Osborne v. J.T.O., Inc. ( 2024 )

[Cite as Osborne v. J.T.O., Inc., 2024-Ohio-2070.]
COURT OF APPEALS OF OHIO
EIGHTH APPELLATE DISTRICT
COUNTY OF CUYAHOGA
CYNTHIA OSBORNE, ET AL., :
Plaintiffs-Appellants, :
No. 113336
v. :
J.T.O., INC., ET AL., :
Defendants-Appellees. :
JOURNAL ENTRY AND OPINION
JUDGMENT: REVERSED AND REMANDED
RELEASED AND JOURNALIZED: May 30, 2024
Civil Appeal from the Cuyahoga County Court of Common Pleas
Case No. CV-18-897825
Appearances:
Cooper Elliott, Charles H. Cooper, Jr., and Barton R.
Keyes; Calabrese & Associates, LLC, and Maria L.
Calabrese, for appellants.
Walter | Haverfield LLP, Alexandra V. Dattilo, and John
E. Schiller; Kenneth J. Fisher; Ranallo & Aveni LLC, and
Robert A. Ranallo, for appellees.
FRANK DANIEL CELEBREZZE, III, J.:
Appellants Cynthia Osborne (“Cynthia”) and Natalie Tomazic
(“Natalie”) (collectively, “appellants”) challenge the judgment of the Cuyahoga
County Court of Common Pleas granting the appellees’ motion for summary
judgment on their claims and denying their motion for leave to file an amended
complaint, their motion to compel discovery, and their motion to modify discovery
order. After a thorough review of the applicable law and facts, we reverse the
judgment of the trial court and remand for further proceedings.
I. Factual and Procedural History
This lengthy litigation arises from a dispute over a family business and
certain related entities. Appellants brought this action on their own behalf and on
behalf of the following entities: J.T.O., Inc. (“J.T.O.”), Fourever J.T.O., Ltd.
(“Fourever J.T.O.”), Jerome T. Osborne, Jr. Family, L.P. (“JTO, Jr., FLP”), Trask
Properties, LTD. (“Trask”), Jiggy Ltd. (“Jiggy”), MRLM, LLC (“MRLM”), and JTO
Club Corp. (“JTO Club”) against J.T.O., Jerome T. Osborne III, individually and as
Trustee of the Jerome T. Osborne, Jr. Trust B (“Ossie”), JTO, Jr., FLP, Fourever
J.T.O., Trask, MRLM, Ossco Properties LTD (“Ossco”), JTO Materials, LLC (“JTO
Materials”), JTO Club, and Jiggy.
The complaint alleged four causes of action, to wit: breach of fiduciary
duty, failure to maintain or provide records, unjust enrichment, and breach of
contract. Appellees1 answered the complaint and filed their own counterclaim,
which is not at issue here.
1 Appellees in this matter are Ossie, J.T.O., Inc., JTO Club, Jiggy, and MRLM, and
will be referred to as “appellees.” Fourever J.T.O., JTO, Jr., FLP, and Trask were
voluntarily dismissed from the action and are not parties to this appeal. Ossco and JTO
Materials were named as parties to the underlying action; however, appellees did not list
them among the named “appellees” in their brief.
The case proceeded slowly and significant motion practice ensued. At
one point, the trial court entered an order limiting discovery to parties in the case.
If the parties sought discovery from a third party, they were required to seek
approval from the court. Appellants filed a motion to compel discovery and a motion
to modify the discovery order, which were both later supplemented. The motions
were held in abeyance by the trial court while settlement discussions were held.
After settlement attempts failed, the trial court indicated that it would rule on the
motions that had been held in abeyance, but it did not.
While the case was pending, appellants moved to amend their
complaint to add additional parties as derivative plaintiffs, which was also held in
abeyance. Several years later, it was denied without analysis.
Appellees moved for summary judgment on appellants’ claims, which
appellants opposed. The trial court granted the motion for summary judgment,
finding that (1) appellants lacked direct ownership interest in J.T.O., JTO Club,
Jiggy, and MRLM and therefore could not bring derivative claims on behalf of these
entities; and (2) appellants could not bring their claims as direct shareholder claims
because they had not presented evidence to demonstrate that they had suffered any
injury separate and distinct from the claimed injury to the corporate entities.
The trial court determined that genuine issues of material fact remained
regarding the derivative claims on behalf of Fourever J.T.O., JTO Jr., FLP, and
Trask. Later, these parties were voluntarily dismissed from the action. The
counterclaim was also dismissed, and appellants then filed the instant appeal,
raising four assignments of error for our review:
1. The trial court erred to the extent that it granted appellees’ motion
for summary judgment.
2. The trial court abused its discretion in denying appellants’ joint
motion for leave to file a first amended complaint.
3. The trial court abused its discretion in denying by implication
appellants’ joint motion to modify a discovery order prohibiting third
party discovery.
4. The trial court abused its discretion in denying by implication
appellants’ joint motion to compel discovery.
II. Law and Analysis
A. Summary Judgment
Appellants argue that the trial court erred in granting summary
judgment on their derivative claims because they have indirect interests in each of
the entities through the parent companies.2 They contend that shareholders of a
parent company have standing to bring derivative actions on behalf of a subsidiary.
Civ.R. 23.1 provides:
In a derivative action brought by one or more legal or equitable owners
of shares to enforce a right of a corporation, the corporation having
failed to enforce a right which may properly be asserted by it, the
complaint shall be verified and shall allege that the plaintiff was a
shareholder at the time of the transaction of which he complains or that
his share thereafter devolved on him by operation of law. The
complaint shall also allege with particularity the efforts, if any, made by
the plaintiff to obtain the action he desires from the directors and, if
necessary, from the shareholders and the reasons for his failure to
2 Appellants’ brief does not raise any argument regarding the dismissal of their
direct claims, and their counsel confirmed at the oral argument held in this matter that
they have abandoned their direct claims.
obtain the action or for not making the effort. The derivative action may
not be maintained if it appears that the plaintiff does not fairly and
adequately represent the interests of the shareholders similarly
situated in enforcing the right of the corporation. The action shall not
be dismissed or compromised without the approval of the court, and
notice of the proposed dismissal or compromise shall be given to
shareholders in such manner as the court directs.
Significant portions of the parties’ briefs address factual issues
regarding the claims against Ossie. However, because the trial court focused solely
on the issue of appellants’ standing and did not address the substance of the claims,
we will not analyze the merits of the claims for the first time here. See Roush v.
Butera, 8th Dist. Cuyahoga No. 97463, 2012-Ohio-2506, ¶ 27 (“As an appellate
court, we do not consider arguments that the trial court did not address.”). Rather,
our analysis of the arguments related to the motion for summary judgment will focus
on the question of whether appellants had standing to bring a derivative suit on
behalf of entities within which they had no interest. Standing is a threshold question
in any case —“[a] party must establish standing to sue before a court can consider
the merits of the claim.” State ex rel. Ohio Stands Up!, Inc. v. DeWine, 167 Ohio
St.3d 248, 2021-Ohio-4382, 192 N.E.3d 371, ¶ 5.
Appellants argue they had standing to bring a derivative claim on
behalf of subsidiaries of the parent companies in which they have an interest and
cite Carlin v. Brownfield, 10th Dist. Franklin No. 84AP-345, 1985 Ohio App. LEXIS
8141 (June 18, 1985), in support thereof. The Carlin Court noted that “[i]t is
recognized in Ohio and in other jurisdictions that shareholders of a parent
corporation, by virtue of their ownership interest in the parent, may maintain a
‘double derivative’ action on behalf of the subsidiary corporation.” Id. at 9-10, citing
Warren Telephone Co. v. Staton, 46 Ohio App. 505, 514, 189 N.E. 660 (11th
Dist.1933); 7A Wright & Miller, Federal Practice and Procedure, Section 1826
(1972).
Ohio is not alone in recognizing such actions. “Delaware law has long
recognized that a shareholder of a parent corporation may bring suit derivatively to
enforce the claim of a wholly owned corporate subsidiary, where the subsidiary and
its controller parent wrongfully refuse to enforce the subsidiary’s claim directly.”
Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 34 A.3d 1074,
1080-1081 (Del.2011). If standing requirements are met, a shareholder of the parent
corporation may “stand in the shoes” of the parent, and prosecute, on the parent’s
behalf, claims that formally belong to the parent’s wholly owned subsidiary. Id. See
also Elgohary v. Steakley, S.D.Tex. No. 4:17-cv-01534, 2017 U.S. Dist. LEXIS
190621, 24-25 (Oct. 10, 2017) (noting that standing to assert a derivative action on
behalf of a wholly owned subsidiary requires standing to assert a derivative action
on behalf of the parent corporation).
In their complaint, appellants assert that they have a direct ownership
interest in JTO, Jr. FLP, and Trask, and that they have an indirect ownership
interest in J.T.O., JTO Club Corp., Jiggy, and MRLM. There does not appear to be
any dispute that appellants are both limited partners in JTO, Jr., FLP, which owns
100 percent of JTO, Inc., which wholly owns the subsidiaries JTO Club, and MRLM.
Further, the parties agree that appellants are members of Trask, which owns 80
percent of Jiggy and that J.T.O. has a 10 percent interest in Jiggy.
However, appellees contend, without citation to any authority, that
this matter is distinguishable from other double-derivative actions because the
parent company here is a limited partnership that has an operating agreement
providing Ossie with authority to take the actions that form the basis of appellants’
claims.
The fact that the parent company is a limited partnership does not
negate appellants’ standing. While there does not appear to be any Ohio authority
addressing limited partnerships in double-derivative actions, other jurisdictions
have found no such limitation. See Bamford v. Penfold, L.P., Ch. No. 2019-0005-
JTL, 2020 Del. Ch. LEXIS 79, 73 (Feb. 28, 2020), citing 2 William E. Knepper &
Dan A. Bailey, Liability of Corporate Officers and Directors, Section 18.01 n.46 (8th
Ed.2019) (noting that Delaware “recognizes double derivative actions involving
limited partnerships”); see also Yale M. Fishman 1998 Ins. Trust v. Philadelphia
Fin. Life Assur. Co., S.D.N.Y. No. 11-cv-1283, 2016 U.S. Dist. LEXIS 58862, 4
(May 3, 2016) (investor in an entity that was a limited partner in a limited
partnership could assert a double-derivative claim on behalf of the limited
partnership).
While appellees maintain that Ossie was permitted to take the actions
complained of by appellants by virtue of the operating agreement, this issue goes to
the merits of appellants’ claims and has no bearing on the threshold issue of
standing.
Because appellants have established standing as limited partners in
the parent companies of J.T.O., JTO Club, Jiggy, and MRLM, the trial court erred in
granting summary judgment on the basis of standing. Appellants’ first assignment
of error is sustained.
B. Motion for Leave to Amend
In their second assignment of error, appellants argue that the trial
court erred in denying their motion for leave to file a first amended complaint. As
noted above, appellants sought to amend the complaint to add additional parties for
their derivative claims.
Appellants contend that their motion to leave was timely filed and
made fairly early in the case proceedings. Our review of a trial court’s decision to
grant or deny a motion to amend a complaint is under an abuse of discretion
standard. LAME, Inc. v. E.G. Sys., 8th Dist. Cuyahoga No. 101566, 2015-Ohio-686,
¶ 14, citing Tenable Protective Servs. v. Bit E-Technologies, L.L.C., 8th Dist.
Cuyahoga No. 89958, 2008-Ohio-4233, ¶ 26. This court has held that the “‘denial
of leave to amend a complaint constitutes an abuse of discretion when a plaintiff
may, by an amended complaint, set forth a claim upon which relief may be granted,
when the motion for leave to amend was tendered in a timely manner and in good
faith, and when no justification for denying leave is disclosed on or apparent from
the record.’” Mills v. Deehr, 8th Dist. Cuyahoga No. 82799, 2004-Ohio-2410, ¶ 16,
quoting Forney v. Cincinnati Reds, Inc., 1st Dist. Hamilton No. C-880016, 1988
Ohio App. LEXIS 4937, 7 (Dec. 14, 1988), citing Peterson v. Teodosio, 34 Ohio St.2d
161, 297 N.E.2d 113 (1973), paragraph six of the syllabus.
In the instant matter, appellants sought leave to amend their
complaint fairly early in the case. While the action had been pending for over a year
at the time the motion was filed, it does not appear that the case had made much
forward progress due to significant motion practice by the parties. Several months
after the motion for leave to amend was filed, the court held a hearing where it ruled
on a number of motions and ordered that the motion for leave to amend, along with
several other motions, would be held in abeyance while the parties apparently
attempted to settle the case.
A year later, after noting that the parties had attempted to settle the
case and had participated in mediation, both to no avail, the court stated that a
decision on the motions held in abeyance would be “forthcoming.” Three years later,
the court denied the motion for leave without analysis.
We find that the motion for leave to amend the complaint was timely
made and in good faith. Further, we can glean no justification from the record as to
why the trial court failed to rule on the motion for three years and ultimately denied
it. Accordingly, we find that the trial court abused its discretion in denying
appellants’ motion for leave to amend the complaint. Appellants’ second
assignment of error is sustained.
C. Motion to Modify Discovery and Motion to Compel
In their third and fourth assignments of error, appellants argue that
the trial court erred by failing to rule upon (and implicitly denying) their motion to
modify discovery order and their motion to compel.
Like the previously discussed motion for leave to amend the
complaint, appellants’ motion to modify the discovery order and motion to compel
were both held in abeyance pending settlement discussions between the parties.
Again, after settlement attempts and mediation failed, the court stated that a
decision on the motions held in abeyance would be “forthcoming.” Three years later,
summary judgment was granted without any ruling upon either of the motions.
Appellees contend that the trial court did not err because the court
had the discretion to manage its own docket and control discovery. However, simply
failing to rule on motions for over three years does not constitute managing the
court’s docket or controlling discovery. Thus, we find the trial court erred in failing
to rule upon (and implicitly denying) appellants’ motion to modify discovery order
and motion to compel. Appellants’ third and fourth assignments of error are
sustained.
III. Conclusion
The trial court erred in granting summary judgment in favor of
appellees and abused its discretion in denying appellants’ motion for leave to amend
the complaint and failing to rule upon appellants’ motion to modify discovery order
and motion to compel.
All of appellants’ assignments of error are sustained, and this matter
is reversed and remanded to the trial court for further proceedings consistent with
this opinion.
It is ordered that appellants recover from appellees costs herein taxed.
The court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate be sent to said court to carry this judgment
into execution.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27
of the Rules of Appellate Procedure.
FRANK DANIEL CELEBREZZE, III, JUDGE
EILEEN T. GALLAGHER, P.J., and
SEAN C. GALLAGHER, J., CONCUR