

City Hospital.”
Tuscarawas County, Case No. 2012 AP 11 0066 12

{¶32} Appellant submits the trial court held him to a “willful” standard of care,

thereby requiring a higher threshold showing to overcome summary judgment. We

agree.

{¶33} In Anderson v. Massillon, 134 Ohio St.3d 380, 2012-Ohio-5711, the Ohio

Supreme Court held “’willful,’ ‘wanton,’ and ‘reckless’ describe different and distinct

degrees of care and are not interchangeable.” Id. at para. 1 of syllabus. The Anderson

Court explained:

Willful misconduct implies an intentional deviation from a clear duty

or from a definite rule of conduct, a deliberate purpose not to discharge

some duty necessary to safety, or purposefully doing wrongful acts with

knowledge or appreciation of the likelihood of resulting injury. Tighe v.

Diamond, 149 Ohio St. at 527, 80 N.E.2d 122; see also Black's Law

Dictionary 1630 (8th Ed.2004) (describing willful conduct as the voluntary

or intentional violation or disregard of a known legal duty). * * *

Reckless conduct is characterized by the conscious disregard of or

indifference to a known or obvious risk of harm to another that is

unreasonable under the circumstances and is substantially greater than

negligent conduct. Thompson, 53 Ohio St.3d at 104–105, 559 N.E.2d 705,

adopting 2 Restatement of the Law 2d, Torts, Section 500, at 587 (1965);

see also Black's Law Dictionary 1298–1299 (8th Ed.2004) (explaining that

reckless conduct is characterized by a substantial and unjustifiable risk of

harm to others and a conscious disregard of or indifference to the risk, but

the actor does not desire harm). Id. at para. 32 and 34.
Tuscarawas County, Case No. 2012 AP 11 0066 13

{¶34} In the instant action, the trial court ‘s definition of “reckless” was incorrect.

We recognize the trial court did not have the benefit of the Anderson decision at the

time of its ruling, however, “when case law controlling disposition of a pending appeal

changes during the pendancy of the appeal, the reviewing court should apply the new

law to the pending appeal.” Vujovic v. Vujovic, Medina App. No. 04CA0083-M, 2005 -

Ohio- 3942 at 14. Accordingly, we reverse the decision of the trial court granting

summary judgment in favor of Appellees and remand the matter with instructions the

trial court redetermine the motion for summary judgment applying the definition of

“reckless” as set forth in Anderson.

{¶35} Appellant’s first assignment of error is sustained.

II, III, IV, V

{¶36} In light of our disposition of Appellant’s first assignment of error, we find

Appellant’s remaining assignments of error to be premature.

{¶37} The judgment of the Tuscarawas County Court of Common Pleas is

reversed and the matter remanded with instructions to the trial court to redetermine the

motion for summary judgment applying the definition of “reckless” as set forth in

Anderson.

By: Hoffman, J.

Gwin, P.J. and

Delaney, J. concur ___________________________________
HON. WILLIAM B. HOFFMAN

___________________________________
HON. W. SCOTT GWIN

___________________________________
HON. PATRICIA A. DELANEY
Tuscarawas County, Case No. 2012 AP 11 0066 14

IN THE COURT OF APPEALS FOR TUSCARAWAS COUNTY, OHIO
FIFTH APPELLATE DISTRICT

MARK D. KOZEL, :
AS CHAPTER 7 TRUSTEE :
FOR TWIN CITY HOSPITAL :
:
Plaintiff-Appellant :
:
-vs- : JUDGMENT ENTRY
:
GREGG ANDREWS, ET AL. :
:
Defendants-Appellees : Case No. 2012 AP 11 0066

For the reasons stated in our accompanying Opinion, the judgment of the

Tuscarawas County Court of Common Pleas is reversed and the matter remanded for

further proceedings in accordance with our Opinion and the law. Costs to Appellees.

___________________________________
HON. WILLIAM B. HOFFMAN

___________________________________
HON. W. SCOTT GWIN

___________________________________
HON. PATRICIA A. DELANEY