J&B Fleet Indus. Supply, Inc. v. Miller , 2011 Ohio 3165 ( 2011 )

[Cite as J&B Fleet Indus. Supply, Inc. v. Miller, 2011-Ohio-3165.]
STATE OF OHIO, MAHONING COUNTY
IN THE COURT OF APPEALS
SEVENTH DISTRICT
J&B FLEET INDUSTRIAL SUPPLY, INC.,)
) CASE NO. 09 MA 173
PLAINTIFF-APPELLANT, )
)
- VS - ) OPINION
)
RICK MILLER, )
)
DEFENDANT-APPELLEE. )
CHARACTER OF PROCEEDINGS: Civil Appeal from Common Pleas
Court, Case No. 08 CV 1591.
JUDGMENT: Affirmed.
APPEARANCES:
For Plaintiff-Appellant: Attorney Kenneth Cardinal
758 North 15th Street
P.O. Box 207
Sebring, OH 44672
For Defendant-Appellee: Attorney Dennis Haines
Attorney Charles Oldfield
Green, Haines, Sgambati, Co., LPA
16 Wick Avenue, Suite 400
Youngstown, OH 44501-0849
JUDGES:
Hon. Mary DeGenaro
Hon. Gene Donofrio
Hon. Joseph J. Vukovich
Dated: June 16, 2011
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DeGenaro, J.
{¶1} Plaintiff-Appellant, J&B Fleet Industrial Supply, Inc. appeals the decision of
the Mahoning County Court of Common Pleas overruling objections to a magistrate's
decision and granting summary judgment in favor of Defendant-Appellee, Rick Miller in a
suit for breach of contract, injunctive relief and fraud. J&B argues the trial court erred by
concluding that J&B's contract-based claims against Miller were discharged in bankruptcy
and by improperly limiting discovery. Finally, J&B argues there were genuine issues of
material fact precluding summary judgment on its fraud claim, and that it pleaded the
fraud claim with sufficient particularity. For the following reasons, J&B's assignments of
error are meritless, and accordingly, the judgment of the trial court is affirmed.
Facts and Procedural History
{¶2} J&B is a corporation that supplies sundry products to commercial and
industrial markets. Miller was employed by J&B as a sales agent. Prior to that, Miller
worked in sales and marketing for J&B's competitors, where he gained expertise in the
industry.
{¶3} On March 23, 2003, Miller and J&B entered into an "Independent Sales and
Marketing Agreement" which had a stated term of twenty years. Among other things,
Miller agreed to terminate his employment relationship with J&B and instead become an
independent distributor. J&B agreed to permit Miller to use the J&B logo, signage,
catalogs, and business accounts for banking purposes. J&B agreed to extend to Miller a
$10,000.00 line of credit, which was secured by Miller's "funded account," the retainage
held by J&B from Miller's sales commissions when Miller was employed as a J&B sales
agent. The Agreement also contained a non-compete clause which purported to limit
Miller's right to compete with J&B for the duration of the contract and for an additional 20
years. The non-compete clause allowed J&B to conduct business in 87 out of 88 of
Ohio's counties. It provided Miller with exclusive rights only to Franklin County, but
permitted J&B to retain some existing customers. The non-compete clause further
prohibited Miller from competing with J&B in 56 Ohio counties, including Stark, where
Miller resides, and counties surrounding Stark.
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{¶4} On November 18, 2003, Miller filed a Chapter 7 bankruptcy petition, and on
April 7, 2004, was granted a no-asset discharge.
{¶5} According to Miller, he informed J&B owner and president Louis W.
diDonato1 about his bankruptcy filing. Miller also averred he had discussions with
diDonato about the bankruptcy, both before he filed, and during the course of the
bankruptcy proceedings. diDonato admitted that he was aware of Miller's financial
problems, stating: "Miller did inform me that he was or would be seeking a divorce and he
had debts. He expressed that he may have to file bankruptcy to rid himself of marital and
personal debts. I cannot recall if he told me before March or after March, 2003."
{¶6} Following Miller's bankruptcy discharge, Miller continued to perform his
obligations under the Agreement. Miller did not notify J&B of the discharge. However,
Miller never entered into a reaffirmation agreement with J&B.
{¶7} J&B filed a complaint against Miller for breach of contract and injunctive
relief. J&B claimed that Miller breached the non-compete clause by conducting business
in competition with J&B in areas prohibited by the Agreement. J&B requested that Miller
be enjoined from continuing to breach the non-compete clause and prayed for damages
for the breach. J&B attached an affidavit from diDonato in support of the request for an
injunction.
{¶8} Miller answered and counterclaimed for fraud and breach of contract.
Specifically, Miller claimed that J&B had committed fraud by failing to disclose all of its
accounts as provided in the Agreement, and that Miller had relied on J&B's alleged
misrepresentations and had been damaged therefrom. Miller also alleged that J&B had
breached the non-compete clause by competing with Miller in Franklin County in
contravention of the Agreement. Miler also requested an injunction prohibiting J&B from
breaching the non-compete.
{¶9} In an August 5, 2008 decision, the magistrate issued a preliminary
injunction, preventing both parties from breaching the non-compete clause. No
objections were filed and the trial court adopted the decision.
1
The record reveals diDonato uses his middle name, William, and also Bill.
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{¶10} On January 13, 2009, Miller, having retained new counsel, filed a motion for
leave to amend his answer and stay discovery. Specifically, Miller sought to add the
affirmative defense of discharge in bankruptcy. Further, Miller moved the court to stay
discovery as he intended to file a dispositive motion on the basis of the bankruptcy
discharge defense and was concerned if discovery continued on other matters J&B could
gain information about Miller's business operations that could give J&B a competitive
advantage over Miller.
{¶11} On March 18, 2009, the magistrate issued an order granting both parties
leave to amend their pleadings. The magistrate set deadlines for filing summary
judgment motions. Finally, the magistrate ruled that pending a ruling on the motion for
summary judgment discovery is stayed except relating to: (1) Miller's affirmative defense
of discharge in bankruptcy; (2) J&B's contention that a contract between the parties
existed after the bankruptcy; and (3) violations of the court's previous orders.
{¶12} J&B never moved to set aside this order. Instead, despite the directives of
that order, on March 20, 2009, J&B filed a motion to compel discovery. As noted in the
record, this motion was improperly served on Miller's prior counsel. The trial court never
ruled on the motion to compel.
{¶13} On March 27, 2009, the magistrate issued an amended magistrate's order,
which was substantially the same as the March 18 order, except that it corrected
misidentification of the parties and errors with dates. J&B never moved to set aside this
order.
{¶14} On March 26, 2009, Miller filed an amended answer and counterclaim, in
which he added the affirmative defense of discharge in bankruptcy. On April 10, 2009,
J&B filed an amended complaint which added claims for fraud and estoppel, in addition to
the claims for breach of contract and injunctive relief. Miller filed an answer to the
amended complaint.
{¶15} Miller filed a motion for summary judgment on April 24, 2009 with regard to
J&B's claims against him, arguing J&B's claims for breach of contract and injunctive relief
had been discharged in bankruptcy. Alternatively, Miller argued that the non-compete
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clause is unreasonable and should not be enforced. Finally, Miller argued there were no
genuine issues of material fact with regards to J&B's fraud claim. Attached to Miller's
motion were his affidavit and two exhibits, the Agreement and his discharge order from
the bankruptcy court.
{¶16} J&B filed a brief in opposition raising four arguments. First, J&B argued that
its breach of contract and injunctive relief claims could not be barred by the bankruptcy
discharge because Miller had waived the use of that defense by counterclaiming for
breach of contract. Second, its claim for injunctive relief is non-dischargeable as it was a
separate and distinct remedy under the Agreement which arose post-bankruptcy. Third,
the non-compete clause was reasonable, and that the law cited by Miller with regard to
the non-compete was inapplicable because the covenant was not made in an
employment context. Fourth, there were genuine issues of material fact remaining
regarding its fraud claim. J&B attached seven exhibits, five of which were pleadings
contained in the record. The other two were an affidavit from diDonato and a copy of the
Agreement.
{¶17} On June 12, 2009, the magistrate issued a two-sentence decision granting
summary judgment against J&B for all of its claims against Miller. J&B filed a request for
findings of fact and conclusions of law. Miller filed a motion to strike that request,
claiming that findings of fact and conclusions of law are inappropriate where litigation has
been terminated by summary judgment. The magistrate overruled Miller's motion to
strike and ordered Miller to submit proposed findings of fact and conclusions of law.
{¶18} On August 11, 2009, the magistrate issued a lengthier decision concluding
that the bankruptcy discharge barred the claims for breach of contract and injunctive
relief, and even if the claims were not barred, the non-compete was unreasonable and
unenforceable. Finally, the magistrate found there were no genuine issues of material
fact regarding the fraud and estoppel claims.
{¶19} J&B filed objections to the magistrate's decision which the trial court
overruled, adopting the magistrate's decision in its entirety, and entering judgment for
Miller on J&B's amended complaint.
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Discovery Orders
{¶20} For ease of analysis, J&B's seven assignments of error will be addressed
out of order and will be grouped together by subject matter. In its fourth and fifth
assignments of error, J&B contends:
{¶21} "The trial court erred in issuing a stay of full discovery which would establish
the reasonableness of the mutual non-compete clause which each sought to enforce by
injunctive relief in the respective pleadings."
{¶22} "The trial court erred by terminating pre-trial discovery regarding
fundamental issues in the litigation based solely upon an affirmative defense in order to
expedite the conclusion of the case."
{¶23} J&B specifically takes issue with two magistrate's orders, one dated March
18, 2009 and the other March 27, 2009. Substantively, both orders are the same in that
they granted both parties leave to amend pleadings and file motions for summary
judgment. Both orders include the following language:
{¶24} "Pending a decision on the motion for summary judgment, discovery herein
is stayed, except that discovery relating to the following:
{¶25} "1.) Defendant's affirmative defense of discharge in bankruptcy.
{¶26} "2.) Plaintiff's contention that a contract between the parties existed after the
bankruptcy;
{¶27} "3.) Violations of this Court's previous Order."
{¶28} The only changes to the March 27, 2009 order (which was labeled
"Amended Magistrate's Order") involved correcting typographical errors regarding dates
and party names (i.e., changing "plaintiff" to "defendant.")
{¶29} J&B argues these orders prevented further discovery regarding the
reasonableness of the non-compete clause, and the limited scope contravenes the Civil
Rules, which provide for liberal discovery on "any matter, not privileged, which is relevant
to the subject matter involved in the pending action." Civ.R. 26(B)(1). Miller counters that
J&B waived these arguments by failing to oppose the discovery orders at the proper time
in the trial court.
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{¶30} Magistrates have the authority to enter orders without judicial approval "if
necessary to regulate the proceedings and if not dispositive of a claim or defense of a
party." Civ.R. 53(D)(2)(a)(i). Orders regulating discovery, such as the ones at issue here,
clearly fall under the purview of this rule. See, e.g., Crawford v. Hawes, 2d Dist. No.
23209, 2010-Ohio-952, at ¶25. See, also, Staff Notes to 2006 Amendments to Civ.R.
53(D). Subpart (2)(b) specifies the procedure for setting aside a magistrate's order:
{¶31} "Any party may file a motion with the court to set aside a magistrate's order.
The motion shall state the moving party's reasons with particularity and shall be filed not
later than ten days after the magistrate's order is filed. The pendency of a motion to set
aside does not stay the effectiveness of the magistrate's order, though the magistrate or
the court may by order stay the effectiveness of a magistrate's order."
{¶32} If a party does not move to set aside a magistrate's order, that party waives
a challenge to that order on appeal. Nettle v. Nettle, 9th Dist. No. 25001, 2010-Ohio-
4638, at ¶13, citing Crawford, supra. See, also, Spier v. Spier, 7th Dist. No. 05 MA 26,
2006-Ohio-1289, at ¶55-57 (discussing a prior version of Civ.R. 53(D)(2)(b)). J&B never
filed a motion to set aside either of the magistrate's discovery orders, and is precluded
from raising the issue on appeal.
{¶33} Moreover, J&B never moved for additional time to complete discovery
pursuant to Civ.R. 56(F). The remedy for a party who must respond to a summary
judgment motion before he or she has completed adequate discovery is a motion under
Civ.R. 56(F). Carbone v. Austintown Surgery Ctr., L.L.C., 7th Dist. No. 09 MA 35, 2010-
Ohio-1314, at ¶30. Importantly, "an appellant who failed to seek relief under Civ.R. 56(F)
in the trial court has not preserved his rights thereto for purposes of appeal." Petty v.
Mahoning Women's Centre, Inc. (Feb. 15, 1995), 7th Dist. No. 93 C.A. 32, at *3-4,
quoting Stegawski v. Cleveland Anesthesia Group, Inc. (1987), 37 Ohio App. 3d 78, 523
N.E.2d 902, at paragraph four of the syllabus.
{¶34} Civ.R. 56(F) permits "a party the opportunity to request additional time to
obtain, through discovery, the facts necessary to adequately oppose a motion for
summary judgment." Morantz v. Ortiz, 10th Dist. No. 07AP-597, 2008-Ohio-1046, at ¶20.
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"A party seeking a Civ.R. 56(F) continuance has the burden of establishing a factual basis
and reasons why the party cannot present sufficient documentary evidence without a
continuance." Shirdon v. Houston, 2d Dist. No. 21529, 2006-Ohio-4521, at ¶10; see,
also, Beegle v. Amin, 156 Ohio App. 3d 533, 2004-Ohio-1579, 806 N.E.2d 1045, at ¶8
(Seventh District). Pursuant to the language of Civ.R. 56(F), this factual basis must be
set forth in an affidavit. Civ.R. 56(F). Such affidavits are made by the movant or his or
her counsel. See, e.g., Reywal Co. Ltd. Partnership v. Dublin, 188 Ohio App. 3d 1, 2010-
Ohio-3013, 933 N.E.2d 1164 at ¶58-59, Shirdon at ¶11. The affidavit must explain the
need for additional discovery and what such discovery would be likely to uncover. Id.
{¶35} J&B argues that Exhibit F of its Brief in Opposition to Summary Judgment,
an affidavit from diDonato, was its attempt to comply with Civ.R. 56(F). However,
diDonato's affidavit failed to mention what additional discovery would have been
beneficial to the case. Rather, it was offered pursuant to Civ.R. 56(C) as substantive
evidence in opposition to the summary judgment motion. Accordingly, J&B failed to utilize
Civ.R. 56(F).
{¶36} Because J&B failed to move to set aside the magistrate's discovery orders,
and because it failed to avail itself of the procedures contained in Civ.R. 56(F), J&B is
precluded from challenging the discovery orders on appeal, or from asserting that the trial
court prematurely granted summary judgment prior to the completion of full discovery.
Accordingly, J&B's fourth and fifth assignments of error are meritless.
Summary Judgment due to Bankruptcy Discharge
{¶37} J&B's first, second and third assignments of error assert:
{¶38} "The trial court erred in granting summary judgment based upon Appellee's
certification of discharge in bankruptcy because there continues to exist a genuine issue
of fact as to the effectiveness of said discharge to the Appellee/Defendant's indebtedness
to this Appellant."
{¶39} "Plaintiff/Appellant's claims for relief are not barred by Appellee's 2003
bankruptcy discharge since Appellee counterclaimed for breach and injunctive relief
thereby waiving the effectiveness of this affirmative defense."
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{¶40} "The trial court erred in that J&B's claim for injunctive relief is equitable and
thus a separate and distinct remedy under the contract which is not barred by the
Appellee's 2003 bankruptcy even if shown to be effective."
{¶41} An appellate court reviews a trial court's summary judgment decision de
novo, applying the same standard used by the trial court. Ohio Govt. Risk Mgt. Plan v.
Harrison, 115 Ohio St. 3d 241, 2007-Ohio-4948, 874 N.E.2d 1155, at ¶5. A motion for
summary judgment is properly granted if the court, viewing the evidence in a light most
favorable to the party against whom the motion is made, determines that: (1) there are no
genuine issues as to any material facts; (2) the movant is entitled to a judgment as a
matter of law; and (3) the evidence is such that reasonable minds can come to but one
conclusion and that conclusion is adverse to the opposing party. Civ.R. 56(C); Byrd v.
Smith, 110 Ohio St. 3d 24, 2006-Ohio-3455, 850 N.E.2d 47, at ¶10. Only the substantive
law applicable to a case will identify what constitutes a material issue, and only the
disagreements "over facts that might affect the outcome of the suit under the governing
law" will prevent summary judgment. Byrd at ¶12, citing Anderson v. Liberty Lobby, Inc.
(1986), 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202. "[T]he moving for summary
judgment, "the moving party bears the initial responsibility of informing the trial court of
the basis for the motion, and identifying those portions of the record which demonstrate
the absence of a genuine issue of fact on a material element of the nonmoving party's
claim." Dresher v. Burt (1996), 75 Ohio St. 3d 280, 296, 662 N.E.2d 264. The nonmoving
party has the reciprocal burden of specificity and cannot rest on the mere allegations or
denials in the pleadings. Id. at 293.
Effectiveness of Bankruptcy Discharge
{¶42} J&B argues that summary judgment was improper because there is a
genuine issue of material fact regarding the effectiveness of the bankruptcy discharge
with respect to J&B's contract-based claims. Specifically, J&B argues that Miller's debts
are excepted from the bankruptcy discharge because they were fraudulently incurred.
Miller counters that this argument has been waived because J&B failed to raise it in its
brief in opposition to Miller's motion for summary judgment.
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{¶43} J&B never argued that Miller's debts were excepted from the bankruptcy
discharge due to Miller's alleged fraud. However, as Miller concedes, J&B did argue, both
in its brief in opposition to summary judgment and its objections to the magistrate's
decision, that there were genuine issues of material fact remaining regarding J&B's
separate fraud claim against Miller. These issues, whether the debts are excepted from
bankruptcy due to fraud, and whether there are genuine issue of material fact regarding
J&B's fraud claim, are similar and turn on the same set of facts; whether the fact that
Miller failed to tell J&B about the bankruptcy and continued to comply with the contract
post-discharge constitutes fraud. Thus, this issue was not waived.
{¶44} The Bankruptcy Code, defines a debt as a "liability on a claim." Section
101(12), Title 11, U.S.Code. The term "claim" is defined broadly under section 101(5) as:
{¶45} "(A) right to payment, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured, or unsecured; or
{¶46} "(B) right to an equitable remedy for breach of performance if such breach
gives rise to a right to payment, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed,
secured, or unsecured." Section 101(5), Title 11, U.S.Code.
{¶47} The United States Supreme Court held a "right to payment" means "nothing
more nor less than an enforceable obligation * * *." FCC v. NextWave Personal
Communications, Inc. (2003), 537 U.S. 293, 303, 123 S. Ct. 832, 154 L. Ed. 2d 863
{¶48} A creditor is defined as, inter alia, an "entity that has a claim against the
debtor that arose at the time of or before the order for relief concerning the debtor[.]"
Section 101(10)(A), Title 11, U.S.Code.
{¶49} A discharge in bankruptcy under Section 727(a), Title 11, U.S.Code
"discharges the debtor from all debts that arose before the date of the order of relief."
Section 727(b), Title 11, U.S.Code. When dealing with a contract-based claim, the claim
"arises on the day the agreement is signed by the parties." In re May
(Bankr.Ct.S.D.Ohio.1992), 141 B.R. 940, 944. Thus, the "right to payment, although
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contingent as to a future breach, arises when the parties enter into the [ ] contract." Id.
{¶50} There are statutory exceptions to discharge listed in Section 523, Title 11,
U.S.Code. At issue is the fraud exception found in section 523(a)(2)(A), which provides in
pertinent part:
{¶51} "(a) A discharge under section 727, * * * of this title does not discharge an
individual debtor from any debt--
{¶52} "(2) for money, property, services, or an extension, renewal, or refinancing
of credit, to the extent obtained by--
{¶53} "(A) false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor's or an insider's financial condition[.]"
{¶54} To establish a prima facie case under Section 523(a)(2)(A), the creditor
must demonstrate that: "(1) the debtor obtained money through a material
misrepresentation that, at the time, the debtor knew was false or made with gross
recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor
justifiably relied on the false representation; and (4) its reliance was the proximate cause
of loss." (Internal footnote omitted) In re Salupo (Bankr.Ct.N.D.Ohio.2008), 386 B.R.
659, 665.
{¶55} There is nothing in the record demonstrating that Miller made a material
misrepresentation to J&B, either prior to or after entering into, the Agreement. To the
contrary, Miller averred that he told J&B's owner about his divorce, resulting financial
downturn and that he planned to file bankruptcy. J&B's president diDonato admitted:
"Miller did inform me that he was or would be seeking a divorce and that he had debts.
He expressed that he may have to file bankruptcy to rid himself of marital and personal
debts." Thus, the uncontroverted evidence establishes that J&B had full knowledge of
Miller's shaky financial circumstances.
{¶56} J&B cites to Ohio Finance Co. v. Greathouse (1947), 64 Ohio Law. Abs. 1,
110 N.E.2d 805, which is factually distinguishable. In Ohio Finance, the creditor
presented evidence that the debtor submitted a written credit application that contained
materially false information about the debtor's financial condition, which was relied upon
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by the creditor in lending money to the debtor. This court concluded the creditor had thus
proven the debt was fraudulently incurred, thereby rebutting the debtor's assertion of the
bankruptcy discharge defense. Id. at 808. By contrast, J&B has failed to rebut the
presumption of an effective discharge as it has presented no evidence that Miller made
misrepresentations to J&B prior to entering into the Agreement.
{¶57} That Miller failed to list J&B as a creditor in his bankruptcy does not
constitute fraud either. The failure to list a debt in a no-asset Chapter 7 bankruptcy
petition does not affect its dischargeability. In re Madaj (C.A.6, 1998), 149 F.3d 467, 469-
470 (holding that unscheduled debt owed by Chapter 7 debtors was discharged in no-
asset case, even though creditors did not learn of case until after entry of discharge order
and noting that the law in this area is "counter-intuitive.") Moreover, "a debt is either
fraudulent or not depending on the debtor's actions and intent in incurring the debt in the
first instance. An otherwise innocently incurred debt * * * does not suddenly become a
fraudulently incurred debt when the debtor fails to list it." Id. at 471 (parenthetical
example omitted).
{¶58} Finally, Miller's failure to notify J&B after-the-fact about the discharge and its
legal effect on the parties' contract does not constitute fraud. A party may voluntarily
comply with an obligation after a bankruptcy discharge. Section 524(f), Title 11,
U.S.Code. Absent a reaffirmation agreement that complies with the requirements of
Section 524(c), Title 11, U.S.Code, such voluntary compliance does not create a new
enforceable obligation. In re Whitmer, (Bankr.Ct.S.D.Ohio.1992), 142 B.R. 811, 815.
See, also, Rogers v. Huntington Natl. Bank, 12th Dist. No. CA2004-03-005, 2004-Ohio-
7045, at ¶21, citing In re Turner (C.A.7, 1998), 156 F.3d 713, 718 ("A reaffirmation
agreement is the only means by which a debtor's dischargeable personal liability on a
debt may survive a Chapter 7 discharge.") There is no reaffirmation agreement between
the parties in the record.
{¶59} A Chapter 7 no-asset debtor does not have the duty to notify his creditors of
a discharge and its legal ramifications. In re Madaj, supra. Further, J&B was, at the very
least, on notice that Miller might file bankruptcy and could have consulted counsel as to
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the legal effect of a bankruptcy discharge, and therefore J&B cannot prove justifiable
reliance. Accordingly, J&B's first assignment of error is meritless.
Waiver of Bankruptcy Discharge Defense
{¶60} First, J&B argues Miller waived his bankruptcy discharge defense by
counterclaiming for breach of contract and injunctive relief. In other words, Miller cannot
assert that J&B's claims for breach of the Agreement and injunctive relief were
discharged in bankruptcy while at the same time claiming J&B breached the Agreement.
Miller counters that this argument has been waived on appeal for failure to raise it in
J&B's objections to the magistrate's decision.
{¶61} Civ.R. 53(D)(3)(b) provides in pertinent part:
{¶62} "(ii) Specificity of objection. An objection to a magistrate's decision shall be
specific and state with particularity all grounds for objection. * * *
{¶63} (iv) Waiver of right to assign adoption by court as error on appeal. Except
for a claim of plain error, a party shall not assign as error on appeal the court's adoption
of any factual finding or legal conclusion, whether or not specifically designated as a
finding of fact or conclusion of law under Civ.R. 53(D)(3)(a)(ii), unless the party has
objected to that finding or conclusion as required by Civ.R. 53(D)(3)(b)."
{¶64} A careful reading of the objections reveals that J&B did not argue that Miller
waived the bankruptcy discharge defense vis-a-vis his counterclaim for breach and
injunctive relief.
{¶65} Thus, J&B waives review of this argument on appeal absent a showing of
plain error. Civ.R. 53(D)(3)(b)(iv); Chalker v. Steiner, 7th Dist. No. 08 MA 137, 2009-
Ohio-6533, at ¶39-40. The civil plain error standard is stringent and rarely utilized,
reserved for the "extremely rare case involving exceptional circumstances where error, to
which no objection was made at the trial court, seriously affects the basic fairness,
integrity, or public reputation of the judicial process, thereby challenging the legitimacy of
the underlying judicial process itself." Gable v. Gates Mills, 103 Ohio St. 3d 449, 2004-
Ohio-5719, at 816 N.E.2d 1049, at ¶43, quoting Goldfuss v. Davidson (1997), 79 Ohio
St.3d 116, 679 N.E.2d 1099, at syllabus.
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{¶66} The trial court did not err, let alone commit plain error. Miller did not waive
the bankruptcy discharge defense vis-a-vis his counterclaim for breach of contract and
injunctive relief because Civ.R. 8 allows for pleading in the alternative:
{¶67} "A party may set forth two or more statements of a claim or defense
alternately or hypothetically, either in one count or defense or in separate counts or
defenses. When two or more statements are made in the alternative and one of them if
made independently would be sufficient, the pleading is not made insufficient by the
insufficiency of one or more of the alternative statements. A party may also state as
many separate claims or defenses as he has regardless of consistency and whether
based on legal or equitable grounds. All statements shall be made subject to the
obligations set forth in Rule 11." Civ.R. 8(E)(2).
{¶68} Thus, a party may raise counterclaims that are inconsistent with defenses.
The fact that Miller counterclaimed for breach of the Agreement, while simultaneously
asserting that J&B's claim for breach of the Agreement was discharged in bankruptcy
does not mean that Miller waived the bankruptcy discharge defense. See, e.g.,
CommuniCare, Inc. v. Wood Cty. Bd. of Commrs. 161 Ohio App. 3d 84, 2005-Ohio-2348,
829 N.E.2d 706, at ¶21 (concluding that neither the timing of the pleading of a defense
nor the existence of claims potentially inconsistent with that defense compelled a finding
of waiver since alternative pleading is permitted under Civ.R. 8(E)(2).) Accordingly, this
argument under J&B's second assignment of error is meritless.
Estoppel of Bankruptcy Discharge Defense
{¶69} J&B next argues that summary judgment was improper because either
promissory or equitable estoppel applies to prevent Miller from asserting the bankruptcy
discharge defense. Miller counters that J&B waived this argument by failing to raise it in
its brief in opposition to the motion for summary judgment, or in its objections to the
magistrate's decision.
{¶70} J&B did amend its complaint to include a "claim" for estoppel, after Miller
amended his answer to include the bankruptcy discharge defense. J&B did not specify
which type of estoppel or how it was to be employed. However, in the language of the
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amended complaint below, J&B was alleging equitable estoppel and using it defensively;
not as a separate cause of action but rather as a tool to prevent Miller's use of the
bankruptcy discharge defense. See, e.g., Merriner v. Goddard, 7th Dist. No. 08-MO-2,
2009-Ohio-3253, at ¶98 (noting that under Ohio law equitable estoppel doctrine may be
employed to prohibit the inequitable use of a defense.)
{¶71} Count Four, entitled "Estoppel" states in relevant part:
{¶72} "30. MILLER, at all material times alleged in Count One, Count Two and
Count Three, has materially, economically and commercially gained an advantage
against J&B competing in the restrictive market place as set forth in the AGREEMENT.
{¶73} "31. For over five (5) years MILLER has mislead, [sic] induced, encouraged
and fraudulently misrepresented to J&B the AGREEMENT was in full force and effect and
MILLER received all the benefits that derived therefrom.
{¶74} "32. MILLER should be estopped from repudiating the AGREEMENT after
five (5) years of receiving the benefits therefrom to the detriment of J&B.
{¶75} "33. MILLER should be estopped from alleging a discharge in bankruptcy
after having received all the benefits of the AGREEMENT."
{¶76} Notably, in its brief in opposition to Miller's motion for summary judgment,
J&B did not argue that Miller should be equitably estopped from asserting the bankruptcy
discharge defense. And in its objections, J&B merely made a blanket statement that its
"fraud and estoppel claims raise genuine issues of material fact." J&B neither explained
specifically what facts were in dispute nor argued that Miller should be equitably estopped
from asserting the bankruptcy defense. Thus, J&B waived its estoppel argument on
appeal and we are constrained to review for plain error only.
{¶77} "'A prima facie case for equitable estoppel requires a plaintiff to prove four
elements: (1) that the defendant made a factual misrepresentation; (2) that it is
misleading; (3) [that it induced] actual reliance which is reasonable and in good faith; and
(4) [that the reliance caused] detriment to the relying party.' " Helman v. EPL Prolong,
Inc. (2000), 139 Ohio App. 3d 231, 246, 743 N.E.2d 484 (Seventh District), quoting Doe v.
Blue Cross/Blue Shield of Ohio (1992), 79 Ohio App. 3d 369, 379, 607 N.E.2d 492.
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{¶78} However, as this court explained in Merriner, supra at ¶98, where equitable
estoppel is applied defensively, it is better explained via the related concept of waiver by
estoppel:
{¶79} "Waiver by estoppel '"exists when the acts and conduct of a party are
inconsistent with an intent to claim a right, and have been such as to mislead the other
party to his prejudice and thereby estop the party having the right from insisting upon it."'
National City Bank v. Rini, 162 Ohio App. 3d 662, 2005-Ohio-4041, 834 N.E.2d 836, at
¶24, citing Mark-It Place Foods, Inc. v. New Plan Excel Realty Trust, 156 Ohio App. 3d 65,
2004-Ohio-411, 804 N.E.2d 979, at ¶57. 'Waiver by estoppel allows a party's inconsistent
conduct, rather than a party's intent, to establish a waiver of rights.' Id." Merriner at ¶99.
{¶80} Miller is not equitably estopped from asserting the bankruptcy discharge
defense. As discussed, supra, a party may voluntarily comply with its obligations under a
discharged contract, but absent a reaffirmation agreement, that compliance does not
create a new enforceable obligation. Sections 524(c),(f), Title 11, U.S.Code. In re
Whitmer, supra, 142 B.R. at 815.
{¶81} Moreover, Miller did not misrepresent his financial situation to J&B. To the
contrary, diDonato admitted he knew about Miller's financial problems, including the
possibility of a bankruptcy filing. diDonato chose not to take any action on this
knowledge, such as consult legal counsel regarding the potential ramifications. Rather,
he stated he considered this Miller's "personal business." Miller did not mislead J&B to its
prejudice by continuing to comply with the contract post-discharge. Therefore, the trial
court did not commit error, let alone plain error.
{¶82} Regarding, J&B's promissory estoppel argument which was never raised in
the trial court, this "is a quasi-contractual concept where a court in equity seeks to prevent
injustice by effectively creating a contract where none existed by supplying the element of
consideration when necessary. The device is not available to override the terms of an
express contract where one exists." TLC Healthcare Servs., L.L.C. v. Enhanced Billing
Servs., L.L.C., 6th Dist. No. L-08-1121, 2008-Ohio-4285, at ¶24, citing Telxon Corp. v.
Smart Media of Delaware, Inc., 9th Dist. No. 22098, 2005-Ohio-4931, ¶58. Here there is
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no question that the parties had an express contract. Therefore, promissory estoppel
does not apply to this case. Accordingly, this argument under J&B's second assignment
of error is meritless.
Bankruptcy Discharge of Claim for Injunctive Relief
{¶83} J&B next argues that the trial court erred by determining that its claim for
injunctive relief was barred by the bankruptcy discharge, because it is separate from the
claim for damages and therefore survives the discharge. Again, Miller counters this
argument has been waived. Because this argument was not raised in the objections to
the magistrate's decision, it is reviewable for plain error only.
{¶84} The trial court's decision regarding the dischargeability of the injunctive relief
was erroneous. As aforementioned, a "claim" is defined by the Bankruptcy Code as, inter
alia, the "right to an equitable remedy for breach of performance if such breach gives rise
to a right to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or
unsecured." Section 101(5)(B), Title 11, U.S.Code.
{¶85} In Ohio v. Kovacs, 469 U.S. 274, 105, S.Ct. 705, 83 L. Ed. 2d 649, the United
States Supreme Court addressed the issue of whether a state-court injunction ordering
the clean-up of an environmental site was discharged under section 101(5)(B). The state
court had appointed a receiver to take possession of the property. While cleanup was
underway the debtor filed bankruptcy. The Supreme Court held that because the
injunctive relief requested necessarily gave rise to a payment of money, the clean up
costs, it was a claim dischargeable in bankruptcy. Id. at 283.
{¶86} In U.S. v. Whizco, Inc. (C.A.6, 1988), 841 F.2d 147, the Sixth Circuit,
relying on Kovacs, held that a coal mine operator's Chapter 7 bankruptcy discharged the
operator's obligation to reclaim a mine site to the extent that fulfilling the obligation to
reclaim the site would force the operator to spend money, but to the extent the operator
could comply without spending money, the operator's obligation to comply was not
discharged. Id. at 150-151.
{¶87} Building on this law, the Sixth Circuit Kennedy v. Medicap Pharmacies,
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Inc. (C.A.6, 2001), 267 F.3d 493 held that a creditor's right to an injunction for breach of a
covenant not to compete was not a claim dischargeable in bankruptcy.
{¶88} "In this case, compliance with an injunction would not require the
expenditure of money. The Kennedys would simply be required to cease operating the
pharmacy in violation of the franchise agreement. Looking at the substance of the
equitable relief sought, it is clear that Medicap was not seeking the payment of money.
Medicap's right to equitable relief does not, therefore, equate to being a claim.
{¶89} "Nor is the requested injunction an alternative to the right of payment. The
Medicap franchise agreement is governed by Iowa law. Iowa law, therefore, determines
the nature of Medicap's remedies arising from the Kennedys' breach. See Butner v.
United States, 440 U.S. 48, 54-55, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979). Under Iowa law,
damages may be awarded in addition to an injunction for breach of a covenant not to
compete. An injunction, however, is designed to avoid irreparable injury and may issue
only when the party seeking it has no adequate remedy at law. Presto-X-Company v.
Ewing, 442 N.W.2d 85, 89 (Iowa 1989)." Kennedy at 497-498.
{¶90} Similarly, Ohio law allows for the award of damages in addition to an
injunction for breach of a covenant not to compete. See, e.g., Mesarvey, Russell & Co. v.
Boyer (July 30, 1992), 10th Dist. No. 91AP-974 at *5 ("Equitable relief and damages are
not necessarily mutually exclusive remedies. But, where damages will adequately
compensate an injured party for a harm suffered, equitable relief is not appropriate.")
{¶91} J&B's request for an injunction "barring Miller from engaging in acts
prohibited by the Agreement," is not a claim that was discharged by the bankruptcy.
Looking to the "substance of the equitable relief sought" the injunction itself does not
require the payment of money.
{¶92} The trial court's analysis focused on whether J&B's amended complaint
also sought damages for breach of the non-compete in concluding the claim for injunctive
relief was discharged. The proper perspective is whether the result of granting the
injunction itself necessarily causes the debtor to incur costs, not whether there is also a
separate claim for damages. Thus, the trial court erroneously concluded that the claim
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for injunctive relief was discharged in the bankruptcy, However, this does not rise to the
level of plain error. Rather, this actually constitutes harmless error, in light of the trial
court's alternative determination that the non-compete clause was unreasonable and
therefore unenforceable.
{¶93} "A non-compete clause prohibits a former employee from working in
competition with his former employer and amounts to a restraint of trade, so these
clauses will be enforced only to the extent that the restraints imposed are reasonably
necessary to protect the employer's legitimate business interests. Brentlinger Enterprises
v. Curran (2001), 141 Ohio App. 3d 640, 645, citing Raimonde v. Van Vlerah (1975), 42
Ohio St. 2d 21, 25-26. 'A covenant restraining an employee from competing with his
former employer upon termination of employment is reasonable if the restraint is no
greater than is required for the protection of the employer, does not impose undue
hardship on the employee, and is not injurious to the public.' Raimonde at paragraph two
of the syllabus. The factors to consider when deciding whether a noncompete clause is
reasonable include: 1) the absence or presence of limitations as to time and space, 2)
whether the employee represents the sole contact with the customer, 3) whether the
employee is possessed with confidential information or trade secrets, 4) whether the
covenant seeks to eliminate competition which would be unfair to the employer or merely
seeks to eliminate ordinary competition, 5) whether the covenant seeks to stifle the
inherent skill and experience of the employee, 6) whether the benefit to the employer is
disproportional to the detriment to the employee, 7) whether the covenant operates as a
bar to the employee's sole means of support, 8) whether the employee's talent which the
employer seeks to suppress was actually developed during the period of employment,
and 9) whether the forbidden employment is merely incidental to the main employment.
Id. at 25." Alan v. Andrews, 7th Dist. No. 06 MA 151, 2007-Ohio-2608, at ¶40.
{¶94} Although the agreement between Miller and J&B is not the typical
employer-employee non-competition agreement as it involves a post-employment
contract, the Raimonde factors still apply. See, e.g., Century Business Servs., Inc. v.
Urban, 179 Ohio App. 3d 111, 2008-Ohio-5744, 900 N.E.2d 1048, at ¶25 (applying
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Raimonde to non-compete agreement entered into simultaneously with the sale of a
business).
{¶95} The burden is on the former employer to prove the restraint is reasonable
and the agreement is valid. Gen. Medicine, P.C. v. Manolache, 8th Dist. No. 88809,
2007-Ohio-4169, at ¶8. While Miller came forward with evidence and arguments why the
clause was unreasonable, J&B presented no evidence in support of the clause and did
not rebut the arguments Miller made in his motion for summary judgment. Instead, J&B
chose to argue that it was unable to complete discovery on this issue. However, as
discussed earlier, J&B did not move to set aside the magistrate's orders limiting
discovery, nor did it avail itself of the procedures contained in Civ.R. 56(F). Thus, the trial
court properly made a determination regarding the reasonableness of the non-compete
based upon the evidence it had before it.
{¶96} Further, the court correctly determined the non-compete is unreasonable
and therefore unenforceable based on the Raimonde factors. First, there are significant
time and place restrictions in the non-compete. It prohibits Miller from competing with J&B
for the 20 year term of the Agreement, plus 20 additional years thereafter. It also
prohibits Miller from competing in 56 of Ohio's 88 counties while prohibiting J&B from
competing only in Franklin County, except for some existing accounts. Notably, Miller
was prohibited from competing in Stark, his county of residence, and all contiguous
counties. Further, the non-compete seeks to eliminate ordinary competition, and stifle
Miller's sales and marketing skills and experience, much of which Miller had developed
prior to his employment with J&B.
{¶97} Moreover, the benefit to J&B is grossly disproportionate to the benefit to
Miller. J&B asserts the non-compete should be enforced because the parties bargained
for it and because Miller received valuable consideration in the form of a line of credit to
support his fledgling business. This argument fails considering: (1) the line of credit was
secured by Miller's "funded account," the retainage held by J&B from Miller's sales
commissions when Miller was employed as a J&B sales agent; and (2) the parties'
relatively unequal bargaining power. Finally, the non-compete operates as a bar to
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Miller's sole means of support, which is his sales business.
{¶98} Although the trial court incorrectly concluded that the claim for injunctive
relief was discharged in bankruptcy, that determination does not rise to the level of plain
error. Rather, this constitutes harmless error in light of the trial court's correct
determination that the non-compete was unreasonable and therefore unenforceable.
Accordingly, J&B's third assignment of error is meritless.
Fraud
{¶99} J&B's sixth and seventh assignments of error assert:
{¶100} "The trial court erred in granting summary judgment on the fraud claim and
incidental issues thereto based upon disputed affidavit testimony which turned on
credibility."
{¶101} "The trial court erred in granting summary judgment because even though
pleadings may be vague Appellee Miller has notice of the matters of which J&B complains
and strict application of rule requiring pleading of fraud with particularity could service no
useful purpose."
{¶102} Civ.R. 9(B) provides: "In all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with particularity." The
elements of a fraud claim are: "(1) a representation (or concealment of a fact when there
is a duty to disclose) (2) that is material to the transaction at hand, (3) made falsely, with
knowledge of its falsity or with such utter disregard and recklessness as to whether it is
true or false that knowledge may be inferred, and (4) with intent to mislead another into
relying upon it, (5) justifiable reliance, and (6) resulting injury proximately caused by the
reliance." Volbers-Klarich v. Middletown Mgt., Inc., 125 Ohio St. 3d 494, 2010-Ohio-2057,
929 N.E.2d 434, at ¶27, citing Burr v. Stark Cty. Bd. of Commrs. (1986), 23 Ohio St. 3d
69, 73, 23 OBR 200, 491 N.E.2d 1101.
{¶103} Turning first to the specificity of J&B's fraud claim, as Miller points out, the
trial court's adverse ruling on J&B's fraud claim was on the merits, not for a lack of
specificity as required by Civ.R. 9. Second, to the extent J&B focuses on the fact that it
was not allowed to complete discovery on this claim, as discussed in assignment of error
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six, J&B is precluded from challenging the magistrate's discovery orders or arguing that
summary judgment was premature because it failed to object to those orders and follow
the procedures in Civ.R. 56(F).
{¶104} Turning to the merits, the trial court correctly granted summary judgment
on the fraud claim. There is nothing in the record demonstrating that Miller made a
material misrepresentation to J&B, either prior to or after entering into, the Agreement.
Rather, Miller averred that he told J&B's owner about his divorce, resulting financial
downturn and that he planned to file bankruptcy. diDonato admitted that Miller had
informed him he was or would be seeking a divorce, that he had debts, and that he may
file bankruptcy. Moreover, as discussed above, the fact that Miller failed to list J&B as a
creditor in his bankruptcy does not constitute fraud. See In re Madaj at 471. Finally,
Miller's failure to notify J&B after-the-fact about the discharge and its legal effect on the
parties' contract does not constitute fraud. A party may voluntarily comply with its
obligations under a discharged contract, but that compliance does not create a new
enforceable obligation. J&B was, at the very least, on notice that Miller might file
bankruptcy and could have consulted counsel as to the legal effect of a bankruptcy
discharge. Because J&B cannot prove justifiable reliance, J&B's sixth and seventh
assignments of error are meritless.
{¶105} In conclusion, J&B's assignments of error are meritless. Many of J&B's
arguments were not raised at the proper time in the trial court and are therefore waived
absent plain error. First, because J&B failed to move to set aside the magistrate's
discovery orders, and because it failed to avail itself of the procedures contained in Civ.R.
56(F), J&B is precluded from challenging the discovery orders on appeal, or from
asserting that the trial court prematurely granted summary judgment prior to the
completion of full discovery. Further, Miller's debts were not "fraudulently incurred" and
therefore they can be excepted from the bankruptcy discharge for that reason. Miller did
not waive his bankruptcy discharge defense by counterclaiming for breach of contract and
injunctive relief. Neither promissory nor equitable estoppel applies to this case. And
although the trial court erred by concluding the claim for injunctive relief was discharged
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in bankruptcy, it does not rise to the level of plain error. Rather, this error was harmless
in light of the trial court's correct conclusion that the non-compete clause was
unreasonable and therefore unenforceable. Finally, the trial court properly granted
summary judgment on J&B's fraud claim. Accordingly, the judgment of the trial court is
affirmed.
Donofrio, J., concurs.
Vukovich, J., concurs.