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Pottschmidt v. Klosterman
Citations: 865 N.E.2d 111; 169 Ohio App. 3d 824; 2006 Ohio 6964; 2006 WL 3825206Docket: No. 06CA0041-M.
Court: Ohio Court of Appeals; December 28, 2006; Ohio; State Appellate Court
Appellants Thomas J. Klosterman, M.D. Inc., Thomas J. Klosterman, M.D., and Klosterman Family Practice, Inc. appeal a judgment from the Medina County Court of Common Pleas favoring appellee Steven A. Pottschmidt, M.D. The case centers on an employment agreement between Dr. Pottschmidt and the original corporation, which was established in June 2001 and amended multiple times to extend his employment through June 2004. Following the expiration of this agreement, Dr. Pottschmidt resigned and subsequently filed a lawsuit alleging breach of contract and quantum meruit for unpaid wages. In September 2004, Dr. Klosterman formed Klosterman Family Practice, Inc. to mitigate potential liabilities stemming from Dr. Pottschmidt's claims, while continuing operations with the same staff and resources. Dr. Pottschmidt later amended his lawsuit to include the new corporation and assert claims for successor liability, piercing the corporate veil, and violations of the Uniform Fraudulent Transfers Act. After a trial in 2005, the magistrate issued a decision that was later adopted by the trial court, despite appellants filing objections and a subsequent motion for a new trial, both of which were denied. Appellants then filed a notice of appeal, presenting four assignments of error for review. The court affirmed the lower court's judgment. The magistrate's findings, adopted by the trial court, are challenged on the grounds that they misinterpreted the evidence regarding an alleged breach of the employment contract by Klosterman M.D. Inc. Specifically, the court mistakenly concluded that Klosterman M.D. Inc. violated the contract by not adhering to a maximum expense deduction limit and that there was no verbal agreement between Klosterman M.D. Inc. and Dr. Pottschmidt to waive this provision. Appellants argue that Dr. Pottschmidt had verbally waived the limitation on expenses, while Dr. Pottschmidt asserts he did not waive it due to a no-modification clause in the contract. The appellate review process involves examining the entire record, assessing the evidence, and evaluating witness credibility to determine if the trial court's judgment constitutes a manifest miscarriage of justice. The standard applied is deferential, allowing for reversal only if there is no competent, credible evidence supporting the trial court’s decision. The employment agreement specifies that Dr. Pottschmidt's monthly compensation is derived from his receipts minus corporate expenses, with section 2(D)(2) detailing a minimum expense of $3,000 and a maximum of 50% of receipts over $6,000. The trial court found that the corporation did not comply with this expense limitation, resulting in an underpayment of $130,958 to Dr. Pottschmidt. Testimonies from both parties confirmed that the expense limitation was not adhered to and outlined how expenses should have been calculated per the agreement. The trial court determined that there was no waiver of the 50-percent-of-receipts limitation based on the no-modification provision in section 10 of the employment agreement, which mandates that any changes must be in writing and signed by the party against whom the waiver is asserted. Dr. Klosterman claimed that the parties had verbally agreed to waive this limitation due to reimbursement for Dr. Pottschmidt's expenses by Medina General Hospital, though he later acknowledged in his deposition that he was aware of the hospital contract at the time of signing the employment agreement. Appellants argued that Dr. Pottschmidt waived his right to enforce this limitation and the no-modification provision by not raising concerns during the contract's term while continuing to perform under its terms. The record shows only three signed documents post-agreement, none of which waived the 50-percent limitation or the no-modification provision. Sections 10 and 11 of the employment agreement clarify that a waiver of one provision does not imply a waiver of any other provision or subsequent breaches. Appellants cited two cases to support their claim of implied waiver. The first, Fahlgren Swink, Inc. v. Impact Resources, Inc., involved a genuine issue of material fact regarding waiver in a summary judgment context, contrasting with the trial resolution in this case. The second, Frantz v. Van Gunten, allowed jury determination on whether parties had waived a written-modification clause, emphasizing the need for clear and convincing evidence. Waiver of a no-oral-modification provision is possible but must be determined by the trier of fact. In this case, Dr. Pottschmidt testified that he did not waive any provisions of the employment agreement and relied on Dr. Klosterman for proper expense allocation. Dr. Pottschmidt only realized the expenses were not allocated according to the agreement when presented with a new contract that removed a critical limitation. Both appellants' accountant and the individual preparing expense reports were unaware of this limitation until 2004. Dr. Klosterman indicated that he would not have amended the agreement had Dr. Pottschmidt insisted on the limitation, asserting that Dr. Pottschmidt did not enforce it despite monthly summaries being provided. Establishing waiver requires a heavy burden of proof. The trial court found sufficient evidence supporting its conclusion that there was no waiver or modification of the employment agreement regarding compensation calculation, leading to the overruling of the appellants' first assignment of error. Regarding the second assignment of error, the trial court's conclusion that Klosterman Family Practice, Inc. is liable for obligations of Klosterman, M.D. Inc. under successor liability was challenged by the appellants. The court followed established Ohio law on corporate successor liability, which states that a buyer corporation is not liable for the seller's tortious conduct unless certain exceptions apply. The trial court found that two specific exceptions—de facto consolidation or merger and continuation of the seller corporation—applied here, and it impliedly found that the transaction was entered into fraudulently to escape liability. The court's findings on both assignments of error were deemed supported by competent, credible evidence. A de facto merger occurs when a merger happens in practice without an official declaration, characterized by the continuation of business activities and personnel, continuity of shareholders through asset sales for stock, rapid dissolution of the predecessor corporation, and the new corporation assuming all liabilities necessary to maintain the predecessor's operations. In this case, appellants argue that the trial court incorrectly found a de facto merger between the original and new corporations, citing the original corporation's lack of dissolution, absence of asset transfer, Dr. Klosterman’s personal assumption of liabilities, and other factors indicating separateness. However, evidence presented at trial showed that the new corporation acquired the original's office equipment, medical supplies, and accounts receivable, served the same patient base, operated from the same location, and had Dr. Klosterman as the sole shareholder. The new corporation took over financial responsibilities previously held by the original corporation, and the original corporation had effectively ceased operations, closing its bank account and filing a final tax return. The continuation theory applies when one corporation sells its assets to another with the same ownership, treating the new entity as a continuation of the old. In this instance, both corporations operated under Dr. Klosterman, utilized the same employees, and served the same patients, supporting the conclusion of continuity between the two entities. Evidence presented at trial indicated that a new corporation was created to avoid liability shortly after Dr. Pottschmidt filed a lawsuit. Dr. Klosterman admitted to forming this corporation, claiming his motivation was concerns over Dr. Pottschmidt's narcotics prescriptions rather than the lawsuit. However, Mr. Cooper testified that discussions regarding the lawsuit occurred prior to the corporation's formation. The trial court found sufficient evidence to establish that the new corporation was liable for the original corporation's tortious acts, thus overruling the appellants' second assignment of error regarding this liability. In the third assignment of error, the appellants contended that the trial court incorrectly pierced the corporate veil of both the original and new corporations to hold Dr. Klosterman personally liable for $133,511. Generally, shareholders are not responsible for corporate debts unless specific conditions are met: complete control over the corporation, the use of that control to commit fraud or illegal acts against creditors, and resulting injury or unjust loss to the creditor. The trial court determined that these conditions were satisfied, allowing Dr. Pottschmidt to hold Dr. Klosterman personally liable. The first condition of the Belvedere test, known as the "alter ego doctrine," requires proof that the individual and corporation are indistinguishable. Factors considered include adherence to corporate formalities, maintenance of corporate records, commingling of funds, and personal use of corporate property. The trial court found that Dr. Klosterman exercised complete control over both corporations, managing finances and legal matters, which supported the court's decision to pierce the corporate veil. Dr. Klosterman and the corporations involved failed to adhere to corporate formalities, evident in their inconsistent use of corporate names for signage, letterhead, and billing, often billing under Dr. Klosterman's name. There was a commingling of personal and corporate funds, exemplified by Dr. Klosterman purchasing a vehicle with personal funds but titling it under the original corporation, which made the payments and allocated them as income to him. After establishing a new corporation, Dr. Klosterman transferred the vehicle's title to himself, and financial transactions between the original and new corporations included income and expenses being intermingled. The new corporation was formed shortly after the original corporation was sued, allegedly to evade liability related to the lawsuit. No consideration was paid for the assets transferred from the original to the new corporation, and while the original corporation had some accounts receivable, the value of its assets was unclear. The trial court found that these actions rendered the original corporation an empty shell, preventing Dr. Pottschmidt from collecting his judgment. The court supported piercing the corporate veil, making Dr. Klosterman liable for the judgment. The appellants' argument regarding the damages awarded to Dr. Pottschmidt, claiming they exceeded the asset value allowed under the Fraudulent Transfer Act (FTA), was deemed without merit. Dr. Klosterman is held personally liable for the original corporation's obligations due to his fraudulent conveyance of assets to a new corporation. This determination is tied to the court's analysis of successor liability and piercing the corporate veil, leading to a judgment against him personally. Damages were awarded to Dr. Pottschmidt for breach of contract, amounting to $130,957, as indicated in the magistrate's report, with no limitations specified for such claims. The appellate court found competent evidence supporting the trial court's judgment, ruling against the appellants' fourth assignment of error. Consequently, the Medina County Court of Common Pleas' decision is affirmed. Additionally, Dr. Klosterman acknowledged personally assuming a $17,000 equipment loan, but noted that the new corporation was covering loan payments and rental fees for equipment owned by the Klosterman Family Education Trust. Judge Boyle concurs with the judgment, while Judge Slaby dissents.