Levy v. Seiber

[Cite as Levy v. Seiber, 2016-Ohio-68.]
IN THE COURT OF APPEALS
TWELFTH APPELLATE DISTRICT OF OHIO
BUTLER COUNTY
R.K. LEVY, :
CASE NOS. CA2015-02-019
Plaintiff-Appellee/ : CA2015-02-021
Cross-Appellant, CA2015-02-030
:
OPINION
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:
DANE SEIBER, et al.,
:
Defendants-Appellants/
Cross-Appellees. :
CIVIL APPEAL FROM BUTLER COUNTY COURT OF COMMON PLEAS
Case No. CV2011-12-4517
Christopher J. Minnillo, 1500 West Third Avenue, Suite 210, Columbus, Ohio 43212, for
plaintiff-appellee/cross-appellant
Chad D. Cooper, 810 Sycamore Street, Third Floor, Cincinnati, Ohio 45202, for defendants-
appellants/cross-appellees, Dane Seiber and Kimberly A. Seiber
Dennis L. Adams, P.O. Box 643, 10 Journal Square, Suite 400, Hamilton, Ohio 45012,
defendants-appellants/cross-appellees, William Sumpter and Kimberly Sumpter
M. POWELL, P.J.
{¶ 1} Defendants-appellants/cross-appellees, Dane and Kimberly Seiber,
defendants-appellants/cross-appellees, William and Kimberly Sumpter, and plaintiff-
appellee/cross-appellant, R.K. Levy, appeal a decision of the Butler County Court of
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Common Pleas involving the sale of a swingers' club. For the reasons stated below, we
affirm in part and reverse in part the decision of the trial court.
{¶ 2} Double K and BD Enterprises is a corporation that operates an adult swingers'
club in Middletown Ohio. Double K was incorporated in 2009 and owned in equal parts by
Dane and Kimberly Seiber, William and Kimberly Sumpter, and Gary and Christina Roth. In
2011, the Sumpters wished to sell their shares of Double K. Levy, who operates a similar
business, became interested in Double K after allegedly hearing that the business was doing
well and the owners were earning $500 a week. During this time, Levy purportedly requested
the tax returns and other corporate records of Double K and did not receive them. On May
26, 2011, the Sumpters entered into a "purchase agreement" to sell Levy their interest in
Double K for $65,000. The purchase agreement also contained a provision pursuant to
which Levy was to purchase the Seibers' shares in the business upon their demand. The
purchase agreement indicated that the Seibers and the Sumpters each owned 50 percent of
Double K.
{¶ 3} Before the closing of the purchase, Levy became aware that the business was
in fact owned in one-third portions by the Seibers, the Sumpters, and the Roths.
Nevertheless, Levy continued with the deal and the closing occurred on June 3, 2011. At the
closing, Levy paid to the Sumpters the balance owed to them under the purchase agreement.
Double K purchased back the shares owned by the Roths for $11,000, by way of a $10,000
loan from the Sumpters and a promise of future payments. The loan from the Sumpters was
evidenced by a "promissory note" and was secured by five percent of the nonvoting stock in
Double K. The promissory note indicated that Levy and the Seibers were jointly and
severally, personally liable for the debt owed to the Sumpters.
{¶ 4} After purchasing shares in Double K, Levy discovered the corporation had
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never been profitable. Eventually, the Sumpters stopped receiving payments owed to them
under the promissory note. Thereafter, Dane Seiber, who had acquired his wife's shares,
demanded, pursuant to the purchase agreement, that Levy purchase his shares of Double K.
Levy refused.
{¶ 5} In December 2011, Levy filed suit against the Seibers and the Sumpters
alleging several claims, including breach of contract, fraudulent inducement, and negligent
misrepresentation. The Sumpters and the Seibers also filed counterclaims against Levy.
{¶ 6} The case proceeded to trial before a magistrate. After a two-day trial, the
magistrate issued a written decision granting judgment in favor of Levy on his fraudulent
inducement and negligent misrepresentation claims and in favor of the Sumpters on their
breach of contract counterclaim. However, the magistrate ruled against Levy on his
remaining claims and the Seibers' breach of contract counterclaim. The magistrate found the
purchase agreement was void as it was a product of fraud, ordered it to be rescinded, and
awarded Levy compensatory damages of $65,000, punitive damages of $1.00, and
reasonable attorney fees. The magistrate also entered judgment against Levy and in favor of
the Sumpters in the sum of $10,000.
{¶ 7} The parties objected to the magistrate's decision. After a hearing, the trial court
issued its written decision and overruled all of the Seibers' and Sumpters' objections because
they failed to file a transcript of the proceedings before the magistrate. However, the court
sustained Levy's objection as to the award of $10,000 to the Sumpters.
{¶ 8} The parties appealed from the trial court's decision. This court dismissed the
appeal as there were outstanding issues left to be resolved. R.K. Levy v. Seiber, et al., 12th
Dist. Butler Nos. CA2015-02-019, CA2015-02-021, and CA2015-02-030 (Oct. 7, 2014)
(Dismissal Entry). On remand, the trial court granted Levy attorney fees in the amount of
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$25,876 and denied any claims not yet ruled upon.
{¶ 9} The Seibers and the Sumpters now appeal, raising several assignments of
error. Levy has also cross-appealed, raising one assignment of error. For ease of
discussion, we will address the assignments of error out of order.
{¶ 10} Seibers' Assignment of Error No. 3:
{¶ 11} THE TRIAL COURT ERRED BY BASING ITS ADOPTION OF THE
MAGISTRATE'S DECISION ON THE FINDING THAT NO TRIAL TRANSCRIPT WAS
FILED.
{¶ 12} Seibers' Assignment of Error No. 4:
{¶ 13} THE TRIAL COURT ERRED BY FAILING TO ADDRESS QUESTIONS OF
LAW RAISED BY THE SEIBERS.
{¶ 14} Sumpters' Assignment of Error No. 1:
{¶ 15} THE TRIAL COURT ERRED IN OVERRULING APPELLANTS' OBJECTIONS
TO THE MAGISTRATE'S LEGAL CONCLUSIONS SOLELY BASED UPON THE LACK OF A
TRANSCRIPT.
{¶ 16} The Seibers and the Sumpters challenge the trial court's review of the
magistrate's decision. First, the parties argue the trial court erred in overruling all of their
objections on the basis that a transcript of the hearing before the magistrate was not filed.
The parties assert that the transcript was filed after the hearing on objections to the
magistrate's decision. Second, the parties maintain that even if the transcript was not before
the trial court, the court should have at least considered their objections to the magistrate's
legal conclusions.
{¶ 17} A party's objection to a magistrate's factual finding must be supported with a
transcript or an affidavit of the evidence submitted to the magistrate. Civ.R. 53(D)(3)(b)(iii).
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The objecting party is required to file the transcript or affidavit with the court within 30 days
after filing objections unless the time for preparing the transcript is extended. Civ.R.
53(D)(3)(b)(iii). When a transcript is filed out of time, a trial court has broad discretion in
deciding whether to consider the transcript. Ramsey v. Ramsey, 10th Dist. Franklin No.
13AP-840, 2014-Ohio-1921, ¶ 23.
{¶ 18} In ruling on the objections to a magistrate's decision, the trial court "shall
undertake an independent review as to the objected matters to ascertain that the magistrate
has properly determined the factual issues and appropriately applied the law." Civ.R.
53(D)(4)(d). However, when an objecting party fails to timely file a transcript or affidavit, a
trial court's independent review of the record is limited to an examination of the magistrate's
conclusions of law and recommendations in light of any accompanying findings of fact.
Manninen v. Alvarez, 12th Dist. Butler No. CA2013-06-106, 2014-Ohio-75, ¶ 21. Moreover,
in such an instance, the appellate court is precluded from considering the transcript of the
magistrate's hearing and our review regarding factual issues is whether the trial court abused
its discretion in applying the law to the magistrate's factual findings. State ex rel. Duncan v.
Chippewa Twp. Trustees, 73 Ohio St. 3d 728, 730 (1995); Singh v. Wadhwa, 12th Dist.
Warren No. CA2013-02-009, 2013-Ohio-3997, ¶ 20.
{¶ 19} In the present case, while the Seibers and the Sumpters objected to the
magistrate's decision in February 2014, neither party filed a transcript with the trial court at
this time. Instead, the Seibers moved to file an untimely transcript on June 5, 2014, the day
of the hearing on the objections to the magistrate's decision. The transcripts were filed in two
volumes on July 18 and July 22, 2014. The trial court issued its written decision on August
12, 2014. In its decision, the court overruled the Seibers' motion for leave to file a transcript,
noted a transcript had never been filed, and overruled all of the Seibers' and the Sumpters'
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objections because the objections "went to credibility issues which can only be reviewed with
a full transcript * * *."
{¶ 20} We find that the trial court did not err in overruling the objections of the Seibers
and the Sumpters in regards to the magistrate's findings of fact. Neither the Seibers nor the
Sumpters filed a transcript of the proceedings before the magistrate in the time allotted by
Civ.R. 53(D)(3)(b)(iii). Instead, the Seibers moved to submit the untimely transcript four
months after their objections. The transcripts were not filed with the trial court for another
five weeks and not until after the hearing upon their objections. While the trial court
incorrectly noted in its decision that a transcript had not been submitted, in light of the
substantial period of time between the initial filing of the objections and filing of the transcript,
the trial court did not abuse its discretion in denying the Seibers' motion and refusing to
consider the transcript. Therefore, the trial court's independent review of the record was
limited to an examination of the magistrate's conclusions of law and recommendations in light
of any accompanying findings of fact.
{¶ 21} However, we find the trial court did err in overruling the objections of the
Seibers and the Sumpters insofar as the objections challenged the magistrate's legal
conclusions. While a timely transcript was not filed, the trial court was still required to
examine the magistrate's legal conclusions. Therefore, while the trial court failed to consider
the objections in regards to the legal conclusions, this court will consider these issues and
review them under a de novo standard of review. See Settlers Walk Home Owners Assn. v.
Phoenix Settlers Walk, Inc., 12th Dist. Warren Nos. CA2014-09-116, CA2014-09-117, and
CA2014-09-118, 2015-Ohio-4821, ¶ 15. Consequently, the Seibers and the Sumpters have
not suffered any prejudice by the trial court's failure to consider the objections to the
magistrate's legal conclusions.
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{¶ 22} Accordingly, the Seibers' third and fourth assignments of error and the
Sumpters' first assignment of error are overruled.
{¶ 23} Seibers' Assignment of Error No. 1:
{¶ 24} THE TRIAL COURT ERRED BY ADOPTING THE CONCLUSIONS OF LAW IN
THE MAGISTRATE'S DECISION.
{¶ 25} Sumpters' Assignment of Error No. 2:
{¶ 26} THE TRIAL COURT ERRED IN ADOPTING THE CONCLUSIONS OF LAW IN
THE MAGISTRATE'S DECISION.
{¶ 27} The Seibers challenge the trial court's adoption of the magistrate's rulings in
favor of Levy upon his fraudulent inducement and negligent misrepresentation claims.1 The
Sumpters also challenge the ruling in favor of Levy on his fraud and negligent
misrepresentation claims. We will address these arguments in turn.
Fraud
{¶ 28} The Seibers and the Sumpters argue the magistrate erred in finding Levy was
fraudulently induced into the purchase agreement due to the Seibers' and the Sumpters'
failure to disclose Double K's financial condition, provide corporate records, and disclose the
additional owners of Double K. The Seibers and the Sumpters assert that the magistrate's
fraud analysis fails for three reasons: (1) they owed no duty to disclose information to Levy,
(2) Levy did not justifiably rely on the nondisclosures because he failed to conduct any due
diligence, and (3) any affirmative misrepresentations by the parties was mere "puffing."
{¶ 29} As stated above, this court is precluded from considering the transcript of the
magistrate's hearing and our review regarding factual issues is whether the trial court abused
its discretion in applying law to the magistrate's factual findings. Singh, 2013-Ohio-3997 at ¶
1. The Seibers also challenge the punitive damages award in their first assignment of error. We will discuss
the punitive damages award later in the opinion.
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20. We will also review legal questions under a de novo standard of review. Settlers Walk.,
2015-Ohio-4821 at ¶ 15.
{¶ 30} The elements of fraud are: (1) a representation or, where there is a duty to
disclose, concealment of a fact, (2) which 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, (4) with intent to mislead another
into relying upon it, (5) justifiable reliance upon the representation or concealment, and (6) a
resulting injury proximately caused by the reliance. Burr v. Stark Cty. Bd. of Commrs., 23
Ohio St. 3d 69, 73 (1986); Nguyen v. Chen, 12th Dist. No. Butler No. CA2013-10-191, 2014-
Ohio-5188, ¶ 24.
{¶ 31} Fraud may consist not only of an affirmative misrepresentation, but also of
nondisclosure when there is a duty to disclose. Generally, in arm's-length business
transactions, each party is presumed to have the opportunity to ascertain relevant facts, and
therefore, neither party has a duty to disclose material information to the other. Blon v. Bank
One, 35 Ohio St. 3d 98, 101 (1988). However, a duty to speak arises in business dealings
when the parties are in a fiduciary relationship, both parties to the transaction understand that
a special trust or confidence has been reposed, or full disclosure is necessary to dispel
misleading impressions that are or might have been created by partial revelation of the facts.
Id.; Word of God Church v. Stanley, 2d Dist. Montgomery No. 07-CV-4467, 2011-Ohio-2073,
¶ 26-27. For example, a party must speak upon failing "'to exercise reasonable care to
disclose a material fact which may justifiably induce another party to act or refrain from
acting, and the nondisclosing party knows that the failure to disclose such information to the
other party will render a prior statement or representation untrue or misleading.'" State v.
Warner, 55 Ohio St. 3d 31, 54 (1990), quoting Miles v. McSwegin, 58 Ohio St. 2d 97, 100
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(1979).
{¶ 32} We find that the trial court did not err in adopting the magistrate's conclusion
that Levy was fraudulently induced into the purchase agreement in regards to the
misimpression created by the Seibers and the Sumpters as to financial profitability and their
failure to provide requested documents. While the sale of the business was an arm's-length
transaction, the Seibers and the Sumpters engaged in conduct that created a misleading
impression that the business was doing well financially, when in fact it had never been
profitable. In its decision, the magistrate recited Levy's testimony, which it found to be on "all
matters more credible," that he was told by a volunteer, the Seibers, and the Sumpters that
the club was "doing great" and drawing $500 per week. Under these circumstances, it was
the duty of the sellers to correct these misimpressions. Instead of clarifying the financial
status of Double K, the Seibers and the Sumpters proceeded along with the sale and
impeded Levy's ability to view the corporation's financial records. While the Seibers and the
Sumpters maintained that Levy never asked about the financial condition of the business and
did not request the financial records, the magistrate found that it was unlikely Levy, a person
who already operates a similar business, "would fail to make at least cursory inquires as to
profitability and conduct of business operations." See Long v. Rice, 11th Dist. Ashtabula No.
2012-A-0056, 2013-Ohio-2402, ¶ 19-22; Word of God Church at ¶ 31-32. This is a
significant factual finding to which we must defer, particularly in the absence of a transcript of
the proceedings before the magistrate.
{¶ 33} We also disagree that Levy's alleged lack of due diligence to investigate the
company made his reliance on the failure to disclose certain information not justified. The
question of justifiable reliance is a factual determination. Nguyen, 2014-Ohio-5188 at ¶ 25.
The magistrate found that Levy's reliance was justified and that the Seibers and the
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Sumpters failed to provide the corporation's financial records to Levy so that he could
complete his due diligence. Therefore, the trial court did not abuse its discretion in adopting
the magistrate's finding that Levy's reliance was justified. Moreover, we also do not find that
any misrepresentation about Double K's profitability was harmless "puffing." While
predictions about the future or statements of opinion are not actionable misrepresentations,
in this case the Seibers and the Sumpters took several affirmative actions that created an
impression of financial profitability or, at least, obstructed Levy's ability to obtain an accurate
financial view of the company. See Kondrat v. Morris, 118 Ohio App. 3d 198, 207 (8th
Dist.1997).
{¶ 34} We do find error with regard to the magistrate's determination that Levy was
fraudulently induced into the purchase agreement by the representation that the club was
owned by the Seibers and the Sumpters in one-half shares, when in fact the Roths also
owned a portion of the club. Levy was aware of the Roths' ownership interest prior to the
time the purchase agreement closed on June 3, 2011. Despite having this knowledge, Levy
not only proceeded with the closing, but entered into a separate arrangement with the
Sumpters and the Seibers to acquire the Roths' interest. Therefore, Levy has waived any
argument that this issue had significance in his decision to purchase the club. Nonetheless,
we find that the other evidence supports Levy's fraud claim. Consequently, we find the trial
court did not err in adopting the magistrate's conclusion that Levy was fraudulently induced in
the purchase agreement.
Negligent Misrepresentation
{¶ 35} The Seibers and the Sumpters also challenge the trial court's adoption of the
magistrate's finding that Levy prevailed on his negligent misrepresentation claim due to the
representation of William Sumpter and the purchase agreement indicating that the Seibers
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and the Sumpters were the sole, equal owners of the company, when in fact, the Roths'
owned one-third of the company. Both the Seibers and the Sumpters raise a number of
arguments as to why this constituted error, including, that they are not in the business of
supplying information and Levy did not rely on the alleged misrepresentation.
{¶ 36} The elements of negligent misrepresentation are as follows:
One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the guidance
of others in their business transactions, 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 Heights, 41 Ohio St. 3d 1, 4 (1989); N. Am. Herb & Spice Co., LTD, LLC
v. Appleton, 12th Dist. Butler No. CA2010-02-034, 2010-Ohio-4406, ¶ 34.
{¶ 37} The Eighth District has summarized the elements of negligent
misrepresentation as requiring "(1) a defendant who is in the business of supplying
information; and (2) a plaintiff who sought guidance with respect to his business transactions
from the defendant." Hamilton v. Sysco Food Servs. Of Cleveland Inc., 170 Ohio App. 3d
203, 2006-Ohio-6419, ¶ 20 (8th Dist.), quoting Nichols v. Ryder Truck Rentals, Inc., 8th Dist.
Cuyahoga No. 65376, 1994 WL 285000, *4 (June 23, 1994). The class of persons who are
in the business of supplying information to others is limited to certain professionals, such as
"attorneys, surveyors, abstractors of title and banks dealing with non-depositors' checks." Id.
at ¶ 21. The claim also requires that a plaintiff seek guidance with respect to the business
transaction, such as when there is a special relationship between the parties and the plaintiff
specifically relies upon the defendant for advice. McNabb v. Hoeppner, 5th Dist. Richland
No. 10CA124, 2011-Ohio-3224, ¶ 21-22.
{¶ 38} The magistrate's findings of fact did not establish that the Seibers and the
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Sumpters are among the class of persons subject to liability under negligent
misrepresentation or that Levy sought guidance from them in regards to the purchase.
Instead, this case involved an arm's-length purchase of an interest in a swingers' club where
the Sumpters were selling their interest to Levy and the Seibers were anticipated business
partners with Levy. The Seibers and the Sumpters are not in the business of supplying
information to others, were not paid by Levy or otherwise compensated to advise him
regarding the purchase, did not offer guidance on the purchase, and did not represent Levy
in the purchase. See McNabb at ¶ 22; Cleveland Constr., Inc. v. Roetzel & Andress, L.P.A.,
8th Dist. Cuyahoga No. 94973, 2011-Ohio-1237, ¶ 40.
{¶ 39} Additionally, as our discussion of the fraud claims indicates, Levy did not
justifiably rely on any misrepresentation regarding the ownership of Double K and has waived
any argument that this issue had significance in his decision to purchase the club.
Consequently, we find the trial court erred in adopting the magistrate's conclusion that Levy
prevailed on his negligent misrepresentation claim against the Seibers and the Sumpters.
{¶ 40} The Seibers' first assignment of error and the Sumpters' second assignment of
error are overruled in part and sustained in part.
{¶ 41} Seibers' Assignment of Error No. 2:
{¶ 42} THE TRIAL COURT ERRED BY FAILING TO ENTER JUDGMENT IN FAVOR
OF THE SEIBERS ON THEIR CLAIMS.
{¶ 43} Sumpters' Assignment of Error No. 3:
{¶ 44} THE TRIAL COURT ERRED IN SUSTAINING APPELLEE'S OBJECTION TO
THE MAGISTRATE'S DECISION.
{¶ 45} The Seibers and the Sumpters challenge the effect of the rescission of the
purchase agreement on their remaining claims. The Seibers argue that even if the purchase
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agreement was properly rescinded, the trial court should have considered their counterclaims
against Levy. The Sumpters argue the trial court erred in determining that due to the
rescission of the purchase agreement, the Sumpters could not recover under the promissory
note.
{¶ 46} A party who is fraudulently induced to enter a contract may sue to rescind the
contract. Butler Cty. Bd. of Commrs. v. Hamilton, 145 Ohio App. 3d 454, 472 (12th
Dist.2001). Rescission is not merely a termination of the contract; it is an annulment of the
contract. Rosepark Properties, Ltd. v. Buess, 167 Ohio App. 3d 366, 2006-Ohio-3109, ¶ 51
(10th Dist.), citing Mid-America Acceptance Co. v. Lightle, 63 Ohio App. 3d 590, 599 (10th
Dist.1989). "The primary purpose of rescission is to restore the status quo and return the
parties to their respective positions had the contract not been formed." Id. Moreover, a
contract that has been rescinded "is ineffective ab initio and no rights may be predicated
upon that contract." May v. State Farm Ins. Co., 10th Dist. Franklin No. 90AP-1407, 1991
WL 81925 (May 14, 1991).
Seibers' Counterclaims
{¶ 47} The Seibers alleged counterclaims against Levy for breach of contract, breach
of the duty of good faith and loyalty, fraudulent inducement, promissory estoppel, and
negligent misrepresentation. The counterclaims alleged that Levy breached the purchase
agreement and committed fraud and negligent misrepresentation when he represented that
he would buy the Seibers' shares in Double K if so requested, but ultimately failed to do so.
The Seibers also asserted that once Levy signed the purchase agreement, he became a
shareholder of the corporation and owed them a duty of good faith and loyalty. In the
magistrate's decision, after determining Levy should prevail on his fraud and negligent
misrepresentation claim, the magistrate ordered the purchase agreement to be rescinded.
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The magistrate denied the Seibers' breach of contract counterclaim due to the rescission of
the purchase agreement. The trial court adopted this conclusion and denied the remaining
counterclaims asserted by the Seibers.
{¶ 48} We find that the trial court did not err in denying the Seibers' counterclaims. As
discussed in the Seibers' first assignment of error, the Seibers and the Sumpters fraudulently
induced Levy into the purchase agreement. The magistrate determined that as a result of
this fraud, the purchase agreement should be rescinded. Rescission of a contract is an
appropriate remedy when the contract is a product of fraud and no rights maybe based upon
that contract. The Seibers' counterclaims were predicated upon the validity of the purchase
agreement. Therefore, the rescission of the purchase agreement defeats the Seibers'
counterclaims
Sumpters' Promissory Note
{¶ 49} The Sumpters' counterclaim alleged Levy breached the promissory note when
he failed to pay the Sumpters the amount owed to them under the note. The promissory
note was entered into on June 3, 2014, contemporaneously with the closing of the purchase
agreement. Multiple transactions occurred at the closing. The Sumpters were paid the
balance owed to them for the sale of their shares in Double K to Levy. Double K purchased
back the shares owned by the Roths for $11,000. Double K purchased these shares by way
of a $10,000 loan from the Sumpters. This loan was evidenced by the promissory note and
obligated the Seibers and Levy to pay the Sumpters $10,000. While the magistrate
rescinded the purchase agreement and ordered the Seibers and the Sumpters to pay Levy
$65,000, the magistrate found in favor of the Sumpters on their counterclaim and awarded
them $10,000, to be paid by Levy. However, the trial court reversed this award due to the
rescission of the purchase agreement.
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{¶ 50} We find the trial court did not err in reversing the magistrate's decision awarding
the Sumpters $10,000 under the promissory note. While the promissory note was separate
from the purchase agreement, the note was made as a consequence of the purchase
agreement. The promissory note was made to enable the Sumpters to exit the corporation
and to allow Levy and the Seibers to obtain full ownership of the corporation. Without the
promissory note, the purchase agreement would not have closed and the Sumpters would
not have obtained the full amount due to them for their shares.
{¶ 51} Consequently, the Seibers' second assignment of error and the Sumpters' third
assignment of error are overruled.
{¶ 52} Seibers' Assignment of Error No. 1:
{¶ 53} THE TRIAL COURT ERRED BY ADOPTING THE CONCLUSIONS OF LAW IN
THE MAGISTRATE'S DECISION.
{¶ 54} Sumpters' Assignment of Error No. 4:
{¶ 55} THE TRIAL COURT ERRED IN AWARDING PUNITIVE DAMAGES.
{¶ 56} Sumpters' Assignment of Error No. 5:
{¶ 57} THE TRIAL COURT ERRED IN AWARDING ATTORNEY FEES.
{¶ 58} Levy's Cross-Assignment of Error No. 1:
{¶ 59} THE TRIAL COURT ERRED IN ALLOCATING ATTORNEY FEES WITHOUT
DECIDING WHETHER THE REQUESTED FEES WERE REASONABLE AND
NECESSARY, OR SHOULD BE ADJUSTED BASED UPON PROFESSIONAL CONDUCT
RULE 1.5(A).
{¶ 60} Lastly, the parties challenge the award of punitive damages and attorney fees.
The Seibers and the Sumpters argue the trial court erred in awarding punitive damages
without making a finding of malice. Both the Sumpters and Levy maintain the attorney fees
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award was in error, with the Sumpters arguing that there was not enough evidence to sustain
the award and Levy arguing that the trial court erred in failing to grant all his attorney fees
without conducting an analysis about the reasonableness of the fees. We will address these
arguments in turn.
Punitive Damages
{¶ 61} We begin by noting our review regarding punitive damages is limited to the
Seibers, as the Sumpters have forfeited any potential error by failing to object to the
magistrate's award of punitive damages. If a party has not objected to a factual finding or
legal conclusion in accordance with Civ.R. 53(D)(3)(b), "[e]xcept 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[.]" Civ.R. 53(D)(3)(b)(iv). However, even then, "unless the appellant argues a
'claim of plain error,' the appellant has waived the claimed errors not objected to below." In
re L.K., 12th Butler No. CA2014-06-145, 2015-Ohio-1091, ¶ 16. The Sumpters have not
argued on appeal how the punitive damages award constitutes plain error. Therefore, their
argument regarding punitive damages as applied to them is forfeited.2
{¶ 62} To be awarded punitive damages in cases alleging fraud, the plaintiff "must
establish not only the elements of the tort itself, but in addition, must either show that the
fraud is aggravated by the existence of malice or ill will or must demonstrate that the
wrongdoing is particularly gross or egregious." Charles R. Combs Trucking, Inc. v. Internatl.
Harvester Co., 12 Ohio St. 3d 241 (1984), paragraph three of the syllabus. See R.C.
2. Even if we were to review the Sumpters' assignment of error regarding the award of punitive damages upon a
plain error standard they would not prevail. Civil plain error is an extremely deferential standard of review and its
application is limited to "those extremely rare cases where exceptional circumstances require its application to
prevent a manifest miscarriage of justice, and where the error complained of, if left uncorrected, would have a
material adverse effect on the character of, and public confidence in, judicial proceedings." Goldfuss v.
Davidson, 79 Ohio St. 3d 116, 121 (1997). This is not one of those "extremely rare cases" presenting "exceptional
circumstances" where application of civil plain error is appropriate.
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2315.21(C)(1). Actual malice, necessary for an award of punitive damages, is (1) that state
of mind under which a person's conduct is characterized by hatred, ill will, or a spirit of
revenge or (2) a conscious disregard for the rights and safety of other persons that has a
great probability of causing substantial harm. Preston v. Murty, 32 Ohio St. 3d 334, 335
(1987). Egregious has been defined as "conspicuous for bad quality and taste." Beaumont
v. Albert, 12th Dist. Preble No. CA2009-03-006, 2009-Ohio-6176, ¶ 32.
{¶ 63} In the present case, the magistrate awarded Levy $65,000 in actual damages,
$1 in punitive damages, and reasonable attorney fees. Specifically, in regards to the punitive
damage award, the magistrate stated: "The Court finds on the evidence and record because
of the fraud and negligence claims, [Levy] is entitled to punitive damages in the amount of
$1.00 for a total of $65,001.00 plus reasonable attorney fees." (Emphasis added.) The
magistrate did not provide any other analysis regarding punitive damages or cite to any legal
authority. The trial court adopted the magistrate's findings.
{¶ 64} We find that the magistrate erred in granting punitive damages to Levy against
the Seibers on the basis of Levy's fraud and negligence claims. To be entitled to punitive
damages in fraud cases, the plaintiff must show that the conduct was malicious, gross, or
egregious. Moreover, punitive damages may not be awarded based on mere negligence.
See Preston at 335; Estate of Beavers v. Knapp, 175 Ohio App. 3d 758, 2008-Ohio-2023, ¶
30 (10th Dist.). An award of punitive damages, without more, should not be construed as a
finding of malice or aggravated fraud sufficient to support the punitive damages award. The
trial court adopted the magistrate's decision regarding punitive damages. Therefore, we find
the trial court erred in granting Levy punitive damages without making the necessary findings.
On remand, the trial court must determine whether based upon the magistrate's findings of
fact, the fraudulent conduct was malicious, gross or egregious to support an award of
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punitive damages.
Attorney Fees
{¶ 65} The parties challenge the trial court's award of attorney fees in the amount of
$25,876.75 to Levy. We review an award of attorney fees for an abuse of discretion. Bittner
v. Tri-County Toyota, Inc., 58 Ohio St. 3d 143, 146 (1991). "Unless the amount of fees
determined is so high or so low as to shock the conscience, an appellate court will not
interfere." Id.
{¶ 66} "Ohio has long adhered to the 'American rule' with respect to recovery of
attorney fees: a prevailing party in a civil action may not recover attorney fees as a part of the
costs of litigation." Wilborn v. Bank One Corp., 121 Ohio St. 3d 546, 2009-Ohio-306, ¶ 7. An
exception to this rule exists when punitive damages are awarded in tort cases involving
malice. Touhey v. Ed's Tree & Turf, L.L.C., 194 Ohio App. 3d 800, 2011-Ohio-3432, ¶ 17
(12th Dist.). If punitive damages are proper, reasonable attorney fees may be awarded as an
element of compensatory damages. Galmish v. Cicchini, 90 Ohio St. 3d 22, 35 (2000);
Roberts v. Mike's Trucking, Ltd., 12th Dist. Madison Nos. CA2013-04-011 and CA2013-04-
014, 2014-Ohio-766, ¶ 26. A prevailing party has the burden of proving the reasonableness
of the fees. Stonehenge Land Co. v. Beazer Homes Invests., L.L.C., 177 Ohio App. 3d 7,
2008-Ohio-148, ¶ 45 (10th Dist.).
{¶ 67} When calculating attorney fees, a trial court is guided by a two-step
determination. The court should first calculate the "lodestar" amount by multiplying the
number of hours reasonably expended by a reasonable hourly rate and, second, decide
whether to adjust that amount based on the factors listed in Prof.Cond.R. 1.5(a). Bittner at
syllabus (applying predecessor to Prof.Cond.R. 1.5[a]); Lamar Advantage GP Co. v. Patel,
12th Dist. Warren No. CA2011-10-105, 2012-Ohio-3319, ¶ 46. Those factors include: (1) the
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time and labor required, the novelty and difficulty of the questions involved, and the skill
required to properly perform the legal service, (2) the likelihood, if apparent to the client, that
acceptance of the particular employment will preclude other employment by the attorney, (3)
the fee "customarily charged in the locality for similar legal services," (4) the amount involved,
and the results obtained, (5) time limitations imposed by the client or the circumstances, (6)
the nature and length of the professional relationship with the client, (7) the experience,
reputation and ability of the lawyer, and (8) whether the fee is fixed or contingent.
Prof.Cond.R. 1.5(a).
{¶ 68} To enable an appellate court to conduct a meaningful review, "the trial court
must state the basis for the fee determination." Bittner at 146. In Bittner, the Ohio Supreme
Court found that there was not enough information to conduct meaningful appellate review
when the trial court did not award the full amount requested by the attorneys and did not
state the factors it took into consideration in its partial award. Id.
{¶ 69} In the case at bar, the trial court granted Levy attorney fees after "having
conducted an intensive review of the filings, considered the memoranda in support and in
opposition, and holding a thorough review of the record prior to rendering its decision" in the
amount of $25,876.75. The trial court did not conduct a hearing on attorney fees, provided
no further explanation regarding its award of fees, the Prof.Cond.R. 1.5(a) factors, or the
lodestar amount. Moreover, the trial court granted a portion of the attorney fees requested
by Levy without providing explanation as to the reduction of the fees. Further, the trial court
stated that the Seibers and the Sumpters should be jointly and severally liable for the full
amount of the fees despite the fact that the Sumpters were not named as defendants in this
matter until approximately four months after the litigation was commenced. Consequently, the
trial court erred in failing to elucidate its basis for granting Levy's attorney fees in the amount
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of $25,876.75.
{¶ 70} The award of attorney fees is vacated and the matter remanded to the trial
court. We recognize that the award of attorney fees here is dependent upon an award of
punitive damages. Therefore, our remand of the punitive damage award may render moot
an award of attorney fees as against the Seibers should the trial court on remand find that
there is no malice supporting an award of punitive damages. However, because the
Sumpters forfeited any issue regarding the award of punitive damages, they remain subject
to an award of attorney fees without regard to the trial court's ultimate resolution of the
punitive damage issue.
{¶ 71} The Seibers' first assignment of error is partially sustained. The Sumpters'
fourth assignment of error is overruled and the Sumpters' fifth assignment of error is
sustained. Levy's cross-assignment of error is sustained.
Conclusion
{¶ 72} Based on the foregoing, we affirm in part and reverse in part. We affirm the
judgment in favor of Levy on his fraudulent inducement claim, the Seibers' counterclaims for
breach of contract, breach of the duty of good faith and loyalty, fraudulent inducement,
promissory estoppel, and negligent misrepresentation, and the Sumpters' breach of contract
claim. We reverse the judgment in favor of Levy on his negligent misrepresentation claim.
We also affirm the judgment awarding punitive damages against the Sumpters. However, we
reverse the judgment adopting the punitive damages award against the Seibers and remand
this cause to the trial court for a review of the award and to make the necessary findings. We
also vacate the award of attorney fees and remand this cause to the trial court to consider
anew an award of attorney fees based upon the record before it. In its consideration of an
award of attorney fees the trial court shall calculate the "lodestar" amount of attorney fees,
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engage in an analysis of the Prof.Cond.R. 1.5(a) factors and explain the basis for the amount
of any attorney fees awarded to Levy.
{¶ 73} Judgment affirmed in part, reversed in part, and remanded for further
proceedings consistent with this opinion.
RINGLAND and HENDRICKSON, JJ., concur.
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