Home S. & L. Co. of Youngstown v. Evergreen Land Dev. , 2016 Ohio 1248 ( 2016 )

[Cite as Home S. & L. Co. of Youngstown v. Evergreen Land Dev., 2016-Ohio-1248.]
STATE OF OHIO, MAHONING COUNTY
IN THE COURT OF APPEALS
SEVENTH DISTRICT
HOME SAVINGS AND LOAN )
COMPANY OF YOUNGSTOWN )
)
PLAINTIFF-APPELLEE ) CASE NO. 12 MA 215
V. )
) OPINION
EVERGREEN LAND DEVELOPMENT, )
et al. )
)
DEFENDANTS-APPELLANTS
CHARACTER OF PROCEEDINGS: Civil Appeal from Court of Common
Pleas of Mahoning County, Ohio
Case No. 08 CV 2876
JUDGMENT: Affirmed in part. Reversed in part and
modified.
APPEARANCES:
For Plaintiff-Appellee Attorney Douglas DiPalma
Attorney Komlavi Atsou
Cavitch, Familo & Durkin Co., LPA
1300 East Ninth Street, Twentieth Floor
Cleveland, Ohio 44114
For Defendants-Appellants Attorney David Detec
Manchester Newman & Bennett, LPA
Atrium Level Two
The Commerce Building
201 East Commerce Street
Youngstown, Ohio 44503
JUDGES:
Hon. Mary DeGenaro
Hon. Frank D. Celebrezze, Jr.
Judge of the Eighth District Court of
Appeals, sitting by assignment
Hon. Kathleen Ann Keough
Judge of the Eighth District Court of
Appeals, sitting by assignment
Dated: March 24, 2016
[Cite as Home S. & L. Co. of Youngstown v. Evergreen Land Dev., 2016-Ohio-1248.]
DeGENARO, J.
{¶1} Defendants-Appellants, Evergreen Land Development and Alfonso
Valdes appeal the judgment of the Mahoning County Court of Common Pleas in favor
of Appellee, Home Savings and Loan Company of Youngstown. On appeal,
Evergreen and Valdes assert that the trial court made multiple errors regarding
discovery: Evergreen's and Valdes' separate defenses and counterclaims,
specifically the timeliness of Valdes' asserted status as an accommodation maker
and both appellant's claims of promissory estoppel and negligent misrepresentation;
the amount of judgment and damages; and finally the award of attorney fees against
Evergreen and their assigned priority. Defendant-Appellant Thomas Zebrasky filed a
separate appeal asserting the same accommodation argument raised by Evergreen
and Valdes. For the reasoning below, all of Evergreen, Valdes and Zebrasky's
arguments are meritless, except for the amount of attorney's fees and costs awarded
to Home Savings against Evergreen. Accordingly, the judgment of the trial court is
affirmed in part, reversed in part and modified. The judgment entered in favor of
Home Savings against Evergreen for reasonable attorney fees and costs of
$378,938.02 is reduced by $3,146.60 and modified to $375,791.42.
Factual History
{¶2} Valdes and Zebrasky had been friends since the 1980's. In 1998
Zebrasky took Valdes to a 100 acre property known as Pine Lake Reserve and the
two men decided to purchase the property and develop an approximate 300
multi/duplex residential unit project in four phases. In June 2003 Valdes and
Zebrasky entered into an operating agreement to establish Evergreen Land
Development, LLC for this purpose. Phase 3 of the four phases was the most critical;
it encompassed the majority of the lakefront and lake view properties and had the
highest profit margin. Valdes had served as a director of a bank in Puerto Rico and
had prior real estate development experience in Florida and Puerto Rico; he had a
net worth between 14 and 21 million dollars at the time. Zebrasky lived in Ohio and
was self-employed restoring and selling collectable cars.
{¶3} To begin the development process Valdes purchased the Phase 4
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parcel using his own funds and loans from lenders in Puerto Rico. After obtaining the
necessary permits, Evergreen targeted Phase 1 as the next step in the development
of Pine Lake, and Valdes inquired about a loan from Home Savings. From the
beginning, Home Savings was aware of Evergreen's plans to purchase the property
from Aqua Ohio, a water supply company, and develop the Phase 1, 2, and 3
parcels, with Phase 3 having the greatest potential profit.
{¶4} In April 2003, Home Savings approved two separate loans for the
purchase and development of the Phase 1 parcel, $1,750,000.00 and $1,200,000.00,
which Valdes and Zebrasky signed personally and on behalf of Evergreen. Both
loans were secured by mortgages on the Phase 1 and 4 parcels, the personal
guarantees of Valdes and Zebrasky, a $150,000 certificate of deposit by Valdes, and
a second mortgage on Zebrasky's home. The loan documents were signed June 17,
2003, by Valdes and Zebrasky individually and on behalf of Evergreen, and consisted
of cognovit notes, mortgages, a construction loan agreement, and a revolving line of
credit. As Evergreen developed Phase 1, Zebrasky was responsible for daily
supervision of the project.
{¶5} Because the municipal authority refused to issue building permits until a
pump station and pipes were in place, in March 2004 Evergreen requested an
additional loan to construct a pump station and 2.5 miles of pipe, for which Home
Savings approved a third loan of $485,000. On April 23, 2004, Valdes and Zebrasky
signed the loan documents personally and on behalf of Evergreen; the loan was
secured by their personal guarantees and a mortgage on the Phase 1 and 4 parcels.
{¶6} By January 2005, Evergreen had pre-sold a number of units and had
used all of the available line of credit for home construction. Evergreen requested
another loan from Home Savings to construct a four-plex on speculation, which
Home Savings approved for $825,600. This fourth loan was secured by mortgages
on the Phase 1 and 4 parcels and by the personal guarantees of Valdes and
Zebrasky. On January 7, 2005, Valdes and Zebrasky signed the loan documents
personally and on behalf of Evergreen. The grand opening of Pine Lake Reserve
occurred in May 2005. In June 2005, Evergreen began construction of the four-plex,
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which was subsequently completed.
{¶7} Also in June 2005 Home Savings approved a $6,215,000 loan as well
as an increase in the line of credit to $5,000,000. The new loans consolidated and
refinanced Evergreen's initial two loans for 1.75 and 1.2 million dollars, the $485,000
for the pump station, as well as provided additional financing for the purchase and
development of the Phase 2 parcel and the purchase of the Phase 3 parcel. Home
Savings also released Valdes' $150,000 certificate of deposit and the second
mortgage on Zebrasky's home. The $825,000 loan for the four-plex built on
speculation remained as a separate loan.
{¶8} On August 5, 2005, Valdes and Zebrasky signed the $6,215,000 loan
documents personally and on behalf of Evergreen. Valdes signed the $5,000,000
loan personally and both Valdes and Zebrasky signed on behalf of Evergreen. The
loan documents included cognovit notes, mortgages, security agreements,
construction loans, the A&D loan and revolving line of credit. The loans were secured
by first mortgages on the Phase 1 and 4 parcels, by Valdes and/or Zebrasky's
personal guarantee, and by the Phase 2 parcel after it was purchased, which
occurred shortly thereafter.
{¶9} After the refinancing documents were signed, Valdes removed
Zebrasky from his role overseeing the development of Pine Lake and replaced him
with Jamie Garayua to manage the project; Garayua had no prior experience in
construction, lending or residential development. That, and other changes not
pertinent to this appeal, resulted in a lawsuit separate from this case between
Zebrasky and Valdes.
{¶10} In May 2006, Valdes asked Home Savings to approve a shift in the
Pine Lake development from multi-family units to single-family units. However, in
August 2006, Valdes began construction of a single-family home without Home
Savings' approval on a parcel that had been designated for a four-plex. Although he
had been removed from his position as the project manager, Zebrasky continued to
own 49% of Evergreen and did not approve of the change in plans and filed an
unsuccessful lawsuit in an attempt to stop construction of this single family unit.
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{¶11} In November 2006, Home Savings completed its evaluation of Valdes'
request which revealed that housing values were declining, the $6,215,000 loan
exceeded the value of the collateral by $898,271, and Evergreen needed $305,657
more than was originally allocated to complete Phase 1. Home Savings proposed a
loan reconfiguration in order to proceed with Valdes' proposal to shift the project to
single family homes and an agreement was ultimately reached. Pertinent to this
appeal, the terms of the reconfigured loan included using funds originally designated
for the development of Phase 2 and also to purchase the Phase 3 parcel, and
instead using those funds to complete the construction of the single family units in
Phase 1 as revised per Valdes' request, and the balance of $151,354 would be
allocated to increase Evergreen's interest reserve account.1 Home Savings also
agreed to reimburse Valdes for the single-family home he built without prior approval;
Valdes drew those funds from the line of credit on November 21, 2006.
{¶12} In January 2007, first Garayua and then Valdes each sent a letter to
Home Savings which between them raised two concerns pertinent to this appeal: why
$151,354 had not been added to the interest reserve account per the agreement and
why funds for the Phase 3 parcel, which Valdes still wanted to purchase, had been
removed as part of the restructure. After a series of discussions the reserve account
issue was resolved and there was agreement to prepare a separate proposal for
another loan to purchase the Phase 3 parcel.
{¶13} On April 16, 2007, a loan request was made for $1,610,662 for the
purchase and development of the Phase 3 parcel, including allocating $125,000 of
the funds for the interest reserve account. The loan committee approved the loan
request for only $1,485,662 and required Valdes to deposit $100,000 into the interest
reserve account.
{¶14} On April 17, 2007, Home Savings sent Valdes a memo which
enumerated four conditions on the new loan: a contract to purchase the Phase 3
parcel from Aqua, the seller of the Pine Lake parcels; a satisfactory appraisal; a cash
1 The interest reserve is money borrowed from the bank and used by the borrower to pay interest due
on loans; when the interest reserve is exhausted, the borrower is expected to make interest payments
from their own funds.
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deposit of $100,000; and, assurances that Zebrasky could not interfere with the
project.
{¶15} In June 2007, Home Savings received and accepted the appraisal for
the Phase 3 parcel and also received assurances from Evergreen's attorney that
Zebrasky could not interfere with the project. However, the two remaining conditions
were not completed. Nonetheless, Valdes requested an increase in the $1,484,662
loan for the purchase and development of the Phase 3 parcel, which was rejected by
Home Savings.
{¶16} Despite the outstanding conditions, Home Savings began preparing
the closing documents for the Phase 3 parcel. On June 15, 2007, Evergreen
attempted to exercise its option with Aqua to purchase the Phase 3 parcel, but on
June 22, 2007, Aqua informed Evergreen that there were outstanding issues to be
resolved before the option could be exercised. Home Savings became concerned
that Evergreen would not resolve the issues with Aqua and close on the Phase 3
parcel, but Evergreen assured Home Savings that Evergreen and Aqua planned to
meet on August 21, 2007, to resolve the pending issues.
{¶17} On October 30, 2007, Valdes assured Home Savings that Evergreen
would close on the Phase 3 parcel within two weeks. Valdes also informed Home
Savings that he would not spend any more of his own money; he wanted the bank to
pay some of his expenses from Phase 3, and to increase the loan by $125,000 so he
would not have to make the $100,000 deposit for the interest reserve account.
{¶18} On December 6, 2007, with the cooperation of Garayua, a proposal
was presented to Home Savings' loan committee to increase the loan to $1,610,000
and not require Valdes to make a $100,000 cash deposit. The loan committee
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rejected this proposal, withdrew its previously approved $1,485,662 loan for the
purchase and development of the Phase 3 parcel, and instead approved a loan for
only up to 50% of the purchase price for the Phase 3 parcel; no funding was offered
to develop that parcel.
{¶19} In accordance with the course of dealings between the parties, the loan
was to remain open for 21 days with the expectation that the loan documents would
be executed within 60 days. Home Savings and Valdes understood there was no
commitment by the bank to lend or the borrower to borrow until the loan documents
were signed.
{¶20} Shortly after December 6, 2007, Valdes again requested a larger loan
in order to purchase the Phase 3 parcel. On December 20, 2007, Home Savings
offered to increase the loan to 65% of the purchase price—$260,000—which was the
maximum amount that could be lent under bank regulations for a land purchase. In
response, Valdes affirmed that in addition to the purchase price for the property, he
paid $50,000 for a lake closure fee and $80,000 for a bond. Based on this assurance,
Home Savings increased its loan offer to $336,375 in order to purchase the Phase 3
parcel which Valdes accepted. The loan was secured by a mortgage on the Phase 3
parcel and by Valdes' personal guaranty. On January 3, 2008, Valdes signed the
loan documents, which included a cognovit note, an unconditional and continuing
guarantee, a mortgage and security agreement; this was also the same date the
purchase of the Phase 3 parcel closed.
{¶21} Evergreen did not advise Home Savings that Aqua could not close on
the Phase 3 parcel until after December 20, 2007. Further, during late 2007 and
early 2008, Valdes never looked for another loan for Phase 3.
{¶22} The single-family home that Valdes constructed in 2006 never sold.
There were no presold lake front units for Phase 3 in 2007 as there had been for
Phase 1 in 2005. Regarding the four-plex Evergreen built on speculation in 2005,
only two of the four units were sold by short sales in 2008. After August 2005, there
were no sales at the Pine Lake development.
{¶23} After Evergreen purchased the Phase 3 parcel, Valdes decided not to
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develop that parcel, and in April 2008 informed Home Savings that he was not going
to invest further in the Pine Lake project or make any more payments on the
outstanding debt. Valdes also told Home Saving that he wanted financial assistance
from the bank for expenses.
{¶24} In default are the $825,600 and $6,215,000 notes signed by Valdes,
Zebrasky and Evergreen; the $5,000,000 note signed by Valdes and Evergreen; and,
the $336,375 note signed by Evergreen and personally guaranteed by Valdes. All
four parcels are encumbered by recorded mortgages in varying combinations.
Procedural History
{¶25} Home Savings initiated the instant litigation in 2008 by seeking and
obtaining cognovit judgments against Evergreen, Valdes and Zebrasky, which were
vacated later that year. The case proceeded to bench trial on February 7, 2011
before the magistrate, resulting in three decisions on May 31, 2011, September 20,
2011 and August 15, 2012.2
{¶26} The May 31, 2011 magistrate's decision made a total of 115 findings of
facts, most of which are detailed in the factual history of this opinion. The magistrate
made thirty-two conclusions of law, including pertinent to this appeal: judgment in
favor of Home Savings on all four notes and granting foreclosure relief; awarding
Home Savings reasonable attorney fees and costs from Evergreen; and judgment in
favor of Home Savings on Evergreen, Valdes, and Zebrasky's counterclaims.
{¶27} The magistrate further determined in the May 31, 2011 decision that the
equitable estoppel claim asserted by Evergreen, Valdes and Zebrasky does not
afford them affirmative relief and therefore is not a counterclaim; further concluding
that equitable estoppel requires a factual misrepresentation inducing reasonable,
detrimental reliance, and they presented no evidence of a factual misrepresentation
by Home Savings regarding the loan for Phase 3. The magistrate similarly found that
there was no evidence presented of a factual misrepresentation, and accordingly
rejected the claims of fraudulent inducement and negligent misrepresentation. The
2Because foreclosure relief was sought other parties with claims were named, but their status is not
pertinent to this appeal.
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magistrate finally determined that those claims accrued to Evergreen as the
corporate entity not its equity owners, and therefore rejected Valdes' personal
assertion of those counterclaims.
{¶28} The magistrate reserved the determination of attorney fees and costs
for a hearing on August 5, 2011, and awarded Home Savings $355,673.71 in
attorney fees and $23,264.31 for expenses against Evergreen in a second
magistrate's decision dated September 20, 2011. Evergreen, Valdes and Zebrasky
timely filed objections to the first two magistrate's decisions.
{¶29} On April 10, 2012, instead of ruling on the objections, the trial court
remanded the case to the magistrate for a determination of whether Valdes and
Zebrasky were required to plead the affirmative defense of being an accommodation
maker and if so, when; and if properly raised for a determination as to whether either
or both were accommodation makers. On April 24, 2012, a hearing was held before
the magistrate pursuant to the trial court's remand.
{¶30} The August 15, 2012 magistrate's decision determined that Valdes and
Zebrasky's assertion that they were accommodation makers is an affirmative
defense; as such, they were required to assert the affirmative defense in either a
Civ.R. 12(B) motion to dismiss, in an answer to the complaint, or in an amendment of
the pleadings pursuant to Civ.R. 15. The magistrate found that neither Valdes nor
Zebrasky raised this affirmative defense even after Home Savings introduced the
notes at trial and they testified regarding the notes; specifically, the record
demonstrated that neither man nor any other witness ever used the words
accommodation party or maker. The first time Valdes and Zebrasky raised the
affirmative defense was in their objections to the May 31, 2011 magistrate's decision,
which does not comport with the Civil Rules. Consequently, the magistrate held that
the defense was waived. The magistrate further held that regardless of the failure to
assert the defense, both Valdes and Zebrasky had signed the notes as makers, not
as accommodation parties, thereby making them jointly and severally liable. Valdes
and Zebrasky consented to and authorized the reconfiguration of the loans, thus their
liability to pay on the notes was unconditional and absolute and the bank was
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permitted to execute the judgment against all defendants.
{¶31} Evergreen, Valdes and Zebrasky objected to this third magistrate's
decision, and on November 19, 2012, the trial court adopted the August 12, 2012
magistrate's decision in its entirety. However, the remaining objections were not
addressed by the trial court.
{¶32} After an attempted appeal and a remand from this court, the trial court
ruled on all three objections on January 15, 2013 and adopted the magistrate's three
decisions in their entirety. On March 20, 2013, the trial court issued a decree in
foreclosure entering judgment on and prioritizing the various liens and claims on the
four parcels.
{¶33} After Evergreen and Valdes filed their appeal, and Zebrasky separately
appealed, the parties filed multiple pre-merit determination procedural motions in
both the trial court and this court including motions to hold the appeal in abeyance, to
dismiss the appeal and to stay execution. Evergreen and Valdes have jointly
asserted eleven assignments of error and Zebrasky has separately stated three,
which are substantively the same as those raised by Evergreen and Valdes. For
clarity of analysis, the assignments of error will be addressed out of order and/or
together as noted.
Discovery
{¶34} Evergreen and Valdes' first of eleven assignments of error asserts:
The trial court erred in denying Evergreen and Valdes the
opportunity to pursue discovery to make and defend the claims in this
case.
{¶35} A trial court has broad discretion in discovery matters and challenges
are reviewed for abuse of discretion. Estate of Hohler v. Hohler, 197 Ohio App.3d
237, 2011-Ohio-5469, 967 N.E.2d 219, ¶ 26. (7th Dist.) "An abuse of discretion
means an error in judgment involving a decision that is unreasonable based upon the
record; that the appellate court merely may have reached a different result is not
enough." See Bergman v. Bergmann, 2d Dist. No. 25378, 2013–Ohio–715, ¶ 9; Hall–
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Davis v. Honeywell, Inc., 2d Dist. Nos. 2008 CA 1, 2008 CA 2, 2009–Ohio–531, ¶35.
"Determinations during the course of discovery will not be reversed in the absence of
an abuse of discretion that prejudicially affects the substantial rights of the parties."
Estate of Banfield v. Turner, 131 Ohio App.3d 213, 216, 722 N.E.2d 136 (7th Dist.
1999), citing State ex rel. Daggett, 34 Ohio St.2d 55, 58, 295 N.E.2d 659 (1973).
{¶36} Evergreen and Valdes argue that the trial court denied them the
opportunity to view key documents and depose key witnesses by denying their
motion to compel, and instead ending discovery. They contend that they sent their
first set of interrogatories and request for production of documents to Home Savings
on January 8, 2010, and Home Savings only partially responded to the request just
before the trial date in December of 2010. They contend that despite their efforts,
Home Savings continually refused to provide discovery. Evergreen and Valdes
stress that they filed a motion to compel—which the magistrate denied—once they
understood that Home Savings would not cooperate in January of 2011. Evergreen
and Valdes further urge that the requested discovery was essential to their defenses
and counterclaims and left them without a complete understanding of Home Saving's
case theory.
{¶37} Home Savings counters that despite having two years3 to conduct
discovery, Evergreen and Valdes failed to: serve a notice of deposition for Home
Savings' witnesses; subpoena a third-party witness; follow up on Home Savings'
responses until eight months later; and waited to raise these issues until just days
before the trial. Further, the requested discovery was duplicative of what was already
produced, did not exist, or was not relevant to any defense or counterclaim.
{¶38} All parties were given sufficient time to conduct discovery. Originally,
the trial court gave Home Savings until November 1, 2009, and Evergreen and
Valdes until December 1, 2009, to conduct discovery, with a trial date of April 14,
2010. Thereafter, the trial court modified the pre-trial/trial schedule and gave Home
Savings until December 15, 2009, and Evergreen and Valdes until January 15, 2010
to conduct discovery. The trial court again modified the schedule and gave Home
3 Home Savings is using the date of the complaint as the starting date which is misleading as it
originally obtained a cognovit judgment against Evergreen and Valdes, which was later vacated.
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Savings until March 15, 2010, and Evergreen and Valdes until April 12, 2010, to
conduct discovery, with a revised trial date of December 20, 2010. Further, the trial
court provided at least one 30-day extension to Home Savings to respond to a
discovery request and also granted Evergreen and Valdes' motion to continue trial
from December 20, 2010 to February 7, 2011. Thus, the trial court gave all parties
ample time to conduct discovery and prepare for trial.
{¶39} Evergreen and Valdes requested depositions of two Home Savings'
employees and a third party witness approximately 11 days prior to trial. Evergreen
and Valdes filed a motion to compel after Home Savings did not make these
individuals available and the trial court denied the motion. By this point, Home
Savings had produced over 5,000 documents. Evergreen and Valdes claim that this
information was necessary to "develop their defenses and counterclaims with respect
to Home Savings' unsafe and unsound banking practices."
{¶40} Home Savings counters that the FDIC order deals exclusively with
requirements to limit exposure to bad loans, to safeguard its deposits and to improve
collections—nothing that is related to the bank's treatment of borrowers. As such, the
FDIC order was not material and/or relevant. The trial court must balance the
relevance of the discovery request, the party's need for discovery, and the hardship
upon the party from whom the discovery is requested. See Huebner v. Miles, 92 Ohio
App.3d 493, 501, 636 N.E.2d 348 (1993).
{¶41} In light of the amount of time Evergreen and Valdes had to conduct
discovery, the untimeliness of their contempt motion, and the information being
irrelevant, the trial court did not abuse its discretion denying Evergreen and Valdes'
motion to compel. Accordingly, their first assignment of error is meritless.
Waiver of Accommodation Maker Status
{¶42} Evergreen and Valdes' second and fourth of eleven assignments of
error assert:
The trial court erred in finding that Valdes' defenses based on
Valdes' status as an accommodation maker to the notes were barred.
The trial court erred in finding that Valdes was not an
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accommodation maker.
{¶43} Zebrasky asserts in his first, second and third assignments of error:
The trial court committed error prejudicial to appellant by ruling
that his defense, based on his status as an accommodation
maker/guarantor was barred.
The trial court committed error prejudicial to appellant by ruling
that he was not an accommodation maker/guarantor on the note in
question.
The trial court committed error prejudicial to appellant by ruling
that actions by plaintiff materially changing the terms and conditions of
the loan in question over appellants' objection, did not excuse appellant
from his obligations as an accommodation maker/guarantor.
{¶44} "[P]urely legal issues, and the trial court's application of the law to the
facts, are subject to de novo review." State v. Moore, 161 Ohio App.3d 778, 2005–
Ohio–3311, 832 N.E.2d 85, ¶ 36 (7th Dist.); Baird Bros. Sawmill, Inc. v. Augusta
Const., 7th Dist. No. 98–CA–152, 2000 WL 817068, *2 (June 19, 2000). Fifth Third
Bank, N.A. v. Maple Leaf Expansion, Inc., 188 Ohio App.3d 27, 2010–Ohio–1537,
934 N.E.2d 366, ¶10 (7th Dist.).
{¶45} It is perplexing that the trial judge remanded the case back to the
magistrate for a determination of whether Valdes and Zebrasky were required to
plead the affirmative defense of being an accommodation maker when the entire trial
was completed and the issue had not been raised until it was asserted in their
objections; thus, the magistrate could not be faulted for failing to consider the issue
when it was never raised at trial. Regardless, as the matter was not raised in any pre-
trial pleadings or at the trial itself, this issue is waived.
{¶46} The magistrate found in the August 15, 2012 decision that when Valdes
and Zebrasky testified at trial, they never used the terms accommodation party or
maker, or gave any indication that their testimony was offered in any way to support
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that affirmative defense; additionally, they did not raise it in a motion to dismiss or in
their answers, or seek to amend pursuant to Civ.R. 15. The magistrate further found
that Valdes conceded that the first time the affirmative defense was raised was in
their objections to the May 31, 2011 magistrate's decision. However, the magistrate
alternatively found that the record demonstrates that Valdes and Zebrasky were
identified as borrowers in the notes, and that there was no limiting or qualifying
language that would suggest that they signed the notes as anything other than
principal makers.
{¶47} Valdes and Zebrasky argue the defense was not waived, but rather
tried by implied consent as contemplated by Civil Rule 15. They acknowledge that
the phrase accommodation maker was not mentioned at trial but contend evidence
was introduced regarding the Evergreen loans including: allocation of loan funds;
manner of repayment; parties' intentions in development; release of mortgages; and
modifications. Home Savings contends that the parties were not aware that an
unpleaded issue had entered the case.
{¶48} First, as correctly found by the magistrate, Valdes and Zebrasky failed
to assert the affirmative defense in either a Civ.R.12(b)(6) motion or in any of the
answers they filed. Second, when determining whether parties have tried an unplead
issue by implied consent a trial court must consider:
(1) 'whether they recognized that an unpleaded issue entered the case'
(2) 'whether the opposing party had a fair opportunity to address the
tendered issue or would offer additional evidence if the case were to be
retried on a different theory' and (3) 'whether the witnesses were
subjected to extensive cross-examination on the issue.' State ex rel.
Evans [v. Bainbridge (1983)], 5 Ohio St.3d [41] at 45-46, 448 N.E.2d
1159. Further, a party's failure to object when evidence relating directly
to the unpleaded issue is introduced does not establish implied
consent. Id. at 46, 448 N.E.2d 1159. Instead, it must appear that the
parties understood the evidence was aimed at the unpleaded issue. Id.Sheperak v. Ludlow, 6th Dist. No. F03-011, 2004-Ohio-3155, at ¶16.
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Woodward v. Kleese, 11th Dist. No. 2007-T-0002, 2007-Ohio-5218, ¶24.
{¶49} A review of the trial record demonstrates that the Woodward factors are
not present. There is no mention of implied consent. The transcript reveals that
there was no cross examination on this issue, nor do Valdes or Zebrasky direct our
attention to any. More importantly, they failed to file a motion to conform the
pleadings to the evidence pursuant to Civ.R. 15. Tellingly, Valdes conceded this
issue was not presented at trial, acknowledging it was raised for the first time in their
objections.
{¶50} Accordingly, the issue regarding Valdes and Zebrasky's status as
accommodation makers is waived; thus Evergreen and Valdes' second and fourth
assignments of error and Zebrasky's first, second and third are meritless.
Counterclaims Raised By Shareholders in Personal Capacity
{¶51} Evergreen and Valdes' third and ninth of eleven assignments of error
assert:
The trial court erred in finding that Valdes could not personally
bring his counterclaims.
The trial court erred in finding that Valdes [and Evergreen's]4
promissory estoppel and negligent misrepresentation claims were
without merit.
{¶52} The issue of standing presents a question of law which is subject to de
novo review. Moore, supra. Generally, "a plaintiff-shareholder does not have an
independent cause of action where there is no showing that he has been injured in
any capacity other than in common with all other shareholders as a consequence of
the wrongful actions of a third party directed towards the corporation." Adair v.
Wozniak, 23 Ohio St.3d 174, 178, 492 N.E.2d 426 (1986). "The personal loss and
liability sustained by the shareholder is both duplicative and indirect to the
corporation's right of action." Id. However, "[a] complaining shareholder has a direct
action only if he sustains a loss separate and distinct from that of the corporation."
4Although only Valdes was identified in the assignment of error in the joint brief filed by Evergreen and
Valdes, in the body of the brief these arguments are asserted by Evergreen as well.
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Turner v. CTW Dev. Corp., 7th Dist. No. 12-MA-124, 2013-Ohio-4455, ¶ 21 (internal
citations omitted).
{¶53} Valdes argues that his injury is unique and not duplicative of Evergreen
and Zebrasky's injury as he invested and lost millions of his own money in the Pine
Lake development whereas Zebrasky did not. Home Savings responds that any
claims belong to Evergreen and cannot be asserted by Valdes; the claims are not
separate but rather rooted in the loans extended to Evergreen.
{¶54} Although Valdes invested substantial sums into Evergreen, he admitted
doing so in the form of a loan to Evergreen and anticipated repayment. His injury is
not unique; Evergreen's financial losses were the same as Valdes'. "[T]he cause of
action accrues to the corporation, not to the shareholders, even though in an
economic sense real harm may well be sustained by the shareholders as a result of
reduced earnings, diminution in the value of ownership, or accumulation of personal
debt and liabilities from the company's financial decline. The personal loss and
liability sustained by the shareholder is both duplicative and indirect to the
corporation's right of action." Adair at 178. As Valdes failed to demonstrate a
separate, distinct injury, he cannot pursue individual claims against Home Savings.
Accordingly, Evergreen and Valdes' third assignment of error is meritless.
{¶55} Evergreen and Valdes' ninth assignment of error asserts that the trial
court erred in finding that the promissory estoppel and negligent misrepresentation
claims were meritless, framing the issue in terms of both sufficiency and manifest
weight of the evidence. This raises the preliminary issue of whether Evergreen's
promissory estoppel claim was properly before the trial court or if it has been waived.
As discussed above, Valdes cannot personally assert any claims against Home
Savings, and the ninth assignment of error is meritless as to Valdes.
Waiver of Distinct Estoppel Theory
{¶56} As stated by the Tenth District, "[t]he difference between the doctrines
[of equitable estoppel and promissory estoppel] can best be explained by observing
that promissory estoppel is used to create a cause of action, whereas equitable
estoppel is used to bar a party from raising a defense or objection it otherwise would
- 16 -
have, or from instituting an action which it is entitled to institute. Promissory estoppel
is a sword, and equitable estoppel is a shield." Holt Co. of Ohio v. Ohio Machinery
Co., 10th Dist. No. 06-AP-911, 2007-Ohio-5557, ¶28, citing Jablon v. U.S., 657 F.2d
1064 (9th Cir.1981).
{¶57} Evergreen concedes on appeal, as it had in its objections to the May
31, 2011 magistrate's decision, that the magistrate correctly determined equitable
estoppel does not authorize affirmative relief and therefore is not a counterclaim.
However, in an attempt to now assert a claim of promissory estoppel, Evergreen
argues that according to Holt, where equitable estoppel is pled, the court is to
construe the claim as a promissory estoppel; thus it has preserved this theory of
recovery. Home Savings counters that this argument is waived; Evergreen only pled
equitable estoppel and the distinct claim of promissory estoppel was not advanced at
any point before or during trial, raising the theory for the first time in its objections and
on appeal.
{¶58} In Holt, the plaintiff asserted a claim of estoppel in his amended
complaint without specifying whether he was asserting equitable estoppel or
promissory estoppel. Holt at ¶5. In determining whether the claim was equitable
estoppel or promissory estoppel, the Court stated "[b]ecause promissory estoppel,
not equitable estoppel, properly is used to create a cause of action, we construe
Holt's 'estoppel' claim in its first amended complaint as a claim of promissory
estoppel." Id. at ¶ 29.
{¶59} Holt is distinguishable from this case. Evergreen is attempting to switch
between distinct theories of estoppel; it originally pled equitable estoppel and is now
asserting for the first time promissory estoppel. Conversely, the issue in Holt was
identifying which distinct theory of estoppel applied where estoppel was pled
generically.
{¶60} The two theories have different elements and serve different purposes;
they are distinct and not interchangeable. The theory of promissory estoppel was not
before the trial court, thus, Home Savings did not have an opportunity to defend
against that claim. Accordingly, Evergreen's promissory estoppel argument is waived.
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Negligent Misrepresentation
{¶61} Evergreen preserved this claim and raises sufficiency and manifest
weight of the evidence challenges. When reviewing sufficiency of the evidence we
look to "[w]hether the evidence is legally sufficient to sustain a verdict", which is a
question of law. Eastley v. Volkman, 132 Ohio St.3d 328, 972 N.E.2d 517 at ¶ 11,
citing State v. Thompkins, 78 Ohio St.3d 380, 386, 1997-Ohio-52, 678 N.E.2d 541.
Thus, sufficiency of the evidence is reviewed de novo. J. Bowers Constr., Inc. v.
Gilbert, 2014-Ohio-3576, 18 N.E.3d 770, ¶ 21 (9th Dist.). Appellate courts are more
constrained when considering manifest weight challenges; "[j]udgments supported by
some competent, credible evidence going to all the essential elements of the case
will not be reversed by a reviewing court as being against the manifest weight of the
evidence." Eastley at ¶ 14, citing C.E. Morris Co. v. Foley Constr. Co., 54 Ohio St.2d
279, 280, 376 N.E.2d 578 (1978). And as Evergreen is asserting the trial court erred
in adopting the magistrate's decision, "[a]n appellate court reviews a trial court's
ruling on a magistrate's decision only for abuse of discretion." Kniszek v. Kniszek,
7th Dist. No. 08 JE 30, 2009-Ohio-3249, at ¶ 26, citing Briarwood v. Bratanov, 9th
Dist. No 23318, 2007-Ohio-2476, ¶ 9.
One commits negligent misrepresentation when 'in the course of
his business, profession or employment, or in any other transaction in
which he has a pecuniary interest, [he] supplies false information for the
guidance of others in their business transactions, [and he] is subject to
liability for pecuniary loss caused to them by their justifiable reliance
upon the information, if he fails to exercise reasonable care or
competence in obtaining or communicating the information.' Delman v.
Cleveland Hts. (1989), 41 Ohio St.3d 1, 4, 534 N.E.2d 835.
Davis v. Montenery, 173 Ohio App.3d 740, 752, 2007-Ohio-6221, 880 N.E.2d 488,
497, ¶ 58 (7th Dist.).
{¶62} At trial and on appeal Evergreen seems to advance an estoppel
argument as opposed to a negligent misrepresentation claim. Evergreen alleged that
- 18 -
certain documents reveal that Home Savings had approved the 1.4 million dollar loan
to purchase and develop the Phase 3 parcel and that the Home Savings' employees
believed that the documents were a commitment to provide the loan. Evergreen
asserts that months later, with only an explanation of economic considerations, Home
Savings backed out of the loan knowing the effect that this would have on
Evergreen's ability to continue with Phase 3.
{¶63} Home Savings responds by arguing that Evergreen has failed to show
any evidence that Home Savings supplied Evergreen with false information,
highlighting that Evergreen's brief actually argues the opposite; that Home Savings
had approved the loan, which was subject to conditions which were not met and then
withdrew the loan approval. In order to prevail, Home Savings asserts that
Evergreen would need to prove that Home Savings had no intention of loaning
Evergreen the money, which Evergreen does not argue and has failed to provide any
evidence to support such a contention.
{¶64} To prevail on a negligent misrepresentation claim the plaintiff must
prove that the defendant provided false information. Evergreen has failed in this
regard.
{¶65} Evergreen ignores that the record demonstrates on December 6, 2007,
the date Home Savings withdrew the 1.4 million dollar loan offer, two required
conditions had not been met. First, a signed contract for the Phase 3 parcel had not
been executed. Moreover, Valdes failed to advise Home Savings that Aqua would
not do so until after December 20, 2007, instead repeatedly assuring the bank during
June through the end of October 2007 that the purchase would close within two
weeks. The closing actually took place on January 3, 2008, the same day Evergreen
and Valdes signed the $336,375 loan to purchase that parcel and reimburse Valdes
for expenses. Second, Valdes had not paid or tendered $100,000 for the interest
reserve account. Instead, on October 30, 2007, Valdes told Home Savings he was
not going to personally invest any more funds in Phase 3, and asked that the loan be
increased by $125,000 in order to fund the interest reserve account so he would not
have to make the $100,000 deposit.
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{¶66} As a result, Home Savings authorized a loan representing 50% of the
price to purchase the parcel only; later, on December 20, 2007, the bank agreed to
increase the amount of the loan to 65% of the purchase price and additional funds to
reimburse Valdes for some of the expenses he incurred in order to purchase that
parcel. Evergreen ignores that it never pursued any other loans to develop Phase 3,
and that in April 2008, three months after the final loan documents were signed and
the funds disbursed, Valdes decided not to develop the Phase 3 parcel and informed
Home Savings that he was not going to invest further in the Pine Lake project or
make any more payments on the outstanding debt.
{¶67} Evergreen has not proven that Home Savings provided false
information. Sufficient competent and credible evidence exists to support the trial
court's finding that Evergreen had not proven the elements of negligent
misrepresentation. As such, the trial court did not abuse its discretion in adopting the
magistrate's decision, and Evergreen's negligent misrepresentation argument is
meritless. Accordingly, Evergreen's ninth assignment of error regarding promissory
estoppel and negligent misrepresentation is meritless.
Discharge Not Warranted-Bilateral Loan Modification
{¶68} Evergreen and Valdes' sixth of eleven assignments of error asserts:
The trial court erred in failing to find that Valdes' obligations
under his personal guarantees were discharged by Home Savings'
unilateral modification of the 2005 A&D loan.
{¶69} Evergreen and Valdes argue that Home Savings unilaterally modified
the terms of the 6.2 million dollar loan without Valdes' consent, therefore Valdes'
personal guarantee is discharged. Home Savings counters that Valdes requested,
negotiated and agreed to the reconfiguration.
{¶70} Valdes requested the modification in May 2006, and not only consented
to the terms, but received funds pursuant to those terms, and also requested and
obtained a separate loan from Home Savings consistent with the reconfigured loan in
order to purchase the Phase 3 parcel. Originally the Pine Lake plan contemplated
- 20 -
multi-family units and Valdes wanted to change that plan and increase the number of
single-family units from 12 to 49; moreover, he commenced construction of a single-
family unit without Home Savings' approval while the bank was evaluating his
proposal.
{¶71} In November 2006, Home Savings completed its evaluation of Valdes'
request which revealed the $6,215,000 loan exceeded the value of the collateral by
$898,271, and Evergreen needed $305,657 more than was originally allocated to
complete Phase 1. A loan reconfiguration was necessary to proceed with Valdes'
request to shift the project to single-family homes and an agreement was ultimately
reached after extensive negotiations between Valdes and Home Savings. The terms
of the reconfigured loan included using funds originally designated for the
development of Phase 2 and to purchase the Phase 3 parcel, and reallocating them
in order to complete the construction of the single family units in Phase 1 as revised
per Valdes' request, and the balance of $151,354 would be allocated to increase
Evergreen's interest reserve account. Home Savings also agreed—as a term of the
reconfigured 6.2 million dollar loan—to reimburse Valdes for the single-family home
he built without prior approval; Valdes received those funds on November 21, 2006.
{¶72} Further, after additional months of negotiations, consistent with the
reconfigured 6.2 million dollar loan, Valdes and Home Savings agreed to a separate
loan for $336,375 to purchase the Phase 3 parcel, which was secured by a mortgage
and Valdes' personal guaranty. On January 3, 2008, Valdes signed those loan
documents.
{¶73} The record demonstrates Home Savings did not unilaterally modify the
$6,250,000 loan. Valdes instigated the modification in order to change the original
purpose of the Pine Lake plan by shifting the project from a focus on multi-plex to
single family units. This necessitated reconfiguring the terms of the loan. Valdes
negotiated and agreed to the terms, including accepting reimbursement of expenses.
He also obtained a subsequent loan to purchase the Phase 3 parcel, which was to
have been purchased from funds from the original loan. Accordingly, Evergreen and
Valdes' sixth assignment of error is meritless.
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Damages and Judgment
{¶74} Evergreen and Valdes' fifth, seventh and eighth assignments of error
assert:
The trial court erred in failing to offset Home Savings' claims by
the amount of collateral that Home Savings released.
The trial court erred in failing to include in its order language
preventing execution on the judgment against Valdes until a deficiency
judgment exists.
The trial court erred in determining that the unpaid principal on
the 2005 A&D loan was $3,435,940.34.
{¶75} As Evergreen and Valdes frame their arguments in terms of sufficiency
and manifest weight of the evidence, both will be discussed, and the appropriate
standard of review for each is set forth above.
{¶76} Regarding mitigation of damages, this Court has held that "[i]t is a
fundamental principle of damages that one injured in his person or property by a
wrongful act or wrongful omission to act, whether as a result of a tort or a breach of
contract, must use reasonable care to avoid loss or to minimize the damages
resulting." Commercial Credit Services Corp. v. David Sugar, Inc., 7th Dist. No. 84
CA 163, 1986 WL 2504 *4 (Feb. 25, 1986), citing 30 Ohio Jurisprudence 3d 20,
Damages, Sec. 16. Further, "the party sued for damages has the burden of
establishing matters in mitigation or reduction of the amount of the other party's
damages." Commercial Credit, *4, citing 22 American Jurisprudence 395, Damages,
Sec. 297.
{¶77} Evergreen and Valdes argue that Home Savings voluntarily, without
knowledge or consent, released the second mortgage it had against Zebrasky's
home which had served as collateral for Evergreen's loans, contending the release
resulted in a failure to mitigate damages and that Evergreen and Valdes are not
responsible for Home Savings' voluntarily relinquishment of collateral. Home Savings
- 22 -
responds by arguing that the mortgage for Zebrasky's home was extra collateral for
the 2003 loan which was paid off through the refinancing provided by the 2005 loan
and that Valdes had knowledge of and consented to the release.
{¶78} A June 16, 2005, Construction Loan Submission Summary discusses
the terms and conditions of the $6,215,000 loan. The mortgage on Zebrasky's home
was collateral for the $1,750,000 loan, which was paid off through the refinancing of
the $6,215,000 loan. As such, Home Savings properly released the mortgage.
Evergreen and Valdes also ignore that Valdes' $150,000 certificate of deposit was
released as security for the $1,750,000 loan at the same time and for the same
reason that the mortgage on Zebrasky's home was released. Further, the release of
Zebrasky's mortgage occurred in 2005 and the default did not occur until 2008. It is
illogical that a duty to mitigate can occur before a default, as there are no damages to
mitigate at that point. Thus, there is competent and credible evidence supporting the
trial court's judgment and the ruling is not against the manifest weight of the
evidence. Accordingly, Evergreen and Valdes' fifth assignment of error is meritless.
{¶79} Evergreen and Valdes contend the trial court further erred in failing to
include language preventing execution on the judgment against Valdes until a
deficiency judgment existed, citing Marion Development Co. v. Bruce, 39 Ohio App.
253, 177 N.E. 471 (1931). Home Savings distinguishes Marion as that case was a
foreclosure action involving an individual who was secondarily, not primarily liable.
Evergreen and Valdes also rely on R.C. 2329.54, but that statute provides protection
for sureties. As discussed above, Valdes is jointly and severally liable on the note as
a principal maker. As such, Home Savings can collect against him before obtaining a
deficiency judgment. Thus, Evergreen and Valdes' seventh assignment of error is
meritless.
{¶80} Evergreen and Valdes further argue that the trial court erred in its
calculation of the unpaid principal on the $6,215,000 loan. Evergreen and Valdes
argue that the magistrate found that the principal amount due on the loan was
$3,435,940.34; however, the amount owed on the principal is actually $3,050,577.75,
- 23 -
a $400,000 difference that will be subject to default-rate interest,5 and further argue
that because they did not draw on the loan after January 30, 2007, the amount owed
should not have changed after that date.
{¶81} Home Savings counters that Evergreen and Valdes did not object to
testimony and evidence regarding the amount owed on the principal at trial;
specifically, plaintiff's exhibit 112, which was a chart admitted into evidence and
summarizing testimony given by Home Savings personnel regarding the principal,
interest and late charges due, as well as the default date and the default interest rate
for each note as of February 7, 2011, the date the trial commenced. Second, Home
Savings argues Evergreen and Valdes did draw on the account after January 30,
2007.
{¶82} The trial court's ruling is not against the manifest weight of the
evidence. A review of the record demonstrates that the amount of principal due
varied over time; for example as of April 16, 2007, the loan had a principal balance of
$3,290,131.50. The $6,215,000 loan documents state that funds were included in
the loan to pay loan fees and interest. $500,000 was built into the loan and allocated
in the interest reserve in order to make these payments. Draws were made over time
to make payments on the accumulating interest on the note up to the time of default.
{¶83} The May 31, 2011, magistrate's decision found that there was due and
owing on the 6.2 million dollar note through February 7, 2011, $4,378,298.18,
specifically referencing plaintiff's exhibit 112. As the trier of fact the magistrate was in
the best position to evaluate the credibility of the testimony and evidence presented.
As there is competent, credible evidence supporting the magistrate's decision, the
trial court did not error in finding the principal balance of the loan as of February 7,
2011, was $3,435,940.34. Accordingly, Evergreen and Valdes' eighth assignment of
error is meritless.
5 Evergreen and Valdes rely on plaintiff's exhibit 42 in support of this position, describing it as Home
Savings' January 30, 2007 Construction Loan Department Cost Breakdown Detail. However, that
document is a January 30, 2007 letter from the bank to Valdes confirming a conversation that morning
regarding reconfiguring the 6.2 million dollar loan by reallocating funds in order to, inter alia, finish
Phase I and infuse funds into the interest reserve account. The letter also confirmed discussions
about preparing a separate loan to purchase the Phase 3 parcel. It does not contain any information
regarding the balance due on the 6.2 million dollar loan.
- 24 -
Attorney Fees and Priority
{¶84} Evergreen and Valdes' tenth and eleventh assignments of error assert:
The trial court erred in awarding Home Savings the full amount in
attorneys' fees.
The trial court erred in placing the attorneys' fee before the notes
in priority to be paid out of the proceeds of a foreclosure sale.
{¶85} An appellate court reviews an award of attorneys' fee for an abuse of
discretion and "must use its power of review to reverse if the amount of fees is so
high or low as to shock the conscience." B-Right Trucking Co. v. Interstate Plaza
Consulting, 154 Ohio App.3d 545, 2003-Ohio-5156, 798 N.E.2d 29, ¶ 71 (7th.Dist.).
As such, the appellate court accepts "that the trial court generally has a better
opportunity to determine the value of the services in each case where it participated
in the preliminary proceedings." Id.{¶86} When a commitment to pay attorneys' fee is present in a contract, the
clause "is enforceable only to the extent that it obligates payment of a reasonable
amount. In determining the amount of attorneys' fees that is reasonable, all relevant
factors shall be considered, including but not limited to, the nature of the services
rendered, the time expended in rendering the services, the amount of money and the
value of the property affected, and the professional skill and expertise of the attorney
or attorneys rendering the services." R.C. 1319.02(D).
{¶87} Further, "[u]nless a court has been requested to make a determination
of the amount of attorneys' fees that is reasonable and finds to the contrary by a
preponderance of the evidence, the following are deemed reasonable amounts: * * *
(2) If the commitment to pay attorneys' fees is not based upon a specific percentage
of the total principal, interest, and other charges owed on the contract of
indebtedness, an amount equal to the attorneys' fees customarily charged by the
attorney or attorneys rendering the services." R.C. 1319.02(D)(2).
{¶88} Evergreen and Valdes argue that the amount awarded to the three out-
of-town law firms representing Home Savings shocks the conscience as the trial
- 25 -
court awarded the full amount of fees and expenses requested, $378,938.02, without
proof of payment, invoices, or evidence specifying the attorneys' fees for those who
worked on the case. Additionally, they argue that the award is outside the local and
customary charges of the Youngstown/Warren area; that Home Savings' own expert
could not identify any local lawyer who charged at the rate of the bank's counsel,
noting that Home Savings' expert charges $165/hour for similar work, less than half
of what Home Savings' lead attorney, DiPalma, charged. In essence, Evergreen and
Valdes are challenging Home Savings' decision to hire firms from the greater
Northeast Ohio area and Florida rather than local counsel from Mahoning County.
{¶89} Home Savings counters that there is credible evidence supporting the
fees, including detailed invoices and the expert testimony and report from David
Shepherd, a Warren, Ohio attorney with thirty-years of commercial litigation
experience. Home Savings argues that Shepherd testified that the rates were
reasonable based on the complexity of the case and are in line with other firms in
Northeast Ohio. Finally, Home Savings argues that Evergreen and Valdes' reliance
on Prof.Cond. R. 1.5 is misplaced as it is an ethical rule, not a substantive rule or
statute, as such, R.C. 1319.02(D)(2) should control evaluation of the attorney fees
award.6
{¶90} Additionally, and contrary to Home Savings' argument, when evaluating
the reasonableness of attorney fees the Ohio Supreme Court held it is proper to also
consider the factors set forth in Prof. Cond. Rule 1.5. See Bittner v. Tri-County
Toyota, 58 Ohio St.3d 143, 145-146, 569 N.E.2d 464 (1991). This is consistent with
the inclusive language in R.C. 1309.02(D) that all relevant factors shall be
considered. Pertinent to this appeal, Shepard based his expert report and testimony
on the factors delineated in Prof.Cond. Rule 1.5, and relied on the following six of the
nine factors delineated in the rule:
6The magistrate's September 20, 2011 decision is based on R.C. 1301.21(A), repealed on June 29,
2011 and replaced with R.C. 1319.02(D), which states the same substantive law as R.C. 1301.21(A).
As the substance of the law remains the same the analysis is not affected; however, the new section
number will be referenced herein.
- 26 -
1) the time and labor required, the novelty and difficulty of the questions
involved, and the skill requisite to perform the legal service properly;
***
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers
performing the services;
Prof.Cond.R. 1.5(a).
{¶91} The magistrate's decision notes that the attorney fees and cost award
was based upon testimony presented and exhibits admitted at a full evidentiary
hearing; specifically the report and testimony of Home Savings' expert Attorney
Shepard, the detailed invoices from all three firms, a summary sheet tallying the fees
and expenses for all three firms, and biographical information for Attorney Douglas
DiPalma of Cavitch, Familo & Durkin, who was the lead attorney for the litigation from
March 2009 through April 2011. Evergreen, Valdes and Zebrasky did not present an
expert to counter Shepard's testimony or report.
{¶92} Three law firms represented Home Savings during the pre-trial, trial and
post-trial proceedings of the six cases consolidated in this appeal. Common to the
invoices in the record submitted by all three firms is that Home Savings was billed
monthly, expenses were detailed, and entries for work done was were detailed by
date, professional, time spent and a description of the work performed. The Cavitch
firm, as well as Messana, Weistein & Stern P.A. also provided the individual hourly
rates for each professional who performed services at both firms. However, Weston
Hurd L.L.P. did not provide the individual hourly rate for its professionals. Instead,
- 27 -
Weston provided the total number of professional hours for work performed for the
month and the total dollar amount billed for those services. Accordingly, Shepard
evaluated the reasonableness of Weston's attorney fees by dividing the total dollar
amount of professional services billed by the hours expended to arrive at a blended
average hourly rate of $159.09 for all professional service rendered by Weston.
{¶93} All three firms also redacted information in the description portion of the
invoices from a number of entries in order to preserve attorney-client privileged
information therein. Accordingly, Shepard opined that he could not speak to the
reasonableness of any of those redacted entries.
{¶94} In his report Shepard stated that in order to evaluate the
reasonableness of the attorney fees for services rendered on behalf of Home
Savings by all three firms in connection with the litigation and collection efforts, he
reviewed the detailed monthly invoices from each firm, the complaints, answers and
counterclaims filed in all three cases, as well as the other pleadings, motions, filings
related to discovery, journal entries and the official online docket for all three cases.
His report also detailed his knowledge of the reputation of both Cavitch and Weston,
attorney billing rates in the Mahoning County legal community and the reputation of
Attorney DiPalma as lead counsel for the matter. At the hearing, he reiterated his
reliance on this information, as well as the biography of Attorney DiPalma and the
billing summaries for each firm, which were also admitted at the hearing; he also
testified that he had reviewed the biographies of attorneys Black and Trombetto.
{¶95} Shepard opined in his expert report that the invoices disclosed
necessary and appropriate work including but not limited to: document review and
evaluation of background facts; legal research before and during litigation; ongoing
communications with the client and other professionals; formulation of litigation and
defense strategies; pleading, discovery and trial preparation and execution;
conferences with opposing counsel; and post trial proceedings including various out
of state collection options. At the hearing, Shepard testified to the complexity and
seriousness of the issues raised in the case, the size of the counterclaims and the
potential verdict against Home Savings, and thus, these circumstances all warranted
- 28 -
multiple attorneys working on the matter and the fees incurred. He noted the matter
involved a number of cases that were consolidated including several cognovit
complaints and a note and mortgage foreclosure complaint, which in his opinion was
beyond the typical foreclosure action litigated locally. With this context, we now turn
to the attorney fees awarded for the services of each firm, in the order in which they
represented Home Savings.
{¶96} Weston provided services from July 10, 2008, through March 6, 2009.
A review of the invoices reveals that Weston's scope of services included: pre-
litigation services to evaluate, draft and file cognovit complaints and attendant
pleadings; obtaining and processing certificates of judgment to pursue collection of
judgment in and out of state; bank garnishments, Ferrari seizure attempt and other
collection efforts in Wisconsin, Florida, Ohio and Puerto Rico as well as working with
local counsel in those efforts; obtaining and reviewing preliminary judicial report and
preparing and filing a complaint in foreclosure; defending the Civ.R. 60(B) motions
filed by Evergreen, Valdes and Zebrasky which were ultimately successful; defending
multiple counterclaims; preparing motions for default and summary judgment against
Evergreen,Valdes and Zebrasky; responding to pleadings filed by multiple parties in
the foreclosure action including, but not limited to, the Pine Lakes condominium
association, the Mahoning County Treasurer and the State of Ohio.
{¶97} Shepard opined that the nature and extent of these services were
reasonable in this case, and that Weston is a mid-sized Cleveland firm with a good
reputation for business litigation in Northeast Ohio. As noted above, he determined
that Weston's hourly rate was a blended average of $159.09 based upon the total
amount billed for professional service divided by the hours of work performed. Based
upon his experience with the Mahoning County legal community, he opined that
Weston's blended average hourly rate was within the range of other well-established
and regarded Northeast Ohio law firms.
{¶98} The total amount for professional services billed by Weston was
$35,271 and $1,634.97 for costs advanced by the firm. As noted above, multiple
entries contained redacted information to preserve privileged information, which
- 29 -
totaled $11,486.29 in billing entries which Shepard could not evaluate for
reasonableness. Thus, he deducted that amount, and opined that the net amount of
$23,784.71 for professional services and $1,634.97 in costs were reasonable for the
services performed by Weston.
{¶99} Messana is based in Fort Lauderdale, Florida and provided services
from November 11, 2008 through January 21, 2009 in connection with the
domestication of a foreign judgment in Puerto Rico and collection avenues. A review
of the invoices reveals that Messana's scope of services included conferring with
other professionals, asset search, filing and pursuing judgment. Shepard opined that
the hourly rates of $365 and $145 were reasonable for out of town counsel
performing work of the type done by Messana in the South Florida legal community.
The total amount for professional services billed by Messana was $1,694.50 and
$303.18 for costs advanced by the firm, which Shepard deemed reasonable. As
noted above, multiple entries in the Messana invoices contained redacted information
to protect privileged information, which Shepard opined with respect to Weston and
Cavitch, he could not evaluate those entries for reasonableness. However he did not
make any deduction for the redacted entries in the Messana invoices. Had he done
so consistent with his rationale for doing so with both Weston and Cavitch's invoices,
$1,520.50 would have been deducted for a net amount of $174 for professional
services and $303.18 for costs advanced by Messana.
{¶100} Cavitch provided services from March 3, 2009 through April 28, 2011.
A review of the invoices reveals that Cavitch's scope of services among six cases
involving the parties included: continuing with the defense of the motions for relief
from judgment, pursuing summary judgment and defending counterclaims filed by
Evergreen, Valdes and Zebrasky and cross-claims file by other parties to the
foreclosure action; document review and consultation with the client, other
professionals and opposing counsel; collection efforts; filing and defending a variety
of pre-trial procedural motions and issues, including but not limited to temporary
restraining order and preliminary injunction; seeking and responding to discovery,
including interrogatories, requests for admissions and multiple depositions involving
- 30 -
thousands of documents; preparing for and attending a variety of court hearings and
conferences; interacting with other interested parties to the foreclosure litigation, for
example, the condominium owners association; drafting and filing extensive
pleadings and notices; prepare for and present a five day trial; obtain and review
Spanish translation of documents; prepare for and attend post-trial proceedings
including preparing and filing post-trial briefs, transcript review; preparing and
presenting attorney fee request.
{¶101} Shepard opined that the nature and extent of these services were
reasonable in this case, and that Cavitch, founded in the late 1800's was one of the
oldest firms in Cleveland and has an excellent reputation in the Northeast Ohio legal
community with a highly regarded business litigation practice. The hourly rates for
professionals at Cavitch ranged between $135-$325 and $335-$345. Based upon his
experience with the Mahoning County legal community, he opined that the hourly
rates for the professionals and attorneys at Cavitch were within the range of other
well-established and highly regarded Northeast Ohio firms. Shepard noted that
Attorney DiPalma, Cavitch's lead counsel for Home Savings, is an adjunct university
professor teaching principles of federal litigation and contract law, and a contributing
editor of the Ohio Transaction Guide legal treatise. He also testified that there are
attorneys practicing in Mahoning County that bill in excess of $345 an hour.
{¶102} The total amount of Cavitch's invoices was $365,868.50, which the
firm reduced by $21,000 for work performed by new associates which Cavitch
deemed to be training costs for the firm; thus Home Savings' was billed $344,868.50
for professional services and $19,700.06 for costs advanced by the firm. As noted
above, multiple entries contained redacted information to preserve privileged
information, which totaled $12,935.50 in billing entries which Shepard could not
evaluate for reasonableness. Thus, he deducted that amount, and opined that the
net amount of $330,194.50 for professional services and $19,700.06 in costs were
reasonable for the services performed by Cavitch.
{¶103} Based upon the record, the magistrate found that the attorney fees
incurred were reasonable as contemplated by R.C. 1319.02 (former R.C. 1301.21),
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and making the deductions for the $21,000 credit by Cavitch, and $11,486.29 from
Weston's billings and $12,935.50 from Cavitch's billings for redacted billing entries
that Shepard could not evaluate for reasonableness, the magistrate awarded Home
Savings attorney fees against Evergreen as follows: $23,784.71 in fees and
$1,634.97 in costs billed by Weston; $1,694.50 in fees and $303.18 in costs billed by
Messana; and $330,194.50 in fees and $21,326.16 in costs billed by Cavitch.
{¶104} The magistrate did not abuse his discretion in finding the services
provided and the costs incurred by the three firms representing Home Savings were
reasonable. This was a multi-million dollar, multi-document commercial loan litigation
which evolved over a period of years and spawned six lawsuits involving complex
and protracted proceedings, and involving multiple parties beyond Home Savings,
Evergreen, Valdes and Zebrasky. However, there were numerical errors in the
attorney fees award.
{¶105} First, as noted above, $1,520.50 in billing entries for Messana's
professional services contained redacted attorney-client information precluding
Shepard from opining on and the magistrate determining their reasonableness.
Thus, Home Savings' attorney fees award must be reduced by that amount. Second,
regardless of what evidence of the amount was presented, Shepard opined that
$19,700.06 in costs advanced by Cavitch was reasonable; however, the magistrate
awarded $21,326.16 in costs. Thus, Home Savings' attorney fees award must be
reduced by the difference, $1,626.10. Accordingly, Evergreen and Valdes' tenth
assignment of error is meritorious in part, and a reduction of the attorney fees award
against Evergreen in the amount of $3,146.60 is warranted.
{¶106} In Evergreen and Valdes' eleventh assignment of error, they argue
that the trial court erred in placing the attorneys' fees higher in priority than the notes
as a matter of law and as a matter of equity. As this presents a question of law, de
novo review is applied. Evergreen and Valdes appear to argue that it would be
improper to give the attorneys' fees secured status by giving them priority over the
mortgages which have been determined to have the first and best lien on the Pine
Lake parcels.
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{¶107} Home Savings argues that attorneys' fees are authorized in the
mortgage agreements which contain a broad clause that gives Home Savings
discretion to apply payments in any manner it sees fit allowing them to apply the
payment against the attorneys' fees before the mortgages.
{¶108} R.C. 1309.615(A) provides that "[a] secured party shall apply or pay
over for application the cash proceeds of disposition under section 1309.610 of the
Revised Code7 in the following order to: (1) [t]he reasonable expenses of retaking,
holding, preparing for disposition, processing, and disposing, and, to the extent
provided for by agreement and not prohibited by law, reasonable attorney's fees and
legal expenses incurred by the secured party; (2) [t]he satisfaction of obligations
secured by the security interest or agricultural lien under which the disposition is
made; (3) [t]he satisfaction of obligations secured by any subordinate security interest
in or other subordinate lien on the collateral if: (a) [t]he secured party receives from
the holder of the subordinate security interest or other lien an authenticated demand
for proceeds before distribution of the proceeds is completed; and (b) [i]n a case in
which a consignor has an interest in the collateral, the subordinate security interest or
other lien is senior to the interest of the consignor; and (4) [a] secured party who is a
consignor of the collateral if the secured party receives from the consignor an
authenticated demand for proceeds before distribution of the proceeds is completed."
{¶109} R.C. 1309.615 lists attorneys' fees first in the order of distribution and
satisfaction of the security interest as second in the order of distribution. Accordingly,
the trial court did not err in listing the attorneys' fees higher in priority than the notes,
and this argument is meritless.
{¶110} Valdes also advanced this argument as a matter of equity. He asserts
that the attorneys' fees were awarded against Evergreen, not Valdes, and since
Evergreen's only asset is the property, placing the attorneys' fees ahead of the
mortgages will result in a deficiency judgment that Valdes will be forced to pay even
though the fees were not awarded against him.
{¶111} R.C. 1309.615 provides that attorneys' fees are placed higher than a
7 R.C. 1309.610 provides for the disposition of collateral after default.
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security interest in the order of distribution. There is no exception for an equity
argument and Valdes does not draw this Court's attention to any. Valdes' equity
argument is meritless. Accordingly, for all these reasons, Evergreen and Valdes'
eleventh assignments of error regarding the priority of attorney fees is meritless.
Conclusion
{¶112} For the reasoning stated above, Evergreen, Valdes and Zebrasky's
assignments of error are meritless regarding: discovery; Evergreen, Valdes and
Zebrasky's separate defenses and counterclaims, specifically the timeliness of
Valdes and Zebrasky's asserted status as accommodation makers and claims of
promissory estoppel and negligent misrepresentation; the amount of judgment and
damages; and finally, the priority assigned to the attorney fees award. However, the
assigned error regarding the amount of the attorney fees award is meritorious in part.
Accordingly, the judgment of the trial court is affirmed in part, reversed in part and
modified; the judgment entered in favor of Home Savings against Evergreen for
reasonable attorney fees and costs of $378,938.02 is reduced by $3,146.60 and
modified to $375,791.42.
Celebrezze, Jr. J., of the 8th Appellate District, sitting by assignment, concurs.
Keough, J., of the 8th Appellate District, sitting by assignment, concurs.